# Presentation: 657494

## The Determination of Electricity Prices in a Competitive EnvironmentSession 2

- <date/time>

- The Determination of Electricity Prices in a Competitive EnvironmentSession 2

- Roger L. Sacquety
- May 22, 2000
- Bangladesh Ministry of Energy and Mineral Resources

## GENERATION

## Generation The Power Plants

**Notes:**
Generation -- the production of electric energy from other energy forms. 

Electric power generators use a variety of prime movers and energy sources are used to generate electric energy.  Prime movers are the engine, turbine, water wheel, or similar machines that drive an electric generator.  

Energy sources include combustion of fossil fuels, nuclear fission, kenetic energy in water or wind, chemical energy in a fuel cell, and sunlight.  Renewable energy sources are considered inexhaustible.  Renewable energy sources include wind, water, sun, geothermal energy, biomass, and waste products.  
Generating units vary in size.  Nuclear and fossil-fuel steam-electric units typically have large capacities, many over 1000 megawatts (MW).  Hydroelectric dams range from less than 1MW to thousands of MW at some of the large Federal dams.  Gas turbines, combustion turbines and combined cycle units are typically less than 200 MW, but some are larger.  Wind and  solar plants are relatively small.   Distributed generation, which can be installed at or near the customer’s site can be quite small, such as rooftop photovoltaic arrays or fuel cells ranging from several to a few hundred kilowatts.

## Slide 4

**Notes:**
Steam-electric (thermal) generating units are typically the large baseload plants.  Steam produced in a boiler turns a turbine to drive an electric generator.  Fossil fuels (coal, petroleum and petroleum products, natural gas or other gaseous fuels) and other combustible fuels, such as biomass and waste products, are burned in a boiler to produce the steam. Nuclear fission is the heat source to make steam at nuclear plants, and geothermal or thermal solar energy are also used to produce steam.  The thermal efficiency of fossil-fueled steam-electric plants is about 33 to 35 percent.  
Gas turbines and combustion engines use the hot gas from burning fossil fuels to turn a  turbine that drives the generator.   These plants can be brought up quickly, and so are used as peaking plants.  The number of gas turbines is growing as technological advances in gas turbine design and declining gas prices have made the gas turbine competitive with the large steam-electric plants.  Thermal efficiency is slightly less than that of the large steam-electric plants.
Combined cycle plants first use gas turbines to generate power and then use the waste heat in a steam-electric generator.  Thus, combined cycle plants make more efficient use of the heat energy in fossil fuels.  New technology is improving the thermal efficiency of combined cycle plants, with some reports of  50 to 60 percent efficiency. 
Cogenerators are facilities that utilize heat for electricity generation and for another form of useful thermal energy (steam or hot water) for manufacturing processes or central heating.  Many cogeneration plants use natural gas as the main fuel are Qualifying Facilities under PURPA.  There are two types of cogeneration systems: bottom-cycling and top-cycling.   In a bottom-cycling configuration a manufacturing process uses high temperature steam first and a waste-heat recovery boiler recaptures the unused energy and uses it to drive a steam turbine generator to produce electricity.   In top-cycling configurations, a boiler produces steam to power a turbine-generator to produce electricity.  Steam leaving the turbine is used in thermal applications, such as space heating or food preparation, or a combustion turbine or diesel engine burns fuel to spin a shaft connected to a generator to produce electricity.  The waste heat from the burning fuel is recaptured in a waste-heat recovery boiler and is used for direct heating or to produce steam for thermal applications.   
The kinetic energy in moving water and wind is used to turn turbines at hydroelectric plants and wind facilities.  Other types of energy conversion include photovoltaic (solar) panels that convert light energy directly to electrical energy, and fuel cells that convert chemical energy directly to electrical energy. 

## Generation by Energy Source, 1998

**Net Summer Capability **
**(776 million kilowatts)**

**Electric Power Industry **
**Net Generation**

**Notes:**
Coal is the Nation’s primary fuel for electricity generation, representing almost half (44 percent) of the capability, and producing over half (52 percent) of the generation.  Coal-fired plants are typically large baseload plants.
Gas and petroleum units make up 18 and 9 percent, respectively, of generating capability.  In 1998, petroleum-fired generation provided 4 percent of our electricity, while gas-fired units provided 15 percent.  Many gas- and petroleum-fired units are used for intermediate and peaking plants. 
Fossil-fuels (coal, petroleum, and gas) were used to produce 71 percent of the Nation’s electricity.  The combustion of fossil fuels by electric power plants is the source for air emissions (CO2, SO2, and NOx) from the electric power industry sector.  
Nuclear power plants represent 14 percent of the generating capability, and generated 19 percent of electricity in 1998.  Nuclear plants have been increasing their capacity factors (the ratio of electricity actually produced to potential production if the unit runs at full power) steadily in recent years, reaching a record high of 80 percent in 1999.  Nuclear plants are large, baseload plants.  
Hydroelectric capability is 14 percent of the Nation’s generating capability.  Precipitation patterns affect the availability of hydroelectric power, which contributed 9 percent of net generation in 1998.  When weather conditions are favorable, large hydroelectric dams typically are used for baseload generation before fossil-fueled plants.  
Renewable generating units use energy sources that are considered to be inexhaustible.  Included are solar, wind, geothermal, municipal solid waste, and biomass fuels, such as landfill methane gas, wood byproducts and waste.  Hydroelectric power is also considered a renewable resource.  Many wind and solar plants are small and intermittent in nature, depending on the availability of their energy source.
“Green power” is a catch word for renewable power because these energy sources are viewed as more environmentally friendly.  

## Representative Regional Capacity by Fuel Source 

**Notes:**
The type of energy source used for generating electricity varies in the United States by region according to the availability of natural resources.   The large icons on this map represent about 10 GW of capacity, not individual plants,  in a regional area for each fuel source.  Smaller icons represent about 5 GW capacity.  Where less than 5 GW of capacity for a fuel type exists for an individual region or State, generating plants are not represented on this map.  
The Pacific Northwest generates most of its power at large hydroelectric projects owned by the Federal government.  
The Nation’s coal-producing States and regions are the location of the majority of coal-fired  plants, and consequently the source of much of the air emissions resulting from the combustion of coal.  The Ohio Valley States (OH, WV, KY, TN) are the largest users of coal for electricity generation in the Nation.  
Texas, Louisiana, and Oklahoma are rich in natural gas, and make use of it for electricity generation.  
Much of the Nation’s petroleum-fired generation is concentrated in Florida and New York.
California has tight restrictions on air emissions that discourage coal-fired generation.  Natural gas, which burns cleaner than coal, is used by many California plants for electricity generation.  However, California utilities purchase electricity from outside of the State, some of which is generated with coal as the main fuel source.
The energy source available for electricity generation is a factor in the disparity of retail prices across the Nation.  For example, the Northwest enjoys the low cost of hydropower, while the some Northeast States depend heavily on petroleum and nuclear power.

## Capability and Net Generation by Ownership, 1998

**Share of Net Summer Capability**
**(776 million kilowatts)**

**Net Generation**
**(3,618 billion kWh)**

- Investor-Owned Utilities

- 64%

- Cooperative

- Utilities

- 4%

- Publicly Owned

- Utilities

- 12%

- Nonutility

- Facilities

- 12%

- Federally Owned

- Entities

- 8%

**Notes:**
Investor-owned utilities own and operate two-thirds of the country’s generating units and generate over two-thirds of the electricity.
Currently, nonutilities power producers own 12 percent of generating capability.  The current trend of IOU’s divestiture of generation assets is likely to decrease IOU ownership and increase nonutility ownership, although some nonutility owners are subsidiary or affiliate companies of large utility holding companies.   
Although cooperative and publicly owned (municipal) utilities are many, they own only 16 percent of generating capability, collectively.  
Federal entities own almost 9 percent of generating capability in the Nation, over half of which are hydroelectric projects operated by the U.S. Army Corps of Engineers, the Bureau of Reclamation, and the Bureau of Indian Affairs.  The Tennessee Valley Authority owns and operates the rest of Federal generation, mainly of coal and nuclear plants. 

## Planned Capacity in the United States  1999  to  2003  (89,399 MW)

**Planned Capacity in the United States **** 1999  to  2003  (89,399 MW)**

**Notes:**
Nonutility companies reported to EIA that they are planning to build 61,456 megawatts of new capacity in the period from 1999 to 2003, the next five years.  Utility companies reported planning to build 27,943 megawatts for the same period.  

Over 99 percent of the total planned capacity in the United States is for natural gas-fired plants or plants that use natural gas and petroleum  (dual-fired plants). 

Planned capacity reported to EIA includes plants in all stages from early planning to those actually under construction.

## Regulation of Generation

**Federal Energy **
**Regulatory Commission**
**Wholesale Sales in Interstate Commerce**
**Hydropower Licensing**

**Notes:**
The Federal Energy Regulatory Commission has jurisdiction over interstate commerce for private utilities (investor-owned utilities), power marketers, power pools, power exchanges, and Independent System Operators (ISO).  The FERC approves rates for wholesale sales of electricity and reviews rates set by the Federal Power Marketing Administrations (PMA).  FERC also confers Exempt Wholesale Generator status (a classification of generator created by the Energy Policy Act of 1992 (EPACT)) and certifies qualifying small power producers and cogeneration facilities under provisions of PURPA.  FERC also licenses the construction and operation of hydroelectric power projects and enforces the provisions of the licenses.
The State Public Utility Commissions have jurisdiction over intrastate trade for electricity.  The PUC’s regulate generation asset costs as part of approving retail rates for customers, approve sites for generation facilities, and issue State environmental regulations.  
The Nuclear Regulatory Commission licenses the construction and operation of nuclear power plants and fuel cycle facilities.  NRC inspects licensed nuclear facilities and oversees decommissioning.  NRC enforces the provisions of nuclear licenses.
The Environmental Protection Agency is charged with implementing the provisions of Title IV of the Clean Air Act.  EPA establishes rules for fossil-fueled power plant pollutants to reduce the air emissions that are a primary cause of acid rain, sulfur dioxide and nitrogen oxides.  Carbon dioxide emissions are tracked, but no regulations exist at this time concerning CO2 emissions.

## TRANSMISSIONand SYSTEM CONTROL

## TransmissionMoving electric energy over high voltage lines from the power plants to the distribution areas

**Notes:**
Electric power transmission is the transportation of large blocks of power over considerable distances from a central generating station to main substations close to major load centers or from one central station to another for load sharing.
The transmission grid consists of high voltage (between 138 and 765 kilovolts) overhead and underground conducting lines made of either copper or aluminum.
High-voltage transmission lines are used because they require less land area for a given carrying power capacity, and result in less line loss.  Because of resistance in the conductors, some power is “lost” in transmission as dissipated heat.  
At the generating station, the voltage of the three-phase alternating current output from the generator is increased with a step-up transformer to the required transmission voltage.   The high-voltage alternating current is then transmitted through the transmission grid to the load center where it is again transformed (stepped down) to lower voltages required by distribution lines. 
The actual power carrying capability of a three-phase alternating current transmission line is a function of resistance, capacitance, and inductance.  Inductance is the more important factor in long-distance overhead lines and the power carrying capability is increased by addition of capacitors to the circuits.

## Transmission Ownership

**Estimated High-Voltage Transmission Line Miles in the United States, 1997 (Miles)**
- Investor-Owned	199,924
- Publicly Owned	21,960
- Cooperative	16,005
- Federally Owned	35,675
**Total****	****273,564**

**Notes:**
About three-fourths of transmission lines are owned by the investor-owned utilities, and Federally owned utilities (PMA’s) own about 13 percent.  The rest are owned by the larger publicly owned municipal utilities and irrigation districts and G&T cooperative utilities (G&T cooperatives are generally entities engaged in the generation and transmission functions for the purpose of serving a set of small distribution cooperatives, typically in rural areas).
With open transmission access rules in FERC Orders 888 and 889, transmission owners are separating the transmission function of their operations to allow independent operation.  Many utilities are joining ISO’s (also known as regional transmission groups) that provide independent operation of their transmission systems.
According to Order 888, transmission owners cannot discriminate between transmitting their own or others’ power over available transmission capacity.  Transmission tariffs must be filed at FERC and applied in a nondiscriminatory fashion.

## The U.S. Transmission System

**and Three Major Interconnections**

**The U.S. Transmission System**

**ERCOT**

**Texas**** ****Interconnect**

**Western**

**Interconnect**

**Eastern**

**Interconnect**

**Notes:**
The U.S. bulk power system has evolved into three major networks (power grids), which also include smaller groupings or power pools. The major networks consist of extra-high-voltage connections between individual utilities designed to permit the transfer of electrical energy from one part of the network to another.  These transfers are restricted, on occasion, because of a lack of contractual arrangements or because of inadequate transmission capability. 
The three networks are:  the Eastern Interconnected System, the Western Interconnected System, and the Texas Interconnected System.  Within each Interconnection, all generators are synchronized at 60 hz/sec.  
The Texas Interconnected System is not interconnected with the other two networks (except by certain direct current lines). The other two networks have limited interconnections to each other. Both the Western and the Texas Interconnect are linked with different parts of Mexico.  The Eastern and Western Interconnects are completely integrated with most of Canada or have links to the Quebec Province power grid. Virtually all U.S. utilities are interconnected with at least one other utility by these three major grids. The exceptions are in Alaska and Hawaii. The interconnected utilities within each power grid coordinate operations and buy and sell power among themselves. The bulk power system makes it possible for utilities to engage in wholesale (for resale) electric power trade. Wholesale trade has historically played an important role, allowing utilities to reduce power costs, increase power supply options, and improve reliability.
In 1965, the infamous Northeast Blackout prompted the formation of the North American Electric Reliability Council (NERC).  NERC is a voluntary industry organization, composed of 10 regions, that sets standards for operating reliability of the transmission and generation system.  
Historically, almost all wholesale trade was within the NERC regions, but utilities are expanding wholesale trade beyond those traditional boundaries.  U.S. international trade is mostly imports.  Normally, most imports are from Canada and the remainder are from Mexico. 

##  Control Area Operators keep the system working together to assure an uninterrupted and reliable supply of electric energy.

**Detail of ECAR Control Area Operators**

**Notes:**
Because electric energy is instantaneously generated and consumed, the operation of an electric power system requires a coordinated balancing of generation and consumption of power.  Control Area Operators (CAO) perform this function, as well as other important tasks, that allow the interconnected electric power systems and their components to operate together both reliably and efficiently.  
There are about 150 Control Areas in the Nation.  Most are run by the dominant large investor-owned utility in a geographic area defined by an interconnected transmission grid and power plant system.  The CAO’s dispatch generators from a central control center with computerized systems in such a way as to balance supply and demand and maintain the transmission system safely and reliably.

## Transmission Open Access

**Transmission Open Access**

**Federal Energy Regulatory Commission **
**Orders 888 and 889**

**Notes:**
The Energy Policy Act of 1992 (EPACT) instructed the FERC to order wholesale wheeling of electricity.  FERC was also authorized to set transmission rates.
FERC responded by issuing Orders 888 and 889.  Order 888 on Open Access of Transmission Lines includes 1) Functional Unbundling – a utility must separate its transmission system from its wholesale sales and purchases activities.  Rates for transmission, wholesale generation, and ancillary services must be separate; 2) Nondiscriminatory Open Access Tariffs – Utilities must file a single transmission tariff that offers transmission services to all eligible customers comparable to the service they provide themselves at the wholesale level; and 3) Reciprocity – Transmission customers who take service under the open access rules must reciprocate with service in turn.  
Order 888 provides the rules for utilities to operate their transmission systems that allow for competition in the wholesale sale of electricity.  Prior to 888, FERC could not order a utility to wheel (transport through a system) electricity for delivery to another system.
Order 889 established an electronic same-time information systems (OASIS) for available transmission capacity so that all customers would have equal, timely access to information. The availability of information is vital to a competitive market model.

## Independent System Operators

**Notes:**
To foster competition in the wholesale market for electricity, the industry required fair and  nondiscriminatory open access to transmission lines to deliver power generated by competing suppliers.

Independent System Operators (ISO) are new organizations that perform the same functions as the CAO’s.  The difference is that an ISO operates the system independently from the various transmission and generation owners of the system.  Transmission rate tariffs are filed with the FERC and apply to all customers, including the owner of the lines.  

Currently, the California ISO, the PJM ISO, the New England ISO, the New York ISO and ERCOT ISO in Texas are operating.  The PJM ISO is the same geographic area of the former PJM control area.   In California, the newly formed ISO took over the control areas and operates the bulk power system for the entire State.  The MidWest ISO will retain its control area operators and provide oversight to achieve the independence that promotes nondiscrimination in transmission access. 

Order 889 established Open Access Same-time Information Systems (OASIS), with  electronic access through the Internet, where all potential customers for transmission service could receive information on available transmission capacity at the same time, giving no one customer an unfair advantage.  

Order 2000 was issued by FERC in December 1999 to require all transmission facility owners and operators to participate in a Regional Transmission Organization (RTO).  The Order set forth minimum characteristics and functions for RTO’s, and allows variability and flexibility in forming the RTO’s.  An RTO can be an ISO, a “Transco,” or another proposed organization meeting the minimum requirements set out in the Order.  

## Regulation of Transmission

**Notes:**
The Federal Energy Regulatory Commission has jurisdiction over interstate commerce in electricity.  The transmission grid interconnects the electric power system over the entire Nation, with the exception of most of Texas, which has maintained a separate system (ERCOT) and Alaska and Hawaii, for obvious geographical reasons.
FERC regulation of the transmission of electricity includes approval of transmission tariffs.  In 1992, the EPACT provided for open transmission access...that is, the FERC could order transmission owners to allow the movement of power through their transmission systems.  FERC implemented rules for open transmission access with Orders 888 and 889.  
FERC also has jurisdiction over regional transmission groups or Independent System Operators.  ISO’s are entities that operate the transmission grid in an area that may comprise many transmission owners.  The ISO operates independently, assuring fair access to available transmission capacity to all.
In 1965 a major blackout in the Northeastern United States precipitated the organization of the North American Electric Reliability Council.  NERC is responsible for the reliability of the electricity supply in North America. 
The membership of NERC is unique.  As a not-for-profit corporation, NERC's owners are 10 Regional Councils.  The members of these Regional Councils come from all segments of the electric industry - investor-owned, federal, rural electric cooperatives, state/municipal and provincial utilities, independent power producers, power marketers, and electricity customers.  These entities account for virtually all of the electricity supplied in the United States, Canada, and a portion of Baja California Norte, Mexico.    
NERC sets operating and planning standards for the electric power industry to ensure a safe and reliable supply and delivery of electric power to the Nation.
The FERC has primary jurisdiction over the siting of transmission lines, and also State agencies are involved in the siting decisions in a State or on State-owned properties.

## Physical versus Contractual Power Flow

**Notes:**
The actual flow of power on an interconnected transmission grid does not respect the contract path.  Power flow cannot be directed over one line or another -- it is shared amongst all parallel paths.

Electricity put into the transmission system is like putting water into a lake at many different  points.  Power plants put electricity onto the transmission grid at many points as water enters a lake from many different streams.  Once power is put out on the transmission grid, each electron is indistinguishable from other electrons, as in the lake, each water molecule is indistinguishable from any other water molecule.  When electricity is taken off the grid for use by a consumer, the electrons are not the very same ones put on the grid by the generator that the consumer is buying power from, just as water taken out of a lake by someone, is not exactly the same water molecules put into the lake from a certain stream.  This analogy illustrates the fact that when a consumer buys “green power” from a generator using, for example, solar energy, the consumer does not actually receive the electrons put on the grid by the solar generator. 

## DISTRIBUTION andEND-USECONSUMPTION

## DistributionThe local system of lower voltage lines and substations that brings the electricity to consumers for end-use consumption.

**Notes:**
Distribution is the delivery of electric power from the transmission system to the end consumer.  The distribution systems begin at the substations, where power transmitted on high voltage transmission lines is transformed to lower voltages for delivery over low voltage lines to the consumer sites.  The system ends at the consumers’ meters.  

Distribution is likely to remain a regulated function, because duplicate systems of lines would be impractical and costly.  Distribution is considered a “natural monopoly,” although in California, competition for the distribution of electricity is being evaluated.

Distributed generation is a growing part of the restructured electric power industry.  Distributed generation is defined as small generators located near or at the consumer site, within the distribution system.   Net metering arrangements are increasingly being offered to consumers that install distributed generation units using renewable resources at their homes or businesses.  
There are just over 3,000 distribution companies in the United States.  They can be IOU’s, publicly owned, or cooperative utilities.  Determining where to draw the jurisdictional line for facilities used in unbundled retail wheeling transactions will     involve case specific determinations that evaluate the seven local distribution indicators that the Commission is adopting.
These seven indicators are:
(1) Local distribution facilities are normally in close proximity to retail customers. 
(2) Local distribution facilities are primarily radial in character. 
(3) Power flows into local distribution systems; it rarely, if ever, flows out. 
(4) When power enters a local distribution system, it is not reconsigned or transported on to some other market. 
(5) Power entering a local distribution system is consumed in a comparatively restricted geographical area. 
(6) Meters are based at the transmission/local distribution interface to measure flows into the local distribution system. 
(7) Local distribution systems will be reduced voltage.

## Distribution Systems Ownership

**Number of Distribution Companies**

**Number of Retail Consumers**

- Investor-Owned

- Public

- Cooperative

- Federal

- 0

- 10

- 20

- 30

- 40

- 50

- 60

- 70

- 80

- 90

- 100

**Millions**

**74%**

**15%**

**11%**

**<1%**

**Notes:**
In 1998, over 3,000 utilities had sales to ultimate consumers.  Of these, investor-owned utilities account for a small share of the total number of utilities, but a disproportionately large share of retail sales to end consumers.  Investor-owned utilities serve 74 percent of all consumers, and represent only 7 percent of the number of distribution utilities.  The IOU’s serve the most populated areas, often covering most of a State’s area and consumer base.  A number of IOU’s operate in multiple States.  

Municipal and cooperative distribution utilities are typically small, ranging from a few hundred consumers to tens of thousands.  Of course, there are some quite large municipals, the largest being Los Angeles Department of Water and Power.  Publicly owned utilities serve 15 percent of consumers, while cooperative utilities serve 11 percent of consumers. 

Federally-owned utilities do not have distribution systems.  However, a few large industrial consumers are served directly by several of the Federal utilities.  This accounts for the inclusion of Federally owned utilities when counting utilities involved in distribution, because distribution is defined at EIA by the ability to deliver power to end users.

## U.S. Electric Utility Sales and 

**Revenue to Ultimate Consumers, 1998**

**Notes:**
Each consumer sector consumed about an equal share of electricity in 1998.  The residential sector produces a higher share of revenue due to the relative cost of serving many small consumers (residential and small commercial) as opposed to serving a small number of very large consumers (industrial).   Industrial customers consume more electricity per customer resulting in less costs for distribution and related services.

The average revenue per kilowatthour (often used as a proxy for price) for residential consumers in the United States in 1998 was 8.26 cents/kWh. Commercial average revenue per kWh was 7.41 cents, and industrial average revenue per kWh was 4.48 cents.  Again, the disparity in price among consumer classes is due to the cost of serving many small consumers as opposed to a few large consumers.  

## Retail Prices of Electricity Sold by Electric Utilities, 1960-1998

**Retail Electricity Real****1**** Price**

**Retail Electricity Nominal Price**

- 1In chained (1992) dollars, calculated by using gross domestic product implicit price deflators.

**Notes:**
The nominal price of electricity shows an increasing trend through the 1970’s and 1980’s.  Recently, nominal prices have leveled off and declined.

However, adjusted for inflation, the real price of retail electricity was relatively high in 1960.  Prices showed a steady decline during the period prior to the 1973 energy crisis (the Arab oil embargo).  The crisis began a period of sharply increasing prices.  Prices peaked in the 1980’s and have since decreased due to declining fuel prices.  

Currently, the Nation is enjoying close to the lowest real prices for electricity in history (when adjusted for inflation).  (The real price is indexed to 1992 dollars.)

## All Sectors

**Average Revenue per Kilowatthour, 1998**

**Notes:**
The average price for electricity varies across the  country.  Average rates vary from a high of nearly12 cents per kWh in some New England States and Hawaii to a low of barely 4 cents/kWh in Idaho, Washington, and Kentucky. 

The difference in prices reflects the availability of low cost power in some regions, such as the Pacific Northwest, where Federal dams provide very cheap hydropower, and the States where TVA, another Federal utility provides inexpensive hydropower and coal-fired generation.  The prices of fuel for fossil-fueled generators affect the ultimate price to consumers.  Nuclear generators have high capital costs, decommissioning  and other costs.  

Regions dependent on expensive nuclear plants, or the price of oil for petroleum-fired plants, or have high expenses for new plants due to expanding economies, generally have higher prices, although many other factors figure into setting retail rates.  The debate over restructuring the generation portion of the industry centers on providing consumers the option to choose the most economically efficient sources of power, which should lower their overall price for electric power.   At the center of the debate for retail choice is the ultimate effect of restructuring on prices in a State or region.    

## Industrial Sector 

**Average Revenue per Kilowatthour, 1998**

**Notes:**
This map shows the industrial sector’s average revenue per kilowatthour across the country.  

The disparity in prices is fueling the restructuring debates being held in many States.  Large industrial consumers generally favor retail competition, because as the largest customers, they are in the best position to solicit the best price for power.

Large industrial consumers contribute largely to a community’s economy, and thus attracting and retaining these large businesses are important to a State. The availability of inexpensive electric power can be a deciding economic factor for  business location.  These facts are taken into account in the debates over whether to restructure to allow retail choice of electricity suppliers.  

In States that have decided in favor of allowing retail choice of suppliers, care has been taken to protect small, residential consumers that are still receiving power from their local utility from experiencing price increases when large industrial consumers choose suppliers other than the incumbent utility.  

## Commercial Sector Average Revenue per Kilowatthour 1998

**Notes:**
Commercial consumers include businesses other than manufacturers and public service entities, such as schools and hospitals.   Large commercial customers may have rates closer to industrial consumers, while very small commercial consumers may have rates similar to residential ones.  

Commercial average revenue per kilowatthour in 1998 was 7.41 cents, ranging from around 4 cents in the Pacific Northwest to almost 12 cents in New Hampshire. 

Large commercial consumers may benefit from restructuring.  Retail access to power suppliers allows commercial businesses that have multiple service sites in many States, such as chain stores, to contract with a power supplier for all their energy needs.  Energy Service Companies (ESCO’s) are offering procurement of electricity and natural gas packaged in total energy management systems that include efficiency measures and other value-added services.   

## Residential Sector 

**Average Revenue per Kilowatthour, 1998**

**Notes:**
Residential consumers, the most numerous, have the highest average revenue per kilowatthour.  As mentioned previously, this is due mostly to the economies of scale principle.  It is less expensive to serve one large consumer in one location than a hundred small consumers spread over a large geographic area.

The benefits provided by restructuring for residential consumers is an issue of debate in most States.  States that have decided to restructure their electric power industry to allow retail choice agree that the residential consumer must be able to share in any benefits such as price reductions.    

Residential consumers do not have the bargaining power or the level of understanding about retail power choice that large consumers possess when shopping for lower electricity prices.  Restructuring laws and rulings have provisions for protection of residential consumers.  As part of restructuring, the regulated utilities are often required to provide residential rate reductions for consumers who remain with the regulated utility.  Small consumers are allowed to aggregate in some States, thus increasing their collective bargaining power similar to that of a large consumer.

## Regulators of Distributionand Retail Sales

**State Public Utility Commissions**

-  Retail Price
-  Distribution Lines
-  Metering, Billing
-  Consumer Protections

**Notes:**
Distribution of electric power is an intrastate function under the jurisdiction of State public utility commissions.  PUC’s set the retail rates for electricity, based on the cost of service, which includes the costs of distribution.   

Retail rates are set by the PUC in ratemaking rulings.  The rates include the cost to the utility for generated and purchased power, the capital costs of power, transmission, and distribution plants, all O&M expenses, and the costs to provide programs, often mandated by the PUC, for consumer protections and energy efficiency, as well as taxes.  As the industry restructures, in some States, the PUC will eventually no longer regulate the retail rates for generated or purchased power.  Retail electricity prices will be open to the market forces of competition.   

The PUC’s will continue to regulate the rates for distribution, the delivery of power to the consumer.   The PUC also has a say in the siting of distribution lines, substations, and generators.  Metering and billing are under jurisdiction of the PUC and in some States are becoming competitive functions.   As the industry restructures, the PUC’s responsibilities are changing.   The goal of each State PUC remains to provide their State’s consumers with reliable, reasonably and fairly priced electric power.

## The Big PictureA Review of Part I

**Generation**

**Transmission**

**Distribution and Consumption**

**Notes:**
The first part of the presentation showed how the electricity industry has been structured.  We saw how the generation, transmission, and distribution functions were operated and regulated.

Under deregulation, the traditional, vertically integrated utility that has provided generation and delivery of electricity will no longer exist.  Already, FERC Order 888 has ordered functional unbundling -- all IOU’s have separated the generation, transmission, and distribution functions into separate divisions, subsidiaries, or affiliate companies.

Change in the industry is focused on who will own generation and the competitive market for selling the electricity, as well as open and fair access to the delivery systems that move power to the customers.  

The delivery of electric power through transmission and distribution systems, along with ancillary services (those services necessary to operate a reliable and safe integrated power system) will remain highly regulated.  

Generation will be unregulated.  The product, electricity, will be bought and sold in a competitive market, both at the wholesale and retail levels.

## Changing Structures in the Electric Power Industry

- The Electric Power Industry is evolving from a highly regulated, monopolistic industry to a more competitive industry.

**Notes:**
Competition in wholesale electric power sales was facilitated with the opening of the electric power grid.  

Transmission and generation have been functionally separated from distribution and retail sales.  Companies are separating into unregulated generation divisions and regulated divisions for transmission and distribution.

Direct access to the transmission system and wholesale power was a catalyst for the States to investigate direct access to retail sales of electricity

California and Rhode Island, two States with relatively high retail rates, were the first to restructure the electric power industry to allow direct access to competitive retail suppliers of electricity.

Twenty-two States have followed their lead, and all others have at least conducted studies on the benefits of retail competition in their States.

## Vertically Integrated Utility

**Notes:**
The electric power industry began around the turn of the century when private electric companies, mostly serving a single municipality, were granted franchises by the municipalities, thus laying the foundation for regulation of a monopoly industry.  In exchange for a designated franchise and a reasonable regulated rate of return, utilities were obliged to serve the public at reasonable and nondiscriminatory rates.  

This regulatory structure, first set in place by the cities, was perpetuated by State and Federal governments during the first decades of the century as utility companies grew and transmission lines made interstate commerce of electricity possible.   Since the 1930’s, electric utilities have been highly regulated by local, State, and Federal governments.

Economies of scale and the monopolistic nature of the wires systems promoted the vertical integration of generation, transmission, and distribution in the electric utility companies.  From the mid-1930’s until the 1970’s, the electric utilities were operated mostly as vertically integrated entities under a high level of regulation from local, State, and Federal governments.

Today, in the majority of States, utilities are “unbundling” the different parts of electric power services:  generation, transmission, and distribution.  Some areas of the electric power industry are entering an era of less regulation and competitive markets.  Deregulation of other monopoly industries, advancement in generation technologies, legislative and regulatory mandates, and regional price variations across the Nation are some of the reasons driving the restructuring of the electric power industry.

.

## Functional Unbundling

- Splits three major functions into affiliate companies
- or divisions within a company...

- ...and creates new functional entities.

- Energy Services Companies

- Retail Marketing
- Energy Service Providers

- Energy Trading
- Power Exchanges

- Telecommunications
- Internet
- Natural Gas

**Generation**

**Transmission**

**Distribution**

**Notes:**
FERC Order 888 required investor-owned utilities to functionally unbundle (or separate) the transmission, generation, and distribution operations and develop separate tariffs for each function.  One outcome is that some utilities are exiting the generation part of the business, and selling generation assets.  Transmission is unbundled into various ancillary services and the use of the transmission lines.

Transmission and distribution services will  remain highly regulated functions, while generation, wholesale trading, and retail sales are becoming competitive.

State legislation to restructure the industry for retail competition, sometimes requires or encourages the separation of the generation business from the transmission and distribution business.  In several States, particularly in the New England region, almost all power plants have been sold or transferred to “non-utility” entities, which are often affiliated companies of investor-owned utilities. 

New and expanding companies are forming that concentrate on one part of the industry, such as transmission organizations, generation companies, distribution companies, and energy service companies.

Utility companies are expanding into other business areas such as telecommunication, cable TV, and Internet services.

## New and Changing Participants

**Power Marketers**
**Electric Service Providers**
**Energy Service Companies**
**Transcos**
**ISOs and RTGs**

**Notes:**
With the changing industry, new opportunities and needs arise.  

Power Marketers are mostly wholesale traders that buy and sell power on the wholesale markets.  Since EPACT opened transmission access, power marketers have been growing in number and the amount of wholesale trade of electricity.  

Electric Service Providers (ESP) is a new term for retail sellers of electricity, especially in restructured States where customers may choose their supplier of electricity.  Many of these competitive companies are affiliated with large investor-owned utilities located nationwide.  

Energy Service Companies offer customers complete service packages that may include electric and natural gas service, energy management, appliance services, and energy efficiency products.

Transcos are companies that will own and operate a transmission system(s) for profit.  Transcos have been suggested as an alternative organization to an ISO or RTO.

The Independent System Operators and Regional Transmission Groups are entities formed to operate transmission systems.  The transmission function had to be separated and operated in a nondiscriminatory manner in order to facilitate open access and competition in the generation portion of the industry.  

## Divestiture of Assets Plants that have been sold by Utilities

**Investor-Owned Electric Utility Generation Capacity **
**Divested or to be Divested by Census Division, Between August 1997 and September 1999**

**Notes:**
Between August 1997 and September 1999, 44.8 GW of capacity had been sold, mostly to unregulated, utility-affiliated companies.  Another 63.3 GW is in the process of selling, and 24.9 GW was transferred by a utility to its own nonutility subsidiary company (affiliated company)

In the New England region, 88 percent of the capacity has been or is about to be sold.  New England States, with the exception of Vermont, have restructured to allow retail competition.  Restructuring legislation either required or strongly encouraged divestiture of generation assets. 

Most New England States and California required some degree of divestiture of generation assets.   Texas’ restructuring law will allow a utility to own no more than 20 percent of the capacity in ERCOT.  Pennsylvania, Ohio, and Virginia’s laws, among others, do not require divestiture of assets.

## Estimated Average Selling Price of Power Generation Capacity by Fuel Type, as of September 1999

**Notes:**
Plants sold include all types, from large steam-electric plants fueled by coal, natural gas, or nuclear fission to small peaking plants that use oil or gas.

The sale of a power plant requires approvals from each regulatory body that has jurisdiction over the plants and utilities that own them.  These include the FERC, the State public utility commissions, and the Nuclear Regulatory Commission.

Of the total amount of capacity in the Nation, 776 GW, approximately 133 GW has changed hands in the last two years.

Most fossil-fueled and hydroelectric plants have sold for 1 1/2 to 2 times their book value, while nuclear plants have typically sold for about 1/2 their book value.

## Corporate Mergers

**Concentration of Ownership of Investor-Owned Utility **
**Generating Capacity, 1992, 1998, and 2000**

**Notes:**
Since 1992, 26 mergers or acquisitions have been completed.  As of September 1999, another 16 were announced and are pending stockholder and regulatory approvals. 

Utilities often merge to better position themselves for competition, believing that a company must be large to be successful in the emerging competitive electric generation industry.

If most of the announced mergers take place, by year’s end the 10 largest investor-owned utilities will own half of the generating capacity in the United States.

Many of these large companies -- such as Southern Company, the largest owner of generation in the United States -- have nonutility subsidiary generation companies.

## Wholesale MarketsCalifornia PX and PJM PX Wholesale PricesApril 1998 to December 1998

**Notes:**
In 1978, PURPA provisions spurred the growth of nonutility generators, which sell electricity to utilities wholesale through contracts or the wholesale power markets.  Competition in the wholesale market for electricity began when the FERC implemented the requirements in the 1992 EPACT by issuing Orders 888 and 889 which allowed open access to transmission lines.  EPACT also created a new class of wholesale generators known as Exempt Wholesale Generators.  

These legislative and regulatory initiatives have effectively created a competitive market for wholesale power in the United States.  Price volatility in the wholesale markets was evident in the price spikes that occurred in the summer of 1998.

Power Exchanges, such as California’s and PJM’s, shown in this graph, are being established where utilities and power marketers can buy and sell  electricity in day-ahead or hour-ahead markets.

Daily wholesale prices are published daily by the trade press and by the power exchanges.    

## Developing Retail Markets for ElectricityAs of October 1999

**	****Number of Customers Switching**
**	****	****Residential****	****156,357**
**	****	****Commercial****	****48,316**
**	****	****Industrial****	****5,039**
**	****	****Total****	****209,752**
**	****	****Percent of Eligible ****	****2.1%**
**	****Load in MWh Provided by Alternative Suppliers ****	****as of 12/31/99**
**	****	****Residential****	****1,193,432**
**	****	****Commercial****	****7,890,840**
**	****	****Industrial****	****14,472,618**
**	****	****Total****	****23,556,892**
**	****	****Percent of Eligible  ****	****13.8%**

**California Retail Direct Access Consumers**
**as of December 31, 1999**

**Notes:**
Retail markets are only just forming in a few States.  The idea of being able to choose your electricity provider, like consumers can do for long distance telephone service, is new.  Consumers will need education and time before retail markets really take off.  

The first State to begin this process was California.  Since March 31, 1998, all consumers in the three IOU territories could choose their electricity supplier.    So far, about 2 percent of residential consumers have switched to other suppliers, while 32 percent of large industrial consumers have switched suppliers.  The amount of megawatthours provided by alternative suppliers is 13.8% of the total load eligible.

In Pennsylvania, the only other State where a retail market is functioning, more interest has been shown in alternative suppliers.  Of more than 5 million consumers eligible to choose alternative electricity suppliers, 507,058 have chosen to switch to a competitive supplier.

Retail competition will likely be a slow process until the utilities complete stranded costs collections and consumers see real savings.  Currently, in some States, such as Massachusetts and Rhode Island, the local utility rates are lower than most competitors.  State restructuring legislation often provided consumers who remain with the local utility a rate reduction during a transitional period as the industry develops competitive markets.

## Restructuring at the State Level

- Restructuring Legislation Enacted

- Comprehensive Regulatory Order Issued

- Commission or Legislative Investigation Ongoing

**Notes:**
State legislatures and public utility commissions, together with major stakeholders in the industry such as large industrial consumers and the utilities, have investigated the benefits of opening the retail electricity market to competition.  

In 24 States, legislation and regulatory orders have been passed that will allow retail competition.  

California and Rhode Island were the first to offer direct access to competitive generation suppliers to their consumers.  At least some consumers in New York, Massachusetts, Illinois, New Jersey, and Pennsylvania may choose alternative generation suppliers.  The rest of the States have schedules that will begin phasing-in retail direct access over the next two to four years.

Several other States are moving toward restructuring for retail competition. But a number of States, including Florida, Alabama, Tennessee, Washington, and Kentucky, have decided that retail competition at this time is unlikely to benefit their consumers.  Many of those States are watching other States and the Federal government’s proposal for restructuring before making further decisions on retail competition.  

## Tables

- Table A - Major Characteristics of Participants
- Table B - Regulators and Major Legislation
- Table C - Corporate Mergers
- Table D - Utility Divestitures
- Table E - Retail Sales, Revenue, and Number of Consumers
- Table F -Retail Direct Access Timeline

## The Energy Information Administration web site is located at 

http//www.eia.doe.gov

Questions and requests for more information may be directed to 
Robert Schnapp, Director 
Office of Coal, Nuclear, Electric, and Alternate Fuels
Energy Information Administration
(202) 426-1211 or
robert.schnapp@eia.doe.gov

**http//www.eia.doe.gov**
**Questions and requests for more information may be directed to **
**Robert Schnapp, Director **
**Office of Coal, Nuclear, Electric, and Alternate Fuels**
**Energy Information Administration**
**(202) 426-1211 or**
**robert.schnapp@eia.doe.gov**