Understanding Today's Electricity Business: Table of Contents

 

 

SECTION ONE: INTRODUCTION 1

Today’s Electricity Marketplace 1
Electricity in Modern Society 4
A Brief History of Electricity 5

 

SECTION TWO: WHAT IS ELECTRICITY? 9

How Electricity is Created 11
How Electricity is Used to Perform Useful Tasks 12
The Key Components of the Electric Delivery System 15
The Key Physical Properties of an Electric Delivery System 16
Electricity Cannot be Stored 16
The Path of Electrical Flow is Difficult to Control 16               
Disturbances Travel Very Quickly and are Hard to Contain 17
Outages and Significant Voltage or Frequency Fluctuations are Not Acceptable 17
The Four Key Physical Sectors of the Electricity Business 18

SECTION THREE: ELECTRIC CONSUMERS 21

Residential Customers 22
Commercial Customers 25
Industrial Customers 28
Aggregate Demand Curves 32

SECTION FOUR: GENERATION 35
Types of Generation 36
Coal 36
Nuclear 38
Natural Gas 38
Hydro 39
Fuel Oil 40
Renewables 41
Distributed Generation 42               
Environmental Considerations 43
Electric Generation, Global Warming and the Kyoto Protocol 44
Demand Response as an Alternative to Generation 46
Use of Generation to Satisfy the Load Curve 47
Baseload 48
Intermediate 48
Peaking 48
Ownership of Generation 49
Developing a Generation Portfolio 50
The Future of Generation 51

SECTION FIVE: TRANSMISSION 55
Physical Characteristics of Transmission 56
Operation and Planning of the Transmission System 57
Transmission System Costs 58
Ownership of Transmission 58
Issues with Transmission Construction 59
The Current Status of the U S Transmission System 60

SECTION SIX: DISTRIBUTION 63

Physical Characteristics of Distribution 63
Radial Feed 67
Loop Feed 67
Network System 67
Operating and Planning of the Distribution System 68
Distribution System Costs 69
Ownership and the Current Status of Distribution Systems 69
The Smart Grid 70

SECTION SEVEN: ELECTRIC SYSTEM OPERATIONS 73

Operational Characteristics of Power Systems 73
What System Operations Does 74
Who Handles System Operations 74
Forecasting and Scheduling 77
Demand Forecasting 78
Scheduling Generation, Transmission and Reserves 78
Ancillary Services 78
Automatic Generation Control (AGC) 79
Spinning Reserves 79
Non-spinning Reserves 80               
Supplemental Reserves 80
Voltage Support 80
Black Start 80
How Supply and Demand are Kept in Balance in Real Time 80
The Changing Role of System Operations 82

SECTION EIGHT: MARKET PARTICIPANTS IN THE DELIVERY CHAIN 85

Participants in the Vertically-Integrated Market Model 85
Investor-Owned Utilities 85
Municipal Utilities and Public Utility Districts 86
Rural Electric Co-ops 86
Federal Power Agencies 87
Public Power Agencies 88
Power Pools 88
Energy Services Companies (ESCOs) 88
Independent Power Producers and Electric Marketers 88
Participants in Restructured or Competitive Electric Markets 89
Merchant Generators 89
Transmission Companies 89
Independent System Operators (ISOs)/Regional Transmission Organizations (RTOs) 90
Electric Marketers 90
Financial Services Companies 91
Transmission Owners 91
Utility Distribution Companies 91
Load Serving Entities 92
Energy Services Companies (ESCOs) 92

SECTION NINE: ELECTRIC MARKET STRUCTURES 95

What is an Electric Market Structure? 95
Vertically-Integrated Monopoly Utility Model 97
The Current Status of Vertically-Integrated Monopoly Utility 98
Single Buyer with Competitive Generation Model 99
The Current Status of Single Buyer 100
Wholesale/Industrial Competition Model 100
The Current Status of Wholesale/Industrial Competition 102
Complete Retail Competition Model 102
The Current Status of Complete Retail Competition 103
Trading Arrangements 105
Wheeling 105
Decentralized 106
Integrated 107
The Current Status of Market Structures and Trading Arrangements 109

SECTION TEN: REGULATION IN THE ELECTRIC INDUSTRY 111

Why Regulate the Electric Industry? 111
The Goals of Regulators 112
The Historical Basis for Regulation 112
State Regulation 112
Federal Regulation 113
Who Regulates What? 115
The Regulatory Process 116
The Initial Filing 116
Preliminary Procedures 117
Hearings 117
The Draft Decision 118
The Final Decision 118
Review of Decisions 118
Tariffs 118
Setting Rates through a Traditional Ratecase 119
Determining the Authorized Rate of Return 120
Forecasting Usage 120
Determining a Revenue Requirement 120
Allocating Revenue to Customer Classes 121               
Determining Rate Design 121
Allocating Revenue to Charge Types 122
Determining the Rate 122
Incentive Regulation 122
Performance-based 123
Benchmarking 123
Rate Caps 123
Service Standards 123
Market-based Rates 124
State and Federal Rate Methodologies 124
The Future of Regulation 124

SECTION ELEVEN: THE CONCEPTS OF MARKET RESTRUCTURING 127

Why Restructuring? 128
Market Evolution under Deregulation 129
Regulation 130
Deregulation 131
Commoditization 132
Value-Added Services 132
The Necessary Components for a Competitive Marketplace 133
Supply Side Competition 133
Fair Access to Transmission 134
Unbiased System Operations 134
Demand Side Competition 135               
Distribution without Impediments to Competition 136
Opportunities for Hedging Risks 136
Creating a Competitive Market 136
Transitioning Generation 137
Creating a Robust Transmission Market 138
Creating an ISO 138
Transitioning to Customer Choice 139
Continued Regulation of Transmission and Distribution 139
Ensuring Reliability 139
Settlements 140

SECTION TWELVE: THE HISTORY OF ELECTRIC MARKET RESTRUCTURING 143

Federal Restructuring 144
The First Steps Towards Independent Generation – PURPAof 1978 144
Fostering Wholesale Generation Competition – the Energy Policy Act of 1992 144
Furthering Open Access Transmission – FERCOrder 888 146
Encouraging Formation of Regional Transmission Operators – FERCOrder 2000 148
The Current Stalemate 149
State Restructuring 150
Separating the Vertical Utility Functions 152
Allowing Retail Access 152
Continued Regulation of the Monopoly Function 152
The California Experience 153
Restructuring in Other Countries 156

SECTION THIRTEEN: MARKET DYNAMICS 159

Supply and Demand 160
Short-term Supply and Demand 161
Long-term Supply and Demand 162
The Current Supply/Demand Situation in the U S 162
Pricing 163
Indexes and Trading Hubs 164
Price Volatility 165
The Wholesale Market 166
Energy and Generation Capacity 168
Forward Markets 168
Spot Markets 169
Transmission Rights 169
Financial Services 170
The Retail Market 170
Utility Retail Services 171
Competitive Retail Services 172
ESCO and other Energy Services 173

SECTION FOURTEEN: MAKING MONEY AND MANAGING RISK 175

How Market Participants Create Profits 176
How a Utility Makes Money —Traditional Method 176 
How a UtilityMakes Money — Incentive Regulation 178
How Unregulated Market Participants Make Money 178
Risk Management 178
Choices for Managing Risk 180
Physical Risk Management 180
Financial Risk Management 181
Speculation versus Hedging 182
Hedging Techniques 182
Value at Risk 184

SECTION FIFTEEN: THE FUTURE OF THE ENERGY BUSINESS 187

A Review of Market Changes 187
The Future of the Generation Sector 188
The Future of Transmission 189
The Future of Distribution 189
The Future of System Operations 190
The Future of Retail Marketing 190
A Sustainable Energy Future? 191

APPENDIX A: GLOSSARY 195
APPENDIX B: UNITS AND CONVERSIONS 207
APPENDIX C: ACRONYMS 209
APPENDIX D: INDEX 215