Electricity Deregulation

The deregulation of electricity generation provides electricity customers with far more options in terms of how they purchase and use electricity.
Electricity Deregulation - Articles

Updated: August 8, 2017

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Electricity Deregulation

Why the Legislation?

Supporters of the legislation say all electricity customers will be beneficiaries because of lower rates for electricity. In 1995 in the regulated environment, Pennsylvanians spent $10 billion for electricity. If the PA rates for electricity drop to the national average, then about 15 percent ($1.5 billion) will be saved each year. If the rates fall to the anticipated competitive price for electricity, then an estimated 25 percent ($2.5 billion) will be saved each year in Pennsylvania.

What Is Deregulation?

For the electric industry, deregulation means the generation portion of electricity service will be open to competition. However, the transmission and distribution of the electricity will remain regulated and your local utility company will continue to distribute electricity to you and provide customer services to you. The generation of electricity is being deregulated, which means you will have the opportunity to shop around for the electricity-generation supplier of choice. Deregulation is not new; you probably remember previous deregulations involving trucking, airline travel, and long-distance telephone service.

What Guidelines Did PUC Set for Deregulation?

The PA Public Utilities Commission (PUC) has been very active in developing rigorous guiding principles concerning the deregulation of electricity generation. These principles include:

  • universal service and energy conservation programs
  • consumer education
  • consumer services
  • reliability of supply electricity

Each utility company must document that its levels of consumer services and reliability equal or exceed the levels that existed on January 1, 1997. In addition, the PUC has capped electricity rates so that rates for the vast majority of customers will not exceed the rates that existed on January 1, 1997. This rate cap will be in effect for the next four to nine years.

What Is the Local Utility Company's Role in Deregulation?

Your local utility company--whether it is an investor-owned company or a rural electric co-op--will continue to distribute electricity to you and provide customer services to you. It does not matter who you may select as your electricity-generation supplier, you will remain a customer of your local utility company for transmission, distribution, and local services.

These services will remain regulated for the foreseeable future. Your local utility company will be responsible for providing line repair and maintenance, restoring service after storms and accidents, and providing customer services, including metering and billing. When your local utility company is restoring electrical service after a storm or accident, the line crews cannot give preferential treatment to those customers purchasing electricity from the company.

Your local utility will also serve as "the electricity generator of last resort." In other words, if your selected electricity-generation supplier is unable to provide the electricity you need, your local utility company will supply you with electricity at the prevailing price. When you shop for electricity, you should certainly consider your local utility company as one of the possible suppliers of your electricity.

What Changes Can You Expect?

A number of changes are likely to take place as a result of deregulation. We have already seen mergers of utility companies. For example, Allegheny Power was created by the merger of Monongahela Power, Potomac Edison, and West Penn Power. GPU Energy was created by the merger of Penelec, MetED, and JCP&L. We may see additional mergers in the future.

Electricity pricing will certainly change. Today, the investor-owned utilities are guaranteed the opportunity to make a profit in the regulated environment, with oversight provided by the PUC. Rural electric co-ops are not guaranteed to make a profit since they are operated as nonprofit cooperatives governed by a board of directors elected by all customers. In the competitive environment, the utility companies will no longer be guaranteed the opportunity to make a profit on the generation of electricity.

A few relatively easy-to-understand pricing options are currently available. It is anticipated that in the deregulated environment, many pricing options will be available, some of which may be very complex.

Utility bills for electricity now include one total price for all these components: generation, transmission, distribution, and local service. There are separate additional charges for fuel adjustment and taxes. Utility bills in the deregulated environment will be "unbundled," meaning that each of the components will be itemized separately with a price per kilowatt hour (kWh) for each. In addition, there may be a competitive transition charge or stranded investment charge for each kWh.

Additional customer choices will also be available in the future. Today, you buy just your electricity from your designated utility company. In the near future, companies and brokers will offer many products and services in addition to electricity. These additional products and services may include propane, diesel fuel, energy services, financing, equipment, and equipment maintenance.

How Can You Get More Information?

You will need much additional information before you can select the most appropriate electricity provider. More information is available from your local utility company, Agricultural and Biological Engineering Extension, trade journals, popular press, and PA Public Utilities Commission.

Aggregation

A grouping of electric consumers (generally residential and small business customers) into a larger purchasing unit in order to gain more bargaining power with the electricity-generation supplier.

Avoided Cost

An estimate of what it would cost the utility to produce the next increment of electricity. The estimate is used to evaluate the purchase of power from nonutility sources.

Biomass

Organic matter including wood, agricultural crops, and crop residues that can be burned to produce energy.

Broker

Someone licensed by the PUC that acts as a middleman in the purchase and sale of electricity.

Cogeneration

A process of producing simultaneously electric and thermal (heat) energy from one fuel source.

Competitive Transition Charge (CTC)

A charge that must be applied to the bill of every customer accessing the transmission or distribution network. The charge is needed so that an electric utility can recover a portion of its transition costs or stranded costs as determined by the Public Utility Commission.

Demand

Maximum amount of electrical power used over a 15-, 30-, or 60- minute interval in the billing period. Expressed in units of kilowatt (kW).

Demand Charge

Amount charged for the highest average power demand recorded during any one time period (ranging from 15 minutes to one hour) within the billing period.

Deregulation

Removal or relaxation of regulations or controls governing a business or service operation. In the case of the electric industry, deregulation means consumers will have their choice of electricity generation suppliers.

Distribution

The local part of an electricity system that delivers power from the substation to the retail customers.

Electricity-Generation Supplier

A person or corporation, broker, marketer, aggregator, or any others who sell electricity or related services using the transmission and/or distribution facilities of an electric utility company.

Electricity Generator of Last Resort

A consumer's local electric utility that will provide power to the consumer if his or her selected generation supplier is unable to deliver.

Energy Conservation

The process of reducing use of energy to conserve and protect environmental resources.

Fossil Fuels

Natural resources such as coal, oil, and natural gas that can be burned to generate electricity.

Generation

Production of electricity from a power plant.

Generation Capacity

The maximum amount of electrical power that a power plant is able to produce, usually expressed in megawatts (MW).

Geothermal Energy

Natural heat from within the Earth, captured for production of electric power. Geothermal energy can also cool air in the summer and heat air in the winter when using ground-coupled heat pumps.

Investor-owned Utility (IOU)

A utility company owned and operated by private investors.

Interruptible Rate

A special utility rate given to those who have their service temporarily stopped as part of an agreement with the utility company. Service interruptions may occur during periods of high demand or high cost periods of short supply for the utility.

Kilowatt-hour (kWh)

Unit of measure of electricity use over a period of time. For example, ten 100-watt light bulbs operated for one hour consumes one kilowatt hour (kWh) of electricity.

Load

The amount of electrical power being used at one time by a customer, circuit, or system. Expressed in units of kilowatts (kW).

Load Management

Shifting energy demands to different time periods of the day in order to reduce demand charges.

Load Profile

Graphic representation of electricity used over a period of time.

Non-Utility Generation

When a company other than a regulated public company produces power for sale.

Off-Peak Period

Period of time when the electricity supplied by a utility system is at a low level compared to other time periods. Corresponds to when demand by customers is low.

On-Peak Period

Period of time when the electricity supplied by a utility system is at a high level compared to other time periods. Corresponds to when demand by customers is high.

Peak Generation Load

The maximum demand for energy (or the maximum load consumed or produced) on a utility system in a stated period of time. This determines the utility's required generating capacity.

Pilot

A utility program offering a limited group of customers their choice of certified or licensed energy suppliers on a short-term trial basis.

Public Utility Commission (PUC)

The state regulatory agency that provides oversight, policy guidance, and direction to electric public utilities as well as other utilities.

Real-time Pricing

Hourly rates for electricity that reflect the actual fluctuating costs for generating electricity.

Renewable Electricity

Electricity generated from replenishable energy sources, such as hydropower, wind, solar, geothermal, or biomass.

Retail Wheeling

Also known as retail customer choice. A utility company is required to transport electricity from a generating plant it does not own directly to its retail customers. This gives retail customers the ability to purchase electricity from sources they choose.

Rural Electric Cooperative

Generally a nonprofit, customer-owned electric utility responsible for providing electricity in primarily rural areas.

Stranded Costs

Investments and commitments made by utility companies that cannot be recovered in the deregulated environment, expect by special billings over a projected five- to nine-year period. The PUC will determine the amount of stranded costs to be recovered.

Transmission

Electric lines that transport generated electricity in bulk from the generation plant to substations

Unbundling

Itemizing utility company services (generation, transmission, distribution, stranded costs, local service) so the customer knows the cost of each service.

Universal Service

Policies, protections, and services that help low-income customers maintain service.This includes customer assistance programs and policies and services that help low-income customers reduce or manage energy consumption in a cost-effective manner.

Valley Filling

An electric utility procedure used to change customer consumption patterns so that output of electricity is more evenly distributed throughout the day or year.

Wheeling

The transmission of power that has been generated by one utility system over the lines of another utility system.

For a more complete list of terms, refer to the Glossary of Electric Terms for the Future produced by the PA Public Utility Commission.

How can you prepare for deregulation?

Complete these steps before shopping for an electricity generation supplier.

  • Document how much electricity you use and when you use the electricity.
  • Identify your major users of electricity.
  • Determine how you could modify your load profile. The more attractive your load profile is to an electricity generation supplier, the more effectively you can negotiate with the electricity provider in order to get a favorable rate.

An electricity generation supplier is a person, corporation, broker, marketer, aggregator or any others who sell electricity or related services utilizing the transmission and/or distribution facilities of an electric utility company.

  • Consider the total cost of any alternate forms of energy, including costs for installation, maintenance and operation.
  • Explore options to become part of an aggregated group for purchasing electricity.
  • Study offers that "sound to good to be true."

Steps for Residential Users of Electricity

Estimate your costs of electricity for various residential uses, such as heating, air conditioning, and water heating. This recommendation applies to homeowners and renters as well as apartment dwellers. Consider how you could shift tasks such as laundering and dishwashing to off-peak hours to reduce you utility bill.

Steps for Industrial and Commercial Users of Electricity

Calculate the cost of electricity as a percentage of total production or service costs. For example, if your company is manufacturing widgets, calculate the cost of electricity per widget produced. If you operate a commercial venture, calculate the cost of electricity per customer serviced and per dollar revenue generated. If you are a farmer, calculate the cost of electricity to produce 100 pounds of milk, a dozen of eggs, one pound of meat, one flat of bedding plants, or one bushel of fruit. After you have carefully documented how and when you use electricity, then you will be better able to negotiate effectively to get the best buy for electricity.

After you have carefully documented how and when you use electricity, you should be able to select the most appropriate electricity generation supplier to meet your needs.

Before selecting an electricity-generation supplier, there are many questions that you need to ask and then you need to evaluate the assurances that you receive from the various suppliers that you are considering. The following are the questions that you need to ask.

How much will I pay?

What is the overall cost per kilowatt-hour (kWh) of generated electricity that is being negotiated? (Be sure to exclude charges from your local utility for transmission, distribution, and local service since these prices are controlled by regulation and are not negotiable.) If all kilowatt-hours are not charged at the same rate, what incentives are provided for a lower price of electricity. For example, what are the on-peak and off-peak rates for electricity? When is the off-peak period for each month of the contract period? Are there fixed- and variable-rate contracts? Are there any demand charges? Are there any volume discounts?

What are the signing bonuses?

What is the value of extra services and gifts that are being offered as incentives to sign contracts? Are these extra services and gifts valuable to you? Just how badly do you need another toaster or bird feeder? Or what is the true value of a free month of electricity or a frequent-flyer mile for each 100 kWh?

What will be included on my utility bill?

Will there be separate bills for generation and all the other charges or can you get just one combined bill? To what extent will individual expenses be itemized on your bill? Will there be any fees (exit charges, termination fees, transition fees, etc.) if you terminate service with your current supplier of generated electricity? Are there any fees that the new electricity-generation supplier will be charging, such as origination fees, demand charges, service charges, minimum charges, and termination fees?

Can I buy "renewable" electricity?

Will your supplier provide "renewable" electricity (i.e., electricity generated from replenishable energy sources, such as hydropower, wind, solar, geothermal, or biomass)? How much extra will you pay for renewable electricity? How can you be sure you are getting renewable electricity?

What is the length of contract?

What is the minimum length of contract period that each electricity-generation supplier is requiring? Under what circumstances can you terminate the agreement before the end of contract period? Under what circumstances can the electricity-generation supplier terminate the contract? What are the penalties to the supplier and/or customer for contract termination? Can the contract be renewed automatically or is it subject to negotiation at that time again?

What happens if my electricity-generation supplier does not meet my electricity needs?

What recourse do you have if your electricity-generation supplier is unable to provide you with all the electricity you need? How much will you pay to get electricity if your designated supplier cannot provide?

Am I negotiating with a reliable electricity-generation supplier?

Is your electricity-generation supplier licensed by the Pennsylvania Public Utilities Commission to sell electricity? How will you be able to contact your supplier after the contract is signed? Can you contact your supplier 24 hours a day, 7 days a week? Is your supplier likely to be available in the future to meet your needs? Is your supplier investing in your community or region as a "good citizen" to improve the quality of life for everyone?

Will I be getting interruptible or non-interruptible service?

Do the advertised rates for electricity apply to interruptible or uninterruptible service of electricity? If the rates are for interruptible service, what provisions exist for obtaining electricity--or other forms of energy--during the interruption? What is the cost of an alternate supply of electricity or other energy during the interruption? Under what circumstances and how often will your electricity supply be subject to interruption?

How can I lower my utility bill?

How can you reduce your expenses for electricity and other forms of energy through an energy management program? To what extent will your electricity-generation supplier assist you in optimizing your use of energy to maximize the profitability of your business, company, or farm? Can the supplier assist you to reduce expenditures for energy in your home?

What are the benefits of aggregation?

How much can you save if you aggregate with other customers? What types of customers should combine into the aggregated group of electricity customers? When joining an aggregated group, what happens if X percent of the members of the aggregated group forfeit the contract? What is the maximum percentage of members forfeiting their contracts that will result in the entire aggregated contract being canceled?

You need to educate yourself now so that you can be an informed shopper when selecting an electricity-generation supplier. Additional information is available from your local utility company, Penn State's Agricultural and Biological Engineering Extension, trade journals, popular press, and PA Public Utility Commission.

Early in the process, there were claims that consumers could save 30 to 50 percent of their costs for electricity because of the deregulation legislation. Those claims appear to be exaggerated; more realistic savings are in the 10 to 15 percent range for those informed consumers who know how to take advantage of the opportunities available because of deregulation. Therefore, it is imperative that everyone become more involved in studying all aspects of the deregulation of electricity generation. The following do's and dont's are intended to get you started on the journey of learning more about deregulation.

Do's

  • Calculate the annual cost of electricity for your business or operation on the basis of dollars per item produced or service rendered. For example, if your company manufactures widgets, calculate the cost of electricity per widget produced. If you operate a commercial venture, calculate the cost of electricity per customer serviced and per dollar revenue generated. It is very important to understand the relative significance of electricity expenditures.
  • Install meters to monitor and record your use of electricity for the various components of your operation. Your local utility should be able to assist you with this activity.
  • Examine your various opportunities to modify your load profile to reduce demand charges and/or to make yourself more attractive to an electricity generation supplier.
  • Consider using other forms of energy in place of electricity in the various phases of your operation. For example, you may want to consider using natural gas or propane as the energy source for heating water. But before making any conversions to other forms of energy, be sure to evaluate the total expenditures involved, including initial investment and anticipated costs for operation and maintenance.
  • Explore the benefits of aggregation; that is, a grouping of electricity consumers (generally residential and small business/commercial consumers) into a larger purchasing unit for the purpose of gaining more bargaining power with the electricity generation suppliers.
  • Carefully study the offers from the various electricity-generation suppliers that you will be receiving. Find out exactly how much it would cost for your electricity (including all charges) to meet your electricity needs. Shop around with various electricity-generation suppliers before making a commitment.
  • Begin now to become more educated on the topic of deregulation of electricity generation so that you will be an informed shopper.

Don'ts

  • Don't sign a contract for a period longer than one year. There are still some uncertainties concerning how electricity will be bought and sold as a commodity in the deregulated environment. Until the dust settles, contracts should not be longer than one year for your own protection.
  • Don't be swayed by free gifts and other "come-ons." Beware of "wise men bearing gifts." You may be receiving many offers with attractive signing bonuses. Be sure to evaluate the true value of these signing bonuses. Just how much is another toaster or a bird feeder worth to you? Or how valuable is a free month of electricity each year or a frequent flyer mile for each 100 kWh purchased? Insist on knowing how much electricity is going to cost you for your operation on a per kWh basis, including all the involved charges.
  • Don't assume your local utility will provide you with the very best deal for electricity. But at the same time, certainly include your local utility company as one of the electricity generation suppliers that you will consider.
  • Don't ignore deregulation. You need to figure out how to take advantage of the opportunities of deregulation.
  • Don't expect to reap huge savings because of deregulation. On the other hand, don't assume that deregulation is "small potatoes" and won't make any difference in your operation. You actually could lose money because of deregulation if you do not become an informed shopper.

However, whenever energy conservation programs are being considered, all the implications of reducing electricity consumption must be evaluated. For example, the utility bill for heating a building can be lowered by reducing the ventilation. However, the reduced ventilation may result in poor indoor air quality, thus having negative impacts on the health and productivity of the occupants. This is an example of "penny wise and pound foolish" because the energy savings are quickly offset by the negative consequences.

Electricity consumption needs to be viewed in the context of an overall energy management plan. The challenge is to optimize energy use to increase profitability of your business, industry, or service. For residential customers, the objective is to use energy as efficiently as possible without adverse impacts on health and comfort.

Instructors

Bioenergy Biomass Energy Systems Thermochemical Conversion Energy Efficiency Controlled Environment Agriculture Solar Energy Resource Evaluation

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