Electric Energy Distribution
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Industry Overview
Over 6,000 companies in the US are involved in the wholesale trade and retail distribution of electricity, with combined annual revenue of more than $220 billion. Companies include owners of high voltage transmission lines and retail distribution systems, and intermediaries like energy dealers and brokers. The US consumes close to 4 billion megawatt-hours (MWh) of electricity per year, about 50 percent of which is bought and sold on the wholesale market.
Competitive Landscape
The electric energy industry in the US is currently in a state- and federally-sponsored transition, or Electric Restructuring. The traditional electricity industry consists of large investor-owned utilities (IOUs); municipal utilities; rural cooperatives; and government entities, like the Tennessee Valley Authority (TVA), that own the generation, transmission, and retail distribution facilities within a limited area, and serve all customers within that area as tightly regulated "natural monopolies." Under restructuring, the generation, transmission, and distribution operations are carried out by separate companies, and the owners of local distribution lines make their lines available to competitors. About half the states have adopted restructuring legislation, but only a third is actively engaged in restructuring.
The intended purpose of moving toward a less regulated electricity market is to decrease the cost of electricity by fostering competition among producers. The practical effect of federal and state legislation has been the divestment of generation facilities by local utilities. Despite restructuring, many local electricity distributors are owned by utility holding companies that also own power generation facilities, wholesale transmission lines, and wholesale power trading companies.
Products, Operations & Technology
The actual operations of retail electricity distributors consist of generating or acquiring wholesale power (often under long-term supply contracts), maintaining and extending a line network, and billing and collections.
Retail distributors generate their own power or buy power in the wholesale market. If local utilities can't meet demand through their own generation facilities, extra electricity may be bought from another utility with spare capacity. While such trading was done informally, the wholesale market has evolved rapidly since 1996, when the Federal Energy Regulatory Commission (FERC) required utilities to open transmission facilities and establish electronic information systems to share capacity information.
Power marketing companies are intermediaries in the wholesale market, buying power from generators and selling to distributors through short- or long-term contracts
The two basic wholesale forward contracts are the Day-Ahead and the Block Forward. The Day-Ahead spot contract is for electricity to be delivered at a specified hour and transmission point during the next day. The Block Forward contract specifies that a block of electricity be delivered daily for a month at some time in the future. Forward contracts are expressed in dollars per megawatt-hour ($/MWh); typical prices range from $15/MWh to $50/MWh, although much higher prices are sometimes paid. Day-Ahead contracts are established on local power exchanges. Futures contracts are traded on the Chicago Board of Trade (CBOT) and the New York Mercantile Exchange (NYMEX).