Electric Energy Distribution
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Industry Overview
The US electric power transmission and distribution (electric energy distribution) industry includes about 1,200 companies with combined annual revenue of about $260 billion. Major companies include American Electric Power, Exelon, FPL Group, Pacific Gas & Electric, and Southern Company. The industry is highly concentrated: the 50 largest companies account for more than 80 percent of revenue.
The electric energy distribution industry includes companies that own and operate high-voltage transmission lines and retail distribution systems, as well as intermediaries like energy dealers and brokers. Electric power generation companies are covered in a separate industry profile.
Competitive Landscape
Demand for electricity is driven by industrial and commercial activity and by population growth. The profitability of individual companies depends on the efficiency of their operations. Large companies have economies of scale in purchasing power; small companies can compete effectively by specializing in geographic regions. The industry is capital-intensive: average annual revenue per worker is about $2 million.
The traditional electricity industry consisted of investor-owned utilities, municipal utilities, cooperatives, and government entities that owned the generation, transmission, and retail distribution facilities within a limited area and served all customers within that area as tightly regulated "natural monopolies." Though "natural monopolies" still exist, the electric energy industry in the US underwent a restructuring driven by changes in federal and state laws in the 1990s. In restructured, or deregulated, markets, generation, transmission, and distribution operations are carried out by separate companies, and the owners of local distribution lines make their lines available to competitors. The intended purpose of moving toward a less regulated electricity market was to decrease the cost of electricity by fostering competition among producers. One practical effect was the divestment of generation facilities by many investor-owned utilities.
Despite the popularity of restructuring activities initially, as of mid-2009 only 14 states had deregulated their electricity industries. Several other states, including California, launched restructuring initiatives before suspending them, in part because of concerns that restructuring caused electricity rates to rise. Many local electricity distributors are still owned by utility holding companies that also own power generation facilities, wholesale transmission lines, and wholesale power trading companies.
Products, Operations & Technology
The primary operations of retail electricity distributors include 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 through affiliates 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. 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).
