Electricity Basics
Electricity is a form of energy characterized by the presence and
motion of elementary charged particles generated by friction,
induction, or chemical change. Electricity is a secondary energy
source which means that we get it from the conversion of other
sources of energy, like coal, natural gas, oil, nuclear power and
other natural sources, which are called primary sources. The energy
sources we use to make electricity can be renewable or
non-renewable, but electricity itself is neither renewable or
non-renewable.
Electricity is an integral part of life in the United States. It is
indispensable to factories, commercial establishments, homes, and
certain modes of transportation. Lack of electricity causes not only
inconvenience, but also economic loss due to reduced commercial and
industrial production. This overview provides information about the
major components of the industry in 2007.
Traditional Electric Utilities
The more than 3,273 traditional electric utilities in the United
States are responsible for ensuring an adequate and reliable source
of electricity to all consumers in their service territories at a
reasonable cost. Electric utilities include investor-owned,
publicly-owned, cooperatives, and Federal utilities. Power marketers
buy and sell electricity, but usually do not own or operate
generation, transmission, or distribution facilities. Utilities are
regulated by local, State, and Federal authorities, and in the case
of many electric cooperatives, by their Board of Directors.
Interstate sales of electricity on the wholesale market and by
public utilities (e.g., investor-owned utilities, power marketers,
independent power producers, and non-exempt electric cooperatives)
are subject to regulation by the Federal Energy Regulatory
Commission (FERC). FERC also regulates interstate transmission
service provided by transmission-owning public utilities. In
addition to regulating transactions in interstate commerce, FERC
licenses hydroelectric facilities on navigable waterways. Licensing
the construction and operation of nuclear power plants, safety and
nuclear waste disposal management is under the jurisdiction of the
Nuclear Regulatory Commission. Retail sales, and unbundled
distribution service provided by investor-owned utilities are
subject to State regulation. In some States, municipal utilities and
electric cooperatives rates are also subject to State regulation.
Approval of the construction of most power plants and transmission
line construction is generally regulated by the States.
State public service commissions have jurisdiction primarily over
the large, vertically integrated, investor-owned electric utilities
that own more than 38 percent of the Nation's generating capacity
and serve about 71 percent of ultimate consumers. There are 210
investor-owned electric utilities, 2,009 publicly-owned electric
utilities, 883 consumer-owned rural electric cooperatives, and 9
Federal electric utilities. A small amount of electricity is sold by
generating facilities directly to end use customers. At least 6
States regulate cooperatives, and at least 7 States regulate
municipal electric utilities; many State legislatures, however,
defer this control to local municipal officials or cooperative
members.
Nonutility Power Producers
The approximately 1,738 nonutility power producers in the United
States include:
Qualifying Facilities (QF) established under the Public Utility
Regulatory Policies Act of 1978 (PURPA). QFs include combined heat
and power (CHP) plants and small power producers. CHP plants produce
process heat (e.g., steam) for primary business activity other than
electricity production. The surplus heat is used to generate
electricity for sale to utilities. Small power producers are
entities that use renewable resources to generate electricity and
which are not larger than 80 MW.
Independent power producers that produce and sell electricity on the
wholesale market at market-based rates, and do not have franchised
service territories. Most are designated as exempt wholesale
generators, which relieves them of many of the regulatory
requirements applicable to traditional utilities subject to FERC
regulation.
Other combined heat and power plants that are often co-located at
nearby industrial sites. These facilities may be classified as
commercial or industrial depending on the North American Industrial
Classification System (NAICS) code associated with the co-located
industry.
Traditional Electric Utilities
Consumer Sectors. Utility service territories are geographically
distinct from one another. Each territory is usually composed of
many different types of consumers. Electricity consumers are divided
into classes of service or sectors (residential, commercial,
industrial, and transportation) based on the type of service they
receive. Utilities categorize consumers into classes of service,
which are used to determine rates for electric service. Customer
classification is determined by each utility and is based on various
criteria such as:
load profile,
NAICS code,
voltage level at which electricity is delivered,
end-use applications, and
other social and economic characteristics (e.g., such as lifeline
rates for low income customers and economic development rates for
commercial and industrial customers).
Electric utilities use consumer classifications for planning (i.e.,
load growth and peak demand) and for determining their sales and
revenue requirements (cost-of-service) in order to derive their
rates. Utilities typically employ a number of rate schedules for a
single sector. The alternative rate schedules reflect consumers'
varying consumption levels and patterns and the associated impact on
the utility's costs of providing electrical service. For example, a
utility may have a basic rate for residential service, as well as a
residential rate that applies to residential consumers with electric
water heaters. Reclassification of consumers, usually between the
commercial and industrial sectors, may occur from year to year due
to changes in demand level, economic factors, or other factors.
Revenue. The revenue associated with sales to ultimate consumers is
referred to as the operating revenue (Figure 1). Operating revenue
is collected through rates that may consist of a number of separate
components, including energy charges, demand charges, consumer
service charges, environmental surcharges, fuel and purchased power
adjustments, and other miscellaneous charges. These rate components
allow the utility to recover the costs it incurs in providing
service to each class of consumers. The elements of the
cost-of-service include operating and maintenance expenses, fuel,
purchased power, capital costs (e.g., depreciation, interest
expenses, and return on equity), State and Federal income taxes, and
taxes other than income taxes. State and local authorities tax the
value of plants (property taxes), the amount of revenues (gross
receipts taxes), purchases of materials and services (sales and use
taxes), and a potentially long list of other items that vary
extensively by taxing authority. Costs that vary with the amount of
electricity produced are generally recovered through energy charges.
Costs that do not vary with production, such as capital costs, are
recovered through demand charges.
Electric utilities, like other business enterprises, are required by
various taxing authorities to collect and remit taxes assessed on
their consumers. In this regard, the utility serves as an agent for
the taxing authority. Taxes assessed on consumers, such as sales
taxes, are called "pass through" taxes. These taxes do not represent
a cost to the utility and are not recorded in the operating revenues
of the utility. However, taxing authorities differ on whether a
specific tax is assessed to the utility or to the consumer, a
difference that in turn determines whether or not the tax is
included in the electric utility's operating revenues.
Average Retail Price (Price). Average retail price is defined as the
cost per unit of electricity sold and is calculated by dividing
retail electric revenue by the corresponding sales of electricity.
The average retail price is calculated for all consumers and for
each sector (residential, commercial, industrial, and
transportation). The average retail price discussed in this primer
represents a weighted average of consumer revenue and sales within
each sector and across sectors for all consumers. Average retail
prices vary across sectors because of the different consumption
patterns of residential, commercial, industrial and transportation
consumers. In addition, average retail price is affected by changes
in the rate schedules used by the electric utilities and by changes
in the volume of electricity sales. Because fixed charges remain
constant in the short run regardless of the volume of sales, with
all other factors remaining constant, average retail price decreases
as the volume of sales increases. Sales volumes may increase through
a combination of customer growth and an increase in average
consumption per customer. In recent years, average consumption per
customer has been declining, but has been more than offset by
customer growth such that total sales continue to increase.
Historically, the rate schedules used by electric utilities were
designed so that as the volume of sales increased, to the extent the
increase in revenue was less than the relative increase in sales,
the average price of electricity would fall. This type of rate
promoted energy consumption over conservation. As the cost of
producing electricity has increased, along with concerns about the
impact of electricity production on the environment, utilities are
implementing rates and other programs that more closely reflect
costs and reduce environmental impacts. These activities include
demand response programs, green pricing, and real-time pricing.
Classes of Ownership. The electric utility industry in the United
States includes 3,273 investor-owned, publicly-owned, cooperative,
and Federal electric utilities, as well as retail and wholesale
power marketers (Figure 2). Historically, investor-owned electric
utilities have served large, consolidated markets where economies of
scale afford the lowest prices. However, publicly-owned,
cooperative, and Federal electric utilities all have a role in
producing, transmitting, and distributing electricity.
http://www.eia.doe.gov/basics/electricity_basics.html
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