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What Is a Wholesale Electricity Market?

In many cases, electricity is generated by a power company that ultimately will not deliver it to the end-use customer. A single megawatt (MW - the most common unit of electricity used in discussions - is generally enough power to light 750 to 1,000 homes), like any other commodity, is frequently bought and re-sold a number of times by a power company before finally being consumed. These transactions are considered "sales for re-sale," and make-up the wholesale electricity market.

The wholesale power company market is open to anyone who, after securing the necessary approvals, can generate power, connect to the grid and find a counterparty willing to buy their output. These include competitive power company suppliers and marketers that are affiliated with utilities, independent power company producers (IPPs) not affiliated with a power company utility, as well as some excess generation sold by traditional vertically integrated utilities. All these power company market participants compete with each other on the wholesale market.

To be a participant in the power company wholesale market, however, one does not need to either own any generation or serve any end-use customers. Just as with many other commodities - pork bellies, oil or stocks - individual traders (a power company, in this case) exist who buy power on the open market and re-sell it.

Trades in the power company wholesale market are understood to be occurring within a multi-state interconnection, and thus are interstate sales. Due to the interstate nature of the sales, the wholesale power company market is regulated across the country - except in ERCOT - by the Federal Energy Regulatory Commission (FERC). ERCOT functions as an exception due to the fact - as described above - that the entire interconnection lies in a single state, Texas.

Within regional wholesale power company markets, however, there exists a split structure. A number of regions - including the Northeast, Mid-Atlantic, much of the Midwest, ERCOT and California - organize their markets under an independent system operator (ISO) - sometimes also referred to as a regional transmission organization (RTO). Most states in these regions also allow for retail competition (further discussed below). By adopting this ISO/RTO structure, these regions have moved to expand competition in electricity. In fact, two-thirds of the electricity consumed in the U.S. is by consumers in an ISO/RTO.

Other regions - including the Southeast, Southwest, Inter-Mountain West and Northwest - chose to retain the traditional power company regulatory model. Under this regime, vertically-integrated utilities retain functional control over the transmission system and therefore choose what generator is dispatched when. Such a model, however, has led to preferential treatment by these power company utilities for their own generation rather than more affordable and environmentally responsible generation available from competitive suppliers and marketers.

http://www.epsa.org/industry/primer/?fa=wholesaleMarket

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