Electric utility

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An electric utility is a company in the electric power industry (often a public utility) that engages in electricity generation and distribution of electricity for sale generally in a regulated market. [1] The electrical utility industry is a major provider of energy in most countries.

Electric power industry industry that provides the production and delivery of electric energy

The electric power industry covers the generation, transmission, distribution and sale of electric power to the general public and industry. The commercial distribution of electric power started in 1882 when electricity was produced for electric lighting. In the 1880s and 1890s, growing economic and safety concerns lead to the regulation of the industry. What was once an expensive novelty limited to the most densely populated areas, reliable and economical electric power has become an essential aspect for normal operation of all elements of developed economies.

Public utility an organization that maintains the infrastructure for a public service

A public utility is an organization that maintains the infrastructure for a public service. Public utilities are subject to forms of public control and regulation ranging from local community-based groups to statewide government monopolies.

Electricity generation process of generating electrical power

Electricity generation is the process of generating electric power from sources of primary energy. For electric utilities in the electric power industry, it is the first stage in the delivery of electricity to end users, the other stages being transmission, distribution, energy storage and recovery, using the pumped-storage method.

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Electric utilities include investor owned, publicly owned, cooperatives, and nationalized entities. They may be engaged in all or only some aspects of the industry. Electricity markets are also considered electric utilities—these entities buy and sell electricity, acting as brokers, but usually do not own or operate generation, transmission, or distribution facilities. Utilities are regulated by local and national authorities.

Investor-Owned utilities or IOUs are private enterprises acting as public utilities. Examples may range from a family that owns a well on their property to international energy conglomerates.

In economic terms, electricity is a commodity capable of being bought, sold, and traded. An electricity market is a system enabling purchases, through bids to buy; sales, through offers to sell; and short-term trades, generally in the form of financial or obligation swaps. Bids and offers use supply and demand principles to set the price. Long-term trades are contracts similar to power purchase agreements and generally considered private bi-lateral transactions between counterparties.

Electric utilities are facing increasing demands [2] including aging infrastructure, reliability, and regulation.

Organization

Power transactions

An electric power system is a group of generation, transmission, distribution, communication, and other facilities that are physically connected. [3] The flow of electricity within the system is maintained and controlled by dispatch centers which can buy and sell electricity based on system requirements.

Executive compensation

The executive compensation received by the executives in utility companies often receives the most scrutiny in the review of operating expenses. Just as regulated utilities and their governing bodies struggle to maintain a balance between keeping consumer costs reasonable and being profitable enough to attract investors, they must also compete with private companies for talented executives and then be able to retain those executives. [4]

Executive compensation or executive pay is composed of the financial compensation and other non-financial awards received by an executive from their firm for their service to the organization. It is typically a mixture of salary, bonuses, shares of or call options on the company stock, benefits, and perquisites, ideally configured to take into account government regulations, tax law, the desires of the organization and the executive, and rewards for performance.

Regulated companies are less likely to use incentive-based remuneration in addition to base salaries. Executives in regulated electric utilities are less likely to be paid for their performance in bonuses or stock options. [4] They are less likely to approve compensation policies that include incentive-based pay. [4] The compensation for electric utility executives will be the lowest in regulated utilities that have an unfavorable regulatory environment. These companies have more political constraints than those in a favorable regulatory environment and are less likely to have a positive response to requests for rate increases. [5]

Remuneration is the pay or other compensation provided in exchange for an employee’s services performed. A number of complementary benefits in addition to pay are increasingly popular remuneration mechanisms. Remuneration is one component of reward management.

Just as increased constraints from regulation drive compensation down for executives in electric utilities, deregulation has been shown to increase remuneration. The need to encourage risk-taking behavior in seeking new investment opportunities while keeping costs under control requires deregulated companies to offer performance-based incentives to their executives. It has been found that increased compensation is also more likely to attract executives experienced in working in competitive environments. [6]

The Energy Policy Act of 1992 removed previous barriers to wholesale competition in the electric utility industry. Currently 24 states allow for deregulated electric utilities: Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Virginia, Arizona, Arkansas, California, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Montana, New Hampshire, New Jersey, New Mexico, New York, and Washington D.C. [7] As electric utility monopolies have been increasingly broken up into deregulated businesses, executive compensation has risen; particularly incentive compensation. [8]

Oversight

Oversight is typically carried out at the national level, however it varies depending on financial support and external influences. [9] There is no existence of any influential international energy oversight organization. There does exist a World Energy Council, but its mission is mostly to advise and share new information. [10] It does not hold any kind of legislative or executive power. In the western hemisphere, many electric utility companies were under oversight from the United States and although the United States has, in the early 21st century, withdrawn from many of these countries. Several major energy utility companies are still under oversight from the United States.

Alternative energy promotion

Alternative energy has become more and more prevalent in recent times and as it is inherently independent of more traditional sources of energy, the market seems to have a very different structure. In the United States, to promote the production and development of alternative energies, there are many subsidies, rewards, and incentives that encourage companies to take up the challenge themselves. There is precedent for such a system working in countries like Nicaragua. In 2005, Nicaragua gave renewable energy companies tax and duty exemptions, which spurred a great deal of private investment. [11]

The success in Nicaragua may not be an easily replicated situation however. The movement was known as Energiewende and it is generally considered a failure for many reasons. [12] A primary reason was the fact that it was improperly timed and was proposed during a period in which their energy economy was under more competition.

Nuclear Energy

Nuclear energy may or may not be classified as a green source depending on the country. Although there used to be much more privatization in this energy sector, after the 2011 Fukushima district nuclear power plant disaster in Japan, there has been a move away from nuclear energy itself, especially for privately owned nuclear power plants. [13] The criticism being that privatization of companies tend to have the companies themselves cutting corners and costs for profits which has proven to be disastrous in the worst-case scenarios. This placed a strain on many other countries as many foreign governments felt pressured to close nuclear power plants in response to public concerns. [12] Nuclear energy however still holds a major part in many communities around the world.

Customer expectations

Utilities have found that it isn't simple to meet the unique needs of individual customers, whether residential, corporate, industrial, government, military, or otherwise. Customers in the twenty-first century have new and urgent expectations that demand a transformation of the electric grid. They want a system that increases a utility's capacity to use solar and wind to produce electricity. Customers also want a system that gives them new tools, better data to help manage energy usage, advanced protections against cyberattacks, and a system that minimizes outage times and quickens power restoration. [14]

See also

Related Research Articles

Deregulation is the process of removing or reducing state regulations, typically in the economic sphere. It is the repeal of governmental regulation of the economy. It became common in advanced industrial economies in the 1970s and 1980s, as a result of new trends in economic thinking about the inefficiencies of government regulation, and the risk that regulatory agencies would be controlled by the regulated industry to its benefit, and thereby hurt consumers and the wider economy.

Electricity retailing is the final sale of electricity from generation to the end-use consumer. This is the fourth major step in the electricity delivery process, which also includes generation, transmission and distribution.

The California electricity crisis, also known as the Western U.S. Energy Crisis of 2000 and 2001, was a situation in which the U.S. state of California had a shortage of electricity supply caused by market manipulations, and capped retail electricity prices. The state suffered from multiple large-scale blackouts, one of the state's largest energy companies collapsed, and the economic fall-out greatly harmed Governor Gray Davis' standing.

Net metering

Net metering allows consumers who generate some or all of their own electricity to use that electricity anytime, instead of when it is generated. This is particularly important with renewable energy sources like wind and solar, which are non-dispatchable. Monthly net metering allows consumers to use solar power generated during the day at night, or wind from a windy day later in the month. Annual net metering rolls over a net kilowatt credit to the following month, allowing solar power that was generated in July to be used in December, or wind power from March in August.

Energy Policy Act of 1992

The Energy Policy Act, effective October 24, 1992, is a United States government act. It was passed by Congress and set goals, created mandates, and amended utility laws to increase clean energy use and improve overall energy efficiency in the United States. The Act consists of twenty-seven titles detailing various measures designed to lessen the nation's dependence on imported energy, provide incentives for clean and renewable energy, and promote energy conservation in buildings.

Public Utility Regulatory Policies Act

The Public Utility Regulatory Policies Act is a United States Act passed as part of the National Energy Act. It was meant to promote energy conservation and promote greater use of domestic energy and renewable energy. The law was created in response to the 1973 energy crisis, and one year in advance of a second energy crisis.

Exelon company

Exelon Corporation is an American Fortune 100 energy company headquartered in Chicago, Illinois. It generates revenues of approximately $33.5 billion and employs approximately 34,000 people. Exelon is the largest electric parent company in the United States by revenue, the largest regulated utility in the United States with approximately 10 million customers, and also the largest operator of nuclear power plants in the United States. It was created in October 2000 by the merger of PECO Energy Company of Philadelphia and Unicom Corp of Chicago, which owned Commonwealth Edison.

Electricity provider switching is the ability of power consumers to have an option—or the "power to choose"—their electricity provider in a deregulated electricity market as permitted by a state public utilities governing body.

Electricity deregulation in Texas, approved by Texas Senate Bill 7 on January 1, 2002, calls for the creation of the Electric Utility Restructuring Legislative Oversight Committee to oversee implementation of the bill. According to the law, deregulation would be phased in over several years.

Texas Genco was a power generation company that came about as part of the deregulated Texas electricity market and owned numerous power plants in the Houston area that serve area power needs. The Company was created in 2001 as part of the Texas electricity market deregulation. Incumbent utilities were required to separate their business functions into a retail electric provider (REP), a transmission and distribution service provider (TDSP), and a wholesale generator.

Edison Electric Institute organization

The Edison Electric Institute is the association that represents all U.S. investor-owned electric companies.

The electricity sector in Argentina constitutes the third largest power market in Latin America. It relies mostly on thermal generation and hydropower generation (36%). The country still has a large untapped hydroelectric potential. The prevailing natural gas-fired thermal generation is at risk due to the uncertainty about future gas supply.

Maryland Electric Deregulation is the result of a bill passed in 1999 by the Maryland General Assembly. This bill changed the entire face of the Maryland utility industry.

Electricity sector of the United States

The electricity sector of the United States includes a large array of stakeholders that provide services through electricity generation, transmission, distribution and marketing for industrial, commercial, public and residential customers. It also includes many public institutions that regulate the sector. In 1996, there were 3,195 electric utilities in the United States, of which fewer than 1,000 were engaged in power generation. This leaves a large number of mostly smaller utilities engaged only in power distribution. There were also 65 power marketers. Of all utilities, 2,020 were publicly owned, 932 were rural electric cooperatives, and 243 were investor-owned utilities. The electricity transmission network is controlled by Independent System Operators or Regional Transmission Organizations, which are not-for-profit organizations that are obliged to provide indiscriminate access to various suppliers in order to promote competition.

The National Association of Regulatory Utility Commissioners (NARUC) is the national association representing the state public service commissioners who regulate essential utility services, including energy, telecommunications, and water. NARUC members are responsible for assuring reliable utility service at fair, just, and reasonable rates. Founded in 1889, the Association is a resource for its members and the regulatory community, providing a venue to set and influence public policy, share best practices, and foster solutions to improve regulation.

The Georgia Public Service Commission (PSC) is a statutory organ of the state government of Georgia; elected among five commission districts, the board consists of a Chairman, a Vice-chairman, and three Commissioners. PSC regulates telecommunications, transportation, electric and natural gas services in the U.S. state of Georgia.

Utility ratemaking is the formal regulatory process in the United States by which public utilities set the prices they will charge consumers. Ratemaking, typically carried out through "rate cases" before a public utilities commission, serves as one of the primary instruments of government regulation of public utilities.

Performance-based regulation ("PBR") is an approach to utility regulation designed to strengthen utility performance incentives. Thus defined, the term PBR is synonymous with incentive regulation. The two most common forms of PBR are award-penalty mechanisms (“APMs”) and multiyear rate plans (“MRPs”). Both involve mathematical formulas that can lower regulatory cost at the same time that they encourage better performance. This constitutes a remarkable potential advance in the “technology” of regulation. Economic theorists whose work has supported the development of PBR include Nobel prize-winning economist Jean Tirole.

References

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  2. By Candace Lombardi, CNET. “Utilities: Green tech good for planet, bad for business.” February 23, 2010.
  3. "Electricity Basics" (PDF). science.smith.edu. Smith College. Retrieved 18 July 2014.
  4. 1 2 3 Joskow, Paul; Rose, Nancy; Wolfram, Catherine (1996). "Political Constraints on Executive Compensation: Evidence From the Electric Utility Industry". RAND Journal of Economics. 27 (1): 165–182.
  5. Bryan, Stephen; Hwang, Leeseok (1997). "CEO Compensation In A Regulatory Environment: An Analysis Of The Electric Utility Industry". Journal of Accounting, Auditing & Finance. 12 (3): 223–251.
  6. Bryan, Stephen; Lee-Seok, Hwang; Lilien, Steven (2005). "CEO Compensation After Deregulation: The Case Of Electric Utilities". Journal of Business. 78 (5): 1709–1752.
  7. "Deregulated States". alliedpowerservices.com. Allied Power Services. Retrieved 18 July 2014.
  8. Arya, Avinash; Sun, Huey-Lian (2004). "Impact of Deregulation in CEO Compensation: The Case of Electric Utilities". American Business Review. 22 (1): 27–33.
  9. Thomas, Steve. "Electricity liberalisation: The beginning of the end" (PDF). Retrieved December 3, 2016.
  10. "Mission". www.worldenergy.org. Retrieved 2016-12-09.
  11. "Nicaragua's latest revolution: Becoming a green energy powerhouse". mcclatchydc. Retrieved 2016-12-09.
  12. 1 2 "Renewable energy's global growing pains". Ars Technica. Retrieved 2016-12-09.
  13. "Nuclear power: private vs state". RT International. Retrieved 2016-12-09.
  14. Riley, Kim (2018-03-08). "IEI event emphasizes efforts by utilities to serve diverse mix of customers". Daily Energy Insider. Retrieved 2018-03-16.