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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

Electricity

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