How Is Electricity Sold At Retail?
The retail side of electricity rates involves the final sale of
power from an electricity provider to an end-use consumer. These
sales range from the service for a large manufacturing facility to
small businesses and to individual households.
In every state, regardless of whether they allow electricity rates
retail competition or not, supply for end-use customers is obtained
either through the open, competitive electricity rates wholesale
market, from utility-owned rate-based (cost-plus) generation, or
some combination of the two.
In states where full retail electricity rates competition (often
called "retail choice") is provided, customers may choose between
their incumbent utility supplier and an array of competitive
suppliers, as opposed to being a captive customer to a single
provider. Competitive retail suppliers provide a variety of service
plans and electricity rates that give consumers and businesses
flexibility in their energy purchases. They may also offer services
to hedge against electricity rates fluctuations, more choices for
alternative energy resources, and newer energy efficiency projects,
among others. These opportunities allow consumers and businesses to
choose the electricity rates and services that best meet their
In most states providing retail electricity rates competition,
customers who don't choose a supplier are served by their incumbent
utility through a service called "provider of last resort" (POLR -
also sometimes referred to as standard offer service, SOS). The POLR
or SOS supplier will then secure its needed power on the wholesale
market through a competitive electricity rates bid process.
Retail electricity rates markets are regulated at the state level.
State regulatory commissions are most often called the state "Public
Utility Commission" or "Public Service Commission." In every state,
these commissions regulate a distribution utility's costs and rate
of return for use and upkeep of the distribution system.
In retail choice states, the commissions approve any alternative
competitive supplier before they can serve customers. The
commissions also oversee a POLR or SOS utility's power procurement,
and approve the results of the process if the process was fair.
In states not offering electricity rates retail competition, the
commissions regulate the expenditures of the monopoly utilities by
allowing a rate of return on most costs. In these states, utilities
are vertically-integrated and may construct, own and operate power
plants - at the ratepayers' expense. To curb inefficiencies that
occur under any monopoly system, many states with
vertically-integrated utilities require utility power resources to
be acquired through a competitive bid process - similar to how
government contracts are filled.