The Competitive Marketplace

And How it Works

Electricity Competition

In the 13 states and the District of Columbia that have fully deregulated their electricity markets (see map on right), only the generation (or supply) of electricity is open for competition. The local distribution company (LDC), such as PEPCO, BG&E, or PECO, still delivers the electricity to every home and business, and remains as the single point-of-contact to both bill for and service a user’s electricity requirements.

Wholesale Market and the ISO

To accomplish deregulation, the electric power industry has restructured by separating the competitive generation sector from the natural monopoly functions of electricity transmission and local distribution. Under this restructuring scheme, central authorities - on a regional basis, called independent system operators (ISO), were given control over both the transmission systems and the wholesale markets for electricity. We sometimes call the ISOs "the grid". The ISO for the Mid-Atlantic States and parts of IN, KY, IL, OH, TN and WVA is called the PJM Interconnection (PJM). PJM’s territory is outlined in the adjacent map with the colors representing the seventeen (17) LDCs.

Local Utility Supply Prices

Immediately following deregulation by each individual state, customers were still supplied with power from their LDC, and could choose to stay with their LDC or, for the first time, opt to buy from a competitive supplier. Those customers staying with the LDC received the LDC’s price for electricity supply, called the standard offer service (SOS). This SOS price is typically fixed for a few months in advance through regular wholesale auctions for residential and most commercial customers. In the case of many LDCs the SOS price changes quarterly. Conversely, larger commercial and industrial customers are charged a rate based on their actual hourly usage and the then current wholesale market.
Each LDC has a set of rules and processes it follows to set the SOS price - rules that have been established by its state’s public utility commission. These rules often include a ‘break-even’ rider, which allows the LDC to pass-on a true-up of actual costs or savings from the provision of this supply, and are published as its tariffed supply rates. As a result clients are never guaranteed an exact fixed rate. While the ISO creates the market for wholesale electricity supply, the price for electricity varies significantly by region due to the proximity of power plants, the fuels used by these power plants, local fuel costs, congestion on transmission lines, in addition to local pricing regulations and structures. Therefore, the prices at one LDC (e.g., BG&E) can be different than those at another LDC (e.g. PEPCO), and these prices can change at different rates.

Deregulated States for Electricity

Natural Gas Market

The market for natural gas, while somewhat similar to the electricity market in how it works and how a customer benefits from competition for supply, is also different as gas is produced all year, stored during the summer, and released from reserves all winter. Transportation and storage can therefore often comprise half of the costs of bringing natural gas to a customer.