How Do Utility and Retail Power Prices Differ?

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In deregulated electricity markets, customers may secure supply from either a utility company or retail provider. 

Supply service from a utility company is also known as default or provider of last resort (POLR) service. Specific naming conventions for default service vary by state. For example, the names Basic Generation Service, Price to Compare and Standard Service Offer are respectively used in New Jersey, Pennsylvania and Ohio. 

In this article, we'll overview the differences between utilities and retail providers in cost components, price setting and product offers.

Cost Components

Cost components for both utilities and retail suppliers are the same for an all-inclusive fixed price product. Cost components can be divided into six main categories: Wholesale Energy (WE), Capacity (CAP), Transmission (TRAN), Ancillary Services (AS), Renewable Portfolio Services (RPS) and Line Loss (LL). Note that transmission costs are recovered differently across deregulated states with some markets (e.g., MISO and PJM, except in Ohio) providing customers choice in transmission service purchase from either the local utility or retail provider, and other markets (e.g., CAISO, NEPOOL, and NYISO) requiring transmission service purchase only from the local utility.

Price Setting

State commissions establish guidelines for when utilities may contract with wholesale suppliers. During identified time periods, utilities typically transact through auctions or requests for proposal (RFP); although, bilateral transactions and self-supply may play a role. An auction enables wholesale energy suppliers to openly submit price bids for designated quantities. An RFP is like an auction except that the bids are sealed and competing suppliers are unaware of alternative offers. Utilities typically pursue auctions and/or RFPs during the same months each year. For example, New Jersey holds a statewide auction every February with resulting default service prices based on prices secured in the current and previous two years, each auction carrying equal weight. In comparison, retail suppliers participate daily in wholesale transactions without governance from state utility commissions.

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Once the auction or RFP is completed, utilities must comply with regulatory guidelines before implementing rates. For instance, default service rates must be approved by the presiding state commission prior to employment. Moreover, purchased power contracts are treated as an expense, and regulatory policies allow utilities to reconcile differences between revenues collected and expenses incurred. As a result, default service rate schedules typically include reconciliation rates (charges or credits) that cause fluctuation in the average supply rate paid. In comparison, supply prices offered by retail suppliers are based entirely on market conditions. Also, retail supply prices established for medium or large load customers are often computed from actual customer usage, as opposed to typical usage underlying utility rate schedules.

Product Offers

Utility companies only offer one default service rate, by rate class, which vary with respect to rate types and general design. For example, certain utilities incorporate demand and/or block charges into their default service rate. Demand charges bill $/kilowatt rates against a customer’s maximum demand (i.e., highest kilowatt level registered in a billing month). Block charges bill segmented rates against segmented usage (kilowatt-hours or kilowatts). For example, an initial rate applies to the first usage block, a second rate to the next usage block and so on. 

Conversely, retail suppliers offer a variety of products which vary by term and price. For example, Direct Energy Business offers an all-inclusive fixed price product for up to 24 months, allowing customers budgeting certainty over a two-year period. Direct Energy Business also offers products that include seasonal rates, contract restarts and months of free energy. We also bundle price offers with innovative technology, such as the Nest Learning Thermostat. Unlike default service rates, all of our price offers are based exclusively on $/kilowatt-hour rates.

Learn how your business can potentially benefit from energy choice.

Posted: November 30, 2016