5.1: Overview

Overview

The electric utility sector used to be a safe - but boring - place to build a career. It was often said that utility stocks belonged in the portfolios of "widows and orphans" because their returns, while never extravagant, were always very stable. That was the past - the present is very different. The combination of restructuring and deregulation, emergence of new technologies and increasing awareness of the environmental impacts of electricity generation, transmission and distribution have left the industry with substantial challenges, all the same time trying to keep costs down and service reliable. Electricity is often described as facing a "trilemma" of issues - keeping electricity affordable, reliable, and clean. Any two of those would not be difficult to handle, but all three together have thrust the industry into a period of rapid change that it has not seen in nearly a century.

This is an exciting story, and the electricity industry has certainly become much more dynamic. But before we get into restructuring, deregulation, and the economic challenges associated with greening the electricity grid, we will first have a look at the basic industrial structure of electricity supply and delivery; and the basic economics of electric power generation in particular.

Learning Objectives

By the end of this lesson, you should be able to:

• identify the three stages in the electricity supply and delivery chain, and explain the differences between each;
• explain why a power plant in New York cannot sell electricity to a customer in California;
• explain the rationale for rate of return regulation for electric utilities;
• demonstrate the process of "economic dispatch" of power plants and calculation of the "system lambda";
• explain the roles of the key players in the regulated electric utility industry.

Additional Readings

• "Rate of Return Regulation," by Mark Jamison. This reading is also available in the Lesson 05 module.
• "Electricity Regulation: A Guide" by Jim Lazar, published by the Regulatory Assistance Project. This report has a lot of detail about the process of utility regulation. It's a great reference but goes into much more detail than we'll need.
• The "Electiricity in the United States" page from the EIA has a lot of good overview information and is kept reasonably current.

For those seeking more detail in the process of rate-of-return regulation for energy utilities (we will discuss primarily electric utilities in this lesson but many of the same principles would apply to gas distribution utilities as well), the following readings are recommended:

• Energy Utility Rate Setting, by Lowell Alt, 2006 Lulu.com publishing, 149pp.
• Electric Utility Planning and Regulation, by Edward Kahn, 1998 American Council for an Energy-Efficient Economy, Washington, D.C., 339 pp.

What is due for Lesson 5?

This lesson will take us one week to complete. Please refer to the Course Calendar for specific due dates. See specific directions for the assignment below.

• Homework: Submit answers to the Lesson 5 questions to the Lesson 05 drop box about electric rates and the economic dispatch process.
• Discussion: Use the Lesson 05 Discussion forum to respond to the prompts about the electric industry. Please also respond to at least two of your classmates' posts.

Questions?

If you have any questions, please post them to our Questions about EME 801? discussion forum (not email), located in the Lesson 00 module. I will check that discussion forum daily to respond. While you are there, feel free to post your own responses if you, too, are able to help out a classmate.