Monthly Archives: July 2015

Tutorial: Key Players in the Energy Markets: Rivalry in the Middle

The players described in the previous post have vastly different characteristics. The most striking difference is the level of rivalry.

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Distributors operate in a defined territory, often corresponding to a city, a state or a province, where they are the sole provider – thankfully, as there would otherwise be multiple lines of poles along roads. Given this monopoly, distributors are subjected to price regulation, meaning that the price they charge for the use of their infrastructure (poles, conductors, cables, transformers, switches, etc.) is set, typically equal to their costs plus an allowed return on their investment. This is done by filing tariffs that are approved by the regulatory body following a rate hearing.

Retail is often a competitive industry, as there is no structural barrier to having multiple players. However, some distributors are also given the retail monopoly over their territory. Some may also provide retail services in competition with other retailers. In those cases, the distributor-owned retailer is also regulated and has to seek approval of its rates, but other retailers typically do not, although they may have to file their rate plans.

It is possible to have multiple transmission companies operating in the same territory, each owing one or a few transmission lines. However, because those transmission lines are not perfect substitutes (they do not necessarily have the same end-points in the network) and because transmission capacity is scarce, electricity transmitter typically have regulated rates, although they may compete for new constructions.

System operators are monopolies over a territory, and they have to maintain independence. They are, in effect, monopolies, although system operators are often government- or industry-owned. Their costs are recharged to the customer base, directly or indirectly.

Large generators are in a competitive business, competing in an open market, although distributed generators, which are much smaller, usually benefits from rates set by a regulator or a government.