Grid Value Chain
Electricity passes through four commercial segments on its way to a customer. Each one is owned, regulated and paid for in a different way, and the bill is the sum of all of them.
Four segments, four business models
A single company once did all of this. It built the plants, strung the wires, read the meters and sent the bill, and a state commission approved the rate that covered the whole package. In much of the country that is still the arrangement. Elsewhere the segments have been separated, and generation competes while the wires remain a regulated monopoly.
Where the money on a bill goes
For a typical residential customer, a little over half of the bill pays for the electricity itself. Most of the remainder pays for the local wires. Transmission is the smallest share of the three, though it is the fastest growing in many regions as new lines are built.
Shares are indicative of the national average and vary widely by state, utility and customer class.
| Charge | How it is measured | What it pays for |
|---|---|---|
| Energy charge | Cents per kilowatt-hour consumed | Fuel and the cost of generating the electricity actually used |
| Delivery charge | Cents per kilowatt-hour delivered | Transmission and distribution wires, substations, maintenance and restoration crews |
| Demand charge | Dollars per kilowatt of peak draw | The capacity a customer requires at its highest moment. Common for commercial and industrial accounts, rare for homes |
| Customer charge | Fixed dollars per month | Metering, billing and the service connection, regardless of consumption |
| Riders, fees and taxes | Varies | Efficiency and low-income programs, storm cost recovery, renewable mandates, state and local taxes |
How a regulated utility earns money
A wires utility is a monopoly, so it cannot simply set a price. Instead a regulator approves rates designed to recover the utility’s prudently incurred operating costs plus a return on the capital it has invested. The pool of investment eligible for that return is the rate base, and the percentage is the allowed rate of return, set in a rate case that can take a year or more.
The arithmetic has a consequence that shapes the whole industry. A utility earns a return on assets it builds and owns, not on power purchases, fuel or efficiency programs, which are passed through at cost. Capital spending grows earnings; spending that avoids capital does not. Performance-based regulation, shared-savings mechanisms and other reforms exist to blunt that incentive, with mixed results.
The regulated revenue formula
Operating costs
+
Depreciation
+
Taxes
+
Rate base × allowed return
=
Revenue requirement
The revenue requirement is then divided across customer classes to produce the rates that appear on bills.
Bundled and unbundled states
Vertically integrated
One company, one bill
The utility owns generation, wires and the customer relationship. The state commission reviews what it builds and sets the total rate. Common across the Southeast, much of the West and the Plains.
Restructured
Competitive supply, regulated wires
Generation was divested or spun off and now competes in a wholesale market. The distribution utility still delivers the power, and customers may buy their supply from a separate retailer. Common in the Northeast, the Mid-Atlantic, Illinois and Texas.
Restructuring began in the late 1990s and stalled after the California electricity crisis of 2000 and 2001. Roughly a third of states now have some form of retail choice, and several that authorized it later suspended or narrowed it. The dividing line is not the same as the boundary of the organized wholesale markets: a vertically integrated utility can belong to a regional market, and a restructured state can sit outside one.
New links in the chain
Independent power producers
Build and operate plants without owning wires or customers, selling into markets or under long-term contracts.
Corporate buyers
Large purchasers sign power purchase agreements directly with new projects, financing construction outside the utility rate base.
Storage operators
Batteries sit awkwardly across the segments, buying and selling energy while also providing reliability services to the wires.
Aggregators
Bundle thousands of thermostats, water heaters, home batteries and vehicles into a single resource that markets can dispatch.