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Electricity Primer - The Basics of Power and Competitive Markets

How Is Electricity Sold At Retail?

The retail side of electricity involves the final sale of power from an electricity provider to an end-use consumer. These sales range from the service for a large manufacturing facility to small businesses and to individual households.

In every state, regardless of whether they allow retail competition or not, supply for end-use customers is obtained either through the open, competitive wholesale market, from utility-owned rate-based (cost-plus) generation, or some combination of the two.

In states where full retail competition (often called "retail choice") is provided, customers may choose between their incumbent utility supplier and an array of competitive suppliers, as opposed to being a captive customer to a single provider. Competitive retail suppliers provide a variety of service plans that give consumers and businesses flexibility in their energy purchases. They may also offer services to hedge against price fluctuations, more choices for alternative energy resources, and newer energy efficiency projects, among others. These opportunities allow consumers and businesses to choose the services that best meet their needs.

In most states providing retail competition, customers who don't choose a supplier are served by their incumbent utility through a service called "provider of last resort" (POLR - also sometimes referred to as standard offer service, SOS). The POLR or SOS supplier will then secure its needed power on the wholesale market through a competitive bid process.

Retail markets are regulated at the state level. State regulatory commissions are most often called the state "Public Utility Commission" or "Public Service Commission." In every state, these commissions regulate a distribution utility's costs and rate of return for use and upkeep of the distribution system.

In retail choice states, the commissions approve any alternative competitive supplier before they can serve customers. The commissions also oversee a POLR or SOS utility's power procurement, and approve the results of the process if the process was fair.

In states not offering retail competition, the commissions regulate the expenditures of the monopoly utilities by allowing a rate of return on most costs. In these states, utilities are vertically-integrated and may construct, own and operate power plants - at the ratepayers' expense. To curb inefficiencies that occur under any monopoly system, many states with vertically-integrated utilities require utility power resources to be acquired through a competitive bid process - similar to how government contracts are filled.