Separation of Commodity and Distribution Function

As discussed in the two previous chapters, over time, the forces of deregulation are moving the jurisdiction of regulated utility rate structures toward the transmission and distribution functions and away from the commodity sale function, which is falling under the control of free market forces. However, in today's market, the rate structures presented above still widely apply as the utilities continue to sell a bundled commodity to their customers or sell unbundled services, notably transmission and distribution under regulated cost-of-service based pricing.

With the advent of electricity wheeling and gas brokering, with open access to transmission and distribution service, opportunities for utilities to make off-system sales have become subject to fierce competition. With open access for the transmission of power for wholesale sale in interstate commerce, the utility must compete for wholesale market share with cogenerators and other independent power producers (IPPs), many of which can generate power at a very low cost. Gas brokers present similar challenges to gas utilities.

From the consumer perspective, the trend of competitive pricing can be very attractive. Currently, competitive pricing is most beneficial to large consumers, notably those with favorable load profiles or competitive options. Such customers often face a win-win situation in which they install operating cost-reducing alternatives or reap savings from a competitive energy rate break or, in some cases, both.

Over time, it is anticipated that an increasing number of consumers will be the beneficiaries of competitive pricing. However, there is also concern that the embedded cost in utility capacity that is no longer cost-competitive will drive up prices to customers stranded without strong competitive options.

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