In re Erving Industries, Inc.

MEMORANDUM OF DECISION

HENRY J. BOROFF, Bankruptcy Judge.

This case presents an issue of first impression in the First Circuit: whether a creditor’s supply of electricity to a debtor within the 20 days preceding the commencement of a bankruptcy case constitutes a sale of goods, entitling the creditor to a priority administrative expense claim under § 503(b)(9) of the United States Bankruptcy Code. 1

I. FACTS AND TRAVEL OF THE CASE

Erving Industries, Inc., debtor and debt- or-in-possession, together with certain of its affiliates, 2 (collectively the “Debtor”) filed a voluntary petition under Chapter 11 of the Bankruptcy Code on April 20, 2009 (the “Petition Date”). On July 2, 2009, at the request of the Debtor, the Court entered an order setting August 7, 2009 as the deadline for creditors to file priority administrative claims under § 503(b)(9) with respect to goods delivered to the Debtor within the 20-day period preceding the Petition Date. Constellation NewEner-gy, Inc. (“NewEnergy”) timely submitted such a claim in the amount of $281,667.88 (the “Claim”).

On September 16, 2009, the Debtor filed an objection to NewEnergy’s Claim (the “Objection”), to which NewEnergy responded (the “Response”). 3 The Debtor and NewEnergy agree that the amount claimed by NewEnergy accurately represents charges for electricity supplied to the Debtor during the relevant time period. But the Debtor objects to the priority asserted for the Claim under § 503(b)(9) *357 on grounds that electricity is not a good covered by the relevant section of the Bankruptcy Code. This is the only issue to be decided. 4 If the Court concludes that electricity is a good within the meaning of § 503(b)(9), then NewEnergy is entitled to a priority administrative claim of $281,667.88 in the Debtor’s Chapter 11 case; if the Court concludes that electricity is not a good, then NewEnergy is left with a general unsecured claim against the Debtor.

II. POSITIONS OF THE PARTIES

A. Service or Sale

Section 503(b)(9) provides a priority claim for the value of goods sold to a debtor in the ordinary course of the debt- or’s business within the 20 days preceding the commencement date of the bankruptcy case. 11 U.S.C. § 503 (b)(9). Although courts have divided on certain questions arising under § 503(b)(9), there is no doubt that § 503(b)(9) does not cover creditor claims arising from the provision of services to a debtor.

1. Debtor

The Debtor would have the Court hold that, regardless of the definition of goods under § 503(b)(9), NewEnergy’s Claim is not entitled to priority status because NewEnergy provided a service. Relying on a description of the electric industry provided by the Massachusetts Executive Office of Energy and Environmental Affairs, the Debtor argues that the industry is composed entirely of service providers, which categorization includes NewEnergy.

Should the Court conclude that the definition of goods under Article 2 of the Uniform Commercial Code (the “UCC” or “Article 2”) is applicable here, the Debtor further maintains that the Court should apply the “predominant factor test” to determine that the transactions between NewEnergy and the Debtor relate primarily to the rendering of services. The Debt- or analogizes this case to Mattoon v. City of Pittsfield, 56 Mass.App.Ct. 124 , 775 N.E.2d 770 (2002), in which the Appeals Court of Massachusetts held that the supply of water was predominantly the provision of a service and not the sale of goods. According to the Debtor, “if water ... is predominantly a ‘service,’ then it is difficult to argue that electricity is anything other than a ‘service.’ ” Debtor’s Obj. at 9.

In further support of its claim that New-Energy provided a service, the Debtor characterizes NewEnergy as a “utility provider.” And pointing to the description of utility providers in both Black’s Law Dictionary and in § 366 of the Bankruptcy Code, the Debtor emphasizes that utilities are described by both as providing services.

Arguing in support of the Debtor at the January 12, 2010 non-evidentiary hearing on the Objection (the “Hearing”), counsel for the Official Creditor’s Committee (“Committee Counsel”) noted that the contract between the Debtor and NewEnergy *358 (the “Agreement”) 5 refers in several places to service or services. According to Committee Counsel, this supports the Debtor’s contention that the Agreement was understood by both the Debtor and NewEnergy to be a services contract and not a contract for the sale of goods.

2. NewEnergy

NewEnergy maintains that the Debtor’s characterization ignores the fact that New-Energy does not perform the traditional service functions commonly associated with electric utilities. Describing the current partially deregulated electric industry in Massachusetts, NewEnergy differentiates between the delivery of electricity as a service and the sale of electricity as the sale of goods. While regulated utilities are still responsible for the ultimate delivery of electricity to customers, NewEnergy says it has no role in that delivery and is involved solely in the sale of electricity as a “competitive supplier.” NewEnergy notes that the Debtor’s arguments are ironically negated by its own practices, i.e., the Debtor pays separately to the local electric utility for delivery of electricity, and New-Energy’s invoices reflect only the charges for the electricity itself.

NewEnergy also disputes the Debtor’s characterization of NewEnergy as a “utility provider.” First directing the Court’s attention to a “Chart of Massachusetts Electric Utility Providers” maintained by the Commonwealth, NewEnergy notes that it is not listed as an electric utility. In addition, NewEnergy maintains that its activities in relation to the Debtor do not fit within the traditional concept of a providing utilities, as assumed by Black’s Law Dictionary and as used in § 366 of the Code, because it does not have a monopoly or exclusive service or franchise area, is not regulated by the government, and is subject to competition from a number of available alternative sources of electricity.

According to NewEnergy, the Agreement supports this analysis. While New-Energy concedes that the Agreement contains an occasional reference to service, it notes that the Agreement also provides that NewEnergy is not responsible for, and in fact expressly disclaims responsibility for, the transmission and distribution of electricity to the Debtor’s location; delivery responsibilities remain in the hands of the regulated local utility.

Finally, NewEnergy contends that the “predominant factor test” has no applicability under § 503(b)(9), because the test applies only in those limited circumstances when a court must characterize an entire transaction or set of transactions as either predominantly the sale of goods or the provision of services. Section 503(b)(9), says NewEnergy, does not require the claimant to demonstrate that, on the whole, its transactions with a debtor were predominantly for the sale of goods. Rather, § 503(b)(9) creates a priority claim for the value of any goods sold to a debtor in the ordinary course of business within the 20 days preceding the bankruptcy filing, even if that sale were part of a larger, predominantly service-oriented transaction. Thus, NewEnergy concludes, the predominant factor test is irrelevant, and the Court should examine only whether the electricity sold to the Debtor by New-Energy constitutes a sale of goods, entitling NewEnergy to a priority claim under § 503(b)(9).

B. The Definition of Goods under § 503(b)(9) and its Application to Electricity

In the event the Court declines to hold that NewEnergy was merely providing a *359 service, both parties recognize that Court must determine the meaning of goods under § 503(b)(9), since the term goods is not defined in the Bankruptcy Code

1. The Debtor

Relying on the fact that the Bankruptcy Code is a federal statute, the Debtor contends that the Court should not rely on the UCC definition of goods, as application of the UCC to § 503(b)(9) would require reference to disparate state laws, yielding undesired non-uniformity of interpretation. Instead, the Debtor says goods under § 503(b)(9) should be defined with reference to the “ordinary or natural” meaning of the word. Arguing for the Black’s Law Dictionary definition of goods as “tangible or movable personal property,” Black’s Law Dictionary 762 (9th ed.2009), the Debtor distills the question to whether electricity constitutes “tangible personal property,” urging the Court to adopt a meaning of goods as “anything that could be packaged, shipped, and dropped off at a customer’s loading bay.” Hr’g Tr. 4:7-15 (Jan. 12, 2010).

The Debtor contends that electricity is simply not a good because it is an intangible phenomena, the movement of electrical charges, and is devoid of physical form or attributes. The Debtor asks this Court to adopt the analysis of the court in In re Pilgrim’s Pride Corp., 421 B.R. 231 (Bankr.N.D.Tex.2009), where the court concluded that electricity is not a good under § 503(b)(9). There, the bankruptcy court applied the UCC definition of goods and held that the provision of electricity was more akin to the transmission of television programming, which is widely held to constitute a service (the distribution of intellectual property) and not the sale of goods under the UCC.

Furthermore, the Debtor maintains that electricity cannot be considered a good under Article 2 of the UCC, because it is not movable at the time it is identified to the contract between the Debtor and NewEnergy, as required under the UCC definition of goods. Drawing upon the analysis of the Pilgrim’s Pride court, the Debtor argues that by the time the electricity subject to the Agreement is “identified,” i.e., measured by the electric meter, it is consumed and no longer movable. Thus, it can not be a good under Article 2 of the UCC.

2. NewEnergy

NewEnergy recommends that this Court join the majority of courts and conclude that the goods under § 503(b)(9) should be interpreted in accord with the definition of that term found in § 2-105 of the UCC. NewEnergy contends that the UCC definition is not only widely-used and accepted by both state and federal courts, but is also consistent with the ordinary, non-legal understanding of the term.

Looking to the UCC definition of goods — things that are movable at the time they are identified to the contract for sale — NewEnergy insists that electricity is a good. First, NewEnergy says, electricity is literally movable; it moves from the location where it is generated, through the transmission and distribution systems, and ultimately arrives at the customer’s location. And electricity is clearly identifiable, because it is measured by the meter upon delivery. Finally, NewEnergy contends that the electricity is not only movable and identifiable, but is movable at the time it is identified to the contract, since it is moving through the electric meter at the time it is measured and identified to the contract between the Debtor and NewEnergy.

But even if this Court were to reject the UCC definition of goods, and focus instead on the Debtor’s “tangibility” requirement, NewEnergy argues that electricity is tangible — a tangibility made obvious from *360 the physical (and often fatal) result obtained by touching a wire transmitting electricity. According to NewEnergy, because it can be “perceived by touch,” electricity is physical, tangible property and constitutes goods not only under Article 2 of the UCC, but also under the Debtor’s proposed meaning of goods under § 503(b)(9).

C. Relationship to § 546(c)

1. The Debtor

The Debtor rejects NewEnergy’s interpretation of the term goods under § 503(b)(9) as too broad. The Debtor says that the term goods as used in § 503(b)(9) encompasses a limited category of things subject to reclamation under § 546(c) of the Bankruptcy Code. According to the Debtor, Congress intended § 503(b)(9) to provide an alternative remedy for creditors who would be entitled to reclamation under § 546(c) but for their inability to meet the rigorous noticing standards under that section. Since § 546(c)(2) specifically provides that creditors unable to reclaim goods under that section may nonetheless be entitled to a priority claim under § 503(b)(9), the Debt- or maintains the two sections were intended to “work in tandem.” The Debtor says the legislative history supports this interpretation, as both the addition of § 503(b)(9) and the revision of § 546(c) were included under the heading “Reclamation” in the public law enacting the 2005 changes to the Code.

The Debtor describes the purpose behind both § 546(c) and § 503(b)(9) as an effort by Congress to prevent debtors from “stockpiling” goods or, at the very least, providing a priority claim for stockpiled goods when creditors are unable to reclaim them. Therefore, the Debtor would conclude that the goods referenced in both § 546(c) and § 503(b)(9) “must have been capable of repossession,” Debtor’s Reply Memo., at 3-4, and since the Debtor also contends that electricity cannot be either “stockpiled” or reclaimed, classifying electricity as a good under § 503(b)(9) is inconsistent with congressional intent.

2. NewEnergy

NewEnergy disagrees with the Debtor’s use of legislative history to interpret the meaning of goods under § 503(b)(9). While acknowledging that Congress may have intended to create a priority claim as an alternative available to creditors who are technically unable to reclaim goods under § 546(c), NewEnergy says that nothing in § 503(b)(9) limits priority status for other creditors. In fact, says NewEn-ergy, other creditors providing goods that are, for practical purposes, unable to be reclaimed (such as raw materials, natural gas, and water) are nonetheless held to have sold goods within the meaning of § 503(b)(9) and have successfully asserted priority claims on that basis.

D. “Narrow” Interpretation of Priority Statutes

Relying on the Supreme Court of the United States’s discussion in Howard Delivery Service v. Zurich American Insurance Co., where the Court held that the objective of equal distribution under the Bankruptcy Code militated against broadly interpreting a priority provision to cover a claim not clearly falling within the statute’s terms, see 547 U.S. 651, 667-68 , 126 S.Ct. 2105 , 165 L.Ed.2d 110 (2006), the Debtor urges the Court to similarly “narrowly interpret” § 503(b)(9) and to reject a “broad” interpretation that would include electricity as goods. NewEnergy, in contrast, maintains that electricity clearly falls within the definition of goods under § 503(b)(9) and, therefore, does not present the type of “close call” which would require the application of the interpretive principles enunciated in Zurich.

*361 III. DISCUSSION

Section 503(b)(9), added to the Bankruptcy Code in 2005, 6 creates a priority administrative expense claim for the value of goods received by a debtor in the ordinary course of business during the 20 days prior to the bankruptcy filing. 7 11 U.S.C. § 508 (b)(9). “Resolving the meaning of section 503(b)(9) begins with the language of the statute itself.” In re Goody’s Family Clothing, Inc., 401 B.R. 131, 133-34 (Bankr.D.Del.2009) (citing U.S. v. Ron Pair Enters., 489 U.S. 235, 241 , 109 S.Ct. 1026 , 103 L.Ed.2d 290 (1989)). It is well-settled that § 503(b)(9) does not provide priority status to claims for services rendered 8 — the statute refers only to “the value of ... goods.” 11 U.S.C. § 503 (b)(9) (emphasis supplied).

A. Services Contract or Contract for Sales?

Regardless of which definition of goods governs the meaning of the term in § 503(b)(9), the Debtor contends that NewEnergy’s Claim is not entitled to priority status because NewEnergy did not sell anything, but merely provided a service. Determining whether NewEnergy provided a service requires a brief examination of NewEnergy’s role in the electric industry 9 and the terms of the Agreement between parties. 10

“In the electric industry as it existed before restructuring, [generation, transmission, distribution, and customer services] were bundled and provided as monopoly services by electric companies, at prices fully regulated by the Department [of Public Utilities].” Mass EOEEA. But today, customers “are [ ] able to purchase generation services from entities other than their traditional electric companies,” and the prices charged by those “competitive suppliers” are “not [ ] regulated by the Department.” Id. Transmission, distribution, and customer services, however, “have not been opened to competition” and *362 “continue to be provided as monopoly services by the electric companies.” Id. Customers’ .electricity bills are itemized and separated into distribution, transmission, energy use, and other charges; customers who purchase electricity from a competitive supplier may request separate billings from the electricity supplier and the local utility company. Id.

Electricity from generation facilities (i.e., “power plants”) reaches a customer’s location through a series of transmission and distribution lines. 11 The generators are connected to a network of high-voltage transmission lines used for transmitting electricity over long distances (the “transmission grid”). 12 Restructuring Primer, at 4.1. Before entering a local utility’s distribution lines, the electricity is typically passed through a substation where it is “stepped down” to a lower voltage. Id. The local utility then distributes the electricity through its lower-voltage distribution system, using transformers to lower the voltage again as the electricity comes off the distribution line and passes into the customer’s home or business. Id.

NewEnergy acts as a “competitive supplier” within this framework. NewEnergy contracts with electricity generators to buy electricity. Under NewEnergy’s contracts with its customers, it sells that electricity to the customer, ensuring that an adequate supply of electricity is delivered from the generating facility to the transmission grid. The customer is then responsible for contracting with the local utility to have the electricity delivered from the transmission grid to the customer’s location.

Relying on the Mass EOEEA’s description of the restructured electric industry, see, supra n. 9, the Debtor says that New-Energy’s role in the electric industry is one of a service provider. The Mass EOEEA does describe the electric industry in terms of services — “generation service”; “transmission service”; “distribution service”; and “customer service.” See Mass EOEEA. But the Debtor’s conclusion that the whole of the electric industry is thus comprised only of service providers takes the Mass EOEEA’s description out of context and places undue emphasis on its terminology.

Regardless of the Mass EOEEA’s general description of the electric industry as one involving various services, that description is apt only to the extent that it actually describes the nature of NewEner-gy’s transactions with the Debtor. The Mass EOEEA’s discussion is intended to educate the general public and to help customers better understand electric industry deregulation in Massachusetts. It does not purport to reach any conclusive legal characterizations relevant to the industry. Thus, to the extent that it describes activities as services as opposed to sales it is not, standing alone, particularly persuasive.

While the Mass EOEEA indicates that some entities provide “generation services,” NewEnergy does not independently generate electricity. It resells electricity it purchases from others. And even if the Mass EOEEA would include NewEnergy’s *363 activities under the category of “generation services,” the Court would not thereby conclude that NewEnergy provides a service. Entities who “generate” things are not service providers merely because they engage in the act of generation. A farmer may be said to “generate” crops by sowing seeds, watering, weeding, and harvesting. But when the farmer takes the fruits of her labors to market, we do not say that she provides a service in the legal sense because she “generates” food. We say she sells food. Similarly, here, the Mass EOEEA may say that certain entities provide “generating services” because they generate electricity, but this is not the whole of the story. Ultimately, the electricity that is generated is sold. Whether or not electricity is a good, NewEnergy is in the business of selling that electricity, and not providing a service. See Ransome v. Wisc. Elec. Power Co., 87 Wis.2d 605 , 275 N.W.2d 641, 643, 648 (Wisc.1979) (“The distribution [of electricity] might well be a service, but the electricity itself, in the contemplation of the ordinary user, is a consumable product.”). 13

But the Debtors also say that NewEner-gy must have provided a service because NewEnergy is a utility and, Black’s Law Dictionary and § 366 of the Code tell us, utilities provide services. 14 NewEnergy, however, says that it is not a utility in the traditional sense, and the Court agrees. Utility is not defined in the Bankruptcy Code, but the term ordinarily refers to a “business organization (as an electric company) performing a public service and subject to special governmental regulations,” that has “some special position with respect to the debtor,” and has “a monopoly in the area so that the debtor cannot easily obtain comparable service from another.” One Stop Realtour Place, Inc. v. Allegiance Telecom, Inc. (In re One Stop Realtour Place, Inc.), 268 B.R. 430, 435, 436, 437 (Bankr.E.D.Pa.2001); see also Darby v. Time Warner Cable, Inc. (In re Darby), 470 F.3d 573, 575 (5th Cir.2006).

NewEnergy is not subject to governmental regulation as are traditional utili *364 ties and the local utilities that continue to provide transmission, distribution, maintenance, and customer services in Massachusetts. See Mass EOEEA. And NewEner-gy does not enjoy a “special relationship with the Debtor,” because alternative sources of electricity are available to the Debtor; the Debtor could choose to obtain its electricity from the local electric utility company or from a variety of other competitive suppliers. See, Darby, 470 F.3d at 575 (where debtor could obtain alternative cable service with minimal inconvenience, cable company was not “utility” within the meaning of § 366). Most telling, perhaps, is the fact that the Mass EOEEA does not list NewEnergy among those entities classified as “utilities” in the Commonwealth. See “Massachusetts Public Utility Service Providers (Electricity),” reproduced at Appendix 4 and available at <http://www. mass.gov/mgis/elec08.jpg> (last visited April 7, 2010). 15

The conclusion that NewEnergy was not providing services to the Debtor is further supported by the terms of their Agree- meat. The Agreement’s very title — Master Electricity Swpply Agreement — indicates that it is a contract governing the sale of electricity and not the provision of a service. The Agreement consistently refers to the Debtor’s “purchase” and New-Energjfs “sale” of electricity. 16 And where the Agreement speaks of service or services, 17 the usage is loose. When read in context, the references to service(s) in the Agreement are generic, in much the same way as the Mass EOEEA generically refers to generation services when actually speaking of both the generation and sale of electricity. 18

For all of these reasons, the Court concludes that NewEnergy’s Claim does not arise from services provided to the Debtor, but solely from the sale of electricity. The only question remaining is whether that electricity constitutes a good under § 503(b)(9).

B. Defining Goods under § 503(b)(9)

The term goods is not defined in the Bankruptcy Code, and the Court must *365 first determine what framework should be applied for assessing whether a thing is or is not a good under § 503(b)(9). The Debtor urges the Court to adopt a “common” understanding of the term, directing the Court’s attention to the definition of goods contained in Black’s Law Dictionary — “tangible or movable personal property.” Black’s Law Dictionary 762 (9th ed.2009). While “[i]n the absence of either a built-in definition or some reliable indi-cum that the drafters intended a special nuance, accepted canons of construction teach that the word should be given its ordinary meaning,” which definition may include its “accepted dictionary definition,” 19 it is also a “ ‘well established’ principle that ‘[wjhere Congress uses terms that have accumulated settled meaning under ... the common law, a court must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning of these terms.’ ” 20 This is especially true in the context of the Bankruptcy Code. See Goody’s, 401 B.R. at 134 (“When Congress amends the bankruptcy laws, it does not write ‘on a clean slate.’”) (quoting Dewsnup, 502 U.S. at 419, 112 S.Ct. 773 ).

Given the wide usage and acceptance of the definition of goods found in the UCC at § 2-105(1), it is hardly plausible that Congress expected bankruptcy judges to roll up their sleeves and set to work re-inventing the proverbial wheel and divining a more amorphous “common understanding” of the term. Instead, this Court concludes (as have most, if not all, courts addressing the issue), that the meaning of goods under § 503(b)(9) is primarily informed by the meaning of goods under Article 2 of the UCC. As the bankruptcy court in In re Goody’s observed:

“Use of the UCC Article 2’s definition of “goods” in interpreting section 503(b)(9) is suggested in a leading treatise and has been adopted by bankruptcy courts examining this issue. Given the near unanimous nationwide adoption of Article 2 of the UCC, the Court concludes that the term “goods” in section 503(b)(9) conforms with the meaning given in U.C.C. § 2-105(1)_”

401 B.R. at 134 . 21

This approach also fosters uniformity. As noted above, each of the states, with the exception of one, has adopted the Article 2 definition of goods. And because the UCC definition has permeated our legal conception of goods, it also “is the definition on which sellers have come to rely in their transactions and is the ‘well-known’ meaning.” Circuit City, 416 B.R. *366 at 535-37. 22 Thus, this Court joins the majority of others and concludes that the appropriate meaning of goods under § 503(b)(9) corresponds with the meaning given to that term in § 2-105(1) of the UCC. 23 Nevertheless, out of an abundance of caution, this Court will also address the definition of goods which the Debtor urges be employed.

C. Whether Electricity is a Good under § 503(b)(9) of the Bankruptcy Code

1. What is Electricity?

... a form of energy occurring in two modes (positive and negative) as an intrinsic property of electrons and certain other subatomic particles, and produced as a flowing cmrent when a conductor such as a copper wire is moved through a magnetic field.

—The Oxford English Dictionary 24

It is important to realize that in physics today, we have no knowledge of what energy is. We do not have a picture that energy comes in little blobs of a definite amount. It is not that way.

—Richard P. Feynman 25

... I give the experimentalist’s answer to the very fundamental but very familiar query: ‘What is electricity?” His answer is naive, but simple and definite. He admits at once that as to the ultimate nature of electricity he knows nothing.

—Robert A. Millikan 26

In some ways, the issue before the Court requires the impossible — the explication of electrical energy, when even great physicists tell us its essential nature remains unknown. 27 Luckily, although the *367 precise nature of energy continues to elude us, the basic processes of electrical energy generation and its mechanics have been discovered. See, e.g., San Diego Gas & Elec. Co. v. The Super. Ct. of Orange Co., 13 Cal.4th 893 , 55 Cal.Rptr.2d 724 , 920 P.2d 669, 673-74 (1996) (quoting U.S. Cong., Office of Technology Assessment, Biological Effects of Power Frequency Electric and Magnetic Fields 4 (1989)). The following rudimentary and decidedly un-nuanced description of electricity that follows may cause the more scientifically-oriented to cringe, but it is, insofar as the Court has determined, an accurate summary.

We begin with the most basic concept, the idea that “all things are made of atoms — little particles that move around in perpetual motion.” Feynman, Six Easy Pieces, at 4. These atoms, in turn, are comprised of “a nucleus that has a positive electrical charge ... together with a number of electrons, all having the same negative charge and mass, which move at distances from the nucleus.” 28 Electrons moving around the nucleus on the outermost plane (or “shell”) can be knocked out of orbit and move from one atom to another, taking their charge with them. It is the energy produced by this movement of electrons from atom to atom that we call “electricity.” 29

Power plants use these basic principles to create electricity by applying a force to push electrons out of their orbits and cause them to “flow” from atom to atom. For example, the force of a spinning electromagnetic rotor will move electrons out of orbit in a nearby copper wire. This creates the electricity and electrical currents that move through various transmission and distribution lines and are ultimately diverted to homes and business where the electricity is put to use. 30

How this electric current is then quantified was explained by the California Supreme Court in San Diego Gas & Electric.

An electric current is a group of charges moving in the same direction through a wire or other conductor. Voltage is the difference in electric potential that causes the charges to flow through the wire ... and is measured in volts (V) or, in the case of power lines, in thousands of volts or kilovolts (kV). Current is the rate at which the charges flow through the wire ... and is measured in amperes. The quantity of power (in watts) that a conducting wire transmits is thus the product of its voltage and its current. Power systems are designed to hold the voltage relatively constant but to meet fluctuating demand by allowing the current to rise and fall.

55 Cal.Rptr.2d 724 , 920 P.2d at 673-74 . 31

2. Is Electricity “Tangible”?

Because the Debtor relies primarily on its articulation of the “common un *368 derstanding” of goods to include only tangible personal property, much of its analysis focuses on the assertion that electricity is not tangible, and is therefore not a good. According to the Debtor, electricity is “simply the movement of electrical charges” and the “physical phenomena arising from the behavior of electrons and protons,” but does not have actual physical form or physical attributes. 32

The court in Pilgrim’s Pride, 421 B.R. at 239 , articulated a similar analysis, beginning with the proposition that the “UCC § 2-105 does not suggest that the provision’s drafters had intended that ‘goods’ would include things which cannot be packaged and handled ... things that, like manufactured goods, clearly occupy space and can be moved about....” Id. 33 The court further concluded that electricity could be analogized to television, radio, telephone, and internet signals which are not considered goods under the UCC. Therefore, that court concluded, electricity should also be excluded from the category of goods under the UCC and § 508(b)(9).

But this Court discerns a marked difference between electricity and television, radio, telephone, and internet signals (“telecommunication signals”). Although their manifestations may appear similar, they are differentiated by both their physical attributes and the purposes for which they are purchased. Telecommunication signals are properly considered services because they are mechanisms by which other non-goods — intellectual property, ideas, sounds, music, images, and words — are sent from one location to another. Electricity, in contrast, is not merely a medium of delivery, but is the thing the customer seeks to purchase. Customers paying for telecommunication signals may, on the whole, be fairly unconcerned with the physical properties or mechanics of the telecommunications signals, except to the extent that those physical properties enhance the delivery of information. On the other hand, electricity customers are undoubtedly concerned with the intimate physical properties of electricity. That is, customers rely on the specific physical properties of electricity to fulfill their needs — anything deviating from those properties simply will not do. And it is those physical properties, the very nature of electricity, that customers contract to purchase. 34

*369 The Court agrees with NewEnergy that, although its ultimate nature may be mystifying to most, electricity is tangible and does possess physical properties. It is not simply an “idea” akin to intellectual property. Although perhaps lacking in corporeal shape and not easily observed, electricity really is some thing, something that can be felt (although we are loathe to) and something that can be created, measured and stored.

3. Is Electricity a Good under § 2-105(1) of the UCC?

Section 2-105(1) of the UCC defines goods as:

all things ... which are movable at the time of identification to the contract for sale ...

U.C.C. § 2-105(1).

a. Movability and Identifiability

Electricity easily meets the mova-bility requirement. 35 Neither the Debtor nor, insofar as the Court has determined, any court, has quarreled with the conclusion that electricity is literally movable. 36 After it is generated, the electric current moves through a huge network of transmission and distribution systems before ultimately reaching the customer’s location.

*370 Like movability, the identifiability of electricity is subject to little debate. “Identification of goods occurs when existing goods are designated, or agreed upon, as the goods to which the contract refers.” 2 Anderson U.C.C. § 2-501:4, at 734 (3d ed.2004). Courts have generally held that electricity is identifiable because it can be measured at the point it passes through the meter, see, e.g., Pacific Gas, 271 B.R. at 640 (“the amounts [of electricity] are metered and therefore identifiable”), and this Court agrees.

b. Movability at the Time of Identification to the Contract

While there is much agreement that electricity is both movable and identifiable, courts have reached different conclusions regarding whether electricity is movable at the time it is identified to the contract for sale. 37 The Debtor argues that electricity is no longer movable at the time it is identified to the contract (i.e., measured by the meter) because identification and consumption occur simultaneously-

But the conclusion urged by the Debtor rests upon an assumption with which the Court disagrees. The notion that electricity is consumed at the time it is identified by the meter (and is therefore no longer movable) is inconsistent with the fact that electricity does not simply reach a customer’s meter and simultaneously cease to exist. Instead, it passes through the meter. At the time the electricity is identified to the contract, it is literally moving, and it remains movable for some period of time thereafter. The electricity continues to move through the customer’s electrical wiring until it is ultimately put to use. This process may occur at speeds so imperceptible that consumption appears to occur simultaneous with identification, but logic compels the conclusion that the electricity is moving (and remains in motion) until it reaches the product sought to be electrified. Because the Court concludes that electricity is movable at the time it is identified to the contract, electricity constitutes a good within the meaning of the UCC and § 503(b)(9). 38

*371 4. Applicability of the “Predominant Factor Test”

Faced with the possibility that the Court might view electricity as part-good, part-service, the Debtor argues that the Court should then also adopt the “predominant factor test” to determine whether the transaction was primarily for the sale of goods or provision of services. According to the Debtor, claims arising from transactions primarily relating to the provision of services would, under this test, be excluded from the priority status granted by § 503(b)(9). The Court disagrees, for the same reasons other courts have employed to reject the application of that test to § 503(b)(9).

The predominant factor test 39 is used by courts to determine whether the UCC Article 2 applies to a particular transaction. For transactions involving both the provision of services and the sale of goods, predominantly service-related transactions are not covered by the provisions of Article 2. See, e.g., White v. Peabody Constr. Co., 386 Mass. 121 , 434 N.E.2d 1015, 1021 (1982) (“Contracts whose predominant factor, thrust, or purpose is the rendition of services are not within the scope of art. 2.”); Mattoon v. City of Pittsfield, 56 Mass.App.Ct. 124 , 775 N.E.2d 770 , 784 (2002) (“Where a contract is for both sales and services ... in order to determine whether art. 2 is applicable, the test is whether ‘the predominant factor, thrust, or purpose of the contract is ... “the rendition of service, with goods incidentally involved.””’) (quoting White, 434 N.E.2d at 1021 ). 40

*372 At least one court has applied the predominant factor test under § 503(b)(9), limiting priority status to goods sold incident to transactions that were primarily for the sale of goods. See, Circuit City, 416 B.R. at 538. This Court, however, agrees with those courts which have concluded that the predominant factor test has no application to § 503(b)(9), because the language of that provision grants priority status for any claim arising from the “value of goods” sold to a debtor, regardless of whether the transaction as a whole could be characterized as primarily the provision of services. The Court adopts the explanation given by the court in In re Plastech:

If a particular transaction provides for both a sale of goods and a sale of services, and the value of each of them can be ascertained, why shouldn’t the value of the goods be entitled to the § 503(b)(9) administrative expense priority and the value of the services be relegated to an unsecured non-priority claim? ... [T]his Court does not have to reach a determination as to whether the sales ... would be considered sales of goods for purposes of the Uniform Commercial Code, products liability law, or tax law, under a predominant purpose test. Under § 503(b)(9), that determination is irrelevant. The only relevant determination under § 503(b)(9) is the value of the “goods” that were delivered, irrespective of whether the contract also called for the delivery and sale of services. The predominant purpose test does not inform the Court as to whether a particular thing that has been sold is or is not “goods.” Therefore, the predominant purpose test is unnecessary.

397 B.R. at 837; see also Pilgrim’s Pride, 421 B.R. at 237 & n. 7.

Because, as noted earlier, the Court holds that the transactions between the Debtor and NewEnergy did not involve the rendering of services, it finds that the predominant factor test has no applicability here. But even were part of what was delivered to the customer a service, the predominant factor test would be irrelevant to the determination of the value of goods received by a debtor within the meaning of § 503(b)(9).

5. Relevance of Reclamation Provisions under § 5^6(c)

The Debtor posits an additional reason why electricity should not be considered a good under § 503(b)(9) — namely, that the meaning of goods under § 503(b)(9) should be interpreted in relation to the reclamation provisions under § 546(c) 41 and properly includes only goods that are capable of being “stockpiled” by debtors and reclaimed by creditors. But the Court finds that the Debt- *373 or’s argument goes too far and disregards the plain language of § 508(b)(9). The reference in § 546(c)(2) to a reclaiming creditor’s ability to assert a priority claim under § 508(b)(9) does not limit the right of other creditors — those who sell goods not easily susceptible to reclamation — to assert priority claims under § 503(b)(9). And the placement of both §§ 503(b)(9) and 546(c) in the “Reclamation” section of the enacting public law does not persuade the Court that Congress had the type of limiting intent the Debtor would ascribe; the sheer placement of sections of the public law cannot trump the plain language of the Bankruptcy Code. Therefore, the Court agrees with the court’s analysis in In re Plastech, where the court explained that:

“[T]here is no basis to import a requirement that the goods be reclaimable, as argued by the Debtor. Congress added § 503(b)(9) to the Bankruptcy Code as part of § 1227 of BAPCPA, entitled ‘Reclamation.’ Most of BAPCPA is devoted to amending § 546 of the Bankruptcy Code, which provides relief to sellers of goods who failed to give an effective notice for reclamation. The Debtor reads this scant legislative history as an indication that § 503(b)(9) is a reclamation concept, and suggests that goods must be reclaimable in order for a seller to have a § 503(b)(9) claim. However, there is nothing in § 503(b)(9) that requires a claimant to also be entitled to a reclamation right under § 546. Section 546 does not limit or control in any way the rights that claimant has under § 503(b)(9).”

Plastech, 397 B.R. at 838. 42

6. Section 503(b)(9) and the “Narrow” Interpretation of Priority Statutes

Finally, the Debtor presents an “equitable” argument for the narrow construction of goods as used in § 503(b)(9). Because the Supreme Court has cautioned that priority statutes should be interpreted narrowly to advance the Bankruptcy Code’s principle of equal distribution, the Debtor urges this Court to construe § 503(b)(9) as foreclosing priority status for claims arising from the sale of electricity. But this argument is premised on the Debtor’s assumption that electricity does not easily fit within the meaning of goods under § 503(b)(9).

Recently, the Supreme Court rejected an “expanded interpretation” of § 507(a)(5), indicating that priority statutes under the Bankruptcy Code should be narrowly construed. Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651, 667-68 , 126 S.Ct. 2105 , 165 L.Ed.2d 110 (2006). In that case, however, the Court engaged in a lengthy discussion examining whether “an employer’s liability to provide workers’ compensation coverage fits the § 507(a)(5) category ‘contributions *374 to an employee benefit plan ... arising from services rendered.’ ” Id. at 668, 126 S.Ct. 2105 . Explicating the typical characteristics of employee benefit plans, the Court found that worker’s compensation coverage was not easily fitted into the common understanding of an “employee benefit plan ... arising from services rendered.” Id. Because the Court found it “far from clear” that the claims arising from worker’s compensation payments fell within the terms of the priority statute, it resolved the “doubt concerning the appropriate characterization ... in accord with the Bankruptcy Code’s equal distribution aim.” Id. at 668 , 126 S.Ct. 2105 .

But that lack of clarity is not present here. Having determined that the only question is whether electricity, as supplied by NewEnergy, is a good under § 503(b)(9), this Court concludes that, using either the UCC definition or the definition urged by the Debtor, electricity easily falls within the definition. The Court should not find an ambiguity where there is none or make policy decisions to limit the application of Bankruptcy Code provisions when the language of the statute is otherwise clear. 43

IV. CONCLUSION

For all the foregoing reasons, the Court concludes (1) that NewEnergy’s Claim is based on the sale of electricity and not the provision of services and (2) that electricity constitutes a good under § 503(b)(9). Therefore, the Debtor’s Objection will be overruled. An order in conformity with this Memorandum of Decision will issue forthwith.

Appendix 1

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Appendix 2

Appendix 2

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This report was prepared as an account of work sponsored by an agency of the United States Government. Reference herein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply its endorsement, recommendation, or favoring by the United States Government or any agency thereof, or Battelle Memorial Institute.

PACIFIC NORTHWEST NATIONAL LABORATORY operated by BATTELLE for the UNITED STATES DEPARTMENT OF ENERGY under Contract DE-AC06-76RL01830

Printed In the United States of America

Available to DOE and DOE contractors from the Office of Scientific and Technical Information, P.O. Box 62, Oak Ridge, TN 37831; prices available from (615) 576-0401.

Available to the public from the National Technical Information Service, U.S. Department of Commerco, 5285 Port Royal Rd., Springfield, VA 22161

This document was printed on recycled paper.

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A Primer on Electric Utilities, Deregulation, and Restructuring of U.S. Electricity Markets

W.M. Warwick

July 2000 Revised May 2002

Prepared for die U.S. Department of Energy Federal Energy Management Program under Contract DE-AC06-76RLO1830

Pacific Northwest National Laboratory Richland, Washington 99352

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Foreword.v

Summary...vi

Acronyms and Abbreviations.viii

1.0 Introduction...1.1

1.1 Background - The U.S. Government, the World’s Biggest Energy Customer.1.2

1.2 Overview of this Primer.1.3

2.0 A Utility Defined.....2.1

2.1 Types of Utilities.2.1

2.2 Utility Functions.2.2

3.0 Generation...3.1

3.1 Major Generator Designs.3.1

3.2 Plant Efficiency. 3.4

3.3 Plant Construction and Operating Costs.3.4

3.4 Plant Selection and Dispatch.3.6

3.5 Utility Planning and Generating Reserve Margins. 3.8

4.0 Transmission and Distribution. 4.1

4.1 Transmission...4.1

4.1.1 Control Centers.4.2

4.1.2 Reliability and Outages...4.3

4.1.3 Adequacy, Reserve Margins, and System Reliability.4.5

4.1.4 Ancillary Services.......4.6

4.2 Distribution and Customer Service.4.7

4.2.1 Service Offices.4.8

4.2.2 Outage and Repair Service.4.8

4.2.3 New Connection and New Service Requests. 4.8

4.2.4 Metering and Billing.4.9

4.2.5 Marketing. 4.10

4.2.6 Energy Efficiency and other Demand Management Services.4.10

4.2.7 Renewable Energy Resource and R&D Programs.4.10

4.2.8 Public Benefits Programs.4.10

4.2.9 Wholesale Customer Services.4.10

5.0 Utility Operation Under Regulation.5.1

5.1 Why Regulation?.5.1

5.2 Power Pools and Regional Power Markets.5.1

5.3 Utility Rates and Costs.5.2

5.3.1 Rate of Return..*5.2

5.3.2 Fixed Costs. 5.4

5.4 The Setting for Rate Setting. 5.8

6.0 What is Deregulation?.6.1

6.1 Why Deregulation? A Historical Perspective.6.1

6.1.1 A Digression into Natural Gas Deregulation.6.1

6.1.2 Back to Electric Industry Restructuring.*6.4

6.2 Utility Functions after Industry Restructuring.6.6

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6.2.2 Plant Selection and Dispatch in a Power Exchange.... 6.9

6.2.3 Transmission. Under Deregulation.6.11

6.2.4 Transmission Access Under Deregulation.....6.11

6.2.5 New Institutions: ISOs and RTOs. 6.13

6.2.6 Reliability and Reserve Margins.6.15

6.2.7 Ancillary Services. 6.15

6.2.8 Tariff Administration and Back Office Functions.6.15

6.2.9 Billing, Settlement, Dispute Resolution.6.36

6.2.10 Planning.6.16

6.2.11 Distribution. 6.17

6.3Customer Services after Deregulation.6.17

6.3.1 Service Offices.....,.6.17

6.3.2 Outage and Repair Service. 6.18

6.3.3 New Connection and New Service Requests... 6.18

6.3.4 Marketing.6.18

6.3.5 Metering and Billing. 6.18

6.3.6 Energy Efficiency and other Demand Management Services...6.19

6.3.7 Renewable Energy Resource Programs.6.20

6.3.8 The Texas Exception. 6.20

7.0 Coping with Utility Restructuring- Guidelines for Federal Customers.7.1

7.1 Recap - What Does Utility Restructuring Mean to Me?...7.1

7.1.1 What has been deregulated?.,.....7.1

7.1.2 Setting the Cost of Energy -Wholesale. 7.2

7.1.3 Setting the Cost of Energy -Retail. 7.2

7.1.4 Setting Delivery Costs - Wholesale and Retail.7.2

7.1.5 Other Retail Charges.7.3

7.1.6 The Bottom Line. 7.3

7.2 Guidelines for Coping - A 10-Step Program.....7.3

7.2.1 Step One- Data Collection. 7.3

7.2.2 Step Two - Review Your Utility Bills.7.4

7.2.3 Step Three - Reschedule Major Energy-Using Activities.7.4

7.2.4 Step Four - Assess Energy Pnce and Use Trends.7.5

7.2.5 Step Five - Assess Energy Efficiency Potential.7.5

7.2.6 Step Six - Assess New Technologies...7.6

7.2.7 Step Seven-Monitor Renewable Resource Developments..7.7

7.2.S Step Eight - Develop a Price and Supply Risk Management Plan.7.8

7.2.9 Step Nine - Institutionalize Energy Management.7.9

7.2.10 Step Ten-Develop an Energy Management Plan and Strategy.7.9

8.0 How Does Deregulation Affect Me* the Federal Energy User?...,...,.8.1

Glossary.A. I

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1.1 This map shows the status of electric utility deregulation in each state in the country.1.1

1.2 The U.S. Government is the largest user of energy in the world.1.2

1.3 Total Federal Building and Facility Net Energy Use.1.2

2.1 The “text book” image of a traditional utility is one that owns all of the generation resources it needs and controls all of its own transmission to meet the needs of its customers.2.3

3.1 A thermal generator creates electricity by using heat from the burning of fuels or nuclear energy to create steam which turns a turbine, which rotates a generator shaft through opposing magnetic fields.......3.1

3.2 Coal, nuclear, and hydroelectric plants have all been used to provide significant amounts of U.S. base load capacity. ...3.2

3.3 Schematic of a gas turbine plant, known, as a simple-cycle combustion turbine or simply combustion turbine plant.3.3

3.4 Schematic of a combined-cycle combustion turbine plant, which combines a steam generator and gas turbine...........3.3

3.5 Peaking plants might be compared to a beachfront hotel.3.5

3.6 Load Profile and Load Duration.3.6

3.7 To ensure a reliable power supply, power generators operate some powei plants around the clock. .3.7

3.8 The oil embargo of the 1970s prompted the government to pass PURPA and to promote use of alternative fuels including geothermal, wind, solar, and the burning of wood and municipal waste. 3.10

3.9 The hydropower dams of the Columbia River Basin are mostly run-of-river projects.3.12

4.1 The transmission grid moves wholesale power from generators to distributors. 4.1

4.2 Power plants have almost always been located away from the loads they serve.4.2

4.3 This photo highlights the key features of a control center.4.3

4.4 The 10 reliability regions of the North American Electric Reliability Council.4.12

5.1 In a regulated utility environment, rates are designed to recover costs used to serve customers and customers are allocated to classes that each have different rates.5.4

5.2 Flat, declining block and inverted rates are three rate designs employed by utilities.5.6

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6.1 A Timeline of the US. Natural Gas Industry in the 20th Century.6.2

6.2 A Comparison of the structures of traditional and deregulated electric supply systems.6.5

6.3 Dutch Auction Example.........6.10

6.4 Currently Proposed RTO Boundaries......6.14

8.1 As with telephone deregulation, your local utility company will continue to maintain power distribution and wiring to your house.8.2

8.2 Buying power in a deregulated market.8.3

Tables

3.1 Construction Costs of Various Generating Plants. 3.4

4.1 Reliability Yardstick.4.4

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A primer, by design, simplifies complex subjects. This primer is no exception. As a result, discussions of many topics may be more black and white than is the case in reality. Further, the process of selecting topics, and summarizing and editing text all introduce a point of view. Although every effort was made to present a balanced discussion, some readers may detect an occasional bias. This is unfortunate, but unavoidable. Although this document was thoroughly researched, errors in source material, interpretation, and editing are inevitable. That said, this is a dynamic document and comments and corrections are welcome. http://pnnl-utilityrestructuring.pnl.gov/electric/Primer/index.htm

Comments and suggestions can be posted via the Restructuring web site or can be sent to the author directly fMike.Warwick@Dnl.gov).

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The objective of the Federal Energy Management Program is to provide Federal agencies and facility managers with timely and accurate information about electric industry restructuring to facilitate wise procurement of power and appropriate decisions about energy efficiency and other energy management investments in the face of industry change. This primer is offered as an introduction to utility restructuring to better prepare readers for ongoing changes in public utilities and associated energy markets. It is written for use by individuals with responsibility for the management of facilities that use energy, including energy managers, procurement staff, and managers with responsibility for facility operations and budgets. The primer was prepared by the Pacific Northwest National Laboratory (PNNL) under sponsorship from the U.S. Department of Energy (DOE) Federal Energy Management Program (FEMP). The impetus for this primer came from the Government Services Administration who supported its initial development

Summarizing a subject this complex, even in the context of this simplified Primer, is challenging. Following is a list of highlights; these concepts are more thoroughly described in the following chapters. Terras are defined in an extensive glossary provided at the end of the report.

• The historic practice of providing consumers with electricity from a monopoly provider is not as efficient economically as it used to be due to the growth in independent power plant developers and competitive wholesale electricity markets. Giving retail customers the opportunity to choose their power supplier is expected to stimulate markets to reduce power costs and increase power products and services.

• There is a legacy associated with traditional utility practices that requires a transition period before power markets are truly open and competitive. The procedure and schedule for transitioning to competitive retail electricity markets is up to each state. Roughly half of the states have adopted a schedule for deregulation to date.

• Changing how retail consumers purchase power requires changes throughout the industry. Now that this process has been launched, the industry is restructuring itself to adapt to competition. The path forward is not fully known, but will involve existing utilities selling off their power generators as well, perhaps, as transmission lines. At a minimum, the operation of individual utility transmission lines will be taken over by third-party operators who will run them as a single, integrated system to serve competitive regional wholesale power markets.

• Retail power sales to consumers are being taken over by a variety of new power suppliers, many of which are subsidiaries of utilities based in other states. These new suppliers are not able to offer significant bill savings under most state transition rules (although they are offering new services including power from renewable resources). Most customers continue to receive power from the local utility on. so-called default service rates that continue to be regulated.

• Competitive power markets are based on bids by generators into a single market, generally on an. hourly basis. Market prices have been volatile. Pnces are expected to continue to be volatile and *387 may become more so, unless new generation and transmission can be «instructed to meet rising power demand. Fortunately, planned generation additions appear to be adequate to meet expected demand foe the rest of the decade. Unfortunately, these new plants may not prevent spot shortages in certain areas or during high-use periods. Also, transmission construction is not keeping pace with either new plant additions or demand growth. This may result in increased transmission costs, outages, or both. This situation may continue for several years, as it takes roughly seven years to site and build new transmission lines.

• Utility-sponsored energy management programs are being phased out in the face of deregulation. Customer-funded programs operated by third parties are replacing many of these programs and new power suppliers are offering their customers’ free energy audits and other energy management services, often for a fee. Some states have adopted utility fees that are used to fund energy-efficiency programs. An independent body, not the utility, often manages these funds.

• In the face of competition for electricity supplies, Federal agencies are required to solicit competitive proposals from alternative suppliers. The GSA and DESC aggregate the energy needs of Federal agencies in every state that deregulates. These GSA and DESC aggregation pools provide an easy energy purchasing option for individual Federal agencies and facilities.

« As deregulation and industry restructuring evolves, new issues will emerge. One of these is reliability. Another is the role customer-owned generators can play in managing volatile power prices.

« The best way to navigate the changing currents of utility deregulation and restructuring is to have a plan and an energy management team. It will take some work to pull together an Energy Management Team and develop an Energy Plan or Strategy, but this will pay off in the long run.

Up-to-date information on the status of deregulation in each state and updated versions of this primer are available on the FEMP restructuring web site: http://pnnI-utilitvrestnicturiDg.pnl.gov/electric/Primer/index.hhn

If you find this primer to be of value or if you have corrections, comments, or criticisms concerning this primer, restructuring, or FEMP, please send them to us via the web site, or to the author directly (Mike.Warwick@pnl.gov).

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BTU British thermal unit

COB Califomia-Oregon border

CCCT combined-cycle combustion turbine

CT combustion turbine

DESC U.S. Department of Defense’s Defense Energy Service Center

DOE U.S. Department of Energy

E&P exploration and production

ERCOT Electric Reliability Council of Texas

EWAG exempt wholesale generators

FERC Federal Energy Regulatory Commission

FOB freight on board

FPC Federal Power Commission

G&T generation and transmission

GSA General Services Agency

GW gigawatt

IGCC integrated gasified combined cycle plants

IOU investor-owned utilities

IPP independent power producers

ISO Independent System Operator

ITC independent transmission companies

KWh kilowatt hour

MAAC Mid-Atlantic Coordinating Council

MCP market clearing price

MMP market marginal price

MW megawatt

NEPool New England Power Pool

NERC North American Electric Reliability Council

NY Pool New York Power Pool

OH operating hour

PBR performance-based regulation

PJM Pennsylvania, [New] Jersey, and Maryland Pool

*389 PMA DOE’s power marketing administrations

PNNL Pacific Northwest National Laboratory

POU publicly owned utility

PSC Public Service Commission

PUC Public Utilities Commission

PUHCA Public Utility Holding Company Act

PURPA Public Utility Regulatory Policies Act

QF qualifying facilities

RPS renewable portfolio standard

RTG Regional Transmission Group

RTO regional transmission organization

TOU Time-of-use

TVA Tennessee Valley Authority

USPS U.S. Postal Service

VA Veterans Administration

wscc Western Systems Coordinating Council

*390 4.0 Transmission and Distribution

People tend to be more familiar with the distribution lines in their neighborhoods than with high-voltage transmission lines. Typically, transmission lines are located in remote areas so they can run for long distances in a straight line, as it is much cheaper to build that way. In contrast, distribution lines have to be close to the customer (Figure 4.1). Consequently, they are more numerous. In general, distribution lines are radial., or run. away from the transmission lines to a dead end.

Power typically flows from a generator, along the transmission grid to a substation where it is transformed, or stepped down, to a lower voltage for distribution. The voltage reduction allows the utility to use smaller wires and shorter poles for distributing power to consumers. Power on the distribution line flows to customer homes and businesses, but it gets stepped down again as it comes off the distribution lines. Those large, round, black transformers that are mounted on the top of power poles outside homes do this transformation. If the home or business is served with underground wires, the transformer is mounted on the ground in a housing of some sort.

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Figure 4.1. The transmission grid moves wholesale power from generators to distributors. The distribution system moves retail power from distributors to customers. Transmission will continue to be regulated at the federal level by FERC. Distribution will continue to be regulated at the state level by state commissions.

4.1 Transmission

When most people think of an electric utility they envision a company, typically associated with a major metropolitan region, that owns generating plants located far away from most of its customers. A large concentration of customers, like a metropolitan area, is called a load center. Power from remotely located generators travels to load centers along high-voltage transmission lines (Figure 4.2). The linkage between power plants and load centers via transmission lines is familiar to most people due to the wide swath of land associated with transmission corridors. Less obvious is that transmission lines also connect to each other forming a network, called the transmission grid. The combination of generation and the transmission network is referred to as a power grid or power system.

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Figure 4.2. Power plants have almost always been located away from the loads they serve. The first plants were in industrial areas close to industrial coal supplies or, in the case of hydropower, along distant rivers. The first electric loads were lights in wealthy neighborhoods far removed from the industrial and shipping areas. Transmission lines tied the generation and the loads together.

Areas that are not well integrated into the power grid are called load islands. Load islands are usually literal islands, like Manhattan and Long Island in New York or peninsulas, such as the DclMarVa and Monterey peninsulas. These areas tend to have fewer transmission lines into them than they would if they were more centrally located on the power grid. Rapid urban growth or lagging construction of transmission can also create loadpockets within the power grid.

4.1.1 Control Centers

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Because so few retail utilities actually own and operate their own generation, they rely on other utilities, usually the largest utilities in tho region, to provide for the transmission of power to them in a process called wheeling. Wheeling power requires the use of transmission lines that are owned by multiple utilities. This use needs to be managed so that power can be tracked as it flows from utility to utility across the grid. Utilities manage the operation of generation, transmission, and transmission maintenance from facilities called control centers. Power that is wheeled through a system is coordinated between adjacent control centers. Although there are over 3,000 retail utilities, there are only 140 control centers in North America. ,f¥

Figure 4.3 shows a typical control center, this one located in Texas. At a control center, control is provided through the computer terminals on the operators’ desks. These terminals provide schedules for the operation of generators and resulting transmission loadings. They also provide real-time information so operators can verify that schedules are being followed and take corrective action when there are deviations from the schedule or if customer demand or weather is different than expected. System controllers communicate with power plant operators and transmission crews through secure computer, telephone, or radio connections.

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Figure 4.3. This photo highlights the key features of a control center. On the far right is a map. Although it Is too small to show these details, the map indicates the location of power plants and transmission lines under the control of the center, usually with colored lights that indicate the status of the power plant or transmission line (e.g., red for out of service). Connections to adjacent control areas are also indicated. {Photo courtesy of Electric Reliability Council of Texas [ERCOT].)

4.1.2 Reliability and Outages

When consumers think about reliability, they generally think in terms of power outages, but reliability is much mote complex tbgn that. Transmission and generation work together. Given the roles each performs, they are effectively substitutes for one another. In other words, power can be transmitted from a remote power plant to a customer, or it can be generated locally, near the customer. In the first instance, transmission substitutes for near-by generation. In the second, generation substitutes for transmission capacity.

The benefit of an extensive transmission system is that it provides access to generation across a much broader area. This allows power purchasers to hunt for lower cost power than might be available locally and for distant generators to perhaps sell their low-cost power for a higher profit. It also allows utilities to diversify the source of their purchases. However, an extensive transmission system also has costs, in addition to the expense of construction and maintenance. Reliance on power from distant power plants delivered over long transmission lines leaves a utility vulnerable to disruptions on the power lines. This has to be taken into account when the utility plans its generating reserve margins, lest it find itself with power supply contracts in hand, and no power deliveries to back them up. These are the kinds of issues that utilities must include in their generation and transmission planning and operations.

*393 Reliability is actually composed of two elements, adequacy of generation and transmission capacity and reliability of transmission and distribution system performance. In other words, is there enough power and transmission capacity and can it be used to get power to all customers when they need it?

When consumers have a power outage, they tend to blame “the power system” or “the utility.” In fact, less than 10% of consumer outages are the result of failures of the main power grid (the generation and bulk power transmission system). About 10% are due to substation failures. The remaining 80% of outages occur in die local distribution system, caused by falling tree limbs or other vegetation, animals getting into the power lines, automobile accidents, and lightning strikes or other severe weather. Typically, distribution outages are localized. In other words, only a small area of the utility system is out of power. Major storms can knock out power to larger areas without actually bringing down the entire power grid. This is because transmission lines are built to be above or away from trees that can interfere with them, while distribution lines tend to follow along tree-lined streets in cities and towns.

Outages are measured in terms of duration and number of customers affected, or “customer-hours” of outage. Another measure, usually mislabeled as “reliability,” is the percentage of time the power system “works.” Typically, power systems work at least 99.9% of the time. This is called 3-nines power (because there are three nines in the percentage, see Table 4.1). Electronic equipment is highly sensitive to power outages and deviations in voltage and frequency (the 60 Hertz, or cycle, frequency that is characteristic of the North American electric grid). Users of sensitive electronic equipment, or even highly automated manufacturing operations, require power that is highly reliable and “clean,” or with few voltage ox frequency deviations. Companies that host Internet servers typically want both “quality” power and “high-9s” power.

All the talk about high-9s power quality and the lack of “reliability” of the power system has obscured the fact that the bulk power grid is highly reliable. If distribution outages are eliminated from outage statistics, reliability at the transmission level would be in the range of 99.999%. Unfortunately, regulators are primarily interested in customer service outages and utilities normally don’t separately report outages on the transmission system versus the distribution system. Nevertheless, a system-wide (transmission level) outage usually warrants front-page coverage in the newspaper. Plow many of those have you seen lately? Recognizing this, some manufacturers in Silicon Valley had the local utility connect them directly to the high-voltage transmission grid.

Table 4.1. Reliability Yardstick - Typically power systems are reliable at least 99.9% of the time. Users of sensitive electronic equipment require power that is highly reliable, called “high-9s” power.

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*394 4.1.3 Adequacy, Reserve Margins, and System Reliability

Transmission systems are planned following assumptions that are similar to generation, namely, demand growth is uneven and unexpected things happen that need to be anticipated. Unlike generation, transmission is both, static and fixed, as well as being long-lived. A transmission line delivers power from point a to point b. It can’t direct the power itself (that is done through die operation of generation and transmission at the control center). Further, transmission lines are “lumpy.” In other words, they come in only a handful of sizes. If one is too small for the job, the next size up represents a significant increase in cost and transmission capacity.

Transmission lines don’t wear out, per se, so once they are built, they tend to last for decades. More significantly, obtaining rights-of-ways for transmission lines is difficult and time consuming. As a result, once a transmission corridor is established, transmission planners anticipate using it for decades to come and tend to size transmission lines to meet future growth for the foreseeable future. The extra capacity on the line provides a reserve for unanticipated events, as well as future growth; however, transmission planners have other guidelines they also follow to ensure adequacy.

When, power is injected onto a transmission line, it flows through the entire network, not just from point a to point b. Using the old “electricity flows like water” analogy, it is similar to a network of irrigation canals, where the water seeks the same level no matter where it comes in or where you want it to go, A transmission line outage (for maintenance as well as unanticipated disruptions) acts like a dam on an irrigation canal, forcing the water around the blockage. If adjacent transmission lines cannot handle the power that is rerouted, safety devices will switch them off, further impeding power flows and potentially leading to cascading outages and system failure, i.e., a blackout. As a result, transmission planners and operators plan to have back-up transmission lines available just in case a line goes down. As long as diere are plenty of lines, and “spares” in reserve, there will be adequate transmission.

New consumers are aware of the role generation plays in ensuring transmission reliability. Electricity flows at the speed of light. As a result, electricity generation, transmission, and use are interdependent and have io be in balance from moment to moment. In other words, how electricity is generated and transmitted affects how it can be used and vice versa. Therefore it is important for all elements of the electric grid, including interactions between the grid and consumption, to be synchronized. The responsibility for this synchronization falls on generators and the transmission system operators that control them.

Generation is dynamic, whereas transmission and consumption are assumed to be essentially passive elements of the power grid. Therefore, generators are used to react to changes in electricity use and to changes in schedules for generation or transmission. For exampLe, if a generator that was scheduled to operate doesn’t, another generator somewhere else has to take up the slack. Similarly, if a transmission line is unavailable, the output of all generators will need to be changed to make sure power flows around the line that is out of service. The process involved in both cases is called redispatch.

Although the transmission system is designed for reliability, the location of generation on the transmission grid is part of that design. Instead of building a redundant line from remotely located power plants all the way to the urban load centers, a generator may be located at the midpoint of a transmission line. This effectively protects against transmission line failures upstream of its location. In other words, *395 if the transmission line upstream of the power plant fails, the power plant can increase its output to replace the power that the transmission line was carrying.

Because the transmission system’s redundant transmission elements and generation location ensure its reliability, transmission planning and expansion typically accompany the addition of new power plants. This is a veiy important point. The last round of power plant additions was in the 1980s. These were plants constructed by utilities and paid for by rate payers under traditional regulatory schemes. These new plants were accompanied by an expansion of the transmission system within utility service areas. In retrospect, “too much” generation and transmission was built in the 1980s and that resulted in a lack of new power plants through the 1990s. We have pretty much used up the spare generating capacity from the 1980s along with the associated transmission. The consequences of this are now evident in recent power shortages and power price spikes and volatility. In the new deregulated era, construction of power plants falls largely to non-utilities. The issue of transmission planning and constiuction is, as yet, unresolved. This topic will be discussed further in the sections on deregulation, but it is important to note the underlying dynamics here.

4.1.4 Ancillary Services

Generators provide a variety of ancillary services to the transmission function, including

• regulation of voltage (i.e„ the 120-, 240-, and 480-volt current at the powerpanel) and frequency (the 60-cycle signature for North American power systems)

• reserves (back-up energy supplies)

• reactive control (the basis for reactive charges)

• load following (exactly matching generation to consumption).

Without these services the power system would be unreliable even with adequate generating and transmssion supplies. Ancillary services require few generators relative to those needed for power supply (less than 10% actually operating); however, the services these generators provide are absolutely critical. The control center provides for these services in the way it schedules and dispatches power plants. Generating reserve margins were discussed previously as a regulatory requirement to meet emergencies during peak demand periods.

Two different types of reserves are required for system reliability. The first is called non-spinning reserve, or installed capacity reserve (ICAP). This is usually supplied by power plants that are available for operation, but sitting idle. Typically, these plants need to be capable of starting up to provide reserves within 10 minutes. Some system operators call this “10-minute reserves” as a consequence. The other type of reserve is called spinning reserve or operating capacity reserve (OCAP). Spinning reserves are provided by power plants that are actually operating, but at less than full capacity, hence the generators, or at least the prime movers that turn them, are “spinning.” Spinning reserves need to be available within 10 minutes, to ensure that adequate voltage is maintained on the system until non-spinning back up generators come on line to provide system support.

Another ancillaiy service is reactive control. Reactive power, also called imaginary power, is a creature of alternating current power systems. It is somewhat difficult to explain, but it typically results from interactions between electric motors and generators. Electric motors rotate like generators but act as if *396 they were working against the power system. That requires the power generators to work harder and bum more fuel. Thus, there are real costs for supplying imaginary power. This is why utilities charge large customers a reactive power fee in their rates. Reactive control is provided at the system level through the operation of selected generators, dedicated to this function. Out on the transmission and distribution system, reactive control is usually provided by capacitor banks.

Generation needs to match electrical demand on a moment-by-moment basis or there is a risk that certain power quality standards won’t be met, specifically voltage and frequency. Industry standards are set for voltage and frequency although these standards allow for limited deviations. For example, when a large load is turned on, generators are forced to work harder, which can cause a temporary drop in voltage until the generators catch up. There are generators dedicated to providing this kind of support to the system, and they constitutes a service called automatic generator control, or ACC. AGC keeps the power grid synchronised so all of the generators are working together.

A related ancillary service is one that provides the necessary energy to match generation to loads within an hour. For example, a power plant may schedule to provide 100 megawatts of energy to the system between noon and 1 PM but may actually provide 120 megawatts in the first 30 minutes and 80 the next. Because the system operator was expecting a uniform 100 megawatts of generation, he had to make up for the difference by changing how some generator operated. This could be done by controlling a specific generator or by redispatching several generators. In either case, there is a cost associated with these changes for loadfollowing, or imbalance energy. Conversely, a utility may have purchased 100 megawatts for use between noon and 1 PM and actually used 120 megawatts the first 30 minutes and 80 the rest. As a result, they may be subject to the imbalance energy charge.

Not all system operators levy imbalance energy charges. Some roll it into other charges or require power sellers to provide this service on their own. Imbalance energy charges can be a significant barrier to the construction and use of generation that is difficult to predict or schedule, such as that from wind or solar generation and distributed generators.

Failures of the bulk power system are rare. When they occur, outages are widespread and the subject of intense industry analysis. The electric industry deals with failures of the bulk power grid like the airline industry handles plane crashes. They thoroughly review what happened, and why, and change practices to prevent a future reoccurrence. These investigations are initiated by die regional industry reliability organization; these organizations form the North American Electric Reliability Council or NERC (see sidebar). The NERC has increased its focus on. grid reliability by requiring each region to have a designated security coordinator.

4.2 Distribution and Customer Service

The distinction between transmission and distribution for a utility is not as obvious as the consumer might think. In fact, the industry has tried to draw a so-called bright line between the two with little success. Such a line is needed to clarify FERC and State jurisdiction over power line regulations and rates. In. general, transmission lines are high-voltage lines, those with kilovolt-ampere (kva) ratings of 750,500, 230, and 115. Distribution lines have lower voltage ratings, such as 69, 34, and 13 kva. For convenience, many in the industry refer to ratings of 115 kva and above as transmission. Things are not that simple, however, because lower voltages are often used for transmission in rural areas where power transfer *397 requirements are less. A functional definition is also used. Typically, transmission lines serve the bulk power system and distribution lines serve retail customers, This distinction is also compromised as large industrial customers often receive retail service over high-voltage lines.

It is not unusual in rural areas for both retail and wholesale transaction to use the same low-voltage wires. In those situations, both FERC and the state may have authority to set access terms and rates, often in conflict with each other. For example, FERC’s access terms for transmission lines require open access, whereas state regulations prohibit retail access prior to deregulation. Similarly, FERC may assign different rates for transmission than states do for distribution, even when both transactions are using the same lines. Regardless, the transmission component of retail rates is generally small, typically less than 10% of the total cost of power.

The energy component of rates varies from approximately two-thirds of the bill for large customers to less than one-third for small customers. Conversely, charges associated with local utility operations compose one-half to two-thirds of most retail customers’ bills. The balance of the rate pays for customer services, including maintenance and repair of the power lines, customer offices, and so on. Each of these has become an expected part of regulated utility service at the retail level. Deregulation may make some of these competitive and others non-economic. Therefore, a review of the primaiy distribution customer services available to retail customers is useful.

4.2.1 Service Offices

Customer service offices provide customers with a convenient way to pay bills, open and close accounts, and resolve complaints. Utilities use these offices as part of their marketing, public relations, and community involvement efforts, including meeting with customers to discuss new service requirements and promoting energy-efficiency services. Often, they are used as field offices for service crews, including meter readers and line maintenance staff. Closing customer service offices is a common cost-cutting move. As the industry restructures, this trend is likely to continue, especially as utilities merge and consolidate.

4.2.2 Outage and Repair Service

When the lights go out, consumers call the local utility for service restoration. In most cases, the utility has limited liability for outages; however, they are often required to repair equipment that may be damaged, such as a VCR damaged due to a voltage surge or to replace items spoiled due to power outages, especially refrigerated foods. This liability is typically limited to a maximum dollar amount and may be restricted to residential customers.

4.2.3 New Connection and New Service Requests

The local utility is the point of contact for connection of new facilities and for expansion of existing services. Generally, utilities are fairly generous with service connections and expansions as new customers means new power sales and distribution revenues. There are exceptions, when the customer is required to compensate the utility for services.

*398 • Customers that are not close to distribution lines are usually charged for costs that exceed “typical” connection costs. These may be prohibitive for remote locations. Some utilities may choose not to provide a line at all, and instead offer a remote power supply option, such as a solar photovoltaic system. A lot of remote areas fall between utility boundaries. In some cases, utilities may claim a remote customer is outside their service area to avoid the additional cost of serving them.

• The local utility is also the focus for interconnection of customer-owned or on-site generation, including distributed energy resources (DER). Standards and expectations for interconnection of DER vary widely and remain an ongoing subject for negotiation within the industry. Utilities have legitimate concerns about protecting the safety of their workers and other retail customers from “stray” voltage from DER devices that may be operating when a power line is supposed to be down. On the other hand, the restrictions utilities want to impose on owners of DER devices are often excessively expensive and potentially defeat the purpose of using DER for back-up power during outages.

• Some customers want to have service drops (connections to the distribution network) from 2 or more different substations to ensure a reliable power supply. This is typically a value-added (extra cost) service.

• Finally, customers that want the ultimate in system-supplied reliability may want to be connected directly to the high-voltage transmission grid. This requires a substation at the customer site, which can be expensive. This is also a value-added (thus extra cost) service, providing the utility even allows it. ^

4.2.4 Metering and Billing

Metering and billing are integral to the provision of electric service; in. essence, tbe power meter is the utility’s cash register. Modem utility meters are capable of many functions that could help customers manage energy more wisely. These new meters are significantly more expensive than traditional ones and usually require replacement of traditional meter reading and billing systems at considerable utility expense. As a result, some utilities stay with traditional meters to keep rates low. Large customers and customers with multiple locations can benefit from more modem metering. Unfoitunately, the slow pace of adoption of advanced metering may limit the ability of these customers to upgrade or to take advantage of all the available features.

Similarly, some customers would like the ability to have all utility bills arrive or come due on the same day. Present utility meter reading practices are based on the utility reading roughly one-twentieth of their meters on each of the 20 working days in the month. Consequently, it is unlikely that bills from multiple locations will all arrive on the same day. Some utilities are addressing these markets with new, extra-cost products. There are also third-party billing firms that essentially take over the utility bill payment function for customers and, in turn, send the customer utility bills the way the customer wants them. For example they may consolidate into a single invoice, the bills for all utilities for all plants, including plants served by multiple utilities in different states.

*399 4.2.5 Marketing

Utilities market electricity as a beneficial service <e.g., “live better electrically”), even in times of scarcity and high costs. When energy conservation is a lesser concern, they actively encourage new customers to locate in their service areas for economic development and to increase electric use to boost revenues. Many utilities have resource centers that are designed to showcase state-of-the art electric technologies to encourage increased adoption of electric uses and therefore electric sales.

4.2.6 Energy Efficiency and other Demand Management Services

Regulated utilities are often a source of information and advice for retail consumers on energy efficiency, efficient equipment selection, and similar support, including audits, rebates, discounts, and financing, Generally, these services are provided at the direction of regulators, not as voluntary programs. As a result, they are often designed to accomplish objectives that benefit the utility as well as the customer. In fact, services that benefit only the customer, not the utility, may be restricted by regulation or require customer payment.

4.2.7 Renewable Energy Resource and R&D Programs

Utility ratepayer funds are also often used to develop renewable energy resources, such as wind and solar power and to fund research that benefits electric utilities, such as research into power plant maintenance, transmission design, and automated distribution system operations. Much utility research is conducted collaboratively, where many utilities contribute a fixed share of revenues to be used for research by third parties, such as the Electric Power Research Institute (EPRI). Some of these programs result in pilot and demonstration projects, such as installation and operation of a wind turbine or fuel cell in the utility system.

4.2.8 Public Benefits Programs

Electricity has been deemed to be an essential public service. Everyone is expected to have access to power to meet minimal health and safety needs. Not all customers have the financial wherewithal to be able to pay for the electricity they use. As a result, most regulators require utilities to collect a small fee from customers to operate programs that reduce the financial burden on low-income and elderly customers, such as home weatherization and low-income customer rate subsidies.

4.2.9 Wholesale Customer Services

Most large utilities also have wholesale customers they serve with power and transmission services. Typically, these wholesale customers are other, smaller utilities that sell the power to retail customers. In rare cases, wholesale customers may be retail customers in all but name due to prior regulatory agreements. Naturally, the level of service provided to these customers varies considerably from those for retail customers. Although wholesale customers can obtain power and transmission services from multiple suppliers in the competitive market, most utilities also offer bundled service under a regulated tariff. This tariff typically consists of the following:

*400 • Generation at prices agreed to between the customer and the PUC. These may be cost-based, using the utility’s generation as a basis, or they may be market based,

• Selected ancillary services, especially load following and load shaping services that match power demands in real-time. Most wholesale energy purchases are for power in blocks, such as 50 MW for 24 hours for 2 months. These are often take-or-pay deals where power that is not used is essentially forfeited to the supplier, but paid for nevertheless. Load following and shaping services exactly match variations in power use to generation. These services can be purchased in the wholesale market for a customer’s entire load or only a residual that remains after a block purchase. Typically, load following services are quite expensive.

• Transmission and associated ancillary services are usually bundled into the transmission tariff. Generally, the State-regulated tariff for these services is higher than the FERC rates.

Additional services may also be available outside the standard tariff, such as substation services (transformation), multiple delivery points (service from more than one substation with additional meters for each), and maintenance of transmission facilities.

A <Muto>Ucal Side+iote, -

The New York Blackout of 1965 and the Creation of NERC

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The first major U.S. power blackout occurred in New York State in 1965. Industry response to this event radically changed the way utilities manage transmission aad generation and laid the foundation for the equally radical changes to power markets and transmission management that began in the 1990s. The foundation for the New York blackout was built gradually over years of increased utility reliance on power imports from more and more remote locations, primarily in Canada. New York utilities had also begun to tely on generating reserves from adjacent utilities in case of emergencies. A power surge on the Canadian power lines caused protective circuit breakers to trip. The loss of power imports from Canada shifted demand to weaker lines from adjacent utilities. These lines also tripped due to the sudden increases in demand. Thc.sc failures had a ripple effect that ultimately resulted in failures throughout the region and a day-long blackout

The New York blackout of 1965 was a wake-up call to the power industry. The industry responded to the blackout by creating a voluntary, utility-managed reliability organization, the North American Electric Reliability Council (NERC).

*401 NERC divided the nation into ten reliability regions, with each region covering multiple states (except for the Texas-specific Electric Reliability Council of Texas, ERCOT) (Figure 4.4). The largest council is the Western Systems Coordinating Council (WSCQ, which covers the entire Western Interconnection, including 11 western states, two Canadian provinces, and the northern portion of Baja California in Mexico. The smallest is the Mid-Atlantic Coordinating Council (MAAC) covering New Jersey, the District of Columbia, and most of Pennsylvania and Maryland. Each reliability council promulgates system planning and operating criteria that are intended to ensure that each utility with generation or transmission assets builds and operates them in a way that allows system controllers to preserve bulk power reliability.

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Figure 4.4. The 10 reliability regions of the North American Electric Reliability Council

Appendix 3

Appendix 3

*402 [[Image here]]

*403 DISCLAIMER

This report was prepared as an account of work sponsored by an agency of the United States Government. Reference herein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply Us endorsement, recommendation, or favoring by the United States Government or any agency thereof, or Battelle Memorial Institute.

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Printed in the United States of America

Available to DOE and DOE contractors from the Office of Scientific and Technical Information, P.O. Box 62, Oak Ridge, TN 37831; prices available from (615) 576-6401.

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This document was printed on recycled paper.

*404 PNNUB906

A Primer on Electric Utilities, Deregulation, and Restructuring of U.S. Electricity Markets

W.M. Warwick

July 2000 Revised May 2002

Prepared for the U.S. Department of Energy Federal Energy Management Program under Contract DE-AC06-76RLO1830

Pacific Northwest National Laboratory Richland, Washington 99352

*405 Foreword

A primer, by design, simplifies complex subjects. This primer is no exception. As a result, discussions of many topics may be more black and white than is the case in reality. Further, the process of selecting topics, and summarizing and editing text all introduce a point of view. Although every effort was made to present a balanced discussion, some readers may detect an occasional bias. This is unfortunate, but unavoidable. Although this document was thoroughly researched, errors in source material, interpretation, and editing are inevitable. That said, this is a dynamic document and comments and corrections are welcome. http://pnnl-utiIityrestructuring-pnl.gov/electric/Primer/index.htm

Comments and suggestions can be posted via the Restructuring web site or can be sent to the author

*406 Summary

The objective of the Federal Energy Management Program is to provide Federal agencies and facility managers with timely and accurate information about electric industry restructuring to facilitate wise procurement of power and appropriate decisions about energy efficiency and other energy management investments in the face of industry change. This primer is offered as an introduction to utility restructuring to better prepare readers for ongoing changes in public utilities and associated energy markets. It is written for use by individuals with responsibility for the management of facilities that use energy, including energy managers, procurement staff, and managers with responsibility for facility operations and budgets. The primer was prepared by the Pacific Northwest National Laboratory (PNNL) under sponsorship from the U.S. Department of Energy (DOE) Federal Energy Management Program (FEMP). The impetus for this primer came from the Government Services Administration who supported its initial development.

Summarizing a subject this complex, even in the context of this simplified Primer, is challenging. Following is a list of highlights; these concepts are more thoroughly described in the following chapters. Terms are defined in an extensive glossary provided at the end of the report.

• The historic practice of providing consumers with electricity from a monopoly provider is not as efficient economically as it used to be due to the growth in independent i>owcr plant developers and competitive wholesale electricity markets. Giving retail customers the opportunity to choose their power supplier is expected to stimulate markets to reduce power costs and increase power products and services.

• There is a legacy associated with traditional utility practices that requires a transition period before power markets are truly open and competitive. The procedure and schedule for transitioning to competitive retail electricity markets is up to each state. Roughly half of the slates have adopted a schedule for deregulation to date.

• Changing how retail consumers purchase power requires changes throughout the industry. Now that this process has been launched, the industry is restructuring itself to adapt to competition. The path forward is not folly known, but will involve existing utilities selling off their power generators as well, perhaps, as transmission lines. At a minimum, the operation of individual utility transmission tines will be taken over by third-party operators who will run them as a single, integrated system to serve competitive regional wholesale power markets.

• Retail power sales to consumers are being taken over by a variety of new power suppliers, many ol' which are subsidiaries of utilities based in other states. These new suppliers are not able to offer significant bill savings under most state transition rules (although they are offering new services including power from renewable resources). Most customers continue to receive power from the local utility on so-called default service rates that continue to be regulated.

• Competitive power markets are based on bids by generators into a single market, generally on an hourly basis. Market prices have been volatile. Prices are expected to continue to be volatile and *407 may become more so, unless new generation and transmission can be constructed to meet rising power demand. Fortunately, planned generation additions appear to be adequate to meet expected demand for the rest of the decade. Unfortunately, these new plants may not prevent spot shortages in certain areas or during high-use periods. Also, transmission construction is not keeping pace with either new plant additions or demand growth. This may result in increased transmission costs, outages, or both. This situation may continue for several years, as it takes roughly seven years to site and build new transmission lines.

• Utility-sponsored energy management programs are being phased out in the face of deregulation. Customer-funded programs operated by third parties are replacing many of these programs and new power suppliers are offering their customers’ free energy audits and other energy management services, often for a fee. Some states have adopted utility fees that are used to fund energy-efficiency programs. An independent body, not the utility, often manages these funds.

• In the face of competition for electricity supplies, Federal agencies are required to solicit competitive proposals from alternative suppliers. The GSA andDESC aggregate the energy needs of Federal agencies in every state that deregulates. These GSA and DESC aggregation pools provide an easy energy purchasing option for individual Federal agencies and facilities.

• As deregulation and industry restructuring evolves, new issues will emerge. One of these is reliability. Another is the role customer-owned generators can play in managing volatile power prices.

• The best way to navigate the changing currents of utility deregulation and restructuring is to have a plan and an energy management team. It will take some work to pull together an Energy Management Team and develop an Energy Plan or Strategy, but this will pay off in the long run.

Up-to-date information on the status of deregulation in each state and updated versions of this primer are available on die FEMP restructuring web site: http://pnnl-utilitvrestructuring.pnl.gov/electric/Primer/index.htm

If you find this primer to be of value or if you have corrections, comments, or criticisms concerning this primer, restructuring, or FEMP, please send them to us via the web site, or to the author directly (Mike.Warwick@pnl.gov).

*408 Acronyms

BTU British thermal unit

COB Califomia-Oregon border

CCCT combined-cycle combustion turbine

CT combustion turbine

DESC US. Department of Defense’s Defense Energy Service Center

DOE US, Department of Energy

E&P exploration and production

ERGOT Electric Reliability Council of Texas

EWAG exempt wholesale generators

FERC Federal Energy Regulatory Commission

FOB freight on board

FPC Federal Power Commission

G&T generation and transmission

GSA General Services Agency

GW gigawatt

1GCC integrated gasified combined cy cle plants

IOU investor-owned utilities

IPP independent power producers

ISO Independent System Operator

ITC independent transmission companies

KWh kilowatt hour

MAAC Mid-Atlantic Coordinating Council

MCP market clearing price

MMP market marginal price

MW megawatt

NE Pool New England Power Pool

NERC North American Electric Reliability Council

NY Pool New York Power Pool

OH operating hour

PBR performance-based regulation

PJM Pennsylvania, [New] Jersey, and Maryland Pool

*409 PMA DOE’s power marketing administrations

PNNL Pacific Northwest National Laboratory

POU publicly owned utility

PSC Public Service Commission

PUC Public Utilities Commission

PUHCA Public Utility Holding Company Act

PURPA Public Utility Regulatory Policies Act

QF qualifying facilities

RPS renewable portfolio standard

RTG Regional Transmission Group

RTO regional transmission organization

TOU Time-of-use

TVA Tennessee Valley Authority

USPS U.S. Postal Service

VA Veterans Administration

wscc Western Systems Coordinating Council

*410 Glossary

A

Access Charge or Wires Charge

A fee charged to an electricity supplier, gas supplier, or long-distance telephone provider (or to the customers of such companies) for access to a utility company's distribution system (the pipes or wires through which the utility supply moves, or the telephone lines owned by the local telephone company). It is a charge for the right to use another company's equipment and systems. The fee is generally set by state regulators at cost-based rates. For example, California electricity customers can purchase electricity from a power supplier of their choice. This supplier must arrange to transport the power over the local utility’s wires. To do so, they must pay an access charge (also called a wires charge). In most deregulated states, the power supplier can bundle this charge into a single consumer bill. In a few states the consumer pays the access charge in a bill that is separate from the power bill. See also Wires Charge.

Affiliate

A company that has the same owner as another company. For example, a company may have a separate company in the power plant development business. The parent company owns both this power developer and the local utility. When regulated utilities purchase or form subsidiaries they have to get approval from regulators. Another way to own several different companies is for a utility to form a holding company. Holding companies facilitate ownership of more affiliates, but are regulated at the Federal (rather than state) level by the Securities and Exchange Commission. They are also restricted under the Public Utility Holding Company Act of 1935 (PUHCA).

Aggregator

An entity that brings customers together to buy electricity in bulk, in order to increase customers' buying power. Aggregators can serve homes, businesses, or entire communities. They facilitate the purchase of power but are not the sellers, Retailers, customers, and brokers may also act as aggregators. It is assumed that the purchase of a large quantity of a commodity will attract more favorable bids than small ones. Commodity price savings from aggregation have been small thus far. However, aggregation results in significant savings in procurement costs, as only one agent is needed to execute a procurement on behalf of all participants.

A public aggregator is a unique form, established by a city, town, or county to purchase electricity in bulk for its citizens in order to increase their buying power. Public aggregators resemble consumer-owned utilities in that they are formed to reduce costs lor consumers. However, aggregators are not utilities and do not distribute power to end users.

*411 Allocation

Generation may Re divided up, or allocated, among purchasers for a variety of reasons, such as to link costs, risks, and benefits for projects developed by multiple sponsors. Power projects developed with public funds most commonly allocate the output (and cost recovery) to specific beneficiaries. For example, power from the Hoover Dam, which was built with Federal funds, is allocated to specific Western utilities that are customer-managed and serve predominately rural areas.

Alternative Energy Supplier

A supplier of energy that is not the company providing distribution and transmission services to the customer. Alternative suppliers may be brokers (agents that are middlemen between energy producers and consumers) or marketers (agents that own the energy they are selling to consumers). Aggregators are not alternative suppliers as they only aggregate customer demand, not supply.

Ancillary Services

The electric power system is dynamic. It responds to electricity use by customers. As a result it must be able to adapt rapidly to changes in use. Deregulation of wholesale generation and transmission markets resulted in unbundling of individual elements of power supply into discrete services that are ancillary to, but necessary for, a reliable power supply, so-called “ancillary services.” These include things such as generating reserves that are not specifically purchased by retail power users, but are included in the retail price of power as they contribute to power system reliability. Ancillary services are critical components of wholesale power trades, but are assumed to be part of the purchase in retail power transactions. Wholesale power suppliers have to make arrangements for ancillary services as part of the process of conducting transactions with retail consumers. Retail customers should clarify that this is the case, just to be sure. Similarly, ancillary services are not the same as the value-added retail services that are often included with retail power sales, such as free energy audits.

B

Back-Up Service

Customers with their own resources may have to provide resources in reserve to ensure against a failure of the primary resource. Typically, this is only required of a customer with on site generating equipment. These customers may require back-up supplies from the local utility. Without this back-up option, the customer would either have to maintain redundant generation on-site or risk power outages if on-site equipment were unavailable or inadequate to meet on-site power needs.

Balancing

Power demand and supply must match on a moment-to-moment basis. Unfortunately, it is impossible to accurately predict demand that frequently. As a result, a portion of generation capacity is set aside specifically to fill-in any gaps to make sure the system stays in balance. A key part of system operation is for suppliers to provide accurate estimates of production, hour-by-hour as well. Sometimes they err. When they do, generation has to come from someone else *412 to make up the shortfall. This also comes from generation used for balancing. When generators err in their estimates, they have to pay for the costs of balancing. These charges can add up for generators that are consistently wrong. Unfortunately, estimate of the power from intermittent renewable resources, like wind and solar, are often wrong and balancing costs may make them uneconomic.

Base Load

The minimum energy level a company must provide to its customers on a constant basis. The exact amount varies each day because aggregate customer loads vary from day to day and month to month. For example the base load for low electricity use in the spring and fall months is lower than in the winter and summer. Consumer loads mirror utility generating requirements. As a result, the phrase “base load” also is used to characterize customer needs. Specifically, power suppliers are interested in each customer’s base loads in order to identify the minimum quantify of power to sell. Both generators and power suppliers also characterize loads in terms of peak load, the maximum amount of power needed.

Base Load Plants

Plants that run at full capacity year round to meet a utility’s base load are called base-load plants. For base load plants, utilities select plants with the lowest generating costs, construction, and operating costs. Traditionally, base-load plants were fueled with coal purchased in very large volumes on long-term contracts.

Bid-Ask Negotiations. See Commodify Market.

Bid-Offer Auctions. See Commodity Market.

Bid Stack. See Dutch Auction.

Bright Line

A distinction the industry is trying to draw between distribution and transmission. Such a line is needed to clarify FERC and state jurisdiction over power line regulation and rates. FERC normally has jurisdiction over high-voltage (750,500,230, and 115 volt) transmission lines while the states have jurisdiction over low-voltage (69, 34, and 13 kilovolt) distribution lines.

British Thermal Unit (BTU)

This is the standard unit for measuring quantity of heat energy, such as the heat content of fuel. One BTU equals the amount of heat necessary to raise the temperature of one pound of water by one degree Fahrenheit. There are 1.03 million BTUs in 1 Mcf (an Mcf is a unit of volume meaning 1,000 cubic feet). There are 3,412 BTUs in 1 kilowatt hour.

Broker

A person or group that arranges for the purchase and sale of electricity, transmission, and other services between buyers and sellers, but does not take title to the power in the transaction. Energy brokers act just like a real estate or insurance broker. They earn a commission on the sale of energy, not a profit on the mark-up. This contrasts with marketers, who own title to the energy they are selling and make a profit based on selling the energy for more than they paid.

*413 Bulk Power Market or Wholesale Power Market

The bulk power system consists of the generation and transmission system and the wholesale financial transactions associated with power and transmission transfers on the system. It includes wholesale purchases and sales of electricity, transmission reservations to wheel that power, and potential interactions with power pools and independent system operators (ISOs). Access to the bulk power market is reserved for wholesalers, including power producers, power retailers, and a few very large direct-use customers. Some Federal agencies have access to the bulk power market at selected sites. See also Grid Transmission System.

Bundled Service

Before deregulation, customers received electric generation, transmission, distribution, and related support functions as a combined service. After deregulation the same services are provided, but each service is individually priced (unbundled) and may be provided by a choice of suppliers. Although all component services are unbundled in rates, only a few are presently subject to choice. The most common services available for competition are power supply, value-added services like energy efficiency, and metering and billing.

Buy-Sell Agreements. See Net Metering.

c

Capacity

The physical capability of a pipeline, power plant, or other facility. In the electric industry, generating capacity is measured in terms of kilowatts (1,000 watts) or Megawatts (1,000 kilowatts) and transmission capacity is measured in kilo-volt-amperes (kva). In general conversation, capacity is used to indicate a maximum; for example “The capacity of the generating plant is 500 Megawatts (MW).” The adjective maximum is assumed.

Capacity Market

Power demand varies from day-to-day and season-to-season. The power system has to have enough capacity in it to provide for the maximum demand for both power and delivery. Since this capacity is only used during peak periods, it may sit idle the rest of the time. Nevertheless, it has to be paid for. Unfortunately, simple kWh billing doesn’t reflect the fact that some generation, transmission, and distribution capacity is just sitting in reserve for peak demand periods. Utilities try to recover those costs through a “demand charge.” Prior to deregulation, retail customers paid the local utility for energy (kWh) and demand (kW) based on the costs of the utility’s generation. Now that wholesale markets are deregulated, the utility may purchase capacity, as a separate commodity, from a competitive market that trades just capacity (or access to stand-by generation).

*414 Capital Investments or Utility Assets

These include generating plants, transmission and distribution systems, and other infrastructure such as office buildings. Utilities raise capital for investments by borrowing from lenders and issuing stock to investors. Investor-owned utilities earn a rate-of-retum for capital they invest in utility facilities. These assets are called the rate base. Utilities do not cam a rate-of-retum on normal expenses, such as salaries, maintenance, and fuel.

Captive Customer

A customer who, because of remote location or lack of competing providers, has no alternative to purchasing service from his or her local utility company.

Cherry-Picking

The practice of pursuing desirable customers and ignoring less desirable customers. The term is commonly used in energy markets to describe a power supplier’s tactic of trying to get the business of the largest users while ignoring small ones. One way small customers can thwart this strategy is to aggregate with other small customers so they resemble a large customer.

Cogenerator

A facility that simultaneously produces electricity and another form of useful thermal energy (such as heat or steam), used for industrial, commercial, heating, or cooling purposes. Using the “waste” heat instead of burning more fuel increases the thermal efficiency of cogeneration projects. As a result, cogeneration is environmentally preferable. Because the use of the waste heat is closely tied to a specific application, the cogeneration plant is almost always located at the customer’s site. The demand for waste heat at that site typically drives the design, and size, of the cogeneration plant. The plant may not be able to provide all of the power needed at the site. Although cogeneration plants may be subject to siting and emissions regulations, all customers have the right to install cogeneration facilities. In other words, you are not required to prove a need for the power and local utilities cannot stop you from installing cogeneration. This is not the case with some other kinds of onsite power plants.

Collar. See Price Ceiling.

Combination Utility

Generally, this refers to a utility that provides both electricity and natural gas to retail consumers. Many electric utilities are merging with retail gas utilities to become retail-focused combined utilities. This trend is called convergence.

Combined-Cycle Combustion Turbines. See Gas Turbines.

Combustion Turbines. See Gas Turbines.

Commerce Commission. See Public Utility Commission.

*415 Competition

A market structure in which two or more companies compete for customers' business. To be effective, competition requires that no company be able to dominate the market. This ability is called market power and is critically reviewed during deregulation and merger proceedings involving present retail utilities. Effective competition should also allow choice on the basis of price without the distorting effects of stranded costs and other, non-power related, fees and surcharges.

Competitive Power Supplier

A competitive power supplier (also known as an electricity supplier, power producer, power generator, power seller, power marketer, or power broker) is a company, person, or organization that sells electricity. Some suppliers generate and sell their own power, while others buy it and then resell it. In any case, the electricity sold by a competitive power supplier is delivered to your home by your local distribution company. How much a competitive power supplier charges for electricity is set by the individual supplier. All customers pay the local distribution company the same rales for local delivery.

Competitive Retail Electric Service

This refers to a situation in which consumers purchase power from competing electricity-suppliers.

Conservation

Reducing a customer's use of water, gas, and electricity to decrease the need to produce and/or transport these commodities. Conservation reduces consumer utility costs and environmental impacts from utility commodity development and distribution.

Congestion

when transmission is inadequate to meet local demand it is called congestion. Power grids were originally designed to provide adequate transmission capacity for local generation plants to provide power to customers located in the vicinity of the plant. In competitive power markets the demand for low-cost power increases and low-cost power may be sent .great distances to reach consumers. The existing transmission system cannot accommodate all of that low-cost power flowing to a few high-volume markets — the result is congestion. Congestion is relieved by operating higher-cost generating plants to run near the high-demand areas. This works because when local generation is used, transmission isn’t needed, so there is less congestion on the transmission grid. The costs associated with congestion relief are passed on to consumers, often only to those on-line during the congested period. Congestion is managed by the utility control center in the area where transmission is congested. In the transition to competitive markets congestion is being managed by ISOs.

*416 Contract Terms

Contract terms are the agreements between a competitive power supplier and a consumer specifying the length of service and whether penalties exist for early termination. Consumer expectations of power supply and reliability were protected by state regulators prior to deregulation. After deregulation, some (but not all) of these expectations may be subject to negotiation. For example, the power supplier may require the customer to reduce loads when power supplies are very expensive or in short supply.

Control Center. See Grid.

Cooperative (Co-op) Utility

A type of utility in which the customers are also the owners. Co-ops are not-for-profit institutions, which reduces costs to end users. Co-ops are managed by a Board of Directors elected by member customers. Co-ops are common in rural areas that are expensive to serve because of the long distances between users. The Federal government contributes in various ways to rural cooperatives to reduce costs to individual owners and users through the Rural Utility Services agency.

Core Market

This refers to utility customers who do not have the option to choose among competing utility suppliers and who are therefore captive to a single supplier. Customers who comprise a utility’s cote market are also referred to as captive customers. The term core customer comes from the natural gas industry. Natural gas utilities divide customers into two types, core and non-core. Core customer refers to a retail natural gas customer that is too small to tap into the wholesale gas market; the local gas distribution company is obligated to serve this customer. In contrast, non-core customeis have sufficient size, expertise, and buying power to negotiate for gas supplies in the wholesale market. The local gas utility is not obligated to provide gas for non-core customers, especially if it interferes with supplies for core customers. Natural gas demand is greatest in the winter when residential heating demand is high. If gas supplies cannot be obtained to serve all customers during these periods, the gas company can curtail deliveries to non-core customers. Natural gas markets were deregulated for large, or non-core, customers over 10 years ago. These large customers can now seek out gas supplies directly from the wholesale market.

Electric utilities do not have a similar distinction between core and non-core classifications for customers. Large retail electricity customers are not allowed to tap directly into wholesale markets. Before deregulation, essentially all customers were core customers. After deregulation, all customers ate essentially noncore customeis, except those that are “captive” because of remote location or lack of local competing providers.

Cost-of-Service (COS) Pricing

This is a method of allocating the costs of providing service to individual customers. It contrasts with value-of-service pricing. Value-of-service pricing is used in. competitive markets, where sellers price'items at “what the market will bear.” Price regulation was imposed on regulated utilities to ensure that utilities are only priced at cost, not at what the market will bear. The assumption was that competitive pricing could be so high as to restrict access to utilities to the *417 wealthy. As a result, cost-of-service pricing was used to set utility Tates. Under COS regulation, utilities are allowed to recover reasonable costs plus a rate of return on investment. The resulting rate is expected to be less than what it would be with competitive suppliets. Because the costs to serve customers varies, COS attempts to correlate utility costs and revenues with the service that is provided to each customer, typically as one customer of a class of customers. As a result, customers in different classes are charged different rates.

Cramming

Adding services and charges to customer bills without the customer’s knowledge or consent. Cramming has been a problem with telephone deregulation and steps are being taken by states to prevent it under energy deregulation.

Customer

There are two utility perspectives on what constitutes a customer. The historic view is based on the energy meter: one meter equals one customer; i.e., a firm with 10 meters would be viewed as 10 customers instead of one bill payer. This view is based on cost-of-service rate making, where utility charges are based on what it costs to serve each meter. This perspective prevents utilities from offering customers with multiple meters a quantity discount, because that would be discriminatory and violate cost-of-service rate-making principles. The advent of competition in the utility industry has encouraged utilities to view each customer as one bill payer regardless of the number of meters they have and to curry favor with customers on the basis of total consumption rather than use per meter. This is the more traditional marketing definition of customer.

Customer Charge

The first component, the “customer charge” is designed to cover customer service costs, including metering, billing, and providing marketing and customer service facilities. The customer charge” varies for each customer class and is generally a flat fee for all customers in the class.

Customer Choice

The ability of consumers to choose their suppliers of natural gas or electricity without respect to utility service area.

Customer Class

Typically, utilities divide customers into three classes (residential, commercial and industrial) for rate-setting purposes. It is not unusual for utilities to further group customers with similar service requirements into subclasses (e.g., residential space-heating customers). Commercial and industrial customers are often called general service customers (small and large respectively). Customers are divided into classes based on use characteristics such as service voltage, maximum demand, average use, and total bill. Many states require special treatment for residential and farm customers based on their comparatively low consumption levels. In those cases, the residential and farm classification is based on customer type rather than other characteristics, even when the customer is a large energy user, with this exception, customers are generally classified based on energy use at each individual meter. As a result, a single firm with multiple meters may have different rates for each one. See also Cost of Service.

*418 Cycling

The process of starting up and shutting down a plant. The costs of cycling varies depending on the plant type.

D

Daily Peak

The maximum amount of energy or service demanded in one day from a company or utility service. See also Peak Demand, Capacity, and Base Load.

Day-Ahead Market. See Power Exchange.

Declining Block Rate

A declining block rate provides consumers with an incentive to consume more power by reducing the cost per kWh as total use increases. Both declining block and inverted rates can have multiple blocks. The simplest form consists of two blocks. However, three or four blocks, each with a different kWh charge, are not unusual. This kind of rate design requires regulation; it would be impossible to implement in an open and competitive market. See also inverted rate.

Default Service

Prior to deregulation, the local utility was required by law or regulation to provide service to all customers in its service area. (This principle is also referred to as universal service.) Utilities were even required to provide service to customers who were costly to serve due to their location or uneconomical to serve because of poor credit. After deregulation, competitive suppliers are expected to shun these customers. As a result, many state deregulation plans include provisions for default service to provide customers with a continuous power supply through their distribution company when, for whatever reason, they are not receiving power through the standard offer service, an aggregator, or a competitive power supplier. Where default service is available, customers are eligible to receive default service at any time and may stay with this service indefinitely, though it may not be the most cost-effective means of buying power. Not all states have provisions for default service.

Delivery Service Charges. See Distribution Charge.

Demand

A measure of customer or system load requirements over a measured period of time. Demand is used to establish requirements for both generating and transmission capacity. In economic terms, this is the inverse relationship between the price of a good and the quantity of the good that is demanded by consumers (high prices drive down demand and vice versa). Demand is for consumers what capacity or base load is for suppliers. See also Base Load, Capacity, Daily Peak, Load, and Peak Demand.

*419 Demand Charge

This is the amount charged to a customer (or customer class) to reflect that customer’s use of a utility during a specified time interval. In cost-of-service analysis, the demand charge is usually based on the fixed costs associated with serving customers. It is levied based on the maximum demand over the interval and is used to pro rate the cost of production and transmission capacity equitably across all customers. For example, if it costs $10 to have a kW of generating capacity available, customers would be charged $10 for each kW of demand (peak consumption) as a demand charge.

Demand Meter

Peak power use is monitored with a demand meter, a kilowatt-hour meter with a separate demand register. Peak demand as registered by the demand meter is billed as a separate line item on the power bill. Demand meters are more complex and expensive than kWh meters. Demand metering functions are built into time-of-use and real-time meters. In fact, time-of-use and real-time meters are often installed primarily for demand, rather than kWh, metering. Similarly, demand charges may also vary on a time-of-use or real-time basis.

Demand Register. See Demand Meter.

Demand-Side Management (DSM)

Demand-side management refers to a range of activities that change the way energy is used in terms of time of day and quantity. The goal of DSM is to reduce demand; from the supplier’s point of view, this either reduces the cost of service or the profitability of service. Customers implement DSM measures to reduce utility costs, although the DSM measure may not reduce utility use, en toto. A demand-side management program is the planning, implementation, and monitoring of electric activities that are designed to influence customers' use of electricity in ways that will produce desired changes in a supplier’s load shape (i.e., changes in the time pattern and magnitude of a supplier’s load). According to the Electric Power Research Institute (EPRI), there are six DSM objectives: load reduction (conservation), load shifting, peak-clipping, valley-filling, load growth, and flexible load shape. Utility programs falling under the umbrella of DSM include load management (direct load control), energy efficiency, energy storage, and innovative rates. DSM programs can be implemented through energy audits, fuel switching, rates, loans, Dr incentive payments. DSM objectives can also be accomplished through non-utility programs that introduce higher efficiency standards or transform markets by introducing more efficient products. See also Efficiency Services and Load Management.

Deregulation

The process of removing price regulations on price regulated utilities. In general, only price regulations are removed, all other aspects remain regulated. The term deregulation is used outside tlie United States to refer to the sale of government-owned or controlled assets to private-sector operators. U.S. based utilities are not government owned to start with so there is no need to go through this phase of deregulation. Under deregulation, generation is separated from transmission and distribution. Local utilities are still required to provide transmission and distribution, which remains regulated, but the generation of power has been deregulated, rates are no longer fixed and power generators compete for customers. Deregulation and industry restructuring are often used interchangeably; however, it is useful to draw a distinction between *420 the two. Deregulation is what regulators do to utilities. Restructuring is the industry-driven adaptation to deregulation, including preparing for competition, seeking new products and markets, and merging with other Firms. Restructuring is what the industry does to itself. See also Restructuring.

A Primer on Electric Industry Restructuring - Glossary

Derivatives

Products such as options and futures offered by financial markets to buyers and sellers. Because they derive their value from trades in markets in which a person does not need to either produce or use tlte item they trade, they are called derivatives. Participants in these commodity markets are called speculators, although trader is a more accurate term. Unfortunately, derivatives have gotten a bad name because of they way some people used public funds to speculate. A typical use of a derivative is to “hedge”, or fix, the price of a commodity that is expected to vary in the market. For example, roughly 30% of the operating cost of an airline is jet fuel. If jet fhel costs doubled in the market, the airlines would need to increase ticket prices to compensate. That would discourage air travel. As a result, airlines typically buy a derivative (an option or future) that lets them buy fuel at a fixed price in the future. If fuel costs are higher than that price, the airline doesn’t use the derivative to buy the fuel. Instead, it sells it for the difference between the price it purchased the derivative for (the “option” price) and the current market, or “strike” price. Now it has the extra money it needs to pay the higher fuel costs, so it doesn’t have to raise ticket prices. If, on the other hand, fuel prices fell below the option price, the airline would have spent money on a derivative that it didn’t need. This extra expense will be tacked on to ticket prices also, Accordingly, choosing an hedging strategy (how many derivatives to purchase and when) is a major business decision. People usually get into trouble when they don’t have a good hedging strategy (called a “risk management strategy”). Often, they buy more derivatives than the need to hedge their risk. Then, when the market moves against them, they have losses that they cannot justify based on a sound analysis of risk.

Direct Access

The ability of a retail customer to purchase electricity directly fiom a competitive power market and then have the local distribution company deliver the power over its transmission and distribution system for a fee. (Also known as customer choice, deregulation, retail wheeling, or open access). See also Wheeling, Open Access, and Transmission Charges.

Disclosure

A requirement that competitors in an electric market provide generation source information, environmental impacts, and other information on price and conditions of service. Some states have adopted rules that require suppliers to make uniform disclosures to consumers.

Disclosure label

A disclosure label is a standard format of information required by state regulators detailing a competitive power supplier's prices, the terms of its contract with a customer, the types of power sources used, its air emissions, and its labor practices. The same format is to be used by every supplier and distribution company to make it easier to compare the various offers. The format of the label is dictated by regulators. However, not all states have disclosure requirements and virtually none of the states use the same standards or use the same label format.

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A Primer oil Electric Industry Restructuring - Glossary

Dispatch

To start and ran a plant. See also Production Costs.

Distributed Energy Resources. See Distributed Generation.

Distributed Generation

Generation sources (also known as distributed energy resources) that are disbursed throughout the grid and located at individual customers’ sites. This is in contrast to traditional sources of generation, typically a few large generating plants located centrally, often at some distance from users. Advances in fuel cells and other generating technologies are making the concept of distributed generation increasingly economical for end users. Another example of distributed generation is a large industrial facility that uses thermal power from process heat to generate both electricity and thermal energy. Individual power generators can be deployed, on-site, to supplement or replace power from the utility grid. Distributed generation devices can also replace existing emergency generators and universal power supply (UPS) systems for critical medical and computer needs.

Distribution

Electricity is generated and transported at higher voltages than it is used by all but the largest industrial customers. It is more efficient to transmit electricity at higher voltages. As a result, electricity is not “stepped down” to consumer voltage levels until it is close to the point of use, namely individual homes and businesses. The delivery of electricity to a retail customer's home or business through these low-voltage lines is called distribution. Transmission is the transportation of electricity at very high voltage levels, generally for long distances.

Distribution Charges or Delivery Service Charges

Part of the basic service charges on every customer's electric or gas bill for delivering electricity or natural gas from the distribution company to a customer's home or business. This charge will vary according to how much it costs to serve a customer in each class. Generally, distribution charges are based on how much energy is used. Historically, larger customers paid for distribution costs through a demand charge, whereas smaller customers paid a simple kWh fee. This may change after deregulation.

Distribu tion Company (or Disco)

The term “utility” has lost some of its meaning in the face of deregulation. Formerly, utilities were assumed to be firms that provided power to consumers. After deregulation many states prohibited formerly integrated utilities from selling power to customers. Instead, they were restricted to simply transmitting or wheeling power between power sellers and retail power buyers/customers. To acknowledge this change, the phrase “distribution company” was introduced to identify the former electric utility company as the company that delivers electricity to your home or business. The distribution company will continue to maintain local wires and poles, and restore your power in the event of an outage. It will continue to read your meter, but it may not be the company that either prepares your bill or collects payment for power use and delivery.

*422 A Primer on Electric Industry Restructuring - Glossary

Divestiture

Divestiture occurs when a utility company sells one of its services or functions to a new company. Divestiture is often used by regulators as a means to mitigate an incumbent utility's market power, in this case, the incumbent utility sells off some or all of its generating plants so that it no longer has market power. Market power is the ability to set prices in the market, thereby frustrating competition among suppliers.

Dutch Auction

The bidding method used in auctions to set prices. The California Power Exchange (PX) uses a Dutch auction to set prices for power and ancillary services. All suppliers bid into the auction at the same time, but none knows the others’ bids. Bids are put in a bid stack, lowest to highest, by the PX. Supplier bids are accepted on a lowest-cost-first basis up to the point that sufficient power has been purchased to satisfy demand. Bids above this point are rejected. The last hid accepted that satisfies demand sets the marginal cost of power or market clearing price (MCP) for power for the bid period, usually a one-hour period. (The market clearing price is also known as the market price, the marginal price, or the market marginal price.) Under a Dutch auction, the last accepted bid establishes the price paid to all vendors, regardless of their actual bid. In other words, if the last amount of energy needed to satisfy total demand was at a price of 4 cents/kWh, all winning supply bidders would be paid 4 cents/kWh even if the bids they submitted were less than 4 cents. Bids above 4 cents would be rejected and those vendors would receive no payment. The use of the term Dutch auction in California is at odds with some other definitions.

E

Efficiency Programs or Services

Efficiency programs are a specific variety of DSM services aimed at reducing a customer’s total energy use without affecting the delivered energy service. Programs could include installing insulation and weather stripping and converting to compact fluorescent light bulbs. These services may be offered by energy-efficiency companies, distribution companies, aggregators, and competitive power suppliers. Although some of the companies offering efficiency programs may charge a higher rate for electricity, it is possible that by reducing your energy use, you could save more money than if you bought electricity at a lower rate without these programs. Energy efficiency programs also help reduce the harmful environmental impacts of power production and use. They also help Federal agencies meet the efficiency goals of Executive Order 12123.

Electric Cooperative

A member-owned electric utility company that generates or purchases wholesale power, arranges the transmission of that power, and distributes the power to serve the demand of rural retail customers on a non-profit basis. Rural electric cooperatives were created to bring electricity to rural areas that were not being served by for-profit utilities because of the high cost and low customer density. See also Cooperative and Investor-Owned Utility.

*423

A Primer on Electric Industry Restructuring - Glossary

Electric Generation

Electricity can be generated through a wide variety of processes, although far and away the most common is by the rotation of a generator shaft, or rotor, through opposing magnetic fields. Shaft rotation induces the flow of electricity in the generator. An external energy source is required to rotate a generator shaft, and that can come from a wide variety of sources. There are four major generator designs based on the primary source of energy, or prime mover, used to turn them. These are water turbines, engines, gas turbines, and steam turbines. Water turbines in hydropower plants direct water flow through dams containing turbine blades attached to one end of a generator rotor. When the water turns the turbine, it also turns the rotor and electricity is generated. Steam turbines are tamed by steam from water heated by heat from controlled nuclear reactions or from the burning of fossil fuels. Fossil-fired generators vary in efficiency from 30 to 65%, i.e., a 30% efficient plant uses over twice as much fuel as a 65% efficient one. Modem plants tend to be much more efficient than older ones.

Electric System

A phrase used to describe the electric generation, transmission, and distribution components as one complete, integrated system. See also ike Bulk Power Market.

Electricity Broker

An electricity broker is a company or individual that facilitates the sale of power to customers, but does not take title to the power and is therefore not the seller. An energy broker earns commissions like a real estate or insurance broker or agent. This contrasts with an energy marketer that actually owns the energy it sells and makes a profit on the mark up between purchase and sales price.

Electricity Generator

An electric power generating plant or the owner or operator of such a plant or plants. When reference is made to a plant, the term usually refers to a single or specific plant. For example, “When the generator trips off-line...” When reference is made to a source of supply (the person or firm selling power) the term is generally not plant specific but refers to the power resources available to the plant owner, typically multiple plants and/or power contracts. For example, “When the generator sells power to the PX ...”

Embedded Costs

This refers to the historical costs of all the capital assets (equipment and facilities) used in an electric utility’s system. Each asset goes on the books at its initial cost. Capital assets are depreciated over time, so the value carried forward on the books declines over time. The resulting value is called “book value.” Book value for an asset may be less than the value of the asset if it were sold on the open market, i.e., the market value. One of the benefits of cost of service regulation is that current prices are tied to the low embedded costs of existing assets. Generally, this means power costs are lower than they would be in an open market.

*424 A Primer on Electric Industry Restructuring - Glossary

Energy, U.S. Department of (DOE)

An agency created by the federal government in 1977. It provides information to achieve efficiency in energy use, diversity in energy sources, a more productive and competitive economy, improved environmental quality, and a secure national defense. Before 1977 these functions were provided by various predecessor Federal organizations. Most states have an agency, sometimes called the state energy office or energy department, tasked with some of the same missions, especially energy conservation. Also included under the U.S. DOE umbrella are the federal power marketing administrations, oversight of the Tennessee Valley Authority, and the Federal Energy Regulatory Commission.

Enhanced Services or Value-Added Services

Any service offering that is not essential to the delivery of basic service. Historically this included extra transformation of power (stepping-down the voltage), power quality monitoring and improvements, energy audits, energy efficiency services, facility maintenance, and so on. Prior to deregulation these services were often provided for free or at a subsidized price. In the post-deregulation world, utilities are offering a long list of services on a fee basis as a means of increasing the products they can sell to customers. With few exceptions, utilities will not offer these services for free after deregulation.

Exempt Wholesale Generators (EWAGS)

In an effort to diversify domestic power supplies in the wake of the oil embargo of the 1970s Congress, in 1978, passed the Public Utility Regulatory Policies Act (PUSPA) allowing non-utilities, called independent power producers to build power plants and requiring local utilities to purchase the output on terms favorable to developers. Eventually, the ability of (he IPPs to provide power, increasingly based on natural gas as a fuel, outstripped the willingness of local utilities to buy it. Consequently, Congress created new categories of power producers, ultimately authorizing utilities to enter the business as exempt wholesale generators, or EWAGS.

F

Federal Energy Regulatory Commission (FERC)

A federal agency that regulates the price, terms, and conditions of all interstate wholesale energy and transmission transactions, natural gas as well as electricity. For example, FERC approves and enforces the transmission rates that utilities charge each other to move power through the bulk pov/er market. FERC has led the deregulation of natural gas and electricity prices by requiring open access to gas pipelines and electric transmission systems. FERC also licenses and inspects private, municipal, and state hydroelectric projects and enforces provisions of the Federal Power Act, such as requests to use transmission facilities by third parties. FERC is a five-member commission within the U.S. Department of Energy that regulates wholesale transactions. FERC commissioners are appointed by the President.

FERC Mega Notice of Public Rule Making (MegaNOPR)

Reacting to industry innovation, FERC requested comments from consumers and industry about new ways of structuring gas transportation in what it called a Mega-Notice of Proposed Rulemaking, orMega-NOPR, in July 1991.

*425 A Primer on Electric Industry Restructuring - Glossary

FERC Orders 436 and 500

FERC issued a series of Orders aimed at introducing competition into toe pipeline business while retaining control of the transportation function. The first of these, Orders 436 and 500, were issued in the late 1980s. These orders allowed consumers to negotiate prices directly with producers and required pipelines to transport the gas resulting from these negotiations. These rules maintained the traditional role of pipeline owners as marketers (buyers and sellers) of natural gas, but allowed producers to secure access to pipelines for their own use. This allowed producers to balance supplies across production regions. These Orders stimulated innovation in pipeline tariffs to reflect variations in reliability (firmness) and transportation contract duration.

FERC Order 636

FERC Order 636, issued April 9,1992, “restructured” (in FERC’s words) the natural gas industry to stimulate competition by consumers for gas supplies and transportation. Order 636 required pipeline companies to open access to capacity to any and ail transporters and to unbundle transportation services so as to allow customers to select supply and transportation services from any competitor in whatever quantity and combination they desired.

FERC Order 888

Adopted in 1996, this order required utilities to allow everyone access to utility-owned electric transmission lines to move power from generators to customers. Applied only to wholesale power markets because FERC has no authority over retail markets but it released pent-up demand and spurred inter-regional power trading, resulting in low-cost power flowing to high-cost areas and a nation-wide leveling of wholesale power prices. Current wholesale power prices average about 3 cents power kilowatt-hour. (Put this in glossary?)

Fixed Costs. See Sunk Costs.

Fixed Price

A price that remains the same for a set time period. Energy buyers can solicit bids for energy supplies based on a fixed price for a specific contract term. This contrasts with price quotes that are tied to an index that floats up and down, typically a fuel cost index.

Forward! Market

Options and futures allow a consumer to establish the price they are willing to pay for a product at some future point in time. Options and futures trade in terms of months into the future. For example, 1 could buy an option to purchase a specific quantity of natural gas for $ 3/ MMBtu 1 or 2 or 3 or up to 18 months from now. The prices for natural gas in each of those months are called “forward” prices. The trend in those prices, in other words, the price in each successive month is called a “forward price curve.” Forward markets and forward price curves are essentially a forecast of what commodity prices will be made by people trading in commodity markets. Forward price curves are not necessarily accurate predictors of future prices, because commodity traders include individuals who are not directly involved in production of the commodity in question. These other traders may react to events differently than the commodity producer does. As a result, they may err in there sense of where prices will be in the future. Nevertheless, a forward price curve provides an indication of where “the marked’ thinks prices *426 are going that price sensitive consumers of commoditiesshould monitor, just in case the market is right.

A Primer on Electric Industry Restructuring - Glossary

Franchise

An agreement that permits a company to conduct business within a township, village, city, or other local government unit. Typically utilities are granted exclusive franchises to serve in a specified area. Franchises are granted by both states and municipalities. Municipalities often charge a franchise fee as a way to generate revenues and to compensate for use of municipal rights-of-way. States may also grant utility franchises. As a result, franchises may overlap. See also Service Area.

Fuel Cell

A fuel cell is a device that generates electricity and hot water through a chemical reaction by combining hydrogen and oxygen. These devices, which are starting to be commercially marketed, are most often fueled by natural gas, methanol ("wood alcohol"), or hydrogen. The hot water produced as a by-product of the chemical reaction can be used in heating systems. Fuel cell efficiency in the electric-only mode is between 40% and 60%. When waste heat is captured and used the overall efficiency increases to 70% to 90%. Most fuel cells are modular, so foe fuel cell can be serviced without shutting it down and requiring back-up power. As a result, fuel cells are being viewed as potential substitutes for grid-supplied power. Fuel cells are already being used in limited applications to improve power quality for sensitive loads, such as computer chip manufacturing.

Fuel Component or Fuel-Cost Adjustment

Generating fuel costs can be highly variable. This variability can make it difficult for a utility to set rates because if the utility pays more for fuel than it planned, it will make less money. To deal with this uncertainty, regulators integrated fuel-cost adjustments into rate designs. This allows utilities to pass through changes in fuel costs. Typically, the rate allows for slight adjustments in foe kWh charge from month to month. Energy suppliers will still face uncertain fuel costs. As a result, it is expected that prices will still be quoted in reference to a fuel cost index or spot market price. For example, power will be quoted as a discount off the spot market price (which is unknown until the day power is consumed). This form of pricing (index-based pricing) guarantees consumer savings compared to spot prices without putting undue risks onto the supplier.

Fuel Cost Adjustment. See Fuel Component.

G

Gas Turbine

Gas turbines are based on jet airplane engine designs. Air is sucked into the gas turbine where it is compressed. This increases the density of the air (which increases combustion efficiency) and heats it. Gaseous fuel is introduced in a combustion chamber and foe resulting exhaust is used to drive a turbine attached to a generator rotor. Electric generators based on this design are usually called simple-cycle combustion turbines, or simply combustion turbines (CTs). Steam *427 generators are often used in conjunction with gas turbines in what are called combined-cycle combustion turbines, or CCCTs. Natural gas is used to fuel most new plants and is partly responsible for the high heat rate of new plants. Coal is an abundant native fuel that can be converted into gas similar to natural gas for use in gas turbines. Plants that include coal gasification are called integrated gasified combined cycle plants (IGCCs). XGCC plants are cleaner burning than old-style coal plants. See also Turbine Generator.

A Primer on Electric Industry Restructuring - Glossary

Generating Reserves

Generating reserves is the excess capacity that regulators require utilities to have to meet emergencies during peak demand periods. The amount required, stated in percentage of peak demand, is called a reserve margin. Typical reserve margins are 15 to 20 percent. Reserves can be provided by having idle plants in the utility generation inventory or having unused plant capacity during peak periods (i.e., all plants are not running at full capacity). Having idle capacity is expensive. Another way to provide reserves is to rely on the idle capacity of adjacent utilities. This is much more economical, especially if the loads of adjacent utilities peak at different times.

Generation Charge (also known as Shopping Credit or Standard Offer)

Deregulation language varies from state to state. This phrase refers to the component of the power bill that is associated with the cost of producing electricity. When there is competition between electric companies, this charge depends on the terms of service between the customers and the supplier. In other words, under competition, it varies depending on the supplier the customer chooses. Some states refer to this generation charge as the “shopping credit” or “standard offer.” Unfortunately, the term “standard offer’’ is also used by many states to refer to the default service rate offered to customers who do not choose or cannot secure power supplies from an alternative suppler.

Generation Company (Genco)

This is a company that operates and maintains a power plant that generates electricity. The new term, Genco, is used to designate firms that are generation companies exclusively. Gencos may be utility subsidiaries, but they do not own wires or perform traditional utility service functions. The term Genco includes all of the various legal terms for power generators, including Qualifying Facilities, Independent Power Producers, and Exempt Wholesale Generators.

Gen-Set

Engine generators, or gen-sets, use an engine as a prime mover to turn the generator rotor. Typical gen-sets are fueled with diesel oil or natural gas. Gen-sets are also often used by consumers for emergency power.

Green Power

Electricity that is produced from sources that are thought to be environmentally cleaner than traditional sources. Green power is usually defined as power from renewable energy that comes from wind, solar, biomass energy, etc. There are various definitions of green resources. Some definitions include power produced from waste-to-energy and wood-fired plants that may produce air emissions as bad as conventional fuels. Some states have defined certain local resources as green that other states would not consider green. For example, the state of Texas has *428 defined power from efficient natural gas-fired power plants as green. Some northwest states include power from large hydropower projects as green although these projects damage fish populations.

A Primer on Electric Industry Restructuring - Glossary

Various states and the federal government are working to clarify labeling for green power. GSA and DESC both request bids for green products that fit the environmentally beneficial guidelines used by the government. Any agency can purchase green power from GSA or DESC and be confident of the source. Further clarification of green power purchasing will be forthcoming as a result ofExecutive Order 13123. FEMP, GSA, and DESC will provide Federal agencies with information as deregulation proceeds.

Grid or Power Grid or Bulk Power System

A network for the transmission of electricity throughout a state or region. The term grid usually refers to the transmission lines; however, the power system is designed as an integrated system that specifically relies on generation and transmission to move power from location to location. The transmission grid is designed as a network, meaning the connections allow two-way power flows. In contrast, local distribution systems are generally designed for power to flow one way, from the transmission lines to end users. The term “radial” is applied to these one-way transmission and distribution elements. One exception is for transmission lines that link generation to the bulk power network. Obviously power flows one way along these lines. They are called integrating transmission lines because they integrate generators into the grid.

The nation’s transmission network is divided into three major systems (western, Eastern, and Texas), which are electrically isolated from each other. Within each of these networks (called “interconnections”), transmission systems are operated at a regional or utility-area level by “control centers.” There are roughly 140 control centers in North America. Each control center manages power flows within its own boundaries and coordinates flows across boundaries with adjacent control areas. If there is a major system failure, the network breaks down into component systems based on these control areas. As a result, the entire country (or interconnection) is saved from a black out. See also Transmission System, Wholesale,

H

Heat Rate

The efficiency of a plant is reflected in a metric called the heat rate, which is expressed in terms of Btus per kilowatt of power (e.g., 9,500 Btus/kWh). One kWh of power produces 3,412 Btus of energy, so a plant with a heat rate of 3,412 would be perfectly efficient. This is an ideal unl

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