Electricity bills are going to vary somewhat across providers and in different states, but it is still possible to create a general useful guide based on common items. The basic items on electricity bills, regardless of the state or provider, will be related to generation, delivery, or taxes. But to understand why they are there, we’ll start with the basics.
Basics
To understand why there are so many charges on electricity bills, it is important to understand the system that gets the electricity from where it is made to your home. Electricity is generated at a plant or other energy resource. This may include factories owned by municipal utilities, or independent electricity resources. The electricity then travels at high voltages through transmission lines to reach substations and distribution centers, where it is reduced in voltage and distributed locally to the grids serving homes and businesses. Some of these transmission lines travel across multiple states, and are owned by a variety of entities, including utilities and third party transmission companies. As such, transmission and associated distribution costs are federally regulated. The local distribution of power is handled by municipal utilities. These utilities may actually generate power as well as maintaining the local grid, or they may be just “wires” utilities, which own, operate and maintain poles, wires and substations, but do not generate electricity. Either way, distribution and associated distribution costs are regulated by state public utility commissions (PUC’s) or similar state regulatory entities.
Regulation
The electricity market in each state varies, depending on whether or not the state is regulated or unregulated. In regulated states, public utilities generate and deliver the electricity to homes, and customers pay the public utility directly. In deregulated states, you may have the choice to buy from the public utility, or buy from a retail electric provider (when both options are available). Retail electric providers, or REP’s (also known as “competitive retailers”, or CR’s), do not generate any electricity on their own, but buy from various suppliers instead to provide the best service and prices to their customers.
And Now, The Electricity Bill
Each customer uses a certain number of kWh’s of energy every month- this is referred to as “usage”. There are costs that are charged per kWh, and so are dependent upon usage, and there are also fixed costs that each customer pays monthly with each bill that are unaffected by the amount of electricity that you use. Any and all charges and fees from the various entities involved in the process of getting electricity from where it is generated to homes and businesses are added on as line items or lumped together in a single bill. That bill is passed on to each electricity customer from their provider, whether that provider is an REP or a municipal utility.
Some of these charges are determined by the provider to recover their costs and make a profit, some are regulated and therefore passed through to the customer without being marked up, and some are state and local sales taxes. Note: Not every customer will see each of the following terms on their bills, and they may be grouped differently, depending on infrastructure and regulatory status.
Generation and Supply
Generation Rate or Supply Charge: The cost for the electricity itself is usually the largest part of the bill, as could be expected. This rate is referred to as the “generation rate” or “supply charge”, and the unit is cents per kWh.
In deregulated states, customers have a choice in which provider they buy their energy from. Competition between REP’s results in different rate structures and plans, like fixed or variable rate plans. With a fixed rate plan, this generation charge is one that is offered by the provider, and guaranteed to remain the same throughout the duration of the contract. The generation rate for a variable rate plan is determined by the provider on a month to month basis and there is no guarantee of consistency.
In regulated states, electricity is provided by a regulated public utility, and the generation rate is dependent upon the costs that the utility incurs to generate the electricity.
Purchase Cost Adjustment: Sometimes, a base generation rate is set by the utility and fluctuations in rate that are caused by fluctuations in the market price of gas are represented by a “purchase cost adjustment” (referred to as a PCA, or “purchased electricity adjustment”, or “market value adjustment”, or similar). This cost adjustment serves the purpose of trying to make up discrepancies in what the utility actually paid for electricity versus what the customer paid. In that case, the base price remains consistent, and the PCA is what varies from bill to bill.
The generation rate (factoring in the PCA when applicable) is multiplied by the customer’s usage per month (or per a set amount of time) in order to determine the cost of generating the electricity that customer has used for that period. In some cases, there are more than one generation rate applied, depending on the customer’s usage. Some providers or utilities have tiered rates, so that usage that exceeds a certain baseline amount may be charged at a different rate.
Transmission charge: A transmission charge is the cost of moving electricity from the plant where it is generated (the supplier) to the local utility that handles distribution. This cost is considered to be a supply cost, and is based on usage.
Delivery
Delivery charges include any fees that electricity customers are charged (regardless of which provider they buy energy from) to cover the costs incurred by the local utility that manages the delivery of electricity to homes and businesses. The delivery fees charged by the local utility are regulated by the PUC. Some are based on usage, and some are fixed. Delivery charges might include:
Distribution charge: These are charges passed through to the customer from the local utility specifically related to the use of local wires, poles, and other equipment used to deliver electricity to consumers from transmission lines. These fees are calculated based on usage, and are regulated by the PUC.
Monthly Charge or Service Charge: These are fixed costs for services like metering, billing, and account maintenance that are handled by the local utility. These costs are not affected by usage.
Transition Charge: The energy market is prone to drastic upheaval due to legislated changes in market conditions, like deregulation for example. Companies can be stuck with massive investments they would not have made in a competitive marketplace, and assets that suddenly become worthless. These so-called nonrecoverable costs are referred to as stranded costs, transition costs, or stranded assets. Transition charges are charges billed to each customer to help an electric utility recover these transition or stranded costs. This recovery via charges to the consumer are determined and regulated by the PUC.
Taxes
Local and state sales tax is applied to each relevant item on the bill.
