Glossary of Selected Terms Used in Utility Deregulation

Note: The following list of terms was excerpted from the National Energy Assistance Directors' Association (NEADA) publication, A Manual for Leveraging Funds in Energy Markets with the Low-Income Home Energy, March 1996. The publication was compiled by NEADA through the National Center for Appropriate Technology's LIHEAP Clearinghouse under contract #105-94-8200 from the Division of Energy Assistance, Office of Community Services, Administration for Children and Families, U.S. Department of Health and Human Services. The views expressed in this update do not necessarily represent the opinions of NEADA, NCAT or HHS. For a copy of the Manual, contact the LIHEAP Clearinghouse or NEADA as follows: Mark Wolfe, Executive Director, 5505 Connecticut Avenue NW, Washington, DC 20015-2601. Phone: 202-237-5199,Fax: 202-237-7316.

Aggregator - A term used to describe any of a number of entities or organizations who will buy or broker electricity for a group of retail customers in a restructured electric industry. Usually refers to a situation of retail competition, where a cooperative, private firm or other such organization would aggregate the demand of dispersed individual customers and buy or broker supplies on their behalf.   By analogy, one could call AT&T, MCI or Sprint long-distance telephone service "aggregators".

At the Bus Bar - Demand and energy output measured at the point of generation.

 At the Meter - Demand and energy use measured at the point of delivery to the customer. The difference between system plant output measured at the busbar (higher) and aggregate use measured at the meters (lower) is due to losses over the transmission and distribution system. Typical line losses on a system a 7 percent.

 Avoided Cost - The incremental cost to a utility for capacity or energy or both that, but for the  acquisition of energy or capacity from another source, the utility would have to incur. Thus, in demand side management (DSM), the cost of producing or delivering power that the utility can avoid by procuring DSM resources (i.e., by lowering capacity and energy requirements via DSM).

Base Load Capacity - Large generating units, typically coal or nuclear, which are designed to operate at high capacity factors, around the clock.

 Base Rates - The rates a utility charges to cover its non-fuel costs. Base rates are set with reference to an historic test year, so as to bring the revenue expected from the rates in balance with the reasonable expenses of the utility over the test period, including a reasonable return on capital.  Unlike fuel charges, base rates are typically set only on a prospective basis. Thus, except where a commission has decoupled rates from sales, base rates do not change from one rate case to another, despite changes in actual earnings relative to the earnings the commission intended the company to have the chance to earn when it set the rates.

 Bilateral Contracts - Contracts with two sides (bi = two, lateral = sides), or two parties. For example, a contract between a generating plant and a retail customer.

 Bill Minimization - Efforts by the utility, such as DSM programs, designed to reduce customer bills, rather than the rate (price) per unit of power.

 California Tests - A set of benefit-cost tests standardized by the California Public Utilities Commission and the California Energy Commission and published in the "Standard Practice Manual: Economic Analysis of Demand-Side Management Programs." The standard tests are the Total Resource Cost Test (TRC), the Societal Cost Test, the Participants Test, the Utility Cost Test, and the Ratepayer Impact Measure (RIM).

Capacity - The amount of electric power that can be delivered at one time by a generating unit, generating station, NUG, or all the plants on an electric system.

 Cogenerator - A power plant that produces both electrical (or mechanical) energy and thermal (steam or process heat) energy. Sometimes the term is loosely used to refer to all NUGs, because NUGs in the early '80's were cogenerators, under PURPA.

 Coincident Peak - The load or draw on a system at the hour of the highest load in a given period (typically a year or month). It is called coincident because it is used to develop the relative contributions towards that single-hour system peak by the various classes of customers (that is, their load at the time coincident with the system peak, as a percentage of the system peak).

 Conservation - This term is used in many ways. Practitioners in the DSM field tend to reserve the term conservation for the reduction of energy use, rather than the reduction in the draw on the system at a specific point in time (demand in electricity parlance, rather than economics parlance). Sometimes it is used to refer to any reduction in energy use, or peak demand.

Conservation Cost Recovery Charge - Given many different names, and with different variations as to the costs included, this is a surcharge on the bill (sometimes folded into the energy charge) to recover DSM costs. In some cases it is reconcilable.

Copayment - The amount a customer is asked to pay towards the DSM measure as a condition of receiving a utility incentive.

Creamskimming - Going after only the most profitable markets. In DSM, taking advantage of only the lowest-cost, most cost-effective DSM measures in any given home, office or factory, and leaving behind other potentially cost-effective opportunities for power savings. Sometimes the term is used to refer to doing DSM only in the premises where the DSM savings are most cost-effective. There are two major problems with cream-skimming. When it limits DSM only to certain homes or businesses, it unfairly excludes some customers. When it limits DSM measures only to the most cost-effective, it fails to take advantage of the opportunity for cost-effective savings, and it may even render those remaining opportunities non-cost-effective (if the cost of returning to the premise to install those DSM measures is not warranted by the remaining DSM opportunities left after the cream-skimming).

Cubic Feet - The volume of a substance (e.g. natural gas) that can fit within a space one foot times one foot times one foot in volume.

Customer Charge - A flat monthly charge payable regardless of the level of usage of the customer.

Decoupling - A technique for setting the rates of a utility so that the earnings a company can achieve are not coupled to the level of sales. In standard utility ratesetting, at least for non-fuel costs, if sales go down, earnings go down, and if sales go up, earnings go up. This is a disincentive to DSM. Decoupling allows rates to float up and down with the level of sales, so that earnings are not tied to sales.

Demand - The amount of energy used at a specific moment in time, measured in watts, kilowatts (kW=1000 watts), megawatts (mW=1000 kilowatts, or 1 million watts). A large nuclear plant has about 1100 megawatts of capacity. A peaking plant may have only 100 megawatts of capacity. For scale, the demand of a domestic hot water heater is typically only 4 kilowatts. To confuse matters, demand is also used by economists to refer to the amount of any good or service which is procured by consumers. Thus, an economist can meaningfully talk about the demand for energy, while an engineer would see this as a contradiction in terms. Utility economists use demand in both senses, so look to the context.

Demand Charge - A charge reflecting the contribution of the customer to the peak demand of the utility. Usually only large electricity customers are given meters that can measure this peak demand, so these are the only customers with a separate demand charge in their rates.

Demand-Side Management (DSM) - Utility activities that influence use on the customer's side of the meter.

Direct Access - A form of retail competition in which individual suppliers arrange to sell power (or gas) to retail customers, directly, or through aggregators buying on behalf of groups of customers. Compare pooling.

Dispatch - The process of connecting running power plants to the system to deliver power (akin to"flipping the switch" to turn on the power).

DSM Measure - A single technology, such as a CF bulb or waterheater wrap, that can be used to alter customer energy or demand requirements.

DSM Program - A plan describing a specific group of customers to receive DSM services (the target market), the specific measures and services provided to that target market, the means to market the measures/services, the incentives offered to the participants, the process of delivering the measures/services, and the process of monitoring program quality and evaluating program benefits, together with the budget for the program.

Economic Development Rate - A discount to a commercial or industrial customer intended to spur economic development. Can be based on number of jobs brought to an area, or saved, or some other such measure of the impact of retaining the customer on the economic health of the area. Similar to Economic Incentive Rate or Incentive Rate.

End-Use - The ultimate benefit that utility service provides, or the use to which the utility service is put. For example, in the residential sector, end-uses include space heat, lights, cooking, refrigeration, motor power (e.g. fans), air conditioning, localized heating such as waterbed warming or electric blankets, hot-air blowers, entertainment/communications (TV, radio, etc.) and water heating.

Energy - The result of consuming power over a period of time. In electricity, measured in watthours: 1000 watthours = 1 kilowatt hour, or the equivalent of a 100 watt bulb running for 10 hours. Most electricity rates/prices for residential service are quoted in kilowatt-hours. In gas, measured in volumes of gas (cubic feet) or a proxy for volumes (therms, q.v.).

Energy Efficiency - Reducing energy or demand requirements without reducing the end-use benefits.

Externalities - The consequences or impacts of resource decisions that are not directly accounted for in the price paid for the resource.

Fuel Charge (fuel cost adjustment factor, gas adjustment factor, etc.) - The rate charged per kilowatt hour (or cubic feet) to cover the costs of the fuel used to produce power (or gas), and other costs that vary directly with the numbers of kilowatt-hours produced (or volume of gas delivered). Typically a utility will be allowed to recover such costs dollar-for-dollar, with any shortfall in recovery in one period made up through higher rates in a succeeding period, and vice versa.

Franchise - A license or similar legal authority to provide service at retail in a given geographic area. An exclusive franchise is a monopoly to provide service in that area.

Incentive - A benefit or consideration, financial or otherwise, given to induce specific action.

Incentive Rate - Usually refers to a discount given to a commercial or industrial customer to give them an incentive for staying in an area, staying open, or expanding their business activities in the area.

Incentive Ratemaking - Refers to the practice of using a price cap or other form of performance-based ratemaking instead of traditional cost-plus ratemaking, to give the utility an incentive to be efficient by letting it retain a larger share of any savings it creates.

Least Cost Planning - Also called Least Cost Integrated Resource Planning, Integrated Resource Planning, Integrated Resource Management (or their acronyms). Any of a number of ways to identify, rank, select and price resources for a utility in such a way that all resources are evaluated on "a level playing field" such that the resources selected are the least cost, most reliable resources for the planning horizon.

Load - The amount of power that is drawn from a utility system at a given point in time. The peak load is the highest amount of power drawn down at anyone time, or the utilities maximum capacity or demand.

Load Base Revenues - The revenues the utility would have collected (usually not including revenues to cover fuel costs, which are collected through reconciling dollar-for-dollar fuel charges), had they not been successful in reducing demand (in the economists' sense of the term).

Non-Utility Generator - A power plant (or its owners) not owned by the utility to whose retail customers the output is sold (also called Independent Power Producer).

Off-Peak - Those periods of time at which energy is being delivered far below the utility's maximum demand.

On-Peak - Those periods of time at which energy is being delivered near and including the utility's maximum demand.

Participants - Customers who choose to participate in DSM programs offered by a utility.

Participants' Test - The California benefit-cost test which evaluates DSM programs from the perspective of the program's participants. The benefits include reductions in utility bills, incentives paid by the utility and any state, federal or local tax benefits received. The costs include all out-of-pocket expenses incurred as a result of participating in a program.

Peak Load - The maximum load experienced (e.g., by a customer of a utility system) over a given period of time.

Peaking Capacity - Capacity which is used in times of maximum demand. This capacity often has low capital costs and high fuel costs (i.e., combustion turbines) and is designed to be operated for relatively short periods of time.

Performance-based Ratemaking - a form of ratemaking intending to make more explicit the performance requirements on which a utility's profits are based. Usually refers to incentive ratemaking (price caps). Can include incentives to meet or exceed specific performance measures, such as prices relative to those of similar utilities, customer service quality, and the like.

Pool - As used in the retail competition debate, refers to a system in which all suppliers of electricity sell to a central buying entity, the pool, which in turn is the single agent for selling power to retail customers and their aggregators.

Present Value - The discounted value of a stream of costs; it represents the amount of money that would be required to cover the payment stream at a given discount rate, and can be used to compare economic costs incurred in different time periods.

Price Cap - A way of setting rates whereby the utility is given a limit on the average dollar per usage (or dollar per customer) revenue it may collect, but within that is given flexibility on how to set the prices, and is permitted to recover profits above those cost-of-service regulation would consider reasonable, up to some limit, as an incentive to be more efficient.

PURPA - The Public Utilities Regulatory Policies Act of 1978.

Ratepayer Impact Measure (RIM) - A test which measures what happens to customer bills or rates due to changes in utility revenues and operating costs caused by a DSM program. The benefits for the RIM are the savings from avoided supply or other system costs. The costs for the RIM are the program costs incurred by the utility, the incentives paid to the participants, decreased revenues for any period when load has been decreased and increased supply costs for any period when load has been increased.

Retail Competition - A market structure in which individual customers could buy from more than one supplier. The supplies could be sold first to a pool, with individual customers or aggregators of customers buying their supplies from the pool, or they could be bought through contracts with the suppliers directly.

Retail Wheeling - The process of delivering electricity to a retail customer. Usually refers to the delivery of such electricity over the transmission and distribution lines of a utility, which is not itself producing the electricity, but rather is delivering it on behalf of a different producer.

Revenue Requirements - The amount that must be recovered from customers to cover a utility's costs.

Societal Cost Test - The benefit-cost test which evaluates DSM programs from a broad societal perspective. It is identical to the Total Resource Cost Test except that the benefits include beneficial externalities, and the costs include negative externalities. Benefits can include avoiding environmental or social externalities costs (e.g. homelessness), and "non-price" benefits enjoyed by participants (improved comfort, aesthetic qualities, etc.).

Stranded Benefits - Benefits of the current system of regulation of the utility industry that would not be realized in a purely competitive market structure. For example, the costs of support for energy conservation activities that utilities would not be able to undertake on their own in a competitive market.

Stranded Costs - The costs a utility has incurred under the current system of vertically integrated regulated monopoly, that it would not be able to recover under a pure competitive market structure. For example, the costs sunk into a nuclear power plant that could not be recovered if rates were lowered to meet competition from less expensive plants.

System - The facilities serving a given area; sometimes refers to the power plants interconnected to serve the area.

Total Resource Cost (TRC) Test - A benefit-cost test which measures the net costs of a demand-side program as a resource option based on the total costs of the program, including both the participants' and the utility's costs. The benefits for the TRC are avoided supply costs (avoided credit and collection costs should also be included, as they are system costs). The costs in this test are the program costs (including equipment costs) paid by both the utility and the participants plus the increase in supply costs for any period in which load has been increased. Sometimes includes externalities: see Societal Cost Test.

Transmission - Moving electricity in large volumes (i.e. at high voltage) from one place to another. Strictly speaking, in an interconnected system, it is physically impossible to trace the particular electrons along the transmission wires from a generator to the ultimate user; the "contract path" is the most direct path along the wires between a seller and a buyer, but it will not correspond to the physical path of the electrons.

Transportation - Moving gas through pipelines from one place to another. Strictly speaking, in an interconnected system, it is not possible to trace the particular molecules of gas along the pipes between a producer and the ultimate buyer; for example, if two suppliers are feeding into the pipeline system at two ends of the system, points A and B, and a buyer close to point A buys gas from the seller at point B, the molecules of gas flowing to the buyer may in fact have been injected into the pipes by the producer at point A.

Utility Cost Test - A benefit-cost test which measures the net costs of a demand-side management program as a resource option based on the costs incurred by the utility (including incentive costs) and excluding any net costs incurred by the participant. The benefits for the Utility Cost Test are the avoided supply costs of energy and demand (avoided credit and collection costs should also be included, as they are system costs). The costs for the Utility Cost Test are the program costs incurred by the utility, the incentives paid to the customer, and any increased supply costs.

Page Last Updated: December 7, 2005