Electric utility

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An electric utility is an electric power company (often a public utility) that engages in the generation, transmission, and distribution of electricity for sale generally in a regulated market.[1] The electrical utility industry is a major provider of energy in most countries. It is indispensable to factories, commercial establishments, homes, and even most recreational facilities. Lack of electricity causes not only inconvenience, but also economic loss due to reduced industrial production.

Electric utilities include investor owned, publicly owned, cooperatives, and nationalized entities. They may be engaged in all or only some aspects of the industry. Electricity markets are also considered electric utilities--these entities buy and sell electricity, acting as brokers, but usually do not own or operate generation, transmission, or distribution facilities. Utilities are regulated by local and national authorities.

Electric utilities are facing increasing demands [2] according to Black & Veatch's annual utility survey, based on input from 700 utility participants, for 2011 the top-three concerns were aging infrastructure, reliability (no. 1 in 2010) and regulation (no. 2 in 2010).

Organization[edit]

Utility service territories are typically geographically distinct from one another. These territories may be set by regulation or by economics as the capital cost of reproducing infrastructure is usually prohibitive. Each territory is composed of different types of consumers, usually broadly described as either commercial, residential or industrial.

Tariff structure[edit]

Electricity consumers are divided into classes of service or sectors (residential, commercial, industrial, and other) based on the type of service they receive. Sectoral classification of consumers is determined by each utility and is based on various criteria such as:[citation needed]

  • demand levels
  • rate schedules
  • distribution voltage
  • accounting methods
  • end-use applications
  • other social and economic characteristics

Utilities typically employ a number of tariffs. The alternative tariffs reflect consumers' varying consumption levels and patterns and the associated impact on the utility's costs of providing the service.

Power transactions[edit]

An electric power system is a group of generation, transmission, distribution, communication, and other facilities that are physically connected.[3] The flow of electricity with the system is maintained and controlled by dispatch centers. It is the responsibility of the dispatch center to match the supply of electricity with the demand. In order to carry out its responsibilities, the dispatch center is authorized to buy and sell electricity based on system requirements. The interconnected utilities within each power grid coordinate operations and may buy and sell power among themselves. The bulk power system makes it possible for utilities to engage in wholesale (for resale) electric power trade. Wholesale trade has historically played an important role, allowing utilities to reduce power costs, increase power supply options, and improve reliability. Authority for those transactions has been pre-approved under interconnection agreements signed by all the electric utilities physically interconnected or with coordination agreements among utilities that are not connected.

Executive compensation[edit]

The compensation received by the executive in utility companies often receives the most scrutiny in the review of operating expenses. Just as regulated utilities and their governing bodies struggle to maintain a balance between keeping consumer costs reasonable and being profitable enough to attract investors, they must also compete with private companies for talented executives and then be able to retain those executives.[4]

Constraints from regulation have been shown to affect the level of compensation received by executives in electric utilities. Executive compensation usually consists of four parts:[5] # Base salary

  1. Short term incentive pay (STIP)
  2. Long-term incentive pay (LTIP); and
  3. Benefits such as retirement and health care

Regulated companies are less likely to use incentive-based compensation in addition to base salaries. Executives in regulated electric utilities are less likely to be paid for their performance in bonuses or stock options.[6]

Executive compensation[edit]

Executives in regulated electric utilities also have less managerial control than those in unregulated or private industries. These executives are in charge of large numbers of workers as well as the company’s physical and financial assets. Limiting their control has been shown to reduce investment opportunities. The same constraints are placed on the board of directors for the utility by the monitoring or oversight of the utility commission and they are less likely to approve compensation policies that include incentive-based pay.[7] The compensation for electric utility executives will be the lowest in regulated utilities that have an unfavorable regulatory environment. These companies have more political constraints than those in a favorable regulatory environment and are less likely to have a positive response to requests for rate increases.[8]

Just as increased constraints from regulation drive compensation down for executives in electric utilities, deregulation has been shown to increase compensation. The need to encourage risk-taking behavior in seeking new investment opportunities while keeping costs under control requires deregulated companies to offer performance-based incentives to their executives. It has been found that increased compensation is also more likely to attract executives experienced in working in competitive environments.[9]

The Energy Act of 1992 removed previous barriers to wholesale competition in the electric utility industry. Currently twenty-four states allow for deregulated electric utilities: Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Virginia, Arizona, Arkansas, California, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Montana, New Hampshire, New Jersey, New Mexico, New York, and Washington D.C.[10] As electric utility monopolies have been increasingly broken up into deregulated businesses, executive compensation has risen; particularly incentive compensation.[11]

See also[edit]

References[edit]

  1. ^ "Electric". snavely-king.com. Snavely King Majoros & Associates. Retrieved 18 July 2014. 
  2. ^ By Candace Lombardi, CNET. “Utilities: Green tech good for planet, bad for business.” February 23, 2010.
  3. ^ "Electricity Basics". science.smith.edu. Smith College. Retrieved 18 July 2014. 
  4. ^ Joskow, Paul; Rose, Nancy; Wolfram, Catherine (1996). "Political Constraints on Executive Compensation: Evidence From the Electric Utility Industry". RAND Journal of Economics 27 (1): 165–182. 
  5. ^ Sullivan, Julia; Good, Jennifer (2011). "Recovery of Executive Compensation Expenses in Utility Rate Cases". The Electricity Journal 4 (3): 59–71. 
  6. ^ Joskow, Paul; Rose, Nancy; Wolfram, Catherine (1996). "Political Constraints on Executive Compensation: Evidence From the Electric Utility Industry". RAND Journal of Economics 27 (1): 165–182. 
  7. ^ Joskow, Paul; Rose, Nancy; Wolfram, Catherine (1996). "Political Constraints on Executive Compensation: Evidence From the Electric Utility Industry". RAND Journal of Economics 27 (1): 165–182. 
  8. ^ Bryan, Stephen; Hwang, Leeseok (1997). "CEO Compensation In A Regulatory Environment: An Analysis Of The Electric Utility Industry". Journal of Accounting, Auditing & Finance 12 (3): 223–251. 
  9. ^ Bryan, Stephen; Lee-Seok, Hwang; Lilien, Steven (2005). "CEO Compensation After Deregulation: The Case Of Electric Utilities". Journal of Business 78 (5): 1709–1752. 
  10. ^ "Deregulated States". alliedpowerservices.com. Allied Power Services. Retrieved 18 July 2014. 
  11. ^ Arya, Avinash; Sun, Huey-Lian (2004). "Impact of Deregulation in CEO Compensation: The Case of Electric Utilities". American Business Review 22 (1): 27–33.