Under the single-buyer electric market model, the utility company creates a supply purchasing group whose job is to competitively procure supply on behalf of all the utility’s end-use customers. This power may be procured from units owned by the utility as part of its regulated function, from merchant units owned by competitive entities, from electric marketers, or in regions with an Independent System Operator (ISO) through ISO markets. Under this model, system operations may be handled either by the utility, an ISO, or a Transmission System Operator (TSO). Some wholesale trading outside of the utility may occur. But since the utility is the only buyer in the local market this happens only if a marketer is aggregating supply from generators and then selling it to the utility or if the marketer is moving power across the utility system into another market. The remainder of the market functions — transmission, distribution, and retail sales — continue to be the monopoly purview of the regulated utility.
Generally, the utility supply purchasing group makes its buying decisions based on reliability of supply and least cost. Since utility generation already has its capital and debt costs covered in customer rates, it does not need to capture these fixed costs in its prices and can offer lower bids. Thus, this model tends to result in independent generation selling into the utility only when existing utility generation is not sufficient to cover customer loads. If the utility is an investor-owned utility (IOU), it is necessary for the state regulatory body to create mechanisms to review its purchasing decisions to ensure they are in the interests of ratepayers and not the IOU’s shareholders.
Many market participants will argue that the single-buyer model provides only limited competition. While generating units may be owned by entities other than the utility, their only source of revenue is sales to the utility. Thus there isn’t much in the way of true competition. To get true competition, markets must allow producers and consumers to come together outside of the regulated monopoly.
Many regions that otherwise subscribe to maintaining the monopoly utility model have opened up their generation sectors to limited competition by implementing some form of the single-buyer model. A common implementation of this model in recent years has been the requirement that utilities needing new supply sources must consider power contracts with independent parties in addition to utility-constructed units when doing integrated resource planning. In some states using this model, new generation has been constructed by Independent Power Producers (IPPs) who then sign long-term (often seven- to ten-year) supply agreements with the utility. Other states have implemented periodic auctions where the utility buyer acquires supply from the market using a centralized auction process.
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