A commodity is a product that is mass produced and unspecialized, and as such it is easily interchangeable with a similar product from another seller. In the energy business, commodities include natural gas, coal, and electricity. For example, wholesale natural gas can be purchased from a variety of supply basins and transported by various pipelines. Multiple entities including producers and marketers may compete to sell an identical product. And all sellers’ products are the same since there are standards for gas entering a transmission system.
In the utility business, the term commodity is commonly used to refer to natural gas or electricity that is bought in the wholesale market or generated by the utility for the resale to end-use customers. The costs of commodities for a utility are commonly a “pass-through,” meaning that the utility charges its customers exactly what it paid. This applies in three distinct areas: natural gas for resale to utility customers, electricity that is purchased from a third-party generator and resold to utility customers, and for utilities that own generation any fuel used to generate electricity that is then sold to utility customers.