In this case, the generation is procured and
scheduled by a system operator who is part of or works on behalf of the utility and
chooses generation on the basis of reliability of supply and cost.
This more open market structure allows for competition among generators and
typically requires utilities to factor in the availability
of independent power producers in planning for future electricity demand.
However, in these regulated markets,
the independent power producers are not guaranteed a reasonable rate of return.
Limiting the degree to which they could complete with the utilities own
generators.
As a result, this type of market structure still tends to incentivize utilities
to sell more electricity and build more infrastructure in pursuit of increased
revenues at the expense of operational efficiency and minimizing price.
A much more competitive market structure has emerged in
a number of states following FERC order 888.
In this structure, utilities have divested themselves of their generation assets or
created separate companies from them such that all generation in the market is now
provided by independent power producers and
no generator is guaranteed a reasonable rate of return.
The utilities still maintain control of transmission and distribution, and
sell electricity to residential, and small commercial customers.
However, the utilities now buy electricity on the wholesale market which is managed
by an independent system operator that not only schedules generation based on
competitive pricing, but also schedules the utilities transmission and
distribution to ensure fair access to the market by the independent power producers.
This type of market may also include wholesale energy marketers who facilitate
the buying of electricity for independent power producers and
the selling of it onto utilities in large commercial, and industrial customers.
In this case, the independent system operator still manages the generation and
transmission market.
It's just that energy marketers now become a buyer and seller of electricity along
with the independent power producers, and utilities, and in the process of helping
the latter two players connect may end up reducing transaction costs.
All in all, the greater competition among generators and
sellers of electricity in this type of market structure has led to an improvement
in industry efficiency and lowered the price of electricity in real terms after
inflation has been accounted for.
The final market structure lies at the other end of the spectrum from
the vertically integrated utility monopoly.
This final structure represents not only complete competition among generation in
the wholesale market, but
also complete competition among final sales of electricity in the retail market.
In this market structure, wholesale energy marketers are joined by retail
energy marketers who buy and sell electricity from the wholesale market and
sell it to residential and small commercial customers.
The utility is reduced ownership of transmission and distribution, but
these infrastructures are managed by the independent system operator,
so as to provide open access to all electricity suppliers and buyers.