To remind you, we're talking about models for electric industry market structure. We talked about Ghana, UAE, France, and now we're going to talk in fair detail about the USA. For several reasons, largely because it's very varied within the US. There are many different structures and they're all changing. So it's a good case study to dive into because it illustrates almost all the variations that are possible or have been thought of to date on how electricity can be bought and sold. That's why I will do a deeper dive into the US. We'll start with one simpler aspect of the US electricity system, is the physical aspect, the grid themselves. By power grid, I mean the actual wires, transmission system, and distribution. Where do they all go and how did they hook up with each other. At the highest level, it's pretty straightforward in the US. We're talking about the physical system, not about the institutions or the financial structures, they're much more complex. But there are essentially three separate physical grids in the US. There's the Western Interconnect, it's called, the Eastern Interconnect, and the Texas Interconnect. These three are largely separate, all synchronized internally. One way to think about it is if you're a squirrel and you jump on a distribution system here, you can end up all the way up here just staying on power lines. But you'd have a hard time jumping the gap. Turns out there are loose connections, there are a few DC links between the two, but not very many you. You can think of them as three distinct physical grids. That's pretty straightforward. It's more complex when you get into the financial system. We'll do a case study within a case study, and we'll look at the US State of Colorado first, as parts of Colorado have relatively what I'll call old-fashioned. I don't mean in a judgmental sense, it's not right or wrong. It's just easier to understand. It's closer to what Ghana has now. We'll start there, talk about how that works, and then start to introduce some of the more complex competitive systems. In the US State of Colorado, located about near the middle of the country, population of just under six million people, has urban and rural parts, there actually are several different electricity providers and structures within the State of Colorado, but there's a dominant one. Most of the state's electricity is provided by a investor-owned, regulated monopoly called Xcel Energy. Let's talk about that company and then how it works. It's a private company, publicly-owned, very confusing terminology, but what that means, it is not a government agency. It is a company, it is a publicly traded stock. In other words, you can go buy a share of this company. The stock symbol is XEl. Anybody can buy a share in it, and stockholders buy into this company, presumably and largely in search of profit or [inaudible] return. In that sense, it's a private company, privately-owned. The government does not own any of Xcel. So that's very distinct from, say, some other companies we've talked about. What does that company do, Xcel Energy? Well, this is, again, we'll call it an old fashion market structure. Their power plants, they generate electricity, they have transmission lines, they have a distribution lines, and they bill customers. If you live in the part of Colorado that is served by Xcel, you get a bill from Xcel, and that bill covers generation, transmission, and distribution. All those three functions are provided by Xcel. Again, pretty straightforward, conceptually called a vertically integrated regulated monopoly structure. Now, Xcel owns many of their own power plants. They also buy from IPPs. We've heard that term before. In this case it has some similar aspects to other countries we've looked at, where the generation is not strictly speaking competitive, but Xcel does have their own power plants, and does buy power from independent power producers via what we call direct bilateral contracts, just two parties, Xcel and a generator. The relationship between the two is governed by a power purchase agreement. Xcel says, "We'll pay you this much for this much power," and the private company says, "Okay," and then provide that. Pretty straightforward at least conceptually. There's not really a lot of competition in generation. Now, Xcel is a monopoly provider and regulated by, in this case, the state government, not the federal government. There is a state government, Colorado State Government, and it has a public utilities commission, sometimes called the PUC, because people get tired of saying the whole thing. The Public Utilities Commission keeps an eye on Xcel and regulates rates. If Xcel Energy wants to significantly change the rates they charge for electricity, the government in the form of the Public Utility Commission, has to approve that change. If Xcel wants to, let's say, build a big new power plant, they may have to get the Public Utility Commission to agree that that's a wise thing for them to do. Why does this regulation exists? Well, Xcel is the only provider. You can imagine if a private company in search of profits was providing a necessary good or service, they would have incentives to increase the price to increase their profit. The Public Utilities Commission provides Xcel with a reasonable profit. The fashion is reasonable, as you can imagine, subject to a lot of discussion. But it's what's called the regulatory compact, an agreement between the company, Xcel in the state. Where the company says, "We'll provide reliable low-cost electricity," and the state says, "Okay. You do that and you can earn a reasonable profit. Not tiny, but enough to keep yourself functioning and attract capital needed for investment." It's essentially an agreement between the company and the state regulators. The Xcel earns a rate of return which is essentially a profit, which is controlled or regulated by the government. But notice that it's not the government itself, it's the private company doing it. There's no retail competition. If you live in the part of Colorado that are served by Xcel, you can't buy electricity from somebody else. In fact, it's illegal in those areas to go into the retail electricity business. There's essentially, again, a regulatory compact, an agreement between the state government and utility. The state government says, "You can earn reasonable profit. No one will be allowed to compete with you, but in return, you have to do a good job and provide low-cost, reliable service." Of course, there's always a discussion between Xcel and the Public Utilities Commission on what the rate of return is, what's a reasonable investment, and so on. But that's the market structure, pretty straightforward. It's how it used to work in most countries and throughout the US, but as we've talked about, that's changing rapidly, but it has not yet changed much in Colorado. In the next videos, we'll talk about how it's changing and how it works, and other reasons in a more complex way.
