What is PJM?
The Ohio state legislature passed an important bill in 1999 that significantly changed the path of the energy industry in Ohio for decades to come and would lead to the retail energy market that Ohio enjoys today. To understand those changes, it is important to understand how the energy utility industry was structured before 1999.
Traditional Utility Structure
Traditionally, the entire supply chain of utility services was owned and operated by a single investor-owned utility company. The utility company owned the power plants, the transmission system, and the local distribution system. The utility company was also responsible for the maintenance, repair, and safety of all equipment within these three systems, as well as providing meter reading services, administration and billing, and customer support.
Under the traditional model, the utility company held a monopoly franchise over customers and was required to have their rates and prices for all services regulated by the Public Utilities Commission of Ohio (PUCO). PUCO would determine fair rates based on the cost of providing those services, including the fixed costs and overhead of expensive plant and equipment, as well as a fair and reasonable rate of return to the utility company investors. However, this cost of service regulation meant that customers would pay rates that included the overhead costs for all of the utility company equipment, including expensive power plants that only produced power a few times each year!
The New Power Market
In 1999, the Ohio General Assembly passed a major law called Senate Bill 3 that fundamentally changed Ohio’s energy industry and achieved more than $15 billion in savings for Ohio electric utility customers. Senate Bill 3 allowed non-utility companies called “Independent Power Producers” (IPPs) to buy, lease, or construct their own power plants and then sell their power into a competitive market. Power plants would submit their power prices into the market for each hour of the day, and the market operators would only dispatch and pay the cheapest power plants needed to provide power during each hour. Under the new system, customers would only pay generation service charges for the power that is actually produced, and customers would no longer pay the overhead costs for the old and expensive power plants that only produce power a few times each year.
Ohio’s lawmakers also recognized that the competitive power market would operate best if customers enjoyed a convenient retail market to “shop” for their generation services. As such, Senate Bill 3 also established a new type of company in Ohio called the “Competitive Retail Energy Supplier” (CRES). These Retail Suppliers would purchase wholesale quantities of power from the Independent Power Producers, and then compete against other Retail Suppliers by marketing and selling that power to households and small businesses at competitive rates. To help customers compare the rates and terms offered by each Retail Supplier, the PUCO established an online Apples-to-Apples comparison chart that allows customers to select the best retail energy product for their home or business.
Finally, Ohio’s lawmakers also understood that some customers may want to save money with competitive generation rates without wanting to spend the time comparing rates and shopping around. Ohio’s lawmakers gave these customers an option called “Electric Aggregation”. Electric aggregation allows the electric load consumed by a group of customers to be bundled together (or “aggregated”) and then enrolled as one single group into the best retail energy rate available for the group. Senate Bill 3 established special entities called “Aggregators”, who would be authorized to bundle certain customers together and negotiate group rates. One special class of aggregator was developed called “Governmental Aggregators”, which could bundle the electric load of their entire community together and negotiate a single group rate if approved by voters on the ballot.
What Didn’t Changed?
Actually, most of the utility supply chain has remained the same. While power plants are now operated by competing Independent Power Producers, the same investor-owned utility company still owns and operates the transmission and distribution system that deliver power from the dispatched power plants. Additionally, the utility company is still responsible for maintaining and repairing all of the lines, poles, transformers, and substations in their service territory. And even if customers are enrolled with a retail energy supplier, the utility company remains the single point of contact for meter reading, billing services, and payments. Finally, the utility company still receives fair and reasonable rates that are regulated by PUCO for all of the transmission, distribution, meter reading, and billing services that all customers use.