Must-know: Electric utility tariffs and pricing

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Sep. 9 2014, Updated 12:00 p.m. ET

Electric utility tariffs and pricing

Retail sales in the U.S. can be divided into four segments:

  • Residential
  • Commercial
  • Industrial
  • Transportation

The residential tariff for electricity is the most expensive. In contrast, the tariff for industrial electricity is the cheapest in the U.S. Some of the differences in the costs are a result of higher distribution and stepping down—reduction in voltage—cost. The cost is associated with the residential supply of electricity.

Duke Energy (DUK), American Electric Power Company (AEP), and NextEra Energy (NEE) enjoy the highest residential customer base. Exelon Corporation (EXC) has more industrial user connections. All of these companies are components of the Utilities Select Sector SPDR (XLU).

Utility companies set their prices different from other businesses. Pricing is determined by the cost of doing business. Utility companies don’t use market-based pricing. Any increase in production, transmission, or distribution impacts the price of electricity.

Factors impacting electricity tariffs:

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  • Fuel prices – Fuel forms a significant part of the cost to generate electricity. Any changes in fuel prices impact the price of electricity.
  • Power plants – Plant construction and maintenance costs are higher for some power plants than others. It’s based on the technology used.
  • Transmission and distribution lines – Maintaining and using the transmission system to deliver electricity contributes to the cost of electricity.
  • Weather conditions – Rain and snow provide water for hydropower generation. Extreme heat can increase the demand for electricity for cooling.
  • Regulations – In some states, prices are regulated by public service commissions. In other states, there’s a combination of unregulated prices—for generators—and regulated prices—for transmission and distribution.
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