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The apple orchard analogy: comparing apples to utilities and what is involved in delivering them to your home
The utility industry is complex. With numerous participants and a mix of regulated and non-regulated companies involved in the production and delivery of utilities, it can be a difficult industry to understand. The apple orchard analogy provides help with a general understanding about the segments; from the production of the commodity to the retail delivery and consumption of the product.
The production and delivery of natural gas and electricity to homes and businesses involves an integrated network of delivery systems, companies and agencies. Add to this, no two jurisdictions regulate utilities exactly the same. This can be confusing for those not involved with the industry day to day or new to Alberta.
The apple orchard analogy offers a simplified overview of the industry, how it works and why it costs more to get the commodity delivered to your home than the actual commodity itself.
Consider an apple growing in an orchard, owned by a private company that plants, maintains and grows its product so that it can be sold on the market. The company takes a risk in buying the land, apple seeds, and equipment to plant, nourish and eventually harvest the apple. The company also has operating expenses such as employment costs necessary to grow and maintain its product.
This is similar to the electric and natural gas industry in Alberta. Just as the apple orchard, electric and natural gas companies are businesses that are not owned by the province, for-profit private businesses that are a taking a risk to produce and sell a product (electricity or natural gas) to the wholesale market. Companies that produce electricity or extract natural gas experience costs in producing that energy, just as the apple orchard experiences costs to grow the apples.
Apples need to be transported to the market or a grocery store for sale, and transportation costs need to be taken into account. The cost difference between buying the apples directly from the orchard or purchasing them at grocery purchase is primarily attributed to the delivery costs of shipping the apple and preparing the apple for sale in a retail outlet.
Likewise, the electricity and natural gas must be delivered to your home and the cost of the wires (for electricity) or pipes (for natural gas) needs to be taken into account. Below are the steps taken to get the commodity to your home.
The orchard produces a lot of apples that need to be transported long distances. This is just like an electricity generation power plant that produces a lot of energy and needs it to get to the delivery point exactly when it’s needed (when someone turns on a light). Transmission infrastructure is needed to support the large-scale movement of electricity and natural gas to every area of our province.
The difference between apples and energy is that you can go a few days without an apple, but it is much more difficult, if not impossible, to go without electricity or natural gas for a few days. Also, unlike long-haul transportation companies, it is more efficient for only one company to be responsible for transmission services within a geographic area so there aren’t multiple lines in the same location. It is not feasible from either an economic or environmental perspective to build and operate duplicate facilities, such as electric transmission lines or natural gas pipelines, that are owned and operated by different utility companies.
This is why the transportation (also called the transmission and distribution) of electricity and natural gas is regulated and there is only one transmission company and only one distribution company designated to provide service in each area of the province. These companies are still investor-owned companies, but they must apply to the AUC for approval of the rates they will charge to the customers. Every utility customer in Alberta pays for transmission costs, but costs will vary slightly depending on the service area where you live. It doesn’t matter which retail company you receive energy services from, the transmission company providing the service and related transmission costs remain the same.
The large supply of apples, just like the electricity and natural gas, needs to be separated and broken down into quantities that can then be prepared for delivery to homes. There are associated costs to have facilities and ensure that this happens safely and efficiently.
Smaller delivery trucks deliver the apples to retail stores from the warehouse. This is another leg in the distribution chain just like the next leg in the electric and natural gas distribution system. These smaller capacity networks deliver the commodity to more drop-off points and often deliver the commodity to smaller geographic areas within a city or town.
Distribution networks can vary in complexity, size and geographic area. For example, more remote areas may have longer distribution lines than larger cities. The distribution costs can vary quite a bit depending on the service area where you live. Just like transmission service, the distribution service company responsible for your geographic area remains the same, no matter which retailer you purchase your electricity or natural gas from.
In the same way that you can choose which store you purchase your apples from, you can also choose which retail service provider sells you electricity and natural gas. The retail grocery store buys the apples at a wholesale cost (which includes the cost of shipping) and sells them to you at more than the wholesale cost so that they can recover costs and provide their shareholders with a return. This is the same for utility retail providers.
Utility retailer providers bill you for the commodity itself and the costs to get the commodity to your home. Unlike when buying the apple, you can see how the costs to get the commodity to your home are broken down by each line item. The AUC approves the electricity and natural gas monthly commodity rates for regulated retailers, but not for competitive retailers.
The retail service providers in your area can be reviewed and compared using in the Utilities Consumer Advocate Cost Comparison Tool.
The current commodity prices for electricity and natural gas (at the source, or at point of generation) are at relatively low levels and have been low for some time. The costs attributed to delivery have gradually increased and/or continue to remain at constant levels. Even if your energy use is low, the costs associated with delivery of reliable energy seven days a week, 24 hours per day, 365 days a year at the flick of a switch will still remain on your utility bill.
Some people may also choose to grow their own apples in their backyard, the same way a homeowner can produce their own electricity, referred to as micro-generation.
At times, you may have more apples (or energy) than you and your household can consume. During those times of oversupply, you can sell that commodity. Other times you may not have enough apples growing (or electricity being created) and you will need to buy it from the market.