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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, to the retail delivery and consumption of the product, it can be a challenging industry to fully understand.
The production and delivery of natural gas and electricity to homes and businesses involves an integrated network of delivery systems, companies and agencies. No two jurisdictions regulate utilities exactly the same and 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. Like an apple orchard, electric and natural gas companies are for-profit private businesses (businesses that are not owned by the province) 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 costs for transportation 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.
Similarly, 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.
An 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 (ex. 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.
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. Regardless of which retail company you receive energy services from, the transmission company providing the service and related transmission costs remain the same.
A large supply of apples, just like 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 having facilities and ensure that this happens safely and efficiently.
Smaller delivery trucks deliver apples from warehouses to to retail stores. This is another leg in the distribution chain just like in the electric and natural gas distribution system. These smaller capacity networks deliver the commodity to more drop-off points and to smaller geographic areas within a city or town.
Distribution networks can vary in complexity, size and geographic area. 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 both the commodity and the costs to get the commodity to your home. Unlike with buying the apple, your utility bill breaks down the costs to get the commodity to your home by each line item. The AUC approves the electricity and natural gas monthly commodity rates for regulated retailers, but not for competitive retailers.
You are able to review and compare the retail service providers in your area by 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 typically stable. 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. This is 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 to the market. Other times you may not have enough apples growing (or electricity being created) and you will need to buy it from the market.