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Glossary of Energy Terms

Useful words and definitions will help you understand your utility bill and lower your costs

En español | Understanding energy utilities and how they affect you can be challenging. Rate-setting terms and words found in your utility bill may be unfamiliar. You may be confused about who to contact to get energy or fix problems.

Natural gas for cooking

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Natural gas for cooking.

AARP has created this energy utility glossary to help you understand some common terms in the energy field. It includes both electric and natural gas. The definitions have been adapted from the websites of the Federal Energy Regulatory Commission (FERC) and the Energy Information Administration (EIA).

See also: Save up to $1,000 a year on your energy bills.

<h3><span>A through C</span></h3>

Affiliate: A company that is directly or indirectly controlled by, or shares the same ownership as, another company.

Aggregation: The process of organizing individual electricity consumers with common characteristics (such as geography or affiliation) for the purpose of purchasing electricity on a group basis.

Alternative Form of Regulation (AFOR): An alternative to traditional general rate cases filed with a state regulatory authority, used as a method to recover costs or supplement revenues. AFORs can involve pass-through mechanisms that allow a utility to recover costs with less justification or scrutiny than in a typical rate case.

Avoided Cost: The cost a utility would have incurred to produce electricity itself or to purchase it from another source instead of from a Qualifying Facility (QF), as defined by the Public Utility Regulatory Policies Act of 1978 (PURPA).

Baseload: The minimum amount of electric power generation that a company must deliver to its customers over a given period and at a constant rate.

British Thermal Unit (BTU): The quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit.

Broker: Any entity that serves as an agent or intermediary in the purchase and sale of electricity without ever owning either the facilities that produce electric power or the power itself.

Bulk Power Market: Purchases and sales of electricity among utilities on a wholesale basis.

CCF (Hundred Cubic Feet): This is the unit of measurement used to measure volume of gas consumption as indicated by a customer’s meter. Some utilities also use CCF as their unit of measurement for billing purposes, although most use therms. See Therm.

Choice Gas Programs: Programs offered by natural gas carriers to provide access to multiple suppliers in a given gas market. Often the difference in prices offered to consumers by multiple "competitive” suppliers are insignificant.

City Gate: A point or measuring station where a distributing gas utility receives gas from a natural gas pipeline company or transmission system.

Cogenerator: A generating facility that produces both electrical and another form of useful thermal energy (such as heat or steam), used for industrial or commercial heating or cooling purposes. 

Commercial Consumption: Gas used by non-manufacturing businesses, including hotels, restaurants, wholesale and retail stores, and other service enterprises, and by local, state, and federal agencies.

Commercial Customer: One of three principal classes of electricity customers (the others are industrial and residential). Commercial customers consist of non-manufacturing business establishments, including retail stores, hotels, restaurants, wholesale businesses and educational institutions, among others. See also Residential Customer and Industrial Customer.

Congestion: Congestion occurs when there is not enough transmission capacity available to move power to or from certain areas.

Corporation Commission: A state authority responsible for the regulation of energy and telecommunications utilities within a particular state. See also Public Utility Commission (PUC) or Public Service Commission (PSC).

Cost Allocation: The process of assigning a utility’s overall costs to the functions of generation, transmission and distribution.

Cost-of-Service Regulation: Traditional energy utility regulation under which a utility is allowed to charge rates based on the cost of providing service to customers and the opportunity to earn a reasonable profit as determined by the state regulatory authority. Also called Rate-Base or Rate-of-Return Regulation.

Cramming: The practice of adding charges to a customer’s monthly bill for optional services that the customer has not authorized.

<h3><span>D through F</span></h3>

Default Provider: An entity that provides electric generation services to customers who have not made their own arrangements for such services either during the transition to, or after implementation of, retail competition.

Delivered Gas: The physical transfer of natural, synthetic and supplemental gas from facilities operated by one company to facilities operated by others or to consumers.

Demand: The amount of electricity, expressed in kilowatts, that is required by customers at a given point in time.

Deregulation: The elimination or relaxation of regulations governing an industry or sector of an industry, often, in the context of the energy industry, in connection with a Divestiture, or other separation of functions or services. Also, less government oversight in general.

Direct Access: A key feature of the restructuring process by which consumers are given the opportunity to bypass their local utility as the generator of their electricity and purchase electricity from another generator of their choice. See Retail Competition and Retail Wheeling.

Distribution Service: The delivery of electricity through local, low-voltage wires to retail customers.

Divestiture: The requirement that an electric utility separate its generation services from its transmission and distribution services and then legally transfer ownership and control of all generation-related assets to a nonaffiliated company. In rare cases, the term may also be used to refer to the transfer of ownership and control of a utility’s transmission or distribution functions to a nonaffiliated company. See also Functional Separation and Structural Separation.

Electric Utility: Any regulated entity that owns and/or operates facilities for the generation, transmission or distribution of electricity and has the exclusive right, within a defined geographic area, to sell these services.

Federal Energy Regulatory Commission (FERC): An independent federal agency within the U. S. Department of Energy that has jurisdiction over the interstate transmission of natural gas, oil and electricity. FERC also regulates natural gas and hydropower projects.

Forced Outage: The shutdown of a power plant, transmission line or other facility for emergency reasons.

Fuel Adjustment Clause: A mechanism to adjust rates through a billing surcharge when a utility’s cost of energy to meet the needs of its customers falls outside a predetermined range. See Purchased Cost Adjustment Mechanism (PCAM).

Functional Separation: The requirement that an electric utility segregate its books and records to isolate the generation function from all other functions. In rare cases, the term may also be used to refer to the segregation of books and records to isolate the transmission or distribution functions from all other functions of the utility. See also Divestiture and Structural Separation.

<h3><span>G Through I</span></h3>

Generation: 1) The process of producing electrical energy from other forms of energy. 2) The amount of electric energy produced, usually expressed in watt-hours (Wh), kilowatt-hours (kWh), or megawatthours (MWh).

Gigawatt (GW): One thousand megawatts (1,000 MW), or 1 million kilowatts (1,000,000 kW) or 1 billion watts (1,000,000,000 W) of electricity. A measure that is often used to describe the capacity of a large power plant or a number of plants.

Grid: A system of interconnected power lines for the transmission and distribution of electricity both locally and nationally.

Hedging Contract: A contract that establishes future prices and quantities of a commodity, such as fuel, independent of the short-term market.

Independent Power Producer (IPP): Any entity not regulated by the government as a public utility that owns or operates an electricity generating facility and offers electric power for sale at market-based rates to utilities and/or the public. Also known as a Non-Utility Generator (NUG).

Independent System Operator (ISO): A neutral entity, not affiliated with any generation, transmission or distribution company, that operates, controls and/or maintains an instantaneous balance of the transmission grid system in a manner that will ensure reliable and fair transfers of electricity between generators and distribution companies. See Regional Transmission Organization.

Industrial Consumption: Natural gas used for heat, power or chemical feedstock in manufacturing, mining or other mineral extraction, as well as agriculture, forestry and fisheries. Industrial consumption also includes natural gas used in the generation of electricity by other than regulated electric utilities.

Industrial Customer: One of three principal classes of electricity customer (the others are commercial and residential). The classification of industrial customer is made either because the consumer 1) is a manufacturing, construction, mining, agriculture, fishing or forestry establishment or 2) uses an amount of electricity that exceeds some specified limit. See also Commercial Customer and Residential Customer.

Investor-Owned Utility (IOU): A utility owned and operated by private investors, as distinguished from a community-owned or cooperatively owned utility.

<h3><span>J Through L</span></h3>

Kilowatt (kW): One thousand watts (1,000 W). A measure of the amount of electricity used by large appliances and households.

Kilowatt-hour (kWh): The unit of electricity for which most customers are charged on their monthly bill (in cents per kilowatt-hour). One kilowatt-hour equals one hour of using electricity at a rate of 1,000 watts. Three-and-a-half kilowatt-hours will provide enough power to keep a 150-watt light bulb on for an entire day. The average household consumes about 900 kWhs of electricity per month.

Liquefied Natural Gas (LNG): Natural gas (primarily methane) that has been liquefied by reducing its temperature to -260 degrees Fahrenheit at atmospheric pressure.

Load: The amount of electric power required at a specific time, or over a specific period of time, by a consumer, circuit or system.

Local Distribution Company (LDC): A local gas company. LDCs earn their profits through the distribution of gas, not through its purchase and resale.

<h3><span>M Through O</span></h3>

Manufactured Gas: A gas obtained by destructive distillation of coal, or by the thermal decomposition of oil, or by the reaction of steam passing through a bed of heated coal or coke. Examples are coal gases, coke oven gases, producer gas, blast furnace gas, blue (water) gas and carbureted water gas. Btu content varies widely.

Market Power: The ability of a company, either individually or in collaboration with other companies, to affect the price of energy in the relevant market.

Megawatt (MW): One thousand kilowatts (1,000 kW) or 1 million watts (1,000,000 W). A term that is most often used to measure the output of a power plant. While a large power plant might be 1000 MW, the average size of a U.S. power plant is just over 200 MW.

Merchant Plant: A power plant built by a nonutility (i.e., an Independent Power Producer or a utility outside its local service territory) to produce electricity that is sold at market-based prices to utilities and other power suppliers rather than directly to retail customers.

Natural Gas: A gaseous mixture of hydrocarbon compounds, the primary one being methane.

Nonbypassable Charge: A charge that all consumers must pay, whether they continue to receive electric service from their present utility or select a new supplier.

Non-Utility Generator (NUG): Any entity not regulated by the government as a public utility that owns or operates an electricity generating facility and offers electric power for sale to utilities and/or the public. Also known as an Independent Power Producer.

<h3><span>P Through R</span></h3>

Pilot Program: A program offered by a utility that allows a limited number of customers to select their energy suppliers on an experimental basis for a limited period of time.

Pipeline: A continuous pipe conduit, complete with such equipment as valves, compressor stations, communications systems and meters, for transporting natural and/or supplemental gas from one point to another, usually from a point in or beyond the producing field or processing plant to another pipeline or to points of use. Also refers to a company operating such facilities.

Power Marketers: Entities that buy and sell electricity, but do not own generation, transmission or distribution facilities. The difference between power marketers and brokers is that power marketers actually take ownership of electricity and must register with FERC.

Power Pool: Two or more interconnected electric systems that seek to obtain greater reliability of service and efficiency of operation by coordinating the development and operation of their electric generation and transmission facilities.

Price Cap Regulation: A form of alternative regulation in which the regulatory authority establishes the maximum allowable price to be charged for a service or group of services, creating an incentive for the regulated company to earn higher profits by cutting expenses or increasing productivity. Also known as Rate Cap Regulation, this form of regulation represents an alternative to Cost-of-Service Regulation, which sets rates for utility services according to their underlying costs plus a reasonable profit.

Provider of Last Resort: An entity that is legally required to provide energy service to customers who are not offered service by any other provider.

Public Utility Commission (PUC) or Public Service Commission (PSC): A state authority responsible for the regulation of energy and telecommunications utilities within a particular state. Called Corporation Commission in some states.

Public Utility Holding Company Act of 1935 (PUHCA): A federal law that was enacted to correct abusive practices by large and powerful utility holding companies that were operating to the detriment of utility ratepayers and shareholders. PUHCA was repealed in 2005.

Public Utility Regulatory Policies Act of 1978 (PURPA): A federal law intended to encourage cleaner, more energy-efficient power production. PURPA has created a new class of nonutility generators, called “qualifying facilities,” that must meet certain ownership, size and efficiency criteria established by the Federal Energy Regulatory Commission (FERC). Once a generator is designated as a Qualifying Facility (QF), it can force a utility to purchase its power, but only at a price that is no higher than the Avoided Cost, which is the cost that the utility would have incurred to produce the electricity itself or to purchase it from another source.

Purchased Cost Adjustment Mechanism (PCAM): A mechanism by which costs incurred by a utility for the purchase of power on the wholesale power market that exceed the projected costs for purchased power as reflected in the base rate filed with regulators may be passed through to electricity customers through an automatic adjustment charge in their bills.

Purchased Gas Adjustment Mechanism: A mechanism by which changes in a utility’s gas commodity costs are automatically passed on to customers through a dollar-for-dollar adjustment in their bills.

Qualifying Facility (QF): A term used in the Public Utility Regulatory Policies Act of 1978 (PURPA) to describe a Cogenerator or small power producer that meets certain ownership, operating, and efficiency criteria set by the Federal Energy Regulatory Commission (FERC).

Rate Base: The value of property on which a utility is permitted to earn a rate of return (profit) as determined by the state regulatory authority.

Rate-Base or Rate-of-Return Regulation: Traditional energy utility regulation under which a utility is allowed to charge rates based on the cost of providing service to customers and the opportunity to earn a reasonable profit as determined by the state regulatory authority. Also called Cost-of-Service Regulation. 

Rate Cap Regulation: A form of alternative regulation in which the regulatory authority establishes the maximum allowable price to be charged for a service or group of services, creating an incentive for the regulated company to earn higher profits by cutting expenses or increasing productivity. Also known as Price Cap Regulation, this form of regulation represents an alternative to Cost-of-Service Regulation, which sets rates for utility services according to their underlying costs plus a reasonable profit.

Rate Design: The process of allocating approved utility costs among the rate classes (commercial, industrial and residential).

Regional Transmission Organization (RTO): An owner and/or operator of the electric transmission facilities within a large region. Formed by merging the transmission networks of several utilities under the control of a single entity, an RTO seeks to promote competition in wholesale power markets. See Independent System Operator.

Reliability: Electric system reliability has two components: adequacy and security. Adequacy is the ability of the electric system to supply customers at all times, taking into account scheduled and unscheduled outages of system facilities. Security is the ability of the electric system to withstand sudden disturbances, such as electric short circuits or unanticipated loss of system facilities.

Repressuring: The injection of gas into oil or gas reservoir formations to affect greater recovery.

Reserve Margin: The amount of unused, available capacity of an electric power system, expressed as a percentage of total capacity. An adequate reserve margin is necessary for system reliability.

Residential Consumption: Gas used in single and multi-family dwellings and apartments and mobile homes for heating, air-conditioning, cooking, water heating and other household uses.

Residential Customer: One of three principal classes of electricity customer (the others are commercial and industrial). Residential customers are private households that consume energy primarily for space heating, water heating, air conditioning, lighting, refrigeration, cooking, and washing and drying clothes. See Commercial Customer and Industrial Customer.

Restructuring: The fundamental reorganization of the electric utility industry away from the traditional regulated monopoly structure, in which utilities are given exclusive rights to generate, transmit and distribute electricity to serve all customers within their service area, toward a market structure that allows consumers to purchase electricity generation services from competing suppliers.

Retail Competition: A market model in which providers of electricity compete directly to serve end-use customers.  See Direct Access and Retail Wheeling.

Retail Wheeling: A method of transmitting power in which utility customers would get direct access to power generators, giving them the option to purchase electricity from more than one provider.  See Direct Access and Retail Competition.

Rural Electric Cooperative (Co-op): An independent electric utility owned by the consumers it serves and established to provide at-cost electric service. Typically, co-ops have been financed initially by the Rural Electrification Administration (REA) and are exempt from federal income tax laws.

<h3><span>S Through U</span></h3>

Securitization: A financing mechanism through which a utility can recover certain costs, such as Stranded Costs, up-front in a single lump-sum payment via the issuance of bonds whose repayment is guaranteed by the legislature. Consumers pay the interest and principal on the bonds through a charge, commonly referred to as a “transition charge,” on their electric bill.

Service Area: The geographical territory served by a utility.

Slamming: The practice of switching customers from one power provider to another without their consent.

Stranded Benefits: Programs funded by a monopoly utility to support environmental protection, fuel diversity, energy efficiency, low-income ratepayer assistance, renewable energy, demand-side management, or other public goods that could be compromised or abandoned in a restructured electric industry.

Stranded Costs: Costs incurred by a utility while operating as a regulated monopoly that would be recoverable under regulated rates but might not be recoverable in a competitive market. For example, costs sunk into a nuclear power plant or long-term purchased power contracts.

Structural Separation: The requirement that an electric utility create a separate subsidiary to run its generation, transmission or distribution services. The subsidiary would operate in a separate building and have its own employees and financial reporting procedures.

Supplemental Gases: Synthetic natural gas, propane-air, coke oven gas, refinery gas, biomass gas, air injected for Btu stabilization, and manufactured gas that is commingled and distributed with natural gas.

Supplier: Any entity that sells electricity to customers using either its own transmission and distribution facilities or those of another company.

Synthetic Natural Gas (SNG): A manufactured product, chemically similar in most respects to natural gas, resulting from the conversion or reforming of petroleum hydrocarbons that may easily be substituted for or interchanged with pipeline quality natural gas. Also referred to as substitute natural gas.

System Benefits Charge: A charge on all energy users to fund public interest programs, such as energy conservation, research and development, energy efficiency, and low-income assistance.

Therm: One hundred thousand British thermal units (100,000 Btu).

Transition Charge: A cents-per kilowatt-hour charge added to every customer’s bill to recover an electric utility’s Stranded Costs. Sometimes called a Competitive Transition Charge.

Transmission: The process of transporting high-voltage electricity from the points of generation to distribution facilities, which deliver the electricity at low-voltage to end users.

True-up Mechanism: A method for adjusting rates to prevent over- or under-recovery of certain costs, including Stranded Costs and costs charged under a Purchased Cost Adjustment Mechanism.  The term typically refers to a provision in legislation or regulation that gives state regulators authority to require the adjustment.

Unbundled Service: Electricity service that is broken down into its basic components, each of which is priced and sold separately. For example, generation, transmission and distribution could be unbundled and offered as discrete services.

Underground Gas Storage: The use of underground facilities for storing gas that has been transferred from its original location (pipeline) and injected into hollowed-out salt domes, natural geological reservoirs (depleted oil or gas fields), or water-bearing sands topped by an impermeable cap rock (aquifer).

Unit Value, Consumption: Total price per specified unit, including all taxes, at the point of consumption.

Unit Value, Wellhead: The wellhead sales price, including charges for natural gas plant liquids subsequently removed from the gas, gathering and compression charges, and state production, severance, or similar charges.

Universal Service: A policy guaranteeing that all ratepayers receive reliable electric service with no degradation in service quality and at rates that are just, reasonable, and affordable.

<h3><span>V Through Z</span></h3>

Vertical Integration: The structure of an electric utility in which the company owns generation plants, a transmission system, and distribution lines and thus can provide all aspects of electric service.

Watt: A unit of measure of electric power at a specific moment in time.  Seventy-five watts describes the amount of electricity that a 75-watt light bulb draws at any particular moment.

Wholesale Competition: A market structure in which a utility may buy its power from a variety of power producers, and power producers may compete to sell their power to a variety of utilities.

Wires Charge: A charge expressed in cents-per-kilowatt-hour that is levied on electric power suppliers or their customers based on the use of transmission and distribution wires.