Q: What is restructuring?
A: The process of restructuring the electric industry in Illinois began with a law that was passed in 1997. The 1997 law cut electricity rates by up to 20 percent and froze them for ten years to allow time for the transition.
Restructuring is needed to provide competition for companies which generate electricity. Before 1997, electric companies were responsible for generating, transmitting and delivering energy. No company can—nor wants to—build an entirely new infrastructure of power lines and underground hardware that would allow it to compete for transmitting and delivering energy. But competition can be introduced in generating electricity. Introducing competition in generating electricity does not happen overnight, but has been developing since 1997. When the rate freeze ends on Jan. 1, 2007, the market will be ready for competition for electric generation, and competition will secure low prices for Illinois customers.
Q: What is the Illinois auction?
A: In an auction, bidders compete to set the highest price for a commodity. The Illinois auction works in the opposite way; bidders compete to name the lowest price for a commodity. Competition in the Illinois auction process drives down the price of electricity, so that Illinois customers will be able to pay the lowest market price for reliable electricity.
Q: What is the cause for the increase in electric rates?
A: Since 1997, the price of electricity has been artificially frozen, while the cost of electricity has increased. When the contracts end in 2007, electric companies must pay the market rate for electricity. Electric companies cannot continue to charge the fixed rate for electricity now that the market price has increased, just as no business can sell a product for less than they paid to buy it. This is why rates will increase. The Illinois Commerce Commission (ICC) must work with the electric industry to secure the lowest rates and a reliable infrastructure for consumers.
Q: What is the market price for electricity?
A: The market price for electricity is a result of several factors, including: how much electricity can be generated in a region, the cost to generate that electricity and the demand for electricity.
Supply and demand impact the pricing structure for electricity in any region. In areas where supply is low and demand is high, prices are higher. Conversely, if there is a surplus of supply and the demand is relatively low, prices are lower. The demand for electricity fluctuates during different times of day and also varies during different times in the year (for example, demand is higher in the evenings when many people come home from work, or during the summer when fans or air conditioners are running).
In most cases, electricity is purchased through contracts that attempt to average out the fluctuations in demand. Contracts secure low prices for electricity, allow for the resources needed to upkeep and maintain the infrastructure and a small percentage for profit (a rate which the ICC dictates).
