Under the wholesale/industrial competition model, the utility remains responsible for providing supply to residential and small commercial customers while marketers take on the responsibility of serving large commercial and industrial customers. For this model to function, there must be competitive independent power producers.
For this model to work, most regulators prefer an independent entity responsible for system operations. Since the system operator implements the rules that determine who gets access to transmission and whose units are ramped up or down in response to system needs, leaving the function within the utility could unfairly bias the markets. Thus, an Independent System Operator (ISO) or transmission system operator (TSO) is created to handle the system operations functions. This market structure also creates the need for entities to match generators with end users, so the role of the marketer becomes important.
In ISO markets transmission may continue to be owned by the utility but is operated under the direction of the ISO. In TSO markets transmission is separated from the distribution utility. In both markets the utility continues to own and operate the distribution system, providing distribution-only services to large customers and providing bundled distribution/supply services to smaller customers. The utility supply purchasing group acquires supply for all the smaller customers and has the option of obtaining supply from utility generation or through contracts with independent generators. In this model a competitive wholesale market is likely to evolve. Because of this competition, smaller customers should see some benefits if it does result in lower wholesale prices since the utility buyer has access to the lower-cost supplies.
Key issues for the regulator in this model include defining the arrangements the utility buyer is allowed to enter into to buy supply and determining how the cost of that supply is passed on to the customers who purchase it from the utility. Options for purchasing supply include bilateral contracts, spot purchases, and periodic auctions. Options for passing on costs include monthly or annual pass-through of costs or a rate cap that puts the utility at risk for costs above the cap.
Many regions that have undergone electric deregulation initially implemented wholesale/industrial competition or some variation thereof. But as markets matured over time, many have later extended supply choice to small commercial and industrial customers.