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Pushed by Enron and crafted behind closed doors, the 84-page measure to deregulate Pennsylvania's electric industry was slipped into a bill that called only for a one-word change in the state's taxicab law.

"This legislation," then-Gov. Tom Ridge promised on the eve of the vote, "will mean lower electric bills for working Pennsylvania families, more jobs for working Pennsylvanians and more choices for Pennsylvania consumers."

Passage by bleary-eyed lawmakers came in a last-minute vote in the middle of the night.

Nearly 12 years have passed since then, and there's yet another year and a half to go before electricity deregulation takes full effect in the Lehigh Valley. Instead of going down, PPL Corp.'s rates are expected to surge an unprecedented 34 percent for homes and up to 43 percent for some businesses on Jan. 1, 2010, when a cap on what the Allentown company can charge for electricity is due to expire.

Businesses are threatening to leave the state. The choices they thought they'd get have yet to materialize. In the PPL service territory, for example, most customers have only one source of electricity -- the same one they've always had: PPL.

Yet, most of the key figures responsible for bringing deregulation to Pennsylvania in the 1990s stand by their words and actions.

"It was part of a package to make Pennsylvania a leader among states," says Ridge, now a consultant in Washington, D.C. "I still think that, at the end of the day, competition is the better model."

Says former PPL Chief Executive Officer William Hecht, an influential early advocate of deregulation, "Fundamentally, it was in the consumer interest. It still is."

He makes his case with a familiar argument: "It will result in the most efficient power supply system." And he offers a new one, about conservation: "I believe that raising the price [of electricity] is going to be a very powerful tool ... in reducing the environmental impact of human activity."

Other industries exposed to the forces of the marketplace delivered lower prices. Airlines and telephone companies both experienced a sharp increase in competition and a wave of innovation after deregulation; suddenly, people could fly cross-country at bus-ticket prices and call long-distance at local rates.

But electricity, it turns out, is just different -- on both sides of the supply/demand equation.

First, power plants cost billions of dollars to build. Would-be competitors to PPL and the other big, established electric companies don't enter the market either because they can't come up with that kind of money, or because they're afraid they won't recoup their investment. Other than a restored coal-fired power plant, no new major baseload generation (the kind that's used year-round) has come online in Pennsylvania under deregulation.

And then, electricity is, unlike air travel and telephone service, a necessity with no substitute. If the price of a plane ticket goes up, people may choose to travel overland or simply stay put. But they have no alternative to electricity when it comes to lighting and powering their homes and businesses; they must buy it, no matter the price.

Such issues have raised doubts that the marketplace will ever deliver the lower electricity rates predicted by free market advocates. Indeed, rates are rising faster in states that restructured their electric industries than in those that retained traditional regulatory control, according to an analysis of U.S. Department of Energy data by Power in the Public Interest, a watchdog group in Olympia, Wash.

Still, the original proponents of deregulation caution against a rush to judgment.

"Deregulation, we knew, was a long-term proposition," says John Quain, former chairman of the Pennsylvania Public Utility Commission. "Once those rate caps come off, I'm still convinced, philosophically, that competition will beat regulation."

Competition -- it was one of the all-American-sounding words Enron employed in the mid-1990s to win converts in Pennsylvania. The Houston company had sent its lobbyists on a nationwide crusade to transform the electric industry.

In Harrisburg, they found a ready audience. Not only were Philadelphia and Pittsburgh burdened with some of the highest electricity rates in the country, but the newly elected Ridge, a Republican whose party also dominated the Legislature, was eager to put his stamp on the state.

Only a few people spoke up during a brief legislative debate that preceded the vote on the taxicab-turned-deregulation bill. Among the most vocal of these was Sen. Vincent Fumo, D-Philadelphia.

Fumo predicted it would lead to "the largest transference of wealth between the poor and middle class to affluent corporations that has ever occurred in America."

Others just wanted more time to consider the arguments. "Most members have not been given a chance to read this bill," Rep. John Lawless, R-Montgomery, pleaded on the House floor.

In the end, Ridge won bipartisan support at 4 a.m., Nov. 26, 1996 -- the final, frantic act of a lame-duck Legislature before heading home for Thanksgiving.

Deregulation "inevitable"

Electricity deregulation was inevitable. Or so it seemed in the early 1990s, says Hecht, who retired as CEO of PPL in 2006.

He recalls the message he heard from a federal official at an electric industry convention: "Get over it, and stop fighting it, and instead figure out how to make it work, because this is going to happen with you or without you."

The it was this: Regulators would be stripped of their authority to set prices. Prices would be determined by the marketplace instead. DE-regulation.

The federal government had made such a dramatic transformation possible with the Energy Policy Act, signed into law by President George H.W. Bush in 1992. The act required electric utilities to open their transmission lines to competitors, thereby allowing non-utilities to build power plants and participate in regional wholesale electricity markets. But electric utilities were, under state law, still monopolies within their service territories. Their customers had no choice but to buy from them.

In Pennsylvania, industrial electricity consumers -- companies such as Bethlehem Steel, Air Products and Chemicals, and Lehigh Cement -- were among the first to call for change. They wanted to be able to shop around for electricity -- which was something deregulation was supposed to allow -- because they believed competition for their business would force electricity providers to lower their prices. The simple cause-and-effect logic of this theory was the source of its appeal.

Enron, however, had something else in mind. The company understood deregulation would enable it to do business in states that would otherwise be off-limits, says Terry Fitzpatrick, who, as a legislative aide to then-state Sen. David Brightbill, R-Lebanon County, helped draft deregulation legislation.

"I can't overstate the importance of Enron in the whole thing," says Fitzpatrick, now a lawyer for the Electric Power Generation Association in Harrisburg. "They did all the things, like hiring lawyers and lobbyists ... testifying at hearings, all the usual things a company would do to make its presence felt."

Kenneth Lay, Enron's founder, went so far as to enlist powerful friends to lobby for his company. In 1997, as Enron sought to gain a foothold in Pennsylvania, he tapped then-Texas Gov. George W. Bush to call Ridge. "I called George W. to kind of tell him what was going on," Lay later told The New York Times. "And I said that it would be very helpful to Enron ... if he could just call the governor [Ridge] and tell him this is a serious company, this is a professional company, a good company."

Robert Bloom, who was a member of the state's Public Utility Commission, learned of Enron's activities in Harrisburg firsthand.

"I was at a local bar," he recalls. "And this lobbyist brought this guy over to me." The guy was Lay, he says. "I shook his hand."

Hecht, however, has grown tired of hearing about Enron. "No conversation about business, let alone energy, can go on for very long without Enron coming up," he says.

While Enron spread campaign contributions around Pennsylvania in the 1990s, the amount was a fraction of what came from Pennsylvania companies and their top bosses, according to campaign finance records at the State Archives in Harrisburg. In 1996, Hecht gave Ridge $5,000; Joseph Paquette, PECO's CEO, gave him $10,000. Enron, by comparison, contributed $1,500 to the House Republican Campaign Committee -- but nothing to the governor that year. When Enron did write a check for Ridge in 1998, it was for $500.

"Early in my tenure as CEO, we had a lot of people dig into [deregulation]," Hecht says. "One of the conclusions we reached is that it is good public policy."

Electricity prices may be going up today, but Hecht -- like other deregulation supporters -- attributes the cause partly to the rising costs of fuels, namely coal, oil, natural gas and uranium; and partly to a shortage of power plants. "Prices are high for a reason. They are telling us something," he says. "Prices are telling you to build [more plants]."

If not for deregulation, prices would be even higher, Hecht insists. The real problem, he argues, is that American consumers have been spoiled by cheap electricity.

"I should think an environmentalist would say, "I believe that we're using energy inefficiently. I believe that we're wasteful,"' says Hecht, who today is board chairman of the Federal Reserve Bank of Philadelphia.

Past sets stage

"Greedy, unreasoning selfishness." That might sound like a comment from an angry PPL customer today, but the quote was actually uttered decades ago, by Republican Pennsylvania Gov. Gifford Pinchot. It's how he characterized the behavior of electric company executives in the 1930s as he was working toward the creation of a new state agency -- the Public Utility Commission -- to rein in what he regarded as excessive profits.

Who, then, could have imagined that the unraveling of Pinchot's most enduring gubernatorial legacy -- state oversight of the electric industry -- would begin in the mid-1990s with two members of the PUC itself?

They were Quain, the chairman, and Commissioner John Hanger. Their co-commissioner, Bloom, described the men, both of whom were appointed by Democratic Gov. Bob Casey, as the "fathers" of deregulation.

"All we were doing was raising rates," says Quain, now a Harrisburg lawyer. "As commissioners, we were saying there has got to be a better way of doing things."

Regulation, aided by technological advancements, had delivered ever-declining electricity rates in the decades that followed World War II. But in the 1970s and 1980s, prices rose as construction costs soared, especially for nuclear power plants.

The cost of PECO's Limerick Nuclear Generating Station in Montgomery County, for example, grew to $6.8 billion by the time it was finished in 1990, more than 20 times the original estimate in 1969. The massive expense was passed on to customers in the form of PUC-approved rate hikes.

Quain explains why: The PUC was required to balance the needs of utilities and consumers. And the utilities' lawyers and experts were often able to make the case for higher rates.

"They put extraordinary resources into that," he says. "So for the most part, rate increases just kept on coming."

Quain and Hanger began talking seriously about deregulation in 1994.

Hadn't other long-regulated industries -- airlines and telephone, trucking and natural gas -- made the transition to competitive markets? The trend had taken off during the Carter administration and accelerated under presidents Reagan and Bush.

"I started from the premise that we live in a free-market economy, and when competition can exist it should," says Quain, who continues to specialize in utility issues.

In the summer of 1996, the five-member PUC issued a report officially endorsing deregulation. After that, Ridge tapped Quain to lead the so-called stakeholder meetings -- a process by which a plan to restructure the electric industry could be crafted outside the normal legislative process.

The stakeholders identified and invited by Ridge and Hanger included all the state's utilities and advocates for commercial and residential electricity consumers, plus out-of-state energy providers such as Enron. All told, several dozen people attended the meetings, including the aides of key lawmakers from both parties. They gathered in an oak-paneled PUC chamber, arguing over the industry's future in leather arm chairs around a conference table.

"It was an incredibly inclusive cast of characters. I don't know of anybody who wanted to be in the room that wasn't," says former PUC Commissioner Hanger, now the head of an environmental organization called PennFuture. "It was probably the most democratic process I've ever seen for producing legislation."

A Nov. 16, 1996, editorial in The Morning Call, however, suggested the secretive nature of the meetings, which took place over 200 hours in September and October that year, might have violated the state's Open Meeting Law. The meetings, the editorial said, "clearly violate the spirit of the law, and appear to be outside the letter of the law, as well."

The first mention of the meetings by Pennsylvania's major newspapers didn't come until mid-October -- after 15 sessions had already taken place.

"That lack of transparency," says Dan Desmond, former director of the now-defunct Pennsylvania Energy Office, "prevented people in the public from understanding fully what was happening."

They would find out soon enough: PPL and the other utilities agreed to temporary rate caps in exchange for permission to continue billing customers for "stranded costs" -- essentially, the billions of dollars they had yet to recoup for nuclear power plant construction.

For the utilities, this meant they would not be at risk of bankruptcy should deregulation lead to a drop in electricity prices and leave them with inadequate revenue to pay down their loans. The caps, meanwhile, were intended to protect residential and business customers should prices move in the other direction.

"At the time, I thought it was pretty fair," Pennsylvania Consumer Advocate Sonny Popowsky says of the compromise, which he supported. "It was surprising to me -- the degree of consensus."

But since then, Popowsky has come to wonder if deregulation was actually a mistake -- albeit an honest one. He does not take issue with former PUC chairman Quain's defense of the stakeholder meetings.

Says Quain, "Everybody had their hearts and minds in the right spot."

Last-minute vote

"It's time to end the retail monopoly on electric generation," Gov. Ridge declared at a news conference Nov. 18, 1996, a week before Pennsylvania's two-year legislative session was to end. That day, lawmakers got started on their make-over of the House Bill 1509, the taxicab bill.

In its original form, the taxicab bill called for changing the word "six" -- as in the number of years a taxicab permit would be valid -- to "eight." It was during the next 48 hours, in the hands of a Senate committee, that the bill would become as long as a novella and get its new name: "The Electricity Generation Customer Choice and Competition Act."

By attaching deregulation to an existing bill, debate in the House was limited. Then, although the bill passed through three Senate committees, it was not sent to the Consumer Protection Committee, which earlier in the year had held five hearings on the concept of deregulation. Delaware County's Clarence Bell, chairman of the committee, was so upset about the dodge he would become the only Republican to vote against the bill.

At his Nov. 18 news conference, Ridge ratcheted up the pressure. He said passage was an urgent matter, because deregulation was also being discussed in Washington, D.C. "If we wait, we risk losing a Pennsylvania solution for the solution of the federal government," he said.

Harrisburg was aflutter, as it always is at the end of a session. Lawmakers were left to figure out the revised bill in an atmosphere of constant distraction.

"Many legislators that I've spoken to since then have admitted there were many aspects of it that they didn't understand," Desmond, the former Energy Office director in the Casey administration, says.

Ridge rejects any suggestion that he was responsible for what lawmakers did or did not do. "It was not as though people didn't know the Legislature was working on deregulation. It wasn't done in a vacuum.... It was well known," he says. "There could have been plenty of hearings, if [lawmakers] chose.... If they wanted more legislative input, I think they could have had it."

The Senate debate on House Bill 1509 came on Nov. 25, the last full day of the session. It was brief and intense.

Fumo, the Philadelphia senator, mocked the stakeholder meetings that led to the bill's creation, commenting wryly that he had never seen so many lobbyists work on behalf of consumers. He accused Republicans of "screwing consumers." Lt. Gov. Mark Schweiker, who was chairman of the debate, shut off the senator's microphone.

Fumo is still angry. "We were cut out of all the negotiations and all the planning, and they sprung it on us," says the senator, who in March of this year, after being indicted on federal corruption charges and suffering a heart attack, announced he would retire from politics.

Deregulation was approved in the Senate 40-10, and then, in the House in a predawn vote, 171-28.

The fight over electricity deregulation, though, was not over. Fumo would make a last stand -- in court. In a lawsuit, he challenged the legality of attaching deregulation legislation to a taxicab bill.

He argued the move violated the Pennsylvania Constitution's prohibition against altering a bill's original purpose and its requirement that a bill be considered on three different days in both legislative chambers. But a judge, citing the court's long-established reluctance to interfere with internal legislative business, dismissed the case in 1998.

(Electricity deregulation would not be the last controversial legislation to follow such a path to the governor's desk. The bill responsible for the infamous 2005 legislative pay raise is but one example. The bill that legalized slot machine casinos also originally had to do with something else. Last year, however, a different judge ruled in a similar case that such parliamentary maneuvers are illegal.)

In retrospect, Fumo says he understands why he failed to persuade more of his colleagues. "Deregulation was an esoteric issue," he says. "I don't think they had any concept of the long-range repercussions."

He claims the electric industry is reaping all the benefits from highly profitable power plants -- he calls them "cash machines" -- that ratepayers paid for through years of stranded cost charges on their monthly bills.

"I don't mind them having the cash machines," Fumo says of PPL and other electric companies, "I mind them not paying for them.... That's the part I find offensive."

Meanwhile, from Washington, D.C., where his staff still refers to him as the governor, Ridge says Pennsylvanians have saved billions of dollars thanks to rate caps. "That's a huge benefit." Another benefit, he says, is the electric industry's much improved operational performance; power plants are cranking out more kilowatts today than they did before, when the industry's profits were controlled by regulators. "I think we probably drove a lot of inefficiencies out of the system."

Asked about the role of Enron, Ridge replies with a laugh: "It would be tough for a Texas company to have influence in Pennsylvania." He explains his support of deregulation as personal philosophy.

"Frankly, as a Republican, I believe that whenever you can ... creating a competitive environment can be better for the consumer," he says. "I had a strong belief that the market would be better if we deregulated."

Backlash

Pennsylvania was, as Ridge promised, "a leader among states." It was the fourth in the country to deregulate its electric industry, doing so just two months after California became the first.

Other states were soon heading down the same path -- although some of those that hadn't already gone too far to turn back slammed on the brakes after California's energy crisis in 2001. An investigation into the cause of the electricity shortage and resulting brownouts would find that Enron was hoarding power to drive up prices.

Today, 16 states and the District of Columbia have deregulated to some degree. Of those, many are, like Pennsylvania, wrestling with the consequences.

In Maryland, shortly after caps ended in 2006 and the price of electricity jumped 72 percent, voters elected a new governor who promised to take on the electric industry. Illinois, hit with a price spike last year, extracted a $1 billion ratepayer refund after claiming to have found evidence of bid-fixing and collusion among energy companies. Ohio, meanwhile, is trying to head off rate shock before its caps end in 2009; lawmakers there recently restored to state regulators the authority to set electricity prices.

In Pennsylvania, not everyone who supported deregulation in 1996 remains as convinced of its merits as Ridge, Hecht and former PUC Chairman Quain.

Popowsky, the state's consumer advocate, is particularly worried about the slow pace of power plant construction. New power plants could, by increasing the supply of electricity, drive down prices. But, he says, because plants are too expensive for would-be competitors to build, Pennsylvania is overly dependent on its established electric companies, such as PPL.

Unlike Hecht, Popowsky does not believe that today's high prices are likely to spur these companies to build. Rather, he reprises an argument originally used to justify oversight of the electric industry during Gov. Pinchot's tenure.

"The way the market functions is that, it seems, it rewards these companies for doing nothing," he says. "The less they build, the higher the prices go."

Among the most forceful critics today are the industrial electricity customers that were among the first to call for deregulation in the early 1990s. David Kleppinger, a Harrisburg lawyer who represents the Industrial Energy Consumers of Pennsylvania, a group whose members includes Air Products and Chemicals Inc. and Lehigh Cement, says the industrials did not appreciate back then just how different electricity is from other commodities.

Kleppinger now believes the electricity market is failing to deliver the most basic objective of deregulation: "The benefits do not flow down to the consumers."

PPL, on the other hand, is clearly thriving. The company had back-to-back record annual profits in 2006 and 2007, and it expects to set a new record after the expiration of caps in 2010.

Nationwide, some electric companies have not done so well under deregulation. Atlanta's Mirant operated 13 power plants across the country when it filed for Chapter 11 bankruptcy protection in 2003. But others -- including Met-Ed's parent company, FirstEnergy Corp. of Akron, Ohio, and PECO's parent, Exelon Corp. of Chicago -- have enjoyed healthy rates of return.

So, if these companies are already making so much money, why do they have to raise rates? How much profit is enough? Such were the questions some in Harrisburg began to ask last year, especially after the likely size of PPL's 2010 rate hike became clear.

At a packed PUC hearing in Bethlehem in April, Sen. Lisa Boscola, D-Northampton, gave a fiery speech that resonated with the angry crowd. "These are middle-class families," she stressed. "Their families' budgets will be decimated in 2010 when PPL's rate cap expires."

In 1996, as a newly elected member of the General Assembly, Boscola was among those who voted for deregulation. "We were told ... more competition leads to more choices and lower prices," she recalled in a speech on the Senate floor this year. "No one -- I repeat, no one -- voted for what exists today ... There is no free market for electricity today. There is no competition."

Now Boscola is calling for electricity rates to be frozen for another five years, something PPL says could force its subsidiary, PPL Electric Utilities, into bankruptcy.

Such a fate would be particularly unfair, argues current PPL CEO James Miller, after so many years of rate caps. "PPL has lived up to its obligations," he says. "The power that has been supplied to customers has been at a level significantly below market price."

EPILOGUE: Ridge has moved on, from Harrisburg to Washington, D.C. Hecht is retired from PPL. Quain left the PUC for the private sector.

Kenneth Lay? He died of a heart attack at age 64 in July 2006, shortly after he was convicted of -- but before serving any jail time for -- conspiracy and fraud. Enron, his creation, has ceased to exist.

But the debate over electricity deregulation goes on and on.

Copyright © 2014, Los Angeles Times
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