By Christina Gostomski
Of The Morning Call
June 23, 2006
A deregulatory process begun years ago is about to crash over Pennsylvania consumers and is expected to bring dramatically higher utility bills. So far, just Pike County is feeling the pain. But over the next few years -- in 2009 for PPL Corp. -- rates are expected to soar across the state.
The question now, energy experts say, is how to mitigate costs and brace consumers for the shock.
"This is only the first day in a long journey. We are here today not to debate the efficacy of electric competition but how to get from here to 2009," Pennsylvania Public Utility Commission member James Cawley said Thursday at a commission hearing on how Pennsylvania should prepare for the end of electric price caps.
The caps will expire in 2009 and 2010 for most of the state. Consumer costs for electricity generation have been frozen since deregulation began in 1997.
PUC members took testimony from some of the biggest names in the energy industry on how to handle the state's changing electricity market. Some company officials argued largely for advertising campaigns to soften the blow to consumers by educating them.
Others tried to convince the PUC they had the cheapest plan for how to buy electricity and sell it to consumers. The commission will set the rules for how utilities buy electricity in the new market.
PPL estimates that under its plan, customers will pay 20 percent to 30 percent more for electricity when the caps come off. PECO, whose caps will expire in 2010, estimates its charges will rise 11 percent.
"Pennsylvania consumers have been shielded from these forces by having their rates frozen at 1997 levels," said commission Chairman Wendell Holland.
When Pennsylvania deregulated its local utilities, allowing regulated utilities to sell their power plants, many believed that consumers would get cheaper rates because they would be able to buy power from companies other than the local utility.
But in places like Maryland and Delaware, which are farther ahead than Pennsylvania in the deregulation process, that hasn't turned out to be the case. And most energy experts say that at least initially, Pennsylvanians won't see lower prices either. In fact, they're far more likely to see price increases.
Pike County Light & Power Co. consumers saw their electric bills rise by more than 65 percent this year. In Delaware, Delmarva Power Co.'s residential electric rates jumped 59 percent in May. And in Maryland, Baltimore Gas and Electric Co. consumers are expected to see a 72 percent increase in their electric bills beginning in July.
The reasons for the higher prices? Natural gas and coal prices have soared since the caps were put in place, and the electric competition that deregulation was supposed to create never materialized. The caps deterred alternative power suppliers because they couldn't beat the utilities' capped rates.
"The main cost driver is fuel, no question about it, and that is going to continue," said William Brier, vice president of policy and public affairs for Edison Electric Institute, a trade association in Washington, D.C.
A price increase after a decade-long cap was inevitable, said John Hanger, president of the Harrisburg-based environmental group PennFuture, "Ten years' passage of time is going to lead to increases."
As part of deregulatory agreements made with utility companies in 1997, electricity generation and transmission rates were capped for most Pennsylvanians. The transmission rates have already expired, so consumers have seen increases on that part of their electricity bill.
Utility companies will buy electricity for residential customers in a wholesale market through long-term contracts. Much of the electricity will be purchased at auctions.
On Thursday, utility officials debated the cheapest way to buy electricity in the new market. Some argued for charging consumers more now and allowing utility companies to hold the money until the caps expire. If electricity costs more in 2009-10 than it does now, the money raised now would go toward that purchase price so that customers' electricity bills wouldn't dramatically increase.
If electricity costs less when the caps expire, consumers would be refunded their money plus interest. The downside to that plan: New customers who don't pay in now would still benefit.
Officials from PECO and PPL want the commission to allow them to begin buying the electricity they will need when their rates expire in staggered shifts now. If they wait until the caps expire to buy the electricity, and the price at auction is high -- as it was after Hurricane Katrina when Pike County Light & Power and BG&E bought their supply -- consumers could be stuck with dramatically high prices.
But, they say, if they buy one-third of the electricity at an auction in 2008, another third in 2009 and the final portion in 2010, a high price at one auction won't hurt as much. In New Jersey, where caps have already expired, a similar plan worked and didn't result in the high spikes seen in Pike County, where the auction was held on a single day.
Additionally, PECO and PPL officials want the commission to hold statewide auctions so electricity suppliers can sell in bulk. Suppliers, they say, will be more willing to offer low bids in that case.
Critics say that if electricity rates drop the year the cap expires, the PECO-PPL plan wouldn't allow consumers to reap as large a benefit as they otherwise would.
Another approach, advocated by Duquesne Light, whose caps have already expired, is to allow utility companies to buy power from multiple sources and manage it in a portfolio similar to a mutual fund. Electricity is then sold to consumers at a fixed rate.
Duquesne customers did not experience the dramatic rise in costs that Pike County encountered when its caps expired.
But critics of that plan say it does not offer consumers real choice.
CAPS COMING OFF
Rate caps set by a decade-old law deregulating electrical utilities are expiring, causing monthly bills to climb. Here's when local caps come off:
PPL Corp.: 2009*
PECO Energy: 2010*
*Caps expire on the final day of the year.
Source: Pennsylvania Public Utility Commission
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