Predictions of a 30% rate hike in 2010 likely to be on the low side

PPL Corp.'s 2010 electricity rate hike will be even higher than 30 percent, if predictions the Allentown company's top executives shared with investors this month prove to be accurate.

In August, PPL told state regulators the average bill could go up 20 percent to 30 percent in 2010, when the company's rate cap expires. Last week, in a news release, the company refined the figure to 30 percent. Both of those estimates were based on current prices for future electricity.

But what PPL didn't say last week is that its top executives believe current prices are low and are therefore bound to go up. PPL Chief Operating Officer Bill Spence made the point clear, albeit in industry jargon, during a conference call with financial analysts on May 3.

''Based on our view of the market fundamentals, we are convinced that additional upside is not yet fully reflected in the current quarter prices,'' he said.

If so, the same judgment -- low and bound to go up -- also applies to PPL's estimate of a 30 percent rate hike.

In his comments to analysts, Spence was not talking about the 2010 rate hike, which is shaping up to be the biggest in PPL history, but about PPL's own bright financial outlook.

PPL is not just a utility delivering electricity to 1.4 million Pennsylvania customers. In fact, the utility side of its business represents only a small fraction of overall revenues. The real moneymaker for the company is selling power it generates on the open market.

So, while an increase in electricity prices may have a regrettable impact on PPL customers, it would be good news for the company's bottom line. Indeed, PPL is forecasting its earnings will increase by roughly half by 2010.

''We are, admittedly, seeing some very, very positive issues as far as 2010 and beyond,'' PPL Chief Executive Officer Jim Miller told the analysts.

The rate cap due to expire on Jan. 1, 2010, applies to what PPL customers pay for electricity generation. Essentially, that component of customers' electricity bills was temporarily frozen in 1997 under Pennsylvania's deregulation plan. Two smaller components, covering the costs of electricity transmission and delivery, were not frozen.

In the post-rate-cap era, the side of PPL that generates and sells wholesale electricity will be free to charge utilities the going rate on the open market. PPL's own utility, meanwhile, will buy the electricity at that price and pass on the cost to its customers.

At 30 percent, the 2010 rate hike would translate into an extra annual expense of more than $300 for the typical PPL customer, who now pays about $1,100 a year for electricity.

In an interview this week, PPL spokesman Dan McCarthy described the 30 percent figure as an estimate based on a ''snapshot'' of current prices for future electricity. He said the prices -- and, thus, the rate hike estimate -- could go up or down.

PPL's top executives, however, seemed to have little doubt about the matter during the conference call. ''There is just nothing that jumps out at us to say that prices are likely to fall,'' Spence said. ''It's pretty well-known that power prices are up and are going to stay up.''

Spence explained his reasoning: The region's electricity supply, already stretched thin, is expected to dip below a critical threshold by next year. But mild weather, depressing the cost of power plant fuel, has kept electricity prices from reflecting such ''scarcity.''

''We believe, however, this is temporary,'' he said.

Told about PPL executives' expectations, Sonny Popowsky, Pennsylvania's official consumer advocate on matters concerning utilities, said he was inclined to agree. He blamed a shortage of generation capacity in the region.

''I think there is a distinct possibility of higher prices than people anticipated even a few months ago,'' he said.

McCarthy, the PPL spokesman, said the plan put forth by PPL's electric utility -- to buy 2010 electricity in chunks incrementally over the next three years -- will help consumers by reducing their exposure to temporary spikes in electricity prices.

For the 4,500 customers of Pike County Light & Power Co., on an earlier deregulation schedule than PPL's, such a spike led to a 72 percent rate hike. It happened in 2005 -- shortly after Hurricane Katrina triggered a run-up in energy prices.

McCarthy said PPL will keep its customers up to date about the execution of its plan to buy electricity incrementally. ''As we have more solid numbers, we're going to make them public,'' he said.

During the May 3 conference call, analysts listened intently to what PPL executives had to say about electricity prices. Then, during the question-and-answer period, one analyst asked what else should be taken into consideration ''just so we don't get too irrationally exuberant.''

PPL CEO Miller said the worst-case scenario would be ''any type of political intervention,'' which he characterized as unlikely.

Consumer advocate Popowsky seemed to go along with that point as well.

Pennsylvania's regulated electric industry of yesteryear can't be re-created, he explained. It has been broken up, and many of the pieces, such as power plants, have been sold off.

''You can't just go back and say: I want those plants back,'' Popowsky said.

sam.kennedy@mcall.com
610-8820-6517
http://www.mcall.com

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