Pa. leaders have failed to protect us from worst of electricity deregulation

Patriot-News Op-Ed by David Hughes

December 29, 2009

Pennsylvania decision-makers’ poor understanding of the electricity industry led them into a big mistake 13 years ago: Giving up the state’s authority to control electricity-generation prices.

Consumers were promised a competitive retail electricity market that would restrain prices. The warnings that such a market would not develop went unheeded, but they turned out to be correct.

We’re told that today’s electricity prices are at early 1990s levels. That happens to be because prices at that time were off the chart for customers of utilities that invested in nuclear generation. Prices were trending downward by the mid-1990s, and they could have continued downward were it not for capping some rates at high levels in 1999.

Now Pennsylvania is approaching the end of the purported transition to full deregulation, with electricity monopolies still in place.

In the PPL service territory, that will mean a 30 percent rate increase for residential customers in January. Other utilities, such as PECO and FirstEnergy (including Met-Ed and Penelec), will go to full deregulation in January 2011.

rtunately, the governor and the General Assembly leadership are refusing to implement serious mitigation strategies to lessen the adverse impact of full deregulation.

Competition in electricity generation cannot happen because the profit margin on a kilowatt-hour of electricity is too small. That’s why the regulatory paradigm was created in the first place.

Utilities needed a huge customer base to make any money in this capital-intensive industry. The quid pro quo for their monopoly status was that they would guarantee reliable, affordable electric service. And except for where utilities opted for expensive nuclear power, that was what happened.

The state abandoned many consumer protections when it gave up regulating generation prices. Electricity generators no longer have to build plants or sell power to customers in their service territories, as they did under regulation.

This means fewer plants are being built in the state, and it could mean even higher prices. The problem is that a few utilities own all the generation capacity and have no serious competitors, so they can charge whatever the market will bear.

Deregulation proponents keep promising that a market will develop when the rate caps come off. But we saw what happened when the caps ended in the Duquesne Light service area in 2002: Not much.

There was a rate decrease due to the sale of Duquesne’s generating plants, but it has been virtually offset by subsequent rate increases. No competitors entered the Duquesne market, and customers have virtually no alternative supplier choices.

A couple of competitors have said they intend to offer service in the PPL service territory in 2010. However, these offers are likely to be limited to a relatively small number of customers at a discount too small to encourage customer switching. PPL’s monopoly status will remain unchallenged, and PPL Corp. (not PPL Electric Utilities) will pocket all of the 30 percent increase.

The biggest deregulation mistake was letting utilities sell their generating assets, often to wholly owned, unregulated subsidiaries. That has made it difficult to mitigate the impact of the coming rate-cap expirations.

However, there are, at least, two important measures state leaders should implement to ease the burden on ratepayers.

First, the Legislature should pass a law placing any newly built generation capacity under regulatory control. Over time, this would ensure that enough energy is available to meet demand at a reasonable price, forcing unregulated electricity suppliers to lower their prices. 

Second, the state Public Utility Commission should open an investigation into costs claimed by the utilities. Before deregulation, utilities said the power plants they had already built would lose money in a competitive market.

To get them to support deregulation, the state permitted them to collect $12 billion in stranded costs from customers during the transition to deregulation. This figure was supposed to represent the difference between what the utilities spent on their generation assets and their worth on the market.

Now that we know what the actual market price for electricity is, the PUC can determine whether those generators were really uncompetitive. It’s likely that an investigation designed to true up the cost estimates will find that there were few, if any, stranded costs.

If that’s the outcome, the money should be refunded to ratepayers. A $12 billion refund could help offset rate hikes until other steps are taken to address the long-term consequences of the deregulation fiasco. 

David Hughes is executive director of Citizen Power, a nonprofit advocacy group based in Pittsburgh. www.citizenpower.com.