Pennsylvania News and Analysis

September 2003

Highlights

PUC Calls for New Reliability Standards of Power Grid

Residential Switching Continues to Decline

PUC Approves Plan to Assign PECO Customers to Alternative Suppliers

Provider of Last Resort Working Groups Offer No Directions or Details

Utilities to Seek Rate Increase When Rate Caps Expire

Deregulation Leads to Huge Tax Savings for Utilities

Commission Supports Standard Market Design

Philadelphia Gas Works Restructuring Plan Approved

While Pennsylvania’s competitive market seems to have stalled, it managed to escape serious problems during the August 14 power outage that affected parts of Pennsylvania as well as seven other states and Ontario, Canada. The PJM Interconnect, the Regional Transmission Organization (RTO) that controls electricity transmission in most of Pennsylvania, New Jersey and Maryland, has been touted by many as having stopped the blackout from cascading all the way down to Florida. Within PJM Interconnect, the transmission system has been upgraded to the tune of $760 million in the last six years, according to John Hanger, President and CEO of Citizens for Pennsylvania’s Future (PennFuture). He said the transmission system worked the way it was supposed to on August 14. The PJM may be the most positive result of restructuring in Pennsylvania. However, the negative results for the state include a decline in customer switching, a depleted tax system for school districts and communities, and higher utility rates when the rate caps expire.

Reliability of the power grid
Even before the power outage occurred, the Pennsylvania Public Utility Commission (PUC) had called for tighter reliability standards for electric utilities.

In a June 26, 2003 Press Release, the PUC announced a set of tentative regulations that would stiffen reliability standards regarding the number and duration of power interruptions. The proposed new standards stem from a comprehensive review of electric service reliability undertaken by the PUC in May 2002, and from findings in a June 2002 report by the Legislative Budget and Finance Committee, which examined how the PUC monitors reliability. The PUC also proposed several changes to reliability reports that electric utilities are required to submit each year.

Switching status
While Pennsylvania still has a reputation as the national model for electric deregulation, customer switching, especially residential, has continued to decline, and only about five percent of residential customers are with alternative suppliers.

While Pennsylvania’s shopping statistics look better than those of some other states, the number of customers served by alternative suppliers has nose-dived since April 2001 when the number peaked at 708,071 residential customers.

As of July 2003, alternative suppliers served 232,225 (or 4.9 percent) of the 4.7 million eligible residential customers. This includes 30,215, or 2.2 percent of PECO’s residential customers assigned to Competitive Discount Service (CDS). It does not include 153,770 former CDS customers now served by PECO on a CDS rate. The five other utility territories had participation percentages of less than one percent as of July 2003.

… the thing to do is to slow the rush toward deregulation in order to think through and solve potential problems before more utilities are forced into bankruptcy and more customers are blacked out.
M. Granger Morgan and Lester B. Lave, Co-Directors of the Carnegie Mellon University Electricity Industry Center, August 2003

We were promised deregulation would bring down electricity prices; that the market would spur new plant construction and grid upgrades. But for most ratepayers, prices have stayed the same or gone up. The transmission system has been let go, and the new plants that have been built have taxed the grid to dangerous levels.
David Hughes, Executive Director of Citizen Power, August 2003

So as rate caps and stranded cost recovery end, Pennsylvania should make sure that aggregation, demand response, competitive bidding to serve default customers and other measures to make sure that the local utility does not dominate the retail market are in place.
John Hanger, President and CEO, Citizens for Pennsylvania’s Future (PennFuture), August 2003

Click here for more history on Pennsylvania's electric shopping statistics.

Bidding plan
In the most recent attempt to encourage electric competition, the Public Utility Commission (PUC) on May 1 approved a plan that will assign 400,000 of PECO Energy’s residential customers to alternative electricity suppliers. The "market share threshold" plan is a requirement of PECO’s 1998 restructuring settlement. It states that the company must randomly assign customers to alternative electricity suppliers if less than 50 percent of its customers had selected another supplier as of January 1. As of the first of the year, approximately 7.6 percent – or about 104,000 – of PECO’s 1,375,666 residential customers were being served by another supplier.

The market share threshold plan will be completed in two phases. In the first phase, winning bidders were supposed to serve 100,000 residential customers, who would be randomly assigned to licensed suppliers in the summer of 2003. Then, in the second phase, another bidding program will be held to assign the remaining pool of residential customers to new suppliers by December 2003. Bids for this service must offer at least a 1.5 percent discount from PECO’s current price to compare for residential accounts and at least a 0.5 percent discount from the price to compare for residential heating accounts. Twenty percent of the customers will be assigned to suppliers offering service with a renewable energy component (containing at least 5 percent renewable resources), but bids for this service do not have to offer a discount from PECO’s current generation price (or price to compare). Customers will receive notices about their assignment and be offered the option to decline the assignment and return to PECO without charge at any time. PECO will continue to handle all billing and customer contact, but the customer’s assigned generation supplier will be identified on the customer bill.

An earlier PECO attempt to shed residential customers under the deregulation requirement failed when the chosen alternative supplier – NewPower, an Enron Corp. spin-off – bailed out of the market in April 2003.

The Commission, however, appears committed to fully exploring the competitive bidding structure to provide default service regardless of its lack of success to date. In a June 2003 paper, Managing Default Service to Provide Consumer Benefits in Resturctured States: Avoiding Short-Term Price Volatility, the author, Barbara Alexander, reports:

The success of the PECO Energy assignment of customers under its May 1, 2003 Order may be the key to future developments in Pennsylvania. Preliminary results do not appear encouraging for this approach, however. The first round of bids for residential customers under Phase I of the program did not result in any bids. As a result, bids will be sought again in December 2003 for 375,000 residential PECO Energy customers. On the other hand, the bids solicited for small commercial customers was successful and 3 suppliers offered service to 65,000 small commercial customers at a 1.25 percent discount from the current generation service price offered by PECO Energy. Clearly, the notion of competitive bidding coupled with rate caps to assure affordable and stable prices for Default Service can result in benefits to customers and afford the opportunity to competitive suppliers to obtain a large number of retail customers without incurring marketing and acquisition expenses.

Default supply
In March 2003, the Pennsylvania Public Utility Commission (PUC) reconvened a Provider of Last Resort Working Group composed of electric industry representatives, consumer advocates and other interested stakeholders, to begin developing rules that would define the duties and rights of providers of last resort service in the electric industry.

Under the state’s electric restructuring law, after the transition period (which varies by utility and can be more than 10 years from the 1996 law) electric consumers will continue to receive generation service from the incumbent utility (electric distribution company or EDC), or a Commission-approved provider of last resort if either they do not choose an alternative electric generation supplier (EGS) or they contract with an EGS for electric energy that is not delivered. EDCs or Commission-approved POLRs are obligated to "acquire electric energy at prevailing market prices," and the EDC or Commission-approved POLR must be permitted to "recover fully all reasonable costs." Although the law contemplates the possibility of an alternative POLR providing default service to consumers, it does not set forth any specific parameters under which an alternative POLR may qualify or offer this service, hence the need for the working group, the PUC said in announcement about the meeting.

Rate caps
The presence of the rate caps and their longevity have prevented any adverse impact on customers due to the changes in the short-term wholesale market since the onset of restructuring. However, some rate caps are scheduled to expire at the end of 2004. Both PPL Corp., which provides electricity to much of central Pennsylvania, and Duquesne Light Co., the Provider of Last Resort, have announced plans to ask state regulators to approve higher electric rates when their rate caps expire on January 1, 2004. Neither utility would divulge how much of an increase they would seek.

Below is a 13-year history of residential electric rates in Pennsylvania:

Pennsylvania Average Annual Price per kWh (nominal cents)

	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003*
Residential	9.7	9.6	9.6	9.7	9.7	9.9	9.9	9.08	9.01	9.08	9.37	9.12

Source: Energy Information Administration
*As of May 2003

Note: Utility bills are accessible here, then arrow down to "Electric Utility Operational Report."

Tax savings for utilities
The major utility companies in the state are paying 85 percent less in taxes on their plants, down from about $120 million annually to about $20 million, as reported in the York Daily Record on July 16. Meanwhile, the utilities are passing on their real estate levies to their customers, based not on what the companies are currently taxed, but on the far higher sums of six years ago.

This is a point of contention for thousands of communities and school districts across Pennsylvania that have seen much-counted-on tax revenues from the utilities shrink, in some cases to almost nothing. The City of Philadelphia, for instance, is losing $20 million a year and fiscally stressed schools nearly $6 million.

This situation was born in the complex deregulation deals the generators cut with the Pennsylvania General Assembly and the PUC in the mid-1990s. They agreed to give up their monopolies and allowed competitors to sell power on what had been their exclusive turfs, although in most utility territories competition hasn’t yet come about.

When deregulation was negotiated, the power companies argued that without a guaranteed rate of return, which was set by the state when power companies were regulated, they could lose billions of dollars. Investments in equipment and facilities, they claimed, might not produce revenues as before. The losses they projected were called stranded costs. The state allowed seven utilities to pass $11.4 billion in stranded costs onto customers over a number of years. Included were the plants’ annual property taxes at their 1997 peak. The calculation didn’t include the steep drop in taxes that would follow, nor has an adjustment been made. Consumer advocates say the utilities should cut their electric rates to match their tax savings.

For the previous 25 years, the power companies’ property taxes were relatively cut and dried. Payments were calculated by the state and put into the Pennsylvania Utility Realty Tax Act fund, or PURTA. For 1997, $167.5 million was paid in, the bulk of it by the two electric behemoths, PECO and Pennsylvania Power and Light. The state government distributed the money annually to every county, town and school district according to their overall tax revenues.

When the state loosened its grip on the electric industry, the commercial power plants (25 major ones, 55 much smaller) were gradually released from PURTA. For the first two years, 1998 and 1999, the utilities were allowed to appraise their plants for tax purposes; the fund tumbled to $60 million.

On January 1, 2000, the plants were removed from PURTA and put on the property rolls of the locales in which they sat, to be assessed and taxed like any other business. On the local tax rolls, the companies have the same right as any property owner: they can appeal their assessments. And they have done so aggressively, arguing that when they gave up their monopolies, their plants plummeted in value.

Contesting the assessments, the utilities said, is part of their duty to customers and shareholders to contain costs. Appeals have been filed on virtually all plants in Pennsylvania. While their cases are pending, the utilities typically make interim tax payments that are considerably lower than what they would pay under current assessments. It is an option not available to homeowners.

Standard market design
Unlike many other restructured states, Pennsylvania supports the federal government’s attempt to impose a Standard Market Design on transmission services that would essentially deregulate transmission grids, change how power prices are regulated and induce utilities to purchase electricity and access to transmission on the open market. See October 2002 On-line Journal

Most of the state’s electric utilities are a part of a regional network, the PJM (Pennsylvania-Jersey-Maryland) Interconnection, which is considered to be a national model that is responsible for the success of Pennsylvania’s restructured market to date. Under the SMD’s vision of a network of regional transmission organizations (RTOs), PJM would continue, and at least five other RTOs would be created, a move that has drawn criticism from other parts of the country. See March 2003 On-line Journal.

The Pennsylvania PUC has gone on record stating that adoption of SMD is essential to the future of electric competition nationwide.

Features of Pennsylvania's restructured market
There are several features of Pennsylvania restructuring law that are unique to the state and that account for its success, or at least for its lack of problems that other states have experienced. They include:

1. Pennsylvania has price caps on both the generation and the transition and distribution portions of the bill. Rates for customers who do not choose a new generation supplier and for transmission and distribution service are capped at January 1, 1997 levels. Rates for generation, including transition charges (or stranded costs), are capped at January 1, 1997 levels as well. The duration of the rate caps varies by utility; some generation rate caps are in place until 2008 or 2010, or until the utility’s stranded costs are paid off, whichever is shorter. So far, only one utility, Duquesne Light, has paid off its stranded costs. As a result, Duquesne has eliminated the competitive transition charge from its bills, and its rates were reduced by 16-20 percent as of March 2002, with another reduction of 39 percent for electric heat customers in February 2003. Most distribution utilities have extended their distribution rate caps until 2003 or 2005, or until the utility’s stranded costs are paid off, whichever is shorter. (For more details on how the rate caps are structured, click here.)

2. The restructuring legislation requires the local electric distribution utility to serve as the default provider while the utility collects its stranded costs, or until 100 percent of its customers have choice, whichever is longer. After that time, the PUC may establish the method by which the default provider is selected. Customers who choose a new supplier may return to their distribution company without penalty -- that is, they may still obtain the service under the rate caps.

3. Pennsylvania's "shopping credit" or default price for generation service (which marketers must compete against) has in some cases been more than the market price for electricity. This has allowed for more competitive shopping and supplier activity, especially in the service territories of PECO Energy (Philadelphia) and Duquesne Light (Pittsburgh). However, higher market prices during 2001 have been blamed for a drop in competition because some marketers could not beat the shopping credit price and pulled out of the state.

4. In contrast to California, Pennsylvania’s wholesale markets are generally considered to be workably competitive and to have adequate generation resources. According to John Hanger, President and CEO of Citizens for Pennsylvania’s Future (PennFuture) and former member of the Pennsylvania Public Utility Commission (PUC), Pennsylvania is extremely fortunate in that most of its electric utilities are a part of a regional network, the PJM (Pennsylvania-Jersey-Maryland ) Interconnection. In an August 26, 2003 posting on PennFuture’s website, Hanger said, "In order to isolate problems quickly and to avoid communication problems between multiple utility control areas, all grid operating information and authority to control the grid should be under as few roofs as possible. Ideally, information would be under one roof. Also responsibility and authority should be on one desk. The buck must stop on one desk. A system of multiple controllers and balkanized authority is a recipe for blackouts. On August 14, the buck – and the blackout – stopped at PJM."

Natural gas markets
As of July 2003, 203,915 (or 9.9 percent) of the state's 2,050,758 residential natural gas customers were served by alternative suppliers. As with electricity, natural gas switching is decling. As of January 2002, alternative suppliers served about 12.5 percent of the state’s residential customers.

The utilities with the highest percentage of switched customers are three western Pennsylvania-based gas utilities -- Columbia, Equitable, and Dominion Peoples. Most of the state’s natural gas consumers have been able to choose a competitive supplier since July 2000.

Philadelphia Gas Works restructuring plan
A major milestone in natural gas restructuring occurred in March 2003 when the PUC approved the restructuring plan of Philadelphia Gas Works, the largest gas utility in the state, serving approximately 500,000 households. Under the 1999 gas restructuring law, the municipal utility was placed under the jurisdiction of the PUC, effective July 2000. Prior to that, PGW was not required to file a restructuring plan.

The approved restructuring plan allows PGW customers to shop for an alternative natural gas supplier beginning in September 2003. It also unbundles rates and services, establishes a customer choice program design, sets forth customer protection standards (commonly known as Chapter 56 protections), provides for consumer education, and addresses universal service issues. The PUC also approved the utility’s proposal to phase out its senior citizen discount program, which provided a 20 percent discount to seniors 65 and older, regardless of income. Customers already in the program as of August 31 would continue to receive the discount.

The restructuring plan also calls for the creation of an advisory committee to ensure that customers continue to receive essential information about Chapter 56 consumer-protection policies, changes in PGW policies, and changes to low-income and senior discount programs.

Representatives from the PUC, the state Office of Consumer Advocate, community-based organizations and other stakeholders will sit on the committee. In addition, the natural gas competition law requires PGW to participate in the statewide consumer-education program administered by the Council on Utility Choice (CUC). The CUC provides information on the benefits of Utility Choice through a website.

Other gas issues
As was the case in much of the country, Pennsylvania was subject to gas price escalations during the winter of 2003; prices remained high in the spring and summer.

In March 2003, the PUC reconvened a Supplier of Last Resort (SOLR) Working Group with much the same purpose as the above-mentioned working group for electricity. Under its natural gas restructuring law, the Commission must "promulgate regulations setting forth the standards for approving an alternative supplier of last resort…including a mechanism to ensure that the rates charged by any alternate supplier of last resort (SOLR) are just and reasonable." Several other provisions contained in the law generally describe the obligations of the SOLR and establish parameters for the approval of an alternative SOLR.

The law defines a SOLR as a natural gas distribution company (NGDC) or natural gas supplier (NGS) which is designated by the Commission to provide natural gas supply service to one or more of the following groups of customers: 1) those who have not chosen an alternative NGS or who choose to be served by their SOLR; 2) those who are refused supply service from an NGS; or 3) those whose natural gas supplier has failed to deliver its requirements. As of July 1, 2004, any party may petition the Commission to become the SOLR to some or all customers, except those customers who have not chosen an alternative natural gas supplier.

As with electric working group, the working group was supposed to focus on development of regulations that establish the standards for approving an alternative SOLR and provide for a mechanism to ensure that the rates charged by the alternative SOLR are just and reasonable. Commission staff developed proposed principles to govern the development of SOLR regulations. (Click here, then arrow down to link to the PDF.)

However, according to the aforementioned June 2003 report by Barbara Alexander, preliminary meetings for both the gas and electric working groups did not produce any amendments to the Pennsylvania restructuring stature that would clarify the intent and method of pricing Default Service.

Other resources
Alexander, Barbara. Default Service: Can Residential and Low Income Customers Be Protected When the Experiment Goes Awry?, April 2002. This paper was originally published in April 2001 and updated in October 2001. This version reflects the most recent information available for state activities with respect to Default Service through 2001 and early 2002. However, readers are cautioned that the states described in this paper routinely consider changes to state restructuring policies that have a significant impact on the nature, price, and purpose of Default Service.

Alexander, Barbara. Default Service: Can Residential and Low Income Customers Be Protected When the Experiment Goes Awry?, April 2001, and an Update to the April paper issued in October 2001. These papers summarize and make some preliminary conclusions about the development of a default or provider of last resort service for residential and small commercial customers as part of the move to retail electric competition. Both papers highlight the status of default rates and impacts of restructuring-related developments on residential and low-income consumers in the states of California, Massachusetts, New York, Pennsylvania, and Texas.

Allegheny Institute for Public Policy. Pennsylvania’s Electric Choice Program: Progress Through 2001, January 2002. Reviews the state’s shopping statistics to date and counters criticism of the Pennsylvania model, concluding that the state is on the right course. Links to other Institute papers on restructuring are available on the website.

Center for the Advancement of Energy Markets. Benefits of Competition in the Mid-Atlantic (PJM) Region, September 2003. This study concludes that restructuring benefits consumers, both large and small, in the Mid-Atlantic region. It reports that restructuring produced $993 million total savings in Pennsylvania and that households within the state save $117 annually, on average, because of restructuring. It further predicts future savings of $10.4 billion for the state.

Keystone Research Center. Pennsylvania Utilities: How Are Consumers, Workers and Corporations Faring in the Deregulated Electricity, Gas and Telephone Industries? May 2001. Analyzing preliminary data from 1994 through 1999, claims that restructuring has led to longer power outages, higher profits, negative in-state reinvestment, and higher executive salaries. Urges the state to conduct a comprehensive assessment of deregulation.

National Center for Appropriate Technology. Managing Default Service to Provide Consumer Benefits in Restructured States: Avoiding Short-Term Price Volatility, June 2003. This paper examines recent developments with respect to the design and pricing of Default Service in states that have adopted retail electric competition and it identifies the key attributes of a model Default Service policy. Six states including Pennsylvania are examined in detail.

PennFuture. Electricity Competition: The Story Behind The Headlines - A 50-State Report, August 2002. Analyzes national price data from 1996 through 2001 and concludes that deregulation has lowered rates in most states, including Pennsylvania, and has contributed to the growth of clean energy.

Pennsylvania Public Utility Commission. Keystone Competition, Summer 2003. This inaugural newsletter is a publication of Pennsylvania’s Public Utility Commission to present a snapshot view of competitive markets and major issues being addressed in the telecommunications and energy competitive markets.

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Last Updated: 10/01/2003