March 11, 2012
The Morning Call
Sam Kennedy
More people shop for electricity as rates go down, but marketplace puts consumers at a disadvantage.
Now that the Lehigh Valley is in its third year of deregulated electricity, can we finally render a verdict on the matter?
Can we say, one way or the other, whether taking a big chunk of Pennsylvania's electric industry and turning it over to the marketplace was good idea? Has doing so led to a more robust and efficient electric system? Has it allowed consumers to shop? Has it given them a meaningful choice?
Most importantly, has deregulation saved ratepayers any money?
First, a little background: For just about as long as Pennsylvania had electricity, rates were determined through an elaborate legal process overseen by public regulators. Utilities would petition for rate hikes, and customers would protest, but the regulators had the final say.
Then in 1996, an 84-page measure to deregulate Pennsylvania's electric industry was slipped into a bill that had originally called for a one-word change in the state's taxicab law. The arcane text had been crafted behind closed doors under the consultation of Houston energy company Enron, which at that point was still famous, in a good way. Finally, then-Gov. Tom Ridge persuaded lame-duck lawmakers to pass the taxicab-turned-deregulation bill in their last, frantic act before heading home for Thanksgiving.
That, in a nutshell, is how Pennsylvania came to be a state — one of 15, plus the District of Columbia — with some form of deregulated electricity.
Subsequently, implementation took place in phases, and it varied from one region of the state to next. In 2005, at the very moment the 4,500 customers of tiny Pike County Light & Power Co. were reeling from a 72 percent rate hike, PPL Electric Utilities customers were enjoying a decade of relatively stable prices, the result of an extended cap on generation charges.
For most Lehigh Valley residents, the full impact of deregulation wouldn't be felt until Jan. 1, 2010. That's when the cap came off and PPL rates jumped 30 percent. (The schedule for Met-Ed, the utility that serves eastern portions of the region, was a year behind PPL's.)
The big increase in electricity rates was tied to the high price of power plant fuel — coal, oil, natural gas and uranium — bought on contract before the Great Recession, and before the Marcellus Shale gas boom. In a quirk of how generation rates are determined on the Mid-Atlantic power grid, the price of natural gas has disproportionate influence. So it follows that PPL's electricity rates track natural gas, and that the rates have fallen in inverse proportion to the recent increase in domestic gas extraction.
Today, PPL residential customers pay about 12 cents a kilowatt hour, or about 12 percent more than they did during the final days of rate caps.
But at the same time, residents of other parts of the state are paying less because of deregulation. Philadelphia and Pittsburgh, for example, had some of the highest electricity rates in the country in the mid-1990s. But today their rates are closer to those of the Lehigh Valley.
Pennsylvania Consumer Advocate Sonny Popowsky describe the changes as "an evening-out of prices across the state."
According to PPL, a forceful advocate of deregulation since its inception, the marketplace has imposed a healthy discipline on the electricity business. On the retail side, for example, customers have reduced energy consumption in response to rising prices. (For PPL's Electric Utilities, a division of PPL Corp. of Allentown, the trend resulted in a 4 percent drop in revenues in 2010.) a division of PPL Corp. of Allentown.
"The decisions and investments made by consumers toward energy efficiency will provide long-term benefits when generation prices rise again eventually," PPL spokesman Michael Wood said in an email.
And on the wholesale side, power plants are more efficient than ever. Specifically, they spend less time idled for maintenance and more time actually generating electricity.
"Suppliers are incented by the market to keep the plants available, well maintained and productive," Wood said. "Otherwise, they wouldn't earn any return."
Another benefit of the marketplace touted by deregulation advocates is "choice." Indeed, consumers may switch from one electricity supplier to another — provided they are willing to put the necessary time and effort into the multistep process of doing so. (The state office of consumer advocate posts directions on its web site, http://www.oca.state.pa.us.) About 40 percent of PPL's residential customers are now buying electricity from a supplier other than PPL.
At this point, a little explanation may be helpful: Think of the supplier as the vendor directly connected to actual electricity generation. The vendor is also involved with transmission — that is, moving the electricity over high-voltage power lines so it can reach your local distribution network. Generation and transmission charges are bundled together on your bill, and account for about two-thirds of the total rate. The remaining charge on your bill is for distribution, or the delivery of electricity directly to your home over local wires.
Generation is the unregulated expense. You can change what you pay for generation by switching to a supplier with a different rate. But what you pay for transmission and delivery is still overseen by regulators, and it doesn't change if you switch suppliers.
Some consumers have switched to "green" suppliers because they want to buy electricity generated with renewable resources, such as hydro, wind and solar power, even though this often means paying a premium. But usually people who switch just want to save a buck.
Among the options available to customers of PPL is electricity from suppliers with easy-to-confuse names such as Energetix, Mxenergy and Spark Energy. But if these companies offered prices cheaper than PPL's at one point in time, that's no longer the case.
Turns out the cheapest electricity now available to PPL residential customers is from PPL itself. So why are so many of PPL's customers — the aforementioned 40 percent — paying more to PPL's competitors? A likely explanation can be found in the structural problems on the retail side of the electricity marketplace:
First, price information is not free-flowing, nor readily accessible. Do you know how much you are paying for electricity right now? Do you know how that compares to what other suppliers are offering? If you are like many people, the answers to those questions are no, and no.
What's more, the marketplace suffers from a significant time-lag that leaves consumers at a disadvantage. Utilitiestake one to two billing cycles to process customer requests to switch suppliers. But suppliers change their prices every three months. That means by the time a switch actually takes place, the rates that prompted the change in the first place may no longer be in effect.
Industrial customers face additional complications. Under the Byzantine rules of deregulation, big electricity consumers such as manufacturers, academic institutions, hospitals and shopping malls are not allowed to establish long-term contracts with traditional utilities. For such contracts, they have to turn to alternative suppliers.
After the expiration of rate caps, some industrial customers saw their electric bills nearly double, according to Pam Polacek, a Harrisburg lawyer who represents the Industrial Energy Consumers of Pennsylvania. She said her clients soon found that though they could shop for electricity among outside suppliers, those suppliers were like gas stations — selling basically the same thing for roughly the same price.
"There aren't a lot of price differences," she said, "because they are all buying their product from the same wholesale market."
Deregulation, Polacek believes, has come at the expense of economic development.
"Pennsylvania isn't as attractive [to manufacturers] as it used to be," she said. "The inability to have stable and predictable pricing...is a problem."
Only one prominent public official involved in the original deregulation debate remains in office: Popowsky, the consumer advocate. Back in the 1990s, he sided with Gov. Ridge and Enron. But as rate caps gave way to price spikes a decade later, he began to wonder aloud if the move to the marketplace was actually a mistake — albeit an honest one.
Now, his feelings have shifted once again. He likes what he sees — PPL customers exercising their right to chose among electricity suppliers, for example. He is happy about other developments, too, such as Philadelphia and Pittsburgh's better rates, and a proliferation of wind and solar power statewide.
Nobody can say for sure whether deregulation is better than the old regulated approach, Popowsky says. Too many variables make direct comparisons impossible. Plus, weighing pros and cons is an inherently subjective exercise. The best anyone can do is give an opinion.
But if you want the consumer advocate's, he's happy to give it: "Bottom line is, I think it has worked pretty well."