GUEST COMMENTARY: Pennsylvania benefited from California’s early foray into deregulation

Tom Hill, PECO Energy Co.

In hindsight, it’s easy to look good in Pennsylvania when comparing us to rolling blackouts and the threat of bankrupt utilities brought about by deregulation in California. But in 1996 when Pennsylvania’s utilities sat down with a group of interested parties as widely divergent as one could imagine, it was not so clear.

At that time, deregulation was beginning to steamroll across the country. It was apparent that Pennsylvania’s legislators and regulators were not far behind. Traditional utilities, including PECO Energy, frankly, were less than enthusiastic about giving up the safe haven of regulated rates, but saw that they could either be an active part of the solution or be left behind.

Constituencies had markedly different agendas as the process first began in the summer of 1997. Utilities were concerned most with recovery of costs for existing generating assets; consumers wanted price protection and lower rates; new market suppliers wanted access to customers.

To bridge the gap in positions, deregulation in Pennsylvania evolved collaboratively, whereas California had used a more top-down approach. Prior to the passage of the Pennsylvania Electric Competition Act in 1997 that removed electric generation from regulation, interested constituencies worked to build consensus under the sponsorship of Gov. Tom Ridge and the leadership of John Quain, the chairman of the Pennsylvania Public Utility Commission (PUC). Consumer advocates, legislators, regulators, new market entrants and utilities built a model that reached compromise and resolution.

A similar model ultimately was used by each utility as it restructured its business to operate in a free market. Customers were permitted to choose their electric supplier while companies like PECO Energy still delivered the power over their distribution systems.

A key component of this model is the consumer rate caps, which means that PECO Energy customers can be confident that the rates they pay for generated electricity are capped through 2010. This protects against upward price pressure including seasonal price spikes.

While California has similar consumer protection laws, there is no protection for utilities against spiraling costs they incur when purchasing energy from wholesalers in the higher priced spot market. The result is that utilities in California, which were forced to divest their generation assets, must now buy power in the marketplace at high prices and sell it at much lower prices, creating severe cash flow problems and the threat of bankruptcy.

In addition, high demand is outpacing supply in California because the state doesn’t have enough generating capacity. PECO Energy and other regional utilities can look forward to nearly 40,000 MW of capacity already on the drawing board, although it’s uncertain whether all of that will be realized in the short term. Even without this new capacity, PECO Energy and others can meet current winter and summer demands.

It’s not enough to have adequate available power, there also must be a well-managed mechanism to distribute it and handle seasonal peaks and valleys. The mid-Atlantic region has one of the oldest and most successful power grids in the United States. The Pennsylvania New Jersey Maryland (PJM) Interconnection, which is cited as a model by the Federal Energy Regulatory Commission, facilitates an open, competitive wholesale market. It allows participating utilities to buy and sell energy and schedule bilateral transactions.

The result is PECO Energy and other participating utilities have long-term contracts that provide a reliable source of power at established prices.

As a member of PJM, we also have multiple fuel resources at our disposal, like coal and oil, along with gas-fired and nuclear plants. California’s regulation generally discouraged development of new generating supplies and relied heavily on conservation, passive generating options such as solar and wind and demand-side management, each of which provided inadequate supply to meet the demands for additional power.

It may be too soon to cite California as losers and Pennsylvania as winners in this new era of electric competition. And, really that’s not the main issue. Rather, this crisis shows that it is essential that all of the key players find some common ground and work together so that ultimately, the customer receives quality service and reliability at reasonable market prices.

Hill is chief financial officer of PECO Energy Co. in Philadelphia. He may be contacted at 215-841-5555.

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