PECO president addresses utility regulators’ conference, ponders future of industry deregulation


PHILADELPHIA, July 8, 2002 — Utility regulators that desire to restructure electric markets should encourage standard market designs and push for distinct segmentation of the market, according to Ken Lawrence, president, PECO Energy, speaking recently at a utility regulators conference.

A 32-year veteran of the industry, Lawrence said local utilities are best suited to serve as the “provider of last resort” (POLR) for residential and small commercial customers in the mass market and should be compensated beyond the recovery of wholesale energy costs based on this obligation to serve.

However, he said, large business and institutional customers should be mandated to shop in the open market, much as they do currently for natural gas and other commodities. Competitive options for these consumers clearly exist, and they have the expertise to manage their commodity purchases.

Lawrence was one of the featured panelists at the MidAtlantic Regional Utility Regulatory Commissioners (MARUC) conference held July 1-2 in Virginia. He brought the unique deregulation perspective as president of the Exelon Corporation subsidiary that consists of both PECO and ComEd, which serve two of the nation’s top five largest retail markets with more than five million customers combined in Philadelphia and Chicago, respectively.

Electric industry restructuring, he said, has brought considerable change and complex challenges for utilities, regulators and consumers. Nevertheless, it has created “long-term price stability unlike any other industry”, new investment in power generation that will serve future needs in support of our economy, and more efficient, customer-focused utility operations.

“We have a greater understanding of how it takes time to restructure an entire industry and foster new competitive markets. Success requires tremendous change — some dramatic, some evolutionary adjustments,” he said. As competitive markets emerge, Lawrence said two distinct market segments will evolve, the mass market and the large users.

“It is clear to us that the power supply market will bifarcate with large businesses, institutions and government entities much more active than the mass market. Yet, it isn’t clear what the demarcation line will be (in terms of load volume),” he said.

Industrial and commercial consumers should be mandated to participate in the open market. “Absent that, these consumers will play in the open market when they benefit and retain the utility’s safety net when prices rise,” he said.

Only mass market consumers require the protection of a provider of last resort, and switching by large users would adversely impact the POLR function by an unacceptable degree. The POLR must be able to plan a fairly steady supply for “a reasonably clear, known group of customers”.

Based upon the early experience in Pennsylvania and Illinois, Lawrence said residential and small commercial customers want the opportunity to shop but are less inclined to switch power suppliers. Instead, these customers place greater value in “simplicity, predictability and reliability.”

Rate caps that were considered essential to protect consumers during the transition period to full competition proved to be detrimental to the development of the consumer market. Retail suppliers found wholesale power, customer care, marketing and back office costs greater than the earnings potential in the energy market.

In his remarks, Lawrence said competition has the best chance for success in major metropolitan areas where standard wholesale and retail market designs serve as a critical foundation, noting the ever-expanding PJM Interconnection LLC as a “model that is working and others are willing to join.”

He said industry planners must understand the expectations of all stakeholders, which have divergent views on matters like the role of utilities and utility performance, ratemaking options, market prices and the need for price signals for consumers and independent power producers, and accommodating new market entrants.

PECO, An Exelon Company, delivers electricity to 1.52 million customers and natural gas to 442,000 customers in southeastern Pennsylvania. Based in Philadelphia, PECO and its sister utility, ComEd in the Chicago area, are subsidiaries of Exelon Energy Delivery.

Its parent, Exelon Corp., is one of the largest energy service companies in the U.S. with the largest retail utility customer base, one of the largest power generation fleets and a leading wholesale energy marketing operation in North America.

In 2001, PECO delivered 35.1 million megawatt hours of electricity and 81.5 billion cubic feet of natural gas, generating $3.9 billion in revenue for Exelon.

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