Restructuring shows Pennsylvanias mettle

April C. Murelio

Associate Editor

As Rodney Akers jogs along the Monongahela River or “Mon,” he looks beyond the brownfields once occupied by Pittsburgh`s thriving steel industry and into the future.

Two of those brownfields-Nine Mile Run, a 238-acre slag heap, and South Side Works, a 123-acre mill site-will in the next few years host homes, stores, theaters, parks and a high-tech industrial complex.

For Akers, Pittsburgh`s assistant city solicitor, these examples of economic revitalization testify to the impetus, initial success and potential of Pennsylvania`s restructured electricity market.

“We are a mature industrial state. We don`t have the best weather, so we have to find other ways to draw attention to our attractiveness,” Akers said. “Charging some of the highest electricity rates in the country wasn`t one of them.”

Little old lady from Munhall

Served by Duquesne Light, a DQE subsidiary and one of Pennsylvania`s highest-cost providers, Pittsburgh`s pre-restructuring experience played out daily across the state for municipalities, large and small businesses and constituents like “the little old ladies from Munhall.”

Elected in 1994 on an economic development platform, Mayor Tom Murphy discovered an ongoing exodus of businesses and their employees from the Pittsburgh area to surrounding communities served by Allegheny Power. On average, Duquesne charged residential customers 12 cents per kWh, compared to Allegheny`s 7 cents.

“It was bad enough that plants were closing, but we seemed caught in community warfare. Other factors were involved, but our research showed electricity rates played a large role,” Akers said. “Duquesne is a good utility and a good corporate citizen, but we became increasingly frustrated with the monopoly situation.”

Besides dealing with the economic drain, Pittsburgh`s municipal govern- ment tired of paying different prices for electricity used by street lights, its asphalt plant, Public Safety and administration buildings, etc.

And unless the city could negotiate a better price or use an alternative provider, Mayor Murphy`s plans for the Mon brownfields seemed thwarted.

This issue prompted several levels of legal action, which started with a September 1996 filing before Pennsylvania`s Public Utilities Commission (PUC) asking for choice within the sites. Although Allegheny filed a support motion, it withdrew from the effort in June 1997, two months after announcing plans to merge with Duquesne.

In statements released at the time, Allegheny said restructuring rendered the support motion moot.

Still uncertain how restructuring would play out, the city filed an antitrust suit alleging collusion and a subsequent appeal after the case`s dismissal in federal court.

However by late July 1998, Akers said the PUC made several rulings designed to ensure a combined Allegheny-Duquesne

would be subject to “genuine competitive market forces;” the city and Allegheny settled; and the merger plans appeared derailed.

In the midst of Murphy`s public debate about competition, Akers said a phone call from a “little old lady in Munhall” demonstrated just how utility competition issues affected people.

“Although her call specifically dealt with high gas rates, we knew it was happening on the electric side as well and that would be addressed first on a statewide basis,” Akers said. “Pennsylvanians were strapped with these high rates, and it had to stop.”

From taxis to free markets

Originally attached to a taxicab regulation bill, the Electricity Generation Customer Choice and Competition Act became law around 3 a.m. Dec. 3, 1996, launching what many believe is the nation`s most successful restructuring effort to date.

According to the Pennsylvania PUC, about two million of the state`s 5.4 million electricity customers are now enrolled in the Pennsylvania Electric Choice Program (PECP), with about 450,000 to 475,000 customers of all those eligible actually switching generation suppliers.

More than 72,000 customers participated in the pilot, which again industry analysts tout as the country`s largest and most successful. Because of these stats, an accelerated schedule brings competition to all customers by the end of 2001.

The PUC reports that all customers initially received about $458 million in savings through PECP. Those who shop around report discounts as high as 20 percent. And as 90 licensed suppliers, vie for attention, consumers are offered a variety of perks.

For example, DTE Edison America offers a $25 energy credit to existing members who refer a new member to the company`s Energy Club. DTE launched the club in September 1998. Besides energy savings, it offers a network of local merchants who give members discounts on everything from dinners to dry cleaning.

“Pennsylvania is blowing past every- one,” said Steve Rosenstock, electrotechnology policy manager with the Edison Electric Institute (EEI). “They did a lot of things right and created a very active, very thriving market.”

Getting it right

When Rosenstock and others talk about Pennsylvania`s success, they typically cite the following:

1. An all-inclusive and open process avoided the perception problems of back-room deals and benefits for the few.

lPennsylvania included 5 percent of the state`s electricity load in its pilot program, opening the doors to all customers-residential, commercial and industrial. “People in Pennsylvania didn`t feel like choice was just for the big guys. There was a real sense that `Hey, these savings are for me,” Rosenstock said.

lThe PUC dealt with stranded cost recovery-an issue that raises the hair on many a neck-as part of each utility`s public restructuring proceedings.

The state`s eight largest utilities received $11.5 billion of the $18.2 billion in stranded costs requested, with consumers expected to pay about 75 percent through competition transition charges (CTCs). However, most of those charges should be removed from the books and the bills over the next five to 10 years at the latest.

lGov. Tom Ridge and PUC Chairman John Quain built consensus around the restructuring effort with roundtable dis-

cussions in 1996 that included legislators, other state officials, utilities, suppliers and consumer groups.

“Did we get everything we wanted? Absolutely not,” said David Hackney, manager of public relations for Exelon Energy, formed in 1998 as an unregulated subsidiary of PECO. “But, there`s something here for all involved. That has made this market thrive. Not everyone has switched. A lot of people decided to stay with PECO, and that`s part of an active market.”

2. A comprehensive education program-led by the PUC and funded by the utilities-included public forums, extensive news coverage, customer mailings, a web site (www.electrichoice.com), and an ad campaign that “was more interesting and a whole lot more entertaining than California`s,” Rosenstock said. “I hate to pick on California. It did go first, and that`s commendable, but Pennsylvania obviously learned from that experience.”

3. Pennsylvania`s system of shopping credits, which varied for each incumbent utility`s service area, seems to work better than across-the-board mandated rate cuts. Although suppliers flock to areas with higher shopping credits and thus wider profit margins, all customers using the credits find some benefit, Rosenstock said.

– Customers of Allegheny, a low-cost provider, received a 3.16 cent shopping credit and no rate reduction. Market activity in the area has been mixed. PECO, Pennsylvania`s high cost provider, now offers customers an 8 percent reduction and about a 5 cent shopping credit.

Hackney said this offering attracted about 70 suppliers to PECO`s area. The utility still manages a 28 percent market share, and Exelon Energy appears to lead the supplier pack.

According to an RKS Research & Consulting survey of 100 businesses, with average revenues of $11.2 million, 54 percent of those participating in PECP (one-fourth or 24 percent of those surveyed) selected Exelon as their alternative supplier. Connectiv followed with 13 percent; PSE&G 13 percent and PP&L captured 8 percent.

Word to the wise

Hackney and Brian Crowe, PECO`s director of customer choice implementation, believe PECO and Exelon demonstrate how an oldline, monopoly driven utility can turn into a competitive company.

Faced with restructuring, Crowe said PECO segmented operations into three groups:

1. a generation and power trading unit;

2. PECO Energy Distribution, which is the provider of last resort; and

3. a ventures unit that includes Exelon.

Once reorganized, Crowe said PECO felt it could better handle the challenges involved with restructuring implementation, which included installing, expanding and enhancing a massive information infrastructure designed to handle exchanges between customers, suppliers and regulators.

Although the cost is still being tallied, PECO expects this investment to easily run into the millions. EEI estimates that it costs utilities $75 to $150 per customer to change its metering, billing, and customer information systems in preparation for retail competition.

“Even if your state isn`t currently discussing competition and restructuring, don`t be fooled,” Crowe said. “It`s coming quicker than you can imagine.”

Despite these challenges and pit- falls, most of those involved wouldn`t turn back even if they could. With the basics covered, the PUC can now turn its attention to loose ends like compe-titive metering and billing, with rulemaking proceedings for this issue currently underway.

As Pennsylvania continues along its restructured path, the state`s power companies have a clearer view than most of a competitive future, and what it means to turn a brownfield green.

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