State of Deregulation: Pennsylvania remains frontrunner, but market could hit wall

Kathleen Davis, Associate Editor

Restructuring proponents often tout Pennsylvania as the single shining jewel in the deregulation crown.

Up until a few months ago, it seemed the Pennsylvania market could do no wrong. It was better, stronger, faster than the rest. These days, however, even Pennsylvania looks a bit winded and disheveled. The state has been faced with rising wholesale prices, retreating competitors and a series of customers returned to their default service providers.

All the turmoil led Kathleen Magruder, vice president of government affairs for NewPower Company, to characterize the current market as “backsliding.”

“The position in Pennsylvania is not nearly as good today as it was a year ago, much less two years ago,” Magruder stated.

“Quite honestly, a lot of the rules and regulations that were put in place three years ago before anyone had actually deregulated turned out to not work in the real world,” she added.

A keystone in the process

HB 1509, the Electricity Generation Customer Choice and Competition Act was passed in December 1996. The original plan was to split consumers into thirds, allowing the first third to choose a supplier by January 1999, the second third would be added in by January 2000 and the final slice would be granted the power to pick by January 2001. (Utilities themselves were required to submit restructuring plans by September 1997.) The dates were eventually rolled back a year so that the final third of customers would begin retail choice in January 2000.

When January 2000 rolled through, opening retail access to all, the Pennsylvania Office of Consumer Advocate reported that just over 507,000 customers had switched to alternate suppliers. By July of that year, the numbers had steadily increased to 528,000. PECO reported that 45 percent of its industrial load, 44 percent of commercial load and nearly 18 percent of residential load had switched. GPU’s numbers hovered around the halfway mark with 40 percent of industrial load and 38 percent of commercial switching, and Duquesne Light reported 28 percent of residential load had switched.

However, July 2000 also saw the first problematic cracks in the process. The Pennsylvania Public Utilities Commission (PUC) approved a change in the default service rates based on the idea that some consumers were “gaming” the system. (Customers were returning to the incumbent utility for the summer when prices were higher, making the default a better deal.) The PUC okayed market-based rates for default service.

Then rising fuel costs hit the fan that winter. In December GPU asked for a deferral of losses that it incurred through rising wholesale costs (attributed to rising fuel costs) to balance the number of returning customers. (GPU was unable to procure a supplier for 20 percent of its “provider of last resort” load.) The decision was put on hold until May 2001, although GPU claimed that projected losses in 2001 could exceed $145 million due to the rising costs of purchasing wholesale power. A settlement was finally approved by the PUC just last month that allows GPU to defer its wholesale power losses through 2005.

Meanwhile, back in January of this year, PECO randomly chose 300,000 residential customers and switched them to NewPower Company, which had been selected by PECO to provide “competitive discount service” from March 2001 through January 2004. (Customers can opt out of the program without penalty.) Other alternative suppliers were not quite so lucky.

Numbers in need of resuscitation

Utility.com, which had been serving as an alternate electric generation supplier in Pennsylvania, went belly-up in March. The Office of Consumer Advocate filed a complaint for refunds against the company and with the PUC on behalf of customers, garnering an approximate $70,000 in refunds to over 1,000 of Utility.com’s Pennsylvania customers. Customers who are owed $500 or less have priority, with a $200,000 fund set aside for those refunds. A complaint was also filed on behalf of customers returned to their utility who have lost promised savings on their bill. While the complaint has been sustained and over $668,371 can be proven, the Office of Consumer Advocate admitted that they do not know whether any money will be available to pay the claims.

In July, the Pennsylvania Office of Consumer Advocate released its latest edition of electric shopping statistics. They stated that 591,596 customers were participating in the open electricity market at that time, a bit above the numbers for the year before. However, those numbers are also well below the 787,846 customers listed for the April issue just a few months before. The Office also noted that about half of the remaining customers were former PECO customers buying power at below market cost as part of the state’s discount power program.

Those declining numbers represent significant amounts of commercial and industrial customers, as well as residential. In April, 77,421 commercial customers had chosen an alternative supplier. By July, that number dwindled to just under 16,500. Industrial customers slid from 2,354 in April to a mere 456 in July. The plunge in MW demand saw the largest slide on the industrial and commercial side as well. While a little over 130,000 residential customers bailed from the alternative supplier programs in July, they only represented about 270 MW. The smaller numbers of commercial and residential customers leaving the program, on the other hand, made a dent of 3,090 MW.

A head above water

Despite the frightening numbers to the contrary, Pennsylvania remains at the peak of the deregulation game. The July update of the Retail Energy Deregulation Index (RED Index), which is published twice a year by the Center for the Advancement of Energy Markets, still ranks Pennsylvania first of America’s fifty in terms of restructuring. (The index uses 22 different attributes to ground those findings.) However, the Index also indicated that Texas (No. 2), Maine (No. 4) and New York (No. 3) are making “the most measurable strides,” while Pennsylvania is slipping.

“While California’s crisis has brought a lot of positive attention to Pennsylvania’s model, many customers in the Keystone State are returning to their original utility suppliers,” stated Ken Malloy, CEO of the Center.

“It underscores how important it is to put the right fundamentals in place if consumers and suppliers are to benefit over the long haul,” he added.

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Officials at PJM Interconnection (of which Pennsylvania is a large chunk) released a study this summer that concluded the six markets operated by PJM were “reasonably competitive” in 2000, which supports the RED Index findings for Pennsylvania. The FERC-required report, prepared by PJM’s market monitoring unit, assessed the day ahead, real time, daily capacity, monthly capacity, regulation and monthly fixed transmission right auction markets. While giving those six a relatively low-wattage green light, the unit stated that “there are potential threats to competition in the PJM markets that require ongoing scrutiny.”

“The state of the market report showsellipse that competition is working in PJM,” said Joseph Bowring, manager of the market monitoring unit. “The report also shows that PJM needs to continue to develop its markets and to continue to develop design modifications to ensure that competition is maintained and strengthened.”

NewPower’s Magruder told EL&P that the company agrees with Bowring’s statement, but that they are not content that PJM’s markets are truly open to full competition. In fact, the company has filed a complaint with FERC alleging that the installed capacity charges (ICAP) are “exorbitant.” The complaint also stated that the ICAP is “unjust and unreasonable, and unduly discriminatory and preferential” against new market entrants.

“We saw Pennsylvania jump out to a really good start a couple of years ago,” Magruder stated. “What has happened along the way, though, is that ICAP has caused dislocation and distortion in market prices. Shopping credits have not kept up to the true cost of serving the customer, and, as a consequence, you see many marketers leaving the market or going out of business.”

“There are very few of us still there,” she added. “And with ICAP the way it is, I don’t believe you see anyone [in Pennsylvania] with a really competitive offer for [residential] customers.”

Phillip Harris, president and CEO of the PJM Interconnection disagrees. In a statement before the U.S. House of Representatives in August, Harris concluded that restructuring “has worked” in the PJM region.

“PJM as we know it today was born out of a vision to create a robust competitive wholesale market. We believe we’ve delivered on that vision and the American consumer in our region is better off as a result,” he added.

But not all is rosy in Harris’ region, according to Magruder.

“We [NewPower] see that there is very real ‘bad behavior’ going on out there [in PJM] that really does affect new market entrants who don’t own generation,” she stated. “It makes us think that this [ICAP issue] is a ploy to get us out of the market.”

“I’m not a conspiracy theorist,” she added. “On my good, upbeat, happy days, I really think that these are people who finally woke up and saw that they could use the rules to benefit themselves. If I were a conspiracy theorist, however, I’d say that the utilities looked at this and saw it as an opportunity to really shut down the competitive business out there.”

With sliding participation numbers and squabbles within the PJM market community, it looks like Pennsylvania may not be the keystone in the foundation of American electric restructuring for too much longer, an observation that Magruder wholeheartedly agrees with.

“Don’t get me wrong, we think Pennsylvania is basically a good market,” she stated. “But, Texas is on its way to the top. That’s the model I try to sell.”

Magruder can be reached by phone at 914-697-2466. More information about the Pennsylvania electric shopping statistics can be found at the Web site for the Office of Consumer Advocate, www.oca.state.pa.us. The PJM Interconnection also has a Web presence at www.pjm.com.

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