The Public Utility Commission this week heard from consumer advocates, businesses, environmental groups and industry experts on actions that could mitigate potential future significant price increases in electricity prices when price caps come off.

Most Pennsylvania electricity consumers are paying capped generation rates and will continue to do so until the end of 2009 or 2010. Recent events in Pennsylvania, Maryland and Delaware have shown that consumers of electricity can be exposed to sudden dramatic price increases when long-term generation caps expire. The long-term caps were agreed upon during state restructuring proceedings.

“Today is a first step. It will not be the only step. This Commission will continue to address this energy crisis aggressively, responsibly and in a timely manner,” said Commission Chairman Wendell F. Holland in a statement. “It is up to all of us to prepare now to protect our customers from the brunt of possible price spikes. By evaluating the possible policy actions that would mitigate prices for consumers, this Commission is acknowledging what is going on around us and preparing now.”

Commission Vice Chairman James Cawley said: “Competitive markets don’t happen on their own. They take work on the part of the utilities, electric generation suppliers, consumer advocates, and this Commission. Today we begin that process, moving forward by bringing all parties to the table to better address consumer education requirements, develop strategies to remove barriers to retail choice and implement default service pricing that reflects prevailing market prices.”

Commissioner Bill Shane said in a statement: “Today we begin a process of balancing how we expose customers to the realities of current market prices with the availability of competitive electric generation suppliers. I believe the purpose of regulation is to enable capitalism to live up to its own pretensions and rhetoric I believe markets are useful allocative tools, not objects of worship. Markets can fail and be manipulated. That’s something we must keep in mind as we move through this process.”

Commissioner Kim Pizzingrilli said: “Our hearing today begins our dialogue on this important and complex topic that will require a great deal of consideration and debate. I look forward to working on this matter so as to ensure that the public interest is protected as we transition into a fully competitive market. With that said, today's testimony, the filed comments and the reply comments, which are due on July 20th, will serve to assist the Commission in addressing these challenges.”

Commissioner Terrance Fitzpatrick, who sponsored the motion that initiated this process, said: “Combating potentially significant electricity price increases at the expiration of rate caps approved under electricity restructuring proceedings presents difficult policy choices – choices that will not be any easier if we wait until the reality of higher prices is upon us. By engaging all of the stakeholders in this process, the Commission will have a wide knowledge base to draw from in advance of any possible action. Pennsylvania is in the position of having some additional time to address this important issue for most consumers. By preparing now, this Commission can best fulfill its duty to protect the public interest.”

Commissioner Fitzpatrick pointed to several examples of rates shocks after caps were removed—Pike County Light and Power Company customers experienced a 70 percent increase in electric rates, Delmarva Power Company in Delaware increased rates by 59 percent and in Maryland Baltimore Gas & Electric increased rates 72 percent.

Commissioner Fitzpatrick outline a series of questions the PUC asked participants to address: educating consumers, encouraging conservation, reducing peak demand for electricity, consider alternatives for avoiding abrupt, large price increases, assistance for low-income customers and to review interplay with wholesale energy markets.

Four panels of witnesses presented testimony during the hearing from the perspective of consumers, utilities, electric generation suppliers and alternative energy interests. Here’s a sampling of the comments offered from a variety of perspectives—

Office of Consumer Advocate: Electric distribution companies should have available a portfolio of resources including long-term and short-term contracts, supply-side and demand-side resources, renewable and non-renewable resources as well as spot market supplies to mitigate the impact of price caps coming off.

“The OCA recognizes that developing a portfolio of resources will not necessarily produce lower rates. A portfolio of very expensive resources will be a very expense portfolio. A portfolio approach, however, will almost certainly reduce volatility and rate shock over time. Unfortunately, our own residents and businesses in Pike County already have seen the results of a flawed transition process.”

Rendell Administration: The Department of Environmental Protection made several recommendations, including establishing a publicly-owned Pennsylvania Power Authority to provide low-cost power just like the New York Power Authority formed in the 1930s, establish demand-side management initiatives, including new programs for demand and energy efficiency, allow long-term contracts for power purchases, diversify generating resources to reduce the number of hours natural gas-fired units set prices in the PJM regional power grid and investigate PJM’s locational marginal pricing model for setting prices.

Electric Power Generation Association: Electric generators noted the PJM 2005 State of the Market Report showed that net revenues have not been sufficient to cover the fixed costs for new generation entering the PJM market and that fuel costs are driving higher electricity costs in the PJM system.

In addition, the cost of complying with current and future environmental regulations will result in the retirement of existing generating capacity leading to higher prices for coal-fired electricity and greater use of expensive natural gas.

“Headlines about significant increases in electricity rates in some states that have retail competition don’t tell the whole story. Electricity rates are not rising due to competition. This is evidenced by the increases in electric rates in traditionally regulated states.

“In PJM, for example, average spot market wholesale electricity prices rose by more than 35 percent in 2003, 11 percent in 2004, and 37 percent in 2005, driven mostly by higher natural gas and other fuel prices and environmental costs. In 2005, natural gas prices in the PJM region were 46 percent higher than in 2004.

“As the rate caps expire, electricity prices paid by retail customers are catching up and starting to reflect market prices. That isn’t to say that customers haven’t benefited from restructuring. Public reports show that when current prices are adjusted for fuel increases, customers have saved billions of dollars as a result of competitive markets and restructuring.”

PJM Interconnection: In addition to discussing pricing issues and models, PJM said the ability to bring less expensive power from one area to another in the regional electricity grid was a critical factor in pricing electricity in the wholesale and retail markets. A number of bulk electric transmission line projects were now being proposed to bring cheaper electricity from the western part of PJM to the load centers of the East where the siting of new generation is increasingly difficult.

PJM also pointed to new demand-side programs that will help reduce electricity demand at peak usage times.

PA Food Merchants Association: PFMA stressed the need for helping small businesses reduce energy use and encouraged the PUC to adopt a program that allows “on-bill financing” for energy efficiency improvements with power providers.

Industrial Energy Consumers of PA: IECP pointed to the fact that even with rate caps, the cost of electricity for industrial consumers has increased from 25 to 100 percent since 1996 in many areas of the state and that Pennsylvania’s retail electricity market has not achieved lower prices, better service and innovation. They recommended a revamping of the PJM pricing model for electricity.

PennFuture: PennFuture noted that the cost of electricity today, in contrast to other forms of energy is a bargain. They pointed to the experience of Duquesne Light where rate caps cap off, but so did stranded cost charges to pay for nuclear power plants, when compared to 1996 rates expressed as 2006 dollars.

PennFuture recommended requiring each utility to file transition plans, renew funding for all sustainable development funds and for the PA Energy Development Authority to encourage renewable energy generation, launching a professional well-funded consumer education program on conservation and energy supply options, requiring utilities to install equipment to allow customers to change usage in real time in response to electricity demand and cost, fund a low-income usage reduction program and utilities should honor rate cap commitments and consumers should honor stranded cost recovery agreements.

The complete list of those providing testimony include: Office of Consumer Advocate, Office of Small Business Advocate, Allegheny County, PJM Interconnection, L.L.C., Industrial Energy Consumers of PA, PennFuture, United States Steel Corporation, Edison Electric Institute, Energy Association of Pennsylvania, Allegheny Power, Duquesne Light Company, PECO Energy Company, PPL Electric, Utilities Corporation, Constellation NewEnergy, Inc., Direct Energy Services, LLC, Electric Power Generation Assoc., Hess Corporation, National Energy Marketers Assoc., Retail Energy Supply Assoc., Reliant Energy Inc., Strategic Energy, LLC, Department of Environmental Protection, TBG Consulting, Citizen Power, Customized Energy Solutions, Ltd., PV NOW and Small Business Development Centers.

Copies of testimony are available online.

To keep track of this issue, go to the PUC website and search for documents under Docket No. M-00061957.

6/23/2006