Senators Tomlinson and Mary Jo White

Wendell F. Holland, chair of the Public Utility Commission, told the Senate Consumer Proetection and Professional Licensure Committee this week that he had one message for the Committee and electric consumers—“conserve, conserve, conserve.”

The Committee, chaired by Sen. Tomlinson (R-Bucks) with Minority Chair Sen. Boscola (D-Lehigh), held a hearing on the issue of transitioning from electric rate caps that are due to expire in most areas of Pennsylvania in 2010 to a market-based system for setting rates.

An estimated 83 percent of electric customers are still under rate caps that were imposed in 1996 as part of the state’s Electric Choice Act that brought competition into Pennsylvania’s electric markets and separated electric generation from electric distribution.

Chairman Holland said he and his fellow commissioners are well aware of the consequences of not easing in market-based electric rates, saying they did not want Pennsylvania to be another California, with its massive brownouts, or a Maryland, where a 72 percent rate increase forced fundamental restructuring of the way that state regulates electricity rates. (Link to PowerPoint Presentation)

Pennsylvania’s limited experience with a transition from caps to market-based pricing has been mixed so far.

When caps expired in 2005 for customers in Pike County, electric rates jumped 73 percent, although Chairman Holland and the other commissioners called that increase a unique case because the utility bought all of its electric in the market at one time.

Duquesne Light Company customers experienced an 11.5 percent increase in rates, although in inflation adjusted terms the cost was actually 15 percent below the rates in effect in 1996. Duquesne was also somewhat unique because they had some of the highest rates in the state when the Electric Choice Act took effect.

UGI’s electric company customers experienced a 59.4 percent increase in generation rates once the caps were lifted.

A recently approved plan for Pennsylvania Power increased residential rates up to 33 percent and for large industrial customers over 50 percent.

Chairman Holland emphasized the importance of educating electric customers to help them understand the cost of energy and how they can play a role in responsible energy use.

James H. Cawley, Vice-Chair of the PUC, said the Electric Choice Act has saved Pennsylvania electricity customers over $6 billion since 2006 and that restructuring the electric system under the Act has not been a failure.

Commisioner Cawley said the impact of switching to market rates for electricity will vary in the remaining areas of the state. For example, when the extra stranded cost charge imposed as part of the 1996 law to allow utilities to recover the cost of building nuclear power plants expires in the PECO area in the Southeast, it will offset the higher cost of electricity and may only result in an estimated 10-20 percent increase in rates.

Conservation was also emphasized by Commissioner Cawley. He said we have to start conserving electricity through the use of new tools like smart meters and smart pricing which gives consumers the signals they need to help in conservation efforts.

Commissioner Cawley did note that “conservation alone is not going to do it in the face of growing demand.”

At the same time the Commissioner said there may be a need to exempt certain groups, due to low income or health problems, from the full impact of market pricing.

Commissioner Kim Pizzingrilli noted a recent independent study found that even modest reductions in electricity use during times of peak demand through demand management systems resulted in significant savings throughout the PJM regional electricity grid.

Commissioner Pizzingrilli said extending the rate caps was not the answer to the transition and each of the Commissioners seemed to agree that simply extending the caps would invite the kind of “disaster” California had when its system of deregulation lead to severe brownouts.

The Commissioner also noted the PUC has one vacancy on its Board and encouraged the General Assembly to act quickly to fill the position once a nomination is received from the Governor.

Commissioner Terrance Fitzpatrick noted the conditions existing at the time the 1996 Electric Choice Act was passed have changed, namely that wholesale prices of electricity have risen higher than the electric rate caps and are more volatile and electric customers are not as anxious to go directly to that market to buy electricity.

The increase in wholesale prices, which Commissioner Fitzpatrick noted the PUC has no authority to control, are also the reason there is less competition in Pennsylvania’s electric market today.

In 1996 about one-third of the electricity market was powered by competitive suppliers and now only about 10 percent is.

Commissioner Fitzpatrick said 98 percent of Duquesne Light’s industrial base is served by competitive electric suppliers because they have market-based rates.

Sen. Tomlinson summed up the dilemman for Pennsylvania this way, “We have to lift the rate caps to get competition to get lower prices.”

In response to a question from Sen. Tomlinson, Commissioner Fitzpatrick said, “There is no doubt that environmental regulations have a big affect on the cost of electricity and if climate change issues are important, we’re going to have to pay for them.”

Sen. Mary Jo White (R-Venango) asked whether the Commissioners support a suggestion by Gov. Rendell last week that long-term contracts be used to help stabilize electric prices.

Commissioner Cawley said they might be appropriate to encourage some new technologies, however, the overall impact of locking in one electric generator at one price for a long period of time is to crowd out competition, and if New Jersey’s experience is any indicator, promote a steady increase in electric rates.

Commissioner Fitzpatrick noted one uncertainty surrounding long-term contracts relates to new congestion transmission fees the Federal Energy Regulatory Commission has created. Generators are reluctant to enter into long-term arrangements because they will not know what those fees will be.

Chairman Holland suggested electric transmission issues are “enormous” for Pennsylvania and recommended the Committee hold a separate hearing on that issue.

Sen. Boscola said she was both “relieved and scared” at the prospect of transitioning to market-based pricing for electricity rates.

Both Commissioners Cawley and Fitzpatrick noted Pennsylvania’s aging fleet of baseload power plants will have to be replaced in the future. But, said Commissioner Fitzpatrick, no one knows whether anyone will build a new baseload plant given the uncertainty in the electricity market and over what environmental policies will be in the future.

For more information, visit the PUC’s Electric Division webpage.

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