The House Environmental Resources and Energy Committee held a hearing on Special Session House Bill 54 (George-D-Clearfield) that would extend the existing rate caps on electricity prices from 2010 to 2013.

"No one wants to use a stick to protect citizens and businesses from dangerous electric-rate increases," said Rep. George. "However, sometimes a stick is needed to move people off self-centered obstinacy."

"The priority remains enactment of a comprehensive energy policy that would put Pennsylvania on the road to energy independence," Rep. George said. "However, the threat of rate increases of 60, 70 percent or more affecting more than 4 million electric customers makes development of stopgap legislation imperative."

Those testifying included: Tyrone Christy, Commissioner, Public Utility Commission; Sonny Popowsky, consumer advocate of Pennsylvania; Carl Wood, regulatory affairs director, Utility Workers Union of America; and Morgan O'Brien, president, Duquesne Light Company.

Copies of the testimony are available online.

PUC Commissioner Tyrone Christy told the Committee the competitive market for electricity is broken and Pennsylvania is unable to exert any influence on market prices because of federal law and the pricing system used by the PJM Interconnection that sets prices at the most expensive price at any given time for all generators, regardless of actual generation costs.

As an example, he said if 10,000 megawatts of power are needed and at that point in time 1 megawatt of gas-fired generation is available for 10 cents per kwh, then those providing all 10,000 megawatts will be paid 10 cents per kwh even though 9,999 megawatts may be coming from coal-fired power plants willing to sell power at 2.5 cents per kwh.

Commissioner Christy recommended the PUC be given authority to require utilities to issue competitive solicitations for the construction of needed generating units to serve increased demand with the intent of driving the market away from PJM.

He also recommended against a provision in the bill setting a 20 percent cap on long-term contracts for electricity and supported the extension of rate caps as a short-term measure, but he said caps do not offer a long-term solution to the problem. Fundamental changes to the regulatory framework are needed in Pennsylvania.

Sonny Popowsky, Consumer Advocate, said he supported rate caps as long as the electric utilities were recovering stranded costs for their nuclear power plants and that whether it happens now or later, the caps will come off and we have to provide for a reasonable transition.

Popowsky recommended in this and several other Senate and House hearings on this topic the state should adopt a “least cost procurement” policy for electric distributors rather than continue to use the existing “prevailing market price” standard. He noted the natural gas industry has been deregulated for many years and has used the least cost method with success since 1984.

Popowsky also said there is a “substantial untapped store of energy efficiency and demand response resources that are less costly than much of our electric generation today” waiting to be implemented and he supported House Bill 2200 which establishes goals for overall electricity usage reduction.

Carl Wood, National Director of Regulatory Affairs for the Utility Workers Union of America and a former Commissioner of the California Public Utilities Commission during that state’s electricity crisis, said Pennsylvania should reassert control over utility investment in new generation facilities and set operating and maintenance standards for all power stations.

The comments of Duquesne Light were entered into the record by John Laudenslager because Morgan K. O’Brien, President and CEO of Duquesne was caught in bad weather coming to Harrisburg.

Duquesne’s comments noted they have been without rate caps for over five years and their rates for residential and small businesses are lower today than they were 15 years ago and will continue to be lower through the end of 2010 “without any special legislation to aide in that transition or any need to phase in rate hikes to avoid price shock.”

Duquesne also said the pricing policies of the PJM Interconnection are not customer friendly and are “exclusively in favor of generators over customers.”

Other groups also provided written comments to the Committee.

Doug Biden, President of the Electric Power Generation Association, offered numerous reasons why extending price caps would ultimately lead to higher prices and less reliable service for Pennsylvania consumers.

Biden emphasized that extending caps on retail prices would require electric utilities to sell electricity at a loss. "This policy would increase the risk of investing in generating plants and other forms of electricity infrastructure," Biden said. "The end result would be more expensive, less reliable supplies of electricity for consumers."

Biden noted that power suppliers would likely add premiums to their prices to cover the risk that utilities would not be able to pay for the electricity. The uncertainty created by such a rate cap extension would also discourage generators from building needed new generation in Pennsylvania.

Biden said, "Wholesale electricity prices have been rising due primarily to higher fuel costs, not because of electricity competition." According to the Public Utility Commission, since 1997, prices have increased over 180 percent for fuel oil, approximately 140 percent for natural gas and unleaded gasoline, and over 50 percent for coal. Biden said that energy prices have also increased due to rapid growth in demand for fuels from developing countries and increasingly stringent environmental requirements.

Biden noted that while price caps have been in effect since January 1997 for most electricity customers in Pennsylvania, ultimately consumers will have to pay the market price for electricity. Biden said, "The longer electricity prices are capped, the more difficult it will be to help consumers make the inevitable adjustment to market-based prices. Delaying the inevitable transition to market prices will not move Pennsylvania forward but instead will make the transition even more difficult."

The Retail Energy Supply Association believes that policy makers should help customers manage the coming electric rate increases, rather than simply extending rate caps, which will only compound the problem and inevitably lead to higher rates for Pennsylvania consumers.

RESA believes the Public Utility Commission has already taken a proactive and prudent approach to addressing this issue. Last year, the Commission issued three major orders to address the expiration of rate caps and the transition to a competitive market. These orders were the product of several years of regulatory proceedings where the Commission weighed the views of utilities, consumer advocates, retail suppliers and other stakeholders.

RESA urged the General Assembly to take a similar practical approach, rather than compounding the problem by extending rate caps.

As rate caps expire, competitive suppliers, like RESA members, will be able to enter the market to compete for customers. Basic economics have shown that competitive market forces are the only sustainable way to keep costs down and to increase innovation. This has already proven true for many western Pennsylvania customers.

In the Duquesne Light service territory where rate caps have already expired, more than 45 percent of consumers have switched to competitive suppliers. In addition, residential and small business customers are paying less today for utility generation service today than they were in 1996.

David G. DeCampli, president of PPL Electric Utilities, said, "Passage of this bill, which would extend artificial price controls on electricity, would result in financial instability for Pennsylvania's electricity delivery companies, threatening reliability for customers. While this extension of price caps may be perceived as politically expedient, it simply will postpone inevitable price increases for customers while threatening a California-type electricity crisis in the Commonwealth.

"Passage of this legislation would mean the state is reneging on an agreement it made with PPL Electric Utilities more than a decade ago. In addition to putting PPL Electric Utilities and other companies in serious financial jeopardy, it sends the signal that Pennsylvania cannot be trusted to live up to its commitments to the state's businesses. The message sent by legislators supporting this bill clearly is at odds with the state's desire to attract new businesses and the jobs that they provide.

"This punitive legislation is particularly disappointing because PPL Electric Utilities has kept up its end of the bargain for 10 years, capping our generation rates. Six other electric delivery companies in the state have been permitted to remove their rate caps as scheduled. To now prohibit rate cap expiration for the remaining five, who originally agreed to even longer price controls, is particularly unjust.

"The financial distress caused by this legislation will severely limit the ability of the state's electricity delivery companies to deploy demand-reduction programs, including smart meter technology," said DeCampli.

Rep. Bud George (D-Clearfield) serves as Majority Chair of the Committee and Rep. Scott Hutchinson (R-Venango) serves as Minority Chair.

NewsClips: PPL Claims Rate Cap Extensions Will Harm Reliability, Customers

Bill Confronts Impact of Rate Cap Expiration

Editorial: Price Runup Speaks to Need for Conservation

Editorial: Start Preparing for Rate Shock

2/15/2008