By Douglas L. Biden, President, Electric Power Generation Association

Caps on the prices that utilities can charge customers for electricity - agreed to when the state first allowed customers to shop for electricity over a decade ago - are set to expire in the next few years. Now some lawmakers want to extend the caps. But putting off the move to market prices will only make the inevitable transition more difficult.

It is not surprising that electricity prices will rise when the caps expire. Adjusting the capped prices for inflation since 1997, when the caps took effect, would result in a 40 percent increase. But the costs that drive electricity prices - fuels used to generate electricity and materials used to build electricity infrastructure - have increased much faster than the rate of inflation due to surging worldwide demand led by developing countries such as China and India.

Coal and natural gas costs have increased by 56 percent and 200 percent, respectively, since 2000. The cost of steel has gone up 60 percent in the past six months alone, contributing to a 130 percent increase in the cost of building new power plants since 2000. These higher costs will continue to increase the retail price of electricity in both states that allow electricity competition and those that do not.

For the past decade, customers have saved money due to the caps. But as the California energy debacle of several years ago demonstrated, price controls always lead to other problems.

The caps on utility prices have stymied development of retail competition, depriving customers of a choice of suppliers. In fact, meaningful competition has only developed in the few areas of the state where the caps have already expired. Also, extending the life of the caps will discourage investment in capital-intensive new plants that can provide electricity around the clock.

While most plants built years ago are now operating very efficiently because of competition, these plants will not last forever.

Last but not least, artificially low, capped prices are encouraging over-consumption of electricity. This is bad for the economy and the electric grid, because it requires additional, expensive infrastructure to serve this demand. It is also bad for the environment, because more usage means more emissions from power plants. Anyone who believes that climate change is a problem should support ending the price caps.

Despite these drawbacks, some lawmakers in Pennsylvania have proposed legislation to extend the caps. This legislation would be illegal, because states may not bar utilities from recovering federally-regulated wholesale electricity prices. But more importantly, this move is poor public policy for the reasons stated above.

The transition to market prices after a prolonged period of capped prices will be challenging, but it can be managed by educating customers and giving them options to conserve electricity and phase-in higher prices over a number of years.

Delaying the transition will just make it harder, because the forces pushing prices higher show no sign of abating. For the long-term good of the economy and the environment, the caps should be allowed to expire.

Douglas L. Biden is President of the Electric Power Generation Association, a regional trade association of major electric generating companies that supply wholesale power in Pennsylvania and surrounding. For regular updates on electric power issues in Pennsylvania, visit PA Energy News.

5/9/2008