Pennsylvania's Electric Deregulation Seen As Success Story

 

Shaped by conflict and confrontation, Pennsylvania's electric utility deregulation program has become a model for its ability to entice consumers to switch power providers. Texas and New Jersey, which both passed deregulation laws this year, borrowed liberally from Pennsylvania's program.

Energy experts also say that of the four states that had electric utility deregulation up and running at the beginning of the year -- Pennsylvania, Rhode Island, Massachusetts and California -- Pennsylvania has done the best job of luring outside power companies to compete with existing utilities in the state.

The key to the success of its program is a price-setting mechanism called a "shopping credit." To grasp the concept, understand that electric utilities charge customers for the generation, transmission and distribution of electricity.

The generation side of the triad is the part being deregulated. In Pennsylvania, if an outside electric company wants to do business, it cannot charge the generating costs that residential customers pay their existing utility.

That amount ranges anywhere from three cents to six cents per kilowatt hour, depending on service territory and customer class.

In a state where the average residential price for electricity is roughly 10 cents per kilowatt hour, a homeowner receiving a three-cent shopping credit would achieve a savings of 30 percent, a powerful incentive to switch suppliers.

"I feel validated," former Pennsylvania Public Utility Commission member John Hanger says, commenting on the fact that 450,000 of the state's 5.3 million residential electricity customers have switched.

To put that 450,000 figure in perspective, it's nearly three times the number of people that have switched in California, the nation's most populous state with a population of 32 million. It formally introduced deregulation in March 1998. Hanger, a prime architect of Pennsylvania's deregulation program, was eased from his $100,000-a-year state job last year after butting heads with Gov. Tom Ridge over how the program should operate.

In California, Massachusetts and Rhode Island, businesses have been viewed as the biggest beneficiaries of deregulation, also known as restructuring. That's because power companies find it easier and more profitable to deal with them, as opposed to households that use small amounts of power and can be located in hard-to-service rural areas.

Pennsylvania made it attractive for customers to shop around for electric service, and provided enough profit potential to lure outside power companies into the state.

"The thing about Pennsylvania's program is that it's definitely one of the most aggressive in the country as far as its shopping credit is concerned. If you look at the numbers, it's one of the few programs in the country that's seen very large numbers (of residential customers) switch."" says Howard Buskirk, a reporter with Energy Daily.

The Keystone State's success hasn't come without criticism or drama. Investor-owned utilities grumble that Pennsylvania's program, which became operational in January, short-circuits the free enterprise system by helping to establish the going price of power.

"You're basically paying people a premium to switch, which doesn't reflect true market economics," says Michael Oldak, a spokesman for the Washington, D.C.-based Edison Electric Institute, whose organization is comprised of about 100 investor-owned utilities providing 70 percent of the country's electricity.

Prior to passing its electric deregulation bill, Texas sent a seven-member legislative delegation to California and Pennsylvania to see how deregulation was being handled. New Jersey, which also passed a deregulation law this year, also paid close attention to Pennsylvania's plan.

Suzi Ray McClellan, a consumer advocate for the state of Texas, said Pennsylvania set an example of how to do deregulation policy.

"They had a good model, they had people signing up left and right to take advantage of what they were going to have," McClellan says. "Basically, everybody got a mandatory reduction on their electric bill, and they (Pennsylvania) have some very clever television ads.

"In California, no one wanted to change," McClellan adds. "You can have choice all day long, but if no one is changing, you still have basically a monopolistic system."

 
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