[BETA] Fortnightly

FOR ALL THE ATTENTION FOCUSED ON NEW LAWS AND regulations designed to create competition in electric power markets, too few people seem to grasp how a market can work. That will change, however, now that Pennsylvania is the first large state to embrace market pricing.

Pennsylvania's lawmakers and three of its five utility commissioners have developed a market to deliver the benefits of competition to consumers.

Rather than "guarantee" politically attractive rate reductions, the Pennsylvania Public Utility Commission, led by Commissioner John Hanger, has challenged market force to deliver more savings than contemplated in any supposed guarantee. The PUC's decision in the PECO Energy restructuring case

provides a guidepost for utility commissions around the nation for dealing with electric restructuring (see sidebar, "A History Lesson").

Also, as we will discuss, PECO Energy's proposed competitive transition charge, as spelled out in a partial settlement, did not reconcile efficiently with the company's estimate of its stranded costs. By discounting PECO's proposed CTC to derive expected present value, we found a difference of nearly $2 billion with the company's $5.46-billion claim for stranded costs. That difference reflects the concern with the utility's assumed zero-percent demand growth rate and the possibility that securitization might not proceed exactly as planned. These necessary assumptions and inherent uncertainties only serve to illustrate the difficulty in founding a restructuring plan upon government-backed guarantees of consumer pocketbook savings.

The key element of the PUC decision was the replacement of anticompetitive caps on retail electricity prices with a credit. The credit allows (em if not motivates (em consumers to shop for the lowest price.

The PUC's decision was elegant in its simplicity. First, it set a transmission and distribution rate that did not subsidize the incumbent utility's competitive activities. Next, the commission set a levelized "competitive transition charge" to allow the utility to recover stranded costs over an 8.5-year period. The energy and capacity portion of existing rates was then left to consumers to determine by shopping for their electricity.

As the first real test of Pennsylvania's Electric Competition Act, the PECO Energy restructuring case drew national attention due to media fireworks triggered by a blizzard of competing advertising claims by PECO and Enron. This battle was initiated when Enron offered to replace the incumbent as the default supplier of electricity throughout southeastern Pennsylvania and to write a check for about $5.46 billion to effect recovery of the utility's stranded costs.

This test followed only after PECO had crafted a compromise among a number of traditional rate-case parties. That compromise, known as the "Partial Settlement," would have avoided extensive wrangling over terms of the restructuring. But it also would have significantly delayed genuine competition and provided the utility with a disproportionate CTC-based subsidy.

In the end, the PUC rejected both the Partial Settlement and the Enron plan. Commissioners John Hanger, David Rolka and Norma Mean Brownell found a way to unleash market forces that fairly balanced the goals of the incumbent utility and consumers.

Looking Behind the Promises

The Partial Settlement would have insulated the incumbent utility from competition for up to