July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
Consumer Choice in Electricity: A Critical Appraisal
FOR YEARS NOW ARGUMENTS ABOUT WHETHER RETAIL electric competition would benefit consumers and would serve the public interest have raged. Often saying there is little to be gained from competition and many dangers, powerful voices have urged opposition to competition or a glacial schedule for implementation of customers choice.
The Pennsylvania electric restructuring cases, however, should help end the arguments about the benefits of retail electric competition. The outcomes of these cases powerfully indict the traditional policy of government price regulation of electric generation monopolies, as practiced in Pennsylvania and most of the nation. Indeed the Pennsylvania experience is a clarion call to speed up implementation of retail electric competition.
The seven principal Pennsylvania electric restructuring cases reveal that Pennsylvania's regulated rates are about $2.4 billion to $3.4 billion higher per year than the competitive price for electricity, even if one assumes 1999 market clearing prices of 3 to 4 cents per killowatt-hour - prices that the utilities said were too high in their stranded cost arguments. This is a stunning result with national implications, considering that Pennsylvania's regulated electric rates are about 16 percent above the national average but are not among the nation's highest. Typically, depending on the survey and the rate class, 12 states are found to have higher average rates.
Table 1 shows the system average bundled rate of seven Pennsylvania electric utilities, what the bundled rate would have been if the PUC did not allow any stranded cost recovery and had implemented full competition in 1999. It also includes the percentage drop in rates that could occur in a fully competitive environment if the competitive generation price averaged 3.5 cents per kilowatt-hour.
That the regulated rates of even low-cost electric monopolies probably exceed competitive prices is driven home by the result in the restructuring case of West Penn Power Co., a low-cost utility and subsidiary of Allegheny Power System, with a Pennsylvania average rate of 5.56 cents per kWh, which is well below the national average. Full competition (meaning no stranded cost recovery or completed stranded cost recovery) would cut even West Penn Power Co.'s total bundled rates by 6 percent or to a system average rate of 5.22 cents in 1999.
This projection of a 6-percent total rate reduction for West Penn Power Co. relies on two data points. First, it utilizes the unbundled transmission distribution rate of 1.72 cents per kWh set for West Penn Power Co. by the Pennsylvania Public Utility Commission. Second, it assumes a 1999 market-clearing price of 3.5 cents per kWh for that portion of the West Penn Power Co. service territory that lies within ECAR, the East Central Area Reliability Coordination Agreement.
Interestingly, when claiming stranded costs before the Pennsylvania Public Utility Commission, West Penn Power Co. and other utilities have projected 1999 market prices well below 3 cents per kWh. If utility market price projections are anywhere close to being accurate, then the benefits of full competition would be even greater than discussed here. For example, at a market price of 3 cents per kWh for generation, the West