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Consumer Choice in Electricity: A Critical Appraisal

Fortnightly Magazine - October 1 1998

FERC and the PJM ISO must remedy market power problems, particularly for capacity and fixed transmission rights within the PJM Power Pool. At the outset of the market, these authorities have the responsibility to make sure that the capacity market is efficient and liquid.

The Pennsylvania commission also became the first regulatory body to establish a shopping credit as the residual number after the unbundled generation rate is split into a CTC and a shopping credit. By setting the shopping credit as the residual, the majority rejected the alternatives of setting the shopping credit or generation credit as equal to a market price estimate or making the CTC the residual. Either alternative inevitably destroys competition by making it nearly impossible for new entrants to deliver any savings to consumers - while awarding stranded costs to utilities. By setting the shopping credit equal to the competitive price, or by making the CTC the residual number, regulators ensure that consumers will get only very small savings at best - and then only if they can find a supplier that can beat the competitive market price, which is a nice trick.

The Fleecing of Consumers

Pennsylvania's electric utilities have certainly amassed a huge amount of stranded costs. Most of that total marks the result of poor utility and regulatory decision making. The captive consumers are innocent of this mess. Yet they are and will remain on the hook as the bankers of last resort for the utilities, until competition relieves them of this costly duty.

Despite what you may have been told or heard, the Pennsylvania PUC has treated the state's electric utilities fairly when deciding the contentious question of stranded costs (which serve as a perverse monument to the failure of electric monopolies and the regulatory model). Do not be fooled by the anguished, even bitter, legal and press attacks that some electric utilities have fired at the PUC. The truth is that Pennsylvania's electric utilities are the recipients, grateful or not, of a great act of generosity by the Commonwealth of Pennsylvania.

Including a pretax return of 10 percent to 11 percent on the $12.2 billion of stranded costs that have been approved for recovery, Pennsylvania's electric utilities will receive at least $21 billion in stranded cost payments over the next seven to 12 years (see Table 5).

The billions of dollars of recovered stranded costs will be collected through a per-kWh charge - the aforementioned CTC. It must be separately identified on the bill of each customer. Each utility's CTC is different and will vary by rate class.

The CTC partially quantifies how far the regulated rates of all of Pennsylvania's electric utilities lie above competitive prices (including the rates of West Penn Power Co., the utility with the lowest electric rates in Pennsylvania). The CTC, therefore, is a measure of the failure (though still incomplete) of traditional regulation. For every electric utility, the CTC makes up a substantial portion of the current regulated rate (see Table 6).

Considering how the airline and trucking industries were treated during deregulation, the recovery of