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 Penn Power Co. system average rate for 1999 would be 4.72 cents per kWh. The company's total rates would be reduced by 15 percent.
The U.S. Energy Information Agency found in 1996 that only six states had average rates of less than 5.2 cents per kWh. Three states had rates equal to 5.2 cents per kWh, while only 4 states showed average rates less than 4.7 cents per kWh. The West Penn Power Co. case, therefore, indicates that probably very few states have regulated monopoly rates below the competitive price of electricity for that region.
Generation and T&D
At the heart of Pennsylvania's restructuring cases has been the unbundling of each utility's current bundled electric rate into its separate components for generation, transmission and distribution. Table 2 shows the T&D rates set by the PUC. Table 3 sets forth the unbundled generation rates found in the restructuring cases and shows the competition transition charge as a percentage of each utility's unbundled generation rate.
As represented by the CTC, stranded costs range from a low of 18.75 percent (for West Penn Power Co.) to a high of 39.15 percent (for Duquesne Light) of the generation portion of current regulated rates.
While stranded costs mark a substantial portion of unbundled generation rates for Pennsylvania utilities (assuming that the competition price of generation is 3.5 cents per kWh), the range by which unbundled generation rates exceed competitive generation prices runs from a low of 0.34 cents per kWh to a high of 3.48 cents per kWh.
Table 4 shows, for each utility, how far the current regulated generation rates climb above the market price floor of 3.5 cents per kWh.
If the market price is 3.5 cents, then regulated generation rates are now 10 to 99 percent above competitive price levels. As such, these regulated generation rates represent the triumph of politics over economics. The winners of this traditional political process that is called public utility regulation plainly have been the monopolists and their shareholders, while the consumers have been fleeced in a way that would have been impossible in a competitive market.
Shopping Credits and Stranded Costs
In its Dec. 11, 1997, 3-2 decision in the PECO electric restructuring case, the PUC established a system average shopping credit of 4.46 cents per kWh - a figure that set the precedent for Pennsylvania's subsequent electric restructuring cases. It also was the largest shopping credit set by any state to date. Had the majority that I led not prevailed on Dec. 11, 1997, a PECO system average shopping credit of 2.8 cents per kWh would have been established, and Pennsylvania would have followed the course of California, Rhode Island and Massachusetts, where low shopping credits have meant little or no competition, especially for small-volume consumers.
Pennsylvania's comparatively high shopping credits have created the most competitive retail electricity market in the country, though certainly other states may be forced into fewer concessions, which could further boost competition.
Furthermore, to prevent possible market manipulation that could diminish the purchasing power of shopping credits, the PUC, the 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 billions of dollars of stranded costs by electric utilities is more a testament to the political power of the electric industry than to the justice of their claims. In Pennsylvania, at least, given the nation's highest shopping credits, electric utilities have seen their stranded cost claims cut and are being made to face real competitors, in return for the stranded costs that they are recovering. Consumers, meanwhile, should save $1 billion in 1999.
Yet it is in those states that have yet to authorize competition that the political power of electric utilities has been most successful. In such states, unless unbundled generation costs are below the competitive market price of generation, customers even now are paying for stranded costs, as such costs are already included in the normal and current rates of electric monopolies. In those states that have yet to give their consumers the right of retail choice, stranded costs just have not been specifically quantified or separately itemized on the bills of customers. Many electric utilities would prefer that case to remain the reality for as long as possible. This out-of-sight, out-of-mind strategy is working in too many states. It is hoodwinking the very consumers and advocates who unknowingly write checks to their electric monopolies to pay for their stranded costs.
Consumers should avoid joining forces with those who want to slow the onset of competition. Instead, they should seek quickly to introduce genuine competition.
John Hanger is the senior resource fellow for the newly formed Center for Competitive Markets, a research organization dedicated to promoting genuine competition in the electric, gas, telephone and airline industries. He also is a partner at the firm of Hanger & Adels, with offices in Camp Hill and Elkins Park, Pa. He was a member of the Pennsylvania Public Utility Commission from 1993 to 1998, and participated in many of the restructuring decisions described here.
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