The ability to provide reliable capacity is becoming both riskier and more costly to society and investors alike.
Revisiting the Keystone State
Rate caps have squelched competition in Pennsylvania.
When I was a member of the Pennsylvania Public Utility Commission in 2001, I wrote an article in Public Utilities Fortnightly (October 2001) evaluating retail electricity competition in the Commonwealth. The bottom recently had dropped out of Pennsylvania’s retail market, with the amount of electric load purchased from competitive suppliers plummeting from a high of 35 percent in April 2000 to 9 percent in July 2001. An increase in wholesale electricity prices and inflexible caps on the supply charges of utilities had combined to force competitive suppliers out of the market.
To revive competition, I recommended: 1) relaxing the rate caps so that utility supply charges would reflect higher wholesale market prices, thereby providing competitive suppliers with an opportunity to re-enter the market; 2) applying the extra revenue from these higher prices to eliminate customers’ stranded-cost obligations more quickly, thus shortening transition periods; and 3) changing the structure of retail prices gradually so they would more closely reflect the value of electricity, which varies over time.
These ideas did not attract political support, however, and the rate caps have remained unchanged.
Competition in 2008
The prolonged period of capped rates in Pennsylvania—years longer than in any other state—has produced some benefits and some drawbacks. On the plus side, due largely to the rate caps, electricity costs in the Commonwealth have fallen from 15 percent above the national average in 1996 to below the national average in 2007. 1 This has been a significant benefit, but a temporary one that many have taken for granted.
On the down side, active retail competition has not developed, except in the service territories of utilities whose rate caps have expired. In addition, the caps have encouraged over-consumption of electricity and have prevented customers from seeing and learning to adjust to higher prices, which will require corrective measures such as allowing customers to phase-in significant price increases when the caps expire in most of Pennsylvania in 2010 and 2011.
It is now clear that the wholesale price increases that stymied retail competition in 2000 and 2001 were the beginning of a new era of more expensive electricity. The rapid industrialization of countries such as China and India have increased the global demand for fuels and for many types of raw materials, including those used in energy infrastructure, thus driving up prices. Increasingly stringent environmental requirements also have contributed to the trend.
The electric industry in Pennsylvania—including electric distribution utilities, competitive retail suppliers, and wholesale generators—faces an uncertain future as policymakers consider how to respond to the expiration of rate caps and the beginning of higher prices. The generation industry faces an additional source of uncertainty—whether the federal government soon will place limits on carbon emissions to combat climate change. All of this uncertainty discourages investment in electricity infrastructure.
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