PA: Electric market is proving tough for competition

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Sunday, February 25, 2001

Electric market is proving tough for competition

By Akweli Parker INQUIRER STAFF WRITER As California's deregulated electricity market unraveled during the last few months, Pennsylvania officials swiftly drove home the message that such a mess could not happen here.

In Pennsylvania, utility executives, energy experts, and others agreed that the deregulation of electricity is working.

But is it?

Several new energy suppliers have entered the state, but they are struggling to match, let alone beat, the capped rates set for Peco Energy Corp. and the state's other established electricity companies, according to the latest price-comparison charts for residential electric service compiled by the state Office of Consumer Advocate.

The intention of deregulation was to encourage competition by companies that could generate or purchase power more cheaply than the incumbent and then resell it. But that simply has not been happening lately.

Regulators say they are concerned, but do not think the current lack of competition signals that Pennsylvania is susceptible to a California-like market meltdown.

"As long as our supply and demand remain in relative balance, I don't think that there is any chance our prices could go anywhere near where they have gone in California," said Terrance Fitzpatrick, a member of the Public Utility Commission.

Pennsylvania's rate caps were set several years ago at what was thought to be a level high enough for competition to flourish at affordable prices beneath the caps.

Instead, higher-than-normal wholesale prices during the last several months have flushed competitors above those ground-level rates, forcing them to sell electricity for more than the established or "incumbent" utility. Their other option - as was recently exercised by California-based supplier Utility.com - is to pull out of the market altogether.

Of the nine suppliers competing with Peco in February, only one, New Power Co., offers a price lower than Peco's average residential heating rate of 4.61 cents per kilowatt hour. This rate, also known as the "price to compare" or the "shopping credit," is based on the cost of generating electricity.

As for Peco's normal residential rate of 5.67 cents per kilowatt hour, which applies to customers who do not have electric heat, several competitors are beating that. But the savings are marginal, according to figures supplied by the state Office of Consumer Advocate.

And competition in other utilities' service territories is markedly less robust.

Neither of Allentown-based PPL's two listed competitors, for example, is selling for less than PPL's average of 4.61 cents per kilowatt hour.

Industry observers say that Pennsylvania's current situation, in which competitors come and go, is not all that unusual for nascent markets. Pennsylvania began electric competition at the retail level in 1999.

"Whenever you create a new market, you're going to have a lot of people come in, and you're going to have a lot of casualties," said Frederic Murphy, an energy-industry expert and professor with Temple University's Fox School of Business and Management.

The problem for many would-be players in the electricity game is that they do not own power plants and thus cannot control their costs.

"The problem in the electricity market is to be able to manage your risks. To do that, you need to have your own generation," Murphy said.

Officials at Exelon Corp., the parent of Peco Energy Co., say that owning a diverse blend of generating plants has cushioned the firm from rising fossil-fuel prices.

"One of our advantages is our nuclear fleet," said Ian McLean, head of the company's Power Team wholesale marketing division. The company owns plants that generate about 15,000 megawatts of nuclear power. One megawatt is roughly enough electricity to power 1,000 homes.

Nuclear power has not been subjected to the huge price runups seen in fossil fuels such as natural gas.

But building power plants is initially expensive, and new nuclear plants are practically out of the question, so some suppliers opt to buy other plant owners' excess electricity on the wholesale market. When those supplies are tight, prices go up.

Morton Yulish of Swarthmore, said he searched for hours to find a deal better than the one offered by his default supplier, Peco.

He finally settled on the Energy Cooperative Association of Pennsylvania, based in Philadelphia. It offered a rate of 5.25 cents per kilowatt hour, compared with Peco's 5.67 cents.

"This is a lot of work for what results in not much savings after all is said and done," Yulish said.

Some competitive suppliers are still in the game because they arranged long-term contracts, protecting them from fluctuations on the spot wholesale market.

While competition has been under a cloud recently, it is still viable, said John Hanger, president of the environmental advocacy group Citizens for Pennsylvania's Future.

"That's not new. People come, people go," Hanger said. "There's a real likelihood you'll see others get into trouble in the next six months."

Hanger, a former member of the Public Utility Commission, helped write Pennsylvania's deregulation law.

"Because retailers can't beat the shopping credit, [that] doesn't mean that competition isn't going to work," Hanger said.

For competition to work, though, consumers must do more than consume blindly, he said.

His group plans to launch a major campaign stumping for the installation of high-tech equipment in homes and businesses. The equipment would let consumers know immediately how much power they are using and how much it is costing them.

These "demand-side management" devices let customers automatically ratchet down the power consumption of electrical appliances and save money instantly.

Consumers' monitoring their consumption could become crucial as the rate caps on Pennsylvania's electric utilities come off in the next several years, fully exposing consumers to the whipsawed whims of the electricity market.

The length of the caps varies by utility. At Peco, the price of transmission and distribution service is capped until Jan. 1, 2005; generation-rate caps are in effect through 2010.

The experience of power marketers who were forced to jack up prices this winter because of high wholesale costs resulted partly from customers' inability to provide instant feedback to the market, Hanger said.

But consumers' incentive to cut back their electricity use may be undermined if supply increases, as expected.

Thousands of megawatts of additional generating capacity are coming on line within the next few years, and prices should drop, PUC spokesman Kevin Cadden said. (Today's prices are still lower than in 1995, he noted.)

Lesley Collons, a spokeswoman for PJM Interconnection L.L.C. in Norristown, agreed that prices would drop with increased supply.

PJM administers electricity transactions and manages the electricity grid for utilities in Pennsylvania, New Jersey, Maryland, Delaware, Virginia and Washington. PJM dispatchers keep tabs on the minute-by-minute availability of power plants to meet the region's energy demand. That information helps set the price that energy suppliers can expect to pay for electricity at a given time in a given region.

"What sets the [price] is the amount of demand actually on the grid," Collons said. "We have plenty of generation to meet demand."

She noted that even with monthly fluctuations, the average electricity price paid by suppliers last year was slightly lower than the 1999 average price.

And last year's average included December, when prices soared $26 over December 1999 to $44, a level that observers consider an aberration.

Still, the price in December - the latest month for which an integrated average was available - is why some competitors across the state cannot match the capped rate offered by the incumbent utility.

As for the fate of Utility.com and others that have decided the waters of competition are too roiled now, Cadden said that "people move in and out of the market all the time."

While the PUC monitors such activity closely, the commissioners do not see it as cause for alarm, Cadden said. The commission and other officials still believe the market will take care of itself.

"If the law of supply and demand works," Cadden said, and even a fraction of proposed power plants actually get built, "you're going to drop the price."

http://inq.philly.com/content/inquirer/2001/02/25/business/ELEC25.htm?template=aprint.htm

-- Martin Thompson (mthom1927@aol.com), February 25, 2001


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