Flawed system is hurting electricity competition in Pa., critics say

The Associated Press

PHILADELPHIA -- Electricity competition is slow to grow in Pennsylvania partly because the rules of competition are flawed, according to consumer groups, energy marketers and utilities.

Many of the new energy suppliers who were supposed to provide competition for the established utilities are losing out and the number of residential customers using alternative suppliers has dropped 25 percent since April.

The number of Pennsylvanians who purchased their electricity from an alternative supplier dropped to 591,596 between April and this month, according to statistics compiled by the state Office of Consumer Advocate. The drop occurred even though about 250,000 PECO Energy Co. residential customers were assigned to an alternative supplier as part of a deregulation agreement.

Only two of PECO's seven competitors offered a lower price than PECO, but by mere hundredths of a penny per kilowatt hour, according to June statistics from the Office of Consumer Advocate. New Power Co. also offered a slightly lower price, but those customers did not choose their supplier; they were automatically assigned to the competitor by state mandate.

At the center of the deregulation debate is PJM Interconnection LLC, a quasi-corporate entity charged with managing the region's electric power grid.

Valley Forge-based PJM has received praise for how it crafted its wholesale electricity market. PJM's territory includes Pennsylvania, New Jersey, Maryland, Delaware, Virginia and Washington.

But the accolades could not prevent high prices in its wholesale energy market from pummeling would-be competitors last winter.

Many competitors to local utilities also took a financial bath in what is called the capacity market, which stipulates that any regional electricity supplier must buy enough energy for all of its customers, plus an additional margin in case some of their purchases fall through.

PJM conducts auctions for this added capacity as insurance against blackouts and other power disruptions. For companies that own power plants, typically the large utilities, this is usually not a burden because they are often the ones selling their excess power into the capacity market.

But it can hurt firms that buy all their power in the wholesale market.

Between December 2000 and January, when the rate for capacity jumped from about $65 per megawatt per day to $177, there was criticism of the practices of generation suppliers.

The higher the demand, the higher the bids that generators receive from firms that need electricity. Generators could withhold their electricity from the market, hoping that desperate energy marketers would pay more to meet capacity obligations.

"Some people within the market figured out a way to game the system within the rules," said Tim Smith of Green Mountain Energy Co., a Texas-based energy marketer that supplies power in Pennsylvania.

Such a price jump could push up an energy marketer's cost by 1.5 cents per kilowatt hour, eroding its ability to charge lower than the local utility, Smith said.

PJM spokesman Robert Hinkel said an investigation found there was no merit to the allegations of abuse.

During most hours, when demand for electricity is moderate, generators sell at or very close to cost, but at night, when demand is low, "we practically give it away," explained Doug Biden, president of the Harrisburg-based Electric Power Generating Association.

The capacity market charges a premium for power during the times everyone wants it.

"I don't blame the marketers for not liking that," Biden said. But he said it allows generators to recover their production costs.

Pennsylvania's large utilities have another advantage for now. They have a cap placed on what they can charge customers, and it is hard for their competitors to offer prices that come in under that.

In the absence of true competition, these mandatory, temporary caps are holding electricity prices down. They expire at different times in the next several years for different utilities. PECO's caps are due to expire by 2011.

At that point, utilities will be free to charge customers for what the utilities say are their true costs of producing energy.

Depending on whom you ask, those same rate restraints make it hard for competitors to beat the local utility on price, giving consumers little incentive to shop around. Others blame high and unpredictable wholesale prices for competitors' woes.

There are signs, however, that the competitive landscape may improve.

Power plants capable of lighting several million homes are scheduled to come online in PJM's region within the next few years. That should make wholesale prices and capacity market prices more affordable to competitors year round, Hinkel said.

http://web.centredaily.com/content/centredaily/2001/07/09/news_local/d0132bc-pa-powercompetition.htm

-- Martin Thompson (mthom1927@aol.com), July 12, 2001