Two views on electric utility restructuring in Pennsylvania

Michael Giberson

From the Central Penn Business Journal, two views on electric utility industry restructuring in Pennsylvania:

First from Matt Brouillette:

Pennsylvania’s electricity rate caps have kept prices artificially low, preventing competitors from entering the marketplace and consumers from having choices. Now, when rate caps expire in 2010 in PPL territory, most of central Pennsylvania will see an increase in electricity prices.

… Rate caps expired in western Pennsylvania years ago, and today 20 percent of Duquesne Light customers have switched to other suppliers. The competition has forced Duquesne Light to offer more competitive prices and better services. The result: Electricity consumers are benefiting.

… Competition forces companies to serve their customers with the best prices and service, giving consumers more control. While it’s true that electricity prices in both monopoly structures and competitive markets have escalated over recent years, that is due to rising costs for generating fuels, not deregulation. Moreover, prices already have begun to drop in competitive markets — an effect not seen in monopoly delivery systems.

Case in point is PPL’s recent announcement of a 30 percent rate hike this January. … A number of companies already have announced their intention to compete for PPL customers, with one, Dominion Retail, guaranteeing a savings of 10 percent on PPL’s rates for the first 5,000 customers.

Rejoinder from Eric Epstein:

Gov. Tom Ridge predicted that electric competition would lead to job growth, economic expansion and decreased rates.

According to Ridge, “Pennsylvania’s national leadership in electric competition continues to bring dramatic savings and economic benefits to Pennsylvanians” (Aug. 4, 2000). The success of electric competition would shave business costs and give employers more money to invest, thereby creating multiplier effects on the state economy. “Competition” also would produce savings that would give consumers more money to spend.

… Could the deregulators have gotten it more wrong?

The reality is not so dreamy. Electric utilities are collecting $11.4 billion in stranded costs, increased taxes on ratepayers and dumped customers at record rates.

… Deregulation was a great bargain for PPL. Last year the company reported a profit of more than $1 billion on $6.5 billion in revenue and set records in consumer cruelty.

… A study published by Carnegie Mellon University’s Electricity Industry Center in 2008 found, “On average, power users in restructured states pay 2 to 3 cents per kilowatt hour more than customers in states that didn’t restructure.”

… Decide for yourself if electric deregulation has delivered on its bold promises or served as yet another corporate failure. But don’t take too long. PPL is set to jack up residential rates by 35 percent in 2010.

Brouillette is president and CEO of the Commonwealth Foundation; Epstein is chairman of Three Mile Island Alert Inc.


7 thoughts on “Two views on electric utility restructuring in Pennsylvania

  1. Electricity deregulation has NEVER lead to a decrease in utility prices consumers pay.
    See the ENRON fleecing of taxpayers in California for the most blatent example of the free market failure produced because of deregulation.

  2. Well, these views are very different 🙂 I am from Germany and I really felt the change from state-owned electrical companies to privately-owned end-suppliers that nowadays dominate the market. It is a big difference and especially when it comes to service levels. I am more on Brouillettes side than Epstein, who obviously has some utopian fantasy about what happens when you deregulate ^^

  3. Max, it might help if you’d explain what the differences were in service levels and other characteristics. Better or worse?

    Both articles have problems. Brouillettes is the one who seems more Utopian to me because he is all-positive about competition. Epstein, on the other hand, spews ill-informed invective in the other direction. Neither case is really that clear. Not to mention that nobody seems to be able to differentiate between taxpayers and ratepayers. Epstein has the utilities increasing taxes on ratepayers, but it’s not immediately clear how that could have occurred. He may not understand the point of stranded costs, but that’s not clear either.

    The Carnegie Mellon study *as described in the article* doesn’t say that the deregulated states cost 2-3 cents/kWh more than the deregulated states well before deregulation. The usual reason for deregulating was to introduce competition because prices were high, and because regulation was thought to have failed. Nevertheless, CMU’s conclusion is about as good as one can do from retail sales and revenue data.

    Unfortunately, you can’t really tell whether prices are lower or higher in deregulation because history does not reveal counter-factuals. (That is, what would have happened otherwise? Are you sure you know?) Plus, stranded costs being awarded and collected clouds the issue everywhere it has occurred, as have capped retail rates, wholesale price caps, etc. Regulation and “deregulation” have both been screwed up in creative ways many times in many places. It’s just not ever going to be a clear call because we’ll never know what screw-ups were avoided when we chose the screw-ups that we chose.
    Consequently, it is no surprise the business writers are confused, or that they average out to no value added.

  4. Hal JordanN has a poor memory. California did it to themselves. First, they only deregulated at the wholesale level, but not the retail level. That left the distributors scrambling for supply but unable to charge even their costs to the end user. Hence, the end user had no reason to change his behavior.

    Second, the reason California had to rely on an Enron was their inability to all construction of generating plants of any kind. Hence, California had to go outside the state for supply.

    No, California was the victim of its own idiocy. A trait they continue to this day.

    Rick

  5. It took everything I had not to go there, Rick. 😉 But just to clarify for you and Hal… Though they may have held a long position prior to the crisis, Enron did not *cause* the power shortage, and Enron’s affect on wholesale prices is doubtless much smaller than most people realize. The rest of the story is too complex for a Monday morning, though I’m sure I’ve written here at length on the subject in the past.

    Here’s an article that explains the physical aspects of the crisis in some detail:

    http://tinyurl.com/9gzx7

  6. “Rate caps expired in western Pennsylvania years ago, and today 20 percent of Duquesne Light customers have switched to other suppliers. The competition has forced Duquesne Light to offer more competitive prices and better services. The result: Electricity consumers are benefiting.”

    I love it when capitalism shows that it works. Market meets demand and everyone wins, especially the consumers. Hopefully, health care will follow soon .

  7. I checked into that statement, Dorian, and the data aren’t quite that postive, at least on the surface. Duquesne’s reported average retail rates have risen just like everybody else’s. They’ve lost over half of their retail kWh sales in the past decade, mostly in commercial and industrial (which is all but gone). Residential sales have not declined though, and the monthly residential rates top out at about 14 cents/kWh these days, while the average monthly for the state tops out below 13. The only real conclusion one can draw from the EIA data is that DUQ’s prices have not declined visibly, and that the data don’t show that retained residential consumers of DUQ have benefitted in any direct way. I wouldn’t argue that they haven’t benefitted at all, but that the picture painted by that statement could be a bit more postive, or at least complex, than reality.

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