PPL and PUC seek ways to keep rates from soaring when caps expire
By Tim Mekeel
Published Jun 06, 2006 13:59
“Whenever you find your inspiration, we’ll be there when the light goes on,” it reads.
But when PPL ponders how its rates might rise, its mindset is more in line with late philosopher and poet George Santayana.
“Those who cannot learn from history are doomed to repeat it,” he wrote.
Seeing the havoc that’s resulted from caps expiring on rates of other electric companies, PPL is taking steps to avoid the same fate when its cap runs out in December 2009.
It’s too early to predict what will happen when PPL’s cap expires, a change set in motion by the state’s deregulation of the electric industry 10 years ago.
But PPL, which serves nearly all of Lancaster County, and the state Public Utility Commission, which oversees the industry, have no interest in letting history repeat itself.
Rates at electric companies in Pennsylvania, Maryland and Delaware have soared as much as 72 percent recently when their caps have expired.
“We believe there are better ways to do it,” said PPL spokesman Dan McCarthy.
The PUC, which also has been studying the forces that have pushed uncapped rates skyward, has scheduled a June 22 public hearing in Harrisburg on the matter.
“We must begin in earnest the conversations about how to best protect the public interest as the transition period to full retail competition ends,” said PUC chairman Wendell Holland.
“We must all work together to develop a plan to alleviate future shock for electric consumers and add stability to electric prices,” he said in a prepared statement.
“At the same time,” Holland continued, “we must work to educate consumers about energy prices and the need for conservation measures so that they may begin to prepare now for volatile energy costs.”
The hearing will be in Hearing Room 1 of the Commonwealth Keystone Building, 400 North St., Harrisburg, at an afternoon time to be announced.
Written comments can be submitted to the PUC’s Shane Rooney via e-mail by 4:30 p.m. June 15. His e-mail address is srooney@state.pa.us
Why the concern?
PPL is delighted that the PUC is tackling the issue, said McCarthy.
“We’re very pleased that the PUC is engaged in this thing, and has been. We’re looking forward to working with them to make sure we get the best deal for our customers,” he said.
It’s a technical issue, but one that will have a tangible impact on customer bills.
At its foundation is the gradual and complex deregulation of the state electric industry, as mandated by the 1996 Customer Choice Act.
As part of deregulation, the state put temporary caps (or limits) on the amounts that electric firms could charge for the two main costs that go into providing service. The expiration of those caps varies by utility and by the cost it covers.
For instance, at PPL, the cap on the amount it could charge to deliver electricity — which represents less than a third of a customer’s total bill — expired in December 2004.
PPL raised that charge in January 2005, with PUC approval, causing the average residential bill to rise 8.5 percent.
The cap on what PPL can charge for generating electricity — which accounts for more than half of the total bill — runs out in December 2009, raising worries about rates come January 2010.
Without a cap, and absent a drastic change in the energy market over the next three years, this charge for generation is certain to rise. It’s just a question of how much.
While the cap on the generation charge is going away, so will a third charge on customer bills, slightly offsetting the likely rise in the generation charge. That charge is the so-called “stranded cost” or “transition” charge, which also expires in December 2009. It accounts for a seventh of the bill.
The transition charge allows electric companies to recover billions of dollars they’ve invested in building power plants over the years, as the industry “transitions” to an uncapped one.
Restructured industry
With caps and charges in flux due to deregulation, so is the very structure of the industry, for the same reason. That too is making a mark on customer bills.
Under deregulation, electric firms’ delivery businesses were separated from their generating businesses. At PPL, for instance, they became PPL Electric Utilities and PPL Generation.
At the same time, deregulation allowed customers to choose their electricity generator (supplier), but made them keep the same delivery business.
What if customers didn’t make a choice, or the firm they chose stopped providing service?
Deregulation required the delivery businesses to fill the gap — a mandate that would cast a shadow on almost every customer bill years later.
Delivery businesses have to serve those customers with electricity obtained from generating businesses under long-term deals, with prices capped at levels set by the PUC and other parties.
The delivery businesses asked the generating businesses to make bids. And for PPL Electric Utilities, the best offer came from a familiar source — PPL Generation, which markets its power via PPL EnergyPlus.
But the deal and the cap run out in December 2009. That means PPL Electric Utilities will have to go back into the electricity market, but without the protection of a cap.
And right now, the market price for electricity is much higher than PPL EnergyPlus’ capped price, since the prices of fuels often used to generate electricity have soared.
Here’s why that matters.
Nearly all of PPL Electric Utilities’ 1.3 million customers, including 200,000 in Lancaster County, get electricity through PPL EnergyPlus and PPL Generation.
Only 180 PPL Electric Utilities customers, all of them commercial or industrial, use power made by another generator, according to the state Office of Consumer Advocate.
The reason is that the gap between capped and market prices has chilled the ability of alternative generators to make money by offering power to PPL Electric Utilities customers.
For instance, while PPL EnergyPlus’ capped retail price for generation is 4.9 cents per kilowatt hour, the weighted wholesale price recently on the regional power grid was 6.3 cents.
At the same time, that gap is turning up the heat on electric firms whose caps are running out and is posing a financial threat to customers now enjoying those capped rates.
That was the predicament facing Pike County Light & Power when its capped deal ran out last fall, prompting it to return to the energy market to fulfill its electric needs all at one time.
“It turned out, it was a bad time,” noted McCarthy.
Pike County customers were walloped with a 73 percent leap in rates, because the electric firm had to secure power just when generators were adjusting for post-Katrina spikes in the prices of two key fuels, natural gas and oil. The rate increase was shaved to 65 percent this spring.
Other electric firms have faced the same scenario with similar outcomes.
Residential rates grew 59 percent for Delmarva Power Co. customers in Delaware on May 1 and will surge 72 percent for Baltimore Gas & Electric customers on July 1.
Chicago-based Commonwealth Edison is proposing another tactic for coping with the expected 15 to 20 percent rise in rates at year-end when its cap expires. It wants to have annual rate hikes of 8, 7 and 6 percent the next three years. If those three hikes don’t cover the increase, the balance — plus interest — would be collected in 2010-2012.
Good cap, bad cap
Ironically, the expiration of generation rate caps had been a good thing under certain circumstances in the past, noted Terrance Fitzpatrick, the PUC commissioner who made the motion for the June 22 hearing.
Duquesne Light, for example, had its generation rates capped at a high level, reflecting its historically steep prices.
And when its rate caps expired in 2004, the energy market was much lower.
The combination of a high cap and a low market meant, when the cap expired, Duquesne’s rates fell 15 percent, said Fitzpatrick in his motion.
Ah, the good old days.
Now 4.7 million customers of PPL, PECO Energy, Metropolitan Edison, West Penn Power and Pennsylvania Electric face sharp hikes in rates when those rate caps expire in 2009-2010.
In scheduling the June 22 hearing, the PUC said it will consider gradually phasing in higher rates before the caps expire, rather than afterwards as ComEd is proposing.
The PUC also hopes to hear suggestions for other ways to avoid an abrupt, sizable rate increase, as well as ways to promote conservation, reduce peak demand for electricity and protect low-income customers.
Former PUC commissioner John Hanger said the PUC can do several things to alleviate a spike in rates when the caps expire and end a time when electricity essentially has been priced “on sale.”
The most powerful option is to encourage conservation, thereby cutting demand for electricity, especially during times of peak use and spur alternative generation.
Hanger, a deregulation advocate who now heads the public-interest think-tank PennFuture, said the PUC also can act to spur production of electricity by plants that don’t use fossil fuels.
As PPL surveys how other electric firms have coped with expiring caps, it’s concluded that procuring its entire 6,000-megawatt load at a single time, as did Pike County Light, would be risky business.
The smarter strategy, PPL believes, would be to “hedge that bet” by making multiple purchases over a period of time to procure its future needs, McCarthy explained.
It might try to make those purchases with other electric firms, to gain buying power, under the auspices of the PUC, he said.
Whether it approaches the market by itself or with other firms, PPL has no interest in rolling the dice and doing it just once in December 2009.
“We certainly believe we should do something before then, and we plan to. We’ll be out in the market well before December 2009 ...,” said McCarthy.
“We can’t predict market prices. But we can design a system to get the best prices available and not expose the company or our ratepayers to the market at any one time,” he said.
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