Overcoming the objections of Peco Energy, City Council on Thursday created an Energy Authority to help city government navigate the impending deregulation of electrical markets.

The 17-0 vote approved an authority whose responsibilities could include the development of power-purchasing blocs on behalf of city government.

The main effect will be to free Philadelphia from a City Charter prohibition on entering contracts longer than four years, said Councilman Darrell L. Clarke, the bill's sponsor.

The authority, whose five unpaid members would be appointed by the administration and Council, could form longer partnerships. It would serve as an arm through which the city could buy energy or engage in alternative-energy projects, Clarke said.

Lance Haver, the city's consumer affairs director, had envisioned the agency as a cooperative, buying power on behalf of customers, but that language was removed from the bill.

"It will not put the city in the business of buying or selling energy to consumers," Haver said.

But he said the authority could help develop innovative projects, such as systems to generate power from the methane released by the Water Department's treatment facilities, or set up solar generating stations to power city government facilities.

"It will put the city in the forefront of a new era in energy," Haver said. "Five years from now, other cities will be looking at what Pennsylvania is doing now and saying, 'We should be doing this.' "

Peco, which serves Philadelphia and its Pennsylvania suburbs, had requested a delay in the vote, objecting that the bill appeared to allow the city to develop power-generation projects in conflict with state law.

But Clarke said the authority "cannot sell to anyone but the city itself." And Chief Deputy City Solicitor J. Barry Davis said state law clearly prohibited the city from competing with other energy suppliers.

The legislation was a response to the coming deregulation in Peco's territory. At the end of the year, caps that have kept electric rates at 1996 levels will come off, and Peco's 1.6 million customers will be free to choose a new supplier of electricity from a wider variety of providers.

For most residential customers, the change may not be so dramatic. Peco's wires will still carry electricity to all the region's Pennsylvania customers, and Peco will still provide customer service and billing.

Peco's distribution fees, which account for about a third of a typical customer's bill, will still be regulated by the Pennsylvania Public Utility Commission.

But Peco will no longer be in the power-generation business. The suppliers that customers choose may offer discounts or electricity from renewable power sources.

For customers who don't switch, Peco will buy power on their behalf at a "default rate" to be set late this year. Rates are expected to go up about 10 percent.

While the residential electrical market may attract a few suppliers when business picks up in the fall, a robust competition is taking place over Peco's commercial and industrial customers. Though only 10 percent of Peco's customers, they consume 56 percent of the electricity.

The city government is one of the region's largest electric consumers; its facilities account for 1,200 electric meters and an annual bill of about $65 million. Philadelphia International Airport alone pays $10 million a year in electrical charges.

The new authority would be in a position to pool those accounts and negotiate a better deal for taxpayers, the bill's sponsors said.

Not everyone was pleased by the bill.

In written testimony presented at a May 5 hearing, Joe Mahoney, executive vice president of the Greater Philadelphia Chamber of Commerce, said the chamber "does not see a sound business case" for establishing the authority.

He said the city already possessed staff with expertise to manage the city's energy use.

"The creation of an energy authority could lead to direct involvement in volatile energy markets with high levels of risk for the city's finances and long-term costs to residents and businesses," he said.

Contact staff writer Andrew Maykuth at 215-854-2947 or amaykuth@phillynews.com.