Pennsylvania decision-makers' poor understanding of the electricity industry led them into a big mistake 13 years ago: giving up the state's authority to control electricity-generation prices. Consumers were promised a competitive retail electricity market that would restrain prices. The warnings that such a market would not develop went unheeded, but they turned out to be correct.
Now Pennsylvania is approaching the end of the purported transition to full deregulation, with electricity monopolies still in place. In the PPL service territory, that will mean a 30 percent rate increase for residential customers in January. Other utilities, such as PECO and FirstEnergy (including Met-Ed and Penelec), will go to full deregulation in January 2011.
Unfortunately, the governor and the General Assembly are essentially ignoring the problems that will accompany full deregulation.
Competition in electricity generation cannot happen, because the profit margin on a kilowatt-hour of electricity is too small. That's why the regulatory paradigm was created in the first place.
Utilities needed a huge customer base to make any money in this capital-intensive industry. The quid pro quo for their monopoly status was that they would guarantee reliable, affordable electric service. And except for where utilities opted for expensive nuclear power, that was what happened.
The state abandoned many consumer protections when it gave up regulating generation prices. Electricity generators no longer have to build plants or sell power to customers in their service territories, as they did under regulation. This means fewer plants are being built in the state, and it could mean even higher prices. The problem is that a few utilities own all the generation capacity and have no serious competitors, so they can charge whatever the market will bear.
Deregulation proponents keep promising that a market will develop when the rate caps come off over the next year. But we saw what happened when the caps ended in the Duquesne Light service area in 2002: not much. There was a rate decrease due to the sale of Duquesne's generating plants, but it has been virtually offset by subsequent rate increases. And no new competitors have entered the Duquesne market.
The biggest deregulation mistake was letting utilities sell their generating assets, often to wholly owned, unregulated subsidiaries. That has made it very difficult to mitigate the impact of the coming rate-cap expirations.
However, there are a number of measures state leaders should implement to ease the burden on ratepayers. First, the legislature should pass a law placing any newly built generation capacity under regulatory control. Over time, this would ensure that enough energy is available to meet demand at a reasonable price, forcing unregulated electricity suppliers to lower their prices.
Second, the state Public Utility Commission should open an investigation into costs claimed by the utilities. Before deregulation, utilities said the power plants they had already built would lose money in a competitive market. To get them to support deregulation, the state permitted them to collect $12 billion in "stranded costs" from customers during the transition to deregulation. This figure was supposed to represent the difference between what the utilities spent on their generation assets and their worth on the market.
Now that we know what the actual market price for electricity is, the PUC can determine if those generators were really uncompetitive. It's likely that an investigation designed to "true up" the cost estimates will find that there were little, if any, stranded costs.
If that's the outcome, the money should be refunded to ratepayers. A $12 billion refund could help offset rate hikes until other steps are taken to address the long-term consequences of the deregulation fiasco.