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The Pennsylvania Power Market is Evolving—is Your Business Prepared?
Q&A with Direct Energy Business on the Upcoming Changes in the PA Power Market

The following Q&A with Direct Energy Business PA Sales Director, David Grupp, and Direct Energy Business Government and Regulatory Affairs Director, Ron Cerniglia, outlines the changes that are occurring in the Pennsylvania power market and why certain consumers in the state may benefit from exercising their right to choose sooner rather than later.

What are the “changes” that are occurring in the Pennsylvania energy market?

When Pennsylvania passed the Electricity Generation Customer Choice & Competition Act in 1996, which allows consumers to procure their electricity from a competitive supplier, rates were frozen for certain utilities to give the competitive market time to grow and to allow time for the regulatory proceedings required to implement this bill. The rate caps for the state’s 11 public utilities have been expiring over the last several years, with five utilities still supplying energy at capped rates—Pennsylvania Power & Light (PP&L), PECO, Allegheny Power, Met-Ed and Penelec.

At the end of this year, the rate caps for the PP&L territory will be ending and businesses receiving energy supply from that utility will be faced with default service pricing that will likely be, on average, 30 percent higher than the utility default supply rates they had been paying. Specifically, small businesses can expect an 18-20 percent increase* and mid-size businesses (<500kW) can expect a 36-40 percent increase*. Large C&I customers (those above 500kW) who stay with the utility will default to hourly pricing, or market-based rates, as opposed to a smoothed-out fixed price. This can amount to uncertainty for these customers since market rates change from hour to hour and can be volatile based on various factors, which is much different than paying a flat rate for power supply.

The rate caps on the remaining utilities—PECO, Allegheny Power, Met-Ed and Penelec—will expire on Dec. 31, 2010 but the procurement plans to establish the default service rates for these utilities are being addressed in their respective default service proceedings, some of which are still pending before the Pennsylvania Public Utility Commission (PAPUC). Click here for a map with utilities and their rate cap expirations

The trend line for historical forward wholesale electricity prices from 2007 to the present shows an increase through last summer and a sharp decline since then. PP&L’s procurements for 2010 were made over a period of time and will be averaged to set default service rates for its customers.

Why are PP&L’s default prices expected to be so high—haven’t electricity prices dropped in this recession?

While it is true that there has been a downward curve in commodity prices since late last summer, due in large part to the recession and the basic principles of supply and demand (with demand being down), the default service rates that will soon be set by the utility for 2010 are based on procurements made at various points in time from July 2007 through April 2009, with one additional procurement auction set to take place in October 2009 (see chart). This procurement schedule to set 2010 default pricing was part of a competitive bridge plan that allowed the utility to procure power over a period of time on a set schedule. These procurements were made in the forward market for delivery year 2010 and the average price of the six rounds of procurements will determine the actual default service rates for PP&L’s customers in 2010. Because forward prices for 2010 were higher at various points in time when these procurements were made, PPL’s default service is expected to be higher than what forward pricing may have been during its lowest points in 2009.

As it stands, with the first five procurements completed, the default service rates will be, on average, 30 percent higher* than the current capped rates. This difference is reflective of the overall price increases of energy from 1997 to the present. Since rate caps were set back in 1997, customers were seeing an artificially low generation rate—not a market-reflective price—for the last 12 years. For example, if you were locked into the 1997 price of gasoline and you were suddenly made to pay whatever the going rate is at the pump today, that price would inevitably be higher today than it was in 1997, unless there was a drastic drop in demand and an abundance of supply.

How can customers prepare for the upcoming changes?

Businesses in the PP&L territory, or any of the remaining Pennsylvania utility territories that have rate caps expiring in 2010, may want to begin to think about taking advantage of a competitive electric supplier for energy procurement options. Competitive suppliers offer procurement choices that are tailored to a business’ usage, budget and appetite for risk. They can help customers capitalize on favorable market conditions, such as have been seen during the recession, through proper planning and advantageous timing of purchases.

The utilities have various approaches and schedules for procuring energy for the post-rate cap period but, based on changes in the market since the rate caps were set (increases in the overall cost of power since 1997), these procurements could result in increases that some customers are not prepared or budgeted for. Over the past several months however, electricity prices have dropped providing an opportunity for lucrative forward purchases. By acting sooner than later, current forward pricing can provide a value over post-rate cap utility default service prices that were secured when forward pricing was not as much of a value.

What does all of this mean in terms of retail competition?

Currently, a large portion of the state’s load is being supplied at capped prices, which leaves very little room for competitive suppliers to offer cost-effective alternative supply options. As rate caps are removed from the remaining five Pennsylvania utilities, more customers will be exposed to true market pricing—instead of artificial pricing in the form of rate caps—which will provide customers with more direct price signals. (Click here for a map with utilities and their rate cap expirations). Customers will likely become more conscious of their energy consumption and will have more of a need to seek out the best product and procurement structure for their business model. Competitive suppliers will have the opportunity to truly compete for customers, which will encourage suppliers to offer more attractive, innovative products and provide better, more reliable service.

According to the Retail Electric Supply Association (RESA), if retail competition is allowed to flourish, consumers in the state will be able to reap the benefits because when producers have to compete for customers, they work hard to reduce costs, improve service and offer innovative products, such as renewable energy options. For example, in the Duquesne Light utility service territory (Southwestern Pennsylvania), where rate caps expired in 2005, current customer shopping statistics show more than 17 percent of commercial consumers** and 49 percent of industrial customers** in that utility territory are procuring their power from competitive electricity suppliers.

As Pennsylvania’s policies to foster competitive markets continue to mature over the next several years and all of the state’s utility service territories will be able to support competitive suppliers, it is expected that all customers will have a broader choice of products and service offerings as suppliers compete to serve customers in utility territories that were locked into capped rates since the state deregulated.

Direct Energy Business, who has made its home in Pennsylvania and has been serving customers here for more than 20 years, is committed to helping businesses in state and across North America understand and make the most of retail electric choice. As energy markets in deregulated regions evolve, Direct Energy Business will continue to advocate on behalf of market rules that support energy supply choice and allow competitive offerings to bring value to the electricity consumers in those areas.

* http://www.shareholder.com/Common/Edgar/317187/922224-09-31/09-00.pdf

** http://www.oca.state.pa.us/Industry/Electric/elecstats/Stats0409.pdf

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