Tag Archive for deregulation

Electricity deregulation will “shock” some central Pennsylvania businesses

From tax shortfalls to price spikes to power blackouts, electricity price deregulation has sometimes been more of problem than a solution, and states sitting on the fence are closely watching what happens with deregulation in Texas and Pennsylvania, which will complete their deregulation programs next year.

Business owners are concerned about the last of Pennsylvania’s electric power companies deregulating their prices since price hikes are likely to occur at a time when businesses can least afford them.

On Jan. 1, the price of electricity for PPL residential and business customers in Clinton, Juniata, Lycoming, Snyder, and Union Counties will become deregulated under Pennsylvania’s 1996 electricity deregulation law.

PPL estimates that its “GS-1” small business customers, which are businesses with a maximum 25 kilowatt peak demand such as small retail stores and small restaurants, will see an 18.4 percent increase in their electric bills next year.

The increase for larger “GS-3” small business customers, the top end being a “big box” store, will see a price hike of about 36 percent.

Allegheny Power, which serves all or parts of 23 Southwestern and Central Pennsylvania counties, began to phase in its deregulation in 2006 with incremental annual rate increases.

In January 2009, Allegheny Power’s rates increased by approximately 12 percent for residential and commercial customers, and 14 percent for industrial customers.

With the rate increase already in place for 2010, the expected remaining increase for Allegheny’s customers would be 14 percent for residential customers, 13 percent for commercial customers and 10 percent for industrial customers.

Originally, Pennsylvania’s utility deregulation was supposed to be completed by Jan. 1, 2001, but numerous delays occurred as the state transitioned to a deregulated market and power companies outside the state went through the extensive review process with the PA Public Utility Commission (PUC) to compete for electricity customers.

Some state legislators supported extending the rate caps until after the economy recovered, but the deadline for completion throughout the state was upheld at Dec. 31, 2010 for most investor-owned utility companies. Rural electric cooperatives and municipally-operated utility companies are exempt.

The PA PUC implemented rate caps to ease the potential chaos as the phased in deregulation occurred.

That deal turned out to be good for small businesses, because price caps kept electricity below market rates. Prices have remained nearly constant since 1996 for most business customers, with annual increases ranging from 0 to about 5 percent, while the prices of oil and natural gas increased and then skyrocketed last year.

PPL estimates that in July 2008 when oil prices hit $147 a barrel, its generation cost increased by 85 percent, but because of regulation, the company could not pass on this cost to its customers.

Only a small number of power plants use oil to generate power in the state. For example, Allegheny Power has seven power plants in Pennsylvania: 79 percent coal-fired, nine percent natural gas-fired, 11 percent pumped-storage and hydroelectric, and only one percent oil-fired.

However, because energy sources can be substituted for each other, they are tied together in the market, so when the price of one goes up, so do the others.

“The goal of ‘utility restructuring’ is to lower electricity prices by creating a competitive market for customers, but it’s likely to be a while before that’s realized at the consumer level,” said William Lloyd, Jr., Esquire, Small Business Advocate for the PA Office of Small Business in Harrisburg.

Next year, most Pennsylvania utility customers will be able to buy their electricity from their present provider or from a PUC-approved power company in Pennsylvania or another state and base their choice on price, contract terms, or green/renewable energy options.

The present provider will continue to distribute and transmit the electricity in their area and will charge for delivering it. They will also serve as “the electricity generator of last resort” if the new supplier is unable to provide electricity.

This will prevent the power outages like those that happened in California, which critics have called the “Chernobyl of electricity deregulation,” which provoked statewide protests over power outages and soaring electricity rates.

“California’s deregulation was very similar to ours, but the important difference is that their legislators decided that utilities should sell their power plants to reduce pollution and rely solely on short-term purchases from outside the state to provide electricity,” said Lloyd.

“The problem was that not having locked in long-term rates at a lower price for two or three years subjected the utilities to price spikes, which they passed on to their customers.”

Pennsylvania’s restructuring plan allows power companies to buy electricity in the “spot market” and longer-term markets to make rates less vulnerable to spikes.

Andrew Kleit

that it leads to tremendous cost overruns,” said Andrew Kleit, Professor of Energy and Environmental Economics, in the Department of Meteorology at Penn State.

“Pennsylvania consumers have been paying billions in dollars for bad investments in nuclear power plants, because the utilities had been investing with rate payer’s money,” said Kleit.

“There will be some pain, but in the long run, the price of electricity would have gone up under either system due to a rise in worldwide demand, but I think this will be a better deal for consumers and companies, because restructuring will force Pennsylvania utilities to invest and operate more wisely, which will make the electricity industry in our state more efficient.”

Will we see more deregulation happening across the U.S.?

“That largely depends on what happens here in Pennsylvania and in Texas,” said Kleit.