Electric Restructuring In Pennsylvania Sonny Popowsky Pennsylvania Consumer Advocate May 10, 2007 Institute for Regulatory Policy Studies Transforming the Electricity Market Springfield, Illinois PA Office of Consumer Advocate 555 Walnut Street Forum Place, 5th Floor Harrisburg, PA (717) Telephone ppt

2 Why did Pennsylvania open up the electric utility industry to competition in the first place? What was the problem?

3 Average Residential Price of Electricity in Cents Per Kilowatthour Duquesne Met-Ed Penelec Penn Power PP&L PECO West Penn Pennsylvania Source: Pennsylvania PUC, Electric Power Outlook, July, 1993

4 If significant utility rate disparities were caused by failed electric generation choices, and if electric generation is not a natural monopoly, then one possible solution is to open up that portion of the electric industry to competition.

5 So, what did we think was going to happen?

6 Competition would drive down electric generation costs to the marginal costs of production and would drive down retail rates. Competition would therefore “strand” existing utility generation investments. That is, market prices would not cover the high embedded costs of utility generating plants that were built under the protection of regulation. Utilities therefore were permitted to recover stranded costs.

7 But Just in Case… Just in case the predictions of significant retail competition and lower electricity prices didn’t come true, the Pennsylvania electric restructuring legislation included long-term retail rate caps that prevented the utilities from charging higher rates than they had been charging prior to restructuring.

8 What actually happened?

9 Projections of PJM Energy Prices Used by PPL to Estimate Stranded Costs vs. Actual ($ per mwh) YearPPL EstimateAnnual Average PJM LMP 1999 $ 22 $ $ 23 $ $ 24 $ $ 24 $ $ 25 $ $ 26 $ $ 26 $ $ 27 $ $ $ $ $ $ $ $ $ $ $ 37

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12 In a single market clearing price market design, such as the one used in PJM, the price bid for the last (most expensive unit) dispatched in any hour establishes the price paid to all the units in the spot market in that hour. These spot prices also affect forward contracts and the prices negotiated for bilateral contracts over time.

13 The use of a single market clearing price causes all wholesale electricity prices to increase when natural gas and other fossil fuel prices rise.

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16 Results of New Jersey Wholesale Auction – 3-Year Bids (¢ per kwh) 2003 (34- month) PSEG Rockland Atlantic Electric JCPL ppt

17 Results of NYISO POLR Auction Pike County Light & Power Company Residential Customers Generation Rate % Change First 1,000 kwh ¢/kwh ¢/kwh129% Over 1, 000 kwh ¢/kwh ¢/kwh129% ppt Total Bill % Change Residential Customer using 700 kwh/month $75.50$ %

18 What’s Next? Will the next round of wholesale price auctions in the Eastern PJM states be substantially lower than the last (post- Katrina) round, or will prices be “stickier” on the way down than they were on the way up?

19 What About Retail Competition? As wholesale prices in PJM increased, retail competition in Pennsylvania declined. For utilities that had lower historic generation rates, the level of residential shopping has approached zero.

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21 In my view, there is nothing wrong with that as long as the default service is reliable and reasonably priced. Default service for residential customers should be as good as, or better than, traditional regulated generation service.

22 To the extent that competitive retail marketers can offer residential customers reliable service at lower prices – or can offer other value-added products such as renewable or “green” products – then the benefits of restructuring will be even greater.

23 The Wrong Answer: If competitors are unable to offer a service that is better than default service, let’s change the rules to make default service worse than competitive service. OR Let’s make default service so ugly – that is, so expensive and so volatile – that consumers will have no choice but to switch.

24 In my view, the goal is not to get all residential customers to switch to competitive generation suppliers. Retail switching is a means to an end, not an end in itself. The goal is reliable service at reasonable prices, whether provided through default service or from the competitive retail marketers.

25 The Default Service Happy Meal Would you like fries with that transmission and distribution service? Do the additional marketing, acquisition, and transaction costs involved in residential retail generation competition outweigh the potential savings to individual customers that the competitors can offer?

26 What Next? As initial rate caps expire, retail default prices in Pennsylvania are supposed to reflect prevailing wholesale market prices, but they should not, in my view, be based only on spot market or short term contract prices. Nor should they be based on one- time auctions, in which the default provider rolls the dice and obtains generation for all of its load at a single point in time.

27 Default service for residential customers should be based on a portfolio approach. The default provider should secure a portfolio of resources through a variety of competitive methods. Default service should include short term and long term contracts and spot purchases; renewable and non-renewable resources; supply side and demand side resources. The goal should be a reasonable and stable price for the vast majority of customers who do not choose (or cannot choose) to switch.

28 Default customers should pay a rate that reflects the overall costs to the default service provider of this portfolio of resources. The price can change annually to reflect the changes in the resource portfolio.

29 Conclusions(1) The likely end state for residential customers in restructured states like Pennsylvania is one in which most customers will continue to be served by their incumbent utility default service provider. In my view, the best model for that service is one in which the customers can receive stable, reasonably priced service from a default service provider who acquires a portfolio of resources through a variety of competitive methods. Even without substantial retail shopping, it is imperative that the PJM wholesale market provide reliable, truly competitively priced wholesale supply services to all retail providers.

30 Conclusions(2) To the extent that retail competitors can attract customers by offering a cheaper, greener, or otherwise “better” service, we should encourage such competition. But the primary goal is not competition for the sake of competition. The primary goal, in my view, is the universal provision of reliable electric service at reasonable and affordable prices.