Energy Deregulation: What Does It Mean?

Deregulation is intended to encourage price competition in industries considered “natural monopolies.” As a result of the Federal Energy Policy Act of 1992 that opened wholesale power generation to the competitive market and the Federal Energy Regulatory Commission's (FERC) Order 888 in 1996 that mandated open access to the electric transmission system, electricity deregulation began. Since prices for retail electric service are regulated by the states and not the federal government, it was left to each state to determine whether or when to deregulate electricity prices. To date, seventeen states and the District of Columbia, including Pennsylvania, have elected to deregulate or “restructure” their electric service markets.

Deregulation of electricity generation pricing has been a fait accompli in Pennsylvania since 1999. For the Pennsylvania electric industry, deregulation means that only the generation portion of electricity service is open to competition under Pennsylvania's Electric Choice Program. As a result, all electricity consumers have the opportunity to shop for their electricity generation supplier of choice. Until 1999, prices paid for electricity by consumers bundled all of the electricity generation, transmission and distribution costs into a single price for energy (kilowatt-hour charge). Under the Pennsylvania legislation restructuring the Commonwealth's electric service industry, these prices were unbundled so that electricity consumers now pay unbundled prices for these services. However, all of these prices were capped beginning in 1999 during the transition to full deregulation for a period of ten years as part of an agreement between the Pennsylvania Public Utility Commission (PA PUC) and the electric utilities.

The transmission rate caps have now expired for all utilities. The distribution rate caps have also expired for all utilities except West Penn Power whose distribution rate caps will expire at the end of this year. The generation rate caps have already expired for some electric utilities: Citizens Electric, Duquesne Light, Pennsylvania Power, Pike County Light & Power, UGI Utilities, and Wellsboro Electric. For PPL Electric Utilities, the generation rate caps will expire on December 31, 2009 and on December 31, 2010 for MetEd, Pennsylvania Electric, PECO Energy, and West Penn Power. The removal of the rate caps now means that utilities already have or are planning to file for higher electric rates to recover costs that have increased substantially during the intervening ten years and prices for generation will reflect the significantly higher open market prices.

Even though all consumers have had the opportunity to select a new generation supplier under the Electric Choice Program since 1999, most didn't elect to change their generation supplier from their local utility. Why? The costs of electric generation under the artificial rate caps were almost always lower than competitive market prices so there has been no economic incentive to switch suppliers. That's all changing with the expiration of the generation rate caps.

Electricity consumers, especially residential and small business users in deregulated states across the U.S. and Pennsylvania, are already feeling price shock as electricity price increases of 50% and more are coming into effect as rate caps expire. Overall costs for electricity have increased due to implementation of more stringent environmental regulations on power plants, the retirement of older generation plants, regional restrictions in transmission and distribution capacity due to inability to site new facilities or recover their costs, growth in electricity demand, and higher fuel prices. The costs of fuel to generate electricity have gone up dramatically. Since 2000, natural gas and fuel oil prices have increased by over 300 percent on an inflation-adjusted basis while the price of coal has increased 150 percent.

Has electricity deregulation been good for Pennsylvania consumers? It depends on who you talk to. Deregulation advocates and some politicians tout the benefits to consumers under the rate caps: claims of $6 billion in cost savings, lower rates than most other states and an improved competitive economic development climate. Others cite that the majority of the cost savings have been realized by the large commercial and industrial consumers and that the rate caps have stymied needed investment in newer and cleaner generating technology, new transmission and distribution facilities and implementation of consumer energy conservation measures. Sensing the political backlash of the expiring rate caps, Governor Rendell and some legislators are now proposing extending the rate caps or even returning to regulated prices.

It remains to be seen whether deregulation beyond the rate caps will be good for Pennsylvania. One thing is certain for consumers: our energy future is going to look a lot different than our energy past.

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