The Basics of Pennsylvania’s Deregulation
In just over 40 days, electricity in Pennsylvania will never be the same. December 31, 2010 marks the final round of rate cap expiration- bringing full fledged competition to the entire state and ending the controversial electricity deregulation process.
In the early 1990’s Pennsylvania’s electricity rates were 15% above the national average- an unusual situation considering the keystone state’s abundance of cheap coal. Unlike cable or Internet service you had no choice where your electricity came from- electricity was a state-run monopoly. This all changed in 1996 with the passage of the Electricity Generation and Customer Choice and Competition Act. The bill was intended to make electricity cheaper by allowing outside companies to compete with PPL, Duquesne Light, PECO, and the other 8 regional monopoly utilities.
Before deregulation occurred, the Pennsylvania Public Utility Commission balanced the needs of consumers and utilities to set prices. This arbitrary method of decision making is far less efficient than market processes because decisions are easily influenced by politics.
Fearful of price gouging legislators tweaked the deregulation bill. Instead of allowing full competition they placed rate caps (or price ceilings) on utilities. Of course this did not sit well with the utilities so the state allowed them to collect a Competitive Transition Charge (CTC) from ratepayers. The fee was designed to pay for any stranded costs- basically risky or poor investments utilities would not have made if they were competing for customers. These political manipulations proved almost fatal to the deregulation experiment. When the cost of materials like coal and natural gas increased, alternative suppliers could not beat the artificially low rates. It was so distorted that Pennsylvanians were paying 12% less for their electricity in 2008 than they were in 1996.
The deregulation process hasn’t been easy. On top of CTC payments, rate cap expiration has been delayed in many parts of the state. In 2003, a massive rate increase for small rural utilities created more controversy and politicians repeatedly threaten to end competition. Thankfully the past year has proved deregulation critics wrong.
Shortly before rate caps were set to expire in the large PPL region the state entered a recession. The economic downturn caused market prices for electricity to drop low enough that competitors could undercut the uncapped prices utilities were charging. All of the sudden Pennsylvanians- after years of being able to shop with no better alternatives- were bombarded with advertising by companies that could offer them cheaper prices on electricity. As a result almost 30% of PPL’s customers have switched representing almost 50% of the load. (Perhaps this would be a good place to advertise the rates of your companies in the PA market) There’s a long way to go, but it is clear Pennsylvania is the only state, apart from Texas, where real electric competition is saving people money.
The next couple of months will be critical as consumers in the eastern portion of the state, including Philadelphia and Scranton, begin to shop. Will state politicians let the market take its course or will they muddle in a process that has already benefited millions? Will the people shop? Will enough alternative suppliers enter the eastern market to create competition? The questions go on and on, but at the end of the day it’s clear that competition in Pennsylvania is the best way to make sure residents pay the lowest electricity rates for years to come.