Electricity Deregulation Blog

POWER POINTS: Deregulation Battleground Moves To Pennsylvania

NEW YORK (Dow Jones)–The fight over deregulating power markets has fizzled, but could well flare up again when many Pennsylvania utility customers open up their January bills.

Customers of PPL Corp.’s (PPL) utility business will see their power rates jump by an estimated 30% following the Jan. 1 expiration of a cap on rates. A similar rate cap will be lifted from the state’s other major utilities, Exelon Corp.’s (EXC) PECO and Allegheny Energy Inc. (AYE), at the start of 2011.

The change for 4.8 million customers over the next year already has prompted a call by the state’s U.S. Sens. Robert P. Casey Jr. and Arlen Specter, both Democrats, for a broad review of the nation’s power markets. The senators in a late December letter to Jon Wellinghoff, chairman of the Federal Energy Regulatory Commission, asked for a “a substantive and comprehensive investigation” to determine whether power markets are producing fair and reasonable rates. A FERC spokeswoman said Wellinghoff plans to respond to the senators’ letter, but declined to say when.

The process of removing rate caps was set in motion more than a decade ago when Pennsylvania and several other states decided to break up their integrated utilities to foster competition and keep rates low. The changes left power plants to sell their wholesale output at market prices, while the charge for the delivery of electricity to customers continued to be set by state regulators.

The transition to a market-based system proved controversial in many states and didn’t deliver lower prices as promised. Protests, however, have died down over the last year as electricity prices fell sharply. The Barclays Capital U.S. Power Index, which tracks a basket of regional forward wholesale power contracts, is nearly 60% below its peaks in July 2008, driven lower by weakened demand and sizable declines in natural gas prices.

The drop in power prices didn’t come sharp enough or soon enough to preclude the 30% increase for PPL’s 1.4 million customers. However, the increase could have been much worse: In mid-2008, Pennsylvania regulators had estimated that removing the price cap could increase residential customers’ rates by around 65%.

The jump in retail rates is driven by the removal of the cap on generation charges, which had been limited since the mid-1990s through long-term agreements with power generators. PPL bought power to supply its customers in 2010 over the last three years, from nearly a dozen suppliers, including Constellation Energy Group Inc. (CEG), Public Service Enterprise Group Inc. (PEG), and its own energy supply business, PPL EnergyPlus.

While some consumers are signing up with a retail supplier at rates lower than what PPL’s utility is offering, many others won’t realize the rate caps have ended until they open their first bill of the year.

“I have no doubt there are many thousands of customers that have not focused on this,” said Sonny Popowsky, the state’s consumer advocate, whose office is already fielding several hundred calls a day on the issue.

For PPL, the end of rate caps promises a boost to its generation business, the main driver behind a jump in projected earnings to $3.10 to $3.50 a share this year from $1.60 to $1.90 a share last year. But the company hasn’t escaped the decline in power prices. At one point, it had forecast earnings of $4 to $4.60 a share for 2010 because of the transition to market-based rates.

By Mark Peters Of DOW JONES NEWSWIRES 

(Mark Peters covers the power and coal industries and environmental markets for Dow Jones Newswires. He can be reached at 212-416-2457 or by email at mark.peters@dowjones.com.)

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