Deregulation

Keystone Success

Why Pennsylvania's plan has worked -- so far

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The only problem 47-year-old computer consultant Keith van Brunt has with electricity deregulation is that it didn't come soon enough. "I couldn't wait to change companies," says van Brunt, who recently received a $25 gift certificate to Home Depot when he switched power companies. "It was painless. I signed up online."

Since 1996, 24 states and the District of Columbia have embarked on some sort of restructuring, all with the goal of a more market-oriented energy system. California, in the words of its governor, has proven a disaster. Others, such as Massachusetts and Rhode Island, have treaded water, with few customers switching companies and few companies entering the market. Pennsylvania, home of the country's first electrician, Benjamin Franklin, has been hailed as a success by everyone from the state's governor to its residential customers.

The Keystone State had the country's 11th most expensive electricity when lawmakers tacked an 84-page electricity-restructuring plan onto a one-paragraph bill allowing taxicab drivers to keep their cars for two extra years. At the time, seven utilities served most of the state's 12 million residents. No one had a choice. In Philadelphia, prices were especially high and service considered poor. "They couldn't even read a meter," says van Brunt, who had the electricity to his Philadelphia row house shut off because his utility, PECO, didn't read the meter. "They were horrendous. One time I ran into a meter reader on an adjacent street. I said, 'You have to read my meter now,' and she replied, 'That's not my street.'"

Electricity choice in Pennsylvania proved as popular as school choice in the inner city, with nearly 1 million customers vying for 280,000 spots in a 1998 pilot program. By January 2000, every citizen and business in the state could choose an electricity generator.

Since the first customers started switching in January 1999, rates have dropped 18 percent; 130 power companies now operate in the state. One quarter of the total load has switched companies. Nearly 10 percent of residential customers have chosen a new power company, and 20 percent choose to pay more for green power.

"Pennsylvania's story has been a success story," the chairman of the Pennsylvania Public Utility Commission, John Quain, told Congress in mid-February. "When Pennsylvania passed electricity competition in 1997, rates were, on average, 15 percent higher than elsewhere in the United States. Today Pennsylvanians pay rates, on average, 4.4 percent lower than elsewhere in the United States."

A combination of good fortune and good law not only allowed the state to avoid California-style blackouts, but to save an estimated $3 billion on power since 1998. That said, Pennsylvania's law is in some ways similar to California's. The plan funneled money to utilities to pay off bad investments and in exchange, retail rates were capped.

But unlike California, utilities weren't forced to sell off their generating capacity and they were allowed to enter into forward agreements for power. Pennsylvania didn't set up a mandatory power spot market. The state allowed direct retail access. Generators can and do enter into direct deals with commercial and industrial users.

The state also benefited from good circumstance. The PJM Interconnection had been running an integrated power grid for Pennsylvania, New Jersey, Maryland, Delaware, D.C., and part of Virginia since 1927. That greatly eased the transition. Power supply is plentiful. The PJM can call on 57,000 megawatts for its 9.5 million customers. The Cal-ISO, in comparison, has roughly 45,000 megawatts for 10 million customers. And since 95 percent of the state's electricity comes from nuclear or coal fired plants, the natural gas price spike didn't send the wholesale price cost through the roof.

Electricity choice has, not surprisingly, been most enthusiastically embraced in areas with high rates, like Philadelphia. In the City of Brotherly Love, there's little affection for the old monopoly utility, PECO, which has seen 45 percent of its industrial, 44 percent of its commercial, and 18 percent of its residential load go else-where. In areas where rates were already low for the residential user—such as State College and Butler—customers had fewer choices and fewer availed themselves of them.

Pennsylvania, while a success so far, ought not to be mistaken for a totally free market. Van Brunt complains that the power still comes over PECO's lines, and PECO sends him the bill. And the state caps retail prices. If power becomes scarce, or the area experiences fuel shocks comparable to California's, Pennsylvania will have the same debilitating disconnect between retail price and wholesale cost that's destroying California's system.

"The only reason that Pennsylvania hasn't melted down like California is that they don't use natural gas in the wintertime," cautions Jerry Taylor, director of natural resource studies at the Cato Institute. "If they did, they'd be in the same boat, and we'd be laughing about Pennsylvania instead of California."