Pennsylvania, New Jersey Receive No Savings from Power Competition

Pennsylvania, New Jersey Receive No Savings from Power Competition

By Benjamin Y. Lowe, The Philadelphia Inquirer -- May 20

The lofty plans to save Pennsylvania and New Jersey consumers money on their electric bills through competition are failing.

The discounted rates, which once brought savings of up to 20 percent, have disappeared over the last 16 months as competition for consumers' business has dried up, an Inquirer analysis shows.

Rates charged by start-up companies now nearly match or exceed those offered by the region's six traditional utilities. For example, the most consumers can save now with a start-up compared with Peco Energy Co. is 2 percent, or about $1.40 on a $70 monthly bill, an amount that discourages switching to a new and unknown supplier.

Most of the start-up companies that offered big savings under the states' three-year-old electricity deregulation programs have stopped serving customers -- sending thousands of households and corporate users back to the traditional utilities.

The idea of deregulation was to lower infamously high electricity rates in Pennsylvania and New Jersey by bringing competitors to the market. It had been essentially a monopoly, controlled by a small number of large utilities -- the consumer had no choice of supplier.

Competition was intended to provide the choice, though traditional utilities still deliver the electricity since they own the lines into homes and businesses.

The programs worked well in both states from their implementation through December 2000. Alternative suppliers flooded the market, offering many opportunities for Pennsylvania and New Jersey consumers to save money on their electric bills.

But that ended on Jan. 1, 2001, when one of the traditional utilities, PPL Corp., of Allentown, raised certain wholesale electricity prices to six times their normal levels. That, for the first time, demonstrated the leverage big utilities have over start-up companies here.

The Pennsylvania Public Utility Commission is investigating to determine if PPL acted improperly. Its findings and recommendations, which could reinvigorate the failing program, could come this week.

The failure of electric competition is especially surprising for Pennsylvania, which was -- and still is -- heralded nationwide after it became one of the first states to open its market to competition in 1999.

It is clear now that Pennsylvania and New Jersey legislators designed a deregulation law that did not provide a truly competitive environment, as other states did.

As a result, 27 percent of the 96 start-up companies in Pennsylvania have dropped out of the market, and 252,235 customers, or 44 percent of those using alternative suppliers, are back with the big utilities.

"Everybody anticipated a market shake-out, but nobody expected it to this extent," said Nadia Adawi, director of operations for the Energy Cooperative Association of Pennsylvania, a Center City group that bundles customers for electricity retailers.

The shake-out in New Jersey is worse: 93 percent, or 94,167, of the customers there using alternative electric suppliers have returned to their traditional utility since January 2001. Moreover, 12 of the 26 start-up companies are not serving customers there -- although some of them are in other markets.

"There isn't the competition we hoped or expected," said Jeanne M. Fox, president of New Jersey's Board of Public Utilities.

Fox's Pennsylvania counterpart, Public Utility Commission Chairman Glen R. Thomas, said the agency still is trying to bring customers the reliability and prices they want. But he conceded Pennsylvania is "working through a transition period."

Many of the start-up companies have not weathered the transition.

Companies such as SmartEnergy Inc., Utilimax.com, and NewPower Holdings Inc. all lost millions when PPL raised prices.

For example, SmartEnergy, of Woburn, Mass., last year returned its 10,000 customers in Pennsylvania and New Jersey to their traditional utilities. The company, like other start-ups, refuses to reenter the market until the rules change.

"Our supply costs were too high to compete with the utility's price," said Patrick Jeffrey, a SmartEnergy vice president.

-- Like thousands in Pennsylvania and New Jersey, consumers such as Morton H. Liebman, who lives in Philadelphia's Woodside Park section, and Edward W. Leisenring, of Berwyn, every month are reminded of deregulation's failure.

Liebman and Leisenring before Jan. 1 of last year saved up to $24 off their monthly electricity bills compared with what they would have paid Peco, their traditional Philadelphia utility.

But that savings is gone. Liebman, 75, a retired history teacher, still is using his alternative electric supplier, ElectricAmerica, but the rate he pays now is nearly the same as Peco's. Leisenring gave up trying to find another electric company and returned to Peco.

"The whole opportunity for savings is gone out of this program," said Leisenring, 48, a Comcast salesman.

Industrial customers also are losing out. Philadelphia Suburban Corp., the Bryn Mawr water utility, saved $3 million a year in electricity costs when deregulation began. The Thomas Jefferson University and Thomas Jefferson University Hospital System saved $5 million annually.

But the savings have vanished. For the last several months, both have looked for competitive electricity suppliers -- without success.

-- The programs in Pennsylvania and New Jersey are collapsing for three reasons.

Most significant, the two states' deregulation laws allowed just six companies, the region's established utilities, to control too much of the electricity production.

Those six -- Exelon (Peco's parent company), PPL and Allegheny Energy Inc. in Pennsylvania, Public Service Enterprise Group Inc. and Conectiv Inc. in New Jersey, and Reliant Energy Inc. in both states -- produce 82 percent of the region's electricity, according to the regional power grid.

That concentration limits the choices for the new companies, which do not have their own power plants and must buy from the bigger utilities. The start-ups said it is too expensive for them to import electricity from outside the region.

A related problem is that five of the six big utilities not only sell the power they produce to the start-ups in the region's wholesale market, but they also have retail arms that sell power to consumers. In short, those five -- all but Reliant -- compete directly with the newcomers.

The big utilities said they do not set prices artificially high for the start-up companies.

Indeed, the deregulation laws in both states made it illegal for the generating and retail arms of the large utilities to collude. But even with separate operations, profits flow to one bottom line -- just as they did before deregulation.

"It's the whole idea of the 800-pound gorilla," said Peter Franolic, director of corporate energy affairs for Bethlehem Steel Corp., the state's top industrial electricity user. Deregulation will not work until "you can shop out [your electricity needs] to a bunch of chimpanzees," Franolic said.

To avoid the concentration of production and the potential conflict of interest, other states -- notably New York, the six New England states and Texas -- broke up their big power plant owners.

The result has been more competitive markets -- with new electric companies in those states having many more choices in buying their power supply, said Phil Q. Hanser, an electricity markets consultant for the Brattle Group, in Cambridge, Mass., who has studied the Mid-Atlantic region's market for five years.

Pennsylvania's and New Jersey's failures relate specifically to the way this market operates and do not involve the kind of irregularities for which Enron Corp. is being investigated in California.

In fact, the big electric companies here say the regional system has prevented electricity blackouts such as California experienced last year, though blackouts have not been a problem for New York, Texas and New England.

The third problem involves the rules of this region's wholesale electric market, where utilities buy and sell power. The market is run by PJM Interconnection, of Valley Forge, and any company serving customers in the region -- from New Jersey to Virginia and west to Ohio -- is subject to its rules.

A key rule requires all utilities to have an electricity reserve for emergencies, regardless of what it costs them. That was the segment of the market involved in the PPL case -- and it affected primarily the new companies without power plants because they could not produce their own reserves and had to purchase them.

"[The rule] remains a ball and chain around the retail market," said John Hanger, a former Pennsylvania public utility commissioner who has opposed the requirement since the law was implemented. "It must be fixed before customers receive the full savings of a properly competitive market."

The Allentown utility does not dispute that prices in the reserve market increased to six times their normal levels. The company, which was the only one of the big utilities with extra power to sell in January 2001, said the spike was a result of increased demand, not any wrongdoing on its part.

But the U.S. Department of Justice is investigating PJM's reserve market, according to a copy of a subpoena obtained by The Inquirer.

The subpoena requested information on specific electricity sales since 1999. The department would neither confirm nor deny a probe.

To be sure, electricity deregulation so far has saved Pennsylvanians $4 billion and New Jersey residents $2.4 billion, state regulators said.

But most of that -- $3 billion for Pennsylvania and all of New Jersey's estimated savings -- has come from temporary, state-mandated rate caps and other one-time reductions.

The caps, which expire next year in New Jersey and in 2010 in Pennsylvania -- were intended merely as a bridge until market competition took hold. Permanent savings will be impossible for consumers in both states with competition failing.

The New Jersey plan's primary sponsor, State Sen. Peter Inverso (R., Mercer), did not return phone calls seeking comment on the drop in competition, but one of the Pennsylvania program's chief sponsors said he did not see any problem with the program.

"We passed the law in 1996, and nobody's rates are that high any more," said Rep. Frank J. Tulli Jr. (R., Dauphin). "I think the marketplace handles [electricity prices] and will handle it to the benefit of consumers."

-- Fixing the electricity deregulation programs in Pennsylvania and New Jersey would require action on two fronts: The states would have to amend their laws; and PJM, probably with a push from federal regulators, would have to change the reserve market.

Tulli and Fox, the New Jersey regulator, said legislation to break up the big utilities is unlikely.

That makes the wholesale market the more likely vehicle for change -- even though PJM and the six big utilities strongly defend the status quo.

The Federal Energy Regulatory Commission is considering the PPL case as it studies new designs for power grids across the country. Its recommendations are expected to be announced in July, said Commissioner Nora Mead Brownell, who is in charge of the initiative and was a Pennsylvania Public Utility Commission member when deregulation was adopted.

But PJM moves slowly, and changes could take years to implement.

That leaves consumers wondering whether they will ever see the same savings they once received.

"The whole idea of taking on another energy company was that customers were going to save money," said Dale H. Anderson, 69, a NewPower customer from Philadelphia's Mayfair section.

With his rates soaring well above Peco's, he returned to the big utility last month.

"[Deregulation] didn't turn out the way it was supposed to," he said.

-----

To see more of The Philadelphia Inquirer, or to subscribe to the newspaper, go to http://www.philly.com