Comparison of PA vs CA

Here is a pretty good comparison of the PA vs. CA markets - and why PA is n=
ot=20
having the same problems. Some of the policy recommendations for moving=20
forward are "self-serving" (ie, 1000 MW of wind generation - the author is =
a=20
wind advocate).

Jim

----- Forwarded by James D Steffes/NA/Enron on 01/18/2001 01:40 PM -----

=09"PennFuture" <pennfuture@pennfuture.org<
=0901/18/2001 01:12 PM
=09Please respond to "PennFuture"
=09=09=20
=09=09 To: <Undisclosed-Recipient:@mailman.enron.com;<
=09=09 cc:=20
=09=09 Subject: PennFuture's E-cubed - Survivor: Electric Competition

PennFuture's E-cubed is a commentary biweekly email publication concerning=
=20
the current themes and trends in the energy market.=20

?
January 18, 2001
Vol. 3, No. 2
?
Survivor: Electric Competition
?
With rolling blackouts plunging the Golden State into darkness, California =
=20
has reached the point of being voted off the electricity policy island. Wil=
l =20
other states soon follow California=01,s footprints in the sand to a collap=
sed =20
electricity system? And how does Pennsylvania=01,s approach to surviving =
=20
electricity restructuring compare to California=01,s?
?
In electricity policy, California and Pennsylvania have one thing in common=
=20
=01* in 1996 they both passed state statutes that were advertised as the me=
ans=20
of ending electricity generation retail monopolies (and reducing electrici=
ty=20
prices for consumers). Yet, that=01,s where the similarity ends.=20
?
Pennsylvania believes that the electricity market cannot be competitive, =
=20
unless both the wholesale and retail electricity segments of the market are=
=20
competitive. The supply of electricity is largely a function of the=20
wholesale market, and demand a function of the retail market. For the=20
electricity market to be optimally efficient, supply and demand must respo=
nd=20
to competitive price signals by the end of the transition period.=20
Consequently, Pennsylvania has focused on retail market structure and push=
es=20
for competitive wholesale market policies like the expansion of the=20
wholesale market known as PJM.=20
?
On the other hand, retail competition was always the sizzle but never the =
=20
steak in California policy-making. Now being scrapped and replaced by=20
something that will again raid consumers=01, wallets, California=01,s appr=
oach=20
assumed that a successful result would occur if competition were introduce=
d=20
only into the wholesale market, as long as utilities passed this price=20
through to their still captive retail customers. In that assumption =01* p=
lus=20
the desire to pay its utilities $30 billion of stranded costs on an=20
accelerated schedule =01* lies the root of California=01,s disaster. Explo=
ding=20
demand and the failure of the federal government to end the balkanization =
of=20
the nation=01,s wholesale electric markets have also played a role in=20
aggravating the outcome but have not caused it, as is proven by the=20
continued successful operation of California=01,s generation-owning munici=
pal=20
utilities.
?
Although the chosen paths of Pennsylvania and California have landed them =
in=20
very different places on the road to surviving and succeeding in electric =
=20
competition, the game=01,s not over and Pennsylvania still faces challenges=
=20
ahead. But with the exception of GPU that now suffers from unwise or unluc=
ky=20
decisions, Pennsylvania consumers and utilities are not only surviving but=
=20
also benefiting from electric competition.
?
How=01,s Pennsylvania Doing?
To date, Pennsylvania=01,s consumers have saved $2.84 billion since Januar=
y 1,=20
1997, and 568,000 consumers have switched to a competitive supplier. That=
=20
total will surpass 900,000 by April as a result of the recent successful=
=20
auction of competitive default supply in the PECO Energy service territory=
,=20
which will enable New Power to serve another 300,000 customers and Green=
=20
Mountain an additional 50,000. This auction wouldn=01,t have succeeded wit=
hout=20
the commitment of PECO Energy and without the high residential shopping=20
credit of 5.65 cents per kilowatt-hour. Licensed competitors now supply=20
about 25% of the electricity consumed by Pennsylvania=01,s families and=20
businesses.
?
So far, by switching many shopping customers have saved 5% to 15% off their=
=20
total electric bills and have been able to contract for electricity for a=
=20
year or longer. Competitive retail offers are well below =01* typically 0.=
9 to=20
3.15 cents per kilowatt-hours =01* what residential consumers were paying=
=20
utilities for generation prior to competition, or the utilities=01, embedd=
ed=20
generation rate. In addition, most shopping and non-shopping customers hav=
e=20
enjoyed guaranteed total rate cuts of 2% to 8%, and rates for customers of=
=20
Duquesne Light will be slashed by about 20% in 2002.=20
?
Renewable and cleaner energy products are available for the first time in =
=20
the state=01,s history, and 80,000 customers have purchased them. The first=
two =20
wind farms in Pennsylvania are operational and several more are likely to b=
e =20
built in 2001. The Commonwealth can realistically act to attract 1,000=20
megawatts of additional new wind generation by 2010.=20
?
The budgets for Pennsylvania=01,s substantial Low-Income Usage Reduction =
=20
Program and for its national leading Customer Assistance Programs, which=20
reduce rates by as much as 50% for low-income families, have been=20
quadrupled. In fact, approximately 80,000 low-income families in the PECO=
=20
Energy service territory alone have received these sharply lower rates.=20
?
Beyond this impressive record of accomplishment, rates are capped at Janua=
ry=20
1, 1997 levels until at least 2005 and at slightly higher levels until 201=
0=20
in most service territories. The jump in natural gas and oil home heating =
=20
bills by as much as 50% this winter underscores the tremendous value of the=
=20
rate cap to consumers. Unlike those energy sources, the retail price of=20
electricity hasn=01,t increased at all. Indeed, the electric rate cap alon=
e has=20
probably saved electricity consumers hundreds of millions of dollars just =
in=20
the last year and made electricity the only energy bargain in this winter =
of=20
gas and oil price spikes.
?
The Pennsylvania and California Experience: As Different as Richard and Ru=
dy=20
Pennsylvania embarked on its competitive retail journey by running a large=
=20
pilot program from November 1997 through December 1998, as required by the=
=20
state electric competition statute. In the pilot, over 220,000 customers =
=01*=20
5% of the entire state=01,s load =01* switched to a competitive supplier. =
The=20
total number of customers that switched in California almost never exceede=
d=20
the number that did so just during Pennsylvania=01,s pilot program.=20
?
The pilot revealed that consumers want to shop for electricity, as more th=
an=20
900,000 customers asked for permission to shop, and would do so if stranded=
=20
costs were not paid to utilities in a manner that destroyed the retail =20
competitive market. Just as importantly, the large pilot project proved tha=
t =20
many companies would enter the retail market to serve all customer classes=
=20
as long as stranded cost recovery mechanisms didn=01,t make entry impossib=
le.=20
?
Of course, whether stranded cost recovery mechanisms kill retail competiti=
on=20
depends on the size of what is variously called the shopping credit, the=
=20
price to compare, or the default rate. These are terms for the amount in =
=20
cents per kilowatt-hour that a switching customer no longer pays for=20
generation service to the local utility once the customer takes his busine=
ss=20
to a competitor.=20
?
California set this amount at absurdly low levels and linked it to the =20
wholesale price. By doing so, California killed retail competition and=20
delivered San Diego=01,s customers into the tender mercies of the local=20
utility, a deregulated monopoly that offered a 100% spot market electricit=
y=20
product.=20
?
By contrast, Pennsylvania recognized that, in a truly free market a shoppi=
ng=20
customer should not pay anything to the utility for electricity no longer=
=20
purchased. Pennsylvania also recognized that its decision to allow utiliti=
es=20
to recover 100% of their documented stranded costs required consumers to=
=20
continue to pay some amount for some transition period for the electricity =
=20
they were no longer buying from the utility. Pennsylvania responded by tryi=
ng=20
to make sure that the amount of stranded cost recovery did not eviscerate=
=20
the consumers=01, shopping credit. Pennsylvania understood that what was l=
eft=20
of the consumers=01, shopping credit after stranded cost payments were=20
considered had to be sufficiently greater than the prices they would see i=
n=20
the market so that they could save money by shopping =01* and so that=20
competitive suppliers would enter the market to serve them.=20
?
Pennsylvania shopping credits are typically 50% to 100% higher than those =
in=20
California, but still well below every utility=01,s embedded generation rat=
e. =20
Retail competition has worked best for consumers in those parts of=20
Pennsylvania where the shopping credits are highest. In those service=20
territories, principally Duquesne Light and PECO Energy, huge numbers of=
=20
residential and other customers have switched suppliers and realized savin=
gs=20
and/or purchased cleaner energy products.=20
?
Lessons Learned
The lesson is clear: retail competition won=01,t work unless shopping cred=
its=20
are set as close as possible to a utility=01,s embedded generation rate, g=
iven=20
the amount of stranded cost recovery allowed. For retail competition to be=
=20
genuine, the shopping credit must equal the utility=01,s embedded generati=
on=20
rate if no stranded costs are recovered, or once recovery is complete.=20
?
Yet, protecting consumers=01, shopping credits is not the only necessary =
=20
condition for a competitive market. Other conditions that must be met are a=
=20
liquid, workably competitive wholesale market that includes future contract=
s=20
as well as spot price trading, and the empowerment of customers through=20
time-of-use meters and appliance control technologies to change their dema=
nd=20
and profit from doing so.
?
Other Differences
From its pilot experience, a unique Pennsylvania restructuring model emerg=
ed=20
that has five major differences from California=01,s policies, in addition=
to=20
the shopping credit: length of transition periods, divestiture of generati=
on=20
assets, reliance on spot markets and requirements to sell and buy from spo=
t=20
markets, size and administration of wholesale markets, and entry of new=20
supply.
?
Transition
Pennsylvania=01,s transition periods are longer, running from at least eig=
ht to=20
as many as 14 years (1997 to 2010). This longer transition period gives ti=
me=20
to correct infirmities in the nation=01,s wholesale markets, reduces the p=
er=20
kilowatt-hour stranded cost charge and price distortion by spreading=20
stranded costs over more years, and time to create a true demand-side=20
response that can police the wholesale market.=20
?
Divestiture and spot markets
Pennsylvania allowed but didn=01,t require utilities to divest generation=
=20
assets, and two have done so. Pennsylvania didn=01,t require utilities to =
sell=20
all power into and buy all power from a newly created wholesale spot marke=
t.=20
Pennsylvania utilities are free to use long-term contracts and any hedging=
=20
instruments that they deem appropriate. The combination of these policies=
=20
have made utilities and their customers less dependent upon the volatile=
=20
spot market than those in California.=20
?
Size and administration of markets
Prior to 1996, two-thirds of Pennsylvania was part of the largest=20
electricity free trade zone in America =01* the 58,000 megawatt wholesale=
=20
market governed by the PJM independent system operator, which stretches fr=
om=20
Virginia to Northern New Jersey and includes Maryland, Delaware, NJ, and=
=20
Washington DC. Unlike the California ISO and Power Exchange (PX) that were=
=20
rushed into operation in 1998, PJM was founded in 1927 and has been steadi=
ly=20
transformed from an entity that once served only member utilities into a=
=20
separate corporation with a board that is completely independent of market=
=20
participants. The PJM board has the legal duty of ensuring that the=20
wholesale market is genuinely competitive and reliable.=20
?
Moreover, unlike the California ISO and PX that serves only portions of =20
California, PJM is a multi-state, regional market. It also borders the New=
=20
York Independent System Operator and is near to the New England System=20
Operator. PJM, NYISO, and New England ISO benefit from their close proximi=
ty=20
and a common wholesale market price cap. In fact, independent system=20
operators administer wholesale markets all the way from Maine to Northern=
=20
Virginia. Nowhere else in America over such a large, connected geographic=
=20
area are the trading rules and operations of the power grid no longer=20
controlled directly by local electric monopolies.=20
?
New supply
About 600 megawatts of new supply were added to PJM=01,s wholesale market =
in=20
2000; 3,000 megawatts will be added in 2001; and 5,000 megawatts in 2002,=
=20
according to PJM officials. This substantial amount of new supply should=
=20
preserve reliability and prevent shortages.
?
Staying On Track
Although Pennsylvania has a successful four years of transition to=20
generation competition behind it, and has delivered many benefits, the=20
process could still go off track. To avoid pitfalls, five things must occu=
r.
?
First, PJM must be expanded to the service territories of Allegheny Energy=
=20
and Duquesne Light, and, in fact, negotiations are underway for these two=
=20
utilities to create PJM-West. FirstEnergy must also be required to join PJ=
M=20
as a condition of its merger with GPU. Additionally, within five years onl=
y=20
one Independent System Operator should operate from Northern Virginia to=
=20
Maine. It=01,s time to seriously think about one of those famous =01&merge=
rs of=20
equals=018 for the three independent system operators on the East Coast.=
=20
Expansion of PJM will create a bigger wholesale market, and a bigger marke=
t=20
should be more competitive, transparent, and stable.
?
Second, customers must be given the ability to change their demand in =20
response to price in real times. As a result, customers must have=20
time-of-use meters and control devices installed on appliances like air=20
conditioners and water heaters. Utilities should be required to install th=
is=20
equipment over the next five to 10 years. Only with this equipment can=20
customers gain financial incentives for changing demand. Ensuring that=20
demand responds more directly to price is critical to limiting wholesale=
=20
market prices, to preserving reliability, and to reducing environmental an=
d=20
public health problems caused by the production and consumption of=20
electricity. PJM calculates that a 1% reduction in peak demand causes a 10=
%=20
reduction in peak price.=20
?
In addition, energy efficiency should be pursued before a crisis hits. =20
Available consumer education money should be used to increase the market =
=20
penetration of fluorescent light bulbs, programmable thermostats, and other=
=20
energy-saving devices.
?
Third, Pennsylvania should monitor additions to supply and attract at least=
=20
1,000 megawatts of new wind generation.
?
Fourth, the budget for the Office of Consumer Advocate (OCA) should be =20
substantially increased to allow it to monitor and research the operation o=
f=20
the wholesale market, in order to guard against abusive market power. OCA=
=20
must have the ability to know as much as market participants about outage=
=20
rates, withholding of power, imports, exports, and so on. A beefed up OCA=
=20
would be the best deterrent to some business practices that ultimately wou=
ld=20
destroy public confidence in competitive markets.
?
Fifth, distributed generation is a potentially powerful competitor to grid =
=20
power. The Commonwealth needs to ensure that any barriers to entry for=20
modern, clean, distributed generation technologies are removed. A uniform=
=20
statewide law that addresses issues such as installation standards, net=20
metering rules, and interconnection policies in a manner that will promote=
=20
distributed generation should be enacted.
?
Together these five policies can help Pennsylvania successfully complete t=
he=20
journey to surviving and succeeding in electricity competition. Yet, the =
=20
failure to enact these policies could put at risk all that has been achieve=
d.=20
A successful completion of this transition is vital to our future, as both=
=20
the benefits achieved so far in Pennsylvania and the ongoing trouble in=20
California make clear.=20
?
In Pennsylvania, more consumer, business, and environmental benefits are n=
ot=20
guaranteed but are in reach. With continuing attention to detail, =20
electricity in Pennsylvania by 2010 can be cheaper, cleaner, and a source o=
f =20
competitive advantage.
?
For other states entering or contemplating electric competition, both =20
California and Pennsylvania offer important lessons on how to stay in the=
=20
game and win. =20

E-cubed is available for reprint in newspapers and other publications. =20
Authors are available for print or broadcast. Support E-cubed by becoming a=
=20
member of PennFuture =01* visit our secure online membership page at=20
www.pennfuture.org by clicking on =01&Support Our Work.=018
?
PennFuture, with offices in Harrisburg, Philadelphia and Pittsburgh, is a=
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statewide public interest membership organization, which advances policies=
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to protect and improve the state=01,s environment and economy. PennFuture=
=01,s=20
activities include litigating cases before regulatory bodies and in local,=
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state and federal courts, advocating and advancing legislative action on a=
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state and federal level, public education and assisting citizens in public =
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advocacy.?
- Vol3No2_11701.doc