Electric Restructuring: The Transition from Rate Caps to Market-Based Pricing
Under the 1996 electric competition law, electric rates - distribution, transmission, generation - charged by electricity companies were capped. For a majority of the state’s electric consumers, generation rates remain capped, meaning it is too early to examine the long-term impact of restructuring on consumers.
The electric competition law provided a framework for giving all retail electric customers direct access to alternative suppliers of generation. When the law was passed, the average electricity price in Pennsylvania was about 15 percent above the national average. Today, on average, the prices throughout Pennsylvania are at or below the national average.
In the last 10 years, environmental factors for electric generation and the prices of natural gas and coal have doubled – both of those products are fuels used in the generation of electricity. While Pennsylvania consumers' rates are capped, the market prices for electricity have risen – just as the prices of other goods and services have risen.
Restructuring delayed anticipated electric rate increases. Without restructuring, utilities would have been filing with the PUC for rate increases because the costs of the fuels used to generate electricity have gone up significantly.
Taking action
The Commission engaged consumer advocates and industry experts on the issues and possible policy actions that could mitigate any potential significant price increases in future electricity prices. Working with the stakeholders, the PUC drew from a wide knowledge base that will result in actions that educate consumers, develop strategies to remove barriers to retail choice and implement default service pricing that reflects prevailing market prices. The Commission also is continuing to explore reasonable, cost-effective programs that consumers and companies can implement to conserve energy or use it more efficiently.
The Commission also is considering final rules for statewide default service plans that will provide consumers with the best possible prices while creating an environment where electric generation suppliers will participate. This is considered one of the most important rulemakings for the Commission since the restructuring of the electric industry. The Commission is entering the final stages of the rulemaking process on the statewide final default service plan and will provide another opportunity for consumer advocates and industry experts to participate before issuing final regulations.
Default Service
The electric competition law also requires electric companies, or a Commission approved alternative supplier, to provide default electric generation service to customers who have not selected an alternative generation supplier. This is commonly called default service or provider of last resort service (POLR). According to the law, the default service prices for electric generation service are required to reflect “prevailing market prices.”
The Commission’s role is to ensure that the process utilities use to achieve the default service electricity generation prices reflects prevailing market prices. The generation prices are not set by the PUC, but rather are set by the wholesale market, over which the PUC exercises no jurisdiction.
To the extent possible, the Commission intervenes in wholesale market proceedings before the Federal Energy Regulatory Commission (FERC) in order to have an impact on the decisions being made by FERC about the wholesale electric markets.
Rate Caps
Under the restructuring, consumers pay unbundled prices for generation, transmission and distribution services, which were capped during the state’s restructuring proceedings. All of the distribution rates have expired. All of the transmission caps have expired. Transmission costs are regulated by the Federal Energy Regulatory Commission.
Also, under the law, each utility’s stranded costs were permitted to be recovered through a nonbypassable competitive transition charge on each customer’s bill. Those charges expire as the generation rate caps expire.
Choosing an Electric Generation Supplier
Customers do have the right to choose an electric generation supplier. The current number of licensed alternative electric generation suppliers offering services for residential customers in Pennsylvania is limited.
While the Commission has licensed many electric generation suppliers, the price caps that have been in place have deterred these generation suppliers from offering service. However, the transition to market-based pricing is triggering electric generation supply marketers to begin offering alternatives to consumers in areas where the rate caps have expired.