Pennsylvania Electricity Rate Cap Expiration
Important Questions & Answers for Business
Q. What created rate caps?
A. Pennsylvania’s 1996 “Electricity Generation and Customer Choice Act” fundamentally restructured the Commonwealth’s retail electric utility. The Act enabled customers to purchase electric generation from alternative suppliers (Electric Generation Suppliers or EGSs) as well as from incumbent electric utilities. To implement the Act and protect ratepayers during the transition while so-called “stranded costs” are paid to the utilities, the Pennsylvania Public Utility Commission (PUC) imposed caps on rates charged by incumbent utilities.
Q. When should businesses start planning for a change?
A. Businesses can and should start planning immediately. There are a number of financial, management and legal considerations. Some companies may need to buy generation supply as soon as a year in advance of the expiration, depending on needs and buying strategy.
Q. When will electric rate caps expire in Pennsylvania?
A. PPL Corporation’s (PPL) cap expires Dec. 31, 2009, and caps for Metropolitan Edison Company, Pennsylvania Electric Company, PECO Energy Company, and West Penn Power Company expire Dec. 31, 2010. Rate caps already expired for customers of Duquesne Light Company, Pennsylvania Power Company, UGI Utilities, Inc.- Electric Division, Pike County Power & Light Company, Citizens’ Electric Company of Lewisburg, and Wellsboro Electric Company.
Q. What happened in other areas when rate caps expired?
A. Duquesne Light Company's commercial and industrial customers in the Pittsburgh area reportedly saw 20% to 40% increases in their electricity costs. In 2005, customers in the Pike County Power & Light Company territory experienced increases of approximately 70%. Customers in Maryland, Delaware and New Jersey had increases ranging from 50% to 120%, with many larger customers limited only to hourly pricing from their incumbent utility.
Q. What are the increase estimates for areas of Pennsylvania when caps expire?
A. A. PPL recently conducted two solicitations for wholesale supply to provide default generation service in 2010 to customers who do not choose to receive service from an EGS. The solicitations resulted in projected retail supply rates of approximately 10 cents per kilowatt-hour (kWh) for residential and small commercial customers or an increase of 25% to 45%. PPL will conduct a single solicitation for its large commercial and industrial customers in the fall of 2009, which is expected to produce comparable or possibly even higher results than the recent solicitations.
Q. Does current incumbent utility service change when rate caps expire?
A. Yes. In Pennsylvania, electric service has been unbundled into three parts—distribution, transmission and generation. When caps expire, the price that incumbent utilities charge for generation will be based on the costs they incur in the wholesale market to serve the account, which is expected to dramatically increase generation prices for institutional, commercial and industrial customers. In some areas, the incumbent utility only may be able to offer larger customers variable hourly priced service. The generation supplier for the account (either the incumbent utility or the EGS) will arrange for the transmission service, which is regulated by the Federal Energy Regulatory Commission. Pricing, terms and conditions for distribution will remain fully regulated with no fundamental change, even if a customer purchases generation supply from an EGS.
Q. What options do customers have when caps expire?
A. Instead of purchasing generation supply from an incumbent utility, customers may shop around for generation supply service from EGSs. EGSs may offer large industrial, commercial and institutional users more favorable pricing and/or a generation supply product that better meets a business’ particular needs. The incumbent utility still must distribute the generation supply to a customer’s facility with the same level of reliability and at the distribution rates that would apply if the customer continued to purchase supply from the utility.
Q. Does the PUC review or establish EGS contracts for commercial, institutional and industrial customers reviewed?
A. No. Each EGS develops a “standard” contract, which is then subject to negotiation with each customer. There can be substantial differences in contract terms and conditions, including those for credit, damages, price changes for certain regulatory events, products included in the quoted price, confidentiality, use of arbitration/ mediation, billing disputes, and other important financial and legal issues. The PUC does oversee the basic financial and technical fitness of EGSs.
Q. Can a customer compare EGS and incumbent utility offers?
A. Yes. Data available on historic and projected future costs for the various wholesale products that make up generation service can be used to confirm whether an offer is fair. In addition, a customer should develop procurement goals appropriately balancing their need for cost certainty and lowest overall costs. Finally, by studying historic trends, customers may be able to time purchases during potentially beneficial market conditions.
Q. Can you only buy generation supply from the incumbent utility or an EGS?
A. No. Single customers or small groups of customers can obtain electricity by using on-site generation, forming micro grids and becoming their own Load Serving Entities. The viability of these options depends on many legal and commercial factors.
Q. How does McNees Wallace & Nurick assist businesses on these issues?
A. McNees Wallace & Nurick LLC advises commercial, industrial and institutional customers throughout the Commonwealth about the legal and market implications of electric industry restructuring. This advice includes education regarding the dynamics of the new marketplace; explanation of the changing retail and wholesale market terminology and rules; identification of procurement goals (such as cost reduction, budget certainty and support of sustainability initiatives); and negotiation of contracts to memorialize the final deal. MWN can provide all legal and technical support for business efforts or can team with internal or external procurement staff to ensure that the contract your business negotiates and signs will meet your expectations and needs.