Energy market lacks power

By Kim Leonard
Sunday, June 19, 2011

Jim Mancini is one of the 31,000 residential electric supply customers that Duquesne Light Co. lost over the past five months.

He still pays the Western Pennsylvania utility to transmit power to his home in Moon. But since December, Mancini has been buying electricity from FirstEnergy Solutions and saving roughly 10 percent compared with Duquesne Light's rate.

"Utilities don't have any incentive to find the lowest cost" power for their customers, he said. "That's why I felt more comfortable signing with an alternate supplier."

Pennsylvania Public Utility Commission Chairman Robert Powelson wishes more people would drop their local electric utility's standard, default service and pick one of the lower-cost competitors that are increasing in number statewide.

"That's what is frustrating me right now," said Powelson, a commission member since 2008. "Why would you pay the default rate, when you can make a change and save a lot of money? The five-member PUC is looking at ways to make Pennsylvania's retail market for power more competitive -- including eliminating, or changing, the utilities' default service that most households use now.

Pennsylvania deregulated its electricity market in 1996. But utilities continued to sell power at capped rates for several years, so few alternate suppliers moved in to try to capture residential customers.

That changed somewhat in the past year as the last of the caps ended. Still, "Pennsylvania has a good retail market, but it's not a great model," Powelson said, "and that's because when you have the wires and poles, companies providing a backstop product the way it is now, it's going to take a long time" for customers to realize they have choices.

The commission is questioning whether default service should continue in its current form, with each utility setting a benchmark price. The Legislature would have to approve big changes, such as allowing alternate suppliers to set default prices and ensure reliable service in a utility's service area.

Duquesne Light Co. started its latest default plan in January, raising average customers' monthly bills by about $4.

The Downtown-based utility has had high numbers of "shopping" customers since deregulation began. But 31,000 more left this year to sign with one of 13 competing suppliers, CEO Richard Riazzi told the PUC as part of its investigation. About 30 percent of Duquesne Light's residential customers, or more than 144,000, now buy power elsewhere.

The utility and others statewide don't make money on selling power. Its parent, privately held Duquesne Light Holdings Inc., makes a profit through a procurement business that buys the power, spokesman Joseph Vallarian said. Duquesne Light earned $350 million last year on revenue of $1.13 billion, according to a report by Duet Group, which owns a stake in the company.

"Customers like having a fixed rate for a set amount of time, so they know what they'll be paying," Vallarian said. "Shopping is working in our territory. The numbers back that up. If it's not broke, don't fix it."

Tyrone Christy, a PUC member, said throwing away default service now would be a mistake. "We just came off the rate caps," he said, and customers still are learning how to shop.

Utilities that sell power for what they pay are giving customers who choose not to shop a reasonably priced, steady product, Christy said.

Citizen Power, a Squirrel Hill-based consumer advocacy group, agrees. "Many (alternate suppliers) weren't offering service a year ago. Some may not be offering it a year from now," said Titus North, the executive director. "If their sales plans don't go well, they could just fold up the tent."

FirstEnergy Inc.'s acquisition this year of Greensburg-based Allegheny Energy Inc. created the state's largest utility with more than 2 million customers, and spurred the PUC investigation, Powelson said. Utilities, at the very least, need to better promote competition, while focusing more on providing reliable service, he said.

Alternate suppliers frequently point to Texas as a good example of a fully competitive market, with more than 25 residential suppliers -- and default prices that are set so high, virtually no one uses them.

"Every household in Texas, from big homes to apartments, makes an active choice as to their supplier and their product," said Jim Steffes, vice president for Direct Energy's residential business. "That forces us not only to drive costs down to the fairest level, but to constantly innovate new solutions."

Pennsylvania's current system lulls customers into paying their utilities for power, as they may have done for decades, Direct Energy and other suppliers contend.

Competitive suppliers point out several problems with the system:

-- Once a customer decides to switch, it may take 45 days for the change to take effect. That's because state law prevents changes during the middle of a billing cycle. In Texas, a customer can start buying power from a new supplier within a day.

-- Utilities send letters to customers confirming that they've decided to switch and giving them 10 days to reconsider, but language in some of the notices might make customers question their decisions, FirstEnergy Solutions spokeswoman Diane Francis said. "There may be a better way to handle the process," she said.

-- A customer who switches to an alternative supplier, then moves across town, must return to the utility for one billing cycle before switching again, Steffes said

"Competition in Pennsylvania, we believe, is pretty strong," Francis said, but a few enhancements could spur competition. FirstEnergy Solutions has enrolled "thousands" of customers in recent months, mostly in Western Pennsylvania.

Pennsylvania customers could benefit from offers used elsewhere, the companies say. Here are examples:

-- Local officials in Ohio and some other states can negotiate favorable rates for an entire community. The deal might be 6 percent off the price to compare, said Francis of FirstEnergy Solutions, which just signed up its first municipal deal in Illinois.

-- Groups of customers in some states can lower their rates through "descending clock" auctions. Power suppliers agree to a high price, then lower their offers until a bottom price is reached.

Starting with the PUC's look at the market, "We have a real opportunity to finish the vision that was laid out in 1997" by then-Gov. Tom Ridge, who advocated deregulation, Steffes said.

Recent surges in shopping in Duquesne Light and other utilities service areas aren't enough, Powelson said.

"Twenty percent shopping is not good," he said. "Really, it should be upwards of 70 or 80 percent." The PUC will hold the last of three hearings in its investigation late this year, and make a report early in 2012.