Companies hope new law helps keep power prices low

Sunday, July 29, 2007

By Bill Toland, Pittsburgh Post-Gazette

Few companies use more electricity than U.S. Steel and Allegheny Technologies Inc. -- it takes a lot of juice to operate a melting shop. That's why these two companies, allied with Duquesne Light and organized labor, lobbied so hard for a new law that allows utilities and the top tier of energy consumers to negotiate long-term, fixed-rate contracts.

The change in the law was prompted, proponents say, by a number of converging factors (not to mention 18 months of lobbying). Electricity price caps already have been lifted in the Pittsburgh area, and will be lifted across the state over the next several years. Customers that consume a disproportionately high amount of electricity worry that deregulation will lead to big price spikes -- bigger, even, than the 40 percent increase that some industrial customers say they've already experienced in spots where caps have been lifted.

Meanwhile, the Pittsburgh business community and legislative delegation say that what big manufacturers remain in Pennsylvania could flee, over time, to states where electricity is cheaper and prices are still controlled by utility commissions. Allegheny Technologies, for example, is considering an expansion in Western Pennsylvania, but claimed it wouldn't have been financially practical without the change in law.

"The one thing business don't like is unpredictability," said Catherine DeLoughry, who handles communications for the Greater Pittsburgh Chamber of Commerce and the local Pennsylvania Economy League branch.

There's an interesting side effect to this law: Any distributor, such as Duquesne Light, that enters into a long-term pact with a customer whose peak demand is 20 megawatts or more "may, in its sole discretion, acquire an interest in a generation facility or construct a generation facility specifically to meet the energy requirements of the customers."

In other words, Duquesne Light could begin generating again, years after it sold its power generating units, said Rep. Frank Dermody, D-Oakmont, one of the main sponsors of the new law.

"We had a big negotiating bugaboo" about that, he said. "They wanted to be able to get back into it."

That was part of the payoff, he explained, in agreeing to a law that could end up locking Duquesne Light into long-term delivery rates that are less than what the utility might have been able to charge on the open market. The other payoff: increased market share, preventing theoretical competitors from stealing customers, for years at a time. Lock up enough customers for three, four or five years, and you build a wall around Western Pennsylvania, even as deregulation kicks into high gear.

The law, House Bill 1530, allows an electricity provider and any company that uses more than 15 megawatts of electricity during peak-demand hours to negotiate a long-term, fixed rate contract. It's an option that has been approved for residential consumers, who can enter a contract of up to three years with Duquesne Light, but wasn't available to businesses.

That's because the Pennsylvania Public Utility Commission recently ruled that the lifting of the price caps did not give utilities and business carte blanche to negotiate long-term contracts with each other. That means businesses generally were forced to enter into short-term contracts, or hope for the best on the hourly auction market, with all of its price fluctuations.

The Legislature and Democratic Gov. Ed Rendell essentially have overridden that PUC decision, said state Rep. Mike Turzai, R-Bradford Woods, who for years has been campaigning for a package of bills to improve Pennsylvania's business climate.

"Business, politicians and labor all came together and said, look, we've got to get something done," Mr. Turzai said. They had the backing of Jay Apt, executive director of Carnegie Mellon University's Electricity Energy Center. His team published a study on electricity reform in January, and one of the paper's recommendations was allowing the electric distributor to negotiate long-term contracts with heavy industrial consumers.

Like a contract with your gym, rates go down if you sign a longer contract, and there's a penalty for opting out. Allowing distributors and suppliers that flexibility "is basic economics." And giving a distributor the security of knowing that it will have major customers for years into the future "provides an incentive for new generation, provides access to capital," Dr. Apt said.

One of the concerns as the bill was being debated, was that the fixed-price deals with a few big customers would mean that the electric companies would have to balance their checkbooks by raising their rates on residential customers or small business.

But the law prevents that, at least theoretically, by requiring the PUC to sign off on each deal, which will make sure "no costs related to the rates are borne by other customers or classes."

Energy watchdogs still aren't fully convinced, saying the change in law is reactive instead of proactive.

"It's an attempt to hedge against rate shock," said David Hughes, executive director of Citizen Power, a Pittsburgh-based energy policy group that favors a return to energy-industry regulation. By allowing utilities to lock huge customers into long contracts, "you can't really have competition," Mr. Hughes said.

As with any deal, not everybody got a slice of the pie. A couple of companies that came in under the 15-megawatt threshold won't be able to enter into the long-term contracts, said Mr. Dermody, meaning they'll likely be paying higher rates than their larger competitors.

"I feel bad about that," he said. "But this is just the beginning ... electricity deregulation doesn't work." He said he intends to sign onto a bill that restores some elements of electricity industry regulation, if an when it's introduced this legislative session.

Spokesmen for ATI and Duquesne Light both said they were pleased with the outcome of the wrangling. Mr. Rendell signed the bill earlier this month.

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(Bill Toland can be reached at [email protected] or 412-263-2625. )