Re-regulate electricity in Pennsylvania

It's time to admit that de-regulation has failed and to make utilities operate in the public interest

Wednesday, July 04, 2007

By David Hughes

The experiment in deregulating electricity service, now in its eighth year in Pennsylvania, is clearly not working. Residential customers have few choices, and the small savings that deregulation proponents claim as a result of competition are virtually gone. On the other hand, utilities are racking up record profits.

David Hughes is executive director of Citizen Power, a regional energy advocacy organization ([email protected]).

In most of Pennsylvania, electricity prices still are set by the Public Utility Commission. However, in less than three years, those controls come off and prices will be determined by the marketplace; that is, by those with market power. Prices are likely to jump to record levels, just as they have in parts of Pennsylvania (in the Penn Power and Pike County service territories), and in other states where rate caps have been removed. The utilities certainly think prices will go up -- they are forecasting more record profits.

At the same time, investment in new infrastructure is lagging, creating dangerously low reserve power. The current group of power-plant owners like it that way. Shortage, and the threat of shortage, drives up the price of electricity. Sound familiar?

Deregulation proponents have run out of excuses as to why competition has not stimulated price moderation and new investment, and they have failed to explain why the existing fleet of power plants should cost consumers so much more to provide electricity than they did just a few years ago. These same people are now suggesting ways that will supposedly cushion the supposedly unavoidable price increases to come. For example, the PUC has opted for "customer education" to, in the words of its chairman, prepare customers "for any price increases no matter what the size." In the end, it appears the PUC will rely on a long series of phased-in rate increases to soften the impact.

Gov. Ed Rendell has made some good proposals to increase the use of renewable energy and energy-efficient technologies. But his heavy reliance on "smart metering" will not result in the expected cost reductions. The governor would spend $250 million from a new customer fee to install electric meters that can be read at any time. Customers would be encouraged to shift usage to off-peak times, when prices are lower, but this would do nothing to bring down prices overall or increase supply.

It is time to stop ignoring the elephant in the room: The problem is deregulation. Without addressing deregulation directly, attempts at mitigating the hardships and dislocations it creates will fail, especially after price controls are lifted.

The central flaw of deregulation is its reliance on companies with a short-term market orientation to manage essential infrastructure, which requires a long-term perspective and long-term financial and institutional commitments. Deregulation and its attendant phenomena -- dismantling the unified electric grid, shopping for short-term power deals and substituting profit maximization for the public interest -- are essentially short-term. From this follows the problems that we see -- profiteering, lagging investment, Enron-style market manipulation and high and rising prices.

Deregulation proponents argue that it is too late to try to control our energy destiny in Pennsylvania by re-regulating utilities to make sure they operate in the public interest. Echoing arguments from the 1890s that were refuted decades ago, they claim that doing so would be a "taking" of utility property, a violation of the 14th amendment to the U.S. Constitution. We should not be frightened by this legal bogeyman. As the Supreme Court said 130 years ago "[W]hen private property is devoted to a public use, it is subject to public regulation."

What could be of more public use than basic energy supplies provided by companies who use public rights-of-way and eminent domain to site their facilities?

Citizen Power has opposed electricity deregulation from the beginning. Now we want to see our leaders truly address the problems associated with rising energy costs and declining reliability of service. We suggest reinvigorating the utilities' obligation to serve the public by demanding long-range facilities planning and investments in both supply and conservation. Pennsylvania also should begin the process to:

- Move away from primary emphasis on short-term arrangements and transactions, including "retail choice" and the wholesale arrangements that provision it.

- Eliminate market manipulation and gamesmanship while unwinding transactions, such as mergers, found to be against the public interest.

- Protect the most vulnerable consumers -- low-income and senior citizens on fixed incomes -- during the transition to a strategic investment plan.

Pennsylvania's leaders can continue down the deregulation path that will surely lead to more serious electricity price and reliability problems, or they can begin to return to a system of public regulation -- a system that, with the exception of the nuclear power debacle, served us well for 70 years. With all of its flaws, public regulation of utilities nevertheless promoted economic stability, equity and growth in Pennsylvania. It can again.