PennFuture's E-cubed ,
 PennFuture's E-cubed is a commentary biweekly email publication  concerning=
=20
the current themes and trends in the energy  market.
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PennFuture, which has offices in Harrisburg, Philadelphia  and Pittsburgh, =
is=20
a statewide public interest membership organization, which  advances polici=
es=20
to protect and improve the state=01,s environment and  economy.? PennFuture=
=01,s=20
activities include litigating cases before  regulatory bodies and in local,=
=20
state and federal courts, advocating and  advancing legislative action on a=
=20
state and federal level, public education and  assisting citizens in public=
=20
advocacy.
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September 11, 2000
Vol. 2, No. 18
?
Pittsburgh v. San Diego: First and Goal
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Pittsburgh, like San Diego, will soon be served by an electric utility that=
 =20
has divested its generation and paid off its stranded costs. Despite these =
=20
important similarities, the different public policies implemented by =20
Pennsylvania and California are producing electricity markets that have=20
little  in common.=20
?
In the Pittsburgh area, where Duquesne Light=01,s distribution service =20
territory delivers electricity, residential customers have several choices=
=20
and  an impressive 30% have switched to a competitive generation supplier. =
In=20
the  electricity transition game, Pittsburghers have a first and goal. By=
=20
contrast,  suffering from a market which features a dominant retail utility=
=20
that is passing  through the hourly wholesale spot market price, San Diego=
=01,s=20
residents need a  completed =01&hail-Mary=018 pass to escape wholesale pric=
e spikes=20
and a lack of  choices.
?
Some crucial changes, nonetheless, to the Duquesne service territory=01,s =
=20
transition from monopoly to competitive wholesale and retail markets=20
generation  should soon be made. Now pending before the Pennsylvania Public=
=20
Utility  Commission at Docket No. R-00974104 is Duquesne Light=01,s Petitio=
n for=20
approval of  its Provider of Last Resort plan (POLR). This filing may be a=
=20
model for the  nation on how to manage a transition once stranded cost=20
charges have been paid  off.=20
?
Also, in the boardrooms of the three main western Pennsylvania utilities =
=20
that are not presently part of the PJM power pool, utility executives will=
=20
soon  decide whether they will voluntarily join PJM. If they do not, ways o=
f =20
compelling inclusion within PJM are under discussion in Harrisburg. On=20
expanding  PJM, there can be no compromise. Western Pennsylvania does not=
=20
currently have  and will not have a viable competitive wholesale market,=20
unless its service  territories become part of PJM.
?
If the western Pennsylvania utilities are included one way or another in =
=20
PJM, and if the Duquesne POLR is approved with at most little change,=20
Pittsburgh  will have the most competitive wholesale and retail markets in=
=20
the country. At  that point, rate regulation of default service could be=20
successfully ended as  long as widespread deployment of time-of-use meters=
=20
and appliance control  technology, that together increase demand response t=
o=20
price, has occurred.
?
On the other hand, if incorrect decisions are made on POLR, PJM, or =20
increasing demand response, Pittsburgh will be on the road to San Diego. An=
d =20
that is an electricity market that no Pennsylvanian or Californian should =
=20
experience.=20
?
Duquesne=01,s POLR transition plan would end the collection of stranded cos=
ts =20
from residential customers as early as February 2002. As a result, it would=
 =20
provide a 17% system average and 21% residential rate cut for customers,=20
whether  or not they are shopping. Transmission and generation rates will=
=20
then be capped  until December 31, 2003, and possibly until December 31, 20=
04.
?
In addition to the rate cuts and caps, the Duquesne plan would increase =20
present shopping credits by 31% on a system average basis =01* to over six=
=20
cents  per kilowatt-hour =01* giving shopping customers the opportunity to =
save=20
as much as  another 15% off the bundled rate in effect on January 1, 1997.=
=20
Between the rate  cut and savings from shopping, residential customers may =
be=20
able to reduce their  rates by 36% when compared to those in effect prior t=
o=20
competition.=20
?
Indeed, based on current price offerings, the end of the stranded cost =20
charge means consumers could even purchase a 100% renewable Green-e product=
=20
and  still save about 17% on their total electric bill, compared to what=20
customers  previously paid for fossil and nuclear-fueled monopoly generatio=
n=20
from Duquesne.  For this reason, the Pittsburgh market can be the hottest=
=20
renewable energy  market in the world. Aggressive public education and=20
marketing are all that is  needed to turn that prediction into reality.
?
The POLR plan, which was developed by Duquesne in collaboration with  sever=
al=20
interested parties, also provides more customer usage data to  competitive=
=20
suppliers and better allocates load responsibility and losses  between=20
competitive suppliers and Orion, the new provider of last resort.=20
?
Flags Thrown on POLR
Nevertheless, the plan is  Duquesne=01,s, not a settlement. Some may object=
 to=20
the proposed rule that  customers not be permitted to switch to POLR servic=
e=20
for below-market summer  rates, although Orion insists it will not supply=
=20
wholesale power without the  protection. A second controversial component o=
f=20
the plan is to permit Duquesne  to avoid a T&D rate case by allowing Duques=
ne=20
to charge four mills above the  price of POLR service from Orion, effective=
ly=20
raising T&D rates by about 10%  from the existing rates that were set in=20
1987.=20
?
Whether or not everyone likes every part of the plan, Duquesne=01,s custome=
rs =20
would save as much as 36% from pre-restructuring rates. The new, higher=20
shopping  credits effectively would become the highest in the country and=
=20
encourage  greater retail competition in the service territory. It could op=
en=20
the door for  new entrants, renewable products and value-added services tha=
t=20
genuinely compete  for customers. Pittsburgh could be the first region in t=
he=20
nation to see what a  competitive market really can provide in the electric=
=20
industry.=20
?
Why Pittsburgh?=20
The PUC restructuring decision  in May 1998, based substantially on the=20
cornerstone PECO decision in December,  1997, established shopping credits=
=20
that have given the Pittsburgh area the most  successful residential retail=
=20
choice plan in the U.S. so far. Duquesne=01,s plan  also included its exit =
from=20
the generation business and the divestiture of its  generation assets. In=
=20
April 2000, Duquesne completed its sale of generation  facilities totaling=
=20
2,614 megawatts (MW) to Orion Power MidWest for $1.7  billion. This=20
successful generation auction greatly reduced Duquesne=01,s actual  strande=
d=20
costs compared to the projected levels.=20
?
Avoiding Interception=20
Even with an end to  stranded cost recovery and high shopping credits in=20
2002, there will be no  genuinely competitive retail market without a=20
genuinely competitive wholesale  market, nor a workably competitive wholesa=
le=20
market without a workably  competitive retail market. Successful electricit=
y=20
competition requires both  competitive wholesale and retail markets (see ou=
r=20
prior issue entitled  =01&California Bad Dreaming=018).=20
?
However, even high shopping credits provide consumers with small retail =20
savings if power cannot economically be transmitted into the region, and=20
such  transmission is very limited in the tiny Duquesne control area.=20
Duquesne has a  large number of shopping customers primarily because Duques=
ne=20
wanted to exit the  generation supply business, Duquesne made some capacity=
=20
available at  below-market rates, and Allegheny Energy did a particularly=
=20
good job aggregating  communities and picking off customers. Only a few=20
suppliers compete, though, and  offer only limited savings, mainly because=
=20
Pittsburgh and the rest of western  Pennsylvania (the Duquesne, Penn Power=
=20
and Allegheny Energy service territories)  still lack a functional=20
Independent System Operator.=20
?
To remedy these problems and help create a competitive wholesale market, =
=20
western Pennsylvania=01,s utilities must join PJM, a power pool that is =20
independently operated and contains over 58,000 megawatts of generation.=20
?
Duquesne=01,s POLR filing itself drives home the urgency of requiring weste=
rn =20
Pennsylvania=01,s utilities to join PJM. Duquesne directly states =01&there=
 is no =20
liquid, visible wholesale electric market in Duquesne=01,s area=018 and tha=
t =01&none=20
is  likely to exist in the near future.=018 These statements strongly under=
score=20
the  need for state action and the failure of policy at the federal level.
?
The absence of a competitive wholesale market makes the issue of basing =20
prices on competitive market rates one of the stickiest issues among those =
=20
working to develop the POLR plan. Duquesne correctly insists that it would=
=20
be  fruitless to move POLR service to market rates without a competitive=20
wholesale  market. Ultimately the plan provides for market-based POLR prici=
ng=20
no sooner  than 2004 if a proceeding establishes during 2003 that a=20
competitive wholesale  market exists.=20
?
Yet, while supporting the conclusion that no competitive wholesale market =
=20
exists and identifying the lack of an Independent System Operator or=20
regional  power exchange as particular problems, the POLR filing has no=20
discussion of the  obvious solution: expansion of PJM to include western=20
Pennsylvania. Duquesne may  be willing to support this solution, if only AP=
S=20
and perhaps First Energy, with  which the Duquesne system is interconnected=
,=20
would join as well. Joining PJM  would eliminate transmission rate pancakin=
g,=20
avoid multiple control areas,  expand the number of generators and supplier=
s=20
serving the market, and enable new  generation, including renewable=20
generation, to serve the Pittsburgh area.=20
?
In the End Zone
Duquesne Light should be  congratulated for its stewardship of the transiti=
on=20
in its service territory and  for its POLR filing. Due to its work so far a=
nd=20
that of others, including the  Public Utility Commission, Pittsburgh will s=
ee=20
huge reductions in the costs of  electricity starting in 2002 and continuin=
g=20
until at least 2004. Pittsburgh will  also be the best place to buy and sel=
l=20
renewable energy in America, as  residential customers will be able to swit=
ch=20
to a 100% renewable power product  and still save about 17% when compared t=
o=20
bundled rates in effect on January 1,  1997.=20
?
All that is a triumph of policy and will make Pittsburgh a better place to =
=20
live and work. But the biggest victory =01* that now can and must be won =
=01* is=20
in  Pittsburgh=01,s grasp. Winning will award Pittsburgh the most competiti=
ve=20
wholesale  and retail markets in the nation. But to secure the win, POLR mu=
st=20
be approved  with no or at most minor modifications, PJM must be expanded,=
=20
and demand side  response to price must be increased. Only then can=20
Pittsburgh truly declare  victory in the electric competition game.

E-cubed is available for reprint in newspapers and other publications. =20
Authors are available for print or broadcast. Support E-cubed by becoming a=
 =20
member of PennFuture =01* visit our secure online membership page at=20
www.pennfuture.org by clicking on =01&Support  Our Work.=018
 - Vol2No18_91100.doc
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