Consumers Flee from Electric Choice Program in Pennsylvania

 Erie Times-News, Pa. - 7/10/01

Jul. 6--Consumers are fleeing Pennsylvania's Electric Choice program as higher wholesale costs are driving competing companies out of the market -- and driving up prices for those who remain.

In GPU Inc.'s service territory, which includes Erie and 30 other Pennsylvania counties, three competitors remain, according to a figures released late last week by the state's Office of Consumer Advocate. Those three companies are servicing about 4,800 customers, as of July 1 -- about 0.5 percent of the total number of customers in GPU's territory, according to the Office of Consumer Advocate. That number represents an almost 90 percent drop from the 47,000 customers who were buying electricity from GPU's competitors when the office issued its previous report April 1.

What it means depends on whom you talk to. Critics of the state's efforts to deregulate the electricity market cite the sharp drop as evidence that the Electric Choice program is failing to live up to its promise. Those who support the state's deregulation program say the latest numbers offer evidence that Electric Choice is doing its job by protecting consumers from massive price swings. In the middle are electricity suppliers and their customers, both of whom are hoping that state regulators can continue to navigate Pennsylvania through a stormy market without exposing them to the blackouts and price spikes that consumers in California are facing.

"Deregulation works best when consumers are paying prices that represent real free-market prices," GPU spokesman Ned Raynolds said. "It's a very difficult and complex issue that regulators have to deal with. How you do that is no easy task."

The state started the Electric Choice program in 1999 to help foster competition in Pennsylvania's electricity market. In setting up the program, regulators created contracts that labeledexisting regional electricity companies as providers of last resort. Under those contracts, the companies -- including GPU -- agreed to provide electricity at a capped rate to any customers who have not signed on with a competing company. At the Electric Choice program's height, as many as 30 competing suppliers were registered to serve customers in GPU's service territories, according to GPU officials.

But wholesale prices have exceeded GPU's capped retail rate for much of 2001, meaning that many of the competing companies could no longer afford to do business in GPU's territory. When faced with the prospect of paying GPU's capped rate or the competitors' higher rates, customers began switching back to GPU.

The trio of competing companies that remain -- Allegheny Energy Supply, Dominion Peoples Plus and Green Mountain Energy -- are listing rates that range from 6.4 cents to 7.3 cents per kilowatt hour. GPU's rate is capped at 4.528 cents per kilowatt hour, according to the Office of Consumer Advocate. GPU, meanwhile, estimates that it will lose between $145 million to $250 million this year as a result of customers switching away from the competing companies.

"It's basically a non-existent program," said David Hughes, executive director of Citizen Power, a Pittsburgh-based organization that is against the state's effort to deregulate the electricity industry. "There is no price being offered now that is cheaper than the price to compare. There is no competition."

Hughes cites the overall drop in participation statewide as evidence that the Electric Choice program is failing to live up to its promise. The number of consumers statewide who were using "alternative suppliers" as of July 1 was about 591,600, down from about 787,800 on April 1, according to the Office of Consumer Advocate. But that number is somewhat deceiving, according to Hughes, who notes that more than 253,000 of the remaining customers are former PECO customers in eastern Pennsylvania who were offered cut rates as part of an initiative to encourage competition. Those customers signed on with the New Power Co. during the first quarter as part of the state's competitive discount service program and are buying their electricity at below-market cost.

Despite the recent drop, state consumer advocate Sonny Popowsky said the Electric Choice program offers consumers with an ideal scenario. When wholesale prices are high, consumers are protected by rate caps. When they drop, consumers can shop for the lowest rate. "The goal is for customers to get the maximum benefit," Popowsky said. "If you have the protection of the rate caps, at least consumers are protected." Popowsky said the real problem is the wholesale market, which has been inflated by soaring natural gas prices and by manipulation by some generators.

"The answer to high wholesale prices is to get the wholesale market working," he said. Hughes, however, sees deregulation as a flawed proposition that will never function as a fully open market. Without full government control of the system, consumers will ultimately get burned by high prices or blackouts, he said.

"It's important that the legislature stop deregulation in Pennsylvania, just like they are doing in other states now," Hughes said. "They should stop deregulation in its tracks. But it's going to take some pain, like California, before the politicians will start acting on it."

In the meantime, wholesale prices are starting to drift down, as natural gas costs wane, Popowsky said. As that happens, retail rates will soon follow and the Electric Choice program will begin to recoup its losses, he said. "If (competitors) can make a profit selling retail, then you will see them coming back," Popowsky said. "It takes awhile to get all of those structures in place. As the market becomes more stable, those prices ought to come down."

Hughes, however, sees a much darker picture. "No one really knows what's going to happen," he said. "Prices will probably go down, but then they will go back up. We're interested in trying to make it work, but I don't think we can."