PennFuture's E-cubed is a commentary biweekly email publication  concerning 
the current themes and trends in the energy  market.
?
PennFuture, which has offices in Harrisburg, Philadelphia  and Pittsburgh, is 
a statewide public interest membership organization, which  advances policies 
to protect and improve the state,s environment and  economy.? PennFuture,s 
activities include litigating cases before  regulatory bodies and in local, 
state and federal courts, advocating and  advancing legislative action on a 
state and federal level, public education and  assisting citizens in public 
advocacy.
?
?
September 11, 2000
Vol. 2, No. 18
?
Pittsburgh v. San Diego: First and Goal
?
Pittsburgh, like San Diego, will soon be served by an electric utility that  
has divested its generation and paid off its stranded costs. Despite these  
important similarities, the different public policies implemented by  
Pennsylvania and California are producing electricity markets that have 
little  in common. 
?
In the Pittsburgh area, where Duquesne Light,s distribution service  
territory delivers electricity, residential customers have several choices 
and  an impressive 30% have switched to a competitive generation supplier. In 
the  electricity transition game, Pittsburghers have a first and goal. By 
contrast,  suffering from a market which features a dominant retail utility 
that is passing  through the hourly wholesale spot market price, San Diego,s 
residents need a  completed &hail-Mary8 pass to escape wholesale price spikes 
and a lack of  choices.
?
Some crucial changes, nonetheless, to the Duquesne service territory,s  
transition from monopoly to competitive wholesale and retail markets 
generation  should soon be made. Now pending before the Pennsylvania Public 
Utility  Commission at Docket No. R-00974104 is Duquesne Light,s Petition for 
approval of  its Provider of Last Resort plan (POLR). This filing may be a 
model for the  nation on how to manage a transition once stranded cost 
charges have been paid  off. 
?
Also, in the boardrooms of the three main western Pennsylvania utilities  
that are not presently part of the PJM power pool, utility executives will 
soon  decide whether they will voluntarily join PJM. If they do not, ways of  
compelling inclusion within PJM are under discussion in Harrisburg. On 
expanding  PJM, there can be no compromise. Western Pennsylvania does not 
currently have  and will not have a viable competitive wholesale market, 
unless its service  territories become part of PJM.
?
If the western Pennsylvania utilities are included one way or another in  
PJM, and if the Duquesne POLR is approved with at most little change, 
Pittsburgh  will have the most competitive wholesale and retail markets in 
the country. At  that point, rate regulation of default service could be 
successfully ended as  long as widespread deployment of time-of-use meters 
and appliance control  technology, that together increase demand response to 
price, has occurred.
?
On the other hand, if incorrect decisions are made on POLR, PJM, or  
increasing demand response, Pittsburgh will be on the road to San Diego. And  
that is an electricity market that no Pennsylvanian or Californian should  
experience. 
?
Duquesne,s POLR transition plan would end the collection of stranded costs  
from residential customers as early as February 2002. As a result, it would  
provide a 17% system average and 21% residential rate cut for customers, 
whether  or not they are shopping. Transmission and generation rates will 
then be capped  until December 31, 2003, and possibly until December 31, 2004.
?
In addition to the rate cuts and caps, the Duquesne plan would increase  
present shopping credits by 31% on a system average basis * to over six 
cents  per kilowatt-hour * giving shopping customers the opportunity to save 
as much as  another 15% off the bundled rate in effect on January 1, 1997. 
Between the rate  cut and savings from shopping, residential customers may be 
able to reduce their  rates by 36% when compared to those in effect prior to 
competition. 
?
Indeed, based on current price offerings, the end of the stranded cost  
charge means consumers could even purchase a 100% renewable Green-e product 
and  still save about 17% on their total electric bill, compared to what 
customers  previously paid for fossil and nuclear-fueled monopoly generation 
from Duquesne.  For this reason, the Pittsburgh market can be the hottest 
renewable energy  market in the world. Aggressive public education and 
marketing are all that is  needed to turn that prediction into reality.
?
The POLR plan, which was developed by Duquesne in collaboration with  several 
interested parties, also provides more customer usage data to  competitive 
suppliers and better allocates load responsibility and losses  between 
competitive suppliers and Orion, the new provider of last resort. 
?
Flags Thrown on POLR
Nevertheless, the plan is  Duquesne,s, not a settlement. Some may object to 
the proposed rule that  customers not be permitted to switch to POLR service 
for below-market summer  rates, although Orion insists it will not supply 
wholesale power without the  protection. A second controversial component of 
the plan is to permit Duquesne  to avoid a T&D rate case by allowing Duquesne 
to charge four mills above the  price of POLR service from Orion, effectively 
raising T&D rates by about 10%  from the existing rates that were set in 
1987. 
?
Whether or not everyone likes every part of the plan, Duquesne,s customers  
would save as much as 36% from pre-restructuring rates. The new, higher 
shopping  credits effectively would become the highest in the country and 
encourage  greater retail competition in the service territory. It could open 
the door for  new entrants, renewable products and value-added services that 
genuinely compete  for customers. Pittsburgh could be the first region in the 
nation to see what a  competitive market really can provide in the electric 
industry. 
?
Why Pittsburgh? 
The PUC restructuring decision  in May 1998, based substantially on the 
cornerstone PECO decision in December,  1997, established shopping credits 
that have given the Pittsburgh area the most  successful residential retail 
choice plan in the U.S. so far. Duquesne,s plan  also included its exit from 
the generation business and the divestiture of its  generation assets. In 
April 2000, Duquesne completed its sale of generation  facilities totaling 
2,614 megawatts (MW) to Orion Power MidWest for $1.7  billion. This 
successful generation auction greatly reduced Duquesne,s actual  stranded 
costs compared to the projected levels. 
?
Avoiding Interception 
Even with an end to  stranded cost recovery and high shopping credits in 
2002, there will be no  genuinely competitive retail market without a 
genuinely competitive wholesale  market, nor a workably competitive wholesale 
market without a workably  competitive retail market. Successful electricity 
competition requires both  competitive wholesale and retail markets (see our 
prior issue entitled  &California Bad Dreaming8). 
?
However, even high shopping credits provide consumers with small retail  
savings if power cannot economically be transmitted into the region, and 
such  transmission is very limited in the tiny Duquesne control area. 
Duquesne has a  large number of shopping customers primarily because Duquesne 
wanted to exit the  generation supply business, Duquesne made some capacity 
available at  below-market rates, and Allegheny Energy did a particularly 
good job aggregating  communities and picking off customers. Only a few 
suppliers compete, though, and  offer only limited savings, mainly because 
Pittsburgh and the rest of western  Pennsylvania (the Duquesne, Penn Power 
and Allegheny Energy service territories)  still lack a functional 
Independent System Operator. 
?
To remedy these problems and help create a competitive wholesale market,  
western Pennsylvania,s utilities must join PJM, a power pool that is  
independently operated and contains over 58,000 megawatts of generation. 
?
Duquesne,s POLR filing itself drives home the urgency of requiring western  
Pennsylvania,s utilities to join PJM. Duquesne directly states &there is no  
liquid, visible wholesale electric market in Duquesne,s area8 and that &none 
is  likely to exist in the near future.8 These statements strongly underscore 
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  
prices on competitive market rates one of the stickiest issues among those  
working to develop the POLR plan. Duquesne correctly insists that it would 
be  fruitless to move POLR service to market rates without a competitive 
wholesale  market. Ultimately the plan provides for market-based POLR pricing 
no sooner  than 2004 if a proceeding establishes during 2003 that a 
competitive wholesale  market exists. 
?
Yet, while supporting the conclusion that no competitive wholesale market  
exists and identifying the lack of an Independent System Operator or 
regional  power exchange as particular problems, the POLR filing has no 
discussion of the  obvious solution: expansion of PJM to include western 
Pennsylvania. Duquesne may  be willing to support this solution, if only APS 
and perhaps First Energy, with  which the Duquesne system is interconnected, 
would join as well. Joining PJM  would eliminate transmission rate pancaking, 
avoid multiple control areas,  expand the number of generators and suppliers 
serving the market, and enable new  generation, including renewable 
generation, to serve the Pittsburgh area. 
?
In the End Zone
Duquesne Light should be  congratulated for its stewardship of the transition 
in its service territory and  for its POLR filing. Due to its work so far and 
that of others, including the  Public Utility Commission, Pittsburgh will see 
huge reductions in the costs of  electricity starting in 2002 and continuing 
until at least 2004. Pittsburgh will  also be the best place to buy and sell 
renewable energy in America, as  residential customers will be able to switch 
to a 100% renewable power product  and still save about 17% when compared to 
bundled rates in effect on January 1,  1997. 
?
All that is a triumph of policy and will make Pittsburgh a better place to  
live and work. But the biggest victory * that now can and must be won * is 
in  Pittsburgh,s grasp. Winning will award Pittsburgh the most competitive 
wholesale  and retail markets in the nation. But to secure the win, POLR must 
be approved  with no or at most minor modifications, PJM must be expanded, 
and demand side  response to price must be increased. Only then can 
Pittsburgh truly declare  victory in the electric competition game.

E-cubed is available for reprint in newspapers and other publications.  
Authors are available for print or broadcast. Support E-cubed by becoming a  
member of PennFuture * visit our secure online membership page at 
www.pennfuture.org by clicking on &Support  Our Work.8
 - Vol2No18_91100.doc