PennFuture's E-cubed is a commentary biweekly email publication  concerning 
the current themes and trends in the energy  market.
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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.
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The following was also released today as a white paper on the status of  
electric competition in Pennsylvania. It can be downloaded in .pdf format 
under  the Pressroom & Publications section of our website 
(www.pennfuture.org) by clicking on the  Reports button.
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August 29, 2000
Vol. 2, No. 17
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On the Watch for Icebergs
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The voyage
The real danger for Pennsylvania in  observing California's ill-fated 
approach to electric restructuring is that it  tempts smugness, to which 
Pennsylvania could easily fall prey, since it has  chartered a different, and 
so far, much more successful path from monopoly to  competition. Pennsylvania 
primarily differs from California by its sincere  commitment to create 
genuinely competitive retail markets. While many states say  that they want 
competition and have even passed laws that supposedly require it,  only 
Pennsylvania and a handful of other states have matched their words with  
pro-competition policies.
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To deliver on its commitment of a genuinely competitive retail market, the  
Commonwealth is implementing unique and specific policies that should give  
customers real choices and break the dominance of incumbent utilities. Among  
Pennsylvania,s more notable transition measures are much higher shopping  
credits, rejection of accelerated stranded cost recovery, longer transition  
periods, competitive default service for a portion of the non-shopping load, 
and  retail rate caps that continue until at least 2004 and as late as 2010. 
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But despite the different route taken, this is no time for smugness.  
Pennsylvania must be alert and learn from, but not follow, California's wake. 
On  electric policy, California's ship of state has sailed like the Titanic,  
ignoring warnings of icebergs ahead, while maintaining high speed on the 
open  sea. 
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The national press, of course, flocks to cover news of the shipwreck. As  
always, bad news is more dramatic, therefore judged to be the better story 
than  the good news of Pennsylvania's success. Unfortunately, the nation as a 
whole  may draw the incorrect lesson from California's voyage that electric  
restructuring is unsafe at any speed, or on any course. That would be as  
erroneous an assumption as deciding, based on the Titanic's ill-fated 
voyage,  that ocean travel is too dangerous.
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Calm waters now, but dangers ahead
Pennsylvania,  however, would be just as incorrect to conclude that its 
successful first three  years and ten months of transition means no more 
icebergs lie ahead. At least  two big obstacles are now visible. 
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First, the wholesale market in western Pennsylvania is not genuinely  
competitive primarily because no Independent System Operator (ISO) covers 
the  region,s utility service territories. The absence of a competitive, 
transparent,  and liquid wholesale market in western Pennsylvania creates a 
major threat to  the success of retail competition there. Taking strong 
action now to require  that Allegheny Energy, Duquesne Light, and 
Pennsylvania Power join the already  functioning PJM Independent System 
Operator will keep the transition on course  in western Pennsylvania. 
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Second, throughout Pennsylvania, there is now inadequate demand-side  
response to market prices. This problem partly results from too little  
deployment of time-of-use meters, uncertainty about terms for competitive 
access  to those time-of-use meters that are deployed, and too little use of 
available  appliance control technology. In order to give customers more 
control over their  bills and to limit wholesale market price spikes, 
customers must be able to  change their demand in response to wholesale 
prices. 
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Even though the poor state of the wholesale market in Western Pennsylvania  
and the limited demand-side response to price are substantial difficulties,  
Pennsylvania's success may cause us to ignore their presence.
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Since Pennsylvania began its transition to retail electric competition on  
January 1, 1997, the Commonwealth has built the most successful retail market 
in  the nation, and possibly the world. According to the Pennsylvania 
Department of  Revenue (see: www.revenue.state.pa.us), electric  competition 
has saved consumers $3 billion and will create 36,000 new jobs by  2004. And 
since January 1, 1999, 528,000 customers have chosen a competitive  supplier, 
even though high wholesale market prices this summer encouraged some,  mostly 
larger, customers to return to their utility. Despite those difficulties,  
more customers have switched to a new supplier in Pennsylvania than in the 
rest  of the nation combined. An incredible 30 percent of Duquesne Light's 
residential  customers have switched. Allegheny Energy's innovative municipal 
aggregation  program and Duquesne Light's transition policies deserve much 
praise for this  result. Equally noteworthy are the approximately 80,000 
customers that have  purchased cleaner or renewable energy products, mainly 
thanks to the green  trailblazing by GreenMountain.com.
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Of course, GreenMountain.com is not alone in the marketplace. More  companies 
are actively competing for accounts in Pennsylvania than in any other  state. 
New Internet retailers of electricity and other products like Utility.com  
and OnlineChoice have entered the market. Just yesterday, The New Power 
Company,  a joint venture of Enron, AOL and IBM, announced it had entered the 
PECO Energy  service territory and guaranteed residential customers savings 
up to 25% on the  electricity portion of the bill. Between traditional 
suppliers, Internet  retailers and green marketers, sufficient market entry 
has occurred to make  competition intense at times. In the PECO Energy 
market, as many as 19 suppliers  at one time have competed for residential 
customers. 
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In 2000, this competitive intensity built 1,000 megawatts of new generation  
within the PJM power pool. By 2005, PJM expects another 15,000 megawatts to 
be  generated mainly from natural gas power plants, which are 95% to 99% 
cleaner in  emissions of sulfur dioxide and nitrogen oxide than many coal 
plants. Renewable  energy technologies will provide the remaining new supply 
that does not come  from natural gas.
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Indeed, the year 2000 ushered in Pennsylvania's first two operating wind  
energy farms. Both wind farms were financed as a result of successful 
marketing  of renewable energy products to retail customers, primarily by 
GreenMountain.com  with a helping hand from Community Energy Inc. The Green 
Mountain 10-megawatt  wind farm in Somerset County is one of the largest east 
of the Mississippi.  
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Through their purchases of renewable energy and cleaner energy products,  
Pennsylvania,s families and businesses are acting powerfully to change the  
electricity industry and to reduce smog, acid rain, and emission of global  
warming gases. Switching to renewable energy products to power their homes 
and  businesses is the single most effective thing Pennsylvanians can do to 
clean  their environment. Every residential customer that switches to a 100% 
renewable  product on average prevents an amount of pollution that is 
equivalent to not  driving 20,000 miles, taking 1.7 cars off the road or 
planting 950 trees. 
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All this is indeed a remarkable record of success, of which Pennsylvania  
should be proud. But to avoid peril, Pennsylvania's policymakers must 
quickly  identify the icebergs ahead, continue forward at a safe speed, and 
change course  as needed. Proceeding in this sensible fashion is easier 
because Pennsylvania  began as early as January 1, 1997 its journey into 
competition. By beginning  early, Pennsylvania could opt for a steady 
transition pace and transition  periods that are long enough to allow the 
development of genuinely competitive  wholesale and retail markets before 
fully ending rate regulation of  generation.
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The transition to full generation price deregulation will last until at  
least 2005 and as long as 2010 in the various service territories. While  
allowing utilities to recover approved stranded costs, Pennsylvania 
generally  has not accelerated stranded cost recovery. To balance stranded 
cost payments to  utilities, electric rates offered by those utilities are 
capped. Utilities,  transmission and distribution rates are capped at January 
1, 1997 levels until  December 31, 2004 in PPL, GPU, and probably Duquesne, 
until December 31, 2005 in  Allegheny Energy, and until Dec. 31, 2006 in PECO 
Energy.
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Generation rates of utilities are also capped. The generation rate caps  last 
at least until 2003 and as long as 2010. Specifically, generation rates are  
capped in Duquesne until December 31, 2003, December 31, 2008 in Allegheny  
Energy, December 31, 2009 in PPL, and December 31, 2010 in PECO Energy and 
GPU.  The rates are normally capped at January 1, 1997 levels until 2005, at 
which  point the rate cap period continues, with modest increases allowed 
during the  remainder of it.
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Avoiding the obstacles
Although this rate of speed is  sensible, Pennsylvania must make an immediate 
course correction to ensure that,  by 2002, the service territories and 
customers of Allegheny Energy, Duquesne  Light Company, and Pennsylvania 
Power are served by PJM * an effective, approved  Independent System Operator 
(ISO) that now serves two-thirds of Pennsylvania.  Presently, Allegheny, 
Duquesne and Penn Power are not part of any ISO and the  absence of an ISO 
makes it impossible to build healthy, competitive wholesale  and retail 
markets in those regions.
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To repeat, neither wholesale nor retail competition can work if all service  
territories in Pennsylvania are not part of an ISO. The ISO ensures that the  
wholesale electric market is workably competitive, the power supply is 
reliable,  and consumers are protected from anti-competitive market 
manipulation. 
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Presently, the wholesale market in western Pennsylvania is not genuinely  
competitive. The poor state of wholesale competition exists because its  
utilities are not part of an ISO that would expand the size of the market in  
which electricity could be freely traded. The Duquesne service territory in  
particular would have more choices, and possibly lower prices were it part of 
a  viable ISO. 
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At this point, the only viable ISO that Allegheny, Duquesne Light and Penn  
Power could join is PJM. Yet, no progress in requiring Allegheny and Duquesne 
to  join PJM has been made since 1998, when the Pennsylvania Public Utility  
Commission (PUC) made membership in PJM or an effective ISO a condition of 
the  proposed Allegheny/Duquesne merger. When the merger plans collapsed, 
ISO  membership and expansion of PJM disappeared from the radar screen. 
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However, it is PennFuture's understanding that Chairman Quain has put PJM  
expansion back on the PUC's agenda. If so, he is doing the right thing.  
PennFuture knows that APS and Duquesne Light, in part due to Chairman 
Quain's  prodding, will soon decide whether they will voluntarily join PJM. 
Indeed, we  believe that Duquesne Light would like to become a PJM member, 
but needs  Allegheny to join as well for Duquesne's customers to gain the 
full benefits of  PJM membership.
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In order to expand into western Pennsylvania, PJM itself must remove a  
barrier by abolishing its installed capacity (ICAP) rule. Allegheny, 
Duquesne,  and Penn Power have never adopted PJM,s peculiar ICAP rule. Of 
course, without  ICAP the western Pennsylvania utilities have operated as 
reliably or more so  than the existing PJM utilities. PJM expansion would be 
the final nail in the  ICAP coffin, yet another benefit of expanding PJM. 
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The recently announced proposed merger between First Energy and GPU creates  
another chapter in the PJM tale. GPU is part of PJM. First Energy is not.  
Therein lies the seed of a possibly disastrous conflict. The First Energy 
and  GPU merger will not be in the public interest and not be approved unless 
more  competitive choices, more consumer savings, more clean energy, or more  
demand-side response is added, or without iron-clad commitments that GPU 
will  remain within PJM and that First Energy will join PJM.
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Given the uncertain outcome of the ongoing informal discussions about the  
expansion of PJM, Pennsylvania's officials need to let all concerned know 
that,  if they do not join PJM voluntarily, they will be ordered to do so. 
The PUC may  be able to do this with existing authority. If not, the 
Pennsylvania General  Assembly must act. 
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The second iceberg that lies in Pennsylvania's path to electric transition  
is enabling first larger customers, and eventually all consumers, to change  
their electric usage in response to market prices. All consumers must be 
given  the ability to alter their demand in real time and before they get 
their  electricity bills. They must be immediately empowered in this way, and 
prior to  the expiration of generation rate caps.
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Enabling retail consumers to change demand in response to market prices  will 
powerfully limit wholesale and retail prices. The market monitoring unit of  
PJM calculates that a 1 percent reduction (about 500 mW) in demand can 
reduce  market prices by about 10 cents/kWh. Customer-determined demand 
modification and  reduction is vital to protecting consumers * businesses and 
families * from  unreasonable price spikes. Increasing the ability of 
consumers to change demand  in response to price also offers environmental 
benefits from reduced emissions  of pollutants from power plants.
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Empowering consumers to change their demand in response to price requires  
installation of advanced meters that record usage hourly and appliance 
control  technology. Equipment that allows the remote resetting of 
thermostats is now  available and should be made widely available to 
consumers. So far, few, if any,  competitive suppliers are offering metering 
services. Market forces have not  been sufficient to universally deploy 
time-of-use meters, though Duquesne and  PECO Energy should be complimented 
for widely deploying the technology in their  service territories.
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PennFuture, therefore, recommends that Pennsylvania require the  installation 
of advanced meters by January 2004 for all commercial and  industrial 
customers with demand greater than 50kW. By 2010 all customers must  have 
their usage recorded by an advanced meter. The distribution utilities  should 
install meters for consumers who are not offered advanced meters by  
competitive suppliers. Given the investments already made by Duquesne and 
PECO  Energy, this recommendation is not onerous and it is achievable.
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As important as installing time-of-use meters is ensuring reasonable access  
to those meters by all market participants. Competitive suppliers when 
serving  customers should be allowed to lease the use of any time-of-use 
meters that have  been deployed. Terms for leasing must be reasonable and 
allow the offering of  competitive power products that allow customers to 
decide whether and how to  change their usage.
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Other recommendations
In addition to expanding PJM to  western Pennsylvania and increasing 
demand-side response to market prices,  PennFuture recommends that a summit 
of the Pennsylvania Congressional delegation  be convened so that it may push 
for comprehensive federal legislation that would  remove barriers to 
wholesale competition and cleaner energy on a national level.  Pennsylvania 
has a lot at stake in ensuring that national markets are  competitive and 
cleaner. Unfortunately, restructuring legislation is now in the  grips of 
Washington gridlock. The Pennsylvania delegation can play an important  role 
in fashioning national markets that help Pennsylvania steer clear of  
icebergs.
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We further recommend that PJM or the PUC investigate whether its auction  
rules for the hourly spot market promote healthy wholesale competition.  
Questions have been raised about whether the existing rules that allow the 
last  unit dispatched to set the price of the whole pool are susceptible to  
anti-competitive strategic bidding. This matter is complicated and important. 
It  should be considered carefully. The best means of doing so is to create a 
formal  process that allows all concerned parties an opportunity to comment. 
Either PJM  of the PUC should create this opportunity. 
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Finally, the recent Pennsylvania Department of Revenue study provides ample  
reason to repeal the Revenue Neutral Reconciliation (RNR) surcharge to the  
electricity Gross Receipts Tax (GRT). The RNR shrinks the purchasing power 
of  the shopping credit and produces uncertainty in year-to-year supplier 
offers  because the RNR changes each year to make up a deficit in direct 
electricity tax  revenues to the General Fund. According to the Department of 
Revenue, by fiscal  year 2004, sales tax and personal income tax gains alone 
from electric  competition are estimated to be over $47 million. Given that 
an additional $10  million in state tax revenues would reduce the RNR rate by 
one mill, and that  the decision on whether to eliminate the RNR will be made 
in 2003, the  Legislature should consider phasing out the RNR at this time.
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PennFuture believes that making these course corrections will avoid the  
icebergs that lie ahead and continue Pennsylvania,s successful transition to  
full electric competition.


E3 is available for reprint in newspapers and other publications.  Authors 
are available for print or broadcast.
 - Vol2No17b_82300.doc