PennFuture's E-cubed is a commentary biweekly email publication concerning the current themes and trends in the energy market. If you have trouble reading this email, please see the document on our website (www.pennfuture.org) under Pressroom & Publications. 
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August 10, 2001
Vol. 3, No. 15

Pittsburgh 2002: A Golden Opportunity For Renewable Energy 

The end of large stranded cost charges to consumers will usher in a golden opportunity next year for the Pittsburgh area to become the renewable energy capital of America. In the Duquesne Light Service Territory in 1996, rates for some customers approached 50 percent above the national average, with residential customers paying more than 12 cents per kilowatt-hour (kWh). Of this 12 cents plus total, about 8.5 cents was for just generation. 

And what did consumers get for this premium 8.5 cents generation price, well above any price - including for today's 100 percent renewable energy products - seen in Pennsylvania's competitive retail market since 1997? Did they get clean and safe energy? Not unless you believe that coal and uranium are renewable resources. 

In fact, the Pittsburgh area was powered by incredibly expensive nuclear plants that often were shut down more than they ran, as well as some of the highly polluting coal plants that kill 2,250 Pennsylvanians each year with microscopic dirt, cause acid rain, produce smog, and contribute to global warming. Both the pollution and the high costs were jammed down the throats of consumers by monopoly-friendly regulators. 

Those who challenged the legacy of high rates and dirty power and asked the old Pennsylvania monopoly utilities about renewable energy were often lectured that renewable energy technology would cost more or was not practical. Today's competitive retail market shows how wrong those lectures were. Right now in Pittsburgh, four competitive suppliers (two are Green-e certified) are offering 100 percent renewable energy products for prices ranging from 6.5 cents to 7.5 cents per kWh. Those prices are less than the 8.5 cents Duquesne's customers paid for coal and nuke generation five years ago. In fact, they are more than a full cent less per kWh.

Since renewable energy products exist in the marketplace, are exponentially cleaner, and cost less than Duquesne's traditional power products, why have they so far not swept the marketplace? 

Can You Say Stranded Costs or Competitive Transition Charges? 
Customers who switch to renewable energy products pay not just the price of the product, but also a regulatory stranded cost charge of up to 3.39 cents per kWh. On a system average basis, the stranded cost charge is 18 percent of each customer's total electric bill and for residential customers it is a whopping 27 percent of the total electric bill. The stranded cost charge is paid even if you switch from Duquesne Light to another company, and allows Duquesne to recover uneconomic investments in nuclear power made when it was a regulated generation monopoly. Without the collection of stranded cost charges, Duquesne may have gone bankrupt. 

Yet, adding the stranded cost charge to the otherwise less costly renewable energy products has the effect of increasing a customer's total bill when s/he bought renewable energy products. Thus stranded cost charges are a real barrier to renewable energy products and other competitive retail electric products.

But in 2002 in the Duquesne Light service territory, the regulatory ball and chain of stranded cost charges will be eliminated by giving a large total rate cut of probably 17 percent to all residential customers and by increasing the shopping credit from 4.89 cents to about 6.1 cents for residential customers. The removal of stranded cost charges means many Pittsburgh-area customers will soon be able to switch to renewable energy products and pay less or no more than what they were paying for electricity in 1996. 

Yes, they could save even more by buying even lower cost dirty power products. But the coming opportunity to power Pittsburgh with renewable energy and pay less than 1996 bills is a once-in-a-century chance. 

The Duquesne Transition 
The reason why Duquesne will be the first Pennsylvania utility to eliminate stranded cost charges is its successful sale of its generation plant. Duquesne first swapped some generating assets with FirstEnergy and then sold all of its generating assets to Orion, while contracting with Orion to continue to provide default service to Duquesne's native load customers. Duquesne has provided distribution service and Orion has provided default generation service at capped rates without notable problems. 

Without a former monopoly utility with a vested interest in keeping generation customers, a far greater portion of customers switched to a competitive supplier than anywhere else in the U.S. Competitive suppliers now serve about 30 percent of all Duquesne customers. The number of Duquesne customers served by competitive suppliers rose steadily until peaking in late 2000 at about 185,000, held steady through spring 2001, and then declined to about 171,230 as of July 2001. The recent decline occurred when retail offers exceeded the system's shopping credit but remained well below Duquesne's 1996 generation rate of 8.5 cents. 

Today, there are four competitive suppliers offering six different products to residential customers in the Duquesne territory, one of which is priced below the shopping credit and enables customers to switch and save, and four of which are renewable energy products. Recent sharp declines of more than 50 percent in forward electric markets make it likely that more products will soon be able to beat the current Duquesne shopping credit of 4.89 cents and of course the 8.5-cent 1996 monopoly rate.

After 2002, the two remaining principal impediments of completing a successful transition to competition in the Duquesne Light service territory will be the full integration of its control area and wholesale market into PJM and wide deployment of demand-response technologies. Time-of-use meters and appliance-control devices allow customers to profit from reducing usage in summer peak hours, protect reliability, reduce market power, and can lessen pollution. The failure to achieve PJM integration and demand response could derail the benefits of stranded cost elimination and what has been so far a successful transition for the Duquesne Service territory.

No More Stranded Costs! 
Stranded cost charges will likely be first removed for residential customers starting in March 2002. Up until now, average system customers have had to pay 18 cents on every dollar paid for total electric service so that Duquesne could recover its stranded costs. With the end of stranded cost charges, different classes of customers (and different individual customers, depending on their usage) will receive a substantial rate cut.

Current Prices for Electric Service from Duquesne Light
(Rates in cents/kWh)
                         RS Rate         GS         GL
Distribution     4.263             2.453        0.475
Transmission 0.250             0.257         0.119
Generation     8.50                 6.451        3.172
CTC portion 
of Gen.             3.390             2.205         0.926
Shopping 
Credit             4.880                 4.246         2.246
Total             12.533                 8.085         3.646

The portion of the bill that is the "Competitive Transition Charge" represents the basic rate reduction that each class will enjoy when the charges are terminated. The charges are scheduled to end in March for general residential customers (RS), April for smaller commercial customers (GS), and September for larger commercial customers (GL). The charges end for other customer classes as late as April, 2004. Residential customers using 600 kWh/month, for example, will stop paying 3.39 cents/kWh for stranded costs, reducing their total electric bill by 27 percent. 

Real Market Prices
Generation rates will still be regulated for customers receiving default generation service under Duquesne's contract with Orion. However, the rates will no longer reflect the remnants of pre-restructuring cost-of-service rates. Instead, they will be based (imprecisely) on "market rates." When the PUC approved the sale of Duquesne's generating plants and the transfer of the default service to Orion, it approved tentative default rates at "market prices" as determined by the Duquesne contract with Orion. 

The precise level of default rates remains unknown, however. Consumers would see total rate reductions of about 21 percent if the default rate is set at 5.5 cents/kWh, and a total rate cut of 17 percent if it is pegged at 5.9 cents. Again, these default rates are well below the 8.5-cent 1996 monopoly rate.

Although the Duquesne/Orion contract set and the PUC approved the default rates, the rates did not assume that Duquesne would be joining PJM West. There have been some non-public discussions taking place between the PUC, Orion, and Duquesne as well as some public discussions, but at this point it is unclear whether the existing rates should or will be adjusted. Whatever the precise answer, the PUC needs to move these proceedings to the public domain and resolve the issues expeditiously, so that customers and suppliers may plan to take advantage of the new market opportunities. 

Competitive Market Opportunities
In 2002, the shopping credit will increase for customers who choose to buy generation from a competitive supplier instead of Orion's default service. Given reasonable assumptions about market prices and what the shopping credit may be, it appears that competitive suppliers will have substantial opportunities to provide competitive service at prices below the shopping credit. For example, if the present residential shopping credit of 4.88 cents/kWh is raised to 5.75 cents/kWh, as presently scheduled, consumers would have a modest opportunity to save by shopping in addition to the savings that all customers - including those remaining on default generation service - will experience from the end of stranded cost charges. If the residential shopping credit is increased to about 6.15 cents/kWh, suppliers competing on price would have a substantial opportunity to offer consumers meaningful savings by shopping. 

One might presume that the 30 percent of all customers already shopping in the Duquesne service territory include many of those most interested in shopping. Will the opportunity to save a bit more after receiving a 17 percent rate decrease without shopping be sufficient to entice many of the remaining customers to shop? Setting the rate too low will provide a disincentive to shop by delivering even more savings to non-shopping customers who already will be getting a huge rate cut because of the end of the stranded cost charges. Given that "market rates" are a prediction that no one has been making accurately, perhaps the PUC should err on the high side to increase competitive market opportunities. There is no better time for doing so than when all customers are about to receive a huge rate cut from the elimination of stranded cost charges. 

Renewable Energy's Time is Now
Even moderate additional shopping based on price does not mean a non-competitive market, however. Perhaps the most successful competitive suppliers will be those that offer products or services that encourage customers to switch for reasons other than price. Renewable energy, energy efficiency, and demand-side response products may well provide suppliers with the competitive edge. 

The opportunity for renewable energy market penetration is, in fact, unprecedented. Two new wind farms are under construction at this time in Somerset and Fayette counties, bringing the total installed wind capacity in the region to about 34.4 megawatts (MW). Two additional wind farms are under development in the same area and another is under development about 30 miles across the state line in West Virginia, potentially bringing an additional 127-145 MW of wind power to serve the Pittsburgh market. Depending on the precise shopping credit, it is likely that wind electricity from these developments could be sold to retail customers at prices close to or not too far above the shopping credit. 

Even if buying renewable energy is not the lowest cost option, consumers would still be investing a portion of their 17 percent rate cut in renewable generation and still receive a reduction in their electric bill from what is now paid. For example, a residential customer could buy one of the five renewable products presently available to consumers in the Duquesne territory and still save from 1 cent to 2 cents per kWh. Alternatively, consumers probably will be able to buy 50 percent wind energy and still receive a total electric bill more than 5 percent less than it is today and was in 1996. 

Large institutions, government agencies, businesses, and families can, without increasing their current electricity bills, become renewable energy consumers. With their choices, they can make Pittsburgh known far and wide as the first green-powered city.
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E-cubed is available for reprint in newspapers and other publications. Authors are available for print or broadcast.

PennFuture (www.pennfuture.org), with 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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