The power of choice, 20 years later

A tectonic shift rattled the electric power industry 20 years ago, and still reverberates today: Pennsylvania ended utilities' monopoly over electricity generation, raising expectations of lower energy costs and enhanced consumer choices.

The Electricity Generation Customer Choice and Competition Act of 1996 unleashed market forces that pushed utilities to divest their power plants and buy electricity from independent generators.

Advocates of competition say it has lowered generation costs and liberated consumers from having to pay off pricey power plants.

"The electric markets have proven to be a good thing for Pennsylvania," said John Hanger, a member of the Public Utility Commission in the late 1990s who was one of the architects of competition.

Customers of Peco in the Philadelphia area and Duquesne Light in Pittsburgh have been the biggest beneficiaries, Hanger said.

Competition in wholesale power markets has shaken the financial foundations of some legacy power plants, contributing to a massive move away from coal-fired generation to new natural-gas plants and renewable power sources, and threatening the survivability of several nuclear power plants, the nation's largest source of carbon-free electricity.

The law also set the stage for competitive retail electric markets, which came into play after 2010. Pennsylvania consumers now can choose their generation suppliers, which has produced mixed results. Though industrial and large commercial customers have embraced competitive power markets, only 35 percent of residential electricity customers have switched.

Some saved money, and others chose innovative new products. But many, induced by unscrupulous marketers, made regrettable choices.

"Competitive markets are bad for poor people," said Patrick M. Cicero, executive director of the Pennsylvania Utility Law Project. He said the organization's research shows that customers enrolled in low-income assistance programs tended to pay more with competitive power suppliers than they would had they stayed with the standard offer from their utilities.

"There is little evidence that retail choice has yielded any significant benefits," said a national report released this year by the Electric Markets Research Foundation, a utility-backed trade group.

Alternative power suppliers disagree, saying that competition has produced customer benefits, including green-energy options and long-term fixed rates.

"Customers want choice," said Ritchie Hudson, the Pennsylvania chair of the Retail Energy Supply Association. "This is apparent when they're going down the cereal aisle at the grocery store, and it's equally true for energy."

Hanger, who has organized a conference in Hershey this week to examine two decades of competition, believes that current conditions are setting the stage for an Uberlike disruption in the power industry when more customers opt to produce their own electricity, or get off the grid altogether.

"Are competitive power markets perfect?" he said. "No. But compared to what was going on in Pennsylvania 20 years ago, we are in such a better place."

Since 2001, when the U.S. Energy Information Administration began charting retail power prices, inflation-adjusted electricity costs have gone up 6.3 percent nationwide. In Pennsylvania, they have fallen 3 percent.

Peco's 1.4 million residential customers, who were paying among the nation's highest rates in 1996, have fared even better.

Peco's "price to compare" - the market-based "default" rate it charges to customers who don't shop - is now at its lowest point since retail competition was fully implemented in 2011.

For a residential Peco customer using 500 kilowatt-hours per month, the inflation-adjusted bill is 26 percent less now than it was in 1996.

Advocates of utility restructuring say the decline in Peco's default price is evidence that all customers have benefited from market rates, not just those who have shopped in retail markets. By law, a utility's default price is based on power purchased on competitive wholesale markets, passed on to customers without a markup.

"Customers who stayed on utility default service got all the benefits of competitive wholesale markets without all the risk from retail markets," said Irwin A. "Sonny" Popowsky, Pennsylvania's retired consumer advocate.

"The way I put it," he said, "you don't have to play to win."

Electric competition was born out of the deregulation movement of the 1990s, when the government was relaxing market controls on industries ranging from airlines to telecommunications.

Federal energy regulators first opened the nation's electric transmission grid to competition, allowing independent power producers access to markets.

Pennsylvania was an early adopter of competition, largely because the regional grid operator, PJM Interconnection, quickly embraced a market framework.

The nationwide movement stalled after traders manipulated the California market in 2000, causing outages and wholesale price spikes that bankrupted one utility. Some states rescinded competitive-market plans after the California debacle, leaving 14 states and the District of Columbia with retail choice. New Jersey and Delaware are among the states with competitive power markets.

On Nov. 8, Nevada residents will vote on a measure that would open that state's power markets to competition - making it the first state to flirt with electric choice since 2001.

Nevada is an exception to an emerging trend in states with restructured power markets to retreat from competition. Regulators in Ohio and New York, pressured by power-plant owners that have threatened to shut down uncompetitive facilities, have moved to provide ratepayer subsidies to keep legacy coal or nuclear plants open. New Jersey, Illinois, and Michigan policymakers are engaged in similar debates.

In Pennsylvania 20 years ago, regulators opted for a gradual shift to competitive markets, to allow the utilities to recover billions of dollars in investments they made in power plants. For example, the PUC and Peco agreed to allow the utility to charge customers $5.3 billion for its Limerick nuclear reactors in exchange for capping rates through 2010.

Skeptics expected Peco's retail rates to skyrocket when rate caps were lifted. But new shale-gas discoveries reduced energy prices, causing the inflation-adjusted bill of a Peco customer to fall.

Some experts say lower fuel costs have as much to do with reduced power prices as competition.

"There is clear evidence that competition has improved efficiency at power plants and improved the coordination of operations across a formerly balkanized power grid," researchers at the University of California-Davis wrote in 2015.

"But the impact of gas price movements and new technologies have had a far larger impact."

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