End Rate Caps to Create Electric Choice and Competition

It may be rare that the Commonwealth Foundation and PennFuture come down on the same side of a major public policy debate. But there is one key issue today on which we agree: Pennsylvania consumers will benefit from a competitive electricity market.

Rate caps expire in 2010 in the PPL territory, which includes most of central Pennsylvania, and for several other electricity providers the following year. Rate caps have kept electricity prices artificially low, preventing competitors from entering the market. Rate cap expiration will help bring full competition to consumers.

Concern about potential price hikes in the midst of a recession may motivate some lawmakers to push for legislation to halt or delay that expiration under the guise of consumer protection, but extending rate caps would be foolhardy.

Pennsylvania consumers can expect increased market competition — and with it, greater choice and better values — once electric rate caps expire. It is already happening in pockets of Pennsylvania.  

Rate caps expired in western Pennsylvania years ago, and today 20% of Duquesne Light customers, who consume 50% of the load delivered by that utility, have switched to competitive suppliers that offer better deals and larger savings. In the Penn Power territory north of Pittsburgh, residential customers can shop among three power suppliers and can save $30 or more annually on their bills by switching to one of the competitors.

When competition was enacted in 1996, Pennsylvania’s electric rates were 15% above the national average. Today, they are about 5% below the national average.

Savings can be seen in other states that embraced competition. Customers shopping for electricity in Maryland are paying close to 2 cents less per kilowatt-hour compared to those who stayed with their default service provider. In Massachusetts, competition saved customers $1.1 billion from 1998 through the end of 2004. Despite rising energy costs, the average rate of electricity offered in Texas’s restructured market is only 2.9% higher than the inflation-adjusted rate in 2001. The average Texan can now choose from 28 providers, compared to only four in 2002.

Competition forces companies to serve their customers with the best prices and service, giving consumers more control. While it’s true that electricity prices in both monopoly structures and competitive markets have escalated over recent years, this is due to rising costs for generating fuels, not deregulation. Moreover, prices have already begun to drop in competitive markets — an effect not seen in monopolies.

Case in point is PPL’s recent announcement of a 30% rate hike this January. That increase is largely the result of PPL’s decision to buy a significant amount of its energy supply last year when fuel costs were high. A number of companies have already announced their intention to compete for PPL customers, with one, Dominion Retail, guaranteeing a savings of 10% on PPL’s rates for the first 5,000 customers.

Since 2001, all Pennsylvanians have been free to shop for their electricity supplier, but rate caps kept competition from developing. Delaying the expiration of rate caps would only inhibit economic growth from companies looking to invest in Pennsylvania. With rate caps still in place for over 80% of Pennsylvania’s ratepayers, 44 different companies are already licensed to be competitive generation electricity suppliers.

The Commonwealth Foundation and PennFuture also find common ground on the benefits of competitive electricity markets, as competition opens the door for diverse and news energy providers who are currently unable to offer competitive prices because of rate caps.

Over the past decade there has been nearly three times as much wind energy produced in regional competitive markets than in closed markets. The old system offers little incentive for improvements in efficiency or advanced research. Competitive electricity markets drive innovation, helping us meet bold energy goals that benefit consumers and the economy.

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Matthew Brouillette is President and CEO of The Commonwealth Foundation for Public Policy Alternatives. Jan Jarrett is President and CEO of Citizens for Pennsylvania’s Future (PennFuture).