PA Deregulation

August 6, 2010

Excerps reported by Commercial Utility Consultants

This is an article we found to be very informative. It presents a very thorough overview of how the current electric market works and what to expect as of Jan 2011.

As you may be aware, PECO’s rates are in the process of being restructured and the new rate structure will take effect January 1, 2011.  The good news is that the Transition charges that are currently applied to all PECO customers’ bills will no longer be applied.  These charges were awarded to PECO when electric deregulation was initiated in Pennsylvania back in 1998 and have been collected via customers’ billings for the last 11 years. Effective January 1, 2011, transition charges which range from approximately 25% to 30% of total PECO billings will be eliminated from the bills.

At the same time the Transition charges are phased out, PECO will begin to charge market based prices for generation.  In return for the Transition charges that PECO was awarded in 1998, the PUC mandated that PECO cap their generation charges at essentially the 1998 rates.  The generation rate caps that have been in effect since 1999 are scheduled to expire on December 31, 2010 and the new charges for generation will be effective on the January to February 2011 billings.  Since generation charges currently constitute more than 50% of PECO bills, these increases will more than offset the impact of the phase out of the transition charges.

PECO customers will be divided into four distinctive classes for purposes of default service procurement.  These classes will be defined as the Residential Class (R), Small Commercial & Industrial Class (SC&I), Medium Commercial & Industrial Class (MC&I) and Large Commercial & Industrial Class (LC&I).  The following is how the last three of these rates classes will be defined:  The SC&I class is defined as Commercial Customers with an annual peak demand of less than or equal to 100 KW; the MC&I class is defined to be customers with a peak demand greater than 100 KW and less than or equal to 500 KW and the LC&I class is defined to be customers with peak demands greater than 500 KW.

The above rate classes will determine how PECO will procure default service supply for these customers.  The fixed price default service for calendar year 2011 for the SC&I and MC&I customers will be determined through a series of three auctions in the fall 2009, spring 2010 and fall 2010.  Default service for LC&I customers will be procured through two auctions; one in the spring 2010 and one in the fall 2010.

 

Since customers are not required to make a commitment prior to the auctions being completed and the price released, PECO will be asking suppliers to submit price quotes for an unknown quantity of power and for an unknown combined load profile.  Accordingly, suppliers will need to build a great deal of risk into their price quotes given the fact PECO will not know the amount of power they will need or the combined load profile of the customers they will be serving.  In addition, suppliers will not know the credit worthiness of the customers that will select the PECO fixed price option.  With the amount of risk each supplier will have to build into their price, we do not anticipate the PECO default fixed price service to be the most competitive price available.

Any LC&I customer that does not opt into the fixed price service and still wants to remain a full service PECO customer will receive day ahead hourly pricing for 2011 as its default service.  Under this scenario, PECO will measure the amount of electricity used each hour and apply the PJM LMP day ahead price to each hour’s usage. The hourly price of electricity is extremely volatile and most financial people shy away from this option as it is not very budget friendly.

Customers will also have the option to purchase power from a third party electric generation supplier (EGS) on a negotiated contract basis. Third party suppliers will offer customers a wide variety of options from a full requirement fixed price to hourly indexed pricing based on one of the several PJM markets.  PJM is the local power pool that handles energy transactions in PECO and many other utility areas.  PJM pricing can be extremely volatile.  The PJM market price for electricity in June 2008 was $98.00 per MWH or 9.8¢ per KWH.  In June 2009, the PJM market settled at $45.00 per MWH or less than half of what it was a year earlier.  The timing of PECO’s auction and when customers shop for their electric supply will be a major factor in determining what the best option will be.  HBS will be available to assist in this process and will be able to provide pricing from all major licensed EGSs should you be interested.

While there will be an increase in the cost of electricity for most customers, the increase for those customers receiving special discounts or riders will be more substantial. Most of the discounts and riders that PECO currently offers are scheduled to be phased out at the end of 2010 further impacting the increase in overall electric costs for some PECO customers.  Discounts currently applied will still be applied but only to the distribution portion of the bills.

There are two major ways to mitigate the increase in electricity costs that will inevitably occur in 2011.   The first would be to shift major electrical usage operations to off-peak hours when prices for electricity are cheaper.  The hourly price of electricity varies like no other commodity and prices can double or triple in a single hour.  This is especially true in summer months when hot weather is a major factor in determining the hourly PJM price.  Unfortunately, most industrial customers do not have the luxury of shifting major energy using operations to off-peak hours.

Another means to reduce projected costs would be to reduce consumption.  There are a number of ways in which this can be accomplished including increasing the electrical efficiency of major energy consuming equipment. In most cases, the most straightforward and cost effective way of reducing consumption is to replace inefficient lighting with newer higher efficiency lighting.  Typically, a payback period of less than two years is attainable.  While these lighting projects may not have made economic sense in the past when the cost of electricity was lower, with the future price of electricity increasing, the economics of these projects could improve significantly.  HBS is available to assist in analyzing the results of previous lighting studies, performing a new study and/or recommending reputable companies from which to solicit proposals to perform this type of work.

Our perspective:

There is a lot of information being bantered about regarding deregulation beginning in Jan 2011.

Be sure to know all the facts.

Just what part of your bill will be effected. What are you currently paying for those items and what are the projected cost.

Should you be speaking to a broker or one of the approved providers, bve sure to ask if the price is fully loaded.

Does it include 7% loss allowance and the gross receipt tax.

Some providers are not including these items but that does not mean you will not be paying them.

to learn more email george@hbsadvantage.com

HBS is an independent energy management consultant. We have been providing deregulated saving to our clients for over 10 years.

We represent all the major providers selling energy in NJ and PA. We will define what provider(s) will be most competitive for your market and get you the best price.

Contact us today:

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