STATE’S ELECTRIC CONSUMERS DESERVE RATE CAP EXTENSION

     HARRISBURG, July 1, 2008 – Pennsylvania must adopt a solution soon to a looming, preventable crisis that threatens to jolt residential and business electric customers with exorbitant rate increases, State Senator Vince Fumo (D-Philadelphia) said today.

     Chances of resolving the problem on behalf of consumers suffered a setback Wednesday during negotiations with legislators, when each of the electric utility companies in the state were asked to present a plan providing real benefits to customers. Their response, according to Fumo, was embarrassing – an offer of pennies to correct a multibillion-dollar problem.

     “Electric utility companies are poised to reap the unfair windfall that they tried but failed to obtain with the 1996 deregulation law, unless we act now to keep rates at a reasonable level,” said Fumo, who originated litigation that established the current rate caps a decade ago.

     The price controls resulted from the settlement of Fumo’s lawsuits against PECO, the provider in Philadelphia and the surrounding southeastern Pennsylvania region. After lengthy and complex legal proceedings before the Public Utility Commission and in the state courts, the settlement required rate cuts in 1999 and 2000, then froze electric rates at 1996 levels until December 31, 2010. It has saved PECO customers an estimated $3 billion.

     The PUC used the PECO settlement as the model when adopting deregulation plans for the other major utilities in the state. When the caps come off, electric utility companies are predicting huge bill increases for customers, because they plan to charge rates that are far above their actual costs of generating and distributing power.

     “Proponents of deregulation predicted that competitive market forces would result in lower prices for consumers, but there is very little actual electric competition in Pennsylvania today,” Fumo said. “While it is too late to return to the days of regulation, when the PUC set rates that allowed utility companies a reasonable profit, we should enact statutes that are in-between a regulated and deregulated system, to prevent companies from gouging their captive customers under their de-facto monopoly.”

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     Fumo and other legislators have been in talks with utility companies in the state to arrive at a fair method of pricing electric power that will protect consumers against sharp increases that could be as high as 60 percent virtually overnight. The electric utility industry is resisting many of their proposals.

     Fumo and his fellow Senate Democrats favor gradually phasing in higher electric rates, without customers being charged more than a reasonable rate, or having to pay additional money to benefit from a more gradual phase-out of the caps.

     They also want to alter the means by which electric companies define the prevailing market rate. During times of peak energy usage, when electric generation companies must rely on more expensive power plants, they charge that higher rate for all of their electricity, even though a larger percentage of their power is still generated by cheaper, more efficient facilities. Senate Democrats want portfolio pricing that reflects actual costs, while still giving utility companies a fair financial return.

     They also seek measures that prevent market manipulation, outlaw winter shut-offs of service, require companies to work with consumers to cut consumption, and create a state power purchasing agency.

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BACKGROUND ON ESTABLISHMENT OF RATE CAPS THROUGH 2010 UNDER ELECTRIC DEREGULATION

In 1996, the state enacted an electric deregulation law that provided no guarantee of better prices for consumers, beyond the vague general promise of lower rates through market competition. In fact, the bill was crafted essentially by and for utility companies in such a way that it created a windfall for them, with little likelihood of savings being passed on to consumers.  

The law was written with significant input from electric company lobbyists, in cooperation with the Ridge Administration and a small handful of friendly Republican legislators.  

The 84-page deregulation act was amended into a one-paragraph bill dealing with taxicab legislation, and passed during the lame duck session of 1996.

Other than the small group involved in drafting the bill, most legislators saw it only a few days before it was amended into the taxicab bill and brought up for a vote in the Senate. 

With little time to react, Senator Vince Fumo quickly drafted an amendment that would have required 10 percent rate reductions for all customers.  It was defeated on a straight party-line vote, with all Democrats in favor and all Republicans opposed. The bill then passed, 40-10. 

The bill permitted the utility companies the right to charge customers for the cost of their nuclear power plants, and allowed generation rates to longer be subject to Public Utility Commission control.  

With the pro-utility bill becoming law, Sen. Fumo attempted to gain consumer benefits through the courts. Utilities were required to file an implementation plan for approval with the Public Utility Commission. The first company to file was PECO, serving Philadelphia and the southeastern Pennsylvania region. 

PECO asked for the right to recapture from customers $7.46 billion worth of investments that would be unprofitable in a competitive market – investments in nuclear power plants. Tacked on to the bills of consumers, that “stranded cost recovery” charge would have fixed consumer electric bills at above market rates, despite competitive market forces. (Eventually, the six largest electric utilities in the state would request $18 billion worth of stranded cost recovery.) 

Sen. Fumo initiated litigation that was eventually supported by 30-some other parties, including state Consumer Advocate Sonny Popowsky, Community Legal Service of Philadelphia, ACORN, and most every consumer advocacy group in southeastern Pennsylvania. The suit challenged PECO’s windfall opportunity and its right to surcharge consumers for its unprofitable investments. 

Lengthy and complex legal proceedings ensued over the next approximately year and half, in front of the PUC and in the state courts. Potential competitor electric companies, notably Indianapolis Power and Light Co, entered the legal fight, and in some instances those companies joined forces with Sen. Fumo. In August of 1997, Sen. Fumo and his fellow litigants reached a settlement with PECO that permitted some stranded cost recovery – although less than the $7.46 billion that it initially sought -- but only because PECO guaranteed all customers 10-percent rate reductions that were to last for several years during the transition to a competitive market, as well as rate caps that would last until 2011. 

Several months later in October, Houston-based energy company Enron announced that it would double the rate cuts to 20 percent if it would be allowed to take over PECO’s market territory as the default supplier, which would essentially have made it the incumbent southeastern Pennsylvania utility in the competitive market.

Realizing that the economic assumptions regarding the electricity market made Enron’s promises implausible – a judgment proven to be sound in light of Enron’s later collapse into bankruptcy and legal morass – Sen. Fumo decided to fight the Enron takeover attempt. He and many members of his legal coalition joined with PECO in an effort to preserve the settlement that they had achieved in August 1997. 

The PUC narrowly rejected the Enron proposal, and in April of 1998, a new settlement was reached with PUC input. It was less generous for consumers than the initial settlement, but still provided substantial benefits. The new settlement required PECO to abandon $2 billion worth of its stranded cost recovery request, reducing the amount to $5.46 billion and ending the recovery process in 2010. Consumers received an 8 percent immediate rate reduction in 1999, and a 6 percent rate reduction in 2000; after that, rates were capped at 1996 levels until December 31, 2010. 

The settlement in the PECO service territory was adopted by the PUC as a model for utilities in the rest of the state under deregulation. Eventually, the PUC would grant just $11 billion in stranded cost recovery of the $18 billion that Pennsylvania companies requested, but customers statewide enjoyed rate caps during the time that companies were transitioning to a competitive market environment.

Click here to see a brief video clip from Senator Fumo's press conference on electric deregulation.

Click here to see another video clip from the electric deregulation press conference.