Navigation Bar
Navigation Bar


 
October 1999 Deregulation Series
Utilities Mull Marketing Strategies
What Role Will Regulators Play?
Who Will Protect the Poor?
More Options for Small Business
Pepco Will Auction Off Its Plants
Environmental Impact Uncertain
An Example of What to Expect
States Deregulate, Congress Debates
Columnists
Cash Flow
Albert Crenshaw says its the same old song. Big business and large-volume users will benefit, while homeowners will likely lose out.

Investing
Investing in utilities used to be easy. Fred Barbash points to where the better investment bets can be found in a more complex, deregulated market.

Color of Money
With deregulation spelling the likelihood of more phone solicitations, commercial ads and legal fine print, Michelle Singletary is tense with anticipation.

A Few Keystone
State Lessons

By Maryann Haggerty
Washington Post Staff Writer
Sunday, October 17, 1999; Page H04

PHILADELPHIA — Drive up Interstate 95 and you see the billboards for Conectiv, Exelon, Peco — made-up-sounding names for utility companies that are trying to become as familiar to locals as Tastykakes.

Listen to the radio and you hear the ads blithely toss around terms such as kilowatt-hours as if everyone has heard them before — because just about everyone here has.

For more than a year, Pennsylvania residents and businesses have been allowed to pick the company that generates their electricity. For most consumers, that has meant a deluge of junk mail. If they slog through it, there's the opportunity to save some money.

The Pennsylvania experience also offers states such as Maryland and Virginia lessons about what to expect as they move toward deregulation.

The commonwealth's deregulation experiment is the nation's most successful by at least one measure — more customers in Pennsylvania have chosen an alternative supplier than in any other state. Even giant California has fewer customers who have defected from their utility company — 167,304 Californians vs. 447,590 Pennsylvanians, more than 11 percent of ratepayers, according to the most recent state counts.

According to a state-run poll, an astounding 94 percent of Pennsylvanians have seen, read or heard something recently about being able to choose their electricity supplier. Even those Pennsylvanians who haven't done anything — by far the majority — have gotten lower electricity bills, because deregulation also included an across-the-board rate cut.

The process has not been glitch-free. For instance, the strain on computerized billing systems was more than anyone expected.

"It turns out that getting customers is probably the easiest thing you'll do," said Gary Stockbridge, an executive at Conectiv, a Delaware-based utility that has been marketing aggressively in southern Pennsylvania. "The hard part is servicing those customers."

Pennsylvania began a limited deregulation pilot program in 1997. So many people signed up for that program that the state used a lottery to pick participants. In mid-1998, enrollment was opened to as many as two-thirds of the customers of each utility. Almost 1.1 million people enrolled in the first week. (Not all enrolled customers went on to pick alternative suppliers.) The program will be open to everyone in January. As in other states, even though customers can pick a generation company, they continue to have their power delivered by the same regulated utility they have always dealt with.

The amount a customer can save varies, depending on location and size of bill. Customers in the southeastern part of the state served by Peco Energy Co. — the former Philadelphia Electric — were paying very high rates before deregulation. Customers in other parts of the state were paying below average.

Not surprisingly, the highest percentage of customers switching suppliers is in Peco's service area. Nearly 15 percent of the company's residential customers and 58 percent of its industrial customers have left. Peco, which recently announced that it wants to merge with Illinois counterpart Unicom Corp., remains profitable.

For an average residential customer in the Philadelphia area, the savings from picking the least-expensive supplier instead of Peco is about $10 per month. But for a big commercial or industrial customer, the savings can be huge.

For instance, most of the civilian federal government buildings in the state joined together under the General Services Administration to shop for electricity. The total bill for the group before deregulation was about $50 million, according to Ken Shutika, a GSA contracting officer in Philadelphia. He said the feds were able to cut $5 million off their electric bill this year.

"The savings of about $5 million for shopping around is the most we've had in any state," he said.

High electric costs were the impetus behind deregulation. They're also the main reason that people have switched, according to the state's survey, which was performed last month.

Largely because utilities built so many expensive nuclear power plants, Pennsylvania's electricity costs have been among the nation's highest. Before deregulation, rates were 15 percent above the national average, according to John Quain, chairman of the state's Public Utility Commission. With customers paying about $10 billion a year total, "if we could move forward with deregulation and simply get down to the national average we would be saving Pennsylvania customers $1.5 billion, and that's a huge number," Quain said.

"There's one major philosophical goal that's just pervasive," he said. "We believe the marketplace is a better control of prices and quality of service than the government."

A history of high prices by itself isn't enough to bring the spirited competition that deregulation's fans hope for — California's prices were and are higher than Pennsylvania's. The details of the deregulatory structure have a lot to do with it.

As part of the process, state regulators set a price at which the regulated utility will sell power to customers who don't switch. This gives competitors a benchmark.

Set it too low and there's little incentive for outsiders to come in. A low number doesn't necessarily guarantee low cost, because it represents only part of a customer's bill. There's another, regulated portion that covers the delivering utility's costs. In a perfect world, the costs are balanced between the two parts so that neither one subsidizes the other.

"Pennsylvania has taught, in comparison to other states, that in order to get a significant switching you need to entice suppliers into the service territory, and to entice suppliers into the service territory you need relatively high generation credits so that they have some margin they can sell to customers," said Tom Michaelman, a senior analyst at Xenergy Inc., a Massachusetts consulting firm that has performed utility-backed studies in various states.

Price is the big selling point in competition, but not the only one. Companies selling "green," or environmentally sensitive, power have had unexpected success even though their products can actually cost more.

"On average, you will pay 5 to 20 percent more . . . to be part of the solution and not part of the problem," said Jeb Hensarling, a spokesman for Vermont-based GreenMountain.com, which he said has been surprised at its success in Pennsylvania.

He said his company has signed up 70,000 customers. That's the same number claimed by competitor Conectiv. Although the state won't release market-share figures, those two companies seem to be second only to Exelon, the unregulated affiliate of Peco, which says in recent government filings that it has 141,000 customers.

Regulators and utility companies agree that the biggest problem facing them during the transition has been with computers. Using a system known as electronic data interchange, or EDI, computers transfer customer information among the companies. Deregulation overwhelmed them, sometimes slowing down customer sign-ups and billing.

"For every 1,000 customers, we move a megabyte of data a day," Conectiv's Stockbridge said. His company has invested "literally millions" in the technology needed to make the switch.

Dealing with EDI was particularly difficult because of the tight time frame, said Brian D. Crowe, director of customer choice implementation at Peco. Customer information systems usually take two to three years to develop, he said; his firm had half that time.

"Because of the compressed time frame, we have had up to 180 people working on this at one time," he said.

"In retrospect, we should have run an EDI pilot," said Kevin Cadden, a spokesman for the Public Utility Commission.

From a customer's point of view, the computer problems have been the biggest annoyance of deregulation, according to the GSA's Shutika. "The utilities have all had trouble making that new part of the bill work," he said. "Billing hassles are a hassle. You can spend a lot of time trying to correct a modest problem."

On balance, deregulation has been a plus for electricity customers, according to Sonny Popowsky, Pennsylvania's consumer advocate, who is officially charged with representing customers before the Public Utility Commission.

"I'm pretty pleased with where we are in Pennsylvania for a couple reasons," he said. "The most important is there were protections put in place to make sure that all customers get some benefit or at least would not be made worse off."

Among them, he said, were the guaranteed rate cuts, some long-term rate caps and protections against cost shifting that aim to prevent small customers from carrying the burden of lower costs for the big guys.

He said, "If 10 percent were shopping, that would not be much of an accomplishment if the other 90 percent were worse off."

© 1999 The Washington Post Company

Back to the top


Navigation Bar
Navigation Bar