Transcript Slide 1

Electric Deregulation
The
Upcoming
Crisis
1
Background
• Late in 1996, the “Electricity Generation Customer Choice and Competition Act”
was enacted. The primary purpose of the act was to deregulate the generation of
electricity and create a competitive retail market.
• Policymakers had hoped that by permitting direct access by retail customers to a
competitive electric market, customers would benefit from lower rates and better
service.
• During the transition to a competitive retail market, all utility companies were
permitted to recover the construction costs of their power plants (costs that may not
be recoverable in a competitive market), by assessing a “competitive transition
charge” (CTC) on each customer’s bill. As a result of litigation, wholesale
generation rates were capped and most customers experienced little to no rate
increases in their electric bills since 1997.
• These rate caps are now set to expire for most customers during the next 2 years.
2
Electric Prices Compared
to Inflation, Other Commodities
3
5 Year Stock Performance (’03-’08)
Under Existing Rate Caps
Exelon Corporation
FirstEnergy
June 27, 2003 – Closing Price $29.83
June 27, 2008 – Closing Price $87.00
Up 192%
June 27, 2003 – Closing Price $37.40
June 27, 2008 – Closing Price $80.01
Up 114%
PPL Corporation
June 27, 2003 – Closing Price $21.45
June 27, 2008 – Closing Price $52.05
Up 143%
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Today…
• Rate caps expiring
• Cost of energy escalating
• No retail competition
5
Rate Caps Expiration Schedule
Under the restructuring, consumers pay unbundled prices for generation,
transmission and distribution services, which were capped during the state’s restructuring proceedings.
With the exception of West Penn Power Co., all of the distribution rates have expired.
The West Penn distribution rate cap expired Dec. 31, 2007. All of the transmission caps have expired.
Transmission costs are regulated by the Federal Energy Regulatory Commission and the PUC.
Company
Citizens Electric Co.
Duquesne Light Co.
Pennsylvania Power Co.
Pike County Light & Power Co.
UGI Utilities Inc.
Wellsboro Electric Co.
PPL Electric Utilities Inc.
Metropolitan-Edison Co.
Pennsylvania Electric Co.
PECO Energy Co.
West Penn Power Co.
Generation Rate Cap Status
% of PA Ratepayers
Expired
Expired
Expired
Expired
Expired
Expired
Dec. 31, 2009
Dec. 31, 2010
Dec. 31, 2010
Dec. 31, 2010
Dec. 31, 2010
0.1
10.6
2.8
0.1
1.1
0.1
24.6
9.5
10.6
27.8
12.7
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Projected First Year Rate Increases
7
Actual First Year Rate Increases
8
Single Market
Clearing Price for Electricity
5
4.5
cents / kwh
4
3.5
3
2.5
2
1.5
1
0.5
0
Nuclear
Coal
Gas
9
Utility Projected Revenues
&
Cost Comparisons
10
PPL Generation
Selling Price/Cost
• In 2007, 94% of our owned generation output is expected to be produced at a fuel cost
of approximately $16/MWh or less.
***Source: PPL Shareholder, 3Q 2007
• PPL EnergyPlus, LLC (“PPL EnergyPlus”), the energy marketing subsidiary of PPL
Energy Supply, LLC, participated as one of the bidders in the competitive solicitation
process. PPL EnergyPlus was one of the winning bidders and has entered into an
agreement with PPL Electric to supply up to 671 megawatts of total peak load in 2010,
at an average price of $91.42 per megawatt-hour.
***Source: PPL 8-K Filing, July 2007
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Expected 2008 to 2010 Margin Walk
April 2008, Shareholder Presentation
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Necessary Steps
to Lessen the Problem
PROCUREMENT: how generation is acquired for ratepayers.
• Require utilities to acquire energy generation for customers at “the least cost” on a
long term basis. Current law permits generation to be acquired at “prevailing market
rates.” HB 2201 only provides for “lowest reasonable rates.”
• Permit utilities to enter into long term contracts – to encourage new energy
generation and provide rate stability. Current law discourages long term contracts in
excess of 3 years. HB 2201 arbitrarily prohibits long term contracts for more than
20% of energy load.
• Require utilities to develop a portfolio mix of long term, short term, and spot
market contracts. Utilities are pushing for “full load requirements” that relieve them
of the duty to acquire energy under terms and conditions most favorable to
ratepayers.
• Mandate the PUC to ensure that utilities are acting in the interest of ratepayers
and prohibit market manipulation or favoritism. HB 2201 has no such requirement.
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Necessary Steps
to Lessen the Problem
MITIGATION: how to lessen the economic shock when rate caps
expire.
• Senate Plan provides a gradual phase-out of rate
caps over a 5-year period, without transferring
additional cost to ratepayers. The purpose of the
phase-in is to prevent financial hardship and damage
to the state economy.
• House Bill 2201 creates a 3-year “balloon” loan for
ratepayers, creating even higher electric bills at the
end of the period.
• Utility plan would allow customers “to pay early” in
anticipation of higher electric rates – otherwise known
as “a Christmas Club.”
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Necessary Steps
to Lessen the Problem
ELECTRIC MARKET CORRECTION: how to ensure market prices
reasonably reflect marginal costs.
• Creation of State Power Purchase Agency – to acquire energy generation at costs
below PJM market rates, and remove inefficient plants from market and reduce
peak pricing.
• Imposition of Generation Assessment – assess in-state produced generation and
pass proceeds to acquire generation for State Power Purchase Agency. Utilities
claim that nuclear power plants are without value to avoid paying PURTA taxes and
lower local property taxes.
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Necessary Steps
to Lessen the Problem
LOW-INCOME ASSISTANCE: how to prevent catastrophic harm to
economically disadvantaged ratepayers who are extremely
vulnerable to escalating rates.
Notice of Termination
• Current
• Ten days written notice before termination
• Attempted personal or telephone notice at least three days prior to termination
• Posted winter notice if personal contact is not made
• Proposal
• Ten day written notice
• Require personal notification at least three days prior to termination
• Attempt personal contact at the time of termination
Winter Termination
• Current
• Permits winter termination for families over 250% of the Federal poverty line
• Proposal
• Ban winter terminations
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