PPL Electric Deregulation

Printable Verison May 1st, 2009

As you may be aware, PPL’s rates are in the process of being restructured and the new rate structure will take effect January 1, 2010.  The good news is that the Transition charges that are currently applied to all PPL customers’ bills will no longer be applied.  These charges were awarded to PPL as a result of deregulation in Pennsylvania back in 1998 and have been collected via customers’ billings for the last 10 years. PPL’s Transition charges are listed on customers’ bills as “Competitive Transition Charge” (CTC).  Effective 1/1/2010, these charges will be eliminated from the bills. Transition charges range from approximately 12% to 18% of total PPL billings.

As you can see from the graphic, electric rates have increased substantially — over 200% in some cases — in nearby markets that have already transitioned to market-based rates!

At the same time the Transition charges are phased out, PPL will begin to charge market based prices for generation.  In return for the Transition charges that PPL was awarded in 1998, the PUC mandated that PPL 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, 2009 and the new charges for generation will be effective January 1, 2010.

PPL’s plan for rates GS-1 and GS-3 customers is to purchase generation over a period of three years and through six power purchase auctions. Each auction will consist of approximately one sixth of the electricity generation supply that PPL anticipates it will need for its GS-1 and GS-3 rate customers in 2010.  To date, PPL has held five auctions purchasing power for an average price of approximately 10.3¢ per KWH for 2010.  This represents approximately 83% of the power needed for 2010 and will be a substantial increase over what most customers are presently paying for generation.  Since generation charges currently constitute more than 60% of the total bill in most cases, these increases will more than offset the impact of the phase out of the Transition charges.

PPL plans to secure electricity supply for large industrial and commercial customers in a single auction to be held in October 2009.  PPL defines large Industrial & Commercial (I & C) customers as those billed under rates LP-4, LP-5, LP-6, IS-P and IS-T.  Large I & C customers interested in possibly participating in PPL’s fixed price program were required to sign up for the solicitation prior to July 27, 2009.  Customers that signed up by that date are not committed to take the fixed price option but will have that as an alternative at a later date.  After the solicitation, PPL will provide the resulting prices to those customers who had previously signed up.  The expected release date for the fixed price is October 8, 2009. Customers that signed up for the fixed price option will then have until November 9, 2009 to select or reject the fixed price option.

Since customers are not required to make a commitment prior to the auction being completed and the price released, PPL will be asking suppliers to submit price quotes for an unknown quantity of power.  Accordingly, there will be a great deal of risk going into supplier price quotes given the fact that PPL 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 PPL fixed price option.  With the amount risk each supplier will have to build into their price quote, we do not expect the PPL default fixed price to be the most competitive price available.

Any large I & C customer that does not opt into the fixed price service and still wants to remain a full service PPL customer will receive real time hourly pricing for 2010 as its default service.  Under this scenario, PPL will measure the amount of electricity used each hour and apply the PJM LMP price to each hour’s usage. The hourly price of electricity is extremely volatile and can literally double or triple in a single hour. 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 PPL 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 PPL’s auction and when customers bid out their electric supply will be a major factor in determining what the best route to take will be.  CUC will be available to assist in this process should you be interested.

While the increase in the cost of electricity will be significant for all customers, the cost increase for those customers receiving discounts from PPL’s Economic Development Initiative (EDI) and Industrial Development Initiative (IDI) Riders will be much more substantial.

Since these discounts are predicated on increases in usage from the 1980s for EDI and 1990s for IDI, they are quite substantial on many customers’ accounts. These credits are scheduled to be phased out at the end of 2009 further impacting the increase in overall electric costs for some PPL customers.  EDI and IDI discounts will no longer be applied after 1/1/2010.

There are two major ways to mitigate the increase in electricity costs that will inevitably occur in 2010.   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.

The only other means to reduce overall 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 dramatically, the economics of these projects will improve significantly.  CUC 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.

House Bill 2200, which was passed in the fall 2008, will also have an impact on what customers pay for electricity in 2011. The Bill expands the PUC’s oversight responsibilities and encourages their requirements on the electric distribution companies (EDCs), including PPL. House Bill 2200 directed the PUC to adopt an energy efficiency and conservation program to require EDCs to submit and implement plans to reduce energy demand and consumption within their service territory.  The PUC recently enacted ACT 129, which is the statute for HB 2200.  ACT 129 encompasses three separate components; namely energy efficiency and conservation, smart meters and rules for default service procurement. PPL and other EDCs will be required to have a 3% reduction in usage by the year 2013.  They will also need to reduce peak demand by 4.5% for the hundred highest hours of use.  In order to meet the stringent requirements of this act, PPL has filed for and is awaiting approval to offer rebates for certain energy efficiency projects, including lighting retrofits.  If your company is currently considering energy efficiency projects, it may make sense to wait and see if PPL’s plans are approved by the PA PUC prior to making a commitment.  PPL’s plan does however, seek approval for retroactivity to projects initiated on or after July 1, 2009.  Additional assistance/rebates are available from the Department of Environmental Protection (DEP) and the Federal Stimulus Plan and low cost financing is available through the PA Sustainable Energy Fund (SEF).                               

CUC will be publishing periodic updates on the future of PPL’s rates as the proposed rate structures are finalized and approved by the PUC.  Should you or someone else in your organization be interested in receiving these updates via email, please email me at joe@commercialutility.com and the selected email address will be added to our distribution list.