PECO Electric Deregulation
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. CUC 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. 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 directs the PUC to adopt an energy efficiency and conservation program requiring all electric distribution companies (EDCs) including PECO to submit and implement plans to reduce energy demand and consumption within their service territory. ACT 129 which is the statute for HB2200, encompasses three separate components; namely energy efficiency and conservation, smart metering and rules for default service procurement. PECO and other PA EDCs are required to reduce consumption by 3% and peak demand by 4.5% by the year 2013. In order to meet the stringent requirements of this act, PECO has filed their plan which was recently approved by the PUC, offering rebates for certain types of energy efficiency projects, including lighting retrofits. With the rate caps expiring and rebates available from PECO, the Department of Environmental Protection (DEP) and the Federal Stimulus Plan now is an ideal time to investigate energy efficiency measures.
CUC will be publishing periodic updates on the future of PECO’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 email@example.com and the selected email address will be added to our distribution list.
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Commercial Utility Consultants of West Chester, PA has been in business since 1975 reducing utility costs for its clients on Electric, Natural Gas, Water/Sewer and Telecom accounts at no cost. CUC can be reached at 1-800-296-2821 or on the web at www.commercialutility.com.
This press release contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ from those indicated in the forward-looking statements. Such risks and uncertainties include, but are not limited to: our revenue is dependent on actual future energy purchases pursuant to completed procurements; the demand for our services is affected by changes in regulated prices or cyclicality or volatility in competitive market prices for energy; we depend on a small number of key energy consumers, suppliers and channel partners; there are factors outside our control that affect transaction volume in the electricity market; and there are other factors identified in our Annual Report on Form 10-K and subsequent reports filed with the Securities and Exchange Commission.