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Remi Elect Rates 2007

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Presented by Rose M. Baker and David L. Passmore at the Annual Users Conference of Regional Economic Models, Inc., “Regional Economies: the Building Block of the Global Community," in La Jolla, …

Presented by Rose M. Baker and David L. Passmore at the Annual Users Conference of Regional Economic Models, Inc., “Regional Economies: the Building Block of the Global Community," in La Jolla, California, 22 October 2007.

Published in Business , Economy & Finance
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  • 1. Tossing the Cap: Electrical Rate Changes in Pennsylvania Starting in 2010 Rose M. Baker David L. Passmore
  • 2. Penn State Workforce Education & Development Initiative Rose Baker David Passmore Program Manager Workforce Assessment Center & Assistant Professor of Education Professor & Director Penn State Institute for Research in Training & Development
  • 3. Background
  • 4. Electricity is a unique commodity…
    • Cannot store
    • Demand varies by season and time of day
    • Cannot control flow to match contracts for delivery
  • 5. Electrical services are divided into three parts…
    • Generation — production of electricity
    • Transmission — movement of electricity at high voltage from a power plant, where it is generated, to its point of distribution
    • Distribution — delivery of electricity from the transmission system to consumers utilizing wires, transformers, substations, and other equipment
  • 6. Remember electricity deregulation?
  • 7. Deregulation involves transition…
    • From a regulated monopoly for generation, transmission, and distribution
    • To unbundled services, in which
      • Transmission and distribution remain commodity services delivered by common carriers
      • Generation is open to price competition to allow consumers to choose among suppliers
  • 8. Concerns…
    • Although market incentives should spur quality, efficiency, and innovation….
    • Deregulated providers might not offer consumer protections if considered costly
      • Protection of vulnerable consumers
      • Possibility of deceptive advertising, termination of service, slamming, dispute resolution, and discriminatory business practices
      • Reduction of public benefit programs
  • 9. Electric Generation Customer Choice & Competition Act
    • Signed into law in 1996 & phased in from 1997 to 2001
    • Allowed Pennsylvania consumers to choose suppliers
      • Any licensed supplier certified for their region
      • A “default provider” at a published tariff rate that is set each year
  • 10. The Act placed a cap on electricity rates
    • Allowed modest annual rate increases
    • 1996 to 2006
      • Delivered short ton of coal ==> +91%
      • CPI ==> +29.9%
      • CPI - food & energy ==> 10.1%
      • PA average electric price ==> + 6.53%
    • By August 2007, caps expired for 6 of 11 providers, but remaining 5 account for 85% of consumers
  • 11. The Act allowed utilities to capture stranded costs
    • Falling electrical prices erode the value of utility assets (estimated by CBO at $100 billion)
    • Recovered through “transition charges,” which expire as caps expire
    • Stranded costs are disputed between utilities and consumer groups
  • 12. Have consumers made choices?
    • Pennsylvania has one of the highest rates of customer choice…. BUT ….
    • Number of customers served by alternative suppliers peaked at 708,071 residential customers (out of 4.7 million eligible residential customers) in 2001
    • Nose-dived by 2003 to 232,225 residential customers who are served by alternate suppliers
  • 13. Why is consumer choice limited?
    • Choice is complex and multi-faceted for most residential customers
    • Rate caps are so low that alternate suppliers do not want to enter the Pennsylvania market
    • Some companies may have unfairly manipulated wholesale electricity markets as early as 2001, subsequently damaging markets and the public’s confidence in them
  • 14. When caps come off…
    • Maryland rates increased 60%-70% when caps were removed
    • Customers in Pike Co. experienced a 72% rate hike when caps were removed
    • Current estimates are that residential rates could rise by 35% and that industrial and commercial rates could increase by 23%-45%….these estimates are revised often
  • 15. Methods
  • 16. Our benchmark analysis… 1%  in residential, industrial, & commercial rates Baseline forecast for PA Benchmark forecast for PA Difference is benchmark for rate change
  • 17. REMI policy variables selected and changed…
    • Industrial rate — +1%  between 2010 and 2015
    • Commercial rate — +1%  between 2010 and 2015
    • Consumer price share of household operations — +0.3%  between 2010 and 2015 (utilities are 30% of costs of household operations according to I/O table)
  • 18. Findings
  • 19. Our findings…
    • Demonstrate effects individually for 1%  in residential, industrial, and commercial—and all three together
    • For 2010, 2012, 2015
    • Are available after roll–out of report in November 2007
  • 20. 1%  of rates three rates combined by 2015…
    • Total output (2000$) = –$235.6 mill
    • Gross state product (2000$) = –$130.1mill, most as a result of reduction in PCE
    • Population = –2,593
    • Private nonfarm employment = –1,449
      • Reduction in PCE accounts for one–half
      • Two–thirds from manufacturing sector
    • Real disposable personal income = –$5.26 mill
  • 21. Implications
  • 22. Some implications…
    • Will occur….we have been buying time
    • Mitigation could result from slow removal of caps or from threat of re-regulation by Governor realized
    • Promising options
      • Alternative fuels—Yes, but…difficult to have impact
      • Conservation—One half of energy in NE US wasted
  • 23. Tossing the Cap: Electrical Rate Changes in Pennsylvania Starting in 2010 Rose M. Baker David L. Passmore