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, California, 22 October 2007.

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  • Remi Elect Rates 2007

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

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