D.C. Regulators Should Counter PEPCO’s Rate Hikes by Halting Disastrous Deregulation Experiment

Nov. 22, 2004

D.C. Regulators Should Counter PEPCO’s Rate Hikes by Halting Disastrous Deregulation Experiment

Public Citizen Urges the Re-Purchase of PEPCO’s Power Plants

WASHINGTON, D.C. – D.C. government regulators are powerless to protect consumers from PEPCO’s proposed 17.7 percent electric rate hike because deregulation has allowed unregulated companies to set higher prices, Public Citizen said today.   The consumer advocacy organization is urging the D.C. Public Service Commission (D.C. PSC) to reject the requested rate hike and work toward re-regulation, so the District once again will have the regulatory power to ensure that prices consumers pay are tied to the true costs of producing power.

The only way for D.C. to adequately protect consumers is to re-regulate the region’s electricity system by ordering PEPCO to re-purchase the power plants it sold to Atlanta-based Mirant, because the commission is less able to control rates if PEPCO is buying power from another entity than if PEPCO re-acquires the plants it sold. Such a move would restore the city’s ability to regulate power prices and implement the cost-based rate system that successfully protected consumers for 100 years.

Further, taking steps to re-regulate the system would be consistent with national trends; nine states have either repealed or delayed their deregulation laws in the past couple of years. Those states are Arizona, Arkansas, California, Montana, Nevada, New Mexico, Oklahoma, Oregon and West Virginia.

“This would put D.C. on the path of lower costs for consumers while maintaining reasonable profits for PEPCO,” said Tyson Slocum, research director for Public Citizen’s energy program. “Controlling rates is particularly important for those on fixed or lower incomes, because they are hit even harder by rate hikes.”

PEPCO voluntarily sold four of its six   D.C.-area power plants to Mirant in December 2000. Mirant, which has paid $17.8 million to settle allegations of Enron-style market manipulation, filed for Chapter 11 bankruptcy protection in July 2003. The sale of PEPCO’s power plants meant that D.C. no longer had any ability to regulate power prices as it had for 100 years, because the U.S. Supreme Court has ruled that states cannot regulate prices from power plants unless they are part of a vertically integrated system.

PJM Connection – a regional transmission organization coordinating the movement of electricity in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia – is the largest centrally controlled dispatch area in the United States. PEPCO must buy all its power through the PJM market, and power prices in PJM have skyrocketed 75 percent under deregulation, with inflation-adjusted electricity prices rising from $25.92 per megawatt hour in 1998 to $45.33 per megawatt hour over the first 10 months of 2004.   These high prices are rising far above the actual cost to produce electricity, meaning unregulated power companies reap record profits while consumers pay more.

“The sole reason PEPCO is seeking a rate increase is because PEPCO is now forced to buy its power from unregulated power producers like Mirant in the regional PJM market,” said Slocum. 

The D.C. PSC originally supported PEPCO’s decision to sell its power plants in an attempt to foster competition for consumers. The problem is, “competition” isn’t occurring in D.C. or in any states that have deregulated.

For example, consider the benchmark used to measure the relative success of such “competition”: the share of D.C.’s residential consumers who have chosen an alternative electricity supplier to PEPCO. The highest “choice” rate achieved in D.C. was in December 2002, when 12 percent of the city’s residents “chose” an alternative supplier to PEPCO.   Nearly two years later, by October 2004, nearly 10,000 fewer D.C. residents were “choosing” an alternative supplier, reducing the share of residential customers “choosing” to 7 percent.  Nationally, just 5 percent of residential consumers in the remaining 15 deregulated states have switched suppliers because wholesale prices continue to climb and retail competitors have shown little interest in serving residential consumers.

There is little cost savings in choosing alternative providers serving residential consumers in the District. The average annual price per kilowatt hour for residential customers is 5.04 cents with PEPCO; 6.4 cents with Pepco Energy Services (PES), an unregulated subsidiary of PEPCO, when 51 percent of the power comes from renewable energy sources; 7 cents with PES’ option of providing electricity generated 100 percent from renewable energy sources; 4.53 cents with Washington Gas Energy Services (WGES), an unregulated subsidiary of Washington Gas, D.C.’s regulated natural gas company; and 4.58 with WGES’ option of providing electricity in which 5 percent comes from windpower.

Although consumers may save a nominal sum by selecting an alternative supplier, most residential consumers haven’t made the switch because they will be even less protected than if they were to stay with PEPCO. For instance, the prices charged by alternative suppliers are wholly unregulated, and alternative suppliers can raise prices dramatically after a contract ends.

Under PEPCO’s proposed rate increase, PEPCO’s residential customers will pay an average of $120 more per year on bills of approximately $690 per year.

“Deregulation is clearly a failed experiment in D.C’s electricity market,” said Slocum.  “It is time to recognize this colossal error and stop a trend that harms consumers instead of helping them.  We urge D.C. to work towards fixing this broken system.”

For more information about PEPCO and deregulation, click here.

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