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PECO – Life After the Rate Caps

Electricity markets were deregulated in Pennsylvania over ten years ago. At that time, the Pennsylvania Public Utility Commission implemented two measures. They allowed electric utilities to recover their “stranded costs” or the cost of investments they had made that they, the utilities, argued would no longer be of value in a deregulated environment. These costs were recovered through a billing surcharge termed the Competitive Transition Charge, or CTC. The Pa PUC also required the electric utilities to freeze or “cap” their rates.

So, what will happen at the end of this year, 2010? The good news is that the CTC surcharge will expire and no longer be charged to customers. The bad news is that the rate caps will also expire.

Currently, the CTC surcharge represents about 30% of the total bill for small commercial customers and about 26% for large commercial customers. The elimination of the CTC charges will, by itself, lower customer’s bills significantly.

At the same time, PECO’s generation and transmission charges currently represent about 50% of the total bill for small commercial customers and about 58% for large commercial customers. These charges are set to increase dramatically. Over the more than ten years that PECO’s rate caps were in place, the wholesale cost of electricity increased. As a result, PECO’s current combined generation and transmission rates are significantly “below market.” PECO generation and transmission rates beginning in January, 2011, will reflect the results of their procurement efforts in the recent and current wholesale energy markets.

During the spring and summer of 2010, large commercial customers had the opportunity to sign up for and participate in a default service auction PECO administered. For those large commercial customers who chose not to participate, their options as of 1/1/2011 will be to receive default service from PECO at the highly volatile Day Ahead Hourly Rate or to purchase energy from an independent electric generation supplier (EGS).

PECO is in the process of acquiring electricity in the wholesale markets for its medium and small commercial customer default service. While most of this supply was contracted for during the fall of 2009 and the spring of 2010, one more auction will take place this coming September. If we were to take a snap shot today, there are two primary reasons why PECO’s combined generation and transmission default rates will, for most customers, be higher than the cost customers could acquire electricity for from an independent electric generation supplier. First, when PECO conducts an auction, suppliers must bid on an uncertain volume and an uncertain average load profile. At the time of the auctions, it is unknown how many of PECO’s customers will remain on default service after January, 2011, and what their combined load profiles will look like. In order to protect themselves, suppliers must add a risk premium to their bids as a way to protect themselves from this uncertainty.

Secondly, the wholesale markets have been generally falling since the summer of 2008. PECO’s first and second auctions for its medium and small commercial customers were conducted while wholesale markets prices were higher than where they currently stand.

The following graphs show Avalon Energy Services’ current estimates of where PECO’s default rates may land along with current estimates of what customers could obtain electricity for from independent electric generation suppliers. Please keep in mind that the actual price of electricity purchased from independent electric generation suppliers can vary significantly based on a business’ individual load profile and credit standing as well as many influences in the wholesale markets. Having pointed this out, leaving PECO for an independent electric generation supplier may not necessarily be the best choice for all customers. It really depends on your unique situation.

Avalon Energy Services stands ready to help you. Let our experts assess your specific situation and develop an energy procurement strategy that best suits your needs.

Copyright 2010 by Avalon Energy Services, LLC.