January 21, 2004—In developing a deregulated electricity market, Pennsylvania got it right, PPL Corporation’s top executive said at a conference recently. He cautioned, however, that the benefits of a deregulated market cannot be fully realized through a Pennsylvania-only approach.
“In Pennsylvania, we were successful in the redesign of our electricity system because we faced the difficult questions—and hammered out solutions, balancing the interests of consumers, energy suppliers and delivery companies—without compromising reliability,” said William F. Hecht, PPL’s chairman, president and chief executive officer.
As a result of Pennsylvania’s approach, electricity customers have saved more than $5 billion, electricity supplies and costs are an attraction for new business in Pennsylvania and the next generation of Pennsylvania’s power plants is being built with investors—rather than ratepayers—taking the risk. “As we all know, electricity is—inherently—an interstate product. It flows across state boundaries much like America’s rivers. It is as integral to our success as our transportation system. It is essential to our homeland defense, our economic productivity and our personal existence,” said Hecht. “For this reason, Pennsylvania’s commitment to a competitive electricity marketplace is only one piece of a much larger puzzle.”
While more than one-third of the nation’s electricity generating capacity is now part of a competitive wholesale market, there has been no recent progress in the direction of this market, Hecht said. And, even in regions where a competitive market is in place, there is “backsliding in the form of increased reliance on artificial price caps.”
“While these wholesale price caps may appear expedient in the short term and we can all agree with their use on a limited basis until a market is properly functioning, continual reliance on them defeats a major benefit of deregulation: the shifting of risk from ratepayers to investors,” said Hecht.
The danger of price caps is very clear, he said: “If investors flee the system because price caps are too low or capriciously imposed, then the long- term victim is the public.”
To make sure that those new supplies are built in the most effective way, Hecht laid out “a prescription” for the ailing competitive electricity market in the United States:
- First, we should endorse the Federal Energy Regulatory Commission initiatives to encourage regional transmission organizations. A workable number of RTOs—seven or eight—would provide needed coordination and the regional knowledge that is important for both pricing and reliability.
- Second, since electricity’s economic value is inherently related to its location, we should endorse the concept of locational marginal pricing. This endorsement implies that price caps would be used only sparingly.
- Third, we should reaffirm our position that the competitive marketplace will lead to more efficient construction of new power plants than was the case under the old central planning system.
- Fourth, we should support passage of federal energy legislation that contains mandatory reliability standards, with penalties for those who do not comply.
The full text of Hecht’s remarks is available online.
