Winter's cold meant higher bills for utility customers with variable-rate plans

A recent, dramatic spike in electricity bills for Pennsylvania customers with variable rates -- and an even bigger increase in consumer complaints -- could be a setback for the state's competitive electricity market.

Lawmakers, regulators and consumer advocates fear that what has grown slowly into one of the most robust electricity markets in the nation -- and a useful tool to keep prices in check -- could be abandoned by consumers hurt by the recent weather-driven price spikes and avoided entirely by consumers afraid to give it a try.

Consumers in Pennsylvania have filed more than 1,500 billing complaints since the start of the year with the state Public Utility Commission. Most of the complaints were about electric bills from variable-rate plans, some of which shot up 300 percent as a result of high demand and transmission issues in the middle of a harsh winter.

At this same time last year, the PUC had received fewer than 300 complaints about variable-rate pricing.

There will be investigations, of course. The utility commission recently announced it would be looking into the high electric bills, and Pennsylvania Attorney General Kathleen Kane also promised to review the problem.

Not to be outdone, the state Senate turned an appropriations hearing with PUC officials late last month into an opportunity to voice concerns over the soaring bills, which were caused by an historically cold January during which energy use was up and the electricity market was strained.

Nobody wants to see Pennsylvania consumers pay unexpectedly high electric bills, but officials hope the situation does not have a chilling effect.

"We pride ourselves in having a strong, robust marketplace," said PUC vice chairman John Coleman. "These situations, real or perceived, really don't bode well for us."


Long road to success

Pennsylvania's electricity marketplace was born in 1996, when state lawmakers started deregulating the industry. They had determined that electricity bills in Pennsylvania were much higher than the national average.

By 2000, all of the state's residents were able to leave their so-called default utility -- such as West Penn Power or Duquesne Light -- and shop around for an electricity supplier. Default service providers are the regulated companies that own and operate delivery infrastructure. Prior to the competitive marketplace, they were the only companies able to sell electricity to consumers.

But the marketplace almost disappeared shortly after its introduction.

In exchange for provisions that allowed default utilities to recover costs associated with any infrastructure improvements that they made, Pennsylvania lawmakers introduced rate caps on those companies. That made their lower prices much more appetizing than the competitive suppliers. Consumer interest in leaving default companies was so low that most competitive suppliers abandoned the marketplace altogether.

But most of those rate caps expired in 2010, allowing default utilities to raise their rates. Then the competitive suppliers returned.

At this point, 39.3 percent of all Pennsylvania electricity customers -- 2.2 million accounts -- have switched from their default service provider to a competitive supplier. Those customers account for 65.4 percent of all electricity load in the state.

In January, the state's marketplace was deemed the second best, based on percentage of subscribers, in the U.S. behind Texas, according to Distributed Energy Financial Group LLC, a Washington, D.C., management consulting firm specializing in energy.

Above all, deregulation helped achieve the initial objective by bringing Pennsylvania's electricity costs in line with the rest of the country.

In 1996, when deregulation began, Pennsylvania electricity consumers in all sectors -- residential, commercial and industrial -- had been paying 16 percent more than the national average, according to the Energy Information Administration, part of the U.S. Department of Energy.

In 2012, the most recent year for which data are available, Pennsylvania electricity consumers were paying just 0.7 percent more than the national average.

While prices have fluctuated, Pennsylvania still mirrors the U.S. electricity market better than it did in the past.

"Customers that are gun-shy about entering the market are not good for the market," said Mr. Coleman, who spearheaded the commission's recent review of variable-rate pricing plans.


Betting on the market

The Pennsylvania electricity marketplace is a mix of default utilities, whose rates are fixed and approved by the PUC, and competitive suppliers, which offer fixed or variable rates without PUC approval.

Most of the recent complaints have come from customers who opted to have variable rate pricing plans.

While default utilities are required to hedge their electricity supply purchases with a mix of long-term, short-term, intermediate and spot markets, variable rate pricing plans follow the spot market -- the most volatile place to buy electricity based on daily rates.

Often that set-up allows consumers to save on their electric bill. Today, some variable rate billing plans are offering better rates than default and fixed-rate competitive suppliers.

"Nobody called to complain to the newspapers then, and said, 'Gee, I'm saving so much money,'" said Mark Berger, company spokesman for Respond Power, an Orangeburg, N.Y., company that sells variable-rate electricity plans in five states, including Pennsylvania.

But when the spot market spiked this January -- in part because of extremely cold weather and southern ice storms -- variable-rate customers were vulnerable. Prices soared to near 40 cents per kilowatt-hour, while customers who stuck with default service providers continued to pay less than 7 cents per kilowatt-hour.

For a customer using 700 kilowatt-hours in a billing cycle, that's a difference of more than $200.

Washington, Pa., resident Nicole Newberry and her husband, Brandon, left West Penn Power for Respond Power in January after a door-to-door salesman promised they would save money by switching.

But the first bill was $125 -- so high she thought she must have missed a prior payment.

"I looked again and realized it wasn't [a missed payment]," said Ms. Newberry, 30. "So I started looking into the cause and finally determined it was the rate per kilowatt hour. It had nearly tripled from last month."

Mr. Berger said customers like Ms. Newberry could still save in the long-haul by staying with a variable rate.

But Ms. Newberry is not sticking around to find out.

She called the PUC about two weeks ago, and a staff member helped her terminate her contract with Respond Power and switch to a fixed rate plan through West Penn Power, her default utility.


Default service gain

If anything, default service providers could emerge stronger from this winter. And that's a good thing, according to Pennsylvania's acting consumer advocate Tanya McCloskey.

"The variable rate situation that we're facing really highlights the importance of our default service, and it gives us a market-based price to compare," Ms. McCloskey said.

Default service providers were in jeopardy after Sen. Bob Mensch, a Republican representing parts of Berks, Bucks and Montgomery counties, proposed Senate Bill 1121 in 2013, which would end default service and push all consumers into the competitive marketplace.

In light of the variable rate crisis, Mr. Mensch has scrapped his bill, which had eight co-sponsors. He has announced plans to write new legislation with more consumer protection.

The Office of the Consumer Advocate opposed the bill, Ms. McCloskey said, as it believed the status quo was ideal. The competitive marketplace gives consumers choices, she said, while the default service providers set the market price.

The recent complaints about variable rates may have slowed any momentum to eliminate default service providers, but they may also slow advances in the competitive market.

"I think there is some concern that this may have a dampening effect on the retail market," Ms. McCloskey said, "but we're still encouraging customers to look at offers that are available to them."

Michael Sanserino:, 412-263-1969 or on Twitter @msanserino.

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