Lessons From Pennsylvania
I traveled to Pennsylvania early this spring to bring back some lessons for Kentucky as it contemplates restructuring its electric utility industry.
I went because Pennsylvania had just completed a full calendar year with deregulated electric utilities. And I went because of the similarities with Kentucky. Electric co-ops in both states serve more than half a million consumers, and the Keystone State is just up the Ohio River from the Bluegrass State.
But there’s an important difference to keep in mind as well. While Kentucky consumers pay some of the lowest electric rates in the country, rates in Pennsylvania rank above the national average.
Despite that huge difference in rates, Pennsylvania’s experience does provide points to consider for Kentucky, as the Kentucky Special Task Force on Electricity Restructuring prepares for another two years of study before making a recommendation to the 2002 session of the legislature.
Although Pennsylvania provides a number of lessons for Kentucky to consider, my visit did not answer the overall question: should Kentucky deregulate its electric utilities? The people I talked with in Pennsylvania thought deregulation was great. But most of the promises of deregulation-significantly lower rates, a wide range of choices of electric suppliers, technological innovation-have not yet materialized, at least for residential customers. If these are the supposed benefits, maybe it makes sense for Kentucky to watch Pennsylvania awhile longer to see if those benefits come true, rather than taking a premature step into an unknown world where, experts agree, there’s no going back.
Despite the lack of a final answer to that overall question, I did come back with a lot of information. The following lists my impressions of the key lessons for Kentucky as it considers deregulation.
Explaining deregulation requires money. The Pennsylvania Public Utility Commission carried out a slick advertising and promotional media campaign to explain deregulation and how it worked. The campaign required a large commitment of resources, but a necessary one to explain this new, complicated program to everyone in the state. Public Utility Commissioner Nora Mead Brownell says, “Introducing deregulation is like introducing a new product. We had to act like Proctor & Gamble or Colgate.”
Regulators must be fast and flexible. Deregulation doesn’t mean the regulators go away. Many utility experts have argued that a more accurate term would be restructuring, or even reregulation. The Public Utility Commission has a lot to do under deregulation- such as licensing electricity providers-and the pace of competition calls for speedy decisionmaking. Brownell says one of the first things she learned was that “the Commission needed to change how it responded. We just don’t move fast enough.”
Billing can be a nightmare. Opening up a monopoly industry suddenly to competition created huge problems coordinating electronic billing interchanges. Phone calls overwhelmed many utilities, and some customers disappeared from billing lists for months. Those problems have since been solved.
Electricity is a tough business. Suppliers wanting to sell electricity in Pennsylvania are trying new approaches to promoting their product such as grassroots campaigns and partnerships with vendors. “Margins are so thin, there isn’t enough money to support conventional marketing,” says Ben Ricci, director of retail marketing for American Cooperative Services, a co-op set up to market electricity from Pennsylvania co-ops to nonco-op customers.
Co-ops are competitive. The answer to the question, can local electric co-ops compete in an open market, seems to be yes, for now. No Pennsylvania co-op customer has switched electric suppliers. That’s because, since co-ops have some of the lowest rates in the state, no other utility will even offer to serve co-op territory in Pennsylvania. But co-op customer loyalty could prove to be a competitive edge as well. Other suppliers are trying to copy the local- , service- , and community-oriented nature of co-ops, says Perry Stambaugh, communications director for the Pennsylvania Rural Electric Association and editor of Penn Lines, Kentucky Living’s counterpart in Pennsylvania. Stambaugh says other electric suppliers “all want to make people believe they’re like co-ops-people-friendly. But they don’t know how to do it.”
Savings can be small, spotty, or nonexistent. Few Pennsylvanians have seen a lot of money as a result of deregulation. For most people the savings from switching electricity suppliers ranges from zero dollars to around $100 a year. Perry Stambaugh’s experience provides one example. It so happens he lives in a rural area not served by an electric co-op. He switched suppliers from one investor-owned utility to another, saving about $120 a year. He says, “That will probably be used for the increase in what I pay for heating