Benefits of shopping for power.

Don Silverson, treasurer for the Hill School, is happy about the deal the school got to purchase its energy at a reduced cost. At first, the school expected its electrical costs to increase next year when the rate caps come off for Peco.
Don Silverson, treasurer for the Hill School, is happy about the deal the school got to purchase its energy at a reduced cost. At first, the school expected its electrical costs to increase next year when the rate caps come off for Peco.

Some find savings without rate caps

Posted: July 18, 2010

The Hill School's annual electric bill is about $425,000. So officials at the renowned Pottstown boarding school were preparing for the worst when Peco Energy Co. transitions to market rates next year.

"Like everyone, we were expecting to see our rates jump 15 to 20 percent come Jan. 1, 2011," said Don Silverson, the school's treasurer.

Silverson hired a broker to find an electrical supplier and deliver what he thought was going to be bad news. But in April, three suppliers tried to outbid one another to get Hill's business.

The offers came in below the school's current costs.

"We're anticipating our savings will be about 12 to 15 percent off what we're using now, which is surprising, since we were told six months ago that rates were going through the roof," said Silverson. The school locked into a three-year contract that will yield expected annual savings of $50,000.

The Hill School's experience may not be typical - its power consumption declines in the summer, when rates are highest - but suppliers vying to sign up Peco's largest customers say that the new competitive electrical market may not be as much of a shock when it hits Jan. 1 as was once expected.

"Most folks are still going to have an increase, but we're not seeing the 20 to 30 percent increases that many feared," said Kenneth Antos, marketing vice president at World Energy Solutions Inc., a Massachusetts broker that ran the online auction for the Hill School.

The event triggering the frenetic scramble to link customers with suppliers is the scheduled end of rate caps Jan. 1.

Under the state's Electricity Generation Choice and Competition Act, signed in 1996, utilities became strictly power-distribution companies, not suppliers. Their rates were capped at 1996 levels to allow them to ease the transition to competitive markets.

When the rate caps expire next year, Peco will continue to receive a distribution charge from all customers, to pay for the maintenance of wires, billing, and customer service. That fee will continue to be regulated by the Pennsylvania Public Utility Commission.

But the larger part of the electrical bill will come from the rate supplier's charge for power generation. Customers can now choose their supplier, but customers who do not want to shop around can stay with Peco's "default rate."

For the utility's 1.4 million residential customers, the default rate is expected to increase by no more than 10 percent of the current charge. It will not be clear until later this year whether many alternative suppliers plan to offer residential discounts. Right now, the only alternatives for households are several suppliers of renewable power, which charge a premium.

But the competition for Peco's 160,000 commercial and industrial customers, who buy 56 percent of the power distributed over the utility's lines, is robust.

The PUC has registered 21 suppliers and 33 brokers in Peco territory. For a fee, the brokers will shop around among suppliers to find the best deal for customers.

"The real story in Pennsylvania is it's very competitive and very active," said Dan Mees, spokesman for World Energy Solutions, whose specialty is running online auctions like the Hill School's.

The market for commercial electrical customers is so intense that "some property managers are getting bombarded with calls" from prospective suppliers, said Jeffrey Byrne, director of business development at Practical Energy Solutions, a West Chester consultant that was the Hill School's adviser.

Byrne said some customers were so overwhelmed that they were frozen in indecision. "If they don't do anything and take the default rate, it's probably the worst choice," he said.

The transition to market-based rates is arriving when there is a buyer's market for electricity. The tepid economy and abundant natural gas supplies have depressed wholesale electrical costs, and some buyers are locking in now on long-term supply contracts, much as a homeowner might opt for a fixed-rate mortgage when interest rates are low.

"There's a whole lot of upside risks if the economy takes off," said Andrew Feick, the facilities director at Ursinus College, whose annual energy budget is about $2 million, divided between electricity and natural gas for heating.

Feick fretted for more than a year about the end of rate caps, and was budgeting for a 30 percent increase. After requesting proposals from suppliers last month, he signed up with a subsidiary of Constellation Energy Group Inc., the owner of Baltimore Gas & Electric Co.

Constellation's offer will provide Ursinus with a fixed rate for 42 months at slightly less than it is currently paying Peco, Feick said.

"If we are able to take the risk out of it, with no additional cost to the institution, that's a huge win for us," he said.

Brokers and suppliers say the offers that commercial and industrial customers receive depend upon many factors: the customer's energy-use profile, its credit rating, and its appetite for price risk.

More risk-tolerant customers might opt for market rates, which can vary hourly depending on season, weather, and demand. Suppliers also may offer incentives to customers that can curtail their demand during peak periods, when costs are high.

The Hill School, for instance, can shift much of its electrical load to off-peak evening hours because it makes tons of ice at night that is used during the day to cool many of the campus' 50 buildings. The novel air-conditioning system is built around ice-making equipment originally installed in 1952 for the school's hockey rink.

"Making ice in off-hours makes us an attractive customer, because our peak demand in the summer is not that high," Silverson said.

The 500-student prep school also maintains a 125-kilowatt diesel generator that can supply about 20 percent of its electrical power when the utility asks it to shed its load during peak hours - also meriting a discount rate.

Some customers are investing in conservation measures to reduce costs, said Thomas Petrella, regional sales manager for Hess Energy Marketing.

"For many customers, energy is one of their top three costs," he said. "Some are looking at moving shifts around to take advantage of discounted power."

Advocates of competition say the new market-based system will lead to innovations similar to the transformation of telecommunications after the phone system was restructured in the 1980s.

"If the goal is to change people's consumption so they use electricity more efficiently and cost-effectively so we don't have to build big new power plants, that's a win for the environment, and that's a win for customers," said David I. Fein, a vice president for energy policy for Constellation Energy Group.

"Those are the type of market signals that people need."


Power Shopping

Pennsylvania's Public Utility Commission explains electrical choices and lists alternative suppliers at www.papowerswitch.com.

Peco Energy Co. responds to customer questions at www.pecoanswers.com.


Contact staff writer Andrew Maykuth at 215-854-2947 or amaykuth@phillynews.com.

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