In developing a deregulated electricity market, Pennsylvania got it right, PPL Corporation’s (NYSE: PPL) top executive said at a conference in Hershey, Pa., today. 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 successful 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.

"While there may be states that have been as successful at this transition as Pennsylvania, I would argue than none has been more successful," said Hecht, in a keynote address at a Pennsylvania electricity restructuring conference, sponsored by Penn Future, an organization that promotes the transformation of public policy, public opinion and the marketplace to restore and protect the environment and safeguard public health.

While Pennsylvania should be pleased with its success, Hecht said, the work of deregulation is not yet complete in the Commonwealth, or elsewhere.

"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."

And, Hecht said, the view from the front line of the electricity deregulation movement outside Pennsylvania "is not promising."

The electricity supply problems in California, the abuses at Enron and last summer’s blackout have shaken the confidence of all stakeholders.

"These events should have given all of us pause, even those who are most supportive of competitive electricity markets. These events should not, however, result in a retreat from deregulation or electricity policy paralysis. They should not result in a victory for those who are arguing for the status quo to protect narrow business interests or ideological prejudices," said Hecht.

"Instead, those three very different events should be examined to gain a better understanding of what works – and what doesn’t," said Hecht.

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."

Since the advent of price caps, he said, building of new electricity generation has essentially dried up in certain regions, especially those where there are transmission constraints.

This lack of clarity, he said, has the potential to seriously damage the electricity infrastructure of the United States. "The real victims of this public policy dilemma will be the consumers of electricity," he said.

While the problem is now very visible today because most regions have an adequate supply of electricity, we will need to build new generation supply in the near future.

A Prescription for the Ailing Competitive Electricity Market

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: