Allegheny realizing company profits under deregulation

November 06, 2005|By DANIEL J. SERNOVITZ

It is too early to tell whether Maryland's electricity customers will realize any long-term savings from the state's efforts to deregulate the market, which started in 1999.

In the nine months since the process began within Allegheny Energy's service area, however, at least one beneficiary of the effort is beginning to emerge.

During a conference call with investors on Oct. 28, Allegheny's chief financial officer, Jeffrey Serkes, said the company posted an additional $37 million in revenue for the third quarter due to Maryland's switch to market-based rates.


Allegheny President, Chairman and CEO Paul Evanson said that in addition to rate increases passed on to the company's business customers through default rates, the company generated about 1 million megawatts in excess energy it sold to regional power-grid operator PJM Interconnection at $71 per kilowatt, an 80 percent increase over market rates for the third quarter of 2004.

Evanson, chief executive officer for Allegheny, said he expects the shift to market rates offers the most promise for economic growth within the company. Allegheny has been seeking to shore up its finances since the company, whose headquarters formerly was in Hagerstown, overextended itself in an effort to become a global force in the energy market.

"Over the long run, our biggest growth opportunity comes from the transition from low, fixed-rate, polar contracts to market-based rates for our (power) generation," Evanson said during the call. "This transition has begun in Maryland this year and is already resulting in improvements in profitability."

William J. Sterner, system president for the Utility Workers Union of America Local 102, which represents some Allegheny workers in the four-state area, said customers should not be surprised at Allegheny's increased profits because, unlike other commodities, electricity cannot be stored and is, therefore, subject to greater volatility.

"It's turning out pretty much how we thought it was going to turn out," Sterner said. "Since electricity cannot be stored, developing a market, and a market price, for electricity is going to be much more difficult, if not impossible."

As part of the state's 1999 Electric Customer Choice and Competition Act, Allegheny switched its commercial and industrial customers in January to default, Standard Offer Service rates that increased by about 46 percent, according to company information. As of September, only 377 of Allegheny's 28,043 nonresidential customers had selected alternate suppliers for their electricity, according to the Maryland Public Service Commission, which oversees the transition to market-based rates.

The Utility Workers Union of America has opposed electricity deregulation measures across the country due to fears utilities will place more emphasis on profits and less emphasis on infrastructure maintenance. Sterner estimated that, since 1996, Allegheny has reduced the number of line workers by about 30 percent.

"We're in a transition to higher rates, not competition, now that they're profit centers," he said. "Now the chicken's come home to roost, and people are going to suffer."

Allegheny spokesman Allen Staggers said Allegheny has reduced the number of line workers since 1996, when the company merged its Potomac Edison, West Penn and Monongahela Power companies into Allegheny Power, but some of those reductions resulted from the merger rather than from deregulation.

"Because of that, we had three of everything," Staggers said. "Some of that redundancy also spilled into some of the lines operations."

Staggers said that while Allegheny posted increased earnings for the third quarter, and year-to-date following the shift to default service in January, it also artificially kept down its rates in advance of deregulation as part of its agreement with the PSC.

"That's because the commercial and industrial customers in Maryland are out from under rate caps. Those rate caps expired at the end of 2004," Staggers said.

Staggers said that default rates are deliberately not the lowest around as part of a PSC-guided effort to increase competition in the market.

The Herald-Mail Articles