Cooperative explains difference in rates

By Sam Harvey
Staff Reporter

Local electric delivery company Delmarva Power will likely have a bit of a suntan — from the spotlight — before summer 2006 ever gets here. Concerned citizens, public officials and the media have been peppering company representatives with questions about pending rate hikes for a couple of months now.

Perhaps of especial interest — how is it that Delmarva Power couldn’t find cheaper wholesale electricity, while the Delaware Electric Cooperative (DEC) could?

Delmarva Power’s residential customers are bracing for a nearly 60-percent rate hike, come May — and commercial users face even more dramatic increases. But rates for cooperative customers climbed a mere 12 percent since the DEC came out from under its rate caps, about a year ago.

Both Delmarva Power and the DEC — plus representatives from Chesapeake Utilities, the Public Service Commission (PSC), the Division of Health and Social Services (DHSS) and numerous charitable organizations — provided an array of information on rate-related topics last week, March 2, at Delaware Tech’s Owens Campus in Georgetown.

First off, why can’t we all have cooperative rates? DEC’s Rob Book explained.

“Our service area is based on the (utility) poles in existence now,” he said. “The service area that was defined when the lines were set up.”

According to Book, many locals have called the cooperative to see if they can switch — “Really, there’s nothing we can do,” he said.

While both Delmarva Power and the DEC are still regulated, there are significant differences in the ways they do business. For instance, the DEC was never set up to be profitable — it was set up to serve residents in the state’s rural areas, bring them into the 20th century.

No for-profit company would have invested in power lines along the old country lanes, to serve the occasional farmstead — there’d be no money in it. Though, with Delaware’s recent population growth, many of those areas probably could be served profitably.

“We’re growing at a pace that puts us near the top, in the cooperative marketplace, nationally,” Book said. “We’re the fourth-fastest-growing cooperative in the country.”

But the nonprofit cooperative and for-profit electricity suppliers staked out their boundaries in the 1940s, he added, and they aren’t about to change now. Duplication of services alone would present an incredible hurdle, Book pointed out.

(Even with the defined territories, there are still a few areas around the state where one can find two and three separate sets of utility poles along a roadway, he added.)

Other factors: Book noted DEC ownership in the Old Dominion Electric Cooperative, which produces the actual, wholesale electricity. While Delmarva Power requests bids from for-profit wholesalers, the DEC holds one-twelfth ownership in Old Dominion, and buys 52 percent of its power there.

“So, we only need to go out for the other 48 percent,” Book explained. “But even there, we’re not buying off the spot market. For example, the energy we’re using today, we bought three years ago.”

And, forecasting major changes in the marketplace with deregulation, he said the cooperative had looked at ways to keep rates low over the long-term. One of the reasons the cooperative had been able to hold its overall rate increases to 12 percent was that they’d lowered costs on the distribution side by 21 percent since 1999, Book pointed out.

As noted in the March 2006 “Cooperative Connections” newsletter, rates will rise, inevitably. But, “Our goal is to remain below market now and well into the future.”

As Book noted, the DEC operates under a rather different business plan than for-profit companies “We have to make a slight margin, for our creditors, system upgrades and maintenance, what have you,” he said. But that’s it. And, according to the newsletter, anything in excess of that margin is eventually returned to the customers/owners.

Delmarva Power, by way of contrast, has shareholders to satisfy. And free-market competitors. And no ownership in any power generation facilities, cooperative or otherwise.

Delmarva Power bids for its wholesale electricity on the open market, and the pending rate hikes reflect the best prices the company could procure. The PSC retained consultants (Vantage Consulting) to review that bidding process, and Vantage found nothing improper.

From that report: “The prices reflect the general condition and prices of the market… Rates, after almost six years of being frozen, will increase significantly. However, the bid prices are reflective of the current market conditions…”

Low bidders were:

• Conectiv Energy Supply. Both Conectiv and Delmarva Power are subsidiaries of Pepco Holdings — Conectiv must submit to extra layers of Federal Energy Regulatory Commission (FERC) scrutiny to do business with its affiliate. Conectiv has four main power plants and dozens of smaller ones up and down the Delmarva Peninsula, and 54 percent of its electricity is generated using natural gas.

• American Electric Power Service, out of Columbus, Ohio. The company owns roughly 80 power plants in the U.S. More than 70 percent of the company’s electricity comes from coal-fired plants.

• The other four low-bidders are brokers: Consolidated Edison Energy (subsidiary of New York-based Con Edison), Constellation Energy Commodities Group (wholesaler for Baltimore, Md.-based Constellation Energy), DTE Energy Trading (Michigan-based DTE Energy subsidiary) and PPL EnergyPlus (wholesaler for Pennsylvania-based PPL).