Pennsylvania Office of Consumer Advocate
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Testimony before the Pennsylvania Senate Consumer Protection and Professional Licensure Committee

Electric Generation Competition

August 19, 1996



My name is Irwin A. Popowsky and I am the Consumer Advocate of Pennsylvania. As always, it is a privilege to testify before this Committee on a matter of extraordinary importance to all Pennsylvania consumers.

The title of this hearing is "Electric Generation Competition." Let me start by stating that this is exactly the right topic for this hearing and that this Committee -- as a part of the General Assembly of Pennsylvania -- is exactly the right place where this issue should be addressed.

Why do I say that this is the right place for this issue to be considered? There is legislation now pending in the United States Congress that would effectively mandate the implementation of retail electric competition by December 15, 2000, throughout the United States. In May, 1996, I had the opportunity to testify before the key subcommittee of the United States House of Representatives addressing this issue, and I urged the members of that subcommittee not to preempt the states in their retail ratemaking roles. I testified at that time that: "I think it is the role of the federal government to implement policies that make it possible for each state to consider and, if appropriate, develop a transition to retail access to competitive generation; but I do not think it is necessary for the federal government to mandate such a transition." As Vice President of the National Association of State Utility Consumer Advocates, I intend to continue to impress upon Congress the primary role that the states must play in determining the extent of and the pace of any transition to greater retail competition in our respective states.

Nevertheless, it was not my position in Congress and it is not my position here, that the states -- particularly states with high cost utilities such as Pennsylvania -- should do nothing to bring about greater retail access to competitive generation. Rather, it is my view that a fundamental change in the regulation of retail electric utilities in Pennsylvania is a matter that is uniquely within the expertise of Pennsylvania's elected representatives and their administrative arm, the Pennsylvania Public Utility Commission. Neither the Congress of the United States nor the Federal Energy Regulatory Commission has adequate knowledge of the specific facts and circumstances that have brought each of our Pennsylvania utilities to their present situations, nor are they equipped to develop a single solution that would be fair to all Pennsylvania utilities and ratepayers, let alone those of all the other 49 states and the District of Columbia.

On December 1, 1995, I had the opportunity to appear as the first witness in the Pennsylvania Public Utility Commission's comprehensive investigation into electric utility competition. The PUC issued its Report and Recommendation to the Governor and General Assembly on July 3, 1996, setting forth the results of that investigation. I believe that the PUC Report, and the accompanying individual reports of Commissioners Hanger and Crutchfield, do an admirable job of setting forth the policy options that our Commonwealth faces regarding the future of the electric industry in Pennsylvania, and also identifying a number of steps that can be taken under existing Pennsylvania law to explore the potential benefits of greater retail access to competitive generation. But I think the PUC Report is correctly entitled a Report and Recommendation to the Governor and General Assembly, rather than a final Commission order or regulation. The Commission properly recognized that it cannot, or at least it should not, implement fundamental changes in the regulation of Pennsylvania's electric utility industry without guidance and authority from our elected representatives. The Commission has the expertise to develop proposals for consideration by the General Assembly and the expertise to implement those policies once they are enacted. But it is the General Assembly and the Governor who must provide the ultimate guidance to the Commission on the policies and priorities that should be implemented. The buck stops here.

With that lengthy introduction, let me return to the first point in my testimony. That is, that this set of hearings is properly entitled: "Electric Generation Competition." I believe there is a great deal of misunderstanding and concern about the nature of the current debate regarding the future of the electric industry in Pennsylvania. People are fearful that they no longer will be able to depend on their local electric utility which currently has an obligation to serve all customers who are willing to pay the tariffed rates within a particular service territory. People are also concerned that there may be chaotic competition such as occurred in the very early days of the electric industry before the turn of the last century where numerous electric companies engaged in street by street competition and ran a jumble of wires through the streets of cities like Philadelphia.

In my view, at least, what we are talking about -- or what we should be talking about -- is competition in the generation of electricity; that is, the construction and operation of power plants. We are not talking about competition in the distribution and transmission of electricity. Distribution and transmission remain "natural monopolies." That is, the cost to society of having a single provider in a given service area is less than the cost of having multiple competitive providers. It makes no economic or environmental sense to have ten sets of competing electric distribution lines running down our streets or into our homes. For that reason, I expect that the distribution of electricity will remain a regulated monopoly and that our current electric utilities -- or their successors -- will continue to provide electric distribution service to all consumers who require such service within their respective service territory.

In addition, the electric transmission grid will continue to be regulated -- primarily at the federal level -- though that regulation will need to evolve in order to enable greater competition among electric generators. Again, I do not expect to see competing transmission grids crossing our landscape.

What I do expect to see, and indeed what I hope to see, is greater competition among the generators of electricity to get the cheapest, cleanest, most reliable electric power to all consumers. The generation of electricity is not a natural monopoly, yet we have continued to regulate it as though it were a necessary part of the vertically integrated electric utility monopoly for many years. As long as the transmission and distribution of electricity are carefully regulated to protect consumers and preserve reliability, I believe there is a great potential benefit to opening up the sale of electric generation to competitive forces.

There is no question in my mind that the great disparity in rates charged by Pennsylvania utilities today is in large part the result of the different generation choices that those utilities made during the 1970's and 1980's. In 1960 and in 1970, for example, the average residential rates per kilowatt hour charged by West Penn Power Company, Duquesne Light Company, and Philadelphia Electric Company were nearly identical -- within a few tenths of a penny of each other. In 1990, however, the average residential rates charged by Duquesne and PECO were more than double the rate charged by West Penn (12.58 cents per kwh for PECO, 12.20 cents per kwh for Duquesne, and 5.04 cents per kwh for West Penn). What happened between 1970 and 1990? For one thing, Duquesne and PECO entered into some of the most expensive nuclear power plant projects in the United States. West Penn didn't.

Perhaps even more importantly, there is also a substantial disparity between the total cost of power from new, efficient plants that are now being built and sold in a more competitive wholesale generation market, and the high embedded power plant costs that are being charged to captive monopoly retail customers by some Pennsylvania utilities.

These results would simply be impossible in a truly competitive market. A bakery could not stay in business very long if it charged $1.00 for a loaf of bread, when identical bread was being sold at a bakery across the street for 50 cents. That is, unless there was a law prohibiting shoppers from crossing the street.

But that's exactly where we are in the electric utility industry. Some Pennsylvania consumers are paying rates for expensive, uneconomic generating plants even though we know that lower cost power could be made available to those consumers through a competitive generation market.

Am I suggesting that we simply declare all generation competitive tomorrow and let power flow to the highest bidder? No, but I am suggesting that the PUC Report as well as the legislation now pending in both the House and the Senate of the Pennsylvania General Assembly are generally headed in the right direction. Each of those documents clearly distinguishes between the generation of electricity, which can and should be more competitive in the future, and the distribution and transmission of electricity, which remain natural monopolies and which must continue to be carefully regulated. Each of those documents also recognizes that competition may only be considered a success if it benefits all consumers. It is not enough simply to offer rate discounts to a few large customers who have competitive alternatives and then shift any remaining costs on to those customers, particularly residential and small business customers, who may not have access to such competition. All three documents also recognize the paramount need to ensure universal service to all consumers. We will have accomplished very little if the end result of this endeavor is to render reliable electric service unaffordable to even more low income consumers. Customer choice for low income consumers must not mean having to choose between paying their electric bill or paying their rent or food bills.

As I said though, I think it is up to the General Assembly of Pennsylvania, not the Congress of the United States or the Pennsylvania Public Utility Commission, to make the critical policy determinations regarding if, how and when a transition to retail generation competition should occur.

With that in mind, I would offer the following principles that I think should be included in any legislation on this vital matter.

First, whatever we do, let's not make things worse for any Pennsylvania consumers. We are already paying rates that are well above the national average and, in the Philadelphia and Pittsburgh areas, residential rates are still among the highest in the Nation. At a time when technological and market innovations should be driving down the cost of electricity for all consumers, it is simply unacceptable to legislate changes that would actually increase rates for any consumers. In addition, we cannot allow regulatory changes under which competitive discounts received by some customers are offset by "rate rebalancing" or other schemes that simply raise rates for other consumers. I would note in this context that Senator Brightbill's proposed legislation, Senate Bill 1475 (P.N. 1884), contains a provision that states that during the period in which any competitive transition charge would be in effect "the total of a customer's unbundled charges, including the competitive transition charge and the universal service and energy conservation charge, shall not exceed the total bundled charges that the customer was subject to on the effective date of this chapter." Similarly, the Tulli/Wright bill, House Bill 2537 (P.N. 3818), states that any competitive transition surcharge must be set at a level that "will not cause the total price for electric power, including transmission and distribution services for any class of customer to exceed the average rates paid by such class of customers as of the effective date of this chapter." That bill also states that customers who continue to purchase generation from their utility under regulated rates during the transition period to retail generation competition "shall have rates capped for generation services as of the effective date of this chapter."

In my view, provisions like these, and even stronger, are essential. The General Assembly must make it clear that the debate in the future must be about how the benefits of competition through lower rates are to be distributed among various utilities and their customers. The threat of rate increases for some customers in order to finance competitive reductions for others should not even be on the table.

Another principle that I would include is that the costs of past uneconomic investments -- the so-called "stranded costs" that would be unrecoverable in a competitive environment -- must be shared by utility investors as well as ratepayers. One way to do this, in a manner that is consistent with existing Pennsylvania statutory and case law, is to state that utilities may receive a return of, but not a return on, any uneconomic costs which would be otherwise stranded due to competition.

Investors in Pennsylvania electric utilities have long been aware that, while they might expect to recover the prudent costs of their investments in facilities that are not fully used and useful to ratepayers, they could not expect to earn a return on such investments. That is the sharing that was approved by the Commonwealth Court in upholding an excess capacity adjustment against Philadelphia Electric Company in 1980; that is the sharing that was set forth by the General Assembly in 1985 for cancelled power plants in Section 520 of the Public Utility Code; and it is one of the remedies provided for excess capacity in Section 1323 of the Public Utility Code that was enacted in 1986.

Thus, while the General Assembly may wish to give the Public Utility Commission the discretion to allow recovery of net, unmitigated stranded costs, the General Assembly should make it clear that it will not authorize the Commission to allow the utility to continue to charge a return on that investment as well.

Moreover, to the extent that stranded costs are charged to any customers during a transition to a competitive retail generation market, those costs must be charged to all customers through some type of non-bypassable charge. That is, even customers who choose to buy their power elsewhere would still be responsible for paying their share of uneconomic costs that are not borne by the utility. In addition, a non-bypassable charge should be used to recover the costs of any low-income, or economic development programs that remain in rates. Again, the critical distinction in my mind is that, while we can allow competitive forces to work in the generation portion of the industry, we must maintain careful regulation of electric distribution service and we should use our jurisdiction over distribution service to ensure that all the costs of utility service, including any social costs that traditionally have been included in rates, are fairly allocated to all parties.

Finally, although the competition that I envision in the electric industry is confined to generation, I certainly do not suggest that even this degree of competition is without risk to consumers. While I have concluded after years of bitter experience that a competitive market probably can do a better job of setting the price of generation than a room full of state and federal regulators, that does not mean that the safety, environmental impact, and reliability of generation sources and systems should not be subject to regulation in the future. I would also note that the first step recommended by the Public Utility Commission in its July 3, 1996 Report -- and a step that I endorse and is already being undertaken in other states such as New Hampshire and Illinois -- is the development of pilot programs to ensure that the potential benefits of retail electric competition as well as any unintended consequences are examined in the context of a fairly controlled experiment.

In closing, I would respectfully urge this Committee and the other members of the General Assembly to keep asking the difficult questions on this extremely vital issue, but to then give the Public Utility Commission the authority and the guidance it needs to develop a plan that brings the benefits of retail electric generation competition to all Pennsylvania consumers while limiting the harms that might occur if such competition were introduced in a careless manner. I look forward to working with you and your staffs as you address this matter.

I would be happy to answer any questions you may have at this time. 




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