Pennsylvania Office of Consumer Advocate

 

 

Pennsylvania Office of Consumer Advocate
555 Walnut Street
5th Floor Forum Place
Harrisburg, PA 17101-1923

Phone: 717-783-5048 or toll free 800-684-6560
Fax: 717-783-7152

Email: consumer@paoca.org

Testimony before the United States House of Representatives
Committee on Commerce
Subcommittee on Energy and Power

Electric Regulation -- A Vision for the Future

May 15, 1996

SUMMARY OF TESTIMONY

The members of the National Association of State Utility Consumer Advocates (NASUCA) share a vision of the electric industry in which the selection of all generation resources is carried out on a fully competitive basis. We support federal policies which are intended to ensure that no ratepayers are forced to pay for uneconomic utility-owned (or non-utility owned) generation when less costly, reliable resources are available through a competitive generation market.

 

NASUCA submits, however, that there is a difference between competition and mere deregulation. NASUCA therefore opposes efforts to repeal essential provisions of the Public Utility Regulatory Policies Act (PURPA) and the Public Utility Holding Company Act (PUHCA) unless they are replaced by adequate competitive and regulatory safeguards to ensure that consumers are protected.

 

To the extent that greater competition in electric generation results in the "stranding" of some uneconomic investments, NASUCA is of the view that utilities are not entitled -- either as a matter of constitutional law or ratemaking policy -- to charge ratepayers for 100% recovery of and return on those investments. Utility investors must bear at least a portion of the burden of uneconomic costs that cannot be recovered in a competitive generation market.

 

Finally, NASUCA submits that the needs of low-income consumers must be fully addressed in any transition to a more competitive electric industry and that mechanisms must be put in place that are designed to ensure universal energy service for all consumers at affordable rates.

 

Speaking for myself as an advocate for consumers in a state with high electric generation costs, I also would like to see a reasonably rapid transition to greater retail access to competitive generation. It is my hope that the Pennsylvania General Assembly and Public Utility Commission will move forward in efforts to bring the benefits of electric generation competition to all retail consumers in a manner that fairly balances the interests of utilities and ratepayers. While I envision a fully competitive retail electric generation market, I believe that other utility functions, such as transmission and distribution, remain natural monopolies that must be carefully regulated in the future. I also believe it is important that the remaining costs of the utility monopoly system, as well as any stranded cost recovery and universal service charges, must be shared by all consumers through a non-bypassable charge.

 

In my view, the federal government should implement policies that make it possible for each state to consider and, if appropriate, develop a transition to retail access to competitive generation. In no case, however, should the federal government mandate 100% recovery of and return on retail stranded costs. A federally guaranteed mandate for 100% recovery of and return on retail stranded costs might actually retard, rather than advance, the goal of bringing the benefits of retail generation competition to some portions of the country.

 


CHAIRMAN SCHAEFER AND MEMBERS OF THE SUBCOMMITTEE ON ENERGY AND POWER:

 

My name is Irwin A. Popowsky. I am the Consumer Advocate of Pennsylvania and I am also the Vice President of the National Association of State Utility Consumer Advocates (NASUCA). NASUCA is an association of 41 consumer advocate offices in 38 states and the District of Columbia. Our members are designated by laws of their respective states to represent the interests of utility consumers before state and federal regulators and in the courts. On behalf of NASUCA, I wish to thank you for the opportunity to testify before this Committee on the future of the electric industry and its impact on the Nation's electricity consumers.

I have testified before this Committee before, most recently on February 1, 1996, in your hearing concerning the Public Utility Regulatory Policies Act of 1978 (PURPA). At that hearing, I set forth NASUCA's position that the mere repeal of the mandatory purchase obligation of PURPA would not advance the goal of bringing lower cost, competitive generation to all consumers. I testified on behalf of NASUCA that the mandatory purchase obligation of PURPA should be repealed only if it is replaced by a competitive electric generation industry structure that would prevent a return to the monopolization of electric generation by electric utilities.

The topic of today's hearing, as I understand it, is a much broader one. That is, to set forth our visions of the future of the electric industry. I would first like to commend this Committee for seeking views of consumers and their representatives at these hearings. Clearly, the interests of consumers must remain paramount in your minds as you consider Congress' role in the restructuring of the electric utility industry. I submit that we will have accomplished very little if the end result of our labors is to render basic electric service less affordable and less reliable for the average American consumer.

While I was invited to speak today on behalf of NASUCA, I must say that we probably have as many "visions" of the future electric industry as we have NASUCA members. That is because we are a truly state-based organization, and each of our members is most initmately familiar with and most strongly concerned about the interests of utility consumers in our respective states.

Nevertheless, NASUCA has developed consensus positions on numerous issues of national importance, which our members believe can benefit all utility consumers. I will therefore begin my testimony by identifying those elements of an electric industry future on which our members generally agree. Then I will give my own views of the vision that I'd like to pursue on behalf of electric consumers in Pennsylvania.

NASUCA members share a vision of the future of the electric industry in which the selection of all generation resources is carried out on a fully competitive basis. While recognizing that the implementation of PURPA has left much to be desired in many instances and has created its own set of uneconomic resources, NASUCA supports the underlying principles of PURPA that require utilities to look beyond their own generation divisions to obtain power for their customers. NASUCA would like to see competition for electric generation resources enhanced in the future so that no ratepayers are forced to pay for uneconomic utility-owned (or non-utility owned) generation when less costly, reliable generation is available through a competitive generation market.

NASUCA also submits, however, that there is a vast difference between competition and mere deregulation; and that deregulation, without full and fair competition, is the worst of all worlds for consumers. During the debates on the Energy Policy Act of 1992, for example, NASUCA expressed concern about the creation by utilities of affiliated exempt wholesale generators, particularly if self-dealing were permitted between the utility and its own affiliate. NASUCA remains opposed to the repeal of the Public Utility Holding Company Act of 1935 (PUHCA), unless and until that Act is replaced with adequate competitive and regulatory safeguards to ensure that consumers are protected. NASUCA also has supported transmission access as a means of bringing the benefits of lower cost wholesale power to all consumers, but remains concerned that transmission access alone is not sufficient to ensure that all consumers will receive the benefits of a competitive generation market.

NASUCA also is of the view that to the extent the uneconomic costs of some existing generation are potentially left stranded by competitive forces, utilities are not entitled -- either as a matter of constitutional law or ratemaking policy -- to charge ratepayers for 100% recovery of and return on those investments. In our Comments to the Federal Energy Regulatory Commission and in many of our respective states, NASUCA members have advocated that utility investors must bear at least a portion of the burden of uneconomic costs which cannot be recovered in a competitive generation market.

Finally, NASUCA members are concerned that the needs of low-income consumers are addressed during any transition to a more competitive electric industry. With federal low income home energy assistance declining, it is especially necessary to ensure that some mechanisms are in place to support universal energy service in which all consumers have access to basic affordable energy services. Customer choice for low income consumers should not mean having to choose between paying their electric bills and buying food for their families. Electricity is not a luxury. It is a basic necessity of modern life in this Nation; and universally available basic energy service must be a paramount goal of all participants in the energy future.

Speaking now for myself, and coming from a state with some of the highest cost electric utilities in the Nation, I would like to see retail, as well as wholesale, access to competitive generation sooner rather than later. I envision an electric industry in Pennsylvania within perhaps the next five years, and almost certainly within the next ten years, in which all consumers have some type of access to competitive generation. I expect that access to occur through some combination of direct bilateral transactions, pooling, and aggregation arrangements, where the generation component of electric service bills for all consumers is based on market prices rather than utility costs.

I hope to see a reasonably short transition period during which retail access would be implemented. I do not envision either ratepayers or utilities bearing 100% of stranded costs -- and they will very likely be in the billions of dollars in Pennsylvania -- but rather I see our General Assembly and Public Utility Commission developing an equitable method for sharing those costs in light of our state Public Utility Code and our historical allocation of risk with respect to utility investment. I would hope that retail access will be made available to all customer classes at the same time, and that adequate pooling and aggregation arrangements will be put in place at the commencement of this transition so that all customers are in a position to benefit proportionately and simultaneously from competitively priced generation.

In short, I see no reason why all retail consumers in Pennsylvania should not receive the benefits of access to a competitive electric generation market within the next several years.

On the other hand, I envision an electric industry where the transmission and distribution functions will continue to be carefully regulated as natural monopolies. In particular, I think it is critical for state public utility commissions to retain the ability to impose non-bypassable charges on all customers who are connected to the utility system, regardless of whether or not those customers purchase generation from their local distribution utility. The costs of the utility system must be borne by all consumers and must not be bypassed by customers who purchase their generation elsewhere. Such a non-bypassable charge also should be used to recover those stranded costs, if any, that are allowed to be collected from ratepayers. Such a charge also might include the costs of any programs intended to provide societal benefits, such as universal service funding. In my view, the goal of state and federal policy ought to be to bring the benefits of a competitive electric generation market to all consumers over a reasonably rapid transition period in a manner that fairly balances the interests of utilities and ratepayers. The goal ought not to be to allow a few customers with competitive generation alternatives to escape from the remaining costs of the system that are still related to the utilities' monopoly functions.

As to the federal role in bringing the benefits of generation competiton to retail consumers, I think many of the necessary steps already are being taken, primarily through the transmission provisions of the Energy Policy Act of 1992 and the Federal Energy Regulatory Commission's proactive role in carrying out those provisions. I think that the FERC also has properly begun to re-examine the appropriate standards for evaluating mergers among electric utilities to ensure that inappropriate mergers are not allowed to undermine the competitive advances that have arisen from greater transmission access. FERC also has taken appropriate steps to reduce consumer exposure to uneconomic PURPA contracts, but has recognized that PURPA still serves an important function in the absence of any other market or regulatory requirements that force utilities to shop for the most cost-effective generation resources.

As to retail access, 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. It is particularly important that the federal government not mandate 100% recovery of and return on stranded investment as the "price" that retail ratepayers must pay in order to get the benefit of federally mandated retail competition. In my mind, a federally imposed stranded cost guarantee on retail ratepayers would actually retard, rather than advance, the benefits of competition at the retail level.

In Pennsylvania, for example, bi-partisan legislation was recently introduced that would require a prompt transition to retail access for all customer classes, and establish a sliding scale of recovery for stranded costs depending on the length of the recovery period. Utilities that could recover stranded costs in three years or less -- without raising customer rates -- would be permitted 100% recovery of stranded costs; the percentage of stranded cost recovery would decline to 65% if the recovery period lasted for ten years. No recovery would be permitted beyond ten years. The Pennsylvania legislation also contains a provision for development of a statewide universal service fund to assist low-income energy consumers.

I do not necessarily endorse all the provisions of the state legislation I just referenced, but I see great potential harm in federal legislation that would mandate retail competition in return for a federal guarantee of 100% stranded cost recovery. I, for one, would prefer to see my state legislators and regulators determine the extent and the pace of the transition to retail competition in Pennsylvania as well as the appropriate sharing of costs and benefits resulting from that competition. Indeed, our highest cost utilities in Pennsylvania already are taking steps to reduce costs and to write down their high embedded nuclear costs -- without raising customer rates -- in order to be in a better position to enter a competitive generation market in the future. I am skeptical that many utilities will take steps to accelerate the write-off of uneconomic embedded costs, and thereby depress current earnings, if their visions of the future include a federally enforced guarantee of 100% stranded cost recovery.

In sum, my own vision of the electric utility industry is an optimistic one. I see the states joining with the federal government in eliminating barriers to competition in those areas of the industry that are not natural monopolies and where consumers can benefit most through competition. I also see the retention of careful regulation at the state and federal level of those aspects of the industry for which regulation is necessary both in order to protect consumers and to facilitate competition in generation. Finally, I see a growing recognition that, as in the recent debate over the Telecommunications Act of 1996, while competition is the preferred means of maximizing consumer benefit in many areas, there is still a need to go beyond market solutions in order to ensure that affordable universal basic electricity service is available to all Americans.

Thank you for this opportunity to testify before your Committee. I would be happy to answer any questions at this time. 

 

 

 

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