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Testimony before City Council of Philadelphia
Committee on Transportation and Public Utilities

Electric Competition

October 2, 1996

My name is Irwin A. Popowsky and I am the Consumer Advocate of Pennsylvania. My job is to represent the utility consumers of Pennsylvania before the Pennsylvania Public Utility Commission and other state and federal agencies and courts that regulate the activities of Pennsylvania's investor-owned utilities. I personally have been involved in a long line of cases over the last 15 years before the PUC, the Commonwealth Court and the Pennsylvania Supreme Court involving Philadelphia Electric Company, now PECO Energy, so I am very familiar with the concerns that I think have given rise to hearings such as this one before this Council.

First, I would like to thank you for the opportunity to appear before you and commend you for holding these hearings on this important topic. I would also like to commend the members of the City Council and the City Administration for their participation in hearings before the PUC on electric generation competition.

Clearly, electric rates are too high in Philadelphia. There are a number of reasons why PECO's rates are so much higher than those of most other utilities, but I think the most significant reason was correctly identified by Councilman David Cohen at the PUC Public Hearing in Philadelphia on January 30, 1996. That is, PECO's reliance on nuclear power. Back in 1960 and in 1970, PECO's average residential rates were virtually identical, within a few tenths of a penny per kilowatt hour, to those of all the other electric utilities in Pennsylvania. By 1990, however, PECO's residential rates were more than double those of the lowest cost utility in Pennsylvania, West Penn Power, which also happened to be the only utility in Pennsylvania that built no nuclear power plants. Again, there are a host of differences among the various Pennsylvania utilities that gave rise to the current disparity in rates, but I submit that the most significant factor (not just for PECO, but for other high cost companies such as Duquesne Light Company in Pittsburgh) was the decision to rely on what turned out to be extraordinarily expensive and uneconomic nuclear power plants.

But if high cost nuclear power plants are the problem, then I think that also leads to the logical solution. That is because the generation of electricity -- that is, the construction and operation of power plants -- is the one segment of the electric industry that is clearly not a natural monopoly. Therefore, the generation of electricity is the one segment of the electric utility industry that, I believe, can benefit most from competition.

What do I mean by a natural monopoly? It seems to me that it makes no economic or environmental sense to run ten sets of competing parallel electric distribution lines down Broad Street or to have five electric meters and wires running into every South Philadelphia row house. The distribution of electricity is a natural monopoly. It is more economical for society to have a single regulated provider of electric distribution service in each given area. Competition in such a natural monopoly service would only lead to higher costs to everyone.

The generation of electricity, however, can and should be subject to competition, and the current debate that is raging across the Nation is how to get the benefits of electric generation competition to the individual consumer, particularly residential consumers. Part of that debate, of course, is not simply how to get power more cheaply to consumers, but also how to ensure that service is reliable, is consistent with environmental goals, and is universally available at affordable prices to all consumers. Of paramount importance from my view is to ensure that so-called competition not be used as a means of shifting even more uneconomic costs from a few large customers who have competitive alternatives onto other customers who lack competitive providers and who are least able to afford higher rates.

I believe though that there is a growing consensus that competition in electric generation is a reasonable answer for the future. If there were generation competition, a utility like PECO would not be able to sell its extraordinarily expensive nuclear power at anything close to its current total cost. Rather, it could only charge the market rate, which would be set by competition among a host of generation suppliers. Only a monopoly could charge the high embedded costs of a plant like Limerick, and only a captive monopoly ratepayer would pay such costs when reliable lower cost alternatives are readily available.

But even if we conclude that generation competition is the ideal solution to keep down electric rates in the future, that does not tell us exactly what to do now, and particularly what to do with the costs of nuclear power plants that already have been built.

Theoretically, we could declare all electric generation fully competitive tomorrow; but if the competitive market actually worked, and generation rates were driven down to current market price, PECO Energy would almost certainly go bankrupt. There is no way that PECO could recover sufficient costs on its current generation mix to be financially viable in a totally competitive market.

Certainly, an argument could be made that bankruptcy is the correct result in this situation and is the best way to bring substantial immediate rate relief to Philadelphia area consumers. Nevertheless, the position I have taken so far in this debate is that the transition to a competitive generation market should be a more gradual one. That is, the transition should be an orderly one which must produce clear and substantial benefits for all consumers, but does not disregard the interests of those who invested in PECO when that Company had an obligation to provide generation resources to all of its present and prospective customers.

But while I am not ready to advocate pushing PECO off a cliff, I am equally unwilling to let PECO or any other utility dig in its heels and insist that consumers cannot receive any benefits from competition until utility investors receive a full recovery of and a full return on all of their so-called stranded investment. Pennsylvania utilities have no constitutional or statutory right to a full recovery of and full return on every dollar they have invested in power plants that turn out to be unnessary, uneconomic, or non-competitive. In a case I argued before the United States Supreme Court, Duquesne Light Company v. Barasch, the Court in 1989 upheld the position of my Office and the Pennsylvania law that declared that utilities cannot charge ratepayers for the cost of power plants -- in that case, cancelled nuclear power plants -- that are not used and useful in serving ratepayers. Again, I am not suggesting that companies like PECO should not be permitted to recover anything when it comes to costs that are stranded as a result of the move to competitive generation. I am suggesting though that they should not be permitted to recover everything. Rather, I expect there will be some sharing of costs that enable consumers to benefit from competition, while preserving the reliability and integrity of the electric system and treating investors fairly.

As to what actions I would recommend for the City of Philadelphia, I would submit that the most significant debates on this issue are being held and will be held in the near future in Harrisburg, before both the General Assembly and the PUC.

I would respectfully urge you to support legislation that would bring about a reasonable transition to a competitive generation system that would maximize benefits to consumers through reduced rates, preserve system reliability, and protect the rights of all consumers to receive safe, adequate and affordable electric utility service. I would urge you to oppose any efforts to provide a legislative mandate that utilities must receive the full recovery of and return on all costs that are stranded as a result of the move to competition. I would also urge you to oppose any legislation in which the benefits of competition are granted to only a few large consumers and even more costs are imposed on customers who lack alternatives.

If legislation is passed, I would urge the City to participate actively in any proceeding before the PUC that would determine the path that competition will take in Philadelphia and the allocation of any stranded cost recovery. I think it will also be incumbent on all of us to devise methods to ensure that all customers, including all residential customers, have access to beneficial competitive alternatives.

I look forward to working with you on behalf of Philadelphia consumers as this debate continues, and I would be happy to answer any questions you may have at this time. 




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