Testimony before the Pennsylvania House Consumer Affairs Committee

House Bill 1068--Natural Gas Deregulation

May 27, 1997

My name is Irwin Popowsky. I am the Consumer Advocate of Pennsylvania. I appreciate this opportunity to testify on this matter of great importance to all Pennsylvania natural gas consumers.

First, I would like to commend the sponsors of the Senate and House legislation on natural gas competition that has given rise to the hearings before these committees. I think these are thoughtful and worthwhile bills that are deserving of careful consideration by the Senate and House of Representatives. As a general rule, I believe it is incumbent on state and federal policy makers to seek out those aspects of regulated industries, including the natural gas industry, where competition can serve the interests of consumers better than continued regulation. In those cases where competition can better protect consumers, I would support a reasonable transition to such competition. As an example, I am glad that consumers now have the choice to buy their own telephone sets at Radio Shack or Sears for $9.95, rather than have to rent their phones from a monopoly telephone company for a few dollars a month for the rest of their lives.

On the other hand, policy makers must recognize that there is a difference between true competition and mere deregulation; and that deregulation of a monopoly industry in the absence of full and fair competition is the worst of all possible worlds for consumers. It is relatively easy to deregulate an industry. Just repeal all the laws and hope for the best. It is more difficult to ensure, however, that regulation is replaced with vigorous competition that protects consumers from price gouging and poor service by unregulated monopolies. Simply deregulating the price of a monopoly service does not mean that full competition will immediately spring forth to serve all consumers.

It's also important to recognize that basic utility service, including natural gas service, is fundamentally different and generally more important than most other goods and services. Residential natural gas service, for example, is primarily used for home heating. For people whose homes are heated with gas furnaces, affordable reliable natural gas service is not a luxury; it is a necessity. Indeed, the loss of natural gas service during a Pennsylvania winter -- for whatever reason -- could be catastrophic to residential consumers.

It is with these principles in mind that I approach the question of whether greater competition in the natural gas industry will be beneficial to residential consumers. My preliminary answer to that question is yes, consumers can benefit from greater competition. In particular, I believe there are likely some economic benefits that can be obtained by giving residential consumers the same types of choices in natural gas suppliers that Pennsylvanian's large industrial and commercial customers already have. As I'm sure you are aware, most large industrial and commercial gas consumers in Pennsylvania already purchase their gas supplies from sellers other than their local gas distribution companies and instead pay the local companies only for the cost of delivering that gas to them. If residential consumers had a similar ability to purchase gas supplies from a wide variety of sources, then I believe that they too could experience some savings in their monthly gas bills.

I would hasten to add, however, that any savings that residential consumers may receive from the introduction of customer choice could be quickly eliminated or reversed unless these changes are accompanied by careful protections against anti-consumer and anti-competitive practices that could leave consumers much worse off than they are under the present regulated system.

As many of you may recall, I supported the electric competition legislation that was signed into law by Governor Ridge last year. I did not support that legislation because I believed it would immediately cut electric rates in half for all Pennsylvania consumers. Rather, I supported the law because I felt that many consumers will pay lower rates over time if true competition takes hold in the generation portion of the electric industry and if the Public Utility Commission carries out the intent of the legislation to benefit consumers. But perhaps more importantly, I supported the law because it protected all consumers against potential cost shifting and rate increases that might result during the potentially lengthy period that may be required for full competition to develop. Specifically, the electric legislation imposed an overall cap on existing utility rates until July 2001. With respect to generation, which is the one area of the electric utility industry that is "deregulated" in the electric legislation, there is an additional rate cap under which utilities generally must continue to offer generation service to their customers at rates that are no higher than current rates for a period that may extend until as late as January 1, 2006. In other words, for most of our electric utilities, a consumer can do absolutely nothing in response to competitive alternatives between now and 2006, and still be paying no more for generation than he or she is paying today. Obviously, it is my hope that competitive forces will drive electric prices down for all consumers over the next several years, but I was not willing to leave residential consumers totally at risk in the event that it takes many years for a truly competitive electric generation market to develop.

Similarly, with respect to natural gas legislation, I would only support such legislation if I were confident that the benefits of greater price competition to residential customers exceeded the risks. While the current legislative proposals that have been introduced before you create a valuable framework to begin consideration of this issue, I would urge consideration of certain additional protections for small consumers.

Specifically, the legislation calls for virtually total deregulation of the price of natural gas supply service effective April 1, 1999. Quite properly, and, as in the case of the Pennsylvania electric legislation, the proposed gas legislation would continue regulation of the price of the monopoly distribution function. That is, the pipes that run down our streets and into our homes would remain regulated. Only the gas supply function (like the generation function in the electric industry) would be subject to competition. The problem I have is, we have no assurance that all consumers, particularly all residential customers, will have fully competitive supply options on April 1, 1999.

The proposed legislation deals with this issue in part by stating in Section 2207(4) that the local gas distribution companies shall continue to serve as the "supplier of last resort" for gas supply service after April 1, 1999, unless the commission has approved an alternative supplier to provide such service. The legislation thus appears to protect consumers from losing gas service altogether, but the question remains at what price will that service be provided. Under the above-noted provision of the legislation, the supplier of last resort would have the duty to "acquire and sell natural gas at prevailing market prices to any customer not otherwise able to obtain gas supply." The problem here is that we have no way of knowing what the "prevailing market price" will be in 1999 or thereafter. What will the "prevailing market price" be on the coldest day of February in Venango or Tioga County? If we end up with an essentially unregulated monopoly, then the prevailing market price would be whatever consumers were willing to pay to keep from losing their service.

My point here is that we cannot rely solely on market prices to protect consumers unless and until we have a fully functioning competitive market for all consumers. Until that time, I would suggest that we need some type of regulatory backstop or ceiling, comparable to the rate cap provisions that are contained in the electric legislation. I realize that, given the variability and volatility of natural gas wellhead prices, it may be difficult to develop a rate cap that could be applied fairly to all Pennsylvania gas utilities. It may be appropriate, therefore, to tie the rate cap to some type of wellhead price index that could be adjusted on an annual basis. Alternatively, the Commission could require utilities and other potential suppliers to competitively bid for the right to provide service as the supplier of last resort in a given area. As I said, however, unless and until every residential consumer has unfettered access to a fully competitive natural gas supply market, I would be reluctant to rely solely on a "prevailing market price" that could vary daily by location and temperature. Again, it is my hope that residential customers will benefit from having a choice of natural gas suppliers, much as the vast majority of industrial and large commercial customers in Pennsylvania benefit today. I am not willing, however, to eliminate any regulatory protection on the "high" side in the event that full customer choice does not develop as quickly or as effectively as we would like. At least during a reasonable transition period, there must be some level of continued price protection.

One other provision that causes me concern in both the Senate and House bills has nothing to do with competition, but involves the rate regulation of the remaining monopoly functions of the gas distribution utility. This provision, Section 2203(9), states that, for purposes of setting rates under Chapter 13 of the Public Utility Code, the Commission must apply a future test year that "shall reflect the costs of service that will be incurred during the period of time when the proposed rates will be in effect." The problem, of course, is that we don't know with any degree of certainty what those costs will be and the Commission would have to rely on unproven and unprovable assumptions that the utility would make in its filing. That is why Pennsylvania utilities are currently required to use a future test year in their filings that includes the nine-month period in which the proposed rate increases will be under review, rather than rely solely on future hypothetical data. This future test year policy now used by the PUC represents a successful compromise between the use of totally historic data that was required under the old Public Utility Law and the fully forecasted futuristic data that is proposed in this legislation. As I said, this provision has nothing to do with the purpose of this legislation, which is to bring about greater competition in the gas supply function. But this provision could result in unreasonable increases in rates for remaining regulated services that could wipe out the benefits to consumers of competition in gas supply service.

Finally, I think it will be important for the General Assembly to consider the tax ramifications of greater natural gas competition. Today, the only natural gas users who pay gross receipts tax are those consumers who purchase gas directly from their local distribution companies. This is unfair to those consumers who currently have no choice of gas supplier other than their regulated provider. The current legislative proposal would essentially remove all natural gas consumption from the gross receipts tax. This would benefit residential consumers because it would effectively produce a five percent reduction in monthly gas bills. On the other hand, I must assume that this change would also have a significant impact on the Commonwealth's tax revenues. I raise this issue at this point not because I have a solution, but because I can assure you that this was a matter of great complexity and concern that arose during the stakeholder discussions on electric competition legislation. In the electric legislation, an effort was made to ensure that all participants in the electric generation market were taxed on an equal basis. In the upcoming natural gas debate, I would urge you to develop solutions that are fair to all consumers and do not impose an unfair burden on residential consumers.

In summary, I would generally support the introduction of greater retail competition in the gas supply function of the Pennsylvania natural gas industry. At this point, however, my questions about the impact of an overnight transition to a deregulated natural gas market for all consumers on April 1, 1999 outnumber my answers. At each step of this debate, I believe it is essential to ensure that regulatory protections now enjoyed by residential gas customers are not removed unless and until they are replaced by the even stronger protections that can be provided by a fully competitive market. I look forward to working with the sponsors of this legislation, the members of this Committee, and all the members of the General Assembly as you attempt to address this important issue in a manner that will benefit all Pennsylvania consumers.