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Testimony of Irwin A. Popowsky, Consumer Advocate

Before the Pennsylvania House Consumer Affairs Committee

Regarding Electric Reliability

March 7, 2001


My name is Sonny Popowsky. I am the Consumer Advocate of Pennsylvania. I want to thank Chairman Wogan and members of the Committee for permitting me to speak on the vital and extremely timely issue of electric utility reliability. Recent events in California have made us all more conscious of the dangerous possibilities when restructuring goes wrong. I hope that we can all contribute to reassuring Pennsylvania's residents and businesses that we will not have rolling black-outs or prices which are out of control. However, we must remain vigilant if we are to preserve our enviable position.

In my opinion, the reliability of the Pennsylvania electric system is too important to leave wholly to the uncertainties of an immature marketplace. I am in favor of encouraging greater competition in the generation portion of the electric industry. But that doesn't mean that we can simply deregulate our utilities, close our eyes, and assume that the market will ensure that service will be either reliable or reasonably priced.

The electricity market, as structured in California, has failed horribly. Our market structure in Pennsylvania has performed much better, particularly in those portions of Pennsylvania that are part of the PJM Interconnection. But our success is due in large part to the fact that we have not simply relieved our electric industry of all regulatory responsibility. PJM, for example, imposes strict reliability requirements, including mandatory generation reserve requirements on all companies who serve customers in the PJM area. Our PUC is specifically obligated, under the terms of our 1996 electric restructuring law to "ensure continuation of safe and reliable electric service to all consumers in the Commonwealth." 66 Pa. C.S. Section 2804(1). This Committee and the Senate Consumer Protection and Professional Licensure Committee have held hearings such as this one to assure yourselves and your constituents that you can continue to expect a safe and reliable electric system. I commend you for holding these hearings and I urge you to continue your careful oversight. Do not be lulled into a false sense of security like your counterparts in the California legislature who were led to believe that "the market" would inevitably provide for reliable service and lower prices. Instead, they have spent the last several months in chaotic legislative sessions trying to save their state's health, safety and economy from the effects of an experiment gone horribly awry.

In the past several months, I have attended a number of hearings and meetings regarding electric reliability. In fact, I currently serve as the representative of residential consumers on the Board of Trustees of the North American Electric Reliability Council (NERC). I wholeheartedly agree with what I've heard at some of our Pennsylvania hearings from Chairman Quain and Commissioner Fitzpatrick of our Commission and from representatives of the PJM, that we in Pennsylvania are in an infinitely better position today with respect to electric reliability than the people of California. The PJM electricity grid is one of the most reliable and probably the best run in North America. We can be proud of the many stakeholders who worked to bring us to this enviable situation. We can be glad that today we have adequate generation suppliers, a solid transmission grid and PJM to make sure that it all works.

My main point today though is that we cannot take any of this for granted. So, I want to point out some areas that do concern me.

Keeping Track of Supply - We have adequate generation today and more is scheduled to be built. This does not mean that we can ignore the issue of generation adequacy, as California did. In fact, a number of our baseload plants are old. Several of our nuclear plants will reach the end of their current licenses during the next decade. Scheduled generation additions that are on the drawing boards today should help us to keep up with load growth and eventually add to the net capacity available within the region. But you can't generate electricity from a drawing board, and we cannot simply assume that whatever is being planned today will automatically be built.

I agree that we should use the forces of the competitive market to encourage developers to build new generating units. However, fuel prices, economic conditions, financial markets, siting and environmental restrictions can all impact decisions to build new plants. We need to keep track of generation adequacy and understand that we can't pretend, as California did, that needed capacity will just, somehow appear. In particular, we should keep informed about two issues:

1) How do the plans for construction in PJM compare to what's actually being built? How do existing and planned generation compare to demand projections?

2) Should we be concerned about the fact that almost all planned generation will be gas-fired? How does the recent run-up in natural gas prices impact construction plans? Will gas prices impact electricity production? Specifically, is there an incentive for electric generators to sell their gas when prices are high rather than make electricity with that gas? What impact will this have on winter reliability? To what extent will non-firm gas contracts limit the ability of generators to produce electricity? What more can we do in Pennsylvania to encourage the development of a more diverse future supply portfolio, including renewable resources?

Support and Expand PJM - Much of Pennsylvania is part of PJM, the regional, interstate power pool. As such, we do not stand alone. Our reliability depends on the effective management of reliability and functional energy markets throughout the region. We are extremely fortunate that PJM is doing that job. There are many stakeholders in the electricity business. It is PJM's job to balance these often parochial interests while fostering both reliability and a healthy wholesale market. PJM will be even stronger if it expands to neighboring, interconnected systems. I strongly support the current efforts to include both Allegheny Power and Duquesne Light in "PJM West." This is an important step toward ensuring that consumers throughout Pennsylvania have the benefit of a reliable, competitive wholesale market. All Pennsylvania consumers will benefit from an expanded PJM market.

I also believe it is essential that PJM remain independent, and not be dominated by any particular industry segment. PJM must operate for the good of our region as a whole, not for the benefit of any particular utility, generator or marketer. For my part, I have assigned staff to participate actively in PJM's committees and working groups so that we understand the system and can work to protect the interests of our clients, Pennsylvania's consumers. We have also successfully fought for a change in the PJM by-laws that will give our Office and other neighboring state consumer advocate offices a greater voice on matters that come before the PJM Members Committee. In addition we have intervened in a number of matters at the Federal Energy Regulatory Commission that will have a critical impact on Pennsylvania electric consumers.

Distribution System Reliability - Most customer outages occur at the distribution level Many of these outages can be avoided through effective maintenance practices. I have a growing concern that this essential component of local reliability requires closer attention. My Office, along with the IBEW, supported stronger distribution reliability standards than those adopted by the Public Utility Commission pursuant to our restructuring legislation. We have continued to press for stronger standards. The settlement of the recent PECO-Unicom merger included improved distribution system standards as one of the conditions for merger approval. We are also proposing similar improvements as a condition of the current GPU/First Energy merger. This is not just an academic concern about statistics and data reporting. I am sure the union representatives here will tell you that maintaining the reliability of the electric distribution system is a difficult and dangerous job. I urge you and the Public Utility Commission to continue to monitor this important issue.

Efficiency and Reliability through Demand Side Response Programs - Finally, we must give consumers greater control over their electric usage and electric bills through what are generally called demand side response programs. These programs improve reliability, by enabling consumers to reduce demand at peak hours. At the same time, these programs can lower bills for all consumers by reducing system demand at the times when the costs of purchasing power are the highest. This is especially important in an energy market like PJM which relies on a single market clearing price that is determined by the highest accepted bid.

It is a well-established principle that resource diversity is one way to improve reliability by reducing risk. Demand-side response improves resource diversity. Demand-side response can be cost effective, particularly in our current situation where wholesale electric prices are slowly but steadily rising. In addition, demand-side resources can be used to reduce the need for upgrades to both transmission and local distribution systems.

The PUC, under the leadership of Commissioner Fitzpatrick, recently initiated a working group to examine how demand-side resources can be reasonably used to improve reliability and prices. I hope you will support this process. Also, PJM is developing a demand-side pilot designed to relieve and even avoid emergency conditions. Again, PJM's work should be supported.

One critical component for customers is the ability to reduce costs through conservation when prices are high. Only a relatively small number of consumers have access to real-time prices and the ability to respond. Large customers, with sophisticated metering equipment, are in the best position to respond to these types of programs first. However, even residential customers can benefit from programs such as those implemented by PJM companies in Maryland that offer customers a discount on their bill if they are willing to allow the utility to cycle down their air conditioners through radio signals for short intervals during peak periods. I hope to see these types of programs offered by suppliers throughout the PJM territory.

Conclusion - I said earlier that we can't operate on blind faith that markets will provide all of the requirements of our complex and vital electric grid. I think you in this Committee need to periodically monitor electric system reliability. I think you should ask us to come before you as frequently as necessary so that you can be confident, on behalf of your constituents, that the Pennsylvania electric restructuring program is still on the right track. We owe it to the citizens of Pennsylvania to avoid the first of California's mistakes, namely, not paying attention.

Thank you, again, for giving me the opportunity to speak to you today. I would be happy to answer any questions you may have at this time.




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