TESTIMONY BEFORE THE PENNSYLVANIA SENATE
CONSUMER PROTECTION AND PROFESSIONAL
LICENSURE COMMITTEE REGARDING
UPDATE ON NATURAL GAS DEREGULATION
My name is Sonny Popowsky. I am the Consumer Advocate of Pennsylvania.
Thank you for the opportunity to appear before this Committee on the issue of
competition in the natural gas industry in Pennsylvania.
This is the second time that I have had the opportunity to testify before
this Committee on the issue of retail competition in the natural gas industry.
When I testified a little over a year ago in May 1997, I stated that I did in
fact believe that residential customers could benefit from greater natural gas
competition. I immediately added, 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 worse off than they are under the present regulated system."
Now that more than a year has passed since my last testimony, my position
has not changed. I still see some potential savings for consumers from greater
competition, but I also submit that care must be taken to ensure that all
consumers actually benefit from these proposed changes.
I and other members of my Office have participated actively in the
stakeholder process that has been led by Chairman Quain regarding the possible
passage of natural gas legislation. While that process has not produced any
consensus proposal for presentation to the General Assembly, I don't think the
process has been a failure. What the stakeholder process has produced, I think,
is a greater understanding among the parties regarding their disparate positions
as well as a greater appreciation of the difficulties in achieving consensus on
natural gas legislation. These difficulties have even been greater than the
problems that were faced by the stakeholders in the electric restructuring
process in 1996.
I think there may have been a belief at the beginning of this process that
it might be easier to move forward on natural gas legislation because many
comparable issues already had been addressed in the preceding electric
legislation process. In fact, the opposite has been true.
I think there are two reasons for the greater difficulty in moving forward
with natural gas as opposed to electric legislation in Pennsylvania. First, the
starting points from which we approach electric and gas legislation are totally
different. Second, the relative benefit/cost ratios that parties face as a
result of changes in the two industries are much different.
First, with respect to the industry starting points, I think it's fair to
say that the natural gas industry in Pennsylvania already is halfway or maybe
even three quarters of the way to where the proponents of competition were
trying to move the Pennsylvania electric industry in 1996. Prior to the Electric
Choice Act of 1996, Pennsylvania's electric utilities were vertically integrated
monopolies. That is, they were responsible not only for the distribution and
transmission of electricity, but also for the generation of the power they sold
to their customers. Unfortunately, some of the generation that had been built or
purchased by our electric utilities was very expensive and uneconomical, and
this in turn led to great disparities among Pennsylvania electric rates. It also
led to rates for some of our utilities that were far above the national average.
Many people thought that this situation could be corrected, at least in the
future, if the generation portion of the electric industry were opened up to
competition. Consumers would no longer be forced to buy the high priced power
produced by their local distribution utility but could instead shop for less
costly, but equally reliable, competitive power supplies.
In the natural gas industry, however, Pennsylvania consumers already
receive many of the competitive benefits in the purchase of the gas commodity
that electric consumers had previously been denied with respect to the electric
generation commodity. For the most part, our local gas distribution utilities do
not produce their own gas, but purchase their gas for the benefit of their
customers in a competitive interstate and intrastate gas market. Larger
industrial and commercial customers in Pennsylvania have actually long had the
option of purchasing gas for themselves and paying the local gas distribution
companies only a "transportation" fee. These large customers therefore are
already in the position with respect to natural gas purchasing that they sought
to achieve in electric legislation. Even smaller gas customers receive some of
the benefits of competition indirectly, because gas utilities are purchasing
their gas in a competitive gas supply market and are required under Pennsylvania
law to obtain reliable supplies under a least cost gas procurement policy that
is reviewed each year by the PUC.
Additionally, many residential customers of our natural gas utilities in
Western Pennsylvania already have the ability to choose alternative gas
suppliers through voluntary programs initiated by Peoples, Equitable, Columbia,
and National Fuel Gas Companies. It is my understanding that participants in
these programs have seen lower bills, but it is not yet clear to me how much of
those savings are due to lower gas prices and how much are due to the avoidance
of gross receipts tax. (Under Pennsylvania law, gross receipts tax is only
charged on natural gas sales from local distribution companies, not from
The question then is not whether we should allow competition in the supply
of natural gas in Pennsylvania. We already do. The question is whether consumers
would benefit if all Pennsylvania local distribution companies were required to
allow all of their customers to choose their own natural gas suppliers. Again,
my answer is yes, I would like to see all Pennsylvania gas consumers have that
choice, but only if protections are in place to ensure that no customers are
harmed by this change.
This brings me back to my second point of comparison between electric and
gas competition in Pennsylvania. That is, the relative benefit/cost ratios that
are likely to result from restructuring legislation.
Prior to the 1996 electric legislation, we had what I think was an
unsustainable situation in Pennsylvania. Some consumers were paying twice as
much for electricity as their neighbors down the road, including some large
commercial and industrial customers who were being put at a severe competitive
disadvantage as a result of high electric rates that were due in large part to
billions of dollars of excessive generation costs that might not have been
incurred in a competitive electricity market. The costs to all Pennsylvanians of
retaining the previously existing electric regulatory system and the benefits of
a move to a competitive generation industry were perceived in 1996 to be
enormous. At the same time, it was possible to craft legislation that
substantially reduced the risks and costs of electric restructuring through such
provisions as rate caps, universal service support, and specific prohibitions
against cost shifting on stranded costs.
In the natural gas restructuring debate, it is my perception that the
margin of benefits is narrower because, as I noted before, there already is
competition in much of the gas supply market. Thus, it is more difficult to
demonstrate substantial savings or other benefits that will result from
legislation. At the same time, numerous parties perceive real increased risks of
going forward with legislation. I am concerned, for example, that without strong
rate cap language, some consumers will pay more in the future if stranded costs
are shifted to customers who choose not to shop. I am also concerned that
"supplier of last resort" service be maintained at an affordable, reasonably
priced level. Each of the other stakeholders has expressed a number of other
concerns that appear to be equally important to them.
When we combine a narrowly perceived set of benefits and a highly
developed set of risks and costs, it is difficult to produce the kind of
compromise that the stakeholders in the electric restructuring process were able
to present to the General Assembly in 1996.
This issue is made even more complex because of the gross receipts tax
issue as well as the fact that a large portion of Pennsylvania gas consumers are
served by the municipally-owned Philadelphia Gas Works. By contrast, in the
electric legislation, municipally-owned companies were limited to a number of
relatively small boroughs and taxes were charged on a similar basis to all
You have a distinguished list of speakers here today who can give you
their perspectives on what various segments of the natural gas distribution,
marketing and supply industries think is necessary or appropriate for
legislation in Pennsylvania. From the perspective of residential consumers,
however, my goal remains the same. That is, to seek out the benefits of
competition in those aspects of utility service where competition can do a
better job than regulation in protecting and advancing the interests of
consumers; but at the same time to recognize that on the coldest day in
February, Pennsylvania gas consumers are far more concerned about keeping their
homes warm at reasonable costs than about economic theory. I look forward to
continuing to work with the members of this Committee, the General Assembly, and
other interested parties in developing principles for natural gas restructuring
that best serve Pennsylvania consumers.