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 alternative marketers.)

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 customers.

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.