TESTIMONY OF IRWIN A. POPOWSKY, CONSUMER ADVOCATE OF PENNSYLVANIA

REGARDING S.B. 601: DEREGULATION OF THE NATURAL GAS INDUSTRY

CHAIRMAN BELL AND MEMBERS OF THE SENATE

CONSUMER PROTECTION AND PROFESSIONAL LICENSURE COMMITTEE

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 and, in particular, on the terms of Senate Bill 601.

I have testified at both of this Committee's prior hearings, in 1997 and 1998, on retail natural gas competition and I also was an active participant in the collaborative stakeholder process of affected industry participants that attempted to provide consensus legislative language for consideration by the members of the General Assembly. That process was led by Public Utility Commission Chairman Quain and former Commissioner Hanger last year and more recently by Chairman Quain and Commissioner Wilson. I want to commend all of these Commissioners and their staffs for their tireless efforts to bring disparate parties together in an attempt to craft legislative language that the members of this Committee and other members of the General Assembly could consider in arriving at a balanced legislative package.

Obviously, as you can determine from the range of testimony that you will hear at today's hearing, the stakeholders were not able to achieve complete consensus on the issues that we discussed. It is not my intent to downplay any of the concerns that you may hear from witnesses who did not support the draft that has been substantially incorporated in Senate Bill 601. I do intend, however, to state why I believe that SB 601 -- particularly when it is coupled with the proposed elimination of the gross receipts tax on natural gas utility customers -- represents a reasonable compromise that will benefit consumers as we transition to a more competitive natural gas industry.

As I reviewed my notes from the last meeting of this Committee on this issue, one message came through loud and clear from the Committee members and particularly from the Committee Chairman. That message was that we must not jeopardize the reliability of service to natural gas customers, particularly during the cold Pennsylvania winter months. In my view, SB 601 strengthens, rather than weakens the reliability obligations of the local gas distribution companies as well as the Commission's authority to ensure that those obligations are met. The Bill calls for each natural gas distribution company to file annual reliability and supply plans to ensure that all of the peak day and seasonal requirements of all customers can be met. The Commission must review and approve such plans for purposes of reliability and supply as part of each company's annual natural gas cost review.

Of equal importance to me, the Bill does not deregulate the price of natural gas that will be charged by local gas distribution companies to those customers who continue to purchase gas from those companies. Rather, the Bill keeps in place the requirements of Section 1307(f) of the Public Utility Code under which local gas distribution companies have an obligation to secure gas supplies for their customers consistent with a least cost procurement policy and the Commission has an obligation to review those costs on an annual basis. While the Bill maintains the possibility that an alternative supplier of last resort may serve such customers in the future, that can only occur with the approval of the Commission and only after the Commission promulgates regulations to ensure that the rates charged by any alternate supplier of last resort are just and reasonable. Thus, whether or not competitive market suppliers provide less expensive or more desirable gas supply services, residential gas customers will retain the ability to purchase gas from their local distribution company or an alternative supplier of last resort at rates that will remain subject to regulation by the Public Utility Commission.

It might be tempting to try to "jumpstart" competition, by allowing the local distribution companies to raise gas prices above their cost-based regulated levels in order to allow new competitors to come in and "beat" those prices for those customers who are willing to shop around. But as we are already learning in the electric industry in Pennsylvania, it is not likely that all, or even a majority of residential customers will immediately switch to competitive suppliers or that all competitive suppliers will immediately begin to serve residential customers. Just as we imposed long-term rate caps on the generation rates of our electric utilities to protect non-shopping customers, SB601 continues the protection of regulated purchased gas cost rates for customers who either choose to stay or who are forced to stay with their current natural gas provider.

In addition, if the General Assembly eliminates the gross receipts tax on natural gas sales, it will effectively reduce the rates of all current local gas distribution customers by five percent and will eliminate the discrimination that is applied to those customers under current Pennsylvania tax law. As you know, the only gas customers who pay gross receipts tax today are those customers who buy gas from their local gas distribution companies. Customers who buy gas from unregulated marketers do not pay gross receipts tax on any part of their gas bills. By eliminating this tax altogether, the General Assembly would end this unfair discrimination and would allow all customers to choose their gas supplier without having to take into account this artificial tax advantage.

By adopting legislation, the General Assembly would also end the current situation in which customer choice is only provided to customers of those companies who choose to make such programs available. This legislation would require all companies to allow customer choice and would properly move the restructuring decision process from the utilities to the Public Utility Commission. In addition, all gas distribution companies would be required to implement consumer education programs and to file universal service and energy conservation programs to help low income customers pay their bills and save energy. I believe this was an extremely important provision of our electric restructuring legislation and must be a part of any future gas restructuring as well.

The bill also would require the licensing of all natural gas suppliers as well as requiring consumer protections on such matters as termination of service, price disclosure, and "slamming", or the unauthorized switching of gas service suppliers. Today, we have "pilot" natural gas choice programs in some or all of several gas service territories, but we have no coordinated consumer education efforts and no generic regulations on such matters as price disclosure requirements or slamming.

While it would be easy to change this legislation in ways that would increase competitive opportunities for natural gas suppliers, I would strongly urge you to reject any proposals that would simply shift costs from shopping customers to non-shopping customers. As I have testified before on both telephone and electric issues, there are no competitive benefits to Pennsylvania when the "costs" of competition are simply shifted on to customers who are the least likely to be offered any real competitive choice.

In conclusion, I think that Senate Bill 601 fairly addresses the needs of Pennsylvania gas consumers in a manner that preserves the overall reliability and integrity of the natural gas system. The Bill would give our Commission the clear legislative authority to require customer choice for all currently regulated local distribution companies and to have licensing oversight over all retail natural gas suppliers. The Bill is designed to prevent cost-shifting onto non-shopping customers and, if coupled with the elimination of the gross receipts tax, would end a long-standing discriminatory impact upon consumers who buy gas from their local distribution companies.

I would be happy to answer any questions you may have at this time. The resources of my office will, of course, remain available to you and your staffs as you continue your deliberations on this important legislation.