TESTIMONY OF IRWIN A. POPOWSKY, CONSUMER ADVOCATE OF PENNSYLVANIA

REGARDING STATE PROGRESS IN RETAIL ELECTRICITY COMPETITION

BEFORE THE UNITED STATES

SENATE COMMITTEE ON ENERGY AND NATURAL RESOURCES
May 25, 1999

As the state-authorized advocate for utility consumers in Pennsylvania, I am pleased with the progress we have made to date in our electric restructuring program. As a result of the state- specific rules that were implemented under our Pennsylvania restructuring legislation, consumers are generally protected against rate increases and cost shifting. Universal service programs to assist low-income consumers also have been greatly expanded. At the same time, Pennsylvania consumers are beginning to take advantage of benefits provided by alternative generation providers in the form of lower prices and choices in the type of generation service they receive. As of April 1, 1999, three months after the commencement of full-scale retail electric competition in Pennsylvania, nearly 400,000 Pennsylvania consumers, including more than 300,000 residential customers, were being served by alternative generation suppliers. Problems have arisen in the course of the Pennsylvania restructuring process, and mistakes have been made. I am optimistic, however, that the process we have begun will continue to provide benefits to Pennsylvania consumers in the future.

The progress we have made in Pennsylvania would not, in my opinion, have been assisted by a federal mandate telling the states when and how to implement retail electric choice programs. Nor is it clear that the approach taken by Pennsylvania would be appropriate in other states, particularly those states that have substantially lower existing electric cost structures. Different issues and different priorities have been and will continue to be addressed in each state's consideration of electric restructuring. States should be permitted to continue to examine the results of electric restructuring in states like Pennsylvania and determine for themselves whether and when a transition to greater retail electric generation competition would be in their respective states' overall best interest.

While the federal government should not mandate retail competition by any date certain or dictate the terms of such competition in the states, Congress should act to address certain issues that must be resolved at a regional, national, or North American level. Specifically, Congress should enact legislation that would authorize an independent North American Electric Reliability Organization to ensure the reliability of the bulk power system subject to review by the Federal Energy Regulatory Commission. In addition, Congress should ensure that the FERC has adequate authority to ensure open, fair and non-discriminatory access to transmission facilities, including authority to establish regional transmission organizations. FERC also must have adequate tools to deal with market power problems that are beyond the ability of individual state public utility commissions to address.

In sum, states are making substantial progress in pursuing their respective visions of how to restructure their states' electric industries. Congress should not impose unnecessary federal mandates on states' retail competition efforts, but Congress should take action to ensure that the reliability of the bulk power system is preserved and that the FERC has adequate authority to address regional transmission and market power issues.

Thank you for the opportunity to testify before this Committee regarding the progress of the states on retail electric competition.

My name is Irwin Popowsky. I am the Consumer Advocate of Pennsylvania and I am the immediate past president of NASUCA, the National Association of State Utility Consumer Advocates. I also serve as one of two consumer representatives on the Board of Trustees of the North American Electric Reliability Council (NERC).

The Pennsylvania Office of Consumer Advocate is a state office whose role is to represent the interests of the consumers of Pennsylvania before state and federal regulatory agencies, courts, and legislative bodies in matters involving Pennsylvania utility services.

Over the last few years, the work of my Office, like the work of many state consumer advocate offices around the Nation, has been dominated by the legislative debate and regulatory proceedings surrounding the restructuring of the electric industry.

As I'm sure you are aware, Pennsylvania was one of the first states to move forward with full-blown retail competition for the provision of electric generation service. Today, the great majority of Pennsylvania residents and businesses are free to choose their own electric generation supplier. By January 2, 2000, nearly all Pennsylvania consumers will have that choice.

More importantly, Pennsylvanians have begun to show that they are actually interested in taking advantage of that choice. By the end of the first three months of the Pennsylvania electric choice program in 1999, nearly 400,000 of Pennsylvania's residential, commercial and industrial customers were receiving electric generation service from someone other than their own traditional electric distribution utility. I have attached to this testimony a set of statistics compiled by my Office setting forth the number and percentage of customers and customer load of each major Pennsylvania electric utility that was being served by alternative generation suppliers as of April 1, 1999. As you can see from the last page of those charts, the percentage of Pennsylvania utilities' residential customer load being served by alternative suppliers ranged from a low of 1.4% to a high of 14.49%. For commercial and industrial customers, the percentage of load being served by alternative suppliers ranged as high as 50% to 75%.

My own view, though, is that the success or failure of an electric restructuring program is not measured by the number of customers who have switched from their former utility supplier. The question from my perspective is whether consumers as a whole have benefitted from their state's electric restructuring program. In Pennsylvania, I think consumers have benefitted. We have seen about $450 million in guaranteed rate reductions for the year 1999 and we have seen prospective funding for low-income universal service and energy conservation programs increase to nearly $100 million per year. Perhaps most significantly, we have implemented long-term caps or ceilings on the rates that can be charged by our existing utilities to customers who continue to buy generation from those utilities. Some of these rate caps last as long as 10 to 12 years in the future. What this means is that while all customers may have the opportunity to see lower prices as a result of competition in the future, even those customers who stay with their utility will be protected against any rate increases. These rate caps effectively prevent the shifting of stranded costs from customers who depart from traditional utility service onto those customers who remain.

In terms of customer choice, residential consumers in Pennsylvania can buy from at least one alternative provider that is offering lower-priced generation service than the incumbent utility in most of our service territories and customers can select at least one "green" power product (albeit typically at higher prices than the incumbent's) throughout Pennsylvania. The savings that residential customers can obtain from switching at this time range from about 2% to 10% off their monthly bills, depending on the utility and the level of usage.

Have we made mistakes in Pennsylvania? Absolutely. While I'm sure several utilities in Pennsylvania would disagree, I think, for example, that the manner in which we set stranded cost allowances and unbundled rates in Pennsylvania will likely lead to an overrecovery of stranded costs by those utilities that do not divest their generation resources. I also think that in retrospect, the method in which we phased in electricity choice in Pennsylvania may have created more problems than it solved. The jury is still out, in my opinion, on whether we will achieve a fully competitive, robust retail market for all residential consumers in Pennsylvania anytime soon.

Overall though, it's my opinion that Pennsylvania consumers are better off under the detailed terms of the 84-page legislation that became our Pennsylvania restructuring law than we were under our pre-existing Public Utility Code. I am pleased with the progress we have made to date and I am optimistic that our efforts will continue to benefit Pennsylvania consumers in the future.

Would Pennsylvania have been even better off if we had been under a federal mandate to establish retail competition by a certain date? I think not.

More importantly, what about those states that have not yet taken the steps that already have been taken by states like Pennsylvania? Should they be ordered by the federal government to open their retail generation service to competition by a date certain? Based on my own views and on my many discussions with my fellow state consumer advocates from around the country, I think again the answer is no.

It is not a coincidence that electric competition legislation moved forward first in states like Pennsylvania and California, with higher than average electric rate structures and particularly higher than average embedded electric generation costs. States like Pennsylvania concluded that monopoly regulation of electric generation plants had not produced optimum results and that competition at the retail level among electric generation providers (but not among providers of natural monopoly distribution services) would better serve the public interest.

It is not at all clear, however, that consumers in all states, particularly residential consumers in low-cost states, would benefit from a rapid transition to retail generation competition. In my opinion, these states ought to be permitted to continue to do exactly what they are currently doing. That is, looking at the results in states like Pennsylvania and California and determining for themselves whether and when a transition to greater retail electric generation competition would be in their respective states' overall best interest. Certainly, these states must retain the ability to protect consumers from rate increases or other potential adverse results that could occur if restructuring is not carried out in a manner that fully accounts for that state's specific interests.

In an often-quoted passage, Justice Brandeis wrote that: "It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country." As in any laboratory, some of the electric restructuring experiments that are being conducted around the country are not achieving their anticipated results; others have been considered more successful. In any case, I think states are better served by following the results of these experiments and moving at their own pace, than by being required to meet a one-size-fits-all federal mandate to open full retail competition by some arbitrary date certain.

Having stated my opposition to a federal mandate of retail competition, let me hasten to add that this does not mean that I am opposed to any federal legislation at this time; nor does it mean that I believe that states would not benefit from federal legislation in a number of areas that will enhance their ability to implement successful retail competition programs in their states.

Specifically, I would actively support proposed federal legislation to create an independent North American Electric Reliability Organization to ensure the reliability of the bulk power system subject to review by the Federal Energy Regulatory Commission (FERC). I believe it is important to spell out in such legislation the preservation of state authority over certain critical reliability issues within state borders, but I think it is essential at this time to move forward with federal legislation that addresses regional, national, and North American reliability issues in a comprehensive manner.

I also would support legislation that would enhance the ability of FERC to ensure open, fair and non-discriminatory access to transmission facilities, including authority to establish regional transmission organizations which may be necessary to support either wholesale or retail competition. FERC must also have adequate tools to deal with market power issues that are beyond the authority of individual state public utility commissions to address. These tools should include the ability to require mitigation of market structures that could lead to market abuses outside the context of a merger case.

In other words, a homeowner in Pittsburgh is probably indifferent to whether a dry cleaner in Toledo or an office building in New York has access to competitive retail generation. That Pittsburgh resident is not indifferent though, if an Ohio utility is using its monopoly bottleneck transmission resources to block a low-cost power transaction from entering Pennsylvania; the Pittsburgh resident is also not indifferent if a rolling blackout that starts in New York rolls across the Pennsylvania border.

In short, I don't at all question the need for federal action in critical reliability and transmission areas that affect the interstate power grid in ways that are beyond the states' jurisdiction and ability to address. I do question, however, the need for federal legislation with respect to retail electricity issues that traditionally and for good reason have been determined by the states. Once you conclude, as I think you must, that the distribution of electricity at the local level shall remain a monopoly function generally regulated by the states, then the question of whether, when, and how the customers of such regulated distribution entities obtain access to competitive generation sources is a matter that can be determined by the individual states without doing harm to the principles of interstate commerce.

The title of this hearing is "State Progress in Retail Electricity Competition." I believe about 20 states have now enacted retail electric choice legislation and another 20 or more are actively considering the issue. In its own way, I am sure that each of these states believes it has made "progress" on this issue, even if our "progress" may be leading us in somewhat different directions. No two state statutes that I've seen have been identical. Some states have focused on maximizing immediate rate cuts, while others have given priority to maximizing the immediate spread of competition. Some states have paid particular attention to promoting indigenous or renewable natural resources, while other states have more fully addressed the concerns of low- income consumers, labor, or economic development interests. My own approach has been to try to maximize competitive opportunities for all customers, but at the same time seek to ensure (through rate caps, universal service programs, and prohibitions against cost shifting) that no customers are made worse off as a result of electric restructuring.

In short, I would respectfully submit that you are asking the right question in the title of this hearing; that is, how are states progressing in their electric restructuring efforts? And you have implicitly raised the corollary question of: what can Congress do to advance that progress? My answer to the first question is that the states are making substantial progress in pursuing their respective visions of how to restructure their states' electric industries. My answer to the second question is to respectfully urge Congress not to take actions that impose unnecessary federal mandates on states' restructuring efforts, but to take strong and prompt action to ensure that the reliability of the bulk power system is preserved and that the FERC has adequate authority to address regional transmission and market power issues.

Thank you for the opportunity to testify before this Committee. I would be happy to answer any questions that you may have at this time.

PA Electric Shopping Statistics