SJR 91

Joint Subcommittee Studying Electric Utility Industry Restructuring

August 18, 1998, Richmond

The joint subcommittee met to discuss consumer, environment and education issues generated by Virginia's move toward retail competition. Representatives of consumer (residential, business and industrial), low-income, senior citizen, environmental, weatherization, and local government groups testified before the joint subcommittee about their concerns falling within these three topics. Additionally, utility and other energy supplier representatives, together with the Virginia State Corporation Commission (SCC) and the Office of the Attorney General, presented their views.

SCC and the Office of the Attorney General

The joint subcommittee received comments from the staff of the SCC and from the Office of the Attorney General's Division of Consumer Counsel. The associate director of the SCC's Division of Retail Regulation noted that a competitive retail market for electric power will develop at its own pace. Consequently, the deregulation of generation assets alone will not ensure competition sufficiently robust to warrant eliminating regulatory price protections. Consequently, the SCC staff recommends two essential consumer protection measures: imposing a rate cap and retaining state jurisdiction over generation assets until it is determined that replacing regulation with competition is justified by competitive market conditions.

The Division of Consumer Counsel advocates a complete examination of consumer, environment and education issues, such as the type of restructuring education information disseminated, methods of payment for such education, potential licensing of aggregators to ensure consumer protection, and requirements for detailed billing that will provide fair and full disclosure.

Consumer Groups

Virginia Citizens Consumer Council (VCCC)

Since Virginia's study of restructuring began nearly three years ago, consumer groups have continued to question the likelihood of benefits to residential and small business utility customers. The theme was revisited by a VCCC representative, who cited a restructuring report prepared for the Consumer Federation of America. The combination of industrial customer clout and incumbent utility market power in a restructured market could easily result in substantial utility price increases to consumers due to (i) significant cost-shifting to residential customers, (ii) an increase in utility transaction costs, (iii) price abuses resulting from incumbent utility market power, and (iv) stranded cost recovery.

The VCCC representative emphasized that all customer classes should have access to a competitive retail market at the same time, and that retail competition should be made contingent upon the development of an effectively competitive generation market prior to deregulation. The VCCC supports universal service, subsidized electric service for low-income households, and customer aggregation as a means of boosting residential customer purchasing power.

The VCCC recommends establishing a per-kWh-based public benefits surcharge (assessed at the generation level) to help establish a fund devoted to furnishing low-income households financial assistance with their electricity bills. Eligibility and assistance levels could be based upon household "energy burden" —the percentage of household income spent on energy costs. The spokesman emphasized the need for specific consumer protection against unauthorized switching of electricity providers and other fraudulent activity—such as the electricity pyramid schemes that have been uncovered in California (a state opened to retail competition earlier this year). She also recommends that post-restructuring electric service be made subject to the provisions of the Virginia Consumer Protection Act.

American Association of Retired Persons (AARP)

The AARP joined the VCCC in supporting universal service and a guaranty of affordability. An AARP representative told the joint subcommittee that energy costs are significant to Virginia's senior citizens. Among low-income older families, energy costs consume an average of 17.5 percent of household income—a much higher percentage of household income than that spent by the non-elderly.

The joint subcommittee was given copies of an "unbundled" Boston Edison electricity bill for a Massachusetts electricity customer. The bill contained eight different components and corresponding charges for such categories as generation, distribution, transmission, and energy conservation. Savings from competition for this customer were limited to those realized in reduced generation costs only (and then only $1.50 on a total bill of $52.69, according to the AARP representative). This potential for confusion, according to the AARP, underscores the necessity of intensive consumer education prior to the inauguration of retail competition in Virginia.

Virginia Council Against Poverty (VCAP)

The issue of electric service affordability was continued in a presentation by VCAP, which joined VCCC and AARP in proposing a consumer benefits surcharge to provide energy subsidies to low-income individuals and families. Subsidizing low-income households would simply continue existing public policy through a different means, according to a VCAP representative.

He explained that Virginians currently support low-income households' electricity usage through the current regulated rates structure. Rates set by the SCC include the additional costs utilities incur in serving lower-income households. These extra costs include administrative costs associated with low-income customer credit issues, together with servicing and collecting overdue and delinquent accounts—a common phenomenon since many low-income households' electric bills exceed 20-25 percent of household income (in contrast to five percent for median income customers).

VCAP advocates establishing a consumer benefits charge to provide low-income subsidies and to fund weatherization, energy conservation, environmental efforts, and consumer education. VCAP would like to see electric energy furnished to economically disadvantaged customers at a price somewhere below the current regulated price of electricity. VCAP also urged the joint subcommittee to consider including provisions in any restructuring bill it develops that would support customer aggregation, thereby permitting aggregators to compete effectively with industrial and large commercial customers.

VCAP also stressed the importance of preparing low-income households for restructuring through consumer education efforts targeting them. Such a program would be mandatory and publicly administered; its costs could be covered through a transition charge paid by all electricity customers. Virginia's community action agencies and similar public agencies with ties to this population could provide this necessary outreach.

Virginia Poverty Law Center

A representative of the Virginia Poverty Law Center told the joint subcommittee that Virginias' low-income electricity customers want rate reductions, not "choice." Moreover, customers in this category are unlikely to be aware of their options; they may be unable to protect themselves in a competitive market for utility services. He drew a parallel to telephone deregulation, citing studies from Michigan and Massachusetts that showed that many of the low-income households surveyed were unaware of the type of telephone service they were receiving; were unaware of rate affordability programs available to them (e.g., Lifeline service); and, in many cases, were unable to identify their long distance carriers. The law center representative characterized this group as a vulnerable market segment. He advocated restructuring legislation provisions establishing discounted electrical rates, special winter disconnection rules, prohibitions against redlining and other special consumer protections for low-income households.

VMH, Inc.

A consultant to VMH, Inc., also expressed his support for systems benefits charges. The most direct means of providing energy assistance to Virginia's lower-income households, he said, is through a consumption-based wires charge, or surcharge on Virginians' electric bills. He estimated an annual need in Virginia of approximately $54 million for rate discounting, energy efficiency assistance and crisis assistance. He added that this sum could be generated by adding a 70-cent surcharge on each Virginia electric customer's monthly bill and that many states with restructuring plans in place have made some provision for low-income energy assistance. Eligibility for the public benefits program could be linked to a low-income household's "energy burden" relative to net income—a method supported by the VCCC, VCAP and the Virginia Poverty Law Center.

Alliance for Lower Electricity Prices Today (ALERT)

ALERT, a coalition of large commercial and industrial electricity consumers, told the joint subcommittee that restructuring cannot take place by legislative fiat and is not a one-time decision. ALERT's representative testified that ALERT advocates effective competition as soon as practical, suggesting that the process begin by enacting legislation establishing timetables, principles and a framework for retail competition. Effective competition, according to ALERT, will result when the following five issues have been successfully addressed: (i) market power, (ii) stranded costs, (iii) reliability, (iv) deregulation of assets, and (v) fail-safe protections.

Apartment and Office Building Association (AOBA)

In written remarks pre-filed with the joint subcommittee, an AOBA representative advised the joint subcommittee that from the viewpoint of consumer protection, any effective program for restructuring must first deal with market power. Failure to resolve this issue, he said, will prevent effective retail competition in Virginia. Citing federal deregulation of telecommunications, aviation and commercial trucking, he emphasized that deregulating any service without effective competition guarantees that consumers of that service will not benefit from it and will likely be adversely affected.

Virginia Municipal League (VML)

In pre-filed testimony, a VML spokesman told the joint subcommittee about VML's current role (together with the Virginia Association of Counties) in purchasing electricity for many of Virginia's local governments during the past 25 years. In that vein, VML is examining aggregation strategies developing in other states to determine what role, if any, Virginia's local governments should play in purchasing power for their residents. VML believes that residential and small business aggregation offers a great opportunity to realize benefits otherwise unavailable to individual electricity customers.

Environment and Weatherization Groups

Southern Environmental Law Center

The Southern Environmental Law Center, headquartered in Charlottesville, believes that electric utility restructuring could result in environmental harm. The most significant problem, according to a center staff attorney, is restructuring's potential impact on air pollution. Restructuring could result in a competitive environment biased toward older power plants, which emit two to ten times the level of key pollutants as similar new plants. Higher emissions levels associated with these plants are the result of exemptions in the federal Clean Air Act, which impose less stringent emissions standards on plants built prior to 1977.

The attorney also expressed concern that a competitive market will result in a shorter-term focus, eliminating energy supplier interest (and investment) in energy efficiency and renewable energy. He cited Virginia Power's reduction of its planned energy savings by more than 90 percent as an illustration of utilities' current focus on promoting increased electricity use, rather than its conservation. The center believes that Virginia should undertake restructuring only if it improves Virginia's environment and the health of its citizens. It recommends that the joint subcommittee examine several key environmental issues, including comparable environmental standards for all generation; fuel type and pollution disclosures; funding for energy efficiency and renewable energy; and environmental performance incentives which would remain regulated after restructuring.

Association of Energy Conservation Professionals (AECP)

The Weatherization Assistance Program (WAP) brings energy efficiency to Virginia's low-income households through weatherization. AECP represents contractors who supply the weatherization services funded by WAP. WAP's statistics show that in 1997-1998, over 2,000 low-income households were weatherized, resulting in 38,000 Mbtu of energy saved, and 1500 tons of carbon reduction.

WAP receives funding from the U.S. Department of Energy (DOE), the Low Income Home Energy Assistance Program (LIHEAP), and—recently—from General Assembly appropriations. However, federal DOE funding is dwindling, and LIHEAP has been targeted for elimination in some quarters of Congress during recent budget discussions. Consequently, future funding for WAP could depend on Virginia's adoption of a systems benefits charge for weatherization and other energy efficiency programs.

Utilities and Other Energy Suppliers

Representatives of Virginia's electric utilities and other energy suppliers also furnished their views on consumer, environment and education issues. For the Virginia Maryland and Delaware Association of Electric Cooperatives, the issues of competitive generation and environmental concerns are intertwined. The association chairman told the joint subcommittee that nearly one-third of the cost of Old Dominion's (a supply cooperative) $1.2 billion coal-fired Clover plant, built in Halifax County in the early 1990s, is devoted to pollution control technology. He expressed concern that a competitive market will demand the "lowest cost" power—power generated by older, dirtier plants that do not have to meet the requirements of the federal Clean Air Act.

The cooperatives also expressed concern about potential consumer detriment generated by the formation of independent system operators (ISOs), noting recent price spikes in power sold via the PJM ISO during periods of uncongested transmission. According to an association representative, Old Dominion, until recently an active participant in the proposed Alliance ISO, has now withdrawn its participation, due to concerns about the problematic nature of ISO independence, structure and conflicting interests among transmission system owners.

A spokesman for Allegheny Power (currently involved in Pennsylvania restructuring as a pilot program participant) told the joint subcommittee that her company supports establishing a comprehensive customer education program to help consumers understand how to choose a generation provider. Allegheny Power also supports a universal service fund to ensure that low-income customers are able to pay for essential services. The fund would be supported by a systems benefit charge payable by all energy users.

Consolidated Natural Gas (CNG), also participating in the Pennsylvania market, supports a consumer education program using public funds and coordinated by the SCC. CNG also supports locality aggregation as well as the continuation of the LIHEAP program, funded through a non-bypassable wires charge, if necessary. Washington Gas similarly advocates the continuation of LIHEAP and other public outreach programs. According to a Washington Gas spokesman, his company's experience in residential and commercial pilot programs (some of which have exceeded maximum capacity), demonstrate that consumers want and value choice.

Virginia Power agrees with the positions of VCCC, AARP and other consumer groups concerning the need for guaranteed access to affordable power. Virginia Power recommends the adoption of its EnergyShare fuel assistance program as the statewide universal service program to which all electricity suppliers could contribute. EnergyShare currently solicits voluntary contributions from Virginia Power customers to help pay the energy costs of lower-income Virginians. Company statistics show that during the 1997-1998 heating season, donations exceeding $1.2 million provided energy assistance to 18,000 individuals.

Virginia Power also supports low-income programs such as LIHEAP, suggesting that costs associated with this program be recoverable through a wires charge over the life of the program. According to a spokesman, the company also advocates (i) licensing for all energy suppliers in a restructured market, (ii) an independent consumer education program supported by a public benefits charge, (iii) funding for renewables, energy efficiency and conservation, funded by public benefits charges, and (iv) public benefits charge-funded retraining, outplacement services and other unemployment benefits for utility workers displaced by restructuring.

Future Subcommittee Activities

The joint subcommittee will convene its next meeting in Roanoke on September 23 at the Hotel Roanoke, beginning at 10:00 a.m. The joint subcommittee will receive comprehensive reports from the Structure and Transition Task Force, and from the Stranded Costs Task Force.

The Honorable Jackson E. Reasor, Chairman
Legislative Services contact: Arlen Bolstad