Thank you for the opportunity to present some of the SCC Staff's views on environmental issues, energy efficiency opportunities and consumer protection measures related to the restructuring of the electric industry.
Last November, the Staff presented to the joint subcommittee a draft working model for restructuring Virginia's electric utility industry. Chapter six of the report supporting the draft working model dealt with environmental issues, including energy efficiency measures. Our basic recommendations on these matters have not changed. Let me briefly review those recommendations.
Environmental Issues
The primary environmental issue related to electric industry restructuring is the effect upon air quality. It is impossible to determine the precise impact of restructuring upon air quality because of all the variables involved. Some argue that there will be at least a slight deterioration in air quality because competitive forces will create economic pressure to use low cost generation regardless of environmental consequences. This, however, should be tempered by existing environmental regulations, such as the Clean Air Act, and new regulations, such as the EPA's recent mandate of a significant reduction in nitrogen oxides.
Because air pollution knows no boundaries, states are limited in effective options for mitigating the impact of electric restructuring upon air quality. A cohesive national policy on air quality has been and will continue to be required. State by state air quality legislation could be confusing and could be used by some states to promote economic development by having reduced standards from adjoining states.
The most commonly suggested options for state legislatures or regulatory agencies to help improve the environment during restructuring are emissions standards, renewables standards and environmental disclosure rules.
The setting of emissions standards would require all electricity suppliers to verify their fuel and emissions rates. If a supplier did not meet a pre-determined standard, it would not be allowed to sell its power in Virginia. This type of standard would be very difficult to monitor and enforce.
A renewables standard would require that a certain percentage of renewables be used in the generation of electricity to be sold in the state. This also would be difficult to monitor. In addition, we have never had a renewables requirement in Virginia, a transition period to competition does not seem like the time to begin such a mandate.
Environmental disclosures are intended to provide customers information that can be used in making a decision on energy choices. Each supplier would detail its fuel use and emissions rate. Unlike the emission standard previously discussed, there would not be a benchmark that must be attained. The disclosures would allow a comparison of the environmental quality of the power available for sale.
The concept of an environmental disclosure rule is attractive. However, it may be very difficult to accumulate and verify meaningful information. For instance, it is likely that the fuel mix and emissions rate for the previous year would be used since the data cannot be gathered instantaneously. This may not be useful information for a power marketer that frequently changes its resource supply.
There is one type of power marketer that should be required to verify its fuel use and emissions rate. These are the marketers of energy touted to be environmentally friendly, often referred to as "green power." Marketers of green power generally charge a premium on the energy they sell to environmentally conscious consumers. Either the SCC or some other agency should be responsible for monitoring and verifying the energy source of green power marketers to prevent fraud.
Other than monitoring green power, the Staff does not recommend any additional environmental measures related to restructuring. The Commission would continue to consider the quality of the environment in its decisions regarding the siting of transmission lines and generating facilities.
Energy Efficiency
The efforts of electric utilities to use energy efficiently fall into two broad categories. Conservation programs result in a reduction in the usage of electricity and load management programs cause a shift in usage that allows generating units to be used more efficiently. Conservation and load management are collectively referred to as demand side management, or DSM. The SCC has long promoted the cost-effective use of DSM.
Throughout the country the use of DSM programs by electric utilities has declined in recent years. There are several reasons for this. A measure of the cost-effectiveness of DSM is the expenses the utility will be able to avoid by reducing the need for additional generation facilities. New technologies in gas-fired generation have lessened the cost to build generation, thus reducing the costs that can be avoided and making it harder for DSM programs to be cost effective. In addition, utilities' planning horizons have shrunk from the 15 to 20 year outlooks of the past. Now utilities are reluctant to commit capital until absolutely necessary. DSM programs generally require a long pay-back period. Also, competitive pressures have caused utilities to focus on keeping the price of power as low as possible, which eliminates some DSM programs.
Declining conservation and energy efficiency programs could have a detrimental affect upon the environment. An option some advocate to raise money for the promotion of DSM and other societal programs is a systems benefits charge. Such a charge would be added to all sales through the regulated distribution system.
The Staff does not recommend a systems benefit charge at this time. We think it is advisable to see how competition develops in the energy services markets. If the competitive market sends improved price signals, perhaps DSM programs will flourish. Also, one of the recognized benefits of competition is innovation. New products and services related to energy efficiency may be introduced without government intervention.
Consumer Protection
The ultimate consumer protection measure is seeking to assure that consumers will not be made worse off from moving to competition. If competition causes rates to increase or reliability to decrease it cannot be considered successful.
A critical issue that must be addressed is the potential for market power abuse by investor-owned utilities. These vertically integrated electric companies currently control virtually all of the transmission and generation facilities within their service area. Until effective competition has developed, this control may allow the incumbent utility to charge monopoly prices for electric service.
There are two consumer protections essential to preventing market power abuses. First is the provision of an extended cap on rates for customers of incumbent utilities that do not choose an alternative supplier. The second is the retention of some form of regulation over generation assets. Both the rate cap and jurisdiction over generation should remain until an objective finding is made that sufficient competition has developed to effectively replace regulatory protections.
Restructuring will require the development of other consumer protection measures. Provisions and rules must be established for a provider of last resort to ensure universal service.
A licensing or registration process for competitive energy providers should be developed to ensure financial viability and technical capability.
Standards of conduct should be developed to address a number of issues including:
fair marketing and advertising practices,
resolution of consumer complaints,
prevention of unauthorized switching,
consumer fraud protection,
protection against misuse of customer information,
rules governing billing and collection, and
rules concerning disconnections and late payment fees.
For standards of conduct to be meaningful, they must be backed up by adequate enforcement measures, which might include license revocation and/or financial penalties.
It is impossible to list all of the consumer protection measures that may be necessary in a restructured industry. As competition develops, potentials for abuse may occur that we have not yet considered. For this reason, Staff recommends that flexibility be maintained in developing standards of conduct and consumer protection measures.