Summary of Comments on Narrative Restructuring Plan

Steven E. Winberg
Director, Energy Policy
Consolidated Natural Gas Company

Task Force on Structure & Transition
Wednesday, August 12, 1998

Thank you for providing CNG with the opportunity to participate in this Task Force meeting.

Rather than review CNG's written narrative that we submitted to staff on June 30, I would like to make a general observation and recommendation based on our participation in electric restructuring in several states and then discuss some specific structure and transition issues that have formed the basis for consensus in other states.

At the initial meeting of the Task Force on May 7, a suggestion was made to define structure as the end-state and that this Task Force should focus on determining what electric competition should look like once the Commonwealth transitions from regulated utility service to competition. With the end-state decided, the Task Force could focus on the transition to get to this end-state.

I thought that was a very good suggestion and I still do, but what has also become clear is that defining the end-state in something more than broad, theoretical terms is probably not possible and determining exactly how to get to this theoretical end-state may be equally challenging.

Since this Task Force initially met just three short months ago, events have occurred that have changed people's perception on both the end-state structure and the transition. While some marketers are pulling out of wholesale and retail markets others are just as quickly entering these markets. We have seen unprecedented electricity price swings of 300% over the course of a few days with millions of dollars lost or gained. And we have seen electric utilities begin to implement vastly different strategies with vastly different views on their future roles. Some utilities are purchasing generating stations, while others are divesting of their generating assets. Some utilities are implementing plans to sever their business tie with retail electric customers and look towards marketers as their new customer. Other utilities are taking just the opposite view and want to compete head-on with marketers, offering competitively priced electricity. In short, we are seeing wildly varying views on not just the end-state but also on how stakeholders plan to transition to that elusive end-state.

It has become clear to CNG that legislation cannot anticipate all the vagaries of an industry in change and therefore must remain broad enough to let the evolving market work and still protect consumers. The Commission has had the historical responsibility to manage the balance between utility needs and consumer needs. CNG strongly believes that during the transition period, the Commission must be charged with maintaining balance. The fundamental difference is that the balance that must be maintained now includes the needs of new market entrants. The Commission must be given the authority to manage the transition and must be given enough flexibility to make mid-course corrections where needed. When a correction is needed, the Commission is the place where stakeholders should go for resolution. This is a role that the Commission has experience with and they have processes and procedures in place that can begin to address these corrections. What needs to be added to the Commissions role is the ability to resolve issues in a timeframe that is more in-line with a competitive marketplace than with a regulated marketplace. Expedited processes and procedures will allow for a much smoother transition to competition and consumer savings.

As we have worked on restructuring in other states, this role for the Commission has become a reoccurring theme and I am beginning to hear the same theme here in Virginia.

Supplier of Last Resort.

Supplier of Last Resort is defined differently by various stakeholders. CNG defines this entity as having the responsibility for supplying those customers that cannot find a supplier, those customers that do not exercise choice and those customers whose supplier fails to deliver their electricity to the distribution system. Others define the Supplier of Last Resort as the entity that just supplies those customers that cannot find a supplier and then separately defines the two remaining functions. The entity that supplies those customers that do not exercise choice becomes the Default Supplier and the entity that serves those customers whose supplier fails to deliver becomes the Backstop Supplier.

As a practical matter, how would you ever determine whether a customer could not find a supplier or simply chose not to choose. Will customers be inclined to admit that no one wants them? Certainly if I could not find a supplier that wanted me as a customer, I wouldn't admit it for fear of being put into a high risk customer class that no one wanted.

As a public policy matter, is it a good idea to differentiate between those two customer segments? Would you not have to ensure that there was no price discrimination between these two segments?

And as a business matter, many marketers believe that they can fulfill these three functions at a lower cost than utilities but only if the three functions are combined so that there is some economy of scale and balance of customer segments.

While CNG does not know if these functions can be performed less expensively in a competitive market, we do believe that legislation should not preclude the possibility. We also believe that, at the beginning of the transition process, the utility should maintain the responsibility for these three functions -- priced at a Commission approved rate to protect consumers and to set a benchmark for competition -- but the Commission should be given the responsibility of periodically assessing the potential for these functions to be competitively bid.

Rate Freeze/Reduction

CNG believes that a rate freeze or rate reduction will have a chilling effect on competition and that it sends false price signals to the marketplace. If the utility maintains responsibility for the Supplier of Last Resort at the beginning of the transition process and this function has a regulated price, then a rate freeze or rate reduction is not necessary to protect the consumer. Consumers can elect not to choose and fall into the Supplier of Last Resort category with a regulated price.

Unbundling vs. Deregulation

CNG believes that unbundling is a necessary first step before deregulation can occur. For competition to work, the marketplace must know what is being charged for a given service. Without price clarity, there can be no true competition and without competition there should not be deregulation. For example, deregulating generation does not need to occur to have competition. What does need to occur is to unbundle the price of generating electricity from the price of transmitting and distributing the electricity so that the customer can make an "apples-to-apples" comparison between offers. Once there is sufficient competition to protect the consumer, then and only then, should deregulation occur.

CNG believes that generation should be unbundled first and that the Commission should be charged with determining the other services and functions that could be competitively bid and determining when they should be unbundled. Our experience has demonstrated to us that the timing of unbundling services and functions varies between utilities and that a legislated schedule for unbundling non-commodity services and functions will not work.

Customer Choice

All customer classes or segments must be allowed to participate and benefit from savings due to competition. Phasing-in customer choice by customer class may put additional transition cost burdens on those customer classes that are the last to exercise choice. Rather than phase-in by class, if a phase-in is needed to achieve an orderly transition, participation should be on a first-come-first-serve basis across all customer classes. For example, Pennsylvania legislation initially allowed 1/3 of each customer class to choose beginning in 1999, the second third in 2000 and the final third 2001. It is worth noting that Pennsylvania legislation also allowed the Commission to accelerate the phase-in and under the current schedule, two thirds of Pennsylvania customers can exercise choice in January of 1999.

In addition, some cost efficiency can be gained because usage patterns vary by customer classes. For example when residential use is peaking in the evening, industrial and commercial use may be low. Marketers may be able to aggregate various customer classes to create a reasonably flat load profile over a 24-hour period and reduce some of the costs associated with buying electricity during peak periods.

Market Power

CNG is a new entrant into retail electricity sales and is concerned about the potential for market power abuse but we are also a gas utility that has seen the issue of market power develop into a forum for arguing that costs should be borne by utilities and their marketing affiliates that are not equally borne by non-affiliated marketers.

While CNG is concerned about market power abuse in generation and transmission, I would like to focus my remarks on retail sales.

Market power is different from market power abuse. Utilities have market dominance or market power simply because of their incumbency. Even in a completely competitive environment, someone is always going to be a market leader. Someone will always have a better mousetrap. Customer choice is not about eliminating market dominance, but rather about providing opportunities for competitors to offer customers an alternative. This task force must guard against legislation that seeks to overcome a perceived market power problem that may simply be customer apathy. We do not believe that adding requirements that impose cost to utilities and their affiliates will overcome customer apathy and result in sustained competition or customer savings.

Rather, legislation should focus on eliminating market power abuse by requiring sufficient separation to achieve two objectives. First, there should be no sharing of information between a utility and its affiliate that it is not willing to share with other marketers. Second, there should be no subsidization by utilities of their marketing affiliates. To go beyond this level of separation will likely lead to costs imposed on utilities and their marketing affiliate that are not incurred by non-affiliates.

Monitoring and control of market power abuse should be left to the Commission and the Commission should impose penalties when market power abuse is proven.

In addition, while most of the concern about market power abuse has been focused on utilities and their affiliates, other types of market power abuse may arise as mergers and joint ventures occur between the wide range of new entrants that may decide to participate in energy choice. Legislation cannot anticipate the entire breadth of market power issues that may arise in the future and therefore must authorize the Commission to monitor the market and take corrective actions where necessary.

Summary

Predicting how electric competition will evolve, how customers will react to choice and how the industry will eventually be structured is anyone's guess and I am confident that everyone involved in this process has a little different opinion on the array of issues facing this Task Force. But as I mentioned earlier, there does appear to be a reoccurring theme.

The legislation needs to be specific enough to begin the process of customer choice but broad enough to accommodate the changes that will most certainly be required as everyone climbs the competitive learning curve and there needs to be an entity with the responsibility and authority to make the needed mid-course corrections. CNG believes the best place for that responsibility to lie is with the Commission.

Thank you.