Senator Reasor and members of the SJR91 Joint Subcommittee, I am Jean Ann Fox, Vice President of the Virginia Citizens Consumer Council. We appreciate this opportunity to present a comprehensive consumer protection, information and education proposal for restructuring the electric utility industry in Virginia.
Impact of Restructuring on Residential Consumers
At your last meeting, we shared a report by Dr. Mark Cooper issued by Consumers Union and Consumer Federation of America titled "The Residential Ratepayer Economics of Electric Utility Restructuring." Dr. Cooper was unable to be here today to discuss his findings, but I would like to repeat his conclusions.
Realistic efficiency gains from electric restructuring are in the 5 to 15% range. In other words, enthusiastic supporters of retail choice who promised up to 40% rate cuts have grossly overstated actual experience. These modest cost savings from competition are likely to be more than offset by the potential costs of competition which will be borne by residential ratepayers.
Restructuring actually raises some costs. Efficiencies of integration are lost. The introduction of competition into the electric industry will itself result in new, additional costs for system management and new facilities. Marketing to attract customers also imposes new costs that are unknown to monopoly providers. Transaction costs could increase the total bill paid by consumers in the range of 10 to 20 percent.
Second, when competition is introduced into former monopoly industries costs are shifted between customer classes. Residential customers who have little bargaining power are likely to be forced to pay a higher share of costs with potential increases in the total bill paid by consumers due to cost shifting in the range of 10 to 20 percent.
Third, we cannot assume that electricity markets will work well, especially in Virginia with market power and transmission constraint problems. Pricing abuse resulting from market power could raise total prices to consumers in the range of 10 to 20 percent.
Fourth, stranded cost recovery, unique to electric restructuring, could increase the total costs to consumers in the range of 5 to 10 percent if recovered over a 5 to 15 year period.
Any one of these pressures on costs would more than off-set any efficiency gains for residential consumers, which is why VCCC believes that the General Assembly must take a pro-active approach to consumer protections. (See Cooper report recommendation attachment.)
In our view, consumer protection is much broader than preventing slamming or regulating disconnects. Virginia lawmakers must set in place the legal and regulatory framework to mitigate market power and produce an effectively competitive generation market prior to deregulation, ensure reliability and an adequate safe supply of electricity, and ensure universal service, including bill-paying assistance for low-income households. Net stranded costs must be mitigated, accurately valued, and shared by stockholders. In addition to addressing these threshold issues, the General Assembly must lay the ground rules for protecting consumers now and in a competitive electric market in the future.
Residential Customers Don't Have Market Clout
Electricity is a necessity for residential ratepayers. There is low elasticity of demand for electricity. In other words, consumers will pay more than they can afford to keep electricity flowing. There are no close substitutes for electricity. Individual consumers have little bargaining power in this market. And, given the gap between the promises and the reality of restructuring in other industries, consumers have no confidence that they will be better off after the electric industry is restructured.
Residential Customers Must Not Be Left Out
All classes of customers must have access to the competitive retail market at the same time. VCCC is very distressed that some participants in these discussions are calling for retail choice only for industrial customers with residential customers admitted at some future date. Offering retail choice to large customers only is fundamentally unfair and will likely harm excluded customers.
This scenario fosters predatory pricing and makes captive customers underwrite utility marketing programs. It makes it harder to monitor cross-subsidization. Predatory pricing injures competition. Utilities in Virginia are permitted to use special rates for large customers and to offer real-time pricing. Restricting choice to large customers can also harm the environment, since small customers are usually more interested in purchasing electricity from renewable resources.
We recognize the logistical challenge to opening the electric market to all classes of customer at the same time. The solution, if the General Assembly decides that a restructured market is in the public interest, is to select a start date that is feasible. We all know that "the big dog eats first." The very least you can do is permit the "little dogs" a place at the table. If a phase-in plan is necessary, then all classes of customers should be phased in together.
Affordable Electric Service for All Virginians
Universal service is a term which includes the goals that service should be widely available (e.g., that no geographic area should be without service) and affordable (that rates for all customers are just and reasonable and that lower income households are able to purchase the service.)
The National Association of Regulatory Utility Commissioners' Policy Statement: "Because electricity service is vital for health, safety, and economic opportunity, universal service is a cornerstone of the public interest. Customers are entitled to access to reasonably priced power and to a forum for dispute resolution." Policymakers in Virginia should expressly declare that quality electric service must be available to all customers at just, reasonable and affordable rates in a restructured electric market.
Universal service should be defined as the availability to all Virginians of a reasonable level of electricity service at prices that do not strain household budgets or result in excess profits for electricity suppliers, or result in subsidies for large customers. A basic service package of firm electric services for all customers, whether urban or rural, should include a block of kilowatt hours sufficient to provide lighting, refrigeration, heating, and cooling as determined by the Commission. The basic package should be offered at a price that does not vary by time of day or season and has no associated administrative fee or fixed fee. Low-income customers should have access to payment programs (such as levelized payment plans), targeted energy conservation and weatherization programs, and special rate structures such as lifeline rates.
Just and reasonable and affordable rates for all electric customers.
Affordability is not simply a low-income consumer problem. Current regulation is required by law to produce rates that are just and reasonable. A move to more competition should not leave residential customers in a worse position than that under current rate base, rate of return regulation.
Prevent cost shifting to residential customers.
Residential and commercial markets are more demand inelastic than large customers. This creates an incentive to raise prices (increasing total revenues) and to resist price reductions (lowering total revenue). Industrial markets are more highly elastic, so a price increase will reduce revenue and a price decrease will increase revenue. Therefore, a deregulated supplier seeking to increase total revenue will raise residential rates and lower industrial rates. Legislation and Commission oversight is needed to ensure relative fairness between customer classes. Large disparities in quality or cost of service are not acceptable.
Protect all ratepayers.
There should be non-discrimination within customer classes, with red-lining explicitly outlawed. Electric suppliers should be prohibited from declining to provide service to customers for the reason that the customers are located in economically distressed. To prevent outright discrimination against lower income households and neighborhoods, every supplier should be required to offer service to every customer within its chosen service territory. This is what "obligation to serve" means in an open market.
Electric utilities must have an obligation to connect all customers to electric service providers of the customer's choosing. In other words, the monopoly distribution company must have an obligation to serve all customers through a legal duty to connect all retail customers in its service area to energy service providers of the customers' choosing at reasonable rates and under reasonable conditions.
Provide for universal service support for low-income consumers.
Competitive markets do not serve all customers well. Markets allocate goods and services based on a consumer's ability to pay and tend to increase prices and provide poorer service to consumers who have little economic power. Low-income households use less electricity than average, have limited ability to shift their usage to off-peak periods, and can be more costly to serve. Unless we put protections in place, market forces will drive competitors to either avoid low-income consumers or provide poorer service at higher prices.
Virginia does not have a lifeline electric program to help low income consumers pay for a basic level of service. Virginia should establish a funding mechanism to pay for all programs intended to achieve universal service, including bill payment plans, weatherization, and low-income energy efficiency programs. A similar universal service program is well established at both the state and federal level for telecommunications.
The funding mechanism should be a competitively neutral uniform assessment on all electricity suppliers including co-generators collected and managed by the Independent System Operator, which will have a count of every kwh sold in the state. The universal service wires charge should be imposed at the generation level, not distribution. Otherwise, industrial customers and some large retailers who take their power at transmission voltage will avoid support for universal service. It would be ironic if the only class of customers to benefit from restructuring were permitted to escape responsibility for assisting the customers most disadvantaged by restructuring.
Since Virginia does not have a public universal service fund or low-income energy assistance program, we do not have the information needed to measure the need for electric discounts and the geographic distribution of customers who need help affording electric service. When Virginia established the telephone universal service rate, Virginia Tech conducted a study to find out the parameters and causes of the problem. The Taskforce on Consumer Protection should commission the same type of fact-finding.
Legislation establishing a universal service fund should also set up a method of evaluating success at improving universal service over time. Roger Colton, an expert on low-income programs, recommends that utilities report to regulators on five objective performance criteria: (1). The frequency of service terminations; (2). Customer compliance with deferred payment agreements; (3) money at risk, or the utility's financial exposure to nonpayment of bills; (4) customers in arrears and not part of a payment plan; and (5) weighted arrears, reflecting the size of monthly residential bills and indicating the extent to which residential service lies in jeopardy of termination.
Provider of last resort for each area of the state.
One provider must have the responsibility as provider of last resort or default provider. In geographic areas where no suppliers choose to serve, regulators must have the authority to name a default provider to ensure al customers have access to continuous and reliable service. The default provider does not have to be the incumbent utility. The default provider must offer service comparable to service offered today at regulated rates that are just and reasonable and no higher than rates today.
Aggregation of residential and small commercial customers.
We fear that competition for residential customers will occur in name only. The experience in California and other states where major companies are withdrawing from the residential market underscores that fear. Restructuring plans must ensure that residential customers have access to choice, such as by requiring new market entrants to serve both residential and commercial customers. Another way to ensure that residential customers will get both universal service and the lowest competitive price for electricity is through aggregating consumers to increase their purchasing power. Participation by any retail customer in a municipal or group aggregation program should be voluntary. Aggregation models should not carve out low-income consumers as a separate group. There are a variety of ways to foster aggregation.
Municipal aggregation such as Massachusetts' Community Choice Plan permits citizens of a municipality to vote in a public referendum or by city council vote, to form a "public aggregator," which will purchase electricity on behalf of all consumers within a municipality's jurisdiction. Community Choice is voluntary, with any consumer having the right to opt-out of the pool. Through public aggregation, consumers can form a large buying group to get lower rates for electricity than would be available to individuals. Public aggregators are publicly accountable through elections, open meeting laws, fair bidding laws, and conflict of interest rules. In Massachusetts, Community Choice municipalities were given the option of recovering the money utilities normally collect from ratepayers for energy efficiency programs, enabling communities to design and implement programs more suited for their citizens and avoid the utility's substantial fees for program operation. The current electric utility continues to own and maintain the distribution system, read meters and do billing. The municipality only negotiates the terms and provisions of the power supply contract on behalf of its citizens.
State government can facilitate aggregation. In Connecticut, the state Office of Policy and Management is required to operate a purchasing pool for the purchase of electricity for state facilities and to provide an opportunity to participate in the purchasing pool to each household that includes an individual who receives means-tested assistance administered by the state or federal government. Any such household receives the same benefits and discounted rates as state facilities do in the purchasing pool. The Commonwealth of Virginia could make it a condition for bidding on its power needs that electric service providers submit competitive bids for the power needs of all participants in the state's first-time homeowners program, and subsidized housing programs, all LIHEAP customers, and nonprofit organizations providing health, housing, job-training and other social services to low income consumers under contract with state or local governments.
Other models of aggregation include for-profit and non-profit corporations subject to SCC jurisdiction. Customers can form co-ops to act as an aggregator for electric service. Vermont has a consumerco cooperative program. Other forms of aggregation include biddable franchise, buying clubs, and affinity groups.
Consumer Information and Education
Competitive markets depend on informed consumers. Consumers who have had no experience in shopping for electricity as a commodity will need information and education services to understand the changes in the electric market, to make informed decisions, and to understand electric bills and services.
The SCC should encourage the development of materials to enable consumers to make effective choices, including standardized information on price, quality and features for comparison-shopping. The SCC will need rules for delivery of bills and billing information, including frequency of bills, standardized format and detail. A parallel experience in the telephone market showed that private payphones caused great confusion. The Commission issued uniform pay phone signage standards to reduce complaints and consumer confusion.
To prepare the public for the restructuring of the electric market, outreach efforts must be conducted, including general advertising and community-based outreach by independent non-profit or public groups. This effort should tell the public what services will be competitive, how to choose or change suppliers and where consumers can get answers to questions and complaints. Consumers will need objective information on which to base service and pricing choices. The SCC should monitor the effects of education efforts, using surveys and company audits.
Customer Service Relationship
The SCC's twenty-year old order on customer service rules should be replaced by a set of standardized requirements. Legislation should require the SCC to adopt and enforce rules for the customer relationship with utilities and non-utility electric service providers.
Dispute Resolution
Legislation should require and Commission rules implement standards for complaint intake, investigation, resolution and redress mechanisms for each electric provider, including a toll-free telephone contact number. In addition, the SCC must have the authority and funding for centralized consumer complaint appeal process. A cooling-off period is needed to permit consumers to cancel contracts to purchase electric service.
Reliable Service
Electric service reliability should be at least as high under competition as it is today. Reliability standards should apply to all entities who contract for or sell electricity. The electric network is too integrated and too vulnerable to allow substandard transactions. The Commission must retain jurisdiction over the reliability of local distribution.
CONSUMER PROTECTION
Regulation of electric service goes beyond setting just and reasonable rates. The Commission has exercised its general authority to govern the transaction between the company and its customers. Consumer protection laws should be updated to apply to all companies in the restructured electric market in a competitively neutral manner.
Regulation of all sellers.
The goal must be to protect consumers without erecting unnecessary and expensive regulatory barriers that would dissuade new entrants from entering the Virginia market.
SCC licensing and certification of all sellers, with minimum standards for reliable delivery of electricity covering normal operating performance, outage and repair and business office performance, and bonding and penalties for failure to deliver or to meet marketing and reliability standards. All service providers should be required to serve all customers in their chosen service area. All companies should demonstrate their technical, financial and managerial capabilities to provide the services for which they request certification.
All electric suppliers must be required to have toll-free telephone service, to notify customers of its dispute procedures, and to report customer service problems to the SCC. The Commission recently proposed a regulation to prohibit local telephone companies from disconnecting local telephone service for failure to pay long distance and other charges. Parallel protection will be necessary for electric service.
Protection Against Fraud, Unfair and Deceptive Acts and Practices
Competition will be accompanied by deceptive advertising, unfair and abusive trade practices. This happened when the long distance market became competitive and companies began "slamming" customers with unauthorized switches of providers. The newest abuse is "cramming" unauthorized fees and charges onto local telephone bills. Several local telephone companies were accused of packing customer bills with unauthorized extras, such as Call Waiting and Call Forwarding. Confusion about service offerings made it easy to overcharge customers. By anticipating the likely results of restructuring electric service, Virginia can prevent harm to consumers.
The National Association of Attorneys General issued a consumer alert last November to warn about "power scams" that may zap U. S. consumers. The president of NAAG warned that the impending deregulation of electric power may trigger an even greater wave of abuses than those that accompanied long-distance telephone deregulation. The Attorneys General warned that con artists will try to take advantage of this new opportunity with misleading promotions, deceptive advertising and outright fraud.
The California Attorney General filed suit earlier this year against an electric service provider engaged in a "pyramid" scheme to sell electricity. The company collected hundreds of dollars from consumers without having any electricity to deliver. Other abuses include companies that market "green" power which meet no requirements for that environmentally-friendly label.
All entities in the electric market should be subject to the same consumer protection laws as other competitive businesses. This can be accomplished either by removing the public service company exemption in the Virginia Consumer Protection Act or incorporating VCPA parallel language in the utility code section and in legislation to restructure the industry. Enforcement should be by the State Corporation Commission, the Attorney General, the Office of Consumer Affairs/VDACS, and private right of action. The SCC should be authorized to adopt regulations to provide greater specificity in prohibiting unfair and deceptive trade practices.
Privacy protection for information about billing, payment history and consumption patterns. This data is an extremely valuable commodity to marketers. Consumers must have control of any personally-identifiable information. Additional information about a customer for marketing purposes should not be released to any electric supplier unless a customer signs a release. No customer information should be provided to a third party without specific written permission of the customer.
Jean Ann Fox
114 Coachman Drive
Yorktown, VA 23693
757-867-7523