VMH, Inc. is a non-profit corporation with offices in Virginia Beach, Richmond, Winchester and Christiansburg. The company serves the elderly, disabled and low to moderate income population in Virginia through its two divisions. The Housing Development Division provides construction and rehablilitation of single family and multifamily residences. The Energy Management Services Division administers the Weatherization Program to the low income population in 19 counties of Virginia as well as provide energy efficiency and mechanical contracting to a wide variety of clients. (Show Charts #3 & 4)

The DOE Weatherization Program was created to increase energy efficiency and thus reduce the burden of energy costs to low income households. Virgina's Weatherization Program has led the nation in advanced diagnostics for energy reduction. (Show Chart #5)

In the Summer of 1995 the National Association of Regulatory Utility Commissioners (NARUC) passed a resolution urging FERC and the States, when implementing restructuring to protect low-income customers. Let Virginia Restructuring Legislation lead the way for the recovery of "stranded benefits" for the low-income, residential and small business consumers.

II. Virtual Restructuring and Cost Shifting

Virtual restructuring is already occurring before legislation. Large corporate customers are making deals with utilities for discounts or threatening to pull out of their service territory, Economic Development Programs are making deals with rate offerings to attract other large corporate customers. Somehow these costs must be shifted, absorbed, or subsidized. In response to threats by Raytheon to leave Massachusetts, the electric utility offered discounts of 20% and more for five years, with lower discounts being offered in subsequent years.

In Michigan, in 1995, Consumers Power Company raised electric rates for its residential users by 8.2% while lowering rates for the industrial users by an average of 4.2%. Like Raytheon, the large industrial consumers such as General Motors and Dow Corning got rate cuts of up to 20%.

In California, after legislation, an estimated $28 Billion worth of utility debts and obligations will be repaid by different ratepayer classes. Small ratepayers will pay 40% of the costs even though they derive only 33% of the benefits from the power plants and contracts. If they paid 33% they would pay $2 billion less. (R. Smith, Mercury News, June 8 97)

The consulting firm MSB Energy Associates in Wisconsin has developed a mathematical model to estimate cost-shifting to residential customers. In Iowa they found that if stockholders recover all costs, and industrial customers get a free ride, then residential customers will see almost a 4% increase in their electric bills. (R. Colton, Dollars & Sense, Jan\Feb 97)

Transition Costs are another concern. Last month the Electric Power Research Institute Director told us about the new administrative and technological improvements that will be required in the transition to a competitive electric industry. He spoke of the OASIS and FACTS systems, new hardware and software for marketing and tracking, upgrading transmission lines for voltage security, all of which involves a significant amout of technology and labor. One thing seemed quite odd after hearing all of that, no one asked him what those costs estimates would be or how they would be paid for. In California, a Competition Transition Charge (CTC) could potentially lead to cost-shifting to the residential and small business classes. (Show Overhead # 7) Transition Cost shifts are already occuring with staff and program cuts, maintenance cutbacks, and office closings. I observed a pattern in the 10+ years I worked for American Electric Power. The people who came to the office monthly to pay their bills were the elderly, disabled and low income customers who could not afford stamps, they can not afford to have a checking account and have to paid in cash, or they are on the brink of being disconnected. Over 40% do not even have telephones to call in with questions or make payment arrangements. Let's recognize that Transition Costs for competion are already a burden on the backs of those who can least afford it.Shouldn't utilities like other competitive entreprenuers have to raise capital or use retained earnings to finance their positioning?

III. Affordability

Low-income Virginian's would be placed in a hardship if any additional costs are shifted to their already tight budgets. American households spend more of their income for electricity than for all other residential energy resources combined. For low income households the average electricity expenditure was $607 from an average income of $10,048. (Eisenberg, et al. 1994)

(Show Chart #6)

This chart shows electricity expenditures and total energy expenditures relative to household income. Electricity expenditures typically represent 60 to 65% of total energy expenditures.

Low income households spend a higher percentage of their income on electricity despite the fact that they use on average almost 20% less electricity than median income households.

Therefore, useage reduction alone is not going to bring their bills to the point where the percentage of their income dedicated to the electric bill is manageable. Their rates must be reduced, so that their bills can be reduced. A mechanism to assure affordability is the Percentage of Income Payment, (PIP). With PIP, the customers average bill over a period is calculated, the percentage that this bill represents of the customers' income is determined and the reduction necessary to bring the bill down to the target affordable percentage is calculated into a monthly credit to be applied to the bill each month. The affordable percentage dollar level is, in effect the customers copay requirement. Paying the copayment consistantly is a condition to participate in the program. The reduction in the rate is applied as a non-changing credit each month. This places the proper economic signal on the customer for prudent electricity useage. Ohio has a PIP Program in place for natural gas at 10% and electricity at 5% of the household income for those customers within the poverty guideline.

IV. Equal Access to the Market

It is important that restructuring legislation provide affirmative steps with enabling language and mechanisms to ensure effective small customer aggregation The legislation adopted in California through carefully crafted language, proposed by the utilities, makes it almost impossible, very expensive, and problematic to aggregate small consumers. A significant barrier to small consumer aggregation is information . Metering for various power components as well as time-of-use is the key. Metering can be expensive and unavailable to low-income consumers unless a mechanism is established for provisioning. Specific load profile information of the end use is critical to assembling a power purchase at the best price. In the New England Power Pool, power factor and frequency modulation will be offered as separate products to industrial customers.

In Australia, market niches are developing to compete for back-up power and spinning reserve on very small time increments. Given metering, load profile and tarriff information, residential, small business and low-income consumers can realize significant savings. Virginia Power currently has an alternative residential tarriff with a demand charge and time-of-use rates. AEP has an Experimental and Load Management tarriff for thermal storage. The number of customers using these tarriffs is very small. The question to ask is WHY? The utility has no obligation to tell the customer what rate would be best for them, nor should they, there are too many variables in lifestyles and loads. It will still be more important HOW people use energy than WHO they buy it from.

V. Stranded Costs and Stranded Benefits

Just as there are good arguements for recovery of "stranded costs" for the utilities, there are also good arguements for the loss of "stranded benefits" to the consumer. At risk is the leveraged funding from the utilities for energy efficiency, safety and education programs. Consumers too, have equity in "the old system". The coin is not one sided. If securitization is necessary to lift the burden of inefficient or unmarketable power plants for the utilities on the supply side, then securitization refinancing of the inefficient, unmarketable housing and commercial stock on the demand side should occur. This can compliment revitalization efforts in enterprise zones and enhance economic development. Look at the public outcry and litigation in Pennsylvania for passing a one sided deal. (Show Overhead # 8)

VI. All Fuels Approach Funding

The major energy suppliers are forming affiliated companies to offer both electricity and natural gas. Marketers are interested in selling commodity to load, offering one form of energy to get access to sell the other. A mechanism such as a "wires charge" on the commodity of electricity could be limiting and entice load shifting avoidance. Restructuring legislation should be broadened to an all fuels approach with a non-bypassable all fuels consumption charge. This would distribute an equitable cost to all fuels consumed and affect less contribution from more sources. In Ohio, there is current litigation to level the playing field and regulate propane to bring it into the fold with a consumption charge.

VII. Administration of Energy Efficiency and Education

The core business of the utilities, historically speaking, has been to provide energy supply. They have proven to society and shareholders that they can do this responsibly and profitabily. In the 1980's utilities were required to develop a new set of business skills to do Integrated Resource Planning and Demand Side Management. The industry never had any market incentive for this activity. In light of the new competitive environment, utilities claim they need to reduce their commitment to these programs and retreat has already begun to occur in Georgia, Michigan and New York.

Energy efficiency and demand side management programs are valuable to society. A study by Oak Ridge National Laboratories in 1989 showed a favorable cost-benefit ratio of 1.6 for the Weatherization Program which has served over 4.4 million homes with leveraged state and utility funds. Meanwhile, many non-profit organizations, community action agencies and energy service companies have a long history of energy efficiency as a core business with the mission to serve social needs. Utility restructuring should not jeopardize these valuable social programs.

A robust competitive energy market place should be designed to enhance the quality of life and service to the whole spectrum of infrastructure, suppliers, traders, marketers and consumers.

This can be accomplished with existing entities, doing what they do best. Local Distribution Companies of the incumbent utility can be the collecting agent of the fuels charge. The Virginia Department of Housing and Community Development, is well suited to develop and administer energy efficiency and education programs as they do so successfully now.

In closing, the needs of Low-Income Virginian's may be unique, therefore, I am enclosing papers that outline various methodologies to assist in the development of effective legislation.

This concludes my presentation and I thank you for the opportunity to speak to you today.

Mary Ann Capp
VMH, Inc.
August 12, 1997