Commission Watch

While electric restructuring pauses, telecom pushes forward.
Fortnightly Magazine - February 15 2003

State PUCs Show Split Personality



While electric restructuring pauses, telecom pushes forward.

No matter which way they turn, state public utility commissions (PUCs) have their work cut out for them.

While federal policy-makers push ahead with wholesale market reforms in the electricity sector, many at the state level now call for a cautious approach to protect consumers.

The same does not appear to be true in the area of telecommunications local exchange service. Although much-publicized statements by federal telecommunications regulators signal a possible shift away from network rates aimed at encouraging new market entrants, state regulators see possible benefits to consumers if a competitive telecommunications market is allowed to mature. Regulators in Kansas tout the significant number of competitors in that state's telephone market, and in Pennsylvania, utility commissioners brag about the success of an outreach program designed to educate consumers about alternative carriers.

However, at the same time, electric market watchers in Ohio, Oregon, and Virginia warn that moves to further deregulate electric service might harm customers rather than help them, especially in the residential sector. The lack of competitive entrants in retail power markets is the most glaring defect. But at the same time, consumers seem alarmed by the recent power market crisis and by troubles associated with the marketing of competitive telephone services and, in Oregon, wary of potential marketing practices and gimmicks.

FCC Plan Alarms PUCs

In January, Federal Communications Commission (FCC) Chairman Michael Powell announced that he was considering a proposal allowing telecommunications local exchange carriers (LECs) to increase prices for network services provided to competing carriers. Regional phone companies have long maintained that the services they must provide to competing carriers are priced too low and that, as a result, some of today's competitive activity is artificial and harmful to regulators' long-term goal of promoting true facilities-based competition.

Stock prices for Bell carriers rallied on the news but fell back the following day as brokerage group UBS Warburg downgraded its investment recommendations on Verizon Communications Inc., SBC Communications Inc., and BellSouth Corp., finding the price spike unjustified. UBS Warburg also warned that network pricing reform could be delayed by legal battles and might not provide expected benefits to earnings. Investment analysts explained that any such change must first be debated by the FCC and state regulators and could land in federal court.

Recent statements by state PUCs support this view. Even though the states balked when the FCC began implementing the Telecommunications Act of 1996 in a way that forced LECs to favor competitors with discounted network service rates, the same regulators are now complaining as the FCC suggests that it might be time to modify the policy.

In a January press release, the National Association of Regulatory Utility Commissioners (NARUC) noted that the Competitive Telecommunications Association (CompTel) released a study, based on state-by-state data collected by the Telecommunications Research and Action Center, indicating that consumers could save up to $9.24 billion a year in lower phone bills nationwide if vigorous local phone service is allowed to flourish. According to CompTel, the customers that are seeing the greatest savings rely primarily on competitive service providers that rely on the so-called "unbundled network element platform," or UNE-P.

EES North America

Late last year the Kansas State Corporation Commission sent a letter to its congressional delegation in Washington, D.C., expressing disagreement with the argument that the pricing of LEC unbundled network elements is the root cause of the financial crisis in the telecommunications industry. The commission noted that Southwestern Bell Telephone Co., the regional dominant LEC, had reduced some of its UNE-P rates on its own initiative in connection with its application to begin providing long-distance telephone service in Kansas. The commission also pointed out that the Bell operating companies currently are not entering each other's local service markets. The commission asked why, if the network services are priced too low, the Bells weren't seeking to take advantage of the situation.

The Pennsylvania PUC, known for its advocacy of electric restructuring, recently began promoting its success in developing a competitive market for local telephone service in that state.

A multimedia grassroots campaign to educate Pennsylvanians about local telephone competition has driven more than 5 million hits to the "utility choice" Web site (, which allows consumers to type in their area codes and exchanges (the first three digits of their telephone number) to view and compare local telephone service providers, plans, and prices in a convenient side-by-side list. The site provides shopping information for electric and natural gas consumers. According to the PUC, there are about 250 companies certified to provide local telephone service in Pennsylvania; approximately 40 of these competitors offer residential local service.

Oregon Consumers Doubt Restructuring

An evaluation of the competitive power market for residential service conducted by the Oregon PUC indicates that now is not the time to proceed with further deregulation of the electric industry in that state. The state PUC said that there was little evidence of competition, and it could not determine how well it might work from a consumer perspective, even for the largest customers. Utility-sponsored rate options, including market-based pricing and time-of-use programs, currently provide some of the benefits expected from a fully functioning competitive market, the PUC concluded.

According to the PUC market report, consumers in Oregon are not enthusiastic about having energy options. A survey conducted by a professional market research firm found that participants fear that the introduction of new electricity options would lead to problems similar to those they have already experienced with telephone companies, such as hidden charges, unreliable service, and aggressive phone solicitations. The PUC also emphasized that residential consumers are not knowledgeable about energy procurement, making consumer protection and public education efforts a vital concern. It said that some of the problems already seen in the telephone market might be worse from the consumer standpoint because electric use is less discretionary.

The PUC report found:

  • There likely would be few, if any, power suppliers competing for residential consumers;
  • The cost of implementing a competitive market for residential consumers exceeds the likely benefits;
  • Competitive power markets for residential consumers have not been in place long enough in other states to learn from their experiences; and
  • Residential consumers are not well suited to assess or manage the risks of a competitive retail market.

According to the PUC market report, seven electricity service suppliers are certified to provide competitive service in Oregon, but only three-IdaCorp Energy, Sempra Energy, and Strategic Energy-have an agreement with a utility to begin offering service. No provider is actually providing service to large business customers, the report said. In addition, the PUC has also registered several aggregators for electric service to nonresidential customers, but aggregation has not yet developed. The PUC said that aggregation is likely to be most successful where electric rates are highest, citing high costs for customer acquisition and administration. The commission also said some costs, such as advertising, would be higher per person in Oregon than in states that already allow residential customers to choose power suppliers, because the state's total population is smaller and less dense than in other regions.

The PUC acknowledged that residential electric rates have declined in states with competitive power markets, but said the phenomenon is due largely to mandated rate reductions or regulatory requirements that competing offers stay below benchmarks during the transition to competition. The PUC said that it could not determine what might happen when such regulations expire. It concluded, however, that typical monthly savings publicized in states promoting competition have been small-from 2 percent to 10 percent of the generation portion of an average customer's monthly bill. It also said that a recent analysis of competitive energy markets in five states found that residential consumers are likely to be worse off with any price plan that exposes them to short-term volatile rates in an immature market. The same study found that none of the states had sustained a robust market for energy services aimed at residential customers. Marketer offers and customer participation have declined steadily over time, the PUC said.

Ohio Electric Market Update

The Ohio Consumer Counsel (OCC), in its 2002 annual report on the state of electric competition, put a positive spin on the tentative response of providers and consumers to retail access seen in the state. At that time, it reported that electric choice was "off to a reasonably good start," and while competition was slow to develop, consumers were benefiting from rate reductions mandated under the Ohio electric restructuring law. But as Ohio begins its third year of retail electric competition, the OCC now sees continuing cause for concern about the health of the state's electric marketplace and the potential long-term risks for Ohio's residential electric consumers. [Tables shown on page 13 include switching statistics for 2001 and 2002.]

Confusion and inaction with regard to federal transmission market issues is a major barrier to possible improvement, says a state-funded residential consumer advocacy group. The report suggests that state policy-makers consider what would happen if there were few or no competing electric suppliers when the market development periods end, and what price protections consumers will have when the current rate freeze disappears.

According to the OCC update, when Ohio's retail electric market was opened to competition in 2001, the Public Utilities Commission of Ohio certified 38 suppliers to sell electricity to all customer classes. By the end of 2002, just two suppliers were actively marketing to the state's residential customers.

Explaining away what might seem a modest success at customer switching, the OCC report notes that through 2002, approximately 813,000 residential consumers statewide-or about 20 percent of those who are eligible to participate in electric choice-actually switched electric suppliers. However, more than 90 percent of those who switched suppliers participated in one of the more than 190 community aggregation groups in the state, and about 98 percent previously bought their electricity from one of the three FirstEnergy companies (Ohio Edison, Toledo Edison, and Cleveland Electric Illuminating). Residential customers in Central and Southern Ohio, and in the Miami Valley, have had virtually no choices for alternative suppliers, according to the OCC.

The OCC concludes that "prompt and decisive" action by the PUC is needed to ensure that residential electric customers receive the benefits-and the safeguards-that Ohio's electric choice legislation intended. One such action is directed at moving forward with regional transmission market reforms. The OCC said that it has filed formal complaints against American Electric Power (AEP) and Dayton Power and Light (DP&L) for failing to comply with the provision of their transition case settlements requiring them to turn over operational control of their transmission systems to an approved independent regional transmission organization (RTO). The OCC has asked the PUC to:

(a) suspend payment of transmission costs to the utilities; (b) levy fines against the utilities; and (c) limit the utilities' ability to move to market-based retail rates at the end of their market development periods. Both AEP and DP&L have argued that the PUC has no authority to consider the OCC's complaints, let alone impose these remedies.

Virginia SCC Sees SMD/Market Problems

The Virginia State Corporation Commission (SCC) formally has expressed concern that adoption of new rules governing wholesale power market design at the federal level could result in an "involuntary (or possibly inadvertent) loss of day-to-day authority over the price and reliability of electric service" for Virginia citizens.

On Jan. 3, 2003, the SCC released a detailed review of the proposed standard market design (SMD) initiative currently under way at the Federal Energy Regulatory Commission and potential risks to electric service in Virginia. The SCC suggested that the state legislature suspend electric deregulation for the time being, noting that the state was particularly vulnerable to loss of authority over retail electric prices and reliability because rates had already been unbundled and the state restructuring law currently requires utilities to join an RTO. It said that such a suspension, including the reversal of the mandate placed on electric utilities to join an RTO, could allow the state the opportunity to determine whether Virginia should be part of the new federal regulatory system and whether retail choice should continue at this time. The SCC said that state policy-makers should "decide promptly" to proceed with, or delay implementation of the state's electric restructuring law.

The SCC report characterizes the proposed SMD as a watershed event for the Virginia electric industry, especially FERC's dedication to the elimination of the native load preference. The SCC said that FERC believes that market-based price signals will do a better job than state regulators at determining where and when generation and transmission facilities need to be built, and that ultimately, competition may regulate the reliability and price of electric service.

The SCC said that, nevertheless, the current generation and transmission infrastructure, including facilities built specifically to serve Virginia, was not designed to support a competitive market. Under such circumstances the removal of the native load preference could result in a situation where on the hottest and coldest days of the year, or whenever something threatens the integrity of the regional transmission system, Virginians could experience service interruptions to make sure that the lights stay on somewhere else in the multi-state region. This could occur even though there is adequate capacity located in Virginia. The SCC also said that because the SMD includes a regional market pricing mechanism, generation entities with market power may be able to charge exorbitant rates unless the situation is identified and corrected in a timely manner. It added that the ability of the Federal Energy Regulatory Commission to monitor potential market abuses and correct such problems has been questioned in the past.

The report also indicates that retail competition has not been successful in most areas of the nation. It points out that nine of the 17 jurisdictions with residential retail choice have no competitive offers below the rates of the incumbent utilities. In several other states only one utility faces a competitive offer. The SCC acknowledged that there were some initial indications of success in states like Pennsylvania, but it also noted that these were "largely the result of regulatory action to lower incumbent utility rates while setting market rates at artificially high levels to encourage competitors." Further retail competition is not functioning in Virginia, the SCC said. No offers of any kind are currently being marketed in the state. Only three competitive suppliers are currently certified to make such offerings. In addition, a number of merchant generation projects were delayed or abandoned in Virginia during 2002. The number of power suppliers is diminishing in Virginia and the rest of the nation as such entities face bankruptcy, merge, or simply go out of business.

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