Energy Future Forum

REMARKS OF BLOSSOM A. PERETZ
ENERGY FUTURES FORUM
NEW JERSEY ASSOCIATION OF ENERGY ENGINEERS
WOODBRIDGE, NEW JERSEY
April 23, 1998

As many of you know, my name is Blossom A. Peretz, and I serve as Ratepayer Advocate for the State of New Jersey. I want to thank the New Jersey Association of Energy Engineers for inviting me to speak today.

I think it's especially important that, with legislation about to be introduced which will restructure New Jersey's electric and gas utility industries, all stakeholders to the energy restructuring debate maintain a continuing dialogue. In addition, there's talk of federal legislation. And just last week, Connecticut, our neighbor to the north, after some delay voted for electric competition. In other words, the electrons are moving, and it appears that the changes in the industry that we've all been talking about for the past five years will actually begin to occur during the next 12 to 18 months. New Jersey's target date is still October 1998 for 10% of New Jersey consumers to have choice.

I'd like to admit that, when my office first began working on electric restructuring issues three years ago, our primary concern was high rates. After all, New Jersey's rates are 9th highest in the nation. Our goal was to achieve at least a 10% rate reduction for all classes of energy consumers. We especially wanted to see residential ratepayers, who don't have the benefit of "rate flex" legislation, achieve that reduction in energy costs.

But, in the intervening three years, our office has had the opportunity to review the stranded cost and rate unbundling filings of the utilities. We recognized that a 10% rate reduction was achievable through a simple rate case proceeding.

Consequently, our goals have been refocused to the more long term and critical issues of restructuring -- insuring a competitive marketplace with the opportunity for third party marketers to compete effectively with utilities in offering power and energy services. Healthy and robust competition, we believe will achieve lower rates alongside incentives for research and development.

The importance of creating a sound structure for competition was underscored for me by a recent New York Times editorial. "How To Stay A Titan," by author Ron Chernow, noted the eerie parallels between John D. Rockefeller's Standard Oil monopoly and Bill Gates' Microsoft. The editorial pointed out that both Rockefeller and Gates represent creative monopolists -- In both cases, the companies price their products to guarantee substantial profits but never so high as to lure competitors back into the field. And Rockefeller refrained from achieving a 100 percent monopoly, later confessing that he allowed a few dozen refiners to eke out a meager existence so he could cite competition in the industry.

I am concerned that if we fail to provide a structure that encourages competitors to enter the New Jersey market we will create a model that would have satisfied John D. Rockefeller: an unregulated utility environment, one in which there are perhaps a few competitors, but not enough to exert significant downward pressure on prices or reduce the market power of the existing monopolies. We understand that this is the current scenario in Rhode Island.

In the near term, mandated reductions may protect electricity consumers from high rates. In the long term, only a competitive market structure will provide the assurance of lower energy rates and the resulting advances in technology that follow. I'm an optimist, and, after a review of the stranded cost and rate unbundling filings, I believe that we can achieve a balance that protects consumers and encourages competition without impairing the financial integrity of former energy providers. Let me share some of the issues I think we can "get right" if we work together.

First, it sounds simple enough but competition cannot exist without competitors. I do not mean to be facetious here. Competition will not occur unless incentives are in place and barriers to market access are removed so that competitive energy providers can actually realize a profit and offer service to New Jersey customers. Legislative initiatives are needed to provide the impetus for competition.

This might be an appropriate time to state that our office is not looking to "put utilities out of business" or encourage customers to switch from their incumbent utility, per se. But we do believe strongly that there must be an open market, and that an open market means competition among utilities and third party marketers on an even playing field. There can be no competition without actual competitors offering services in the New Jersey marketplace.

Stranded costs are, of course, a tremendously important issue. We believe that full stranded cost recovery is a barrier to competitive pricing and will reduce the opportunity for price competition. Stranded costs really refers to the difference between the utility's generation cost and the market price. When you place 100% of stranded costs on a customer's distribution bill, you eliminate competitors' margin within which they can offer customers a discount. With 100% stranded cost recovery, the customer pays virtually the same whether he stays with the incumbent utility or switches. When the stranded costs are removed from the generation component of the utilities bill, the utility's offering is reduced to the bare market price. This means that when a customer is evaluating whether to switch to a competitive provider, the "shopping credit" is barely enough to pay for competitive supplies. There is, then, no financial incentive to switch. Allocating part of the stranded cost to the generation charge creates an incentive to shop.

I should make it clear that the Ratepayer Advocate is not opposed to recovery of stranded costs consistent with rate reduction and a competitive market. We are opposed to a guarantee of 100% recovery. And we are not opposed to partial securitization of stranded costs if that can reduce the burden of repayment on customers.

Similarly, unbundling of the utility structure -- separating generation, the competitive service, from transmission and distribution -- is critical; we feel strongly that divestiture of generation provides the best guarantee of a competitive market. The buyers of the utility's generation would by definition be new competitors to the service territory. This will open up the marketplace. However if the auction results with one buyer who buys up the entire PJM Market, then we would have a newer and bigger generation giant.

There is no question that standards for divestiture have to be carefully and properly put in place. We will not promote competition in New Jersey if the utility is able to deliver all of its customers to a new supplier, which could then become a new incumbent monopolist.

And, by the way, we were pleased that the Board has just voted to adopt the standards that we had proposed to govern auctions.

Divestiture will not only ensure that new competitors have an opportunity to buy into the generation market, but with an effective divestiture, the stranded cost recovery charge would be defined by the marketplace. I would also propose that we perhaps include the NUG contracts as candidates for auction and sale. NUG contracts were included in the auction of generation assets in Massachusetts.

Customer aggregation has also become an important issue. I believe that residential customers will only see long term savings above the initial 10% rate reduction if they aggregate. As you probably know, aggregation refers to grouping customers together to purchase energy on an aggregated basis. We believe that properly structured aggregation legislation is critical if there is to be any chance at all for a competitive market to develop here. Industrial customers have the option to purchase energy at competitive rates already. However, I think we all appreciate that residential customers are less attractive customers for most energy marketers. Many customers will have difficulty gaining access to competitive providers on favorable terms owing to transaction costs and other factors. The overhead alone of marketing to individual residential customers is prohibitive.

And for residential customers, municipal aggregation holds great promise. Indeed, the Ratepayer Advocate has concluded that municipal aggregation provides the greatest opportunity for residential and small business customers to see significant savings in an open energy market.

We believe that legislation should make aggregation as simple as possible for municipal and other local authorities to include all energy requirements in their areas. In other words, local government aggregation will work best -- will result in the lowest prices -- if the needs of residential and business customers and of the local government itself are combined within a single aggregation proposal. All we need to say is that "A municipality shall have the authority to act as agent for its residents in identifying, selecting and negotiating with alternative sellers to sell electric and gas services to its residents".

All customers should be included who do not "opt out". And I should note that those commercial entities that wish to aggregate with other commercial customers would be able to "opt out" of the municipal aggregation group.

I've also heard a very few negative comments comparing the "opt-out" provision to "slamming," the illegal process by which phone customers' service is switched to another carrier without their permission. The "opt-out" provision, in contrast, provides all customers with full disclosure on the proposed aggregation and gives them plenty of time and information with which to make an informed decision. The only town in New Jersey with experience in aggregation -- Monroe Township -- used the "opt-out" provision. They've had 86% of all residents join the aggregated group, and none of these residents have subsequently "opted-out." Slamming is a fraudulent business practice that is used by fly-by-night scam artists to rip-off the unwary. It has no connection to the process of aggregating potential electric customers of a municipality dedicated to the health, safety and welfare of its constituents. Moreover requiring a "wet signature" is no guarantee against fraud. Based on our conversation with commission staff in several states, the option of allowing customers to switch telephone providers based on a customer signature is frequently misused by providers who may forge customer names or obtain signatures of unauthorized household members. The wet signature requirement will only deter competition and will not insure against fraud.

We believe that the simplified procedures I've outlined will allow municipal aggregation to play a significant role in linking up residential and other customers with competitive suppliers. And ultimately, we believe that this type of simplified approach to aggregation benefits all classes of consumers to the State of New Jersey.

I've left another critical element of restructuring for last, and that is consumer education. Large industrial and commercial customers are sufficiently sophisticated to understand their choices. The expected advantage of competition will easily rebound to the benefit of these customers, simply by virtue of their bargaining power. Residential customers will need to be educated about the changes in the marketplace. A recent survey by Yankee Energy System reported that only one out of every three people contacted in a nationwide survey is aware of state and federal efforts at deregulating the electric and natural gas industries.

We believe that the only way to ensure that consumers have the information they need to function in a competitive marketplace is through a comprehensive, coordinated state-led education campaign. A massive statewide blitz in New Jersey on both the state and local level is essential if we are to reach consumers. Do the educated and politically sophisticated residential consumers understand their impending choices? Does the average consumer understand his impending choices? The answer is a profound "no." How can they choose - or choose not to choose - unless they understand the issues and options.

I look forward to your questions and I look forward to speaking to you throughout this conference. The restructuring debate is far from over, and I think we all have a lot to discuss and contribute. To quote the great New Jerseyan Thomas A. Edison:

"Everything comes to him who hustles while he waits".

Thank you.

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