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BEFORE THE NEW JERSEY BOARD OF PUBLIC UTILITIES
| IN THE MATTER OF THE ENERGY ) MASTER PLAN PHASE I PROCEEDING ) TO INVESTIGATE THE FUTURE ) STRUCTURE OF THE ELECTRIC ) POWER INDUSTRY ) | Docket No. EX94120585Y |
DIVISION OF RATEPAYER ADVOCATE'S
PROPOSAL FOR RESTRUCTURING OF THE ELECTRIC UTILITY INDUSTRY
AMENDED WORKING DRAFT -- August 16, 1996
Overview
Restructuring
Markets
Stranded Costs
Social Benefits
Pilot Programs
RESTRUCTURING PROPOSAL
1.Market Structure
2.Separate distribution, transmission and generation functions
3.Generation
4.Transmission
5.Distribution
6.Customer Choice, Universal Service and Consumer Protection
a.Customer Choice
b.Universal Service/Provider of Last Resort
c.Consumer Protection
7. Low Income Assistance Programs
8.Regional Grid Operation and Management
9.Stranded Asset Recovery and Equitable Sharing of the Benefits of Restructuring 10.Environmental Protections
11.Gross Receipts and Franchise Tax
12.Pilot Program
The Division of Ratepayer Advocate (DRA) represents the interests of all utility customers in the State of New Jersey. The DRA believes that the electric utility industry in New Jersey is in need of a thorough overhaul. There is no question that electric service in New Jersey is reliable; but we are convinced that reliable service can be achieved at lower rates. We believe that residential, industrial and commercial customers all can and should have the opportunity for lower rates. And that opportunity should come soon.
The DRA is convinced that the only really effective way to lower electric prices in New Jersey is to create a system that requires utilities to compete for retail customers with alternative suppliers. To that end, the DRA has developed a plan to begin bringing retail competition to the electric utility industry in New Jersey. The elements of DRA's plan fall naturally into four broad areas of action:
Restructuring the electric utilities;
Developing markets for competition;
Dealing with stranded costs;
Tempering market outcomes to ensure choice and equity.
Each of these areas is addressed at length in this report. In addition, the need to get started by undertaking pilot programs is discussed. The remainder of this section provides a brief overview to our proposal.
A fundamental requirement for competition in New Jersey's electric utility industry is the restructuring of the major public utilities which today dominate the industry. The DRA proposes that the electric utilities serving New Jersey fully separate their generation function from their other monopoly functions through at least functional unbundling. Generation would cease being subject to price regulation by the Board. In the DRA's plan all retail customers, including residential customers, will have the right to choose their electric suppliers and to require their local distribution utility to deliver electricity to them. At their own discretion, however, customers may choose to receive Basic Generation Service from their distribution utility. The plan will make it possible for New Jersey's ratepayers to shop for the best sources of power that are available, just as they can already shop for all the other goods and services that they require, including natural gas and telephone service that were formerly provided only by utilities.
To support customer choice, the plan envisions a competitive, efficient and reliable generation market. A pair of institutions will be at the center of this market. One is an Independent System Operator ("ISO") that will control the dispatch of generation and the operation of transmission facilities in a manner that ensures system reliability pursuant to Mid-Atlantic Area Coordinating Council ("MAAC") and National Electricity Reliability Council ("NERC") criteria. The other is a Power Exchange that will create an hourly spot market for electricity. As in any other market, effective competition in electricity supply requires that there be a large number of independent suppliers competing with one another so that no group of suppliers dominates the market. In the DRA's plan, these suppliers will have the choice to sell to customers under bilateral contracts, or to participate in the Power Exchange's spot market, or to engage in some combination of the two. It is expected that local contract and spot markets will be supplemented by other markets for electricity in the region, created by such bodies as the New York Mercantile Exchange (NYMEX).
During the transition to competition, one of the most important issues the Board must address is the treatment of stranded investment costs. Stranded costs are due to a fundamental and unanticipated change in the electric utility industry, namely the emergence of retail competition. Neither the ratepayers nor the shareholders caused this change, yet both must live with it. As an initial matter, utilities should take all reasonable actions to mitigate any stranded costs. Unmitigated stranded costs should be shared between ratepayers and utility shareholders on an equitable basis. Such sharing is essential if there are to be lower rates for all consumers in the short run.
The DRA's plan is premised on the need to make competitive opportunities available to all classes of customers. The plan contains features which together ensure that the electric market is accessible by residential consumers and small businesses as well as large firms. However, opportunity for those interested in benefiting from competition should not be purchased at the cost of hardship for others. The DRA is unequivocally committed to affordable rates for low- and moderate-income ratepayers, and to protecting service quality, reliability and universal access. The DRA plan also calls on the Board to ensure that reasonable utility activities designed to foster efficiency are not abandoned in a competitive market. Finally, the Board must ensure that all consumers are protected -- not just from high prices -- but also from fraud and misinformation.
The ability to ensure the continuation of universal service, protect low-income ratepayers, promote funding for efficiency and, ensure the recovery of stranded costs, requires the development of an equitable system for imposing non-bypassable charges on all electric consumers in the state. The DRA's plan does not discuss these charges in detail since they are a means, and not an end in themselves. However, the importance of their development cannot be over-emphasized. The Board must develop a procedure for imposing and collecting these charges.
In implementing a change as important as the shift to competition in electricity, the Ratepayer Advocate submits that it is prudent to evaluate, prior to the adoption of any restructuring plan, how a competitive retail electricity market will work in New Jersey. Thus, we propose that, by mid- 1997, each electric utility would have in place a pilot program that would offer a representative sample of its customers the choice of obtaining electricity from other suppliers. The pilots will allow all parties to gain experience in a broad range of technical and administrative matters relevant to competition in the electric utility industry. These pilot projects, lasting one year to 18 months, would provide the first step toward competition. They would be followed by a phase-in of customer choice based upon a final plan, starting in mid-to-late 1998. Residential, commercial and industrial customers should all participate in each phase.
The goal of this proposal is to foster a competitive market that will offer customers lower-cost electric services without sacrificing standards of reliability, and consumer and environmental protection. This goal is served through the provision of consumer choice. Consumer choice, in turn, is best provided by a developing a flexible market structure that allows for a combination of various mechanisms.
The first is the facilitation of the development of a short-term voluntary pool for energy market transactions with clear and transparent spot market prices. This pool would be initially supported by the requirement that the Distribution Company purchase at least a portion of its Basic Generation Service from the pool, although the formation of other voluntary spot markets would not be barred. A Power Exchange would be established to coordinate the development of this initial pool/spot market. The Power Exchange should be separated from the Independent System Operator ("ISO") to avoid disputes over dispatch decisions. (See section 2 for discussion of the ISO.)
The second mechanism is to allow for bilateral contracts for physical delivery between suppliers and customers (or their respective agents) with minimal coordination by the pool operator. All such contracts would have to be scheduled through and subject to the rules of the ISO. Suppliers would not be required to sell into or through the Power Exchange.
The third mechanism is to encourage, but not mandate, the formation of regional aggregators by local governing bodies, such as municipalities or private entities, which could negotiate and enter into power supply or energy service contracts on behalf of their constituents or customers.
2. Separate distribution, transmission and generation functions
Under this proposal, the state's former retail electric companies would become regulated Distribution Companies and would provide two primary services to customers in their service territories: Distribution Service to all electricity users and Basic Generation Service to those customers who do not or cannot select their own generation supplier. Distribution Service is the local wires service needed to deliver electricity from the transmission network to the final customer, and to provide such services as metering, billing and Universal Service, as discussed below. Basic Generation Service is electric supply service provided to customers who have not chosen or cannot obtain a generation supplier. Basic Generation Service would be secured by the Distribution Company through a combination of methods: (1) purchases from the spot market; and (2) a bidding process to select wholesale energy suppliers for a "standard" period of service (perhaps five years). The bidding process would be subject to review and oversight by the Board to ensure that it is open, fair and reasonable.
Generation is to be functionally unbundled or divested to ensure against anti-competitive behavior, with generation assets valued by the market. The former utility generation would be operated by unregulated generating companies. These Genco's would not be allowed to continue to provide electric supply directly to their affiliated Distribution Company. It would, however, have the option of selling into the "spot market" from which the Distribution Company would make purchases, or to submit bids to the Distribution Company (along with any other supplier) to provide basic service. The transmission system would be operated by a regional ISO, which would control its day-to-day operations, be responsible for all short- and long-term planning, and maintain system reliability. A spot market for electricity would be created through establishment of a regional Power Exchange. Retail service (packaging and marketing of electric supply services) would be provided by competitive firms.
Although the DRA advocates the functional unbundling of these utility services and voluntary divestiture of the generation segment, certain steps must be taken at this time before a meaningful pilot project can be implemented. At a minimum, standards of conduct should be developed to govern the relationships between the affiliated operational units of the electric utilities. Providers of energy services, including marketers, generators, aggregators and traditional utilities themselves, must be afforded the opportunity to compete on a level playing field. Consumers will be the ultimate beneficiaries of an environment that fosters competition in the electric energy industry. The Board should initiate a proceeding to develop standards of conduct governing the affiliated components of each utility. Every effort should be made to see that a level playing field is created to facilitate competition in the electric energy arena.
All electric utilities subject to BPU jurisdiction shall file unbundled tariffs (separation of charges for generation, transmission and distribution) within three months, or by December 1996. Functional unbundling must be completed accurately and fairly to avoid cost shifting and creation of cross-subsidies. Electric tariffs should mirror the way electric services are offered, and priced, by providers, in accordance with customer needs. Each utility should be required to submit tariffs which would facilitate the ability of consumers to choose their energy providers. The unbundling of electric tariffs shall be guided by the following policy objectives: (1) nondiscriminatory transmission and distribution system access and pricing, (2) providing accurate price signals for electric energy supply sources, and (3) the avoidance of inter -and intra- class cost shifting. Pursuant to this goal, the transfer of depreciation reserves from transmission and distribution reserves to generation plant reserves shall not be allowed.
The Board should follow the successful model of the unbundling of gas utility tariffs in New Jersey. Several years ago, gas utilities were required to offer unbundled rates and formal proceedings were convened in order to facilitate the necessary tariff changes. Likewise, each New Jersey electric utility should be required to file a proposal for unbundling their electric tariffs (separate charges for power supply, transmission, customer service, distribution, and other societal components [e.g. DSM, low-income, stranded costs, etc.]), consistent with the idea of fostering customer choice in the electric industry. Thereafter, formal proceedings should be established, involving marketers, other energy providers, users, and the DRA, wherein the tariff unbundling proposals of each electric utility may be reviewed. The schedule for these proceedings should permit unbundled tariffs to become effective during the first quarter of 1997.
Divestiture, to the extent it occurs, will be encouraged to proceed voluntarily in conjunction with a transition to a restructured utility industry. Encouragement may include allowing the acceleration or increase of stranded cost recovery.
a. Economic regulation of power generation (cost-of-service regulation, certificate of public need requirements, etc.) will be ended and be replaced by market forces. Environmental regulation, including siting regulations, shall continue.
b. Effective provisions must be established to ensure against anti-competitive behavior by de-regulated generators through exercise of both vertical and horizontal market power.
c. Nuclear decommissioning and post-shut down costs (as deemed appropriate by the relevant regulatory body) will be recovered through the wires charge of the Distribution Company that formerly held an entitlement to a nuclear unit.
d. Formation of power brokers, marketers and customer aggregators will be encouraged.
a. Pursuant to Federal Energy Regulatory Commission ("FERC") Order No. 888, provision of transmission services is regulated by the FERC, and distribution will be regulated by the BPU. It is recognized that the precise demarcation between transmission and distribution is not clear. The dividing line between transmission and distribution should allow for every retail electricity transaction within the state to include a component that is subject to BPU jurisdiction so that state policy requirements will not be bypassable. We believe that clarity on this issue will be provided by further actions at FERC, or, perhaps, through court decision or federal legislation.
b. Transmission service will be functionally separated or divested from distribution.
c. Eminent domain authority is to be made available to transmission providers, including private entities, by petition upon BPU review and approval.
The Distribution Company:
a. Remains a monopoly service regulated by the BPU. Such regulation may include alternatives to traditional embedded cost-of-service, rate base/rate of return regulation;
b. Has the obligation to distribute energy to customers and connect any customer to the distribution system;
c. Performs billing services at the request of transmission and generation providers. It is to be the exclusive provider of such services until such time as it can be demonstrated that this function can be provided competitively without sacrificing reliability, simplicity and without increasing customer confusion;
d. Collects funds from all customers, through a non-bypassable wires charge, to support: Stranded asset cost recovery (as settled); Energy efficiency investment; Low income bill payment assistance programs; Regulatory assessment to support the BPU and the Ratepayer Advocate; and enhanced consumer protection and anti-trust enforcement activities as will be necessary in the restructured power system;
e. Implements least-cost distribution system planning and investment, incorporating existing precedent;
f. Establishes procedures for customers to choose their supplier of generation service;
g. Establishes procedures to track energy and power flows within the Company's distribution system for purposes of settlement and balancing, and to appropriately bill each customer (or his/her supplier, if authorized by the customer) for Distribution Service;
h. Provides load research and load profiles on a timely basis to customers and suppliers for purposes of allocating energy and load between customers and suppliers, so as to enable customer choice of a supplier without requiring the installation of any metering equipment beyond that in place today;
i. Provides Basic Generation Service - electric supply service automatically provided to any customer (1) who has not notified the Distribution Company of an alternative supplier choice, (2) whose retailer fails to meet its contract obligations for supply to the customer, or (3) who is dropped by the retailer for any reason, including non-payment.
j. The provisions of Title 48 Public Law 1995, chapter 180 ("the Flex Rate Act") pertaining to "off-tariff rate agreements" shall not apply to the distribution company, i.e., the distribution company shall not be authorized to offer discounts from its Basic Generation Service.
6. Customer Choice, Universal Service and Consumer Protection
1. All customers should be able to choose their electricity provider.
2. There shall be a two-year phase-in of customer choice starting around March 1998, with customers from all classes -- residential, commercial and industrial -- participating in each phase.
3. The two-year phase-in could be based on the following time frame:
* September 1998: 10 percent of all customers to be eligible for retail access;
* September 1999: 50 percent of all customers to be eligible for retail access;
* March 2000: 100 percent of all customers eligible for retail access.
4. Each customer is to receive one bill for all electric services (unless either the customer or supplier requests separate billing for generation services). The Distribution Company remains the billing authority.
5. Large electric customers should be required to have hourly meters. No special metering shall be required for residential customers or small businesses.
6. Customers shall be able to disconnect from Basic Generation Service without payment of an "exit fee." Reasonable restrictions on switching should be permitted by contract or by BPU regulation (e.g., notice requirements or staggering dates upon which large customers would be permitted to switch) to ease the utility's administrative burden and allow for adjustments in power supply.
7. Aggregators would be encouraged to provide electric supply to all electricity consumers, and no special metering would be required for customers who sign up with an aggregator or any other provider. Municipalities, counties or other local bodies would be authorized to aggregate all customers within their jurisdiction to form a municipal aggregation unit. This entity would not be a municipal utility, and would only negotiate for and purchase electric supply on behalf of customers within its jurisdiction. Such customers would retain the option of staying with the Basic Generation Service, choosing the municipal aggregator, or choosing another aggregator/marketer/supplier of their choice. In all cases, the Distribution Service would continue to be provided by the distribution monopoly company.
8. Guidelines for aggregation should be established and effective at least six months before the introduction of retail choice.
b. Universal Service/Provider of Last Resort
1. The Distribution Company will continue to have a duty to provide connection, generation, conservation programs (to the extent still required by the BPU) and billing services to all customers within its service territory who fail to choose an alternate generation supplier. Alternatively, the Board could select a provider of last resort by means of a competitive bidding process for a period such as five years.
2. Prices for "basic generation service" will be identical for all customers taking service at the same voltage level, irrespective of location. .
3. Distribution Companies shall have the duty to connect all customers to the system and charge equal rates for distribution service to all customers with service at the same voltage level and in the same customer class, irrespective of location.
4. Unless and until such time as the BPU determines that low-income customer support services are effectively replaced through an alternative mechanism, existing programs to support low-income customers shall remain in place. In addition, within six months of adoption of this proposal, a comprehensive low-and fixed-income support program is to be established.
5. Distribution Companies will be entitled to recovery of "bad debt" expenses.
6. All expenses associated with meeting state universal service requirements will be collected from all customers of a distribution provider, on a usage-sensitive basis.
1. Consumer protection measures currently in place for both residential and non-residential customers shall remain intact.
2. The BPU shall retain jurisdiction over billing, connection and disconnection disputes.
3. All electricity providers, including marketers, brokers and aggregators, shall be required to register with the BPU and be subject to New Jersey consumer protection laws and regulations. Registration provisions must provide consumers with adequate information upon which to select a supplier that best meets their needs.
4. Appropriate procedures for the regulation of retail energy providers -- including but not limited to guidelines regulating affiliate transactions -- should be established and effective at least six months before the introduction of retail choice.
5. The BPU shall convene a group of electricity providers, including marketers, brokers, and aggregators, to develop consumer information guidelines that will be effective at least six months before the introduction of retail choice.
6. Any entity or person serving the retail electric supply market within the State of New Jersey shall agree to maintain an office within the State for purposes of accepting service of process. In addition, all such entities or persons shall agree to submit to the jurisdiction of the courts of New Jersey and to be bound by the laws of New Jersey for purposes of resolving disputes that arise under this Proposal.
7. Low-Income Assistance Programs
a. The distribution utility will be required by the Board to provide low-income assistance programs including but not limited to rate discounts, payment assistance programs, arrearage forgiveness, customer education on conservation and weatherization programs for low income customers. Such programs shall be underwritten by all distribution customers through a fee included within the non-by-passable wires charge.
Although the restructuring of the electric utility industry is expected to result in reduced rates for all consumers, these rate reductions will not necessarily ameliorate the persisting affordability problems for low-income ratepayers. According to statistics compiled by the BPU, over 124,000 New Jersey households had their gas and/or electric service terminated in 1995. Compounding matters is the reduction or complete elimination of various federal entitlement programs which once served as a safety net, including providing recipients with the resources to maintain necessary utility services.
Moreover, it must be recognized that under current regulation, aside from the direct, explicit low-income customer protections provided by the utilities pursuant to BPU order or voluntary programs, the utilities - to varying degrees - have implicitly afforded additional protections, such as forgiving the accumulation of billing arrears, or providing liberal payment programs. Under rate of return regulation, such programs were enabled through supporting contributions in the rates of all ratepayers. Under a competitive market scheme, the financing and continuation of these programs is at risk. Certainly, there is a compelling need to develop and adopt comprehensive low-income initiatives to protect the most vulnerable consumers in a restructured environment.
There are currently several forms of low income assistance programs being used by utilities throughout the country. Programs which change the billing or pricing arrangements to decrease the possibility of utility disconnection must be implemented to help mitigate the difficulties of low income consumers in payment of their energy bills. These programs could prove to be effective in protecting low income consumers when coupled with the existing statutory requirements for budget billing and deferred payment agreements.
Conservation programs also cannot be overemphasized as an important tool to provide protection to low income consumers. It is often the case that poorly weatherized housing inhabited by low income consumers is the main culprit behind excessive energy consumption, leading to unaffordable energy bills. Although several companies currently have weatherization programs, they must be monitored to determine whether they are effectively being used to provide the best benefits for low income consumers. These programs have also been coupled with arrearage forgiveness plans as well, as an incentive to low income consumers.
Regardless of the program used, it is clear that throughout the restructuring process, there must be maintained a constant concern for the low income consumer, because these are the consumers who may be least able to avail themselves of the potential new consumer choices available after the unbundling of the electric utilities. Since distribution companies will continue to operate under BPU regulation as a monopoly service, they are the party which can most effectively implement programs targeted at reducing the need of customers with an inability to pay.
b. A lifeline credit program should be considered for all ratepayers who qualify under the Board's winter termination standards, to be funded through a non-bypassable wires charge.
Currently, the State Lifeline Program offers $225 for assistance with utility bills to persons who meet the eligibility requirements of the Pharmaceutical Assistance to the Aged and Disabled (PAAD) program, or to recipients of Supplemental Security Income (SSI). However, due to the criteria, these benefits are limited to senior citizens or disabled consumers. In addition, assistance is offered to low income consumers through the federally funded Low Income Home Energy Assistance Program (LIHEAP), however, funding for this program has been in jeopardy, and is therefore not a reliable source in addressing the needs of low income ratepayers.
It is therefore necessary to provide for a reliable funding source to ensure that the needs of low income consumers are met. The transformation of the industry will lead to new market entrants throughout the spectrum of the unbundled utility: transmission, generation, and distribution. These parties can assist in the effort to provide assistance to low income consumers.
Some utilities in New Jersey already have fuel fund programs which derive their sources from a combination of shareholder and customer contributions. All suppliers of energy should be required to follow their lead and create or contribute to fuel funds in time for the commencement of restructuring. Fuel funds should be used to provide relief for those consumers who fall on hard times but do not qualify for other forms of assistance
c. The Board shall revisit its existing regulations in light of the restructuring of the industry, and set policies regarding the practice of connecting customers to, and disconnecting customers from, the distribution system to ensure that needy ratepayers are protected.
The Winter Termination Program, which provides criteria that utilities must adhere to prior to the termination of a customer's service between November 15 thru March 15, aids the efforts of preventing life threatening circumstances due to lack of utility service during the winter months. In addition, there are currently regulations which limit service discontinuation in cases of medical emergencies, and bill disputes. Such regulations may prove necessary to provide continued protection of consumers in the new competitive electric industry.
8. Regional Grid Operation and Management
As a preliminary matter, we recognize that the members of the Pennsylvania - New Jersey - Maryland Power Pool ("PJM") are in the process of providing the details of their restructuring proposal for filing with the FERC, and that it is claimed that this restructuring will provide for the creation of an independent ISO wherein no one class of participants controls the decision-making process. The concern with PJM's approach is that only current members are involved in the development of the draft. It would appear that a more equitable approach would provide for the constitution of the independent Board of Directors as the first order of business, and allow such Board to develop its own plan of restructuring. Irregardless, it will be critically important for all interested entities to participate in the FERC proceedings reviewing PJM's proposal.
From a more general perspective, it is envisioned that:
a. The regional grid system will be operated to:
1. Ensure system reliability;
2. Facilitate economically efficient power generation; and
3. Ensure open access for all generators to all customers.
b. Grid operation and management will be the responsibility of an ISO regulated by the FERC.
1. The ISO shall have no financial relationship to any energy provider.
2. The ISO shall be governed by a Board of Governors appointed or elected by the region's generators, suppliers, and transmission companies.
3. ISO responsibilities will include:
(a) ensuring open, non-discriminatory access to the transmission system;
(b) managing grid operations;
(c) maintaining real-time reliability of the system;
(d) managing transmission congestion;
(e) resolving conflicts between inconsistent power plant generating schedules;
(f) providing imbalance settlement functions; and,
(g) certification of energy providers
c. Transmission Service
1. Transmission services will be provided under FERC- approved, open access, non-discriminatory tariffs.
2. Transmission services would be designed and priced to:
(a) encourage economically efficient use of transmission and generation facilities;
(b) send economic price signals for investment in new generation and transmission assets; and,
(c) provide for full recovery of costs associated with prudent transmission investments.
d. Power Exchanges
1. Independent regional power exchanges will be encouraged to operate voluntary, market-based auctions for power (for example, for "day ahead" power).
e. Reliability
1. The reliability of the power system must be maintained consistent with the National Electricity Reliability Council ("NERC") and the Mid-Atlantic Area Coordinating Council ("MAAC") national and regional reliability standards.
2. The ISO should establish procedures that govern the ISO's actions with respect to unit dispatch in the event that maintaining system reliability requires deviations from the dispatch schedules presented by generation suppliers and the power exchanges.
3. The ISO should establish a means to secure operating reserves at all times and a means to secure any ancillary services necessary to maintain system reliability.
4. While the transmission system is to be required to maintain certain standards of reliability, at the retail level customers should be able to opt for different standards of reliability through the development of market based price signals wherever practical.
9. Stranded Asset Recovery and Equitable Sharing of the Benefits of Restructuring
a. A public policy decision to permit electric utility restructuring requires an understanding that the benefits of restructuring will exceed the costs of restructuring. Absent the likelihood of a net public benefit, there is no reason to adopt restructuring.
b. The determination of costs and benefits of restructuring will be considered in a public forum, such as the BPU, with the availability of conventional legal procedures.
c. The magnitude of restructuring costs and benefits will depend on the ultimate structure of the electric utility industry and the timing of the restructuring. Above market, sunk costs potentially include unrecovered (above market) fixed capital costs of generation ownership and above market power contract costs. Below market assets include a substantial number of generating units and substantial portions of the transmission and distribution system. To the extent that restructuring nets the above market assets with below market assets, there exists the potential for significant mitigation of non-economic costs of electric utilities.
d. Subject to an understanding that there is a net public benefit, benefits and costs should be apportioned equitably, on a negotiated basis, between ratepayers and utilities. This will ensure significantly lower rates for ratepayers and permit appropriate recovery of non-economic costs by electric utilities.
e. Utilities should make all reasonable attempts to mitigate uneconomic costs, for example by renegotiating purchased power contracts or by lowering the total operating costs of plants where it is safe and economic to do so. Thus, any calculation of stranded costs should reflect such mitigation efforts. Stranded costs should include only those costs which are truly unavoidable.
f. Stranded costs should be shared between ratepayers and utility shareholders. The amount utilities are permitted to recover should be determined on a case-by-case basis. Fairness and past New Jersey practice, particularly 50-50 cost sharing, should guide the disportion of any stranded costs.
Stranded costs are due to a fundamental and unanticipated change in the electric utility industry, namely the emergence of retail competition. Neither the ratepayers nor the utilities caused this change, yet both must live with it. It is fair and reasonable that both parties should bear part of the net cost of the transition by sharing stranded costs.
The claims of some utilities that the "regulatory compact" has created a "right" to compensation of 100% of so-called "stranded costs" is incorrect and based upon a distortion of regulatory law and economics. The regulatory compact simply provided that in exchange for accepting a limited service territory, within which it would be granted monopoly rights, the utility would agree to accept restrictions on its sale of products (including, but not limited to price) set by a regulatory body, rather than by market forces. The courts have applied this regulatory compact to prevent the destruction of existing economic values, such as where a utility board or commission would require the provision of service by the utility at an unreasonably low rate.
Utilities have never, however, been protected from the operation of market forces or the evolutionary effects of technological change. Under circumstances where the utility will be released from its obligation to serve and simultaneously released from the restrictions of a limited service territory and restricted product, it has no claim upon any particular level of revenues set by the state. There has been and can be no "taking" of property with just compensation as protected by the due process clause where the utility gains unfettered access to the marketplace.
A sharing of costs is fair, however, because it is recognized that the competitive markets will not develop immediately, and a transition period will be required. During this transition it is appropriate to equitably distribute the economic burden between consumers and shareholders. However, this sharing must be only for a limited period, and of a limited amount.
g. Starting from a 50% / 50% split, the Board should consider, on a company-by-company basis, what factors leading to the stranded costs that may have been unique to that company.
h. The length of time over which stranded cost recovery occurs should reflect the amount to be recovered from ratepayers, the number of ratepayers in a service territory, and the typical charges for electricity excluding stranded costs which these ratepayers face.
a. Regional Issues: The open access transmission rule adopted by FERC (Order No. 888) and state activities related to retail competition have raised the issue of potential increases in the transport of ozone and its precursors, associated with increased generation of electric power in the Midwest by cheaper and older coal-fired plants, into the northeastern states. The incremental effect of restructuring or open access on emission levels may be difficult to quantify. The broader and more important issue for all New Jersey citizens, is that our state and industry should not be burdened with increased emissions entering from outside the region due to these regulatory and structural changes.
The very nature of the problem requires a regional solution, such as that being attempted by the Ozone Transport Assessment Group ("OTAG") process, or the Federal Implementation Plan being considered by the Environmental Protection Agency ("EPA") if OTAG is not successful. (In addition, FERC has agreed to undertake a rulemaking to consider mitigation measures if OTAG fails.)
At this time, an attempted solution for this issue within the context of the Energy Master Plan does not appear practical or feasible. Should the regional and federal attempts at addressing these issues fail, state-wide action should be reconsidered.
b. Energy efficiency investment provisions
i. Objectives:
Lower customer electricity bills;
Minimize power system environmental impacts.
Realize improvements in housing and commercial infrastructure that reduce energy consumption.
ii. Efficiency investment shall be considered in least-cost distribution planning. The current DSM rules should be readopted and modified as necessary to apply to the to-be-formed Distribution Companies.
iii. A Distribution Company must:
Maintain adequate Demand Side Management ("DSM") investment levels at least until competitive generation markets are fully effective and have matured.
Continue to secure efficiency investment with emphasis on:
(1) Lost opportunity market;
(2) Permanent transformation of energy-efficiency markets;
(3) Geographically targeted energy efficiency investments to reduce transmission and distribution costs;
Establish and periodically review an appropriate budget that meets the above investment objectives through a BPU proceeding.
When competitive generation markets are fully effective and have matured - to a point where the actual effects of competitive generation can be assessed - the need for mandating demand-side distribution utility investment will be reassessed and appropriate changes or refinements made.
iv. Nothing in this proposal is intended to prevent energy service companies from installing energy efficiency improvements that are paid for by a share of the customer's energy savings. To the contrary, it is a major goal of this proposal to spur development of energy efficiency services which are sufficiently competitive and vigorous as to not require regulatory intervention. Toward that end, each Distribution Company should be required to develop a transformation plan to move toward market-driven programs. However, until market barriers for these services are significantly reduced and the energy efficiency service industry is competitive, utility-sponsored (i.e., Distribution Company) programs must remain in effect.
11. Gross Receipts and Franchise Tax
The current Gross Receipts and Franchise Tax should be replaced with a tax on energy use, applicable on an equitable basis to all customers of the Distribution Company.
New Jersey has made a firm commitment to introduce retail competition into the electric utility industry. As part of that commitment, the Board should require implementation of pilot programs as a first step toward retail competition. Once unbundled rates have been filed and reviewed by the Board -- a process that should be completed within six months -- a pilot Program should be implemented in each utility's service territory. Each pilot program should offer at least three percent of its customers the choice of obtaining electricity from other suppliers. The pilot programs should remain in effect for a period of 12 months.
Clarity on the role of pilot programs, particularly their linkage to a phase-in to full competition, is important. The Board must avoid any possibility that the pilot will delay retail competition. Instead, we should structure the pilots so that they facilitate the transition. In this transition the purpose of the pilot programs is to obtain real information on the form retail competition should take in New Jersey. To do this, the pilot programs must meet two criteria:
First, the Seller's price in the pilot programs needs to be reasonably representative of what participants could expect under full competition; and
Second, information on pricing available from participating sellers needs to be available under reasonable conditions.
There is simply no point in having a pilot program if the prices offered are unrepresentative or in large part secret.
The key to meeting the above criteria lies in the design of the pilot programs. It is essential that the pilot programs be large enough so that a number of suppliers could reasonably participate. Thus, in deciding on the size of pilot programs, the Board should invite comments from potential non-utility suppliers, addressing the issue of reasonable market size. Further, just for the pilots, utility marketing affiliates should be excluded. This will help avoid situations, such as that in Illinois, where utilities have used their knowledge and position to "capture" the pilot. Finally, it is important that the pilots be publicized early and extensively. All of this will increase the likelihood that the pilots replicate a real competitive market.
Under competition many market transactions will be confidential. This is appropriate since generation will not be price regulated. However, in a pilot, the purpose is to obtain information. In particular, in order to gauge the ability of competition to lower prices, the Board needs data on market prices. The Board should therefore work closely with those suppliers interested in the pilots to develop confidential reporting procedures which provide the necessary information while fully protecting competitively-sensitive information.
Pilot programs of the type needed are unlikely to just happen. The Board will have to direct the utilities to undertake them. Specific principles which the Board should require the utilities to follow are described below:
1. The Board should order Public Service Electric & Gas Company, Jersey Central Power and Light Company and the Atlantic City Electric Company to file proposed pilot programs within two months. The programs would be effective no later than March 1997. Orange and Rockland Utilities is already beginning a pilot program in New York and would not need to begin a new pilot program in New Jersey since its New York pilot should provide data that could be usable for its New Jersey customers.
2. The three utilities should provide regular reports on the progress and results of the pilot every six months. Rockland Electric Company would also provide six month reports on its pilot program.
3. One-half of the customers participation could be based on geographical location with certain municipalities in the program and the other half would be open to the customers throughout the utility's service territory. The municipalities and customers chosen would be volunteers. The participating customers not in the volunteering municipalities could be chosen at random. The utility would assure that the participants comprise a fair sampling of customers so that the pilot program reflects the share of load that is used by each customer class.
4. The Board should ensure that participating retailers demonstrate their capability to provide reliable service and that they have the financial, business and technical ability to do so. The marketers would be registered with the Board as well as being required to maintain a New Jersey office for the purpose of accepting service of process and admitting to the jurisdiction of our state courts and agreeing to comply with all New Jersey laws and Board regulations and policies concerning consumer protection including the moratorium on winter shutoffs.
5. A utility's energy marketing affiliate would not be eligible to participate as a marketer in the utility's own service territory, but could solicit customers in the territory of another utility.
6. If a participating customer leaves the pilot program, he would not be permitted to re-enter at a later time. After the first six months of the pilot program, the Board could increase the size of the pilot program by an additional three percent if it is warranted.
7. All customers participating in the pilot program would be subject to all non-LEAC tariff riders, such as the DSF (demand side management) and RAC (manufactured gas plant remediation) riders. The reasonable incremental cost (above existing costs already embedded in rates) of the pilot program would be recoverable from all of the utility's customers (subject to rate review) and not only the customers participating in the pilot program.
8. Any retailers who participate in the retail projects should be required to file full details of all their pricing with the Board. This data should be treated as confidential. The Board should require the disclosure of any data it believes would help it prepare for full retail competition.