ENERGY-ONLY CREDIT; BASIC GENERATION SERVICE

OPENING REMARKS
BLOSSOM A PERETZ, ESQ.
BEFORE THE BOARD OF PUBLIC UTILITIES
RESTRUCTURING HEARINGS

ENERGY-ONLY CREDIT; BASIC GENERATION SERVICE

May 5, 1998

Before the Board of Public Utilities
Energy Restructuring Hearings

The Board of Public Utilities continues its restructuring hearings and focuses this week on comments and proposals from utilities, the Division of Ratepayer Advocate and other interested parties concerning PSE&G's proposal to provide an energy-only credit, as well as various proposals on basic generation service, which is intended to assure that all customers have electric service, irrespective of whether the customer chooses a supplier or not.

These hearings will first address PSE&G's "energy-only" credit proposal, which purports to provide a credit for the wholesale value of energy-only on the bill of customers who purchase electricity from alternative suppliers. The Division of the Ratepayer Advocate urges the Board to reject PSE&G's proposal, because our analysis shows that it would block development of a competitive market for electricity in New Jersey and perhaps result for up to two years in some customers paying twice for a portion of the electricity they purchase.

As the Board is aware, PSE&G is proposing to reduce its current rates by a maximum of 6.7% and then cap those reduced rates for seven years. But under PSE&G's proposal, customers who decide to buy electricity from an alternative supplier could be double-charged for a portion of the electricity they purchase. PSE&G's proposed "energy-only" credit would subtract the wholesale energy charge from a customer's bill if he decides to purchase electricity elsewhere. However, PSE&G would continue to charge customers for capacity and administrative costs, irrespective of where they purchase electricity. No customer will choose to purchase from another utility or supplier if that means a higher bill because of double billing for capacity. Consequently, PSE&G's proposal stops competition in its tracks.

PSE&G's proposal virtually insures that marketers won't compete in PSE&G's service territory. The fact is that alternative providers also incur capacity costs. All load-serving entities are required by regional standards [PJM Power Pool standards] to have or obtain capacity needed to serve customers.

A supplier could choose to offer customers in PSE&G's service territory a price that includes only the cost of energy. But it will be very difficult, if not impossible, for an alternate supplier to offer a price that must include capacity, energy and administrative costs, at a rate that will beat PSE&G's price for energy-only.

Furthermore, even if an alternative supplier were able to sell energy-only within PSE&G's service territory, it would be required to sell energy-only below the PJM hourly spot market price, a notion that must be seriously questioned.

It cannot be stressed too heavily that, according to the Board's Final Report, "the central theme of electric restructuring is to effectively eliminate the monopoly provision of electric power supply." (Final Report at p. 120). The failure of PSE&G to offer a capacity credit and only offer an energy credit based upon the PJM hourly spot market will have a profoundly negative effect on the development of competition within its current service territory compared with the goal set forth in the Final Report.

As Ratepayer Advocate witness Peter A. Bradford opined in testimony for this proceeding: "PSE&G would put New Jersey too on the path to competition without competitors, markets without marketers and customer choice without alternatives - an astonishing hijacking of the concept of restructuring."

Consequently, the Ratepayer Advocate has proposed in this proceeding in the testimony of its witness Andrea Crane that the Board examine the issue of pricing energy and capacity credits in a manner similar to that applied by the Pennsylvania Public Utility Commission. In its recent decision regarding PECO Energy Company's request for approval of its restructuring plan, the Pennsylvania Commission recognized that the level at which the energy and capacity credits were set would determine whether real competition would result. If the credits were set too low, competition would be harmed or even destroyed.

If our goal is competition, we cannot be near-sighted and adopt a mandated utility rate decrease as the only tool for restructuring. We must also foster a vibrant competitive marketplace where customers will have expanded opportunities to reduce electric bills and increase customer services based on expanded research and development. Choice for consumers must be meaningful and not illusory. Otherwise we will be holding hearings at the Board in three years -- similar to those hearings just completed in telecommunications -- examining why there is no competition in the New Jersey energy marketplace.

Hearings this week will also evaluate the manner in which basic generation service will be provided to New Jersey customers. The Ratepayer Advocate believes that the availability of basic generation service is important to provide customers with a default or supplier-of-last-resort generation service. However, again, this should not be an impediment to competition.

The Ratepayer Advocate proposes that the regulated arm of the the electric utilities -- that is, the transmission and distribution entity -- should be required to solicit competitive bids to provide capacity and energy needs for Basic Generation Service for the first two year period of deregulation. Requiring competitive bids will stimulate the generation market, since each utility will be seeking to acquire generation at the best price. In addition, the competitive bids can serve as a benchmark for the Board as it sets an appropriate bundled rate to be charged those customers who remain with the utility for the provision of electric service.

After that period, the Board should put out to bid the right to provide Basic Generation Service. Competitive bidding for the right to provide Basic Generation Service will give alternative providers an opportunity to enter the marketplace.

In other words, the Ratepayer Advocate proposes a two-year transition period and two-year contract term between the utility and the third-party supplier. This proposal provides a way for the Board to safeguard the 10% rate reduction, at least to customers who do remain customers of the utility for basic generation. This approach also provides rate stability for Basic Generation Service customers, which is especially important for residential and small commercial customers as they begin to learn about deregulation and their new options. The Ratepayer Advocate's approach also mitigates the utility's risk, because rates for basic generation service would not be set until bids have been received from providers of the actual generation.

New Jersey's electric utilities, with the exception of PSE&G, have proposed to flow through to Basic Generation Service customers some version of a market price as a means of setting rates. The Ratepayer Advocate believes this approach, which can result in regular changes in electric rates for customers, is fundamentally flawed for two reasons. First, it can result in rate variability for those customers who are least able to and/or least willing to absorb market-based changes in their electric rates. Many customers will decide to remain with their existing utility -- will choose not to choose -- because they are unwilling or unable to deal with the energy market and price fluctuations.

Second, if Basic Generation Service rates change regularly through adjustment clauses to reflect market prices, there is no guarantee that customers will see the 5% to 10% rate reduction that the Board seeks for all New Jersey customers. If market prices for energy go up, customers least able to strike a better deal with alternative suppliers could even see a rate increase above and beyond their pre-deregulation bills. That cannot be what the Board intended as a byproduct of electric deregulation in the State of New Jersey.

Finally, it sounds simple enough but competition cannot exist without competitors. 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. The assurance of a level playing field, as always, is the means of attaining the goal of the competitive marketplace.

The Ratepayer Advocate is by no means looking to 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 the even playing field. There will be no competition in New Jersey without actual competitors offering services in the New Jersey marketplace. A vibrant New Jersey marketplace will have opportunities for all players -- and the winners will be the energy consumers of our state.