Principles for protecting low income customers in Electric and Gas industry restructuring

NATIONAL CONSUMER LAW CENTER CONFERENCE:

PROTECTING ENERGY AFFORDABILITY FOR
LOW INCOME CUSTOMERS IN A CHANGING MARKET

Key Bridge Marriott, Arlington, Virginia
February 26, 1998

PANEL PRESENTATION: PRINCIPLES FOR PROTECTING LOW INCOME CUSTOMERS IN ELECTRIC AND GAS INDUSTRY RESTRUCTURING

Remarks of Blossom A. Peretz, Esq.
Director, New Jersey Division of the Ratepayer Advocate

Good afternoon. My name is Blossom Peretz, and I am the Ratepayer Advocate for the State of New Jersey. I am pleased to be able to participate in this panel discussion, and I would like to share with you my perspective on the changing regulatory environment in the electric and gas industries. New Jersey is in the midst of its restructuring cases, with administrative law hearings proceeding on each of our state's four utilities' restructuring proposals. Initial decisions will be issued by the judges hearing those cases by the end of May. The New Jersey Board of Public Utilities (BPU) will then make its determination on how restructuring should proceed. The phase-in of retail competition is scheduled to begin in October of this year, with full retail competition to be in place by the turn of the century. As you can see, many of the questions being asked during this conference demand immediate answers if New Jersey is going to protect energy affordability for its low income customers.

The New Jersey Ratepayer Advocate represents all utility customers in our State, including residential, small business, commercial and industrial customers. In that regard, my office has a broad and unique mandate. Balancing the interests of such a diverse group of constituents is a delicate, challenging task. A special part of my responsibility, however, lies in protecting the interests of New Jersey's most vulnerable utility customers- the elderly, the disabled, and the low income residents of our state. For many of these people, the Ratepayer Advocate is their only voice in the restructuring proceedings. My office is committed to ensuring that the benefits of competition reach these electric and gas customers.

According to 1990 Census figures, 350,000 of New Jersey's 2.8 million households, or 12.5%, can be classified as "low income" households- that is, the combined income for the household is 150% or less of the federal poverty guidelines. This is the income trigger used for a number of federal assistance programs, such as Food Stamps, Medicaid, and the Low Income Home Energy Assistance Program (LIHEAP.) Despite the fact that low income households use about 20% less energy for all residential purposes than non-low income households, the "energy burden" on low income households in New Jersey is at least four times as great as that on non-low income households. In fact, low income households in New Jersey spend between 11% and 25% of their income on energy needs alone, compared with less than 4% for non-low income households. According to a Census report covering September through December, 1992, over 32% of low income households were unable to pay their utility bills in full, and nearly 10% were disconnected from their electricity or gas for nonpayment. The trend in the disconnect numbers appears to be getting worse in New Jersey- over 125,000 customers were disconnected in 1996, and over 146,000 were shut off in 1997. Clearly, existing low income programs are not enough to ensure that low income customers have affordable access to energy.

The public generally supports the goals of consumer protection and the broad societal benefits that are part of the monopoly electric utility industry today. There is no call for a drastic change- in fact, even large industrial customers favor the continuation of low income programs. There are many reasons for this, including political compromise, but the fact remains that the issues of fairness and equity have kept a prominent place in the restructuring debates. The concept is generally termed "universal service," a phrase that is much in vogue in the energy and telecommunications industries today. The idea, as you know, is to make affordable service available to everyone who desires it. Programs to assist low income customers obtain affordable service have long been part of the utility industry, and there is a general agreement that this feature should somehow be retained in a restructured energy industry.

The reality, however, is that many of the benefits derived from current utility programs are at serious risk in a competitive environment. These programs were imposed by regulators on the monopoly utilities as part of their "obligation to serve." The programs do not pay for themselves, although well run programs can offset much of their cost. The low income programs that exist, however, fall short of meeting the needs of a large segment of the low income population, chiefly because they either do not reach a large number of people, or because the program has few dollars to spread around.

The programs that exist in New Jersey include:

LIHEAP - administered by two state agencies who have suffered radical budget cuts in recent years, this program reaches only 50% of eligible households.
Fuel funds - three of the four utilities in our state have official fuel fund programs, which combine customer donations with shareholder funds to supplement certain energy assistance programs. In 1995, 4,000 families received such aid.
Lifeline program - provides assistance to low income elderly and disabled adults for utility bills, in the form of an annual voucher of $225 per household payable to the utility. The program has distributed aid to over 200,000 individuals over the last several years.
DSM - most of the funding for residential energy efficiency programs comes from federal funds, notably Weatherization Assistance Program (WAP.) These programs can leverage one-time investments into long term rate reductions and cuts in energy consumption, but reached only 1,468 housing units in 1995.
Utility funded programs - N.J. utilities fund modest energy management and weatherization programs targeted to low income customers. Two of the four utilities waive security deposits for low income customers.
Indirect programs - all utilities collect their administrative and general charges through general rates, which helps low income customers who often have a higher ratio of expenses associated with their accounts due to bill collection, disconnects and credit procedures.

These programs do help many low income customers in New Jersey. However, there is no coordination among the programs or the entities that administer them, nor do these programs ensure affordable energy bills. New Jersey has no "safety net" for its low income customers as we move toward competition. We are left with an inadequate cache of low income programs that will surely erode unless there is a significant and fundamental review and coordination of benefits.

Because these existing protections of low income customers are inadequate, my office has asked our Legislature and the BPU to consider successful programs that are currently implemented in other states. A survey of other states' efforts is needed to develop a comprehensive array of options. An analysis of these programs, including costs and how effective they are in delivering affordable energy to low income customers, should reveal which program would work best for New Jersey.

Briefly, some of these programs include:

Bill discounts- across the board rate cuts of 15-20% for eligible customers. Qualification can be made by linking enrollment with participation in an assistance program such as LIHEAP, SSI, Medicaid, Food Stamps, or AFDC (TANF).
Targeted Benefits- linked to the customer's ability to pay heat and electric bills, this type of program aims to reduce the total energy burden to a certain percentage of household income. One drawback is that these programs have significant administrative costs stemming from the individualized nature of the program.
Energy Management Programs- assist low income households in managing energy use and reducing total energy needs, through weatherization, energy audits, efficient appliance programs and consumer education. Overall bills are reduced and kept low, reducing the need for other future assistance.

How can these programs be funded in a restructured energy industry? In New Jersey, funding for the existing low income programs in the new competitive environment will be acquired through a societal benefits charge (SBC.) The SBC would be funded by a nonbypassable wires charge imposed on all customers who take delivery of electricity through the distribution system. That way, the cost would be spread equally among all customers, and no customer would be unfairly burdened. However, the danger with using a SBC exclusively to fund low income programs is that if the SBC is too high, the benefits of competition will be lost.

An alternative to using a societal benefits charge to fund all low income programs would be to set up a universal service fund modeled after the one used in the Federal Telecommunications Act of 1996. Under the Telco Act, annual assesments are made on all telecommunications carriers and collected on an "as needed" basis. The key feature of the universal service fund is that the assesment is not necessarily passed on to ratepayers. In fact, the universal service fund was intended to be funded solely by the telecommunications service providers. Those choosing to pass along the assesments to their customers would be making a competitive choice to market their services as a higher rate. Companies absorbing the assesment would have lower rates. Instituting a similarly structured universal service fund mechanism for the competitive gas and electric industries would increase the range of options for funding low income programs while preserving the rate benefits promised by competition.

Universal service and low income programs provide many necessary benefits but do not address one of the basic problems competition presents for small and low income customers. The problem is the low income customer's lack of market power. While many energy marketers will target large industrial and commercial customers, fewer will be interested in the individual residential customer; fewer still in the low income residential customer. This lack of market power has often meant disaster for low income customers in other deregulated industries. However, there is at least one option that can both increase the market power of residential customers and help reduce the costs of administering low income programs. That option is aggregation.

Municipal aggregation can successfully transform individual residential, small business, and municipal electric customers into potent buying groups. By pooling the demand of various individual customers with local businesses and the municipal load, municipalities can command better deals, demand better service, and save money. Aggregation does not need to be limited to municipalities, either: counties, credit unions, school districts, trade, industry, environmental or consumer groups could all form the core of an aggregate. Under the municipal aggregation model, the municipality assembles the buying group, solicits bids, negotiates and approves the arrangement. The chosen energy marketer then contracts with each member of the aggregate, who becomes responsible for her own bill. The marketer benefits by obtaining a large, stable energy load; the customers benefit by getting a better combination of price and service than they could achieve on their own.

Municipal aggregation programs will require extensive local education campaigns, however. These campaigns must be run by local officials, volunteers, community groups, and other essential contributors to any grassroots effort, such as social service agencies. While education will be part of a municipal aggregation effort, so too will be information gathering. A municipality seeking to aggregate will need to know all about the energy use profiles of its constituents. This can easily include information on the energy burden of potential members. It will be in the interest of the aggregated group and the energy marketer to include the low income members of the community when they form the energy pool.

Of course, municipal aggregation is not a panacea for the low income customers. Significant pitfalls exist. One of these is "redlining," or the avoidance of certain geographic/demographic areas that are perceived (rationally or not) to be uneconomical. A simple example would be to compare the aggregated load of Princeton with Trenton. Energy marketers might associate certain costs with doing business in Trenton, such as a higher rate of uncollectible bills, lower per-resident profits, and a higher percentage of low income customers requiring assistance, and decide that their profit potential does not warrant pursuing the Trenton aggregate. However, the systems benefits charge, universal service fund, and other system subsidies such as direct government benefits must be available to defray those added costs. Indeed, the availability of these subsidies to low income users might make serving aggregations of low income customers commercially attractive. Many low income customers reside in large, densely populated areas which are geographically attractive for aggregation.

In conclusion, I would like to share with you some of the principles my office has prepared to assist our Legislature during the restructuring process to protect the interests of low income customers:

All customers must have an opportunity to share in the benefits of increased competition. One customer class may not reap benefits at the expense of another.
Universal service must be provided. Electric service is essential and should be available and affordable to all customers.
An equivalent level of protection for low-income customers equivalent to that provided within the current electric utility industry structure must be maintained. Each electric company that provides distribution service shall have an obligation to procure electric service for customers in its service territory, as necessary.
New or augmented Low Income Energy Assistance Programs must be created. Current levels of assistance are inadequate.
A comprehensive, unbiased consumer education program must be part of the transition to competition, to minimize confusion among ratepayers and limit the potential for fraud and unfair marketing practices.
Create a system of licensing and consumer protection to ensure sufficient protection for low income, residential and small commercial customers without obstructing or unduly burdening new entrants to the market.
Aggregation must be encouraged, because it represents the best alternative for small customers to shop effectively. Municipalities are natural units for aggregation, but other groups may emerge as well, and creative approaches should not be stifled.

Finally, I would like remind everyone why competition, if structured correctly, can deliver so many benefits. It is because of customer choice, which has become the guarantor of efficient and fully competitive markets and the incentive for research and development to bring creative and lower cost products to the marketplace. Ultimately, customers served by the electric industry should be able to choose among a range of service providers, services, pricing options and payment terms. Our job is to ensure that all customers will have the opportunity to reap the benefits of choice.

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