AARP Testifies at House Democratic Policy Hearing Opposing Changes to Default Electricity Service for Consumers

My name is Sonny Popowsky, and I am appearing here today as a volunteer member of the Executive Council of the Pennsylvania AARP.  Prior to my retirement in October 2012, I served as the Consumer Advocate of Pennsylvania for 22 years and worked at the Office of Consumer Advocate for 33 years.

On behalf of Pennsylvania AARP’s 1.8 million members, I would like to thank this Committee for holding this important and timely hearing on Pennsylvania’s electric restructuring program and the serious threat to the continued success of that program that is contained in Senate Bill 1121.  Senate Bill 1121 proposes radical changes to the competitive policies and consumer protections that were adopted in 1996 and enhanced in 2008 as integral parts of the restructuring of the Pennsylvania electric industry. The proposal for the state to sell off the electric generation service of all its default service customers without their consent has not been implemented in any other state, and in Connecticut, the state in which this proposal was first devised, the plan was ultimately withdrawn by its sponsors.  AARP strenuously opposes SB 1121 and urges Members of the General Assembly to reject this bill in its entirety. 

While serving as Consumer Advocate, I had the honor of working with the Members of the General Assembly, as well as Governor Tom Ridge and Governor Ed Rendell, in developing the legislation that has enabled all Pennsylvanians to obtain the benefits of competitive electric generation markets. Those legislative efforts involved strong stakeholder input from a broad array of interested parties, and provided a balanced approach to restructuring that has served Pennsylvania well and has avoided some of the catastrophic results that occurred in California and other states as a result of poorly implemented restructuring plans. 

The hallmark of the Pennsylvania restructuring model has been customer choice.  Customers choose whether and when to shop for electric generation service at the retail level.  Today, nearly three quarters (72.3%) of the electric generation sold to Pennsylvania retail consumers is provided by unregulated electric generation suppliers.  In terms of the number of customers, more than 2.2 million Pennsylvania electricity consumers, including nearly 1.9 million (or 37.7% of) residential customers, are currently being served by these alternative suppliers.  The remaining customers have chosen to remain on, or return to, utility “default” service.  Importantly, however, it must be emphasized that 100% of Pennsylvania electricity consumers are receiving competitively priced generation that is procured from competitive wholesale generation markets.  This is true whether those customers receive their generation from unregulated retail marketers or from their utility default service provider.

Under the provisions of Act 129 of 2008, utility default service providers are required to obtain their generation through competitive procurement processes in the competitive wholesale markets.  These are not the vertically integrated monopolies that served Pennsylvania consumers prior to 1996.  Today, all of our Pennsylvania regulated utilities are purchasing power in the wholesale market and then passing through the cost of that power to their retail default service customers with no additional profit margin.  The prices charged for that default service change on a quarterly basis and are subject to reconciliation so that the utilities recover no more and no less than the actual cost of providing the service.

While the majority of Pennsylvania residential customers currently receive this competitively priced utility default service, as I noted above, nearly 1.9 million residential customers are served by competitive retail suppliers who offer an array of generation services.  These unregulated generation services include products that feature annual or multi-year fixed prices, variable monthly prices, renewable “green” generation, and, with the advent of “smart” meters in service territories such as PPL, products whose prices can vary by the day of the week or the time of day.    

That is the essence of the customer choice provided under Pennsylvania’s electric restructuring program.  Customers who wish to analyze the offers in the retail market and then switch to alternative suppliers are free to do so; customers who wish to receive their competitively procured generation through their utility default supplier are free to do so as well.  Moreover, under the “anti-slamming” provision of Section 2807(d)(1) of the Public Utility Code, customers cannot be forced to change their supplier without their consent.

Under Senate Bill 1121, the Members of the General Assembly would substitute their judgment for the judgment of the more than three million of their individual constituents who have chosen to remain with or return to utility default service. Under Senate Bill 1121, the Commonwealth would grant itself the right to auction off the electric generation service of all residential and business customers who are receiving default service as of June 1, 2015.  Customers would have their utility default service sold out from under them without their consent or even over their objection.  Customers could not choose to remain on or return to utility default service because, after June 1, 2015, this bill would eliminate default service as presently structured.

In return for selling off your constituents’ electric generation service, the Commonwealth would receive a $100 “acquisition fee” for each customer obtained by the winning bidders.  Customers who remain with their winning bidder for at least three months would receive a $50 “bonus” from the electric generation supplier.  The supplier would also pay $2 per customer to the Public Utility Commission for a consumer education program.  Customers who are auctioned off would receive a fixed generation service price for 12 months based on the results of the auction.  After that 12-month period, however, customers who do not affirmatively switch to another product or supplier will remain with the supplier to whom they were auctioned at a price to be determined by that supplier on a month-to-month basis.   

At the same time that the auction occurs, utility default service under SB 1121 will be statutorily eliminated.  Therefore, there will be no way to determine whether the customers who are auctioned off to the marketers will be better off or worse off than they would have been in the absence of this state-mandated customer sale.  There will no longer be a competitively-based utility default service “Price to Compare” that customers can reference to determine whether they can save money by switching to an unregulated supplier or provide a benchmark against which to measure different offers.  Recall that under current law, our utilities provide default service by purchasing power in the competitive wholesale generation markets and simply passing the cost of procuring that generation on to retail default service customers. Under Senate Bill 1121, the auction winners will provide their retail generation service by purchasing power in the wholesale markets, but they will also have to recover the $100 per customer acquisition fee, the $50 customer bonus, and the $2 per customer education fee.  In addition, they will have to try to earn a profit from these customers either in the 12-month fixed rate auction period or in subsequent years if the customers who have been switched without their consent simply stay with that marketer and pay whatever that marketer decides to charge them on a month-to-month basis.  Again, there will be no way to determine whether those customers are better or worse than they would have been under utility default service because that service will be eliminated.

While utility default service would end under SB 1121, it would be replaced by an expensive and volatile “next generation” default service provided by an alternative supplier selected by the Public Utility Commission.  That service is good for no more than 60 days and would be priced by the PUC to allow the provider to recover the “projected market price for electric generation” “together with all direct and indirect costs and risks of providing next generation default service, including cost of capital.”    After 60 days on this service, customers would be randomly assigned to an unregulated marketer.  Given the costs involved and the 60-day limit, this “next generation” default service is certainly not a substitute for the competitively-priced, unlimited time period, default service that more than three million Pennsylvania electricity consumers rely upon today.   

Members of this Committee who were serving in the General Assembly in 1996 will recall that one of the most contentious issues at that time was the treatment of utility “stranded costs”, that is, the costs that had been incurred by utilities to build generation under traditional monopoly regulation but that might not have been recovered by the utilities if we had moved immediately to fully competitive generation markets.  SB 1121 gives rise to yet another round of stranded costs – reflecting the costs of existing utility contracts for wholesale energy and renewable credits that were supposed to extend beyond June 1, 2015.  Under SB 1121, those newly stranded costs – including “foregone profits” -- will be borne by all utility consumers through a non-bypassable automatic adjustment clause.

Additional stranded costs may arise after June 1, 2016, when, under the terms of SB 1121, electric generation marketers are permitted to provide “consolidated billing” service to their customers.  That is, the marketer can bill customers not only for their own generation service, but also for the utilities’ regulated distribution service.  Perhaps even more concerning, these marketers would become responsible for implementing all the consumer protection rules for billing and collection that now apply to our regulated utilities.  While the utilities would still be responsible for “physically terminating or discontinuing service to a customer,” the utilities would provide this critical function under SB 1121 “at the direction of the customer’s electric generation supplier.”   

AARP surveys of Pennsylvania residents age 50 years and older conducted in 2012 and 2013 [1] , [2] show that residential consumers are aware of their right to shop for competitive electricity suppliers and have shopped around.   But those surveys also show that a large majority support keeping the current default service structure intact.  Specifically, the AARP 2012 survey found that 93% of Pennsylvania residents aged 50 and above are aware that state law allows them to choose their electricity provider and nearly two thirds of the respondents (66%) said they had been contacted by an electric supplier in the last 12 months urging them to switch. About  23% of the respondents said that they had actually switched electric suppliers during that 12-month period.  Significantly, the great majority (74%) of the respondents in that survey said that it was “extremely important” or “very important” for electric utilities to continue to provide a “standard plan” at the lowest reasonable cost.  When this survey was updated in 2013, 68% of the respondents stated that they “strongly support” or “somewhat support” the requirement that Pennsylvania electric utilities provide a “default electric plan,” while only 7% said they would “strongly oppose” or “somewhat oppose” such a requirement.

The Members of this Committee, however, don’t need an AARP Survey to tell them that the nearly two thirds of your constituents who rely on utility default service do not want that service sold out from under them.  Just ask them.  I have spoken to literally thousands of Pennsylvania electricity consumers in the last 15 years, first as the Consumer Advocate and now as a member of the Executive Council of AARP.  I have always encouraged consumers to consider the competitive choices that are available to them under Pennsylvania’s electric restructuring laws, but I have also always assured them that they are not required to switch from their default supplier and that they are entitled to return to that default service if they choose to do so.

Many consumers have saved money by switching electricity suppliers in Pennsylvania, while many others have ended up paying more than they would have paid if they had stayed with their utility default service.  But in either case, those customers have voluntarily entered the retail market and have voluntarily taken on the responsibility of calculating the costs and benefits of switching to an unregulated retail supplier.  It is clear to me that many Pennsylvania consumers are aware of their choices, but have decided to stay with or return to their default service supplier.  In my opinion, we should respect that decision, particularly where, as in Pennsylvania, the default supplier is procuring power in competitive wholesale markets and then passing on the benefits of those competitive procurements to their customers on a dollar-for-dollar basis.   

What we have in Pennsylvania is working.  There is nothing to suggest that more than three million Pennsylvania consumers want to have their current default service sold out from under them.  The procurement and delivery of default service in Pennsylvania by electric distribution utilities over the past several years has provided a reasonable, stable, and competitively priced service for those who wish to receive it.   

The goal of Pennsylvania electric restructuring has never been and should not be to promote retail switching solely for the sake of retail switching.  Rather, the Pennsylvania laws have been designed to ensure that a stable, competitively-priced generation default service option is available to all customers, while providing those customers the opportunity to seek additional benefits by shopping in the competitive retail market as well.

We know that, on average, nearly two thirds of your constituents have decided to stay with or return to their default service provider.  AARP would respectfully urge the Members of this Committee and all the Members of the General Assembly not to deprive those customers of that choice without their consent, and we would therefore urge you to reject the provisions of Senate Bill 1121 in their entirety.