ELECTRIC DEREGULATION: A LOOK AT THE RETAIL MARKET FOR RESIDENTIAL CUSTOMERS

1. ELECTRIC DEREGULATION: A LOOK AT THE RETAIL MARKET FOR RESIDENTIAL CUSTOMERS Barbara R. Alexander Consumer Affairs Consultant 83 Wedgewood Dr. Winthrop, Maine 04364 (207)395-4143 E-mail: barbalex@ctel.net

2. DUAL RETAIL MODELS FOR ELECTRICITY • Approximately 15 states adopted electric restructuring and enabled retail competition for the generation or supply portion of the customer bill • Distribution or delivery services regulated as monopoly with traditional rate cases: poles and wires; customer service • Generation supply is not owned by the utility; prices set through contracts purchased in the wholesale market through regional organizations regulated by FERC • Other states have retained their full “cost of service” regulation of utility generation as well as distribution services

3. CRUCIAL IMPORTANCE OF DEFAULT SERVICE IN RETAIL COMPETITION STATES • MANY NAMES: DEFAULT SERVICE, STANDARD OFFER, PROVIDER OF LAST RESORT • MANY FUNCTIONS • SUPPLIER DEFAULTS • CUSTOMER DEFAULTS • CHOOSE NOT TO CHOOSE: LARGEST GROUP • PURPOSE OF SERVICE IS KEY TO ITS PRICING • KEY LINK TO UNIVERSAL SERVICE AND AFFORDABILITY CONCERNS • NO DEFAULT SERVICE IN TEXAS

4. Pressure to adopt short-term procurement for default electricity supply service • Regulators equate short term wholesale market prices as the only measure of “competitive” service • Marketers want “ugly” default service to drive customers in their arms and “create” competition • Utility management is risk adverse • Policy preference for time-varying rates with advent of advanced metering—reflection of wholesale market short-term prices • Examples: • Pennsylvania PUC has proposed “end state” with 100% procurement of default service quarterly by utilities • Connecticut Governor has proposed to auction off default service customers to retail suppliers for $80 M budget revenues • Ohio PUC has approved retail auctions for natural gas service to eliminate distribution company role in default service

5. WHAT DO CUSTOMERS WANT? • Surveys conducted by AARP in Connecticut and Pennsylvania and in Maine by PUC clearly document that vast majority of residential customers want stable electricity rates and want the utility role in default service to continue • While customers value competition, they want to see savings of 10% or more compared to default service

6. MANDATES RESULT IN SURCHARGES AND FEES ATTACHED TO DISTRIBUTION SERVICE FOR SUPPLY SIDE PURPOSES • Efficiency Mandates • Renewable Energy Mandates: require distribution utilities to sign long term contracts for off shore wind projects • Smart Grid surcharges to pay for metering that enables time-varying rates designed to lower peak energy usage and prices for supply service • Decoupling rate adjustments • RESULT: CUSTOMERS IN DEREGULATED STATES SUBSIDIZE PROGRAMS TARGETED TO SUPPLY SIDE OF THE BILL

7. COSTS TO IMPLEMENT RETAIL COMPETITION • Distribution Utilities have incurred costs that are passed on to distribution customers: • Billing enhancements • Electronic Data Exchange protocols • Customer Education • Complaints and Inquiries • Support of retail market enhancements, such as Referral Programs • STRANDED COSTS

8. RESIDENTIAL SHOPPING: SIGNIFICANT INCREASE IN SOME STATES • New York: 22.5% • Pennsylvania: 30% (PECO); 40% (PPL) • Maine: 32% • Connecticut: 44% (CL&P) • New Jersey: 15% • Massachusetts: 12.5% • Maryland: 25% (BGE) • Ohio: 70% (FirstEnergy); 47% (Duke Energy) IMPACT OF MUNICIPAL AGGREGATION • Illinois: ALMOST ENTIRELY DUE TO MUNICIPAL AGGREGATION

9. DO CUSTOMERS SAVE MONEY BY SELECTING ALTERNATIVE SUPPLIER? • Why don’t the state regulators find out the answer to this question? • Utilities bill for suppliers and use their regulated collection methods to collect supplier charges (Purchase of Receivables) so data is available. • The publicly available information to date indicates a disturbing trend.

10. PPL Electric in Pennsylvania • Over 70% of the low income customers served by an alternative supplier were paying more than the PPL Electric default service price at the time of the evaluation by an intervenor in PPL’s default service proceeding

11. Niagara Mohawk in New York • A study by PULP in a rate case documented that between August 2010 and July 2012, 84 % of the residential electric bills and 92 % of the residential gas bills of those who switched to alternative suppliers were higher than the bills of those who decided to keep getting their supply from the utility. • And those statistics translated into huge disparities in consumer bills. For instance, the data showed that over that 24-month period, those with higher bills paid nearly $500 more for electricity and $260 for natural gas. • Identified low income customers paid a net additional cost of $13.3 million during this study period compared to default electricity rates and $5.8 million during this same period for gas service compared to default natural gas rates. Only a very small percentage of low income customers paid lower prices when served by an alternative supplier, 8.5% of electric customers and 6.6% of natural gas customers. These savings were modest over the 24-month period, averaging $40 for electricity and $63 for gas.

12. Illinois CUB’s Gas Market Monitor • Citizens Utility Board in Illinois publishes an analysis of how natural gas supplier plans have actually impacted customer bills since 2003. • 94% of the alternative natural gas supplier plans have resulted in higher prices for residential customers over the term of these contract terms compared to default service. • The average customer loss is $1,202.00. This trend has been evident for many years and for almost all suppliers.

13. OPAE Analysis in Ohio • Data submitted by the Ohio Partners for Affordable Energy in two recent natural gas proceedings in which the regulatory commission has proposed to eliminate default service and auction customers off to retail suppliers also demonstrates that the bulk of competitive natural gas supplier offers are higher in price than default service provided by the natural gas utilities. • At Columbia Gas of Ohio customers purchasing commodity natural gas from unregulated suppliers have paid over $861 million since the advent of retail choice for natural gas service. According to this study, in the most recent six months for which data is available, Ohio customers served by marketers have paid $37 million more than what would have been charged for default natural gas service, and that figure does not include any winter heating months.

14. CANADIAN STUDY • The Office of Auditor General in Ottawa evaluated supplier offers for electric service. Approximately 15% of residential customers had selected an alternative supplier, primarily based on the marketing theme of “price protection and stability.” Most of these supplier plans are fixed price for a 4-5 year period. • The Auditor sampled customer bills from 2006 to 2009 from various suppliers and found that the supplier fixed price ranged from 8.49 cents per kWh to 10.53 cents per kWh but that during this same period the regulated default service price was 5.4 cents per kWh to 6.3 cents per kWh. • The same retail customers paid from 35% to 65% more for their electricity compared to the highest default service rate over the term of their contract. • Over the term of a five-year contract (which was typical of the contracts entered into by residential customers) a customer using 1,000 kWh per month would pay about $2,000 more for electricity than under the regulated default

15. RESTRUCTURING STATES HAVE RETAINED HIGHER PRICES THAN AVERAGE

16. IMPACT OF RESTRUCTURING AT RETAIL LEVEL

17. NATIONAL EIA DATA CONFIRMS HIGHER PRICES FROM SUPPLIERS • State      Competitive Supplier     Full Service Provider • CT           18.37                                            17.92 • DC          12.91                                            13.44 • DE          12.78                                            13.72 • IL            11.58                                            11.79 • MA         16.14                                            14.49 • MD         13.44                                            13.29 • ME         15.40                                            14.47 • MI          13.25                                            13.27 • MT         9.84                                               9.75 • NH         14.94                                            16.52 • NJ           16.30                                            16.23 • NY          19.27                                            18.06 • OH          11.04                                            11.57 • PA          13.33                                            13.24 • RI            13.96                                            14.34 Note: Compiled by John Howat at NCLC; these prices reflect averages of all suppliers; residential prices only.

18. Consumer Protection Policies: Retail Suppliers • State regulators are not doing their job of regulating the conduct and contract terms of alternative suppliers • Licensing is designed to make it easy to enter the market • State regulators don’t have the skill set or the political will to “regulate” a competitive market where deceptive practices and unfair contract terms should be prohibited • Rules fail to address frequent abuses of door to door and telemarketing sales conduct • Enforcement is lax and important tools such as license revocation and restitution to affected customers rarely invoked

19. FIXED PRICE? • A supplier in PA is offering a long term fixed price contract with the following: In addition to the charges described above, if any regional transmission organization or similar entity, EDC, governmental entity or agency, NERC and other industry reliability organization, or court requires a change to the terms of the Agreement, or imposes upon [SUPPLIER] new or additional charges or requirements, or a change in the method or procedure for determining charges or requirements, relating to your electric supply under this Agreement (any of the foregoing, a “Pass-Through Event”), which are not otherwise reimbursed to [SUPPLIER], Customer agrees that [SUPPLIER] may pass through any additional cost of such Pass-Through Event, which may be variable, to Customer. Changes may include, without limitation, transmission or capacity requirements, new or modified charges or shopping credits, and other changes to retail electric customer access programs.

20. VARIABLE PRICE? • A Supplier in Ohio is offering a variable rate contract with the following description of how the price will change during the contract term: “Under [SUPPLIER’S] variable price plan, your price may fluctuate from month to month based on wholesale market conditions applicable to the Distribution Company’s service territory.” • Another Ohio Supplier: “In a variable-rate model, your supply rate is based on a variety of factors including our costs to purchase energy, applicable taxes, fees, charges, costs, expenses and margins and can change each month.” THESE CONTRACTS DO NOT REFLECT ANY EXTERNAL INDEX OR FORMULA OR CONTAIN A HIGH OR LOW BANDWIDTH FOR THESE MONTHLY PRICE CHANGES

21. IS THERE ANY GOOD NEWS? • NOT REALLY • IMPROVED REGULATIONS FOR DOOR TO DOOR MARKETING IN PA • APPARENT LEGISLATIVE REJECTION OF CT PROPOSAL TO AUCTION OFF CUSTOMERS • PA LEGISLATION THAT MANDATES STABLE AND PRUDENT MIX OF CONTRACTS FOR DEFAULT SERVICE STILL INTACT