Electric Service

BEFORE THE HOUSE PUBLIC UTILITIES COMMITTEE
OVERSIGHT HEARINGS ON ELECTRIC UTILITIES

TESTIMONY BY BRUCE J. WESTON
INTERIM CONSUMERS’ COUNSEL

DECEMBER 7, 2011

Good morning Chairman Stautberg, Vice Chair Gonzales, Ranking Member DeGeeter and members of the House Public Utilities Committee. Thank you for allowing me to testify today regarding Ohio’s electric utilities and their service to Ohio’s residential utility customers. I am Bruce Weston, the Interim Consumers’ Counsel. The Office of the Ohio Consumers’ Counsel (OCC) advocates on behalf of Ohio’s residential utility customers for affordable and reliable utility services. In this testimony, I will discuss a few of the benefits and challenges for residential utility customers regarding their electric utility service in Ohio.

Background

Electric services have three components: the distribution, transmission, and generation of electricity. Distribution and transmission services are regulated by various levels of government primarily because they are natural monopolies. It would not be cost-effective to build multiple alternatives to these systems

Transmission service is regulated by the federal government, primarily by the Federal Energy Regulatory Commission (FERC). Distribution services are regulated by the Public Utilities Commission of Ohio (PUCO).

Electric generation service in Ohio is governed by Amended Substitute Senate Bill 221 (SB 221) from the 127th General Assembly. Utilities have two options for pricing generation service. One option is a market rate offer (MRO). The other is an electric security plan (ESP). The market rate offer requires an electric utility to procure generation service by making purchases from wholesale suppliers through a competitive bidding process. The law specifies that once a utility operates under an approved market rate offer, the utility can never return to an electric security plan. For an electric security plan, the law does not specify how generation pricing is to be determined. But the plan can include distribution charges in addition to generation, unlike the market offer that is limited to generation.

To date, market rate offers have been proposed but not implemented. Recently approved electric security plans have included a market auction as one component of the electric security plan. That is somewhat like having a market rate offer in an electric security plan. Having a market auction within an electric security plan has provided lower generation prices to customers. But the approach has also required Ohioans to pay for additional charges that were approved as part of the electric security plan. All of Ohio’s electric distribution companies except Dayton Power & Light are either operating under an electric security plan with a market auction or have a pending proposal to do so.

SB 221 also provides customers with options for generation service. Customers can choose a competitive supplier of generation services, either directly with a supplier or through governmental aggregation, where available.

Customer Benefits in Ohio’s Current Regulation of Electric Generation

Ohio law contains some valuable protections for electricity customers.¹ Those protections include the following:

1. Competition, in the form of opt-out governmental aggregation and electric generation choice;

2. Default generation service pricing (i.e., the standard service offer); and

3. The significantly excessive earnings test (SEET).

Competition, in different forms and where available, is one of the benefits for customers under SB 221. One form of competition is governmental aggregation. Another form of competition is individual customer choice. Attached to my testimony is OCC’s fact sheet “Comparing Your Electric Choices” that shows retail choice offers.

The electric utility’s standard service offer, or SSO, is an essential consumer protection. The standard service offer is the generation price that is set either through a market rate offer, MRO, or an electric security plan, ESP. While not perfect, the standard service offer is important to customers for three reasons. First, it is a default price option for generation service if customers choose not to shop or if such shopping is unavailable to them. Second, with the use of a wholesale market auction, the standard service offer price can be favorable for customers. Third, the standard service offer has been a useful price-to-compare for customers who are considering other choices. If you look at the attachment, you can see some of the competitor offers are at a discount off the price to compare. Even though competitive electricity suppliers are currently offering customers good competitive options, Ohio should maintain the comparison price point for customers that is set by the utilities’ standard service offers.

The significantly excessive earnings test (SEET) is one of the most important customer protections in SB 221. Each year, an electric utility is required to show that its earnings were not significantly excessive when measured against the earnings of comparable public companies.

This test has already resulted in refunds for customers regarding one electric utility. In that case, OCC, the Ohio Energy Group and others worked together toward obtaining a refund for customers.

It should be noted that, in 2009, the most profitable electric utility in the United States was located in Ohio. That may be good for investors, but it is not good for customers. The significantly excessive earnings test works toward restoring more balance between the interests of the utility’s shareholders and those of its customers.

The Challenges for Affordable Rates

I will discuss three challenges for achieving affordable rates:

1. An electric security plan can include charges for more than just generation service;

2. The utilities can “veto” a PUCO decision in an electric security plan case;

3. There is a prohibition against the PUCO approving an electric security plan after the utility has used a market rate plan.

I would like to briefly explain each of these challenges.

Electric Security Plans have developed with a twist under the law. The twist is that electric security plans are including, in essence, market rate offers within the ESP. But unlike a real market rate offer, the MRO in the electric security plan comes with a price of admission for customers. That price of admission--to pay for more than just the market rate--can be steep. For example, that price has included proposals for customers to pay for distribution capital recovery, enhanced reliability, storm damages, and other things. In this regard, the statutory comparison between a market rate offer and an electric security plan has been relatively subjective and not necessarily applied to produce the lowest rates for Ohio customers.²

The next challenge is an electric utility’s ability to reject – or “veto,” so to speak – a PUCO decision regarding an ESP. If the PUCO modifies a proposed ESP, the utility may withdraw its application. This “veto” power limits the PUCO’s ability to modify and improve an electric security plan because, at the end of the process, the utility can reject the PUCO’s decision. The “veto” power limits parties’ negotiating power during settlement discussions. And the “veto” power limits what parties can accomplish through litigation, as well. There is an excellent discussion of this point in a Concurring and Dissenting Opinion by PUCO Commissioner Roberto, filed March 25, 2009, in PUCO Case 08-935-EL-SSO:

“In the case of an ESP, the balance of power created by an electric distribution utility's authority to withdraw a Commission-modified and approved plan creates a dynamic that is impossible to ignore. I have no reservation that the parties are indeed capable and knowledgeable but, because of the utility's ability to withdraw, the remaining parties certainly do not possess equal bargaining power in an ESP action before the Commission. The Commission must consider whether an agreed-upon stipulation arising under an ESP represents what the parties truly view to be in their best interest - or simply the best that they can hope to achieve when one party has the singular authority to reject not only any and all modifications proffered by the other parties but the Commission's independent judgment as to what is just and reasonable. In light of the Commission's fundamental lack of authority in the context of an ESP application to serve as the binding arbiter of what is reasonable, a party's willingness to agree with an electric distribution utility application can not be afforded the same weight due as when an agreement arises within the context of other regulatory frameworks. As such, the Commission must review carefully all terms and conditions of this stipulation.”

It would be preferable for electric utilities, like other parties, to not have “veto” power over a PUCO decision.

The third challenge is the prohibition that prevents the PUCO from authorizing the utility to return to an electric security plan after the utility has used a market rate plan. That prohibition is a deterrent to approve market rate offers, because the approval of the market rate offer would prevent the PUCO from later ordering an electric security plan. It would be better to not discourage the use of market rate offers. As mentioned, electric security plans with market auctions (as differentiated from pure market rate offers) tend to have a price of admission for customers to gain the benefit of the market rate.

Building New Generation Resources in Ohio

There has been discussion in this committee about building new generation facilities in Ohio. Power plants can be built under both regulated and deregulated models. With regard to the regulated model, certain consumer protections should be maintained and others should be added to the law.

First, power plant construction should continue to be subject to the consumer protection that currently exists in the law for resource planning. Electric utilities are required to annually file a long-term forecast report indicating the “need,” if any, for additional electric resources. For years in which the utility forecasts a “substantial change” (such as the need to build generation), the forecast process also requires, by rule, a cost-effective resource plan. That plan includes the electric utility’s projected mix of supply-side (generation) and demand-side (energy efficiency and other demand reduction mechanisms) resources to meet the projection of peak demand and total energy requirements. This process contributes to decisions about what should be built or saved through efficiency, if new generation even needs to be built.

Second, additional consumer protection is needed with regard to charges to customers for power plant construction. The building of power plants may be viewed by some as an opportunity to charge customers for Construction Work in Progress or CWIP. The use of CWIP will require customers to pay for a power plant that is not yet providing service to them. Moreover, customers will be asked to pay for the plant through a non-bypassable charge. Non-bypassable charges hinder the further development of retail electric choice in Ohio. In this regard, competitive retail electric service providers would have to overcome the utility generation charges in their own “offers” to customers.

Ohio’s largest electric distribution utilities have either already spun off their generation assets to an unregulated subsidiary, are in the process of doing so, or are waiting for PUCO approval to do so. In these situations, investors in the unregulated generation subsidiaries—and not customers—would bear the full risk of cost collection. As generation in Ohio becomes increasingly more competitive, the model emerging can be one where the electric distribution utilities are in a position to procure a least cost mix of demand-side resources (in increasing amounts in compliance with ORC 4928.66) and supply-side resources through a competitive auction.

It’s worth noting that the least expensive resource in Ohio is energy efficiency. I say “least expensive” because, under Ohio rules, a utility’s three-year energy efficiency and peak demand reduction portfolio must be less expensive than the supply-side alternative as demonstrated by a positive Total Resource Cost test result.3 The energy efficiency and peak demand reduction requirements4 of Senate Bill 221 have already saved Ohio consumers many millions of dollars.

For example, just last week AEP filed its portfolio of energy efficiency programs with a figure of $880 million in customer bill savings.

Conclusion

Thank you for listening to my recommendations regarding Ohio’s electric distribution utilities. The benefits for customers that I’ve described should be preserved in any new law. And the challenges for customers should be addressed in future legislation.

1 The general opinions in this testimony are not intended as OCC positions in individual cases where statutes are applied to specific patterns of facts.

2 Also, the comparison has been rendered impractical by the practice of including an auction process as part of an ESP. SB 221 provides that utilities may only provide service under an MRO if they blend prices from a previously established ESP [R.C. 4928.142(D)]. If the prices from the earlier ESP were set based upon one or more competitive auctions, a utility that has spun off its generating assets may be unable to guarantee that it can provide service at a blended price that includes prices based on past auction results. Such utilities may be unable to propose an MRO, and an MRO comparison with a proposed ESP may lack meaning.

3 The TRC test is usually the litmus test in many jurisdictions and it compares the utility and customer costs of the energy efficiency program to utility resource savings (usually represented by avoided capacity and energy costs).

4 Beginning in 2009, Ohio requires that a cumulative 22 percent of utility sales be met with energy efficiency by 2025. Also, electric-distribution utilities must implement peak demand efficiency programs designed to achieve efficiencies in peak demand of 1 percent in 2009 and .75 percent through 2018.