Good morning, Senator Bark, Senator Inverso and Members of the Senate Economic Growth, Agriculture and Tourism Committee.

Restructuring of the energy industry has been front page news as the result of both the high electric costs in California and the recent unprecedented high cost of natural gas throughout the country. Considering the impact of this industry on consumer pocketbooks and business opportunities in New Jersey, it is timely that this Committee has decided to examine the many critical issues related to electric power industry restructuring in New Jersey.

Among the clear goals of the Electric Discount and Energy Competition Act ("EDECA") were lowering the high cost of energy, improving the quality and choice of service, placing New Jersey in an improved competitive position in regional, national and international markets, providing greater reliance on competition, and ensuring universal service for affordable and reliable energy. The question facing us today is: How many of these goals have been met and what should we be doing to achieve the lofty promises of EDECA?

It is no secret that retail electric competition in New Jersey is not living up to its promises. When the Legislature passed the EDECA in 1999, it declared that competition "will produce a wider selection of services at competitive market-based prices." Reality has proven otherwise. Consider the following:

1. Today only about 85,000 customers are being served by competitive suppliers, representing only about 2% of the state's 3.1 million residential customers. This means that 98% of New Jersey electric customers continue to receive their electric supply from their incumbent utility, just as they did before restructuring.

2. Each day fewer suppliers are actively soliciting customers, especially small customers, and several suppliers have recently announced they would be leaving the state.

3. Several electric utilities are deferring significant costs for future recovery from ratepayers starting in August, 2003. This may cause "rate shock" and further inhibit competition.

4. One analyst recently warned that in New Jersey "competition ... is already rather lethargic (and) could die altogether."

There are many reasons why competition is not developing and fingers can be pointed in many directions. The purpose of my testimony today, however, is not to point fingers, but to help this Committee begin the hard work of making competition successful.

The work that must be embarked upon by the Legislature entails modifying the EDECA to put in place the prerequisites to successful retail competition. At the outset I would like to thank Senator Inverso for introducing bill S-1908, which would repeal the "wet signature" requirement for customers changing electricity or natural gas suppliers. Enactment of S-1908 is an important step toward making competition viable in New Jersey, and I urge the Senate to pass this bill. My testimony today will briefly focus on those areas where additional modifications to the EDECA are necessary to make competition viable.

Theses areas include:

1. Basic Generation Service

2. Distributed Generation

3. Customer Aggregation

4. Consumer Education

5. The Establishment of a Universal Service Fund

6. Comprehensive Resource Analysis Standards

7. Competitive Customer Account Services (Billing and Metering)

8 Standards for Merger Review

I will also discuss briefly, in my written remarks, modifications to current rules and/or regulations on:

Interaffiliate Relations

Alternative Dispute Resolution

1. Basic Generation Service

"Basic generation service" (also known as "BGS") is the service provided to customers who do not or cannot select a competitive provider, or whose competitive provider fails to provide service as promised. Basic generation service plays play two roles:

• It provides a backstop for customers who lack other alternatives.
  
• It can stimulate competition by giving new entrants an opportunity to serve large blocks of customers who otherwise would not shop competitively.

Since large numbers of customers never choose a supplier and therefore receive basic service, the design of BGS has a significant impact on competition in the retail generation market. Basic generation service, therefore, should not be an exception to competition; it should be a stimulus to competition. For BGS to work, a neutral entity, such as the Board of Public Utilities, should have responsibility for overseeing the procurement of basic service in a neutral, competitive process.

New Jersey is not making sufficient progress toward this goal. The EDECA itself is not neutral on this issue, because it makes the incumbent public utilities the initial providers of basic generation service. But utilities, either directly or through affiliates, also participate as competitors in the retail generation market, so they are not neutral. Although EDECA suggests that this regime would last only three years, the Board has made no progress toward examining, let alone implementing, a competitive regime for BGS at the end of the transition period in August, 2003.

Legislative amendments should require the Board to move immediately, by a date certain, to design and implement a competitive bidding process or some other reasonable framework for the provision of BGS starting in 2003. It will take time to design the terms of the request for proposals, to determine the appropriate price, terms and conditions for the service, to select one or more basic service providers, and to negotiate contracts which assure stable supply at a reasonable price. New legislation should specify, where feasible, the general criteria for selection and the general terms of service. To assure a fully competitive process for the selection of basic service providers, the Board must start now.

Distributed generation refers to small, modular generation facilities, which are located close to the point of consumption and which will reduce our reliance on large power stations. Improvements in technology have made new fuel cell and microturbine technologies easier to manufacture, install and use. New Jersey's steeply rising demand for electricity is straining central plant and transmission and distribution assets.

Distributed generation can bring to New Jersey at least 6 benefits:

1. Allow customers to diversify their generation portfolios, so as to protect against fuel price volatility;

2. Stimulate diversity in a variety of generation technologies, including renewable resources;

3. Reduce the significant up-front capital requirements and time delays associated with large, centrally-produced generating facilities;

4. Improve system reliability;

5. Reduce environmental impacts when compared to central generation facilities; and

6. Improve overall efficiency of the electric system.

Crucial to the success of distributed generation is interconnection. The existing utilities must have a clear obligation to provide interconnection at reasonable cost and without unreasonable delay. Neither the EDECA nor the Board's draft regulations satisfy this need. Legislation should direct the Board, in concert with the Ratepayer Advocate, the utilities, and industry to provide standards for connection for distributed generation customers within specific time frames.

3. Customer Aggregation

Government aggregation is needed because consumers acting individually lack the resources and bargaining power necessary to participate effectively in the market. The savings available to an individual small consumer are easily outweighed by the cost of making sense of the choices available to them. Allowing municipalities to negotiate on behalf of all consumers in their community reduces these costs. Suppliers also benefit from government aggregation because, from the supplier's viewpoint, the cost of educating small consumers and motivating them to switch can exceed any generation cost savings or service benefits they can provide. Opt-out aggregation can also create the group efficiencies and purchasing power necessary to secure better arrangements for consumers and to make electric service more responsive to community needs. The byproduct of opt-out municipal aggregation is a major one: by "jump-starting" the market, aggregation can increase the efficiency and competitiveness of the market overall.

Unfortunately, the government aggregation provisions in the EDECA undercut the ability of local governments to bargain on behalf of their residents. The negative features of the statute include:

1. The requirements of protracted and redundant procedures before an aggregator can execute a contract;

2. An undue limitation on the length of the term of any aggregation contract;

3. Undue limitations on the types of services that can be bundled into the contract;

4. The inability of municipalities to have access to names, addresses and other customer information;

5. The requirement of "opt-in" by written signature in all forms of government aggregation.

The effect of these barriers is that many, if not most, consumers who fail to make a shopping decision will end up with the default service provider, instead of being enrolled into the service of the most competitive supplier identified by their municipality.

The current government aggregation provisions need a comprehensive revision. That revision should have at least the following 4 components:

1. Eliminate the written consent requirement for opt-in aggregation programs, so that residents can join up electronically or by telephone.

2. For electric power suppliers enrolling consumers pursuant to an opt-out government aggregation contract, waive the affirmative consent requirements of Section 37.

3. Eliminate the "one contract" limitation, which prevents a municipality from obtaining services from two or more suppliers. There will be many situations where multiple contracting can better meet the municipality's needs. ⁽¹⁾

4. Require each electric public utility to provide to municipalities, upon request, a list of customers within the municipality's jurisdiction. The list should include account codes and meter numbers, and should indicate which customers have selected a competitive electric power supplier. The legislation also should require the utility to transfer the list to the electric power supplier selected by the municipality to supply its aggregation program.

4. Consumer Education

For New Jersey's electricity consumers, choosing an electric supplier is an utterly new experience. Electricity competition will work only if these consumers make active, well-informed decisions. Education is essential. It must help customers understand how to compare energy services and suppliers, in terms of quality, price and reliability.

The state's customer education efforts to date have fallen far short of this goal. The dominant messages are negative. Customers are warned about slamming (even though there are very few competitors in the state), and they are reminded that if they don't shop they still can obtain a 15% rate savings. These messages do not encourage and empower the consumer to enter the competitive market.

At the root of this problem of content is the process in place. A Board order directed the Utility Education Council ("UEC"), comprised only of utilities and the Board, to retain an outside consultant to prepare and implement a consumer education plan in conjunction with the UEC. In fact, many state-sponsored ads in the newspapers reference the incumbent utilities by name. While a separate group, consisting of consumer representatives, provides advice to the UEC, the group's views are not binding, and have not been able to remove the anti-competition slant of the messages. The Legislature should direct the creation of a balanced Consumer Education Committee consisting of representatives of the Board, the Ratepayer Advocate, the utilities, the marketers and other consumer interest groups such as AARP and Legal Services of New Jersey.

5. Universal Service

New Jersey needs effective low-income programs. According to the 1990 Census, 12.5% of New Jersey households are at or below 150% of the poverty level. Low-income customers devote a substantial percentage of their income to obtain electric and natural gas service. This energy burden is often 4-5 times higher than that experienced by non-low-income families. Poor families are disconnected from utility services at a much higher rate than middle income families. Further, utilities incur substantial credit and collection costs to bill and collect from low-income customers.

The EDECA established a policy to "[e]nsure universal access to affordable and reliable electric power and natural gas service" and to create a universal service fund. However, despite holding numerous hearings and receiving detailed recommendations of the need for a low-income program in New Jersey from a wide variety of groups, including the AARP and other community-based organizations throughout the State, the Board has not issued any regulations or orders to begin a universal service program, and there is no statutory deadline for it to do so. New legislation is necessary to establish the low-income programs, establish administrative responsibilities for administering the programs, define program eligibility, and provide funding. The Ratepayer Advocate has developed a comprehensive state-wide proposal based on percentage of income, which has been successfully implemented in Pennsylvania and in other states. New Jersey low-income consumers deserve the same opportunity.

6. Comprehensive Resource Analysis

7. Competitive Customer Account Services (Billing and Metering)

Another issue which has been a roadblock to competition is the delay in implementing competition in billing and metering services, also called "customer account services" or "CAS." The EDECA required the BPU to "issue an order for providing customers the opportunity to choose a supplier for some or all customer account services not later than one year from the starting date for retail competition . . . ." N.J.S.A. 48:3-55(a). Despite this statutory mandate, and despite the fact that there was a unanimous settlement agreement in mid-2000 to resolve the competitive CAS proceeding, the BPU has still not issued a final order implementing competition in these services. Instead, the BPU modified key provisions of the settlement agreement that all parties had signed onto, and has since failed to act on motions to reconsider its ruling and finally implement competition in customer account services.

Many potential suppliers view the ability to provide competitive customer account services as key to success in the retail market. Therefore, I urge the Legislature to use its oversight powers to direct the BPU to implement competition in customer account services as required by the EDECA.

Over the last decade we have witnessed an unprecedented number of utility mergers, causing a rapid consolidation of the electric industry. In New Jersey alone two of the state's four utilities have been acquired by out-of-state companies. First Energy's acquisition of GPU is pending. Under another current proposal, Conectiv, already the product of a recent merger, would be acquired by a Washington, D.C.-based utility. Numerous other mergers have taken place within the regional generation market within which New Jersey sits.

This consolidation trend is paradoxical to New Jersey's efforts to establish competitive retail markets. Mergers may have several detrimental effects on competition leading to the acquisition and exercise of market power. They can --

-- reduce the number of current or potential competitors in one or more markets;

-- result in the consolidation of key assets into the control of a single competitor;

-- result in state regulatory loss of jurisdiction over assets or transactions critical to the New Jersey marketplace and infrastructure;

-- exacerbate preexisting market power problems, such as brand name loyalty and access to low-cost generation; and

-- lead to still other mergers and acquisitions and further industry consolidation.

These harms are long term and difficult to reverse.

New Jersey's current statutory provisions governing mergers need strengthening. First, the statute must address all consolidations, combinations or major changes in control; merger planners should not be able to escape Board review by structuring their transaction in a way which avoids the statute.

The statute must require merger applicants to demonstrate positive benefits to the state's consumers in the form of customer savings, enhancement to competition, and continued accountability to New Jersey's energy policies. Given the nascent development of New Jersey's present competitive markets, the Legislature should make clear that the Board must remain vigilant that a merger of competitors will not only benefit consumers but will also have the potential to support principals of competition.

9. Interaffiliate Relations

The first area involves the type of separation between competitive and noncompetitive businesses. New Jersey law demands only the least possible type of separation. A utility may provide competitive services without forming separate affiliates, and its competitive efforts may make use of ratepayer-financed assets without paying full market value for them. In fact, one Board regulation under the statute permits utilities to provide "[c]ompetitive services to non-residential customers using existing public utility employees." It is exceedingly difficult to prevent cross subsidies when noncompetitive and competitive businesses are so closely intermingled.

Legislation, therefore, should require separate corporate affiliates, and fair market value pricing where the competitive affiliate makes use of the utility's resources. Legislation also should require utilities and their affiliates to make available to the Board all books and records necessary to permit complete and accurate examination of interaffiliate relations.

10. Alternative Dispute Resolution (ADR) Procedures

In accordance with the EDECA's provisions, the Board released draft ADR standards on March 31, 1999 and accepted public comments, but has yet to adopt ADR standards. The Board should adopt the ADR standards now to eliminate another impediment to competition in New Jersey.

But utility-supplier disputes are not the only possible ones. As more customers shop, disputes will arise between customers and suppliers, and customers and utilities. An expensive, time-consuming litigation process will simply discourage customers from shopping at all. The Board instead should establish a simple, inexpensive procedure whereby all classes of customers may have access to an ADR forum. Moreover, the fees for participating in such ADR programs should be set low enough to avoid discouraging customers from using this efficient alternative. ⁽²⁾

The Ratepayer Advocate is available to assist the Board in the development of specific ADR procedures for customer disputes and invites other interested parties to participate in this effort.

Should the electric power industry be re-regulated? My answer at this time would be no. I remain an optimist and believe that with the help of this Legislature we can achieve our goals with benefits to all consumers. A recent national study ranks Pennsylvania as the nation's leader in electric deregulation. Let's make New Jersey No. 1.

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Footnotes

1. An example would be where different suppliers specialize in providing different services to customer groups with different needs or interests, such as low income groups, suppliers specializing in green power or suppliers specializing in a particular type of business entity. Municipalities should be able to contract with as many providers as are necessary to create an optimal aggregation program.

2. Pursuant to Section 46 of the EDECA, the Board has the authority to implement interim standards as the Board determines to be necessary to effectuate the Act's provisions. See EDECA, Section 46. A simplified ADR process for customers is needed to effectuate the transition to a competitive energy market.