REMARKS OF BLOSSOM A. PERETZ, E SQ.
DIRECTOR, DIVISION OF THE RATEPAYER ADVOCATE

BEFORE THE NEW JERSEY BOARD OF PUBLIC UTILITIES

IN THE MATTER OF THE ESTABLISHMENT OF A
UNIVERSAL SERVICE FUND PURSUANT TO SECTION 12 OF THE
ELECTRIC DISCOUNT AND ENERGY COMPETITION ACT OF 1999

BPU Docket No. EX00020091

BPU Hearing Room,
44 South Clinton Avenue, First Floor
Trenton, New Jersey

August 9, 2000 9:00 a.m.

My name is Blossom A. Peretz, Ratepayer Advocate for New Jersey. The Division of the Ratepayer Advocate represents the interests of all utility customers, including residential, small business, commercial and industrial ratepayers. The Division is also a party in every case where New Jersey utilities seek changes in their rates or services. The Ratepayer Advocate also gives customers a voice in setting long-range energy, water, and telecommunications policy that will affect the rendering of utility services well into the next century.

For many New Jersey citizens, especially low-income residents and senior citizens, energy bills are an unaffordable burden. Over 1.4 million persons in this State live with incomes at or below 200 percent of the federal Poverty Level. Of these, nearly 300,000 live below 50 percent of the Poverty Level, and 290,000 more live between 50% and 100% of the Poverty Level. Many New Jersey households lack the resources to run a fan or air conditioner--or even a refrigerator--during the summer, or to heat their homes in winter. Customers can be forced to engage in a wide variety of dangerous or unhealthy activities in an effort to keep paying utility bills. In a recent study, Roger Colton, a nationally recognized expert on universal service, found customers who had engaged in all of the following practices to deal with unaffordable energy bills:

• Using unsafe energy sources for heating, such as ovens, burners, and charcoal grills;
• Burning alternative fuels such as furniture, clothes, siding, used tires, doors and woodwork in fireplaces and wood stoves;
• Abandoning homes and doubling up with other families for weeks at a time during cold weather;
• Using high-interest credit cards to purchase food and fuel;
• Foregoing the purchase of food, medical care, dental care and medicine;
• Foregoing the payment of other bills, such as rent or water.

The consequences of unaffordable energy are all too familiar in New Jersey, where every winter brings newspaper stories of children killed or injured, or families left homeless, because someone resorted to a dangerous kerosene heater to heat their home.

This is why, when the New Jersey Legislature passed the Electric Discount and Energy Competition Act of 1999, it called for the creation of a Universal Service Fund to guarantee affordable electric and gas service. In so doing, the Legislature expressed its agreement with the many other States which have made Universal Service a part of their energy restructuring efforts, either through legislation or through policies adopted by their utility regulatory commissions. These states include our neighboring states of New York, Connecticut, Pennsylvania, Maryland, and Delaware, as well as a long list of other states throughout the country, including: Ohio, Maine, New Hampshire, Massachusetts, Rhode Island, Illinois, California, West Virginia, Montana, and Wisconsin.

As part of its Universal Service mandate, the New Jersey Legislature directed the Board to determine the level of funding, the programs to be funded, and the manner in which the programs will be administered. Today’s hearing is part of the Board’s decision making process.

Last month, the Ratepayer Advocate, along with consumer advocacy organizations, energy suppliers, and the utilities, filed their formal proposals for the Universal Service Fund. The Ratepayer Advocate’s proposal, sponsored by Roger Colton, a nationally recognized expert on universal service, is for a comprehensive, statewide, Universal Service Fund. The crux of the plan we are calling for relies upon a rate affordability assistance program. This program consists of four components, which should be coordinated with existing energy assistance programs. I emphasize the nature of the plan--rate affordability--which seeks to coordinate a household’s income with the amount of income allocated to energy bills -- so that no one will be forced to eat cat food in order to pay his energy bills and avoid a shut-off.

The first component of the affordability plan we are proposing is to provide low-income consumers with a fixed credit on their energy bills, which is designed to bring their energy bills down to an affordable percentage of their household income. This is known as a "percentage of income payment plan." This type of plan has shown its effectiveness since the mid-1980s, when it began to be introduced by natural gas utilities in Ohio. This approach has since been adopted in other states, including Pennsylvania, Maryland and New Hampshire.

The second component of the affordability plan is an arrearage forgiveness program. A rate affordability credit will not be effective if a family is facing a large arrearage when it enters the program. Arrearages existing when a household enters the program should be forgiven over a period not exceeding two years, subject to affordable customer co-payments of no more than 1 percent of a household’s income.

The third component is crisis intervention. For many low-income households, any unexpected expense, such as a medical emergency, a car or appliance repair, or a higher-than- usual energy bill due to extreme weather, can suddenly result in an inability to pay. A crisis intervention fund should be available to address these situations. Under New Jersey’s federal Low-Income Home Energy Program, known as "LIHEAP," six percent of the overall funds for energy assistance are set aside for crisis intervention. This same percentage of the Universal Service Fund’s rate assistance funding should be set aside for emergency situations. These funds should be available to both low-income households and higher-income households facing extraordinary expenses such as medical bills.

The fourth important component of the Ratepayer Advocate’s proposed rate affordability program is outreach and intake initiatives. New and expanded initiatives are needed to reach out to consumers who may be unaware that they are eligible for the program, and to make it easy for them to enroll. Households which are already enrolled in the LIHEAP program should be automatically screened for eligibility in the Universal Service program. Utilities should do their part by identifying customers who have difficulty paying their energy bills, and referring them to the administrator of the Universal Service program. A statewide network of community-based organizations should be enlisted to refer eligible households to the program. The Ratepayer Advocate also recommends that a part of the millions of dollars being spent in Board’s statewide educational campaign on energy restructuring and customer choice should be devoted to informing eligible consumers about the Universal Service program.

Lack of access to offices, confusing applications, and red tape can be major barriers to participation in an energy assistance program. New Jersey’s Universal Service program should take advantage of today’s computer technologies to lower these barriers. The data needed to verify an applicant’s eligibility for rate assistance already exists in the computer data bases maintained by the New Jersey LIHEAP office and other state agencies. These can be used to automatically qualify and enroll persons who are referred to the program, rather than requiring each applicant to travel to the appropriate office and fill out a cumbersome application form. Automatic enrollment has been successfully implemented in other states, including PECO Energy’s gas and electric Universal Service program in Pennsylvania, and telephone lifeline programs adopted in New York and Ohio.

In addition to the rate affordability program I have outlined, the Ratepayer Advocate’s proposed Universal Service program includes three other components to help alleviate the energy burdens borne by senior citizens and low-income consumers. First, the Universal Service program should be coordinated with the low-income energy efficiency programs that are being recommended by the Ratepayer Advocate in another proceeding before the Board. Energy efficiency is the best way to keep energy bills affordable.

Second, New Jersey should operate an Assistance in Aggregation Program, to help low-income consumers form aggregated groups to buy energy at lower prices in the competitive marketplace. The Board is aware of the Ratepayer Advocate’s position on aggregating residential customers who otherwise will not benefit from opportunities in the competitive marketplace. This opportunity is even more important for low-income ratepayers.

Third, in order to encourage competitive energy suppliers to offer service to low-income consumers, the Board should develop a mechanism to allow third-party suppliers to transfer some of their risks of nonpayment to a guarantee pool.

A critical issue for the success of the Universal Service program is the way it is administered. The Universal Service program should be administered and funded on a state-wide basis, rather than by the individual utilities. In that way, benefits can be delivered and paid for on a fair and consistent manner throughout the State. Ratepayers in Gloucester County should have the same benefits as ratepayers in Hudson County. The Ratepayer Advocate is proposing that the rate affordability components of the proposed Universal Service Fund be administered by Department of Human Services and the Department of Community Affairs, which currently administer New Jersey’s LIHEAP program. These agencies’ existing administrative structure and networks with community-based organizations make them the logical choice to administer outreach, enrollment, and benefits determinations for the rate affordability components of the program. The other components of the Ratepayer Advocate’s proposed plan also should be administered on a state-wide basis.

Now that I have described our proposal, I will turn to an issue of concern to everyone: How will we pay for this program? The Ratepayer Advocate is proposing that the Universal Service program be funded through a non-bypassable charge to all of the State’s energy consumers, including residential consumers, and both small and large businesses. In this way, the Universal Service fund will add only a modest amount to each customer’s energy bill. Our program would cost only about 75 cents per month for a residential customer initially, and that amount would be reduced as utilities realize savings from the program.

We expect these savings to be substantial. The utilities currently spend millions of dollars each year in attempts to collect unpaid energy bills from households that do not have the resources to pay them. The utilities have large numbers of employees on their staffs that engage in credit and collection activities such as calling customers with overdue bills, making deferred payment arrangements, and visiting customers’ homes to disconnect, and then reconnect, electric or gas service. Universal Service programs in other states have resulted in substantial savings in these types of costs. For example, studies of Universal Service programs implemented by Equitable Gas Company in Pennsylvania and Columbia Gas Company in Ohio have found that these programs reduced the utilities’ credit and collection costs. In at least one case in Pennsylvania, the savings were found to be about 45 percent of the total cost of the program. The Pennsylvania Public Utility Commission recently issued a policy statement requiring that savings from Universal Service programs be included among the sources of program funding. Likewise, in New Jersey the savings resulting from Universal Service programs should be passed through to ratepayers through an adjustment in the Universal Service charge.

A comprehensive Universal Service program will take some time to implement for the entire State. Therefore, the Ratepayer Advocate is proposing that the Board first implement a smaller-scale version of our proposed rate affordability program in discrete communities throughout New Jersey. We have recommended that the Board consider establishing interim programs in Newark, Camden, Atlantic City, Asbury Park, Long Branch, and Elizabeth. This smaller-scale program should be implemented for a twelve-month period, starting with the upcoming heating season. This program can be expanded to the full-scale Universal Service program for the 2001-2002 heating season.

The Ratepayer Advocate is working diligently on behalf of senior citizens and low-income residents to ensure that the Board adopts comprehensive, statewide Universal Service proposal in compliance with the legislation. We believe that, in addition to easing the heavy energy burdens borne by New Jersey’s low income residents, a Universal Service program will be a good business investment, and a good investment in New Jersey’s future.

I would like to thank the Board for giving us the opportunity to share our views on this important issue. As you know, we believe that a comprehensive evidentiary proceeding was more appropriate for the Board to consider a Universal Service plan. Developing a plan which will be successful in assisting all low-income involves many complex issues, and the costs of the plan may be passed through to ratepayers. We believe that issues of this importance warrant a complete evidentiary record. Nevertheless, our filed testimony is very comprehensive, and we look forward to working with the Board and all parties to implement a sound proposal for New Jersey. I leave you with a quote from former President John F. Kennedy: "A government which thinks in terms of humanity will survive."

COMMENTS OF ROGER D. COLTON
ON BEHALF OF THE
NEW JERSEY DIVISION OF THE RATEPAYER ADVOCATE

BEFORE THE NEW JERSEY BOARD OF PUBLIC UTILITIES

My name is Roger Colton. I am a principal in the firm of Fisher, Sheehan & Colton, Public Finance and General Economics of Belmont, Massachusetts. I provide technical assistance to a variety of state agencies, consumer organizations and public utilities, on rate and customer service issues involving telephone, water/sewer, natural gas and electric utilities. I am appearing today on behalf of the New Jersey Division of Ratepayer Advocate.

New Jersey's retail choice legislation provides for the creation of a Universal Service Fund (Section 12(b)). The legislation provides that the Board shall determine: (1) the level of funding; (2) the appropriate administration; (3) the purposes and programs to be funded with monies from the fund; (4) which programs should be provided as part of the provision of regulated services which provide a public benefit; (5) whether certain designated funds should be deposited in the fund; and (6) whether new charges should be imposed to fund new or expanded social programs.

A New Jersey Universal Service Program should be directed toward providing low-income consumers with the opportunity to obtain and maintain quality utility service at affordable prices. It is a sad but true fact of life today that many New Jersey consumers simply cannot afford basic household necessities such as home energy. The generally accepted measure of inability-to-pay involves energy burden. A household's energy burden is the household energy bill as a percentage of household income. If a person has an energy bill of $1,000, in other words, and an annual income of $5,000, that person’s energy burden is 20%.

Energy burden is used as the measure of inability-to-pay at both the state and federal levels. The federal Low-Income Home Energy Assistance Program ("LIHEAP"), for example, is statutorily directed to target the highest level of benefits to households with the lowest incomes and the highest energy burdens. In addition, virtually every state adopting a low-income rate affordability program funded through a system benefits charge uses energy burden as the mechanism to target benefits.

One of the primary impacts of unaffordable home energy burdens is the nonpayment of home energy bills. Experience with other states and other utilities demonstrates quite clearly that a relationship exists between low-income status and payment troubles. Nonpayment, however, is not the only impact of inability-to-pay based on non-sustainable home energy burdens. In addition, unaffordable burdens force low-income consumers to make unreasonable budget decisions between competing household necessities (e.g., heat or eat), and be forced to engage in a wide variety of dangerous and/or unhealthy activities in an effort to keep paying their utility bills.

In addition, these energy burdens have been found to represent an impediment to low-income consumers taking constructive actions to address their inability-to-pay. All too frequently, a low-income customer is faced with an immediate need (i.e., bill payment by a date certain) with the available constructive responses to an inability-to-pay unable to deliver assistance either in the form, the time period, or the magnitude necessary to meet that need. Given the immediate consequences of failing to address the short-term nonpayment crisis, the customer is pushed into negative, and perhaps even counter-productive, actions such as not taking medicine, not eating food, or borrowing high cost funds off of credit cards, in order to pay the utility bill.

There is no question but that this inability to pay is a social problem. There is also no question, however, but that this inability to pay represents a utility problem. For these households, regardless of the number of disconnect notices that are sent, regardless of the number of times service is disconnected, regardless of the type of payment plan that is offered, there will be insufficient household funds to pay. A utility can recognize this conclusion, and support Universal Service Programs such as that proposed by the Ratepayer Advocate, or a utility can deny the conclusion and devote its time and energy and attention to what will prove to be fruitless, and expensive, collection endeavors.

This conclusion is not simply mine. The Pennsylvania Public Utility Commission, for example, has noted the costs of payment problems that are already "embedded in existing rates" and required that the savings generated by low-income programs are to be used as one source of revenue to pay for such programs. In addition, the Vermont Public Service Department noted that there are:

two harsh realities for the utility industry. First, charging a rate and collecting a rate are two separate actions. Simply because a utility charges a particular rate does not mean that the utility will ever collect that money from a low-income household. Second, even when a utility does collect the total bill from a low-income household, the utility often spends considerable sums in the very act of collection.

Consider the home energy burdens that low-income households bear in New Jersey. As my testimony for the Division of Ratepayer Advocate reported, a two-person household living at 75% of the federal Poverty Level in New Jersey would pay 19% of its income for its combined natural gas and electric bill. The federal Poverty Level measures what incomes are associated with "being poor," taking into account household size. To place this 19% figure into context, consider the following: the 1999 median family income in New Jersey was $67,335. Median income is that income where half of all persons are above it, and half are below it. To bear the same home energy burden as our two-person household at 75% of Poverty, a family with New Jersey's median family income would need to pay $12,800 each year for its home energy bill.

New Jersey's existing low-income energy assistance programs are not designed to address this basic affordability problem. Three programs exist to assist low-income households with their home energy problems. The Low-Income Home Energy Assistance Program--known by its acronym: LIHEAP--is the primary program. Because LIHEAP funding is limited in several important ways, it is not an adequate substitute for a Universal Service Program.

• First, LIHEAP is available to only a limited number of utility heating customers. In FY 1999, LIHEAP served only 50,000 electric and natural gas heating customers in New Jersey. In contrast, there were nearly 400,000 low-income utility customers in the state. As can be seen, LIHEAP serves but a small proportion of the total number of low-income customers.

• Second, LIHEAP funding is available only during the period in which LIHEAP applications are being taken. LIHEAP is considered to be primarily a winter heating program. In 1999, while 120,000 households received heating assistance, only 17,000 received medically necessary cooling assistance. LIHEAP applications are only taken for six months of the year.

• Finally, LIHEAP is almost exclusively a home heating program. It thus addresses a small part of a low-income consumer's energy affordability problem. Home heating represents only 35 to 40% of a low-income customer's total home energy bill. In contrast, electricity represents 60 to 65% of a low-income home energy bill. LIHEAP standing alone, therefore, cannot be an adequate energy affordability program.

In addition to the LIHEAP program is New Jersey's Lifeline Program. The Lifeline Program is designed to increase energy affordability to income-eligible households. According to materials provided by the New Jersey Lifeline Agency, benefits are set at $225, to be applied in one lump sum credit if the recipient receives gas and electric service from the same company; if the recipient takes gas and electric service from different companies, the benefit is split in to two equal parts. Because Lifeline credits are limited to a special portion of the population: the elderly and disabled. They do not represent a broad-scale energy affordability program.

Finally, New Jersey SHARES is the utilities’ statewide fuel fund, charged with the task of providing benefits to households facing crisis situations as defined by payment problems. New Jersey SHARES, however, was never designed to represent a basic affordability program. In addition, as I describe above, not all affordability problems turn into non-payment problems. A person who pays his or her utility bill because they take only three of the five pills their doctor prescribes, or because they are skipping two meals per day, faces no less of an affordability problem than the person who takes his or her medicine, eats regular meals, and cannot afford to pay the utility bill as a result.

Based upon these documented needs in New Jersey, and the legislative mandate that the Board create a Universal Service Fund to address home energy affordability problems, I proposed a Universal Service structure for New Jersey. An appropriate Universal Service Program for New Jersey includes a rate affordability assistance program, which should be available to households with incomes at or below 150 percent of the federal Poverty Level. In addition, a reasonable amount of rate affordability assistance should be reserved for households with incomes up to 200% of Poverty having special needs. The rate affordability program should consist of the following components:

• Basic rate affordability assistance. Low-income consumers should receive a fixed credit designed to bring their energy bills to sustainable levels, based on a percentage of household income. I can talk about the programmatic and operational benefits of a fixed credit program if you wish me to do so.

• Arrearage forgiveness. Arrearage forgiveness serves to help get low-income customers "even" so they have a chance at future success in making payments. Arrearages should be forgiven over a period not exceeding two years, and should be subject to affordable customer co-payments.

• Crisis intervention assistance. A crisis intervention fund should be funded, to prevent the loss of service due to inability-to-pay in some circumstances. This benefit should be coordinated with LIHEAP emergency benefits, as well as the benefits provided by the utilities through New Jersey SHARES and other programs.

• Customer outreach and intake initiatives. Specific education and outreach initiatives should be implemented to make low-income consumers aware of both the existence of the program and the requirements for participation. These should include expanded implementation of the Chronicles software (formerly known as the Benefits Outreach and Screening Software, or "BOSS"). In addition, outreach on the Universal Service Program should further be provided to all utility consumers as part of the consumer education program relating to electric and natural gas restructuring generally.

In addition to the rate affordability program, a Universal Service Program should also include components that will address the underlying causes of unaffordability and help to control the costs of the program. These components should include:

• Energy efficiency assistance. According to the U.S. Department of Energy while low-income households use less energy in their homes overall, they have less energy efficient housing and appliances. The Ratepayer Advocate has recommended specific energy efficiency initiatives as part of the Comprehensive Resource Analysis proceedings before the Board. To the extent not funded through the utilities’ Societal Benefits Charges, these low-income energy efficiency programs should be funded through the Universal Service Fund.

• An assistance in aggregation program. Aggregation efforts have been shown to reduce the cost of low-income Universal Service Programs. However, aggregation will not just happen. New Jersey should operate an assistance in aggregation program by an Independent Statewide Administrator. This program will provide administrative, legal and technical assistance in much the same fashion as such programs provide for affordable housing development.

• A low-income guarantee pool. In order to promote active competition for low-income consumers, a mechanism should be established to allow third-party suppliers to cede some of the risk of nonpayment to the guarantee pool.

• Reporting requirements. Finally, the Board should require the utilities to submit reports tracking both the performance of the Universal Service Program and the impact of competition upon low-income consumers.

Now, I will address the administration of the components I have just summarized. Universal service is a statewide concern, which should be addressed statewide. There should be a single, statewide Universal Service Fund, and the programs I am recommended should all be administered on a statewide level. In this way, benefits will be delivered, and paid for, on a fair and uniform basis throughout the state. As new Universal Service Programs are being developed, the clear trend is to develop statewide programs. New Hampshire's Energy Assistance Program ("EAP"), for example, is a statewide program administered through the state LIHEAP office. The Maryland universal service program is a statewide program administered by the Maryland Energy Assistance Program ("MEAP"). California's program is statewide. Even Pennsylvania's programs, while implemented on a utility-specific basis, are implemented pursuant to explicit statewide policy direction promulgated by the Pennsylvania PUC.

Finally, let me address costs. The Universal Service Program that I have proposed on behalf of the Ratepayer Advocate is reasonably priced. Before taking into account the savings which this program can reasonably be expected to generate, the cost is only six tenths of one percent on an electric bill and only eight tenths of one percent on a natural gas bill. These costs are well within the mainstream of universal service costs nationwide.

And, as I have noted, these costs will be even less when offsetting savings are taken into account. Consider the experience in other states:

• In Pennsylvania, the Columbia Gas universal service program -- called the Customer Assistance Program, or "CAP"--generated 61% fewer disputes, 53% fewer new payment agreements, 69% fewer canceled payment plans, and 48% fewer termination notices.

• In Pennsylvania, customers who stayed in the Equitable Gas Energy Assistance Program for one full year generated net positive benefits to the company of $262. Those who remained in EAP for a second year generated an additional $206.

• National Fuel Gas Distribution Company's Low-Income Rate Assistance ("LIRA") program generated an improvement in collections of $1.5 million (nearly a 40% improvement over five years.

• The Clark County (Washington State) Public Utility District's Guarantee of Service Program ("GOSP") reduced delinquencies for program participants from 74% to 18%; reduced disconnections for program participants by 64%; and increased average customer payments from $22 per month prior to program entry to $55 per month during the program.

• Finally, Niagara-Mohawk Power Company's rate discount program almost doubled the total number of payments to the utility during the post-treatment period compared to the pre-treatment period and, for its two groups of customers receiving discounts, actually, on the average, increased payments from $883 to $1174 (for one discount group) and from $968 to $1188 (for the other).

I have attached a brief summary of these programs which I have just cited.

In sum, the Universal Service Program proposed by the Ratepayer Advocate is good social policy for the State of New Jersey. It addresses the affordability problems of low-income New Jersey consumers. The Ratepayer Advocate's proposal is, however, much more. It is good business policy as well. While the costs of the Universal Service Program are reasonable from the very beginning, as the business savings generated by the Ratepayer Advocate's proposal kick in, are quantified, and are then passed through to all remaining customers, the program will represent an inexpensive tool to use in addressing the affordability problems of low-income consumers as mandated by the legislation.

For myself, and on behalf of the Ratepayer Advocate, I would like to thank you for allowing me to attend today to provide the Board with input on this critical issue.

• Used "net back ratio" as measure of cost-effectiveness. "Net back" is the amount of revenue collected net of collection costs.

• Net back ratio for low-income customers before receiving universal service discount was 0.91. Net back ratio after receiving universal service discount was 1.37 (for persons with two full years of participation) (1.41 for persons with one full year).

• Increased total dollars received by utility, even after taking into account discount. Increased revenue was $262 per participant in year one and an additional $206 in year two.

• Used net present value cash flow as measure of cost-effectiveness.

• Before receiving discount, low-income customers paid $939 of each $1,276 bill. After receiving discount, low-income customers paid $772 of each $811 bill.

• Number of payments made by participants increased by 30% (an average increase of 2.2 payments per participant); number of service disconnections decreased by slightly over 80%.

• Before program, company under-collected by $3.8 million present-valued over five years; after discount, company under-collected by $2.3 million present-valued over five years, an improvement of $1.5 million (nearly 40%) over five years).

• Used comparison groups as measure of cost-effectiveness. Groups 1 and 2 did not receive discount. Groups 3 and 4 did receive discounts.

• Groups 3 and 4 almost doubled the total number of payments made to the utility (426 to 829 for Group 3; 368 to 792 for Group 4). Group 1 decreased the number of payments made while Group 2 slightly increased its total number of payments (from 404 to 446).

• Groups 3 and 4 experienced substantial increased total dollar payments. Group 3 increased its average payment from $883 to $1174 while Group 4 increased its average payment from $968 to $1188. Group 2 payments increased slightly from $844 to $895.

Due to federal budget cutbacks, fuel assistance payments decreased for all participants. However, despite these reductions in fuel assistance, the increase in customer payments resulted in an increase in total dollars paid to the utility of $31 for Group 1 and $91 for Group 4 compared to decreases in total dollars of $26 for Group 1 and $102 for Group 2.

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