Pennsylvania Power & Light Co. supports giving all Pennsylvania consumers the opportunity to choose their electricity supplier, the company's chairman said Tuesday (1/16).

"We believe that customer choice will introduce the advantages of competition, additional efficiencies and, ultimately, benefits for all stakeholders," Chairman Bill Hecht said.

Hecht detailed PP&L's position Tuesday during testimony before the Pennsylvania Public Utility Commission in Harrisburg. The PUC is conducting an investigation into electric utility competition in Pennsylvania.

Hecht said society demands choice and the electric utility industry in Pennsylvania must move forward to meet the expectations of consumers. The dramatic difference in rates among utilities has created a perception that the current structure is unfair, Hecht said.

"We believe that competition in this industry will be beneficial to customers, utilities and the commonwealth itself," Hecht said. "Working together we can put structures in place now that will ensure that these benefits will be realized and will be equitably shared among all of the stakeholders."

Hecht spelled out four principal issues that must be addressed — but are not impediments — in the transition to full customer choice:

• The opportunity for all customers — not just large customers — to be able to choose their electricity supplier.
• The ability for utilities to recover costs incurred because of the requirements of federal or state regulation.
• The development of a system to ensure the continuation of reliable electricity service.
• Continued funding for social programs.

"PP&L proposes a transition period to address technical, administrative, contractual and legal details and to provide an opportunity to mitigate stranded costs," Hecht said.

PP&L recommends that this transition be planned and carried forward as a collaborative process guided by the commission, Hecht said.

"We look forward to working with the PUC and others so that the benefits of competition and customer choice are available to all the citizens of the commonwealth," Hecht said.

Supplemental Testimony of William F. Hecht
Chairman, President and Chief Executive Officer
Pennsylvania Power & Light Company
January 16, 1996

The future structure of the electric utility industry in Pennsylvania and the United States is the most critical issue facing regulators, utilities and customers. We commend the Commissioners for initiating this investigation and for conducting it in a careful and detailed manner befitting the importance and complexity of the issues involved. We also commend the Commission's Staff on the fine report it issued in August. The Staff report represents a thorough effort to identify the many technical, legal, and administrative issues which will have to be addressed as we move toward a more competitive environment.

We believe the Staff report provides a valuable starting point.

PP&L supports choice of electricity suppliers for all customers. Although the current system of regulation has helped to create a world-class electric utility industry, customer choice will introduce the advantages of competition, additional efficiencies and, ultimately, benefits for all stakeholders.

We believe the move to increased competition in the electric utility industry is being driven by three forces:

• First, as a general theme, our society demands choice. We have become accustomed to a variety of customized and tailored options in almost all of the goods and services we buy.
• Second, there is a perception that government and economic regulation may not always be as effective as competition in providing the goods, services, and choices that society demands. Whether this perception is true or not, increased competition has come to the telecommunications, trucking, airline, banking, and natural gas industries.
• Third, existing rate differentials among utilities are dramatic. In some instances, these differentials exist even between adjacent utilities. The result has been a perception that the current structure is unfair.

PP&L is prepared to address four principal issues as we move toward an efficient and equitable competitive market for electricity: (1) full participation by all customers, (2) appropriate recovery of stranded costs, (3) continuation of reliable service and (4) funding for social programs. We firmly believe these items can be resolved. Following is a summary of our suggested approach for each.

-- Full Participation by All Customers
The recent proposal made by the majority of the PJM members for the restructuring of the power pool is an important step in this direction. Also, the competitive market model proposed by Dr. William Hogan may be one illustration of an appropriate structure for a competitive electric industry.

-- Appropriate Recovery of Stranded Costs
Costs which were required by Federal or state regulation, such as generation contracts with qualifying facilities and regulatory assets, must be fully recoverable by the distribution utility to the extent these costs cannot be otherwise mitigated. Utility generation was constructed to meet Commission-adopted reliability levels. Thus, costs that electric utilities prudently incurred in the past to construct generating facilities, or to contract for energy and capacity, should be similarly recoverable.

-- Continuation of Reliable Service
Discussions with our customers indicate that they are generally satisfied with the quality of service we provide. The existing electrical system is technically and administratively sophisticated — it must be in order to respond instantaneously to customer demands and changes in conditions. PP&L believes that this high quality of service can be maintained under competition. During the transition period, load serving entities should retain an obligation to own or contract for sufficient resources to provide their share of a generation reliability level agreed to by regulators. Such a requirement also would minimize "free riders" taking advantage of current levels of capacity and help to mitigate potentially stranded investment.

-- Funding for Social Programs
PP&L believes that social programs should be funded from general tax revenues, or as an alternative, spread across the broadest base possible — for example, all energy suppliers or consumers, including electricity, natural gas and oil.

PP&L proposes a transition period to address technical, administrative, contractual and legal details and to provide an opportunity to mitigate stranded costs. PP&L recommends that this transition be planned and carried forward as a collaborative process guided by the Commission. Furthermore, consistent with our belief that the time has come to move to customer choice, PP&L proposes that:

1. Utilities begin to separate, or unbundle, the charges on their bills into the various components, for example, generation, transmission and distribution, and customer service;

2. Utilities and regulators consider the role of performance-based ratemaking in both the transition and as part of the ultimate industry structure;

3. The Commission and other participants address reciprocity issues with other jurisdictions; and,

4. All participants collaboratively work with legislators to discuss any necessary statutory changes.

PP&L looks forward to working with the PUC and others so that the benefits of competition and customer choice are available to all the citizens of the Commonwealth.