William F. Hecht

May 23, 1996

Thank you, Chairman Durham, for providing the opportunity to comment on this legislation and on the concept of providing choice for the electricity users of the Commonwealth.

I'd also like to take this opportunity to commend Rep. Tulli for his leadership on this topic. As a prelude to my remarks about this specific legislation, I would like to reiterate for this panel our position on customer choice for electricity suppliers:

PP&L firmly believes that increased competition — more choice for all of Pennsylvania's electricity users — will be beneficial for everyone.

All customers will benefit through lower rates. Business and industry will realize cost savings and the employees of those enterprises will be better able to compete in a global marketplace.

Pennsylvania communities will benefit as lower electricity prices lead to more — and better jobs — in existing companies, as well as an improved ability to attract new factories, offices and other facilities.

Utility shareowners can benefit, over the long-term, as companies become more competitive, more responsive to marketplace needs, more robust.

For these reasons, we are very pleased that Rep. Tulli and Sen. Brightbill have introduced comprehensive bills that set aggressive timetables for providing Pennsylvania customers with a choice of their electricity supplier.

We support the overall goal of both bills: To provide a policy framework for the transition to competition in the electric utility industry in Pennsylvania.

When we stated our support for competition in testimony before the Public Utility Commission early this year, we laid out four principles that we think are essential to a smooth transition to customer choice.

Briefly, those four principles are:

1) All customers must have the right to choose their supplier.

2) Important social programs must not be put at risk.

3) Reliability must not be sacrificed.

4) A method must be developed for recovery of utility transition costs.

I'm very pleased to tell you today that we believe House Bill 2537 addresses all four of these principles. In my commentary, then, I'd like to offer thoughts on possible additions and clarifications that we think would further strengthen an already solid approach to this important challenge.

The legislation contemplates a phase-in of certain aspects of customer choice in Pennsylvania. We believe that a phase-in could provide practical solutions to some of the more challenging aspects of this transition.

We also would be enthusiastic about collaborating with various constituencies on a more rapid transition.

Regardless of the timetable we eventually adopt, we must ensure that we keep the consumers of electricity as our main focus. The goal of this process is to give Pennsylvania's citizens access to competitively priced electricity. At PP&L, we are supportive of actions that provide the citizens with the access in the most expeditious manner.

Now, I'll share with you an overview of our thoughts on this important legislation in terms of the four principles that I briefly mentioned earlier.

First, choice must be made available to all customers. The Tulli bill guarantees full choice to all customers by the end of the transition period in 2002. As I've said, we whole-heartedly agree that all customers should have the right to choose their supplier as soon as practical.

Provisions of House Bill 2537 specifically define the options that would be available to customers. The bill establishes protections for smaller customers and it specifically requires that customer service remain at current levels.

We believe that there could be some clarification of the phase-in provision of the bill. As part of a phase-in process, the legislation establishes a maximum percentage of a utility's retail load that can be supplied under direct contracts with generators during each year of the transition period. It is not clear how this would be implemented or whether there should be a distinction between direct and third-party contracts.

If there is agreement that a phased-in process is desirable, perhaps we could specify the percentage of customers who would have access to competitively priced electricity in a given year of the phase- in.

For instance, we might say that 25 percent of all customers would have the right to choose their supplier in the first year. Another 25 percent in the next year, and so on. These customers would have the right to choose their supplier through direct contracts with generators, through aggregators or through whatever legitimate suppliers are available at the time.

The second principle is an assurance that those who now are economically disadvantaged will not be further disadvantaged by the move to customer choice.

We believe it is very important that we understand how those most in need will be cared for under a less-regulated system. On that point, this legislation establishes a universal service requirement, funded through either public or private funds.

To ensure that we meet our social obligations in a manner that is fair to all customers, we would propose strengthening this aspect of the bill to specifically authorize the recovery of costs for current social and environmental programs.

And, as we have said on a number of occasions, we also believe that funding for these social programs should come from users of all forms of energy — not just from the users of electricity. A third principle is an assurance that the reliability of the electricity system is not placed in jeopardy.

The Tulli bill deals with important aspects of this issue, specifically requiring that each utility's plan for transition addresses maintaining the safety and reliability of the electric industry. The bill also requires all public utilities and local distribution utilities to participate in a qualified transmission network coordinated by an independent system operator, or ISO.

This provision is important because we believe the ISO will provide an essential mechanism for maintaining reliability. The bill also provides that any entity selling electric generation services to any retail customer in Pennsylvania must obtain a certificate of public convenience from the PUC. This requirement helps to maintain reliability by ensuring that companies selling electricity in the Commonwealth are qualified to do so.

The legislation can be strengthened by mandating development of appropriate generating reserve levels.

One approach could be to require local distribution utilities to purchase — for the account of its customers — sufficient generation from the market to meet their reliability requirements.

A fourth principle that must be part of the transition process is a recovery method for utility transition costs.

The proposed legislation addresses this issue. It recognizes that contracts with non-utility generators, regulatory assets and a portion of public utility generating assets can become stranded
investments in a move to competition.

And, the bill sets up a mechanism for a utility to seek recovery of these stranded costs.

Additional clarification on stranded cost recovery could make the legislation even stronger — and speed up the offering of competition to all customers.

We believe it makes sense to consider these transition costs as two categories: one, costs incurred in complying with federal and state requirements; and, two, investments in generating facilities. The first category includes unrecoverable costs arising from requirements concerning the purchase of power from non-utility generators; the deferral of certain taxes; the obligation to decommission power plants; the costs of social and environmental programs; and the cost of spent nuclear fuel disposal.

These regulatory and social costs arose from legal requirements imposed on utilities because they were obligated to provide service within certificated territories.

Therefore, we believe that these expenses should be collected from all electricity users located in these certificated territories. A second category of stranded costs relates to prudent investments in generating facilities that may not be recoverable in a competitive marketplace. These costs, we believe, should be collected through a rider on delivery charges.

One approach would be to set the rider at a specific state-wide level — say, 1 cent per kilowatt-hour — for a specific state-wide period of time — say, five years. (Incidently, this would be consistent with the five-year transition period currently proposed in the bill.) A customer who chooses to shop during this period would pay the rider; a customer who does not choose to shop would continue to pay the utility's regulated bundled rates.

With such an approach, consumers would begin to see the benefits of competition immediately and utilities would have an opportunity to recover their prudently incurred investments in generating assets. This would allow the marketplace to set the amount of stranded investment actually recovered. And, providing customers with access to electricity sold in a competitive marketplace is what this effort is all about.

That provides you with a brief overview of our thoughts on this legislation, which we believe is a crucial element in creating the policy framework — the rules of the road — as the electric utility industry is transformed.

We also believe that regulatory agencies like the PUC will — and should — be very much involved in implementing this new framework. It is crucial that we start the transformation process as soon as possible.

From an economic development standpoint, the Commonwealth cannot afford to delay in providing customer choice. A failure to make this transition smoothly — and relatively swiftly — will result in lost jobs for the people of Pennsylvania.

On the other hand, by moving forward now, we have the opportunity to firmly establish Pennsylvania as an excellent place to do business. To make this transition a smooth one, we need a collaborative process. To get the right answers, we need to involve customers, regulators, legislators ... everyone who has a stake in the way utilities operate. The hearings that you are holding on this legislation are an important part of that collaboration process. We are convinced that a truly collaborative process will result in a new system that will benefit all parties.

In closing, I want to re-emphasize that PP&L remains committed to offering choice of electricity supplier to Pennsylvania consumers as soon as possible.

That ends my prepared remarks on House Bill 2537. Before wrapping up my testimony, I'd also like to reiterate PP&L's continued support for House Bill 2075, which provides standards and procedures for review by the PUC in the event of a proposed hostile acquisition of an electric utility.

We testified in favor of that bill last fall and we continue to believe that such legislation is in the public interest. I'll be happy to answer any questions that you have.