November 9,  1999

ADAMANTINE CUSTOMERS AND THE UTILITY RESTRUCTURING JUGGERNAUT

Remarks of Gerald A. Norlander
to the Committee on Utility Law
of the New York State Bar Association

This is an exciting time of change for all of us who practice in the area of utility law - - We are in the midst of a global reorganization of the systems  chosen by societies to provide their citizens with telecommunications, natural  gas and electricity services - services essential for people to engage in normal  daily life and economic activity.

At the federal level, Congress enacted a fundamental restructuring of the telecom industry with the Telecommunications Act of 1996. Congress is now considering numerous electric industry restructuring proposals.

At the state level, the legislatures of  California, Massachusetts, Pennsylvania, New Jersey, Texas and many others have acted to restructure their statutory schemes for electric service. In New York  the Public Service Commission has taken the lead administratively.

The  utility restructuring paradigms being designed and implemented all around the world generally seek

• to unleash the forces of competition, and
  
   
• to reduce the direct role of governments in the pricing of essential services.

Utilities, with varying degrees of enthusiasm, also are joining in this  movement.

Indeed, with government agencies and the industry aligned, the utility restructuring now underway has the appearance of an overwhelming "juggernaut," whose force will not be deterred, slowed or diverted.

Yet, in the gas  industry -- which has been restructured and open to competition for some time -- a recent filing of a New York company casts doubt on the invincibility of the  utility restructuring "juggernaut." It acknowledges:

• "the ... market has been open to competition for several years and has made  little progress, especially in the residential and small business sectors,"  and
  
   
• "the enjoyment of competitive service and pricing options has been limited primarily to the few large, high load factor customers who have been 'cream-skimmed'"

The barriers to competition for residential customers are said to be "adamantine"[1] Part of the blame is placed on consumers themselves, for alleged lethargy:

• "one of the strongest forces of human nature -- inertia" is said to be the cause The filing concludes that "absent a carrot or a stick" many people simply  will not choose a new utility company.

The filing suggests that the competitors cannot offer enough "carrots" to  induce customers to switch. So now the remedy proposed is the "stick" - to  increase the price to customers who remain with the incumbent company. This  stick of higher prices, it is hoped, will now encourage the customers not to "remain at rest.," and to choose a new provider.

Why would customers have "adamantine" resistance to the industry restructuring 'juggernaut"?

The laws of physics do not tell us what  happens when a seemingly irresistible force like utility restructuring meets an  apparently immovable object, the residential consumer. Part of the solution may lie in the recognition that the "adamantine" customer resistance is not irrational or totally immovable, and that the restructuring "juggernaut" is not  what it appears to be.

People can and do embrace some change rapidly -- particularly when other people they know -- their "friends and family" -- try something new and it works well for them. Look at the explosive growth of the  internet, the widespread use of e-mail. I believe we need to examine further the  reasons for the customer resistance to changing providers of utility service.

Advertising "savings of up to 10% on electricity " will not work when  the word is out -- the reality is that competitive companies are not offering significant bottom line savings to residential utility consumers. Customers will learn from their friends and families who tried another company how much if anything is really saved, or if there are billing and service headaches. Consumers will not be pleased to learn that their rates will go up if they do  not switch to another provider, when that company's prices are not significantly  lower than their present rates, and when the services may be inferior.

Price is important, but price is not the only consideration, particularly when it comes to something as vital as utility service. Customers  are concerned about non-price issues such as reliability and service.  Reliability to customers does not just mean the flow of electricity or gas, or a dial tone for telephone. It also means reliable and accurate billing, reliable responses to requests for information and service, and reliable mechanisms for  dealing with the inevitable problems that will arise.

For residential  customers, and especially low income customers, continuous service and  reliability is impaired if prices are not affordable, if assistance to pay bills  cannot be accessed in times of need, if deferred payment arrangements cannot be made, or if additional charges are imposed for late payments, partial payments, and switching providers. If the system does not provide affordable service to  the poor, their lives and the lives of their neighbors can be endangered by  dangerous forms of alternative energy. Schools cannot perform their functions well if children lack light or heat or telephone service at home. Social  services designed to promote self sufficiency cannot be successful if a family is preoccupied by a utility crisis or cannot be reached by telephone.

Also, any system that leaves a residue of low income customers paying  the highest prices, while customers with higher profit potential or less credit  risk are skimmed off, is not likely to find favor with legislators. After all, it is the legislators who ultimately bear the responsibility for systems that assure universal service and affordable prices. Without common minimum service standards applicable to all providers, the risk of switching companies may be too great for customers who cannot risk losing their money. The "stick" of an artificial price differential to penalize the customer who does not choose an  alternative provider may not be enough to force the migration of customers to alternative companies, particularly if those companies have no duty to provide  service, and have the incentive to avoid the low income customer. If there is no confidence that the system will work for the poor, then there can be no general  confidence that the system will work for others.

• An example of how low income issues can be done right is in the area of  telephone competition. New providers of local service offer or resell lifeline service and provide their services in conformance with the Commission's TEFPA  rules. Thus, a customer can switch providers without fear of losing lifeline assistance or customer protection rights and remedies, including PSC administrative resolution of disputes. Such assurance is necessary if we are to  see effective price competition and migration of customers to new providers. Also, these policies may prevent the concentration of high cost and low income customers in a pool that is charged the highest prices.
  
   
• Another example is that of Massachusetts, which enacted a statute requiring  electric distribution companies to guarantee payment of the bills of low income  customers so that competitors would not be tempted to avoid serving them,  thereby making low income customers the best credit risk for a competitive energy supplier. Competitive companies there must also follow the same customer protection standards with which custoemers are familiar.

Measures such as these can soften the resistance of customers. Just as the resistance of customers to restructuring should not be assumed to be impenetrable, we need to re-examine the restructuring "juggernaut."

The  word "juggernaut" comes from India. According to Hobson Jobson [2], the earliest English reference to "juggernauts" was in  1321. The juggernaut was a huge wooden chariot, several stories high with massive wheels, pulled by a throng of devotees once a year to celebrate  Jaganath, an aspect of Vishnu, the lord of the universe. By legend, people were  crushed to death under the wheels of the "juggernaut."

When we look at  the history of the term, analogies to the utility industry and the utility  restructuring "juggernaut" now rumbling along are quite striking.

• According to Hobson Jobson, a 1321 account says some victims of the  juggernaut were not opponents trying to halt or divert the vehicle, but instead  were the most fervent believers, who "cast themselves under the chariot, so that its wheels may go over them, saying that they desire to die for their god. And  the car passes over them, and crushes them, and cuts them to sunder, and so they  perish on the spot."
  
   
• Similarly, a 1667 account says "[w]hen this Hellish Triumphant Chariot marcheth, there are found (which is no Fable) persons so foolishly credulous and  superstitious as to throw themselves with their bellies under those large and  heavy wheels, which bruise them to death."
  
   
• An 1818 account also indicates that some victims voluntarily threw themselves in front of the juggernaut -- they had "long been suffering from some  excruciating complaints, and chose this method of ridding themselves of the  burden of life in preferences to other modes of suicide."
  
   
• Hobson Jobson also says some of the deaths due to the Juggernaut's crushing  force were simply accidental -- so there may be good reasons for the customers  to stay clear of the wheels of the restructuring juggernaut, lest the little customer become innocent road kill. So in the original sense of the word, the  "juggernaut" did not crush those who would try to alter its course, but rather the most ardent believers, the sick, and accident victims.

Neither mythology nor modern physics can tell us what happens when the irresistible force meets with adamantine resistance. That answer, I believe, is work for lawyers, including many of us in this room, who are working on the  solutions - negotiation, litigation, and ultimately -- legislation!

There is much unfinished business of electric restructuring which  requires federal and state legislation. Much can be learned from the example of the telecommunications industry which is well out in front of the electric  industry. At the federal level, the TCA of 1996 ratified the existing lifeline rate program, which had been adopted administratively without express statutory authority, and expanded lifeline rates nationwide. New York's early leadership, well before TCA 96, in finding efficient ways to administer the lifeline and Link Up program through computer matching, is now being followed in the other  states such as Texas, where the state legislature recently enacted a requirement  to automatically enroll the poor in utility lifeline discount rate programs.

Also, the '96 Act is stimulating great interest and much action to address the "digital divide," which separates the rich and poor in their access to and use of advanced telecommunications services. Perhaps our telecom and energy utilities will converge in ways that could empower their low income  customers with the means to participate more fully in the digital age.

Today, there are many proposals for federal legislative action to speed  national electric industry restructuring, and to repeal or overhaul the existing  statutory framework. To date, there has been no grand compromise in Congress, as occurred in telecommunications and recently in the banking industry, to permit a  comprehensive federal restructuring plan to go forward. There are frequent industry calls for repeal of federal statutes like the 1934 holding company act,  and PURPA, but these are vigorously opposed by consumer groups such as AARP,  Consumer Federation of America, and NASUCA in the absence of a comprehensive  federal restructuring statute that adequately address consumer concerns for  universal service, affordable rates, and customer protection.

• The federal electric restructuring proposals now under consideration do not  adequately address the issues of affordable service to the poor, universal service, and customer protection. I would note that PURPA required states to adopt certain minimum procedural protections for electric customers and to consider lifeline rates for the poor [3]. Although these  provisions were quite weak, they should not be repealed without being replaced by improved standards to protect universal service and affordability for the poor.

As I previously mentioned, at the state level, New York is in the vanguard in  dealing with low income issues in telephone industry restructuring, such as  lifeline rates and consumer protection standards uniformly applicable to all  players.

In electric restructuring, however, we have neither federal nor  state restructuring legislation. That which has been accomplished has been done  administratively under the constraint of statutes enacted nearly a century ago. As a result there are many unanswered questions that need to be addressed in  legislation:

• The obligation to Serve. Can incumbent providers "exit the merchant function" and convert to being mere distributors, while other companies supply electricity or gas as a commodity at market prices? Some of New York's gas and  electric utilities take the position that they are required by existing law to  remain in the business of providing full service to customers, including the commodity, at regulated rates.
  
   
• The Michigan Supreme Court held last summer that the statutory definition of  electric "service," which is like New York's, contemplates that an electric corporation will provide not only wires, but electricity too![4]
  
   
• If incumbent providers go out of the business of selling electricity, how  will the cheap hydropower, which they now receive for the benefit of residential  customers, be provided without markup, if those customers must now purchase all  their power from other sources at market prices?
  
   
• Are alternative providers to participate in the New York markets under existing laws requiring certificates, or with no licensing provision or other direct regulatory oversight?
  
   
• In the absence of price regulation how will affordability for the poor be  addressed?
  
   
• Will customers have the same rights and remedies with competitive providers?
  
   
• Should the statutory authority for retail wheeling be expanded to cover all  classes, not just the industrial and commercial classes?
  
   
• Are existing statutes and agency powers sufficient to deal with fraudulent and deceptive marketing practices and market abuse?
  
   
• Are safety, reliability, and workforce protection sufficiently addressed?  Will customer service offices and customer service jobs remain in the state if  interstate mergers are allowed?
  
   
• How will stranded costs be allocated if current utility owners of nuclear  plants sell them at prices far below what was paid for them?
  
   
• Are the current energy and utility tax structures consistent with a  disaggregated energy marketplace? How will the tax structure deal with transactions structured as occurring out of state?

When these and the myriad of other issues are addressed  by the legislature in comprehensive restructuring legislation, I am confident  that the "adamantine" resistance to restructuring will ease, and the restructuring "juggernaut' can proceed along its route in a safe manner.

Thank you very much.

1. "Adamantine," the dictionary says, means with diamond-like hardness. One of the great pleasures of practicing utility law is to learn new  words - especially in briefs of opposing counsel!
   
    
2. Hobson-Jobson, A Glossary of Colloquial Anglo-Indian Words and Prhases Yule and Burnell, 1903, 1994 edition edited by Crooke, at p. 466-468.
   
    
3. 16 USCA §§ 2623(b)(4), 2624(b).
   
    
4. Consumers Power Co. v. PSC, (Mich. Sup. Ct. June 29, 1999).