You asked for a status report on electric restructuring initiatives in other states. Much of the information in this report comes from an Energy Information Administration Web site that tracks this issue, http: //www. eia. doe. gov/cneaf/electricity/chg_str/tab5rev. html.

SUMMARY

Twenty-two states, including Connecticut, adopted laws in the 1990s restructuring the electric industry to allow customers to choose their suppliers. The other states are Arizona, Arkansas, California, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, and Virginia. In addition, the agency that regulates utilities in New York restructured the industry administratively.

California and Nevada have subsequently suspended competition, although Nevada allows certain large customers to choose their supplier with the approval of its Public Utilities Commission (PUC). (This memo uses the term PUC generically-the actual name of the regulatory commission varies by state. ) Arkansas, Montana, New Mexico, and Oklahoma have delayed the start of competition to a future date. Arizona, Illinois, New Hampshire, Oregon, and Rhode Island have substantially amended their restructuring laws. The remaining states, like Connecticut, have not substantially amended their laws.

Nationally, there has been little competition for residential and small business customers, and in most states fewer than 5% percent of such customers have chosen competitive suppliers. The remaining customers continue to be served by the incumbent utilities under provisions similar to Connecticut's standard offer service requirement. On the other hand, in several states (although not Connecticut) a larger proportion of large business customers have chosen competitive suppliers. Please note that several states, including Michigan and Texas, opened their electric markets to competition less than one year ago.

INTRODUCTION

Although restructuring laws vary by state, they generally have several common features. With the exception of Oregon, the laws allow all customers to choose their electric supplier. (Oregon only allows non-residential customers to choose. ) Utilities must provide default service (called standard offer service in Connecticut) at PUC-regulated rates to customers who do not choose. Several states, including Connecticut, required utilities to cut their rates as part of their restructuring laws. OLR Reports 2001-R-0174 compares standard offer provisions in Connecticut's law to similar provisions in California, Massachusetts, New York, and Rhode Island.

Most states required utilities to separate their generation functions from their power distribution functions. Many, like Connecticut, encouraged or required utilities to sell off their power plants and other generation assets such as contracts to purchase power. Other common features of restructuring laws include (1) provisions for the recovery of stranded costs (costs incurred by utilities with PUC approval, whose continued recovery was jeopardized with the start of competition); (2) requirements that utilities obtain part of their power from renewable resources; and (3) mechanisms to provide funding for conservation programs and various utility-related public policies.

STATES THAT HAVE DELAYED OR SUSPENDED COMPETITION

Arkansas

Legislation adopted in 1999 would have opened the retail market to competition as early as January 2002. The act required utilities that sought recovery of their stranded costs to freeze their rates for three years. Other utilities must freeze their rates for one year.

Legislation passed in 2001 delays the start of competition to October 2003 at the earliest and October 2005 at the latest. It also allows the PUC to further delay this date based on the adequacy of the state's transmission system and generating capacity needed to support a competitive market. Later in 2001, the PUC recommended that the legislature either repeal the law or delay the start of competition until at least 2010. The Arkansas legislature, which did not meet in regular session in 2002, has taken no action on the recommendations to date.

California

The state's initial 1996 restructuring law opened the market to competition as of 1998. It required utilities to reduce rates for small customers by 10% and then freeze them until they recovered their stranded costs. It required utilities to divest most of their generation assets. Between 1997 and 1999, the legislature adopted several amendments to the law, addressing issues such as slamming (switching suppliers without the customer's consent).

For a variety of reasons, California's experience with restructuring starting in 1999 was catastrophic. Rates shot up dramatically for the one utility (San Diego Gas & Electric, SDG&E) whose rates were unregulated after it recovered its stranded costs. The other two utilities incurred billions in costs they could not pass on to their customers. Wholesalers became reluctant to sell power in the market, and state and federal regulators have alleged that several manipulated the market. The state experienced recurring brownouts and blackouts in late 1999 and early 2000.

In September 2000, the legislature retroactively capped SDG&E's rates and allowed the PUC to extend the freeze through December 2003. In January 2001, the legislature passed three bills. One reformed the Independent System Operator, which administers the state's transmission system. The second barred utilities from selling off their power plants until 2006. The third authorized the state Department of Water Resources to spend up to $ 400 million to procure electricity for the state's residents. The department spent this amount in less than a month, and in February 2001, the legislature appropriated $ 500 million more for this purpose. It authorized the department to issue up to $ 10 billion in bonds to purchase electricity, backed by future electric revenues. It also authorized rate increases.

In February 2001, the governor issued an executive order establishing a $ 800 million conservation program which provided incentives to reduce commercial lighting and rebates for energy efficient appliances. The order also required businesses to reduce outdoor lighting by half during non-business hours. In March 2001, he issued an order designed to expedite the construction and permitting of power plants and boost the output from existing facilities in the state.

Also in March 2001, the PUC approved rate increases of over 40%, effective May 2001, for customers of the two utilities that had been subject to the rate freeze (Pacific Gas & Electric and Southern California Edison). The increase primarily went to reimburse the state for the power it purchased for those customers. Low-income customers were exempt from the increases. In June 2001, the PUC modified the increase. Under the later order, residential customers of the two utilities saw rate increases of between zero and 80%, depending on their usage. Customers using less than 130% of the baseline amount (which varies geographically) and low-income customers saw no increase. Commercial rates increased between 34% and 45% and industrial rates increased an average of 50%.

Legislation adopted in May 2001 created the Consumer Power and Conservation Financing Authority. The authority can construct power plants and transmission projects, issue up to $ 5 billion in bonds, and establish programs to promote energy efficiency, renewable energy, and efficiency and environmental improvements to existing power plants.

In October 2001, the PUC suspended retail competition. Customers who had chosen a supplier were allowed to continue to receive service from it until the expiration of the contract, and to renew and modify contracts. At that time, fewer than 1% of residential customers had chosen a supplier, but 21% of large business customers had done so.

Legislation adopted in 2002 requires utilities to increase the use of renewable energy by 1% per year until 20% of their retail sales are generated from renewable sources.

OLR Reports 2001-R-0081 and 2001-R-0086 discuss the relevance of California's experience to Connecticut.

Montana

In 1997, Montana passed legislation allowing large industrial customers to choose their suppliers starting July 1998 and giving all customers choice by July 2002. The law also froze rates for two years beginning July 1998. However, in 2000, the PUC delayed retail

competition for non-industrial customers from July 2002 to July 2004 because the state did not have a competitive power supply market in place.

Montana was substantially affected by the problems in the California market. At one point, aluminum smelters in the state (among the state's largest electricity customers and employers) found it more economic to shut down their mills rather than pay the increased costs of electricity. In January 2001, the PUC approved an increase in distribution rates for customers served by Montana Power, the state's largest utility. The increase represents a 4. 5% increase for customers who buy their power from Montana Power and a 7. 5% increase for customers who buy power from competitive suppliers.

In 2001, the legislature significantly amended the restructuring law. The amendment extended the rate freeze to July 1, 2007. It allowed customers being served by competitive suppliers to switch back to utility service, so long as they did not resell the electricity. It required utilities offer a "green power" option, i. e. , electricity produced from renewable resources. It also directed the PUC to adopt a mechanism to ensure that utilities could fully recover their electricity procurement costs in rates.

In addition, the Montana Board of Investment was authorized to invest in 450 megawatts (MW) of new generation projects and 120 MW in purchases from existing generating facilities that meet certain criteria. (One megawatt is enough power to serve 750 to 1,000 households. ) Approved projects must have contracts for the sale of power to the default suppliers or a Montana industry, and the projects must be backed by sales the electricity produced by the project. The amendment also created the Montana Power Authority, financed by revenue bonds, to purchase, construct and operate electric generating or transmission or distribution systems or enter into joint ventures for these purposes. Finally, the amendment created the Consumer Electricity Support Program, funded by the state electrical energy excess revenue tax. The program is designed to promote price stability, provide subsidies for law-income and default customers, and provide low-interest loans for new or upgraded transmission facilities or new generation facilities.

Nevada

The state's initial 1997 legislation would have allowed all customers to choose their suppliers by the end of 1999. The law was amended in June 1999 to (1) delay competition to March 2000; (2) give the governor, rather than the PUC, the authority to select another date if he deems it in customers' best interests; and (3) cap residential rates for three years.

The governor further delayed competition twice in 2000, the second time to September 2001. In March 2001, he released the Nevada Energy Protection Plan, which recommended an indefinite halt to restructuring due to high demand, low supply, and unstable prices. The plan also contained recommendations on utility plant divestiture and ways to accelerate power plant and transmission line construction.

In May 2001, the legislature re-regulated electric utilities and barred the sale of their power plants before July 1, 2003. The act also allowed utilities to use a deferred accounting method to protect customers from wholesale price volatility. Retail rates were frozen until early 2002, but now can be adjusted to reflect changes in the costs of procured power. The legislation also created a universal service fund for low-income energy assistance

Additional legislation was passed in July 2001 to (1) allow large customers using one MW or more to choose a competitive supplier with permission from the PUC, (2) fund low-income energy assistance with a universal energy charge, and (3) amend utility laws including those on the rate-setting process. A separate act passed that month requires electric companies to obtain 5% of their power from renewable resources by 2003, and 15% by 2013, compared to 3% currently.

New Mexico

The state's restructuring law opened the market for residential customers to competition in 2001 and the rest of the market in 2002. But legislation passed in May 2001 delayed these dates to 2007 and 2008, respectively. It also delayed the deadline for Public Service of New Mexico (the state's largest utility) to separate its generation and distribution functions, and allowed it to proceed with plans to build new generation plants.

Oklahoma

Oklahoma's 1999 restructuring law allowed residential and small business customers to choose their suppliers in 2001 and other customers to do so in 2002. (The PUC subsequently delayed the start of competition for small customers to 2002. ) The act allowed utilities to recover at least half of their stranded costs through charges on customer's bills, spread over a five-year period.

Legislation passed in 2001 established a task force to study the effects of restructuring. Under the act, competition cannot not be implemented until after the task force issues its final report at the end of 2002, and the legislature enacts revised enabling legislation.

STATES THAT HAVE SUBSTANTIALLY AMENDED THEIR LAWS

Arizona

Legislation adopted in 1998 affirmed the PUC's authority to require utilities to open territories to retail competition. (The commission is a constitutionally created agency with unusually broad powers. ) The utilities were initially required to divest their power plants and other generation assets. They were entitled to recover their stranded costs but had to reduce rates for residential customers by 5%.

The PUC subsequently adopted rules for restructuring the investor-owned utilities in the state, with retail competition to be phased in over two years, starting with large customers. In 1999, the PUC delayed the introduction of competition as a result of a state Supreme Court case dealing with stranded costs. Settlements reached with the state's major utilities mandated a 7. 5% rate cut over five years for Arizona Public Service, with a rate cap set to expire in 2004. Tucson Electric Power has reduced rates by 3%, and its rates are frozen until 2008. Although the entire state is now open to competition, to date very few customers have chosen competitive suppliers.

In August 2002, the PUC nullified a section of the restructuring law that requires utilities to divest their generation assets, based on a finding that (1) the generation market was insufficiently competitive and (2) divestiture would limit the commission's jurisdiction and its ability to protect customers from market power abuses. In September 2002, it ordered the state's two major investor-owned utilities to cease their divestiture efforts. In November 2002, the PUC announced that, beginning in 2003, it might allow independent power producers to supply 30 percent of the state's summer power. The plan is subject to legislative approval.

Illinois

Illinois passed its restructuring law in 1997. It allowed some large customers to choose their supplier by October 1999, and all customers to do so by May 2002. It provided rate cuts for two utilities, including the state's largest (Commonwealth Edison). Under the original legislation, most customers were to receive a 15% rate reduction by August 1998, and another 5% reduction in May 2002. The legislation was amended in 1999, to accelerate the introduction of competition sought that all customers could choose by October 2001, and to move up the second rate cut by seven months. OLR Report 2002-R-0694 provides additional information about the law.

However, the PUC reported that as of August 2002 "there is absolutely no competition (or choice) for retail residential electric customers, and it is unlikely competition (or choice) will be available for these customers for the next several years. " The report noted that commercial and industrial customers have limited access to competitive suppliers outside of the Commonwealth Edison service territory, and competition in this area has been reduced with the approval of a new mechanism by which large customers can buy power from their utilities at market-based rates. The PUC cited this mechanism, the restructuring legislation itself, transmission constraints, and credit risks as being among the reasons for the lack of competition.

New Hampshire

The state's initial 1996 legislation required the PUC to open the market to retail competition no later than July 1, 1998. The legislation was the subject of lengthy litigation, primarily dealing with the treatment of the stranded costs of Public Service of New Hampshire (PSNH), the state's largest utility. In September 2000, the PUC approved a settlement that resolved the dispute. The settlement, which was incorporated into legislation adopted in June 2000, resulted in the utility's residential customers receiving a 5% rate reduction on October 1, 2000. Upon start of competition (May 2001), their rates were reduced by a further 10%. Under the settlement, PSNH agreed to absorb $ 450 million of its $ 2. 3 billion in stranded costs, and was allowed to securitize (refinance) $ 800 million of these costs. PSNH also agreed to divest its generation assets. Competition began in PSNH's service territory in the spring of 2001. It began in service territory of Granite State Electric (the other major utility) in 1998.

Oregon

As described in OLR Report 2002-R-0694, Oregon's restructuring law is unusual in that it only allows non-residential customers to choose a supplier. The law requires utilities to provide several options to residential and small business customers, including several that promote renewable energy use. Small businesses were also given the option of receiving service from utilities at PUC-regulated rates that vary to reflect the utility's cost of providing the service.

Under the original legislation, businesses customers would have been allowed to choose their suppliers as of October 2001. However, legislation passed in August 2001 delayed competition, and most other provisions of the law, until March 2002. It extended the cost of service option to large businesses. It also required the PUC to report to the legislature by January 2003 on whether residential customer should be allowed to choose their suppliers. OLR Report 2002-R-0909 provides additional information on the 2001 changes in the law.

According to the PUC's December 2002 status report, no business customers are currently served by competitive suppliers. Approximately 9% of the non-residential demand for one of the state's major utilities (PGE) is provided under the cost of service option; for the other major utility (PP&L) the proportion is less than 1%. About 3% of all residential and small business customers have chosen "green power" or other non-traditional options.

Rhode Island

Rhode Island was the first state to pass restructuring legislation in 1996, opening the market to competition in 1997. As in Connecticut, its law requires utilities to provide standard offer service to customers who do not choose a supplier (Rhode Island's requirement runs until 2009). Under the original legislation, the price of standard offer service increased annually by 80% of the consumer price index, plus increases in costs beyond the utility's control. Utilities also had to provide last resort service to customers who were no longer eligible for standard offer service and who were unable to obtain or retain service from a competitive supplier.

In 2002, the legislature amended these and several other provisions of the law. It required that the rate for standard offer service just cover the utility's costs in providing this service, and barred the utility from making a profit on it. It authorized the utility to enter into hedges and other financial instruments to protect its customers from volatility in fuel prices. It authorized, under certain circumstances, customers to return to standard offer service after having selected a competitive supplier. The amendment entitled residential customers returning to standard offer service to pay the same rate as customers who had stayed on this service. The amendment modified procedures for the procurement of power for standard offer service and established procurement procedures for last resort service.

The amendment also allowed municipalities to serve as aggregators, gathering customers together to make them more attractive to suppliers. The amendment allows opt-in and opt-out municipal aggregation. Under the former approach, a municipality can offer its residents to buy power from a supplier chosen by the municipality. Under the latter approach, residents of the municipality are automatically switched to the supplier, unless they affirmatively chose not to participate in the program. (Connecticut's law allows the former approach but not the latter. To date Connecticut municipalities have expressed little interest in serving as aggregators. )

The 2002 legislation is described in greater detail in OLR Report 2002-R-0601. To date, there has been very little development of competition.

OTHER STATES

In the remaining states, the restructuring law has not changed significantly since its adoption. In most of these states, competition has been slow to develop, particularly for residential and small business customers. Generally, fewer than 5% of these small customers have chosen a competitive supplier. As discussed below, competition has developed more quickly in Ohio. Competitive suppliers at one point served a substantial part of the Pennsylvania market, but this proportion has recently fallen dramatically.

In most states, a substantially larger proportion of large customers than small customers have chosen a competitive supplier. For example, in Texas slightly more than 6% of residential customers have chosen a supplier, while 19% of large commercial and industrial customers have. Generally, the largest customers have been most likely to choose a supplier. For example, in Massachusetts approximately 15% of small and medium business customers have chosen a supplier, but more than 50% of large business customers have done so. In New York, only 7% of non-residential customers have chosen a supplier but they account for 28. 4% of the non-residential electric demand.

Ohio

Ohio's 1999 law opened its markets to competition in 2001 and required utilities to freeze electric rates for five years and cut residential customers rates by 5%. Most utilities have seen relatively few small customers choose competitive suppliers. But in the service territories of Cleveland Electric Illuminating, Ohio Edison, and Toledo Edison the switch rates range from 24% to 55%. According to the state's Office of Consumer Counsel (OCC), a major reason for this phenomenon is aggregation (the gathering of customers to make them more attractive to suppliers), particularly by municipalities. Ohio allows opt-in and opt-out municipal aggregation. Further information about Ohio's aggregation options is available on OCC's website, http: //www. pickocc. org/ electric/aggregation. shtml.

Pennsylvania

In Pennsylvania, participation in the competitive market has ebbed and flowed. At one point, Pennsylvania was widely seen as having had the greatest success in promoting competition. In several utility service territories more than one-third of residential customers, and a higher proportion of non-residential customers, chose competitive suppliers. Pennsylvania also had a unique assignment program in two service territories. Under settlements entered into by the PUC and the utilities, a specified proportion of utility customers were assigned to two competitive suppliers (Green Mountain Energy and NewPower, a subsidiary of Enron). These companies were chosen by competitive bid and had to offer a rate less than that charged for the default service provided by the utilities. Customers chosen to participate in the program could return to default service, which was subject to a rate freeze, but initially relatively few did. OLR Report 2001-R-0066 provides additional information on Pennsylvania's law.

Participation in the competitive market declined substantially in 2001, as wholesale electric prices (and thus the rates charged by competitive suppliers) rose. Many customers returned to default service and many suppliers left the market because they were unable to profitably compete against the fixed price default service. In addition, NewPower left the market after Enron filed for bankruptcy protection. As of October 1, 2002, fewer than 5% of customers outside of the Duquesne Light service territory have chosen competitive suppliers. As of October 1, 2002, 26. 4% of Duquesne Light customers have chosen a supplier.

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