February 15, 2001
STANDARD OFFER PROVISIONS IN CONNECTICUT AND OTHER STATES
By: Kevin E. McCarthy, Principal Analyst
You asked for a comparison of the standard offer provisions in electric restructuring law in Connecticut and other states. These provisions require utilities to provide service to those customers who do not choose a competitive supplier. You were particularly interested in the rates charged for generation services under these provisions.
We compared the standard offer and related provisions in restructuring initiatives in Connecticut, California, Massachusetts, New York, Pennsylvania, and Rhode Island. (In New York, the state's electric restructuring initiative came from the Public Service Commission rather than from the legislature.) We selected California and Pennsylvania because they are generally seen as the least and most successful examples, respectively, of electric restructuring. We choose the remaining states because they border Connecticut.
All of these initiatives require electric utilities to continue serving those customers who do not choose a competitive supplier. In Connecticut, this provision is called standard offer but other states refer to it by other names. The generation component of standard offer is sometimes called a “shopping credit” because it serves as a benchmark for consumers to use when choosing an electric supplier.
Standard offer provisions vary widely by state, and the generation component of these rates varies by utility. The generation components of Connecticut's rates are substantially below those in California and comparable to those charged in Rhode Island. Massachusetts' generation components are similar to Connecticut's, but people moving into a utility's service area pay a higher “default” rate. Connecticut's generation components are generally above those in Pennsylvania. In New York, the method by which the generation component is set varies by utility; in some cases the price of this component fluctuates with changes in the wholesale price of electricity.
PA 98-28 requires utilities to provide standard offer service to those customers who do not choose a competitive supplier. Under the act, the utilities must charge a rate for this service that is at least 10% below their December 1996 rates. The rate charged for standard offer service is subject to modification under limited circumstances, as described in OLR memo 2001-R-0066. Customers who leave standard offer service can return, but must then remain on standard offer for at least 12 months. These provisions end December 31, 2003, unless the legislature extends them. After that date, utilities will still have to serve these customers, but rates will reflect market costs.
Currently, virtually all Connecticut utility customers are on standard offer. The generation component of the standard offer rate for residential Connecticut Light and Power customers is 5.5 cents per kilowatt-hour (kwh). For United Illuminating customers the component is 5.0 cents per kwh.
California's restructuring legislation requires utilities to provide standard offer service to customers who do not choose a competitive supplier. The vast majority (approximately 98%) of customers are on standard offer service. The original restructuring legislation capped standard offer rates until a utility recovered its stranded costs or May 2002, whichever comes first. Stranded costs are utility costs previously in rates whose continued recovery was threatened by the start of competition in the electric industry.
In July 1999, San Diego Gas and Electric (SDG&E) paid off its stranded costs and the California Public Utilities Commission (CPUC) deregulated its standard offer rates. By the summer of 2000, the average residential bill tripled as the utility passed on high wholesale costs to consumers. In September 2000, the legislature capped retail rates at 6.5 cents per kwh, allowing SDG&E to recover the money it lost due to the new rate cap in three years.
Because of further increases in wholesale costs, SDG&E says it has a balance of $447 million in uncollected bills. On January 24, 2001, it asked the CPUC to add 2.3 cents per kwh to its rates, which would boost the average residential customer's $72 monthly payment for electricity to $83.50.
The state's other two major utilities, Pacific Gas and Electric (PG&E) and Southern California Edison (SCE) are still recovering their stranded costs. As a result, their rates were subject, through December 2000, to the initial rate freeze. During this time, the utilities incurred approximately $12 billion in costs they could not pass on to their customers, largely due to increases in the wholesale costs of electricity. On January 4, 2001 the CPUC approved rate hikes for utilities. The increases will be about 9% for residential customers and between 7% and 15% for businesses. The current generation component of PG&E rate (averaged over all customers) is 6.7 cents per kwh. For SCE, the component is 7.2 cents per kwh.
Subsequently, the legislature passed a bill (AB 1X) that authorizes the issuance of state bonds to cover the utilities' unpaid costs. The bill bans future rate increases on that part of a customer's bill that is up to 130% of a baseline that varies by region in the state. This will protect approximately 75% of the companies' residential customers. The act also effectively suspends retail competition.
Standard offer service will be available to customers of each utility through 2004. A customer who did not select a competitive supplier as of March 1, 1998 automatically was placed on standard offer. Customers who move into a company's service territory after March 1, 1998 are not eligible to receive standard offer and receive default service instead. As in Connecticut, the vast majority of customers are on standard offer.
The Department of Telecommunications and Energy sets the rates for standard offer and default service; the latter may not exceed the average market price for electricity in New England. The current standard offer rate ranges from 5.12 to 7.26 cents per kwh. The current rate for default fixed rate service is 6.37 to 7.94 cents per kwh. These rates are subject to change later this year (June for most of the state's utilities). There is also an option in which default rates vary monthly.
In general, once customers select a competitive supplier, they can no longer return to standard offer service, except that (1) low-income customers can return at any time and (2) customers participating in a municipal aggregation program can return within 180 days of joining the program.
In 1996, the Public Service Commission (PSC) required each of the utilities it regulates to submit restructuring plans. (The PSC does not regulate publicly owned utilities, notably the Long Island Power Authority.) The PSC subsequently entered into settlement agreements with each of the companies. The settlements generally run until 2002, although several of the companies have proposed modifications and extensions of their settlements.
Under each of the settlements, the company is presumed to be the “provider of last resort,” responsible for serving customers who do not choose a competitive supplier or whose supplier fails them. The method by which the PSC has priced the generation component of this service varies by company. For Consolidated Edison, the generation component price is based on market prices for electricity and generation capacity. This means that electric prices for the company's customers vary monthly. In contrast, the total rate charged to residential customers of Niagara Mohawk is capped at approximately 10 cents per kwh. The generation component of this rate fluctuates with the market, with the distribution component adjusted accordingly to keep rates below the cap. To the extent that the utility loses money because of this provision, it is entitled to recover the shortfall later. The generation component was priced by the PSC for several companies. For New York State Electric & Gas the rate is 3.54 cents per kwh. For Rochester Gas and Electric, the rate is 2.8 cents per kwh. Both companies have proposed settlement revisions that would base these prices on market rates.
The PSC is currently conducting a proceeding to determine whether the companies should continue to serve as the provider of last resort. PSC staff anticipate that the commission will issue a decision on this case in the next few months.
Pennsylvania's law requires utilities to provide standard offer services as long as they are recovering their stranded costs. The projected date for full recovery of these costs ranges from 2004 until 2011, depending on the utility. Customers who choose a competitive supplier can return to standard offer.
Pennsylvania is widely seen as the most successful example of restructuring, with approximately 560,000 customers having chosen competitive suppliers. In Connecticut, in contrast, approximately 1,000 customers have moved off of standard offer.
The generation component of the standard offer rate currently ranges from 3.2 cents per kwh for Allegheny Power to 5.6 cents per kwh for Philadelphia Electric Company. These figures will rise as the utilities recover their stranded costs.
Customers who do not choose a competitive supplier go on standard offer, and the utilities must provide this service through 2009. The rates charged to standard offer customers are the 1996 rates, automatically increased by 80% of the rate of inflation as measured by the Consumer Product Index. In addition, the utility regulatory commission can adjust this rate to account for cost changes that are beyond the utility's control. The rate is currently 5.9 cents per kwh for Narragansett Electric, which serves most of the state.
Customers who leave standard offer service may not return. Instead, they go on last resort service. The rate for residential customers is the same as the standard offer service rate. For nonresidential customers, the last resort rate is higher, currently 8.9 cents per kwh, although it is scheduled to decrease to 7.9 cents per kwh in April 2001.