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Stranded Benefits and The Anticipated Impact on RatesElectric Utility Restructuring and the Low-Income Consumer Facts on File: Nos.7 & 8 Fisher, Sheehan & Colton,
Public Finance and General Economics What's a "Stranded Benefit"? One major low-income concern about a move to a competitive electric industry involves the creation of "stranded benefits." Stranded benefits involve electric utility programs and actions that will be at risk of elimination (or significant reduction) in a competitive industry. These utility initiatives frequently involve actions that are currently done because the utilities have been directed to do them by state regulators rather than because the utility has chosen to do them. The programs are often based in notions of "equity" rather than in notions of economics. The Reason for Stranding There will be two types of electric service providers involved in a competitive electric industry. On the one hand, there will be the existing utility who currently supplies electricity under state regulation, the "incumbent." On the other hand, there will be the new competitors. These new competitors might be out-of-state companies. Some may own their own power plants. Some may simply be marketers, who buy electricity from companies who produce it and then resell it for a profit. The problem arises because these new competitors will not be under the same regulatory obligations to provide equity-based programs as the incumbent utility. As a result, the incumbents will argue (with some justification) that they are being forced to bear costs that their competitors do not, thus making the incumbent less competitive. To remain competitive, the reasoning will go, the programs provided subject to regulatory direction must be eliminated or curtailed. Shutoff Restrictions at Risk One set of benefits at risk are the regulatory protections that have been established to limit the use of utility shutoffs as a collection tool. These limitations have been imposed because they are "fair," not necessarily because they are justified on any economic grounds. The grandaddy of utility shutoff protections put at risk is the winter shutoff moratorium, called the "cold weather rule" in many states. Under this rule, a utility is barred from disconnecting service during severe weather. Some states have temperature-based limitations, barring shutoffs only when temperatures fall below a certain level irrespective of the date. Other states have date-based limitations, barring shutoffs completely during certain time periods (such as December through March). Utilities have always claimed that winter shutoff restrictions impede their ability to collect bills during the winter months. As a result, they claim that significant increases occur in both uncollectible dollars and unpaid bills, both of which increase costs. Whether or not these claims are true --there is certainly evidence that they are not-- based on the utilities' beliefs, it can be expected that since new competitive electric service providers will not be subject to the jurisdiction of state regulators, and thus will not face the same winter restrictions, utilities will ask for the elimination of these protections. Winter restrictions are not the only shutoff restrictions at risk. Shutoff restrictions during medical emergencies, on days when utility offices are closed, and similar regulations will be placed at risk as well. "Affordable Rate Programs" at Risk Affordable rate programs are a second type of "stranded benefit." Affordable rate programs can involve discount rates for low-income consumers. They can involve arrearage forgiveness programs. They can involve discounts for senior citizens or for persons with disabilities. The thing about rate discounts and arrearage forgiveness programs is that few utilities may seem to have them. It might seem at first glance, therefore, that placing affordable rate programs at risk does not place many states in jeopardy. Affordable rate programs, however, do not refer simply to rate discount programs. They would include, also, for example, long-term deferred payment plans. Deferred payment plans cost utilities money in two ways. First, the negotiation of a payment plan is expensive, in that it requires personal contact (albeit perhaps by telephone). In addition, the utility loses the working capital associated with carrying the arrears over the life of the plan. It can be expected that utilities, while not asking to eliminate deferred payment plans altogether, will seek substantial restrictions on such plans. They will likely ask that plans be much shorter than in the past, thus requiring higher monthly payments toward arrears. They will likely ask that consumers seeking deferred payment plans prove their inability to pay. They will likely ask for restrictions on the offer of multiple plans, for example, denying the availability of such a plan if you had entered into a deferred payment plan during the previous year. They will likely ask for larger downpayments, for example, requiring a customer to pay half of the arrears and making the other half subject to a deferred payment plan. Energy Efficiency Programs at Risk A third set of "stranded benefits" will involve existing energy efficiency programs. Low-income energy efficiency programs can consist of two primary efforts. First, many utilities engage in weatherization programs for heating customers. These efforts involve traditional weatherization efforts such as installation of insulation, set-back thermostats and similar space-heating measures. Some programs are "stand-alone" programs, where the utility engages in the weatherization efforts itself. Other existing utility efforts involve supplements to federal Weatherization Assistance Program (WAP). A second electric utility program involves non-space-heating energy efficiency. These typically involve the installation of efficient lighting and often involve the replacement of old and inefficient refrigerators. Summary "Stranded benefits" include those programs and efforts that incumbent utilities provide because they have been directed to do so by state regulators. These efforts are placed at risk by electric restructuring to the extent that incumbent utilities successfully argue that making utility companies provide such programs places them at a competitive disadvantage with new electric service providers who are not also required to offer the same or similar programs. One impact of a restructured electric industry is the likely impact that low-income customers will pay increased bills for electricity. Cost-of-service vs. Value-of-Service Rates Understanding two concepts will help explain this probable rate impact. The first concept is called cost-of-service ratemaking. Under cost-of-service ratemaking, which has historically been the norm under state regulation, state regulators seek to match the rates charged to consumers with the costs incurred in providing those consumers with electricity. There is, in other words, some element of causation. If a customer class causes the utility to incur certain costs, that class pays those costs. The second concept is called value-of-service ratemaking. Under this approach, prices are set equal to what the market will bear rather than being based on cost causation. Value of service ratemaking takes into explicit consideration the alternatives available to customers. If fewer alternatives are available, the customers will be "willing" to spend more to retain service and prices are thus set higher. Given the lack of alternatives for most low-income consumers, the "value" of electric service is higher and prices are set accordingly. The reasons that low-income consumers have the fewest alternatives will be familiar to low-income energy service providers. Low-income households tend to be tenants. As a result, they do not have the authority to make energy saving home improvements. In addition, since energy savings go to tenants, landlords do not have the incentive to do so. Low-income consumers do not have the money to invest in energy savings devices. It makes no difference to a poor person that spending $100 will save $130 if he or she does not have the $100 with which to begin. Low-income consumers do not generally have substantial discretionary energy use. They don't have things to "turn off" in order to save energy. If the move to value-of-service ratemaking means that captive customers will pay more, which it does, then low-income consumers are likely in line for a series of price increases. Fixed vs. Variable Costs A more subtle form of passing higher costs on to captive users (including low-income consumers) is through a reallocation of fixed and variable costs. The "fixed" costs of a utility system are those costs that do not vary based on the amount of electricity sold. They include headquarters buildings, power plants, executive salaries, and the like. In contrast, the "variable" costs of a utility are those that increase or decrease directly with the amount of energy sold. Thus, for example, fuel costs are variable costs; if you sell more electricity, the utility must burn more coal to produce the power. Under principles of cost causation, variable costs are charged to the consumers who cause the utility to incur the costs. In contrast, however, there are no accepted means of allocating fixed costs. Accordingly, as the utility industry becomes more competitive, it is likely that the utilities will charge their larger customers close to their variable costs as a means to keep prices down and retain those customers as customers. The result, however, is to allocate the fixed costs of the system to captive customers. As a result, customers with fewer alternatives (such as low-income customers) will bear the largest share of fixed costs while those classes with more alternatives will be assigned a smaller share. They can thus expect to see increases in price even when the total costs of the utility remain stable or decrease. Unbundling Rates and Services Aside from increases in their base rates, one additional way in which low-income consumers will likely face increased prices is through the "unbundling" of rates and services. Debundled service fees can represent a significant increase in "rates" to customers even if base rates remain the same or decrease. Customers who are facing payment troubles, for example, can nonetheless still face significant increases in the monies which they owe to a utility if either the utility debundles existing elements of service and institutes new fees for those individual elements, or, if the utility institutes increases in existing fees for certain elements of service other than those paid for through base rates. Look What's Happened with Banks Unbundling is not new to consumers. Banks are the masters of "unbundled" fees. Most consumers have experienced fees for ATM machines that were not previously imposed. Fees are charged to use credit cards. With some banks, fees are charged to have a consumer's checks returned to them in their statement each month (rather than photocopies of the checks). In a competitive industry, these fees need not be cost-based. Since bank deregulation in the 1980s, fees charged by banks have been skyrocketing. Recent newspaper headlines proclaim: "Banks Begin to See Gold in Bounced Checks." Reports state that non-sufficient funds (NSF) fees have risen from an average of $15.11 in 1990 to an average fee of $19.35 per check by 1993. The large banks are charging fees averaging 971% more than the processing costs. Researchers have estimated that banks earned in excess of $1 billion in 1994 from NSF fees alone. Of course, banks charge other fees as well. The Utility Counterpart The utility industry is already beginning to adopt these banking practices. One Vermont utility has proposed to charge consumers a fee every time they are sent a shutoff notice. A Pennsylvania utility proposed charging a fee for "field collection calls," where a company representative personally visits your home and collects money while there. Other fees that can be expected include fees to pay for the negotiation of a deferred payment plan, fees to cash third party checks at company offices, and fees to have a utility check your bill if you dispute the amount that you have been billed. Summary Predictions that competition in the electric industry will result in price savings to all consumers fail to take into account the impact of competition on low-income customers. Whether it is through increases in base rates, or increases in fees for unbundled services, it is likely that a competitive electric industry will impose higher prices on low-income consumers. Roger Colton is an attorney and economist in Belmont, Massachusetts. Colton has been hired to analyze electric restructuring issues by clients ranging from the U.S. Department of Energy (DOE), to the National Association of Regulatory Utility Commissioners (NARUC), to the Edison Electric Institute, the national electric utility industry association. Colton has also worked for numerous state agencies and local community-based organizations on restructuring issues. Roger D. Colton Page Last Updated: December 7, 2005 |
