The Ohio Consumers’ Counsel sees cause for concern during review of electric market

COLUMBUS, Ohio, Jan. 8, 2003 — As Ohio begins its third year of retail electric competition, the Ohio Consumers’ Counsel (OCC) sees continuing cause for concern about the health of the state’s electric marketplace and the potential long-term risks for Ohio’s residential electric consumers.

When Ohio’s retail electric market was opened to competition in 2001, the Public Utilities Commission of Ohio (PUCO) certified 38 suppliers to sell electricity to all customer classes. By the end of 2002, just 2 suppliers were actively marketing to the state’s residential customers. Now, as we enter the third year of what is for most Ohio consumers a temporary five-year “market development period,” the OCC is increasingly concerned about the lack of meaningful retail competition in Ohio.

Ohio’s retail electric marketplace is at a critical crossroad. In 2003, the state must address a number of tough issues:

* What happens if there are few or no competing electric suppliers when the market development periods end?

* What price protections will consumers have when the current rate freeze disappears?

* What state actions will be taken to break the logjam over regional transmission issues that threaten both the reliability and affordability of electricity for Ohio consumers?

The answers to these questions and others will determine whether electric choice ultimately works for the benefit of Ohio consumers. However, answering the questions and implementing effective solutions will take significant time and effort. The OCC’s heightened sense of urgency stems from an awareness of how much work remains to be done before the end of 2005.

Review of Two-Year Switching and Savings Data

Through 2002, approximately 813,000 residential consumers statewide — or about 20 percent of those who are eligible to participate in electric choice — actually switched electric suppliers. More than 90 percent of those who switched suppliers participated in one of the more than 190 community aggregation groups in the state, and about 98 percent previously bought their electricity from one of the three FirstEnergy companies (Ohio Edison, Toledo Edison and Cleveland Electric Illuminating). Residential customers in Central and Southern Ohio, and in the Miami Valley, have had virtually no choices for alternative suppliers.

Ohio’s electric restructuring legislation established a 20 percent residential switching goal for each operating company of the state’s electric utilities. This goal was to be reached by the midway point of the utility’s “market development period.” So far, the only meaningful progress toward achieving this goal has occurred in FirstEnergy’s territory. The OCC is concerned about the slow progress toward the 20 percent switching goal for customers of Ohio’s other utilities.

There are two key reasons for the lack of competition and low switching levels in most other parts of the state:

* FirstEnergy’s prices were higher to begin with than the prices offered by the state’s other utilities, so it has been easier for alternative suppliers to compete against FirstEnergy’s regulated rate than against the rates for Ohio’s other utilities.

* As part of its restructuring agreement, FirstEnergy agreed to make a limited supply of low-cost wholesale electricity — called “market support generation” — available to suppliers interested in marketing to residential customers. This “MSG” played an important role in helping to jump start competition in the FirstEnergy service territory.

The OCC also believes that inadequate work has been done to protect consumers when the legislatively mandated rate freeze currently in place disappears at the end of the market development period. This issue demands most urgent attention in the area of the state served by Dayton Power & Light (DP&L), where no suppliers currently are actively marketing to residential customers. Whereas most Ohio utilities have five-year market development periods that extend through 2005, the market development period for the area of the state served by DP&L extends only through 2003.

In October, 2002, DP&L asked the PUCO to extend the company’s market development period through 2005. Unless interested parties including the OCC can come to an agreement over whether and how this extension may occur, the PUCO will have to make a decision on the matter.

Not all the news is discouraging. Even in those areas of the state where electric supplier choices have been limited — or, in some cases, still do not exist — residential customers are saving money. Under the new law, residential consumers who have purchased their electricity from the state’s investor-owned electric utilities have received a five percent reduction in the generation portion of their electric bill. Cumulative savings resulting from this discount have totaled approximately $250 million statewide through 2002 and will continue to accumulate through the end of the market development periods.

Specific Causes for Concern

As noted above, the OCC continues to be disappointed by the lack of meaningful competition in Ohio’s retail electric marketplace. Specific concerns include the following:

* Competition is stalled in virtually all parts of the state. As of December 31, there were just two electric suppliers actively soliciting residential consumers. Residential customers in Central and Southern Ohio, and in the Miami Valley, have had virtually no choices for alternative suppliers. Fewer choices for consumers mean fewer opportunities for savings.

* Few suppliers are marketing to individual consumers. Approximately 98 percent of Ohio’s residential customers who have switched suppliers have done so through large aggregated buying groups. While the OCC actively supports community aggregation as one way consumers can lower their electric bills, we remain concerned that there are not more suppliers marketing directly to individual residential consumers.

* More progress should be made to determine why competition has stalled. A review should consider:

— What actions may be needed to ensure the development of competition before the market development periods are permitted to end, and

— Whether the potential impact on consumers will be negative when the current price caps are eliminated and identify steps that could be taken to minimize any such negative impact.

* More progress should be made to define the “default provider” bidding process. The PUCO has not finalized the bidding process that ultimately will determine prices for large blocks of residential consumers after the current market development periods end in 2003 (for DP&L customers) and 2005 (for customers served by Ohio’s other electric utilities). The OCC believes that residential customers who have neither joined a community aggregation group nor chosen a new supplier at the end of the market development periods should be offered a fixed price for electricity set by a winning bidder for a large buying pool of such customers for each utility. The bidding process is critical to providing a “safety net” to protect residential consumers from volatile electric rates if the market does not develop as contemplated in Ohio’s electric restructuring legislation. The rule-making process for defining this “default provider” bidding process will take months, and prospective bidders will need adequate advance time to obtain power based on the size and load of the expected bidding pool.

* Ohio has major unresolved regional transmission issues. Ohio’s electric utilities have not yet fulfilled their legal obligation to turn over operational control of their transmission systems to an approved, independent Regional Transmission Organization (RTO). The state’s major utilities elected to pursue several different options, resulting in a delayed, fragmented and ineffective approach to resolving Ohio’s transmission needs.

* Unfair and unlawful line extension charges have been authorized. On November 7, 2002, the PUCO approved new fees that American Electric Power, FirstEnergy and Monongahela Power can charge their customers to extend new or replacement power lines to their homes. The OCC believes these new fees violate the rate freeze mandated by Ohio’s electric choice legislation. The OCC’s request to the PUCO to reconsider its decision was rejected on December 19, 2002.

Required State Actions

OCC believes that prompt and decisive action by the PUCO is needed to ensure that residential electric customers receive the benefits — and the safeguards — that Ohio’s electric choice legislation intended. Specific necessary actions include the following:

* Extend DP&L’s market development period. In Ohio’s current undeveloped retail marketplace, competition is at a standstill and consumer choices are few and far between. In this environment, removing the existing price caps as scheduled when DP&L’s market development period ends on December 31, 2003, could put consumers at risk for higher, volatile electricity prices without viable alternatives. One month before DP&L’s October request for an extension, the OCC filed a complaint with the PUCO and requested limitations on DP&L’s rates, which would protect residential consumers while providing more time for a competitive market to develop.

* Conduct midpoint reviews of Ohio’s other retail markets. These reviews should be used to obtain information that would allow the PUCO to spur healthy, ongoing competition and protect residential consumers in the post-transition marketplace. The OCC calls on the PUCO to begin plans immediately for conducting reviews of the status of competition in Ohio’s electric utility markets no later than July 2003, the midpoint of the market development periods for American Electric Power, Cincinnati Gas & Electric, FirstEnergy and Monongahela Power.

* Impose sanctions against AEP and DP&L until regional transmission issues are resolved. American Electric Power (AEP) and Dayton Power and Light (DP&L) have failed to meet the deadline specified in the agreements that settled their electric choice cases at the PUCO, requiring them to turn over operational control of their transmission systems to an approved independent Regional Transmission Organization (RTO). The OCC and others have filed formal complaints against AEP and DP&L for failing to comply with this provision of their transition case settlements and has asked the PUCO to (a) suspend payment of transition costs to the utilities, (b) levy fines against the utilities, and © limit the utilities’ ability to move to market-based retail rates at the end of their market development periods. Both AEP and DP&L have argued that the PUCO has no authority to consider the OCC’s complaints let alone impose these remedies. The PUCO should reject these arguments and grant appropriate remedies.

* Finalize rules for the default provider competitive bidding process. Rules governing the default provider bidding process for the post-market development period must be completed early enough to allow prospective suppliers to obtain sufficient power to serve the needs of residential customers in the expected bidding pool. The PUCO’s rule-making process should be completed as soon as possible, and it is imperative that the final rules result in a bidding process that benefits residential consumers.

Federal Issues and Economic Factors

The OCC recognizes that certain unresolved issues at the federal level are impeding Ohio’s progress toward a competitive retail electric market and increased opportunities for savings for consumers. Ohio’s electric choice legislation was written with certain assumptions about federal actions needed for the development of healthy wholesale markets — and some of those actions have yet to occur. Two federal policy areas with important impact on Ohio include the following:

* Regional Transmission Organizations (RTOs) and standard market design. Confusion and lack of direction at the federal level regarding Regional Transmission Organizations (RTOs) have delayed development of a single, fully functional RTO in Ohio. The Federal Energy Regulatory Commission (FERC) recently has provided some important guidance regarding RTOs, but much work remains in this area. The transfer of operational control of utilities’ transmission systems to a single independent RTO is needed for the reliable and cost-effective movement of power into, through and out of Ohio. However, Ohio’s electric utilities have joined different RTOs, creating a “seam” within the state where the RTO boundaries meet, which could add unnecessary transmission costs. Much work is needed to ensure that this seam does not inhibit fair and open access to the transmission grid and that it does not result in unnecessarily high transmission rates resulting from the accumulation of charges from every utility whose transmission lines are used to transport electricity across different regions of the state and throughout the Midwest.

* Federal energy legislation. While federal energy legislation has temporarily stalled in the U.S. Congress, the OCC remains concerned that any legislation that ultimately is passed must (a) protect FERC’s authority to oversee progress toward the development of competitive wholesale markets, and (b) retain important consumer protection standards currently in federal law. Some versions of federal energy legislation considered by Congress in 2002 represented potentially devastating steps backward on both of these issues. Enhanced FERC authority over wholesale markets and strong consumer protection standards are more essential than ever in today’s uncertain and sometimes volatile energy markets.

In addition, certain economic pressures — the sluggish economy, increased financial risk factors and fallout from troubles in the power marketing sector involving Enron and others — have adversely affected the development of a healthy wholesale electric market.


The OCC will continue its strong advocacy for Ohio’s residential consumers in 2003. The coming year will be a pivotal year for “electric choice” in Ohio. The Ohio General Assembly placed responsibility for the success of electric choice largely in the hands of the PUCO. If electric choice is to yield its intended promises, now is the time for the PUCO to take the prompt and decisive action the OCC has called for in this report. However, that action alone will not be enough. It must be coupled with continued progress at the federal level on key transmission issues. Federal support and direction are needed to ensure that residential electric customers receive the benefits that Ohio’s electric choice legislation intended.

Source: Ohio Consumers’ Counsel


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