 National Center for Appropriate Technology 3040 Continental Drive Butte, MT 59702 406.494.8662 Fax 406.494.2905 |
Electric Utility Restructuring and the Low-Income Consumer - Facts on File Nos. 9 - 12Fisher, Sheehan & Colton, Public Finance and General
Economics The Anticipated Impact
on Services The Anticipated Impact on Services One impact of a restructured electric industry will be the likely effect it has on the services offered to low-income and payment-troubled customers. Low-income customers are likely to receive fewer and less quality service than they have received in the past. "Services" Used by Low-Income Consumers The "service" provided by an electric utility is more than simply the service of providing kilowatt hours (kWh). It instead includes both the physical product and the bundle of related or supporting services as well. To the extent that this bundle is reduced, the level of services provided by a utility to those customers who use (and rely upon) that bundle is reduced as well. There are a host of service components that low-income consumers use that are above and beyond the mere receipt of kWh. The services provided involving the treatment of payment-troubles are most likely to be used by low-income consumers. The services provided involving the need to make personal contact with a utility, whether to deal with payment-troubles or to make monthly payments, distinguish low-income customers from the residential class generally. The services involving the provision of information about public bill-paying assistance distinguish low-income consumers from residential customers generally. Where Will Service Reductions Occur? It is reasonable to expect that the level of service provided by competitive electric utilities will be reduced in the following areas:
Several impacts will be of particular concern to low-income consumers. Especially with unknowns surrounding the question of reliability, adequate levels of customer service are of particular importance. In an effort to cut costs and thus "become more competitive," Public Service Company of Colorado (PSCO) centralized its customer service operations and closed its regional customer service centers. The belief of local low-income advocates in Colorado is that this reduction in the number of customer service centers has made it more difficult for low-income customers to make in-person contact with the company. If one assumes that low-income households make a disproportionate number of contacts with the company --an assumption that has an empirical basis-- this reduction will have a disproportionately adverse impact on low-income customers. These personal contacts may be to ask for short-term bill payment extensions, to seek deferred payment arrangements, to discuss medical certificates underlying service termination postponements, to make bill inquiries, to seek information on fuel assistance, or a host of other reasons. It can be empirically established that low-income households have less access to transportation and a greater inability to travel longer distances to make personal contact with the company. Even if entire customer service centers are not closed, a reduction in the number of customer service representatives makes it more difficult for low-income customers to contact the company by telephone. The lack of telephone service is directly related to the level of household income. Low-income households who do have a telephone in the home, therefore, must use alternatives such as pay phones, or phones at friends and relatives homes. A reduction of service for these no-telephone households would involve not simply the inability to contact a company representative by telephone, but an inability to contact a representative within a reasonable holding time. "Call back" procedures, also, frequently do not assist these no-phone customers. Lessons from Telecommunications Evidence shows that customer service in other industries suffers under deregulation. For example, U.S. West cut its work force by a total of 60,000 employees. From 1989 to 1994, the number of customer service centers decreased from 560 to 26, slowing repairs and raising other customer concerns. In addition, the wait for new service orders has increased, customer
service calls have an average wait of up to 22 minutes and customer
complaints over the same period increased from 54 per month to 752
per month. The impact of competition on low-income households cannot be determined based on the "average" consumer. In that situation, rates decline and services decline as long as overall customer satisfaction is at acceptable levels for the average customer. The fallacy in this approach, however, is two-fold: (1) not all consumers are "average"; and (2) service reductions tend to disproportionately adversely affect low-income consumers. The Anticipated Impact on Consumer Protections Restructuring the electric utility industry will have substantial impacts on the offer of consumer protections. Not only will restructuring fundamentally change the way in which consumer protections are offered --often being enforced through the competitive market rather than by regulation-- but will change the nature of the issues to be addressed as well. The discussion below considers the impact of restructuring on consumer protection issues old and new as well as on the regulatory framework that has been crafted for the benefit of consumers. The Reliance on Service Disconnections Consumer protection issues are made more acute as competitive electric companies rely more heavily on the disconnection of service as a collection device. This concern is based on the reality-based observation that utilities will increasingly refuse to seek work-outs with customers who are facing payment troubles. The observation is "reality-based" if for no other reason than the fact that Southern California Edison has already cited competition as the primary reason to change its collection practices. In that case, Southern California Edison chose to treble its service disconnections (up to one-half million customers in 1995 alone), citing competition as the main reason it was calling in debt. Consumer Shutoff Protections One concern of low-income customers involves the explicit consideration of equity issues in electric industry decisionmaking concerning service disconnections and other collection efforts. Equity concerns exist at two levels. First, equity involves ensuring procedural customer service protections. Providing adequate notice prior to the denial of service, ensuring an opportunity to contest a denial of service as unjustified, and requiring a rational connection between the reason for denial and the service itself, are all examples of equitable procedures. Second, equity involves substantive customer service protections. The offer of deferred payment plans through which arrears may be retired over time, as well as protections from the disconnection of energy service during extreme summer or winter weather, are examples of substantive protections. These procedural and substantive protections find their support in notions of "fundamental fairness" rather than in economics. As a result, ensuring that the actions of utility companies comply with fundamentally fair procedures and principles is certainly not guaranteed by a competitive market. Billing Disputes and Inquiries Electric restructuring will offer a bewildering array of places and people to approach if a consumer has a question or a dispute with a particular bill. One likely impact of this array of contacts is the potential for confusion over to whom a consumer must turn to receive answers regarding bill inquiries. Under the existing system, the location of the billing is at the distribution company. There is a single point of contact for the customer. Under the new framework, it is expected that consumers will buy their "distribution" services from one company and their "generation" service from another. If the consumer purchases energy efficiency services, that may come from yet a third company. Consider, also, that under most restructuring proposals, the "meter" will continue to be owned by the local distribution company. The local distribution company will also provide the meter readers. Meter readings will be provided to the actual provider of electric service for purposes of developing a bill. The potential for confusion is substantial. Consider two common consumer problems. First, what happens when a consumer believes a meter is running "fast," (i.e., is reporting more electricity being used that is actually the case). Is the complaint to be filed with the generation company (to whom the consumer owes money based on the meter reading) or with the local distribution company (who actually owns the meter)? Second, assume that a consumer in a multiple unit building finds that his or her meter has been "cross-wired" (the meter to Apartment A is, in fact, attached to Apartment B and vice versa). Is the complaint to be filed with the generation company (to whom the consumer owes money) or with the local distribution company (who owns the meter)? What if Apartment A and Apartment B buy their power from different electric service providers? The entire issue of consumer inquiries and disputes presents consumer protection problems. Unfair Marketing One aspect of a competitive electric industry that must work appropriately for consumers to benefit is the process of marketing by electric service providers. In this sense, "marketing" involves making contact with consumers, making claims as to the products and services that will be provided, and making representations as to the agreements that will govern the relationship between the consumer and the provider. One aspect of unfair marketing involves switching a consumer from one service provider to another without their knowledge or permission. In the telecommunications industry, this practice is called "slamming." A related problem involves service providers who offer information to persons who request it while not clearly stating that the consumer's action will also be considered a "request" to change providers. Truth in advertising presents separate issues. In one telecommunications case in Illinois, a long distance telephone company promised prospective customers that for one year after signing up, they would pay nothing for a year of long distance phone calls anywhere in the world on Fridays, so long as certain minimum billings amounts were maintained for which customers did pay. After a time, however, the phone company changed its mind and began charging for its Friday calls, albeit at a 25% discount. The court, which ultimately approved the company's action, said that the phone company made the representation as to free Fridays "knowing the representation was false." According to the court, federal jurisdiction over the long-distance carriers prevailed over any state consumer protection statute. The phone company in this case had filed papers with the Federal Communications Commission (FCC) saying that it was going to change its agreement. Thus, the court said, "whatever the salesman says and whatever is advertised, the consumer can learn the truth from the FCC." As a result, the court held that the phone company's agreement to provide free Friday service could not be enforced. Neither could the consumer obtain damages from the phone company for misrepresentation or fraud. Payment Disputes The authority of the distribution company to disconnect service to one retail marketer for nonpayment of a bill to a different retail marketer is another example. In some states, for example, billing for all telecommunication services is provided through the local telephone company. While that may seem convenient, it also creates the potential for abuse. A local telephone carrier, for example, may agree to disconnect service to all long distance carriers for nonpayment of a bill to any one carrier. In these cases, the local phone company simply enters into an agreement with MCI not to provide MCI service if a consumer has failed to pay AT&T. In other cases, the local phone company has agreed to disconnect local service if the long distance bill is not paid. Since the local service is still a monopoly, the threat of local disconnection is extremely coercive. The allocation of customer payments is another issue that will arise if electric restructuring is permitted. If a consumer's total energy bill is $100, and the consumer pays only $80, a basic question arises: whose bill has been paid? The allocation of the partial payment amongst service providers has implications not only from the consumer's perspective (does he or she lose service, and from whom), but from the service provider's perspective as well (who must bear the expense of an unpaid bill). Regulatory Jurisdiction All of these consumer protection issues are made greater by the jurisdictional questions that arise in a restructured electric world. If a Houston-based energy company is providing electric service to persons in Pennsylvania, does the state utility commission have the power to regulate that company? What happens if the service provider is only a Denver-based marketer or broker (a company that owns no facilities but only buys and then resells the electricity)? If the electric service provider is an out-of-state firm, is there state jurisdiction or are those issues subject only to federal regulation. The issue is not hypothetical. One low-income elderly couple in West Virginia had a dispute with AT&T over their long distance telephone bill. The local phone company threatened to disconnect their entire phone service if the AT&T bill was not paid. The state utility commission said that it had no jurisdiction over the inter-state dispute and that the couple would have to file a complaint with the federal agency. The federal agency, however, had no jurisdiction over local service disconnections. The couple paid their disputed bill. Restructuring the electric industry is going to create significant consumer protection issues, particularly for those who have difficulty in paying their bills. The consumer protection issues will involve the likely cutback in procedural protections, such as shutoff notices. They will involve reductions in substantive protections such as required payment plans and bans on winter disconnections. They will involve jurisdiction disputes, such as that faced by the West Virginia couple who had no place to go to contest the disconnect based on a disputed bill, or the Illinois consumer who relied on a fraudulent misrepresentation about "free Friday" telephone calling. The issue of redlining in a competitive electric industry has been raised by consumer advocates who fear an industry disinterest in residential customers generally, and in hard-to-serve or payment-troubled residential customers in particular. Indeed, in many of the sets of "principles" being promoted around the country to govern restructuring the electric industry, an anti-redlining provision has merited explicit consideration. What's "Redlining"? The primary emphasis of redlining concerns involves the definition of geographic areas based primarily on racial/ethnic and/or socio-economic factors. A group of advisory committees to the United States Committee on Civil Rights has defined insurance redlining as "canceling, refusing to insure or to renew, or varying the terms under which insurance is available to individuals because of the geographic location of a risk." Similarly, redlining within the home mortgage industry has been defined as "the process of drawing or outlining a geographic area within which lending will be denied due to the composition or characteristics of the area." Irrational vs. Unlawful Redlining is objectionable whether or not it is economically irrational. A decision to redline may well be an economically rational decision. One example may involve the decisions of the automobile insurance industry to engage in the practice of "territorial rating." Under such a system, auto insurers set policy premiums based in large part on the geographic location of the insured. Locations in large urban areas and inner cities are deemed to be more risky, and therefore more expensive to serve, than suburban areas. Accordingly, the rates charged to the predominantly low-income and minority auto owners in these areas are consistently higher than non-urban, non-poor, non-minority locations. The thing is, the conclusion that urban customers are more risky, and thus more expensive to serve than non-urban customers, may be true. Thus, while the geographic-based decisionmaking may be "redlining," it is nonetheless economically rational. Similarly, just because bank lending patterns are racially discriminatory does not ipso facto mean that they are economically irrational. It may well be that households in certain geographic areas of the city, as a class, do not have the financial resources to support home mortgages. Even more possible, households in certain geographic areas of a city may not, without further inquiry, satisfy the indices of "creditworthiness" which historically have supported a decision to grant a mortgage. No question exists but that if a bank or other financial institution would pursue a further inquiry, it may ultimately discover the creditworthiness of the individual households in this area. Nonetheless, to pursue such an inquiry may be expensive and considered unmerited by the profit potential from that area. In the alternative, a bank may simply decide that it can generate the same number of loans for an equal dollar value in a different geographic area of the city without engaging in the additional inquiry. In the absence of the additional expense of the further inquiry, the profit margin per loan may be higher and a profit-maximizing enterprise may rationally be drawn to the second geographic area. In sum, ultimately, while the creditworthiness of the households in both areas of town may be equal, the transaction costs in making the creditworthiness decision may be vastly different, thus affecting the profit margin and the decision to serve. In this instance, even if unlawful, the decision of the financial institutional to redline is not economically irrational. Potential Redlining Decisions Potential redlining decisions that could be expected from a competitive electric industry include: Refusal to serve: Electric service providers could decide not to serve particular geographic areas. These might include inner cities, where heavy concentrations of poverty might threaten the easy collection of revenue. They might include various areas where lower incomes are viewed as associated with lower use and thus lower profit potentials. This refusal to serve could be evidenced not simply by a refusal to serve (as in the home mortgage industry), but by the cherry-picking found in telecommunications. A decision to serve only high income suburban areas, in other words, excluding every other place, would be a type of redlining. Territorial pricing: Electric service providers could decide to vary the price for service based on geographic location. Like insurance companies who increased prices based on "territorial ratings," electric companies could allege that the cost of serving particular geographic areas (such as low-income and minority neighborhoods) is higher and thus merits correspondingly higher prices. Lack of infrastructure development: Electric service providers could decide to refuse to provide newer technology that permits either a diversification of service or a higher quality service. The infrastructure needed to permit the time-of-day pricing, or real time pricing, underlying retail wheeling sales could be denied to markets that industry participants simply do not wish to serve. Lack of facility development: Akin to the absence of branch banks, electric service providers could refuse to serve certain geographic areas simply by deciding not to develop a presence in those areas. It is reasonable to expect service to follow facilities. Level and type of service: Electric service providers could refuse to provide the same quality of service based on geographic considerations. A decision to offer certain neighborhoods or communities service based only on prepayment meters or service limiter adapters would be a type of redlining. Summary Just as redlining has been an issue in banking, insurance, and the telecommunications industry, it should be expected in a competitive electric industry as well. The fact that redlining decisions have been made does not necessarily mean the industry is acting irrationally. Indeed, the redlining may be motivated by economic considerations. If universal electric service is to be maintained, vigilance against redlining (economically rational or not) must be maintained as well. Environmental Issues Affecting the Poor One concern of low-income customers is that environmental impacts are often public costs that cannot reasonably be expected to be accounted for in the decisionmaking of a competitive firm. To the extent that the clean-up or mitigation of environmental degradation is mandated by statute or regulation, the environmental costs are internalized. To the extent, however, that the environmental costs are not subject to clean-up or mitigation, they may not be considered at all in a competitive environment. Environmental impacts can be imposed on low-income customers in any one of a number of ways. They may involve the physical taking of property for facility location; the splitting of neighborhoods by transmission lines; the creation of noise, air and water pollution associated with generating plants; or the exposure to electro-magnetic fields. In addition, aesthetic impacts are often found to have little or no economic value. Facility Construction Electric competition can be expected to present substantial environmental problems to low-income households. The fact is that most electric infrastructure most seriously adversely affects low-income households and people of color and the most environmentally damaging infrastructure is at the generation and transmission level. Competitive markets not only will fail to redress these environmental problems, but can actually be expected to exacerbate them. An electric industry competitive at the generation level will have financial incentives to impose the greatest environmental harms on low-income and minority classes. In making facility siting decisions, there will be an economic incentive to take the least-cost property. Since property values for low-income households are likely to be lower, when the electric industry seeks to minimize costs to be competitive, the push will be to take these properties. In addition, when facility siting decisions are made, significant delay can substantially increase costs. Accordingly, the industry will have an incentive to minimize such delay. The political power of low-income customers is likely to be less than industries. Substantial research shows that political involvement, efficacy, and a sense of "public self" decreases dramatically for those lower in the spectrum of socio-economic status. Lower socio-economic groups are the least likely group not only to get involved politically, but to speak out --even on their own behalf-- or to be involved in a utility regulatory process. When an industry seeks to minimize costs by minimizing delay, therefore, the incentive will be to deal with these less powerful forces. Resurrecting Old Power Plants A competitive power industry will create the opportunity for owners of existing generation to resurrect fully depreciated generating units that have been previously shutdown in urban areas. These units can be operated to produce off-system sales based strictly on variable costs. Given the availability of air pollution control offsets to the utility industry, the environmental impacts of these old, inefficient and dirty fossil-fuel units will not be locally mitigated. As a result, the low-income and minority households and businesses that reside in proximity to these units will suffer disproportionate harm. A report for the National Association of Regulatory Utility Commissioners (NARUC) agrees. That report concludes that "industry restructuring will likely result in competitive pressures to increase the operation of currently underutilitized coal facilities with relatively high emissions, and to extend the operation lives of these facilities." If nothing else, the initial base for increased sales by competitive electric companies will likely be old, highly polluting coal-fired power plants. As a result, the public, especially urban dwellers, will experience costly increases in harmful air emissions as a result of utility sales in off-system markets. A report by Minnesotans for an Energy Efficient Economy (ME3) agrees, finding that Minnesota's largest utility has four coal plants in the Minneapolis/St. Paul metro area that have significant potential to increase generation. According to that report: "the plants have several common characteristics, the most important being that they are all aging, coal-burning generators operating in densely-populated areas." In addition, ME3 concludes, because old plants do not need to meet the pollution control standards of new plants, emissions from the metropolitan plants "are extraordinarily high compared to current standards governing new power plants." Increasing the operation of old coal-fired power plants will directly lead to increased deaths. According to the ME3 report, "simply put, the more often a plant runs, the more pollution it will emit." ME3 then cites estimates that 64,000 people may die prematurely from heart and lung disease each year due to particulates. Public Input into Decisions Finally, a competitive electric industry will create substantial opportunities for a decrease in public input into decisionmaking. The ability to participate by low-income customers tends to be localized. Hence, as a competitive electric industry increasingly seeks a federalization of decisionmaking, these customers will be excluded. These federalized decisions are likely to involve decisions regarding facilities, including both generating plant and transmission lines. Even today, for example, there is a push to federalize transmission line decisions that have traditionally been local. One utility industry proponent has already stated that legislatures and state utility regulators "routinely capitulate" to "local residents" who protest transmission siting. He continued: "Unless some institution addresses this problem effectively. . .the present allocation of jurisdictional power to authorize transmission projects will impair the efficacy of the electricity transition and will distort the performance of the post-transition electricity market." Summary 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 |
