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Low-Income Line / Leveraging Update SeriesA REPORT PREPARED FOR THE LIHEAP
Clearinghouse 9/4/97 Note: This update has been prepared by the National Energy Assistance Directors' Association (NEADA) under contract to the National Center for Appropriate Technology (NCAT) for the LIHEAP Clearinghouse as part of a project designed to assist states in developing strategies to effectively leverage LIHEAP funds in a rapidly changing utility environment. This is last update in the series. NEADA is considering continuing the series as part of its regular membership services. Please feel free to call Mark Wolfe, NEADA Executive Director at 202-237-5199 if you have any comments about the series or would like to receive future issues if the series is continued. INSIDE COMPETITION IS CHANGING EVERYTHING SYSTEMS BENEFITS CHARGE CAN SAVE PUBLIC BENEFITS SYSTEMS BENEFIT CHARGES: WHERE DO THEY STAND? MAKING THE CASE FOR SYSTEMS BENEFIT CHARGES . . . AND THE BEAT GOES ON
The U.S. electricity industry is changing its spots . . . .rapidly. States are passing laws; California, New Hampshire, Rhode Island, Pennsylvania, Montana and Maine have already passed restructuring laws, and Massachusetts, Connecticut and Vermont are well on their way. Consumers have to choose their electricity suppliers by a "date certain." The new era has arrived; competition is replacing monopolies. With all this merging and purging, pushing and prodding, will the newly restructured electricity industry preserve some of the more vulnerable components of the old system, namely public benefits programs? In some cases, yes. Some, not all, restructuring bills and laws include provisions to continue or enhance existing public benefit programs that are currently funded by the utility industry. The weatherization of homes, various energy efficiency programs, renewable energy procurement, and research and development are among the low-income energy assistance programs slated to be saved. If the public benefits are to be preserved, how will they be funded? A systems benefit charge is one answer. This is a charge on the distribution of all electricity (i.e. no by-pass transactions) collected by the regulated distribution company and included in the distribution bills to all customers. It matches well with existing delivery systems; does not require an eager utility; will work during the transition and final retail choice phases; and has been adopted by several states. Getting the charge installed is just part of the answer, however. Providing electricity services may present concerns. Energy marketers will probably not look kindly on the low-income market, even if it is heavily subsidized, because lower-income households tend to have higher arrearage rates. The first part of the Low Income Line discusses how a systems benefits charge would be established and set up; the second part discusses legislation and key provisions required to implement systems benefit charges. This issue of the Low Income Line explores two related options for assuring the delivery of affordable electricity services to low-income households. It was prepared by Chuck Guinn, John Smith and Mark Wolfe. __________ COMPETITION IS CHANGING EVERYTHING The electricity restructuring issue has shifted from a debate over whether retail competition should even be considered, to one about when and how to ease the foreseeable negative consequences of a competitive system. The future structure of the electricity industry will include a very competitive generation market, a federally regulated transmission system, a state regulated monopoly for the distribution of electricity from suppliers to customers, and a very competitive retail market, which includes marketers and aggregated consumers. The vertically integrated (generation ® transmission ® distribution ® sales) market is ending. In its place is a competitive generation market born of a federal government requirement that all generation suppliers have open access to the transmission grid. The retail markets are also becoming competitive as state governments allow customers to choose their electricity supplier. The regulation of electricity prices is also changing as the industry is restructured. The era of cost plus a reasonable return on prudent investments is ending. The remaining monopoly functions of transmission and distribution (i.e. the wires companies) will be regulated by price caps to encourage cost efficient operation and service. The generation price will be market based; hence the product of bilateral contracts and the market clearing spot market price. The retail market will be unregulated with respect to price, which in turn will be the product of negotiation between sellers and buyers. The market power of buyers and their electricity use profile will be major factors in the price of their electricity. Aggregation of buyers is a means to improve the market power of customers. The foreseeable negative consequences of electricity restructuring include "stranded utility costs" and "stranded benefits." The former term refers to utility assets, such as uneconomic generation units (i.e. many nuclear units) in a totally competitive generation market and power purchase contracts that are above market clearing prices. "Stranded public benefits" refers to various public policy programs that society chooses to have the regulated utility provide and/or fund. These programs include low-income assistance, such as the weatherization of homes, various energy efficiency programs, renewable energy procurement, and research and development focused on efficiency and diversity of resources. The recovery of "stranded costs" and the preservation of "stranded benefits" are decisions that states are making as they implement their specific restructuring laws. The financial mechanisms for the "recovery" and the "preservation" are very similar; charges placed on the state-regulated distribution system (i.e. "wires" charges). Since "stranded costs" and "stranded benefits" are being addressed in a common forum (usually the state legislature), they tend to be linked as advocates search for a consensus position. __________ SYSTEMS BENEFITS CHARGE CAN SAVE PUBLIC BENEFITS One way to fund the preservation of the public benefits programs is a systems benefit charge on the distribution of all electricity (i.e. no by-pass transactions) collected by the regulated distribution company and included in the distribution bills to all customers. More than likely, the charge would be based on a per kilowatt hour of consumption. The fees would be collected by the distribution company and transferred to the appropriate funds of an administrative agency or agencies. The specific fee level and use categories for the collected funds are likely to be determined when the legislative process results in the final law. The actual charge in many states will be determined by the state public utility commission (PUC) at an amount needed to continue existing programs. Systems benefit charges are generally expressed in terms of mils per kilowatt hour. One mil is equal to 1/10 ($0.001) of one cent. In other words, for every one million kilowatt hours generated, a one mil charge would raise $1,000 (1,000,000 kilowatt hours times $0.001). Nationally, as shown in the following table, a one mil charge would raise about $3 billion if applied across all consumer end-uses of electricity -- residential, commercial, and industrial. _________ SYSTEMS BENEFIT CHARGES: WHERE DO THEY STAND? California has the most extensive systems benefit charges and the highest level of charge. The systems benefit charges for stranded benefits (energy conservation and affordability programs), enacted or proposed, range from about one mil per kilowatt hour ($.001) to over five mils per kilowatt hour ($.005). There is no "standard" approach to systems benefit charges among the states. Each state is developing and applying the charge to meet its perceived public benefits needs. Any state considering such a mechanism should review the Vermont proposal, which passed that state's Senate. Vermont's proposal is both comprehensive and compatible with the national system's benefit charge program proposed by Senator Jeffords, and is likely to be an element in an Administration proposal to restructure the electricity industry. Vermont's proposal calls for two system benefit charges: one at 3 mils ($.003 ) per kilowatt hour to fund energy efficiency programs and research, development and demonstration of renewable sources; and the other at 1.5 mills (initially) per kilowatt hour to fund a statewide electric energy affordability program of low-income energy assistance. The funds from both charges would be administered by an Electric Systems Benefits Administrator to ensure the funds are used efficiently and effectively. The proposal calls for the creation of a Efficiency Utility Corporation to carry out statewide energy efficiency programs with some of the energy efficiency funds. The proposal also calls for a two-tier renewable recourse portfolio standard (RPS) for all retail electricity sales. The intent of the first tier portfolio standard is to ensure that future sales of electricity contain at least the current level of renewable resources. The intent of the second tier standard is to ensure a four percent increase in the renewable source share of total electricity sales by 2007. The RPS would feature tradeable credits for renewable sources. The Vermont proposal offers a continuation of energy efficiency programs, a strong commitment to renewable resources -- both commercial and emerging -- and a significant low-income assistance program. The proposal also recognizes the need for a new structure and delivery of public benefits programs once the electric industry is restructured and retail competition is a reality.
The New Hampshire legislation illustrates the steps and background information that is necessary to "make the case" that a systems benefit charge is necessary to provide a long-term solution to the energy needs of low-income households. The final plan approved a systems benefit charge to fund energy assistance; it relied heavily on information presented during public hearings that described the need for energy assistance for low-income households on the basis of the energy burden, size of the eligible population, and the importance of providing affordable electricity services. Excerpts from the report testify to the effectiveness of providing an analytical base for decision making: Rationale for providing low-income subsidy "Restructuring of the electric utility industry should be implemented in a manner that benefits all consumers equally, that is one customer class does not benefit to the detriment of another. Costs should not be shifted unfairly among customers. A non-bypassable and competitively neutral system benefits charge applied to the distribution system may be used to fund public benefits related to the provision of electricity. Such benefits, as approved by regulators, may include, but not necessarily be limited to, programs for low-income customers." Population to be served The Community Action Program (CAP) testified that there are 50,000 households in New Hampshire at or below 150 percent of the federal poverty level, a widely recognized standard for determining low-income eligibility. CAP quantified the magnitude of the problem in New Hampshire, "The average non-heating customer pays approximately 2.5 percent of income towards the electric bill and the average heating customer pays approximately five percent of income towards the electric bill." For low-income customers, the percentages are drastically different, however. CAP broke down the percentage of income going towards electricity into three categories: · customers whose incomes are between 0 and 49 percent of the federal poverty level; · customers whose incomes are between 50 and 100 percent of the federal poverty level; · customers whose incomes were between 100 and 150 percent of the federal poverty level. Non-heating, low-income customers paid 23.4 percent, 7.8 percent and 4.7 of their incomes for electricity, respectively. Heating low-income customers paid 47.4 percent, 15.8 percent, and 9.5 percent of their incomes for electricity respectively. CAP argued that, through the use of a fixed credit model percentage payment plan, payment levels for low-income customers should be reduced to a level ranging from 2.5 percent to five percent of income. Other program benefits In addition to the direct benefits provided to low-income customers, there are many societal benefits which accrue from the establishment of a low-income energy assistance program. It reduces the utilities' uncollectible accounts, which is a cost of service item recovered from all customers. Additionally, it is possible that there will be a beneficial impact on poverty taxes as low-income bills are made affordable and fewer municipal funds are needed for crisis assistance. Funding approach "Funding for the low-income assistance program will be collected through a systems benefit charge. As commercial and industrial customers receive as much benefit from the positive tax impacts of a low income assistance program as other rate classes, we find it in the public good to require funding of the program across all franchises and all rate classes. The systems benefit charge shall be established, after notice and hearing, as a flat amount per kilowatt hour used and applied equally to all customers." __________ . . . AND THE BEAT GOES ON The following is a quick run-down on where other states stand on enacted funding approaches for low-income energy assistance, as enacted: Maine requires that the state public utility commission establish a reasonable level of funding for energy conservation programs comparable to the amount expended currently for similar programs and low-income assistance programs based on an assessment of aggregate customer need. Massachusetts provides for a systems benefit charge, at a level to be determined, to provide discounted rates for low-income households. Montana provides a systems benefit charge, at a level of 2.4 percent of each utility's retail sales revenue, to continue funding of energy conservation, renewable resources, and low-income energy assistance. Pennsylvania provides a systems benefit charge, at a level to be determined, to ensure that energy conservation, low-income energy, and universal service are appropriately covered. Rhode Island provides a 2.3 mils per kWh systems benefit charge to pay for demand-side management, renewable energy resources, and low-income energy assistance. For more information about the status of state low-income energy assistance programs in the states, please call Mark Wolfe of NEADA (202) 237-5199. Page Last Updated: September 24, 2009 |
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