"FirstEnergy's proposal, in its present form, will over-compensate FirstEnergy, over-charge the customers, unduly delay competition, and put government aggregation programs out of business."

Testimony
Michael G. Konicek, on behalf of the City of Cleveland
Before the Ohio Public Utilities Commission
Case No. 03-2144-EL-ATA
Cleveland hearing
November 24, 2003

My name is Michael G. Konicek and I serve as the Director of Public Utilities for the City of Cleveland. In that capacity I provide supervision over the City's electric, water, and sewer utilities, in general, which includes advising the City Administration on electric deregulation issues. My responsibilities include oversight over the City's electric aggregation program. Cleveland's aggregation program currently provides electric generation services to about 60,000 City of Cleveland customers that receive electric utility service from Cleveland Electric Illuminating Company.

I would like to thank the Commission for this opportunity to address FirstEnergy's Rate Stabilization Plan, and what I view as very serious issues for the residents and businesses in the City. I appreciate, as well, the commitment of Chairman Schriber to handle FirstEnergy's application "by the book." Handling FirstEnergy's application "by the book" is especially important because recent events have shaken the public's confidence in Ohio' s electric deregulation program, and in the ability of regulators to protect the public interest. This past summer's electric blackout, the ongoing controversy over FirstEnergy's stranded cost recovery, and the turmoil at the office of the Ohio Consumers' Counsel have all contributed to public skepticism and distrust. It will be up to this Commission to reassure, to prove, to the citizens that someone is looking out for their interests. The FirstEnergy, so called, Rate Stabilization Plan application provides the opportunity to do so.

To restore public trust in the Commission, there must be a process that guarantees that customers and other affected parties will have the right to be adequately heard. The process must ensure that customers, their representatives, power marketers, and the Commission itself, have adequate time to explore these complicated issues. This is a complex case, and its impact will be felt for many years to come.

Unfortunately, the Commission has set out a timetable that is unprecedented in its swiftness, especially for a case of this magnitude.

The scheduling of this very hearing illustrates the problem with the timetable. This hearing is taking place a few days from Thanksgiving, on less than a month's notice, and at a time of day when most people are working. The issues in this case are difficult for trained experts to understand, let alone the average citizen. In Cleveland, our residents are lucky in that many belong to neighborhood groups and coalitions that take an active interest in such issues. Accordingly, we have heard complaints from interested citizens, community groups, and other customer advocates who feel they have been denied a fair chance to participate.

The timetable poses an even more serious problem for the parties who are participating in the litigation before the Commission. This case is enormously complex, and there are billions of dollars at stake. Yet, the Commission has scheduled the hearing in Columbus to begin less than two months after FirstEnergy filed its application. As we speak, participants and their lawyers are hurriedly poring through mountains of documents trying to make sense of it all, and some of those lawyers are sitting in the Commission's own offices. We have no assurance that the Commission has even allowed itself enough time to analyze the issues.

Indeed, the Commission must realize now, from all the motions and appeals for more time, that this timetable is simply inadequate. The Commission should not feel pressured by FirstEnergy's demand for a rushed decision, and should protect the interest of consumers and participants. FirstEnergy was free to file its application earlier in the year and cannot now complain if the Commission extends the proceedings by several months.

I share the Commission's concern that the competitive market is not fully developed, and that consumers could be at risk from full-blown retail competition after 2005. While the plan for 2006 through 2008 could protect the customers from price spikes, the question is - at what cost? The rates for electricity in northern Ohio are among the highest in the nation. These high electricity costs contribute to companies going out of business, and to the loss of jobs and tax revenues. High electricity costs reduce the quality of life in the City, especially for low-income and fixed-income residents. The FirstEnergy plan may well shield customers from price volatility, but it could also mean three more years of price increases - and no competitive relief from the same high energy costs.

If the price of FirstEnergy's plan is continued high electric rates, then it is essential that the Commission study those rates and ensure that they are no higher than warranted. Back in the year 2000, everyone understood that FirstEnergy would stop collecting the so-called "stranded" generation costs after 2005. FirstEnergy now wants to call it the Rate Stabilization Charge, and continue to recover it for another three years.

The City has no objection to providing FirstEnergy fair compensation during the transition to open competition. FirstEnergy, however, has not justified the new Rate Stabilization Charge with any cost-based accounting support. Given the current controversy over stranded costs and the burden that would be imposed on customers, FirstEnergy must fully and completely justify the charge to the Commission-and the public - before imposing it on customers for another three years. The Commission should begin its analysis with a study of the stranded costs collected by FirstEnergy to date, and to be collected through the end of the market development period in 2005. The Commission must also ensure that there is a sound basis, grounded on standard accounting practices, to continue collection of the Rate Stabilization Charge through 2008.

The total cost to consumers of the FirstEnergy plan cannot be determined from FirstEnergy's application. The distribution rates may seemingly be frozen through 2007, but there are numerous allowances for increases, including an open-ended one for costs to improve reliability. In light of the recent blackout, these costs could have a very significant impact on the FirstEnergy proposed rates. Each of these adjustments demands Commission scrutiny.

Another new proposed cost is the interest on deferrals of the Regulatory Transition Charge. This cost will apparently amount to tens of millions of dollars or more, but FirstEnergy does not attempt to identify the likely cost. Moreover, FirstEnergy desires to impose the interest charge during the existing market development period, contrary to the terms of the existing plan. The FirstEnergy plan would produce even more deferrals, and the RTC recovery period would be extended beyond its current expiration date.

If the FirstEnergy plan is intended to provide customers with insurance against rate spikes, then that insurance should not be terminable at the whim of FirstEnergy. Yet, that will be the result, because, for example, FirstEnergy will be able to terminate the plan by shutting down generating units totaling a mere 250 MW, rather than bring the units into environmental compliance.

If FirstEnergy customers must wait until 2008 for open competition, then it is all the more important to preserve existing customer choice. There are no certified electric suppliers offering service in the CEI service area - but there are several successful governmental aggregation programs. The City of Cleveland initiated its aggregation program in 2001, and so far has saved its 60,000 Cleveland customers about $3,500,000. However, government aggregation as it exists today is no substitute for full-blown competition. The purpose of government aggregation, when combined with the price incentives, was to help jump-start competition. Under the current model, customers essentially subsidize FirstEnergy in order to have competition for a defined period of time, in exchange for the benefits of the open competition that was to follow. As it has turned out, however, the rate of deferrals (the money that FirstEnergy recovers in connection with customer switches) is much higher than anyone expected. This means that the subsidy from the customers is much greater than expected. And, it appears, the market development period may last longer than anyone expected, in part due to FirstEnergy activities to delay market development.

Obviously, the longer this process is dragged out, the longer customers must wait to realize the benefits of competition, and the more they must pay for it. Until that process is completed, customers lose, and FirstEnergy is the biggest winner. This situation is intolerable, and this Commission can, and must, do something about it. The Commission should undertake a technical analysis of FirstEnergy's present and projected generation and distribution costs, and the proposed rates for 2006 through 2008. The Commission should be guided by two goals: First to protect customers from over-compensating FirstEnergy, and second, to ensure that the market is developed for full competition as soon as possible.

In the meantime, government aggregation will play an important role and the Commission should protect it. The basic concept that customers with little bargaining power, if acting alone, can instead pool their demands and negotiate a better deal, is a sound one. With no alternative power marketers, aggregation provides the only real opportunity for many FirstEnergy customers to save money on their electric bills in the short term.

Unfortunately, FirstEnergy's plan gratuitously assaults government aggregation programs, an assault that has no relationship at all to whatever the company's legitimate interests may be. FirstEnergy desires to slam the door on any customer who doesn't join an aggregation program by December 31, 2004. Beginning on January 1, 2005, those potential aggregation customers would be denied the credit of 65% of the Rate Stabilization Charge and would be left with the paltry "little g" credit, an amount that has never been supported by cost studies.

There is no legitimate reason to require customers to commit to an aggregation program by December 31, 2004 for electric service that won't even commence until January 1, 2006. Customers have a hard enough time comparing current price proposals without attempting to divine what the prices would be one year later. The result among the frustrated FirstEnergy customers would be inertia-they would stay with FirstEnergy for lack of any understandable alternatives.

FirstEnergy also proposes to reduce the shopping credits that will be available to customers. Until customers escape the burden of FirstEnergy's stranded costs, a reasonable shopping credit is the only thing that makes aggregation work. FirstEnergy has attempted to reduce the shopping credit twice in the past two years, and both times this Commission has rejected FirstEnergy. Please don't let the third time be the charm.

Additionally, FirstEnergy wants to require customers to commit to three-year aggregation contracts. FirstEnergy doesn't explain how it can require a three-year contract when by law an aggregation customer must have the ability to opt out every two years. And under FirstEnergy's plan, pity any customer who drops out of an aggregation program, because for six months FirstEnergy will charge that customer the average of the highest purchased power costs paid by any FirstEnergy affiliate to serve any customers during that month. Thus FirstEnergy plan will make it harder for aggregation customers to leave FirstEnergy and punish them if they return.

Also missing from FirstEnergy's proposal is the market support generation that assisted government aggregation programs in the past. Not surprisingly, missing, too, are the heavy financial penalties that the FirstEnergy companies previously faced if shopping levels did not reach 20%.

These are only a few of the many issues that must be addressed in depth by the Commission. FirstEnergy's proposal, in its present form, will over-compensate FirstEnergy, over-charge the customers, unduly delay competition, and put government aggregation programs out of business. Not surprisingly, FirstEnergy is demanding hasty approval of these fundamental changes in northern Ohio's electric deregulation program. For these reasons, the City of Cleveland opposes FirstEnergy's Rate Stabilization Plan as proposed. Thank you.