# THE ENERGY CRISIS OF 2001

**Testimony of Jerrold Oppenheim, Esq.**

**For Low-Income Weatherization and Fuel Assistance Program Network**

57 Middle Street

Gloucester, Mass. 01930

\(978\) 283-0897

Fax (978) 283-0957

<JerroldOpp@tgic.net>

# January 2001

Massachusetts, like much of the rest of the country, faces an energy
crisis. Skyrocketing prices are not limited to the gas industry. Or the
electric industry. Or oil. And as energy industries converge, the price
of gas, for example has an impact on the price of electricity. And
vice-versa. Furthermore, the remedies to this crisis cut across fuel
industries:

-   Efficiency to lower prices by cutting demand,

-   Help with bills, and

-   Improved retailer acquisition.

The Low-Income Weatherization and Fuel Assistance Program Network,
described in St. 1997, c. 164; Sec.37; G.L. c. 25. Sec. 19, implements
about \$20M a year of low-income efficiency measures pursuant to
programs sponsored by every Massachusetts electric utility, nearly every
Massachusetts gas utility, the U.S. Department of Energy (DOE), and the
Massachusetts Department of Housing and Community Development (DHCD).
The community action programs that comprise most of the network are
deeply rooted in low-income communities and in this country's commitment
to battling poverty.

The 24% or more of Massachusetts families who do have enough income to
live at a subsistence level have suffered a 14% drop in income despite
the economic boom that rewarded those on top with 45% income jumps. Now
electricity, natural gas, and oil prices are doubling and more, in some
cases overnight. The price of Electricity Default Service, much of it
generated by natural gas, is increasing as much as 137%. This winter's
gas bills will be at least 70% higher than last winter's. Heating oil
prices have doubled. Similar price hikes are occurring across the
country, just as they have when other public utilities were restructured
or deregulated in the last 17 years.

To address this crisis, the Network recommends:

-   Permanent, well-funded comprehensive efficiency programs to lower
    prices by cutting demand.

-   Increased assistance for struggling families to help them pay their
    bills. This should include an extended moratorium on utility
    terminations, expanded discounts and other cash assistance,
    permanent and comprehensive efficiency programs at the few utilities
    that do not have them, financing of residential bills, and effective
    outreach that informs people of the help they can get.

-   Mandated construction of high efficient electricity generating
    plants by Massachusetts electric utilities to serve as
    cost-of-service benchmarks against which to measure the performance
    of the wholesale marketplace.

According to the Massachusetts census data center, Massachusetts
Institute for Social and Economic Research (MISER), there are more than
560,000 families in Massachusetts who meet the General Court's
definition of low-income. That is about 24% of our neighbors. (Others,
such as the Women\'s Educational and Industrial Union and the Center on
Budget Policy and Priorities, put the number much higher.)

These are people without the money to be able to provide shelter for
their families while also feeding them, clothing them, and providing
medicine when required. Doubling of all Massachusetts energy prices now
literally forces them to choose between heating and eating:

-   The price for electric generation in Massachusetts has increased by
    as much as double and more since restructuring was enacted to bring
    prices down. "Default Service" is now the monopoly service for the
    quarter of residential customers who have moved since 1997, and
    eventually for everyone \-- there are literally zero competitive
    alternatives for residential customers. Prices for Default Service
    are jumping 67% to 137% this month and next, depending on the
    utility. Standard Offer, which will disappear in 2005, has doubled
    in price since restructuring. Altogether, Default Service customers
    have seen their restructuring discount wiped out; for Standard Offer
    customers, the restructuring discount is just about gone.

-   The price for commodity natural gas hit a record earlier this month,
    quadrupling in a year. According to the U.S. Department of Energy
    (DOE) -- which may be understating the matter for New England \--
    retail bills are going to be 70% higher this winter as compared to
    the less cold winter we had last year. Massachusetts gas utility
    prices are fifth highest in the
    country.![](media/image1.wmf)(Source: DOE, 2001 projected)

-   The price for home heating oil has about doubled in the last two
    years, including a 48% increase this winter (based on comparative
    beginning-of-winter price surveys by the Massachusetts Division of
    Energy Resources DOER).

For Massachusetts families, especially those with low incomes, this is a
catastrophe. U.S. Census data confirm that the period from the mid-1970s
to the mid-1990s has brought remarkable prosperity to the top 20% on the
economic ladder; their incomes jumped 45%. But the Census also shows
that the poorest 20% of Massachusetts families have actually lost ground
-- in the same period, their incomes fell 14%. And, indeed, faced with
this catastrophe, fuel assistance applications over the past two winters
have increased an estimated 26% (based on this year's applications
during October through December).

> ![](media/image2.wmf)
>
> Source: DHCD.

Alarmingly, this energy crisis is part of a national trend.

-   Oil and natural gas are national markets. Similar price jumps have
    occurred across the nation. The price of crude oil more than tripled
    over the last two years.

-   Natural gas that sold a year ago at \$2.12 per million British
    Thermal Units (MMBTUs, a measure of heat) sold recently for \$10.34.
    That is about equivalent to oil at \$63 a barrel.

-   Electric generation that used to be priced at an average of about
    three cents a kWh in California sold for 40 cents last month,
    according to the [Wall St. Journal]{.underline}. That is like paying
    \$10.00 for a 75¢ can of Coke. San Diego retail bills tripled and
    more. In Central and Northern California, where the restructuring
    deal does not allow pass-through of these increases because the
    utilities already received other benefits, the utilities paying
    these charges say they face bankruptcy. California Governor Gray
    Davis sums it up this way: "California's deregulation scheme is a
    colossal and dangerous failure. ... It has resulted in skyrocketing
    prices, price gouging, and an unreliable supply of electricity,. In
    short, an energy nightmare."

-   New York City electricity bills jumped 43% last June, reflecting Con
    Ed's pass-through of electric generation price increases.

-   In the Midwest in the previous summer, wholesale prices peaked at
    \$9.00 per kWh.

-   Average wholesale prices last October in Alberta were 17¢ per kWh.

-   Here in New England, average electric generation prices have more
    than doubled since opening of the so-called competitive marketplace.
    What used to be three-cent electricity peaked at \$6.00 per kWh for
    four hours last May \-- \$150.00 for that 75¢ can of Coke. So far
    this month, according to ISO-New England, the average wholesale
    price of electricity is 7.1¢.

Some economic analysts assert that today's high prices will come down
and eventually average out to be less than they were in the regulated
past. While this may not appear likely, even if it turns out to be true
it describes a serious economic problem for average families. Arguing
that volatile pricing is good for consumers is like asserting that the
person with one arm in a freezer and the other in an oven is perfectly
alright, on average.

Electric industry restructuring and gas tariff unbundling were not
supposed to be like this. Competitive suppliers were supposed to appear
and offer lower prices. For the 7% of Massachusetts large commercial and
industrial customers that have found an alternative, the theory seems to
have worked. But only 0.1% of residential customers have found an
alternative and there are no competitors in the residential market right
now.

Such market segmentation that penalizes relatively small residential
customers is not an unusual result of utility deregulation:

-   Residential local telephone rates rose as much as 50% in
    Massachusetts after long distance rates were deregulated in 1984.
    The long distance prices primarily paid by business customers
    dropped more than 50%.

-   Since wholesale natural gas prices were deregulated in 1986,
    Massachusetts residential gas prices have increased 28% while
    industrial prices have been below their 1986 levels in most years
    and have never increased as much relative to 1986 as have
    residential rates.![](media/image3.wmf)

-   Deregulation brought almost-overnight increases of 12% to cable TV
    subscribers and 150% to pay phone users.

Indeed, states that had started down the path to electric industry
restructuring have decided to take another look, especially since the
debacle in California. Just one recent edition of DOE's "Restructuring
Weekly Update" announced pullbacks in Georgia, New Mexico, Nevada, North
Carolina, and West Virginia.

Among residential customers, the economy is especially cruel to
low-income consumers:

-   One study found that supermarkets (when they locate in low-income
    neighborhoods at all) charge 36 percent more for produce of a
    quality that would never sell in a middle-class suburb.

-   Some vocational schools pay more attention to student loan paperwork
    than to education.

-   Indeed, some industries seem to exist only for the purpose of making
    their way by exploiting low-income consumers, such as with
    short-term payday loans at 531 percent interest; rent-to-own stores
    that in effect charge similar credit fees; check cashing agencies
    that (at two to six percent of the face value of a check) charge
    more than it would cost to operate a bank account; used car dealers
    with warranties such as "five minutes or fifty feet."

In New England, wholesale oil and gas price increases are often blamed
for the electricity price run-up. According to DOE, utilities paid 77%
more for oil and 67% more for gas in 2000 compared to 1999. However, at
Massachusetts Electric Co. (MECo), for example, only about a third of
the Standard Offer power is fueled by oil and gas. The balance is
generated with fuels the prices of which have not changed at all, such
as coal, uranium, and hydropower. Thus the difference in overall
generation price for MECo, 2000 vs. 1999, that was due to oil and gas
prices is about 21% \-- considerably less than the 67% increase in the
price of MECo Default Service. On the other hand, wholesale spot
electricity prices in New England have risen sharply -- also not fully
explainable by the price of oil and gas. Thus the real cause of the
retail electricity price hikes is wholesale electricity price jumps over
and above those caused by jumps in the prices of gas and oil.

So what is going on? The Union of Concerned Scientists and Synapse
Energy Economics suggested one possibility in a recent report: outages
in the first year of the market were 47% higher than in the last year
before the market, suggesting the possibility that suppliers have been
withholding output in order to raise market prices. But whatever the
cause of high electricity prices, it is time for the Commonwealth to act
on behalf of its citizens to bring prices back to a just and reasonable
level.

What can we do?

[1. Efficiency.]{.underline} As a nation, we broke the back of the OPEC
cartel with energy efficiency. Supply shortages -- a culprit in all the
energy price hikes this year -- cannot be exploited by price gougers
such as OPEC when demand reductions eliminate the shortage. In the
1970s, we made our homes and cars more efficient, we turned down the
heat at night when we did not need it, and we drove our cars at 55.

In 2001, we can use more efficient appliances and tighter homes to break
the back of the current-day electricity, gas, and oil cartels with no
change in comfort levels. Compact fluorescent light bulbs use 75% less
electricity than conventional bulbs. Efficient refrigerators use at
least 30% less than typical units. A computer in "sleep" mode reduces
its electricity consumption by 40%. Weatherstripping and insulation can
cut a heating bill by 20% or more.

Using such technologies, the Massachusetts electric utilities operate
the most effective efficiency programs in the country.

In a system that California Gov. Davis describes as "crazy," about 15%
of wholesale electricity (100% in California) is sold in an auction
process under which all kWhs get the highest bid price that is accepted.
Each generator submits a bid and the Operator accepts bids, in ascending
order of price, only up to the point where demand is met. Imagine a
trucker asking for bids for diesel fuel. The low bidder can only provide
a third of the trucker's requirements; higher bidders provide the rest
-- and all bidders get the highest price accepted. Under such a system,
lowering demand can lower the price for all kWhs sold in the auction by
reducing the demand below the increment supplied by the highest accepted
bid. Preliminary analysis by the Division of Energy Resources (DOER)
confirms that potential savings from more efficient use of electricity
are in the millions of dollars.

Furthermore, reducing the demand for electricity also reduces the demand
for the gas used to generate electricity. Thus, for both gas and
electricity (as well as for oil), concerted demand reductions can be
used to force down prices.

Utility-funded efficiency more than pays for itself. The electricity
restructuring act established a utility-funded efficiency program that
shrinks each year and is to be reviewed by the General Court after five
years. That review should be conducted now, with consideration of an
increase in efficiency funding to address the price crisis. Furthermore,
gas utilities should be mandated by law to join electricity industry
efforts.

Rates should also be redesigned to reflect the fact that increased usage
is costly because it raises prices for everyone. Price schedules should
be inverted, as electricity prices are in Houston, so that higher
per-unit prices are paid for larger amounts of consumption.

Finally, development is needed of new technologies that sip fuel, such
as fuel cells to generate electricity. These technologies are costly
now, but the General Court created a Renewables Trust Fund to help make
such technologies cost-effective.

[2. Help with bills.]{.underline} Massachusetts families need immediate
help. Several excellent programs are already in place:

-   The Department of Telecommunications and Energy (DTE) recently
    broadened eligibility for protection under its rules restricting
    utility terminations in the winter.

-   The General Court enacted low-income electricity bill discounts and
    the DTE has established similar discounts for gas.

-   All Massachusetts electric utilities and most gas utilities (Key
    Span, NStar, Fitchburg Gas & Electric, Berkshire Gas, and Fall River
    Gas) conduct high quality, comprehensive low-income efficiency
    programs together with community action programs.

Targeted expansion of these programs would make them even more useful to
people in need. For example, the winter moratorium should be extended
past March 15 to allow hard-pressed families time to pay their winter
bills.

Comprehensive low-income efficiency programs are now mandated for all
electric utilities in the Commonwealth. They should be mandated as well
for all gas utilities. Currently, the size and quality of gas efficiency
programs must be negotiated periodically, which means that a determined
utility -- such as Bay State Gas Co. -- can avoid this responsibility by
refusing to agree to a high quality, comprehensive program. A clear
mandate would also send an important message to the out-of-state
corporations that have recently purchased every Massachusetts gas
utility.

Another step that would help is automatic levelized billing to smooth
out seasonal increases. Similarly, consideration should be given to
utilities financing all residential bills by deferring payment over a
reasonable period. Also, although federal fuel assistance payments, at
up to \$1000, are relatively high this year, there may still be need for
additional state assistance or emergency increases to the low-income
discount.

Most important, however, is outreach. The electricity discount, for
example, reaches only about 26% of the families eligible for it,
according to data recently released by the DOER. Better enforcement is
needed of the statutory requirement that electric utilities "conduct
substantial outreach efforts" to promote the low-income discount.

[3. Purchasing practices.]{.underline} Investigation is needed about gas
and electric purchasing practices to determine whether sufficient
hedging and long-term contracting is being conducted. Spot and
short-term prices are typically higher and most volatile during times of
relative shortage, as now. For example, the current practice of
purchasing electricity only for six-month periods may be contributing to
price increases. In reviewing the California debacle, the Federal Energy
Regulatory Commission (FERC) was critical of that state's failure to
require that virtually all purchase contracts be for terms of two to
five years.

However, the cheapest utility acquisition of electricity may not be a
purchase. Electric utilities can build plant to produce electricity more
cheaply than they can currently buy it. Indeed, utility-constructed
plant may be a legally more prudent means of acquiring electricity than
paying robber baron prices. Such utility plants, the output of which
should be priced on the basis of costs, will provide a benchmark for the
wholesale market to meet. (As part of this process, wholesale bids
should no longer be held in their current secrecy. They should be posted
in public.) California Gov. Davis -- with the approval of a California
utility regulator who describes himself as "a free market economist" \--
proposed state-owned generating facilities to accomplish this, but we
need not go that far.

The FERC recently turned jurisdiction of California's utility-owned
plants back to the state's regulators in an example of the best solution
to that state's restructuring nightmare. (It also announced in advance
what it would consider to be a reasonable price for five-year purchase
contracts.) Indeed, Southern California Edison has demanded in pending
litigation that FERC itself return to cost-of-service regulation for
wholesale transactions. Similarly, Rhode Island Attorney General Sheldon
Whitehouse has proposed cost-based standards for FERC oversight of New
England prices.

Wholesale energy markets are producing windfall profits and not
operating efficiently. Massachusetts families need their government to
protect them. This should include:

-   Permanent, well-funded comprehensive efficiency programs to lower
    prices by cutting demand.

-   Increased assistance for struggling families to help them pay their
    bills. This should include an extended moratorium on utility
    terminations, expanded discounts and other cash assistance,
    permanent and comprehensive efficiency programs at the few utilities
    that do not have them, financing of residential bills, and effective
    outreach that informs people of the help they can get.

-   Mandated construction of high efficient electricity generating
    plants by Massachusetts electric utilities to serve as
    cost-of-service benchmarks against which to measure the performance
    of the wholesale marketplace.