Senate Energy and Public Utilities Committee

Prepared by

Steve A. Bozsa Jr.

President

Viking Energy Resources

October 16, 2007

Testimony of Steve A. Bozsa Jr.

Viking Energy Resources

October 16, 2007

Good Afternoon, my name is Steve Alexander Bozsa. I am president of Viking Energy Resources.

Ohio has yet to experience true levels of deregulation because although we passed legislation we have not deregulated and the blame for this rests squarely on the shoulders of FirstEnergy and the PUCO. Ohio has a well-conceived but poorly executed deregulation plan that should not be scrapped. Rather, a few well placed adjustments could make a huge positive economic impact for the state. Ohio’s lawmakers appeared to have the best interest of residents and local governments at heart in 1999 when they created a deregulation process that allowed for municipal aggregation of residential electric demand. Only Ohio and Massachusetts included municipal aggregation participation, but it must be used carefully to achieve the desired objectives.

What appears to be electricity deregulation’s darkest hour comes as the potential to make deregulation work dawns on Northeast Ohio. Those who genuinely want to strengthen both economic viability and quality of life in our region should look to leveling the uneven playing field against marketers and residential consumers.

There is no need to revisit and completely rewrite the deregulation law that is currently on the books except for the one mistake made by the legislature in 1999 when Senate Bill 3 was passed. Too many of the tough decisions were handed over to the Public Utilities Commission because the legislature at the time was afraid to handle those decisions themselves. This allowed First Energy, with approval from the PUCO, to create circumstances that were anti-consumer and anti-competitive. Efforts by FE and the PUCO were able to artificially suppress prices and discourage the market they said they wanted to create.
 

A main obstacle was the amount of time to collect the exorbitant amount of money that was charged to consumers during the market development period of 11 billion dollars in stranded cost recovery. There was no evidentiary hearing to probe the reasonableness of these costs that have been exploiting consumers through various different names. This cost recovery of transition costs was disguised on consumers’ bills as part of the Rate Stabilization Plans (RSP) and Rate Certainty Plan (RCP).

These are some of the recommendations I would make to the Legislature:

There is no need to create an electric security plan rate; fair competition will give us that security. The Legislature should recommend the Governor replace the Leadership at the PUCO which he recently had a chance to do, but chose not to. This is customary for a new Governor when he forms his Cabinet. Stop FirstEnergy from using the auction process to set a market price when the supply side of the wholesale market is robust and not a failure. Finally, guarantee greater transparency to future PUCO proceedings that may burden consumers and our states economy. That 11 Billion would have been better spent if it were in the pockets of Ohioans as disposable income to be circulated in the economy for the benefit of all rather than going to the utilities bottom line.

Even now, alternate suppliers of electricity wait in the wings; they need a level playing field and an environment that supports true competition. The field will become more level if customers realize that FirstEnergy's true unit price is not the "generation component" priced around 5 to 5½ cents. To get the total price, you must add "transition charges" (or "stabilization charges") of nearly two cents more.

For example, one typical residential CEI bill that I saw recently showed a true price of 7.3 cents per kilowatt-hour (including the extras), but claimed that the "price to compare" was 5.6 cents. That's like comparing the base price of a Cadillac to that of an accessory-loaded Chevrolet to prove Caddys are cheaper than Chevys.

Alternate suppliers would eagerly and profitably compete in a deregulated electricity market here. They hold back because they anticipate that customers won't understand the difference between their openly "fully loaded" price and the deceptive "base price" from incumbent FirstEnergy, supplied locally by CEI, Ohio Edison and Toledo Edison. Alternative suppliers have reason to believe the auction process in Ohio can't work and isn't necessary. So they did not submit bids for the last attempted auction because they didn't want to reveal their best pricing. The PUCO process was an all-or-nothing "auction" in which alternative suppliers would have difficulty reselling power to various classes of customers. FirstEnergy was also guaranteed the last bid.

FirstEnergy's Rate Stabilization Plan defied legislative intent and restricted choices for consumers after 2005 and perhaps forever. It continued a billing policy giving customers a paltry 4.5-cent per kilowatt-hour discount (the "shopping credit") when they sought supply alternatives. Why not require FirstEnergy to deduct the full price of more than 7 cents? Customers should not have to pay almost double for the same electricity.

We are all mainly here today revisiting this issue because large industrial users are not happy with current market conditions. The truth is businesses and residents pay different prices for electricity. This is true everywhere, not just in states that have passed deregulation. It doesn't make sense to change public policy every time large manufacturers, who already enjoy special privileges and subsidies, even prior to the first round of legislation, think the grass is greener on the other side of the regulatory fence.

Simple economies of scale and derivative negotiating power accrue to commercial and industrial commodity customers.

The more relevant comparison to be made is between electric prices for the same class of customer between northern Ohio, served by FirstEnergy and the remainder of the State. In short, ask not why residents pay more in northern Ohio than do businesses in northern Ohio. Ask why residents in northern Ohio pay more than residents in Canton, Columbus, Mansfield, and elsewhere in Ohio.

Inflation is not the whole story of rising electric rates. Compared with the fixed costs of building generating plants like Perry, Davis-Besse, or Beaver Valley, the effect of inflation on high electric prices is negligible. FirstEnergy seems to have persuaded the PUCO to allow it to reimburse itself for these plants several times over.

I have heard the phrase “One size does not fit all” and groups are coming to this committee saying that we need a hybrid plan that is tailored to each individual company in each region of Ohio. This is false because that is what we have now with the PUCO allowance of different plans for different companies to recover transition costs unfairly as I pointed out earlier. One size does fit all! Why shouldn’t it? This is the United States of America! When did we become socialists? In America we believe in free markets.

Markets are to be preferred over regulation for most, if not all, commodities. Free markets and fair competition brings about efficiency in the market place, efficiency drives out those who are not able to compete. It’s all elementary if you’re an American.

Regulated prices enrich well-placed monopoly suppliers when prices are higher than the potential open-market price. When rates are set too low, they ensure supply shortages. Free markets have the best opportunity to lead to just-right prices. If we need an example that price’s will come down rather then go up, we need only to look as far as the telecom industry. In 1987 I bought my first mobile phone that was installed in my car. For the same price that I paid 20 years ago equals the current price I pay for 3 different cell phones that I and my family can carry in our pockets.

Ohio has already paid a very large price in the initial round to deregulate. In addition to the recovery charges utilities were also given favored property tax treatment because the argument was that their infrastructure was now to be shared by competitors. The Shaker Heights City School District conducted a study citing the ‘Annual Property Tax Revenue Losses Under Electric Utility Deregulation” (attached). I live in Cuyahoga County for which these statistics speak. In just Cuyahoga County alone governmental bodies suffered near 50 Million Dollars in tax revenue loss. Included in this figure are Cities, Villages, Townships, School Districts, Libraries, and County Services such as Health, Welfare, Parks, and Port Authority. In the city of Maple Heights the Mayor leases space inside city hall to private business just so he can pay his electric bill. Does this make sense to anyone?

If the Governor chooses to ignore all the reasonable arguments made on behalf of market forces and he is determined to re-regulate Ohio then I propose that these losses must be recovered by the State on behalf of these burdened city & school budgets and the tax code restored to pre-deregulation rates for the future. Additionally all stranded costs that the utilities collected in anticipation of competition must be returned to the rate payers.

The legislature should be concerned with just one thing and that one thing is what’s best for all of Ohio, and that’s all. I am sure we are all familiar with the adage that “when you try to please everyone you ultimately wind up pleasing no one”.

Let's wisely and effectively use the tools provided in Ohio's original deregulation laws and rules to open the market to other suppliers and bring benefits of deregulation to all Ohioans. As winning professional sports teams demonstrate, the time comes to bring in new players to refresh the roster and make the games more competitive. And like good game officials, let those who make and enforce the rules "get out of the way and let 'em play!"

Electric deregulation in Ohio still retains potential to induce cheering by Ohio's taxpayers and energy consumers.

I thank you for the opportunity to present my testimony to you today and I would now be pleased to do my best to answer any questions you may have.

Senate Energy and Public Utilities Committee

Prepared by Sidney L. Spencer

Principal

Viking Energy Resources

October 16, 2007

Testimony of Sidney L. Spencer

Viking Energy Resources

October 16, 2007

Good Afternoon, my name is Sidney Spencer. I am a principal with Viking Energy Resources. We are a group of well-informed northern Ohio consumers who decided to try to make electric choice and its benefits a reality. It helps that we have a few decades in the electric business to draw upon.

What have we accomplished so far?

Viking Energy Resources is prepared to offer generation service to residential consumers on an aggregated basis in FirstEnergy’s service territories at a rate less than they are currently paying FirstEnergy. We will offer our rate fixed for five years beginning in 2008.

We began our efforts to serve our fellow consumers many years ago by investigating how to utilize bulk power from the wholesale power market. Our strategy has always been to offer the greatest possible savings compared to FirstEnergy’s historically high rates. Of course, we need our power to be as dependable and reliable as FirstEnergy’s, or more so. Our goal is to permanently switch customers. FirstEnergy should not need to “stand by” for returning customers. We also want our power to be stable in price over the longest possible term. There has been concern about extreme price volatility in the short term market. We created ways to satisfy our needs from the wholesale power market. We thought we had cleared our biggest hurdle. We were wrong.

We knew that bulk power had to be delivered through the MISO transmission system to FirstEnergy’s distribution lines. Other retail services, such as running a call center, were also required by the CRES rules. Our original plan for handling delivery to FirstEnergy’s distribution system was to partner with a retail marketing division of a major corporation. However, one marketer after another turned us down when we talked about serving residential customers in Ohio. These corporate people said their ratios of risks and returns were much better elsewhere. So, we decided to take on the MISO transmission issues, the power trading, and rest of the retail services ourselves. Now, our enhanced team has the knowledge and experience to deliver the power. We have the best alumni of CEI and CPP working together.

Now, we are ready to help our fellow consumers. We are aiming to serve the largest, most stable first block of customers possible. Thank goodness for opt-out aggregation. The first block we serve will get the best price. We are looking forward to providing a successful application of regional cooperation involving many cities. The money consumers will retain instead of sending more and more to FirstEnergy’s bottom line will give Northern Ohio’s economy a definite boost.

What took us so long?

Viking Energy Resources has been working for years because FirstEnergy and the PUCO have erected multiple barriers to consumer choice and competition. Think of it as the Berlin Wall of the electric business. The first obstacle has been consumer confusion. It almost takes a degree in quantum physics to understand FirstEnergy’s residential tariffs and bills. If consumers can’t understand what they’re paying now, how can they make intelligent choices?

For example, consumers like us have to deal with the customer charge, “little g”, the RSC, the transmission charge, the RTC, and the delivery charge when reading our FirstEnergy bill. There are “umpteen” riders attached that affect the calculations. We consumers must understand what is meant by the terms like by-passable and non-by-passable, shopping credit, and the price to compare. The items listed on the bill don’t even line-up with the terms described in the tariff. It is not surprising that most consumers wonder if any change in supplier is worth the effort.

The next obstacle to competition has been intimidation. Marketers have told us they don’t feel comfortable or welcome in front of the PUCO. One marketer told us that every time they took an issue to the PUCO there were Tony Alexander and Alan Schriber on the other side of the table, and Tony Alexander always wins.

Most importantly, consumers who even consider switching, face double charging by FirstEnergy. Consumers under the transition charge/shopping credit scheme, created by FirstEnergy and approved by the PUCO, have to continue to pay FirstEnergy for generation services along with their new alternative supplier. Of course, most consumers will choose to only pay once.

Facing these obstacles it’s no wonder widespread competition hasn’t been established and most potential marketers have left for greener pastures. We agree with Consumers Counsel’s assessment that the FE/PUCO deregulation process was designed to fail. However, Viking Energy Resources started here and we are here for the duration.

How can you help us and the consumers we wish to serve?

Please, start by preserving the spirit and intent of the innovative law you passed in 1999. It was the implementation by the PUCO, with help from FirstEnergy, where things went astray.

Direct that consumer bills and tariffs should be simplified. Make certain people can understand which parts of their bills cover generation charges, transmission charges, and delivery charges. Have the staff of the PUCO publish comparisons of bills for the various utilities with break-downs by these categories each month. A summarized version of Consumers Counsel’s “Attachment A” would be a good starting point. Ohioans can then tell where they stand compared to their fellow Ohioans.

End double charging by means of transition charges for customers who have already committed to switching for the long term. Consumers and businesses only need to pay for their electric generation service once.

Do these things and competition will have a fighting chance in Ohio. Other marketers will take another look at this great state. We can show the rest of the country how to successfully do electric choice.

Thank you very much for your time and attention.