BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Order Instituting Rulemaking on the ) Commission's Proposed Policies ) Governing Restructuring California's ) R.94-04-031 Electric Services Industry and ) Reforming Regulation ) ) ) ) Order Instituting Investigation on ) the Commission's Proposed Policies ) Governing Restructuring California's ) I.94-04-032 Electric Services Industry and ) Reforming Regulation ) ) ) COMMENTS OF THE GREENLINING COALITION Customer Choice Through Direct Access: No Real Choice for those Most at Risk Dated: August 24, 1994 ROBERT GNAIZDA, ESQ. LINDA FILCHEV, ESQ. THE GREENLINING COALITION 1535 Mission Street San Francisco, CA 94103 (415) 431-7430 COMMENTS OF THE GREENLINING COALITION Customer Choice Through Direct Access: No Real Choice for those Most at Risk I. Introduction Customer choice in a direct access world raises serious concerns for California's low-income residents and communities of color. The benefits of direct access for large energy consumers are clear; but how will California's fifteen million minority residents and thousands of minority-owned businesses fare under the Commission's plan? The Greenlining Coalition, comprised of over twenty civil rights and minority business organizations, believes the picture is grim. Marketplace inequities, the likelihood of captive customers paying yet higher rates, and the serious potential for redlining and consumer abuse, are problems that will plague the industry under the Commission's plan. Those most at risk will get stuck with the highest rates, lowest quality service and, in a system supposedly premised on choice, will have little or no choice at all. The Greenlining Coalition supports direct access if direct access results in real choice for all consumers. Real choice in the electricity market requires bargaining power, an educated consumer class, a vigilant regulatory body, and a marketplace free of discriminatory practices and consumer fraud. This Commission has an obligation to protect the interests of all consumers -- including people of color and those at economic disadvantage -- before it embarks upon an unprecedented experiment with potentially serious consequences for California. Community organizations have had little opportunity to participate in the restructuring proceedings due to informational and cost barriers that continue to remain in place. Public awareness of the restructuring and its potential 1 impact is low, and in some communities, virtually non-existent. The Commission must be more responsive to the needs of California's minority and low-income consumers if it is to implement a plan that creates real choice for all. II. Without Market Leverage there is No Real Choice The most formidable impediment facing residential and small business customers in the direct access scheme is lack of bargaining power. Whether small customers can benefit from direct access depends on their ability to band together to form purchasers' co-ops and buyers' blocks capable of wielding marketplace leverage. In this regard, California's low-income and minority consumers are at a distinct disadvantage. Having to contend with continued discrimination and limited economic opportunity, these communities lack the financial resources required to form buying blocks capable of competing with large energy consumers for lower rates. More importantly, these communities lack information. Informal studies indicate that scant few people of color have heard of the Commission's proposal and, of those, virtually none have a basic understanding of what the proposal does or what its impact will be. 1 The Commission plans to make direct access available to residential customers by 2002, but it has yet to address how direct access for the residential customer would work in practice. Before the Commission moves forward with the restructuring, it must implement measures to redress the marketplace inequities that strip minority and low-income consumers of the bargaining power required to negotiate in the competitive market. The first step is public education, and more specifically, education of 1Informal study conducted by the Greenlining Coalition in San Francisco, June-July, 1994. 2 those who are most at risk. The Greenlining Coalition has repeatedly called for the creation of a consumer education fund similar to the TET fund in the telecommunications industry.2 Consumer education must precede consumer choice if meaningful choice is to be available for all. III. Captive Customers Will Pay the Highest Rates Commentators in this proceeding have predicted that residential and small business customers will find themselves captives of the utility of last resort as large energy users leave the system in search of lower rates. Outside competitors, unencumbered by stranded investments, will lure large energy customers away, forcing the utilities to raise the rates of their existing customer base. A spiral results as more and more customers leave the utility and rates continue to increase. Those customers without market leverage -- inner city residents, the poor, and people of color -- will have no choice but to pay the increasing rates of the utility of last resort. They will become the utilities' captives. The end result is ironic; large energy consumers reap the best bargains in the competitive market while those most at risk get stuck paying increasing rates. The alternative scenario is no better. In an effort to remain competitive, existing utilities will offer discounted rates to their large, industrial customers, but increase rates for the residential and small business consumer class. The Commission has stated its commitment "to preventing inequitable shifting of costs among customers" and that it will explore the 2See testimony of the Greenlining Coalition, full panel hearing before the California Public Utilities Commission titled "Balancing Public Policy Objectives," July 1, 1994. 3 construction of accounting barriers to prevent such a scenario.3 At the present time, the Commission's proposal contains no specific means of preventing the inequitable shifting of cost. Furthermore, we are not assured that accounting measures alone are adequate to counter the threat of price hikes for the small consumer class. It would be a perverse situation indeed if large industrial consumers reap the benefits of customer choice at the expense of small consumers. Low-income families already spend a disproportionately high percentage of their monthly income on utilities. Even a slight increase in electricity rates would have a harsh impact on families whose resources are already stretched. A restructuring plan that results in inequities of such magnitude is not in the interest of most Californians, and is certainly not in the interest of communities of color and the poor. IV. Redlining and Marketplace Abuse in a Direct Access System Competitors will eagerly vie for the business of large energy users; but will they pursue the low-income and minority markets? Redlining has been the standard practice in the financial services and insurance industries for years. 4 The Greenlining Coalition has every reason to believe that redlining will become the norm in the electric services industry as well. At the present time, it is unclear whether service providers will step into the residential market, much less inner city communities. Even if small consumers are able to organize 3California Public Utilities Commission, Proposed Policy Statement on Restructuring California's Electric Services Industry and Reforming Regulatory Policy, April 20, 1994, pp.28-29. 4See Wall Street Journal, "Mortgage Denial Rate for Blacks in '93 Was Double the Level for Whites, Asians, July 29, 1994. 4 themselves into buying blocks, the utility of last resort may be the only service provider in the residential market, and almost certainly the only provider in the minority and low-income markets. Assuming a thriving alternative marketplace springs up for small consumers, it will be a marketplace rife with abuse. Companies will channel their resources into advertising and promotional activities instead of quality service. Undercapitalized middlemen and brokers will prey on the non-English speaking and the uninformed. Service shut-offs will increase as the most vulnerable fall victim to marketplace scams. Recent abuses in the telecommunications industry has proven that even highly-regulated, reputable corporations will take advantage of their customers if the opportunity arises. Without independent, strict scrutiny and an educated small consumer class, consumer abuse will run rampant as the poor and uneducated become likely victims. This Commission must implement strict consumer protection mechanisms aimed at the residential and small business markets. Electricity is a basic necessity and the consequences of abuse are especially dire. Again, public awareness goes a long way in preventing consumer fraud. A multi-lingual consumer education effort, strict consumer protection laws, and a swift and effective avenue for customer complaints can create a direct access market free of abuse. V. Conclusion The Greenlining Coalition supports direct access, but only if direct access works for all customers. All customers must have the necessary bargaining power and information to make meaningful choices in a competitive 5 electricity market free from consumer abuse. Direct access, as it stands now, could create an inequitable situation in which minority and low-income consumers end up paying the highest rates, receive the poorest service, and become victims of fraud. For those most at risk, direct access could mean no choice. The Commission's restructuring proposal is an experiment of unprecedented nature in the energy industry. The impact of the proposal, especially upon those most at risk, remains unknown. The Commission cannot implement a plan that truly benefits all Californians without the input of low-income people and communities of color. Nor can it implement a plan of such unprecedented nature without a commitment that programs such as LIRA and WMDVBE, programs that form a much-needed safety net, remain firmly in place. Lower rates, high quality service, and a competitive electricity market offering all consumers real choice are laudable goals. Whether the Commission achieves those goals depends on its ability to respond to the needs of all Californians -- including those most at risk -- to insure that meaningful choices are available for all. Dated: August 24, 1994 Respectfully submitted, THE GREENLINING COALITION ROBERT GNAIZDA LINDA FILCHEV Linda Filchev Attorneys for Intervenor 6