Background
The Massachusetts restructuring statute,ⁱ  which mandated retail competition as of March 1, 1998, was one of the first state electric restructuring statutes. The model used by Massachusetts is typical is most respects, in that the utilities are obligated to continue serving customers who do not choose a competitive provider, customers who seek to return to regulated service, and customers whose provider defaults. Under the state Department of Telecommunications and Energy (DTE) restructuring decisions, most utilities voluntarily agreed to divest generation resources, and they were allowed to recoup stranded costs in rates for a period of time. The Massachusetts restructuring law required utilities to offer service with a 10 percent rate reduction followed by an additional 5 percent reduction over several years.

The law also increased funding for low-income energy efficiency, an endorsement of the low-income discount rates that had been adopted at some utilities in the past, and increased spending for renewable energy projects and initiatives. All of these programs were funded by utility ratepayers through targeted funds or included in distribution service rates.

Massachusetts did adopt one unique provision for its restructuring program. While most states adopted a Default Service or Provider of Last Resort rate that utilities must provide to non-shopping customers, Massachusetts adopted a two-tier system: "Standard Offer Service" (SOS) and "Default Service."ⁱⁱ   Standard Offer service is provided by existing utilities to all customers who choose not to choose. The statutory mandate for rate reductions (10 percent in 1998 and 15 percent beginning on September 1, 1999) was implemented through Standard Offer Service.

Standard Offer service is available only for the transition period of seven years (until March 1, 2005). The restructuring law provides a limited set of circumstances under which a customer may enter the competitive market and then return to this service, but basically new customers who move into a distribution utility's service territory after competition begins cannot receive SOS. Customers who were being served by utilities in March 1998 may enter the competitive market and return once within 120 days, but any other customers who enter the competitive market and seek to return to utility service are not eligible for Standard Offer Service. However, the law allows low-income customers (defined as those receiving the low-income rate discounts available at each utility) to return to Standard Offer service at any time.

Default Service is available for customers who move into the service territory after the onset of competition and those who wish to return to regulated service after entering the competitive market. Unlike SOS, however, Default Service must reflect "market-based rates" and is not subject to the rate caps or rate reductions associated with SOS. Because it was not clear how this statutory pricing directive should be implemented, the Massachusetts DTE decided early on that utilities should provide those eligible for Default Service with the Standard Offer price until the mechanisms for procuring and pricing Default Service could be fully implemented.ⁱⁱⁱ   The DTE initiated a proceeding to implement the market price requirement for Default Service in June 1999.^iv   The Department noted that " . . . Default Service pricing and procurement will affect the types and number of bids to supply Default Service and could have implications for the competitiveness of the retail market." ^v   As of June 2002, more than 590,000 residential customers were "qualified" for Default Service pricing, primarily because they had moved to a new location after March 1, 1998.

A citizen referendum attempting to repeal retail electric restructuring made the ballot in the fall of 1998, but Massachusetts voters rejected it by a relatively wide margin. At that point, the issue from the general public’s perspective was whether to adopt the 10-15 percent rate reduction and allow competition or reject it in favor of what was perceived as very high electricity rates. Although not as high as Maine’s (12 cents per kWh at Central Maine Power Co. due to rate increases associated with non-utility generation contracts) or New Hampshire (15 cents per kWh for Public Service of NH due to the bankruptcy settlement of cost overruns associated with Seabrook Nuclear Plant), the typical Massachusetts residential electricity rate was about 9.5 cents per kWh (total bill) in 1998.

Supplier Activity
The Massachusetts DTE unbundled the customers' utility bills so that they could compare the price for generation (determined in restructuring proceedings) with those available from competing marketers. The gap between the negotiations and enactment of the legislation and the actual onset of formal competition proved to be significant.  By early 1998, providers claimed they were unable to beat the SOS rates. When rates were unbundled, wholesale market prices were about 2.5 cents per kWh, and the SOS rates were initially fixed at 2.8-3.2 cents per kWh.

Full retail competition was initiated in March 1998, but very few customers switched then or since, and few alternative suppliers have entered the retail market in a significant way. Marketers allege that this is because the SOS generation charge that appears on unbundled customer bills has always been below wholesale market prices and does not reflect the costs of acquiring and retaining mass market customers. This situation was exacerbated with rising prices in the wholesale market through 2000. As of November 2000, only 2,848 residential customers had switched.

Even so, several dot com electricity suppliers (Utility.com and Essential.com) sought customers in Massachusetts in 2000, but went out of business in 2001. There is currently only one provider licensed in the state to provide electricity to residential customers that is actually marketing to residential customers. This supplier, Dominion Retail (an affiliate of Dominion Power, based in Virginia), has only recently initiated marketing efforts after rates for Default Service increased and is offering fixed rate service for a minimum two- to three-year term.

There are many suppliers licensed to market to commercial and industrial customers, and there was a significant amount of marketing activity to such customers in 1998 and 1999.  Since then, however, even nonresidential customers have not seen significant competitive activity. During 2000, the number of competitive supply customers fells from 9,471 to 5,682.^vi

There was slightly more activity in all customer classes during 2001, due to the higher rates charged for utility generation service (discussed in more detail below). As of December 2001, 5,451 residential customers, 5,112 small commercial, 3,202 medium commercial, and 1,215 large industrial customers were taking generation service from competitive providers. Of course, the vast majority of kWh of competitive generation sales was to industrial customers.^vii

Standard Offer Service and Default Service
In mid-2000, the DTE decoupled Default Service rates from SOS rates.^viii  The Department ordered utilities to offer both a variable price and a fixed-price, six-month Default Service rate. Residential customers who had to obtain Default Service were automatically placed on the six-month fixed price rate, but offered a month-to-month variable price as well. Commercial and industrial customers were put on the variable price option. Utilities were ordered to obtain bid prices by customer class, but some stated that they were not able to implement multiple Default Service prices with the current billing systems. The DTE rejected a suggestion that the Default Service prices include any administrative costs associated with the procurement of Default Service or other costs, such as bad debt expense. In a later Order, ^ix the Department clarified that the utility should reconcile the cost for this service annually and that the over- or under-recovery would be passed to all customers. The declared objective in decisions about Default Service was to "send an efficient price signal."^x

The new Default Service rates went into effect on January 1, 2001. These rates were substantially higher than SOS rates, namely 7.032 cents per kWh at Boston Edison (residential) and more than 8 cents at Fitchburg Gas and Electric and Western Massachusetts Electric Co. While affected customers were issued bill notices to explain the forthcoming rates, bills containing the higher rates were not issued until February 2001.

At the same time that the Department moved to market-based rates for Default Service in late 2000, electric utilities asked for significant increases in Standard Offer Service as well. The basis for these requests was the rising fuel prices in the wholesale market. In effect, the utilities sought a fuel clause adjustment to their rates and alleged that the Restructuring Act did not intend to prevent such fuel clause adjustments in mandating the 10-15 percent rate reductions. In a Letter Order issued on December 4, 2000^xi the DTE agreed with the utilities and confirmed that the utilities had been accruing deferred fuel costs and should not continue to do so. As of August 2000, the utilities had accrued Standard Offer service deferrals of $10 million for Fitchburg, $60 million for Massachusetts Electric, and $144.8 million for NSTAR companies (Boston Edison and two other electric utilities). These accruals were projected to increase substantially throughout 2001. The DTE ordered an annual change in SOS to reflect actual fuel costs incurred by utilities, subject to reconciliation of actual costs incurred to provide this service. Utilities were also ordered to inform customers of these price changes.

In June 2001, the DTE approved a new round of rate increases for the generation supply portion of SOS, applicable to the July-December 2001 time period. Residential customers of Boston Edison eligible for SOS pay 7.445 cents per kwh, compared to 6.215 cents during January-June, 2001 or 4.5 cents in 2000. Massachusetts Electric Co. customers (a subsidiary of National Grid) pay 6.631 cents per kWh, compared to 5.401 in January-June, 2001 or 3.8 cents in 2000. The monthly variable rate for the generation or supply portion of the bill for a Default Service residential customer for the period July-December, 2001 varied among utilities, but was typically 10-11 cents per kwh in the summer and 7-9 cents in the winter. The fixed rate option was generally in the 8-9 cents per kWh range. For example, Massachusetts Electric’s fixed residential Default Service rate is 9.213 cents per kWh for the period May-October, 2001.^xii

Another way to evaluate or compare the pre-restructuring prices to those in effect in 2001 would be to compare the total bill price for residential customers. The following graph^xiii shows the average statewide prices charged for the total bill for SOS and Default Service at each electric utility in comparison to pre-restructuring prices. The average total bill for a residential Default Service customer has increased over 30% since 1998, the onset of retail electric competition in Massachusetts.

These prices were substantially higher than those forecast by utilities or regulators or that could be explained by higher energy prices generally. According to a filing by Western Massachusetts Electric Co. seeking approval for an energy efficiency plan, actual electricity prices were 77 percent higher than price projections used in earlier plans to calculate program benefits for 2000 and 2001. These higher prices for the generation portion of the electricity bill were almost double the price increases for heating oil and natural gas.^xiv

In 2002, prices for SOS have remained in the 5-6 cents per kWh range for the winter months (Jan.-March) and have dropped to 4-5 cents per kWh for the April-December period. In short, SOS prices have generally doubled since 1998. Default Service prices vary by utility,^xv ranging from 7.57 cents per kWh for the fixed price option (Western Mass Electric) to 4.996 cents per kWh (Fitchburg Electric) for the July-December 2002 period.^xvi

Even in the face of such significant increases in the generation portion of the customer’s bill, only one marketer has entered Massachusetts to seek residential customers. As of June 2002, 49,721 residential customers were served by competitive suppliers.

Consumer Protection Programs and Policies
The Massachusetts restructuring statute contained specific directives to continue strong consumer protection policies and programs. Competitive providers must comply with the same billing and collection rules that are applicable to utilities and which remain in place for the distribution utilities. The DTE adopted consumer protection regulations applicable to competitive providers, including mandatory price and environmental disclosures, terms of service statements, customer switching and authorization provisions with mandatory penalties for slamming violation, and customer complaint procedures.^xvii   Competitive suppliers cannot disconnect service for nonpayment. The Department has jurisdiction over competitive providers for licensing and enforcement of regulations, including resolution of customer complaints, assessment of penalties, and the issuance of cease and desist orders. All competitive providers must be licensed by the DTE.

The Legislature did not authorize the DTE to allow competitive metering and billing, so all competitive providers must either offer stand-alone billing for generation services or arrange to bill through the utility’s regulated bill.

Under the original rules, competitive suppliers did not have access to lists of residential customers or usage information about customers unless each customer specifically authorized the release of such information. In the face of higher prices and lack of both supplier and customer participation in retail electric choice, the DTE opened an investigation into the status of the competitive market, with the avowed intent of "taking all appropriate steps to bring the benefits of industry restructuring to electricity consumers."^xviii  The focus of the early steps explored by the Department was to stimulate supplier interest in Default Service customers and, based on comments from suppliers gathered at technical meetings in early 2001, increase supplier access to information about Default Service customers. The DTE ordered that utilities to make lists of customer names, addresses, and rate classes available to all licensed suppliers that were prepared to serve customers immediately. It then sought comment on whether or how suppliers should obtain access to further customer-specific information, such as credit history and load/usage data, and whether consumers should be able to electronically enroll with suppliers.

Comments from suppliers^xix indicated that the customer list information would be valuable, along with customer-specific usage and load shape information. The suppliers showed little interest in credit history information, but did indicate that the customer lists provided by utilities should exclude customers who were 30 days or more in arrears. Suppliers also strongly urged the DTE to reflect the provisions of the Electronic Signatures in Global and National Commerce Act^xx ["E-Sign"] so that customers could electronically "sign" enrollment agreements with suppliers over the Internet.

Consumer groups^xxi and the Attorney General^xxii raised concerns about the manner and method of the release of customer-specific information and pointed to the DTE's obligation to consider customer "privacy" concerns in its efforts to jump-start a competitive market for electricity. Specifically, these comments pointed out that the DTE had not come up with a way to notify customers that information was being released or a way for customers to "opt out" of such lists before their release. Consumer groups raised concerns about the potential for "redlining" by suppliers if the rate code information reflected customers' participation in the electric rate discount programs (reflected in most utility tariffs with a specific rate code). They pointed to the suppliers' proposal that customer lists not contain customers with an arrears balance as evidence of the potential for redlining. The consumer groups pointed to the statutory and regulatory requirement in Massachusetts for a written confirmation of a customer’s enrollment with a supplier, and they proposed methods to reconcile access to the Internet and the need to prevent slamming.

It appears that customer lists with name, address, and some sort of rate designation have, in fact, been released to suppliers in Massachusetts, pursuant to the Department's June 29^th Order, without a formal program of customer notification and opportunity to "opt out." This is contrary to the process adopted in other states that have released customer lists, namely, Ohio, Pennsylvania, and Texas, in which customers were provided prior notice and offered the option to opt out of a supplier list by postcard, phone, or Internet (e-mail). Furthermore, no state has allowed suppliers access to customer payment information without specific prior authorization, including the payment status of the customer (such as the request by the suppliers in Massachusetts that customers in arrears not appear on the list).

On October 15, 2001, the DTE issued its final order in its competitive market investigation,^xxiii stating that, "Access to a customer’s historic usage is critical for suppliers to project what their wholesale costs would be as that customer’s retail supplier" and that the current system requiring specific customer authorization by the supplier is "cumbersome and inefficient." The DTE also stated that it was "convinced that, with proper education efforts, the vast majority of customers will appreciate the value of having their historic usage information included on the Customer Information Lists" and adopted an "opt-out" system that allows customers to prevent the release of their usage information by contacting the local utility. This opt-out process requires utilities to provide two consecutive bill messages and bill inserts to customers, informing them of the release of this information and how to prevent its release (by telephone or letter). The first generic release of the Customer List information was done in February 2002.

Responding to the general tenor of most comments, the DTE ruled that utilities should not provide suppliers with customers' credit or payment history and that the customer list should not be filtered by removing customers with late payment histories. With respect to concern that the use of tariffed rate classifications would identify customers on low-income discount rates, the Department required utilities to use rate classifications that do not reveal this information to suppliers.

When considering application of the "E-sign" law, the DTE interpreted various Massachusetts laws to mean that customers could "sign" a customer authorization form (and select a supplier) electronically, thus avoiding any determination of preemption. The Department deferred the development of procedures and protections to allow Internet enrollment for electricity sales to Phase II of the proceeding.

In Phase II, the Department announced that it would explore several important issues designed to further restructuring. First would be how and whether distribution utilities should act as "brokers" for Default Service customers, that is, in assisting or acting as a middle man to stimulate customer enrollment with competitive suppliers. Second, the DTE will explore how municipal aggregators can aggregate Default Service customers within their municipal boundaries. The pending proposal by the Cape Light Compact proposal to provide such a service as a pilot project^xxiv will be used to issue generic guidance on this matter. Finally, the DTE will explore the details concerning Internet-based enrollment.

Consumer Education
The restructuring statute authorized and directed consumer education activities to help consumers realize savings. The consumer education program was to provide "a consistent and reliable basis for comparing products and services offered in the electric market" and "assist in the detection and avoidance of unfair or deceptive marketing practices."^xxv

Unlike most other states, Massachusetts assigned responsibility and funding for consumer education to agencies other than the utility regulatory agency. The Regulated Industries Division of the Attorney General’s Office (official public advocate) and the Division of Energy Resources (DOER) jointly implemented the consumer education program. This program was modest, primarily because of its small budget. Again, unlike other restructuring states, Massachusetts did not assess consumer education funds from utilities. Rather, the Division of Energy Resources dedicated specific fiscal resources for educational activities in 1998 ($2 million) and 1999 ($1 million). No money was dedicated to consumer education activities in 2000.

An in-house consumer education task force (including other state agencies, distribution companies, low-income consumer and environmental advocates, marketers, suppliers, and other interested groups) developed the Massachusetts consumer education plan. In addition to the projects listed above, the major components of the education program included baseline research, print advertising, television, radio, call center, web site, campaign logo, speakers’ bureau, personal contacts, newspaper stories, media relations, and bill inserts. An advertising agency created the actual message concepts and was responsible for the outreach efforts. The Consumer Education task force retained editorial and direct control over how the messages were conveyed. The educational efforts on electric restructuring occurred primarily after the opening of the competitive market (in 1998) but were exhausted by the end of 1999.

Also, unlike other states, Massachusetts did not conduct an extensive television or public service announcement program. Rather, the consumer education plan relied on a toll-free hotline, consumer guides and brochures provided in various languages, an educational video used at small group presentations, and various DOER reports.

Universal Service Programs
The Massachusetts Department of Telecommunications and Energy has long required electric and gas utilities to fund low-income discounts or rate reduction programs for low-income customers as part of their regular revenue requirement reviews. The electric restructuring legislation required distribution companies to continue these programs "comparable to the low-income discount rate in effect prior to March 1, 1998." Program costs must be included in the rates charged to all other customers of a distribution company. Further, "Each distribution company shall guarantee payment to the generation supplier for all power sold to low-income customers at said discounted rate." The discount is available to customers with household income at or below 175 percent of the federal poverty guidelines.

The distribution companies are required to conduct substantial outreach to obtain a high penetration rate for these programs, including establishment of an automated program to match customer accounts with lists of recipients of means-tested public benefit programs. Before the end of the seven-year transition period, the Department must analyze and make recommendations concerning the affordability of electricity, consider modifications for expanding the program, and consider whether to adopt a sliding scale discount program (thus providing a better match between usage and income). Low-income customers who receive the rate discount must be provided service at Standard Offer rates and are exempt from Default Service, at least through the transition period. After March 2005, however, the Standard Offer Service will no longer be available, and all customers will receive the Default Service prices.

The legislation also required a five-year energy conservation program funded by distribution company rates at levels that are the highest in the nation. Funding started at 3.3 mills per kWh in 1998 and phased down to 2.5 mills in 2002, totaling about $500 million over this period. Included in this program is a permanent set-aside for low-income demand side management of .25 mills per kWh or 20% of each utility’s residential conservation program. The program must be coordinated with the local Weatherization Assistance Program agencies and conform to statewide standards that will be set by the Division of Energy Resources.

While theoretically appealing, the universal service programs have a very poor penetration rate at most Massachusetts’s utilities. In 1999, only 27 percent of eligible households (130,000 out of 360,000 eligible households) received the electric discount rates, yet the DOER reported at the same time that the distribution companies were in compliance with DOER Outreach and Eligibility Guidelines!^xxvi  The DTE currently has a proceeding pending to examine policies and programs to increase the penetration rate for these programs. Consumer advocates have proposed more reliance on automatic enrollment and coordination between the utilities and the state financial assistance agencies, similar to the electronic communication of eligibility status in the New York Telephone Lifeline Program.^xxvii

Municipal Aggregation
The nation’s first exposure to an organized municipal effort to aggregate its residents for the purchase of electricity occurred with the formation of the Cape Light Compact in Massachusetts. Part Two of this paper details the formation of the Compact and its status to date.

Preliminary Conclusions and Observations
There is a consensus among regulators in Massachusetts that market-based pricing in the form of Default Service can deliver the benefits of competition to the state's residential customers. The leadership of DTE and DOER are intent on creating a methodology that results in routine price changes (i.e., every six months) for residential customers to reflect short-term wholesale market developments. There is some concern that these price changes should not be volatile and that the DTE would supervise how utilities acquire this service by bids and purchases. However, there is no stated interest in exploring approaches that would provide a fixed rate over a multi-year period. Rather, Default Service is viewed as a means of soliciting marketer interest in serving Massachusetts customers and, under this approach, Default Service must not undercut short-term prices available on the wholesale market. Furthermore, unless the Legislature changes the current policy, Default Service will be the only form of electric service after the transition period is complete in early 2005.

A working group is currently exploring the various opinions and proposals for Default Service and its relationship to the stimulation of a competitive market in Massachusetts. A proposal is forthcoming from DOER that will rely on short-term market pricing for this service. At least one utility (NSTAR) has suggested that a more stable and fixed price service should be devised, at least for residential customers. Consumer advocates are seeking a long-term stable pricing program for Default Service. Clearly, there is a wide gap in the intent and purpose of the various informal proposals that have surfaced to date. The views of Massachusetts legislators may be crucial to the final resolution of these issues in the next year.

Another issue that merits careful attention by consumer representatives is whether Massachusetts will attempt to move additional costs into the price for Default Service so that customers' generation portion of the bill will increase to reflect bad debt costs or other billing and collection costs. This would remove some portion of these costs currently reflected in distribution rates. Marketers have stated that this approach would allow them to compete on the true retail costs of providing generation service. However, it also raises concerns about redlining, or the possibility that marketers will be able to discriminate when soliciting customers to avoid those with poor credit history or payment problems. If this type of "cherry picking" occurs, payment-troubled and low-income customers are likely to remain with the higher cost utility service.

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xvi The DTE publishes the approved SOS and Default Service prices for each utility on its website: www.state.ma.us/dpu/restruc/competition/index.htm.

xxvii Comments of the Massachusetts Community Action Program Directors Association and the Massachusetts Energy Directors Association, before the Massachusetts DTE, Docket 01-106, In Re Increasing the Penetration Rate for Discounted Electric, Gas and Telephone Service, January 31, 2002. Available at http://www.state.ma.us/dpu/electric/01-106/131comments.pdf

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