OHIO

Background
After an extensive and well-publicized two-year debate in the Legislature, Ohio adopted retail electric restructuring in 1999, with an implementation date of January 1, 2001.ⁱ  This legislation reflects an overall approach similar to those adopted by Pennsylvania, Michigan, Virginia, Texas, and other states: Larger commercial and industrial customers gain access to the potentially more competitive prices in a deregulated retail electric market in return for protections for residential customers in the form of a rate decrease and a rate cap for a specified transition period.

The Ohio program retains the incumbent utility as the Default Service provider and establishes rate caps for the "market development period" through 2005. Except for certain energy efficiency and universal service riders and the effect of taxation changes, the unbundled rates must not exceed total bundled rates in effect in 1999. The restructuring statute also preserved and mandated rate reductions here the Public Utility Commission of Ohio (PUCO) had already approved rate decreases or such decreases were scheduled to go into effect. In addition, the generation portion of the bill for residential customers must reflect a five percent reduction (which appears on the customers' bills in the form of a credit) during the transition period. This rate reduction may be altered or removed by the PUCO no earlier than 2003 if the Commission finds that it has unduly discouraged market entry by competitors.ⁱⁱ However, the generation rate reduction has been the subject of negotiations and settlement provisions in the various utility transition plans.

The utilities were not required to divest their generation resources, but were required to adopt a structural separation plan for competitive retail and regulated distribution services.

Supplier Activity
When retail electric competition began in early 2001, the PUCO certified 38 companies to sell electricity. From the beginning, however, there was a distinct difference in provider marketing activity and customer switching between the northern and southern portions of Ohio. In the northern areas served by FirstEnergy utilities, prices were below wholesale market prices, and various marketers offered services to residential customers. In addition, municipal aggregation had its first and significant successes. In the southern areas, however, prices were already low and few, if any, providers sought residential customers.

At the end of the first full year of retail electric competition, the PUCO reported that 12 marketers had established customer bases; more than 150 local governments had enacted aggregation ordinances; and aggregation programs accounted for 85 percent of residential customer switching, more than 50 percent of commercial customer switching, and almost 25 percent of industrial customer switching.ⁱⁱⁱ

As of the summer of 2002, the competitive activity had disappeared, even in the northern portions of Ohio. Of the 725,000 residential customers who have switched suppliers, over 90 percent are being served through the municipal aggregation programs. Active competition among competitive providers for individual residential customers is virtually nonexistent. The recent bankruptcy filed by New Power, one of the most active providers for retail electric service targeted to residential customers, has meant that consumers in central and southern Ohio have no alternative to their incumbent local electric utility. The only remaining active residential provider is an affiliate of FirstEnergy in northern Ohio. Residential customers of Dayton Power and Light, Ohio Power, and Monongahela Power have never seen an offer by a competitive provider.

Provider of Last Resort
The Ohio rate caps for generation supply are firm and do not include an exception for increased fuel costs. This aspect of Ohio’s restructuring program is similar to the default service and rate cap policies in effect in Pennsylvania. The Default Service obligation under the rate cap provisions continues at least through the market development period, i.e., through 2005. The restructuring legislation requires the distribution utilities to offer a market-based price for this service, obtained through competitive bidding, beginning in 2006. The Commission must adopt rules setting forth the competitive bid process by January 1, 2004.^iv

Utilities must issue unbundled bills that state the "price to compare" for generation supply service so that customers can compare prices with competitive providers. Furthermore, the electric bill must calculate and disclose the customer’s individual price for electric generation service each month using a cents per kWh disclosure.^vi  This allows customers to easily compare offers among providers because the alternative providers must calculate an average monthly bill in a kWh format as part of their terms of service disclosures.

Ohio adopted a procedure similar to Pennsylvania's, in which providers can get access to a mass customer list from the incumbent utility with customer names, addresses, telephone numbers, and historical usage information. Customers were informed of this list and their ability to "opt out" if they do not want their information shared with providers. However, this information does not contain billing or payment information, all of which the PUCO prohibited utilities from sharing with providers.

Utility incumbents must offer providers the option to include their generation supply charges on customer bills. Alternatively, providers can issue their own bills for generation supply. However, providers do not have the option of issuing and collecting a bill for the regulated distribution service that is billed by utilities. Furthermore, providers cannot threaten disconnection of service to collect unregulated charges, but they can terminate the contract with customers in default, thus returning the customer to the incumbent utility. Utilities retain their traditional collection tools, including the right to disconnect service, but only for regulated distribution charges and the Default Service generation charges.

Consumer Education
To prepare consumers for the new electric environment, the legislation required each investor-owned electric utility to contribute to a $33 million consumer education program (referred as the Ohio Electric Choice campaign), to be used during Ohio’s five-year market development period. The Legislature allocated $16 million for the first year of the education campaign and $17 million in decreasing amounts for years two through five. The consumer education budget also funded each of the five electric utilities’ required territory-specific education campaigns.

The coordinating committee for consumer education consisted of the Public Utilities Commission of Ohio, in conjunction with the Ohio Consumers’ Counsel (OCC) and the Ohio Electric Utility Institute (OEUI). The PUCO, however, had final decision-making authority over the campaign. The target audiences were residential consumers, small- and mid-sized commercial customers, elected officials, community leaders and civic organizations, trade associations and consumer groups. Special emphasis was placed on reaching minority populations, rural populations, senior citizens and low-income customers.

The Ohio Electric Choice campaign conducted a baseline research study in June 2000 and a six-month survey in February 2001 to gather consumer opinions on electric choice. When baseline research results are compared with the six-month research results, it is clear that the two campaigns raised consumer awareness and knowledge levels. The baseline research and the follow-up study indicated that consumer awareness of electric choice increased from 38.2 to 62.3 percent. Knowledge of electric choice increased from 19.8 to 33.6 percent. In the fall of 2001, another survey indicated that 75 percent of consumers were aware of electric choice.^vii

Since electric competition has been slow to develop in Ohio, both the Ohio Electric Choice campaign and OCC’s electric choice campaign adjusted the messages sent to consumers. Both campaigns have been careful not to overstate the notion that consumers have a choice. The Ohio Electric Choice campaign has stopped airing television advertisements and is relying on print and radio advertisements, information on its website and collateral materials to maintain awareness and knowledge of electric choice.

Universal Service Programs
Ohio also legislatively endorsed the PUCO's long-standing universal service programs for low-income customers. The Percentage of Income Payment Plan (PIPP), in which low-income customers are required to pay no more than 15 percent of their annual household income for electricity and natural gas service, will continue as part of the federal LIHEAP or fuel assistance program administered by the Ohio Department of Development. Ohio uses a combined application form for LIHEAP and PIPP, so that customers who are eligible for LIHEAP are automatically enrolled in PIPP, thereby providing a "one-stop shop" for energy assistance statewide.

The Ohio restructuring legislation also funded an Energy Efficiency and Weatherization program targeting low-income customers. This program focuses on high-cost, high-usage buildings occupied by customers who are eligible for PIPP to help reduce electric costs (and the costs of the subsidy paid by all ratepayers).

Ohio will also build on its successful experience in aggregating low-income natural gas customers participating in PIPP.^viii Under this program, individual utilities auctioned off their natural gas PIPP customers to certified marketers for natural gas supply service at prices lower than the incumbent utility's. The Ohio Department of Development is authorized to explore this same approach for electric PIPP customers. However, under these programs, the reduced costs associated with the aggregation of low-income customers are funneled to reduce the PIPP subsidy costs and do not directly benefit the low-income customers.

Riders included in regulated utility rates and paid by all customer classes fund the PIPP and energy efficiency programs.

Municipal Aggregation
An interesting and unique feature of the Ohio legislation is the emphasis on customer aggregation. Municipalities may adopt an ordinance that aggregates all residents within its boundaries. Part Two of this paper details Ohio’s experience with aggregation to date.

Preliminary Conclusions and Observations
Obviously, the level of individual customer shopping and marketer activity in Ohio is far below the expectations of policymakers when restructuring was adopted in 1999 and implemented in 2001. However, the aggregation programs in Ohio can surely be characterized as a major success and one that has not been duplicated elsewhere. The increased attention and efficiencies associated with the implementation of the low-income programs, along with their legislative "stamp of approval" has contributed to public benefits associated with restructuring. Furthermore, the consumer protection rules and disclosure requirements imposed on new marketers are models for other states.

In recent months, both the PUCO and the Ohio Consumers’ Counsel (OCC) have focused attention on the structure of the wholesale market in Ohio and market power issues. The OCC issued a Summer 2002 Electric Market Update^ix
that asks the PUC and other legislators to adopt a sense of urgency about the state of the underdeveloped electric market, pointing out that after the transition period, customers will be subject to market rates without a competitive market to temper those rates.

The OCC has also filed a formal complaint^x with the PUCO against American Electric Power (AEP), alleging that the utility’s methods for operating and pricing its transmission system have inhibited the development of the competitive market. The OCC strongly supports a single electric market for Ohio (in the form of the Midwest RTO) and opposes AEP’s refusal to join a functional Regional Transmission Organization by the FERC deadline of December 15, 2001. The fragmented and uncoordinated approach to transmission pricing and access in Ohio is certainly a key factor in the lack of a regional market for electricity, along with the continued differences in prices and marketer activity between the northern and southern portions of the state.

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i Amended Substitute Senate Bill No 3, 123^rd General Assembly, eff. October 5, 1999.

ii Sec. 4928.34 and 4928.40.

iii Public Utilities Commission of Ohio, The Ohio Retail Electric Choice Programs, Report of Market Activity for the year 2001, April 2002. Available at the Ohio PUC website: http://www.puco.ohio.gov.

iv Sec. 4928.14.

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Part Two