The R Street Institute is a nonprofit, nonpartisan,
public-policy research organization with a mission to engage in policy research
and outreach to promote free markets and limited, effective government. R
Street has a long standing interest in electricity competition because of the
economic and environmental benefits it provides. R Street’s energy program is
headed by Travis Kavulla, who served eight years on the Montana Public Services
Commission and is the former President of the National Association of Regulatory
Utility Commissioners (“NARUC”).

Pennsylvania is a leader in consumer choice in electricity
markets. Ensuring that competition in Pennsylvania is not undermined by
cross-subsidization is a core principle of the Commonwealth’s law as well as an
important policy matter that must be resolved appropriately for Pennsylvania
and other jurisdictions that have elected to pursue electricity market

No one other than the amicus
curiaeor its counsel paid for the preparation of this amicus curiaebrief or authored
this brief, in whole or in part.


  1. The
    Choice Act Requires Pennsylvania’s Public Utility Commission to Prevent

1996, Pennsylvania passed the Electricity Generation Consumer Choice and
Competition Act (“Choice Act”). The Choice Act restructured Pennsylvania’s
electric markets, giving residential and business customers in the Commonwealth
the ability to choose their electric provider. Prior to 1996, Pennsylvania
electricity operated under a monopoly utility model. Under this system,
electric utilities were granted exclusive right to provide electric service in
a given geographic region and were subject to extensive oversight and
regulation by the Commonwealth’s Public Utility Commission (“PUC”). Electric
rates were determined under a cost-of-service model, according to which a
utility was allowed to charge what was necessary to recover its costs plus an
additional amount to provide a return on and of its investment. 

the new system, incumbent electric utilities were required “to unbundle their rates
and services and to provide open access over their transmission and
distribution systems to allow competitive suppliers to generate and sell
electricity directly to consumers in this Commonwealth.” 66 Pa. Cons. Stat. § 2802(14). In passing the Choice
Act, Pennsylvania recognized that the switch to competition was essential “to benefit all classes
of customers and to protect this Commonwealth’s ability to compete in the
national and international marketplace for industry and jobs.” Id. § 2802(7).

the Choice Act made Pennsylvania’s electric system substantially more
competitive, the Legislature also decided to keep certain parts of the electric
system immune to competition.
Setting forth the policy goals of the Choice Act, the Legislature asserted that
“[i]t is in the public interest for the transmission
and distribution of electricity to continue to be regulated as a natural
monopoly subject to the jurisdiction and active supervision of the commission.”
Id. § 2802(16). The Act also determined
that “[e]lectric distribution companies should continue to be the provider of
last resort in order to ensure the availability of universal electric service
in this Commonwealth.” Id. 

other states that have restructured their electric markets have determined to
“quarantine the monopoly” in order to ensure competition functioned properly. See Michael Giberson & Lynn
Kiesling, The Need for Electricity Retail
Market Reforms
, Regulation, Fall 2017, at 34, 37. This is not
the path that Pennsylvania chose. Instead, the Commonwealth codified a policy
in which the residual poles-and-wires company—sometimes called a “default
provider”—would continue to provide energy-supply service, at least to customers
who did not elect to choose a third-party provider. PECO Energy Company
(“PECO”) is one such default provider.

Commonwealth’s policy choice to have a default provider comes with an obvious
risk. The residual monopoly may seek to underprice its energy-supply offering,
which is subject to competition, by allocating more costs to the
poles-and-wires service, which its monopoly customers cannot help but to
purchase short of cutting the cord altogether. The Choice Act, anticipating
this danger, provided that the “commission shall require that restructuring of
the electric utility industry be implemented in a manner that does not
unreasonably discriminate against one customer class to the benefit of
another.” 66 Pa. Cons.
Stat. § 2804(7). Indeed, the act
specifically imposed an affirmative duty on the PUC to examine “all default
service rates shall be reviewed by the commission to ensure that the costs of
providing service to each customer class are not subsidized by any other
class.” Id. § 2807(e)(7). 

order to achieve the purposes of the Choice Act, courts and regulators must
vigilantly police the boundaries between the competitive and non-competitive
sectors of the electricity system. This Court recognized this truth in Lloyd v. Pa. Pub. Util. Comm’n, 904 A.2d
1010 (Pa. Cmmw. Ct. 2006), when it noted that the Commission should not allow
“one class of customers to subsidize the cost of service for another class of
customers over an extended period of time.” Id.
at 1020.  

the act of setting default rates—as the PUC is charged to do in the instant
proceeding—can become a self-fulfilling prophecy of a default choice. If
default provider rates do not reflect the actual costs of serving customers who
do not choose a third-party supplier, then customers do not have a true choice.
Instead, competitors that do not have a monopoly function to sop up costs must
lay the full freight of overhead costs on the rates they would charge
customers, making the default provider’s prices look more attractive by
comparison. This results in a situation where “default service customers are
misled about their retail market options and thus, frequently remain with their
incumbent utility” even where they would not do so absent the subsidy. See Frank Lacey, Default Service Pricing – The Flaw and the Fix, 32 Electricity J. 3,
5 (2019). Such an outcome would be contrary to “the overarching goal of the
Choice Act,” which “is competition.” Coal.
for Affordable Util. Servs. & Energy Efficiency in Pa. v. Pa. Pub. Util. Comm’n
120 A.3d 1087, 1101 (Pa. Cmmw. Ct. 2015). 

  1. Allowing
    Allocation of All Indirect Costs to Monopoly Services is Inconsistent with the
    Choice Act 

way to shift costs into the monopoly rates charged to all distribution
customers is through an inaccurate accounting of indirect costs. Any business
providing electric service has to incur certain indirect costs, such as costs
for overhead, billing, and customer service. Such customer-service and
administrative costs have traditionally been recognized as distinct from costs
for distribution and should be allocated differently. See Nat’l Ass’n of Regulated Util. Comm’rs, Electricity Utility Cost Allocation Manual 20–22 (Jan. 1992).

decision of how to allocate administrative and customer-services costs can have
a significant impact on the competitiveness of a default provider’s retail
service. If the costs of these services are completely allocated to
distribution services (and thus paid for by all electric customers, including those
who do not use the utility as their default service provider), the default
provider could deliver retail electric services at a lower cost than it would
be able to if it was a stand-alone provider. If this is allowed, the default provider
gains an unfair advantage.  

The impact of these allocation decisions can be substantial.
One recent research study found that:

The indirect costs
incurred to provide service to default service customers amount to billions of
dollars annually and are being paid by distribution customers. This distorts
significantly the retail energy markets, providing the incumbent default service
provider with a pricing advantage that allows them to maintain market dominance
in the residential and small commercial customer segments.

supra, at 5. Testimony presented to
the PUC suggests that allowing allocation of all administrative and customer
service costs to residential distribution service is the equivalent of a
subsidy of 1.25 cents per kilowatt hour to residential customers of the default
provider’s competitive business.   Direct Testimony of Chris Peterson on Behalf of NRG Energy
Company, Pa. Pub. Util. Comm’n v. Phila. Energy Co., No. R-2018-3000164 (June
26, 2018).

is happening here is obvious: PECO is underpricing a service offering that is
subject to competition and shifting those costs to rates that all customers
must pay. Surely this is more convenient to PECO, which faces neither a risk of
losing customers to competitors nor of under-recovering the costs of offering
energy supply service to Pennsylvanians. But neither the PUC nor this Court
should countenance it. 

are numerous ways of reasonably allocating administrative and customer-service
costs between distribution and retail electric services. But allocating all of
those costs to distribution services is inherently unreasonable and not
supported by any evidence in this record. The determination to let PECO
allocate 100 percent of its indirect costs to its monopoly services requires a
judicial response to vindicate the Commonwealth’s clearly announced policy.


         For the foregoing reasons, amicus curiae supports the Petition to vacate the PUC’s determination as to the allocation of indirect costs and to remand the proceeding to the PUC for future action consistent with this Court’s Order.  

Josiah Neeley                                        

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