COMMONWEALTH OF HOUSE OF REPRESENTATIVES

CONSUMER AFFAIRS COMMITTEE HEARING

STATE CAPITOL HARRISBURG, PA

MAIN CAPITOL BUILDING ROOM 14 0, MAJORITY CAUCUS ROOM

THURSDAY, FEBRUARY 7, 2 013 9:02 A.M.

PRESENTATION ON REGULATED UTILITY INDUSTRY

BEFORE: HONORABLE ROBERT W. GODSHALL, MAJORITY CHAIRMAN HONORABLE SHERYL M. DELOZIER HONORABLE BRIAN L. ELLIS HONORABLE WARREN KAMPF HONORABLE THOMAS H. KILLION HONORABLE KURT A. MASSER HONORABLE HONORABLE MARCY TOEPEL HONORABLE PETER J. DALEY, DEMOCRATIC CHAIRMAN HONORABLE HONORABLE TINA M. DAVIS HONORABLE HONORABLE ERIN C. MOLCHANY

Pennsylvania House of Representatives Commonwealth of Pennsylvania 2

COMMITTEE STAFF PRESENT: AMANDA N. RUMSEY MAJORITY EXECUTIVE DIRECTOR JANE M. HUGENDUBLER MAJORITY LEGISLATIVE ADMINISTRATIVE ASSISTANT

ELIZABETH A. ROSENTEL DEMOCRATIC EXECUTIVE DIRECTOR BRETT J. BIGGICA DEMOCRATIC RESEARCH ANALYST JERRY J. LIVINGSTON DEMOCRATIC RESEARCH ANALYST JAMIE L. MACON DEMOCRATIC LEGISLATIVE ASSISTANT 3

I N D E X

TESTIFIERS

* * *

NAME PAGE

STEVEN J. SAMARA PRESIDENT, PA TELEPHONE ASSOCIATION...... 7

FRANK P. BUZYDLOWSKI DIRECTOR, STATE GOVERNMENT RELATIONS, VERIZON COMMUNICATIONS...... 19

TERRANCE J. FITZPATRICK PRESIDENT AND CEO, ENERGY ASSOCIATION OF PA...... 29

BOB BARKANIC SENIOR DIRECTOR OF ENERGY POLICY, PPL ENERGYPLUS; VICE CHAIR, RETAIL ENERGY SUPPLY ASSOCIATION-PA...... 38

TANYA J. McCLOSKEY ACTING CONSUMER ADVOCATE, OFFICE OF CONSUMER ADVOCATE...... 4 8

ROBERT F. POWELSON CHAIRMAN, PA PUBLIC UTILITY COMMISSION...... 56

JT HAND CHIEF OPERATING OFFICER, YORK WATER COMPANY; CHAIR, NATIONAL ASSOCIATION OF WATER COMPANIES-PA...... 77

STEVE TAGERT PRESIDENT, AQUA PENNSYLVANIA...... 82 4

1 P R O C E E D I N G S

2 * * *

3 MAJORITY CHAIRMAN GODSHALL: Good morning. The

4 hour of 9 o'clock having arrived, I'd like to call the

5 meeting to order.

6 This is a hearing on the regulated utility

7 industry and is being recorded. And we want to get started

8 with having the Members introduce themselves and where

9 they're from. We have a number of new Members.

10 We'll start on my left.

11 REPRESENTATIVE PICKETT: Tina Pickett. I'm from

12 Bradford, Sullivan, and Susquehanna Counties.

13 MAJORITY CHAIRMAN GODSHALL: Warren.

14 REPRESENTATIVE KAMPF: Warren Kampf, Chester and

15 Montgomery Counties.

16 REPRESENTATIVE TOEPEL: Marcy Toepel, Montgomery

17 County.

18 REPRESENTATIVE MOLCHANY: ,

19 Allegheny County.

20 REPRESENTATIVE KIM: Good morning.

21 My name is Patty Kim, here in Harrisburg, part of

22 Dauphin County.

23 REPRESENTATIVE MASSER: ,

24 107th District, Northumberland, Montour, and Columbia

25 Counties. 5

1 REPRESENTATIVE DAVIS: Good morning.

2 , Bucks County.

3 REPRESENTATIVE ELLIS: Brian Ellis, Butler

4 County.

5 REPRESENTATIVE BURNS: Frank Burns, Cambria

6 County.

7 MAJORITY CHAIRMAN GODSHALL: And I guess at this

8 point I have to introduce my new Co-Chairman, Peter Daley.

9 MINORITY CHAIRMAN DALEY: Thank you,

10 Mr. Chairman.

11 You didn't have to introduce me, but I was going

12 to probably just butt in if you hadn't.

13 Mr. Chairman, it's a pleasure to be serving with

14 you as the Chairman on this for the Democrats. I mean, I

15 look at the composition of the Committee. We have some

16 really excellent Members of the Legislature. I'm looking

17 forward with enthusiasm to be working with you as a partner

18 on many issues over the next 2 years, and I want to thank

19 you for, since we have been here together for 31 years,

20 came in at the same time, I knew someday we'd probably be

21 sitting together, working together, in this capacity.

22 Thank you, Mr. Chairman.

23 MAJORITY CHAIRMAN GODSHALL: Well, when I said

24 "introduce," I know there are some Members out here that

25 are new to me and also I thought would be new to you. And 6

1 the other thing I would like to say, you can see there's a

2 lot of interest in what we do in the Committee with the

3 attendance here this morning.

4 So I would just like to say, traditionally,

5 regulated utilities are subject to certification and

6 oversight by the Public Utility Commission. The industry

7 has undergone many changes over the years with the advent

8 of electricity and natural gas competition and the

9 development of technology that has completely changed how

10 we think about telecommunications.

11 Regulated utilities are generally the companies

12 we think of when we pay our electric, gas, water, and

13 telephone bills. Today, we'll be hearing from

14 representatives from each of these industries as well as

15 electric and natural gas suppliers. I'm certain that the

16 information presented today will be informative and will

17 provide valuable insight into these industries.

18 There will be an opportunity for questions

19 following each panel, and I ask that Members please hold

20 their questions until that time.

21

22 PANEL 1 - TELECOMMUNICATIONS

23

24 MAJORITY CHAIRMAN GODSHALL: So with that, we're

25 going to get started, and Panel No. 1 is 7

1 telecommunications: Steve Samara, the Pennsylvania

2 Telephone Association, and Frank Buzydlowski from the State

3 Government Relations from Verizon.

4 Gentlemen, whenever you're ready.

5 MR. SAMARA: Good morning, Chairman Godshall.

6 Chairman Daley, welcome.

7 Welcome to the new Members of the Committee. I

8 don't know if you picked this Committee or you were

9 assigned this Committee, but you're going to have some fun,

10 I guarantee you. You've got some outstanding leadership

11 and some terrific staff to work with. So I look forward to

12 the next 2 years working with all of you.

13 My name is Steve Samara. I'm President of the

14 Pennsylvania Telephone Association. PTA is an organization

15 which represents the interests of the State's rural local

16 exchange companies, or RLECs, and you'll get used to the

17 abbreviations and acronyms and buzz words. And those

18 aren't words that come out of Buzz's mouth; that's just a

19 general notion. We do have a Newton's Telecom Dictionary

20 which is about 3 inches thick. I didn't bring it with me

21 because, you know, my back is getting a little weaker as

22 the years go on. But it's out of date as soon as it's

23 printed, but it's a whole different lexicon with the telcom

24 industry, and you'll learn that going forward.

25 But I want to give kudos to Chairman Godshall for 8

1 holding this hearing. I think it's important at the outset

2 of every legislative session, even for the returning

3 Members of the Committee, to have a refresher on some of

4 the things that are of interest to the telcom industry and

5 for the new Members of the Committee to kind of whet your

6 appetite on what is going on in telcom. So I look forward

7 to working with you.

8 In preparation for this hearing, I did look back

9 at my testimony from 2 years ago and there wasn't, quite

10 frankly, much I could use anymore. This is a very dynamic

11 and challenging and volatile time in the RLEC industry.

12 And we'll look ahead here this morning, but I want to spend

13 a little time looking back and giving an introduction to

14 our industry and what we've been doing on behalf of our

15 customers and your constituents and what we may see going

16 forward as priorities for the PTA member companies.

17 This is our map. Some of you may have seen it;

18 some of you may have not. The colored areas are the rural

19 local exchange companies in the State. The white areas are

20 Verizon. These are available in the PTA gift shop for a

21 nominal charge, but -- actually, we can get them to you;

22 that's fine.

23 But I do that because there are lots of folks

24 who, you know, probably to Buzz's benefit, or maybe not,

25 think that Verizon is the only carrier in the State, and 9

1 there's a bunch of them. There's a bunch of them. We

2 range in size from several hundred thousand access line

3 companies to some real mom-and-pops that just have less

4 than a thousand access lines in the State. All of these

5 companies have deployed or are deploying broadband in

6 accordance with Act 183 and are offering a variety of

7 services in addition to traditional dial tone.

8 I was able to glean something from my testimony

9 from 2 years ago that I will repeat here: "My member

10 companies are, in many respects, as advanced as any sitting

11 before you here today and are truly telecommunications, as

12 opposed to simply telephone companies. All of us are in

13 pursuit of the customer who wants telephony, video,

14 Internet, data, and mobile services." I know this

15 Committee is going to be looking at all of the sectors of

16 the industries that come before them, but we're all after

17 the same customer. In many respects, we are more similar

18 than dissimilar in trying to provide cutting-edge services

19 to folks. But, you know, this hearing is designed to

20 receive testimony from regulated utilities, so let me tell

21 you how the RLECs fit into that dynamic.

22 My member companies continue to be regulated by

23 the PUC, as the Chairman mentioned, albeit under a more

24 streamlined version of regulation since the passage of

25 Act 183 in 2004. We'll talk a little bit about that act 10

1 going forward. But that statute was a compact between the

2 incumbent local telephone companies, the Legislature, and

3 the commission, which lessened regulation in exchange for

4 universal broadband deployment in their service

5 territories.

6 Specifically, the act provided for a menu of

7 network modernization options for rural telcos, which

8 include a universal broadband deployment by the end of 2008

9 or 2013 with regulatory obligations weighted accordingly.

10 In other words, the more aggressive you agreed to deploy

11 broadband, the greater regulatory goodies you got, so

12 that's the way that worked.

13 Most of the PTA member companies agreed to meet

14 that universal bogey by the end of 2008, while two

15 companies will reach that universal deployment threshold by

16 the end of this calendar year, and those two are over

17 95 percent complete with their efforts. The latter group,

18 the 2013 group, is also required to help fund a variety of

19 programs, including the Broadband Fund, the Education Fund,

20 and participate in the Bona Fide Retail Request Program, or

21 the BFRR, which some of you may have heard about.

22 And I want to spend a little time talking about

23 the BFRR, because it has turned out to be more than just

24 "window dressing." When we were talking about Act 183

25 several years ago, there was no one who thought that there 11

1 would be any level of local aggregation for demand, but it

2 has turned out to be a real popular program. It allows a

3 minimal level of interest and demand aggregated at the

4 local level, 50 retail access lines, or 25 percent of a

5 community, which is defined in the act as those folks

6 served by a central office switch or a remote terminal.

7 So what that translates into is, you could have a

8 half a dozen people saying they want broadband. They

9 demonstrate that interest and agree to sign up for a year

10 of broadband service with the company, demonstrate that to

11 the company, and then we have to refocus our efforts to get

12 that broadband to them.

13 We've had hundreds of these statewide. I know

14 Verizon has had probably thousands of them statewide. It

15 has really turned out to be a nice way for the companies,

16 as opposed to just, you know, building it and hope they

17 come, to direct their deployment to areas where they know

18 there is going to be some interest.

19 So if you have questions about BFRR, I'm happy to

20 talk about that, but it has been a really popular program,

21 I think, for customers and for my member companies.

22 The deployment figures that I mentioned

23 previously are important to remember, because decisions on

24 funding broadband deployment nationally are, in part, based

25 upon how many of your constituents are currently capable of 12

1 subscribing to broadband services. And to the best of my

2 knowledge, Act 183, we still have the most aggressive

3 broadband deployment statute in the nation.

4 You will no doubt, as you get into telcom and

5 start looking at broadband and these issues, you'll see

6 maps. There are Federal maps. There are State maps. I

7 cringe a little bit when someone opens a conversation with

8 me, "Well, I saw a broadband map," because historically

9 they're not colored in. I mean, my guys, my 2008 guys and

10 certainly my 2013 guys, you know, we want those service

11 territories colored in. We're done. You know, we're done

12 with that part of it, you know, statutorily. We're going

13 above and beyond that, but I have yet to see a map at any

14 level that colors us in.

15 So if you see a map and you're questioning how

16 that jives with Act 183 and where broadband is available

17 and where it isn't, please give me a call. I'm happy to

18 take a look at those. But, you know, I always bristle a

19 little bit when someone takes a look at a map and it

20 doesn't reflect what we've done here under Act 183.

21 With all that being said, my member companies

22 continue to be regulated by the PUC at levels that I would

23 consider to be more stringent than others. We are

24 providers of last resort. We are subject to PUC regs, as I

25 said, albeit a little more streamlined than they were 13

1 several years ago, but we're always interested in taking a

2 look at deregulation efforts that would allow us to be more

3 competitive for the folks we're competing with.

4 A little bit more about broadband in

5 Pennsylvania.

6 While Pennsylvania's RLECs have met or are

7 meeting the statutory deployment requirements of the act,

8 the number of consumers actually subscribing to that

9 service needs to increase. This notion that you build it

10 and they will come is a nice notion, but it doesn't always

11 translate into reality. We'd love for take rates to be

12 better. Just because we have broadband out there doesn't

13 mean everyone is subscribing to it, and we need to get to

14 some level of subscription rates before this makes business

15 sense, quite frankly.

16 So to the PUC's credit, they recognized several

17 years ago that take rates were not what they should be.

18 They reached out to the industry and worked cooperatively

19 with us to work on that situation, and what we came up with

20 is kind of an interesting program. We worked with the

21 commission and used funding from the Council for Utility

22 Choice to set up the "I Do More With High Speed Internet"

23 Website and the "Internet All Stars" campaign.

24 It's idomorewithhighspeedinternet.com. I know

25 that doesn't really roll right off the tongue, but it's a 14

1 good site. I'd encourage you to take a look at it. The

2 concept is simple: We solicit perspective from citizens

3 who use broadband services in a variety of interesting ways

4 and disseminate that information to the public in order

5 that the benefits of the Internet become apparent to a

6 wider population.

7 So I would encourage you to take a peek at it.

8 There are some interesting folks on there that are

9 receiving services from my member companies, and they're

10 using it in lots of interesting ways, from some small

11 mom-and-pops to just folks who just want to stay connected

12 to family and friends, and the commission has done a real

13 nice job with that.

14 They unveiled the campaign several months ago,

15 and Commission Chairman Rob Powelson said at the time in a

16 news release that "High speed Internet service can offer a

17 variety of benefits to users, including access to job

18 opportunities, health information, and government services.

19 This campaign demonstrates just how valuable the service is

20 for Pennsylvanians."

21 I would be remiss if I didn't highlight some

22 recent regulatory developments and how that is kind of

23 flavoring where we are today and some of the things that we

24 are interested in as a rural community.

25 A little over a year ago, the Federal 15

1 Communications Commission adopted its landmark Intercarrier

2 Compensation/Universal Service Fund Order -- CAF Order;

3 it's known by a number of different names -- which is

4 causing a seismic shift in how telephone companies exchange

5 payments with each other -- access charges -- and how

6 services are rendered and how they receive support for

7 keeping basic phone service affordable.

8 It's about an 800-page order. Even the summaries

9 are 25 to 30, 40 pages. The cliff notes are 15 pages.

10 They're all 10 pages more than even I want to read about.

11 But regardless of how you feel about the order, I believe

12 it' s safe to say that the frameworks developed by Congress

13 and regulatory bodies over the past several decades to

14 ensure that basic service is affordable are really being

15 turned on their heads. So you guys need to be aware of it

16 because it's affecting your constituents, my guys need to

17 be aware of it because it's affecting our customers, and

18 we'll keep you apprised of what's developing with that

19 order going forward.

20 There have been several petitions for

21 reconsideration and clarification of the order. The order

22 is on appeal in Federal court. It will take a little while

23 for all these things to kind of work through the system.

24 But there are provisions of that order already being

25 implemented, and they have an impact, and it all trickles 16

1 down to the bottom line, and you folks need to be aware of

2 that.

3 In closing with "Priorities, " I didn't

4 necessarily call them legislative priorities, but they're

5 things that we're interested in going forward.

6 A couple issues which you guys have taken a peek

7 at over the past couple of years -- copper theft. Copper

8 theft is still an issue for my folks. It's amazing what

9 you can do with a dinosaur or infrastructure equipment. I

10 mean, you can do a lot over copper that you couldn't years

11 ago. And a lot of my member companies are using fiber to

12 deploy the network, but there's still a lot of copper in

13 the ground. It's reliable, it works, and you can do a lot

14 more with it than you thought you could. And the folks who

15 want to make a couple sheckles out of copper figure they

16 can do a lot more with it than the telephone companies can,

17 because they come to our pole yards and strip the

18 insulation off and sell it, and it's a pretty lucrative

19 business until you get caught. So it's something we

20 obviously pay a lot of attention to.

21 We're generally interested in all of the business

22 issues that the General Assembly is going to be taking a

23 peek at. We're telcos, but we're still business people,

24 and small business people -- business taxation issues,

25 unemployment reform, workers' comp reform -- all of those 17

1 things we keep a finger to the pulse of because they impact

2 us on a daily basis.

3 There are also issues such as access avoidance

4 and call completion, which have risen to national concern

5 and focus, quite frankly. We do have companies within the

6 State, continue to have companies within the State who just

7 want a free ride to use our networks for nothing.

8 We had a bill introduced two sessions ago that

9 dealt with what we call the bad actors, the folks who found

10 wiggle room within the current State regulations and

11 legislation to, you know, ride on our networks for free.

12 And when you start taking a look at call paths between

13 originating and terminating carriers, there are a lot of

14 folks between a call between one of my member companies and

15 Verizon. There are intermediate carriers that are involved

16 in least-cost routing to get calls where they need to get,

17 and there are opportunities for arbitrage and there are

18 opportunities for getting a free ride.

19 The PUC, to its credit, several years ago stopped

20 one of the most notorious carriers from doing that. And it

21 is, quite frankly, difficult to legislate against the

22 defrauders without capturing other folks in that net, but

23 it's something we continue to want to take a run at.

24 On the call-completion issue, what you might hear

25 from folks is, what we're getting, and we're seeing this on 18

1 a national level, is originating carriers using an

2 intermediate carrier to get a call completed, and, you

3 know, if that intermediate carrier decides that they can go

4 a cheaper way to get the call completed, they will

5 eventually not terminate the call to where it's supposed to

6 go. They'll call from Florida to Pennsylvania, for

7 instance, and it will never show up. You know, the person

8 picking up the phone making the call will dial a call; the

9 person at the end of it will never receive the call. And

10 many times that call, because of those intermediate

11 providers, will never even hit our switch, so we don't even

12 know that the call was attempted and failed. It never even

13 hit my guy's network, but my guys are the ones on the hook

14 for not completing the call, so you'll see some complaints

15 rising about that.

16 The FCC is taking a look at that. It's something

17 I hope will be solved at a national level. But these are

18 the kinds of nuances and things that, you know, you're used

19 to picking up the phone, getting a dial tone, making a

20 call, and having the call completed, but there are lots of

21 other elements in that equation that we'll be informing you

22 guys and educating you guys about that you need to be aware

23 of, because obviously they're your constituents and our

24 customers.

25 But again, I appreciate the opportunity to be 19

1 here. We didn't get down in the weeds too much because we

2 have limited time here, but thank you, Chairman Godshall,

3 Chairman Daley. I'd be happy to answer any questions you

4 guys may have.

5 MAJORITY CHAIRMAN GODSHALL: Okay. At this

6 point, Frank, we'll go ahead with Verizon.

7 MR. BUZYDLOWSKI: Okay. Thank you. Thank you,

8 Chairman Godshall.

9 Good morning, Mr. Chairman, Chairman Daley,

10 Members of the Committee. My name is Frank Buzydlowski,

11 and I will try to avoid as many buzz words as I can in my

12 testimony this morning.

13 I'm Director of State Government Relations for

14 Verizon, and it is my honor to represent our companies to

15 the Commonwealth of Pennsylvania.

16 On behalf of our 31,000 employees and retirees

17 who reside in our great State, I welcome the opportunity

18 to share with you our perspective on today's

19 telecommunications industry, an industry that has undergone

20 dramatic change over the past few years.

21 Over the course of my career with Verizon, I have

22 personally witnessed the choices available to the "average"

23 residential customer transformed from yesterday's plain old

24 telephone service delivered over copper wire by only one

25 provider to today’s myriad of landline and wireless voice, 20

1 broadband, and other fixed and mobile communications

2 technologies available from an unlimited number of

3 competitors.

4 Today’s customer demands an integrated array of

5 voice, Internet, and video services, and the competitors

6 ready to deliver those services are abundant. Amid this

7 intense competition, Verizon has transformed itself from

8 "the phone company” to a sophisticated communications

9 provider delivering cutting-edge services that people

10 demand. And we have invested billions of dollars in this

11 State’s wireline and wireless network infrastructure to

12 provide Pennsylvanians with a first-class network designed

13 to handle the next-generation products and services that

14 are at the heart of Pennsylvania’s competitiveness.

15 To understand the nature of our industry today,

16 it is important to appreciate the ever-expanding

17 competitive alternatives that consumers have for their

18 communications needs. As of the end of 2011, one in three

19 households in the United States was wireless only,

20 eliminating landline service entirely, while another

21 16 percent consider a cell phone to be their primary line.

22 And those customers who continue to use landlines

23 have plenty of choices besides Verizon. The FCC reports

24 that as of year-end 2011, CLECs, which are competitive

25 local exchange carriers, and interconnected VoIP, or voice 21

1 over Internet, providers served 41 percent of the landlines

2 in Pennsylvania -- 41 percent of the landlines -- a

3 percentage that continues to grow.

4 And the FCC also reports that Pennsylvanians are

5 increasingly relying on the Internet to communicate. As of

6 June 2011, Pennsylvanians had over 2 million cable modem

7 Internet connections, close to 4 ^ million mobile wireless

8 Internet connections, and nearly 1.2 million high-speed DSL

9 Internet connections.

10 This trend away from traditional landline service

11 is reflected in Verizon’s business as well. In less than a

12 decade, we have lost over half of our Pennsylvania

13 landlines as residence and business customers have switched

14 to cable, wireless, VoIP and CLEC competitors, dropped

15 their second lines, and in many cases stopped wireline

16 service altogether in favor of making their wireless phones

17 their only phones.

18 Today, broadband, wireless, and global Internet

19 Protocol, or IP, technologies are a major engine of

20 Pennsylvania’s economy, and Verizon is a leader in

21 delivering those communications innovations to residences,

22 businesses, and government. Our skilled and dedicated

23 employees build and operate the most reliable and advanced

24 network, serving more than 2 ^ million landlines in this

25 State. We also provide broadband services through our 22

1 FiOS, DSL, and wireless products. We are a leading

2 provider of global information technology, security and

3 communications solutions, and we deploy the nation’s most

4 advanced fiber-optic network. You'll see some examples at

5 the bottom of that page, our FiOS, our high-speed Internet,

6 and our wireless products and services that are available

7 in this State.

8 And in this State, we have deployed over

9 3.4 million miles of fiber-optic cable, and that number

10 continues to grow every day. Our interoffice facilities

11 are 100 percent fiber-optic, and we are extending our fiber

12 farther and farther into the network by using it to connect

13 our central offices to remote terminals that bring

14 high-speed Internet technology to rural communities,

15 providing residents and businesses in those areas another,

16 and in many cases the first, choice for their broadband

17 service.

18 Verizon has also made available to many

19 Pennsylvania customers higher download speeds of 10 to

20 15 megabits per second. Fiber optic cable is also being

21 used to deploy FiOS, which brings video as well as

22 high-speed Internet services and telecommunications to our

23 customers.

24 And Verizon Wireless 4G LTE broadband will

25 provide a new technology for high-speed Internet service, 23

1 especially in rural Pennsylvania. Verizon Wireless

2 customers use their 4G LTE-enabled devices to surf the Web,

3 post status updates and photos, share music, and download

4 files at speeds up to 10 times faster than customers on

5 3G networks. Verizon Wireless customers can also take

6 advantage of HomeFusion Broadband to deliver high-speed,

7 in-home Internet access, particularly in areas where

8 land-based Internet options are limited or are not

9 currently available.

10 Verizon is making the investment to bring this

11 cutting-edge 4G LTE wireless broadband network to parts of

12 rural Pennsylvania to fulfill Chapter 30 broadband

13 deployment commitments. You heard Steve refer to his

14 membership and their deployment, and Verizon is on track to

15 this completion also, using the appropriate technology to

16 deliver the services as fast as possible. Since 1993, our

17 network capital investments for these and other upgrades

18 exceed $15 billion -- that's just in Pennsylvania -­

19 including more than $683 million invested last year alone.

20 And the latest, most advanced utilization of our

21 broadband network is the development of information

22 communications technology to provide "cloud" services, such

23 as the remote sharing of medical records, which helps to

24 control costs and reduce errors. In addition, ICT and

25 broadband technologies provide the ability to reduce energy 24

1 consumption via "smart grid" home monitoring and control

2 applications.

3 Verizon is also unwavering in its commitment to

4 community service. The Verizon Foundation is focused on

5 using technology to solve critical social issues in the

6 areas of sustainability, education, and health care.

7 Last year alone, the foundation contributed more than

8 $1.1 million to nonprofit groups in Pennsylvania.

9 In addition, Verizon employees volunteered more

10 than 25,000 hours and raised approximately $1 million for

11 nonprofit groups through the Verizon Volunteer Program.

12 Through the Verizon Check Into Literacy Program, $540,000

13 was donated to 50 Pennsylvania nonprofits, and through

14 Verizon’s participation in the EITC Program, 30 nonprofits

15 were recipients of $200,000.

16 We are proud of our accomplishments in network

17 enhancements, high-speed Internet expansion, and community

18 support, especially since we have made this progress during

19 a time of incredible transformation in our business. Your

20 Committee and this General Assembly have been instrumental

21 over the years in encouraging competition and technological

22 advances in the communications industry by passing

23 legislation to keep pace with those changes.

24 In 1993, you passed HB 84, the original

25 Chapter 30, which first recognized the importance of 25

1 lightening regulation for some competitive telephone

2 services and encouraging deployment of the advanced

3 network. In 2004, you passed HB 30 and took another step

4 toward recognizing the diminished need for regulation once

5 competition has gained a foothold in the market. And in

6 2008, you recognized the additional changes that had

7 occurred in our industry and passed SB 1000 to assure that

8 the Internet remains free from unnecessary regulation and

9 to incent Voice over Internet service development.

10 But with the recent explosion in competitive

11 alternatives, available services, and new technologies, it

12 is time once again for the law in Pennsylvania to keep pace

13 with the industry. Outdated regulatory requirements in a

14 competitive environment hold back development and harm

15 consumer interests. The future success of our industry

16 depends on continued legislative and regulatory policies

17 that foster an even more innovative and competitive

18 marketplace.

19 Now more than ever before, consumers are in the

20 driver’s seat to select the products, services, and

21 technologies that meet their needs and their budget. The

22 result is robust competition that is financially beneficial

23 to consumers. Thus, in looking forward, we encourage the

24 Members of this Committee to consider new legislation to

25 provide regulatory parity in the marketplace by adopting 26

1 policies that continue to remove unneeded and outdated

2 regulation. Continuing the work that you started with

3 Chapter 30 and the VoIP Freedom Act will allow Pennsylvania

4 to remain a national leader in encouraging growth and

5 innovation in our industry.

6 Last June, Representative Scott Boyd introduced a

7 bill to continue that work. Of course, it was very late in

8 the session and it was not expected to move, but it teed up

9 the issue for the new Legislature this year, and now we

10 hope that a revised version of that bill will be introduced

11 by a Member of this Committee in the near future. We look

12 forward to working with Chairman Godshall and Chairman

13 Daley and the Members of this Committee to help move that

14 legislation to become law this session.

15 Thank you for this opportunity to appear before

16 you, and I'll be happy to answer any questions that you may

17 have.

18 MAJORITY CHAIRMAN GODSHALL: Thank you.

19 And I'd also like to welcome Representative

20 Delozier and also Representative Killion, who are in

21 attendance.

22 And there's a question from Representative

23 Pickett.

24 REPRESENTATIVE PICKETT: Thank you.

25 I think it may end up just being a comment, but, 27

1 Steve, when you showed the map and I look at my area

2 specifically where the rural territories are and the

3 companies are, how does that work for you? What kind of a

4 challenge is that? Because I can carry my Verizon-powered

5 phone into that area and use it, so in effect that map

6 isn't really the whole story.

7 MR. SAMARA: Well, the map is the traditional

8 franchise-service territories of the landline companies,

9 yes. It's becoming, I think, less and less meaningful,

10 quite frankly, in today's day and age with all the other

11 technologies that are out there. But I use it as a tool

12 just to show people that geographically from a historical

13 perspective, the landline service that my company has

14 offered does -- well, we don't have, obviously, the lion's

15 share of the access lines. We do have traditional

16 provider-of-last-resort responsibilities in a lot of rural

17 areas of the Commonwealth, and it's a pretty wide swath of

18 territory, quite frankly.

19 So your point, Representative Pickett, is well

20 taken, that those lines are continuing to blur as other

21 technologies come to fruition. And if you look at what the

22 satellite providers are showing, they have their own, you

23 know, concentric circles of areas where they can hit, and

24 the wireless guys, the same deal. But from a traditional

25 "here's where we have to serve because we're still a 28

1 regulated entity," that's what that map shows, and I think

2 it's important to remember that, you know, we're still the

3 only regulated, State-regulated entity in the telecom

4 sector that's out there doing that. And those are the

5 areas that we had to reach with broadband under Act 183 and

6 that my member companies have reached or are reaching.

7 MAJORITY CHAIRMAN GODSHALL: Thank you very much,

8 and I appreciate your testimony. And I will have to tell

9 you that when we get to that cloud stuff, I sort of delete

10 that. You know, I've caught up on the rest, but the cloud

11 information I haven't bothered with so far. Maybe sometime

12 you can tell me why this is important.

13 MR. BUZYDLOWSKI: I'd be happy to.

14 MAJORITY CHAIRMAN GODSHALL: Okay.

15

16 PANEL 2 - ELECTRIC AND NATURAL GAS

17

18 MAJORITY CHAIRMAN GODSHALL: At this point we

19 want to go with the next panel. It will be the electric

20 and natural gas. Terry Fitzpatrick, Energy Association of

21 Pennsylvania, and Bob Barkanic, Vice Chair of RESA, the

22 Retail Energy Supply Association, will be our testifiers.

23 Gentlemen, when you're ready. And at this point,

24 we're right on schedule, and I want to try to keep that

25 way, if we can. 29

1 MR. FITZPATRICK: Good morning.

2 Good morning, Chairman Godshall, Chairman Daley,

3 Members of the Committee. Thank you very much for the

4 opportunity to come here and talk with you today.

5 My name is Terry Fitzpatrick. I'm the President

6 of the Energy Association of Pennsylvania. We're a trade

7 association of electric and natural gas utilities operating

8 in the State.

9 We perform a few different functions: advocacy,

10 obviously, before the General Assembly and regulatory

11 agencies especially; in our case, the Public Utility

12 Commission. But I also want to emphasis, we do help our

13 member companies to share best practices and educate their

14 employees as well as employees of out-of-State utilities by

15 putting on educational conferences regarding operational

16 issues, both electric and gas, and consumer-service issues.

17 On page 3 of my presentation I listed our members

18 there. Pretty evenly split between electric utilities and

19 gas. We have 11 electrics and 12 gas companies. All of

20 them are investor-owned utilities with the exception of the

21 Gas Works, which is a municipal operation

22 owned by the city of Philadelphia.

23 Some quick facts regarding electric and natural

24 gas utilities on page 4 of my presentation.

25 Electric utilities are also known as electric 30

1 distribution companies, or EDCs. We distribute electricity

2 to roughly 6 million customers in Pennsylvania. That's

3 almost everybody. We employ 9,000 men and women in our

4 operations in Pennsylvania.

5 With respect to the gas utility members, they're

6 known as natural gas distribution companies, or NGDCs.

7 You're getting a lot of acronyms today, so I'm just going

8 to add to that a little bit. The gas utilities distribute

9 gas to just under 3 million customers in the State and

10 employ 5,200 citizens of Pennsylvania.

11 There's also a pie chart there on page 4 that I

12 think is important, something I go back to and refer to a

13 lot. It tells you basically how we heat our homes here in

14 Pennsylvania, and you'll see that just over half of the

15 homes are heated with natural gas and the remainder are

16 split between -- the other big sources are electricity and

17 heating oil or fuel oil and then a smattering of other

18 types of fuels.

19 What do electric utilities do? I tried to make

20 this as simple as possible. Sometimes electric utilities

21 are referred to as "wires" companies. They construct, own,

22 operate, and maintain the wires, poles, and other

23 infrastructure over which electricity is delivered to your

24 home or place of business.

25 Electric utilities also interact with customers 31

1 by providing bills, responding to service outages,

2 educating customers on safety and energy-efficiency

3 issues, and also administering universal service programs,

4 which are programs designed to help low-income and

5 payment-troubled customers maintain their service.

6 And last but not least, electric utilities serve

7 as the retail market's default supplier. Electric

8 utilities, it is important to remember, do not own power

9 plants anymore. At one time, they did. They were

10 vertically integrated. But since the passage of the

11 Competition Act in 1996, electric utilities no longer own

12 power plants. So in order to provide power to customers

13 who do not purchase it from an electric generation

14 supplier, the folks that Bob Barkanic is going to talk

15 about, we have to purchase it in the wholesale market in

16 order to sell it to customers, and when we do that, we do

17 not earn a profit on that part of the service that we might

18 provide. Any profit we earn is on the distribution portion

19 of the bill. But we do have an assurance that we will at

20 least get our costs back to provide that service.

21 Now, similarly on page 6, what do gas utilities

22 do, you'll see there are a lot of similarities here. Gas

23 utilities own the pipes that get the gas to your home.

24 They own and operate all the distribution pipeline, meters,

25 and other infrastructure that is necessary to get it from 32

1 the "city gate," which is an industry term -- the line of

2 demarcation between the interstate pipeline system and the

3 local gas utilities' local operations.

4 The gas utilities, like the electric utilities,

5 also interact with customers by providing bills, responding

6 to service issues, educating customers on safety and energy

7 efficiency, and again, administering these universal

8 service programs to help low-income customers stay on.

9 And finally, gas utilities also serve as the

10 retail market's "supplier of last resort." A little bit of

11 a different terminology, but a very similar concept. They

12 purchase gas in the wholesale market for customers who do

13 not choose to buy gas from a natural gas supplier. And

14 again, gas utilities do not earn a profit on that supply

15 service, but they do have an assurance that they will

16 recover their costs.

17 Sometimes a picture is worth a thousand words, so

18 on page 7 we presented a couple of pictures here that

19 depict how electricity and gas get from the point where

20 it's produced to the home or place of business where it's

21 used.

22 Then on page 8 I start talking about other

23 players in the industry, just to show where utilities fit

24 in to the overall industry structures. With regard to the

25 electric industry, the other main players are electric 33

1 generators. These are the companies that own power plants

2 that produce electricity. They sell their output into the

3 wholesale market, which is regulated by the Federal Energy

4 Regulatory Commission. And in the region that we're in,

5 those markets are administered by something, by an entity

6 called PJM, which is a regional transmission operator.

7 The other main player is the electric generation

8 suppliers. That's who Mr. Barkanic here represents, and

9 he'll be telling you more about that. But just very

10 briefly, these entities are licensed by the PUC and sell

11 supply in the competitive retail market that we've

12 established in Pennsylvania. They're subject to some rules

13 to protect consumers, but their prices are not regulated by

14 the PUC. It's basically, you know, they track the market

15 prices at which they can buy it, and they may compete based

16 on price or other factors such as environmental attributes

17 of their electricity.

18 Page 9, the other players in the gas industry, to

19 show where gas utilities fit in. Gas producers: Those are

20 the companies operating in the Marcellus Shale and in other

21 areas that own and operate the wells, and they sell into

22 the wholesale market, and all of that is subject to Federal

23 or FERC oversight.

24 You have the interstate and intrastate pipelines.

25 Intrastate are sometimes called the midstream companies 34

1 that transport gas from the well to the city gate, and

2 again, this is subject to FERC oversight.

3 And last but not least, you have the natural gas

4 suppliers. Those are the retail suppliers that sell gas to

5 retail customers, licensed by the PUC, and they compete on

6 the basis of price or other factors.

7 Starting on page 10, just some facts about demand

8 here. With electricity, I think it's interesting,

9 particularly the little chart on the side that talks about

10 the penetration of various electronic devices, some of

11 which have been around for decades, but others are more

12 recent, and you see the degree of penetration we're

13 getting. The basic, I think, theme here being, you know,

14 we're finding lots of uses, new uses, for electricity all

15 the time. But despite all that, despite that proliferation

16 of these products that use electricity, in Pennsylvania,

17 demand has grown at only an average annual rate of

18 1 percent over the last 15 years.

19 With respect to natural gas, on page 11, some

20 facts there. The bottom line: Natural gas comprises

21 almost one-fourth of all the energy used in the United

22 States, and of course with the development of the shale

23 plays, including the Marcellus, there is more and more

24 demand for gas now because the price is very favorable,

25 just basically reflecting the overall supply/demand 35

1 situation. So I think a lot of our public policy

2 discussions will be on how we can get the benefits of that

3 gas out to more of the citizens of Pennsylvania.

4 One page here, on page 12, I just give a little

5 more detail about the universal service programs I

6 mentioned earlier. These are safety net programs to help

7 customers who are having trouble keeping up with their

8 bills stay on utility service.

9 The total amount of spending for these programs,

10 just to give you an idea of their magnitude, in 2011, both

11 the electric and gas utilities, if you combine all the

12 spending, it was almost $450 million -- quite sizable.

13 The programs are paid for by other customers

14 largely, but there are some utility-funded programs as

15 well.

16 And the largest component of all those are the

17 customer assistance programs, or CAP programs as they're

18 known, which offer reduced bills to customers based on a

19 percentage of their income or some type of a rate discount.

20 They're similar, but not all of them are exactly the same

21 among the utilities. And there is an arrearage forgiveness

22 component to those as well, and that comprised about

23 $400 of the $450 million I mentioned earlier.

24 Now, in addition to those utility-run programs,

25 you also have the LIHEAP program, which provided 36

1 $209 million in benefits in 2011. And the LIHEAP program

2 is open to all sorts of customers, no matter what your

3 heating source is. So fuel-oil customers also have access

4 to LIHEAP whereas they wouldn't have access, of course, to

5 the utility-run universal service programs.

6 On page 13, I just list some of the policy issues

7 that I expect we'll be having discussions about in the

8 weeks and months to come.

9 First, reauthorization of the Responsible Utility

10 Customer Protection Act, Chapter 14. If you haven't heard

11 the words "Chapter 14" yet, you'll be hearing more about

12 them, I think, as we move through this session. This was a

13 law that was passed in 2004 but contained a sunset date,

14 and unless it's reauthorized, it expires at the end of

15 2014. Our industries are supporting reauthorization of

16 Chapter 14. There are a lot of commonsense provisions, we

17 think, in there. We think we have the data to support that

18 it has done the job and has been fair to customers. So

19 that's an issue we'll certainly be talking about.

20 Retail competition. There are ongoing

21 discussions about steps that could be taken to enhance

22 retail competition for both electricity and natural gas,

23 and of course as the utilities, the default suppliers,

24 we're involved in those discussions, and I think we'll be

25 talking more about that as the session goes on. 37

1 Alternative energy mandates. This is really an

2 ongoing issue since the passage of the Alternative Energy

3 Portfolio Standards Act in 2004. There is legislation

4 being proposed to increase the level of those mandates. We

5 get involved in that discussion. Even though we're assured

6 recovery, the electric utilities are assured recovery of

7 those costs, if an obligation is put on us to buy more of

8 that kind of power, we do have concerns for the long-term

9 impacts of the costs on customers, so we're engaged in that

10 debate as well.

11 Gas line extensions. With the proliferation of

12 the supplies from shale gas, there's more and more demand

13 from customers who do not have access to natural gas

14 service to be able to get that access. That involves some

15 very expensive extensions of gas utility lines. We want to

16 be part of that debate. We are looking at ways to get that

17 gas service out to more customers to extend the lines,

18 revisiting the policies that we've always used. At the

19 same time, there's a balance that's necessary there to make

20 sure that existing customers aren't forced to bear too much

21 of a burden to build lines to new areas, particularly when

22 we're under so much pressure to replace a lot of the older

23 infrastructure we have to put new pipes in for safety

24 reasons.

25 And finally, promoting new uses of natural gas 38

1 through a variety of methods, including but not limited to

2 public policy steps that could be taken to encourage more

3 use of natural gas in motor vehicles.

4 That concludes my presentation. I'll look

5 forward to answering questions.

6 MR. BARKANIC: Chairman Godshall, Chairman Daley,

7 Members, my name is Bob Barkanic. I am the Senior Director

8 of Energy Policy for PPL EnergyPlus, and I am here today

9 representing RESA, the Retail Energy Supply Association.

10 Mr. Chairman, if you don't know this by now

11 you'll know very quickly that this is the best committee

12 that you could be on. The staff, in particular, is

13 excellent, good to work with, cooperative on both sides of

14 the aisle, and I think our colleagues in Washington could

15 learn a great lesson if they saw the way the Chairman

16 cooperated in the deliberations before us.

17 MINORITY CHAIRMAN DALEY: That's exactly what

18 he's been saying.

19 MR. BARKANIC: It really is a great honor to be

20 able to be before you, especially being here with my friend

21 and colleague, Mr. Fitzpatrick.

22 I am here representing RESA today. RESA, I have

23 given you a presentation that I will not go through, but if

24 you have any questions, hopefully I'll be brief so we can

25 get to any questions that you might have. 39

1 RESA, with recent consolidation in the industry,

2 is 18 members. We are 18 members, and we are retail

3 suppliers for electricity and gas. Some of our companies,

4 and on one of the slides you can see the logos and the

5 company names of those companies, are very big companies -­

6 Fortune 500, Fortune 200, Fortune 100 companies.

7 We monitor legislation and regulatory proceedings

8 in 13 States and the District of Columbia. We here in

9 Pennsylvania are represented by the Triad association in

10 the person of Ron Boston. So if you see him, he better be

11 pushing our agenda.

12 I am here to talk about electricity. David

13 Cetola, who works for the Hess company, is the Gas Caucus

14 Chair. He was unable to be here today.

15 Terry mentioned that the Electricity Generation

16 Customer Choice and Competition Act of 1996 opened up these

17 markets for retail electricity. The purpose of that act is

18 to enable customers to make informed choices, and that's

19 what we are all about. We want to give customers choices

20 for whatever energy, electricity, gas product they need or

21 want.

22 So the Choice Act, for us, competition is great,

23 and in fact if you take anything away from what I say, the

24 three things would be that competition is good in this

25 industry. It has worked. It can be better, and we are 40

1 working with the Public Utility Commission and other

2 parties to make it better. That would be one.

3 Two would be, retail suppliers have added value

4 to Pennsylvania by saving customers money and by providing

5 innovative products and services that individual customers

6 need and want. That could be a renewable product. That

7 could be a time-of-use product. That could be a

8 demand-response product. That could be any kind of a

9 product. It's the customer's choice, which is, I think,

10 where the strength of the program comes.

11 And the third thing is that the Pennsylvania PUC

12 has done a remarkable job in pulling us together as an

13 industry to come up with ways to improve the competitive

14 markets, and we're looking forward to seeing what the PUC

15 comes out with, hopefully next week, on their Retail Market

16 Investigation.

17 So choice. And choice, up to 2 million customers

18 in Pennsylvania have made a choice to shop for electricity.

19 Six out of every 10 kilowatt hours that are delivered in

20 Pennsylvania are delivered by retail suppliers. So it has

21 made a huge impact and will continue to do so.

22 Terry mentioned the various components, and I

23 want to show you how retail, hopefully show you how

24 retailer suppliers fit in that spectrum of generation,

25 supply, and distribution companies. 41

1 The generators are a separate entity, like Terry

2 mentioned. They sell into a wholesale market, and there

3 are two suppliers in that market basically -- wholesale

4 suppliers, retail suppliers -- and then the electric

5 distribution companies. If you choose as a customer to not

6 go to a retail supplier, you're put on default service.

7 That's the utility going out into the wholesale market and

8 buying power for you. And that's a choice that many

9 Pennsylvanians have made, and as long as they're making a

10 conscious choice, we don't have a problem with that.

11 We -- retail suppliers -- also have direct

12 contact with customers. And I gave Amanda our consumer

13 education guide. It's the principles, some of the

14 principles that our RESA member companies follow in order

15 to do business here in Pennsylvania and in other

16 jurisdictions where we operate.

17 So why choice and why this is important. Retail

18 suppliers have provided thousands of jobs, saved millions

19 of dollars to consumers, and have introduced innovative

20 products and services. And at present there are over

21 100 suppliers, brokers, aggregators, operating in

22 Pennsylvania today. There are thousands of jobs that have

23 been created by this industry.

24 And we're starting to see innovations in this

25 space. And some of them, I'll call them marketing kinds of 42

1 innovations, but they're innovations nonetheless. You can

2 have affiliates with your university or with the Chamber.

3 Or there's one company represented by Colin here today,

4 Direct Energy, that has a product where you can pick one

5 day out of the week where you don't have to pay for

6 electricity. You can pick a product from one of my other

7 competitors that guarantees you a price for up to 7 years.

8 You can buy a product where, if you signed 10 people up,

9 you get your power for free.

10 So because we have the ability to market and to

11 sell our product the way we want to, innovations will come.

12 And I think as we move from getting the utility to do what

13 they do best, which is wires and infrastructure, and out of

14 providing generation supply, more innovation will come, and

15 I think they will be real and I think they'll be clever and

16 I think they'll be advanced in technology, just like the

17 revolution that we saw in the telecommunications industry.

18 So I think the real benefit comes when retail suppliers and

19 other innovators, not only retail suppliers but other third

20 parties, will be confident that they can invest money in

21 Pennsylvania to implement new and innovative technologies.

22 We compete, retail suppliers compete on price,

23 but we will keep customers on customer service and on the

24 introduction of new products and services. So price is

25 very important to everybody, and that's usually the first 43

1 thing everybody wants to talk about, but it's not the only

2 thing, because if you're going to make a choice to buy a

3 green product, you might recognize that there's a premium

4 to be paid for that, but you're willing to do that because

5 that's your choice.

6 So the three things: Competition has been great

7 for Pennsylvania. We think it can be better. RESA has

8 added a lot of benefits to Pennsylvania in jobs and in

9 savings, our retail suppliers. And we support the

10 Pennsylvania Public Utility Commission in their effort to

11 enhance competitive markets.

12 We look forward to working with you as a

13 legislative agenda is unveiled by the Public Utility

14 Commission, and I look forward to any questions that you

15 might have.

16 MAJORITY CHAIRMAN GODSHALL: Thank you very much.

17 I appreciate that.

18 And Terry, you were mentioning 51 percent of the

19 population, I guess, at this point has the benefit of

20 natural gas. What about the other 49?

21 You know, there is a tremendous, I think it's

22 between 40 and 50 percent that the cost of heating a home

23 is less with natural gas than it is with oil. You know,

24 it's at least 40 if not close to, probably 40 to 45, you

25 know, and 49 percent of Pennsylvanians don't have that 44

1 option. And we have the natural gas right here in our back

2 yard, and somehow we've got to do something.

3 MR. FITZPATRICK: As I said — was that an

4 invitation? Was that a question, Mr. Chairman? Maybe I

5 shouldn't jump in.

6 MAJORITY CHAIRMAN GODSHALL: Yeah, it's an

7 invitation for you to tell me--

8 MR. FITZPATRICK: And I did allude to that in my

9 testimony. I think it is important to look at those

10 policies to do everything we can to get gas out to more

11 folks.

12 At the same time I want to be straight with you

13 and give you the pro/cons here. Building that

14 infrastructure, that distribution infrastructure, is very

15 expensive, and it is difficult in a lot of areas that are

16 already developed, because, you know, you might have to

17 tear up existing streets to get it there. And then when

18 you go by customers' homes, you might not have any

19 assurance that they're going to take it. I mean, if they

20 already have a furnace that's operating pretty well, you

21 know, they have to make an economic decision then whether

22 the advantage and the price of natural gas is sufficient to

23 make that investment. So it can be difficult to make the

24 economics work.

25 And I guess I should also say that unlike 45

1 electricity and telephone, when the natural gas industry

2 was formed, it was never viewed as something where

3 everybody had to have it, because there were other

4 competing heating sources. Now it's fuel oil and

5 electricity. I think anthracite coal, in the area where I

6 grew up, was a big heating source also. So there was

7 competition; there were alternatives to natural gas, so you

8 never had the universal service push like you did with some

9 others.

10 But we do recognize the advantages in gas now.

11 We want to get it out to more people. It just has to be a

12 balanced policy, because, again, we're mindful of the

13 obligations we have to replace the old infrastructure that

14 we have, and there are only so many dollars to go around in

15 order to do all of these things.

16 MAJORITY CHAIRMAN GODSHALL: I know we have a

17 hearing on that coming up a little later--

18 MR. FITZPATRICK: Right.

19 MAJORITY CHAIRMAN GODSHALL: -- but the

20 invitation was there so I thought I'd throw it at you.

21 Representative Pickett.

22 REPRESENTATIVE PICKETT: Thank you.

23 Maybe it's because I live in a very rural area,

24 but I'm a little confused on the utilities' viewpoint on

25 choice. It seemed initially that they really didn't want 46

1 any default customers. They wanted everybody to get out

2 and find another purchase place. But they seem to be

3 competing now, coming up with prices that are matching what

4 might be available on a choice basis.

5 MR. FITZPATRICK: Well, I think that's right,

6 Representative Pickett. Some of what you're saying may be

7 referring to the period during which rate caps were in

8 effect, which was really for a number of years and the

9 passage of the act, you know, in 1996 until really up to a

10 few years ago. It's a little different in each utility

11 service territory. But particularly there we're a couple

12 of companies, I think Penelec and Med-Ed, for example, that

13 really had some programs in place years ago to try to get

14 customers, to try to get everybody to shop. They didn't

15 really work in the end because wholesale prices went up

16 more than anybody expected. Customers came back to the

17 utility at the capped rate because that was below, you

18 know, the rate that they could get it from a competitive

19 supplier. There was really a whole history of things that

20 happened there.

21 But the caps are gone now, so, you know, the

22 price that you buy from the utility reflects the market,

23 because we have to buy it in the market. It doesn't swing

24 up and down immediately as wholesale prices do, and in fact

25 that's, I think, one of the policy issues we'll be talking 47

1 about with retail competition.

2 But I think the bottom line is, the electric and

3 gas utilities, we all want to encourage customers to take

4 advantage of the competitive options they have. We don't

5 make money on that supply service, so we want customers to

6 look at options. Really, it doesn't gore our ox if

7 customers shop, so we encourage them and educate them on

8 how to do that.

9 REPRESENTATIVE PICKETT: Thank you.

10 MR. BARKANIC: So, Representative, from my view

11 on that, we've been in a very steady, low gas price state

12 for a long period of time. So the utilities are required

13 to buy power for up to 1 to 2 years. So they'll look back,

14 and since the gas prices have been fairly stable, there's

15 not a lot of difference. Competition is tough, the margins

16 are thin, and that just makes competitive suppliers sharpen

17 their pencils a little bit more.

18 So in each of the service territories where the

19 price to compare is competitive, you can find deals that

20 are less than the price to compare.

21 REPRESENTATIVE PICKETT: Thank you.

22 MAJORITY CHAIRMAN GODSHALL: You know, I just

23 read, I think, that the price of electricity is now lower

24 -- it's down to the lowest since 2009, I believe. So, you

25 know, that's all to the benefit of the consumer. 48

1 With that, I don't think there are any additional

2 questions, and I thank you for your testimony.

3

4 PANEL 3 - PUBLIC UTILITY COMMISSION

5 AND OFFICE OF CONSUMER ADVOCATE

6

7 MAJORITY CHAIRMAN GODSHALL: I call Panel 3 up,

8 which is the PUC, Chairman Powelson, and Tanya McCloskey

9 from the Office of Consumer Advocate.

10 Tanya, welcome to the Committee. We worked quite

11 well with your predecessor, and we wish you well.

12 ACTING CONSUMER ADVOCATE McCLOSKEY: Thank you,

13 Chairman Godshall.

14 MAJORITY CHAIRMAN GODSHALL: He had his way of

15 doing things occasionally, but we got around that.

16 ACTING CONSUMER ADVOCATE McCLOSKEY: He certainly

17 did.

18 MAJORITY CHAIRMAN GODSHALL: Whenever you're

19 ready.

20 ACTING CONSUMER ADVOCATE McCLOSKEY: Okay.

21 Chairman Godshall and Members of the Committee, I

22 think Chairman Powelson is indicating I should go first.

23 My name is Tanya McCloskey, and I am serving as

24 the Acting Consumer Advocate of Pennsylvania since the

25 retirement of Sonny Popowsky at the end of October of 2012. 49

1 I've worked at the Office of Consumer Advocate since 1987

2 with a primary focus on energy issues. Thank you for

3 inviting me to give comments before this Committee

4 regarding the regulated utility industry.

5 Let me first introduce the new Members of the

6 Committee to the Pennsylvania Office of Consumer Advocate.

7 The office was established by the General Assembly in 1976

8 to fill a gap that had long existed in the representation

9 of consumers, particularly residential consumers, before

10 the Pennsylvania Public Utility Commission and other State

11 and Federal agencies and courts that regulate the

12 activities of Pennsylvania's public utilities.

13 Traditionally, utilities have always been well

14 represented at the PUC by lawyers and expert witnesses who

15 could advocate for utility stockholders in matters such as

16 rate increase requests for utility services. Our office

17 was created so that consumers who have to pay those utility

18 bills would also be represented by professional attorneys

19 and experts. The job of representing consumers cannot be

20 performed by the PUC itself because the members of the

21 commission serve in a judicial role and must balance the

22 interests of the utility stockholders and consumers in

23 achieving a result that is just and reasonable for all

24 parties.

25 The OCA also has the right to appeal PUC 50

1 decisions that we believe are adverse to the interests of

2 consumers, and we have taken such appeals all the way to

3 the Pennsylvania Supreme Court and, in one landmark

4 decision, to the United States Supreme Court. Offices like

5 mine have been established across the country, and the

6 National Association of State Utility Consumer Advocates

7 now includes members from more than 40 States and the

8 District of Columbia.

9 In addition to our litigation activities, the OCA

10 helps to educate consumers on matters involving their

11 utility services, and we also serve as a resource to

12 Members of the General Assembly by responding to

13 constituent concerns and by providing our views on how

14 proposed legislation would affect the interests of

15 Pennsylvania consumers. In particular, we have worked

16 closely with the Chairmen and Members and staff of this

17 Committee, and we look forward to continuing that work as

18 you deal with the complex and difficult utility issues that

19 are certain to come before you.

20 Turning to the specific subject of today's

21 hearing, the regulated utility industry in Pennsylvania,

22 our office participates actively in cases that come before

23 the Pennsylvania Public Utility Commission involving

24 electric utilities, natural gas utilities,

25 telecommunications companies, and water and wastewater 51

1 companies. My written testimony contains information about

2 each of these specific industries for your consideration.

3 For these oral remarks, I will summarize some of

4 the key points regarding the industries.

5 For two of our industries -- electric and natural

6 gas -- Pennsylvania has engaged in a transition from a

7 fully regulated monopoly service to a partially

8 regulated/partially competitive industry over the past

9 15 to 20 years. Through the legislative initiatives of the

10 General Assembly, Pennsylvania has carried out a successful

11 ongoing transition process and is now well positioned for

12 the future.

13 Pennsylvania consumers arguably enjoy the best of

14 both worlds when considering their utility energy service

15 in that they have the protection of a basic service

16 provided by their utility in accordance with the

17 requirements established by the General Assembly and the

18 choice of an alternative provider that may offer them lower

19 prices or additional services to meet their needs.

20 Starting with electric service, Pennsylvania's

21 approach to electric restructuring through the 1996 law and

22 the 2008 amendments contained in Act 129 have served

23 consumers well. As I mentioned, consumers now have the

24 full benefit of the competitive wholesale generation

25 markets through utility default service provided through a 52

1 mix of resources procured at least cost. That is, even if

2 customers do not switch electric suppliers, the generation

3 they receive is purchased from a competitive wholesale

4 market. And many customers have also decided to take

5 advantage of retail choice by choosing to be served by an

6 alternative provider who offers products or services that

7 customers find preferable to their utility default service.

8 This stands in marked contrast to the regulated environment

9 prior to the 1996 act when all customers received service

10 from their vertically integrated monopoly utility.

11 Pennsylvania's transition to a restructured electric

12 industry has gone well and has progressed without the

13 tremendous rate shock and political upheaval that has

14 plagued other States.

15 After many years on a roller coaster ride, our

16 natural gas consumers are now benefiting from the decline

17 in natural gas prices and some hoped-for stability in the

18 wholesale price of natural gas. Much of this decline is

19 due to the development of Marcellus Shale in Pennsylvania

20 and across the region.

21 The key issue, from my perspective, is that

22 Pennsylvania natural gas consumers continue to receive the

23 benefit of any price reduction and longer term price

24 stability that result from these changes in the wholesale

25 natural gas markets. In this regard, Pennsylvania natural 53

1 gas consumers have been well served by the statutory and

2 regulatory framework under which our retail natural gas

3 distribution utilities must obtain natural gas for their

4 customers in the wholesale market under a least cost

5 procurement strategy. The utilities are permitted to

6 recover the prudent wholesale gas purchases -- no more, no

7 less -- through a reconcilable adjustment clause with no

8 profit or markup. It should also be noted that some

9 residential natural gas customers, particularly in western

10 Pennsylvania, have taken advantage of retail choice for

11 their commodity service.

12 There are two other issues of great importance in

13 the natural gas area, one involving the extension of

14 natural gas service to currently unserved areas and the

15 second being the safety of the natural gas infrastructure.

16 The extension of natural gas service will be the subject of

17 another hearing, and I look forward to a discussion there

18 on this topic.

19 As to the safety of our natural gas

20 infrastructure, the expanded jurisdiction provided to the

21 PUC for inspection of facilities and the additional tools

22 included in the recently enacted Act 11 should assist in

23 accelerating the repair and replacement of aging and

24 dangerous pipeline.

25 Our telecommunications service in Pennsylvania 54

1 has undergone significant changes in its regulatory

2 framework since the initial passage of Chapter 30 of the

3 Public Utility Code in 1993 and its reenactment in 2004.

4 The primary concern for consumers regarding

5 telecommunications service remains the assurance of

6 universal service at reasonable and affordable rates for

7 every Pennsylvanian who wishes to have such service.

8 Telecommunications service is unique in that the more

9 people that are connected to the telephone network, the

10 more everyone benefits from that network.

11 There has been much discussion about competition

12 in the telecommunications industry over the years. The

13 competition in the telecommunications industry, facilitated

14 by Chapter 30, has benefited many Pennsylvania consumers,

15 particularly those who can now buy bundled packages of

16 services. But even with the advances in telecommunications

17 services in recent decades, there are still some parts of

18 Pennsylvania where customers rely on the basic telephone

19 service provided by their local telephone company. The

20 General Assembly has maintained a carefully drawn category

21 of "protected" services, including basic residential

22 service, that continues to be subject to a higher level of

23 commission scrutiny and regulatory protection. The

24 combination of competition and limited regulation contained

25 in Chapter 30 has worked well and should continue. 55

1 I'd like to turn to water and wastewater

2 companies in Pennsylvania, and these companies are

3 different from the three industries that I've just

4 discussed.

5 The majority of our water and wastewater systems

6 are not subject to the jurisdiction of the Public Utility

7 Commission but are operated by municipalities or municipal

8 water authorities. I would also note that a number of our

9 water utilities regulated by the Public Utility Commission

10 has declined in the last 20 years, as many smaller

11 utilities have been acquired by or merged into larger water

12 utilities.

13 The costs incurred by these companies to provide

14 safe, clean water service has continued to increase, as the

15 utilities must meet State and Federal environmental and

16 health requirements and ensure that water service is

17 suitable for all household purposes.

18 It is critical now and into the future that all

19 utilities use our precious water resources wisely so that

20 they are able to provide safe and adequate service at

21 prices that are affordable to all consumers across

22 Pennsylvania. It's also critical that our wastewater

23 utilities operate in the most economical and

24 environmentally sound manner.

25 As this Committee embarks on this legislative 56

1 session, I look forward to working with the Members to

2 preserve and strengthen the protections for consumers in

3 the Public Utility Code.

4 Thank you again for the opportunity to provide

5 these comments. I would be happy to try to answer any

6 questions you might have.

7 MAJORITY CHAIRMAN GODSHALL: Thank you.

8 Chairman Powelson and the PUC.

9 PUC CHAIRMAN POWELSON: Thank you.

10 Good morning, Chairman Godshall, and I know

11 Chairman Daley had to step out for a conference call, and

12 Members of the Committee for allowing me the opportunity to

13 be here today.

14 Let me start by recognizing the efforts of

15 Tanya McCloskey. I came on the commission in 2008, and her

16 former boss, who I bumped into yesterday in Washington,

17 Mr. Popowsky, who still remains active on utility matters,

18 I just want to praise her, because she has been a very

19 steady hand in not only working with the Public Utility

20 Commission but, in her testimony, that core mission of

21 protecting consumers, and I think she has done that on

22 countless occasions.

23 And I know there's a decision that needs to be

24 made, but I just want to say, on behalf of my colleagues at

25 the commission, you have our steadfast support in the 57

1 efforts that you've put forth as the Acting Office of

2 Consumer Advocate.

3 ACTING CONSUMER ADVOCATE McCLOSKEY: Thank you,

4 Chairman.

5 PUC CHAIRMAN POWELSON: Now, this morning,

6 Chairman, if it pleases you, I'm not going to read all

7 13 pages of my testimony.

8 MAJORITY CHAIRMAN GODSHALL: Well, your

9 counterpart had 20. You know, I was really getting worried

10 when I saw that.

11 PUC CHAIRMAN POWELSON: Let me just say it's a

12 very exciting time in the utility sector, but it's also a

13 very challenging time. I need not remind anybody in this

14 room about the 1.8 million customers in the Pennsylvania

15 footprint that were impacted by Hurricane Sandy, and we'll

16 talk a little bit about that today in the testimony.

17 It's also a great time for Pennsylvania

18 consumers, as Tanya alluded to. The price of natural gas,

19 I remind everybody, in 2008, as we were kind of ramping up

20 with rate caps coming off, we were in a $14/mn Btu market,

21 and if you go to Bloomberg this morning, you're looking at

22 a 3.33 spread on natural gas.

23 Direct pass-through savings to customers, I share

24 this chart with you. Here's wholesale power prices in PJM.

25 All-in delivery costs of $85 per megawatt hour. In 2012, 58

1 that all-in price is $47. That's a 50-percent drop in

2 wholesale power prices, and what that is leading into, with

3 the backdrop of the development of the Marcellus Shale, is

4 the ability for Pennsylvania, from an economic development

5 perspective, to attract and retain employers here. It's

6 what I call the dusting off of the rust ball of

7 Pennsylvania, and I like to say it's nice to see us

8 economically relevant again because of this rich, abundant

9 energy source.

10 Now, as it was mentioned earlier, a number of

11 responsibilities have been given to the Public Utility

12 Commission over the last 18 months. As you know, we passed

13 Act 11, and thanks to your leadership, Chairman Godshall,

14 it now provides our utilities new tools with the

15 accelerated replacement of infrastructure, particularly on

16 the gas side of the ledger, but we cannot lose sight of the

17 fact that with storms, and I like to call them the "new

18 norm storms" that have been hitting the East Coast, our

19 electric utility infrastructure as well. And so Act 11 was

20 very important, and we'll talk a little bit about that.

21 And then pipeline safety, the passage of Act 127,

22 giving the Public Utility Commission new safety

23 responsibilities in Class 2, 3, and 4 areas of Pennsylvania

24 as we develop out to get the gas from the wellhead into the

25 marketplace. And so we are ramping up, with the hiring of 59

1 gas safety inspectors, to get out and cover these new

2 responsibilities.

3 And then, more recently, the passage of Act 13,

4 which puts us in the role of the collection and

5 distribution of the Marcellus Shale impact fee moneys here

6 in the Commonwealth.

7 Now, you heard earlier, we talked a little bit

8 about electric competition? There's a little proceeding in

9 front of the commission right now known as our Retail

10 Market Investigation. The Retail Market Investigation,

11 just for the new Members that are here, started as a result

12 of, at the time, it was the second largest utility merger

13 in the country. It was the merger of FirstEnergy acquiring

14 Allegheny Power. And to the credit of our then Chairman,

15 Chairman Jim Cawley, we approved the merger, but we

16 approved the merger with the conditions that we would use

17 the approval of the merger to look at the overall retail

18 landscape. And I think at the time it was a very proactive

19 thing to do, because we had just come out of a rate-cap

20 environment and we were really kind of seeing this new,

21 emerging industry, and Mr. Barkanic mentioned the retail

22 energy supplier community, coming into Pennsylvania and

23 making offers to customers.

24 Now, I remind everybody here, this is new to a

25 lot of us in Pennsylvania. We're okay getting our 60

1 cell phone provider, we're okay picking our cable provider,

2 but when it comes to picking a generation supplier, it's

3 just new to people. And to the credit of the Public

4 Utility Commission, we have spent an inordinate amount of

5 time bridging that gap in terms of proper consumer

6 education, and the Office of Consumer Advocate has also

7 joined us in that effort.

8 But it is amazing, at this point in time, this

9 past week, that we hit 2 million customers in the

10 Pennsylvania marketplace that have made an affirmative

11 choice to pick a generation supplier and save real money on

12 their monthly electric bill. And in terms of our Retail

13 Market Investigation, we're not going to harm senior

14 citizens or low-income customers and take away those

15 choices from them and take away those customer protections

16 that have been afforded to them in the act that was

17 established back in 1996.

18 So we think at this point in time, in a very

19 cheap gas environment, we have a very unique opportunity

20 here in Pennsylvania to really make Pennsylvania one of the

21 premier retail markets in the country. And I'm not saying

22 we're not. There's a report out by an organization in

23 Texas known as the ABACCUS reporting agency. Pennsylvania

24 this year ranked number one in the country for number of

25 retail energy suppliers that entered the marketplace. All 61

1 of our large industrial customers, over 90 percent of the

2 load has shifted away from the default supplier and have

3 made an affirmative choice to pick a supplier. That's a

4 good trend, but large industrial customers have what? They

5 have one person or two people or a team on staff, and

6 that's their sole responsibility, is to manage that energy

7 bill, and that's a little different in the household with

8 all of the responsibilities moms and dads have. And I

9 apologize, Mr. Chairman, for being late, but I had one of

10 those duties today; it was called bus duty.

11 So we think, in terms of where we're headed, we

12 are not going to do anything as a Public Utility Commission

13 to erode the construct that was set back in 1996 that would

14 do harm to customers. That's not who we are. That's not

15 how we go about this process. We've had over a year and a

16 half of hearings where we brought all the interested

17 parties together. We've taken input from school districts

18 to local governments. We've met with small mom-and-pop

19 business owners who have all provided us feedback on where

20 we're headed and why it's important to make some additional

21 reforms that will make this supplier market more robust

22 here in this State.

23 The other issue that I want to talk about is a

24 new responsibility that has been led by our Vice Chairman,

25 John Coleman. We have been, over the last year and a half, 62

1 in discussions with the Department of Labor and Industry to

2 take on the One Call responsibilities and house it under

3 the Public Utility Commission. And at this point in time,

4 we've had a very positive conversation with Secretary

5 Hearthway and her management team in terms of making this

6 transition possible. In fact, if I took you across many

7 States, One Call is usually housed and staffed under the

8 Public Utility Commission. We're one of those oddities of

9 sorts that just, I don't know why, I wasn't around at the

10 time, but it's just not housed. It's under the Department

11 of Labor and Industry, and Secretary Hearthway has been

12 very direct with us in saying, we're a labor safety

13 management organization, we're not a gas safety

14 organization, and we do think it's appropriate that it fall

15 under the auspices of the Public Utility Commission, and

16 that priority is such that we are working with the One Call

17 organization and the industry to hopefully make that

18 transition happen here over the next year.

19 I mentioned earlier Act 13, which gives the PUC

20 new responsibilities to collect and distribute the State's

21 impact fee, Marcellus Shale impact fee. I'm proud to

22 report, this past calendar year, the PUC collected more

23 than $204 million from the drillers of unconventional gas

24 wells here in the Commonwealth, and we distributed the

25 revenue, as directed under the act, to State agencies, 63

1 county governments, local municipalities, the Marcellus

2 Shale Legacy Fund, well in advance of the December 1

3 deadline, which is truly remarkable. We had less than I'd

4 say a 9-month window in which to build all of the

5 infrastructure needed from IT to bringing all the parties

6 together, collaborating with the DEP on updated well data,

7 and we did this ahead of the statute, which is truly a

8 testimony to the leadership team at the commission. I

9 particularly would like to give a shout-out this morning to

10 Mr. Bob Gramola, who's our Director of Administration, and

11 Jan Freeman, our Executive Director. They worked

12 tirelessly on this effort.

13 Let me shift gears to Act 127. This is a major

14 game-changing piece of legislation for the commission. As

15 you know, I served on Governor Corbett's Marcellus Shale

16 Commission, and one of the key aspects of the report was to

17 address the proper development of pipelines in the State -­

18 and they are coming at a rapid clip right now -- and having

19 what I used to call, what I like to say, boots on the

20 ground out there inspecting and making sure that business

21 and residential consumers here in Pennsylvania have the

22 peace of mind that as tubular steel goes in the ground and

23 it's filled in, that it's safe and we're not going to get a

24 call at midnight that there has been an explosion.

25 So we have been, thanks to the House and the 64

1 Senate leadership, given these new responsibilities under

2 the act, which was part of an overall, comprehensive

3 strategy to increase gas safety here in the Commonwealth.

4 But the PUC takes this role very seriously, and due to the

5 steps that have been taken, I'm pleased to report that

6 we've had no reportable pipeline incidents in 2012, and

7 we've hired, at this point, three new gas safety inspectors

8 that are out there. Three is not enough. We recognize

9 that. What I am learning in this job is it takes a long

10 time to train these people, and guess what? We're

11 competing with industry to attract these people. So we are

12 doing our part, but more needs to be done.

13 Let me conclude with Act 11, I think the third

14 piece of game-changing legislation. It has been talked

15 about nationally. I just got back from our National

16 Association of Regulatory Commissioners' meeting in

17 Washington this past week, and many States are now looking

18 to that legislation as they deal with the same issues we've

19 dealt with around utility infrastructure, and now we have

20 new ratemaking tools that really parlay into what we did in

21 the mid-nineties with the water DSIC, which is a nationally

22 recognized best practice. But we now allow a distribution

23 system improvement charge which will help, in my view,

24 accelerate the replacement of aging utility infrastructure

25 here in the State. 65

1 I'm proud the report, as of January of this year,

2 public utilities in the State were able to petition the PUC

3 for approval to establish a DSIC, and to date, six

4 utilities have filed their petitions to implement a DSIC.

5 And these petitions are currently under review, so I won't

6 comment on them in detail. However, as part of the

7 legislation -- part of the act; excuse me -- utilities were

8 required to submit capital plans with us, or what I call

9 asset optimization plans, and I'm proud to report most of

10 our utilities have filed those plans.

11 As I said in testimony, we are not affording the

12 new provisions of this act to gold-plate the electric or

13 gas distribution system. We recognize that from a modeling

14 perspective, these utilities know some of their

15 underperforming circuits; they know some of their

16 distressed pipelines. What we're trying to say is we want

17 you to get that hazardous pipeline out of the ground and

18 not do it in a 70-year window, and this is what Act 11 will

19 do.

20 I also will not underestimate the fact that it is

21 going to create a nice opportunity here in the State,

22 whether it's a tubular steel manufacturer, our union labor

23 force, which is extremely well skilled. For small business

24 contractors out there that do this work, you're going to

25 see an emergence in , in Philadelphia, in many 66

1 parts of Pennsylvania where these projects get up and

2 running. It's not going to grab headlines in the

3 Wall Street Journal or the Harrisburg Patriot-News, but I

4 do think it's a great opportunity, and, Mr. Chairman,

5 without your leadership, we couldn't have gotten this done.

6 So with that, I know I could hit on a host of

7 other issues, but I want to leave time for questions here

8 this morning, and my colleagues and I, again, Mr. Chairman,

9 appreciate the opportunity to be here.

10 MAJORITY CHAIRMAN GODSHALL: Thank you very much

11 for your testimony, and Representative Delozier.

12 REPRESENTATIVE DELOZIER: Thank you,

13 Mr. Chairman.

14 I appreciate the testimony on both, and really,

15 mine is probably more of a statement just in the sense of

16 bringing something to the attention that I have to say

17 bothered me a little bit. One of those parental duties

18 that we do have, I was home on a snow day with the kids and

19 I was working on the computer and the phone rang, and it

20 popped up "Pittsburgh." It had a 412 number and area code,

21 and I picked it up and I answered the phone. And I guess I

22 was a little concerned by who was on the other end, and

23 unfortunately -- well, unfortunately probably for them -­

24 they got me, primarily because I asked a lot of

25 questions. 67

1 But the opening statement that was given to me

2 was that I was now entitled to a new government program to

3 lower my electric rates and to please stay on the line and

4 if you had any questions or wanted to hit a certain button

5 to talk to someone. So I hit the button to talk to

6 someone, because all of a sudden a lot of questions popped

7 into my head as to what government program I was entitled

8 to dealing with my electric rates, and I figured I would

9 know if there was a new program that was out there.

10 So I get an individual, and that individual, you

11 know, said, would you like to partake in this? And I said,

12 well, can you tell me what program this is and who is

13 subsidizing it or how the government is paying for it and

14 why I'm entitled to this program, and the end result was,

15 really, it was just shopping. And this person and the

16 program was coming across to individuals saying that it was

17 a new program; I was now entitled to some subsidy to assist

18 with my electric rates.

19 And basically what this company was doing was

20 really just shopping for me: going on the Internet,

21 finding my address, and as a PPL customer, she was

22 explaining shopping to me, which I told her I fully

23 understood and that I had shopped. She's like, well, I can

24 possibly get you some better rates. So what this company

25 was doing was really just looking on the Internet for the 68

1 best rates that possibly were around that could be less

2 than what I was paying, which is fine in and of itself, but

3 they were serving a purpose and getting paid somehow. So

4 my question was, how were they making money considering

5 this is something as a consumer I can do for free and go

6 out there and shop and ask my questions and go on the

7 Internet and find the better prices, and even ask PPL, and

8 they are very helpful, you know, to direct customers as

9 needed.

10 But I guess my concern was, the first statement

11 by the individual on the telephone was that I was entitled

12 to this brand new government program and that somehow, you

13 know, when you get to individuals like myself who asked

14 42 questions and highly irritated the individual that was

15 on the phone, because I was asking, how do you make your

16 money? Is the new company paying? Which is fine, that's

17 part of business and as we're getting through, but I guess

18 it was the clarity issue as to the fact that some people

19 that don't know, even when you said so many are shopping,

20 which is fantastic, but a lot of folks that don't

21 understand what is happening, when they hear there's a new

22 government program that they could possibly get a lower

23 rate and they're thinking the government is paying for it

24 when in reality it's a free service, that concerned me as

25 to the fact of those that may not be as familiar with 69

1 shopping and may understand, like I said, my understanding

2 is the fact that I don't want to mislead consumers. And

3 this is something we want to encourage, and if we have

4 companies coming in and taking advantage possibly, I just

5 want to bring that to light in the fact to better

6 understand that the consumer be educated, as you have

7 educated individuals.

8 Have you heard of companies coming in and taking

9 advantage of this type of earning money somehow, or if they

10 are, can you explain to me how they are earning that money?

11 Or getting paid for it.

12 PUC CHAIRMAN POWELSON: I am first off alarmed

13 because the call script, probably the cleats got over the

14 chalk line by saying it's a government program, and you

15 were dead on in asking questions.

16 We have been very stern with the retail energy

17 supplier -- and I think Bob Barkanic would attest to that

18 -- about codes of conduct. We came down very hard on a

19 company that was doing door-to-door marketing.

20 REPRESENTATIVE DELOZIER: Right.

21 PUC CHAIRMAN POWELSON: And, you know, at the end

22 of the day, the worst thing that can happen to a retail

23 energy supplier is having their license revoked. And we've

24 had a couple of, I'll say bad actors, but those companies,

25 they have to submit bonding requirements, certificates of 70

1 insurance, before they're out there in the marketplace.

2 Now, that type of marketing presentation to you

3 sounded potentially like a third-party broker out in the

4 marketplace. But I will tell you, we take it very

5 seriously, the codes of conduct. And I commend the retail

6 energy supplier community and the National Association of

7 Energy Marketers. There is zero tolerance for bad actors

8 in the marketplace, and I can assure you, and I've been

9 very stern with the proper education of sales teams, you

10 know, you just don't go out there and start knocking on

11 doors or sending out direct mails if it's not truth in

12 advertising, because that's going to really, in both of our

13 worlds, cause a lot of anxiety for customers.

14 REPRESENTATIVE DELOZIER: Are there a lot of

15 brokers out there---

16 PUC CHAIRMAN POWELSON: There are; yeah.

17 REPRESENTATIVE DELOZIER: -- that are doing a

18 number of these sales that are---

19 PUC CHAIRMAN POWELSON: This is new. Most of

20 your brokers are playing in this small business, large

21 industrial space. The residential piece, I'll tell you, a

22 lot of it, and I just got my FirstEnergy direct mailer,

23 you're getting direct mail -- as residential customers -­

24 you're getting direct mailers; you're going to our

25 Website. 71

1 Now, this is, like I said -- I'll take you to

2 Texas -- these retail energy suppliers are buying ads on

3 the major networks competing for your business. We're not

4 there yet. And we're seeing billboards. Some people, like

5 Direct Energy, have their bus here in town, shrink-wrapping

6 a bus. But this is all, I mean, this is all coming, and

7 it's a good thing, to Bob's point. I won't argue.

8 A lot of these companies look at Pennsylvania as

9 a growth opportunity, and they're putting corporate

10 headquarters here. We think that's a good thing.

11 REPRESENTATIVE DELOZIER: Right.

12 And I appreciate it. It took me back when I

13 answered the phone and it was that. And I knew she was

14 reading, or it was a tape recording at the beginning, so I

15 did recognize that, but it was more I didn't realize that

16 there were necessarily brokers that were going around and

17 working within the industry in and of itself. I had not

18 had interaction with that.

19 And I do agree with you in the sense that any

20 growth is a good growth. It's just a matter of, like I

21 said, I wanted the perception not to be by the consumer

22 that there was another government program out there,

23 especially when it was one that they certainly could take

24 advantage of on their own for free and not necessarily have

25 any interaction with the broker. 72

1 Thank you.

2 MAJORITY CHAIRMAN GODSHALL: Representative

3 Toepel.

4 REPRESENTATIVE TOEPEL: Thank you, Mr. Chairman.

5 I think my question is for Chairman Powelson.

6 Thank you for being here today.

7 A quick question about the Act 13 impact fee on

8 the collection and distribution. I think I heard some

9 reports of there were some errors in calculation on the

10 amount that was going to be distributed to the local

11 governments and agencies, and as well as some money that

12 was maybe owed by some of the gas companies. Can you

13 comment on the calculation distribution and whether there

14 are any gas companies that still owe money?

15 PUC CHAIRMAN POWELSON: Yeah. I can't report on

16 the gas companies -- I don't have the number, but I'll

17 circle back with you off line.

18 The calculation issue that started off as a media

19 story, as I mentioned earlier, we got the moneys out before

20 the statutory deadline. It came down, and I don't want to,

21 you know, make it a very complicated calculus answer here,

22 but there's this spatial analysis that's done of the wells,

23 and we had to go back, and thanks to the efforts of the DEP

24 and working with them, that we needed to have proper well

25 count data, and that's really what drove a glitch in the 73

1 computer model. What was perceived as an issue was a

2 nonissue. And to the credit of Williamsport, there was a

3 calculation error, and it was fixed before the checks were

4 sent out.

5 REPRESENTATIVE TOEPEL: Okay. So they're all

6 resolved---

7 PUC CHAIRMAN POWELSON: All resolved.

8 REPRESENTATIVE TOEPEL: -- and you'll let me know

9 if there are any that still owe money.

10 PUC CHAIRMAN POWELSON: And I will talk to you

11 off line if there are any drillers that owe us. We've had

12 a couple that have done, I call it venue shopping, a

13 spudded well versus a nonspudded well. And I think my view

14 of it -- I'm just giving you a layman's term -- if you

15 punch a hole in the ground and there's natural resource

16 being extracted, you're on the hook for the fee. And we've

17 had a couple companies around the edges that have, you

18 know, expressed some concerns that it's a nonproducing

19 well; therefore, we don't have to pay the fee, and we've

20 made it clear to them you have to pay the fee.

21 REPRESENTATIVE TOEPEL: Thank you.

22 MAJORITY CHAIRMAN GODSHALL: Thank you.

23 And Representative Pickett.

24 REPRESENTATIVE PICKETT: Thank you.

25 In talking a little bit about pipelines, when the 74

1 pipeline oversight came to the PUC, there was still a lot

2 of concern in my area about what I think is the Class 1,

3 where it's the very rural population with the pipeline and

4 the gathering lines in particular.

5 It was said at the time that the Federal

6 Government may push down an oversight or inspection of

7 those lines. Do you have any insight into that?

8 PUC CHAIRMAN POWELSON: Yes. That's a great

9 question and it's a timely question.

10 PHMSA, which is the Pipeline Hazardous Safety

11 Administration, the Administrator, Cynthia Quarterman, came

12 to Pennsylvania about a month and a half ago, had a press

13 event, expressed some concerns about these Class 1 areas.

14 Senator Lisa Baker, to her credit, has pulled us into

15 discussions. The question becomes, Federal Government, do

16 you want to do it or are you going to give us the resources

17 to ramp up additional safety inspections beyond what we

18 have in Act 127?

19 Based on her press event, they're trying to say

20 "we're looking to do it." Now, I respect that, and if the

21 Federal Government wants to come into Pennsylvania and do

22 the Class 1 inspection, one is to coordinate with us,

23 which I know they will, but leading up to this they have

24 made it known that they're understaffed to begin with. I

25 think they have something like less than 58 nationally, 75

1 you know, tasked gas safety inspectors to cover the

2 50 States.

3 So we've got to, you know, to my credit of

4 Commissioner Gardner, he has been working with PHMSA, and

5 I'll be the first one to tell you it has been a rocky

6 relationship. But on this one, you know, my quick answer

7 is, if they want to take it on, then fine, but make sure

8 there's collaboration with us and that you're going to put

9 the resources that you told us you don't have to go ahead

10 and do this.

11 REPRESENTATIVE PICKETT: Is there anything that

12 gives them a deadline on making that decision?

13 PUC CHAIRMAN POWELSON: No, there's not. I think

14 what's driving it is, I think they're seeing in States like

15 Pennsylvania and Texas, as these new shale plays come in,

16 and the Utica -- and she did make a comment about the

17 NiSource transmission line in West Virginia. So there's,

18 you know, I think Washington now is waking up to the fact

19 that they have some sweat equity in this safety

20 responsibility.

21 REPRESENTATIVE PICKETT: Thank you, Mr. Chairman.

22 MAJORITY CHAIRMAN GODSHALL: Do other States do

23 their own checking on type 1, Class 1?

24 PUC CHAIRMAN POWELSON: I'm not sure. I can get

25 back to you on that. I don't know. I don't think so. I 76

1 think Classes 2, 3, and 4 are being covered by the States.

2 Class 1 has been---

3 MAJORITY CHAIRMAN GODSHALL: I was going to say,

4 if this is an issue, if we would pass something, you know,

5 including Class 1, I mean, to get right to the issue of the

6 problem.

7 PUC CHAIRMAN POWELSON: What I could do, if the

8 Committee is amenable to it, I would like to have

9 Paul Metro come in and kind of give you -- he's on the

10 national association of safety inspectors -- give you kind

11 of a high-level briefing of what's going on in the pipeline

12 safety world. I think it would be very good for this

13 Committee to see it. And we'd be glad to do it, both for

14 the House---

15 MAJORITY CHAIRMAN GODSHALL: And you're

16 inspecting all the rest?

17 PUC CHAIRMAN POWELSON: That's pretty much — and

18 we're inspecting the distribution lines that go into our

19 homes and businesses, which we know about those two events

20 that happened last year in Pennsylvania.

21 MAJORITY CHAIRMAN GODSHALL: Okay. Thank you

22 very much, and thank you for -- Chairman Daley did have an

23 important conference call -- for mentioning that.

24 ACTING CONSUMER ADVOCATE McCLOSKEY: Thank

25 you. 77

1 PANEL 4 - WATER

2

3 MAJORITY CHAIRMAN GODSHALL: On the last panel we

4 have the water. We have JT Hand, Chairman of the

5 Pennsylvania Chapter of the National Association of Water

6 Companies, and Steve Tagert, President, Aqua Pennsylvania

7 -- who have been waiting patiently.

8 Gentlemen, when ready.

9 MR. HAND: Thank you, Mr. Chairman.

10 Members of the Committee, it's a pleasure to be

11 here this morning, and I do hope that your patience as well

12 is worth the wait as you hear a little bit about the water

13 and wastewater industry in the State of Pennsylvania.

14 My name is JT Hand, and I serve as the

15 Chief Operating Officer for the York Water Company in York,

16 Pennsylvania, and today I'm representing the Pennsylvania

17 Chapter of the National Association of Water Companies.

18 Let me give you a little bit of background on the

19 National Association of Water Companies and specifically on

20 the Pennsylvania Chapter.

21 The Pennsylvania Chapter consists of 10 member

22 companies that provide safe and reliable drinking water

23 service to approximately 3.1 million Pennsylvanians in

24 485 communities over 39 counties. In addition, 4 of our

25 member companies provide wastewater service to 78

1 approximately 155,000 Pennsylvanians in 25 communities over

2 8 counties. If you combine our service territories with

3 that of Aqua Pennsylvania, the private or investor-owned

4 water industry provides service to approximately

5 4.1 million Pennsylvanians. That's 32 percent of the

6 population.

7 Now, unfortunately, some may think that our

8 members as for-profit entities, that we sell water as a

9 commodity or we treat wastewater for profit. What we

10 actually provide are services and infrastructure that are

11 required for the safe and reliable water and wastewater

12 treatment and delivery. The solutions our members and our

13 industry provide are as powerful as they are varied. We

14 offer distinct advantages that allow for access to more

15 resources, more expertise, broader partnerships, and

16 innovative technology.

17 Now, I'm going to reinforce a little bit about

18 what we heard from the Public Utility Commission's Acting

19 Consumer Advocate. There is a distinction between the

20 investor-owned private utilities and the municipally

21 operated systems.

22 The Pennsylvania Public Utility Commission, the

23 PUC, has complete jurisdiction over the rates and service

24 of private or investor-owned water and wastewater systems.

25 However, the PUC only has limited jurisdiction over the 79

1 rates and service of those publicly owned municipal water

2 and wastewater systems -- limited to only regulating the

3 rates and service of customers outside those municipal

4 boundaries.

5 According to the PUC's Website, they currently

6 regulate 95 water systems, including those publicly owned

7 municipal water systems that serve outside their

8 boundaries, and 59 wastewater systems, including those

9 publicly owned municipal wastewater systems that serve

10 outside their boundaries.

11 In addition, the Office of Consumer Advocate, the

12 OCA, and Office of Small Business Advocate monitor the

13 rates and service of investor-owned systems. The Federal

14 Securities and Exchange Commission also regulates some

15 investor-owned systems.

16 At the National Association of Water Companies,

17 we are committed to working with elected leaders at the

18 Federal, State, municipal, and local levels who seek

19 innovative solutions and go the extra mile to the benefit

20 of their constituents.

21 We thank this Committee in particular for the

22 enactment of Act 11 of 2012 allowing for a distribution

23 system improvement charge, DSIC, to be extended to

24 wastewater and other utilities. The support for such

25 policies and infrastructure initiatives maintains our 80

1 industry's momentum. It unifies our efforts to improve

2 quality of life. It reinforces our responsibility to care

3 for our common environment, creates jobs, and stimulates

4 the economy.

5 I really have just two issues that I'd like to

6 bring before the Committee today, and the first is

7 reauthorization of Chapter 14.

8 Chapter 14, the Responsible Utility Customer

9 Protection Act, Act 201 of 2004, as you've heard earlier,

10 is expected to expire December 31, 2014, unless sooner

11 reenacted by the General Assembly. The National

12 Association of Water Companies respectfully requests that

13 Act 201 be reenacted, as Chapter 14 has been an effective

14 tool to effectively and responsibly manage customer debt.

15 However, at the time Chapter 14 was enacted, none

16 of our member companies were in the wastewater business, so

17 the term "wastewater," or more commonly used term "sewer,"

18 is not referenced in Act 201. This has presented problems

19 for our member companies with wastewater operations,

20 because residential customers who receive wastewater and

21 water service from a public utility are guided by Act 201,

22 Chapter 14, and Chapter 56 regulations. While Act 201 does

23 not specifically reference "wastewater, " it is difficult to

24 separate water and wastewater from engineering and billing

25 perspectives. 81

1 The administrative functionality in handling

2 customer accounts in cases where utilities provide the

3 customer both water and wastewater service is complex. In

4 these cases, Act 201 governs the water portion of the

5 customer account and the PUC regulations govern all aspects

6 of the wastewater portion of said account. This approach

7 has caused customer confusion and difficulty for the

8 utility's customer service support system in implementing

9 Chapter 14 for the water component of the account and

10 Chapter 56 for the wastewater component. It requires a

11 utility to manually process these customer accounts.

12 From a practical and administrative perspective,

13 it is reasonable to utilize the same application, the same

14 deposit, the same payment agreements, and collection and

15 termination standards as outlined in Act 201 for

16 residential water customers and maintain the same standards

17 for residential water/wastewater customers. This approach

18 would limit customer confusion as well as eliminate the

19 need to allocate utility resources for manual processing.

20 Therefore, the NAWC requests that in addition to

21 reauthorizing Act 201, that it be amended to include

22 residential wastewater service under the provisions of the

23 act.

24 My second issue for this morning -- stormwater.

25 Last session, the House Local Government 82

1 Committee considered legislation sponsored by

2 Senator Erickson which has been reintroduced as SB 351 of

3 this session to allow for the creation of municipal

4 stormwater authorities. Absent the express authorization

5 by the General Assembly, municipalities have been reluctant

6 to establish stormwater authorities to help them respond to

7 the escalating costs of stormwater management to address

8 regulatory requirements and to mitigate flooding concerns.

9 Similarly, the Public Utility Code is absent of

10 express authorization for public utilities, such as

11 wastewater utilities, to provide stormwater management

12 services. Specifically, the definition of "public utility"

13 would need to be amended to include stormwater. This is

14 something that PUC-regulated systems already do very well.

15 We are very good at the collection and distribution system

16 maintenance, expansion, and improvements within and across

17 municipal boundaries, and we believe that we can provide a

18 uniform service for water, wastewater, and stormwater needs

19 of these municipalities. Therefore, the NAWC requests that

20 the definition of "public utility" be amended to include

21 stormwater.

22 And with that, I'll be happy to take your

23 questions at the conclusion of the testimony.

24 MR. TAGERT: Good morning, Chairman Godshall,

25 Chairman Daley, and Members of the Committee. 83

1 My name is Steve Tagert, and I'm President of

2 Aqua Pennsylvania, and I want to thank you for the

3 opportunity for us to present testimony today regarding the

4 water and wastewater industry. I'm glad that Chairman

5 Daley is back. Although we lost one more person, I had

6 10 of you as names to get my free electric service, so I'm

7 going to need to pick one more person here.

8 Aqua Pennsylvania is a subsidiary of Aqua

9 America. We're based in suburban Philadelphia. We are the

10 second largest investor-owned water utility in the United

11 States. In Pennsylvania, we provide service in 30 counties

12 to approximately 1.4 million people. In the United States,

13 we cover nine States and about 3 million people, and our

14 subsidiary, Little Washington Wastewater Company in

15 Pennsylvania, also provides sewer service to approximately

16 40,000 residents.

17 First, Mr. Chairman and Members of the Committee,

18 I want to thank you for passing Act 11. That provides us

19 the ability to file joint water and wastewater rates and

20 now allows for DSIC for wastewater companies and for other

21 utilities. It has worked so very well for the water

22 industry, we're tickled to death to have that in with the

23 wastewater industry as well, and it's going to work as a

24 great tool for the replacement of the State's aging

25 infrastructure. 84

1 In addition, your efforts with the passage of

2 Act 13 has allowed Aqua to begin changing our fleet of

3 vehicles over to CNG. We're starting off with the purchase

4 of 13 CNG-fueled dump trucks, quite a number of vans and

5 pickups, and our goal is to have 90 of our 371 fleet

6 running on CNG in the future.

7 I'd also like to take the opportunity to publicly

8 thank Chairman Powelson and the other Commissioners for

9 their work during Hurricane Sandy. Our 4-hour -- we had to

10 give daily 4-hour updates on outages. We got all of the

11 major utilities in the State on nightly conference calls

12 during the event. I think it just went fantastic. I want

13 to acknowledge Chairman Powelson's leadership in that. The

14 calls were extremely productive, and the whole idea was to

15 get the utilities to cooperate, to work together to get

16 service restored to customers in Pennsylvania.

17 Of our 435,000 customers in Pennsylvania, we had

18 less than 400 customers that lost water, and that was less

19 than 24 hours. I would like to commend the electric

20 utilities for the enormous work they did. Listening to

21 what they had to go through, the coordination of bringing

22 people in from other States, was just phenomenal. What a

23 job they did.

24 We have a few ideas as you look forward to

25 legislation in the upcoming year involving the water and 85

1 wastewater industry. We ask that you continue supporting

2 policies to promote a fair and level playing field between

3 investor-owned and municipal systems. Please consider in

4 any of your legislation these measures that will promote

5 consistency in requiring the full cost of service pricing.

6 We also ask that you require the same

7 transparencies with the municipals that investors are

8 required to disclose, that they have to account for their

9 capital expenditures that occur as well as their operating

10 costs -- expenses, salaries, benefits, and so forth.

11 We feel that the investor-owned companies present

12 an excellent alternative to municipal and nonviable

13 companies, companies such as Aqua, American, York, and

14 United. We're disadvantaged by the price comparisons with

15 the municipals. A lot of it is because they don't charge

16 the full cost of service and that they also don't pay

17 taxes.

18 Nonviable systems, they lack the resources to

19 maybe make those capital investments, and then when they

20 do, it's a huge burden on their customers. So we make a

21 very good alternative to that.

22 We offer the advantages of economies of scale in

23 investing in our assets -- pumps, plants, and pipes that

24 strengthen the systems and bring reliability and good water

25 quality. 86

1 My next recommendation suggests revisiting the

2 mandatory well testing that was previously introduced by

3 Chairman Godshall. That was HB 1855 in 2012. This

4 mandatory testing would protect our State's valuable water

5 resources. Improperly constructed wells can lead as

6 avenues or pathways for contaminants and bacteria and, you

7 know, hurt the water aquifer. So there needs to be

8 requirements on well construction to better protect our

9 most valuable resource, which is our water aquifer.

10 I'll leave you with some closing facts. You've

11 heard a number of times today about the DSIC program, the

12 distribution system improvement charge. It has worked well

13 for Aqua. Since 1996, we've replaced or rehabilitated over

14 1,300 miles of main. We continually track water-quality

15 calls. They have absolutely been reduced over the years.

16 New mains mean better fire flows, better fire protection

17 for the residents and the people of the Commonwealth. It

18 also can mean better insurance with better ISO ratings as

19 you get out the old tuberculated pipe and replace it with

20 larger mains and mains with less friction loss.

21 From 2000 to 2004 in southeast Pennsylvania, we

22 averaged approximately 930 main breaks per year. Over the

23 last 3 years, we've gotten that down to 570 breaks. The

24 result is less customer outages and customers and

25 complaints due to loss of service. 87

1 I'll close with thanking you for the opportunity

2 to present testimony today, so I'll let you get to an early

3 lunch. As always, you can contact our government affairs

4 team, Kim Joyce or Heidi Hawkins or myself, with any

5 questions and so forth. And I wish you a wonderful day and

6 hope you all get home safely before the snowstorm, but

7 knowing that as you get home, your public utilities in

8 Pennsylvania will be providing you with service. You can

9 rest assured of that. So thank you very much.

10 MAJORITY CHAIRMAN GODSHALL: I totally agree with

11 you on the municipal end of it as far as, I have gone

12 through some of that back home in my district pertaining to

13 those municipal authorities, empire building more than

14 anything else, and it's, you know, with no accountability.

15 It's, you know, beyond belief.

16 MR. TAGERT: And that's correct. And many times

17 they don't have the political will to raise rates as they

18 should be for the true cost of service, and that's

19 something we'd really like to see, a more even playing

20 field.

21 MAJORITY CHAIRMAN GODSHALL: An illustration was

22 a purchase of a company not too long ago, that their wells

23 were contaminated with excess levels of arsenic and were

24 not usable, and a number of millions of dollars spent to

25 purchase the company with a 10-year rate freeze, you know, 88

1 above the rate levels that most other people are paying.

2 So there's no accountability, and I don't know how to get

3 at that, but it's happening and it's happening in more

4 cases than in my own district.

5 MR. TAGERT: Yeah, and we'd love to see that

6 addressed as well, Chairman.

7 MAJORITY CHAIRMAN GODSHALL: Are there any

8 questions? No questions.

9 Well, thank you very much for testifying, and we

10 appreciate your coming out here, appreciate the attendance

11 that we have here, and I'd say meeting adjourned.

12

13 (The hearing concluded at 10:55 a.m.) 89

1 I hereby certify that the foregoing proceedings

2 are a true and accurate transcription produced from audio

3 on the said proceedings and that this is a correct

4 transcript of the same.

5

6

7 Debra B. Miller

8 Committee Hearing Coordinator/

9 Legislative Reporter

10 Notary Public