Testimony of Roger Colton on Duke-Progress merger

 DOCKET NO. E-2, Sub 998

DOCKET NO. E-7, Sub 986
 
Summary of  the Testimony of Roger D. Colton
 
My name is Roger D. Colton. I am a principal in the firm of Fisher Sheehan & Colton, Public Finance and General Economics of Belmont, Massachusetts. In that capacity, I provide technical assistance to a variety of federal and state agencies, consumer organizations and public utilities on rate and customer service issues involving telephone, water/sewer, natural gas and electric utilities. 
I work primarily on low-income utility issues. This involves regulatory work on rate and customer service issues, as well as research into low-income usage, payment patterns, and affordability programs.  My educational background is in both law and economics. A list of my qualifications is presented in Appendix A.
My testimony identifies adverse impacts to consumers that will likely arise from the merger between Duke Energy and Progress Energy. I then assess the extent to which these harms will likely fall disproportionately on low-income households and why low-income households, by the very nature of their poverty, do not have the capacity to take steps to avoid these adverse impacts. Finally I propose a series of merger-related conditions that will help mitigate the identified harms, and deliver positive benefits, to the low-income population.
Harms arise because of the expected impacts of the merger on the ability of the Company to deliver the full range of customer services, including customer services to payment-troubled low-income customers. 
The proposed merger of the two North Carolina utilities will have an adverse impact on the services offered to low-income consumers. A disproportionate number of low-income customers have arrears. These low-income customers are in substantial need of services provided through Company customer service representatives. These customers will be adversely affected through consolidation and dilution.
Consolidation refers to the process of combining functions and offices so that a larger geographic area can be served, possibly with a smaller staff in fewer offices, using a unified system and procedures. One impact of consolidation into the uniform information system of the merged companies will be to take discretion away from local customer service representatives to deliver the very services which the members of the low-income payment-troubled population rely upon. 
The merger constrains the rights conferred upon North Carolina customers (to have their individualized circumstances taken into account) and imposes upon Duke’s customer service representatives the obligation to instead work within the confines of a standardized data processing system.           
The proposed merger will also dilute the resources available to low-income payment-troubled customers of Duke as the blending of low-income and customer service resources will divert resources from low-income customers. The problem arises in one of two ways. First, there is no question but that the merger is ultimately intended to result in a reduced number of customer service representatives serving ratepayers. Second, in addition to this staff reduction, the dilution of resources available to low-income ratepayers will occur because the low-income customers in Duke communities tend to face lower energy burdens than their counterparts with Progress. 
            The merged company will be devoting fewer resources to its combined payment-troubled population. At the same time these resource reductions are occurring, Duke is being combined with a company that has greater affordability problems and thus more significant payment-troubles. As a result of the combined effect of this reduction in resources directed toward an increase in payment-troubles, the resources available to deal with the existing payment troubles will be diluted. To the extent that two companies are merged, therefore, with one company's customers facing greater payment troubles, that company will receive a higher level of resources and attention.
            Low-income consumers frequently require assistance in dealing with their payment troubles. Low-income consumers rely upon the company to deliver a variety of services, taking into account their individual circumstances, including, but not limited to, the negotiation of payment plans, the negotiation of deposits, and the avoidance of service disconnections for nonpayment. For all of the reasons outlined above, the merger will necessarily reduce the legal rights conferred upon payment-troubled customers, and have an adverse impact on low-income payment-troubled customers through consolidation and dilution. In the absence of mitigation, these harms will accrue to the direct and substantial detriment of low-income consumers.
Given the inability-to-pay of low-income households, the untreated energy consumption of low-income households will lead to increasing bill payment troubles leading to a reliance on customer service processes. As the merger of Duke and Progress leads to an ever-bigger utility, with less flexibility in the pursuit of customer service processes coupled with less knowledge of local external resources to help address the inability-to-pay problems, an increasing burden will fall on the low-income customer population as the existing customer service processes become less effective. 
Substantial research supports the conclusion that utility bill payment problems flow from an inability-to-pay.  When households face unaffordable home energy bills, they can engage in different types of behavior. They might pay their energy bills while experiencing deprivation in other household necessities. They might not pay their energy bills, while maintaining their other necessities. Or they might engage in a reduction in energy use, beyond mere conservation, and face household deprivation in those respects. Service disconnection becomes a real threat for many low income households.
Market barriers applicable to low-income families rather than generic to all residential customers include high initial capital costs, lack of access to capital, high implicit discount rates/payback periods, high proportion of low-income renters, split incentives between landlord and tenants, and high mobility rate of low-income renters. 
The primary mitigation measure involves efforts to reduce low-income home energy bills to a more affordable level through a series of usage reduction strategies. By reducing energy consumption provided by the Company, these measures also help prevent the payment troubles. The usage reduction measures that would contribute to the mitigation of these harms, however, cannot be expected to be provided in the absence of specific merger-related conditions.  
In my testimony, I propose merger conditions to mitigate the likely harms to low-income families. The first is for Duke to provide a payment to the NC Housing Finance Agency of $27 million per year for ten (10) years to supplement the funding of low-income weatherization.  The proposed funding level is also consistent with other commitments that have been made by public utilities as a condition of their combination into larger companies. I recommend the Housing Finance Agency because of my concern that the money not be administered by Duke, but rather by another agency. The Housing Finance Agency already partners with agencies throughout North Carolina in providing services to many low-income families.  
             My second recommendation to mitigate effects of the merger on low-income families is an Arrearage Management Program (AMP). Duke can require that its funding be targeted toward high-use, high-arrearage households in order to facilitate the coordinated impact of weatherization funding and the AMP initiative. An AMP participant would enter into a payment plan that has an arrearage and a current bill payment component to it. Arrears would be subject to a deferred payment arrangement of 12 months. In addition, current bills are made subject to a 12-month levelized budget billing agreement. Any confirmed energy assistance received by the customer would be subtracted from the levelized budget billing payment requirements for current bills. 
I recommend full funding be provided for the AMP through a deferred cost recovery mechanism. Program funding, including administrative costs and evaluation costs, should be accrued in a deferred account subject to recovery (with carrying costs) in Duke’s next base rate case. Set-up costs, which should be minimal, should be provided as Duke’s contribution to the program.
            I conclude that the AMP is not only a reasonable, but also a necessary, component of the merger conditions related to low-income weatherization. Addressing low-income payment-troubles in a manner so as to mitigate the customer service harms that I have identified in my testimony requires not only a mechanism to address current bills, but a mechanism to address pre-existing arrears as well. 
Lastly, in my opinion, the Agreement and Stipulation does not address the harms that I have identified. The Agreement and Stipulation does not address the risks posed by the merger to low-income customers involving the increased risk of reduced customer service, increased costs (through late payment fees, customer service fees, deposits, and the like), and the increased risks of collection activity being directed toward low-income customers (including the loss of service due to disconnections for nonpayment). 
The proposed $15 million contribution for both undefined “workforce development” and “low-income energy assistance” is not sufficient to meet the test set forth in the settlement document, that the Stipulation Agreement, paragraph 15, would “ensure that the Merger will have no adverse impact on the rates charged and the service provided by DEC and PEC to North Carolina retail ratepayers, that DEC’s and PEC’s North Carolina retail ratepayers are protected and insulated to the maximum extent possible from all known and potential costs and risks associated with the Merger, and that the benefits of the Merger to DEC’s and PEC’s North Carolina retail ratepayers are sufficient to offset those potential costs and risks.
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