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Presentation of Janee Briesemeister, Consumers Union
Consumers International
III Regional Conference for the Caribbean Region
June 10, 1999
Public utilities in the U.S. are in transition, as the political trend is to deregulate former monopoly utilities and open up former monopoly markets to competition. These shifts in the system of regulation and in market structure have thus far provided no meaningful benefits for consumers, and in most cases have resulted in increased rather than decreased prices paid for basic services. The new regulatory structure has also taken away some of the advocacy tools used by consumer organizations. Therefore, we must begin to do their work differently in order to effectively advocate on behalf of small consumers.
I would like to briefly review the history of the U.S. system of regulating utilities, and the traditional ways in which consumer advocates have used the process to influence decisions regarding utility rates and services. Then I will describe the U.S. utility industry in transition and the new challenges and opportunities for consumer advocacy.
Historic Ownership and Regulation of Utilities
There are three basic forms of utility ownership in the U.S., each with its own system of regulation:
· Private for- profit businesses given monopoly status and subject to government regulation of price and service; or
· Owned and operated by a local government which sets prices and policies (most commonly water and electric utilities); or
· "Cooperatively" owned by "members" who are customers, primarily in rural areas. Cooperative electric, telephone and water utilities developed to provide service where private business would not. These utilities were supported by very low cost government loans. Regulation is a mixture of government regulation and self-governance.
Consumer Participation
Most consumer advocacy groups formed in 1970's as utility requests for rate increases escalated. Billions of dollars in electric rate increases have been approved during the 70's, due largely to the placement of nuclear power plants into rates, as well as due to increasing fuel prices. Many consumer groups were formed to protest the cost and safety record of proposed nuclear power plants.
Advocates include government agencies, independent consumer organizations (such as Consumers Union), and legal services agencies representing low-income consumers. The rate increases of the 1970's helped consumers win legislation in many states creating government-funded advocate offices, with the specific mission of representing the small consumer in utility rate proceedings.
Consumer advocates influence utility rates and service both though the formal regulatory proceedings and by advocacy on the "outside", such as through the news media.
Formal Proceedings The regulatory process, based on our legal system, includes opportunities for participation, which includes the right to obtain information from the utility. Consumers of utility service are given status as an "intervenor" meaning they have a right to participate in the proceeding because they are affected by the regulator's decision. The regulatory process also gives consumers the opportunity to file complaints, or request the regulator take action on rates or service issues. In other words, the process is not dependent on the utility making a request to the regulator. Intervernors are also able appeal the regulator's decision through the court system.
Despite the openness and transparency of the regulatory system in our country, it does not put consumer advocates on the same par with utility companies. Participation requires money and expertise in complex legal, economic and technical matters. In theory, the process gives consumers a hearing before a fair and unbiased decision-maker. However, no proceeding is immune from political influence. Nonetheless, the availability of formal hearings sometimes provides a forum where consumers without political power are often able to win victories. The right to gain access to information held by the utility and to present the information in a open hearing, often before the media, can embarrass the utility and the most biased regulators.
Outside the Hearing Room Consumers cannot limit their participation to the hearing room. There is an "outside" process which is equally, and sometimes more important. Consumer advocates disseminate messages through the news media to educate consumers and influence decision-makers. Advocates sometimes organize public protests of government decisions or utility actions, although public protests on utility issues are far less common today in the U.S. than they were during the construction of nuclear power plants. "Grass roots" organizations (meaning membership based organizations) influence policy through direct consumer contact with decision makers, such as through letter writing campaigns (including email) and phone calls. As consumer advocates we have also extended our involvement to include participation in the passage of legislation affecting utility regulation.
Victories and Losses Over the decades consumer advocates have developed the expertise necessary to credibly challenge utilities' claims in formal proceedings. All requested rate increases have not been granted and for the most part good service quality standards have been established. This includes the goal of universal service-meaning that everyone has access at an affordable price, including in low income and rural areas.
These victories have helped build credibility and institutionalize the consumer voice before the regulatory body and legislators. Because we have made credible arguments, backed up by public opinion, utilities and regulators have to take us seriously, or at least expend some effort in muzzling us. The latter is the current trend, which I will discuss in a moment.
Although consumer advocates have established our presence, and our country has a relatively transparent regulatory process, the consumer voice is not on a par with that of the utilities. Billions of dollars in rate increases have been approved in the last three decades. Often utilities "control" the regulators through political influence. Utilities use the political process to influence the outcome of proceedings, such as by using their campaign contributions to influence governors and legislators who in turn can influence appointed regulators. It also cannot be overemphasized how much money it takes to participate in a regulatory proceeding. Utilities often attempt to stifle consumer participation by using tactics which increase the cost of the proceeding.
The environmental record of victories on behalf of consumers is also mixed. In the U.S. consumer and environmental advocates are often in separate organizations and there is a growing schism between the two. Recently several major environmental groups have taken positions on utility issues which many consumer advocates believe did not fully consider the cost to consumers.
The Trend Toward "Competition" in The Utility Industry Has Hurt Consumers
The utility industry in the U.S. is in the process of change. Deregulation of utilities is part of a political trend calling for less government oversight of business. Citizens are told that government intervention through regulation is bad for business and jobs. Consumer advocates have been promised more choices and lower prices through deregulation. The message is, "competition will solve all problems with the market."
In our experience, deregulation is not equivalent to competition. In fact, competition-real competition, not just the theoretical opening of markets to competition-must precede deregulation of monopoly utilities. Yet our struggle has been against utilities which push for policies which deregulate monopolies while erecting barriers to competition.
A good example is the telecommunications industry. Beginning in the 1980's policies shifted toward moving away from comprehensive regulation and monopoly markets. Consumers were told they would be better off with competition because they will receive more choices and lower prices. Bit by bit telecommunications services were deregulated and opened to competitors. In 1996 federal law opened all aspects of telecommunications to competition. Many states also passed state telecommunications deregulation laws around the same time. There was an expectation that after a "transition" period of about 3 or 4 years there would be sufficient competition in the market.
Consumers Union has studied the impact of deregulation on consumers and our conclusion is that most residential consumers are worse off now than they were under monopoly markets. (Our studies and reports can be found on our website, http://www.consumersunion.org/resources/publications.htm) . Among our findings:
· Contrary to expectations, there are virtually no competitive alternatives for residential customers. Competition is just starting to develop for business customers. This finding is especially problematic because most laws assume competition will replace the need for regulation. It is clear that merely opening markets to competitos does not ensure that competition will develop, or that it will develop at the same pace for all types of customers.
· The consumer market has been bifurcated. We call this the "Digital Divide". Customers who have large telecommunications expenditures, especially business customers, have received lower prices and better service. At the same time small consumers, who use few services and have modest expenditures, have seen higher monthly phone bills. This is due to new fees and surcharges added to bills to aid the "transition to competition." In addition, costs have been shifted from competitive to non-competitive services, and this is justified as "rate rebalancing". Low income consumers and consumers with poor credit histories often have no choice but high cost services, such as pre-paid phone service, which can cost as much as three times the monthly rate of the incumbent phone company.
· The telephone monopolies are taking actions contrary to the development of competitive markets. The "urge to merge" has been phenomenal. Rather than a proliferation of new companies, the result of deregulation has been the merger of large regional companies into larger national and global companies. Potential competitors are buying each other rather than competing with each other. The incumbent monopoly companies erect barriers to competition. Some have challenged nearly every pro-competitive regulatory decision in court. Competitors are too busy in court to compete in the market.
· In addition to price increases there are new problems for consumers. Consumers are confused-they can't compare offers, and they can't determine which offer is the best for them. We say consumers can't "compare apples to apples". There is a growing problem with fraud. Fraudulent practices have triggered development of an entirely new lexicon: "slamming" means to have the company providing your service changed to another company without your knowledge or permission; and "cramming" is the practice of adding charges to phone bills for services that were never ordered or authorized. Since deregulation of utilities has begun, service quality has suffered, and we have seen elimination of services.
New Challenges and New Opportunities for Advocates
The trend of opening utility markets to competitors is both a challenge and opportunity for consumer advocates. Most policymakers in the US believe that a competitive market is sufficient to discipline price and service quality. Given that mindset, we have had difficult successfully arguing for retention of price protections and other regulations. Formal proceedings have been limited. For instance, it is more difficult to get information in regulatory proceedings, as much information is classified as "confidential trade secret" and exempt from public disclosure under our laws. With the introduction of competition many disputes that come before regulators are viewed by regulators as "business v. business" as would-be competitors try to keep one another out of the market. In these situations the impact on consumers is often forgotten.
As advocates, our role in rate proceedings is being replaced by a new role as market monitors--keeping an eye on the level of competition, prices, bad business practices and service quality problems. There is also a need for customer education regarding new market structure. Consumers are confused by offers which cannot be compared against one another on a standard basis. Market place confusion causes consumers to look for help from non-biased sources, such as consumer organizations. On the other hand, the good economy in the U.S. makes consumers less active and less likely to complain about a series of relatively small rate increases, whether deserved or not. Similarly, the impact "merger-mania" and globalization of business has on consumers has little meaning for the average citizen. Without strong public support behind us, consumer advocates have a more difficult job. So we must be creative in using new tools, such as the Internet, and new organizations, such as consumer purchasing cooperatives, to communicate directly with consumers.
An even more troubling trend is for utilities (and businesses in other sectors as well) to co-opt the consumer movement. They do this is in several ways. There is increasing use of public relations to influence the news media and public opinion. Utilities run issue campaigns just as candidates for office run political campaigns, including putting multi-million dollar commercials on television to promote deregulation. Public opinion polling is used to back up utility-initiatives, although we all know that poll results can be influenced by the way the question is asked. Utilities give significant donations to existing public interest organizations, usually ones which have not typically participated in utility rate cases. These groups then often make statements supportive of the utility's position. Finally, utilities, like many businesses in the U.S., have created "astroturf" or "front" groups. These are groups which have names that sound like consumer organizations, but are fully funded by utilities. They entice real consumers to sign on to their cause by offering slick direct mail promotions and free membership.
Next Steps
In terms of our political action, we should follow the example of the utilities and think long term. Look at what has happened with utility regulation in the U.S. Utilities take a very long term view. The move in increments toward their goal. They keep coming back and coming back. SBC is probably the best at understanding political power, and the company has been so successful because it is extremely disciplined in its message. We must do the same-rather than react, we must set a course. The same message has been repeated over and over at this meeting-consumers must have access to basic service, information, safety, redress, environmental protection. As Rhoda said, these principles address inherent weaknesses in markets. Competitive markets do not solve all consumer problems as some proponents argue.
Like utilities, we must think globally. Obviously, we do that through CI and meetings like this one. However, I'm sure we all find that we get very involved in our local issues and forget that a utility's actions fit into its global strategy. We should not forget that our international colleagues on the consumer side can give us valuable assistance. The same utility may have already attempted the same trick in another country. For example, in some recently passed legislation regarding electric utilities in Texas (where I am based) we were able to win a limit on the price that can be charged for pre-paid electric service, showing that the highest cost electricity in the UK's retail electricity market is for pre-paid service (for which there is no risk to the utility of non-payment).
Finally, we must also be strong in our advocacy to make whichever structure is chosen-regulated monopoly utilities or a competitive market-work as effectively as possible in the interest of consumers. Certainly monopoly utilities were not the perfect situation for consumers, if there were there would have been no need for us. But promised benefits of competition have not developed either. Instead we see benefits for few, higher prices for many, and more profits for the big transnational corporations. The opening of markets to competition does not replace the need for rules and regulation to protect consumers, nor do they diminish the need for strong consumer advocates.
Thank you.
