Setting and Enforcing Standards
One of PUC's most important responsibilities during the transition to deregulation will be to ensure that all competitors in utility markets meet minimum standards of quality and reliability and do not engage in anti-competitive practices.
While PUC's rules address some minimum standards of quality, PUC generally has examined the quality of utility services only after the fact, in the context of rate hearings. Competitive markets will require the agency to set and enforce meaningful rules and standards for competition to protect Texas consumers.
In theory, fully competitive markets might eliminate the need for a strong regulatory presence. Full competition, however, particularly in the electric industry, may not be in place in Texas for years to come. In the meantime, service standards need special attention in the present interim period, when traditional controls have eased and effective new ones are not yet in place.
PUC's evolving regulatory role also will require the agency to remove barriers to fair market competition and ensure fair market practices.[ 1 ] Standards ensuring fair competition will be addressed through the agency's rulemaking authority.
PURA requires PUC to ensure that public utilities provide safe, adequate, efficient, and reasonably priced services. Traditionally, PUC has addressed problems in this area on a utility-by-utility basis, through its rate case process. Competition, however, will lessen PUC's ability to rely on rate cases to maintain standards. In a competitive environment, the agency must use its rulemaking process to give direction to service providers.
PUC recognizes its need for greater "front-end" regulation. In its recent restructuring, the agency created an Office of Policy Development, in part, to help the commissioners develop additional rules. TPR's review of PUC's current and planned rulemaking activity, however, indicates that this new policy focus is still being overshadowed by rulemakings tied to legislative initiatives and other ongoing technical changes.
Responsibility for PUC's rulemaking functions is divided between the Office of Policy Development and the Office of Regulatory Affairs. During fiscal 1996, PUC adopted 22 new telephone rules and 13 electric rules.[ 2 ] Twelve new electric and telephone rules are being considered in fiscal 1997. PUC estimates that its rulemaking workload will involve the equivalent of almost 13 full-time staff members in fiscal 1997.[ 3 ]
PURA authorizes PUC to enforce the rules it adopts.[ 4 ] PUC rules are in place to ensure that the public interest is protected, including the rights of utility customers. Over the last few years, PUC audits of utilities for compliance with its rules have returned $3.3 million to utility customers from billing mistakes and overcharges.[ 5 ]
PUC's enforcement efforts are handled primarily through the Consumer Protection and Enforcement (CP&E) Division. This division is staffed by a manager and four full-time positions; the manager reports to the newly created director of Consumer Affairs, under the direction of the executive director.[ 6 ] CP&E's fiscal 1996 and 1997 operating budget totals $228,865.[ 7 ]
CP&E's major functions are conducting compliance audits and enforcement investigations, recommending fines and penalties, and educating service providers. The compliance audit program averages eight electric and three telephone utility audits and more than $460,000 in refunds each year.[ 8 ] Current enforcement investigations include 10 electric and 31 telephone companies.[ 9 ]
PUC's enforcement process includes several steps. PUC conducts complaint investigations and compliance audits to ensure that utilities follow customer protection guidelines and other agency rules and orders. If PUC cannot successfully bring a company into compliance, it can ask the Attorney General's Office to initiate civil penalties and file suit against the company on behalf of PUC.
The success of PUC's compliance audit process, however, has depended heavily on its ultimate enforcement tool, rate regulation. As already noted, competition will make this tool considerably less effective.
The 1995 Legislature gave PUC a critical new enforcement tool, the ability to impose administrative penalties on utilities for noncompliance with its rules. Although the law went into effect in September 1995, PUC did not adopt rules implementing it until September 1996. At this writing, PUC has not yet imposed penalties for any violations.
TPR's review found that most parties to PUC rulemakings feel the process is constructive. Nonetheless, the agency has made only minimal progress toward setting the standards needed to govern the transition to competition through its rules. Current minimum standards have not been reviewed for any changes necessitated by the growing number of new service providers, particularly in telecommunications. The first proposal in this chapter addresses these concerns.
Another area of concern is the potential impact of deregulation on revenues generated by the gross receipts tax. TPR proposes PUC work with the Comptroller's office to examine this issue and report to the 1999 Legislature.
TPR found that a number of state utility agencies have programs in place to improve compliance and minimize violations by educating utilities on standards and rules. Another proposal addresses PUC's need for a similar program in Texas.
Several other states have improved the coordination and efficiency of their audit efforts by consolidating them within the organization. PUC's compliance audit efforts cut across divisions and are conducted on an ad-hoc basis, without systematic procedures. TPR recommends consolidating these functions for increased efficiency and improved oversight.
Finally, TPR believes that strengthening the administrative penalties law would help ensure that the agency has sufficient authority to reasonably address violations after the big stick of rate regulation is supplanted by competition.
PUC should ensure that it maintains appropriate minimum standards for all telecommunications and electric industries during their transition to a deregulated market.
Texas' Public Utility Regulatory Act requires PUC to ensure that public utilities provide safe, adequate, efficient, and reasonably priced services. The act authorizes PUC to set service standards and develop procedures utilities must follow in measuring and reporting on the quality of services they provide.[ 10 ]
PUC rules set general service quality standards for both telephone and electric utilities; for example, local telephone companies should not receive more than six customer trouble reports per month for every 100 lines.[ 11 ] PUC's standards for telephone service offer a number of explicit guidelines concerning such issues as operator service, access to long-distance carriers, and appropriate transmission levels. The rules also require telephone utilities to investigate and correct situations in which services fall below standard, and to report the results to PUC.[ 12 ]
Rules governing electric service focus largely on ensuring that utilities' equipment and services comply with a variety of national, state and regional standards. For example, electric utilities are required to maintain certain constant voltage levels and record the operations of every automatic circuit breaker in their system.[ 13 ] Other rules for electric utilities govern the location, testing, and accuracy of customer usage meters; voltmeter maintenance and regular voltage surveys; and recording requirements for the output and character of service rendered by generating stations.
In addition to quality-of-service standards, PUC rules provide a variety of other forms of consumer protection, in areas involving customer relations, refusal of service, deposit refunds, billing procedures, and service cutoffs.[ 14 ]
Regulatory response to competition
As utilities prepare for increased competition, they will examine ways to reduce or minimize costs. Improved competitiveness, however, should not come at the expense of service quality. Frequent power interruptions, overloaded telephone lines, backlogs of service calls, or poor responsiveness to consumer inquiries and complaints should not be tolerated by Texas regulators. A 1995 national summit of state utility commissioners noted that current utility standards across America must be revised and adapted to fit the changing regulatory environment.[ 15 ]
A recent report by the Wisconsin Public Service Commission (PSC) on electric utility restructuring proposed that the state respond to competition by developing extensive service requirements at both the distribution and retail levels to protect residential, commercial, and industrial customers. PSC is developing a number of new standards it believes are necessary in a restructured electric power industry.[ 16 ]
Standards for customer service, such as for billing procedures, also may need to be modified in response to competition. Recently, a coalition of Texas consumer groups petitioned PUC to develop rules barring local telephone companies from cutting off the service of customers who have not paid the long-distance portion of their bills. This proposed rule is intended to fight "slamming"-- the changing of the customers' long-distance carrier without their knowledge or consent--by protecting their local service if they refuse to pay the portion of their bills tied to the unauthorized long-distance company's services.[ 17 ]
The Ohio Public Utility Commission recently issued for public comment a set of proposed new standards that significantly increase consumer safeguards and eliminate a number of out-of-date technical requirements. These rules are the result of a year long process to obtain input on customer expectations, and utility and new service provider needs, including a survey of all the major stakeholders by the National Regulatory Research Institution in Ohio. Of particular interest is the agency's decision to expand the standards to all new service providers, including both facility-based companies and resellers of services. The Commission hopes to have the new standards in place in the next few months.[ 18 ]
Standards should be applied equally to all new competitors, not just the incumbent utility. One instance of unequal application already exists. In 1995, PURA was amended to create two new certificates authorizing companies to compete in the local exchange telephone market. The first is a Certificate of Operating Authority, or COA, for companies building their own facilities; a COA holder must meet existing quality of service standards. The second certificate is a Service Provider Certificate of Operating Authority, or SPCOA, entitling the holder to resell services. The SPCOA is limited to companies with 6 percent or less of the intrastate phone market (as defined in terms of minutes of use over the most recent year). However, SPCOA carriers are not subject to current quality-of-service standards applying to incumbent local telephone companies or COA holders.[ 19 ] As of November 7, 1996, the PUC had approved 62 SPCOA applications.[ 20 ]
In a recent report on competition in the telecommunications markets, PUC acknowledged this problem and asked the Legislature to authorize the agency to revoke SPCOA certificates or administer administrative penalties if their holders fail to comply with PUC customer service and service quality standards.[ 21 ]
To protect the public, standards should be applied to all competing participants, not simply the incumbent provider or a select group of new providers. While this has only become an actual problem on the telephone side, the potential exists for similar problems as electric deregulation emerges.
Registration of new providers
Another area of concern is the rising number of new service providers that may not be covered by PUC's current rules. As markets expand and competition increases, new providers and new classes of providers will spring up to fill niches that previously were all handled by a smaller number of easily identifiable monopoly utilities. Standards cannot be ensured if PUC lacks an accurate listing of all providers. Yet TPR found that PUC does not have comprehensive records of the growing number of service providers already operating under its jurisdiction.
PUC regulates about 158 electric and local telephone utilities and has limited jurisdiction over 49 telephone and electric cooperatives, 100 newly certified telephone providers, 368 telephone operator service providers, 600 registered pay phone providers, and 70 permitted telemarketers using automatic dialing/announcing devices.[ 22 ] In addition, PUC requires long-distance carriers and power marketers and exempt wholesale power generators to register with the agency, although it does not regulate these activities. At present, more than a thousand long-distance carriers and 49 power marketers and generators are registered in Texas.[ 23 ]
Keeping track of this expanding universe of providers already presents significant problems. PUC estimates that as many as 600 Texas payphone providers are unregistered, even though they are required to do so by law.[ 24 ] Furthermore, PUC has regulatory authority over billing and certain service matters of 800 Texas apartment complexes that submeter electric service to over 100,00 individual apartments, yet these complexes are not required to register with PUC.[ 25 ]
PUC will be unable to ensure consumer protection in the competitive market unless it can monitor all electric and telecommunications service providers operating in Texas. California, the first state to approve electric retail competition, included in its legislation a requirement that all retail suppliers register with the state's utility agency. The state is contemplating more extensive licensing and oversight procedures to monitor market participants. Rhode Island and New Hampshire, which also have passed retail electric competition legislation, will require the registration of service providers.[ 26 ]
A. The Public Utility Regulatory Act should be amended to require all entities providing electric or telecommunications services regulated by PUC to register with the agency.
This type of general statutory authority will ensure that PUC has the means to keep track of all the players involved in the changing environment, even if additional entities come under their regulation but are not clearly required to register with PUC. This change would not impact entities already specifically required to register, such as long-distance carriers and electric wholesale generators, even though they are not subject to PUC regulation.
This change would pull in entities already subject to PUC regulation but not currently registered, such as apartment owners who submeter electricity to their tenants. PUC would need to develop specific rules regarding how each type of provider should register, and PUC should maintain a comprehensive list of all types of electric and telecommunications providers subject to their jurisdiction.
B. PURA should be revised to authorize PUC to apply minimum quality standards to all electric and telecommunications service providers.
PURA should be amended to ensure that all new service providers are subject to the same standards and enforcement processes as incumbent utilities. This should specifically include SPCOA holders.
PUC rules should be revised to subject new groups of service providers to PUC standards whenever they enter the market and to clarify which standards apply to each group of providers.
C. PUC should review its current minimum standards for electric and telecommunications services to ensure public protection during the transition to deregulation.
The changes brought on by competition will require PUC to review its current process for setting and monitoring standards. TPR found that the agency recognizes the need for such changes to their rules, but has not yet reevaluated its rules and procedures to address these concerns.
The introduction of new services will require PUC to regularly revise and adapt its rules to match the changing regulatory environment. This process should acknowledge that all areas of the state will not reach full competition at the same time. Different service quality standards may be needed for competitive and noncompetitive market areas.
These recommendations should be implemented with existing resources.
The impact of deregulation on the state's gross receipts tax should be examined.
Texas levies a tax of one-sixth of one percent on the gross receipts from rates charged the ultimate consumer by public utilities within PUC's jurisdiction, including long-distance carriers. The tax is collected by the Comptroller's office and more than covers the operating expenses of both the PUC and the Office of Public Utility Council. After adjusting for accounting technicalities, the utilities gross receipts tax raised $35.7 million in general revenue in fiscal 1996, respectively, and is expected to generate $45.4 million during fiscal 1997.[ 27 ]
During this review, TPR attempted to ascertain if public utilities had been complying with the requirements of this tax and making payments appropriately. Several concerns were raised.
Comptroller records indicate difficulty in obtaining an accurate accounting of which companies are operating in Texas as "public utilities" from the PUC.[ 28 ] In the past, the Comptroller's office has periodically canvassed public utilities to ensure compliance. For example, in 1991 the Comptroller sent letters to 147 telephone companies which resulted in additional payments of $710,000 from 27 companies. Such periodic monitoring helps ensure compliance.
However, with changes in the law, it can be difficult to track who is in included in the definition of public utility. Confusion has resulted in the distinction between the definition of a public utility, which for telecommunications has only included dominant carriers, versus a telecommunications utility, which includes a variety a new providers. In the traditionally regulated environment, which was dominated by a few major companies, it was easier to identify companies included in the definition of a "public utility" and therefore subject to the gross receipt's tax.
In telecommunications, the rapid proliferation of new entrants into the market since deregulation is making the picture considerably more complex. This situation will likely be the case on the electric side as well if retail competition is authorized.
As both of these markets are opened up to increasing competition, consideration should be given to the impact on the gross receipts tax. If the tax is applied only to the incumbent or dominate public utilities, revenues will decrease as segments of the market shift to new competitors.
PUC and the Comptroller's office should conduct a joint study examining the current structure of the gross receipts tax and the potential impact of deregulation on revenues generated from this tax.
Immediate attention should be given to the current definitions contained within PURA to ascertain precisely which categories of utilities are subject to the tax. The Legislative Council is currently examining this language for recodification.[ 29 ] However, if statutory clarification is needed, recommendations should be developed for the 1997 Legislature. Once clarified, the PUC should compile a list of utilities subject to the tax and provide the list to the Comptroller's office at the beginning of each fiscal year.
The joint study should examine the current structure of the tax and the long term impact of deregulation on revenues generated from the tax over the next 10 years, with a report to the 1999 Legislature. The requirement in the previous recommendation for all providers to register with PUC should facilitate this effort.
This recommendation should be implemented within existing resources of each agency.
PUC should develop a comprehensive educational program for electric and telephone service providers.
Education efforts aimed at service providers are a must for consumer protection. Large utilities, of course, employ staff members who are responsible for keeping abreast of PUC rules, since compliance is in their best long-term interest. Small providers, however, often provide utility services as a sideline. They may, for instance, own a payphone, or provide electricity through a submetering arrangement within an apartment complex. These smaller operators are subject only to certain PUC rules and generally are not as well informed about their service responsibilities. An increasingly deregulated environment will produce more providers and likely will increase the potential for violations. New providers may be unfamiliar with the rules and may violate them in efforts to keep costs down; many will come and go as the marketplace evolves.
The most effective way to reduce consumer complaints and increase compliance by service providers is to prevent violations from occurring in the first place. One way to do this is to provide better information to providers regarding their responsibilities to consumers and PUC. Yet PUC does not have a formal process to educate service providers in their responsibilities under state law and PUC rules; instead, the agency relies on the utilities to understand their responsibilities.
PUC's provider educational efforts generally are limited to post-audit discussions with providers aimed at correcting violations. After PUC's auditors completed a review of a regulated utility, they typically meet with utility personnel to explain any violations found during the audit and to set a deadline for their correction. Yet the majority of violations found during PUC's audits are common and recurring, such as the incorrect calculation of interest on customer deposits. TPR learned, however, that PUC has not made any effort to communicate information on common violations to all utilities in any systematic way, such as through newsletters or pamphlets. According to the PUC staff, this causes repeated noncompliance on the part of the utilities.
Occasionally, PUC compliance auditors make efforts to speak at scheduled meetings of certain targeted groups, such as the Texas Payphone Association, to discuss common violations and increase their awareness to compliance with PUC rules. To date, however, these efforts have been limited.[ 30 ]
TPR found that several states take steps to educate service providers before violations occur. For example, Pennsylvania's utility agency makes special efforts to draft its service rules in plain language, and conducts periodic workshops to discuss new rules with providers.[ 31 ]
In addition, the agency uses its complaint database to identify the most frequent violations, which often represent systematic problems affecting many utility customers. The agency then categorizes these violations and regularly provides all utilities with specific examples of the most common ones. This process gives the utilities an opportunity to voluntarily correct deficiencies in their operations.[ 32 ]
PUC should develop a program to educate utility service providers in their legal responsibilities.
Better education of service providers, in combination with strong enforcement actions, should increase compliance with PUC rules and reduce customer service violations. The Investigations and Compliance Section proposed in Proposal 7 should be responsible for developing this program.
These educational activities could be performed by PUC auditors along with their audit responsibilities, as these staff members already understand the rules and know the providers. This process could be performed in cooperation with TPR's proposed expansion of the consumer education function (see Proposal 12), and take advantage of common training materials and equipment to the extent possible.
In developing this program, PUC should take advantage of its complaint database, the results of its compliance audits, and focus groups, if necessary, to identify common problem areas and violations to be addressed through the educational process. The program should incorporate an outreach function, providing utilities with easy access to explanations of various service rules. The Consumer Affairs Division maintains a toll-free number to facilitate consumer questions; a similar approach may be appropriate for service providers as well.
Other ways to educate providers could include ongoing efforts to state PUC rules in simple language and periodic workshops to discuss newly adopted rules. Current efforts to speak to service provider organizations should be expanded. As new competitors come into the utility marketplace, PUC should identify opportunities to educate them as well.
If properly implemented, a successful education program should help to minimize violations and increase consumer satisfaction.
This recommendation would entail an initial cost and staff time to design and prepare the educational materials; after that, the cost of maintaining those materials should be relatively minor. These costs should be absorbed within existing agency resources.
[ 1 ] Vernon's Ann.Civ.St.art. 1446c-O, SS3.001.
[ 2 ] Based on TPR analysis of the Public Utility Commission's current and planned rulemakings for fiscal years 1996-1999.
[ 3 ] Letter from Anita L. Fourcard, Office of Policy Development, Public Utility Commission of Texas, November 20, 1996; interview with Vicki Oswalt, director of the Office of Policy Development, Austin, Texas, November 22, 1996; and interview with Jess Totten, assistant director, Office of Policy Development, Austin, Texas, November 25, 1996.
[ 4 ] Vernon's Ann. Civ. St. art. 1446 c-O SS1.101(b).
[ 5 ] Public Utility Commission of Texas, "Status Report on Compliance Audits as of September 30, 1996," Austin, Texas, October 1996, p. 4.
[ 6 ] Public Utility Commission of Texas, "PUC Organization Chart," Austin, Texas, November 1, 1996.
[ 7 ] Budget worksheets from John Casey, fiscal director, Public Utility Commission of Texas.
[ 8 ] Public Utility Commission of Texas, "Status Report on Compliance Audits as of September 30, 1996."
[ 9 ] Memorandum from Patricia Dolese, manager, Customer Protection & Enforcement Division, to commissioners, Public Utility Commission of Texas, November 1, 1996.
[ 10 ] Vernon's Ann. Civ. St. art. 1446c-O, SS3.155.
[ 11 ] 16 T.A.C. SS23.61(e)(7).
[ 12 ] 16 T.A.C. SS23.61(e).
[ 13 ] 16 T.A.C. SS23.62.
[ 14 ] 16 T.A.C. SS23.41-SS23.59.
[ 15 ] National Regulatory Research Institute, Missions, Strategies, and Implementation Steps for State Public Utility Commissions in the Year 2000: Proceedings of the NARUC/NRRI Commissioners Summit (Columbus, Ohio, May 1995), pp. 20 and 29.
[ 16 ] Wisconsin Public Service Commission, Report to the Wisconsin Legislature: Electric Utility Restructuring in Wisconsin (Madison, Wisconsin, February 22, 1996), pp. 4 and 8.
[ 17 ] "Consumers Seek `Slamming' Aid," Austin American Statesman (Austin, Texas, November 2, 1996), p. D-1.
[ 18 ] Interview with Amy Weinrich, public utility administrator, public interest center, Ohio Public Utility Commission, January 10, 1997.
[ 19 ] 16 T.A.C. SS23.61.
[ 20 ]Interview with Daryl Tietjen, assistant manager, Office of Regulatory Affairs, Public Utility Commission of Texas, Austin, Texas, December 2, 1996.
[ 21 ] Public Utility Commission of Texas, 1997 Scope of Competition in Telecommunications (November 18, 1997), Appendix E. (Draft report.)
[ 22 ] Public Utility Commission of Texas, 1995 Annual Report (Austin, Texas, June 1995), p.1 and Interview with Dan Foster, Legal Administration, Public Utility Commission of Texas, January 6, 1997.
[ 23 ] Public Utility Commission of Texas, "IXC List," Austin, Texas, November 14 and December 2, 1996. (Computer printout.)
[ 24 ] Interview with Patricia Dolese, Public Utility Commission, December 6, 1996.
[ 25 ] Interview with John Capitano, compliance auditor, Consumer Protection and Enforcement Division, Public Utility Commission of Texas, Austin, Texas, December 6, 1996; and 16 T.A.C. SS23.[ 51 ] (a).
[ 26 ] The Regulatory Assistance Project, Consumer Protection Proposals for Retail Electric Competition, pp. 74-75.
[ 27 ] Texas Comptroller of Public Accounts, September 1995 Certification Revenue Estimate (Austin, Texas, September 1995), Table 3; and Texas Comptroller of Public Accounts, 1998-1999 Biennial Revenue Estimate (Austin, Texas, January 1997), Schedule I.
[ 28 ] Interview with Liz Grieder, Tax Policy, Office of the Comptroller of Public Accounts, January 16, 1997.
[ 29 ] Interview with Carolyn Hall, Attorney, Legislative Council, January 16, 1997.
[ 30 ] Interview with Patricia Dolese, October 17, 1996.
[ 31 ] TPR telephone survey of eight state utility commissions, November 1996.
[ 32 ] Pennsylvania Public Utility Commission, Bureau of Consumer Services, Consumer Services Activity Report: Telephone Utilities 1994 (Harrisburg, Pennsylvania, 1995), pp. 42-43.
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