<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:60356.wais]
THE ELECTRICITY COMPETITION AND RELIABILITY ACT
=======================================================================
HEARINGS
before the
SUBCOMMITTEE ON ENERGY AND POWER
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
on
H.R. 2944
__________
OCTOBER 5 and 6, 1999
__________
Serial No. 106-66
__________
Printed for the use of the Committee on Commerce
U.S. GOVERNMENT PRINTING OFFICE
60-356 CC WASHINGTON : 1999
COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin
BILL LUTHER, Minnesota
LOIS CAPPS, California
James E. Derderian, Chief of Staff
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Energy and Power
JOE BARTON, Texas, Chairman
MICHAEL BILIRAKIS, Florida RALPH M. HALL, Texas
CLIFF STEARNS, Florida KAREN McCARTHY, Missouri
Vice Chairman THOMAS C. SAWYER, Ohio
STEVE LARGENT, Oklahoma EDWARD J. MARKEY, Massachusetts
RICHARD BURR, North Carolina RICK BOUCHER, Virginia
ED WHITFIELD, Kentucky FRANK PALLONE, Jr., New Jersey
CHARLIE NORWOOD, Georgia SHERROD BROWN, Ohio
TOM A. COBURN, Oklahoma BART GORDON, Tennessee
JAMES E. ROGAN, California BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ALBERT R. WYNN, Maryland
HEATHER WILSON, New Mexico TED STRICKLAND, Ohio
JOHN B. SHADEGG, Arizona PETER DEUTSCH, Florida
CHARLES W. ``CHIP'' PICKERING, RON KLINK, Pennsylvania
Mississippi JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York (Ex Officio)
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
(Ex Officio)
(ii)
C O N T E N T S
----------
Page
Hearings held:
October 5, 1999.............................................. 1
October 6, 1999.............................................. 161
Testimony of:
Bailey, Hon. Vicky A., Commissioner, Federal Energy
Regulatory Commission...................................... 58
Breathitt, Hon. Linda Key, Commissioner, Federal Energy
Regulatory Commission...................................... 65
Brice, Rutherford ``Jack,'' Member, Board of Directors, AARP. 240
Casten, Thomas R., President and Chief Executive Officer,
Trigen Energy Corporation.................................. 270
Church, Lynne H., Executive Director, Electric Power Supply
Association................................................ 192
Cooper, Mark N., Director of Research, Consumer Federation of
America.................................................... 247
Cowart, Richard H., Director, Regulatory Assistance Project.. 255
English, Glenn, Chief Executive Officer, National Rural
Electric Cooperative Association........................... 201
Glauthier, Hon. T.J., Deputy Secretary of Energy, U.S.
Department of Energy....................................... 16
Hawkins, David G., Director of Air and Energy Programs,
Natural Resources Defense Council.......................... 211
Hebert, Hon. Curt L., Jr., Commissioner, Federal Energy
Regulatory Commission...................................... 69
Helton, William, New Century Energies, representing Alliance
for Competitive Electricity................................ 162
Hoecker, Hon. James J., Chairman, Federal Energy Regulatory
Commission................................................. 51
Kanner, Marty, Coalition Coordinator, Consumers for Fair
Competition................................................ 251
Massey, Hon. William L., Commissioner, Federal Energy
Regulatory Commission...................................... 76
Mayben, William R., President, Nebraska Public Power
District, representing Large Public Power Council.......... 196
Moler, Elizabeth Anne, General Counsel, Americans for
Affordable Electricity..................................... 243
Nevius, David R., Vice President, North American Electric
Reliability Council........................................ 167
Owens, David K., Executive Vice President, Edison Electric
Institute.................................................. 182
Popowsky, Irwin ``Sonny,'' Pennsylvania Consumer Advocate
Office of Consumer Advocate, representing the National
Association of State Utility Consumer Advocates............ 119
Rao, Rajeshwar, President, Indiana Municipal Power Agency,
representing Transmission Access Policy Study Group........ 215
Richardson, Alan H., Executive Director, American Public
Power Association.......................................... 169
Segal, Scott H., on behalf of the National Alliance for Fair
Competition................................................ 275
Smith, Marsha H., Commissioner, Idaho Public Utilities
Commission, representing the National Association of
Regulatory Utility Commissioners........................... 102
Smith, Tom, Director, Texas Public Citizen................... 268
(iii)
(IV)
Page
Material submitted for the record by:
Bailey, Hon. Vicky A., Commissioner, Federal Energy
Regulatory Commission, responses to questions of Hon. Joe
Barton..................................................... 143
Breathitt, Hon. Linda Key, Commissioner, Federal Energy
Regulatory Commission, responses to questions of Hon. Joe
Barton..................................................... 147
Brice, Rutherford ``Jack,'' Member, Board of Directors, AARP,
responses to questions of Hon. Joe Barton.................. 312
Church, Lynne H., Executive Director, Electric Power Supply
Association, responses to questions of Hon. Joe Barton..... 310
English, Glenn, Chief Executive Officer, National Rural
Electric Cooperative Association, responses to questions of
Hon. Joe Barton............................................ 309
Glauthier, Hon. T.J., Deputy Secretary of Energy, U.S.
Department of Energy, responses to questions of Hon. Joe
Barton..................................................... 155
Hebert, Hon. Curt L., Jr., Commissioner, Federal Energy
Regulatory Commission:
Responses to questions of Hon. Joe Barton................ 140
Responses to questions of Hon. Vito Fossella............. 142
Hoecker, Hon. James J., Chairman, Federal Energy Regulatory
Commission:
Responses to questions of Hon. Joe Barton................ 132
Responses to questions of Hon. Vito Fossella............. 138
Responses to questions of Hon. Ed Bryant................. 140
Massey, Hon. William L., Commissioner, Federal Energy
Regulatory Commission, responses to questions of Hon. Joe
Barton..................................................... 146
Nevius, David, Vice President, North American Electric
Reliability Council, responses to questions of Hon. Joe
Barton..................................................... 305
Owens, David, Executive Vice President, Edison Electric
Institute, responses to questions of Hon. Joe Barton....... 298
Popowsky, Irwin ``Sonny,'' Pennsylvania Consumer Advocate
Office of Consumer Advocate, representing the National
Association of State Utility Consumer Advocates, letter
dated October 18, 1999, enclosing response for the record.. 153
Rao, Rajeshwar, President, Indiana Municipal Power Agency,
representing Transmission Access Policy Study Group,
responses to questions of Hon. Joe Barton.................. 313
Richardson, Alan, Executive Director, American Public Power
Association, responses to questions of Hon. Joe Barton..... 300
Smith, Marsha H., Commissioner, Idaho Public Utilities
Commission, representing the National Association of
Regulatory Utility Commissioners, responses for the record. 149
THE ELECTRICITY COMPETITION AND RELIABILITY ACT
----------
TUESDAY, OCTOBER 5, 1999
House of Representatives,
Committee on Commerce,
Subcommittee on Energy and Power,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2123, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Bilirakis,
Stearns, Largent, Burr, Whitfield, Rogan, Shimkus, Wilson,
Pickering, Fossella, Bryant, Hall, McCarthy, Sawyer, Markey,
Pallone, Gordon, Rush, Wynn, Strickland, and Dingell (ex
officio).
Staff present: Joe Kelliher, majority counsel; Cathy Van
Way, majority counsel; Miriam Erickson, majority counsel;
Ramsen Batfarhad, economic advisor; Sue Sheridan, minority
counsel; and Rick Kessler, minority professional staff.
Mr. Barton. The Subcommittee on Energy and Power will
please come to order.
Today, we are going to begin the first of 2 days of
hearings on H.R. 2944, which is a comprehensive piece of
legislation to restructure the utility industry and the
generation and transmission of electricity in the United
States.
The Chair wishes to inform all members that we are going to
adhere to regular order. We will recognize the ranking members
and the subcommittee chairman and the full committee chairman
for a 5-minute opening statement today. All other members will
be recognized for 3 minutes. If there are members not present,
their statements will be put into the record in their entirety.
Tomorrow, we don't plan to have opening statements other than a
brief introduction of our witnesses.
The Chair would like to recognize the distinguished ranking
member, Mr. Hall, for his opening statement.
Mr. Hall. Mr. Chairman, thank you, and members of the
committee. We have reached a milestone in the subcommittee's
consideration of restructuring legislation with this
legislative hearing today. This is a hearing that we have
needed and that we have looked forward to.
I want to congratulate Chairman Barton. His efforts have
really been tireless. He has made trips to all parts of this
country to hear people and to keep an open door and to bring
this subcommittee to the point we have reached here today, this
morning.
And you have shown and extraordinary amount of leadership,
Mr. Chairman, working with all of us and attempting to move
this legislation through, to give the committee the right to
work its will, and regardless of what the final outcome is of
this legislation, your efforts, Chairman Barton, have advanced
the public debate and our understanding of these very difficult
and complex issues. I think you have done us a real service
already.
I plan to listen carefully to the witnesses over the next 2
days to see whether we can find a common ground on which to
move forward. I have particular concerns over what authority
FERC should have in determining shape of the bulk power market
of the future--is my time up already? Your beeper works--and I
am pleased that you have asked the entire Commission to appear
before us today.
I believe their expertise and insights will be particularly
valuable at this point in our consideration of the legislation.
They, like us, are of different minds about many of the issues
before us, but unlike us, they have spent many, probably more,
waking hours examining and deliberating these issues, and I am
sure their testimony will be informative and instructive to us.
Other witnesses represent States and State officials. State
preemption is a huge issue in this legislation. As a former
county judge and former State senator, I have a strong bias
against preemption of State authority. Preemptive provisions in
this legislation will have to be accompanied by compelling
reasons for exercising Federal preemptive authority, and that
is what we will probably hear today.
By singling out these issues, I by no means intend to
signal that other issues are not as important and deserve less
attention. Our time and that of the witnesses is limited here
today. It is more important that we hear from the witnesses.
With that, Mr. Chairman, I yield back my time and thank
you.
Mr. Barton. We thank the distinguished member from Texas
and recognize Mr. Stearns for a 3-minute opening statement.
Mr. Stearns. Five minutes?
Mr. Barton. Three.
Mr. Stearns. Mr. Chairman, thank you. I think when we look
at this restructuring of some of the major issues, I think
there is a consensus for prospectively repealing the Public
Utility Regulatory Policy Act and provide for recovery of
mandated costs, repeal the Public Utility Holding Company Act,
apply FERC authority over non-jurisdictional entities, ensure
transmission reliability, retain State authority to order
competition, and encourage competition through State
reciprocity.
You know, I think this bill that we have looks at most of
these core issues and addresses them. Now, not everybody is
going to be happy with this bill. When we come to restructure
an over $200 billion industry, you are not going to strike a
perfect masterpiece on the first brushstroke.
I wanted to point out, Mr. Chairman, Michigan has an
interesting program called Electric Choice. It is a multiphase
program allowing the States to adopt lessons learned in
competition. The first bid phase alone brought in 117 requests
from customers, power marketers, and associations to
participate as competitive electric providers. In Illinois, 430
of Comed's business customers have signed up to receive power
from other registered suppliers. So, competition also affects
States that haven't deregulated.
And the States are doing an excellent job. If we are to
enact Federal legislation on this issue, we have to respect
their hard work and success. As I said earlier, we don't have a
perfect bill on the first attempt, but I am sure through the
hearings like today, we will.
Our purpose today is to hear everybody, get their input,
and to go and try to fine tune our efforts and understand what
it takes to get a more perfect regulatory bill.
Judging from the people in the audience and the people
standing out in the line, I can say that this must affect a lot
of people, Mr. Chairman, so I hope that we move deliberately,
and, most importantly, we respect some of the States who have
already started reform in our approach to this bill.
And I yield back.
Mr. Barton. We thank the gentleman from Florida.
I would like to recognize the gentleman from Ohio, Mr.
Sawyer, for a 3-minute opening statement.
Mr. Sawyer. Thank you very much, Mr. Chairman. Thank you
for your conduct of these proceedings throughout this year. It
has been a long and I think constructive year, and thank you
also for the introduction of a comprehensive bill to serve as a
baseline for where we go to from here.
We really are at a critical juncture. I guess I would agree
somewhat with the gentleman from Florida. I don't expect to
find a perfect bill. I do hope that we can find a consensus
bill, one that perhaps not everyone is happy with but which we
can share some hope for that will work over time.
And that is really what is at stake here. Over the past
century, electricity has powered virtually a second American
revolution and has defined who we have become in this century.
Through law and practice and policy, sound regulation has made
this possible. It has evolved over time. And that century-old
system, quite to the contrary of some of the rhetoric we heard
at the beginning of the year, has served us well, I believe. It
has brought us to the juncture that we are at today.
I think it is also fair to say that properly arrayed
competition will bring better service at lower prices to the
vast majority of Americans. Our job is to develop a regulatory
framework in such a way that it accommodates changing
technologies in a dynamic, competitive set of markets. The key
to success, in my view, will be the adequacy of the
transmission system. The grid is the backbone and the lifeline
of competition.
The structure of the network really exists only as a
product of evolutionary happenstance over the last century. It
works. Various transmission components border upon one another,
and electricity flows between them. But as a system, it was
never designed as part of coherent regional transmission plans,
which is what we need to build into the future.
The legislation that we are working on needs to anticipate
that to handle the enormous flow of electricity across broad
geographic areas and to anticipate the variability of the need
for capacity and at the same time to allow it to grow and be
fully maintained and physically secure. A grid that lacks
capacity or that limits growth, limits commerce.
To encourage the growth of those markets, I believe that
Federal legislation should promote new investment so that the
grid can grow responsibly, and the Federal framework must
embody several basic principles. First, it should encourage the
formation of RTOs, regional transmission organizations, but not
mandate the structure of the transmission business. We have all
said one size does not fit all, but a single template to meet
the needs of diverse markets is going to be a difficult thing
to undertake, and we may well all not hit it right the first
time. We should anticipate the need for it to change.
We should encourage the expansion of transmission
investment. We should expressly recognize the importance of
expansion and the necessity and cost of maintaining and
improving the reliability of electric service. It seems to me
that----
Mr. Barton. The gentleman's time is unfortunately expired.
By unanimous consent, the gentleman from Ohio is recognized for
another 1 minute.
Mr. Sawyer. I would be happy to----
Mr. Barton. I like what you are saying, so I want you to
keep going.
Mr. Sawyer. Okay. I am trying to go as fast as I can. I am
saying a whole lot less than what I have got down on the paper
here.
Mr. Barton. I understand.
Mr. Sawyer. I appreciate the chairman's flexibility.
The Congress should set standards for establishing rates to
cover transmission costs and to provide incentive to encourage
the expansion of the grid.
It is also important, it seems to me, that transmission
systems not be subject to shifting and contradictory regulatory
jurisdictions and the requirements that come about as a result
of that. It seems to me that FERC ought to have jurisdiction
over all transmission. It may not be the same jurisdiction that
it has today, but it should be broad jurisdiction, including
unbundled transmission sold at retail. It should be expanded to
cover all transmission service and interstate commerce; in
short, to create a classic level playing field. Everybody ought
to be involved in that regardless of the original genesis of
their generating business.
I recognize the chairman has set some more goals. I am
going to truncate what I have to say--the rest of what I have
to say and insert it in the record. But just let me suggest
that Federal legislation ought to ensure that transmission
networks grow in step with competition. If they can't do that,
if we can't build a prospective opportunity for this system to
change, it seems to me that we will have missed the opportunity
that the competition presents.
With that, Mr. Chairman, I thank you for your flexibility
and yield back what small fraction of time I may have left.
Mr. Barton. We thank the gentleman from Ohio.
We now recognize one of the most tireless members for
restructuring, Mr. Largent of Oklahoma.
Mr. Largent. Thank you, Mr. Chairman. I want to commend
you, your staff, the committee staff for the professional and
open manner in which H.R. 2944, the Electricity Competition and
Reliability Act, has been assembled. To reach the point of
holding today and tomorrow's much anticipated hearing on the
bill before us, the subcommittee this year has held 11 hearings
and received testimony from 92 witnesses examining the myriad
of issues that constitute electricity restructuring.
Having worked on comprehensive electricity restructuring
for over year, it is critical that Congress pass Federal
legislation in the very near future to compliment the retail
competition plans that 24 States have already enacted. My own
State of Oklahoma, a State with relatively low electricity
costs, has recognized the benefits that will flow from a
competitive marketplace and has adopted its own restructuring
legislation. The importance of Oklahoma's own retail
competition plan, when coupled with Federal legislation
promoting wholesale competition, should result in what is
tantamount to a second land rush in terms of the beneficial
economic impact it will have attracting new business to my
State.
At a national level, competition will grant consumers the
ability to reduce their electricity bills by choosing their
electric provider. Savings are estimated to be the equivalent
to a 5 percent income tax cut for a family of four. What about
the examples of other monopoly industries? Following the
deregulation of long distance telephone service, airlines,
trucking, and railroad, the lowest price reduction was 28
percent.
Taxpayers will also save money. The National Taxpayers
Union concluded that electric restructuring could save the
Federal Government anywhere from $31.4 billion to as much as
$75.6 billion over the next 5 years.
Witnesses before this subcommittee have stressed the fact
that electrons do not distinguish between State or service
territory boundaries. Electricity is an industry that is
basically interstate commerce. We need to recognize this
phenomenon and create a Federal regulatory structure that will
provide a much more consistent national power grid. By doing
so, we can design a national reliability standard to prevent
regional reliability lapses such as those that occur during the
blackouts in the Midwest this past summer.
I commend my colleagues on the subcommittee for their
thoughtful insight and constructive input on this legislation.
I will remind you that there have always been skeptics when
Congress tackled complicated deregulatory efforts in the past,
but Congress has been successful to the surprise of the
naysayers. Now is the time to move forward.
I yield back my time, Mr. Chairman.
Mr. Barton. We thank the gentleman from Oklahoma.
The gentleman from Massachusetts who has also been tireless
in his efforts to open up the electricity grid, along with
Congressman Largent, Mr. Markey is recognized for 3 minutes.
Mr. Markey. Thank you, Mr. Chairman. Powerless probably
more than tireless.
I have watched with growing discomfort over the last 4
months as what began as an attempt to break down the regulatory
barriers that have protected electric utility monopolies from
competition has been transformed into legislation which would
effectively defend and extend the power of the existing
monopolies and stifle the emergence of competition. This is an
astounding and deeply troubling transformation. It is as if the
majority, having lost sight of the original objective, now has
resolved simply to redouble its efforts to get a bill.
What kind of a bill? The product that has emerged from the
majority's internal discussions might best be called the
electric futility legislation for it likely will render futile
the best efforts of competitors to enter into the monopolist's
closed markets and prevent consumers from getting lower prices
through real price competition.
It pains me to reach this conclusion for I strongly support
Federal legislation to promote competition in the electric
utility industry. In fact, there may be no one on this side of
the aisle who more strongly supports the objective of enacting
Federal restructuring legislation, and I have always felt that
it is not a partisan issue. I have tried to work closely with
the gentleman from Oklahoma, Mr. Largent, the majority whip,
Mr. DeLay, so that we can do it on a bipartisan basis.
Unfortunately, something seems to have gone very wrong with
the product before us. This is really not a competition bill
any longer; it is a monopoly bill. It does not demonopolize the
utility industry; it deregulates the monopolies in a manner
which will free them to engage in a wide array of unfair,
predatory, and manipulative practices; practices which would
stifle the emergence of competition and leave consumers paying
more than they should for their electricity.
Let us look at some of the specific problems with this
bill. It fails to give FERC authority to monitor, investigate,
and correct anti-competitive behavior in generation markets. It
repeals PUHCA 12 months after enactment, before the provisions
intended to promote competition are in place, before many
States can enact any new authorities that might be required,
and without giving FERC and the States the full books and
records authorities they will need to protect ratepayers
against cross subsidies. It fails to address the ability of
utilities to leverage revenues and resources from their
monopoly functions to subsidize competitive ventures which
allow the monopolies to unfairly compete against independent
businesses.
It would allow for the creation of a two-tiered system of
transmission use in which utilities could grant themselves
preference for their own use and competitors would be unable to
fairly, effectively, and efficiently utilize the transmission
grid. It would allow utilities to reclassify transmission
facilities as distribution and thereby evade FERC jurisdiction
even when such facilities are truly part of the interstate
network.
Mr. Barton. I hate to interrupt the gentleman. I am not
quite as thrilled to hear what he is saying--but he has the
right to say it. But if he could sum it up in about 1 more
minute, we would appreciate it.
Mr. Markey. It is a long list----
Mr. Barton. I understand.
Mr. Markey. [continuing] but I will get--I can go to the
highlights.
It would allow a closed club of utility monopolists to
control and dominate regional transmission organizations and
would not give RTOs the powers needed to assure open and
efficient operation of the transmission system. It directs the
utilities to provide competitors with interconnection and then
fails to expressly preclude utilities from favoring their own
generation plans over those of competitors in future connection
requests. It inserts a poison pill into the consensus
reliability language by allowing States to develop reliability
standards that may conflict with the national standards. There
is no effective environmentally sustainable renewable energy
generation technology or energy efficiency language in the
bill.
In whole, this bill heads in just the opposite direction on
just about every point. I do not believe that this stance
musters as an anti-monopoly bill which ultimately is what
competitors and consumers will need if they are to get the full
benefits of a national electricity marketplace.
I thank you, Mr. Chairman.
Mr. Barton. We will put the gentleman from Massachusetts as
an undecided on the bill, correct?
The gentleman from Illinois, Mr. Shimkus, is recognized for
3 minutes.
Mr. Shimkus. Thank you, Mr. Chairman. Now that we have had
our dose of sunshine for this morning, I want to thank you for
working together on this draft legislation. I do say draft
legislation and just want to remind folks here in the audience
and people to testify that we sat probably for 2 months in a
working group, which was bipartisan by invitation. Maybe two
members of the democratic aisle came and attended those
religiously--Congressman Hall, Congressman Sawyer.
Then I know the chairman very openly, when we dropped the
first draft and also the second draft, asked for a bipartisan
meeting to talk over the individual aspects of the draft
legislation but was told no by my colleagues and friends on the
other side, which is frustrating for me to hear all the
problems with the draft legislation but not the willingness to
come and sit down at a table to address these issues.
So, I want to commend my colleague and chairman for doing
the best he can to work through a lot of these issues. We have
moved great distances from a date certain aspect of the last
Congress to a point where that is not even going to be an
aspect mentioned as far as part of the legislation. I think
that is positive. In the State of Illinois, we have moved great
distances based upon an Illinois deregulation bill.
I plan on asking numerous questions today and tomorrow
outlining some concerns with the legislation, but I do want to
thank the chairman for the reciprocity language that has been
changed based upon the second draft, especially for the State
of Illinois.
There are some issues that, again, I will address as far as
there are some Illinois that still think the grandfather clause
needs to be strengthened to avoid accidental Federal
preemption. I am hearing from Commerce Commission that some
provisions still preempt State authority such as section 702 on
net metering and section 101(e) on sections designed to give
FERC authority to determine the function of power lines.
I am also hearing about fair competition between propane
dealers and electric coops. Are coops cross subsidizing their
propane business particularly in States where they are self-
regulated or is that just a perceived threat? I hope we get
some answers in these 2 days of hearings. I think this should
be examined.
There are additional issues which I plan on bringing up,
but in the interest of time and efficiency, I will yield back
my time and listen closely to the testimony today.
Thank you, Chairman Barton.
Mr. Barton. Thank the gentleman from Illinois.
And we recognize another distinguished gentleman from
Illinois, Mr. Rush, for a 3-minute opening statement.
Mr. Rush. Thank you, Mr. Chairman.
Mr. Chairman, let me begin by commending you for the work
that you have done to bring this important and significant
legislation to the attention of the subcommittee.
I think all of us will agree it has not been easy, in terms
of the number of consumers that will be affected. It could be
easily argued that electricity restructuring is the most
important work that the Commerce Committee has taken on since
the deregulation of the telecommunications market. Those that
were involved in that debate may recall that it was not until
much work had been completed that legislation was finally
passed out of the subcommittee and then the full committee, and
eventually it was passed on the floor.
Mr. Chairman, I know the work that you have done. We have
worked together on a number of issues regarding this
legislation. Let me just say that the legislation before us
accomplishes many things. It clarifies State and Federal
jurisdiction under the Federal Power Act. It codifies FERC
Order 888, and it provides for the formation of the regional
transmission organizations, just to name a few things.
That said, Mr. Chairman, I must admit that I am not
convinced that H.R. 2944 really accomplishes competition and
reliability. For now, I will reserve judgment. I will listen
intently to the testimony of the witnesses, and I will attempt
to ask the appropriate questions. I will do this, Mr. Chairman,
not to expose what the bill does not do but really to ensure
that what we do do from this committee really and truly
benefits our consumers.
Having said that, I am ready to move forward with the work
of electricity restructuring but only if we do as the title of
the bill suggests: Provide electricity reliability and
electricity competition in addition to enhancing consumer
service and consumer protection.
Thank you, Mr. Chairman. I yield back the balance of my
time.
Mr. Barton. Thank you, Congressman.
We now recognize the distinguished gentleman from North
Carolina, Mr. Burr, for a 3-minute opening statement.
Mr. Burr. Thank you, Mr. Chairman. I thank you for this
hearing, but, most importantly, and not to slight our other
panelists, I thank you for the opportunity to have five FERC
commissioners here to testify.
Mr. Chairman, it was Thomas Jefferson that said, ``I am not
an advocate of frequent changes in laws and constitutions, but
laws and institutions must advance to keep pace with the
progress of the human mind.'' We have an obligation to our
Founding Fathers. That was a warning to us all that as the
human mind progresses, we have a responsibility as legislators
to make sure that the system changes, the Federal system. We
did that with the Telecommunications Act earlier this decade,
and I think that to not accomplish this task would be a failure
to what our Founding Fathers reminded us of.
I am extremely complimentary of you, Mr. Chairman, for
perseverance as we have gone through this process. It has been
a long road with many hurdles, and I think that we have reached
a point where I am glad to say that we can move forward, and I
am optimistic about the outcome. I think that this truly
reflects the hard work of staff, of members, and of industry.
It is also refreshing to see that you have reached across
the aisle as it relates to the participation by Mr. Brown, Mr.
Wynn, and specifically, Mr. Sawyer, and others. I have
personally co-sponsored Mr. Sawyer's transmission language,
because I believe that it is the right language to have in
place. I also realize that what we have today is not a final
product, but it is a framework, a framework that all members
can work within to find the right vehicle that can be created
out of that.
Today and tomorrow we will solicit the advice, the
instructions of our witnesses to try to refine it, to make sure
that we have the right tools in place, and to discard those
things that aren't needed. We will remove Federal barriers yet
to competition, and we will create new incentives for
competition.
Mr. Chairman, I am optimistic at the opportunity. I realize
that there are varying views of what competition is. Some
believe that competition can only be created when a Federal
agency has the ability to regulate every step of competition. I
am on the other end of that spectrum. I believe that without
the free flow of electricity, not only from companies to
consumers but without the regulatory burden of a Federal
agency, will you in fact have true competition.
So, I encourage my colleagues to work to refine this
language. I commend the chairman and the ranking member for
this hearing, and I yield back the balance of my time.
Mr. Barton. Thank the gentleman from North Carolina.
I would now like to recognize the distinguished ranking
member of the full committee, the gentleman from Michigan, for
a 5-minute opening statement.
Mr. Dingell. Mr. Chairman, you are most courteous. I will
try and comply with your wishes.
First of all, Mr. Chairman, I commend you for holding
legislative hearings on this bill, H.R. 2944 of which you are
the sponsor. It is a lengthy and comprehensive proposal dealing
with issues of utmost importance to this very essential
industry and its customers, and it warrants our very close
attention.
Today and tomorrow, members are going to be hearing some
severely conflicting testimony on the merits of what has been
included in the bill, what has been omitted, and how its
various provisions fit together. This last issue is not
unimportant since the bill appears to draw on a number of prior
proposals, and legislation of this significance must be
internally consistent.
Mr. Chairman, as you know, I have been concerned that
members of this committee have a sufficient grasp of the
complex subject before us as they sift through the different
arguments to determine what, if any, restructuring legislation
should be enacted on the Federal level by the Congress. There
has not been much agreement amongst the different elements of
the industry, consumer groups, State and Federal regulators,
and other interested parties.
I want to commend you for your effort to build the
consensus necessary for legislation of this magnitude. The road
to enactment is long, and it is important for members to find
common and durable ground before reporting the bill. The issue
is difficult, it is complex, and it is controversial.
If a consensus does not emerge from these hearings and if
members on both sides of the aisle are comfortable going
forward to a markup, then we will address those questions as
they should be. However, if this is not the case, there will be
little merit in forcing a markup simply to meet an arbitrary
deadline. To do that guarantees us a fine fight and little
opportunity of accomplishment.
It is not unusual, I would note, for major legislation to
require many Congresses to mature. Notwithstanding the wishes
of some of our honored guests, the time for enactment of
legislation that will serve the broad public interest may not
yet have arrived.
I want to thank you for the courtesy for your staff has
extended to the minority in developing the witness list, and I
look forward to hearing from the witnesses. It is important
that we should have a complex piece of legislation heard with
sufficient witnesses to gather broad cross section of the views
as a people. I regret consideration of other legislation on the
floor this week is not going to give me the time to spend at
these hearings as I would like.
I would like to note that many questions remain to be
addressed: reliability, whether or not conservation or
environmental provisions should be included, consumer concerns,
stranded costs, State responsibilities, State actions taken,
State actions pending, job security, antitrust questions, needs
to address the concerns of different components of the
industry, including public's, TVA, Bonneville, and many others,
and to do so in a way that takes care of the concerns and the
needs of all.
This is not a simple industry; it is one which is composed
of many different kinds of components, serving different
customers in different ways in different parts of the country
under different regulatory systems. And I would hope that as we
go forward, we will consider that the impacts of this matter
may not be simple.
I do thank you for your courtesy to me, Mr. Chairman, and I
commend you for that way in which you are proceeding. Thank
you.
Mr. Barton. I thank the gentleman for that opening
statement.
We would now like to recognize the gentlelady from New
Mexico, Congresswoman Wilson, for a 3-minute opening statement.
Ms. Wilson. Thank you, Mr. Chairman, and I won't take 3
minutes.
I wanted to commend you for having this hearing and also
for producing a bill in a way that was very open to input from
all of the members of this committee and even those outside of
this committee, and I appreciate that.
I think all of us recognize that this is an extremely
complicated issue. There are a number of different facets to
it, and the intent of all of the members of this committee and
also the Chair is to get this right, to make sure that a bill
that eventually merges from this Congress enhances competition
while protecting consumers and ensuring there is universal
access to electricity for all Americans, including Americans in
rural areas.
I just wanted to thank the chairman for holding this
hearing and moving this bill forward, and I know there are many
more things we have yet to work out, but I appreciate his
leadership.
Thank you.
Mr. Barton. I thank the gentlelady from New Mexico. The
Chair would recognize the gentleman from Kentucky, Mr.
Whitfield, for a 3-minute opening statement.
Mr. Whitfield. Mr. Chairman, thank you very much. I
understand we have already had 11 hearings and 92 witnesses,
and I want to commend the chairman for being very open in this
process.
I am delighted this morning that I have a young woman from
my hometown of Hopkinsville who is serving as one of the
commissioners who will be testifying this morning, and I know
that, along with her, both of us will be looking at this
legislation and its impact on Kentucky which has some of the
lowest electricity rates in the Nation. Also, 95 percent of our
electricity is generated by coal fire processes, and any
legislation on deregulation that passes obviously we are going
to be very concerned about its impact on coal and on our rates.
And, so I look forward to the testimony this morning, and
thank you for giving me the opportunity to be here.
Mr. Barton. I thank the gentleman from Kentucky.
We are prepared to recognize the gentleman from New Jersey
or we can go to Mr. Bryant and give you a few minutes to get
settled.
We recognize the gentleman from Tennessee, Mr. Bryant, for
a 3-minute opening statement.
Mr. Bryant. I want to thank you, Chairman Barton, for this
opportunity today to address this issue. I really do appreciate
all the work that you have put into making this an open,
deliberative process, and also I want to specifically thank you
for honoring your commitment to do those things. You have been
very kind to all of us, always ready to listen to what we have
to say, and I especially appreciate your concern with those of
us from the Tennessee Valley.
I do believe that the free market and increased competition
can lead to better service and lower prices for consumers.
However, I want to ensure that the thousands of residents and
businesses in the rural areas across the country, not just in
the Tennessee Valley, but across the country are not forgotten
in this move to restructure. Our agricultural communities and
small towns rely on reasonable electricity rates to keep their
farming, their industries, and their small businesses alive.
As we work on this legislation, we must safeguard that
balance between State and Federal Governments and must not
create an immense Federal bureaucracy, such as FERC, in the
name of deregulation. We must preserve both private and public
power and promote diversity in generating sources from coal,
natural gas, and nuclear to renewables such as hydroelectric
and solar energy.
Although this legislation is concentrated on the national
electricity picture, we must also recognize the differences as
well as the similarities between regions of our country. I
believe that we should give primacy to regional solutions. The
one-size-fits-all Federal legislation would not recognize our
different needs.
My home State of Tennessee is unique, because it is the
only State in the country where wholesale competition cannot
occur without Federal action, even though the Tennessee Valley
Association has been very successful over the years in the
region with helping out on navigation and the environment and
flood control. I do not view myself as the primary defender of
the TVA; rather, I believe that it is my role to be the
defender of the citizens of Tennessee. I believe that we can
craft legislation which will maintain inexpensive and reliable
power for the people of our region.
Again, I want to thank Chairman Barton for his leadership
on this particular legislation, and I look forward to
continuing to work with the members of this subcommittee and
the full committee to craft the right solution for
restructuring, and I would yield back my time.
Mr. Barton. I thank the gentleman from Tennessee for those
words, and also thank him for the work that he has put into the
TVA section of the bill. He has done yeoman's work in that
area.
I now recognize the gentleman from New Jersey, Mr. Pallone,
for a 3-minute opening statement.
Mr. Pallone. Thank you, Mr. Chairman. I have many concerns
regarding this bill, but I heard your 3-minute warning there,
so I am cutting back some of what I was going to say.
I did want to say, though, that including my own State
there are 24 States that have already restructured their
electric utility sector, and I think we have to be extremely
careful not to damage these States efforts or cause them to
redo their legislation. Any grandfathering language must be
crafted with the utmost care, and I hope our witnesses will
address the implications of the provisions in the chairman's
mark on States that have already passed restructuring
legislation.
On State Federal jurisdiction, H.R. 2944 appears to
essentially codify the 8th Circuit Court of Appeals decision
which held that FERC cannot bar utilities from giving first
priority in transmission service to their native load before
providing capacity to other parties. This could jeopardize firm
transmission service. The decision also could jeopardize
mergers that depend on a reservation of firm transmission
service.
In terms of reliability, the legislation has incorporated
so-called consensus language. Some utilities believe, however,
that this language is based on out-of-date models and goals and
would undermine market efficiency and optimization. Any
legislation we write should foster true competition and provide
non-discriminatory access to the Nation's electric grid.
Overall, this bill does not appear, in my opinion, to be a
true competition bill, and it seems that many entities and
groups I have heard from agree that RTOs, regional transmission
organizations, or ISOs, independent system operators, should
encompass larger geographic regions to reduce the potential for
market power abuses and to foster true competition. If market
power is being exercised, we must examine the process and rules
under which the system is operating. Over 100 organizations
have written and/or called me to express their concerns in this
regard.
The other issue that is most important to me critical is
environmental protection, and this bill is clearly lacking in
environmental protection provisions. We cannot let this sector
restructure at the cost of polluting our environment and
endangering people's health. Fourteen Republicans have sent a
letter to Chairman Barton emphasizing support for and demanding
inclusion of environmental protections, and I will elaborate
more upon this tomorrow when we have experts testify on this
topic.
But on a related note, though, over 100 groups have written
supporting the inclusion of a renewable portfolio standard and
the public benefits trust, but these are not in the chairman's
mark. These provisions go hand-in-hand to ensure universal
service and promote the use of clean energy sources. Charges
for public benefits have long been in consumers' utilities
bill, and they would not be newly imposed.
So, I have highlighted, Mr. Chairman, some of the initial
major issues that concern me with regard to this version of the
chairman's mark, but clearly we all need time to examine the
legislation more thoroughly, in my opinion, at both the macro
and micro levels. I am interested in hearing out witnesses'
analysis of the bill.
Thank you, Mr. Chairman.
Mr. Barton. Thank you, Congressman Pallone, and we--the
Chair shares several of the concerns that you have addressed,
and we hope this legislative hearing and the time right after
it we can work together on some of these issues.
Seeing no other members present who have not yet been given
an opportunity to give an opening statement, the Chair would
recognize himself for his 5 minute opening statement.
The bill before the subcommittee is a very different bill
than the bills that we have considered earlier in this session.
This bill has no Federal mandate. This bill does not preempt
States in areas historically reserved to be regulated by the
States. This bill does focus on the core Federal issues that
States have little or no ability to address.
We held our first hearing on this issue more than 4 years
ago. Since then we have held 32 hearings, received testimony
from 331 witnesses. This year we have held 11 hearings and
heard testimony from 92 witnesses. There was one thing that
every witness we have heard from this year has agreed upon, and
that is that the need for the Congress to act in this session
on electricity legislation.
There was another clear message from the hearings that we
have held this year: The States have little or no ability to
address certain core Federal issues, such as interstate
commerce, foreign commerce, reliability of the interstate
transmission grid, open access to the interstate transmission
grid, the role of the Federal utilities in competitive electric
markets, Federal and State jurisdiction, and reform of Federal
electric and tax laws. Only the U.S. Congress can address these
core Federal issues.
Some would say that we have deliberated too long. Mr.
Markey says that he does not want any more seminars on
electricity, and I agree. He just wants a final exam, and I
agree with that also. If I were at Indianapolis, I would say,
``Ladies and gentleman, start your markup pens. The time has
come to act.''
The situation is clear: Change is sweeping across the
electricity industry. States are opening their retail electric
markets. Some utilities are voluntarily divesting themselves of
generation; others are merging. New entrants are buying
utilities. Federal electric laws that were written in most
cases more than 60 years ago are simply not adequate for
today's situation. Those Federal laws were based on the premise
that States would always regulate retail electricity rates.
That premise is no longer valid.
There is a cost to inaction. If Congress does nothing,
problems that exist under the status quo will remain.
Reliability will be at risk. The transmission system will
remain subject to four different sets of rules. Transmission
owners will retain the ability to discriminate against their
competitors, and incentives to invest in transmission will
remain inadequate. Consumers will be exposed to slamming and
cramming by electric marketeers. The privacy of consumer
information may not be assured, and consumers will not be
assured access to the information that they need to choose
among competing retail electric suppliers. The Public Utility
Holding Act of 1935 will continue to discourage new entrants
into the electricity industry. The mandatory purchase
obligations of PURPA will remain in force and may require
utilities to sign contracts to purchase power at above market
rates. Disincentives in the Federal tax law will discourage
State and municipal utilities and rural electric cooperatives
from opening their transmission systems and retail markets.
Payment of the Bonneville Power Administration's unrecovered
power costs will remain taxpayer liabilities. The Tennessee
Valley will continue to be the only region in the country where
wholesale competition is prohibited, and distributors in the
region will continue to be forced to buy their power solely
from the Tennessee Valley Authority.
Ladies and gentleman, any one of these reasons is
sufficient for the Congress to pass electricity legislation in
this session of Congress. So, once again, I say, ``Ladies and
gentleman, please start your markup pens.''
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Michael Bilirakis, a Representative in
Congress from the State of Florida
Thank you, Mr. Chairman.
First, I would like to thank you for scheduling two legislative
hearings on your bill, H.R. 2944, the Electricity Competition and
Reliability Act. There is little doubt that electricity restructuring
is extremely complex. In 1999 alone, our Subcommittee has held eleven
hearings and received testimony from 92 witnesses on the broad range of
issues surrounding electricity restructuring.
Mr. Chairman, you should be commended for your attempt to draft a
consensus restructuring bill. This was a truly herculean undertaking,
and I appreciate your efforts to solicit the views of the Energy and
Power Subcommittee members before introducing H.R. 2944.
As we continue to consider the restructuring of our electricity
industry, it is important for us to have a thorough understanding of
the impact any restructuring legislation could have on our current
system. In this regard, I am anxious to hear the testimony of our
witnesses.
They have a wide range of expertise, and I am sure their comments
will provide us with some additional guidance on the complex issue of
electric utility restructuring. Their analysis of H.R. 2944 should be
very useful in our Subcommittee's discussions.
Mr. Chairman, I look forward to our continuing dialogue on H.R.
2944 and electricity restructuring.
Thank you, Mr. Chairman.
______
Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
Mr. Chairman, I am happy to be at today's legislative hearing on
H.R. 2944. As you know, I have been a supporter of comprehensive
electric utility restructuring since the early days of the 104th
Congress and supporter of competition in the electric utility industry
prior to the enactment of the Energy Policy Act of 1992.
Throughout this debate I have been concerned about one thing, that
all consumers benefit. I have said many times both publicly and
privately that consumers, not utilities, should be front and center in
any restructuring debate.
As I look at the proposal before us, and listen to the testimony of
the witnesses I will be concerned about one thing: ``How does it impact
consumers?'' I want restructuring legislation to work for the
suppliers, new entrants and incumbent utilities, for the reliability of
the national grid--and ultimately for consumers. I believe our nation's
retail customers have been captive ratepayers for too long.
I am hopeful that the federal government will be able to choose its
supplier someday soon. The government is a big customer. Taxpayers will
surely benefit when the Federal government starts to lower its monthly
bill. Federal savings from restructuring are calculated at billions of
dollars, so if there are any budgeteers in the room, I hope you are
paying attention.
Mr. Chairman, I am happy to see you taking this important step and
look forward to working with you as this bill moves through the
Committee process.
Thank you.
______
Prepared Statement of Hon. Albert R. Wynn, a Representative in Congress
from the State of Maryland
Mr. Chairman, I want to thank you for holding these hearings on
electricity deregulation. The deregulation of the electricity industry
is a critical issue that will affect every American. Today most of us
take for granted the fact that our homes are temperature controlled,
our lights turn on and off at the flip of a switch, and our appliances,
fax machines and computers operate at our command. We do not think
about where our electricity comes from or how it gets to our homes and
offices. Yet electricity is a fundamental part of our day--without
which most of us could not easily function.
A critical issue that we must consider is the role of the federal
government and the jurisdiction of the states. The federal government
clearly has a role but we must make sure that this role is limited to
addressing only the truly federal issues. We should ensure that the
interstate transmission system is adequate and reliable and remove
barriers to competition such as PURPA and PUCHA.
Electricity deregulation legislation should not expand FERC
jurisdiction into areas current under state jurisdiction or give FERC
new authority that would undermine a competitive electricity
marketplace. New regulatory authority given to FERC should be very
limited and clearly defined. We don't need to ``reregulate'' if the
underlying goal is to promote free markets and competition.
Any federal bill should refrain from dictating to states the
details associated with implementing retail competition. Metering,
billing, affiliate rules, consumer protection, universal service and a
host of other issues should be left for resolution at the state level
by lawmakers and regulators who are familiar with the specific needs of
their states.
In Maryland, for example, our legislature passed in April an
electric restructuring law that is very comprehensive. It will become
even more detailed as the Public Service Commission provides the rules
for implementing the legislation. Neither Maryland, nor any of the
other 23 states that have enacted restructuring laws should be forced
to go back to the drawing board re-write the rules for electricity
deregulation issues that clearly fall within their jurisdiction and
have already been dealt with by their state legislatures.
Our task is to find just the right balance that will encourage
competition, yet leave the states with the flexibility they need to
formulate plans best suited to their citizens.
______
Prepared Statement of Hon. Billy Tauzin, a Representative in Congress
from the State of Louisiana
Mr. Chairman, the legislation before us today is a good first step
toward achieving competitive retail electricity markets nationwide.
However, it proposes the outright repeal of PURPA upon ``date of
enactment.'' Unfortunately, this has significant negative implications
for the many PURPA facilities that are in my Congressional district.
Many companies in my district built PURPA plants because they
needed the electricity and steam to operate their manufacturing plants.
They built these QFs (Qualified Facilities) because they could produce
alternative forms of electricity for less than the price charged by the
local utility. Low cost energy is essential to their competitiveness in
domestic and international markets.
While it is true that QF reliance on ``PURPA contracts'' has
created an artificial electricity wholesale marketplace, PURPA does
provide QFs with important protections that should be preserved--at
least until our electricity markets are competitive.
These protections include guaranteed access to interconnection,
standby/back up maintenance power at just and reasonable prices,
mandatory power purchase requirements and PUHCA exemptions. If we
choose to abruptly withdraw these safeguards before realizing a
competitive electricity retail marketplace, then we will have seriously
compromised QF ability to secure debt financing of their operations.
Frankly then, PURPA protections are needed now and will continue to be
necessary until there is a competitive electricity retail market that
will allow QFs the flexibility and choice that usually accompany
competition. .
Don't get me wrong Mr. Chairman, I am in favor of repealing PURPA.
However, I am inclined to support language which phases out the effect
of PURPA over time as proof of retail competition across the country
becomes more evident. Such language, I believe, would be fairer to the
QFs than a provision repealing PURPA on date of enactment. At the same
time, it would also make clear that the wholesale market inefficiencies
created by guaranteed contracts are on the way out.
I look forward to working with you to reach a satisfactory outcome.
Mr. Barton. With that, I am going to welcome our first
witness, but before that, I noticed that we have all five of
our FERC commissioners, and you all look very uncomfortable all
scrunched up out there in the front row. We will be very happy
to let you use the majority lounge. You can hear our first
witness and hear the questions and answers and make some phone
calls. You are welcome to continue there in the audience, but
if you wish to--and I am sure the minority would welcome you
into their lounge too; this is not a partisan--if some of you
want to go to the left and some to the right, that is okay. But
you are welcome, because we will be with the gentleman from the
Department of Energy for probably the next hour or so. Okay?
Mr. Glauthier, we want to recognize you as our first
witness of our legislative hearings. As the distinguished
member of the Department of Energy and the No. 2 person at the
Department of Energy, the Deputy Secretary of Energy, you have
had quite a bit to do with the formulation of the Department's
comprehensive bill. And although we are somewhat saddened that
we couldn't have Mr. Richardson, we are delighted that we have
you. So, we are going to recognize you for such time as you may
consume, and then we will have some questions for you.
Welcome to the committee.
STATEMENT OF HON. T.J. GLAUTHIER, DEPUTY SECRETARY OF ENERGY,
U.S. DEPARTMENT OF ENERGY
Mr. Glauthier. Thank you, Mr. Chairman, Mr. Hall----
Mr. Barton. And you need to really put that microphone
close to you, sir.
Mr. Glauthier. Thank you, Mr. Chairman, Mr. Hall, Mr.
Dingell, and other members of the subcommittee. Thank you for
inviting me here today to present the administration's views on
H.R. 2944, the Electricity Competition and Reliability Act.
At the same time the Federal Energy Regulatory Commission
continues to promote competition in the wholesale markets, 24
States have now adopted electricity restructuring proposals
that allow for competition at the retail level. Almost every
other State has the matter under active consideration. The
Clinton administration believes that this is a positive
development. Competition, if structured properly, will be good
for consumers, good for the economy and good for the
environment. However, the full benefits promised by competition
can only be realized within an appropriate Federal statutory
framework. What we do at the Federal level and when we do it,
will have a profound impact on the success of State and local
retail competition programs.
Mr. Chairman, I want to commend you and the other members
of this subcommittee for the effort you are putting forth. Many
of the issues are complex and controversial. Nevertheless, it
is vitally important to consumers, the economy, and the
environment that these issues be resolved in an appropriate
manner.
I also want to thank you for the courtesy which you and
your staff have shown to myself, Secretary Richardson and other
members of the Clinton administration. I believe that working
together in a bipartisan fashion, the administration and
members on both sides of the aisle can achieve a result that
will benefit all Americans.
Let me begin with three points: First, it is critical that
Congress pass comprehensive electricity restructuring
legislation soon; second, restructuring legislation can succeed
only if it is developed on a bipartisan basis, and, third,
although the bill includes some encouraging provisions, the
administration cannot support H.R. 2944 in its current form,
but we are willing to work together to achieve legislation that
we can all support.
As the States continue to move forward, the absence of
action at the Federal level is creating significant uncertainty
in the increasingly regionalized power and transmission
markets. The fact is, if we don't act, the benefits from State
restructuring programs will be limited.
At the very least, Congress needs to extend FERC
jurisdiction to all major transmission owners; it needs to
clarify FERC's authority with regard to the formation of
regional transmission organizations; it needs to authorize the
development and enforcement of mandatory reliability standards
to enable FERC to prevent incumbent utilities from using market
power to inhibit competition; to ensure that public benefits
programs, including renewable energy, low-income assistance,
and energy conservation are not lost as a result of the
transition to competition, to eliminate statutory impediments
to State competition programs, and to enable competition to
thrive in the regions served by Federal utilities.
Electricity restructuring is not a partisan issue. Members
on both sides of the aisle have offered thoughtful and
meaningful proposals that merit consideration, including a
bipartisan bill introduced earlier this year by Congressmen
Largent and Markey. Mr. Chairman, we encourage this
subcommittee to continue your efforts to develop a bipartisan
bill that will enable Congress to enact comprehensive
restructuring legislation that can be supported by the
administration.
We commend you for including a number of positive
provisions in H.R. 2944, such as those intended to enhance
reliability, protect consumers, and promote aggregation.
Clearly, your legislation addresses many of the key issues that
need to be included in a comprehensive electricity
restructuring bill. However, we believe that H.R. 2994 should
be modified to establish the necessary ground rules and
adjustments required for the transition to competition.
Given the time constraints of this morning, I would like to
focus my comments on four important issues: First, market
power; second, FERC jurisdiction over transmission; third,
regional transmission operators, and, fourth, public benefit
programs. My written testimony contains a more detailed
discussion of the administration's views on H.R. 2944.
First, on market power. The primary goal of Federal
electricity restructuring legislation must be to aid the
transition to competition in a manner that allows consumers to
benefit through lower rates. However, significant rate savings
cannot be achieved if effective competition fails to develop.
Open transmission access and the creation of independent
regional transmission organizations should go a long way toward
achieving competitive markets. However, access to transmission
is, by itself, not enough. Utilities that own substantial
amounts of generation in a region or strategically located
facilities may be able to influence prices and inhibit the
entry of new competitors through horizontal market power.
Mr. Chairman, we are disappointed that H.R. 2944 fails to
provide FERC with sufficient authority to address market power.
We recommend that the bill be modified to incorporate the
market power provisions in the administration's bill.
The second area I would like to speak to is jurisdiction
over transmission. FERC Orders No. 888 and 889 have had a
tremendous positive impact in promoting wholesale competition
by requiring jurisdictional utilities to provide competitors
access to transmission facilities under rates and terms
comparable to those provided to itself. The administration
supports the provisions in H.R. 2944 which extend FERC's
authority to the transmission facilities owned by previously
non-jurisdictional utilities.
We are concerned, however, that H.R. 2944 can balkanize the
regulation of transmission in light of a recent 8th Circuit
Court of Appeals decision. FERC may be unable to prevent a
utility providing transmission services that are bundled with
the retail sale and distribution of power from discriminating
against other electricity suppliers in favor of its own
generation.
State regulators, which would have jurisdiction over
bundled transmission services, may not have sufficient
incentives to adequately police a utility's use of its
transmission lines.
Mr. Chairman, we strongly urge you to reevaluate this
provision. We are not suggesting that FERC should regulate the
rates for bundled transactions, but FERC should have the
ability to ensure that all competitors have equal access to
transmission resources.
The third area I would like to speak to is regional
transmission organizations. Properly sized, independent,
regional transmission organizations can provide significant
benefits, including the enhancement of reliability and the
promotion of more efficient and competitive markets.
The administration is encouraged that H.R. 2944 would
require all transmitting utilities to join RTOs and we
generally support the standards for RTO formation laid out in
the bill. We are concerned, however, that the legislation
limits FERC's discretion in approving an RTO. It is important
that FERC be able to require the formation of an RTO that would
be optimal for a particular region.
The fourth area is public benefits. Mr. Chairman, we
commend you for recognizing the need to address renewable
energy in restructuring legislation. We support both the
extension of the Renewable Energy Production Incentive program
for municipal and cooperative utilities and wind and biomass
tax credits for investor-owned utilities. However, more does
need to be done, such as the inclusion of a renewable portfolio
standard. The progress we have made in renewables could be
partially lost during the transition to competition because
these technologies have not yet achieved full cost
competitiveness.
In addition, we continue to be concerned that retail
competition could lead to reduced support for programs that
provide important public benefits. A public benefits fund,
which provides matching funds to the States for low-income
assistance, energy efficiency programs, consumer education, and
the development and demonstration of emerging, clean
technologies, should alleviate these concerns.
In conclusion, Mr. Chairman, while the States are
proceeding with their restructuring programs, all eyes are on
Congress to learn what signals the wholesale and retail markets
will receive. This committee's leadership has been essential
and will continue to be. Although we cannot support H.R. 2944
in its current form, the administration's approach to
comprehensive restructuring legislation has many elements in
common with your proposed legislation. And I know that several
members of this subcommittee, on both sides of the aisle, have
put forth proposals that also merit serious consideration.
We are confident that a bipartisan bill can be reported out
of the subcommittee soon. Secretary Richardson and I, as well
as our staff, and other members of the administration stand
ready to assist you and the other subcommittee members in this
vital endeavor. Only by working together can we take the steps
that are necessary to provide consumers with the full benefits
of competition.
Thank you, Mr. Chairman.
[The prepared statement of Hon. T.J. Glauthier follows:]
Prepared Statement of T.J. Glauthier, Deputy Secretary, U.S. Department
of Energy
introduction
Mr. Chairman, thank you for inviting me today to present the
Administration's views on H.R. 2944, the Electricity Competition and
Reliability Act. DOE, the Agency responsible for formulating and
implementing the Clinton Administration's energy policies, is a strong
proponent of comprehensive Federal electricity restructuring
legislation. On April 15, Secretary Richardson transmitted to Congress
the Comprehensive Electricity Competition Act (CECA) <SUP>1</SUP>--the
Administration's vision for the role the Federal government should play
in the transition to competition.
---------------------------------------------------------------------------
\1\ The Administration transmitted CECA to Congress in two separate
parts. The first part, which was introduced by Congressman Bliley and
Dingell (upon request) as H.R. 1828 on May 17, includes all of the non
tax-related provisions in the Administration's proposal. Both parts
were introduced in the Senate by Senators Murkowski and Bingaman (upon
request)--S. 1047 and S. 1048--on May 13.
---------------------------------------------------------------------------
At the same time FERC continues to promote competition in the
wholesale markets, 24 states have now adopted electricity restructuring
proposals that allow for competition at the retail level. Almost every
other state has the matter under active consideration. The Clinton
Administration believes that this is a positive development.
Competition, if structured properly, will be good for consumers, good
for the economy and good for the environment. Companies that had no
incentive to offer lower prices, better service, or new products will
now compete for customers. Consumers will save money on their electric
bills. Lower electric rates will also make businesses more competitive
by lowering their costs of production. By promoting energy conservation
and the use of cleaner and more efficient technologies, greenhouse gas
emissions will be reduced, as will emissions of conventional air
pollutants. However, the full benefits promised by competition can be
realized only within an appropriate Federal statutory framework. What
we do at the Federal level, and when we do it, will have a profound
impact on the success of state and local retail competition programs.
Mr. Chairman, I want to commend you and the other members of this
Subcommittee for the effort you are putting forth in an attempt to
enact comprehensive electricity restructuring legislation. Many of the
issues are complex and controversial. Nevertheless, it is vitally
important to consumers, the economy and the environment that these
issues be resolved in an appropriate manner.
I also want to thank you for the courtesy which you and your staff
have shown to me, Secretary Richardson and other members of the Clinton
Administration. I believe that working together, in a bipartisan
fashion, the Administration and members on both sides of the aisle can
achieve a result that will benefit all Americans.
Let me begin with three points:
<bullet> It is critical that Congress pass comprehensive electricity
restructuring legislation sooner, rather than later.
<bullet> Restructuring legislation can succeed only if it is developed
on a bipartisan basis. And
<bullet> Although the bill includes some encouraging provisions, the
Administration does not support H.R. 2944 in its current form.
We would like to work with you to achieve a version of
restructuring legislation that we could all support.
federal action is critical
While some state competition programs are already in effect, tens
of millions of additional consumers will soon have the ability to
choose their power in those states implementing retail competition
programs over the next 2-3 years. As the states continue to move
forward, the absence of action at the Federal level is creating
significant uncertainty in the increasingly regionalized power and
transmission markets. The fact is, if we don't act at the Federal
level, the benefits from state restructuring programs will be limited.
<bullet> First, competition is not going to work if transmission lines
operate under different sets of rules and requirements. It is
essential that all wholesale and retail power marketers have
non-discriminatory access to the wires that transport their
product. While the Federal Energy Regulatory Commission (FERC)
has jurisdiction over the transmission of electricity in
interstate commerce, FERC's authority is somewhat limited.
Congress needs to ensure that all major transmission facilities
are, to the extent practicable, subject to comparable FERC open
access requirements.
<bullet> Second, independent regional transmission organizations (RTOs)
will help promote efficient, competitive and reliable markets.
However, FERC's authority over, and ability to require, RTO
formation remains uncertain. Congress must address these
uncertainties.
<bullet> Third, as we move to a more competitive environment, the
reliability of our bulk power systems can no longer be
entrusted to voluntary standards. Significant support has
developed for a proposal to have an electric reliability
organization, overseen by FERC, establish mandatory reliability
standards. Congress should authorize the development and
enforcement of mandatory reliability standards.
<bullet> Fourth, restructuring efforts won't succeed if competitive
markets are not developed. While open transmission access and
the formation of independent regional transmission
organizations should go a long way towards changing the
monopoly structure of the electric utility industry to
competition, the fact is that some utilities may have
horizontal market power as a result of their control over a
substantial amount of generating capacity, enabling them to
crowd-out potential competitors and keep the price of power
artificially high. Congress must empower FERC to prevent
incumbent utilities from using market power to inhibit
competition.
<bullet> Fifth, existing programs that provide support for renewable
energy and other important public benefits were designed for a
system of regulated markets. Congress should act to ensure that
these public benefits are not lost as a result of the
transition to competition.
<bullet> Sixth, certain Federal statutory provisions may impede the
efforts of the states and FERC to promote competition. Congress
needs to eliminate these impediments and modernize those
statutes which are inconsistent with the development of fully
competitive markets.
<bullet> Seventh, the statutes governing the operation and regulation
of Federal utilities--the Tennessee Valley Authority (TVA) and
the Federal Power Marketing Administrations (PMAs)--must be
revised to allow for effective competition in the regions they
serve.
Mr. Chairman, the Federal government clearly has an important role
to play in the transition to competition. While the states are moving
forward rather briskly, Congress has yet to act. The Federal government
needs to send the appropriate signals about what the rules of the road
will be in this new world of competition. Instead, we are sending
signals of confusion.
The electricity markets are crying out for the certainty that is
necessary before essential investments are made. Generating capacity
reserve margins have significantly tightened. The construction of new
major transmission facilities has dramatically slowed. Aging
distribution facilities are beginning to wear out.
Several regions of the country have experienced major problems in
recent summers. As the heat and humidity rose, some utilities found it
increasingly difficult to meet consumer demands. Spot prices for
electricity rose dramatically. Elected officials and utility executives
made urgent public appeals for conservation. Factories were forced to
shut down their operations and send workers home. Some areas
experienced rolling blackouts. Other areas lost power due to failures
in overworked and outdated distribution facilities. While it is
difficult to attribute all of these problems to the uncertainties
surrounding the transition to competition, they clearly have played a
significant role. In short, Mr. Chairman, we can't afford to wait until
the 107th Congress to do what needs to be done now.
need for bipartisan approach
The electricity sector is our nation's most capital-intensive
industry, holding assets with a book value of approximately $700
billion. In addition, electricity affects our everyday lives and
businesses. It is not at all a stretch to point out that access to
power can sometimes be a matter of life and death. This is a major
industry that is in the process of a monumental transition.
Very few major congressional initiatives are accomplished in the
absence of a bipartisan approach and with cooperation from both ends of
Pennsylvania Avenue. Mr. Chairman, electricity restructuring is not a
partisan issue. Members on both sides of the aisle have offered
thoughtful and meaningful proposals that merit consideration, including
a bipartisan bill introduced earlier this year by Congressmen Largent
and Markey. DOE encourages you to continue your efforts to develop a
bipartisan bill that will enable Congress to enact comprehensive
restructuring legislation that can be supported by the Administration.
comments on h.r. 2944
Mr. Chairman, we commend you for including a number of positive
provisions in H.R. 2944, such as those intended to enhance reliability,
protect consumers and promote aggregation. Clearly, your legislation
addresses many of the key issues that need to be included in a
comprehensive electricity restructuring bill. However, we believe H.R.
2944 should be modified to establish the necessary ground rules and
adjustments required for the transition to competition.
I would like to take a few minutes to discuss, in some detail, the
Department's views on four important issues: (1) market power; (2) FERC
jurisdiction over transmission; (3) regional transmission operators;
and (4) public benefits programs. Thereafter, I will briefly comment on
H.R. 2944's treatment of several other items.
Market Power
The primary goal of Federal electricity restructuring legislation
must be to aid the transition to competition in a manner that allows
consumers to benefit through lower rates. However, significant rate
savings can't be achieved if effective competition fails to develop.
Open transmission access and the creation of independent regional
transmission organizations should go a long way towards achieving
competitive markets. However, access to transmission is, by itself, not
enough. Utilities that own substantial amounts of generation in a
region or strategically located facilities may be able to raise prices
above competitive levels and inhibit the entry of new competitors
through horizontal market power. Because electricity markets are
becoming increasingly regional and multi-regional, state regulators
cannot adequately address market power issues. As a result, it is
essential that the Federal government, as the guardian of interstate
commerce, be able to take aggressive action during the transition
period to ensure that utilities are unable to use horizontal market
power to control prices and impede competition.
The antitrust laws are not, by themselves, sufficient to address
the market power problems a newly-restructured electricity industry may
face. The traditional regime of rate-of-return regulation has led to
high concentrations of ownership of generation facilities regulation.
As the Department of Justice recently noted in testimony before this
Subcommittee:
The antitrust laws do not outlaw the mere possession of
monopoly power that is the result of skill, accident, or a
previous regulatory regime. Antitrust remedies are thus not
well-suited to address problems of market power in the electric
power industry that result from existing high levels of
concentration in generation or vertical integration.''
FERC currently has the authority to condition merger applications
to remedy potential market power. Absent a merger application, FERC's
only other available tool to address market power is to deny a request
for market-based rates. However, denying such requests could severely
impede the Commission's ability to promote wholesale competition.
To ensure that the development of competition is not hindered by
the exercise of market power, the Administration's legislation would
authorize FERC to remedy concentrations of market power in the
wholesale market, including the authority to order the divestiture of
assets, if market power is found. In addition, our bill would enable
FERC to provide backup market power remedies for the retail market, at
the request of a state. This is important because some states seeking
to open their markets to retail competition may not have clear
statutory authority to remedy market power problems in their state or
have jurisdiction over facilities in other states that may be the cause
of a market power problem.
Mr. Chairman, we are disappointed that H.R. 2944 fails to address
horizontal market power. We recommend that the bill be modified to
incorporate the market power provisions in the Administration's bill.
Jurisdiction over Transmission
FERC Orders No. 888 and 889 have had a tremendous positive impact
in promoting wholesale competition by requiring jurisdictional
utilities to provide competitors access to transmission facilities
under rates and terms comparable to those provided to itself.
Unfortunately, FERC's open access authority does not directly extend to
non-jurisdictional utilities, such as most cooperative and municipal
utilities, as well as TVA and the PMAs. The Department supports the
provisions in H.R. 2944 which extend FERC's regulatory authority to the
transmission facilities owned by previously non-jurisdictional
utilities.
We are concerned, however, about FERC's ability to prevent
discriminatory transmission access as a result of a recent 8th Circuit
Court of Appeals decision--Northern States Power v. FERC. In that case,
the Court essentially ruled that FERC has no authority to prevent a
utility from denying access to others in favor of its own bundled
retail sales.
H.R. 2944 states that FERC would have authority only over the
unbundled transmission of electricity that is sold at retail, while
state regulators would have jurisdiction over transmission when it is
part of a bundled retail sale. It is necessary that all transmission
owners and all transmission services be subject to similar rules and
requirements. The distinction in H.R. 2944, in light of the 8th Circuit
decision, would balkanize the regulation of transmission and could have
a potentially chaotic impact on the development of competitive markets.
FERC would be unable to prevent a utility providing transmission
services that are bundled with the retail sale and distribution of
power from discriminating against other electricity suppliers in favor
of its own generation. State regulators, which would have jurisdiction
over bundled transmission services, may not have sufficient incentives
to adequately police a utility's use of its transmission lines,
especially if the competing supplier were seeking access to sell power
to consumers located in another state.
Mr. Chairman, we urge you to reevaluate this provision. Whether
transmission is bundled or unbundled, it is essential to the
development of competitive markets that all competitors have non-
discriminatory access to the facilities.
Regional Transmission Organizations
Properly sized, independent, regional transmission organizations
(RTOs) can provide significant benefits, including the enhancement of
reliability and the promotion of more efficient and competitive
markets. FERC's recent Notice of Proposed Rulemaking, which encourages
transmission-owning utilities to participate in RTOs, is a positive
step. However, this voluntary approach does not ensure that appropriate
RTOs will be developed.
The Department is encouraged that H.R.2944 would require all
transmitting utilities to join RTOs and we generally support the
standards for RTO formation laid out in the bill--(1) independence, (2)
appropriate scope and regional configuration, (3) operational control
over all transmission facilities comprising the RTO, (4) responsibility
for planning transmission additions and upgrades, and (5) other
standards FERC determines are in the public interest.
We are concerned that the legislation limits FERC's discretion in
approving an RTO. While an RTO might meet the standards set out in the
legislation, it might very well not be the optimal RTO for a particular
region. However, H.R. 2944 would prohibit FERC from disapproving a
less-than-optimal proposal as long as the proposed RTO met the
statutory standards. In addition, FERC's hands would be tied with
regard to RTOs approved prior to the date of enactment. Although a
previously approved RTO might require alteration due to changes in
circumstances, FERC would be powerless to alter it. In addition, this
provision could have a chilling effect on FERC's grants of approvals
for new RTOs prior to the date of enactment, if FERC knows that it
could not require changes to an RTO following the date of enactment of
the legislation.
Moreover, although we support the concept of incentive pricing
policies in certain limited situations, it is unclear why FERC should
be required to establish a pricing policy designed to encourage
transmitting utilities to form RTOs (and extend the policies to already
existing RTOs), when the legislation already requires transmitting
utilities to join RTOs. It is important to remember that transmission
will continue to be a monopoly function. Any deviation from cost-of-
service ratemaking should be limited to exceptional circumstances.
Public Benefits
While retail competition has the potential to increase renewable
energy's share of the electricity market, the inherent uncertainty of
the transition to competition, the recognition of important
environmental and energy diversification benefits from renewables, and
the fact that existing Public Utility Regulatory Policies Act
requirements are incompatible with competition and ineffective under
present market conditions suggest that Federal policy towards renewable
electricity should be revisited in the context of restructuring.
Mr. Chairman, DOE commends you for recognizing the need to address
renewable energy in restructuring legislation. We support the extension
of both the Renewable Energy Production Incentive (REPI) program for
municipal and cooperative utilities and the wind and biomass tax
credits. However, more needs to be done; otherwise, the progress we
have made in renewables could be partially lost during the transition
to competition because these technologies have not yet achieved cost-
competitiveness. The inclusion of a renewable portfolio standard would
provide market-based support for the development and deployment of
renewable energy technologies. Unlike the mandatory purchase provisions
of PURPA, this approach would be consistent with competitive
electricity markets.
In addition, we continue to be concerned that retail competition
could lead to reduced support for programs that provide important
public benefits. Under cost-of-service regulation, programs supporting
and promoting research and development, energy efficiency and low-
income assistance were supported, in part, through utility rate
structures. As utilities prepare for competition, they will be
unwilling to include in their rates the cost of programs not included
in the rates of their competitors. A public benefits fund, which
provides matching funds to the states for low-income assistance, energy
efficiency programs, consumer education and the development and
demonstration of emerging, clean technologies, should alleviate these
concerns.<SUP>2</SUP>
---------------------------------------------------------------------------
\2\ The Administration's public benefits fund proposal also
includes a rural safety net in the unlikely event that competition
adversely impacts rural areas.
---------------------------------------------------------------------------
Other Issues
Mr. Chairman, while I cannot comment on each and every provision in
H.R. 2994, I would like to briefly discuss several additional issues.
<bullet> Target Date/Opt-Out--Mr. Chairman, the Department recognizes
that since Chairman Bliley dropped his insistence on Federally-
mandated competition, the debate over restructuring legislation
has shifted to other issues. Nevertheless, we continue to
believe that there is substantial merit to establishing a
target date for the implementation of retail competition and
requiring state utility commissions and non-regulated municipal
and cooperative utilities to hold proceedings to examine the
benefits or costs of adopting retail competition programs. I
know we both share the opinion that competition, if it is
structured properly, will benefit all classes of consumers.
Most, if not all, state utility commissions and non-regulated
utilities would likely come to the same conclusion after a
thorough examination.
<bullet> Transmission Siting--We are pleased that H.R. 2944 recognizes
that regional solutions to transmission siting issues are both
appropriate and necessary. In addition, the Administration has
no objections to providing FERC with authority to order
transmission-owning utilities to expand their facilities, as
long as state siting authority is not diminished.
<bullet> Reliability--As I discussed earlier, one of the most critical
elements of comprehensive electricity restructuring legislation
is the need for mandatory reliability standards. The
reliability title of H.R. 2944 closely mirrors the language
included in the Administration's legislation and language
proposed by the North American Electric Reliability Council. We
believe the differences between these proposals can be
resolved.
<bullet> Consumer Protection--H.R. 2944 contains several vitally
important consumer protection provisions, including items
related to information disclosure, consumer privacy and
measures designed to prohibit marketers from engaging in
slamming and cramming practices. We fully support these
provisions.
<bullet> Mergers--We are pleased that H.R. 2944 retains FERC's
authority under Section 203 of the Federal Power Act to review
utility mergers and extends FERC's jurisdiction over mergers
that involve generation-only and utility holding companies.
Utility mergers are not necessarily anti-competitive. However,
it is vital that FERC-- the regulatory agency with significant
experience with and understanding of electricity markets--be
able to prohibit or condition a merger that would have a
deleterious impact on retail or wholesale
competition.<SUP>3</SUP>
---------------------------------------------------------------------------
\3\ To avoid inadvertent impacts on small consumer-owned systems,
the Administration bill excludes entities with existing loans made or
guaranteed under the Rural Electrification Act from merger review
requirements.
---------------------------------------------------------------------------
<bullet> Reciprocity--The Administration believes that each state
should have the authority to determine whether to prohibit a
utility not fully subject to retail competition requirements
from participating as a marketer in that state if the state has
implemented retail competition. Recognizing that H.R. 2944
instead imposes a Federal reciprocity requirement, we believe
the requirement would be ineffective. By allowing utilities not
subject to retail competition to avoid the reciprocity
limitation by simply filing an open access plan with a state
utility commission, the legislation could very well allow
utilities that file sham proposals to escape the intent of the
reciprocity provision. We think this provision should be
modified.
<bullet> Aggregation--Mr. Chairman, the Administration commends you for
including Section 541 in H.R. 2944. This provision will help
entities that are interested in aggregating to increase
consumers' purchasing power and enable them to reap the full
benefits of retail competition.
<bullet> Interconnection--We welcome the inclusion of a Federal
interconnection standard in H.R. 2944. Distributed power and
combined heat and power technologies can enhance both
reliability and the environment. We believe a more expansive
approach than that included in the bill is required.
Interconnection should not be restricted based on ownership or
the ability to serve nearby facilities. In addition, we believe
that regulatory and tax barriers that inadvertently discourage
the use of these technologies should be addressed.
<bullet> Federal Utilities--We are pleased to see that the key issues
associated with Federal utilities which the Administration
believes need to be addressed in restructuring legislation, as
well as the general approach to resolving these issues, are
included in H.R. 2944. Although Title VI of the legislation
differs in certain limited respects from the Administration's
proposed restructuring legislation, both bills share the same
goal--enabling competition to thrive in the regions served by
Federal utilities. We believe the differences between the two
approaches can be resolved.
<bullet> Private-Use Prohibition--We agree that it is necessary to
resolve the issues surrounding the tax treatment of debt issued
by municipal utilities to enable them to fully participate in
competitive markets. The small differences between the
provisions in H.R. 2944 and the Administration's proposed
legislation should be easily bridged.
conclusion
Mr. Chairman, while the states are proceeding with their
restructuring programs, all eyes are on Congress to learn what signals
the wholesale and retail markets will receive. This Committee's
leadership has been essential and will continue to be. Although we do
not support H.R. 2944 in its current form, the Administration's
approach to comprehensive restructuring legislation has many elements
in common with your proposed legislation. And I know that several
members of this Subcommittee, on both sides of the aisle, have put
forth proposals that merit serious consideration.
We are confident that a bipartisan bill can be reported out of the
Subcommittee soon. Secretary Richardson and I, as well as our staff,
stand ready to assist you and the other Subcommittee members in this
vital endeavor. Only by working together can we take the steps that are
necessary to provide consumers with the full benefits of competition.
Mr. Barton. We thank the gentleman from the Department of
Energy for his testimony.
The Chair would recognize himself for 5 minutes for
questions.
Mr. Secretary, I would like for you, in your own words, to
define market power.
Mr. Glauthier. Market power is the ability of an entity to
set prices, to exercise control of the pricing or terms of
availability of services in a market.
Mr. Barton. Okay. I think you are very aware that 24 States
have done something on electricity restructuring. Haven't most
of those States addressed market power in their State bills?
Mr. Glauthier. Our concern is as we move forward, we feel
we need a Federal consistency, a national consistency, and that
the Federal Energy Regulatory Commission has some ability to
assure that market power isn't used in regional markets, which
cross State boundaries.
Mr. Barton. Okay. Are you--with the exception of the
Tennessee Valley Authority and the Bonneville Power
Administration, which are Federal utilities that are not at all
regulated now by the States, are there any other situation
where there is market power concentrated across a region that
you are aware of?
I shouldn't let the staff give you the answer, but he is a
good guy, so we will let him this time.
Mr. Glauthier. Well, multistate holding companies certainly
have control of assets across wide regions.
Mr. Barton. But there is--I have seen no study that is
interstate that indicates, again, with the exception of the
Federal utilities, which we do address in our bill, that there
is a concentration of market power. And I do see that in every
State that has acted, many but not all of those States have
addressed market power in some way. So, while I share your
concern in the abstract for market power, when we look at the
actual market in the United States for electricity, I see no
compelling reason to give the Federal Government an authority
that it has never had before. Would you like to comment on
that?
Mr. Glauthier. Well, we are also talking about a situation
of open competition which has never existed before. And what we
are asking is that the Federal Energy Regulatory Commission
have the authority to ensure that market power is not abused.
But we are not expecting that it is going to have to intervene
in many cases. This is a question of having the oversight and
the ability to ensure that markets will operate.
Mr. Barton. But the very--and I am not going to belabor
this, because we have got a lot of other testimony and a lot of
other questioners--but the very intent of the legislation
before us is to create competition, to put more players into
the market both in terms of having the opportunity to sell and
to generate. And you have to assume that there is no public
utility commission, no Governor, no State legislature in the
country that says, ``Yes, we want to concentrate market power
for our customers.''
I mean, if I didn't think the States and their regulatory
bodies weren't cognizant of this potential problem, I would be
right with you, but since I have talked to many of them and
they are very cognizant of it and very concerned about it, I
don't think that we need to put in a Federal market power
provision. But having said that, there is one vote for the bill
before the committee now, and that is mine, and it takes at
least 16 to pass.
Let me go to the RTO provision of the bill pending before
the subcommittee. You said some very nice things about our RTO
provisions, and I want to thank you. But you expressed a
concern that we limit FERC's discretion to force what you call
the optimal regional transmission organization. I don't think
this is a surprise to you, but that was intentional. We wanted
to limit the FERC's discretion, and so my question to you: Why
would you assume that five commissioners, as well-informed and
well-intentioned as they may be, would have more perfect
knowledge than the market participants themselves that are
creating the RTO? So long as we require the utilities to
participate in an RTO, what is wrong with setting the
guidelines? And as long as the participants themselves certify
and FERC agrees that they meet those guidelines, why not let
them create in their own way, to use your term, the optimum
RTO?
Mr. Glauthier. Transmission access I think is going to be
one of the greatest keys to success of this program overall. If
you don't have open access to transmission, then the rest of
the elements of competition are not going to work. The FERC
commissioners, while there are five of them, are confirmed by
the Senate and do represent the informed perspective of the
community. Their ability to look at the patterns that exist in
different markets, different regions, we think is important to
be able to oversee these regional organizations that will
emerge.
Mr. Barton. Well, my time has expired. I didn't hear you
say you thought they would do a better job. So, I ought to quit
while I am ahead on that.
We are going to recognize the gentleman from Ohio, Mr.
Sawyer, for 5 minutes.
The gentleman from Ohio, Mr. Sawyer, who was here before
the gentleman from Illinois and the gentleman from Tennessee,
although the gentleman from Ohio did leave, but he did come
first.
Mr. Sawyer. I promised you I would come back, Mr.
Chairman.kay
Mr. Barton. Okay, so you are recognized first.
Mr. Sawyer. Thank you. Thank you very much.
Thank you very much for your testimony today and for the
obvious depth of thought that you have put into not only the
bill that is before us but to a number of the other proposals
that are with us today.
If my numbers are right, the current transmission network
is somewhere in the neighborhood of 150,000 miles, however you
want to measure that. And my understanding is that NERC is
anticipating a growth over the next 10 years of some 6,000
additional miles. It seems to me that that substantially
understates what likely growth in peak load will be over the
next 10 years, particularly if we have the kind of competition
for access to transmission that I think we are talking about
here. Would you agree that basic assessment?
Mr. Glauthier. Well, I am not sure whether it is miles that
will increase or the capacity along many existing routes, but
there certainly will be a substantial amount of transmission
utilized in this new competitive market.
Mr. Sawyer. Well, let me put it another way. Would you
agree that the transmission grid, as it is currently
constituted, is constrained?
Mr. Glauthier. Yes.
Mr. Sawyer. And would you agree that it is really not
designed to--it was never designed to perform the tasks that it
may be called upon to fulfill in a market environment?
Mr. Glauthier. Yes, that is true.
Mr. Sawyer. In that sense, is it your belief that it is
even possible to design an optimal template that would fit
within what may be determined as existing markets? How would
you decide what a market is? How would you call upon the
commissioners to choose what a market is?
Mr. Glauthier. We would expect them to look at markets in
regional contexts. We think that there will be broad regional
patterns, and that is one reason that we encourage the
formation of planning mechanisms that would allow planning for
new transmission capacity, for example, to be done on a
regional basis while still respecting the States' role in
selecting individual sites and making those decisions.
Mr. Sawyer. My interest in trying to anticipate what an
appropriate Commission role might be is to recognize that the
markets that might have been anticipated even 10 years ago are
different today from what they would have been 10 years ago had
we put such a vehicle in place. And it is almost certain that
they will be substantially different from--in 10 years from
where they are today.
And it is for that reason that I have real discomfort in
talking about putting in place and fixing an optimal design for
a regional market that may not even exist as a regional market
10 years from now, particularly as the technology changes to
make possible the continued rapid expansion of what we think of
as regions. Would you agree with that?
Mr. Glauthier. Yes. Yes, we would.
Mr. Sawyer. In that sense, then let me ask you: When you
say that you support limited incentive pricing policies; that
you don't in the sense that you don't understand the need for
it if in fact the Commission is in a position to order the
formation of RTOs to serve markets that may change
substantially even within a span of time as little as 10 years.
Mr. Glauthier. Well, we think there is a need for FERC to
have flexibility to oversee this system and to be able to
adjust as changes take place.
Mr. Sawyer. Can you tell me why you have more faith in the
capacity of FERC to see 10 years down the road than the ability
of pricing policies to change to reflect changed demand and
changed architecture of a regional market?
Mr. Glauthier. Well, pricing policies will probably drive
the proposals that come to FERC. As the planning is taking
place within a region, the local and State governments have
very strong roles in making those decisions. We do not envision
FERC developing a master plan for the country and imposing
that, but rather trying to set a set of procedures or rules in
place that will help ensure that there is an active process
going on everywhere to ensure that this kind of transmission
develops.
Mr. Sawyer. Just very briefly, do you see a role for
pricing policy in nurturing that growth and evolution?
Mr. Glauthier. We have not built incentives--pricing
incentives into our proposals. Our sense is that there will be
a strong incentive for development for competitors that want to
enter these markets. Whether they need actual pricing
incentives to develop this, we have not made a decision. We
haven't come to that as an element that we have supported.
Mr. Sawyer. Thank you, Mr. Chairman.
Mr. Barton. Thank you, Congressman Sawyer.
We recognize the distinguished vice-chairman, Mr. Stearns
of Florida, for 5 minutes.
Mr. Stearns. Thank you, Mr. Chairman.
The administration bill gives FERC extraordinary powers to
order divestiture. How many regulatory agencies have the power
to completely restructure the industries they regulate,
including the power to order divestiture?
Mr. Glauthier. I am not sure how many industries have that.
What we are talking about is----
Mr. Stearns. I don't think you can name one, and yet the
administration is giving FERC this extraordinary power. So, I
need you to justify it.
Mr. Glauthier. What we are talking about is trying to be
sure that there is an independence between the generation
assets of a system and the transmission assets, so that a
utility not be able to use its position in the transmission
market to favor its position with generation; that if we are
going to have open competition, we have got to have the
transmission system be open to all offers.
Mr. Stearns. Well, I don't see any precedence for what you
are doing here, what the administration is doing. Now, I know
you personally probably don't have a big stake in this, but you
are here defending the administration's proposal, so I think
many of us are just sort of a little dumbstruck here that the
administration give FERC so much extraordinary powers, and
there is no precedent that I can see to do this. And I don't--I
missing something. You are not making the case why FERC has to
have these extraordinary powers.
Mr. Glauthier. Certainly we have seen divestitures come
from the court system, from the Judiciary in different markets.
In this case----
Mr. Stearns. Yes, but isn't that antitrust law? That is
antitrust law. That is not coming from a Government agency.
Mr. Glauthier. Well, in this case what we are dealing with
is a set of companies and a whole marketplace which has grown
up over decades under a regulatory environment which we are now
talking about changing.
Mr. Stearns. Couldn't the courts do that today?
Mr. Glauthier. We would rather have a planned transition
than leave this to the courts. Under today's regulatory
environment, where there is a monopoly that is governed or
sanctioned by State law, the market power is legitimate; it is
appropriate; it has arisen naturally. What we are talking about
is trying to change this so that there will be free and open
competition in this market.
Mr. Stearns. Well, staff has pointed out to me that what
you are allowing is like if we take, for example, the FAA. They
could go in and break up United Airlines or they could go in
and break up U.S. Air, and that is the kind of authority that
the administration is allowing FERC to have and which you are
defending here this morning.
So, we don't see any precedence for it, and we are alarmed
that you are giving FERC that power when it really should be to
the courts, and so I think our point today, and which it
appears we disagree with the administration, is this is an
extraordinary power to order divestiture, which we are a little
worried about here.
Mr. Glauthier. If I could make one point, and that is that
any authority that FERC would have to take those kinds of
actions is premised on a determination that there is market
power in a particular area that does allow a company to
exercise that kind of pricing control in a market. If in fact
the utilities take the actions, open up the regions for
competition, then those conditions will not exist, and there
will not be any ability for FERC to make those kinds of orders.
Mr. Stearns. Wouldn't you agree that you are establishing a
new precedence here? It is like saying the FAA can start to go
in and break up airlines and that is a new precedent.
Let me go on here. In your testimony, you have reservations
concerning the jurisdiction clarification in section 101. FERC
proscribes similar language in Order 888. Why do you disagree
with the Commission which has the experience in this area?
Mr. Glauthier. I am not familiar with the section
referenced. 101 is----
Mr. Stearns. Section 101 is to allow FERC to determine all
transmission.
Mr. Glauthier. I am sorry, could you repeat the question?
Mr. Stearns. In your testimony, you have reservations
concerning the jurisdiction clarification in section 101. FERC
proscribes similar language in Order 888. Why do you disagree
with the Commission which has the experience in this area?
Mr. Glauthier. If this is referring to the 8th Circuit
Court decision last spring, our legislation was drafted before
that decision came out, and since the decision we want to
clarify our position here and be sure that FERC would have the
authority to guarantee that there is access to the
transmission.
As I said in my oral statement, we are not proposing that
FERC regulate or decide the rates in bundled transactions but
that it be able to have oversight to assure access to those
transmission lines.
Mr. Stearns. Before I give back my time, Mr. Chairman--my
time is expired--but basically I think that he is criticizing
something that is really not in your bill.
Mr. Barton. We thank the gentleman from Florida, and we
want to thank the distinguished Deputy Secretary for being
honest. I couldn't--if somebody said, ``What does section 302
of the bill do,'' I would have to be honest and say I would
have to look at the summary before I commented on it. So, we
actually appreciate your being honest enough to say, ``What
does 101 do,'' although it is the first section in the first
title.
The gentleman from Texas, Mr. Hall, is recognized for 5
minutes.
Mr. Hall. You know, Mr. Chairman, it seems to me that one
of your renditions or it may have been in one of your letters
from the chairman--I am not sure, I saw it somewhere--where you
had a carrot out there to those States enticing them in. It
seems like the easiest and the surest way and put some type of
a structure there that tells them that if they don't take that
carrot, they darn well better--should. That is a nice way to
treat the States. I think we may resurrect that.
And, Mr. Deputy Secretary, we have a long way to go on this
bill, and we are all sitting here with the hard solemn
knowledge. The chairman knows it better than anyone that if one
senator doesn't like one paragraph in this that they can stop
that bill this year, and we are back here the next year. But
this is a process we have to move along, and I think the
gentleman from Florida, though, got us into the question about
restructuring and what the States had done, how many had done
it, and how many still need to do it.
My State passed a bill, the State of Texas--I think you are
well aware of that--and in the recently passed restructuring
legislation down there in Austin, the Texas legislature enacted
a generation market power provision that generally required
utilities with more than 20 percent of the generation in the
State to auction the capacity over the 20 percent threshold for
as long as it exceeded 20 percent. That is a mandate or
instruction to the State. Do you have an opinion on how that
applicable--and how workable that approach would be to Federal
laws?
Mr. Glauthier. I don't have a specific opinion on whether
we should have that in the Federal law, but in terms of
consistency of the Federal statute and that type of a State
statute, as long as the State is taking actions of that sort,
then we would not expect FERC would make any finding that there
will be a market power situation that would require them to
take any additional action at the Federal level.
Mr. Hall. So, it doesn't give you any heartburn at all?
Mr. Glauthier. No, it doesn't.
Mr. Hall. Well, in the event that this subcommittee does
not get together--and it is my understanding from the chairman
that he would like to pass a bill out. It is also my
understanding that he would like to get it as strong a voice to
the Chairman Bliley, because he might get another letter back
from him if it is not the way--wasn't it in Othello, the
merchant of Venice where they said, ``Oh, that mine enemy would
write me a letter.''
Mr. Barton. I don't think that is germane to the witness.
Mr. Hall. Okay, I will get back.
But in your testimony, you outlined a number of reasons why
the Federal Government ought to enact restructuring now, right
now, and that is what the chairman is trying to do. I don't
know how much of a stonewall he is up against, because we have
to navigate the full committee rules of the floor, the Senate,
and, there, one person, if they just stand up and make an
inquiry, they almost kill any of the bills that are going get
over there this late.
So, I guess we have to think in these terms, whether we
like to or not. You outlined a number of reasons why we ought
to do it, but if we are unable to do it on a comprehensive
package in this Congress, what kind of a bare bones package
should we enact that probably--that might navigate the Senate?
You work both sides.
Mr. Glauthier. The one thing that Secretary Richardson said
to me this morning before I came up was, ``Urge them to go
ahead and act quickly; let us move ahead.'' We are not prepared
to decide where we might fall back. At this point we would like
to support comprehensive legislation, work with the full
committee to move that ahead.
Mr. Hall. That is a good answer, but be thinking about a
fall-back position, because I think it is going to come around.
I yield back my time, Mr. Chairman. I have some other
questions, but I will put them in the record and ask that they
be--space be left at this structure for my question to go in.
Mr. Barton. I thank the gentleman from Texas, and I would
make the point before we recognize Mr. Largent, it goes back to
something that I said. The Chair, and I think the members of
the subcommittee, share the administration's concern about
perceived market power, but we are simply unconvinced that the
States don't share that concern, and the States that have acted
in different ways have addressed market power. California
required divestiture; Texas did not; Pennsylvania did not, but
they are addressing it.
So, there is not a need for a Federal one-size-fits-all on
the States that have yet to act. If the States that have acted
have addressed it, why do we think that the States that have
not yet acted but might, if we pass a Federal bill eliminating
the barriers, would not address it themselves? Before I
recognize Mr. Largent, do you want to----
Mr. Glauthier. If I may, if adjacent States, for example,
have not acted, then even though your own States has taken
actions, the market there may be impacted; it may not really be
the opportunity to get the advantages of competition. If the
States have acted, then the sorts of authorities we are talking
about for FERC would not have any effect, because there
wouldn't be any remaining problem for them to have to act
about.
Mr. Barton. Okay. The gentleman from Oklahoma, Mr. Largent,
is recognized for 5 minutes.
Mr. Largent. Mr. Glauthier, let me ask you a follow-up
question to the chairman's remarks. What authority would a
State have to mitigate market power that existed across its
State border? In other words, generation facilities that are of
the same company that cross State lines, what ability would one
State have to mitigate that market power that existed across
its border?
Mr. Glauthier. That is an excellent example, and that is
one of the concerns we have; that it seems the State's
authority stops at its State border.
Mr. Largent. But electricity does not stop at the State
border, is that correct?
Mr. Glauthier. That is absolutely correct.
Mr. Largent. Which is why we are here today.
Let me--in your testimony, on pages--the bottom of page 6
and the top of page 7, you are talking about ``as a result, it
is essential that the Federal Government, as the guardian of
interstate commerce, be able to take aggressive action during
the transition period to ensure that utilities are unable to
use horizontal market power to control prices and impede
competition.'' When you say ``during the transition period,''
what kind of period of time are you talking about?
Mr. Glauthier. We are not sure how long it will take to
transition into a fully competitive working market. Certainly,
the first few years we expect there will be some bumps in the
road, and maybe some transitional actions will be required that
would not have to be long-term actions. Some of our provisions
go for 10 to 15 years in our bill. It really will depend,
whether you are talking about things that require capital
investments and take some time or whether they are more
operating changes that can phased in rather quickly.
Mr. Largent. So, one of the ideas that I floated before the
hearing--just throw out right now--is that I think most experts
would say the transition period would be somewhere between 3
and 5 years to get to a fully competitive market. Is it
possible to institute some sort of market power tools, placed
in FERC hands, that would sunset after a certain period of
time, as we have gotten into a more competitive market?
Mr. Glauthier. I think the concept is a concept that is
good that we ought to work with a bit. Whether the exact period
would differ, for example, for different kinds of actions, such
as the planning and action process in investing in new
transmission facilities, which will take some time, might
differ from those actions that focus on the market and the
behavior for pricing and offerings in a particular market or
electricity for retail customers. But I think the idea is a
good idea, and we ought to take that into consideration.
Mr. Largent. Well, one of the market power tools that the
administration proposes, that, frankly, I am not a fan of, is
the ability to order divestiture. But one comment I would make
about that, one of my colleagues earlier, Mr. Stearns,
mentioned, or tried to make the comparison between FAA being
able to order divestiture of United Airlines or American
Airlines and trying to compare that with FERC ordering
divestiture of the Southern Company. That is hardly comparing
apples to apples since the Southern Company, other IOUs, have
been granted a monopoly status, whereas American Airlines and
United have not. So, I don't think that is a fair comparison.
But I want to go on down on page 7 in your testimony. You
talk about FERC's only other available tool--this is to address
market power and wholesale markets--is to deny a request for
market-based rates. Now, many people, before FERC had Order
888, suggested that there could be market power existing in the
wholesale market, and so FERC needed to have a tool at its
disposal to address market power and wholesale, and one of them
was to deny market-based rates; in other words, stay with the
cost-based rates and deny market-based rates. Has the FERC ever
utilized that tool in its history since Order 888? Have they
ever denied market-based rates as a result of market power?
Mr. Glauthier. I don't believe they have since 888, but you
may have to ask that question again to the next panel----
Mr. Largent. Okay.
Mr. Glauthier. [continuing] to get a definite answer.
Mr. Largent. Thank you.
My last question, Mr. Chairman, goes back to the Public
Benefits Fund. You make a case for the administration's
position on the Public Benefits Fund. Twenty-four States have
already moved and done something, including Oklahoma, on
deregulation. Have all 24 States addressed the Public Benefits
Fund?
Mr. Glauthier. No, not all of them have, and there has been
some variety among those who have--different lengths of time,
for example, that a Public Benefit Fund would exist. So, we
think it is important to have one that would be consistent and
applicable across the country.
Mr. Largent. Okay. Thank you, Mr. Chairman. I yield back.
Mr. Barton. I am sorry, Mr. Largent. I was engaged in a
staff conversation. You yielded back your time, all right.
The gentleman from Illinois, Mr. Rush, is recognized for 5
minutes.
Mr. Rush. Thank you, Mr. Chairman.
Mr. Deputy Secretary, I want to commend you on your
testimony and answers to the questions this morning. I think
you have been very forthright and illuminating in terms of the
administration's position.
H.R. 2944 repeals PURPA without establishing renewable
energy portfolio standards. However, the bill does provide for
tax incentives regarding the use of renewable energy. In your
opinion, which provision would generate the greatest amount of
competition while also acting as the greatest incentive for the
use of renewable energy?
Mr. Glauthier. We favor a renewable portfolio standard;
think that that provides the support for these not yet fully
mature technologies that are going to be increasingly important
in our electricity sector. We also support the tax incentives
and would like to see both implemented.
Mr. Rush. Section 542 of the bill will give FERC
jurisdiction over distributed generation facilities, which are
defined as electric power generation facilities of 50 megawatts
or less. Such FERC authority appears to be a departure from
previously established jurisdiction boundaries, and they seem
to be in contradiction to section 101 of the bill. Might this
provision be seen as a preemption of State authority?
Mr. Glauthier. I believe the authority for the distributed
power is really to be sure that there is the ability to look at
the systems as an integrated system and to incorporate all of
the power that would be in a market.
Mr. Rush. Well, let me ask, are there any other areas
regarding distribution reliability where FERC jurisdiction
would be appropriate?
Mr. Glauthier. The local distribution systems are not under
the authority of FERC. So, FERC's authority would really stop
when the power ends the transmission--long-term transmission
system and enters the local distribution utility.
Mr. Rush. So, in answer to the question then, there aren't
any areas regarding distribution reliability where FERC
jurisdiction would be more appropriate or that will allow FERC
to address issues of reliability.
Mr. Glauthier. I don't believe there are. I think you are
right.
Mr. Rush. Do you think that this is an appropriate----
Mr. Glauthier. We think that it is important for the States
to deal with this, so we are having a meeting, a regional
meeting, in the Midwest, in Chicago, at the end of this week.
Mr. Rush. Yes, I am supposed to testify. I will be a part
of that meeting on Friday.
Mr. Glauthier. So, we are looking forward to try to deal
with that and to get more ideas developed in that area.
Mr. Rush. Are you concerned about the epidemic of blackouts
that occurred over the summer?
Mr. Glauthier. We are concerned about that, and Secretary
Richardson this summer announced a six-point plan to try to
deal with that.
Mr. Rush. And so you are--the position of DOE right now is
we still want to leave it at the--leave this issue of
reliability at the State level without any Federal intervention
at all, any Federal guidelines or standards?
Mr. Glauthier. No, I am sorry, I didn't mean to leave that
impression.
Mr. Rush. Please don't.
Mr. Glauthier. Reliability is one of the primary reasons we
feel there is a need for Federal legislation, and that we need
to move from what is today a set of voluntary standards on
reliability to a set of mandatory standards across the country.
As we see deregulation or increased competition occur, we are
going to see more and more participants in the market at all
levels. It is going to be more important to have a uniform and
enforceable set of reliability standards for the industry.
Mr. Rush. Thank you, Mr. Chairman.
Mr. Barton. Thank you, Congressman Rush.
It seems like we recognize the gentlemen from Illinois in
conjunction. So, this time we go from the democratic gentleman
from Illinois to the republican gentleman from Illinois, Mr.
Shimkus, for 5 minutes.
Mr. Shimkus. The dynamic duo of the committee, Mr.
Chairman.
Mr. Barton. That is right.
Mr. Shimkus. I am pleased to follow my colleague from
Chicago.
It is great to have you here, and I think we are focusing
on a major concern based on the administration's bill. We know
that there are no market power provisions in H.R. 2944 other
than the RTOs, because the hearing record seems to have been
made that they clearly are not necessary, if you have sat in
all the hearings that we have had.
My State addressed market power through a mandatory ISO.
How would you think my State would feel if a restructuring bill
was passed, signed into law, that then took away their
authority based upon FERC's power in determining market power?
Mr. Glauthier. Well, I think if the State authority has
acted to really assure that there is competition occurring----
Mr. Shimkus. Well, wait--really assure? What do you mean by
``really assure?'' I mean, based--the dilemma we have here is
you trust the Federal regulators; I trust my public utility
commission. Now, I guess the question is, is that your
position? Do you trust the Federal regulators over the State
public utility commission?
Mr. Glauthier. We look to the State commissions to act
first and to try to incorporate the programs that they have
already decided to put in place, in many cases, or that States
will be deciding to put in place, and we are looking to FERC to
have an oversight authority to guarantee that as the States act
we don't end up with a patchwork of programs that are
inconsistent or where some----
Mr. Shimkus. Tell me why the administration's position is
willing to destroy the deregulation bill in the States of
Illinois based on superimposing FERC regulation with respect to
ISOs and market power? Why are you willing to give up a State
that has moved to address all these concerns addressed in a
deregulatory bill based upon the assumption that the RTOs, or
in this case a mandatory ISO, will not address the concern of
market power?
Mr. Glauthier. Well, first, I don't agree with the premise
that we are going to change the State program.
Mr. Shimkus. Well, it does, though, in Illinois. It will
cause the players to then claim that the rules have been
changed, and based upon that rule they can go and have this law
dismissed.
Mr. Largent. Would the gentleman yield just for a second?
Mr. Shimkus. The gentleman will yield.
Mr. Largent. I don't want to defend the administration's
position--he can do it himself--but I believe in the
administration's bill that the only time the FERC would come in
would be at the request of the State of Illinois. The State of
Illinois would have to petition the FERC to come in and to look
at unmitigated market power.
Mr. Shimkus. Well, we are going to see if that is the
administration's position.
Mr. Barton. We appreciate the gentleman from Oklahoma
defending the administration's position. This is truly
bipartisan and bicameral process.
Mr. Shimkus. Well, I don't have an answer, first.
Mr. Glauthier. Well, part of the answer I wanted to give is
that----
Mr. Largent. Well, isn't Mr. Largent correct in defending
the administration?
Mr. Glauthier. Yes, he is. Yes, and we appreciate the
assistance.
In market power, that is the State would have to make the
petition.
Mr. Shimkus. But has the administration addressed--asked my
public utility commission? I mean, in promoting the Federal--in
the administration bill, have you raised this to the public
utility commissions of the various States?
Mr. Glauthier. There certainly have been conversations with
the----
Mr. Shimkus. The State of Illinois?
Mr. Glauthier. Well, with NARUC. I am not sure that the----
Mr. Shimkus. Yes, or no; State of Illinois?
Mr. Glauthier. I can't guarantee that.
Mr. Shimkus. Okay. I think--okay. Do you have anything else
that you want to add.
Mr. Glauthier. I just wanted to make the statement that the
requirements we are talking about are intended not to replace
the State actions but to follow on. If the States' actions for
some reason are not termed sufficient--and I understand the
concern you have about who makes the decision----
Mr. Shimkus. And my time is expired. I will just say that
the State of Illinois went through a very tedious process to
move to competition, and as people know on this committee that
I am going to be guarded to make sure that the work done in the
State of Illinois is not tubed by any interests, either
interstate or intrastate.
So, with that, I yield back my time, Mr. Chairman.
Mr. Barton. All right. They are not called the Fighting
Illini for nothing, Mr. Secretary. Mr. Shimkus is stalwart in
his defense of the State of Illinois, just stalwart.
We would recognize the gentleman from Massachusetts, Mr.
Markey, for 5 minutes.
Mr. Markey. Thank you, Mr. Chairman, very much.
And we are operating obviously in terrain that has been
trod before--divestiture authority is well established as a
Federal power. Obviously, the Department of Justice, under
antitrust laws can force divestiture, and the Federal Trade
Commission, under antitrust laws, can force divestiture. The
Nuclear Regulatory Commission, under the Atomic Energy Act, can
force divestiture. The Securities Exchange Commission, under
PUHCA, can force divestiture. So, this is--not only is it not
unprecedented, it is deeply woven into the fabric of the
relationship between the Federal Government and the States.
So, Mr. Secretary, I would like to ask you to very
specifically, looking at the Barton bill on FERC jurisdiction
over the transmission system, what will happen to the
transmission system and energy market if section 101 of the
Barton bill is enacted?
Mr. Glauthier. Our concern is that the transmission
systems, the regional systems, may develop in a pattern that is
not optimal for individual markets, and we want the FERC to
have the responsibility to oversee that, be sure that in fact
the open access, that is the objective of full competition,
will be available.
Mr. Markey. Are you familiar with the market concentration
provisions of the Texas law and whether it could serve as a
model for the Federal law?
Mr. Glauthier. I am not personally familiar with the
details of it.
Mr. Markey. Do you think it makes sense for the Federal law
to be weaker than the Texas law?
Mr. Glauthier. No, in principle, I don't.
Mr. Markey. Do you think that--do you believe that
transmission owners will form adequate RTOs without clear FERC
authority?
Mr. Glauthier. No.
Mr. Markey. What do you think about incentive transmission
pricing? Why do transmitting utilities need incentives to join
RTOs when some already are in RTOs, and the bill already
requires those that are not in one to join one?
Mr. Glauthier. We are not sure that there is any incentive
needed for that. We have not proposed an incentive of that
sort.
Mr. Markey. Do you think that--so, you should believe that
the RTOs should have open membership requirements?
Mr. Glauthier. Yes, we do.
Mr. Markey. You do. Are you concerned about the prospects
for utilities to favor their own generation in interconnection
to the transmission system?
Mr. Glauthier. Yes, we are.
Mr. Markey. Do you think that we need interconnection
language in the Barton bill in order to ensure that we can
prevent against such activities by utilities?
Mr. Glauthier. Yes, similar to what we have in the
administration bill.
Mr. Markey. Now, Chairman Hoecker points out in his
testimony that the Barton bill actually would prevent FERC from
ordering transmitting utilities in Texas to provide open access
to their transmission systems. Do you share his concerns about
this type of exemption?
Mr. Glauthier. I am, as I said, not specific with the
details with the Texas one, but we do share his concerns in
general about this area.
Mr. Markey. Do you think that we should welcome Texas into
the Union?
In terms of the electricity restructuring debate, it is
understandable that Alaska would argue that it is not one of
the 48 contiguous States as you try to construct a national
model. My objective, ultimately, is to make sure that all of
the lower 48 are included and that this national market too be.
And, finally, Mr. Chairman--Mr. Secretary, if we were to
grant FERC market power authority but then sunset that
authority in 5 years, couldn't the incumbent utility
monopolists sue to block competition from coming and then run
the clock out until FERC couldn't use its market power
authority?
Mr. Glauthier. I think we would have to look very carefully
at any possible transition rule so that there isn't potential
for abuse.
Mr. Markey. Thank you, Mr. Chairman.
Mr. Barton. Thank the gentleman.
We recognize the gentleman from North Carolina, Mr. Burr,
for 5 minutes.
Mr. Burr. Thank you, Mr. Chairman. I learned a lot in that
last exchange out of all the times that we have been through
debates on electricity.
I think I finally figured out where my good friend, Mr.
Markey, is. He is in a touch pinch in New England, because he
needs lower prices. He just doesn't want to let the marketplace
do it. He would like it to be mandated that you have lower
prices regardless of what the cost of generation. Regardless of
where you get it from, let us just make sure that everybody
absorbs the cost of the problem in New England. Let us create
another problem everywhere.
And there is a real important key to it--you have to have a
Federal regulator to accomplish it. It does not happen with
State regulators. You can't link it together, and I am not so
sure that that is not where the administration is also.
Let me ask you: Define competition for me.
Mr. Glauthier. Competition, in my view, is the offering of
products or services at availabilities and prices where the
consumers are able to make their selection, where there is an
opportunity to choose among those competing----
Mr. Burr. So, choice is a very important thing for
competition.
Mr. Glauthier. Yes, sir.
Mr. Burr. And is more choice better than less choice?
Mr. Glauthier. Yes.
Mr. Burr. And is competition good?
Mr. Glauthier. Yes, it is.
Mr. Burr. Is choice good?
Mr. Glauthier. Yes.
Mr. Burr. Tell me about consumers in Tennessee? Do they
have choice?
Mr. Glauthier. Not currently.
Mr. Burr. Should they?
Mr. Glauthier. That is a part of our proposal and a part of
this bill, as well.
Mr. Burr. And how much choice will they have?
Mr. Glauthier. Well, it is going to be up to the individual
municipal utility systems or the coops to decide whether they
want to participate under our bill.
Mr. Burr. What would be an abuse of market power? You
talked about the abuses to market power. Tell me what one of
those abuses would be?
Mr. Glauthier. Well, one abuse would be if a utility in a
region is able to dominate the local systems----
Mr. Burr. So--and I don't want to interrupt you--but if you
have competition by your definition, which is choice, you can't
have abuse of market power, can you?
Mr. Glauthier. If you are really offering choices, that is
right; if there is the opportunity for choice. That is what we
are trying guarantee.
Mr. Burr. So, the only way to have an abuse of market power
is if you have an instrument that stands in the way of choice
in the marketplace.
Mr. Glauthier. An instrument or an ownership pattern or
some of other control that does it.
Mr. Burr. Now, would that control be excessive regulatory
authority by the FERC?
Mr. Glauthier. We think that that is a technique to try to
help assure that we don't have the kind of control that we are
worried about. We worried about----
Mr. Burr. Give me an instance where a Federal regulatory
agency encouraged and created competition versus stymied and
destroyed competition.
Mr. Glauthier. The Department of Justice and the Federal
Trade Commission, of course, are doing this all the time.
Mr. Burr. Now, would they be a good one to put in charge of
merger?
Mr. Glauthier. We think that FERC has a degree of technical
expertise in understanding this market that puts them in the
appropriate role here.
Mr. Burr. So, in every case but this one, they would be the
correct authority.
Well, I thank you for your answers. Mr. Chairman, I yield
back.
Mr. Barton. The Chair would recognize the gentlelady from
Missouri, if she is ready, or we can go to another Republican
and then when you are ready come to you. Are you--do you want
some time? Okay.
Then we recognize the gentlelady from New Mexico,
Congresswoman Wilson, for 5 minutes.
Ms. Wilson. Thank you, Mr. Chairman.
I wanted to ask you some questions related, really, to a
statement in your testimony. You say, ``What we do at the
Federal level and when we do it will have a profound impact on
the success of State and local retail competition programs.''
And the questions I have really have to do with how we make
this transition from regulated to market-driven power, and, as
you know, the Department of Energy not only deals with this as
a policy issue but as a consumer in my State of New Mexico.
The Department of Energy is actually one of the largest
industrial users of power in Albuquerque, New Mexico, because
you control the contracts for Kirkland Air Force Base. And for
those of you who aren't aware of it, Kirkland uses about 65
megawatts of power in New Mexico. It is one of the largest
industrial users, and that, to put it in context, is the city
of Santa Fe, our capital city, uses, on average, about 88
megawatts of power. We are talking about a large industrial
user.
The Department of Energy has applied to move to market
power for Kirkland Air Force Base immediately even though State
law, passed by the State legislature, says that we are going to
transition to that starting with retail consumers and small
businesses and just individual customers in 2001 and industrial
consumers in 2002 so that we don't shift costs from large
industrial users to schools and individual users and small
businesses.
Is it the Department of Energy's position that you can
enter a competitive marketplace before every other industrial
user in the State of New Mexico?
Mr. Glauthier. My understanding is that the contract you
are discussing is a wholesale contract, and our application to
FERC follows the procedures for that. We do want to be sure
that our actions follow the appropriate actions for all
entities there.
Ms. Wilson. There is a Federal law that also says Federal
agencies must comply with State law and that no Federal
appropriation, whether through the Department of Defense or the
Department of Energy, can be used outside of the context of
State law, which prohibits industrial users from going to
market power until 2002. Is it the Department of Energy's
position that this law doesn't apply?
Mr. Glauthier. No, it is not. It is my understanding that
that law applies to retail sales again, and we certainly want
to be sure that we are doing everything within the confines of
the law and appropriate policy.
Ms. Wilson. Is it your position then that you are not an
industrial user?
Mr. Glauthier. My understanding is this is a wholesale
contract and not an industrial, retail contract with public
service in New Mexico.
Ms. Wilson. And since it is a wholesale contract, what you
are saying is that the State law passed in 1999 does not apply
to you.
Mr. Glauthier. This is a different category than retail
sales.
Ms. Wilson. New Mexico is going to competitive market power
in a phased way--2001 for retail, 2002 for large industrial
users. Is it your position, then, that the Department of Energy
is neither of those?
Mr. Glauthier. That is my understanding; that we are a
wholesale customer and so do not fall within those groups.
Ms. Wilson. And, so you don't have to comply with any of
the State law passed in 1999?
Mr. Glauthier. What we are trying to do is to move toward
competition and to do it within the prescriptions that apply to
wholesale sale. So, that act does not apply.
Ms. Wilson. So, the circumstance then is that the largest
industrial user of power in the State of New Mexico is the
Department of Energy and that you feel you are not covered by
State law. Is this then going to be the position of the
Department of Energy or of the administration on every other
Federal Government user of power as we move to retail
competition in the States?
Mr. Glauthier. I think our position will be that we have to
adhere to all of the appropriate laws and policies that relate
to whatever categories our contracts fall under. In this case,
it is a wholesale sale. I don't know what the other categories
or other situations would be.
Ms. Wilson. Thank you, Mr. Chairman.
Mr. Barton. The Chair wants to let the gentlelady know the
subcommittee's on the side of the schoolchildren and the small
consumers in the great State of New Mexico, and I bet we will
get the administration to be on that same side. I just have a
feeling since Secretary Richardson used to represent New Mexico
that we can work that problem out. I think we can.
Does the gentlelady from Missouri wish to be recognized
now?
Ms. McCarthy. I thank you, Mr. Chairman, very much for your
indulgence, and I apologize to the panelist for missing his
testimony. My State of Missouri's campaign finance law was
before the Supreme Court, and I, having advocated for campaign
finance reform while a State legislator and now again in the
Congress, felt compelled to be there.
But with 24 States in some stage of deregulation of
electric energy, including my own, what has DOE seen as a
successful model of deregulation, and what--would you please
share with us what you--to what you--what attributes are in a
success model for any State?
Mr. Glauthier. I don't believe we have actually pointed to
any individual State and said ``This is the example.'' What we
see are elements in the patterns across the country which are
strong and constructive steps toward competition and toward
opening up these markets. We like to encourage the States to
take actions that seem appropriate to them and be sure that the
overall pattern is moving forward.
Ms. McCarthy. Then it sounds like you are quite willing to
let States proceed to devise their own models of deregulation
and have a kind of a hands-off approach until perhaps all
States have completed that task, then take a step back and
decide what role the Federal Government has at all in this
process, if any.
Mr. Glauthier. We would like to encourage the States to
develop their own plans and programs, and what we want to do is
be sure that there is an appropriate Federal oversight
authority to step in if needed in those selected cases.
Ms. McCarthy. And at what date out in the future would you
want that authority?
Mr. Glauthier. The way we have introduced our bill it would
be to ask each State to make a formal decision by 2003----
Ms. McCarthy. No, no, that is not my question, but perhaps
you are getting to the answer; I apologize if I interrupted.
But I don't see a role for you now at all. I think States are
perking along and doing just fine. Now, there is no one perfect
model yet, but, as you indicated in your answer to me,
eventually we would be able to take a look at what works well
for the States or regions or applications.
But I guess the real thrust of my question is why do we
need you involved at all in this? I think that is what I need
to hear, and if you have already answered that a dozen times
before I got here, I apologize; just be succinct. And at what
point do you need to be engaged? I don't believe you need to be
engaged at this point at all. But is there sometime out there,
perhaps if the States don't work cooperatively as a region or
as groups, that you would need to be engaged?
Mr. Glauthier. I think one example would be the
transmission access area where if States are moving toward
competition themselves, but there are inconsistencies among
States within a region and a concern that some utilities are
not getting access to the transmission facilities in a
neighboring State to be able to sell to customers, then that
kind of action is the sort of thing we think that FERC should
have the authority to look at to see whether any additional
steps are needed. That could happen soon. That could happen
early as some States move ahead to implement their programs.
Ms. McCarthy. So, at what point, then, do you want FERC
engaged in this process? Only at the point when States can't
get along?
Mr. Glauthier. We would like FERC to have the authority now
to begin to oversee the way these programs are being
implemented and think that it will be important to have them
involved from the beginning.
Ms. McCarthy. Would you explain what you mean by involved,
because I think that is where some of this cooperation breaks
down? I think there is a fear that you--that FERC will come in
and try to tell States what to do when States are out there
doing what they know best and think is right. And I don't want
to be a party to some confrontation that isn't necessary.
Mr. Glauthier. A couple of examples. One would be in the
reliability area. We think there is a need for reliability
standards that would be developed and enforced nationally. That
ought to start now. It ought to begin as we are seeing this
market bring in more and more----
Ms. McCarthy. But haven't we been doing that?
Mr. Glauthier. We have voluntary standards right now. There
are no mandatory reliability standards.
Ms. McCarthy. Why do we need mandatory ones, if the
voluntary ones are working. Is there a problem?
Mr. Glauthier. Yes, we think there is a problem. This
summer, for example, the power outages certainly demonstrated
some kinds of problems. As we see markets open up, we will have
more and more entrants, more diversified kinds of companies
offering services in generation and transmission and then local
distribution. All of that is going to increase the uncertainty
of the reliability, and we need to be sure that we have got the
ability to keep the lights on and make sure everyone is getting
the services that they deserve.
Ms. McCarthy. Don't you think that the public service
commissioners, or whatever they are called in the respective
States, also feel that way?
Mr. Glauthier. Yes, and we actually would think they would
encourage this; that the reliability standards are something I
believe they support.
Ms. McCarthy. Why do they need you, if that is the case?
Mr. Glauthier. A lot of it is on an interstate basis. It is
not within any single State, and so you really have large
regions of the country interconnected in a way that has to be
overseen more broadly.
Ms. McCarthy. We are doing that now in many parts of this
great Nation. I live in Missouri; I get my energy from Kansas.
It seems to work just fine. I guess I am hoping that we engage
you in a role where you actually are problem-solving but not
creating problems, because I happen to think it is working very
well out there. We have got wonderful rates in the Midwest, and
there aren't a whole lot of people complaining about it.
Mr. Glauthier. In the reliability area, for example, our
expectation would be that the organization would grow out of
what we have now with the National Electric Reliability
Council; that it would have a strong role of the States; that
it would not be at war with the States, but rather would be a
way for States to participate together and help set these
standards and be sure that they are in place in a way that
everyone who participates in the market really has to follow.
Ms. McCarthy. I thank you. I very much appreciate those
thoughts, and I appreciate what you are saying, and I welcome
that. I wanted to hear that this was going to be cooperation
with States that are already out there doing it, not a Federal
imposition of how to do it, but yet a partner in making sure
that the customer is well served.
And, Mr. Chairman, I apologize for going over my time
limit.
Mr. Barton. No, ma'am, we were delighted to have you go
over your time, because you echoed much of what I said. I don't
want to spook you, but it sounded--it was like gentle rain on
the plain in the spring to hear your thoughts. So, we
appreciate that very much. We will be happy to add you as an
original co-sponsor; in fact, the only co-sponsor of the bill.
We recognize the gentleman who represents the top 20
undefeated Mississippi State Bulldogs for 5 minutes for
questions.
Mr. Pickering. Thank you, Mr. Chairman, and I want to
commend your efforts in putting this legislation together and
having this hearing today. And in a spiritual sense, ``Blessed
are the peacemakers in the legislative context.'' Too often it
is ``Blessed are the peacemakers for they have all been shot.''
And I hope that is not the case here, as we try to compete--I
mean, balance a competing interest in the regions and look at
the issues.
I am going to take a little bit of a different tack than
the other members. I am actually going to ask questions as it
relates to the legislation.
Mr. Secretary, in H.R 2944, the subcommittee chairman's
legislation, he amended section 203 of the Federal Power Act to
expand FERC reviews of sale of power plants and transmission
facilities by State and municipal utilities, cooperatives, and
Federal electric utilities. Now, why he expands that authority,
he also limits the time to 90 days of that review. What is your
view, your opinion, of that? Is it necessary to expand the
authority into those other areas? Do you support that? And what
is your view of limiting the time?
Mr. Glauthier. We do support the expansion into these other
utilities that have been non-jurisdictional utilities. On the
timeframe, I would like to defer to the next panel and ask
them. We think that it is certainly important to be sure that
the decisions can be made with enough information in front of
them, and I don't want to presume that or speak for them.
Mr. Pickering. Well, why is there a need for Federal review
of these sales into, for example, cooperatives or municipal
utilities? Could we not maintain under current jurisdiction
with the timetable to assure a timely review and decision with
a certainty of markets as we go into this transition? Why do
you need to go into these other areas where FERC currently has
no jurisdiction?
Mr. Glauthier. Our feeling is that we need to be sure that
the access and market power issues can be addressed--the ones
we have been discussing for some time this morning--that all
utilities in the market really have to be following the same
guidelines, the same rules. So, having them all a part of the
same system will be important.
Mr. Pickering. Do you see the potential for a municipality
or a cooperative to have market power?
Mr. Glauthier. In certain areas, there are large coops,
there are--there is the possibility.
Mr. Pickering. Another question deals with mandatory RTOs.
Now, FERC is going forward in its NOPR based on an incentive-
based approach, non-mandatory approach. Do you favor a
mandatory RTO or incentive-based approach to achieve the type
of transmission organization necessary to promote competition?
Mr. Glauthier. We think that the utilities will want to
join RTOs. I don't believe there is a need to provide strong
incentives or the type we talked about earlier that is in this
bill. In terms of mandatory RTOs, I personally doubt that there
will many occasions where utilities have to be directed to join
an RTO. I think that it is more important that we have the FERC
involved in overseeing RTOs to be sure that they are
appropriately sized for the regions that they are dealing with;
that there is a rate structure.
Mr. Pickering. So, are you saying that a mandate is not
necessary? Incentives would be sufficient with FERC
participation, cooperation, counsel?
Mr. Glauthier. I think a mandate is necessary as a fall-
back, but that it will not be operative very often; that, in
fact, utilities will come forward and join RTOs, but I think
you need a mandate there as a guarantee for some small
percentage of systems.
Mr. Pickering. Let me give you another example of whether
mandatory--a mandate is necessary or not. In
telecommunications--which I realize is different, but there are
some parallels--we gave an incentive approach for local phone
companies to open their markets and in return if they opened
their markets, they could get into long distance--a non-
mandatory approach but an incentive-based--if you do this, you
will receive freedom to go into other markets. Bell Atlantic is
about to petition to open its market in New York and other
regional companies are preparing to do that.
As the market forces and the convergence, as well as the
consolidation of that market takes place, it seems to be that
both regulatory incentives and market pressures are achieving
the objectives without a mandate. Now, if that is the case in
telecommunications, why would that not be the case in electric
utilities?
Mr. Glauthier. Congressman, I am not sure I understand the
example exactly, because a few years ago with the break-up of
AT&T, you seemed to have the break between local distribution
and long distance, which is somewhat similar to our local
distribution utilities and the transmission.
Mr. Pickering. So, if you put in the open access
requirements, if you eliminated the vertical integration issues
of market power and you gave incentives to do so with
reliability and transmission organizations that would be
appropriate, do you need mandates?
Mr. Glauthier. Well, the mandate I think in this industry
is the parallel to the court order. The reason that it is a
mandate we are talking about for the transmission----
Mr. Pickering. But you are confusing long distance with
what we did in local. The legislation was different than what
the AT&T consent decree did.
Mr. Glauthier. Yes, but I believe what we are talking about
here is really a requirement to be sure that the transmission
access is available to everybody; that transmission is not
being used as a point of leverage with generation assets alike,
and so to guarantee that transmission assets are independent
and available to everybody there does need to be some
requirement.
Mr. Pickering. Mr. Chairman, I know my time is up. Could I
have one additional question? And this deals with the
reciprocity clause and the chairman's legislation. Are you
familiar with that?
Mr. Glauthier. Yes, I am.
Mr. Pickering. And what are your views of the reciprocity
clause in the proposed legislation? Do you support it, oppose
it? Is there a way to improve it? And should it be State-
specific rather than broadly based?
Mr. Glauthier. It is important to have the clause. We do
support the reciprocity clause, and it needs to be able to be
used on an interstate basis so that if a utility in one State
has its market opened up to competition, it is going to be able
to compete in the markets with those utilities that are trying
to enter its market. That may cross State bounds.
Mr. Pickering. But as far as the specific legislation
proposed, do you support the reciprocity language or would you
narrow it to make it on a State-by-State basis?
Mr. Glauthier. The----
Mr. Pickering. If you understand my question. If I need to
clarify or ask a better question, I can try.
Mr. Glauthier. Well, the position in our own legislation is
that the State would make the decision on reciprocity, and I
think that that clarifies my response.
Mr. Pickering. The Barton proposal would require every
utility, if they have assets in other States that are open, if
they have a closed State, to submit a petition in support of
competition in the State that is closed before their facilities
in other States could participate in an open, competitive
market. Do you support or oppose that approach?
Mr. Glauthier. Okay, our approach is to support giving the
States the discretion and not the Federal Government the
authority over that.
Mr. Pickering. I think I understand your position. Thank
you, sir.
Mr. Chairman.
Mr. Barton. We thank you, Congressman Pickering.
Deputy Secretary Glauthier, we will have other written
questions for you, but there are no other members present that
have not had an opportunity to ask at least oral questions. So,
we are going to excuse you. We appreciate your presence today.
We want to commend you and the Department--oh, whoa, I didn't
see Mr. Bryant; I am sorry.
Mr. Bryant. Well, now that you have recognized me, I will--
--
Mr. Barton. I am sorry, Congressman Bryant.
Mr. Bryant. Let me just ask, if I could----
Mr. Barton. Five minutes.
Mr. Bryant. [continuing] just a couple of questions in
regard to some environmental issues. The administration bill
and the Pallone bill set a Federal renewable portfolio standard
of 7.5 percent by the year 2010. Is that realistic?
Mr. Glauthier. Yes, we think it is.
Mr. Bryant. A number of the States already have established
their own individual standards in this area. Is there a need to
clarify State authority to impose renewable portfolio
standards?
Mr. Glauthier. We think there is a need for a national
standard, and what we proposed is one that would have trading
credits, if you will, so that if a State, one area, can build
renewable capacity more easily than another, more
competitively, then it can be done there, and the overall
requirement can be met. And, so it would not have to met State-
by-State; that is, physically, by assets in each State.
Mr. Barton. Would the--could the gentleman from Tennessee
yield?
Mr. Bryant. I would be happy to yield.
Mr. Barton. You answered Congressman Bryant that the 7.5
percent mandated renewable was realistic, but my staff just
told me in order to meet that target by the year 2010, 50
percent of all new generation that is built between now and
then would have to be renewable. Do you really think that we
can build 50 percent of the expected new generation capacity
with renewable energy sources in the next 11 years?
Mr. Glauthier. Maybe we need to share some of our detailed
projections. The information I have is that 14 percent of the
new capacity would have to be renewable. So, it may be that
some of our expectation is also co-firing of existing coal fire
capacity, for example, with biomass or some other changes that
would help to meet the target.
Mr. Barton. Okay. Well, we expect an expanding market.
Perhaps your projectors expect a contracting market, so that
might be why you only get at 14 percent. But we will work on
that.
I yield back to the gentleman from Tennessee.
Mr. Bryant. Thank you, Mr. Chairman. I did want to comment
on that when I ask a couple of more questions, just in a
summary conclusion.
But just a couple of other questions. Does the
administration support the bill introduced by Mr. Waxman to
amend the Clean Air Act to require older coal power plants in
the Midwest and the Southeast to meet new performance
standards?
Mr. Glauthier. We have not taken a position on that
legislation yet.
Mr. Bryant. And do you know when you might?
Mr. Glauthier. No, I don't have any prediction or estimate.
Mr. Bryant. Okay. Does the--have you taken a position on
the Clean Air Act provisions of the Pallone bill, which sets
national emission standards for nitrogen oxide particulates,
carbon dioxide, and mercury? In June, Secretary Richardson said
the administration believed that these clean air amendments
should not be included in electricity legislation. Is that
still the position?
Mr. Glauthier. Yes, the administration's view is it should
not be included in the electricity restructuring legislation
but should be dealt with in consideration of the Clean Air Act.
Mr. Bryant. Well, I appreciate that.
I just tell you from the standpoint of what I am hearing,
and again I am focusing on the Southeast, but, you know, I hear
other things too. In these--the renewable standards, as our
chairman indicated, just don't appear to be realistic, maybe
even up here, but certainly from what I am hearing back in my
area. It is just not reasonable at this point, that number.
While we are all committed to going that direction, we are
concerned as this deregulation process unfolds that we not go
overboard on this with unattainable standards. We are going to
be asking in particular the TVA to compete again in a
deregulated world--and Mr. Whitfield is not here--but a good
part of the power is generated through coal by our plants, and
we are already dealing with clean air standards and trying to
go that direction, but I think we are going to need greater
transition periods and a little bit more flexibility in those
areas.
Mr. Glauthier. We are more optimistic. I understand we are
at about 2.3 percent renewables already, so the next 10 years
our projection is that we can get to 7.5 percent, although it
is a bit ambitious. That is why we have built in a cost cap in
our proposal, as well, so that if it is more expensive than the
1.5 cents per kilowatt hour that we have built in, that would
take effect, and we would not see people spending higher
amounts of money just to meet a target.
Mr. Bryant. Thank you for your efforts there, and would
yield back my time.
Mr. Barton. Thank the gentleman.
We noticed that we are graced with the presence of the
distinguished Congressman from Staten Island, New York, the
Republican parties own Vito Fossella who says he has no
questions but he has this cryptic note that says, ``Go
Yankees.''
I would point out that the Dallas Stars beat the Buffalo
something-or-anothers in hockey, and the San Antonio Spurs beat
the something-or-nothing Knickerbockers from New York.
Mr. Fossella. Go Yankees.
Mr. Barton. Does the gentleman wish to ask any questions?
Mr. Fossella. No.
Mr. Barton. Okay. Mr. Shimkus says he has one question
before we let this gentleman go.
Mr. Shimkus. Yes, I want to be the kinder, gentler Shimkus
and apologize for getting so excited.
I want to go back to really the same issue, trying to
understand if they are the RTOs, whether it be ISOs or whether
they are transcos; ISOs being what Illinois has opted for, in
fact, made mandatory to ensure against market power. Why is
that not enough to--two additional questions--what additional
powers are needed and how does cost-based rates help in this
discussion?
Mr. Glauthier. It may be that the provisions there for
the--in the Illinois statute for transmission will do the job,
and what we want is for FERC to have the authority just to be
able to oversee that and be sure that it doesn't--that nothing
more is needed. There is market power that can exist at the
generation level or the link between generation and retial
sales, so it is not all in transmission, but it may be the
position of the utility in the marketplace that is still
restricting competitive choice, competitive options. And, so
that aspect of market power also needs to be addressed.
Mr. Shimkus. What about cost-based rates? Is that--how do
you see that being helpful in the market power debate?
Mr. Glauthier. Well, of course, we all want to move away
from cost-based rates and really see----
Mr. Shimkus. But it is being promoted by folks as a
solution to the market power, at least in the short-term,
however you define that.
Mr. Glauthier. It may have a role in a transition period in
some cases, but it is certainly something we want to move away
from as an overall pattern. So, I would look at that as a
potential transition action or step.
Mr. Shimkus. Thank you, Mr. Chairman. I yield back.
Mr. Barton. Since we have let a Republican ask one more
question, we are going to let a Democrat ask one more question.
Mr. Sawyer. But this will be the last question before we
release this witness.
Mr. Sawyer. Thank you, Mr. Chairman.
With a number of questions, we have been talking about how
this transmission system can grow and accommodate an uncertain
future. Can you comment on siting decisions and the
administration's point of view with regard to decisions,
particularly in circumstances where a State might not be the
direct beneficiary of siting decisions that were nonetheless
needed in order to evolve a transmission system?
Mr. Glauthier. We think that siting decisions ought to be
addressed somehow in a regional context. We would hope the
States would work together to try to deal with those questions.
Ultimately, the authority rests with each State on the
individual siting decisions, but we want to encourage the
planning and cooperation on a regional basis.
Mr. Sawyer. In that sense, do you think it should be
different from natural gas pipeline siting decisions?
Mr. Glauthier. Yes.
Mr. Sawyer. Why?
Mr. Glauthier. Really based on the historical patterns that
over the decades in which the utility industry has grown up,
the States have had the authority, and so it has never been
done really on a regional basis.
Mr. Sawyer. I am really not trying to--do you believe that
is compatible with regional markets and the growth and
evolution of the grid needed to serve them?
Mr. Glauthier. What we would like to do is encourage
regional cooperation and for regions to work together on the
questions of new capacity additions, new transmission
expansions, and those siting decisions naturally will be a part
of that. But we would like to see it done in a way that still
respects the States' individual authorities, as well.
Mr. Sawyer. Thank you, Mr. Chairman.
Mr. Barton. Thank you.
Now, we do want to release this witness.
Mr. Markey. Mr. Chairman?
Mr. Barton. The gentleman from Massachusetts?
Mr. Markey. Is it possible that I could ask an extra
question, as well?
Mr. Barton. Yes. I don't want to let the pandora's box too
open. We have got two more panels today and a series of votes
in the next 4 or 5 minutes, but the gentleman from
Massachusetts has certainly been a positive contributor to the
dialog. Final exam time is almost here, so if you like--if you
could just ask 1 or 2, though.
Mr. Markey. Thank you, Mr. Chairman. I appreciate it.
Earlier, the gentleman from North Carolina suggested that I
don't trust markets and I just want more Government regulating,
because I have higher rates in New England, and therefore want
to raise rates again down in North Carolina.
And I would like to respond to that.
Mr. Barton. Well, let us don't pick a food fight between
Massachusetts and North Carolina right now, if possible.
Mr. Markey. I don't think that this will be considered a
food fight. This will be--you know, my wife always tells me,
``You have two choices in life: reenactment or
reconciliation.''
Mr. Barton. Okay.
Mr. Markey. And reenactment, very bad--reenactment is very
bad.
Reenactment leads to escalation. So, this is an attempt at
reconciliation, which is good, very good.
Mr. Barton. Oh, Okay.
Mr. Markey. We should always be trying to achieve it.
Mr. Barton. Well, just notice that I am in the middle here.
Mr. Burr. The gentleman from Massachusetts won't mind if I
stay seated for this, will he?
Mr. Markey. That is okay.
So, first, I do trust markets, but I don't trust
monopolies. And one thing I have discovered over the years is
that markets are very inefficient when it comes to eliminating
Government-granted monopolies. It just doesn't happen.
Government action is sometimes needed to break up a monopoly
and create a real market, because----
Mr. Barton. This is supposed to be a question.
Mr. Markey. I understand that, but sometimes I find that
the best questions are in the form of answers.
Mr. Barton. We will put the gentleman on one of the panels
if he wishes.
Mr. Markey. Well, let me ask you this, Mr. Gauthier: Do you
find it curious that all the organizations representing
consumers and competitors oppose the Barton bill, while the
incumbent monopolists like it? That is more pointed than I
wanted to make it, but----
Mr. Glauthier. There are elements we think need to be added
to the bill to provide consumer protection.
Mr. Markey. But is that an interesting--do you think it is
accidental that all the competitors and consumers are on one
side, and the monopolists are on the other side?
Mr. Glauthier. It is an interesting observation. We think
there needs to be some perfection of the bill before we can
support it.
Mr. Markey. Okay, good. Well, that will be our goal then,
and I thank you, Mr. Chairman, for allowing me to ask that
question.
Mr. Barton. All right. Seeing no other member who wishes to
ask one more question, we are going to release this witness.
We want to thank the administration and the Department for
your cooperation, and we do look forward to working with you. I
told the Secretary this, and I want to tell you this: We really
appreciate the staff and their cooperative attitude in working
with our staffs.
So, you are released from this subcommittee.
Now, we have a series of votes. We have 3 to 4 votes. That
is going to take probably 30 minutes. So, we are going to
recess for lunch, because we have to, not because we want to,
and we will reconvene at 1:30. And if nobody else is in the
room, I want myself, and--which I will be here--and the FERC
commissioners, okay?
So, we are recessed until 1:30 Eastern Daylight Savings
Time.
[Whereupon, at 12:34 a.m., the subcommittee recessed, to
reconvene at 1:31 p.m., the same day.]
Mr. Barton The subcommittee will come to order.
We actually have all the commissioners here I think. We
want--well, we have got one more here.
We want to welcome the distinguished Federal Energy
Regulatory Commission to the Subcommittee of Energy and Power.
Today, we are going to start off with the Chairman, the
distinguished Mr. James Hoecker, then we are going to go from
the Chairman's left or the committee's right--to Ms. Bailey,
Ms. Breathitt, Mr. Hebert, and Mr. Massey.
We are going to recognize each of--your written statements
are in the record in their entirety, and we are going to
recognize each of you for such time as you may consume, which I
am a little bit leery of doing since some of you are from the
South and talk slowly. But we really do want to hear your
comments, but I would encourage you to try to limit them to 5
to 10 minutes so that we can have some time to ask questions.
So, Mr. Chairman, you are recognized, and then after you we
will go with Ms. Bailey and then right on down the road.
STATEMENTS OF HON. JAMES J. HOECKER, CHAIRMAN, ACCOMPANIED BY
HON. VICKY A. BAILEY, COMMISSIONER; HON. LINDA KEY BREATHITT,
COMMISSIONER; HON. CURT L. HEBERT, JR., COMMISSIONER; AND HON.
WILLIAM L. MASSEY, COMMISSIONER, FEDERAL ENERGY REGULATORY
COMMISSION
Mr. Hoecker. Thank you, Mr. Chairman. Chairman Barton,
members of the subcommittee, it is again a privilege for me to
appear before you; this time, in general support of H.R. 2944.
Mr. Chairman, I recognize the difficulty of sorting through
the complex facets of electric restructuring to find the
appropriate combination of forward-looking initiatives that
will serve the American energy consumer well, doing neither too
much nor too little, employing Federal authority effectively
but not excessively. We share with you a faith in the benefits
of competition and in the ability of public policy to ensure
that there is an efficient and equitable market structure
within which competition can flourish. I, therefore, applaud
your desire to enact legislation, and I pledge to help you do
so.
I agree with the Deputy Secretary that electricity markets
require certainty now more than ever, that demands on the
system require a boost in generation reserve margins and
transmission capacity, and that the Congress should now speak
to how it would have this industry evolve in the future.
In response to the Energy Policy Act of 1992 and our own
Order 888, competition is growing in electric generation and
marketing sectors. New challenges to system reliability are
more in evidence. The time has therefore arrived to strengthen
the platform upon which competition and reliability must stand.
And by that I mean non-discriminatory access to the integrated
network of high voltage transmission.
For 2 years, I have testified before both Houses of
Congress that the newly competitive bulk power market needs
legislative assistance to do four things: To place all electric
transmission under the Commission's jurisdiction for purposes
of ensuring non-discriminatory access to transmission services;
second, to clarify and reinforce the Commission's authority to
promote regional transmission organizations; third, to protect
the integrity of transmission service through mandatory
reliability rules established by self-regulating organizations
subject to FERC oversight, and, fourth, to reform the Public
Utility Holding Company Act.
Now, although I recognize that the administration and this
committee have a much broader restructuring agenda than does
our Commission, I am pleased to say that H.R. 2944 takes these
four key issues I have mentioned head on, and with some
reservations, I would say it does a good job.
In my written testimony, I make several suggestions for
your further evaluation, but let me highlight a few before I
close. First, State regulators, appearing on the next panel as
the National Association of Regulatory Utility Commissioners,
would give utilities a chance to avail themselves of the
opportunity to join an RTO voluntarily but would then allow the
FERC to require a utility to join an RTO if that utility had
not done so voluntarily.
Now, that is my position, as well. Our proposed rule
already sets forth a timetable for voluntary utility actions in
this connection. However, I view the statute mandate that you
propose as a very sound alternative.
Second, three of my colleagues and I asked the Congress to
help us ensure that all uses of the transmission system are
treated comparably in the face of a troublesome recent decision
in the 8th Circuit Court of Appeals. An addition to the bill is
suggested in my testimony to address this problem.
And, third, I note that other pending legislation would
enhance the Commission's authority to address market power
outside the context of mergers, and I support such measures. As
the Commission moves toward light-handed regulation, its
ability to monitor the market and to identify and address
exercises of residual market power becomes ever more important.
In conclusion, my objective is to help create a market
structure that ultimately will allow markets, and not
regulators, to determine the price of wholesale electric power.
You will notice, I am sure, that the members of the Commission
do not entirely agree on how to get to competitive electricity
markets. We do agree that competition is the goal, however. We
do agree that RTOs have substantial benefits, that reliability
must be protected, and that market power must be constrained in
the context of mergers and elsewhere.
The question for the subcommittee, and in fact for our
Commission as well, is how proactive and supportive we should
be in pursuit of these objectives.
Mr. Chairman, I thank you for the opportunity to offer my
views here this afternoon, and I look forward to your
questions.
[The prepared statement of Hon. James J. Hoecker follows:]
Prepared Statement of Hon. James J. Hoecker, Chairman, Federal Energy
Regulatory Commission
Mr. Chairman and Members of the Subcommittee: Good morning. My name
is James J. Hoecker, Chairman of the Federal Energy Regulatory
Commission. Thank you for the opportunity to appear before you today.
My testimony will address the need for Federal electricity legislation
generally and the provisions of H.R. 2944 in particular.
In prior testimony before this and other subcommittees of the House
of Representatives, I have recommended that Congress enact legislation
to address several matters that are critical to achieving fully
competitive, reliable wholesale electric power markets. These include
placing all electric transmission in the continental United States
under the same rules for non-discriminatory open access and comparable
service; reinforcing the Commission's authority to foster regional
transmission organizations; establishing mandatory reliability rules to
protect the integrity of transmission service, relying on a self-
regulating organization with appropriate Federal oversight of rule
development and enforcement; providing the Commission with appropriate
authority to remedy market power; and, reforming the Public Utility
Holding Company Act (PUHCA).
As discussed below, the provisions of H.R. 2944 advance a number of
these policy goals. I commend you, Chairman Barton, for developing this
bill. I will suggest some additions and modifications for your
consideration.
i. introduction
Traditional regulation of electricity sales for resale in
interstate commerce--i.e., the wholesale or ``bulk'' power market--has
been based on the recognition that electric utilities were operating as
natural monopolies. Consequently, during most of this century, federal
agencies addressed market power and ratepayer interests, not by
promoting competition, but by strict oversight of the terms of services
and cost-of-service rates. In the 1980s and early 1990s, however,
several developments in the electricity generation sector indicated
that the interests of utility ratepayers could be better protected by
competition in wholesale power markets than by cost-based regulation.
The benefits of replacing traditional regulation with competition
became evident in other industries, such as trucking, railroads, long-
distance telecommunications and natural gas. In the Energy Policy Act
of 1992, Congress took important steps toward competition in wholesale
power markets, by providing the Commission with greater authority to
order transmission owners to transmit power for other buyers and
sellers in the wholesale market, and by modifying PUHCA to eliminate a
key barrier for new generators entering these markets. Electric
generation units built and operated independently of traditional
utilities had already proved to be competitive and reliable parts of
the electric system.
Consistent with these changes in the industry, the Commission in
1996, through a major rulemaking called Order No. 888, ordered open,
non-discriminatory access to the transmission facilities of public
utilities for wholesale market participants. This open access
obligation prohibits public utilities from discriminating against
competitors' transactions in favor of their own wholesale sales of
power. Order No. 888 has enhanced competition in wholesale power
markets significantly, although it has not opened the grid to
competition entirely.
Today, the promotion of competition and reliable service among
power suppliers in wholesale markets remains the Commission's primary
goal in this area. The Commission's fundamental regulatory objectives
are: (1) to substitute competition for price regulation in wholesale
power markets to the extent possible; and (2) to ensure that
transmission service is made available under non-discriminatory terms
and conditions so as to enable competition among suppliers of
electricity in these markets. Transmission facilities form an
integrated, interstate grid that is essential for delivering power, in
the same way the interstate highway system allows trucks to deliver
other commodities across state boundaries pursuant to private
contracts. The transmission grid, however, is owned by individual
utilities and, absent regulation, these utilities can effectively
prevent the use of these facilities by their competitors. Thus,
regulation of transmission is necessary to ensure open access, non-
discrimination and reasonable rates. Effective regulation of the
relatively small transmission portion of the utility business (it
accounts for about only three to four percent of the average price of
energy delivered to the home) enables competition in the much larger
generation sector to produce sizeable ratepayer benefits.
The Commission is seeking to use its current authority to promote
competitive wholesale markets. The Commission has also made a
determined effort to assist states choosing to pursue retail market
competition, which ultimately will succeed only if there is a
competitive wholesale market. However, most of the federal regulatory
framework dates from before competition became significant in this
industry and, in some key respects, now impedes these efforts. I
therefore support Federal legislative reforms that will better enable
the Commission to promote competition and reliability in wholesale
markets as well as facilitate retail competition initiatives, as
appropriate.
ii. transmission issues
A. Open Access
Fair and open access to reliable transmission service is an
essential predicate to competition in bulk power markets. Congress
expressly recognized this fact in the Energy Policy Act of 1992, by
giving the Commission limited new authority under Federal Power Act
(FPA) section 211 to require utilities to provide transmission service
to others on a case-by-case basis. The Commission later, in Order No.
888, relied primarily on its traditional authority to prevent undue
discrimination when it ordered public utilities to provide generic open
access to their transmission facilities. The Commission concluded that
Order No. 888 was necessary to support competition in wholesale power
markets.
I view Section 102(a)(1) of H.R. 2944 as a confirmation that the
open access provisions of Order No. 888 are completely consistent with
Congressional goals. H.R. 2944 would clarify the Commission's authority
to require open access transmission services under FPA sections 205 and
206, and would apply this clarification to any ``rule or order
promulgated by the Commission before, on, or after'' the bill's
enactment. I support this provision as eliminating any remaining
uncertainty about the Commission's authority to adopt the Order No. 888
open access transmission requirements.
H.R. 2944 would extend the Commission's open access authority to
all ``transmitting utilities,'' as defined by the FPA. Under current
law, the open access obligations of Order No. 888 apply only to
transmission facilities owned or operated by ``public utilities,'' as
defined by the FPA. In other words, approximately one-third of the
transmission grid in the contiguous 48 States is not subject to the
Commission's open access requirements, even though these facilities are
generally integrated with, and are integral to the operation of, the
rest of the network. This portion of the grid is owned primarily by
federally-owned utilities, electric cooperatives that are financed by
the Rural Utilities Service, and some municipal utilities. While some
of these entities have chosen to offer open access transmission service
voluntarily, many others do not. These gaps in open access to the
transmission grid inevitably impede the development of fully
competitive wholesale power markets. Only federal legislation making
all utilities subject to the same open access requirements can remedy
this problem.
I believe that all transmitting utilities should be subject to the
same transmission rules. Open access to a seamless transmission grid by
all electricity suppliers is essential if the Congress and the
Commission intend to guarantee that buyers and sellers of electricity
have as many choices as possible. I note, however, that H.R. 2944
narrows the definition of transmitting utilities to exclude certain
utilities that transact within the Electric Reliability Council of
Texas (ERCOT). While the Commission does not have authority to regulate
transmission within ERCOT as it does elsewhere, it has had authority
since 1978 to order transmitting utilities, including those that
transmit within ERCOT, to provide transmission services in some
circumstances under FPA section 211. Although used sparingly, this
authority has been used to promote competitive access. Central Power &
Light Co., et al., 17 FERC para. 61,078 (1981); City of College
Station, Texas, 86 FERC para. 61,165 (1999); Tex-La Electric
Cooperative of Texas, Inc., 69 FERC para. 61,269 (1994). The proposed
change in definition would exempt those utilities that transact only
within ERCOT from the current, limited section 211 authority as well as
the broader open access authority addressed in H.R. 2944 itself. The
Congress should leave the Commission with section 211 authority in this
area.
B. Regional Transmission Organizations
In Order No. 888, the Commission encouraged, but did not require,
the formation of independent system operators (ISOs). The Commission
found that ISOs would promote broader, regional power markets and
provide greater assurance of non-discrimination. Since 1996, six ISOs
have been established (in California, the mid-Atlantic states, New
England, New York, the Midwest, and Texas). Four of these are currently
operational.
The Commission is now seeking to address the remaining impediments
to full competition, which fall largely into two categories. First are
the engineering and economic inefficiencies inherent in the current
operation and expansion of the transmission grid. For example, each
separate transmission operator makes independent decisions about the
use, limitations, and expansion of its part of the grid, but the
interconnection of the separate transmission systems causes each such
action to immediately affect other parts of the grid. With the increase
in competition, the grid is being stressed by many new entrants and by
new transactions using two or more systems in a region, presenting
challenges to the historical approach to maintaining the reliability of
separate, but interconnected, systems. Also, competitive markets must
evolve into regional markets if they are to thrive, and the efficiency
gains of competitive markets will be imperiled unless regional
solutions are used for pricing transmission services and managing
regional constraints and expansion needs.
The second category of impediments are the continuing opportunities
for transmission owners to unduly discriminate in the operation of
their transmission systems so as to favor their own or their
affiliates' power marketing activities. In the wake of Order No. 888,
many market participants continue to allege, and the Commission has in
some cases confirmed, that transmission service problems related to
discriminatory conduct remain.
To address these impediments, the Commission has proposed new rules
to promote the voluntary formation of regional transmission
organizations (RTOs) such as ISOs and independent companies that own
and operate only transmission facilities (transcos). Such institutions
are encouraged to form in the near future, under a schedule specified
in the proposal. Notice of Proposed Rulemaking on Regional Transmission
Organizations, 64 Fed. Reg. 31,389, FERC Stats. & Regs., para. 32,541
(1999).
An RTO is an organization formed to administer the operation of the
transmission system on behalf of all the participants in the market. It
may be a for-profit or non-profit institution but it must be
independent of all other financial interests of power market
participants. It should cover an appropriately configured region and
have adequate operational control over the transmission grid. If
properly designed, an RTO can ensure the non-discriminatory operation
of the transmission grid, eliminate pancaked transmission charges for
using transmission systems owned by different utilities, reduce and
better manage congestion on the transmission lines, and facilitate
transmission planning on a multi-state basis.
Section 103 of H.R. 2944 would require each transmitting utility to
establish or join an RTO by January 1, 2003, and to file an application
for its proposed action with the Commission by January 1, 2002. I fully
support the bill's goal of having utilities participate in an RTO.
However, I offer the following suggestions for improving H.R.
2944's provisions on RTOs. First, I would advance the deadline for
participation in RTOs by at least one year, so that consumers can begin
receiving the substantial benefits of RTOs much sooner. Because
transmission systems are already regionally integrated, economic
efficiency gains from the coordinated operation of transmission over a
broad geographic area are readily attainable. It is therefore
increasingly difficult to justify delaying such benefits to the public.
The Commission's RTO proposal calls for RTOs to be operational by
December 15, 2001.
Second, let me address proposed FPA section 202(h)(2), which
addresses the standards RTOs must meet. Although the topics of the four
standards proposed for FPA section 202(h)(2)--independence, geographic
scope and configuration, operational authority and expansion--are
generally consistent with key considerations identified in the
Commission's proposed rule, I believe the bill should not attempt to
codify detailed prescriptions for each of the four policy standards.
The Commission has yet to evaluate all of the comments submitted on its
proposed rules. As importantly, competitive markets will continue to
evolve in ways that are difficult to predict. Detailed standards that
appear appropriate today may be inappropriate in future years. For
example, the bill ``deems'' the requirement for independence to be met
when market participants own passive, nonvoting interests or 10 percent
or less of the voting interests. It is not appropriate to lock the
details of these standards into statutory text, given the possible need
to adapt the standards to future changes in the industry before the FPA
is again modified. I recommend a somewhat different approach; namely,
that the Congress should preserve the Commission's discretion to adapt
policy to changing circumstances, especially with respect to
administering the key policies of independence and regional scope and
configuration. The Commission as well as the institutions we regulate
need the ability to adapt to changing market conditions and to changing
regional needs.
Third, under Section 103 of H.R. 2944, the Commission must approve
an application to join or establish an RTO if the RTO meets the
prescribed standards. It specifically prohibits the Commission from
requiring a utility to participate in a different RTO. Although I
believe the Commission must and will apply standards fairly and
promptly, the language in the bill could be construed as allowing the
Commission only to approve or disapprove an application, but not to
modify it. To ensure that RTOs yield their expected benefits as soon as
possible, and consistent with the Commission's authority under other
FPA sections, such as sections 203, 205 and 206, the Commission should
have the procedural flexibility to work with the applicants to modify a
flawed proposal, instead of simply disapproving a deficient or non-
complying application and thereby imposing the burden of reapplication.
Further, the concept of RTOs, while sound, is a work in progress and
the Commission should be able to approve such applications subject to
conditions when necessary to make them consistent with the public
interest.
Finally, Section 103 of H.R. 2944 states that ``[t]he Commission
shall encourage incentive transmission pricing policies'' for RTOs.
Section 103 states that such pricing policies include incentives for
transmitting utilities to form RTOs, as well as incentives for RTOs to
eliminate rate pancaking, to minimize cost shifting and to encourage
adequate investment in and expansion of the transmission grid. I
support these goals. The Commission has already solicited comment on
whether and how to employ such incentives in the context of the ongoing
RTO rulemaking.
C. Reliability
The changes in the industry in recent years have created a need for
new tools for ensuring the reliability of the transmission grid. In the
past, reliability was addressed through the voluntary cooperation of
transmission owners. Today, industry participants increasingly
recognize that cooperative efforts among transmission-owning utilities
may not be sufficient in a competitive environment, and that a
mandatory system for ensuring the reliability of the grid is needed.
This recognition has caused the industry to begin seeking the
Commission's involvement on reliability issues, even though the
Commission has not regulated system reliability historically and it has
no express authority to do so. For example, while the Commission has
authority to address discrimination in jurisdictional transmission
services, it has no explicit statutory role in setting or reviewing
particular reliability standards or in ensuring the security of the
electrical system or the adequacy of supply. That was left largely to
the industry and the States.
As I have testified previously, Congress should make compliance
with appropriate reliability standards mandatory. There appears to be
an industry consensus that it can continue to work collaboratively to
develop reliability standards, using a process in which all market
sectors are fairly represented. I believe that, if the standard-setting
process is representative of all stakeholders, a high degree of self-
regulation is appropriate. However, sufficient Federal oversight will
be needed to ensure that the standards set by that process are
adequate, not unduly discriminatory or anticompetitive, and
enforceable, and to ensure that enforcement of the standards is
effective and fair.
Section 201 of H.R. 2944 meets these reliability concerns. Section
201 also recognizes the role of the States in ensuring the reliability
of local distribution facilities by preserving existing State authority
over local distribution facilities unless the exercise of such
authority would unreasonably impair the reliability of the bulk power
system. I believe that any Federal legislation should also preserve for
the States any reliability practices that they have historically
engaged in with respect to bundled transmission in their jurisdictions,
provided that such practices are consistent with the applicable
regional or national standards and such reliability practices do not
unduly impair competition in bulk power markets.
D. Undue Discrimination and Comparability
In Order No. 888, the Commission required public utilities to offer
transmission service to third parties under the same rates, terms and
conditions as the utilities applied to themselves for their own
wholesale and retail sales of generation. Further, load-serving
utilities thereafter were to take transmission service for their
wholesale sales of generation under the same tariff as everyone else.
In other words, the Commission required ``comparability'' of
transmission services for a public utility and its transmission
customers. Comparability is critical to ensuring that competition in
power markets is not distorted by preferential or discriminatory
transmission services.
A recent court decision may have placed a cloud on the Commission's
ability to ensure comparability and support competition. The appellate
court decision in Northern States Power Co., et al., v. FERC, No. 98-
3000 (8th Cir., May 14, 1999, rehearing denied, September 1, 1999), if
interpreted and applied broadly, may prevent the Commission from
enforcing rules that provide for comparable terms and conditions of
service for all users of transmission, including pro rata curtailments
of transmission service used by a utility for in-state ``native load.''
Arguably, this court decision may allow one state to require its
utilities to establish a preference for in-state uses of the
transmission grid to the detriment of consumers in other states whose
utilities depend on comparable access to electricity supplies over the
same transmission facilities. If states can effectively establish
preferential transmission services for the utilities they regulate, the
wholesale power markets will become balkanized and competition in those
markets could wither.
I suggest revising Section 101 of H.R. 2944 to address this
concern. In particular, I suggest adding a provision at the end of FPA
section 201(a), as modified by section 101(b)(1) of the bill, stating
that:
In regulating the transmission of electric energy under any
provision of this Part [Part II of the FPA], the Commission
shall have exclusive authority to establish rates, terms and
conditions of transmission service that are just, reasonable
and not unduly discriminatory or preferential, including rates,
terms and conditions that prevent or eliminate undue
discrimination or preference associated with a public utility's
or transmitting utility's own uses of its transmission system
to serve its wholesale and retail electric energy customers.
Such a provision would clarify the Commission's authority to ensure
that transmission services within its exclusive jurisdiction are
provided on a basis that is comparable to, i.e., no less favorable
than, other transmission services provided by a transmitting utility,
and that competition among power suppliers is not distorted.
E. Expansion of the Transmission Grid
Section 105 of H.R. 2944 would allow the Commission, upon
application, to order a transmitting utility to enlarge, extend or
improve its transmission facilities. Before doing so, the Commission
would be required to refer the matter to a joint board for
recommendations on the need for, design of, and location of the
proposed expansion. The provision retains the states' traditional
siting authority.
I do not see a current compelling need for the Commission to be
given the authority specified in section 105 of H.R. 2944. Instead, my
expectation is that RTOs will help address many issues concerning
expansion of the transmission grid including the need for new
facilities and who pays for them. However, even if an RTO were to
recommend system expansion, nothing could be done without the
cooperation or acquiescence of state siting authorities. Nothing in
H.R. 2944 proposes to alter that.
iii. merger review and market power
Under FPA section 203, the Commission must review proposed mergers,
acquisitions, and dispositions of jurisdictional facilities by public
utilities, and must approve such transactions if they are consistent
with the public interest. In evaluating the public interest, the
Commission considers a transaction's effects on competition, rates, and
regulation.
The Commission's jurisdiction over mergers is currently limited in
certain ways. First, the Commission has no direct jurisdiction over
transfers of generation facilities. It can review transactions
involving a public utility only when they involve other facilities that
are jurisdictional (such as transmission facilities or contracts for
wholesale sales). Second, the Commission lacks direct jurisdiction over
mergers of public utility holding companies that have electric utility
subsidiaries. While the Commission has construed such mergers to
involve jurisdictional indirect mergers of public utility subsidiaries
of the holding companies, or changes in control over the jurisdictional
facilities of the public utility subsidiaries, the FPA is not explicit
on this point. Section 401 of H.R. 2944 would address both
circumstances appropriately, clarifying that the Commission has
jurisdiction over transactions involving only generation facilities and
mergers of holding companies. I support these amendments.
Section 401 of H.R. 2944 also would require the Commission to act
on mergers within five months or, for good cause shown, an additional
three months. Since the Commission issued its Merger Policy Statement
in December 1996, the Commission has taken final action on nearly all
mergers within five months after receipt of a complete application.
Those actions included review of complex electric and gas-electric
mergers, some of them quite large and unprecedented. Therefore, I would
expect the proposed deadlines to be adequate, with one caveat.
Occasionally a merger raises numerous and genuine issues of material
fact that necessitate extensive fact-finding in a hearing context. For
example, out of the 30 merger applications filed since issuance of the
Commission's Merger Policy Statement, the Commission has acted on 23 of
them (the other seven having been filed only recently) and needed to
establish an evidentiary hearing with respect to only three of them
because there were material facts in dispute. In such cases, the
Commission needs more time to resolve such factual disputes than H.R.
2944 would allow. In those infrequent instances when material facts are
disputed, an artificially short deadline would leave the Commission
with little recourse other than to reject the application.
I note that other pending legislation would enhance the
Commission's authority to address market power outside the context of
mergers. For example, the Administration's proposed bill, H.R. 1828,
would allow the Commission to address market power in retail markets,
if asked to do so by a state lacking adequate authority to address the
problem. It would also give the Commission explicit authority to
address market power in wholesale markets by requiring a public utility
to file and implement a market power mitigation plan. H.R. 2050,
sponsored by Congressmen Largent and Markey, also contains provisions
that would allow mitigation of market power, to the benefit of
competition and consumers. Such provisions are particularly desirable
in the circumstances where a State lacks adequate authority to address
market power issues and seeks FERC's assistance. As the Commission
moves toward light-handed regulation, its ability to monitor the market
and to identify and address exercises of residual market power becomes
more important.
iv. puhca
Adopted over 60 years ago to restrain the growth and power of large
utility holding companies, PUHCA requires some utilities to comply with
restrictions that are not entirely compatible with today's bulk power
competition. In some instances, PUHCA encourages the very
concentrations of generation ownership and control that undermine
competitive power markets. It discourages asset combinations that could
be pro-competitive. Thus, PUHCA should be reformed, with one major
caveat. Reform legislation should ensure that both the Commission and
States have adequate access to the books and records of utilities and
their affiliates, to protect against affiliate abuse and ensure that
captive consumers do not cross-subsidize entrepreneurial ventures.
Sections 511-524 of H.R. 2944 would satisfy these concerns.
v. conclusion
Competition is growing in the electric generation and marketing
sectors, in response to the Energy Policy Act of 1992 and the
Commission's efforts to remove barriers to competition. My objective in
seeking legislation is to create a market structure that ultimately
will allow markets--not regulators--to determine the price of wholesale
electric power. Effective regulation of transmission facilities that
are essential for delivering power is critical to ensuring that
consumers continue to receive increasing benefits from competition in
power markets. Likewise, effective restraints on the exercise of market
power in these newly competitive electricity markets is essential to
advancing competition.
Thank you again for the opportunity to offer my views here this
morning. I would be pleased to answer any questions you may have.
Mr. Barton. Thank you, Chairman.
We would now like to hear from Commissioner Bailey.
STATEMENT OF HON. VICKY A. BAILEY
Ms. Bailey. Good morning, Mr. Chairman and members of the
subcommittee. I thank you for inviting me, along with all of my
colleagues, to testify this morning on H.R. 2944, the
Electricity Competition and Reliability Act of 1999.
Having joined the Commission 6\1/2\ years ago, the electric
utility industry the Commission regulates today bears little
resemblance to the industry I first encountered as a Federal
regulator in 1993.
Competition in the marketplace is now clearly the driving
force. Electric utilities can no longer afford to be stodgy,
conservative enterprises of earlier years. Management is
increasingly entrepreneurial in spirit and action. Shareholders
as well as ratepayers increasingly are demanding decisive
action to promote transaction-related revenues and to cut
costs.
I have been reluctant to call for sweeping Federal energy
restructuring legislation, and I have been reluctant to
champion prescriptive, industry-wide action by the Commission.
My concern is that any such overreaching action will stifle the
type of industry innovation and flexibility that has marked the
last few years. I am extremely hesitant to support any major
piece of legislation or rulemaking that would lock into place a
1999-vintage vision for the industry when that vision might
very well be overtaken by technological as well as other
advances in future years.
Competition requires that industry participants enjoy the
opportunity to take chances and possibly to make mistakes. But
while I encourage risk-taking, and generally favor fewer layers
of regulatory review rather than more, I remain mindful of the
vital role that utility services provide in the everyday lives
of the people of this Nation. America's consumers and
industries must remain confident that electric service will
remain as reliable as ever. And all of the pro-competitive
rhetoric of enlightened commentators and Government officials
will amount to nothing if the benefits of competition, through
lower prices or increased product offerings, ultimately do not
work their way down to all consumers.
In my judgment, H.R. 2944, taken as a whole, does a very
good job of threading the needle, allowing utilities to develop
their own competitive business strategies, while ensuring that
competitive miscalculations do not impair the reliable
operation of the grid or limit the availability of low-cost
energy services. I commend the subcommittee for its thoughtful
and comprehensive review of the issues confronting the many
participants in the marketplace, and its crafting of compromise
legislation that represents a careful balance of various
concerns and positions.
Let me comment briefly on four of the specific elements of
the bill.
One, mergers. The recent trend of consolidation in the
increasingly competitive electric utility industry will not
abate and probably will accelerate. I also expect new and
different kinds of merger proposals, involving different kinds
of business combinations, to be presented to the Commission.
I am concerned about the pace of Commission review of the
merger applications filed with us. I believe it is inconsistent
for the Commission to promote competition on the one hand,
while on the other hand failing to respond in a timely and more
predictable manner to the efforts of regulated utilities to
restructure themselves in a manner that, in their judgment, is
best able to respond and adapt to competitive realities. I hope
that the possibility of delay or uncertainty in the review of
merger applications does not act to inhibit corporate
initiatives and innovation.
I sense this same concern in the language of section 401 of
H.R. 2944 that limits the time for Commission review to, at
most, 240 days from the date of filing. At present, the
Commission already is acting on the vast majority of merger
applications within that timeframe. Nevertheless, a
legislatively mandated 240-day time cap for Commission decision
could affect the Commission's processing of harder cases
involving the proposed combination of larger utilities.
It effectively eliminates all but the most abbreviated of
evidentiary hearings in merger cases. Many commentators
undoubtedly will criticize the loss of procedural options
currently available to the Commission; I, however, will not.
Contested issues of policy and fact can, in almost all merger
circumstances, be decided on the basis of the written pleadings
filed for the Commission's consideration. And while I am not
attached to any single duration of any limitation, I do not
find it unreasonable to expect the Commission to act in a
timeframe consistent with Congress' view as to the need for
timely and predictable action.
As to the rest of section 401, which expands the
Commission's merger authority in certain respects, I add my
skepticism as to the need for Commission authority to consider
the effect of any proposed merger on retail markets. In recent
years, State commissions have refrained from asking the
Commission to intercede in this area, and have demonstrated
that they are quite competent to address the retail
implications of proposed utility mergers. I see no reason to
add an additional layer of regulatory review.
On the issue of regional transmission organizations, I
appreciate section 103 of H.R. 2944, in its reference to
encouraging utility innovation and individual design in the
formation of RTOs. But I am deeply concerned by a mandate that
compels filing by all utilities by January 1, 2002 and RTO
participation by January 1, 2003.
I believe that the Commission already possesses sufficient
authority under existing law to encourage transmission-owning
utilities to cooperate voluntarily with their neighbors to
advance regional solutions to lingering competitive and
operational problems in wholesale power markets. I would much
prefer to allow utilities to continue the rapid pace of utility
restructuring and to work out among themselves and with their
customers, with encouragement from the Commission or Congress
rather than a legal directive, how best to design regional
markets that serve all interests in an efficient and
competitive manner.
The vast majority of transmission-owning utilities already
are members of regional transmission institutions--i.e. in
California, New England, New York, the Mid-Atlantic, the
Midwest and most of Texas--or are actively engaged in
discussions to form some such type of institution. I support
congressional and Commission action that works to encourage
this type of regional cooperation, especially with
transmission-owning utilities that currently are not public
utilities subject to the Commission's regulation and oversight.
I suspect that transmission-owning utilities increasingly
will find it difficult, from many different perspectives to
refrain from such cooperation. But I do not support
congressional or Commission action that, whether phrased
subtlety or more overtly, makes the decision for utilities to
turn over operational control of the transmission facilities
they own to someone else.
For all of these reasons, I believe that a mandate to join
a RTO by a date certain is unnecessary and ill-advised. In my
judgment, the other provisions of section 103 give
transmission-owning utilities all of the incentive they need to
participate in an RTO of their choosing.
On the issue of reliability, competition cannot be at the
expense of reliability. I have been very impressed with the
efforts of the North American Electric Reliability Council and
the regional councils that NERC administers to ensure the
continued integrity and reliability of the electrical grid. The
electric utility industry and the customers it serves are in a
much better position to assess and ensure the continued
reliability of electric service.
I have refrained from calling out for additional regulatory
authority over reliability. Nevertheless, as wholesale power
markets become increasingly competitive, and strains are
imposed on the continuing reliability of the electrical grid
planned and designed for a less competitive, more vertically
integrated environment, close cooperation with reliability
organizations and State and local authorities become
imperative.
For this reason, I have no objection to the language found
in section 201 that would clarify the Commission's oversight
role by directing it to approve the formation and governance of
a self-regulating electric reliability organization. Nor do I
object to the Commission's review of mandatory reliability
standards and its appellate-type review of implementation and
enforcement disputes.
My only hesitation with respect to the reliability
provisions of H.R. 2944 would be the Commission's ability to
entertain a much larger share of reliability-based issues and
disputes, which might have to be decided in close to real-time.
My hope is that the need for Commission intervention will be
lessened by increasing respect for and adherence to mandatory
reliability rules and additional incentives to invest in and
expand badly needed transmission capacity.
Finally, I am pleased to see legislative language in
section 101 of H.R. 2944 that clarifies the boundaries between
Federal and State jurisdiction over different aspects of
electricity supply and delivery. The clarifying language, for
the most part, adopts the jurisdictional dividing lines adopted
by the Commission in its Order Number 888 rulemaking. Those
lines, for the most part, have been accepted by industry
participants and State regulatory commissions. This is
important in order to eliminate the jurisdictional turf battles
and protracted court disputes over ambiguous congressional
delegations, in order to ensure that the benefits of increased
competition flow through to consumers as quickly and
comprehensively as possible.
With that, thank you for the opportunity to present my
views on this important piece of Federal legislation, and I
would be happy to answer any questions you may have.
[The prepared statement of Vicky A. Bailey follows:]
Prepared Statement of Vicky A. Bailey, Commissioner, Federal Energy
Regulatory Commission
Introduction
Good morning Mr. Chairman and Members of the Subcommittee. I thank
you for inviting me along with all of my fellow Commissioners to
testify this morning on H.R. 2944, the Electricity Competition and
Reliability Act of 1999.
I joined the Commission six and one-half years ago. The electric
utility industry the Commission regulates in 1999 bears little
resemblance to the industry I first encountered as a federal regulator
in 1993.
Competition is now clearly the driving force leading the utility
industry to restructure. Electric utilities are no longer the stodgy,
conservative enterprises of earlier years, favored primarily by widows
and orphans. Open access transmission and negotiated, market-based
rates are in. Preferential and discriminatory access, and years'-long
hearings to assess cost structures and cost allocations, are on their
way out. Utility executives are increasingly entrepreneurial in spirit
and action; shareholders and ratepayers increasingly are demanding
decisive action to promote transaction-related revenues and to cut
costs.
Utilities have responded to the advent of competition in a number
of different ways. One business strategy is to concentrate on core,
niche services. A number of utilities have reached the conclusion that
they can best respond to competitive forces by concentrating on their
``wires'' business; i.e., focusing on electrical transmission and
distribution. These utilities have decided to sell off their generating
assets--sometimes at a price far in excess of book value, with the
proceeds often going to reduce or eliminate their exposure to
uneconomic or ``stranded'' generation investment. Other utilities have
decided to focus their efforts on power generation and marketing.
Another business strategy is to remain vertically integrated and to
offer an array of different utility products and services. Some
utilities have reached the conclusion that they can best flourish in a
competitive environment by getting larger and developing economies of
scale. For this reason, the Commission has received numerous
applications in recent years from utilities proposing classic
``horizontal'' combinations at the same level of the market
(generation, transmission). Other merger applications reflect a recent
trend toward ``convergence'' or ``vertical'' combinations between
electric and natural gas utilities. I expect these trends to continue--
indeed, accelerate--and I would not be surprised to see future
convergences between electric utilities and other types of industries,
such as telecommunications and Internet providers.
Finally, electric utilities are increasingly finding that it is in
their best interest to cooperate voluntarily with their neighbors to
develop regional institutions that promote reliable operation of, and
non-discriminatory access to, the grid.
Who can best claim credit for these dramatic developments? To some
extent, we regulators and legislators can. Congress can be quite proud
of its legislative accomplishments, such as the Public Utility
Regulatory Policies Act of 1978, that (despite unfortunate side-
effects) introduced competition into the wholesale power supply market
by encouraging the entry of non-traditional, independent power
producers. Moreover, the Energy Policy Act of 1992 greatly accelerated
the development of competitive markets by offering power suppliers
additional ways to reach willing buyers. This Commission can be proud
of its efforts in recent years--such as the promotion of non-
discriminatory, open access transmission service--to ensure that the
benefits of increased competition are not confined to only a few of the
largest industry participants.
But, in my judgment, industry participants themselves deserve most
of the credit for the restructuring of the industry and the competitive
evolution of the market. Despite a reputation for conservatism,
electric utilities have not been hesitant to adopt bold new strategies
to take advantage of the opportunities that competition has to offer.
Frankly, I have seen little industry resistance to the pro-competitive,
open access policies initiated by federal and state legislators and
regulators. To the contrary, I have been impressed by the degree of
sophistication and innovation adopted by different utilities in
different regions of the country to respond in different ways to
competitive pressures and opportunities.
For this reason, I have been reluctant to call for sweeping federal
energy restructuring legislation. And I have been reluctant to champion
prescriptive, industry-wide action by the Commission. My concern is
that any such overreaching action will stifle the type of industry
innovation and flexibility that has marked the last few years. New
ideas and concepts for utility governance and operation are being
brought to my attention every week. Some of them will flourish, and
others will undoubtedly prove unacceptable. I have no grand design for
the utility industry of the next millennium. I am extremely hesitant to
support any major piece of legislation or rulemaking that would lock
into place a 1999-vintage vision for the industry, when that vision
might very well be overtaken by technological or other advances in
future years.
Competition requires that industry participants enjoy the
opportunity to take chances and, possibly, to make mistakes. But while
I encourage risk-taking, and generally favor fewer layers of regulatory
review rather than more, I remain mindful of the vital role that
utility services provide in the everyday lives of the people of this
nation. America's consumers and industries must remain confident that
electric service will remain as reliable as ever. And all of the pro-
competitive rhetoric of enlightened commentators and governmental
officials will amount to nothing if the benefits of competition--
through lower prices or increased product offerings--ultimately do not
work their way down to all consumers.
In my judgment, H.R. 2944, taken as whole, does a very good job of
threading the needle--allowing utilities to develop their own
competitive business strategies, while ensuring that competitive
miscalculations do not impair the reliable operation of the grid or
limit the availability of low-cost energy service. I commend the
Subcommittee for its thoughtful and comprehensive review of the issues
confronting the many participants in the marketplace, and its crafting
of compromise legislation that represents a careful balance of various
concerns and positions.
I continue to comment briefly on a few of the specific elements of
the bill.
Mergers
I have already explained my belief that the pace of merger activity
in the electric utility industry will not abate and, probably, will
accelerate. I also expect new and different kinds of merger proposals,
involving different kinds of business combinations, to be presented to
the Commission.
I have expressed my concern on numerous occasions as to the pace of
Commission review of the merger applications filed with us. I believe
it would be inconsistent for the Commission to promote competition on
the one hand, while on the other hand failing to respond in a timely
and more predictable manner to the efforts of regulated utilities to
restructure themselves in a manner that, in their judgment, is best
able to respond and adapt to competitive realities. I hope that the
possibility of delay or uncertainty in the review of merger
applications does not act to inhibit corporate initiative and
innovation.
I sense this same concern in the language of section 401 of H.R.
2944 that limits the time for Commission review to, at most, 240 days
from the date of filing. At present, the Commission already is acting
on the vast majority of merger applications within that time frame.
Legislative language imposing a time cap will not affect in any
significant manner the Commission's processing of the ``easy'' merger
cases it receives for review.
It will, however, affect the Commission's review of harder cases. I
suspect that the industry is increasingly exhausting the limited scope
of potential mergers that present little concern for their effect on
competition, rates and regulation, and will increasingly present to us
mergers of larger utilities that will attract a significantly higher
degree of opposition and analytical scrutiny. The Commission already
has set two such merger applications--involving American Electric Power
and Central and South West in one case, and Western Resources and
Kansas City Power & Light in another--for hearing; those cases are
awaiting decision by the administrative law judges and, ultimately, by
the full Commission. The Commission will face similar pressure to set
other large mergers--such as those recently proposed by Northern States
and New Century in one recent announcement, and PECO and Commonwealth
Edison in another--for lengthy, trial-type hearings.
A legislatively-mandated 240-day time cap for Commission decision
effectively eliminates all but the most abbreviated of evidentiary
hearings in merger cases. Many commentators undoubtedly will criticize
the loss of procedural options currently available to the Commission;
I, however, will not. Contested issues of policy and fact can, in
almost all merger circumstances, be decided on the basis of the written
pleadings filed for the Commission's consideration. While I am not
attached to any single duration (180 days? 240? 365?) of any
limitation, I do not find it unreasonable to expect the Commission to
act in a time frame consistent with Congress' view as to the need for
timely and predictable action.
As to the rest of section 401, which expands the Commission's
merger authority in certain respects, I add my skepticism as to the
need for Commission authority to consider the effect of any proposed
merger on retail markets. This extension of authority appears to be
counterproductive to the goal of more expeditious action on merger
applications. The Commission has made it clear that it will consider
the effect of a merger on retail competition if the applicable state
commission articulates that it is without jurisdiction or lacks the
ability to consider such retail competitive effects. In recent years,
however, state commissions have refrained from asking the Commission to
intercede in this area, and have demonstrated that they are quite
competent to address the retail implications of proposed utility
mergers. I see no reason to add an additional layer of regulatory
review.
Regional Transmission Organizations
I find much to appreciate in section 103 of H.R. 2944, dealing with
regional transmission organizations. Specifically, I appreciate its
reference to encouraging utility innovation and individual design in
the formation of RTOs. But I am deeply concerned by a mandate that
compels filings by all utilities by January 1, 2002 and RTO
participation by January 1, 2003.
I believe that the Commission already possesses sufficient
authority under existing law to encourage transmission-owning utilities
to cooperate voluntarily with their neighbors to advance regional
solutions to lingering competitive and operational problems in
wholesale power markets. I would much prefer to allow utilities to
continue the rapid pace of utility restructuring, and to work out among
themselves and with their customers--with encouragement from the
Commission or Congress rather than a legal directive--how best to
design regional markets that serve all interests in an efficient and
competitive manner.
The vast majority of transmission-owning utilities already are
members of regional transmission institutions (in California, New
England, New York, the Mid-Atlantic, the Midwest and most of Texas) or
are actively engaged in discussions to form some such type of
institution. These developing regional institutions are taking several
different forms (most notably, for-profit transcos that own and operate
transmission facilities, or not-for-profit independent system operators
that do not own the facilities under their operational control). I
support Congressional and Commission action that works to encourage
this type of regional cooperation--especially with transmission-owning
utilities that currently are not ``public utilities'' subject to the
Commission's regulation and oversight. I suspect that transmission-
owning utilities increasingly will find it difficult, from many
different perspectives (reliability, business, etc.), to refrain from
such cooperation. But I do not support Congressional or Commission
action that, whether phrased subtlely or more overtly, makes the
decision for utilities to turn over operational control of the
transmission facilities they own to someone else.
For all of these reasons, I believe that a mandate to join a RTO by
a date certain is unnecessary and ill-advised. In my judgment, the
other provisions of section 103 give transmission-owning utilities all
of the incentive they need to participate in a RTO of their choosing.
For example, the section on RTO independence (revised FPA section
202(h)(2)(A)) would afford utilities the discretion to design
organizational structures that would allow market participants to
retain passive, non-voting interests in the RTO, or own up to 10
percent of the voting interests in the RTO. This provision would allow
for a great deal of innovation and flexibility among different types of
RTOs in different regions of the country.
Moreover, I support initiatives of the type found in revised FPA
section 202(h)(6), which would encourage the Commission to confer
``incentive transmission pricing policies'' on transmission-owning
utilities which decide to participate in RTOs. If Commission-designed
encouragement is sufficient, I doubt many utilities would be able to
resist the type of incentive-based pricing policies that would operate
as a lure to RTO entry.
Reliability
As I have already explained, competition cannot be at the expense
of reliability. Historically, the critical matter of protecting the
integrity of the electrical grid has been left in the first instance to
the industry itself. The Commission has interceded when necessary to
``keep the lights on'' or, in recent years, to ensure that reliability-
based operating practices do not interfere with the availability or
quality of non-discriminatory open access transmission service.
I have been very impressed with the efforts of the North American
Electric Reliability Council and the regional councils NERC administers
to ensure the continued integrity and reliability of the electrical
grid. The electric utility industry and the customers it serves are in
a much better position to assess and ensure the continued reliability
of electric service than federal regulators lacking intimate
familiarity with the details and complexities of remote transmission
paths.
I have refrained from calling out for additional regulatory
authority over reliability. Nevertheless, as wholesale power markets
become increasingly competitive, and strains are imposed on the
continuing reliability of the electrical grid planned and designed for
a less competitive, more vertically-integrated environment, close
cooperation with reliability organizations becomes imperative. For this
reason, I have no objection to the language found in section 201 of
H.R. 2944 that would clarify the Commission's oversight role by
directing it to approve the formation and governance of a ``self-
regulating electric reliability organization'' (ERO). Nor do I object
to the Commission's review of mandatory reliability standards and its
appellate-type review of implementation and enforcement disputes.
In addition, as electricity markets become increasingly
competitive, close cooperation with state and local regulatory
authorities with oversight over the reliability of local distribution
facilities become imperative. For this reason, I have no objection to
the language found in section 201 that would clarify the authority of
states and local authorities to ensure the reliability of local
distribution facilities. Because I am generally wary of additional
layers of regulatory review that may add to uncertainty, I am very
appreciative of the language of revised section 217(n) of the FPA that
ensures that such authority would not be exercised in a manner that
could impair the reliability of bulk power systems.
My only hesitation with respect to the reliability provisions of
H.R. 2944 would be the Commission's ability to entertain a much larger
share of reliability-based issues and disputes, as envisioned in
section 201, in light of its limited resources and general
unfamiliarity with these issues (which might have to be decided in
close to ``real-time''). My hope is that the need for Commission
intervention will be lessened by increasing respect for the mandatory
rules of the EROs the Commission approves. And the availability of
``incentive transmission pricing policies'', referenced in section 103
of H.R. 2944, limited to transmission-owning participants in RTOs that
act to promote reliable transmissions operations and encourage
investment in and expansion of transmission facilities, should act as a
significant incentive to minimize any reliability-based disputes.
Federal/State Jurisdiction
Finally, I am pleased to see legislative language in section 101 of
H.R. 2944 that clarifies the now-murky boundaries between federal and
state jurisdiction over different aspects of electricity supply and
delivery. The clarifying language, for the most part, adopts the
jurisdictional dividing lines adopted by the Commission in its Order
No. 888 rulemaking; those lines, for the most part, have been accepted
by industry participants and state regulatory commissions. I believe it
is important, whenever possible, to eliminate jurisdictional turf
battles and protracted court disputes over ambiguous congressional
delegations, in order to ensure that the benefits of increased
competition flow through to consumers as quickly and comprehensively as
possible.
In light of recent litigation on the subject of comparability of
service, I would add one more clarification. That addition would
clarify that the Commission's jurisdiction over unbundled transmission
service is exclusive, and that the Commission retains the authority to
protect against undue discrimination or preference in the provision of
transmission service to all transmission users. Such clarification
would codify existing Commission policy by allowing it to require that
a transmission-owning utility offer transmission service to others that
is comparable to (i.e., no worse than) the service it provides to
itself.
Thank you for the opportunity to present my views on this important
piece of federal legislation. I am happy to answer any questions you
now may have.
Mr. Barton. Thank you, Commissioner.
Before we recognize Commissioner Breathitt, I want to
remind the other commissioners we do have all your statements
in their entirety in the record, and I think most of the
subcommittee have read them.
The Chairman did an excellent job of summarizing within a
reasonable time. Commissioner Bailey's remarks were well taken,
but they took about 15 minutes. So, the other three
commissioners, we don't want to constrain you, but we hope that
you could summarize in 5 to 10 minutes.
Ms. Breathitt.
STATEMENT OF HON. LINDA KEY BREATHITT
Ms. Breathitt. Thank you, Mr. Barton. I do admit that I am
a Southerner, and I might talk a little slower, but I do have a
summary of my testimony, and it is four double-spaced pages.
Good afternoon, and I do sincerely thank you for inviting
me and my colleagues to appear before you today to discuss the
need for Federal electricity legislation and the provisions of
H.R. 2944.
Let me begin by commending you, Mr. Chairman, and other
members of the subcommittee and your staffs, for crafting what
I consider to be a comprehensive and important piece of
legislation that certainly has gotten the attention of
virtually everyone in the electric industry, including the
administration and State and Federal regulators. The efforts of
this committee have advanced the level of electricity
discussion, and that is a good thing.
I believe that Federal electricity legislation, such as
H.R. 2944, is needed to address the uncertainty that seems to
exist in the industry. Much of the uncertainty surrounds issues
such as statutory authority, jurisdiction, and the need for and
effect of wholesale and retail competition. The guidance and
clarification offered by the legislation will enable the
Commission to further its goals of achieving a fair, open, and
competitive bulk power market.
My written testimony addresses 5 specific aspects of the
legislation, and this afternoon I would like to briefly
summarize these.
The first is open access transmission. The Commission has
worked diligently for several years to open the Nation's
electric transmission system for the provision of non-
discriminatory transmission service to all wholesale buyers and
sellers. However, certain impediments to full open access
remain, and I believe that section 102 of the bill addresses
one of those impediments by providing the Commission authority
to require open access transmission on the part of State and
municipal utilities and rural electric cooperatives. Many of
these entities have already filed open access reciprocity
tariffs with FERC, and I believe this provision would result in
a more cohesive transmission grid and will greatly facilitate
open access.
The second issue is regional transmission organizations,
which we have come to call RTOs. On May 13, in a unanimous
decision, the Commission issued its Notice of Proposed
Rulemaking on RTOs. The Commission found that RTOs would
beneficially address many of the operational and reliability
issues now confronting the industry. In the NOPR, the
Commission sought to accomplish its objective of forming RTOs
by strongly encouraging voluntary participation by public
utilities.
The voluntary approach for RTO formation outlined in the
NOPR was, in my opinion, a fundamental aspect of our proposal.
Section 103 of the bill would require all utilities to join an
RTO by a certain date. I continue to prefer the voluntary
approach at this time and believe there is considerable support
among stakeholders for a voluntary approach. And, as Chairman
Hoecker just said, we do agree that RTOs can bring many
benefits to competitive markets.
The third issue is expansion of the interstate transmission
facilities. One of the most important issues facing the
electric industry is the need to enhance or expand the
transmission grid. Section 105 of the bill proposes to address
this by authorizing the Commission to rule on applications
filed by transmitting utilities to expand facilities after
consultation with regional joint boards comprised of effective
State and Federal agencies. Because certificate authority does
reside with the States, I believe a FERC role would be
confusing, although I support regional cooperative efforts.
The fourth issue is electric reliability. Section 102 of
the bill would provide the Commission with authority pertaining
to the formation of a self-regulating electric reliability
organization and the development of enforceable reliability
standards. I believe that emerging competition in the electric
industry necessitates a change in the manner in which the
reliability of the grid is overseen and managed, and I believe
that the current system should be replaced by a model similar
to that proposed in the bill.
And the final issue that I address in more detail in my
written testimony is merger authority. Section 401 of your bill
authorizes the Commission to review proposed mergers of
facilities of all electric utilities, including State and
municipal utilities, rural cooperatives, and Federal electric
utilities. This section also extends the Commission's merger
authority to include generation companies.
I support the provisions of this section. I believe the
Commission is uniquely situated and eminently qualified to
perform this important task. Given the changing nature of the
industry, I believe it is essential that the Commission
continues to evaluate utility mergers and that the scope of our
merger authority be extended as you have proposed.
Furthermore, I believe the proposed time limit proposed in
the bill is reasonable but should be modified to allow the
Commission additional time to review in a public hearing
context the occasional merger application that raises issues of
material fact.
In conclusion, let me again commend this subcommittee for
crafting an important bill. I appreciate this opportunity to
share my thoughts, and I will look forward to your questions.
[The prepared statement of Hon. Linda Breathitt follows:]
Prepared Statement of Linda Breathitt, Commissioner, Federal Energy
Regulatory Commission
Chairman Barton and Members of the Subcommittee: Good morning. My
name is Linda Breathitt and I am a Commissioner of the Federal Energy
Regulatory Commission. Thank you for inviting me and my colleagues to
appear before you today to discuss the need for Federal electricity
legislation and the provisions of H.R. 2944, the Electricity
Competition and Reliability Act of 1999.
Let me begin by commending you, Mr. Chairman, and other Members of
the Subcommittee for crafting what I consider to be a comprehensive and
important piece of legislation that will certainly advance the
development of competitive wholesale and retail electricity markets in
this country.
I believe that Federal electricity legislation, such as H.R. 2944,
is needed to address the uncertainty that seems to exist in the
industry. Much of the uncertainty surrounds issues such as statutory
authority, jurisdiction, and the need for and affect of wholesale and
retail restructuring. I believe H.R. 2944 will, in large part, allay
the uncertainty. Furthermore, the guidance and clarification offered by
the legislation will enable the Commission to further its goals of
achieving a fair, open, and competitive bulk power market.
I am unable today to address each provision of H.R. 2944.
Therefore, I would like to comment briefly on five specific aspects of
the proposed bill: (1) open transmission access; (2) regional
transmission organizations; (3) expansion of interstate transmission
facilities; (4) electric reliability; and (5) merger authority.
Open Transmission Access
The cornerstone of the Commission's efforts to create an open, non-
discriminatory electric transmission system is the requirement that all
public utilities that own, operate, or control interstate transmission
facilities provide transmission service over their facilities to all
wholesale buyers and sellers on a non-preferential basis. Such non-
discriminatory open access to transmission services is essential to the
development of competitive wholesale bulk power markets. Despite the
Commission's efforts, however, certain impediments to full open access
remain. One such impediment is that a significant portion of the
Nation's transmission grid is owned and operated by utilities not
subject to Commission open access requirements. Section 102(b) of H.R.
2944 amends the definition of ``public utility'' in section 201(e) of
the Federal Power Act (FPA) to include transmitting utilities, other
than Federal power marketing administrations and the Tennessee Valley
Authority, for purposes of regulating transmission rates, terms, and
conditions. I believe this provision would result in a more cohesive
transmission grid and will greatly facilitate open transmission access.
Regional Transmission Organizations
On May 13, 1999, in a unanimous decision, the Commission issued its
Notice of Proposed Rulemaking (NOPR) on Regional Transmission
Organizations (RTOs). In the NOPR, the Commission found that
appropriate regional transmission institutions can address many of the
operational and reliability issues now confronting the electric
industry. Specifically, we found that such institutions could: (1)
improve efficiencies in transmission grid management; (2) improve grid
reliability; (3) remove the remaining opportunities for discriminatory
transmission practices; (4) improve market performance; and (5)
facilitate lighter handed regulation.
The Commission proposed, among other things, to establish
fundamental characteristics and functions that RTOs must satisfy.
Furthermore, we proposed that all public utilities that own, operate,
or control interstate transmission facilities make certain filings
pertaining to participation in an RTO. Specifically, utilities not
already participating in an approved Independent System Operator (ISO)
would make one of two alternative filings with the Commission by
October 15, 2000. First, a utility may propose to participate in an RTO
that satisfies the minimum characteristics and functions and that will
be operational no later than December 15, 2001. Alternatively, a
utility may make a filing that describes its efforts to participate in
an RTO, any existing obstacles to RTO participation, and any plans and
timetables for future efforts to participate in an RTO. A public
utility that is already a member of an existing ISO would make a filing
no later than January 15, 2001 that explains, among other things, the
extent to which the ISO in which it participates meets the minimum
characteristics and functions for an RTO.
In the NOPR, the Commission sought to accomplish its objective of
forming RTOs by encouraging voluntary participation by public
utilities. In this light, as indicated above, the Commission proposed,
as part of its filing requirements, a process for a utility to describe
in an alternative filing any efforts to participate in an RTO, reasons
it has not participated in an RTO, any obstacles to RTO participation,
and any plans the public utility has for further work toward
participation in an RTO.
The voluntary approach for RTO formation outlined in the NOPR is,
in my opinion, a fundamental and crucial aspect of our proposal. I
believe that a certain amount of flexibility is necessary on the part
of the Commission as utilities move toward forming RTOs. Therefore, it
is important to me that public utilities have an opportunity to
identify and explain any obstacles or restrictions they face in joining
an RTO.
Section 103 of H.R. 2944 would require all transmitting utilities
to establish or join an RTO by January 1, 2003. I believe that Congress
should not impose, at this time, a mandate for utilities to join an
RTO, but rather should encourage voluntary participation. There is
considerable support among stakeholders for a voluntary approach.
Section 103 of H.R. 2944 also proposes certain standards that RTOs
must meet. In his testimony to the Subcommittee today, Commission
Chairman James J. Hoecker recommends that Congress take a somewhat
different approach. Given that the Commission has yet to evaluate all
of the comments submitted on its RTO NOPR, Chairman Hoecker suggests
that Congress should not lock the details of these standards into
statutory text given the possible need to adapt the standards to future
changes in the industry before the FPA is again modified. I agree with
Chairman Hoecker that Congress should preserve the Commission's
discretion to reflect changing circumstances in specific RTO
requirements and standards.
Expansion of Interstate Transmission Facilities
One of the most important issues now facing the electric industry
is the need to enhance or expand the transmission grid. The success of
the Commission's goals of transmission open access and wholesale
competition depends on an adequate and reliable supply of transmission
capacity. Since the issuance of Order No. 888 in 1996, there has been a
tremendous increase in the amount of wholesale electric power being
traded. Open access and industry restructuring, both at the wholesale
and the retail levels, have caused demand for transmission capacity to
soar. As a result, the Nation's transmission grid is struggling to keep
pace with the industry's rapid growth. The increased usage is imposing
tremendous strain on the system. The Commission must take deliberate
action to encourage the industry to address this situation.
Section 105 of H.R. 2944 proposes to address grid expansion by
authorizing the Commission to order a transmitting utility to expand
its transmission facilities, upon application of an electric utility or
transmitting utility. Furthermore, this section would create joint
boards consisting of State and Federal agencies to make recommendations
to the Commission pertaining to transmission system expansion. In his
testimony, Chairman Hoecker states that he sees no compelling need for
the Commission to be given the authority specified in Section 105 of
H.R. 2944. I agree with Chairman Hoecker on this point. It is my belief
that RTOs will play a significant role in system expansion.
In my opinion, the transmission system is not keeping pace with
growing demand in the bulk power market. The reason for this is that
the industry is increasingly unwilling to make transmission-related
investments given the uncertainties that exist in an industry still in
the midst of restructuring and the risk of earning inadequate returns
on new transmission investments. I believe the Commission must address
this problem in two ways. First, the Commission must ensure that its
transmission pricing policies conform to the changing electricity
marketplace and that transmission owners or operators are encouraged to
file innovative pricing proposals. Second, the Commission must adopt
policies that will provide proper incentives to market participants and
other investors to expand and enhance transmission facilities. Both of
these objectives will be addressed, as they pertain to RTOs, at least,
in the new FPA section 202(h)(6) as proposed in section 103 of H.R.
2944. This would be a reasonable starting point for the Commission to
consider the effect its current transmission pricing policies have on
the evolving electric industry and the need for a more incentive-based
approach.
Electric Reliability
Section 201 of H.R. 2944 amends the FPA to provide the Commission
with specific authority pertaining to the formation of a self-
regulating electric reliability organization and the development of
enforceable reliability standards. Many in the industry, including the
North American Electric Reliability Council (NERC), recognize the lack
of clear Federal authority for establishing or enforcing reliability
standards for the electric industry and the importance that electric
reliability be maintained as the industry is restructured. I believe
that emerging competition in the electric industry necessitates a
change in the manner in which the reliability of the interconnected
electric system is overseen and managed. The present model of voluntary
compliance by electric utilities of regulatory rules and criteria
established by NERC and its member Regional Reliability Councils has
worked effectively for over three decades. However, given the profound
changes taking place in the industry, I believe this voluntary system
should be replaced by a model similar to that proposed in Title II of
H.R. 2944. Such a model would retain many of the features of the
current system that has been so effective in the past, while adding
necessary oversight and enforcement mechanisms. There is a compelling
need for such Federal authority and I support the provisions of this
section.
Merger Authority
Section 401 of H.R. 2944 amends the FPA to authorize the Commission
to review proposed mergers and disposition of facilities of all
electric utilities and transmitting utilities, including State and
municipal utilities, most rural electric cooperatives, and Federal
electric utilities. This section extends the Commission's merger
authority to include generation companies and clarifies the
Commission's merger authority over holding companies. Furthermore, the
section establishes time limits for the Commission to review merger
applications.
I support the provisions of this section. The Commission is charged
under Section 203 of the FPA to evaluate public utility mergers and
dispositions to determine whether such actions are consistent with the
public interest. I believe the Commission is uniquely situated and
eminently qualified to perform this important task. The Commission and
its Staff possess extensive knowledge of and expertise in the electric
industry. Given the changing nature of the electric industry, I believe
it is essential that the Commission continues to evaluate public
utility mergers and that the scope of our merger authority be extended
as proposed in this section.
As for the time line proposed in section 401(a)(4) of H.R. 2944, I
believe the Commission has shown repeatedly that it processes merger
applications within the prescribed 150-day period. However, I agree
with Chairman Hoecker that occasionally a proposed merger raises issues
of material fact that must be resolved in a public hearing context. In
these instances, I believe the Commission would need additional time in
which to process the application.
Conclusion
In conclusion, I believe that Federal legislation is needed to
address uncertainty that exists in the industry. For the most part, I
believe that H.R. 2944 accomplishes this objective. However, there are
certain provisions of the proposed legislation that should be revised.
I have identified a few such instances.
Congress has a considerable opportunity in this session to pass
meaningful legislation that will expand competition in the wholesale
and retail electric markets. I urge Congress to avail itself of this
opportunity. I look forward to continuing the dialogue with the
Subcommittee on this important legislation.
Mr. Barton. Thank you, Commissioner.
We would now like to hear from Commissioner Hebert.
STATEMENT OF HON. CURT L. HEBERT, JR.
Mr. Hebert. Thank you for the opportunity to appear before
you today. Chairman Barton's invitation specifically asked me
to address whether there is a need for Federal electricity
legislation, and, if so, why?
In the interest of time, I have modified my comments, and I
ask and answer a more narrow question: Does FERC need Federal
electricity legislation? Not necessarily.
For investor-owned utilities, FERC has adequate existing
authority to create a competitive market; more accurately, I
should say allow a competitive market to form. One area
Congress could speak to involves the Federal power marketing
agencies--the Bonneville Power Administration and the Tennessee
Valley Authority. The effort involves untangling the
transmission from the generation and the financial and legal
commitments these agencies may have made. Change also involves
the matter of tax exempt financing and the problem of
preference customers and the so-called fence within which
bodies, such as TVA, operate. Therefore, it will take time to
sort out. I would prefer selling off their transmission assets
instead of additional jurisdiction.
For the investor-owned side, the economics of the industry
already push companies into restructuring. Generation now
operates as a true business. FERC has extended market-based
rates from merchant generators to services traditionally
provided by utilities. In Order Number 888, the Commission
declared new entry into generation will receive market-based
rates for all practical purposes. Transmission, the highway of
electricity, will remain regulated and will operate as a
utility.
The next step must come from Federal Energy Regulatory
Commission. Our rate setting encourages utilities to sit still
and do nothing. We all but prohibit companies from engaging in
the transmission business. We also keep new investors out. In
allowing utilities to recover original cost, less depreciation
on facilities about 30 years old, FERC says to a potential
entrant, ``You cannot afford to buy these facilities for their
value.'' It also tells integrated utilities, ``You won't get
anything for your assets, so if you sell, you will be asking
for shareholder opposition.''
To cure that, FERC must grant an acquisition adjustment
that reflects the economic benefits transmission facilities
will bring to the table. On the other hand, policies that force
sellers to return ratepayers any and all gains from a sale
negate the good in the acquisition adjustment. FERC and the
states must allow shareholders to reap at least half the
profits of the sale of transmission. FERC can do this.
Higher rates of return to reflect greater risk of
transmission would encourage restructuring for existing
facilities, as would shorter depreciation to account for the
likelihood of distributed generation and other technological
changes that may render facilities obsolete before the end of
their physical life. FERC can do this.
Most important for the future, restructuring, competition,
and innovation come down to expansion. Business has a simple
way of handling new facilities--incremental pricing. Arbitrary
as it might seem from a theoretical point of view, making the
new customer pay the cost of the interconnection brings
certainty at the least cost. Existing customers can rest
assured, once they have paid their freight, that a new customer
would not saddle them with more.
All of this and more FERC can accomplish by exercising its
authority under Section 205 of the Federal Power Act. Since the
1940's, the Supreme Court has held that nothing in the act
binds the Commission to any particular formula, as long as we
balance the interests of consumers with that of the utilities.
Were we to do that here, we would institute the kinds of
incentives and performance-based rates that will allow a
separate transmission business to form and thrive. A separate
transmission business, a clean break, in the words of the
Federal Trade Commission staff's comments in the RTO NOPR,
forms the best foundation for competition in generation and low
prices to the customer.
Other impediments to restructuring exist, some of which you
correctly blame FERC for, even apart from rates. For example,
utilities complain that FERC takes too long to rule on
applications to dispose of facilities, of the type that
utilities will have to file in order to form RTOs. Congress, in
theory, can legislate an end to delay. Better yet, FERC itself
can and should accelerate the process.
I think we should put a provision into the Final RTO Rule
that we will act on those applications within 6 months. FERC
should use its existing discretion. FERC's review of mergers
could delay formation of RTOs.
The current draft of the Barton bill in front of us today,
that we are speaking about, expands FERC's jurisdiction over
mergers by including generating facilities. The August 4 draft
would have eliminated FERC review of mergers. FERC should get
out of the merger business. I have always said good mergers
should be approved in 6 months, and bad mergers should never
happen. Utilities are not exempt from the antitrust laws of
this great Nation. DOJ, FTC, the SEC all take a look--FERC is
not an antitrust agency.
We hear clamor in another area: reliability. The argument
goes that competition, meaning cost shifting--or cost cutting,
excuse me, will slight the long-term investment in reliability.
Therefore, critics caution, Congress must step in. I disagree
completely, that the two considerations must pull in different
directions. Here, again, FERC has authority to act.
We can supplement performance-based rates to include
reliability, another word for quality. When I served as
commissioner and chairman in Mississippi, we included the
minimum reliability as one measure of performance on which the
utilities can earn profit. We at the FERC could adopt the same
measure as part of the rate plans under section 205 of the
Federal Power Act. Adding reliability to performance-based
plans means quicker action than having a self-regulating
organization establish standards with appeals to FERC, because
we would make the utility's economic interest coincide with the
public interest. Here, again, FERC has the existing authority
to act.
I noted with approval of the reports that this draft of the
bill rejects FERC's mandates and favors incentives. When I read
the draft, I saw that in fact the authority for FERC to mandate
RTOs fell away, and the bill directs FERC to offer incentives.
So far, so good.
I pause, however. Under the draft bill, Congress, not FERC,
mandates RTOs. For the industry, a mandate robs companies of
the initiative, whether the compulsion comes from a law or from
an administrative rule. Moreover, the draft requires FERC to
consider existing transmission organizations in certifying
RTOs. This prevents progress. The most ardent advocates of
existing ISOs concede that these organizations represent, at
best, a step toward the ultimate goal of true independence. In
short, everyone agrees ISOs must evolve. This bill freezes the
status quo with existing ISOs. I would allow ISOs to exist,
though I find them falling short of the RTO criteria of
independence. Instead, I would clear the way toward the goal:
truly independent transmission companies.
This leads to my next topic, incentives. Everyone knows I
favor them. To work effectively, however, incentives must
induce, not sugar coat compulsion. If Congress mandates RTOs,
at best, you turn precisely designed economic measures that
proponents must tie to specific results into rewards for
obeying the law. At worst, you rob incentives of their meaning.
We must ask ourselves: Does the seller to a distress sale
really negotiate the price?
Companies deserve no reward for obeying the law. I wonder
how we would design proper incentives for past or even existing
conduct. Since ISOs must evolve into better organizations, we
should provide the incentive only for the better organizations.
You could solve the problem by inserting a sunset date for ISOs
to become truly independent. Once we freeze ISOs as the
preferred institutions, we have stopped in its tracks the
evolution of the industry.
I did want to comment on something that Deputy Secretary
Glauthier said in regard to incentives and RTOs. He said--and I
am pretty sure it was within one sentence--that we don't need
incentives and that utilities will join RTOs on their own and
that mandates are needed. Well, those are three different
things, and they can't all be true, because you either need
incentives or you need mandates or everyone joins voluntarily.
And let us not forget how we did solve some of our Clean
Air Act problems. The SO<INF>X</INF> and NO<INF>X</INF> credit
showed incentives worked gracefully and wonderfully are working
today, and I insist we rethink that in the electricity area.
We must treat transmission as a business. Regulation treats
transmission as politics with committees, debates, and
compromises, and as law with complaints, litigation, and
appeals. Treating transmission as a business means rescinding
regulations that prevent business people from operating
transmission as a viable enterprise. Your predecessors gave
FERC broad authority to establish just and reasonable rates.
The courts have given deference to our expertise. Let us use
that tool, and let competition flourish. In short, let FERC let
go.
Over the last 2 years we have changed the debate from
historical regulatory prescription and mandate to that of
empowerment through economic persuasion. Since you are seeking
my counsel, I will be a bit more bold than usual. I do need the
help of Congress. I have made it clear to the members of this
committee on the occasion I have had to speak with them that
your intentions are not clear at the Federal Energy Regulatory
Commission. I have invited oversight and believe this to be a
step in the right direction. You and your predecessors have
given us the right tools. I need you to ensure they are being
used properly.
Thank you, and, Mr. Chairman, I do apologize if I went a
little longer than expected. Myself and Commissioner Bailey are
not accustomed to being in the majority.
[The prepared statement of Hon. Curt L. Hebert, Jr.
follows:]
Prepared Statement of Hon. Curt L. Hebert, Jr., Commissioner, Federal
Energy Regulatory Commission
Thank you for the opportunity to appear before you. Chairman
Barton's invitation specifically asked my colleagues and me to address
``whether there is a need for Federal electricity legislation, and if
so, why . . .''. The letter also requested comment on specific
provisions of the Barton Bill and solicited alternate language, if
possible.
I have publicly stated on many occasions that I will comment on the
need for legislation only if asked. Since, Mr. Chairman, you have done
so, I will give you my views to the full extent of my thinking, as it
pertains to FERC. I will comment in general on certain provisions in
the Bill and will not presume to propose alternate language, as I have
had but a few days to read this massive Bill. I will, of course, gladly
go into detail in response to questions.
Does FERC need Federal electricity legislation? Not necessarily.
For investor owned utilities, FERC has adequate existing authority to
create a competitive market. More accurately, I should say allow a
competitive market to form. Enough authority at the state level exists
to allow competition to spread there and to include publicly owned
utilities.
The one area Congress could speak to involves the Federal power
marketing agencies, the Bonneville Power Administration and the
Tennessee Valley Authority. While I think it desirable to cover that
part of the picture, I think Congress can wait until the rest of the
country sorts out its restructuring and the affected regions, the
Northwest, Southwest and Southeast, have an opportunity to consider the
complex issues. The effort involves untangling the transmission from
the generation and the financial and legal commitments these agencies
may have made. Change also involves the matter of tax exempt financing
and the problem of preference customers and the so-called ``fence''
within which bodies, such as TVA, operate.
For the investor owned side, the economics of the industry already
push companies into restructuring. Generation now operates as a true
business. FERC has extended market based rates from merchant generators
to services traditionally provided by utilities. In Order No. 888, the
Commission declared new entry into generation will receive market based
rates, for all practical purposes. Transmission, the highway of
electricity, will remain regulated and will operate as a utility.
As we saw in other industries, beginning with the airlines, a
business and a utility use opposite approaches. A CEO of a business
looks at value, innovation and opportunity; a CEO of a utility looks at
cost, rate base and rate of return. In visits to my office, officials
of integrated utilities have expressed the desire to tackle one or the
other--looking for profits in generation or engaging in strategically
important transmission. Witness as well some utilities, such as Duke
Energy and the Southern Company, buying generation that others, such as
New England Power Company and Consolidated Edison Company, sell off. As
I wrote in an article in the Public Utilities Fortnightly last year,
``The fruit of divestiture has ripened.''
The next step must come from FERC. Our rate setting encourages
utilities to sit still. We all but prohibit companies from engaging in
the transmission business. We also keep new investors out. In allowing
utilities to recover original cost, less depreciation on facilities
about 30 years old, FERC says to a potential entrant, ``You cannot
afford to buy these facilities for their value.'' It also tells
integrated utilities, ``You won't get anything for your assets, so if
you sell, you will be asking for shareholder opposition.'' To cure
that, FERC must grant an acquisition adjustment that reflects the
economic benefits transmission facilities will bring to the table. On
the other side, policies that force sellers to return to ratepayers any
gains from a sale negate the good in the acquisition adjustment. FERC
and the states must allow shareholders to reap at least half the
profits from sale of transmission.
Higher rates of return to reflect greater risk of transmission
would encourage restructuring for existing facilities, as would shorter
depreciation to account for the likelihood of distributed generation
and other technological changes that may render facilities obsolete
before the end of their physical life.
Most important, for the future, restructuring, competition and
innovation come down to expansion. We have all seen statistics showing
transmission investment has declined to a trickle (if not less).
Primarily, a pricing scheme that requires all customers to pay for all
facilities creates arguments. It leads to controversies. Why should I,
an existing customer, pay for a new line, when I have all I need? On
the other side, I, as a new customer, want everyone else to supplement
my costs, so of course, everyone should contribute to my line!
Business has a simple way of handling new facilities: incremental
pricing. Arbitrary as it might seem from a theoretical point of view,
making the new customer pay the entire cost of interconnection brings
certainty at the least cost. Existing customers can rest assured, once
they paid their freight, that a new customer would not saddle them with
more. New customers will have to calculate the full cost of their
ventures and will plan accordingly. Once they commit to a price, they
will see the transaction through. I add here, parenthetically, that
incremental pricing will still leave some controversy, when opposition
to construction or upgrade stems from other considerations.
All of this, and more, FERC can accomplish by exercising its
authority under Section 205 of the Federal Power Act. Since the 1940's,
the Supreme Court has held that nothing in the Act binds the Commission
to any particular formula, as long as we balance the interests of
consumers and utilities. Were we to do that here, we would institute
the kinds of incentives and performance based rates that will allow a
separate transmission business to form and thrive. A separate
transmission business, a ``clean break,'' in the words of the Federal
Trade Commission Staff's comments in the RTO NOPR, forms the best
foundation for competition in generation and low prices to the
customer.
Other impediments to restructuring exist, some of which you
correctly blame FERC for, even apart from rates. For example, utilities
complain that FERC takes too long to rule on applications to dispose of
facilities, of the type that utilities will have to file in order to
form RTOs. Congress, in theory, can legislate an end to delay. Better
yet, FERC itself can and should accelerate the process. I think we
should put a provision into the Final RTO Rule that we will act on
those applications within six months. FERC should use its existing
discretion. Moreover, the August 4th draft would have eliminated FERC
review of mergers. Currently, FERC's review of mergers could delay
formation of RTOs. The August 4th draft had a good idea.
We hear clamor in another area: reliability. The argument goes that
competition, meaning cost cutting, will slight the long-term investment
in reliability. Therefore, critics caution, Congress must step in. I
disagree completely that the two considerations must pull in different
directions. I also disagree completely that Congress must take the
lead. Here, again, FERC has authority to act.
Remember, in a business, the management looks at profit margins,
not low cost. Earning a profit entails quality service; or, more
accurately, several layers of quality service, depending on how much
the consumer wants to pay. In any event, entrepreneurs must meet
minimum criteria. In most instances, take electric appliances, for
example, a close relative to the electric industry, Underwriters
Laboratory, a private group, sets standards that companies adhere to
without the need for one word of legislation. Why? Society makes it in
the interest of appliance manufacturers to do so.
We can supplement performance based rates to include reliability,
another word for quality. When I served as a Commissioner and Chairman
in Mississippi, we included the minimum reliability as one measure of
performance on which the utilities earned profit. We at the FERC could
adopt the same measure as part of rate plans under section 205 of the
Federal Power Act. Adding reliability to performance based plans means
quicker action than having a self-regulating organization establish
standards with appeals to FERC because we would make the utility's
economic interest coincide with the public interest. Here, again, FERC
has existing authority to act.
Furthermore, taking the regulatory approach makes meeting the goal
more difficult. Coercion means utilities would resist, at the
Commission and in the courts of appeals. If we compensate companies for
their additional risk taking and bold action, we align the economic
interest and the public interest. We would not need to discuss
authority for FERC or legal issues of the type this hearing will
debate. Again, as I wrote in my article, ``FERC must let [the ripe
fruit] fall from the tree.''
I said at the outset of this testimony that existing institutions
can deal with municipal utilities and cooperatives. Having served in
the Mississippi Legislature, I know that cities, counties and districts
exist as creatures of the state. Under the Mississippi Constitution, as
in other states, the Legislature exercises tight control over the
affairs of political bodies within its boundaries. The Legislature must
authorize taxes and expansion of municipalities into new areas. With
that leverage, state legislatures can enact laws to place public
transmission agencies on the same track as investor owned. FERC, of
course, might think it can do it too, and, under the Barton Bill, we
would have the jurisdiction. I think, however, that the elected
legislatures, closer and more accountable to the people, know better
than FERC, how to accomplish restructuring in their areas. The August
4th draft directed the FERC to give ``maximum practicable deference''
to state commissions, which would be preferable to mere deference.
After all, we all agree that low prices to the customer remains the
paramount end. Restructuring forms but a means to that end.
I see no need for legislating on the cooperatives. The strong
economy and changes in the law give cooperatives incentives to pay off
their debts to the Rural Utilities Service. If this trend continues, as
we have seen at FERC, many will become public utilities under FERC
regulation. If FERC enacts incentives for transmission, more will
volunteer. In this market of deregulated generation, cooperatives and
municipals, with their local roots, will see their niche as serving the
people's need for transmission. I do not think that they could compete
nationally as generators with the large investor owned companies. As I
have said repeatedly, if FERC incents, they will come. I think the
municipals and cooperatives will, too.
Now I will turn what, to me, form the major features of the Bill:
incentives and flexibility. The approach the proposed legislation takes
holds great interest to me. From the beginning of my tenure at FERC, I
have spoken out forcefully in favor of encouragement and incentives and
against mandates. Even with my vision of an independent transmission
company as the model for RTOs, I favor allowing other forms of
organizations to exist. I would just give incentives to RTOs that
exhibit true independence.
I noted with approval the reports that this draft of the Bill
rejects FERC mandates and favors incentives. When I read the draft I
saw that, in fact, the authority for FERC to mandate RTOs fell away,
and the Bill directs FERC to offer incentives. So far, so good.
The fine, print, however, makes me wonder about the direction the
Bill is heading. Section 103 requires all transmitting utilities to
establish or join an RTO, albeit of their own design by 2003. Paragraph
(2) establishes criteria and wisely says that independence encompasses
separation of control, but could include passive ownership and 10%
voting control or lower. I agree with the idea that independence
requires separation of legal control and tolerate passive ownership and
10% voting control. I acknowledge that 2003 extends by almost one year
the deadline the RTO NOPR has for voluntary RTOs to begin operation.
I pause, however. Under the draft Bill, Congress, not FERC,
mandates RTOs. For the industry, a mandate robs initiative, whether the
compulsion comes from a law or from an administrative rule. Moreover,
the draft requires FERC to consider existing transmission organizations
in certifying RTOs. This prevents progress. The most ardent advocates
of existing ISOs concede that these organizations represent, at best, a
step toward the ultimate goal of true independence. In short, everyone
agrees ISOs must evolve. This Bill freezes the status quo with existing
ISOs. As I said at the outset, I would allow ISOs to exist, though I
find them falling short of the RTO criterion of independence. Instead,
I would clear the way toward the goal: truly independent transmission
companies.
This leads to my next topic, incentives. Everyone knows I favor
them. To work effectively, however, incentives must induce, not sugar
coat compulsion. If Congress mandates RTOs, at best, you turn precisely
designed economic measures that proponents must tie to specific results
into rewards for obeying the law. At worst, you rob incentives of their
meaning. We must ask ourselves, does the seller to a distress sale
really negotiate the price?
Although I support incentives as providing proper direction and
motive, I oppose an indiscriminate application of incentives. The draft
Bill requires incentives for existing ISOs, rewards they do not need
and that I would deny them. I said earlier exiting ISOs fail the
independence test. Besides that, why increase rates for past conduct
that occurred anyway? Some of the past conduct occurred under the
compulsion of law. Companies deserve no reward for obeying the law. I
wonder how to design proper incentives for past conduct. As with
grandfather provisions for existing ISOs as RTOs, giving the same
incentives to ISOs defeats the purpose of restructuring. Since ISOs
must evolve into better organizations, we should provide the incentive
only for the better organizations. Once we freeze ISOs, we have stopped
in its tracks the evolution of the industry.
You could solve the problem by inserting a sunset date for ISOs to
become truly independent. The draft Bill has nothing in it. If you
wanted to enact something and chose a date (without being arbitrary),
you should save the incentives for organizations that get to the end
state earlier. On that score, I note that this Bill removed the date
for retail competition, a step that I applaud.
If I may, please let me conclude with a discussion of one more
provision that I think illustrates the distinction between my approach
and that of the draft Bill. I agree with the goal, I raise questions
about the means.
The draft Bill enmeshes the government in reliability to a greater
extent than now, or necessary. FERC will have to certificate a
reliability organization, hear appeals of controversies over
reliability and establish mandatory rules. The model for this comes
from the Securities and Exchange Commission with self-regulating stock
exchanges. I dare say I am not an expert in stocks, but I can see
something like that for a market in which unsophisticated and
unsuspecting investors may lose their life savings.
Here, however, we have a better solution. We deal with
sophisticated businesses. This reality allows for performance based
rates as the insurer of reliable operations. Reliability has two
components: safety and adequate capacity. Both of these, or the lack of
them, affect the bottom line of a business. My suggestion then is to
create a climate in which that occurs in transmission. Specifically,
tie profits to performance--safe performance and an adequate number of
transactions. Give transmission companies business plans to meet.
Favorable earnings result from good results, losses from poor
management. Clearly, we don't need legislation to do that. FERC has the
authority to institute performance based rates. We did it in
Mississippi. The Public Service Commission put three criteria into the
final plans. Two of them fall directly under the category of
reliability, and one indirectly. Earnings depended on the number and
duration of interruptions, customer satisfaction (using actual
complaints) and price into which we factored sales transactions. The
companies figured out how to set and meet reserve margins, safety
standards and capacity goals. We aligned the private economic interest
with the public interest. FERC can do that now. We said in the RTO NOPR
that we would consider it. Why enmesh FERC in details that it has no
expertise or resources to devote? Instead of engaging in proceedings
lasting years and years debating reserve margins and capacity needs,
FERC, every few years, would review performance plans and fine tune
them.
Congress should leave it up to FERC to get restructuring right. I
think we must treat transmission as a business. Regulation treats
transmission as politics, with committees, debates and compromises and
as law with complaints, litigation and appeals. Treating transmission
as a business means rescinding regulations that prevent business people
from operating transmission as a viable enterprise. Your predecessors
gave FERC broad authority to establish just and reasonable rates. The
courts have given deference to our expertise. Let us use that tool and
let competition flourish. In short, let FERC let go.
Thank you.
Mr. Barton. Well, I am sure you wrote it for 5 minutes, but
you spoke it for about 12 minutes. That is just--but I listen
at about the 12-minute speed, so that is okay.
Last but not least, the Honorable Commissioner Massey, and
you are recognized for such time as you may consume.
STATEMENT OF HON. WILLIAM L. MASSEY
Mr. Massey. Thank you, Mr. Chairman. I will try to be
brief, because I am going to endorse in large part many
provisions of your bill.
It is my view that the enactment of this legislation with
certain amendments can ensure an open, seamless, and highly
reliable interstate transmission grid that will in turn
facilitate vibrantly competitive power markets.
Why should Congress act now? Simply stated, legislation is
necessary to facilitate the removal of barriers that undercut
the economic promise of competition. Market and grid access
uncertainties that flow from such barriers can stifle
investment in necessary generation and exacerbate price
volatility. Residual market power, a patchwork of grid rules,
or rules followed merely on a voluntary basis, can smother
embryonic competitive markets.
Legislation can resolve these uncertainties, and since all
power sold at wholesale is ultimately consumed at retail, it is
important to understand that efficient wholesale markets are a
necessary predicate to efficient retail markets.
Thus it is my view that H.R. 2944's provisions subjecting
all transmitting utilities to one set of rules should be
enacted. Provisions requiring transmission owners to join RTOs
by a date certain, in my judgment, are in the public interest.
However, detailed legislative standards for such institutions
that may need to evolve over time are unnecessary.
Provisions authorizing the private reliability standards
organization to promulgate mandatory rules should be enacted.
Under the legislation, the Commission would certify that
organization and rely substantially on its expertise. The
Commission would not develop the rules but would rely upon the
private organization to do so. This is in the public interest.
Market power can smother embryonic competitive markets. I
would suggest that H.R. 2944 be amended with language from H.R.
1828 and H.R. 2050 authorizing the Commission to examine and
address market power in wholesale and retail markets in certain
circumstances.
A recent 8th Circuit Court of Appeals decision sanctions a
state policy granting a preference for in-state uses of the
interstate grid. It is roughly analogous to a State reserving
the interstate highway system exclusively for vehicles licensed
in that State. It allows discrimination against interstate
transactions. If broadly applied, this decision could balkanize
the grid. I recommend that Congress ensure that there is no
discrimination against interstate users of the grid. Chairman
Hoecker has suggested language in his testimony to fix this
problem which I heartily endorse.
In summary, I suggest that any legislative reforms focus on
facilitating policy choices that will lead to large and robust
competitive markets. Open access rules followed by all grid
owners will help. Regional transmission organizations will
facilitate large regional markets, and mandatory reliability
rules will ensure that power is delivered reliably to
consumers.
I thank you for your attention this afternoon, and I would
recommend the enactment of H.R. 2944 with the modifications
noted in my testimony.
Thank you, Mr. Chairman.
[The prepared statement of Hon. William L. Massey follows:]
Prepared Statement of William L. Massey, Commissioner, Federal Energy
Regulatory Commission
Mr. Chairman and Members of the Energy and Power Subcommittee: My
name is William L. Massey. I have served as a Commissioner of the
Federal Energy Regulatory Commission since 1993. I welcome this
opportunity to testify with respect to H.R. 2944, the Electricity and
Competition Act of 1999. I congratulate Chairman Barton for introducing
this important legislation.
i. introduction
At this juncture in the transition to competition initiated by the
Energy Policy Act of 1992 and Order No. 888, Congress can take the
steps necessary to ensure an open, seamless and highly reliable
transmission grid that will in turn facilitate vibrantly competitive
power markets.
By making the entire interstate transmission grid, regardless of
ownership, subject to open access rules, legislative reform can ensure
nondiscriminatory access on a nationwide basis. Congress can ensure
grid reliability by authorizing a private reliability standards
organization that will promulgate mandatory reliability rules. By
requiring all grid owners to form appropriately configured regional
transmission organizations (RTOs), legislation can help mitigate
residual vertical market power, capture for consumers the operational
efficiencies created by grid regionalization, and promote large and
robust power markets. By authorizing the Commission to mitigate
horizontal market power in wholesale or retail markets that may arise
from pockets of generation concentration, Congress can ensure that the
price for power is determined by the forces of competition rather than
by market manipulation.
Why should Congress act now? Simply stated, legislation is
necessary to facilitate the removal of barriers that undercut the
economic promise of competition. Market and grid access uncertainties
that flow from such barriers can stifle investment in necessary
generation and exacerbate price volatility. Residual market power, a
patchwork of grid rules, or rules followed merely on a voluntary basis,
can smother embryonic competitive markets.
Although the prospect of mandatory grid reliability rules appears
to enjoy broad industry support, under current law there is no clear
path to achieve this goal. Moreover, roughly one third of interstate
grid facilities are by law not subject directly to the Commission's
pro-competitive policies and standards prohibiting discrimination.
In addition, existing jurisdictional uncertainties may make it
difficult to ensure full industry participation in RTOs. Without full
participation, the substantial pro-competitive benefits such
institutions can facilitate will be available only on a patchwork
basis.
Legislation can resolve these uncertainties that now hamper efforts
to facilitate competitive wholesale markets and ensure a reliable
national grid. And since all power sold at wholesale is ultimately
consumed at retail, it is important to understand that efficient
wholesale markets are a necessary predicate to efficient retail
markets.
ii. comments on h.r. 2944
At the outset, let me generally associate myself with the testimony
of Chairman Hoecker. He and I appear to be generally of a common mind
on appropriate legislative reforms.
H.R. 2944 effectively addresses most of the issues mentioned in my
introductory comments. The issues it resolves are complex and
challenging ones, and I commend Chairman Barton for placing this bill
before the House of Representatives.
Although my testimony will focus primarily on legislative reforms
that will facilitate wholesale competition, I would like to note
briefly for the record that I support retail competition as well.
Although wholesale competition is beneficial for consumers in any
event, its full promise will not be achieved in the absence of retail
customer choice.
A. One Rule for All Transmitting Utilities (Section 102)
This legislation extends the Commission's authority to the grid
facilities of all transmitting utilities, including federally-owned
utilities, electric cooperatives and municipal utilities. This
provision will ensure the benefits of the Commission's open access
rules to the users of these facilities. I support this important
provision.
Although state regulators in Texas have done a commendable job
promoting competition within Texas, I would not further limit federal
jurisdiction over ERCOT facilities. Accordingly, I would not recommend
the enactment of the bill's language eliminating the Commission's
section 211 jurisdiction over ERCOT.
B. Mandatory Reliability Rules (Section 201)
A strong industry consensus appears to support legislation to
facilitate mandatory reliability rules. Such rules would provide a firm
grid foundation for competitive markets. Section 201 provides that a
private standards organization, composed of a broad and balanced cross-
section of industry representatives and other experts, would promulgate
mandatory rules subject to federal oversight. The North American
Electric Reliability Council (NERC) has impressive expertise in this
area, and it is my assumption that it will make the internal
organizational structural changes, if any, that are necessary to
qualify as the private standards organization envisioned by this bill.
It is my view that enactment of this provision is essential to
maintaining grid reliability in a competitive era.
C. Regional Transmission Organizations (Section 103)
I strongly support this section's imperative that all transmitting
utilities participate in RTOs, and I highly commend Chairman Barton's
foresight in recognizing the value of such institutions and requiring
universal participation. There is, however, little justification in my
view for delaying mandatory RTO participation until 2003. Utilities are
already aware that the Commission through its RTO Notice of Proposed
Rulemaking has sent an unmistakable signal that the Commission intends
for an RTO to form in every region of the country by December 15, 2001.
I am confident that the Commission would promulgate rules that meet
the legislation's goals with respect to independence, scope and
configuration, corporate form (for-profit and not-for-profit
institutions), operational authority and efficiency. I see no reason
for Congress to be prescriptive about such issues, or to provide
detailed legislative standards for institutions that may need to evolve
over time. I would, therefore, suggest the elimination of detailed
legislative provisions describing RTO standards and features.
Given the legislation's mandate for RTO participation, I do not
understand its rationale for financial incentives for utilities to form
RTOs. The need to comply with federal law should be incentive enough,
and joining bonuses would appear to be unnecessary. In addition, they
are not free, and are paid for by grid users in the form of higher
rates. I do, however, support incentives for good performance, measured
by reliability, sound congestion management, solid plans for necessary
grid expansion, customer satisfaction and similar standards. Well
designed performance-based rate incentives would be good public policy.
With regard to determining appropriate RTO scope and configuration,
I would prefer that the legislation rely upon the Commission's
expertise to determine and apply appropriate factors. If, however,
factors are to be specified in legislation, I would add a provision
allowing the Commission to apply ``any other factor that the Commission
determines will promote competitive bulk power markets, reliability and
efficiency.''
Moreover, I am assuming that transmission owners must join an RTO
of appropriate scope and configuration, as determined by the
Commission, in order to be in compliance with the legislation. Thus, I
do not fully understand the legislative admonition that the Commission
shall have no authority to point the utility toward a particular RTO.
Absent circumstances I cannot envision, if a utility proposes to
participate in an RTO in an inappropriate region (e.g., geographically
separate from its operations), the Commission should have the authority
to require participation in an appropriate RTO region. I would suggest
that the legislation be clarified in this respect.
D. Mergers and Market Power Issues (Section 401)
The amendments to the Commission's authority to review mergers of
generation facilities and holding companies are excellent and should be
enacted.
For the bulk of mergers that raise no serious market power
concerns, the specified deadlines for Commission action would be
reasonable. Indeed, the Commission has moved expediently on mergers
since issuance of our 1996 Merger Policy Statement. For mergers that do
appear to raise market power concerns, however, a hearing before an
administrative law judge is sometimes required to resolve factual
issues. For such cases, I do not believe that legislative deadlines are
appropriate. The Commission is always under pressure to move merger
cases through the process as quickly as possible, consistent with
thorough review. In such cases, a tight statutory deadline may lead to
an ill-considered and hasty approval of an anti-competitive merger, or
the unreasonable rejection of a merger that might otherwise be
reasonably approved after more thorough review.
Like Chairman Hoecker, I note favorably that both H.R. 1828 and
H.R. 2050 would authorize the Commission to examine and address market
power in both wholesale and retail markets under certain circumstances.
Retail markets will be regional markets that do not respect state
boundaries, and it may be difficult for some states to evaluate retail
market power in regional markets without federal assistance. Thus,
these are important provisions. For robust competitive markets to
develop and thrive, any residual market power should be recognized and
appropriately mitigated.
E. Discrimination Against Interstate Transactions
Imagine you are driving around I-495, the Washington beltway, and a
severe constraint develops due to a traffic accident. Let's assume that
the State of Virginia has a policy that favors Virginia motorists.
Virginia troopers require all vehicles without Virginia tags to exit
immediately so that only Virginia-licensed drivers can travel on the
beltway. Maryland applies the same discriminatory policy on the beltway
to favor Maryland-licensed motorists. This would impede commerce and
would be completely chaotic and unacceptable on interstate highways.
Unfortunately, a recent decision of the 8th Circuit Court of
Appeals, Northern States Power Co., et al. v. FERC, sanctions this same
discriminatory scenario on the interstate electron highway. The court
sanctions a preference for in-state uses of the interstate grid. During
a constraint, wholesale transactions can be cut so that the local
utility can favor its own in-state customers.
Power markets are regional, and do not respect state boundaries. A
state-by-state balkanization of the interstate grid would be chaotic
and unworkable, just like the hypothetical scenario on the beltway.
Congress should clarify the Federal Power Act to guarantee that all
grid users are subject to the same rules, and cannot be bumped off the
interstate electron highway by an in-state preference. Chairman Hoecker
has suggested clarifying legislative language, which I heartily
endorse, in his written testimony.
F. Miscellaneous Issues
Let me in closing comment briefly on three other issues addressed
by H.R. 2944:
<bullet> I agree with the thrust of the provisions promoting renewably
energy, and would endorse virtually any approach that does not
distort the competitive marketplace. A portfolio approach is
also a reasonable concept.
<bullet> I agree with H.R. 2944 that PUHCA should be repealed, while
strengthening the ``books and records'' authorities of FERC and
state regulators.
<bullet> Regional approaches for the siting of transmission wires are
an excellent idea, and appear to track the bill's mandate for
regional transmission operations.
iii. conclusion
I appreciate this opportunity to comment on H.R. 2944, and will be
pleased to answer any questions.
Mr. Barton. Thank you, Commissioner. I am glad we saved you
for last. That is a good way to end the FERC testimony, because
I agree with you--we ought to enact H.R. 2944 with
modifications, as long as I agree with the modifications.
We are going to recognize Mr. Burr of North Carolina first,
because he has a pending engagement at 2:30, for 5 minutes for
questions.
Mr. Burr. Thank you, Mr. Chairman, and it is with our
Governor as it relates to the disaster in North Carolina, so I
appreciate the chairman's indulgence.
I wish I could say that this panel is different than any
that we have had before on electricity deregulation, but it is
not. There are differing opinions, differing views, and the
reality is that we can't all be right. Somebody is right,
somebody is wrong, and it is somewhere in between or maybe that
is where the process is supposed to send us.
Commissioner Bailey, let me ask you, your supportive of the
240-day merger language. Let me ask you, if we were to modify
the bill to say at the end of 240 days the lack of any FERC
decision then automatically approved the merger, would you
still be supportive of that language?
Ms. Bailey. The lack of a decision by FERC would
automatically accrue----
Mr. Burr. Approve.
Ms. Bailey. Approve.
Mr. Burr. Because the current language says at the end of
240 days if FERC has done nothing, the merger is denied. How
about if we say the merger is approved?
Ms. Bailey. Well, I think either case is a little difficult
to agree with. I wouldn't dispense with the role as far as FERC
is concerned in our merger analysis. My issue is just that it
takes entirely too long, whether the issue--whether the merger
is approved or disapproved.
To actually say--I have never said that I was in favor of
such a decisionmaking process where anything would be
automatic. I think that is very difficult to do with these
kinds of cases. So, I guess I would say I would probably not be
in favor of such a remedy other than to say that I think
whatever duration this Congress would put on FERC, I think they
would be willing to follow and willing to do, and the resulting
decision will be what it will be.
Mr. Burr. Let me ask Commissioner Bailey, because I think
you asked specifically that there be flexibility at the end of
that 240 days for the tough cases--excuse me, I am sorry,
Breathitt. I apologize, Commissioner. Let me ask you, how many
mergers has FERC approved in 240 days?
Ms. Breathitt. At the last Commission meeting, Commissioner
Massey actually announced the tally. We have had 30 mergers--
isn't it, Bill--since we have--in the last--well, since we have
had----
Mr. Massey. For mergers that have been filed since the 1996
merger policy statement, 22 out of 25 have been processed
within roughly 150 days. The 3 that were not processed within
150 days were set for hearing and have taken longer than that.
But that is 88 percent that have been processed within 150
days.
Ms. Breathitt. So, the few that, since I have been at the
Commission, which is 2 years, we have only set several for
hearing, and those are the instances that I said in my
testimony, I would ask the committee to amend their language to
give us that extra time that we would need for those mergers
that we felt presented specific facts, material facts that
required extra time for us to consider.
Mr. Burr. So, with the exception of Commissioner Hebert,
240 days to make a decision is acceptable to you.
Ms. Breathitt. Yes, I think that is doable.
Mr. Burr. I would tell you that the financial markets work
on a much smaller timeframe, and that it is the
unpredictableness of 240 days which goes to the heart of what
you said one of the objectives that FERC oversight should be to
stimulate the development and use of technology. If I
understood you correctly, Commissioner Bailey, you said that
oversight was needed to stimulate the development and use of
technology. Am I correct?
Ms. Bailey. I made reference to technology from the
standpoint of trying to hold back from locking in a 1999
vintage vision because of technological and other advances.
Mr. Burr. Let me just ask all of you to comment, and that
will be my last question, Mr. Chairman. How does current FERC
oversight stimulate the development of and the use of
technology in the marketplace?
Mr. Hoecker. Well, Congressman, I would offer this answer.
I think that competition will stimulate technology. I think
competition is what we are all after, and I think, to the
extent that distributed generation or fuel cell technology,
microturbines, or other kinds of gas-based technologies for
electric generation want to come into the market, they need to
be supplied with markets.
How do they get to those markets? They get there through
open access transmission, and without that, without access to
markets, those technologies are not going to be as economically
supportable----
Mr. Burr. So, in an open marketplace, in retail
competition, that does not stimulate the use of new technology?
Only FERC can stimulate the use of new technology? Only FERC
oversight?
Mr. Hoecker. No, I don't think that is what I said. I said
our goal was promoting competition. It is competition. It is
the market. And I think you and I agree on this, that it is the
market that will stimulate technological developments.
Mr. Burr. And the last comment, Mr. Chairman. Everybody has
mentioned reliability, and I think that that is at the heart of
every member of this committee. I would ask you, is there a
greater degree of reliability with more competition or less
competition?
Mr. Hoecker. Congressman, my answer would be competition
means a greater degree, and we have had that experience on the
gas side with open access to gas, interstate gas
transportation. We have a much higher level of reliability, and
I expect similar developments on the electric side, as well.
Mr. Barton. Gentleman's time has expired.
The gentleman from Texas, Mr. Hall, is recognized for 5
minutes.
Mr. Hall. Thank you, Mr. Chairman.
Chairman Massey, I agree with you in saying that you have
support for this bill with several amendments, and there is
little I could add in the paper. I watch the ads in the paper
for cars that are for sale, particularly antique cars, but I am
always concerned when they say, ``1958 Buick, restorable.''
Mr. Massey. I am too, Mr. Hall.
Mr. Hall. We can restore it if they give us enough money
and a good enough body, right?
Mr. Massey. Right.
Mr. Hall. And the chairman's been generous with his time on
that. So, let me--Mr. Chairman, you note in your testimony
about transmission pricing incentives; that the Commission has
asked for comments on the RTO rulemaking on incentives, and
starting with you, Mr. Chairman, give me just a snapshot view
of where you are in your thinking on this issue.
Mr. Hoecker. Our proposal in the RTO rulemaking is to
explore various kinds of incentives that will stimulate more
efficient economic behavior by utility transmission owners in
the context of RTOs. We mention performance-based rates,
congestion pricing, various kinds of things like risk-adjusted
rates of returns, things that would encourage better use of
transmission and make utilities more willing to access the
capital markets to expand the grid where necessary and so
forth.
We are in the process of analyzing our comments now, and I
expect to have a protracted conversation with my colleagues
about where we go from here on that issue, but it is an
important one.
Mr. Hall. Ms. Bailey, on pages 8 and 9 of your testimony,
you seem to disagree with the chairman on the need for a
deadline of the utilities to join an RTO, and you say you
believe utilities need the time and flexibility to innovate. If
you have a different vision, and apparently you do, from the
chairman, of what a restructured bulk power market should look
like or just a different way of getting there, which is it? Or
is it both?
Ms. Bailey. My disagreement with the chairman may be just
in how to get there. I agree with him wholeheartedly as to the
efforts that this Commission has put forward to move toward a
competitive bulk power market. To the extent that you have
mentioned the mandate issue, I just believe that there is the
ability to have more flexibility and innovation as a result of
technology and ideas, how that might advance things as opposed
to being prescriptive and making a generic timeframe.
Mr. Hall. Mr. Hebert, do you want to add to that or you
have any different view? I would be surprised if you didn't.
Mr. Hebert. Congressman Hall, I do, and I appreciate you
giving me the opportunity to answer it.
I think it is ultimately important that we provide
incentives, whether it be accelerated depreciation, increased
rates of return based on risk, acquisition adjustment, or other
incentives, quite frankly, that we haven't even thought of at
this point. And it does go back to Congressman Burr's question
to a certain degree, too, because he was asking about
technology and how do we provide for technological advances?
Well, we do that through competition, but he had a very
good question in asking whether or not FERC can provide it.
Well, no, sir; FERC cannot provide it. Competition can provide
it. I know someone earlier was looking for a definition of
competition, which is where supply and demand can meet, but
when they start to meet that is exactly when you get the
investment necessary to try create technological advances much
like we have seen after the Green decision in
telecommunications. But FERC has to take the initiative and
provide the economic incentive to do so.
Mr. Hall. You used the, I think, your view of separate
transmission business on page 4 of your testimony, and when you
use the FTC's word, quote a ``clean break,'' unquote, do you
mean the total separation of transmission from generation,
including ownership and control?
Mr. Hebert. Yes, sir; that is what it means.
Mr. Hall. Full go.
Mr. Hebert. Absolutely. That would make it truly
independent.
Mr. Hall. And on page 5, is it your view that FERC should
no longer review mergers?
Mr. Hebert. Yes, sir; it is.
Mr. Hall. Time limitation on FERC mergers--I think the
gentleman from North Carolina got into that--resolve any of
your concerns?
Mr. Hebert. It does in the sense that I think it is better
than what we currently have, although I will have to step back
one moment and commend the Chair and the Commission for doing a
good job here in the recent past on mergers.
My point is this though: Utilities are not exempt. They
have no immunity from antitrust laws, and I have yet to be
convinced by anyone that there is anything in market power
concerns that they can't be taken care of otherwise, through
the DOJ or the FTC, or under the Public Utility Holding Company
Act and the SEC. So, my point is, why duplicate this service if
indeed it is not necessary? We are not an antitrust agency, but
we do have some in the United States.
Mr. Hall. I think my time is up or I would ask the chairman
if he would like to answer that.
Mr. Chairman, would you like to make comment on Mr.
Hebert's----
Mr. Hoecker. Well, I of course appreciate----
Mr. Hall. I thought he was pretty generous in acknowledging
that in some things you had done a good job.
Mr. Hoecker. Well, I think that is one for our side, but I
am----
Mr. Hall. It still 3 to 2, isn't it?
Go ahead.
Mr. Hoecker. That is the story, isn't it?
I am very anxious that this Commission continue to process
merger applications responsibly and quickly to the maximum
extent we can. We have lived up to our promise to the public in
our policy statement 3 years ago, but I do think that whereas
the antitrust agencies look periodically at the electricity
market, the bulk power markets, and the consequences of mergers
for competition, we do it systematically.
We are experts in that area. We understand how those
industries and those companies work, and we think we are much
more capable of conditioning mergers in a way that will allow
them to go forward with some fine-tuning rather than the kind
of more dramatic antitrust type solutions that you get from
antitrust agencies.
And I would add that I take exception to Commissioner
Hebert's characterization. It is very clear in our case law
that we are responsible for looking after antitrust type
concerns in the context of our regulation.
Mr. Hall. Thank you, Mr. Chairman.
Mr. Barton. Thank you.
The gentleman from Florida, Mr. Bilirakis, is recognized
for 5 minutes.
Mr. Bilirakis. Thank you, Mr. Chairman.
I wasn't here for an opening statement, and I would just
merely add to all of the others that may have been commending
and congratulating the chairman to the effect that he has been
just about as fair as anybody could possibly be up here and
always open-minded and listen to all of us. There are some
areas that have not been satisfactorily as far as some of us
are concerned, but it hasn't been because he had closed mind to
those ideas.
One of the areas that greatly concerns me, and I am just
not clear on, is section 102, the open access for all
transmitting utilities. It seems that under those provisions
FERC will be able to order electricity be delivered to retail
customers even if a State has not elected to have retail
competition.
We worked awfully hard on the date certain idea and we
thought we had that issue resolved, and then this language pops
up. So, I guess I would ask all of you your opinion. Should I,
from my view point or from the view point of those who are
concerned, been concerned about the date certain concept and
open access? Should I be concerned? Do you feel that that
provision gives FERC the authority, to order retail competition
in closed States? Mr. Chairman?
Mr. Hoecker. Congressman Bilirakis, I don't think that that
provision is designed to do that. I view 102 as an endorsement
of the Commission's initiative in Order 888, which requires
open access to bulk power facilities, i.e., high voltage
transmission. Sometimes high voltage transmission is delivered
directly off the grid to what would arguably be a retail-type
customer. Order 888 is very clear that we would presume a
distribution function in those instances so that States would
maintain jurisdiction and be able to do such things as recover
retail transition costs.
So, I think that it is clear, and it is certainly our
intention, and it is the way I read the bill, that we leave
regulation of the distribution function and access to the
retail markets to the States.
Mr. Bilirakis. Well, but subparagraph 2, notwithstanding
paragraph 1, ``The Commission may issue an order that requires
the transmission of electric energy directly or indirectly to
retail electric consumers who are served by local distribution
facilities that are subject to open access.'' And I will admit
I am not quite clear on those last three or four words. I mean,
it seems to be pretty direct.
Mr. Hoecker. If the transaction is going directly to a
retail customer, we can ensure that the transmission is
available to complete that transaction.
Mr. Barton. Would the chairman yield?
Mr. Hoecker. Yes, sir.
Mr. Barton. If Mr. Largent can answer a question for the
Deputy Secretary, I think I can answer a question for the
Chairman of the FERC Commission. The key phrase there is
``subject to open access.'' So, in a closed State, you are not
subject to open access, and that is the key phrase. So, to pick
a State out of the air--Florida--which is not subject to open
access at the State level, FERC would not have jurisdiction, if
that eases the gentleman's mind.
Mr. Bilirakis. Well, it would ease it I think if we took
another look at the language and change it in such a way so
that this concern is addressed.
And if FERC orders the utility to expand its transmission
capabilities, who should pay for that expansion, Mr. Chairman?
Mr. Hoecker. Well, that is a good question.
Mr. Bilirakis. I gather the previous one was not.
Mr. Hoecker. Your questions just keep getting better.
The bill provides for authority for the Commission to order
expansions subject to State siting authority. I believe I said
in my written testimony we didn't believe, or I didn't believe,
that that was necessary for us to have. But if the grid is
expanded, usually the ratepayers or the wholesale customers in
the locale of--in the service territory of--the utility that is
either expanding or in whose territory the expansion occurs
will pick up the tab, which is a problem if the expansion is
made for the benefit of ratepayers in another jurisdiction or
another service territory.
So, you raise a very, very difficult question. And it is
one reason why we think that regional institutions, like RTOs,
where utilities can work these kinds of problems out and
allocate those costs on an equitable basis is very important.
Mr. Bilirakis. Well, I guess my time is up. It amazing that
5 minutes went that quickly, but that is what it is.
All right. Thank you, Mr. Chairman.
Mr. Barton. Thank you, Chairman Bilirakis.
Recognize the gentleman from Ohio, Mr. Sawyer.
Mr. Sawyer. Thank you, Mr. Chairman.
I am struck by the last comment in light of the final
question that I asked before we broke for lunch. I remember the
Deputy Secretary, when I asked him about siting decisions,
suggesting that we could get all the States together and they
could sort of work it out. That was my reaction too. I was
tempted to ask him if that would work sort of like the multi-
State, low-level, nuclear waste compact, but I didn't have the
heart to do it.
How do you envision resolving precisely the kind of siting
difficulties that clearly are a part of this business? You have
authority in terms of natural gas; that is difficult enough. Do
you see the need for similar kinds of authority with regard to
electric transmission?
Mr. Hoecker. Well, I believe the Secretary's response was
that there wasn't a history of Federal siting authority on the
electric side, and I think that one could certainly make an
argument that in a competitive market, where the interstate
traffic and electrons are so much more important than they used
to be, that some regional or Federal authority to site
transmission might be very helpful.
Rather than recommend that, however, I have put my eggs in
the RTO basket or in some equivalent regional organization or
compact that will be able to bring together the people with the
most identifiable and likely common needs in a region in terms
of getting to loads, getting generation to market, and let them
decide what the appropriate expansion of the system is.
Mr. Sawyer. Are there other comments from other
commissioners?
Ms. Breathitt. I will add from my prior experience as a
State commissioner that siting is held near and dear to the
hearts of State commissions. If we did it at FERC, it would
require changing the Federal Power Act, and I agree with the
chairman that I am not advocating doing that.
You will probably hear from the next panel, from NARUC, how
they feel about siting, and I know that some have called for a
comparable siting authority with respect to electricity that we
have in gas, but I think regional consultation with RTOs, with
State commissions in the region where the power lines may need
to go through, could be an answer to facilitate expansion.
Mr. Sawyer. Let me ask another question. When we talk--the
chairman used the term expansion with the service territory of
the utility making the expansion. In a competitive environment
what do we mean by ``service territory?''
Mr. Hoecker. That is a good question--I am sorry. In a
classic sense, of course, a service territory is----
Mr. Sawyer. I know what it was. I am trying to figure out
what it is going to be and how some of these old structures
that worked well in a rate of return, obligation to serve
environment will work in a competitive market.
Mr. Hoecker. There will continue to be utilities who are
load-serving entities who have distribution and are obligated
by State or local law to serve all the customers in that area.
Mr. Sawyer. So, you are talking about a distribution
definition.
Mr. Hoecker. Right. At the bulk power level, you are
absolutely right. You have merchant generators who can sell
anywhere in the marketplace under whatever contracts they can
get, and that does tend to change the concept of a service
territory.
Mr. Sawyer. Let me ask one more question. Well, I will tell
you what, I will wait for a second round. We are starting to--
--
Mr. Bilirakis [presiding]. I don't know whether there is
going to be a second round or not; it is up to the chairman.
So, without objection, you are recognized for an additional
minute.
Mr. Sawyer. We have talked a great deal about the formation
of RTOs and the mandate that appears to depart from the where
the NOPR was heading. I am concerned about once formed are they
presumed to serve a useful purpose in the same configuration
for all time or are there--do you anticipate vehicles for
shifting the design, and if that is the case, why not allow a
much more voluntary formation than the one that I have heard
several people talk about here today? How do you envision that
changing?
Mr. Massey. Well, my view is we need to get them up and
going in every region of the country, and our policy provides
that they should not build in any features that would prohibit
their evolution over time. They may very well evolve. They may
change shape; they may get larger; they may move from an ISO
structure to a transco structure, and it is the Commission's
official policy that the RTO itself not build into its
structure any features that would inhibit its evolution to a
more efficient structure over time.
Mr. Bilirakis. Very, very briefly, please, Tom.
Mr. Sawyer. I will pause, thank you.
Mr. Bilirakis. All right, good. Thank you.
Mr. Rogan.
Mr. Rogan. Mr. Chairman, I do have a couple of questions,
but I am pleased to yield to my friend from Ohio for a follow-
up.
Mr. Sawyer. I appreciate the gentleman's generosity, but I
wanted to pose a question. I don't think we are going to get a
much more involved answer at this point, but I think it is a
question that deserves an answer as we move in building
consensus legislation. So, I thank the gentleman.
Mr. Rogan. Thank you, Mr. Chairman, and, Mr. Chairman, I
also echo your comments earlier and wish to associate myself
with them in commending Chairman Barton for the yeoman's work
that he has put into this particular effort. I welcome all of
the witnesses.
I would like to get the opinion of each of the
commissioners as to how we should--or how you anticipate FERC
would deal with transmission over non-interstate commerce
lines; in other words, non-contiguous States? Maybe I can just
start at the end.
Ms. Bailey. When you say non-contiguous, how FERC would
deal with transmission?
Mr. Rogan. Yes.
Ms. Bailey. That is the crux of our open access; our Order
888 is open access. I am not quite sure where your question
is----
Mr. Rogan. Well, I am really asking, under the terms of
this bill, if this bill were to become law, how would FERC, in
your opinion, deal with regulating transmission that would be
not over interstate commerce, traditional interstate commerce?
Ms. Bailey. To the extent you are talking about PMAs or
TVA, BPA, those kinds of entities----
Mr. Rogan. Yes.
Ms. Bailey. [continuing] that we have not--okay. I
previously probably have not taken a stand myself on that
position, but to the extent that we are trying to move toward
what you would call superhighway in electricity, I think there
I would have to say, yes, they need to be brought into the
fold.
So, to the extent that I am sure you have probably already
been in discussions, and this bill is probably a consensus, and
these entities are aware, I am supportive of what you have in
there. So, I think to the extent that we want to avoid the
swiss cheese factor and the patchwork of access, I think it is
key that we probably move in this direction.
Ms. Breathitt. I had mentioned earlier that a lot of the
non-jurisdictional entities, such as the Federal PMAs and
coops, that transmit electricity have filed reciprocity, open
access tariffs with us, but I agree with my colleague,
Commissioner Bailey, that to have what we call, when we talk
about a seamless grid, that 30 percent of the--roughly the 30
percent of transmission that is not included in our tariffs
eventually should be and probably sooner rather than later.
Mr. Rogan. Mr. Chairman?
Mr. Hoecker. Congressman, I think my colleagues have hit
the nail on the head. The nubs of it, I think, are that it is
hard to imagine transmission that isn't in interstate commerce.
There is a lot of transmission that isn't jurisdictional to the
FERC for legal reasons, but almost all of it is part of an
integrated grid over which electrons flow in and out of States,
in and out of power marketing agencies, in and out of municipal
systems, and what we are suggesting is that we provide a
uniform standard of comparable service and access to all that
transmission, and without exception, and that is the way we
will get to a workable market.
Mr. Rogan. Thank you.
Mr. Hebert. Thank you, Congressman Rogan. When I take the
approach looking at BPA and TVA, I take a little different
thought process and try to come up with a business solution,
and it is my thought that we can resolve it without having
additional jurisdiction coming to FERC, and that would be to
get them to sell of their transmission assets to a
jurisdictional utility, and therefore we would--it would
accomplish the same end but through a different means. So, that
would be my preference, and I have made that clear.
I know you, as a former State legislator, understand when
it comes to munis that you have got other tax issues of local
and State concern that come up.
Mr. Rogan. Thank you.
Mr. Massey. My thinking, Congressman, is that they would be
just like the interstate grid, interstate transmission, and
would be subject to the provisions of Order 888, which requires
open access service, unless the Congress specifies a different
way for us to regulate those systems.
The idea is creating the largest markets possible all
across the country, and that is a function regulators of
interstate commerce, which is what we are, can facilitate. A
State can open its borders to competition, but it is very hard
for that single State to ensure grid access in the surrounding
States. Only federal regulators can do that and eliminate any
swiss cheese effects.
Mr. Rogan. Mr. Chairman, thank you. I yield back.
Mr. Barton I thank the gentleman from California.
We recognize the gentlelady from Missouri for 5 minutes for
questions.
Ms. McCarthy. Thank you very much, Mr. Chairman.
I wanted to ask some clarification on how the regional
transmission organizations that utilities join work with the
transmission agencies that States join. Are they the same?
Because if a utility regional--utilities join a former regional
transmission organization, is it States that have to belong to
that? I am a little confused.
My only other experience with interstate compacts was with
the idea that Congress had at one point in time that if the
States decided where to send the level nuclear waste, that
would be the best solution, and it didn't work. So, could one
of you clarify for me from the bill how these would work, these
regional transmission siting agencies that States join, and
then the regional transmission organizations that the utilities
join?
Mr. Hoecker. Regional transmission organizations are
either----
Ms. McCarthy. Well, let me make it clear. What if Missouri
joins with New York, and that becomes our regional transmission
siting agency, but our utilities in our two States don't join
with those parties. The New York utilities join with
Connecticut, and the Missouri utilities join with Texas? Well,
who is talking to whom, and how does this all work?
Mr. Hoecker. Okay. Our proposed rule would have contiguous
utilities joining together in a regional transmitting grid.
Ms. McCarthy. Oh, so you are going to do this by rule.
Mr. Hoecker. Well, we are proposing to urge utilities to do
it voluntarily, but we have set some baseline criteria for how
these organizations ought to work and when they should begin to
form.
Ms. McCarthy. So, why do we need two different ones then,
if you are going to tell the utilities to join in these
contiguous States an the States to join in these contiguous
States? Are we not--are we really opening competition? I guess
that is where I am coming to.
Mr. Hoecker. That is a good question. There are I think
four or five States now--Wisconsin, maybe Illinois, a couple of
other States--that have actually told their utilities to join a
FERC-authorized regional transmission organization.
Transmission is regulated at the Federal level. What we are
trying to do is to create a broad market at the bulk power
level, which is basically high-voltage transmission and energy
sales and purchases between utility companies. And that will
create access at the wholesale level that will facilitate what
the States do at the retail level.
Ms. McCarthy. Is it fair to presume that you, in a sense,
will control competition, then, by the way you design these
things?
Mr. Hoecker. Well, we are asking the utilities to design
it. We are finding in many States, including California, and
the States within PJM and NEPOOL, which have now got an RTO,
that State regulators have been very influential in how these
organizations are governed, what their policies are, how the
wholesale transmission entity interacts with competition at the
retail level.
So, this is really an opportunity, as I view it, for
regions and for States to put their imprint on the bulk power
market in a way that they can't now. They can engage in--help
engage in regional planning activities for expansion of the
transmission grid that we were talking about earlier, enhancing
reliability measures, ensuring that----
Ms. McCarthy. So, let me ask a question. So, my Missouri
utilities will, based on your rule, likely join with other
utilities right in the Midwest region. You are going to----
Mr. Hoecker. In some logical, economic, and physical
marketplace, yes.
Ms. McCarthy. So, you will control that competition there--
--
Mr. Hoecker. I don't think----
Ms. McCarthy. [continuing] and that will----
Mr. Hoecker. I am sorry. I didn't mean to interrupt.
Ms. McCarthy. But what if they wanted to join with Texas or
somebody else? I mean, that is not contiguous nor logically in
the region, but it might make good economic sense.
Mr. Hoecker. Well, it would have to be a contiguous
marketplace.
Ms. McCarthy. I am sorry?
Mr. Hoecker. One of the propositions in our proposed rule--
and of course we are still taking comment on this and
evaluating that--is a regional scope and configuration that for
an RTO to operate appropriately and to be acceptable, it should
replicate in some sense a historical, physical, and commercial
marketplace that already exists--utilities that do transactions
with each other. If Missouri finds itself in a position of
sharing a common interest in terms of utility commerce with
Texas, it need only make that argument to us, and we will
decide whether in fact that is the case.
Ms. McCarthy. Yes, and that is my point--you will control
competition. I happen to think, though, by the way, with
Missouri being a low-cost State, that just staying in the
Midwest and making sure we all work together, which seems to be
working well now, will continue. It ain't broke out there. We
don't need to fix it. But I am just wondering who is in charge
here.
And, Mr. Chairman, thank you for indulging me with these
questions.
Mr. Barton. Thank you, Chairwoman--I mean, Congresswoman.
Mr. Pickering is recognized for 5 minutes.
Mr. Pickering. Thank you, Mr. Chairman.
Let me ask just a quick question of each of you first to
put things in context, and I am just going to ask a question,
do you support or oppose an incentive-based RTO approach or a
mandatory RTO approach? And, so if we could start with
Commissioner Bailey, do you support mandatory RTO or an
incentive-based approach?
Ms. Bailey. Incentive-based, to use your words, incentive-
based.
Mr. Pickering. Ms. Breathitt--if that is the correct way to
pronounce it?
Ms. Breathitt. My opening statement reflected that I think
a voluntary approach is the best course to be on at this time.
Mr. Pickering. Chairman?
Mr. Hoecker. I believe in supporting incentives in the
right context. If your question is should incentives be the
only mechanism for creating these institutions, I would have to
say no.
Mr. Pickering. So, you would support a combination of a
mandatory stick at the end as well as incentive-based approach.
Mr. Hoecker. Well, even voluntary. I think that a lot of
utilities find competition to be in their interest.
Mr. Pickering. So, you--are you saying that there is a way
to structure a voluntary, incentive-based approach without a
mandatory approach?
Mr. Hoecker. Well, that is what we have proposed. I don't
know if I would call it incentive-based entirely, but there are
certainly incentives that we are going to seriously consider.
Mr. Pickering. Commissioner Hebert?
Mr. Hebert. Incentive-based or voluntary. I am not sure if
you are using those synonymously. I know Commissioner Breathitt
had said voluntary. So, I guess to specific I would say
incentive-based.
Mr. Pickering. Commissioner Massey?
Mr. Massey. I support incentives for good performance once
the RTOs are formed. Performance-based rate incentives sound
like a good idea to me. The customers get good performance that
way.
With respect to joining bonuses, I am not in favor of
joining bonuses. I do believe----
Mr. Pickering. How would you define a joining bonus?
Mr. Massey. I would define it as giving some sort of a
financial sweetener to a utility to entice them to join an RTO.
My concern is that someone has to pay for those, and it is the
customers of the utility through higher rates, and if we can
achieve the formation of RTOs without increasing rates in that
way, that would be my preference. But once they are formed, I
do believe that we should find ways, through performance-based
rates, to incent good performance.
Mr. Pickering. Let me clarify in one additional way. If you
don't believe in bonuses, do you believe in sanctions or
penalties if they don't form RTOs or mandates to force
formation of an RTO of a specific size or specific criteria?
Mr. Massey. I would like to see RTOs form in every region
of the country, and----
Mr. Pickering. Does that mean FERC should have the
authority to mandate that?
Mr. Massey. Well, the Commission has market-based rate
authority, for example, which might be----
Mr. Pickering. So, just a clean, clear answer yes or no. Do
you support a FERC authority to mandate RTOs?
Mr. Massey. Yes, I do.
Mr. Pickering. Okay. So, 4 to 1, is that correct? Incentive
voluntary approach versus a mandated approach?
Mr. Hoecker. Well, let me clear about this.
Mr. Pickering. Maybe 3 to 2.
Mr. Hoecker. I think we are going to explore with the
industry ways to get our desired goals through a voluntary
approach, but that the Commission may find it necessary in some
instances in the future to explore other kinds of approaches.
If, for example, Congressman, all the utilities in your
part of the country were to join an RTO and began to enjoy the
benefits of that regional marketplace, but one or two utilities
with key transmission facilities refused to join or refused to
fill in the blank spots, the Commission is confronted with a
tough policy choice there.
Mr. Pickering. Okay. Let me now go into the details or the
substantive if you were to take an incentive-based approach.
Now, the chairman, Chairman Barton, has included some
incentives that were included in a bill by Mr. Sawyer that
would give incentives to form the RTOs or the transmission
organizations. Do you support those provisions, and what in
addition should be included in legislation to give the greatest
opportunity for a voluntary, incentive-based approach to work?
Let me start, first, with Commissioner Hebert, and then,
Chairman, if you want to add anything and anybody else on the
panel.
Mr. Hebert. Thank you, Congressman Pickering. I have
supported incentives, as you know, and I have had a
conversation, as well, with Congressman Sawyer, and he knows
that I do support that and think that is exactly the direction
that this Commission should move in.
If we do it voluntarily, not only do we save ourself the
time in not having to get out and mandate these, we also save
our time, because through the incentive process, you are not
going to have the lawsuits that you would otherwise have
through trying to force, such as you have right now with 888
and northern States. It is the better route to take. It is an
easier route to take, and with everything being as unclear as
it is right now, I see no reason to go in that direction.
But the exact incentives that you are looking for would be
something in the neighborhood of accelerated depreciation, an
increased return on equity based on risk, an acquisition
adjustment. Because in the end, when you are looking at the
acquisition of those assets, there are two things that have to
be answered. The selling company wants to know how much of it
can they keep? In other words, the stockholders want to know
how much of it can they keep? My suggestion is that you allow
them to keep half of it; the other half would go to the
ratepayers. When it comes to the other side, the acquiring
company wants to know what type returns they are going to be
able to make, and you need to also answer what the valuation
will be based on when it comes to their rate of return.
Mr. Pickering. Chairman?
Mr. Hoecker. I believe 202(h) is the provision you are
looking at, and I find the list of potential incentive
transmission pricing policies listed there to be pretty
attractive, and we are going to be sorting through those and
figuring out how we can make that or something similar work.
I would say, however, that the provision appears to provide
incentives to transmitting utilities to form RTOs, and I
suggest that the bill may be internally inconsistent in the
sense that there is a mandate and then this incentive
provision. I, frankly, think that utilities are going to want
to get in the transmission business or set up a separate
transmission company if they think that is going to be a viable
and competitive and economically sound line of business, and
that is what we ought to focus on--inducing good performance,
as Commissioner Massey says, but also making it clear that
these new companies are going to be able to attract capital in
the marketplace, expand the grid where necessary, and that they
are not going to be penalized in their rates of return because
of the establishment of a transmission company.
Mr. Pickering. How would you resolve the internal conflict?
Mr. Bilirakis [presiding]. We are running out of time here,
Chip.
Mr. Pickering. I yield back.
Mr. Bilirakis. I would hope that what they are telling us
is that the bill's language should be changed in that regard,
and I suppose that is where you were.
Mr. Pickering. Yes, they were going in the right direction.
Thank you, Mr. Chairman.
Mr. Bilirakis. Mr. Largent to inquire.
Mr. Largent. Thank you, Mr. Chairman.
Mr. Hoecker, does the FERC currently have the authority to
address market power in the wholesale markets?
Mr. Hoecker. We have authority to address market power most
specifically when we review mergers, when we set rates and
terms and conditions of service. I think that our market power
review is inherent in the Federal Power Act, but that there
are, I think, some limitations in terms of the kinds of
remedies we can achieve and how we can address market power
concerns in a more competitive environment when utilities are
required to change their conduct and not to, for example,
operate their transmission to favor their own generation.
Mr. Largent. Is the wholesale market not competitive today?
Is that what you are saying?
Mr. Hoecker. I don't think it is entirely competitive, no.
Mr. Largent. And why not?
Mr. Hoecker. Well, I think it is--I think, first of all,
there are big parts of the wholesale market that are not
subject to open access or part of the interstate----
Mr. Largent. Like TVA or munis or----
Mr. Hoecker. Yes, I think that is certainly a big question
as to how we could possibly assure against the exercise of
market power in those instances.
Mr. Largent. What about in areas that FERC does have
authority over the transmission with IOUs? Have you, at the
FERC, have you guys looked at cases where you believe market
power has existed, but you felt like that your remedies have
fallen short?
Mr. Hoecker. Well, RTOs maybe, you can view that as one
example. The fact is that utility companies have come through
this century as largely vertically integrated companies with
transmission distribution and generation and that will, quite
understandably, work in the market in ways that will favor the
biggest return on all those assets together.
RTOs are one way of separating or functionally
disaggregating parts of the industry so that there is more
competition, there is more confidence in the impartiality,
shall we say, of the operation of the transmission system.
Without remedies like that separation and I very seldom bring
up the ``D'' word, because it is kind of a red flag, but
without those kinds of remedies, we have to resort to things
like cost of service ratemaking and to treat utility companies
as if we were in the 1960's instead of on the verge of a new
millennium and a market economy for energy.
Mr. Largent. Well speaking of that, have you guys ever had
to do that? In other words, revoke somebody's market-based
rates as a penalty for exerting market power?
Mr. Hoecker. Well, we have granted market-based rates in
hundreds of instances, but we have said, for example, that in
certain geographic areas or certain markets where competition
cannot be shown in the generation area, we would not grant
market-based rates.
Mr. Largent. You have done--you have denied----
Mr. Hoecker. We have done that, yes.
Mr. Largent. Okay. Let me ask you another question, and
that is that different regulatory schemes found within Mr.
Barton's bill on transmission, on bundled versus unbundled
sales. Is that workable? I mean, how can you do that?
Mr. Hoecker. Are you talking about section 101?
Mr. Largent. What section is that?
Mr. Hoecker. The jurisdictional provision.
Mr. Largent. I think it is section 101.
Mr. Hoecker. Yes.
Mr. Largent. Where you have a State PUC regulating
transmission for bundled sales and FERC regulating transmission
of unbundled sales, and how do you do that on a national grid?
I mean, is that workable?
Mr. Hoecker. It is difficult. I think that the Federal
Power Act speaks to our jurisdiction over transmission and says
very little else. But over the years, we have accommodated the
States, and they have generally regulated the rates, terms and
conditions of service or transmission that is bundled in a
retail transaction. And I think that that is an effort to
strike a balance over the use of facilities that we share
jurisdiction over arguably. And that works okay if we can all
agree.
Mention was made earlier and in my testimony about the 8th
Circuit decision that would allow States to, rather than
curtail their own native load or their own retail markets, to
prefer those and to curtail somebody else, and that is on the
transmission level. That decision is somewhat problematic,
because in Order 888 we said that all uses of the transmission
should be comparable; that is, if a utility finds itself
constrained in terms of transmission and has to curtail, it
should do that pro rata across all uses of that transmission.
This court decision appears to say that that is an interference
with the retail marketplace even though we are talking about
transmission.
It is a very confusing area, and if that decision were
applied very broadly, I think there is a substantial risk of
some serious balkanization of the wholesale marketplace. And,
quite frankly, I think a competitive marketplace where everyone
gets the same treatment in terms of use of the wires, is the
best protection that State retail customers and State
commissions have, and I hope we can persuade them of that.
Mr. Largent. Mr. Chairman, I see my time is up. I want to
take advantage of this excellent panel and hopefully get a
chance on a second round of questioning.
Mr. Bilirakis. Well, that is really up to Mr. Barton. I do
know that the next panel has been sitting very patiently since
10 o'clock this morning, but that is up to the chairman and
whatever he should decide to do.
Mr.--he has gone to Norfolk?
Mr. Markey to inquire.
Mr. Markey. Thank you, Mr. Chairman. Thank you very much.
Mr. Bilirakis. Your time started a few seconds ago.
Mr. Markey. Thank you, Mr. Chairman.
Welcome, sir. I would like to examine the Barton bill and
have you look at section 101 and ask whether or not you believe
that that section codifies the recent 8th Circuit decision and,
if so, what impact that would have on FERC's ability to prevent
utility monopolies to grant themselves preferential service for
their own use and prevent competitors from fairly, effectively,
and efficiently utilizing the transmission grid?
Mr. Hoecker. Well, arguably, you can certainly read the 8th
Circuit decision as doing just that. Whether this language--I
think this language basically codifies what we said in Order
888, which is that to the extent transmission is bundled within
a retail service, to that extent, we would defer to the States
in terms of the regulation of rates and terms and conditions of
service, provided--and this is a big provided--provided that
all uses of the transmission system are comparable and that a
utility applies its curtailment policies, for example, on a
prorated basis to the all the uses. The 8th Circuit departs
from that formulation, but I don't necessarily see this
language adopting that.
Mr. Markey. You don't--so you don't--in your view, section
101 does not undermine the Commission's comparability standard?
Mr. Hoecker. I don't think it has to, and I think that the
Commission----
Mr. Markey. You don't think it has to? I mean, is it clear
that it does or doesn't or would you need--do you need to be
clarified or are you going to leave it for a court decision?
Does the 8th Circuit have to go in and clarify? I mean, what do
you mean it doesn't necessarily have to?
Mr. Hoecker. Well, I would put it this way: The call here
that States have authority over that portion of transmission
that is bundled within a retail service was a call that this
Commission made in 1996, and if the principles of comparability
are adhered to by providers of transmission, I don't think that
that necessarily has an adverse effect on our competitive
objectives.
If, however, like the 8th Circuit decision, this
jurisdictional call is leveraged into the kind of
discriminatory practice that you are talking about, that is a
problem. I don't necessarily think that this language
necessarily gets us to that point, but it certainly lays the
predicate for it. I agree with you.
Mr. Markey. Okay. Now, the RTO provisions of the Barton
bill appear to tell the FERC to accept utility RTO proposals
but give FERC no other options. Is that a correct assessment?
Mr. Hoecker. I am very sorry; would you please say that
again?
Mr. Markey. I said that the RTO provisions in the Barton
bill appear to tell FERC to accept utility RTO proposals but
give the FERC no other options. Is that your reading of the
Barton language?
Mr. Hoecker. Yes, I think that it pretty much says if the
utility proposal conforms to the criteria in the statute, that
we should accept it.
Mr. Markey. Okay. So, under the RTO proposal, can FERC
reject an RTO that is too small, not sufficiently independent,
or without adequate authority?
Mr. Hoecker. Under the legislation, I think we could. It
does refer to scope and configuration, and I am assuming that
we would have to be clearer and more detailed in the statute in
implementing that provision.
Mr. Markey. So, you think you would have sufficient
latitude, then, to foster an RTO that satisfies the minimum
conditions under the language?
Mr. Hoecker. Yes. The real problem I have is that it is not
clear that 2, 3 years hence these are necessarily going to be
all the appropriate minimum conditions that might be desirable
from a commercial standpoint.
Mr. Markey. Okay. So, in you mind, what would be the reason
for providing incentives to an RTO that is already in
existence?
Mr. Hoecker. I think that the view I have of incentives
generally runs to encouraging utilities to engage in the most
efficient economic behavior. Certainly, whether or not they are
in RTOs, we would want them to do that, but in particular I
think that the benefits of RTOs and the benefits of incenting
utilities to perform better is worth it to this Commission, and
hopefully the Congress, to sweeten the pot a little bit.
Mr. Markey. If I am correct, do you establish the FERC----
Mr. Bilirakis. The gentleman's time is up. Now, how much
further?
Mr. Markey. I have one question.
Mr. Bilirakis. One question with a very brief answered
required.
Mr. Markey. If I am correct, the established FERC position
is to eliminate rate pancaking. Is the provision on incentive
rates or phasing out pancaking at odds with FERC policy?
Mr. Bilirakis. Brief response, please.
Mr. Hoecker. I don't think it is.
Mr. Markey. You don't think it is.
Thank you, Mr. Chairman.
Mr. Bilirakis. Mr. Bryant, who has been waiting very
patiently.
Mr. Bryant. Thank you, Mr. Chairman. I will be brief. I
want to yield the balance of my time to my colleague from
Oklahoma.
But, Mr. Chairman, I have a question regarding H.R. 2944
and its allowance to TVA to sell wholesale power outside the
so-called fence. Could TVA get FERC approval to charge market-
based rates for these sales outside the fence? And, if you
could, could you answer that for me in writing?
Mr. Hoecker. I would be delighted to do it in writing.
Mr. Bryant. Okay. And, second, my concern is that we
deregulate--we truly deregulate as best we can, realizing there
is a need for some regulation. What--could you answer again in
writing what you anticipate under a Barton-type bill to be the
growth in the size of your organization? I assume you are going
to need additional manpower, funds, and so forth. If you could
give us somewhat of a reasonable projection based on a Barton-
type bill.
Mr. Hoecker. I will do the very best.
Mr. Bryant. Is that feasible? Okay.
And at this time, I would yield the balance of my time to
Mr. Largent.
Mr. Largent. Thank you, my friend from Tennessee.
Mr. Hebert, I wanted to ask you one question about part of
your testimony on page--well, what page is it; there is not a
number on it. But you said that earlier existing ISOs failed
the independence test. Could you comment on that?
Mr. Hebert. Yes, thank you, Congressman Largent. The ISOs
as we know them today, the very genius in the ISO itself is in
the name--independent system operator--where they are anything
but truly independent, because you have a stakeholder group who
is going to make the decision when it comes to planning and
forecasting and the organization itself. And to become
completely independent my suggestion is that we move toward an
independent transmission company that has total separation from
operation and control. We have someone who is in the
transmission business.
Now, as you know, and you and I have had private
conversations, and it is my testimony and my belief that at
rates of return of under 10 percent certainly we are not going
to get people in the transmission business, so we have got to
give pricing signals to get them in the business. Now, the way
for us to do that is through the incentive process, and you
will have people come to the table. I have people come to my
office and speak with me privately. I had a gentleman in my
office I was speaking about earlier today who had $50 billion
who was ready to put one together. These people are ready to do
it, but they are not going to do it for less than 10 percent
when on the open market they can make 12 and 15 and 18 every
day.
Mr. Largent. Well, the current--the ISOs that exist today,
do they not have consumer advocate groups that are part of the
board or----
Mr. Hebert. Yes.
Mr. Largent. But you are saying that they don't--it is the
IOUs or the stakeholders that dominate the board is what you
are saying.
Mr. Hebert. Well, the consumer groups are one of the
stakeholders. You also have the companies themselves. You have
stakeholder groups which are defined by the ISO themselves.
Mr. Largent. But I am talking about consumer advocacy
groups that are not stakeholders in transmission or--I mean,
there is not consumer groups that are stakeholders in owning
generation assets or transmission assets or distribution
assets, are there? I mean, you said that consumer groups are
stakeholders. In what sense? As ratepayers?
Mr. Hebert. No, in the sense--let me give you California,
for example. You have consumer advocates, which I don't know
how many seats they hold currently on the committee, but they
hold seats on the committee.
Mr. Largent. Right.
Mr. Hebert. Which is a committee of 25, I believe.
Mr. Largent. Well, I guess when I heard you say
stakeholders, I assumed you meant that people who were
regulating themselves. Consumer groups aren't regulating
themselves other than being ratepayers. You see what I am
saying? I mean, if a consumer advocacy group is sitting at the
table, now there may be an issue about the ratio of IOUs versus
consumer groups that throws the balance to what I term
stakeholders, and that may be an issue. Maybe that is what you
are talking about in terms of losing independence. Is that what
you are saying?
Mr. Hebert. Well, I guess part of the problem you and I are
getting into is semantically in that I have become quite
confused on exactly what a consumer group is, be it from my
days in the State legislature to chairman of the State
commission, to here. What is a consumer group to one is
certainly just an advocate for an interest to another, as you
know. You know that; you deal with on a daily basis.
But the ISOs themselves are not independent to the extent
that you don't have total separation from operation and
control. The operators are still players in controlling the ISO
itself. When it comes to an independent, for-profit
transmission company, you have total separation.
Mr. Largent. I gotcha. Okay, thank you, Mr. Chairman.
Mr. Bilirakis. Mr. Hall, do you have a further question for
these--the chairman is in the other room, and he wants to ask
some questions, and--he does not prefer to go into a second
round.
Mr. Hall. You mean, he wants a round and----
Mr. Bilirakis. No, his round--he hasn't had his round yet.
Mr. Hall. Well, we don't want one either.
Mr. Bilirakis. He wants to ask questions from the first
round, but I am willing to recognize members of the panel for
one question each, if they would like, until he comes in. I
hereby recognize you.
Mr. Hall. Mr. Chairman, if we would be allowed to submit
questions and the panel would agree to answer them within a
week, because we may be marking this up in a week or 10 days.
Mr. Bilirakis. By all means. That of course is a request of
the panel regarding all questions.
I would ask this then: Some charge that H.R. 2944 codifies
the northern States power decision and balkanizes transmission
regulation by providing for State regulation of the
transmission used in retail sales--the subject we were on a few
minutes ago that Mr. Largent went into. In your view, does H.R.
2944 codify the northern States decision or does it codify
Order 888, and does it in fact balkanize transmission
regulation?
Mr. Chairman?
Mr. Hoecker. In my view, my reading of the bill is that it
codifies the jurisdictional call in 888. It doesn't necessarily
codify the decision.
Mr. Bilirakis. Any further quick responses to that? Mr.
Hebert? Mr. Massey?
Mr. Massey. Mr. Chairman, I would not legislate that
division of authority. That is the call we made in Order 888,
but it would concern me somewhat to legislate it, because I am
not sure what flows from that, and it may be that it would lead
to a further balkanization of the marketplace that we would see
over time as things develop. So, my preference would be not to
legislate that distinction between bundled and unbundled
transactions.
Mr. Bilirakis. Mr. Hebert?
Mr. Hebert. Thank you, Mr. Chairman. As to Northern States,
I would have to agree with the chairman--I think it is a very
close call. I don't know. It would be my thought initially that
it does not codify the Northern States' case. However, when it
comes to 888, it does not in fact codify 888, but what it does
do is codify the authority to issue 888.
Mr. Bilirakis. Any further comments?
Ms. Breathitt. With respect to bundled versus unbundled
retail sales, I would think that at some point in time the
other 25 States will probably make decisions to have retail
open access, at which time there won't be any more bundled
retail sales; that would go away. If you had it in the
legislation, it may become outdated.
Mr. Bilirakis. Yes, well, it is an area that needs to be
clarified, certainly.
Mr. Sawyer, do you have anything you want to offer?
Mr. Bryant?
Mr. Largent?
Mr. Chairman?
Mr. Barton. Thank you, Mr. Chairman. I would like to ask my
5 minutes of questions now.
Mr. Bilirakis. By all means, please do so.
Mr. Barton. I want to thank the entire Commission for being
here this afternoon. I have a few fairly simple questions.
First, I want to ask if the Commission is generally
supportive of the provisions in the current draft on Bonneville
and the TVA in terms of FERC authority that is extended to
those Federal utilities?
Mr. Hoecker. I am.
Ms. Breathitt. I am.
Ms. Bailey. I am, also.
Mr. Massey. Yes, I am too.
Mr. Hebert. I am, Mr. Chairman, with the exception--I think
what you are trying to accomplish is the right thing; however,
I have told you privately, as well, I think the best way--and I
understand bills are made of compromises--but the best way
would be to sell of those transmissions assets to a
jurisdictional utility instead of increasing the authority that
FERC has.
Mr. Barton. Okay, I understand that.
Second, we have got several members of the subcommittee on
both sides of the aisle that are very concerned about FERC
jurisdiction over the transmission system in terms of
cooperatives and municipals. We have put in a small
transmitting utility exemption. We also encourage distributed
generation facilities. Currently, it is at 50 megawatts, and I
am getting a lot of complaints that that is too big. Does the
Commission have a number that you would feel comfortable with,
if we took that from 50 megawatts and took it down to a smaller
number? And if you do, I would sure like to hear your number.
Mr. Hoecker. Mr. Chairman, I know that I don't have a
number. I think that interconnection for small distributed
generation is certainly appropriate. I don't know what the
feasible cutoff would be from a statutory perspective.
Mr. Barton. Okay. Does the number 10 megawatts strike a
bell with anybody? Or you just don't want to say?
Ms. Bailey. I think from the standpoint of a 50 megawatt, I
think there are some power plants that can be 50 megawatts, so
that is why you are getting some feedback probably on that.
Mr. Barton. Yes. And we realize that we have been too
generous, and we--we, I; I am not going to blame the
subcommittee for this. Okay.
What about the provisions we have put in on self-
certification for cooperatives if they send a letter to the
Commission that they are not FERC jurisdictional? Have you
all--that they are not a transmission cooperative and they are
not going to be FERC jurisdictional. We have tried to make that
as simple and as easy as possible, because the cooperative said
that they didn't have the funds to hire high-priced attorneys
and things like this. Have you all looked at those provisions,
and, if so, are those acceptable to the Commission?
Mr. Hoecker. Speaking for myself--we haven't talked--but we
have instances in other statutes for self-certification, and I
think that we could make that work. We have provided waivers
from open access for small cooperative utilities even if they
owned transmissions. So, it is something that we have some
sympathy for.
Mr. Barton. Okay. Three of you are former State regulators,
and if I were to summarize the dispute between the subcommittee
in terms of how to reach the goal of competition, there is one
group that thinks we ought to defer as much as possible to the
States and be as circumspect as possible in terms of additional
authority at the Federal level. And that is where the current
draft is. There is another group that feels like that we need
more direct Federal intervention to get to the market that
everybody supports.
In your opening statements, all of you were generally
supportive of the thrust of the bill, which does not have a
Federal mandate in terms of a date certain, and it does defer
generally to the States in any area that it can. Are you all
comfortable with that approach?
Mr. Hebert?
Mr. Hebert. Mr. Chairman, if I may, the August 4 draft used
the term ``maximum practical deference'' to the States, which I
thought was preferable to the language of this one. I think you
just the term ``deference.'' So, if I had to choose the
language of the two, being a former State legislator and State
chairman, I would suggest that ``maximum practical deference''
would be preferable.
And a lot of that would have to do with which boulevard you
take. Which end of the boulevard are you going down, and if you
are going down the one which takes you toward mandates, then
you probably don't want to give as much deference. But if you
are going toward voluntary incentive-type systems and RTOs,
then maximum practical deference I believe would work and be in
the best interest.
Mr. Barton. Any other Commissioner, Ms. Breathitt?
Ms. Breathitt. I haven't read NARUC's comments that will be
proffered soon by my friend, Marsha Smith from Idaho, but the
history of the Commission working well with the States to work
out the difficulties where our jurisdiction butts up against
their jurisdiction, it is fairly well defined in the Federal
Power Act. To be a little bit more direct, unless there is
something that I don't know at this point, I think your current
bill keeps those lines well divided.
Mr. Barton. Last--oh, Mr. Chairman--Hoecker?
Mr. Hoecker. I just want to make an observation, Mr.
Chairman. I don't think over the last half dozen years you will
find a commission that is more deferential and accommodating to
State interests. This integrated industry that we are talking
about today affects both Federal and State interests
profoundly, and we try to accommodate them in a variety of
ways. We have been deferential in terms of their ability to
recover stranded costs. We have been deferential in terms of
their jurisdiction over bundled retail service. We are
deferential in terms of their ability to regulate reliability
at the retail level, and even in some transmission areas, I
would be deferential. We are deferential in terms of their
ability to have access to books and records if PUHCA is
reformed. We are deferential in terms of how we try to
facilitate retail competition. And we have really, I think,
gone more than the extra mile in that regard.
But make no mistake about it, what we are talking about
here is regulation of an interstate--of interstate commerce in
electricity, and at some point I think there has to be a
recognition that there is a large Federal interest at stake
here and that we need to take action at the wholesale level to
make competition happen.
Mr. Barton. Mr. Hebert, and then my time is expired.
Mr. Hebert. Mr. Chairman, just one other quick observation.
Mr. Barton. We will let Ms. Bailey--Commissioner Bailey--we
are going to give everybody a shot now. So, you all waited a
long time. That is why we wanted all five of you here.
Mr. Hebert. Just a quick observation. As you know, once we
start arguing what the intent of Congress was or is, we have to
look at clarifying language, and whatever you pass, if you do
pass something, if you come out with deference, I can guarantee
you there will be a day at the FERC, at the Commission table,
where someone argues they didn't mean maximum, they mean
practical, they just meant mere deference, because they had the
opportunity to do something else.
Mr. Barton. Okay.
Mr. Hebert. Thank you.
Ms. Bailey. Mr. Chairman, let me just suggest that the
issue of deference is because traditionally, historically, the
bulk of the jurisdiction has been with the States. The States
are very critical to your vision and our vision of this
competitive electricity competition bill and reliability
legislation that you have here.
Legislation that just transfers more authority to FERC is
not useful in this process, I think, to the extent that what
you are seeing now is the result of successes of the
initiatives that FERC has done and that should be built upon,
and I think the States are at the point where they could help
us do that. So, I am definitely in the camp where with
cooperation and collaborative efforts with the States, I think
is very necessary.
Mr. Barton. Thank you. Thank you, Mr. Chairman.
Mr. Bilirakis. Thank you, Mr. Chairman.
I think we have completed the questioning from the panel
here, and thanks so much. You have been very, very patient and
very busy people, and you have sat here very patiently through
these many hours. We appreciate it. You have been an awful lot
of help.
Thanks, Mr. Chairman, and members of the Commission.
The next panel will also have been most patient. The
Honorable Marsha Smith, commissioner of Idaho--with the Idaho
Public Utilities Commission, representing the National
Association of Regulatory Utility Commissioners, and Mr. Irwin
``Sonny'' Popowski, Pennsylvania Consumer Advocate Office of
Consumer Advocate, Harrisburg, Pennsylvania, representing the
National Association of State Utility Consumer Advocates.
If they would come forward, please.
Let us have a little bit of order. The hearing has not
ended.
Your written testimony has already been presented and a
part of the record, and I will set the clock at 5 minutes.
Obviously, I won't cut you off if you go over it to some
degree. You have been very patient. We appreciate your taking
the time, both of you, to be here.
And we will recognize Ms. Smith to present her testimony.
STATEMENTS OF MARSHA H. SMITH, COMMISSIONER, IDAHO PUBLIC
UTILITIES COMMISSION, REPRESENTING THE NATIONAL ASSOCIATION OF
REGULATORY UTILITY COMMISSIONERS; AND IRWIN ``SONNY'' POPOWSKY,
PENNSYLVANIA CONSUMER ADVOCATE OFFICE OF CONSUMER ADVOCATE,
REPRESENTING THE NATIONAL ASSOCIATION OF STATE UTILITY CONSUMER
ADVOCATES
Ms. Smith. Mr. Chairman, thank you for this opportunity to
be here today. I really appreciate it. And the first thing I
want to say is to thank the chairman for his hard work on the
bill that we are considering today and to thank the staff of
the committee, the subcommittee, for being always available and
attentive to listen to the State concerns, which have been
many. So, we really appreciate your hard work.
This is a lengthy bill with many provisions, and of course
it is not possible to address them all in 5 minutes, so I am
going to hit on a few key provisions that are still very
important to us.
First of all, we strongly support reliability legislation.
There is a need to move from the current voluntary system to a
mandatory system. Title II will have our unqualified support if
a glaring omission is corrected. And that glaring omission is
that there is no role for State policymakers in the process
outlined. And there must be a role for the State policymakers
in reliability. Who gets the calls when the lights go out
because of transmission system trouble? Governors and State
public utility commissions, that is who. It will not be
acceptable to tell folks at home to call FERC or Congress or a
national reliability organization. This is not only good policy
but just plain common sense.
We propose two additions to the reliability section of the
bill. Our proposed language is attached to my written
testimony. First, we suggest a savings clause for those States
which now exercise authority to ensure reliability. Don't take
from the States, which already exercise their existing
authority to deal with their specialized concerns.
Second, we suggest a statutory process for a State advisory
role at the regional level. Recently, opponents of the advisory
role have raised the specter that it will balkanize and be
another layer of regulation. All you have to do is look at the
successes in the western interconnection to know that the
opposite effect will occur. This will be a process to
efficiently and cooperatively address, at the regional level,
the concerns that arise at a regional level. It is not another
decisionmaker or level of regulation or bureaucracy.
The two provisions we propose have widespread support. You
already have letters from numerous groups representing a wide
variety of interests nationwide. Please add these provisions to
the bill.
We really appreciate the evidence that our earlier comments
were heard and that there is no mandate for States to implement
retail competition by a date certain. Nearly half the States
have acted to date; others will follow in an appropriate manner
and at a time that is right for them. So, it makes little sense
to us, and we oppose the provisions of the bill that impose
hard reciprocity. That is a detriment to States trying to
create the most active and efficient retail competition.
Why limit the choices their consumers can enjoy? Why limit
off-system revenues that can lower rates? If the purpose of the
legislation is to lower consumer electric bills, then
reciprocity does not belong in it. Furthermore,
interconnections also go beyond national boundaries. So, to the
extent that reciprocity is also imposed on an international
basis, it causes difficulty for States that have boundaries
with Canada and Mexico.
On distributed resources, I want to point out that many
States are strong supporters of distributed resources and
technologies, and some believe that those are the future of
this industry. A 1998 NARUC resolution supporting greater
consistency in terms and conditions of interconnection of small
scale generating units demonstrates our support.
Unfortunately, the provisions of section 542, dealing with
special rules for distributed generation, will not encourage or
facilitate the development of these technologies. Instead, they
are likely to create more problems and probably delay and
hamper the deployment of distributed resources.
Interconnection on the local distribution level is a State
and local concern. It has serious consequences for distribution
reliability. FERC is not the correct entity to oversee these
types of interconnections. The State commissions are in place
to address these very local concerns, and will be able to do so
faster and with better results, because they are aware of
different concerns that may apply to different systems. A
statement by Congress expressing a Federal policy to encourage
distributed technologies would be positive. The provisions of
section 542 may be disastrous. Public safety is at issue as
well as electric reliability at the local level.
I am very pleased to see that responsibility for the
formation of regional transmission organizations, or RTOs, has
been placed on the industry and the regions. All of the regions
of the Nation are actively engaged in forming or working toward
forming the right regional body in terms of geographic scope
and governance structure. I do share some of Commissioner
Bailey's concerns with the dates that are in the bill and
believe that they may not be realistic.
I would like to emphasize that State jurisdiction over
retail services must be retained regardless of the facilities
used. System maintenance, planning, and siting are core State
responsibilities and must remain so. We are concerned with
legislating the FERC's seven factor test out of Order 888.
Instead, we urge a wholesale-retail test, a transaction test,
not a wires classification test.
The bill could also be enhanced by the provisions to secure
public benefits that may otherwise be lost. NARUC supports
maintaining programs that support energy efficiency, renewable
technology, research and development, universal service, and
low-income assistance.
With that, Mr. Chairman, I would commend to you the written
comments, which in more detail outline our concerns with the
bill but recognizing that it is a good place to start.
[The prepared statement of Marsha H. Smith follows:]
Prepared Statement of Marsha Smith, Commissioner, Idaho Public
Utilities Commission and Vice Chair, National Association of Regulatory
Utility Commissioners
Mr. Chairman and Members of the Subcommittee: My name is Marsha
Smith. I am a Commissioner on the Idaho Public Utilities Commission and
Vice Chair of the National Association of Regulatory Utility
Commissioners (NARUC) Committee on Electricity. I also serve NARUC as a
member of the Ad Hoc Committee on Electric Industry Restructuring. In
addition, I am Chair of the Committee on Regional Electric Power
Cooperation (CREPC), a committee of the Western Interstate Energy Board
(WIEB). WIEB is an organization of 12 western States and 3 Canadian
Provinces. I respectfully request that NARUC's written statement be
included in today's hearing record as if fully read.
NARUC is a quasi-governmental nonprofit organization founded in
1889. Within its membership are the governmental bodies of the fifty
States engaged in the economic and safety regulation of carriers and
utilities. The mission of NARUC is to serve the public interest by
seeking to improve the quality and effectiveness of public regulation
in America. More specifically, NARUC is comprised of those State
officials charged with the duty of regulating the retail rates and
services of electric, gas, water and telephone utilities operating
within their respective jurisdictions. We have the obligation under
State law to assure the establishment and maintenance of such energy
utility services as may be required by the public convenience and
necessity, and to ensure that such services are provided at rates and
conditions which are just, reasonable and nondiscriminatory for all
consumers.
I greatly appreciate the opportunity to appear on behalf of NARUC
before the United States House of Representatives, Committee on
Commerce, Subcommittee on Energy and Power regarding H.R. 2944, the
``Electricity Competition and Reliability Act.'' I commend the Chairman
for holding this hearing and for the work and effort by you and your
staff to produce this legislation. NARUC and its members appreciate the
complexities you have confronted while trying to get H.R. 2944 to this
juncture. We would also like to thank you for your consideration of our
views throughout this process and your efforts to reach a compromise on
issues important to the States.
Since the beginning of the debate in Congress regarding electric
industry restructuring NARUC has been guided by a set of basic
principles in the transition to competitive retail electricity markets.
A general theme of these principles is that the States should have
jurisdiction over components of the competitive retail electricity
market, including reliability and FERC jurisdiction should be focused
upon components of the competitive wholesale electricity market. To
this end our principles are intended to support State restructuring
initiatives and to provide customer choice while ensuring the continued
provision of adequate, safe, reliable and efficient energy services at
fair and reasonable prices at the lowest long-term cost to society.
In light of the local impact that restructured retail markets will
have, State commissions and legislatures should decide whether, when
and how local markets should be opened to greater competition. We would
like to express our appreciation for your decision to not include a
date certain mandate in H.R. 2944.
A brief summary of NARUC's restructuring principles:
<bullet> The safety, reliability, quality and sustainability of
services must be maintained or improved;
<bullet> All consumers must share the benefits of structural
improvements and be protected from anti-competitive behavior,
undue discrimination, poor service and unfair service
practices;
<bullet> Public benefit programs must be maintained, including those
which support energy efficiency, renewables technologies,
research and development, universal service and low-income
assistance; and
<bullet> States and State commissions must be afforded the flexibility
to determine retail electric policies, including the content
and pace of restructuring programs and retail stranded cost
determinations.
Based on these basic goals, NARUC believes that Federal legislation
could enhance restructuring initiatives by:
<bullet> Affirming State authority to order and implement retail
access/customer choice programs free from the threat of
preemption under the Commerce Clause or the Federal Power Act;
<bullet> Affirming States' authority to impose wires charges to support
the recovery of stranded costs, State-sponsored energy
efficiency and/or environmental and renewables programs, and
universal service programs;
<bullet> Affirming States' authority to regulate retail power delivery
services regardless of the facilities used, thereby eliminating
the threat of customers bypassing the local distribution
network;
<bullet> Reaffirming States' exclusive jurisdiction over the rates,
terms and conditions of retail electric services, including
retail transmission services;
<bullet> Authorizing the voluntary formation by States of regional
regulatory bodies to enable States to address regional
transmission and system operation concerns; and
<bullet> Reaffirming a State role in reliability.
I would now like to devote the remainder of my time to discussing
H.R. 2944.
discussion of pending legislation
Title I--Open Transmission Access
Section 101 of this Title provides that the States shall have the
authority to require retail competition or unbundling of transmission
and distribution. The Federal Energy Regulatory Commission (FERC) is
given exclusive jurisdiction over unbundled retail transmission but is
specifically denied jurisdiction over bundled retail sales of
electricity subject to State regulation. The Section permits States to
impose charges on retail services for public purpose programs. It also
gives FERC the authority to determine whether a particular delivery
facility is FERC jurisdictional or State jurisdictional, using the 7
factor test found in Order 888. When making this determination, FERC
shall give ``deference'' to the position taken by the State.
NARUC supports the provision found in this section that affirms
State authority to implement retail competition and is pleased that the
bill denies FERC jurisdiction over bundled retail rates and services.
However, we also support legislation that affirms State authority to
regulate retail power delivery regardless of whether the facilities are
transmission or distribution. Accordingly, while we applaud H.R. 2944
for preserving State authority over bundled services, we also support
State authority to regulate all services provided retail consumers on
an unbundled basis, including transmission.
Additionally, NARUC supports the provisions of H.R. 2944 that
affirm State authority to: impose non-bypassable charges to support
stranded benefits including implementation of programs to promote
energy efficiency, renewable energy resources, and support for low
income consumers; implement programs to promote energy efficiency and
renewable energy resources, and to support low-income and rural
consumers; and ensure that all market participants adhere to
appropriate health, safety, reliability and consumer protection
standards. However, NARUC also supports the inclusion in legislation of
workable mechanisms to support State public benefits programs that
consider a Federal-State partnership with broad-based competitively
neutral funding mechanisms, and Federal support to assist and encourage
the States to develop and implement public purpose programs that meet
the needs of the States and the Nation. In addition, we continue to
support funding for public purpose research and development programs
based upon taxes and tax credits and non-bypassable system charges.
Concerning the identification of facilities as ``transmission'' or
``distribution'', NARUC has serious reservations regarding the
workability of provisions in H.R. 2944 that codify the FERC Order 888
seven factor test. Application of this standard can hardly result in an
intelligible ``brightline'' between State and Federal jurisdiction as
the Supreme Court directed over 30 years ago. We believe that the
retail/wholesale test removes uncertainty and avoids the need to
categorize every piece of wire in the nation when it is necessary to
draw the transmission/distribution distinction. NARUC also supports
legislation that would authorize States to form voluntary regional
bodies to define the character of transmission facilities.
In Section 102, the bill extends FERC jurisdiction to
``transmission utilities'' defined as ``any entity (including State and
municipality) that owns or operates facilities used for transmission''
of electricity. The Section also authorizes FERC to address recovery of
stranded wholesale costs.
NARUC has not taken a position on the extension of FERC
jurisdiction to non-jurisdictional entities or wholesale stranded cost
recovery. However, we would like to reiterate our opposition to FERC
authority over the recovery of any retail stranded costs, an issue now
being litigated in the United States Court of Appeals.
Section 102 also includes a provision that authorizes FERC to order
retail transmission services on behalf of retail customers served by an
open access distribution company. While NARUC does not have a specific
position on this issue, in general we support Federal transmission
policies that assist States in voluntarily opening retail markets.
Section 103 of H.R. 2944 requires transmitting utilities to
establish or join a Regional Transmission Organization (RTO) by January
1, 2003. Under this section FERC may approve, but not require, the
establishment of such RTOs. NARUC supports legislative language that
leads to the voluntary formation of ISOs. However, we believe that
legislation should clarify the authority of State and Federal
regulators to require that transmission owners transfer control of
systems to ISOs, where necessary to ensure a competitive market, in the
event voluntary action is not effective. In addition, NARUC supports
legislation authorizing formation of voluntary regional bodies to
address transmission system issues.
This Section also includes a savings clause allowing State
commissions to address transmission issues, including maintenance,
planning and siting, ``in a manner consistent with this Act and FERC
decisions under this Act.'' We believe it to be fundamental that
legislation regarding retail electric competition affirms the authority
of States to regulate retail power delivery services regardless of
facilities used. This provision, as drafted, does not meet this
fundamental principle. Maintenance, planning and siting are core
responsibilities of the States, and must remain so, and not to FERC
jurisdiction under the FPA.
In Section 104 of this bill Congress authorizes the formation,
under FERC approval and oversight, of interstate compacts for regional
transmission siting. NARUC supports legislation authorizing formation
of voluntary regional bodies to address transmission system issues such
as the definition of transmission and distribution facilities,
operation of transmission systems (including supervision of ISOs and
PXs), system planning, transmission pricing and facilities siting.
However, our policy on voluntary regional bodies does not contemplate
FERC approval and oversight. Additionally, we believe transmission
siting must remain State jurisdictional.
Section 105 of H.R. 2944 gives FERC authority to order the
expansion of transmission facilities, subject to State and local laws
concerning property rights and siting, upon utility application and
requires FERC to convene a joint board for the purpose of receiving
recommendations before transmission expansion may be ordered. NARUC has
a long history of support for FERC authority to convene joint boards.
However, NARUC does not support FERC authority to order expansion of
transmission facilities if that authority preempts State authority over
siting, system planning or retail power delivery services.
title ii--reliability
The reliability of the nation's electric system is one of the most
important issues in this debate, and NARUC believes that Federal
legislation must indeed address this subject. Federal legislation
should facilitate effective decision-making by the States and authorize
States to create regional mechanisms for the purpose of addressing
transmission reliability issues.
NARUC cannot support reliability legislation that fails to provide
a role for States in ensuring reliability of all aspects of electrical
service, including generation and power delivery services, or results
in FERC preemption of State authority to ensure safe and reliable
service to retail consumers. To that end, we recently sent to the
Subcommittee two amendments to the reliability title to safeguard State
jurisdiction to secure safe, reliable and adequate service for retail
consumers. These amendments included a savings clause to protect
current State commission authority over retail service reliability
except for actions that harmed reliability, and a provision to
establish a voluntary regional body of State officials to advise
industry-based reliability organizations. Unfortunately, neither
amendment was included in H.R. 2944. While we appreciate inclusion of
the bill's savings clause to protect State authority over distribution,
it is clearly inadequate to remove legal clouds over State regulation
of transmission-related issues.
We continue to urge the Subcommittee to include our amendments in
this legislation. Further, we are prepared to consider alternative
formulations of State role provisions as this legislation moves
forward, whether as part of a broader bill or as a stand-alone
reliability bill. However, the inclusion of no meaningful role for the
States in addressing reliability issues is simply unacceptable.
NARUC, however, does support workable mechanisms to assist energy
efficiency programs that enhance reliability. We believe that
construction of new power lines is not the only way to strengthen our
reliability system. All alternatives must be on the table, including
initiatives on the customer's side of the meter.
In attachment 1 of this testimony, I have provided the Subcommittee
with amendments that addresses the State's concerns.
title iii--consumer protection
Section 301 requires that the Federal Trade Commission (FTC), in
consultation with FERC, the Department of Energy (DOE), and the
Environmental Protection Agency (EPA), issue rules for disclosure to
retail consumers. NARUC supports initiatives leading to minimum,
enforceable uniform standards for disclosure and labeling but believes
that such activities should occur primarily at the State level.
Therefore, NARUC would support consultation with State commissions as
well as FERC, DOE and EPA in any legislation creating a Federal role.
Section 302 deals with consumer privacy issues, and while NARUC
does not have a specific position on consumer privacy, NARUC believes
that Federal legislation ought to affirm State jurisdiction over the
terms and conditions of retail service.
Section 303 addresses FTC rules against slamming and cramming and a
savings clause for State disclosure rules that ``are not inconsistent
with'' FTC requirements. NARUC does not currently have a formal
position on slamming/cramming issues but we would support language that
affirms State authority to ensure adherence to consumer protection
standard.
Section 304 expresses a sense of Congress that States should ensure
universal service to all consumers. NARUC's principles on restructuring
affirm our view that universal service must be maintained in all
restructured markets.
title iv--mergers
Section 401 modifies FERC's authority over mergers by adding time
limits for decisionmaking, authorizes FERC to address mergers at the
holding company level, and directs FERC to assess the impact of mergers
on wholesale and retail markets. It also extends FERC's authority over
disposition of utility assets to include direct authority over
generating facilities rather than indirect authority over wholesale
power supply.
NARUC supports a Federal merger policy where both Federal and State
regulators (i.e. State commissions and the FERC) thoroughly evaluate
mergers to assess their impact on competition, access to transmission
and distribution facilities and ultimately on electric rates. We
believe that the role of economic regulators should complement review
by antitrust agencies to adequately protect the public against market
power abuses. NARUC also supports merger policies where State
commissions have primary responsibility to assess retail impacts of the
merger. FERC should support the States in this regard, particularly
when the State commissions in question lacks adequate State law
authority.
title v--promoting competition
Sections 501 and 502 of H.R. 2944 would establish reciprocity
provisions restricting sales into retail markets that are open to
competition. NARUC opposes these reciprocity provisions. Reciprocity
limits consumer choices and potential savings. Federally mandated
reciprocity provision will result in harm to retail customers. In the
case of a State with retail access, a reciprocity provision may remove
potential suppliers of lower cost power. In a State without retail
access, a reciprocity provision may eliminate opportunities for off ``
system revenues that could be used to reduce customers'' rates. In
either case, consumers are worse off under reciprocity.
In short, if the purpose of electric restructuring is to save money
for electric consumers then a reciprocity provision should not be in
the bill.
Sections 511-524 and 531-533 address PUHCA and PURPA. NARUC
supports reform or repeal of PUHCA as competition becomes effective
through comprehensive legislation. We support mechanisms that maintain
State and Federal authority over holding company practices and
preserves consumer protection provisions of recent legislation `` the
1992 Energy Policy Act and the 1996 Telecommunications Act. NARUC also
supports reversal of the Ohio Power decision and State access to books
and records. We oppose the legislation's provisions that grant FERC
authority to exempt holding companies and their affiliates from State
books and records requirements.
With regard to PURPA, NARUC supports legislation to lift PURPA's
purchase requirement where a State has made a finding that the
acquisition of generating capacity is subject to competition or other
acquisition procedures that protect the public interest with respect to
price, service, reliability and diversity of resources. Additionally
NARUC strongly opposes the provision in H.R. 2944 that grants FERC
authority to preempt the States by ordering the recovery of costs in
retail rates.
Section 541 authorizes aggregation of acquisition of power by
retail consumers in open retail markets, ``notwithstanding any
provision of State law''. NARUC has taken no specific position on
aggregation, but in general supports exclusive State authority over the
regulation of rates, terms and conditions of retail electric services.
Section 542 requires FERC to issue regulations requiring a local
distribution utility to interconnect with distributed generation
facilities presumably preempting State interconnection policies. While
NARUC believes that access to the electric supply market by small-scale
distributed resources can offer important public benefits (mitigating
market power, furthering innovation, easing transmission and
distribution constraints, increasing resource diversity, and expanding
customer choice), NARUC does not support FERC preemption of State
interconnection policies. State commissions should be the agencies
responsible for removing unnecessary barriers to interconnection.
title vii--environmental provisions
Sections 701 and 702 establish a renewable energy production
incentive, and provide for net metering, with a savings clause that
permits the State to impose a cap on net metering. NARUC supports the
inclusion of legislative provisions affirming a national commitment to
continued commercialization and supply of renewables. If Congress
adopts minimum national standards, such as a renewable portfolio
standard, NARUC supports the use of tradable credits as one market-
compatible mechanism to meet such standards. However, States should
have flexibility to apply and supplement any Federal standards.
NARUC also believes that it is the role of State commissions and
legislatures to choose to adopt net metering measures. It is the role
of Congress and FERC to remove legal barriers to State implementation
of net metering that may be contained in the Federal Power Act or
PURPA.
title vii--internal revenue code provisions
The only comment that we have with regard to this Title concerns
Section 803. NARUC supports the provision to allow deductibility of
decommissioning costs.
conclusion
Mr. Chairman, in conclusion let me again thank you and your
colleagues on the Subcommittee for allowing NARUC to participate in the
legislative process, not only through my appearance here today, but in
our informal discussions as well. Respectfully, let me state that we do
not support the enactment of H.R. 2944 as currently drafted. The bill's
failure to adequately provide a role for the States in the area of
reliability is enough to require us to withhold our support at this
time.
In 1978, Congress enacted five bills comprising the National Energy
Act, which for the first time injected the Federal government into
retail electric and natural gas service issues. Virtually all of those
statutes, with the exception of PURPA, have been either repealed or
consigned to irrelevancy. Congress is now poised to repeal PURPA,
completing its repudiation of the 1978 legislation's involvement in
retail utility markets.
We urge Congress to keep the lessons of the National Energy Act in
mind as it considers further retail legislation. We strongly support
the decision to abandon pursuit of the date-certain mandate. Having
made that decision, we now urge you to focus the attention of the
Congress on areas where new Federal laws can facilitate State
restructuring efforts and on areas where the Federal government can
work in partnership with the States to continue support for important
public purposes such as R&D, low income assistance, renewable energy
technologies, and energy efficiency.
If Congress chooses to act, Federal legislation should preserve
broad State authority to implement these policies flexibly in response
to the conditions in local retail markets. The development of retail
customer choice should be implemented in a manner that respects these
differences. In our view, that can only happen if decisionmakers
closest to these conditions--State commissions and legislatures--enjoy
the flexibility to adapt pro-competitive policies to the needs of local
retail consumers. In the weeks and months ahead, I and my colleagues
look forward to continue working with Congress and with all interested
parties to develop workable policies that support an efficient and
environmentally sound electric services industry that meets the needs
of all retail customers.
I have provided two attachments to my written statement for your
review and consideration. Attachment 1 is the NARUC supported
reliability amendment for inclusion in Title II. Attachment 2 is an
analysis of H.R. 2944 with NARUC supported policy statements for each
Title and relevant sections.
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Mr. Bilirakis. Thank you. Thank you very much for all that,
Ms. Smith.
Mr. Popowsky, please proceed.
STATEMENT OF IRWIN ``SONNY'' POPOWSKY
Mr. Popowsky. Thank you, Mr. Chairman.
My name is Sonny Popowski. I am the consumer advocate of
Pennsylvania, and I am testifying on behalf of the National
Association of State Utility Consumer Advocates, or NASUCA.
NASUCA is an organization of State utility consumer advocate
offices from 39 States and the District of Columbia. We are
charged by our respective State laws with representing utility
consumers before State and Federal regulatory agencies, courts,
and legislative bodies.
First, I would like to thank Chairman Barton and the
members and staff of this subcommittee for consistently seeking
the input of NASUCA members as representatives of retail
electric consumers in our respective States in each step of
your deliberations. We heartily endorse your efforts to ensure
that the voices of the consumers who ultimately will pay the
bill for electric restructuring are heard in this debate.
We believe that the success of your efforts in this
monumental task will be judged not by the size of the financial
gain to any particular segment of the electric industry but
rather by the impact on the reliability and price of electric
service to America's electricity consumers.
With respect to the first two questions that the witnesses
were asked to address, the need for Federal legislation and the
necessary components of such legislation, NASUCA agrees that
Federal legislation is required in at least two areas:
reliability and market power. But as I and other members of
NASUCA have testified on several prior occasions, we do not
believe that a Federal mandate for retail electric competition
in all States by a date certain is either necessary or
appropriate.
We believe that the individual States are in the best
position to determine whether and when to open up their
electric industries to one of the various forms of retail
electric competition that are being implemented today in
numerous States. On the other hand, NASUCA members recognize
the limitations of State authority and therefore the need for
Federal legislation in such areas as reliability and market
power.
With respect to reliability, I have had the honor to serve
for the last 2 years as 1 of 2 consumer representatives on the
Board of Trustees of the North American Electric Reliability
Council, or NERC. I believe that NERC is an outstanding
organization that has done a magnificent job of maintaining the
reliability of our Nation's electric system, but as the members
of NERC and virtually all industry participants agree, the
basic voluntary structure of NERC cannot be sustained in an
increasingly competitive electric industry.
There is a need for Federal legislation to establish an
independent electric reliability organization that can develop
and enforce mandatory reliability rules subject to the
oversight of the FERC. NASUCA supports Federal legislation that
would accomplish this goal, such as the language contained in
H.R. 2944, with the caveat that such legislation must clearly
preserve the role of States in maintaining the reliability,
safety, and adequacy of electric service within their State's
borders.
With respect to market power, NASUCA supports Federal
legislation that would strengthen the ability of the FERC to
ensure open, fair, and non-discriminatory access to
transmission facilities. Federal legislation should give FERC
clear authority to monitor the development of competitive
markets and the authority to take necessary steps to remedy
anti-competitive abuses. We would respectfully suggest that
H.R. 2944 be amended to include stronger market power
provisions, such as those included in H.R. 2050, which was
introduced by Mr. Largent and Mr. Markey and in the
administration bill.
Now, H.R. 2944 requires the establishment of regional
transmission organizations, or RTOs, but does not give FERC the
direct authority to establish such organizations. In addition,
while the legislation properly requires that the RTO must be
independent of market participants, the section goes on to
state that the independence requirement can be met, for
example, even if a market participant owns as much as 10
percent of the voting interest in the RTO.
NASUCA would urge the elimination of such exceptions to the
independence requirement, as they could lead to the domination
of RTO governance by a particular industry segment. The
hallmark of a successful RTO in NASUCA's view is total
independence from the financial interests of any particular
market participant or market segment.
NASUCA also submits that additional transmission pricing
incentives are not necessary in order to encourage the
development of competitively neutral, independent RTOs.
In addition to the need to address market reliability and
market power, NASUCA would also support Federal legislation
that establishes basic standards for consumer protection and
universal service as long as such standards do not preempt
efforts of the States to provide stronger protections and
universal service benefits to consumers.
Finally, in this regard, NASUCA would note that consumers'
efforts in achieving competitive benefits at the Federal level
would be enhanced by the establishment of a FERC Office of
Consumer Council. The establishment of such an office was
included in the August 4, 1999 discussion draft that was
submitted to this subcommittee but was not included in H.R.
2944, as introduced.
Now, in my prepared written testimony, I have compared some
of the specific provisions of H.R. 2944 to the consumer
checklist for Federal legislation that was presented to this
subcommittee by NASUCA president, Fred Schmidt, on July 22,
1999. And we hope that you will keep these principles in mind
as you go forward with the legislative process.
Again, NASUCA appreciates the opportunity to comment on
this bill and on the principles that we believe should be
contained in any Federal electric restructuring legislation. We
look forward to continuing to work with you, the members of the
committee, and your staff in developing policies and
legislation that will truly benefit all consumers.
Thank you.
[The prepared statement of Irwin ``Sonny'' Popowsky
follows:]
Prepared Statement of Sonny Popowsky, Consumer Advocate of the
Commonwealth of Pennsylvania on Behalf of the National Association of
State Utility Consumer Advocates
Chairman Barton and members of the Subcommittee on Energy and
Power: My name is Sonny Popowsky. I am the Consumer Advocate of
Pennsylvania and the Immediate Past President of the National
Association of State Utility Consumer Advocates (NASUCA). NASUCA is an
organization of state utility consumer advocate offices from 39 states
and the District of Columbia, charged by their respective state laws
with representing utility consumers before state and federal regulatory
agencies, courts, and legislative bodies. I have been asked by you to
testify on behalf of NASUCA regarding 1) the need for federal
electricity legislation; 2) the specific elements that should be
included in any federal legislation; and 3) the provisions of H.R.
2944, the Electricity Competition and Reliability Act of 1999, that are
of particular interest to NASUCA.
Before addressing these questions, I would like to thank Chairman
Barton and the members and staff of this Subcommittee for consistently
seeking the input of NASUCA members, as representatives of retail
electric consumers in our respective states, in each step of your
deliberations. While we do not necessarily agree with all of the
provisions of H.R. 2944 or, for that matter, any of the legislative
proposals that have been introduced in this Congress, we heartily
endorse your efforts to ensure that the voices of the consumers who
ultimately will pay the bill for electric restructuring are heard in
this debate. We believe that the success of your efforts in this
monumental task will be judged not by the size of the financial gain to
any particular segment of the electric industry, but rather by the
impact on the reliability and price of electric service to America's
electricity consumers.
With respect to your first two questions--the need for federal
legislation and the necessary components of such legislation--NASUCA
agrees that federal legislation is required in at least two areas:
reliability and market power.
As I and other members of NASUCA have testified before the House
and the Senate on several prior occasions, we do not believe that a
federal mandate for retail electric competition in all states by a date
certain is either necessary or appropriate. We believe that the
individual states are in the best position to determine whether and
when to open up their electric industries to one of the various forms
of retail electric competition that are being implemented today in
numerous states. On the other hand, NASUCA members recognize the
limitations of state authority and therefore the need for federal
legislation in such areas as reliability and market power.
With respect to reliability, I have had the honor to serve for the
last two years as one of two consumer representatives on the Board of
Trustees of the North American Electric Reliability Council (NERC). I
believe that NERC is an outstanding organization that has done a
magnificent job of maintaining the reliability of our Nation's electric
system. But as the members of NERC and virtually all industry
participants agree, the basic voluntary structure of NERC cannot be
sustained in an increasingly competitive electric industry. There is a
need for federal legislation to establish an independent electric
reliability organization that can develop and enforce mandatory
reliability rules, subject to the oversight of the Federal Energy
Regulatory Commission (FERC). NASUCA has endorsed legislative language
that would accomplish this goal, with the caveat that such legislation
must preserve the role of states in maintaining the reliability, safety
and adequacy of electric service within their state's borders.
NASUCA also supports federal legislation that would strengthen the
ability of the FERC to ensure open, fair and non-discriminatory access
to transmission facilities, including authority to establish
independent and competitively neutral regional transmission
organizations. Federal legislation should give FERC the authority to
monitor the development of competitive markets and to remedy anti-
competitive abuses.
In addition to the need to address reliability and market power,
NASUCA would also support federal legislation that establishes basic
standards for consumer protection and universal service, as long as
such standards do not preempt efforts of individual states to provide
stronger protections and universal service benefits to consumers.
Finally, in this regard, NASUCA would note that consumers' efforts
in achieving competitive benefits at the federal level would be
enhanced by the establishment of a FERC Office of Consumer Counsel. The
establishment of such an Office was included in the August 4, 1999,
Discussion Draft that was submitted to this Subcommittee, but was not
included in H.R. 2944 as introduced. NASUCA would urge that the
creation of such an office be included in any final legislation that
addresses electric restructuring at the federal level.
Turning to the specific provisions of H.R. 2944 that are of
greatest interest to NASUCA, I would like to compare those provisions
to the ``Consumer Checklist'' for federal legislation that was
presented to this Subcommittee in testimony presented by NASUCA
President Fred Schmidt of Nevada on July 22, 1999. As stated by Mr.
Schmidt, the NASUCA Consumer Checklist represents a roster of
principles that we believe should be reflected in any federal
legislation to ensure that electric restructuring benefits, rather than
harms, consumers. Those principles and the extent to which we believe
they are consistent with the provisions of H.R. 2944, are set forth as
follows:
1. Federal Preemption: Federal legislation should permit states to
adopt retail competition statutes or rules. There should not be
a federal mandate for states to require retail competition by a
date certain.
H.R. 2944 does not mandate retail competition by a date certain.
NASUCA fully supports the decision to leave this fundamental decision
to the states.
2. Stranded Costs: Retail stranded cost issues should be left to
states.
H.R. 2944 generally leaves stranded cost issues to the states.
NASUCA supports this reservation of critical state authority.
3. Market Power: Legislation should provide FERC with specific
authority to monitor the development of competitive markets, to
eliminate undue concentrations of market power in any relevant
market, and to remedy anticompetitive conduct or the abuse of
market power by any player, incumbents, affiliates, or new
market entrants. These powers should include the authority to
order divestiture or other structural remedies when necessary.
NASUCA respectfully submits that H.R. 2944 does not adequately
address market power issues. NASUCA strongly urges that market power
provisions such as those included in the Administration Bill, H.R.
1828, and the Largent/Markey Bill, H.R. 2050 be included in any final
legislation.
4. Transmission and ISOs: Legislation should authorize FERC to require
ISOs or other independent and competitively-neutral regional
transmission operation organizations. Legislation should
authorize FERC to rectify transmission policies, practices or
prices which create a competitive advantage for services
offered by the transmission provider or affiliates.
H.R. 2944 requires the establishment of regional transmission
organizations (RTOs) by transmitting utilities by January 1, 2003, but
does not give FERC the authority to establish such organizations. In
addition, while the legislation, in Section 103 properly requires that
the RTO must be independent of market participants, this section goes
on to state that the independence requirement can be met, for example,
even if a market participant maintains passive ownership or owns as
much as 10 percent of the voting interest in the RTO. NASUCA would
strongly urge the elimination of such exceptions to the independence
requirement from market participants as they could easily lead to the
domination of RTO governance by a particular industry segment. The
hallmark of a successful RTO in NASUCA's view is total independence
from the financial interests of any particular market participant or
market segment. NASUCA also submits that additional transmission
pricing ``incentives'' are not necessary or appropriate in order to
encourage the development of competitively neutral independent RTOs.
5. Reliability: Legislation should authorize FERC to review the
reliability requirements imposed by an independent North
American Reliability Organization to promote reliability of
electric supply.
H.R. 2944 contains a reliability section similar to that endorsed
by NERC and a number of utility organizations. NASUCA supports the
language with the addition of a savings clause clarifying that states
have a vital role in maintaining the reliability, safety and adequacy
of electric systems within each state's borders. The savings clause in
Section 201 of H.R. 2944 is inadequate because it only refers to state
jurisdiction over local distribution facilities.
6. Consumer Protection: Legislation by Congress should adopt provisions
which would set minimum standards for basic consumer
protections. States should retain authority to set additional
or more stringent or more specific standards.
The draft includes many of the protections suggested by NASUCA,
including protection from cramming and slamming, consumer privacy, and
supplier information disclosure. NASUCA would support additional
provisions that would establish minimum federal standards in such areas
as credit collection activities and service quality standards. In all
such cases, these federal standards should be viewed as floors that can
be strengthened by state actions to protect consumers.
7. Universal Service: Legislation should adopt universal service
standards and principles as part of any restructuring.
The legislation appropriately includes a sense of the Congress that
every retail customer should have access to electric energy at
reasonable and affordable rates. The legislation does not contain
specific standards or principles in this regard, however. NASUCA would
seek to work with members of this Subcommittee to develop provisions
that would insure that all Americans can have access to safe,
affordable electric service.
8. Aggregation: Aggregation of small customers should be encouraged.
Federal legislation should not preclude states from
facilitating the aggregation of small customers by any entity.
H.R. 2944 contains language clarifying the authority of
municipalities and other entities to aggregate retail customers. NASUCA
submits that all barriers to such aggregation efforts should be
eliminated.
9. Mergers: Legislation should specifically revise merger standards to
require a net benefit to consumers. Legislation should expand
FERC merger authority to include combinations that are
currently outside FERC jurisdiction, such as electric
communications and electric-gas mergers.
NASUCA would respectfully urge stronger FERC review authority over
mergers, including language that would require mergers to provide a net
benefit to consumers.
10. PUHCA: PUHCA should be addressed only as part of comprehensive
restructuring legislation. Waiver of certain PUHCA provisions
should be conditioned on holding companies (i) being subject to
effective competition in every state in which they operate, or
(ii) divesting all of their generation assets. In addition,
legislation should provide FERC with current PUHCA authority to
review affiliate transactions, provide state and federal access
to books and records, and limit diversification.
The legislation does include repeal of PUHCA as part of
comprehensive restructuring legislation and provides state and federal
access to books and records. It does not, however condition repeal on
the existence of competition or divestiture of generation assets or
provide FERC with current PUHCA authority to limit diversification.
11. PURPA: Legislation should not waive Section 210, the PURPA
mandatory purchase obligation, unless protections are in place
to insure that utility generation is subject to effective
competition.
PURPA is repealed, but there are no provisions insuring that
utility generation is subject to effective competition.
Again, NASUCA appreciates this opportunity to comment not only on
H.R. 2944, but on the overall principles that we believe should be
contained in any federal restructuring legislation. We look forward to
continuing to work with you in developing policies and legislation that
will truly benefit all consumers.
Mr. Bilirakis. Thank you very much, Mr. Popowsky.
Ms. Smith--well, I guess, maybe to both of you--I would
just say that through our subcommittee's review of electric
restructuring, I have stressed--and I might add that the
chairman was always willing to listen--that any restructuring
legislation must take into account the unique factors that
exist in each State.
For instance, in my home State of Florida, Florida is a
peninsula with interconnections to other States only along our
northern border. Florida's electrical loads are concentrated in
central and southeast Florida, but much of the generation is in
the north, which means that there is a dominant north to south
flow of power and not a uniform flow of power in all
directions. Florida has no generating fuels native to the
State. All fuels have to be brought into the State--oil, coal,
nuclear, and natural gas. Florida's vulnerability to natural
disasters, such as hurricanes, pose an additional threat to our
State's electric system, and I might just add that
approximately 90 percent of our consumers are residential
consumers as it gets to business or industrial, if you will,
and I know that that figure probably applies to a few other
States, but I would say that that is kind of a unique feature
as attributable to Florida.
So, I guess my question goes--and you can see I would like
to think that you can see that utility restructuring would
present under those kind of circumstances many challenges to a
State that would have those unique factors. So, the question
that I would have is do you think that this bill, as it now is
written, preserves a State's ability or Florida's ability or
any States' ability to deal with each of the unique
characteristics adequately?
Ms. Smith?
Ms. Smith. Well, Mr. Chairman, I guess that is why we
strongly advocate the addition of our savings clause and our
State advisory role with the reliability section. You know me,
I have been here before stressing how unique the Northwest is,
and that is true. And that is why I strongly believe that we
have to work together as regions and as interconnections.
There is no national electric grid. There is a western
interconnection grid; there is ERCOT. If Texas didn't want to
be part of the Union electrically, they don't have to be. And
then there is the eastern interconnection, which I am sure from
your point of view looks a little different than from mine in
the West where I look east and I see one interconnection.
So, that is why I strongly advocate that as a way to
preserve a policymakers input into processes that will be
important in terms of reliability.
Mr. Bilirakis. Mr. Popowsky, do you have----
Mr. Popowsky. I would agree. I think that is the best
example of where you, particularly a State like Florida, would
want to be careful to ensure that as long as you are not
operating in a way that is inconsistent with Federal
reliability standards in some way that would harm interstate
commerce, certainly the issues that are faced by the Florida
commission and all of you in Florida, with respect to
reliability, you want to turn to your commission and turn to
your State government first. So, we would support the concept
that the legislation should include language that would
preserve the role of the States in reliability.
Similarly, with respect to--generally, with respect to
issues like consumer protections universal service, we think
that there is a role for the Federal law to play in developing
basic standards, but we think that the States ought to be
permitted to enhance those protections on behalf of their
consumers.
Mr. Bilirakis. And you speak on behalf of NASUCA when you
say that.
Mr. Popowsky. Yes.
Mr. Bilirakis. Thank you.
Mr. Sawyer, to inquire.
Mr. Sawyer. Thank you, Mr. Chairman.
You both have been strongly recommended to me to answer the
question that I have been asking this afternoon: how best to
preserve an appropriate State role in terms of siting decisions
for transmission, while making sure that reluctant States, or
those who see no internal benefit, are not in a position to
impede the development and evolution of a sound regional grid.
Ms. Smith. Well, Mr. Sawyer, I think I sound like a broken
record. I think the answer does lie in a regional approach
through a properly formed RTO with the State advisory body, and
I think in our interconnection, I think everyone sees the
necessity of working together, because we are interconnected,
and an Idaho power path in eastern Idaho has operating
limitations placed on it, because if it puts too much power
over it, a path in southern California goes down. So, we
understand that we are interconnected.
We also have an active wholesale market in north-south
transfers of power. So, it is beneficial to all of us when
power can move north and south, and it moves both directions
depending on the time of the year and the load.
So, from my view in the West, the answer lies in having a
strong regional body with State advisory role so that all----
Mr. Sawyer. Who should create that region?
Ms. Smith. No----
Mr. Sawyer. Not no, who?
Ms. Smith. Oh, who? I thought you said, ``Should you?''
Well, I think your voluntary--your approach is correct to allow
the industry in the first instance to work it out. It is a
struggle, and I won't try and minimize the struggle that it is.
And we are going through it now. We just had an all-day meeting
on what kind of government structure is appropriate, and there
wasn't a resolution yet, but we are working on it. I believe
the Midwest, the Northeast, I think all regions are working on
that, and I think eventually the right answer, depending on
physical operation of the system and the market where trading
and buying and selling is occurring, will emerge.
Mr. Sawyer. Mr. Popowsky, you are representing a State
just--a hypothetical State that is not a participant, and you
nonetheless are the locus of a proposed transmission facility.
How best should your State's voice be preserved without
standing in the way of the ability of surrounding States to
benefit from this investment?
Mr. Popowsky. That is not as hypothetical a question as you
suggest, and I think there were some people who thought that
there ought to be a power line from Ohio to New Jersey, and
that those of us in Pennsylvania who had a little problem with
that were being provincial.
Mr. Sawyer. I wasn't thinking of any State in particular.
Mr. Popowsky. But I think that the planning--and I agree
with Commissioner Smith--I think the planning, and I think the
prior witnesses said that the planning has to be done on a
regional basis. We are in this together. We have to try to
develop regional transmission plans that benefit all of us in
Ohio, New Jersey, Pennsylvania, Maryland.
The problem then becomes once you develop a regional plan,
when you get to the actual physical siting, I don't think you
can take that authority away from the people who are closest to
where that line is going to be sited. That was really one of
the big problems in Pennsylvania. Even if you have an agreement
that there ought to be a power line, when you decide whose
orchard it goes through, whose historic sites it runs through,
whose neighborhoods, that is an issue that I think has to be
decided at the State level, and hopefully if we have regional
plans that benefit everyone, then we can--those local concerns
can be accommodated, but I think the actual physical siting
still has to be done at the State level.
Mr. Sawyer. Is there a Federal role in that to resolve
differences?
Mr. Popowsky. I think there can be a Federal role in
facilitating that regional--the regional planning issues and
the regional development issues. I think that if people
perceive that there is a benefit overall to these kinds of
improvements in the transmission facilities, then they might
get built better, but I think that you still need to--when you
draw that line, you need to--that final decision has to be made
at the State level.
Mr. Sawyer. Thank you, Mr. Chairman.
Mr. Largent [presiding]. I am going to yield myself 5
minutes since it was my turn.
Commissioner Smith, you talked about the States, 24 States,
have move forward. When will we see the State of Idaho move
forward with electricity restructuring?
Ms. Smith. That cold day in Hell?
Mr. Largent. Ah. Gosh, I read all your testimony about
wanting to induce competition, what is wrong with Idaho? We
can't have competition there?
Ms. Smith. Well, when you sit with the lowest rates in the
country and there are no studies to show you will be better
off, it is difficult to get your legislature to move anywhere
but back.
Mr. Largent. What are the rates for Idaho?
Ms. Smith. Our residential customers generally pay less
than 5 cents a kilowatt hour.
Mr. Largent. Okay.
Ms. Smith. Our industrial customers are less than two.
Mr. Largent. Your residential customers are 5 cents per
kilowatt hour?
Ms. Smith. Yes.
Mr. Largent. What is Oklahoma? Six? About six. And we have
already moved forward. So, well, I guess I just wanted to kind
of place some of your comments and your testimony in context
with what is actually taking place in Idaho, which is awfully
cold in Idaho.
Ms. Smith. Well, I am here to testify on behalf of States
of the Nation generally as represented by the NARUC.
The other important consideration that you have to
understand, when you talk about electric power in Idaho, you
are also talking about our water resources in the Snake River
and water rights, and nothing brings people out of their chairs
faster than the idea that existing water rights may be altered
by some change in the operation of the dams on the river. So,
it is much more complicated than the price of power for our
State, and I think it is going to take us a lot longer to work
those----
Mr. Largent. Can you, as a State commissioner in Idaho,
deal effectively with Bonneville issues or is that something
that has to be done at the Federal level?
Ms. Smith. Mr. Chairman, that has to be done at the Federal
level. There is a Northwest Power Planning Council which has
members appointed by the four Northwest States, but they don't
have real regulatory authority over Bonneville.
Mr. Largent. One of your comments that you have said that
``NARUC can't support H.R. 2944, as it is currently drafted.
The bill's failure to adequately provide a role for the States
in the area of reliability is enough to require us to withhold
our support at this time.'' Could you explain that? I mean, I
guess I heard Mr. Popowsky on the one hand say that we needed
to have mandatory reliability standards, and----
Ms. Smith. And I agree with him on that.
Mr. Largent. Okay, so what are you talking about?
Ms. Smith. I am talking about adding the two provisions--a
State savings clause and the State advisory role. And language
is attached to my testimony. We have been working on it for the
last year and a half. I think there is still some work going on
on just exactly how the savings clause should read, but the
State advisory role language is nailed down pretty good. It has
strong support. NERC does not oppose it and thinks its
inclusion could be beneficial. So, I think those are the two
provisions that we are speaking of on the reliability section.
Mr. Largent. Well, does it make sense to have 50 different
reliability standards on a grid that we are trying to say is a
national grid? I mean, we now have the capacity to wheel
electricity across State lines. Does it make sense to have 50
different reliability standards?
Ms. Smith. No, it wouldn't, Mr. Chairman, and that is not
what we are advocating. If you read the State advisory role
language, it would empower Governors to appoint members, and if
those State policy people could agree on an interconnection-
wide proposal or recommendation, then we would ask FERC to give
that deference, but that is a very specialized circumstance,
and that is why I am saying it is a process whereby regional
concerns can get solved at the regional level more efficiently
than they could be solved at the Federal level.
Mr. Largent. If in Federal legislation there is provisions
that provide for non-bypassable fees that could be used for
everything from universal service or environmental issues or
low-income heating, why do we have to have Federal language
specifying public benefits? I guess what I heard in your
testimony was, on the one hand, you don't trust the Federal
Government to do anything; leave it up to the States. But when
it came to public benefits funds, and there was renewables and
some other issues, you want the Federal Government to jump in
there and make sure that we get that in.
Ms. Smith. Well, Mr. Chairman, I hope I didn't say we don't
trust the Federal Government not to do anything, but I did say
that we encourage and NARUC supports workable measures to
encourage energy efficiency, encourage the development of
renewables technologies, to keep research and development
going, and to promote universal service and have low-income
assistance.
Mr. Largent. The States don't do that?
Ms. Smith. Some States do do that, not all States.
Mr. Largent. Does your State do it?
Ms. Smith. We have never seen the need to have low-income
assistance other than on a voluntary basis where customers
choose to add extra dollars to their bills.
Mr. Largent. What about public benefits?
Ms. Smith. I guess, by public benefits--well, we have
energy efficiency programs. We have low-income weatherization
programs, those types of things, yes.
Mr. Largent. So, you basically have tailored something that
fits Idaho?
Ms. Smith. Yes, but what has happened in the Northwest is
we have moved away from a State-by-State approach, and we now
have a regional approach in the Northwest Energy Efficiency
Association, NEEA. So, we do it on a regional basis now.
Mr. Largent. You like having it on a regional basis.
Ms. Smith. Yes. I think if you are looking toward the
markets of the future, you want to have these on a regional
basis.
Mr. Largent. And wouldn't that be preferable to a national
basis?
Ms. Smith. I think we would appreciate the support of the
Federal Government in implementing those programs, and some of
them, frankly, would have national, applicable----
Mr. Largent. So one size fits all.
Ms. Smith. No, not necessarily.
Mr. Largent. Oh, okay. Well, my time has expired.
Gentleman from California.
Mr. Rogan. Mr. Chairman, thank you.
Following up on the chairman's federalism issue, it raised
a point there have been a number of people that have suggested
that any consumer protection legislation ought not be dealt
with on the Federal side; it ought to be left up to the States.
And I am just wondering, Mr. Popowsky, what are your feelings
about that?
Mr. Popowsky. We would have no objection to Federal
legislation that would establish minimum basic standards at the
Federal level for some of the issues that are addressed in
2944, like slamming and cramming. We would just want to make
sure that those standards could be enhanced and supplemented at
the State level to address specific State concerns so that
States would not be preempted from having additional
protections for consumers in those areas.
Mr. Rogan. Your suggestion would be that in Federal
legislation there essentially be a floor established----
Mr. Popowsky. That is right.
Mr. Rogan. [continuing] that States could not go under but
were free to buildupon.
Mr. Popowsky. That is correct.
Mr. Rogan. Are there any other areas that you would want to
see addressed in Federal legislation?
Mr. Popowsky. Well, as I said in my testimony, I think we
need Federal legislation on the reliability issue, again, with
the caveat that there are specific State issues that have to be
addressed at the State level, and we would also support market
power provisions that would address market power problems at
the wholesale level that could not be addressed by individual
States.
Mr. Rogan. Ms. Smith, do you want to weigh in on that?
Ms. Smith. No.
Mr. Rogan. I wish everybody was as brief in their answers
as you are, and, in fact, Mr. Chairman, on that happy note, I
will yield back. Thank you.
Mr. Barton I thank the gentleman from California.
Now, Mr. Sawyer, have you asked questions? Okay.
The Chair would recognize himself for the last 5 minutes of
questions.
Mrs. Smith, welcome for the second time to the subcommittee
on this issue. Have you studied or your association studied the
Bonneville title of the draft before us?
Ms. Smith. Mr. Chairman, I haven't specifically.
Mr. Barton. Okay. You are aware, though, that it is what
the region--you said you believe in regionalism, and I assume
you are aware that we put in what your region wanted on
Bonneville.
Ms. Smith. If you did that, then I shouldn't comment.
Mr. Barton. Okay. So, you should say something nice about
that part of our bill.
Ms. Smith. Thank you very much.
Mr. Barton. There you go. Okay.
And I am told that in terms of the specific policy items
that NARUC has put on the table, we have addressed every one in
a positive way except the issue of States setting their own
reliability standards. Can you tell me how many States
currently set their own reliability standards?
Ms. Smith. Mr. Chairman, I don't know that States
specifically set their own reliability standards.
Mr. Barton. Well, they don't, except for one.
Ms. Smith. Is that New York?
Mr. Barton. The Empire State.
Ms. Smith. Yes. Well, they have specific concerns with the
little island we call Manhattan.
Mr. Barton. But, I mean, should we let one tail, even a big
tail like the Empire State, wag the entire 49 other, or 47
other States, if we exclude Alaska and Hawaii, in terms of
State reliability standard setting? Shouldn't we go with the 49
as opposed to the 1 State and then try to address that on a
specific basis?
Ms. Smith. I think, Mr. Chairman, that it may--there may be
other States that also exercise some local reliability
concerns, and I think there is probably room in the process,
particularly if it is built around regions and RTOs.
Mr. Barton. We encourage participation in RTOs.
Ms. Smith. Yes. And I believe that kind of a structure will
allow room to accommodate----
Mr. Barton. And we allow for regional standards in the
current draft. So, I think we are----
Ms. Smith. I think we are----
Mr. Barton. [continuing] same page there.
Ms. Smith. [continuing] kind of on the same page.
Mr. Barton. Yes.
Ms. Smith. We would like to see the----
Mr. Barton. I think we are not only on the same page, I
think we are in the same paragraph. We are not just maybe on
the exact sentence structure.
Ms. Smith. That is true.
Mr. Barton. Okay.
Mr. Popowsky--am I saying that right?
Mr. Popowsky. Yes, that is right.
Mr. Barton. Oh, good. The consumer protections in the bill,
I assume you have looked at those?
Mr. Popowsky. Yes.
Mr. Barton. I am getting some feedback. I just had a
meeting with one of the members of the subcommittee, and they
are expressing kind of a generic unease, but when I ask for
specific changes to improve the consumer protection, I have not
been given any definitive proposals. I did not read your
testimony, so you may have had some specifics in there. Could
you elaborate on any enhanced consumer protection that you
might feel we need to put in the next draft before we go to
markup?
Mr. Popowsky. Well, basically, there were some additional
areas that were in our comments that we filed at the last
meeting concerning, for example, credit and collection
standards, service quality standards. Mainly the point is, as
what I tried to make with Mr. Rogan, which is that we support
the idea that the FTC should be able to establish consumer
protection standards at the Federal level. We think they could
be expanded in a couple of the areas that we cited in our
testimonies, but it is important to us also that they be viewed
as floors rather than as ceilings, and we volunteer in our
testimony to work with the committee to determine if there are
any other specific provisions that are necessary.
Mr. Barton. Okay, now we have some input that we ought to
drop consumer protection from the Federal title, because that
is something the States can handle. I happen to believe we
ought to have some Federal consumer protection items in the
bill, as does Chairman Bliley. He is very strong on that.
But to take the devil's advocate position, would your
association accept if we were to drop as a Federal item the
consumer protection and just put some language in that says we
encourage States to take up that gauntlet?
Mr. Popowsky. No, we would prefer the approach--the general
approach that you have taken, which is to identify consumer
protections that ought to be recognized at the Federal level,
use those as a floor, and perhaps to expand the categories that
you have covered in your testimony--I am sorry, in your bill,
rather than drop it. That would be our preference, as long as
it is a floor, not a ceiling.
Mr. Barton. Okay. I have got one more question; I want to
make sure I understand it before I ask it.
The staff has asked me to ask a question about State
aggregation rights, and I am not sure I totally understand it.
But should the States, in your opinion, Mr. Popowsky--it has
been a long day--be able to discriminate against aggregators?
For example, should the State of Texas be able to bar
cooperatives from aggregating and the State of Louisiana be
able to give municipalities a preference by allowing forced
aggregation?
Now, I don't understand what I just asked you, so if you
don't understand it either, we are even. But there is
apparently a concern about States doing aggregation different
in different States if we don't have Federal aggregation
language, which we do have in our current draft.
Mr. Popowsky. Generally, I would--our position is we would
like to eliminate any barriers, certainly any barriers to
aggregation. Beyond that, we are not looking to have a Federal
rule, I think, that would force aggregation. We would look to--
we think different States have done it differently. I think
many of our members have a preference for what is called opt-
out aggregation where a municipality could aggregate its
consumers and then have them opt-out of that. But the key here
is to make sure that there are no unnecessary, in fact, no
barriers to aggregation.
Mr. Barton. What if a State has a State barrier against
aggregation? Should the Federal Government preempt that State
aggregation provision in this legislation?
Mr. Popowsky. I don't think NASUCA has addressed that, but
at this point we would just say that there should certainly be
no Federal barriers to aggregation. We also have resolutions
that would support dropping State--we would encourage States to
drop those barriers. I can't say that we have--that we would
ask the Federal Government to step in----
Mr. Barton. So, if we, in order to foster competition and
to foster the creation of markets, if we had a Federal
preemption against State aggregation barriers--I am beginning
to understand my question now--your association would at least
be neutral and could possibly be supportive of that.
Mr. Popowsky. I would say we don't have a position on that,
because it just--that particular question hasn't come up. Like
I said, we would support of elimination of Federal barriers on
aggregation----
Mr. Barton. I got what you----
Mr. Popowsky. [continuing] and we would like to eliminate
State barriers as well.
Mr. Barton. There are no Federal barriers on aggregation,
but we want you to help us take down some of these State
barriers against aggregation.
Mr. Popowsky. Well, we would be happy to work with you on
that, if you are aware of----
Mr. Barton. Okay, that is a good answer.
Mr. Popowsky. Thank you.
Mr. Barton. Okay. Does Mr. Pickering wish to ask questions
of this panel?
Mr. Popowsky. I have no further questions.
Mr. Barton. Does Mr. Sawyer have one last question? Okay,
does Mr. Rogan? Okay.
We want to thank you two panelists. We are going to
continue our hearing tomorrow, I believe at 10 a.m., and we
have two panels, each has 6 or 7 people--9 and 8. Okay, so we
are going to have a long day of enlightenment tomorrow from the
private sector.
The hearing is recessed until 10 a.m. tomorrow morning in
this room.
[Whereupon, at 4:15 p.m., the subcommittee recessed, to
reconvene at 10 a.m., Wednesday, October 6, 1999.]
[Additional material submitted for the record follows:]
Responses of Hon. James Hoecker to Questions from Joe Barton, Chairman,
Subcommittee on Energy and Power
Question 1. H.R. 2944 clarifies Federal and State jurisdiction,
providing for FERC jurisdiction over transmission used for unbundled
retail sales, and for State jurisdiction over transmission used for
bundled retail sales. Is this clarification needed, and does the bill
draw the jurisdictional line properly?
Response. On its face, the Federal Power Act (FPA) assigns the
Commission jurisdiction over all facilities for the transmission of
electric energy in interstate commerce by public utilities.
Nevertheless, consistent with the historical practice of including the
costs of transmission used to service retail markets or ``native load''
in state-regulated bundled retail rates, Order No. 888 held that the
Commission has jurisdiction over transmission used for unbundled retail
sales, and that States have authority over transmission used for
bundled retail sales. It was the Commission's view that, until the
advent of retail competition where transmission becomes ``unbundled,''
this was the most workable arrangement. These determinations, made in
1996, are currently pending before the Court of Appeals for the
District of Columbia Circuit.
As I view it, H.R. 2944 seeks to codify this 1996 interpretation. I
believe that codification of the Commission's jurisdiction over
transmission used for unbundled retail sales is appropriate. Such
jurisdiction is necessary to ensure that all unbundled transmission is
provided on a comparable basis to all users of the bulk power grid and
to avoid balkanization of transmission access, with different
interstate transmission rules established by each state that moves to
retail choice.
However, codification of State jurisdiction over bundled retail
transmission is appropriate only if it is accompanied by other
legislative language that ensures the Commission's ability to require
non-discrimination in the uses of the transmission grid. Regrettably,
the Commission's stance in Order No. 888 is now being used to hamper
its ability to ensure comparable transmission services for all uses of
the grid, including service to native load. A recent appellate court
decision may have placed a jurisdictional cloud over the Commission's
authority to achieve Order No. 888's goals of non-discrimination in the
provision of transmission services. See Northern States Power Co., et
al., v. FERC, No. 98-3000 (8th Cir., May 14, 1999, rehearing denied,
September 1, 1999) (NSP). This decision, if interpreted and applied
broadly, may allow the States--through their jurisdiction over
transmission used for bundled retail sales--to establish preferential
terms and conditions for the bundled transmission services they
regulate compared to the terms and conditions available to other
transmission users. In other words, the historical regulatory practice
enshrined in Order No. 888 of treating transmission used as part of a
native load service differently from transmission used for other bulk
power transactions, including service to other utilities' native load,
makes demonstrably less sense in a competitive wholesale marketplace.
There are two ways to address the potential problems that could
arise from the NSP decision. The first is to add a specific provision
to H.R. 2944 to clarify the Commission's authority to ensure that
transmission services within its exclusive jurisdiction are provided on
a basis that is comparable to, i.e., no less favorable than, other
transmission services provided by a transmitting utility. This
clarification is necessary to remove the potential for future
balkanization of the interstate transmission grid. Accordingly, my
testimony suggested revising Section 101 of H.R. 2944 to add a
provision at the end of FPA section 201(a), as modified by section
101(b)(1) of the bill, stating that:
In regulating the transmission of electric energy under any
provision of this Part [Part II of the FPA], the Commission
shall have exclusive authority to establish rates, terms and
conditions of transmission service that are just, reasonable
and not unduly discriminatory or preferential, including rates,
terms and conditions that prevent or eliminate undue
discrimination or preference associated with a public utility's
or transmitting utility's own uses of its transmission system
to serve its wholesale and retail electric energy customers.
This approach to addressing the NSP comparability problem is necessary
if H.R. 2944 codifies State authority over bundled retail transmission
or if the bill is silent on this matter.
The second way to address the NSP problem is not to codify State
jurisdiction over bundled retail transmission and instead to expressly
grant the Commission authority over all transmission, including what is
now called bundled transmission. While the Commission's interpretation
of State jurisdiction in Order No. 888 reflected an analysis of
existing law and a recognition of the long-standing historical role of
states in regulating transmission associated with retail sales, the
industry has evolved significantly since Order No. 888 was issued. If
dual (Federal-State) regulation of the transmission system results in a
State-mandated preference for bundled transmission services and the
balkanization of transmission access, with different rules established
by each State and by the Commission, the Congress should need to
broaden the Commission's jurisdiction to address this problem. It is my
understanding that a legislative amendment has been proposed by the
Americans for Affordable Electricity that would take this approach and
make my proposed clarification unnecessary.
In sum, I urge the Congress to avoid further litigation and
potential transmission discrimination problems by, at a minimum,
adopting my proposed revision to section 101(b)(1) of H.R. 2944.
Alternatively, the Congress may want to consider explicitly giving the
Commission jurisdiction over all transmission, including transmission
used for bundled retail sales.
Question 2. In your view, does section 102(a)(2) of H.R. 2944 amend
section 212(h) of the Federal Power Act to authorize FERC to order
retail wheeling to a consumer served by local distribution facilities
in closed States? Is there a need to clarify the definition of ``open
access'' in the legislation?
Response. I interpret section 102(a)(2) as authorizing the
Commission to order retail wheeling only to consumers in those states
that have required their utilities to provide open access over the
utilities' local distribution facilities, i.e., to consumers in those
states that have adopted retail choice. Of course, retail wheeling to
these consumers may require wheeling by utilities in closed states and
I interpret H.R. 2944 as allowing the Commission to order this service.
The cited provision states that, notwithstanding the existing
provisions of section 212(h)(2), ``the Commission may issue an order
that requires the transmission of electric energy directly or
indirectly to retail electric consumers who are served by local
distribution facilities that are subject to open access.'' The bill
defines ``open access'' with respect to local distribution facilities
as meaning that the ``local distribution company that owns, controls,
or operates the facilities offers not unduly discriminatory or
preferential access to the facilities.'' The bill does not alter the
states' authority to decide whether or not to order retail open access.
Transmission ``open access'' should be given the meaning the Commission
gave it in Order No. 888.
Question 3. Some charge transmission owners are redesignating
transmission facilities as distribution facilities in order to avoid
FERC open access requirements. Have you seen examples of such efforts
by utilities? Are these utility efforts being supported by State public
utility commissions?
Response. As retail competition is implemented, there arises a need
to draw a distinction between transmission and local distribution
facilities. Several utilities in various states have filed with the
Commission proposals to classify certain facilities as either
transmission or local distribution. Consistent with Order No. 888, each
of these proposals was reviewed previously by the relevant State public
utility commission as to the appropriate classification. Order No. 888
prescribed a general seven-factor test which defines what types of
facilities would constitute transmission facilities subject to
Commission jurisdiction or local distribution facilities subject to
State jurisdiction. The Commission has issued six orders granting
deference to State commissions who properly adopted the seven factor
test. These cases did not involve substantial reclassifications.
Recently, the Commission has received four cases involving
application of the seven-factor test by the State of Illinois. These
involve substantial reclassifications to local distribution and the
Commission is still reviewing these proposals. If a proposed
reclassification could impair the availability of open access services,
the Commission would be concerned and would consider this possible
adverse effect in evaluating the proposed reclassification.
Question 4. H.R. 2944 includes an exemption from FERC regulation
for small transmission owners. Do you believe this exemption is
appropriate? Do you have any comments on the specific exemption
provisions in H.R. 2944?
Response. Section 102(b) of H.R. 2944 would require the Commission
to adopt rules allowing an exemption from Commission regulation for
certain transmitting utilities. The bill lists certain criteria for
exemption, which are similar to the Commission's criteria for waiving
Order Nos. 888 and 889, and would allow the revocation of an exemption
in the event of changed circumstances. The bill also specifies
streamlined procedures for applicants to seek and obtain an exemption.
The bill's exemption provisions are reasonable. While the
Commission is strongly committed to the policies of open access
transmission services and competition in wholesale markets, I believe
H.R. 2944's exemption provisions can be implemented without undermining
those policies.
Question 5. FERC does not regulate transmission systems operated by
State and municipal utilities and cooperatives, which are some of the
largest systems in the country. State and municipal utilities oppose
FERC regulation of transmission rates, and want to retain that
authority. If State and municipal utility transmission systems continue
to be unregulated could they shift power costs onto their transmission
rates? Could they discriminate against competitors?
Response. With the exception of services ordered under section 211,
transmission systems owned by state utilities, municipal utilities and
cooperative-owned utilities are self-regulated or are regulated by a
state agency such as the public utility commission or public service
commission. If such a utility were to charge other users more than its
own cost of transmission, it would result in discriminatory rates for
other users. When such a utility charges competitors more for
transmission than it charges itself, it would give the utility's
generation a competitive advantage that was not based on actual
differences in generation cost.
In Order No. 888, the Commission addressed the potential for such
cross-subsidization and discrimination by public utilities. The
Commission required public utilities to offer transmission service to
others at the same rates, terms and conditions that public utilities
apply to themselves, and to take Commission-jurisdictional services
under the same tariff available to others. This ``comparability''
requirement is an important tool in preventing public utilities from
using their control of transmission facilities to discriminate against
their competitors in power markets.
As a matter of clarification, let me address several concerns that
I have heard voiced about proposed FERC jurisdiction over municipally-
and cooperatively-owned transmission. First, most public power entities
do not own transmission and depend on open access to the transmission
of others. Second, some cooperatives are concerned about potential
interference in their local distribution functions. The Commission has
no interest in regulating in that area. Third, a primary concern of
many transmission-owning public power entities is the threat to tax-
exempt financing that open access and federal rate regulation
represent. I believe that all transmission should be operated under the
same rules, and that the tax rules should be adjusted to accommodate
that result. Finally, some small cooperatives and municipally-owned
utilities have raised concerns about the cost of FERC regulation. I
believe the provisions of H.R. 2944 concerning exemptions for small
transmission owners reasonably address this concern in a manner that is
consistent with our open access policies.
Question 6. Should FERC regulate transmission that is not in
interstate commerce--such as transmission in noncontiguous States and
territories?
Response. Transmission that is not in interstate commerce consists
principally of two types of transmission. First, such transmission
includes transmission within noncontiguous States and territories, such
as Alaska and Hawaii. While I do not object to Congress giving the
Commission the authority to regulate the rates, terms, and conditions
of transmission within noncontiguous States and territories, I do not
believe that it is essential for the Commission to have such authority.
It is essential that all interconnected transmitting utilities be
subject to the same transmission ``rules of the road,'' and that all
electricity suppliers have access to a single, seamless transmission
grid over which to transact business. This is what allows wholesale
buyers and sellers of electricity to have choices. Within the lower 48
States, where the transmission systems are interconnected, the
Commission's pro-competitive regulation is necessary to achieve this
end.
Second, the Commission has historically construed the transmission
of electric energy wholly within the Electric Reliability Council of
Texas (ERCOT) as not being in interstate commerce, and thus has treated
the utilities performing such transmission as not being public
utilities so long as they do not otherwise engage in Commission-
jurisdictional activities. Two of the four investor-owned ERCOT
utilities (West Texas Utilities Company and Central Power and Light
Company) operate both within and outside ERCOT and are public utilities
subject to the FPA. The other two investor-owned utilities in ERCOT,
Houston Lighting & Power (HL&P) and Texas Utilities Electric Company
(TU), are not considered public utilities. A settlement agreement
approved by the Commission in 1987 under section 211 of the FPA
required certain ERCOT utilities to construct specified asynchronous
direct current interconnections between utilities in ERCOT and
utilities in the Southwest Power Pool. Central Power and Light Co., et
al., 40 FERC para. 61,077 (1987). A provision in the order approving
the settlement stated that ``HL&P and TU shall use the HVDC
interconnections for any purpose, including the purchase, sale,
exchange, wheeling, coordination, commingling or transfer of electric
power and energy in interstate commerce.'' A section 211 order does not
subject a utility to Commission jurisdiction for any other purpose.
Thus, unlike similar entities elsewhere in the country, these utilities
are not considered public utilities under sections 205 and 206 of the
FPA.
In my testimony before the Subcommittee, I noted that H.R. 2944
would narrow even further the Commission's limited authority over ERCOT
transmitting utilities--by denying the Commission the authority under
section 211 of the Federal Power Act (as amended by the Energy Policy
Act of 1992) to order transmission by those utilities that otherwise
transmit only within ERCOT. In my testimony, however, I also stated:
``I believe that all transmitting utilities should be subject to the
same transmission rules. Open access to a seamless transmission grid by
all electricity suppliers is essential if the Congress and the
Commission intend to guarantee that buyers and sellers of electricity
have as many choices as possible.'' I urge that the Congress at least
retain the limited authority that the Commission presently has under
section 211 of the Federal Power Act with respect to ERCOT utilities.
Question 7. NARUC proposed amending the reliability title of H.R.
2944 to authorize individual States to establish reliability standards.
What is your position on this proposal? How many States regulate
transmission reliability? Would 50 different reliability standards
improve reliability? How would 50 different standards affect interstate
commerce?
Response. The NARUC proposal, as drafted, would reserve to States
the right ``to take action to ensure the reliability, adequacy, or
safety of electric facilities within the state except where the
exercise of such authority has a material adverse impact on the
reliable operation of the bulk power grid.'' This proposal is broader
than H.R. 2944's provision, which would preserve existing State
authority over local distribution facilities unless the exercise of
such authority would unreasonably impair the reliability of the bulk
power system. Of the two approaches, I find H.R. 2944's provision to be
more appropriate. However, I also believe that Federal legislation
could preserve for the States certain reliability practices that they
have historically engaged in with respect to bundled transmission in
their jurisdictions. Federal reliability laws should ensure that such
State practices are consistent with the applicable regional or national
standards and that such reliability practices do not unduly impair
competition in bulk power markets.
According to a recent survey by the North American Electric
Reliability Council (NERC), three states have specific jurisdiction
over bulk power grid security and operation and have established
reliability standards through the Regional Reliability Councils.
Moreover, many states have maintenance and inspection standards for
transmission facilities, and some states establish generation reserve
requirements. Again, these measures are developed in coordination with
the Regional Reliability Councils.
I do not read the reliability language included in H.R. 2944, even
without the NARUC savings clause, as preempting those legitimate State
roles. States would still be able to act to protect the reliability of
local distribution, but they must do so consistent with the rules that
apply across the transmission system. Having said that, I emphasize
that it is essential that rules be established on a regional basis (as
they are now) in order to prevent one state from inadvertently
interfering with the reliability of service or the resource decisions
made by retail customers in another state. Fifty different sets of
reliability standards could create problems for interstate commerce and
for maintenance of grid reliability. Individual states cannot guarantee
reliability of the interstate grid.
Question 8. What is your view of the transmission pricing
provisions of the bill introduced by Mr. Sawyer (H.R. 2786)?
Response. Section 5 of H.R. 2786 would add a new section 215 to the
FPA. This section would require the Commission to permit recovery of
all costs associated with transmission service, including expansion
costs. It also would require consideration of costs and benefits to
interconnected transmission systems caused by the creation of a
regional transmission organization (RTO). Under H.R. 2786, rates, terms
and conditions must promote economically efficient transmission, the
expansion of transmission networks, the introduction of new
transmission technologies and provision of transmission services by
RTOs, prevent cost shifting to rates for services outside the
jurisdiction of the Commission, and be just and reasonable and not
unduly discriminatory.
The Commission is further required by the proposed legislation to
issue a rule within 180 days of enactment that would provide incentives
to transmitting utilities to promote the voluntary participation and
formation of RTOs without having the effect of forcing utilities to
join, and extend such incentives to existing RTOs, limit the charging
of multiple rates for transmission service, provided that a transition
mechanism or period is allowed, minimize shifting of costs among
existing customers, encourage efficient and reliable operation of the
grid through congestion management, performance-based ratemaking, or
incentive rates, and encourage efficient and adequate investment and
expansion of the transmission system.
The bill would require the Commission to allow negotiated rates,
and would allow the Commission to grant market-based rates only where
it finds that relevant geographic and product markets for transmission
services or for delivered wholesale power are subject to effective
competition.
I believe the pro-competitive objectives of Mr. Sawyer's
transmission ratemaking provisions are appropriate and laudable. I
subscribe to the notions that we should incent economically efficient
behaviors by utilities, prevent cost shifting, and encourage
transmission owners to alleviate, not prolong, system congestion and
alleviate rate pancaking.
I nevertheless believe that the transmission pricing provisions of
H.R. 2786 may be too prescriptive. The standards under the FPA already
allow the Commission to consider most, if not all, of the issues
addressed in H.R. 2786 (e.g., incentives for utilities to join RTOs,
congestion management, performance-based ratemaking, enlargement of
adequate transmission investment). However, the FPA gives the
Commission flexibility to determine appropriate ratemaking
methodologies that are just, reasonable and not unduly discriminatory.
This flexibility allows the Commission to craft rate approaches that
suit specific facts and companies, and which will most effectively
reduce the role of regulation in a competitive market.
Several provisions of H.R. 2786, however, could be construed to
preclude the Commission from adequately protecting transmission users.
For example, the bill requires the Commission to allow negotiated
transmission rates and prescribes a specific test for market-based
transmission rates. In addition, the bill can be read to require rates
that harm ratepayers because it appears to require recovery of all
costs incurred, even those that were imprudently incurred. Under
current law, the Commission does not permit recovery of imprudently
incurred costs. I believe that these provisions could unduly hamper the
Commission in its efforts to protect competition and consumers.
I am also concerned that over-emphasis on creating incentives to
expand the grid may lead to distortion of the market, where
alternatives to expansion, such as construction of new generation or
investment in energy efficiency technologies, would cost less. Again,
this is an issue that calls for fact-specific consideration and
solutions.
I believe that appropriate incentives can be structured to create
the proper market signals under current law. The Commission is
exploring just such incentives in our Notice of Proposed Rulemaking,
RM99-2.
Question 9. Some criticize the length of FERC merger proceedings.
How long does it take FERC to approve mergers?
Response. The Commission has been highly responsive to the
increasing number of requests for merger authorization. In December
1996, the Commission issued its Merger Policy Statement, and made a
commitment to act on mergers within 90 days of the close of a 60-day
public comment period, or within 150 days total. Since making that
commitment, the Commission has received 31 merger applications and
acted on 24 of them (setting three for hearing). One application was
withdrawn and the other six have been filed only recently. The
Commission has met its target of action within 150 days consistently.
In fact, in a number of cases, the Commission has acted much more
quickly.
As noted, the Commission set only three of these 24 cases for
hearing. The cases set for hearing generally involved mergers of large
utilities, with potentially significant effects on competition, and
raised genuine issues of material facts.
Question 10. H.R. 2944 amends section 203 of the Federal Power Act
to expand FERC review of sales of power plants and transmission
facilities by State and municipal utilities, cooperatives, and federal
electric utilities. Currently, those sales are not subject to review by
FERC, DOJ, or FTC. Is there a need for federal review of these sales to
ensure market power issues are addressed?
Response. Your question contains two elements: (1) whether the
Commission needs jurisdiction over transfers of generating facilities;
and (2) whether the Commission needs authority to review transfers of
facilities by non-public utilities.
As to first aspect of the question, I believe that this Commission
should have direct jurisdiction over transfers of generation
facilities. Concentration of generation assets may directly and
seriously affect competition in wholesale markets, and our review of
such transactions is critical to protect the public interest. I discuss
this further in my answer to Question 11, below.
As to the second aspect of the question, the Commission has not
requested an expansion of its jurisdiction to cover review of transfers
of facilities by non-public utilities. I would note that the Commission
has jurisdiction under section 203 over a public utility's purchase or
sale of jurisdictional facilities, an authority which would apply to
some transfers of facilities by non-public utilities to public
utilities and vice versa. Apart from these circumstances, Commission
review of facility transfers among non-public utilities could also help
to protect the public interest in competitive markets. The generation
and transmission assets of certain non-public utilities are extensive,
and the sale and redeployment of these assets could adversely affect
competition, depending on the extent of other facilities controlled by
the acquirer and on other circumstances.
Question 11. The Burr bill (H.R. 67) and the Sawyer bill (H.R.
2786) repeal section 203 of the Federal Power Act. What is your view of
this proposal?
Response. I strongly oppose repeal of section 203. This authority
is an essential element of the Commission's pro-competitive policy. In
reviewing a merger, the Commission assesses the effects on competition,
on rates, and on regulation. In most cases, the primary issue is the
effect on competition. Consistent with its overarching goal of
promoting competition in wholesale power markets, the Commission seeks
to ensure that mergers will not harm competition. If a merger is likely
to harm competition, mitigation of this potential harm is required in
order to ensure that the merger is consistent with the public interest.
Under this authority, the Commission has prevented competitive harm by
providing other market participants with access to the transmission
facilities of the merger applicants, thus ensuring that the merger does
not reduce the competitive options available to wholesale buyers and
sellers. Similarly, the Commission has accepted commitments by
applicants to turn over control of their transmission facilities to
independent system operators (ISOs), as a way of ensuring the merger
did not cause competitive harm. The Commission also has required rate
protection for captive customers. These and other conditions and
commitments imposed or accepted by the Commission have provided
substantial benefits to the public and, thus, ensured that the mergers
were consistent with the public interest.
Although some have argued that our review is unnecessary in light
of the authority of the Department of Justice and the Federal Trade
Commission, I do not agree; this Commission's expertise and its role in
working with energy markets distinguishes it from the functions of
antitrust enforcers. Our day-to-day involvement with the electric
industry gives us a valuable and detailed understanding of electricity
markets as they are shaped by the transmission grid. This expertise can
provide critical insights in assessing a merger's effects on
competition. Second, this Commission's authority to protect the public
interest encompasses not only the effect of a transaction on
competition, but also its effects on the rates consumers pay. Since
certain aspects of the electric power industry, such as transmission,
are not subject to effective competition, the broader scope of the
inquiry conducted by the Commission helps to protect consumers from
effects not considered by the antitrust agencies. Third, our procedures
permit public participation in a timely process to determine the public
interest, in a way antitrust enforcement does not. This public review
process remains important in today's electric industry, given the vital
importance of the industry to American citizens and the national
economy.
Question 12: H.R. 2944 allows TVA to sell wholesale power outside
the region but provides for FERC regulation of such sales. Could TVA
get FERC approval to charge market-based rates for these sales?
Response. The Commission has explained in a number of cases in
recent years the criteria that it applies in deciding whether public
utilities may make power sales at market-based rates. The Commission
allows power sales at market-based rates if the seller and its
affiliates do not have, or have adequately mitigated, market power in
generation and transmission and cannot erect other barriers to entry.
In order for a transmission-owning public utility or its affiliate to
demonstrate the absence or mitigation of market power, and in
particular the absence or mitigation of transmission market power, the
transmission-owning public utility must have on file with the
Commission an open access transmission tariff for the provision of
comparable services. The Commission also considers whether there is
evidence of affiliate abuse or reciprocal dealing.
If the Commission were called upon to decide whether TVA were
entitled to make power sales at market-based rates, I believe that the
Commission would be likely to apply these same criteria. I cannot at
this juncture, however, in the absence of any factual record (including
submissions both from TVA and from other interested parties on, for
example, TVA's market power in generation and transmission) conclude
whether TVA would or would not be able to meet these criteria.
Question 13. H.R. 2944 directs FERC to approve a transmission
surcharge on use of the BPA transmission system for electric sales in
the Pacific Northwest. Would it be difficult to fashion this surcharge?
Response. No. Designing a surcharge which would permit BPA to
recover shortfalls in power sales revenues from transmission system
users would not be difficult. Of course, BPA would be required to fully
support its proposed surcharge in order for FERC to carry out its
responsibility under H.R. 2944 to accept, reject, or modify the
surcharge.
______
Responses of Hon. James Hoecker to Questions from Hon. Vito Fossella
Question 1. It is my understanding that FERC wants jurisdiction
over ``retail transmission'' which means it will have to deal directly
with retail customers. What facilities does FERC have in place to deal
with retail customers in terms of servicing their needs, resolving
complaints etc. when it now has virtually zero information about local
loads and local conditions.
Response. The Federal Power Act places interstate transmission
services under the Commission's jurisdiction. Pursuant to Order No.
888, the Commission established open access terms and conditions for
all jurisdictional transmission services, including transmission of
power that will ultimately be delivered to a retail customer as an
unbundled, separate service. However, the Commission also emphasized
that Order No. 888 did not affect or encroach upon state authority in
such traditional areas as the authority over local service issues,
including reliability of local service, authority over utility
generation and resource portfolios, and administration of integrated
resource planning. Order No. 888, FERC Stats. & Regs. para. 31,036 at
31,782 (1996). As a practical matter, in a retail competition
environment, power destined for delivery to retail customers is
delivered, on their behalf, to the local distribution company which
completes the delivery service under state jurisdiction. In Order No.
888, we established procedures that allow state commissions to request
waiver of the standard transmission terms and conditions to the extent
necessary to accommodate their retail access programs. To date, this
arrangement is working very well. The Commission therefore does not
seek or need particular facilities or resources to deal directly with
the needs of individual retail consumers of electricity.
Question 2. New York City is unique. It's needs are unique. And to
be frank, I am concerned that by enforcing a national standard for
reliability, this may result in lowering the standard for some places,
such as New York City, since it may prove too costly to reinforce other
system's to NYC's level. How would you envision FERC's national
reliability standard differing from New York State's reliability
standards. In your opinion, would these differences hurt the consumers
in New York? If FERC had jurisdiction over reliability of the
transmission system, how would FERC coordinate efforts with the states
especially during times of system emergencies like storm outages? A
concern that I have, and a concern of my city and state, is that FERC
might order recovery of the transmission system in its entirety thereby
diverting restoration crews away from restoring services to retail
customers. This could result in an inefficient use of resources and
delayed recovery after a storm.
Response. I believe the Commission's potential role in overseeing
the establishment of bulk power reliability organizations and standards
does not infringe or compromise in any way the ability of states to
ensure the reliability of electric distribution systems on behalf of
retail customers. In fact, the system for developing reliability
standards under the provisions of H.R. 2944 is very similar to the
system currently used. Standards are now, and will continue to be,
developed by market participants through regional and national self-
regulating organizations. Local and regional protocols are developed
and agreed to at the regional level. Reliability protocols that states
rely on during emergencies are, and should continue to be, coordinated
with regional organizations that represent other parts of the
interconnected grid. The primary differences between the current system
and the system contained in H.R. 2944 are that the rules would be
enforceable and there would be avenues for appeal or review of rules by
parties, including states, who believe that the rules are not providing
the best protection of the reliability of their service or that the
rules are discriminatory. These kinds of procedural protections would
be to the benefit of New York customers as well as others. The State of
New York would continue to have the ability to protect the security,
adequacy and safety of local service in New York.
FERC does not now have, nor would it have under the provisions of
H.R. 2944, a role in emergency responses such as restoration of
services after storm outages.
I agree with you that New York City has unique needs. However, its
location at the intersection of three ISOs and reliability councils
makes it evident that the reliability of bulk power service to the city
will depend on effective and uniform maintenance of reliability
standards, not just in New York, but across the grid. As the
marketplace becomes more diverse and competitive, voluntary industry
compliance with reliability standards needs to be buttressed with a
limited degree of federal oversight and enforcement power.
Question 3. Does FERC believe it should have the full authority to
order the building and siting of new electric transmission lines
despite the objections of the host state(s)? Does FERC believe that the
language included in Section 105 of the second draft bill, which amends
Section 216 of the Federal Power Act would remand this power to FERC
and take it away from the states?
Response. H.R. 2944 would not give the Commission authority to
order the siting of new transmission lines. This type of land use
regulation, i.e., certifying the use of particular land for purposes of
transmission facilities, is exercised by the States (although the
Commission has similar authority for purposes of certificating natural
gas pipelines and non-Federal hydroelectric facilities). As I stated in
my testimony, I do not see a current compelling need for the changes
specified in section 105 of H.R. 2944 at this time.
I will note that the Commission currently has authority to order
the enlargement of transmission capacity in conjunction with an order
to provide transmission services under section 211 of the FPA. However,
the Commission must terminate an order to enlarge capacity if the
transmitting utility has failed, after making a good faith effort, to
obtain the necessary approvals or property rights under applicable
Federal, State and local laws. The Commission also has imposed on
public utilities a similar obligation to enlarge transmission capacity
if necessary to meet their open access obligations under Order No. 888.
The latter were imposed pursuant to the Commission's authority to
remedy undue discrimination under FPA sections 205 and 206.
Section 105 of the second draft bill would provide authority to
order construction in a new section 216 of the FPA. Section 216 would
require the Commission, before exercising its authority under that
section, to refer the matter to a joint board, including one or more
representatives from each affected State. I believe that the ability to
expand transmission capacity in appropriate ways will be key to
competition and efficient wholesale power markets. An effective
regional planning effort, which could be accomplished by regional
transmission organizations, could complement and assist state siting
proceedings.
Question 4: Section 532 of the bill deals with Recovery of Costs--
stranded costs per se. As you may know, New York has agreements in
place with all relevant parties involved that results in a sharing of
these costs. The first batch of these agreements are set to be
renegotiated in 2001, and then the following in 2003. Would the
language contained in this section or anywhere else in this legislation
preempt the agreements NY already has in place or give FERC authority
to preempt these agreements? Do you feel that any FERC involvement in
any future negotiations would create any obstacles or delays for this
process that is already running fairly smoothly in NY?
Response. Section 532 provides that, with regard to any legally
enforceable obligation entered into or imposed pursuant to section 210
of the Public Utility Regulatory Policies Act of 1978 prior to the date
of enactment of the bill, the FERC ``shall promulgate and enforce such
regulations as may be required to assure that no utility shall be
required directly or indirectly to absorb the costs associated with
such purchases from a qualifying facility after the date of the
enactment of this Act.'' I do not read Section 532 or any other section
of the bill to preempt the agreements New York already has in place
that would result in a sharing of the costs associated with purchases
from a qualifying facility. Nor would it give FERC authority to preempt
these agreements. Because the bill is silent as to its effect on
preexisting agreements such as those you describe, I believe that the
bill has no impact on such preexisting agreements.
Further, I do not feel that FERC involvement in any future
negotiations would create any obstacles or delays for the process that
you indicate is already running fairly smoothly in New York. To the
contrary, I believe that the FERC would encourage negotiated agreements
to address the cost recovery issue. The Commission has expressly
encouraged such agreements in the past and has allowed the recovery of
a utility's costs incurred pursuant to such an agreement.
I suggest, however, that section 532 be clarified to ensure that
utilities may agree to enter into such agreements in the future. As
currently written, section 532 could be interpreted to bar a utility
from negotiating such an agreement regardless of the benefits of such a
settlement.
______
Responses of Hon. James Hoecker to Questions from Hon. Ed Bryant
Question 1. Would the Tennessee Valley Authority be able to make
sales outside the fence at market-based rates?
Response. The Commission has explained in a number of cases in
recent years the criteria that it applies in deciding whether public
utilities may make power sales at market-based rates. The Commission
allows power sales at market-based rates if the seller and its
affiliates do not have, or have adequately mitigated, market power in
generation and transmission and cannot erect other barriers to entry.
In order for a transmission-owning public utility or its affiliate to
demonstrate the absence or mitigation of market power, and in
particular the absence or mitigation of transmission market power, the
transmission-owning public utility must have on file with the
Commission an open access transmission tariff for the provision of
comparable services. The Commission also considers whether there is
evidence of affiliate abuse or reciprocal dealing.
If the Commission were called upon to decide whether TVA were
entitled to make power sales at market-based rates, I believe that the
Commission would be likely to apply these same criteria. However, I
cannot at this juncture, and in the absence of any factual record
(including submissions both from TVA and from other interested parties
on, for example, TVA's market power in generation and transmission),
conclude whether TVA would or would not be able to meet these criteria.
Question 2. What would be the budgetary effect on FERC under a bill
such as H.R. 2944?
Response. It is extremely difficult for me to quantify precisely
how implementing such a bill will impact the Commission's resources. We
are a small agency but one which is working diligently to anticipate
many of the fundamental changes occurring in the energy industry.
Assuming the Commission were to be authorized to act in the areas
specified in H.R. 2944, some increase in our budget request would be
likely, especially in the early stages of staffing these efforts. For
example, the Commission has traditionally had no responsibility to
review or oversee any aspect of the reliability standards process, so
we would have to augment our engineering staff to handle these tasks.
Our very preliminary estimates are that $5 to $17 million per year
would likely be sufficient to implement the Administration's proposed
legislation on electric restructuring. We would expect that the costs
may be toward the higher end of this range during initial
implementation and then decline over time. H.R. 2944 would cost
somewhat less because, for example, it does not contain a provision
requiring the Commission to receive and act on State filings on the
decision of whether to allow retail choice.
Any estimate I would supply you is necessarily dependent on what
array of FERC-related provisions any new legislation might contain;
consequently, it is somewhat premature to examine our expected staffing
needs and other costs in depth at this time. The Commission will make
every effort to minimize the costs of its oversight functions and is
currently reengineering its processes to obtain greater productivity
from the public's investment.
______
Responses of Hon. Curt L. Hebert, Jr. to Questions from Hon. Joe Barton
Question 1. H.R. 2944 clarifies Federal and State jurisdiction,
providing for FERC jurisdiction over transmission used for bundled
retail sales, and for State jurisdiction over transmission used for
bundled retail sales. Is this clarification needed, and does the bill
draw the jurisdictional line properly?
Response. H.R. 2944 codifies the jurisdictional split the FERC made
in Order No. 888. I find the clarification helpful, in that Congress
would endorse FERC's call, but not necessary. Under the current Federal
Power Act, the FERC has jurisdiction over transmission that occurs
separately from a retail sale and the states have jurisdiction over the
transmission portion of a bundled retail sale. I think the bill drew
the proper jurisdictional line.
Question 2. In your view, does section 102(a)(2) of H.R. 2944 amend
section 212(h) of the Federal Power Act to authorize FERC to order
retail wheeling to a consumer served by local distribution facilities
in closed states? Is there a need to clarify the definition of ``open
access'' in the legislation?
Response. The current text is confusing. By stating that FERC could
order transmission to a customer that purchases from distribution
facilities subject to open access, it appears that the authority would
apply only to states that introduced competition. In that case, no need
exists for the amendment. FERC would control the transmission portion
of the unbundled retail sale and the state the distribution.
Moreover, without a definition of open access, and in context of
other references in the bill to open access as being in the context of
Order No. 888, one could argue that, if the utility is subject to open
access, as all IOU's under Order No. 888, FERC may order wheeling even
in closed states.
Substituting ``retail competition'' for ``open access'' would make
the provision most clear.
Question 3. Some charge transmission owners are redesignating
transmission facilities as distribution facilities, in order to avoid
FERC open access requirements. Have you seen examples of such efforts
by utilities? Are these utility efforts being supported by State Public
Utility Commissions?
Response. I have read anecdotes of that occurring. I have no
evidence that any reclassification has, as its purpose, avoidance of
FERC requirements. Indeed, if FERC follows my recommendation on
incentives and for-profit RTOs, that kind of evasion would not happen.
Question 4. H.R. 2944 includes an exemption from FERC regulation
for small transmission owners. Do you believe this exemption is
appropriate? Do you have any comments on the specific exemption
provisions in H.R. 2944?
Response. As a believer in incentives, performance based rates and
for-profit transco's, I think it inappropriate to exempt small
transmission owners from FERC jurisdiction. In a world of command and
control, the issue of burden arises. With incentives, however, the
industry would focus on economic benefits and opportunities, which
should inure to all participants in interstate transmission. I would
not favor exemptions.
Question 5. FERC does not regulate transmission systems operated by
State and municipal utilities and cooperatives, which are some of the
largest systems in the country. State and municipal systems oppose FERC
regulation of transmission rates, and want to retain that authority. If
State and municipal utility transmission systems continue to remain
unregulated could they shift power costs onto their transmission rates?
Could they discriminate against competitors?
Response. As I said in my testimony, State and municipal utility
systems, and to an extent, cooperatives, must answer to their
Legislatures and State governments. Therefore, FERC need not regulate
them; under most State constitutions, authority exists to prevent
publicly owned systems from engaging in undesirable behavior. In
addition, under my vision of truly independent RTOs, State and
municipal members could not survive by raising prices for transactions
or discriminating.
Question 6. Should FERC regulate transmission not in interstate
commerce--such as transmission in non-contiguous States and
territories?
Response. No, because these areas would not form part of a national
grid, having no connections to the ``lower 48'' States.
Question 7. NARUC has proposed amending the reliability title of
H.R. 2944 to authorize individual States to establish reliability
standards. What is your position on this problem? How many States
regulate transmission reliability? Would 50 different standards improve
reliability? How would 50 different standards affect interstate
commerce?
Response. I think that neither FERC nor the States should prescribe
reliability standards. As I stated in my testimony, reliability should
form one of the factors in performance based rates. I think each plan
with each RTO should have its own standards, depending on regional
factors. In Mississippi, our Public Service Commission negotiated
individual plans for each of our utilities.
Question 8. What is your view of the transmission pricing
provisions of the bill introduced by Mr. Sawyer (H.R. 2786)?
Response. I favor incentives and performance based rates, with no
guarantees of cost recovery, but with the opportunity to keep profit
within a range. I think that, theoretically, we might move to market
based rates, but not in the foreseeable future.
Question 9. Some criticize the length of FERC merger proceedings.
How long does it take to approve mergers?
Response. I rely on the information in the Chairman's response.
Question 10. H.R. 2944 amends section 203 of the Federal Power Act
to expand FERC review of sales of power plants and transmission
facilities by State and municipal utilities, cooperatives, and Federal
electric utilities. Currently, these sales are not subject to review by
FERC, DOJ or the FTC. Is there a need for Federal review of these sales
to ensure market power issues are addressed?
Response. No. For state and municipal utilities, the DOJ or FTC
would review the sales, if any impact on interstate commerce resulted,
unless the state action doctrine applied. Under that judge-made law,
the authorities in the States would closely supervise the transaction.
If Congress wants to overrule the state action doctrine, I think it
better to do so generically, not just in electricity.
For Federal utilities, I would imagine Congress would need to
authorize sales, as public funds built them. In that case, Congress
would consider all the implications, or Congress could authorize the
antitrust agencies to review these issues. They, not FERC have the
expertise and the ability to collect information quickly.
Question 11. The Burr bill (H.R. 667) and the Sawyer bill (H.R.
2786) repeal section 203 of the Federal Power Act. What is your view of
this proposal?
Response. I favor it, as I testified at the hearing on October 5.
The DOJ and FTC, not FERC, have the expertise in antitrust and the
experience in mergers. Also, both are accountable for their actions to
Congress and the American people.
Question 12. H.R. 2944 allows TVA to sell wholesale power outside
the region but provides for FERC regulation of such sales. Could TVA
get FERC approval to charge market-based rates for those sales?
Response. Yes, if TVA, as a new entrant in the region, had no
market power in the area in which it makes its sales.
Question 13. H.R. 2944 directs FERC to approve a transmission
surcharge on the use of the BPA transmission system for electric sales
in the Northwest. Would it be difficult to fashion this surcharge?
Response. I disagree with the notion of imposing a transmission
surcharge for sales. I dislike subsidies. In any event, FERC does not
have the resources to fashion a surcharge that would have to take into
account all the interests involved. We would have to balance the
interests of transmission customers in proper price signals and the
preference customers in low prices. I think we would distort the
market. Right now, the best FERC can do in reviewing BPA rates is to
take a quick look as to whether the agency will meet its repayment
schedule that Congress establishes. I think that FERC would act no
better in this instance, either.
______
Responses of Hon. Curt L. Hebert, Jr. to Questions from Hon. Vito
Fossella
Question 1. It is my understanding that FERC wants jurisdiction
over ``retail transmission'' which means it will have to deal directly
with retail customers. What facilities does FERC have in place to deal
with retail customers in terms of servicing their needs, resolving
complaints, etc. when it now has virtually zero information about local
loads and local conditions?
Response. FERC does not want jurisdiction over transmission at
retail. The Barton bill codifies the jurisdiction FERC asserted in
Order No. 888 over interstate transmission of energy when the customer
in a state with retail competition purchased from someone besides the
local utility. Order No. 888 left the distribution portion in the hands
of the State. Therefore, the State, not FERC, will continue to deal
with local loads and local conditions in retail sales.
Question 2. New York City is unique. Its power needs are unique.
And to be frank, I am concerned that by enforcing a national standard
for reliability, this may result in lowering the standard for some
places, such as New York City, since it may prove to be too costly to
reinforce other systems to NYC's level. How would you envision FERC's
national reliability standard differing from New York State's
reliability standards? In your opinion, would these differences hurt
the consumers in New York? If FERC had jurisdiction over reliability of
the transmission system, how would FERC coordinate efforts with the
states especially during times of system emergences like storm outages?
A concern I have, and a concern of my city and state, is that FERC
might order recovery of the transmission system in its entirety thereby
diverting restoration crews away from restoring services to retail
consumers. This could result in an inefficient use of resources and
delay recovery after a storm.
Response. I oppose FERC having authority to establish reliability
standards. I also think that the current system, involving private
regional reliability councils establishing the standards needs reform.
I favor injecting reliability standards in the performance based rate
plans I advocate for utilities. In particular, each plan for each
Regional Transmission Organization would contain a target for reliable
performance. I envision interested parties negotiating the issue, along
with the other factors in the plan for presentation to FERC. Each RTOs
earnings would rise or fall on how well it does. Therefore, in the case
of storms, rather than have FERC order deployment of crews, the RTO
would find it in its economic interest to do the best job it could.
In any event, it is my belief that even my colleagues favoring a
FERC role would not necessarily establish the same standard for the
whole Nation or fashion maximum, rather than minimum standards. I also
do not envision FERC directing crews in storms, even if we received
authority over reliability.
Question 3. Does FERC believe it should have the full authority
over the building and siting of new electric transmission lines despite
the objections of the host state(s)? Does FERC believe that the
language in Section 105 of the second bill draft, which amends Section
216 of the Federal Power Act would remand this power to FERC and take
it away from the states?
Response. I oppose giving FERC authority to approve building and
siting of transmission facilities. I think FERC could better give
economic incentives for transmission expansion and upgrade. We should
reform our pricing policy that looks at cost recovery, rather than
economic value and efficiency. Several bills, including the Barton
bill, contain provisions for incentive pricing. I think in that way,
FERC would encourage a more efficient transmission system through the
market.
I think Section 105 does not take away siting authority from the
States. That section gives utilities the opportunity to reverse a FERC
order requiring expansion, if the necessary State or local agencies
deny permits.
Question 4. Section 532 of the bill deals with Recovery of Costs--
stranded costs per se. As you may know, New York has agreements in
place with all relevant parties involved that result[] in a sharing of
these costs. The first batch of these agreements [is] set to be
renegotiated in 2001, and then the following in 2003. Would the
language contained in this section or anywhere else in this legislation
preempt the agreements NY already has in place or give FERC authority
to preempt these agreements? Do you feel that any FERC involvement in
any future negotiations would create any obstacles or delays in this
process that is already running fairly smoothly in NY?
Response. Section 532 states that any FERC rule would apply
prospectively. FERC has refused to compel renegotiation of PURPA
contracts and, in fact, preempted states, such as California, from
abrogating existing PURPA contracts.
As for FERC's role in renegotiations, it would depend on the wishes
of the State. For example, last fall, New York, through Chair Maureen
Helmer of the Public Service Commission, asked for FERC's help in
renegotiating the PURPA contracts of New York State Electric and Gas
Company, an upstate utility. Eventually, the New York Commission
brought the parties together, without FERC's involvement.
______
Responses of Hon. Vickey A. Bailey to Questions from Hon. Joe Barton
Question 1. H.R. 2944 clarifies Federal and State jurisdiction,
providing for FERC jurisdiction over transmission used for unbundled
retail sales, and for State jurisdiction over transmission used for
bundled retail sales. Is this clarification needed, and does the bill
draw the jurisdictional line properly?
Response. I think this clarification is useful. The clarifying
language adopts, for the most part, the jurisdictional dividing lines
adopted by the Commission in its Order No. 888 rulemaking; those lines,
for the most part, have been accepted by industry participants and
state regulatory commission. I believe it is important, whenever
possible, to eliminate jurisdictional turf battles and protracted court
disputes over ambiguous congressional delegations, in order to ensure
that the benefits of increased competition flow through to consumers as
quickly and comprehensively as possible.
In light of recent court litigation on the subject of comparability
of service, cited in Chairman Hoecker's response, I have no objection
to an additional clarification that would further codify existing
Commission policy. That policy, based on the Commission's authority to
protect against undue discrimination or preference in the provision of
transmission service, requires that a transmission-owning utility offer
transmission service to others that is comparable to (i.e., no worse
than) the service it provides to itself.
Question 2. In your view, does section 102(a)(2) of H.R. 2944 amend
section 212(h) of the Federal Power Act to authorize FERC to order
retail wheeling to a consumer served by local distribution facilities
in closed States? Is there a need to clarify the definition of ``open
access'' in the legislation?
Response. I recall this question coming up during the question and
answer session of the FERC Commissioner panel of the October 5 hearing
on H.R. 2944. The explanation we received from the Committee is that
section 102(a)(2) does not authorize the Commission to order wheeling
to retail customers in ``closed'' states (that have not adopted retail
competition). I am fine with this explanation. If, however, there is
some perception of ambiguity in the reference to ``local distribution
facilities that are subject to open access,'' I have no objection to a
clarification that explains that the Commission's authority to order
retail wheeling is confined to consumers in ``open'' states that have
adopted retail competition.
Question 3. Some charge transmission owners are redesignating
transmission facilities as distribution facilities, in order to avoid
FERC open access requirements. Have you seen examples of such efforts
by utilities? Are these utility efforts being supported by State public
utility commissions?
Response. I am aware that some utilities are redesignating
transmission facilities as distribution facilities. The Commission
occasionally reviews such a redesignation in the context of utility
filings that reflect the rate consequences of such a redesignation; in
these circumstances, the Commission is very deferential of the state
commission's characterization of transmission and distribution
facilities. Such deference to state designations of transmission and
distribution facilities is contemplated in Order No. 888 (which adopts
a 7-factor test for analysis).
Obviously, the redesignation of a facility from transmission to
distribution acts to remove that facility from aspects of Commission
regulation. But I am not in a position to assess the motivation of any
such T/D redesignation, or to suggest that any such undertaking is one
merely to evade Commission jurisdiction (such as a direction to provide
open access, non-discriminatory service).
Question 4. H.R. 2944 includes an exemption from FERC regulation
for small transmission owners. Do you believe this exemption is
appropriate? Do you have any comments on the specific exemption
provisions in H.R. 2944?
Response. I have no problem with the exemption provisions in H.R.
2944. They reflect, for the most part, the Commission's existing
practice. Specifically, the Commission already waives the requirements
of Order Nos. 888 (to provide open access transmission service) and 889
(to participate in an Internet-based transmission information system
and to separate transmission from wholesale merchant functions) for
transmission-owning utilities that are small and/or own limited and
discrete transmission facilities.
Question 5. FERC does not regulate transmission systems operated by
State and municipal utilities and cooperatives, which are some of the
largest systems in the country. State and municipal utilities oppose
FERC regulation of transmission rates, and want to retain that
authority. If State and municipal utility transmission systems continue
to be unregulated could they shift power cost onto their transmission
rates? Could they discriminate against competitors?
Response. I am in agreement with Chairman Hoecker's response to
this question. I add that a number of government-owned and cooperative-
owned utilities already have consented to follow the open access
requirements applicable to transmission-owning public utilities subject
to Commission regulation, in order for themselves to be eligible for
``reciprocal'' open access service. In addition, an increasing number
of cooperative-owned utilities are buying out their debt to the U.S.
government (through the Rural Utilities Service of the U.S. Department
of Agriculture) and are thus voluntarily acceding to Commission
jurisdiction over their rates and terms of service.
Question 6. Should FERC regulate transmission that is not in
interstate commerce--such as transmission in noncontiguous States and
territories?
Response. A series of court cases through the decades have
established that all transmission in the continental (lower 48 states
of the) United States--with the exception of transmission within the
Electric Reliability Council of Texas--is in interstate commerce. I am
in agreement with Chairman Hoecker's response to this question as it
relates to the activities of ERCOT utilities.
Question 7. NARUC proposed amending the reliability title of H.R.
2944 to authorize individual States to establish reliability standards.
What is your position on this proposal? How many States regulate
transmission reliability? Would 50 different reliability standards
improve reliability? How would 50 different standards affect interstate
commerce?
Response. As a general matter, I much prefer fewer layers of
regulatory review rather than more. Nevertheless, I have no objection
to legislative language of the type found in section 201 of H.R. 2944
that would clarify the authority of states and local authorities to
ensure the reliability of local distribution facilities. As electricity
markets become increasingly competitive, close cooperation with state
and local regulatory authorities with oversight over the reliability of
local distribution facilities become imperative. Well-publicized power
outages in the last year (such as in San Francisco, New York City, and
Chicago), due to isolated inadequacies in local distribution
infrastructure, suggest that federal regulatory oversight, in itself,
cannot assure the continued reliability of local service. Moreover, I
am appreciative of limiting language, such as that found in revised
section 217(n) of the FPA, that acts to ensure that any such exercise
of state or local authority cannot ``unreasonably impai[r] the
reliability of the bulk power system.''
Question 8. What is your view of the transmission pricing
provisions of the bill introduced by Mr. Sawyer (H.R. 2786)?
Response. Among the many transmission pricing provisions of Mr.
Sawyer's bill, my principle interest lies in those that would offer
incentives to transmitting utilities for engaging in various types of
Commission-favored activities. I support the use of incentives to
promote--rather than compel--participation in regional transmission
organizations. As I explain in my written testimony, I favor the use of
incentives that encourage utility innovation and individual design,
rather than federal legislation that compels utility RTO filings and
participation by a date certain. I also favor incentives that act to
promote reliable and efficient transmission operations and that
encourage investment in and expansion of transmission facilities.
As Chairman Hoecker explains, however, the Commission already
retains the flexibility under the Federal Power Act, as currently
written, to pursue much or all of these behavior-based policy
objectives.
Question 9. Some criticize the length of FERC merger proceedings.
How long does it take FERC to approve mergers?
Response. Chairman Hoecker's response provides the raw data. The
vast majority of the merger applications the Commission receives are
processed in a timely manner. Nevertheless, I fail to understand why
the Commission cannot process all merger applications in a timely
manner (say, 150, 180 or 240 days at most) that will provide the type
of predictability and uniformity necessary to allow utilities to
restructure themselves in a manner that, in their judgment, is best
able to respond and adapt to the same competitive forces that the
Commission is attempting to promote.
The trend toward utility consolidation is accelerating. The
Commission is starting to receive a number of merger applications
involving larger utility applicants. These applications likely will
attract numerous interventions and vigorously-argued calls for extended
evidentiary hearings, for numerous ``pro-competitive'' conditions to
approval, or for outright rejection. My understanding is that financial
markets and developing business strategies cannot await over a year of
uncertainty while the Commission parses through the various options.
Question 10. H.R. 2944 amends section 203 of the Federal Power Act
to expand FERC review of sales of power plants and transmission
facilities by State and municipal utilities, cooperatives, and Federal
electric utilities. Currently, those sales are not subject to review by
FERC, DOJ, or FTC. Is there a need for Federal review of these sales to
ensure market power issues are addressed?
Response. Frankly, I do not perceive a gap in regulatory oversight
over utility asset sales that requires an expansion of federal
jurisdiction. Market power issues currently are being addressed by the
Commission, in its continuing assessment of: (1) the utility mergers
and asset sales over which it currently does have authority to review;
and (2) utility requests to sell power at wholesale at negotiated,
market-based rates. Moreover, the Commission is actively monitoring the
competitive operation of wholesale power markets. If the Commission
detects the presence or exercise of market power, it retains the
authority to adopt utility-specific corrective action. (Similar market
monitoring and enforcement activity currently is undertaken in regional
markets by the regional transmission institutions that the Commission
already has approved.)
Question 11. The Burr bill (H.R. 667) and the Sawyer bill (H.R.
2786) repeal section 203 of the Federal Power Act. What is your view of
this proposal?
Response. To date, I have refrained from advocating the outright
repeal of section 203 of the Federal Power Act. I agree with Chairman
Hoecker to the extent he responds that the Commission retains a unique
and vital regulatory role under section 203--but only if that role is
exercised in a timely manner (say, no more than 150-240 days). If
Commission merger review extends beyond that limited time frame, I
believe Commission merger review becomes counter-productive, as it
would inhibit the ability of utilities to take advantage of competitive
opportunities and to develop pro-competitive business strategies.
Question 12. H.R. 2944 allows TVA to sell wholesale power outside
the region but provides for FERC regulation of such sales. Could TVA
get FERC approval to charge market-based rates for these sales?
Response. I have nothing to add to Chairman Hoecker's response to
this question.
Question 13. H.R. 2944 directs FERC to approve a transmission
surcharge on use of the BPA transmission system for electric sales in
the Pacific Northwest. Would it be difficult to fashion this surcharge?
Response. I have nothing to add to Chairman Hoecker's response to
this question.
______
Responses of Hon. William L. Massey to Questions from Hon. Joe Barton
Question 1. H.R. 2944 clarifies Federal and State jurisdiction,
providing for FERC jurisdiction over transmission used for unbundled
retail sales, and for State jurisdiction over transmission used for
bundled retail sales. Is this clarification needed, and does the bill
draw the jurisdictional line properly?
Response. I believe that a clarification of Federal and State
jurisdiction over the uses of transmission is necessary, but I fear
that the one that is proposed in H.R. 2944 will lead to a further
balkanization of the interstate grid. As Chairman Hoecker points out,
the historical regulatory practice adopted in Order No. 888 of treating
native load uses of transmission differently from all other uses of
transmission makes less sense in a competitive wholesale market
environment. Efficient electricity markets require that all grid users
be subject to the same rules. Different transmission rules set by
individual states will result in discriminatory access and a
balkanization of the markets that are now developing. My preference
would be to broaden the Commission's jurisdiction to include all uses
of transmission, whether bundled or unbundled, so as to ensure that the
Nation's transmission grid will support efficient electricity commerce.
Question 2. In your view, does section 102(a)(2) of H.R. 2944 amend
section 212(h) of the Federal Power Act to authorize FERC to order
retail wheeling to a consumer served by local distribution facilities
in closed States? Is there a need to clarify the definition of ``open
access'' in the legislation?
Response. I endorse Chairman Hoecker's response to this question.
Question 3. Some charge transmission owners are redesignating
transmission facilities as distribution facilities in order to avoid
FERC open access requirements. Have you seen examples of such efforts
by utilities? Are these utility efforts being supported by State public
utility commissions?
Response. I endorse Chairman Hoecker's response to this question. I
would also make two additional points. First, I would be deeply
concerned if the Commission's review of reclassification proposals
indicated that such reclassifications were being accomplished to avoid
Commission jurisdiction and open access requirements. Second, I would
like to point out that, in addition to impairing the availability of
open access transmission service, strategic reclassifications can
result in the addition of distribution charges on certain generation
facilities and thereby make those assets, or service from those assets,
more costly than the transmission provider's own generation assets or
services.
Question 4. H.R. 2944 includes an exemption from FERC regulation
for small transmission owners. Do you believe this exemption is
appropriate? Do you have any comments on the specific exemption
provisions in H.R. 2944?
Response. I endorse Chairman Hoecker's response to this question.
Question 5. FERC does not regulate transmission systems operated by
State and municipal utilities and cooperatives, which are some of the
largest systems in the country. State and municipal utilities oppose
FERC regulation of transmission rates, and want to retain that
authority. If State and municipal utility transmission systems continue
to be unregulated could they shift power costs onto their transmission
rates? Could they discriminate against competitors?
Response. I endorse Chairman Hoecker's response to this question. I
believe that all transmission in interstate commerce, regardless of
ownership, should be directly subject to the Commission's open access
policies. I would also like to mention that under Order No. 888's
reciprocity provisions, a number of non-jurisdictional transmission
providers have filed open access tariffs with terms and conditions that
are consistent with Order No. 888.
Question 6. Should FERC regulate transmission that is not in
interstate commerce--such as transmission in noncontiguous States and
territories?
Response. I endorse Chairman Hoecker's response to this question.
Question 7. NARUC proposed amending the reliability title of H.R.
2944 to authorize individual States to establish reliability standards.
What is your position on this proposal? How many States regulate
transmission reliability? Would 50 different reliability standards
improve reliability? How would 50 different standards affect interstate
commerce?
Response. I endorse Chairman Hoecker's response to this question. I
would add as a caveat that, because effective electricity markets do
not respect state boundaries, we should strive for as much regional or
national uniformity in reliability standards as possible.
Question 8. What is your view of the transmission pricing
provisions of the bill introduced by Mr. Sawyer (H.R. 2786)?
Response. I endorse Chairman Hoecker's response to this question in
most respects. I would like to be clear, however, that I do not favor
financial bonuses or incentives to entice transmission owners to
participate in RTOs. As I discussed in my testimony, such bonuses are
not free. They are paid for by transmission system users, and
ultimately by consumers, in the form of higher electricity rates. I do,
however, favor performance-based incentives where clearly defined
performance standards are met or exceeded by transmission operators.
Question 9. Some criticize the length of FERC merger proceedings.
How long does it take FERC to approve mergers?
Response. I endorse Chairman Hoecker's response to this question.
Question 10. H.R. 2944 amends section 203 of the Federal Power Act
to expand FERC review of sales of power plants and transmission
facilities by State and municipal utilities, cooperatives, and federal
electric utilities. Currently, those sales are not subject to review by
FERC, DOJ, or FTC. Is there a need for federal review of these sales to
ensure market power issues are addressed?
Response. I endorse Chairman Hoecker's response to this question.
Question 11. The Burr bill (H.R. 67) and the Sawyer bill (H.R.
2786) repeal section 203 of the Federal Power Act. What is your view of
this proposal?
Response. I endorse Chairman Hoecker's response to this question. I
feel strongly that repeal of the Commission's merger authority is not
in the public interest, and particularly not during the massive
industry consolidation now underway.
Question 12. H.R. 2944 allows TVA to sell wholesale power outside
the region but provides for FERC regulation of such sales. Could TVA
get FERC approval to charge market-based rates for these sales?
Response. I endorse Chairman Hoecker's response to this question.
Question 13. H.R. 2944 directs FERC to approve a transmission
surcharge on use of the BPA transmission system for electric sales in
the Pacific Northwest. Would it be difficult to fashion this surcharge?
Response. I endorse Chairman Hoecker's response to this question.
______
Responses of Hon. Linda K. Breathitt to Questions from Hon. Joe Barton
Question 1. H.R. 2944 clarifies Federal and State jurisdiction,
providing for FERC jurisdiction over transmission used for unbundled
retail sales, and for State jurisdiction over transmission used for
bundled retail sales. Is this clarification needed, and does the bill
draw the jurisdictional line properly?
Response. The clarification given in H.R. 2944 pertaining to
Federal and State jurisdiction over transmission is consistent with the
findings made by the Commission in Order No. 888, which was issued in
1996. In that ruling, the Commission determined that it has
jurisdiction over unbundled retail transmission, and that States have
jurisdiction over bundled retail transmission. Therefore, it is
appropriate for Congress to amend the Federal Power Act (FPA) as
proposed in section 101(b)(1) of H.R. 2944. However, as Chairman
Hoecker contends in his response to this question, if such an amendment
is made, additional legislative language is necessary to ensure the
Commission's ability to require non-discrimination in the uses of the
transmission grid. Chairman Hoecker has suggested, both in his written
testimony before the Subcommittee and in his response to this question,
specific language to be added at the end of FPA Section 201(a), as
modified by H.R. 2944. I concur with Chairman Hoecker that such
additional language would be necessary.
Question 2. In your view, does section 102(a)(2) of H.R. 2944 amend
section 212(h) of the Federal Power Act to authorize FERC to order
retail wheeling to a consumer served by local distribution facilities
in closed States? Is there a need to clarify the definition of ``open
access'' in the legislation?
Response. Section 102(a)(2) amends Section 212(h) of the FPA to
clarify FERC authority to order transmission of electric energy to
retail electric consumers served by local distribution facilities
subject to open access. It is clear to me that, as drafted, section
102(a)(2) would apply only to those States which have enacted retail
open access. In other words, FERC would have authority to order retail
wheeling only in ``open'' states, not in ``closed'' states. As far as
the definition of ``open access'' used in the legislation, I concur
with Chairman Hoecker that transmission open access should be given the
meaning the Commission gave it in Order No. 888.
Question 3. Some charge transmission owners are redesignating
transmission facilities as distribution facilities in order to avoid
FERC open access requirements. Have you seen examples of such efforts
by utilities? Are these utility efforts being supported by State public
utility commissions?
Response. The issue of transmission/distribution reclassification
is one that concerns me, and I might add is a relatively new area
brought about by retail open access plans. As Chairman Hoecker mentions
in his response, several utilities have filed with the Commission
proposals to classify certain facilities as either transmission or
distribution. Some of the recent filings propose substantial
reclassifications of transmission facilities as distribution
facilities. As these cases are pending before the Commission, it would
be inappropriate to discuss them. However, I believe these are
important cases that deserve careful attention by the Commission.
Question 4. H.R. 2944 includes an exemption from FERC regulation
for small transmission owners. Do you believe this exemption is
appropriate? Do you have any comments on the specific exemption
provisions in H.R. 2944?
Response. I concur with Chairman Hoecker's response to this
question.
Question 5. FERC does not regulate transmission systems operated by
State and municipal utilities and cooperatives, which are some of the
largest systems in the country. State and municipal utilities oppose
FERC regulation of transmission rates, and want to retain that
authority. If State and municipal utility transmission systems continue
to be unregulated could they shift power costs onto their transmission
rates? Could they discriminate against competitors?
Response. In my written testimony before the Subcommittee I contend
that, despite the Commission's diligent efforts to create an open, non-
discriminatory transmission system, certain impediments to full open
access remain. One such impediment is that a significant portion of the
Nation's transmission grid is owned and operated by utilities not
subject to Commission open access requirements. I support section
102(b) of H.R. 2944, which amends the definition of ``public utility''
in the FPA to include transmitting utilities and provides FERC
authority over the transmission systems of State and municipal
utilities and rural electric cooperatives. I believe this provision
would result in a more cohesive transmission grid and will greatly
facilitate open transmission access. I believe the potential exists for
any regulated or unregulated transmission system to shift costs
inappropriately and discriminate against competitors. However, I prefer
to believe that discriminatory practices are the exception rather than
the rule. Nevertheless, it is important that FERC have jurisdiction to
regulate the transmission rates, terms, and conditions of these
utilities.
Question 6. Should FERC regulate transmission that is not in
interstate commerce--such as transmission in noncontiguous States and
territories?
Response. I concur with Chairman Hoecker's response to this
question. In particular, I believe the success of open, non-
discriminatory transmission access depends on the consistent
application of transmission rules across the interconnected grid. To
this end, I reiterate Chairman Hoecker's request that Congress not deny
the Commission the limited authority it now has under section 211 of
the FPA to order transmission by utilities within ERCOT.
Question 7. NARUC proposed amending the reliability title of H.R.
2944 to authorize individual States to establish reliability standards.
What is your position on this proposal? How many States regulate
transmission reliability? Would 50 different reliability standards
improve reliability? How would 50 different standards affect interstate
commerce?
Response. I concur with Chairman Hoecker's response to this
question. In particular, I support the reliability provisions in Title
II of H.R. 2944, which, among other things, adds a new section 217(n)
to the FPA preserving State and local authority to ensure the
reliability of local distribution facilities within the State, except
where the exercise of such authority unreasonably impairs the
reliability of the bulk power system. As Chairman Hoecker states, H.R.
2944, as drafted, would not prevent States from acting to protect the
reliability of local distribution, as long as they do so in a manner
that is consistent with the rules that apply across the transmission
system.
Question 8. What is your view of the transmission pricing
provisions of the bill introduced by Mr. Sawyer (H.R. 2786)?
Response. I concur with Chairman Hoecker's response to this
question.
Question 9. Some criticize the length of FERC merger proceedings.
How long does it take FERC to approve mergers?
Response. I believe that such criticism is unwarranted. As I
indicate in my written testimony, the Commission has shown repeatedly
that it processes merger applications within the 150-day period
prescribed in our 1996 Merger Policy Statement. As Chairman Hoecker
notes in his response to this question, of the 24 merger applications
the Commission has acted on since 1996, only 3 were set for hearing.
The remaining applications were consistently processed within the
prescribed time period.
Question 10. H.R. 2944 amends section 203 of the Federal Power Act
to expand FERC review of sales of power plants and transmission
facilities by State and municipal utilities, cooperatives, and federal
electric utilities. Currently, those sales are not subject to review by
FERC, DOJ, or FTC. Is there a need for federal review of these sales to
ensure market power issues are addressed?
Response. As stated in my written testimony, I support the
provisions of section 401 of H.R. 2944, which authorizes the Commission
to review proposed mergers and disposition of facilities of all
electric utilities and transmitting utilities, including State and
municipal utilities, most rural electric cooperatives, and Federal
electric utilities. Given the changing nature of the electric industry
and in order to protect the public interest, I believe it is essential
that the Commission continue to evaluate public utility mergers and
that the scope of our merger authority be extended as proposed in
section 401 of the bill.
Question 11. The Burr bill (H.R. 67) and the Sawyer bill (H.R.
2786) repeal section 203 of the Federal Power Act. What is your view of
this proposal?
Response. I join Chairman Hoecker in strongly opposing repeal of
section 203 of the FPA. I believe the Commission's authority to review
public utility mergers is vital to the public interest. Furthermore, I
am convinced that the Commission is uniquely situated and eminently
qualified to assess a proposed merger's effects on competition, rates
and regulation. Given the Commission's special expertise and knowledge
of the electric industry, I believe that retention of the Commission's
merger authority is absolutely necessary.
Question 12. H.R. 2944 allows TVA to sell wholesale power outside
the region but provides for FERC regulation of such sales. Could TVA
get FERC approval to charge market-based rates for these sales?
Response. I concur with Chairman Hoecker's response to this
question.
Question 13. H.R. 2944 directs FERC to approve a transmission
surcharge on use of the BPA transmission system for electric sales in
the Pacific Northwest. Would it be difficult to fashion this surcharge?
Response. I concur with Chairman Hoecker's response to this
question.
______
Responses of Marsha H. Smith, Commissioner, Idaho Public Utilities
Commission, on Behalf of The National Association of Regulatory Utility
Commissioners to Questions from Hon. Joe Barton
Question 1. The Administration proposes a public benefits fund
financed by a new $3 billion tax on electric generation. This proposal
is based on a theory States will slash public benefits programs as they
open retail electric markets. 24 States have opened their retail
markets. How many slashed their public benefits programs? How many
strengthened their programs? Is a Federal public benefits fund needed
if States maintain public benefits programs?
Answer: NARUC is currently in the process of producing a database
to track the various policy elements found in each State restructuring
plan. This database is not yet completed to the extent that would allow
us to give a definitive answer. However, the initial research we have
done appears to show mixed results depending upon the specific program
in a particular State. Some States have increased some programs and
decreased others, while other States made no changes to the way they
handled public benefits programs.
While we expect States to continue playing an important role in
maintaining public benefits, NARUC believes there is a Federal role as
well. Our policy on public benefits in restructured utility markets
supports the inclusion in Federal legislation of ``workable mechanisms
to support State and utility public benefits programs.'' In developing
these mechanisms, we believe that Congress should focus its attention
on the following goals:
<bullet> A Federal-State partnership, building upon state and utility
expertise in designing and implementing electric service and
public purpose programs, and leaving the greatest possible
degree of flexibility and regulatory oversight to individual
States;
<bullet> Such programs may be designed, supported, and delivered
through the nation's electric system, using broad-based,
competitively-neutral funding mechanisms, subject to regulatory
oversight; and
<bullet> Federal support should be made available to assist and
encourage the states to develop and implement public purpose
programs that meet the needs of the States and the nation.
Further, we believe that there is a National interest in diversity
of generation resources, including necessary and appropriate public
interest research and development, to support a continuing Federal role
in this area during and after the restructuring process.
Question 2. Under the Administration bill, only certain public
benefits programs are eligible for Federal matching grants--low income
assistance, energy conservation, consumer education, research and
development programs that provide environmental benefits, and rural
assistance. Should Congress limit the ability of States to fund public
benefits programs?
Answer: NARUC's position, independent of the Administration's
specific proposal, is that Congress should not limit the ability of
States to fund public benefits programs by either restricting the
mechanisms used to support such programs or limiting their scope.
Question 3. H.R. 2944 clarifies State authority to impose public
purpose charges to fund programs of their own design, even if no State
jurisdictional facility (such as distribution) is used. Do you believe
this approach is preferable to a Federal public benefits fund?
Answer: NARUC strongly supports legislation that removes any doubt
that States can establish funding mechanisms for public benefit
programs. We believe that there is also a Federal role in this area,
consistent with the principles described in our answer to Question 1
above.
Question 4. The Pallone bill (H.R. 2569) includes a Federal public
benefits fund different from the Administration's proposal. The bill
sets different limits for State public benefits programs, imposes a new
distribution tax instead of a new generation tax, and is twice as large
($6 billion instead of $3 billion). What is NARUCs position on the
public benefits provisions of H. R. 2569?
Answer: NARUC has taken no position on the size of any Federal
public benefits program that restructuring legislation would establish.
Again, as our answer to Question 1 states, we do believe that there is
a Federal role in this area that goes beyond the removal of barriers to
State programs.
Question 5. Some witnesses support including market power
provisions in electricity legislation, authorizing FERC to order
divestiture if it determines an electric supplier has generation market
power. Does NARUC support these proposals? Do States have authority to
address generation marketpower?
Answer: First of all, Congress should not preempt State
jurisdiction to address market power issues. We believe that
divestiture is not the only option available to mitigate market power
in the generation market. State regulators must have at their disposal
a continuum of options for the mitigation of market power, and
accordingly, we urge Congress to preserve State flexibility to use
these options as needed. Legislation should clarify the authority of
States to use accounting conventions and codes of conduct, which may be
sufficient safeguards in some cases. Legislation should clarify the
authority of the States to require and police the separation of utility
and non-utility, and monopoly and competitive businesses, and to impose
affiliate transaction and other rules to assure that electric customers
do not subsidize non-utility ventures. Legislation should clarify that
States have clear authority to require the formation of appropriate
state and regional institutions where necessary to ensure a competitive
electricity market. As market power abuse may require the application
of well-tailored structural solutions, legislation should clarify that
the States are not restricted in their authority to require divestiture
where appropriate and necessary. Additionally, Congress should also
clarify that States have the ultimate and meaningful authority to
ensure effective retail markets and should eliminate any barriers to
the exercise of that authority by the States.
Second, concerning the scope of FERC's authority to address market
power issues, Congress may well conclude that FERC should have a
similar array of options to apply in specific cases. We believe that
any new authority granted the Commission to address issues within its
jurisdiction should complement the work of the States and such other
Federal agencies as the Federal Trade Commission and Department of
Justice and not preempt or restrict actions taken at the State level.
Question 6. How many of the 24 States that opened their retail
markets addressed generation market power issues? Some States--Texas,
California, New York, and the New England States--included generation
market power provisions. Others--New Jersey and Pennsylvania--did not.
Answer: Our preliminary analysis of State restructuring policies
indicates that many States have provided their regulatory commissions
with the array of options described in our answer to Question 5. While
we haven't been able to conduct an exhaustive analysis of State
restructuring legislation since we received the Subcommittee's
questions, we can report that States that have restructured retail
markets have provided their regulators with the authority to order
divestiture of generation facilities directly or as a condition for the
recovery of stranded costs (Maine, New Jersey, Nevada, Delaware,
Arkansas, Massachusetts, Connecticut), the authority to require
separate subsidiaries for regulated and non-regulated businesses
(Nevada, New Jersey, Rhode Island, Connecticut, New Hampshire, Ohio,
Virginia, Maryland, Maine), the authority to require functional
separation of competitive and regulated businesses (i.e. the model
adopted by FERC in Order No. 888) ( Illinois, New Jersey, Arkansas),
and the authority to revoke subsidiary licenses for market power abuses
(New Jersey).
Question 7. The Administration bill authorizes FERC to provide
backup market power remedies for retail markets at the request of
States lack of authority to remedy market power. Do States lack
authority to remedy marketpower issues?
Answer: As our answers to Questions 5 and 6 indicate, States do not
lack authority to remedy market power abuses that are within their
jurisdictional authority under the Federal Power Act. Any legislation
Congress considers that affects the allocation of jurisdiction must not
restrict the ability of States to monitor market behavior and impose
remedies necessary to protect consumers from market power abuses.
Question 8. H.R. 2944 clarifies Federal and State jurisdiction,
providing for FERC jurisdiction over transmission used for unbundled
retail sales, and for State jurisdiction over transmission used for
bundled retail sales. Is this clarification needed, and does the bill
draw the jurisdictional line properly?
Answer: NARUC believes clarification of Federal and State
jurisdiction is needed. However, the bill does not draw the
jurisdictional line properly. We support a jurisdictional division
based upon the bright line distinction between wholesale and retail
services: FERC would exercise jurisdiction to regulate wholesale power
transactions, including the transmission services necessary to complete
such transactions, and States would exercise jurisdiction to regulate
retail power transactions, including the transmission and distribution
services necessary to complete such transactions. Jurisdiction,
including ratemaking authority, should not shift based upon State
decisions to allow customer choice. Accordingly, NARUC does not support
the bill's allocation to FERC of regulatory authority over unbundled
retail sales.
Similarly, we oppose other proposals that would be even more
preemptive of State authority to regulate services provided retail
customers, such as the proposals by Americans for Affordable Energy
(AAE) and FERC Chairman Hoecker that would give FERC exclusive
jurisdiction to regulate all retail transmission services, whether
bundled or unbundled. Members of Congress should understand what these
proposals ask it to do: provide a distant FERC exclusive authority to
regulate prices and conditions of service provided by facilities that
were planned and constructed to serve retail customers, that have been
paid for by retail customers, and that criss-cross the fields, towns,
forests and waterways owned by or adjacent to retail customers.
Our proposal (retail authority to the States, wholesale to the
FERC) is not a formula for chaos, or balkanization of the grid, or a
crazy quilt. Rather, the situation described in Elizabeth Moler's
testimony for AAE (i.e. the difference between transmission service in
Virginia and West Virginia) is directly attributable to the decision
FERC made in Order No. 888 to assert jurisdiction over unbundled retail
transmission services. Had FERC not done so, regulatory jurisdiction
would now be uniform in Virginia and West Virginia--both State
commissions would regulate transmission services provided retail
customers whether bundled (West Virginia) or unbundled (Virginia).
Nor is it unusual for State and Federal regulators to share
regulatory authority over facilities used for services provided in both
jurisdictions. Indeed, this was the very state of affairs in the
electricity industry beginning in 1935 when Congress first adopted the
wholesale/retail distinction. Similar situations occur in the
telecommunications industry where plant and equipment is used for both
local and long-distance services. In sum, Congress should clarify the
Federal Power Act to ensure that services provided to retail customers
remain subject to State authority.
Question 9. Some charge transmission owners are redesignating
transmission facilities as distribution facilities to avoid FERC open
access requirements. Have you seen examples of such efforts? Are any
such utility efforts being supported by State public utility
commissions?
Answer: NARUC is aware of recent reports claiming that transmission
owners are using the ``seven-factor test'' adopted by FERC in Order No.
888 to ``refunctionalize'' their facilities. We are also aware of
suggestions that this process is resulting in the conversion of
facilities from Federally-regulated transmission to State-regulated
distribution. Finally, we understand that the implementation of the
seven-factor test is occurring in State regulatory proceedings where
State commissions are making findings that are then implemented through
FERC's Order No. 888 open-access tariffs. However, while we have not
had time to conduct an exhaustive evaluation of State decisionmaking in
this area, we can report the following:
The Illinois Commerce Commission conducted extensive time consuming
proceedings to apply the seven-factor test to its jurisdictional
utilities. As Order No. 888 requires, the work conducted by the
Illinois staff involved detailed analyses of diagrams and descriptions
of the facilities comprising each utility's power delivery system.
Application of the seven-factor test in Illinois resulted in some
significant reclassification of facilities from transmission to
distribution--up to 40% in the case of Commonwealth Edison. The
Illinois staff is convinced that their Commission applied the test as
FERC intended in Order No. 888, and that if there is a problem, it is
attributable to the test itself.
Similarly, the New York Public Service Commission conducted a
classification proceeding to develop rules that categorize utility
facilities consistently with FERC's Order No. 888 policies, focussing
its attention on cost allocation and revenue impact issues, i.e. how
the application of FERC's policies, supplemented with additional
technical factors tailored to local conditions, would affect consumer
rates. Importantly, while the rules developed in this proceeding have
not been fully implemented, the New York commission undertook its
analysis with the goal of supporting competitive markets in the State,
not to restrict access or deny service.
Some observations on the issue of refunctionalization:
<bullet> First, NARUC did not support the adoption of the seven-factor
test by Order No. 888. We believed at the time that contrary to
the Supreme Court's long-standing admonition that there be a
``bright-line'' between State and Federal jurisdiction, the
``seven-factor test'' would lead to case-by-case, power line-
by-power line jurisdictional determinations based upon weighing
and reweighing of the factors. In other words, it was our view
that a multifactor test could only lead to differing outcomes
in different cases. It would appear that in this respect, Order
No. 888 is operating exactly as FERC intended: State
commissions are making case-by-case determinations in the first
instance based upon application of the seven factors, and the
results then go to the Federal level to be implemented via
tariff.
<bullet> Second, from the perspective of retail competition, it is not
clear that refunctionalization (to the extent it's occurring)
is necessarily being undertaken to avoid open-access
requirements as much as it is to shift costs from the Federal
to State jurisdiction. In open access States, transmission
owners that also provide distribution services (i.e. the
vertically integrated utilities formerly providing bundled
services) must provide open access service to retail customers
regardless of the character (transmission or distribution) of
the specific facilities used to deliver the power. Accordingly,
if the entire retail transaction is subject to one
jurisdictional authority at the State level (covering
transmission and distribution services), refunctionalization
can provide no escape from open access requirements.
<bullet> Third, our proposal to allocate jurisdiction based on how
facilities are used rather than through case-by-case
application of seven technical factors restores the bright line
and limits the opportunity to shift facilities from one side of
the jurisdictional line to the other. Clearly, an allocation of
jurisdiction based upon wholesale (FERC) and retail (State)
service avoids the case-by-case problems of the seven-factor
test while preserving the categorization of facilities as
State, Federal or joint that has existed for decades.
Question 10. Should FERC regulate transmission that is not in
interstate commerce--such as transmission in noncontiguous States and
territories?
Answer: As a preliminary matter, the extension of FERC authority to
reach transmission services that are not in interstate commerce may
raise constitutional issues concerning Congress' authority under the
Commerce Clause.
Regardless of constitutional concerns, NARUC opposes the extension
of FERC authority that displaces, directs or preempts State authority.
At this point, no one has made the case that FERC's authority should be
extended to include transmission services provided in Alaska, Hawaii,
or Texas as this question would imply.
Question 11. Should States be able to discriminate against
aggregators? For example, should one State be able to bar cooperatives
from aggregating, while another State gives municipalities a preference
by allowing forced aggregation?
Answer: NARUC has taken no position on whether Federal legislation
should address the specific issue of aggregation. However, we have a
long-standing position that matters involving rates and conditions of
service to retail consumers should be addressed at the State level.
Accordingly, NARUC does not support legislation that preempts State
authority over retail services. Finally, we believe that the State
legislatures and commissions have adequate authority and interest to
work out fair and equitable aggregation rules and procedures without
Federal involvement.
Question 12. H.R. 2944 includes aggregation language barring States
from discriminating among aggregators. Have any of the 24 States that
opened their retail electric markets discriminated against aggregators?
If so, please identify the States and describe the discriminatory
provisions.
Answer: As stated in our answer to Question 11, we believe that
issues affecting retail electric service should be addressed at the
State level. Issues concerning eligibility standards to aggregate
retail purchases should be addressed in State legislatures and
regulatory commissions.
Question 13. Mr. Brown introduced a bill (H.R. 2734) to grant
municipal governments a preference in aggregating consumers, by
permitting them to aggregate consumers without their express consent
and preempting State laws that do not have opt out aggregation
provisions. What is NARUCs position on H.R. 2734?
Answer: NARUC has taken no position on H.R. 2734.
Question 14. Some States established their own renewable portfolio
standards. Is there a need to clarify State authority to impose
renewable portfolio standards?
Answer: There is a need to clarify State authority to impose
renewable portfolio standards. Congress should make clear that State-
adopted RPS programs are permissible under Federal law, i.e. not
preempted or precluded by such statutes as the Federal Power Act or
PURPA, or the Commerce Clause.
Question 15. H.R. 2944 includes net metering provisions. Who should
pay for new meters--the consumer, the local distribution company, or
the retail electric supplier? Who should own the meters?
Answer: These issues should be left to the states, who should
continue to have authority over distribution networks.
Question 16. Contractors propose amendments to provide for Federal
regulation of cross-subsidies in distribution rates, require States to
develop codes of conduct to prevent cross-subsidies and limit use of
names and logos by utilities, and provide for enforcement of these
prohibitions by State public utility commissions. What is your view of
these proposals? Do States have sufficient authority to address cross-
subsidy issues, or is Federal legislation necessary?
Answer: NARUC reiterates its position that retail activities should
remain within the jurisdiction of State commissions. Federal
legislation should clarify the authority of the States and territories
to require and police the separation of utility and non-utility, and
monopoly and competitive businesses. Congress should also clarify that
State and territorial regulators have the ultimate and meaningful
authority to ensure effective retail markets and should eliminate any
barriers to the exercise of that authority by the States and
territories. It is inappropriate to force small businesses and other
such aggrieved parties to take their complaints to Washington for
resolution. States have complaint processes to deal with local
concerns. States have instituted rulemaking proceedings to impose
affiliate transaction and other rules on monopoly utility companies
under their jurisdiction to assure that electric customers do not
subsidize non-utility ventures. Current State restructuring efforts are
providing critical tools to assist State and territorial regulators in
addressing market power and issues of unfair competition.
______
October 18, 1999
The Honorable Joe Barton
Chairman
Subcommittee on Energy and Power
Room 2125 Rayburn Building
Washington, D.C. 20515-6115
Dear Chairman Barton: Thank you for your letter of October 8, 1999,
and thank you again for inviting me to testify on behalf of the
National Association of State Utility Consumer Advocates (NASUCA) at
your Subcommittee Hearing on October 5, 1999. As I stated at that
hearing, NASUCA sincerely appreciates the willingness of you and your
staff to reach out in your deliberations to NASUCA members as the
representatives of retail electric consumers in their respective
states. NASUCA looks forward to continuing to work with you and other
members of Congress as you go forward with the consideration of
legislation in this vital area.
In response to the specific questions in your October 8, 1999
letter, NASUCA would respond as follows:
Question 1. Why do you believe a Federal electricity bill must
include market power provisions? States have authority to address
generation market power issues as they enact retail competition laws,
and may order divestiture, as some have done. Also, antitrust law
applies to electric utilities in competitive markets.
Response. Like electrons flowing on the grid, market power extends
beyond state boundaries. Individual states do not have jurisdiction
over companies or assets outside of their state borders. Antitrust laws
do not adequately address market power lawfully obtained, as through
the former legal and regulatory structure that existed for almost 100
years.
Question 2. Should States be able to set transmission reliability
standards that supercede national and regional standards. How many
States set transmission reliability standards? I understand New York is
the only State that regulates transmission reliability. If New York is
the only State that issues such standards, how can it be an essential
State function?
Response. States do have a vital role in maintaining the
reliability, safety, and adequacy of electric systems with each state's
borders. All states address reliability issues in some way, even if
they do not have specific regulations regarding ``transmission
reliability.'' It is NASUCA's position that states should retain
authority to address all reliability matters within their state
boundaries as long as their actions are not inconsistent with the
actions of the new North American Electric Reliability Organization or
the Federal Energy Regulatory Commission with respect to bulk power
transactions in interstate commerce.
Question 3. Why tie PUHCA repeal to divestiture? In my view, PUHCA
is a barrier to entry. Why should existing utilities have to sell their
generation to get out from under PUHCA? How much of U.S. generating
capacity is operated by subsidiaries of registered holding companies?
How much of U.S. generating capacity are you proposing to divest?
Response. NASUCA does not tie PUHCA repeal to divestiture. Rather,
NASUCA urges the Congress not to repeal PUHCA without first insuring
that holding companies are subject to either effective competition or
effective regulation where effective competition does not exist. NASUCA
does not have statistics regarding generating capacity that you
requested, nor does NASUCA propose a specific level of divestiture.
PUHCA still contains structural protections, vital reviews of
affiliate transactions, and the federal means to order divestiture of
one or more portions of a business in order to protect consumers and
promote the public interest. It also prohibits utility holding
companies from acquiring utility companies that provide monopoly
distribution service in disparate regions.
NASUCA provides several options regarding means for protecting
consumers and competition from this occurrence. Divestiture of
generation is only one potential mechanism; NASUCA would expect that a
showing of competitive retail generation markets for small customers in
each state in which the utilities have service territories would be the
primary means to address this potential problem. In addition,
regulators of distribution services in each state would need to ensure
that there is effective regulation to prevent utilities from gaining an
unfair advantage at captive consumers' expense.
Question 4. How many of the 24 States that opened their retail
markets addressed generation market power issues? Some States--Texas,
California, New York, and the New England States--included generation
market power provisions. Others--New Jersey and Pennsylvania--did not.
Response. NASUCA does not maintain a database that would enable a
prompt response to this question. In Pennsylvania, there is, in fact, a
section on ``Market Power Remediation'', 66 Pa.C.S. Sec. 2811.
Question 5. The Administration bill authorizes FERC to provide
backup market power remedies for retail markets at the request of
States lack of authority to remedy market power. Do States lack
authority to remedy market power issues?
Response. As noted in the answer to Question Number 1, states may
lack authority to address some market power issues that arise beyond
their borders, but that can have an impact within their borders. NASUCA
would agree that states should be permitted to request FERC ``backup''
on market power issues that are beyond the states' own authority to
address.
Response. Again, NASUCA thanks you for the opportunity to provide
continued input on these issues. If you have any questions about
NASUCA's position on these or any other electric restructuring issues,
please contact NASUCA's Executive Director, Charles Acquard at 202-727-
3908.
Sincerely yours,
Irwin Popowsky, Consumer Advocate of Pennsylvania
Immediate Past President, NASUCA
______
Response of Hon. T.J. Glauthier, Deputy Secretary of Energy, to
Questions of Hon. Joe Barton
Question 1. The Burr bill (H.R. 667) and the Sawyer bill (H.R.
2786) repeal section 203 of the Federal Power Act. What is your view on
this proposal?
Response. We oppose the repeal of Section 203 of the FPA. As we
transition from a period of monopoly utility service to competition in
the wholesale and retail markets, it is imperative that we act to
eliminate the impediments to competition. While utility mergers and
consolidations are not per se inappropriate, some do have the potential
to reduce competition. We need to ensure that mergers and
consolidations don't actually reduce competitive pressures.
Determining whether a merger will be anti-competitive requires
regulators and antitrust enforcers to make predictive judgements. These
judgements are frequently difficult, and are certainly more difficult
in an industry, such as electricity, where there are no fully
competitive markets to use as a benchmark to determine whether a
proposed merger will harm consumers.
It is important that the Federal Energy Regulatory Commission
(FERC), with its significant expertise, retains its authority to ensure
that proposed mergers are in the public interest. Section 203 provides
FERC with the flexibility to craft appropriate policies and procedures
dealing with mergers in the electric power industry over which it has
jurisdiction. Section 203 also gives FERC the ability to place
conditions on its merger approvals and to exercise continuing
jurisdiction over the merged entities. This authority plays a
significant role in preventing anticompetitive mergers, particularly
during the transition period to competition.
Question 2. States have authority to address generation market
power issues as they enact retail competition laws, and may order
divestiture, as a number of States have done. Also, antitrust law
applies to electric utilities after States cease regulating retail
rates. Why is it necessary to give FERC a broad grant of discretionary
authority to restructure the industry and order divestiture?
Response. The Administration bill would give FERC the authority to
address wholesale market power problems. States do not have
jurisdiction over sales of electricity in the wholesale market and
consequently lack authority to address possible wholesale market power
problems. FERC, under the Administration bill, would have backup
authority to address retail market power problems. This authority can
only be triggered at the request of a state. This backup authority is
needed because a state may not have adequate statutory authority or
jurisdiction to address market power that harms its consumers.
As we make the transition to competition, ownership patterns and
transmission constraints in a particular region may result in consumers
being denied access to an adequate number of generators. This situation
may allow the dominant firm to raise price above competitive levels to
those consumers. In those instances, it is absolutely critical that
FERC be given the necessary authority to mitigate market power. The
Administration bill would give FERC the authority to mitigate market
power, after a public proceeding, only in those instances where it is
found that a utility can exercise market power. This is not a broad
authority to ``restructure the industry.'' It is an authority to
protect consumers from market power. The ultimate goal of the
Administration's market power provisions is to ensure that consumers
realize the benefits of competition. A failure to address adequately
possible market power problems may result in replacing regulated
monopolists with unregulated ones.
The antitrust laws do not outlaw the mere possession of monopoly
power. In other words, the antitrust laws cannot challenge the
structure of a market. For example, if, after the advent of
competition, a utility possesses a 90 per cent share of a market, the
antitrust laws are powerless to prevent this firm from charging
monopoly prices. In order for a monopolist to violate the antitrust
laws, it must engage in ``bad acts,'' which are defined as exclusionary
conduct designed to enable a firm to gain or maintain a monopoly.
Charging high prices is not considered exclusionary conduct and is
therefore not an antitrust violation.
Question 3. The Administration bill gives FERC extraordinary powers
to order divestiture. How many Federal regulatory agencies have the
power to restructure the industries they regulate, including the power
to order divestiture?
Response. Section 11 of the Public Utility Holding Company Act
(PUHCA) provides the SEC with the authority to require a utility
holding company to simplify its corporate structure, including the
authority to require divestiture. In addition, the FCC has the
authority to require divestiture. The FCC has issued orders and
promulgated regulations authorizing divestiture in those instances when
the agency determines that divestiture is necessary to preserve
competition.
It is important to keep in mind that the electric power industry is
fundamentally different from other industries. All electric energy
produced by all interconnected generating stations must continuously
and instantaneously balance the aggregate energy being consumed by all
users. Electricity cannot be economically stored. Market power
remedies, such as divestiture, were probably not necessary in those
industries that did not develop from government-sanctioned monopolies.
Question 4. The Administration bill would authorize FERC to order
divestiture to mitigate generation market power. Aren't there less
intrusive means of mitigating market power, such as reregulating retail
rates charged by suppliers?
Response. It is important to note that divestiture is not the
exclusive remedy that FERC would have at its disposal to address market
power under the Administration proposal. FERC may find that there are
other remedies that adequately mitigate market power. Re-regulating
rates may not necessarily be a ``less intrusive'' means of mitigating
market power. Rate regulation is very costly and burdensome. It
requires complex rules and constant oversight and examination of a
utility's sensitive records. There are constant battles over, among
other things, accounting rules and proper allocation of costs. After
more than a century of experience with price regulation in this
industry, there is a strong consensus--which forms the foundation of
the efforts to restructure the industry--that markets are superior to
price regulation.
Divestiture is a common remedy used by the federal enforcement
agencies to remedy likely market power caused by an anticompetitive
merger. This remedy, in the merger context, preserves the competition
that otherwise would have been lost. Once the assets necessary to
preserve competition are sold, there is no government oversight of the
firm. The market establishes the prices at which the firm's products or
services are sold.
Likewise, in a restructured electric power industry, FERC would
seek divestiture only when necessary to give customers an adequate
number of suppliers from which to choose. Once the assets are sold that
are necessary to ensure that there is competition, the market sets the
prices at which energy is sold.
Question 5. You testified antitrust laws are not sufficient to
address generation market power issues. Describe a market power abuse
that would not violate the antitrust law.
Response. The mere possession of monopoly power does not constitute
a violation of the antitrust laws. For example, an incumbent utility
with a significant share of the market may be able profitably to raise
price above competitive levels to consumers. This firm's choosing to
exploit its market power by raising its prices above competitive levels
would not constitute an antitrust violation.
Question 6. The Administration proposes a public benefits fund
financed by a new tax on electric generation. This proposal is based on
a theory States will slash their public benefits programs as they open
retail electric markets. 24 states have opened their retail markets.
How many slashed their public benefits programs? How many strengthened
their programs? Why is a Federal public benefits fund needed if States
maintain public benefits programs?
Response. The Administration's proposed public benefits fund does
not envision any taxes. Rather, a public benefits charge (capped at \1/
10\ of a cent per kilowatt-hour) would be established by FERC to
generate an amount sufficient to meet requests made by State and tribal
governments for matching funds (subject to a $3 billion/year national
cap) to support eligible public purpose programs. If no state or tribal
government sought matching funds, no fees would be collected.
In addition, a wires charge of up to .17 mills per kwh would be
available if the Secretary of Energy were to determine that competition
has adversely impacted rural consumers. The rural safety net would be
administered through the public benefits fund.
Of the states that have adopted restructuring programs, six states
have decreased their funding for energy efficiency programs and eight
states have increase funding for these programs.
Expenditures for public purpose programs have generally declined in
recent years. For example. spending on demand-side-management programs
in 1998 were approximately half the level of 1994 expenditures.
Many, but not all, states that have opened their retail markets
have arranged to continue funding of public purpose programs for a
limited time period. A federal public benefits fund would provide all
states with an incentive to maintain such programs through 2015.
Federal encouragement is appropriate given that the benefits of public
purpose programs often extend beyond state boundaries.
Question 7. Legislation introduced by Mr. Pallone (H.R. 2569)
includes a Federal public benefits fund different from the
Administration's proposal. The Pallone bill sets different limits for
State public benefits programs, imposes a distribution tax instead of a
generation tax, and is twice as large ($6 billion instead of $3
billion). What is the Administration's position on H.R. 2569?
Response. The Administration agrees with the intent of H.R. 2569--
to provide a mechanism to promote expenditure on public benefits
programs. Both proposals authorize the collection of a fee to help pay
for State public purpose programs.
With regard to the assessment of the fee, the Administration
believes that a charge on generation is more appropriate. Many
distribution companies are very small. A charge of as much as 2.0 mills
per kilowatt-hour, as proposed in H.R. 2569, would represent a
significant increase in the costs of distribution. An additional charge
of up to 1 mill (as the Administration has proposed) would not have
nearly the same effect on the costs of generation.
With regard to the size of the Federal contribution to public
benefits fund, the Administration believes that the Federal
contribution of $3 billion and the contribution of the states at
another $3 billion would be sufficient to cover what was being
recovered in rates prior to the transition to more competitive markets.
However, we also note that the charge envisioned in H.R. 2569 would be
reduced by 50% of the amount of any wire charge imposed by a state for
eligible public purpose programs. Therefore, the amount collected under
H.R. 2569 is unlikely to be double the amount collected under the
Administration bill.
Question 8. Some argue Federal electricity legislation should not
include any consumer protection provisions, and should rely on States
to address these issues. Why should consumer protection provisions be
included in Federal legislation.
Response. The Administration believes that, generally, most
consumer protection issues are best addressed by the states.
Nevertheless, it is important to recognize that, in a competitive
environment, marketers headquartered in various states will be
competing for customers. State regulatory authority over unscrupulous
marketers will be somewhat limited. That is why the Administration bill
includes provisions designed to prevent retail suppliers from engaging
and slamming and cramming practices. I understand that H.R. 2944
contains similar provisions.
Question 9. H.R. 2944 clarifies Federal and State jurisdiction,
providing for FERC jurisdiction over transmission used for unbundled
retail sales, and for State jurisdiction over transmission used for
bundled retail sales. Is this clarification needed, and does the bill
draw the jurisdictional line properly?
Response. One of the reasons Congress needs to enact electricity
restructuring legislation is to ensure that FERC's open access rules
apply to all significant transmission owners. FERC's current authority
is limited under the Federal Power Act and, potentially, as a result of
a recent 8th Circuit Court of Appeals Decision in the Northern States
Power v. FERC case. If wholesale and retail competition are going to
effectively develop, FERC must have the ability to ensure that all
significant transmission facilities are subject to open access
requirements. H.R. 2944 could be interpreted as limiting the
applicability of FERC's open access rules to unbundled retail
transmission; leaving a significant portion of transmission exempt from
these open access requirements. The bill needs to be modified to
eliminate this uncertainty and ensure that the open access rules apply
to all transmission.
Question 10. You criticize H.R. 2944 because it does not provide
for FERC regulation of transmission used to make bundled retail sales.
Did the Administration bill grant FERC that authority? My understanding
it did not. How can you criticize H.R. 2944 for not including something
the Administration bill did not propose?
Response. The Administration's proposed legislation is silent with
regard to FERC's authority over bundled retail transmission. However,
our bill was transmitted to Congress prior to the 8th Circuit's
decision in the Northern States case. This decision raises serious
questions about the potential effectiveness of FERC's open access
rules. Certainly, legislation must clarify that FERC has sufficient
jurisdiction to ensure that utilities don't use their transmission
facilities to discriminate against other marketers.
Question 11. FERC does not regulate transmission systems operated
by State and municipal utilities and cooperatives, which are some of
the largest systems in the country. State and municipal utilities
oppose FERC regulation of transmission rates, and want to retain that
authority. If State and municipal utility transmission systems continue
to be unregulated could they shift power costs onto their transmission
rates? Could they discriminate against competitors?
Response. If FERC were to have the authority to ensure that
municipal and cooperative utilities' transmission rates are just,
reasonable and not unduly discriminatory, these utilities will be on
the same footing as public utilities are today, and will be unable to
use their transmission systems to advantage their power systems.
Question 12. Should FERC regulate transmission that is not in
interstate commerce--such as transmission in noncontiguous States and
territories?
Response. The Administration believes that FERC should regulate
only transmission that is in interstate commerce. Constitutional
questions might arise should FERC's jurisdiction be extended to
transactions not in interstate commerce.
Question 13. What is your view of the transmission provisions of
the bill introduced by Mr. Sawyer (H.R. 2786)?
Response. The Administration agrees with Mr. Sawyer that
transmission is a key element of promoting wholesale and retail
competition. However, we are concerned about several provisions in the
bill.
First, H.R. 2786 requires FERC to allow transmitting utilities to
recover all costs incurred in providing transmission service. We
believe that, while this is generally the appropriate policy, FERC must
retain authority to review costs to ensure that they are appropriate
for inclusion in rates.
Under H.R. 2786, transmission rates must be established to
accomplish a number of different policy goals. We believe that these
are laudable goals. However, we don't believe they should be
statutorily mandated. FERC has the expertise and experience to set
pricing policies appropriate to the transmission industry. On the other
hand, permitting negotiated transmission rates, as H.R. 2786 does,
could result in discrimination among users of the transmission system.
The Administration also agrees that FERC should encourage
innovative pricing policies. However, we have concerns regarding
incentive pricing to encourage participation in a regional transmission
organization (RTO). The Administration believes that FERC should have
the authority to require such participation, as it may not be possible
to ensure a fully competitive electricity market without RTOs. For the
same reason, the Administration is concerned with H.R. 2786's goal of
voluntary RTO formation. In addition, there is no requirement that RTOs
be independent of market participants. We agree with FERC that
independence is an RTO's most important characteristic.
Question 14. H.R. 2944 includes an exemption from FERC regulation
for small transmission owners. Do you believe this exemption is
appropriate? Do you have any comment on the specific exemption
provision in H.R. 2944?
Response. The Department of Energy supports an approach which
exempts, from FERC jurisdiction, transmission facilities owned by
municipal and cooperative utilities which are not essential to
efficient, reliable and competitive interstate power markets.
Question 15. NARUC proposed amending the reliability title of H.R.
2944 to authorize individual States to establish reliability standards.
What is your position on this proposal? Would 50 different reliability
standards improve reliability? How would 50 different standards affect
interstate commerce?
Response. The issue of how best to incorporate a role for the
states in bulk power system reliability is complex. Certainly, a system
of 50 different standards would not improve reliability, and would have
an adverse impact on interstate commerce. We support a continuation of
the dialogue between NARUC and NERC and other stakeholders to develop
provisions that would allow for an appropriate state role.
Question 16. The reciprocity provisions of the Administration bill
would grant States, municipal utilities, and cooperatives the power to
regulate interstate commerce. 3,000 different entities would regulate
interstate commerce (there are 2,000 municipal utilities and over 900
cooperatives). Is that wise? Since reciprocity is regulation of
interstate commerce, isn't it better it be a Federal rule?
Response. While it is true that reciprocity requirements regulate
interstate commerce, authorizing states and non-regulated municipal and
cooperative utilities to impose reciprocity requirements is consistent
with the approach taken by H.R. 2944, which leaves many matters related
to interstate commerce subject to state and local regulation.
Question 17. You argue that utilities could avoid the reciprocity
provisions in H.R. 2944 by filing sham open access plans with their
State public utility commissions. How do you propose to address the
situation where a multistate utility operates in both open and closed
States? Should the utility be denied access to retail markets in the
open States it has historically served?
Response. The Administration does not believe that a multistate
utility should be penalized if it serves a state that requires
competition and a state that has yet to require competition. However,
the reciprocity provisions included in H.R. 2944, which apparently are
intended to discourage utilities from acting to inhibit the
introduction of retail competition, enables a utility to avoid the
reciprocity restrictions simply by funding a competition plan with its
state commission. There is no mechanism to ensure that the plan filed
by the utility is a serious proposal and that the utility will make an
effort to allow its customers access to the benefits of retail
competition
Question 18. The Administration bill includes a Federal date
certain with an opt out--a flexible mandate. Why do you believe the
flexible mandate is needed? The real pressure on States to open their
retail electric markets comes from competition with other States for
economic development. The flexible mandate will result in a lot of
litigation, and may not accelerate State action.
Response. The Administration believes that retail competition, if
structured properly, will benefit consumers, the economy and the
environment. We also believe that most, if not all, state public
service commissions and non-regulated municipal and cooperative
utilities would concur if they held a proceeding to review the matter.
The flexible mandate approach encourages states and non-regulated
utilities to implement retail competition programs but recognizes that
unique local issues might require a different approach.
We disagree with your assumption that the ``flexible mandate will
result in a lot of litigation . . .'' The opportunities for challenging
the decision of a state public service commission or a non-regulated
utility to opt-out are limited.
Question 19. A number of States have established their own
renewable portfolio standards. Is there a need to clarify State
authority to impose renewable portfolio standards, or is there no doubt
States have such authority?
Response. We are unaware of any challenges to the authority of
states to adopt renewable portfolio standards. In addition, we believe
states would have the ability to impose a renewable portfolio standard
and require a higher amount of renewable generation if a Federal
renewable portfolio standard is enacted.
The Administration believes that the limited programs that have
been adopted in a small number of states cannot provide the significant
national benefits that would result from the adoption of a national
renewable portfolio standard that requires all retail sellers to cover
7.5% of their sales with generation from eligible renewable resources
by 2010.
Question 20. Does the Administration support the bill introduced by
Mr. Waxman to amend the Clean Air Act to require older coal power
plants in the Midwest and Southeast to meet new source performance
standards (H.R. 2900)?
Response. The Administration has not yet taken a position on H.R.
2900.
Question 21. The Administration bill includes aggregation language
similar to the aggregation provisions in H.R. 2944. Have any of the 24
States that opened their retail electric markets discriminated against
aggregators? If so, please identify the States and describe the
discriminatory provisions.
Response. Maryland, which adopted retail competition legislation,
prevents municipalities from acting as aggregators. In addition, it is
not entirely clear that all states permit the rural electric
cooperatives operating within their borders to aggregate on behalf of
their distribution customers.
Question 22. Mr. Brown introduced a bill (H.R. 2734) to grant
municipal governments a preference in aggregating consumers, since it
permits them to aggregate consumers without their consent. What is the
Administration's position on that bill? Should municipalities have an
advantage in aggregating over churches, social and charitable
organizations, and others?
Response. The Administration believes that aggregation is an
important tool to ensure that residential and small commercial
electricity consumers reap the full benefits of retail competition
programs. It is the Administration's position that municipalities and
all other entities should be able to aggregate groups of consumers. At
the same time, we don't believe that any aggregator should be able to
force a consumer to be served by that entity. We don't read the Brown
bill as forcing any consumer to be served by a municipal aggregator.
Question 23. The Administration bill includes interconnection
provisions similar to H.R. 2944. Will these provisions lower barriers
to entry for new power plants?
Response. Interconnection standards in the Administration bill
apply specifically to small-scale distributed generation facilities and
combined heat and power facilities. These provisions lower a
potentially important barrier to entry for those new power plants that
fail within these categories. Unwarranted impediments to
interconnection provide a means for incumbent utilities to prevent
entry and exert market power. Moreover, interconnection standards vary
widely from utility to utility thereby discouraging widespread use of
distributed generation. For these reasons, the Administration proposes
a provision to establish and implement national uniform, and non-
discriminatory technical interconnection standards for the hookup of
distributed power generation systems to distribution utilities.
Question 24. The Administration bill promotes interconnection of
``small scale electric power generation facilities'' of undefined size,
and H.R. 2944 promotes interconnection of distributed generation
facilities of 50 megawatts or less. Should distributed generation
facilities be of unlimited size? Are there reliability implications if
these facilities are too large?
Response. We believe that distributed power is likely to play a
significant role in meeting customer needs in restructured electricity
markets. The Administration bill does not set a specific size threshold
for distributed generation facilities because we believe that the
definition of a ``small-scale electric power generation facility''
should be determined based on technical considerations. A working group
under the Institute of Electrical and Electronics Engineers is already
developing a voluntary industry standard for interconnecting
distributed power with electric distribution and subtransmission
systems, and plans to have a complete draft ready by March 1999 to
start the consensus process. We understand that the current draft
envisions voluntary standards applicable to facilities up to 50
megawatts in size, but this is clearly subject to further technical
deliberation.
Question 25. The Administration bill includes net metering
provisions similar to H.R. 2944. Who should pay for new meters--the
consumer, the local distribution company, or the retail electric
supplier? Who should own the meters?
Response. The Administration believes that questions concerning the
ownership of and payment for distribution meters should be addressed at
the state level. In this regard, meters used for net metering are no
different from other distribution meters. However, given the national
interest in increased use of renewable energy technologies, the
Administration's restructuring proposal would insure that net metering
service is made available to consumers in all parts of the country who
wish to install small-scale renewable energy technologies.
THE ELECTRICITY COMPETITION AND RELIABILITY ACT
----------
WEDNESDAY, OCTOBER 6, 1999
House of Representatives,
Committee on Commerce,
Subcommittee on Energy and Power,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m. in
room 2123, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Stearns, Largent,
Burr, Whitfield, Shimkus, Wilson, Pickering, Fossella, Bryant,
Ehrlich, Hall, McCarthy, Sawyer, Markey, and Wynn.
Staff present: Joe Kelliher, majority counsel; Cathy Van
Way, majority counsel; Miriam Erickson, majority counsel;
Ramsen Betfarhad, economic advisor; Elizabeth Brennan,
legislative clerk; Sue Sheridan, minority counsel; and Rick
Kessler, minority professional staff member.
Mr. Barton. The Subcommittee on Energy and Power of the
Commerce Committee will come to order.
Today is a continuation of a hearing that we began
yesterday, a legislative hearing on the pending piece of
legislation, H.R. 2944.
Today we are going to begin hearing from groups out in the
country that have an interest in this. I think we have a total
of 17 witnesses in two panels, and I believe that we have
accepted every witness request from every member of the
subcommittee on both sides of the aisle.
I will make this announcement periodically during the day,
as more members show up, but it is unlikely we will go to
markup next week because the full committee is going to try to
mark up a Superfund bill that Congressman Oxley is working on
in his subcommittee, but it is the Chair's intention to spend
the rest of this week and next week getting input from members
and interest groups on specific legislative language and
specific changes to H.R. 2944, and then the following week--not
next week, but the week after next--to schedule a markup. And I
will do that in conjunction with Chairman Bliley and
Congressman Hall and Congressman Dingell in terms of actually
scheduling a date certain for a markup. But it is my intention
to do that not next week but the week after next.
With that, we want to begin to hearing testimony. We are
going to start with Mr. William Helton, which is somewhat
different. Normally, we go from the Chair's left to right, but
we are going to go from the Chair's right to left because that
is the way we have it in the witness list.
So, Mr. William Helton is with New Century Energies, and he
represents the Alliance for Competitive Electricity.
Your statement is in the record in its entirety. We ask
that you summarize it in, let's say, 6 minutes. How about that?
Welcome to the committee.
STATEMENTS OF WILLIAM HELTON, NEW CENTURY ENERGIES,
REPRESENTING ALLIANCE FOR COMPETITIVE ELECTRICITY; DAVID R.
NEVIUS, VICE PRESIDENT, NORTH AMERICAN ELECTRIC RELIABILITY
COUNCIL; ALAN H. RICHARDSON, EXECUTIVE DIRECTOR, AMERICAN
PUBLIC POWER ASSOCIATION; DAVID K. OWENS, EXECUTIVE VICE
PRESIDENT, EDISON ELECTRIC INSTITUTE; LYNNE H. CHURCH,
EXECUTIVE DIRECTOR, ELECTRIC POWER SUPPLY ASSOCIATION; WILLIAM
R. MAYBEN, PRESIDENT, NEBRASKA PUBLIC POWER DISTRICT,
REPRESENTING LARGE PUBLIC POWER COUNCIL; GLENN ENGLISH, CHIEF
EXECUTIVE OFFICER, NATIONAL RURAL ELECTRIC COOPERATIVE
ASSOCIATION; DAVID G. HAWKINS, DIRECTOR OF AIR AND ENERGY
PROGRAMS, NATURAL RESOURCES DEFENSE COUNCIL; AND RAJESHWAR RAO,
PRESIDENT, INDIANA MUNICIPAL POWER AGENCY, REPRESENTING
TRANSMISSION ACCESS POLICY STUDY GROUP
Mr. Helton. Mr. Chairman and members of the subcommittee, I
am Bill Helton, chairman and chief executive officer of New
Century Energies. New Century Energies serves over 1.5 million
electric and 1 million gas customers in portions of six western
States, including Colorado, New Mexico, Texas, Wyoming, Kansas,
and Oklahoma. Three of the States we operate in--New Mexico,
Oklahoma, and Texas--already have adopted customer choice
legislation.
We support providing customers with a choice of their
electric supplier and are working in our other States to
achieve that very objective.
I also am testifying today on behalf of the Alliance for
Competitive Electricity, an organization of 11 investor-owned
utilities formed nearly 4 years ago for the purpose of
promoting Federal restructuring legislation to foster a more-
competitive electric industry.
Ten of our 11 members operate in States that already have
adopted retail choice plans. Now, these States include:
California, New Mexico, Texas, Oklahoma, Michigan,
Pennsylvania, New Jersey, Massachusetts, Rhode Island, New
Hampshire, Maine, Virginia, and Arkansas.
The Alliance has endeavored to be an interested, credible
broker on many difficult restructuring issues.
Mr. Chairman, as you know better than anyone, addressing
the Federal issues associated with restructuring the $220
billion electric industry has proven to be complex,
controversial, and mostly thankless task.
I personally want to take this time to thank the committee
for its time and energy, attention, and perseverance, and, in
many cases, good humor that you have brought to bear on this
issue, and for doing the hard work that needs to be done to get
to the finish line.
I also want to thank you and your staff for listening to
our ideas and our suggestions and our comments on the August 4
staff discussion draft.
Mr. Chairman, H.R. 2944 is not a perfect bill, from our
perspective, but it is a good one that fairly addresses most
Federal electric industry restructuring issues in a reasoned
and balanced way.
At your very first hearing on electric industry
restructuring issues in this Congress, you asked a
distinguished panel of witnesses whether, if certain key
Federal restructuring issues could be addressed, but not all of
them, would it make sense to pass a good, albeit not perfect,
bill.
Three of your witnesses all indicated that it was important
not to let the perfect be the enemy of the good, and there was
an urgency to dealing with a number of restructuring issues,
including reliability. That was good advice then and that is
good advice today.
As we work toward implementing customer choice in the three
States that we serve that have adopted this as their policy, it
is becoming increasingly clear that, despite the primary role
the States must play, the States do not have the jurisdiction
or the authority to do all that is necessary.
For example, the States cannot deal with the Federal
barriers that now stand in the way of a more competitive
industry, including PUHCA and PURPA.
The States cannot clarify State/Federal jurisdictional
ambiguity that threatens FERC order number 988 and State
restructuring plans.
The States, additionally, cannot extent FERC's transmission
regulation, including FERC's open access policies, to non-FERC
jurisdictional transmission owners, including TVA and the PMAs.
The States cannot reform the PMAs or the TVA to allow the
consumers they serve to obtain the benefits of a more-
competitive electricity market.
The States cannot insure the reliability of the interstate
transmission grid.
And, last, the States cannot establish a new regulatory
regime governing the transmission system that ensures open,
non-discriminatory access.
The States cannot do these many things that need to be done
to bring all consumers the benefits of a more-competitive
electric industry. So, regardless of your position or your
State's position on retail customer choice, much must be done
in Congress in order to help smooth the restructuring path.
We believe that your bill satisfactorily addresses most of
these core Federal issues. In particular, we are pleased the
way the bill addresses uniform regulation and open access for
all transmission owners. We are pleased the way it addresses
the clarification of State/Federal regulatory jurisdiction. We
are pleased with the bill's assist in insuring reliability of
the bulk power system. We are also pleased in the way it
addresses that States should be given explicit authority to
impose charges on jurisdictional activities. Also, the bill
does a good job in addressing FERC's regulation that it should
be extended to PMA's TVA energy sales rates.
The bill adequately covers the repeal of PUHCA and PURPA.
Mr. Chairman, these issues that I have mentioned must be at
the core of any comprehensive Federal electric industry
restructuring legislation, and all are addressed satisfactorily
in H.R. 2944.
We remain concerned, however, over the private use and the
co-op tax relief provision contained in H.R. 2944 and believe
that BPA, TVA, regional transmission organization, reciprocity,
merger review, aggregation, and interconnection provisions can
be improved without fundamentally changing your intent.
We will be developing perfecting legislative language to
accomplish those improvements.
H.R. 2944 does a great deal to mitigate market power. The
bill requires utilities to turn over operational control of
their transmission systems to an independent RTO that allows
customers to band together----
Mr. Barton. Mr. Helton, can I ask you to summarize. You
have gone past your 6 minutes.
Mr. Helton. Yes, sir.
Mr. Barton. We want to move this panel on.
Mr. Helton. In conclusion, Mr. Chairman----
Mr. Barton. Very good. Fast learner.
Mr. Helton. I want to thank you and the other members of
the subcommittee for the good work that you have done. H.R.
2944 reflects your tireless efforts to seek compromising
consensus. From any perspective, it is basically a good bill
worthy of support.
[The prepared statement of William Helton follows:]
Prepared Statement of Bill Helton, Chairman of the Board and Chief
Executive Officer, New Century Energies, on Behalf of The Alliance for
Competitive Electricity
i. introduction
Mr. Chairman and Members of the Subcommittee, I am Bill Helton,
Chairman of the Board and Chief Executive Officer of New Century
Energies. New Century Energies serves over 1.5 million electric and
natural gas customers in portions of six Western states, including
Colorado, New Mexico, Texas, Wyoming, Kansas and Oklahoma. Three of the
states we operate in, New Mexico, Oklahoma and Texas, already have
adopted customer choice legislation. We support providing customers
with a choice of their electric supplier and are working in our other
states to achieve that objective.
I also am testifying today on behalf of the Alliance for
Competitive Electricity, an organization of 11 investor-owned utilities
formed nearly 4 years ago for the purpose of promoting federal
restructuring legislation to foster a more competitive electric
industry. Ten of our 11 Members operate in states that already have
adopted retail choice plans. These states include California, New
Mexico, Texas, Oklahoma, Michigan, Pennsylvania, New Jersey,
Massachusetts, Rhode Island, new Hampshire, Maine, Virginia, and
Arkansas. The Alliance has endeavored to be an interested, credible,
broker on many difficult restructuring issues.
Mr. Chairman, as you know better than anyone, addressing the
federal issues associated with restructuring the $220 billion a year
electric industry has proven to be a complex, controversial, and mostly
thankless, task. I personally want to thank you for the time, energy,
attention, perseverance, and good humor that you have brought to bear
on this issue and for doing the hard work that needs to be done. I also
want to thank you and your staff for listening to our ideas,
suggestions, and comments on the August 4 staff discussion draft.
Mr. Chairman, H.R. 2944 is not a perfect bill from our perspective.
But it is a good one that fairly addresses most federal electric
industry restructuring issues in a reasoned and balanced way.
At your very first hearing on electric industry restructuring
issues in this Congress, you asked a distinguished panel of witnesses
whether if certain key federal restructuring issues could be addressed,
but not all of them, it would make sense to pass a good, albeit not
perfect, bill. Three of your witnesses, former Deputy Secretary of
Energy and former FERC Chair Elizabeth Moler, former FERC Commissioner
Michael Naeve, and former Deputy Secretary of Energy Linda Stuntz all
indicated that it was important not to let the perfect be the enemy of
the good and that there was an urgency to dealing with a number of
restructuring issues, including reliability. That was good advice then,
and it remains good advice today.
ii. the role of congress
As we work toward implementing customer choice in the three states
we serve that have adopted this as their policy, it is becoming
increasingly clear that, despite the primary role the states must play
in restructuring the electric industry, the states do not have the
jurisdiction or the authority to do all that is necessary. For example,
the states cannot deal with the federal barriers that now stand in the
way of a more competitive industry, including PUHCA and PURPA; the
states cannot clarify state/federal jurisdictional ambiguity that
threatens FERC Order No. 888 and state restructuring plans; the states
cannot extend FERC's transmission regulation, including FERC's open
access policies, to non-FERC jurisdictional transmission owners,
including TVA and the PMAs; the states cannot reform the PMAs or the
TVA to allow the consumers they serve to obtain the benefits of more
competitive electricity markets; the states cannot ensure the
reliability of the interstate transmission grid; and the states cannot
establish a new regulatory regime governing the transmission system
that ensures open, non-discriminatory access, while providing the
incentives necessary to upgrade and expand that system. The states
cannot do these many things that need to be done to bring all consumers
the benefits of a more competitive electric industry. So, regardless of
your position, or your state's position, on retail customer choice,
much must be done in Congress in order to help smooth the restructuring
path.
We believe that your bill satisfactorily addresses most of these
core federal issues. In particular, we are pleased with the provisions
addressing the following:
<bullet> Uniform Regulation and Open Access for All Transmission
Owners--While investor owned utilities are subject to FERC
regulation of the rates, terms and conditions applicable to the
provision of transmission service, municipal and state
utilities, co-ops, TVA, and the PMAs are not. As a consequence,
only about 70% of all transmission is subject to FERC
regulation, including wholesale open access requirements. This
creates an untenable situation. FERC jurisdiction should be
extended to all transmission owners in the lower 48 states.
With the possible exceptions of TVA and BPA, which continue to
be treated as ``special'' in certain respects, H.R. 2944 would
satisfactorily accomplish this.
<bullet> Clarification of State/Federal Regulatory Jurisdiction--As we
move to a new regulatory system in which the various components
of electric service are ``unbundled,'' it is clear that the
Federal Power Act, which was written at a time when retail
sales were ``bundled,'' needs to be updated. A clear new
``bright line'' between state and federal regulatory
jurisdiction needs to be drawn. States should be given
exclusive regulatory authority over bundled retail sales, over
the retail sale component and the local distribution service
component of an unbundled retail sale, and over the ``service''
of delivering retail electricity. FERC should be given
exclusive jurisdiction over the transmission component of an
unbundled retail sale and should retain its exclusive
jurisdiction over wholesale sales and transmission. This
``bright line'' was spelled out in FERC Order No. 888, and it
represents a reasonable and fair division of regulatory
authority. H.R. 2944 adopts this position.
<bullet> Help Ensure Reliability of Bulk Power System--Our existing
voluntary reliability organizations have served us well.
However, with the advent of EPAct, FERC Order No. 888 and
retail competition, the transmission system is being stressed
as never before. In addition, there are hundreds of new
entrants in the electric market that make it more difficult to
manage the system using voluntary reliability standards.
Virtually all industry participants believe strongly that new,
enforceable, reliability standards need to be adopted to help
ensure that our transmission system continues to operate safely
and reliably. Consensus reliability legislation has been
developed by the NERC, and is, in most material respects,
included in H.R. 2944.
<bullet> States Should be Given Explicit Authority to Impose Charges on
Jurisdictional Activities--States, in carrying out their
exclusive jurisdiction over retail sales and local
distribution, should be given explicit authority to require the
payment of charges deemed necessary to recover retail
transition and stranded costs; to ensure adequate supply and
reliability; to assist low-income customers; to encourage
environmental, renewable energy, energy efficiency or
conservation programs; to provide for assistance to electric
utility workers adversely affected by restructuring; and to
encourage research and development. H.R. 2944 would do this.
<bullet> FERC Regulation Should be Extended to PMA and TVA Energy Sales
Rates--The PMAs and TVA essentially regulate their own rates.
In the new, competitive wholesale and retail marketplace, this
is an anachronism that could lead to unfair competition. FERC
jurisdiction should be extended to PMA and TVA sales. Both
wholesale and retail sales of capacity and energy should be
covered. In addition, the FERC should use Federal Power Act
rate making and accounting standards to carry out this new
authority to ensure that both IOUs and federal power agencies
are regulated in a similar manner. H.R. 2944 takes significant
steps toward accomplishing this.
<bullet> The Public Utility Holding Company Act of 1935 (``PUHCA'')
Should be Repealed--PUHCA is serving as an impediment to
competition. It should be repealed. H.R 2944 adopts consensus
language that would repeal PUHCA one year after the date of
enactment.
<bullet> The Purchase Mandate in the Public Utility Regulatory Policies
Act of 1978 (``PURPA'') Should be Repealed and Costs
Recovered--PURPA has long outlived its usefulness. It is
costing consumers billions of dollars a year in excess power
costs and is inconsistent with competitive generation markets.
The purchase mandate in section 210 of PURPA should be
prospectively repealed; existing contracts protected; and full
recovery of PURPA costs assured. H.R. 2944 includes the Stearns
consensus legislation that would accomplish this.
<bullet> Transmission Policies Should be Updated--EPAct, FERC Order No.
888, and FERC's Regional Transmission Organization (``RTO'')
Notice of Proposed Rulemaking have created unparalleled
regulatory uncertainty with respect to the interstate
transmission of electricity. Congress should establish clear
standards with respect to RTOs, while giving industry the
flexibility to develop appropriate independent organizations to
manage the operation of transmission facilities. H.R. 2944
establishes a framework that would accomplish these important
objectives. We believe, however, that some changes to the RTO
language may be appropriate and we hope to work with the
Subcommittee on these as the process goes forward.
Mr. Chairman, these issues that I have mentioned must be at the
core of any comprehensive federal electric industry restructuring
legislation, and all are addressed satisfactorily in H.R. 2944. We
remain concerned, however, over the private use and coop tax relief
provisions contained in H.R. 2944 and believe that the BPA, TVA, RTO,
reciprocity, merger review, aggregation and interconnection provisions
can be improved without fundamentally changing your intent. We will be
developing perfecting legislative language to accomplish these
improvements. Some of our members also are concerned about the merger
provisions of H.R. 2944. These provisions would expand FERC authority
to review the retail aspects of mergers and asset dispositions,
ostensibly for purposes of addressing market power concerns. Such power
is already resident, both in authority and practice, in the Department
of Justice and the Federal Trade Commission under existing antitrust
laws. The addition of duplicate review of areas that are currently
beyond FERC jurisdiction raises concerns of opportunities for market
meddling, a problem that will stifle full competitive development.
I am sure others have concerns that the bill does not go far enough
in expanding FERC authority over transmission (thereby displacing the
states) or that not enough is being done to address ``market power,'' a
flexible term that is being used to justify a whole host of utility
market restrictions.
H.R. 2944, in fact, does a great deal to mitigate market power.
Your bill:
<bullet> requires utilities to turn over operational control of their
transmission systems to independent RTOs, something Congress
has never required of any other network industry;
<bullet> allows customers to band together to aggregate load, thereby
gaining negotiating leverage; and
<bullet> establishes uniform federal interconnection standards, thereby
increasing competition.
At the same time H.R. 2944 increases regulatory authority in these
areas, it carefully preserves the array of authorities that already
exist. For example, your bill does not:
<bullet> displace or preempt state authority to regulate retail rates;
<bullet> eliminate or curtail FERC authority to regulate wholesale
rates;
<bullet> diminish in any way Department of Justice or Federal Trade
Commission authority under existing antitrust laws or limit
private rights of action under these laws.
What advocates of ``market power'' amendments are asking you to do
is to disable particular competitors, not enable competition. I urge
this Subcommittee not to get into the business of favoring one
competitor over another.
iii. conclusion
Mr. Chairman, I again want to thank you and the other Members of
the Subcommittee for the good work that you have done. H.R. 2944
reflects your tireless efforts to seek compromise and consensus. From
any perspective, it is a good bill worthy of support.
Mr. Barton. Thank you, Mr. Helton.
Be advised that all your testimony is in the record. Many
members have reviewed that, so we ask to try to hold to the 6
minutes. I thank you for your testimony.
The next is Mr. David Nevius, vice president of the North
American Electric Reliability Council from Princeton, New
Jersey.
Welcome. You have 6 minutes. Your full testimony is in the
record.
STATEMENT OF DAVID R. NEVIUS
Mr. Nevius. Thank you very much.
NERC applauds the subcommittee chairman for including the
NERC consensus reliability language in title II of H.R. 2944.
We also commend the other members of the subcommittee who have
advanced other bills containing the NERC consensus language.
I have submitted the prepared remarks for the record, in
which we support prompt enactment of reliability legislation
contained in title II of H.R. 2944, with just a few
modifications, and we have alerted your staff of where those
issues are.
Being part of this large panel, with another panel to
follow on the second day of your hearings, I am going to be
very brief.
My single but very, very important message to you all is:
we need reliability legislation now.
Without the ability to enforce compliance with mandatory
reliability rules fairly applied to all participants, we may
not be able much longer to keep the interstate electronic grids
operating reliably.
Thank you. I look forward to your questions.
[The prepared statement of David R. Nevius follows:]
Prepared Statement of David R. Nevius, Vice President, North American
Electric Reliability Council
The North American Electric Reliability Council (NERC) firmly
believes that there is an urgent need for Federal legislation to
establish an independent, industry self-regulatory electric reliability
organization (ERO) to ensure the continued reliability of the
interstate (and international) high-voltage transmission grids. These
grids are critical to public health, safety, welfare, and national
security throughout North America.
Title II of H.R. 2944, ``Electric Reliability,'' would establish
such an ERO that would develop and enforce mandatory reliability rules,
with FERC providing oversight in the U.S. to make sure the ERO and its
affiliated regional reliability entities operate effectively and
fairly. Similar oversight would be provided by government entities in
Canada and Mexico. NERC applauds the Subcommittee chairman for
including the NERC consensus language in Title II of H.R. 2944. NERC
also commends other members of the Subcommittee who have advanced bills
containing the NERC consensus language.
Three issues need further consideration in H.R. 2944:
FERC Authority to Establish Interim Standards and Procedures--H.R.
2944 includes two additions to the NERC consensus language that are
problematic. These additions direct the Commission to: (1) establish
interim reliability standards if it suspends any previously approved
standards, pending development of new standards; and (2) establish
interim procedures or governance or funding provisions if it suspends
any previously approved provisions, pending development of new
provisions. NERC believes that this language needs further work. The
underlying philosophy of a self-regulatory organization is that it be
afforded every opportunity to make any necessary modifications to its
own standards and procedures before a regulatory body steps in to
establish standards and procedures on its own. This is doubly important
in the case of the ERO because it is intended to have shared oversight
by governmental bodies in Canada, Mexico, and the United States. Any
such interim standards established by the Commission could have
negative reliability or trade impacts on Canada or Mexico, on which
they would have no opportunity for input. There may be helpful guidance
for resolving this issue in the securities industry context. For
example, Section 19 (c) of the Securities and Exchange Act provides the
SEC with the power to modify a self-regulatory organization's rules,
but does so in a manner that (1) gives the self-regulatory organization
an opportunity to modify its own rules and (2) specifies detailed
procedures calling for notice and public participation that the SEC
must follow. The nature of these procedures encourages the self-
regulatory organizations to modify their own standards and procedures,
rather than have something imposed by the SEC. NERC is working with
other supporters of its consensus language and will offer proposed
alternative language to the Subcommittee staff for consideration.
Role of the States--Recently, proposals have been made to add
language to the NERC consensus language defining the role of States in
ensuring reliable electric service to retail consumers. This is an
important and complex issue that must be resolved. Representatives of
industry organizations and the States are working to resolve this issue
literally as we speak, and NERC strongly supports these efforts.
Avoiding Statutory Ambiguities--Provisions of the existing Federal
Power Act contain definitions that create an ambiguity as to the scope
of the reliability title. For example, Section 201(f) states that no
provision of Part II of the Federal Power Act applies to the United
States, a State, or any political subdivision thereof, or to any agency
of any of those unless the provision expressly so states. The
reliability title is clearly intended to apply to all entities,
regardless of ownership. To avoid such ambiguities, NERC suggests
adding a phrase at the beginning of what would be new Section 217(b)(1)
[H.R. 2944, page 34, line 19] to read: (b) Commission Authority--
``Notwithstanding any other provision of the Federal Power Act, . . .''
Such an addition would allow the provisions of Title II of H.R. 2944 to
stand alone and independent of any existing or future provisions of the
Federal Power Act.
NERC supports prompt enactment of any legislation containing Title
II--Electric Reliability of H.R. 2944. The existing scheme of voluntary
compliance with industry reliability rules for the high-voltage grid
system is simply no longer adequate. The rules must be made mandatory
and enforceable, and fairly applied to all participants in the
electricity market. Even after enactment of this reliability
legislation, it will take some time to complete the necessary rule
making and gain the required approvals before the ERO can actually
begin operation. The longer it takes to establish this new system, the
greater becomes the risk and magnitude of grid failures.
The users and operators of the system, who used to cooperate
voluntarily under the regulated model, are now competitors without the
same incentives to cooperate with each other or comply with voluntary
reliability rules.
NERC is seeing a marked increase in the number and seriousness of
violations of its reliability rules, yet there is no recourse under the
current voluntary model to correct this behavior.
Market participants are increasingly asking FERC to make decisions
on reliability issues for which FERC does not have either the technical
expertise or direct, clear statutory authority. The indirect, limited
authority FERC does have regarding reliability applies to only two-
thirds of the Nation's transmission facilities-co-ops, municipalities,
the federal power marketing administrations, the Tennessee Valley
Authority, and ERCOT utilities are outside its jurisdiction--and FERC
has no authority in Canada or Mexico.
The bottom line is that not a single bulk-power system reliability
standard can be enforced effectively today, by NERC or the Commission.
NERC urges the members of the Energy and Power Subcommittee and the
full Commerce Committee to push ahead aggressively with this much
needed reliability legislation. The continued reliability of North
America's high-voltage electricity grids and all the customers who
depend on them are at stake.
In Closing . . .
<bullet> A new electric reliability oversight system is needed now.
<bullet> An industry self-regulatory system is superior to a government
system for setting and enforcing compliance with grid
reliability rules.
<bullet> Title II--Electric Reliability of H.R. 2944, with just a few
modifications, will allow for the timely creation and oversight
of a viable self-regulatory reliability organization.
<bullet> The longer it takes to establish this new system, the greater
becomes the risk and magnitude of grid failures.
<bullet> The reliability of North America's interconnected transmission
grids need not be compromised by changes taking place in the
industry, provided reliability legislation is enacted now.
Mr. Barton. You really learn rapidly. The chairman is going
to be so pleased with my stewardship here. Thank you, Mr.
Nevius.
Next we have Mr. Alan Richardson, executive director of the
American Public Power Association from Washington, DC.
STATEMENT OF ALAN H. RICHARDSON
Mr. Richardson. Thank you, Mr. Chairman. I was going to ask
for the balance of Mr. Nevius' time until I heard the applause.
Mr. Barton. I think there would be an objection.
Mr. Richardson. It is a pleasure to be here again
testifying before you.
APPA believes that there is a need for and supports the
enactment of comprehensive Federal restructuring legislation
that facilitates State electric utility restructuring
initiatives by clarifying Federal areas of jurisdiction that
remove interstate commerce and Federal tax code barriers to
competition.
We believe Congress should pass legislation because these
issues are solely within the jurisdiction of the Federal
Government, and Federal legislation is essential to put in
place the industry structure that will make wholesale
competition and retail deregulation plans work effectively.
The key to effective and sustained competition is putting
in place the proper structure, and the key to the proper
structure is getting transmission right.
I think the requirements are quite simple. We need large
regional transmission grids that mirror regional power markets.
The grids must be operated, maintained, planned, and
constructed on a competitively neutral basis. That is, they
must be completely independent, and they must encompass all
facilities that comprise the interconnected grid.
There are several provisions of the bill that would make it
difficult to achieve these objectives. For example, FERC's
jurisdiction over vast amounts of transmission facilities may
well diminish if these facilities with State acquiescence are
redefined or refunctionalized as State jurisdictional
distribution facilities.
More troubling to us, FERC is not given the authority to
establish regional boundaries. Incumbent utility proposals for
RTOs are more likely than not to have boundaries dictated by
the competitive interests of the generation owners and not by
the regional markets. We think the only way to get there is to
permit FERC to establish these borders to give all stakeholders
reasonable time in consensus negotiations to create RTOs that
match those borders, ensure a process that protects the rights
and interests of participants, and provides backstop authority
for the Commission, as appropriately conditioned, as indicated
in my testimony, to get the job done if the negotiations fail
to produce the appropriate result.
Another problem that we see with H.R. 2944 is that it
undermines the essential requirement of independence and
competitive neutrality of RTOs. Passive ownership of up to 10
percent voting interest per participant will not guarantee
independence--in fact, just the opposite.
Incentive rates for the creation of RTOs and extending
incentives to participants in existing RTOs is, in our view,
inappropriate; however, incentives are appropriate to remove
constraints and reward superior performance.
H.R. 2944 is deficient in dealing with utility mergers and
addressing generation horizontal market power. While reasonable
steps should be utilized to prevent protracted proceedings, in
the end protecting the public interest is far more important
than expedited consideration of proposals to advance private
corporation interests.
Protecting the public interest includes preserving the
opportunity for full evidentiary hearings to analyze merger
proposals where that is necessary.
We do support the expansion of FERC's authority over
holding company mergers and the required consideration of how
proposals brought to the Commission could affect competition in
transmission and generation markets. However, the benefits of
these changes may well be more than offset by the changes in
the merger review process and the unreasonably short deadline
set for intervener participation in Commission proceedings.
Horizontal market power should also be addressed.
Generation power may not be a long-term problem, but it is a
significant problem in the transition phase because we start
with such high degrees of concentration in particular markets,
aggravated by significant transmission constraints.
FERC should be able to deal quickly and effectively with
the exercise of generation market power. It should be given a
toolbox of potential remedies to deal with these issues that
remain at its disposal until it reports to Congress that the
transmission system is regional in scope, competitively
neutral, and adequate to provide competition in generation
markets throughout the country.
Finally, the expansion of full-blown jurisdiction over
transmission facilities of publicly owned utilities contained
in this legislation appears to us to be a solution in search of
a problem.
Jurisdiction beyond that absolutely necessary to ensure
comparability is unnecessary.
Those are our concerns. Let me identify a few issues that
we support.
We do support the reliability title strongly. There are
still some glitches to be worked out, but we believe it is
essential that it be included and that it be passed.
We support the aggregation provisions and are pleased that
units of State and local government are specifically authorized
to perform this function for their own citizens.
We support the renewable resource provisions, although with
some reservations, as noted in my statement.
And we support, most of all, H.R. 2944's proposed
resolution of public power's private use problem. Private use
is a critical problem for public power with taxing and
financing transmission and generation facilities. If it is not
addressed, many of these systems will be forced to opt out of
competition, because if they do not opt out they put their
consumers, communities, and bondholders in jeopardy. However,
over time, opting out is simply politically impossible;
therefore, we are in a bind.
H.R. 721, the Bond Fairness and Protection Act, is a fair
and equitable resolution to the problem. It has been
incorporated, for the most part, in H.R. 2944. We believe this
is a very positive step forward in resolving this real problem.
We hope the original language of that bill, H.R. 721, can be
restored, and we hope no further changes in that legislation
are permitted as this or a successor bill moves through the
subcommittee.
Mr. Chairman, thank you for the opportunity to testify. I
appreciate it. And I look forward to answering your questions.
[The prepared statement of Alan H. Richardson follows:]
Prepared Statement of Alan H. Richardson, Executive Director, American
Public Power Association
Mr. Chairman, members of the subcommittee, my name is Alan
Richardson. I am the executive director of the American Public Power
Association. APPA is the national service organization representing the
interests of the nation's nearly 2,000 publicly owned, locally
controlled, electric utilities, providing electric service to nearly 40
million Americans.
You have asked us to address four questions. First, whether APPA
believes there is a need for Federal electricity legislation. Second,
if so, why Congress should pass such legislation. Third, what specific
elements should be included in such legislation. And fourth, to discuss
the provisions of H.R. 2944, the Electricity Competition and
Reliability Act .
need for federal legislation
APPA has consistently advocated the enactment of comprehensive
Federal electricity restructuring legislation that facilitates state
electric utility restructuring initiatives by clarifying state and
Federal areas of jurisdiction, and that removes interstate commerce and
federal tax code barriers to competition that are solely within the
jurisdiction of the U.S. Congress.
There is only one reason for Congress to enact comprehensive
electric utility restructuring legislation--to promote competition for
the benefit of all consumers. The overriding objective must be to
restructure the industry in a way that has a high probability of
benefiting all classes of customers with no degradation of reliability
of service.
The abuse of existing market power, aggravated by the accumulation
of ever increasing control over transmission and generation in the
hands of an ever decreasing number of players is the biggest single
obstacle to the realization of this objective and the creation of
robust competition in the electric utility industry.
Evidence that both of these factors exist--abuse of existing market
power, and the ever increasing control over essential facilities in the
hands of decreasing number of players--abounds. Attached to my
statement is a list, on a year-by-year basis, of investor-owned utility
mergers and acquisitions, plant acquisitions, transactions involving
Foreign utilities, and holding companies established. The sheer
magnitude of the change in the structure of the industry in the past
two years alone is overwhelming. Even more significant is the
accelerating pace of this change. In the first nine months of 1999
alone, investor owned utilities have announced or consummated 30
mergers or major acquisitions, compared to 12 the year before.
There is nothing coincidental about this trend. It can be traced
directly to the open transmission access provisions of the Energy
Policy Act of 1992, the aggressive implementation of that Act by the
Federal Energy Regulatory Commission two years later, combined with
state legislative restructuring initiatives that began less than five
years ago. As FERC tried to break open the transmission grid to promote
wholesale competition, and states have tried to create an environment
conducive to retail competition, the vertically integrated investor
owned utility monopolies, while paying lip service to competition, have
been taking dramatic steps to consolidate their control of both the
transmission grid and the generation market.
As noted by Albert A. Foer, president of the American Antitrust
Institute, Inc., in his article ``Institutional Contexts of Market
Power in the Electricity Industry'' published in the May, 1999 issue of
The Electricity Journal, ``the ongoing wave of utility mergers,
apparently in strategic preparation for restructuring, has the
potential to nullify the objective of opening up markets. Many mergers
involving adjacent geographic markets appear to be aimed at expanding
the incumbency advantages prior to restructuring.''
The evidence of the abuse of market power, and the urgent need to
address it through Federal restructuring legislation, is abundantly
clear from the hearing record of this subcommittee. The vast majority
of witnesses with very diverse constituencies and interests that have
appeared at subcommittee hearings over the past three years have
pleaded for legislation to address this problem. Virtually alone on the
other side of this debate of whether market power problems exist are
the investor owned utilities. They deny the existence of significant
market power problems, counsel against any legislation to deal with
such problems, and seek further protection.
why should congress enact legislation?
The market power problems that exist, as well as those that we can
now predict with a great degree of certainty, can only be addressed by
Congress. These are interstate commerce problems that simply cannot be
addressed by the individual states.
Federal antitrust laws work well to remedy problems in mature
markets. But they are not well suited to guide the transition to
competition for industries, such as the electric utility industry, that
start from highly concentrated monopolies. Antitrust laws alone cannot
convert such industries to ones that are capable of being controlled by
competitive forces. Our antitrust laws are very useful tools to address
market power problems after they have been identified. But they are not
particularly useful in identifying and rooting out the causes of these
problems.
The identification of such problems in any modern industry is hard,
but in the electric utility industry, this is not simply hard, it is
extremely difficult. Electricity is a real time product. It is
literally consumed as it is produced. It cannot be stored. This makes
transactions in the electricity market very vulnerable to subtle
discriminations such as capacity reservations on existing transmission
facilities and manipulation of such seemingly innocuous events as
unscheduled maintenance of strategically located generation and
transmission facilities. For these reasons, the antitrust agencies have
generally favored structural remedies. And have testified before this
subcommittee in that regard.
Congress held out the promise of competitive wholesale electric
markets when it enacted the Energy Policy Act of 1992. This promise was
reaffirmed when the Act was implemented aggressively by the Federal
Energy Regulatory Commission. But FERC has now acknowledged that its
approach, reflected in Order 888, is deficient in many respects. Its
current proceeding on regional transmission organizations is an attempt
to address some of these deficiencies. Other deficiencies are apparent
as well, including the absence of solid, clear legal authority under
which FERC can effectively remove obstacles in the interstate commerce
of electricity. Only Congress can address these problems.
Congress should also act to ensure the reliability of the electric
utility system. Voluntary reliability standards are no longer adequate.
In this area, at least, there is a consensus among all of the
stakeholders that Congressional action is required, even though some
disagreements still persist with respect to the role of the states and
state utility commissions.
And finally, Congress must act to address U.S. Tax Code provisions
that are inconsistent with the new utility environment being brought
about by state restructuring legislation. Public power's ``private
use'' problem is a clear example of this. The operational limits
imposed on publicly owned utilities with facilities financed by tax-
exempt bonds by statutory private use requirements are simply
incompatible with the demands of the new market. These limits must be
removed.
what should be included in federal restructuring legislation?
From APPA's perspective, the following essential elements should be
included in Federal restructuring legislation:
<bullet> Provisions that clarify federal law to ensure that FERC has
jurisdiction to enforce comparability in transmission services
on facilities that are in fact part of the national grid.
<bullet> Provisions that broaden the criteria used by FERC in the
review of proposed mergers, expand the authority of FERC to
review holding company to holding company mergers, transmission
company mergers, and significant sales of generation assets,
and enable the Commission to address market power problems by
means up to and including asset divestiture.
<bullet> Provisions that expand the authority of FERC with respect to
the creation of regional transmission organizations that are
truly independent, and sufficiently broad in scope and
configuration to promote efficient and non-discriminatory power
markets, while taking into account the specific, unique
characteristics, rights and obligations of publicly owned
utilities.
<bullet> Provisions to address ``tax transition'' problems arising
because provisions of the U.S. Tax Code are out of sync with
state restructuring legislation.
With the exception of the last item, H.R. 2944 falls far short of
what must be included in Federal legislation. For this reason, APPA
opposes H.R. 2944 in its present form.
We are well aware that what we believe must be included in Federal
legislation is seen by some as an expansion of regulation that is
incompatible with deregulation and creation of an open, competitive
market. APPA disagrees. Expanded regulation in some areas is in fact a
prerequisite to expanded competition in others. As Albert Foer observed
in the article to which I previously referred:
Experience with examples of deregulation teaches that
competitive markets do not materialize just because
theoreticians believe they are good or because there are basic
economic characteristics of a market that make it possible to
perform more efficiently. Rather, competitive markets are
deeply embedded in social, intellectual, legal, and political
institutions. Transitions from regulation to competition,
therefore, are not likely to work out very well unless the
institutional framework is also being changed in parallel ways.
Transitional problems must not be dismissed as if they don't
affect future institutional relationships. The transition can
create a life of its own, leading to outcomes that were never
envisioned.
We are extremely concerned over the institutional framework that is
currently evolving, unchecked for the most part by either FERC or the
states. Expanded regulation in the areas identified above are
absolutely essential through this transition period to put in place the
right institutional framework that will carry us from regulated,
vertically integrated monopolies of today, to the deregulation of the
bulk power market tomorrow.
That expanded regulation in some areas is not only compatible with
but essential for competition in others is obvious from a review of the
transmission access provisions of the Energy Policy Act of 1992.
Congress correctly concluded that competition in the bulk power market
could not occur unless it expanded the authority of the Federal Energy
Regulatory Commission in the regulation of interstate transmission
facilities. Congress had the wisdom to understand that expanded
regulation was required to promote competition in the bulk power
markets. We hope Congress demonstrates the same wisdom today, and takes
the steps necessary to ensure that the promise of competition it held
out in 1992, becomes a reality as we move into the next millennium.
comments on h.r.2944
H.R. 2944 is a lengthy and complex piece of legislation. We are
still reviewing its provisions to determine their ultimate effect.
However, we have set forth below our concerns with respect to several
parts of this legislation, together with recommended changes. Our
comments are not organized in the order of their priority to public
power. Instead, they follow the order in which these issues arise in
H.R. 2944.
Section 101--Clarification of State authority regarding retail electric
competition; clarification of Federal and State jurisdiction.
APPA believes that the States and the self-regulated publicly owned
utilities should retain the authority to decide if, when and how to go
to retail competition. The legislation preserves these rights. However,
in attempting to create a bright line distinguishing Federal and State
regulatory jurisdiction, two provisions of H.R. 2944 combine to
eviscerate FERC jurisdiction over significant components of the
interstate transmission network.
Section 101(b)(1)(B) does not allow FERC regulation over bundled
retail sales of electric energy. Section 101(e) allows for a FERC
determination of whether a particular facility qualifies as
transmission or distribution, but requires FERC to give deference to
State commission decisions. When these provisions are combined, this
section cuts FERC out of the regulation of significant amounts of
transmission access and use over bundled sales. If this section is
interpreted to allow a preference for bundled firm load over unbundled
firm load on the same transmission system under emergency situations,
then it is clearly inappropriate. Such an interpretation would
undermine the goals of promoting competition and standardizing
regulation of the national grid.
To avoid FERC regulation and to frustrate effective competition in
the bulk power market, investor owned utilities are hard at work
``refunctionalizing'' their assets. What was transmission and therefore
subject to FERC jurisdiction yesterday, is being redefined or
refunctionalized as distribution, putting those facilities under state
commission jurisdiction in order to evade FERC regulation tomorrow. As
noted in a paper written by Whitfield A. Russell, president, Whitfield
Russell Associates, ``Refunctionalization of Transmission Assets Under
FERC Order 888: Impact on Market Power,'' ``refunctionalization
presents an opportunity for transmission owners to charge vastly
different rates (and to offer delivery services on vastly different
terms and conditions) to similarly situated retail and wholesale
customers (both generators and consumers).'' (A copy of Mr. Russell's
paper is attached to this testimony.)
APPA members have witnessed this refunctionalization trend as well.
Roy Thilly, the current president of APPA and the Chief Executive
Officer of Wisconsin Public Power, Inc., in testimony at a workshop on
market power and consumer protection sponsored by the Federal Trade
Commission on September 13, 1999, stated that ``one Wisconsin utility
has asked our PSC to find that there is virtually no transmission in
our state. This utility would refunctionalize more than 80% of its
transmission system to distribution, gutting its obligation to transfer
control to an ISO.'' The objective of this action, according to Mr.
Thilly, is clear. It is ``to avoid giving up control and to create an
anticompetitive buffer between customers and the market.''
APPA supports the ``function'' approach in H.R. 2944 (and FERC
Order No. 888) to determine which facilities are part of the
transmission network and therefore subject to FERC jurisdiction, and
exclude facilities that constitute part of the distribution network.
However, the process must be carefully and consistently administered to
ensure that it does not permit abusive refunctionalization actions.
While it may be appropriate for FERC to give ``due consideration'' to
State commission determinations regarding the function and purpose of
specific transmission facilities, requiring that they defer to these
determinations is extremely problematic. We urge the subcommittee to
amend section 101(e) by substituting ``due consideration'' for ``due
deference.''
Section 102--Open Access for all Transmitting Utilities.
Public power systems own approximately 8% of transmission
facilities at voltage levels of 138kV or higher. These facilities are
widely dispersed across more than 100 public power systems, and most of
these facilities are not part of the backbone transmission grid but are
an instead part of local distribution networks. For the most part,
those publicly owned utilities that own significant transmission
facilities that constitute part of the interconnected grid have
voluntarily filed open access tariffs. We believe it is difficult on
public policy grounds to sustain the proposition that publicly owned
transmission facilities should be subject to FERC jurisdiction. Such
Federal preemption of local authority in order to regulate a very
limited amount of transmission when the owners of those facilities are
already providing comparable service appears to us to be a solution in
search of a problem.
We are pleased that H.R. 2944 proposes to minimize the expansion of
FERC jurisdiction over publicly owned transmission facilities by
permitting FERC to waive jurisdiction over transmitting utilities whose
transmission facilities are ``limited and discrete'' and ``do not form
an integrated grid,'' and for ``small'' publicly owned transmitting
utilities (annual sales of 4 million megawatt hours or less) that are
``not part of a centrally dispatched power pool.''
Presumably, the objective of expanding FERC jurisdiction over
publicly owned transmitting utilities is to ensure that the
transmission services they provide to third parties are comparable to
the services they provide themselves. We believe that this objective
can be achieved by limiting FERC jurisdiction to the non-rate terms and
conditions of service for publicly owned transmitting utilities that do
not obtain a FERC waiver. FERC jurisdiction over rates of publicly
owned transmitting utilities could conflict with the responsibilities
of those utilities to abide by revenue requirements contained in their
bond covenants, and could also conflict with state legal and
constitutional requirements.
APPA recommends that FERC jurisdiction over public power systems
that do not obtain waivers should be limited to non-rate terms and
conditions to ensure they are comparable to the transmission services
that private power companies are required to offer under their open
access tariffs. FERC jurisdiction over rates and revenue requirements
for public power systems should be limited to ensure comparability.
Where FERC determines that rates are not comparable or are
discriminatory, it could remand the rate to the local regulatory
authority for review and revision as necessary. Public power systems
would therefore retain local control over rate making and revenue
requirement decisions.
Section 103-- Regional Transmission Organizations
The Regional Transmission Organization (RTO) provision is designed
to ensure that every transmitting utility will be in a RTO by 2003.
This is a positive step, but there are serious problems with the
timing, conditions for FERC approval, and the absence of FERC authority
to correct problems after the RTO deadline passes.
APPA continues to support the authority of FERC to establish and
require utility participation in strong, truly independent RTOs in
order to facilitate the development of vigorously competitive regional
power markets. The legislation should provide such authority as well as
appropriate criteria to govern its use. In addition to such issues as
independence, size and scope of RTOs, the statutory criteria should
accommodate the unique characteristics and legal requirements of public
power to ensure that public power's participation by FERC order is not
inconsistent with state laws and constitutional requirements.
Furthermore, the additional criteria for public power participation
must be consistent with bond covenant requirements and not impair
control of local system operations or reliable and economic service to
the public served by publicly owned facilities for whose benefits
public funds have been expended. Lastly, the criteria should not
require public power systems to participate in certain ISOs or RTOs in
cases where they have been mandated as part of state legislation to
promote retail competition and such legislation has preserved the right
of public power systems to determine whether or not to join such
entities.
The deadlines established, filings by January 1, 2002,
participation by January 1, 2003, will delay by at least two years the
current rulemaking actions of FERC (Docket No. RM99-2-000) to promote
an open and more competitive bulk power market through the creation of
RTOs. FERC proposes that all public utilities that own, operate or
control interstate transmission file proposals for an RTO by October
15, 2000, and that RTOs be operational by December 15, 2001, more than
a year earlier than required under H.R. 2944. This delay is totally
unnecessary. But it is inconsequential when one considers the
opportunity for additional delays in the creation of RTOs provided by
this legislation. If enacted in its present form, H.R. 2944 will delay
the formation and effective operation of RTOs for several years beyond
2003. Section 103 requires that a stay be issued whenever a FERC RTO
order is challenged through a petition for rehearing before the
Commission, or subsequently is challenged in court.
We urge the subcommittee to consider carefully the consequences of
this provision of H.R. 2944. Consider, for example, what would have
occurred if FERC had been required to stay the implementation of Orders
888 and 889. These orders were issued in April, 1996. Petitions for
rehearing were filed, granted by FERC, and certain modifications were
made in the initial orders. Thereafter, these orders were challenged in
an appeal that is now pending before the U.S. Circuit Court of Appeals
for the D.C. Circuit. The case has not yet been argued. It is extremely
complex, with multiple parties. No decision is expected until at least
the fall of 2000. Then, of course, there is the possibility of Supreme
Court review and/or a remand to FERC for reconsideration of specific
issues. If Congress had directed that these orders must be stayed
pending appeals, we would not yet have seen even the limited progress
toward more competitive bulk power markets that these orders have
brought about.
Under current law, the Commission has the discretion to stay its
orders during appeal. We believe it should retain this discretionary
authority with respect to RTO orders. APPA also recommends that the
deadlines proposed for RTO filings and formation should be
reconsidered. Deadlines give comfort to those seeking to delay the
process, and the prospect of mandatory stays of FERC orders provides a
potent weapon for those determined to frustrate the creation of RTOs.
Even more troubling than these timing problems, however, are the
criteria established for FERC consideration of proposed RTOs. There are
several characteristics that must be part of any RTO. It must be
independent to ensure that those who control transmission cannot
exercise vertical market power. It must have boundaries that are
rational, and that prevent the balkanization and gerrymandering of the
grid. It must take into consideration the needs of all stakeholders,
including, the needs of public power transmitting utilities, to ensure
fair and equitable treatment of all. In addition, while it may be
appropriate for FERC to provide incentives for performance, it is not
appropriate for FERC to provide incentives for participation. And
finally, it is absolutely essential to clarify FERC's legal authority
to accomplish these objectives, and to order the creation or
reconfiguration of RTOs, consistent with the characteristics set forth
above, if the proposals brought forward do not achieve at the outset,
or over a reasonable period of time, the desired results. Section 103
is deficient in all of these areas.
APPA notes the following deficiencies and problems with the
provisions of section 103 of H.R. 2944 (set forth in the order in which
they appear in this section and not necessarily in their order of
importance to APPA):
<bullet> FERC is directed to approve an RTO application filed by a
single transmitting utility if it meets certain criteria. Given
the massive consolidation occurring through mergers and
acquisitions, single utility RTO proposals are a distinct
possibility. The proposed criteria do not require the effective
broad participation of all affected stakeholders, particularly
wholesale customers. The absence of substantial customer
support for a RTO filing indicates that the RTO business plan
reflects monopoly needs, not market needs.
<bullet> The Commission may approve proposals that do not meet all
standards but are consistent with such standards. Since the
Commission cannot order the creation of RTOs, it may feel
compelled to accept proposals that do not fully satisfy those
conditions and therefore will not effectively promote the
development of a more competitive bulk power market. Further,
this is an invitation to delay through litigation over what
constitutes substantial compliance. Since FERC cannot order
participation in a RTO that is not of the transmitting
utility's choice, and a finding of non-compliance must be
stayed through the appeals process, utilities determined to
prolong the RTO creation process have every opportunity to do
so. Clearly, this will result in the failure of this
legislation to achieve the desired results of RTO creation and
participation in a timely fashion.
<bullet> The ``independence'' standard will not produce RTOs that are
in fact independent of market participant control over
operations. Permitting passive ownership interests, and
ownership of ten percent of voting interest (page 20, lines 2
through 16) must be deleted. So-called ``passive'' ownership is
not innocuous. In filings in FERC Docket No. RM99-2-000, the
Edison Electric Institute concedes that a ``passive'' ownership
carries with it a fiduciary relationship to the passive owners.
The management and board of for-profit transcos will be fully
aware of the impact of their decisions on the generation
interests of the ``passive'' owners. There will be an inherent
conflict of interest with respect to decisions related to
unaffiliated generation assets that compete head-on with the
generation interests of the transco's ``passive'' owners. A ten
percent voting interest in a company with widely held stock
would essentially permit the ten percent owner to control
corporate affairs. Two private power companies, each with ten
percent voting interest, would clearly permit those two
companies to control the corporation. APPA is opposed to the
ownership provisions that purportedly qualify but in fact
undermine the independence standard. The legislation should be
silent in this regard and permit the Commission to decide (and
if necessary reconsider) what is permissible in terms of both
passive ownership and voting interests.
<bullet> The conditions regarding scope and configuration are
appropriate, but are problematic when considered from public
power's perspective. Given the limited amount of transmission
facilities owned by publicly owned utilities, it will be
difficult if not impossible for them to develop, on their own,
RTOs that ``comprise an appropriate scope and regional
configuration.'' Of necessity, they will be forced to
participate in RTOs constructed by (and perhaps with passive
ownership and controlling voting interests held by) investor
owned utilities. There is no requirement that a collaborative
process be established that will protect the rights of these
systems. Indeed, there is no guarantee against (and based on
past practice every reason to be fearful of) RTO proposals
developed by private power companies that: operate against the
interests of public power; do not accommodate public power's
unique characteristics and legal requirements; may be
inconsistent with state laws and constitutional requirements
under which public power systems operate; are not consistent
with public power's bond covenants; and impair public power's
control over local systems operations or their ability to
provide reliable and economic service to the public served by
them and for whose benefit public funds have been expended to
develop publicly owned facilities. Finally, to comply with this
legislative directive, some public power systems may be faced
with the unreasonable choice of submitting a proposal to FERC
to join what amounts to a RTO created by state legislation to
promote retail competition where that same state legislation
has reserved to them the right to decide whether or not to
participate. In those cases, FERC approval could amount to a
Commission directive changing a RTO approved by the Commission
prior to enactment of this legislation, something expressly
prohibited in the legislation itself.
<bullet> Incentive transmission pricing policies to promote RTO
formation are expressly authorized, and such incentive prices
are to be extended to participants in existing RTOs. APPA
strenuously opposes rate incentives, performance based rates,
and relaxed FERC regulation offered as inducements to public
utilities to participate in RTOs. Incentives should only be
provided for performance, not participation.
<bullet> The Commission is permitted to withdraw approval previously
granted if the RTO fails to comply with provisions of the
legislation. But what happens then? The Commission is expressly
prohibited from requiring utilities from participating in a
different RTO than the one it proposes. It is absolutely
essential that this deficiency be recognized and addressed.
<bullet> Finally, this section in combination with other provisions of
the legislation that will contract the scope of FERC
jurisdiction over facilities that are in fact part of the
integrated transmission grid, is likely to produce entities
that are RTOs in name only, but without much of a functional
transmission grid to actually administer.
In 1978, when Congress was considering President Carter's National
Energy Policy Act, it came close to expanding FERC authority to require
transmitting utilities to provide open access. In the end, Congress
acceded to the pressure of private power companies, and the authority
given to FERC was so encumbered with unreasonable and unrealistic
conditions that the authority presumably granted to the Commission
could never be exercised. This mistake was finally corrected 14 years
later as part of the Energy Policy Act of 1992. We fear that the same
fate, and failure, will occur with respect to the creation of RTOs
under this section. This provision will not get the job done. The RTO
proposals brought forth by private power companies if this provision is
enacted will not promote competition. Instead, they will further
entrench the control over transmission in the hands of a relatively
few, very large private power companies. Wholesale customers, retail
customers in states that have opened their markets, and independent
power producers will suffer. If the past is prologue, it will be at
least a decade before Congress returns to this issue and finally takes
the steps necessary to create the RTOs or other grid management
institutions required to ensure that all industry participants have
full, fair and nondiscriminatory access to interstate transmission
facilities.
Title II--Reliability
It is important at the outset to reflect on the ultimate goal of
uniform reliability standards to govern interstate commerce in electric
transactions. First, electricity is too important to our society to
permit voluntary reliability standards for individual utilities, that
may or may not be followed depending on the economic consequences of
any particular opportunity. And second, our society simply cannot
permit the existence of inconsistent rules governing the real-time
operation of the interstate bulk power market. Uniform rules,
applicable to all, that can be enforced, are essential.
APPA has been an active participant in the construction of industry
consensus language contained in Title II that establishes an
independent, industry self-regulatory electric reliability
organization, transitioning the present North American Electric
Reliability Council (NERC ) to the North American Electric Reliability
Organization (NAERO), to ensure the continued reliability of the
interstate high-voltage transmission grid. We were also signatories to
the recent letter to Chairman Barton that expressed concern with the
specific language of the proposal put forth by the National Association
of Regulatory Utility Commissioners (NARUC) regarding a state savings
clause. We note that H.R. 2944 has included language that creates a
state savings clause related to the reliability of local distribution
facilities. As noted previously, through refunctionalization the
relatively limited facilities that are today identified as distribution
facilities can be greatly expanded to include facilities that are in
fact part of the interconnected grid. If this is permitted to occur,
the significant benefits anticipated from the enactment of the
reliability provisions in H.R. 2944 will be diminished. We look forward
to continuing to work with the state entities and the Subcommittee to
develop language that reasonably addresses these legitimate state
concerns in a manner consistent with the intent of the placing of
responsibility for bulk power system reliability in the hands of a
self-regulating reliability organization.
Title III--Consumer Protection
These sections guard against unfair trade practices and are
generally consistent with APPA policy related to consumer protection.
However, protecting consumers from abuses in a competitive market
assumes the existence of such a market. That assumption is highly
suspect in the current environment, and unlikely to change under the
environment that would be created if H.R. 2944 is enacted without
significant modification. APPA supports strong consumer protection
provisions, but we believe that the most significant protections
Congress can provide consumers is the creation of an industry structure
that will in fact create a competitive market. We believe we can put
considerable trust in a truly competitive market. But we do not have
such a market at present. We do not believe such a market will arise
under the laws as they now exist, and we are even more skeptical that
they will arise under the laws as they are proposed to be restructured
and revised by H.R. 2944.
Title IV--Mergers
Section 401--Electric Company Mergers and Disposition of Property.
APPA strongly opposes the changes regarding the authority of FERC
with respect to its review and approval of mergers and asset
disposition. We cannot support this legislation unless FERC's current
authority to review mergers through full evidentiary proceedings is not
only preserved but expanded to address both existing and incipient
market power problems.
Under existing law, FERC must approve disposition of certain assets
(which may or may not include generation facilities) by ``public
utilities'' after ``notice and opportunity for a hearing'' if the
proposed disposition is ``consistent with the public interest.'' The
first draft of this legislation proposed to eliminate FERC's authority
in this area entirely. H.R. 2944 is an improvement over the draft
proposal in that it preserves this authority, clarifies the
uncertainties regarding FERC jurisdiction over the transfer of
generation assets, extends jurisdiction to include holding company
systems that include electric utility companies, and requires
consideration of the effect of such transfers on competition in
wholesale and retail markets. Expanding the reach of the Commission is
absolutely essential, and requiring consideration of the effects on
competition of such transfers is an improvement over the provisions of
existing law.
Unfortunately, these improvements are more than offset by the
prohibition of on-the-record evidentiary hearings. Under current law,
FERC has the discretion to utilize both ``paper'' hearings with or
without an opportunity for oral comments, or on-the-record evidentiary
proceedings, depending on complexities of each specific case. H.R. 2944
would eliminate the option of evidentiary hearings. Instead, those
challenging a proposed merger or other disposition of assets, would
have 60 days within which to file written and oral comments. FERC would
then have 90 days (and up to an additional 90 days) to issue its order.
Existing law, deficient as it is, is far better than what is proposed
in H.R.2944.
If Congress truly intends to protect all electric consumers from
abuses of market power, it must first preserve the procedural
protections of the review process by not eliminating the opportunity
for evidentiary proceeds, second, expand the types of transactions
subject to FERC review, and third, expand the scope of the Commission's
review to require consideration of how proposed mergers and
acquisitions will affect wholesale and retail competition. Further, in
reviewing mergers, FERC should be directed to employ a ``net positive
benefit test,'' not simply the ``no net harm'' test currently utilized.
Unless proposals brought before FERC actually produce net positive
benefits and enhance competition, they should be rejected.
Finally, FERC's authority to address existing market power problems
must be expanded. Concentration of market power in generation is
already a problem, and likely to become an even greater problem in the
near future. For the past several years, we have had a surplus of
generation. That surplus is quickly disappearing nationally, and has
already disappeared in some regions. At the same time, some industry
participants have been able to acquire vast amounts of generation
resources, and through these acquisitions they will be able to exercise
generation market power in the future.
APPA believes that these problems can only be addressed by
providing FERC with additional authority to deal with generation market
power. Generation market power may well be a transition issue. This
would certainly be the case if we are able to achieve, through federal
legislation, large, regional and totally independent grids that are
able to remove constraints through the construction of additional
transmission. This, combined with ease of entry into the generation
markets, may eliminate, over the long term, generation market power.
However our starting point is one of high degrees of generation
concentration in specific markets that also have significant
transmission constraints. The consequence of these two factors is
higher prices and poorer service for consumers. What is required is
clear authority for FERC to deal quickly and effectively with the
exercise of generation market power.
Remedies here can be temporary, not permanent. They need not have a
long term impact on the ownership or control of utility assets.
However, they should address the temporary market distortions. For
example, ``temporary'' divestiture of generation could occur through an
auction procedure for capacity for limited periods of time. Or FERC
might impose cost-based rates for generation where market power exists.
What is required is to transform FERC from an arcane price-setting
agency to an agency with an affirmative duty to structure and oversee
the bulk power market to ensure that it will be effective and sustain
competition over time. APPA recommends that FERC be provided with a
``toolbox'' of potential remedies to deal with generation market power.
The toolbox should include the ultimate tool of divestiture authority.
Just as the hangman's noose truly focus the attention of the condemned,
the prospect of mandatory divestiture as a last resort to address
generation market power would focus the attention of those with
generation market power. Perhaps it will never be used. But having it
available in the ``toolbox'' is essential. After a reasonable
transition period, FERC could be directed to report to Congress. Such a
report should include whether transmission organizations have captured
the proper geographic scope, whether they are competitively neutral,
and whether they provide for effective competition markets throughout
the country. When these conditions are met, generation market problems
may well have been effectively addressed, and the ``tools'' placed in
the FERC ``toolbox'' might then be removed.
Section 402--Elimination of Review by The Nuclear Regulatory Commission
APPA was the leading proponent of Congressional enactment of
Section 105 of the Atomic Energy Act. With the exception of the
transmission access provisions of the Energy Policy Act of 1992, this
provision of law has done more to open transmission access to wholesale
customers than any other act of Congress, including the antitrust laws.
Today, many private utility owners of nuclear facilities are
selling or proposing to sell these assets to a few domestic and Foreign
corporations. These nuclear facilities are large--ranging from several
hundred to over one thousand megawatts of capacity. Collectively,
nuclear facilities provide nearly 15 percent of the total generation
capacity available in the United States.
As operating licenses for these facilities are transferred from
incumbent owners to an ever decreasing number of domestic and Foreign
operators, an evaluation of whether such transfers will create or
maintain situations inconsistent with the antitrust laws seems more,
not less, relevant. Repealing the antitrust review authority of the
NRC, combined with other aspects of H.R. 2944, will contribute to the
consolidation and abuse of market power in the hands of a few entities.
As the initial advocate of this provision of law, and consistent with
APPA's concerns over the total absence of effective controls of market
power in H.R. 2944, APPA objects to this section.
While we object to the repeal of this provision of consumer
protection legislation, we believe that conditions previously imposed
in reviewing the antitrust consequences of granting construction
permits and operating licenses for nuclear power generation facilities
must be enforced. H.R. 2944 preserves these conditions, and their
enforcement. While we strongly object to the repeal of this provision
of law, if that were to occur, conditions previously imposed must be
preserved and enforced.
Title V--Promoting Competition
Section 501--Retail Reciprocity
APPA has no policy on this provision but urge further
consideration. Presumably, the reciprocity requirements that prohibit
utilities that do not provide retail customer choice in their own
service areas from engaging in retail markets where choice is
permitted, are intended to promote competition. However, this provision
could actually limit the number of competitors in a particular market,
thereby producing the opposite of what is intended. As a practical
matter, these requirement can be easily avoided if utilities prohibited
from dealing directly in another state work through a power marketer
that is not so limited. If this is not an option, the reciprocity
requirements might operate as a backdoor mandate for retail
competition. For all of these reasons, we suggest that this provision
be reconsidered.
Subtitle B--Public Utility Holding Company Act of 1935
The Public Utility Holding Company Act of 1935 has been more
important than any other Act of Congress in regulating the structure of
the electric utility industry. Unlike other regulatory statutes, the
Holding Company Act requirements are passive. It defines permissible
structures of holding company formation in order to ensure effective
state and federal regulation of electric utility holding companies, and
it does so in an attempt to protect consumers, investors and the public
interest. This statute has been an outstanding success. Its repeal or
modification should be considered with great caution.
APPA opposes repeal of the Holding Company Act on a stand-alone
basis, that is, outside of the framework of comprehensive, industry
restructuring legislation. However, APPA will not object to repeal of
PUHCA, provided that repeal is coupled with strong market power
provisions. Such provisions are not included in H.R. 2944, and
therefore APPA opposes PUHCA repeal as proposed in this legislation.
More acceptable to APPA than the provisions of H.R. 2944 are
proposals in other legislation pending before this Congress that
provide for prospective repeal in 18 months from enactment, not the 12
month period contained in this legislation. APPA is also concerned that
H.R. 2944 restricts regulatory access to books and records of holding
companies to review only costs incurred, as opposed to permitting a
broader review of total operations. We believe this restriction is
inadequate to protect the consumer interest. Further, not only are
adequate consumer protection provisions lacking in this section of the
bill, but the weakening of market power protections throughout the
legislation make the repeal of PUHCA unacceptable even though it would
occur as part of broader comprehensive restructuring legislation.
Section 541--Aggregation
This section authorizes entities, including political subdivisions
within a state, to aggregate consumer electric needs. We strongly
support this provision and urge that it be preserved in any legislation
adopted by this subcommittee. One consistent concern of residential
consumers across the country is that they will be shut out of the
benefits of competition. Noted economist and one of the fathers of
deregulation in this country, Alfred Kahn, in a recent speech at an
EEI-sponsored meeting in Chicago, stated that he sees few signs that
the deregulation of the electric utility industry will provide benefits
for small customers any time in the near future. Aggregation,
particularly of small consumers, provides a solid, consumer-oriented
tool that could provide options for residential and small business
customers. APPA supports this provision so long as it expressly
preserves the rights of states and political subdivisions to aggregate
the electric needs of their citizens.
Title VI--Federal Electric Utilities
More than a quarter of APPA members purchase power from the
Tennessee Valley Authority and the various Federal power marketing
administrations. We support regionally-based solutions that address the
unique characteristics and relationships that TVA and the Federal power
agencies have with their wholesale customers. The provisions in this
section are generally consistent with the goals of APPA policy for
maintaining the existing TVA and PMA structure as closely as possible
with current law. With respect specifically to the Federal power
marketing administrations, we do not believe that legislation is
necessary to maintain the current cost-based rate structure. In fact,
including such language in the legislation raises questions regarding
cost-based rates for these entities, and provides opportunities for
opponents of the Federal power program to advance proposals to change
the cost structure of these agencies from cost-based to market based
rates. For these reasons, APPA supports deleting the PMA sections
dealing with PMA rates altogether. Inclusion of language that simply
restates current practices only invites amendments to change such
practices.
Title VII--Environmental Provisions
Existing law providing incentives for public power investment in
renewable energy must be maintained and enhanced. H.R. 2944 preserves
the Renewable Energy Production Incentive Program (REPI), and restricts
it to public power systems and other non-profit developers of renewable
energy. Even though this provision is little more than a reaffirmation
of existing law, APPA supports this aspect of the legislation. However,
the legislation would and should not exclude landfill methane gas
recovery from eligible biomass projects.
APPA believes that increased use of available resources can be best
achieved through competitively neutral incentives that treat public
power entities on an equivalent basis as non-public power entities.
Incentives should be structured to assist power generating entities to
overcome existing barriers to increased renewable energy use and
deployment of other green technologies. Incentives should be structured
to provide comparable benefits to each region of the country and allow
power generating entities to be most responsive to the needs and
preferences of their customers and the competitive market. The
incentives should be easy to administer and provide sufficient
documentation for easy verification. To the extent REPI is retained, it
should be changed to address the uncertainty of annual congressional
appropriations and funding.
APPA proposes a two-prong approach to encouraging renewable energy
development in the public power community. The first is to address the
existing authorized REPI program by providing funding to cover current
project recipients. Under law, REPI participants are eligible for ten-
year payments calculated at 1.5 cents per kWh of electricity generated
from eligible projects. We propose that Congress direct DOE to make
current REPI project sponsors whole, and that sufficient funds be
allocated to cover all eligible projects. Funds could be allocated by
any number of mechanisms including: 1) one-time lump sum appropriation;
2) creation of a trust fund/escrow account funded at a level sufficient
to allow the revenues to grow over time to cover project costs; or 3)
accelerated appropriations to provide advance funding for future REPI
payments, similar to the Clean Coal Program.
Part two of the package involves the creation of new incentives
available to non-taxpaying entities that do not participate in the
revised REPI program. The option we prefer is the creation of
refundable production tax credits under the Treasury Department that
could be exchanged with other utilities. Non-taxpaying entities would
be eligible to claim a tax credit similar to the Section 45 credit.
Specifically, the amount of credit is not effected by the amount of
federal tax liability, rather, it would be calculated along the same
guidelines as the Sec. 45 and REPI projects. As with these two
programs, a participant would be given a refund based on a 1.5 cents
(adjusted for inflation) per kWh of electricity generated from
renewable energy projects.
Title VIII--Tax Provisions
While APPA appreciates the fact that H.R.2944 maintains the
structure or H.R.721 as the appropriate means to resolve public power's
``private use'' problem that has arisen from the current
incompatibility of U.S. tax laws and state restructuring demands, we
are very concerned that what has been included in H.R. 2944 modifies
provisions of H.R. 721 in a few significant ways. H.R. 721 has been
carefully crafted to address public power's private use problem with
full consideration of the interests and concerns of all market
participants. H.R. 721 has been co-sponsored by more than 85 members of
the House of Representatives, from both political parties spanning the
broad reach of the political and ideological spectrum.
H.R. 2944 incorporates the major elements of H.R. 721 but restricts
the legitimate use of tax-exempt financing by publicly owned utilities
for certain purposes in the future beyond the restrictions already
contained in H.R. 721. At the same time, H.R. 2944 proposes to vastly
expand the tax subsidies available to investor owned utilities with
respect to nuclear decommissioning expenses and the tax treatment of
decommissioning funds in event of sale of nuclear facilities. The
provisions relating to nuclear decommissioning expenses not only go far
beyond what has been proposed by the Administration, but go beyond
provisions found appropriate by the House Ways and Means Committee and
included in tax reform legislation enacted by Congress before the
August recess and recently vetoed by President Clinton. This lack of
symmetry in treatment of public and private power tax issues is
troubling.
These ``tax transition'' issues are not within the jurisdiction of
the House Commerce Committee. Because they are obviously part of the
electric utility restructuring debate, and because members of Congress
will look to members of this subcommittee and the full committee for
guidance on how all of these restructuring issues should be addressed,
we are very pleased that for the most part H.R. 721 was incorporated in
H.R. 2944. Their inclusion in H.R. 2944 sends a strong signal to
committees of jurisdiction regarding the preferred approach to dealing
with these matters. We appreciate Chairman Barton's desire to reconcile
the tax code problems, and his desire to address the private use
problem using the basic framework of H.R. 721.
The provisions of H.R. 721 are an extremely fair and reasonable
resolution of public power's private use problem. APPA insists that
this problem be addressed. Unless we are convinced that this problem
will be addressed, and that it will be addressed in a fair and
equitable manner either as part of comprehensive restructuring
legislation, or on a stand-alone basis, we will strongly oppose any
federal electric utility restructuring legislation.
Conclusion
APPA supports comprehensive Federal legislation to promote
competition in the electric utility industry. H.R. 2944 in its present
form will not achieve this goal. It fails to address serious market
power problems. It is a step backward in its treatment of FERC review
of utility mergers and the further accumulation of market power by
private power companies. It purports to establish Regional Transmission
Organizations. But the promises it holds for the creation of truly
independent, broad RTOs that will promote competition in the bulk power
market cannot possibly be met given the criteria established for their
approval by FERC, and the absence of real authority for FERC to help
structure the industry in ways that will promote competition and
benefit consumers.
APPA opposes H.R. 2944 in its present form. At the same time, APPA
wants Congress to enact legislation that promotes competition and
ensures that the benefits of competition--lower rates and better
service--will be experienced by all electric consumers. APPA will
continue to work with Congress to achieve these results.
Mr. Barton. Thank you very much.
Next we will hear from Mr. David Owens, executive vice
president of Edison Electric Institute.
Your full statement is submitted for the record and you
have 6 minutes. Welcome.
STATEMENT OF DAVID K. OWENS
Mr. Owens. Thank you, Mr. Chairman.
Good morning, Mr. Chairman and members of the subcommittee.
EEI supports Federal legislation that removes Federal
barriers to competition, facilitates State restructuring
actions, addresses critical transmission and reliability
issues, and applies the same rules to all competitors.
We believe that H.R. 2944 makes significant progress toward
achieving some of these goals. On others we have some concerns
and suggestions.
My written testimony outlines EEI's views on specific
provisions, so I will just mention a few highlights for you.
We commend the chairman for removing Federal barriers to
competition by removing PUHCA and reforming PURPA. In addition,
the bill addresses a number of important transmission and
reliability issues. For example, it would establish a self-
regulating reliability organization and extend FERC
transmission jurisdiction over all transmission facilities. We
certainly believe that is an important step in the right
direction.
We also commend the chairman for recognizing that expansion
of transmission capacity is critical. However, the bill's
provisions, unfortunately, do not achieve this important goal.
Similarly, the bill recognizes the need to expedite FERC's
merger review, but, at the same time, the merger provisions
would result in more government regulation.
We are concerned with some key areas of H.R. 2944. First,
the bill fails to develop the same rules for all competitors.
It would allow, for example, Federal utilities, government-
owned utilities, and co-ops to use their current subsidies to
construct new generation of transmission facilities in a
competitive market. This would simply give these entities a
tremendous advantage over their competitors.
Simply put, the market would follow the subsidies, and
government share of the electricity market undoubtedly would
increase.
Second, the bill would reregulate, not deregulate, in
several areas.
H.R. 2944 would expand Federal regulation by establishing a
deadline for the formation of regional transmission
organizations and by increasing FERC's merger authority.
Electricity markets are robust today. Given the degree of
remaining Federal and State regulation, we believe neither of
these provisions is necessary or desirable.
Third, the bill would intrude into State jurisdiction over
retail electric service on a number of issues, including
interconnection standards, net metering, aggregation, and
retail reciprocity.
As members of this subcommittee well know, 23 States are
moving forward with their own restructuring plans. They
certainly should not be forced to revisit key provisions.
Similarly, the remaining States are considering their own
plans, and they certainly want their flexibility to maintain
the development of these areas.
We look forward to working with the chairman and other
members of the subcommittee to improve these areas of the bill.
Finally, we commend the chairman for not making H.R. 2944 a
vehicle for micro-managing competition with punitive market
restrictions. You heard some of those from Mr. Richardson.
We are pleased that the bill does not expand FERC authority
to order utility divestiture, nor does it impose competitive
handicaps on utilities and their affiliates.
Proponents of punitive market restrictions claim there are
not enough competitors in the market. Nothing could be farther
from the truth. There are thousands of electricity suppliers
already in the marketplace, plus big, well-known, national
companies, including some of the world's large oil and gas
companies. They are certainly very active in this market.
Proponents of punitive market restrictions also claim that
competitors will not be able to reach consumers. They ignore
the continued tight Federal and State regulation of essential
utility facilities. These are the transmission lines which will
ensure all competitors nondiscriminatory access to utilities'
wires. And they ignore the continued State regulation of the
utility affiliate transactions.
The ability to bring lower prices or better service to
consumers is what competitive markets are all about. Market
share, alone, simply does not equal market power. Suppliers
cannot be equalized in competitive markets. As long as there is
nondiscriminatory, open access to provide consumers with a
choice of suppliers and no company can manipulate prices or
shut others from the marketplace, consumers will find the best
combination of price and services to meet their needs.
As I have stated, EEI strongly believes that H.R. 2944
makes significant progress toward achieving important public
policy goals, while falling short on others.
We commend the chairman for his efforts to develop a
workable electricity bill. We look forward to continuing to
work with him and members of this committee.
Thank you for this opportunity to provide our views. I
certainly look forward to your important questions.
[The prepared statement of David K. Owens follows:]
Prepared Statement of David K. Owens, Executive Vice President, Edison
Electric Institute
introduction
I am David K. Owens, Executive Vice President of the Edison
Electric Institute (EEI). EEI is the association of U.S. shareholder-
owned electric utilities and industry affiliates and associates
worldwide. A super-majority of EEI's members have established EEI's
approach to competition in the electricity industry, although a few
members disagree with some elements of that approach. We are pleased to
have the opportunity to testify before the Subcommittee on H.R. 2944,
the Electricity Competition and Reliability Act.
EEI supports federal electricity legislation that removes federal
barriers to competition, facilitates state restructuring actions,
addresses critical transmission and reliability issues and applies the
same rules to all competitors. We believe that H.R. 2944 makes
significant progress toward achieving some of these goals, while
falling short on others.
We commend the Chairman for the inclusion of provisions on issues
that only the federal government can address, including PUHCA repeal
and PURPA reform; facilitating state restructuring initiatives by
resolving federal/state jurisdictional issues; and addressing a number
of transmission and reliability issues, including establishment of a
self-regulating reliability organization and extension of FERC
transmission jurisdiction over all transmitting utilities. And, we
commend the Chairman for not making H.R. 2944 a vehicle for
micromanaging competition with punitive market restrictions.
However, we do have concerns with H.R. 2944 in a number of key
areas. It fails to develop the same set of rules for all competitors by
continuing--and in some cases expanding--federal subsidies to
government-owned electric utilities, electric cooperatives and federal
electric utilities, and allowing the use of these subsidies in
competitive markets. It expands federal regulation by establishing a
deadline for regional transmission organizations and increasing FERC's
merger authority. The bill also would intrude into state jurisdiction
over retail electric service and raise implementation concerns in some
areas, including interconnection standards, net metering, aggregation
and establishing new FTC standards. We look forward to working with the
Chairman and other Members of the Subcommittee to improve these areas
of the bill.
We would like to share with the Subcommittee our views on the
specific provisions contained in H.R. 2944.
title i--open transmission access
Federal/State Jurisdiction
Section 101 of H.R. 2944 would clarify state authority to order
retail competition and to impose nonbypassable charges for public
purpose programs. This section also would clarify federal/state
jurisdiction over components of an electricity sale, as well as
distribution and transmission facilities. We believe that federal
legislation needs to address these jurisdictional issues to help reduce
uncertainty in electricity markets, and we support their inclusion in
H.R. 2944.
Open Access Transmission
Section 102 of the bill would clarify the authority of the Federal
Energy Regulatory Commission (FERC) to require all transmitting
utilities to provide open access transmission service and to authorize
recovery of transition costs arising from any requirement to provide
open access transmission. Regarding transition costs, we believe the
legislation can be enhanced by the clarification of congressional
intent regarding the recovery of transition costs under FERC Order 888.
There is a need for certainty in this area--certainty that can be
provided only by legislative direction.
EEI strongly supports requiring all transmission providers to be
subject to FERC transmission jurisdiction to facilitate efficient use
of our nation's transmission system, and we commend the Chairman for
including this provision. It does not make sense, from a regulatory
standpoint or from a competitive standpoint, to have a significant
portion of the transmission system operating under a different set of
rules, or in some cases, no rules at all.
However, Section 102 does not extend FERC transmission jurisdiction
over the federal electric utilities, including the Tennessee Valley
Authority (TVA), the Bonneville Power Administration (BPA) and the
other federal Power Marketing Administrations (PMAs). While this
authority is addressed in Title VI of the bill, we recommend that
Section 102 be modified to include the federal electric utilities so
that all transmitting utilities are covered in this particular section.
Title VI is likely to be referred to other committees with jurisdiction
over the PMAs and TVA, and those committees may make significant
changes to the title.
Section 102 also would allow certain transmitting utilities to
exempt themselves from FERC transmission jurisdiction if they meet
certain criteria. We are concerned that the self-certification process
for exemption could be abused. FERC already has the authority to grant
waivers from its transmission regulations to small transmission
providers and has granted such waivers in the past. We would reiterate
that all transmission needs to be subject to uniform regulation.
Regional Transmission Organizations
Section 103 of H.R. 2944 would require each transmitting utility to
establish or join a regional transmission organization (RTO), effective
January 1, 2003. EEI supports a flexible, market-based approach to grid
regionalization that applies to all transmission providers. We oppose
the federal deadline by when utilities must join an RTO.
As any stakeholder involved in the development of the six
independent system operators (ISOs) already approved by FERC can
attest, the establishment of RTOs is an arduous, time-consuming process
that requires a satisfactory resolution of many contentious, critical
issues among many interests. Several of the approved ISOs were
developed from existing tight power pools; other RTOs will not have
this advantage and will be more difficult and take longer to construct.
Imposing an artificial deadline on the creation of RTOs will reduce
flexibility in evolving transmission markets.
In addition, this federal mandate appears to ignore the tremendous
progress already being made at FERC with regard to its notice of
proposed rulemaking on RTOs. FERC's proposed RTO rule will further
facilitate the voluntary development of RTOs.
Section 103 also would require FERC to approve an RTO application
if FERC determines that the RTO meets specific standards outlined in
the bill. We agree with the Chairman that if an RTO meets specific
standards, including the ones outlined in the bill, FERC should approve
the RTO. We recommend that the standards be expanded to include FERC
consideration of cost and cost recovery.
However, we are extremely concerned about the provision that would
allow FERC to impose any other additional standards it wants on an RTO.
We believe Congress should establish RTO standards so prospective RTO
participants understand the requirements the RTO must meet in order to
obtain FERC approval. Otherwise, prospective RTO participants will be
trying to establish an RTO under a cloud of uncertainty that FERC can
second guess their decisions by repeatedly modifying RTO standards.
Section 103 would direct FERC to encourage incentive transmission
pricing policies for RTOs. This language is essentially the same as the
incentive pricing provision in H.R. 2876, introduced by Representative
Sawyer. We propose that this provision be modified to extend these
incentives to all transmitting utilities, as H.R. 2876 provides, not
just those in RTOs. We also support the additional transmission
proposals in H.R. 2876. We strongly support reform of FERC's
transmission pricing policy, and we appreciate congressional
encouragement of reforms.
FERC's current transmission pricing policy does not provide
sufficient incentives for construction of critically needed new
transmission facilities throughout the country. FERC must reform its
transmission pricing policy to facilitate transmission construction in
order to assure the continued expansion of competitive markets. In the
long run, reliability will suffer, and consumers will be harmed, if new
transmission capacity is not built.
Expansion of Interstate Transmission Facilities
Section 105 of H.R. 2944 is intended to help expand interstate
transmission facilities. Unfortunately, while we agree with the intent,
we are concerned that the section does not achieve its objective. Under
this section, a transmitting utility may apply to FERC for an order to
expand its transmission. If the utility is unable to obtain the
necessary state permits to build the transmission line, the utility may
ask FERC to rescind its order.
The chief problem with this section is that the FERC order has no
teeth and does not resolve the growing difficulty of obtaining
necessary siting permits from a state that may realize little benefit
from a transmission line being built to serve interstate commerce.
Section 105 requires FERC to consult with a joint federal/state board
before issuing an order to build, but the joint board does not have any
siting authority either. Without these teeth, there is no incentive for
a utility to seek a FERC order.
We believe that addressing the substantial barriers to expanding
the interstate transmission system is probably the most critical
transmission policy issue. Without new transmission construction,
electricity suppliers and regulators will find themselves fighting
increasingly pitched battles over who gets priority for use of an
increasingly scarce resource.
title ii--electric reliability
EEI participated in the stakeholder process to develop the
consensus reliability legislation sponsored by the North American
Electric Reliability Council (NERC). Like the other stakeholders, we
believe that new, enforceable reliability standards need to be adopted
to help ensure our interstate transmission system continues to operate
safely and reliably in competitive markets.
We support the inclusion of the NERC consensus language in H.R.
2944, and we appreciate the Chairman's support for this proposal. We
would like to comment on the bill's most important modification to the
NERC proposal. H.R. 2944 adds a savings clause preserving state
authority to ensure the reliability of local distribution facilities.
While the states have legitimate reliability concerns, it is important
that the self-regulating reliability organization have clear
responsibility for assuring the reliability of the interstate bulk
power system. Otherwise, the end result may be to weaken overall
reliability due to confusion and conflict over who has authority over
what reliability responsibilities. EEI, along with other stakeholders,
is continuing to work with state entities to develop compromise
language to address the states' concerns.
title iii--consumer protection
Sections 301, 302 and 303 would require the Federal Trade
Commission (FTC) to promulgate rules addressing electric supplier
information disclosure, consumer privacy and unfair trade practices
(slamming and cramming). We support measures to protect consumers as
they take advantage of choices in a competitive electricity market. Our
primary concern with these sections is their potential to preempt
existing state restructuring plans. These sections are among the
provisions in the bill that tread into state jurisdictional matters
relating to retail electric service.
title iv--mergers
Section 401 of H.R. 2944 addresses FERC merger authority, while
leaving intact merger review by the Department of Justice and the
states. On the one hand, the section attempts to expedite FERC's merger
review by establishing a timetable for FERC action and substituting the
hearing requirement with a procedure for oral and written presentation
of views. This appears closer to the approach taken by the Department
of Justice. We strongly agree that regulatory review of utility mergers
must be expedited, streamlined and simplified. It makes no sense that
the BP-Amoco merger--creating one of the world's largest oil and gas
companies--could be approved on two continents in less than 100
business days while utility mergers can drag on for two years without
resolution. We appreciate that BP Amoco operates in a competitive
market, but monopoly utility functions will still remain regulated at
both the federal and state levels after a merger to ensure access to
essential facilities and to protect consumers.
On the other hand, Section 401 would substantially expand FERC
authority by authorizing FERC review of any disposition of generation
facilities and holding company mergers, which are not currently within
FERC jurisdiction. We are concerned that this language moves in the
wrong direction by expanding regulation. A growing number of utilities
are selling their generation facilities in order to focus on other
business opportunities or to satisfy state restructuring plans. These
dispositions of assets are subject to state review. There is no need
for additional FERC review under Section 401, which would potentially
slow down the move to competition in some states.
Section 401 also would expand FERC authority by requiring FERC to
examine a merger's impact on competition in retail markets, another
area already subject to state review. FERC examines a merger's effect
on wholesale competition, but requiring FERC to examine the impact on
retail markets clearly intrudes on the states' jurisdiction and
unnecessarily duplicates existing regulation.
We understand that some entities argue for even more burdensome
utility merger review. They want electric utilities to be subject to
higher merger standards than any other industry, even though utility
mergers already are subject to more regulation than literally any other
industry. Proponents of these draconian proposals claim that utility
mergers will dramatically reduce the number of competitors. We would
point out that there are thousands of suppliers who currently
participate in electricity markets, with many new entrants--among them
the world's largest oil and gas companies--getting into the market.
Claims that the electricity market will somehow lack competitors are
both ludicrous and blatantly inaccurate.
title v--promoting competition
Retail Reciprocity
Section 501 would impose a mandatory reciprocity provision on the
states. We believe the section should be modified to clarify state
authority to impose reciprocity requirements on suppliers if a state
chooses to do so. Otherwise, this section as currently written would
preempt existing state restructuring plans in a number of states,
including California, which consciously chose not to impose reciprocity
requirements on suppliers in their state restructuring plans. We would
prefer a provision which facilitates, rather than intrudes, into state
decisions relating to reciprocity.
Public Utility Holding Company Act (PUHCA)
Subtitle B of Title V would repeal PUHCA 12 months after enactment
and substitute a new act giving FERC and state regulatory commissions
access to the books and records of holding companies and affiliates.
PUHCA is an impediment to competitive markets that only Congress can
address, and we strongly support inclusion of this subtitle in H.R.
2944. PUHCA was enacted in 1935 during the New Deal in response to
conditions in the electricity industry at that time. However, like
everything else, the electricity industry has obviously changed over
the past 60 years, and it is time that PUHCA be changed to recognize
this fact.
Public Utility Regulatory Policies Act (PURPA)
Subtitle C of Title V would reform PURPA by repealing prospectively
the mandatory purchase obligation, protecting existing contracts and
providing for the recovery of federally mandated, FERC jurisdictional
PURPA costs. We strongly support inclusion of these provisions in H.R.
2944, including those addressing PURPA cost recovery. A federal statute
that forces utilities to purchase power at above-market prices,
regardless of whether they need that power--and consequently forces
consumers to pay billions of dollars more for power than they otherwise
would--cannot be justified in a competitive market.
Aggregation
Section 541 of the bill would preempt all other federal and state
laws addressing aggregation, except those relating to undue
discrimination and preferential treatment, to allow any entity,
including an electric cooperative or municipality, to aggregate retail
consumers in open states.
EEI believes that consumers who have retail electric choice should
be able to choose any qualified supplier they wish, including one that
aggregates them with other customers. However, we oppose any
government-initiated slamming that would force all customers in a
particular area or group to switch suppliers, even if they later have
the opportunity to opt out of such a forced switch. We are concerned
that the preemptive provisions of Section 541 would allow a
municipality, cooperative or other entity to force an entire group of
customers to switch suppliers.
In addition, we are concerned that the provisions in Section 541
that preempt state law are so broad that they could undo other
important public policies. For example, these provisions appear to
allow an electric cooperative or municipality that is required by state
law to operate only within its own discrete service territory to jump
the fence and compete outside that service territory.
We would be pleased to work with the Chairman to modify the
language of this provision to assure that any service provider in open
states may aggregate consumers who voluntarily choose to purchase
electricity from that provider, consistent with applicable rules for
obtaining electric service.
Interconnection
Section 542 would give FERC the authority to order interconnections
to utility distribution systems for distributed generation facilities.
Distributed generation obviously will play an increasingly important
role in meeting consumers' power needs in a competitive market. EEI,
along with other groups, is working with the Institute of Electrical
and Electronics Engineers (IEEE) to develop a uniform interconnection
standard regarding reliability and safety issues relating to
distributed generation facilities. IEEE is the organization that has
the technical, engineering, reliability and safety expertise to assure
the standard results in the safe integration of distributed generation
into the distribution system.
We have several concerns with Section 542. First, the bill defines
a distributed generation facility as a facility of 50 megawatt capacity
or less that is designed to serve retail electric consumers at the
facility. Fifty megawatts is a lot of power; a facility this size is
not one that average consumers would install in their homes or small
businesses to meet their basic power needs. Fifty megawatts would be
large enough to meet the peak electricity demand of a small city of
roughly 6,000 homes. Utilities do not connect 50-megawatt generation
facilities to their distribution systems; instead, these would have to
be connected to bulk-power transmission systems. Forcing a utility to
connect 50-megawatt generation facilities to its distribution system
would create serious reliability and safety problems.
Second, Section 542 would give FERC authority to order utilities to
increase their distribution capacity in order to carry out a FERC
interconnection order. This is a clear intrusion of federal authority
into the states' traditional regulation of distribution service. At the
same time, Section 542 does not address the crucial issue of who pays
for any required upgrade in distribution capacity. While FERC would be
able to order distribution upgrades, the authority for allowing the
recovery of the cost of such upgrades would remain with state
commissions, with no assurance of any cost recovery. We believe
authority to order distribution upgrades should remain with the states,
which regulate distribution activities.
title vi--federal electric utilities
Electricity restructuring cannot achieve its anticipated results
unless the rules governing competition treat all competitors alike.
This proverbial ``level playing field'' among different types of
electricity providers requires similar tax and regulatory treatment,
similar access to investment capital and similar access to preference
right power on behalf of our respective consumers. If the current
subsidies available to public and cooperative power are available to be
used to construct new generation or transmission facilities in a
restructured electricity marketplace, then we will have multiple sets
of competitors operating under multiple different sets of rules.
Shareholder-owned utilities would be at considerable disadvantage in
such an environment, not because other competitors are more efficient
or better managed, but because they have better access to government
subsidies. Unfortunately, Title VI does not address these issues; in
fact, the title would make matters significantly worse.
Subtitle A--Tennessee Valley Authority
Section 602 repeals certain provisions of the Federal Power Act
dealing with interconnections, wheeling and portions of the TVA Act
establishing the ``fence'' around TVA's service area. Section 603
limits TVA's sales to retail customers, authorizes the sale of
``excess'' TVA power and electricity exchanges outside its service area
and applies various Federal Power Act requirements to TVA.
TVA is a heavily subsidized government utility. Permitting TVA to
sell its subsidized power beyond its service area raises the specter of
unfair competition and undermines this bill's purpose of promoting real
competition in electricity markets. The section provides no meaningful
guidance on how TVA power is to be sold.
Section 604 provides that TVA may issue bonds for new or enhanced
generating facilities if TVA determines they are necessary to supply
the demands of distributors and retail consumers. In tandem with
Sections 602 and 603, this means that TVA can sell its subsidized power
over the fence and then issue bonds to build capacity to meet its
internal needs. TVA has plenty of generating capacity, as evidenced by
its easily meeting power needs on sixteen record degree days during
this summer's extraordinary heat wave and drought. The only reason for
Section 604 is to permit TVA to acquire new generating capacity for
anticipated sales beyond its service area. We believe there is no
reason for TVA to build new capacity in a competitive generation
market.
TVA operates under a $30 billion debt ceiling established by
Congress and currently has outstanding obligations of roughly $26
billion. These bonds are not guaranteed by the full faith and credit of
the United States government, but they are perceived as such by bond
rating agencies and investors. The federal government has never allowed
a wholly owned federal corporation to go bankrupt and those who sell
and own bonds are banking on an ``implied guarantee'' that does not
exist. Nonetheless, this association with the financial strength of the
federal government gives TVA bonds an AAA rating and enables TVA to
borrow at rates substantially below those of similarly situated
utilities.
A ten-year plan TVA issued two years ago articulated a goal of
reducing TVA's debt by half over the ensuing decade. TVA has made
little progress towards this goal and, in fact, has already slipped two
years in its timetable. Allowing TVA to slip even further into debt
courts fiscal disaster. We believe Congress should take TVA at its word
and lower its debt ceiling along the schedule outlined in its ten-year
plan.
Section 605 permits TVA to renegotiate its long-term contracts with
distributors. This is fair to the distributors who must now give ten
years notice before they can leave TVA's system or buy power from other
vendors. These contracts effectively preclude the entry of new
competitors in the Tennessee Valley. It will take some time for TVA to
renegotiate these complicated agreements with 159 distributors and even
longer to agree on the treatment of stranded costs, as outlined in
Section 608. At a minimum, TVA's over-the-fence sales should not begin
before these agreements are reached and outside competitors have the
same access to Tennessee Valley customers that TVA has to customers on
the other side of the fence.
Section 609 applies federal antitrust law to TVA but not the
sanctions that make such laws effective. We believe TVA should be
covered in the same manner as other utilities.
Section 612 says that Subtitle A ``shall be interpreted and
implemented in a manner that does not adversely affect bonds issued by
the Tennessee Valley Authority.'' We cannot imagine a larger loophole.
It puts the interests of TVA's bondholders ahead of those of America's
taxpayers, the true owners of TVA. This section should be removed.
Without changes, Subtitle A would unleash an enormous subsidized
electricity vendor into the competitive marketplace this legislation is
supposed to create. It does not address TVA's staggering debt and, in
fact, encourages TVA to borrow still more. It equips TVA with special
exemptions from law and, in its final section, essentially absolves TVA
of the most basic regulatory constraints.
Subtitle B--Bonneville Power Administration
Section 623 would authorize Bonneville Power Administration (BPA)
to impose a surcharge of up to $100,000,000 per annum on its
transmission customers. These revenues would be used to pay off debt
Bonneville has incurred in acquiring generation capacity. The surcharge
could ostensibly only be imposed if Bonneville projects ``that
available financial reserves in the Bonneville Power Administration
Fund attributable to the power function will fall below $150,000,000.''
The section also provides for FERC oversight.
We strongly oppose this surcharge. Since federal transmission
regulation began in the 1930s, policy has been that those who use power
pay for its generation and those who use transmission capacity pay only
for transmission. Under Section 623, in many cases, transmission
customers would be forced to pay for electricity that someone else
actually uses. There also would be situations where the transmission
customer paying the surcharge would be paying for generating capacity
acquired to compete against its own. In truth, BPA's current
customers--more than two thirds of whom are industrial facilities--can
easily afford to cover BPA's generating costs: It would require a rate
increase of less than two tenths of a cent per kilowatt hour.
Section 625 authorizes ``acquisition of new major generating
resources.'' We believe this is a good example of ``mission creep.''
BPA was established to sell the power produced at 29 federal
hydroelectric facilities on the Columbia River system. It has gradually
metamorphosed into a utility with a much larger role in the Pacific
Northwest. We believe BPA should return to its mission and concentrate
on marketing and distributing the power from federal dams. There is no
rationale for BPA to acquire or construct new thermal generating
capacity in a competitive environment when other suppliers are willing
to do so.
Like the similar provision in the TVA subtitle, Section 626 applies
federal antitrust law to BPA but without the economic penalties other
entities face. If BPA wants to be a player in competitive markets, it
should face the same laws and penalties that other players face.
Section 627 calls for ``encouraging the widest possible diversified
use of electric power at the lowest possible rates to consumers
consistent with sound business principles.'' (emphasis added). We
believe the foundation principle of BPA should be what it is for
virtually every other federal agency responsible for the management and
sale of the public's resources: To achieve for America's taxpayers the
best possible price or ``fair market value'' whenever public assets are
sold.
The federal government routinely sells coal, oil, natural gas,
timber and other assets. The prime responsibility of agencies like the
Minerals Management Service, the Bureau of Land Management and the
Forest Service is to ensure receipt of ``fair market value'' when the
public's assets are sold. There are open and public bidding procedures
under which the high bidder wins. There is administrative and judicial
review and close congressional oversight. These programs bring to the
Treasury billions of dollars per year in revenue.
No such regimen covers BPA's sale of electricity produced at
federal generating facilities. We are referring here not to the
preference right power sold within BPA's traditional service area but
to the power BPA sells outside the Pacific Northwest or ``over the
fence.'' This power is sold through nonpublic negotiations and the
prices are not released. No other federal assets can be sold in this
way. Imagine the umbrage in Congress if the Department of the Interior
sold coal or oil tracts through a secret process and at a secret price.
We propose a system for the ``over the fence'' sale of Bonneville
power, one modeled after the successful systems for selling other
federal assets. Nothing less will ensure taxpayers that government is
receiving top dollar on the sale of their assets.
title vii--environmental provisions
We commend the Chairman for not including a mandatory renewable
energy portfolio standard in H.R. 2944. A renewable portfolio standard
is a hidden tax on all consumers that would force them to pay more for
electricity. Polls demonstrate that many consumers will voluntarily pay
more to purchase electricity from renewable energy sources, and
consumers in open states should have this option. We believe the
Chairman has included more appropriate incentives to promote renewable
energy, including the renewable energy production incentive and the
renewable energy tax credit.
Net Metering
Section 702 of H.R. 2944 addresses net metering service. Again, net
metering relates to the provision of retail electric service; these
issues are being addressed by the states, and Section 702 is an
intrusion in state jurisdiction. Further, net metering should apply
only to the energy portion of the bill and not relieve a consumer from
paying other charges on the bill, including those for public policy
purposes and distribution services.
title viii--provisions relating to internal revenue code
For competition to work, Congress needs to address the artificial
competitive advantages provided by the tax exemptions and tax-exempt
financing used by government-owned utilities and electric cooperatives
when competing against other electricity suppliers, so that all
competitors can participate in open markets under the same set of
rules. For this reason, EEI has concerns with section 801 and 802 of
the bill.
Business Activities of Mutual or Cooperative Electric Companies
Section 801 would remove the requirement that electric cooperatives
and similar organizations pay taxes on income from sales to nonmembers
to the extent that income exceeds 15% of revenues. Federal subsidies
have been given to electric cooperatives on the argument that they are
nonprofit organizations serving only their owner-members.
We believe that section 801 goes too far when it allows electric
cooperatives to retain their tax-exempt status while making an
unlimited amount of sales to nonmembers. Also, we do not feel it is
warranted to permit electric cooperatives to exclude debt written-off
as an exclusion from the 85% member income test.
Tax-Exempt Bond Financing of Certain Electric Facilities
EEI has major concerns with section 802 because it provides
expansive relief to government-owned utilities, even if they do not
fully open to competition, and allows them to issue new tax-exempt
bonds for new transmission and generation facilities that will compete
with privately owned, taxpaying entities. These provisions also would
provide substantial loopholes allowing government-owned utilities to
sell electricity for profit outside their service territories without
paying income taxes on these sales. The provisions would distort
competitive electricity markets by helping government-owned, subsidized
utilities to expand at the expense of tax-paying electricity suppliers.
In contrast, the Administration has proposed a much different
approach to dealing with the tax consequences of electricity
restructuring. Their proposal would grandfather outstanding bonds for
government-owned utilities that offer choice to their consumers, but
would eliminate the ability to issue any tax-exempt debt in the future
for all facilities involved with transmission or generation of
electricity. Legislation (H.R. 1253) introduced by Representative
English takes a similar approach as the Administration, but would take
the additional step to tax profits on sales made outside of a
government-owned utility=s service territory. EEI believes either of
these approaches is more equitable than H.R. 2944 as they provide for
competition to take place on a more level playing field. Consumers
deserve to receive true market signals as they choose their electric
supplier. Subsidized power does not give them the true signals of
efficiencies and lowest costs.
Nuclear Decommissioning Costs
EEI strongly supports section 803 of the bill, the provisions of
which were introduced by Representative Jerry Weller (H.R. 2038). The
need for this section results from the evolution from a regulated
environment to a competitive electricity market. Because of this
structural change, the tax treatment of nuclear decommissioning funds
is not clear under current law. In addition, restructuring has brought
regulatory and market forces to bear upon continued ownership of
nuclear power plants, resulting in transfers and sales of these plants.
In some instances, state restructuring laws require divestiture of
power plants. These activities have triggered unforeseen tax
consequences that, if not corrected, could force the early shutdown of
nuclear units that cannot be sold, resulting in the loss of jobs and a
reduction of energy supply.
The provisions in this section will address needed reforms to U.S.
tax law associated with decommissioning of nuclear power plants in a
deregulated market by: (1) eliminating the cost of service requirement;
(2) defining nuclear decommissioning costs and clarifying that all such
costs are currently deductible; (3) allowing for the transfer of
nonqualified funds to a qualified decommissioning fund; and (4)
providing for the tax-free transfer of these funds when nuclear assets
are sold to a non-regulated entity.
Renewable Energy Tax Credit
EEI supports section 804, which would extend the tax credits for
electricity generated by wind and biomass.
other issues
In addition to commenting on what is in H.R. 2944, we want to
commend the Chairman for what is not in the bill. Of utmost importance,
we are pleased that the bill does not grant FERC new authority to order
utilities to divest their assets nor does it impose competitive
handicaps on the ability of utilities and their affiliates to offer new
services and products.
Federal legislation should protect competition, not competitors; it
should not become a vehicle for favoring new entrants by breaking up or
otherwise handicapping the ability of existing utilities to compete.
Recent polls conducted by EEI show that 91 percent of American
consumers believe that their current electricity supplier should remain
in the mix of competitors from which they can choose.
Any evaluation of market power issues must look to where the
electricity industry is rapidly heading, not to where it has been, or
even where it is right now. Proponents of draconian market power
proposals act as though monopolistic utilities are about to be
completely deregulated to run amok in a competitive market.
To the contrary, in competitive electricity markets, utility
monopoly functions will continue to remain regulated at both the
federal and state levels to ensure all competitors access to essential
facilities and to ensure that distribution utilities do not cross
subsidize or provide unfair preferences to their affiliates. A number
of different federal and state statutes address potential market power
problems. In addition, state restructuring plans are addressing
potential market power concerns.
And, let's not ignore what is already occurring in evolving
competitive electricity markets: thousands of competitors currently
exist, with many more large, established companies with significant
name recognition entering the market. Tens of thousands of megawatts of
new generation is being planned, which will be constructed and brought
on line much more quickly than in the past. In addition, utilities are
selling tens of thousands of megawatts of their own generation.
Market share simply does not equal market power. As long as
consumers have a choice of suppliers, a company can serve a large
portion of the market without having the ability to manipulate prices
or prevent other suppliers from competing. In competitive markets,
sellers offer different advantages to consumers, and they cannot be
equalized. The ability to bring lower prices or better services to
consumers is what competitive markets are all about.
conclusion
We support legislation that removes federal barriers to
competition, facilitates state restructuring activities, addresses
critical transmission and reliability issues and applies the same rules
to all competitors. We believe that H.R. 2944 makes significant
progress toward achieving some of those goals, while falling short on
others. We commend the Chairman for his continuing efforts to develop a
workable electricity bill, and we look forward to continuing to work
with him and other Members of Congress to address our concerns with
H.R. 2944.
Mr. Barton. Thank you, Mr. Owens.
We would now like to hear from Ms. Lynne Church, who is
executive director of the Electric Power Supply Association
and, just as a personal aside, is an expert on traffic
congestion in northern Virginia.
Ms. Church. Mr. Chairman, you are stealing my speech.
Mr. Barton. Welcome. Your statement is in the record and we
give you 6 minutes to summarize it.
STATEMENT OF LYNNE H. CHURCH
Ms. Church. Thank you.
Good morning, Mr. Chairman, Mr. Hall, and members of the
committee.
My name is Lynne Church. I am the executive director of the
Electric Power Supply Association, which is the national trade
association for the competitive power supply industry,
including power marketers and non-regulated generators active
in the United States, as well as U.S. global markets.
I thank all of your for the opportunity to present my
testimony and our analysis of H.R. 2944.
The bill focuses primarily on the wholesale marketplace.
While EPSA's vision of the future certainly demands a national
competitive market for electricity, there is a very broad
consensus that additional Federal legislation is needed to
promote truly competitive wholesale power markets.
We do not yet have full comparability of rates, terms, and
conditions for interstate transmission service. Barriers to
entry for new market participants remain. It may surprise the
subcommittee, but many of EPSA's members actually believe the
wholesale market is getting less, not more, competitive.
The long-term success of your effort will be linked to a
simple question: does this law make wholesale power markets
more robust, more fair, and more competitive? This question has
real-world implications for your constituents and consumers, in
general.
Just last week, for example, the local electric utility,
PEPCO, announced a 7 percent rate reduction. Fully half of this
reduction is attributed to cost savings associated with
increased reliance on the wholesale markets.
H.R. 2944 is complex, and EPSA clearly agrees with many of
the provisions; however, one area of significant concern
relates to the regulatory oversight of the interstate
transmission grid. If this legislation is to be pro-
competitive, it must make absolutely clear that all users of
the interstate system are subject to a consistent set of rules
overseen by a national regulatory body.
Unfortunately, in three separate provisions, the bill
unnecessarily subjects the interstate grid to potentially
intrusive State control. Any one change would be problematic,
but the combination of the three has the potential to defeat
the creation of a truly competitive and efficient marketplace.
The bill clarifies that Federal authority is limited to
unbundled power sales, or those sales where customers are
billed separately for power generation and transmission
services.
For those 24 States--we count 24--which have adopted a
framework of retail competition, all power sales are
essentially becoming unbundled. In those States, Federal
authority will extend to all uses of the interstate grid.
However, as long as some States opt against retail choice, this
legislation will perpetuate a system where large portions of
the interstate grid will remain outside of Federal control and
subject to State control. And those States that have moved to
competition may well be penalized in terms of serving their
customers.
It is akin to suddenly turning an eight-lane superhighway
into a bumpy country road once it reaches a political boundary
of a State.
This jurisdictional split will create risk in the
marketplace and may lead some States to engage in ill-conceived
attempts to protect in-State consumers at the expense of out-
of-State power users.
To use the highway analogy again, imagine what would happen
if northern Virginia decided to mitigate road congestion during
rush hour by permitting only cars with Virginia tags on its
highways and excluding DC and Maryland drivers from its roads
during those hours.
The subcommittee needs to recognize that our grid is truly
interstate from an engineering standpoint, and even small
disruptions can have broad impact.
For example, we believe that a poorly managed effort to
curtail 400 megawatts of power flowing between Ontario and
Michigan this past July led ultimately to the dramatic price
spike in Illinois, Indiana, and Ohio that we have read about,
and to hundreds of millions of dollars in unnecessary costs.
This distinction between unbundled and bundled uses of the
transmission grid is an artificial and unnecessary one. It is
fundamentally at odds with the concept of full comparability
and an effort to promote a robust competitive power place.
The other two areas of which I speak are the areas dealing
with grid reliability and the determination of transmission
versus distribution assets.
The bill in those areas further interjects State regulators
in issues that are best considered at a national level.
In a number of other areas, the legislation has been
significantly improved since the initial draft in August, and
we appreciate the Chair and the committee's and the staff's
role in listening to us and including some of these provisions.
Particularly, the bill's language on mergers, regional
transmission organizations, and new plant interconnections are
very positive steps. They do not resolve all our concerns, but
they are definitely a step in the right direction. And I refer
you to the text of my written comments for some suggested
refinements to those provisions, as well as to the PURPA and
renewable power section.
Some subcommittee members have expressed opposition to any
new authority to FERC, yet, we do not believe that FERC needs a
greatly expanded role. Instead, the Commission's existing
authority needs to be clarified and FERC's role encouraged to
evolve.
Competitive power markets will continue to rely on an
interstate grid that is a monopoly provided service. As such,
these markets will require the presence of an effective
watchdog, and FERC is, realistically, the only agency equipped
to handle this responsibility.
To summarize, enormous consumer benefits can be achieved
through the enactment of pro-competitive wholesale power
legislation, but the system today is broken. Without action by
this Congress, your constituents and consumers, generally, will
be threatened with unnecessary market volatility and higher
prices for power.
[The prepared statement of Lynn H. Church follows:]
Prepared Statement of Lynne H. Church, Executive Director, Electric
Power Supply Association
Mr. Chairman, Ranking Minority Member, and Subcommittee Members, my
name is Lynne H. Church, Executive Director of the Electric Power
Supply Association (EPSA). EPSA is the national trade association that
represents the leading competitive power suppliers--including power
marketers and developers of competitive power projects--active in the
U.S. and global energy markets. On behalf of the competitive power
industry, I thank you for this opportunity to present our analysis of
your legislation to restructure the electric power industry, H.R. 2944,
the Electricity Competition and Reliability Act.
The Goal of Legislation: Building a Robust, Competitive Wholesale Power
Market
As you know, H.R. 2944 focuses primarily on the wholesale
marketplace. While EPSA's vision of the future demands a national,
competitive retail market for electricity, our experience in today's
wholesale markets underscores the potential value of your legislative
efforts.
As testimony before the Subcommittee has made clear, there is a
broad consensus that much still needs to be done. True comparability of
rates, terms and conditions for interstate transmission service for all
classes of customers has yet to be achieved. Barriers to entry for new
market participants remain. The monopoly providers of transmission
services are learning to use their systems in ways that can be at odds
with a competitive marketplace. It may surprise the Subcommittee that
many of EPSA's members actually believe the wholesale market is getting
less, not more competitive.
The long-term success of your effort will be linked to a simple
question: does this law make wholesale power markets more robust, more
fair and more competitive? While issues in the wholesale market
directly concern electric power distribution companies, power producers
and marketers, this question has real world implications for your
constituents. Just last week, for example, the local electric utility
PEPCO announced a seven percent rate reduction. Fully half of this
reduction is attributed to cost savings associated with increased
reliance on wholesale markets. We believe the impacts on consumers are
direct: more competition, more benefits; less competition, less
benefits and higher costs.
H.R. 2944 Splits Jurisdiction Over the Interstate Market and Could
Increase Risk
H.R. 2944 represents a complex policy proposal and we recognize
that the legislative process will result in a stream of changes and new
ideas. We look forward to working with the Subcommittee as this process
unfolds and are optimistic that our collective efforts can result in
critically needed, pro-competitive legislation.
While EPSA clearly agrees with many provisions in the legislation,
there are issues that need further action or alternative solutions. As
one area of significant concern, we raise the issue of regulatory
jurisdiction over the operation of the interstate transmission grid. If
this legislation is to be pro-competitive, it must make absolutely
clear that all users of the interstate system are subject to a
consistent set of rules overseen by a national regulatory body.
Unfortunately, in three separate provisions, the bill unnecessarily
subjects the interstate grid to potentially conflicting and disruptive
regulatory control. Any one change would be problematic, but the
combination has the potential to defeat the creation of a truly
competitive and efficient marketplace.
First, the bill clarifies that federal authority is limited to
``unbundled'' power sales. An unbundled sale is one where a customer is
billed separately for power generation and transmission services.
``Bundled'' sales are where a customer gets a single bill for electric
service and typically has no choice of power provider.
As states move to retail competition, all power sales essentially
become unbundled: this is critical to the concept of customer choice.
Hence, in a world where all the states have embraced retail competition
(as 24 have done already), federal authority extends to all uses of the
interstate grid. On the other hand, as long as states opt against
retail choice, your legislation perpetuates a system where some uses of
the interstate grid are subject to state control, while others are in a
national system.
In many states, ``bundled'' uses of the interstate grid amount to
80% or more of the transactions on the interstate grid. As written,
this legislation has the possible effect of reducing the interstate
grid--our interstate highway system for power--from an eight lane super
highway to a dirt road. In addition, this jurisdictional split may
permit some states to engage in ill-conceived attempts to protect
instate consumers at the expense of out-of-state power users.
Continuing with the highway metaphor, imagine what would happen if
Northern Virginia decided to mitigate road congestion by permitting
only cars with Virginia license plates on its highways during rush
hour?
The Subcommittee needs to understand that, regardless of legal
jurisdiction, our grid is truly interstate and even small local
disruptions can have broad impacts. For example, we believe that a
poorly managed effort to curtail 400 Mw of power from flowing between
Ontario and Michigan led ultimately to a dramatic price spike in
Illinois, Indiana and Ohio last summer and to hundreds of millions of
dollars in unnecessary costs for consumers.
The distinction between unbundled and bundled uses of the
transmission grid is an artificial and unnecessary one. Separate
treatment and regulatory oversight makes impossible a system of
consistent rules and comparability with respect to transactional rates,
terms and conditions. Such a split in jurisdiction creates potentially
overwhelming commercial risk. It also is fundamentally at odds with any
effort to promote a robust competitive wholesale power marketplace.
In two other areas, as part of the sections dealing with grid
reliability and the determination of transmission assets, the
legislation interjects state regulators in issues that are best
considered at a national level. Rules governing grid reliability, for
example, have regional, national and commercial impacts. Allowing fifty
states broad rights to ``adjust'' these rules to reflect local concerns
is a formula for potential chaos in the wholesale marketplace.
In addition, there is growing concern in the marketplace that,
through a process known as ``refunctionalization,'' the owners of
transmission assets will attempt to reclassify these transmission
facilities as elements of the distribution network. In part, such
actions will be taken to avoid federal oversight. This effort, it is
feared, will effectively shrink the physical marketplace and result in
potentially increased congestion and supply disruptions. If
transmission owners are allowed to appeal to local interests and
authorities for these determinations, a consistent set of rules will be
impossible and erosion of the interstate transmission system could
result. While the perspective and advice of local authorities can be
invaluable, the legislation must make clear that local concerns cannot
trump the national interest.
H.R. 2944 Includes Improved Market Power Provisions, But More Work
Needed
In a number of other areas, the legislation has significantly
improved since the initial draft was released in early August. Three
such provisions relate to the bill's language on mergers, regional
transmission organizations (RTOs) and new plant interconnection with
the interstate grid. While not resolving our concerns with respect to
the abuse of market power in the marketplace, these provisions
represent a step in the right direction.
Even in these areas, however, we encourage you to adopt further
refinements. For example, independent control is absolutely essential
to the operation of a commercially acceptable RTO. However, the
legislation defines any RTO where participants each own less than ten
percent of voting stock as ``independent.'' This language should be
changed--an RTO where six transmission owners control 60% of the voting
rights meets few market participants definition of ``independent.'' As
another example, we note that the bill's provisions to ensure that the
non-discriminatory interconnection of new power plants improve on the
status quo. Nevertheless, the process outlined in the legislation is
still insufficiently streamlined to have a significant, positive
impact.
Lastly, we urge the Subcommittee to ensure the capability of
federal regulators to react in near ``real-time'' and with direct, but
light-handed, remedies to allegations of market power abuse. EPSA
members do not see the courts or anti-trust laws as a viable approach
to resolving market power issues on a day-to-day basis. The markets and
participants are changing rapidly. Litigation, especially when anti-
trust laws are involved, is unwieldy, extremely expensive and unlikely
to lead to a rapid resolution of concerns. Given these circumstances,
justice delayed will mean justice denied for many market participants.
While some Subcommittee members have expressed opposition to any
new authority at FERC, we do not believe that FERC needs a greatly
expanded role. Instead, the Commission's existing authority needs to be
clarified and FERC's role encouraged to evolve. Competitive power
markets will continue to rely on an interstate grid that is a monopoly-
provided service. As such, these markets will require the presence of a
effective watchdog and FERC is realistically the only agency equipped
to handle this responsibility. States acting on their own cannot serve
this role. On the contrary, acting on their own, states could
exacerbate the problems facing the industry.
Additional PURPA and Renewable Power Provisions are in Order
Before closing, we would like to comment on two other sections in
the legislation, relating to PURPA and renewable power. For some time,
EPSA has supported the prospective repeal of PURPA's mandatory purchase
obligations, linked to the introduction of competitive retail markets.
If PURPA is amended in federal law, there must be explicit recognition
and preservation of existing PURPA contracts. We also endorse your
efforts to guarantee the recovery of PURPA contract costs as
appropriate federal policy. However, such cost recovery must be
explicitly related to the honoring of existing contracts. Lastly, EPSA
urges the repeal of the ownership restrictions on PURPA Qualifying
Facilities (QFs). In 1992, the Congress placed no such restrictions on
Exempt Wholesale Generators (EWGs) and the time has come for similar
treatment for QFs.
EPSA also endorses additional support for renewable resources. The
bill's Renewable Energy Production Incentive is unfairly focused on
non-profit companies. This program should be expanded to cover all
types of companies. Alternatively, the tax credit for renewables
included in the legislation should be expanded to include the full
range of technologies covered by the Incentive program (i.e., ``solar
energy, wind, biomass, or geothermal'').
Conclusion
EPSA's members are very appreciative of this opportunity to share
with the Subcommittee our views of your legislation and the state of
competition in wholesale markets. We look forward to working with the
Subcommittee and the full Committee to ensure the creation of
critically needed, pro-competitive legislation.
To summarize, enormous consumer benefits can be achieved through
the enactment of pro-competitive wholesale power legislation. We are
not advocating intrusive ``re-regulation,'' as some might claim.
Rather, we advocate light-handed, consistent oversight of all
competitive aspects of the industry with appropriate enforcement
policies and national regulation of the monopoly interstate
transmission network. Today, the system is broken. Without action by
this Congress, your constituents will be threatened with unnecessary
market volatility and higher prices for power.
Mr. Barton. Thank you.
We now want to hear from Mr. William Mayben, who is the
president of Nebraska Public Power in Columbus, Nebraska. He
represents the Large Public Power Council.
Your statement is in the record. We welcome you. We hope
that when Texas A&M plays Nebraska in a month that there is a
power outage in the big red machine on the football field, but
certainly not in the utility grid.
Mr. Mayben.
STATEMENT OF WILLIAM R. MAYBEN
Mr. Mayben. Nebraska has been known to have a power outage
in the second half for just a strategic thing.
Thank you, Mr. Chairman.
Nebraska Public Power District is a vertically integrated
electric utility that serves about 1 million of the 1.6 million
people that live in Nebraska. That does not sound like very
much, based upon some of the numbers I have been hearing, but
for us it is pretty important.
The Large Public Power Council is represented by 21 of the
largest publicly owned State and locally owned electric
utilities in the country. We have about 6 million customers in
total, about 44,000 megawatts of generation, and about 25,000
miles of high-voltage transmission lines.
Now, we distinguish ourselves from the dominance of the
electric utility industry in that we do not engage much in
mergers--in fact, none at all--and, for the most part, we are
not interconnected with either one of ourselves, so we truly
depend upon the national grid.
The Large Public Power Council applauds the chairman's
efforts in bringing together a comprehensive bill to deal with
deregulation of the electric industry. As it is formed, we
believe for the most part, it will be very beneficial for the
consumers throughout the United States.
We have two fundamental issues with regard to the bill, as
it is drafted, and we are really pleased with the way it is
going, but we have a little bit of problems. Our problems are
pretty well laid out in the details of my prepared testimony.
The first thing we have problems with is in the private use
area. As you know, private use was really imposed upon public
power entities issuing tax-exempt debt to construct
transmission lines and power plants back in the 1986 Tax Reform
Act. That act clearly was passed in contemplation of the
regulated monopoly utility industry that we had at that point
in time.
As we go forward with deregulation, it is clear that that
act does not fit a segment of the electric utility industry
very well, and we believe that it has to be addressed.
Fundamental limitations that we face are that we can only
issue or we can only take about 10 percent of the output of our
generation or our transmission and use it in an open
competitive market, or derive only about $15 million a year in
the engagement of the wholesale market.
We believe the transmission issue that is most troublesome
to us--and, by the way, we support very strongly the work that
is necessary to create a robust transmission system throughout
the United States. We think that is the key to a competitive
market, and we think if we can accomplish a competitive market,
many of the other things that we are concerned about with
regard to market power will be ameliorated, to some extent.
A fundamental problem is that public power is different
than investor-owned utilities. We are required, for the most
part, to abide by the statutes and the rules that are set forth
in our legislatures and in our home communities, and those
rules are contrary to the rules that the investor-owned
utilities can abide by with Federal jurisdiction.
We believe that the bill needs to recognize that public
power is different, that the rules that we are asking for with
regard to jurisdiction by the Federal Government recognizes our
situation.
With regard to the creation of RTOs, the public power
entities support that, and we believe very strongly that they
should be a part of the regional transmission organizations.
But, again, we believe that we need to be given the recognition
of the uniqueness of public power in terms of becoming members
of the RTOs.
We are concerned, at this stage of the game, that, if we do
not have that kind of recognition, we will find ourselves
without the ability to participate in the RTOs, and we think
that the market will be affected by our absence. So we urge you
to contemplate that we be given some special consideration.
In conclusion, again we applaud the chairman and the
committee for coming forth with a comprehensive bill. We think
it is the step in the right direction. We would like to work
with you as much as we possibly can to see to it that our
particular needs are addressed.
[The prepared statement of William R. Mayben follows:]
Prepared Statement of William R. Mayben, President, Nebraska Public
Power District on Behalf of The Large Public Power Council
My name is William Mayben, and I am President of the Nebraska
Public Power District. I am testifying today on behalf of the Large
Public Power Council. We appreciate the efforts that Chairman Barton
and this Committee have made to assemble a comprehensive electric
industry restructuring bill that aims to benefit all consumers. Today I
would like to comment specifically on several aspects of Chairman
Barton's bill that are of paramount importance to our members.
The Large Public Power Council (``LPPC'') is an association of 21
of the largest state and locally-owned electric utilities in the United
States. Our members serve approximately 6,000,000 retail customers, and
own and operate over 44,000 megawatts of generation. In addition, we
own and operate in excess of 24,000 circuit miles of transmission
lines. LPPC's members are located throughout the country in states
including Washington, Texas, Arizona, California, Florida, Georgia, New
York and Tennessee.
We have reviewed Chairman Barton's bill, and overall, we believe
the bill takes some positive steps towards encouraging a competitive
and healthy electricity market. We do support the comprehensive
approach to restructuring reflected in the bill, but have some specific
concerns regarding several provisions. As I will outline in my
testimony, we believe that any comprehensive restructuring bill must
both satisfactorily resolve the private use issue and recognize that
the federal government must not regulate state and municipal agencies
as if they were private corporations. Given these overarching
principles, I will focus my comments on several aspects of the bill
that are of the greatest interest to our consumers, who will ultimately
either bear the brunt of, or enjoy the benefits of, federal
legislation. Those issues are private use restrictions, proposed new
powers for FERC that would extend to public power transmission, and
participation in Regional Transmission Organizations (RTOs).
Private Use
I will begin with the most compelling issue for LPPC's members and
consumers today--private use restrictions. Private use restrictions
form a serious barrier to open competition and consumer choice. Failure
to provide relief from some of these restrictions will preclude many
public power systems from opening their systems to full competition and
could result in higher rates for consumers. Such a result would be
contrary to the goal of providing a competitive market that is open to
all who wish to participate, ultimately to the benefit of all
consumers. Unless public power systems are provided with private use
relief, many of us will not be able to be full participants in a
competitive marketplace and thus would have little stake in advancing
federal restructuring legislation. We would like to work with this
Committee to craft fair, effective and comprehensive restructuring
legislation--but it must be comprehensive. We cannot support federal
restructuring legislation without effective private use relief.
Background
By way of background, public power systems have no practical source
of external financing other than the municipal debt markets. Unlike
private companies, public entities cannot issue stock. The private use
rules that apply to our financing, most recently revised by Congress in
the 1986 Tax Reform Act, were promulgated prior to the advent of a
competitive electric industry. The rules provide that no more than the
lesser of 10 per cent, or $15 million, of power generated by a power
plant financed with tax-exempt debt, or transmission capacity of a
transmission line financed with tax-exempt debt, may be sold to a
private entity under a customer-specific contract. In simpler terms,
the rules preclude us, for most transactions, from providing open
access transmission and distribution services and from offering
competitive prices for power sales.
In the regulated monopoly world that existed prior to competition,
this restriction was problematic but manageable. In a competitive world
of open transmission access, it has very serious consequences for our
members, their customers, and investors. Here's what the private use
rules mean in a competitive environment, which already is a reality in
the wholesale market and which is becoming a reality in the retail
market in nearly half of the states :
1. In its recent Notice of Proposed Rulemaking, FERC has strongly
encouraged that all transmission-owning utilities participate in
Regional Transmission Organizations (RTOs). Furthermore, Chairman
Barton's bill and a number of other legislative proposals contemplate
mandating participation in RTOs. We support the development of RTOs as
important to the establishment of competitive markets that are both
efficient and reliable. At the same time, private use rules may act to
preclude effective participation of public systems in an RTO. A public
power system that joins an RTO will not be able to issue new tax-exempt
bonds to finance transmission facilities that have been turned over for
operation by the RTO, thereby raising costs to all users. Moreover, a
public power system that wishes to join an RTO and has issued tax-
exempt bonds for transmission after July 9, 1996, will have to redeem
those bonds with higher cost debt or interest on those bonds will
become taxable--again, raising costs for the utility and its customers.
2. In a competitive environment, large customers will seek and
obtain special tailored contracts to meet their specific needs, just as
they do in buying any product. If outdated private use rules remain
intact, a public power utility may be unable to offer such a contract,
even to customers in its own service territory that it has been
successfully serving for decades. This could deny that customer the
best choice in the market, and will lead to loss of customers for the
utility for reasons that have absolutely nothing to do with price or
quality of service.
3. If a public power system loses a customer in a competitive
environment (and all utilities will lose customers), the public system
may be unable to re-market the generating capacity it had built to
serve that lost customer as a result of the private use rules. Thus,
any excess capacity that a public system has may become idle and
unproductive for the economy solely as a result of the private use tax
rules. Inability to resell the capacity can lead to significant
financial losses and reductions in overall economic efficiency. The
bottom line: the remaining customers of that utility would pay higher
costs.
In summation, penalties for public power consumers come in the form
of higher rates for customers, at a time when competition is supposed
to be reducing rates. The consequences for public power's investors are
equally undesirable. Public power's investors include a broad spectrum
of people who have invested in this debt to fund their retirements,
college educations, and other needs. These investors hold more than $70
billion in outstanding tax exempt debt issued to finance generation,
transmission and distribution facilities, and rely on the ability of
public power systems to repay them through the sale of power from the
assets they financed. Failure to address private use issues places
these investments in jeopardy, as it may cause downgrades of public
power bonds and lead to increased turbulence in the public power debt
market. This in turn may impact other segments of the municipal debt
market, upon which states, cities and towns rely to finance necessary
infrastructure. Uncertainty in these markets leads to higher borrowing
costs, all of which ultimately will be absorbed by investors, citizens
and customers.
Treatment of Private Use in the ``Electricity Competition and
Reliability Act''
For the reasons I have just outlined, we believe Chairman Barton
has advanced the prospects for workable restructuring legislation by
providing relief from private use restrictions in his bill. Chairman
Barton's bill would allow publicly-owned utilities to elect to
permanently forego the ability to issue future tax-exempt debt to build
new generating facilities. In return, the bill would grandfather
existing tax-exempt debt incurred to build electric power facilities
and permit the electing systems to operate outside of current
restrictive private use rules. In this way, publicly-owned utilities
will be able to bring the full benefits of competition to their
customers. Those utilities that do not elect to terminate issuance of
tax-exempt debt would remain subject to modified private use rules.
We believe, and are pleased that Chairman Barton agrees, that a
fair marketplace that invites all to participate cannot exist without
meaningful relief from private use restrictions. I should note that we
do have some technical concerns about a few recent modifications to the
private use provisions of Chairman Barton's bill. I will be happy to
address these in greater detail at the Committee's request.
Transmission Policy
I would now like to turn to transmission issues that will be
important for our members in an increasingly competitive market--
assuming Congress provides us with the private use relief needed to
participate fully in that market. Since its inception, the LPPC has
focused on transmission policy as a critical issue for its members. The
LPPC was the first group of transmission owning utilities to express
support for open transmission access in the debates preceding the
Energy Policy Act of 1992. At the same time, we led the way in
developing and promoting regional transmission entities as a mechanism
to manage and operate the transmission system in an open access
environment.
The LPPC would like to continue to provide leadership in making
changes to the transmission system that will enhance competitive
markets. As such, we would like to work with the Committee to develop
transmission policies that ensure nondiscriminatory access to public
power transmission facilities while recognizing that it is not feasible
to govern access to investor-owned and public power transmission by
identical rules. We are concerned about provisions in Chairman Barton's
bill that give FERC the same authority over transmission rates charged
by state or local agencies as it has over private corporations. Such an
expansion of FERC authority is flawed policy. By definition, State and
local agencies are not private, for-profit corporations. They should
not be regulated as such. For example, FERC's cost of service
ratemaking methodology--which relies on concepts such as rate of return
on equity--is inappropriate for public power systems whose external
financing comes exclusively from debt. Also, in many instances, state
and local bond covenants held by public power systems include coverage
ratios that require transmission revenues in excess of the level FERC
will allow under standard cost of service ratemaking.
We recommend that the Committee not give FERC general ratemaking
authority over public power transmission rates. If the Committee thinks
additional FERC authority in this area is necessary, it should be
limited to authority to require public power systems to file the same
type of open access tariff public power systems now file voluntarily
under the ``safe harbor'' procedure used to qualify for reciprocity
under Order No. 888. This new authority would be limited to requiring
that public power transmission utilities offer non-rate terms and
conditions of transmission service comparable to those that investor-
owned utilities are required to offer under their open access tariffs.
With respect to rates, FERC's authority would be limited to ensuring
that a public power system's transmission rates are comparable to the
rates it charges itself. Thus, on rates, FERC could require that public
power transmission owners not discriminate in favor of their own sales
services, but could not set or review such owners'' revenue
requirements or the level of rates. Attached to our testimony is a
proposed amendment that carries out this objective.
We have similar concerns about provisions that mandate membership
in RTOs. LPPC believes that an evolutionary--and not revolutionary--
approach is needed to ensure the continued delivery of reliable,
affordable electricity to consumers. Furthermore, as FERC has
recognized, public power faces difficult issues in participating in
RTOs. These must be addressed before a national system of RTOs can be
put into place. As I touched on previously, private use restrictions
present a barrier for participation by public power systems.
Furthermore, many public power entities operate under additional legal
and operational requirements that affect their ability to participate
in the ownership of an RTO or to transfer ownership or operations of
their transmission facilities to an RTO. These requirements include
provisions in state constitutions, state and local laws, and bond
covenants that vary from system to system.
For these reasons, we are unable to support any provision giving
FERC authority to require public power systems to join RTOs unless in
addition to addressing such issues as independence, size and scope of
RTOs, the statutory criteria requires the RTO to accommodate the unique
characteristics and legal requirements of public power. This will
ensure that public power's participation by FERC order is not
inconsistent with state laws and constitutional requirements and with
bond covenant requirements. In addition, FERC RTO requirements should
not impair control of local system operations or reliable and economic
service to consumers served by publicly owned facilities. Lastly, the
criteria should not authorize FERC to require any public power system
to join an RTO if the state in which the public power system operates
has chosen not to mandate that its public power entities (which are
instrumentalities of the state) participate in RTOs.
Conclusion
As the Commerce Committee acts on this bill, we stand ready to
offer our assistance and support to the Committee. We are hopeful that
other Committee members can support the work that Congressmen Barton,
Largent, Markey and others have already done on the issue of private
use. We also offer our assistance to the Committee in developing
workable transmission policies that recognize the unique
responsibilities and obligations of publicly-owned utilities.
As pleased and reassured as we are regarding Chairman Barton's
leadership on the private use issue, I must again caution the Committee
that LPPC's members will not be able to support restructuring
legislation that does not provide meaningful private use relief--either
in the same bill or in companion legislation from the tax committees.
We recognize that the Commerce Committee's jurisdiction does not permit
it unilaterally to deal with all pending tax and non-tax restructuring
issues; however, we are confident that the Commerce and Ways and Means
committees can work together to effectively resolve this issue.
In conclusion, the LPPC believes that the Committee continues to
move in a positive direction on electric power competition issues. We
look forward to working with you to ensure that private use provisions
similar to those endorsed by Chairman Barton are enacted by this
Congress, and through that effort, offer our assistance in supporting
this Committee's efforts on broader restructuring issues, including
transmission policy.
Thank you for the opportunity to testify before you today.
Mr. Barton. Thank you, sir.
The Chair wants to announce they have just called a vote on
the floor. It is on approving the journal. We are going to
continue the hearing. If there is a fast member who can get
over and vote and get back, I will turn the chair over, but I
am going to continue the hearing.
We want to hear from our next witness, the former
Congressman from the great State of Oklahoma, Mr. Glenn
English, who is now representing a National Rural Electric
Cooperative Association.
Mr. English, welcome to the committee. Your testimony is in
the record in its entirety. We recognize you to summarize it
for 6 minutes.
STATEMENT OF GLENN ENGLISH
Mr. English. Thank you very much, Mr. Chairman. I
appreciate that. Let me just say that we are very pleased to be
here today and have an opportunity to address H.R. 2944.
Restructuring, we feel, brings a new responsibility to
electric cooperatives around this country. It is an
increasingly important option we feel that consumers will need
and desire, and we want to applaud the effort by the chairman
and by the committee to work with electric cooperatives to make
sure that we are able to fulfill that responsibility.
Let me also say, Mr. Chairman, there are really four key
items that electric cooperatives would like to focus the
committee's attention on at this particular time.
While there are a number of other elements within the
legislation that we address in our written testimony, and some
that are of a technical nature that we would urge to be
considered and looked at, the four items that we particularly
want to focus the committee's attention on today deal with the
guaranteed right of consumers to aggregate and right of
electric cooperatives to serve those consumers; second, to
minimize the unnecessary regulatory burdens on consumer-owned
electric cooperatives; third to put all electric utilities in
the same ball park as far as the services that they can offer
to consumers; and fourth, we want to permit electric
cooperatives to work together to serve consumers more
efficiently.
The first issue with regard to the right to aggregate, we
want to commend the chairman for the legislation and his
addressing of this issue. We feel that certainly the
legislation moves in the right direction as far as dealing with
that particular concern.
The second issue, the summary signal, that the intent was
for electric cooperatives with limited transmission facilities
to be able to, in an uncomplicated way, obtain exemption from
the jurisdiction of the Federal Energy Regulatory Commission.
We feel that is a very laudable intent by the legislation,
since there are some 400 small electric distribution
cooperatives who use high-voltage lines to provide retail
service to their widely disbursed rural consumers.
Now, these facilities have no impact--I want to repeat, no
impact--on the transmission grid, and for that reason should
not have to undergo any type of expensive or prolonged
regulation by the Federal Energy Regulatory Commission.
With that in mind, we would urge the chairman and the
committee to work on the language, itself, to clarify the issue
and to state in detail, if possible, a simple, inexpensive
exemption process to provide the small distribution
cooperatives with the kind of certainty that they are going to
need in dealing with the process.
Let me also say, Mr. Chairman, we took note of the fact
that the Federal Energy Regulatory Commission is authorized to
review mergers not only among the large entities, the mega-
mergers of this country, but between cooperatives, as well.
We were somewhat puzzled by that inclusion in the language
of the legislation, quite frankly, because these are, for the
most part, small entities.
In fact, when FERC needs to be focusing its attention on
the mega-mergers that are taking place and the impact that that
is going to have as far as consumers around this Nation, it
appears that this is diverting resources and attention to deal
with people who have little or no impact as far as the market
power issues of this country are concerned.
In particular, we have been calling for even a heavier
review of some of these mega-mergers that have been taking
place in this Nation, and we still feel that the bill unduly
restricts FERC's authority to look at those mega-mergers.
In particular, from a size standpoint, Mr. Chairman, to
make my point about the fact that this is somewhat puzzling, if
you took all the generation and transmission capabilities of
all electric cooperatives all across this country and merged
the whole group together, they still would not be as large as
the American Electric Power Company's assets.
Second is the fact that these electric cooperatives
generate power for their own use for their own membership. If
you take all the electric generation capability that we have
among our membership, it still only covers about half of all
the electric power needs of individual cooperatives. Since
nearly all that is committed to our membership, it really does
not leave much available for any of our members who may wish to
become players in an open market to be much of a factor, so
that really does not make much sense.
The other thing that I would call to the committees
attention, mergers by rural electric cooperatives, G&Ts, are
already under review by the Rural Utilities Service. Any of
those that have an RUS loan are required to undergo review and
approval before they can take that action, so there is already
Federal review at that particular point.
To simply add the Federal Energy Regulatory Commission is
an additional burden on electric cooperatives as a second
review at the Federal level, and also as a diversion of much-
needed resources for the Federal Energy Regulatory Commission
to be focusing on what is the real issue, and that is the mega-
mergers and the market power that is going to truly have an
impact on the marketplace in this country.
We would like to work with the committee to see if there is
some way we can address this issue, and to deal with the fact
that cooperatives that are small and self-power primarily are
the only members, and other cooperatives already subject to
Federal merger could not be dealt with.
Mr. Chairman, I see my time has expired. I do want to
address several other issues, but I hope to be able to do that
during the question period, and particularly I would like to
address the issues pertaining to propane. Some of the issues
have been raised of our good friends of the propane industry
regarding subsidies and taxes.
Thank you, Mr. Chairman.
[The prepared statement of Glenn English follows:]
Prepared Statement of Glenn English, Chief Executive Officer, National
Rural Electric Cooperative Association
introduction
Chairman Barton and Members of the Committee, I appreciate this
opportunity to continue our dialogue on the restructuring of the
electric utility industry. For the record, I am Glenn English, CEO of
the National Rural Electric Cooperative Association, the Washington-
based association of the nation's nearly 1,000 consumer-owned, not for
profit electric cooperatives.
These cooperatives are locally governed by boards elected by their
consumer owners, are based in the communities they serve and provide
electric service in 46 states. The more than 32 million consumers
served by these community-based systems continue to have a strong
interest in the Committee's activities with regard to restructuring of
the industry.
Electric cooperatives comprise a unique component of the industry.
Consumer-owned, consumer-directed electric cooperatives provide their
member-consumers the opportunity to exercise control over their own
energy destiny. As the electric utility industry restructures, the
electric cooperatives will be an increasingly important option for
consumers seeking to protect themselves from the uncertainties and
risks of the market. I would like to thank you, Mr. Chairman, and
Members of the Committee for your receptiveness to the concerns and
viewpoints of the electric cooperatives.
The title of the bill before the Committee, H.R. 2944, is The
Electricity Competition and Reliability Act. We applaud the intention
of the Chairman and the Committee to ensure true competition in the
electric utility industry. We are evaluating each provision of the bill
on the basis of whether it enhances or impedes competition, and whether
it supports or impedes the ability of electric cooperatives to continue
to meet the needs of our consumer-owners in that restructured industry.
At the beginning of my testimony, I would like to focus on a few
key issues that we believe must be addressed if NRECA is to be able to
support H.R. 2944. In the second part of this testimony below, I will
discuss a number of other elements in the bill about which we are
concerned. We intend to continue to work with the Committee and
Congress to try to address those issues. In the third part of my
testimony I will also note a few simple changes we recommend to fix
technical problems in the bill.
key priorities
NRECA and the electric cooperatives seek legislative language that
would guarantee consumers access to the ``cooperative option.'' We were
looking to see if H.R. 2944 would:
<bullet> guarantee consumers the right to aggregate and the right of
electric cooperatives to assist those aggregation groups;
<bullet> minimize unnecessary regulatory burdens on consumer-owned
electric cooperatives;
<bullet> put all electric utilities on an level playing field with
respect to the sale of non-electric products or services; and
<bullet> permit electric cooperatives to work together to serve their
consumers more efficiently.
On the first issue, the discussion summary of ``Major Changes''
released last week indicated that the Chairman's intention in H.R. 2944
would be to clarify the authority of cooperatives to aggregate retail
customers.
And, we were pleased to see, the language of H.R. 2944 does,
indeed, clarify the authority of cooperatives to aggregate retail
consumers.
On the second issue, the summary signaled the Chairman's intention
to give distribution cooperatives with limited transmission
facilities--utilized only for the distribution of electric service--an
uncomplicated way to obtain an exemption from the jurisdiction of the
Federal Energy Regulatory Commission (FERC).
This is a laudable intent. More than 400 small electric
distribution cooperatives use high voltage lines to provide retail
electric service to their widely dispersed rural consumers. These
facilities have no impact on the transmission grid, and should not be
subject to expensive, unnecessary FERC regulation.
We were disappointed to see, however, that the language of H.R.
2944 was not consistent with the discussion summary. Although the
summary described an uncomplicated self-certification process to exempt
these distribution cooperatives from FERC jurisdiction, H.R. 2944
subjects these small distribution cooperatives to a complicated and
uncertain process that does not accomplish the Chairman's goal.
Congress should not use FERC regulation as a barrier to small
cooperatives and new entrants into the market place. We believe it is
possible to create a simple, inexpensive, exemption process that
provides small distribution cooperatives with the certainty they need.
On this same issue, we were concerned that both the discussion
summary and the bill language would authorize FERC to review mergers
between cooperatives.
In previous testimony before this Committee and the House Judiciary
Committee, NRECA has expressed concern that mega-mergers in the
electric utility industry could lead to undue market concentration that
would harm competition, reduce the quality of electric service, and
raise prices for consumers. For that reason, we welcomed the bill's
restoration of FERC authority to review public utility mergers. And, as
I discuss in the second section of this testimony, below, we are
concerned that the bill still unduly restricts FERC's ability to review
these mega mergers.
At the same time, however, we are concerned that the bill also
requires cooperatives to obtain FERC approval before they can merge. I
want to emphasize the unnecessary burden that this provision imposes on
electric cooperatives and their member-consumers without providing any
benefit to the objectives of the legislation.
Of course, we recognize the Committee's wish for a uniform approach
to merger review, but there are legitimate differences that the
Committee needs to recognize between mega mergers that could harm the
development of competition for electric energy and mergers between
small, member-owned electric cooperatives.
First, because of their small size and member-focus, mergers
between cooperatives simply do not have the same impact on the
competitive market as do mergers between large investor-owned
utilities. If all of the generation and transmission cooperatives were
merged into one national entity, that entity would not be as large as
AEP--American Electric Power.
Moreover, cooperatives are selling most of the power they produce
to their own members because they were formed to bring their members a
reliable, affordable source of power, not to speculate in open markets
or to make a profit. Even if they wanted to get involved in the open
market, most generation and transmission cooperatives could not.
Nationally, generation and transmission organizations generate only
about half of the electricity required by their member systems. They do
not have the uncommitted or merchant power supplies required to become
major players in energy markets.
Second, mergers between cooperatives are also already subject to
extensive review. Any merger of electric cooperatives requires the
approval of their member-owners. And, any merger involving a
cooperative with outstanding Rural Utilities Service (RUS) financing is
subject to comprehensive review by RUS.
Instead of protecting the public interest, FERC review of
cooperative mergers only makes it more difficult for cooperatives to
meet their obligation to meet the power supply needs of their member
consumers at the lowest possible cost. And, because of their small
size, there are times when cooperatives can operate more efficiently,
acquire power at lower costs and reduce market risks for their members
by joining with their neighboring cooperatives.
Congress should be encouraging consumer-owned electric cooperatives
to work together to provide better service for their member-consumers,
not subjecting them to new regulatory burdens.
We would like to work with the Committee to draft an exemption from
FERC merger review for those cooperatives that are small, sell power
primarily to their own members and other cooperatives, or are already
subject to federal merger review.
The second issue I want to raise today is the need for Congress to
provide some consistency with respect to the non-electric businesses in
which sellers of electric energy can engage.
Today, investor-owned utilities, municipal utilities, electric
cooperatives, power marketers, and other participants in the retail
electric market are subject to different limitations on their ability
to participate in the market for non-electric products and services.
Those differences are unbalancing the playing field in the electric
energy market and increasing costs for consumers.
More and more, competitors in the electric energy market will be
attracting consumers by offering packages of products and services.
Consumers may be buying their electric energy, their natural gas or
propane, their cable television, and their local telephone service from
the same company.
If one class of participants in the electric energy industry is
denied the right to offer services that other participants can offer,
it will be unable to meet the needs of consumers interested in packaged
offers. So limited, that class of participants will be at a distinct
disadvantage.
We would like to work with the Committee to draft language that
would ensure that all participants in the electric energy industry are
on an equal footing. Such language would not give sellers or
distributors of electric energy the right to sell any particular
product or say that states have to allow any seller or distributor of
electric energy the right to sell any other product or service. All it
would say is that states have to treat all providers equally.
This language is particularly important if Congress chooses to
repeal PUHCA. Proponents of PUHCA repeal have argued that it makes no
sense to impose artificial restrictions on the lines of business that
certain utilities can engage in based solely on the form of those
utilities'' corporate structure. That logic applies here as well.
Now, you are probably already hearing from some who are pressing
for restrictions on cooperatives. In recent weeks, for example, a
number of propane gas spokesmen and their hired Washington-based
lobbyists have circulated misrepresentations on Capitol Hill, charging
electric cooperatives with unfair competition in the provision of
propane service.
These spokesman claim that cooperatives utilize low-interest
funding from the Rural Utilities Service to set up propane companies
that compete unfairly by selling propane at ``below market'' prices,
and that cooperatives are able to do so because those propane
operations are ``cross-subsidized.''
Let me put that notion to rest right here and now. Electric
cooperatives may not, by law, cross-subsidize a subsidiary
organization, be it propane, provision of water and sewer utility
services, Internet access, satellite television service or home
security services. All costs of subsidiaries are allocated to those
subsidiaries or those subsidiaries are operated with separate staff and
facilities.
Electric cooperatives that enter the propane business generally
enter because their consumers request it or because existing small
propane organizations approach the cooperatives to take over the
business. The resultant propane businesses operate to recover costs,
not profits, and their rates reflect that.
Some charge that cooperatives providing diversified services are
able to compete at an advantage because they ``don't pay taxes.'' It is
true that most cooperatives pay no federal income taxes on their
electric business because they are tax-exempt companies and because
they operate on a not-for-profit basis. But, when cooperatives engage
in most diversified businesses, they must pay unrelated business income
tax on any profit they make from those businesses. Moreover, if the
cooperatives pass any revenue from those diversified businesses to
their consumer-owners as dividends, the cooperatives'' members must pay
income taxes on those dividends.
Further, cooperatives and their subsidiaries pay every other
business, personal property, transaction, sales, or other tax that
every other business entity pays.
I just wanted to make that clear. Cooperatives are different from
corporations and proprietorships and partnerships in a number of ways:
they are organized by and for consumers; they operate as non-profit
entities; their sole focus is the provision of services to their
consumers and responding to requests for services from those consumers.
In the realm of state and local taxes, though, they are exactly the
same as every other business.
This is important to bear in mind in the restructuring of the
electric utility industry. Because cooperatives are consumer-owned and
consumer-driven organizations with a history of success in providing
services, consumers look to their cooperatives to provide additional
services necessary for the their communities. Limitations on the
ability of cooperatives to continue to provide these services, to
provide services that every other electric utility can provide is a
restriction on the ability of consumers to provide for themselves.
The last issue I want to focus on today is the need for electric
cooperatives to work together to meet consumer needs.
Let me give you an example. In Georgia, electric cooperatives serve
a number of Kroger supermarkets. Kroger, for reasons of efficiency,
wishes to receive one bill for the electric service for all of its
stores.
When Georgia moves to competition, a single large power marketer or
investor-owned utility could probably provide that service directly. It
would have the geographic scope and resources to be able to do so. But
it would not have any local relationship with the individual Kroger
stores or the communities in which they operate.
On the other hand, the several electric cooperatives now serving
the Kroger markets do have that long standing relationship with the
stores and their communities. But, because more than one cooperative
would have to work together to provide a common service, they might not
be able to provide that consolidated bill directly without violating
federal antitrust laws.
Instead, they would have to expend the resources to organize a
joint venture specifically to provide that service. And even so, they
could inadvertently violate federal antitrust law.
Federal antitrust law was just not written with consumers or
cooperative consumer organizations in mind, and the law sometimes gets
in the way of common sense. The kind of cooperation that could better
serve consumers--in this case, both Kroger and the cooperatives other
members--was not contemplated by the law.
I recognize that this is not the jurisdiction of this Committee,
but I also recognize the Committee's interest in all of the issues
related to true competition in the electric utility industry. I'm not
suggesting that cooperatives be exempt from antitrust provisions. I am
pointing out to the Committee that the competitive bar is higher for
small entities than it is for large, interstate and international
utilities.
additional areas of concern
While the three issues emphasized above are NRECA's key priorities,
there are a number of other issues in the bill that are of concern to
electric cooperatives and their members. As this bill moves through the
legislative process, we intend to continue to work to address these
issues. For the convenience of the Chairman and the Committee, I'd like
to discuss these matters sequentially as they appear in the bill,
rather than in any priority order.
Findings
H.R. 2944's ninth finding states:
Federal programs to benefit rural consumers have succeeded, and
rural America has been electrified. However, rural America pays
some of the highest electric rates in the country. Competition
will assure reliable, reasonably priced rural electric service.
This finding is inaccurate. Rural America pays high electric rates
because it costs more per consumer to provide distribution service, not
energy. To serve their members, rural utilities must string far more
wire and cross far more rugged country than the suburban and urban
utilities. Rural electric cooperatives serve an average of 5.76
consumers per mile of line. By contrast, investor-owned utilities
average 34.85 consumers per mile of line and municipal utilities
average 47.76 consumers per mile of line.
Restructuring will only bring competition to sales of electric
energy, not distribution or transmission. Thus, even if competition
lowered energy costs, it would not have any effect on distribution
costs, the largest contributor to rural consumers'' high energy costs.
There is also significant question whether restructuring will bring
benefits to rural consumers. A draft study by the Department of
Agriculture, and studies completed by the American Gas Association, the
Competition Policy Institute, and several universities have all found
that competition could actually raise rates in rural communities and
largely rural states.
Experience in states that have already restructured also cast doubt
on this Finding. Pennsylvania has often been touted as the state whose
electric restructuring efforts have brought choice to the most
consumers. To take advantage of that choice, Pennsylvania's electric
cooperatives opened up their systems ahead of schedule to allow every
one of their members the right to choose his or her electric supplier.
Yet, there is not one alternative supplier of electric energy today
willing to offer competitive service to those cooperatives'' members.
The benefits of competition have not reached Pennsylvania's rural
communities.
Regional Transmission Organizations
NRECA has several concerns with Sec. 103 of the bill concerning
regional transmission organizations (RTOs)
Mandatory Participation
NRECA has long been supportive of voluntary RTOs. As NRECA has
stated in its comments on FERC's Notice of Proposed Rulemaking on RTOs,
NRECA believes that properly designed RTOs can provide significant
system benefits, increasing reliability and reducing the ability of
transmission owners to exercise market power.
Mandatory RTOs, however, as provided by H.R 2944, pose several
risks to the reliability of the system and to the healthy operation of
energy markets. We hear from our members that the only thing worse than
no RTO is a bad RTO. An RTO put together too fast, without full
agreement of all industry participants and without adequate review from
FERC is a prescription for problems. A bad RTO can make it easier for
transmission owners to exercise market power, to favor their own
generation, to restrict the flow of power across the RTO, or to raise
transmission prices unreasonably. By mandating the formation of RTOs at
short notice, and by restricting FERC's ability to regulate the
structure, type or form of an RTO, the language now in H.R. 2944 could
make the formation of bad RTOs far more likely.
Independence
We are pleased that the standards for regional transmission
organizations in Sec. 103 of the bill require RTOs to be independent of
all market participants. We are concerned, however, that H.R. 2944
requires FERC to accept as ``independent'' RTO structures that we
believe could continue to allow large utilities to exercise undue
control over their transmission facilities. That could require FERC to
accept RTOs that retain, or even exacerbate, existing problems with
reliability and market power.
Moreover, pursuant to its Notice of Proposed Rulemaking on RTOs,
FERC is currently holding a public process to develop appropriate
standards for RTOs. All interested parties, including utilities,
consumers and even Wall Street, are now filing comments and reply
comments with FERC. Among other issues addressed in those comments is
the appropriate definition of ``independence.'' H.R. 2944's definition
pre-judges that process and imposes its own definition in the absence
of a public process.
We would like to see the definition of ``independence'' deleted
from Sec. 103 of the bill.
Incentive Pricing
We have a similar concern with respect to the subsection in the
bill addressing ``Incentive Transmission Pricing Policies.'' That
section requires FERC to encourage incentive transmission pricing
policies for RTOs. As with the issue of ``independence,'' appropriate
pricing policies for RTOs is currently subject to public debate at
FERC. The issue has arisen not only in the context of the RTO Notice of
Proposed Rulemaking, but also in the context of at least one pending
case on an individual RTO's rates.
Again, we think that H.R. 2944's provision has inappropriately pre-
judged the proper result of an ongoing public process. We would like to
see the standards in this section made voluntary for FERC so that FERC
is free, when it has completed its current investigation, to apply the
rule that it finds most likely to serve the public interest.
Electric Reliability
I would like to thank the Chairman and the Committee for including
in H.R. 2944, with only minor amendments, the electric reliability
language that was adopted by the NERC Board of Trustees. NRECA, and a
coalition of other industry participants, believe that the language
adopted by the NERC Board comprises the best option now possible to
provide for the continued reliability of the bulk power system.
Rather than express concerns with the language in the bill, I would
instead ask the Committee to resist requests to further amend the
language. There are those who oppose certain aspects of the language,
or who would like a greater say in the operation of the electric
reliability entity or the bulk power system than the language allows,
and NRECA and the coalition are continuing to talk to those interests
to see if a compromise can be worked out.
We respectfully request that the Committee not make further changes
to the reliability language until that group can reach agreement.
Otherwise, the fragile consensus that has developed within the industry
on the NERC language could dissipate, and result in failure to enact
much needed legislation to preserve reliability.
Mergers
As I mentioned in the main part of my testimony, NRECA is very
pleased that H.R. 2944 restores FERC merger review. As I have testified
to before this Committee and the House Judiciary Committee, unfettered
mega-mergers in the electric utility industry pose a significant threat
to the development of competition in the industry.
Unfortunately, while H.R. 2944 does restore FERC merger review, it
also appears to reduce the opportunity for public scrutiny of mergers
and to hamper FERC's ability to protect the public interest.
First, H.R. 2944 replaces the current hearing process with a simple
comment period. By doing so, H.R. 2944 reduces the transparency of the
merger review process and denies FERC and the public the access to
information they need to properly evaluate the potential competitive
impact of the proposed merger.
Second, H.R. 2944 also establishes strict deadlines that would
hamper FERC's ability to thoroughly review large utility mergers. Some
of these mergers involve international companies with hundreds of
subsidiaries and affiliates, billions of dollars of assets in a dozen
or more states, and millions of consumers. The time limits imposed by
H.R. 2944 would not give FERC sufficient time to evaluate the impact
that such mergers would have on the $220+ billion electric industry.
NRECA continues to believe that it is in the public and consumer
interest for FERC to have full authority to conduct a public review of
mega-mergers between public utilities that could eliminate or limit
competition in the marketplace.
The Committee should understand that electric cooperatives do not
oppose all utility mergers. Mergers can be a legitimate business
strategy to respond to changing markets and changing market conditions.
Since 1996, FERC has given its blessing to approximately 30 utility
mergers and many more are pending. NRECA has requested hearings in only
two of those proceedings.
In fact, NRECA has supported the application of loosened review
requirements for mergers between smaller entities that could increase
competition in the market place by creating a new company that can
compete more effectively without being large enough itself to exercise
market power.
NRECA would be happy to work with the Committee and Congress to
develop language that would achieve the proper balance between
protection of the public interest and the encouragement of efficiency
in the industry.
Public Utility Holding Company Act of 1935
As I have said in previous testimony, NRECA believes that it is a
mistake to repeal the Public Utility Holding Company Act of 1935
(PUHCA). PUHCA protects both electric consumers and competition in the
electric utility industry by helping to ensure that public utilities do
not grow too large or complex to be effectively regulated.
If the Committee nevertheless intends to go forward with PUHCA
repeal, NRECA strongly urges the Committee to consider the approach
taken in the bill sponsored this Congress by Representatives Steve
Largent (R-OK) and Ed Markey (D-MA), which takes a sensible approach.
Their proposal would repeal the consumer protections in PUHCA only for
those utilities that operate in states where competition has already
been implemented. That approach would provide competition a better
chance to put down roots and start to grow before any public utilities
were freed from PUHCA's protective provisions.
Interconnection
NRECA recognizes that the development of new distributed generation
technologies and the interconnection of such facilities to the grid are
increasingly important. Cooperatives have made extensive use of
existing distributed generation technologies and have been actively
working to study new distributed generation technologies and to develop
new applications where distributed generation can improve reliability
and lower costs for consumers.
Cooperatives have also been involved in parallel efforts to develop
standards for the interconnection of distributed generation
technologies with the grid. One is being conducted by the Institute of
Electrical and Electronic Engineers and the United States Department of
Energy (DOE). The other is being conducted by the National Association
of Regulatory Utility Commissioners (NARUC) and is funded by the DOE.
Just this week, NRECA submitted comments on a Draft Report to NARUC on
interconnection issues.
Nevertheless, NRECA is concerned that the substantive provisions of
Sec. 542 of H.R. 2944 could impose unnecessary costs on electric
utilities and their consumers. Moreover, the section's requirement that
FERC develop interconnection standards is probably premature. It would
likely preempt the efforts now pending before the Institute of
Electrical and Electronic Engineers and NARUC, and the tight deadline
could require FERC to act before it or the industry fully understands
the effects that developing distributed generation technologies will
have on the safety and reliability of the interconnected grid.
Other PMAs
NRECA is concerned that Sec. 632 of H.R. 2944, ``Wholesale Power
Sales By Federal Power Marketing Administrations,'' gives FERC the
unnecessary and inappropriate authority to change rates set by the
power marketing administrations.
Today, the PMAs are required to set their rates to recover their
costs, as those costs are defined by Congress. They propose their rates
to the Secretary of Energy who then submits them to FERC for review.
Because the PMAs rates must be set according to very specific statutory
requirements, FERC does not today have the authority to modify the PMAs
rates. Instead, if FERC is concerned about something in the rates, it
can only reject the rates and remand them to the PMAs. That ensures
that the final development of the rate is set by the regulatory entity
most familiar with the costs that have been recovered and the statutory
mandates with regard to the rates.
We would like to see all of Sec. 632 deleted.
Net Metering
Section 702 of H.R. 2944 requires retail electric providers to make
net meters available to consumers that have installed eligible on-site
generating facilities. NRECA believes that net metering imposes an
unreasonable obligation on electric consumers to subsidize those who
install self-generation.
The policies require utilities to pay consumers retail price for
wholesale power. That is an even higher subsidy than the ``avoided
cost'' price provided by PURPA. The policies also require utilities to
pay high costs for what is generally low-value power. Power from wind
and photovoltaic systems is intermittent, cannot be scheduled or
dispatched reliably to meet system requirements, and is expensive to
integrate into the system.
Further, net meters cause customers to under pay the distribution
and other fixed costs they impose on the system. A utility has to
install sufficient facilities to meet the peak requirement of the
consumer and recovers the costs of those facilities through a kWh
charge. When the net meter rolls backwards, it understates the total
kWh consumed by the customer, and thus under recovers the utility's
costs.
Finally, net meters can be deliberately or inadvertently ``gamed.''
Consumers with self-generation can lean on the system by drawing power
at times when it is expensive for the utility to provide it and then
run down the meter by self-generating at times when the utility does
not need the power. That can be a problem with windmills particularly
because wind is often calm in the hot times of day when system demand
peaks, and then picks up again in the cool evenings when system
requirements are low.
Environmental
We are pleased that Section 701 of H.R. 2944 was revised from the
discussion draft to ensure that the Renewable Energy Production
Incentive (REPI) program is available only to not-for-profit electric
cooperatives and municipally-owned entities that generate electric
energy for sale using solar, wind, biomass or thermal energy. In
addition, we applaud deletion in H.R. 2944 of a cap of $50 million
through 2004, which had appeared in the discussion draft.
Internal Revenue Code
While the 85/15 tax issue is addressed in H.R. 2944, it falls short
of what is needed to address issues raised in a restructured electric
utility marketplace. For example, the language fails to address revenue
from unbundled electric activities (including metering, billing and
service charges), revenues from asset sales, and revenue from
diversified businesses provided the business is operated on a
cooperative basis.
technical issues
In addition to the substantive issues discussed above, there are a
few technical fixes that need to be made to ensure that the language in
the bill actually achieves its intended purposes.
Public Purpose Charges
Section 101(d) of the bill provides that it does not affect the
authority of a State or municipality to require public purpose charges.
The section serves an important purpose, but appears to leave out some
electric cooperatives.
There are three categories of electric utilities that may need to
collect public purpose charges. The first--state-regulated electric
utilities--includes all investor-owned utilities and a few cooperative
utilities that operate in states where they are subject to state
regulation of their rates. The second category is municipal utilities,
who are not regulated in most states. The third category is
cooperatives who, like municipal utilities, are not regulated in most
states. Section 101(d) takes care of the first two categories, but not
the third: non-state regulated cooperatives.
We would be happy to suggest to the Committee a very simple fix to
address this oversight.
Definition of Transmitting Utility
Section 102(d) of the bill includes a new definition of
transmitting utility. It has been amended to include utilities that own
transmission not used for wholesale sales. In H.R. 2944, an additional
parenthetical has been added at the end that has not appeared in prior
drafts: ``(other than facilities subject to an order of the Commission
under section 210 or 211).''
That parenthetical appears to be a partial transposition of
language in the definition of ``public utility'' that states ``other
than facilities subject to such jurisdiction solely by reason of
section 210, 211, or 212.''
The parenthetical creates a cyclical definition problem. Sections
210 and 211 apply to transmission facilities owned by transmitting
utilities. If ``transmitting utility'' does not include entities that
own facilities subject to Sec. Sec. 210 and 211, then there are no
transmitting utilities.
Reciprocity
Section 501 of the bill provides for retail reciprocity. It
attempts to ensure that any utility that seeks to compete for other
utilities'' consumers provides its own consumers with choice. In order
to prevent efforts to bypass the reciprocity provision, the bill also
applies to entities affiliated with electric utilities.
NRECA believes that Congress should not have to mandate reciprocity
requirements. A national mandate inappropriately imposes rules on those
individual states that believe their consumers interests are better
preserved through open competition than through reciprocity
requirements.
Rather than focus on the merits of a reciprocity requirements,
however, I would rather ask this Committee to make a technical fix to
the section that should eliminate some unintended consequences of the
bill.
As drafted, the provision applies to ``affiliates,'' but the term
``affiliate'' is not defined in the Federal Power Act. It is unclear,
therefore, how the section will be applied. Depending on a court's
interpretation of ``affiliate,'' the provision could either be too
broad, or too narrow.
For example, under one definition of ``affiliate,'' it would only
include two companies, one of which owns an interest in the other.
Under this definition, ``affiliate'' would not apply to two companies
with common ownership. A utility could therefore evade the reciprocity
requirements by creating a holding company and put power marketing and
distribution functions in two sister subsidiaries.
On the other hand, ``affiliate'' could be interpreted broadly to
include any two companies that share significant interests, in each
other, or in a third company. FERC has adopted this interpretation of
affiliate in certain contexts. Under this definition, there is a risk
that two cooperatives that each have an ownership interest in a common
generation and transmission utility could be considered affiliates. If
that happened, the reciprocity provision could prohibit a cooperative
in one state from competing for consumers in that state because the
cooperative's G&T also served a cooperative in other states that had
not moved to competition. The reciprocity provision could apply even
though the two distribution cooperatives involved had no ownership
interest in each other and no common owners.
We would be happy to work with the Committee to insert a definition
of ``affiliate'' that would eliminate the potential for over
inclusiveness or under inclusiveness.
conclusion
Mr. Chairman, all of us harbor many concerns regarding the
restructuring of this basic, essential, complex industry. The Committee
and you--in particular--Mr. Chairman, have been attentive and receptive
to the concerns of 30 million electric cooperative consumers.
This bill does not contain everything that electric cooperatives
would like to see in a restructuring bill. We have outlined some of
those concerns as an attachment to my testimony. We will continue to
work with the Committee and with the Congress to ensure that electric
cooperative concerns are met. That is how the legislative process
works. Given the discussions that we have had with you, Mr. Chairman,
and with the Committee, we are confident that some of these concerns
will be worked out, and that the intentions of the discussion summary
will be clarified in final bill language, and on the basis of that,
electric cooperatives do not object to moving this bill forward.
It is, of course, possible that proposals to change this
legislation will make parts of it totally unacceptable to electric
cooperatives, and in that case, we would have to oppose those changes
and, possibly, the legislation. Again, that's the way the legislative
process works.
I appreciate the opportunity to discuss H. R. 2944 and these very
important matters with the Committee today. Electric cooperatives will
continue to be available to the Committee to bring true competition to
the electric utility industry and to ensure that the benefits of that
competition flow equitably to all electric consumers.
I would be happy to answer any questions.
Mr. Barton. Thank you, Mr. English.
We now want to hear from Mr. David Hawkins, who is the
director of air and energy programs at the Natural Resources
Defense Council.
Your statement is in the record in its entirety, and we
would recognize you for 6 minutes to summarize.
STATEMENT OF DAVID G. HAWKINS
Mr. Hawkins. Thank you, Mr. Chairman.
I would like to make two points this morning. The first is
that we have a huge remaining air pollution problem from
electric generating in this country, and the second is that we
should address that problem as part of a restructuring program.
First, the nature of the air pollution problem. Contrary to
expectations some 30 years ago when Congress first expressed
itself on controlling pollution from electric generation and
their sources, many existing power plants that were in
operation 30 years ago are still in operation, and they are
still operating under outmoded pollution control rules and not
meeting modern environmental performance standards, and yet
they are competing against facilities that are required to meet
modern environmental performance standards--in our view,
competing unfairly.
But first the environmental issue. The electric generating
industry, as a result of these policies, these flawed policies,
is the single largest sector that is responsible for some of
the most pervasive remaining air quality problems in this
country.
Electric generating is responsible for over two-thirds of
the Nation's sulfur dioxide emissions, and around a third of
nitrogen oxides, mercury, and carbon dioxide.
Now, these pollutants are responsible for what we call a
Pandora's Box of health and environmental harm. They are
responsible for fine particles that contributes to tens of
thousands of premature deaths in the U.S. each year; smog that
plagues our major cities and causes respiratory attacks in
children and in seniors; acid rain that still damages lakes,
streams, forests, and monuments; regional haze that spoils
trips every year for millions of people who visit our national
parks; nitrogen emissions that help over-fertilize productive
estuaries, including the Chesapeake Bay, Long Island Sound,
Pamlico Sound, and Pamlico Sound, and the Gulf of Mexico,
leading to dead zones where aquatic life perishes; and mercury
contamination of lakes and streams that has led over 40 States
to issue continuing advisories against the consumption of fish
that store this toxin; and, finally, carbon dioxide--the
pollutant that you cannot get away from--carbon-dioxide-driven
climate change that threatens to create disruptive weather
patterns and sea level rise that modern human civilization
simply have never experienced.
The second point is: why address these issues now?
First, delaying addressing these issues is not going to
make Congress' job any easier. These issues will have to be
addressed, and they will not get easier by simply trying to
brush them away right now. What it would do is increase the
environmental damage associated with delay, and also prolong
uncertainty.
Second, a failure to address today's balkanized emission
rules will leave in place an industry structure where fair
competition is simply not possible.
Today, the amount of pollution resulting from producing a
megawatt hour of electricity varies widely from State to State.
Nitrogen oxide emissions in States range from below two pounds
per megawatt hour to over eight pounds per megawatt hour.
Sulfur dioxide emissions range from below four pounds per
megawatt hour produced to a high of over 20 pounds per megawatt
hour.
Now, these policies are a direct result of the patchwork of
regulations that, in effect, operate as a subsidy to dirtier
generators.
Because all markets are connected by wires, different
pollution standards promote a survival of the filthiest market,
where plants that are the dirtiest bid power at the cheapest
prices and are able to increase their market share.
But these market distortions really do not deliver large
consumer benefits. The price differences caused by different
pollution requirements are quite small, usually on the order of
2 to 3 mills per kilowatt hour or less. But these small
differences in a competitive marketplace are enough to give
dirtier producers a decisive market advantage in many areas.
A generation performance standard would be a reform that
would create a level playing field for generators. The standard
would define the amount of pollution that could legally be
emitted for a kilowatt hour of electricity and would treat all
players fairly, and it would directly reward cleaner, more-
efficient generators and remove the subsidy that current policy
provides to dirtier ones.
Congressman Pallone's Fair Energy Competition Act, H.R.
2569, contains such an approach and we support it.
A final benefit of setting the environmental ground rules
for this industry is that it would provide a clear road map for
business in planning long-term investments. The history of the
clean air program has developed as a series of unconnected
initiatives, typically focused on a single pollutant. Today, we
can look over the next 10 to 15 years and realize there will be
a number of additional environmental problems that will have to
be addressed. But if we pursue the traditional approach, no one
can say with certainty which pollutants will be addressed
first, how deep the reductions will be, and in what order the
steps will occur.
As a result, business planners today must approach their
investments by making educated guesses about future
environmental requirements.
Billions of dollars are changing hands as generation plants
are sold under State restructuring programs. One thing we can
say for sure is someone is guessing wrong.
By enacting integrated cleanup programs, Congress could
provide both certainty and reduce the tendency to prolong
dependence on existing, outmoded plants through the traditional
process of applying end-of-the-pipe cleanup devices normally
aimed at controlling only one pollutant.
Now, the chairman and the ranking member's State, Texas,
has recognized the value of addressing both of these issues
together, and recently enacted legislation in Texas has
addressed air pollution directions as part of a cleanup
program. We commend that example to the committee, but point
out that no State can solve its problems alone; hence, the need
for Federal policy.
Thank you.
[The prepared statement of David G. Hawkins follows:]
Prepared Statement of David G. Hawkins, Director, Air & Energy
Programs, Natural Resources Defense Council
electricity generation and air pollution
Today, electric generation imposes an enormous burden of air
pollution on the American public and the great bulk of that pollution
comes from plants that are not required by federal, state, or local
policy to meet technically feasible, affordable modern environmental
performance standards. This policy failure stems from decisions made in
Congress nearly thirty years ago.
In the 1970 Clean Air Act Congress required that all new
powerplants and other large pollution sources be designed to minimize
air pollution using state-of-the-art techniques. But the Act exempted
existing plants from this performance requirement. Instead existing
plants, if controlled at all, were required to clean up only to the
degree needed to address local air quality problems.
There were several reasons for this approach. First, most air
quality problems were perceived as local. Second, at the time, the
electric power industry was mostly a local one. Third, the exemption
was assumed to be temporary--Congress believed existing plants would
retire and be replaced by new ones meeting modern performance
standards.
Now, nearly 30 years later, we know that the facts on the ground
have changed. We know now that many of our most threatening air
pollution problems are not local--they are regional, national, and even
global. Our electric generating industry is rapidly becoming a national
industry with all parts of the country connected by wires over which
the product can move anywhere in the lower 48 states. And those
powerplants that were supposed to retire have kept on running like the
Energizer Bunny. As a result, pollution from electric power generation
is a dominant cause of nearly all our most pressing air quality related
problems.
Four pollutants cause a host of public health and environmental
damage: sulfur dioxide, nitrogen oxides, mercury, and the pollutant no
one can get away from, carbon dioxide, the dominant greenhouse gas.
Electric generation in the U.S. is the largest single source of these
four horsemen of air pollution. Electric powerplants release over \2/3\
of total U.S. emissions of sulfur dioxide, and over \1/3\ of each of
the other three pollutants. These pollutants are responsible for a
Pandora's box of health and environmental harm:
<bullet> fine particles, that contribute to tens of thousands of
premature deaths in the U.S. each year;
<bullet> smog that plagues our major cities, and causes respiratory
attacks in kids and seniors;
<bullet> acid rain, that still damages lakes, streams, forests, and
monuments;
<bullet> regional haze, that spoils trips to national parks for
millions of visitors annually;
<bullet> nitrogen emissions that help over-fertilize estuaries,
including the Chesapeake Bay, Long Island Sound, Pamlico Sound,
and the Gulf of Mexico, leading to dead zones where aquatic
life perishes;
<bullet> mercury contamination of lakes and streams that has lead 40
states to issue continuing advisories of the fish that store
this toxin;
<bullet> and, carbon dioxide driven climate change, that threatens to
create disruptive weather patterns and sea-level rise that
modern human civilizations have never experienced.
This plague of pollution problems is a product of the grandfather
loopholes in current federal law that allow 30, 40 and 50-year plants
to keep operating without meeting modern performance standards. The
patchwork of lenient or nonexistent rules at the state and local level
has created pollution havens where grandfathered plants can engage in
domestic environmental dumping, distorting fair energy markets.
As we move to modernize the electricity market economically, we
must accompany it with modern environmental performance measures. A
central purpose of electric industry restructuring legislation is to
create a free and fair, competitive market for energy services. But
fair competition is impossible in an environment where air pollution
performance requirements are balkanized. Because all markets are
connected by wires, different pollution standards promotes a ``survival
of the filthiest'' market, where plants that are the dirtiest bid power
at the cheapest prices and increase their market share.
These market distortions do not deliver consumer benefits. The
price differences caused by different pollution requirements are quite
small--usually 2-3 mills per kilowatt-hour or less--but these small
differences are enough to give dirtier producers a decisive market
advantage in many areas. The market distortions also discourage
investment in new, cleaner, more efficient generation and in renewable
resources.
Under the current rules, an entrepreneur who seeks financing for,
say, a clean, high-efficiency natural gas plant can point out that it
emits no sulfur, no mercury, and much less nitrogen oxides
(NO<INF>X</INF>) and carbon dioxide (CO<INF>2</INF>) than the
competition. But, with the partial exception of sulfur (for which
allowance programs exist under the acid rain law), this superior
environmental performance has no economic value in the market place.
The financier wants to know whether the plant will be able to run more
cheaply than the competition. If the competition is a group of
grandfathered coal-fired powerplants, the answer often will be no and
the new plant may not be financed.
To address the egregious health, environmental, and economic flaws
in the current air pollution control programs a number of bills have
been introduced in Congress. Notable examples include Congressman
Pallone's ``Fair Energy Competition Act of 1999'' (H.R. 2569), and the
Waxman-Boehlert ``Clean Smokestacks Act'' (H.R. 2900). These bills
establish industry-wide caps on tons of each of the ``four-horsemen''
pollutants: sulfur dioxide (SO<INF>X</INF>), NO<INF>X</INF>,
CO<INF>2</INF>, and mercury. The caps on SO<INF>X</INF> and
NO<INF>X</INF> would provide building blocks for meeting health-based
smog and fine particle standards and would reduce acid rain further.
The mercury cap would attack the largest single remaining U.S. source
of this pollutant. And the CO<INF>2</INF> cap would return emissions to
1990 levels--the target set in the 1992 Rio Climate Treaty that the
U.S. has ratified.
With the exception of mercury, for which there are both local and
regional concerns, these bills would implement the cap through a
marketable permit program where power generators could trade their
clean-up obligations to meet the caps in the most efficient manner. A
``generation performance standard'' would create a level playing field
for generators--the standard would define the amount of pollution that
could be legally emitted for a kilowatt-hour of electricity. This
system will directly reward cleaner, more efficient generators.
In contrast to the current situation, if these bills were law, a
developer of a new clean powerplant would be able to show direct
tangible economic benefits from its reduced environmental impact.
Because the new plant would be able to generate electricity below the
law's ``generation performance standards,'' for every kilowatt-hour
sold, the plant would produce another profit-making product: emission
allowances that can be banked or sold on the market. This additional
revenue stream would make financing such projects that much more
attractive.
A final benefit of these integrated pollution cleanup bills is that
they provide a clear roadmap for business in planning long-term
investments. The history of clean air progress has developed as a
series of unconnected initiatives, typically focused on a single
pollutant. Today we can survey the next 10-15 years and be confident
that additional measures will be pursued to reduce the four horsemen
pollutants. But if we pursue the traditional approach, no one can say
now with confidence, when, how deep, and in what order these important
steps will occur.
As a result business planners must approach today's investments by
making educated guesses about environmental requirements. Billions of
dollars are changing hands as generation plants are sold under state
restructuring programs. One thing we can say for sure is that someone
is guessing wrong. By enacting integrated cleanup programs Congress
could both provide certainty and reduce the tendency to prolong
dependence on existing outmoded plants through the traditional process
of applying end-of-pipe cleanup devices normally aimed at controlling
only one pollutant.
In short, we know we need to reduce a range of damaging pollutants
from the electric generating sector; we know how to do it; and we know
that failure to take these steps as part of restructuring legislation
will increase damage, prolong uncertainty, and encourge unfair
competition. Mr. Chairman, your committee has jurisdiction over both
the economic and environmental performance of this industry. We urge
you and your colleagues to avoid an arbitrary separation of these
interdependent issues. Instead we hope you will seize the opportunity
to demonstrate that Congress can address the key issues that face the
industry and the public in a manner that produces a cleaner, more
efficient, more sustainable, and more competitive industry that
delivers energy services for lower costs.
Mr. Barton. Thank you very much.
Next we will hear from the final member of this panel, Mr.
Rao, president of Indiana Municipal Power Agency.
Welcome. Your full testimony has been submitted for the
record, if you would summarize. You have 6 minutes.
STATEMENT OF RAJESHWAR RAO
Mr. Rao. Thank you, Mr. Chairman and members of the
committee.
My name is Rajeshwar Rao. I am the president of the Indiana
Municipal Power Agency.
IMPA is a political subdivision of the State of Indiana,
created in 1980 to allow its 31 municipal members serving
250,000 people to jointly finance, develop, own, and operate
electric generation, transmission, and local facilities in
Indiana.
We are relatively unique because we own $50 million worth
of transmission facilities that make us jointly own Cinergy's
transmission grid, and also obtain transmission from others to
meet the needs of our members.
I am here today to testify on behalf of the Transmission
Access Policy Study Group. TAPS is an informal association of
transmission-dependent utilities in 29 States created to
promote open, equal, nondiscriminatory access to the Nation's
electric transmission grid.
IMPA and other TAPS members have been buying and selling
electricity in wholesale markets for more than 20 years. We
know from first-hand experience that merely declaring that
there should be competition and open access does not make it
so.
After decades of operating particularly integrated
monopolies, the industry will not magically transform into one
characterized by vigorous competition without decisive action
from Congress to restructure the industry for competition.
TAPS believes that Federal restructuring legislation is
needed to make retail competition work for consumers. However,
if we are serious about electric competition, it is absolutely
critical that we get the basic structure right and provide the
tools needed to ensure that Federal legislation achieves its
promise of true and fair competition in the electric power
marketplace. Only then we can ensure that restructuring will
lead to lower prices for all consumers across the Nation.
Basic concerns about how H.R. 2944 fails to meet and fully
address transmission market power are covered in my written
statement, and in the oral statement of APPA and CFC, also. But
I want to use my time to answer important questions which were
asked yesterday.
There are several questions I can answer with real-life
examples. I will try to cover some of them in my 5 minutes, but
would like to share the other examples later if time permits.
Question one: are RTOs needed? Absolutely. You will not get
competition without it. For example, TAPS members, Oklahoma
Municipal Power Authority, have been trying to purchase 15
megawatts from Duke Energy Trading and Marketing for the summer
of 2000. Although Duke requested transmission from a competitor
nearly a year ago, the competitor has refused to answer,
stating only that transmission of this small amount of power is
under study.
There is no way to know if this is a stall because there
really is not a mere 15 megawatts of transmission capacity
available, or, on such a huge system, whether they are
improperly holding the capacity. We do not know.
Under these circumstances, it is not surprising in this
situation, where transmission limitations preclude access, OMPA
received only seven responses, most of which were transmission
contingent to its recent RFP which it sent to 100 suppliers.
With an RTO, the transmission decisions that are critical to
competition would be made by the independent RTO, assuring they
will be non-biased. Rather than re-regulation, RTOs are an
essential step toward the more lightened FERC regulation.
Next question: will voluntary RTOs work? No. Transmission
owners will not voluntarily relinquish their current ability to
use their ownership and control of transmission to prefer their
own generation. For example, TAPS member Florida Municipal
Power Agency has worked hard to get most of the market
participants in the State, including the co-ops, power
marketers, the developers of big power, utility and board to
support creation of some form of RTO. However, these efforts
are currently at stalemate by the opposition of the two largest
utilities, who control 90 percent of the transmission in the
State.
If utilities can join and shape their own RTOs, will that
work? No. To do their job in promoting competition, RTOs must
be large and rationally configured, not configured to increase
the market power of participating utilities.
For example, I have a picture here showing the midwest and
connecting to the east coast. AEP, back in the map, is located
in the Ohio/Indiana/Virginia area. They tried to negotiate
participation in the midwest ISO, the blue section, but after
some time, after about a year, they said that they would rather
form their own Alliance RTO and created a barrier.
I want to give you some examples of how AEP's transmission
is a barrier to Cinergy. BOTH AEP and Cinergy have generation
located in the Ohio valley where there is surplus power.
It is cheaper to transmit electricity to the white section,
but, on the other hand, by creating a barrier, AEP
differentiated the generation facilities owned by Cinergy and
AEP, making Cinergy generation facilities more expensive than
AEP generation facilities.
Since the red light is on, I am going to stop here, but I
have several true, real-life examples of market power in both
generation and transmission. I will respond to questions later.
Thank you, Mr. Chairman.
[The prepared statement of Rajeshwar Rao follows:]
Prepared Statement of Rajeshwar Rao, President, Indiana Municipal Power
Agency on Behalf of Transmission Access Policy Study Group
Good morning, Mr. Chairman and Members of the Subcommittee. My name
is Rajeshwar Rao. I am President of the Indiana Municipal Power Agency
(IMPA). IMPA is a political subdivision of the state of Indiana created
in 1980 to allow its 31 municipal members to jointly finance, develop,
own and operate electric generation, transmission, and local facilities
to provide for their electricity needs. IMPA's 31 member municipalities
currently serve approximately 250,000 people.
IMPA is relatively unique because we are both a transmission owner
and a transmission dependent utility. IMPA has invested some $50
million in transmission facilities that are part of a Joint
Transmission System in Indiana, through which we have rights over the
entire Cinergy transmission system. At the same time, IMPA is a
transmission dependent utility with respect to access for our member
municipal systems connected to the AEP transmission grid, and access to
our ownership share of a Louisville Gas & Electric generation facility
in Kentucky.
Because of this dual role, IMPA is keenly sensitive to the
importance of establishing a transmission system that is open, fair and
non-discriminatory. As a result, we have been aggressive advocates of
establishing fully independent Regional Transmission Organizations
(RTOs) that are fair to both transmission owners and transmission
users. Nothing short of a totally ``color blind'' RTO that treats all
transmission owners and users the same, regardless of who owns
particular transmission facilities, will succeed in achieving
Congress's goal of establishing a truly competitive market place for
electricity.
I am here today to testify on behalf of the Transmission Access
Policy Study Group (TAPS). TAPS is an informal association of
transmission dependent utilities and other supporters in 29 states
created to promote open, equal, non-discriminatory access to the
nation's transmission grids. IMPA, like the other municipal,
cooperative and investor-owned utilities, and municipal joint action
agencies that are members of TAPS, must depend on the use of
transmission systems of large vertically-integrated utilities in order
to reach alternative sources of power supply for our consumers. TAPS
members have been active in wholesale markets for some 20 years, and
have been on the ``bleeding edge'' of efforts to obtain transmission
service, open access, and RTOs. We know from first hand experience
that, given the crucial role of transmission and the current industry
structure, merely declaring there to be choice will not magically
transform the electric industry to one where the price of generation is
determined by the invisible hand of vigorous competition.
TAPS has concluded that the only way to get to a competitive
electricity industry is by restructuring the industry to provide the
transmission and market structure needed to allow competitive forces to
work. We believe federal legislation is needed to achieve this critical
objective, but it must be the right legislation. If the Chairman and
the Subcommittee are serious about electricity competition, we need to
work together to get the basic structure right, and to provide tools to
ensure that the intended transformation stays on course. Watered-down
or halfway measures simply won't work. Compromise on the key issues of
industry structure will do far more harm than good.
The proposed Electric Competition and Reliability Bill, H.R. 2944,
describes its purpose as ``benefit[ting] American electric consumers
through lower electric rates, higher quality services, and a more
robust United States economy by encouraging retail and wholesale
competition in electric markets . . .'' TAPS shares the Chairman's
goals. However, TAPS is concerned that H.R. 2944 will not achieve this
purpose. Indeed, provisions of the bill appear likely to induce
precisely the opposite effect: strengthening the grip of monopolists,
and exposing consumers to electricity prices disciplined by neither the
competitive market nor regulation.
Specifically, TAPS believes the bill fails to provide the
transmission and market structure needed to support competitive
wholesale and retail markets. We urge the Subcommittee to amend H.R.
2944 to ensure that the bill serves its pro-competitive purposes.
With regard to transmission, the Subcommittee should:
1. Grant FERC the authority to require, without delay, participation in
truly independent and rationally configured large, regional
transmission organizations;
2. Prevent transmission owners from evading inclusion of facilities in
RTOs by creative reclassification of high voltage transmission
facilities to distribution; and
3. Place regulatory responsibility for transmission service clearly in
FERC's hands.
With regard to generation market power, the Subcommittee should:
1. Empower FERC to take steps to remedy and prevent the exercise of
market power and market manipulation; and
2. Eliminate or revise the proposed unworkable time limits on FERC
merger review and clarify FERC's authority to review mergers
involving generation-only facilities.
transmission
1. FERC needs authority to require strong, independent, broad regional
RTOs.
H.R. 2944 correctly recognizes that the current regimen of control
of transmission by individual vertically-integrated utilities must
change to be compatible with competition, and that a regional
transmission organization is the structure needed in a competitive
electric industry. While TAPS applauds the Chairman for recognizing the
need for RTOs, we are concerned that the proposed RTO provision is so
compromised as to largely defeat the intended pro-competitive purposes.
<bullet> Independence: RTOs are critical to removing control of the
transmission facilities, which all competitors need to use to reach the
market, from the hands of one set of market participants that can use
that control to favor themselves. Instead, control of transmission
should be placed in the hands of a competitively neutral, independent
body. The proposed legislation starts out by correctly recognizing that
RTOs ``must be independent of all market participants, and no market
participants may exercise control over the operation of the [RTO].''
However, it then compromises the ``bedrock'' RTO concept of
independence by expressly defining it to ignore retention of 10% of the
voting shares and unlimited non-voting ``passive'' interests that
include rights to ``participate in major corporate changes'' to the
RTO. Adoption of such lax standards means that the RTO will never be
fully independent of market participants, leaving self-favoritism and
undue discrimination a continuing and ever-present threat. In an RTO
with 5 participating transmission owners, each of whom retained a 10%
voting share, the transmission owners could hold a 50% voting interest.
Instead of legislating plainly non-independent RTOs, the Subcommittee
should insist on RTOs that achieve a clean structural break, completely
separating transmission control from generation interests.
<bullet> Scope/pancaking: As FERC has recognized, RTOs can
facilitate competition by ending the current system of balkanized
markets, where an additional ``pancaked'' rate (or toll) must be paid
whenever a transaction crosses the boundaries from one transmission
owner to the next. In contrast, RTOs would permit competitors to sell
their electricity goods throughout a broad regional market by payment
of only a single ``non-pancaked'' charge. By expanding the market, RTOs
can increase the number of buyers and sellers that can transact with
each other, enhancing competition and reducing market power. H.R. 2944
threatens to undermine this critical RTO role by giving at least tacit
approval to the concept of RTOs comprised of just a single utility,
preventing FERC from requiring utilities to join an RTO other than the
one they propose (unless the bill's standards are not met), and
permitting pancaked rates to continue for a ``transition'' period.
Given the delayed implementation of this provision, pancaked rates
could well be in place during the critical first years and indeed
decade of retail competition, or not eliminated at all in the case of
single utility RTOs. Also lethal to competition are gerrymandered RTOs
designed by a group of vertically integrated transmission owners to
enhance their market power by creating barriers to competitors. H.R.
2944 seems to foster such anticompetitive RTOs, rather than give FERC
clear authority to ensure that RTO boundaries are dictated by the scope
of regional markets, not by individual company desires to protect the
value of its generation or achieve a competitive advantage. The
Subcommittee should grant FERC express authority to require
participation in RTOs that have a large regional scope designed to
facilitate competition and enhanced reliability, and to eliminate
pancaked rates. As noted by APPA, the statutory criteria will need to
accommodate unique characterizations and legal arguments of public
power.
<bullet> Authority to require construction/incentives: The proposed
legislation correctly acknowledges the RTO role in planning additions,
but gives RTOs no role in requiring construction of grid expansions.
Instead, the legislation endorses the use of incentive rates to induce
transmission owners to construct (as well as to join RTOs). Bribing
transmission owners is neither a necessary nor an appropriate means to
ensure the transmission infrastructure needed for competition. Indeed,
the costs associated with such inducements not only needlessly saddle
consumers with excessive costs, but undermine the competitive forces
RTOs are intended to promote by paying one group of competitors
monopoly rents for their transmission. The best way to induce
construction is to fully separate transmission from generation
interests, so decisions to expand are not influenced by how the
expansion affects the value of the transmission owner's generation.
Providing RTOs the authority to cause needed construction by the
transmission owner or others opens the doors to market-based means to
get the needed transmission constructed efficiently--by bidding out
construction to third parties. Instead of endorsing incentives, the
Committee should strengthen the RTO's authority to require construction
and enable FERC to evaluate the best means to ensure prompt
construction of needed grid additions.
<bullet> Delayed implementation/incomplete remedies: H.R. 2944 as
proposed puts RTO formation on a slow track. Transmitting utilities
need not join until January 1, 2003 and even that date may be postponed
``pending any proceeding under this section or Section 313,'' the
Federal Power Act's judicial review section. A recalcitrant
transmission owner can postpone for years the date when it must finally
join an RTO and relinquish its ability to use ownership and control of
transmission to benefit its generation sales. In the meantime, it can
use its potent power to choke off competitive retail markets in their
infancy. The provision for ``transitional'' pancaked rates further
removes from consumers the benefits RTOs are intended to provide. The
RTO provision is also weakened by the absence of clarity on key points,
such as what happens if a transmitting utility does not join an RTO,
and what happens if FERC does not initially approve the proposed RTO or
withdraws its approval. Particularly given FERC's RTO Rulemaking, the
legislation should require prompt formation of RTOs, and give FERC the
tools to demand adherence to the provision.
2. Provisions are needed to prevent transmission owners from evading
inclusion of facilities in RTOs.
The proposed legislation sets forth a seven-factor test for
distinguishing transmission from distribution facilities, and requires
FERC to give maximum deference to a state's determination. This
provision lends itself to abuse that could result in empty RTOs, thus
gutting the interstate transmission infrastructure necessary to support
vigorous wholesale and retail competition. RTOs will not provide the
needed neutral infrastructure if transmission owners are allowed to
create competitive barriers by restricting the facilities to be subject
to RTOs. Given the regional nature of RTOs, equity demands that there
be consistency from state to state, utility to utility, in defining the
facilities subject to the RTO. Finally, removal of needed transmission
facilities from RTO control by artificial reclassification will impede
the RTO's ability to reliably and efficiently operate the grid.
TAPS members have seen ``7-factor test'' filings being made around
the country as a means to escape FERC's open and non-discriminatory
access requirements, and to retain effective control over transmission
while ostensibly surrendering facilities to an RTO. In one such filing,
Wisconsin Public Service Company sought to reclassify to distribution
all but 124 miles of its nearly 1500 miles of high voltage transmission
lines now subject to FERC open access tariffs, leaving only 7 of its 33
interconnections with other utilities subject to FERC transmission
regulation. Although that filing was withdrawn in response to political
pressure, others have followed the same tactic. For example,
Commonwealth Edison has refunctionalized 40% of its formerly
transmission facilities (including 345 kV facilities) to distribution.
TAPS submits that these evasion tactics, which threaten to
undermine the effectiveness of the RTO provision, as well as FERC open
and non-discriminatory access requirements, should be stopped. The bill
should include a presumption, rebuttable by clear and convincing
evidence, that non-radial lines in excess of 60 kV be classified as
transmission. Such a standard would be consistent with my experience
regarding the typical function of non-radial facilities of such
voltage.
2. FERC must be responsible for regulating interstate transmission.
For electricity competition to be successful, it is essential that
FERC have authority to establish one set of rules for the use and
operation of the nation's interstate transmission system. The Eighth
Circuit, however, recently undermined FERC's ability to do so. The
court ruled that states can set their own rules for the transmission of
``bundled'' retail sales (traditional retail sales where the price for
power is ``bundled'' with the price of transmission and distribution
services) and favor these in-state users when there is insufficient
transmission capacity. Northern States Power v. FERC, 176 F.3d. 1090
(8th Cir. 1999).
Under NSP, each state can set its own rules for transmission of
bundled retail sales within that state, without regard to what other
states do and without regard to FERC's rules, while FERC is limited to
setting rules for wholesale and ``unbundled'' (choice) retail uses. No
regulatory body would have authority to ensure a coherent scheme for
the use and allocation, among all users, of what is necessarily the
single transmission network.
Think what pandemonium would occur if the interstate highways
posted two sets of speed limits, one for in-state cars and the other
for cars going out of state. Think how many crashes would occur if the
state established a different regime for preferred in-state cars to
switch lanes--they need not look or signal, because they are to be
accorded priority. Imagine further that a state could establish a rule
that if there was congestion, in-state cars would be permitted to pass,
while out-of-staters would have to wait on the side of the road until
the traffic subsided. Interstate commerce would plainly be impaired.
As we move toward competition on a state-by-state basis, it is
essential that FERC be authorized to establish a single scheme for use
of the grid that does not relegate use of the grid for wholesale sales
or retail choice programs to second class citizen status. Consumers
will not switch suppliers if they cannot rely on obtaining power. The
absence of a clear, unified set of rules would also enable one state to
cripple choice programs in a neighboring state, by according in-state
bundled sales a higher priority than unbundled deliveries to its
neighbors.
TAPS believes NSP to be wrongly decided under the current Federal
Power Act, which provides FERC authority, without limitation, over
transmission in interstate commerce. (We understand that FERC is
considering seeking Supreme Court review.) The proposed bill, however,
defines FERC jurisdiction as encompassing wholesale and unbundled
retail transmission, while carving out expanded state authority over
transmission of bundled retail sales. In this way, the proposed bill
legislates at best confusion, and at worst NSP's absurd and
counterproductive result. TAPS urges that the bill recognize that there
can be only one set of rules for all users of the interstate
transmission network, and those rules need to be set by FERC.
generation market power
1. FERC should be empowered to take steps to remedy and prevent the
exercise of market power and market manipulation.
The structure and physics of the electric industry make it
extremely challenging to transform into a robustly competitive
industry, where market forces rather than regulation set generation
prices. Not only do today's vertically-integrated monopolists have the
ability to use their vertical market power derived from owning and
controlling the transmission highways to foreclose others from
competing to economically and reliably serve their load, but ownership
of generation tends to be highly concentrated within geographic
markets. Electricity is an enormously complex networked industry, in
which operation of generation affects transmission availability for
competitors and electricity must be produced at the same time as
customers need it because it typically cannot be stored. These
characteristics create many hidden opportunities to manipulate and
control the market. Large incumbent utilities, which dominate various
markets as a result of their history as state sanctioned monopolists,
are in a position to effectively foreclose competition.
Getting to real competition in a highly monopolistic industry with
the complexities of electricity supply is a major undertaking. In the
long run, properly structured, truly independent, large regional RTOs,
which have the authority to plan and implement necessary grid
additions, can go a long way toward mitigating market power concerns by
expanding the market and eliminating constraints. However, elimination
of constraints will not happen overnight, or necessarily even in the
first decade after effective RTOs are up and running. Either due to the
existence of transmission constraints and natural geographic barriers,
or due to the existence of artificial barriers and walls created by
vertically-integrated organizations, generation market power does exist
within geographic regions of the country and will continue to exist,
even with RTOs. FERC needs the authority to identify and impose
adequate remedies to correct such market power problems if there is to
be effective competition.
Thus, to ensure the competitive infrastructure needed for
competition to flourish, Congress will need to transform FERC from a
price-setting agency to one with clear and specific responsibility to
ensure that interstate markets for electricity are and remain
vigorously competitive for the benefit of all consumers. FERC needs
explicit authority to take whatever actions are necessary to remedy
generation market power problems that threaten emerging competitive
markets, particularly in the likely-to-be-lengthy transition period.
This authority must include a variety of tools that FERC can employ
where necessary, including requiring the auction of capacity for
periods of at least four years; cost-based rates; public disclosure of
information (including transparent pricing); shared access to assets or
services on a nondiscriminatory basis at reasonable rates; or, where
other measures prove insufficient, divestiture of assets for fair
value. Unfortunately, H.R. 2944 makes no effort to address this
critical structural issue.
Because of the interstate nature of the grid and emerging markets,
individual states will be powerless to effectively address this
problem. Given the technical complexity of the industry and its real
time nature, this task will be best accomplished by empowering FERC to
meet its new responsibilities rather than relying on slow and expensive
antitrust litigation, at least through the transition to mature
competitive markets. Indeed, the Department of Justice and the Federal
Trade Commission have conceded that antitrust laws alone are not
adequate to address pre-existing market power. Above and beyond FERC's
RTO and merger authority, the Subcommittee should grant FERC new
authority to move quickly and decisively to eliminate undue generation
market power as it arises, and to impose stiff penalties for market
manipulation, in order to make such manipulation a very risky venture.
2. The proposed unworkable time limits on FERC merger review should be
revised and FERC's authority to review mergers involving
generation facilities should be clarified.
TAPS applauds the Chairman for maintaining FERC authority to review
mergers, and abandoning the approach taken in the draft bill of
stripping that critical authority from FERC. Given the potential for
mergers to increase market concentration and restrict competition at
the time FERC and the Congress are attempting to promote wholesale and
retail competition, preserving this important function is vital.
TAPS is concerned, however, that the time limits proposed to be
placed on FERC review will nevertheless de facto deprive the public of
effective FERC review of mergers. Unlike the Department of Justice and
the Federal Trade Commission, FERC operates without the benefit of the
powerful Hart-Scott-Rodino information tools. In addition, FERC review
is an open process, involving the public who can provide real world
experience that can assist in evaluating the merger. Granting FERC
merger authority, while depriving it of the time to gather and analyze
the information needed to meaningfully assess the likely impact of the
merger on competition, is a bad compromise that threatens to undermine
the competitive industry structure the bill is intended to promote.
Indeed, the time limits may well encourage merger applicants to be slow
to provide the Commission (much less intervenors) with the essential
information, cloaking it with claims of confidentiality and the like.
TAPS recognizes that the Subcommittee may be concerned that the
current system creates the potential for effective denial of mergers by
delay. The answer, however, is not establishing unworkable time limits
that negate FERC review of mergers with significant competitive
consequences. Rather, an alternative approach needs to be developed
that affords FERC the opportunity to do its job well, while respecting
the reasonable needs of merger applicants. For example, the legislation
could require FERC to expedite approval of non-controversial mergers,
and could provide procedures, including information requirements for
applicants, which will help expedite the more difficult to analyze
mergers.
In addition, TAPS recommends that the Subcommittee clarify FERC's
jurisdiction over mergers of generation-only companies, to ensure FERC
review of all mergers and acquisitions that can affect the structure of
the electric industry. The absence of such clarification invites
evasion of FERC authority.
TAPS appreciates this opportunity to present its views on H.R. 2944
to the Subcommittee.
Mr. Barton. Thank you, Mr. Rao.
I will now recognize myself for 5 minutes, and maybe
longer. And let me just say, as many of you have testified
before and been here, it is good for us to continue to move on.
Most members have the statements, so if some members missed
your testimony, they will get back for the opening comments, or
at least for the questions, but it is, I think, better for all
of us as we keep moving on in the hearing so that we can get to
the second panel eventually.
Let me start.
You know, I have heard from the Illinois Municipal Electric
Agency that generation market power, horizontal market power,
will be a problem in a deregulated electric industry. Some of
you have testified to that.
There are no market power provisions in H.R. 2944 other
than RTOs, because the hearing record seems to have made it
clear that they are not necessary, based upon our previous
hearings.
When I asked the DOE witness yesterday about this issue, he
could not explain the problem.
Mr. Rao, in your written testimony, it also does not
explain the problem, although I think maybe you touched on it
in some of your questions and probably will have more real-life
examples to share, and so there is a frustration evident in my
search for an answer.
Some people say there is a problem, but there is a refusal
to explain technically how it becomes a problem, so I would
like to ask this question to Mr. Rao and Mr. Owens, to explain
the problem clearly and directly for the subcommittee and
answer these questions directly.
Exactly why cannot RTOs mitigate horizontal market power?
And are there circumstances where generation market power
exists today?
Mr. Rao, why don't we begin with you?
Mr. Rao. I have an example for the second part of the
question, and then I will go back to the first part of the
question.
Generation market power is the ability of one or a few
utilities to increase the price above the level that would
apply in a competitive market with many competitors.
The combination of high concentration levels resulting from
development of this industry and State-sanctioned monopolies
coupled with transmission limitations creates the situation
where, in many places in the country, there is clear market
power, and utilities are willing to take steps to keep it that
way.
To give you an example, Florida is a peninsula with high
growth load coming into the State. There is about 38,000
megawatts of load at present in Florida, and only 3,600
megawatts of limited import capability, and there are two major
utilities that own about 75 percent of generation to meet that
load.
Recently, one of the subsidiaries of Duke Energy, wanted to
build a merchant plant in Florida with about a mere 500
megawatt capacity. They wanted to build in one of the
municipalities which is a member of TAPS.
When Duke Energy's subsidiary asked the public service
commission for approval, the two investor-owned utilities with
the 75 percent generation market power intervened to stop that
project, and when they did not succeed, when the commission
approved that particular proposal, they even took it to the
Florida Supreme Court. It is right now pending.
It says that the utilities with existing market power will
try to stop new entrants.
Mr. Barton. That is an example. Of course, we all know that
Florida is almost, for some aspects, almost not considered part
of the continental United States because it is a peninsula. So
how about inside the mostly contiguous 47 other States?
I am in trouble. I am not going to run nationwide, I will
tell you that.
Mr. Rao. I do have another example which exists within
the--not necessarily Florida.
Mr. Barton. Could you briefly, because I want to get Mr.
Owens' answer to this question, also.
Mr. Rao. Yes.
Mr. Barton. Just give me the location and the company.
Mr. Rao. Eastern Wisconsin has the same type of situation
with a 10,000 megawatts of load and 1,200 to 1,300 megawatts
import capacity, almost all of which is controlled by three
major utilities in eastern Wisconsin.
These three utilities together control more than 90 percent
of generating capacity----
Mr. Barton. But there are three utilities that have
competition in that market, or would have?
Mr. Rao. They are----
Mr. Barton. I mean, you are talking about three different
producers.
Mr. Rao. Three different producers.
Mr. Barton. Let me move to Mr. Owens. I have got the
ranking member here bugging me to move along.
Mr. Owens?
Mr. Owens. You asked the question whether regional
transmission organizations would help mitigate market power,
and I would say yes, they would.
The issue of market power, if I might just break it down
into two components, first, one area relates to what we call
``vertical market power,'' and historically that has related to
your access to the transmission system.
All investor-owned utilities are required by law to provide
nondiscriminatory access to the transmission system under
FERC's implementing Order 888. Certainly regional transmission
organizations would seek to make sure that access to the grid
is proper.
In addition, you asked a question relating to horizontal
market power. Horizontal market power, many folks generally
relate that to your ability to control the generation market.
As I indicated in my oral remarks and in the written
statement that I provided for the record, there is an explosion
of participants in the bulk power supply market. There are no
barriers to entry to that market. We have thousands of
independent power producers.
As others have indicated, there is a significant
opportunity for generators to locate in all aspects of this
market, so I do not believe that there is the existence of
horizontal market power.
Now, to the degree that there is, the States are well
equipped to deal with those issues. I do not believe that there
is a need for additional Federal authority to deal with the
issue of horizontal market power.
Mr. Barton. Thank you, Mr. Owens.
I would like to turn now and recognize for 5 minutes the
ranking member of the subcommittee, Mr. Hall.
Mr. Hall. Thank you, Mr. Chairman.
I am not pushing you, but I do have an 8 dinner meeting.
And, Ms. Church, I will give you some wisdom from the
1930's. Will Rogers said the way to solve the highway traffic
problem was to require all automobiles to be paid for before
they could get on the highway.
So you can imagine how bad it is now. I wish he could see
it today. Will Rogers would not like anybody, would he?
I am not confused. I guess I am still confused, but I am
trying to listen to this panel and glean from what you say what
you mean and what you want.
I have heard Mr. Helton say we will be developing the
proper amendments, and Mr. Nevius said we need reliability
legislation now, and I do not know whether this requires some
amendments or not. Ms. Church said the bill subjects certain
aspects to intrusive State control. Mr. Owens said we have some
concerns and objections, repeal PUHCA and reform PURPA and the
bill repeals both. Mr. Mayben said the bill fails to treat all
parties alike. Mr. English--I had to leave before I got to
listen. I tried to listen to all of his, but I sure did not
want to miss an important vote over there. But we urge the
chairman to work on language.
How many of you are for the bill just like it is? How many
of you are for the bill with a few amendments, not to
completely restore the automobile, but just--1, 2, 3, 4, 5, 6.
I count 12.
Well, let me see. Mr. Helton, let me ask you some questions
here, if I might.
Your statement says H.R. 2944 is not a perfect bill but a
good one, right?
Mr. Helton. That is correct.
Mr. Hall. And your testimony lingers long on the merits of
the legislation. Let me ask you about some of the problems that
you have with this legislation and, if you can--and maybe you
cannot--give me a yes or no answer, or tell me you cannot
answer it.
On TVA, the bill preserves TVA consumers first call on
cheap power, permits TVA to build a new generation of
facilities, and allows TVA to sell outside the valley. Do you
support that or not?
Mr. Helton. Do not.
Mr. Hall. And Bonneville, the bill would permit Bonneville
to recover its stranded costs through a surcharge on
transmission consumers that would raise costs for other users,
such as California consumers who use the system for retail
purchases. Do you favor that as written?
Mr. Helton. Under reasonable terms, probably yes.
Mr. Hall. You would have to have an amendment there though?
Mr. Helton. Yes.
Mr. Hall. State preemption--the bill imposes a Federal hard
reciprocity provisions. This would reduce the number of
suppliers from whom the consumers in open States could purchase
and preempt State laws to the contrary. Do you support that?
Mr. Helton. We would like to amend that one, as well.
Mr. Hall. Okay. That is one you do not like and two to
amend.
Do you support the provision on RTO mandates? The bill
includes a Federal mandate requiring transmission owners to
join a regional transmission group by the year 2003 and setting
specific criteria for FERC appeal. Do you support that?
Mr. Helton. Generally, yes. The specific criteria is the
area of concern.
Mr. Hall. Okay. You cannot give me a yes or no on that?
Mr. Helton. Cannot.
Mr. Hall. FERC merger authority--the bill expands FERC's
merger authority to include transmissions involving generation
facilities and holding companies. Do you support that as
written?
Mr. Helton. Yes.
Mr. Hall. That is the first unequivocal yes, is it not?
Mr. Helton. No, sir. I think--didn't I do that on the first
one?
Mr. Hall. You may have. Yes.
Mandatory interconnection to local distribution systems--
this bill gives distributed generators of a considerable size,
up to 50 megawatts, the right to interconnect with local
distribution companies. Do you support that?
Mr. Helton. No.
Mr. Hall. And then, let me see, your statement indicates
that your coalition will be developing perfecting language. Do
you have a time on when you are going to submit that language
and you are going to give it to the chairman? He has been very
open with us, and he will immediately send it on to us. Do you
have those amendments ready?
Mr. Helton. Almost.
Mr. Hall. Okay. I think my time is up. I have two more
pages of questions here, but I will get back to you maybe.
Thank you.
Mr. Barton. As long as we do not run past 8, we are going
to be fine with Mr. Hall.
I will now turn to my colleague from Kentucky, Mr.
Whitfield, for 5 minutes worth of questions.
Mr. Whitfield. Thank you very much.
Mr. English, in your testimony you focused on some of the
major concerns of the co-ops, and I noticed that in your
testimony you also talked about some concerns about section 103
of the bill relating to the regional transmission
organizations, and I was just wondering if you could elaborate
on that a little bit more?
Mr. English. Mr. Whitfield, our association strongly
supports voluntary RTOs. We do feel that that is an important
element. We are also concerned, I might say, about the fact
that RTOs are regulated by the Federal Energy Regulatory
Commission, and, as far as members of RTOs, that seems to be
the appropriate way for us to address that, particularly as you
are dealing with some of the smaller entities such as electric
cooperatives.
We think that the RTO provision that is contained in the
bill, which also allows for members to set up their own RTOs,
is one that has some promise. We would like to do some work
and, I suppose, like the other members here on the panel, we
probably have got some ideas in mind for amendments. But that
is the position that we take on RTOs.
Mr. Whitfield. Okay. And then I had not heard a lot of
discussion about this net metering issue. Could you elaborate
on that just a little bit?
Mr. English. Well, as far as any net metering, it has to do
with those who also may be--consumers who may be generating
some power on their own and may be able to sell it back through
the grid.
The issue, I guess, is what is the net between the two.
Mr. Whitfield. Right.
Mr. English. That, as I understand it, while it may sound
good on paper, may have some real difficulties in the real
world as you attempt to integrate that into the process and the
grid, itself.
Mr. Whitfield. Okay. All right. Thank you.
Now, Mr. Hawkins, yesterday, when the Administration
testified, and then when Secretary Richardson had testified on
this previously, and even Carol Browner testified, they all
sort of took the position that this restructuring legislation
was not the right place or the right format to get into
additional environmental legislation, and particularly on
CO<INF>2</INF> reduction mandates and so forth.
That is still their position, but your organization
obviously still feels that you want to pursue this; is that
correct?
Mr. Hawkins. Our organization and many other organizations
believe that we should address the air pollution problem from
this industry while we address its economic performance, and
this is not the first instance that we have disagreed with the
administration.
Mr. Whitfield. And will you all be supporting the Pallone-
Waxman amendments in this area if they come forth with those,
as they have discussed?
Mr. Hawkins. Yes, sir.
Mr. Whitfield. Okay. Now, as you know, I represent an area
that uses a lot of fossil fuel to generate its electricity, and
one thing that is frequently referred to is that these coal-
fired utility plants in the midwest and southeast are
uncontrolled and that they are exempt from the Clean Air Act
requirements, and yet all of these plants are required to
comply with the national air ambient quality standards. All of
them are required, under the Clean Air Act, to reduce their
sulfur dioxide emissions by 50 percent below the 1985-1987
levels. The 1990 amendments also require these plants to reduce
their nitrogen oxide emissions by approximately 40 percent
below existing levels, and they would also be subject to any
reductions on the EPA's proposed fine particle and 8-hour ozone
standards. I know that there is a problem with that in the
courts right now. But they do meet a lot of environmental
standards and are required to do so. So would you elaborate a
little bit on the concern that you have about these plants?
Mr. Hawkins. Yes, sir.
The State of the law is that plants that were in operation
before 1970 are treated fundamentally differently than plants
that have been built in the last 30 years and plants that will
be built tomorrow.
Modern plants are required to generate electricity meeting
state-of-the-art performance standards in terms of how clean
you can generate electricity. Older plants are not required to
do that. Older plants are allowed to rely on a patchwork of
regulations that differ from State to State, and, as a result,
the facts are clear: the power produced from an older plant
pollutes sometimes 3, 4, 5 times as much as a competitor's
power from a modern plant.
We think that that is an outmoded policy and one that is
still causing a lot of environmental harm.
Mr. Whitfield. But you do not deny that they are meeting
the legal requirements that they must meet today?
Mr. Hawkins. Well, the trade press and some of the daily
press have been filled with reports in the last several months
about inquiries as to whether, in fact, some of these plants
are complying with their legal obligations; specifically,
whether they are complying with their obligations to seek a
permit when they make certain major changes in the operations
or the physical aspects of their facilities.
We are aware that the New York attorney general has sent
notice letters stating his conclusion that a number of these
companies are, in fact, violating the law, and we have read
trade press reports that the USEPA is carrying on its own
investigation.
So no, sir, we do not think it is clear that they are
meeting all legal obligations.
Mr. Whitfield. But even if they are, you still would like
to see the law changed as it relates to them?
Mr. Hawkins. That is correct.
Mr. Barton. The gentleman's time has expired.
The Chair recognizes the gentleman from Ohio, Mr. Sawyer,
for 5 minutes.
Mr. Sawyer. Thank you, Mr. Chairman, and thanks to our
entire panel.
Let me turn first to Mr. Nevius. First of all, thank you
very much for all of the work that NERC has done. It has been
important and central to a lot of the legislation that we have.
I am assuming that you fully subscribe to the notion that
electric supply could deteriorate over the long term if
transmission capacity does not keep pace with growth and
demand?
Mr. Nevius. The reliability of the electric grids could
certainly be at risk if we do not have a way to enforce
mandatory standards. The issue of electric supply involves
other things in addition to the amount of transmission,
including the amount of generation and what kind of demand side
measures of programs.
Mr. Sawyer. Of course. But transmission----
Mr. Nevius. But transmission----
Mr. Sawyer. [continuing] adequacy is in strength, no matter
how much generation exists, if it is not adequate? You would
agree with that, I am sure?
Mr. Nevius. Yes.
Mr. Sawyer. The amount of transmission that is planned for
the next few years, however, is substantially less than we
talked about even a few years ago. Am I correct in that?
Mr. Nevius. The amount that has been planned to be added
has continued to decline over the last 10 to 15 years.
Mr. Sawyer. Let me ask you, with regard to NERC's comments
on the RTO, NERC asserted that transmission rates must provide
incentives to get the right amount of transmission
infrastructure built. Do you agree with NERC that we must
ensure that enough transmission capacity is available to
prevent short-circuiting competition?
Mr. Nevius. I guess the comments that we made regarding
RTOs and also the adequacy of transmission indicate that
various proposals to provide incentives in one form or another
are certainly not inconsistent or incompatible with the self-
regulatory reliability concept that is contained in title II,
and we are not proposing specific pricing or incentive
mechanisms, themselves.
Mr. Sawyer. I understand that, but it is your assertion
that incentives are useful and necessary?
Mr. Nevius. They can be. Yes.
Mr. Sawyer. Yes. Thank you very much.
Ms. Church, I understood yesterday that the deputy
secretary of Energy said that incentives are not necessary to
attract transmission investment. Do you agree with that?
Ms. Church. We agree. We believe that in some cases
incentives may be appropriate. We think the whole system really
needs to be re-looked at, because it was developed for a system
that is changing substantially.
Mr. Sawyer. For very different purposes.
Ms. Church. Yes.
Mr. Sawyer. Yes. I agree.
Can you speak to your notion of what incentives might be
useful, helpful, necessary?
Ms. Church. I would be glad to provide the member with some
comments to elaborate on that.
Mr. Sawyer. That would be great. Thank you.
Ms. Church. Thank you.
Mr. Sawyer. I am assuming, from what you have said, then,
that you would agree that if more robust transmission networks
do not develop, that the whole notion of how we go about
achieving the level of competition we are trying to achieve
simply cannot take place?
Ms. Church. Well, I believe it can be ameliorated by the
development of RTOs. For example, one of the things that we
have seen over the last several summers are curtailments of
large amounts of power that have a cascading effect on the rest
of a whole region, and the example I used in my testimony was
the Michigan/Ontario incident.
Mr. Sawyer. Sure.
Ms. Church. If the midwest had a large RTO, it would have
helped to internalize those constraints, and it may have
prevented the curtailment of 400 megawatts.
Mr. Sawyer. The real problem there was high delivered
prices and not necessarily high generated prices.
Ms. Church. But the whole reason was that power was unable
to move into that area. In curtailing to alleviate a 400
megawatt constraint, 4,000 megawatts were actually curtailed,
which kept power from coming in from New York and PJM into the
midwest, which created a shortage of generation, which, of
course, drove the prices up.
We believe we do need new transmission, but the existence
of good RTOs would alleviate a lot of the problems that we are
seeing.
Mr. Sawyer. Thank you very much. I see my time has run out.
Mr. Shimkus [presiding]. Thank you. Your time has run out.
Thank you very much.
Now I will recognize the gentleman from Oklahoma, Mr.
Largent, for 5 minutes.
Mr. Largent. Thank you, Mr. Chairman.
Mr. Richardson, I would like to ask you, one of the things
you talked about was the independence of RTOs. Is it your
opinion that the ISOs that are currently in existence are
independent?
Mr. Richardson. Ones that are in existence, ones that are
being proposed are not--you cannot give a yes or no answer to
that because each has different characteristics. Some are, some
are not.
Mr. Largent. Okay. Let me ask you a question about market
power. Can you talk to us a little bit about market power? I
will give you my opinion here--market power exists because of
physical realities of where generation is located, talking
about horizontal market power, and physical constraints that
exist because of the transmission lines that currently exist.
Talk to us about the transient nature of market power, in
your opinion.
Mr. Richardson. Thank you for asking that question.
Mr. Shimkus, if the record is incomplete with respect to
market power, then that is our fault that we have not provided
sufficient examples.
I would point, as examples, to the preamble of the regional
transmission organization preamble from the Federal Energy
Regulatory Commission, where they say open access is
insufficient, the need for independent system operators is
clearly demonstrated, and then they go on to give actual
examples of abuses of market power where there are clear
findings of problems in the abuse of market power by vertically
integrated utilities where they favor their own generation
because they control transmission. They give examples of
situations where there have been allegations of abuses of
market power. They note that in some cases individual
companies--my members and others--are afraid to come forward
for fear of retribution. So they suggest that perhaps we are
seeing only the tip of the iceberg of the abuses of market
power.
It is a marvelous piece of information. I hesitate to
overburden this committee with further paper, because I have
already done a pretty good job of that in my prepared
testimony, but it is a very good piece that I think
demonstrates the problems of market power and the remedies that
are needed.
Now, when we are looking at market power, we have what I
regard as institutional market power problems that arise from
the vertical integration of our utility industry historically.
Regional transmission organizations, if they are properly
structured and have the right boundaries that do not game the
system by creating, rather than eliminating, constraints
between high-and low-cost systems are the solution, and we need
to move forward with those, and we should do so first in a
collaborative fashion.
We strongly believe that the Commission in the end may need
the authority to order utilities to participate in such
organizations because that may be the only way to rationalize
and get rid of the vertical market power that currently exists.
Horizontal market power, as I said in my opening statement,
the ability to use vast amounts of generation to affect prices
for consumers, not--because generation affects the way the
transmission system works, and so, by constraining generation
by unscheduled outages of generation facilities can have
economic consequences in the marketplace that need to be
addressed, but I think this is probably a transitional issue.
It is not necessarily one where FERC needs authority that
exists in perpetuity, as I suggested in my oral statement.
Perhaps what FERC needs is a tool box of remedies up to and
including the dreaded ``D'' word, that being a divesture of
capacity through a capacity auction for a period of time until
these problems are addressed.
Other tools can be used, up to the point where they can
come back and report to the Congress that the industry has been
restructured, and that is really what we are talking about. We
are talking about the structure of the industry, and that is
why independent system operators are so critically important.
It is the structure that we have to get right. The Holding
Company Act structured our industry for 60 years. now we are
talking about taking that down. We are looking at a new
structure, and this is an opportunity for this Congress truly
to get the structure right.
These opportunities do not come along very often. That is
why we want legislation now. We see the industry restructuring
itself and we are concerned that the monopolists are
controlling the restructuring of the industry, not policymakers
who are looking out for the interests of the public.
I hope that--I got a little bit on my soap box, sir.
Mr. Largent. That is okay.
Mr. Richardson. But I hope I addressed the question.
Mr. Largent. Mr. English, I want to give you a chance to
address the issue of propane.
In what way does the Federal Government place limits on co-
ops today in terms of their ability to expand their business
opportunities? What is the mission of a rural electric co-op?
Mr. English. Well, I think the mission of electric
cooperatives, whether they are in rural areas or any other
area, is one of meeting the needs of the consumer members, the
people who choose to come together and make their purchases
through the entity of a cooperative.
Mr. Largent. Meeting what needs? Their electricity needs?
Mr. English. Whatever needs they may have.
Mr. Largent. Any need?
Mr. English. Exactly.
Mr. Largent. Cable, DVS, propane----
Mr. English. Exactly.
Mr. Largent. [continuing] groceries?
Mr. English. As I used the example before this committee
once before, to deny consumers the opportunity to do it for
themselves, and that is basically what we are talking about, or
do it as a group for themselves, is like denying someone to
opportunity to grow tomatoes in their back yard garden and eat
them. That is like saying you have got to sell them to the
grocery store and buy them from the grocery store. You cannot
eat your own tomatoes.
That is basically the same process that we are talking
about here.
But as far as whether we are talking about propane or
whether we are talking about any other service from the
standpoint of an electric cooperative and recognizing the fact
there are all kinds of different cooperatives--housing
cooperatives, you have got farmer cooperatives, you have got a
wide variety of different cooperatives in this Nation today--it
also should be recognized, the fact that, for instance, under
the Rural Utilities Service, any loans are specifically
restricted only for electric utility service.
If they, in fact, use those funds for any other purpose
other than for the infrastructure or assets of the electric
utility, itself, they would be in violation of a loan
agreement. Not only could they be declared ineligible for the
loan, but they could also be declared--have the loan called at
that particular time.
Mr. Shimkus. Has the gentleman answered your question?
Mr. Barton. Well, we have Congressional courtesy. We let
former Members speak a little bit longer than the other
panelists.
Mr. Shimkus. Overruled by the chairman.
Just remember that, my friends on the left. I tried to get
over there.
Mr. English. In addition, I might add this also gets into
the question of tax exemptions. Electric cooperatives are not
for profit and are governed by the Internal Revenue Service. As
such, should they, in fact, cross-subsidize, as some have
argued, then they would be in violation of their--with the
regulations of the Internal Revenue Service and could lose
their tax-exempt status.
There are procedures for anyone who suspects that such
violations are taking place to proceed, whether it be with the
Rural Utilities Service or whether it be with the IRS.
And also, very quickly, let me say that any other
businesses outside electric service, they would be subject to
the unrelated business income tax, which is a Federal tax at
the corporate level.
So there are taxes with regard to any of these other
businesses, whether it be propane or whether it be anything
else with regard to any margins that might result from that.
Those margins, by the way, could not go back to an electric
cooperative as far as the rates are concerned. It would have to
go back to the membership, itself, and they, too, would pay
income tax on that.
Mr. Shimkus. He is going to have to throw me out of the
chair. I am going to move on. Thank you very much.
I move to the gentlewoman from the State of Missouri, Ms.
McCarthy, for 5 minutes.
Ms. McCarthy. I thank the chairman, and I would like to
thank the witnesses for their presentation today.
I would like to explore a concept with you that is still
troubling to me as we move forward, and that is how, as we move
forward into this new era of competition, do we achieve the
efficiencies and also the environmental goals that we have
obligated ourselves to worldwide?
My worst fear is that, as we open up competition, industry
will look more and more to the cheapest sources of fuels in
order to compete, those perhaps being the more traditional uses
of coal and others that we know make our cities hard to breathe
in and cause the EPA great concern as far as air quality.
Is there enough in this measure on encouraging uses of
indigenous energies, those that are renewable and clean? Do we
need to add a renewable portfolio standard, as we have
sometimes talked about? Is the incentive program, as currently
proposed, enough? And what about a public benefits fund so that
we are encouraging conservation and low-income assistance, as
well?
How do we set a standard in the world where we move to
efficiency to lower costs for consumers, but also to a better
environment?
I know, Mr. Hawkins, you spoke to this briefly in your
testimony. I would like to begin with you, but I would like to
hear from any other member of the panel who is interested in
sharing these thoughts with us so that we can come together and
propose language that would make this work.
Mr. Hawkins. Well, thank you, Congresswoman McCarthy.
Yes, our coalition of organizations supports three critical
environmental measures: the public benefits trust that you
mentioned, to support existing investments in efficiency, low-
income services, and other public benefits; the renewable
portfolio standard--both of those will be addressed in the
second panel; and, finally, achieving an environmental
performance cleanup.
On that last point, the way I would try to answer your
question is the way that this industry will be incented to
improve its performance is by making good performance valued in
the marketplace.
In my testimony, I point out today's situation, which is
problematic. An entrepreneur that wants to build a new high-
efficient, clean power plant goes to investors, and that
entrepreneur can point out that the power plant may emit very
little sulfur dioxide, may emit very little or no mercury, may
emit far below the required control levels for nitrogen oxides,
and may emit much less CO<INF>2</INF> than other competitors.
But the investors are not interested in that. Investors are
interested in what is your bottom line bus bar costs and how
does it compare to your competition. And if your competition is
an old grandfathered power plant that is able to continue to
burn dirty fuel because of balkanized pollution control rules,
the investor says, ``Sorry. Great idea. Come back later.'' And
the plant doesn't get built.
So the way to deal with this is to put a generation
performance standard in the law which treats all generators
equally, and says, ``When you produce a megawatt hour of
electricity, that is a useful social service and you are going
to get a certain allocation of pollution allowances to meet
those needs.'' Now the entrepreneur comes in, has this super-
clean plant, and he or she can say to the investor, ``When I
generate a megawatt hour of electricity, I am generating an
additional revenue stream because I am going to have credits
that can be sold into the market, and that really makes my
investment a more-attractive opportunity for you,'' and that
will tend to make the answer be yes to build that plant.
Ms. McCarthy. Thank you.
Ms. Church?
Ms. Church. I think, generally, that enactment of
comprehensive wholesale legislation will benefit the
environment. We would certainly like to see, over time,
comparability between the older and the newer plants, and we
definitely believe that, where credits are being allocated,
that newer entrants do need to have an opportunity to get those
credits and they need to be reallocated periodically.
And on renewables, we do think that there are some
amendments that could help strengthen the bill. The current
bill tries to provide symmetry between the tax credits that are
already in the law and benefits to public power.
There are still a number of renewable sources that fall
through the cracks on that attempted symmetry, and we do think
some refinements are needed there.
Ms. McCarthy. I thank you. And I see that I have run out of
time. Thank you, Mr. Chairman.
Mr. Shimkus. Thank you. And I recognize the chairman of the
subcommittee, Chairman Barton, for 5 minutes, or however long
as he wants to take.
Mr. Barton. No, no. Five minutes.
Just an observation before I start my questions. I used to
sit out in the audience during the natural gas debate in the
early 1980's about decontrolling natural gas, both in the House
and in the Senate, and I felt I knew the answer and I was so
smart, and if those ignorant Senators and Congressmen would
just let me do it, we could solve that problem. And now I am
over here and I wish I was over there, because I feel like, you
know, what are we going to do, because everybody that has
testified today has had some very good points.
So I used to be a lot smarter when I was sitting out there
than I am when I am sitting up here.
Let me start off with an easy question. The current draft
before us has a distributed generation size cap of 50
megawatts. We are told by a lot of people that is a little bit
too large. Is there a better number, Mr. Owens, that you would
like to see our third draft go to on distributed generation?
Mr. Owens. Well, I certainly think 50 megawatts is just an
extreme. I do not have a specific number, but I think if you we
going to start, you certainly should start at something
significantly scaled down. Let's say perhaps five megawatts
could be an upper limit.
Mr. Barton. Five to ten. Mr. Richardson, do you have a
position, your group have a position on that?
Mr. Richardson. Mr. Chairman, my group does not have a
position. I was struck at the size of 50 megawatts when I first
read through H.R. 2944. It seemed to me to be quite large.
Mr. Barton. Okay. Let me ask you a question, Mr.
Richardson, again on market power.
Mr. Richardson. Yes, sir.
Mr. Barton. Yesterday, the Clinton administration's
witness, the deputy secretary of Energy, really enforced upon
the subcommittee that we needed to take the Administration's
provision on market power, which would allow the FERC to
require forced divestiture.
I am not of that persuasion. I think you know that, having
come to our working group. I am concerned about, if there truly
is market power, we need to do something, but I do not see why
the States are not the solution. Didn't California have market
power provisions in their State law?
Mr. Richardson. They have divestiture requirements.
Mr. Barton. But it was a State decision?
Mr. Richardson. Yes, it was a State decision.
Mr. Barton. Doesn't Texas have market power provisions in
its law?
Mr. Richardson. Yes.
Mr. Barton. Okay. Doesn't Pennsylvania?
Mr. Richardson. I am not that familiar with Pennsylvania's
legislation, but I believe you are correct.
Mr. Barton. Just for the subcommittee's edification, we are
going to address market power. If we need to put a political
fix in, so be it, but, before we decide on a political fix, we
ought to really look at what is happening in the States, and
every State that has acted in some fashion has addressed market
power, and we really should think carefully, in my opinion,
before we put a Federal fix on market power in if the States
are taking--are already handling that.
Now, Mr. Richardson, you said something that really struck
me. You did not give a specific example. You said you did not
want to burden the subcommittee with more paper. Well, burden
us. If you know of a specific example where a utility generator
withheld generating capacity at a critical period simply to
drive the price up and exercised market power, I would like to
know that.
Mr. Richardson. We will give you examples of the
combination of the abuse of transmission and generation.
Mr. Barton. Well, your specific example, though, was you
talked about horizontal generation power, where a particular
utility could withhold generation from the system to--I think
you used the word ``game'' the system.
Now, I know we have had some transmission bottlenecks. I am
familiar with most of those. I won't claim I am familiar with
all of them. But I have not heard before somebody make the
allegation that a generator withheld generating capacity during
a peak period, and I would be interested in it, and I know
former Chairman Dingell would be interested in it. That is one
of his big concerns. So we would really like to have that.
Now, Mr. Hawkins, I want to ask you a question. You are the
witness that says we ought to put in some Clean Air Act
provisions for the grandfathered power plants. If we do not put
those in, are you going to recommend a vote against any bill?
Mr. Hawkins. We certainly will look at the entire bill, and
if the bill does not contain provisions which provide
assurances that this restructured industry will protect the
environment, then yes, we would recommend the members to vote
against the bill.
Mr. Barton. My understanding is, under the current Clean
Air Act, we have Federal standards. We do grandfather some of
these older power plants that burn some of the coal.
Could a State put in a tighter standard on those
grandfather plants, or does the Clean Air Act preempt that?
Mr. Hawkins. A State could put in a standard as a matter of
law. The problem is that the State could not protect its air
quality just by regulating the sources within its State.
Mr. Barton. My point is, under the current Clean Air Act,
if that is a problem, the State of Ohio, to pick a name out of
the air, or the State of Illinois, to pick another State out of
the air, they could set tighter standards for those plants,
could they not?
Mr. Hawkins. They could, but they would be ineffective
because----
Mr. Barton. But they could do it? They could do it. The
answer to that is yes.
My time has expired and I yield back to the gentleman from
Illinois.
Mr. Shimkus. Thank you. And, for Mr. Richardson, if you
would provide that information.
Mr. Richardson. We will do that.
Mr. Shimkus. I just wanted to get the commitment on the
record that you would provide that information to the chairman.
Mr. Richardson. Yes.
Mr. Shimkus. Now I recognize the gentleman from Florida,
Mr. Stearns, for 5 minutes.
Mr. Stearns. Thank you, Mr. Chairman.
This is directed to Lynne Church. Just a clarification. I
think earlier staff indicated that you made the assertion that,
I think in the PURPA language that I have, it does not
explicitly protect existing contracts; is that true?
Ms. Church. I said that in my written testimony. Correct.
Yes.
Mr. Stearns. I just wanted to read from page 79 of the bill
that I have that says, ``Existing rights and remedies not
affected,'' page 79--``Nothing in this section affects the
rights or remedies of any party with respect to the purchase or
sale of electric energy or capacity from or to a facility
determined to be a qualifying small power production
facility,'' and so forth.
And it says, ``Pursuant to any contract or obligation to
purchaser to sell electric energy or capacity in effect on the
date of the enactment of this act.'' So----
Ms. Church. Well, we would like to see some language that
specifically provides symmetry between protection of the
utilities for their recovery of stranded costs that are tied to
above-market PURPA contracts with the obligation, therefore, to
continue to supply to pay under the existing contract.
Mr. Stearns. Well, from what I just read to you, it appears
that they have these remedies in place in the bill that I have,
so, I mean, I think your initial statement might not be
correct. Do we agree on that?
Ms. Church. We will certainly look at it again, sir.
Mr. Stearns. Okay. You proposed granting FERC jurisdiction
over transmission used to make bundled retail sales.
Ms. Church. Correct.
Mr. Stearns. What is the position of the States on this
issue?
Ms. Church. NARUC has filed comments that, as I understand
it, disagree, and I think that the reason that we believe it is
very, very important is that, while the States are very well-
meaning--and I certainly do not attribute any malevolence to
their view--they are taking--they tend and have the
opportunity, under the way the law is being interpreted, to
take very parochial views, which can have the impact of
adversely impacting neighboring States, and certainly
preventing the market from operating the way it should.
The example I would use is the one that underlies the
Northern States Power case, the 8th circuit case, which I think
has brought this to the fore, where the Minnesota law required
the utility to curtail a firm transportation contract on its
transmission system in order to protect its ``native load.''
Well, the contract that they curtailed was, in fact, power that
was moving to the next State, Wisconsin, to serve their native
load.
And so what we need to realize is that the system, even
now, and even more so in the future, as States open up, is
going to be relied upon to serve residential customers.
And I think the second view that there is general
misunderstanding, both sometimes on the Commission's level and
in the general public, that curtailment of transmission
automatically is going to end up turning off the lights. That
is not correct.
What it really means is that sometimes, where a contract is
curtailed, the recipient of that contract is going to have to
go into the hourly market for more expensive power, but most
times it does not mean the lights actually go out.
Mr. Stearns. Mr. Richardson, you say that H.R. 2944
eviscerates FERC's jurisdiction over the transmission system.
Now, this is not what FERC told us yesterday. FERC told us that
H.R. 2944 codifies Order 888. So let's be clear what you are
asking here.
You want Congress to go beyond Order 888 and give FERC
jurisdiction over a larger part of the transmission system than
it is asserted in Order 888? Is that not correct?
Mr. Richardson. I do not believe so, Mr. Chairman.
There are a couple of issues here. One, I, frankly, get
rather confused when I look in that language in that section,
bundled and unbundled services. There are a couple of problems
that we have with----
Mr. Stearns. Just let me interrupt you for a second.
Mr. Richardson. Yes, sir.
Mr. Stearns. Just the way I laid the question out, do you
agree or not? Do you want me to read it again?
Mr. Richardson. Well----
Mr. Stearns. In other words, my question----
Mr. Richardson. Yes. Please do.
Mr. Stearns. Is that not correct? You are saying that----
Mr. Richardson. Second part, Mr. Stearns, the refunction-
alization issue that I mention in my testimony gives the
utilities the opportunity--and I think it is pretty well
documented in another item that I included with my testimony--
to remove facilities that are currently FERC jurisdictional by
refunctionalizing them from the function of transmission to the
function of distribution.
Now, that certainly diminishes the authority of the
Commission over facilities with respect to which they currently
do have jurisdiction.
Mr. Stearns. Okay. Has FERC been approving those
classifications?
Mr. Richardson. I am not sure of the status of those
classifications. The language of the--I can give you instances,
for example, in Wisconsin of a proposal to take nearly 80
percent of transmission out of FERC's jurisdiction, converting
it to State jurisdiction. There are other examples in the
article that I presented.
Of particular concern to us is the requirement that FERC
defer to those State commission decisions, and, as I believe
Ms. Church said a moment ago, there are concerns about
parochial treatment.
Mr. Stearns. Okay. Mr. Chairman, my time has expired.
I thought I would bring to the attention of the committee a
``USA Today'' advertisement on Friday, September 17, in which
there is probably no need for electric if this is true. It
says, ``Tired of high electric bills? How about no electric
bills? This machine will give you free electricity for the rest
of your life.''
Mr. Richardson. I will take two.
Mr. Stearns. It says it capitalizes upon the fourth law of
motion--now, to my knowledge there are only three--and it
utilizes energy previously thrown away so that you will have
free electricity for the rest of your life. So if anybody wants
a copy of this ad, here is an opportunity for free electricity.
Mr. Barton. TVA will be selling those in the lobby.
The gentleman from Mississippi, Mr. Pickering. Five
minutes. Questions only.
Mr. Pickering. Thank you, Mr. Chairman.
Let me just ask a number of the panelists the same
question. Let me first start with Mr. English.
Upon reviewing the draft in its current form, could you
support or would you oppose, and what are the three primary
concerns that you have with the legislation in its current form
that would need to be addressed to obtain your support if you
do not support it at this current time?
Mr. English. As I stated in my previous testimony, Mr.
Pickering, the thing that we are most concerned with is
unnecessary regulations with regard to achieving the goals
pertaining to the question of the regulatory burden under FERC.
We do have concerns. We do not really think it makes much sense
as far as merger authority under FERC.
We are concerned that in a restructured environment that we
have, in effect, electric cooperatives be able to provide all
the services that any other electric utility can provide, and
also we want to make sure electric cooperatives can work
together to be able to provide and meet the same needs,
particularly from a billing standpoint, that other electric
utilities can.
Mr. Pickering. Just a quick follow-up. How many of your
States or how many of your co-ops operate in States where there
is no State regulatory authority or jurisdiction at the present
time?
Mr. English. I would need to submit that for the record,
but roughly--I had better submit it for the record. I think it
is half to three-fourths, somewhere in that neighborhood.
Most States view electric cooperatives from the standpoint
that, since they are consumer-owned, they elect their own board
of directors from the consumers, they regulate themselves,
unlike other utilities.
Mr. Pickering. It has actually been a pretty good system,
hasn't it?
Mr. English. Worked extremely well. I am not aware of
complaints from States that provide for this process.
Mr. Pickering. I believe Mississippi is one of those.
Mr. English. It is, indeed.
Mr. Pickering. Let me ask Ms. Church the same question that
I first asked Mr. English.
Would you support or oppose the current draft? And what are
the three primary things that would need to be addressed if you
do not currently support the legislation?
Ms. Church. We believe, as I said before, there are a lot
of things in the bill that we really like; however, the three
provisions that we think give State commissions an undue
opportunity to intrude onto the interstate grid may lead us to
a position where we would not be able to support.
We do believe that those provisions, particularly the
distinction between bundled and unbundled, is a critical flaw
in the bill.
Mr. Pickering. And would you currently support the
legislation?
Ms. Church. We certainly support the passage of
legislation. We think it is needed. But we do think this bill
does need some revisions.
Mr. Pickering. Mr. Owens, would you support or oppose the
current draft?
Mr. Owens. I think the current draft needs some
refinements, and I would put them in probably two large
categories. One large category, I am certainly very troubled by
the aspects that deal with public power, the TVA, the
Bonneville, the co-op revisions, and the municipal provisions.
New generation and transmission should be subject to the
same rules. Subsidies should not be used to distort the
marketplace, so I would suggest a major improvement in that
area.
The second area that I am troubled about is the expansion
of FERC's authority, particularly with respect to the merger
provisions. I particularly believe it is unnecessary to have
FERC dabble in the area of retail competition issues.
Similarly, I do support flexibility in regional transmission
organizations.
And then, finally, I have some difficulty with the net
metering requirements in the bill which could be fine-tuned, as
well as the aggregation aspects, and then the inter-connection
requirements, the 50 megawatt standard and the requirement that
FERC can require that the distribution system be expanded.
Mr. Pickering. Thank you, Mr. Chairman.
Mr. Barton. Thank you, Mr. Pickering.
Mr. Wynn has arrived, and so we will yield to Mr. Wynn 5
minutes for questions.
Mr. Wynn. Thank you, Mr. Chairman.
Unfortunately, I did not have the opportunity to hear the
testimony, so it would probably be presumptuous to start asking
questions. I will defer.
Mr. Barton. It would be very Congressional for you just to
pitch right in.
Mr. Wynn. I am going to try to start a new precedent.
Mr. Barton. An informed questioner. How about that?
Is Mr. Ehrlich here?
Mr. Shimkus. He has left, Mr. Chairman.
Mr. Barton. Okay.
Mr. Shimkus. Mr. Chairman, may I just ask that we can get
some more questions submitted on the record----
Mr. Barton. Yes.
Mr. Shimkus. [continuing] for written response from the
panelists?
Mr. Barton. Yes. We are not going to do a second round of
questions.
Mr. Shimkus. Right. I understand.
Mr. Barton. Okay.
Congressman Tauzin asks unanimous consent on his behalf to
submit a statement for the record. Is there objection to all
members of the full committee, not just the subcommittee, being
given unanimous consent to put a statement in the record on
this issue?
[No response.]
Mr. Barton. Hearing none, so ordered.
Let me, before I release this panel, reiterate what I said
at the beginning.
We are going to have one more panel today. We are not going
to go to markup next week because of the pending markup of the
Superfund bill at the full committee, but it is the Chair's
intention, again, in consultation with Chairman Bliley and Mr.
Hall and Mr. Dingell, to try to schedule a markup the week
after that. So, all of these concerns that have been expressed
by this particular panel, we encourage you to do two things:
No. 1, put them in legislative language; No. 2, find a champion
on the subcommittee, preferably two champions, one on the
republican side and one on the democrat side, and submit them--
get your champions working, and then submit the language to
Congressman Hall and myself so we can review it, because I do
intend to put together a subcommittee substitute that we will
mark up the week after next.
So the time has come to stop being concerned and start
being constructive in putting these issues into language that
the subcommittee members on both sides of the aisle can take a
look at.
Again, thank you for your testimony. You are excused.
As soon as they have vacated the premises, we want to hear
from our second panel.
Lady and gentlemen, we welcome you to the subcommittee. We
are going to start with Mr. Brice and work our way through to
Mr. Segal. Each of your statements is in the record in its
entirety. We are going to recognize you to summarize it in 6
minutes, and we are going to start with Mr. Jack Brice, who is
a member of the board of directors of the American Association
of Retired--is it People or Persons?
Mr. Brice. We just say ``AARP'' now. We changed the name
legally.
Mr. Barton. So it is just----
Mr. Brice. But prior to that it was ``persons.``
Mr. Barton. Persons. Okay. AARP. We could say ``real
people.'' How about that? Anyway, we welcome you, sir, and you
are recognized for 6 minutes.
STATEMENTS OF RUTHERFORD ``JACK'' BRICE, MEMBER, BOARD OF
DIRECTORS, AARP; ELIZABETH ANNE MOLER, GENERAL COUNSEL,
AMERICANS FOR AFFORDABLE ELECTRICITY; MARK N. COOPER, DIRECTOR
OF RESEARCH, CONSUMER FEDERATION OF AMERICA; MARTY KANNER,
COALITION COORDINATOR, CONSUMERS FOR FAIR COMPETITION; RICHARD
H. COWART, DIRECTOR, REGULATORY ASSISTANCE PROJECT; TOM SMITH,
DIRECTOR, TEXAS PUBLIC CITIZEN; THOMAS R. CASTEN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER, TRIGEN ENERGY CORPORATION; AND SCOTT
H. SEGAL, ON BEHALF OF THE NATIONAL ALLIANCE FOR FAIR
COMPETITION
Mr. Brice. Good morning. We thank Chairman Barton and the
other members of the committee for inviting us to present our
views on the consumer protection provisions within H.R. 2944,
the Electricity Competition and Reliability Act.
We will confine our remarks to the provisions contained in
title III of the bill, as well as to the sections in title V
dealing with aggregation. However, as representatives of
residential consumers, we also share some of the concerns
surrounding the market power provisions voiced by other
panelists over the past 2 days.
In short, AARP wants to ensure that residential customers
benefit from competition, that strong consumer protection
provisions are in place, and that electric utility service is
available to all.
AARP believes that residential customers should benefit
from restructuring; unfortunately, residential customers are
simply not as attractive to utilities as industrial customers
are.
Mr. Chairman, we feel one means to strengthen the position
of residential consumers is through aggregation. Aggregation
will allow residential consumers to pool their respective
electricity needs, enabling them to negotiate lower rates from
a power provider and benefit from the outset.
AARP also supports a Federal role in facilitating
aggregation in States that have opened their markets to
competition.
H.R. 2944 recognizes the importance of aggregation, as
well.
The bill provides residential consumers with flexibility,
allowing that any entity that aggregates consumers may acquire
retail electric energy on an aggregate basis.
As we have suggested before, residential consumers would
further benefit if aggregation was offered on an opt-out basis.
The opt-out provision would ensure that a majority of under-
served consumers could reap the benefits of lower rates.
For competition in the electric industry to work, strong
consumer protection laws must be applied to the sale of
electricity in restructured industry. We are pleased that title
III of H.R. 2944 is devoted to addressing consumer protection
concerns.
Mr. Chairman, the anti-slamming and anti-cramming
provisions will go a long way toward addressing these abuses.
AARP is also pleased that the need for information
disclosure is increasingly understood by policymakers and
reflected in H.R. 2944. The bill includes provisions outlining
the kind of information that supplies must present to consumers
when offering services. Many of the details that we have urged
to be included in billing statements are included in this
section.
Further, the legislation clarifies that States may impose
additional requirements. This kind of consumer information
floor is what we have been seeking.
Further, we applaud Chairman Barton for striking a delicate
balance between the protection of individual privacy and the
need to make aggregate consumer information available to
promote competition.
AARP values the individual's right and ability to control
the movement of personal information. We are pleased that
provisions in H.R. 2944 recognize that right by requiring prior
written approval before personal information can be disclosed.
We also support the provision in H.R. 2944 that requires
local distribution companies to make aggregate consumer
information available to retail electric suppliers upon
request.
By facilitating the transfer of this type of information,
residential consumers are more likely to be offered choice.
While we are pleased overall with the consumer protection
provisions included in H.R. 2944, AARP would still like to see
a truth in billing requirement adopted to supplement the
information disclosure provision. AARP is concerned that, in a
competition environment, less-attractive customers will be
adversely affected.
H.R. 2944 recognizes universal service through a sense of
Congress, but places the full burden on a State to collect fees
and implement the program.
AARP believes that there is still a role for the Federal
Government in ensuring that electric service is provided to all
consumers.
AARP is pleased with the attention Chairman Barton has
devoted to residential consumers in H.R. 2944. The consumer
protection and aggregation provisions should benefit consumers,
but only if adequate market power provisions are put into place
to ensure that competition becomes a reality.
And, finally, AARP hopes that, as legislation moves toward
passage in the House, the provisions we have discussed today
remain intact or are improved. We urge this committee to
remember that residential consumers will benefit from
restructuring only if aggregation is facilitated, strong
consumer protection provisions are enacted, and electric
service is ensured for all.
Again, Mr. Chairman, we thank you for inviting us to
testify.
[The prepared statement of Rutherford ``Jack'' Brice
follows:]
Prepared Statement of Rutherford ``Jack'' Brice, Member, Board of
Directors, AARP
Mr. Chairman and Members of the Committee: My name is Jack Brice
and I am a member of AARP's Board of Directors. We thank Chairman
Barton and the other members of the Committee for inviting us to
present our views on the consumer protection provisions within H.R.
2944, the ``Electricity Competition and Reliability Act.'' We will
confine our remarks to the provisions contained in Title III of the
bill as well as to the section in Title V dealing with aggregation.
However, as representatives of residential consumers we also share some
of the concerns surrounding the market power provisions voiced by other
panelists today.
AARP's membership has a vested interest in the move towards
competition now underway in the electric utility industry. For
everyone, electricity is a basic necessity of modern life. The cost of
this necessity, however, can comprise a significant portion of an
average consumer's personal expenditures. In fact, energy costs can
take up to as much as 5 percent of the median-income household's
monthly budget. Older Americans are particularly vulnerable to rapid
increases in energy prices. Although older persons consume
approximately the same amount of residential energy as non-elderly
Americans do, they devote a higher percentage of total spending to
residential energy. Among low-income older families, an average of 17.5
percent of their income is spent on residential energy. Too often, low-
income older persons are faced with the choice of risking their health
and comfort by cutting back on energy expenditures or reducing spending
for other basic necessities.
In testimony AARP presented to this Committee earlier this year we
discussed generally our concerns surrounding the move to retail
competition. We questioned the claims that retail competition would
bring about substantial rate reductions for all ratepayers, including
the elderly. We also expressed hope that consumers would receive the
corollary benefits of the ability to shop among competitive providers,
and to take advantage of a new array of products and pricing options.
We concluded that the fate of residential consumers in a restructured
electric industry will depend on whether the new market structure gives
them a fair chance to receive the benefits of competition, ensures that
their interests are represented in the market, and provides fundamental
protections against abuse.
Residential ratepayers, and particularly older Americans, face very
significant risks--and few, if any, assured benefits--in the move to
retail competition in the electric power industry. These risks go
beyond the ability to benefit from choice. They also include risks
associated with confusion, deception and fraud.
AARP is pleased that H.R. 2944 addresses these risks. Our testimony
today will focus on how elements of Chairman Barton's bill support
AARP's goals to:
<bullet> Ensure that residential customers are among the first to
benefit from competition;
<bullet> Provide strong consumer protection provisions; and
<bullet> Establish a comprehensive universal service policy, including
a guarantee of affordability.
Residential Customers First
AARP believes that residential customers should benefit from
restructuring. Unfortunately, residential consumers are simply not as
attractive to utilities as industrial customers are. Discussions
between AARP staff and representatives of electric utilities,
industrial consumers and regulators have highlighted the fact that
residential consumers are not likely to reap the full benefits of
restructuring during the initial years of competition. The ability to
aggregate, however, will help to bring some benefit in the short-term.
Aggregation will allow residential consumers from like communities
or associations to pool their respective electricity needs, enabling
them to negotiate lower rates from a power provider and benefit from
the outset.
AARP supports a federal role in facilitating aggregation in states
that have opened their markets to competition. H.R. 2944 recognizes the
importance of aggregation as well. The bill provides residential
consumers with flexibility, allowing that any entity that aggregates
consumers may acquire retail electric energy on an aggregate basis. As
we have suggested before, residential consumers would further benefit
if aggregation were offered on an opt-out basis. The opt-out provisions
would ensure that a majority of underserved consumers could reap the
benefits of lower rates. Rep. Brown has introduced the concept of a
residential opt-out aggregation system in his ``Community Choice for
Electricity Act of 1999.''
Consumer Protection Laws
For competition in the electricity industry to work, strong
consumer protection laws must be applied to the sale of electricity in
a restructured industry. Low-income, non-English speaking and elderly
consumers, in particular, will need very strong consumer protections to
prevent abuse in the competitive market.
We are pleased that Title III of H.R. 2944 is devoted to addressing
consumer protection concerns. Attacking the problems of slamming and
cramming, while providing for information disclosure and privacy
restrictions is to be commended.
If enacted, the anti-slamming and anti-cramming provisions of the
Chairman's legislation will go a long way towards addressing these
abuses.
AARP is pleased that the need for information disclosure is
increasingly understood by policymakers and is reflected in H.R. 2944.
The bill includes provisions outlining the kind of information that
suppliers must present to consumers when offering services. Many of the
elements that we have urged be included in billing statements, such as
price information, description of charges, and information regarding
interruptibility of service are included in this section. Further, the
legislation clarifies that states may impose additional requirements.
This kind of ``consumer information floor'' is what we have been
seeking.
Further, we applaud Chairman Barton for striking a delicate balance
between the protection of individual privacy regarding information
exchange and the need to make aggregate consumer information available
to promote competition. AARP values the individual's right and ability
to control the movement of personal information. We are pleased that
the provisions in H.R. 2944 recognize that right by requiring prior
written approval before personal information can be disclosed.
We also support the provision in H.R. 2994 that requires local
distribution companies to make aggregate consumer information available
to retail electric suppliers upon request. By facilitating the transfer
of this type of information, residential consumers are more likely to
be offered choice.
While we are pleased overall with the consumer protection
provisions included in H.R. 2944, there are certain areas that need
further attention. In earlier testimony we detailed the importance of
adopting a ``Truth-in-Billing'' requirement to supplement the
information disclosure provision. AARP suggested that a comprehensive,
easy-to-read billing statement each month would help alleviate consumer
confusion, making consumers more likely to become participants in the
competitive marketplace. This provision is missing from H.R. 2944.
AARP also supports the creation of a consumer database housed at
the FTC to assist residential customers in obtaining information about
retail electric utility providers, including aggregators. Additionally,
the creation of an Office of Consumer Counsel within the FERC, as
outlined in an earlier draft, would assist consumers.
Finally, as large aggregators, utility companies and power
marketers are likely to operate on an interstate basis, it is incumbent
upon the Congress to ensure that they meet certain threshold
operational requirements and that deceptive, fraudulent or other
illegal behavior not be not tolerated.
Universal Service
As we have said previously, electric utility service is essential.
Therefore, one of the cornerstones in any restructuring effort is the
requirement that electric utility service be universal and affordable.
A universal service policy must ensure basic electric service at a
level of consumption that would meet the needs of residential
ratepayers for lighting, heating, cooling, cooking, and recreation. In
our view, affordability means that electricity rates do not strain the
household budget.
AARP is concerned that in a competitive environment, less
attractive customers may be adversely affected. H.R. 2944's only
recognition of universal service is through a ``Sense of the Congress''
provision. Unfortunately, such a declaration places the full burden on
the states to collect fees and implement the program. AARP believes
that there is still a role for the federal government in ensuring that
electric service is provided to all consumers. At a minimum, federal
involvement should include participation on a Federal-State Joint Board
that would oversee a program funded by a fee placed on all generators
of electricity.
Conclusion
AARP is pleased with the attention Chairman Barton has devoted to
residential consumers in H.R. 2944. The consumer protection and
aggregation provisions should benefit consumers, but only if adequate
market power provisions are put in place to ensure that competition
becomes a reality.
AARP hopes that as legislation moves toward passage in the House,
the provisions we have discussed today remain intact or are improved.
We urge this Committee to remember that residential consumers will
benefit from restructuring only if aggregation is facilitated, strong
consumer protection provisions are enacted and electric service is
ensured for all.
Mr. Chairman, the work that you have done to highlight many of the
inherent problems in the move to a deregulated environment is to be
commended. H.R. 2944 is a big step in the right direction. AARP looks
forward to continuing our active participation in this debate on both
the federal and state level and to working with you in crafting
solutions that will ultimately benefit not only our members, but the
nation as a whole.
Mr. Barton. Thank you, Mr. Brice.
We would now like to hear from The Honorable Betsy Moler,
the general counsel for Americans for Affordable Electricity
and a former deputy secretary of Energy and commissioner at the
FERC.
Ms. Moler?
STATEMENT OF ELIZABETH ANNE MOLER
Ms. Moler. Thank you, Mr. Chairman and members of the
subcommittee. It is a pleasure to be before the subcommittee
again today.
I am testifying on behalf of Americans for Affordable
Electricity, or AAE. AAE is a diverse coalition of over 200
member organizations. Their common bond is support of a more
competitive electric marketplace. We appreciate the opportunity
to testify.
AAE believes there is an urgent need for Congress to enact
legislation to modernize the laws governing this Nation's
electricity business. Many of the laws currently on the books,
as you have recognized, Mr. Chairman, are impeding progress
toward a more-competitive electric marketplace.
AAE supports customer choice. Since Chairman Bliley took
customer choice off the table, as he said, as a legislative
priority in this Congress, we have turned our focus to
improvements in the wholesale electricity marketplace that will
further competition.
My testimony today focuses on wholesale issues; however, I
do want to reiterate our support for customer choice, as well
as legislation that would give all customers the right to
aggregate their electricity purchases, whether or not they are
located in States that provide customer choice.
We believe that H.R. 2944 is a well-intentioned piece of
legislation; however, we do not support enacting it in its
current form because we believe it will serve to inhibit
competition, rather than to promote it.
In the brief time I have today, I want to focus on one
aspect of H.R. 2944 that is particularly troublesome, the
transmission jurisdiction provisions.
Section 101 purports to clarify the respective role of
Federal and State jurisdiction, but in doing so it creates new
barriers to competition. We need to have all transmission under
one set of rules, and we need to separate the transmission
function from the sales function in order to make electricity
markets more open and competitive.
Let me explain.
Section 101 clarifies that FERC has authority over
unbundled transmission of electric energy sold at retail, while
State regulatory authorities have authority over any bundled
sale of electric energy. This same standard is being applied
today, although it is being challenged in the DC circuit
litigation over Order 888.
In Order 888, FERC determined it had jurisdiction over so-
called ``unbundled transmission'' in interstate commerce by
public utilities. Thus, in States that have adopted customer
choice, the use of the transmission facilities is under FERC's
jurisdiction. However, the same type of facility is not under
FERC's jurisdiction in States that have not adopted customer
choice.
What does this mean in the real world? You have a crazy
quilt of jurisdictional lines. FERC has authority over
transmission lines in States that have adopted customer choice,
while State regulators have authority over exactly the same
type of facilities in States that have not adopted customer
choice.
Virginia, for example, has adopted customer choice
legislation, while West Virginia has not. The Virginia
transmission lines are subject to Federal regulation, while the
West Virginia lines are not.
This simply does not make sense any more. All transmission
lines that are part of the interstate network must be under
FERC's jurisdiction and subject to the same type of open access
requirements. Split jurisdiction over the interstate grid
simply does not make sense.
Based upon experience since Order 888 was issued, AAE
firmly believes that we need to put all uses of the interstate
transmission grid under the same rules. The same open access
tariff should apply to wholesale transmission transactions and
to both bundled and unbundled retail transmission.
We have submitted legislative language with my testimony
today to treat all transmission lines the same, whether they
are used for bundled or unbundled retail sales.
Let me explain and emphasize this is not back-door customer
choice. The text of the amendment makes it very clear FERC does
not have any authority to require customer choice. That choice
would remain with the States.
The amendment addresses two other issues we believe are
also critical. First, it would require all uses of the
transmission system to be under the same open access tariff.
Utilities would be required to take service under an Order 888
type tariff just like everyone else. That is not the case
today.
Second, it would require utilities to separate their
transmission and electric sales functions.
This approach is not some wild idea that we dreamed up
overnight. It is the same approach that FERC applies now for
natural gas pipelines.
Order 636 put all shippers under the same tariff and
required pipelines to separate their transmission and sales
functions. It works.
The proposal dovetails with the reliability section of the
bill. Frankly, I cannot reconcile the reliability section with
the provisions in section 101 that limit FERC's authority over
transmission lines.
Nothing is more critical to the Nation's economic well-
being than a reliable power supply. This is a classic
interstate commerce issue.
Individual States cannot guarantee reliability of the
interstate grid. FERC must have the authority to do so.
We urge the subcommittee members to take an evenhanded
approach to writing this vitally important piece of
legislation. We support restructuring legislation that will
address these anachronistic laws such as PUHCA and PURPA,
provided that new mechanisms are put in place to encourage open
competitive markets.
Thank you for allowing AAE to testify.
[The prepared statement of Elizabeth Anne Moler follows:]
Prepared Statement of Elizabeth Anne Moler on Behalf of the Americans
for Affordable Electricity
Mr. Chairman and Members of the Subcommittee: It is an honor to
appear before you today. My name is Elizabeth Anne Moler. I am a
partner in the law firm of Vinson & Elkins, L.L.P. I am testifying
today on behalf of Americans for Affordable Electricity, or AAE. AAE
represents over 260 member organizations; their common bond is support
of more competitive electricity markets. The diverse coalition includes
commercial, residential and industrial energy consumers, utility and
non-utility generators, power marketers, other energy providers,
citizens groups, school administrators, and others.
We appreciate the opportunity to testify on H.R. 2944, Chairman
Barton's recently introduced Electricity Competition and Reliability
Act.
AAE believes there is an urgent need for Congress to enact
legislation to modernize the laws governing this Nation's electricity
business. Much has changed since 1992 when Congress passd the Energy
Policy Act. Since then, events in the marketplace, and actions
undertaken by both Federal and State regulators have partially reshaped
this vital industry. Now inaction by the Congress is frustrating
further progress toward an even more reliable, efficient, competitve
industry for our Nation. Many of the laws currently on the books are
impeding progress toward a more competitive electricity marketplace.
AAE supports customer choice. We favor legislation that would give
all customers the right to choose their electricity supplier by a date
certain. Since Chairman Bliley took customer choice ``off the table''
as a legislative priority for this Congress, we have turned our focus
to improvements in the wholesale electricity marketplace that will
further competition. Most of my testimony today focuses on wholesale
issues. However, I want to reiterate our support for customer choice as
well as legislation that would give all customers the right to
aggregate their electricity purchases whether or not they are located
in states that provide customer choice.
We believe that H.R. 2944 is a well intentioned piece of
legislation. However, we do not support enacting it in its current form
because we believe it will serve to inhibit competition rather than
promote it. In the brief time I have today, I want to focus on one
aspect of H.R. 2944 that is particularly troublesome. Section 101
purports to ``clarify'' the respective role of federal and state
jurisdiction. But in doing so it erects new barriers to competition. We
need to have all transmission under one set of rules. And we need to
separate the transmission function from the sales function in order to
make electricity markets more open and competitive. Let me explain.
Section 101 would clarify that the Federal Energy Regulatory
Commission (FERC) has authority over ``unbundled transmission of
electric energy sold at retail'' while state regulatory authorities
have authority over ``any bundled retail sale of eletric energy, to any
local distribution service component of any unbundled retail sale of
electric energy, or to any retail sale component of any unbundled
retail sale of electric energy''.
What would this mean in the real world? You would have a crazyquilt
of jurisdictional lines where FERC would have authority over
transmission lines in states that have adopted customer choice, while
the state regulators would have authority over exactly the same type of
facilities in states that have not adopted customer choice. Virginia,
for example, has adopted customer choice legislation while West
Virginia has not. The Virginia transmission lines would be subject to
Federal regulation while the West Virginia lines would not. It would
make more sense to have all transmission lines that are part of the
interstate network be under FERC's jurisdiction and subject to the same
type of open access requirements. Split jurisdiction over the
interstate grid just doesn't make sense.
Frankly this crazyquilt exists today and is causing significant
problems in wholesale markets. FERC Order No. 888, issued in April,
1996, required utilities to ``open up'' their transmission lines. They
were required to file open access transmission tariffs and to take
transmission service for their own new wholesale sales under the
tariff. The Commission determined that it had jurisdiction over so-
called ``unbundled'' transmission in interstate commerce by public
utilities. Thus, in states that have adopted customer choice, the use
of transmission facilities to serve retail customers is under FERC's
jurisdiction. However, the same type of facility use is not under
FERC's jurisdiction in states that have not adopted customer choice.
(The Commission's determination that it lacked jurisdiction over the
transmission aspects of bundled retail sales is being challenged
today--3\1/2\ years later--in the Order No. 888 litigation that is
before the D.C. Circuit.) Based upon our experience since Order No. 888
went into effect, AAE firmly believes that we need to put all uses of
the interstate transmission grid under the same rules. The same open
access transmission tariff should apply to wholesale transmission
transactions, and to both bundled and unbundled retail transmission.
We are submitting an amendment as an attachment to my testimony
that would treat all transmission lines the same, whether they are used
for bundled or unbundled sales. Let me emphasize that this is not
``back door'' customer choice. The text of the amendment makes it very
clear that FERC does not have any authority to require customer choice;
that choice would remain with the states.
The amendment addresses two other issues that we also believe are
critical. First, it would require all users of the transmission system
to be under the same open access transmission tariff. Utilities would
be required to take service under an Order No. 888-type tariff, just
like everyone else. Second, it would require utilities to separate
their transmission and sales functions.
This approach is not some wild idea that we thought up overnight.
It is the same approach that FERC uses for natural gas pipelines. Order
No. 636 put all shippers under the same tariff, and required the
pipelines to separate their transmission and sales functions. It works.
States still have the authority to determine whether to adopt customer
choice; some have while others have not. The natural gas marketplace is
truly open and competitive. Congress should ensure that electricity
markets are equally efficient and competitive.
This proposal will also enhance the usefulness and effectiveness of
other provisions in H.R. 2944. This is particularly true for the
reliability section. Title II gives FERC jurisdiction over a new
electric reliability organization. The reliability organization is
charged with the responsibility of developing binding reliability
``organization standards'' for the ``bulk-power system''.
Frankly, I cannot reconcile the reliability section with the
provisions in Section 101 that limit FERC's authority over transmission
lines. Nothing is more critical to the Nation's economic well being
than a reliable power supply. This is a classic ``interstate commerce''
issue. Individual states cannot guarantee reliability of the interstate
grid; FERC must have the authority to do so.
Section 103 requires all transmitting utilities to join a Regional
Transmission Organization (RTO). AAE has not taken a position on this
particular proposal. However, RTOs will be much more effective if FERC
has authority over all transmission lines, not just those used for
wholesale transactions and unbundled retail transactions.
The aggregation issue is also important. In the absence of a date
certain for customer choice, AAE advocates allowing customers in both
``open'' and ``closed'' states to aggregate their purchases. The ABC
grocery store chain, or the RAH RAH university alliance, should be able
to aggregate their purchasing power to purchase electricity for
multiple locations in multiple states. Without such a provision millons
of residential and commercial customers will be unable to enjoy the
benefits that competition will bring and H.R. 2944 should provide.
AAE supports legislation that will address these vitally important
transmission market power issues. Our July 22 testimony addressed
PUHCA, PURPA, grid management and reliability. Our position on those
issues remains the same.
We urge the Subcommittee Members to take an even-handed approach to
writing this vitally important piece of legislation. We support
restructuring legislation that will address anachronistic laws, such as
PUHCA and PURPA, provided that new mechanisms are put in place that
encourage open, competitive markets.
Thank you for allowing AAE to testify.
Mr. Barton. You are very welcome. We are just delighted
that you testified, and we liked your testimony, actually. Do
not agree with it all, but we liked the way you gave it.
We are going to hear from Mr. Mark Cooper, who is director
of research with the Consumer Federation of America.
STATEMENT OF MARK N. COOPER
Mr. Cooper. Thank you, Mr. Chairman. And I also speak today
on behalf of Consumers Union, who has signed onto our
testimony.
With well over half the electricity in this Nation sold in
States that have restructured their industry, consumers'
electricity bills will be increasingly determined by the actual
performance of markets. Unfortunately, the promise of lower
prices and more choices at the State level is being undermined
by the failure of the interstate market to support effective
competition.
Only Federal authorities can order and oversee the
interstate market, we believe, according to seven principles.
We fear that the legislation before the committee will
deregulate the industry without de-monopolizing it. Unless
amendments are made, it will make matters worse, not better,
because consumers will be denied the benefits of competition
while they are subject to abuse of market power by incumbent
utilities who are no longer restrained by regulation.
The seven principles are straightforward, and I will
deliver these in seven sentences, because they are simple
amendments.
Federal legislation should make a clear commitment to
universal service, defined as the availability to all Americans
of electricity services at rates that are just, reasonable and
affordable.
Market power and generation must be eliminated. Federal
authorities must ensure that generation markets are free of the
exercise of market power. Simply put, antitrust authorities,
who already have broad powers to oversee these markets, should
make an affirmative finding that the market is competitive,
workably competitive, before they are deregulated. Simple
finding.
Third, open highways of commerce are necessary. The
authority of the Federal Energy Regulatory Commission to
require the national grid be operated in a reliable and open
manner must be clarified and sharpened. All utilities should be
required to participate in transmission organizations that have
no interest in generation or energy service markets and include
representatives of all customer classes.
Fourth, residential consumer sovereignty must be promoted.
Federal legislation should require States to facilitate
aggregation. At the very least, it should require that no State
or local statute prohibit or hinder consumers from aggregating
their purchase of electricity to all types of organizations,
including cooperatives and units of local government.
Fifth, all consumers should benefit from competition. No
utility should have the opportunity to enjoy the benefits of
competition outside of its service territory until consumers
within its service territory also have the benefits of
competition. Before a company enjoys the benefits of being
provided relief from Federal regulations, at home it should
ensure that its own markets are open to competition.
Competition is the replacement for regulation.
Sixth, financial transactions must be sound. Basic
oversight has to be applied to financial transactions and
commodity markets on a national basis, such as certification
and licensing of brokers, and establishment of margin
requirements, which should be imposed on electricity as a
commodity, which is, in fact, a very, very special and precious
commodity.
Seven, electricity restructuring should not result in any
degradation in environmental quality. Congress should ensure
that performance standards, portfolio requirements, whatever
instruments you prefer should be available to ensure that, as a
result of the increase in production from certain facilities,
there is no resulting degradation in the environment.
Those are seven principles. I believe we can state those
very, very clearly and specifically, and that is the way we
think the interstate market should be----
Mr. Barton. It was more than seven sentences though. I lost
count at about 20. But they were seven principles.
Continue with your statement.
Is it concluded?
Mr. Cooper. Thank you, Mr. Chairman.
[The prepared statement of Mark N. Cooper follows:]
Prepared Statement of Mark N. Cooper on Behalf of Consumer Federation
of America and Consumers Union
Mr. Chairman and Members of the Committee, my name is Dr. Mark N.
Cooper. I am Director of Research at the Consumer Federation of
America. I appreciate the opportunity to appear before you today to
offer our views on federal legislation to restructure interstate
electricity markets. Consumers Union joins in these views.<SUP>1</SUP>
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\1\ Consumer Federation of America is the nation's largest consumer
advocacy group, founded in 1968. Composed of over 250 state and local
affiliates representing consumer, senior citizen, low-income, labor,
farm, public power, and cooperative organizations, CFA's purpose is to
represent consumer interests before the congress and the federal
agencies and to assist its state and local members in their activities
in their local jurisdictions.
Consumers Union is a nonprofit membership organization chartered in
1936 under the laws of the State of New York to provide consumers with
information, education and counsel about goods, services, health, and
personal finance; and to initiate and cooperate with individual and
group efforts to maintain and enhance the quality of life for
consumers. Consumer's Union's income is solely derived from Sale of
Consumer Reports, its other publications and from noncommercial
contributions, grants and fees.
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legislation is necessary to ensure effectively competitive interstate
markets
With well over half the electricity in the nation sold in states
that have restructured their industries, consumers' electricity bills
will be increasingly determined by the actual performance of
electricity markets. This unparalleled transition for an industry that
is so vital to the national economy and has such a large impact on
consumer pocketbooks must be made to result in a market that will truly
benefit American consumers. Unfortunately, the promise of lower prices
and more choices at the state level is being undermined by the failure
of the interstate market to support effective competition.
In order for any market to function properly there must be an
effective supply-side, an effective demand side, and open highways of
commerce in between so that transactions can take place. The interstate
market is failing consumers and competitors in all three areas. These
market failures allow incumbent utilities to preserve their monopoly
and frustrate the flow of competitive electricity.
The objective of restructuring is to replace traditional regulation
with market forces. In many instances, however, consumers have been
hurt because regulation has been removed before market competition
exists. The result has been the unfettered exercise of market power.
Evidence of the abuse of market power in interstate markets is
abundant. Electricity has been withheld from markets to inflate prices.
Electricity has been hampered from flowing across state borders by
self-interested foreclosure of transmission facilities. Manipulation of
financial transactions and speculative deals have driven prices far
above reasonable levels at critical moments. Barriers have been erected
by some states that prevent consumers from effectively expressing their
demands in the marketplace.
Federal legislation is critically necessary to correct this series
of dramatic failures. Only federal authorities can order and oversee
the interstate market. The market must be restructured according to
seven principles.
<bullet> A commitment to universal service
<bullet> Elimination of market power in generation
<bullet> A reliable national grid operated on principles of non-
discrimination
<bullet> Meaningful choice for residential consumers
<bullet> Equal opportunity all consumers to benefit from competition
<bullet> Sound financial transactions
<bullet> Environmental preservation
universal service must be ensured and enhanced
The ultimate goal of restructuring in the electric utility industry
should be to ensure and promote universal service in a more efficient
manner than at present. Affordable and reliable service to the public
is the ultimate goal; competition is the means to that end. Federal
legislation should make a clear commitment to universal service defined
as the availability to all Americans of a reasonable level of
electricity service at rates that are just, reasonable and affordable.
market power in generation must be eliminated
As the transition to competitive markets begins, incumbent
utilities still dominate the generation market in many areas and at
critical peak periods when supplies can become extremely tight. Federal
authorities must ensure that the generation market is competitive and
free from the exercise of market power. Antitrust authorities have
broad powers to prevent the abuse of market power. The Federal Trade
Commission should be required to make an affirmative finding that
markets are workably competitive before federal regulatory authority is
relaxed.
open highways of commerce are necessary
At this point in time, many incumbent utilities still own
generation and the transmission system, which provides opportunities
for vertically integrated monopolies to use their market power in
transmission to foreclose others from competing in the generation
market. Separating ownership of generation from transmission and
distribution is the best method of preventing abuses. Independent
operation and control over the transmission network is necessary to
ensure reliability and open, non-discriminatory access to the
transmission system for all parties.
The authority of the Federal Energy Regulatory Commission to
require the national electricity gird to operate in a reliable and open
manner needs to be clarified and sharpened. All utilities should be
required to participate in transmission organizations that have no
interest in generation or energy service markets and include
representatives of all customer classes on the governing board. The
infrastructure for the market must be competitively neutral and
operated as a common carrier. The boundaries for these transmission
organizations should be dictated by the scope of regional markets of
sufficient scale to promote competition.
residential consumer sovereignty must be created
In order for consumers to have the opportunity to benefit from the
competitive marketplace for electricity they must have the ability to
make informed choices. Aggregation is crucial to creating an
alternative for residential consumers; education is crucial to
effective choice.
Federal legislation should require states to facilitate
aggregation; at the very least, it should require that no state or
local statute should prohibit or hinder consumers from aggregating
their purchases of electricity. Therefore, federal legislation should
require that no state or local statute or regulation or other state or
local legal requirement prohibit or have the effect of prohibiting the
ability of consumers to aggregate their demand through all types of
organizations including cooperatives and units of local government.
Instrumental in the ability of consumers to benefit from a
competitive market is the ability to make informed choices. Information
must be provided in a readily understandable manner that allows
consumers to make comparisons between sellers in terms of price, terms
and conditions (such as fees, contract terms and minimum payments), the
services that are being provided and the type of electricity that is
being used. Post-purchase remedies must be facilitated by clear
identification of the seller, provision of a toll-free telephone number
and policies to prevent abusive marketing practices, such as slamming,
cramming and the bundling of regulated and unregulated services.
equal opportunity for all consumers to benefit from competition must be
provided
No utility should have the opportunity to enjoy the benefits of
competing outside of its service territory until the consumers within
its service territory have the opportunity to benefit from competition.
Before a company may enjoy the benefits of being provided relief
from regulations intended to promote the public interest, such as PURPA
and PUHCA, there should be a showing that the generation market in
which they are based is competitive. If they are not subject to
competition at home, the potential abuses that these statutes were
intended to prevent remain a threat to consumers.
financial transactions must be sound
Markets must have confidence in the financial transactions that
trigger the exchange of goods and services. The electricity market has
been plagued by defaults, questionable deals (daisy chains) and
misleading transactions. Prices have not been transparent. Terms and
conditions have been unclear. Electricity is unlike most other
commodities in that it cannot be stored and moves according to unique
physical laws. When financial transactions break down, the electricity
market can be severely disrupted.
The basic oversight that is applied to financial and commodity
markets--such as certification, licensing and bonding of sellers,
establishment of margin requirements, regulation of financial
instruments and disclosure of transactions, publication of prices,
etc.--should be applied to the electricity commodity market by an
existing federal financial agency. A study of additional steps
necessary to ensure the smooth functioning of the electricity market
should be conducted.
environmental preservation
Electricity restructuring should not result in any degradation in
environmental quality. Reliance on market forces may increase the use
of generation resources that do not directly bear the full cost of the
environmental burden they place on society (i.e. they impose negative
external environmental costs). Congress should ensure, through
performance standards, portfolio requirements, credit trading, or
direct funding that environmental quality is preserved and improved.
Mr. Barton. Okay. Thank you.
We want to now hear from Mr. Marty Kanner, who is the
coalition coordinator for the CS for Fair Competition, which is
different than the Americans for Affordable Electricity. See,
we have all these good groups here before us today.
So we will put your statement in the record and encourage
you to summarize it in 6 minutes, please, sir.
STATEMENT OF MARTY KANNER
Mr. Kanner. Certainly, Mr. Chairman. And, if nothing else,
your efforts have fostered a plethora of organizations,
coalitions, and initials.
I would like to start my testimony, Mr. Chairman, with the
concluding statement from the executive summary of EEI's
testimony. ``As long as consumers have a choice of suppliers
and no company can manipulate prices or shut out other
competitors, consumers will find the best combination of prices
and services to meet their needs.'' Mr. Chairman, I could not
agree more strongly that that is exactly the end state that we
seek to achieve. The difference, however, is quite sharp.
Edison Electric Institute and their members and many of
their members and allies would argue that we simply step away
and let the markets take care of themselves. I think we would
all agree that the financial markets--the New York Stock
Exchange is one of the best examples of free markets anywhere
in the world, but I do not think we would say that Morgan
Stanley, Michael Milken, and the Bass brothers should be able
to regulate the system on their own; that we need the SEC as an
oversight agency to ensure there is not market manipulation,
consumer and investor abuse, or other things antithetical to
that competitive end state that we seek to achieve.
A number of you have asked important questions that I would
like to answer.
Mr. Shimkus asked whether RTOs can mitigate horizontal
market power, and the answer, Mr. Chairman, is absolutely yes,
but we need to make sure that those RTOs, in fact, are
independent, have clear and robust authorities, and are of
geographic scope that achieves the desired aim.
Mr. Chairman, the provisions in your bill I believe do not
achieve that objective, because they allow the transmission
owners to continue to set the rules of the market and do not
have that independent authority to look at it and say, ``No,
not good enough.'' And then, second, as a number of witnesses
have suggested, even if we create the perfect RTO, if we remove
from the jurisdiction of those facilities a vast share of the
transmission lines in the country, then we do not have that
open highway of commerce that most of us believe is necessary.
Another question was whether there are examples of
generation market power. The answers are clearly yes. In
California, where they have opened retail markets, after doing
so and where, Mr. Chairman, as you noted, generation assets
were divested, you had substantial price increases, you had the
State-created ISO and State-created power exchange, as well as
the investor-owned utilities that used to own the generation go
to the Federal Energy Regulatory Commission and say, ``There is
an exercise of generation market power.'' The State, itself,
had no authority to control and regulate those price spikes,
and, had there not been price caps in place, consumers would
have seen a doubling of their monthly electric bills.
Those are the sorts of examples we want to avoid, not
institutionalize.
You asked, Mr. Chairman, if States can do it alone, and you
noted that a number of States have required asset divestiture.
While that is true, I note that in the main the objective in
those divestiture examples was to create evaluation for
stranded cost recovery, not to address market power.
The effect was that assets were bundled and you just
changed the name of the owner. You still had the same
concentration levels in those relevant power markets. We did
not divvy up the pie, if you will.
One important exception, however, is your State of Texas,
where they expressly said, ``We want to make sure that we have
competitive generation markets,'' and created some mechanisms
that I believe form a very workable model at the national
level, that we say we want to make sure the generation markets
are competitive.
Have the utilities file their own mitigation plans, and
then have an impartial third party look over those and
determine whether they are acceptable or not.
Mr. Chairman, I would encourage you to provide for all
consumers the competitive benefits and choices that it looks
like consumers in Texas will be able to have.
Mr. Chairman, as it has been noted by several witnesses, we
need legislation. The current market is not properly
functioning, and those retail markets that have opened up won't
realize the benefits that those States tried to create if we do
not, in fact, have a competitive market structure.
Consumers for Fair Competition has put together model
legislation to address these issues. We would encourage you and
your staff to review those and work cooperatively with us and
the members of the committee to make sure that the intended
benefits of a competitive market are, in fact, realized.
[The prepared statement of Marty Kanner follows:]
Prepared Statement of Marty Kanner on Behalf of Consumers for Fair
Competition
Mr. Chairman, Members of the Subcommittee, I am Marty Kanner. I am
testifying today on behalf of Consumers for Fair Competition (CFC), a
coalition of small business interests, power marketers, consumer and
investor owned utilities, small and large electric consumer
representatives and environmentalists. Chairman Bliley has repeatedly
called for putting consumers front and center in the restructuring
debate, and the members of CFC want Congress to pass legislation that
will enable electric consumers to realize the benefits of competition.
As underscored by a recent letter sent to Congress by more than 100
organizations, which I have attached to my testimony, legislative
action is imperative to correct the significant failures in the
wholesale electric market and create the open highway of commerce
needed for state retail competition efforts to succeed.
As I have testified before, this is not an infant industry in which
business success is decided by innovation, entrepreneurial prowess and
efficiency. We are attempting to restructure an industry of government-
sanctioned monopolies that control the vast majority of generation,
transmission and distribution facilities and associated customer
information. Despite the Energy Policy Act and other efforts to infuse
competition in the wholesale market, the reality is that there is not
robust competition in the market today:
<bullet> System constraints and market manipulation have caused wild
price volatility and price spikes that--had retail consumers
not been insulated by price caps--would have led to outrageous
electric bills and an outcry for action;
<bullet> Large, vertically-integrated utilities have a chokehold on the
transmission system and all users and uses of the grid don't
operate under the same tariff;
<bullet> Many regional power markets are dominated by a single or small
handful of players, that can dictate prices and shut out
competitors;
<bullet> The continuing wave of utility mergers are likely to
accelerate this consolidation; and
<bullet> Utilities continue to leverage ratepayer-provided funds and
resources to enter new business lines through unregulated
affiliates that compete unfairly with small and large
businesses.
As CFC has previously testified before this subcommittee, Congress
must pass legislation to achieve a market in which these structural
flaws are remedied so that consumers have many choices, competitors are
not unfairly disadvantaged, and competitive market forces prevent
consumer abuse and market manipulation.
H.R. 2944, if enacted in its current form, would not create the
vibrant competitive market that consumers want and need. In fact, it
would be a step backward.
Transmission
The nation's transmission grid is the highway of commerce. Even in
the states that have adopted retail competition, consumers won't be
able to effectively choose among suppliers if those suppliers cannot
gain access to the market. Despite the progress made in the Energy
Policy Act of 1992, the transmission network remains a two-class
system, with transmission owners granting themselves first-class
service while competitors are relegated to the end of the line. All
users of the transmission grid must operate under the same tariff and
have the same tariff choices.
Today, each utility's transmission network, despite a certain
amount of reliability coordination, is operated largely as if it were
an isolated island. This unnecessarily constrains and contracts
markets. By acting in their own self-interest, owners can:
<bullet> reserve the majority of transmission capacity for their own
use (which use is not effectively subject to FERC comparability
standards);
<bullet> hide retail and wholesale charges in bundled rates and create
a lack of transparency in the transmission market;
<bullet> operate the system to favor its own (or affiliates') wholesale
or retail marketing function,
<bullet> take actions ostensibly for reliability purposes--such as
congestion management and emergency curtailment procedures--in
a discriminatory and anti-competitive manner,
<bullet> impede the development of and sales by competing power
suppliers; and
<bullet> fail to make transmission investments that would alleviate
congestion and promote the competitive market.
Provisions in Section 101 of H.R. 2944 erode existing transmission
access standards and drastically reduce the amount of transmission that
would even be part of the interstate grid. A recent decision in the 8th
Circuit has crippled FERC's vaunted ``comparability'' standard. Section
101 would codify this decision by granting the states exclusive
jurisdiction over bundled transmission service. Such action effectively
limits application of open access policies to the 10-15 percent of
transmission capacity that are surplus to a utility's own needs.
The impact of this provision on bundled transmission service is
compounded by subsection (h) which facilitates the reclassification of
transmission facilities as distribution--outside the scope of
comparability requirements. Such reclassification can also result in
discriminatory cost-shifting to entities receiving service on these
reclassified lines.
Combined, these provisions dramatically shrink the transmission
network and cripple interstate commerce. It would be like allowing
parts of the interstate highway system to be reclassified as county
roads that then have toll gates erected. If these provisions are not
changed, even the most robust RTO provision would not create the open
system needed for competitive electricity markets.
Unfortunately, H.R. 2944 does not advance effective RTOs.
CFC believes that control of the nation's transmission system must
be transferred to truly independent bodies that encompass the broadest
geographic regions and have strong authority to operate, plan, maintain
and expand the transmission system. Such entities must provide for the
functional separation of the monopoly transmission and market
functions. It is imperative that all users of the system have equal,
and non-discriminatory access to the nation's grid.
The provisions of section 103 do not break the utility stranglehold
on the transmission system nor foster the open markets that must be
achieved:
<bullet> Utilities are allowed to structure RTOs to serve their own
interests rather than having an independent referee promote
RTOs based on the interests of the market. Section 103 fosters
a ``take it or leave it'' approach. While utilities are
required to establish or join an RTO and the FERC is given
standards by which to judge these filings, the Commission
cannot require formation of or participation in an RTO if the
filing fails to meet the standards. Thus, utilities could file
inadequate RTOs and FERC is left with the choice of accepting
``half a loaf'' or rejecting the filing and retaining the
flawed status quo.
<bullet> The bill doesn't foster true independence. By allowing 10
percent voting interests to pass the ``independence'' test, a
small handful of utilities within an RTO can hold a majority of
the voting interests. This is hardly a separation of the
ownership and control of transmission and generation and
creates a loophole that guts the underlying purpose of the RTO.
<bullet> Bill encourages, small, numerous RTOs. H.R. 2944 encourages
smaller, more numerous RTOs that will encourage ``pancaking''
rates and increase costs for consumers.
<bullet> RTOs would become an exclusive club. The provision allows
transmission owners to shut out new market entrants, end-users
and transmission dependent utilities from the RTO process.
<bullet> The RTOs responsibilities are limited--we cannot allow
monopolists to set the rules of the market. The provision
allows RTOs that have no meaningful authority, simply
administering rules and procedures established by the
transmission owners. The provision fails to provide authority
over associated generation that is essential for transmission
regulation. Moreover, the bill is silent on which entity--the
RTO or the transmission owner--will calculate available
transmission capacity and reserve requirements and implement
curtailment and reliability procedures.
<bullet> Transmission incentives send the wrong signal. Cost based
pricing is the proper norm for monopoly services. We do not
believe that incentive rates are needed or appropriate to
induce formation of RTOs, eliminate rate pancaking, or minimize
cost-shifting. The failure to invest in transmission has more
to do with the strategic and financial value in sustaining
transmission bottlenecks than the lack of ``incentives''. While
congestion pricing can be used to reflect true transaction
costs and encourage new investment, utilities should not be
rewarded for providing an essential, monopoly service.
Transmission incentives are not needed.
Failure to provide an open highway of commerce, in which all users
operate under the same tariff and have the same tariff choices, will
raise rates, frustrate competition and lead to the further
balkanization of the system.
Market Concentration
In the electric generation market, market boundaries are determined
largely by transmission constraints--physical limitations on transfer
capabilities. Within these boundaries, it is common for an incumbent
utility to own more than 40 percent of the generating capacity. At this
level of concentration, economists recognize that the dominant firm can
set and control prices above what would occur in a truly competitive
market.
Despite a significant increase over the past few years in the
construction of non-utility generation, such facilities still represent
a comparatively small fraction of total generation. Moreover, potential
developers of such facilities often face a diverse set of entry
barriers. For example, incumbent utilities displace competitors in the
queue to connect new power plants to the grid. They also own the prime
sites for future plant location (often adjacent to existing plants). In
addition, in many states, only utilities themselves can request and
receive the necessary regulatory permits. Even if new, independent
plants can be built, it will be years--and there will need to be
considerable growth in demand--before competitive suppliers will break
the lock of the dominant player and markets will begin to operate
competitively.
CFC supports the provisions of the DeLay-Markey bill of last
Congress, which grants FERC affirmative authority to investigate and
remedy undue concentration, as an effective means for addressing this
problem. Alternately, Mr. Chairman, your state of Texas adopted
provisions that provide a workable model for federal legislation. We
would encourage you to provide consumers throughout the nation the same
assurances of competitive generation markets that Texans will enjoy.
In addition, Congress must eliminate discriminatory standards for
interconnection with the grid. We cannot allow utilities to advantage
their own generation projects to the detriment of new market entrants.
Mergers
The various procedural limitations on merger review established by
H.R. 2944 effectively eliminate meaningful review.
There are certainly potential utility mergers that do not warrant
timely and extensive review. However, for many mergers, the time limits
and elimination of hearings and cross-examination will severely limit
the ability to analyze the competitive impact of the proposed merger.
While there are time limits under the anti-trust laws in merger
reviews, I would highlight that those same laws have robust data filing
and discovery requirements.
We would urge you to delete the procedural limits in H.R. 2944. If
the merger review process is to be truncated, then data filing and
discovery requirements analogous to that which exists under the anti-
trust laws must be established.
Affiliate Transactions
By straddling regulated and unregulated markets, utilities can
cross-subsidized their competitive, unregulated activities with
revenues and resources provided by captive ratepayers. Not only do such
actions harm consumers, they harm the countless small and large
businesses that the utilities unfairly compete against.
The information disclosure and consumer privacy provisions of H.R.
2944 are important steps in addressing some of the underlying problems
in affiliate transactions. However, more is needed. While state
commissions can review and regulate the practices of utility affiliates
providing energy services, they are unlikely--or often unable--to
review the activities of utility affiliates in energy related
enterprises targeting residential and commercial markets for
electrical, mechanical, air conditioning and heating and fuel supply
markets. State Commissions already act on behalf of consumers. Now they
need the direction and authority to act on behalf of existing
competitors in a deregulated retail energy market.
Congress recognized the need to prevent anti-competitive cross-
subsidization in the 1996 Telecommunications Act. Congress should not
set a lower standard of fair competition for the energy market than it
did for the telecommunications market. CFC urges Congress to prohibit
cross-subsidization, adopt model structural and behavioral standards
for state commissions and establish a cause of action for abusive
affiliate practices. We believe the limitation on books and records
under the PUHCA provisions are a step in the wrong direction.
Conclusion
The current system is not working, and action is needed to correct
market deficiencies and promote competition.
Congress must make a clear choice: advance the interests of
monopolists, or the interests of consumers and competition. These are
not issues that can be balanced or compromised. In order to achieve the
benefits of competition, we must eliminate the anti-competitive
vestiges of the old, regulatory system.
Mr. Chairman, we appreciate your openness to improving amendments
and look forward to working with you and the members of the Committee
to develop a bill that advances a competitive electric marketplace.
Mr. Barton. Thank you, Mr. Kanner.
We would now like to hear from Mr. Richard Cowart, who is
the director of the Regulatory Assistance Project.
Mr. Cowart?
STATEMENT OF RICHARD H. COWART
Mr. Cowart. Thank you, Mr. Chairman.
I guess I should emphasize that I speak today as someone
who for 12 years sat as the Chair of a State Public Utility
Commission, and my views are my own.
As is obvious to the members of the committee, the subject
of electric restructuring is no longer a theoretical one. The
States have clearly been the laboratories of democracy in this
transformation, and the good news now is that Congress can
learn from what has been going on throughout the Nation.
A review of this bill reveals that much has been learned
from the policy debates and experiences of the States.
Provisions in the bill on consumer protection, electric
product disclosure, net metering, and a number of the
transmission and reliability provisions are commendable. In
other areas, though, it seems that key lessons from recent
experiences around the country are not being dealt with in
Congress.
In particular, the draft bill does not adequately address
the challenges we now face in maintaining environmental
quality, universal service, and electric system reliability.
And in my short time with you today I am going to focus on
reliability.
We know that this is the most important goal of the
American electric system. Customer polls consistently reveal
that keeping the lights on reliably is the top priority that
people have for the electric system, and it is the No. 1
concern that they have about industry restructuring.
In recent months, it has become clear that the reliability
of the Nation's electric system is under great strain. Outages,
power warnings, price spikes, rolling brownouts--I think you
know the litany of events that have occurred in all regions of
the country over the past 2 or 3 years, and particularly during
the summer peak periods.
The North American Electric Reliability Council, which
likes to speak quietly on such things, is starting to warn that
we face a real reliability problem, and I heard Mr. Nevius say
this morning that we need reliability legislation now.
The common response to the events that we are discussing
here has been a call for more construction of more energy
supply facilities--90,000 megawatts, 100,000 megawatts, 120,000
megawatts of new generation is often called for--along with the
accompanying gas pipeline capacity and electric transmission
capacity to serve this growth in output and throughput.
But there really are three elements to the equation, and
the bill only deals with two of them. The three elements are:
generation, transmission, and end uses. We need to focus for a
moment on the end use issues.
The reliability problem that we now face is, in large
measure, the result of rapid load growth over the past decade,
coupled with a serious falling off in efficiency and demand
side management measures by the Nation's utilities.
According to the EIA, electric consumption grew by 31
percent over the past decade. In the critical summer peak
period, growth has even been more dramatic--a 56,000 megawatt
increase between 1993 and 1997, alone.
This is the electrical equivalent of adding the entire six-
State region of New England to the Nation's peak demand every
18 months, and that process is continuing.
Unfortunately, while this demand has been rising, utilities
have been dramatically reducing their investments and their
achievements in cost-effective energy efficiency and demand
side management programs.
And we should pause for a moment to remind ourselves that
these utility efficiency programs have, in fact, been very
successful.
In the early 1990's, energy savings were rising annually at
double-digit rates, costs of power reduction averaged 2.1 cents
per kilowatt hour, and peak load reductions of up to 29,000
megawatts were attained.
But with the advent of competition all this has turned down
sharply. Total utility spending on demand side management and
achievements in this area have dropped in half, and the
achievements that were expected to be attained by now have also
been dropped in half.
Utilities in 1993 expected that we would be now able to
clip our peak demand by 55,000 megawatts. That has been reduced
to 25,000, leaving an efficiency gap of about 30,000 megawatts.
Just imagine for a moment what an extra 30,000 megawatts of
non-polluting----
Mr. Barton. Mr. Cowart, would you suspend? We are not going
to take this away from your time. I would just make an
announcement to the subcommittee. I am told we have three 15-
minute votes, and I count three more witnesses after Mr. Cowart
at 6 minutes each. That is 18 minutes.
So at the conclusion of Mr. Cowart's testimony we are just
going to put a little firewall right there between Mr. Cowart
and Mr. Smith and take a lunch break and we will reconvene at
1:30. But we are going to finish with Mr. Cowart, take a break,
come back at 1:30. Every member of the audience has to be back
in the same seat at 1:30, and then we will hear from Mr. Smith,
Mr. Casten, and Mr. Segal.
Continue, Mr. Cowart.
Mr. Cowart. All right. Thank you.
Imagine what an extra 30,000 megawatts of non-polluting
capacity could have achieved to forestall the blackouts and
power outages that we have been seeing over the past couple of
summers.
The potential for energy efficiency investments in this
country is by no means exhausted, and the good news is that it
would save a lot of money, it would leave a lot of money in the
pockets of American households and at the bottom lines of
American businesses.
There are a number of important provisions in this bill to
strengthen the reliability of the electric grid, but when you
are trying to keep up the water level in a big reservoir, you
might need some bigger pumps and you might need some bigger
pipes, but it is also smart to see if the water on the other
end is just leaking into a hole in the ground.
We need to go out and work on energy efficiency, Mr.
Chairman, as part of the restructuring of the electric
industry.
Now, the good news, in conclusion, is that the States have
been working on these issues, and there are good models out
there, both for the provision of energy efficiency services and
also for the provision of renewable energy services to American
consumers.
I would commend the committee's attention to the work the
States have been doing in this area, and I would recommend that
you add provisions to support those measures to this
legislation.
[The prepared statement of Richard H. Cowart follows:]
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Mr. Barton. Thank you, Mr. Cowart.
The subcommittee stands in recess until 1:30.
[Brief recess.]
Mr. Barton. We are going to go ahead and start. We had a
malfunction of the House automatic teller machine, so there was
a move to record the rule on health care by actual old-
fashioned roll call vote, and, unfortunately, I am a ``B,'' and
before I knew about it they were past me, so I had to wait. I
apologize.
Mr. Sawyer. Mr. Chairman, is this an electric reliability
problem?
Mr. Barton. It has been pointed out that there was a
transmission access problem.
Actually, what happened, Mr. Barcia got a new voting card
today. Our members are given these electronic voting cards.
They put his name in it as Arcia, not Barcia. So when he
recorded his vote, the electronics of the machine tried to find
Arcia and went crazy because there is no Arcia, to it melted
down the system, looping, trying to put the ``no'' vote of
Arcia where there was no person. So they have corrected that
problem.
Mr. Smith, your testimony is in the record in its entirety,
and we recognize you for 6 minutes. I know it will surprise
some of the audience, but you were my witness, which has got to
be something of a first for me, having a representative of
Public Citizen testify at my request.
Welcome.
STATEMENT OF TOM SMITH
Mr. Smith. Mr. Chairman, I am honored. And thank you very
much for your invitation. I am proud to be here.
I run Public Citizen's Texas office. As you know, we are a
national nonprofit consumer organization, founded over 25 years
ago now by Ralph Nader, and we are here today to talk about our
concerns about electric utility deregulation.
Before I begin, I would like to say thank you to you, Mr.
Chairman, and other members of this committee because there are
a number of provisions in this bill that we recognize as being
here because people like myself or others in the environmental
community have asked for them--your disclosure section, the net
metering section, your privacy and slamming and cramming
sections, and, although we do not think they go far enough, the
renewable sections that begin to encourage it through
extensions of various tax credits.
I have basically five themes I want to talk with you about
today. And let me begin by saying, for those of us in Texas and
around the Nation who are looking at electric utility
deregulation, the test is really who is going to benefit. Is
Bubba going to benefit, or is it the big boys?
And what we see today is that there is not enough in this
bill for Bubba to really benefit yet, and it seems to us it is
kind of like crossing the stream. You have gotten about three
steps out into the middle of the stream and the path is not
clear to the dry bank on the other side, and if we do not get
some more stones in the middle of that stream, we are all going
to get wet and wish we would never have started to cross.
And so what I would like to do today is visit with you
about some of those other stones that we think we can put in
the stream that will get us to a place that may be better for
us all.
First, let me go through the five or six big themes I want
to talk about, and then I will come back and hit them in
greater depth.
The first is, as you have heard across the table today,
there is a lot of interest in aggregation. We think the most
cost-effective way to serve the average residential consumer is
through opt-out aggregation like they have in Ohio and
Massachusetts, where a group of people is aggregated together
and then has the opportunity to leave and go out if they choose
to play in the retail market.
The second big issue for us we think is reducing pollution
from our power plants and not choking our kids in the future.
It is important to recognize that over two-thirds of the coal
plants in this country are grandfathered and do not meet
today's current standards. And if we were to require them to
meet those standards, three-quarters of significant pollution
that is choking our cities would be eliminated. We think that
this is an opportunity to clean up the air over our cities.
We think that we need to ensure that new energy sources are
developed for our future. And, as we mentioned, we appreciate
the renewables portion of your bill, but we think the way to go
about it is through a renewables portfolio standard and a small
public benefit trust fund.
We think that we need to enhance competition, if possible,
and help consumers save money through enacting strong energy
efficiency provisions.
And, last, we need to prevent just uncuffing the monopolies
and give consumers new tools and strong tools to assure that we
are able to deal with market power.
Let me go to the first point.
We think that the problem with the aggregation provision
that is in your bill today is that it puts all the transaction
cost on those that are not going to be able to afford them--the
associations or the local government agencies that may choose
to try and put together a package of electricity to sell to
consumers.
And what it does is it creates an impenetrable barrier of
high marketing and transaction costs that will functionally
prevent that kind of aggregation from benefiting any except the
trade associations and perhaps a few rural communities.
Many States have taken a look at this issue and have said
the cost of switching a customer is high, and so high that we
think the way to go about it is what they have done in Ohio and
Massachusetts--allow the community to have a great debate and
say, ``Do we want to serve the customers within our
boundaries?'' And if, after that debate, the answer is yes,
then everybody in that community is part of that buying club
and you have professional help in making a choice among the
various offers made to that community for power.
And then, if somebody wants to go out and buy at retail,
they have the opportunity to do so and can opt out and go play
in the retail market.
Why is this important? After competition in Texas, 60
percent of us are still with AT&T. Most of us do not care
enough about the nuances or the various differences in price to
go out and shop. This is a real opportunity to lower the costs
for everybody in that community.
The second thing we want to talk about, an incredibly
important part of the issue for us is air pollution.
As I mentioned, two-thirds of our power plants are
grandfathered. And, Mr. Barton, you asked a darned good
question. Why is this not a State issue?
In Texas we said, ``We are going to clean up our
grandfathered power plants, require them to reduce emissions by
50 percent.'' And we decided that this--the reason we did this
was because it was the most cost-effective way to reduce
pollution in our State, far less expensive than even getting
our cars inspected, and significantly less costly than buying
reformulated gasoline or low-emission vehicles. It was a
bargain that was worth doing.
But the problem is, what you heard time and time again from
people in Texas is, ``This is going to make us uncompetitive in
the national market.'' That is why it is important that we set
the standard across the United States to be the same.
If we were to adopt the current Federal new source
performance standard, there would be dramatic reduction in
pollution in the eastern United States. The ``New York Times''
reported on August 28 that if we adopted the Federal new source
performance standard and cleaned up all those old power plants,
industrial NO<INF>X</INF> in New York City would drop by 80
percent. That is the implication of this.
And if we do not do that, what we do is we drop our
generating portfolio to the dirtiest common denominator, and we
can do better than that.
Recently, a study came out--yesterday--called ``Out of
Breath'' by a coalition called ``Clear the Air.'' This will be
distributed to you all soon. It basically documents that
153,000 times a year somebody goes to the emergency room due to
asthma. Power plants are the largest single cause of this.
And, last, I would make the argument that we need to do
something better for renewable resources. The renewable
portfolio standard would set a national goal that would enable
us to have energy independence, be able to reduce the cost of
these resources, be able to produce a product we can sell to
the emerging countries who are not yet hooked up to the grid,
and get us away from the single fuel dependence that we are
rushing toward at headlong speed because everybody is buying
and building natural gas plants.
I am old enough, as you are, Mr. Chairman, to have been in
Texas in the days when we could not get natural gas for our
power plants, and that caused us to make the mistakes that have
caused us to have the stranded cost problem today, to build
those nuclear plants, to build those coal plants, and to go
down the wrong path. But the wrong path does not need to be
replicated, and we are about to do that unless we require fuel
diversity in our mix, and we believe that having a set-aside of
10 percent for renewable energy by 2010 is a good way to do
that and a cost-effective way.
Thank you for your time, and thanks for the invitation.
Mr. Barton. Thank you, Mr. Smith.
We now want to hear from Mr. Tom Casten, who is president
and CEO of Trigen Energy Corporation headquartered in White
Plains, New York, but I am told he is a constituent or at least
a personal friend of Congresswoman Karen McCarthy of Missouri,
who wanted to introduce you to the committee, but she is
apparently still on the floor in the roll call vote. So when
she comes back, if she comes back and this panel is still here,
we will give her an opportunity to brag on you a little bit.
Your statement is in the record in its entirety, and we
recognize you for 6 minutes to summarize it.
STATEMENT OF THOMAS R. CASTEN
Mr. Casten. Thank you, Mr. Chairman. I am going to leave my
statement in the record and you can look at the things there.
I was struck this morning by your comment that it was
easier on this side, and that you and the panel have to wrestle
with competing ideas and philosophies and sort something out of
all of this. I think I can provide one comment that might help
you sort through those competing ideas, and then--you before
have complimented people on providing facts as part of their
answer, and I would like to present a couple facts.
One of the things that I have heard on this and earlier
panels very consistently is that we have one point that we all
agree about: we do not want competition in our part of the
business. I completely agree with that. I find it is a
horrible, evil force for any businessman. I lay awake at night
trying to think about how to innovate and how to cut my costs,
and I cannot get that done. We have to give up profits. And I
would be very pleased if this bill would simply say, ``Nobody
can compete with Tom Casten.'' And I would thank you for that.
My suspicion is that that is----
Mr. Barton. We do not have anybody from Nebraska on the
subcommittee or that would probably be an amendment.
Mr. Casten. My suspicion is that the goal of this panel
and, indeed, the Congress is not to prevent people from
competing with Tom Casten, and I do not think it should be to
prevent people from competing with the members of the Edison
Electric Institute or the American Public Power Association or
the TVA or the RUS, but that the real goal is for you to
unleash competition and get at the innovation.
With that said, let me present a couple facts.
I am that competition. As we sit here, there are some 200
small generators that we have installed in the last 20 years
running in about half the States in the country--those that do
not have laws against it.
We have 32 power plants in 18 States that serve multiple
users, and I would just like to go through the facts of what
those competitive power plants do in hopes that that might give
this committee some idea of why you are going through all this
heavy lifting and how big the goal is at the end of the day.
In 1998, those 31 power plants put out 46 percent of the
criteria pollution that EPA said would have come from producing
the same heat and power in a conventional way.
They save more than 30 percent of the fossil fuel that
would have been burned doing it in a conventional way.
They are technology and fuel independent. We burn coal, we
burn gas, we burn oil, we burn biomass, we burn municipal
waste. I do not think Congress needs to tell us what to burn.
We will burn whatever is cheapest if you give us the chance to
compete.
Now, the common thing that I see in the press and I hear
people talking about is to portray this whole process as what
benefits will go to the individual as a purchaser of
electricity in their home, and I think that is important, and
competition will help those people, but I think it is the wrong
question.
I would like to review with you where the benefits go from
our plants.
In Philadelphia, our 150 megawatt cogen plant provides the
thermal energy to virtually every educational institution,
every higher educational institution--people like University of
Pennsylvania, Drexel, Thomas Jefferson--and that lowers the
cost of tuition and education.
In Tulsa, Oklahoma, we provide that kind of savings to all
of the city buildings.
In Kansas City, we provide it to city, State, county, and
Federal buildings. Kansas City even uses us as a way to meet
their air quality rules, because we are so much less polluting
that they do not have to force carpooling. So the benefits go
to lowering the taxes that people pay for government.
We serve some 26 hospitals, and we save them between 20 and
40 percent of what they would have paid, and this lowers the
cost of medical care to everybody.
If those benefits are not persuasive, I can tell you that
we do some really important things. In Golden, Colorado, we cut
down the cost of making a can of beer.
Those benefits go to everybody.
What I believe is in front of this panel is to understand
what can happen if you continue with your good work and get a
bill passed.
Our estimates are that the U.S. consumer will save more
than $100 billion a year with competition. Our estimates are
that the air quality will come into compliance everywhere just
through competition.
We believe that the competitiveness of every U.S.
manufacturer will improve by reducing the cost that they pay
for energy.
I just leave you with a thought. Where would we be today
without competition in other places? Maybe only 60 percent of
the people still stay with AT&T, but I suspect 60 percent of
the people in this room have a cell phone because Craig McCall
could compete and was not forced not to.
Where would we be in computers if Michael Dell was not
allowed to compete and say, ``I have got a different way to do
it''?
The challenge that I think this panel has is to get a bill
out that will let everybody compete, and then just stand back
and enjoy, because it will be fun to watch.
Thank you.
[The prepared statement of Thomas R. Casten follows:]
Prepared Statement of Thomas R. Casten, President and CEO, Trigen
Energy Corporation
Mr. Chairman and members of the Subcommittee, thank you for
allowing me to testify before you today on H.R. 2944, the Electricity
Competition and Reliability Act of 1999.
My name is Tom Casten, and I am the CEO of Trigen Energy
Corporation. Trigen specializes in generating energy very efficiently.
We own and operate the most efficient power plants in the world, and
our stock in trade is combined heat and power, or CHP.
We have thirty-three projects, with operations in nineteen states,
Canada and Mexico. We joint venture with many companies, including
electric utilities such as Cinergy and Pepco. Since I last testified
before this subcommittee, Trigen has announced several major new
projects and has won two very satisfying industry awards, including an
award from the National Council for Public-Private Partnerships and the
Power Plant of the Year Award from McGraw-Hill.
Mr. Chairman, our projects and our people are at work every day
showing how efficient energy production is both good for business and
good for the environment. By restructuring the electricity industry,
Congress can reward investors, benefit consumers, strengthen our
economy and clean up our air, land, and water. As you know, I've had
the privilege of appearing before this Subcommittee and other House
committees to share my thoughts on the important economic and
environmental benefits of electricity restructuring. Rather than
restate those comments, I have attached copies of my previous testimony
to these remarks and ask that they be made part of the record of this
hearing.
Chairman Barton and the Members of the Subcommittee, thank you for
pushing forward on electricity restructuring. This is an issue of
critical importance to our industries, to the wholesale and retail
consumers of electricity, and to the global competitiveness of the
United States. Competition is already upon us, with the States leading
the way. The Federal government must rise to the task of completing
this nationwide effort by addressing those barriers to competition that
inherently lend themselves to national legislation, matters that cannot
be responsibly dealt with in a piecemeal, State-by-State way.
It is evident that H.R. 2944 is the result of painstaking,
thoughtful work that reflects the benefit of numerous hearings,
consultations, examination of issues by the Subcommittee's working
group, and input by incumbents and independents, the States, the
Administration, consumer groups and others. H.R. 2944 marks a critical
step in efforts to improve electricity markets and we offer our support
for its enactment.
As I read the bill, it strikes me, however, that the current
language should be modified with regard to the following five issues:
interconnection, PURPA repeal, CTC's , depreciation schedules, and tax
incentives. I'll discuss the changes we think you should make, and have
attached to my testimony specific amendatory language for your
consideration.
Interconnection
H.R. 2944 correctly recognizes the economic and environmental
importance of new distributed generation, including CHP systems, by
addressing the central issue of interconnection. Current charges for
interconnection can be prohibitively and unreasonably expensive, and
requirements vary arbitrarily from State to State, utility to utility,
site to site. Incumbents who do not want to face competition often
attempt to cloak anticompetitive behavior in the guise of technical
disagreement over interconnection. It's essential for interconnections
to be safe and reliable, but let's take the market gamesmanship out of
electrical engineering. Bringing uniformity to interconnection through
national technical standards will reduce uncertainty, lower costs, and
facilitate deployment of modern generation, including CHP technology,
across the country.
Interconnection language must be sufficiently broad to help all
appropriately sized generators connect to the distribution grid. I am
concerned, however, that the present language ofSec. 542 may be too
limiting, and will retard the ability of the nation to realize the
substantial economic and environmental benefits offered by CHP and
other new generators. For example, the present language apparently does
not apply to third-party owned systems, systems currently designed to
serve wholesale customers, or systems designed for off-site sales of
electricity. It should give you some sense of the unduly narrow scope
of the current language to note that it would appear to benefit few of
my company's projects.
Let me give you an example of the interconnection problem. We know
how to interconnect generators with the distribution grid. We have done
it literally dozens of times. Technically, it is a pretty
straightforward task. In 1997, my company approached a Maryland utility
to request interconnection for a 703 kw generator to be installed in a
downtown Baltimore office building. The small system would supply the
building's electric load and air conditioning. Yet, two years later, we
were still dickering with the utility over so-called ``technical''
issues. Months after receiving our initial request for interconnection,
the utility asked that Trigen design a different, specialized
interconnection. Trigen completed the new design at an additional cost
of $44,000. The utility rejected the design. In response, Trigen
offered to use guidelines developed by Consolidated Edison in New York
City, even though the ConEd guidelines were disproportionately
burdensome and expensive given the very small size of the installation.
The utility agreed, but after Trigen complied with these requirements,
the utility imposed further ``technical'' restrictions on Trigen's
ability to operate the facility. These disagreements have only recently
been resolved, at a great cost to Trigen and our customer. One would
strongly suspect that this was anti-competitive behavior masquerading
as technical disagreement which successfully prevented the unit from
operating for two years. H.R. 2944 would not fix this sort of problem,
and thus needs to be amended.
Prospective Repeal of PURPA's ``Must-Sell'' Provision
H.R. 2944 would repeal both the ``must buy'' and the ``must sell''
requirements of Section 210 of PURPA. Trigen does not challenge
elimination of the ``must buy'' provision, but the ``must sell''
provision absolutely should not be repealed until all retail markets
are competitive and until back-up power can be purchased competitively.
That's not the case now, and until those fundamental changes are made,
the utility should continue to be required to provide back-up power for
qualifying facilities. The current language of Sec. 531 would harm
competition. Elimination of PURPA's ``must sell'' requirement before
laws are changed to allow new facilities to purchase back-up power
competitively will leave new entrants at the mercy of the local
utility, subject to discriminatory pricing or outright denial of back-
up power. Let's not take a step backward.
Elimination of Competitive Transition Charges
Trigen recognizes that utilities should be able to recover
prudently incurred, legitimate and verifiable stranded costs that
cannot be reasonably mitigated. However, States should be required to
consider reducing the stranded cost charge on an electric consumer
which efficiently produces energy on-site by a fuel cell or a combined
heat and power, distributed power or renewable power facility. Such a
provision would be consistent with an overall agenda of promoting clean
and efficient power generation without imposing a mandate on States.
Trigen believes that the relevant language contained in section 101 of
the restructuring proposal submitted by the Administration would be an
appropriate amendment to this legislation.
Tax depreciation schedules
The tax code currently does not allow depreciation of CHP and
distributed generation technologies in a way that matches how the
technology is actually used. This inappropriate treatment discourages
investments in these technologies. For example, the IRS allows a gas
turbine located inside a building for on-site generation use to be
depreciated over a 39-year period. The same piece of equipment used for
transportation (e.g., on an airplane) depreciates in one quarter of the
time. The moving parts of the turbine used for electricity and heating
may be replaced as many as three times while the owner continues to
depreciate the original investment. Shortening the time over which this
equipment depreciates would remove an impediment to investment in what
is otherwise an efficient and environmentally beneficial technology.
The Administration's restructuring proposal included a provision
that would shorten the depreciation period to 15 years. While we were
grateful for the Administration's recognition that new distributed
generation and CHP systems should not be subject to a depreciation
period of 39 years, the approach failed to recognize that a one-size-
fits-all class life for energy equipment is a fundamentally flawed
approach which will grow increasingly anachronistic by the month.
New and small turbines have different physical properties and will
generally operate under quite different conditions than large turbine
units employed by traditional electric utilities and, consequently,
will have different service lives. Further, the competitive marketplace
will force energy suppliers to replace or ``upgrade'' standing
equipment before it fails, since installation of more efficient
technology offers lower costs to customers and the opportunity to hold
or capture market share for competitive energy suppliers. We expect
that energy generation equipment will come and go in the marketplace in
a manner that strongly resembles that of modern computers `` assets
which outlive their economic lives long before they cease to work
properly. Because these new and efficient technologies have different
``actual'' lives, they should not be subject to a single class life in
the code. Accordingly, we have attached to this testimony modifications
to the Internal Revue Code which would add new schedules of class lives
for key energy generation technologies.
Combined Heat and Power Investment Tax Credit
Tax credits are typically offered by the Federal government to
obtain public benefits by prompting private parties to make economic
choices that they would not so readily make otherwise. As such, an
investment tax credit is a good short-term mechanism to promote CHP
systems, which offer very significant public and private economic and
environmental benefits, but can often be more difficult for the private
sector to deploy than electric-only projects because of the complexity
inherent in assembling a ``thermal load'' or set of heating/cooling
customers. We believe it is appropriate to enact a short term tax
credit to assist deployment of new, modern generation while longer term
solutions to competitive barriers are being developed, such as
adjustments to the depreciation schedule, as discussed above. To be
clear, to the extent the depreciation treatment of CHP is corrected, we
do not believe that a tax credit will be necessary. However, to the
extent a lesser fix is chosen for the depreciation treatment of CHP,
the tax credit would remain an important short-term incentive for CHP
system deployment.
Conclusion
Given the inevitability of competition in the electricity market,
and both national and global trends that will guide the future of
energy production in this country, I believe that emerging technologies
are serving and will serve an indispensable purpose in meeting goals of
energy efficiency and environmental demands. I urge this subcommittee
to pass a strong, balanced restructuring bill reflecting the concerns I
have raised here today. I thank the subcommittee for the opportunity to
appear before you. Thank you, Mr. Chairman.
Mr. Barton. Thank you, Mr. Casten. We appreciate your work
that you have done in your company providing services for the
communities that you are in and appreciate your testimony.
Now we would like to hear from our last witness, Mr. Scott
Segal. Apparently, he is just representing Bracewell and
Patterson.
STATEMENT OF SCOTT H. SEGAL
Mr. Segal. Yes, we are a potent player in the electricity
area.
Mr. Barton. The only law firm that has its own lobbyist
just on this issue. That is pretty interesting.
Mr. Segal. The new alternative energy source.
Mr. Barton. Actually, I am told you are representing
contractors. Your statement is in the record in its entirety.
We recognize you for 6 minutes.
Mr. Segal. Thank you, sir.
Good afternoon, Chairman Barton and members of the
subcommittee. My name is Scott Segal, and I am an attorney with
the law firm of Bracewell and Patterson here in Washington and
a proud native of the great State of Texas, I might add.
I also serve as outside counsel for the Air Conditioning
Contractors of America, and we are appearing today on behalf of
the National Alliance for Fair Competition, of which ACCA is a
member.
The alliance is composed of 10 trade associations, and was
formed especially to draw attention to the problems of small
service contracting businesses with respect to unfair
competition from public utilities and their unregulated
affiliates. Many of our members are family owned and operated
companies.
As the subcommittee has considered electricity
restructuring legislation, I know that each of you has been
barraged with information on a bewildering array of topics,
such as stranded cost, transmission access, and the like. The
Alliance is concerned that in this thicket of complexities the
issue of cross-subsidization and other forms of anti-
competitive conduct and their impact on small businesses has
been lost.
My job today is to attempt to clear away the underbrush and
present you with a simple message: Congress must address cross-
subsidization and related unfair monopoly practices if you are
to create a framework in which competition can flourish, and
you can do so without giving undue power to Federal regulators
or interfering with State prerogatives in this area.
Mr. Chairman, what is this whole debate about electricity
restructuring all about? Well, in my view it is about creating
the conditions for competition in the electric power industry
so that the American consumer will benefit from more choice,
better service, and lower prices. The members of our alliance
strongly support full competition. We are fully accustomed to
competition, do not seek subsidies or special treatment in
order to compete. Similarly, we do not believe that utility
affiliates competing in service industries should enjoy cross-
subsidies derived from their parent companies' monopoly power.
To allow these practices to go unchecked will destroy, or at
least potentially harm, the goals of full competition, and,
subsequently, shortchange consumers.
We do not oppose utility diversification. In fact, we
welcome the competition. However, ensuring vigorous competition
and benefits to consumers will take place only if the legal
framework ensures the competition is open rather than dominated
by the vestiges of this monopoly status.
I would illustrate my point--and with all due respect to
Mr. Casten--ours are member companies that do not fear
competition. We think we are competition.
I brought along with me a local telephone directory, which
I would now like to read into the record. No, just kidding.
This is a local telephone directory from northern Virginia. If
you look up air conditioning contractors in here, there are 31
pages of listings. If you look up electric utility, there is
one--not page, one listing.
The point I am trying to make is: do we want the market for
energy services to look more like the former or the latter? We
know competition and are not afraid of it.
Mr. Chairman, I know that as you have proceeded you have
been rigorous limiting the content of the bill to matters in
which Federal action is necessary. I submit to you that
establishing some standards in the area of affiliate
transaction meets this litmus test.
First, antitrust law, a traditional area of Federal
responsibility, does not address cross-subsidization and
related practices adequately. There is a long-established role
for the Federal Government in antitrust policy; however, both
the Department of Justice and the Federal Trade Commission have
testified that antitrust laws are ill-suited to addressing
existing market power resulting from the previous regulated
monopoly status of electric utilities; therefore, existing
antitrust law is not sufficient. Indeed, this Congress
recognized the need to enact stringent affiliate safeguards in
the Telecommunications Act of 1996.
Our alliance seeks only to assure that minimal protections
against market power abuse are enacted and that States remain
free to achieve these ends in the manner they see fit.
Second, unregulated competitive affiliates will operate
across State lines. Suffice to say that electric utilities
exist across State lines and they offer affiliate services
across State lines, so a national solution is justified.
Further, the availability and application of State remedies
to claims of competitive harm is uneven, at best, and even
within States there is typically a division of authority
between State PUCs, which are charged with protecting
ratepayers, and antitrust enforcement agencies, which are
charged with enforcing restriction on anticompetitive
practices.
We go to either one, and both say we are going to the wrong
agency, and that can get frustrating for a small business.
Ultimately and fortunately, we believe that Federal
guidance on cross-subsidization and self-dealing will
complement rather than supersede State action. The alliance is
simply seeking to ensure that competitive issues confronting
small business and the people they serve do not fall between
the cracks.
I want to make crystal clear, we are not asking the
subcommittee to dictate the details of State codes of
condition; rather, we seek broad policy principles that are
essential to guaranteeing competition while continuing to allow
the States the utmost freedom to innovate.
Accordingly, our members believe that the legislation can
be improved by the addition of a few minimum standards.
First, a clear prohibition on cross-subsidization of
competitive affiliates.
Second, a requirement that States develop codes of conduct
and that they be applied to all affiliates, but note I say that
States develop it.
Next, a requirement that competitors harmed by cross-
subsidies and anticompetitive conduct have recourse to State
PUCs.
And, last, a requirement that enforcement include a remedy
for harm to competitors occasioned by such unfair competitive
practices.
Again, I must emphasize our alliance is not advocating that
Congress prescribe the details of codes of conduct for utility
affiliates, nor are we asking that Congress provide broad new
powers to Federal agencies like the FERC or anybody else.
Rather, we are asking that Congress set broad policy goals
which represent a minimum, a floor, to ensure free and open
competition.
Well, as they say in the refrigeration business, we just
hope you do not freeze us out of the bill.
I thank the members of the subcommittee for this
opportunity to appear before you today, and we look forward to
answering any questions you may have.
[The prepared statement of Scott H. Segal follows:]
Prepared Statement of Scott H. Segal on Behalf of the Air Conditioning
Contractors of America and the National Alliance for Fair Competition
Good morning Chairman Barton, Congressman Hall and members of the
Subcommittee on Energy & Power. My name is Scott Segal and I am an
attorney with the law firm of Bracewell & Patterson here in Washington,
D.C., and serve as outside counsel for the Air Conditioning Contractors
of America (ACCA). I'm also appearing today on behalf of the National
Alliance for Fair Competition (NAFC), of which ACCA is a member. The
National Alliance for Fair Competition is composed of ten national
trade associations. NAFC was formed specifically to draw attention to
the problems small businesses face with respect to unfair competition
from public utilities and their unregulated affiliates.
The organizations which comprise NAFC consist, overwhelmingly, of
small, private sector businesses engaged in the design, supply, sale,
rental, installation and servicing of electrical and mechanical
products, equipment, and systems, as well as providing energy fuels.
These firms operate in residential, commercial and industrial markets.
While a few larger firms are included within the group, the majority of
businesses are small. Many are family owned and operated.
As the Subcommittee has considered electricity restructuring
legislation, I know that each of you has been barraged with information
on a bewildering array of topics such as stranded costs, transmission
access, the role of the federal power administrations, and others. Each
issue has its own complexities. NAFC is concerned that in this thicket
of complexities, the issue of cross-subsidization and other forms of
anticompetitive conduct and their impact on small business has been
lost. My job today is to clear away the underbrush and present you with
a simple message: Congress must address cross-subsidization and related
unfair monopoly practices if you are to create a framework in which
competition can flourish, and you can do so without giving undue power
to FERC or interfering with state prerogatives in this area.
During the course of the Subcommittee's hearings on this issue, you
have been presented with testimony from contractors and other working
people regarding the types of practices that allow incumbent utilities
to unfairly leverage their market power in competitive markets, such as
heating, ventilating, air conditioning and refrigeration (HVACR)
services. I do not intend to revisit these issues in detail, but
provide a representative list of the types of conduct that concern
small business including cross-subsidies to and preferential treatment
of affiliates. This encompasses: shared customer data, equipment,
vehicles and personnel, cost-shifting, marketing data, free advertising
for affiliates, preferential referrals, discriminatory access and
pricing of services, and similar uncompensated transfers of tangible
and intangible benefits.
I will focus my testimony on the following points: (1) cross-
subsidization and other anticompetitive practices harm consumers and
competition; (2) there is a need for federal legislation to create a
framework for competition and precedent for doing so; (3) Congress can
set minimum standards to achieve the goals of competition without
stifling state innovation; and (4) H.R. 2944 does not currently go far
enough to address these issues.
Getting Back to Basics: Creating the Conditions for Competition
I would like to return to first principles for a moment. What is
the debate over electricity restructuring all about? It's about
creating the conditions for competition in the electric power industry
so that the American consumer will benefit from more choice, better
service and lower prices. The members of the NAFC strongly support full
competition. We are fully accustomed to competition and do not seek
subsidies or special treatment in order to compete. Similarly, we do
not believe that utility affiliates competing in service industries
should enjoy cross-subsidies or other advantages derived from their
parent company's monopoly power. To allow these practices to go
unchecked will destroy your goals of full competition and subsequently,
short change consumers.
As a deregulated retail market for electricity takes shape,
incumbent utilities feeling competitive pressure are increasingly
driven to diversify into energy services and other affiliate
activities. For instance, if you go to the Pepco webpage, you will find
a link to Pepco Energy Services. This webpage states, ``Pepco Energy
Services is backed by the strength, stability and commitment of its
parent company, which has a 100-year history of delivering quality
customer service.'' <SUP>1</SUP> The same webpage describes Pepco
Energy Services' ability to design and install HVACR systems, lighting
and other energy equipment, and a full range of services performed by
contractors today. NAFC does not oppose this diversification, and in
fact, welcomes the competition. We are, however, concerned that as many
regulators have recognized, ``there is a strong incentive for regulated
utilities or their holding companies to subsidize their competitive
activity with revenues or intangible benefits derived from their
monopoly businesses . . .'' <SUP>2</SUP>
---------------------------------------------------------------------------
\1\ See <http://www.pepco-services.com/>.
\2\ Promulgation of New Rules Governing Activities Between
Affiliates, Public Utility Commission of Texas, Project No. 17459, 23
Tex. Reg. 5294 (May 22, 1998).
---------------------------------------------------------------------------
In creating a framework for competition, the Subcommittee must be
mindful of the background against which you are legislating.
Competition is not starting from the level playing field characteristic
of a newly developing market, but rather, with regulated monopolies.
Ensuring vigorous competition and benefits to consumers will take place
only if the legal framework ensures that competition is open rather
than dominated by the vestiges of this monopoly status.
As I mentioned, the NAFC believes that cross-subsidization and
other anticompetitive practices are bad for consumers and bad for
competition. Here's why:
<bullet> Bad for Consumers: Cross-subsidization and preferential self-
dealing will artificially increase the costs of the regulated
utility as costs incurred for the benefit of the affiliate are
shifted to the regulated firm. These higher costs will be
passed on to consumers in increased prices in the regulated
market. In addition, these practices will increase costs in
unregulated markets like those for HVACR services by displacing
innovative, lower-cost suppliers and entrants with a higher-
cost affiliate of the incumbent utility which can undercut
pricing due to the subsidy that it enjoys.
<bullet> Bad for Competition: Competition thrives in an environment
where numerous entrants compete on choice, price and quality of
service for consumers. Yet, as we make the transition to a
competitive environment, there are strong incentives for
regulated utilities or their holding companies to subsidize
their competitive affiliates with revenues or intangible
benefits derived from monopoly businesses. These benefits allow
the affiliates to drive lower-cost providers from the market
and to deter new entrants into the market. This results in less
competition and less choice for consumers.
To illustrate my point, I have brought along with me today a local
telephone directory. In this Northern Virginia directory, I find
thirty-one pages of entries for HVACR contractors. By contrast, I find
only one entry under ``electric company.'' Do we want the market for
energy services to look more like the former or the latter?
Why is Federal Legislation Necessary?
Mr. Chairman, I know that as you have proceeded to develop
consensus legislation you have been rigorous in attempting to limit the
content of the legislation to matters in which federal action is
necessary. I submit to you that establishing some standards in the area
of affiliate transactions meets this litmus test.
<bullet> Antitrust law, a traditional area of federal responsibility,
does not address cross-subsidization and related practices.
While the federal government shares authority over enforcement
of the antitrust laws with the states, there is a long-
established federal role due to the impact of competition
policy on interstate commerce. Yet in testimony before this
Subcommittee, representatives of the Antitrust Division at the
Department of Justice and the Federal Trade Commission, the
principal agencies charged with enforcing the antitrust laws,
have testified that the antitrust laws are ill-suited to
addressing existing market power resulting from the previous
regulated monopoly status of electric utilities.<SUP>3</SUP>
Therefore, leaving the competitive implications of market power
abuses affecting small business to the antitrust laws is not
sufficient. Indeed, this Congress recognized the need to enact
stringent affiliate safeguards in the Telecommunications Act of
1996 to prevent the opportunity for market power abuses by the
Bell operating companies to the benefit of their affiliated
competitive businesses. Some of these provisions included
requiring separate affiliates, biennial audits, restrictions on
joint marketing, prohibitions on preferential treatment to name
just a few. By contrast, NAFC seeks only to assure that certain
minimal protections against market power abuse are enacted and
that states remain free to achieve these ends in the manner
that they see fit.
---------------------------------------------------------------------------
\3\ Electricity Competition: Market Power, Mergers and PUHCA,
before the Subcommittee on Energy & Power of the Committee on Commerce,
U.S. House of Representatives, 106th Cong. (May 6, 1999) (statement of
Mr. Douglas A. Melamed, Antitrust Division, United States Department of
Justice, and statement of The Honorable Mozelle Thompson, Commissioner,
Federal Trade Commission).
---------------------------------------------------------------------------
<bullet> Unregulated, competitive affiliates will operate across state
lines. The presence of these unregulated affiliates in several
states will present new difficulties for individual state
commissions, and it is unlikely that the limited jurisdiction
of state bodies will be well-suited to ensure fair and open
competition when multistate holding companies are involved.
State commissions frequently lack the authority and resources
to pursue these issues effectively. It is unrealistic to expect
a nationwide energy market to develop without national
legislation to ensure true, fair retail competition.
<bullet> The availability and application of state remedies to claims
of competitive harm is uneven at best. Because the electric
power industry has been regulated for most of this century as a
local monopoly, state regulators have been concerned primarily
with issues related to ratepayer protection and ensuring an
appropriate rate-of-return. In the newly emerging competitive
environment, there will be an increasing need to pay close
attention to issues of competition and competitive harm
occasioned by unfair practices such as cross-subsidization.
<bullet> There is a division of authority between state PUC's, charged
with protecting ratepayers, and antitrust enforcement agencies
charged with enforcing restrictions on anticompetitive
practices. Indeed, in some states, affiliate codes of conduct
have been held not to apply to all competitive affiliates, but
only to marketing affiliates.
<bullet> Small business is often left without an effective remedy for
competitive harm. As a result, small businesses harmed by
anticompetitive practices are often left without a remedy.
While state PUC's have the ability to deny a rate increase or,
in an extreme case, impose a fine, these remedies have little
meaning for competitors harmed by cross-subsidization and
related practices. As previously noted, the antitrust laws are
similarly ill-equipped to address concerns arising from
existing market power. Therefore, those harmed by
anticompetitive practices are left without a remedy.
<bullet> Federal guidance on cross-subsidization and self-dealing will
complement rather than supersede state action. In moving from
an electric power industry characterized by local monopolies to
one in which there is unfettered competition, the NAFC is
simply seeking to ensure that competitive issues confronting
small businesses and the people they serve do not fall between
the cracks. I wish to make crystal clear that we are not asking
this Subcommittee to dictate the details of state codes of
conduct. Rather we seek to see enacted certain broad policy
principles that are in our view essential to guaranteeing the
creation of a free and open competition while continuing to
allow the states the utmost freedom to innovate to achieve
these policy objectives.
H.R. 2944 and the Need to Address Affiliate Safeguards
To the extent that H.R. 2944 addresses affiliate transactions,
please refer to Title V of the bill, and in particular in sections 513,
514 and 516. Sections 513 and 514 of the bill take the important first
step of ensuring that federal and state regulators have access to the
books and records of utilities and related companies for the purpose of
assessing costs incurred to protect ratepayers. Section 516 of the bill
entitled ``Affiliate Transactions'' serves merely as a savings clause
which states that nothing in the legislation shall preclude the
application of other existing law to determine whether costs of an
activity performed by a related company may be recovered in rates. In
other words, this provision preserves the status quo.
Yet, as I have detailed above, the status quo is not sufficient to
promote truly open competition in energy services markets, and this
will ultimately be to the detriment of the American consumer. The lack
of federal or state protections that provide an adequate remedy in
these areas and the increasingly interstate nature of these operations
demands congressional attention. Accordingly, the members of the NAFC
believe that federal legislation should at a minimum take the following
modest steps, including:
<bullet> a clear prohibition on cross-subsidization of competitive
affiliates;
<bullet> a requirement that states develop codes of conduct and that
they be applied to all affiliates equally;
<bullet> a requirement that competitors harmed by cross-subsidization
and other anticompetitive conduct have recourse to the state
PUC for a remedy; and
<bullet> a requirement that enforcement include a remedy for harm to
competitors occasioned by such unfair competitive practices.
Again, I must emphasize that the NAFC is not advocating that the
Congress prescribes the details of state codes of conduct for utility
affiliates. Nor are we asking that Congress provide broad new powers to
federal agencies such as the FERC. Rather we are asking that Congress
set certain broad policy goals to ensure free and open competition in
the market for energy services which are inextricably bound up with
this debate. These broad policy goals represent basic tenets of a
competitive marketplace which Congress has seen fit to protect before
to ensure that the benefits of competition are available across the
country. The states have, and should continue to, be free to devise
innovative solutions to achieve these basic objectives of competition.
I thank the Members of the Subcommittee for the opportunity to
appear before you today. I hope that many of you will agree that some
congressional action in this area is appropriate, and look forward to
answering any questions that you may have.
Mr. Barton. We do appreciate that. You may get a chilly
reception on your use of metaphors, but we are going to work on
it. Thank you, Mr. Segal, for that testimony.
The Chair is going to recognize himself for 5 minutes for
questions.
Mr. Brice, you used a term that I am not familiar with in
your testimony. You talked about you wanted a ``truth in
billing'' requirement. Could you, in layman's terms, express to
me what ``truth in billing requirement'' means in terms of this
bill?
Mr. Brice. I think what we are--I am at a loss, myself, to
really explain what that means.
Mr. Barton. Well then just give it to us for the record,
because Congressman Hall did not know, I did not know, my staff
did not know. Whoever wrote your testimony hopefully does know.
Mr. Brice. Yes, I am sure they do.
Mr. Barton. And we are open to it, if we understand what it
is, because who can be against truth in billing? I mean, it
kind of, on its surface, appears to be a good idea. So if you
will just get that to us for the record.
Mr. Brice. Yes, Mr. Chairman.
Mr. Barton. Okay.
Ms. Moler, I am going to ask you a cheap shot question, but
I am going to tell you up front that it is a cheap shot
question, because I do not mean it personally, but I was struck
by some of the terminology in your testimony. You talked about
the crazy quilt of regulation.
Who was the chair of FERC in 1996?
Ms. Moler. I was.
Mr. Barton. You were.
Ms. Moler. Yes, sir.
Mr. Barton. Okay. I thought so. When was FERC Order 888
issued?
Ms. Moler. In 1996, when I was the chairperson.
Mr. Barton. In 1996, when you were Chair. Now, remember, I
told you up front this is a cheap shot question.
Ms. Moler. I will not give you a cheap shot answer. I will
give you a serious answer.
Mr. Barton. I know. Do not we codify, if the bill before us
were to become law, do not we codify the crazy quilt regulatory
scheme that FERC Order 888 put in place in 1996 when you were
chair of the FERC?
Ms. Moler. Mr. Chairman, as my statement acknowledges,
Order 888 applies to wholesale transactions and to unbundled
retail transactions. It does not apply to bundled retail
transactions.
Mr. Barton. I mean, that is what----
Ms. Moler. At the time we issued the order, there was one
State that had customer choice enacted. The world has changed
very, very significantly since Order 888 was enacted. So I am
and Americans for Affordable Electricity believe that at this
point, with the industry having evolved the way it has evolved,
that you need to go farther than Order 888.
Mr. Barton. But you admit----
Ms. Moler. I recognize that it does codify Order 888. I
recognize that, sir, but I also----
Mr. Barton. So I am in agreement with where you were in
1996. I am just not in agreement----
Ms. Moler. Well, I am hoping you will come along.
Mr. Barton. [continuing] yeah with where you are in 1999.
Ms. Moler. I am hoping you will come along. The crazy quilt
that has evolved has very little happening under the Order 888
tariffs, and we simply need to go farther at this point to
encourage further competition. But it does codify it. Yes.
Mr. Barton. Okay. Well, I do not mean that personally, you
know. I want you to know that. I would not--that just kind of
struck me the way you put it that I needed to chastise you a
little bit, but I understand----
Ms. Moler. Well, one of the challenges in these jobs is you
have to look at changed circumstances----
Mr. Barton. That is true.
Ms. Moler. [continuing] to figure out what the appropriate
response is under the changed circumstances.
Mr. Barton. Now let me ask you another question. And this
is not a cheap shot question. Why will not the bill, as it is
drafted--we have mandatory participation in RTOs. They have to
join RTO's. We give the States regulation of bundled rates, and
the States I think--I think the States will do a better job of
looking at that issue than the group that you represent do--and
we still have the Federal antitrust regulatory scheme that is
in generic law. So why won't that combination of mandatory RTO
participation, State regulation of bundled sales at retail, and
Federal antitrust law that is still on the books, why doesn't
that solve the market power problem if there is a market power
problem?
Ms. Moler. Until you require everyone to be under the same
rules for transmission, you are not going to get the much-
revered level playing field.
Mr. Barton. But the RTO is regional.
Ms. Moler. The RTO would not require all of the utilities'
use of its system to be subject to its requirements.
Mr. Barton. But it does require every utility who
participates in that RTO to be subject to the rules for that
RTO.
Ms. Moler. Sir, there are many RTOs--ISOs now--for which
the vast majority of the utilities' use of its transmission
system are not under their jurisdiction.
Mr. Barton. Okay. Well, I----
Ms. Moler. I was stunned, frankly, when I learned this. I,
too, thought we had done a great thing with Order 888, and I
still believe it was a great thing.
Mr. Barton. Well, you did a good thing.
Ms. Moler. But what we are learning in the actual----
Mr. Barton. We are doing a great thing in our bill. You did
a good thing in Order 888.
Ms. Moler. Well, I encourage you to even greater greatness.
Mr. Barton. Okay.
Ms. Moler. What we have learned is that until you put all
of the uses of the same kinds of facilities under the same
rules, that you are not going to get comparability and you are
not going to get the kind of competition that will serve the
public.
Mr. Barton. Okay. I want to ask Mr. Smith a question
because my time has expired, and then I am going to go to Ms.
McCarthy, if she wants to introduce Mr. Casten after the fact.
Mr. Smith, you talked about an opt-out preference for
aggregation, which sounds to me suspiciously like forced
municipal aggregation. Why are you not satisfied with our opt-
in aggregation provision which gives people the voluntary
right--and not just city governments, but any group to
aggregate in a State that is open?
Mr. Smith. I was hoping you would ask me that question.
Mr. Barton. I bet you were. That is why I asked it.
Mr. Smith. And the other argument, of course, that I
expected was, ``Well, is not this just State-sanctioned
slamming.'' I think there are two answers to that. One is, we
are not going to make anybody change unless the community has a
great and robust debate over whether or not they ought to serve
as that aggregator.
And the genius of democracy is at the smallest levels,
where people can have that debate as to whether or not they do
want to create a new municipal utility or whether their county
government should serve them, or out in the rural areas of
Texas, beyond where you and I both live, whether or not the
school district or the councils of government perhaps could
serve them at lower cost.
And I think that is the--in our question, in our minds, as
we have begun to look at this as to whether or not we are
better off in those instances having new municipals created, or
what opportunities this gives us, that debate is what gives us
comfort that it is not just forced municipalization.
The other key component to this, sir, is----
Mr. Barton. You could have a 51/49 debate, though, or a 52/
48.
Mr. Smith. You sure could.
Mr. Barton. I mean, there is--democracy is a wonderful
thing, but I see votes on the floor almost every week that are
218 to 217, or very close to that.
Mr. Smith. And I am usually on the losing side of it, but I
understand that democracy----
Mr. Barton. Well, we want to keep it that way.
Not really. I retract that.
Mr. Smith. And, Mr. Barton, the other thing that scares me
to death is putting this to a vote when you have got the big
utilities having the right to fund the elections against you. I
understand that this is a big issue, and it is a gut call for
all of us that we think is worth doing.
But I think that is the point. We think it is worth doing,
and, as people have looked at how to make this work best for
consumers, there are those situations where new creations of
government make the best sense. That was what happened two
generations ago when our grandfathers electrified most of Texas
or, in my case, Illinois.
They looked at the fact the most cost-effective way to do
this was with a public aggregator.
Mr. Barton. Well, we are for aggregation. Our bill has got,
I think, a very strong and defensible aggregation provision in
it. I am just not sure we want to go to the opt-out version
that your group supports.
Mr. Smith. And the reasons that we think that it is
superior are two. One is it eliminates that solicitation and
transaction cost that is essentially a barrier that prohibits
many municipalities from going out and trying to aggregate and
then switch consumers, because that has been an incredibly
difficult thing, as we have seen, in just about every State
that has gone to competition, to get people to move.
And, second----
Mr. Barton. Be concise, because my time expired about 5
minutes ago.
Mr. Smith. And that is probably the most concise thing is
the cost barrier is so high that, unless you do it the other
way--and the other point that I wanted to make is we do give
people who want to go out and play in the retail market, who
think there is a better deal out there for them, the
opportunity to leave and go out and buy in the retail market,
to join associations like mine or AARP or the big business
association and go out and buy in those groups if they want to,
or buy in the retail market, and so it is the best of both
worlds, we think.
Mr. Barton. Okay. The gentleman from--well, first the
gentlelady from Missouri. Does she wish to formally introduce
Mr. Casten to the committee?
Ms. McCarthy. Mr. Chairman, I am going to brag about him
when it is my turn to ask questions.
Mr. Barton. Okay. Then we are going to recognize the
gentleman from Ohio, Mr. Sawyer, for 5 minutes for questions.
Mr. Sawyer. Thank you, Mr. Chairman.
Let me go back to Commissioner Moler and go back to the
dead horse I keep beating in terms of transmission.
I hope it is not a dead horse, Mr. Chairman.
It seems to me that one of the things we keep hearing in
one form or another is that people are deeply concerned about
equality of access, and to make sure that transmission is not
used as a conscious tool in advantaging one supplier over
another, and in the end wind up cutting off markets.
It seems to me that you are probably a veteran of the
California transmission wars. In fact, it was the head of the
California Commission who at one point said that 100 years of
transmission wars made the ISO a psychological necessity. That
was before RTOs.
Putting those wars behind us, could you look into the
future and speculate on what the success of stand-alone
transmission entities might look like, the kind of things that
the Transmission Alliance is talking about five, 10 years into
the future?
Ms. Moler. I believe that there are substantial pressures
on utilities to look at what their core businesses are going to
be. There is some interest in the industry in developing stand-
alone transmission companies.
One of the challenges that we have in the industry today,
as I look at it, and as my clients look at it, is that not all
uses of that system are on the same tariff, and so there are
dramatic differences in access, terms, and conditions, rates,
preferences, all those kinds of things in terms of use of the
same kinds of facilities.
Mr. Sawyer. Are you describing, in effect, the arenas of
regulatory reform that would be required to enable the success
of these kinds of structures?
Ms. Moler. I believe that, in order to have a fully
competitive market, transmission will continue to be a monopoly
for the foreseeable future. I do not think we want two sets of
wires down the interstate highways.
Distribution I believe will continue to be regulated by the
States for the foreseeable future. And what we are seeing now
is a diminution in wholesale transactions. We are seeing the
wholesale market is not functioning well at all. We are seeing
less trading now on NYNEX, for example, than you saw just a
year ago. Things are headed in the wrong direction.
An economist I talked to yesterday said that he believes
that on most systems that less than 10 percent of the use of
the transmission lines is subject to Order 888 requirements. I
was stunned by that number.
We have got to have more happening--same kinds of
facilities, under the same set of rules.
Mr. Sawyer. Do we need to encourage investment?
Ms. Moler. Absolutely.
Mr. Sawyer. Can you talk about the kind of encouragement
that we ought to provide?
Ms. Moler. Americans for Affordable Electricity does not
have a particular position on incentive rates versus
traditional rate-making approaches. I think there is some
experimentation going along.
I can tell you from experience that it is difficult to
develop an incentive rate structure that really works.
Mr. Sawyer. In one point in your testimony you analogize
to--is it Order 668?
Ms. Moler. Order 636 is the gas equivalent.
Mr. Sawyer. That is what I meant, the natural gas order.
Does that analogy extend to citing decisions, as well? Should
it? And, if not, what is the solution to the conundrum that we
face with regard to----
Ms. Moler. AAE does not have a position on this. I,
personally, have testified before this committee that I believe
there should be Federal siting of electric lines that is
analogous to the siting under section seven of the Natural Gas
Act.
Mr. Sawyer. Thank you very much. I appreciate your
flexibility, Mr. Chairman.
Mr. Barton. The Chair is turning the Chair over to Mr.
Largent, and the Chair recognizes Mr. Largent for 5 minutes for
questions.
Mr. Largent [presiding]. Thank you, Mr. Chairman.
I want to ask your question, first of all, to a
distributive generator, and that is Mr. Casten with Trigen.
One of the questions our chairman has been asking is about
this 50 megawatt language that is in the bill and what would be
an appropriate number.
You are a distributive generator. What would be a fair
number if it was something less than that?
Mr. Casten. I believe that you should eliminate the number
and describe what it is you are protecting. You cannot get a
right number.
What I would suggest is that a distributive generation
facility be defined as one that is designed and primarily used
to provide electricity to its host, and that if you are doing
that you have the right to an interconnect that is a standard
and that is safe, but it is equitable for the size differences
between things, because that is----
Mr. Largent. Is there a certain size, Mr. Casten, that has
to be interconnected to a transmission versus a distributive
distribution system?
Mr. Casten. Yes, there is, but it is going to vary by
utility by utility, and I think Congress shouldn't get anywhere
close to the electrical engineering. We can work that out. But
the point is that if you can connect to the local distribution
system you ought to have the right to do it if primarily there
to provide services for that entity.
Mr. Largent. Okay.
Mr. Casten. Coming back to the earlier question, I think
everybody is focused on a view that the world will continue to
generate its power centrally and it will all go through the
transmission system. I predict that the big competitive force
will be transmitting energy through gas pipelines, oil trucks,
coal, and it will be made at the other end of the line, and
that is what will put the pressure on the transmission lines to
behave.
Mr. Barton. Will the gentleman yield just to follow up on
that?
Mr. Largent. Sure.
Mr. Barton. We thought about a functional definition
instead of a discrete number, and the reason we do not have a
functional definition is that we are told that there are some
fairly creative utilities out there and distributive generators
that can game that definition.
Are you satisfied that there are attorneys adequate enough
to the task to come up with a functional definition that can
withstand the gamesmanship?
Mr. Casten. I am reasonably satisfied, and we will submit
the best shot we can that would do that. The gaming is severe
right now.
Mr. Barton. Okay. Thank you. Thank you, Mr. Largent.
Mr. Largent. Let me ask Mr. Kanner, Marty, I want to ask
you a question about the remedies for market power. If FERC had
ability to address--market power, does it have to be
divestiture? That is the first question. Or does divestiture
have to be one of those tools that they have in their box?
No. 2, if you say it does need to be in the tool box, does
it have to be permanent divestiture?
And then, three, because most people have viewed the market
power issue as being sort of transitional, maybe over a 3- to
5-year period of time, does the potential exist to say that we
could sunset FERC's ability to address market power after, say,
a 5-year window?
Mr. Kanner. Thank you, Congressman. Those are all very
important and valuable clarifications.
We do not advocate forced divestiture of all utility
generation. It is simply not real. And we do think that it is a
useful tool, as a tool of last resort, but there are many other
things that can be used. I note that in the State of Texas,
where they do not prescribe asset divestiture, they do have a
system where the utilities, in essence, auction off the
capacity from generation, or some portion of it, for a set
period of time, and I think that is a very effective tool to
both foster the competition that we need and address market
power. So it is sort of a ``twofer'' if you will.
And I think that, as they did in Texas, some of those
remedies can, in fact, be sunset. I would urge the committee,
while we have our ideal language that does grant FERC that last
resort mechanism of divestiture, that the Texas model is also a
very valuable one for the committee to look at.
One of the keys there is that the utility, itself,
prescribes its mitigation plan, as you did in the bill that you
offered with Mr. Markey, so the utility says, ``Here is what we
propose to do,'' and then the Commission reviews whether it is
adequate, and the bill can prescribe what some of those tools
can be.
Mr. Largent. Okay. The Chair is going to give himself 1
more minute, since the chairman took some of my time, and I
wanted to ask Ms. Moler a question.
I think Mr. Sawyer talked about the analogy that you used
between what we did--and I wasn't here, unfortunately, which is
why I ask the question--the analogy between gas transportation
and what we are attempting to do in terms of regulating the
transmission lines and not having, you know, the FERC regulate
unbundled retail sales and States regulate bundled sales.
How did that work with gas and how do you see--I mean, can
you kind of enlighten us on that analogy a little bit?
Ms. Moler. The very short course in the evaluation of the
natural gas rulemakings would go something like: first, FERC
tried to have some special programs where you could have
customer choice if you wanted it. They were reviewed by the
courts. They were found to be discriminatory. FERC then
eventually, in Order 636, required all gas pipelines to develop
tariffs that would provide open access, same terms and
conditions for everyone, use the gas pipeline, and also
required the sale of the natural gas to be separated from the
transmission as far as the corporate arrangement is concerned.
It did not go beyond the city gate, so a lot of States
still have bundled sales, so it is possible to have both
bundled and unbundled transmission subject to the same rules as
far as the interstate aspects of it are concerned.
And the gas market has been relentlessly competitive since
that time.
Mr. Largent. Okay. I am going to yield to the next
questioner, but I would like to get maybe a 1- or 2-page
summary of what you just said, and maybe a few more details on
that, if you would not mind.
Ms. Moler. I would be happy to do so.
Mr. Largent. Thank you.
Who is next? Ms. McCarthy from Missouri?
Ms. McCarthy. Thank you, Mr. Chairman, and thank you for
your generous use of time. I hope that we can all be granted
the same.
I wanted to begin, first of all, by welcoming back Mr
Casten. When you visited with us the last time, as we were
having discussions about what would be in the perfect bill, you
mentioned to me that there are, in fact, at least in our State,
and perhaps in others, laws that impede companies from
competing, and you were very enthusiastic about us taking up
and passing a bill.
But does this bill that we are looking at, if it were
enacted as it is currently drafted, really solve or exacerbate
problems you are facing in trying to conduct your business
today in Missouri? And I would like any other panelist to
reflect on that, as well.
And I would like to ask a second question to you, Mr.
Casten, to Mr. Cooper and Cowart, and that is one that I asked
an earlier panel today. Does the Barton bill provide sufficient
guarantees that renewable power providers will be able to
compete successfully in a deregulated market, and would it,
indeed, improve reliability in a restructured market?
Mr. Casten, thank you again. I am quite proud, as is my
county executive, of the work you are doing. In fact, she was
just in New York on a national panel that ``Forbes Magazine''
sponsored talking about the public/private partnership that you
have established in our community. It is a great model to us
all.
But my concern, as a member of this committee, is to make
sure whatever we do at the Federal level enhances that, does
not impede it, and, therefore, speaks correctly to it.
Thank you.
Mr. Casten. Thank you for the question.
There are a series of barriers that we face that I wrote
about in chapter eight of my book, and I am not sure how many
of them you can deal with at the Federal level, but I will just
take off some of the ones that are there.
Fifteen States make it illegal for a third party to
generate power, and I think that the Federal Government in the
bill could say everybody can generate power.
There is a law in Missouri, as you know, that is an anti-
flip-flop law which has been used that if you have once been
supplied by one supplier, you cannot flip to another one. That
is a pretty effective way to shut off competition, and that
needs to be affirmatively stated.
The largest problem that distributed power faces is
interconnection, and it is a boring electrical engineering
thing, and I appreciate the panel dealing with it, but it is
consistently used to say, ``We have got to have these safety
standards that are appropriate for a 1,000 megawatt nuclear
plant apply to everything that comes on line.'' As the chairman
of the West Chester Putnam Boy Scouts, we are trying to put in
a 12-cabin campground that is sustainable, and we want to put
up 12 kilowatts of photovoltaic, and the local utility has been
given the right to force us to spend $30,000 testing the
interconnect. They have no standards.
Well, you have got net metering in the bill, but if you do
not get the interconnect standards set by an impartial agency,
then net metering won't help.
So get the interconnect. I do not think that you can get
one bill that does everything the first time. I think you have
done a great job as far as you have come. It can be improved,
of course. But get it started, and then, with 2 years in, come
back and fix up some other things.
Your second question was: does it give enough help to the
renewables?
Ms. McCarthy. To compete successfully.
Mr. Casten. To compete successfully.
Ms. McCarthy. And provide reliability.
Mr. Casten. Okay. I think that it gives enough with the
interconnect to take 2 years and see what happens.
I am struck by Fredrich von Hayek, who said that the
affairs of human beings became so complicated that nobody could
predict what they would do, about 30,000 years ago.
And so the minute you change the rules and open it up to
competition, I am looking over my back, because somebody is
going to figure a way to do it cheaper, and I think renewables
will--see what happens for a couple years and then adjust it,
is my advice.
Ms. McCarthy. Mr. Cowart?
Mr. Cowart. All right. I will take my turn.
First, I would like to make an observation about
distributed resources, generally. We tend to concentrate on
distributed generation as an important goal, as an important
public value as we move into a more competitive environment,
and I agree with Mr. Casten that distributed generation can be
a really important resource for the Nation.
But efficiency resources are also distributed. They are
modular. They can be manufactured at scale. And they produce,
in an electrical sense in terms of providing electrical service
to end users, much of the same benefits as distributed
generation.
We need to remember to support both distributed efficiency
and distributed generation as we go forward.
To answer your question about renewables, I do not believe
the bill does do enough to ensure the healthy future for
renewables that the Nation will need.
With respect to reliability, as I said earlier in my
remarks, I am very concerned, in fact, that we are missing the
boat on reliability. We are leaving out of the equation here
one-third of the picture--that is the efficiency with which
electricity is ultimately used, which drives the problems that
we are seeing in transmission and in generation adequacy.
And I know the question will be asked: well, why is that a
Federal issue? Why is energy efficiency a Federal issue?
Probably 10 times today, maybe more, I have heard people
say that reliability is a regional issue, that incentives ought
to be given to support new transmission investments, and
incentives need to be given to open up the market for the
construction of new generation.
Because the grids that we all are connected to are regional
in scope, the physics of those grids dictate that what happens
somewhere else on the grid is going to affect reliability
everywhere and the price everywhere. And, for that reason, it
just doesn't make--it is not logical, and we are leaving a lot
of money on the table if we say that an RTO or other
reliability organization has the authority to mandate the
construction of new transmission for reliability purposes, or
we can raise the reserve margin across an entire region for
reliability purposes, which are going to raise costs to
everybody.
But we do not have a mechanism at the regional level to
support enhanced investments in energy efficiency which could
achieve the same reliability goal less expensively.
Ms. McCarthy. Mr. Chairman, I know that time has expired,
but I know there are a couple of other panelists who would like
to speak to the reliability question that I raised. May I have
an extension of time?
Mr. Largent. The gentlelady has had an extension of time,
but yes, if you would like to have one more response, that
would be fine.
Ms. McCarthy. Yes. Mr. Segal, I think you wanted to speak,
and then Mr. Cooper.
Mr. Segal. Thank you, Congresswoman.
Ms. McCarthy. Or whomever.
Mr. Segal. It will be a real short answer for us.
We are not here to talk about the renewables portfolio or
anything like that. As service contractors, the bottom line is
this with respect to what is in the bill: the bill has a good
first start in some areas with respect to open books and
records, but, frankly, that is not much of a start.
In order to actually fix the problem with respect to cross-
subsidization, getting into unregulated affiliate markets,
there need to at least be broad principles articulated within
the bill, as there were in earlier drafts. There need to be
broad principles that include a clear prohibition and cross-
subsidization, because, just like this committee recognized in
the Telecommunications Act of 1996, there are not sufficient
protections in existing antitrust law with respect to
competition in unregulated markets. There need to be at least
some mechanism to make sure that these small businesses--
really, the small business discussion item for this bill, these
small businesses do not fall through the crack because there is
no enforcement mechanism in place to make sure that they are
not crushed by utilities as they try and move into unregulated
markets.
Ms. McCarthy. Mr. Smith?
Mr. Largent. Maybe we can have the rest of the panelists
submit their responses in writing. We have got to move on.
There is a reception in here at 4, I am told, so we have to
keep moving.
Ms. McCarthy. First things first.
Mr. Barton. The gentleman from Illinois, Mr. Shimkus, is
recognized for 5 minutes.
Mr. Shimkus. Thank you, Mr. Chairman.
Mr. Kanner, will you please describe for me horizontal
market power? Just define it. I am having a hard time getting
it defined the last couple days. Can you do that?
Mr. Kanner. Sure. It would be where, in a given market all
trading the same thing or selling the same thing, the ability
of an entity or a group of entities to raise and sustain prices
above what would occur in a competitive marketplace.
So, in other words, if it is office supplies, I could sell
pencils for whatever I want and there is no one else that can
effectively cut my ability to do so.
Mr. Shimkus. And so, in the term of power instead of office
supplies, it would be controlling the price?
Mr. Kanner. In terms of power, it would be two summers ago
in California where the generators in southern California were
able to raise the prices 3,500 percent in some of the ancillary
services market and sustain those prices because there were
only four players.
Mr. Shimkus. Why cannot a quality, independent RTO approved
by FERC, which, based upon my understanding, would require open
access, why can they not control or mitigate this type of
market power?
Mr. Kanner. Again, in California during those price spikes
there was a qualified ISO approved by FERC in place, and that
entity went to FERC, went to a Federal regulator, to ask for
help to resolve the problem.
You simply have markets that get defined by transmission
constraints, and within those markets, if you do not have
enough players, then you do not have the competitive price
check that I think we are all looking for.
Mr. Shimkus. Ms. Moler, always pleased to see you again
after attending so many hearings. Do you want to add to this
for me?
Ms. Moler. The only thing I would add to it, Marty--I
believe that Marty, Mr. Kanner, has correctly described the
answer to your market power question.
A qualified RTO can work if all transactions from all of
the entities participating in the RTO have to be under the same
rules. A lot of the RTOs that are already approved by FERC do
not--the tariffs do not apply to utilities' sales, bundled
sales to their own customers, so they are first in line and
they are not even on the tariff.
So they are a good start. Some of the RTOs would do that, I
might add. But you have got to have all uses of the
transmission system covered.
Mr. Shimkus. If the FERC required for the system to be
open--and we are talking physics here--and people put power on
the grid and the consumer pulls power down, it is in a pool,
and so the producer has a record of how much they are putting
on the grid, the consumer has a record of how much they are
pulling down, and those interact, and if the grid is open, how
is there horizontal market power?
We do not know where those electrons are going. That is my
point.
Ms. Moler. The electrons all get mixed up. Right.
Mr. Shimkus. I mean, that is the point. In the physics of
this in this debate, we cannot follow it from the producer to
the consumer. All we know is that it is going to a pool and
people are pulling it down, and we are going to individually
contract with a producer.
So if the FERC requires that the ISO or the RTO or the
transco is opened, why doesn't this system work? People are
telling me they need more tools than that.
Ms. Moler. I believe that truly open access, where it
covers all the transactions on that grid, is a very effective
remedy for market power. I view that as a market power
initiative.
When people talk to this subcommittee and advocate market
power remedies, I believe that truly open access, as described
in the amendment that we submitted today, would accomplish
that.
Mr. Shimkus. And, Mr. Casten, do you want to just add to
that debate on the physics?
Mr. Casten. The only point I would say is that the issue
that people are concerned about came about because there was no
price signal to the consumers, and so we want to be careful
trying to solve a problem with legislation. We can get the
wrong problem.
The consumers did not see that high price and could not do
anything about it. Hopefully, in a competitive market consumers
will say, ``I do not want to pay $3,500 a megawatt hour right
now. I will do something else.'' That will solve some of the
market power from the other end.
Mr. Shimkus. As we saw with the price spikes in the
midwest, there has been numerous entries now into the
generation, or at least proposals on the board to fulfill the
void.
Thank you, Mr. Chairman, for being so generous with the
time, and I yield back the balance of my time.
Mr. Largent [presiding]. The chairman wants to announce
that any and all members who have additional questions can
submit those in writing for the panelists, and we will get
responses.
I recognize the gentleman from Massachusetts.
Mr. Markey. Thank you, Mr. Chairman, very much.
One thing I have learned is I never get in between Steve
Largent and a reception.
We are going to keep that consecutive game streak going
here, you know what I mean?
You know, here is the thing that I try to keep in the back
of my mind, which is that these are monopolies, you know, and
it is a deep-seated pathology. Okay? It really is. And you are
what you eat, and when you eat monopoly profits for that long
it is going to be hard to change, and there is a kind of a
paradox when you deal with monopolists, when you legislate in
that area, which is that it takes more regulations to put on
the book in order to break up the monopoly than already existed
beforehand, but it is toward the goal of making sure that all
the rest of these competitors can get in, and once all the
competitors are in and secure then you can take all the
regulations away and then you do not need any at all.
But breaking down 100 years of pathology is not easy, so
you have got to go through that process to turn it into a
healthy, balanced, normal marketplace, which most other parts
of the economy have.
So what I would like to ask--first, Ms. Moler, I will try
to get all my questions in to Ms. Moler and Mr. Kanner--is why
is it that in the testimony today all the people representing
retail consumers and industrial consumers and independent power
producers and power marketers and other competitors have very
serious problems with the Barton bill, the transmission, the
RTO, the merger, and the other market-power-related provisions,
and all the monopolies support the Barton bill?
Why is that, Ms. Moler? What, in your opinion, do you think
it is about the Barton bill that----
Ms. Moler. I would hazard a guess that they do not believe
that the monopoly power has been appropriately constrained.
Mr. Markey. What do you think, Mr. Kanner?
Mr. Kanner. Well, Congressman, I think we can say that very
clearly all of the proponents of markets and competition and
consumers believe that Congress needs to and must address these
sets of issues if we are going to receive the intended benefit
to competition.
Mr. Markey. Okay. Now, Mr. Kanner and Ms. Moler, earlier
one of the witnesses from the last panel mentioned some
specific examples of instances in which incumbent utility
monopolies had exercised market power, including Florida Power
and Light, AEP, and some utilities in Wisconsin.
Are you familiar with any real-world examples of market
power problems? Can you point to any States, regions, Mr.
Kanner?
Mr. Kanner. I think you can. I used earlier the example in
California, which is, to me, the starkest, where there were
dramatic price increases in the ancillary services market of
some 3,500 percent and it was limited there because the
computer could only enter four digits, so it was $9,999. So
that is a very clear example.
I think we have had market power examples elsewhere where
these new generators that Mr. Shimkus mentioned are desirous of
building new plants, but they are told that they are last in
line because the utility's own plants get to grandfather and be
cued up first for interconnection, and the longer you wait, not
only do we forestall that competitive market, but the cost of
interconnection, because of the impact on the system, goes up,
and ultimately those projects can be uneconomic, not viable.
Mr. Markey. Mr. Cooper, could you give me the nightmare
scenario? Could you briefly?
Mr. Cooper. Well, the nightmare scenario I think occurs in
reality in California. If you think about what happened there,
the State of California could not make a market on its own and
had to turn to the FERC and say, ``We need some relief.'' The
simple fact of the matter is that this is an interstate market.
The nearest competitive power may be across the State border,
and the State cannot--the entity that has that power can, in
fact, be operating in both States.
Imagine the screaming and shouting if the State of
California tries to tell a generator in Nevada who is
withholding his power in California that they have to sell it
into the State. It cannot happen. They would just scream and
shout and say they crossed the State border.
This is an interstate market. The transmission grid is a
highway. This is the highway of commerce.
Imagine if you are a vegetable producer in Texas who says,
``Look, let's put up a toll booth at the State border and turn
back all the trucks that might come from California with fruit
in them.'' This is a nightmare system.
You have to have a supply side, a demand side, and a
highway of commerce in between, and clearly that highway is an
interstate highway and it is an interstate market.
Mr. Markey. Ms. Moler, let me ask you a question.
Does section 101 of the Barton bill codify the 8th circuit
decision which held that FERC cannot bar utilities from giving
first priority in transmission to serving their native load
even if this undercuts their obligation to provide firm
transmission service to other parties?
Ms. Moler. I believe that section 101 does codify the 8th
circuit decision. The FERC----
Mr. Markey. And what impact does that have on FERC's
ability to prevent utility monopolies to grant themselves
preferential service for their own use and prevent others from
fairly, effectively, and efficiently utilizing the transmission
grid?
Ms. Moler. FERC would have no authority to look at the
bundled transactions that you describe.
Mr. Markey. None at all?
Ms. Moler. Correct. The reliability provision does talk
about FERC having authority over ``bulk power facilities.''
And, as I said in my prepared statement, I cannot reconcile the
bulk power sections and the jurisdictional sections.
I noticed that NERC today proposed to solve that by saying,
notwithstanding any provision of the Federal Power Act, this
reliability authority would be up and running, but section 101
does amend the Federal Power Act.
Mr. Markey. Thank you.
Thank you, Mr. Chairman.
Mr. Largent. Thank you.
I recognize the gentleman from Tennessee.
Mr. Bryant. Thank you, Mr. Chairman.
Again, let me thank you for just continuing to hold these
various hearings on this very important issue.
Today we have had two very representative panels, and I
appreciate their testimony. Unfortunately, I have been in and
out today with another subcommittee hearing with the Surgeon
General in one, and also on the floor talking about health
care, which is another very important issue, certainly one of
the day.
In order to avoid duplication, since I have not heard all
of your testimony, I am not going to wade in and try to ask you
additional questions, but, Mr. Chairman, I would ask that we be
given a few days and maybe we could submit questions in writing
if we have any additional questions.
Mr. Largent. Yes. Without objection.
Mr. Bryant. Thank you.
And, again, thank you for your presence here today.
I yield back the time.
Mr. Largent. And the gentleman from Texas is recognized for
5 minutes, Mr. Hall.
Mr. Hall. Mr. Chairman, thank you.
I have noticed that there are not very many people asking
Mr. Smith any questions, and I left--I had to leave and go and
come back, and I have been going to see where Mr. Markey was.
He goes and comes and then come back revved up and ready to go.
Are you the same one they call ``Smitty'' down in Austin,
Texas?
Mr. Smith. Mr. Hall, I am that same Smitty.
Mr. Hall. The same one that came to my office and told me
everything I was doing wrong----
Mr. Smith. And hope to do that again.
Mr. Hall. Well, I enjoyed you. You are a class guy.
Mr. Smith. Thank you.
Mr. Hall. And you just say what everybody else says, so--
but I noticed that some here represent AARP, some Americans for
Affordable Energy, coalition coordinator for Consumers for Fair
Competition, Consumer Federation of America, and then you
represent everybody else. You represent the public citizen,
right?
Mr. Smith. Right. That is what I try and do.
Mr. Hall. I have a quick question to ask everybody, but I
will ask you first. How has this bill been implemented in Texas
that we just passed there? How is it working?
Mr. Smith. Well, it is good and bad and ugly, and the----
Mr. Hall. In that order?
Mr. Smith. Yes. I think our Public Utilities Commission has
done a great job of doing rulemaking on this.
The bad news is that we did not anticipate a number of the
problems in the bill and we did not get language tight enough
in a number of key areas, some of which you have been talking
about today.
Mr. Hall. It was amazing to get a bill with the vote you
got down there, right?
Mr. Smith. Well, especially in the House. And it was a bill
that was heavily worked, and we got tremendous--almost
everybody, with the exception of Public Citizen and the
consumer groups, were in support of the bill, and the chairman
and the House did a tremendous job down there. And we got an
awful lot in that bill. I do not mean to be belittling it. We
just did not think that this was a good idea.
But the ugly part and the part that I think is really
important here in this conversation is what we did not really
understand was that the way we set up the ISO, the ball has
been stolen from the Public Utilities Commission on a number of
critical matters regarding reliability, access to transmission,
the data collection about consumers and how consumers get
shifted around.
And so when you all do your ISOs, unless you--our goal
would be to have them done publicly, but if you do have these
regional ISOs, make sure you have a significant majority of
consumer representatives on those boards that control them;
otherwise, the same big old boys that have been running the
system are going to continue to control who gets access and you
will continue to have monopolies really running the system.
Mr. Hall. Part of your presentation was to assure we are
not just benefiting the big boys.
Mr. Smith. Yes. That is the essence of it.
Mr. Hall. You recommended allowing communities to buy at
wholesale for their citizens, and you said to help protect
residential consumers you should consider adding a provision
called ``community choice.'' There is a provision on
aggregation, but community choice you say is different. How is
different from the provision the that chairman put in his bill?
Mr. Smith. We had a robust discussion a few minutes ago
about this, and----
Mr. Hall. Okay. I won't--if you have covered that, I won't
go into it.
Mr. Smith. But let me give you the short version, and that
is that what happens then is the community gets together, votes
on whether to create a new public power entity or buy power for
its consumers, and then we think gets the wholesale deal.
In Texas, what we found was that when people went out to
wholesale they were getting 20, 28 percent reductions in price.
The best in the country right now, the best market in the
country right now in Pennsylvania, the star market, it is only
an 18 percent difference from what it was before they did
deregulation.
We believe that wholesale gets you better deals for the
average consumer, and that is the key message that we have got,
so that is why we are suggesting that you give the community
choice and then you give the people the opportunity to opt out
if they would like to do so.
Mr. Hall. Are you for this bill?
Mr. Smith. No, sir, I am not. As I mentioned earlier, I
think it is a--there are a couple good things in it, but it
needs to go further.
Mr. Hall. All right. You are not for the bill.
Mr. Brice, do you support this bill?
Mr. Brice. With some revision.
Mr. Hall. All right. Betsy?
Ms. Moler. With some change.
Mr. Hall. Do you all have the same opinion?
Mr. Barton. I have seven amendments. By the time we are
done with the amendments, it will not look like the original
bill, that is for sure.
But we need legislation.
Mr. Hall. Who was it that asked a while ago and they gave
us all the things that were wrong with it, and I whispered to
the chairman, ``Ask him what is right about that.''
Mr. Barton. That was our strongest supporter.
Mr. Hall. Well, you cannot fault this chairman. He has laid
it out there and we can take shots at it and can restore it and
correct it maybe. I hope we can.
Mr. Kanner?
Mr. Kanner. With some substantial changes, substantial.
Mr. Hall. Mr. Cowart?
Mr. Cowart. Also with substantial changes. I think it can
be restored, frankly.
Mr. Hall. Maybe I have not got enough time for you to tell
me what. Go ahead. Go ahead and tell me. You are just against
it like it is and you do not think it is repairable?
Mr. Cowart. No. I said I think it could be repaired. There
are some very significant, positive elements in this bill, and
it is just the very important parts of what ought to be done
aren't included at all.
Mr. Hall. Mr. Smith, you have already spoken. You have not
changed?
Mr. Smith. Have not changed in the last five witnesses.
Mr. Hall. Mr. Casten?
Mr. Casten. Given a choice between this bill and no bill--
--
Mr. Hall. You, in your testimony, seemed to have wanted a
smaller bill. You think the time is not right, or something?
Mr. Casten. No, I did not mean that at all.
Mr. Hall. Did I misunderstand you?
Mr. Casten. Yes, sir.
Mr. Hall. Okay.
Mr. Casten. Given a choice between this bill and nothing, I
wholeheartedly support passing the bill.
Mr. Hall. Okay.
Mr. Casten. I think there are some more barriers that have
not been dealt with and they could be added, but you are in the
right direction, sir.
Mr. Hall. Well, you know, we are at the subcommittee level
and we will have a new chairman when we get to the committee. I
do not know in whose hands and what those hands want to do with
this bill when it gets there. And Rules is going to have an
awful lot to say about it, the Speaker will have a whole lot of
input at the Rules Committee, and when it gets to the floor--we
are a long way from the bill. But I agree with you--I think it
is better than no bill, and that with some real helpful
amendments that we can maybe restore this vehicle.
Yes?
Mr. Segal. Mr. Hall, I have got good news and I have got
bad news.
Mr. Hall. Give me the bad news first.
Mr. Segal. Bad news first is, as the bill is currently
drafted, the service contractors cannot support it. But the
good news is, all we have to have is a cross-subsidization
provision in with broad principles and we can support pretty
much any other bill, no matter what it says about all their
transmission problems, doesn't matter as long as there are
good, broad principles on our issue.
Mr. Hall. To get that one thing, how many votes up here can
you deliver?
Mr. Segal. I will answer that question. We have chapters in
every Congressional District in every State, air conditioning
contractors, alone, 4,000 of them, and we will mobilize----
Mr. Hall. It is already getting to be winter now. How about
the people in the wood business?
Have you got any people----
Mr. Segal. Electricians, plumbers, you name it, they are
going to kill me because I am leaving somebody out, but every
service contractor that is facing unfair monopoly based
competition, we are absolutely willing to support a bill that
contains adequate provisions on cross-subsidies.
Mr. Hall. Mr. Chairman, I asked to be last because I wanted
to go out in good nature and real gratitude to you, and I say
this in all sincerity, for the openness, that your door has
absolutely been open to everyone, and you have traversed this
Nation back, forward. I have asked for hearings in Honolulu.
You have turned those down. I did not like that.
But I think that we owe you a great debt of--hell, I am the
only one up here.
I am in slapping distance, so I have to be for him.
We do thank you for the way you have engineered this, and I
am honored to be a part of it with you.
I yield back my time.
Do you want me to take another 30 minutes?
Mr. Barton. No, no. I think we are--we were supposed to
have been out of the room at 3, because they are getting ready
for an Armey reception at 4.
Let me close the hearing. I want to thank you, Congressman
Hall. You have been polite to me. This is a team effort, and I
could not ask for a better ranking member than you in terms of
being open and congenial and forward-thinking in trying to
reach the goal.
I want to compliment the full committee ranking member, Mr.
Dingell, for all of his accessibility and his willingness to
listen and make sure the process goes forward.
Chairman Bliley has been very supportive of the hearing
process and moving toward delineation of the issues. So it is a
team effort.
I want to thank this panel. I apologize. Because of the
lateness of the day and the votes, we did not have all of the
subcommittee back to hear your testimony, but it is in the
record and we are going to be looking at it.
As I have told this first panel, my intention is to go to
markup the week after next, so, Mr. Casten, who said he had
some language on functional distribution, we need to look at
that, and I know Mrs. Moler's group has got some discrete
language. I know Mr. Kanner's group has. Try to get a champion
on each side of the subcommittee to bring it forward. I am
going to sit down with Congressman Hall as soon as we get all
that in, go through and see if we need to change the current
draft before we go to markup, or whether we want to go to
markup and then have a log of amendments. But we are going to
have an open markup process.
The one thing that I am going to discourage is subcommittee
members coming into the markup having not shown their
amendments to anybody. I cannot prevent that from coming up for
a vote. It is an open process. But I am going to tend to be
very negative on amendments that have not been shopped and have
not been shown to both sides of the aisle in terms of them
being accepted into whatever the legislative vehicle is.
Our subcommittee is well versed in the issue, well educated
on both sides of the aisle. This is a big, big issue. I think
it dwarfs telecommunications. I think it is more complex than
natural gas deregulation was. So we need the best minds working
on these issues, giving us the legislative language, and then I
have got confidence, between the kinds of members we have on
both sides of the aisle that are dedicated to trying to get a
good bill, we can come up with a good bill.
I do not disagree with most of your testimony, quite
frankly, that this is--you know, not too many of you are
categorically for the bill as it is, but with some changes. The
key is going to be, you know, how do we balance those changes
in the good for the country.
I have told the republicans on the subcommittee when we
meet, ``I want suggestions on good public policy,'' and then we
are going to have to make some political decisions, but I want
suggestions on good public policy so that, if we start with
good public policy, when we have to make a political decision
to get the votes, at least the base underline is good public
policy.
So I know you have got interest groups and I know your
interest has got to be preeminent in your presentation, but
when you go back and make your reports tonight or tomorrow to
the trade groups that you represent, try to get them to think
about not just what is best for you, but what is best for good
public policy, because we have got a chance in the next 2 weeks
to mark up a bill that restructures an industry that has never
been in any type of a competitive market for over 100 years,
and that is a real opportunity, and we ought to take advantage
of it in this session of Congress.
I thank this panel. You are adjourned, and the committee is
adjourned.
[Whereupon, at 3:20 p.m, the subcommittee was adjourned, to
reconvene at the call of the Chair.]
[Additional material submitted for the record follows:]
Responses of David K. Owens, Executive Vice President, Edison Electric
Institute to Questions of Hon. Joe Barton
Question 1. Some witnesses suggest including Clean Air Act
amendments in electricity legislation based on the Waxman bill (H.R.
2900) or the Pallone bill (H.R. 2569). What is your position on these
bills?
Response: EEI does not support including Clean Air Act amendments
in electricity restructuring legislation. Any provisions affecting air
emissions from electric generating sources should be part of an overall
reauthorization of the Clean Air Act which applies to all industries,
rather than done piecemeal in other legislation. Electric generating
plants already face uncoordinated, overlapping and inconsistent
programs under the Clean Air Act, probably the most complex of
environmental statutes. Adding more requirements outside of the Clean
Air Act structure would only make matters worse. Additionally, the air
emissions included in both the Waxman and Pallone bills are addressed
in the existing Clean Air Act, and implementation of the statutory
programs is underway or currently under development. It would be
premature to add other requirements outside of the Clean Air Act before
all the existing Clean Air Act provisions are fully implemented and the
impact on overall air quality fully realized.
Question 2. You assert FERC has no authority over holding company
mergers. If so, why did AEP and CSW submit their merger for FERC
approval? Do you expect PECO Energy and Unicom to submit their merger
for FERC approval? H.R. 2944 does not expand FERC regulation if it
merely clarifies existing authority.
Response: The Federal Power Act does not grant FERC explicit
authority over mergers of holding companies. In fact, FERC's assertion
of jurisdiction over holding company mergers is relatively recent. Many
disagree with its position as a matter of law. But, as a practical
matter, litigation of this issue during the pendency of a merger could
delay merger approval for years. Approvals of utility mergers already
take too long. Thus, as a practical matter federal restructuring
legislation needs to resolve this issue, just as it should resolve
other issues where FERC jurisdiction is ambiguous. However, we are
opposed to expansion of FERC merger authority over holding companies.
Question 3. Mr. Rao proposes establishing a rebuttable presumption
that nonradical lines in excess of 60 kilovolts are transmission
facilities. What is your reaction?
Response: FERC's seven part test, which is accepted in the Barton
bill, properly concludes that a variety of factors need to be
considered to correctly distinguish transmission from distribution.
FERC developed this test in Order No. 888 after considering comments
from all interested parties. FERC concluded that no single factor, not
even voltage, is sufficiently important to be a primary measure of the
nature of a given facility. Under the current FERC approach, FERC will
give great deference to state determinations applying the seven part
test. Mr. Rao's approach might well deny states authority over
facilities that really serve a distribution function.
Question 4. Mr. Rao gives examples of IOUs redesignating
transmission as distribution in order to avoid open access
requirements. Why did Commonwealth Edison reclassify 40% of its
transmission as distribution? Why did Wisconsin Public Service Company
try to reclassify over 90% of its transmission as distribution?
Response: Every proposal to clarify what is transmission and what
is distribution is subject to regulatory review and approval by state
regulatory commissions and FERC. FERC established the seven part test
for identifying transmission facilities in Order No. 888 because it
recognized that restructuring could require utilities to revise
precisely how they accounted for transmission and distribution
facilities based on whether or not an asset was actually being used for
a transmission or distribution function in a competitive context. FERC
recognized, for example, that open transmission access could utilize
facilities which utilities had traditionally treated as distribution
for accounting and regulatory purposes. The requirement of open access
distribution in state restructuring plans similarly could cause
utilities to take a new look at how they classified various facilities.
In fact, states such as Illinois have required utilities to
refunctionalize as part of their restructuring legislation.
In Order No. 888 FERC also described the process and factors it
would use to review these classifications. This process provides for
public input, and deference to state determinations about the proper
classification of transmission and distribution facilities within each
state. However, FERC makes the final decision on all of these requests.
No utility can unilaterally transfer facilities from one category to
another. In short, this process is a natural response to the changing
use and regulation of the utility delivery system that is fully
regulated by FERC and the states.
Question 5. You state Congress should authorize States to impose
reciprocity, which would give States the power to regulate interstate
commerce, by denying out-of-state electric suppliers access to their
retail markets. Are you concerned States may abuse this power? For
example, New Jersey could use its reciprocity power to deny the access
of coal utilities to its retail markets.
Response: With the modification we suggest, the only criteria which
a state could use to require reciprocity involves whether a utility has
applied for or provides open access distribution. A state could not
impose environmental or other restrictions under this reciprocity
approach.
Question 6. You state TVA provisions ``absolves TVA of the most
basic regulatory constraints.'' Under the status quo, TVA is not
regulated, it has a closed transmission system, it sets its own
transmission rate and power rates, Federal law requires its customers
to buy from TVA, and antitrust law does not apply to TVA. H.R. 2944
opens TVA's transmission system, provides for FERC regulation of TVA
transmission and power sales outside the region, gives TVA customers a
choice, and applies antitrust law to TVA. What is a better deal for
TVA, the status quo or H.R. 2944?
Response: The phrase you quote in your questions refers to Section
612 of H.R. 2944, which says that Subtitle A ``shall be interpreted and
implemented in a manner that does not adversely affect bonds issued by
the Tennessee Valley Authority.'' We believe that this extraordinarily
broad loophole virtually voids many of the regulatory provisions that
might otherwise apply to TVA under other sections of H.R. 2944.
We also do not believe the goal of fair competition is advanced by
allowing TVA to carry its subsidies and exemptions over the fence into
competitive wholesale markets. If TVA is to be an active competitor in
the electricity marketplace, it should play by the same rules as other
active competitors.
______
Responses of Alan Richardson, Executive Director, American Public Power
Association to Questions from Hon. Joe Barton
Question 1. You say H.R. 2944 eviscerates FERC jurisdiction over
the transmission system. That is not what FERC told us yesterday. FERC
told us H.R. 2944 codifies Order 888. Let's be clear what you are
asking for--you want Congress to go beyond Order 888 and give FERC
jurisdiction over a larger part of the transmission system than it
assessed in Order 888. Isn't that correct?
Response. APPA's view is not that H.R. 2944 eviscerates all FERC
jurisdiction over the transmission grid. Rather, as I testified
previously:
[I]n attempting to create a bright line distinguishing
Federal and State regulatory jurisdiction, two provisions of
H.R. 2944 combine to eviscerate FERC jurisdiction over
significant components of the interstate transmission network.
Section 101(b)(1)(B) does not allow FERC regulation over
bundled retail sales of electric energy. Section 101(e) allows
for a FERC determination of whether a particular facility
qualifies as transmission or distribution, but requires FERC to
give deference to State commission decisions. When these
provisions are combined, this section cuts FERC out of the
regulation of significant amounts of transmission access and
use over bundled sales. If this section is interpreted to allow
a preference for bundled firm load over unbundled firm load on
the same transmission system under emergency situations, then
it is clearly inappropriate. Such an interpretation would
undermine the goals of promoting competition and standardizing
regulation of the national grid. [emphasis added]
The bill's attempt to establish a bright line between state and
federal jurisdiction is likely to balkanize the grid and to lead to
protracted litigation of the new divide. As private power companies
seek to protect themselves from competition, they could use the
extension of slate jurisdiction over facilities and the bright-line
prohibition on FERC inquiry into the comparability of bundled retail
service to unbundled wholesale service to establish effective barriers
to competition.
Section 101 will prompt utilities to forum-shop, seeking to
transfer assets to state jurisdiction where the regulatory climate is
favorable and the objective is to protect their generation and merchant
functions from competition.
APPA does not seek to extend direct FERC authority over the
transmission of electric energy, as part of a bundled retail sale.
However, the Commission must have the authority to ensure that all
users of the transmission grid receive comparable, non-discriminatory
access to the grid, whether the sale is characterized as a bundled
retail sale, an unbundled retail transaction, or a sale for resale in
interstate commerce. Chairman Hoecker has in fact sought just such a
clarification in his testimony, illustrating that H.R. 2944 in fact
does not codify Order 888. Rather it constricts the scope of the
Commission's existing jurisdiction.
H.R. 2944 here raises two issues of grave concern to APPA. First,
if transmission facilities are refunctionalized to ``local
distribution,'' it becomes much more difficult to make the case that
such facilities must be controlled and operated by RTOs. The results
may be RTOs that lack operational control over the entire bulk
transmission grid. An RTO's ability to perform each of the functions
identified by FERC and those identified within H.R. 2944 would clearly
be impaired if, for example, a major portion of the grid's Available
Transfer Capability, is controlled not by the RTO, but by local
utilities. Of equal importance, an RTO's ability to expand the grid in
response to the needs of all transmission customers will be hobbled by
dependence on each local utility to upgrade non-RTO facilities.
Second, the bright line between bundled retail and unbundled FERC-
jurisdictional transactions would appear to foreclose inquiry by FERC
(or by a wholesale customer in a court of competent jurisdiction) into
the comparability of the transmission services afforded by a local
utility to its bundled sale retail customers in comparison to the
rates, terms and conditions of transmission access afforded to
wholesale transmission customers. One must remember that none of the
independent system operators now in operation or the RTOs now
envisioned by the industry intends to operate the entire grid--from
generator busbar to customer meter. Thus, comparability of the
wholesale and retail delivery services provided by the local utility is
still an issue of great concern to public power. For the most part,
APPA members are interconnected at sub-transmission voltages through
facilities that may or may not be operated by RTOs. Thus, our members
will remain subject to discriminatory conduct by private power
companies. Reliance upon state Commissions to ensure that public power
systems receive comparable access would result in increased regulation,
as states are forced to take on functions now performed at the federal
level. In addition, one can anticipate a proliferation of differing
regulatory regimes among the states governing local transmission
access. While each state properly must design and implement its own
program for retail choice, standardization of the rules for local
transmission access under a FERC-jurisdictional tariff is essential for
the creation of large and liquid regional power markets.
Question 2. One thing we have heard loud and clear the past four
years is the need to respect the States. You propose granting FERC
jurisdiction over transmission used to make bundled retail sales. What
is the position of the States on this issue?
Response. APPA has been among those urging Congress to respect the
rights of the States (and their political subdivisions) regarding if,
when and how to address retail competition. In our view, they, are
better positioned than Congress to address these issues. This is why we
have consistently, opposed a ``date-certain Federal mandate'' for
retail competition. At the same time, we have endorsed Federal
legislation to sort out the difficult jurisdictional issues necessary
to make wholesale competition (competition in interstate commerce) work
as intended, and to lay the foundation for effective retail competition
in those states that have or may in the future proceed down that path.
Theoretically, every electron in the grid flows in interstate commerce.
We have never suggested that Congress could not endorse this expansive
view of what constitutes interstate commerce, only that it should not.
The problem then is how to draw reasonable boundaries between those
issues subject to FERC jurisdiction, and those that should be left to
the States. Transmission has historically been used to define the
boundary, and, following Order 888, this has given rise to questions
regarding FERC jurisdiction over transmission for bundled retail sales
and unbundled wholesale sales. We believe that there should be
comparability with respect to access, use and price for transmission
services without regard to whether the facilities are used for bundled
retail sales or unbundled wholesale sales. We believe this was one of
many goals of Order 888.
Congress should make it clear that FERC has full jurisdiction over
all elements of transmission in interstate commerce, including the use
of subtransmission and distribution voltage facilities that are needed
to accomplish the transmission of energy at wholesale. To the extent
that the Congress determines that the states should retain jurisdiction
over the transmission portion of bundled retail sales, Congress should
also find that such jurisdiction is shared with the Commission. Where
there is a conflict between state commissions and FERC under the
Federal Power Act, the interests of the state should give way to the
extent that they create a barrier to interstate commerce.
If we do not have uniform treatment of transmission facilities
there will be wide disparities in treatment of similarly situated
customers. For example, citizens of State A served by a publicly owned
electric utility that purchases power at wholesale and unbundled
transmission service from a private power company could be treated
differently from other citizens in the same state who are retail
customers of the same private power company simply because the IOU's
transmission costs are bundled together with the power and distribution
components of the retail bill. The opportunities for discriminatory
treatment with respect to transmission access, use and charges in such
situations are apparent.
We do not speak for the States on this issue, and therefore cannot
provide a definitive answer regarding their position.
Question 3. You oppose FERC deference to the States in
determination of transmission and distribution facilities, which is the
approach FERC laid out in Order 888. Is FERC giving too much deference
to the States? Can you give examples? You indicate utilities are trying
to reclassify facilities. Is FERC agreeing to this reclassification?
Response. In Order No. 888, the FERC announced that it had
jurisdiction over all facilities necessary to complete a wholesale
transaction, without regard to whether such facilities were labeled
``transmission,'' ``distribution'' or ``local distribution.'' The
Commission stated that it would apply a seven-factor test to determine
what facilities were ``distribution'' facilities for purposes of
determining the federal/state jurisdictional split when a sale is made
to a retail end user and that it would defer to state regulators'
determinations of what facilities are distribution.
In the real world, under the guise of applying the seven-factor
test, owners are seeking to ``refunctionalize'' (reclassify)
substantial amounts of their existing transmission facilities in an
attempt to remove these facilities from FERC jurisdiction. As of yet,
the states and FERC would appear to have properly applied the seven-
factor test. Recent utility initiatives give us great pause,
particularly in light of the language proposed in H.R. 2944.
In one recently filed application to the FERC, a major transmission
owner in Illinois has proposed to refunctionalize approximately 40% of
its total transmission facilities to distribution. Although details in
the filing are sketchy, it appears that almost all 138 kV and below
facilities would be ``distribution'' facilities if FERC approved the
application. Only 345 kV and above facilities would remain
transmission.
Another transmission owner in Wisconsin submitted a filing to its
state regulatory agency under which only 124 out of a total of 1,474
pole miles of existing transmission should remain transmission. The
remaining 1,350 miles would be reclassified as ``distribution.'' The
filing would have left only seven of the owner's 33 interfaces
available for transfer to a RTO.
In Order No. 888 FERC has stated that it will defer to state
commission determinations. While such deference may be appropriate in
the determination of what facilities constitute ``local distribution''
or ``transmission'' facilities, these proceedings do not take place in
a regulatory vacuum. Restructuring presents many states with a
substantial loss of regulatory jurisdiction to FERC (in the area of
RTOs and transmission), to a self-regulatory NAERO (in the realm of
reliability), and to largely unregulated markets (in the area of
generation and marketing). State regulators will have a strong
incentive to capture jurisdiction, by extending their purview from
local distribution to the transmission of electric energy, even where
such transmission is of an interstate or multi-state character. Owners
also have a strong incentive to retain control of such facilities
rather than transferring them to an RTO.
The refunctionalization of facilities from transmission to
distribution raises significant issues, including:
<bullet> Would refunctionalization of transmission to distribution mean
that FERC has no jurisdiction over these ``distribution''
facilities?
<bullet> Will these ``distribution'' facilities become subject only to
state jurisdiction?
<bullet> Will operational control of these ``distribution'' facilities
be transferred to the RTOs as originally planned or will owners
retain full operational control over such facilities?
<bullet> Will these ``distribution'' facilities no longer be subject to
the requirements of Order No. 888?
<bullet> Will these ``distribution'' facilities no longer be subject to
any of FERC's open access or comparability requirements?
<bullet> Will state regulators determine rates, terms and conditions
under which wholesale customers have access to these
``distribution'' facilities, including whether owners can
reserve significant portions of the capacity of these
facilities for reliability purposes (i.e., CBM), impose load
ratio restrictions on the use of such facilities, adopt non-
comparable allocation or curtailment schemes or otherwise
impose rates, terms or conditions that would discriminate
against and limit customer access to such facilities?
<bullet> Will states that have different or conflicting economic
interests use their new authority to balkanize regional
markets, e.g., to prevent the transmission of low-cost energy
to ``downstream'' states or to prevent the transmission of
energy deemed to be insufficiently ``green?''
<bullet> Will customers be exposed to a vertical rate pancake if they
are served by ``distribution'' facilities or are purchasing
from a generator connected to the grid by ``distribution''
facilities? If so, will the sum of the vertical pancake exceed
the owner's current transmission rate?
The functional approach to differentiating between transmission and
distribution facilities makes sense, so long as it is applied taking
into account these and other questions. It is appropriate for FERC to
consider state commission determinations, but requiring FERC, by
statute, to give due deference to state commission determinations at
the very least is an invitation to litigation.
Question 4. Mr. Rao proposes establishing a rebuttable presumption
that nonradial lines in excess of 60 kilovolts are transmission
facilities. What is your reaction?
Response. A rebuttable presumption based on the size of the
facilities as proposed by Mr. Rao would be appropriate. We have not
addressed what the appropriate threshold should be.
In light of our concerns with the refunctionalization of
transmission facilities to local distribution, we agree that a lower
voltage threshold provides greater assurance that utilities will not be
able to create barriers to competition. A rebuttable presumption would
also allow a transmitting utility to petition for the exclusion of
specific facilities or classes of facilities from transmission.
Congress might consider, for example, the restructuring legislation
recently enacted in Wisconsin. According to The Energy Daily, Friday,
October 8, 1999, page 2, Wisconsin's Reliability 2000 legislation
contains language that classifies anything above 130 kilovolts as
transmission and puts the burden on a utility to explain why lines in
the 50-130 kilovolt range should not be classified as transmission.
Question 5. You say ``it is difficult on public policy grounds to
sustain the proposition that publicly owned transmission facilities
should be subject to FERC jurisdiction.'' I agree that small public
transmission systems should be exempt from FERC jurisdiction, and H.R.
2944 does that. Why should large public transmission systems like New
York Power Authority be exempt from FERC regulation? Why shouldn't
these large systems be fully open?
Response. As noted in our testimony, APPA appreciates the fact that
H.R. 2944 limits FERC jurisdiction over small publicly owned
transmitting utilities. The specific comment in our testimony, that is
quoted in this question is based on a number of factors. For example,
most of the large public power systems that own substantial amounts of
transmission facilities have voluntarily filed tariffs with FERC or a
Regional Transmission Group that provide for comparable transmission
service, are participants in ISOs (such as is the case with the New
York Power Authority), or both. The transmission facilities of these
utilities are fully open. In addition, publicly owned transmitting
utilities are subject to FERC open access transmission orders under
amendments to the Federal Power Act contained in the Energy Policy Act
of 1992. Further, APPA supports the expansion of FERC authority to
require all transmitting utilities to participate in RTOs. However, as
noted and more fully explained in our testimony, the exercise of this
authority with respect to publicly owned utilities must take into
account the unique conditions and characteristics of publicly owned
utilities. Therefore, based on what publicly owned utilities have
already done to provide comparable treatment, what they may be required
to do on a case-by-case basis under provisions of the Energy Policy Act
of 1992, and what we believe should occur with respect to RTO formation
and participation, additional FERC jurisdiction appears unnecessary.
However, to the extent Congress concludes that FERC jurisdiction over
publicly owned transmitting utilities should be expanded, we urge that
such regulation be as light-handed as possible to ensure comparability
without imposing unnecessary regulatory burdens.
Question 6. You want to limit FERC regulation of large public
transmission systems to non-rate terms and conditions. If large public
systems retain rate authority, they could shift power costs into
transmission rates, and would have an incentive to shift costs if their
power costs were above-market. Should publics be able to shift power
costs into transmission rates?
Response. Shifting power costs into transmission rates is
inappropriate. For the reasons set forth in our testimony, we do oppose
FERC jurisdiction over public power transmission rates. jurisdiction
over rates and revenue requirements should be limited to ensure
comparability. Comparability encompasses standards of reasonableness
and non-discrimination. We stated in our testimony that ``where FERC
determines that rates are not comparable or are discriminatory, it
could remand the rate to the local regulatory authority for review and
revision as necessary. Public power systems would therefore retain
local control over rate making and revenue requirement decisions.''
[emphasis added]
Question 7. You say market power issues ``simply cannot be
addressed by the individual States.'' Did California reduce generation
market power? Did the New England States reduce generation market
power? Did Texas reduce generation market power?
Response. In fact, the states have a major role to play in the
control and mitigation of market power, through the conditions and
directives they impose on utilities during the restructuring process.
States, for example, have used utility generation divestiture to ensure
there are multiple owners of deregulated generation assets within their
state. Without such state action, their restructuring efforts risk the
creation of unregulated monopolies.
Once the divestiture has occurred, most states will find it
difficult if not impossible to mitigate market power, because electric
power markets generally extend far beyond the boundaries of a single
state. Texas, with its DC voltage interconnections to other states, is,
like Alaska and Hawaii, an obvious exception. Even a state as large as
California is overwhelmingly dependent on electric power imported from
other parts of the west. In fact, throughout much of the year, imports
set the market price for power sold into the California market. Thus,
concentration in the electric generation market in a region,
particularly where coupled with control of scarce import capacity,
presents a risk from the exercise of market power in these
``downstream'' markets. If the concentration is in the upstream (and
out-of-state) region, regulators in downstream states have few if any
tools to deal with such concentration.
States lack the power to halt the trend of mega-mergers intended to
create large, regionally dominant generation suppliers. Neither can the
states effectively halt the creation of multi-state holding companies
whose complex financial and business relationships are difficult for
even federal regulators to decode. This problem will become even more
serious if the current restrictions on the scope and configuration of
utility holding companies are eliminated by the repeal of the Public
Utility Holding Company Act.
Question 8. Should individual States have the authority to
establish transmission reliability standards? Would fifty different
state standards improve reliability? What would be the impact on
interstate commerce?
Response. States have had the authority to regulate the plans and
actions of the utilities within their borders with regard to
reliability standards for several decades as a part of the voluntary
industry self-governance system known as the North American Electric
Reliability Council (NERC). The NERC system functions through several
regional grids that really reflect the engineering of the system and
have little relationship to state political boundaries. This system
worked to produce the most reliable electric system in the world while
the industry functioned through the geographic monopolies regulated
primarily at the state level.
Since the passage of EPACT in 1992, when Congress opened up the
national electric transmission grid to promote greater wholesale
competition and exchange, those geographic borders have been become
even less relevant to the control and flow of electricity around the
country. The industry, with an unprecedented level of cooperation,
decided that the voluntary system no longer fulfills the reliability
needs of the system, and that a self-regulatory organization (NAERO)
with federal enforcement powers was needed to provide the proper level
of focus on the reliability of the system. This focus on national
reliability standards is also needed to support the expected increase
in market activity that will be carried out over the system.
There is nothing in the industry consensus language, which is
included in H.R. 2944, that undermines the states' abilities to
regulate the actions of utilities operating within their borders with
respect to reliability standards for transmission and distribution
delivery of electric power to retail customers in their state.
Fifty sets of different state reliability standards could undermine
the reliability of the interstate electricity transmission system. The
national standards that the NAERO process envisions will reflect state
and regional input throughout the process. States should not have the
authority to establish standards that affect the national standards for
transmission reliability necessary to create an effective and properly
functioning interstate transmission grid. If states are allowed to
create standards that negatively affect national transmission
reliability, it could undermine the goals of promoting electric
competition in interstate commerce.
Question 9. You assert H.R. 2944 prohibits FERC merger hearings.
H.R. 2944 does not eliminate hearings and maintains the discretion of
FERC to hold hearings when it believes doing so is necessary to build a
record to base a decision on. Do you believe FERC has to hold hearings
under current law? How many of the 30 recent mergers were set for
hearings?
Response. I attempted to be very precise in my testimony. I did not
state that H.R. 2944 prohibits FERC merger proceedings. I did state
that ``H.R. 2944 would eliminate the option of exidentiary hearings.''
[emphasis added] Section 203 of the Federal Power Act provides for
``notice and opportunity for hearing.'' H.R. 2944 would delete this
language, and substitute language providing for ``notice and a 60-day
opportunity for oral or written presentation of views . . .'' There is
a significant difference between an opportunity for a hearing, which
may include everything from no hearing, to a paper hearing, to a full-
blown evidentiary hearing, on one hand, and the much more limited
opportunity for oral or written presentation of views on the other. In
our view, the opportunity for oral and written presentations provided
in H.R. 2944 does not encompass evidentiary hearings. For the reasons
set forth in our testimony, we do not believe FERC should be prohibited
from requiring such hearings. We are concerned over the potential for
mergers to frustrate rather than promote competition. FERC has found
this to be the case in its evaluation of certain merger proposals.
While every merger takes at least one competitor out of the market,
some mergers may promote greater competition and benefit consumers.
Therefore, we do not believe FERC must hold an evidentiary hearing in
every merger proceeding that comes before it, but we do believe it must
have the opportunity to do so.
According to research done by FERC Commissioner Massey and
presented at a recent Commission meeting, of the 30 merger applications
received since the FERC adopted its new and streamlining procedures,
five were received within the last five months and have not yet been
processed. Of the remaining 25 cases, only three were directed to be
set for hearing. These three were: American Electric Power and Central
and Southwest; Western Resources and Kansas City Power & Light; and
Allegheny-Duquesne. In the latter case, the applicants were offered the
option of going to hearing or accepting a set of conditions to address
and mitigate market power concerns. That merger was subsequently placed
on hold (in our view, for reasons unrelated to FERC's action). Thus,
only two of the last 30 major merger applications have been to full
evidentiary hearings. Examples of expeditious consideration include
Scottish Power, which received FERC approval to acquire PacifiCorp
within 98 days of its filing at FERC, and the MidAmerican Energy and
CalEnergy merger; which was approved in 93 days.
FERC has a self-imposed 150-day deadline for processing merger
applications. Clearly, many merger applications can be handled within
that time, but some clearly cannot. The Federal Power Act directs FERC
to review mergers and only approve those that are consistent with the
public interest. It is simply, not possible, and in our view not
appropriate, to ask FERC to examine extremely complex transactions and
determine whether they are indeed consistent with the public interest,
and to do so within time constraints legislated by Congress.
______
Responses of David Nevius, Vice President of the North American
Electric Reliability Council to Questions from Hon. Joe Barton
Question No. 1: Is there a way to provide for enforceable
reliability standards without providing for some additional Federal
authority to enforce standards? Can private organizations such as NERC
assume police powers or compel transmission owners or bulk power users
to join NERC? Can there be enforceable reliability standards without a
Federal role?
Answer: No, I don't believe it is possible to have enforceable
reliability standards without some additional Federal enforcement
authority, for three reasons. First, the Federal Energy Regulatory
Commission has jurisdiction over the wholesale sale of electricity in
interstate commerce and the transmission of electricity in interstate
commerce. FERC does not have clear jurisdiction over issues dealing
with reliability. Following the Northeast blackout in 1965, legislation
was introduced in Congress that would have given the Federal Power
Commission (FERC's predecessor) clear authority and responsibility over
reliability matters. But Congress never adopted that legislation.
Instead, the industry formed what would become the North American
Electric Reliability Council to coordinate industry standard setting on
a voluntary basis, with compliance based on ``peer pressure.'' There
were no enforceable reliability standards, but that approach has served
North America well for more than three decades. It is the emergence of
competition in the electric industry that now calls that approach into
question.
Second, FERC does not have jurisdiction over all entities that must
interact to maintain the reliability of the interstate, international
high voltage electric transmission system. FERC does not have
jurisdiction over the utilities within the Electric Reliability Council
of Texas, the Tennessee Valley Authority, the Federal power marketing
administrations (Bonneville Power Administration, Southeastern Power
Administration, Southwestern Power Administration, and Western Area
Power Administration), the municipally- and state-owned utilities, and
the rural electric cooperatives that have financing from the Rural
Utilities Service. Those entities account for approximately 30 percent
of the transmission assets in this country.
Third, policing and enforcement is inherently a governmental
function. Absent governmental authorization, such as exists in the
securities laws for the stock exchanges and National Association of
Securities Dealers to operate under Securities and Exchange Commission
oversight, NERC cannot assume police powers nor can it compel
transmission providers or bulk power system users to become members.
For these reasons, NERC proposes creation of an independent
industry self-regulatory reliability organization under FERC oversight.
This plan follows the self-regulatory models of the securities
industry. The new organization would have the authority to set and
enforce mandatory reliability standards. This approach capitalizes on
the electric industry's technical expertise in this highly complex
area, while also providing the governmental presence needed to assure
the fairness and validity of the enforcement process.
Question No. 2: There are some differences between the proposed
NERC reliability language and the reliability provisions of H.R. 1828.
Please provide comments on those differences, and indicate whether you
believe H.R. 1828 is an improvement over the NERC proposal.
Answer: The reliability provisions of H.R. 1828 are essentially the
same as the NERC reliability language, with three significant
exceptions. (Section 601(a) of H.R. 1828 would add a new section 218,
dealing with reliability, to the Federal Power Act; the section
references below are to that new section 218.)
The first important difference deals with governance of the new
industry self-regulatory organization. The NERC language provides for
governance by a ``board wholly comprised of independent directors.''
H.R. 1828 (section 218(e)(4)(E)) changes that to governance by a
``board of no more than eleven members, one of whom shall be appointed
by the Secretary of Energy.'' That change is unacceptable to NERC and
the coalition that is supporting the NERC language. The fundamental
premise of the NERC reliability legislation is to have an industry
self-regulatory organization operating under government oversight.
Permitting the Secretary of Energy to designate a representative on the
board would put the government into the organization itself More
importantly, the NERC proposal calls for independent directors, that
is, directors who do not have an interest in other market participants.
This independence requirement is omitted in H.R. 1828. This omission
has consequences even beyond the Department of Energy and could
transform the board for the new reliability organization from an
independent one to a ``stakeholder'' board--a significant change. The
Federal power marketing administrations, for example, are part of the
Department of Energy. The Secretary of Energy, therefore, is not
``independent'' from other market participants, but is a stakeholder in
the industry. Finally, the high voltage transmission system is
international in nature. The proposed new reliability organization
provides a means for interests from the U.S., Canada, and, as
appropriate, Mexico, to participate together in reliability standards
development and enforcement. The provision of H.R. 1828 that would
place a representative of the United States government in the governing
structure of the new reliability organization has already raised
significant questions from Canadian participants.
The second significant difference between the NERC language and
H.R. 1828 concerns the treatment accorded Federal power marketing
administrations, the Tennessee Valley Authority, the Bureau of
Reclamation, and the Corps of Engineers, as well as requirements of the
Nuclear Regulatory Commission. Section 218(k) of H.R. 1828 states:
``Any actions taken under this section by the Commission, the
Electric Reliability Organization, and any Affiliated Regional
Reliability Entity shall be consistent with any statutory or
treaty obligation of a Federal Power Marketing Administration,
the Tennessee Valley Authority, the Bureau of Reclamation and
the Corps of Engineers and any Nuclear Regulatory Commission
requirements.''
There is no comparable provision in the NERC language, and NERC
sees no basis for including such a provision. The provision appears to
establish an additional substantive standard that any actions by the
self-regulatory organization must meet for these identified electric
market participants. NERC knows of no reason why these entities should
be given special status when it comes to reliability, or why these
entities should not be bound by the same reliability rules that would
bind all other participants in the electricity markets. The Commission,
the Electric Reliability Organization, or an Affiliated Regional
Reliability Organization cannot change a statutory or treaty obligation
of these entities, any more than they can change any other law to which
other electric industry participants may be subject, including, for
example, clean air laws. NERC therefore recommends that this provision
not be included in any reliability legislation that moves forward.
The third significant difference between the NERC language and H.R.
1828 concerns the application of the antitrust laws. Under the NERC
language, activities of the Electric Reliability Organization and its
Affiliated Regional Reliability Entities, as well as the activities
undertaken in good faith under the rules of those organizations by
members of those organizations, are rebuttably presumed to be in
compliance with the antitrust laws. Under the provisions of H.R. 1828
(section 218(o)), the conduct of the Electric Reliability Organization,
its Affiliated Regional Reliability Entities, and members of those
organizations, to the extent that conduct is undertaken to develop or
implement an Organization Standard that is approved by the Commission
under other provisions of the legislation, would not be deemed illegal
per se. Such conduct would be judged on the basis of its
reasonableness, taking account all relevant factors affecting
competition.
NERC believes that the antitrust provisions of H.R. 1828 are too
restrictive. More than in any other industry, the cooperative actions
of participants in the electric industry are crucial to being able to
maintain the reliable operation of the transmission grid. Market
participants should not have disincentives to engaging in the necessary
cooperative behavior. By establishing the presumption, although
rebuttable, that the actions of the reliability organization and its
regional affiliates are legal, NERC's approach offers the needed
assurance to industry participants that engaging in the cooperative
actions necessary to maintain a reliable bulk power system will not
subject them to antitrust liability. The presumption of antitrust law
legality is justified by the oversight authority given to FERC over the
reliability organization's governance procedures and development and
enforcement of standards.
NERC therefore recommends that the original antitrust provisions of
the NERC language be substituted for those in section 218(o) of H.R.
1828. If this cannot be accomplished, several technical issues in this
H.R. 1828 language should at least be addressed. These include:
1. Omission of ``enforcement'' from protected activities. The H.R. 1828
language states that conduct undertaken to ``develop or
implement'' standards is not deemed illegal per se, but it
makes no mention of ``enforcement.'' The responsibilities of
the Electric Reliability Organization and its affiliates and
members are to ``develop, implement, and enforce'' reliability
standards. ``Enforcement'' should be included as a protected
activity.
2. Focusing the ``reasonableness'' language exclusively on effects on
competition. H.R. 1828 specifies that conduct is to be ``judged
on its reasonableness, taking into account all relevant factors
affecting competition (emphasis added).'' Some of the
activities of the Electric Reliability Organization, its
affiliates and members in setting and enforcing standards for
the reliable operation of the grid will likely have the effect
of restricting competition, because that is necessary in order
to maintain reliability. Having such activity judged based only
on matters affecting competition eliminates half the equation.
While we recommend retention of the original NERC language, if
any 66 reasonableness'' standard is to be included, NERC
strongly recommends that the language be revised to include
impacts both on competition and reliability. Alternatively, the
standard could be one of ``reasonableness, taking account of
all relevant factors,'' without highlighting any particular
factor.
3. Limitation of antitrust protection to actions ``approved by the
Commission under subsection (O).'' NERC recommends that this
clause be deleted. Otherwise, this language raises at least two
significant issues. First, what are the implications of this
language for standards that are adopted and enforced on an
emergency basis prior to ``approval'' by FERC? Second, is any
antitrust protection available under the language of H.R. 1828
for an existing Organization Standard that is suspended under
subsection (0(3)(b)?
In addition to these three significant differences, H.R. 1828
provides for an Electricity Outage Investigation Board within the
Department of Energy (section 602 of H.R. 1828). This additional
governmental agency is unnecessary. Both the NERC language and H.R.
1828 would establish the Electric Reliability Organization as an
independent, industry self-regulatory organization, with FERC
overseeing that organization. An Electricity Outage Investigation Board
within DOE would simply duplicate the efforts of the new reliability
organization and FERC.
The remainder of the differences between the NERC language and the
reliability provisions of H.R. 1828 are of either a clarifying or
conforming nature. NERC has no objection to those other changes.
Question No. 3: There are concerns about how transmission
constraints impede interstate electric sales. Where are the major
constraints--which States and regions have the worst constraints? How
do these transmission constraints limit interstate commerce in
electricity?
Answer: Transmission constraints limit interstate commerce in
electricity because they restrict the amount of power that can be moved
from one part of the country to another at a particular time. The
constraints arise from the physical configuration of the generation and
transmission facilities. The constraints can be one of three different
kinds--thermal limits, voltage limits, or stability limits.
<bullet> Thermal Limits: Thermal limits establish the maximum amount of
electrical current that a transmission line or electric
facility can conduct over a specified time period before it
sustains permanent damage by overheating or before it violates
public safety requirements. System operators must constantly
monitor actual flows throughout the network to ensure that the
power flows do not exceed these limits. Operators must also
monitor for ``contingency'' limits, that is, to ensure that the
power flow on any one facility will not exceed its limit
following the sudden loss (outage) of any other facility.
(Since electrical power flows readjust instantaneously, the
system must at all times be operated in this preventive mode.)
<bullet> Voltage Limits: System voltages and changes in voltages must
be maintained within a range of minimum and maximum limits.
Voltage limits establish the maximum amount of electric power
that can be transferred without causing damage to the electric
system or customer facilities. A widespread collapse of system
voltage can result in a collapse of portions or all of the
interconnected network.
<bullet> Stability Limits: The transmission network must be capable of
surviving disturbances (e.g., generators tripping off,
lightening strikes, wind damage to conductors) through the
transient and dynamic time periods (ranging from milliseconds
to several minutes) following a disturbance. All generators
connected to ac interconnected transmission systems operate in
synchronism with each other at the same frequency (nominally 60
Hertz). Immediately following a system disturbance, generators
begin to oscillate relative to each other, causing fluctuations
in system frequency, line loadings, and system voltages. For
the system to be stable, the oscillations must diminish as the
electric systems attain a new, stable operating point. If a
new, stable operating point is not quickly established, the
generators will likely lose synchronism with one another, and
all or a portion of the interconnected electric systems may
become unstable. The results of generator instability may
damage equipment and cause uncontrolled, widespread
interruption of electric supply to customers.
NERC's Planning Standards and Operating Policies set parameters
within which the system must be designed and operated in order to avoid
exceeding any of these limits.
Twice a year, NERC reports on its assessment of the reliability of
the electric system for the upcoming season, examining both generation
adequacy and transmission adequacy. While the location of transmission
constraints can vary from time to time, depending upon how the system
is configured, what load is being served, and what generators are
online, the NERC reliability assessments give a general picture of
where transmission constraints are likely to occur. I have attached a
copy of NERC's 1999 Summer Assessment (released June 1999) to my
answers. The summaries of the Regional assessments, beginning at page
21 of the Summer Assessment, give a general indication of where
transmission constraints can be expected under base case conditions,
However, as conditions depart from the base case either because of
equipment outages or higher-than-expected demand, transmission
constraints may be more severe or arise in other areas than indicated
in the report. As stated in the Executive Summary of the 1999 Summer
Assessment, ``[i]mprovements to the transmission system are not keeping
pace with the demands being placed on the system.''
Question No. 4: What is your position on the FERC proposed rules on
RTOs? In particular, do you think the pricing provisions will encourage
expansion of transmission and remove constraints?
Answer: NERC told FERC in comments filed August 23, 1999, that
properly functioning RTOs could help the industry deal with the
challenges it faces, but that RTOs were not the whole answer. NERC
identified four challenges facing the electric industry: the current
balkanization of the transmission grid; the mismatch between how
business is arranged and how power actually flows; transmission pricing
and compensation issues, and the huge increase in the number and
complexity of transactions. With regard to transmission pricing, NERC
said the following:
``Transmission rates must provide incentives to get the right
amount of transmission infrastructure built. The cost of
transmission is a relatively small part of the overall price of
delivered power. We must make sure that shortages of
transmission capacity do not restrict power flows and limit the
benefits that otherwise could be achieved from competitive
electricity markets.''
In the notice of proposed rulemaking, FERC expressed a willingness
to be flexible about transmission rates and to entertain incentive
rates as an inducement to get companies to join an RTO. The Commission
did not directly take on the linkage between transmission rate reform
and needed expansion of the transmission system. NERC believes that
this is a subject that the Commission will need to take on directly. I
have attached a copy of NERC's comments to these answers.
Question No. 5: H.R. 1828 and H.R. 2050 authorize compacts to plan
and site transmission lines. Do you think States will delegate their
siting authority to such regional bodies?
Answer: NERC thinks it unlikely that states will delegate their
siting authority to regional bodies in a way that effectively deals
with siting new transmission, although regional planning efforts may be
productive. In certain parts of the country (New England, for example)
there is considerable experience in states working together to address
regional problems. But the problems facing the industry today are often
siting new lines between what have been traditional regions. NERC's
Annual Ten-Year Reliability Assessments cite a number of examples of
these difficulties. I have attached a copy of NERC's Ten-Year
Reliability Assessment for the period 1998-2007 to these answers.
Unless the regional bodies were sufficiently large to include what are
now ``boundary'' problems, giving a regional body siting authority may
not be effective.
Moreover, siting new transmission lines has become one of the most
contentious issues facing state authorities. NERC does not believe that
state authorities would willingly give up control over matters that
their citizens feel so strongly about.
One additional factor is increasingly present. Federal land
management and resource agencies are playing a growing role, for
example under the Federal Land Management Policies Act, in deciding
whether and where additional transmission facilities can be built.
Regional compacts would not be effective in these circumstances unless
federal agencies are willing and able to turn over their own siting
authorities.
______
Responses of Glenn English, CEO, National Rural Electric Cooperative
Association to Questions from Hon. Joe Barton
Question 1. You propose removing limits on cooperative business
activity. My understanding is Federal law imposes no limits on
cooperative business activity, and any limits are set by State law. Do
you agree? If so, aren't you really asking Congress to preempt State
cooperative laws?
Answer. The Public Utilities Holding Company Act (PUHCA) places
federal barriers on the diversification activities of investor-owned-
utilities. State laws tend to provide the barriers to the
diversification activities of electric cooperatives. If Congress is
going to remove the barriers provided by PUCHA for the largest
utilities in the land, it should also remove the barriers for the
electric cooperatives.
Question 2. One thing we have heard loud and clear the past four
years is the need to respect the States. States have authority to
remove limits on cooperative business activity. If States have the
authority and the willingness to address this issue, why should
Congress preempt them?
Answer. State laws limiting electric cooperative business activity
were created for an earlier time. If there is to be no changes to
federal laws governing the electric industry, there is no need to
change state laws limiting electric cooperative business activity.
However, if competition is to be the result of changed federal laws,
then it makes no sense to allow barriers to continue to exist to
prevent members of electric cooperatives from providing themselves with
the diversified services they want through their cooperative.
Cooperatives are an important segment of the electric industry, and
thus, an important constituency for the Commerce Committee. To make
competition truly vigorous, people will need the authority to provide
the level of service they want for themselves through an electric
cooperative.
Question 3. Do you believe only cooperatives should qualify for an
exemption from FERC transmission regulation or should municipal
utilities or IOUs with small transmission systems also be eligible for
an exemption?
Answer. Electric cooperatives are consumer-owned. If you take
service from an electric cooperative, you are a member-owner of that
cooperative, and have a voice in the operation of it. That is
completely different from investor-owned-utilities that are operated to
make a profit from customers for the benefit of absentee stockholders.
The difference is truly significant for the concept of regulation.
Courts and Public Service Commissions across the nation have repeatedly
held that consumers can operate their own consumer-owned systems
according to their own needs without the necessity of being protected
by an agency of the Government. Local ownership, local control and
local autonomy are a more powerful force for consumer protection than
absentee regulators.
Additionally, true, effective competition for retail electric
service cannot be imposed by a remote, heavy handed, federal
bureaucracy attempting to force every supplier to be the same as every
other supplier. Retail competition will come from differences among
participants, and from the ability of participants to be different and
to offer different and new ideas, and from the ability of participants
to appeal to different market niches and to address unique local
circumstances. Size is definitely a significant consideration; other
issues are the extent of integration of the transmission facilities
with the bulk power system and the ownership structure.
Question 4. You propose exempting cooperatives from FERC merger
review because cooperatives are so small that mergers are unlikely to
raise market power issues. Should mergers involving other small
electric utilities also be exempt from FERC review?
Answer. Electric cooperatives should be exempt from FERC merger
review in part because they are small; in part because they are
consumer-owned, and in part because they are subject to merger review
at the Rural Utilities Service (RUS), a federal agency within the U.S.
Department of Agriculture, as a consequence of loan funds for the
construction of electric facilities in rural areas. As the mortgage
holder, RUS has the ability to prevent a merger, or suggest alterations
to merger terms. Subjecting electric cooperatives to merger review by
two federal agencies with dissimilar agendas is a prescription for
trouble.
As regards FERC's responsibility for protecting against market
power, NRECA and the American Public Power Association (APPA) jointly
filed a petition at FERC suggesting a moratorium on investor-owned-
utility mergers in excess of 1,000,000 customers until Congress
completes its work in creating a competitive environment for retail
electric sales. FERC did not act on the petition. Small system mergers
are of much less risk to the market than large system mergers and
should be subject to different standards of review.
If two consumer-owned systems want to merge, why should FERC be
involved? Consumers do not need FERC to protect them from themselves in
a merger case.
Question 5. RUS does review cooperative mergers, but my
understanding is they do so from the point of view of a banker and are
only concerned about loan recovery. Does RUS consider market power
issues when they review cooperative mergers?
Answer. The principle focus of RUS in a merger case seems to be the
repayment of the loan, the value of the mortgage and, furthering the
objectives of the rural electric Act, which is intended to insure
affordable, reliable electricity to consumers. Moreover, additional
federal review of cooperative mergers, focused on market power, is
unnecessary in part because cooperatives are so small. RUS is the
mortgage holder on about $32 billion in loans to electric cooperatives
to provide facilities to serve people in rural areas. The American
Electric Power Company (AEP) sold more electric power last year than
all the electric cooperatives in the nation combined. The repayment of
the RUS loan and the value of the mortgage is affected by market power
in that electric cooperatives do not have market power in the sense
that they can dominate a market.
Question 6. You express concern about the States setting individual
transmission reliability standards. Would 50 different transmission
reliability standards improve reliability? Would 50 different standards
burden interstate commerce?
Answer. Fifty different bulk transmission system reliability
standards would not accommodate reliability or interstate commerce.
NRECA supports a continued state role in preserving reliability of the
local distribution systems
______
Responses of Lynne H. Church, Executive Director, Electric Power Supply
Association to Questions from Hon. Joe Barton
Question 1. You propose granting FERC jurisdiction over
transmission used to make bundled retail sales. What is the position of
the States on this issue?
Response. We presume that the states' position on this issue will
vary from state to state, with some opposing and some supporting. In 24
states, for example, retail competition in electricity markets has
already been embraced. A key element of this process is the decision to
``unbundle'' the components of electricity transactions and separate
the costs of generation from those associated with transmission and
distribution services. For these 24 states, therefore, there will be no
direct long-term impact from the change in legislative policy that we
propose.
The lack of direct impact, however, does not imply that these 24
states or the remaining states will be indifferent to this issue. In
many states, the cost of power to consumers will be increasingly and
directly linked to access to a viable, robust wholesale power market. A
state that relies on an interstate wholesale market has to be vitally
concerned about the codification of rights for other states to place
the equivalent of toll booths on the interstate electricity grid. Thus,
any state that has come to rely on competitive wholesale markets should
be very concerned by the bill's clear split in regulatory authority
over the interstate grid.
Experience has shown that even small disruptions or curtailments of
transmission at distant locations can result in dramatic price impacts.
During the hearing process, one Subcommittee member stated that he
trusted his own state's public utility commission more than he trusted
FERC. This is not a correct reflection of the issue at hand. The proper
question is whether a policymaker trusts another state's public service
commission more than the FERC.
Many states, we believe, are coming to recognize the value of a
single regulatory body to have oversight responsibility and set
consistent ``rules-of-the-road'' for the interstate grid. At an earlier
Subcommittee hearing, representatives from Ohio and Pennsylvania said
as much in response to members' questions. What these states are
realizing is that; without consistency, there will be no investor
confidence; without confidence, there will be no robust, competitive
wholesale power market; and without a robust, competitive wholesale
market, many of the consumer benefits promised during the state's
debate over retail restructuring will not appear.
Question 2. You say H.R. 2944 interjects States into FERC
determinations of transmission and distribution facilities, by
providing deference to State views. Don't States already have a role in
such determinations? FERC granted them a role 3 years ago in Order 888,
but providing for deference to State views.
Response. EPSA believes absolutely that the States have a role to
play in these determinations. However, whether the states have a role
is not the critical issue for EPSA members. Our concerns center on the
extent of this involvement and, most critically, whether local
interests and issues will be allowed through a legal guarantee of
``deference'' to trump the general, national interest. As a simple way
to address these concerns we have suggested that the legislation be
amended to include the phrase ``provided such action is not contrary to
the public interest'' at the end of Section 101 (e).
It is true that FERC agreed to grant deference to the states on
these issues in Order 888. However, we believe that there is an
enormous qualitative difference between a decision made by an
independent regulatory body to grant deference to an entity and a
requirement of deference included in public law. In general, EPSA would
express concern or opposition to the specific language of Orders 888
and 889, were the Subcommittee to choose to codify the decisions
embodied in those orders as law. These orders are complex and the
public context is evolving. In the gas industry, for example, the
Commission's Special Marketing Programs led to Orders 436 and 451,
which led in turn to Order 636. Law, on the other hand, is often
relatively static and inflexible. EPSA is concerned that legislating
deference to the states, as drafted, will create a legal straightjacket
for FERC and obstruct the public interest.
Question 3. You oppose FERC deference to the States in
determination of transmission and distribution facilities, which is the
approach FERC laid out in Order 888. Is FERC giving too much deference
to the States. Can you give examples? You indicate utilities are trying
to reclassify facilities. Is FERC agreeing to this reclassification?
Response. As stated above, EPSA does not oppose some deference by
the FERC to state commissions. The question centers on the degree of
deference and whether local issues are allowed to trump the national
interest.
It is impossible today to answer the question as to whether FERC is
giving ``too much'' deference to the states. The issue of
``refunctionalizing'' transmission assets is a relatively new one and
is currently before the Commission in at least one case. Until FERC
acts, we cannot say.
However, we strongly believe that this is a very significant issue
and threat to the interstate grid. As competition takes hold, utilities
may attempt to shift assets between state and federal jurisdiction as
one way to exercise market power.
Evidence is mounting that transmitting utilities have already begun
to abuse FERC's ``seven part test.'' The American Public Power
Association recently released a report by Whitfield Russell Associates
with some troubling statistical information on this new trend.
According to the report, commonwealth Edison of Chicago recently
refunctionalized 40% of its net transmission plant, almost all of it to
distribution, including some 345 kV facilities. Sierra Pacific Power
has refunctionalized 50% of its transmission system, while Wisconsin
Public Service Corporation (WPS) recently filed with the state public
service commission to classify virtually all of its transmission assets
as distribution. If accepted by the Wisconsin Public Service
Commission, only 124 pole miles of facilities, out of 1,474 pole miles
reported on WPS's 1998 FERC Form 1, will remain subject to the
Commission's open access tariff.
FERC may or may not agree with these efforts to refunctonalize
transmission assets. However, regardless of the specific decisions
ultimately made, it makes little sense to codify an unqualified policy
of deference to state decisions. If such language were in the Federal
Power Act today, we would have no doubt that its effect would be to
tilt the decision making process further away from the pursuit of
positive, national policy.
Question 4. You say ``States acting on their own'' can't address
generation market power? Did the New England States reduce generation
market power? Did Texas reduce generation market power?
Response. Many states have attempted to address market power
issues. Some plans have been more effective than others. In New England
and in California, state action has resulted in the divestiture of
significant electric power generation capacity, which has broadened the
ownership base of the existing asset base and reduced vertical
integration in local power markets. In Texas, there was an attempt to
reduce the concentration of ownership of generation assets, but the
effort may fail. While the intention was to limit generation ownership
to no more than 20% of the market, loopholes included in the
legislation seem to permit at least one utility to continue to own
almost 40% of the current installed capacity in ERCOT with little
likelihood that significant divestiture will occur.
Notwithstanding the success (or lack thereof) of state attempts to
mitigate market power, there were always be a need for a multi-state or
national authority. Without question, the electricity grid is
interstate. For the foreseeable future, the grid will be composed of
regulated monopoly companies, many of which are and will continue to be
vertically integrated with generation capacity. Actions taken in one
state can directly affect the price paid for power in another state.
For example, the dramatic price spikes in the Midwest wholesale market
this past summer were linked to a curtailment of transmission capacity
along the U.S.-Canadian border.
Given the rapidly evolving nature of the electric power industry,
it is impossible to predict where and how market power will be
exercised. However, as long as the grid and wholesale markets are
interstate, it will be impossible for any state to fully protect its
customers from anti-competitive out-of-state activity. In fact, a state
may find itself unable even to identify or document the use of market
power from events beyond its boundaries, much less counter or remedy
it. As a result, we have endorsed the Administration's legislative
language as an appropriate, minimalist legislative solution to the
general issue of market power.
Question 5. You testify EPSA members do not see the courts or
antitrust laws as a viable approach to resolving market power issues.
What do you mean? Are you saying the market power problems you are
worried about don't rise to the level of antitrust law violations or it
takes too long to bring an antitrust action?
Response. Antitrust laws represent a powerful tool to address
market power. However, this tool, in general, is extraordinarily
expensive to apply and, when used, slow to achieve results. For
example, the electricity trade press reported last summer about a court
decision supporting a group of municipal utilities in an antitrust
action against an investor-owned utility on an allegation of
discriminatory access to the grid. When you read the article, you
discover that (1) the order to open the utility's system originated in
1980, (2) the discriminatory activity occurred in 1989, (3) an earlier
court agreed with the municipalities in 1993, and (4) notwithstanding
the latest court action, the investor-owned utility is still denying
that the recent decision is final.
Subcommittee members need to understand that the electric power
industry is rapidly and dramatically changing. Companies are entering
and exiting the industry on an almost daily basis. These companies
cannot rely a process that takes a decade or more for justice to
unfold.
In addition, we do not expect that every instance where the issue
of market power raised to require a court suit for resolution. In some
instances, the issues may be minor and need only a modest regulatory
intervention to address. Some anti-competitive activities may be,
frankly, inadvertent and more a result of mindset (``this is the way
we've always done it'') than a conscious decision to advantage the
monopoly provider. Without flexibility in policy and the ability to
resolve these issues in near ``real-time,'' the advantage of those with
potential market power will only increase. If one company understands
that its competitor lacks the financial wherewithal to survive a
lengthy legal battle, a clear advantage lies with the stronger company.
______
Responses of Jack Brice, Member, Board of Directors, AARP to Questions
of Hon. Joe Barton
Question 1. Some propose deleting the consumer protection
provisions from H.R. 2944, arguing State have authority to address
these issues. Should consumer protection provisions be included in
Federal legislation?
Response. Unquestionably, consumer protection provisions should
remain in Federal legislation. In testimony before your Subcommittee,
AARP stressed the importance of consumer protection provisions in
federal electric utility restructuring legislation. We view the Title
III provisions in H.R. 2944 that address ``slamming,'' ``cramming,''
information disclosure and privacy as a necessary consumer protection
floor. Absent federal guidelines, consumers could be subjected to the
types of deceptive and misleading practices that have plagued the
telecommunications industry. Further, we hope that states will act
independently to strengthen the provisions you have introduced in the
federal bill.
AARP is not alone in its support of federal consumer protection
provisions. Both federal and state-based consumer advocacy groups have
publicly stated the need for a federal role in this area. For example,
at the October 5 & 6 hearings on H.R. 2944, the National Association of
State Utility Consumer Advocates (NASSUCA), the Consumer Federation of
America (CFA) and the Regulatory Assistance Project (RAP) all testified
in support of Title III.
AARP believes that for competition in the electric utility industry
to work, strong federal consumer protection laws must be applied to the
sale and service of electricity in a restructured environment to
prevent abuse in the marketplace. Title III of H.R. 2944 supports that
belief and should be retained in any subsequent versions of the bill.
Question 2. You support municipal opt outs, or forced aggregation,
such as proposed by Mr. Brown. Why should municipalities have a
preference in aggregation?
Response. AARP supports the residential opt-out aggregation concept
in Mr. Brown's (D-OH) legislation, H.R. 2734. We do not however,
embrace the exclusivity givens to municipalities in the bill. In
actuality, AARP prefers the language currently in H.R. 2944. In
discussions with Members of the Subcommittee and staff over the past
two months, we have been promoting a more expansive definition of
aggregation than the one proposed by Mr. Brown. We believe that Title V
of H.R. 2944 achieves that goal by allowing ``any entity that
aggregates consumers'' to acquire retail electric energy on an
aggregate basis.
However, as we testified on October 6, we would like to see opt-out
aggregation facilitated rather than an opt-in plan. Opt-out aggregation
would ensure that a majority of underserved consumers could reap the
benefits of lower rates. Both opt-out aggregation and expanding the
number of groups eligible to aggregate are consistent with AARP's
overall goal of ensuring that residential customers benefit from
competition in the electric utility industry.
Question 3. You say that H.R. 2944 places the ``full burden'' of
universal service programs on the States. Isn't that where the burden
is now? Outside of programs like LIHEAP and weatherization, isn't
universal service a State responsibility?
Response. You are correct, Mr. Barton. Currently, the burden of
maintaining universal service programs is fully on the shoulders of the
states. While not necessarily ideal, ensuring electric service to all
has been manageable in large part due to the monopolistic nature of the
industry. AARP is concerned that a competitive marketplace will
displace the existing ``obligation to serve,'' putting more pressure on
the states to monitor the delivery of power to all residents.
Federal programs like LIHEAP and weatherization do provide some
needed assistance in today's utility environment. However, the annual
battles over adequate appropriations for these necessary programs
leaves doubt that the programs can continue to exist in their current
forms. More certainty is needed. AARP supports a universal service
program, administered by a Joint Federal-State Board and funded by a
per kilowatt hour charge that is assessed to all providers of
electricity. We strongly suggest that this assessment come from general
revenues and not become a line-item on consumers monthly billing
statements.
Truth-in-Billing Requirement
This section is in response to your question to Jack Brice at the
October 6 hearing. You inquired as to what AARP meant by ``truth-in-
billing'' as neither you nor Mr. Hall ``could be opposed to `truth-in-
billing.' ''
As AARP has testified to previously, we envision that a ``Truth-in-
Billing'' requirement will make it easier for consumers to read their
monthly billing statements, recognize who is providing service, what
they are paying for it and who they can call if they have questions. We
believe that such a provision will reduce the incidences of
``slamming'' and ``cramming'' and that it will complement the
information disclosure provisions of H.R. 2944 nicely.
______
Responses of Raj Rao, Indiana Municipal Power Agency to Questions of
Hon. Joe Barton
Question 1. You propose ``complete separation of transmission
control from generation interests.'' Do you propose mandatory
divestiture of transmission?
Response. TAPS does not propose mandatory divestiture of
transmission. Rather, TAPS proposes that FERC be given the authority to
require transfer of the control of transmission facilities (along with
sufficient control over generation to permit reliable operation of such
transmission facilities) to an RTO with broad regional scope. TAPS
proposes that FERC be empowered to require divestiture of transmission
only if it finds it necessary to achieve truly independent RTOs.
The complete separation of transmission from generation interests
discussed in TAPS' testimony refers to the critical RTO characteristic
of independence, not particular corporate forms. We feel strongly that
the RTO must be structured so that no transmission owners (or other
market participants) can control or influence the RTO. Thus, we oppose
the provisions in H.R. 2944 that permit market participants to retain
up to 10% of voting interests and unlimited ``passive'' interests
(which include a voice in certain decisions) as severely undermining
the fundamental concept of an independent regional grid.
TAPS has not taken a position on the transco vs. ISO debate. Both
structures can work if they are truly independent, have the appropriate
and broad geographic scope, and have authority to operate, plan and
expand the transmission system.
Question 2. You propose granting RTOs authority to require
construction. Do you propose giving RTOs authority to site transmission
lines?
Response. While TAPS would not object to giving RTOs authority to
site transmission lines, RTO siting authority is not a part TAPS' RTO
proposal, nor is it necessary to the TAPS proposal. Rather, what is
critical is that the RTOs have the authority to identify the
transmission upgrades necessary to meet the needs of all users and for
system reliability, and to require implementation of those upgrades by
the existing transmission owners or others, e.g., by bidding out
construction to third parties (a non-regulatory, market-based solution
to ensuring construction of needed transmission). The RTO or the entity
responsible for construction would need to obtain whatever siting
approvals are required. TAPS assumes that the RTOs finding that an
addition was necessary to meet regional needs would assist in the
siting process.
I note that while TAPS does not now have a position on siting
authority, I personally believe that federal siting authority could
assist in assuring that the transmission needed to support competitive
interstate power markets is constructed.
Question 3. You propose granting FERC jurisdiction over
transmission used to make bundled retail sales. What is the position of
the States on this issue?
Response. TAPS believes that it is essential to the bill's intent
of facilitating retail competition that FERC be clearly given authority
over all transmission service, whether bundled or unbundled. As
explained in our testimony, competition cannot develop on a state by
state basis if one state has the authority to grant a higher priority
to ``bundled'' power deliveries to its citizens, while relegating
unbundled transmission to out-of-staters to second class status. TAPS
recognizes that some states are seeking this authority, but we believe
such efforts are short-sighted. At its core, this issue is not a state
vs. federal matter, but rather a state vs. state issue that demands a
federal solution.
Question 4. You say H.R. 2944 allows large incumbent utilities to
foreclose competition. Can utilities foreclose competition without
violating antitrust law?
Response. Yes, as A. Douglas Melamed, Principal Deputy Assistant
Attorney General, Antitrust Division, Department of Justice, testified
before your Subcommittee on May 6, 1999 (at 6):
Let me now turn to the issue of market power. Because of the
existing structure of the electric power industry, there are
likely to remain significant market power problems in the
transmission and generation of electricity, even as the
industry is restructured to increase the role of competitive
market forces.
The authority of the Department of Justice to enforce the
antitrust laws with respect to the electric power industry does
not sufficiently address the ability of electric utilities to
exercise market power that can thwart free competition within
the industry. The antitrust laws do not outlaw the mere
possession of monopoly power that is the result of skill,
accident or a previous regulatory regime. Antitrust remedies
are thus not well-suited to address problems of market power in
the electric power industry that result from existing high
levels of concentration in generation or vertical integration.
For example, if one utility, by virtue of its history as a state-
sanctioned monopolist, owned most of the generation within a market
area, and there was limited transmission capacity to import power from
alternative sources, merely declaring there to be choice would relegate
consumers to purchasing their essential electricity requirements from
the worst of all worlds--a deregulated monopolist that would be free to
increase price above the level that would result from effective
competition. Foreclosure of competitors would result from past
regulatory regimens and past decisions about the siting and
construction of generation and transmission that created the current
topography of the transmission grid, not necessarily a violation of the
antitrust laws.
Indeed, market power can be conferred by ownership of
strategically-located generating units which, because of the
configuration of the transmission system and the location of generation
in a given area, ``must run'' for reliability purposes (e.g., to
maintain voltage levels under particular conditions). Without violating
the antitrust laws, the owner of such ``must run'' units is in a
position to take advantage of its market power by ``naming its price''
(acting as a monopolistic ``pricing maker,'' instead of a competitive
``price taker'') during time periods when the unit ``must run'' units
even in otherwise deregulated generation markets.
Question 5. You testify that ``individual states will be powerless
to effectively address this problem.'' Did California reduce generation
market power? Did the New England States reduce generation market
power? Did Texas reduce generation market power?
Response. Mere divestiture of one utility's generation, in bulk, to
a different owner in an effort to quantify and reduce stranded costs
does not reduce generation market power. While the presence of the
California ISO and ISO-New England have the effect of reducing market
power, significant generation market power remains. Indeed, reports
submitted to or by the new institutions illustrate that neither
California nor the New England States, acting individually or in
concert, have eliminated the generation market power that threatens to
deprive consumers of the benefits of competition.
For example, the March 9, 1999 ``Second Report on Market Issues in
the California Power Exchange Energy Markets,'' prepared by the Market
Monitoring Committee of the California Power Exchange, and filed at
FERC in AES Redondo Beach, L.L.C., et al., Docket Nos. ER98-2843, et
al., reports continuing exercise of market power. See, for example, the
report's description of bidding behavior (at 57, emphasis in original):
[M]any of the generators sometimes bid as if they have market
power, rather than as price-taking competitors. To put this
another way, not only did the generators have the ability to
affect the market price at times, but they also acted to
exercise that market power
The report also states (at 64) that ``at various times most of the
new owners of generation divested by the California investor-owned
utilities ``held back substantial amounts of capacity from the PX Day-
Ahead market. The amount offered (at any price) in the PX market was
often much less than the firm's effective capacity.'' While the authors
of the report did not have enough information to identify precisely why
capacity was withheld, the report observes (at 64): ``To the extent
that there was withholding of capacity from the PX market, whether to
meet anticipated ISO demands or deliberately to raise prices, it would
have the effect of further raising prices in the PX market.'' The
report concluded (at 66-67) that ``during some hours there was
considerable potential for generators to exercise market power in the
PX market . . . At these and other times, some [generation owners] bid
in a way that is consistent with an attempt to exercise market power,
and prices were high at these times.'' The report warned (at 68) that
forces ``if not countered, may lead to more frequent and more severe
episodes of high prices in the future.'' Significantly, as reported in
the oral testimony before the Subcommittee of Marty Kanner on behalf of
the Consumers for Fair Competition, investor-owned utilities in
California have sought FERC assistance in restraining the exercise of
market power in California.
Similarly, notwithstanding deregulated generation markets, ISO-New
England had to invoke Market Rule 15 (imposing temporary price caps)
more than 100 times this past summer to correct market deficiencies. At
the request of ISO-New England, FERC recently approved ISO-NE authority
to impose interim price caps to correct market flaws during periods of
capacity shortage, noting (at 4): ``Generators, it appears, are bidding
strategically to set the market clearing price during [capacity
shortage] conditions. At these times, all bids must be selected so
there is no effective price limit on the bids.'' \1\ ISO New England,
Inc., FERC docket No. ER99-4002-000, issued September 30, 1999.
Significantly, the New England Conference of Public Utilities
Commissioners submitted comments on September 22, 1999 supporting the
interim caps, explaining (at 1-2): ``NECPUC has worked hard to ensure
that ISO New England has the authority and tools necessary to monitor
the electricity markets for design flaws, competitiveness and
efficiency.''
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\1\ The portion of the underlying report that describes ``bidding
behavior'' has been withheld from the public at this time on grounds of
confidentiality. See Review of Reserves and Operable Capability
Markets: ``New England's Experience in the First Four Months,
Preliminary Draft dated October 1, 1999, by Peter Cramton, Professor of
Economics, University of Maryland and President of Market Design Inc.
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The recognition by the New England States that they cannot alone
``solve'' continuing and significant generation market power problems
is further highlighted by NECPUC's August 23, 1999 comments to FEC in
the RTO rulemaking proceeding, FERC Docket No. RM99-2-000 (at 17-18,
emphasis added, footnote omitted):
Th[e market monitoring] function should be expanded to
include mitigation of market flaws and power, and not be
limited merely to monitoring the markets. The Commission
proposes that the RTO be required to monitor markets for
transmission services, ancillary services and bulk power to
identify design flaws add market power and propose appropriate
remedial actions . . .
We agree that it is essential for an RTO to monitor the
markets. However, to be effective, RTOs must have unequivocal
authority to enforce violations of market standards and back
those findings with real sanctions and penalties. Failure to
have such authority will, at best permit, and at worst
encourage, anti-competitive activities by market participants.
Those anti-competitive activities could easily negate the
efficiency and cost savings gained by opening up competitive
wholesale markets.
Therefore, in addition to the monitoring requirements
proposed by the Commission, NECPUC strongly recommends the
adoption by RTOs of formalized market power monitoring and
mitigation rules such as those available to ISO New England.
Market Rule 13 authorizes ISO New England to impose sanctions
when market participants, through their actions, threaten to
impair short-term reliability or competitiveness of the
regional market, and Market Rule 15 allows ISO New England to
use emergency corrective actions to remedy market design and
implementation flaws. Adoption of such rules by an RTO will . .
. help assure that RTOs meet the Commission's goal of a
competitive market.
As the NECPUC comments highlight, generation markets are regional
and, with limited exceptions, are not confined to a single state. A
state has limited ability to address what is necessarily a multi-state
problem. Indeed, a growing number of utilities span multiple states and
even multiple regions. No one state has jurisdiction to solve the
problem. By analogy, assuming the big three automobile manufacturers
were engaged in price fixing, you wouldn't want to deny the Department
of Justice the authority to sue because a single state could do so. The
same is true here.
The portion of Texas covered by the Electric Reliability Council of
Texas, which is connected to the integrated North American grid only by
DC ties, is one of those exceptional circumstances where the
electricity market is more confided. Some of the approaches adopted in
the Texas legislation, such as the provisions for divestiture and
capacity auctions, could be effective tools to reduce market power.
However, for those states that are part of the Eastern or Western
Interconnections, state efforts to address what are inherently regional
market power problems (as acknowledged by NECPUC) are likely to be far
less effective than federal authority to address market power.