<DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:75759.wais]
ELECTRIC TRANSMISSION POLICY: REGIONAL TRANSMISSION ORGANIZATIONS, OPEN
ACCESS, AND FEDERAL JURISDICTION
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY AND AIR QUALITY
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
OCTOBER 10, 2001
__________
Serial No. 107-64
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
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COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma BART GORDON, Tennessee
RICHARD BURR, North Carolina PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia BART STUPAK, Michigan
BARBARA CUBIN, Wyoming ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois TOM SAWYER, Ohio
HEATHER WILSON, New Mexico ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi TED STRICKLAND, Ohio
VITO FOSSELLA, New York DIANA DeGETTE, Colorado
ROY BLUNT, Missouri THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia BILL LUTHER, Minnesota
ED BRYANT, Tennessee LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Energy and Air Quality
JOE BARTON, Texas, Chairman
CHRISTOPHER COX, California RICK BOUCHER, Virginia
STEVE LARGENT, Oklahoma RALPH M. HALL, Texas
Vice Chairman TOM SAWYER, Ohio
RICHARD BURR, North Carolina ALBERT R. WYNN, Maryland
ED WHITFIELD, Kentucky MICHAEL F. DOYLE, Pennsylvania
GREG GANSKE, Iowa CHRISTOPHER JOHN, Louisiana
CHARLIE NORWOOD, Georgia HENRY A. WAXMAN, California
JOHN SHIMKUS, Illinois EDWARD J. MARKEY, Massachusetts
HEATHER WILSON, New Mexico BART GORDON, Tennessee
JOHN SHADEGG, Arizona BOBBY L. RUSH, Illinois
CHARLES ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi TED STRICKLAND, Ohio
VITO FOSSELLA, New York THOMAS M. BARRETT, Wisconsin
ROY BLUNT, Missouri BILL LUTHER, Minnesota
ED BRYANT, Tennessee JOHN D. DINGELL, Michigan
GEORGE RADANOVICH, California (Ex Officio)
MARY BONO, California
GREG WALDEN, Oregon
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Anderson, John, Executive Director, Electricity Consumers
Resource Council........................................... 58
Bennett, James D., Commissioner, New York State Public
Service Commission on behalf of National Association of
Regulatory Utility Commissioners........................... 93
Cook, David N., General Counsel, North American Electric
Reliability Council........................................ 42
English, Glenn, CEO, National Rural Electric Cooperative
Association:
Morning session.......................................... 38
Afternoon session........................................ 122
Esposito, Peter G., Vice President and Regulatory Counsel,
Dynegy, Inc. on behalf of Electric Power Supply Association 135
Flynn, Peter, President, New England Power Company on behalf
of Richard P. Sergel, National Grid USA.................... 110
Fontes, Roger A., General Manager, Florida Municipal Power
Agency on behalf of American Public Power Association...... 25
Franklin, Allen H., President, CEO & Chairman, Southern
Company.................................................... 96
Gerken, Marc S., President, American Municipal Power-Ohio on
behalf of TAPS............................................. 129
Harris, Phillip G., President and CEO, PJM Interconnection... 49
Johnston, Robert, President and CEO, Municipal Electric
Authority of Georgia on behalf of The Large Public Power
Council.................................................... 113
Kanner, Marty, on behalf of Consumers for Fair Competition... 63
Nordhaus, Robert R., Van Ness Feldman on behalf of Large
Public Power Council....................................... 34
Schriber, Alan R., Chairman, Ohio Public Utilities Commission
on behalf of National Association of Regulatory Utility
Commissioners.............................................. 11
Steffes, James D., Vice President of Government Affairs,
Enron Corporation on behalf of Electric Power Supply
Association................................................ 54
Szwed, Stanley F., Vice President, Transmission, Firstenergy
Corp. on behalf of Edison Electric Institute............... 15
Trabandt, Charles A., former FERC Commissioner............... 140
Travieso, Michael J., Maryland People's Counsel.............. 147
Vesey, Andrew M., Vice President Energy and Utilities for the
CAP Gemini Ernst & Young................................... 67
(iii)
ELECTRIC TRANSMISSION POLICY: REGIONAL TRANSMISSION ORGANIZATIONS, OPEN
ACCESS, AND FEDERAL JURISDICTION
----------
WEDNESDAY, OCTOBER 10, 2001
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Energy and Air Quality,
Washington, DC.
The subcommittee met, pursuant to notice, at 9 a.m., in
room 2123, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Largent, Burr,
Whitfield, Norwood, Shimkus, Wilson, Bryant, Radanovich, Tauzin
(ex officio), Boucher, Sawyer, Wynn, Waxman, Rush, McCarthy,
Strickland, Barrett, and Luther.
Staff present: Sean Cunningham, majority counsel; Jason
Bentley, majority counsel; Brendan Williams, legislative clerk;
Hollyn Kidd, legislative clerk; Sue Sheridan, minority counsel;
and Rick Kessler, minority counsel.
Mr. Barton. The subcommittee will come to order. If our
audience would find a seat.
We have an unusual situation this morning. We have two
separate hearings with a separate lunch break in between. We
also have the Democratic Caucus meeting to elect a new Whip. I
spoke with the ranking member, Mr. Boucher, last evening and he
agreed that we could do our opening statements and then I would
call a recess until our Democrats got here to hear the
testimony.
Now, it's possible the Democratic Caucus will be all peace
and harmony, and there'll be a unanimous consent election, but
it's probable that it's going to be fairly contested and take a
number of ballots, and the Democratic process will go slowly.
So, it could be that we'll do opening statements and then
recess until approximately 11 a.m. I hope that we have some
folks show up before then.
So we're going to start our opening statements and get as
many as the Republicans on the record, and then wait until Mr.
Boucher and some of his colleagues come on the majority side.
So the Chair would recognize himself for an opening
statement.
First, I want to thank all our panel members for coming
back. I believe this panel was scheduled to be here on
September 11, and as we all know a very bad thing happened that
morning which required us to postpone this hearing. But we're
glad to have you all here and I'm told that everybody that was
here September 11 is back here.
We give special thanks to Mr. English. We understand that
you're going to be here this afternoon, too. So, we'll get a
double dose of your wisdom.
We're going to hear this morning about Siting, Incentives
and Reliability. It's my belief that the Congress and the FERC
should do what it can to encourage the expansion of
transmission capacity where needed, particularly through
private sector investment. The FERC should take a new look at
incentive rate making in the discussion draft that's now
publicly available. We have some incentives to make that
happen.
I believe the States should continue their traditional role
of siting transmission lines, but I now believe that the
Federal Government should impose a deadline on States for
timely consideration for looking closely at transmission lines
that are in the public interest.
The discussion draft calls for the FERC to act as a
backstop for applicants after 1 year of work or lack thereof at
the State level.
On reliability there is broad agreement that some
organization or organizations should have the power to enforce
reliability standards. The question now is how to do it. Many
on this subcommittee, including my good friend Congressman Wynn
of Maryland have been leaders in encouraging consideration of
reliability proposals.
Today we're going to have before us several witnesses who
are all committed to some reliability legislation. I look
forward especially to hearing that testimony and working with
the members about the proper plan to put that forward.
This afternoon after a short break in our second hearing
we're going to reconvene and hear from the second panel on the
RTOs or regional transmission organizations. The issue of open
access for transmission and the jurisdictional issue of who
should have jurisdiction over those RTOs.
I want to thank any of our witnesses who are already here
in the audience that are going to participate on the second
panel.
Last night I released a revised discussion draft on a
proposed starting point on RTO policy. I would like to say that
it is, at the moment, my best guess about where the middle
ground is on RTOs, but it is a draft. And I certainly expect
people, some people to be for it and some people to be against
it, and some people to be undecided and sit on the fence.
That's the whole reason we put out discussion drafts.
The language that we released late last evening all
transmitting utilities must file, perform or participate in an
RTO, and that's all--A-L-L, not O-I-L.
FERC must approve RTO applications that meet--you've got to
wake up now. We got a lot of time this morning. Ralph Hall's
not here to entertain you, so I've got to do the best that I
can.
FERC must approve RTO applications that meet certain
minimum standards, but may propose changes to applications if
they do not meet those standards. If there is no agreement, the
FERC in the discussion draft could order participation in an
RTO, but the applicant could appeal that FERC mandate to the
Federal courts. FERC shall continually enforce uniform market
rules including seams agreement between RTOs.
Finally, under the proposed draft language, the FERC may
not require approved RTOs to merge. So what we've tried to do
is hit a middle ground between a FERC mandate and let the FERC
do whatever it wants to give FERC no authority and let the
private sector participate or not participate as it so chooses.
It's my personal belief that all utilities should be in an
RTO. It's also my belief that there's no magic about a specific
number of RTOs. The No. 4 has been bandied about quite a bit
recently. That's a good number, but it's not the only number
out there.
There's no magic about having three RTOs in the Eastern
Interconnect and one in the Western Interconnect. I believe
that if all--A-L-L--utilities are in an RTO, the RTOs work well
within themselves and with other RTOs, we will have greatly
helped to establish a seamless national network.
The open access provision and the discussion draft are
equal to what was in the Electricity Restructuring legislation
in 2944 in the last Congress. There is a way to ensure equal
terms and conditions for transmission access while retaining
the unique characteristics of public power and coops. Now I
want to pursue that, but I also want to make sure that all who
depend upon transmission lines to sell power in the wholesale
markets or to purchase wholesale power for their consumers can
gain the proper access to the bulk power transmission network.
Finally, we're going to welcome witness testimony on the
jurisdiction issue. Who should have jurisdiction over the
transmission component of a bundled retail sale? This issue is
wrapped up in the RTO debate and it may be that members solve
this issue when we decide about RTOs. The Supreme Court just
last week heard arguments on jurisdiction. I believe that the
Congress should step in and provide clarity to the law if a
consensus is possible. I want an appropriate role for the
States, but I do think that we need a less bulkanized system.
After this hearing and after the proper time period to let
members digest the testimony in its written form, it's my
intent to begin discussion of the subcommittee members on both
sides of the aisle on a second electricity draft. Mr. Boucher,
of course, will be deeply involved in it, as will full
committee ranking member Mr. Dingell.
Electricity has not been and should not be, and as long as
I'm subcommittee chairman will not be a partisan issue. We have
a good base of member education and member interest on both
sides of the aisle. Time is short in this Congress. I'm under
no illusions that if the Congress adjourns very quickly,
there's a good chance that we'll have to roll this over to next
spring. But there's also a possibility, and when I walked in I
was told by staff that it looks like the ice is beginning to
break in the Senate and the energy bill is going to go forward.
So, I think there is a chance that if we could have two good
hearings today and member interest and the Congress stay in
session longer than another week or 2, we could move to a
markup on this bill in this Congress in the next month or so. I
hope that's the case. I would love to move a bill out of
subcommittee and have it ready to go, perhaps, for discussion
in a comprehensive energy bill that we go to conference with
the Senate.
Our goals for an electricity restructuring are several. In
a simplified form, we want to increase the supply of
electricity. We want to improve the effective operation of our
transmission grid and we want to increase the capacity, at
least the potential to increase the capacity of our
transmission grid.
Those of you that are here testifying on behalf of the
various State utilities today can help put those goals forward.
Now, you can help us toward a better function electricity
system. As I've told some of you privately, this is not the
time to tell what you think what I want to hear or what Mr.
Boucher wants to hear, or anyone else for that matter. It's the
time for you to tell us what you really believe. Look beyond
the interest of your special interests; look at the broader
national purpose. And if you'll help us in that regard, we can
reach a compromise that's good for the country.
So I look forward to these two hearings today. These are
the last two hearings I propose to hold unless we need to have
a legislative hearing on the bill that we introduce. So this is
a very, very important day.
[The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Subcommittee on Energy
and Air Quality
Today's hearing takes the place of two hearings that were canceled
during the week of September 11. I would like to thank the members of
the first panel for coming back. I know some of you were stranded here
for a while last time.
This morning, we will hear about siting, incentives and
reliability. I believe Congress and the FERC should do what it can to
encourage the expansion of transmission capacity where needed,
particularly through private sector investment. FERC should take a new
look at incentive ratemaking, and my discussion draft would make that
happen. States should continue their traditional role of siting
transmission lines, but I now believe the Federal government should
impose a deadline on them for timely consideration and for looking
closely at lines that are in the public interest. My discussion draft
calls for FERC to act as a ``backstop'' for applicants after one year
of work at the State level.
On reliability, there is broad agreement that some organization or
organizations should have the power to enforce reliability standards.
The question now is how to do it. Many on this Subcommittee, including
Congressman Wynn of Maryland, have been leaders in encouraging
consideration of reliability proposals. Today we have before us several
witnesses who are all committed to passing some reliability
legislation. I look forward to hearing the testimony and working with
Members about the proper plan to put forward.
Later today, after a break, we will reconvene and hear from a
second panel on Regional Transmission Organizations (RTOs), open access
for transmission, and the jurisdiction issue. If those witnesses are
already here, I thank you for coming and hope you enjoy Round One.
Just last night, I released a revised discussion draft with my
proposed starting point on RTO policy. In the language, all
transmitting utilities must file to form or participate in an RTO. FERC
must approve RTO applications that meet certain minimum standards but
may propose changes to applications if they do not meet the standards.
If there is no agreement, FERC can order participation in an RTO but
the applicant can appeal to Federal courts. FERC shall continually
enforce uniform market rules, including seams agreements between RTOs.
Finally, FERC may not require approved RTOs to merge.
I believe all utilities should be in RTOs. To me, there is no magic
in having 3 RTOs in the eastern interconnect and 1 in the western
interconnect. I believe that if all utilities are in RTOs, and the RTOs
work well within themselves and with other RTOs, we will have greatly
helped establish a seamless national network.
The open access provisions in the discussion draft are equal to
what was in electricity restructuring legislation in the last Congress.
There is a way to ensure equal terms and conditions for transmission
access while retaining the unique characteristics of public power and
cooperatives, and I want to pursue that. But I also want to make sure
that all who depend on transmission lines to sell power on the
wholesale markets, or to purchase wholesale power for their consumers,
can gain the proper access to the bulk-power transmission networks.
Finally, I welcome witness testimony on the ``jurisdiction
issue''--who should have jurisdiction over the transmission component
of a bundled retail sale. This issue is wrapped up in the RTO debate,
and it may be that Members solve this issue when we decide about RTOs.
The Supreme Court just last week heard arguments on jurisdiction, and I
believe that Congress should step in and provide clarity to the law if
a consensus is possible. I want an appropriate role for the States, but
I want a less balkanized system.After this hearing, I will begin
discussions with Subcommittee Members on electricity. These, of course,
will start with Subcommittee Ranking Member Boucher and full Committee
Ranking Member Dingell. Electricity is not a partisan issue, and there
is a good base of Member interest and education on both sides of the
aisle. If there is interest in moving forward, and if Congress will
remain in session for sufficient time, I will work to introduce a bill
in the coming weeks and move toward markup. I look forward to working
with all Members and stakeholders for suggestions on revising the
discussion draft.
Our goals with electricity restructuring should be many.
Simplified, they are:
1. Increasing the supply of electricity;
2. Improving the effective operation of our transmission grid; and
3. Increasing the capacity of our transmission grid.
The witnesses today can help us on that path toward a better-
functioning electricity system. I encourage your honesty and also your
consideration of the national interest. Now is the time to look beyond
the reasons to oppose compromises or be parochial. Now is the time to
establish an electric grid and trading system for the 21st Century that
we can all be proud of.
Mr. Barton. We'd like to welcome Mr. Shimkus for an opening
statement. I'm assuming you were the first member here? Mr.
Norwood was here first. Well, we're going to welcome Mr.
Norwood for an opening statement then.
Mr. Norwood. Thank you, Mr. Chairman. I know it's hard for
you to know which one of us was here first.
Mr. Barton. Just glad you all both were here.
Mr. Norwood. I promised John I'd get that in.
Thanks for holding this hearing today on the important
issue of transmission and all the critical issues associated
with that. I plan to be brief with our statement and get as
fast as we can to this very impressive array of witnesses that
we have.
Over the last 10 years marriages enacted both by the
Congress and the FERC, this country's transmission network has
undergone significant changes evolving from what used to be
historically small wholesale power sales that ensured
reliability. Today's current wholesale megamarket allows many
different buyers and sellers to transfer power back and forth
from one end of the grid to the other. In fact, the wholesale
market today is now 400 percent larger than it was just 10
years ago.
Unfortunately, our current infrastructure was not developed
with this new wholesale market in mind, and is really not
equipped to handle such large bulk power transfers efficiently
and reliability. Today bottleneck areas and problems of
congestion on the grid are common. With these growing pains it
is clear, I believe, that this committee and the Congress face
new challenges to find thoughtful and well-balanced solutions.
That's what really what this is all about today.
I look forward to hearing the testimony from both panels
today, both panels, and commend this collection again of
witness that you have brought before us.
Mr. Chairman, as usual, I truly applaud your leadership in
this committee in trying to craft coherent national energy
policy, and we're grateful for all the work that you do. And
with that, I'll yield back.
Mr. Barton. Thank you, distinguished gentleman from
Georgia.
And we would welcome the gentleman from Illinois for an
opening statement.
Mr. Shimkus. Thank you, Mr. Chairman. I appreciate this
hearing and I want to welcome our panelists, both this one and
the next one. And I think it'll be a long day, so I hope you
got comfortable seats.
The $64 million question this year has been what do we do
about transmission? So as long as many of us have been involved
in this process, this is my fifth year, it's really boiled down
to transmission in the eyes of many of us.
Do we let FERC or the States have jurisdiction over siting,
or is there some mixture? Do we make RTOs mandatory or do we
make them voluntary, or we allow them to be voluntary? How many
RTOs do we have; the chairman mentioned that, 4, 8 or more?
What kind of incentives do we offer? The list goes on and on
and that is why today's hearing and all you panelists here are
so important to help us sort through some of this process as we
have draft legislation proposed and changes to drafts, and as
the chairman as said, willingness to continue to work through
this process.
But the fact remains that we have to change the way the
transmission system is run and governed. RTOs were the first
step in the process, but we still have a lot more to do. The
whole industry is dramatically different from the past. The era
of big monopolies and set service areas will soon be a thing of
the past in most areas of the Nation. Illinois is moving to the
deregulated market, but we've experienced three RTOs within the
State of Illinois for a period of time.
Power will easily be generated in one State and be sent to
another grid for use in other States, but the transmission
infrastructure has not kept up with the demand. We have to make
sure that can happen without the problems.
The easier we can get power to consumers, the cheaper it
will be for them. The task ahead of us is not easy. There are a
lot of different constituencies that have a lot of different
ideas about how we should proceed, and we've heard from many of
those constituencies already and we look forward to working
with the.
I believe Chairman Barton has shown that he's ready for the
task, and really this subcommittee as we've dealt with it for
many, many years in working with our colleagues on the other
side. We are excited about getting to some compromise and
moving forward. And I look forward to working with the chairman
on this issue.
Again, Mr. Chairman, thank you for this hearing and I yield
back my time.
Mr. Barton. We thank the gentleman from Illinois.
We'd welcome the gentleman from Tennessee for an opening
statement.
Mr. Bryant. Thank you, Mr. Chairman.
I, too, thank you for holding this hearing this morning,
and I believe we have another one this afternoon. And I'm
coming in late and having to move between meeting and meeting,
which I will continue to do today, so I may be out as other
members may be out today. I want to go ahead and apologize to
this very distinguished and numerous long panel here today. I
think it's better to go one panel than 2 or 3 smaller panels.
It cuts down on the number of questions we ask.
I heard the end of my colleague from Georgia, Mr. Norwood's
statement, and it sounded very articulate and I'm very tempted
to adopt it, because he's always a man of wisdom, and I may do
part of that. But I'm going to cut my--I will adopt his
statement. I'm sure our chairman's was also good, and I'll
adopt his statement also. I will add one comment and I will
yield back my time after that.
I'm not sure anyone on the panel, I haven't had the
opportunity to see the statements yet, addresses this issue.
But an open question as we move forward on the siting issues,
the issue of acquiring right-of-way, acquiring properties,
eminent domain and that tension, and it's tension I think is an
understatement that exists with property owners being from an
area that is very mindful; representing a constituency that's
very mindful of property rights, I want to make sure that we
pay proper respect to that. And that any governmental powers
that we have out there or that we create to expand, enlarge or
whatever, eminent domain and the authority to use it, I think
we have to be careful in doing that.
On balance with the not-in-my-back-yard syndrome, I
understand fully that we have a transmission problem in this
country and we have to move forward aggressively with the
stability of legislation behind it, the force of law behind it
to go ahead and built new transmission. So we have to find that
balance in there between protecting property rights and yet
doing something for the common good and avoid the not-in-my-
back-yard syndrome.
So, it is a complicated issue, I understand. And perhaps
someone on this panel can address the eminent domain issues and
who should exercise that, should that be delegated to the
private sector; those kinds of things if it's possible.
And with that, Mr. Chairman, I would yield back my time.
Mr. Barton. Thank the gentleman.
Seeing no other members present, the Chair would ask
unanimous consent that all members not present have the
requisite numbers of days to put their opening statement in the
record in its entirety at the appropriate point. Is there
objection? Hearing none, so order.
The Chair would also announce that Mr. Norwood, Mr. Bryant
and myself are going to briefly change parties, go as a block
to the Democratic Caucus, see what we can get for voting for
either of the candidates up for the Whip, probably some votes
on health care for Mr. Norwood, and I'll takes votes on
electricity bill and Mr. Bryant can take votes on some good
deed for the TVA, or something at that point.
We're going to be in recess. I would ask my first panel to
not wander too far. I think there's an outside chance that we
could get started around 10. So you're at liberty to move about
the compound, but don't go back to your offices. Let's stay in
this general area.
And we will reconvene as soon as we have some of our
Democratic friends here to start the panel.
[Brief recess.]
Mr. Barton. The Chair recognize the distinguished ranking
member for an announcement on who the new Whip is, and for an
opening statement.
Mr. Boucher. Well, thank you, Mr. Chairman. I will have to
disappoint you with regard to one of those matters, but not
with regard to the other. We are still counting votes, and I
was so interested in coming to take part in your hearing today
that I left before the result was announced. But I'm sure that
all of us in due course will find out what that result is.
Mr. Barton. Okay.
Mr. Boucher. It will not be a secret.
Mr. Barton. Well, there are several of us that are
available for a brief switch in parties if it's so close that
one or two votes makes a difference.
Mr. Boucher. We would be glad to talk with each of those
individuals, and if there are as many as six of them, that
truly would be excellent news for us.
Thank you very much, Mr. Chairman. Today's hearings
assemble a group of expert witness who can help frame the
questions at the root of the electricity restructuring debate
and indicate to us what problems effect the Nation's
electricity system, and suggest how Congress can improve the
system through the passage of legislation.
Today we will hear from two panels on matters related to
electricity transmission policies. This morning's witnesses
will address the siting of new transmission lines and system
reliability. And this afternoon's panel will address regional
transmission organizations, matters relating to open access and
the balance between State and Federal jurisdiction.
I want to commend Chairman Barton for his diligent effort
to conduct thorough and balanced hearings on these matters of
fundamental importance, and I also want to commend him for his
usual practice of working closely with members on our side as
we approach these important considerations.
My State and many others have adopted some form of retail
competition plan, although approximately one-half of the Nation
remains subject to traditional utility structures. At this
point I think it seems unlikely that Congress will enact a
direct retail competition mandate and our legislature debate,
therefore, centers on electricity transmission policy questions
including how best to allocate existing transmission capacity
and whether and to what extent, and by what means the Federal
Government should encourage the construction of new
transmission capacity.
We should also bear in mind that some of the most
fundamental questions regarding the balance between Federal and
State authority over transmission were last week argued before
the United States Supreme Court, and a decision on those very
important matters should be forthcoming from the Court in the
near term. That fact may influence to some extent our
considerations in this subcommittee.
As we consider these matters it is essential to reflect not
only on the best policy approach, but also how much of the goal
of our best policy choices can be accomplished within the
confines of existing law. Does the FERC believe that it has
sufficient authority under the Federal Power Act to perform its
responsibilities and to carry it to the conclusions that it
might desire to reach?
Beyond the issues relating to transmission policy, we have
a number of other associated concerns. What problems, for
example, arise from the continued application of PUHCA. If
PUHCA is to be repealed, what consumer protections need to be
put in place in any electricity legislation that we consider?
Can we achieve a more efficient use of existing generator
capacity through real-time pricing and how can real-time
pricing be encouraged? What are the merits or the problems
associated with the continued application of PURPA. And what is
the position of the Administration with regard to this entire
set of issues and what legislative recommendations would the
Administration make to us at this time?
These are questions that we will examine during the course
of this day and in future weeks. And as we do so I want to
thank Chairman Barton for his singular dedication to a major
reform of Federal policy with respect to electricity. And I
very much look forward to working with him as we seek the best
approach to these complex matters.
Thank you, Mr. Chairman.
Mr. Barton. We thank the gentleman.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Steve Largent, a Representative in Congress
from the State of Oklahoma
Mr. Chairman, in light of the tragic events of September 11th, the
Committee correctly chose to postpone the two hearings that we will be
holding today. As someone who has spent a considerable amount of time
on the electricity restructuring issue, and more specifically
transmission related issues, I want to thank you for promptly
rescheduling these two very important hearings.
For those of us who are old enough to remember the movie ``The
Graduate,'' there is a memorable line from the film in which Dustin
Hoffman's character is offered a one word piece of advice--
``plastics.'' Well I believe there is one word that this Subcommittee
should keep in mind as it proceeds forward with comprehensive
electricity restructuring legislation. That word is ``transmission.''
California's energy problems earlier this year clearly demonstrated
the economic chaos caused by a lack of generation. That being said, if
we do not clarify the rules of the road for the interstate transmission
system, generators will continue to be precluded from moving power
across State lines because of a lack of investment, siting problems, a
patchwork of different regulatory guidelines, or the abuse of market
power.
As members of this Subcommittee and our witnesses know all too
well, the current transmission system was not built for the number of
wholesale transactions that take place on a daily basis.
It was designed largely to supply intrastate demand. Yet since the
enactment of the Energy Policy Act of 1992, there has been an increase
in interstate bulk power transfers, something the existing system was
not designed to handle.
Our current transmission system is analogous to the way our road
system was connected, or more accurately, not connected prior to the
construction of our interstate highway system in the 1950s.
The regulation of our transmission system varies depending on
whether the lines run through an open state or a closed state. The
regulation varies depending on the ownership of the lines. Investor
owned utilities are regulated by FERC while lines owned or operated by
municipals, co-ops, TVA, or BPA are largely exempt from FERC
regulation. Even the type of sale, be it an unbundled or bundled retail
sale is subject to different types of regulation.
It's my hope that we can create some form of regulatory parity to
put all industry participants on an even playing field.
I believe FERC has taken several pro-active steps with the issuance
of FERC Orders 888, 889, and 2000 to develop competitive wholesale
power markets.
Clearly, FERC is not content to sit on the sidelines while industry
and Congress decide how to restructure. On September 26th newly
appointed Commissioner Pat Wood outlined a very ambitious, some say too
ambitious, policy directed at the formation of competitive wholesale
power markets.
Mr. Chairman, I know you recently released a draft of your
comprehensive restructuring bill. With what time we have left in the
remainder of the session, I look forward to working with on this
legislation, in particular Section 201 and Section 202, the open access
and RTO provisions.
With that I look forward to hearing from our distinguished panels
of witnesses and I yield back.
______
Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee
on Energy and Commerce
First, let me thank Chairman Barton for continuing this series of
hearings on our Nation's electric power industry. In today's two-part
hearing we will focus on the transmission system--the infrastructure
that is necessary for getting power efficiently and reliably from the
generator to the consumer, and the competitive interstate marketplace
that is needed to ensure affordable electricity supplies.
Attention to reliable transmission goes in hand with Committee
efforts to assure that our Nation has an affordable, reliable
electricity supply that will keep pace with the demands of the 21st
Century. This will require that we put an end to the uncertainty over
the operation and governance of the interstate transmission system and
establish clearly defined rules for competitive wholesale markets.
Since 1992, Congress has encouraged the development of
competitively generated wholesale power, which resulted in a general
decline in electricity prices, as well as cleaner and more efficient
production of power. The increased efficiency came at an essential
time. The Energy Information Administration recently reported that,
since 1990, as retail electricity sales (our demand) grew by 26%, power
generating capacity increased by only 10%, and transmission capacity
grew only 15%. So our success fueling the recent period of economic
growth with electricity was achieved only because we were able to
generate more power, more economically from existing plants.
Yet success generating power more efficiently would have been
meaningless without the ability to deliver the electricity to where it
was economic and most needed. This has prompted a rethinking of our
Nation's interstate transmission system and has made clear that we need
a vibrant, accessible interstate transmission system if we hope to
deliver the full benefits of that low-priced power to consumers.
According to the Electric Power Research Institute, the number of
wholesale power transactions increased 400% over the past decade--on a
patchwork system designed to serve individual utilities. At the same
time, investment in transmission infrastructure has steadily declined.
We now know that the coordinated use of a number of transmission
systems can allow a low-cost producer in one state to sell power
cheaply to buyers in another. As our demand for electricity continues
to grow, it is becoming more important than ever that we have the
ability to share electric power freely within regions and among states.
To do this, we cannot continue to view transmission as individual power
lines; we must look at it as part of a broader, interstate system.
Therefore, it is critical that our Nation begin designing and
building modern, 21st Century transmission systems. This, of course,
will require a legal and regulatory framework to make it happen.
We must look at a variety of issues to determine how best to
proceed in these matters. Today's hearing will allow us to focus on
grid reliability, transmission siting issues, and incentives to
encourage new transmission-system investments. This afternoon, we will
hear testimony on the formation of Regional Transmission Organizations
(RTOs), open access to transmission, and the role of the Federal
government and States in ensuring that we have vibrant, competitive
wholesale power markets. It will be a long day, but very informative.
It is important that we address these issues, especially at this
time of uncertainty over our Nation's energy security. I thank Chairman
Barton for holding these hearings, and I look forward to the testimony
of our witnesses.
Mr. Barton. We have 8 of our 10 panelists here. We're going
to start with Mr. Schriber and just head right down the line,
and we'll make sure that Mr. Nordhaus and Mr. Ken get here and
get an opportunity to participate.
We're going to welcome you, Mr. Schriber, as Chairman of
the Ohio Public Utilities Commission. He's here on behalf of
the National Association of Regulatory Utility Commissioners.
Put your statement in the record and ask you to summarize it in
5 minutes.
STATEMENTS OF ALAN R. SCHRIBER, CHAIRMAN, OHIO PUBLIC UTILITIES
COMMISSION ON BEHALF OF NATIONAL ASSOCIATION OF REGULATORY
UTILITY COMMISSIONERS; STANLEY F. SZWED, VICE PRESIDENT,
TRANSMISSION, FIRSTENERGY CORP. ON BEHALF OF EDISON ELECTRIC
INSTITUTE; ROGER A. FONTES, GENERAL MANAGER, FLORIDA MUNICIPAL
POWER AGENCY ON BEHALF OF AMERICAN PUBLIC POWER ASSOCIATION;
ROBERT R. NORDHAUS, VAN NESS FELDMAN ON BEHALF OF LARGE PUBLIC
POWER COUNCIL; GLEN ENGLISH, CEO, NATIONAL RURAL ELECTRIC
COOPERATIVE ASSOCIATION; DAVID N. COOK, GENERAL COUNSEL, NORTH
AMERICAN ELECTRIC RELIABILITY COUNCIL; PHILLIP G. HARRIS,
PRESIDENT AND CEO, PJM INTERCONNECTION; JAMES D. STEFFES, VICE
PRESIDENT OF GOVERNMENT AFFAIRS, ENRON CORPORATION ON BEHALF OF
ELECTRIC POWER SUPPLY ASSOCIATION; JOHN ANDERSON, EXECUTIVE
DIRECTOR, ELECTRICITY CONSUMERS RESOURCE COUNCIL; MARTY KANNER
ON BEHALF OF CONSUMERS FOR FAIR COMPETITION; ANDREW M. VESEY,
VICE PRESIDENT, ENERGY AND UTILITIES, FOR THE CAP GEMINI ERNST
& YOUNG
Mr. Schriber. Thank you, sir. And thank you for giving me
the opportunity to testify here today.
In addition to being Chairman of the Public Utilities
Commission of Ohio, I'm also Chairman of the Ohio Power Siting
Board, and I'm prepared to talk about many of the issues that
you've raised earlier and have spoken of, but I'll stick
specifically to power siting at this point.
Ohio, I believe, has perhaps more authority as a siting
board than most States, and it's been a very effective siting
board. It's very socialized in the way it's constructed. I, as
Chairman of the Public Utilities Commission, I'm also Chairman
of the Power Siting Board. We have the Director of the EPA,
Department of Health, Department of Development, Agriculture,
Natural Resources, Engineers and legislative members that
comprise our board.
In order to receive approval for construction of a new
facility in Ohio an entity, any entity, must apply for and
obtain a certificate of need and convenience and environmental
compatibility.
I will point, and I think what's come to my mind as a
casual observer, is that a lot of the issues that we see, and
if you were to scan the testimony, come into whether it should
be State or Federal issues who should exercise the power in
this regard with respect to siting. And although a lot of
arguments can be made either way, I believe very strongly, and
I think reality suggests, that the States for various reasons
have some issues before them which we can handle as far as
siting is concerned.
Most of the siting issues turn out to be landowner issues,
and these as State authorities we become very intimately
involved with. Many of the issues regarding siting have to do
with natural resources within the State, and a lot of them have
to do with agricultural land, the displacement of agricultural
land and the optimum use of agricultural land.
As a State authority we move much, much faster than might
be done in either other States or at the Federal level. And we
certainly have the infrastructure already in place.
In Ohio our authority enables us to look beyond State
boundaries in proceedings with other jurisdictions when we site
major power plants, transmission lines or gas pipe lines. For
electric power lines the statute requires that we look to the
grid to the facilities beyond the State boundaries to make sure
we are compatible with that.
And finally, in Ohio our jurisdictional trigger goes to all
facilities. So not only would a public utility who needs or
wants to build a facility have to come before the Ohio Power
Board, but any facilities. It could be a merchant company, it
could be a nonpublic utility. so that in effect in Ohio we
believe we have sort of a one-stop shop where all utilities or
nonutilities that wish to build facilities would come before
us.
I would say that our record speaks for itself. It's not
before you, but our record would suggest that since in the
years 2000 and 2001 we've added 2200 megawatts of electricity,
most are gas peaking plants, although we have combined cycle
baseload gas plants under construction, by and large we move
people in and out within 6 months upon application.
I would also point out that we have a pipeline, the
Independence Pipeline that has been proposed through Ohio over
which FERC has jurisdiction. That pipeline has taken years.
It's been a contentious debate for over 2 years. Interestingly,
although FERC has jurisdiction, we've gotten thousands of
letters because for some reason, I think that may be obvious,
that the State authorities are those who usually get the flake
when things don't quite work out for the landowners within our
States.
So, if Ohio could be a model for other States, I would say
that would be an optimum solution in my mind. Now, does this
mean that FERC could not adopt the Ohio model? They probably
could, but as I've suggested because of our sensitivity to
landowners, because of our sensitivity to the use of our
resources, I would suggest that the States would, if they
could, be somehow compelled to adopt our model, move forward
much more expeditiously in power siting.
And I'll stop with that. As I said, I could go on other
issues, but we have a lot of panelists here. And I appreciate
the opportunity to be here.
[The prepared statement of Alan R. Schriber follows:]
Prepared Statement of Alan Schriber, Chairman, Ohio Public Utilities
Commission
Mr. Chairman and Members of the Subcommittee: Good morning. My name
is Alan Schriber. I am the Chairman of the Ohio Public Utilities
Commission. I am here today on behalf of the National Association of
Regulatory Utility Commissioners, commonly known as NARUC. I greatly
appreciate the opportunity to appear before the House Energy and
Commerce Subcommittee on Energy and Air Quality and 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. Its membership includes the State public utility commissions for
all States and territories. NARUC's mission is to serve the public
interest by improving the quality and effectiveness of public utility
regulation. NARUC's members regulate the retail rates and services of
electric, gas, water and telephone utilities. We have the obligation
under State law to ensure 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 that are just, reasonable and nondiscriminatory for all
consumers.
I would like to begin today by addressing electric transmission
siting.
NARUC strongly disagrees with the presumption permeating here in
Washington that ``the root cause of all transmission congestion
problems in this country is State eminent domain and siting authority,
and therefore the Federal government must step in.'' This theory is, at
best, simplistic.
As a nation, we want the lights to come on whenever we flip the
switch. We want to run consumer goods using electricity that is
inexpensive. We want to be able to be employed by and own stock in
companies that produce these electric-powered consumer goods. We want
our companies to be able to buy power at interruptible rate levels, but
never have to be interrupted.
However, we do not want generation facilities fouling the air,
water, and land, nor do we want transmission lines running through our
communities or near our schools or homes. We do not want gas pipelines
running under our feet or near our communities. We do not want to pay
any additional costs associated with renewable energy. We do not want
to spend the money necessary on research to find technologies to
replace the energy sources we currently depend upon.
Therefore, the conclusion that we must draw from all of this is
that a major impediment to siting energy infrastructure in general and
electric transmission in particular is the great difficulty in getting
public acceptance for needed facilities. Quite frankly, this tells us
that no matter where siting responsibility falls, with State government
or the Federal government, siting energy infrastructure will not be
easy and there will be no ``quick fix'' to this situation.
Giving the Federal Energy Regulatory Commission (FERC) eminent
domain and siting authority is not a panacea. Beyond the practical
matter of the time FERC would need to be prepared to assume this new
role and the additional funds that Congress would need to appropriate
to accomplish this, how many examples actually exist where a State
action (or inaction) is solely responsible for unreasonably preventing
a needed transmission project?
Currently, the States have the responsibility and authority to site
transmission. In fact, the transmission infrastructure that is
currently in operation now has received State siting approval.
Additionally, those projects that are in the planning stages are being
planned with State approval in mind.
Make no mistake, NARUC and its membership understand that
additional transmission is necessary in all regions of the country.
NARUC's members are also well aware of the difficulties involved with
the siting of these facilities. The fact remains that in spite of these
difficulties, the States have been successful in siting the electric
transmission infrastructure that exists today. However, we must also
continue to be cognizant of the basic laws of physics. As much as we
all would like to be able to move electrons from wherever they are
produced to wherever they are needed, like we can with natural gas
molecules, the electric transmission system is not able to accommodate
those types of transactions. In other words, the transmission system as
it now exists was not built to handle the types of wholesale
transactions that a competitive market will require. This means we will
have to be innovative to make the system function the way we need it to
function.
For instance, as we look for innovative ideas, we can begin by
remembering that generation and transmission are substitutable. A State
may determine that a transmission line is not necessary if, for
example, distributed generation is used instead, thereby saving
valuable resources and protecting citizens from the unnecessary costs
of the transmission project. FERC does not now have the ability to make
such a determination, and we do not support proposals to expand FERC
authority over generation.
NARUC believes that the States should do more to improve upon the
tremendous success story of the nation's electricity infrastructure.
States exercising jurisdiction over the siting and certification of
transmission facilities should not discriminate against interstate
facilities, meaning that in general, interstate facilities should be
sited, certificated, and otherwise regulated under the same standards
and procedures as intrastate facilities.
NARUC supports voluntary regional bodies that permit the States in
which an interstate transmission facility is proposed to be sited, to
issue certificates authorizing the construction of the proposed
facility through collective decisionmaking. If States choose to retain
certification authority for themselves, there should be agreed upon
mechanisms to resolve disputes where individual States involved have
come to conflicting and/or inconsistent determinations in their
respective deliberations. These voluntary regional bodies could:
address siting of transmission; identify regional bulk power market
needs for State siting agencies to consider in their respective
deliberations; and, plan for the construction of new interstate
transmission facilities.
Congress should affirm that States have the primary authority to
establish, operate and govern these voluntary regional siting bodies,
and FERC could act as an appropriate ``backstop'' authority where
States or regions fail to act. Additionally, Congress should provide an
explicit grant of authority to the States and FERC to act in
cooperation.
Until all stakeholders (residential and commercial consumers,
industrial consumers, utilities, energy suppliers and marketers,
transmission owners and environmentalists) begin to make sacrifices, it
will continue to be extremely difficult to improve our electric
transmission system. We as public officials must also try to use our
positions to apply reason rather than fanning the flames of emotion.
Mr. Chairman, NARUC would like to thank you for efforts to produce
legislative language that does not take the draconian step of overt
Federal preemption of State authority over siting and eminent domain
for transmission facilities. However, for the reasons I have just
mentioned, NARUC must respectfully oppose the Federal transmission
siting provisions found in section 402 of your electricity legislation
discussion draft.
I would now like to briefly comment on 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. NARUC continues to
support the NERC process that has developed legislation mandating
compliance with industry-developed reliability standards and provides
explicit authority to FERC and the States to cooperate to enforce those
standards. NARUC also supports legislation that includes workable
mechanisms to support energy efficiency programs that enhance
reliability.
Enforcement of operational standards and criteria should be
supervised by the FERC in cooperation with the States through existing
State authority, joint boards, or other mechanisms. Enforcement of
compliance with planning and system adequacy standards should rest
first with the States and regional bodies. Congress should explicitly
affirm the public interest in transmission grid reliability and the
need for mandatory compliance with reliability standards. Congress
should expressly include in legislation: (1) a savings clause to
protect existing State authority to ensure reliable transmission
service, and (2) a regional advisory role for the States.
Federal legislation should also facilitate effective decisionmaking
by the States and recognize the authority of the States to create
regional mechanisms including, but not limited to, inter-state compacts
or regional reliability boards, to ensure transmission reliability.
NARUC cannot support reliability language that fails to provide a
continuing role for States in ensuring reliability of all aspects of
electrical service, including generation, transmission, and power
delivery services or results in FERC's preemption of State authority to
ensure safe and reliable service to retail consumers. State officials
will be held accountable by the public when the lights fail to stay on.
Because of this responsibility, State officials and regulators are
particularly concerned that they be able to act effectively to ensure
uninterrupted electricity service.
NARUC witnesses have appeared before your Subcommittee many times
prior to today requesting a State savings clause and a regional
advisory role for the States. However, the Chairman's electricity
discussion draft legislation fails to include these two ``must have''
provisions. Mr. Chairman, NARUC must therefore respectfully oppose the
reliability title of your discussion draft.
The third topic I was asked to comment on today was ``incentive
rates.'' NARUC has begun to hold discussions on this issue, though we
have not developed an official position as of yet. I would be happy to
provide you with my own thoughts on this topic during the question and
answer portion of this hearing.
Thank you for your time and attention. NARUC members and staff look
forward to working with the members of this Subcommittee to put forth a
successful national energy policy. Thank you again and I look forward
to your questions.
Mr. Barton. Thank you, Mr. Schriber.
We now want to hear from Mr. Stanley Szwed, who is Vice
President of Transmission for FirstEnergy Corporation. He's
here on behalf of the Edison Electric Institute.
Your statement's in the record, we would ask you to
summarize it in 5 minutes.
STATEMENT OF STANLEY F. SZWED
Mr. Szwed. Thank you, Mr. Chairman. And I do very much
appreciate the opportunity to testify here today.
I'm Stan Szwed, Vice President of Transmission for
FirstEnergy Corp of Akron, Ohio, and I am testifying on behalf
of the Edison Electric Institute.
Mr. Chairman, thank you also for your discussion draft. It
includes good provisions on nearly all of the transmission
priorities that we support.
My testimony today will focus first on why transmission is
critical to competition and reliable electric service, and
second on specific legislative recommendations.
Mr. Chairman, wholesale competition is here, so is retail
competition in many States. Transmission capacity is critical
to competition. There is not enough of it and, clearly, it is a
Federal responsibility. If you want competition to work,
Congress must address transmission needs. It's that simple.
Transmission is the critical backbone of the entire
electrical network. It is not a service that would be nice to
have that we won't have enough of, like broadband, for example.
This is electricity and we all depend on it daily.
We do have the greatest transmission network in the world,
but it wasn't built for what we're trying to accomplish in
competitive markets today. The transmission system we have
today, many times we can't get power from a point A to a point
B. It's no one's fault. The lines simply were just not designed
to move power between points that people now want to connect
to. So we have to transform what I call a system of local roads
network into what we need now, and that is more of an
interstate highway system. And the key to building the highway
system we all want is to set the right regulatory atmosphere
necessary to attract investment.
In essence, with the formation of regional transmission
organizations, RTOs, we're establishing a separate new
industry. If Congress and FERC get sidetracked on the perfect
RTO size and boundaries, if Congress and FERC bog down on the
perfect rules of the road, we'll be in the theoretical
classroom forever.
Investors want us out of the classroom and into operation.
Turning off investors will stifle competitive markets and harm
consumers. Our collective efforts to get it perfect will not
mean getting it at all.
Now I'd like to turn my attention to suggesting seven
specific legislative aspects that we would ask to be considered
in any legislative work done. The first is that of reforming
transmission rate making.
Congress should reform transmission rate making to reflect
risks in the new transmission industry and to make transmission
a reasonable investment proposition. Returns on transmission
assets should be in line with assets in industries with equal
risk.
The Barton discussion draft section 401 is a good step. We
also thank Congressman Sawyer and Burr for introducing H.S.
2814 which would reform transmission rate making. In the last
Congress this subcommittee adopted by voice vote the rate
reform provisions from their similar 1999 legislation.
Second, we do need to reform transmission siting. EEI
supports a FERC siting rule which States are unable to act on
new transmission line applications. If a State failed to act on
an application or materially altered it, FERC could issue a
certificate of public convenience and necessity for a
transmission line. This is essentially what the Barton
discussion draft calls for.
Third, adopt mandatory reliability standards. Effective
competitive markets need to have mandatory reliability
standards. We also believe there should be a single national
reliability organization. The discussion draft contains
reliability provisions we generally support.
Fourth, remove tax barriers. We need to allow tax deferred
sales and tax free spinoffs of transmission property as
provided in H.R. 4 Such taxes impede RTO formation. This
language resulted from an agreement between investor owned and
public power providers of electricity. Thank you for including
this in your discussion draft as well.
Five, repeal the Holding Company Act. It is a significant
disincentive for transmission investment if entities with more
than a 10 percent ownership stake in RTOs are required to
become a registered holding company. the Holding Company Act is
outdated. It has no benefit to customers and in stifling
progress on policy goals. We should simply get rid of it.
Six, avoid RTO mandate authority for FERC. Congress should
not mandate RTO participation or authorize FERC to do so. RTOs
are forming and mandate authority for FERC is risky. Investors
must know their investments cannot be summarily forced into a
structure with wholly different financial fundamentals.
And last, streamline section 203 of the Federal Power Act.
The Barton discussion draft would repeal this section, and we
support repealing it as we support other measures that address
the lengthy and duplicative FERC reviews.
Thank you, Mr. Chairman. Your actions will have very
important consequences for our future infrastructure needs.
[The prepared statement of Stanley F. Szwed follows:]
Prepared Statement of Stanley F. Szwed, Vice President-Transmission,
FirstEnergy Corp. on Behalf of Edison Electric Institute
introduction
Thank you for the opportunity to testify before the Subcommittee
today. I am Stan Szwed, Vice President of Transmission for FirstEnergy
Corp. FirstEnergy is a diversified energy services company
headquartered in Akron, Ohio, and is the nation's 10th largest electric
utility. We serve 2.2 million customers in Northern Ohio and Western
Pennsylvania. We are in the final stages of our proposed merger with
New Jersey-based GPU. GPU serves 2.1 million customers in Pennsylvania
and New Jersey. When our merger is completed, FirstEnergy will be the
4th largest electric utility in the nation based on customers served.
As Vice President of Transmission, I am responsible for the operation
of the FirstEnergy transmission system--that is, managing the electric
power grid and keeping it available 24 hours a day, seven days a week,
365 days a year. Our system--and others like it in three major
interconnections in North America--is always on.
I am testifying today on behalf of the Edison Electric Institute
(EEI), the association of U.S. shareholder-owned electric utilities and
industry affiliates and associates worldwide. I am pleased to have the
opportunity to testify before the Subcommittee on critical transmission
issues that should be addressed in electricity restructuring
legislation.
At the outset, let me express my sympathies to all those affected
by the attacks on America on September 11, which was the date this
hearing was originally scheduled to have taken place. Electric
transmission facilities are critical infrastructure, and the industry
takes very seriously its responsibility to maintain the security and
reliability of those facilities.
EEI is a leader in advocating public policy to support competitive
electric generation markets with market-based pricing and a wide
diversity of market participants. EEI and its members firmly believe
that market-oriented restructuring of the electric industry remains the
best opportunity to provide consumer benefits and to develop reliable
new sources of supply. To accomplish this goal, EEI strongly supports
passage of comprehensive energy legislation.
FirstEnergy has been an industry leader on electric transmission
issues. With many partners, we have accomplished groundbreaking work to
develop what was, when we proposed it, a first of its kind: a for-
profit transmission company as a regional transmission organization.
During the course of our work, we have tried to help policy makers set
the right course for transmission. I hope that my experience on these
two efforts--the development of a for-profit RTO (The Alliance) and the
promotion of proper federal policy on transmission--will be of value
for the Committee.
background
The Energy Information Administration (EIA) projects that more than
1,300 new power plants will need to be built between now and 2020, to
meet our economy's electricity needs. However, without an adequate
transmission system, that power will not get to where it is
needed.<SUP>1</SUP>
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\1\ As the PA Consulting Group stated in its 2001 report,
``Transmission represents only a small portion of the cost of
electricity, but has a substantial effect on the success of electricity
markets by increasing access to supplies and reducing electricity
prices. However, the inability of the restructuring process to
adequately address as yet the needs of the transmission sector is
jeopardizing the health of both the sector and of the entire electric
power industry, which it supports.'' Roger Gale et al., PA Consulting
Group, The Future of Electric Transmission in the United States Sec. 1-
1 (2001).
---------------------------------------------------------------------------
In many areas transmission capacity has not expanded to keep pace
with new demands to support competition. Utilities built the bulk of
today's transmission system before the advent of wholesale and retail
electricity competition, primarily to move power limited distances and
to bolster reliability. The current transmission grids were not
designed to serve as the interstate super-highway system for
competitive electricity markets. Therefore, it should not come as any
surprise that transmission congestion is on the rise.
Fundamental changes in the industry are imposing tremendous demands
on transmission systems to carry more and more transactions across even
greater distances. Between August 1999 and 2000, transmission
congestion in the Eastern Interconnection grew by more than 200
percent.<SUP>2</SUP> In the first quarter of 2001, this transmission
congestion was already three times the level experienced during the
same period in 2000.<SUP>3</SUP>
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\2\ Eric Hirst and Brendan Kirby, Edison Electric Institute,
Transmission Planning for a Restructuring U.S. Electricity Industry 8
(2001).
\3\ Id.
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Maintaining transmission adequacy at current levels would require
about $56 billion in investment during the present decade.<SUP>4</SUP>
The Electric Power Research Institute (``EPRI'') estimates it will cost
up to $30 billion to bring the western regional transmission system
back to a stable condition and $1 billion to $3 billion a year after
that to maintain this condition in the face of continued
growth.<SUP>5</SUP> Such investment must come from transmission-owning
companies and, ultimately, from investors.
---------------------------------------------------------------------------
\4\ Id. at v.
\5\ The Western States Power Crisis vi (2001).
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This will be a major challenge. The fact is--annual investment in
transmission has been declining by almost $120 million a year for the
past 25 years.<SUP>6</SUP> Transmission investment in 1999 was less
than half of what it had been 20 years earlier.<SUP>7</SUP> As the
North American Electric Reliability Council (``NERC'') testified
earlier this year: ``[i]n North America 10 years ago we had a little
less than 200,000 circuit-miles of high voltage transmission lines.
Right now we have about 200,000 circuit-miles of those lines. And ten
years from now we are projecting that we will have just over 200,000
circuit-miles of high voltage transmission lines.'' <SUP>8</SUP> For a
graphical representation of the decline in transmission investment over
the last 25 years and the increase in the number of wholesale
transactions using the transmission system, please refer to the charts
included at the end of this testimony.
---------------------------------------------------------------------------
\6\ Hirst and Kirby, supra note 2, at 5.
\7\ Id.
\8\ National Energy Policy with Respect to Federal, State, and
Local Impediments to the Siting of Energy Infrastructure: Hearing
Before the Senate Comm. on Energy and Nat. Resources, 107th Cong.
(2001) (statement of David N. Cook, General Counsel, North American
Electric Reliability Council).
---------------------------------------------------------------------------
the transmission business
The new transmission business must be able to make a case for
itself. It must be able to demonstrate to investors, employees,
customers, regulators, suppliers, and others that it can perform and
grow--that it can be a stand-alone enterprise. For a stand-alone
transmission company operating independently of affiliated generators,
distribution companies or other market participants, this means it must
demonstrate that it can attract investment, recruit and keep highly
talented, highly motivated people, and pay a just and reasonable return
to its owners. Investors need to know that investing in the new
transmission industry has commensurate opportunity for reward as
investments of similar risk.
Federal and state regulatory policies seek to promote competition
for electric service by permitting both retail customers and generators
access to the transmission system on a nondiscriminatory basis. In
particular, the FERC, by promoting the formation of regional
transmission organizations, is requiring transmission service to be
furnished by large multi-state organizations independent of
transmission owners. This policy requires the transmission business to
stand on its own in providing reliable transmission service, expanding
its facilities to support growing competition for electric service, and
providing reasonable compensation to stockholders. Since reliable and
readily available transmission service is one of the keys to effective
competition, a regulatory environment absolutely, without fail, must be
created that gives this new transmission business the opportunity not
simply to survive, but to thrive. California demonstrates that we
cannot overlook the direct relationship between investing to keep up
with changing demands and electric reliability.
Open access to transmission facilities, which FERC required in
Order No. 888, means that transmission lines once solely used for the
vertically integrated company that owned the line, are now part of an
interstate transmission system that could be used by anyone. The
problem is that as a whole, the systems were not built to serve as an
interstate highway. They were built to deliver electricity from a
specific power plant to a specific load center within the regulated
service area of a single utility or utility system. The separation of
transmission from the traditional utility and the transfer of control
over transmission service to RTOs introduce new requirements and
dictate a new approach to ensuring reliability of transmission service.
The new transmission industry will need to compete with the private
sector to attract investment, build a business, and serve its
customers. Don't just take my word for how important it is to get the
new transmission industry right. The PA Consulting Group stated in its
2001 report that ``the inability of the restructuring process to
adequately address as yet the needs of the transmission sector is
jeopardizing the health of both the sector and of the entire electric
power industry, which it supports . . . [The] lack of additional
incentives in the face of new risks lies at the heart of many of the
problems now facing the transmission sector.'' <SUP>9</SUP>
---------------------------------------------------------------------------
\9\ Roger Gale et al., supra note 1 at Sec. 1-1.
---------------------------------------------------------------------------
In a comprehensively regulated service such as transmission,
setting out the right business proposition depends very heavily on
Congress and federal regulators establishing the right federal
policies. I especially want to commend Representatives Sawyer and Burr,
who have looked at transmission from the perspective of trying to
increase investment, encourage construction and expand markets.
FirstEnergy endorses their legislation, H.R. 2814, and encourages the
Committee to include it or similar elements in any electricity
restructuring legislation. Based on the legislative principles outlined
above, an electricity bill should address the following areas:
Reform Transmission Rates
Congress should provide definitive pricing direction to FERC with
the policy goal of having a healthy, robust transmission system for the
nation that can help deliver the many benefits of electric competition
to all consumers. As such, Congress should reform transmission rate
making to reflect the risks and uncertainties in the brand new
transmission industry. FERC has a legal obligation to set rates that
simultaneously protect consumers' interests in having reasonable rates
and investors' interests in reasonable returns. However, transmission
rate reform, which many parties acknowledge is needed, has been too
long in coming. As has been noted, ``The transmission sector, as the
provider of services to participants in both the wholesale and retail
markets, has . . . seen an increase in risk, but there has been little
if any increase in potential rewards.'' <SUP>10</SUP> The best thing
for consumers is a robust, growing transmission network, and it will
require some different regulation to bring that about.
---------------------------------------------------------------------------
\10\ Id.
---------------------------------------------------------------------------
We support transmission rate reform so that returns on transmission
assets are in line with assets in industries having commensurate
risk.<SUP>11</SUP> The September 21, 2001, electricity discussion draft
circulated by Chairman Barton (``Barton discussion draft'') directs
FERC to conduct a rulemaking that would improve transmission rates with
the goal of promoting the expansion and improvement of interstate
transmission networks. We also support innovative rate treatments, such
as allowing transmission owners to share with customers some of the
financial benefits of providing more cost-effective service.
---------------------------------------------------------------------------
\11\ In recent years the S&P 500 companies have, on average,
yielded a rate of return on equity (ROE) of approximately 20 percent,
while vertically integrated electric utilities have lagged behind at
10-13 percent on average. See Joint Comments of Kit Konolige et al.,
regarding the Commission's Notice of Proposed Rulemaking on Regional
Transmission Organizations, at 9, FERC Docket No. RM99-2-00.
---------------------------------------------------------------------------
We believe that if reform of transmission pricing is undertaken,
prices for delivered electricity will remain stable and may even
decline. Generation accounts for the lion's share of electricity
costs--some 75%. A more vigorous transmission sector should strengthen
competition. Increasing access to supply should lead to more
competition and lower delivered prices.
The President's National Energy Policy Report called for the
Department of Energy to work with FERC to encourage the use of
incentive rate making proposals. H.R. 2814, the bill introduced by
Representatives Sawyer and Burr, also directs FERC to utilize
innovative transmission pricing policies. Chairman Barton's discussion
draft contains helpful language on this point. And H.R. 2944, the
electricity bill passed by this Subcommittee in 1999, included
innovative pricing language. FERC is moving in the right direction on
issues like these, but encouragement from Congress, especially in the
form of legislative language directing FERC to consider the need for
transmission investment and expansion when setting rates, is very
important.
Reform Transmission Siting
One of the key impediments to increasing transmission capacity is
the problem of siting new lines, particularly lines that are built to
facilitate interstate power transactions. To help site new transmission
lines, EEI supports giving FERC a role as backstop. This backstop would
come into play only when states are unable or unwilling to act on the
application. Under this proposal, if a state failed to act on an
application, or materially altered it, FERC would be given the
authority to issue a certificate of public convenience and necessity
for a transmission line. FERC would have similar authority if other
Federal agencies failed to act or materially altered a regionally
approved proposal.
The proposal to grant FERC a key role in siting new transmission
lines has gained support across the political spectrum. The President's
National Energy Policy Report recommends developing legislation to
grant FERC siting authority for new transmission. The Barton discussion
draft would grant FERC a backstop role if a state lacked authority to
site a new transmission line, withheld approval or delayed final
approval for more than one year. H.R. 2814 also would grant FERC a
similar backstop role. In his draft bill on electricity legislation,
Senate Energy Committee Chairman Bingaman proposed granting FERC siting
authority.
It made sense in 1935 when the Federal Power Act was adopted to
leave transmission siting authority with the states, since transmission
lines were generally local in nature. It also made sense for Congress
to grant FERC's predecessor, the Federal Power Commission, authority to
make siting decisions for natural gas pipelines, since they tend to be
interstate in nature. Now, however, our transmission system is being
asked to meet obligations similar to natural gas pipelines: move large
amounts of energy across long distances and across state lines.
FirstEnergy endorses federal siting authority, even though in Ohio
we have a comparatively good siting process. In the early 1970s, Ohio
established a transmission siting board. Today in Ohio, if you propose
a transmission facility, the application need only be approved by the
state siting board. The applicant must demonstrate a need in Ohio for
the facility, and must demonstrate that environmental considerations
are given due regard. Once these thresholds are met, the board issues a
certificate on environmental compatibility and public need. Roughly 28
states have siting statutes, while the remaining states retain roles
for local authorities in siting decisions.
We understand that the issue of federal eminent domain authority
raises concern. Of course, to carry out necessary siting, there must be
a certificate of public convenience and necessity issued. Only then may
the holder of the certificate exercise the authority. The FERC
currently has authority to issue certificates for natural gas pipelines
and for electric transmission for hydroelectric projects. In addition,
the federal electric utilities that own transmission have eminent
domain authority.
Electric utilities currently exercise the power of eminent domain
when issued state certificates of public convenience and necessity if
they are unable to acquire the rights-of-way through other means. EEI
recently surveyed its member companies on their use of eminent domain
authority. The companies that responded have transmission operations in
39 states. They reported acquiring 4,107 miles of transmission line
rights-of-way over the last five years, involving more than 14,000
parcels of land. Of those parcels, only 417--or 2.9 percent--required
the use of eminent domain authority. Utilities clearly exercise eminent
domain as a last resort.
Remove Tax Barriers
Congress should enact tax reform to remove disincentives to
formation of regional transmission organizations and to provide
incentives for new investment. Specifically, we need to allow for tax-
deferred sales and tax-free spinoffs of transmission property, as
provided for in H.R. 4. This language resulted from an agreement
between the Edison Electric Institute, the American Public Power
Association, and the Large Public Power Council. In addition, we need
to accelerate depreciation periods for transmission property, as called
for in S. 596, introduced by Senator Bingaman.
Forming a for-profit transmission company or transco, which is what
my company and many others are doing to comply with Order No. 2000, is
extremely difficult, and is complicated by the tax laws. To meet the
Order's independence requirement, many utilities would prefer to find a
way to divest transmission assets. In other cases where government
action requires a taxpayer to sell property, the tax code prevents
incursion of tax penalties. If utilities sell transmission property and
reinvest the proceeds into other utility property, taxes should be
deferred until a taxable event involving the property occurs. If
utilities spin off transmission property, this should not be considered
a taxable event.
As for depreciation of transmission assets, the depreciation period
should be brought into line with periods for property in other
industries, given the changed circumstances under which the industry
must attract capital.
Remove PUHCA Barriers
Congress should repeal the Public Utility Holding Company Act. It
is now a significant barrier to investment in RTOs. When the Senate
Banking Committee held a hearing on S. 206, the Public Utility Holding
Company Act of 2001 (which has now been adopted by that committee by a
19-1 vote), Cindy Marlette, FERC's Deputy General Counsel, testified to
the impact of PUHCA on RTO formation, stating:
PUHCA may cause unnecessary regulatory burdens to utilities
who, in compliance with Commission policy and regulations, seek
to form or join regional transmission organizations (RTOs) . .
. Under PUHCA, any entity that owns or controls facilities used
for the transmission of electric energy--such as an RTO--falls
within the definition of public utility company, and any owner
of ten percent or more of such a company would be a holding
company and potentially could be required to become a
registered holding company. This could serve as a significant
disincentive for investments in independent for-profit transcos
that qualify as RTOs.<SUP>12</SUP>
---------------------------------------------------------------------------
\12\ Hearing on S.206 ``The Public Utilities Holding Company Act of
2001: Before the Senate Comm. on Banking, Housing and Urban Affairs,
107th Cong. (2001) (Statement of Cynthia A. Marlette, Deputy General
Counsel, Federal Energy Regulatory Commission).
---------------------------------------------------------------------------
Put simply, the Holding Company Act stifles investment in the
emerging independent transmission industry. As EEI member companies
attempt to raise financing for newly forming RTOs, they are discovering
that PUHCA's restrictions are a significant concern to Wall Street
firms and a barrier to investment.
Avoid Market Structuring Authority for FERC
Congress should avoid giving FERC new authority to restructure the
industry. As noted above, RTOs are forming. This process is already
subject to intense FERC review and approval.
FirstEnergy has been actively involved in RTO formation for the
last four years. Our company joined the Alliance filing in June 1999,
well before Order No. 2000 was issued. With four major FERC orders
behind us, each conditionally approving our filings and encouraging us
to continue, the Alliance is nearing operations. And we are not alone;
electric utilities in the Northeast and the Southeast have also spent
countless hours and invested millions of dollars in efforts to form
their own RTOs. Giving FERC additional authority to alter the process
at this stage could damage and impede the progress already made. Now is
certainly not the time to increase uncertainty. With 98 percent or more
of investor-owned transmission assets committed to RTOs in development,
the industry is demonstrating that many proposals in the last Congress
for additional RTO authority were unnecessary. FERC is an economic
regulatory agency. Market structuring decisions should remain primarily
where they reside today--in the Department of Justice, Federal Trade
Commission, and with the state antitrust authorities.
Furthermore, if the federal government focuses the transmission
debate on the authority of the commission to restructure the industry,
it conditions the industry to be concerned with regulation, and not
with making transmission systems work. The businessmen will be
regulatory experts, not transmission experts. Lately my colleagues and
I have spent a lot of time negotiating our way through regulatory
changes and policy debates, when what we need to do most is run this
critical business and focus on customer satisfaction.
Adopt Mandatory Reliability Standards
In a competitive electricity market, voluntary reliability rules
that market participants may or may not obey, depending on their
economic incentives, will not work. We have already seen market
participants bending and even ignoring the existing voluntary rules for
their own gain. The North American Electric Reliability Council (NERC)
is reporting numerous violations of its voluntary reliability rules. A
comprehensive restructuring bill should include provisions to ensure
reliability standards developed by technical experts are mandatory and
enforceable on all market participants, with FERC oversight. Also, the
rules should apply uniformly to provide stability and security for new
markets with new boundaries.
The President's National Energy Policy Report calls for such
legislation. H.R. 312, legislation introduced by Representative Wynn,
contains reliability provisions developed by NERC and numerous industry
stakeholders. H.R. 2814 includes the same reliability provisions. H.R.
2944, as approved by this Subcommittee in 1999, contained similar
provisions. Also, the Senate passed a version of this bill last year.
The Barton discussion draft contains different language, but we believe
its overall goal is consistent with the previous proposals and that,
with a few modifications, this language would be acceptable to a
majority of EEI's member companies.
Streamline Merger Review Authority
Congress should streamline, at the very least, the review of
dispositions of utility property by the FERC under Section 203 of the
Federal Power Act. Among other things, this review is a barrier to
consolidation of transmission networks and formation of RTOs.
Section 203 of the Federal Power Act is currently a ``one-size-
fits-all'' provision that applies to the disposition of all
jurisdictional assets with a value of $50,000 or more. It applies to
everything from a simple sale of a transmission substation to the most
complicated utility transactions. FERC reviews of dispositions of
property under section 203 take far too long and are often duplicative
of reviews conducted by other agencies. For some transactions, review
is required by FERC, the Department of Justice, the Federal Trade
Commission, the Securities and Exchange Commission, the Nuclear
Regulatory Commission, and each affected state. Utility transactions
should be reviewed by the government, commensurate with the way
transactions involving other industries are reviewed. However, the
massive, time-consuming, duplicative review specific to the electric
utility industry is contrary to consumer interests because it delays
companies' ability to respond to market needs and needlessly increases
transaction costs.
Both the Barton discussion draft and H.R. 2814 would repeal Section
203 of the Federal Power Act, which grants FERC authority to review
public utilities' disposition of property, consolidation and purchase
of securities. This eliminates duplicative federal merger reviews,
leaving the Department of Justice or Federal Trade Commission to review
such mergers.
the alliance rto
FirstEnergy is one of the leaders in forming the Alliance Transco
Limited Liability Company (Alliance Transco LLC) that we anticipate
will be qualified as the Alliance RTO. We anticipate that an affiliate
of National Grid USA, itself part of a worldwide independent
transmission-only company, will be the independent Managing Member of
Alliance Transco LLC. As part of the transaction, National Grid expects
to make very substantial investments in Alliance Transco LLC to fund
start-up and to acquire assets. Alliance Transco LLC will be a for-
profit transmission company. The business of the company will be to
provide transmission service. The EEI member companies that now own the
transmission assets expected to be controlled by Alliance Transco LLC
will become its customers, aligning their interests more closely with
other generators and utilities. As I mentioned, with two years of
regulatory proceedings behind us and substantial approvals already
obtained, Alliance Transco will be ready to operate by the end of this
year in accordance with the ambitious timetable set by Order No. 2000
if it gets final approval from FERC this fall.
Over the last four years, and especially since the first Alliance
filing in 1999, a major portion of my daily activity and the people I
work with has been focused on forming the Alliance. The model we built
has attracted five newer members to the Alliance, which will now be
able to provide transmission service roughly from the Gateway Arch in
St. Louis to Kitty Hawk, North Carolina. It will link large load
centers such as Chicago, Cleveland, and Northern Virginia.
Alliance is but one RTO being developed by EEI member companies. In
each case and under each model, there are business and human challenges
that must be overcome. On the business side, we are focused on crafting
and executing the business and financial arrangements necessary to
establish electric transmission institutions that can serve growing
competitive markets for electricity. This is the cutting edge of
financial restructuring.
On the human side, the new transmission industry will need
experienced and highly trained, highly motivated personnel. It takes
experienced people to run these systems. The system operators are the
finest people around. The last thing they want to happen is to reduce
load or have a blackout. They take pride in making sure that we
effectively balance resources and load, and they work day and night--
literally 24 hours a day, seven days a week, 365 days a year--to keep
the lights on. We must keep these operators. However, without the right
business proposition, and without some certainty about the direction
and promise of this emerging industry, how will we keep them?
I implore you to craft legislation in such a way that accelerates
and does not retard the development of this new transmission industry
and the start-up of RTOs in development.
conclusion
Our country needs a comprehensive electricity restructuring bill.
And since transmission is the backbone of the entire industry, Congress
needs to ensure that wholesale electricity markets are capable of
delivering adequate, affordable and reliable electricity to consumers.
Without sufficient transmission capacity it won't happen. Transmission
is the linchpin to well-functioning wholesale and retail markets. We
look forward to working with this Subcommittee to develop the
transmission reforms necessary to enable the industry to launch the
independent transmission businesses of the future and close the
transmission investment gap.
[GRAPHIC] [TIFF OMITTED] T6759.001
[GRAPHIC] [TIFF OMITTED] T6759.002
Mr. Barton. Thank you, Mr. Szwed.
We now want to hear from Mr. Roger Fontes, is that correct?
Who is the General Manager of the Florida Municipal Power
Agency and he's here on behalf of the American Public Power
Association.
You're recognized for 5 minutes.
STATEMENT OF ROGER A. FONTES
Mr. Fontes. Good morning, Mr. Chairman, and thank you,
members of the subcommittee for the opportunity to testify
today.
I am testifying on behalf of the American Public Power
Association which represents 2,000 publicly owned utilities
serving 40 million customers.
APPA supports the implementation of Federal policies that
will establish effective wholesale competition, and we share
the view of many members of the subcommittee that getting the
transmission issue right is the key to achieving that goal.
Nowhere is this more evident than in my State of Florida where
we have inadequate interstate connections with other States and
where prior transmission discrimination has led to lengthy
litigation on transmission access issues.
Getting it right means resolving all of the issues you have
identified for these hearings today, but you've also asked the
panel to specifically address three key ones: Siting, incentive
rates and reliability of the grid. So let me address each of
these.
Siting. It is widely recognized that the Nation's
transmission system is weak and highly constrained. These
problems inhibit competition and threaten reliability. The
biggest obstacle to new transmission lines is the difficulty of
siting.
Currently the balkanized State-by-State process is not
working. Since these facilities are necessary to support
interstate commerce, a Federal role is appropriate and
essential. APPA supports the concept of Federal eminent domain
authority for major transmission facilities and in that regard
we support section 402 of the chairman's draft bill.
Given the political problems involved, however, we think
this authority should only be used after appropriate
consultation and cooperation with State and local governments.
Thus, we suggest that this section be expanded to include an
authority to create States creating joint siting boards that
mirror RTO boundaries, require these boards to provide one-shop
review and approval processes for RTO approved facilities and
provide FERC with siting authority if States fail to establish
boards or act on RTO plans.
Regarding incentive rates. Many transmission owners are
urging Congress to direct FERC to institute incentive rates to
encourage transmission construction. We strongly believe that
this is the wrong approach and is unnecessary. We must stop
looking to the entities that both own transmission and
generation to build new transmission facilities. The risk of
losing generation sales to competitors by building new
transmission is so great that we believe the incentive will not
help. And extensive profits really only spill through to higher
consumer rates for everyone.
Indeed, the chairman's discussion draft includes a
proposal, and we respectfully request that it be deleted.
First, really, the obstacle to transmission is not the lack
of capital or investors. The main obstacle is siting.
Transmission is a low risk traditionally regulated utility
investment. It has been successful in attracting capital at
reasonable and regulated rates of return. I believe Thomas Lane
from Goldman Sachs testified before your committee in late July
and said ``There is definitely a role in the markets for low
risk/low return investments, which is what transmission
represents.'' We agree with this statement.
A recent example of this is Department of Energy's request
for interest in constructing what's now become the famous Path
15 in California, which I understand garnered more than a dozen
responses.
Second, additional legislation is not needed. FERC already
has existing authority to approve innovative or performance
based rates. FERC has had an incentive rate policy since 1992.
Personally I find it ironic that the same time large
transmission owners are demanding higher rates to build new
transmission, they are steadfastly refusing to allow public
power and cooperative system to be paid by RTO's for their
prior transmission investments. Congress should not support
this gambit.
Transmission will be built if we resolve siting issues and
support FERC's authority to require RTOs to have the full
authority to plan and construct the grid.
Reliability. Certainly events of the past year have
reenforced the importance of maintaining and improving the
reliability of the transmission system. APPA supports enactment
of Federal legislation to establish a national electric
reliability organization to set and enforce reliability
standards with FERC oversight. In this regard we support
section 301 of the chairman's draft. We also support some
changes to that section as proposed by the NERC, National
Electric Reliability Council, that would impart, underscore the
need for FERC to oversee implementation of the standards and
enforce compliance by RTOs and others using the Nation's
transmission grid.
Thank you for the opportunity to be here today. Public
power looks forward to working with the subcommittee to address
these issues for the benefits of all consumers. Thank you.
[The prepared statement of Roger A. Fontes follows:]
Prepared Statement of Roger A. Fontes, General Manager and CEO, Florida
Municipal Power Agency, on Behalf of the American Public Power
Association
Thank you, Chairman Barton, Ranking Member Boucher and Members of
the Subcommittee for this opportunity to testify. I am pleased to
appear today on behalf of the American Public Power Association to
discuss several important issues involved in restructuring the nation's
electric transmission grid.
I am General Manager and CEO of the Florida Municipal Power Agency
(FMPA), a joint action agency providing wholesale power and other
services to 29 municipal electric utilities in Florida. APPA represents
the interests of more than 2,000 publicly owned electric utility
systems across the country, serving approximately 40 million customers.
APPA member utilities include state public power agencies and municipal
electric utilities that serve some of the nation's largest cities.
However, the vast majority of these publicly owned electric utilities
serve small and medium-sized communities in 49 states, all but Hawaii.
In fact, 75 percent of our members are located in cities with
populations of 10,000 people or less.
Public power systems' first and only purpose is to provide
reliable, efficient service to their local customers at the lowest
possible cost. Like hospitals, public schools, police and fire
departments, and publicly owned water and waste water utilities, public
power systems are locally created governmental institutions that
address a basic community need: they operate to provide an essential
public service, reliably and efficiently, at a reasonable, not-for-
profit price. Publicly owned utilities also have an obligation to serve
the electricity needs of their customers and they have maintained that
obligation, even in states that have introduced retail competition.
And, because they are governed democratically through their state and
local government structures, public power systems operate in the
sunshine, subject to open meeting laws, public record laws and conflict
of interest rules. Most, especially the smaller systems, are governed
by an elected city council, while an elected or appointed board
independently governs others. Democratically governed, not-for-profit,
obligated to serve all customers--understanding the underlying
structure and mission of public power is essential in crafting balanced
electricity legislation that will maintain industry diversity and
promote the consumer interest.
Wholesale Competition First--the Role of the Federal Government
There is only one reason for Congress to enact comprehensive
electric utility restructuring legislation--to promote wholesale
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 consumers with no degradation
of reliability of service.
Moving from a monopoly model to a competitive model is very
difficult. Those in this transition who are threatened with a loss of
market control can be expected to fight tenaciously to retain
competitive advantages or seek to gain market power. The biggest
obstacles to the creation of robust wholesale competition in the
electric utility industry are: 1) the inadequacies of our nation's
transmission infrastructure; 2) the failure to establish on a
comprehensive basis efficient, competitively neutral regional
transmission organizations and to plan, construct, operate and provide
the transmission service needed for regional markets to succeed, and;
3) the pervasive existence of market power in regional generation
markets that can be exercised to keep prices for consumers well above
truly competitive levels.
The evidence of the continuing abuse of transmission and generation
market power is abundantly clear from the hearing record of this
Subcommittee. The vast majority of witnesses from very diverse
constituencies and interests that have appeared at Subcommittee
hearings over the past five years--whether it was on specific
restructuring legislation or in response to the western electricity
crisis of the past year--have pleaded for Congress to address this
problem.
Because they involve interstate commerce, Congress can only address
the market power problems in generation and transmission. Federal
antitrust laws may remedy problems in mature markets, but they are not
effective to guide the transition to competition for industries, like
the electric utility industry, that must evolve from highly
concentrated monopolies. Antitrust laws cannot convert such industries
to ones that are capable of being controlled by competitive forces.
The identification of market abuses in any modern industry is hard,
but in the electric utility industry, 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 discrimination and
manipulation, including the ability to withhold transmission from
competitors through reservations of capacity for ``reliability'' and to
manipulate the timing of maintenance of strategically located
generation and transmission facilities. For these reasons, the primary
federal antitrust agencies, the Federal Trade Commission and the
Department of Justice, have previously testified in favor of remedying
the electricity market structure.
Transmission: the Key to Competition
Since today's hearing is focused on transmission issues and how
they are addressed in Chairman Barton's discussion draft, my testimony
will delineate transmission provisions that are essential in federal
restructuring legislation and will also cite specific provisions in the
draft bill, including those that could be modified or eliminated. It is
important to remember, however, that generation markets and the
transmission system are inextricably linked. In particular, it is
essential that federal legislation provide the Federal Energy
Regulatory Commission (FERC) with authority to prevent and, where
necessary, remedy the exercise of market power.
It is widely recognized that our current transmission system is
weak and highly constrained. The weaknesses of the grid not only
threaten reliability; they undermine our ability to achieve robust
competition. Competitive wholesale markets simply cannot work unless
numerous competitors are able to deliver their product to buyers.
Today, our regional grids are characterized by ever increasing
congestion leading to more and more interruptions and providing buyers
with fewer and fewer reliable choices of supply. We need to fix the
grid, physically by enabling prompt construction of needed facilities,
and institutionally by providing for independent, competitively neutral
planning, operation, and service.
Thus, APPA shares the view of many Members of the Subcommittee that
getting transmission ``right'' is the key to building an effective,
competitive wholesale market and that expansion of the grid is critical
to making the interstate transmission system more robust and efficient.
The way to achieve these goals is four-fold:
1) reform the balkanized, state-by-state transmission siting process;
2) stop looking exclusively to entities that own both generation and
transmission to build new transmission facilities. The risk of
losing generation sales to competitors by building more
transmission is so great that these entities will not do it
without hefty incentive payments--payments that will
unnecessarily increase electricity costs for consumers;
3) grant FERC the authority to establish large, rationally scoped and
truly independent Regional Transmission Organizations (RTOs)
with full authority to plan and expand the regional
transmission system; and
4) ensure that RTOs fully compensate all transmission owners--whether
large vertically-integrated utilities, smaller transmission
dependent utilities, or a non-industry investors--for their
investment in transmission facilities turned over to an RTO's
control and operation.
The Chairman's draft admirably addresses the first item, goes in
the wrong direction on the second, and has not yet addressed the third
and fourth.
Regional Planning and Siting
The Administration's National Energy Policy Report directed
Department of Energy Secretary Abraham to ``develop legislation to
grant authority to obtain rights-of-way for electricity transmission
lines, with the goal of creating a reliable national transmission
grid.'' APPA supports the approach employed in Section 402 of the
discussion draft that provides FERC with siting authority when States
or other entities designated to review siting requests are either
unable or unwilling to act.
As the Subcommittee reviews the discussion draft, we would suggest
that these additional provisions be added to Section 402 to further
streamline the siting process:
1) Authorize the creation of joint state siting boards that mirror RTO
boundaries.
2) Require theses siting boards to provide a one-stop review and
approval process for facilities in approved RTO regional plans.
3) Establish reasonable deadlines within which these siting boards must
act on RTO plans. Although Chairman Barton's draft authorizes
FERC to be given siting authority on a particular project if a
State or siting entity has failed to act within a year, we
believe that certain projects may need more immediate action.
4) Grant the RTO federal eminent domain authority for the project so
that it will not have to proceed in multiple state courts under
different standards once a project has been approved either by
a joint board or by FERC.
As the Chairman has acknowledged by including FERC siting authority
in his draft, the adequacy of the interstate transmission grid is vital
to our nation's economic and security interests and should be addressed
on the national level. The current bureaucratic maze of state
regulations and the threat of possible judicial action in multiple
state courts substantially hinder the siting of new interstate
transmission lines. By substituting a single joint siting process for
reviewing projects in multiple states that are subject to different
rules and standards, investors will be able to proceed with much
greater certainty that a project will be approved and completed.
Incentive Pricing
We are aware that some transmission owners have been urging
Congress to legislate to direct FERC to institute ``incentive,''
``innovative,'' or ``negotiated'' rates to encourage owners to expand
the grid. In fact, the Chairman's draft directs FERC to conduct a
rulemaking on incentive and performance-based transmission rates. This
provision is unnecessary; APPA believes that FERC, under the Federal
Power Act and Order 888, already has sufficient authority and
flexibility to design transmission rates to ``promote economically
efficient transmission and generation of electricity.'' These rates
remain subject to the ``just, reasonable, and not unduly discriminatory
or preferential'' standard that has been the hallmark of FERC rate-
making authority. (This standard was recently affirmed by FERC in Order
2000 on RTOs.) Further, APPA believes that incentive rates will
undoubtedly lead to increases in overall transmission costs, which are
decidedly not in the public interest.
As is mentioned above and will be discussed in more detail below,
the most significant impediment to achieving a robust transmission
system is the current, fractured, siting process. Because the
Chairman's discussion draft addresses this most vital of transmission-
related issues, the codification of ``incentive,'' ``performance-
based,'' ``innovative,'' or ``negotiated''' rates is unnecessary and
the wrong approach. For these and the following reasons, we feel
strongly that Section 401 should be eliminated from the draft bill.
Additional Legislation Is Not Necessary; FERC Is Already Empowered to
Approve Innovative or Performance-Based Rates:
Legislation endorsing innovative rate-making to encourage
transmission owners to join RTOs, invest in new facilities, and operate
the transmission system efficiently is not necessary. The Federal Power
Act (FPA) already makes ample room for incentives and performance-based
rates that satisfy the ``just, reasonable, and not unduly
discriminatory or preferential'' standard that is the hallmark of
utility rate-making. In addition to this fundamental standard, Section
212(a) of the Federal Power Act, which FERC has read into Sections 205
and 206, already provides FERC all the flexibility needed to design
rates to ``promote economically efficient transmission and generation
of electricity,'' but subject to the essential protections of the
``just, reasonable and not unduly discriminatory or preferential''
standard. Requests for additional legislative pricing authority should
be recognized for what they are--requests for rates that would not
otherwise meet the longstanding and fundamental requirement that rates
be just, reasonable, and in the public interest.
The concept of incentive rates is not new to FERC. Since 1992, FERC
has had an incentive rate policy.<SUP>1</SUP> That long-standing policy
recognizes that to be fair, ``Incentive rate-making must simultaneously
protect customers' interest and offer potential rewards to the utility
for good performance.'' They also must be balanced: ``[I]ncentive
regulation should be designed to penalize utilities that fail to
achieve these efficiencies--opportunities for reward should be offset
by symmetric downside risk.'' The policy statement establishes sound
regulatory standards to guide evaluation of incentive rates, including
the requirement to quantify benefits to consumers and maintain quality
of service.
---------------------------------------------------------------------------
\1\ Policy Statement on Incentive Regulation, 61 FERC para. 61,167
(1992).
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FERC's RTO rulemaking, Order 2000, expressly endorses its 1992
incentive rate policy and applies it to the RTO context. In Order 2000,
FERC both outlined a series of incentives and pricing innovations that
RTOs could propose, and endorsed performance-based rates. FERC's RTO
rule expressly invites rate treatments, such as rate moratoriums, rates
of return that consider ``risk premiums and account for demonstrated
adjustment in risk,'' and ``non-traditional depreciation schedules for
new transmission investment,'' 18 C.F.R. Sec. 35.34(e). At the same
time, the Commission's rule requires a demonstration as to ``how any
proposed rate treatment would help achieve the goals of Regional
Transmission Organizations, including efficient use of and investment
in the transmission system and reliability benefits to consumers,'' as
well as a cost-benefit analysis.
Existing law expresses policies on reasonable incentives and rate
innovations, and demonstrates that new incentive rate legislation is
not necessary. Existing law gives FERC ample authority to provide
balanced and justified rate incentives and performance-based rates that
foster investment in and efficient operation of an expanded grid
capable of supporting a robust competitive market, and ensuring
reliable service to all consumers. No additional pricing language is
needed to permit pricing innovations or incentives that meet the
Federal Power Act's just and reasonable and not unduly preferential
standard.
FERC has the ability to approve performance-based rates that reward
above-average performance in the timely and cost-effective construction
of needed facilities, but FERC also has the ability to penalize poor
performance and significant congestion not remedied in a reasonable
time. It needs no new congressional directive to reward RTOs that
reduce their costs, increase throughput and customer satisfaction, and
eliminate congestion, while enhancing reliability.
Some proposals appear designed to raise rates to a level where the
requirements of Order 2000 and FERC's incentive rate policy would not
be satisfied, and to rewrite the FPA's long-revered rate-making
standard. By legislating incentives, without requiring the
quantification of benefits to consumers and any cost benefit analysis,
the legislation would tip the balance achieved by the just and
reasonable standard, as reflected in Order 2000. In addition, some
proposals would provide for incentive rates even where a transmission
owner does not join an RTO.
As to RTOs, these proposals would legislate continued ``pancaked''
rates that violate Order 2000. A centerpiece of Order 2000 is the
elimination of cumulative pancaked rates (or tolls) that must be paid
whenever a transaction crosses the corporate boundaries separating one
transmission owner from the next, a rate practice that FERC found to
impede development of competitive markets. To remove such barriers to
competition, FERC's RTO rule expressly requires: ``Customers under the
Regional Transmission Organization tariff must not be charged multiple
access fees for the recovery of capital costs for transmission service
over facilities that the Regional Transmission Organization controls''
18 C.F.R. Sec. 35.34(l)(ii).
In addition, it is neither necessary nor appropriate for Congress
to legislate utility rates of return. This determination, which FERC
makes with the help of expert testimony, as well as information from
the financial community on what would constitute an appropriate rate of
return should be left to an expert agency, governed by long-standing
Supreme Court precedent as to what rate of return is reasonable.
Lastly, and most inappropriate for a monopoly service, is the
proposal of some IOUs for ``negotiated rates'' that are expressly
``without regard to costs.'' FERC has repeatedly found non-
discriminatory, open access transmission service to be the necessary
foundation for competitive wholesale markets that the Energy Policy Act
of 1992 intended to foster. Negotiated rates would undermine this
fundamental policy objective. Vertically integrated transmission owners
could use this provision to burden their competitors, for example, by
refusing to provide service on a timely basis, or without extensive or
expensive litigation, absent ``voluntary'' agreement to an extortionate
rate. Indeed, congressional authorization of ``negotiated'' rates would
signal a ``Back to the Future'' approach, inviting the very
discrimination and self-preferences that formed the factual foundation
for Order 888 and FERC's open access requirements.
Even as they relate to RTOs, ``negotiated rates'' are a bad idea.
RTOs, while independent of market participants, are still transmission
monopolists, providing a service essential to their electricity
markets, and our nation's economic well being. The concept of rate
``negotiation'' makes no sense in this context, where customers are
necessarily captive to the RTO on which their loads or generations are
located. RTOs, seeking to maximize profit from their expansive regional
transmission monopoly, might well be tempted to use ``negotiated
rates'' as a mechanism to extract excess profits for providing
customers the service to which they should be entitled at regulated
rates. (Of course, the just and reasonable requirement does not prevent
compensation to RTOs for providing enhanced or expedited service.)
Indeed, protecting consumers from the ability of public utilities to
insist on excessive charges for essential services is a core purpose of
the FPA and the fundamental premise for subjecting monopoly services to
be regulated, just and reasonable, and not unduly discriminatory or
preferential rates.
Enhancing FERC's Authority to Require RTOs that Have Full Authority to
Plan and Cause Expansion of the Regional Grid is a Far More
Effective Way to Ensure Investment in a Robust and Reliable
Transmission System:
Today, the only parties that can build additions to the integrated
transmission grid are the existing transmission owners. A weakness of
many of the RTOs being formed is that they are not permitted to
construct transmission lines themselves, but have to order or cajole
existing vertically integrated owners to construct. This gives
tremendous leverage to the owners. It should not surprise anyone that
owners in this negotiating position are holding out for higher rates of
return and depreciation schedules much shorter than the useful life of
facilities, while the situation gets worse.
A key factor discouraging construction is the fact that owners of
local generation who also own transmission have a significant conflict
of interest when it comes to transmission construction that will open
their generation up to competition. For instance, a new transmission
line may cost $200,000,000 ($100,000,000 of equity) and the FERC return
on equity may be 12%, or $12,000,000 per year. But construction of the
line may also expose the owner to losses of up to $30,000,000 a year in
generation sales. Thus, it is not surprising that such an owner will be
reluctant to build transmission and needs a large incentive to proceed.
A second important problem with looking to existing, vertically-
integrated transmission owners to finance the transmission needed is
that many of these owners are diversifying into unregulated generation
and other investments that have significantly different risk profiles
than transmission. If a company is willing to take high risk and its
``hurdle'' rate to justify new investments is a 15-20% return with a 5-
8 year payback, a transmission investment is not going to pass the test
without a major incentive paid by captive customers. This is
particularly true in light of the competitive downside to major
transmission improvements for an owner of local generation. Similarly,
transmission projects are not going to meet the investment criteria of
venture capitalists or those interested in Internet stocks. This does
not mean, however, that the rate of return for transmission should
compete with the potential returns for those alternative investments,
which involve much more risk.
Notwithstanding, owner attempts to justify incentives by claiming
that transmission is risky is quite untrue. Transmission is the
prototypical low risk, traditional, regulated utility investment that
has been very successful in attracting capital at reasonable, regulated
rates of return.
The most significant risk associated with transmission is in
getting facilities built in the first place ( the long lead times
required to build and the fact that a line may ultimately not get built
because of siting controversy. This risk can be mitigated by allowing
recovery of prudent planning and siting costs for facilities in
approved RTO plans, whether or not the facilities are ultimately built.
But once a transmission line is built, the risk is relatively low,
and certainly significantly lower than with generation. A good example
is the recent Fitch Report on the new American Transmission Company in
Wisconsin, a transco that began operations on January 1, 2001. As the
report points out, over 95% of this transmission-only company's revenue
requirement is guaranteed by recovery from its firm, network customers
regardless of changes in load, weather, etc. The way costs are
allocated and charged under FERC procedures to the network customers of
a monopoly transmission system provides a very certain and steady
recovery of revenues. The primary remaining risk is that variable O&M
costs (which are minor) will exceed what is included in rates, or that
management will do a poor job otherwise and the authorized return will
not be realized. This risk profile certainly does not justify a rate of
return on equity in excess of a just and reasonable regulated utility
return ( or accelerated depreciation, for that matter.
There is certainly adequate capital in the markets for a safe,
regulated annuity-type investment, which is what monopoly transmission
should be. The new RTO regime needs to be designed to attract capital
for projects from investors that are looking for solid 11-12% utility
returns, year in and year out, with low risk ( the risk being that the
return may go to 10% in one year or up to 13% in another. These are
very different investors than those looking for a 15-30% return and are
willing to risk 0-5% or a loss.
As Thomas Lane, Managing Director, Goldman Sachs & Co. testified to
this Subcommittee on July 27, ``There is definitely a role in the
markets for a lower risk, lower return investment which is what
transmission represents. Whether it's 11%-12%, somewhere in that
neighborhood is what we still need to ferret out with the investor
base.''
There is no reason to think that ``cost plus'' regulation, plus a
reasonable return on prudent investment, will be insufficient to
attract investment in transmission, without added ``inducements.'' Cost
plus rate-making has been blamed for inducing over-investment in
expensive generation facilities, pre-competitive generation markets; a
utility would only earn more by building more. Once decisions to expand
transmission are divorced from existing owners, with their competitive
and financial conflicts of interest, this same regulatory regimen would
be ample to spur investment.
For these reasons, we believe it is very important that RTOs be
specifically authorized in legislation to build transmission--whether
they are for profit or nonprofit organizations--or, if they choose, to
bid out passive ownership. If there is a major transmission project the
cost of which will be $100,000,000, the RTO should be able to finance
the project itself as a regulated utility or raise the needed capital
by bidding out the return required, taxes, and depreciation (the fixed
costs of ownership). Individual companies or pools of investors,
willing to be passive owners and looking for the solid annuity-type of
return of a monopoly transmission utility will certainly bid.
In addition, public power and co-op systems should be not only
permitted, but also encouraged, to finance at least their share of
transmission additions through debt. This will help keep the cost of
service down for everyone.
To this end, it is essential that RTOs be structured to compensate
all transmission owners--whether a large vertically-integrated utility,
a smaller transmission dependent utility, or a non-industry investors
in transmission--for their investment in transmission facilities.
Transmission expansion (and RTO participation) will be discouraged if,
as is now proposed by several RTOs, transmission dependent utilities
that own transmission are to be paid only a fraction of their revenue
requirement (if that) for transmission facilities turned over to an
RTO's control and operation. RTOs will not fulfill their purpose if
only incumbent large transmission owners are fully compensated for
their transmission investment.
In other words, we should not accept transmission owner efforts to
retain exclusive rights to construct while seeking rate incentives as
an inducement to do so. Rather than granting existing owners an
exclusive right to build for RTOs and giving in to their incentive
demands, we should enable RTOs to put competitive pressure on the cost
of capital.
Thus, Congress should adopt legislation that arms FERC with
authority to require formation of large, rationally-scoped and truly
independent regional transmission organizations with full authority to
plan and expand the regional transmission system. This would fully
separate transmission from generation interests, so expansion decisions
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.
Reliability
APPA supports the goal of the Chairman's draft in creating a
national electric reliability organization to set and enforce
reliability standards, subject to FERC oversight. The Administration's
National Energy Policy report also calls for enactment of mandatory
reliability standards by an independent body and overseen by FERC to
``address the problems created by increased demands on the transmission
system that have resulted from changes within the industry brought on
by wholesale competition.''
Even though the United States has the most reliable electric system
in the world, the electricity crisis in the West demonstrated the
delicate balance between reliability and the markets within which the
electric grid must operate. Consequently, great care needs to be taken
to ensure that the current level of reliability is not sacrificed in
any restructuring of the industry. As the industry has become more
competitive, more participants have been executing an increasingly
greater number of transactions every day. The focus of most of these
transactions is on short-term costs rather than on system stability.
The North American Electric Reliability Council (NERC) and its
regional councils currently promulgate and implement standards to
ensure the adequate availability of electricity throughout the country.
This voluntary system of compliance with reliability standards works
reasonably well in the regulated environment in which the industry
previously operated, but it will not continue to provide the necessary
safeguards in a competitive market nor in an era of heightened threats
of terrorist attacks.
It is our understanding that NERC has submitted suggested changes
to Title III, Section 301, of the Chairman's draft bill. APPA concurs
with NERC's comments, and would underscore the need for FERC to oversee
the implementation of reliability standards and enforce compliance by
RTOs. The Chairman's draft should be modified to explicitly require
this obligation to comply. RTOs will be responsible for the reliable
operation of the bulk system in real time. They also need to be
responsible themselves by complying with reliability standards.
other transmission issues
FERC Transmission Jurisdiction
Local control is one of the most fundamental aspects of public
power. However, it is difficult to envision effective wholesale
markets, which, as noted, APPA strongly supports, without some degree
of federal involvement in public power transmission that is part of the
regional grid. APPA members have struggled with the problem of
balancing the retention of local control with the recognition that
transmission is a matter of interstate commerce. While publicly owned
utilities with transmission facilities are not anxious to be subjected
to FERC jurisdiction, the limited jurisdiction contemplated in Chairman
Barton's restructuring bill (H.R. 2944) from the last Congress, known
as FERC-lite, is an acceptable compromise and is consistent with APPA
policy. In essence, FERC-lite would extend FERC jurisdiction to public,
cooperative, and federal utilities with transmission facilities
interconnected to the national grid. The FERC-lite language makes the
important exception, however, that FERC would not be given the
authority to set transmission rates for these transmitting utilities.
Instead, FERC would determine whether the rates to others are
comparable to those charged to themselves. If they are not, FERC would
remand the issue to the publicly owned utility.
While the Chairman's draft includes the essential provisions of
this FERC-lite approach, unfortunately, it also includes new provisions
giving FERC the authority to order refunds by public power systems, and
in so doing, providing FERC authority over public power systems'
transmission rates under Sections 205 and 206 of the Federal Power Act.
The combination of these authorities, in fact, results in very heavy
federal regulation of public power and cannot be supported by APPA. We
suggest that the provisions related to FERC refund authority be
deleted.
The issue of transmission jurisdiction in a bundled vs. unbundled
transaction is an important issue now before the U.S. Supreme Court.
Within APPA's membership, there are different positions on this issue.
Transmission dependent utility (TDU) members believe that service to
them must be fully comparable to utility owners' own use of the system.
The native load of a TDU system should not be shed before the native
load of the owner or there can be no fair competitive market. Public
power transmission owners that are vertically integrated are equally
concerned that FERC not interfere with their primary obligation to
provide highly reliable, economic service to the consumers that own
them and for whom their systems have been built.
Creation of Regional Transmission Organizations (RTOs)
The single most important step that can be taken to achieve the
goal of a robust transmission system is the establishment of large,
truly independent RTOs that have primary planning responsibility for
the regional grids under their control. APPA continues to support the
authority of FERC to establish and require public utility participation
in strong, truly independent RTOs in order to facilitate the
development of vigorously competitive retail markets. Any federal
legislation should provide FERC with the authority needed to achieve
this goal. In addition to mandating true independence, and sufficient
size, and rational 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 should not
impair control of local system operations of reliable and economic
service to customers of public power systems.
In order for an RTO to be effective in promoting a competitively
neutral transmission system, it must have several specific
characteristics. It must be independent to ensure that owners of
transmission cannot exercise vertical market power. It must have
boundaries that are rational and that eliminate the current
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 users. In addition, while it may be appropriate for
FERC rates to reward excellent performance as previously discussed, it
is not appropriate for FERC to provide incentives for participation in
RTOs. Instead, RTO participation should be a key condition to enjoying
the benefits of market pricing and relaxed wholesale regulation.
It is absolutely essential to clarify FERC's legal authority to
accomplish these objectives or we will experience continued long delays
and unnecessary litigation. Without a clarification of FERC's
authority, utilities will continue to resist and delay RTO formation--
and the current chaotic state of development will continue
indefinitely.
Publicly owned utilities have been willing to participate in RTOs
which are consistent with the specific criteria set forth by FERC in
Order No. 888 and clarified in Order No. 2000. In fact, FERC
commissioners and various FERC orders have specifically addressed
public power participation, not to encourage public power systems to
join but rather to encourage private utilities to let them join on fair
and reasonable terms.
RTO Participation
FERC has indicated that it believes it currently has the authority
to order jurisdictional utilities to participate in RTOs, and we agree
that restructuring legislation should affirm this existing authority
while expressly confirming and providing for:
1) The authority asserted in Order No. 2000 to order RTO participation
by a jurisdictional utility to remedy undue discrimination or
anti-competitive effects and as a condition for mergers or
market based rates. Legislation should also confirm FERC's
authority that was the foundation for Order No. 888.
2) Recognition and reinforcement of FERC's existing authority to
require RTO participation as a condition to authorizing market-
based rates for jurisdictional utility wholesale power sales.
Where such authority has already been granted, FERC should be
required to review those prior actions and determine whether,
absent the participation of the wholesale supplier in an RTO,
continued market-based wholesale rates are consistent with
promoting competition or in the public interest.
3) RTO participation by jurisdictional utilities should be a necessary
condition in determining proposed mergers of vertically
integrated utilities are consistent with the public interest.
4) RTO participation by jurisdictional utilities should be a condition
precedent to any relaxation of Public Utility Holding Company
Act (PUHCA) requirements.
5) As mentioned above, FERC should be allowed to reward superior
performance by RTOs, but prevented from providing financial
incentives simply for RTO participation.
6) FERC must have the authority and responsibility to ensure that RTOs
are capable of providing the infrastructure and services
required for competition to thrive. This authority should
include the responsibility to determine what constitutes
``independence'' of RTO operations from control, direct or
indirect, of the owners of transmission committed to the RTO
(as well as other market participants); whether a proposed RTO
will have the authority to operate, control, plan and cause
expansion of the grid for the benefit of all customers; and
what boundaries are necessary to ensure a regional scope
sufficiently broad so as to ensure development of robust and
efficient regional electricity markets.
In addressing the participation of non-jurisdictional utilities--
public power systems and rural electric cooperatives--FERC should be
given the ability to direct RTOs to accommodate their unique tax and
legal requirements. And, if a RTO also administers wholesale markets,
FERC should--after reviewing all market rules, tariffs and protocols
promulgated by the RTO--make a finding that the rules and protocols do
not allow sellers or buyers to exercise market power.
Regarding the issue of FERC mandating the participation of non-
jurisdictional utilities in RTOs, deference should be provided to
publicly owned utilities, similar to the restraints on FERC
jurisdiction over transmission facilities noted above. Specifically,
APPA recommends that FERC's authority to order publicly owned utilities
to join a regional transmission organization should be limited to
situations in which FERC finds that (1) the publicly owned transmission
owner has (a) engaged in undue discrimination in the provision of
transmission services, or (b) abused its control over transmission so
as to disadvantage competitors; and (2) that the FERC open access
transmission tariff has not and is not likely to remedy the problem. In
such cases, APPA agrees FERC should be authorized to require the
publicly owned utility at issue to surrender control of its
transmission to an independent regional transmission organization that
meets FERC RTO criteria.
We also believe Congress, in clarifying FERC's authority to order
utilities to join RTOs, should take into consideration the cost
consequences of such action. Clearly, RTOs should decrease, not
increase, total transmission costs. Cost shifts and increases have been
a very significant problem for public power systems in California.
Obviously, it would be imprudent for a public power system, which has
financed transmission with public funds, to join an RTO that will
significantly increase the cost of power to its customers. Some cost
shifting may be inevitable, but any FERC action in this area should be
premised on the principle that adverse cost consequences for utilities
ordered to join RTOs should be held to the minimum possible. This is
particularly important with respect to public power systems that have
constructed their facilities with public funds.
APPA appreciates the Subcommittee's willingness to address the
important issue of comprehensive electric utility restructuring
legislation and the key role of the transmission system in fostering a
competitively neutral wholesale electric market for the benefit of all
consumers.
Mr. Barton. Thank you very much.
We now want to hear from Mr. Robert Nordhaus, whose with
Van Ness Feldman. He's here on behalf of The Large Public Power
Council.
Your statement's in the record. We'd ask you to summarize
it for 5 minutes.
STATEMENT OF ROBERT R. NORDHAUS
Mr. Nordhaus. Mr. Chairman, members of the subcommittee,
I'm Robert Nordhaus here on behalf of LLPC. I'm standing in for
our originally scheduled witness, Chuck Manning of Austin
Energy who was not able to make it back for this hearing.
By way of background, LLPC is an association of the 22
largest public power systems in the country, and among our
members are the principal public power transmission owners.
We will have a witness in the afternoon who will address a
number of specific issues with respect to FERC jurisdiction and
RTO policy. I'm addressing three matters; reliability, siting
and transmission rate making.
With respect to reliability, LLPC does support the general
approach of the NERC consensus bill from last year. We realize
the consensus seems to have evaporated, but we do believe that
it is necessary to provide for mandatory reliability standards
and for an enforcement mechanism that applies to all players in
the electric power industry.
FERC's authority now is limited. The mechanism for
enforcing the current voluntary reliability standards if
largely limited to contracts and tariffs and there's no public
suasion behind them. So, we would recommend that any
comprehensive electric restructuring legislation include
provisions that make the current voluntary standards mandatory,
provide for an adequate enforcement mechanism. We do believe
that it's appropriate for the day-to-day work in developing
standards and enforcing them be delegated to a private
organization acting under FERC supervision.
With respect to siting, the LLPC support carefully
circumscribed eminent domain authority. We think that it's
important to make sure that those who exercise this authority
do it after a careful coordination with whatever regional
transmission planning mechanisms are set up, presumably through
RTOs, and that the interests of State and local governments in
the process be respected.
We have suggested in the testimony a couple of things. One
is that the committee may wish to limit the exercise of this
authority, the eminent domain authority, in the chairman's bill
discussion draft to RTOs and to transmission owners acting with
the approval of an RTO whose transmission is under the
operation of an RTO. Similarity, as we look at where the real
problem is, it may be that a further condition that could be
appropriate is that the exercise of this authority be
predicated on a finding by FERC that it's necessary to ensure
adequacy of interstate transmission service.
With respect to rate making, the LLPC believes that the
starting point for transmission rate making should be cost
service rate. In our testimony we set out several circumstances
under which it may be appropriate to depart from that. As a
general matter, we do not think that market based rates for
transmission services are feasible or appropriate under
virtually any circumstances.
With respect to negotiated rates, we suggest that that may
be possible where the transmission users has an unqualified
right to elect a cost based rate in lieu of a negotiated rate.
With respect to performance based rates, we think that
there's actually some significant latitude for coming up with
workable performance rates using a split savings formula that
gives a portion of efficiency savings or savings through
construction of new transmission facilities, a portion of the
savings to the transmission owner as long as a portion of the
savings is reserved for the transmission users.
With respect to incentive rates generally, our view has
been, particularly with rates of return, that current rates of
return look pretty good compared to what investors are doing on
the stock market right now. That the place for incentive rates
of return is not for all transmission investment, but perhaps
for critically needed new investments, and that's something
that we think could be considered.
I would also echo Mr. Fontes' point, and that is FERC does
have adequate authority under existing law to deal with all of
these issues. It's not clear that it needs to be addressed in
legislation.
Mr. Chairman, those are our remarks. And with that, I'll
yield to the next speaker. We thank you.
[The prepared statement of Robert R. Nordhaus follows:]
Prepared Statement of Robert R. Nordhaus on Behalf of The Large Public
Power Council
My name is Robert R. Nordhaus and I appear today on behalf of the
Large Public Power Council (LPPC). I am a member of the law firm of Van
Ness Feldman, PC, and serve as outside counsel to LPPC. The LPPC is an
association of 22 of the largest public power systems in the United
States. LPPC member systems directly or indirectly provide reliable,
affordably-priced electricity to approximately 18 million customers and
we own and operate over 44,000 megawatts of generation and
approximately 26,000 circuit miles of transmission lines. LPPC members
are located in states and territories representing every region of the
country, including several states represented by members of this
Committee--such as Tennessee, Texas, California, New York, and Arizona.
LPPC members are publicly-owned, service-focused and committed to
the local residents and communities they serve. The benefits of their
reliable and cost-effective provision of generation, transmission, and
distribution service flow directly to their customers and communities.
Mr. Chairman and members of the Subcommittee, the LPPC appreciates
your efforts to develop comprehensive electricity legislation. The LPPC
supports the enactment of comprehensive legislation that promotes a
competitive, efficient wholesale power market of benefit to all
consumers. The LPPC believes that a robust wholesale market should be
encouraged and supports efforts to increase competition so long as low-
cost, reliable service is ensured for consumers.
The LPPC also appreciates the efforts this Subcommittee has made to
advance the debate on how to achieve a competitive market that benefits
consumers. The Large Public Power Council offers its continued
assistance in crafting legislation to facilitate competitive markets.
The LPPC has reviewed the Discussion Draft dated September 21, 2001,
issued by Chairman Barton, and while we will not comment extensively on
this draft, my testimony and that of Bob Johnston later today will
highlight several of LPPC's specific concerns. We understand that this
is a discussion draft and that it is intended to foster significant
discussion among the affected parties and the Committee members. The
LPPC would like to continue to participate in this dialogue.
I would like to comment on the issues that are the focus of the
Committee's attention today.
incentive rates
The LPPC supports the continued establishment of transmission rates
according to well-established, cost-based rate principles. Allowed
rates of return should be sufficient, as determined under conventional
approaches, to compensate transmission owners for the risk and costs
caused by increased use of the existing transmission facilities and
reasonable costs to attract capital for the new transmission
construction. However, the costs related more appropriately to the
generation or distribution businesses of the transmission owner should
not be included. Given the substantial uncertainties accompanying the
restructuring of transmission ownership and operation, as well as the
nature of the business going forward, it may be premature to depart
from cost-based ratemaking principles in establishing transmission
rates.
We do not support the concept of market-based rates for
transmission service. Except for isolated circumstances involving the
construction of merchant transmission facilities, there is no evidence
of competition among transmission providers for wholesale or retail
customer business. Only a tiny minority of wholesale or retail
customers enjoy physical interconnections with more than one
transmission provider. Under current circumstances, there is no
competitive market pressure to limit transmission rates; thus there is
no economic justification for implementing market-based transmission
rates.
The LPPC believes that the establishment of transmission rates
through negotiations between transmission providers and customers
should be permitted only when the customer has either or both of two
demonstrated alternatives: the ability economically to continue to
conduct business without the proposed transmission service or the
availability of the transmission provider's cost-based default tariff
(similar to the ``recourse rate'' in natural gas regulation). The use
of negotiated rates may also be appropriate when lining up customers
for a new merchant or project-financed transmission facility.
Finally, the LPPC is willing to consider the appropriateness of a
performance-based or other form of incentive rate for transmission
service. We believe that the building of new transmission should be
encouraged and believe that properly structured incentive rates might
be able to encourage such investment. However, any incentives must be
tied to acceptable and demonstrable benchmarks of performance. An
acceptable proposal could provide for a ``split the savings'' formula
under which the transmission provider would be permitted to retain a
percentage of demonstrated savings achieved through improved efficiency
of operation (as compared to an accepted baseline cost of service) or
through construction of new facilities that relieve congestion and
lower transmission users' congestion costs. The form of incentives or
savings must not disadvantage or discriminate among different types of
wholesale energy customers or transactions. In addition, we believe
that such proposals should be made only in the context of a filing by
an RTO or subsidiary organization encompassing more than one
transmission provider's system, (e.g., an independent transmission
company).
Section 401 of the Discussion Draft directs FERC to conduct a
rulemaking to establish incentive rate policies, designed to promote
expansion of and improvements in the transmission network. The LPPC
urges a more narrow application than is contemplated by the Discussion
Draft. For example, while we could support higher rates of return for
critical new transmission investment, we would not support a general
increase in rates of return for sunk investments that is unrelated to
changes in market interest rates or equity returns.
siting issues
A thorough review of the various processes that serve as a barrier
to constructing new power generation and to the more efficient use of
existing power generation should be undertaken. There are multiple,
sometimes duplicative permitting requirements for new generation
facilities. In addition, various regulatory requirements make
construction of new facilities time-consuming, costly, and
unpredictable. Recognizing the need for a more efficient and
transparent permitting system, the LPPC would encourage a review of the
permitting requirements for new and existing generation and, where
possible, require that the processes be streamlined, conducted in
parallel and expedited to the maximum degree feasible. The LPPC
supports the creation of an inter-agency process among the
Environmental Protection Agency, the Department of Interior, FERC, and
the Nuclear Regulatory Commission that would streamline the current
requirements.
Coordination of federal approvals on the multiple permits would
reduce time-lines, uncertainty, and costs for companies constructing or
modifying generation facilities. Given the importance of getting power
on line, this issue can make a real contribution to a comprehensive
energy strategy.
The difficulty in constructing new transmission facilities and
upgrading existing facilities on a timely basis is one of the key
obstacles to assuring the delivery of low-cost, reliable electric power
to consumers. Prompt federal and state action is necessary to enable
transmission providers to install new facilities and upgrades where
needed. The LPPC supports giving FERC carefully circumscribed authority
to provide transmission-owning RTOs or ISOs the right of eminent domain
if they demonstrate that the installation of transmission facilities is
required to ensure adequate and reliable service. Owners of
transmission facilities under operational control of an RTO or ISO
would be given similar authority. Section 402 of the Discussion Draft
provides federal eminent domain authority to an applicant seeking to
construct or modify transmission facilities. As currently drafted,
there is no requirement that the transmission facility be part of a
regional planning process or approved by an RTO or ISO, or that it be
necessary to enhance or improve reliability or economy of service. The
LPPC would urge that this provision be revised to provide the eminent
domain authority to the RTO (or to transmission owners whose facilities
are operated by an RTO) and that the role of the state and local
governments be given greater weight. One possibility would be to limit
exercise of this authority to circumstances where adequacy of
interstate service is at issue.
The LPPC also supports the development and use of mechanisms--such
as interstate transmission siting agencies or joint boards (comprised
of members of federal and state regulatory agencies)--that encourage
the coordination of federal and state environmental permitting and
certification activities.
reliability
As the recent crisis in the West has demonstrated, great care must
be taken to ensure the continued and reliable supply of electricity as
the industry is restructured. The LPPC supports mandatory reliability
criteria and standards developed by national or regional reliability
organizations overseen by FERC. We supported the NERC reliability
consensus legislation last Congress. Although it appears that the
consensus has evaporated at this time, we remain committed to
supporting the general concepts contained in that legislation. The LPPC
believes that there is a need to clarify FERC authority over
reliability, that there should be binding electric reliability
standards, and that there should be a clear mechanism to enforce these
reliability standards.
The LPPC believes that regional modeling should be done to assess
the impacts of the creation and development of RTOs on the transmission
grid. As the transmission grid is regionalized, an evaluation of the
lessons learned should be done so that reliability is ensured and the
potential benefits are maximized.
We believe that any legislative proposal should make it clear that
compliance with reliability organization rules or standards does not
subject entities to the jurisdiction of FERC for purposes other than to
ensure reliability. Also, reliability standards need to be supported by
long-term contracts that will ensure the availability of operating
reserves.
conclusion
As the Subcommittee continues to move forward with electricity
legislation, the LPPC offers our continued assistance. We look forward
to helping you to develop comprehensive electricity legislation that
addresses our concerns, garners wide support and can ultimately be
enacted. I will be happy to answer any questions you have.
Mr. Barton. We thank you, Mr. Nordhaus.
We now want to hear from Mr. Glenn English, who is CEO of
the National Rural Electric Cooperative Association. He's also
a distinguished former Member of the House of Representatives.
Your statement's in the record in its entirety, and we
would welcome you to summarize it in 5 minutes.
STATEMENT OF GLENN ENGLISH
Mr. English. Thank you very much, Mr. Chairman. I
appreciate that, and I want to follow up on what Mr. Nordhaus
was talking about, focus on one particular aspect of the draft
that was circulated and one that, quite frankly, I find to be
very puzzling.
It has to do with the whole question of incentive rates.
We've had a lot of discussion about incentive rates. What does
not seem to be generally recognized is the fact the Federal
Energy Regulatory Commission already has the authority for
incentive rates. That's under the existing law. They are
required to provide incentive rates that are just and
reasonable.
Well, that gives anyone an awful lot of discretion to
simply use your judgment to determine what is just and
reasonable, what is necessary to get this job done. But it
appears from the language in the draft that that simply is not
adequate. So if it is not adequate, obviously that brings one
to the conclusion that if you are including just and reasonable
to be redefined in this legislation, then you must be
attempting to redefine it to something that's unjust and
unreasonable. And quite frankly, I have a hard time
understanding how in the world anyone could justify insisting
that the Federal Energy Regulatory Commission in effect grant
rates that are unjust and unreasonable. That's what I find to
be particularly disturbing about this proposed legislation.
Now, as it stands now we think the Federal Energy
Regulatory Commission has all the authority they need to use
their good judgment and to act in the public interest. There is
no disagreement over the fact that there needs to be more
transmission built in this country. There is no disagreement
over the fact that this country needs a transmission system to
meet the needs of the country everywhere. And we all join in
supporting that. But this particular segment to give the
Federal Energy Regulatory Commission more tools, instead it
takes away the tools that FERC has and it requires the FERC to
act in a way that they find to be unfair. To act in a way that
will obviously discriminate against the consumers of this
country.
And, in fact, I think a very strong case can be made, Mr.
Chairman, that this particular provision is nothing but a
transfer of wealth from the consumers of this country to the
utilities that are building this transmission.
Now, the outrage with regard to this particular section
doesn't stop there, Mr. Chairman, because it isn't just new
transmission that would come under this new provision of
requiring the Federal Energy Regulatory Commission to provide
more than what they feel to be just and reasonable. They're
required now to provide it on transmission that already exists.
now, if we were in fact going to raise rates to consumers
with regard to the transmission line to require that consumers
pay an unjust and an unreasonable rate on existing
transmission, we would hope that there would be something done
with that money that'd be productive. But there's absolutely
nothing in this legislation that require those funds to be used
to build new transmission. In fact, there's nothing to prohibit
the additional funds from being overseas. That simply doesn't
make any sense, Mr. Chairman.
So we find this to be a very unfair segment and certainly
we think that at the very least if consumers are going to be
required to pay an unfair, an unjust and unreasonable amount of
money for transmission in this country that there should be
some provision that requires that money to be used to build new
transmission in this country.
Now, what we find to make far more sense, and since we're
going to get out of the classroom and out of the academics with
regard to this issue, Mr. Chairman, is your own State of Texas.
We think your own State of Texas has the right approach with
regard to building transmission of this country, and we take
note of the fact for all of those that are interested in more
than an academic exercise, that this year in the State of Texas
three-quarters of a billion dollars is going to be building
transmission. And next year they already have scheduled over a
billion dollars of more transmission being built in the State
of Texas. But they don't find that there's any requirement for
an unjust or unreasonable rate. In the State of Texas that's
being done with a 10-percent return on investment, which is in
line with what the testimony was for this committee from the
investment community from Goldman Sachs.
In addition, Mr. Chairman, there are no incentives that are
being provided in the State of Texas. There's no accelerated
depreciation as this legislation includes in the State of
Texas, but they're building transmission in the State of Texas.
Now, if it can be done in the State of Texas, I'd ask you why
can't it be done in the rest of this country. It has certainty,
Mr. Chairman, in the State of Texas; that's the reason. They
let others do it in the State of Texas. They open it up and let
everybody compete. Anybody that wants to build transmission,
let them do it. That's what they do in the State of Texas.
And they let the shareholders, all those people that are
going to be using it and making the decision on where that
transmission is going to be built.
Now, that makes sense, Mr. Chairman. And I would suggest to
you if we're going to do something productive in this
legislation on building transmission, that we should in fact
allow FERC to use the State of Texas proposal in order to build
transmission in this country. Give them the options. You know,
if you feel it's necessary, give FERC whatever authority they
feel they need to get this job done, but let's not limit the
options. Let's not require the FERC to do something that's
contrary to what their good judgment allows.
Mr. Chairman, I'd only say if it's good enough for the
State of Texas, it's good enough for the rest of this country.
Thank you very much.
[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 Subcommittee, 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 35 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 cooperative 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 electric cooperatives.
transmission reliability
North America needs the electric transmission equivalent of the
interstate highway system. The current transmission system cannot
reliably handle the dramatic increase in transactions since the
enactment of the 1992 Energy Policy Act. Transmission deficiencies are
contributing to wholesale and retail electric market failures that are
harming consumers.
Based on the following reasons, NRECA does not believe that these
problems can be solved only by offering utilities high incentive
transmission rates or other financial incentives to build transmission.
<bullet> FERC's Existing Authority. FERC already has the authority to
establish incentive transmission rates. FERC issued a policy
statement in 1994 that would permit ``more flexibility to
utilities to file innovative pricing proposals . . .'' In Order
2000, FERC stated that it was ``critically important for RTOs
[regional transmission organizations] to develop ratemaking
practices that . . . provide incentives for transmission owning
utilities to efficiently operate and invest in their systems.''
<SUP>1</SUP> In testimony before the Energy and Air Quality
Subcommittee on September 20, 2001, Deputy Secretary of Energy
Frank Blake stated that ``FERC has great flexibility under
current law to set transmission rates at a level to attract
investment.' Since FERC has existing ratemaking authority to
approve incentive transmission rates, legislative language is
unnecessary.
---------------------------------------------------------------------------
\1\ FERC has also been encouraging the submission of incentive
transmission rate proposals. According to FERC in Order 2000, ``we have
approved five ISOs [independent system operators] with innovative
transmission pricing, but otherwise have received few innovative
transmission pricing proposals.''
---------------------------------------------------------------------------
<bullet> Higher Electricity Prices for Consumers. Currently, FERC has
wide discretion in determining whether a public utility's
transmission rate is reasonable. Legislative language requiring
FERC to approve incentive transmission rates is designed solely
to handcuff FERC by curtailing its authority to reject
unreasonably high transmission rates, resulting in higher
electricity prices for consumers. Also, by limiting FERC's
ability to reject unreasonable rates, the opportunity for
profiteering based on transmission rates exists.
<bullet> The Investment Community Is Unconvinced. During the July 26
hearing before the Energy and Air Quality Subcommittee, Thomas
Lane, Managing Director in Goldman Sachs Energy and Power
Group, responded to Member questions and stated that there is a
role for transmission rates that include the more traditional
return on investment of around 12%. Since Wall Street believes
that investments will flow into the transmission sector based
on the current rate structure, it is unnecessary to force FERC
to rubber stamp unreasonable rates.
<bullet> Lack of Newly Constructed Transmission. Legislative language
forcing FERC to approve incentive transmission rates will not
automatically result in the construction of new transmission
for two reasons. First, the language fails to guarantee that
transmission facilities will, in fact, be built in exchange for
FERC's approval of incentive rates. Second, the language would
require FERC to approve incentive rates for the operation of
existing transmission facilities. High rates of return
associated with existing transmission facilities will act as
disincentives to the construction of new transmission that is
needed to support a robust wholesale market.
<bullet> Impediment to Generation Markets. The interstate transmission
system should exist to enhance the competitive generation
market not to balkanize it further. Any approach that allows
individual companies with a financial interest in the energy
market to control transmission would have the unwelcome effect
of erecting tollgates on the interstate system, thereby
narrowing generation markets and protecting the existing power
of local generators.
NRECA is concerned that the incentive approach would raise the
rates of return and increase the costs for consumers, the intended
beneficiaries of lower prices from competition. Also, FERC not only has
that authority under existing law, but also has been encouraging
utilities to propose innovative incentive-based rate designs for
years.<SUP>2</SUP> In fact, FERC recently offered utilities a 300
basis-point increase in the rate of return and a 7-year recovery period
if they would build transmission in the West by a stated deadline.
---------------------------------------------------------------------------
\2\ FERC's Pricing Policy for Transmission Services, 59 Fed. Reg.
55,031 (1994) (codified at 18 C.F.R. Part 2); Formation of Regional
Transmission Organizations, 65 Fed. Reg. 810, 913 (2000) (codified at
18 C.F.R. Part 35).
---------------------------------------------------------------------------
Given FERC's current efforts to encourage innovative rates, NRECA
is concerned that legislative language establishing only incentive
rates may handcuff FERC, limiting the agency's ratemaking discretion at
a critical time in the development of a competitive industry.
As an option to legislating higher rates of return, NRECA believes
Congress should lower the risk of building transmission. Congress
should direct FERC to allow any entity that builds a qualifying
transmission project to recover its costs. By reducing the risk,
Congress could encourage institutional investors and others looking for
low risk investments invest in improvements to the nation's
transmission grid.
To qualify for assured cost recovery, NRECA believes that
transmission projects must:
--be identified through a regional joint-planning process that
coordinates and has oversight for the reliable operation of the
regional transmission system
--be constructed according to best engineering practices
--be operated by the relevant Regional Transmission Organization (RTO)
--offer service pursuant to traditional cost-of-service principles,
with the cost-of-service analysis taking into account the low
risk provided by FERC's obligation to assure cost recovery.
By mitigating risk, spreading the cost of new facilities broadly,
and enabling new competitors to build transmission, NRECA's approach to
new transmission helps to ensure that the interstate highway system can
be built at the lowest possible cost to consumers.\3\
---------------------------------------------------------------------------
\3\ FERC's Pricing Policy for Transmission Services, 59 Fed. Reg.
55,031 (1994) (codified at 18 C.F.R. Part 2); Formation of Regional
Transmission Organizations, 65 Fed. Reg. 810, 913 (2000) (codified at
18 C.F.R. Part 35).
---------------------------------------------------------------------------
electric reliability
Since 1968, the electric utilities of the United States, Canada,
and part of Mexico have worked together through NERC to develop
voluntary standards that have provided North America with the most
reliable energy in the world.
The introduction of restructuring, however, is putting pressure on
the voluntary system. Under regulation, regulators have placed a
premium on reliability and utilities were guaranteed to recover
reasonable reliability-related expenses. In a competitive environment,
however, investor-owned utilities are rewarded for cutting costs and no
one has the authority to ensure that those cost-cutting measures do not
degrade the reliability of the bulk transmission system.
It is necessary for Congress to replace NERC with a new self-
regulating industry organization that has the authority, under FERC
oversight, to develop and enforce mandatory reliability standards.
For that reason, NRECA supports the NERC consensus language that
has been included in several bills introduced in the House and Senate.
That language would require FERC to approve a new North American
Electric Reliability Organization that would have the power to ensure
the reliable operation of the interstate bulk transmission grid. NRECA
believes that similar legislation needs to be enacted as soon as
possible.
NRECA opposes a competing proposal that would grant authority over
reliability directly to FERC. The Commission lacks the expertise or the
resources to address reliability on its own. There are questions
whether it has been able to handle adequately its existing mandate to
regulate wholesale markets. Responsibility for the reliability of the
nation's grid would strain its existing staff even further. On the
other hand, while stronger enforcement authority is needed, there is no
question that NERC has done an admirable job of setting reliability
standards. Congress should not reject an industry-based model that has
worked extremely well for over 20 years.
Mr. Barton. Well, I don't know about all that, but it's
certainly well spoken. You can always tell a former
congressman.
Mr. English. Well, and someone from Oklahoma, you don't
know how difficult it was for me to say that, Mr. Chairman.
Mr. Barton. Well, your team won the football game on
Saturday, so you got the right to come here and pontificate a
little bit.
Mr. English. Well, thank you very much.
Mr. Barton. It goes with the territory.
We now want to hear from Mr. David Cook who is general
counsel for the North American Electric Reliability Council.
Your statements in the record, and we ask you to summarize
in 5 minutes.
STATEMENT OF DAVID N. COOK
Mr. Cook. Good morning, Mr. Chairman, Mr. Boucher and
members of the subcommittee.
My name is David Cook. I am general counsel for the North
American Electric Reliability Council (NERC).
I appreciate the opportunity to testify this morning on the
critical issue of assuring the continued reliability of the
North American bulk power system. NERC strongly urges Congress
to enact reliability legislation in this session of Congress.
NERC and a broad coalition of State, consumer and industry
representative support legislation that would transform the
current set of voluntary electric system operating guidelines
into a set of mandatory transmission system reliability rules,
developed and enforced by an industry-led self-regulatory
organization with FERC oversight in the United States. For more
than 30 years a voluntary industry based system for maintaining
the reliability of the bulk electric system has worked very
well. But for the reasons outlined in my testimony, voluntary
standards will not serve us well for the future.
This past June 14 major organizations wrote to the Congress
and the Administration in support of legislation making the
reliability rules mandatory and authorizing creation of an
industry electric reliability organization subject to FERC
oversight in the U.S. Such an organization would be the best
position to marshal the technical expertise and market
expertise of the whole industry to develop rules for running
the higher complex interconnected transmission system. Such an
organization would be able to focus on reliability as its
primary mission while the electric industry and electricity
markets continue to evolve and new forms of business
organizations come into existence.
An electric reliability organization would also address the
international nature of the interconnected grid. That
organization with participation from the U.S., Canadian and
Mexican interests could ,subject to regulatory oversight from
those countries, develop the common set of rules necessary to
operate the interconnected grid that spans national borders.
This subcommittee approved one version of the NERC
coalition language when it passed H.R. 2944 in 1999. Last year
the Senate passed the NERC consensus legislative proposal as S.
2071, but hat bill was not considered in the House.
The President's National Energy Policy endorses development
of legislation authorizing an industry self-regulatory
organization subject to FERC oversight in the U.S.
I wanted to thank to Mr. Wynn and those who joined him in
reintroducing that proposal this year as a H.R. 312. I also
want to acknowledge Mr. Burr and Mr. Sawyer for including the
NERC language as part of their bill, H.R. 2814.
Since the June letter those groups have worked with others
to develop a shorter less detailed version of the reliability
legislation. I have submitted a copy of that revised language
with my testimony.
The revised legislation provides for the creation of a
self-regulatory organization under FERC oversight of
reliability. In addition, it provides FERC with greater
flexibility and authority to oversee the work of the electric
reliability organization. It clarifies the role of the electric
reliability organization and regional transmission
organizations. And it includes definitions of ``adequacy'' and
``security'' to more clearly delineate the scope of that
organization's authority.
A number of organizations have announced they will support
the revised version of the legislations, others are still
reviewing the matter.
With respect to the September 21 discussion draft
circulated by Chairman Barton, NERC believes that Title II with
the changes that we have recommended in correspondence included
with my testimony provides a workable basis to move forward on
reliability legislation. NERC stands ready to work with the
members of the subcommittee and their staff as well as others
in the industry to make improvements to the language, but we
continue to believe that creation of an industry electric
reliability organization is critical.
The need to change how we deal with reliability is clear.
Mr. Chairman, I was in Colorado last month and heard you say to
those in the industry now is the time to act. I completely
agree with you. The electric industry is undergoing profound
changes and our system of reliability needs to change to keep
pace.
The events of September 11 served to underscore the
importance of the effort. As this subcommittee has heard, NERC
plays a critical role in the protection of the security of our
electric transmission infrastructure. In the future it will be
that new electric reliability organization that serves as a
point of contact and coordination on this industry-wide
security efforts.
Those who would simply give the job of reliability to FERC
without authorizing an industry electric reliability
organization ignore this important function currently served by
NERC.
NERC urges Congress to adopt legislation authorizing
creation of such an organization for reliability and for
security.
Thank you very much. Be happy to answer your questions.
[The prepared statement of David N. Cook follows:]
Prepared Statement of David N. Cook, General Counsel, North American
Electric Reliability Council
Good morning, Mr. Chairman and members of the Subcommittee. My name
is David Cook and I am General Counsel for the North American Electric
Reliability Council (NERC).
Summary
NERC strongly urges Congress to enact reliability legislation in
this session of Congress. NERC and a broad coalition of state,
consumer, and industry representatives are supporting legislation that
would transform the current set of voluntary electric system operating
guidelines into a set of mandatory transmission system reliability
rules, promulgated and enforced by an industry-led reliability
organization, with FERC oversight in the United States. NERC firmly
believes that steps must be taken now to ensure the continued
reliability of the electricity transmission system if the Nation is to
reap the benefits of competitive electricity markets. The changes
taking place as the electric industry undergoes restructuring are
recasting the long-established relationships that reliably provided
electricity to the Nation's homes and businesses. Those changes will
not jeopardize the reliability of our electric transmission system IF
we adapt how we deal with reliability of the bulk power system to keep
pace with the rest of the changes that the electric industry is now
experiencing. NERC believes that the best way to do this is through an
independent, industry self-regulatory organization, modeled after the
securities industry, where the Securities and Exchange Commission has
oversight of several self-regulatory organizations (the stock exchanges
and the National Association of Securities Dealers).
NERC is a not-for-profit organization formed after the Northeast
blackout in 1965 to promote the reliability of the bulk electric
systems that serve North America. It works with all segments of the
electric industry as well as consumers and regulators to ``keep the
lights on'' by developing and encouraging compliance with rules for the
reliable operation of these systems. NERC comprises ten Regional
Reliability Councils that account for virtually all the electricity
supplied in the United States, Canada, and a portion of Baja California
Norte, Mexico.
What is Reliability?
Reliability means different things to different people. For the
consumer it could mean, ``Does the light come on when I flip the
switch?'' Or, ``Does a momentary surge or blip re-boot my computer or
cause me to lose a whole production run of computer chips I was
manufacturing?''
To NERC, reliability means making sure that all the elements of the
bulk power system are operated within equipment and electric system
thermal, voltage, and stability limits so that instability,
uncontrolled separation, or cascading failures of that system will not
occur as a result of sudden disturbances such as electric short
circuits or unanticipated failure of system elements. It also means
planning, designing, and operating each portion of the bulk power
system in a manner that will promote security in interconnected
operations, not burden other interconnected systems, and not interfere
with the functioning of competitive markets.
NERC sets the standards by which the grid is operated from moment
to moment, as well as the standards for what needs to be taken into
account when one plans, designs, and constructs an integrated system
that is capable of being operated securely. The NERC standards do not
specify how many generators or transmission lines to build, or where to
build them. They do indicate what tests the future system must be able
to meet to ensure that it is capable of secure operation. NERC's rules,
which are not enforceable, have generally been followed, but that is
starting to change. As economic and political pressures on electricity
suppliers increase, NERC is seeing an increase in the number and
severity of rules violations. Hence, the voluntary approach is no
longer adequate for maintaining the reliability of the bulk power
system. Just as the rest of the electric industry is changing, the
reliability infrastructure must change too.
Voluntary Reliability Rules Will Not Work in a More Competitive
Electric Industry
NERC's formation in 1968 was the electric industry's response to
legislation that had been introduced in the Congress following the 1965
blackout in the Northeast. That legislation would have given the then
Federal Power Commission (FPC) a central role in the reliability of the
bulk electric system. Instead of adopting that legislation, Congress
opted for an industry-led effort. For more than thirty years, this
industry-based voluntary system has worked very well and we have had an
extremely reliable electric system. But the reliability rules or
standards have no enforcement mechanism. Peer pressure has been the
only means available to achieving compliance.
As good as that system has been, voluntary standards will not
suffice in the future. Here is why:
<bullet> The grid is now being used in ways for which it was not
designed.
<bullet> There has been a quantum leap in the number of hourly
transactions, and in the complexity of those transactions.
<bullet> Transmission providers and other industry participants that
formerly cooperated willingly are now competitors.
<bullet> Rate mechanisms that in the past permitted utilities to
recover the costs of operating systems reliably are no longer
in place, or are inadequate given increased risks and
uncertainties.
<bullet> The single, vertically integrated utility that formerly
performed all reliability functions for an area is being
disaggregated, which means that reliability responsibilities
are being divided among many participants.
<bullet> Some entities appear to be deriving economic benefit or
gaining competitive advantage from bending or violating the
reliability rules.
<bullet> Construction of additional transmission capacity has not kept
pace with either the growth in demand or the construction of
new generating capacity, meaning the existing grid is being
used much more aggressively.
A number of factors have contributed to our present circumstance.
Demand has been steadily increasing over the past decade and is
expected to increase. This past summer several utilities in the Eastern
Interconnection experienced new all-time peak demands on their systems.
The good news is that merchant generators are now building or planning
to build hundreds of new plants across the country to meet this
increased demand. The bad news is that the same is not true for
transmission.
Ten years ago North America had a little less than 200,000 circuit-
miles of high voltage transmission lines. Today we have about 200,000
circuit-miles of lines. Ten years from now we are projecting that we
will have just a little over 200,000 circuit-miles of high voltage
transmission lines. All of these new generators will need to access the
transmission grid to get their power to where it is needed. For the
most part, however, the transmission dollars that are being spent today
are just to connect new generation to the grid; they are not going to
build major new power lines that will strengthen the grid's ability to
move large blocks of electricity from one part of the country to
another, or in some instances, such as Texas, from one part of a State
to another. That lack of additional transmission capacity means that we
will increasingly experience limits on our ability to move power, and
that commercial transactions that could displace higher priced
generation with lower priced generation will not occur.
Moreover, the existing grid is being pushed harder and is being
used in ways for which it was not designed. Historically, each utility
built its generating stations close to load centers, which were largely
cities. As the cities grew, the electric systems grew with them,
spreading outward from the center. The weakest part of the electric
grid is generally where one system abuts another. Initially, utilities
installed connections between adjacent systems for emergency purposes
and to share generating reserves to keep costs down. Gradually those
interconnections were strengthened so that adjoining utilities could
buy and sell electricity when one had lower cost generation available
than did the other. But these systems were not designed to move large
blocks of power from one part of the country to another, across
multiple systems, as is happening today. The volume and complexity of
transactions on the grid have grown enormously since the advent of open
access transmission.
Electric industry restructuring adds to the challenge. In the past,
vertically integrated utilities with monopoly franchise service
territories had complete responsibility for all aspects of their
electric systems. They planned and built their transmission systems,
ensured that sufficient generation was constructed, and operated and
maintained their transmission and distribution systems, all to serve
customers within designated service areas. With restructuring, there
may no longer be a designated group of consumers for which to plan
service. Instead, responsibilities to construct and maintain
generation, transmission, and distribution are being divided among
multiple entities. In some cases, those responsibilities may be falling
between the cracks. Regional Transmission Organizations (RTOs) may
provide a means to reintegrate some of these functions. But the RTO
proposals that have been filed to date vary considerably in the extent
to which the RTO will have the authority to plan and expand the
transmission system, not only to connect new generation, but also to
meet broader needs of wide-area reliability and commerce.
The result of all this is that the transmission grid is being
increasingly stressed. NERC is seeing more congestion on the grid, for
more hours of the day. NERC is also seeing increasing violations of its
reliability rules. If these trends continue, we risk the increased
likelihood of grid failure.
Legislation is Needed to Ensure Bulk Power System Reliability in a More
Competitive Electricity Market
We need legislation to change from a system of voluntary
transmission system reliability rules to one that has an industry-led
organization promulgating and enforcing mandatory rules, backed by FERC
in the United States and by the appropriate regulators in Canada and
Mexico. In August 1997, NERC convened a panel of outside experts to
recommend the best way to ensure the continued reliability of North
America's interconnected bulk electric systems in a competitive and
restructured electric industry. On a parallel track, in the aftermath
of two major system outages that blacked out significant portions of
the West in July and August 1996, the Secretary of Energy convened a
task force on reliability, chaired by former Congressman Phil Sharp.
Both groups came to the same conclusion: The current system of
voluntary guidelines should be transformed into a system of mandatory,
enforceable reliability rules, AND the best way to accomplish that was
to create an independent industry self-regulatory organization,
patterned after the self-regulatory organizations in the securities
industry, with oversight in the United States by the Federal Energy
Regulatory Commission.
On June 18, 2001, NERC and a broad coalition of state, consumer,
and industry representatives (the American Public Power Association,
the Canadian Electricity Association, the Edison Electric Institute,
Institute for Electrical and Electronics Engineers--USA, the Large
Public Power Council, the National Association of Regulatory Utility
Commissioners, the National Association of State Energy Officials, the
National Association of State Utility Consumer Advocates, the National
Electrical Manufacturers' Association, the National Rural Electric
Cooperative Association, the Northwest Regional Transmission
Association, the Transmission Access Policy Study Group, and the
Western Interconnection Coordination Forum) sent a letter to each
member of the House Energy and Commerce Committee in support of
legislation to authorize creation of such an industry self-regulatory
organization to develop and enforce reliability rules. That legislation
would accomplish the following goals:
<bullet> Reliability rules would be mandatory and enforceable.
<bullet> Rules would apply to all operators and users of the bulk power
system in North America.
<bullet> Rules would be fairly developed and fairly applied by an
independent, industry self-regulatory organization drawing on
the technical expertise of industry stakeholders.
<bullet> FERC would oversee that process within the United States.
<bullet> Approach would respect the international character of the
interconnected North American electric transmission system.
<bullet> Regional entities would have a significant role in
implementing and enforcing compliance with these reliability
standards, with delegated authority to develop appropriate
regional reliability standards.
This Subcommittee approved one version of the NERC legislative
language when it passed H.R. 2944 in 1999. Last year the Senate passed
the NERC consensus legislative proposal as S. 2071, but that bill was
not considered in the House. This year, Mr. Wynn and a number of other
members have reintroduced the NERC legislative proposal (H.R. 312). In
addition, the President's National Energy Policy endorses development
of legislation authorizing an industry self-regulatory organization
subject to FERC oversight within the U.S.
Since the June letter, the organizations supporting the NERC
reliability legislation have continued to work with representatives
from across the electric industry, as well as state and consumer
interests, in an effort to strengthen and broaden support for the
legislation. One of the major criticisms of the earlier legislative
language has been that the proposal is longer and more detailed than
may be appropriate for a legislative enactment. To address that
concern, as well as to respond to other concerns that have been raised
over the recent months, we have developed revised legislative language
that is shorter, less detailed, and more flexible to accommodate
whatever structural changes emerge in the industry. I have attached a
copy of that language to my testimony.
The revised legislation preserves from the earlier version the
essential features for authorizing creation of a self-regulatory
electric reliability organization. In addition, the revised
legislation:
<bullet> provides FERC with additional flexibility and authority in
shaping the development of the electric reliability
organization and in overseeing its ongoing standards
development and enforcement activities;
<bullet> clarifies the respective roles of the electric reliability
organization and evolving regional transmission organizations;
and
<bullet> includes definitions of ``adequacy'' and ``security,'' the two
components of reliability.
Together with the state savings clause from the earlier
legislation, these new definitions place bounds on the scope of the
electric reliability organization's standard-setting authority.
Under this legislation, FERC can assure harmonization of
reliability standards developed by the electric reliability
organization and market rules in two ways. First, FERC must approve the
process by which reliability rules are developed. The legislation
requires that process to be open, balanced, not dominated by one
particular sector, and consistent with the requirements of due process.
FERC can assure that market interests are adequately represented in
that process. Second, FERC must approve the reliability rules before
they take effect. If, despite the balanced process, a proposed
reliability rule intrudes too far into commercial or market activities,
FERC can reject the proposed rule and direct the electric reliability
organization to make appropriate changes.
Changes to this revised reliability legislation were made just
before the horrific events of September 11, and those events have
interrupted efforts by those who have supported the NERC legislation in
the past, as well as others, to complete their review of this language.
In light of the Subcommittee's hearing schedule and the Chairman's
stated desire to move forward on electric restructuring legislation,
including reliability, NERC believes it appropriate to submit the
proposed language to the Subcommittee now. NERC as well as all those
that supported the earlier language believe this revised legislative
proposal to be a considerable improvement over the earlier language,
but it maintains all the essential features of that earlier language.
Support for this proposal is not unanimous, and doubtless the language
can be improved further. NERC is prepared to work with Members of this
Subcommittee and Subcommittee staff, as well as with others from the
industry, to make whatever changes are necessary.
In addition, on September 21 Chairman Barton released a discussion
draft of electric restructuring legislation. NERC commented on Title
III, the reliability provisions of that draft, in a letter to Chairman
Barton on October 2. A copy of that letter is attached to my testimony.
NERC believes that Title III of the September 21 discussion draft, with
the changes recommended in our October 2 letter, would form a workable
basis for moving forward with reliability legislation. NERC stands
ready to work with Members of this Subcommittee and Subcommittee staff,
as well as with others in the industry, to develop appropriate
language. What is critical is that we act now to update how we deal
with reliability, even as the rest of the electric industry is
undergoing profound changes. The horrific events of September 11 only
serve to underscore the importance of that effort.
An Industry Self-Regulatory Organization Is the Best Approach for
Developing and Enforcing Reliability Standards
Having an industry self-regulatory organization develop and enforce
reliability rules under government oversight takes advantage of the
huge pool of technical expertise that the industry has been able to
bring to bear on this subject over the last 30 plus years. FERC does
not now possess and is not likely to achieve anything approaching the
level of technical sophistication inherent in the NERC standard-setting
process, which involves dozens of committees and working groups and
thousands of professionals representing all segments of the electric
industry. Having FERC itself set the reliability standards through its
rulemaking proceedings, even if based on advice from outside
organizations, converts matters that ought to be resolved by those with
technical engineering expertise and commercial markets expertise into
matters that are the province of lawyers. These complex rules need to
be worked out together, using a fair and open process, in a
collaborative fashion by all segments of the industry.
The electric industry is in a great state of flux, as regional
transmission organizations are forming, reforming, and consolidating.
The path is not yet clear about how many RTOs there will be, or how
extensive will be the participation in those RTOs, or when they will
all come into existence. With all the uncertainty as to who will
ultimately operate and plan the interconnected transmission system, it
is more important than ever that an industry-led self-regulatory
organization be created to establish and enforce reliability standards
applicable to the entire North American grid, regardless of who owns or
manages it. The self-regulatory organization can focus on reliability
as its primary mission, even while new market structures and new RTOs
are being formed. Because FERC will provide oversight of the self-
regulatory organization in the U.S., FERC can ensure that the self-
regulatory organization's actions and FERC's evolving RTO policies are
closely coordinated.
An industry self-regulatory organization also addresses the
international character of the interconnected grid. There is strong
Canadian participation within NERC now, and that is expected to
continue with the new organization. Having reliability rules developed
and enforced by a private organization in which varied interests from
both countries participate, with oversight in the United States by FERC
and with oversight by provincial regulators in Canada, is a practical
and effective way to address the common set of rules needed for the
international grid. Otherwise, U.S. regulators would be dictating the
rules that Canadian interests must follow--a prospect that would be
unacceptable to Canadian industry and government alike. Or regulators
on either side of the border might decide to set their own rules, which
would be a recipe for chaos. There are also efforts under way to
interconnect more fully the electric systems in Mexico with those in
the United States, primarily to expand electricity trade between the
two countries. Expanded international electricity trade is a key
element of the President's National Energy Policy. With that increased
trade, the international nature of the self-regulatory organization
will take on even more importance, further underscoring the necessity
of having an industry self-regulatory organization, rather than FERC,
set and enforce compliance with grid reliability standards.
Conclusion
NERC commends the Subcommittee for attending to the critical issue
of ensuring the reliability of the interconnected bulk power system as
the electric industry undergoes restructuring. A new electric
reliability oversight system is needed now. The continued reliability
of North America's high-voltage electricity grid, and the security of
the consumers whose electricity supplies depend on that, is at stake.
An industry self-regulatory system is superior to a system of direct
government regulation for setting and enforcing compliance with grid
reliability rules. The revised NERC Coalition legislative language
presents the best approach for achieving that goal. It is also the
approach that has had the most consistent, widespread support among
industry, state, and consumer interests. Title III of the September 21
discussion draft, with the changes we have recommended, would also
provide a workable basis for moving forward. It would then contain the
essential features of the NERC approach. The reliability of North
America's interconnected transmission grid need not be compromised by
changes taking place in the industry, provided reliability legislation
is enacted now.
Mr. Barton. Thank you, Mr. Cook.
We now want to hear from Mr. Phillip Harris, who is
President and CEO of the PJM Interconnection in the northeast
or the Atlantic Mid-Atlantic.
Your testimony is in the record and we ask that you
summarize in 5 minutes, please.
STATEMENT OF PHILLIP G. HARRIS
Mr. Harris. Thank you, Mr. Chairman.
Someone once said that in addressing complex public policy
that the main thing was to keep the main thing the main thing.
And the main thing is about customers. This is all about
ensuring customers of the benefit of competitive price
generation. That was the intent of the amendments to the
Federal Power Act in 1992 and the fact that certain missteps
have occurred in implementation in certain areas of the country
should not overshadow that in the mid-Atlantic region, a region
that has now grown to serve seven States plus the District of
Columbia, competition has worked. This represents about 10
percent of the electric capacity in this Nation.
What we have found is that FERC already has the authorities
they need for the most part under the Federal Power Act.
Encouragement of this Congress should be to encourage FERC to
get through the transition. In our area, we've got most of the
transition and it's working, and the numbers are somewhat
staggering. But from that practical experience for 10 percent
of the Nation's electricity supply, we have certain facts that
we think are an indicator of how to move through the transition
sooner.
We know there are those who suggest complex additions to
law to create new organizations with exclusive authorities. But
we believe this is a step background.
To my testimony I've attached a graph that really tries to
demonstrate that electricity is a giant ecological system. It
touches the very fabric of all our lives; from the fuel that is
used to the ultimate choice by the consumer. We simply can't
carve out a transmission only reliability standard without
realizing the effects on everything else.
We have also discovered that there are no such things
anymore as pure reliability standards. When you truly have
competition that delivers value to customers, then ultimately
the economics provide the value. Competition does work and
competition can increase the liability. And with the technology
that is rapidly advancing today, we've been able to find
solutions to what was heretofore seen as only reliability
problems. And these technological solutions do work.
We've also seen the emergence of new organizations such as
the Gas Industry Standards Board that's been remarkable in what
they've accomplished over the past few years. They have
international cooperation. They are voluntarily developing
standards. They're receiving accreditation from the American
National Standards Institute as a standard setting body and
then their standards go to FERC, which are approved as a model
that should also be looked at.
And also we have found in the past 5 years of working with
competition that our compliance with NERC standards has
improved, not deteriorated.
There are also those who seem to think that the competition
is simply about transmission. It is not. It is about providing
value to customers through competitive price generation. This
means that you need to have regional planning protocols. FERC
Order 2000 stipulates that all RTOs will be involved with
regional planning. From 1994 to 1996 we developed a regional
planning protocol for the mid-Atlantic area. This was a venture
that involved the environmental community, all the States,
deciding agencies in our States. Our regional planning protocol
has resulted in over $700 million of transmission construction
that is currently underway. Our current plans see no need for
anything major that would be an impediment over the next 5 or
10 year horizon. The problem is getting to regional planning
and get it into effect throughout the Nation, that then begins
to solve the problem of siting and the coordination that's
necessary to move forward.
We have also found that keeping the emphases on the
consumer creates value. Over the 5 years we have seen the
customer prices in PJM go to less than $100 99 percent of the
time. Our competition has shown that 71 percent of the time the
price has been less than $30.
We have 7,000 megawatts of new generation under
construction. We have 40,000 megawatts from 140 different
companies under different stages of planning for generation
construction. This is competition that works and competition
that FERC can put into place with their current authorities.
We think the evidence for competition is viable and the
evidence is real. We think there are probably three simple
things that we would suggest to you as you look forward to your
legislative activities.
One, you should send a clear, simple and flexible authority
of FERC to address all the reliability issues.
We think you should encourage and support the FERC to get
through the transition. The problem is the transition. We get
through the transition that will enable regional planning and
competition to provide value to customers sooner rather than
later is the key to success.
And third, ensure that FERC has the resources to be
effective in enforcement actions in a 21st century information
economy.
Thank you, Mr. Chairman.
[The prepared statement of Phillip G. Harris follows:]
Prepared Statement of Phillip G. Harris, President and CEO, PJM
Interconnection, L.L.C.
``The future requires a higher sophistication in
acknowledging and dealing with differences . . .''
Peter F. Drucker
This insightful quotation from Peter Drucker sums up the challenge
for all of us in the electric industry sector. As policymakers and as
members of the industry, we must achieve 21st century information
solutions which ensure that our policies and institutions match the
efficiency and pace of this speed of light product known as
electricity.
My name is Phillip Harris. I am the President and CEO of PJM
Interconnection, the country's only fully functioning FERC-approved
Regional Transmission Organization (RTO). We operate the largest
competitive electricity market in the world, serving over 8% of the
U.S. population. We also ensure the reliability of the electric power
grid in a five-soon to be seven-state region including Washington D.C.
(and this Capitol Building) as well as all or parts of New Jersey,
Pennsylvania, Delaware, Maryland, Virginia, West Virginia and Ohio. We
are honored to have been designated as the platform for use in FERC's
planned Northeast RTO (NE RTO). As evidenced on the attached chart, the
proposed NE RTO will encompass approximately 183,000 MW and is larger
than the entire western grid of the United States and western Canada.
The critical test of any idea is the test of use. In the PJM
region, restructuring of this industry has worked to deliver real value
to the 24 million inhabitants therein. During the year 2000, PJM spot
market prices were below $100/MWH 99% of the time and approximately 71%
of the time our prices were less than $30/MWH. New investment in this
capital-intensive industry is flocking to our region. Over 140 new
generating projects have been announced, which would add over 40,000 MW
of generation to our region, as well as over $700 million in new and
upgraded transmission investment. We were recently designated by
Business Week as one of the top 50 businesses in the United States
successfully integrating Internet technologies--the only utility to
receive such designation. More than 70 nations have sent delegates to
PJM to learn about its market model and the operation of the grid in
the mid-Atlantic region. The Pennsylvania retail restructuring plan has
been widely recognized as the most successful in the nation.
With this background, I wish to address the fundamental points the
Subcommittee raised in its October 5 letter.
i. the current status and future outlook for this industry
Congress decreed competition in bulk power electric markets as the
law of the land back in 1992. Although nine years later this vision has
yet to be realized in much of this country, in the PJM region, with the
support of our States and our market participants we have been able to
meet Congress' expectations. The key to our success has really been
quite simple--we have made our mission the efficient assimilation, use
and widespread dissemination of information that makes the markets
work.
As the attached chart indicates, despite the product moving at the
speed of light, this industry has traditionally been operated through
various ``silos'' of data and operation with little in the way of
networking and integration. There were separate silos of data
associated with the acquisition and delivery of fuel, the generation of
electricity, its transmission and ultimately its distribution. Each of
these silos operated as autonomous islands with little sharing of data.
For example, even though the actions of a residential customer in
flipping on a light switch had a speed-of-light effect back at the
generating station, due to the lack of effective information flows, the
customers receive bills for usage weeks later with no ability to
evaluate, in real time, the economic effect of their actions. So too
the transmission system was sized and built years earlier to deliver
power from generating stations to load centers at peak times with
little thought given to siting such lines at places that would relieve
critical congestion on that system. In short, even though the physics
of the product was sending us key information in real time, we didn't
adequately listen to those signals and instead built infrastructure in
an inefficient manner reflecting that failure.
By the same token, we have created silos in the form of
institutions which govern the delivery of this product. We have the
NERC looking at reliability standards, the FERC looking at markets, the
DOE looking at infrastructure and the state PUCs looking at retail
issues. Some of this can be expected from the natural evolution of our
laws over time. However, just at the time we should be looking to
network these different functions and break down these walls, NERC
urges you to create yet a new silo--an industry organization, with
funding authority granted by Congress, which would dictate standards on
the physical operation of only the bulk transmission system without
regard as to whether those standards properly integrate with the
functioning of the marketplace--a role beyond its competence. You can't
pigeonhole reliability standards and separate it from the marketplace
and retail electric programs any more than you can design a pen cap
without also working in the design of the pen. There is no ``pure''
reliability issue separate from economics. For example, with an
effective demand response system, customers though the marketplace will
be voting with their dollars on the level of reliability of service
they seek. They will be individually deciding whether they wish to
incur a temporary curtailment of service and should receive economic
compensation for so doing. No ``core'' national reliability standard
can take the place of empowering customers to make economic decisions
in their best interest. For this reason, we should avoid creating a new
silo called ``reliability.''
However, to date RTO development in the country has also involved
the creation of silos. In the northeast we have three ISOs, each with
their own rules despite the fact that the New York, PJM and New England
markets (as well as the ECAR market) are essentially one large market
crying out for a uniform set of rules and operations. We have proposed
solutions in the FERC mediation process that will enable those markets
to rapidly network into one while still maintaining essential local
practices and enhancing the security and operation of the northeast
grid. We need to embrace these solutions rather than slow them down.
It is for those reasons, as you wrestle with provisions dealing
with reliability, RTOs, siting, etc., we urge you not to create new
``silos'' of institutions that look at parts, rather than the networked
whole. In the PJM region, we have worked to avoid such silos, to the
degree practicable:
--The PJM States work directly with us as the RTO, rather than having
disparate sets of rules that change at every border. Our State
PUCs deserve much credit for their leadership in making this
happen.
--We integrate reliability standards and the marketplace on a daily
basis. We have networked our regional reliability organization
very closely with the market participants and the states
because the needs of the marketplace and reliability are
interdependent.
--We have come up with new solutions in our PJM West marketplace, to
network the needs for delivery of capacity with a vibrant
marketplace while retaining their local reliability standards.
Through the intended creation of four large RTOs in the country,
the new FERC has set forth a vision which can work to network all of
these important functions and, for the first time, match the borders of
natural markets in the country. This is a wise and forward-thinking
policy that deserves all of our support. We believe FERC needs all of
our support to make the right decisions to put these large RTOs in
place rapidly and ensure participation therein, in order to deliver
real and measurable results to customers.
ii. how congress can help
What can this Congress do to further these efforts? We would
recommend the following:
1. Reliability Issues--Congress should adopt simplified reliability
legislation assigning the ultimate responsibility for devising and
enforcing mandatory reliability standards to the FERC. As noted before,
the pace of change and the speed of light of this product mandate that
we not ``hard wire'' in new private institutions with their self-
regulating ability to, in effect, tax the public. Rather, the FERC
should have the flexibility to assign all or parts of these tasks to
different entities as it sees fit. Flexibility and simplicity should be
the hallmark of reliability legislation. We have proposed legislation
that would accomplish this and stand ready to work with you and others
to refine any proposed reliability provisions.
2. Siting--Congress should provide deference to decisions reached
through balanced regional planning processes that are open and which do
not favor transmission solutions over generation solutions or one
technology over another. State siting processes should be part of the
planning process undertaken by the RTO and State siting decisions
arrived at through such open balanced regional processes should be
afforded Federal and State deference. By embracing and enhancing open
regional planning processes that involve the states, Congress would
avoid the Hobson's Choice of favoring federalization of siting or
continuing individual state decisions that could conflict with one
another.
3. More Standardization of Market Design--FERC needs to more
clearly delineate the exact market functions to be performed by
emerging RTOs and ensure a certain degree of standardization of design,
so as to promote the free flow of information to enable commerce in
this speed of light product. We remain concerned that while we have the
ISOs involved in facilitating the markets in the northeast, in much of
the rest of the country the developing RTOs seem to want to remain
passive grid operators with no obligation to ensure a vibrant
marketplace.
As I indicated at the beginning the RTOs maintain critical data in
real time on each aspect of the production and delivery of electricity.
Neither retail competition nor your direction for vibrant wholesale
competition back in 1992 will work without a clear role for the RTO to
assimilate and distribute that critical information to the marketplace
in real time. After all, the New York Stock Exchange would not work
very well without the publication of prices. So too the RTOs must have
a role in facilitating the marketplace by timely assimilating and
delivering that critical data to serve as a ``platform'' on which
competition can flourish.
Although we must allow for a certain degree of regional
flexibility, the FERC's prior approach of letting a thousand flowers
bloom has not worked quickly enough to keep up with the needs of this
speed-of-light product. We are heartened by the creation of an Energy
Industry Standards Board using the successful Gas Industry Standards
Board model. Their model presumes a linkage between wholesale gas,
retail gas, wholesale electric and retail electricity services. A model
much more functional for networking the needs of the 21st Century. By
the same token, we believe the new FERC's initiatives outlined so far
are worthy of this Congress' full support. This is not the time to
``dumb down'' what is otherwise needed by these still immature markets.
4. FERC Resources--Congress should ensure that FERC is fully
staffed and has the resources needed to appropriately monitor the
markets and regulate in those areas where the market is not properly
functioning. This is not the time to pull the rug out of FERC's efforts
to deliver on the promise of the Energy Policy Act of 1992 and Order
2000.
5. Enhancing Grid Security through a Hierarchical Network Model--
The events of September 11 have made us painfully aware of the need to
keep security of infrastructure foremost in our minds. Unfortunately,
those that presume ``silos'' proffer the risk inherent in them. Whereas
the value of networked organizations provide resiliency, security and
connectivity to meet the heightened security challenges of this
century.
The creation of large RTOs under the Regional Network Model that
PJM proposed for the Northeast will significantly enhance the security
and continuity of the national grid. Under the PJM Regional Network
Model approach, data and responsibility will be decentralized among
multiple paths while, through a hierarchical design, the benefits of
integration and uniformity are realized. This is far more secure than
the system that presently exists, wherein we have individual ``silos''
of security responsibility among each of the individual utilities in
much of the country. If models such as those we proposed are accepted
by the FERC, we can go a long way to ensuring the benefits of a
networked model while strengthening those decentralized features
necessary to resist terrorist or cyber attack. In short, the NE RTO, if
designed correctly, will enhance the security and reliability of the
northeast grid from what presently exists today.
6. Role of Technology--The nation is moving rapidly to networked
information through advanced technology. FERC should have these
advanced tools and the staff resources to use them in order to identify
and be responsive to market dysfunctions in a timely manner. And even
more importantly, in writing laws in the electricity area, Congress
should provide broad authority to the FERC and other government
institutions rather than codifying constraints which will tie the
agency's hands. New technology solutions that we have not even dreamed
of will solve problems that seem intractable today. But if we hard-wire
in solutions and institutions, we will unknowingly stifle that very
technology we so much want to succeed.
Our message is simple: with the wise use of information and with
institutions such as the FERC having broad and flexible authority and a
clear mission to promote competitive markets, our laws and institutions
can begin to catch up and operate nearer to the speed and efficiency of
this product known as electricity. At PJM, we have used the
assimilation and ubiquitous delivery of information to empower our
customers to meet their needs. We believe that this Congress should
embrace similar 21st century solutions. We at PJM look forward to
working with you to achieve this important goal.
Mr. Barton. Thank you, Mr. Harris.
We now want to hear from Mr. James Steffes, who is Vice
President of Governmental Affairs for ENRON Corporation. He's
here on behalf of the Electric Power Supply Association.
Your statement's in the record in its entirety. We would
ask that you summarize it in 5 minutes.
STATEMENT OF JAMES D. STEFFES
Mr. Steffes. Thank you, Mr. Chairman.
My name is Jim Steffes. I'm pleased to be here today
representing the member companies of the Electric Power Supply
Association (EPSA), of which I presently serve as Chairman of
the Regulatory Affairs Committee.
I would first like to discuss reliability. It's a fair
statement that just about everyone within the industry agrees
on the need to implement mandatory reliability standards. The
old system of voluntary compliance no longer ensures a reliable
network. It is also a fair statement that there is not
consensus on how best to develop and enforce these mandatory
standards.
EPSA recommends that Congress provide FERC with a straight
forward delegation of authority to implement and enforce
mandatory reliability standards. This authority, coupled with
FERC's current economic regulation of wholesale electricity
markets, will best provide for reliable and low cost
electricity service for American consumers.
We do not think that enacting reliability language that
tries to separate commercial matters from reliability matters
is the right approach. It is critical that reliability
legislation be aligned with FERC's approach to
nondiscriminatory open access transmission and most
importantly, to appropriate size RTOs.
EPSA is also troubled by proposed language that would hard
wire significant issues such as mandating the role of regional
reliability entities. These issues are better left to the
flexibility of the regulatory process. FERC should evaluate the
merits of this and other issues in a rulemaking proceeding. It
is simply unwise to statutorily mandate the authority of
regional reliability entities.
We are equally troubled by any limit on FERC's ability to
seek necessary reliability rule changes on its own motion. Our
industry continues to change at a rapid pace. Unfortunately, if
we leave reliability rule changes in the hands of a self-
regulating organization, it is highly likely that we will never
reach consensus on the most pressing matters. A good example is
the question over the independence of security coordinators.
This issue has been discussed for many years inside NERC, but
no consensus has reached the NERC Board of Trustees. I would
submit that given the nature of the issue, none will.
The latest NERC legislative proposal still contains
procedural mechanisms that limit, rather than enhance, FERC's
role on moving forward with reliability matters.
EPSA respectfully recommends that Congress direct FERC to
establish and enforce mandatory reliability standards. The
approach we support is based on the traditional model that
Congress normally follows: Establish a general a policy and
direct the appropriate agency, FERC, to carry it out. This is
not to say that we disagree with an industry led standard
setting organization. We believe that the industry has the
knowledge and technical skills to continue to staff this work.
We simply want to make it clear that FERC is in charge.
Let me conclude on this topic by reiterating the central
message. Trying to divorce commercial matters from reliability
matters makes no sense in a competitive electricity market. Too
many subjects. In fact, I would argue all subjects are both
reliability and commercial in nature.
In sum, the best way to strengthen reliability and
establish robust competitive markets is to leave FERC with the
discretion to make appropriate changes to a mandatory
reliability regime as changes in the industry require.
Let me end by making two points on siting and incentive
rates.
First, while physical improvements in the grid may be
necessary, FERC and Congress must first focus on getting the
rules of access right. Implementing right sized and well
functioning RTOs and ensuring that all users take transmission
service in a nondiscriminatory manner will properly define
where more transmission is needed.
Second, while EPSA has no hostility toward the idea of
incentive rates, we truly wonder if any additional language is
needed. FERC clearly has authority to be flexible in setting an
allowable rate of return.
In conclusion, Mr. Chairman, EPSA wishes to thank you and
the subcommittee for this opportunity to discuss our views on
these important issues. We look forward to continuing to work
with you and your colleagues as you develop electricity
legislation in the weeks to come.
Thank you.
[The prepared statement of James D. Steffes follows:]
Prepared Statement of James D. Steffes, Vice President, Government
Affairs, Enron Corp. on Behalf of the Electric Power Supply Association
Mr. Chairman and members of the Subcommittee, my name is Jim
Steffes. I am a Vice President, Government Affairs for Enron Corp.
based in Houston, Texas, where my responsibilities center on regulatory
policy including the topics you are considering in this hearing. Enron
is one of the world's leading energy, commodities and services
companies. Enron markets electricity and natural gas, delivers energy
and other physical commodities, and provides financial and risk
management services to customers around the world.
I am pleased to be here today representing Enron and the member
companies of the Electric Power Supply Association (EPSA), of which I
presently serve as chairman of the Regulatory Affairs Committee. EPSA
is the national trade association representing competitive power
suppliers, including independent power producers, merchant generators
and power marketers. EPSA members provide reliable, competitively
priced electricity from environmentally responsible facilities in U.S.
and global power markets. On behalf of the competitive power industry,
I thank you for this opportunity to address reliability, siting and
transmission pricing incentives, as you consider electricity issues.
reliability
Mr. Chairman, regarding the fundamental subject of the reliability
of the bulk-power transmission system, there is general agreement on
the need to replace today's voluntary standards with mandatory
standards that apply to all system users. However, there is not a
consensus on how best to develop and enforce mandatory standards. It is
critical that reliability legislation be consistent with the Federal
Energy Regulatory Commission's (FERC's) approach to non-discriminatory,
open access transmission, including large Regional Transmission
Organizations (RTOs), if we are to bring the benefits of competition to
consumers.
Congress faces an important choice between two alternative
legislative approaches to achieving mandatory reliability standards.
Under the first approach, Congress could enact a lengthy electric
reliability title sponsored by the North American Electric Reliability
Council (NERC) that entombs numerous details in statute that are
normally left to the flexibility of the regulatory process. Under the
second approach, Congress could instead place mandatory reliability
standards squarely under FERC's jurisdiction and direct the agency to
promptly conduct a rulemaking to establish an efficient standards-
setting process and an effective enforcement mechanism. We strongly
favor the latter approach for the following reasons.
NERC and those in its self-described ``consensus group'' continue
to advocate what we and others regard as an unworkable regime that
seeks to draw a false line between reliability and commercial matters.
The NERC proposal would hand over ``reliability issues'' to a newly
created ``self-regulating organization.'' The problem with this
strategy is that too many subjects are not purely either reliability or
commercial in nature; in fact they are inseparable. For example,
scheduling of specific power transactions over a transmission system is
a commercial matter with reliability implications. Because FERC is
squarely responsible for commercial practices in the electric industry,
NERC's reliability approach will undermine FERC's responsibilities
under the Federal Power Act.
Given the importance Enron and other EPSA members attach to
reliability, we participated in extensive discussions with NERC and
others over the past several years to attempt to resolve our
differences. While that process did not produce an agreement, we
commend the extensive efforts that produced several legislative
proposals, including the version NERC released last month. However,
while the text of NERC's latest proposal is shorter, it is still
needlessly lengthy and cumbersome because it seeks to tackle matters
best left to FERC.
Unfortunately, the latest NERC proposal is still laden with
procedural mechanisms and delegations of authority that limit, rather
than enhance, FERC's role on reliability matters. It is clear to us
from participating in the NERC discussions that those who endorse its
approach intentionally seek to limit FERC's authority over reliability
in the name of enhancing reliability. For example, the NERC legislation
proposes to create a new ``self-regulating organization'' that is in
many respects independent from FERC. While there is certainly a key
role for industry input on reliability standards, the ``self regulating
organization'' as NERC proposes it would be too removed from FERC's
general regulatory responsibility over wholesale power markets.
Similarly, while it may make sense for FERC to defer to specific
regional entities or approve regional variances from otherwise uniform
reliability rules, FERC should evaluate the merits of doing so on a
case-by-case basis. It is simply unwise, as the NERC legislation
proposes, to statutorily mandate across-the-board regional reliability
entities and regional rules variances. If those seeking approval of
such entities can make a strong case in a particular instance, then
they should make that case to FERC for its determination based on a
factual record. FERC should not be forced to accept those entities or
variances by force of federal law.
The approach we support is based on the traditional model that
Congress normally follows of setting a general policy and directing the
appropriate regulatory agency to carry it out, subject to congressional
oversight. With reliability, we respectfully recommend that Congress
direct FERC to establish mandatory reliability standards. After
receiving public comments, FERC should determine the appropriate role
of an industry organization to recommend standards and when to permit
regional variances, among other details. Nothing is gained by giving
regulators a responsibility as important as keeping the lights on and
then tying their hands.
In sum, the agreed upon interdependent goals of strengthening
reliability and establishing robust competitive markets can best be
achieved by leaving FERC with the discretion to make appropriate
changes to a mandatory reliability regime as changes in the bulk power
system require. Both the Bush Administration and Senate Energy Chairman
Bingaman appear headed in a direction on reliability consistent with
our views.
siting
The transmission grid is the backbone of the wholesale power
market. Enron and EPSA have repeatedly argued in favor of regulatory
reform that provides consistent, non-discriminatory access to the grid.
Beyond improved rules regarding access, we support efforts to
enhance the interstate grid. The siting of new or expanded transmission
facilities is critical to meeting the needs of power consumers. As you
know, siting issues are presently handled at the state or local level.
While this may have made sense at some time in the past, these policies
need to be re-examined to allow for a reliable and low cost system.
The Subcommittee is well aware of ``Path 15'' in California. This
transmission bottleneck has existed for many years, in spite of a well-
documented need for improvements. Last winter, the impact of poor
siting policies was felt by thousands of businesses and families in
northern California when this bottleneck prevented available surplus
power from southern California to reach the electricity-starved markets
in the north. Path 15 is not an isolated example.
Members of Congress and the Administration have proposed new
policies that would make the siting process of interstate transmission
facilities reflect interstate priorities. EPSA strongly endorses these
reforms as necessary and appropriate. It will continue to be important
to consider carefully the demands of the citizens in the towns and
states where new transmission facilities are built. However, the siting
process must also reflect regional and national priorities. Whether
Congress adopts a new policy patterned on the successful program that
allows new interstate natural gas pipelines to be built, or crafts a
new approach that starts at the state and regional level, but uses a
federal siting ``backstop,'' the time has come for new ideas and a new
approach.
transmission incentives
The need for reform of the siting process is often coupled with a
call for new financial incentives for transmission. In general, Enron
and EPSA have no objection to allowing a higher return on the
development of critically needed transmission facilities. In at least
one instance, EPSA has made a direct plea to FERC to raise the rate-of-
return for transmission facilities. However, we have three caveats with
regards to any policy that would expand or enhance financial
incentives:
First, FERC clearly has authority to be flexible in setting an
allowable rate-of-return for new facilities. Anyone advocating new
legislative authority or requirements should first demonstrate why this
existing authority is insufficient to encourage new development.
Second, if the Congress endorses new policies to create new
financial incentives, the projects to receive these incentives should
be determined by FERC with input from a balanced, independent
organization, such as an RTO.
Third, if higher rates for new facilities are contingent upon a
determination of critical need, it will be important to ensure that
this policy does not inadvertently encourage a disregard of timely
upgrades in the expectation that improvements to deteriorated
infrastructure will bring a greater reward.
inter-relationship of transmission policy issues
While the Subcommittee will hear testimony later today on Regional
Transmission Organizations (RTOs), we want to stress how appropriately
structured RTOs are the strongest foundation for sound transmission
policies, including those topics being considered in this hearing.
In our view, it is critical that Congress support the formation of
RTOs of sufficient size and configuration in order to facilitate strong
regional power markets that will bring power from where it exists to
where it is needed. If this overriding objective is achieved, other
benefits will flow to consumers.
For example, reliability will be enhanced as large RTOs provide
transmission service in a non-discriminatory manner to those that have
power so they may bring power to where it is needed to meet demand.
Well functioning markets--the very goal of FERC's RTO policy--will
ensure reliability. Similarly, RTOs as FERC envisions them maximize
efficient use of generation and transmission assets, reducing (though
not eliminating) the need for some facilities and related siting
decisions. As to incentives, investments for the benefit of regional
markets are more likely to be made when those assets are operated
within the type of RTO structure we support, rather than as part of
vertically integrated utility systems.
Attached is a letter that EPSA sent to Chairman Barton and members
of the Subcommittee last month on pending legislation that centers on
transmission incentives and RTO policy (H.R. 2814, the ``Interstate
Transmission Act''). The letter provides further details on these
important points. Please place this letter in the hearing record.
conclusion
In conclusion, Mr. Chairman, we thank you and the Subcommittee for
this opportunity to present these views on reliability, siting and
transmission pricing incentives in the context of non-discriminatory,
open access transmission. We look forward to continuing to work with
you and your colleagues as you develop electricity legislation in the
weeks to come.
Mr. Barton. We thank you.
We want to hear now from Dr. John Anderson, who is the
Executive Director of the Electricity Consumers Resource
Council.
Your testimony is in the record, and we ask that you
summarize it in 5 minutes.
STATEMENT JOHN ANDERSON
Mr. Anderson. Thank you very much, Mr. Chairman.
Large industrial customers understand that the transmission
grid is the linchpin of America's electricity system. Without
adequate transmission capacity, the system fails. Similarly,
without standards to ensure reliability, even a system with
adequate generation and transmission will not be able to
deliver power to end users on a regular and efficient basis.
The transmission system is in need of improvement. We need
to have existing congestions in transmission mitigated, and we
need the transmission system to be operated in a
nondiscriminatory manner. Specifically, no owner of
transmission facilities should use those facilities to benefit
its generation at the expensive of others.
Today I do address the three issues central to this
hearing. First is the issue of incentive based rates for
transmission, sometimes called innovative pricing or
performance based rates. This issue has received much attention
before this subcommittee, even today before the subcommittee
and, of course, FERC.
We must remember that transmission is built and operated in
the framework of a monopoly not competitive. ELCON members
certainly believe that transmission owners should have a
reasonable opportunity to recover prudently incurred costs and
earn a just and reasonable return on the investment dollars
that they put into transmission. But they should not get more
than that.
Simply put, you can try to drive a monopolist, but if you
try you should not expect to get the results that you were
seeking.
The rate of return authorized for a monopoly transmission
investment should reflect the risk that incurred. Generally
investment in transmission is low risk. This subcommittee heard
testimony from Goldman Sachs earlier and from several other
people, and I refer you to that.
If transmission owners and transmission investors can first
demonstrate a higher degree of risk, then a higher rate of
return might be acceptable. But they should have to demonstrate
that first.
Section 401 of Chairman Barton's draft dealing with
incentive rates strikes me as overly prescriptive, unnecessary
and undesirable. Ordering FERC to establish transmission
pricing policies based on incentive based performance rates,
both directs and confines FERC regardless of whether its
expertise or market conditions may otherwise indicate.
I find it particularly ironic that this subcommittee would
want to legislate so precisely when FERC only 2 weeks ago on
September 25 under the leadership of its new Bush appointed
Chairman, Pat Wood, a good Aggie, embarked on an ambitious new
plan----
Mr. Barton. There's no such thing as a bad Aggie.
Mr. Anderson. Thank you very much. Mr. Chairman, I stand
corrected. Thank you very much.
Simply put, legislative direction such as is included in
section 401 of the draft bill is unnecessary. It would severely
limit FERC's ability to respond to market developments and
should not be included.
The second issue is siting, specifically the issue of
whether a Federal right of eminent domain should exist to
facilitate such siting. I find it almost contradictory that
some who support providing financial incentives for new
transmission oppose Federal right of eminent domain.
Congress recognized long ago that FERC should have the
right of eminent domain in the siting of new natural gas
pipelines. We believe the same right should exist for the
siting of new transmission. Electricity clearly is interstate
in nature.
The language in section 402 of your bill establishing a
Federal backstop for transmission siting is generally positive.
However, I emphasize that even a Federal backstop will not
change the protective attitudes of transmission owners who do
not want new transmission capacity because it would jeopardize
their own generation.
The third issue is often called reliability, but in reality
is simply the creation of a new electric reliability
organization. ELCON and our members seek large seamless
nondiscriminatory electricity markets. We support a strong top
down reliability organization subject to FERC oversight. That
organization must have fair and representative governance
procedure. It should set uniform national reliability and
commercial practice standards and procedures for North America.
A one stop shop, to speak.
RTOs should implement, not set the standards. There's no
discernable need either for affiliated regional reliability
entities or regional advisory bodies, nor is there a need to
statutorily prescribe variances or mandates.
The proposal put forth in section 301 of your bill is a
noble effort. It recognizes that we do not need the complicated
duplicative structure and process that was an integral part of
the bill originally created under the auspices of NERC.
When ELCON first considered this issue we believed that
reliability and commercial practices were separate components
that could be treated separately. We now no longer hold that
position. Although NERC purports that its standards and
missions are confined to reliability, they actually overlap
substantially with commercial practices. Simply stated, it is
impossible to separate reliability from commercial issues so
one organization should handle both.
In conclusion, ELCON seeks large nondiscriminatory seamless
electricity markets. Such markets would benefit all customers
by providing the opportunity to purchase electricity that is
lower prices and more efficiently produced. We do not need
artificial financial incentives to transmission owners or
anyone else to get there. We need markets. We need a Federal
approach since electricity is interstate in nature. And we need
a means of siting new transmission that is efficient and
effective. And finally, we need one set of rules, not several.
Mr. Chairman, thank you very much for the opportunity to be
here with you.
[The prepared statement of John Anderson follows:]
Prepared Statement of John Anderson, Executive Director, The
Electricity Consumers Resource Council
Mr. Chairman, members of the Subcommittee, thank you very much for
the opportunity to testify at this hearing this morning.
As you know, ELCON, formally the Electricity Consumers Resource
Council, is the national association representing large industrial
users of electricity. Our member companies come from virtually every
segment of the manufacturing community.
Large industrial customers understand that the transmission grid is
the lynchpin of America's electricity system. Without adequate
transmission capacity, the system fails. Similarly, without standards
to ensure reliability, even a system with adequate generation and
transmission will not be able to deliver power to end users on a
regular and efficient basis.
The transmission system is in need of improvement. We need to have
existing congestions in transmission mitigated, and we need the
transmission system to be operated in a nondiscriminatory manner.
Specifically no owner of transmission facilities should use those
facilities to benefit its generation. For the most part, the
shortcomings in our transmission system are the result of a series of
events.
America's transmission grid--still governed essentially by a 1935
statute--has been asked to change from a country road to an interstate
highway. Electricity is being bought and sold in ways that had never
been imagined.
In recent years there has been uncertainty about how the
transmission grid would be operated. Logically, monopoly transmission
owners have been reluctant to make necessary investments in improving
or expanding the transmission market to relieve transmission
congestions that often protected their own inefficient generation. This
is an understandable, but undesirable, result of increasing competition
in generation. Additionally, electricity restructuring on a state-by-
state basis has presented transmission owners with an uncertain future,
which has also contributed to a hesitant investment pattern.
Of late, given the increased attention being paid to our
increasingly inadequate transmission grid, there have been a number of
proposals put forth. Some we find positive, some negative, some simply
incomplete.
incentives:
Let me turn first to an issue that has received much attention
before this Subcommittee and before the Federal Energy Regulatory
Commission--that is the issue of incentive-based rates for
transmission, sometimes called innovative pricing or performance-based
rates. ELCON has paid considerable attention to this issue, and in fact
ELCON published an ``Issue Profile'' entitled Performance-Based
Regulation in August 2000. That report is available at our web site,
http://www.elcon.org/Documents/pbr--profile.pdf.
ELCON members are perhaps the pinnacle of capitalism. They compete
in world markets. They are keenly aware of rates for investment and
return on investment, of risk and aversion to risk.
Some people seem to think that increased competition in generation
in some way changes the fact the transmission remains monopolistic.
There is a basic difference between competitive markets, such as those
in which ELCON members participate, and monopoly markets which is where
we find owners of electricity transmission.
We understand perfectly well that the underlying theory of
``incentive regulation'' is intuitively appealing. This accounts for
the growing popularity of proposals to provide ``incentives'' for
transmission.
But we must remember--transmission is built and operated in the
framework of a monopoly market. ELCON members certainly believe that
transmission owners should have a reasonable opportunity to recover
prudently incurred costs and earn a just and reasonable return on the
investment dollars they place in transmission. But they should not get
any more than that. Simply put, you can try to bribe a monopolist, but
if you try, you should not expect to achieve the result that you are
seeking.
We must also keep in mind that investment in transmission is
essentially low-risk. As this Subcommittee heard from a Goldman Sachs
analyst at an earlier hearing, a return in the historical 11-12 percent
range usually is adequate. It will stimulate appropriate investment
dollars. If transmission owners and transmission investors can first
demonstrate a higher degree of risk, a higher rate of return might be
acceptable.
This was clearly illustrated in a recent report prepared by the
financial analysts Fitch on the newly formed American Transmission
Company, a transmission-only company not affiliated with any one
utility. That report states that ATC's ``costs are recouped through an
annual revenue requirement passed through rates to ``network''
customers' and that those network customers contribute over 95 percent
of ATC's annual revenues. This is yet another illustration that
investment in transmission is intrinsically low risk.
``Incentives'' beyond cost of service for new monopoly transmission
investments fail on several counts.
First, cost-of-service regulation should provide adequate economic
incentives, because utilities are allowed to recover prudently-incurred
costs and earn a virtually guaranteed rate of return with almost no
downside risk. There is no need to embellish any monopoly transmission
owner's potential earnings as long as this guarantee applies.
Second, incentives cannot make a monopolist behave as a real
competitor unless the monopolist is allowed to fail. Changing the rate
of return does not change the underlying problem. The only way to
minimize this problem is to structure the regulatory process in ways
that minimize the potential for improper strategic behavior and
gamesmanship.
Third, traditional cost-of-service regulation is not lacking
workable incentive mechanisms. In fact, under cost-of-service,
regulators often establish bandwidths around allowed returns that
reward exceptional behavior or exceptional risk and punish the
opposite. But those who want to construct new transmission must first
demonstrate that such risk exists.
Section 401 of the ``Barton draft,'' dealing with incentive rates,
strikes me as overly prescriptive, unnecessary and undesirable.
Ordering FERC to establish transmission-pricing policies based on
``incentive-based and performance-based'' rate treatments both directs
and confines FERC regardless of whether its expertise or market
conditions may otherwise indicate. Further, requiring FERC to report to
Congress every year, assessing both ``the level of transmission
investments in the preceding year and assessment of the level and
sufficiency of the Commission's allowed financial returns'' will likely
result in an upward spiral of rates of return on investment that might
never end.
(Parenthetically I am reminded of the old, probably politically
incorrect, joke where the crazy man is singing off-color and off-key
tunes outside an apartment at two o'clock in the morning. One apartment
dweller asks him to stop and the crazy man says yes, for five dollars.
The apartment dweller throws him five dollars and the crazy may goes
away. But he comes back the next night, louder, more off-color, and
more off-key. The apartment dweller comes to the window and is about
the throw out five dollars when the crazy man say, no, tonight the rate
is ten dollars. After all, he says, ``I may be crazy, but I am not
stupid.'')
I find it particularly ironic that this Subcommittee would want to
legislate so precisely when FERC, only two weeks ago on September 25,
under the leadership of its new Bush-appointed chairman, Pat Wood
(Texas A&M, 1985), embarked on an ambitious new plan for ``Making
Markets Work.'' Although we do not support every provision of Chairman
Wood's plan, it comprehensively addresses the need for infrastructure
improvement and expansion with the stated objective of providing
``clarity of cost recovery to infrastructure investors.'' FERC already
has the authority to approve higher rates of return, FERC has the
authority to approve incentive-based rates, and FERC has the authority
to create innovative rate structures (for example, FERC included such a
requirement in Order 2000).
Simply put, legislative direction such as is included in Section
401 of the draft bill is unnecessary, would severely limit FERC's
ability to respond to market developments, and should not be included.
siting:
Now let me turn to transmission siting and, specifically, the issue
of whether a federal right of eminent domain should exist to facilitate
such siting.
I find it almost contradictory that some who support providing
financial incentives for new transmission oppose a federal right of
eminent domain.
Those who wish to build new transmission are faced with a myriad of
different state rules and regulations. What has been called NIMBY--not
in my backyard--has grown into BANANA--build absolutely nothing
anywhere near anything. But a word of caution--unless you change the
underlying motives of transmission owners, establishing a simpler
procedure, while helpful, will not get the job done.
Congress recognized long ago that FERC should have the right of
eminent domain in the siting of new natural gas pipelines. We believe
that the same right should exist for the siting of new transmission. It
is clearly interstate in nature. Since citizens in one state may object
to new power lines that provide power to citizens in another, it is up
to the Federal government--in this instance FERC--to provide a means to
overcome such provincialism and ensure that the needed infrastructure
is in place. Because, in truth, all citizens will benefit from a well
functioning, reliable, electricity grid.
The language in Section 402 of the draft bill, establishing a
``Federal backstop'' for transmission siting, is generally positive.
However, a two-step process will by definition result in less, not
more, transmission capacity. And even a Federal backstop will not
change the protective attitudes of transmission owners who do not want
new transmission capacity because it would jeopardize their own
generation.
reliability:
That brings me to my last point--what is often called reliability
but in reality is simply the creation of a new electric reliability
organization.
ELCON and ELCON members seek large, seamless, nondiscriminatory
electricity markets. We support a strong ``top-down'' reliability
organization that sets uniform national standards and procedures for
North America. RTOs should implement, not set, standards. We favor
fewer levels of bureaucracy. We believe questions of reliability should
be decided as quickly as possibility, and we seek rules of the road for
reliability that are consistent so that buyers and sellers face a
seamless electricity market. Rules intended to increase reliability
should not unnecessarily intrude into commercial practices.
ELCON has been working with the North American Electric Reliability
Council (or NERC) for over four years in an attempt to draft
legislation that would authorize an appropriate new reliability
organization. We need a new organization because NERC as presently
operating has no statutory authority. This means NERC has no
enforcement or funding authority, and no antitrust immunity. NERC was
created for the market of the 1960's; it is not designed for the
markets of the twenty-first century.
ELCON helped draft and then supported what is sometimes called the
consensus reliability language first proposed in February 1999. That
language has been revised several times over, and ELCON continues to
this day to participate in NERC drafting sessions that, in truth, seem
to be moving away from consensus at every meeting. The reason for the
increasing lack of consensus is not really surprising. As we see the
wholesale market continue to develop--what happened in California, what
is happening with RTOs, what is happening at FERC--we realize that what
was proposed two and a half years ago is inappropriate for today's
electricity world. It was too detailed, too cumbersome and too
prescriptive. It should not be adopted.
As you are well aware, FERC is attempting to establish five large
regional transmission organizations. These RTOs would be in charge of
the operation of the grid within their regions. A critical question is
who will draft the necessary reliability and commercial standards, a
national standards organization or each RTO individually? If RTOs can
draft their own standards, why do we need a national reliability
organization?
The proposal put forth in Section 301 of the Barton draft is a
noble effort. It recognizes that we do not need the complicated,
duplicative structure and process that was an integral part of the bill
created under the auspices of NERC.
The most recent version of the legislative language coming out of
the NERC process establishes a new North American Reliability
Organization (or NAERO) as well as a series of new Affiliated Regional
Reliability Entities (or ARREs). The geography of the ARREs is expected
to be identical to the geography of the RTOs. But the division of
responsibility between the two is unclear.
We contend that the ARREs are at best redundant and at worst
counter-productive. They will contribute to a variety of rules and
regulations and heighten the ``seams'' issue of how power flows from
one RTO to another. More importantly, those who propose that ARREs be
granted the right to ask for variances for different reliability
standards in each RTO only increase those dangers. And those who
suggest that ARREs be allowed to seek such variances directly from FERC
are really seeking a balkanized electricity grid rather than a unified
one. We are pleased that the Barton draft language does not envision or
sanction such entities.
Finally the NERC ``consensus'' language proposes, in statute, the
creation of Regional Advisory Bodies which also may offer proposals to
FERC and whose proposals shall receive ``deference'' from FERC. Again,
ELCON does not believe that we should create RTOs with each responsive
to multiple masters. This will Balkanize the electricity marketplace.
Again, we are pleased the Barton draft does not include or create such
bodies.
ELCON and ELCON members believe that RTOs can best serve the
purpose of implementing national reliability standards and
administering those standards for purpose of operating a reliable grid.
The standards should be established by a national organization. We do
not need ARREs. We do not need Regional Advisory Boards. And we
certainly do not need a process that gives deference to regional
groups, which, again, can only lead to Balkanization. It is the
interest of consumers and in the interest of reliability to create a
system with as few levels of bureaucracy as necessary.
That leads to one more issue--the question of standards for
reliability versus standards for commercial practices. When ELCON first
considered this issue, we believed these were two separate components
that should be treated separately. We know longer hold that position.
Although NERC purports that its standards and its mission are confined
to reliability, we believe that they overlap substantially with
commercial practices. It is impossible to separate reliability from
commercial issues. Along those lines, the Gas Industry Standards Board
has approved a proposal that it become an Energy Industry Standards
Board to develop appropriate commercial standards for electricity, with
the understanding that they might also affect reliability. I don't know
if this question needs to be addressed in legislation or by FERC, but
it should at least be considered.
Optimally, we believe that any standard-setting organization
created needs to address questions of both reliability and commercial
practices--a one-stop shop so to speak. It should be a strong ``top-
down'' organization, subject to FERC oversight and approval, that
establishes standards and practices. There is no discernible need for
affiliated regional reliability entities or regional advisory bodies.
Nor is there a need to statutorily prescribe variances or mandates for
deference. There should be an antitrust exemption based on ``rule of
reason,'' rather than on a rebuttable presumption. And this body should
have a just and reasonable funding mechanism.
conclusion:
In conclusion, ELCON seeks large, nondiscriminatory, seamless
electricity markets. Such a grid would benefit all consumers, providing
all consumers with the opportunity to purchase electricity that is
lower priced, more efficiently produced. We do not need artificial
financial ``incentives''--to transmission owners or anyone else--to get
there. We need a federal approach. We need a means of siting new
transmission that is not fraught with danger. And we need one set of
rules, not several.
Thank you Mr. Chairman.
Mr. Barton. We thank you, Doctor.
We'd now like to hear from Mr. Marty Kanner whose the
coordinator for Consumers for Fair Competition.
His statement's in the record and you're recognized for 5
minutes.
STATEMENT OF MARTY KANNER
Mr. Kanner. Thank you very much, Mr. Chairman, members of
the subcommittee.
You've heard this morning that transmission is critical to
ensuring competitive markets. You've also heard that
transmission system is constrained, and you've heard from a
number of witnesses that incentive rates are unnecessary to
relieve those constraints and provide the seamless highway of
commerce that's needed. So my challenge this morning is to add
what you've already heard.
Some have suggested that incentive rates boosting the
return on investment is necessary in order to attract the
capital needed to invest in the transmission system. It's
absolutely true that the failure to invest in the transmission
network is related to economics. But it's not the economics
associated with the rate of return on those investments, rather
it's the economics of the competing business; generation. When
we have vertically integrated utilities any transmission
constraint boosts the prices that can be charged for generation
within that constraint and effectively preclude the
introduction of competitors.
Looking at the economics, looking at the comparative
investment and generation assets and transmission assets, it's
absolutely true that if you follow the dollars maintaining
constraints boosts profits. Simply adding to the return that
can occur on the transmission system won't relieve those
incentives, won't change the economics. It's simple: The
economics dictate that transmission constraints are a good
thing for transmission owners.
So the question then is what do you do to relieve the
constraints and is it necessary to provide incentives. Before I
answer that question, I'd like to go beyond.
In the various proposals including section 401 in the
chairman's discussion draft, as well as the bill introduced by
Mr. Sawyer and Mr. Burr there is not a limit on those
incentives to just new investments. Rather, incentives would
also inure to efficient operation of the grid, to participate
in RTOs, even to those that are already RTO participants.
Again, those are needed.
FERC has already taken steps to encourage RTO
participation. And efficient functioning of the transmission
grid should be a requirement for a monopoly owner, not
something that we need to provide sweet monopoly candy for
people that do their job.
On negotiated rates, it violates the basic tenant of the
Federal Power Act. The Federal Power Act requires just
reasonable, not unduly discriminatory or preferential rates.
There's no way to ensure that if parties can simply have a
sidebar agreement and tell transmission users it's take it or
leave it. Pay what we are saying or else you don't get access.
And there's no way for others, whether it's competing
transmission users or FERC to determine whether that negotiated
rate was fairly and reasonably entered into.
As you've heard today, there's plenty of latitude within
the Federal Power Act to ensure just and reasonable rates--to
require just and reasonable rates and ensure that transmission
owners receive a reasonable rate of return. In fact, that's
precisely what the just and reasonable standard calls for. It
requires that rates are neither extraordinary to transmission
users, nor confiscatory for transmission providers. Within
those bounds, there's tremendous latitude for the commission to
ensure that rates reflect the risk associated with the
investment and they are provided sufficient incentives to do
what's necessary for the system, which makes me wonder then
what is the hidden agenda?
As you know, many utilities are seeking to sell or spin off
their transmission assets. If utilities are no longer going to
be transmission owners, why are they pushing so hard for
incentive rates? The only conclusion I can come to is that
they're looking to boost the asset value for those sales. If
they can promise a potential purchaser that you'll get a 20
percent return on the investment, they can increase the sale
price that they can otherwise attract.
If this is, in fact, the hidden agenda, then we need to
make sure that transmission rates are based on the depreciated
book value and not on the premium paid when new parties
purchase these same assets. Otherwise, all we're doing is
churning the assets and ensuring that transmission rates are
higher.
So what can be done? You've heard from a number of my
colleagues today. We need a system that ensures access to all
parties under the same terms. We need viable vibrant RTOs that
have the authority to plan and ensure investment in the system.
That's all that's needed, Mr. Chairman. Incentive rates clearly
are not.
[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 the Consumers for Fair Competition (CFC),
an ad hoc coalition of consumer-owned utilities, small and large
electric consumer representatives, small business interests, and
others. While the interests of these organizations are diverse, we are
unified in the belief that Congress and the Federal Energy Regulatory
Commission (FERC) must take clear and significant steps to promote the
market structure needed to foster and sustain effective competition in
wholesale electric markets, and its associated consumer benefits.
CFC commends you, Mr. Chairman, for focusing attention on the needs
of the electric transmission system. As the members of this
Subcommittee know, the transmission system is the highway of commerce
for the electric utility industry. As many of you also realize, today's
electric highway system is in need of drastic repair. We are all by now
familiar with Path 15--the North-South constraint in California that
contributed to several of the State's rolling blackouts as well as
higher electricity prices. Unfortunately, while Path 15 may be one of
the most infamous constraints, it is far from the only one. Throughout
the country there are constrained paths that inhibit wholesale power
transactions, limit generation competition (and consequently increase
rates), create ``load pockets'' in which market power can be exerted,
and threaten system reliability.
There is a glaring need for additional investment in the
transmission system. Some have suggested--incorrectly--that the lack of
transmission investment is a result of inadequate returns on those
investments and that ``incentive rates'' are needed to cure this
problem. In fact, they go far beyond investment in transmission
additions, calling for incentive rates to reward efficient management
of the transmission system, entice membership in Regional Transmission
Organization, promote deployment of new technologies and assure system
reliability. While all of these goals are important, incentive rates
for transmission--especially rates that are set outside the bounds of
the ``just and reasonable'' standard that has guided nearly seventy
years of utility regulation--are unnecessary and harmful to consumers.
transmission returns are not driving away investment
Some have suggested that the lack of utility investment in
transmission is directly caused by inadequate returns on those
investments--utilities aren't investing in transmission because they
can't attract capital at 10-12% returns. These assertions are simply
untrue.
Utility transmission investments are not competing with the high-
flying returns of high-risk investments. Traditionally, utility stocks
were the investment of choice for low-risk investors--widows and
orphans. Many utilities today are restructuring themselves to become
pure wires companies or to separate their merchant, competitive
operations from their ``traditional'' business in regulated functions.
As noted before this Subcommittee on July 27 by Thomas Lane, Managing
Director of Goldman Sachs, ``There is definitely a role in the markets
for a lower risk, lower return investment which is what transmission
represents.''
Transmission is a monopoly service. As a monopoly function, its use
must be priced at cost, with a rate of return that reflects the low
risk associated with a monopoly function.
other factors discourage transmission investment
The lack of adequate investment in the nation's transmission system
is due to factors other than return:
1. Competing Profit Motives. It is absolutely true that economics
drives the failure of utilities to invest in transmission--but
it is not the economics associated with the rate of return on
transmission investment. The transmission network is owned by
vertically integrated utilities with significant investment in
generation facilities. Transmission constraints serve to boost
the price that can be charged for generation within that
constraint and to frustrate market entry by potential
competitors. It is more profitable to maintain a constraint and
we should not seek to bribe utilities to relieve those
constraints.
2. Transmission Siting. Many transmission additions cannot be built--or
are severely delayed--because of the current transmission
siting regime. CFC does not have a position on the
appropriateness of federal siting authority. However, we
recognize that the current regime is a contributing factor to
the inadequacy of transmission investment.
3. Uncertainty Associated With RTOs. Some utilities may have foregone
or delayed investment in transmission as the world of RTOs
sorts itself out. Utilities, assuming that the cost of those
investments will be recovered through the RTO, may seek to
avoid a rate case fight before state regulators. I want to
emphasize, however, that RTOs can be the cure to needed
transmission investment, as I will explain later.
4. Uncertainty Associated With Technology and Generation Investment.
The industry is going through significant changes. It is
possible that a narrow subset of transmission investments could
be rendered moot by the siting of new generation. However, I
would note that there are less harmful means of addressing this
potentially uncertainty. Moreover, effective transmission
planning by an RTO can minimize or eliminate this uncertainty.
incentive rates are even less justified for general transmission
functions
My testimony has focused on transmission incentive rates for new
investment. However, the advocates of incentive rates go far beyond new
investment--calling for incentives for joining RTOs, rewarding existing
RTOs, limiting rate pancaking, promoting efficient operation and
reliability.
Why are we providing incentives for RTO membership when most
utilities have already joined RTOs under FERC Order 2000, itself a
``voluntary'' mandate, and FERC has taken additional steps to prompt
RTO participation? What purpose do ``sign up'' incentives serve for
those RTOs that already exist? Why should we provide incentives to
limit rate pancaking when FERC Order 2000 already calls for the
elimination of rate pancaking?
negotiated rates violate the underlying tenet of ferc regulation
The notion of ``negotiated rates''--FERC approving rates without
regard to cost--is most abhorrent. The Federal Power Act prevents the
charging of rates that are ``unjust, unreasonable, unduly
discriminatory or preferential''. Negotiated rates can violate each of
those standards. A transmission owner can impose excessive charges and
tell the transmission user to ``take it or leave it''. Alternately, a
transmission owner can discriminate between competing generation
developers, facilitating interconnection only for the generator willing
to pay top dollar. Moreover, if FERC (and competitors) are unable to
review the underlying costs, no one will know if the negotiated deal
reflects a fair rate or simply the transmission equivalent of ``an
offer you can't refuse''.
incentive rates: the hidden agenda?
Many utilities are seeking to sell or spin-off their transmission
assets. If utilities are no longer going to be in the transmission
game, why are they calling so loudly for incentive rates. I fear that
the underlying motivation is to increase the market value of those
assets. Didn't we already see this phenomenon in the sell-off of
utility generation assets (a study by Professor Harry Trebing shows
that 93% of those were for well above book value)--with its obvious
negative impacts for consumers in California? Potential investors may
be willing to pay a higher purchase premium if they can be assured of
inflated returns.
If this is, in fact, the hidden agenda, it is critical that we
ensure that future transmission rates are based on the underlying book
value of transmission assets and not on the acquisition cost.
``just and reasonable'' remains the proper standard
The Federal Power Act directs FERC to ensure that all transmission
rates are ``just and reasonable''. This standard provides sufficient
latitude for FERC to: (1) adjust rates of return to reflect any
increase in investment risk, (2) allow performance based rates to
reward exceptional performance that benefits consumers, (3) send price
signals (e.g., congestion pricing) to encourage investment to relieve
constraints. Significantly for the members of CFC, the ``just and
reasonable'' standard also requires that consumers do not pay
extortionary rates.
There is significant risk of consumer harm in flipping that model
and directing FERC to provide incentive rates every time a transmission
owner comes forward.
how do we relieve transmission constraints?
Mr. Chairman, I have spent my testimony critiquing the notion of
incentive rates. But given the reality of today's transmission
constraints, I feel obligated to also offer constructive suggestions
for relieving those constraints.
1. Ensure Fair and Equal Access. ``Phantom'' transmission constraints
exist throughout the system. Transmission owners reserve more
transmission capacity than is needed, creating artificial
constraints that impede transactions. Similarly, inadequate or
untimely postings of available transmission capacity suggest
constraints that do not exist. Congress must ensure full, fair
and equal access for all parties to the nation's transmission
grid.
2. Independent Planning. As noted above, vertically integrated
utilities have little economic incentive to relieve
constraints. RTOs--as independent managers of the grid--must
have robust and effective planning authority and
responsibility.
3. Authority to Compel Construction. All to often, utilities will
ignore or defer transmission investment needs. RTOs must have
the authority to compel utilities to build needed transmission.
If utilities are unable or unwilling, then the RTO should be
authorized to build the facilities itself or solicit
competitive bids.
conclusion
There is no doubt that significant investment in the nation's
transmission system is needed. However, incentive transmission rates
are not the cure. Transmission rates--as a monopoly service--must
continue to be guided by the ``just and reasonable'' standard.
Mr. Barton. We thank you, Mr. Kanner.
Before we recognize Mr. Vesey, the Chair wishes to make a
housekeeping announcement. We're moving expeditiously through
this panel. Based on the number of members present and those
expected to be present, I think we can conclude the questioning
of this panel by approximately noon. Given that, we have called
the representatives for the second panel and we're going to
start the second hearing at 1 p.m. instead of at 2.
So those of you that need to go make phone calls.
We expect to start the second hearing at 1 p.m. instead of
2. We've notified the panelists and they're agreeable. So if
people need to know that information, please be notified.
We now want to welcome our last testifier on the first
hearing, Mr. Andrew Vesey, who is Vice President Energy and
Utilities for the Cap Gemini Ernst & Young L.L.C.
Your testimony is in the record, we recognize you for 5
minutes.
STATEMENT OF ANDREW M. VESEY
Mr. Vesey. Thank you, Mr. Chairman.
Over the past 25 years capital investment in the
transmission system has remained stable despite rising off
system sales and falling reserve margins. However, since the
mid-1970's the transmission system has grown at half the rate
of demand. Transmission sector needs investment.
Today's transmission goods grew incremental over time as
the industry met the requirements of growth and the pressures
for increased reliability. There was little reason to believe,
however, that the current structure's the most economic or the
most reliable in light of current market needs. In some parts
of the country inadequate transmission capacity already
diminishes the prospect for competitive power markets.
On the rate of return regulation utilities make money by
investing in assets. The apparent lack of investment in
transmission is most likely the result of the market not
believing that the owners of transmission have the ability to
generate future revenues sufficient to cover their costs and
provide a competitive return.
If the market is doubtful, it is because the cost of
capital used to establish prices is believed to be too low. Too
low because the market sees risks that are not being
acknowledge in the rate making process.
What are these risks? Well, among them are competition.
Competitions of the grid exist now and will grow over time. The
emergence of distributed generation technology such as small
gas turbines and fuel cells provides the potential of bypassing
the transmission grid and the risk of straining transmission
investment.
Difficulty of siting new facilities is also one of the
risks not recognized. With the passage of the Energy Policy Act
of 1992 the transmission grid was required to act as a common
carrier for bulk power transactions. It is this new
responsibility that has revealed that the system, which was
interconnected for liability purposes, could not longer be
relied upon for the level of interregional commerce demanded by
the bulk power markets.
Significant investment in interregional transmission
capacity is needed. The current siting process, however, is
ill-equipped to adequately handle this type of project given
the mismatch between those incurring the costs and those
receiving the benefits of this type of project across local,
State and regional boundaries.
Finally, there's the investment risk associated with
ongoing activities regarding the governance of transmission
owning entities to ensure independence for market participants.
The desire to separate asset ownership from the control and
operation of those assets, if not done thoughtfully, has the
potential of seriously deluding the powerful incentives
provided by the market on for profit asset owning enterprises.
There is today no clear consensus as to which business
structure is optimal for owning transmission assets. The rules
of the road are not fully written, and indeed may be different
region-to-region.
So how do we ensure the proper investments are made? One
approach may be to simply have regulators provide higher rates
of return in line with perceived risks. While fully
compensating investors for risks is an absolute necessity, if
these increased profits are earned through the current rate of
return framework, they will at best only deliver a narrow range
of the needed investments, not the broad range required by the
new competitive markets. And at worse, they may result in over-
building.
The new competitive market is significantly different from
the markets in which today's transmission business is
developed. It is a market potentially made up of thousands of
commodity suppliers, hundreds of service providers and millions
of individual consumers. It is characterized by high
transaction costs and low barriers to entry and exit by both
sellers and buyers.
The network not only has to effectively manage the flow of
electricity, but also has to manage the flow of information and
cash. Traditional rates of rate of return regulation rewards
firms for placing assets on the ground to transport
electricity. This new competitive market requires firms to be
rewarded for behaviors that promote customer focused, market
driven solutions to facilitate commerce.
With properly designed pricing transmission companies will
succeed only by maximizing throughput, maintaining broad
nondiscriminatory access and making system investments to
maintain optimal congestion levels. When the benefits of lower
costs and higher volume flow to the bottom line, transmission
companies will seek efficient decisions inducing competitively
neutral solutions. They will find the most cost effective, not
the most asset intensive answers to customer needs and they
will devise innovative operating procedures and a range of
tailored cost effective offerings that fully utilize their
facilities. But most importantly, they will be driven to enrich
their customers by maximizing the value of commerce along their
networks.
Thank you.
[The prepared statement of Andrew M. Vesey follows:]
Prepared Statement of Andrew M. Vesey,\1\ Vice President, CAP Gemini
Ernst & Young LLC
---------------------------------------------------------------------------
\1\ This testimony is based in large measure on the material
presented in the book ``Unlocking The Benefits of Restructuring: A
Blueprint For Transmission'', By Shimon Awerbuch, Leonard Hyman and
Andrew Vesey, Published by Public Utilities Report Inc; Vienna,
Virginia, November 1999.
---------------------------------------------------------------------------
Over the past 20 years capital investment in transmission remained
relatively stable, in real terms, despite rising off-system
transactions and falling reserve margins. In the 10 years preceding the
Northeast Blackout of 1965, and in the decade following, utilities did
build high voltage lines at a rapid pace that kept up with growing
demand. From the mid-1970s to the present, however, the transmission
system has grown at less than half the pace of demand.
With generating reserves falling and transmission plant showing
little expansion, transmission operators have responded by running the
system in emulation of just-in-time inventory management concepts,
which rely on coordination of all suppliers without the ``safety-net''
provided by system availability in excess of current needs. This
operational response will work only as long as all suppliers continue
to produce and ship on schedule and as long as buyers readily can find
alternative suppliers.
The transmission sector needs investment. Our transmission grids
grew incrementally over time as the industry met the requirements of
growth and the pressure for increased reliability. There is little
reason to believe, however, that the current structure is the most
economic or the most reliable in light of current market needs.
Moreover it is doubtful that the existing structure represents an
appropriate trade-off between economy and reliability, or that it
incorporates the levels of reliability that customers want. In some
parts of the country inadequate transmission capacity already
diminishes the prospects for competitive power markets and decreases
the system reliability during power plant outages. System operators,
fortunately, have learned to compensate for some of the physical
deficiencies by running the networks more efficiently.
It is not clear, however, that transmission owners have avoided
physical expansion because they could achieve their goals through the
clever operation of their systems: owners more likely decided to avoid
expansion because of siting difficulties or inadequate potential
returns on their investments. The siting difficulties are well
documented, but they have to be placed in the context of incentives, as
well. Under rate-of-return regulation, utilities make money by
investing in plant. Utility managers, therefore, never have avoided
large, lumpy investments when they expected that the allowed rate of
return would equal or exceed their cost of capital.
Capital flows to a business based on the markets expectation that
the business's management has the ability to use the capital to
generate a stream of revenue that exceeds the cost of generating that
revenue by an amount that is at least equal to the next best use of
that capital. Simply stated capital flows to return. The market's
``expectation'' is based on consideration of all the risks to which the
generation of revenue is exposed and the period of time to fully
recapture the invested capital and its return. The flow of capital to a
business is directly proportional to that business's management's
ability to create value by generating earnings that are greater than
the business's cost of capital in the long run.
The apparent lack of investment in the transmission sector is most
likely the result of the market not believing that the business has the
ability to generate future revenues sufficient to cover its cost and
provide a competitive return. Under rate-of-return regulation the
amount of revenue required is predetermined by calculating a unit price
which, based on forecasted sales, will generate sufficient revenue to
cover all production costs plus a profit. Calculating the firm's cost
of capital determines the profit. If the market is doubtful that
revenues are sufficient to yield the required return it is because the
cost of capital used to establish prices is too low. It is too low
because the market sees risks that are not being compensated for in the
ratemaking process.
Among the risk that the market sees are:
<bullet> Competitive challenges to transmission's monopoly status
<bullet> Difficulty in obtaining right-of-way and siting new
transmission
<bullet> The Evolving regulatory framework governing transmission
Firstly, competition to the grid does exist and will grow over
time. The rapid expansion of distributed generation technology such as
gas-fired turbines as well as the advent of fuel cells clearly suggest
that the role of transmission may change significantly over the next
one or two decades. This competitive pressure should provide powerful
incentives to a profit-oriented transmission owner to provide high
quality service, efficiently manage embedded plant, and to add new
capacity (where warranted) to enhance the functioning of the system,
rather than lose market share to competitors. This new capacity,
incidentally, would not be limited to wires and structures, but must be
extended to include software, information systems, and new electronic
and technical devices. All of which enhance the firm's capability to
facilitate high value commerce in the emerging competitive electric
energy market.
As mentioned earlier, the emergence of distributed generation
technology has the potential of contesting the monopoly status of the
transmission sector. This raises the increased specter of bypassing the
transmission grid and the risk of stranding transmission investment.
Secondly, the current interconnected electric grid evolved over
time to (1) transport energy from remotely located generating stations
to local load centers required to serve local load, (2) aggregate
diverse local load to lower overall generation investments and (3)
enhance local reliability by inter-connecting neighboring systems. All
these objectives provided local benefits in either cost or reliability.
The cost and environmental impacts of providing right-of-way for
transmission was evaluated against the anticipated local benefits. On
the occasion when a transmission line crossed local jurisdictional or
State boundaries the siting process became much more difficult as
parities that bore costs did not readily perceive the benefits.
With the passage of the Energy Policy Act of 1992, the
transmissions grid was required to evolve further to act as a common
carrier for bulk power transactions. It is this last responsibility
that has revealed that the system that was interconnected for
reliability purposes could no longer be relied upon for the level of
inter-regional commerce demanded by the bulk power market. Significant
new investment in inter-regional transmission is required. The
traditional local siting process is ill equipped to adequately handle
this type of investment given the increased mismatch between those
incurring the cost and those receiving the benefits, a source of
considerable investment risk.
Finally, the ongoing activities regarding the governance of
transmission owning entities to ensure independence from market
participants through the creation of new entities such as RTOs, ISOs
and TRANSCOs creates investment risk. The separation of asset ownership
from the control and operation of those assets, if not done correctly,
has the potential of seriously diluting the powerful incentive provided
by profit maximization. There is today no clear consensus as to which
business structure is optimal for transmission. The rules of the road
are not yet fully developed and may be different region to region.
So how do we ensure that the proper investments are made? One
approach might be to conclude that all that is needed is to compensate
transmission owners by having regulators provide them with higher
rates-of-returns, commensurate with the perceived risks. While fully
compensating investors for risk is absolutely necessary, if these
returns are gained through the current rate-of-return regulatory
framework they will at best only deliver a narrow range of investments
not the broad range required in the new competitive electric energy
markets. At worst they may result in non-value-adding over investment.
To understand why this is so it is important to change our view of
transmission from as an enabler of the generation market to an enabler
of commerce in the competitive electric markets.
The pre-1992 view of transmission was as a transportation system
delivering electricity from company owned large plants, distant from
company owned loads, to ratepayers over a system of company owned
wires. Our post-1992 view has been modified to transmission being a
transportation system delivering electricity from independently owned
large plants, distant from loads, to customers over a system of company
and non-company owned wires. While this view accurately describes the
current state of transmission it does not accurately reflect the role
of transmission, i.e. how transmission creates value in the new
competitive market. It will not help identify the types of investment
needed or give guidance on how best to induce firms to make those
investments.
A more helpful view of transmission is as a network, facilitating
commerce in a competitive energy market, where every consumer is a
potential repackager and reseller of product and every one connected to
the network is a customer.
A network is a set of dynamic, sustainable, value-producing
relationships between parties with common interest. A network can be
physical or virtual .The network is a medium through which exchanges
between the parties can take place. The exchanges can be knowledge,
information, or goods and services. The network is viable as long as it
is value adding by offering those using it an economic advantage over
alternative relationships.
The set of dynamic, sustainable, value producing relationships
between parties with common interest in this case is the competitive
energy market. This competitive market is significantly different from
the markets in which today's transmission businesses developed and
currently operate. It is a market made up of thousands of commodity
suppliers, hundreds of service providers and millions of consumers.
High transaction costs and low barriers to entry and exit by both
sellers and buyers characterize it. The network manages not only the
flow of electricity but also the flow of information and cash.
Traditional rate of return regulation rewards firms for placing assets
in the ground. The new competitive market requires behaviors that
promote customer focused, market driven solutions by having
transmission businesses rewarded for:
<bullet> Providing access and throughput at lowest cost
<bullet> Efficiently utilizing its assets
<bullet> Providing new service offerings
<bullet> Efficiently meeting open access, service quality and other,
public policy objectives
<bullet> Maximizing throughput subject to efficient reliability
constraints
<bullet> Promoting volume and commerce: increasing the value of
transactions
We need to move from seeking to create incentives that focus mainly
on inducing capital investments in new transmission lines to those that
induce the correct organizational behaviors. With properly designed
pricing, flow based, market driven, transmission companies succeed by
maximizing throughput, maintaining broad, nondiscriminatory access and
making system investments to maintain ``optimal'' congestion levels.
When the benefits of lower cost and higher volume flow to the
bottom line, transmission companies will:
<bullet> Seek efficient decisions--inducing competitively neutral
solutions
<bullet> Find the most cost effective--not the most asset intensive
solution to customer needs
<bullet> Drive to enrich customers--maximizing the value of commerce
along the network
<bullet> Devise innovative operating procedures and a range of
tailored, cost effective offerings that fully utilize its
facilities subject to efficient reliability constraints
Mr. Barton. Thank you.
The Chair would recognize himself for the first 5 minutes
of questions, and we're only going to have one 5 minute round.
Mr. Schriber, I thought your testimony was excellent, as it
was the last time you testified before us or your
representative.
What do you think the position would be of the various
State PUCs if we put in the Ohio model as a Federal model for
States for follow with regards to siting decisions?
Mr. Schriber. Mr. Chairman, I think, at least in my
interface with the other States, they would be delighted, I
think, to share the same statutory authority we have.
Many States have no power siting boards. We have
neighboring States that rely almost entirely upon homerule. As
a result, we have many, many more projects sited in Ohio than
we would find in neighboring States. I would therefore suggest
that the States would probably relish the opportunity to adopt
the types of authority that we've been given by the State
legislature.
Mr. Barton. Okay. Is there anybody on the panel that is
opposed to the general provision in the pending draft that
gives Federal backstop authority on siting if the States fail
to act? Is there anybody that opposes that backstop? I see
nobody shaking their heads or doing anything. So the Chair is
going to announce that nobody opposes it.
Mr. Boucher. You haven't asked the members yet, Mr.
Chairman.
Mr. Barton. Well, I know. But the members are going to tell
me. I'm not worried about that.
On the reliability issue, we've got two different views
here. We've gone one view, we have a gentleman that represents
NERC that says be fairly prescriptive and put it into the law.
We've got another view that our friend from ENRON put into the
record that FERC can do it, just give the FERC the authority.
I will note that some people's positions have changed since
the last Congress, and that could be because we have a
different FERC Commission, but that's just an observation. That
may not be reliability.
Is this really a technical issue? Should we let the
technicians do it because it's an engineering problem or is
reliability more of a policy issue and we need to let the
political mechanism handle it?
Mr. Cook, would you like to answer that?
Mr. Cook. Yes, Mr. Chairman. And let me speak to the issue
that's been raised as well about the inner relationship between
reliability rules and the commercial rules.
I agree with Dr. Anderson that they are inner linked. It's
why NERC has gone to an independent board of directors, it's
why we've added a market interface committee to our current
committee structure. It's why we involve all segments of the
industry including customers in our standard setting process to
make sure that those commercial impacts are picked up as we go
forward.
In fact, Dr. Anderson sits on the Executive Committee of
our Operating Committee.
And in the new model I would expect that that same kind of
attention to those issues would happen.
The draft requires that no single sector can veto a
standard, that no two sectors can control it and it encourages
broad participation in the standard setting process. So in the
first instance, it would not simply be the engineers only that
would be making those judgment, it would be a collective
judgment by industry participants. But the organization would
be able to muster a lot of technical expertise to bring to bear
on those subjects. And it would come together at FERC because
the organization would be under FERC oversight, the standards
would not actually take effect until FERC said they could.
So that, it's a way to get the technical expertise of the
industry brought to bear on these issues. And if in the
inclusive standard making process that hasn't flushed out the
commercial impacts and figured out way to accomplish both
commercial purposes and reliability purposes, FERC is still
there in a sense as an overseer backstop role to make sure that
those issues get attended to. That's the structure of our
proposal.
Mr. Barton. Mr. Steffes.
Mr. Steffes?
Mr. Schriber. I want to highlight again the inner
relationship between commercial and reliability matters. And
while NERC proposes that they will begin to, you know, create
an opportunity for the commercial elements to be recognized, we
simply have found that on the hard questions--and I bring up
the one in my oral testimony, the independence of security
coordinators. On the hard questions a consensus body can't make
that decision.
The NERC draft, even the modified NERC draft I think
continues to say that FERC could say that's not the model we
want, but we can't get them to pull in the right answer.
This industry is changing at a tremendously fast pace. We
need FERC to be able to say I need a new rule, I need a new
rule to ensure reliability to ensure the competitive markets
continue to work. And we don't see that unless you just provide
general oversight--general policy to FERC. That's our kind of--
--
Mr. Barton. My time has expired. I'm going to let Mr.
Harris answer this question, then I'm going to go to Mr.
Boucher.
Mr. Harris. Thank you, Mr. Chairman.
What we've experienced in dealing with this issue from
retail choice all the way through the wholesale system is that
reliability isn't just a wholesale problem. It is an ecological
system. It involves all elements. And so the only area that you
can really deal with that is under a FERC oversight.
FERC ultimately has to make the determination. We're also
finding that we can give solutions economically to what used to
be reliability solutions, and many of these are driven at the
retail level. You just can't carve out something that says it's
only a wholesale issue.
We would suggest that FERC has the authority and through a
rulemaking process they can come up with the right
organizational structure where it involves NARU or GSBI,
whatever, but FERC can create a structure that is vibrant and
robust to deal with the technical issues that are going to be
emerging, and that would be the appropriate way to address the
question.
Mr. Barton. Thank you. I'm going to not ask this as a
question, just make a comment. I thought it was very
interesting that my good friend, Mr. English, basically defined
incentive rates by definition as just and unreasonable, and
then gave a very elegant statement justifying his definition.
I want to put on record that the Chair doesn't take as
definitionally correct that incentive rates are unreasonable by
definition. That's a debate that we'll have as we go to markup.
With that, I would recognize my good friend, Mr. Boucher,
for 5 minutes for questions.
Mr. Boucher. Well, thank you very much, Mr. Chairman. And I
want to join with you in thanking these panelists for their
very excellent presentations here this morning. We have been
informed by what you have told us, and appreciate your taking
the time to share your views.
But there is a kind of a generalized belief and some
anecdotal evidence that we do not have adequate transmission
capacity in the Nation, but I'm not aware of precise studies
that pinpoint where the deficiencies are. And I would like, as
an opening matter, ask if anybody here is aware of either
governmental studies that clearly demonstrate inadequate
capacity or perhaps think tank studies that lead to the
conclusion. And if you do, can you point us to those? Is anyone
aware of studies? Mr. Szwed?
Mr. Szwed. Yes, I think maybe one place you can turn is to
the North American Electrical Liability Council. There's a lot
of efforts that are done in terms of assessing the adequacy of
the transmission system as well as the adequacy of generation
across the United States.
I think you can also look toward evidence in terms of
evidence of the number of transactions that are taking place
and the degrees of where they're have been issues or
curtailments that have taken place to give you an indication of
areas where there are in fact is congestion and perhaps where
additional transmission capability could be enhanced.
Mr. Boucher. All right. That's helpful.
Mr. Cook, would you care to comment?
Mr. Cook. There are certain interfaces that are congested
on a fairly regular basis. One comes to mind in the Wisconsin
area that is pretty limiting on commerce a fair amount of time.
And there's some other places like that in the country that can
be identified.
There are also the circumstance, though, that these limits
can change from season to season, year to year depending on
weather patterns, for example.
Last year there was considerable congestion in the central
part of the country, Tennessee/Kentucky and so on, as sort of
relatively lower costs power from cooler areas tried to move
south.
This year, it's interesting, the congestion was there but
it was in a northbound direction because of the temperature
differentials sort of went the other way.
So attention to this issue does require, you know, paying
attention to that kind of thing as well.
There are currently some studies underway to try to get a
better handle on this and focus on it.
Mr. Boucher. Whose performing those studies?
Mr. Cook. The Department of Energy, I understand, has got a
current study underway.
We issue an assessment, a 10-year assessment every year
that pays some attention to these issues and documents that
kind of stuff.
Mr. Boucher. What was your most recent assessment?
Mr. Cook. The most recent assessment was last--it would
have been last October/November. Our board is considering this
year's 10 year assessment at its meeting next week in
Vancouver, and it will be available shortly after that.
Mr. Boucher. Well, I would like to ask, Mr. Chairman, that
we receive for the record a copy of the assessment that you
issued last year and also the upcoming one to the extent that
they focus on the question of inadequate transmission capacity
and document those instances in which there are notable
deficiencies.
Mr. Chairman, if it's appropriate, I would ask that that be
made a part of this record.
And I would ask Mr. Cook that you provide it.
Mr. Cook. I'll be happy to make sure that the subcommittee
has that material.
Mr. Boucher. It just seems to me that if we're going to
legislate on the question of capacity, whether it be through
incentive pricing or some backstop Federal authority to order
that new capacity be built in the event that the States fail to
act, that we at least ought to be absolutely confident that
there is a significant problem for us to address.
And I'll note again the generalized belief that there is,
but we really don't have detailed evidence of that.
Let me ask a little bit about the notion of incentive
pricing, and I acknowledge that there is a debate about whether
or not it's a good idea.
I would like to ask this panel whether you believe it's a
good idea or not whether you think that the FERC has current
statutory authority to order incentive pricing should FERC
believe that it is a good idea? Does anyone want to comment on
FERC's current statutory authority with regard to incentive
pricing?
I think we heard very adequately from our good friend Mr.
English on that very subject, so let me call on Dr. Anderson.
Mr. Anderson. Yes, sir. I think that it's pretty clear that
they have the authority. They've already included an incentive
rate provision in their Order 2000, and that has not resulted
in any significant problems.
I think also to relate back to your last question, which I
think is a very good one, there certainly are areas of the
country where there are transmission constraints. But as Mr.
Cook said, they change from hour-to-hour as various power flows
change. I would relate that back to the incentive area also.
It would not be appropriate, in my view, for you to
legislate across the board incentives to build transmission.
It's got to be much more targeted than that. It's got to be
targeted to where there are constraints. And I think the idea
of getting a study is a good idea. It's going to be a very,
very difficult one because it's a moving target.
But I think very strongly that the Commission has authority
and has already taken action on incentives.
Mr. Boucher. Thank you, Dr. Anderson.
Who would like to offer a competing view? Mr. Szwed?
Mr. Szwed. Yes. I would like to say a couple of things.
First of all, I would agree, FERC does have latitude and
authority to deal with alternative forms of pricing today. But
I don't think we've seen any evidence of that at all recently
in anything that's really been implemented by anyone.
And I think as we think about transmission and we think
about transmission moving into a separate business, a separate
situation apart from other aspects of a vertically integrated
utility where it is a business that needs investment, it needs
people, it needs innovation to be able to do and in order to be
able to effect to meet the goal of achieving broad competition
and securing the infrastructure of the U.S., I think what
Congress needs to do here is even though FERC may have that
authority, is through legislation perhaps provide a stronger
encouragement for FERC to--consist with the policy of having
the reliable and efficient grid to support competition, to use
the authority they have with respect to incentive pricing and
put those kind of things to encourage investment and attract
investment in the transmission grid.
Mr. Boucher. Thank you, Mr. Szwed.
Does anyone else want to comment on that issue?
Mr. Kanner. If I could, Congressman.
I think it's absolutely correct that FERC has the authority
for incentive rates, performance based rates to allow
congestion pricing. The boundaries, as I said in my testimony,
are what's just and reasonable. What's not confiscatory to
consumers or--I'm sorry--extraordinary to consumers or
confiscatory to the company.
Transmission owners have the right to challenge a FERC rate
of return, to say we need more money to reflect the sorts of
risks that Mr. Vesey suggested exist. As long as those rates
and rates of return fall within that zone of reasonableness and
just and reasonable rates, then there's nothing to complain
about. It's what the perimeters that FERC uses in setting
rates.
In terms of establishing separate transmission companies,
we heard from Goldman Sachs that that sort of transmission
distribution utility is likely to be lower risk and therefore
require a lower rate of return, not a higher rate.
Mr. Boucher. Mr. English, would you like to have the last
word on this?
Mr. English. I'm reluctant to do so, Mr. Boucher.
But the issue's judgment, that's what we're really talking
about. We've got people who don't like the way that FERC has
exercised the authority that they have, and it's been their
judgment that this is the fair, the just and reasonable way of
doing it. So what this is all about is redefining just and
reasonable so that they have to define the way and set aside
their judgment.
Mr. Boucher. You would agree that they have the authority
to provide for incentive pricing should they choose to do so?
Mr. English. There's absolutely no question about it. It's
in the law.
Mr. Boucher. Okay. It seems to me that everyone agrees with
that, and that's an important consideration for us as we go
about making our decisions.
So the issue really for us is, as I suppose as you phrase
it, Mr. English, and that is given the fact that FERC can do
this, should we take the next step and require that they do it?
Well, thank you all very much. This is a helpful
discussion.
And thank you, Mr. Chairman.
Mr. Barton. The gentleman's time expired.
I recognize the gentleman from Tennessee, Mr. Bryant for 5
minutes.
Mr. Bryant. I thank the chairman.
As I mentioned to you, I was going to be in and out. I'm in
again, and so I've missed your testimony and I'm not sure
anyone has addressed the issue specifically as I raised it
regarding the siting and the eminent domain, and things like
that.
So, let me go ahead and ask a couple of questions related
to that, and really open the panel to those of you that might
feel you need to say something on this, that you're qualified
to talk about this.
But in the draft of this bill the States will continue to
have eminent domain authority over transmission siting, but
after 1 year there's kind of a backstop where FERC if the State
hasn't responded, FERC can go ahead and site the proposal.
They'll be given the power to step and site new transmission if
the courts determine that it's in the public interest, so you
still got the public interest test of course.
My questions relate to how you would define and how we
would define or how we would anticipate public interest being
defined, as well as who would be exercising authority along. I
know the State law would apply in the beginning, but once the
FERC got involved would there be the possibility that--I don't
know. Would there be the possibility that there could be
different entities authorized, delegated the authority of
eminent domain beyond the governmental entity? In other words,
private companies? And I may be getting a little far afield.
We've had situation in Tennessee in regard to pipelines
where there were actually private company delegated that
authority. And they were out trying to condemn land to put
their pipeline in. And, again, it caused quite a--in my part of
the State. But it was very controversial and I'm just looking
for some input on, again, how do we mitigate, I guess, to some
extent the consequences of eminent domain and how you define a
public use as well as limiting it, perhaps, to a public entity,
governmental entity to exercise that power?
Yes, sir? Is that Mr. Harris?
Mr. Harris. Yes, sir. It's interesting in listening to the
discussion, because it's very difficult to make an informed
decision without the right information.
What we've developed in the mid-Atlantic is a regional
transmission planning protocol that's been approved by the
FERC. This was so important in the mid-Atlantic region that we
decided that this had to be developed before we began
commercial operations in 1997.
This regional plan has the input of all effected parties;
the States, the environmental community, the transmission
owners, the generators, everyone participates in the planning.
The information on the plan is made ubiquitously available
so that generation can compete and transmission planning can be
enhanced.
For the areas that we serve, we now have nearly $700
million worth of transmission planned and under construction.
Our regional plan, which is publicly available, shows that
those transmission expansion plans will meet the needs for the
region for the next 5 to 10 years, and this is updated several
times a year.
So in order to get down to do you really have a problem or
not, you need to determine what is the information.
Mr. Bryant. Well, could I ask you something?
Mr. Harris. It may be that there's not a problem.
Mr. Bryant. Could I ask you when you were talking about the
regional plans, and again RTOs, I guess, contemplate regional
type organizations. They cross State lines.
And in this regional plan that you have experience with,
you have different States with different State eminent domain
laws.
Mr. Harris. That's right.
Mr. Bryant. And what happens there when there's a conflict
in that, let's say, or one State cannot get access to that
portion of the region that's needed for this plan to work
because of their laws?
Mr. Harris. That's a good question. I think ultimately you
have to believe in the common sense of good people. When you
provide the right information and people participate, they
understand what the issue; that we're looking at things over a
broad region. They see what is necessary to affect the common
good of the public for the whole region.
And when you also actually look at the data, back to Mr.
Boucher's problem of what really is the problem you're trying
to fix; when you actually look at the hard numbers and see what
you need to do, what often you find is a matter of an
enhancement here. We have areas where one utility is building
something that is actually solving another problem for another
utility in another State, but it's the most economical way to
do it, and it's getting done.
So the answer is get to the real hard issues, develop the
fact, allow broad public participation, understand the issue
and then see what we need to do. And what we've seen in this
area, which is a very sensitive area in the mid-Atlantic
region, is that we've been able to solve this problem.
Now, should we have an episode where we cannot, maybe we'd
have to come back. But we're saying we're able to see the
synergy between the State, the regional and the local needs to
work together in a way for the common good. We think this is a
better way of doing it to the future.
Mr. Bryant. Yes. I think maybe I'm talking to the
policymakers, and I think that's good and it may ultimately be
that the courts and the various State legislatures decide this.
Ultimately the courts decide these kinds of conflicts of law.
Mr. English, you've had experience on all sides of this.
Mr. English. I'm afraid so, and probably no group is
effected more than electric cooperatives as far as land wise,
46 States across this country on this particular issue.
I think this goes to the heart of a real question that this
committee needs to answer, and that is the question of what is
the objective of this legislation? Are you attempting to deal
with all transmission, no matter whether it be local, regional
or national? Or are you truly trying to do something along the
lines of identifying what needs to be a national grid? And if
you're trying to do that, this gets into the question of
whether or not you're going to identify what portions of the
existing system and how that needs to be linked up with other
regions of the country to develop that grid. That would narrow
considerably what you're talking about in the area of eminent
domain. And I imagine that makes it far more acceptable to the
States. Certainly makes it more acceptable to our members, and
I would think to a lot of members of this committee.
But if you're going to just simply have a blanket FERC
provide eminent domain as the final decider of this issue for
transmission no matter what its purpose, no matter where it's
built, then I think that that's a different matter. And,
obviously, that takes this bill, makes this a much more narrow
bill and that may not be what this committee wants to focus
truly on the national aspects of the transmission issue and
leave the rest to the States.
Mr. Bryant. Congressman, I'd ask unanimous consent for 1
additional minute so that the gentleman on the end can respond.
Unanimous consent.
Mr. Schriber. Thank you, Mr. Chairman.
Congressman, I would point out that the Natural Gas Act
provides for FERC State joint participation. In Ohio, as I
testified, I believe we have a fairly broad authority to site
facilities, we have engaged in those joint proceedings with
anyone at the Federal level which is provided for. And I also
pointed out, and I think you can imagine that in Tennessee if a
landowner was exceptionally upset or aggrieved, you may get a
letter. But I can assure you that your State authorities would
really feel the heat, as we would in Ohio.
So I would propose, as I have proposed that the States who
are very sensitive to landowner issues, who are sensitive to--
very sensitive to the allocation of our land resources or the
appropriate authorities, and I think that on a joint basis
either regionally or regionally and with Federal participation
a lot of the eminent domain, a lot of the siting problems can
be overcome.
Mr. Bryant. Thank you.
I thank the chairman for yielding me that additional time.
Mr. Largent. The gentleman's time has expired.
Recognize the gentleman from Ohio for 5 minutes for
questions. Mr. Sawyer?
Mr. Sawyer. Thank you, Mr. Chairman.
Let me just take a moment to thank Chairman Barton for this
hearing. I genuinely believe that of all of the hearings that
have been called on this large and complex matter, that this
particular gathering of people in these two panels may
represent the central issues in the entire question of how we
go about building a Federal framework within which to enable
all of the things that are going on in the States.
It is critical to making available the assets necessary to
real competition in a variety of regional grids throughout the
United States.
And so I want to thank Chairman Barton, and I want to thank
our participants today. There are a lot of unanswered
questions, and I just regret that we don't have more time today
to undertake some of those questions.
Let me further thank a couple of Ohioans who are here
again. I regret that other matters before elements of this
Congress prevented me from being able to be here to help them
give appropriate introduction.
And finally, let me just say that I hope that our panelists
this morning would respond in writing to questions or, perhaps,
in conversation in the coming weeks to a much wider range of
questions than I have the capacity to grasp today.
Mr. Cook. Be happy to do that, yes, sir.
Mr. Sawyer. Please. Thank you.
Let me turn to Stan Szwed. You have been involved in
setting up the Alliance RTO. You've suggested that the
flexibility to set up an entity that can attract the kind of
investment that it will take to grow and nurture and facilitate
real transmission entities. Can you give us examples of what
that means in terms of attracting investment and how FERC
authority to mandate RTO participation would effect that
decision?
Mr. Szwed. I think just generally, the Alliance RTO is a
structure which is developed around the for-profit independent
transmission company where there is an independent owner/
operator of transmission assets. And, in fact, in the
development of the Alliance regional organization, we have in
fact attracted a strategic investor because of the construct
and structure of the model as well as trying to provide for
opportunity for that strategic investor to see that the
regulatory process would, in fact, hopefully put in place a
reasonable rate program and mechanism for which business could
thrive and survive, and have a longevity and for future
investment to be made.
So we're in that process of development today. And, in
fact, the Alliance in many respects with a few additional
rulings from FERC on a couple of matters that are pending, is
well positioned to be in operation as early as the end of this
year. And what I'm concerned about in mandate language or
mandate authority is we in the utility business across so many
of our investor owned companies, I think something like 98
percent of the investor owned utility transmission assets are
in some form of developing RTO. If we suddenly start changing
the rules and mandating authority, that could upset a great
deal of effort that has gone today and just may not get to a
situation where we are in fact or would have operating RTOs in
place sooner than later.
Maybe just one more comment to add on that. I kind of think
that in the development of all these RTO structures, earlier in
my remarks I outlined what I thought was necessary no matter
how many RTOs there are across the United States. The seven
points that I outlined in my testimony are what we believe are
important to have a successful transmission network and
infrastructure in the United States. And we, the EEI companies,
believe that very strongly.
Mr. Sawyer. Thank you very much.
Glenn English, it's good to see you.
Mr. English. Thank you very much, Mr. Sawyer.
Mr. Sawyer. If we give FERC the authority to ensure the
recovery of costs for new transmission facilities, it seems to
me that those entities that take advantage of the FERC's
protection ought to be subject to FERC's rules. The question
that I would have for those entities like cooperatives
receiving that protection, aren't they receiving a significant
benefit without any of the attendant responsibilities under the
Federal Power Act?
Mr. English. I guess the question I have for you, are you
talking about in the construction of transmission?
Mr. Sawyer. Yes.
Mr. English. Well, most of the transmission that we have is
very localized, as I'm sure that you know.
Mr. Sawyer. Yes.
Mr. English. It's basically a transmission that applies to
our own membership. We have a great sensitivity about this
question of whether our membership, which actually owns the
utility to provide power for themselves, is going to be able to
continue to govern their own asset. We're a little bit unique
and different in that we're not third parties that have an
investment; we're people that actually own our own utility. We
invest in that utility to provide for our needs.
If you're talking about the government coming in and then
breaking that up, that would be much like someone coming in and
telling you we want to get between you and your constituents.
And we want, Congressman, don't be listening to what your
constituents tell you, we want to tell you how we should
operate.
Mr. Sawyer. Happens all the time.
Mr. English. Happens all the time. And if you stay in
office, you don't listen to them, do you? Because, you know,
the issue here I think is that particular question.
As far as going out and building transmission, keep in mind
we're very dependent on this transmission system in this
country. We're probably more dependent than anybody else. Any
costs that are unnecessary, any unnecessary costs going in that
system get passed on to our members. We have great objection of
that and concern.
We believe that the judgment of FERC should, in fact,
determine what is just and reasonable. And what we've strongly
believed is that any attempt to override that is telling those
FERC Commissioners you must rule on something that you feel is
unjust and unreasonable. You must provide that benefit.
What we think would make a lot more sense, as I said
earlier in my testimony, let's broaden out the options that
FERC has. Let's let FERC use some additional judgment. But what
this proposed draft does, it restricts what FERC does. It says
you can no longer use your judgment. It says you must do
something that you, obviously, feel is unjust and unreasonable.
That's what we think is unfair.
We'd like to see this opened up. Let's use the experience
of what's gone on in this country, let's use the Texas model,
which by the way this legislation we note does not effect
Texas. Texas is exempt as far as the provisions of FERC on the
incentive provisions contained this bill on unjust and
unreasonable.
We think that we ought to go the other way and let's take
the Texas model in which they're building three-quarters of a
billion dollars worth of transmission this year, going to build
another billion next year, it's scheduled; let's take that
model and bring that into FERC and give FERC the opportunity to
use that option.
Mr. Largent. The gentleman's time's expired.
Mr. Sawyer. Then I will yield it back.
Mr. Largent. I'm going to yield myself 5 minutes to ask a
few questions.
It seems to me the issue that, Mr. English, you raise is
one that's been handled in past pieces of legislation where we
were able to craft some language that separated the definition
of what is distribution versus what is transmission as it
relates to cooperates that you all basically signed off on it.
It seems to me that what I heard you saying earlier that's the
same sort of mindset that we should have when it comes to
developing this national grid versus trying to give FERC
authority over every line that carries electricity, is that
correct?
Mr. English. To a certain extent. I think the real issue we
have is a practical one. You know, FERC's very limited as far
as the resources they have available.
You know, one could really look at this; if we were
interested in deluding the influence of FERC, if we wanted to
try to make sure that FERC was ineffective, let's just give
them a lot of jurisdiction and no more resources to do it.
We'll spread them so darn thin they can't get the job done
under any circumstances. And I think that's where we are.
This bill gives FERC a lot more responsibility. Now the
question is do we want FERC to do that job and do it well with
limited resources, recognizing the budget problems and the
difficulty if we've got? If so, then it comes down well what's
really important from a Federal level in dealing with this
transmission issue? And what we would suggest is it makes a lot
more sense for us to truly develop this, and I'm not suggesting
under any circumstances any government money be used on this,
keep in mind, but along the lines we did the interstate highway
system.
We've got the equivalent today of what was the old two lane
system, State highways existed back in the early 1950's. We
reincorporated a lot of State roads, upgraded those with new
standards and made some connections in linking those roads
together and developing an interstate highway system. We think
that that makes an awful lot of sense concept wise, and we
think that FERC should have that responsibility. FERC should
have the final say so. We think, just as we did with the State
highway system, that you allow the States or the local folks to
have a lot of input as which roads should be upgraded, what
should be incorporated into that and develop this system in
partnership with the States. And I think they would welcome
that. That gives FERC a job they can do.
If we're just going to go willie nillie anything that
anybody can define somehow as being transmission of this
country, no matter if it only goes a mile, and we've got some
that would only go a mile that could possibly fit into that
definition and we're going to give FERC jurisdiction on it,
FERC's going to be spread so thin on----
Mr. Largent. Can you sum up? I only 5 minutes. Thank you
for your comments.
Mr. English. But you're right.
Mr. Largent. One of the things that I wanted to begin my
questions with was recalling a committee hearing we had last
year with what were then the sitting FERC Commissioners. And I
asked them the question can any of you give me a definition for
just and reasonable rates. Not one Commissioner could give me a
coherent definition of what constitutes a just and reasonable
rate. Not one. These are the Commissioners that we're wanting
to--some of us want to give them more authority, some of us
want them to give them less authority. You know, less authority
in transmission, but all of you say we need to give them more
authority on reliability standards.
So I guess I would start there when we deal with
transmissions. Somebody in their testimony, I can't remember
where I saw it, said that we could need as much as $56 billion
worth of investment in new transmission in this country. $56
billion. Why don't we have that? Why are they not out there
building transmission lines? Why are we so far behind the power
curve, so to speak, in new transmission?
I think if I asked a panel nodding question, do you all
agree we need more for transmission in this country, all of you
would nod yes we definitely need more transmission. But then a
number of you on the panel said that we don't want to
incentivize by giving higher rates of return on transmission
construction. So we have sort of a conundrum here in that, you
know, Marty, you talk about the fact that the current
constraints boost profits. So the people who could benefit by
having new transmission really don't want to do transmission,
the generators, because they're actually getting higher rates
of return on their generation asset because there's no
transmission. And then the people that may be third party, you
know, that want to develop a transco and be independent
transmission owners, they're not really going to do it because
the risk that's there that Mr. Vesey pointed out, they see as
being as higher than the rate of return that's currently being
granted by FERC.
So, there is the conundrum. We have a huge need for
additional transmission, but we nearly a consensus, at least a
majority of the panel that say but don't give them any higher
rates of return on their transmission because, you know, it's a
burden on consumers. So where do you go from there?
Mr. Kanner, I guess I would like to ask for your comments.
Mr. Kanner. Well, I appreciate that, Congressman.
I think in part it's separating the transportation
function, that highway system, from the merchant function.
Having RTOs with effective planning and construction
responsibility is a clear step in the right direction where
they're not looking at the merchant aspects and whether it
boosts generation rates and profits or not.
They also could conceivably say we're going to bid it out.
We're going to find whoever is willing and able to build a
transmission link at the cheapest possible rates and not we're
going to just say whoever will do it, we'll give them the
maximum amount; rather say whose willing to do it for the least
amount.
There's an independent transmission company in Wisconsin
that is building new facilities. And my understanding is the
rating agencies have said that's a low risk venture. So it
seems like there is a model that can work, we need to get
there.
Mr. Largent. Mr. Vesey, I give you just a moment to comment
on that problem.
Mr. Vesey. Thank you. And it a problem. And I think the
issue comes down all rates are incentive rates. I mean, it's
not more or less the formation of capital and this question
about what the right level is. If we had none of these other
risks, if we would resolve all the siting issues and make the
siting clear and expeditious, if we were to resolve the
questions around RTOs and the question of independence, then
you probably would see the current levels of return being
appropriate to bring that capital to bear. So there's two ways
to deal with this. You either can raise the reward or you can
lower the risk; all that's within the purview of the things
we're talking about here and should be part of the
conversation.
I think the other part is that one has to be cautious that
don't only think about incenting investment to build new
capacity. There are a lot of ways to provide addition transfer
capability in the transmission system. We have talked not at
all about the introduction of new technologies into
transmission, because there is no incentive. In current rate of
return regulation a utility will not get the benefits of those
efficiencies, only makes money on capital investments, so why
would anybody whose in the transmission business make an
investment in something that increases the efficiency,
therefore lowering costs, when they have no return at all?
So, one of the points of my testimony is we have to think
about this question of motivating behaviors, not looking to
specifically induce capital to build new lines. It's a much
broader conversation we have to have. And when we restructure
the question that way, I think then you can find a balance
because you can the providers of this new capacity working in
tandem with their customers, which is critical.
Mr. Largent. Thank you, Mr. Vesey.
My time's expired.
I believe Mr. Wynn from Maryland is next.
Mr. Wynn. Thank you, Mr. Chairman.
I would like to begin by thanking our subcommittee chairman
Mr. Barton for his generosity in agreeing to work with me on
the subject of reliability. I sincerely appreciate his offer
and look forward to working with him on this issue.
I'd like to begin by asking Mr. Harris, and I don't think
this is too far afield, Mr. Harris, you can correct me if I'm
wrong. I understand that PJM has some concerns regarding a
recent FERC directive to join the Northeast RTO. If that is
true, would you articulate your concerns? We've heard testimony
that there are apparently some seams in the system that they
were attempting to correct via that directive.
The second question has to do with my concern regarding
reliability. And you seem to object to the notion of a self----
Mr. Barton. Will the gentleman suspend? We want to thank
Mr. Schriber or Chairman Schriber for being--we understand you
have a plane to catch. If there are questions for you, we'll
put them in a written statement and get them to you. But thank
you for your participation.
Mr. Schriber. Thank you very much, and thanks for having
me.
Mr. Barton. Certainly.
Mr. Wynn. If, in fact, you object to the notion of self-
regulating entity which would have FERC oversight, would you
kind of articulate your concerns. And then if the other panel
members who have an opposite view would support a self-
regulating entity for this purpose, I'd certainly welcome that.
So, why don't we proceed with your, Mr. Harris?
Mr. Harris. Thank you, Congressman.
Take on the first issue. PJM is currently the only approved
RTO in the United States that's operational. With PJM West
we're close to 70,000 megawatts, seven States, plus the
District of Columbia. We have competition that works. We have a
regional planning protocol that works.
There is concern when you talk about enlarging that or
merging that that what we have that works so well may
deteriorate if you try to bring in other areas or other regions
too rapidly or too quick. And that is something that needs to
be looked at as the large RTOs develop. And that was our
concern and what we're discussing with the State of Maryland,
and I think those are valid questions that need to be answered.
On the issues of where we are going with the standards.
Again, let me just state the 3 or 4 points here.
The electric system must be thought of like an ecological
systems; it touches everyone's life and all elements of it. It
isn't simply transmission. Generation and transmission are in
competition. In planning, you can have a generation solution
that may be more important than the transmission solution and
more viable for the public good.
What we're about here to ensure that customers of a value
of competitive price in generation, and transmission is a very
meaningful role in that. So the key is having the plan that
allows that to take place so everyone can participate and
understand what's going on.
The standard setting that needs to take place effects
everything. Ninety-eight percent of the outages on a system are
distribution outages. They are under State control, not FERC
control or even NERC control. So when you talk about a standard
in the 21st century, you need to develop a standard that is
fully consistent with retail choice program and the State
needs, the bulk needs, the fuel needs, the generation needs and
all of this in a holistic way.
So our concern with the proposal is that it tends to try to
carve out a single element and create some organization around
that. We need to move to the 21st century and look at a
holistic solution. Therefore, we think that the better way to
do it is to allow FERC to issue some sort of rulemaking and
through a FERC process create the appropriate body that could
look at these things holistically in a way that you can then
provide standards that FERC can approve.
Mr. Wynn. Can I just jump in and say could not a regional
entity such as you describe be a subset of a self-regulating
organization such that the regional entity would purpose to the
self-regulating organization rules appropriate to that region,
the SRO could then approve those and if FERC did not object,
proceed and then have the kind of regional impact or input that
you're describing?
Mr. Harris. Yes, sir, that is one of the ways that this
could be done. There are other ways, and that's when we need, I
think, rulemaking way that FERC can come up with what would be
appropriate to deal with the issues that we have and be
flexible enough to adapt as technology and the learning curve
grows as we develop this industry of competition.
Mr. Wynn. Are there other members of the panel that want to
comment on that issue?
Mr. Anderson. Mr. Wynn, if I could comment very quickly.
I think one of the points that Mr. Harris made, and several
others have made, is that increasingly we recognize now that
reliability cannot be treated as a stand-alone issue. It's
overlapped with the commercial practices. It's absolutely
incredible. Every reliability rule has commercial practice
implications, just like very commercial practice rule has
reliability implications. They need to be dealt with together.
One of the big problems with NERC is that NERC deals only
with reliability and the commercial practice implications of it
are second hand, their step-child sort of thing. Now, NERC
could solve that by expanding itself to not be just a
reliability organization, but to be both a reliability and a
commercial practice organization, or on the other hand the Gas
Industry Standards Board could expand, as they say they're
going to do, and create an Energy Industry Standards Board and
deal with both reliability and commercial practices. To me, one
or the other, either one of them would be a good way to start,
but neither one of them now are doing it in this holistic way.
You got to take both of them.
We believe very, very strongly that both have to be worked
on together.
Mr. Barton. The gentleman's time, unfortunately, is
expired.
The Chair would recognize the gentlelady from Missouri for
5 minutes for questions.
Ms. McCarthy. Thank you, Mr. Chairman.
And thank you for this very important hearing. And I
appreciate all the input we're getting today, very valuable
input from the panelists. And I'm going to give you full
disclosure before I ask my question.
Before joining the Congress, I served in the Missouri State
Legislature for 18 years. And I was President of the National
Conference of State Legislatures before coming to Congress. So,
I very much like what I'm hearing from several of the witnesses
about the fact that we, as Mr. English put it so well, you
know, we have an existing system that works, how do we link it
to the rest of the country? What is our real objective here?
And I think the objective is to create some sort of dispute
resolution that will work.
I'm going to tell you about a company in my State and
region, Ameren, which is working effectively in a bistate way
with Illinois. Everything's going smoothly. But should they
want to put in a new line or make any other improvements or
opportunities, there's really no place for them to go if
Illinois disagrees.
And so I think the question we're grappling with is how do
we put in place some sort of body that will resolve that for
us? And coming from a State legislative background, I would
like to see that body out there in the States.
So, I was very intrigued by Mr. Schriber's comments and
also Mr. Harris in your text about some sort of voluntary
regional body that permits the States to work in an interstate
way to resolve this.
And I wonder if any of you on the panel could come up with
the mechanisms that they would need specifically to do that? I
would very much appreciate that.
And also, a second sort of thought for someone to ponder.
You know, Ameren has invested and is investing about $25 to $30
million toward improvements in its efforts in those two States.
So when we talk about incentive rate structures, I worry
because those companies that choose not to invest in their
transmission infrastructure seem to me will be rewarded through
incentive rates. And so what does that say to companies that
stepped up to the plate and did it without being told to?
Mr. Harris. Yes, ma'am.
First of all, let me go back to the planning process the
mid-Atlantic that was developed in a cooperative way with all
of the States, the environmental community and the transmission
companies. It took us 2 years to develop that process. It is a
cooperative process that has been approved by the FERC. It
clearly delineates what the accounting and the cost
responsibilities are among the entities. It is just absolutely
crucial to have regional planning protocol.
Now, we recognize that we would not have all of the answers
to the world's problems, so therefore we've engaged in a
process, we entered into an arrangement with each of our
States. And each of the States meet periodically and regularly
with our independent board of our RTO and we discuss the issues
that are ahead of us as we move forward to the next levels of
evolution. And having an inner active way to deal with the
issues and to move forward is a way that we address the
problem.
What we've discovered is that when you really get the
details of the information and allow public input with ubiquity
of information, that the common sense of good people can
prevail. We are building construction. Generation is competing.
Things are getting done.
Do we have all the answers? No, but where we stand today is
something that is working. We don't see a large need for major
transmission in the next 5 to 10 years. We will continue to
work with our States very carefully in this arrangement where
the States have direct input into the independent board as we
try to engage the problems.
So I think seeing it as a holistic thing that effects
everyone and as a process as we move to the future is the wise
way to go forward.
Ms. McCarthy. Has FERC played any role as you've moved
forward with this independent board?
Mr. Harris. In only two ways. First of all, they approved
our regional transmission expanding protocol, which bound all
the companies that wanted to play with it. And the second thing
when they approved us an RTO, they also directed that we
consider the economic consequences when we evaluate
transmission plans instead of just the load growth and the
needs, but we also have to look at the economic consequences of
congestion and other things, and we'll integrate that into our
plan.
Ms. McCarthy. Thank you.
Would anyone else care to comment? Yes?
Mr. Vesey. Very briefly. I think that we shouldn't leave
the impression that no transmission is being built across the
United States. In fact, significant capital is being spent, but
it's mostly in continued maintenance and upgrade of existing
facilities.
The challenge becomes when you're building a line between
States interregionally, and that's where the highest risk
reside.
I think that we've come to the point where we're actually
managing our transmission infrastructure on a just-in-time
basis, which is one of the reasons why the critical points that
were made earlier, why there is such an impact in terms of
reliability and commercial issues. Because we've got to the
point where that's how we run the systems. There's a clear
tradeoff that we're making in terms of our ability to put new
capacity in the ground versus the way we're going to operate
these systems to keep the systems up.
So the only points here are that there are--it's not no
transmissions being built, there are some who are building them
and in some instances the risk and the reward is appropriate.
In others it's not, the balance isn't right and that happens
when people have to site, obtain new right away and actually
site new transmission line and are being intrastate or
interregion, which is a critical issue as we're talking about
the bulk wholesale markets.
Ms. McCarthy. So you're thinking that the incentive rate
structure is for those opportunities that are not as rewarding
and don't attract the investors as much as they should?
Mr. Vesey. Again, I think the issue is that all rates are
incentive rates. The points of the issue is in some new project
development, the risks are definitely higher than others. Two
of those sources of risks are the inability of--the difficulty
of siting process between which cross State boundaries or
regional boundaries. And the second one is the lack of clarity
on how these RTOs, transcos, ISOs are going to work effectively
to produce revenues for their businesses. We don't have an
effective business model yet because that rules aren't
finished.
In those instances, to make investments that either cross
those lines or involved in one of those forming up forming
organizations, obviously the risk is if you buy the market is
being higher than the return.
Ms. McCarthy. I just wouldn't want to put incentive rates
in place that would discourage investments from companies like
Ameren who stepped up to the plate. Thank you.
Oh, yes, do I have time----
Mr. Anderson. Ma'am, one just quick comment on your
regional bodies. As the one consumer group that's here at the
table, although we represent large consumers, we are a consumer
group.
Consumer groups, we are very concerned about creating a
third forum or a third entity that we have to participate in.
Right now we have to participate at the State level. We also
have to participate at the Federal level. It takes tremendous
amounts of resources to participate in each one. And to add a
third layer is a very difficult thing, and I urge you to do
that very cautiously.
Ideally, would be to create a regional body which takes
over the State roles then in siting, but the States don't want
to give that up either. If the States don't want to give up
their siting authorities, which I well understand for a whole
lot of different reasons, I urge you to be very careful in
creating a regional body that then consumes a lot of resources
also.
Ms. McCarthy. Thank you.
Thank you, Mr. Chairman.
Mr. Largent. The gentlelady's time has expired.
Mr. Sawyer. Mr. Chairman, I would ask unanimous consent,
Mr. English looked like he wanted to make response.
Mr. English. Yes, thank you very much Just very quickly.
I think that we're making a couple of errors here on our
assumptions. One is this is a judgment issue. FERC has all the
authority. They can double rates, triple rates, quadruple rates
if they find that to be just and reasonable.
The second thing, is we're ignoring one big problem, and
that is it is not in the interest of a lot of present
transmission holders to see new transmission built, to see
bottlenecks eliminated and roadblocks eliminated. Because it
all comes down to the fact that right now that's part of the
monopoly aspect, that's where they can make their money, that's
where they can control the generation, that's where they can
prevent this competition on wholesale power that I understand
that that's what this committee is about. And unless you
address that to simply increase the rewards, that doesn't
overcome what these people really find to be in their best
interest. And we've got to find out some way in which to break
those roadblocks.
Mr. Sawyer. Mr. Chairman, Mr. Szwed.
Mr. Szwed. Yes. I just want to take exception to the fact
that there seems to be the allegation that we're not building
transmission because it's advantaging our generation. And I
just want to remind you all that for the last 5 or 6 years
utilities who own both generation and transmission have been
under a code of conduct obligations with regard to Orders 888
and 889, and that's further promulgated by Order 2000 and the
move to RTOs.
I think, you know, just going back, you know, we have been
building transmission. My company alone spent $35 or $35
million just last year in transmission to connect customers, to
facilitate equipment repairs. I've got a request pending to put
a large transformer in now that's $5 million alone.
The issues goes back to what a lot of what Mr. Vesey was
talking about. We're trying to create a more robust national
marketplace and the transmission system we have today wasn't
built for that. It was built to serve local load, connect
neighbors and provide for reliability. What we've got to do is
transform that, and that needs new investment.
It's going to take new investors because the rules that
we're operating under require independence for all this today.
And we'd really like to see new investment, new independent
investment come in and be done. And that requires the right
kind of rates, the right kind of pricing, the right kind of
returns.
And I've heard here today the discussion of transmission is
a low risk situation. I think you got to put it in the context
of what it's all about. When we separate transmission from the
rest of the vertical integrated utility, it takes on a
different risk profile because its sole business is providing
transmission service, and it has risks. And just to say that
returns ought to be low because this is a low risk type
proposition, I think we have to think about it. The risk reward
ought to be commiserate with the comparable kinds of risk
opportunities or possible kinds of other industries that have
similar or equal risk, and the returns ought to be that. We
haven't seen the kind of returns from FERC that recognize that
yet, and that needs to be recognized as we establish the
pricing reform that needs to be done.
Mr. English. Focus on reducing the risk, Mr. Chairman.
Mr. Largent. We'll return to the regular order here and
recognize the gentleman from Wisconsin, Mr. Barrett for 5
minutes.
Mr. Barrett. Thank you, Mr. Chairman. And I apologize for
not being here, so some of my questions may be redundant.
I think some of you have mentioned a situation in
Wisconsin, and that's the State that represent. And earlier
this week I was home and talking to a farmer in the State of
Wisconsin. The Wisconsin Public Service Commission has just
approved about a 240 mile line from Duluth, Minnesota to
Wausau, Wisconsin. And the concerns that this farmer had was
evidenced by a question that was asked of the current Governor,
who was asked whether it was fair to move this transmission
line over a number of farms that had been there for many, many
years. And the response was we're not going to let a couple of
farmers stop this transmission of electricity into the State.
The farmer's argument was I thought an interesting one, in
that he said the power of eminent domain has traditionally been
used for the public good in the sense that you have a company
that is granted the public domain. Generally in the past if
it's been granted, it was either to a regulated industry where
the profit was monitored or some other entity where there is
interaction between the government, the State government and
the company itself so that the greater good would be
recognized.
His argument was that this is different, that these
transmission companies are essentially simply for-profit
companies and why should the law of eminent domain or whatever
laws are going to be used in this situation allow a for-profit
company to take the land away from a for-profit dairy farmer
who is supplying milk to the people in this country?
If one or two of you can respond to that, as if I were the
farmer sitting there, as to why that should happen?
Mr. English?
Mr. English. And that farmer's probably a coop member, so
he's probably one of our members. And I think he makes an
excellent point.
The real issue I think you still come down to is this
question, you know, is this something that is necessary for the
overall public good. I think what you categorize as eminent
domain and the use of eminent domain and the overall purpose of
it, I think you're right, we do have to go back to the heart of
that and how do we use it. And it has to be done very, very
selectively, very carefully. It has to be something that is
necessary for the overall good. And that's certainly true, I
think, whenever you're providing that on the Federal level.
The States should be allowed to deal with this issue. It's
only if it's absolutely necessary, you know, this is a final--
if it can't be resolved any other way that the Federal
Government says it has to be done for the overall national
good. But that should be a last resort. Last, last resort.
Mr. Barrett. Well, and I think the debate we're having
here, though, exemplifies that. The discussion, and I
understand that the draft bill has some flexibility allowing
the Federal Government to come in and take this over. But I can
tell you, not with this farmer this week, but with a farmer
that I met with in the last 2 months, walking into his farm--
their farm, a man and woman's farm, I felt like a character out
of an ``Erin Brockovich'' movie. Someone just coming in from
the Federal Government who didn't care at all about this poor
farmer in Edgar, Wisconsin whatsoever. And we were going to use
whatever methods we could to put this power line in.
So, I am concerned about the provisions in here that give
the Federal Government more authority, because there are people
who feel this disenfranchised from State government because the
public service commissioners wouldn't even come and hold public
hearings in their part of the State of Wisconsin. And now we're
being told well those people are too close to you and we're
going to remove you even further from the decisionmaking power
of this democracy.
And I think that's one of the reasons you've got the
western Governors--because I think that this is an offshoot of
the whole issue of private rights and people feel as though the
Federal Government is going to come in and just squash them.
And I haven't heard a compelling reason why that isn't the case
with the provisions in this draft bill, and I'd be interested
to hear someone who can defend those. Someone who wants to
defend those. Mr. Szwed?
Mr. Szwed. Just a general comment. I think, as I said in my
testimony, I think we are looking toward the States as the
primary vehicle for accommodating that. And, again, the
language really provides for FERC as the backstop. And I think,
you know, I sometimes feel like we're between a rock and a hard
place on this, maybe even more so when Chairman Schriber was
here, because it's a tough situation between State and Federal.
But as we move toward larger regional marketplace that has an
interstate nature to it, obviously we'd like to see the States
resolve the issues of siting first. But at some point there
seems to be the need to have a backstop and some entity to go
to or some authority to go to to resolve the issue if in fact
that is important for the greater good of the competitive
region of the electric marketplace.
Mr. Barrett. But the legislation we're talking about, under
the Natural Gas Act, when FERC acts don't they have to have at
a minimum of certificate of convenience and necessity for the
public good? And I don't see that here. Here it's just
whatever's good for the transmission company and no time at all
for the public good or public necessity.
Mr. Szwed. Yes, I believe that's the case with the gas
side. And even in the case of Ohio where in Ohio if you take
Ohio as a microcosm where years ago we used to do this county-
by-county sort of thing and now it's rolled into the Ohio Power
Siting Board, there's still in that cases also a requirement
for the need and the benefit of the facility as well.
Mr. Barrett. Shouldn't we need that in this situation?
Mr. Szwed. And I would think that we probably would want to
demonstrate the need for the facility and the reasons, and the
benefits that it would provide, right.
Mr. Barrett. I yield back, Mr. Chairman.
Mr. Largent. All right. With that, I think everybody has
had a chance to ask questions.
I want to thank all the panelists for your time. Many of
you are familiar faces that have been contributors in panels in
the past. We want to say thank you to all of you for your
participation.
We'll convene the second panel at 1. Thank you.
[Whereupon, at 12:31 p.m., the subcommittee recessed, to
reconvene at 1 p.m., the same day.]
Mr. Barton. If our panelists and our audience will take
their seats, we'll start our second hearing of the day.
As soon as we get order, we're going to let Mr. Norwood
make some introductions and then begin the hearing.
We know that we have witness that's coming by train, I
think from Baltimore, he may be a little bit late so we're
going to go ahead and start.
The Chair wants to thank this panel for coming back. We
also want to thank you for fastforwarding an additional hour.
And we especially want to thank Mr. Franklin, because I'm told
that he's been under the weather and is coming in spite of
somehow suffering from a cold or the flu, or something like
this.
Our second hearing today is Electric Transmission Policy:
Regional Transmission Organizations, Open Access, and Federal
Jurisdiction.
The hearing will come to order.
The Chair would recognize Mr. Norwood to make a brief
introduction, and then we will begin to hear testimony.
Mr. Norwood. Thank you very much, Mr. Chairman, and I
commend you on your selection of witnesses. Anybody from Texas
that has enough sense to have two people from Georgia on the
same panel, I know I have a great deal of respect for. But I do
appreciate your leadership on these issues and would like to
commend you and the ranking member for the selection of the
witnesses.
If I may, I'd like to take this opportunity to recognize
and welcome two gentlemen from the great State of Georgia who
will be testifying on this second panel today. Robert Johnson
from MEAG Power and Allen Franklin from Southern Company.
Thank you, gentlemen, for being here.
Robert Johnson is the President, Mr. Chairman, and Chief
Executive Officer from MEAG Power headquartered in Atlanta.
MEAG Power is a public generation and transmission corporation,
as you know, that provides power to 48 Georgia communities
serving nearly 750,000 Georgians, many of whom are my
constituents.
With over 24 years in the electric utility industry, Mr.
Johnson has held several management positions at MEAG at one
time or another, having overseen both engineering and
operations. In addition, Bob serves on the Board of Directors
for the Energy Authority, one of the largest power marketing
joint ventures among public power organizations that is located
in Jacksonville, Florida.
Bob received his bachelor of electrical engineering from
Georgia Tech in 1978 and he's still a good guy, and his
professional engineering license in 1983.
Also testifying before our second panel today is a good
friend of mine, Allen Franklin, Chairman and President and
Chief Executive Officer of Southern Company, also headquartered
in Atlanta. Previously Mr. Franklin was President and Chief
Operating Officer of Southern Company, and prior to that served
in the same capacity at Georgia Power Company, Southern
Company's largest subsidiary.
Allen received his bachelor's degree in electrical
engineering from the University of Alabama, and a master of
science from the University of Alabama, Birmingham.
Mr. Chairman, both of these gentlemen are respected leaders
within the electric utility industry and within the Georgia
community, as both serve on the Board of Directors for the
Georgia Chamber of Commerce.
Bob and Allen, I'm very happy to have you here today before
this committee, and I look forward to hearing each of your
testimonies and perspectives on these critical issues affecting
our national energy policy.
Thank you, Mr. Chairman.
Mr. Barton. Thank you, Mr. Norwood.
Does Mr. Boucher wish to make a brief opening statement
before we begin? Okay.
We want to welcome this panel. And, again, thank you for
your attendance. We're going to start with Mr. Bennett and go
right down the line.
Mr. Bennett is a Commissioner of the New York State Public
Service Commission. We know it's been a very difficult time for
you the last several weeks because of what happened at the
World Trade Centers. We really appreciate your attendance
today. We know that had to be difficult for you to take away
from your duties in New York to come and testify before this
subcommittee.
Your statement's in the record in its entirety, and we
would recognize you for 5 minutes to elaborate on it.
STATEMENTS OF JAMES D. BENNETT, COMMISSIONER, NEW YORK STATE
PUBLIC SERVICE COMMISSION, ON BEHALF OF NATIONAL ASSOCIATION OF
REGULATORY UTILITY COMMISSIONERS; ALLEN H. FRANKLIN, PRESIDENT,
CEO & CHAIRMAN, SOUTHERN COMPANY; PETER FLYNN, PRESIDENT, NEW
ENGLAND POWER COMPANY ON BEHALF OF RICHARD P. SERGEL, NATIONAL
GRID USA; ROBERT JOHNSTON, PRESIDENT AND CEO, MUNICIPAL
ELECTRIC AUTHORITY OF GEORGIA ON BEHALF OF THE LARGE PUBLIC
POWER COUNCIL; GLENN ENGLISH, CEO, NATIONAL RURAL ELECTRIC
COOPERATIVE ASSOCIATION; MARC S. GERKEN, PRESIDENT, AMERICAN
MUNICIPAL POWER-OHIO ON BEHALF OF TAPS; PETER G. ESPOSITO, VICE
PRESIDENT AND REGULATORY COUNSEL, DYNEGY, INC. ON BEHALF OF
ELECTRIC POWER SUPPLY ASSOCIATION; CHARLES A. TRABANDT, FORMER
FERC COMMISSIONER; AND MICHAEL J. TRAVIESO, MARYLAND PEOPLE'S
COUNSEL
Mr. Bennett. Very good. Thank you, Mr. Chairman, and thank
you for your comments. It has been a hard time for the State of
New York, but everyone in the State is very grateful for all
the support from the Congress and from all the other areas of
this great country.
Actually I'm not here just as a Commissioner from the State
of New York, but also as a representative of the National
Association of Regulatory Utility Commissioners, otherwise
known as NARUC, which is an organization composed of all of the
utility regulatory commissioners in the country.
The written statement of NARUC has been put into the
record, and I'll just make a few brief comments and, perhaps,
add something from the New York State perspective, and answer
any questions you might have.
Three basic issues before us today: Transmission
jurisdiction, regional transportation organizations or RTOs and
open access.
To be brief insofar as transmission jurisdiction, it's very
clear that FERC has jurisdiction over wholesale rates. It's the
position in New York State and also of NARUC that the State
retain authority to establish retail jurisdiction, and the
jurisdiction to set retail rates including the rates for
transmission services. And that FERC's jurisdiction should not
be expanded to include unbundled retail transmission service.
Second, the States should continue to exercise regulatory
oversight over retail transmission service. As an alternative
to State oversight, the States could be authorized to form
voluntary regional bodies or RTOs to address regional
transmission system issues and FERC should be required to defer
to States acting on a regional basis.
Insofar as retail jurisdiction, it's our belief that the
jurisdiction should remain with the States.
I think the two major issues here are reliability and
pricing. New York has something of a unique position right now
in that we have an ISO, an independent system operator, which
is like an RTO of one State. However, we are working very
cooperatively with New England and with PJM. And with
experience we see that this region will be able to put together
a voluntary RTO working on its own experience and its own
knowledge without having the need for a direction from FERC as
to how it should be done.
We would also believe that Congress, if it so elected,
should provide for a State commission advisory role and RTO
governance that allows deference to the State commissioners
within a region that reach consensus concerning governance and
operational issues.
NARUC does not support charging local retail customers for
new transmission facilities to move merchant plant energy to a
regional grid.
NARUC also has long supported nondiscriminatory wholesale
open access for transmission services.
In conclusion, in the case of existing transmission
facilities, the local retail consumers have born the vast
majority of the costs of the utility's transmission facilities.
It is the utility's obligation under State law or FERC approved
contract to provide these consumers reliable and affordable
service; they should not bear any unfair burden due to the
transition to an open access transmission regime.
Thank you.
[The prepared statement of James D. Bennett follows:]
Prepared Statement of James Bennett, Commissioner, New York State
Public Service Commission
Mr. Chairman and Members of the Subcommittee: Good morning. My name
is James Bennett. I am a Commissioner on the New York State Public
Service Commission. I am here today on behalf of the National
Association of Regulatory Utility Commissioners, commonly known as
NARUC. I greatly appreciate the opportunity to appear before the House
Energy and Commerce Subcommittee on Energy and Air Quality and 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. Its membership includes the State public utility commissions for
all States and territories. NARUC's mission is to serve the public
interest by improving the quality and effectiveness of public utility
regulation. NARUC's members regulate the retail rates and services of
electric, gas, water and telephone utilities. We have the obligation
under State law to ensure 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 that are just, reasonable and nondiscriminatory for all
consumers.
States have an important stake in how electric transmission
services are provided to retail consumers. The transmission facilities
that serve consumers were approved by State governmental entities, and
importantly are being paid for by these retail customers. We are,
however, keenly aware of the interstate commerce implications of
transmission service and we believe that the issue of transmission
jurisdiction is now properly before the Supreme Court. Accordingly,
NARUC recommends that Congress follow its prudent practice of allowing
the Court to rule on transmission jurisdiction issues prior to taking
any legislative action.
States should retain authority to establish retail rates that
include transmission services, and FERC jurisdiction should not be
expanded to include unbundled retail transmission service. FERC should
continue to have ratemaking authority for interstate wholesale
transactions and should have jurisdiction over transactions between
suppliers and retail customers located in different States. Prior to
the unbundling of rates to permit consumer retail choice, the States
set the full bundled rate--including transmission service. This
provided customers not only simplicity but a single source of
regulatory redress when problems or complaints arose. Now that retail
rates are becoming unbundled in order to allow customers to choose a
generation supplier, such customers are no less in need of simplicity
and regulatory oversight. NARUC believes that the best way to provide
that protection is to allow the States to continue to exercise
regulatory oversight over retail transmission service.
As an alternative to State oversight, States could be authorized to
form voluntary regional bodies to address regional transmission system
issues and FERC should be required to defer to States acting on a
regional basis.
NARUC supports legislation leading to voluntary formation of
Regional Transmission Organizations (RTOs), with deference given to
States in RTO development, including size, geographic scope and
configuration, as well as States acting collectively on a regional
basis. Congress should develop a mechanism for States to address
ongoing concerns in RTO functions after the initial RTO development
period, including reliability, market monitoring, pricing, congestion
management, planning and interregional coordination. In New York, for
example we have established very high reliability standards--
particularly in the highly congested New York City area. These high
standards come at a cost but we believe such a cost is miniscule
compared to the consequences of a major outage. We believe that the
States, working in conjunction with their RTO, are best able to
develop, monitor, and insure effectiveness of such standards. New York
has also worked with its ISO to develop sophisticated market monitoring
systems and market price mitigation programs that help prevent the
abuse of market power. Because of the unique electrical configuration
in New York City, such programs are essential to protect consumers from
price gouging especially during times of extreme scarcity of supply. As
the Northeastern RTO is being developed, we are working with the
parties to ensure that these practices continue.
In order to ensure a cooperative working relationship between the
States and the RTOs , Congress should provide for a State commission
advisory role in RTO governance that allows for deference to State
commissions within a region that reach consensus concerning governance
and operational issues. In New York, PJM and New England, State
commissions have a good working relationship with their respective
Independent System Operators. As RTOs develop and electric systems
become larger, we need to continue to find ways to have continued
cooperation between the States and the emerging RTOs.
At the heart of the issues raised at today's hearing--RTOs,
transmission jurisdiction, and open access--is the relatively new
development of merchant generating plants and the question of who pays
to get the power produced by these plants to the markets where the
owners of these plants wish to sell their power. These facilities are
not owned by utilities and are not necessarily constructed near where
they are needed. These generation units are not being constructed
solely for the purpose of supplying the electricity needs of the State
or region in which they are located. The main purpose for these plants
is to sell power to the wholesale market for the most profitable price,
regardless of where the purchaser is located.
This raises the question of who should pay for any new transmission
to get this merchant power to where it has been sold. NARUC does not
support charging local retail ratepayers for new transmission
facilities to move the merchant plant energy to a regional grid. In New
York, for example, new generators are responsible for the costs of
transmission lines necessary to connect to the grid. In addition, any
grid improvements made necessary solely related to the new generation
are also paid for by the generator. Any other improvements are paid for
by the transmission owner and passed through to all users of that
transmission system.
In the case of existing transmission facilities, the local retail
consumers have borne the vast majority of the costs of the utility's
transmission facilities. Because the utility's obligation under State
law or FERC-approved contract is to provide these consumers reliable
and affordable service, they should not bear any unfair burden due to
the transition to an open access transmission regime. We clearly expect
that the new RTOs working with the States will develop sound
interconnection policies that fairly allocate the costs of new
transmission facilities between generators and transmission users.
In closing, NARUC has long supported non-discriminatory wholesale
open access for transmission services. State Commissions, however, must
retain the authority to protect retail consumers by ensuring that they
are not unfairly burdened by financial and environmental costs that
ought to be born by other stakeholders. Further, States must continue
to be deeply involved in RTO development, monitoring, and price
mitigation.
Thank you for giving me the opportunity to appear before you today.
I look forward to answering your questions.
Mr. Barton. Thank you, Mr. Bennett.
We'd now like to hear from Mr. Allen Franklin, who is the
CEO of Southern Company.
And, again, we appreciate you coming since I've been told
that you've been a little bit under the weather.
Your statement's in the record, and we'd ask you to
elaborate for 5 minutes.
STATEMENT OF ALLEN H. FRANKLIN
Mr. Franklin. Thank you, Mr. Chairman.
Let me say, first of all after hearing Mr. Bennett's
testimony, I largely agree with the points that he made. Let me
add just a moment or state just for the record our corporate
situation, which I think helps explain our position on a lot of
these issues.
At this point about 90 percent of all of our net income is
regulated by the States. About 10 percent is related to our
participation in the wholesale market. So the big part of our
business is still State regulated related to retail customers,
but wholesale is important because it's a significant part of
the growth of our company.
For that reason, because retail is so important, we tend to
be very sensitive to what our State commissions think, and we
tend to be very sensitive to how different changes to the
industry effects our retail customers.
Let me also set the stage for the current state of the
electric industry in the southeast. Unlike other parts of the
country, there is plenty of generation in the southeast.
There's massive amounts of competitive generation under
construction. In fact, we expect the capacity to double in our
service area in the next 5 years producing much more generation
than will be needed to serve local load.
A bigger issue with us is not enough generation, there's
plenty, but the huge amount of transmission that's going to be
required to move that generation into the market and outside
the southeast.
We're currently projecting that over the next 5 to 6 years
we'll spend about $6 billion of additional capital for new
transmission. That will triple the amount of investment we have
in transmission. It took 80 years to get to $3 billion, in the
next 6 years we're going to be at $9 billion. That will create
a 10 percent rate increase for our retail customers, which is a
concern to us and, obviously, through our commission.
We intend to build the transmission that's required, and
take that obligation seriously, but there are some FERC pricing
issues I'm sure that were discussed this morning that make this
transmission requirement much more severe than it should be.
And the primary problem is that transmission pricing is not
distant-sensitive, which results in generation being located
much further from load centers than it should be, which
increases cost and reduces the reliability of the system.
That's a problem I hope that can be addressed.
Now moving to RTOs. In my judgment RTOs are a good idea if
done properly. I think their time has come. And I think FERC
Order 2000 that was issued in late 1999 was very much on the
right track. It laid out standards and expectations, and it
left it to utilities and State commissions to move the process
forward.
We were making great progress in the southeast in
developing an RTO structure in the size and the scope along
with eight other public power entities to form a large, what I
think would have been a very effective RTO in the southeast.
That was going extremely well until FERC issued an order in
July that in essence stopped that process in its tracks. Since
that time there's been a great deal of confusion about the
direction RTOs would take in the south.
Where FERC goes next is not clear, but it's certainly a
possibility that they would mandate not only the size, but the
structure of the RTO. That's the wrong answer, in my judgment,
from our standpoint in the southeast.
First of all, I think they'd take the wrong structure.
Second, it will cause public power to opt out, and in our
part of the country it's critical that public power
participate. There's been a severe State backlash, States all
the way from North Carolina to Louisiana have objected to the
FERC direction. It makes the nondistant-sensitive pricing
worse, simply because an RTO is larger.
Mr. Chairman, I think there is a relatively simple solution
to the current situation. I think if we can get back on the
pre-July track that we're on in the southeast, and if Congress
can help us do that and FERC can help us do that, that'll be a
plus. If FERC can work on their pricing and make it distant-
sensitive, that will be a big plus, and I would encourage
Congress to do what it can to help FERC move in that direction.
I want to also discourage Congress at this time from giving
any additional authority to FERC to mandate RTOs, to mandate
divestiture of generation or to take additional authority from
the States on bundled transmission rates. If that happens, I
can give you reasonable assurance that RTOs will form in the
southeast. I think they will form faster and they will perform
better.
Thank you.
[The prepared statement of Allen H. Franklin follows:]
Prepared Statement of Allen Franklin, Chairman, President, and CEO,
Southern Company
introduction
My name is Allen Franklin, and I am Chairman, President, and CEO of
Southern Company. Southern Company is the owner of five operating
electric utility companies including Georgia Power and Savannah
Electric and Power in Georgia, Alabama Power, Mississippi Power, and
Gulf Power in Florida. In our southeastern service area, we have over
35,000 MW of generating capacity and serve over 3.9 million customers
at rates that are 15 percent below the national average. Southern
Company is also the largest wholesale power provider in the Southeast.
Our service territories cover 120,000 square miles and we have over
26,000 miles of transmission lines.
Southern Company supports removal of the remaining barriers to
robust competitive wholesale markets through federal legislation. We
believe continued, fair competition in wholesale markets can lead to
added consumer savings while maintaining the high level of reliability
that consumers have come to expect. We also support the development of
properly sized and configured regional transmission organizations to
help further the goal of non-discriminatory access to the transmission
system. Southern Company's operating subsidiaries have been
participating in and benefiting from competitive wholesale markets by
putting our incremental generation needs out to bid. This program has
been very successful in helping to ensure that consumers in our service
area pay the lowest possible price for electricity--which should be the
main goal of electricity policy initiatives. Just last year, Southern's
operating companies procured 3,000 megawatts of power via long-term
contracts through competitive bids, and we are seeking another 3,100
megawatts this year. In response to Georgia and Alabama Power's most
recent requests for proposals, generators bid over 30,000 megawatts for
the solicitation of only 3,100 megawatts. Clearly a robust wholesale
market already exists in the Southeast. The objective of Federal
legislation and FERC policy should be only to enhance what already
exists.
Evidence that the competitive market is functioning well in the
Southeast can also be seen by the incredible amount of new merchant
generation seeking to build in the South. We currently have signed
interconnection agreements for about 18,000 MW of new generation and
have pending requests for another 34,000 MW, all in our service area.
In fact, we are no longer worried about a shortage in generation in the
region. If all of this generation is built, it would more than double
the available generation in our area--clearly much more than is needed
to serve consumers in this area. We are becoming more and more
concerned about the feasibility of siting, building and paying for the
additional transmission facilities that may be needed to satisfy
transmission service requests from all of these new generators--in
addition to what we must build to serve our retail customers.
We are currently investing significantly in new transmission
facilities--both to retain reliable service to our own growing load,
and to provide transmission services for merchant generators building
in our service area. We currently have transmission assets with a book
value of 3 billion dollars. Over the next five years, we expect to
double that investment to 6 billion dollars, just to keep pace with our
load and the generating projects that have already requested service.
If we are ultimately able to site and construct transmission for all
currently announced generation projects in the region; our total
transmission investment could triple in the next five to six years--
from 3 billion to nine billion dollars. Retail customer rates could
increase by 10 percent if we are required to pick up most of these new
transmission costs, as we are under current FERC policies. It is not
clear that savings in generation will ever be sufficient to offset
these higher transmission costs.
This gives rise to one of our major concerns, as will be discussed
in my testimony today; that FERC has not paid adequate attention to
whether or not its transmission access and pricing policies are leading
to rational investment in generation and transmission to minimize the
total costs of electric service. Nor has FERC focused on transmission
pricing policies necessary to bring forward the investment in
transmission needed to support competitive markets. For example, the
rationale being used for having just a few very large regional
transmission organizations (RTOs) in the country is that by having a
single postage stamp rate for a large region, you can have generation
built anywhere to serve load anywhere. But this policy ignores several
critical facts. First, building generation closer to load results in a
more reliable system. Second, it is significantly less expensive to
build gas pipelines to move gas to generators located near load centers
than it is to build generation near the gas fields and build new
electric transmission to move power to load centers. Third, FERC's
postage stamp rate policy for electric transmission juxtaposed against
distance sensitive rates for gas pipelines gives generators uneconomic
incentives to build closer to the gas source--exacerbated by the fact
that generators don't always have to pay the full cost of new
transmission required as a result of their location decisions.
These economic distortions exist today--they are simply made worse
by moving to very large RTOs. Before very large RTOs are considered,
appropriate transmission pricing for RTOs, ensuring proper locational
decisions by generators must be developed.
We do not know if the Commission's stated plan for four large RTOs
across the country will best promote economically efficient, secure and
reliable wholesale markets, or what costs and benefits to our customers
would result from such a scheme. The Commission has yet to conduct any
analysis to suggest what the optimal size or configuration for an RTO
might be, and what is the most efficient and reliable market structure
within an RTO. We believe such analysis is critical to ensuring our
customers and state regulators that our participation in an RTO is in
the best interest of all electric consumers.
Thus, we are obviously very concerned about the direction of FERC's
transmission policies. While it may be true that there is a shortage of
generation or transmission investment in some parts of the country, it
is not the case in our service area. We are continually building new
transmission facilities. And as noted, we also have a tremendous amount
of new competitive wholesale generation being built in the region. Our
rates are well below the national average and we consistently rate
among the top utilities nationally in customer satisfaction. We are
concerned that movement to very large RTOs, without careful forethought
regarding implementation costs and without appropriate transmission
pricing and investment policies, could have disastrous results for our
consumers in terms of cost and reliability. We have been taking a
careful, rational approach to the formation of regional transmission
organizations to ensure that the overall goals of a competitive
wholesale market are achieved and that our customers benefit.
southern company's rto development efforts
When FERC issued Order 2000 at the end of 1999 we immediately began
to examine what strategy made sense for us in terms of forming or
joining a regional transmission organization. The necessary starting
point for us was the Integrated Transmission System in Georgia. The
Georgia transmission system has been jointly owned by four partners
since the mid-1970's. The partners are Southern Company subsidiary
Georgia Power, the Municipal Electric Authority of Georgia (MEAG
Power), the Georgia Transmission Corporation--a cooperative utility--
and Dalton utilities--a municipal system. For an RTO to properly
function in our region, it will require at a bare minimum the
participation of these four utilities. That is because the facilities
owned by the ITS partners are inter-mingled--sometimes we might own
different wires on the same poles, or their wires will begin where our
wires end. It would be impossible for an RTO to operate our
transmission without also operating the transmission systems of our
partners.
Thus, we began our RTO discussions with the Georgia ITS partners.
These discussions continued through 2000 and into 2001. Simultaneous
discussions were also held with many other utilities in the Southeast,
including all of our regional investor-owned utilities and TVA, and
were broadened to include the Alabama Electric Cooperative (AEC) and
the South Mississippi Electric Power Association (SMEPA). However,
Order 2000 required Southern Company to make a filing by October 15,
2000 either agreeing to participate in an RTO or listing the barriers
precluding such participation. Because we had not yet reached agreement
with other utilities on the exact form of an RTO, Southern Company
filed by itself on October 15. Our filing took the form of a Request
for Declaratory Order, seeking FERC's guidance on whether our proposed
RTO would meet the standards of Order 2000. While it was never our
intention to form a single company RTO, we were limited by time
constraints.
On March 14, 2001, FERC issued a response to Southern's Request for
Declaratory Order. The Commission rejected Southern's October filing on
two grounds (1) Southern Company proposed that only wholesale
transmission services would be subject to the RTO tariff, contrary to
FERC policy, and (2) Southern Company proposed some transmission
incentives that would flow to transmission owners as opposed to the
RTO. FERC determined that this would violate the principles of Order
2000, in which the Commission intended to incent the entity making
investment decisions, not the entity building transmission.
Southern believed that we could respond adequately to these FERC
concerns. However, the Commission also noted in its' March 14th order
that as an alternative to correcting the deficiencies in its October
filing, Southern should explore joining with one or more other
utilities to form an RTO in the Southeast. Thus, Southern continued
negotiations with the ITS partners and other utilities in our sub-
region and we also held discussions with GridSouth, GridFlorida,
Entergy and TVA. Around the same time, several non-jurisdictional
utilities in the Southeast that had been somewhat unsuccessful in their
attempts to join other RTOs in the region requested to join our
discussions to form the SeTrans RTO. These utilities included Santee
Cooper, Jacksonville Electric Authority (JEA), and the City of
Tallahassee.
At FERC's request, Southern filed a status report regarding our
efforts to join or form a larger Southeast region RTO on May 14, 2001
(the status report was supplemented on June 20, 2001). Southern told
FERC that since our October filing, Southern had furthered negotiations
with the non-jurisdictional transmission owners in our area. To this
end, we included with our status report Memoranda of Understanding with
MEAG Power, Dalton Utilities, the City of Tallahassee, Jacksonville
Electric Authority and the South Mississippi Electric Power
Association. After the May 14 filing, Georgia Transmission Corporation,
Alabama Electric Cooperative and Santee Cooper also signed Memoranda of
Understanding. Thus, nine utilities were now involved in forming the
``SeTrans RTO'', representing over 39 thousand miles of transmission,
$6 billion dollars in transmission investment, and over 44,000
megawatts of generation that would be within the RTO's purview. This
would place SeTrans among the largest RTOs in the nation.
Southern Company also reported to the Commission regarding its'
discussions with Grid South, Grid Florida, TVA and Entergy. Southern
decided that joining with GridSouth, Grid Florida or Entergy was not
feasible at that time. These entities were far along in their RTO
development. Dealing with the many issues involved with the non-
jurisdictional utilities in our area, as well as the jointly owned
transmission system in Georgia would slow the progress that those
entities had made. Southern Company and the municipals and coops with
which we are partnering also have some critical differences over the
RTO governance structure of GridSouth, GridFlorida and the Entergy/
Southwest Power Pool RTO. We believe that smaller RTOs could be
implemented much sooner than the larger RTOs favored by FERC, and if
warranted by the market and consumer benefits, merged into a larger RTO
at a later date.
While TVA indicated that it does not wish to join with Southern in
an RTO, we have agreed that most of the benefit of a joint RTO can be
gained through coordination agreements (that provide for seamless
transmission services and markets across RTO and utility boundaries).
Thus, Southern signed a separate Memorandum of Understanding with TVA
to develop such seams arrangements. GridSouth, GridFlorida and Entergy
have also expressed interest in working on seams issues with SeTrans.
We recently executed a three-way Memorandum of Understanding with TVA
and Entergy to work on these issues.
The goal we expressed in our status report was for SeTrans to make
a final filing with FERC for the establishment of the RTO by December
of this year, with an operational date possibly as early as the fall of
2002. Up until July 12, 2001, Southern Company--in partnership with the
eight other transmission owning utilities in the Southeast--was
negotiating and was close to completing a formal agreement to cover the
initial costs of RTO development and establish a decision-making
structure. We had also hired an independent facilitator and established
working groups to develop detailed market and operational protocols.
On July 12, 2001, the FERC rejected Southern Company's Status
Report and issued an order requiring jurisdictional utilities that were
in the process of forming separate RTOs in the Southeast to enter into
a 45 day ``mediation'' process to merge the separate entities into a
single Southeastern RTO. The implementation of this mediation process
was a deviation from FERC's previous policy direction and applied not
only in the Southeast, but in the Northeast as well. Specifically, the
parties asked to merge their efforts were SeTrans, GridSouth, and
Entergy. In addition, GridFlorida and the Southwest Power Pool (SPP)
were invited to participate, but they were not required to participate.
Also invited (but not required to participate) were state commissions,
non-jurisdictional utilities (municipal utilities and cooperatives,)
TVA, the Southeastern Power Administration, and all intervenors in the
dockets related to these RTOs. About 200 people participated in the
mediation that was led by a FERC administrative law judge (ALJ) with
consulting assistance.
the mediation process
The mediation was subject to a confidentiality rule invoked by the
ALJ. We provide here just a broad overview of the issues and a short
summary of the mediator's report, which was made public on September
10, 2001.
The Southeastern mediation focused on the form of governance, the
market model to be adopted, how congestion pricing should be done,
transmission pricing, and other required functions of RTOs, as laid out
by FERC in Order 2000.
While the mediation began with a discussion of four different
models (SeTrans, GridSouth, GridFlorida, and a combined Entergy/SPP
proposal), the discussion narrowed down to only two options. These are
(1) a Transco (independent transmission company) type model, and (2) an
independent system administrator model (also know as the independent
third-party operator model) that has been supported by the SeTrans
group.
The Transco proposal has an RTO that is managed by a new entity
that is formed via the investment on a passive basis in a limited
liability company (LLC) with the anticipated divestiture of
transmission by one or more parties to the LLC. Until actual
divestiture of transmission assets, a Board of Directors that is
selected through a fairly complex stakeholder process governs the new
Transco Company. Initially, the Transco Company is owned by the
utilities that have invested in it, with the percentage of ownership
being based on the proportion of the amount invested. The transmission
assets of a utility can be transferred into the LLC with the passive
ownership of the divesting utility's ownership interest in the LLC
increasing proportionately. Eventually, the Transco might be ``sold''
to investors through an initial public offering, at which time, the
Board of Directors for the Transco would be elected by shareholders.
The SeTrans System Administrator Model, on the other hand, would
have a proven, experienced independent third-party transmission
operator that would be hired by the transmission owners to operate an
RTO that meets all of the requirements of FERC Order 2000. The System
Administrator would have operating contracts, approved by FERC, with
each of the participating transmission owners that would be similar,
but that could contain certain terms and conditions specific to the
needs of individual entities (particularly municipals and coops.)
The System Administrator would not own any transmission, and thus
would not be biased in any way towards its own transmission or against
that owned by others. However, the System Administrator would still be
a for-profit company with a balance sheet substantial enough to meet
its' commitments. It would receive a management fee for performing RTO
functions, and would have profit incentives (and penalties) to operate
reliably and efficiently. We believe the for-profit nature of the
System Administrator is essential to making performance incentives
work. The System Administrator would be hired for a five-year term with
extension provisions, but could be fired for cause with FERC's
permission.
Although there may be some surface similarities, there are
fundamental differences between the two models. First, the Transco is a
start-up company with an independent stakeholder-selected Board, with
the option to turn it into a shareholder elected Board if an IPO
occurs. The System Administrator, on the other hand, is an already
existing, proven company, independent from all market participants,
that has its own Board of Directors and shareholders already in place,
and has contractual incentives to operate reliably and efficiently.
The second fundamental difference is in asset ownership. The
Transco is specifically set up as a repository for divested
transmission assets, and earns a return on those assets. Under the
System Administrator model, all transmission assets remain with
others--although independent Transcos would certainly be able to
participate on the same basis as other transmission owners.
The mediator's final report discussed some of the pros and cons of
both models, but in the end recommended adoption by FERC of the Transco
model, with some modifications that were discussed during the mediation
process. The mediator believed that of the two models, the Transco
model ``is better developed and more clearly in compliance with
requirements of Order 2000 based on a `best practices analysis' of
other RTOs which have received Commission approval and prior Commission
precedent with respect to the current filings.'' We continue to
believe, however, that the System Administrator model offers the
greater flexibility, is immediately more efficient, and can accommodate
the requirements of all transmission owners and other stakeholders. We
clearly disagree with the judge's findings.
The Commission has not yet acted on the mediator's report, but
there are indications that it will act within the next several weeks.
southern company position
Southern Company actively participated in the mediation process. We
are continuing to support the SeTrans model with the other SeTrans
participants. We are extremely wary about turning over control of our
assets and the reliability of our system to an entity that does not
have a Board with direct fiduciary responsibility to anyone for the
assets under its' control, as would be the case (at least until an IPO
occurs) with the Transco model. We are also concerned about having our
assets managed by a company that also owns transmission assets.
Questions arise as to whether the Transco might favor its own assets.
Finally, we are concerned about turning operation and control of
transmission and system reliability over to a new, unproven entity. We
prefer an experienced operator. Thus, we have made it clear that the
Transco model, as currently constituted, is unacceptable to Southern
Company. However, we do believe that Transcos can and will develop
under the SeTrans governance model. We are certainly not opposed to
for-profit transmission companies (Transcos), and we would like to
retain that as an option for ourselves for the future.
Another reason for support of the SeTrans System Administrator
model is that it is the only model within which public power entities
have said they can participate. Participation of public power is
critical in our service area because of their significant ownership of
transmission. Public power is very wary of turning control of
transmission over to an entity that also owns transmission. In some
cases, they believe it violates their charters or other legal
requirements. Without their participation, any RTO in our region would
be riddled with holes--like Swiss cheese--and unable to perform all of
its intended functions.
In addition to these matters, we have some even more basic
concerns. Southern Company supports the concept of RTOs and believes
they can improve the efficiency and reliability of wholesale power
markets. However, we are not yet convinced that a super-sized, single
RTO for the Southeast is in the best interest of the customers that we
serve or our shareholders.
Clearly, as proposed RTO sizes become larger, local control and
interest on the part of the RTO operator will become more diffuse. It
is unclear whether a system operator overseeing the entire Southeast
will be able to deal effectively with local reliability problems. For
example, would an operator in North Carolina be able to assess and deal
with a reliability issue in South Florida or Mobile, Alabama, as would
a smaller RTO with more intimate knowledge of local conditions? And a
very large RTO will be expensive. We don't have any idea, at this time,
whether the proclaimed benefits of a very large RTO outweigh the costs.
In fact, to our knowledge no one has yet done any cost-benefit or other
analysis on the proper size and scope of RTOs in the Southeast.
For these reasons and others described below, Southern Company
sought rehearing of the July 12 Commission order to negotiate a
Southeastern RTO as have many of the other SeTrans participants and
almost all of the state commissions in the Southeast. We believe that
such a rehearing petition will preserve our legal options. While
neither the FERC nor individual commissioners have publicly stated that
a single RTO will be ordered if the parties don't come to voluntary
agreement, that is certainly a course that industry observers expect
FERC to take. Even if there is not a direct order to participate, there
are increasing signals that regulatory pressure may be brought to bear
on transmission owners who oppose FERC-prescribed solutions.
Again, it bears emphasizing that our problem is not with the RTO
concept. As discussed above, Southern Company has planned to join an
RTO for over two years now and has been working diligently towards that
goal. Indeed, we have helped lead an effort that has attracted
substantial public power support--something that few other RTOs in the
country have done. Nonetheless, we are opposed to FERC mandates that
determine what the RTO should look like, what area it should cover, and
how it should operate. If both FERC and the Congress allow voluntary
negotiations to continue--consistent with FERC objectives--along the
path adopted in Order 2000, the nation will end up in a far better
place than if RTO mandates come from Washington. We do not believe that
there should be a concern that too many RTOs will be formed. Even
before the July 12th orders, there were a maximum of 14 separate RTOs
being formed, and talks were already under way to consolidate several
of them. And to the extent there are ``seams'' issues regarding
differences in markets within the separate RTOs, those seams issues
could be dealt with, as the FERC Chairman acknowledged in his testimony
before this Committee on September 20th, by FERC rules that would
require common market procedures among RTOs.
Our clear preference is to be allowed to continue to negotiate with
our public power partners and neighboring investor-owned utilities to
perfect an RTO proposal that has sufficient scope, meets all of FERC's
Order 2000 requirements, and is acceptable to our state regulators.
State commissions throughout the Southeast, including Alabama, Georgia,
Mississippi, North Carolina, South Carolina and Louisiana, all filed
requests for rehearing or clarification of FERC's July 12th order.
Three states--North Carolina, Louisiana and Florida--have opened
regulatory dockets to examine whether the costs of RTO participation
are prudent with respect to the pros and cons of RTO participation for
the retail customers of jurisdictional utilities. All of the state
commissions in the Southeast have taken a very strong position that
FERC should not mandate a broad regional RTO until the costs and
benefits to ultimate consumers have been carefully evaluated.
Southeastern state regulators, legislatures, and consumers are all very
much opposed to retail consumer choice at this time, and are concerned
that while not directly linked to customer choice, mandated
participation in RTOs will lead to that result. We fear that FERC's
current path towards mandating very large and broad RTOs will cause
irreconcilable differences with state commissions. Clearly if an RTO
doesn't work as expected or the costs and benefits are out of line, we
will be held accountable by our retail customers via our state
regulators.
Southern Company has established a list of principles that are
critical with respect to our participation in an RTO. These principles
are set forth below:
<bullet> The RTO must meet the basic requirements of FERC Order 2000.
<bullet> The benefits of RTO participation to our retail customers must
exceed the costs.
<bullet> The scope of the RTO must not prevent the RTO from being able
to maintain regional and local bulk power system reliability.
<bullet> The RTO should be a for-profit entity with incentives (and
penalties) to ensure optimal performance with respect to
reliability and cost effectiveness.
<bullet> The RTO should have a Board of Directors that is accountable
to its shareholders and has a fiduciary responsibility to the
performance of the RTO.
<bullet> The RTO should be comprised of a third party operator with
actual operating experience, as opposed to a newly created and
untested entity.
<bullet> The RTO development process and structure must accommodate
participation by all transmission owners, including public
power, electric cooperatives, investor-owned utilities, and
Transcos.
<bullet> The Third Party Operator must be independent of all market
participants and transmission owners, thereby avoiding the need
for complicated safeguards to ensure independence.
<bullet> The RTO must facilitate entry of other, and perhaps new forms
of transmission owners, including Transcos, to ensure that
needed transmission facilities will be built.
<bullet> The RTO must use operating agreements that, although
substantially similar, will accommodate the legal and
institutional requirements of all participants.
<bullet> The RTO must be acceptable to state regulators.
We continue to believe that the proposed SeTrans RTO will best
satisfy these objectives and should be allowed to reach fruition. At
this time, there is no need for a FERC mandate, or for additional
authority to be granted to FERC. Indeed, such action would likely be
counter-productive.
Southern Company also supports the tax provisions included in H.R.
4 that would make it possible for transmission owners to sell or spin
off transmission to new corporate organizations without incurring large
tax liabilities. While Southern does not currently plan to divest
transmission, it should be retained as an option for the future.
do very large rtos or a national grid make sense?
The desire to move towards a ``national grid'' or very large RTOs
in this country must be tempered with economic and technical realities.
The term ``national grid'' itself is a misnomer. Some who use the term
use it as a rationale for socializing interconnection and transmission
costs among all consumers, regardless of the benefits they receive. It
does not make sense--from either an economic or reliability standpoint
to ``nationalize'' the transmission grid. Having a centrally controlled
grid is not feasible or desirable form the point of view of system
security and reliability as discussed below. Nor does it make economic
sense to remove all bottlenecks and congestion from the transmission
system, because, in most cases, it is much less expensive to locate
generation on the unconstrained side of the system, rather than
building transmission to alleviate the constraint. In the Southern
Company system alone, we have estimated that the costs of removing all
bottlenecks could be $12 billion, with commensurate rate increases to
our customers of over 30%. Thus, to argue that the cost consequences of
a ``national grid'' are inconsequential, as some have, clearly
stretches the bounds of reason.
Furthermore, not all consumers benefit from transmission system
upgrades, and should not be required to pay for system enhancements for
which they receive no benefit. Only by requiring that cost causation
principles be used--i.e., that those who create costs should pay for
them--will true economic efficiency occur. Competitive wholesale
markets can benefit consumers--but only if competitors face the true
costs of decisions they make. Markets that are haphazardly designed by
bureaucracies, without careful attention to all potential consequences,
are doomed to failure.
A primary argument used by proponents of broad regional or national
grids is the notion that the transmission grid is like a lake, where
elections are injected into the grid at one point to form a ``pool'' of
electrons. Under this analogy, users can take electrons out of the
``lake'' from any point as needed. Under such a vision (mistaken we
believe) there would be no limit to the practical size of a grid,
because there would be no cost of transportation (transmission) of
electrons--in fact, electrons would not be transmitted at all--and
there would be no added complexities in grid operations. The ``lake''
analogy, however, is seriously and dangerously misleading.
The use of the ``lake'' analogy as support for broad geographic
RTOs or a national grid represents a misunderstanding of how the bulk
power system works. The fundamental problem is that a lake by its very
nature is a storage medium for water. Thus, water can be ``injected''
into the lake when it rains (or when water from river flows into the
lake) and then taken out anywhere from the lake as needs arise. If
there is more supply than demand, the lake level simply rises. If
demand is greater than supply, the lake level lowers. In either case,
the system remains stable.
Electricity, however, cannot be stored. There is not an equivalent
``lake'' where power can be injected at one point and taken out at
another. Power must be produced at the instant it is needed. Power from
specific units is required to meet specific customer needs. While the
customer may not use the exact same electrons that are generated for
the customer's use, generation must be increased to meet a specific
customer's increase in demand, and generation must be decreased when
specific customers reduce demand. If supply and demand is not kept in
constant balance, the system will become unstable and widespread
blackouts can result. The specific generation to be increased in
response to a customer's increase in demand must be decided by the
system operator so that specific transmission lines are not overloaded,
consistent voltage is maintained and system stability is achieved. The
operator also has to do all this in the least costly manner possible.
Thus, it is not the case that power can be injected (generated)
anywhere in the system and taken out anywhere, at least not without
very costly reliability consequences.
An additional complicating factor in the electric system is
something called reactive power. Reactive power is a product of the
production of alternating current (AC) power, and must be supplied to
run all motors that are connected somewhere in the grid. Reactive power
does no useful work and does not exist as a product that can be
separated from the ``real'' component of power, but the system can't
operate without it. Operators have to ensure that reactive power is
sufficient on a moment-to-moment basis. And unlike the ``real''
component of power, the reactive component of power can not be
transported over long distances. Again, the ``lake'' analogy ignores
the need for and nature of reactive power.
Power (although not necessarily electrons) does flow from specific
generators to specific customers, over multiple paths (based on the
laws of physics, power will flow from generation to load over the paths
of least resistance.) A simplified example may help to explain how this
works. Suppose an island utility (to eliminate the effects of
interconnected systems) has a demand of exactly 100 MW at 1:06 PM. The
utility will be generating 100 MW (actually slightly more because of
losses) at that time. Suppose at 1:07 PM a local industrial customer
starts up its assembly line and in an instant the customer's demand
jumps to 110 MW. Generation at the utility must instantaneously
increase to match the increase in demands of 10 MW. The specific
generating units to be ramped up again depends on the condition of the
transmission system at that moment. The utility will be constantly
monitoring the system to determine whether transmission lines can
handle additional power. Because power cannot be directed to flow over
specific lines, operators can only adjust flows on transmission lines
by adjusting where power is generated. Thus, generation might actually
be ramped up by 15 MW at one unit and ramped down by 5 MW at another
unit to provide the 10 MW.
In this simplified example, nothing else on the system has changed.
Thus, the additional 10 MW of power will be injected into the grid to
specifically meet the 10 MW of new demand, and the additional 10 MW of
power generated will flow directly to that customer.
The actual system is much more complicated in that demand is
constantly changing. Some generators can react to changes on the demand
faster than others, and systems are interconnected so that changes in
the utility will affect other utilities with which that utility is
interconnected. Also, most of the matching of supply and demand is done
by computers although human operators can and may have to intervene.
The point of this discussion is to demonstrate the complexity of
the grid and associated operational issues. Trying to maintain
reliability over a small area is difficult enough. Trying to operate
the system over a whole interconnection would be either impossible or
extraordinarily expensive and complicated. The optimal size for a
``control area'' (a control area is the geographic area within which a
single operator has control) or an RTO is difficult to determine and
can depend on many factors. The biggest factor is the capability of the
interconnections between utilities. If interconnections are weak, there
is probably little trade between the utilities and little economic
value to expanding the size of the control area or the RTO. From a
technical standpoint, control area or RTO size is also limited by the
capability of computers, software, metering and telecommunication among
utilities. To change the control area size arbitrarily and without the
knowledge of the control area parameters will likely increase costs to
customers.
Taken together, all of these issues--both technical and economic--
suggest that broad geographic RTOs or a ``national grid'' may create
more problems than they solve. The optimal size for RTOs, while
difficult to determine, should be based--as FERC suggested in Order
2000--on logical market areas and on the strength or weakness of
interconnections among sub-regions. Optimal size is also a function of
technical limitations and costs. And broad RTOs raise pricing issues
that must be resolved. But perhaps most importantly, the markets
themselves should be allowed to determine appropriate RTO boundaries.
As markets develop, RTOs will merge, break-up and reconfigure, as
market needs dictate. Setting RTO boundaries by legislative or
regulatory fiat would set in concrete boundaries that may or may not be
the right ones. Furthermore, it has been demonstrated that seams
agreements and reciprocity agreements among RTOs can achieve all of the
same objectives as broader RTOs, perhaps at much lower costs. The key
is to preserve flexibility as we learn more about markets and how they
are working.
Implementation of very large RTOs or even a ``national grid''--in
particular the concept of collapsing the whole United States into just
a few electrical control areas--also has reliability and security
implications that are particularly critical. These issues and concerns
are not and should not be considered to be a barrier to RTO formation.
They are, however, issues that should be addressed in determining the
proper scope, configuration and market structure for RTOs.
The transmission grid in North America has evolved over many years
with one primary objective in mind--to reliably connect local area
generation to serve local area load. Interconnections with neighboring
systems were also developed to provide limited backup for unplanned
contingencies. Market forces today require that the transmission system
be used in ways it was never designed for in support of long distance
energy transactions with flow patterns varying from day to day. These
new uses for the transmission system complicate the jobs of security
engineers and operators, and stress the lines and substations designed
to serve area loads.
Today, reliability management begins with the transmission planning
studies designed to connect existing and forecasted generation to
existing and forecasted loads. Load serving entities such as Southern
project forecasted load growth and transmission planners run
contingency studies separately and jointly with neighboring systems to
determine the least cost transmission solution required to meet
projected needs. Additionally, any known firm transmission commitments
for point to point service are included in the base transmission plan.
For the projected load and generation plus the set of contingencies
modeled, these studies will define the transmission additions required
to avoid thermal, voltage, and stability constraints.
Once the transmission additions are constructed--which may follow a
protracted siting process--operations engineers manage the day to day
operation of the system using load flow programs with contingency
analysis. This type analysis is critical to reliability management by
ensuring that the existing system configuration is always operated to
withstand the next planning contingency. By measuring actual flows on
transmission lines, the real time load flow includes the effects of
loop flows from other systems and can immediately analyze new
configurations as lines and generators trip or are placed in service.
These load flow analysis tools are also used to calculate total
transmission capacity for commercially important points of receipt and
delivery on the transmission system. These values are posted on an
electronic bulletin board (OASIS) and adjusted as transmission
capability is sold or added. As additional transmission capability
requests are made, security analysis is performed to ensure that
adequate transmission capability exists to honor the requests.
As transmission constraints appear, the Security Coordinator with
responsibility for that area determines the appropriate action to
relieve the constraint. The Security Coordinator may use local
procedures, including reconfiguration of the system, redispatch of
generation, or curtailment priorities using contractual agreements to
relieve identified constraints. If local procedures are not sufficient,
the NERC line loading relief program will be implemented to curtail
lower priority energy transactions contributing to the constraint. This
process has resulted in one of the most reliable electric power systems
in the world.
The implementation of a single RTO in the Southeast or even for the
entire eastern interconnection raises a number of reliability
management issues. As discussed, these issues can be addressed with
careful organization and delegation. If these issues are not properly
resolved, large area management of reliability will certainly result in
reduced reliability, less than optimum use of the transmission grid,
delay in addressing constraints and potential cascading outages.
Large area reliability management will require that methods be
developed to preserve or provide: local knowledge, observability,
forecasting, control, and governance that allows hierarchical decision-
making.
No matter how the RTO is structured to manage grid reliability and
no matter how large an area it covers, we can maintain reliability at
the lowest overall cost to consumers through the following actions:
1. Locate generators near loads: Consider two extreme cases. In Case 1,
generating plants are widely distributed across the system to
match the distribution of load. Generation near each load
center is capable of serving the load in that area and
transmission capacity exists to back up local generation (and
to import lower cost power to the area for economic reasons.)
In Case 2, generation is located far from load centers near
fuel sources and large amounts of power are moved to major load
centers on a routine basis.
In the real world, neither extreme case will exist due to
practical constraints ranging from environmental restrictions
on locating plants near major cities, to the feasibility of
siting and constructing transmission to support Case 2. But
clearly the system will be more reliable and less costly if
generation is more widely distributed as described in Case 1.
Unfortunately, current FERC policy will not lead to this
preferred result. The reasons will be discussed later in this
testimony.
2. Do not overly centralize control: As more and more control of the
electric system is consolidated for larger and larger
geographic areas into one location, the opportunity to have
major wide spread control failures becomes more probable. If
the large area RTO implements a single control system for the
entire area, a single point failure (or catastrophic event)
that disables this system and any back-up systems, will leave
the entire area with no control options and will certainly
reduce reliability. Smaller RTOs (or at a minimum, hierarchical
control areas within a larger RTO) would limit this exposure
the same as distributed generation limits exposure to
transmission failures. Clearly, there is a tradeoff between
larger RTOs for market efficiencies and smaller RTOs for local
control and reliability. The proper balance can be found. But
it is our judgement that at least initially, smaller RTOs--with
close coordination among RTOs--is a better near-term solution
than immediate implementation of the huge RTOs currently being
considered by FERC.
FERC should not mandate the boundaries for RTOs, nor should
Congress give FERC such authority. Rather, FERC--as it did in Order
2000--should express its objectives for RTOs and then let market forces
and regional circumstances dictate the appropriate size, scope and
configuration based on natural markets, reliability and security
concerns and trading patterns. It was this direction in which we were
headed--successfully, we believe--before the FERC actions of July 12th.
Another critical component to maintaining reliability, whether in
RTOs or otherwise, is to ensure that there are enforceable reliability
standards. Congress should pass legislation that would allow
reliability standards to be established and enforced by a self-
regulating reliability organization, with FERC as a back-stop. In this
regard, we support the reliability provision in the Chairman's
discussion draft.
making markets work--open access and pricing
If we are to rely on a competitive wholesale market for a good part
of our future needs--and Southern plans to do so--we need to focus on
how to ensure that such markets will operate efficiently and reliably.
As stated earlier, getting markets to work efficiently by proper
pricing of transmission is critically important to ensuring low costs
and reliable service to consumers. Very large RTOs as suggested by
FERC, without proper attention to how pricing will work, could have
severe unintended consequences from both a cost and reliability
standpoint. While transmission pricing was a specific subject of this
Committee's previous hearing, we believe the relationship of pricing to
RTO scope and configuration is critical to the long-term success of
RTOs and worthy of further discussion here.
FERC has indicated that one of its main objectives for very large
RTOs is to eliminate pancaking--the charging of multiple transmission
rates as you cross transmission owner boundaries. While that may
``sound'' like a good idea, the truth is that eliminating pancaked
rates and replacing them with a single postage stamp rate for a large
region is exactly the wrong way to go. A postage stamp rate ignores the
fact that it costs more to transmit power over longer distances than it
does over shorter distances. More facilities are used for power
transmitted longer distances, and losses increase as well.
The problem is made more complicated simply because not all areas
of the country are created equal in terms of utility size. In the
Northeast, for example, you may have 50 utilities in a single state,
meaning that a wheeling transaction could require transmission service
agreements with multiple utilities just for short distance service. In
such cases, it may make sense to eliminate pancaking.
In the Southeast, however, we generally have very large utilities,
as is certainly true in our case, which may span several states. If we
had a single RTO with postage stamp rates in the Southeast that
included Entergy, than the price would be the same to wheel power from
southeast Texas to the Outer Banks of North Carolina as it would be to
wheel power from the Atlanta suburbs to Atlanta. That just does not
make good policy or economic sense, yet FERC appears to be headed in
just that direction.
The fact that under a postage-stamp rate, short-distance services
subsidize long-distance services is only a part of the problem. Our
greatest concern, and one that we believe you should share as well, is
that it sends the wrong price signals to generators seeking locations
for new plants. If it costs generators the same to transmit power over
long and short distances, then it is axiomatic that generators will
locate closer to the fuel source rather than closer to the load in
order to save on fuel transportation costs. But locating further from
the load means that more transmission facilities will be used and that
new transmission facilities will be needed sooner than they otherwise
might have been--it costs more to transmit over longer distances than
it does over shorter distances, even ignoring electrical losses that
occur on the transmission system.
The price signals and location decision-making resulting from
FERC's current policies are in direct contrast with the historical
method of electric system planning, where generation sites are compared
based on total costs--including the trade-off between pipeline or coal-
by-rail transportation costs and incremental transmission costs. And as
discussed above--remember Case 1 and Case 2--the system will be
inherently less reliable.
Proper transmission price signals are also essential to the
effective deployment of distributed generation. If transmission users
see the true costs of their use of the transmission system, then they
are more likely to look at distributed generation as an alternative.
Without proper price signals, there is no way to know whether
distributed generation is an effective alternative to transmission
investment.
FERC's current pricing policy means that we may will be faced with
more demand for new transmission facilities than would be the case if
the true cost of transmission were properly considered in locating new
generation. In our region in particular, we are concerned about the
feasibility and cost to retail customers of constructing transmission
on such a massive scale.
We are already planning to spend about 3 billion dollars (compared
to a book value of current transmission assets of 3 billion dollars) on
upgrading the transmission system just to maintain reliability and to
accommodate generation now under construction over the next five years.
Having to build new transmission for even more generating facilities
that are locating away from load centers because of inappropriate price
signals will significantly increase these investment levels, not to
mention the problems of siting and constructing this transmission.
Network transmission improvements for all the new generation that we
believe is probable over the next five to eight years will cost an
additional 3 billion dollars, increasing our total transmission
investment from today's level of 3 billion dollars to a total of 9
billion dollars. We don't know how much proper price signals would
reduce that amount, but we can be sure it would have substantial
beneficial effect.
Consumers would ultimately pay for this transmission investment. It
is not at all clear to us that added generation efficiencies from an
expanded wholesale market will be sufficient to offset these added
costs. We often hear that because transmission is such a small
proportion of total costs relative to generation that the savings
inherent in large wholesale generation markets will outweigh any
potential increased transmission costs or transmission inefficiencies.
If we were forced into building a whole lot of new transmission because
of inefficient generation location, then it is clear that the costs of
transmission will no longer be small relative to generation, and in
fact may outweigh generation costs at the margin--particularly when
siting costs and reliability issues are factored in.
The problem is exacerbated because FERC's pricing policies have not
been consistent between gas pipelines and electric transmission. Gas
pipeline pricing is generally distance sensitive, while electric
transmission is not. Thus, electric generators can locate close to the
gas fields and avoid distance sensitive pipeline charges, and then
transmit the electricity to the load over a long distance at a postage
stamp price. Again, the result does not make sense and does not
efficiently allocate capital between these two competing forms of
energy infrastructure.
The bottom line is that before FERC revises its RTO policies and
sets boundaries, it ought to spend some time getting transmission
pricing right. If large RTOs are formed under current pricing policies,
we may end up over-spending for new transmission facilities and putting
generation in the wrong locations. And with FERC's policy of rolling in
the costs of most incremental transmission facilities, our retail
consumers will bear a large proportion of those costs with little or no
benefit.
Another important transmission access issue is the application of
open access rules to all utilities. We believe that all transmission-
owning utilities--including municipals, cooperatives, federal power
marketing administrations and TVA should be subject to the same rules
for open access. Our preference would be that all utilities be made
subject to the Federal Power Act. However, if the ``FERC Lite''
concept--which only gives FERC the ability to remand open access
tariffs back to the transmission owner is to be adopted--we remain
concerned that there is no way for FERC to ever ensure comparable open
access by non-jurisdictional utilities. There could be an infinite
loop, where the non-jurisdictional utility never provides a
satisfactory tariff to the Commission. There must be some teeth to the
Commission's enforcement authority with respect to all utilities.
interconnection standards and cost allocation
Another issue that concerns us with very large RTOs is the issue of
generation interconnection. With so much new generation being built in
the Southeast, the question of who gets interconnected, in what order,
and who pays for interconnection costs are becoming increasingly
important.
The discussion draft of legislation circulated by the Chairman
contains interconnection provisions which we can support, mostly
because it requires generators (or their customers) to pay the direct
costs of interconnection. We would, however, also like to see
provisions in legislation that would require generators to pay
transmission system upgrade costs when such upgrades would not have
been required but for the generation. One proposal that merits
attention is ``participant funding'' of transmission upgrades.
Participant funding would allow the generator or transmission service
applicant to pay for the costs of new transmission, in exchange for
which they would receive rights to use the transmission system without
paying congestion costs. Such rights would have a value equivalent to
the transmission investment made by the market participant.
The Chairman of FERC has publicly indicated that he would like to
see a change in FERC's transmission interconnection policies with
respect to cost allocation. In the past, generators wishing to
interconnect with the utility system would themselves be responsible
for direct interconnection costs. If network improvements were also
needed, FERC has relied on its ``or'' pricing policy--i.e., the
generator would pay embedded costs or incremental costs, whichever is
greater. More recently, the Commission indicated in Order 2000 that
perhaps in the RTO context, ``and'' pricing would be more appropriate,
meaning that generators would pay for their use of the existing
transmission system and for any network upgrades they cause.
The FERC Chairman has indicated that he disagrees with these
policies, and that he would like to see both direct interconnection
costs and network upgrades rolled into overall transmission rates and
paid for by all load using the transmission system of the
interconnecting transmission provider. In other words, even if a
generator locates in Georgia to sell to load in Ohio, retail customers
in Georgia (and everywhere else in the Southeast) would pick up a share
of the interconnection costs. The implication of this potential change
in policy of shifting costs from wholesale generators to retail
customers is clear. The problem is particularly acute with large RTOs,
because customers may have to pick up more of the costs of transmission
than they would have needed locally. Given the very large number of
merchant plants being built in the Southeast, a shift in policy to
require all load within an RTO to pay the interconnection costs of new
generators will have a significant cost impact on our retail customers,
and will certainly cause new generators to be less concerned about the
costs they impose on the electric system.
And again, there are inconsistencies with gas pipeline practices at
FERC. When an industrial customer or gas well wants to hook up with the
interstate pipeline system, they are almost always required to pay the
cost of the connections. It would be unthinkable in the gas industry to
have an industrial customer tie into the pipeline system for its own
use and have all other customers pay for it. But that is no different
than allowing generators to interconnect and having customers who
receive no benefits from that generation pick up the tab. We would urge
Congress to make it clear that those who benefit from interconnections
and transmission upgrades should be the ones who bear the costs.
jurisdictional issues
The final issue that we'd like to address is the tension between
state and federal jurisdiction. This state/federal jurisdiction issue
will not only be a major topic of debate in Congress and at FERC, but
also now the Supreme Court has the issue squarely before it. Southern
Company believes that states should continue to have authority over all
aspects of bundled retail sales, including transmission. Some would go
further (as NARUC has) and retain state jurisdiction for unbundled
transmission services when the buyer and seller are in the same state.
At the other end of the spectrum, some argue that FERC should have
jurisdiction over all transmission, whether it's used for wholesale or
retail, bundled or unbundled.
This debate is about much more than turf. The real underlying issue
is who gets priority use of the transmission system during periods of
constraint or emergency. And whether utilities can reserve enough
capacity on the transmission system to meet their native load needs
before offering capacity to others. Clearly, those advocating federal
jurisdiction would like to have all uses of the transmission system on
an equal footing. But this ignores the fact that the transmission
system was specifically built to serve our native load customers and we
continue to have a legal obligation to serve retail customers in states
that have not opened to retail competition.
This issue is at the heart of state commissions' concerns over
giving FERC authority to regulate the transmission portion of bundled
retail sales. It is the job of state regulators to protect the
interests of in-state customers. We believe these customer interests
can be served without constraining interstate commerce by leaving
jurisdiction over bundled retail sales to the states. We do not believe
that more authority at the federal level, at the expense of the states,
is warranted.
A second jurisdictional issue of importance is market power
mitigation. Congress will be considering bills that give FERC broad new
authorities for investigating and mitigating market power, both at the
wholesale and retail levels. We believe FERC and the states already
have sufficient authority to prevent and remedy market power problems.
FERC, certainly, can withhold authority of any supplier to sell at
market-based rates. But some believe FERC should also have the
authority to order suppliers to divest generation. Such authority would
clearly usurp traditional state jurisdiction over generation. If given
this authority, FERC might try to require divestiture of plants, even
where those plants are needed to serve retail customers in states
without customer choice. Furthermore, there is no other federal agency
that has authority to order divestiture of assets by market
participants. We believe such authority is unnecessary, and will again
lead to numerous federal/state conflicts.
conclusions
The issues currently being considered by this Committee in
developing electricity legislation will have profound effects on the
industry for years to come. We believe that Congress can best ensure
the efficient and reliable development of competitive wholesale
electric markets by:
1.Continuing to allow RTOs to develop successfully under FERC Order
2000 in a manner consistent with market needs and regional
circumstances. Congress should refrain from giving FERC
authority to mandate RTOs, and in fact should encourage FERC to
continue along the path it started with Order 2000.
2. Providing guidance to the FERC on transmission pricing, to ensure
that federal pricing policies lead to sufficient investment in
transmission and ensure that pricing signals provided by
transmission lead to the efficient development and location of
new generating sources. Congress should also ensure that FERC
pricing policies do not allow for cross-subsidization among
electric customers or groups of electric customers.
3. Ensuring continuation of the proper historical boundaries between
state and federal jurisdiction, by leaving with states the
ability to regulate all aspects of retail sales, while
providing mechanisms for more effective coordination and
cooperation between state and federal regulators. If states and
FERC are constantly at odds, there will likely be little that
gets accomplished, no matter how much authority FERC has been
granted. There are appropriate roles for both state and federal
regulation in the emerging utility markets, and these roles
should be respected.
4. Adopting authority for a self-regulating reliability organization to
adopt and enforce reliability standards with appropriate FERC
review. It is imperative that reliability and security of the
nation's electric power supply system should remain our number
one priority.
5. Providing that all transmission-owning utilities abide by the same
regulatory rules.
6. Removing federal barriers to effective competition by repealing
PUHCA and PURPA, and removing tax barriers to forming new
corporate structures for transmission ownership and investment.
The greatest concern we have with respect to industry restructuring
is of unintended consequences. California is certainly the best example
of what can go wrong when the momentum of a process overtakes good
reason and careful forethought. We need careful thought on all of these
industry restructuring issues before we move forward. It's the classic
case of not being able to unscramble the egg once its been scrambled.
We fear that we are all moving forward on a fast track without having
reviewed the potential unintended consequences. We should move forward
in restructuring, but in a deliberate, thoughtful manner. And we should
always put consumer interests at the top of our lists. The costs and
benefits to consumers of all restructuring policy options need careful
review. And such review should occur before we make critical structural
changes to the electric utility industry that can not be reversed.
Mr. Barton. We thank you, Mr. Franklin.
We now want to hear from Mr. Peter Flynn, who is President
of New England Power Company up in Massachusetts. We'll get a
little bit different of a regional perspective, I'm sure.
We welcome you and put your statement in the record, and
ask you to elaborate on it for 5 minutes.
STATEMENT OF PETER FLYNN
Mr. Flynn. Thank you very much, Mr. Chairman.
New England Power Company is the principal transmission
subsidiary of National Grid USA. And I am appearing today in
place of Richard Sergel, President and CEO of National GRID
USA. Mr. Sergel provided the committee with written testimony
in advance, and I'll be testifying consistent with his prefiled
testimony.
Let me begin by explaining that National Grid USA is in the
transmission and the distribution business in the United States
and in the transmission business in other countries. We have no
aspirations to be in the generation or wholesale power sales
business. In fact, we're getting out of that business. So I
come to you today offering the perspective of a company that
intends to be and wants to be in the wires business.
I offer three observations for the committee's
consideration.
First, we believe that time is of the essence to take
actions that will foster the development of workably
competitive wholesale markets. We are encouraged by recent
statements by the Chair of the Federal Energy Regulatory
Commission that indicates that that agency is ready to move
forward and aggressively pursue the formation of regional
transmission organizations, RTOs. And we believe that's a good
thing. However, there were some actions that only this Congress
can take, and key among them would be the removal of existing
tax disincentives for the sale of transmission assets.
The single most important thing that Congress can do to
foster the development of independent transmission sector would
be to remove that tax disincentive.
Second, the transmission sector is currently evolving. Some
believe it will evolve to a structure that will be governed by
not for profit entities. Others believe it will evolve to a
structure that in which transmission will be governed by
investor owned transmission companies operating under incentive
rates.
Our experience is that the business form will be better
able to attract the investment and provide the innovation that
will provide benefits for customers. We submit, however, that
policymakers today need not choose between those two
alternative structures provided that independent transmission
companies operating under incentive rates have the opportunity
to develop, the marketplace will ultimately choose the
structure that best provides benefits to consumers.
We urge Congress to ensure that independent transmission
companies have an opportunity to develop and Congress could do
that be enacting legislation that urges FERC to adopt incentive
rates that will attract new investment and foster renovation.
My third and final observation is that transmission must be
independent, but not impudent. Independence is critical. Some
argue, however, that independence requires a form where the
entity managing the grid takes an almost hands-off approach to
new investment. They argue that investor owned transmission
companies will over invest in the grid. We disagree with that
argument. In fact, we believe that the transmission grid is the
essential highway that will allow competition in wholesale
markets to occur.
The danger is not that the grid will be overbuilt. The
danger, we submit, is that transmission investment will
continue to lag. And we suggest that policymakers should avoid
relegating transmission owners to a passive ownership role
only.
Thank you, Mr. Chairman. And I look forward to answering
any questions that the members may have.
[The statement of Richard P. Sergel follows:]
Prepared Statement of Richard P. Sergel, President and CEO, National
Grid USA
Thank you for giving me this opportunity to appear here today to
discuss transmission issues related to electric restructuring. I am
President and CEO of National Grid USA, the US affiliate of National
Grid Group. National Grid Group is the leading provider of independent,
for profit transmission in the world.
In the UK, National Grid owns and operates the 4,500 mile high-
voltage transmission network in England and Wales, as well as
interconnections with France and Scotland. Since privatization in 1990,
National Grid has reduced controllable costs on the UK grid by over 50%
in real terms, and saved a further <brit-pound> 1 billion by reducing
congestion on the system. At the same time, National Grid has
consistently improved its record for system availability and
reliability, even while demand on the system has grown to an all time
high 50.6 GW in December of 1999. Moreover, in addition to balancing
generation and demand, regulators have recently entrusted National Grid
with the development and implementation of new commercial mechanisms
for the bilateral trading of electricity throughout England and Wales,
in accordance with recently adopted New Energy Trading Arrangements
(NETA).
Worldwide, National Grid also operates Transener, the Argentine
transmission system, through a joint venture with Perez Compac. The
system consists of over 5500 route miles of 500 kv transmission lines
across an area equivalent to Western Europe. Transener recently
completed construction of an 800 mile transmission line that connects
generation located in the Andes with Buenos Aires. National Grid is
also actively involved in the construction and operation of
transmission interconnections between Zambia and the Congo, Tasmania
and mainland Australia, the Isle of Man and the UK, and in the North
Sea.
In the United States, National Grid is likewise actively engaged in
acquiring or partnering with US utilities who seek to become or create
independent wires or transmission businesses. As a consequence, Grid
has been an active participant in RTO formation efforts not only in New
England and throughout the Northeast, but also with the Alliance
Companies in the Midwest.
By virtue of our worldwide experience and our active participation
in RTO formation efforts here, I believe that National Grid is uniquely
qualified to offer an informed view not only on the important role that
independent transmission plays in the creation of successful
competitive wholesale markets, but on the challenges that we in the
United States face as we attempt to create an independent transmission
sector. I would like to offer three basic observations that cut across
all of the subjects under discussion here today.
First, time is of the essence. In the wake of California, we need
to accelerate the creation of successful, competitive wholesale markets
for electricity. To put the matter bluntly, electricity restructuring
needs a victory. We can hardly expect state regulators in regions that
have yet to embrace restructuring to do so unless and until we
demonstrate that competitive wholesale markets not only can function,
but can deliver real value to consumers.
As evidenced by it's July 12th orders, the FERC recognizes the
importance of expediting the RTO formation process as a means of
fostering wholesale markets. While we understand the concerns of many
who argue that the FERC's action was somewhat abrupt, we embrace the
FERC's underlying goal. Consequently, we have redoubled our own efforts
to work through the mediation process to expedite the creation of a
regional Northeast transmission organization while at the same time
carving out a role for an independent transmission company. The near
term creation of a successful wholesale market throughout the
Northeast, a region that by and large already has embraced both
wholesale and retail restructuring, is in our view critical to the
overall success of restructuring, and we will do all within our power
to make it a reality.
The Alliance RTO likewise offers the promise of immediate action.
Assuming that the FERC approves the pending filings, the Alliance could
be out of the gate by as early as December 15th of this year, creating
a regional transmission organization extending over eleven states. This
will dramatically hasten the formation of competitive wholesale
markets. Indeed, the Alliance RTO, if approved, would serve as an
invaluable platform from which to extend the benefits of wholesale
markets and regional transmission to the larger region. Moreover, if
approved the Alliance RTO will provide policy makers with a laboratory
with which to resolve the ongoing debate concerning the future
structure of the transmission sector.
Congress also can help expedite the formation of an independent
transmission sector and competitive wholesale markets. Congress should
enact measured electric restructuring legislation that, at a minimum,
ensures the following:
<bullet> Open Access. The success of wholesale markets depends first
and foremost upon open access to the transmission grid.
Congress should ensure that the nation's transmission grid,
including that owned and operated by public power, is made
accessible to market participants and stakeholders.
<bullet> Clarified FERC Jurisdiction. Congress should clarify that the
FERC has jurisdiction over all transmission, bundled and
unbundled, public or private. An appropriate transition period
should be considered for bundled rates, and the FERC need not
have authority over rate-setting for publicly owned
transmission, but it must have sufficient authority to ensure
and enforce open access.
<bullet> FERC ``Backstop'' Siting Authority. Congress should ensure
that the FERC has authority to assist regional transmission
organizations in planning, siting and building new
transmission. In the first instance, siting should remain in
the province of the state and local authorities. If the process
bogs down, however, regional transmission organizations should
have recourse to the FERC.
<bullet> Removing Tax Disincentives. The single most important thing
that Congress can do to foster the development of an
independent transmission sector is to remove tax disincentives
for the sale of transmission assets. We are convinced, based
upon conversations with many market participants, that they
would VOLUNTARILY exit the transmission business if they could
defer or otherwise steer clear of the significant capital gains
penalty they face under the existing tax code. I applaud the
House for addressing the issue in HR 4, and urge the Senate and
the President to promptly enact the measure into law.
Second, the transmission sector must continue to evolve. The RTO
debate has spawned a far ranging discussion of the true nature of the
transmission sector, and its ultimate organizational structure. Some
argue that because of the grid's vital role in fostering competitive
markets, transmission must be organized as a public entity, a political
collective answerable to its many stakeholders.
In National Grid's experience, however, transmission is best run as
a regulated business, not unlike other regulated, network businesses,
e.g. natural gas pipelines, telecommunications, etc. Our experience in
the UK and elsewhere strongly suggests that a properly incentivized,
independent transmission company can best attract new investment, best
develop and employ new technology, and best apply innovative management
techniques not only to upgrade the grid, but more fundamentally to
extract significant unrealized value from the existing grid, for the
benefit of customers.
In reality, however, the debate about the future structure of
regional transmission is probably premature. Transmission will
ultimately adopt the form best suited to meet the needs of the emerging
marketplace. It may emerge, as we envision, as a regulated business
with unique regulatory responsibilities, or it may ultimately emerge as
an extension of government regulatory authority with attendant business
responsibilities. Policy makers should resist making premature
judgments on which structure will work best, and allow the natural
evolutionary process to continue.
Instead, we believe that policy makers should focus on those issues
that will most directly benefit markets, such as uniform market rules,
investment incentives for new transmission, and innovative rates that
encourage the efficient operation of existing transmission assets.
Congress can aid in that process by ensuring the following:
<bullet> Financial Incentives. Congress should urge the FERC to adopt
financial incentives for new transmission investment and
innovative rate designs to foster efficient operation of the
existing facilities.
<bullet> Interconnection Standards and Procedures. Congress should
instruct the FERC to adopt uniform national transmission and
distribution interconnection standards and procedures to
expedite bringing new sources of supply to market.
<bullet> Removing Tax Disincentives, as previously discussed.
Third, Transmission must be Independent, but not Impotent. National
Grid's experience throughout the world has affirmed that the
transmission sector must be independent from market participants to
assure truly competitive wholesale markets. We hold that view not
merely as a result of a license condition, or business expedient, but
as a central tenet of our business plan. We do not engage in the
generation business outside of the US, and have already disposed of, or
are actively disposing of, our minor generation assets in the US.
National Grid has no interest in being a market participant.
The FERC, of course, has recognized the importance of independence
in both Orders 888 and 2000, and is holding the industry as a whole,
and National Grid in particular, to a very high standard of
independence.
Independence, however, should not be confused with impotence. True
independence assures that the transmission grid will be operated at the
highest possible levels of efficiency for the benefit of all customers,
including not only generators and marketers, but also industrial,
commercial and residential customers who depend upon the grid for the
reliable delivery of energy from a wide variety of sources.
Recently, however, a few in the ongoing RTO debate have taken the
position that those who own transmission assets can never be truly
independent, even if they are totally divorced from affiliated market
participants. They argue that transmission owners cannot be entrusted
to operate their own assets for fear that they will overbuild the
transmission grid, and disadvantage generators or other market
participants.
In our view, and certainly in recent experience, the danger of
under-investment in transmission is real. The possibility of over-
investment is, at best, hypothetical. In reality, transmission doesn't
compete with generation--the true competitor is the cheaper and more
efficient generation that new transmission can deliver to customers.
Could it be that those who purport to worry about too much new
transmission are in actuality worried about too much new competition?
We would therefore oppose any Congressional enactment that would
relegate transmission owners to passive ownership.
Mr. Chairman, we believe that policy makers are properly focused on
how to revitalize the transmission sector to aid in the development of
competitive markets. We believe that Congress can play a valuable role
in that process. I'd be pleased to answer any questions the Committee
might have. Thank you.
Mr. Barton. Thank you, Mr. Flynn.
We now want to hear Mr. Robert Johnston, whose President
and CEO of the Municipal Electric Authority of Georgia. He's
here on behalf of The Large Public Power Council.
Your statement's in the record, we would recognize you for
5 minutes to elaborate on it. Welcome.
STATEMENT OF ROBERT JOHNSTON
Mr. Johnston. Well, thank you, Mr. Chairman.
Mr. Barton. You need to really pull that microphone close
to you.
Mr. Johnston. The LLPC is a collection of 22 of the largest
public power systems in the country. We serve 18 million
people, 44,000 megawatts of generation and 26,000 miles of
transmission. We're located in all regions, including many
regions represented by the members of this committee and we
have long supported regional transmission entities that
facilitate open access. We've also supported comprehensive
legislation that promotes wholesale markets.
Addressing some specific issues today, I'd first like to
address bundled retail service issues. We must be allowed to
retain capacity, both generation and transmission, to service
our native load. Unlike wholesale energy transactions that they
have no relationship to obligation to serve, we must retain
this capacity because of the obligation to serve, an obligation
that is imposed on us by State law.
Any legislation or regulation that requires us to provide
capacity to third parties that would otherwise be used for
native load service is simply unacceptable. It will potentially
cause to curtail service to native load communities, it may
raise the cost or it may do both. Given that exposure, we
cannot do that voluntarily.
In order to fully open the transmission system the Federal
legislation must also address private use tax restrictions on
private power assets. Without resolution of this issue, we
simply will not be able to put that 26,000 miles of lines into
the system in open access; we'll be prevented from putting
those resources into RTOs. And, third, we will be prevented
from selling excess generation out of our system that may, in
fact, be created by the open access.
We recognize that the committee does not have jurisdiction
over the tax issue, but we appreciate the chairman's previous
support for the issue. The chairman's draft does contain
appropriate language which addresses the issues, however I will
mention that the recently passed H.R. 4 legislation has
inappropriate language and would not be adequate.
We supported Chairman Barton's legislation last year that
incorporated the concept of ``FERC-lite.'' The concept required
nonjurisdictional transmission systems such as LLPC systems to
provide nondiscriminatory open access service. The new
language, unfortunately, in the draft takes the ``lite'' out of
the FERC-lite proposal.
Rate refund authority given to FERC under the draft
language effectively removed any local jurisdiction over cost
recovery associated with publicly owned assets. These are
assets that those communities have the responsibility for the
debt. The language is unacceptable in our view and should be
stricken from the draft.
Regarding RTOs, LLPC supports RTO development, as
previously stated. That said, we strongly believe that there is
a right way to evolve to the preferred state so as to do no
harm to reliability and low cost to our customers.
We believe the proper approach is to buildupon efforts that
are already working or in development and grow the RTOs in a
controlled and logical way. it's critical that you realize that
every region, and in fact every State has unique economic,
operational, legal and regulatory requirements that must be
addressed in an RTO. Because of this, it's clear that one size
and one form for all regions is not an appropriate approach, as
FERC is leaning toward. It is ill-advised and raises the
probability of failure.
In our opinion, you are basically throwing together
extremely large geographic areas that have never operated
together, turning that over to a completely new entity with
zero operating experience and asking it to operate a system
that is the life blood of the economy. Like it or not, that is
going to raise the complexities and increase the risk.
Now, I'm saying this as a representative of an organization
that believes in and supports development of RTOs, but not in a
blind one size, one form approach.
Thank you, Mr. Chairman. I'll be glad to answer any
questions.
[The prepared statement of Robert Johnston follows:]
Prepared Statement of Bob Johnston on Behalf of The Large Public Power
Council
My name is Bob Johnston and I am the President and Chief Executive
Officer of MEAG Power, located in Atlanta, Georgia. I am testifying
today on behalf of the Large Public Power Council (LPPC). The LPPC is
an association of 22 of the largest public power systems in the United
States. LPPC members directly or indirectly provide reliable,
affordably-priced electricity to approximately 18 million customers and
we own and operate over 44,000 megawatts of generation and
approximately 26,000 circuit miles of transmission lines. LPPC members
are located in states and territories representing every region of the
country, including several states represented by members of this
Committee--such as Tennessee, Texas, California, New York, and
Arizona--and include several state public power agencies as well.
The majority of LPPC members perform the same functions as
traditional vertically-integrated utilities. However, LPPC members are
publicly-owned, not investor-owned. As a result, LPPC member systems
are not profit seeking entities. We are, instead, service-focused and
committed to the residents and communities we serve. Therefore, the
benefits resulting from the reliable and cost-effective provision of
generation, transmission, and distribution service flow directly to
public power customers and communities.
Mr. Chairman and members of the Subcommittee, the LPPC appreciates
your efforts to develop comprehensive electricity legislation. The LPPC
supports the enactment of comprehensive legislation that promotes a
competitive, efficient wholesale power market of benefit to all
consumers. The LPPC has long taken an active and progressive role in
supporting the development of a competitive electricity market. 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. More recently, we have 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 and were one of the first organizations to promote the
formation and implementation of Regional Transmission Groups.
The LPPC supports competitive wholesale power markets and open
access, non-discriminatory transmission service. Public power systems
are oftentimes net buyers in the market and greater access to
competitive wholesale power markets will benefit our customers and
communities. Public power also sells any excess power, when available,
in the wholesale market. However, our systems are built specifically to
serve our native load customers. We do not overbuild our systems or
speculate on future energy needs.
Our first obligation is to our local customers and communities.
Therefore, we support comprehensive energy and electricity legislation
that will provide greater access to competitive wholesale power
markets, that ensures open access, non-discriminatory transmission
service, that improves reliability and increases efficiencies in the
management and operation of the transmission grid, and that ensures
delivery of services to consumers at the lowest reasonable rates. We
oppose any changes in law that would undermine the use of our
transmission assets to deliver reasonably-priced power to our retail
customers.
We appreciate the efforts this Subcommittee has made to advance the
debate on how to achieve benefits for electricity consumers and we
would like to offer the Large Public Power Council's continued
assistance in crafting legislation. During the debate on these issues
in the last Congress, the LPPC provided our input to the Committee and
contributed our views to the debate. We appreciate this opportunity to
continue our involvement. We have reviewed the Discussion Draft dated
September 21, 2001, issued by Chairman Barton, and, while we will not
comment extensively on the Discussion Draft, we highlight a few of our
specific concerns in this testimony. As noted above, we have been
active in this debate for some time and have long supported Chairman
Barton in his efforts to enact comprehensive energy legislation.
However, we have serious concerns with the Discussion Draft in its
present form, particularly with respect to (1) provisions of the draft
that subject public power to virtually all of FERC's ratemaking
authority and (2) the draft's repeal of FERC's authority to review
mergers and asset sales. We understand that this is a discussion draft
and that it is intended to foster significant discussion among the
affected parties and the Committee members. The LPPC would like to
continue this dialogue. We must, however, stress again that there are
legal constraints--such as private use tax restrictions, bond indenture
requirements, and state statutory obligations--that are unique to
public power, which must be addressed before full open access can be
provided or participation in RTOs can be contemplated.
I would now like to comment more fully on the issues that are the
focus of the Committee's attention today.
transmission policies and the legal constraints on public power
The LPPC believes that a competitive energy market should include
open access to the transmission grid on a non-discriminatory basis and
that the reliability of electric service must be preserved and
preferably enhanced, through competition. For a competitive market to
be viable, LPPC member systems must be able to continue to meet the
needs of our customers and must be able to provide a reliable and cost-
effective delivery system. We must be able to serve our native load at
the lowest reasonable cost while meeting reliability standards. As
locally-owned and operated entities, LPPC members' first obligation is
to the communities that we serve. Our commitment to these communities
is to continue to provide reliable and reasonably priced electric
power.
It is important to emphasize that two things make us different than
others in the electric industry. We are governed and supervised
locally--and our performance directly affects our ratepayers rather
than shareholders. We are therefore very protective of our ratepayers
and our public policy positions tend to emphasize consumers rather than
institutions. As a result, we believe that any transmission policy must
recognize these obligations and allow us to continue to serve our
native load.
In addition, since public power systems have retained the legal
responsibility to meet the energy needs of their native load customers,
they must maintain and retain resources to ensure the capability to
supply such energy. Sufficient generation assets and assured
transmission access are required to assure that the energy needs of
customer-owners are met in a reliable and cost effective manner. State
and local laws place requirements on public power systems that must be
addressed. For example, my utility, MEAG Power, has an obligation under
our state statute to serve our customers. Unlike an energy marketer who
wants firm transmission rights to support a sales contract, we must
preserve the capacity to supply our customers due to an obligation to
serve imposed by state law.
In order to create fully open access transmission, federal
legislation must resolve the ``private use'' tax issue and should
recognize the distinct nature of public power and its contribution to
the electricity industry. The LPPC has testified extensively on this
issue, both before this Committee and the House Ways and Means
Committee. Without resolution of current tax restrictions relating to
private use, restrictions on tax-exempt bonds (1) will prevent public
power from fully opening up its transmission and distribution systems
for use by investor-owned utilities and marketers, (2) will prevent our
full participation in Regional Transmission Organizations (RTOs), and
(3) will constrain our ability to make long-term sales of surplus
power. Absent adequate reform of private use, one of the key problems--
how to move electric power from generation to load--will continue to
plague the system, and the objectives of comprehensive legislation, the
development of a robust, competitive, and fair market, will not be
achieved.
While we appreciate the efforts of the House on this issue and
recognize that this Committee does not have direct jurisdiction over
this matter, we cannot stress our position on this issue with more
conviction. We appreciate the efforts of the subcommittee and the
inclusions of our agreement on private use in the Discussion Draft.
Earlier this session, the House passed H.R. 4, the Securing America's
Future Energy (SAFE) Act. H.R. 4, as passed by the House, addresses
private use issues, but contains a number of changes to the private use
provisions as introduced in the Hayworth bill [H.R. 1459] that
frustrate the aim of opening up and expanding the transmission grid.
The Hayworth bill represented a landmark agreement between public power
and investor-owned utilities forged at the request of Congress, and all
parties believe it strikes an appropriate balance with respect to
removing restructuring-related tax impediments. However, the private
use provisions in H.R. 4 were modified in significant ways and these
changes make H.R. 4's private use provisions unworkable--and in some
respects, worse than current law--for public power. The Chairman's
Discussion Draft contains the language as included in H.R. 1459 and we
ask the Committee's assistance in ensuring that these key private use
relief provisions are revised and modified so the original objectives
sought by this agreement are achieved.
The LPPC supports proposals to ensure that all market participants
have access to the transmission system on a fair and open basis.
``FERC-lite,'' as included in the subcommittee's bill in the last
Congress, is part of such an open access policy. It would require
public power entities to provide transmission services at rates that
are not unduly discriminatory and require non-rate terms and conditions
to be comparable to those required of the investor-owned utilities. We
believe that open transmission access, including the FERC-lite
provision, will encourage a robust and competitive market. However, as
noted above, absent adequate private use reform, public power will be
unable to provide open access transmission service due to the existing
legal constraints. For this reason, our support for the ``FERC-lite''
concept is predicated on the removal of these legal constraints.
In addition, due to ``private use'' tax restrictions, our
transmission-owning members have sized their transmission systems to
supply their own native loads. At this time, we have limited
transmission capacity available for other entities. To the extent we
have such capacity, we are willing to make it available to all comers
on a non-discriminatory basis, as FERC-lite would require. But, a rule
that required us to make available to others transmission capacity we
need to serve our native load will result in power curtailments or
higher prices to our own customers. Any expansion of FERC transmission
jurisdiction must respect the interests of the customers for whom the
transmission facilities were built.
The LPPC supported Chairman Barton's legislation introduced last
Congress. The bill incorporated the ``FERC-lite'' concept and required
large non-jurisdictional transmission providers to provide non-
discriminatory open access. However, that bill did not apply to the
transmission component of a bundled retail sale, thereby allowing
public power transmission owners to continue to serve our native load.
Similarly, the Administration in its ``Comments on Draft Electricity
Restructuring Act of 2001'' (Senator Bingaman's Discussion Draft), has
recommended that the provision on federal jurisdiction over the
transmission component of the retail sale be eliminated from the draft.
The LPPC believes that this is appropriate. Some current proposals
would expand transmission jurisdiction in a way that would jeopardize
the ability of public power systems to serve their own resident, retail
customers. The LPPC cannot support extending FERC jurisdiction in this
manner as it may interfere with our fundamental obligation to provide
reliable power to our ratepayers and owners.
In addition, the LPPC has very serious concerns regarding the
provisions contained in Section 702 of the Discussion Draft, which
would amend Section 206 of the Federal Power Act. When combined with
the amendments in Section 201, the effect is to take the ``lite'' out
of FERC-lite. The ``Uniform Refund Authority'' provisions would allow
FERC to set just and reasonable rates (and order limited refunds) for:
(a) public power transmission to jurisdictional public utilities; and
(b) public power wholesale sales to jurisdictional public utilities.
This would largely negate the limitations on the Commission's
ratemaking authority over public power transmission that are an
integral part of FERC-lite. The Uniform Refund Authority provision
would subject public power wholesale sales and transmission rates to
review by FERC when and if such rates are challenged under Section 206.
While public power systems would be able to set their own rates in the
first instance, these rates could, at any time, be reset by FERC. If so
reset, the public power system could then be required to pay
retroactive refunds. In our view, the ``Uniform Refund Authority''
provision, as drafted, cancels out FERC-lite and imposes unworkable,
``after-the-fact'' rate regulation on public power entities.
rto policies should respect unique and regional characteristics
As noted earlier, the LPPC strongly believes that the nation's
transmission grid should be organized in a manner that first and
foremost ``does no harm'' to existing transmission and related delivery
systems that are performing properly and as designed. Any proposed
changes should be thoroughly studied to ensure that benefits exceed
costs and that unintended consequences are minimized. Necessary and
timely upgrades to and expansion of the transmission grid are needed.
This will most likely be accomplished if transmission assets are
managed through a not-for-profit regional transmission organization
(RTO). Under this model, such upgrades would not need to meet the
higher rate of return requirements necessary for a for-profit entity.
Native load customers of one state should not be forced to bear the
cost of massive grid upgrades that are to benefit marketers or
customers or another state. The costs of upgrades are more
appropriately borne by those who benefit from them.
The LPPC believes that RTOs should be created to foster wholesale
competition. RTOs should have an appropriate geographic scope,
preferably be not-for-profit, and, in all cases, be fully independent
of market participants. While LPPC believes that this type of
organization will operate more cost-effectively and will more likely
result in the open transmission necessary for a fully functioning
market, our members are open to consideration of other types of models.
The LPPC opposes granting FERC broad new authority to compel
transmitting utilities to join RTOs. Similarly, the Administration in
its ``Comments on Draft Electricity Restructuring Act of 2001''
(Senator Bingaman's Discussion Draft), did not endorse expansion of
FERC's authority in this area and recommended that provisions providing
FERC with additional authority be deleted. The LPPC does, however,
support confirming the authority that FERC asserted in Order 2000 to
order jurisdictional utilities into an RTO on a case-by-case basis in
order to remedy undue discrimination or anticompetitive conduct.
The LPPC has significant concerns about provisions that mandate
public power membership in RTOs. The LPPC believes that an
evolutionary--and not revolutionary--approach is needed to ensure the
continued delivery of reliable, affordable electricity to consumers.
The LPPC does support the voluntary formation of RTOs. Many LPPC member
systems are already participating voluntarily in RTOs or ISOs while
others are working hard to establish RTOs in their regions. We have
long endorsed the basic notion that coordination of transmission can
have positive benefits for consumers. However, we understand that every
region may have very different needs and problems. As such, we would
strongly urge that the formation of RTOs proceed carefully, and without
a ``one-size-fits-all'' approach.
Regional efforts to form RTOs and ISOs underway at this time should
be recognized and the efforts made should be built upon. While the LPPC
is not necessarily opposed to the concept of four large RTOs currently
being advocated by FERC, this should not be the first step. We should
not let the perfect be the enemy of the good. Creating RTOs over large
geographic areas multiplies the complexities and has the real potential
of slowing progress. We believe that the advances made on a smaller
scale should be recognized and those efforts continued. It may be
possible, at some later time, to build upon these efforts and create
larger scale transmission systems. The LPPC believes that regional
modeling should be done to assess the impacts of the creation and
development of RTOs on the transmission grid. As the transmission grid
is regionalized, an evaluation of the lessons learned should be done so
that reliability is ensured and the potential benefits are maximized.
As our members participate in the development of RTOs and ISOs, our
unique constraints have come into play. For example, my company, MEAG
Power has participated in the discussions on a southeast RTO--
``SeTrans.'' Since we have an obligation under state statute to serve
our native load, our participation in SeTrans was predicated on an
ability to preserve the capacity necessary to provide power to these
customers. Through negotiations, we believe we will be able to
grandfather in our native load obligations and obtain recognition of
our pre-existing transmission rights. In addition, under proposed
SeTrans policies, we would not be required to curtail our native load
unless all other mitigation measures have been attempted. This will
allow us to fulfill our obligations to our customers imposed by state
law. However, the same solution would not work for all public power
entities. Unfortunately, recent actions at FERC may undercut the
voluntary efforts underway in many regions, e.g., the SeTrans RTO
proposal in the southeast, that are designed to accommodate public
power.
In addition, public power systems face difficult issues in
participating in RTOs. These must be addressed before a national system
of RTOs can be put into place. As noted earlier, 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, the LPPC believes that the voluntary regional efforts
undertaken by the industry should be used and built upon, since through
these negotiations efforts have been made to accommodate the unique
characteristics and legal requirements of public power.
The legal restrictions on public power and its participation in
RTOs varies from state to state. Some states, such as Georgia, restrict
the use of public funds while others limit the ability of public
entities to associate with for-profit entities. Still other states
specifically authorize public power entities to join with other public
entities in the ownership and operation of electric transmission
facilities. Attached to my testimony is a matrix that highlights some
of the state and local requirements applicable to LPPC member systems
which might affect their ability to participate in an RTO. What this
illustrates is that a one-size-fits-all approach cannot feasibly
address the myriad of issues that confront public power and its
participation in RTOs.
conclusion
As the Subcommittee continues to move forward with electricity
legislation, the LPPC offers our continued assistance. We would be
happy to work with the Subcommittee and its staff to properly tailor
FERC transmission jurisdiction to the unique structures and
responsibilities of public power systems, ensure market power and
merger protections for consumers, and retain the appropriate level of
flexibility for FERC as it approves new RTOs. However, I must again
stress that any comprehensive electricity legislation must meaningful
private use relief--either in the same bill or in companion legislation
from the tax committee--in order to be workable.
We look forward to working with the Committee to develop
comprehensive electricity legislation that addresses our concerns,
garners wide support and can ultimately be enacted. I will be happy to
answer any questions you have.
Examples of State and Local Legal Requirements for Public Power
Participation in Ownership of an RTO
------------------------------------------------------------------------
------------------------------------------------------------------------
Chelan County, Public Utilities District Wash. Const. art. VIII, Sec.
No. 1. 7 provides that no county,
city, town, or other
municipal corporation shall
give any money or property,
or loan its money or credit
to or in aid of any
individual, association,
company or corporation, or
become directly or
indirectly the owner of any
stock in or bonds of any
association, company or
corporation.
Wash. Rev. Code Sec.
54.16.040 allows a PUD to
purchase, maintain,
conduct, and operate
transmission lines within
or without its limits, for
the purpose of furnishing
the district's inhabitants
and any other persons,
including public and
private corporations,
within or without its
limits, with electric
current for all uses.
Wash. Rev. Code Sec.
54.16.090 allows a PUD to
enter into any contract or
agreement with the U.S., or
any state, municipality, or
other utility district; or
with any cooperative,
mutual, consumer-owned
utility; or with any
investor-owned utility; or
with an association of any
such utilities, for
carrying out any of the
powers authorized by Wash.
Rev. Code Title 54.
Wash. Rev. Code 54.12.010
prohibits unlawful
delegation of Commission
authority; case law
requires needs of local
ratepayers to be addressed.
Colorado Springs Utilities................ Colo. Const. art. XI, Sec.
1 forbids a city to lend or
pledge its credit or faith,
directly or indirectly, in
any manner to any person,
company, or corporation,
public or private, for any
purpose whatever; or become
responsible for any debt,
contract, or liability of
any person, company, or
corporation, public or
private, in or out of the
state.
Colo. Const. art. XI, Sec.
2 prohibits a city from
becoming a shareholder in
any corporation or company
or joint owner with any
person, company, or
corporation, public or
private, in or out of
state; but a city is not
prohibited from becoming
such a shareholder or joint
owner to effect the
transmission of energy in
whole or in part for the
benefit of the inhabitants
of such city.
Colo. Rev. Stat. Sec. 31-15-
707(1) allows a city to
acquire electric light and
power works and
distribution systems and
all appurtenances necessary
to any of said works or
systems, or to authorize
the erection, ownership,
operation, and maintenance
of such works and systems
by others, subject to voter
approval, municipal bond
and financing requirements,
and a condition that allows
the city to purchase and
condemn such works or
systems.
CS Charter 6-70 restricts
participation unless in the
ordinary course of
business.
CS Bond Ord. 8-14 restricts
participation unless in the
normal course of business.
JEA....................................... Fla. Const. art. VII Sec.
10 generally prohibits a
municipality, county,
special district, or agency
of any of them to become a
joint owner with, or
stockholder of, or give,
lend or use its taxing
power or credit to aid any
corporation, association,
partnership or person; but
it does not prohibit laws
authorizing such entities
from becoming a joint owner
of, giving, or lending or
using its taxing power or
credit for the joint
ownership, construction and
operation of electrical
energy generating or
transmission facilities
with any corporation,
association, partnership,
or person.
Fla. Stat. Chap. 163 & 361
authorize joint power
projects among utilities,
public and private,
domestic and foreign,
subject to restrictions
that the right to full
possession and to all of
the use, services, output,
and capacity of any such
project during the
estimated useful life
thereof be vested, subject
to creditors' rights, in
the entity created pursuant
to Chapter 163 or 361.
Under local law and
charter, may need City
Council approval.
Bond covenants prohibit
adverse effect on revenues.
Los Angeles Department of Water and Power. Cal. Const. art. 16, Sec. 6
prohibits any political
subdivision of the state to
give or lend credit in aid
of or to any person,
association or corporation,
whether municipal or
otherwise, in any manner
whatever, for the payment
of the liabilities of any
individual, association,
municipal or other
corporation whatever; it
also prohibits the
legislature from
authorizing the state or
any political subdivision
thereof to subscribe for
stock or become a
stockholder in any
corporation whatever.
L.A. City Admin. Code Sec.
Sec. 23.129 & 23.132
require City Council
approval.
L.A. City Charter Sec. Sec.
219.4 & 390 require City
Council approval.
Lower Colorado River Authority............ Texas Const. art. 3
prohibits a public utility
from owning or acquiring
stock in a corporation or
from owning an interest in
a partnership or joint
venture (except with
respect to electric
generating facilities with
other utilities).
Bond covenants require LCRA
Board of Directors to
retain authority to adjust
rates to assure that LCRA
can meet its debt service
and coverage requirements;
no prejudice to bondholder
rights.
Municipal Electric Authority of Georgia... Ga. Const. art. IX, Sec.
II, para. VIII prohibits
any county, municipality,
or other political
subdivision of Georgia,
through taxation,
contribution, or otherwise,
to appropriate money for or
to lend its credit to any
person or to any nonpublic
corporation or association
except for purely
charitable purposes.
Ga. Code Ann. Sec. 46-3-
126(5) authorizes MEAG to
acquire electric
transmission lines by
purchase or otherwise,
either as owner of all or
of any part in common with
others or as agent, and to
purchase or construct part
of the capacity of
transmission projects
sponsored and owned by or
in common with others, and
to transmit power both for
itself and on behalf of
others.
Ga. Code Ann. Sec. 46-3-
126(7) authorizes MEAG to
exercise any one or more of
the powers, rights, and
privileges conferred in the
section either alone or
jointly or in common with
one or more other parties
or utilities, whether
public or private. MEAG is
authorized to own an
undivided interest in
transmission facilities
with any other parties,
whether public or private,
and to enter into
agreements with the other
parties regarding the
construction, operation and
maintenance of such
transmission facilities by
any one or more of the
parties to the agreement
acting as agent for the
others.
Ga. Code Ann. Sec. 46-3-127
prohibits MEAG from
constructing or operating
any project for profit
except insofar as such
profit will inure to the
benefit of the public.
Nebraska Public Power District............ Neb. Const. art. XI Sec. 1
prohibits a city, county,
town, precinct,
municipality or other
subdivision of the state
from ever becoming a
subscriber to the capital
stock, or owner of such
stock, or any portion or
interest therein, of any
private corporation or
association.
Neb. Const. art. XIII Sec.
3 prohibits the credit of
the state's political
subdivisions from ever
being given or loaned in
aid of any private
individual, association, or
corporation.
Affirmative and restrictive
bond covenants covering,
among other things, rate
setting and compensation,
revenue requirements,
standards for contract or
property transfer approval
based on interests of NPPD
and bondholders, use of
proceeds or payments, and
preserving the bonds'
income tax exemption.
Cannot delegate or surrender
statutory authority to FERC
or submit to its
jurisdiction voluntarily.
Can participate in a public
RTO but only by agreement
authorized under Nebraska
Interlocal Cooperation Act
(Neb. Rev. Stat. Sec. 13-
801 et seq.) or Joint
Exercise of Powers statutes
(Neb. Rev. Stat. Sec. 70-
628.01-628.04). Cannot
delegate or surrender
statutory duties and
elected governing board
powers to governing board
of public RTO controlled by
private persons.
New York Power Authority.................. N.Y. Pub. Auth. Law Sec.
1005(11) requires that
participation in an RTO be
necessary or convenient for
carrying on the Authority's
business; possible
restrictions in bond
covenants based on
permissible investment
criteria.
Omaha Public Power District............... Neb. Const. art. XI Sec. 1
prohibits a city, county,
town, precinct,
municipality or other sub-
division of the state from
ever becoming a subscriber
to the capital stock, or
owner of such stock, or any
portion or interest
therein, of any private
corporation or association.
Neb. Const. art. XIII Sec.
3 prohibits the credit of
the state from ever being
given or loaned in aid of
any individual,
association, or
corporation.
Neb. Rev. Stat. Sec. 70-
601(1) defines ``district''
to be public entities
organized within Nebraska.
Neb. Rev. Stat. Sec. 70-649
allows any public power
district to sell to any
public power district,
public power and irrigation
district, irrigation
district, city or village,
any power plant, electric
generating plant, electric
distribution system, or any
parts thereof, for such
sums and under such terms
as its board of directors
may deem fair and
reasonable.
Neb. Rev. Stat. Sec. 70-
628.01 allows any district
that is interested in the
operation of power plants,
distribution systems, or
transmission lines of
ethanol production or
distribution facilities,
either alone or in
association with another
district or districts, may
sell, lease, combine,
merge, or consolidate all
or a part of its property
with the property of any
other district or districts
with the approval of a
majority of the board of
directors of each district
involved.
Neb. Rev. Stat. Sec. Sec.
70-625 gives a public power
district all the usual
powers of a corporation for
public purposes and
authorizes it to purchase,
hold, sell, and lease
personal property and real
property reasonably
necessary for the conduct
of its business, subject to
any limitations in the
petition for its creation.
Neb. Rev. Stat. Sec. Sec.
70-628.01-.03 authorizes a
public power district to
exercise its powers either
alone or jointly with other
districts, municipalities
and public agencies, and
electric cooperatives and
electric membership
corporations within or
outside the state.
Neb. Rev. Stat. Sec. 70-
628.04 authorizes any
public power district
participating jointly and
in cooperation with others
in an electric transmission
facility to enter into
agreements with the other
participants, including
provisions for the
construction, operation,
and maintenance of such
facility and allocation of
resulting costs among the
participants.
Orlando Utilities Commission.............. Fla. Const. art. VII Sec.
10 generally prohibits a
municipality, county,
special district, or agency
of any of them to become a
joint owner with, or
stockholder of, or give,
lend or use its taxing
power or credit to aid any
corporation, association,
partnership or person; but
it does not prohibit laws
authorizing such entities
from becoming a joint owner
of, giving, or lending or
using its taxing power or
credit for the joint
ownership, construction and
operation of electrical
energy generating or
transmission facilities
with any corporation,
association, partnership,
or person.
Fla. Stat. Chap. 163 & 361
authorize joint power
projects among utilities,
public and private,
domestic and foreign,
subject to restrictions
that the right to full
possession and to all of
the use, services, output,
and capacity of any such
project during the
estimated useful life
thereof be vested, subject
to creditors' rights, in
the entity created pursuant
to Chapter 163 or 361.
Under charter, may need
City Council approval.
Bond covenants prohibit
adverse effect on revenues.
Sacramento Municipal Utility District..... Cal. Const. art 16, Sec. 6
prohibits a political
subdivision of the state
from lending or pledging
its credit, in any manner,
for the payment of the
liabilities of any
individual, association,
municipal or other
corporation, or from making
a gift of any public money
or thing of value to any
individual, municipal, or
other corporation.
Cal. Const. art 16, Sec. 6
prohibits a political
subdivision of the state
from subscribing for stock,
or becoming a stockholder
in any corporation.
Cal. Pub. Util. Code Sec.
12801 allows a municipal
utility district to
acquire, construct, own,
operate, control or use,
within or without the
district, works or parts of
works for supplying the
inhabitants of the district
and public agencies
therein, or some of them,
with light, water, power,
and heat.
Seattle City Light........................ Wash. Const. art. VIII, Sec.
7 provides that no county,
city, town, or other
municipal corporation shall
give any money or property,
or loan its money or credit
to or in aid of any
individual, association,
company or corporation, or
become directly or
indirectly the owner of any
stock in or bonds of any
association, company or
corporation.
Wash. Rev. Code 35.92.052
provides cities owning
their own electric
utilities to enter into
agreements with investor-
owned utilities,
cooperatives, public
utility districts, other
cities, and agencies of the
United States for the
undivided ownership of
transmission and generation
facilities, so long as the
city is not severally
liable for actions of the
other participants and so
long as the city assumes no
larger share of the
responsibility and expenses
than its proportionate
ownership share.
Snohomish County, Public Utilities Wash. Const. art. VIII, Sec.
District No. 1. 7 provides that no county,
city, town, or other
municipal corporation shall
give any money or property,
or loan its money or credit
to or in aid of any
individual, association,
company or corporation, or
become directly or
indirectly the owner of any
stock in or bonds of any
association, company or
corporation.
Wash. Rev. Code Sec.
54.16.040 allows a PUD to
purchase, maintain,
conduct, and operate
transmission lines within
or without its limits, for
the purpose of furnishing
the district's inhabitants
and any other persons,
including public and
private corporations,
within or without its
limits, with electric
current for all uses.
Wash. Rev. Code Sec.
54.16.090 allows a PUD to
enter into any contract or
agreement with the U.S., or
any state, municipality, or
other utility district; or
with any cooperative,
mutual, consumer-owned
utility; or with any
investor-owned utility; or
with an association of any
such utilities, for
carrying out any of the
powers authorized by Wash.
Rev. Code Title 54.
Wash. Rev. Code Sec.
54.12.010 prohibits
unlawful delegation of
Commission authority; case
law requires needs of local
ratepayers to be addressed.
Santee Cooper............................. S.C. Const., art. X, Sec.
11 prohibits the state or
any of its political
subdivisions from becoming
a joint owner of or
stockholder in any company,
association or corporation;
but the General Assembly
can authorize Santee Cooper
to become a joint owner
with privately owned
electric utilities,
including electric
cooperatives of electric
generation or transmission
facilities, or both, and to
enter into and carry out
agreements with respect to
such jointly owned
facilities.
S.C. Const. art VIII, Sec.
13 permits the sharing of
lawful cost, responsibility
and administration of
functions with one or more
governments whether within
or without the state.
Tacoma Public Utilities: Light Division... Wash. Const. art. VIII, Sec.
7 provides that no county,
city, town, or other
municipal corporation shall
give any money or property,
or loan its money or credit
to or in aid of any
individual, association,
company or corporation, or
become directly or
indirectly the owner of any
stock in or bonds of any
association, company or
corporation.
Tacoma City Charter Sec.
4.1 allows the city to
possess all powers granted
to cities by state law to
construct, purchase,
acquire, add to, maintain,
and operate, either within
or outside its corporate
limits, public utilities
for supplying power to the
municipality's inhabitants
and to sell and deliver any
of these utility services
outside its corporate
limits to the extent
permitted by state law.
Tacoma City Charter Sec.
4.5 prohibits the use of
revenues for purposes other
than the necessary
operating expenses of the
utility, including interest
on and redemption of the
outstanding debt thereof,
and making additions and
betterments thereto and
extensions thereof. The
funds of any utility shall
not be used to make loans
to or purchase the bonds of
any utility, department, or
agency of the city.
------------------------------------------------------------------------
This document reflects preliminary analysis for discussion purposes only
and is not intended to be a legal opinion with respect to any matter
nor to indicate that all or part of the facilities of LPPC members are
transmission facilities for purposes of FERC jurisdiction. Submitted
with LPPC Comments on RTO Notice of Proposed Rulemaking, Docket No.
RM99-2-000 (August 20, 1999).
Mr. Barton. Thank you.
We have a series of two votes pending on the floor, and
those are the only two votes for the day. We're going to hear
from Mr. English, then we're going to recess to go vote, and
then we will come back at approximately 2 p.m. to finish Mr.
Gerken and Mr. Esposito and Mr. Trabandt and Mr. Travieso.
So, Mr. English, we're going to give you the last word for
this session of the panel. And then we'll go vote and we'll
come back and will start with Mr. Gerken.
STATEMENT OF GLENN ENGLISH
Mr. English. Thank you very much, Mr. Chairman. I
appreciate that.
As I think the members of this panel are well aware, the
National Rural Electric Cooperative Association represents a
1,000 cooperatives, 46 States and 35 million consumers in those
States. It is owned by those consumers.
Mr. Chairman, the National Rural Electric Cooperative
Association supports the formation of large independent
regional transmission organizations if they're fully
independent and properly designed and operated, minimizes
market power and maximizes efficiencies. That's what we think
the objectives of RTO should be.
Electric cooperatives expect and intend to be a part of
RTOs that are established across this country. Of course, that
would mean that the transmission that is a part of those RTOs
would be under the FERC jurisdiction. And we have no objection
to that.
Mr. Chairman, for that reason, NRECA see little reason
for--to subject electrical cooperatives to additional Federal
regulatory commission authority if, in fact, those cooperatives
are a part of RTO.
We recognize that this would have a very heavy financial
burden on those electric cooperatives and, of course, that
would be on those consumer owners themselves.
As far as legislation is concerned, we appreciate the carry
forward of the recognition of the importance of the
relationship between the consumer and his duly elected board,
and the ability of that board to carry out the intent of those
consumers.
We are, however, somewhat puzzled by the insertion of
section 206 of the Federal Power Act in applying that to the
electric cooperatives. That seems to us to, in effect, take
away what was given under the so-called FERC-lite provisions.
We're also extremely concerned about the fact that it
appears we'd find ourselves with dual jurisdiction, two
different Federal agencies directly us as to what we should do.
First is the Rural Utility Service, and of course anyone that
has a loan through Rural Utility Service, they have their own
rules, regulations, mandates as to what must be done. Second
would be any FERC jurisdiction, which could in the very
likelihood at least on some occasion be contradictory to what
we're being told with those agencies.
We think that if anything is done in this area,
particularly as it applies to our assets and resources that may
very well be under loan, that there should be something in the
legislation that addresses that dual jurisdiction and requiring
those two Federal agencies to work together to make sure that
we don't find ourselves in that kind of a conflict.
Also, we believe that the States should retain their
traditional jurisdiction over retail sales and electric
distribution systems should not be subject to FERC
jurisdiction. Particularly whenever you consider the fact that
FERC does not have the resources nor does it have the
experience to be able to address a number of these issues, many
of which are engineer related.
So, we would strongly urge that careful consideration be
given to the fact that any kind of retail sales, anything
addressing the retail sales should remain with the States and
should not be subject to FERC jurisdiction.
And also I would again make the point, Mr. Chairman, as I
did earlier today, that unless the FERC is specifically
targeted as to what their objectives are, that will do nothing
except dilute the very limited resources that FERC already has
and make them incapable of carrying out the responsibilities
that are to be assigned to them.
We think the RTO's are extremely important. We think they
need to be run right. We believe that everyone should have an
equal chance to participate in those RTOs, and that's going to
depend on a very vigorous and very alert FERC, one that has the
resources to do that job.
Thank you very much, 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 Subcommittee, 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 35 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 cooperative 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 electric cooperatives.
regional transmission organizations
NRECA supports the formation of large, independent Regional
Transmission Organizations or RTOs for all transmission owners.
RTOs, if fully independent and properly designed and operated, can
substantially mitigate the ability of transmission owners that also own
generation to influence the market for electric energy and to
potentially discriminate against competitors. Because an effective RTO
can operate the transmission system on a regional basis to maximize
efficiencies, it can also significantly improve reliability and reduce
the potential for power market instability that can lead to price
spikes.
NRECA has supported the formation of RTOs in a number of ways.
NRECA submitted comments to the FERC in the rulemaking that resulted in
Order No. 2000, and, in fact, FERC adopted several of NRECA's
recommendations. NRECA representatives attended each of the
Commission's five regional collaborative meetings during 2000 and
facilitated presentations made by individual cooperatives at those
meetings. NRECA also successfully facilitated voluntary RTO
informational filings by cooperatives even though the Commission's
regulations did not require most cooperatives to make such filings.
Finally, NRECA and cooperatives in the southeastern United States have
been very active in the ongoing FERC mediation that is seeking to
establish a single, large Southeast RTO.
For cooperatives to fully participate in RTOs as they clearly wish
to do, and in order for properly formed RTOs to develop, the following
issues are of critical importance:
Full Recovery of Transmission Revenue Requirements. Transmission-
owning cooperatives must obtain full, immediate recovery of their
revenue requirements from an RTO if they agree to commit their
facilities to the functional control of that RTO, as contemplated by
Order No. 2000.
Comparable Inclusion of Transmission Facilities. Some transmission-
owning cooperatives have had difficulty getting their transmission
facilities accepted for operation/cost recovery by a future RTO on the
same basis as investor-owned utilities during the RTO formation
process. Those IOUs opposing inclusion of cooperative transmission
facilities point to the radial, load serving nature of these facilities
as a reason for excluding them, overlooking the fact that they own
comparable facilities that are included in their FERC-regulated
transmission revenue requirements. Cooperatives therefore favor the use
of a single, consistent standard to govern the RTO's functional control
of all transmission facilities, regardless of the owner.
Grandfathered Contracts. Many cooperatives have substantial
contractual arrangements with neighboring transmission providers. These
contracts take many forms: some are among joint transmission owners,
others deal with provision of both generation and transmission, and
some are transmission-only agreements (both pre- and post-Order No.
888). Whatever their content and form, these contracts are vital to
sustaining the cooperative's ability to provide on-going service to
their own member-owners. Transmission-owning cooperatives will not be
able to join an RTO unless they have assurances that such contractual
rights will not be severed without their consent. Similarly,
transmission-dependent cooperatives cannot lose access to the
transmission facilities needed to serve their member loads.
Regulation by the Rural Utilities Service. Many cooperatives have
substantial loans from, and, as a result, are substantially regulated
by the Rural Utilities Service (RUS) of the U.S. Department of
Agriculture. The Commission must take RUS regulation into account and
coordinate with RUS to ensure that when cooperatives seek to join RTOs,
inconsistent, inefficient regulation of cooperatives by these two
federal agencies does not occur.
85-15 Revenue Test. Cooperatives lose their tax-exempt status when
more than 15 percent of their revenue is received from nonmembers. The
Internal Revenue Service (IRS) has not clarified that, when a
cooperative joins an RTO, the revenues received by the cooperative from
the RTO will not be deemed to be nonmember income for purposes of the
85-15 revenue test. Congress must ensure that cooperatives can join
RTOs without unintentionally violating their current not-for-profit tax
status. NRECA appreciates the Chairman's effort to address the 85-15
issue in the September 21 discussion draft. That language, however, is
inadequate to solve the problem and permit cooperatives to participate
in RTOs. Since the September 21 discussion draft addresses tax issues,
it should incorporate the provisions in H.R. 1601.
Cost Shifting. RTO transmission rates and tariffs should (a)
mitigate cost shifting and take into account the specific needs and
characteristics of each affected region, including costs of operation,
debt, and other expenses; (b) use the same effective return-on-
investment to all participating transmission owners; and (c) recognize
the goal of establishing a single non-pancaked rate structure
applicable to all customers.
RTO Market Power. As transmission service remains a monopoly, and
as individual RTOs assume control of larger transmission systems than
individual transmitting utility owners, RTOs will possess unprecedented
market power. In this context, a badly governed and operated RTO may be
worse than no RTO at all. Thus, the monopoly status of an independent
RTO must be acknowledged at the outset, and the RTO's transmission rate
structure and associated cost-of-service should be developed using
traditional cost-of-service ratemaking principles. RTOs should not be
eligible for ``incentive ratemaking,'' ``performance-based ratemaking''
or ``light-handed regulation'' that would have the effect of increasing
rates to transmission customers without concomitant benefits or
reducing independent regulatory oversight of such an RTO's activities.
Collaborative Process. The Commission has sought to encourage RTO
forming public utilities to actively collaborate with cooperatives in
order to accommodate their needs as consumer-owned entities.
Unfortunately, in numerous instances collaboration has been nothing
more than a thinly disguised effort of saying, ``take it or leave it.''
For cooperatives to effectively join RTOs, public utilities must be
required to meaningfully collaborate with cooperatives beginning with
the earliest stages of RTO formation efforts. The Commission should not
fail to act when informed of RTO formation efforts that exclude
cooperative participation.
An NRECA member-approved resolution stating its conditional-support
for RTO formation is attached hereto for the Committee's convenience
and reference.
open access and federal jurisdiction
NRECA opposes efforts to subject electric cooperatives to the
jurisdiction of FERC. That expansion of jurisdiction would
unnecessarily impose heavy financial burdens on electric cooperatives
and their consumer-owners.
NRECA also opposes efforts to move jurisdiction over retail sales
and the distribution system from the states, where that jurisdiction
properly lies, to FERC. FERC lacks the experience and resources to
regulate retail service and the distribution system, as well as the
capacity to address the important state and local interests that are
inherent in retail electric service.
NRECA, however, sincerely appreciates the Chairman's efforts in the
106th Congress to limit the expansion of FERC jurisdiction over
electric cooperatives. NRECA looks forward to working further with the
Chairman and the Committee to resolve any concerns they may have about
FERC's role in a manner that minimizes the adverse impacts on
cooperatives and their consumer-owners.
Expansion of FERC Jurisdiction over Cooperatives with Transmission Is
Unnecessary
Proponents of expanded FERC jurisdiction argue that all
transmission owners, including cooperatives, must be subject to the
same regulatory scheme if they are to move power efficiently across the
grid. In fact, however, sellers of electric energy can move power
across electric cooperative lines.
In the Energy Policy Act of 1992 (EPAct), Congress amended Sec. 211
of the Federal Power Act to require electric cooperatives and other
transmitting utilities to provide non-discriminatory transmission
service to any eligible entity that requests service. In the event the
eligible entity is unsatisfied with the service or price offered,
Sec. 211 allows that entity to petition FERC for an order requiring the
transmitting utility to provide service.
Moreover, FERC's Order No. 888 requires all public utilities to
provide transmission service under a pro forma tariff that includes a
``reciprocity'' provision. That provision permits a public utility to
deny a transmitting utility open access transmission service unless the
transmitting utility offers to provide the public utility equivalent
transmission services in return.
EPAct and FERC's Order 888 reciprocity requirements have proven
extremely effective in opening up the entire transmission grid. Any
eligible entity can obtain transmission service from electric
cooperatives as easily as they can from any public utility, under
comparable terms.
Moreover, cooperatives simply are not large enough in most
instances to pose a barrier to open markets. Whereas only 19 of the 166
independently-owned public utilities subject to Order 888 qualify as
small utilities,<SUP>1</SUP> all but 26 of the nearly 1000 rural
electric systems qualify as small utilities under that definition. Of
those 26, four own no transmission lines at all.
---------------------------------------------------------------------------
\1\ FERC Stats. & Regs. para. 31,036, at 31,897 (citing to the
Small Business Administration definition of a small utility that is a
utility that sells 4 million megawatt hours or less per year).
---------------------------------------------------------------------------
To put it in perspective, FERC logically should have a more
significant role regulating larger electric utilities such as Entergy--
whose subsidiaries own and operate more than 14,000 miles of
transmission line and sell more than 97,000,000 MWH to more than
2,400,000 metered accounts--than it should have regulating Hickman-
Fulton Counties Rural Electric Cooperative-- which owns 1 mile of
transmission line, and sells less than 120,000 MWH per year to fewer
than 4,000 member-owners.
Congress Should Not Subject Electric Cooperatives to Expanded FERC
Jurisdiction Under Sec. 206 of the Federal Power Act
Until recently, proposals to expand FERC jurisdiction over
cooperatives were intended to subject all transmission facilities to
the same rules. Those proposals would ensure that cooperatives provided
open access to their transmission facilities at rates that were
comparable to what they charged themselves.
Sec. 702 of the September 21 discussion draft goes far beyond that
baseline. Sec. 702 would subject all transmission service and all
wholesale sales made to public utilities to FERC review and regulation
under Sec. 206 of the Federal Power Act.
H.R. 2944, the Electricity Competition and Reliability Act, as
passed by the Energy and Power Subcommittee in the 106th Congress,
included language to expand FERC's jurisdiction over transmission-
owning cooperatives <SUP>2</SUP> based on a comparability standard.
Specifically, the language would have authorized FERC to review the
rates a transmission-owning cooperative charges its members against
those it charges to non-cooperative members to ensure the rates are
comparable. If the rates are not comparable, they would be remanded to
the transmission-owning cooperative for revision. In this manner, the
transmission-owning cooperative is allowed to maintain control of the
ratesetting function, which is key to our consumer-members. The
comparability standard along with the small electric utility exemption
is know as ``FERC lite''.
---------------------------------------------------------------------------
\2\ Transmission-owning cooperatives that have RUS loans and loan
guarantees.
---------------------------------------------------------------------------
Unfortunately, the September 21 discussion draft emasculates FERC
lite. Sec. 201 creates the veneer of establishing the comparability
standard as the basis for expanding FERC jurisdiction over
transmission-owning utilities. Upon close analysis, however, Sec. 702
of the discussion draft nullifies the comparability concept that was
incorporated in Sec. 201 of the discussion draft. Under this section,
rather than review cooperative transmission rates under a comparability
standard, FERC would subject cooperative transmission rates to a full
review under the just and reasonable standard. Rather than remand rates
to boards of directors elected by cooperatives member-consumers, FERC
would set the rates itself at whatever level FERC considers
appropriate.
In addition to emasculating FERC lite, Sec. 702 would also, for the
first time, subject cooperatives' wholesale rates to FERC review and
regulation. At a time when Congress and FERC are seeking to move
towards a competitive wholesale market for electric energy, Sec. 702
would move in the opposite direction, increasing the regulatory burden
on electric cooperatives that seek to sell power in the wholesale
market.
NRECA recognizes that some entities have abused those markets. They
have exercised their market power to raise the cost of electricity.
Sec. 702 does not address those abuses.
Electric cooperatives have not been part of the problem. Not-for-
profit electric cooperatives have not gamed markets, they have not
abused consumers, and they have not exercised market power. It would be
impossible for them to have done so. Cooperatives do not own enough
generation and are not large enough players in electric markets to
exercise market power. All together, electric cooperatives generate
only about 5% of the electric power in the country, which is less than
half of the power they need to serve their own consumers. All combined,
electric cooperatives' sales to public utilities represent less than 1%
of all sales in the wholesale market.
H.R. 2944 recognized the substantial differences between not-for-
profit consumer-owned electric cooperatives and investor-owned
utilities, and made an effort to accommodate those differences;
Sec. 702 ignores those differences.
Expansion of FERC Jurisdiction to Cooperatives with Transmission Would
Subject Cooperatives to Expensive Duplicative Regulation
If FERC jurisdiction were expanded, electric cooperatives would be
subject to unnecessary, duplicative, and possibly contradictory
regulatory obligations.
First, all electric cooperatives are regulated by their customers.
Cooperatives are not-for-profit and are owned by the consumers they
serve. They are governed by boards of directors composed solely of
consumer-owners, who are themselves chosen by the consumer-owners of
the cooperative in open elections. The tradition of local ownership and
control and democratic governance runs deep. And, because cooperatives
are not-for-profit companies that are directly responsible to their
consumers, all but fourteen States have delegated their power to set
and regulate rates to the cooperatives' boards of directors.
Second, even those electric cooperatives that have outstanding RUS
loans or loan guarantees are subject to significant regulation by FERC.
As explained above, RUS borrowers with transmission facilities are
subject to Sec. 211 of the FPA. RUS borrowers must provide non-
discriminatory transmission service on request, and are subject to FERC
wheeling orders where disputes arise. RUS borrowers are also subject to
the reciprocity requirements in FERC's Order No. 888 and 889.
Third, RUS borrowers are subject to pervasive regulation by RUS,
pursuant either to RUS regulations or to the loan document that RUS
borrowers must sign to obtain loans or loan guarantees. RUS regulation
ranges the gamut: restrictions on depreciation rates, standards and
specifications for electric system construction, uniform system of
accounts, required standard contract forms, mandated competitive
procurement procedures, merger review, credit management, and a myriad
of additional topics--even intervention in the choice of senior
managers for borrowers in financial difficulty. In all, RUS regulations
cover more than 800 pages in the Code of Federal Regulations. Moreover,
other RUS mandates are contained in hundreds of extant ``REA
Bulletins'' covering most categories of electric system construction
and daily operation.
If FERC's full Federal Power Act (FPA) jurisdiction were expanded
over transmitting utilities, RUS borrowers would be subject to several
more levels of regulation than any investor-owned utilities. RUS
borrowers could also be subject to conflicting requirements from
different agencies. For example, both RUS and FERC would have the
authority over cooperatives' transmission rates, accounting systems,
and record keeping methods. Depending on how broadly FERC's
jurisdiction was expanded, both agencies could also have authority over
cooperatives' mergers and asset transfers, transmission maintenance
procedures, and investments in new transmission facilities.
That duplicative authority would raise costs and increase
regulatory uncertainty for cooperatives, make it more difficult for
cooperatives to react quickly to changes in the competitive market, and
handicap cooperatives compared to public utilities, which do not face
duplicative regulatory obligations.
FERC Lacks the Resources to Address Expanded Jurisdiction over
Cooperatives
FERC has insufficient resources today effectively to meet its
current regulatory obligations. In light of the limits on its
resources, it is hard to imagine how FERC could effectively handle an
expansion of its jurisdiction and authority. According to the last FERC
Annual Report containing such numbers (1996 report), FERC regulates
about 370 public utilities. Depending on the manner in which FERC
defines ``transmission'', extending FERC jurisdiction over transmitting
entities could add more than 450 cooperatives and many municipal
systems. The number of FERC-regulated entities could more than double.
In other words, FERC would become stretched even thinner. Under
such circumstances, the amount of abuse in the market would be certain
to increase dramatically. The holes in the regulatory net would become
so large that utilities could conclude the chance of getting caught in
wrongdoing would be so remote as to pose no barrier. Thus, instead of
enhancing the competitive market, expansion of FERC jurisdiction could
severely handicap it, putting consumers at substantial risk.
FERC Lacks the Capacity to Regulate the Distribution System and Retail
Services
Several proposals for electric legislation would: (a) grant FERC
the responsibility for establishing standards for the interconnection
of distributed generation to the distribution system; (b) mandate net
metering for some consumer-owned generation; (c) establish principles
for setting rates for retail energy service to consumers with
distributed generation; and (d) grant consumers, subject to FERC
regulation, the right to sell power they choose not to use
(``negawatts'') to third parties.
NRECA opposes the federalization of these issues for several
reasons. First, electric cooperatives own 44% of the nation's
distribution system. Much of these distribution systems are located in
rural areas where the population density is low, averaging less than 6
consumers per mile. As a result, the revenue generated in these areas
is extremely low, averaging approximately $7,000 per mile. Net metering
and distributed generation interconnection programs, for instance, if
formulated and implemented without a strong sensitivity and
appreciation for local conditions would lead to increased electricity
costs for consumers in rural areas that could least afford to pay them.
Second, electric cooperatives have obtained $36.4 billion in RUS
financing. As a result of this financing, RUS must approve the rates
and practices of distribution cooperatives and cooperatives that own
generation and transmission. Negawatt and net metering programs and
distributed generation interconnection standards have a direct impact
on these rates and practices; however, they are being federalized
without any role for RUS. This will create significant problems for
cooperatives.
Third, these issues have traditionally been the responsibility of
states and local regulatory bodies. Moving these issues to the federal
level makes it more difficult, or in some cases impossible, for states
and local regulators to protect the public interest.
Policy decisions with respect to retail electric and distribution
services can have tremendous impact on local standards of living and
economies. It is important, therefore, for state and local regulators
to be able carefully to balance local interests and to craft tightly
focussed regulations of retail electric and distribution services that
meet local needs. Moving responsibility over these issues away from the
local community to the federal level makes it less likely that
regulatory decisions will reflect local needs or protect local
interests. Moving responsibility over these issues away from the local
community to the federal level also makes it harder for utilities to
provide reliable, universal electric service at a reasonable cost.
The ``negawatts'' proposal embedded in Sec. 104 of the September 21
discussion draft is a perfect example of the risks of federalization.
At the federal level, the proposal is attractive because it appears
that it would create a more liquid regional wholesale market. At the
local level, however, it is clear that the proposal could cause
significant price increases for retail consumers served by the same
utility as a few very large industrial consumers who resell their
power. It could also cause significant economic disruption in that
community when industries choose to sell power and lay-off the workers
no longer needed to work on idled production lines. State and local
regulators are more likely to be sensitive to those kinds of concerns
than federal regulators.
Moreover, NRECA does not believe that FERC has the experience or
the resources to regulate effectively matters relating to retail
electric or distribution services. Over more than 65 years, FERC and
its predecessor, the Federal Power Commission (FPC), regulated
wholesale sales and transmission service. FERC has never established
technical standards for the interconnection of generation at the
transmission level, and it has never had any experience whatsoever
regulating retail services or distribution systems. FERC does not
employ today a single distribution engineer. Further, as discussed
above, FERC is experiencing difficulty meeting its existing
responsibilities today with its limited resources. Multiplying FERC's
responsibilities by giving it new jurisdiction over retail and
distribution services would spread FERC's limited resources even more
thinly to the detriment of both wholesale and retail consumers.
Mr. Barton. We thank you. When we come back, we'll start
with Mr. Gerken. We're in recess until approximately 2 p.m.
[Brief recess.]
Mr. Barton. The subcommittee will come to order.
The pending business before us is the hearing on RTOs and
transmission policy for the electricity industry. We had heard
from Mr. English, we now want to hear from Mr. Gerken as soon
as everybody gets settled. it looks like they're about settled.
Your statement's in the record. You're recognized for 5
minutes.
STATEMENT OF MARC S. GERKEN
Mr. Gerken. Good afternoon, Mr. Chairman and members of the
subcommittee. I am Marc Gerken, President of American Municipal
Power-Ohio in Columbus, Ohio. I am testify today on behalf of
AMP-Ohio and TAPS.
AMP-Ohio is a wholesale power supplier and service provider
for 84 municipal power systems throughout Ohio, Pennsylvania
and West Virginia.
TAPS is an association of transmission dependent utilities
and other supporters of nondiscriminatory transmission access
and vigorously competitive wholesale electric markets. For more
than 16 years AMP-Ohio has been involved in a competitive
purchase and delivery of wholesale power as an aggregator for
municipal electric systems. As an active participant in the
Midwest wholesale market, AMP-Ohio has experienced both
benefits of competition and the limitations of the current
market structure.
The topic of today's hearings, RTOs, open access and
transmission jurisdictions are key to achieving an effective
wholesale competition and its intended purpose meeting consumer
benefits. And I stress the consumer benefit part. Compromise on
these issues will do far more harm than good.
AMP-Ohio operates in five different transmission control
areas today that will be part of RTOs, the Alliance RTO, the
Midwest ISO and the PJM RTO, that'll be PJM West. Not only are
there competing RTO proposals, but transmission owners are
playing RTO musical chairs, hoping from one RTO into another
created a checkerboard system with potential holes and
inconsistencies. These kinds of behaviors do not advance the
development of large independent rationally scoped RTOs, which
TAPS believes are essential to a competitive market.
TAPS applauds FERC Chairman Pat Wood's recent statements
and efforts to ensure proper RTO formation. Despite this
important development, Federal legislation is still needed to
clarify and affirm FERC's authority to move forward with this
new organized scheme.
Absent congressional affirmation, more aggressive FERC
action is likely to get mired in litigation, therefore with
regards to RTOs TAP would urge Congress to do three things.
Affirm FERC's authority to require jurisdictional utilities
to participate in an RTO to remedy undue discrimination, and as
Chairman Woods also proposes, generic condition for market
based authority and merger approval.
Second, authorize FERC to require transmission owning
Federal utilities to participate in an RTO if needed to remedy
undue discrimination.
And last, authorize FERC to order RTO participation by
municipal and cooperative utilities upon finding that the
transmitting utility has engaged in undue discrimination in the
provisions of transmission, and that open access tariffs are
unlikely to remedy this problem.
On the question of FERC jurisdiction over transmission,
TAPS believes that for the 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. Somewhat like Mr.
Flynn mentioned, think what pandemonium would occur if the
interstate highways posted two different speeding limits for
passenger cars. A higher limit for interstate in-state cars and
a lower rate for out of State cars. Go on farther and think how
many crashes or congestions would occur if the State
established a different regime for instate cars to switch
lanes, maybe you don't have to turn your turn signal on, versus
the out of State cars. Or think what would happen if a State
would mandate that out of State vehicles pull over to the
shoulder during rush hours so that in-state vehicles could
pass. You cannot have multiple inconsistent systems for use of
an interstate transportation system, it won't work; yet this is
precisely what the divided transmission authority allows.
Some have suggested that the current split jurisdiction
assures reliability to the transmission owner's native load.
Our view is that it has the potential to subject native load
customers of other utilities to less reliable and more
expensive service. We do not see this as the State versus
Federal issue, rather it is a State versus State, consumer
versus consumer issue. And FERC is the only entity that can
ensure open fair nondiscriminatory and reliable service to all.
TAPS urges Congress to recognize in the legislation that
there can be only one set of rules for all users of the
transmission network, and those rules need to be set by FERC.
And subsequently, TAPS support FERC jurisdiction over
transmission use for bundled as well unbundled retail sales and
also FERC jurisdiction over the terms and conditions of service
over municipal cooperative system transmission systems subject
to the FERC-lite provisions.
TAPS looks forward to working with the subcommittee. And I
appreciate it, and I look forward to your questions.
[The prepared statement of Marc S. Gerken follows:]
Prepared Statement of Marc S. Gerken on Behalf of the Transmission
Access Policy Study Group
Good afternoon, Mr. Chairman and Members of the Subcommittee. My
name is Marc Gerken. I am President of American Municipal Power-Ohio in
Columbus, Ohio.
AMP-Ohio is a nonprofit wholesale power supplier and services
provider for municipal electric utility systems, including 79 of Ohio's
85 community-owned electric utilities, three in Pennsylvania and two in
West Virginia. Ohio municipal electric systems account for
approximately six percent of the retail electric sales in Ohio, serving
about 360,000 meters statewide. Our organization has 186 employees, and
operating revenues of more than $228 million. Our members receive their
power supply from a diversified resource mix, including: wholesale
power purchases through AMP-Ohio and on the open market; energy
produced at the 213-megawatt, coal-fired Richard H. Gorsuch Generating
Station owned and operated by AMP-Ohio; individual community-owned
generation facilities; and municipal generation joint ventures such as
the 42-megawatt Belleville Hydroelectric Project and the 157-megawatt
OMEGA JV2 distributed generation.
Ohio's municipal electric systems do not own significant
transmission facilities, and therefore are transmission dependent. In
2000, the non-coincidental peak for AMP-Ohio member communities was
1,793 megawatts. We operate in five different transmission control
areas today that will be part of the Alliance RTO, Midwest ISO and PJM
RTO. Our energy control center has handled arrangements to move power
across as many as 18 different transmission systems in one year.
I am here today to testify on behalf of the Transmission Access
Policy Study Group (TAPS). TAPS is an association of transmission-
dependent utilities and other supporters of equal, non-discriminatory
transmission access to the nation's transmission grids and vigorously
competitive wholesale electric markets. TAPS members are located in
more than 30 states. (Let's attach list of members and map.) AMP-Ohio,
and the other municipal, cooperative and investor-owned utilities and
municipal joint action agencies that are members of TAPS, are
transmission dependent utilities (TDUs). We 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. AMP-Ohio's 20-year involvement in the
competitive purchase and delivery of wholesale power as an aggregator
for our members gives us a full appreciation of the central role of
open and non-discriminatory access to transmission in ensuring all
consumers access to reliable service and for wholesale and retail
competition to be a success.
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. To promote electricity
competition and ensure reliable service to all consumers, we must all
work together to get the basic infrastructure right. The subjects of
today's hearing--RTOs, open access, and transmission jurisdiction--are
key to achieving these important objectives. Compromise on the critical
issues of industry structure will do far more harm than good.
Specifically, we believe that Congress should enact legislation to:
<bullet> Clarify FERC's authority to require participation in large,
truly independent and rationally configured regional
transmission organizations (RTOs), with full authority to
operate the regional grid as well as to plan and expand it, or
cause its expansion.
<bullet> Place regulatory responsibility for all transmission service--
wholesale and retail, bundled and unbundled--clearly in FERC's
hands (subject to ``FERC lite'' jurisdiction over the
transmission owned by municipal and cooperative utilities).
1. ferc needs authority to require strong, independent, broad regional
rtos
Large, rationally configured, independent and robust regional
transmission organizations, with exclusive authority to operate, plan
and cause expansion of the grid, are key to getting the transmission
infrastructure right. The current regimen of control of transmission by
individual vertically-integrated utilities must change to be compatible
with and support competitive markets. Regional transmission
organizations are the structure needed in a competitive electric
industry. As FERC correctly found in Order 2000, RTOs are required (1)
to eliminate the continued opportunity (that exists notwithstanding
Order 888's requirement of open access tariffs) for discriminatory
transmission practices; and (2) to achieve efficient management of the
grid and improve reliability.
Today, the grid remains largely in the hands of one set of market
participants (vertically-integrated utilities or utilities with
transmission subsidiaries) that can use that control--in ways often
difficult to detect--to favor themselves. Even if the owner is not
discriminating, that potential chills the market, as FERC has found.
When curtailments are called or transmission service requests are
denied, a doubt arises as to whether competitive considerations came
into play.
AMP-Ohio has experienced denials of service and interruptions that
are frankly inexplicable except as the result of the transmission
owner's manipulation of the transmission system to advantage its own
generation and sales and disadvantage a competitor. For example, on
June 30, 1999, AMP-Ohio's request to transmit 20 MW from a member city
was denied based on a claimed lack of available transmission capacity
(ATC). A check of the ATC across the interconnection in the opposite
direction showed no capacity in that direction either, in apparent
defiance of the laws of physics. We were amazed that an interface could
be fully loaded in both directions at the same time--one would think
that some unloading would occur, even be encouraged, as opposing
reservations or uses are made. Our skepticism about the accuracy of the
transmission providers' claimed lack of ATC in both directions was
increased by the fact that we had to replace the power we had sought to
transmit with a $4,000 per megawatt hour purchase--about 40 times the
cost of generating our own power--from one of the transmission
providers.
As a defense against such discriminatory interruptions and service
denials that are both costly and threaten reliability, AMP-Ohio has
undertaken an aggressive campaign to place 157 megawatts of small,
distributed generation resources in our member communities. But this
defensive action only highlights the need to get operation of the
transmission system out of the hands of market participants. Only truly
independent RTOs, with no stake in the market, can achieve the trust
required to create a marketplace--a competitively neutral platform--on
which competition can thrive, with enhanced reliability and efficient
use of generation resources.
Regionalization of transmission planning under the control of an
independent RTO, with authority to expand or cause expansion of the
grid, is also critical to a robust transmission system capable of
reliably handling the competitive market's increased traffic. Single
system regional planning will be a dramatic improvement over a grid
planned by numerous owners with different competitive agendas.
Vertically-integrated utilities who now control planning and expansion
often have a competitive interest in not improving their transmission
system. Many risk losing substantial amounts of money if they construct
new transmission that opens their generation up to competition. Even
hefty incentives, paid by captive transmission customers, may be
insufficient to overcome this competitive disincentive. No such hurdle
would impede construction if independent RTOs had full responsibility
to plan and build, or cause construction of, transmission facilities
necessary to create and sustain competitive wholesale markets and
provide a high degree of regional reliability for end use customers.
Federal legislation should confirm that RTOs must perform this critical
function.
As was stated this morning by the American Public Power
Association's witness, Roger Fontes, legislating new forms of incentive
pricing for transmission services is NOT the right tack to take to
encourage grid expansion and improvements; we should not accept
transmission owner efforts to retain exclusive rights to construct
while seeking rate incentives as an inducement to do so. Rather than
granting existing owners an exclusive right to build for RTOs and
giving in to their incentive demands, we should enable RTOs to put
competitive pressure on the cost of capital. Therefore, Congress should
1)authorize RTOs to cause expansion of the regional grid by
constructing transmission themselves or by bidding out construction and
passive ownership; and 2) allow and encourage public power utilities to
share in the ownership of the new transmission facilities.
As FERC has also recognized, RTOs can facilitate competition by
ending the current balkanized markets, where an additional ``pancaked''
rate (or toll) must be paid whenever a transaction crosses the
corporate boundaries separating one transmission owner from the next.
In contrast, RTOs that eliminate rate ``pancaking,'' as FERC Order 2000
requires, would permit competitors to sell their electricity goods
throughout a broad regional market by payment of a single 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.
FERC Order 2000 gets the minimum functions and characteristics of
RTOs right. However, it relies on voluntary action to get RTOs formed.
But lethal to competition are gerrymandered RTOs designed by a group of
vertically-integrated utilities to enhance their market power by
creating barriers to competitors. Also crippling to efforts to expand
the grid, and to invest in the baseload generation necessary to serve
growing customer needs, is the uncertainty created by the ``RTO-
hopping'' spawned by reliance on voluntarism.
``Musical chair'' RTOs have plagued my region, the Midwest. We have
two RTOs forming--the Midwest ISO (MISO) and the Alliance RTO--where
there should be one, and their configurations keep changing. This past
year, three major utilities--Illinois Power, Exelon (ComEd), and
Ameren--sought to exercise what they claimed were their ``rights'' to
pull out of MISO and switch to Alliance. The result (effectuated
through a settlement that FERC approved) creates a hole in the Midwest
ISO. Even more recently, on August 31, DTE Energy Co.'s transmission
subsidiary filed with FERC to join the MISO and withdraw from the
Alliance, despite the fact that DTE is not directly connected with any
MISO member. Revolving door RTOs will never achieve their purposes. Nor
will checkerboard RTOs.
In February 2001, the Alliance and MISO reached an agreement
through FERC mediation efforts that, in principle, calls for the
continuation of the two RTOs, while establishing a single pricing
structure for certain transactions, and an inter-RTO coordination
agreement. However, the effectiveness of this arrangement remains to be
seen.
Recent FERC orders and statements by FERC's new Chairman Pat Wood
indicate a greater willingness to require RTO participation and ensure
that RTOs have a large, rational scope. In orders issued July 11, FERC
expressed a preference for four RTOs (aside from the ERCOT portion of
Texas)--one in the West, one in the Southeast, one in the Midwest and
one in the Northeast, and initiated a 45-day mediation as step one in
forming a single RTO for the Southeast and Northeast, respectively. At
FERC's September 26 meeting, Chairman Wood issued a memo in which he
made clear his willingness to employ ``sticks'' instead of just
``carrots'' to ensure RTO formation:
What to do about the December 15, 2001 date in Order No.
2000? I recommend that this be changed to be the date by which
all jurisdictional utilities must either elect to join an
approved RTO organization or have all market based rate
privileges by any corporate affiliate be prospectively revoked,
following a Section 206 investigation. I would also recommend
that no mergers be approved relating to entities who do not
become part of an operational RTO. And for an public utility
that chooses not to be part of an RTO, I believe we would need
to take a hard look at the transmission rates they are
permitted to charge to ensure that they are just and reasonable
and recognize the interdependence of the power grid.
While we applaud Chairman Wood's statement, federal legislation is
still needed to clarify FERC's authority to move forward on this newly
energized course. Absent Congressional guidance, more aggressive FERC
actions are likely to get mired in litigation. In fact, legal
challenges to the flexible directives included in Order 2000 will be
argued before the D.C. Circuit next week. TAPS therefore urges Congress
to adopt in legislation the RTO participation position that was
developed and is supported by APPA's transmission owning and TDU
members:
<bullet> Confirm FERC's authority to require FERC-jurisdictional (as of
the date of enactment) utilities to participate in an RTO as a
generic condition for continued or requested market-based rate
authorizations or as a standard requirement for merger approval
or to remedy undue discrimination.
<bullet> Authorize FERC to require transmission-owning Federal
utilities to participate in an RTO to remedy undue
discrimination.
<bullet> Authorize FERC to order RTO participation by municipal and
cooperative utilities based on a finding that the utility has
engaged in undue discrimination in the provision of
transmission service, or abused its control over transmission
so as to disadvantage competitors, and open access transmission
tariffs are not likely to remedy the problem. Any such orders
must accommodate tax code restrictions and/or bond covenants.
2. ferc must be responsible for regulating all 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. For this
reason, TAPS supports extension of FERC jurisdiction over the terms and
conditions of service over municipal and cooperative transmission
systems, subject to ``FERC Lite'' provisions. In addition, TAPS
supports FERC jurisdiction over the transmission used for bundled as
well as unbundled retail sales. In fact, TAPS believes the Federal
Power Act as currently enacted encompasses such jurisdiction, as we
made clear in our brief to the Supreme Court. However, we urge Congress
to clarify FERC's authority to reflect today's policy objective of
promoting competitive markets and ensuring reliable service for all
consumers.
The Supreme Court case pertains to Order 888, in which FERC
asserted jurisdiction over transmission for unbundled retail service
(where states have adopted retail competition), but not transmission
used for bundled retail sales (traditional retail sales where the price
for power is ``bundled'' with the price of transmission and
distribution services). The D.C. Circuit upheld FERC's assertion of
jurisdiction over unbundled retail transmission as compelled by binding
Supreme Court precedent as well as by deference to FERC's
interpretation. Although the Court of Appeal's decision strongly
suggests that FERC could exercise jurisdiction over the transmission
component of bundled retail electric sales, it upheld FERC's decision
not to do so as ``a statutorily permissible policy choice.'' At the
Supreme Court, a number of states are challenging FERC's assertion of
jurisdiction over unbundled retail transmission; Enron is challenging
FERC's failure to assert jurisdiction over the transmission used for
bundled retail transactions. TAPS has stated its support of Enron, and
filed a brief opposing the states' challenge. The case was argued on
October 3.
Good public policy in 2001 and beyond should not depend on whether
and how the Supreme Court interprets the 1935 Federal Power Act, as
amended. Rather, for competitive markets to work, Congress must clarify
FERC's jurisdiction over all uses of interstate transmission.
To access competitive markets, all users must rely on the same
integrated transmission grid. Perhaps no other industry stands more in
need of a single set of interstate rules, and a single traffic cop, to
ensure the coordinated, non-discriminatory, and efficient use of the
transmission required to support competitive electricity markets.
Think what pandemonium would occur if the interstate highways
posted two sets of speed limits for passenger cars, 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.'' It would also be inconceivable
for Virginia to establish a rule that during rush hours, out-of-state
vehicles on Interstate 95 must pull over to the shoulder so Virginia
vehicles may pass.
Yet, that is precisely what divided transmission authority would
allow, as determined by the Eighth Circuit. That court ruled that
states could set their own rules for the transmission of bundled retail
sales 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.
Such a system will not work. You cannot have multiple, inconsistent
systems for reserving, allocating and scheduling transmission over the
unitary transmission network. Reliability, efficiency, and competitive
markets will all suffer in the name of preserving service to a favored
subset of retail consumers.
For example, AMP-Ohio and its members serve the bundled retail
customers of those member cities by paying to use the transmission of
other utilities. In August, AMP-Ohio's transmission service that
permits its members to serve these retail customers under network
service was curtailed, increasing costs and threatening reliability.
Should these retail customers, who have long paid and continue to pay
their fair share of the costs of the transmission system, be more
exposed to curtailments than the bundled retail customers of
transmission owners? And should retail customers that dare to exercise
their retail choice options (where available under state law) be
treated as second-class citizens if they receive power transmitted
through a state that gives priority service to its own bundled retail
customers?
As an active participant in the Midwest wholesale power market,
AMP-Ohio has experienced threats to system reliability and prices
spikes in recent years. While there are constrained transmission
interfaces and a need for generation and transmission additions, in our
opinion the root cause of these problems is market manipulation and
market structure. Based on our 20 years of practical experience in the
market, we can attest to the fact that the market has become
increasingly dysfunctional and has taken steps backward, not forward.
Retail competition will not be successful if power supplied through
the market, using FERC-jurisdictional unbundled transmission service,
is less reliable than power supplied to bundled customers. Consumers
will not switch suppliers if they cannot count on reliable delivery of
power from their new supplier. Nor can competitive wholesale markets
thrive where states retain authority to accord transmission owners
serving their bundled retail customers access rights superior to those
of other users.
While some will suggest that the current split jurisdiction assures
reliability to the transmission owners' ``native load'' customers, our
view is that it creates a black box that prevents the open markets that
are needed to benefit all equally ``native load'' consumers. If a
utility says it has no transmission capacity available to others
because it is needed for its own bundled retail use, can we be sure
that this isn't market manipulation in the name of reliability?
Utilities have been known to reserve all of the transmission import
capacity in the unlikely event that every single generation plant in
the control area simultaneously shuts down. Removing such actions from
FERC scrutiny by placing them behind a state-jurisdictional curtain
invites discrimination and destroys any pretense of non-discriminatory
open access. And they subject equally ``native load'' customers of
other utilities to less reliable and more expensive service. Every
utility, those that own transmission and those that do not, have native
load customers that deserve and must have equal reliability. As was
said by former FERC Chairman Martin Allday, everybody is somebody's
native load customer.
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 wholesale uses or retail choice
programs to second-class status. The absence of a clear, unified set of
rules would 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. This is not a state versus
federal issue. Rather, it is a state versus state, consumer versus
consumer issue. And only FERC is in a position to ensure open, fair,
nondiscriminatory, and reliable service to all.
TAPS urges Congress to recognize in legislation that there can be
only one set of rules for all users of the interstate transmission
network, and that those rules need to be set by FERC.
TAPS appreciates this opportunity to present its views to the
Subcommittee.
Mr. Barton. Thank you, Mr. Gerken.
We want to now hear from Mr. Peter Esposito, who is Vice
President and Regulatory Counsel for Dynegy, Inc.
Your statement's in the record and we welcome to have you
elaborate on it for 5 minutes.
STATEMENT OF PETER G. ESPOSITO
Mr. Esposito. Thank you, Mr. Chairman and members of the
committee for allowing me to speak here today on behalf of the
Electric Power Supply Association and my company, Dynegy.
Those that are familiar with the energy situation last year
in California, I know you all are, might logically ask why
should I touch power? Isn't it the third rail of energy here?
The simple answer is just because California didn't get it
right doesn't mean the Nation as a whole can't afford to do it.
Power's the life blood of the American economy. Growth and
demand must be met by growth and supply and improvements in an
aging infrastructure.
Today some regions are on the edge of a supply/demand
imbalance, as California was. This imbalance will only get
worse unless we change today's regulatory paradigm of a
patchwork of ever changing rules being issued under the aging
statute. Simply put, those who supply and transmit power need
rules they can rely on and consumers simply want power that is
reasonably priced and reliable. Consumers don't want to be
surprised by price spikes or blackouts, especially given the
increased threats we now face.
In this regard, incumbent monopolies have a legal
obligation to provide service often at any price. New entrants
are aligned with consumers because they know they will not be
successful in the market unless they actually provide consumers
reliable power at a reasonable price.
How do we satisfy your constituents and our customers? We
satisfy their desire for reliability at reasonable prices
through competitive markets that allow customers to choose from
a variety of suppliers and products that reflect the balance of
price and reliability risk those customers choose to assume.
It is amazing in this United States what a profit incentive
can do to assure the products are on the shelves in ample
supply. Mr. Radanovich was here, I'd point out, to whine.
Establishing competitive markets requires some common sense
and a big picture view. There are three perspectives that are
involved in any market and are involved in the electric market:
That of those who produce, in this case the generators; those
who deliver, the transmission owners; and, those consume,
consumers.
This isn't rocket science. We need to assure that the raw
material, energy, can be produced in large quantities and
transported flexibly to the points where consumers want to use
it. Much as the space program gave us a great political and
technology benefits, forging flexible markets gives us double
benefits. It trains us to reconfigure systems to make economic
sense on an hourly basis allowing markets to help mitigate the
impacts of nefarious attacks on our infrastructure. Flexibility
works very well in the gas industry to bring consumers great
benefit, it'll work here in the electric industry.
More specifically, from the production side we must assure
easy entry to markets. We can do that by establishing uniform
interconnection rules applicable to all, as you all have
proposed. But that is not all we have to do. We have to assure
that wire owners do not restrict access to wires in order to
favor their own generation, and to do that we need to separate
control as we talk about this morning.
FERC plans to do this through RTOs and Congress should
affirm FERC's authority to compel memberships in RTOs by all
transmission providers, or at a minimum not interfere with the
FERC's current policy of saying you're either in the old world
or the new world. That policy, if implemented, will work.
The mere formation of RTOs, however, is not enough to
ensure that markets can do their job effectively. We must
assure that each has an open access tariff that is flexible to
allow the aggregation of supply and the aggregation of
customers, not just to take a static system and use it in a
static manner.
We need to deal with the seams issues between transmission
providers. Today's transmission system is all too often
characterized by numerous relatively small franchise service
areas shaped in ways that would make the best congressional
redistricters proud. To move power between regions one must
contract with each of these franchisees for transmission
service.
Imagine changing trucking companies at each county line
when trying to truck tangerines from Tampa to Trenton or
oranges from Orlando to Oswego. The farmers and consumers had
to pay the cost of this inefficiency, Congress would have acted
decades ago to fix this problem and, in fact, it did by
creating a national highway system. Yet this is how we transmit
power in most regions today.
This structure of the early part of the last century has
stayed in place in large part due to structural and political
inertia, if not outright existence. The time is right to fix
this and reducing the sheer number of transmission providers by
forming RTOs is, in part, the answer. So too is making the RTOs
large enough to limit the burdens associated with changing
trucks at every county line. This doesn't, however, require
uniform markets, just consistent business practices between the
RTOs.
One problem with RTOs is that they will become big
monopolies. We need to get consumer inputs through stakeholder
advisor boards. Another thing is to incent them correctly. We
talked about incentive rates this morning. We ought to be
thinking about volumetric rates. You provide more service, you
make more money. It's a pretty simple concept, works in the gas
industry.
We can remove artificial barriers including PURPA and
PUHCA. We can empower FERC to require consistent business
practices.
From a transmission owner's perspective we need a
regulatory and tax climate in which capital formation can
occur. That involves regulatory certainty, changes in tax laws
and the right to make a profit commiserate with risk.
Second, they need the ability to expand their service to
expanded access. We talked about siting this morning.
And finally, there are other ways to expand transmission
including use of existing rights of way and new technology.
Finally, consumers need to be empowered. They need to see
price signals so they know how much it's going to cost when
they consume power. California they predicted 260 hours of
blackouts last year where this past summer we had none, zero.
Why? Because the consumers got the price signal.
Finally, we need a means of consumer choice. And I know
you're not going to go to mandating retail access, but you can
set up a paradigm in the wholesale market where retail access
can work, and I encourage you to do that.
Your bill is going in the right direction, but the devil is
in the details. I'd encourage you to take a look at those
details, some of them sort of reverse direction, and we look
forward to working with you on those details.
Thank you.
[The prepared statement of Peter G. Esposito follows:]
Prepared Statement of Peter G. Esposito on Behalf of Electric Power
Supply Association and Dynegy Inc.
Mr. Chairman and members of the Committee. Thank you for allowing
me to speak here today on behalf of the Electric Power Supply
Association. EPSA is comprised of generators and marketers of electric
power. I also speak on behalf of Dynegy, a marketer and generation
owner, and a member of EPSA.
Those familiar with the energy situation that developed in
California over the last year will agree that incorrectly restructuring
the power industry can have dire consequences. Armed with this
knowledge, you may quite naturally ask: ``why should I touch power; it
could be just another political third rail?''
The simple answer is that just because California didn't do it
right doesn't mean the Nation as a whole can afford not to do it at
all. Now more than ever, power is the lifeblood of the American
economy. Growth in demand must be matched by growth in supply and
improvements in an aging delivery infrastructure. Today, some regions
are on the edge of a supply demand imbalance. This imbalance will only
get worse unless we change today's regulatory paradigm of a patchwork
of ever-changing rules being issued under an aging statute.
While those who supply and transmit power need modern rules they
can rely on, consumers simply want power that is reasonably priced and
reliable. They don't want to be surprised by price spikes or blackouts,
especially given the increased threats we now face.
Incumbent monopolies have a legal obligation to provide reliable
service at any price. New entrants are aligned with consumers because
they know that they will not be successful unless they actually provide
consumers reliable power at a reasonable price.
How do we achieve these reliability and price objectives
simultaneously? Everyone seems to have an idea,
<bullet> Do we have the government build power plants to create a
reserve? That would be folly unless we want the government to
build all the plants. Otherwise the private sector would simply
back off its new construction until equilibrium of supply and
demand was created. No one is going to build power plants in a
glutted market if they are not going to get back their
investment and some return on that investment.
<bullet> Do we require public utilities to build more generation? Go
back to the ``good old days?'' Remember what got us here was
overbuilding during the rate-based ``nothing's too good for the
ratepayers'' construct, where the ratepayers are on the hook to
pay for virtually anything and everything the utilities build,
whether it is economic or not. Can our economy afford to pay
large premiums on power year after year under the old regulated
regime while our competitors in the rest of the world adopts
the new deregulated regime? Of course not!
And how do we satisfy your constituents and our customers? We can
satisfy their desire for reliability at reasonable prices through
competitive markets that allow customers to choose from a variety of
suppliers and products that reflect the balance of price and
reliability risk those customers choose to assume. It is amazing in
this United States what the profit incentive can do to assure that
products are on shelves in abundant supply.
Establishing competitive markets does not involve nuclear physics.
It does, however, require some common sense and a big-picture view.
There are three perspectives this Committee must consider when
addressing electric restructuring. These are the perspectives of:
1. Generators: those who produce the product and who need easy entry to
markets, signified by access to the grid
2. Transmission owners: those who deliver the power, who need
roadblocks to grid expansion removed, and
3. Consumers: those who purchase and consume power, and who deserve
power that is reasonably priced and reliable.
These are the three basic players in any market. Each needs to be
empowered.
This is not rocket science. We need to assure that the raw
material--energy--can be produced in large quantities and transported
flexibly to the points where consumers want to use it. Much as the
space program gave us great political and technological benefits,
forging flexible markets gives us a double benefit: By training us to
reconfigure systems to make economic sense on an hourly basis, vibrant,
flexible markets also help mitigate the impacts of nefarious attacks on
our infrastructure.
More specifically:
First, from the production side, you must assure generators easy
entry to markets. In power industry parlance, this means assuring that
new generation can get interconnected to the grid and that, once
connected, it is able to reach many consuming markets under reasonable
contractual terms and at a price that is reasonable and determinable in
advance.
Bearing in mind that transmission is presently a monopoly and will
be for some time, this means:
<bullet> establishing base-line interconnection rules for all markets,
in all states, that require transmission owners to provide new
generators with open access to their delivery systems, even
when those new generators compete with generation owned by
those who control the wires.
One means of assuring that wires owners do not restrict access to
wires in order to favor their own generation is to separate the control
of wires from control of competing generation. FERC plans to do this
through the formation of large Regional Transmission Organizations
(RTOs), in effect pooling the transmission assets of many utilities
under one independent operator. Congress should affirm FERC's authority
to compel membership in RTOs by all transmission providers.
The mere formation of RTOs, however, is not enough to assure that
markets can do their job effectively. We must:
<bullet> Assure that each RTO has open access tariffs that facilitate
the movement of power from many generators to many consumers.
These tariffs must apply fairly and across the board to all
users of the transmission system so as to assure each a chance
to compete, both in the sale and purchase of energy.
<bullet> Deal with ``seams'' issues between transmission providers.
Today's transmission system is all too often characterized by
numerous relatively small franchised service areas shaped in
ways that would make the best Congressional redistricters
proud. To move power between regions, one must contract with
each of these franchisees for transmission service. Imagine
changing trucking companies at each county line when trying to
truck tangerines from Tampa to Trenton. If the farmers and
consumers had to pay the costs of this inefficiency, Congress
would have acted decades ago to fix the problem, indeed it did
by creating a national highway system with characteristics like
minimum bridge heights. Yet this is how we transport power in
most regions of the country today. This vestige of the early
part of the last century has stayed in place in large part due
to structural and political inertia, if not outright
resistance. The time is ripe to fix this, and reducing the
sheer number of transmission providers by forming RTOs is, in
part, the answer. So too is making RTOs large enough so that
the burdens associated, for example, with moving power from
Florida to the PJM are not overwhelming.
<bullet> One problem with RTOs is that they will, by definition, become
giant monopolies. Giant monopolies generally have no incentive
to act like a competitive business and their service tends to
become ``bureaucratic,'' to be kind. Because customers will not
have another RTO to go to for service if they don't like their
regional RTO, we must create incentives for RTOs to treat
customers as customers. There are two ways to address this.
<bullet> First, there must be some recognized means of assuring
customer input is taken seriously, for example through
stakeholder advisory boards to the the RTO.
<bullet> The second is to make RTO cost and profit recovery dependent
on providing valuable service, e.g., by setting up rate
designs that are based on throughput, not merely on
ownership of wires. When the RTO does a good job, it should
be rewarded; when it does not, it should not.
<bullet> Economies of scale must be achievable:
<bullet> Congress should remove artificial barriers, including
ownership restrictions included in PURPA and PUHCA.
<bullet> FERC must be empowered to require consistent transmission
business practices across the country.
Second, from the transmission provider perspective, you must give
the RTOs the tools to do their job and the ability to make a profit.
This entails providing:
<bullet> A regulatory and tax climate in which capital formation can
occur.
<bullet> Regulatory certainty: Change is inevitable, but constantly
changing rules need not be. Just as generators are asking
for some certainty in environmental requirements and market
rules, transmission owners have a right to know what is
expected of them; when they will be rewarded and when they
will be punished by regulators.
<bullet> When change is required, there should be adjustments made to
facilitate change. Here, tax laws changes are necessary to
assure that taxable events do not occur simply because
transmission assets are transferred under government
request to RTO control.
<bullet> Transmission owners must have the right to make a profit
commensurate with risk.
<bullet> The ability to provide better service with expanded assets.
The surest way to eliminate any semblance of generator market
power is to remove all congestion from the system, so that many
sellers can reach many buyers and vice-versa. This will require
that something be done to facilitate siting of new transmission
facilities, in what could be a very painful political process.
This could occur through regional compacts, or through RTO
processes, with a federal eminent domain backstop. Again,
consumers all over the nation will benefit from better markets
and increased infrastructure security if we come together as a
Nation to deal with critical siting issues. Whatever method of
dealing with these issues is chosen, landowners must feel they
got a fair shake.
<bullet> Let us not forget in this quest that there are many ways to
expand transmission, through the use of existing rights of way
and with new technology. New wires in new rights of way are not
the only way to expand and enhance the transmission system.
Third, consumers need to be empowered.
<bullet> Price signals: Consumers need to be charged power they
consume, so they know how much they will be billed if they
consume more or less of it. Contrary to lore, demand for power
in the aggregate is elastic, as has been proven so forcefully
in California this summer:
<bullet> where the NERC predicted 260 hours of blackout and none,
repeat none, occurred, and
<bullet> where wholesale prices came down before West-wide wholesale
price caps went into effect, once retail prices rose.
<bullet> Choice: Getting wholesale markets right means establishing the
foundation for customer choice. In California, had customers
been able to choose the 5 to 6 cent power being offered by
generators last year they would not now be shouldering the
burden of much more expensive power that was purchased last
winter, before demand dropped off. We realize that the Congress
is not likely to force choice on the states, but it should at
least give the states wholesale markets that allow choice to go
forward should the states so choose.
Finally, but most importantly, we all need market rules that set up
sustainable markets, that is, markets that are fair both to consumers
and suppliers of power. Just as price caps will stifle the addition of
needed generation, so too will very high prices stifle the economic
growth and prosperity of our country.
Both FERC and Congress have a role in assuring we meet these goals.
Congress can best help consumers receive the most reliable and
reasonably priced power by reaffirming FERC's authority and providing
it with policy direction and appropriate flexibility to achieve these
goals. The time to do this is now.
Mr. Barton. Thank you.
We now want to hear from Mr. Charles Trabandt, former FERC
Commissioner, former general counsel to this committee, former
general counsel, I think, to the Senate Energy Power Committee
and until August the CEO of a company that was located, I
believe, in one of the towers at the World Trade Center.
So, we really, really appreciate you being here and
appreciate your expertise, and thank you for your prior service
to the country. And I'm sure that you have many services yet to
provide for the country. Welcome to the committee.
Your testimony is in the record and we would ask you to
summarize it in 5 minutes.
STATEMENT OF CHARLES A. TRABANDT
Mr. Trabandt. Thank you, Mr. Chairman. It's a privilege to
be with the committee again.
As this morning's hearing demonstrated, there's a critical
need for capital investment in the Nation's electric
transmission infrastructure and I would suggest that isn't just
for new interregional lines. The country is quite a bit behind
in terms of sustaining capital investment for the existing
system, as well as for new transmission lines. And I encourage
you to think of that.
Pat Wood last week also informed the country as well as
you, as I understand it, that the needs that we had prior to
September 11 probably are going to increase as a result of the
attacks and the requirements of the new homeland defense
infrastructure requirements, which both you and the Senate are
considering right now.
FERC in Order 2000 sought to address that need by providing
structural and regulatory flexibility for independent for-
profit transmission companies or transcos as an alternative
business model for the regional transmission organizations.
That flexibility, in fact, have worked and I'm sure you're well
informed of this, but we have across the country in every
region a large number of investor owned utilities and public
power entities which have joined transcos.
Just last week a group of six southwest utilities acted to
create the newest transco that would serve Arizona and New
Mexico.
Today it is clear from a business and financial perspective
that the for-profit business model is a viable and, I believe,
preferred option for RTOs. Furthermore, I am convinced a
properly structured transco will be able to access the capital
markets for equity and debt financing to provide timely funding
for the improvement and expansion of the transmission
infrastructure, which was the nature of my responsibilities as
a managing director at Merrill Lynch.
The Alliance Transco RTO with National Grid USA as the
proposed managing member I suggest is one example of the
transco RTO model which provides important precedence for
further transco development. In that model National Grid, as
you may know, has committed to a billion dollars of investment
in the Alliance company's systems as part of the deal that was
struck in August.
I couldn't agree more with Mr. Vesey who spoke to you this
morning about the new RTO transmission business under your bill
as well as under Order 2000. I think it's a mistake to think of
the new transmission business that these RTOs will be running
as the same thing as transmission services that have been
provided in the past. This is a new business model, it involves
different risks and it certainly, in my judgment, is worthy of
consideration of incentives to ensure the availability of
capital to meet all the responsibilities that the RTOs will
have that the utilities did not have in providing transmission
services.
FERC in July, however, took actions to require mediation
negotiations in the northeast and the southeast intended to
support an immediate drive toward a single RTO in each region.
The actions signaled a major policy change to establish four
RTOs, one each in the northeast, southeast, midwest and the
west and to do so without the incentives and the flexibility
provided by Order 2000, which as I just indicated has been
successful from the model that I support.
I would counsel caution with regards to such an immediate
policy change because of the potential risk that it will
materially disadvantage the transco alternative, and thereby
inhibit the availability of capital for existing systems and
new systems.
Also such a policy change could have a negative impact on
FERC actions already taken such as the alliance, Midwest ISO
settlement arrangements which will support initial operations
in the midwest in the very near future.
Finally, I would recommend that the subcommittee in any
legislation consider measures to preserve the structural and
regulatory flexibility of Order 2000 for the RTOs, particularly
in the transco business model. Such measures I believe should
ensure the transcos can be a vital segment of the future
electric transmission system and provide the needed capital for
investment.
In addition, I would recommend that the subcommittee
consider appropriate procedures to protect investments already
made and approved in operating transcos, and to provide for an
orderly transition to any new policy direction which, Mr.
Chairman, I think you've laid out in your discussion draft
which, hopefully, would continue to support a viable transco
alternative and financing for the infrastructure needs of the
industry.
Thank you, Mr. Chairman.
[The prepared statement of Charles A. Trabandt follows:]
Prepared Statement of Charles A. Trabandt
Thank you, Mr. Chairman, for the opportunity to testify before the
Subcommittee on the subject of ``Electric Transmission Policy: Regional
Transmission Organizations, Open Access, and Federal Jurisdiction.'' At
the outset, I want to commend the Subcommittee for its decision to
proceed with these hearings. While we can never forget the horrific and
tragic events of September 11th, we also cannot allow the perpetrators
of those acts of war to paralyze our great nation. So, it is
appropriate that important business such as these hearings go forward
to address critical energy issues of the future.
On the morning of September 11th, I was at the Institute of Nuclear
Power Operations (INPO) in Atlanta for a regularly scheduled meeting of
the INPO Advisory Council and a dinner to honor Dr. Jim Rhodes, the
retiring INPO CEO. As the terrible events of that morning unfolded, the
meeting was canceled and INPO immediately joined nuclear utilities
across the country in tightening security and implementing emergency
preparedness plans with impressive professionalism. From all reports,
the nuclear industry performed superbly throughout those early days of
national crisis and continues to do so.
That same morning, my former colleagues in the Global Energy and
Power Group of Merrill Lynch's Investment Banking Division had just
arrived at their offices in the North Tower of the World Financial
Center, across from the World Trade Center. They were evacuated
immediately after watching in horror as the second hijacked aircraft
hit the twin towers. I am thankful to report that they all escaped
without serious injury. However, it now appears that those offices
could be closed for an extended period, so my old group will be
relocated elsewhere in the New York City area.
I have been asked to provide testimony on FERC's Order No. 2000 RTO
policy from a financial perspective, with particular emphasis on the
independent transmission company or transco alternative and the
incentives for transco's. My testimony reflects my eight years of
experience as a Managing Director in the Global Energy and Power Group
of Merrill Lynch's Investment Banking Division, from which I retired in
August. As a Managing Director, I had responsibility for strategic
advisory assignments for electric utility and energy company clients
around the world. Among other assignments, I have advised electric
utilities on specific transmission transactions, including the
establishment, financing and strategy of Hydro One in Ontario and the
establishment and financing of U.S. RTO's. My testimony is also
informed by my prior service as a FERC Commissioner and as a Committee
Counsel in the House of Representatives and the Senate.
Other witnesses in this and prior hearings have testified about the
increasingly urgent need for investment in the nation's electric
transmission infrastructure. Investment by any measure has fallen just
as the wholesale electricity market under open access policies has
grown dramatically. And, just as the electricity system moves toward
Regional Transmission Organizations, the stress and strain on the
transmission infrastructure is going to increase at an accelerating
rate for several reasons.
Electricity demand nationwide has continued to grow and is
projected to do so at a steady rate. Construction of new generation
plants is underway at a record pace, requiring new interconnections and
upgrades and increasing the demand for transmission services. Wholesale
electric transactions for existing generation, with associated
transmission service requirements, have increased several fold in
recent years. Additionally, the system already is experiencing
increased congestion with growing costs and fast rising transmission
curtailments or TLR's. And probably not yet well understood nor fully
appreciated, the existence of a new RTO can significantly change the
wholesale transaction structures and transmission service requirements
to execute newly economic trades. In short, there is a critical need to
provide investment to maintain the national grid, which undoubtedly
will increase in the aftermath of the September 11th attacks and in the
new context of homeland defense.
These relatively inevitable pressures on the electric transmission
system in the context of the drive to RTO's under FERC Order No. 2000
support a flexible approach to financing and structuring RTO's. FERC
acted prudently to provide the electric industry with the opportunity
to structure RTO's as independent for-profit transmission companies
(transco's), as Independent System Operators (ISO's) or as hybrid ISO-
transco organizations. Hybrid organizations could include an RTO
structured as an ISO with one or more transco's as members, who also
may provide various services to the RTO.
FERC also developed a transmission rate-making policy for RTO's
which was intended to remove pricing disincentives for transmission
owners to join RTO's and to help transmission companies become viable
businesses. Under that rubric, FERC endorsed Performance-Based Rate
Regulation (PBR) for RTO's to create incentives to make efficient
operating and investment decisions, share benefits between customers
and the RTO, protect system reliability, and prescribe rewards and
penalties in advance based on benchmarks. PBR has been implemented for
transmission services in Canada and the United Kingdom, in Federal
regulation of telecommunications in the U.S., and by State PUC's for
retail electric, gas, and telecommunications service.
Consequently, while a novel concept at FERC thus far, the PBR
approach is well established in regulatory circles. What is less
apparent, however, is that it will take some time to collect the
required data for the benchmarks for a new, non-power pool RTO.
Nonetheless, the PBR has substantial financial and regulatory appeal as
an alternative to FERC's traditional transmission ratemaking policy.
In addition, FERC decided to consider innovative pricing proposals
for RTO's, on a case-by-case basis, in response to its concern about
continued under-investment in the transmission grid. The possible
innovative pricing proposals include a formula rate of return,
levelized rates, accelerated depreciation and incremental pricing for
new transmission facilities. FERC also encouraged market approaches to
congestion management as early as feasible. An RTO also can propose a
rate moratorium for the period through January 1, 2005, and capture
cost-saving benefits or increase leverage to increase earnings.
Additionally, FERC will consider acquisition adjustments on a case-
specific basis where there are measurable benefits to customers.
FERC also recognized that the IRS Code created a substantial
disincentive for transmission owners to divest substantially
depreciated transmission systems. As a result, passive ownership rules
provide specific protections and rights for those owners who transfer
control to the RTO (transco). Of course, the House-passed energy
legislation would address the problem and mitigate or remove that tax
disincentive.
Another disincentive exists in the context of registration
requirements under PUHCA with the SEC. The multi-state nature of the
larger proposed RTO's could trigger a registration requirement for the
owner of a small active ownership interest, with relatively severe
limitations and approval requirements for other business and financial
activity. Several potential strategic partners and equity financial
investors have indicated that they would be unwilling to accept
registration as a condition of a strategic partnership or an active
equity investment in an RTO. Legislative action by the Congress or
administrative action by the SEC may serve to remove this financial
disincentive at some point.
Not surprisingly, many possible strategic partners and equity
financial investors are themselves directly, or are affiliated with,
market participants, as defined by Order No. 2000. As such, those
potential investors are limited by the FERC rules to a 5% ownership
stake for 5 years, in order to ensure RTO independence, although they
could make qualified passive investments. Thus, the market participant
limitations do constrain the investment opportunity for many potential
(and knowledgeable) investors and limit the universe for marketing
transco private equity. But, it does not appear that FERC will amend
Order No. 2000 to address this issue.
FERC also adopted a policy of ``open architecture'' and required
that RTO's be designed so that they can evolve over time. The purpose
of open architecture is to allow RTO's to improve, evolve and
accommodate technical change, albeit subject to FERC review. The open
architecture policy is particularly important for transco's, given the
likely substantial changes between Day 1 operations and later
requirements, such as congestion management and new investment
policies, which have major financial implications.
This overall regulatory flexibility has spawned transco proposals
across the country, which could create the proper conditions for the
nascent independent transmission industry. Transco's could support
further development of the competitive wholesale electricity market by
accessing capital markets to secure the much needed financing for
sustaining capital expenditures, upgrades and expansion of the
transmission infrastructure. As a general financial matter, transco's
should become attractive as an equity investment to strategic partners,
financial (private equity) investors, and the public market.
Strategic partners will be attracted by the opportunity to manage a
significant asset base, share in the value creation potential (``gain
sharing''), have specified rights with regards to the assets, and an
acceptable projected return on the equity investment. There are
indications that there are a number of potential strategic partners,
however the probable requirement to register under PUHCA with the SEC
is an impediment today. Financial investors will require a well-defined
and meaningful investment as a private placement with a subscription
agreement, appropriate limitations on liability, an acceptable return
and exit strategy, board representation, and other typical features.
There are definitely financial investors interested in the transco
opportunity, provided that the specific transco structure can be
formulated to satisfy their individual requirements.
Transco's also may become attractive to the public equity markets
in the form of an IPO, a spin-off, or a tracking stock, each of which
has differing characteristics and conditions. The IPO alternative
probably will require, among other factors, a solid management track
record of a couple of years, a good business plan and marketing story,
sufficient size for liquidity, adequate projected growth and total
return, well developed valuation, reasonable regulatory stability, and
of course, a positive stock market environment. As a result, it is not
likely that the new transco's under Order No. 2000 will be positioned
for an IPO in the first or second year of operations. That factor
suggests the importance of a strategic partner and/or financial
investors in the initial transco financial plan.
Additionally, transco's should be capable of obtaining strong
investment grade credit ratings, which will support financing by access
to debt markets. Credit rating agencies have become more experienced
with the transco concept and have developed a series of quantitative
metrics and qualitative factors to assess the credit quality of a
transco. A transco with transmission system assets should be able to
achieve a solid investment grade rating with a capital structure having
debt in the range of 60% to 70%, under reasonably favorable regulatory
treatment.
The electric utility industry is moving with reasonable dispatch to
capture the opportunity provided by the FERC regulatory flexibility.
For example, the Alliance Companies (nine Midwestern utilities and
Dominion Energy), Grid South (three investor-owned utilities serving
the bulk of customers in North Carolina and South Carolina), Southern
Company and public power groups in Georgia, Alabama, and Mississippi,
Grid Florida (three investor owned utilities serving the bulk of
customers in Florida), Entergy in Arkansas, Louisiana and Mississippi,
and TransConnect (five investor-owned utilities in the Pacific
Northwest) have proposed and committed resources in varying degrees to
a for-profit Limited Liability Company (LLC) structure for their RTO.
Utilities, such as First Energy, DTE and Consumers Energy, have created
independent transmission subsidiaries to facilitate options for their
systems. In addition, the American Transmission Company with investor-
owned and public-owned transmission systems in Wisconsin already has,
and the TRANSLink group, including NSP, Mid-American, Alliant, NPPD and
OPPD, is in the process of, forming independent transmission companies
in the hybrid structure under the Midwest ISO-proposed RTO. And, last
week, Arizona Public Service, Salt River Project, El Paso Electric,
Public Service of New Mexico, Tucson Electric and Texas-New Mexico
Power announced that they were abandoning the non-profit DesertSTAR ISO
proposal in favor of a new for-profit transco RTO, WestConnect, for the
southwest region. Each of these initiatives will create the opportunity
in one form or another to access capital markets for financing
purposes.
Two recent developments highlight the opportunity for for-profit
transco's. First, a new consortium, in July 2001, won a structured
auction in Alberta and signed an agreement to acquire the TransAlta
transmission system which supplies 60% of the Province's transmission
requirements. The consortium is 50% owned by SNC-Lavalin, one of the
leading engineering and construction firms in the world, 25% owned by
the Ontario Teacher's Pension Plan Board, a large institutional
investor in Canada (OTPP), 15% owned by Macquarie Financial Group of
Australia, and 10% owned by Trans-Elect of the U.S. The consortium paid
a premium for the TransAlta assets in a competition which reportedly
included several other international strategic and financial investors.
SNC-Lavalin made the investment to capitalize on its international
engineering and financing expertise, which when combined with the
strengths of the TransAlta team, would support high quality
transmission services and much needed expansion of Alberta's
interconnections with surrounding jurisdictions. OTPP concluded that
Alberta wanted to make it attractive for investors to expand the
electricity system, such that the TransAlta transmission business was a
good asset to finance pensions. And, Macquarie also saw the acquisition
as a good investment and its first of many infrastructure investments
in Canada. While not directly on point in the context of U.S. RTO's,
this consortium demonstrates that there are strategic investors, such
as SNC-Lavalin, and financial investors, such as OTPP and Macquarie,
who are prepared to make financial commitments in the transmission
infrastructure under favorable financial conditions.
More recently, on August 28, 2001, eight of the Alliance Companies,
announced that they had signed a Letter of Intent (LOI) with National
Grid USA, by which National Grid USA would become the Managing Member
of the Alliance Transco LLC. The transaction is subject to the
negotiation of definitive documents pursuant to a detailed Term Sheet
attached to the LOI and to a FERC determination that National Grid USA
is qualified to be Managing Member. The eight Alliance Companies and
National Grid USA made filings at FERC on August 28 seeking the
requisite approvals of the joint Alliance Transco LLC. The Alliance RTO
has already been substantially approved by FERC under Order No. 2000.
The Alliance-National Grid USA transaction is highly significant
and well reflects the potential business, commercial and financial
benefits of FERC's regulatory flexibility with regard to RTO structure
under Order No. 2000. A key element of the transaction as filed at FERC
is a non-binding declaration of intent by Commonwealth Edison to divest
transmission facilities with a gross book value exceeding $1 billion.
Such a declaration of intent satisfies a critical pre-condition for
establishing Alliance Transco LLC as the Alliance RTO. The resulting
RTO would be structured as a for-profit transmission LLC, the first of
its kind to become operational under Order No. 2000.
The Term Sheet attached to the LOI lays out the key elements of a
strategic partnership which would be beneficial to the Alliance
Companies, National Grid USA and the customers of the Alliance Transco
RTO. National Grid USA's parent company has an excellent track record
in the United Kingdom for managing transmission assets effectively and
ensuring reliable delivery of electricity. The Term Sheet commits
National Grid to making $1 billion in specified investments in the
Alliance RTO in exchange for a seven-year management contract and
associated compensation. At the same time, the Alliance Companies are
provided with significant incentives to divest their assets in the form
of cash and attractive passive investments with financial benefits and
assured liquidity in several forms.
For those companies which do not divest immediately, there will be
various protections to ensure that National Grid USA as Managing Member
fulfills it obligations in its functional control of their systems.
Both divesting and non-divesting Alliance Companies will have FERC-
approved approval rights over certain National Grid USA actions, while
National Grid will have a right of first negotiation on any
transmission asset sales by an Alliance Company to another party. In my
judgment, the Alliance-National Grid USA LOI and Term Sheet is an
excellent example of the types of commercially-based business and
financial transactions which are possible under FERC's transco-RTO
structure.
The FERC transco-RTO structure can also be beneficial in creating a
business-oriented approach and commercial culture for providing RTO
services. In that regard, the Alliance Companies created a special
purpose LLC structure for the start-up activities required to support
initial operations of Alliance RTO. The special purpose LLC, with the
nickname ``Bridge Co'', is a classic model of a lean but effective
commercial organization in modern business terms.
Bridge Co has a CEO as the only full time employee and a staff of
seconded employees, supported by consultants and contractors with
tightly negotiated contract arrangements. Bridge Co is coordinating all
of the start-up arrangements for Alliance RTO, but without making any
market design-related business decisions. In order to minimize initial
operating costs and maximize open architecture design flexibility in
the future, Bridge Co has negotiated favorable contracts for virtually
all RTO-required functions and has avoided any significant investment
in functional assets.
All back office functions, employee benefits packages, information
technology requirements, subordinate security coordination and
supporting activities have been outsourced and procured by competitive
bid from non-affiliated vendors. Additionally, Bridge Co has optimized
organizational centralization and decentralized operations, such that
staffing levels are adequate and cost-effective. The combination of
these forward looking commercial approaches should support an initial
RTO operation and organization that will have minimized costs on day
one, while ensuring operational reliability, system security and high
quality services for Alliance RTO transmission customers.
Bridge Co currently is completing RTO system tests with vendors,
conducting customer training programs and beginning operational tests
with the Alliance Companies and then Alliance customers. Bridge Co is
now hiring the operational staff required for 24/7 transmission
operations. Total cost for the Bridge Co start-up effort and payment of
Alliance Companies' expenses is approximately $75 million, which would
be reimbursed by National Grid USA pursuant to the LOI. The existing
Alliance master schedule contemplates that all necessary preparations
will be completed and all required approvals will be received for
initial operations, assuming timely FERC and state PUC actions. That
result also could be another tangible benefit of the FERC transco-RTO
policy, recalling that the Alliance companies operate in eleven states,
stretching from Missouri to Virginia, with approximately 57,000 miles
of transmission lines, 115 Gwe of generation capacity, and serving
approximately 40 million customers.
The fact that the Alliance for-profit transco RTO has reached the
stage of operational testing for initial operations, while at the same
time negotiating the definitive documents for a strategic partnership
with National Grid USA as the Managing Member of Alliance Transco LLC,
is itself a testament to FERC's flexible RTO policy. Quite importantly,
FERC in January 2001, ordered that the Alliance Companies and MISO
participate in a settlement conference associated with the requests of
Ameren, Commonwealth Edison and Illinois Power to withdraw from MISO
and join the Alliance. Chief Administrative Law Judge Wagner presided
over a two-month negotiation which culminated in a settlement approved
by FERC.
Under the settlement, Alliance and MISO were authorized to pursue
their separate RTO models, the three withdrawing companies made total
payments of $60 million to MISO, and Alliance and MISO were required to
implement an Inter-Regional Coordination Agreement and develop a super-
regional rate. The thrust of the latter requirement was to create a
seamless market for transmission services to support a competitive
wholesale electricity market across the Midwest region. Alliance and
MISO have pursued that objective aggressively in so-called ``seams''
negotiations and in Open Access Transmission Tariff filings made at the
end of August to support initial operations of both systems. Similarly,
Alliance and MISO have participated in a stakeholder process to address
the key market design issues associated with congestion management in
their respective systems.
Of course, there is opposition to the flexibility which has
resulted in the Alliance-MISO settlement agreement and the Alliance-
National Grid USA LOI. Opponents generally prefer the ISO structure for
a Midwest RTO and/or are anxious to put in place a single, fully
integrated electricity market in the Midwest supported by one RTO, and
I respect those views. FERC on July 12, 2001, signaled that the
majority was in favor of four large RTO's in the Northeast, Southeast,
Midwest, and West, and ordered jurisdictional transmission owners in
the Northeast (PJM ISO, N.Y. ISO and N.E. ISO) and the Southeast into
``mediation'' negotiations facilitated by FERC ALJ's. Various parties
have petitioned FERC to convene Midwest ``mediation'' negotiations
intended to reverse the Alliance-MISO settlement and broker some form
of direct merger to form a single Midwest RTO.
FERC has provided some additional detail in the past few weeks
regarding its new RTO policy. Chairman Wood testified before the
Subcommittee that large RTO's were not only required for competitive
markets, but were now imperative for a reliable national power grid. He
testified that the cost of planning and executing the necessary level
of security and infrastructure protection will be significant and will
require expertise that only large region-wide organizations can
provide. To that end, FERC plans to make decisions in the Northeast and
Southwest mediation cases in the next month or so, based on mediation
reports from the assigned ALJ's. FERC has scheduled technical
conferences next week on the key RTO market structure issues, including
congestion management, cost recovery, market monitoring, transmission
planning, business and reliability standards and the nature of
transmission rights. The conferences will form the basis for a
rulemaking to establish a significant amount of standardization
nationwide in uniform market structure regulations. FERC also will
review the status of the Alliance-MISO seams agreement and possibly
consider requiring mediation for a merger, while encouraging RTO West
and DesertSTAR to initiate merger discussions for a west-wide RTO which
eventually would include California.
Other witnesses have testified about the legal and policy
considerations in opposition to and support of the FERC-ordered
mediation in the Northeast and Southeast and the concept of four RTO's
nationwide. From a business and financial perspective, I would counsel
caution in this immediate policy direction. Policy makers and
regulators may wish to consider the potential risk that the transco RTO
alternative will be materially disadvantaged by such a significant and
immediate change in the FERC RTO policy.
In the area of infrastructure and transmission grid security, the
Congress, the Administration and industry have responded in quick order
to the heightened threat of terrorism. The Subcommittee provided
leadership with the hearing on September 20th with Administration
witnesses and related activities. The Department of Energy was
scheduled to make legislative recommendations on security on October
9th with immediate Committee mark-up of emergency legislation in the
Senate this week. NERC has been in a readiness state of high alert and
an EEI task force has been working with NERC, NEI, other energy trade
groups and DOE on enhanced security measures.
All of these initiatives, and undoubtedly many more in the context
of homeland defense, will parallel the preparations for Desert Storm a
decade ago. Government and industry worked in close cooperation then to
ensure adequate protection of our vital energy sector. And, I 'm
confident that today's efforts ultimately will be just as successful in
the face of the new terrorist threat. At the same time, I support
action by the Subcommittee to pursue its legislative agenda in the area
of electricity policy. The nation now will probably require even more
capital investment in the electric transmission grid and there needs to
be some resolution of the major policy issues to support that result.
In conclusion, the structural and regulatory flexibility provided
by FERC under Order NO. 2000 has spawned a new generation of
independent for-profit transmission companies and RTO's. Those
transco's will be operated on a commercial business-like basis and
should have access to the capital markets. Transco's should have the
financial capability if properly incentivized to fund the critical
transmission infrastructure improvements and expansion required to
maintain system reliability and to support a competitive wholesale
market. I would recommend that the Subcommittee in any Federal
transmission policy legislation consider measures to preserve that
flexibility, so that transco's can continue to be a viable and growing
segment of the future electric transmission system. In addition, I
would recommend that the Subcommittee consider appropriate procedures
to protect investments already made in approved and operating transco's
and to provide for an orderly transition to any new policy direction,
which hopefully would continue to support a viable transco alternative.
Thank you, Mr. Chairman. I would be pleased to answer any
questions.
Mr. Barton. Thank you.
We now want to hear from Mr. Michael Travieso, who is with
Maryland People's Council.
We do appreciate your expediting your schedule to get here.
Your testimony's in the record, and we would welcome you to
elaborate on it for 5 minutes.
STATEMENT OF MICHAEL J. TRAVIESO
Mr. Travieso. Thank you very much, Mr. Chairman.
It's not easy, I guess, but it's Travieso, it's apropos
here. I guess it's like the oil company used to be.
Mr. Barton. Well, I apologize for mispronouncing it.
Mr. Travieso. That's okay.
I am the Maryland People's Counsel. I was appointed to that
position by Governor William Donald Schaeffer in 1994, and
serve at the pleasure of the current Governor. I run a small
State agency which has the responsibility for representing
residential customers in the energy and telecommunications
industries.
My office has been very active in the past in PJM and the
formation of the PJM policies, and is currently very active in
the Northeast RTO process. We've been involved in the 45 day
mediation process and continue to be involved.
I would like to commend you, Chairman Barton and the
members of the committee and your staff for continuing efforts
to seek out and include the views of consumers or consumer
representative as you proceed with your inquiry into the
development of effective competitive wholesale markets. My
testimony, however, is not intended as an endorsement of the
deregulation and restructuring of the electric industry
everywhere. While Maryland has restructured, I share the
concerns of many about the ability of residential and small
business customers to benefit unless wholesale markets can be
made to function efficiently. Without a workably and
competitive and efficient wholesale market, retail prices will
be higher and perhaps much higher than necessary.
I also believe that individual States who have restructured
should be able to determine their own fate and determine, if
they wish, that utilities with the obligation to serve under
just and reasonable rates should remain in place.
This testimony will focus on the basic principles necessary
to establish a proper framework for a competitive wholesale
market.
I believe that the existing transmission systems were not
planned or built to serve regional markets, and therefore must
be redesigned. I believe that RTOs should have the authority to
conduct transmission planning, studies and have the authority
backed by FERC to order the construction of new transmission.
I do not favor for-profit transmission companies. I believe
that it will raise the cost of capital for transmission
organizations and companies just as they have done for
generators. Regulated transmission companies have not had
difficulty attracting capital because under the cost of service
regulation they are guaranteed a return. In fact, utility's
cost of capital has traditionally been among the lowest of any
businesses in the United States.
Larger regional transmission organizations are better than
smaller ones because of the reduction in administrative and
transaction costs and the increase in generating capacity and
diversity. I think the 40,000 megawatts which is in the bill is
too small. I think that when you have transmission RTOs of that
size, there's a significant risk of the exercise of market
power. And my office favors the creation of the northeast RTO,
although we have lots of concerns. That would create an RTO of
over 120,000 megawatts, which would have the effect of reducing
the opportunity for generators, generator owners to
strategically bid their generation and to raise the price.
I would say the principle difficulty in ensuring a truly
competitive wholesale market would be creating one of
sufficient size and scope to create uncertainly on the part of
owners of generation that their bids to sell power will be
accepted. I'm not talking about regulatory uncertainty. I'm
talking about a situation in which there are enough sellers
that the bids that these sellers are going to submit will have
to be at or near marginal costs in order for them to actually
sell their power. and when we redesign the electric system and
returned, that's what the rhetoric was; the bids were going to
be at or near marginal costs. That can only happen if there is
a sufficient number of sellers, sufficient liquidity in the
market, both the energy and the capacity market.
I favor fewer and larger RTOs as long as they are properly
structured, cost benefit analysis are performed prior to their
formation and costs are not shifted from one set of customers
to another or from customers of high cost transmission owners
to those of low cost transmission owners.
I oppose incentive rate making and actually NASUCA, the
organization that my office is a member of, opposes incentive
rate making as well for the recovery of transmission costs as
unnecessary and not cost effective. It could lead to excessive
earnings, higher consumer costs. There's no evidence of need. I
believe that RTO planning will be sufficient to lead to the
development of a transmission system that can do the job.
I believe that the FERC currently has the legal authority
to do what it is now doing regarding the creation of four large
RTOs, market power mitigation and the imposition of customer
refunds on entities that have used market power. However, FERC
needs to exercise its power more to ensure that markets work
efficiently and consumers are protected.
FERC does need additional authority over transmission
planning and in certain other areas. We are--I am against the
FERC exercise of jurisdiction over retail transmission where in
States that have not restructured, where they still have
bundled rates. I believe that jurisdiction belongs to the
States.
RTO markets must design and encourage the utilization of
demand side peak load reduction programs. And I note that's in
the draft without much greater demand elasticity than currently
exists. In PJM and elsewhere peak load prices will easily be
subject to the exercise of market power.
I believe that individual States must continue to play a
prominent role in assuring reliability and in helping with the
design of wholesale markets. However, the success or failure in
obtaining workably competitive markets will ultimately depend
on the FERC and on the RTO structure and authority.
Thank you very much, and I'll be happy to answer questions.
[The prepared statement of Michael J. Travieso follows:]
Prepared Statement of Michael J. Travieso, Maryland People's Counsel
introduction
My name is Michael Travieso and I am the People's Counsel for the
State of Maryland. I have been in that position since 1994. The Office
of People's Counsel is an independent state agency that represents the
interests of residential utility consumers of electricity, natural gas,
telephone and water services before the Maryland Public Service
Commission, federal agencies, state and federal legislatures, and the
courts. Created in 1924, the Maryland People's Counsel is the oldest
consumer advocate agency of its kind in the United States.
My office is a member of the National Association of State Utility
Consumer Advocates (NASUCA). NASUCA represents 42 state utility
consumer offices from 40 states and the District of Columbia. While I
am speaking on behalf of the Office of the Maryland People's Counsel
today, NASUCA members have extensive experience with electric utility
restructuring at the federal and the state level. NASUCA has issued a
series of resolutions concerning electric deregulation and the
formation of regional transmission organizations that indicate the
views of consumer advocates across the country. Many of my comments
here today rely on those resolutions which are available on the NASUCA
website.
I would like to start by commending Chairman Barton, the members of
the committee and your staff for your continuing efforts to seek out
and include the views of consumers and consumer representatives as you
proceed with your inquiry into the development of effective,
competitive wholesale power markets.
My testimony is not intended as an endorsement of the deregulation
and restructuring of the electric industry. I share the concerns being
raised by many about the ability of residential and small business
customers to benefit unless wholesale markets can be made to function
efficiently.<SUP>1</SUP> This testimony will focus of my views on the
basic principles necessary to establish a proper framework for a
competitive wholesale market.
---------------------------------------------------------------------------
\1\ See Cooper, Mark N., Electricity Deregulation And Consumers:
Lessons From a Hot Spring And A Cool Summer, (Consumer Federation of
America, August, 2001), and sources cited therein).
---------------------------------------------------------------------------
My points in summary form are the following:
1. Without a workably competitive and efficient wholesale market,
retail prices will be higher than, and perhaps much higher than
necessary.
2. The principal difficulty in ensuring a truly competitive wholesale
market will be creating one of sufficient size and scope to
create uncertainty on the part of the owners of generation that
their bids to sell power will be accepted.
3. Both for reliability and market design purposes, RTOs must continue
or establish installed or deliverable capacity requirements and
concomitant capacity markets in addition to energy and
ancillary services markets.
4. Generally speaking, larger regional transmission organizations are
better than smaller ones because of the reduction in
administrative and transactions costs and the increase in
generation capacity and diversity.
5. Generally speaking, the existing transmission systems were not
planned or built primarily to serve regional markets and,
therefore, must be redesigned and enhanced to do so.
6. RTO market design must encourage the utilization of demand-side peak
load reduction programs. Without much greater demand elasticity
than currently exists in PJM and elsewhere, peak load prices
will be easily subject to the exercise of market power.
I believe that individual states must continue to play a prominent
role in assuring reliability and in helping with the design of
wholesale markets. However, the success or failure in obtaining
workably competitive markets will ultimately depend on the FERC and on
RTO structure and authority. FERC should have clear authority and
jurisdiction to:
a. Determine the appropriate size of RTOs;
b. Require transmission owners to join particular RTOs;
c. Return generators to cost-of-service prices if necessary;
d. Provide regulatory oversight to RTOs in order to monitor regional
wholesale markets and impose appropriate behavior modifying
penalties on parties or entities shown to have abused their
market power;
e. Regulate the long-range planning and cost recovery of transmission
owners in order to foster the efficient sale and delivery of
electricity and capacity across large regional wholesale
markets;
f. Ensure the competitive neutrality of transmission systems by
assuring that transmission owners will provide for open access
and use of the transmission system at just and reasonable rate
without any discrimination in favor of generation owning
affiliates;
g. Ensure the provision of transmission service at the lowest cost
possible;
h. Require that RTOs meet strict standards of economic operation and
investment;
i. Require that RTOs have independent non-stakeholder boards which
guarantee input from consumer advocates and state public
service commissions;
j. Provide a regulatory forum for the resolution of complaints by
market participants of tariff or RTO protocol violations,
violations of relevant federal law and the use and abuse of
market power;
k. Require RTOs to enforce compliance with rules and protocols
promulgated by the North American Reliability Council, (NERC).
An RTO must exhibit the following characteristics and be able to
perform the following functions:
<bullet> it must be independent from market participants;
<bullet> it must serve a region of sufficient scope and configuration
to perform effectively and support efficient and non-
discriminatory power markets;
<bullet> it must have operational responsibility for all transmission
facilities under its control;
<bullet> it must have authority for maintaining the short-term
reliability of the grid.
<bullet> it must administer its own transmission tariff and use a
transmission pricing system that promotes efficient use and
expansion of transmission and generation facilities;
<bullet> it must ensure the development and operation of efficient and
fair mechanisms to manage transmission congestion;
<bullet> it must develop and implement procedures to address parallel
path flow issues both within its own region and with other
regions;
<bullet> it must provide for a supplier of last resort for all
ancillary services that cannot otherwise by supplied
efficiently by market mechanisms;
<bullet> it must be the single OASIS--the Open Access Same-Time
Information System--site administrator for all transmission
facilities under its control and independently calculate total
transmission capacity (TTC) and available transmission capacity
(ATC);
<bullet> it must monitor markets for transmission services, ancillary
services and bulk power to identify design flaws and potential
market power problems and propose appropriate remedial actions;
and
<bullet> it must be responsible for planning necessary transmission
additions and upgrades in coordination with appropriate state
authorities.
I favor fewer and larger RTOs so long as they are properly
structured; cost benefit analyses are performed prior to their
formation; and costs are not shifted from one set of customers to
another or from customers of high cost transmission owners to those of
low-cost transmission owners. I oppose incentive ratemaking for
transmission owners as unnecessary and not cost-effective. This
country's transmission system should be regulated as the monopoly it is
and should be operated in the public interest.
I believe that the FERC currently has the legal authority to do
what it is now doing regarding the creation of four large RTOs and
regarding market power mitigation and the imposition of customer
refunds on entities that abuse market power. In my view, FERC needs to
exercise its power to ensure that markets work efficiently and
consumers are protected. FERC does need additional authority over
transmission planning and in certain other areas.
If the FERC has any concerns about its authority, I urge this
Subcommittee and Congress to give FERC the specific tools it asks for,
including:
--specific authority to order the formation of RTOs and to order
utilities to join them;
--authority to ensure the adoption of uniform interconnection
standards;
--authority to award customer refunds for past periods if the FERC
determines the rates charged to be unjust and unreasonable;
--authority to assess civil penalties for market power violations;
--enhanced authority to review and scrutinize mergers;
--clear authority to remedy market power abuse
--authority to mandate reliability standards for bulk power markets and
to work with the states to ensure the reliability of electric
supply;
--authority to require the development and implementation of demand
response/peak sharing programs.
That concludes my prepared remarks. I want again to thank the Sub-
committee for this opportunity to appear and to speak on behalf of the
residential consumers of Maryland and to express what I believe are the
concerns of consumers in general.
Mr. Barton. Thank you.
The Chair recognizes himself for questions. Just as an
aside, the House has finished its business on the floor for the
day, so that when this hearing is adjourned, members can go
home if they wish. Just put that as a suggestion.
I have a general question. We put out at the staff level a
draft RTO proposal late yesterday afternoon. Have any of your
groups had a chance to see that and study it? Okay. I don't
see.
Mr. Esposito. We've had a chance to see it, but not study
it.
Mr. Barton. Okay.
Mr. Travieso. We've seen it, we haven't studied it yet.
Mr. Barton. Okay. Well, I would encourage you to study it
and get your written comments to the committee staff and the
minority staff, and any specific members.
We've had a lot of testimony, a lot of discussion about the
number of RTOs. FERC was moving toward four RTOs plus ERCOT.
What's the general position of you gentlemen? Is there a magic
number and is that magic No. 4 plus one or should we let the
market operate and see what seems to make most sense based on
the geographic considerations?
Mr. Franklin?
Mr. Franklin. Mr. Chairman, there's certainly not a magic
number. I don't think anyone could know what the proper--what
the optimum ultimate size should be and what it will be 10
years from now. To my knowledge, no studies have been done.
There are some natural markets that have formed around the
country, there's some in the southeast. I think the natural
markets that have formed that have some reasonable transmission
capability within that region so you can move significant
amounts of power within that region is a good start.
Our thought is that forming RTOs that can be formed
relatively quickly that meet the needs of a specific region
that can get concurrence of State commissions in that region,
even if it's somewhat smaller, getting those done quickly but
putting them together in a way that they could be merged with
larger RTOs later makes a lot of sense.
I think over time if an RTO is too small, it'll become
obvious. There'll be demands for lots of transmission between
that RTO and the next one and lots of power movements. And over
time you can go from smaller RTOs to larger RTOs, but I think
the other process is irreversible. I don't see how you form a
huge RTO that covers 20 States and later decide that was too
big, you can't manage the bureaucracy is out of control. It
seems to me it's almost impossible to go in the other
direction.
Mr. Bennett, do you have a comment on that since you're
representing the NARUC group, plus your State?
Mr. Bennett. Yes, I would say it's sort of a geographic
evolutionary process. As I said in my opening remarks, we see
the benefit of a voluntary approach where a region puts
something together. But as a practical example, New England,
New York and PJM are working together. And logic dictates that
if and when RTOs become the way to go, that would be a region
that seems to work together, has worked together and is doing
it now.
Mr. Barton. Okay. You all haven't had a chance to study the
RTO draft that we released yesterday afternoon, but it has as a
minimum size requirement for an RTO 40,000 megawatts. Would any
of you care on the record to comment on the minimum size
requirement? Is 40,000 reasonably good or should it be higher,
should it be lower, or should there be no minimum requirement
in terms of the number of the size of the megawatts in the RTO?
Mr. Esposito?
Mr. Esposito. Mr. Chairman, 40,000 would allow California
to remain a single State RTO, and I think we've seen the
experience of single State RTOs not being pleasurable, to say
the least. So you might want to look at a bigger number.
I think at the end of the day what you really want to look
at is where our market's developing, and that's where the
physics, not the politics work together. And, you know, 40,000
might be fine somewhere and not good somewhere else. So, it's
difficult to just set a number in stone.
Mr. Barton. Okay. Mr. Gerken?
Mr. Gerken. What I think is important, I think I commented
a little earlier on the first question. I think 4 or 5. The
larger the RTOs to us, the better. I think what's more
important is----
Mr. Barton. The larger the size?
Mr. Gerken. The larger the size of the RTO, less seams
issues, but also importantly is that all these are run under
one set of rules and guidelines. I think that is the biggest
issue right now.
We're stressed to a little point. We happen to fall within
the Midwest ISO and the Alliance RTO, and that was formed as a
merger, but it's still questionable whether that formation's
going to work as what I call, I guess, a subset of one large
RTO.
Mr. Barton. Okay.
Mr. Travieso. Just to follow up, I did say in my testimony
that I thought 40,000 was too small.
Mr. Barton. As a minimal?
Mr. Travieso. As a minimum. Even as a minimum. It seems to
me that once you're down to that size, in order for that size
of an RTO to work, you'd have to have very vigorous FERC
oversight and enforcement against market power abuse.
Mr. Barton. Okay. My time has expired, but I'm going to ask
one more question. Should the FERC be given the authority to
force a private entity into a specific RTO? Now the draft
mandates that you join an RTO, but it gives the time period and
flexibility about creation, but there are those that say we
should give the FERC the authority to mandate participation in
a specific RTO. Mr. Franklin?
Mr. Franklin. I'd like to answer that, Mr. Chairman, being
a private entity. The answer is no.
Mr. Barton. I am surprised. Shocked, amazed and stunned.
Mr. Franklin. FERC doesn't know any better than any of the
rest of us ultimately what size RTOs are going to be best or in
which RTO in particular--transmission system should be. I think
what needs to be in place is a national policy, which there is,
that RTOs be formed. And I think there needs to encouragement
to get them formed, but the heavy hand of simply dictating
arbitrarily not based on cost studies, market studies or
anything else that company A needs to be in RTO B without
questioning or asking the question of State commissions,
utilities, customers or anyone else just seems to me to be
arbitrary and will lead to a bad result.
Mr. Barton. Okay. Mr. Flynn?
Mr. Flynn. Mr. Chairman, my response to your question would
be no, I would be concerned if FERC were in a position where it
could dictate join a particular RTO, because I don't think all
RTO structures are necessarily equal. I think different
structures have the potential for offering different degrees of
benefits to market participants, to generators in the region as
well as to consumers in the region.
Based on our experience, we believe that there's greater
potential for providing consumer benefits from an RTO that has
as part of it an investor-owned for-profit independent
transmission company. And if one gives FERC the authority to
dictate a particular form of RTO, our concern would be that
FERC, based on the information that's available, might pick
wrong up front and we may be forced into a form of RTO that
could be suboptimal.
So we would rather see the flexibility for different
structures to develop and then let the market choose which one
is providing the highest level of consumer benefits.
Mr. Barton. Okay. Mr. Johnston, and then Mr. Esposito, and
then we're going to go to Mr. Boucher for his questions.
Mr. Johnston. I would agree that--let me say the only time
that FERC should be given the authority to force an entity into
an RTO is to relieve market abuse as a mechanism of relief of
that. Otherwise, I agree with some of the other comments that I
don't think there is a perfect size. I think you have to look
at markets, you have to look at operational issues in the
regions, you have to look at cost benefits; all those play into
the RTOs and which is best for me to join or for some other
entity to join. But other than the relief of market abuse, I
would not agree that FERC should have that authority.
Mr. Barton. Mr. Esposito?
Mr. Esposito. I agree a lot of points Mr. Flynn made, but
at a certain point you can't just have a big hole in the middle
of a region. And somebody's got to say you got to be part of
the one that surrounds you. And the only entity I can think of
to say that is FERC.
Mr. Barton. Are you aware of a particular company or small
group of companies in a particular region that would try to
create a hole in the middle of the donut, so to speak?
Mr. Esposito. There's a lot of that going on in the
midwest. You can see the maps that are just Swiss cheese,
because it does exist.
Mr. Barton. Mr. Boucher?
Mr. Boucher. Well, thank you, Mr. Chairman. Let's continue
the discussion with regard to RTOs and, Mr. Franklin, let me
begin with you.
I know that when the FERC issued Order 2000 your company
expressed support for the basic theory of that order, which is
that utilities would be encouraged to join RTOs, but not
required to do so.
This July the FERC has made a somewhat more affirmative
statement and has gone beyond Order 2000 by suggesting that if
investor owned utilities do not join RTOs, the FERC perhaps
would withhold merge authority and might withhold the authority
for market based rates. So there's something of a greater
encouragement, shall we say, for IOUs to join RTOs than was
existent in Order 2000.
So my first question to you is how do you feel about the
new order, what is your reaction to that as compared to Order
2000. And if you find that the July order imposes problems for
you, what are those problems, if you could precise? Is it
higher rates that would be imposed upon transmission sales or
is it the inability to reserve sufficient capacity for your
native load? I mean, what are the kinds of precise problems
that you see stemming from this July order?
Mr. Franklin. Thank you. A very good question, and I'll try
to give a fairly short answer.
First of all, the FERC order in July was not helpful. In
the southeast, every investor owned utility that I have
knowledge of and most all public power groups were working in
good faith to form RTOs. So we didn't really need a bigger
hammer. We already felt the need to move in that direction.
What FERC has done, in my judgment, first of all has not
only expressed an interest in moving faster and more
deliberately to RTOs, they're beginning to express a very firm
position on the structure for the RTO in the southeast and the
size. Well, unfortunately, that was not the structure and the
size being pursued throughout the southeast, so it has pretty
much thrown those negotiations into turmoil and I think slowed
down the process.
No. 2, the States in the southeast are not at all convinced
about the direction that RTOs should take. I think FERC
generally was going in the right direction with Order 2000, and
we were in the process of trying to convince our States that
that was a good move. I think the recent approach by FERC has
tended to dissuade or increase the concern that the States have
about where FERC is ultimately going.
And we can't move into an RTO. With 90 percent of our
income regulated by States we cannot move into an RTO structure
or size that our State strongly oppose. It would be financial
suicide for us. So it's awfully important for us to bring the
States along, and I think FERC action has hurt that.
The other point, the very large RTOs I think long term may
make sense. I doubt there needs to be four, maybe there needs
to be six, maybe there needs to be eight. I don't know. I think
time will tell. But with current FERC pricing where you can
move within an RTO, where you can move power any distance for
the same price you move it one mile, we're going to get huge
distortions related to location of generation. And FERC has not
been willing to address that.
One of my greatest concerns related to large RTOs is the
distortion that we see in the location of generation because of
inadequate distance-sensitive pricing.
Let me just mention one other thing since I've got the
floor. The chairman's probably about to cut me off.
But a big issue from a corporate standpoint for us is there
is not inadequate generation in the southeast. I heard one of
the panelists say there was imbalance. There is imbalance;
there is way too much generation being built in the southeast.
That's probably good for consumers long term, but it's going to
require a huge amount of transmission. Ultimately we're going
to have to build that transmission and collect the cost of that
transmission from our retail customers. Regardless of FERC
State jurisdiction the ultimate consumer in our region has to
pay for that transmission. And we want to be sure that only the
right transmission is built and that our State commissions are
willing to allow us to recover that cost. That's a huge
financial issue for us.
Mr. Boucher. You have mentioned a couple of times in your
testimony today this notion of distance-sensitive pricing, and
I think it might helpful for us if you were a little more
specific about what the problem that you perceive is and how
distance-sensitive pricing should properly be structured to
address that problem.
Mr. Franklin. Okay. Thank you for this opportunity.
In most any other form of transportation that I'm aware of,
the further you move a product the more it cost to move it. So
if you're going to build a manufacturing plant, all things
equal, you build it closer to the market not a 1,000 miles
away.
In electric transmission within a region, within an RTO
that's not true. You can build a power plant a mile from the
load or 500 miles; the cost to move the power is the same. So
there's no incentive to build the generation close to the load.
That exacerbates the transmission problem. It's resulting in
generation being build by the boatloads down along the Gulf
Coast where natural gas is located and shipped to Atlanta, and
Charlotte and up the east coast when in fact it should be built
close to those load centers, all other things equal.
That causes two problems. It increases the investment in
transmission and the ultimate cost to consumers. And No. 2, it
makes the system less reliable because you have these massive
power flows; the greater the power flow the more bottlenecks
are created and the more reliability problems are created.
Mr. Barton. Will the gentleman yield?
Mr. Boucher. Before I yield, Mr. Chairman, ask you one
additional question.
You've really defined well, I think, the problem. But
what's the answer? I mean, how do we achieve distance-sensitive
pricing so as to result in generation being built in a way that
is proximate to where electricity is consumed?
Mr. Franklin. It actually is pretty simple. It's been done
in the natural gas industry. If you move gas from the Gulf
Coast to Atlanta, it cost a whole lot more than moving it just
10 miles inshore from the Gulf Coast. So FERC is very familiar
with distance-sensitive pricing.
There can be lots of debates about the exact method where
there is zonal. In other words, you have a megawatt mile
approach, which offends a lot of people, and I'm not sure it's
a great idea either, or do you say you can move power for a
price for 100 miles and when you go the second 100 miles
there's another increment? There are lots of methodologies; I
think a methodology that can be found that's fair.
I think the problem is the mentality has been at FERC, and
our industry too to a degree, that transmission is such a low
cost in the total cost of electricity compared to generation
that it doesn't matter; that it doesn't matter if you
overbuild. It doesn't matter if you build too far from the load
center. Well, that's changing.
What we're looking at is tripling our investment in
transmission. It's only about 10 percent of our total
investment to date. Transmission is about 10 percent. Within
the next 5 years it'll go to 20 percent. So investment in
transmission does matter and making efficient transmission
decisions is just as important as making efficient generation
decisions.
Mr. Boucher. Well, that's excellent food for thought, and I
thank you.
I'd be happy to yield to the chairman with the admonition
that I have one additional question I'd like to ask.
Mr. Barton. I was just going to ask what he answered if
there's a way to do distance-sensitive pricing that the
industry thinks makes sense, that's all.
Mr. Boucher. Mr. Chairman, let me suggest, if I might, Mr.
Chairman, that maybe we ask Mr. Franklin and his very excellent
staff to enlighten us a little bit further with some written
recommendations.
Mr. Barton. Could the gentleman suspend just a second?
Mr. Boucher. I'd be happy to.
Mr. Norwood. Are we going to have more than one round?
Mr. Barton. We're going to have a long one round.
Mr. Norwood. I see. So the light's not nearly as important?
Okay. No problem.
Mr. Barton. You'll be on Georgia time when we----
Mr. Boucher. And, Mr. Franklin, if you could perhaps send
us some written suggestions in the fairly near timeframe about
how distance-sensitive pricing might actually work. What kind
of formulas would make sense to achieve it?
Mr. Franklin. We will absolutely do that. Thank you.
Mr. Boucher. That would be helpful.
Mr. Chairman, the other question I have is this: The
Supreme Court had arguments last week in the consolidated cases
arising out of the FERC's Order 888. No sooner had the FERC
issued Order 888 than it was sued from both directions.
Marketers filed suit saying the FERC had not gone far enough to
assert jurisdiction over transmission and the States, on the
other hand, sued FERC saying that they had done too much and
that Order 888 asserting authority over unbundled transactions
in States that were open to competition was more than FERC
could have done, and that FERC was not empowered to do it. And
the Supreme Court heard the arguments on both of those
positions last week.
This set of arguments, that case, really goes to the
fundamental issues that we have to address in terms of the
balance of State and Federal authority over transmission. And
I'm wondering if anybody here thinks that this subcommittee
ought to wait until the Supreme Court renders its decision,
which we could probably expect in the near term, anywhere from
2 months to 6 months depending on what they get to first,
before we legislate on this complex and very difficult subject?
I am agnostic. I'm open to suggestions. I haven't made up
my mind about whether it makes sense for us to go forward at
this point and begin to tackle these thorny issues, but I would
welcome your advise. And so let me offer the opportunity to
suggest to us whether it's better to wait or whether it's
better to move.
Mr. Barton. That will have to be the last question.
Mr. Bennett. I have an easy answer on that, since the State
of New York was one of those arguing against the FERC extension
of jurisdiction, we think it would be wise to wait.
Mr. Boucher. Okay. Anybody disagree? Did I see a hand over
here?
Mr. Esposito?
Mr. Esposito. I would just say you might think about
somehow encouraging the Supreme Court to act quickly. I don't
know what kind of vehicle you have to do that.
Mr. Boucher. That's above our pay grade, Mr. Esposito.
Well, maybe if we actually report a bill, that might a
signal of some sort.
Well, thank you, Mr. Chairman. And I want to thank these
panel members for their helpful testimony.
Mr. Barton. We do encourage all members to put their
written comments in on this distance-sensitive pricing. We
understand that Mr. Franklin's position is probably not
unanimously accepted by the other members of the panel.
The gentleman from Georgia, Mr. Norwood's recognize for 10
seconds--5 minutes.
Mr. Norwood. This is going to be a loud hearing, I can see.
Thank you, Mr. Chairman. And I do thank the panel members.
I find it interesting the ranking member and the chairman,
I believe, got right at the heart of the issue and I want to
stay on this thing of RTOs just for a little while. And I'm
particularly interested, Mr. Johnston and Mr. Mr. Franklin,
hearing from you as all panel members, but I want us to say
what you said before maybe in maybe some different ways so that
it sits very well with this committee and we all have an
understanding of it.
It's pretty clear, I think, to all of us that FERC has been
moving rapidly trying to get everybody into RTOs. It seems that
they like the magic number of four. It seems that they like the
thought of large RTOs. And I'm interested in hearing again,
first, is this a possibility? Is it technologically possible?
Again, how do you feel about that? What if the FERC gets this
wrong? What will it do to your customers and my constituents?
Have there been studies done so that we can understand,
perhaps, if we get it wrong what it might do to our customers?
What's the consequences of us moving too quickly right now?
What will it do to your customers and my constituents if we go
too fast? Are there ways that the FERC can speed the process
along without mandating to our utilities a certain
predetermined configuration that you have to sit in stone right
now or that perhaps we'll try to sit in stone?
And I'm willing to give up a great deal of time to hear you
two gentlemen to discuss that.
Mr. Johnston. We believe that it's a fairly hard sell in a
low cost State for RTOs generally, even though I'm speaking
here as LPPC and we support the development of RTOs, but
reasonable thought out RTOs that we've taken a look at
operational issues, we've taken a look at natural markets,
we've taken a look at cost benefits.
Frankly, I have not seen--I don't believe there is any cost
benefit, comprehensive cost benefit analysis for the southeast
United States on the value of RTOs. And I'm not saying that
there isn't value, I'm saying there has not been comprehensive
studies done or got out.
Mr. Norwood. Well, could they be ongoing and we don't know
about it? Is somebody looking at that?
Mr. Johnston. Well, maybe they are, but I am not aware of
them. But they need to be done and we've stressed that they
need to be done, because it's very difficult for us to go to
our communities and sell the cost of RTO development, which
could be hundreds of millions of dollars, and I have seen very
few people say that you're going to lower transmission costs by
the creation of RTOs. I think most of us believe you're going
to raise the transmission costs. So where's the value going to
come from? It's going to come from the generation side.
Well, if it comes from the generation side, and you're
already in a low cost State, that's a difficult cost benefit
analysis because the chances are what's going to happen to your
generation is it's going to get exported, you're not going to
import cheaper generation.
So, I'm not saying it can't be done. I'm saying it's a very
tough sell in a low cost State. But it needs to be done or it's
dead on arrival in my communities when I try to sell the cost
of developing an RTO.
So comprehensive cost benefit studies, operational studies.
As some have said, these systems that we've built over the last
100 years were never built to be put together, so there has not
been an operational study on what happens when you do put them
together. And there will be issues, operational issues that
come out of that that have not even been studied.
Mr. Barton. Would the gentleman yield?
Mr. Norwood. Yes, sir.
Mr. Barton. And I'll give you as much time as you need.
Well, I'm a little puzzled. Basically the transmission
assets already exist and there are already people operating
them. What is the additional cost of creating an RTO if the
infrastructure is in place and the personnel's in place, and
all we're really doing is setting the ground rules and
requiring that there be, for lack of a better word, cooperation
and communication? Where is the additional cost in that?
Mr. Franklin. That's a good question, but there's also a
very good answer.
Mr. Barton. Thank you.
Mr. Franklin. An RTO, the primary cost is setting up one
very large centralized control system with staff that
actually--it's not just a coordination in cooperation. It is
replacing a number of smaller control centers and smaller
staffs that may be scattered around several States with one
large control center; lots of electronics, lots of computers,
lots of screens, lots of telecommunication equipment. The thing
in California, as I recall, for the power exchange and the ISO
was like $600 million to set up.
Now, that is an extreme. A lot of things in California was
an extreme. It won't cost anywhere near that, but our best
estimate for the smaller RTO that we were talking about with
the coops in municipals is probably $100 million.
Mr. Barton. But over time if you're going from many to
fewer, you know, and from older to newer in terms of equipment
it will save money, wouldn't it?
Mr. Franklin. Well, it's a case if somebody would buy those
old control centers from you, but you still have the investment
in those control centers plus you build a new one.
Now, long term, I think--let me--if I could address maybe
both questions sort of.
We haven't done a cost benefit study. We've done a cost
study, a rough, very rough cost estimate of what the RTO would
cost. Maybe $100 million, maybe a little more initially to set
up.
I've been involved in the industry 30 something years. I've
been planning transmission for a big part of that. My gut
feeling is that over time with that kind of investment, the
size we're talking about, it probably will pay for itself. I
couldn't prove it today, but I think it probably would. But
when you talk about a much bigger RTO, it's the typical
centralization, decentralization question.
You can prove on paper centralizing every decision in a
company that the CEO will make it run better, but it doesn't.
The same is true in trying to centralize the operation of a
huge transmission system in one place as opposed to having
maybe 3 or 4 operating centers. Theoretically you get more
efficiencies, you have fewer control centers, but what you end
up with is more bureaucracy and decisions being made further
from consumers and further from the frontlines.
When you say how centralized should a company be, there is
no exact answer. How big should an RTO be, there's no exact
answer. The bigger it is the more bureaucratic it becomes, the
further reliability decisions are made from where the real
reliability problems are, but theoretically the more efficient
it is. And we think the balance is what's being proposed in the
southeast for the SETRANS model.
And let add one other point to Mr. Norwood's question.
Another big issue, Congressman, and I'm very concerned about
this because we're the most regulated industry in the world and
we're one of the most regulated companies in the world.
We're regulated by four State commissions. And if we go
into a big RTO and it doesn't work, and we don't have our State
commissions on board, it's going to be a disaster just like
it's been a disaster in California.
And I don't mean a disaster from a reliability standpoint,
I mean a disaster for us. We're going to be punished
financially just like the companies in California have been
punished.
It's critically important for us to get the States
comfortable and onboard with where we're taking RTOs. I think
that can be done, but it can't be done with a heavy hammer
mandate from Washington. It's just not going to work.
Mr. Barton. Of course, I could say you could help in
getting the States onboard.
Mr. Franklin. And I will.
Mr. Barton. Poor little old struggling southern company
might have some influence.
Mr. Norwood. Reclaiming my time.
Mr. Franklin. I tell you what, if we had had----
Mr. Barton. It still is Mr. Norwood's time.
Mr. Franklin. If we had had the influence with the State
commissions that the chairman gives us credit for, our stock
would be selling for 50 bucks a share, not 25.
Mr. Norwood. You've made it clear, I think, to the chairman
that if we have that RTO there are X amount of new dollars that
are going to be spent. And then you said well, we think we can
pay for that. Well, I don't have any doubt you're going to pay
for that. My question is it's my constituents who are going to
pay for that, because that's who you have to pass that on to.
Mr. Franklin. Right.
Mr. Norwood. And so the question has to be if we're going
to do this, what is that going to do to rates in Georgia?
Mr. Franklin. Congressman, I think initially it's going to
raise rates. I don't think there's any question for two
reasons. We're going to have an incremental cost of forming the
RTO, that's new dollars. We're going to have to build a lot of
new transmission; that could be helped if we had FERC
transmission pricing right. So I don't think there's any doubt
near term the rates are going to go up.
Longer term if these markets operate more efficiently, the
generation markets; in other words having a larger region, more
efficient generation markets what you would hope is the lower
generating costs would offset the higher cost of setting up the
RTO. Now, that's a gamble, but I think it's a pretty good
gamble for the RTO our size.
Now, if it's start costing $200 million or $300 million,
I'd be hard pressed to make that representation.
Mr. Norwood. Mr. Chairman, I've only got eight more
questions, and I'll be brief. But I do have two other little
quick things.
And, Mr. Franklin, while we're talking let's finish this.
Mr. Sawyer. With unanimous consent.
Mr. Norwood. I didn't notice Mr. Boucher needed it.
I keep hearing over and over again at these hearings this
analogy that compares our transmission system to a reservoir.
And I can visualize that pretty well where you can put
electrons in anywhere along the system and you can take them
out anywhere else.
As someone who is regulated by FERC, I've heard the
discussion about FERC authority in establishing transmission
ratemaking standards. Now, I'd like to hear your view on that
situation.
Mr. Franklin. Let me talk about the lake analogy first.
Mr. Norwood. Well, tell me about that reservoir.
Mr. Franklin. There is no legitimate analogy between a lake
and a transmission system. It's like comparing an airplane to a
tugboat. I mean, there is no analogy at all.
In an electric system you have to be very, very careful
where you inject power. You can burn the system down if you
inject it in the wrong place. You have to be very, very careful
where you add demand. And you have to add transmission based on
the pattern of growth of generation and demand. So the lake
analogy is useless. The highway analogy I would also add is
useless.
You can't take shortcuts and pretend the electric system is
a lake or a river, or a highway system. It's not. It's an
electrical system and it's very much more complicated than
static systems like highways or lakes. And, again, I think a
little more thought going into that before the California
experiment was implemented might have saved a lot of grief.
Mr. Norwood. How does this relate to transmission
investment and getting a return on the risk associated with
that investment? I mean, is this something that FERC has
sufficient authority over already or is this something that
Congress needs to act on?
Mr. Franklin. I think as far as authority to set wholesale
rates for transmission, FERC has authority. What I would like
to see FERC do, and they have indicated in the past they would
but it doesn't seem to be a priority, is to really focus on
transmission pricing to make sure that transmission investment
is done efficiently; that is generating plants are located in
the right place, and that there is some incentives for building
this huge amount of transmission.
I am flabbergasted that people, they believe in
competition, somehow don't believe that incentives work in a
regulated business. It's just like in a competitive business.
I'm also flabbergasted that utilities and State commissions
that offer incentive rates for demand side products to use less
energy, to use energy differently, they believe incentive rates
for those kind of products, somehow that won't work for
transmission investment.
I think it's a very short-sighted approach to simply
continue to try to divide up the same amount of transmission
among more users as opposed to focusing on getting the right
amount of transmission built, and incentives will help that.
Mr. Norwood. Mr. Johnston, we probably need to answer
quickly here. You know, I realize that the municipals and coops
are not regulated by FERC, however, folks around here are
talking about changing that. What is your feeling on this and
the FERC having jurisdictional control over transmission
associated with bundled services to our communities?
Mr. Johnston. Well, we would strongly oppose FERC
jurisdiction over bundled retail service to our communities.
You know, frankly, it goes back to our obligation to serve and
our State mandates. If you take away the tools that we use to
carry out that obligation, how can we be expected to accomplish
it? Because if you give FERC control over priority and use of
that facilities, you in effect are tying our hands and our
ability to carry out that obligation to serve. You know, it's
kind of a silly statement, but maybe you have to transfer the
obligation to serve to FERC, but I'm not sure they care to have
it.
Mr. Norwood. Well, what happens if we were to do that? I
mean, I don't understand what happens back home if FERC were to
have that jurisdictional control.
Mr. Johnston. Well, in a plain simple example, if I am
moving electrons across the grid in Georgia in order to deliver
it to my communities and a constraint occurs in that system and
FERC is in control of that system or somebody under FERC's
control is in control of that system and they direct the
priorities such that they remove my native load to relieve the
constraint, that's stripping me of my ability to deliver that
obligation to serve that native load.
Mr. Barton. We're going to have to discourage the gentleman
from any further questions.
Mr. Norwood. I bow to the chairman.
Mr. Barton. And we want to announce for the other members
about to ask questions, it is acceptable to ask questions of
the panel members who are not from the great State of Georgia.
Mr. Norwood. But not desirable. Mr. Chairman, I apologize
to the other panel members. It's sort of natural for me to
ask----
Mr. Barton. I understand. I understand.
The gentleman from Ohio is recognized for such time as he
may consume.
Mr. Sawyer. Thank you, Mr. Chairman.
I just have to observe that there are--I can think of at
least a couple of transportation systems that are distant-
sensitive. I'm not sure that we want to emulate them in this
case, but one is the Postal Service.
Mr. Barton. Very good point.
Mr. Sawyer. And the other may have some distance-sensitive
pricing, but most of us can't discern it, and that's the
airlines. There are an awful lot of fees that have no bearing
on distance and there are an awful lot of people who are
unhappy with that.
I would also suggest that centralized command and control
of the kind that you suggested as a hypothetical seems to have
been tried in the Soviet Union and fell apart. And my
submission is that it would not be useful.
Let me ask one more question of the gentleman from Georgia,
and anybody else who would like to answer, and that is the end
of year deadline, it seems to me, creates some enormous
pressures. Can you tell us your reaction to the feasibility and
the result if in fact that's adhered to?
Mr. Franklin. Well, I think the end of your deadline goes
back to Order 2000.
Mr. Sawyer. Okay.
Mr. Franklin. We were on a course along with the people
from the municipals in Georgia represented by Mr. Johnston and
others to move in that direction. I think the recent
developments starting back in May and then concluding or being
further exacerbated by the FERC order in July have knocked
these negotiations off track. I think the end of year deadline
does not seem feasible to me at all anymore.
Mr. Johnston. Could I add something there?
Mr. Sawyer. Sure. Sure.
Mr. Johnston. It's important to also recognize that the
form of RTO that FERC is leaning toward, which is away from
what we've been negotiating, essentially will alienate the vast
majority of public power in the southeast, meaning public power
is going to walk away from that RTO and has told FERC that.
It's not just MEAG, it's virtually all the major transmission
holders, public power transmission holders in the region.
You're going to have a huge potholed RTO if FERC does what they
have indicated they're going to do, and it will not work very
well.
Mr. Sawyer. The whole struggle for competition in your
arena for the last 85 years it seems to me, has been a
competition for capital. That's been where the real competition
has been, and that's where the price advantages have resulted.
Mr. Trabandt, you mentioned that a properly structured
transco will be able to access capital markets adequately. Can
you give us briefly a sense of what you think is a properly
structured transco and if the current access to financing is
continued in the future, what will be the prospects for
transmission capitalization?
Mr. Sawyer. Congressman, I appreciate the question because
I think it's very important for the subcommittee to focus on
the notion that these are new business operations. The RTO
responsibilities which have been established by FERC in which
the various RTOs around the country have been trying to satisfy
would require this new business entity to be operating in a
circumstance somewhat different from what had been previously
contemplated, I think.
When I talk about properly structured, I'm talking about a
capitalization that perhaps would be 60 to 70 percent debt with
the increment of equity that would go with that, perhaps some
preferred that would be structured in a way such that the
coverage ratios would ensure that it's investment grade and
will stay investment grade, which means it has to be credit
worthy itself and it must have credit worthy counterparties for
its contracts. That the investment that it's required to make--
in many of these RTOs the negotiations have been along the
lines of if a new generator--and in fact the chairman's
proposed bill addresses this interconnections. We actually
looked at all the proposed interconnections of the companies
associated with the Alliance RTO. And there are numerous
proposed power plants around the country, as you know. Perhaps
the slow in the economic will change that, perhaps the
uncertainty in regulations as a result of California will
change that. But nonetheless, there are lots of proposed power
plants, all of those plants have to be interconnected and all
of those interconnections are going to have to be paid for. And
every new interconnection, as you heard from Mr. Johnston and
also from Mr. Franklin, change the flows on the system. And
those have to be accommodated as well. And that's going to
require substantial upgrade of the existing infrastructure to
be able to support the competitive market. That's the reason, I
think, that some formulation of an incentive, and as Mr. Vesey
testified this morning, whether it's a somewhat higher rate of
return because of the increased risk associated with it or
whether it's in the form of other features that FERC has
already adopted in Order 2000, is appropriate to ensure that in
fact we can get the kind of capital to go in assuming the
structure, and I described it in my testimony as well.
Mr. Sawyer. Is the traditional notion of ``just and
reasonable'' rate as reflected in comparable kinds of risks in
the marketplace, the same risk profile, will that apply
effectively in the environment that we're talking about?
Mr. Trabandt. I'm glad you raised that, because I was
interested in Congressman Largent's comment about the FERC
Commissioners being here last year and none of them could
define ``just and reasonable.''
The definition of just and reasonable was established by
the Supreme Court in a famous case some years ago, and there's
not a whole lot of question about that. And I don't think
anything that's being discussed in the way of incentives, and I
read the chairman's proposal to make this clear, is to suggest
anything that's not just and reasonable. But there is a range
of reasonableness that's established under the applicable law
with regards to what rates can be to take into account, for
example, public policy associated with this very specific
issue, infrastructure of commitments, to take into account
greater risk, to take into account circumstances where the
regulators have concluded that their benefits to the public and
the consumers from having a different formulation of rate.
It's interesting to my experience, you all are more
knowledgeable than I, but the FCC's been doing this for quite
some time in telecommunications. When I was at FERC we worked
with them when they adopted an incentive rate formulation which
you all have long since approved. Most States have incentive
rates of one kind or another. They've been wildly successful in
reducing congestion in the United Kingdom where there's an
incentive that's shared between the customers and between the
company in terms of formulating new approaches to the business,
which I think Mr. Vesey's testimony clearly looks at.
All of that can be built into a business model with a
structure which I think could be highly successful in
addressing these issues.
I think the question before you is FERC, as I understand it
and all I know is what I've read, has indicated that it doesn't
believe that with its new approach, it's new policy, that
incentives will any longer be required. And while I don't
question for a minute they have the authority, I helped write
the incentive policy of FERC in 1991 and believe they did then
and believe they did under Order 2000; I think the question is
are those going to be available to support these new business
structures, which you've heard from others are going to be
very, very challenging businesses.
Mr. Sawyer. Are there others who would care to comment? Mr.
Flynn?
Mr. Flynn. Mr. Sawyer, I think the notion of ``just and
reasonable'' certainly accommodates a return on rate base, the
traditional rate making that we've had in the industry in the
past. And whether the return that FERC sets is just and
reasonable, the market will tell us by whether or not
investment is forthcoming to go into assets. But I think the
notion of just and reasonable can accommodate more than just
traditional return on rate bases, as Mr. Trabandt alluded to a
minute ago.
National Grid has pending before FERC today what I think is
the first incentive rate for transmission that's been proposed
in the United States. And it was a joint filing with the New
England Power Pool which consists of generators, municipal
utilities, marketers as well as transmission companies. Really
the cross section of the industry. And the proposal that's
before FERC, as I recall, had over 90 percent approval and it
was supported by ISO New England.
What was it? It was an incentive proposal that said we,
National Grid, need to do some maintenance on our system. A
good utility does maintenance on its transmission system. But
to do maintenance the traditional way of working, at least in
the northeast, is to take that transmission line out of service
while you're doing the work. When you take the line out of
service, that path is no longer available for power to get from
generation to load. And what you end up doing is adding
congestion on the rest of the transmission system.
And we know in New England today congestion costs the
consumers are paying are more than $100 million a year. And
doing some studies and working with ISO New England, we did
forecasts that taking this line out of service was going to
create the potential for significant congestion that consumers
would pay.
Well, the first thing we did is move the time of the outage
to the fall, so it wasn't during the summer peak. But beyond
that, we solved the potential of doing this work live, working
the line live, keeping it in service so the power continue to
flows to customers while we're doing the required maintenance.
And it appeared to us from our forecasts, and the work with
ISO New England, that the savings to customers in terms of
lower power costs because of the savings in congestion would
more than offset the additional costs of doing the work live.
And so this was a proposal we brought to the New England
Power Pool, and it really was a share the savings type of
incentive where everybody wins. And the customers who used the
system, the generators that used the system all looked at this
and said ``Yes, this is a good idea.'' This is the type of
thinking we would like to see investor owned transmission
companies bring to the management of the grid.
Now, this proposal is pending before the Commission. The
work is going on. We're doing it live whether or not we get
incentive from FERC. But nonetheless, it took a fair amount of
work and study to come up with the idea to do the thinking of
how you could save consumers money on the system. And we're
really looking at this as a signal from the Commission will
this sort of--approval of the incentive will give the signal to
the industry that, yes, if you come forward with innovative
ways of creating savings for customers, there'll be something
in it for shareholders. And I think the concept of just and
reasonable rates can accommodate that sort of incentive
ratemaking as well as traditional return on rate base.
Mr. Barton. If the Chair would interrupt. The gentleman
from Ohio has had 11, 12, 13 minutes. Now, I said such time as
you may consumer, because I gave Mr. Norwood 15 minutes, but--
--
Mr. Sawyer. Or such time as they may consume?
Mr. Barton. Yes. But if you could wrap it up in the next 2
minutes, because we need to let Mr. Shimkus and the vice
chairman of the full committee, Mr. Burr, have some time. Mr.
English has to leave at 3:30, I believe.
Mr. Sawyer. I can wrap it up in the next 2 seconds, Mr.
Chairman. I yield back the balance of my time.
Mr. Barton. Well, if you have another--okay.
Mr. Sawyer. Thank you very much. Appreciate your latitude.
Mr. Barton. And we're going to go to the gentleman from
Illinois, Mr. Shimkus for such time as he may consume, but
hopefully shorter road than longer.
Mr. Shimkus. As you wish, Mr. Chairman. Thank you for the
time.
I'll tell you what I'm struggling with, and we've been in
this debate now for 5 years that I've been a Member of
Congress. But we do have a new environment today than we had a
month ago, and I'm going to give you some examples, and I think
we would be remiss if we did not add into this debate the new
shift in the world based upon terrorism.
So some of this debate on how we're going to arrange our
transmission grid should probably start addressing things like
security, redundancy, capital available for repair, which I
don't know if we've discussed very much today, and I missed the
first panel, and I apologize for that.
The other thing I learned--I've been struggling with is the
business model with what we have done, one, as we've addressed
the airline industry. There was a time when you went to
business classes on developing small business, what did you
tell someone who wanted to develop a small business, you'd
better have the capital to allow you to survive for 3 years
without turning an actual profit in that business. But as we
have become leaner and meaner, just in time inventories and
stretching the price so thin because we all wanted lower prices
in every good and service, we have diminished our ability for
the capital reserve to respond to emergencies.
I'm really struggling with this. I see that that has
happened in the airline industry and it's costing us a lot of
dollars, a lot of tax dollars to keep these industries solvent,
which is important for our whole Nation.
The other thing that I'm personally struggling with is, and
it does kind of relate to the industry, the--I was at the
Verizon headquarters down right across from the World Trade
Center on the Telecommunications Subcommittee, Mr. Chairman. I
think it's--and it fits into this whole debate about
competition. Because here we have a regional Bell company
that's supposed to be the big, in essence, regional monopoly
that helps put down the competitive local exchanges, but it was
big enough to bring a lot of capital to bear to get the
connections up rapidly, and their story is monumental what they
did at the switching station to get the economy back forward.
The little competitors would say, you know, they can't compete
but would the little competitors combined be able to provide
the response, the emergency response that a regional monopoly,
in essence--they don't like that terminology, but in essence
the regional Bell was able to bring to the table?
So in this whole debate on addressing the transmission
grid, my concern is what about this new environment of having
the capital available to respond in case of tragedies and
disasters, and the like? And I just want to throw that out. I
don't want responses yet, but that's what I'm personally
addressing right now, and I think it needs to be part of the
debate, Mr. Chairman, especially as we talk about capital
available, the redundancy issue and the repair issue and how do
we fund the expansion of the transmission grid.
So that's an intro, but I want to ask Mr. Flynn, because
you've had some expertise, can you tell me about the National
Grid's business operations in Great Britain and are there any
lessons that we can learn from the restructuring of England's
power industry and things that we should do or things that we
should not do?
Mr. Flynn. I think there are some lessons to be learned.
Obviously, you cannot go from one system and just map it to the
United States point for point and say well what worked there
will work here. But just to set the stage a little bit, back a
decade ago all of the industry in the U.K. was government
owned. And 11 years ago the U.K. privatized the system and it
created an independent transmission company, that is a company
that was for-profit investor owned, to manage the transmission
grid that had no interest in the generation of power sales
business. And that's National Grid. So that's the genesis of
our company.
What has occurred in the U.K. over the period of a decade
is that National Grid has reduced the controllable costs of
operating the transmission system by about 50 percent. And it
has reduced congestion costs on the transmission system by
about 1 billion pounds. Both of those occurred under a system
of incentive rates that the regulator in the U.K. established.
In essence, the regulator said ``Look, we want you to
manage the system as a business and what we're going to do is
work with you up front to set targets with regard to what we
think is the right level of costs that a company that's
prudently operating the system would incur, and then we're
going to set your rates based on those target revenues. You
have the incentive and to try to operate the system more
efficiently. And to the extent that you do, there will be
sayings that your shareholders get to share in. On the other
hand, if you're less efficient than we think you should be,
then there'll be some shareholder pain and your profits will be
less.'' They also established an incentive with regard to
congestion costs on the system. And congestion costs are
essentially costs that customers pay for power because
generators that bid low, that are low cost, cannot run. They're
constrained off by the system operator because there isn't
enough transmission capacity to get the power from the low cost
generators to the load centers. And because these low cost
generators are constrained off, higher cost generators have to
run and the difference is called congestion costs.
And when the markets opened in the U.K. congestion costs
increased steadily the first few years, the same thing we've
seen, quite frankly, when the markets opened in New England.
And what the regulator said is we want to give you an incentive
to begin to manage the system to control these congestion
costs, and to the extent you're able to bring the cost down,
your shareholders will be able to share in that.
I think the broad lesson is if you create a rate system
with the right financial incentives, then the regulated
transmission company will respond. And if you align incentives
for shareholders with what's in the interest of customers, then
you have a happy situation with the management of the
transmission company is trying to create customer benefits and
at the same time is adding to shareholder value.
With the right incentive rate structure, you also have a
viable business that (a) that's able to raise the capital
that's necessary to invest in the system. And, indeed, National
Grid has engaged in considerable investment in the U.K. system,
most of it not in new transmission lines on virgin right-of-
way. Most of it is upgrading the existing system to improve the
efficiency of the system, but under a business model a viable
business is able to go to the capital markets and get that
capital to make the necessary investment.
Mr. Shimkus. Thank you. And I know that using that U.K.
model is difficult comparing it to the United States with the
size and distance and stuff, but I did want to have that
answered. And I'm going to finish up with a local general--
Illinois has three RTOs. And I'd like to have Mr. Esposito, he
talked the seams issue, what are the difficulties you face in a
State in which there is actually three different RTOs?
Mr. Esposito. The easy answer, Congressman, is that you
know for three RTOs you have at least three seams, and you have
to deal with things like scheduling times, being consistent
when you go to put your power on the system, and you're going
to go across these seams, that everything links up.
You have issues with what they call ramp rates. Some RTOs
will look at different ramp rates and some might start at the
beginning of the hour, some might start 15 minutes before the
hour. These are problems that they've experienced in other
places, particularly New England, New York, PJM. And you have
to get some entity to say this is going to be the rule. And in
the case of natural gas, that became the Gas Industry Standards
Boards. It looks like we may have the Electric Industry
Standards Board there to do that.
Being able to deal with those important issues that are
day-to-day, hour-to-hour issues is critical.
Conversely, three isn't all that bad because you have a
situation where you will develop best practices. Now, one of
the things we had in the New York/New England PJM area was a
situation where one of them required you to schedule your power
an hour and a half ahead and the other allowed you to schedule
the exact same type of transaction a half hour ahead. So we
were able to say ``well, they could do it in a half hour, why
do you take an hour and a half.'' And you develop best
practices over time.
So I think looking at resolving seams, we shouldn't jump
all the way to saying we're going to have a uniform set of
rules across the country or a uniform market, because that
could be a uniform mistake.
Mr. Shimkus. I'll just two bits worth and yield back, Mr.
Chairman.
It does tie into my previous comments and the effect,
although you may eventually get to best practices there may be
some deficiencies initially in the system by which you may not
be able to get the return on the investment which addresses the
repair and the maintenance and the possible development of
redundancies and the things I think, the new environment--in
this new environment that we'd better start talking about and
considering.
And with that, Mr. Chairman, thank you and I yield back my
time.
Mr. Barton. For our last questions, the gentleman from
North Carolina.
Mr. Norwood. Could the gentleman respond to that, Mr.
Esposito?
Mr. Barton. I didn't think that was a question. I thought
that was a statement. But, sure if he wants to respond.
Mr. Esposito. Yes. I would just respond when you go to a
competitive market, you've got people like us who make money
finding efficiencies in the system. When people say no, we say
why not and try to work around. And I think you end up with the
work arounds by having competitors enter the market. These
aren't people who make money unless they find a solution.
Mr. Gerken. Can I answer, add to that? I've got three RTOs.
One of the things that we've got three RTOs and we don't
see a real issue of working within those. My issue from a small
perspective is being able to move my power on an hour-to-hour
basis.
Let's say I'm trying to, for layman's terms, I'm moving
from one IOU, IOU-A to IOU-B, and I'm moving 100 megawatts.
What happens is during the hour I get a TLR, or transmission
line relief that says I have no capacity through that
interface. That's physically impossible, but what happens is
all the IOUs have reserved all of their native load or all
their generation to that capacity that says zero. Well, my
problem is if it was an independent system operator, if I said
``Okay, I will turn 50 megawatts of peaking generation on in B
to unload you 50 megawatts, will you allow me 50 megawatts
in,'' I don't get any justification or satisfaction because
they control the rules today.
If an RTO was there independently looking at it, watching
the flows, I would actually be giving them benefit as well as
my asset benefit. That's all we see is the trouble area right
now.
Mr. Shimkus. I should ask Mr. Norwood, is that fine? Do you
yield back your time?
Mr. Norwood. I didn't have to.
Mr. Barton. All right. Mr. Burr, the last questioner.
Mr. Burr. I thank the chairman. I've enjoyed listening to
Mr. Shimkus.
If I cover ground that you've already plowed before me, I
apologize.
Mr. Barton. I would encourage you to plow it quickly.
Mr. Burr. I will plow it extremely quickly.
Mr. Barton. We've already had one crop harvested today.
Mr. Burr. I won't even plant a second one.
Mr. Franklin, let me ask you, because I think you've
covered in some detail in your testimony some concerns that you
have about RTO formation specifically how quickly FERC's trying
to move. Which speed should they move if they should?
Mr. Franklin. Congressman, my concern is not so much how
quickly, it's more a case of how prescriptive FERC apparently
intends to be on the size and scope of the RTOs.
I think that, first of all, the RTOs that are formed we're
going to be stuck with for a long, long time. And whether it
takes 18 months or 2\1/2\ years in the long term doesn't make
any difference. I mean, it's much better to get it right.
At the same time, I think before this latest order coming
out of FERC, we were getting close to a broad agreement in the
southeast to form an RTO. Now, once we had the broad agreement
to form it, it probably takes a year to 18 months to actually
put it in place and have it working. So I don't think under any
circumstances we're talking about a long period. The issue is
more how prescriptive FERC will be as opposed to letting RTOs
evolve in different regions.
Mr. Burr. What experience do we have within FERC today and
RTOs at their ability to evaluate the assets?
Mr. Franklin. When you say ``evaluate the assets,'' you
mean----
Mr. Burr. Value the assets.
Mr. Franklin. Oh, the value of the assets in an RTO? I
first of all wouldn't profess to know what expertise is in----
Mr. Burr. But is the only example that we have up to this
time what we did in California? Was it FERC that valued the
assets that went into the----
Mr. Franklin. No. No. I don't think so.
Mr. Burr. All right.
Mr. Franklin. Being from Georgia I'm in a perfect position
to evaluate and be an expert on California.
Mr. Burr. That's why I asked you.
Mr. Franklin. So take what I say with a grain of salt.
I think the high cost, and I'm going to say this very
generally because I don't want to overstate what I really know.
The high cost of forming the power exchange and the ISO in
California was more a case of the design, how elaborate the
computer systems were, the time it took to do it, how many
people were involved. It seemed to me it was sort of a design
by committee. But it doesn't seem to me that the cost of buying
those computer systems, putting the software together, hiring
the staff; it doesn't seem to me that that should be related to
be the FERC.
Mr. Burr. You, a southern company, to join an RTO would be
asked to turn over your transmission grid, correct?
Mr. Franklin. We'd be asked to turn over the control and
operation of our transmission grid, not the ownership.
Mr. Burr. The reimbursement that you might receive for the
use of that grid would have a significant factor on whether you
participate in the upgrade of that grid, would be that be
correct?
Mr. Franklin. First of all, we have a--it would have a big
factor in whether we were smiling or frowning when we did it.
We have some legal obligations to provide services, Mr.
Johnston said about the municipals. So we have an obligation to
build transmission. We have an obligation to expand the system
as demand grows. But it's awfully hard to build transmission.
You got to get siting, you've got to deal with local
landowners. It's a very unpopular thing to do locally. And you
can do it with a whole lot more enthusiasm and a whole lot more
courage in dealing with local problems if you're getting a
decent return on that future investment.
Mr. Burr. Is there anybody that believes that we do not
need to upgrade our transmission grid in this country?
Mr. Bennett, let me ask you, is it the position of the
public utility commissions that FERC has the authority to take
a closed State and to require them to open up, to participate
in a----
Mr. Bennett. I'm sorry, what were the last two words?
Mr. Burr. Does FERC have the authority in your estimation
to go into a closed State and require them to join an RTO?
Mr. Bennett. I think that's part of the litigation before
the Supreme Court now, I would say it's the position of NARUC
and the position of New York State that FERC does not have that
authority.
Mr. Burr. I was just trying to get you to stay that.
Mr. Bennett. And they should proceed on a voluntary basis.
Just a comment. One of the greatest problems, aside from
the economic part of it, one of the great problems is how do
you get the transmission lines built from one State to another.
I happen to live on Long Island, which is known as a load
pocket. We have a need for 5,000 megawatts and we can produce
about 5,010 megawatts, so we're right on the line. And we had a
plan to bring power across the Sound from Connecticut which was
going very well, and then at the last minute we derailed. Now,
I'm sure we can work things out with our friends in
Connecticut, but it is very, very difficult to get these
transmission lines built even within one's State. And if you're
going to go from one State to another, the difficulty becomes
compounded. But I think that it works--we're going to do a lot
better in that situation working with Connecticut than if
someone tried to mandate it.
Mr. Burr. It may have been your testimony, Mr. Franklin,
and I think we've had it before and I certainly understand it,
that the ability to site generation might overcome some of the
bottlenecks in transmission grids. And I would also add to
that, and I'll be happy for you to comment, that there are many
places in the country where, for whatever reasons, we won't
build generation facilities where there's a need for power. And
the ability to upgrade a transmission grid and put a generation
facility in the desert, as advantageous as it is, for somebody
else to put a generation facility right next to a high growth
area where we can deliver power.
Under the scenario, shouldn't we as a national interest
make sure that whatever we do is something that creates the
type of incentive that does upgrade our transmission grid where
it's needed?
Mr. Franklin. Yes, sir. I think there are two points.
When deciding where to build generation, for example, we
don't need to let the cost of transmission or the cost of
generation alone dominate that discussion. We need to look at
the total cost of both. The real incremental cost; how much
more is it going to cost to build a generating plant in
location A versus B, and how much new transmission is going to
be required. And add the cost up and whichever one is the
lowest cost, that's where the generation should be built. And
if we get transmission pricing right, that's exactly, in my
judgment, that will happen.
So the first issue is to get the pricing right so
generation is built where it needs to be built. I think the
second component you referenced is to be sure it is a
reasonable financial investment to put money in transmission so
that the capital is coming into the transmission business.
If we do those two things, I think the market demand will
over time make sure we have the right amount of transmission
and we'll have generation located in the right place.
Mr. Burr. Is there anybody that would disagree with the
statement that Wall Street will be a good indicator as whether
we've found the right balance as to how to write a transmission
bill? I show that as all yeses.
Thank you, Mr. Chairman. I yield back.
Mr. Barton. Thank you, gentlemen.
I want to thank this panel. This concludes our series of
hearings on the electricity industry. The next step is to put
out a second draft after appropriate consideration of the
comments on the first draft. I would encourage you to look at
our RTO proposal that I authorized the release of yesterday
afternoon. Get those comments in writing to us as quickly as
possible.
The Senate is attempting to move some sort of energy
legislation. If and when that occurs, I would like to be able
to go to markup with an electricity bill so I could have the
option with Mr. Dingell and Mr. Boucher, and Mr. Tauzin to put
it into the comprehensive energy conference if that occurs.
Thank you, gentlemen, for your testimony today.
This hearing is adjourned.
[Whereupon, at 3:45 p.m., the subcommittee was adjourned.]