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Home > Electronic Reading Room > Document Collections > Commission Documents > Commission Meetings, Slides, Transcripts, Meeting SRMs, and Full Written Explanation for Closed Meetings > 1997
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04/24/1997
1
UNITED STATES OF AMERICA
NUCLEAR REGULATORY COMMISSION
- - -
BRIEFING ON ELECTRIC UTILITY RESTRUCTURING
- - -
PUBLIC MEETING
Room 1F16
11555 Rockville Pike
Rockville, Maryland
Thursday, April 24, 1997
The Commission met, pursuant to notice, at 9:00
a.m., Shirley A. Jackson, Chairman, presiding.
BEFORE:
SHIRLEY A. JACKSON, Chairman
GRETA J. DICUS, Commissioner
KENNETH C. ROGERS, Commissioner
NILS J. DIAZ, Commissioner
EDWARD McGAFFIGAN, JR., Commissioner
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STAFF AND PRESENTERS SEATED AT THE COMMISSION TABLE:
JOHN C. HOYLE, Secretary
KARYN D. CYR, General Counsel
LEONARD JOSEPH CALLAN, EDO
DAVID MATTHEWS, Chief, Generic Issues and
Environmental Projects Branch, NRR
ROBERT WOOD, Senior Financial Analyst, NRR
MARYLEE SLOSSON, Deputy Director, Division of
Reactor Program Management, NRR
SUSAN TOMASKY, General Counsel, FERC
BRUCE B. ELLSWORTH, Commissioner, New Hampshire
Public Utilities Commission, President, NARUC
ROBERT W. GEE, Commissioner, Texas Public
Utilities Commission, Chair, NARUC Commission on
Electricity
EMMIT GEORGE, JR., Commissioner, Iowa Utilities
Board, Chair, NARUC, Subcommittee on Nuclear
Issues, Waste Disposal
E. LINN DRAPER, JR., Chairman, President and Chief
Executive Officer, American Electric Power
Service Corporation
JOE COLVIN, President and Chief Executive Officer,
NEI
PHIL HARRIS, President, PJM Interconnection
Association
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STAFF AND PRESENTERS SEATED AT THE COMMISSION TABLE:
[continued]
JAMES ASSELSTINE, Managing Director, Lehman
Brothers
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P R O C E E D I N G S
[9:00 a.m.]
CHAIRMAN JACKSON: Good morning, ladies and
gentlemen.
The historic change to a competitive market for
the electric power industry is having far-reaching
consequences and presents many challenges for the nuclear
power industry. As restructuring proceeds and the business
environment changes, our licensees and the NRC must ensure
that economic pressures do not erode nuclear safety and must
assure the adequacy of decommissioning funding.
To ensure that the NRC is taking the right actions
at the right time in the appropriate manner, it is important
that we gain an understanding of the changes and emerging
issues that are occurring as a result of these momentous
changes. To address the significant issues and concerns,
the NRC has brought together economic regulators and
representatives of the nuclear industry as well as our own
staff to present their roles and perspectives on the future
of the electric power industry with the transition to a
competitive market.
Yesterday, we focused in a Commission meeting,
public meeting, on transmission reliability and security.
Today, we will focus on other issues associated with
electric utility restructuring and economic deregulation.
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The restructuring of existing utilities raises a number of
complex issues. We are seeing proposed legislation at the
federal and state levels and many new financial
arrangements.
The NRC needs to keep itself abreast of
developments and be able to respond to legislative proposals
and financial changes which include mergers and
acquisitions, antitrust issues, stranded cost recovery and
the introduction of independent system operators.
I would like to welcome the NRC staff and the
members of the two panels that will be speaking today on
these issues.
On the first panel, after the staff speaks, will
be Susan Tomasky, General Counsel for the Federal Energy
Regulatory Commission; Commissioner Robert Gee, Chair of the
NARUC Committee on Electricity; Commissioner Bruce
Ellsworth, President of NARUC; and, commissioner Emmit
George, Chair of the NARUC Subcommittee on Nuclear Issues
and Waste Disposal.
I am also pleased and will welcome them again at
the time, to welcome the members of the second panel,
Mr. Joe Colvin, President and CEO of the Nuclear Energy
Institute; Dr. E. Linn Draper, Chairman, President and Chief
Executive Officer of Electric Power Service Corporation;
Mr. Phil Harris, President of PJM Interconnection
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Association; and Mr. James Asselstine, former Commissioner,
now Managing Director of Lehman Brothers.
If the Commissioners have no opening comments,
Mr. Callan, please proceed.
MR. CALLAN: Good morning, Chairman and
Commissioners.
Chairman, as you just noted, we are the first of
several panels to brief the Commission on the status of
economic deregulation and restructuring of the electric
utility industry. As you know, the NRC staff has, at the
Commission's direction, undertaken several initiatives to
address the NRC's concerns about the potential health and
safety impacts of economic deregulation of its power reactor
licensees. Our briefing will update you on the status of
our initiatives and will highlight several issues currently
of concern to the NRC and other participants in the
deregulation process.
This is our first briefing to the full Commission
since July 30, 1996.
With me this morning are Marylee Slosson, the
Deputy Director of the Division of Reactor Program
Management in the office of NRR, David Matthews, a branch
chief, who works for Marylee Slosson, and Robert Wood.
I will now turn the briefing over to David
Matthews.
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David.
MR. MATTHEWS: Thank you, Joe, and good morning.
I am only going to spend a couple of minutes by
way of brief summary and an outline of the staff's intended
remarks.
If I could have the first slide, please?
As Mr. Callan indicated, we briefed the full
Commission in July of last year with regard to a seven point
action plan that the staff had undertaken starting in
February of 1996. Today, we did not intend to go by rote
through the individual items of that action plan because we
view that that progress is generally well known. We have
briefed the status of that action plan in many fora over the
last few months. We did, however, want to focus on what we
view to be the accomplishments that have been afforded
through those efforts within the last year or 18 months.
I want to comment at this time, as an outgrowth of
our last briefing in July, the Commission raised an issue to
the staff for us to consider in connection with this general
area of restructuring and that was the issue of non-owning
operators who -- proposals had been offered associated with
the operation of plants by people who had not previously
been listed on the license and weren't licensees.
The staff has, at the Commission direction,
undertaken a separate review of that issue and a paper
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presenting some policy considerations is in preparation and
is due to the Commission here in the next month or two.
CHAIRMAN JACKSON: You will not be speaking
specifically to that today?
MR. MATTHEWS: Right, although we will indicate
that that is one of the "emerging issues," because of the
unique arrangements that are materializing. It is not one
that we are prepared to speak to in detail at this time.
With that, I want to indicate that Bob Wood will
carry us through the presentation and he will focus on the
accomplishments of the last 12 or 18 months. He will also
briefly review what is the continuing NRC's involvement and
review in restructuring activities that are taking place in
the recent past, as we speak today and in the near future.
He will also mention what we see to be some emerging issues
that the NRC certainly has to keep an eye on and then
particularize it to a few issues that we think the NRC has
to be actively involved in addressing in the hear future and
then he will provide a summary and conclusions.
MR. WOOD: Thanks, Dave.
Slide number 2.
Chairman Jackson, Commissioners, I am happy to be
here.
CHAIRMAN JACKSON: We are happy to have you.
MR. WOOD: We issued the action plan, as Dave
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mentioned, back last February with seven elements. Most of
those elements are on here. I will try to be very brief in
summarizing them. As you all remember, we issued an
advanced notice of proposed rulemaking in April on
decommissioning funding assurance and that now is coming
close to final internal completion and will be coming up to
the Commission as a proposed rule.
CHAIRMAN JACKSON: When do you anticipate that?
MR. WOOD: It will probably go to the EDO's office
within a day or two.
CHAIRMAN JACKSON: So, in May?
MR. WOOD: Sometime in May.
CHAIRMAN JACKSON: Okay.
MR. WOOD: The administrative letters that we
issued to all of our power reactor licensees last June
reminded them of their obligation to inform us of any
activities that might be considered direct or indirect
transfer of control of the license under our 50.80 reviews
and we have gotten a few responses back on that from time to
time since then.
We issued a draft policy statement on September
23. We extended the comment period once because of interest
expressed by the public. The final policy statement is now
under staff review and is moving along internally and will
be up to the Commission sometime later in June, I believe.
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The draft standard review plans that were issued
in concert or prepared in concert with a draft policy
statement were published or notice of availability was
published in the Federal Register on December 27. As you
may remember, the standard review plans concern both the
financial qualifications, review process and the
decommissioning funding assurance review process as it
stands now and there is a separate standard review plan on
the antitrust review process. We got six comments back on
that and will be revising the standard review plans based on
those comments.
We have ongoing staff level liaison function that
I think is going along very well with FERC and with the
state PUCs through the NARUC committee framework. And,
finally, we have work going on with the Financial Accounting
Standards Board endorsing right at this point what they call
an exposure draft which is a draft proposal which would give
us information on the status of decommissioning funds.
Finally, we have an ongoing evaluation of our
50.80 process and our general financial qualifications
framework and I will get into that a little bit more.
CHAIRMAN JACKSON: When do you expect your review
of the FASB exposure draft?
MR. WOOD: Well, we have a guide which has been
prepared which endorses the exposure draft. We are at the
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mercy, of course, of FASB's schedule. My understanding is
that FASB will probably either be issuing another exposure
draft because of issues raised for non-nuclear facilities
that also have long lives and have costs associated with
their ultimate disposal. So they may do that in the second
quarter of this year, which we are in now, of course. I
understand that at the earliest, the final FASB guide or
regulation wouldn't be coming out until December of this
year.
CHAIRMAN JACKSON: This relates to reporting
requirements?
MR. WOOD: This relates to reporting requirements
and the status of decommissioning and how people or
companies would deal with the ultimate liability to get rid
of that obligation.
Slide 3, please.
We believe that we have fairly well summarized the
current process that we use by issuing the standard review
plans. We will, of course, be changing the standard review
plans as we change the regulations that underlie them. As I
mentioned earlier, we have been reviewing all restructuring
proposals under our 50.80 transfer of license requirements.
So far, we haven't seen any divestitures of assets. Most of
the things we have seen so far have been mergers or
formations of holding companies.
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We do expect to see future issues where
divestiture is raised. We also expect to see future issues
where proposed purchases by foreign entities may occur.
Basically, our review is basically
straightforward. As you know, we have a dichotomy in our
regulations for power reactor licensees between those that
are defined as electric utilities in our regulations in the
definition section and then nonelectric utilities. And
electric utilities have, because of their historic access to
ratepayers through regulated rates, have a little bit lower
threshold to meet than nonelectric utilities. We do
ascertain in our reviews that a licensee would remain an
electric utility and if they don't they would have to comply
with the more rigorous standards that pertain to the
electric utilities.
For holding companies, what we are concerned about
is as holding companies are formed over our existing
licensees that there may be transfers of assets away from
our licensees to a parent or affiliated company. So we have
been getting commitments from licensees that they will
inform us if there are any significant transfers of assets
so that we will at least know about it and take appropriate
action if we need to.
CHAIRMAN JACKSON: Let me ask you two questions.
One, in terms of obtaining the commitments to inform the NRC
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when significant assets are moved, are those commitments
made a part of the license or the license transfer?
MR. WOOD: We do have, in recent -- in the last
year or so made them as license conditions. Prior to that,
there was less consistency on that approach and we had
obtained letters. One thing in this broader review of our
financial qualifications framework, I think we are certainly
looking at the feasibility of whether to make that a
requirement in the regulations rather than doing it through
the license condition process.
CHAIRMAN JACKSON: If you were to do that, would
that require a separate rulemaking or you would be doing
this in the rulemaking coming forward in May?
MR. WOOD: It won't be part of the rulemaking
coming forward in May. It would be a separate rulemaking.
This rulemaking would look at more of the general
qualifications process. The rulemaking that is coming
forward in May is looking specifically at decommissioning
funding assurance and the impacts of deregulation on that.
CHAIRMAN JACKSON: As a general practice today,
you are making these commitments license conditions going
forward?
MR. WOOD: Right.
CHAIRMAN JACKSON: And the second question has to
do with consideration of foreign ownership issues. How well
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prepared are we in terms of reviewing those?
MR. WOOD: I think we have to do some more work on
what the standards are. I think at this point part of the
problem is, you know, clearly any entity that owns over 50
percent of a licensee and is foreign would raise -- would
probably be in contravention of the Atomic Energy Act. Just
as clearly, if there is a de minimis amount, under say 5
percent, it would be highly unlikely where they could
exercise any form of control.
But you have a gray area in between that you would
have to evaluate. In most cases, foreign companies aren't
going to exercise control with 10 or 20 percent of voting
stock but not always. So we would have to look at each
particular situation, I think.
CHAIRMAN JACKSON: I guess I am really asking two
questions. One is, how well prepared are we in terms of
being able to look at what may be less than obvious
situations? That's number one.
Number two, how well prepared are we to move
quickly relative to those reviews?
MR. WOOD: You know, I think we could make a
review and I don't think it would be on the critical path;
it would be on the general review that we would look at and
it would take, like most reviews do now, in the order of
three to six months and it would be another element we would
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look at.
At the same time, I think we want to look at
resolving, if we can, some sort of benchmarks or milestones
below which we wouldn't have to look at at all or above
which we would clearly have to look at.
CHAIRMAN JACKSON: How close are you to developing
such thresholds?
MR. WOOD: We are starting on that but we haven't
gone very far into it.
MR. MATTHEWS: Let me make a comment that it is an
element that is required of us and we have looked and
addressed it in each SER that we have issued associated with
the proposed restructuring or change in ownership. So it is
an essential element because it is a prohibition in the
Atomic Energy Act. We just have not seen one that would
challenge our judgment in that regard. Namely, there just
hasn't been a case in which we have uncovered any foreign
ownership.
So it is an explicit part of our review and we
have been addressing it in each instance. Where the
challenge will come is the first time that we see one with
some material ownership and then we are going to have to
evaluate its significance. To say that we have criteria
would be a strong overstatement; we don't.
I believe it is something that could be factored
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in, appreciating that it might take some additional time,
into our standard review plan. That may be an appropriate
mechanism to do it. But it is one of those many emerging
issues that the staff has yet to articulate any clear
standards on.
MR. WOOD: Yes, we do have a statement in the
current standard review plan that went out on foreign
ownership but it is very broad and very general and that was
the best we could do, given the time constraints at that
time. We are going to have to revisit that.
CHAIRMAN JACKSON: Commissioner McGaffigan.
COMMISSIONER McGAFFIGAN: On the definition of
electric utility, as states go about passing retail
competition statutes, will that move utilities from being an
electric utility under our definition into the other
category at some point in time?
MR. WOOD: It all depends on the specific state
proposal.
COMMISSIONER McGAFFIGAN: So you are going to have
to audit each state proposal?
MR. WOOD: Well, yes. And in the proposed rule
that will be coming up we do try to address the issue of
those states that do have dedicated nonbypassable charges
that take care of decommissioning funding. We would want to
handle that in our regulations so that I think the staff's
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thinking is for that purpose they would still be considered
an electric utility even though for other purposes they may
not be. So you could have a divergence.
COMMISSIONER McGAFFIGAN: Depending on how
decommissioning funds are handled in the state statute?
MR. WOOD: Right.
COMMISSIONER McGAFFIGAN: Have we conveyed that
tentative position to the states?
CHAIRMAN JACKSON: We just did, if we did not
before.
[Laughter.]
COMMISSIONER McGAFFIGAN: Fair enough.
MR. WOOD: You would have -- you could be
considered to be an electric utility from the point of view
of decommissioning funding assurance if states had
mechanisms for that. Whereas, the same entity might not be
for general financial qualifications to operate the plant.
Slide 4, please.
The emerging issues as we see that, I am not going
to mention any more about grid reliability and ISOs. You
had a very detailed meeting yesterday afternoon on that
subject.
We do see some issues with respect to unique
ownership and operating arrangements which gets back to
Dave's earlier remarks about non-owner operators and how
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they might play out in some of our considerations.
CHAIRMAN JACKSON: What are some of the issues
that you are considering?
MR. WOOD: I think I will really -- if I may, I
will use the recent Maine Yankee Entergy agreement as kind
of a template for what we have done and we looked at that
proposal particularly. Because Maine Yankee had retained
responsibility and ultimate authority to shut the plant down
and control over ultimate spending, we didn't see any real
problems with that.
Other proposals may come along that may not have
all those elements in them and we may raise our level of
concern as a result. There again, I think we have to be
concerned about future partnership forms and we are just not
sure what those are. I think we would certainly be
concerned about -- that the licensee has to maintain control
in some way or that whoever takes the authority gets put on
the license.
There, as you know, there are two issues involved
in this, in this 50.80 transfer process. It is both
financial qualifications and technical qualifications. We
do have to look at those.
As Dave mentioned, we will be addressing this
whole issue in more detail in the paper that will be coming
up to the Commission in the near future.
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CHAIRMAN JACKSON: You mentioned the issue with
respect to future partnership forms of whoever takes on the
authority. You mean the operational authority?
MR. WOOD: Right.
CHAIRMAN JACKSON: Gets put onto the license?
MR. WOOD: Right.
CHAIRMAN JACKSON: Was Entergy put onto the
license?
MR. WOOD: No, because of Maine Yankee's retaining
of the ultimate authority and control, we did not do that in
that case.
CHAIRMAN JACKSON: Okay.
Commissioner McGaffigan.
COMMISSIONER McGAFFIGAN: Are we going to suggest
templates for partnership forms that will pass muster? Are
we going to do this sort of case by case and let a body of
case law build up so that people will recognize what we
approve and what we don't approve?
MR. WOOD: I think we probably are going to end up
doing it case by case because I don't think we can visualize
at this point all the potential permutations of what might
come in.
We do have antitrust issues that we are going to
look at, of course, statutiorally required to do so. As I
did mention earlier also, we have seen a number of state
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initiatives now where, in most cases, they have provided for
a secure source of revenue streams, at least for
decommissioning. There is also the broader issue of
resolution of stranded costs in general, including recovery
of capital costs, which I think we are probably less
concerned about unless it gets to the point where the lack
of that recovery stresses a utility -- a licensee enough
financially that they would have trouble running the plant
safely.
As I mention also, a lot of these approaches that
the states are using in terms of nonbypassable charges seem
to be a good surrogate for the existing approach to rate
regulation and rate recovery. If that process continues to
hold, I think we will be in pretty good shape. Of course,
we don't have a crystal ball and some states may not choose
to go that route.
CHAIRMAN JACKSON: So a key to avoiding our having
to take direct action with respect to our licensees is the
issue of nonbypassable charges?
MR. WOOD: I believe so, yes.
CHAIRMAN JACKSON: Okay.
MR. WOOD: Next viewgraph, please.
There are a number of issues that we have
already -- Dave has already covered and I have touched on
the issues that have to be addressed and possibly resolved.
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As I mentioned earlier, there is this broad look that we are
initiating now in terms of the general 50.80 review process
and even our -- the financial qualifications review process
under 50.33(f) and we will be at some point coming up with
the policy options on that for the Commission's
consideration.
CHAIRMAN JACKSON: At some point, what does that
mean?
MR. WOOD: Sometime this summer, I believe.
CHAIRMAN JACKSON: Okay.
MR. WOOD: We have a concern, we have gotten
several comments both on the draft policy statement and the
standard review plans and the regulatory information
conference earlier this month on industry's concern about
having very specific defined NRC position on what we expect
in our financial qualifications review. We thought we did
that in the policy statement and in the standard review
plans. I think they want an even firmer line in the sand.
I am not sure how we can do that, given that we
don't really know what is going to happen in the future and
there are many variations on restructuring but we will be
considering that, of course.
We are, of course, concerned about the
acceptability of the level of decommissioning funding
assurance that might come out in some state restructuring
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approaches and we will have to look at those as they
develop. We are concerned also about the availability of
funding assurance mechanisms to nonelectric utilities as
they get kicked out of this category into being a
nonelectric utility, they would no longer be allowed to put
money aside annually over the projected life of the reactor;
they would have to come up with some sort of guarantee
mechanisms for any unfunded balance. To do that, they would
either have to prepay or use a surety bond or a letter of
credit or a guarantee coupled with a financial test. It is
not clear in all cases where those would be available to
those licensees that need them.
Finally, we are looking at the possible need for
federal legislation in various areas of restructuring.
CHAIRMAN JACKSON: Which areas do you feel need
perusal with respect -- are you perusing with respect to the
need for federal regulation?
MR. MATTHEWS: Let me speak to the issue of
federal legislation. It is one that we have become
increasingly involved in, in concert with Karen's staff.
We met with the Department of Energy within the
last few weeks and received an explicit invitation to
participate with them in even to the point of drafting
legislative proposals in concert with their staff. We are
proceeding next week to sit down for our first meeting to
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examine the alternatives.
So we have just at this point in time come up with
some areas to discuss with them jointly and I will just give
you the flavor for what those areas are. These aren't in
any order of preference; they are just areas that have been
raised by the staff and outside interest as being an area
where there may be a need for federal legislation to
backdrop or give a statement of congressional intent or
support as state-specific and FERC initiatives in the
restructuring area go forward.
I say it that way because I don't believe we have
identified, with the possible exception of one area any
areas that we think we need bolstering in terms of our
regulatory authority in this area as we move forward in the
sense that we have some large gap. I look to Karen to
correct me on that statement if that is not true. So it is
along the lines of providing support.
One area is bankruptcy priorities, as you may see
bankruptcies coming out of some of these restructurings,
particularly those in the Chapter 11 category. We certainly
would like to see some support for the view that
decommissioning funding would have a priority associated
with any such cases, even in advance of preferred creditors.
So that is one of the -- one of the areas for discussion.
Certainly, the treatment of decommissioning funds
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in the overall context of stranded costs as we have
discussed here is important. Given the variability of some
of those proposals, some statement of federal intent in that
regard, possibly deferring to an agency such as ours and
FERC to address that issue, might be a possible proposal.
The antitrust area is one that we think it is
worth examining. There have been calls for us to remove
ourselves from the antitrust arena given the number of
people that do look at that area. One of the consequences
of an antitrust or the removal of antitrust review
responsibilities from the Atomic Energy Act as it applies to
the NRC's responsibilities is that we have a number of
licensees, those licensed since 1970, that have existing
antitrust license conditions and we would have to do an
assessment of what the impact of removing our statutory
authority in that area would be on those existing conditions
so the issue is not as simple as just eliminating the review
requirement. That is one that is at least ripe for
discussion.
CHAIRMAN JACKSON: Have we begun to take that
look?
MR. MATTHEWS: We have gone so far as within the
next few weeks you will see a NUREG document published that
will at least collate all of the existing antitrust license
conditions in one location in order to at least have a
. 25
baseline of reference to begin that assessment. That is a
companion piece to the one we issued very recently which,
for the first time, collated a current listing of all of the
known owners of nuclear power plants and their operators, as
reflected in today's licenses as well.
We felt when we entered into this 18 months ago
that we had our data distributed throughout licenses and,
although it was retrievable, it certainly wasn't immediately
accessible so that is the foundation we have laid for those
two reviews.
One area I will mention that certainly is worthy
of possible further discussion is the grid reliability
issue. It wasn't explicitly addressed by DOE when they
discussed this issue with me several weeks ago but it is one
I think the staff has to consider for possible -- let's put
it this way. Putting it on the table in the short term, and
I look to other members of the staff to support me in that
regard as we go forward with DOE. My intent was to give DOE
a call, in fact, this morning and ask them if that is
something that would be appropriate in their view to add to
the agenda.
CHAIRMAN JACKSON: Commissioner McGaffigan?
COMMISSIONER McGAFFIGAN: May I follow up on the
question on the case-by-case review? I interpret what you
said later as industry would prefer to have a little more
. 26
certainty.
Have you considered doing a reg guide saying here
is one possible approach? We do that in other areas. If
you divert from the reg guide, you know, you are into case-
by-case country but if you stick to a reg guide or we
endorse some NEI or whatever document, FSAB document, then
you are in good shape, has that been thought about in the
restructuring area?
MR. WOOD: Yes, in fact we thought we did that
with the standard review plan and we did have a specific
framework for reviewing financial qualifications and --
CHAIRMAN JACKSON: Does that standard review plan
have an associated reg guide?
MR. WOOD: No, no it doesn't. But I think it had
enough detail that it provided how we actually do review and
the benchmarks that we do use --
CHAIRMAN JACKSON: Might you be able to promulgate
out of it a reg guide?
MR. WOOD: We certainly could.
CHAIRMAN JACKSON: Certainly, they are companion
pieces, aren't they?
MR. WOOD: We certainly could. It may be somewhat
redundant, but --
CHAIRMAN JACKSON: To try to lay, as Commissioner
McGaffigan says, on the table at least an acceptable
. 27
approach?
MR. WOOD: Yes.
We only got six comments back on the standard
review plans and, even among those six comments, they were
all from industry, and there was some divergence of opinion
as to the process that we were using and in a couple of
cases I felt that they basically agreed with it but wanted
some fairly minor modifications to it and in other cases
they felt it didn't go far enough in laying out a specific
position.
The last bullet on page 5, I think we pretty much
covered earlier in our remarks so I won't belabor that.
COMMISSIONER DIAZ: Let me ask a loaded question
on this instance. Since this is a new global economy, has
somebody even asked a question is it -- will the Atomic
Energy Act be changed in this respect?
MR. WOOD: Yeah, I think clearly there have been
some initiatives on the part of, or consideration at least
on the part of industry and others to amend the act in that
way to eliminate that prohibition.
COMMISSIONER DIAZ: How hard would that be?
MR. WOOD: I'm sorry?
COMMISSIONER DIAZ: How hard would that be?
MR. WOOD: I don't know how high on Congress's
priority list it would be.
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COMMISSIONER McGAFFIGAN: Do we know whether other
nations have similar -- I know from Congress it is usually
if everybody else will allow American utilities to own, then
it is one thing. If there are prohibitions on American
ownership, then there is a tendency to want to be --
MR. WOOD: Clearly, there are a number of U.S.
utilities that have invested in overseas utilities so,
obviously, the prohibitions --
CHAIRMAN JACKSON: Do they own nuclear assets?
MR. WOOD: I think in a couple of cases they do.
You know, certainly this prohibition was part of the
security efforts at the beginning of the Cold War so, from
that standpoint, some of the reasons for it may be obviated.
CHAIRMAN JACKSON: Have we thought through what
would be an appropriate NRC position? You know, what the
policy considerations are or should be that would guide a
stance that we might take on the issue?
MR. WOOD: I don't think we have thought it out in
any detail on this point.
COMMISSIONER DIAZ: I think it might be worthwhile
to start thinking. If we start getting into this area to
have some idea which way we would go.
CHAIRMAN JACKSON: We have to start thinking about
which way we would go.
COMMISSIONER DIAZ: Yes.
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[Laughter.]
MR. WOOD: Slide 6, please.
In our summary and conclusions, we have noticed
kind of a divergence of states. There has been some
acceleration or quite a bit of acceleration in several
states in terms of taking deregulation initiatives.
However, other states don't -- and those are generally
states with lower cost power, don't seem to have it as high
a priority. So most states are at least in the study phase
but some states are moving ahead quite a bit more rapidly
than other states.
We believe that we have taken, through our action
plan and some other initiatives, those actions that would
cope with these changes that are going on. I think we
believe that our current regulatory framework and
requirements are adequate to cope with the changes that are
going on, both with respect to providing assurance for
plant -- safe plant operations and also for safe
decommissioning.
But, obviously, we are going to have to be on our
toes and continuing to monitor the situation as it develops.
I think because of that, because each state's approach is
somewhat different and unique, that we have got to look at
how each state and their licensees in those states approach
the problem and make the determination as to whether they
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actually in fact do provide adequate assurance for
operations and decommissioning.
That concludes my prepared remarks.
CHAIRMAN JACKSON: Commissioner Dicus had a
question.
COMMISSIONER DICUS: Yes, I wanted to address that
with you a little bit. On your comments which you have made
on the rate at which economic deregulation appears to be
accelerating and I think it is, and there are indications it
may go at an even faster rate. My base question follows up
on a comment or a question the Chairman had a little bit
earlier and I want to broaden it a bit.
Are we as an agency, and you have addressed this a
little bit, but do you really think we as an agency are
prepared or looking down the road far enough for this
accelerating rate that we can stay in front of the curve?
Because I think this is an area we clearly do not need to
fall beyond -- behind the curve.
MR. WOOD: Right.
COMMISSIONER DICUS: And things like evaluating
some of these unique ownership operator arrangements that
come up on a case-by-case basis, I tend to agree at this
point in time that is probably what has to occur. But when
three or four of these things start occurring very quickly,
that is very time consuming to do it.
. 31
My question, what are you planning, where are we
in ensuring we are thinking six months ahead, a year ahead
or whatever so that we can keep pace? Another part of the
question would be for example, I think I read in some of the
documents that we were going to be somewhat dependent if not
entirely dependent on the FASB standard to tell licensees
how to do the reporting or accounting for some of the
financial arrangements and that standard is clearly not
coming down the pike for quite some time. Can we wait for
that or do we not need to go ahead and be prepared on the
front end so that everyone knows what is expected of us?
I know it is a very broad question. Maybe it is
more of a statement than a question but I need to know where
we are with this.
MR. WOOD: I think there are two things in answer
to your question. The first is, we do have the default
framework now on this dichotomy between electric utility
licensees and nonelectric utility licensees and it really
does depend on the rate treatment they receive. We need to
fine tune that definition. But the basic definition and the
basic concept, I think, is there.
So I think with that and, you know, for
decommissioning and with our historic approach to
inspections for operating plants and maintaining safety that
way, I think we will be in pretty good shape. That doesn't
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mean that we can't do more but I think while we are looking
at these things we have that already in place.
With respect to the FASB standard, there were two
elements in the action plan and there was one element that
was trying to do something short of rulemaking to get
information on the status of decommissioning funds. It was
almost serendipitous the way FASB's standard came out just
about the time of that proposal and we decided that we would
try to hook onto that as a good vehicle for getting that
information. But it wasn't the only approach we had.
A second element in the action plan was to
consider a reporting requirement that we would put in our
regulations and that is considered in the proposed rule that
you will be getting in a while.
So if the FASB standard doesn't go through, we
still have that if you agree that that is an appropriate
thing to do. We can have that approach too.
COMMISSIONER DICUS: What about resources? If we
get into this much more intensive effort with acceleration,
where do we stand with resources to cover it?
MR. MATTHEWS: Although that wasn't an item
specifically identified in the action plan, it was obvious
when the action plan was spawned that it was going to demand
additional resources, not only from the standpoint of the
immediate tasks that we had undertaken but as has happened,
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there are many collateral issues that have arisen.
The list that I keep on my desk of things that I
need to look into or that the staff needs to review that we
haven't had time to review gets longer by the day.
CHAIRMAN JACKSON: Where do we stand on the human
resources?
MR. MATTHEWS: We've got two additional staff
members that have been hired, authorized. One is on board,
one will be here May 5. We have a third staff member who is
expected to be selected and hopefully come on board by the
end of the summer.
CHAIRMAN JACKSON: At least one or more of these
will be individuals with the kind of financial backgrounds
that we need to do this?
MR. MATTHEWS: We would hope they all have that
kind of background. They were specifically --
CHAIRMAN JACKSON: Well, at this stage of the
game, we'll take --
MR. MATTHEWS: No, I understand. But we have some
very qualified people that responded to our request. These
were people outside the NRC. The first two individuals that
we have hired came from the industry. One had a recent
history with Entergy and Mid South in the financial planning
and strategic planning area and another was an engineering
economist most recently working with New York Power
. 34
Authority but prior to that with PSE&G so they come from
that background and have been involved are familiar with the
kind of issues we are talking about in their current jobs
before they came to work for us.
CHAIRMAN JACKSON: Okay.
Commissioner Rogers?
COMMISSIONER ROGERS: No, I have no more
additional questions.
CHAIRMAN JACKSON: Commissioner Diaz, Commissioner
McGaffigan?
Thank you very much.
We will call the federal and state regulatory
panel. Thank you.
I think we will begin with Ms. Tomasky, the
General Counsel of the Federal Energy Regulatory Commission.
Good morning and thank you for coming.
MS. TOMASKY: Thank you, Madam Chairman. It is a
pleasure to be here.
CHAIRMAN JACKSON: You have to press the button.
Thank you.
MS. TOMASKY: Madam Chair, members of the
Commission, I appreciate very much the opportunity to come
here today and share with you some information about the
recent activities of the Federal Energy Regulatory
Commission. I think everyone in this room, perhaps everyone
. 35
in the country well knows that the FERC is strongly
committed to developing competitive markets for electricity.
Toward that end, we have initiated fundamental changes in
our approach to regulation.
These changes we expect will encourage the
development of competition in wholesale power markets and we
believe will provide very significant benefits to consumers.
We also believe that our rules will ensure a fair and
rational transition to a competitive and reliable wholesale
marketplace.
We understand that the NRC is vitally interested
in the potential effects of these changes on the nuclear
power industry. You have asked that I provide you an
overview today of what the Commission has been doing and I
would like to talk about four major policy areas of the
Commission's activities. These are our requirements for
open access transmission service, the recovery of stranded
costs, recent actions with respect to market-based rates for
wholesale sales of electricity and our merger policy.
I am sure you have a number of very specific
questions concerning the intersection of our programs and
yours and I look forward to discussing those specific issues
with you in questions after the overview and after we have
heard from other panelists, if you like.
The centerpiece of the Commission's electricity
. 36
policy initiatives is Order Number 888. In Order 888, the
Commission has required all public utilities under the
Federal Power Act to file nondiscriminatory open access
transmission tariffs. Under these tariffs, transmission
owning public utilities are required to provide transmission
service to wholesale buyers and sellers on the same terms
and conditions that apply to the transmission owner itself.
In other words, the transmission owning utility can no
longer restrict access to its transmission system to favor
its own generation.
To ensure that access to the transmission system
is not subject to manipulation, the Commission in Order 889
has also required public utilities to functionally separate
their power marketing and transmission functions. A public
utility is also required to have in place an Internet
accessible computer information system known as an OASIS.
This permits perspective transmission customers to know what
transmission capacity is available on the system and at what
price.
Open access transmission is now a fact of life
across the industry. There are a number of many difficult
issues yet to be resolved. I am sure we will be discussing
many of them today because they do affect the nuclear
industry. However, there is little dispute, I think, over
the fundamental principle of open access. Most
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jurisdictional utilities have timely implemented their open
access tariffs and they are really busy figuring out how to
do business in an open access environment.
Let me now then turn to another critical element
of the Commission's open access policy, which is the
treatment of stranded costs. In the coming competitive
marketplace we believe that utilities sellers ultimately are
going to have to compete on the same basis as other sellers.
But we are also aware that in the past utility investment
decisions including nuclear investment decisions were made
under wholly different expectations and within a different
regulatory framework. That is, of course, the cost-based
regulatory framework with which you are familiar and with
which for many years we have regulated the utility industry.
There is no question that a competitive
marketplace and, in particular, the Commission's
requirements for open access create the prospect that
customers are going to depart the system. The consequence
of them leaving the system is that some of the costs
associated with the utilities providing power to their
traditional customers can be stranded. There is no question
that the stranded cost issue, which is the price tag for
open access in our view, is the most hotly contested issue
associated with Order 888.
In Order 888, the Commission studied thousands of
. 38
pages of comments on this issue from over 400 commentors and
we came to the conclusion very firmly stated several times
in various iterations of the rule that utilities should be
given an opportunity to recover all verifiable and prudently
incurred stranded costs. In our view, stranded costs
associated with the rule are costs that occur when a
customer departs the system and then uses the supplier's
transmission system to access new supplies.
Recovery of stranded costs from a particular
customer is going to be determined on a case-by-case basis
under the Commission rules and, as a result, many of the
questions I think we will likely explore today about what
stranded cost recovery really means we expect to evolve in
the case-by-case process. As a general matter, the utility
will bear the burden of demonstrating that it had a
reasonable expectation of continuing service beyond the term
of a contract in order to receive what we call the extra
contractual stranded cost recovery.
But I think it is important to note that the
Commission in Order 888 did not abrogate existing
requirements contracts so that customers who are obligated
contractually to stay on the system would do so and continue
to bear their cost responsibility. Again, on a case-by-
case basis, the Commission could consider opening up those
contracts and, in that context, we would expect to deal with
. 39
the stranded cost issues if we were going to permit the
customer to depart that system early.
Clearly, we think that a fair transition to
competition includes stranded cost recovery but, as the
prior panel's discussion, I think, made very clear, the vast
majority of stranded costs are likely to be generation costs
incurred to serve retail load that will be stranded as a
result of state retail choice programs and, as a result, the
vast majority of the challenges involved in dealing with
stranded cost issues are going to fall to the states.
We have done a number of things in Order 888 that
we think accommodate the states' move to retail access if
they chose to do so and we have certainly encouraged the
state commissions to address these issues up front as they
proceed with retail choice.
Let me mention briefly the FERC's policies
governing market-based rates for wholesale sales of
electricity. For several years now the Commission has been
ruling on applications of wholesale sellers including power
marketers to sell electric power at market-based rates. We
have some complicated proof procedures that are required for
utilities who need to demonstrate the lack of generation
market power in order to sell from existing generation but
we do have a number of utilities including some nuclear
utilities who are selling off system at market-based rates.
. 40
We generally expect this trend to continue. Our
review process for market-based rates really has to do with
issues of generation market power, whether or not we believe
that if a seller sells into a particular market it is likely
to dominate that market and therefore it will be able to
elevate the price for a sustained period of time. If we are
satisfied that generation market power is not present, we
will permit -- or it has been mitigated, we will permit the
seller to move to market-based rates.
Let me mention one last area which is the
Commission's actions with respect to its merger policy which
your staff had indicated that you had an interest in.
In December 1996, the Commission issued a
statement of policy that will govern future review of
applications for public utility mergers. We are doing a
fairly brisk business in merger application review recently.
It is certainly something that many in the utility are
understandably turning to and is something that business
typically turns to under -- when economic circumstances
change in order to realign themselves in order to face new
challenges. That is something that our Commission certainly
expects from the utility industry.
We do not want to discourage that. At the same
time, mergers that actually reduce the number of sellers in
a marketplace do have the possibility of raising competitive
. 41
concerns. We have worked for a number of years attempting
to open up these marketplaces to a variety of sellers so it
is natural that we would want to look at these mergers to be
satisfied that the anticompetitive effects are not so
significant that the merger should be disapproved.
The merger policy statement lays out the criteria
by which we are going to evaluate these mergers in some
detail. I think it provides expedited procedures for
mergers that don't raise competitive concerns and it also
provides hearing and other procedures and certainly a more
scrupulous inquiry where our initial screen suggests there
are concerns.
The last issue I want to mention, Madam Chair, has
to do with the issue of reliability which I know you have
addressed extensively yesterday. The FERC very much
supports the efforts of the North American Electric
Reliability Council to take the lead on reliability issues.
There are some challenges, unquestionably, that
restructuring of the utility industry will pose and we have
certainly encouraged NERC to take the lead in attempting to
address them.
The Chair of our Commission recently testified
before Congress on these issues and she stressed in
particular her concern with the fact that NERC membership is
not mandatory. She recommended that Congress ought to put
. 42
the FERC in the position of ensuring that NERC standards do
become mandatory and to be able to provide mechanisms for
enforcing those standards and for compliance. We do not
have a specific proposal on this issue and we have again
continued to encourage the efforts of NERC to open up its
memberships to all the likely participants in power markets
so these issues can be addressed.
That concludes my general remarks. Madam Chair,
members of the Commission, I would be happy to answer
questions.
CHAIRMAN JACKSON: Thank you very much. I think I
would like to ask you a couple of questions.
With respect to FERC's position on the stranded
costs issue, and you mentioned a case-by-case approach and
your prepared, submitted remarks spoke of FERC as being a
forum for stranded cost disputes, would you expect to have
explicit consideration of decommissioning funding costs as
part of your consideration of stranded cost issues?
MS. TOMASKY: We certainly would, Madam Chair.
The Commission did mention in Order 888 and in our rehearing
order that we believed that nuclear decommissioning costs
were appropriately considered to be stranded costs and would
be dealt with on a case-by-case basis. I would imagine as
those case unfold we would continue to observe the
traditional relationship with your Commission. I do not
. 43
imagine that our Commission has any interest in second-
guessing issues of how decommissioning occurs.
We have traditionally looked at, in determining
how decommissioning costs are put into rates now, we have
traditionally looked at issues, the estimates, and those are
frequently litigated amounts. We actually just set for
hearing a case involving Connecticut Yankee in which we
expect those issues to be resolved.
That was not a classic stranded cost case, a
restructuring stranded cost case in the sense that departing
customers were leaving the system and therefore we were
being asked to address how to tread nuclear decommissioning
costs in that context. But I have every confidence that our
Commission takes that very seriously and we would expect
those issues to be worked out along with others in these
proceedings.
It is, admittedly, a somewhat more difficult issue
than simply attempting to figure out what the present value
is of a remaining obligation, reduce it to a current form
and then decide how it is going to be paid. We understand
that there are uncertainties.
But I just want to stress that we had enormous
success in the natural gas restructuring with settlement of
many of these issues. We have in fact in front of us a case
with NEPCO that is currently in hearing and I understand
. 44
that technical conferences with an eye or a hope for
settlement are going on and that many of those -- that
indeed involves a dramatic restructuring of the buyer/seller
relationships for that company and we are very hopeful that
these issues will be resolved.
CHAIRMAN JACKSON: Do you have a position with
respect to the issue of foreign ownership control or
domination, as you know, the different business forms occur?
MS. TOMASKY: Our Commission doesn't have a
position with respect to that. If I could interpret a bit
from our merger policy statement, I can say that it is
something that gave us very little concern. We believe and
fully expect that ownership is going to move all over the
place, quite frankly, with respect to the electric utilities
and we think that the movement of capital is a pretty good
thing.
We do not attend to issues of national security as
you do. Not that we don't think they're important but we
understand it is your job, not ours. And those are the
kinds of things that would inform those kinds of concerns.
What we have dealt with in the context of foreign
investment have been issues of reciprocity with respect to
transmission access. Those are policy concerns that are
pertinent to us and our considerations.
We also understand, obviously, that the SEC
. 45
regulates sort of quantities of investments and there are
issues with respect to foreign holdings under the Public
Utility Holding Company Act but that is not something that
our commission has gotten into and, quite frankly, given our
focus on competitive concerns and concentrations of
generation market, it may well be that the farther away the
merging entity is from the utility the better our Commission
likes it.
CHAIRMAN JACKSON: You mentioned that FERC should
have the authority to make, for instance, compliance with
NERC standards mandatory. This is on the issue of grid
reliability, et cetera.
Have you proposed, and I think maybe you did
address this but I am going to ask again, specific
legislative language that relates to any kind of a federal
backstop for NERC's activities and actions?
MS. TOMASKY: We have not proposed specific
legislation. We have certainly recommended to the
Department of Energy that they address these issues and I
would expect that the Chair of our Commission who we expect
to be headed that direction will carry that general policy
initiative with her.
I do understand that it has been very much on
DOE's mind. There are lots of debates that go on about how
much authority we do and don't have. We had suggested that
. 46
we be the repository for it because we have certainly
attempted to recognize NERC standards in the context of our
open access tariffs and, in recent discussions with DOE, as
they were talking about downsizing, they seemed to want some
of the interconnection authority that they have, or at least
they were discussing the possibility of interconnection
authority with the FERC. It is a job we think we can do.
We do not have specific legislation in mind and I assume
that the ultimate formulation will work its way through with
the Administration interagency review process.
CHAIRMAN JACKSON: Do you have any specific
positions with respect to ISOs, their formation, membership,
mandating their formation, et cetera?
MS. TOMASKY: Our Commission was encouraged, in
the context of Order 888, to mandate ISOs as a means to
remedy undue discrimination. In essence, to separate the
generation function from the transmission function. We
decided not to do that.
We went a regulatory path that we call functional
unbundling where we required that as an operational matter
that the generation and transmission functions be separated
within a utility and impose standards of conduct to be
imposed by employees to ensure that that separation was
effective. Nevertheless, the Commission has strongly
encouraged the formation of ISOs and the investigation of
. 47
ISOs, particularly in the context of the reform of tight
power pools, which is going on in several regions of the
country.
We have ordered the tight power pools to
restructure their transactions to unbundle transmission and
generation transactions and also to address other aspects of
our undue discrimination rules and most of them are turning
to some form or the other of ISOs to go forward. There are
legitimate -- you know, ISOs are a dream in pursuit of
realization in a lot of parts of the country and we think a
very useful dream. There are legitimate debates over
whether an ISO makes sense except on a broad regional basis
and certainly in terms of pricing efficiencies and
operational efficiencies, we see a lot of benefits in ISOs.
We have been asked to mandate it. We have
declined to do so, so far. The issue of mandating ISOs
arises in several merger cases we have and that is another
context in which we would examine them. So I guess the
short way of saying it, we think they are a good thing and
we are doing our best to encourage them but we haven't
mandated them yet.
CHAIRMAN JACKSON: Okay. Let me ask you one last
question for the time being.
We are North America.
MS. TOMASKY: Yes.
. 48
CHAIRMAN JACKSON: And that implies
interconnectivity of the electrical network to the north and
to the south. Are there any government-to-government
activities or initiatives that need to occur to deal with
the issue? Again, I am thinking from our point of view
having to do with the interconnectivity and its effect on
the reliability of the grid.
MS. TOMASKY: Well, first of all, we absolutely
agree with you and I think while we do not believe, I think
that there are specific issues associated with restructuring
and reliability that are critical, clearly exchange of
information is absolutely essential.
We would like to see and have taken some steps to
try to encourage the Canadian provinces and the publicly
owned utilities up there to make open access a rule of law
for them as well. We -- in particular, if they are trying
to do business in the United States and marketing their
power down here.
We have essentially imposed a reciprocity
requirement, a do-unto-others requirement, in effect. If
they want to do business down here, they have to make their
transmission systems available. We would like to see
dialogue on those issues.
With respect to reliability, it seems to me that
NERC is quite aware of the interconnection issues and we
. 49
have, although we have challenged NERC in a number of
significant respects to open up their membership, to attempt
to evolve their standards to meet some of the new and
different issues associated with restructuring, for example,
the multiplicity of sellers that they will be facing moving
power into the grid, the issues that I know have been
identified by you, Chairman Jackson, over the question of
incentives for maintenance.
But we ultimately believe that NERC needs to take
the lead and that the FERC has appropriately a follow-up
role in enforcement.
CHAIRMAN JACKSON: Commissioner Rogers, Dicus,
Diaz?
COMMISSIONER DIAZ: Based on what little I know
about Mexico's grid and rates, has a thought come through
about the difficulty there would be to bring Mexico into
some common standard as far as free market? Because they
really don't.
MS. TOMASKY: I know about this, Commissioner,
only anecdotally, actually. We have had some conversations
with Mexican officials who have come to our Commission
seeking sort of structural advice on how to deal with rate
regulatory issues.
I know that they are attempting to make some
progress but I understand it is a very difficult and slow
. 50
process there. They have very significant infrastructure
issues that would make -- that have raised some concerns
about interconnection with the United States. I also know
that there is a lot of interest in simply locating power
plants along the border to move power into the United States
and that that has created some environmental controversies.
But I do not know of a systematic approach to
these issues other than, I think, the very good faith
efforts of Mexican regulators to try to develop a regulatory
system for them that makes sense.
COMMISSIONER DIAZ: Thank you.
CHAIRMAN JACKSON: Commissioner McGaffigan?
COMMISSIONER McGAFFIGAN: To follow up on the
Chairman's question, you basically are proposing that NERC
membership be made mandatory in this country and that there
be an enforcement and compliance mechanism that is also
mandatory through NERC. My recollection yesterday is that
we have most of Canada and just a little piece, around
Tijuana or whatever, of Mexico in NERC.
Does Canada have to do the same thing in terms of
mandating NERC membership and mandating that if we want to
ideally get the system, mandating a compliance structure? I
think to just be more specific in following up the
Chairman's question.
MS. TOMASKY: To be fair, Commissioner, I don't
. 51
know that we have or that Chair Moler has formed a view. We
certainly have been reluctant to tell Canada what to do in
terms of handling these issues. But I certainly see the
benefits of symmetry are certainly attractive.
The issues aren't going to change when you go
north of the border. I do not know that Canada is facing
the same questions associated with restructuring but I would
also emphasize that the reliability issues that have come to
attention recently are not necessarily associated with
restructuring. The outages that happened in the West, for
example, have nothing to do with the Commission's
restructuring initiatives or, for that matter, the proposed
restructuring initiatives in California.
So the reliability issues are there. They don't
stop at the border and it strikes me that the prudent thing
to do would be to engage in discussions with the Canadian
government if our administration decides that is the right
course, to let them know what is going on and to suggest to
them that comparable requirements on the other side could be
useful.
COMMISSIONER McGAFFIGAN: The other question I
have is you regulate wholesale transmission and you are very
careful to point out that on the retail side, that's the
states' responsibility. Although in a paragraph you didn't
read, you said there is work to be done on the federal/state
. 52
relationship.
If you go to the decommissioning cost issue, when
you look at an individual case, are you looking at the part
of decommissioning costs which you say in your statement is
the smaller part that relates to wholesale and what is the
mechanism for looking at the total, the totality of
decommissioning costs? If you are regulating 10 percent and
the states are regulating 90 percent, how does that work?
MS. TOMASKY: The answer -- the simple answer to
your question is, yes, we have the small piece of it. The
larger answer to the more important piece of your question,
which is how does it all work together, is we've got to
figure that out.
We actually have jurisdiction over transmission in
interstate commerce, which would actually include unbundled
retail transmission. But with respect to stranded costs,
the critical jurisdictional issue under Order 888 is
jurisdiction over the generation.
We basically regulate wholesale sales and, as a
result, costs incurred to serve wholesale requirements
customers and coordination customers are the basically are
the kinds of utility costs that we are talking about and
that we regulate. It is a small piece of the pie. There is
no question about that.
With respect to some utilities, some nuclear
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utilities have structured themselves as wholesale suppliers
and, in those cases, those issues come before us entirely
and we would handle --
COMMISSIONER McGAFFIGAN: Connecticut Yankee is
that sort of case, isn't it?
MS. TOMASKY: Yeah, the NEPCO case is an example
of that. There are -- most of the utilities around the
countries, however, are not structured that way. State
commissions can intervene in our proceedings. We have
indicated that in the context of state restructuring
proposals, we would give considerable deference to what the
states do.
I don't think there is going to be a big overlap
but there may well be questions of how to deal with gaps in
the numbers between what the states would do and what we
would do.
The Commission traditionally on costs, we have
dealt with these things strictly as cost allocation issues.
It is not, in that sense, a new rate issue for the
Commission. Generation facilities are often shared and we
do an allocation that we think makes sense and states do an
allocation that they think makes sense and sometimes it adds
up to more than 100 percent and sometimes it adds up to a
bit less.
We are probably going to have to pay a bit more
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attention to that number in the context of nuclear
decommissioning and I would expect that to certainly be
something that would be pursued. I also do expect, though,
that as you have seen, that most of these restructuring
proceedings that states undertake are going to, if they are
done with the full cooperation of the utilities and the
local parties, they are going to end up with a solution to
these issues and something that our Commission could easily
defer to if there were a settlement or at least something
approaching a settlement that appeared to make sense.
CHAIRMAN JACKSON: At this point, is FERC
considering any additional actions or any legislative
changes that would clarify the issues? I guess I am trying
to get you to elaborate a little even beyond what you have
already done on the clarification of questions of state
versus federal responsibilities.
MS. TOMASKY: There are some issues that I
don't -- don't necessarily go to the issues of stranded
costs that we have been interested in having dealt with in
legislation. I think that it would probably be useful for
me to elaborate a bit on the kind of jurisdiction that FERC
is asserting under 888 because it is a matter of some
controversy. It is not categorically true that we would
never deal with retail stranded costs. Essentially what we
said was that stranded costs arising from the departure of a
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wholesale customer is our job.
If we had indicated that there is a gray area,
which is what happens when a previously retail customer
leaves the retail system, becomes a wholesale customer
through a municipalization or something like that, and
strands retail assets, in that circumstance, our Commission
has determined that it would assert primary jurisdiction
with respect to the recovery of those stranded costs.
The theory for doing that is that we believe that
the stranded costs are the result of the availability of
open access tariffs that the Commission created. If there
were not open access tariffs available, the municipalization
and the opportunity to leave the system would not be
available. And on that basis, the Commission has indicated
it would assert primary jurisdiction there although, of
course, if a state had already acted to deal with the
stranded cost recovery in some fashion we wouldn't permit
double recovery on the part of the utility, we would deal
with it through some sort of crediting mechanism.
With respect to what we call pure retail stranded
costs which are occasioned by a state retail access program,
we have indicated that the only instance in which we would
step in would be to fill a regulatory gap where the state
commission determined it lacked authority to deal with this.
I should point out that all of the states that have been
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pursuing retail access programs thus far have understood
that the stranded cost issue was an important one and one to
deal with and dealt with up front and so there hasn't been
any occasion for people to come to us and say, it's time for
you to get involved.
We also tried to make clear in 888 that we weren't
a forum for second guessing the substantive decisions of the
state but, simply, a forum to deal with stranded costs if
the state lacked the authority to do so. So that is the
context, sort of the detailed context that I have sort of
broadly summarized before.
CHAIRMAN JACKSON: Right, thank you.
You know, FERC and the NRC have established a -- I
could have called it NURC but it would have caused
confusion -- a valuable working relationship and it has
allowed us to share safety concerns with you as you make
your economic regulatory decisions. And it has been
effective, we think, to the NRC in addressing areas of
mutual interest.
But do you see any additional steps that might
need to be taken to assure that areas of shared concern are
incorporated in our respective policies and are there any
areas of overlap or duplicative review that you think could
be eliminated to provide more efficient and effective
regulatory oversight in these areas?
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MS. TOMASKY: Well, I totally agree with you,
Chairman Jackson, that we have taken the most important step
which is that we are now talking to each other a lot and our
staffs continue to talk and I know the discussions that have
happened recently where we just explore issues and come to
an understanding have actually revealed, I think, that there
are fewer problems than people might think in ensuring that
your responses to competition and our responses to
competition are entirely consistent.
I think that in terms of potential overlap, I
think that when we get into case-by-case determinations of
stranded costs and decommissioning that the NRC undoubtedly
has a vital interest and we would expect to hear from you
from those cases, in those cases, and we certainly would
value your contribution and your judgments very highly in
those cases. We have, I am sure you well know, rigid rules
about ex parte communications and things like that but,
within, we can certainly work out appropriate ways for you
to contribute your views in those cases and I think it would
be very useful. Yes, there is always a potential conflict,
potential for conflict, but I think that they are completely
reconcilable.
There has been a lot of talk in terms of overlap
about your antitrust review and our competition review. I
do not have a judgment as to whether or not one or the other
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is duplicative. I know we think ours is pretty valuable and
we would like to hold onto it. As to whether or not you
believe that your antitrust review remains appropriate, let
me emphasize that we have never found it to conflict with
the exercise of our jurisdiction in any way.
I think that my understanding of some of the open
access license conditions with respect to transmission have
probably been overtaken by our open access tariffs. I
understand most of them to be company and perhaps even
transaction specific and our open access tariffs which are
available to all comers are probably the best way to move
power right now under a tariff. I think that is what most
people are doing.
I think that, ultimately, you are in the best
position to judge and to recommend to the Congress the
enduring validity of your antitrust considerations.
CHAIRMAN JACKSON: Thank you.
Further questions?
I think we will -- we don't mind if you stay.
MS. TOMASKY: I'm happy to stay. Thank you.
CHAIRMAN JACKSON: I am going to turn to
Mr. Ellsworth, president of NARUC, to talk about your part
of the presentation.
MR. ELLSWORTH: Thank you very much Chairman
Jackson, members of the Commission. On behalf of NARUC, we
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appreciate the opportunity to come and share with you our
overview of the status of restructuring among our members.
If it is acceptable to you, the presentation this
morning will be made by Commissioner Gee of Texas, who
chairs our Committee on Electricity. Commissioner George
from Iowa who chairs our subcommittee on nuclear issues and
I will stand ready to answer any questions that you may have
of us following Commissioner Gee's presentation.
CHAIRMAN JACKSON: Thank you.
MR. GEE: Thank you, Chairman Jackson and members
of the Commission.
It has been almost a year since the NARUC
leadership had an opportunity to visit with you to talk
about restructuring activities and I think it is fair to
say, as you know, based upon the presentation of your staff
this morning, much has occurred.
CHAIRMAN JACKSON: Yes. And I must say, I have to
insert, and you knew I was going to zing you on this,
because I think when we met you said nothing much is going
to happen for a while.
[Laughter.]
CHAIRMAN JACKSON: So I just had to put that onto
the table.
MR. GEE: There is a lesson there; never say
never.
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In fact, a great deal has occurred and I would
like, in a few brief moments today, just to hit the high
points or our prepared statement so that we can entertain
questions that I know that you have of President Ellsworth
as well as Commissioner George with respect to what has
happened.
Since we last met with you, the National
Association of Regulatory Utility Commissioners has adopted
a statement of principles to guide our member commissions in
the path of restructuring and that is accompanied in our
prepared remarks today. It sets out some guideposts as a
recommendation for our member commissions to follow as they
go about the process of restructuring. You will note that
it touches upon such critical matters as maintenance of
reliability in a restructured market, the need for states to
address fairly and equitably the concerns related to
stranded costs as well as maintaining the imperatives of
continuing to provide universal service to all customers.
Since we last met, 10 states have adopted statutes
or the state commissions already have proposed reforms to
restructure the retail markets. Nine of these 10 have acted
within the last 10 months. This represents fully one-third
of our nation's population which is now being subjected to
significant restructuring of these retail markets.
I am told and my information that we provided to
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you so indicates that all states except one in the United
States are at least considering or have already adopted
reforms of retail markets. That single state that has not
done so, I believe, is Tennessee which, as you know, is
generally made up of the Tennessee Valley Authority, which
is not subject to state regulation.
Generally, restructuring has occurred initially
from what are known as high-cost states, that is states that
have a great deal of embedded generation cost that are above
current market prices. The process began generally in the
northeastern states as well as California. Since then,
however, a number of what are known as low-cost states have
also begun taking the initiative.
I would update our prepared remarks to inform you
that since we prepared our remarks the state of Oklahoma,
its legislature, both the house and the senate, have
approved a bill that would open up their retail markets by
the year 2002. It is anticipated that their governor will
probably sign that into law within the next 30 days. Also
the legislature of the state of Montana also has adopted
restructuring legislation, also to provide for retail
competition by the year 2002.
Those two states are generally known as low-cost
states. They have some flexibility by way of moving to open
up the retail markets primarily because they bear minimal
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stranded cost concerns. Neither state, I am told, has any
nuclear power capacity and I believe that they are moving
forward to open up their retail markets in order to provide
competitive opportunities because they see that that is
generally the trend that is occurring in those states that
have higher cost responsibility.
My own state is also within the category of states
that are low cost. There are bills that are being actively
debated and considered as we speak in my state legislature
and the time frame that is under discussion is around 2001
and 2002 by which my own state may open up its retail
markets.
Turning to the critical issue of stranded costs,
as I indicated, NARUC's position is that its member
commissions should all address fairly and equitably the
concerns raised by utilities with respect to their having
incurred verifiable stranded costs that would be rendered
uneconomic in a competitive market. With respect to the
nuclear industry, as you know, those stranded costs
generally fall in two categories, those representing
embedded fixed plant costs and decommissioning costs.
The critical question being addressed at the state
level as they move about restructuring is to what extent
should such costs be placed -- the recovery of such costs be
placed at risk in the market or should there be other
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mechanisms to make more certain the cost recovery for those
concerns.
I am pleased to report and I believe your staff
alluded to this that two states that have addressed the
question of decommissioning cost recovery, California and
Pennsylvania, have opted to maintain the revenue stream for
collection of those costs through a nonbypassable wires
charge. I am told that in California that is already
explicitly provided for in their statute.
In the Pennsylvania case, the statute provides the
commission to make a determination of the extent to which
those costs should be included in a nonbypassable wires
charge. That decision, as I understand, is still pending.
It has not been made yet but it is certainly something that
is critical on the agenda within the state of Pennsylvania
to address.
I think it is fair to say that in my conversations
individually with state regulators as to the activities
going on in their commissions, each of them places a very
high priority on the continued recovery of decommissioning
costs under any restructured scheme. In terms of critical
issue priority, I would say that is probably at the highest
level, among the highest levels if not the highest level in
all of the restructuring discussions.
Additionally, measures to address the fixed cost
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recovery concerns associated with restructuring have also
been addressed by either the state commissions or the
legislatures. One means of addressing a potential
uneconomic fixed plant cost is to accelerate those costs.
That is a measure that has been undertaken in California. I
believe also South Carolina has opted for that approach to
ease the transition.
In my own state, even though our legislature has
not yet decided to open up its retail markets, our
commission has made a decision in one major utility case to
permit acceleration of potentially stranded costs on a
current basis to ease the transition to the potential
competition in retail markets.
Another measure being used to provide for better
means of cost recovery is the concept of securitization. I
know you have a presentation on that later today. Suffice
it to say at least two states have already adopted that
approach.
The state of California has adopted an approach
whereby the state has enacted a statute that provides for
the backing, the assurance of a revenue recovery through a
competitive transition charge. That would enable the
utility to sell an asset of a revenue stream representing a
share of these uneconomic costs in order to be able to
recoup a measure of cash in order to buy down those
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uneconomic costs.
The state of Pennsylvania also has adopted a
similar approach and it is my understanding that this
approach is being under -- is under consideration in a
number of states and state legislatures where restructuring
is being contemplated.
Also, again, returning to the issue of
decommissioning, NARUC itself as an association is placing a
high priority on attempting to provide its members guidance
with respect to the treatment of decommissioning costs in a
restructured environment. We are currently within NARUC
attempting to put together a dialogue on decommissioning
cost recovery in a restructured market.
As part of that dialogue, we have directed our
staff to come up with an issues list and to make
recommendations on what would be the proper forum by which
we could gain a broad-based cross-section of representation
of all interests to see if a consensus can be reached within
a collaborative forum to make some recommendations that our
member commissions could use as guide posts. Your staff is
part of that process within the NARUC staff. We welcome
their participation, we think it is critical.
Commissioner Emmit George is leading that process
and I am sure he can fill you in on the details. We do
anticipate that that dialogue will be getting under way
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within a matter of the next few months.
Finally, in closing, let me address some of the
matters with respect to the concerns of reliability and also
with respect to adoption of the approach, as we have seen,
of adopting an independent system operator. I know that you
devoted a great deal of time to the question of reliability
in your workshop yesterday and I won't cover new ground.
NARUC has not yet taken a position endorsing the
concept of an independent system operator. There have been
a number of our member commissions that are active in NARUC
that have individually endorsed the concept of an
independent system operator that is truly independent from
the ownership and control of transmission owners.
One of the critical concerns in moving toward
adoption of an ISO approach is the question of what is truly
independent and I know that that is a matter that is under
debate in various forums since there is no common model of
what an independent system operator ought to look like.
Another concern I have heard is the question of
how does reliability mesh, the imperatives of reliability
mesh with the desires to shift control and operation away
from those that own the transmission grid to a new entity
that does not have ownership but may well have
responsibility for also playing a part in maintaining
reliability through dispatch decisions. That is also an
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issue that I know is being addressed in a number of areas
where the discussion of how the shape of an ISO is to occur,
how can reliability be maintained consistent with the need
to attain a measure of independence of control of the grid
apart from ownership.
In my own state, in Texas, we adopted a rather
simplified approach to that because we have a reliability
council that is wholly contained within our state. We
simply allowed our reliability council to become the
independent system operator. That approach has worked well
thus far but we are closely monitoring that to ensure that
all concerns of the users of the grid are met and are
handled in a manner which is perceived by them, anyway, to
be done in a fair and nondiscriminatory basis.
Again, let me thank you for the opportunity to
address you today. As I indicated previously, we appreciate
the continued participation of your staff in NARUC's efforts
to give us guidance on the imperatives of your Commission as
we attempt individually to try to address these critical
concerns of restructuring our retail markets.
I am available to answer questions as are
President Ellsworth and Commissioner George.
Thank you.
CHAIRMAN JACKSON: Thank you.
Let me preface my questions to you with a comment
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which I probably should have prefaced everything with today.
And that is that in a certain sense we have a nice, clean
task. You know, we are health and safety regulators and so
we are trying to ensure that our issues are dealt with
because if they aren't then that triggers the need for us to
take some action the way we can, which is with respect to
our licensees.
In doing that, and this is as much a comment as a
question to you, have you considered that in a certain
sense, in mandating competition, that to the extent that
there aren't either transition or overarching strategies for
dealing with what are health and safety related issues, that
in the end you propagate into how competitive an environment
you will or will not have?
What am I saying? I am saying, for instance, if
we take the issue of decommissioning costs, that that is
something that absolutely we have a responsibility to ensure
is available. It is ultimately a health and safety issue
and it is an issue that impacts your individual states.
That is, to see the nuclear facility is completely and
appropriately and safely decommissioned.
If, in fact, there aren't strategies to either
create continuing revenue streams and the like, that
triggers requirements we have to place on the nuclear
utilities. If that is the case, one could argue that that
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puts them at a competitive disadvantage. I am dealing
strictly with the narrow issue of decommissioning costs as
opposed to the larger issue of stranded costs. But it is
something that is an absolute health and safety requirement.
So I just kind of give you that, you know, in the
background.
So my question, first question to you is, what
are -- you mentioned NARUC guidance to its members with
respect to decommissioning costs. What are the key elements
of that guidance as it has evolved to this point?
MR. GEE: Right now, our efforts are only
informative because we are attempting to catalogue the host
of different policy concerns related to restructuring as
they may affect decommissioning costs.
I can say that among them would include,
automatically with or without restructuring, the sufficiency
of decommissioning cost funding and whether, in a
restructured environment, which might lead potentially to
premature retirement of plant, whether we would aggravate
what might already be an insufficient level of funding that
has been accrued in a going-forward basis. That is of deep
concern to many of us who have not yet made the
restructuring call in our individual states and would like
to look, by way of example, to what is being done in other
states to address both the sufficiency of existing funding
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as well as maintaining a common level of guaranteed funding
in a restructured environment, such as the adoption of an
approach as in California, for instance, and whether that is
the way that most states ought to be headed as they open up
their markets for retail competition and decide that a
measure of generation is going to be placed within the
market and susceptible to market forces.
We are hopeful that we can identify these issues
and then from that make recommendations to our member
commissions who have not yet made restructuring decisions
that they can then take back to their respective state
legislatures who, ultimately, are the ones that have the say
so, whether or not to open up retail markets, and that those
recommendations can be given sufficient weight or a heavy
degree of weight in any restructuring proposal that is
ultimately adopted by state legislature.
Commissioner George, I think, can speak more
specifically on some of the issues that have already come up
on the screen with respect to decommissioning funding that
our staffs, our respective staffs, are looking into.
MR. GEORGE: I think that the issue that brought
this to our attention and I dictated that we needed to
address the notion of decommissioning in a generic sense was
the conference in Ft. Meyer last January.
There was a presentation there by one of the
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speakers with regard to the tax credit associated with
decommissioning and if there is accelerated decommissioning,
as has occurred in California, that a company would not be
able to recover the accelerated cost but would have to only
take the depreciation over the planned life of the facility.
That raised the question that there are a number
of issues surrounding decommissioning that commissioners
will have to face as we go forward with this process. Many
states have not taken any action or addressed these issues
in any way while several have actually gone through
legislation.
But what I suggested is that we needed to sit down
and identify all of the issues and, in terms of the guidance
that Commissioner Gee suggests NARUC gives to its
membership, that that guidance is or at least in this
instance will be an identification of what the issues are
and a discussion of what the potential resolutions might be,
leaving to the state commissions or state legislatures the
policymaking decisions in the final analysis as to how they
might proceed.
It is an opportunity and an effort to inform as
opposed to direct what is done at the state level.
CHAIRMAN JACKSON: What kind of time line are you
operating on to come forward with this guidance?
MR. GEE: We initially thought that we might start
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this process prior to our summer meeting in July. Whether
that occurs or not really will depend on our full
electricity committee which this matter will be presented to
within the next 30 days. We have actually discussed it at
that level but a formal presentation will be made to them in
the next couple of weeks.
CHAIRMAN JACKSON: This is an example of where
there is a nexus between the issue. You know, your
consideration in the economic realm, such as a tax credit
for decommissioning costs, and how that might get impacted
by an accelerated amortization schedule for decommissioning
funding because that, in fact, is something that we would
have to consider for those entities that no longer meet our
definition of an electric utility. In a certain sense, it
is already built into our existing regulatory framework.
So I would urge you in a timely manner to move
along with what guidance you might come forward with for
your members because we are going to move along in terms of
what we have to do but we are not looking to put those
utilities that happen to own nuclear assets at a competitive
disadvantage relative to those that are not.
At the same time, we have a health and safety
responsibility. But I think it is a shared responsibility
that, in the end, you also have. Because the nuclear assets
in your states were built under certain presumptions about
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cost recovery and the like. But, in the end, we have to do
what propagates into our regulatory regime.
Mr. Ellsworth?
MR. ELLSWORTH: Madam Chairman, if I can take off
my NARUC hat for a minute and put on my New Hampshire hat,
although we recognize your legal responsibility for health
and safety, I assure you that we have at the state level at
least a moral obligation because it was we who assisted or
participated in the bringing of those power plants on line
in the first place. So if there were health and safety
problems, it would be our reputations as much as yours if
there was a failure.
I can tell you in New Hampshire even in the
absence of the specific principles that we at NARUC are
working toward, that the state regulators have principles of
their own in mind to assure the decommissioning costs are
going to be covered. We have state laws to require that
decommissioning costs are identified and provided for. We,
in our restructuring orders, have made provisions to assure
that they are nonbypassable.
So even in the transition, states have those
issues very much in mind and have health and safety very
much at the forefront of those decisions.
CHAIRMAN JACKSON: Are any of you dealing with the
issues of where in the creditor queue decommissioning costs
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should stand or where in the queue they should be relative
to bankruptcies in your states?
MR. GEE: That is a very good question. I will
give you as honest an answer as I can give you.
Ironically, it has not come up yet, even though we
have had a bankruptcy in our state of an electric utility
that had some nuclear generation. And the same, I know,
holds true with Commissioner Ellsworth.
You have before you two commissioners from the two
states where there have been major utility bankruptcies. I
don't recall, frankly, the question of exactly where the
priority of decommissioning funding falls within this
bankruptcy queue priority. I do know that the way the
restructured bankruptcy occurred in our state, it did set
out a list of priorities and I would have to go back and
check the record, and I can provide that information to you.
But I do know that while the bankruptcy was
pending and ultimately after it emerged from bankruptcy,
there was no immediate concern that the impaired financial
integrity of this particular company was going to harm the
continued and safe operation of the nuclear power plant. I
believe that it owned a fractional share of this plant.
CHAIRMAN JACKSON: Right. I think that's the
reason.
MR. GEE: Seventeen percent, I believe, of Palo
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Verde was held by El Paso Electric.
MR. ELLSWORTH: In terms of collection of
decommissioning costs, my recollection, in our bankruptcy,
because we have a separate statute that requires the
collection of those costs that the bankruptcy did not affect
the collection of those costs.
CHAIRMAN JACKSON: Does --
MR. GEORGE: Commissioner Jackson?
CHAIRMAN JACKSON: Yes.
MR. GEORGE: If I might comment, Iowa does not
have a utility in trouble but I think that the priorities
that are set with regard to a bankruptcy are set by
Congress. States have some provision with regard to
personal effects that are protected from bankruptcy but the
state laws are all preempted.
CHAIRMAN JACKSON: Right.
Does NARUC endorse the concept of mandatory NERC
membership by whomever operates transmission facilities?
MR. GEE: We have not taken a position on that
specific matter. What we have said, and I think our
statement of principles does indicate and, in fact, it is
probably the one of the first principles there, is continued
reliability above all else must be maintained in a
restructured economic market.
We have been working very closely with our
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utilities to ensure that no matter what economic decisions
we make with respect to opening up market opportunities to
new entrants, that the imperatives of reliability must
continue to be met and, to the extent that there is a cost
associated with maintaining that reliability, we will make
efforts to ensure that, if need be, those costs are commonly
borne and shared by all rather than simply subject to
recovery in a competitive market.
But, no, we have not officially taken a stance on
recommending mandated membership in NERC.
CHAIRMAN JACKSON: You mentioned with respect to
the ISO concept a good question is what is truly
independent. And you talked about how reliability would
mesh with the shift of control to, you know, an entity
without ownership.
Do you view the efforts going on in terms of the
Midwest ISO to be a potential model for how to address the
issue?
MR. GEE: I am not that familiar with that
particular ISO and the discussions that they have been
having other than what I generally read through the trade
press to be able to respond adequately to your question.
As I indicated, the concept of an ISO varies from
region to region and what we are seeing grow out of this
process is a variety of different approaches. I do know
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that a common concern that I have heard is who is ultimately
responsible for making sure that the grid is maintained and
whether reliability is -- whether the grid ultimately
continues to have the same degree of reliability when you
try to divorce control and ownership.
CHAIRMAN JACKSON: Does it present the state
utility commissions with an inherent conflict of interest in
the sense that, you know, to truly have an independent
system operator may require some transference of regulatory
authority with respect to grid management, planning, et
cetera?
MR. GEE: I think that is a very good question. I
think, in fact, it does pose a question of to what extent
can a state commission or a state regulator have sufficient
jurisdiction to cover what is essentially a regional entity
that is making control and operations decision across the
grid. I do know that generally the FERC has been authority
that has asserted jurisdiction over the ISO approval process
so I would anticipate that there is some regulatory
oversight but I also know that individual states may also
have different imperatives in making sure that their segment
of the grid is maintained in an adequate fashion and that
reliable service continues to be provided and that states,
for example, have jurisdiction over the siting of new
transmission or additional transmission facilities. That is
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a province that has traditionally been held within state
jurisdiction.
CHAIRMAN JACKSON: I accept that if you are
talking about regional grid management, there are issues
having to do with congestion?
MR. GEE: Yes.
CHAIRMAN JACKSON: Vulnerability of the grid that
plays in the large to planning, which may be beyond a given
state interest.
MR. GEE: I agree. And I think that the questions
that you raise point up the unfortunate infirmities of the
existing state/federal scheme that, in fact, the Federal
Power Act and the respective state statutes are not well
suited to what is essentially now becoming more and more a
regional market which is beyond the individual authority of
a state and certainly something which is going to have to be
balanced with a need for continued federal oversight.
CHAIRMAN JACKSON: What is the resolution of this
dichotomy?
MS. TOMASKY: There is -- you very accurately, I
think, describe a natural tension that occurs as we are
moving forward on a couple of different fronts. The first
really has to do with the tension between the desire for
separation for business purposes between generation and
transmission and when you get into the retail side
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distribution, and the desire to make sure that the people
who are in charge actually are enough in charge that they
can make the decisions necessary to turn the lights on and
keep them on.
I think that we are going to be engaged, as ISO
proposals come before us, in a very nitty gritty debate that
will come to us in filings from people on all sides over
very specific issues about management and control of the
transmission systems and we will have to decide. Everybody
who has an interest in that is going to have to participate
and tell us.
We have already begun to see circumstances in
which marketers, independent sellers who are interested in
maximum separation will tell us that specific kinds of
decisionmaking need to be separated from the sellers. We
have also had utilities tell us that that is not going to
work.
From a reliability perspective, I think that our
Commission has tended to be, in the end, although we test
the assumptions and the claims of the utilities, I think in
the end we care most about reliability and so far we haven't
done anything, I don't think and I don't think we would be
inclined to make a specific decision that would impair that.
Although we would have a tendency to question claims, to be
sure that we are not facing a situation where someone claims
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it is reliability and it's not.
You are absolutely right about the regional
planning issue and I know it is something our colleagues in
the states are dealing with. Our Commission at times in the
past has encouraged the formation of regional transmission
groups but we have been, I think, disappointed that RTGs
have not assumed a more prominent role in regional planning
because we do think that there are enormous efficiencies to
be gained in managing congestion and managing planning from
that perspective.
But it is a legitimate issue of concern for the
state, citing issues for state concerns. They involve a
host of environmental and power supply issues that states
have been traditionally in charge of.
I do know that folks at NARUC are talking about it
a lot and they understand it is a tension. It hasn't gotten
much play at this point in the congressional debate but I
think it is a very, very important and difficult issue.
CHAIRMAN JACKSON: Mr. Ellsworth?
MR. ELLSWORTH: Let me just offer my perspective
and it is a personal one and it is limited to NEPOOL and our
New England experience.
It is my personal opinion that no one can run the
transmission grid as well as the utility industry itself
can. It is my opinion that the value of the ISO is not
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necessarily to run the system but it is to make sure that
the system is open to everybody and I think that is the
direction that we have gone.
There has been an opportunity in New England for
the regulatory community to participate in the organization
and establishment of the ISO to make sure that that
independence is maintained. The regulatory community has
opted, although it has been invited, not to be a part of the
ISO but to monitor it closely and be a close part of it, to
see that it is being done openly and properly. I think
that's the way it should be.
In terms of siting, New Hampshire has had a number
of siting issues before it and a number of the siting
projects that have been brought to the state's attention,
and we have a separate siting law that looks at each one, a
lot of those projects have not been for the sole purpose of
benefitting the state of New Hampshire. But our law
requires that we have the region in mind and each one of our
decisions has had that region in mind.
Having said that, though, I can tell you that our
state is not prepared to relinquish siting authority to
someone else beyond our control.
CHAIRMAN JACKSON: Commissioner Rogers?
COMMISSIONER ROGERS: I have no additional
questions.
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CHAIRMAN JACKSON: Commissioner Dicus?
COMMISSIONER DICUS: No.
CHAIRMAN JACKSON: Commissioner Diaz?
Commissioner McGaffigan?
COMMISSIONER McGAFFIGAN: I do have two.
Given the importance of decommissioning costs, I
read through your NARUC principles and I couldn't find any
reference to it. I mean, stranded costs get mentioned
toward the end.
Are you going to consider reissuing the principles
at some point with some bolstered discussion of the
importance of taking care of decommissioning costs?
MR. GEE: I don't know if we would necessarily
amend our statement of principles. The statement of
principles was adopted almost a year ago before some of our
states and state legislatures began acting on
decommissioning.
COMMISSIONER McGAFFIGAN: Right.
MR. GEE: It does address, within the context of
the statement, the need for states to weigh the concerns of
stranded costs and to make sure that stranded costs are
addressed in a fair and equitable fashion. So we would --
just using the perspective of that language, we have
regarded that as broadly inclusive, to include the questions
occasioned by decommissioning cost recovery.
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The separate question of how to recover
decommissioning costs and whether they are sufficient, I
think, is something that is going to be the subject of our
dialogue and what would happen out of that is if we can
reach a consensus within the national association to make a
recommendation to our member commissions, that would then be
reflected in a resolution that we would then take up by our
executive committee and would formally become a position of
the association which would have the strength of essentially
being a part of the statement of principles by virtue of a
second resolution.
So the short answer is the association will have
an opportunity to examine more specifically all of the host
of policy issues with respect to decommissioning cost
recovery and then take up through the form of a resolution a
position that would be given equal weight as though it were
part of the original statement of principles.
COMMISSIONER McGAFFIGAN: The other issue I just
want to clarify, tax code issues came up in the discussion
and is there any need in terms of in the decommissioning
cost area of looking at the interaction of how these costs
are recovered with the federal or state tax codes?
I am just trying to understand when plants are
prematurely retired, is Connecticut Yankee or Zion or
whatever have been or are going to be, was that foreseen in
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the tax code and are there problems that come up in the tax
code that we haven't previously foreseen?
MR. GEORGE: I don't think it was anticipated in
the tax code and I think it will require attention in terms
of legislation. I think the reason it was raised at our
January meeting was to solicit support from NARUC in terms
of making the tax change.
Our response was that we should probably talk
about the entire issue of decommissioning in such that we
can respond not only to the tax issue but the other issues
that are associated with it.
COMMISSIONER McGAFFIGAN: Thank you.
CHAIRMAN JACKSON: Yes.
MS. TOMASKY: I did want to mention that we did
deal with this issue briefly but we somewhat directly in
Order 888, the question of deductibility of nuclear
decommissioning costs in particular and stranded costs was
raised before us and we were asked to clarify that if
someone is recovering stranded costs that that is part of
the utility's cost of service and it was suggested to us if
that were the case that that would help shore up continued
deductibility of those costs. Indeed, we did make that
clarification.
Now, I can't testify whether or not that is
sufficient for the IRS for those purposes but we did make
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that clarification at the request of some utilities.
CHAIRMAN JACKSON: Thank you. Thank you very
much.
Let me call the industry panel and to thank them
in advance for their patience. I think the next time, if we
have another meeting on this subject, we will begin with the
industry panel.
Let me make a comment that I was going to make as
part of my closing remarks while the groups are changing.
That is particularly I am thinking of the various regulatory
entities, that I would ask you not to finesse or back away
from the issues related to decommissioning costs and grid
reliability and security from the point of view of the
public health and safety implications or figuring it into
and taking a more direct and proactive stance because we are
not going to back away from it.
So I would just like you to keep that in the back
of your mind.
Mr. Colvin, I thank you, and Mr. Draper,
Mr. Harris and Mr. Asselstine. And however you wish to
structure this. We're all ears.
MR. COLVIN: Madam Chairman, thank you and good
morning.
I would like to really begin with Dr. Draper's
presentation and followed by mine and work down in that
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order, if that is acceptable?
CHAIRMAN JACKSON: Sure.
MR. COLVIN: Thank you.
DR. DRAPER: Good morning, Chairman. Thank you
for the opportunity to be here. Members of the Commission.
This is I guess the second time I have appeared on this
subject, the first being about 18 months ago at the first of
these sessions and we appreciate the chance to talk about
the important subjects.
In terms of regulatory actions, the starting point
is the NRC's action plan and initial draft of proposals to
position the NRC for the restructuring of the electric power
business. The draft policy statement, the advanced notice
of proposed rulemaking on decommissioning and the draft
standard review plans published last year raise some of
NRC's major concerns and allowed the industry to provide its
perspective on these important issues.
I am here today representing a cross-section of
the electric power industry. As a member of the NEI
executive committee and since last June as Chairman of the
Edison Electric Institute, I will address the electric
industry's policy objectives as restructuring proceeds and
outline the more specific goals and objectives established
by the nuclear power industry. Joe Colvin will then discuss
some of the more significant nuclear regulatory issues.
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I think it is fair to say that the restructuring
of the electric power industry is proceeding more slowly at
the federal level and more quickly at the state level than
many people expected even a year ago. At the federal level,
I believe the 105th Congress and the Administration are
beginning to recognize that we must approach electricity
deregulation and restructuring carefully and deliberately
because the economic and social costs of mistakes would be
very high.
The national interest demands that we get it
right. We must ensure that all consumers of electricity,
large and small, will benefit from restructuring in terms of
cost, service and reliability. We must ensure that the
transition to competition recognizes past regulatory
commitments, providing for the opportunity for the recovery
of prudent, legitimate stranded commitments through the
Federal Energy Regulatory Commission and the states.
For policymakers, the first step is to establish
broad areas of responsibility, what decisions should be made
at the federal level, what authority should be reserved to
the states and what determination should be left to the
market.
We believe the federal government should
articulate general principles and guidance and address those
issues that only the federal government can address such as
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possible amendments to the Atomic Energy Act, repeal of the
Public Utility Holding Company Act, the Public Utilities
Regulatory Policy Act, which are major impediments to
competition.
Recognizing that states have differing
circumstances, we continue to think that the majority of the
issues are best handled at the state level. We believe that
some issues, corporate structure, for example, should be
left to the market. Government-imposed divestiture, in
particular, we believe, would be inappropriate.
Turning to the state level, based on what we have
seen in states like California and Pennsylvania which have
significant nuclear capacity, we are generally encouraged by
the responsible manner in which state government officials,
regulators, legislators and governors are approaching
restructuring. We are particularly encouraged by the
explicit recognition in both California and Pennsylvania
that nuclear plant decommissioning is a public health and
safety imperative and decommissioning funding must be
assured.
We recognize that decommissioning funding
assurance is one of NRC's major concerns and rightly so. We
believe the NRC can and should take considerable comfort in
the way the states have handled this issue so far. Let me
assure you that the nuclear industry also regards
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decommissioning as a national public health and safety
imperative and considers assurance of decommissioning
funding is one of our highest priorities.
Let me turn now to the nuclear industry's major
goal as restructuring proceeds and the objectives we have
formulated to the achievement of that goal.
The goal is very simple, to maintain the excellent
safety performance and ensure that nuclear plants are not
placed at a competitive disadvantage as restructuring of the
electric power industry proceeds. To reach these goals, the
industry has established four specific objectives. These
are not in any particular order; they are equally important
to us.
First, we must provide the industry with maximum
possible certainty and clarity about future nuclear
regulatory requirements as companies consider restructuring
options such as consolidation of nuclear operations,
ownership transfers and the like.
Second, we want to ensure that companies have
maximum possible flexibility to reposition their nuclear
generating assets without subjecting those nuclear units to
unnecessary economic penalties or financial stress.
Obviously, NRC regulations and requirements,
particularly in the area of financial assurances, will play
a major role here.
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Third, in federal or state legislation, the
industry believes that nuclear utilities should have a
reasonable opportunity to recover stranded costs, including
unrecovered capital and unfunded decommissioning
obligations.
Finally, we believe it is appropriate to undertake
a critical examination of certain provisions of the Atomic
Energy Act, to determine whether the conditions that
justified those provisions still prevail. If conditions
have changed then we believe that the Atomic Energy Act
should be clarified or amended.
Joe will cover several specific nuclear regulatory
issues. NRC requirements and regulations are one of the
critical factors that will influence the nuclear industry's
business decisions going forward, including the degree of
flexibility available to licensees as they consider how best
to position their nuclear plants for a competitive
environment. One of the major tasks as we move forward will
be to define those issues in areas which involve nuclear
safety and are thus within NRC's purview and those critical
issues that fall outside NRC's statutory mandate.
Recovery of statutory commitments is a critical
issue that falls outside NRC's statutory mandate. Various
NRC officials have expressed concern recently about recovery
of those stranded commitments. Although recovery of
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standard commitments is one of the industry's major issues
and although we would welcome NRC's support for the general
principle that companies should be allowed a reasonable
opportunity to recover prudent, legitimate and verifiable
stranded commitments, we don't believe recovery of stranded
commitments is a legitimate NRC safety issue.
Recovery of stranded commitments involves whether
or not a company will be able to meet its fiduciary
obligations to its shareholders and bondholders. It is
entirely separate from operating economics which will
determine whether or not a nuclear plant or any power plant
will continue to operate.
We believe the public interest is best served if
the NRC focuses on results, on answering the key question,
what are we trying to achieve. The answer, we would assume,
is to continue to ensure the adequate protection of public
health and safety.
So how do we separate the success path for this
objective? The NRC might have started this process by
articulating the issues on its mind regarding nuclear power
plants operating in a restructured competitive market. Now
the NRC must engage the industry in a substantive discussion
about whether or not those issues are important and then
develop practical mechanisms and techniques to address the
important issues.
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Let me now turn the microphone over to Joe Colvin,
NEI's president and CEO, for the second half of our
presentation after which we will be happy to answer your
questions.
MR. COLVIN: Madam Chairman, commissioners, good
morning again.
As Linn indicated, I would like to spend a few
moments and talk about some of the specific aspects of the
Commission's interest related to restructuring that are
specific to the nuclear energy industry and that need the
Commission's attention.
The U.S. nuclear energy industry is a mature
industry and it is a natural evolution for it, as part of
the larger electricity industry, to move toward deregulation
and associated restructuring. Restructuring presents unique
challenges for the industry and for the agency that
regulates it, but it also presents opportunities for
positive change. It is forcing us to look at the most
efficient ways to meet our respective responsibilities.
Our number one goal, of course, is to maintain
excellence and safety performance while ensuring that
restructuring does not place nuclear power plants at a
competitive disadvantage and Linn outlined the industry's
four key objectives related to restructuring. I would like
to elaborate on those just a bit.
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As he mentioned, one of the industry's objectives
is to ensure as much clarity and certainty as possible, in
particular concerning future regulatory requirements for
plant ownership, license transfer and related issues.
Another objective which is closely related is to ensure that
utilities have the flexibility to reposition their nuclear
generating assets without undue regulatory burdens.
The industry needs as much certainty as possible
in advance concerning what financial assurance and
requirements in that area will be necessary and acceptable
to the NRC to fulfill its safety responsibility.
This is essential to allow consolidation of
nuclear units into new operating entities, ownership
transfers and other restructuring arrangements. Regulatory
requirements must allow utilities the flexibility to make
the changes they deem best in order to compete. If they
cannot reposition their nuclear generating assets without
lengthy regulatory proceedings, nuclear energy will not be
able to compete with generating sources that are not
similarly burdened. In order to provide the clarity and
certainty, we believe changes are needed in the license
transfer process as well as how the atomic safety and
licensing board proceedings are conducted.
Any requested license amendment involving a change
in ownership or control of a commercial nuclear power plant
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involves NRC reviews and likely, in most cases, will involve
a formal hearing. Certainly, the NRC and its licensing
boards must fully explore the important safety issues that
might be raised.
We believe changes are needed to ensure that the
existing process does not give competing factions an open-
ended opportunity to manipulate the NRC's regulatory process
to the disadvantage of the nuclear power plant operators and
owners and to the NRC's disadvantage as well. We believe
the Commission should provide direction to its licensing
boards to ensure that their inquiries are limited to issues
that arise within the context of the proposed license
amendment or transfer being sought. The boards should also
ensure that a clear safety basis exists for issues that
intervenors seek to raise in NRC proceedings.
The industry also believes it is time to reexamine
certain provisions of the Atomic Energy Act to ensure its
applicability to a mature industry. In particular, the
requirement for NRC to conduct antitrust reviews and the
current restrictions on foreign ownership of nuclear power
plants that have been discussed earlier today, in our view,
need to be eliminated. Antitrust and market power
considerations are already examined extensively in cases
involving mergers and acquisitions, transmission tariffs and
other corporate restructuring by the Federal Trade
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Commission, the Department of Justice, the Securities and
Exchange Commission, the Federal Energy Regulatory
Commission and state regulatory commissions. The Act's
current restrictions on foreign ownership of nuclear power
plants represent an unnecessary impediment to responsible
foreign entities that are willing and eager to invest in
commercial U.S. facilities.
We believe the NRC should examine the Atomic
Energy Act and initiate legislation where appropriate to
amend the act. The industry will work with you to support
necessary legislative changes.
Another objective involves the recovery of
investment and, in particular, recovery of decommissioning
and stranded costs. While Linn thoroughly discussed this, I
would like to add that the industry continues to encourage
the NRC to support legislative or regulatory proposals that
would allow nuclear plants to recover decommissioning costs
and other prudently incurred costs that may become stranded
in transition to a competitive environment.
I have discussed several of the industry's
objectives related to restructuring. But the fundamental
issue important to restructuring is the regulatory process.
In scheduling these two days of briefings, the NRC invited
comments on how it can best address issues related to
restructuring.
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I believe the agency would provide tremendous
value to its customer, the American public, by creating a
more efficient, safety-focus regulatory process. Regulatory
requirements must have a clear nexus to safety, the NRC's
statutory mandate and the industry's highest priority.
As I mentioned earlier, the U.S. nuclear industry
is a mature industry and is a benchmark for the rest of the
world's nuclear programs. Overall, U.S. nuclear power
plants are performing at very high levels of safety,
reliability and cost efficiency and the NRC has ample
regulatory mechanisms to address any safety issue that might
arise at any plant. Yet even top performing plants are
struggling today with a regulatory process that has become
excessive, a process that tends to regulate to the lowest
common denominator and that frequently extends, in our view,
beyond the agency's safety mandate.
In regulating the cost of service environment, the
cost of excessive NRC requirements is recovery with the
approval of the state regulators and, frankly, consumers
have paid for meeting requirements that in some cases do not
have a clear link to improving plant safety. In a
competitive market, NRC and the utilities must reexamine the
cost/benefit relationship of regulation more closely.
Today, the rules are changing. The industry and
the NRC have the responsibility and, in fact, the
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opportunity as well to reexamine how nuclear power plants
are regulated. In a regulated industry, inefficient or
excessive regulation can place nuclear power plants at a
competitive disadvantage and the NRC's regulatory process
must be clearly defined and sharply focused on safety.
When it is not, it creates confusion and
misunderstanding for both the industry and the regulator
about what each other's respective responsibilities are.
This has a tremendous impact on how nuclear energy is viewed
by the Congress, policymakers, the public, the financial
community and it creates the economic uncertainties for
companies that own and operate these plants.
The top performing plants in the United States
today both in safety and operational performance are
typically the most cost efficient as well. They are
competitive today but, in light of the uncertainties in the
current regulatory process, even these utilities face
significant challenges and the risk of being placed at a
competitive disadvantage.
As I indicated earlier, I think restructuring
presents many challenges but it gives us a lot of
opportunities to ensure that we continue the economic and
environmental benefits of nuclear and they will continue to
be realized by our nation.
Thank you.
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MR. HARRIS: Thank you, Madam Chairman. We are
pleased to be here this morning to present to you some of
PJM's perspective on some of the restructuring issues. We
think we do have a specific and unique perspective to be
able to do this.
PJM is the oldest tight power pool in the world.
We are also the largest and most sophisticated entity of its
kind in the world. Over the past two years, for example, we
have had 48 different countries come to visit PJM and we are
larger than most countries in the world trying to implement
these solutions.
Over four years ago, we became a separate company
that administered this power pool, separate and distinct
from the member companies, so we have crossed those
problems. On February 28 of this year, the FERC approved
operations in PJM for the nation's first bid-based energy
market. They also approved in operations for PJM the first
multiple company, multiple state regional transmission
tariff administered by a single entity and this is the first
of its kind in the world.
We also have, within Pennsylvania and New Jersey,
beginning this year, substantial pilot programs on retail
choice and these programs will be in place over the next
three years.
We also have effective right now a pure
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independent board running PJM. One of the FERC mandates for
having an independent board was that you have expertise on
that board in the operations of the power grid. We are
pleased that two of our board members, one, Dr. Richard
Leahy, Dean of Engineering at Rensselaer Polytechnic, who is
a nuclear expert in his own right, and another one, Mr. Lynn
Eury, former executive vice president and chief operating
officer of Carolina Power and Light, is on our board and
brings us some special nuclear perspectives.
In operations of PJM, if you look at the total
number of units, there is only one other entity that
operates as many units as we do to maintain grid
reliability. But part of that is our history in knowing how
to deal with the complexities of separate operations with a
separate control center with multiple companies in multiple
states.
We have 13 nuclear facilities of over 13,000
megawatts that we have to deal with. One of the things that
we have, for example, in learning in practice of how to deal
with is the coordination between a central operator between
the local control center and the nuclear facility. We have
procedures and plans in practice that we rehearse on
emergency procedure drills, procedures in plans and practice
on emergency restoration that we coordinate.
One of our key committees in PJM, for example, is
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a nuclear coordination committee that can consist of the
plant operators, plant managers from each of the nuclear
power plants, the operators of the local control centers and
my operations staff. They meet regularly on the nuclear
coordination issues involved in this kind of an environment.
As we began to go along and look at how we are
going to proceed to the future -- next slide, please -- one
of the things that the states had wanted to maintain was the
benefits of this kind of arrangement that has been enjoyed
by this region over the years. Just energy alone last year
was going to be $100 million savings for that year alone.
The states of Maryland, the states of New Jersey, have
looked at PJM in separate analysis and said the annual
savings of being able to operate over multiple states,
multiple jurisdictions, multiple companies as essentially a
dispatch entity has savings in excess of $1.2 billion a
year. As we move ahead, we want to be able to maintain this
kind of savings and yet be able to ensure that competition
takes place in a robust way, which is national policy.
Next slide, please.
In looking at the power grid, what I wish to draw
to your attention here is the real interest, if you look at
the daily load shape, which I put up here for a typical
winter for PJM is, one, the size. Our minimum load of
26,000 megawatts is larger than the peak of every other
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entity in the world except for eight. We will ramp, which
is the way that you move each hour, often over 4,000
megawatts an hour, which is larger than 115 other control
areas in North America.
In operations of this power grid, however, we have
to pay attention as to what's happening instantaneously. In
looking at it from that perspective is why we would suggest
to you that there are four cornerstones to look at,
cornerstones you may think are kin to a SALP report on power
grid operations, based on our experience.
Quite simply, we are flying an airplane that never
lands and you just can't stand still, the power grid, to
solve the problems of restructuring.
If you look at what takes place in restructuring,
you have a central operator, as I mentioned, where a
separate and distinct entity that operates an energy market
and a regional transmission tariff and the control area for
this grid. We are not technically an ISO at this point.
All the government structures are still being debated among
the participants. But as transmission is separated from the
load entities, as you get into retail choice and generation
becomes fully competitive, there are certain things that
have to be maintained in that functionality.
As you look at the different functionality and you
look at what is transpiring 24 hours a day, seven days a
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week, it is a daunting task. For example, every three-and-
a-half seconds we have dispatch signals sent back and forth
between all the generation plants and our control center.
Every 10 seconds, we share over 500 data points from the
control areas around us and as far away as Canada to make
sure the integrity and security of the power grid of the
Northeast is in place.
Every 14 seconds, we have nearly 10,000
telemetered values sent in across the system that we look at
to maintain the status, to make sure the system is still
secure. Every 30 seconds, we have over 800 flows analyzed
on a full load flow that are checked against their limits on
the system to see if they are still in place.
Every 10 minutes, we have thermal contingencies
analyzed for nearly 1,200 points on the system to make sure
they are still in place and within their limits. Every 10
minutes we analyze the 300 worst voltage conditions on the
system and we take the top 15 expected contingencies and do
full load flows on those and that takes place every 30-
minute interval, 24 hours a day, seven days a week.
So if you look at it from this unique perspective
of a fully functioning and operating central operator over
multiple states, multiple districts and a very large entity,
we think that there are four cornerstones to look at as you
evaluate restructuring, whether it is occurring in this
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country or the other countries that came by and worked with
PJM.
The first of these is you have to look at the
capability to reliably operate the grid. We can do that now
but the capability is extended because you have to have
capability to reliably operate the grid in a rapidly
changing environment. What the environment is going to be
next year when you get into full competition is going to be
different two years from now so your capability to operate
in the context of that is a must, as you restructure.
The second thing is information exchange.
Information exchange is critical. There is an interesting
article in the Electricity Journal this week talking about
how information exchange may be the Achilles heel as people
take self-interest and protective interest on the
information. Information is our lifeline. Without all the
information necessary, we can't operate the grid reliably.
Authority. You have to have authority to maintain
steps to maintain security of the system and it needs to be
clear and it needs to be stated. Within PJM, for example,
each local control center has clearly stated authorities and
what they need to do to protect the integrity of their
system on a local basis, including their nuclear facilities.
That is directly coordinated with the authority that my
dispatchers have in order to operate and be able to shed
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load within the system.
In the new operating agreement we are operating in
right now, the president, myself, has clear authorities to
direct an emergency, declare an emergency and direct all
actions of entities out of that emergency. It is very
important that those authorities are clearly stated and
carried out when you have emergency conditions.
And, finally, if all of these things are met, the
important thing is that as you go forward, you have
predictable behaviors. Without having predictable behaviors
that you can make sure that you are going to have in the
grid, then you will have problems and you will have faults.
All of these are building blocks to ensure that that will
take place.
If we look at the first one, capability to
reliably operate the grid, I can't under stress the
importance of this in training. In PJM, we have five
percent of our budget in training. We train all the system
operators throughout the grid.
In starting up the bid-based energy market and the
regional transmission tariff that FERC approved for us on
February 28, from that time to date we have trained over
1,000 people. Over 400 operators have been trained and over
600 market participants. We have conducted training classes
throughout the mid-Atlantic region, we have conducted
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training classes in Houston, Texas, for the marketers down
there on how to participate in this market.
I can't underscore the value of having
comprehensive training programs. NERC is very concerned
about this also and, as you probably heard yesterday, they
were talking about certification of training programs,
certification of operators and so forth. We support all of
these and think they are a must.
It is sl important that you have all of the
communications telemetering and so forth in place. For PJM,
this stuff is already in place.
In other areas, as they develop into the various
functionalities, like in California, they have many elegant
consultants and firms that are ensuring that whatever
processes and procedures come in place, the hardware and the
software and so forth will work. Again, you are flying an
airplane that can't land. You can't stand it down so the
systems have to be in place and have to work as they change
and as they go forth.
The emergency procedure drills are extremely
important, particularly as new players come in and come out.
PJM conducted an exhaustive emergency procedure bill before
we began our bid-based market and regional tariff that
involved not only the states but Department of Energy and
also involved the market participants to make sure that
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should something have happened after we began our new energy
market that everyone was qualified and understood what would
take place during the emergency procedures.
Twice a year, we also conduct system restoration
after a blackout. We simulate a blackout of the entire East
Coast and go through restoration procedures that are heavily
involved. It takes about two days to go through the drills
but we found them exceedingly productive.
Madam Chairman, we would certainly welcome any of
this Commission or the staff to come by and observe our
drills and procedures as we go forward.
Information, as mentioned, you know, may be the
Achilles heel. As market participants begin to do their
thing and as generation becomes unbundled, it has to be
crystal clear and understood in whatever form that the
information to the grid operator has all the information
they need in order to operate the grid reliably. There is
many elements of these but I just want to highlight three
that would have to be put into the proper context of
whatever restructuring takes place in whatever portion of
the country or the world.
One is there is certain before-the-fact
information. In order to get the grid in a position to
operate reliably, you have to have data and information on
what is transpiring, what is taking place and so forth so
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you can plan for the next day and up to the next week's
events. As we learned in January of '94, fuel levels, for
example, are very important, as we begun to run out of fuel
in January of '94 and the emergencies we had there.
Sometimes we wonder, when we get into a full
generation market, that could be extremely market sensitive
to know what the fuel levels are. Well, those are elements
we feel have to have contractual rights to make sure we have
all that information before the fact so we can make sure the
grid is positioned reliably.
You have transactions, as I elucidated earlier,
real time transactions of things you have to do as you
operate the grid hour by hour, day by day. And then you
have after-the-fact. You have to have all the information
necessary to analyze reliably and productively a fault
should it occur to determine what are the lessons learned.
And, as your industry knows very well, root cause analysis
is the key to be able to go forward and learn from mistakes
that will be made and to do this you must have exhaustive
amounts of data.
We have found in PJM our historical database right
now is in the terabytes and growing on the amount that we
have to capture and keep in stored level and I think the
ability for a central entity to be able to capture that,
store it, have it available for others to look at and so
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forth is critical to the success.
This next slide on ISO functions, a little bit
busy and I won't go into that. But, again, we would
certainly welcome you to come and tour the center and we
will spend more time on this. But I just wanted to point
out, this is the operations that take place on the floor.
And you will see up at the top two separate networks. We
are in place, operating today with a bifurcated information
system where we have information that goes on what is termed
the OASIS for all the market participants. And, since we
operate both, the pool in and of itself does not participate
in the market; we strictly administer the market and make
sure it is operated according to the rules.
We have a separate information network that
concerns all of the security data. And I think as this
thing gets into place and works throughout North America
that we will be able to solve those information requirements
so we can operate the grid reliably. Confidentiality
agreements have been stressed and other sorts of things are
being put in place to ensure that this kind of
communications can continue.
The third element has to do with clear authority.
I had mentioned authorities that we currently have in PJM
but authorities must be tied to the developing role of
sanctions. One of my worst nightmares is that even though
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you might have sanctions with penalties on the sanctions, a
party could take a commercial position that the penalty or
the sanction is just a cost of doing business and when you
are dealing with a real time system where you have to
make -- where you have a product that is instantaneously
generated and consumed, you can't have someone making a
commercial interest when you need that plant on or off or
whatever condition it may be.
So second guessing and self help is something that
could obviate the authority. So as these sanctions are
developed and put in place throughout North America and are
looked at for what the requirements are for various entities
to comply with those, could be the one that will make sure
the authority is clear and crisp or the one that could
undermine it.
Finally, we deal, have to deal with predictable
behaviors. We think that as the restructuring is taking
place through various places throughout this country and the
world, everyone is very concerned with reliability. I have
not come across one individual from the most avid marketer
to the most conservative that is not saying that reliability
must stay in place. Everyone recognizes the severe impacts
of an outage and, certainly, in this region for PJM that
serves arguably the world's political capital and in our hip
pocket has a city that on any given day can have 12 million
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people in 10 square miles, you know that we have to have
reliability for this area. It is extremely important and
everyone is very sensitive to that.
But these four cornerstones, we feel, are what
needs to be developed and, as you look at the various
restructuring options, you need to ensure that the
capability is there and there are ways to measure the
capability through training, experience and so forth, to
make sure that takes place, certification.
Information is necessary and that comes through
the contracts that you have. The authority is there, which
is clear and crisp through the sanctions, the mandatory
rules and guides and so forth that have to be in place.
And, finally, with all of these together, we feel
that it can be a vibrant and a healthy new industry as it
moves forward and will meet the terms and conditions of
reliability that we all expect.
Thank you, Madam Chairman.
CHAIRMAN JACKSON: Thank you very much.
Rather than addressing specific questions at this
point, I am going to let Mr. Asselstine make his
presentation and then we can have a discussion.
MR. ASSELSTINE: Thanks, Chairman Jackson.
What I would like to do this morning and in the
next few minutes is just touch on a few topics that I
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addressed before the NARUC meeting when I was on a panel
with Commissioner Rogers and I thought I would touch briefly
on some of the changes that we have seen as the competitive
framework is developing both at the federal level and at the
state level, talk about stranded cost recovery and
securitization which we view as a useful concept or tool
that can assist the utilities in recovering their stranded
costs, offer a few comments on disaggregation and then close
with just a few points on the effects of competition on the
operation of nuclear plants in the country.
If I could have my first slide, please?
At the federal level, there are a number of
legislative initiatives that are either being considered or
potentially could be considered over the course of this year
and next year. Certainly the industry has strongly
advocated repeal or modification of the Public Utility
Holding Company Act and also some of PURPA requirements that
utilities purchase power from independent power producers.
As you have heard already today, nuclear
decommissioning cost recovery is certainly a potential
candidate for legislation at the federal level and, finally,
there are a series of broader industry restructuring
proposals that have been introduced both in the Senate and
in the House that cover a fairly broad range, including
legislative proposals that would provide more of a one-
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size-fits-all federal solution for retail competition and
stranded cost recovery to other proposals that would be more
of a safety net to help ensure the states all reach the same
ultimate objective in terms of retail competition.
If I could have my next slide, please?
As you have heard, there has been a very
substantial amount of activity at the state level. We
expect that trend to continue over the course of this year
and on into next year. By around the end of this year we
expect that many, if not most of the higher cost states in
the country, will have instituted industry restructuring
plans and proposals and we are also seeing, although we are
at a relatively earlier stage in the process, a growing
convergence among many of those state plans to include the
points that I have outlined here.
First, a reasonable transition period of on the
order of five years to get to full retail competition.
Second, the opportunity, although clearly not a guarantee,
for stranded cost recovery. Third, the phase-in of retail
competition over the transition period. Fourth, in many
instances the institution of a wholesale competitive market
to try to capture some of the incremental efficiencies and
cost savings from competition as we are working through the
transition period. The use of independent system operators
and I think you have heard a fair amount of that yesterday
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and today. And, finally, in a number of states, the use of
securitized financing as a tool to accelerate competition
transition charge recovery.
If I could have my next slide, please?
We have listed here a number of states where we
expect to see activity. We have seen two states thus far
that have enacted comprehensive statutory frameworks for
industry restructuring. Those are California and
Pennsylvania. A number of other states are actively engaged
in the process and, with few possible exceptions, our
expectation is at this point that those frameworks will be
balanced and reasonable.
If I could have my next slide, please?
I have summarized a few of the key points from the
California statute. We do view the California legislation
as a fairly significant milestone in the transition to a
more competitive environment in the utility industry in the
country and we expect that it will continue to serve as a
model for state consideration in a number of other states.
I am not going to go through all of the elements in the
California statute.
A few that I would point to, first, the phase-in
of direct access or retail competition subject to the
implementation of a nonbypassable competition transition
charge that would be paid by distribution customers.
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If I could have the next slide, please?
Second, and a trend that we are seeing among a
number of other states, emphasis on some near-term rate
reductions to provide some tangible benefits in many
instances, particularly for small customers, at the outset
of the process so that customers will see some near-term
benefits from the competitive marketplace and, finally, the
use of securitized financing as a mechanism to accelerate at
least a portion of the recovery of stranded costs by the
California utilities.
If I could have the next slide, please?
On stranded cost recovery, there are just a few
points that I would make. First, in terms of the magnitude
of the problem and the role that nuclear power plays in the
problem, there are basically three sources of stranded
costs. Those are, first, investment in above-market
generation, and that is really a sunk cost recovery
question. Second, above-market power purchase obligations,
which is really an ongoing operating expense for the
utilities. And, third, deferrals, regulatory assets and
funding of social programs such as demand-side management.
There are a variety of estimates of the magnitude
of the problem. Moody's Investor Service has put out a
recent update of their -- in 1996 of their estimate and they
continue to believe that the total amount of stranded costs
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for the industry are about $136 billion.
A few other factors pointed out by Moody's, and I
think you have heard a bit of this already. Stranded costs
tend to be concentrated by region. The Northeast, the West
and portions of the Midwest are the regions that have the
largest concentration of stranded costs. Also the greatest
exposure in general is with the lower rated companies and
that is also not surprising since those were the companies
that had large plant construction programs under way in the
1980s.
A few key points in terms of stranded costs.
First, not all stranded costs are for utility-owned
generation. There are very substantial exposures to
stranded costs for power purchase obligations and we see
this probably most clearly in California and in New York.
Second, not all generation related stranded costs
are nuclear. There are some expensive coal units around
that were built in the '80s and those are a portion of the
stranded cost problem as well.
But, third, I think it is fair to say that nuclear
units and, particularly, many of the large current
generation units that were licensed in the 1980s do
represent a substantial component of the problem.
When we look at stranded cost recovery, and
actually if you could go back one slide, I think, great --
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when we look at stranded cost recovery, we see it really as
a function of three components. The first of those is where
are the utility's rates today and where will those rates be
during the course of the transition period as you move to
full retail competition?
Second, if you use securitization as a tool for
stranded cost recovery, what benefits can you derive from
securitization?
And, finally, what a lot of regulators are
referring to these days as mitigation savings. What other
cost reduction savings can you wring out of the business?
Those are really the three components.
If I could move to the next slide, please?
This chart really just shows the revenue path for
California for the California statute. I think the
significance here is simply to point out that there are some
immediate cost savings that can be achieved in California
and we expect will be achieved through the use of
securitized financing. Those cost savings will cover most
but probably not all of the 10 percent rate reduction that
was mandated for small customers in California to begin on
January 1, 1998.
Over the course of the five-year transition
period, the continued benefits from securitization as well
as some of the other cost savings that the California
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companies will achieve really provide the mechanism for
recovering a substantial portion of their stranded costs and
most stranded costs really are expected to be recovered by
the end of the transition period. With few exceptions,
unrecovered stranded costs at that point would become the
obligation or liability of the shareholders.
There is one significant benefit in California
that is a big plus for the California utilities. That is,
the structure of their independent power contracts. Those
contracts move to a substantially lower cost over the next
couple of years. By keeping rates at current levels or 10
percent lower for small customers, the utilities will be
able to keep those savings and apply them to stranded cost
recovery. Unfortunately, that is not a financial benefit
that exists in any other part of the country.
If I could have the next slide, please?
In terms of securitization itself, let me start
with just a brief description of what it is. It is really
the use of an asset-backed financing which is a nonrecourse
financing to the utility. Therefore, not a direct
obligation of the utility. This financing would have very
high credit quality, AAA credit ratings and that credit
quality would be derived from a statutory authorization to
impose an irrevocable and nonbypassable charge on the
utility's distribution customers which would then be used to
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repay the debt. These bonds would not be obligations of the
state or obligations of the utility but would really be
backed by that statutory ability to collect revenues.
The utility would transfer their stranded costs
for securitization to a trust which would issue the bonds
and the utility would receive the cash proceeds from the
sale of the bonds. Those cash proceeds would then be used
by the utility to reduce their costs, typically by retiring
their existing debt and also by repurchasing some of their
existing common equity.
When we look at securitization, we really see six
benefits from it for the utilities and for their ratepayers.
The first of those is you can accelerate stranded cost
recovery and, effectively for the portion that is
securitized, you immediately recover those stranded costs.
The second and related benefit is that the utility
no longer bears any risk or uncertainty in terms of stranded
cost recovery for the portion that is securitized.
Third, the securitization permits the financing of
at least some stranded costs over a longer time period than
otherwise might be permitted. In California, for example,
securitized financings are likely to be over 10 years. The
normal period for stranded cost recovery is five. So it
gives the utilities the ability to extend out stranded cost
recovery over a longer period of time for at least a portion
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of those costs.
Fourth, there are economic savings that can be
provided and translated into rate reductions. Those rate
reductions really help, I think, allow the states arrive at
a reasonable transition period for competition. Those
savings are really as a result of shrinking the utility's
capital structure. In effect, what the utility is doing is
taking assets that are currently on their books, financed
roughly half with equity and half with debt, refinancing
those very efficiently with 100 percent debt financing using
the guarantee of recovery of the revenues.
Finally, there should be benefits to the utility
through recovering their stranded costs in terms of
enhancing their credit quality by removing the uncertainty
for stranded cost recovery.
If I could have the next slide, please?
Just a moment on disaggregation and I think, at
that point, I probably will stop given the lateness of the
hour.
There are a variety of stages in terms of changes
that will take place in the organizational structure within
the industry. Most utilities have already established
strategic business units and the states are moving rapidly
to unbundle rates and separate rates out for the different
categories of the business.
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As we move forward with competition, it is likely
that utilities will either separate their businesses into
separate subsidiaries within a holding company structure or,
ultimately, potentially sell or spin off some of their
assets.
If I could have the next slide, please?
In terms of spinoff of the assets, we tend to
think that most utilities would continue to prefer either
functional unbundling or structured unbundling within a
holding company system. Nevertheless, market power concerns
are likely to drive utilities more toward disaggregation
and, ultimately, utilities may agree to sell or spin off
assets in order to achieve unregulated status for their
generation. We see a number of examples of this at this
point both in California, in New England and also in New
York with Niagara Mohawk.
I think with that, I am going to stop at this
stage and turn it back over to you, Chairman Jackson.
CHAIRMAN JACKSON: Thank you very much.
In fact, I will begin with a comment and then a
question to you, Mr. Asselstine.
As you are aware, the NRC does not see its role as
directing how the amount or components of stranded costs are
to be defined or recovered. In fact, we will stop talking
about it and spend our time talking about decommissioning
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funding since that is our issue.
But it is essential that we fully understand what
decisions are being made in establishing those definitions
and how they impact the availability of resources both for
operation but especially for decommissioning of nuclear
power plants. And the concept of securitization as you have
outlined it rests on an economic regulatory structure that
ensures a stream of revenue from ratepayers.
Can you -- you focused a lot on California but can
you extract from what you said two or three key issues you
think have to be clearly addressed, either in state
legislatures, by state legislatures or orders from PUCs or
others so that the revenue streams are, in fact, assured
that would back this approach?
MR. ASSELSTINE: Sure.
There are a few key ingredients that are really
necessary and I think our belief and this is true I think
for most of the firms that are involved in the asset-backed
financing business, is that you really do need, in order to
obtain the highest credit quality rating for these bonds,
AAA ratings, you really are going to need the statutory
underpinning to support these transactions.
The key legislative components that we are looking
for is the statutory creation of the ability to recover
stranded costs. Second, the authorization to impose a
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nonbypassable and irrevocable charge so that once the bonds
are issued, you really know that the revenues will be there
until the debt is fully repaid. Third, what is called a
true-up mechanism and that is a tool to ensure that as you
move through the term of the debt, you have the ongoing
ability to adjust the size of the charge to make sure that
you continue to collect enough money so that all of the debt
is repaid. And a final provision is really a state covenant
that the state will agree both at the legislative level and
at the regulatory level not to do anything to disrupt or
impair the revenue stream that would be used to recover the
cost of this financing.
Those are really the core elements. At the
legislative level, there are also a corollary set of
requirements that we would look for in terms of the
individual state commission orders that implement the
legislation which basically track the same components.
If you have those elements, institutional
investors who invest in the asset-backed market would look
at this as a very stable and dependable asset class and they
would be willing to invest in these securities in the
amounts that are likely to be available. And as we look out
over the next say three or four years, we see a potential
size for this market of on the order of $50- to $100
billion.
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CHAIRMAN JACKSON: You talked about the
establishment of a trust. Can you elaborate a little bit
more on the role that a trust plays in this financing
approach and, in your opinion, having been an NRC
commissioner, is this a critical factor in ensuring that
funds, particularly for decommissioning, would be available
when they are needed?
MR. ASSELSTINE: In terms of the asset-backed
financing, the trust is really a special entity, it is a
special purpose vehicle which only exists to receive the
transition cost asset and to issue the debt and then collect
the money and repay the debt. The objective here is to
ensure that it is bankruptcy remote, that nothing can be
done to impair the availability or access of those funds.
On decommissioning costs, I think the point that I
would make, I am actually quite encouraged. We are at an
early stage in developing the competitive frameworks through
many of the states but I am encouraged so far that state
regulators and legislators have really recognized that
decommissioning is a safety issue, it is an obligation and a
requirement that has to be met and there has been a pretty
clear willingness to impose the same kind of nonbypassable
and irrevocable charge to be paid by distribution customers
to meet ongoing decommissioning funding obligations over the
remaining operating life of the plant.
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We have seen that in the statute in California, we
have seen the statutory authorization to the Pennsylvania
commission to deal with it and, although the Pennsylvania
commission hasn't acted at this point, I would expect that
they would follow the same path as in California and
recognize that this cost should be recovered along the same
lines as any other stranded cost. Perhaps this is a
separate item.
As long as the states continue to do that, that
ought to provide a fair amount of comfort to all of us, both
investors and to the Commission, that the decommissioning
funding requirements will continue to be met even if the
structure of the industry changes.
CHAIRMAN JACKSON: Can you just speak for a moment
in terms of what the financial impact you think would be,
the relative financial impact of the spinoff or sale of
assets as compared to a holding company?
MR. ASSELSTINE: That is a very interesting
question and I think all of us, both the utilities, those of
us who follow utilities from the financial side, the rating
agencies, are beginning to struggle with how do you evaluate
the individual pieces of the business as the utilities
restructure themselves. The next four or five years are
going to be a fairly interesting time in this industry and I
think, literally, you are going to see the shape of many
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utilities change fairly significantly.
We have started to look at the individual
components. If you take the average vertically integrated
U.S. electric utility which has a single A credit quality
today, what you tend to see is a capital structure that is
roughly 50 percent equity, 50 percent debt, which reflects a
blended business risk position for that consolidated entity.
We tend to believe and our informal conversations with the
rating agencies tend to confirm that if you looked at the
distribution part of the business, the risk profile of that
business is probably lower than the vertically integrated
utility. It will continue to be a regulated monopoly. In
all likelihood we are going to see performance-based
ratemaking for that part of the business. So utilities will
have an incentive to lower their costs, they will be allowed
to keep at least a portion of any economic savings that they
are able to achieve.
Given the lower business risk profile of the
distribution business, it ought to be possible to maintain
single A credit quality by increasing leverage, for example,
to say a debt-to-total-capitalization ratio of on the order
of 60 percent rather than 50 percent. You can also probably
operate that business with lower cash flow coverages or
earnings coverages for your interest requirements than you
would normally see for a vertically integrated utility.
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I think generation is the flip side of the coin.
The generation business is likely to be a competitive
market-priced business. If stranded cost recovery goes as
we expect it to, at the end of the transition period we
should have most of the generation assets marked either at
market or very close to the market price that those assets
need to have to be able to compete effectively in the
marketplace. But it will be a competitive market, your
revenues will depend upon your ability to sell power at
competitive prices and therefore that business probably has
a higher risk profile.
Our rough cut there is that you probably won't be
able to leverage that business as much as the vertically
integrated utility. Perhaps the right capitalization is a
40 percent debt to total cap of larger equity component for
that business and you may need higher cash coverages of
interest along the lines of other commodity-based kinds of
industries in the country.
If you begin to parse out nonnuclear and nuclear
generation, I think that the equation shifts even more
dramatically as you look to the nuclear units. Again, if we
get through stranded cost recovery, what you really are
focusing on in the nuclear units is an avoided cost issue,
how competitively can those plants operate, and I agree with
the comments that Linn and Joe made.
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Well run, larger nuclear units in this country
should be able to compete very effectively. If you look at
the top quartile performers in the industry, those plants
can generate power taking into account fuel and O&M costs of
well below 2 cents per kilowatt hour. That is a very
competitive price, in my view, given where the market is
likely to be in virtually any part of the country.
If you go down the performance scale and look at
plants in the lower quartile of the industry, I think there
may be a different story there and my suspicion is those
plants are really going to have to move up more toward the
mid range or the higher portion of the industry if they are
going to be able to compete effectively on a long-term
basis.
You also have problems with smaller, single-unit
sites like a Connecticut Yankee where I think even if it is
basically a sound plant, the economics may weigh against the
plant on a variable cost basis.
CHAIRMAN JACKSON: Well, one thing that seems to
come out of what you are saying, though, is the question of
who or what kind of entity securitizes the stranded costs in
the sense that since you are basically talking debt
financing here, this whole issue of cash, higher or lower
cash covenants is part of -- coverages, rather, as part of
some kind of covenants could be harder to securitize that
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debt could be impacted, you are basically saying, by the
structure of the company?
MR. ASSELSTINE: Well, I think as long as you have
the statutory provisions you can deal with the stranded cost
problem regardless of the organizational structure of the
company. Where the organizational structure will really
come into play, I think, is on an ongoing basis what
financial capabilities will the company really need to
compete effectively and how do you factor that in also on
the generation side in terms of where they are going to have
to be able to produce power to be competitive with other
sources.
CHAIRMAN JACKSON: Okay, thank you.
I just have a quick question for Mr. Harris. In
your discussion of restoration procedures, you have specific
protocols with respect to nuclear plants.
MR. HARRIS: Yes, ma'am, we do.
CHAIRMAN JACKSON: Could you just give a few words
to say something about that?
MR. HARRIS: Well, we have the protocols embodied
in our operating procedures in accordance with the NERC
protocols and guidelines. They have a high priority for
restoration.
CHAIRMAN JACKSON: Okay.
MR. HARRIS: In our emergency restoration where we
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black out the grid, one of the things we look at is how
quickly can the units come back on. One of the things that
we are looking at and having discussions, for example, is if
you assume a total blackout how quickly, in an emergency
condition, can you get the plants back on line.
That hasn't been totally solved but, for PJM, for
example, in our drills, assuming they can come back readily
will make the difference in having the grid back on line
within 24 hours as opposed to five days. So this is
something that is continually looked at as we do these
drills and rehearsals. It is very important to us.
CHAIRMAN JACKSON: You talked about before the
fact, real time and after the fact communication and you
spoke about intra and interregional communication from an
after-the-fact point of view. Are there key elements from a
before-the-fact point of view in terms of interregional
communication as far as the interface with other regional
grids and issues of degradation of voltage on the grids?
Are there some operating or governing protocols in that
area?
MR. HARRIS: Yes, ma'am. In the NEPOOL, PJM, New
York Power Pool, Ontario Hydro, Hydro Quebec area, we have
protocols for us, Allegheny Power System and Virginia Power.
For years we have shared data. We have over 500 data points
that we share every 30 seconds that we share amongst
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ourselves automatically that is folded into the analysis
that we do on the power grid. It is a very robust and
probably the most robust sharing of data in and amongst the
region in the whole of North America.
CHAIRMAN JACKSON: Do you see any of that as being
unnecessarily threatened by any of the competitive
pressures?
MR. HARRIS: No, ma'am, I do not. I see it being
enhanced, actually, with the advent of security centers
which I think you were briefed on yesterday.
CHAIRMAN JACKSON: Okay. Commissioner Rogers?
COMMISSIONER ROGERS: Well, we have heard so much
today that I think we are pretty well saturated.
I just want to make a remark for Mr. Colvin and
that is I think some of his observations are very
interesting but I think they need to be more explicit and
today at this time is not the time to do that. But I think
when you are talking about the need for more efficient
safety-related regulation, then I think it is important for
you as a representative of the industry to be more explicit,
exactly what you are talking about, because I firmly believe
that no changes of any sort are going to come about unless
there is a very clear identification of exactly what you are
talking about and why. But I wouldn't expect an answer to
that right now.
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CHAIRMAN JACKSON: Right.
MR. COLVIN: All right, I understand.
[Laughter.]
CHAIRMAN JACKSON: Right.
Commissioner Dicus.
COMMISSIONER DICUS: But some day.
A question, two real quick ones, I think, to
Mr. Harris. I think I heard you say this, I'm not sure, but
you believe in mandatory membership in NERC?
MR. HARRIS: We think that that is a wise goal.
We do not know whether it is achievable when you have full
generation competition, people can choose their directions.
What we do believe in, however, is the contractual
conditions to do business in our pool contractually
obligates you to obey the rules of NERC and MAAC, the
regional council we are in, and the directions of the
control center.
By having a contractual relationship that captures
that, we think we can cover that gap. It would be laudable
if we get to that point but I don't know if in the full
generation context you can without some sort of legislative
mandate.
COMMISSIONER DICUS: That was my follow-up
question. If it isn't done by contract, then do you think
it has to be done by legislation?
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MR. HARRIS: Yes, ma'am.
CHAIRMAN JACKSON: Commissioner Diaz.
COMMISSIONER DIAZ: I have three small questions
and maybe some comments.
I listened to Mr. Colvin and it follows up on the
comments by Commissioner Rogers that I wrote in here, the
industry is requiring a defined, stable, safety-focused
regulatory infrastructure and you need that for an
undefined, deregulated electric marketplace. It seems to be
a very tough issue.
And then, you know, reasserting what Chairman
Jackson, Commissioner Dicus said, I think this coming years,
maybe starting now, the value of frequent in-depth
communications and advanced probing of this area will be
very necessary because we realize that the industry needs
some framework but the situation is continuously changing.
I think that will require maybe an added incentive for us to
be very aware of what your concerns are and those need to be
very well stated.
If you want to comment to that, fine.
MR. COLVIN: Commissioner Diaz, if I might provide
one example, to leave the Commission with a concept of what
we are discussing, and I might use the discussion that we
have had on grid stability and grid reliability over the
past seems probably like days to the participants.
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But if we tie that to the issue of station
blackout, I think that this is an issue which the Commission
is rightly looking at and needs to look at and assure itself
that the safety from the grid reliability standpoint is, in
fact, assured.
At the same time, however, if you look at the
process by which we implemented the safety requirements, the
implementation of the station blackout rule, there is a
basis, a safety basis which is based upon risk and if you
just take a simple look at that and its assumptions, as
decided by the rule, you can quickly come to the conclusion
that we would have to have more than 50 grid disturbance
events in a year to be even starting to penetrate the basis
under which that regulation was implemented by the
Commission. And you will recall that grid disturbance is
only one small portion of the real concern about initiating
events, the loss of off-site power. The main disturbance
and concern is from a loss of off-site power initiation
event is a plant-centered event. So that is the largest
portion.
So we are really looking -- I think there are many
indicators that we have here to look at where we have in the
past envelope from a safety basis the real risk to public
health and safety. The Commission dealt with that
appropriately, the industry dealt with that appropriately,
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the Commission monitored that activity and, unless there is
a significant change that goes outside, puts us outside the
envelope under which that safety case was made, then there
is no reason to go through and review that safety case and
reevaluate and reanalyze that.
So I just encourage the Commission from a process
standpoint, I think you have in that situation we have the
ability to determine today that we are in full compliance
with the Commission's safety risk and would do so for some
time to come unless grid reliability got to a very
significant point of where it was unreliable. I think you
have heard the discussions from Mr. Harris and others today
to that we are putting in a lot of steps to ensure that
doesn't occur.
So I was somewhat disappointed in yesterday's
discussion of that, that that question was not addressed
fairly quickly and fairly easily because, in fact, it is a
fairly simple matter to look at the bounding conditions as
an industry on what the safety case is.
So it is from the process standpoint and if that
process now entails each licensee to go reevaluate and
reanalyze, I think that is an area where the licensee's
resources as well as the Commission's is not well focused
because the safety is -- it is easy to determine that that
is assured. So it is in that context that my comments
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should be taken.
COMMISSIONER DIAZ: Thank you.
The second point was on the Atomic Energy Act. I
think we realize that foreign ownership is really becoming
an issue and I think that the fuel cycle market is going to
become an issue on that and that is another aspect that we
are going to really need to look at because it is not only
uranium now; it is uranium and plutonium and it is
enrichment abroad and it becomes an issue that I think the
industry needs to bring if they are going to be going into
that area so we can get an early look at it.
To accelerate, you talk about grid reliability and
I had a comment and maybe a question for Mr. Asselstine.
When we wrote, you know, the Atomic Energy Act and the
Commission got charged with maintaining national security,
it actually meant something. It meant that we were going to
control special nuclear materials, that we were going to
make sure that technologies that were critical to the
proliferation issues were controlled and all those kinds of
things that were clearly identified.
Now, you know, we are shifting into an area which
practically national security is established also in terms
of grid reliability and the economics of the country. In
that sense, you know, the issue of base plants and nuclear
power plants become like a stationary component that has
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additional importance in determining what national security
is as far as economics and grid reliability.
Have you dealt with this issue in any way that
identifies what a clear contribution of nuclear power plants
is in this area?
MR. ASSELSTINE: I think to some extent. I think
my reaction would be certainly if you look at the number of
units that we have and the role that those units play as
base load generating units, they are a pretty essential
component of the system, now and in all likelihood going to
have to continue to be for the most part under a competitive
system.
That is partly why I am encouraged by the
information, at least, that we have available to us that if
you have well run plants, those plants should be competitive
on a long-term basis under virtually any scenario and, at
this stage at least, our own assessment is that relatively
few plants should really be vulnerable to early shutdown if
they are able to achieve the kind of performance levels that
are being achieved by the stronger performers within the
industry and you shouldn't see large-scale or at least the
risk of large-scale shutdowns of the units simply due to
competition.
Again, if you break the pieces down, if
decommissioning costs are dealt with as a separate matter,
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if you deal with stranded cost recovery so that you get the
capital investment in the plant down to a reasonable level
relatively quickly, then you are left with a variable cost
analysis. If you run the plants well, they should be
competitive on a variable cost basis going forward. If they
aren't, then those plants are likely to be as vulnerable or
more vulnerable in a truly competitive marketplace.
I spoke at another meeting a week or so ago
looking at the economic effects on nuclear issues and one of
the points that I made was if you begin to separate nuclear
out as part of your generation, you need to focus not only
on decommissioning costs but also on what happens if you
have an extended shutdown of the unit.
Somebody in the audience said, basically, you
really don't have to worry about that because in a truly
competitive marketplace if you have a nuclear generating
company and the unit is down for two years, you know what
the answer is going to be. That unit won't resume
operation.
So, if anything, the competitive pressures, I
think, are going to put more emphasis on the challenge of
running plants well and efficiently and the strong
performers are going to be the ultimate survivors.
COMMISSIONER DIAZ: Thank you.
CHAIRMAN JACKSON: Commissioner McGaffigan?
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COMMISSIONER McGAFFIGAN: I hate to do this but
just three quick questions and I think the answers can be
answered quickly.
You talked, Mr. Draper, about the need for
flexibility in repositioning nuclear assets. You heard the
staff earlier say that they are going to basically look at
those issues on a case-by-case basis. And if you are
looking for flexibility, maybe we have to be case by case.
How do we square what you are saying and what the
staff said earlier?
DR. DRAPER: I am not sure they are inconsistent.
It seems to me that we don't want undue delays, we don't
want artificial constraints on the way the organizations can
be configured as we go forward because one thing we do know
is as we go forward people will wish to array their assets
in quite different ways from the way they are now.
So it seems to me that case by case is fine as
long as it is done expeditiously and there are no artificial
constraints.
COMMISSIONER McGAFFIGAN: And that gets to
Mr. Colvin's point about the expeditious nature of the
licensing board processes. But how do we give the licensing
board, if we don't have reg guides, you know, some template
that says, this is okay? How do we give them some way to
judge when something comes in?
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MR. COLVIN: Well, I think we need, and let me
follow up on your question if I might. I think we need to
look at some templates or some models and we have done that
in part with the staff to date to look at some of those. We
have identified a lot of other questions that came up. I
mean, the whole issue of ISO and its nexus to safety and
grid reliability came out of one of those earlier
discussions so I thought that was very healthy, so we are
going to work with the staff.
I think from, just following up on Linn's comment,
if you think about the various arrays and the combinations
and permutations that you can have, it seems to me the way
we've got to start that is not trying to identify all of
those but to try to identify some bounding conditions. What
are the major factors that are important to the NRC from its
safety perspective that relate to the financial ability of
the utility to operate within the financial constraints that
ensure its safety? If we could identify those in a fairly
direct way, I think they are somewhat, and at least in the
industry's view, somewhat mushy is probably the best way to
talk about it.
I mean, they are up there in the eye of the
beholder and I think we ought to figure out a way to work
together to have the dialogue in this type of forum or
whatever forum is appropriate to more crisply define those
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and do those from the safety perspective.
COMMISSIONER McGAFFIGAN: A second question that
we have avoided today and I will just ask you.
Decommissioning costs we treat as if we know what they are
and we have now gone through some decommissionings and as I
understand it we have been surprised on the up side as to
what the actual costs are. I think at the moment, people
just lay aside whatever money we have said might be needed
without even a final rule on decommissioning, which we are
simultaneously working on.
If this is the last chance to get decommissioning
costs treated as stranded costs, is anybody looking at
whether the numbers are right at the moment? Any of you can
answer that.
MR. COLVIN: Let me take a crack at that. We have
worked hard on that issue with the Commission to try to
define that. Mainly, the uncertainties in the
decommissioning costs come primarily from uncertainties in
low-level waste disposal cost. And given our failure from a
national policy perspective to cite low-level waste
compacts, then it is all a very interrelated problem.
I will say that there are some good methods that
are out there and to come up with the best estimates that
are available today and then bound those from an uncertainty
about the cost of low-level waste disposal. So I think we
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can get there, here from there. I think that there are
discussions in those areas about periodically truing up, I
think was the word that Mr. Asselstine used to true up those
features. Through that process, we will have to make the
appropriate adjustments.
It is a true health and safety issue. It is an
issue which I think all parties agree needs to be dealt with
through nonbypassable or overall charges, wire charges. We
just need to figure out the mechanism to deal with that. So
I am confident that we can do that.
COMMISSIONER McGAFFIGAN: My last question is more
a comment. I took during Commissioner Rogers' noting
Mr. Colvin's statements about need to align our regulatory
framework to safety and the future, and I think it goes to
sort of a fundamental issue, if these folks are going to be
in a competitive environment, they are going to have to be
agile. That is what all the Microsofts and the successful
American corporations have to be agile.
In the past, we had a ponderous industry dealing
with a ponderous regulator and I think there is sort of a
challenge to us to figure out how to be a more agile
regulator while they are trying to be more agile companies
while also preserving safety. So there is a real
fundamental issue there but we don't have time today to talk
about it, I don't think.
. 142
I'll leave it at that.
CHAIRMAN JACKSON: Well, picking up on that, I
would like to thank the NRC staff and members of the two
panels representing regulators and the various industry
sectors for taking the time to come today to brief the
Commission on the developments in the electric utility
restructuring.
The Commission will continue to gather information
about developments in this area and interact with the
various sectors to be able to adequately address safety
concerns that might arise as a result of any of the issues.
I concur with Commissioner McGaffigan's comments and my only
parenthetical remark is that presumably we are on that path.
It may not be fast enough for everybody and it may not
cover everybody's issues all the time. So if we are not on
that path, it is our fault.
So I would like to think that the actions that are
already under way, some completed, as well as the meetings
like the ones we have had today and the one on grid
reliability contribute to both a comprehensive and a
cohesive understanding of the evolving environment which
should allow us to respond effectively and in a timely
manner to carrying out our public health and safety mission.
So we do welcome your input and thank you again
and so that we all can continue to enjoy the benefit of a
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safely operated, soundly and fairly regulated nuclear
generated electricity along with the economic benefits of
deregulation. I think we have gotten some good input that
our staff should fold into any proposed rulemakings or any
other initiatives that are under way.
So unless my fellow commissioners have any closing
comments, we are adjourned.
[Whereupon, at 12:18 p.m., the briefing was
concluded.]
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