**Statement of**

**David K. Owens**

**Executive Vice President, Business Operations**

**Edison Electric Institute**

**Before the**

**United States Senate**

**Committee on Energy and Natural Resources**

**May 1, 2008**

My name is David K. Owens, and I am Executive Vice President in charge
of the Business Operations Group at the Edison Electric Institute (EEI).
EEI is the trade association of U.S. shareholder-owned electric
companies and has international affiliate and industry associate members
worldwide. Our U.S. members serve 95% of the ultimate customers in the
shareholder-owned segment of the industry and represent about 70% of the
U.S. electric power industry.

EEI appreciates the steps forward that Congress took in the Energy
Policy Act of 2005 (EPAct 2005) to encourage new investment in and by
the electric utility industry. Our country needs new investment in
electric infrastructure to ensure continued availability of reliable,
affordable electricity. The steps Congress took in EPAct 2005 to
modernize regulation of the industry, while ensuring that ample consumer
protections remain in place, were appropriate and are producing positive
results. Contrary to predictions that were made before EPAct 2005 was
enacted, merger activity since enactment has actually been relatively
modest.  At the same time, the provisions of EPAct 2005 have encouraged
significant new investment in energy infrastructure.

Moreover, the Federal Energy Regulatory Commission (FERC) has done an
exemplary job in implementing its new responsibilities under EPAct 2005.
FERC has undertaken and completed a series of major rulemakings and new
auditing and enforcement initiatives in a very short time, meeting tight
deadlines set in EPAct 2005. In the process, FERC has strengthened its
regulation of utility mergers and acquisitions, managed the complicated
transition from the Public Utility Holding Company Act of 1935 (PUHCA
1935) to its successor the Public Utility Holding Company Act of 2005
(PUHCA 2005), and incorporated new oversight of affiliate transactions,
in particular to prevent cross-subsidization and encumbrance of utility
assets except when in the public interest. And FERC has done all this
while working closely with and respecting the authority of the states
that also regulate utilities in these areas.

**[Our country needs significant new investment in electricity
infrastructure in coming years to meet increasing demand and to ensure
continued reliability.]{.underline}**

As this Committee knows well, electricity is a vital service to our
nation. EEI and its member companies take pride in providing reliable,
affordable supplies of electricity, even as our country's population and
demand for electricity have grown dramatically in recent years and
continue to grow. Electricity is essential to powering our homes,
businesses, and industries with cooling, refrigeration, heating,
lighting, computers, telecommunications equipment, medical equipment,
and the host of other day-to-day necessities on which we all rely.
Because electricity is provided and used on an instantaneous basis and
cannot practicably be stored, the provision of affordable, reliable
electricity requires a careful balancing of generation, transmission,
and distribution facilities. In turn, constructing, operating, and
maintaining these facilities require an enormous investment.

In coming years, the United States will need significant additional
electricity generation and delivery resources. The Energy Information
Administration (EIA) is projecting that electricity demand will increase
by 30% by 2030. Already, as the North American Electric Reliability
Corporation (NERC) has indicated in its most recent 10-year assessment
of the nation's electricity system, many areas of the country are
operating on thin demand-supply and delivery-capacity margins.[^1] This
need for new facilities will only increase in future years, as a result
of continued population growth, increasing electrification of our
nation's homes and businesses, increasing demand for renewable energy
resources, and compliance with enhanced environmental standards -- even
with a major commitment to energy efficiency.

To put these issues in perspective, I would like to provide some
numbers:

[Overall Capital Expenditures (Capex)]{.underline}

-   Capex for U.S. shareholder-owned electric utilities rose by 15.5% in
    2007, from \$59.9 billion in 2006 to \$69.1 billion in 2007, and is
    projected to reach approximately \$75 billion in 2008 and \$75.5
    billion in 2009.[^2]

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-   Total capital spending in 2007 was projected to be allocated as
    follows: Generation 31%; Distribution 30%; Environmental 14%;
    Transmission 12%; Natural Gas-related 6%; and General/ Other 7%.[^3]

-   Companies are boosting spending on environmental compliance and
    transmission and distribution upgrades, and are beginning to
    announce new generation projects in many power markets to ensure
    adequate reserve margins over the long term. Already, 657 projects
    that would provide more than 130,000 MW of capacity either have
    applications pending, have been approved, or already are under
    construction.[^4]

-   According to a recent study conducted by the Brattle Group,
    dramatically increased raw materials prices (e.g., steel, cement)
    have increased construction costs directly and indirectly through
    the higher cost of manufactured components common in utility
    infrastructure projects. These cost increases have primarily been
    due to high global demand for commodities and manufactured goods,
    higher production and transportation costs (in part owing to high
    fuel prices), and a weakening U.S. dollar.

-   Preliminary findings released by the Brattle Group estimate that,
    without taking into account utility energy efficiency programs,
    close to \$1.5 trillion in investment in new generation (\$559
    billion) and transmission and distribution (\$900 billion) will be
    required by 2030 to meet electricity demand.  Brattle further
    estimates that required generation investment can be reduced from
    \$559 billion to \$457 billion if more aggressive utility energy
    efficiency programs are implemented.

[Transmission Capital Expenditures]{.underline}[^5]

-   In 2006, both shareholder-owned electric utilities and stand-alone
    transmission companies invested an historic \$6.9 billion in the
    nation's transmission grid.  This represents a 51% increase over
    2000 levels.

### Since the beginning of 2000, the industry has invested more than \$37.8 billion in the nation's transmission system. 

### Over the 2007-2010 time period, the industry is planning to invest **\$37 billion** in the transmission system.

### This amount represents a **55%** increase over the amount invested from the 2003-2006 period.

[Distribution Capital Expenditures]{.underline}

-   In 2006, shareholder-owned electric utility investment in the
    distribution system surpassed \$17 billion for the first time.  This
    level of investment (\$17.3 billion) represents a 6.5% increase over
    the inflation-adjusted \$16.2 billion (\$14.5 billion prior to
    inflation adjustment) invested in 2005.

### 2006 industry distribution investment represents an 18% increase over 2000 levels. 

### Since the beginning of 2000, the industry has invested almost \$109 billion in the nation's distribution system. 

![](media/image1.wmf)

**[To provide the investment resources for electricity infrastructure,
electric utilities need to be able to employ a variety of organizational
structures, merge, consolidate, form partnerships, and acquire
assets.]{.underline}**

EEI members include vertically integrated electric utilities that
provide electricity generation, transmission, distribution, and related
services to families and businesses throughout the country. Our members
also include generation-only and transmission-only "stand alone"
companies. Many of these utilities and companies are owned by parent
companies that may also own other electric utilities, energy, and
non-energy businesses. Many of the energy companies are affiliated with
others, either through parent-subsidiary or partnership models.

Thus, there are a variety of organizational structures and affiliations
within the electric utility industry. This variety of structures and
affiliations has enabled the electricity industry to finance, construct,
operate, and maintain facilities needed to provide our country with the
electricity it needs. Indeed, the sheer cost of electricity facilities,
and the risks involved in siting, financing, and earning a reasonable
rate of return on them -- especially in times of increasing wholesale
competition and fuel and materials charges -- often require the ability
to use a variety of organizational structures and affiliations to share
costs and risks.

In addition, utilities need the option to merge or consolidate with
other companies. For electric utilities and their customers, mergers and
acquisitions offer many potential benefits including:

-   Potential cost efficiencies

-   Increased economies of scale

-   Greater optimization of generation, transmission, and distribution
    assets

-   The ability of a larger utility to offer new and innovative products
    and services to consumers

-   Acquisition of superior technology capability

-   Scale necessary for significant capex, to maintain credit quality,
    to lower cost of capital, and to enhance access to capital markets
    and new investors.

Indeed, severely limiting utilities' ability to take advantage of
economies of scale and experience in competitive markets could deny
electric customers the benefits of such economic efficiencies. These
efficiencies enable companies to supply products and services at lower
costs to consumers.

This said, the pace of mergers and acquisitions in recent years has been
relatively modest. In 2007, there were four announced deals, six
completed transactions, and one withdrawn deal. In 2006, there were
seven announced deals. This represents a small step up in overall
activity from the quiet three-year period from 2003 through 2005, when
most companies were implementing back-to-basics strategies by exiting
non-core businesses, investing in core utility and competitive
generation operations, and strengthening their balance sheets.
Nevertheless, the number of whole company merger and acquisition deals
in 2006 and in 2007 remained well below the higher pace that marked the
late 1990s, when 10 to 20 announcements per year were the norm. An
emerging trend of recent utility merger and acquisition activity has
been the increasing participation of private equity investors and
international buyers, including infrastructure funds and international
utilities.

![](media/image2.jpeg){width="6.041666666666667in"
height="3.1145833333333335in"}

**[Under existing federal laws, FERC is well equipped to ensure that
mergers and acquisitions are in the public interest, and that consumers
are well protected -- and FERC is fully on the job.]{.underline}**

Recognizing the need for new infrastructure, and the need to accommodate
new investment in and by the electricity industry, in the past two
decades, Congress has taken steps to update and modernize the laws
governing the structure and operation of the industry. These steps have
helped to ensure that companies have sufficient flexibility to provide
the resources needed to get the job done, while also ensuring that
consumers and markets are well protected. In particular, Congress,
states, and the FERC have taken steps to encourage competition in fuel
supply and electricity generation, while also ensuring open access to
electric and natural gas transmission facilities. In addition, organized
markets for electricity sales and delivery have evolved, including
regional transmission organizations (RTOs) and independent system
operators (ISOs), providing the ability to call on a wide array of
generation and transmission resources to serve load centers within
different regions of the country.

Recognizing that these legal and policy changes have spurred changes in
the electric utility industry, in EPAct 2005, Congress replaced the
70-year old PUHCA 1935 with an updated PUHCA 2005. In addition, Congress
updated section 203 of the Federal Power Act (FPA) to require FERC, in
reviewing proposed mergers and financial transactions, to ensure that
these activities will not result in cross-subsidization of non-utilities
by utilities or encumbrance of utility assets, unless in the public
interest.

In making these changes, Congress recognized that the FPA and other laws
governing the electric utility industry have evolved substantially since
1935. Furthermore, FERC, states, and Wall Street have developed
increasingly sophisticated regulations and other measures to ensure that
companies that provide electricity services make ample information about
their finances and activities available to regulators and the public,
and the companies do not engage in inappropriate behavior that can harm
customers.

In particular, FERC has put in place advanced merger, acquisition,
accounting, financial, and reporting regulations, policies, and
practices. Under its merger provisions, FERC examines a wide array of
factors, such as: the ability of companies in a proposed merger to
exercise market power; the relative concentration that would result from
the merger; benefits of the merger to wholesale and retail consumers;
and measures necessary to protect consumers. FERC also has detailed
accounting and financial disclosure requirements to ensure that public
utility, wholesale, and transmission activities are open to regulators
and the public. FERC actively oversees utility financial transactions
under section 203 of the Federal Power Act, and FERC oversees rates to
ensure that they remain just and reasonable under sections 205 and 206
of the Act.

In addition, FERC has moved aggressively under its existing authority to
prevent abuse of financial relationships between regulated utilities and
their unregulated affiliates, issuing strict new rules that prohibit
utilities from using debt linked to utility assets for non-utility
businesses. FERC has imposed rules to regulate cash management
practices, including limits on the amount of funds that can be
transferred from a regulated subsidiary to a non-regulated parent
company. FERC also has adopted detailed standards of conduct to ensure
that transmission providers do not use their unique access to
information to provide unfair advantages to their wholesale merchant
functions and their marketing affiliates. FERC vigorously audits and
enforces compliance with these standards. FERC closely scrutinizes all
transactions where a utility seeks to purchase power from an affiliate
by contract or purchase a power plant owned by an affiliate, to ensure
that the price does not exceed the market price and the utility does not
unduly favor its affiliate over other competitors in the wholesale
market.

Since passage of EPAct 2005 alone, FERC has issued a number of complex,
stringent regulations aimed at implementing PUHCA 2005 and revised FPA
section 203. These regulations ensure that companies will keep detailed
records and make them available as needed to FERC and to state
regulators. They ensure that FERC approval is required for mergers,
acquisitions, and major financial transactions, subject to strict
guidelines and certain blanket authorizations to help streamline the
review process. They also protect against inappropriate
cross-subsidization of non-utilities by utilities, in particular when
captive customers could be harmed. To list just a few of the more
significant FERC developments in these areas since EPAct 2005:

-   PUHCA 2005 regulations

    -   December 8, 2005 -- Final rule and report to Congress

    -   April 24, 2006 -- Rehearing order

    -   July 20, 2006 -- Rehearing order

    -   December 7, 2006 -- Technical conference

    -   February 26, 2007 -- Rehearing order

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-   PUHCA 2005 accounting and reporting regulations

    -   January 11, 2006 -- Guidelines for notification of holding
        company status

    -   January 13, 2006 -- New dockets prefix notice

    -   February 9, 2006 -- Additional guidelines for filings under
        PUHCA 2005

    -   March 6, 2006 -- Filing guidelines for self certification
        notices

    -   April 7, 2006 -- Electronic filing guidelines

    -   July 18, 2006 -- Technical conference

    -   October 19, 2006 -- Final rule

    -   October 19, 2006 -- Form 60 electronic filing final rule

    -   December 14, 2006 -- Form 60 software notice

-   FPA section 203, merger, and cross-subsidy regulations

    -   December 23, 2005 -- Final rule

    -   January 10, 2006 -- Errata to the rule

    -   April 24, 2006 -- Rehearing order

    -   July 20, 2006 -- Rehearing order

    -   August 1, 2006 - Errata to the rehearing order

    -   December 7, 2006 -- Technical conference

    -   March 8, 2007 -- Technical conference

    -   July 20, 2007 -- Policy statement

    -   February 21, 2008 - Final rules and supplemental policy
        statement

These activities have involved thousands of hours of work by FERC, with
input by the public, to ensure that the Commission has developed
careful, protective measures. In each of the technical conferences, FERC
Commissioners and staff heard in person from representatives of all
stakeholders, particularly representatives of state commissions and
consumers addressing the respective role of FERC and the states. The
Commission has had to take a large array of factors into account,
balancing the need for information and to impose appropriate
constraints, against the cost and impacts on companies and markets. We
believe, on balance, the Commission has sought to implement its
statutory responsibilities fairly and effectively, in the public
interest.

**[States play an important role in regulating utilities, approving
utility mergers, and protecting retail customers. Federal law should
continue to accommodate this role without duplicative or conflicting
requirements. ]{.underline}**

As the General Accounting Office (GAO) has recognized at page 9 of its
report to Congress on "Utility Oversight" in the wake of EPAct 2005,
"state regulators in all but a few states reported \[that\] utilities
must seek state approval" for mergers, and "most states have some type
of authority to approve, review, and audit affiliate transactions." In
fact, as the record before FERC and in its technical conferences
demonstrates, states play a prominent role in these areas.

States clearly play a very active role in reviewing proposed mergers.
State utility commissions look closely to ensure that mergers will be in
the public interest and will fully protect retail customers. Often
governors and even legislatures weigh in as well. States also are not
shy about denying approval of a proposed merger if they believe that the
proposal does not meet these tests or provide adequate benefits to
utility customers. In addition, states actively oversee utility
activities, including affiliate transactions, with a substantial focus
on protecting retail customers. States oversee retail rates to ensure
that the rates are reasonable given the costs needed to provide
electricity. States also ensure that rate-regulated utility resources
are not inappropriately used for non-utility activities, and states
ensure that utility affiliates fairly reimburse regulated utilities for
any shared resources. States ensure compliance with these rules through
their careful scrutiny of company books and records, to which PUHCA 2005
assures access. A February 2004 Fitch Ratings report highlights the
"increasingly proactive" efforts of state commissions in these areas,
especially through their authority to approve rates:

> *\[State regulatory commissions\] generally have broad statutory
> mandates to do whatever is necessary to uphold the public interest and
> ensure that reliable service is provided at just and reasonable rates.
> This broad authority can be used to disallow from customer rates any
> financing, affiliate transaction or other operating costs viewed as
> inconsistent with the public interest.* [^6]

Last year, EEI conducted a survey of existing state laws and voluntary
utility practices. We found that under their original enabling state
legislation, most state commissions have considerable authority to
assure the financial integrity of the utilities they regulate and to
insulate and protect customers of public utilities from potential
adverse consequences of non-utility related investments or activities.
These authorities allow state commissions to address transactions
involving affiliates of a public utility and to insulate the
jurisdictional utility and its consumers from the actions of other
affiliates when appropriate. While each state commission may implement
its authority in its own manner, most state commissions have the
authority:

-   To approve the issuance of securities by the jurisdictional utility
    (or utility subsidiaries), including common stock, preferred stock,
    long-term debt, short-term debt above a certain "materiality"
    threshold, and guarantees of obligations of others.

-   To regulate the capital structure of the jurisdictional utility
    (e.g. debt to equity ratios).

-   To assure that payment of dividends by a jurisdictional utility is
    derived from retained earnings or does not lead to a deviation from
    the utility's approved capital structure range.

-   To regulate or review intercompany loans involving a holding company
    or utility affiliates.

-   To establish appropriate pricing for the sale of goods and services
    between a jurisdictional utility and affiliated companies.

-   To regulate services, transactions or contracts between a
    jurisdictional utility and its holding company or other affiliates
    companies above a material amount. Some states exercise this
    oversight though an audit or prudence-review process; others through
    a prior contract review.

-   To approve the sale or pledge of jurisdictional assets of the public
    utility.

-   To approve the acquisition of utility assets (above a material
    amount) by a public utility that would be put into rate base within
    the commission's jurisdiction.

-   To approve a sale or merger of a jurisdictional utility, including
    approval of the transfer of equity rights which provide a
    controlling interest in a jurisdictional utility.

-   To obtain needed information from the jurisdictional utility to
    ensure compliance with these other authorities through annual or
    periodic reporting, certification of status, an audit process, rate
    case filing or other methods.

Furthermore, states are continually refining and expanding the authority
of state public utility commissions over utility activities.

Congress and FERC have recognized that states play an important role in
regulating electric utility mergers and activities, and have sought to
accommodate the state role carefully in federal statutes and
regulations. Thus, the FPA provides a clear sharing of responsibilities
between states and FERC in overseeing utility activities. And similarly,
FERC regulations reflect the complementary federal and state roles.

For example, in adopting new regulations for implementing FPA section
203, FERC has been appropriately careful not to preempt effective state
regulations, but instead to review state-imposed requirements to see if
additional requirements are warranted under federal law. Applying these
regulations, FERC recently approved a proposed merger involving Puget
Energy, conditioned in part on the Washington Utilities and
Transportation Commission adopting conditions that the merging companies
proposed to have the state commission adopt to protect against
inappropriate cross-subsidization. FERC concluded that, if adopted,
those measures would fully protect against cross-subsidization without
the need for additional federal constraints. FERC therefore approved the
merger contingent on those conditions being adopted at the state level.
This is cooperative federalism in the public interest in action.

**[FERC is actively and appropriately implementing its PUHCA 2005, FPA
section 203, merger, and cross subsidy responsibilities, and does not
need additional authority that could create unnecessary burdens and
uncertainty, thus discouraging investment.]{.underline}**

Taking all the developments just discussed into account, EEI
fundamentally disagrees with the GAO report's conclusion that FERC is
not doing an active enough job at overseeing utility mergers,
acquisitions, affiliate transaction, and cross-subsidy issues. FERC
actively oversees utility mergers and acquisitions, and the Commission
has instituted a very aggressive array of regulations, accounting and
reporting requirements, and auditing and enforcement measures to protect
captive customers, promote effective markets, ensure fair competition,
prevent inappropriate cross subsidies and encumbrance of utility assets,
and provide open access to transmission. Congress has put an array of
such statutory requirements in place, and we believe these requirements
are more than sufficient and are being effectively implemented by FERC.

In addition, the Securities and Exchange Commission (SEC) oversees
company accounting, auditing, finances, and participation in financial
markets, including through implementation of the Sarbanes-Oxley Act of
2002. States oversee utility retail rates and activities, as discussed
above. And companies have voluntarily and as part of binding commitments
adopted an array of positive measures to protect customers. Taken
together, these measures provide robust assurances that the electric
utility industry operates for the public benefit, and these measures
amply protect consumers.

Requiring FERC to take additional steps toward rigid rules for corporate
and financial separation of shareholder-owned electric utilities and
their non-utility affiliate companies is unnecessary in light of the
fact that FERC and the states already have the authority to protect, and
do protect, regulated utilities and their customers from any potential
risks of affiliate businesses.

Increased federal oversight over non-utility corporate activities and
structure could create substantial barriers to investment and
competition in electricity markets, and could create unreasonable
restrictions and delays on the day-to-day business operations of
companies, contrary to what Congress intended when it modernized utility
regulation in EPAct 2005. It also could encroach upon authority
currently exercised by state utility commissions, and it would
unnecessarily duplicate, and possibly contradict, consumer protections
and corporate governance standards already in place at the federal and
state levels, including tough SEC corporate governance and accounting
standards imposed on all publicly-traded companies, not just utilities,
by the Sarbanes-Oxley Act. Furthermore, issues of affiliate transactions
and corporate financing are already addressed by state and federal
regulators, who have the flexibility to consider individual
circumstances and transactions.

Given the array of federal and state laws now in place, there is
abundant federal statutory and regulatory oversight of mergers and
acquisitions and protections against inappropriate cross subsidization
and encumbrance of utility assets. Congress does not need to add any
additional new requirements and constraints at this time.

[^1]: NERC 2007 Long-Term Reliability Assessment 2007-2016 (October
    2007), [www.nerc.com](http://www.nerc.com/).

[^2]: The 2008 and 2009 projections and the 2007 category allocation are
    based on EEI's spring 2007 study of industry capital spending based
    on SEC Form 10-K data, company presentations, and discussions with
    companies.

[^3]: Id. The "General/ Other" category includes investments that do not
    fit into the other categories listed, such as construction,
    materials, fuel processing, and mining activities.

[^4]: These numbers are based on recent analyses byVentex, Inc., an EEI
    consultant.

[^5]: These transmission and distribution investment data are provided
    in real terms (2006\$) and have been adjusted for inflation using
    the Handy-Whitman Index®.  Planned transmission investment was
    adjusted for inflation using the GDP Deflator.

[^6]: "Utility Regulatory Survey of State Public Service Commissions,"
    Fitch Ratings Ltd., February 25, 2004, p. 2.