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Comprehensive Electricity Competition Plan 

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http://www.hj.doc.gov/elcc trie/plan .htm 

m 

COMPREHENSIVE ELECTRICITY COMPETITION 

PLAN 

INTRODUCTION 

Economic forces are forging a new era in electricity policy, where electricity prices will be 

determined primarily by the market rather than by regulation. Under this new system, often 

called "retail choice," consumers arc allowed to choose their electricity supplier much like 

the choice of long distance telephone service that has existed for over a decade. Electricity 

policy is moving in this direction because subjecting utilities to competition will lead to 

increased efficiency in the industry and thus benefit the economy and the environment. 

The importance of this policy change cannot be overstated. The electricity sector is our 

nation's most capital intensive industry, holding assets with a book value in 1994 of close to 

S700 billion. It had total sales of $212 billion in 1996, larger than the telecommunications 

industry. The industry also has a significant impact on the environment. 

In the past, electricity customers did not have the ability to choose their supplier. Instead, 

under State law, utilities generally were monopolies with both a right and responsibility to 

serve all consumers in a particular area. The State permitted the utility to charge customers a 

regulated rate for electric power based on the cost of producing such power plus a "rate of 

return" on investment. 

In general, the electric monopoly system has provided reliable power to electric consumers 

in the United States. However, a monopoly system has a fundamental weakness: it does not 

provide incentives to be cost-efficient because a monopoly supplier does not have to 

compete and essentially has a guarantee that its costs will be recovered. 

Under electricity restructuring, competition will replace regulation as the primary 

mechanism to setting electricity generation prices. Utilities would be required to open up 

their distribution and transmission wires to all qualified sellers. The transmission and 

distribution of electricity would continue to be regulated because they will remain 

monopolies for the foreseeable future. The system would be restructured, not completely 

deregulated. 

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Comprehensive Electricity Competition Plan 

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THE NEED FOR FEDERAL ACTION 

We respect the actions of those States which are in the process of implementing retail 

competition, and seek to build on, rather than disrupt, those efforts. Nevertheless, effective 

retail competition cannot happen without federal legislation. First, based on the laws of 

physics, electrons do not respect State borders. Accordingly, as States remove the constraints 

of monopoly franchise territories, electricity markets will naturally become more 

regionalized. Only federal legislation can adequately address the needs of these regional 

markets. 

The electric industry is also hampered by statutes which inhibit the development of 

competitive markets. The entire federal electricity law framework dates from the New Deal 

and is premised upon State-regulated monopolies rather than regional competitive markets. 

Federal law must be updated so that it stimulates, rather than stifles, competition. 

Finally, the States alone cannot obtain the full economic and environmental benefits of 

competition for American consumers. Without comprehensive Federal electricity 

restructuring legislation, neither State nor federal regulators will have the necessary tools to 

ensure that regional electricity markets are truly competitive and operate as efficiently as 

possible. Moreover, there will be no assurances that support for renewable technologies and 

other important public puipose programs will continue absent a federal program. Without 

such tools, electricity prices will likely be higher and the environmental gains which we 

expect under the Administration's plan will not be fully realized. 

BENEFITS OF THE ADMINISTRATIONS COMPETITION PLAN 

The Comprehensive Electricity Competition Plan embodies the overall agenda of the 

Clinton Administration to expand the economy and improve the environment. We believe 

that a more competitive electricity industry will provide immense benefits to individual 

American consumers as well as being an overall boon to our economy. It will result in lower 

prices, a cleaner environment, greater innovation and new services, a more reliable power 

supply grid, and save the government money. 

The Department of Energy estimates that retail competition will save consumers at least $20 

billion a year on their electricity bills. This translates into direct savings to the typical family 

of four of $104 per year. Indirect savings, which would arise from the lower costs of other 

goods and services in a competitive market, are $ 128 per year for a typical family of four. 

Thus, total projected savings for such a family are $232 a year. 

Competition will also spark innovation in the American economy, creating new industries, 

jobs, products and services just as telecommunications reform spawned cellular phones and 

other new technologies. This will further strengthen our nation's position as the most vibrant 

and dynamic economy in the world. 

Major benefits will accrue to the federal, State and local governments through lower 

electricity prices. Total government spending on electricity was $19.5 billion in 1995. With 

competition, these costs are likely to decline by at least 10%, a savings of close to $2 billion 

year. This restructuring dividend will help governments maintain balanced budgets into the 

future while meeting critical public needs. 

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Restrucruring will also produce significant environmental benefits through both market 

mechanisms and policies that promote investment in energy efficiency and renewable 

energy. Competitive forces will create a efficient, leaner and cleaner industry. For, example, 

we estimate that our Competition Plan will reduce greenhouse gas emissions by roughly 25 

to 40 million metric tons in 2010. A generator that wrings as much energy as it can from 

every unit of fuel will be rewarded by the market Today, a monopoly supplier recovers its 

costs regardless of whether it uses its power]resources efficiently. Competition also provides 

opportunities for consumers to vote with their wallets for green power and facilitates the 

marketing of energy efficiency services alor g with electricity. 

Restructuring also makes possible the introc uction of new policy mechanisms such as the 

renewable portfolio standard and enhanced public benefit funding, which will guarantee 

substantial environmental benefits notwithstanding market outcomes. We believe that the 

environmental benefits from the Administration's restructuring plan, which includes the 

renewable portfolio standard and the public benefit fund, will outweigh any negative effects 

associated with the demand increasing effects of lower prices or other factors. 

The Administration's specifications for electricity competition legislation, outlined below, 

reflect the need for the simultaneous calibration of many elements in an interconnected 

statutory framework in order to achieve the desired bottom line: achieving the economic 

benefits of competition in a manner that is fair to all Americans and improves the 

environmental performance of the electricity industry. 

Our restructuring proposal is best understood in terms of five main objectives: (1) 

encouraging States to implement retail competition; (2) protecting consumers by facilitating 

competitive markets; (3) assuring access to and reliability of the transmission system; (4) 

promoting and preserving public benefits; and (5) amending existing federal statutes to 

clarify federal and state authority The discussion below follows this structure. 

I. ENCOURAGING STATES TO IMPLEMENT RETAIL COMPETITION 

Ten states have enacted legislation implementing retail competition. Nevertheless, in most 

of the country, electric utilities remain monopolies. We anticipate that most States will 

recognize the benefits of retail competition, Sand will implement competition on their own 

initiative. Nevertheless, the policy of the Aajministration is to encourage all States to 

embrace the benefits of retail competition. 

A. Retail Competition- Flexible Mandate 

Proposal: Support customer choice throi 

utility to permit all of its retai 

of their choice by January 1, 

utilities to opt out of the 

public proceeding, that 

alternative policy such as a 

current monopoly system. 

The Administration believes that federal leg 

mandate is the best means to obtain the 

h a flexible mandate that would require each 

customers to purchase power from the supplier 

', but would permit States or non-regulated 

competition mandate if they find, on the basis of a 

consumers in the State would be better served by an 

-crafted retail competition plan or the 

lei 

2:003, 

Stkteislation with a flexible retail competition 

economic benefits of competition while ensuring 

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that States have the opportunity to tailor their utility systems to meet their unique needs. In 

our view, this approach strikes the proper balance between the need for federal policy to 

support competition and the tradition of State determination of retail electricity policy. It 

also addresses the concerns of some low-cost States that a one-size-fits-all approach to retail 

competition could lead to increased costs in their States. Finally, the flexible mandate builds 

on State-restructuring plans that have been enacted to date, rather than disrupting them. 

The flexible mandate avoids the constitutional questions that have arisen concerning other 

retail choice proposals, because it does not require that States administer a federal law. 

Instead, States have the ability to opt out of retail competition. See Print2 v. United States. 

117 S.CT. 2365 (1997). 

B. Stranded Cost Principle 

Proposal: The Administration endorses the principle that utilities should be able to 

recover prudently incurred, legitimate and verifiable retail stranded costs that 

cannot be reasonably mitigated. States would continue to determine recovery 

of investments, including stranded cost recovery, under State law. This policy 

should also encourage the use of competitively neutral mechanisms that 

minimize to the maximum extent possible any effect of stranded cost recovery 

on the choice of supplier or product offering by purchasers of electricity. 

FERC would have "backup" authority to establish a stranded cost recovery 

mechanism if a State lacks such authority.. 

Many industry observers expect that lower prices resulting from the pressure of competition 

will eliminate or sharply reduce the ability of some utilities to recover their past investments. 

The inability to recover such past investments results in "stranded costs." Put simply, the 

implementation of a stranded cost policy requires a determination of who is responsible for 

paying the difference between the cost of production from power plants that were built when 

costs were high and today's lower prices — utility shareholders, ratepayers, or both. But these 

arc not "new" costs. Customers are paying them today. However, they must be addressed as 

part of the transition to competition or numerous utilities could be bankrupted. 

The Administration endorses the principle that utilities should be able to recover prudently 

incurred, legitimate, and verifiable retail stranded costs arising from the transition to retail 

competition, if such costs cannot reasonably be mitigated. This federal policy should 

encourage States to provide for recovery of stranded costs because resolution of this issue is 

one of the key stumbling blocks that must be surmounted in order to provide choice to 

consumers. At the same time, the fundamental authority of States to address this difficult 

issue should be preserved. Recovery of investment in generating capacity has traditionally 

been overseen or regulated by State public utility commissions. In fact thus far, all States 

that plan to implement retail competition have provided for utility stranded cosi recovery in 

some manner. Under the Administration's proposal, States would continue to determine 

recovery of investments, including stranded cost recovery, under State law. 

Nevertheless, to provide States with the ability to ensure that utilities within their borders 

can recover stranded costs, the Administration recommends that the Federal Energy 

Regulatory Commission be given the authority to provide a back-up mechanism for stranded 

cost recovery in particular instances where a State lacks authority to provide such recovery 

due to State constitutional constraints or other jurisdictional gaps. The United States 

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government would not assume any stranded cost liability in the exercise by FERC of its 

backup authority on stranded costs. 

II.PROTECTING CONSUMERS BY FACILITATING COMPETITIVE MARKETS 

Encouraging States to implement competition is a necessary but not sufficient condition for 

the realization of competitive markets. Customers, who lack experience with competitive 

electricity markets, must have adequate information so they can get the lowest possible price 

on electricity. Moreover, eliminating monopoly franchises and cost-of-service regulation 

still leaves in place the traditional vertically-integrated utility structure that may not be 

suited for efficient and effective competitive markets. 

A. Consumer Information 

Proposal: The Secretary of Energy would be authorized to conduct a rulemaking to 

require all suppliers of electricity to disclose information on price, terms, and 

conditions of their offerings; the type of generation source; and generation 

emissions characteristics.. 

Under a retail monopoly structure, electricity consumers have no ability to choose suppliers, 

so there is generally no need for information comparing the price and environmental 

qualities of different electricity suppliers. In competitive markets, many different suppliers 

will offer a diverse menu of energy products and services with different pricing and billing 

options. Consequently, consumers will need reliable information so they can compare the 

products and prices offered by suppliers and make informed choices. To address this need, 

the Administration recommends that all electricity suppliers be required to disclose in a 

uniform, easy to read label, basic information on the price, terms and conditions of service 

sufficient to enable consumers to make comparisons among various offers. 

Uniform and easy to understand labeling along the lines of the Food and Drug 

Administration's highly successful nutritional labeling system will ease customer choice. 

Research performed by the National Council on Competition and the Electric Industry 

showed that almost 60% of consumers they interviewed believed that they had enough 

information to make an informed choice when electricity products were uniformly labeled 

compared to 21% when no products were labeled. Both consumer and environmental groups 

have advocated an approach that would be modeled after the "nutrition facts" now on food. 

Details of such a labeling approach would be developed by DOE, with ample opportunity for 

public comment. 

In addition, customers may wish to make their choice of supplier based on a consideration of 

environmental factors affected by their suppliers' generation mix. Customers interested in 

purchasing electricity produced using renewable resources, natural gas or other power 

sources will need assurances that representations as to general source and environmental 

characteristics are true. Participants in State pilot programs have frequently tried to 

differentiate their products by advertising them as "green." Some of their claims have been 

misleading, if not fraudulent. For example, in the New Hampshire pilot program, one 

supplier offered electricity which it claimed was generated by hydroelectric facilities. 

However, such power was, in fact, generated by pumped storage facilities. Another supplier 

claimed that the power it was selling was not generated by either nuclear or coal facilities. 

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However, it was later learned that the power the supplier was selling as "green" power was 

in fact power generated, in part, from nuclear and coal facilities. 

In addition to protecting consumers, a disclosure provision will also protect marketers that 

are selling truly "green" power, thereby encouraging greater participation by marketers in the 

"green" power market. For example, in California, six power marketers agreed to participate 

in the "Green-E" logo program, which requires each participant to market products that are 

based on at least 50 percent renewable-energy supply. Because use of the "Green-E" logo is 

limited only to participants in the program, such participants are given assurances that their 

fellow marketers of "green" power are satisfying the same minimum standards for "green" 

power sales. ! 

i 

A number of States considering the implementation of retail competition are also exploring 

the need for consumer disclosure requirements. In fact, the National Association of 

Regulatory Utility Commissioners passed a resolution in November 1996, supporting 

initiatives to require consumer disclosure. While the Administration encourages States to 

pursue such efforts, we nevertheless believe that, given the current movement toward 

regional markets, disclosure labels within and between regions must be uniform. Absent 

uniform disclosure labels, consumers may be unable to effectively compare products offered 

by many suppliers from many different parts of the country. Moreover, uniformity in 

disclosure requirements will better enable the relevant governmental agencies to verify the 

claims made by suppliers. 

B. Public Utility Holding Company Act Repeal. 

Proposal: Repeal of substantive requirements of PUHCA. Provide FERC and State 

Commissions with additional access to the books and records of holding 

companies and affiliates of public utilities within holding companies to assist 

them in guarding against interaffiliate abuse following repeal of PUHCA, in 

.combination with the other reforms, such as additional merger and market 

power authority. 

Congress enacted the Public Utility Holding Company Act ("PUHCA") in 1935 to break up 

the giant interstate utility holding companies that had formed and to preclude the recurrence 

of holding company financial abuses. However, many of PUHCA's requirements, such as the 

requirement that a holding company operate a single integrated utility system, are not 

compatible with a more competitive electricity market. Indeed, one of the objectives of 

competition is to encourage efficient builders and operators of generating capacity to 

participate in markets throughout the nation. Accordingly, the Administration supports the 

repeal of PUHCA as pan of a comprehensive Electricity restructuring bill. 

Nevertheless, protection of consumer interests-- particularly guarding against 

cross-subsidization and abusive market power;'-- remains necessary. To assist in guarding 

against interaffiliate abuses that may disadvantage customers paying cost-of-scrvicc rates, 

FERC and State Commissions need greater access to the books and records of holding 

companies and the affiliates of public utilities within the holding companies, as well as 

additional authorities to address mergers and market power, which are discussed in the next 

two sections. The Administration would support enactment of S.621, by Senators D'Amato 

and Dodd, as part of comprehensive electric industry reform legislation. 

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C. Merger Review. 

• . 

Proposal: Establish FERC jurisdiction over the merger or consolidation of electricity 

utility holding companies and generation-only companies. FERC's review of 

mergers should be streamlined. 

A simple repeal of PUHCA would create a gap with regard to the regulation of mergers of 

public utility holding companies. Currently, FERC does not have clear jurisdiction over 

public utility holding company mergers or consolidations; such mergers are now subject to 

review by the SEC under PUHCA. Accordingly, section 203 of the Federal Power Act 

should be modified to provide FERC with jurisdiction over the merger of public utility 

holding companies. In addition, FERC docs not have jurisdiction over generation facilities. 

In a largely deregulated generation market, mergers of generation-only utilities could result 

in market power in the generation market and the FPA should therefore be amended to 

provide FERC with jurisdiction over the merger of these entities. Finally, to further 

streamline the Commission's review process, section 203 of the FPA should be amended to 

clarify that an on-the-record hearing is not required for each merger application. 

D. Authority to Address Market Power 

Proposal: Authorize FERC to remedy wholesale market power if FERC finds market 

power in wholesale markets. Authorize FERC, upon petition from a State, to 

remedy market power in retail markets if the State is implementing retail 

competition, finds market power, and has insufficient authority to remedy the 

market power. FERC would be authorized in these circumstances to require 

generators with market power to submit a plan to mitigate market power, 

which FERC could approve with or without modification. FERC would be 

authorized to order divestiture to the extent necessary to mitigate market 

power.. 

The Commission's recently issued rules requiring open and comparable access to 

transmission services and information (Order Nos. 888 and 889) should, when fully 

implemented, largely mitigate market power associated with the control of transmission 

facilities. However, open transmission access will not, by itself, prevent the exercise all 

forms of market power in electricity markets. A utility can possess market power simply as 

the result of its ownership of all or substantially all of the generation facilities within a 

market. However, the mere presence of market power would not trigger application of the 

antitrust prohibitions. In addition, physical transmission constraints could limit the 

geographic scope of markets especially during certain seasons or time periods. 

FERC currently has the authority to condition merger applications to remedy any potential 

market power. Absent a merger application, FERCs only other available tool to address 

market power is to deny a request for market-based rates. However, such action would 

severely impede the Commission's ability to promote wholesale competition. To ensure that 

the development of competition is not hindered by the exercise of market power, the FPA 

should be amended to give the Commission the authority to remedy concentrations of 

market power in the wholesale market, including the authority to order the divestiture of 

assets, if such market power is found. 

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Under die Administration's approach, States n tain the primary responsibility for 

implementing retail competition. In opening t ieir markets to competition, States are likely to 

address market power problems. However, be ;ause of the regional nature of many markets, 

a State may be presented with a market power problem that extends beyond its borders and 

its jurisdiction. Accordingly, the Administration recommends that FERC be authorized to 

provide "backup" market power remedies, including divestiture of assets, if a State is 

implementing retail competition, finds that onp or more suppliers have market power in 

those retail markets, has insufficient authority 

FERC to take action. Given that a requiremen 

to remedy the market power itself, and asks 

to divest assets is an extraordinary remedy, 

FERC should in the first instance consider pre posals by the generators possessing market 

power on how to mitigate market power through less intrusive means. FERC would'be 

authorized to order divestiture only to the extt nt necessary to mitigate market power. 

HLASSURINC ACCESS TO AND RELIABILITY OF THE TRANSMISSION 

SYSTEM 

To realize a fully competitive market, transmission must be available on a 

non-discriminatory basis, must be reliable, ana must be adequate to accommodate the many 

and required transactions. In a regulated market, the regulated utilities worked in tandem 

with their regulators and neighboring utilities to ensure that the transmission system was 

adequate and secure. However, a competitive market will require a different approach. 

A. Strengthen Electric System Reliability 

Proposal: The Federal Power Act should Be amended to require FERC to approve the 

formation of and oversee a private self-regulatory organization that 

prescribes and enforces mandatory reliability standards.. 

The electric utility industry, dirough a traditi 

has performed admirably in maintaining relial 

highly competitive market environment, a di 

will be pressures to cut costs and to drive the 

economic value out of them as possible witho] 

since many transmission owners will also be 

business, there may also be an incentive to exi 

transmission system for economic purposes, 

of voluntary self-regulation and cooperation, 

ility over the past thirty years. However, in a 

ferent mix of incentives will be at work. There 

owcr grids harder, to squeeze as much 

t causing a system breakdown. Moreover, 

the power generation and marketing 

rcise control over strategic parts of the 

rhaps using reliability concerns as a pretext. 

As a result, we need to establish through fedetal legislation a framework that will build upon 

and maintain the industry's tradition of self regulation, but require all panicipants in physical 

electric transactions on the grid to comply with mandatory reliability standards. The FPA 

should be amended io give FERC the authority to approve and oversee a self-regulating 

organization that will prescribe and enforce rnandatory electric reliability standards. Federal 

oversight is required to provide legal support for a private self-regulating structure. Under 

this approach, FERC will be given the authorny to review all mandatory reliability standards 

developed by the self-regulating organization to ensure that they are in the public interest 

and reflect an appropriate level of reliability. fERCs review of such standards will also give 

recognition to the technical expertise of the si 

self-regulating system will be open to all entii ies that use the bulk-power system and should 

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be required for all entities whose behavior is c itical to system reliability. Under the 

oversight of FERC, the private self-regulating organization system will monitor compliance 

with the reliability standards and, when neccss ary, enforce compliance with the standards. 

The Department of Energy's Task Force on Ellsctric System Reliability, an independent 

advisory body chaired by Dr. Philip Sharp, the former Chair of the U.S. House of 

Representatives Energy and Power Subcommi [tee, has submitted findings and 

recommendations to DOE regarding an appro] date reliability framework. These 

recommendations serve as the foundation for our proposal. 

B. Authority to Establish and Require Independent System Operation 

Proposal: Amend the FPA to provide FERtV with the authority to require transmitting 

utilities to turn over operational\control of transmission facilities to an 

-independent system operator. . 

As a result of Order No. 888, all public utilities are required to provide open and non 

discriminatory access to transmission facilities for wholesale buyers and sellers. This rule is 

intended to reduce a transmission owner or op srator's ability to discriminate in the provision 

of transmission services. However, separation of the operation and control of transmission 

facilities from generation through participatio: i in an independent system operator (ISO) 

structure would greatly reduce the risk that op sration of the transmission system could be 

distorted to favor some generators or customers over others. 

The benefits of the independent operation of 

regional-scale ISOs addresses concerns about 

owners. An efficiently dispatched and proper! 

absent the establishment of regional independj 

some transmission operators to join an ISO c 

entities. 

le transmission system are clear. A network of 

the exercise of market power by transmission 

priced bulk power system might not develop 

:nt system operators. Yet, the unwillingness of 

ild prevent the successful formation of such 

FERC's authority to require an investor-ownejl utility to join an ISO is not clear, and it 

appears to have no authority to require either public power or cooperative entities to join an 

ISO. We propose that FERC be given the authority to require that any transmission owner, 

regardless of its ownership structure or FERC s jurisdiction over other aspects of its 

operations, participate in an ISO, and to set ot ler requirements pertaining to ISOs as needed 

to serve the public interest. 

C. Regional Transmission Planning Agencies 

Proposal: Amend federal law to encouragt the development of regional transmission 

planning and siting groups.. 

recog tize 

The electric utility industry is moving 

regional Independent System Operators 

to achieve greater economic and system effici 

regional market requires the effective plannin 

and distribution facilities. A regional 

the needs of an evolving regional market. 

towardfregional markets. The recent proposals for 

the importance of aiding regional markets 

ncy. However, an effective and efficient 

; and siting of new generation, transmission 

transmission planning agency would best respond to 

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An interstate compact would be necessary to t ursue regional planning and siting, and such a 

compact must be approved by Congress. The < Administration supports legislation which 

would provide the required Congressional cor sent for compacts which FERC finds meet the 

specified criteria relating to the workability oil the structure, that is, each participating State 

has given the regional agency a uniform grantjof authority and decisionmaking rules do not 

involve supermajority requirements that could stalemate the body. This authority to approve 

regional planning bodies would supplement, t ot replace, the current joint board authority 

found in section 209 of the FPA. 

IV. PROMOTING AND PRESERVING PUBLIC BENEFITS 

Existing programs providing support for rene\ 

benefits were designed for a system of regul < 

modification to continue their important cont 

economic policy goals within the context of a 

proposal on restructuring includes provisions iiat promote the continued pursuit of public 

able energy and other important public 

d markets. These programs require 

bution towards meeting environmental and 

competitive market The Administration's 

interest goals, including improving air quality 

markets. 

within the framework of competitive 

A. Secure The Future of Renewable Electricity Through a Renewable Portfolio Standard 

Proposal: Adopt a federal Renewable Port foil 

minimum level of additional renewable 

States. The RPS would require 

their electricity sales with ge.nerh.tion ft 

technologies such as wind, solai, 

requirement would be initially s it 

to retail electricity sales project '.d 

an intermediate increase in RPS 

to 5.5% in 2010. 

The RPS should be subject to a cost cap. 

o Standard (RPS) to guarantee thai a 

generation is developed in the United 

ectricity sellers to cover a percentage of 

torn non-hydroelectric renewable 

biomass or geothermal generation. The RPS 

close to the ratio of RPS-eligible generation 

under baseline conditions. There would he 

requirement in 2005, followed by an increase 

Repeal \y"> prospectively the "must buy" provision of section 210 of the Public 

Utility Regulatory Policies Act (mJRPA), but preserve existing contracts and 

exemptions. 

Retail competition itself has the potential to s: gnificantly increase renewable energy's share 

of the electricity market, because it will allow environmentally-conscious consumers to 

support green energy technologies with their wallets. Nonetheless, the inherent uncertainty 

of the transition to competition, the recognition of important environmental and energy 

diversification benefits from renewables, andjthe fact that existing PURPA requirements and 

State initiatives to promote renewable energylare both incompatible with competition and 

ineffective under present market conditions a l suggest that federal policy towards renewable 

electricity should be revisited in the context cr restructuring. To this end, the Administration 

supports a federal Renewable Portfolio Stand lrd that would require all electricity sellers to 

cover a percentage of their electricity sales wi th generation from non-hydroelectric 

renewable sources such as wind, solar, biomaEs or geothermal energy. 

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Retail sellers could meet the proposed RPS ret uirement by generating sufficient renewable 

electricity to meet the coverage ratio, by purer asing tradeable renewable electricity credits 

(RECs) that would be created and tracked for i sach unit of RPS-cligiblc renewable electricity 

produced, or by some combination of these strategies. In contrast to the facility-based 

requirement of PURPA, our proposed definition of eligible renewable generation focuses 

directly on the use of renewable fuels or sources. All generation using RPS-cligiblc 

renewable fuels or sources could receive RECs, regardless of whether the fuels are used in 

new or existing facilities or whether the electricity generated from eligible renewable 

sources is sold on the grid. Where RPS-cligibjc and non-RPS eligible fuels are used in the 

same facility, RECs would be awarded based on the proportion of RPS-cligible renewable 

fuel multiplied by total generation. However, sources that elect the kind of net metering 

discussed in a later section of this Plan could not also receive RECs. 

The Administration proposes that the RPS requirement be initially set close to the ratio of 

RPS eligible generation to retail electricity safes projected under baseline conditions. There 

would be an intermediate increase in the RPS requirement in 2005, followed by an increase 

to 5.5% in 2010. The RPS would expire in 20&5, when me economics and benefits of 

renewable technologies are expected to be finely established. The RPS would include a 

provision for banking of RECs, to encourage a smooth and continuous ramp-up of 

renewable electricity production during die interval between RPS adjustment points. In 

addition, our proposal provides for a backup cost cap to hold program costs below a 

pre-specified ceiling. The market-based approach of the RPS mechanisms and the cost cap 

will assure diat wc maintain a reasonable balance between the costs of the RPS program and 

its environmental and energy independence benefits, and will strongly encourage efforts to 

reduce the costs of renewable electricity gene: ation technologies. 

PURPA, enacted in 1978, fostered the commercialization of renewable energy through 

section 210's requirement diat a utility purchase power from cogenerators and renewable 

energy facilities (QFs) at the utility's avoided :ost. Section 210 has had die incidental benefit 

of introducing competitive procurement practices in the electric utility industry. However, in 

competitive markets, the market access protections for qualifying facilities (QFs) provided 

by Section 210 of PURPA are no longer needed to ensure fair opportunities for non-utility 

power producers. Moreover, it is unreasonable to apply a "must buy" requirement to electric 

utilities in a competitive market, where they have no captive customers required to pay a 

premium for QF power. Further, under present market conditions, PURPA is not an 

effective mechanism to support renewable energy technologies. 

The RPS employs market forces through renewable energy credit trading, and spreads the 

cost of supporting renewable generation more evenly across the retail electricity market than 

does PURPA's "must buy" provision. It also avoids the need for troublesome regulatory 

determinations regarding "avoided cost." We therefore propose to repeal the "must buy" 

provision of section 210 of PURPA prospectively in favor of a more flexible and 

economically efficient renewable portfolio standard. However, die amendments to PURPA 

should clarify thai existing contracts would not be affected by any prospective change in the 

obligation to purchase under section 210. Moreover, the regulatory exemptions under 

applicable federal and State law for existing QFs should also be preserved together with 

their right to interconnection, backup and starjdby power on reasonable terms. 

It should be noted that odier elements of the Administration proposal will also encourage the 

development of renewable electricity generation. These include consumer disclosure 

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requirements, which should further help the development of renewable energy, and a net 

metering provision that is likely to be of particular benefit to small scale solar generation 

technologies. In addition, States may provide idditional support to renewable technologies 

through the public benefit fund. 

B. Encourage and Support Continued Funding for Public Benefit Programs 

Proposal: Create a $3 billion per year public benefit fund to provide matching funds to 

States for low-income assistance* energy efficiency programs, consumer 

- education and the development and demonstration of emerging technologies, 

particularly renewables. 

The Administration supports the creation of a $3 billion per year public benefit fund (PBF) 

to provide matching funds to States for low-in come assistance, energy efficiency programs, 

consumer education and the development and demonstration of emerging technologies, 

particularly renewables. The PBF would be fi nded through a generation or transmission 

interconnection fee on all electricity, capped at 1/10 of one cent (1 mill) per kilowatt-hour. It 

would be overseen by a Joint Board composed of Federal and State officials who would set 

standards for fund eligibility. States would have the flexibility to decide whether to seek 

funds and how to allocate funds among public purposes. Within each State, programs such 

as renewable development and energy efficiency should compete for funds on the basis of 

cost-effectiveness. The PBF will sunset after 5 years of operation. 

The introduction of competition itself should provide important public benefits, as sellers 

will have a strong incentive to add value to and differentiate their products in ways diat will 

provide such benefits. Initial experience with pilot programs and nascent competition 

suggest that, as strategies to attract and retain customers, companies will provide bundled 

packages of electricity and efficiency services i 

sell renewable ("green") power as a premium product to environmentally-conscious 

consumers. 

(instead of a "raw electricity" commodity) and 

Nevertheless, if not properly implemented, retail competition could lead to reduced support 

. i for electricity-related programs mat provide important public benefits. Under cost-of-service 

regulation, programs supporting and promoting renewable generation, energy efficiency and 

low income assistance were supported in part through utility rate structures, and utilities 

recovered the costs of approved programs witfiin their monopoly service area as a part of me 

overall cost of service. As utilities prepare foi 

include in their rates die cost of programs not 

competition, such entities will be unwilling to 

included in the rates of their competitors. 

Moreover, although transmission and distribution will remain regulated, public benefits 

programs will suffer if States do not continue to require funding for tiiese programs. 

A number of States that plan to open their electricity 

already planning to recover die costs of certai i 

non-bypassablc distribution charge on all elecjtricity 

encourage and support die creation of diese 

structured to give States the flexibility to allocate 

addresses unique State or local needs. A fedei al 

the activities in question provide public benefits 

proposed matching fund amount of $3 billion 

preserve the current level of support States provide 

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markets to retail competition are 

public benefit programs through a 

customers. A federal PBF will both 

programs at the State level, and can be 

public benefit funding in a manner that 

PBF is also justified by the fact that many of 

s that transcend State boundaries. Finally, the 

will encourage States, at a minimum, to 

for public purpose programs, estimated 

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Lower-cost renewable technologies such as wind, 

considerable support through current utility 

Renewable Portfolio Standard. No "double 

projects. Such projects could only receive 

instance could receive support from both mechanisms 

geothermal and biomass, which receive 

rates, would be supported primarily through the 

dipping" would be permitted for renewable 

sup port from either the RPS or die PBF, but in no 

C. Net Metering 

Proposal: Make all consumers eligible for 

service providers assure the 

appropriate nondiscriminatory 

only to very small (up to 20 kW) 

a cap determined at the state 

10014 

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net metering and require that all distribution 

availability of interconnection, subject to 

safety standards. The provision should apply 

renewable energy projects, and be subject to 

level. 

Net metering provides an incentive for electricity users to install small-scale on-site 

renewable generation sources (such as the rooftop solar photovoltaic panels featured in the 

President's Million Solar Roofs Initiative announced in June, 1997) in order to reduce 

electricity generation from conventional sources. The net metering customer maintains the 

benefit of connection to the power network, bit saves on both transmission and distribution 

charges and power charges when renewable e lergy is being generated either for use or for 

resale to the grid. 

A federal requirement to provide net metering arrangements would provide support for 

dispersed, small, renewable generation resources. Accordingly, die Administration 

recommends mat all consumers be made eligible for net metering. The provision should also 

require that all distribution service providers assure the availability of interconnection, 

subject to appropriate nondiscriminatory safety standards. Such non-discriminatory 

interconnection standards would apply to all reasonable interconnection requests. Finally, 

the provision should apply only to very small (up to 20 kW) renewable energy projects. 

P. Nitrogen Oxide Trading Authority 

Proposal: Clarify EPA authority to require a cost-effective interstate trading system for 

nitrogen oxide (NOx) pollutant rzductions addressing the regional transport 

contributions needed to attain a rd maintain the Primary National Ambient 

Air Quality Standards (PNAAQ11) for ozone. No change is proposed to 

existing EPA authority to determine geographic coverage or level of 

reductions required in addressb \g regional transport contributions. 

Our restructuring proposal is likely to provide 

emissions of nitrogen oxides (NOx) and carbon 

2010. Notwithstanding tiiese benefits, the work 

(OTAG), a multi-year consultative process th it 

interest groups, and electric utilities throughout 

further substantial reduction in NOx emissions 

ambient health-based standard for ozone in thp 

source of NOx emissions. 

net benefits to the environment by reducing 

dioxide relative to baseline projections for 

of die Ozone Transport Assessment Group 

included representatives from states, public 

the Eastern United States, suggested that a 

over a wide area is needed to attain the 

Nortfieast Electric generators are a major 

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In November 1997, the Environmental 

regional transport of NOX emissions tiiat 

Air Quality Standard for Ozone dirough a set 

eastern States and the District of Columbia 

Clean Air Act. EPA's proposal is based on die 

Protection Agency (EPA) proposed to address the 

contibute to violations of the Primary Ambient 

c if NOX emissions budgets to apply to 22 

undfer audiority provided in Section 110 of the 

work of OTAG. 

Bom the air quality and economic interests favor 

to achieve the emissions reductions necessary 

To mis end, EPA has proposed to allow interstate 

However, States may be reluctant to take advantage 

therefore proposes to clarify EPA's authority to 

oxides. 

use of efficient market-based instruments 

to address adverse regional transport impacts. 

trading of budgeted emissions allowances, 

of this flexibility. The Administration 

require a cap and trade system for nitrogen 

Our proposal would not affect either the level 

area over which reductions should be made, tc 

ongoing regulatory processes under existing 

addressing these technical issues. 

af emissions reductions, or the geographic 

jaddress regional transport of emissions. The 

statutory authority are the appropriate venue for 

E. Air Emissions 

The Administration believes that retail compe' 

air and a down-payment on greenhouse gas 

Competition Plan will reduce greenhouse gas 

the year 2010. 

As previously discussed, our plan includes a 

annually (1.0 mill/kWh,) to match State 

renewable energy, and other public benefit 

consumers identify and choose power from 

Renewable Portfolio Standard, to require that 

generated from non-hydroelectric renewable 

provision encouraging the installation of smal 

NOX for emissions, to facilitate cost-effective 

we expect that retail competition will strength 

reduce the iwo-diirds waste of energy currently 

electricity — tiicreby further cutting greenhouse 

pollution, and conserving fuel. 

We believe that our plan will produce cleaner 

http://www.hr.drtt.gov/electric/plan.htm 

i'tion will deliver economic savings, cleaner 

emissions reductions. We estimate diat our 

amissions by 25 to 40 million metric tons by 

Rublic Benefits Fund of up to $3 billion 

comnltments for financing energy efficiency, 

programs; "green labeling" provisions to help 

environmentally friendly generators; a 

at least 5.5 percent of electricity sales be 

sources, subject to a cost cap; a net metering 

renewable systems; and trading authority 

,'•• market-driven NOX reductions. In addition, 

sn incentives to improve efficiency, and 

associated with fossil-fuel generation of 

: gas emissions, saving money, reducing 

air and reduced greenhouse gas reductions, 

although the precise impacts are difficult to predict We intend to work with die Congress to 

ensure that any unanticipated consequences atje addressed quickly and in keeping with die 

Administration's climate change policies. 

Therefore, tiiose making investment decisions 

recognize the Administration's strong commitment 

the timetable set out in the President's climate 

Congress for carbon cap-and trade authority 

restructuring proposal. The Administration's 

authority to be in place by 2008, and the Administration 

Congress whatever legislative vehicle is most 

through the period of restructuring should 

to reducing greenhouse gas emissions on 

change policy. We are not asking this 

jipart of die Administration's electricity 

climate change policy calls for cap-and-trade 

will consider in consultation with 

appropriate for this purpose. 

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In Uie meanwhile, die Administration will sec]: to ensure tiiat we have accurate, accessible 

data on the progress toward cleaner air and carbon dioxide reduction. Under current law, the 

utility industry reports various types of emissions. The Administration intends to ensure that 

the relevant Federal agencies coordinate die data received on emissions from the utility 

sector and then provide such data in annual reports to the President. 

F. Rural Safety Net 

The Administration is confident diat a properl y structured retail competition system will 

benefit consumers in all parts of the nation, in :luding rural areas. Nevertheless, the 

Administration is mindful of the possibility diat in cenain cases competition could have 

adverse impacts in rural areas where the cost of delivering electricity to consumers is 

relatively high. Accordingly, a rural safety net should, if necessary, be established to address 

any unintended consequences arising from die transition to retail competition. DOE and 

USDA staff are currentiy working togedier on 

competition on rural areas. 

V. AMENDING EXISTING FEDERAL STATUTES TO CLARIFY FEDERAL AND 

analysis to determine die likely impact of 

STATE AUTHORITY 

The existing Federal regulatory framework fo • die electric power industry was established 

early in die New Deal widi the enactment of the Federal Power Act and the Public Utility 

Holding Company Act. The State regulatory structure, for die most part, preceded tiiese 

federal statutes. This regulatory framework has remained essentially unchanged: 

vertically-integrated utilities enjoy die advantages of monopoly franchise territories and 

authorized rates of return on investment, in exchange for an obligation to serve all customers 

widiin tiieir respective service territories at regulated rates. 

The federal statutory framework does not rea dily accommodate individual State initiatives to 

institute competition among retail suppliers. In fact, certain federal statutes which were 

drafted in the context of cost-of-service regulation may prove unworkable in a restructured 

market. Moreover, FERC may be unable to fully implement its open-access policy absent 

increased audiority under die Federal Power / >ct. Amendments to the Federal Power Act 

will be necessary in order to enable botii FERC and the States to implement competition 

effectively. 

A. Clarify Federal Jurisdiction 

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Proposal: Provide FERC with clear authority to order retail transmission in a 

transmission system other than where the end user is located to complete an 

authorized retail sale. 

Reinforce FERC jurisdiction over rales, terms, and conditions of unbundled 

retail transmission. 

Reinforce FERC authority relied upon to promulgate Order No. 888. 

Provide that FERC's open access rules apply to municipal utilities, 

cooperatives, the Tennessee Valley Authority (TVA), and Federal power 

marketing administrations (PMAs), with the proviso that, with respect to the 

PMAs, TVA, and cooperatives financed by the Rural Utilities Service, it may 

be necessary in some instances to adopt special stranded cost mechanisms to 

take into account the unique facts and circumstances surrounding these 

federal investments or loans. 

A number of technical changes to the Federal Power Act (FPA) are needed to ensure that the 

jurisdiction of the Federal Energy Regulatory Commission (FERC) is sufficient to protect 

consumers in the newly competitive framework in electricity markets. First, FERC should 

have clear authority to order transmitting utilities to provide retail transmission in a utility 

system other than where the end user is located if needed to complete a State-authorized 

retail sale. This clarification of the law is necessary to ensure that transmission system 

owners in one system do not have the ability to frustrate State-sanctioned retail sales in 

another system. In addition, FERCVjurisdiction over rates, terms, and conditions for 

unbundled retail transmission should be clarified to avoid the potential burden of duplicative 

and potentially conflicting regulation in this area by providing FERC with jurisdiction over 

such transmission. 

In 1996, FERC issued its landmark orders (Order Nos. 888 and 889) requiring jurisdictional 

utilities to file open access transmission tariffs. This was a critical step in opening markets to 

competition. However, FERC's authorities to require the filing of open access tariffs and to 

allow for die recovery of stranded costs resulting from die implementation of open access 

have been challenged. To ensure that open access will be implemented widiout any cloud of 

legal uncertainty, the FPA should be amended to remove any doubt that FERC has die 

autfiority to require die filing of open access tariffs by rule without a hearing and that FERC 

has die authority to allow utilities to recover stranded costs resulting from implementation of 

the open transmission access requirement. 

Order No. 888 applies to public utilities, but it does not apply directly to entities such as the 

Federal power marketing administrations (PMAs), rural electric cooperatives, and 

municipalities. Effective wholesale competition requires diat suppliers and purchasers of 

electricity have1 comparable access to all necessary transmission facilities. Limiting open 

access tariff requirements to those utilities subject to the Commission's ratemaking 

jurisdiction would constrain and distort the development of competitive power markets. 

Accordingly, to provide for greater and more efficient competition, the transmission rates, 

terms and conditions of non-jurisdictional utilities should be subject to the Commission's 

jurisdiction and open access rules. 

While the Administration supports the mandatory application of the Commission's open 

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access requirements to non-jurisdictional utilities, with regard to the PMAs, the Tennessee 

Valley Audiority (TVA), and rural electric cooperatives financed in part by the Department 

of Agriculture Rural Utility Service (RUS), the Administration supports such application 

with die proviso that it may be necessary in some instances to adopt special stranded cost 

aumorities diat take into account the unique facts and circumstances surrounding these 

-federal investments or loans. This is an imponant issue because the combined debt of RUS, 

TVA. and ihe Bonneville Power Administration (BPA) is over $70 billion. One possible 

approach is to autiiorize the Commission to suspend or modify the application of open 

access requirements to these entities for specified periods if it finds that adequate stranded 

cost mechanisms are not in place (see also discussion below regarding role of Federal power 

agencies). 

Wc arc pleased to note diat flic PMAs are acting voluntarily to comply witii FERC open 

access requirements. The Bonneville Power Administration's (BPA) open access 

transmission tariff has been conditionally approved by die Commission and die other PMAs 

that own transmission, die Western Area and Southwestern Power Administrations, filed 

open access tariffs in December 1997 for review and approval by die Commission. 

B. Clarify State Jurisdiction to Implement Retail Competition 

Proposal: Amend the Federal Power Act (FPA) to clarify that it does not preempt States 

from ordering retail competition. 

Amend the FPA to clarify that it does not preempt States from imposing a 

charge on the ultimate consumers receipt of electric energy. 

The FPA should be amended to clarify that it does not preempt States from ordering retail 

competition. At least two State retail competition plans have been challenged on these 

grounds, and other such challenges are likely if this matter is not addressed. The FPA should 

also be amended to clarify mat it does not preempt States from imposing a charge on the 

ultimate customer's receipt of electric energy. Such charges arc being used by States to allow 

for the recovery of stranded costs and to fund public benefits programs. 

C. Clarify State Authority to Impose Reciprocity Requirements 

Proposal: Provide States that have implemented retail competition with the authority to 

preclude an out-of-state utility with a retail monopoly from selling within the 

State unless that out-of-state utility permits customer choice. 

Retail competition will enable currently captive retail customers to purchase power from 

alternative suppliers. Such competition will likely result in some utilities losing a portion of 

dieir existing load to outside suppliers. If neighboring utilities allow retail competition, the 

utility with surplus power due to the advent of retail competition in its own formerly 

exclusive service area could mitigate or eliminate stranded costs by selling its surplus to die 

customers of these utilities. However, if neighboring utilities are not subject to a retail 

competition requirement, a utility in this situation would have greater difficulty in mitigating 

its losses and the amount of its stranded costs would likely increase. 

States can assist utilities in gaining access to die customers of utilities over which the State 

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has no ratemaking audiority ("extra-jurisdictional utilities") by imposing a reciprocity 

requirement. Such a requirement would condition an extra-jurisdictional utility's access to 

customers of the jurisdictional utility on the extra-jurisdictional utility's providing retail 

access to its own customers. However, some States have expressed concern that the 

Commerce Clause would limit their ability to impose reciprocity requirements on 

extra-jurisdictional suppliers. To provide States with clear authority, the Federal Power Act 

should be amended to provide States widi the audiority to impose a reciprocity requirement 

on all extra-jurisdictional suppliers of electricity within die United States. 

A Commerce Clause challenge could also be raised with respect to a State's attempt to 

prevent low cost indigenous power from being sold to customers outside die State following 

implementation of retail competition, which could have die effect of increasing electricity 

rates for in-State consumers. We are considering whether States should be given specific 

authority to preserve such low-cost indigenous power following implementation of retail 

competition. 

D.The Appropriate Role of Federal Power Agencies 

The Administration is also considering die question of the appropriate role of the federal 

power agencies, particularly BPA and the Tennessee Valley Authority (TVA), in the new 

competitive market. The Administration is favorably inclined toward die recommendations 

made concerning BPA by the Comprehensive' Review of the Northwest Energy System, a 

public stakeholder process sponsored by the Governors of Washington, Oregon, Idaho and 

Montana. However, issues such as stranded costs, which were not adequately addressed by 

the Review, must be resolved before we have a complete blueprint for adapting BPA to 

competition. Appropriate resolution of this matter is critical to assuring that the costs and 

liabilities associated with Bonneville, including Federal and Washington Public Power 

Supply System debt, continue to be borne by die beneficiaries of the Bonneville system, not 

Federal taxpayers. The Northwest Governors Transition Board is addressing die stranded 

cost issue, and we look forward to receiving its recommendations. 

The Administration is also considering the issue of the introduction of botii wholesale and 

retail competition to the TVA service area. As a first step, we have established the 

independent Tennessee Valley Electric System Advisory Committee, under the audiority of 

the Secretary of Energy Advisory Board, and chaired by former Congressman Butier 

Derrick. The Committee is comprised of a broad spectrum of TVA stakeholder and is 

working togedier to develop recommendations for restructuring the power activities of TVA. 

We expect them to provide us with a broad framework for bringing competition to TVA and 

restructuring its operations. We look forward to the committee's recommendations, which it 

intends to produce by March 31, 1998. 

VI. MISCELLANEOUS PROVISIONS 

A.Amendment to Bankruptcy Reform Act 

R 

Proposal: Amend the Bankruptcy Act to make nuclear decommissioning costs a 

nondischargeable priority claim. 

Nuclear decommissioning costs should be a nondischargcablc priority claim in a bankruptcy 

proceeding, which would ensure that no licensee would be able to avoid decommissioning 

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liability. Section 503(b) of the Bankruptcy Reform Act of 1978 should be amended to 

provide diat such costs should be a nondischargeable priority claim. 

B.EIA Study of Impacts of Competition 

Proposal: The Energy Information Administration should be directed to study the 

impacts of wholesale and retail competition. 

The collection of information relating to the impacts of wholesale and retail competition will 

be critical to die Federal and State governments' respective examinations of whether 

customers are receiving die economic benefits of an efficient competitive market, to 

suppliers' efforts to operate and plan efficiently, and to consumers' decisions as to which 

supplier of electricity best meets their needs. Provisions which would more thoroughly 

specify die information autiiorized to be collected by the Administrator for a study on the 

impacts of competition would enable die Energy Information Administration to justify 

collection of this information, especially to reluctant information providers. Accordingly, the 

Administration recommends legislation to direct such an EIA study, and to authorize EIA to 

collect the necessary information. 

C.Effect on operation of antitrust laws 

Proposal: Provide that nothing in the new legislation affects operation of antitrust laws. 

Continued and effective operation of the antitrust laws is of critical importance in the 

successful implementation of retail competition. Accordingly, die Administration 

recommends die inclusion of an antitrust savings clause which provides that nothing in the 

legislation would be construed io modify, impair, or supersede die operation of the antitrust 

laws. 

D.EIiminate antitrust review bv Nuclear Regulatory Commission 

Proposal: Eliminate antitrust review by NRC. 

Section 105c of the Atomic Energy Act (AEA) requires antitrust reviews by the Nuclear 

Regulatory Commission in connection with applications for an NRC license to construct or 

operate a commercial utilization or production facility. However, such reviews are no longer 

necessary in light of the authority of die Justice Department and die Federal Energy 

Regulatory Commission witii respect to utility market power issues. Thus, die 

Administration recommends diat section 105c be stricken from the Atomic Energy Act. This 

amendment to the AEA would nevertheless leave intact existing antitrust license conditions 

and the NRC's authority to enforce those existing conditions. 

E. Taxes 

(1) Nuclear Decommissioning Costs 

Proposal: Amend the Internal Revenue Code relating to deductions to a qualified 

nuclear decommissioning fiend. 

The amount of contributions to a qualified nuclear decommissioning fund a utility is entitled 

to deduct under section 468A of die Internal Revenue Code is the lesser of the 

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"cost-of-service" amount or the "ruling amount." In a restructured market, if a nuclear power 

plant is no longer subject to cost-of-service ratemaking, it could be determined that the 

amount of decommissioning costs included in cost-of-service would be zero. Because the 

amount qualified for die tax deduction is the lesser of the amount included in the cost of 

service or the ruling amount, die tax deduction would then be zero. To address this problem, 

section 468A needs to be amended. 

(2) Tax-Exempt Bonds 

Proposal: Amend the Internal Revenue Code to provide that (I) private use limitations 

are inapplicable to outstanding bonds for publicly-owned generation, 

transmission or distribution facilities if used in connection with retail 

competition or open access transmission, and (2) tax-exempt financing is 

unavailable for new generation or transmission facilities. Tax-exempt 

financing would continue to be available for distribution facilities subject to 

current law private use limitations. 

Restructuring of the electric utility industry forces a reexamination of the rules governing the 

use of tax-exempt bonds to finance facilities for the generation, transmission and 

distribution of electricity. The basic framework of current law rules was established to fit an 

era when individual electric systems, whether privately or publicly-owned, operated witiiin 

clearly defined service territories and when the wheeling of power was not widely practiced. 

The basic premise of these rules is that tax-exempt bond financing is not generally available 

for facilities used io a significant extent by private persons in a capacity other than as a 

member of the general public. As die industry moves toward a more efficient, integrated 

structure, transmission and distribution facilities financed in prior years with tax-exempt 

bonds need to be open to use by private firms in the business of generating electricity. Public 

power systems are expected to participate in restructured environments that allow 

competing, private generators of electricity to sell to customers who formerly had no option 

but to be supplied by those public systems. 

The efficiency and equity of a restructured industry depends upon leveling the playing field 

with respect to capital costs while at the same time ensuring diat publicly-owned facilities 

are not discouraged by the federal income tax rules from fully participating. 

Accordingly, the Administration recommends that facilities financed with.outstanding 

tax-exempt bonds should be free from die private use limitations provided that (i) such 

facilities continue to be owned by public entities, and (ii) such generation, transmission and 

distribution facilities are used in connection with retail competition or open access 

transmission- The Administration further recommends that new generation and transmission 

facilities be ineligible for tax-exempt bond financing. The Administration recognizes that 

certain situations may warrant transition or other relief and would like to work with 

Congress to identify such situations and develop appropriate relief measures. Tax-exempt 

financing would continue to be available for distribution facilities subject to current law 

private use limitations. 

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r^mgntctoWrhmftster | PPI..TM tn r>OF. Home Page I Updated: 03/25/98 

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