U.S. GOVERNMENT PRINTING OFFICE

59–318 u WASHINGTON : 1999

HEARING ON THE ROLE OF THE POWER MARKETING ADMINISTRATIONS IN A RESTRUCTURED ELECTRIC INDUSTRY

HEARING

BEFORE THE

SUBCOMMITTEE ON WATER AND POWER

OF THE

COMMITTEE ON RESOURCES

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

JUNE 24, 1999, WASHINGTON, DC

Serial No. 106–51

Printed for the use of the Committee on Resources

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

or

Committee address: http://www.house.gov/resources
(II)

COMMITTEE ON RESOURCES

DON YOUNG, Alaska, Chairman

W.J. (BILLY) TAUZIN, Louisiana

JAMES V. HANSEN, Utah

JIM SAXTON, New Jersey

ELTON GALLEGLY, California

JOHN J. DUNCAN, JR., Tennessee

JOEL HEFLEY, Colorado

JOHN T. DOOLITTLE, California

WAYNE T. GILCHREST, Maryland

KEN CALVERT, California

RICHARD W. POMBO, California

BARBARA CUBIN, Wyoming

HELEN CHENOWETH, Idaho

GEORGE P. RADANOVICH, California

WALTER B. JONES, JR., North Carolina

WILLIAM M. (MAC) THORNBERRY, Texas

CHRIS CANNON, Utah

KEVIN BRADY, Texas

JOHN PETERSON, Pennsylvania

RICK HILL, Montana

BOB SCHAFFER, Colorado

JIM GIBBONS, Nevada

MARK E. SOUDER, Indiana

GREG WALDEN, Oregon

DON SHERWOOD, Pennsylvania

ROBIN HAYES, North Carolina

MIKE SIMPSON, Idaho

THOMAS G. TANCREDO, Colorado

GEORGE MILLER, California

NICK J. RAHALL II, West Virginia

BRUCE F. VENTO, Minnesota

DALE E. KILDEE, Michigan

PETER A. DEFAZIO, Oregon

ENI F.H. FALEOMAVAEGA, American

Samoa

NEIL ABERCROMBIE, Hawaii

SOLOMON P. ORTIZ, Texas

OWEN B. PICKETT, Virginia

FRANK PALLONE, JR., New Jersey

CALVIN M. DOOLEY, California

CARLOS A. ROMERO-BARCELO ́, Puerto

Rico

ROBERT A. UNDERWOOD, Guam

PATRICK J. KENNEDY, Rhode Island

ADAM SMITH, Washington

WILLIAM D. DELAHUNT, Massachusetts

CHRIS JOHN, Louisiana

DONNA CHRISTIAN-CHRISTENSEN, Virgin

Islands

RON KIND, Wisconsin

JAY INSLEE, Washington

GRACE F. NAPOLITANO, California

TOM UDALL, New Mexico

MARK UDALL, Colorado

JOSEPH CROWLEY, New York

RUSH D. HUNT, New Jersey

LLOYD A. JONES, Chief of Staff

ELIZABETH MEGGINSON, Chief Counsel

CHRISTINE KENNEDY, Chief Clerk/Administrator

JOHN LAWRENCE, Democratic Staff Director

SUBCOMMITTEE ON WATER AND POWER RESOURCES

JOHN T. DOOLITTLE, California, Chairman

KEN CALVERT, California

RICHARD W. POMBO, California

HELEN CHENOWETH, Idaho

GEORGE P. RADANOVICH, California

WILLIAM M. (MAC) THORNBERRY, Texas

GREG WALDEN, Oregon

MIKE SIMPSOM, Idaho

CALVIN M. DOOLEY, California

GEORGE MILLER, California

PETER A. DEFAZIO, Oregon

OWEN B. PICKETT, Virginia

ADAM SMITH, Washington

DONNA CHRISTIAN-CHRISTENSEN, Virgin

Islands

GRACE F. NAPOLITANO, California

ROBERT FABER, Staff Director/Counsel

JOSHUA JOHNSON, Professional Staff

STEVE LANICH, Minority Staff
(III)

C O N T E N T S

Page

Hearing held June 24, 1999 .................................................................................... 1

Statement of Members:

Doolittle, Hon. John, a Representative in Congress from the State of

California ....................................................................................................... 1

Statement of Witnesses:

Casten, Thomas R., President and CEO, Trigen Energy Corporation ......... 16

Prepared statement of ............................................................................... 19

Crews, Wayne, Director of Competition and Regulation Policy, Competitive Enterprise Institute ............................................................................... 29

Prepared statement of ............................................................................... 32

English, Glenn, Chief Executive Officer, National Rural Electric Cooperative Association ............................................................................................. 71

Prepared statement of ............................................................................... 73

Hauter, Wenonah, Director, Public Citizen’s Critical Mass Energy Project 91

Prepared statement of ............................................................................... 94

Hoecker, James J., Chairman, Federal Energy Regulatory Commission .... 3

Prepared statement of ............................................................................... 5

Mele, Chris, Legislative Director for Energy, National Association of Regulatory Utility Commissioners ..................................................................... 24

Prepared statement of ............................................................................... 26

Rezendes, Victor S., Director, Energy, Resources, and Science Issues;

Resources, Community and Development Division, U.S. General Accounting Office .............................................................................................. 104

Prepared statement of ............................................................................... 106

Richardson, Alan H., Executive Director, American Public Power Association ................................................................................................................. 61

Prepared statement of ............................................................................... 63

Santa, Don, Vice President, LG&E Energy Corporation ............................... 83

Prepared statement of ............................................................................... 85
(1)

THE ROLE OF THE POWER MARKETING ADMINISTRATIONS IN A RESTRUCTURED

ELECTRIC INDUSTRY

THURSDAY, JUNE 24, 1999

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON WATER AND POWER,

COMMITTEE ON RESOURCES,

Washington, DC.

The Subcommittee met, pursuant to notice, at 2:04 p.m., in Room

1334, Longworth House Office Building, Hon. John Doolittle [chairman of the Subcommittee] presiding.

STATEMENT OF HON. JOHN DOOLITTLE, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. DOOLITTLE. The Subcommittee on Water and Power will

come to order.

We are meeting today to hear testimony on the role of the Federal Power Marketing Administrations in a restructured electric industry. The first section of the hearing is devoted to issues regarding the overall restructuring, while the second half of the hearing

discusses the overall restructuring as it relates to the Power Marketing Administrations.

I also want to call everyone’s attention—and I’ll say this again

when we get more members here—but for the witnesses, through

the miracle of technology, everything you say over these microphones will be broadcast on the Internet around the world. So keep

that in mind during the recesses.

Although the Commerce Committee has the lead on the electric

industry restructuring initiative, the House Resources Committee

has legislative responsibility for the generation and marketing of

electric power from Federal Regional Power Marketing Agencies.

The Subcommittee on Water and Power oversees the Power Marketing Administrations within the Department of Energy, which

market the electrical power produced at Federal water projects.

Since the PMA’s market more than 6 percent of all electric power

generated in the United States, they play a significant role in any

legislation before Congress that seeks to restructure the $200 billion-per-year electric power industry.

Over the last four years, this Subcommittee has held several

hearings to address the efficiency of the PMA’s and the underlying

generation and transmission assets. We have also remained deeply

involved in the general debate concerning restructuring of the electric power industry as well as PMA’s specific initiatives.
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This hearing is the first hearing in a series that will examine the

role of the PMA’s in restructuring. It will focus on the parameters

of the broader restructuring debate itself rather than the specific

issues that arise in the individual PMA service areas. It will discuss the Federal legislative and regulatory steps that are driving

the restructuring. It will also look at the responses of the States

and the dramatic changes in the technology that will affect both restructuring generally and management of PMA assets in particular. A number of affected groups will testify on the impact and

issues involved in restructuring and how PMA management and

mission affect those issues. Finally, there will be consideration of

how the PMA’s in a restructured environment will be able to repay

the Federal investment in PMA and generating agency assets.

Future hearings will be directed to the issues that are unique in

each of the PMA service areas. Thereafter, we will take up the various legislative options that are under consideration. At that time,

I know, there are several members of the Subcommittee who may

have specific provisions that they will want to have considered.

And I urge members to reserve their debate on those issues for

those later hearings.

The overall argument over whether or not the electric industry

should be restructured has largely been decided. While States and

the Federal Government are moving at different speeds toward restructuring and sometimes in different directions, the advantages

to consumers resulting from competitive markets for electricity

services are real and warrant fundamental changes in the laws and

regulations governing the industry.

Indeed, many of the States, the industry as a whole, and the

technology itself have moved us rapidly in that direction over the

last few years. While the need for restructuring is easily answered,

the challenge remains how we restructure.

As one of our witnesses will remind us, it is also the question of

whether we should be restructuring or deregulating the marketplace. One of the tough problems facing policy-makers at the Federal level is the overlapping jurisdiction with the States, respect for

the principle of Federalism and States rights have led to the establishment of a dual system of regulation between the Federal Government and the States.

We are far from the end of this debate. This set of hearings

should be very interesting, particularly since the assets this Subcommittee must deal with are Federal rather than local.

During the course of this hearing, I am especially interested in

getting answers to three questions. One, what will competitive electricity markets of the future look like? Two, how will the management of the PMA’s affect electricity competition? And three, how do

we ensure local benefits and open the marketplace and fair competition?

I look forward to hearing the testimony of today’s witnesses.

I don’t see that I have a Ranking Member with us at this time,

and should he wish to offer his opening statement, I will yield to

him.

In the meantime, I would like to invite our first panel of witnesses to come forward. And if you would, remain standing, please,

so that I can administer the oath.
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Okay. Would you please raise your right hand?

[Witnesses sworn.]

Let the record reflect that each of our witnesses answered in the

affirmative.

And, gentlemen, please be seated. We are very pleased to have

you here.

The custom of the Committee is to turn on the yellow light at

the beginning of your fifth minute. Please don’t cut off your testimony when the red light goes on, but it is an indicator that is a

guide. Take it for that.

We are very appreciative of having the expertise available to us

today, and we would like to begin by introducing the Chairman of

the Federal Energy Regulatory Commission, Chairman Hoecker,

James Hoecker.

STATEMENT OF JAMES J. HOECKER, CHAIRMAN, FEDERAL

ENERGY REGULATORY COMMISSION

Mr. HOECKER. Thank you, Mr. Chairman. I appreciate very much

your invitation to appear today. I am here to outline what is being

accomplished at the FERC in wholesale power markets, which is

the focus of its jurisdiction under the Federal Power Act.

In the broadest sense, competition is growing in wholesale power

markets in response to various factors: the Energy Policy Act of

1992 and technological and business developments and the Commission’s efforts to remove barriers to competition and to let markets, not regulators, determine the price of wholesale power.

Wholesale competition will provide substantial benefits to industry and to consumers, including innovative services, supply options,

and the prospect of reduced prices for energy end-users. Even

where retail choice is unavailable, wholesale competition will lower

the cost of power purchased by utility suppliers for resale in that

retail market.

The Commission is promoting competition in wholesale power

markets primarily through two key initiatives. The first initiative

is Order No. 888, which we adopted in 1996. It sought to promote

competition by increasing the availability of transmission services

that sellers and buyers depend on in order to trade power.

Order No. 888 required each public utility that owns, controls, or

operates transmission facilities to file an open-access, non-discriminatory transmission tariff with us. Order No. 888 also allowed a

utility to seek recovery of its so-called stranded costs. These are

costs of utility generation plants incurred to serve a customer that,

in an open-access environment, uses the utility’s transmission to

buy power from someone else, even though that utility may have

had the reasonable expectation of serving that customer indefinitely.

In the three years since the issuance of Order No. 888, the power

industry has undergone extensive change. Many electric utilities

have merged with other electric utilities and even gas utilities.

A large number of new sellers have entered the wholesale power

market. Traditional utilities have sold 10 percent of the Nation’s

generating capacity to new operators. About two dozen States have

started or set a date for retail competition.
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And in response to growing wholesale competition, transmission

access, and State policy decisions, it is more important than ever

to manage transmission operations regionally.

Because of continuing engineering and economic inefficiencies as

well as the continuing ability of transmission owners to discriminate against others who want to use their wires to gain access to

markets, the Commission recently proposed a second initiative. It

strongly encourages the voluntary formation of regional transmission organizations or RTOs.

If RTOs meet certain minimum requirements under our proposal,

such as a sufficient geographic scope and independence from any

power seller or buyer, they will be able to lead us toward a fairer,

more efficient, and more reliable system for trading bulk power.

The Commission’s proposed rules seek to encourage not only public utilities, but also non-public utilities such as Power Marketing

Administrations to join RTOs. However, the Commission can order

transmission over PMA facilities in only limited circumstances.

And the PMAs are not subject to the same Order 888 open access

rules applicable to public utilities.

Although I am pleased to say that three PMAs voluntarily offer

transmission service under open access tariffs that are on file with

us, the differences and applicability of competitive open access

among owners of transmission should, nevertheless, be eliminated.

To ensure that transmission service is available from the PMAs

and other non-public utilities, and as readily as it is from public

utilities, the Congress will have to act.

Competitive power markets will depend on a transmission network that is as open and as accessible as possible. Transmission

policy in the areas of open access, regional operations, and reliability should be crafted to recognize that transmission facilities

owned by PMAs are integral parts of the power grid.

Mr. Chairman, members of the Committee, I want to thank you

for the opportunity to share with the Subcommittee the Commission’s perspective on electric restructuring. And I will be pleased to

answer your questions.

[The prepared statement of Mr. Hoecker follows:]
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Mr. DOOLITTLE. Thank you.

Our next witness will be Mr. Thomas R. Casten, president and

CEO of Trigen Energy Corporation. Mr. Casten.

STATEMENT OF THOMAS R. CASTEN, PRESIDENT AND CEO,

TRIGEN ENERGY CORPORATION

Mr. CASTEN. Thank you, Mr. Chairman, and members of the

Subcommittee, for inviting me. I want to compliment you for considering the issue of electric deregulation. I believe that there is no

issue before this Congress of greater importance to America’s economic strength and the quality of the U.S. in the global environment.

I think that modernizing electric regulation is an issue around

which the diverse perspectives represented by the Resources Committee can come together. This is so because electric restructuring,

if done right, will create jobs, lower energy costs, improve services,

and significantly reduce air pollution. These public goods will accrue to all Americans.

I discuss the economic and environmental benefits of unleashing

electric competition in a book that I authored last year called

‘‘Turning Off the Heat,’’ copies of which have been distributed to

all Committee members and your staffs.

I believe it is possible to discern the future and the positive direction of a competition-driven energy industry by observing other

recently deregulated network industries. America’s electric industry is woefully inefficient in the way it uses raw materials, precisely because of monopoly protection and outmoded regulations.

The U.S. industry wastes two-thirds of all the fuel that it burns,

and it has shown zero improvement in that efficiency in 40 years.

For the past four decades, the U.S. has been stuck at 33 percent

efficiency. As a result, energy costs all Americans too much and

there is far too much pollution. My company, by contrast, operates

45 power plants in 17 States that capture between 65 and 90 percent of the energy in the fuel that we burn and that emit half the

pollution.

Competition will force all energy companies to extract more value

from the fuel that they burn. This will lower the prices that consumers pay, and it will cut pollution. Competitive energy producers

will offer better value, just as the deregulated telecommunications

has offered cellular phones, Internet access, and now global satellite services.

For example, dispersed generation units are available and proven

today that do not require more transmission lines and are 20 times

cleaner than today’s aged electric generating plants. Competition

will cause the U.S. to drop its carbon dioxide emissions to well

below the targets that were set in the Kyoto Protocol while reducing the cost of energy to all citizens. It’s a win/win.

Electric restructuring is moving forward, but with different parochial rules in each State. Half the States represented by members

of this Subcommittee and more than a third of the States represented by members of the full Committee have already chosen to

restructure their electricity markets. Others will follow quickly.
17

Congress now has before it restructuring bills that appear to

have many of the elements of successful national compromise, particularly the version offered by Representatives Largent and Markey. I believe it is in the national interest for Congress to move

quickly to pass legislation that removes Federal barriers to open

competition in energy markets.

The Subcommittee’s jurisdiction over Federal power programs offers its members a particularly complex challenge. You are tasked

with determining how to integrate capitalist market forces into the

practices and customer bases of government-owned or governmentaffiliated enterprises, including PMA’s and their customers.

I know how contentious these matters are. I have no interest in

wading into the middle of the battles between public and private

power. Where I pick sides is in the fight between government regulation and open markets. I think this Subcommittee should focus

its inquiry not on the traditional positions of the contending electricity camps, but on the interest of individual energy consumers

and on the broad national interest in a strong economy and a clean

environment.

The Subcommittee should concentrate on delivering economic

and societal benefits of modern energy technology to all consumers,

including those traditionally served by Federal power programs.

Whether considering a rural water district, Federal military installation, Indian reservation, or municipal power authority, the most

important question to me is, how can that energy customer enjoy

the best possible value and cause the least damage to the environment today and in the future?

Federal power programs were instituted earlier in this century

largely to promote economic development in those parts of the

country or among those sectors of society not well-served by private

electricity business. At a minimum, it should be Federal policy to

help those same regions or sectors of society obtain still more favorable energy services from the private sector, if the private sector

makes them available. And I assure you, it will.

This will mean, among other things, assuring that Federal transmission policies encourage interconnection of distributed generation. If grants and subsidies are to remain part of the Federal

power program, it would be appropriate to focus those grants

where the market has failed to provide high-value energy services

to customers.

Mr. Chairman, Congress has deregulated five network industries

since 1970: rail freight, interstate trucking, interstate gas, long-distance telephones, and airlines. A 1997 study found that, 10 years

after the regulations were eased in each of those industries, real

prices dropped between 27 and 58 percent, service improved, and

all classes of customers in each of those industries shared the benefit.

I am convinced that opening competition in the energy markets

will benefit all energy consumers and all the communities in which

they live. I am also convinced that the power of the market will inevitably reduce energy-related air pollution, including CO2, while

saving money.
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I urge this Subcommittee to lend its weight to the drive toward

competition in electric markets.

Thank you for this opportunity to testify, and I will be happy to

take your questions.

[The prepared statement of Mr. Casten follows:]
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Mr. DOOLITTLE. Thank you.

Our next witness will be Christopher Mele, legislative director

for energy with the National Association of Regulatory Utility Commissioners.

Mr. Mele.

STATEMENT OF CHRIS MELE, LEGISLATIVE DIRECTOR FOR

ENERGY, NATIONAL ASSOCIATION OF REGULATORY UTILITY

COMMISSIONERS

Mr. MELE. Good afternoon, Mr. Chairman, and members of the

Committee. As you said, my name is Chris Mele, and I am with

NARUC. NARUC is an organization comprised of State officials

charged with the duty of regulating the retail rates and services of

electric, gas, water, and telephone utilities operating within their

respective jurisdictions.

Before I go forward, I would like to just point out that my background in this issue goes back quite a few years. I was up to my

eyeballs in it in the State of Pennsylvania when we re-regulated or

de-regulated or restructured our electric industry in that State.

And that time I was representing the rural electric cooperative and

the municipals. So for the last four or five years of my career have

been wading through this hip-deep most times. In fact, my wife

would tell you that I probably know this issue better than her in

the last five years.

I greatly appreciate the opportunity to appear before your Subcommittee on behalf of NARUC. States are, in fact, leading the

charge to restructure electric markets. And each case, the States

are putting in place elements that are essential to ensure vibrant,

safe, and sustainable markets.

Twenty-two States so far—and the number keeps growing rather

rapidly—have adopted retail electric restructuring programs to enable customers to choose among energy suppliers while ensuring

the safety, reliability, and quality of electric services.

I guess the key here is do no harm, and I think that is the way

the States are operating. And I think that when the Federal Government is ready to go, that is the way they should operate.

Some will argue that the level of activity is insufficient, that the

States should have adopted retail. Yet the States that have adopted

retail open access electricity programs are home to more than 50

percent of the Nation’s population. All this activity has taken place

within the last four years alone. And I believe the States will continue to pursue restructuring programs that are in the public interest and in the States’ interest.

State restructuring initiatives contain many common elements,

customer choice, functional unbundling, pricing reform, stranded

cost recovery, protection of public benefits, sensitivity to the exercise of market power, and mechanisms to support emerging regional markets.

It should come as no surprise that the timing and implementation of such initiatives differ from State to State in ways that reflect local customer needs and other market realities, including

such factors as climate, demographics, indigenous resources, environment impacts, past choices of technology, current resource pref-
25

erences, system capacity, geography, and form of utility ownership—just to name a few.

The State’s intention, and NARUC’s hope, is that we can learn

from the unfolding State initiatives about what does and doesn’t

work before risking harm to the broader consuming public by requiring States to restructure local markets by a date certain or a

uniform set of Federal standards to take into account the unique

local circumstances of each State.

We believe it prudent for Congress not to risk disrupting these

policies through prescriptive national models, but rather consider

legislation that facilitates State restructuring efforts. There are

things Congress can do to help the States by removing uncertainty

and reducing the prospect of torturous litigation.

NARUC established a broad set of principles that I am going to

summarize here on how to move forward both from the State level

and from the Federal level.

One is enabling customers to choose among electricity suppliers

through State determinations of appropriate restructuring policies.

Two, maintaining or improving the reliability of the electric system.

Three, ensuring customer access to reasonably priced services,

including adequate protections for low-income customers.

Four, protecting consumers from anti-competitive behavior,

undue discrimination, poor service, and unfair billing and disconnection policies.

Five, ensuring the maintenance or improvement of public benefits in environmental programs through existing or new mechanisms.

Six, State determinations concerning retail stranded cost recovery.

And, lastly, enhanced State authorities necessary to create regional mechanisms to address transmission reliability, market

power, and other regional concerns.

As I said, there are areas that the Federal Government ought to

be involved in, affirming States’ authority to order and implement

retail access or customer-choice programs free from the threat of

pre-emption under the Commerce Clause or the Federal Power Act,

affirming States’ authority to impose wires charges to support the

recovery of stranded costs and other State-sponsored programs.

Let me jump to my conclusions and just say a few things we

think that the Federal Government should leave to the States, and

I mentioned them briefly before. But one is grandfathering. Currently, none of the proposals out there have an in-depth

grandfathering provision. If you don’t grandfather carefully and

fully, you are going to disrupt what 22 other States have already

done. And in the best case, you will create confusion; in the worst

case, you may destroy the markets that are forming.

With that, I would like to end my comments and ask that my

written testimony be put into the record. And I thank you for you

attention.

[The prepared statement of Mr. Mele follows:]
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SUMMARY OF REMARKS BY CHRISTOPHER MELE, NATIONAL ASSOCIATION OF

REGULATORY UTILITY COMMISSIONERS

• States should be left to decide whether, when and how local markets should

be opened to greater competition that enables customers to choose among electricity suppliers, while maintaining system reliability, protecting consumers

from anti-competitive behavior or poor service, and ensuring the continuation

of important public benefit programs.

•Federal legislation could greatly enhance restructuring initiatives by:

—Affirming State authority to order and implement retail access/customer

choice programs;

—Affirming State authority to impose charges to support stranded costs

and benefits policies;

—Affirming State authority to regulate customer bypass of local distribution networks;

—Reaffirming State jurisdiction over the rates, terms and conditions of retail electric services; and

—Authorizing voluntary formation of regional regulatory bodies to enable

States to address regional transmission and system operation concerns.

—Providing for ‘‘grandfather’’ of existing State restructuring proposals.

• In conjunction with focused legislation, NARUC would also favor reforming

PUHCA and repealing prospectively the mandatory purchase requirements contained in PURPA conditioned upon the development of competitive retail electric markets.

• Unlike any of the other regulated industries, conditions in the electric industry

vary widely across the country. While the development of retail customer choice

is critical, preferably it should be implemented in a manner that respects these

differences. In our view, that can only happen if decision-makers closest to these

conditions—State commissions and legislatures—enjoy the flexibility to adapt

pro-competitive policies to the needs of local retail consumers.

• If Congress reaches a consensus that it needs to accelerate and broaden the

transition to greater retail competition, it should do so through legislation that

preserves broad State authority to implement policies flexibly in response to the

conditions in local retail markets.

STATEMENT OF CHRISTOPHER MELE, LEGISLATIVE DIRECTOR FOR ENERGY, NATIONAL

ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS

Mr. Chairman and Members of the Subcommittee:

Good morning. My name is Christopher Mele. I am the Legislative Director for

Energy for the National Association of Regulatory Utility Commissioners, commonly

known as NARUC. I respectfully request that NARUC’s written statement be included in today’s hearing record.

NARUC is a quasi-governmental nonprofit organization founded in 1889. Within

its membership are the governmental bodies of the fifty States engaged in the economic and safety regulation of carriers and utilities. The mission of the NARUC is

to serve the public interest by seeking to improve the quality and effectiveness of

public regulation in America. More specifically, NARUC is comprised of those State

officials charged with the duty of regulating the retail rates and services of electric,

gas, water and telephone utilities operating within their respective jurisdictions. We

have the obligation under State law to assure the establishment and maintenance

of such energy utility services as may be required by the public convenience and

necessity, and to ensure that such services are provided at rates and conditions

which are just, reasonable and nondiscriminatory for all consumers.

I greatly appreciate the opportunity to appear on behalf of NARUC before the

Subcommittee on Water and Power of the U.S. House of Representatives Committee

on Resources. I would also like to commend the Chairman for exploring State perspectives on the complex issues involved in fostering greater competition in the electric industry.

Before passage of the Energy Policy Act of 1992 (EPAct), our system of regulated

electric monopoly service providers was a model of stability as regulators worked to

ensure that utilities provided essential services to retail consumers at reasonable

rate levels. Before and since EPAct, the U.S. has enjoyed the most economical electricity rates among those Western industrialized nations not heavily dependent on

hydropower sources of energy. Times and fashions change, of course, and now the

electric utility industry is one of the last of the utility sectors to undergo a transformation from monopoly franchise to market participant. States are leading the
27

charge to restructure retail electric markets. In each case, the States are putting

in place elements that are essential to ensure vibrant, safe and sustainable markets.

Twenty-two States have adopted retail electric restructuring programs to enable

customers to choose among energy suppliers while ensuring the safety, reliability

and quality of electric services. Still others are working through their State commissions and/or legislatures to open access to retail electricity markets.

While some argue that this level of activity is insufficient, the States that have

adopted retail open-access electricity programs are home to more than one-half of

the nation’s population. All this activity has taken place within the last four years

alone, and I believe States will continue to pursue restructuring programs that are

in the public interest and the States’ interest.

The States pursuing retail open-access are acting with great care and precision

to ensure the continued reliability of electric services and universal access to retail

services and public benefits previously provided by a vertically integrated industry.

Careful review of these activities discloses that State restructuring initiatives contain many common elements: customer choice, functional unbundling, pricing reform, stranded cost recovery, protection of public benefits, sensitivity to the exercise

of market power, and mechanisms to support emerging regional markets. It should

also come as no surprise that the timing and implementation of such initiatives differ from State to State in ways that reflect local customer needs and other market

realities including such factors as climate, demographics, indigenous resources, environmental impacts, past choices of technology, current resource preferences, system

capacity, geography, and form of utility ownership—to name a few.

The States’ intentions, and NARUC’s hope, is that we all can learn from the unfolding State initiatives about what does and doesn’t work before risking harm to

the broader consuming public by requiring States to restructure local markets by

a date certain through a uniform set of Federal standards that fail to take unique

local circumstances into account. We believe it prudent for Congress to not risk disrupting these policies through prescriptive national models, but rather consider legislation that facilitates State restructuring efforts. There are things Congress can

do to help the States by removing uncertainty and reducing the prospect of tortuous

litigation.

In July 1996, NARUC adopted ‘‘Principles to Guide the Restructuring of the Electric Industry.’’ The Principles are intended to support States’ restructuring initiatives to provide customer choice while ensuring the continued provision of adequate,

safe, reliable and efficient energy services at fair and reasonable prices at the lowest

long-term cost to society. In light of the local impact that restructured markets will

have, our Principles reiterate our view that State commissions and legislatures

should decide whether, when and how local markets should be opened to greater

competition.

In brief, the NARUC Principles support:

• Enabling customers to choose among electricity suppliers through State determinations of appropriate restructuring policies;

• Maintaining or improving the reliability of the electricity system;

• Ensuring customer access to reasonably priced services, including adequate

protections for low-income customers;

•Protecting consumers from anti-competitive behavior, undue discrimination,

poor service and unfair billing and disconnection policies;

• Ensuring the maintenance or improvement of public benefit and environmental programs through existing or new mechanisms;

• State determinations concerning retail stranded cost recovery; and

• Enhanced State authorities necessary to create regional mechanisms to address transmission, reliability, market power and other regional concerns.

Based on these basic goals, NARUC believes that in tile following areas, Federal

legislation could enhance restructuring initiatives by:

• Affirming State authority to order and implement retail access/customer choice

programs free from the threat of preemption under the Commerce Clause or the

Federal Power Act;

• Affirming States authority to impose wires charges to support the recovery of

stranded costs, State-sponsored energy efficiency and/or environmental programs, and universal service programs;

• Affirming States’ authority to regulate retail power delivery services regardless of the facilities used, thereby eliminating the threat of customers bypassing

the local distribution network;

• Reaffirming States’ exclusive jurisdiction over the rates, terms and conditions

of retail electric services, including retail transmission services;
28

• Authorizing the voluntary formation by States of regional regulatory bodies to

enable States to address regional transmission and system operation concerns.

With these issues resolved legislatively, while continuing to accord States the discretion to determine whether, when and how to open retail electricity markets to

competition, States would be confident of their legal authority to move forward on

restructuring efforts as local conditions dictate.

In conjunction with this type of focused legislation, NARUC would also favor reforming the Public Utility Holding Company Act of 1935 (PUHCA), while continuing

to ensure consumer protections against abusive multistate utility holding company

practices, and repealing prospectively the mandatory purchase requirements contained in the Public Utility Regulatory Policies Act of 1978 (PURPA). NARUC conditions its support for PUHCA reform and PURPA repeal upon the development of

competitive retail electric markets and as part of broader restructuring legislation,

not as stand alone initiatives.

Another issue in this debate, where Federal legislation is necessary, is reliability.

Any legislation should explicitly confirm the public interest in transmission grid reliability, the need for mandatory compliance with reliability standards, and a provision of explicit authority for the FERC and the states in cooperation to enforce the

necessary standards. I emphasize the cooperative nature of this task. Congress

could accomplish this by authorizing voluntary formation by States of regional bodies to oversee transmission issues, Independent System Operators, system planning

issues and reliability.

One last component that would need to be addressed in Federal legislation is the

inclusion of language to ‘‘grandfather’’ State restructuring plans that were in place

prior to enactment of any Federal legislation. In the States that have moved to provide retail open access, there have been delicate compromises reached to produce

consensus. States have crafted these proposals and plans to meet their unique circumstances. In addition, Federal preemption could have disastrous effects on those

States which already have retail consumers participating in burgeoning open access

markets. In essence, without a grandfather provision Congress would be changing

the rules for an immature market, causing confusion at best and the collapse of an

undeveloped market at worse.

While I have just discussed issues which NARUC believes the Federal Government ought to include in legislation should Congress proceed with electric restructuring, there are areas where NARUC believes Congress ought not take action.

NARUC does not support proposals which require States to implement customer

choice by a date certain. For the reasons previously stated, a Federal mandate is

unnecessary (given the pace at whichState commissions and legislatures are now

moving) and unwise (given the need for each State to address restructuring issues

at a pace that makes sense in light of its individual economic, demographic, climatic

and yes, political circumstances). We appreciate the desire of some to get on with

the transition as quickly as possible, but if implementation of the pioneering State

programs proves that the benefits of customer choice are as compelling as the proponents of a Federal mandate believe, States will embrace pro-competitive policies,

as many currently are, at a pace that makes sense for their individual needs.

States should also retain jurisdiction to address the recovery of costs for power

sales and delivery service provided retail customers regardless of the facilities used.

This means that technical definitions as to the character of facilities as transmission

or distribution investments should not impinge upon the ability of State commissions to exercise authority over every retail transaction. This issue is of critical importance to ensure that States have the option of imposing non-bypassable charges

to fund stranded cost and benefit programs.

Conclusion

The States are now performing their historic role as laboratories to test how the

words ‘‘greater competition for retail consumers’’ can be turned into real-world services that customers will buy. The State commissions and legislatures must be allowed to continue to experiment with retail access, including customer choice initiatives. As the consequences of competitively-based wholesale markets become clearer,

States are putting in place complementary retail policies which are adapted to regional market conditions. State commissions are developing and implementing compatible retail policies which preserve reliability, prevent the stranding of ‘‘public

goods,’’ ensure consistency with environmental values, minimize cost shifting, provide for stranded cost recovery, and most importantly, improve economic efficiency.

Over time, States will work together, as some are now doing, to devise and implement regional institutions to adapt their regulatory responsibilities to the reality of

regional power markets.
29

If Congress chooses to act in this area, any Federal legislation should preserve broad State authority to implement these policies flexibly in response to the conditions in local retail markets. The development of retail customer choice should be

implemented in a manner that respects these differences. In our view, that can only

happen if decisionmakers closest to these conditions—State commissions and legislatures—enjoy the flexibility to adapt pro-competitive policies to the needs of local retail consumers. In the weeks and months ahead, my colleagues and I look forward

to continue working with Congress and all interested parties to develop workable

policies that support an efficient and environmentally sound electric services industry that meets the needs of all retail consumers.

Mr. DOOLITTLE. Thank you. And let me assure you that all the full set of testimony will be included in the record along with your

oral statements here.

Our next witness will be Mr. Wayne Crews, director of competi- tion and regulation policy with the Competitive Enterprise Institute.

Mr. Crews.

STATEMENT OF WAYNE CREWS, DIRECTOR OF COMPETITION

AND REGULATION POLICY, COMPETITIVE ENTERPRISE INSTITUTE

Mr. CREWS. Good afternoon, Mr. Chairman, and members of the

Subcommittee. My name is Wayne Crews. I direct competition and

regulation policy at the Competitive Enterprise Institute. I appreciate the opportunity to appear today. CEI is non-partisan, nonprofit organization that works to educate opinion leaders on market-based alternatives to political programs and regulations. I am here today to provide an alternative—a little bit of an alter- native model of achieving the free market, free electricity markets,

asking the question, does the pursuit of Federal retain open access

have it wired or tangled? When policymakers embark upon restructuring, as opposed to deregulating a heavily regulated industry,

they risk creating more regulation than existed before. This is the

dilemma raised by today’s calls for mandatory retail open access in

electricity, which is intended to ensure that every commercial, residential, and industrial customer shall have the choice of any electricity provider while the local utility will be required to distribute

the new provider’s electricity. Nearly every network industry now, from electricity and tele- communications to railroads and cable TV—and even, potentially,

the computer operating systems—suffers from the threat of open

access disease, a regulatory infection caused by dual exposure to

regulators who assume themselves indispensable to competitive

markets and economists who cling to the notion that capitalism

generates natural monopolies apart from a government-granted

franchise.

The irredeemable problem with open access and achieving at the

retail level is its coercive character. The desire of a transmission

or distribution owner to control its wire isn’t compatible with the

desire of others to hitch an uninvited ride, a problem for which

there is no stable regulatory solution.

Thus, despite years of effort, electricity reform at the Federal

level stands a good chance of dying again in Congress this year.

Every fundamental question—State versus Federal jurisdiction, the

role of independent system operators, reciprocity, the role of rural

power, stranded costs—all remain hotly debated.
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More substantial and robust electricity competition could emerge

if more precious years weren’t wasted trying to mandate it. Competition doesn’t require granting everybody with a kite and a key

the right to dump their electricity into the grid for somebody else

to manage.

Instead, the artificial barriers that prohibit voluntary competition are the State-granted exclusive local delivery franchises that

protect incumbent utilities. These should be removed. Open access

leaves those delivery franchises intact, and as the market grows

and the deregulated generation aspect of the industry moves forward, it is going to contort around this still-regulated transmission

structure while other network industries in the country are moving

ahead, even in some cases creating redundancy in certain areas.

If those franchises were ended as opposed to pursuing mandatory

access, that would grant to entrepreneurs and adventurous electric

utilities the clout voluntary access deals and develop infrastructure

by forming consortia, sharing rights of way with network industry

cousins, like telecommunications, Internet, and railroad firms.

For instance, an independent power producer could team up with

a baby Bell and real estate developers on the fringes of the grid

to share costs of providing electricity and communications services

to residential and business customers. That is one type of example.

Some entrepreneurs could emulate companies like Qwest and

Level 3; each is financing fiber networks thousands of miles long

that feature buried redundant empty plastic conduits for rapid installation of next-generation fiber. And, on top of this, at this point

in history, barring a breakthrough in wireless data transmission,

given the Internet revolution, a multibillion-dollar effort to rewire

the last mile to household consumers may emerge. So sharing costs

with power entrepreneurs could prove essential, but right now they

are prohibited from attempting that, given the exclusive franchise.

Under genuine competition, incumbent utilities threatened with

such constant entry would be likely to offer open access voluntarily.

Thus, the aims of the forced open access advocates would emerge,

but in a market-driven manner. Other competitive pressures include lightweight micro-turbines capable of serving a 7-Eleven or

large homes, which some researchers believe could rival the change

in computing from mainframe to the desktop in significance.

Other potential avenues for competition include relatively new

computer-controlled sideways drilling technology that allows oil

and gas companies to flexibly snake under streets without disturbing the above ground. There are new technological controls

over power flows that make it not quite so true anymore that we

can’t control where the electrons go. Other examples are in the

handouts.

But ending exclusive franchise is necessary to ensure that firms

other than existing utility monopolies can exploit all these options.

Otherwise, a homeowners’ association or a business park employing

micro-turbines could find itself in violation of the local franchise.

Of course, if we removed the franchises and competition doesn’t

start to emerge in some places, then the States may properly consider forced access on a rifle-shot basis. That is the way it should

be done.
31

Forced-access advocates forget that innovation in transmission

and distribution is as important as any other kind of innovation.

Forced access could compromise entrepreneurial incentives to embrace innovation and enhance reliability because their advance remains too dependent on what regulators do.

Consultant Martin Mills points out that today’s noisy and dirty

grid is leading developers to design buildings with separate power

systems, that second wires are inevitable in a lot of cases, and that

the grid ultimately will need to emulate the architecture of the

Internet to obtain the necessary liability levels.

The ability to make and execute such market strategies depends

crucially on owners and operators who directly profit or lose from

their decisions. Altering our deregulatory approach in the 106th

Congress would set in motion a restructuring that is as fully efficient and entrepreneurial as possible. Years would possibly be

saved on the need to revisit the industry to have its distortions legislatively ironed out, as may occur in telecommunications.

There is too often a tendency among policymakers to embrace

technocratic solutions. Under genuine competition, regulators disappear. In contrast, mandatory access risks armor-plating regulators at a crucial moment in business history. Inefficiencies created by actual government monopolization of the grid will outweigh

any potential, but unlikely, monopolistic abuses by the private

owners of transmission and distribution, if they are subject to

threats.

The answers to questions regarding the shape of tomorrow’s

power markets are not all locked into today’s initial conditions. Information will be created by entrepreneurs as we go along, and we

should give them a chance.

I thank the Subcommittee for its attention.

[The prepared statement of Mr. Crews follows:]
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Mr. DOOLITTLE. Thank you.

I announced this this at the beginning, but now that some of our

additional members have shown up, all of the proceedings are

being broadcast live over the Internet. I wanted to make you all

aware of that.

Well, I appreciate the testimony that all of you have offered, and,

Mr. Crews, let me just begin with you. Is there one jurisdiction

some place that comes closest to implementing what you have advocated here?

Mr. CREWS. I think even at the level of the States, even at the

State level, distribution franchises are staying intact. I think, ultimately, what might make sense is something like was done with

the intrastate trucking deregulation that Congress did a few years

ago as part of the FAA reauthorization. Congress removed the right

or the ability of States to limit access of trucking companies and

to limit their prices. That is the kind of thing that should be investigated. I think even if we have full mandatory access put in place

at the State level and at the Federal level, we are still left with

local delivery franchises for the next 10 years of so, and we would

have to revisit that question.

And I think a lot of potential pain could be avoided by addressing

those kinds of concerns now. The Supreme Court has addressed

them recently in the Bell case in terms of—the case involved not

every service has to be offered to competitors on an open-access

basis. It was bogging some of those services down. So you can run

into problems there with innovation.

I am given to understand that in Colorado there is an example

where—I don’t know the details of it, but it is something I could

certainly look up and supply to the Committee—where a gas company was offering services to customers, but was not offering itself

as a public utility. And therefore, it wasn’t subject to the mandatory access requirements and things of that sort. So there are

things that can be picked up.

Mr. DOOLITTLE. Well, if you could find out something more about

that and send it along I would appreciate it.

I saw you nodding your head, Mr. Casten. Did you want to comment on that subject?

Mr. CASTEN. To your direct question, sir. In 49 States, if a private power entrepreneur runs a wire across the road, they receive

a go-to-jail card.

In Colorado, there is a law that has been tested for the gas companies that allows you to serve a group of private people. It hasn’t

been tested electricity-wise.

I think the example you are looking for is the United Kingdom.

In 1989, when the U.K. deregulated, they allowed anybody that

wanted to to run a wire. There haven’t been very many wires run,

but the cost of distribution and transmission has fallen to everybody because the monopoly protection was removed.

Mr. DOOLITTLE. Mr. Hoecker, would you want to comment on

this subject?

Mr. HOECKER. Well, I am not familiar with the Colorado law that

has been mentioned. It sounds to me as if there is some form of

distributed generation off the grid.
47

If we are talking about the transmission system or interstate

pipeline transportation, we are talking about industries that do

have characteristics of natural monopoly. They are becoming open

access. I happen to think open access is a very positive development, not simply a job-insurance program for regulators.

We have seen, as Mr. Casten has mentioned, natural gas prices

drop since well-head prices were deregulated. And we have done

our part at the FERC to promote access and free markets in the

interstate pipeline industry. We expect to do the same thing for

electric transmission as well.

And it is clear that the Congress, through the Federal Power Act,

has concluded that these kinds of facilities are affected with a public interest, that they have monopoly characteristics, and as the DC

Circuit has said in another context, the Federal Power Act and the

Natural Gas Act fairly bristle with concern about undue discrimination.

So as we move toward a free market and entrepreneurship and

begin to bring the forces of markets to bear on industries that have

formerly been monopolies, we have to structure a reasonable transition and not simply walk away from our public interest responsibilities.

Mr. DOOLITTLE. Mr. Crews believes that this isn’t as great a

problem as some seems. So somebody else runs a separate distribution facility, what’s the problem with that?

Mr. HOECKER. I think separate distribution facilities or non-utility transmission services, while we haven’t seen them, are entirely

possible, but I also think that investors are going to think twice before building essential facilities in competition with the local utility

franchise, who has had those facilities paid for by ratepayers over

several generations. That is to go in the face of good financial planning in my estimation.

Mr. DOOLITTLE. Do you have an answer to that, Mr. Crews?

Mr. CREWS. Well, I would say, we don’t have to argue about it.

We can do away with the franchises and see what occurs. It may

be that nothing does happen, prices remain high, and open access

should be instituted on some kind of an ad hoc basis because of

that residual monopoly power. But someone may move in, and if

someone does attempt to move in, and we are seeing duplication

and redundancy in other network industries, if someone does move

in, that local utility has a serious problem on its hands. Because

if someone does take the step of putting in new wire and all they

have to do is call Pirelli Cable to do it, if they make the deals and

lay that wire, then that utility really has a stranded cost on its

hands.

Mr. DOOLITTLE. Well, my time is up. The Chair recognizes Mr.

Smith for his questions.

Mr. ADAM SMITH. No questions.

Mr. DOOLITTLE. Mr. Walden is recognized.

Mr. WALDEN. Thank you, Mr. Chairman.

A question for Mr. Hoecker: The Northwest delegation is working

to develop a regional approach to balancing the role of the Bonneville Administration in a competitive environment. Similar efforts,

I understand, are underway at the TVA. Do you support these sort

of regional approaches on this issue?
48

Mr. HOECKER. Absolutely. I think looking at the electricity market on a regional basis is essential as bulk power markets and the

number of wholesale transactions become more important and become more numerous. It is important that we look at reliability,

transmission planning and expansion, and transmission pricing

policies on a regional basis so that we can have real market forces

at work at the generation level.

Mr. WALDEN. Given the discussion you and Mr. Crews had a moment ago about deregulating the transmission side, do you see that

there would be a problem in a district like mine that is 72,000

square miles where we have got one person for every nine miles

of line, in some cases? Do you think we would see some cherrypicking go on in the urban areas and leave the rural areas underserved if it is not under monopoly control?

Mr. HOECKER. I think that is always a concern. I think it ought

to be the policy of regulators, and of the government generally, to

ensure that all Americans have fair access to electric power. And,

clearly, some remote rural customers are very expensive to serve.

So, you are right, it is not an easy answer when it comes to those

people.

Mr. WALDEN. Mr. Crews, I would entertain a response from you

on that question.

Mr. CREWS. It is always a concern. You want to be sure that

rural customers are served. But rural customers don’t need just

electricity. They need cable TV and Internet access, and all those

kinds of things. And I would think that the best way to at least

help assure that is to make sure that there is not a local monopoly

that can’t be competed against, to at least have the potential for

others to figure out a way if they can to come in with a wire.

And if they team up with—for instance, railroads now are selling

off something called their short-liners. They are selling off their

short spurs that serve rural areas. It is a perfect opportunity for

them to sell those to, say, Level 3 and Enron, and then those two

go in and try to put some infrastructure in place.

So we need lots of things occurring. And plus, if it a rural area,

it is easier to get the rights to lay wire rather than——

Mr. WALDEN. Yes, I would suggest that at some point I invite

you to come to my district. Towns like Fossil and Condon, they

don’t have cable TV, either, or very good access. So competition is

really not the issue. It is just trying to get service at all.

Mr. Hoecker, I want to go back to you in the limited time I have.

You have testified in favor of gaining jurisdiction over more than

400 transmission-owning electric co-ops. I assume this is, presumably, in response to existing problems or lack of jurisdiction. In the

last years, have you run into those kinds of problems? Co-ops?

Complaints?

Mr. HOECKER. I think—let me hearken back to your first question, which is the importance of regionalism. In using all the highvoltage transmission, which is generally highly integrated with the

investor-owned transmission, electric co-ops, transmission-owning

municipal utilities, and Power Marketing Administrations have important facilities that are integral to the operation of the grid. And

if we are going to have a more efficient, more competitive bulk
49

power market, the entire network, it seems to me, needs to be subject to the same kinds of open access requirements.

And that isn’t the case now. And whether we like it as a regulatory matter or not, transmission that is owned by one set of utilities, be they FERC jurisdictional or not, the operation of those facilities affects everybody’s service.

Mr. WALDEN. Okay. Under the administration’s bill, FERC would

gain jurisdiction over more than 400 co-ops, a thousand muni’s,

PMA’s, TVA, BPA. How do you plan to handle that somewhat increased workload you may find yourself with?

Mr. HOECKER. Well, I should be clear that what we are seeking

jurisdiction over is the rates, terms, and conditions of high-voltage

transmission service. BPA, TVA, those co-ops all provide a diverse

menu of services to their customers, including retail service.

The Commission has no interest in that. We are not a retail regulator. That is the bigger part of the market. And we are simply

trying to ensure that the bulk power market is inclusive and as

transparent as possible.

Mr. WALDEN. Thank you, Mr. Chairman. I yield back my time.

Mr. DOOLITTLE. Mrs. Napolitano is recognized.

Mrs. NAPOLITANO. Thank you, Mr. Chair.

Mr. Hoecker, there is a specific question I have based on California experience. One of the things that was brought to my attention is that NEV, the New Energy Ventures, this week purchased

the AES. One of the news accounts, they have a long-term contract

to buy power from Bonneville, the Federal Power Agency’s largest

single customer outside the Pacific Northwest. The contract arrangement shields NEV from Bonneville’s decision earlier this year

to sell its excess capacity at prices set by the California Power Exchange.

As a result, NEV remains able to buy power at below-market

rates for resale in the California market, which is going to undercut, you know, some of my smaller providers. In effect, they are

going to be pocketing the difference between the secret contract

price for taxpayer-generated power and the higher market price.

What sort of Federal or the FERC controls would have to be in

place to address this kind of situation?

Mr. DOOLITTLE. I would be happy to provide you with a fuller answer with that question. I think I would have to take a look at the

contract arrangements. When Bonneville sells into southern California, or into California, into the independent system operator of

the power exchange, it is subject to the same rules as any other

seller of electric power.

I am not sure to what extent the New Energy Ventures contract

with them would undercut, or the merger that you mentioned,

would undercut the other providers in terms of price, but I would

be happy to provide you with a fuller answer to that.

Mrs. NAPOLITANO. I would very much appreciate it.

Mrs. NAPOLITANO. Second question would be that I am wondering what your position would be on H.R. 1486, the bill to provide for a transition to market-based rates for the PMA’s?

Mr. HOECKER. Well, the FERC, of course, has provided marketbased rates for hundreds of energy providers over the last decade.
50

And we have for new generation essentially allowed wholesale energy suppliers to sell at what the market will bear.

The concern I would have for market sales by a Power Marketing

Administration is the concern under the statutes that they be able

to recover their costs and repay their Federal obligations. But I

haven’t looked at this from a competitive perspective.

Certainly, we would like to see generation move to market. And

I think that that is important for all sources of generation.

Mrs. NAPOLITANO. The other question I think I would have for

Mr. Casten a—where are you? There you are. One of the questions

is, what are the assumptions you are making when you assert that

competition will cause the U.S. to drop its carbon-dioxide emissions

to well below the targets of the Kyoto Protocol?

Mr. CASTEN. Carbon dioxide is unlike any other pollutant. The

only way you get rid of it is to burn less fuel. The electric industry

is horribly inefficient. It burns three units of fuel to produce one

unit of power. We have demonstrated in all of our plants that we

can burn one-and-a-quarter units of fuel to make a unit of power.

Mrs. NAPOLITANO. How do you accomplish that?

Mr. CASTEN. We localize the generation to where there is a requirement for heat, such as the Coors brewery or an agricultural

processing factory, or chemical plant, hospital——

Mrs. NAPOLITANO. You have recovery?

Mr. CASTEN. We then recover the heat that would have normally

been thrown away and use that to offset other fossil energy. We

also avoid the losses that are involved in the transmission system

because the electricity is generated right at the user at their local

voltage. It doesn’t go up through the wires.

And so the overall efficiency of delivery goes up by two-and-half

times. The savings that we create totally come out of not burning

fuel. So our company as a whole produced 54 percent of the CO2

last year that would have been produced had the same power been

generated conventionally.

Mrs. NAPOLITANO. Very interesting, and I think it is very admirable.

Thank you, Mr. Chair.

Mr. DOOLITTLE. Thank you.

Let me ask and I invite you gentlemen to comment. I have read

that within 10, or perhaps as long as 20 years, although the article

seemed to imply it was more likely to be 10 years, many, if not

most, homes would be generating their own power through fuel

cells. Would you care to comment on that?

Yes, Mr. Casten?

Mr. CASTEN. The consensus of almost everybody that understands the technology is that we have learned that we can make

power efficiently in smaller units and that the optimal power unit,

which was moving up year after year, has moved down to very

small.

Fuel cells are a wonderful technology because they are clean and

they don’t take any maintenance. And they would be in every home

today, but they cost too much.

The argument that I believe I would subscribe to is that the

automotive industry is probably going to drive the cost of fuel cells

down via mass production, and that we will get to a point where
51

we make most of the electric power locally. Most of the transmission system will prove to have been overbuilt, and we will

greatly improve the competitiveness of the whole society by that

kind of a move.

Along the way, though, we are already able to generate power

on-site in all of our industry, hospitals, high schools, medical centers, with technology that exists, is proven and is cost-effective. But

we are prevented from doing that by all of these barriers to efficiency.

In this rural territory that the Congressman referred to, I could

put in a plant in a high school and it is maybe not quite efficient

economically. If I could run some of the power down to the local

hospital, I might have an economic plant. But in 49 States, if I run

that wire, I go to jail.

So if Congress removes some of the barriers and lets the technology that is already available compete, your constituents are

going to see lower-priced power and more services. We are ready

with the technology.

Mr. DOOLITTLE. So even in the rural areas, in that example, it

would clearly be a benefit toward doing some of those things?

Mr. CASTEN. Absolutely.

Mr. DOOLITTLE. Mr. Hoecker, is it my understanding then that

you are in support of this idea of asserting your jurisdiction over

the PMA’s?

Mr. HOECKER. Well, we would have to be given that jurisdiction

by the Congress.

Mr. DOOLITTLE. Right, but——

Mr. HOECKER. Yes. I support that.

Mr. DOOLITTLE. You do support that. That would then mean that

the PMA transmission facilities would be subject to the same open

access requirements as the public utilities?

Mr. HOECKER. That is our purpose, sole purpose.

Mr. DOOLITTLE. Do you believe that electric energy produced at

hydroelectric facilities should be considered renewable for the purpose of meeting a renewable generation requirement and should

the Federal Government seek to impose that?

Mr. HOECKER. I know what a controversial question that is. And

I view renewable energy, non-fossil energy, as very important. And

hydroelectric is absolutely essential to the stability of the grid, particularly in the West. And I am happy to call it renewable. I am

not sure what my opinion means as far as legislation is concerned.

Mr. DOOLITTLE. Well, I, for one, would be grateful, at least if you

would express the opinion vigorously that it should be deemed renewable.

Mr. Casten, tell me your views about this issue of a Federal renewability standard. Do you think there ought to be such a thing?

And if so, do you think hydropower should be counted as renewable?

Mr. CASTEN. Mr. Chairman, I think it is incumbent that we have

leadership to move to a sustainable world. We are going to run out

of fossil fuel, and before we run out of it, we are going to run out

of places in the air to park all the carbon. Our grandchildren will

still find water raining in the mountains and able to come down
52

and make electricity. They are going to find a lot less fossil fuel

than we found.

So, I think that everything that doesn’t burn fossil fuel ought to

be encouraged. As to the specifics of the renewable standard, I

think it is an awkward way to achieve the result, and that a better

way to achieve the result would be for Congress to say to anybody

that wants to make heat or power, go ahead, make heat and power,

but here is the amount of fossil fuel that you are allowed to burn

per megawatt hour you produce, and if you use more than that,

buy some credits from somebody else. If you use less fossil fuel, sell

your credits.

Oh, and another thing, next year, the amount allowed will go

down. And then, periodically, Congress could set how fast that

curve goes down, but let the market decide what is the best way

to get to sustainability. You give us the leadership; certainly let

hydro play a role in it.

Mr. DOOLITTLE. Thank you. Mr. Walden.

Mr. WALDEN. Thank you, Mr. Chairman.

I just want to follow up on your comment, Mr. Casten, because

the example you used sort of strikes at the point I was trying to

make. You could put in your power-generation facility for the high

school, but you should know in this county of 1,700 people there

is no hospital.

And so you might serve something in downtown, but it is the

rural nature of this very county that I am struggling with on how

all this works, because if you take the high school and you take the

mill, and they are no longer on the grid there that the co-op is providing for, who is going to reach out? Is your company willing,

then, to go out and go past the hospital and go out a hundred miles

in this county and drop line every 9 miles to a ranch?

See? That is what I am trying to deal with in my district. I know

it is unique from some, because it is so large and rural and expansive. But this is what the folks there are saying. People who have

strung that line, maintained that line are saying, you take the big

users off our system, who is going to step up to the plate to provide

power to the ranch that is 30 miles out of town? Are you going to

do that?

Mr. CASTEN. We originally granted monopolies in order to encourage people to invest that money, and that worked. We got everything electrified.

Mr. WALDEN. It did.

Mr. CASTEN. But Congress had to fill in the holes with the rural

utility systems. The country is now pretty well electrified, and the

wires are there. And my question is, why would the people with the

wires there stop providing service if they no longer had a monopoly?

Mr. WALDEN. Well, what is their cost going to be though to do

that if you take their big users off. Isn’t their cost per going to go

up to maintain the service?

Mr. CASTEN. I am not at all sure.

I grew up in Windsor, Colorado, which is a pretty rural little

town served by an RUS. And Kodak moved in there. There is an

opportunity for Kodak to make 20 megawatts of power about onethird cheaper than it comes from Tri-State, the RUS. If that power
53

was made at Kodak, you avoid the transmission cost of bringing

that power over the mountain. And it is not clear at all to me that

two businesses wouldn’t work together. We are now starting with

the power locally and much cheaper. And it can still get out to my

father-in-law’s farm.

But I think that the larger issue is to——

Mr. WALDEN. Well, we do have Cogen facilities throughout this

district as well, and the power is purchased and is distributed.

Mr. CASTEN. Right. But the power can only be sold by the Cogen

facility to its competitor. He can’t run a wire across the street. And

this tends to distort what is the best economic way to get it done.

I am arguing to take those barriers out of the way and trust, by

and large, that markets fill every niche in trying to provide the

service. Then come back if there are problems and make the adjustments.

Mr. WALDEN. Yes, but I guess I am not willing—I am concerned

about just saying come back and fix the problem, because rural

communities in districts like mine get left out on every highway

that is created. And that’s what I struggle with as I try and represent this area.

I mean, I have been in small business for 13 years. I know where

the profit is in my business, and I know where the loss is. I don’t

go seek the loss. I go seek what is profitable.

And that is my concern for districts like mine that get left off the

Internet, that wouldn’t have power if it weren’t for the government

stepping in. I mean, I generally approach this from a very free-enterprise status, but, on the other hand, there is some basic service

I am concerned will be lost if we are not very careful about how

we go down this road. Can you help me with that? Because Kodak

is not going to locate in Fossil or John Day or——

Mr. CASTEN. I share the concern with Fossil, but I raise another

concern. The kinds of technologies that I referred to in my answer

to the chairman are being held back because you can’t put them

in any place. And those are precisely the kind of technologies that

would work pretty well on my father-in-law’s farm, which is in Hill

Rose, Colorado, which about as remote as you get. Those technologies will be developed and brought forward and made more

cost-effective.

So I think that the challenge that you have—and I appreciate

that it is a challenge—is to try to get the barriers out of the way,

so that these technologies can develop and still take care of these

remote parts of the market.

Mr. WALDEN. And I understand what you are saying. There is a

company in Bend that has developed a power unit. I am going to

go visit in the next couple of weeks. That, you know, they are trying to get down to microwave-sized thing that will produce enough

power for a house. We have had generators before.

I literally have places in my district that just this year may get

the first access to telephone service because they are so remote.

And so, I mean, I realize I face a little different problem, but this

is the problem I face, and to the extent we can get more power out

there, great. I just don’t want to leave those people off the line.

Mr. CASTEN. Just my final comment.

Mr. WALDEN. Yes.
54

Mr. CASTEN. I spend some of my time as the president of a Boy

Scout Council, and we are building cabins in an extremely remote

area. And the technology has now improved so that it is cheaper

for us to put in photo-voltaic power than to run the transmission

line. So the technology is coming.

Mr. WALDEN. Well, as a fellow Eagle Scout—and I serve on a

council, too—I am glad to see you are doing that. Good work.

Thank you.

Mr. DOOLITTLE. Mrs. Napolitano.

Mrs. NAPOLITANO. Thank you.

Mr. Casten, I asked you the question in regard to the assumptions issue. One of the questions that I didn’t quite get to, and

didn’t ask really for the answer was, does your industry need to

take over what percentage, 10, 20, 50, of the market to accomplish

the emissions reductions to meet the Kyoto Protocol?

Mr. CASTEN. In the United States, the average power plant was

built in 1964 using 1959 technology. And I am thankful that the

Internet and my personal computer came a little bit later or we

would have a hard time being here today.

The people worry that, if Congress steps in, there will be the premature retirement of some of these assets. I would suggest that

what we are facing is the post-mature retirement of most of the

fossil power plants in the United States. It is not a matter of taking over the markets, but of generating that part of the power that

is possible in connection with heat loads.

And I can tell you what that statistic is. We had a peak of

550,000 megawatts of electricity generated on the peak hours of the

year last year in the United States. That is our peak.

The DOE has found that we could put in about 120,000

megawatts of new combined heat and power serving existing thermal loads, breweries, hospitals, universities, packing plants, chemical factories, and so forth. That would get us to a national average

efficiency of 55 to 60 percent. And that level, we would be below

the Kyoto carbon emissions, and we would be saving money.

Britain deregulated electricity in 1989 and is now 7 percent

below the carbon output that they were at in 1990. All of the drop

has come from generating efficiency in the electric industry. Carbon emissions from industry have gone up slightly. Emissions from

transportation have gone up a lot. And yet, Britain’s total CO2

emissions are 7 percent below where they were, and their economy

is very healthy.

So what needs to happen is for Congress to change the rules so

that this kind of efficient power will get built. Am I answering your

question, ma’am?

Mrs. NAPOLITANO. You have gone around the way, but you got

there.

Mr. CASTEN. Thank you.

Mrs. NAPOLITANO. Thank you, Mr. Chair.

Mr. DOOLITTLE. I am interested in unleashing these exciting developments. Sounds like it is your belief, Mr. Casten, that the existing regulatory scheme is what is hindering this and maintaining

these inefficient plants in existence to this day. Is that correct?

Mr. CASTEN. Yes, it is.
55

Mr. DOOLITTLE. If we go to this deregulation, what happens to

reliability in the system, which has been quite high, I believe, heretofore?

Mr. CASTEN. I know of no commodity in my lifetime that has

been in short supply except those that had price regulation by the

government someplace. Somehow there is bread on the shelf every

day even though there is not a Federal bread regulatory agency.

[Laughter.]

I think that when you are in business, if you don’t provide the

reliability that the customer wants, you don’t stay in the business

very long. And I think we will as an industry provide reliability,

but I make another point. Not every customer wants as much reliability as they are presently receiving. Some of that reliability costs

an awful lot of money. Many of the big industries would find it

cheaper to shut down a couple of megawatts rather than to pay for

20-percent extra power generation standing in place. Deregulation

will give people those choices of how much reliability they buy. The

market will supply it.

Mr. DOOLITTLE. Well, what is your reaction to that, Mr. Hoecker?

Mr. HOECKER. Well, I agree with an awful lot of what Mr. Casten

says. I think these technologies are wonderful, and the market

needs to test them. And they need to be promoted in an environment where these new sources of generation and some of the old

ones, like hydro, have access to markets. And we want them to

have access to the wires on a non-discriminatory basis. We think

that will encourage their development. In those cases where they

are distributed generation off the grid, I think the reliability question is a very poignant one because I think many Americans and

American businesses would like to have the backup that connection

to the utility, to the power grid, provides even if they self-generate.

I think that, frankly, reliability is—will be seen increasingly, perhaps—as a commodity just like power itself, and that a business

decision to cycle one’s plant offline for several hours to save power

costs will be an important decision to make, and it is being done

even today. But it is the universal access to power; it is the power

at reasonable prices that I think Americans regard as almost a

right. And I think that we tinker with that at our peril. So I am

just advocating a bit of carefulness in this transition.

Mr. DOOLITTLE. Although the proponents of deregulation would

argue that, with some evidence from industries that have been deregulated, that the prices would drop, not go up. And with respect

to that, let me just ask you, talking about running the wire across

the street and it being a felony or a crime in 49 of the 50 States,

what do you think of the idea of relaxing that so that they could

run the wire across the street?

Mr. HOECKER. Well, I am not an expert on retail access laws per

se, but I think the competition needs to come to the retail environment just as we are trying to promote it at the wholesale level. I

don’t think that we ought to criminalize that sort of behavior, if in

fact that is what is happening.

There are reliability concerns, safety concerns, pricing concerns

associated with the kind of situation that has been described, but

I personally think the government should not burden those kinds

of transactions unnecessarily if there is no public interest involved.
56

Mr. DOOLITTLE. I don’t know how we got you as Chairman of

FERC, but I am glad we did. I appreciate your candid response.

Are there further questions? Oh, yes.

Mr. MELE. Mr. Chairman, if I could respond? I have heard a

number of discussions dealing with the wires across the street,

which is the jurisdiction so far of my members. And one of the

things that concerns me, and it was brought up in the discussion

with rural areas—and let me give you a little story.

In Pennsylvania, the co-ops also had to open up their systems,

just as the investor-owneds did. Nobody wants to sell power in the

co-op areas.

These two gentlemen are talking about running wire; they are

talking about industrial customers. My members care about the

residential ratepayer. The residential ratepayer isn’t going to see

new wire coming to their houses—maybe 20 years from now after

the companies have made all of their money on the industrial side,

and then the residential folks have to pick up that cost.

The other thing I would say, if you are going to allow residential

distribution open access, if you will, you had better change the tort

laws and the product-liability laws in this country. I would use that

as a caution.

Mr. DOOLITTLE. Well, what is your reaction to the notion, if we

change those laws that prohibit other people from building distribution systems, would that unleash the technology that would

lead to many of the homes being able to generate their own power?

Mr. MELE. I think the technology is going to happen regardless

of whether you open the distribution system up or not. As was stated before, there is money—if there is money to be made there, they

will do it. If there is not enough money to made there, they won’t

do it. What they are going to advocate is, open up the distribution

system—which is, I think everyone would agree, a State jurisdictional issue—open up the distribution to provide three or four different wires coming into a house.

And it is not going to come into a house. It is going to go into

industry; it is going to go into large commercial, may even go to

some small commercial. Residential ratepayers aren’t going to see

it for quite awhile.

Mr. DOOLITTLE. Well, suppose that were the case, and it went

mainly to, which I presume probably would be the case initially,

that it would go to the bigger users, but that is not necessarily a

problem anyway, is it?

Mr. MELE. Not necessarily, I wouldn’t think. However, the distribution system at that—when you are getting down to the level

of the wires to the meter, the wires that are running down streets,

I can see many reliability problems, perhaps. I can see, in certain

instances, residential ratepayers’ rates going up for their distribution component. I could see—foresee, rather—when there is a reliability problem, a residential ratepayer would pick up the phone

and call his State legislator or his commissioner, his public utility

commissioner, they are not going to pick up the phone and call the

chairman and the clerk. They don’t even know they exist.

I am talking about a residential ratepayer. You are right about

the industrial and large commercial. That is 100 percent correct.
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Mr. DOOLITTLE. I realize my time is up. Let me just ask this follow-up question. I think I have read that some power companies

are now technically able to do other things with those wires than

just put power through them, like maybe a phone service or a cable

TV service or something like that. So doesn’t this all kind of get

rearranged, our whole model of thinking about this, now that those

are sort or interchangeable? Any reaction? Mr. Hoecker.

Mr. HOECKER. We are seeing an incredible trend toward diversification in the utility business. There has been a lot of consolidation among electric utilities, but also between electric utilities and

gas companies because they both have access to the customer base.

There are alliances between electric utilities and telephone operations or data—I should be more sophisticated and say, data and

Internet providers. I think that we will see an emergence of energy

and data and other kinds of services to the home by the same and

competing providers using the same wires.

But the essential point I would make is that they are using the

same wires. They are using an essential facility that allows all providers access to customers. And when you have essential facilities

like that, you have to ensure that access is fair and non-discriminatory, whether it is into somebody’s house or whether it is between

two utilities across the State line.

Mr. DOOLITTLE. Are there further questions from our members?

Mr. Walden.

Mr. WALDEN. I might just follow up with one statement, Mr.

Chairman, just to help, not ride this thing into the ground, but to

give you an example in my district, Harney Electric Co-op has 348

miles of transmission line that services 1,887 customers. Now,

again, I am concerned you could potentially go in and take whatever industrial customers are there, and there are a couple off the

system, and, you know, the economics change dramatically for a

small provider like that, just the economies of scale could be lost.

So, as we work through this, I think we have to take these situations into account, is what I am saying. Because I don’t want to

leave those people out there paying an enormous rate for the power

they used to get all in the name of deregulation, because I think

industrial customers are going to be the first ones served and benefited by whatever deregulation comes.

I also harken back to my days in the legislature in support of let

the States make these decisions—and Oregon is working on a deregulation bill right now—as opposed to us always jumping in to

decide these things for them.

So, thank you, Mr. Chairman.

Mr. DOOLITTLE. Let me just—did you want to respond? Go

ahead, Mrs. Napolitano.

Mrs. NAPOLITANO. Thank you, Mr. Chair.

Just one more statement, and I have had discussions in California over this particular issue, and that is that utilities have become very cognizant of making money for their investors, at least

in my area they do. And I was told at one point that they had to

make a certain amount of earning for their ratepayer—for their investors, and I thought, I thought you were public utilities. And we

got into a little argument over that.
58

Do you have any comments over that because that bothers me?

Public utilities were meant to be serving the public, not necessarily

to make money for their investors.

Naturally, that is an investment. I am an investor. I may lose

money on my investment, but I am not guaranteed a good return

on my investment—and if I put into stock or bonds, or whatever.

And that bothers me because that changes the flavor, if you will,

of what utilities were meant to be. Would you address that?

Mr. HOECKER. Well, there is a long history of utilities that are

affected with a public interest, being regulated by agencies like

mine and those that Mr. Mele represents. I think that it is very

important that we protect those public interests in reliability and

safety and reasonable prices.

On the other hand, it is important that investor-owned companies be able to earn a fair return and attract capital, so that they

can continue to provide good services. Public utilities—electric utilities, in particular—kind of like the old Ma Bell, have been staples

of the blue chip investment portfolio for a long time, and that is

because they tend to provide a very nice dividend to their investors

and are not necessarily always plowing their earnings back into the

business because it hasn’t been a competitive environment.

That may change as they are under pressures to compete. That

may change their risk profile; that may change the way investors

look at utilities. But I think it is important for us to make sure

that they have a fair opportunity to earn their costs and a fair return. That’s been a staple of the regulatory principles for the better

part of this century, and I think that should continue to be the

case.

But, clearly, when we move beyond cost-of-service regulation and

into competition, they are at risk. And many of them are asking

to be placed at risk, so they can provide new and innovative services. And we have to weigh those competing desires and motivations to make sure that we all have electricity service.

Mr. CASTEN. Could I comment on that quickly?

Mrs. NAPOLITANO. Certainly.

Mr. CASTEN. Just to put it in perspective, if you look at all the

investor-owned utilities, they earn between 3 and 5 percent of their

revenue as profits. The kind of changes I am talking about will

drop costs by 30 to 50 percent. The profit portion of it, whether it

is there with an IOU or not there with a PMA, is rather tiny. It

is the 45 to 50 percent of the consumer dollar that is buying fuel

or that is paying for transmission that goes away.

So profit is a small part of costs. It is about unleashing the competition to drive the other costs out of the equation. We energy entrepreneurs will all dream about making big profits when we do it,

and then some guy will come in and offer a lower price, and the

consumer wins just standing there watching.

Mrs. NAPOLITANO. I wish there were more of that.

The other question I have has to do with the fuel cells. What is

the life of a fuel cell?

Mr. CASTEN. The only fuel cells that have been in commercial operation have now got over 40,000 hours on the stacks and they

haven’t been replaced. The cost of maintenance on a fuel cell is al-
59

most completely the replacement of the stack part of it. And everybody has sort of had to forecast what that is going to be.

It has surprised everyone in running as long as it has. It appears

that the technology is going to be able to give us four or five years

between major overhauls.

Mrs. NAPOLITANO. And the disposal of such fuel cells?

Mr. CASTEN. There is a platinum on the element, and they would

be almost certainly taken back and recycled.

Mrs. NAPOLITANO. Recycled?

Mr. CASTEN. Yes.

Mrs. NAPOLITANO. Thank you.

Mr. DOOLITTLE. Thank you. Would you just care to take a

minute, maybe, and briefly describe the fuel cell and how it might

work in the home environment? Yes, if you would, too, Mr. Casten?

Mr. CASTEN. All of our existing generation with fuel is a combustion process that some way or other drives a piston or a turbine

or whatever else. The fuel cell releases electricity in a different

fashion. It uses a chemical process.

The fuel first has to be reformulated to be only hydrogen, and

then as it moves across the cell, helped by a catalytic process, the

electricity flows, very tiny electricity, seven-tenths of a watt. They

stack these things up together to give you enough electricity.

The only emissions from the fuel cell are CO2, water and some

heat. And you can use the heat to make hot water or whatever.

The technology is marvelous. That’s the good news.

The bad news is that the fuel cells today cost about $3,000 per

kilowatt versus maybe $450 per kilowatt to put in a new combinedcycle gas turbine plant. So for fuel cell technology to gain acceptance, it is going to have to come down in cost with mass production.

Mr. DOOLITTLE. And that was your point about taking a page out

of the automaker’s book?

Mr. CASTEN. General Motors has recently tied up with a company, I think, called Plug Power. And there is a lot of money going

to be invested to bring fuel cell costs down because that is about

the only way we can think of to make a non-polluting car. And if

fuel cell technology gets driven by the automotive industry, it will

end up out in the ranch houses as well.

Mr. DOOLITTLE. Oh, so this would be used in automobiles as well,

you mean?

Mr. CASTEN. Absolutely.

Mr. DOOLITTLE. Mr. Walden’s concern about the rural areas—I

mean, your testimony seems to acknowledge perhaps an exception

for those areas or a way that even the improving technology could

benefit those areas in the way of energy production, so they would

free up dollars for other assistance. Is that a correct reflection of

what you were saying in your testimony?

Mr. CASTEN. Yes, sir. I think there is some of the problem he alluded to. But I think we do need to separate distribution and generation. If there is cheaper power available, the companies with the

distribution wires should be able to buy it and pass it on. But I will

acknowledge completely that they get a lot of money from the one

Kodak, and if Kodak is no longer there, there is some adjustment

that would have to be taken care of.
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Mr. DOOLITTLE. Okay. Further questions?

[No response.]

Well, let me just ask this—this raises one issue. I think you are

describing a high-temperature fuel cell. But there are low-temperature fuel cells, too, aren’t there?

Mr. CASTEN. The fuel cells that I am familiar with have heat left

over from 500 degrees Fahrenheit up to about 1,000 degrees Fahrenheit, and all of it is capable of being recaptured to make some

useful heat, if we put them in the right places. They all reject heat.

Mr. DOOLITTLE. What do you think? What is the timeframe that

we will actually see these available for homes? What would be your

best guess?

Mr. CASTEN. I think that if we don’t deregulate federally, we are

probably looking in the 2010, 2015 area. If we deregulate federally,

we are probably looking at 2005.

The comment that Chris Mele made, I do disagree with. There

are 15 of these States that make it illegal for you to generate

power on the site of the customer if you are not the local utility.

There are so many other barriers. Yes, we would love to go deploy

these things, and hopefully, make a profit, but the barriers that I

cited in chapter 8 of my book are so stacked up that it is almost

a miracle when you are finally able to get a power plant in that

is not part of the protected monopoly.

And I think Congress does need to say to the States, electricity

is interstate commerce; you cannot restrict people from generating

and selling electricity.

Mr. DOOLITTLE. Well, I would certainly like to thank all of you

for the testimony you have given us. This has been a very interesting discussion. And I think it is indicative of the exciting times

that we face, and some real opportunities and perhaps challenges

that will confront us as we move toward it.

We no doubt will have a few extra questions that we would like

to pose in writing, and we will hold the record open for your response, which we would hope would be as expeditious as possible.

Mr. DOOLITTLE. And with that, we will excuse the members of

this panel.

Mr. HOECKER. Thank you, Mr. Chairman.

Mr. CASTEN. Thank you.

Mr. MELE. Thank you.

Mr. CREWS. Thank you, Mr. Chairman.

Mr. DOOLITTLE. We will invite the members of our second panel

to come forward and ask you to assemble yourselves and remain

standing, so we can administer the oath.

Would you please raise your right hand?

[Witnesses sworn.]

Let the record reflect that each answered in the affirmative.

We are very pleased to have you join us and welcome you to the

hearing.

Our first witness is Mr. Alan H. Richardson, executive director

of the American Public Power Association.
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STATEMENT OF ALAN H. RICHARDSON, EXECUTIVE

DIRECTOR, AMERICAN PUBLIC POWER ASSOCIATION

Mr. RICHARDSON. Good afternoon. I am Alan H. Richardson, executive director of APPA. I am just returning from seven days in

Salt Lake City at APPA’s annual conference. So while I would otherwise say that I am very happy to be here, and in view of the fact

that I have just taken an oath, I will simply say, thank you for the

opportunity to testify. Public power systems consist of about 2,000 municipally owned, State-owned utilities located throughout the country. Public power

systems truly are public utilities. They are owned by units of State

and local government. They are directly or indirectly governed by

elected officials. They are managed by public servants. They focus

on protecting and promoting the needs of the communities they

serve.

As I have listened to what the previous panel has been saying, it seems to me that it is more appropriate to talk about the role

of the power marketing program in the context of industry restructuring. We are not really restructured yet. And it seems to me that

a lot of the comments that you have received in the discussion that

has occurred really looks at timing issues in the implementation of

change, not whether or not change is going to occur in the industry,

because clearly it is. APPA does support comprehensive Federal legislation relating to industry restructuring, but, as always, the devil is in the details.

The most important detail is that legislation advance the interest

of all consumers. And I think that to me means that it has to address a number of issues and it has to be looked at in a longer term

perspective than immediate and rapid change. We are all trying to promote competition in the industry, but I

think it is also important to bear in mind that competition is a

means to an end, and that end is benefits for consumers. I think

it is also important to recognize that in every environment, whether it is a natural environment or an economic environment, competitors try to monopolize the situation that they enjoy. And to me,

that means that we need to make sure that we have a market

structure in place that controls the natural tendency of these competitors to engage in monopoly practices.

To paraphrase a comment that was made, and has been several

times, by FERC Chairman Jim Hoecker, he says that you cannot

believe in competition and yet be an agnostic in terms of market

structure. And I think that is absolutely true.

Now there are a number of issues that are a concern to APPA.

I have identified them in my statement that I have submitted for

the record.

To summarize briefly, we are concerned about Federal tax code

provisions that deal with the way that we can use facilities financed with tax-exempt bonds in a new restructured environment.

That is a critical issue for us as we move into a restructured environment and one that the House Ways and Means and Senate Finance committees need to address as quickly as possible to remove

these impediments for publicly owned utilities who legitimately use

the instrument of tax exempt financing for their own infrastructure

facilities in order to operate, not simply compete but to operate in
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a restructured environment that is a now a reality in 22 States,

and soon to be a reality in many more.

Congress needs to clarify State and Federal jurisdiction to make

sure that the States can move forward. State and local decisionmaking should be preserved. We do oppose a Federal date-certain

mandate from this Congress for industry restructuring.

Most important, Congress needs to address market power issues

because, as I said, market structure, we believe, is critically important to the realization of the goals of competition as the means to

the ends of benefiting electric consumers. And that, of course, has

to be the overarching goal for any restructuring activities benefiting all consumers.

Now we believe that the Federal power marketing programs that

currently exist do contribute to these goals of promoting competition, protecting against market power, and benefiting all consumers. We think the allocation of Federal power to 1,180 publiclyowned and cooperatively-owned utilities keeps these institutions in

the marketplace as competitors.

A viable market needs a multitude of buyers and sellers. And the

preservation of those entities, certainly through this transition period in the marketplace, we believe is very important for the benefits it provides to enhance competition in the market.

Another function of these utilities is to provide yardstick competition at the distribution level, and we think that that is also

very important. Yardstick competition does work. It is important

for regulators to be able to compare the activities of various competitors in a marketplace, and these publicly owned and cooperative systems that operate today do serve that function.

By the same token, yardstick competition in generation, we believe, is served by the sale of Federal power at market-based rates

into the market. Now I think we have seen this in the Pacific

Northwest, for example, where the price of Bonneville power really

has set the mark for the price of other power, including the price

of power that comes out of the Washington Public Power Supply

System. And I can tell you there is significant pressure on that institution to meet the price that is set by the Bonneville system.

So I believe the yardstick function continues to work and work

to the benefit of consumers, certainly again through the transition

period. The goal of electric restructuring is lower rates for all consumers. The proponents of market-based rates, however they might

be defined, and I don’t think we have come up with an adequate

definition in the rhetoric, in the debate over PMA power, that adequately describes what market rates are, or would be higher than

today’s current rates.

And it seems rather inconsistent to me to advocate policies that

increase rates for millions of consumers under the guise of industry

restructuring intended to benefit consumers through lower rates

when the exact opposite will occur.

Mr. Chairman, I thank you for the opportunity to be here this

afternoon and look forward to questions you might have.

[The prepared statement of Mr. Richardson follows:]
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Mr. DOOLITTLE. Thank you.will be Glenn English, chief executive

officer of the National Rural Electric Cooperative Association and

a former distinguished member of the House of Representatives.

Mr. English.

STATEMENT OF GLENN ENGLISH, CHIEF EXECUTIVE OFFICER,

NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION

Mr. ENGLISH. Thank you very much, Mr. Chairman. I appreciate

that. I am Glenn English, the chief executive officer of the National

Rural Electric Cooperative Association. I represent some 1,000 electric cooperatives across the country. I might point, Mr. Chairman,

these are privately-owned, not-for-profit, consumer-owned organizations.

And, Mr. Chairman, what I would like to do today is to request

that my entire written testimony be made a part of the record and

to speak not from the testimony but respond to the questions that

you asked at the beginning of the hearing and also address some

of the testimony that we heard earlier.

We have a rather unique perspective being electric cooperatives

because in many States—in fact, most States—the 46 States that

electric cooperative exist, we have some 83 percent of all the counties across the country in which we have electric cooperatives exist.

They are not regulated. So that wire that you are talking about,

those consumers who are part of those cooperatives do indeed have

the ability to do exactly what Mr. Casten was saying that couldn’t

be done in so many areas and I think gives us a rather unique perspective with regard to much of what is happening in restructuring.

The reason that I say that is because I think, from one point of

view, electric cooperatives are the only people who have truly had

choice over the past 60 years that they have existed. And the reason that I say that is because, at any given time that those consumers wished, they could come together and vote to sell their electric cooperative, and sell it to anyone that they wished to sell it to.

So it is a little bit different.

As you all know, certainly the reason our electric cooperatives

got started in the first place is because of the fact that big power

companies wouldn’t provide electric power in many of those rural

areas. And also, I think, it should be understood that not only

would they not provide that power, but the only way that these

people could get power is to do it themselves.

And what they found was that this mechanism, this form of private business, the cooperative mechanism, built on the seven cooperative principles, that allowed them to do it themselves. And they

came together, with a little assistance from the Federal Government; through government loans, they were able to, in fact, build

their own electric utility.

Now that electric utility has gone to the point now that it represents nearly half of all the electric utility infrastructure in the

entire Nation. So it is a huge infrastructure that really only serves

about 10 percent of all the consumers in the Nation, some 30 million consumers spread across those 46 States.

What we are finding today, though, as we are seeing restructuring take place in the States, is that people are deciding that
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they would rather do it themselves. And they are once again reaching for that self-reliance, private-business approach known as the

cooperative.

And this has recently happened in your home State of California,

Mr. Chairman, in which we have the California Electric Users Cooperative, some 18 agricultural businesses, spreading all the way

from San Diego to the Oregon border, who have decided to do it

themselves. And they have formed an electric cooperative and are

now providing power to those businesses.

And New York City, we have a group of residential consumers

decided to do it for themselves. And we had the first Rochdale Electric Cooperative that was established there.

And what we are also finding is that, under a restructured environment, this gives an awful lot of people the opportunity to do it

for themselves under this form of business.

We are developing new technology. You had the previous discussion with regard to fuel cells. And certainly the electric cooperatives have been very active as far as the research and development

of fuel cells. We have, we think, a great opportunity to provide that

for some of the most remote regions that are served by electric cooperatives.

For instance, one now that has been developed and is being tried

is in the State of Alaska, in some small villages up there. And they

are using that fuel cell. They have just about completed those tests,

and they intend to install it permanently on an island off the coast

of Alaska.

And, indeed, new technology is coming onboard. I have no idea,

Mr. Chairman, nor can anyone else tell you from the standpoint of

what technology will come, be developed in the next few years. I

know it isn’t going to be 10 or 15 years before you see fuel cells.

As I mention, you already got it within probably the next two years

that it is being operational in Alaska.

But what I do know is that we have a cost that is involved in

providing electric power in this country. It is ultimately that cost

that will decide what form of fuel will be used to deliver those electrons to businesses. And we have a huge investment in the infrastructure that exists today.

I suspect that what we will see is new technology coming online

as it is affordable and as it makes sense to the American people.

And as this new technology comes online, no question, it is going

to replace much of the existing technology. There is no question;

environmentally it is going to be more sound. There is no question

that it will carry a lower price for the American consumer.

But the bottom line is, it is the economics, the sound economic

principles that have always guided American business, that will determine when it comes online and how it comes online. And certainly, as far as the form of business that it will be used, I would

suggest to you that the cooperative mechanism under a restructured environment will have the probably the greatest opportunity

to lead the way because it is the consumers themselves that make

the decision in that form of business.

Thank you very much, Mr. Chairman.

[The prepared statement of Mr. English follows:]
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Mr. DOOLITTLE. Thank you.

Our next witness is Mr. Donald Santa, vice president of LG&E

Energy Corporation.

Mr. Santa.

STATEMENT OF DON SANTA, VICE PRESIDENT, LG&E ENERGY

CORPORATION

Mr. SANTA. Good afternoon, Mr. Chairman, and Mr. Walden. On

behalf of LG&E Energy Corp., thank you for the opportunity to testify today regarding the role of Federal Power Marketing Administrations in a restructured electric industry.

LG&E Energy is a diversified energy services holding company

headquartered in Louisville, Kentucky. LG&E has been a leader in

the competitive transformation on the electric industry and was

among the earliest investor-owned utilities to support comprehensive Federal restructuring legislation.

LG&E’s two regulated subsidiaries, Louisville Gas and Electric

Company and Kentucky Utilities Company are within the Southeastern Power Administration’s service territory. And the company

has experience dealing with public power and Federal utilities in

a variety of contexts.

In some cases, the LG&E companies supply public power with

both generation and transmission services, and in other cases, the

roles are reversed. In some cases, LG&E is a partner with public

power, and in other cases, we are competitors. This is quite typical

of how IOU’s interact with public power. In my comments today,

I will offer certain comments addressing both public power and the

PMA’s and then focus on PMA-specific issues.

The legal framework governing IOU’s and public power affects

each of these relationships I just referenced. Electric restructuring

and the public policy promoting competition in the electric industry

necessitate re-examining this legal framework. In particular, does

this legal framework distort the market and frustrate the goal of

competitive industry restructuring?

I will discuss this issue in three contexts. First, the rules governing access to transmission facilities owned and operated by public power and Federal utilities. Second, the rules governing public

power and Federal utilities when they participate in competitive

segments of the electric industry. And third, the fundamental question of the role of the Federal Government as a generator and marketer of electricity.

With respect to the first issue, public power and Federal utilities

should be required to provide access to their transmission facilities

under the same terms and conditions of service as investor-owned

utilities. Transmission is the interstate highway system for commerce in electricity. Regardless of whether the transmission is

owned by an IOU, public power, or a Federal utility, it is a monopoly function. And the detriments to competition from the exercise

of market power in transmission are the same regardless of the

ownership.

As Chairman Hoecker noted, the Energy Policy Act authorized

the Commission to order non-jurisdictional utilities to provide

transmission access on a case-specific basis. And in response to
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Order 888 reciprocity conditions, a number of publicly-owned utilities have voluntarily filed open-access tariffs. Still there is no effective substitute for the full scope of the Commission’s Federal Power Act authority to regulate the rates and

terms and conditions of transmission service under a common set

of standards. To paraphrase Betsy Moler, the former chair of the

FERC, open access does not work well on Swiss-cheese basis.

Admittedly, it is not as simple as just amending the Federal Power Act. In fairness to public power, the Internal Revenue Code

must be amended to address the tax consequences of providing private parties with access to transmission facilities constructed using

tax-exempt financing. There is no dispute regarding this basic

point. The devil is in the details, however, and, as always, the level

playing field is in the eye of the beholder. Next, to the extent that public power and Federal utilities choose

to compete in competitive segments of the electric market, they

also should be subject to the same legal requirements as investorowned utilities competing in the same markets. With regard to

such activities, they should be subject to the same regulatory obligations, the antitrust laws should apply with equal force, and the

tax-exempt status should not be permitted to distort the outcomes

in competitive markets.

With respect to the Power Marketing Administrations, the fundamental question of the role of the Federal Government as a generator and marketer of electricity must be revisited. This necessarily

raises the issue of whether the PMA’s and Federal Power projects

should either be privatized or fundamentally restructured.

Admittedly, this is a complicated and divisive issue fraught with

political peril. Still, at a time when the electric power industry is

undergoing a fundamental restructuring, and the New Deal era

statutes that served as the basis for Federal regulation of that industry are being re-examined, the role of the Federal Government

as a generator and marketer of electricity should be re-examined

as well.

While I am not an expert in the laws governing the PMA’s and

the particulars of the public policy issues affecting the PMA’s constituencies, I offer the following observations based on my experience with analogous issues in other contexts:

First, the facts about Federal power must be separated from the

myths about Federal power. For example, Federal power’s proponents frequently cite its role as a competitive benchmark or

yardstick for investor-owned utilities. What are the facts?

GAO points out that the PMA’s historic position as a low-cost

power provider stems from a number of factors. These include the

inherent low-cost of hydro-power relative to other generating resources, Federal financing at low interest rates, flexibility in the repayment of principal on the treasury portion of PMA’s debt, the

PMA’s tax-exempt status, and operating budgets that seek to break

even rather than earn a profit or return on investment. Few, if

any, of these factors are grounded in sound management and efficient operation.

The validity of any benchmark comparison is further undermined

by the fact that the PMA’s rates do not cover all costs associated

with the production, transmission, and sale of power. For example,
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GAO has reported that SEPA’s, SWAPA’s, and WAPA’s net cost to

the treasury for the years 1992 through 1996 totaled about $1.5 billion because these PMA’s rates did not recover all power-related

costs.

Finally, even if one concedes that the benchmark concept for

IOU’s may have served some purpose in the past, one must question whether this concept has become an anachronism in an increasingly competitive market for the generation and sale of power.

My second observation is that the role of the Federal Government should be no greater than is needed to address legitimate

needs that cannot be met adequately by the marketplace. To the

extent there is a legitimate Federal interest to be served by intervening in the market, that intervention should be no greater than

is necessary to address the problem. The fact that an extensive

Federal intervention in the market for electricity may have been

justified a half-century ago does not necessarily justify that same

level of intervention today.

The goal of rural electrification has already been accomplished.

And to the extent there remains a need to protect the rates of rural

electric customers, it is hardly clear that the current program is

very effective at achieving that goal.

For example, many of the current end-user recipients of PMA

power are not rural customers. In fact, most rural customers are

served by IOUs, and not by the PMAs and other preference customers. Therefore, I think as a threshold matter, the Committee

should ask, is there still a legitimate Federal interest in protecting

rural electric customers?

And even if the answer is yes, the Subcommittee should ask, is

there a better way to target the Federal response to those who

truly are in need and not just those who by the accident of history

are within a preference customer-service territory?

Admittedly, because of the non-power uses of Federal water

power projects and the legal obligations that attach to those uses,

resolving the transition issues associated with Federal power will

be daunting. This should not, however, deter the Subcommittee

from asking and answering the threshold question of whether the

Federal Government’s historic role as a generator and marketer of

electricity can be justified going forward.

In conclusion, let me commend the chairman and the Subcommittee for their interest in the role of PMA’s in a restructured

electric industry. As you no doubt appreciate, these are not easy

issues. Still, they are important and timely questions in connection

with providing a legal framework that encourages competitive electric markets.

Thank you for the opportunity to testify, and I am happy to respond to any questions the Subcommittee may have.

[The prepared statement of Mr. Santa follows:]

STATEMENT OF DONALD F. SANTA, JR., SENIOR VICE PRESIDENT, DEPUTY GENERAL

COUNSEL, LG&E ENERGY CORP.

Good afternoon, Mr. Chainnan and Members of the Subcommittee. My name is

Donald Santa, and I am the Senior Vice President, Deputy General Counsel of

LG&E Energy Corp. Thank you for providing LG&E Energy Corp. with the opportunity to testify today regarding the role of Federal power marketing administrations (‘‘PMAs’’) in a restructured electric industry.
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I have been asked to address today, from the perspective of an investor-owned

utility, the issues that restructuring creates for the electric power industry. More

particularly, I have been asked to address the role of public power, and especially

the PMAs, in a restructured industry and the public policy issues related to this

segment of the industry.

LG&E Energy Corp.’s Perspective.

Let me begin by telling the Subcommittee about LG&E Energy Corp. and its perspective on electric restructuring. LG&E Energy is a diversified energy services

holding company headquartered in Louisville, Kentucky. The company has businesses in power generation and project development, retail gas and electric utility

services, and asset-based energy marketing. The company owns and operates two

regulated utility companies, Louisville Gas and Electric Company and Kentucky

Utilities Company. Together, these companies serve retail customers in the Commonwealth of Kentucky and in a five-county portion of the Commonwealth of Virginia. LG&E Energy owns equity in and operates non-utility powerplants in six

states as well as Spain and owns interests in natural gas distribution companies

in Argentina.

Over the past decade, LG&E Energy has transformed itself from a small, locally

focused regulated utility company into a diversified energy services company. This

transformation mirrors the changes that have occurred in the electric power industry over that same period.

LG&E Energy Corp. has been a leader in the competitive transformation of the

electric power industry. LG&E was among the first companies to form an unregulated energy marketing affiliate and to open its transmission system to non-discriminatory third-party access. LG&E also was among the first investor-owned utilities to support comprehensive Federal restructuring legislation.

LG&E’s two regulated utility subsidiaries are within the Southeastern Power Administration’s service area, and the company has experience dealing with public

power entities in a variety of contexts. For example, Kentucky Utilities Company

is a wholesale requirements supplier to 11 municipal systems and one college in

Kentucky. (As part of doing business with these customers, KU has dealt with

issues concerning their entitlements to SEPA power.) Louisville Gas and Electric

Company is a partner with the Indiana Municipal Energy Agency and the Illinois

Municipal Power Agency in its Trimble County generating station. LG&E’s Western

Kentucky Energy Corp. subsidiary is leasing and operating the generating assets of

Big Rivers Electric Corporation, a generation and transmission cooperative, and is

selling power under contract to Big Rivers’ four member distribution cooperatives.

And, given the proximity of the Tennessee Valley Authority, the LG&E companies

have experience in dealing with TVA as a power supplier and as a competitor in

off-system sales markets, as a transmission provider, and in the context of territorial disputes with TVA and its member cooperatives.

Finally, let me add a note about my personal perspective. Prior to joining LG&E

in 1997, I served for four years as a member of the Federal Energy Regulatory Commission. During that period, the Commission implemented Title VII (the electricity

Title) of the Energy Policy Act of 1992, issued its landmark Order No. 888 open access rule and dealt with many issues of first impression in connection with electric

restructuring.

A Sea Change in Industry Structure.

The domestic electric power industry has undergone a sea change in less than a

decade. The combination of the market, technological innovation and the catalyst

provided by Title VII of the Energy Policy Act have compelled an irreversible restructuring of the Nation’s electric power industry. This restructuring currently is

incomplete and has not occurred at a uniform pace across all regions and all segments of the industry. Still, there is no denying that the competition genie is out

of the bottle.

While Title VII of the Energy Policy Act addressed only the wholesale power market, the message that Federal energy policy endorsed competition in the generation

and sale of electricity—and non-discriminatory transmission access as a means to

promote that competition—profoundly affected the mindset of the electric power industry. Once unleashed, market forces do not respect the line between Federal and

state jurisdiction and the distinction between wholesale and retail customers. Beginning first in California and New England—and now spreading to other regions—individual states have begun opening their retail electricity markets to competition.

At last count, a total of 21 states have authorized consumer choice for electricity.

Not surprisingly, retail restructuring generally has occurred fastest in the states

with high electricity rates and slowest in the states with low rates. Still, it is not
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a stretch to predict that within the foreseeable future most, if not all, states will

have made the transition to retail electric competition.

While many refer to the ‘‘deregulation’’ of the electric industry, in fact only some segments of the industry are being ‘‘deregulated’’ while other segments are being

‘‘reregulated.’’ What is being ‘‘deregulated’’ are the segments and functions of the

industry that are competitive. In particular, the generation and sale of electricity

are being freed from traditional monopoly regulation. Also, functions such as metering and billing are being considered for deregulation. Meanwhile, the transmission

and distribution segments of the industry—that is, the wires used to deliver electricity from the generator to the consumer—still exhibit the attributes of natural

monopolies and are being ‘‘reregulated’’ on a stand-alone basis. Retail restructuring is breaking down the longstanding vertically integrated, mo- nopoly structure for electric utilities. As a result, there is no longer such a thing

as a typical electric utility or even a typical model for an energy services company.

Some companies, especially those in states that have not yet restructured their retail power markets, remain vertically integrated—that is, a single corporate entity

provides generation, transmission and distribution services within a monopoly franchise service territory. Still, vertical integration is no longer the predominant model. Increasingly, energy services companies are making strategic decisions regarding which segment—or segments—of the energy business they wish to focus their resources. Some companies, in many cases with the incentive to recover stranded

costs, have sold their electric generating assets. The Edison Electric Institute estimates that by next year, approximately 25 percent of all fossil fuel and hydroelectric

generation owned by investor-owned utilities will have been offered for sale. These divesting companies are focusing their resources on other aspects of the business. Some will be pure ‘‘wires’’ companies operating the transmission and distribution networks within their service territories and perhaps consolidating with

other such companies to realize efficiencies of scope and scale. Others will focus on

marketing products directly to consumers. This can range from marketing the energy commodity, to providing energy services, to marketing non-energy network

services such as telecommunications, Internet and home security. For every seller of generating plants, there is, of course, a buyer. Some companies are acquiring the divested generating plants as part of a strategy to become regional, and in some cases national, generating companies. In addition, open access

and competition have created tremendous interest in the construction of new, merchant generating plants. Merchant plants are powerplants constructed (or acquired)

solely for the purpose of selling power into the competitive market. The companies

acquiring divested generation and constructing merchant plants are putting shareholder dollars at risk. There is no guarantee that the cost of owning and operating

such powerplants will be recovered in the competitive market. This is in stark contrast to the traditional regulated, cost-of-service model for the recovery of utility

powerplant investment.

Furthermore, a whole new segment of the electric industry has emerged as part

of restructuring. This is the energy marketer segment. The growth of this segment

has been astounding. For example, in 1998 energy marketers sold 2.3 billion megawatt hours of electricity, compared to only 7.1 million megawatt hours in 1994. This

explosion in power marketer volumes is solid evidence of the liquidity that is developing in electric power markets.

As has been widely reported, restructuring has resulted in a wave of consolidation

within the energy industry. This consolidation began with a series of mergers between neighboring, vertically integrated utilities. It now, however, has spread to

combinations that cut across industry segments and that have brought a series of

new players to the industry. In two cases now pending before the regulators, utilities from the United Kingdom have applied for authorization to acquire domestic

utilities. There also has been a whole series of ‘‘convergence’’ mergers where electric

companies have acquired natural gas pipelines and local distribution companies.

There also are several instances where energy marketing companies have begun to

acquire established utility companies. In other words, the new entrants have begun

acquiring some of the industry’s traditional players. To use an analogy to some of

the toys we used as children, it is as if the ‘‘tinker toys’’ or the ‘‘erector set’’ that

comprised the traditional industry structure is being taken apart and re-assembled

into a variety of interesting new strategic structures.

We also are seeing the beginnings of regional structures for the operation and

management of the transmission grid. Given the physics of electric transmission,

the regional scope of wholesale power markets, and the advantages in terms of efficiency and reliability, a compelling case can be made for regional operation and

management of the grid. Beginning first with its Regional Transmission Group policy statement and continuing with the Independent System Operator (or ‘‘ISO’’)
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principles adopted as part of the Order No. 888 open access rule, the FERC has encouraged voluntary efforts to establish regional structures for transmission. Most recently, the Commission issued a notice of proposed rulemaking providing even

stronger impetus for regional transmission organizations (or ‘‘RTOs’’). In the three

years since Order No. 888, the Commission has authorized five ISOs. A competing

regional structure, the independent transmission company (or ‘‘transco’’) has gained

favor in some quarters, and the Commission currently has pending before it applications to authorize two transcos.

Completing the Legal Framework for Restructuring.

While the Energy Policy Act and subsequent actions by the FERC and the states

have spurred electric restructuring, there remains a need for follow-up action by the

Congress to remove impediments to a complete restructuring of the electric power

industry. As noted earlier, LG&E Energy was an early proponent for comprehensive

Federal restructuring legislation. Our preference would be a nationwide date certain

for retail competition as the centerpiece of a Federal restructuring bill.

Still, should this not be possible, LG&E believes that there are a number of other

positive steps that the Congress could take to promote an efficient restructuring of

the electric power industry. Importantly, these steps address areas of Federal law

that are beyond the authority of the states. Only action by the Congress can remove

these impediments. In particular, Federal legislation should be enacted to enhance

the competitiveness and efficiency of wholesale power markets and to ensure the reliability of the transmission grid.

First, the transition to competitive electric markets is being impeded by Federal

laws that burden the industry with outdated legal obligations. The Public Utility

Holding Company Act of 1935 should be repealed. The Congress also should repeal

prospectively the mandatory purchase obligations under the Public Utility Regulatory Policies Act.

Second, FERC’s authority to regulate interstate transmission should be enhanced.

The Commission should be authorized to regulate all owners of interstate transmission facilities (i.e., municipals, cooperatives and Federal utilities, in addition to

the investor-owned utilities currently regulated). It also should be authorized to

order the owners of interstate transmission facilities to participate in RTOs and to

establish mechanisms for enforcing national reliability standards.

The Role of Public Power and the Power Marketing Administrations.

As exemplified by my earlier comments about LG&E’s experience with public

power, investor-owned utilities interact with public power in a variety of contexts.

In some cases, IOUs supply public power with both generation and transmission

services and, in other cases, the roles are reversed. In some cases, IOUs are partners with public power and, in other cases, the two are competitors. The legal

framework governing IOUs and public power affects each of these relationships.

Electric restructuring and the public policy promoting competition in the electric

industry necessitate a re-examination of this legal framework. In particular, it must

be asked whether this legal framework distorts the market and frustrates the goal

of competitive industry restructuring. For purposes of discussion, this examination

of the legal framework can be subdivided as follows:

•First, the rules governing access to transmission facilities owned and operated

by public power and the Federal utilities;

• Second, the rules governing public power and Federal utilities when they participate in the competitive segments of the electric industry; and,

•Third, the fundamental question of the role of the Federal Government as a

generator and marketer of electricity.

Transmission Access.

With respect to the first issue, public power should be required to provide access

to its transmission facilities under that same terms and conditions of service as investor-owned utilities. Transmission is the interstate highway system for commerce

in electricity. Regardless of whether transmission is owned by an IOU, public power

or a Federal utility, it is a monopoly function. And the detriments to competition

from the exercise of market power in transmission are the same regardless of ownership.

If the goal of Federal energy policy is greater competition in the generation and

sale of electricity, open access to all parts of the highway system should be provided

under the same terms and conditions. This becomes even more important as policy

begins to focus on regional markets and the advantages of regional management

and operation of the transmission grid. To paraphrase Betsy Moler, the former chair

of the FERC, open access does not work well on a ‘‘swiss cheese’’ basis.
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1Federal Electric Power: Operating and Financial Status of DOE’s Power Marketing Administrations (GAO/RCED/AIMD-96-9FS, October 13, 1995). 2 Oversight Hearing on Accounting Practices for Federal Power Marketing Administrations Before the Subcomm. on Water and Power Resources of the House Committee on Resources, 104th

Cong. 104-101 (1996) (statement of J.M. Schaefer, Administrator, Western Area Power Administration).

The Energy Policy Act authorized the Commission to order non-jurisdictional utilities to provide transmission access on a case-specific basis. And, in response to the

Order No. 888 reciprocity conditions, a number of publicly-owned utilities have voluntarily filed open access tariffs with the FERC. Still, there is no effective substitute for the full scope of the Commission’s Federal Power Act authority to regulate the rates, and terms and conditions of transmission service under a common

set of standards.

Admittedly, it is not as simple as just amending the Federal Power Act. In fairness to public power, the Internal Revenue Code must be amended to address the

tax consequences of providing private parties with access to transmission facilities

constructed using tax exempt financing. There is no dispute regarding this basic

point. The devil is in the details, however. And, as always, the ‘‘level playing field’’

is in the eye of the beholder.

Competitive Ventures.

Next, to the extent that public power chooses to compete in competitive segments

of the electric power market, it also should be subject to the same legal requirements as investor-owned utilities competing in the same markets. With regard to

such activities, public power should be subject to the same set of regulatory obligations; the antitrust laws should apply with equal force; and public power’s tax-exempt status should not be permitted to distort the outcomes in competitive markets.

The Federal Government as a Generator and Marketer of Electricity.

With respect to the Power Marketing Administrations, the fundamental question

of the role of the Federal Government as a generator and marketer of electricity

must be re-examined. This necessarily raises the issue of whether the PMAs and

Federal power projects either should be privatized or be fundamentally restructured.

Admittedly, this is a divisive issue fraught with political peril. I readily acknowledge the complications arising from the multiple purposes served by Federal water

power projects, the potential rate implications for preference power customers and

the concerns of the various constituencies with a stake in the PMAs as part of their

regional economies. Still, at a time when the electric power industry is undergoing

a fundamental restructuring and the New Deal era statutes that have served as the

basis for Federal regulation of the industry are being re-examined, the role of the

Federal Government as a generator and marketer of electricity should be re-examined as well.

While I am not an expert in the laws governing the PMAs and the particulars

of the public policy issues affecting the PMAs’ constituencies, I offer the following

observations based on my experience in dealing with analogous issues in other contexts:

First, the facts about Federal power must be separated from the myths about Federal power. Already, the Subcommittee’s record of hearings on this issue and the

work done by the General Accounting Office at the Chairman’s request have done

much in this regard.

For example, Federal power’s proponents frequently cite its role as a competitive

‘‘benchmark’’ or ‘‘yardstick’’ for investor-owned utilities. What are the facts?

GAO points out that the PMAs’ historic position as low-cost power providers

stems from a number of factors, few of which are grounded in sound management

and efficient operation. These factors include ‘‘the inherent low cost of hydropower

relative to other generating sources, Federal financing at relatively low interest

rates, flexibility in repayment of principal on the Treasury portion of the PMAs’

debt, the PMAs’ tax exempt status, and operating budgets that seek to break even

rather than earn a profit or return on investment.’’ 1

Even the PMAs question the validity of any comparison. In a prepared statement

submitted to this Subcommittee in connection with its September 19, 1996, oversight hearing, J.M. Shafer, the Administrator of the Western Area Power Administration, stated: ‘‘I question the usefulness of comparing the PMAs against other,

nonfederal utilities for the purposes of determining why PMA power costs are

lower.’’ 2

The validity of any ‘‘benchmark’’ comparison is further undermined by the fact

that the PMAs’ power rates do not recover all of the costs associated with the pro-
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3 Federal Power: Regional Effects of Changes in PMAs’ Rates (GAO/RCED-99-15, November

16, 1998). 4 Federal Power: PMA Rate Impacts, by Service Area (GAO/RCED-99-55, January 28, 1999).

duction, transmission and sale of power. GAO has reported that SEPA’s, SWAPA’s

and WAPA’s net cost to the Treasury for the years 1992 through 1996 totaled about

$1.5 billion, because the PMAs’ rates did not recover all power-related costs. While

the PMAs generally were following applicable laws and regulations for the recovery

of their costs, the fact that such costs were not recovered in their rates calls into

question the worth of any comparison to the rates charged by investor-owned utilities.

Finally, even if one concedes that the concept of the PMAs as a ‘‘benchmark’’ or ‘‘yardstick’’ for IOUs may have served some purpose in the past, one must question

whether this concept has become an anachronism in an increasingly competitive

market for the generation and sale of power. Another example of separating the facts from the myths about Federal power is the role of the PMAs in serving rural customers. The laudable goal of a Federal program to ensure that rural and small-town America received electric service has been

accomplished. Furthermore, in many cases, the demographics and the economies of

the areas served by the PMAs have changed dramatically over the intervening

years. For example, GAO reports that over one half of the towns that preference

customers reported serving are urban. Furthermore, PMA power is used to serve

very affluent areas, including Aspen, Colorado and parts of Orange County, California.3

Yes, PMA power is used to serve many rural customers. PMA power is not used, however, to serve the majority of rural customers. The majority of rural customers

are served by investor-owned utilities. According to data compiled by the Edison

Electric Institute, almost 60 percent of Americans living in rural areas with fewer

than 1,500 people are served by IOUs. Furthermore, IOUs serve almost 80 percent

of Americans living in areas with populations between 1,500 and 2,500 people (i.e.,

small-town America).

My second observation is that the role of the Federal Government should be no greater than is needed to address legitimate needs that cannot be met adequately

by the marketplace. To the extent there is a legitimate Federal interest to be served

by intervening in the market, the intervention should be no greater than is necessary to address the problem. The fact that an extensive Federal intervention in

the market for electricity may have been justified a half century ago does not necessarily justify that same level of intervention today. And, if it is decided that such

an intervention cannot be justified going forward, the needs of stakeholders that

have relied on the historic policy should be dealt with as a transition issue rather

than as a basis for preserving the status quo. As already noted, the goal of rural electrification has been accomplished. And, to the extent there remains a need to protect the rates of rural electric customers, it

is hardly clear that the current program is very effective at achieving that goal. As

mentioned earlier, many of the current end-user recipients of PMA power are not

rural customers. In fact, most rural customers are served by IOUs. Therefore, as

a threshold matter, the Subcommittee should ask: Is there still a legitimate Federal

interest in protecting rural electric customers? And, even if this question can be answered affirmatively, the Subcommittee should ask: Is there a better way to target

the Federal response to those who truly are in need and not just those who by the

accident of history are within a preference customer’s service territory? Clearly, if the Federal Government chooses to privatize or otherwise fundamen- tally restructure the PMAs, there will be legitimate stakeholder interests and transition issues that must be addressed. In this regard, the experience of the states

in dealing with retail electric power restructuring is instructive. In each and every

state that has chosen to restructure its retail power markets, there have been important transition issues. And, as part of the consensus building process that was

necessary to forge broad support for restructuring, solutions were found for each of

these issues.

For example, preference customers express concern that eliminating the PMAs

will subject them to dramatically higher market rates for purchased power. While

in some cases that might be true, it is not necessarily true across the board. In looking at this issue, GAO concluded that the results vary widely depending on the particular PMA and customer in question.4 For the customers with a legitimate need,

this can be addressed as a transition issue.

Admittedly, because of the non-power uses of Federal water power projects and

the legal obligations that attach to such uses, resolving the transition issues associated with Federal power will be daunting. Still, the mere presence of such issues
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should not deter the Subcommittee from asking and answering the threshold question of whether the Federal Government’s historic role as a generator and marketer

can be justified going forward.

In conclusion, let me commend the Chairman and the Subcommittee for their interest in the role of the PMAs in a restructured electric industry. As you no doubt

appreciate, these are not easy issues. Still, these are important and timely questions

in connection with providing a legal framework that encourages competitive electricity markets.

Thank you for the opportunity to testify today on behalf of LG&E Energy Corp.

I am happy to respond to any questions from the Subcommittee.

SUPPLEMENTAL INFORMATION

Donald F. Santa, Jr.

Senior Vice President,

Deputy General Counsel

LG&E Energy Corp.

Louisville, KY 40202

Mr. Santa’s statement addresses the issue of the role of public power, and especially the Power Marketing Administrations, in a restructured electric industry from

the perspective of an investor-owned utility. The statement first describes electric

industry restructuring in general and the steps needed to complete the legal framework for restructuring. The statement then focuses on how electric restructuring

and the public policy goal of promoting competition in the electric industry necessitate re-examining the legal framework governing public power and the PMAs. The

statement identifies three areas for re-examination: (1) the rules governing access

to transmission facilities owned and operated by public power and Federal utilities;

(2) the rules governing public power and Federal utilities when they participate in

the competitive segments of the electric industry; and (3) the fundamental question

of the role of the Federal Government as a generator and marketer of electricity.

Mr. DOOLITTLE. Thank you.

Our next witness is Wenona Hauter, director of Public Citizen’s

Critical Mass Energy Project.

Ms. Hauter.

STATEMENT OF WENONAH HAUTER, DIRECTOR, PUBLIC

CITIZEN’S CRITICAL MASS ENERGY PROJECT

Ms. HAUTER. Mr. Chairman and members of the Subcommittee,

I am Wenona Hauter, director of Public Citizen’s Critical Mass Energy Project. And thank you for the opportunity to testify on behalf

of Public Citizen.

Public Citizen was founded by Ralph Nader in 1971. It is a nonprofit research, lobbying, and litigation organization located in

Washington, DC. We advocate for consumer protection and for government and for corporate accountability.

As the rules governing the electric industry are rewritten State

by State, the debate over the role of the PMA’s dramatizes the larger debate over deregulation. Who should really benefit? Is it residential consumers and rural consumers? Or should all the benefits

flow to large industrial customers, investor-owned utilities, and

Wall Street financial firms. Should the air and water that is so important for our families’ health and well-being be an important consideration? To answer questions in relation to the PMA’s, it is important to understand how utility regulation is unfolding across the

Nation.

Ohio became the 23rd State to send a bill to the Governor yesterday. But only a handful of bills are actually being implemented.

Unfortunately, while the stated goal of the changes to the electric

industry is to break up the monopolies an create competition, that
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is something we all support, the outcome of rewriting the laws governing the electric industry is turning out to be something quite

different.

The process has been gamed at the State level as the incumbent

utilities use their enormous power at State legislatures to rewrite

the rules for their benefit. In many cases, the result will be in the

long term the creation of unregulated monopolies.

These monopolies have even been granted billions of dollars in a

bailout to pay them back for their uneconomic investments, leaving

them in the enviable position of having free capital that is fueling

the consolidation in the industry.

At the same time, the large industrial customers are getting

their special deals, and the power marketers are winning the right

to sell to them. Meanwhile, the residential and small-business consumers have been left unprotected from large price increases in the

future after the legislated rate reductions have been sunset. With

60 percent of American families having an income of below

$30,000, the price of fuel cells is going to have to come way down

before everyone has a fuel cell in their basement.

There is no competition for residential customers in States that

have begun implementing their bills, California, Massachusetts,

and Rhode Island. At the same time, we see unprecedented consolidation in the industry and we see air emissions already beginning

to rise because coal-power is becoming the cheapest option.

Utilities are purchasing coal plants at above book value. While

no supports fuel cells more than we do at Public Citizen, we think

it is going to be a long time before these utilities close down these

coal plants that they are purchasing today.

The PMA’s have the opportunity to play a unique role in protecting consumers in a deregulated marketplace. Because the deregulated electricity market is likely to have insufficient competition, the PMA’s and the consumer-owned utilities, both the municipals and rural electric cooperatives, will provide yardstick for the

fair price of electricity.

Restraining the sale of PMA electricity would remove this benchmark function of the PMA’s and their preferred customers. This

would be especially damaging to consumers at a time when their

strong influence is needed to prevent cartel-like behavior and other

forms of market domination and abuse within regional power pools.

The PMA’s and consumer-owned utilities provide for corporate

diversity among the many players who sell and buy electricity.

They emphasize customer service rather than corporate profit.

Transmission is another area where the PMA’s can play a valuable role in the future. Three of the four PMA’s own a significant

amount of transmission lines and facilities. These Federal PMA’s

could serve as the backbone for three non-profit, publicly-owned

transmission companies. This would ensure fair electricity markets,

increase reliability, increase transmission access, reduce regulation,

reduce bureaucracy, eliminate cross subsidies, and eliminate affiliate abuses at the hands of the investor-owned utility companies.

At the very least, the PMA’s, with their large network of transmission lines and substations provide stabilization to the volatility

that we already see in some markets where auctions of wholesale

electricity are taking place.
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Now, because we believe that the PMA’s do serve an important

function, especially for the future, we are pleased to see that the

attempts to privatize them or to sell federally-owned dams have

subsided, but we also oppose backdoor privatization efforts. We

view the provisions in the Franks-Meehan legislation, which forced

the PMA’s to sell electricity at so-called market-based prices, as

being unfair to millions of consumers living in the 33 States that

the PMA’s serve. It is also a sly way of forcing the PMA’s to charge

a higher price for electricity in an attempt to bring on their demise.

The term ‘‘market-based’’ is not defined in the legislation, and in

this case, it is being used pejoratively to imply that some undefined

subsidy exists. Now there are some utility plants that generate

power below current market rates, including FERC-licensed hydropower projects owned by private utilities in the Northeast and elsewhere.

Forcing any power plant to sell at some undefined rates could

needlessly raise costs for consumers. The PMA’s should continue

providing cost-based power. This will be especially important in the

deregulated environment where we can already see the vast advantages large consumers are having over residential and small-business consumers. It is going to be especially true of rural and innercity consumers, who there will be little competition to serve.

We do not believe that the provision in H.R. 1486 mandating

that revenues from electricity sales be diverted to the treasury for

deficit reduction is reasonable, either. It is inappropriate to tax

power users to reduce our Federal deficit, when far more money

could be saved by closing loopholes and giveaways and other forms

of corporate welfare.

However, we do believe that it is appropriate for PMA’s to include in the cost of power mitigation strategies that deal with damage to fish, wildlife, and rivers. The PMA’s—and, for that matter,

the investor-owned utilities—must become responsible stewards of

our natural environment. Dams are a major culprit of the degradation of our Nation’s fresh-water resources. Their effects are farreaching and ecologically complex.

Dams are concrete and impenetrable, the antithesis of a river’s

dynamic and fluid nature. Dams turn rivers into quiet stagnant

reservoirs. They reduce or regulate water flows, while changing

temperature levels that wildlife have evolved to depend on.

Through diversion for power production, dams block water needed

for healthy river systems and wreak havoc on the river’s biological

life. The most widely-recognized environmental effect of dams is

their effect on fish; for instance, bringing those Northwest salmon

runs to the brink of extinction.

Deregulation is putting added stress on rivers that have hydro

facilities because the demand for low-priced power places a higher

value on peak-hour electricity. And hydro facilities can stop or start

generation in a matter of minutes to respond to demand. This is

one of the reasons for the pressures from IOU’s to privatize dams

and the PMA’s: Access to cheap, peak power means large profit.

Obviously, this is one of the reasons we oppose privatizing dams

or PMA’s. Rivers are owned by no one, nor should they be. They

are a public resource. Private companies are driven by growth
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needs, and they are not economically rewarded for being good environmental stewards.

On the other hand, the PMA’s should be responsive to the residents of their region and be good stewards. There are practical, affordable measures based on sound science that can bring back fish

and restore the health of rivers. The costs of these measures should

be included in the cost-based services provided to the residents of

the regions.

In conclusion, the PMA’s should play an important role in the future as the electric industry continues to go through changes, from

providing a yardstick on how consumers are doing in the deregulated market and contributing to the diversity of utility ownership

through creating an example for environmental stewardship.

Thank you very much.

[The prepared statement of Ms. Hauter follows:]

STATEMENT OF WENONAH HAUTER, DIRECTOR, PUBLIC CITIZEN’S CRITICAL MASS

ENERGY PROJECT

Summary

Public Citizen, founded by Ralph Nader in 1971, is a non-profit research, lobbying,

and litigation organization based in Washington, DC. Public Citizen advocates for

consumer protection and for government and corporate accountability, and is supported by over 150,000 members throughout the United States. The Critical Mass

Energy Project, of which I am director, is Public Citizen’s energy policy arm, working to decrease reliance on nuclear and fossil fuels and to promote safe, affordable

and environmentally-sound energy alternatives.

As the rules governing the electric industry are rewritten, the debate over the role

of the Federal power marketing administrations (PMAs) dramatizes the larger debate over deregulation of the industry. Who should really benefit? Should it be residential consumers? What about rural consumers? What about the environment? Or,

will all the benefits flow to investor-owned utilities (IOUs), Wall Street firms, and

large industrial customers?

To answer these questions in relation to the PMAs, it is necessary to understand:

(1) how electric utility deregulation is unfolding across the nation; (2) the unique

role PMAs play in providing a yardstick for the cost of electricity for consumers in

the changing electricity market; (3) the benefits and costs to consumers in the regions served by the PMAs; (4) the appropriate role for transmission systems owned

by the PMAs; (5) and the serious threat to the environment of privatizing or changing the role of the PMAs.

Public Citizen is pleased that attempts to privatize the PMAs or to sell federallyowned dams have subsided. For the record, we do not favor the privatization of the

PMAs, the attempts to force PMAs to sell electricity at so-called market-based

prices, or the related attempt to sell federally-owned dams. The Federal hydro

plants and the PMAs that sell their power are part of projects that serve many

other purposes, including irrigation, flood control, navigation, municipal water supply, recreation, and fish recovery and protection. Turning over dams or PMAs to

utilities and others whose sole interest is to maximize power revenues threatens

these other purposes.

The dramatic changes in the electric industry provide an opportunity for the

PMAs to continue serving their historic roles of providing low-cost power to rural

areas of the United States as well as serving as a yardstick for measuring how and

if consumers are benefiting from deregulation.
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Mr. DOOLITTLE. Thank you.

Our final witness is Victor S. Rezendes, director of energy and

resources and science issues with the U.S. General Accounting Office.

Mr. Rezendes, welcome again.
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STATEMENT OF VICTOR S. REZENDES, DIRECTOR, ENERGY,

RESOURCES, AND SCIENCE ISSUES; RESOURCES, COMMUNITY AND DEVELOPMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE

Mr. REZENDES. Thank you, Mr. Chairman. It is a pleasure to be here today to discuss the PMAs’ role in the restructured electricity

industry. I have identified five broad goals of the electricity restructuring that we think have impact on the PMAs. The first major goal of

deregulation is encouraging price competition, including removing

practices that treat potential competitors inconsistently and providing customers with lower electricity prices. As the market moves

from a regulated to a more deregulated retail environment, it may

be necessary to determine whether more consistent treatment of

power providers is warranted.

For example, we have reported that, although PMAs are gen- erally required to recover all costs, favorable financing terms, the

lack of specific requirements to recover certain costs, have resulted

in the net cost to the Federal Government of over a half a billion

dollars each year. In part, because the PMAs sell power generated

almost exclusively from hydropower, are not required to earn a

profit and do not fully recover the government’s costs in their rates,

they are generally able to sell power more cheaply than other providers. Also, some electricity suppliers, such as investor-owned utilities, are required to pay Federal, State, and local taxes, but PMAs

do not.

The second broad goal relates to protecting the environment. Be- cause the electric industry is a major source of air pollution, a relevant question is whether the existing body of environmental law

can accommodate change or whether restructuring legislation

should have an environmental component to ensure compatibility

with environmental values.

Some are concerned that competitive markets may result in increased emissions of pollutants because lower prices resultant from

restructuring would increase electricity purchases and, therefore,

increase generation an emissions. And, as a result, older polluting

coal-fired generating facilities, which are generally exempt from

the Clean Air’s Act New Source Emission Standards, would be used

more extensively. While the generation mix is likely to change, currently less than 2 percent of the PMAs’ power comes from coal-fired

plants. However, over 50 percent of TVA’s power comes from these

plants.

PMA hydropower is a clean, domestic, renewable source of electricity. However, hydropower facilities have significant impacts on

surrounding areas, especially fish and wildlife.

The third goal relates to balancing the equity among stakeholders. As the industry moves to restructured environment, some

costs that were included in the traditional regulated structure may

not be recoverable in competitive rates.

Similarly, in terms of equity, concerns the issue whether PMA

rates should be at market rates. If PMAs were authorized to charge

market rates for power, slightly more than two-thirds of the

present customers would experience a relatively small or no rate

increase, increases of less than one-half of 1 percent per kilowatt.
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Another issue affecting future price of PMA power is the reliability of Federal generating assets. In March, we reported that the

Bureau’s and the Corps’ hydro-power plants are generally less reliable in generating electricity than non-Federal hydro-plants. We

concluded that these agencies were unable to obtain funding for

maintenance and repairs as needed, and, therefore, delayed repairs. These delays caused frequent extended outages and inconsistent plant performances.

The fourth broad goal of restructuring is maintaining the reliability of the interstate transmission grid. An issue that directly relates to the PMAs is the maintenance of reserves that may be

called upon to meet planned or unforeseen outages by power providers. As we recently reported, hydro-power’s inherent flexibility

in meeting different levels of demand creates an opportunity for

hydro-power to play a significant role in meeting demand during

peak periods.

Finally, the last broad goal is promoting deregulation by redefined Federal roles, such as the Federal regulatory agencies. While

restructuring has focused largely on deregulating the retained markets, some segments of the electric industry may face new or increased regulation.

Recent transmission policies have dealt with the concerns of market power and ownership and control of transmission facilities. For

example, the PMAs transmission rates and facilities may have to

come under new Federal regulation.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Rezendes follows:]
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Mr. DOOLITTLE. Thank you.

Mr. Richardson, there seems to be some dispute as to what the

effect of competition in the electric sector will have on reliability.

In other words, some have formed a conclusion that competition

will enhance reliability, and other maintain that it will harm reliability.

I am unclear, I guess, where APPA is because I think they have

supported an ad which indicates it will harm reliability. And that

is contrast to the NERC and the Department of Energy, which

have come to the opposite conclusion. Could you tell us what you

think about that and what the basis for you belief it?

Mr. RICHARDSON. Well, yes, I would be happy to do that, Mr.

Chairman. The ad and our concern relates to advertisements of

others urging the very rapid deregulation of the industry on the assumption that such action will encourage or promote greater reliability. In fact, we think that is not the case, that rapid action

today will simply enhance the power of those who are able to manipulate the marketplace to their own advantage and to the detriment of reliability.

There was a report that was released within the last couple of

days by the Consumer Federation of America and Consumers

Union regarding the price spikes of last summer that came to a

number of conclusions, including the fact that in the opinion of

those two organizations what had occurred in the price spikes in

the Midwest was more a question of market manipulation than it

was the natural occurrences of outages and other problems that we

are experiencing with the system.

Now to the broader point, will restructuring promote reliability

or will it disadvantage or place reliability at issue, I think there

are a couple of responses to that, and they have to do again with

the timing that I referred to. It seems to me that the very rapid

restructuring that is being proposed by some of a very quick datecertain Federal mandate could well place reliability in jeopardy;

particularly at this point, since we do not have mandatory reliability standards.

The American Public Power Association, along with my colleague’s association, National Rural Electric Cooperative Association, the Edison Electric Institute, and others have developed consensus legislation, which, for the most part, is included in the administration’s proposal on restructuring, and we strongly support

that. We think that is appropriate because reliability is a very serious issue.

In the longer term, I think a very good case can be made that

as we bring in new technologies, we have distributed generation,

which is something the APPA has long supported, and we begin to

move away from the large, central-station power plants, there are

some reliability, some positive reliability consequences that can

occur.

So I say, I think we are back to the point that I made at the very

outset that in terms of timing and how soon this transition to these

new technologies will occur and the benefits that they might hold

over the longer term for a more reliable electric system.

Mr. DOOLITTLE. I am not clear in my own mind as to what their

timeframe is, those who are promoting a very rapid change in this
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area. But, I mean, what timeframe do you think would be reasonable?

Mr. RICHARDSON. Well, we are on a pretty fast track right now

in terms of State legislation. Twenty-two is, I believe Wenona

Hauter said, 23 States now, with Ohio having sent legislation to

the governor, it seems to me highly likely that within the next four

to five years most other States will have tackled this issue and

come to some conclusions.

What has been of concern to us is Federal mandates requiring

the complete customer access by—for all States, for all customers—

by the end of 1999 or the beginning of the year 2000. Each State

needs to move at its own pace, and the utilities within those

States, particularly the self-regulated utilities such as the public

power systems that I represent, need to be able to govern their own

affairs and structure their activities to move into a more competitive environment.

Mr. DOOLITTLE. But let me ask you and Mr. English both—if

your reaction to the GAO’s findings about the lower reliability of

the PMA’s, the lack of money for the proper maintenance of the

generation equipment, and so forth, is that a concern to your organizations?

Mr. RICHARDSON. I think we are concerned that the money that

is going into the Federal Government, paid by the rates of the customers of those systems, is not getting back out and being used for

the purposes intended. Funds are included in the rates that are

being paid by the customers of the Power Marketing Administrations, and yet, through the appropriations process, problems with

budget and accounting matters, it is not getting back to the intended, beneficiary, which is those facilities that do need to be repaired.

Mr. DOOLITTLE. Mr. English.

Mr. ENGLISH. Mr. Chairman, if I could just pick up on that? I

wholeheartedly agree. Let me also say, though, that I think there

are a number of issues that we would have with what the GAO has

reported with regard to the PMA’s. I think, again, putting this into

government terms versus real-world terms—and I think most citizens of this country would have a very difficult time in understanding the calibrations of the GAO and how they came to the

conclusions that they did with regard to this issue of cost to the

government—it is my understanding, in the calibrations that they

have used, for instance, that most of what they are talking about

has to do with interest.

Now, when most people borrow money, they go down and borrow

the money, and on the day that they receive the money, it is what

the interest rate is that day, and that is what they normally pay.

It is my understanding, as far as what the GAO does, they ignore

that reality, and then, in fact, what they have done is taken a period of time when the interest rates were at the highest, and saying, even though the money was borrowed at that time from the

government when the rates were that low, that doesn’t matter; we

need to take an average rate, which I believe is 8 percent. That is

the number they used, even though the money may cost the government much, much less at the time that it was actually borrowed.
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I think there is a second issue that comes into play here, and

that is the reality of what has taken place through the developments of the PMA’s through the years. The reality is that many of

the dams were constructed and agreements were signed with regard to preference of power at a particular time, when power may

even have been cheaper from other sources. But, again, you found

people in the area, and we are talking about many times small

towns, electric cooperatives have, in fact, reached an agreement

with the government at that time to make a commitment that they

would, in fact, buy power and that they would in fact pay for—let’s

make sure we understand that—pay for the construction of the

dams.

Now what we have also seen happen, Mr. Chairman, through the

years is that it isn’t just good enough to pay for the dam; it isn’t

good enough just to pay for the cost of producing the power. But,

instead, these PMA’s have become something of a cash cow for various causes that may exist in the local area, and I wholeheartedly

agree that many of them are very worthwhile.

Recreation, for instance, for people in the local area, that is certainly beneficial. Irrigation for many farmers in the local area, that

is certainly beneficial—and certainly in assisting in the environmental causes in these areas, and that is certainly beneficial.

And we have talked about the question of fish, and certainly,

particularly in the Bonneville area, we have seen enormous sums

of money that are being spent by the ratepayers and those who buy

power from Bonneville for dealing with the issue of salmon.

Now those are issues far beyond what we talk about simple costs

and the payment of the construction of the facilities and the payment for the generation of power.

So I take great issue with that. And I think that it is something

that we have really got to put in real-world terms in order for us

to make certain we understand exactly what is being calculated in

the way of the cost and what those costs were. Are they truly the

cost to the Federal Government or are they just come calculation

as to what the government should have received in the way of interest rates over some long-term average?

So the issue now of the question of whether the PMA’s are operating as efficiently as they should, my colleague is absolutely right;

there is no question about it that money that has been paid by the

ratepayers many times is not being used for the purpose of continuing to make sure that those operation are at the peak efficiency, but are for other purposes. And I think that is wrong, Mr.

Chairman.

Mr. DOOLITTLE. Would you and Mr. Richardson and your organizations support efforts to make sure that the money that is collected for those purposes is spent for those purposes?

Mr. ENGLISH. I can’t speak for my colleague here, Mr. Chairman,

but I would say the NRECA has long supported the fact that we

will do just about anything to make sure that the money that is

collected from the ratepayers for the purpose of maintaining those

generating facilities is used for that purpose. We have even volunteered to collect money from the people in the local area to maintain that over and above what the rates are. But, you know, it is

extremely important and extremely frustrating, Mr. Chairman.
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Mr. RICHARDSON. We agree with that, Mr. Chairman.

Mr. DOOLITTLE. Thank you.

Mr. Rezendes, did you wish to comment on, or to respond to, Mr.

English’s observations on the GAO findings?

Mr. REZENDES. Yes. First, I would like to mention on the deferred maintenance fees, that it is the difficulty of the appropriation process, with the long lead time and competing priorities within an appropriation account that makes doing the maintenance and

the kinds of business kinds of things that a private sector would

do very difficult for the Federal Government to do, because whether you do maintenance on a generator or whether you are going to

provide relief for hurricane victims is not a difficult choice for the

Federal Government to make, one that, obviously, the private sector is not confronted with.

Getting back to the financing issue, that is only one of numerous

things that the PMAs aren’t recovering costs from. We also mention some retirement benefits, post-retirement health insurance

issues. There’s some construction cost.

But the big issue, I think, Mr. English is exactly correct, is the

financing. We used a method—and I don’t want to get too heavy

into this in terms of what the average government portfolio is

versus what the portfolio is of the various PMAs—that is a half a

billion dollars a year. However, no matter what methodology you

use—I don’t care if you go loan by loan, which we did, and that

came out even higher—no matter which methodology, no matter

how you look at it, the Federal Government is not recovering the

interest cost that it is incurring that the PMAs have the benefit of

the money from.

In addition, PMAs, as you know, borrow money routinely over

the years at various interest rates based on what they are at the

time. However, they do have the option of paying back the high,

and do pay back the high interest rates first and leave the low interest rates on the books, which means that only increases the

amount of subsidy the Federal Government has to sustain to maintain that.

Mr. ENGLISH. Mr. Chairman, could I respond to that?

Mr. DOOLITTLE. Well, I want to follow up with another question

because we are going to have a vote here in a minute.

You mentioned, Mr. Rezendes, the dams and hydroelectric power

has an impact on rivers and fish, which it obviously does. Did your

statement contemplate positive impacts as well as negative, or was

it just negative?

Mr. REZENDES. No, it was a negative impact. And the fish mitigation costs, as you know, for just Bonneville is really a big number.

I think Bonneville expects in the not-too-distant future they could

be spending a billion dollars on this.

Mr. DOOLITTLE. Well, with nothing to show for all of that money,

I might point out. Well, that perhaps could the subject of another

GAO study.

Well, I am aware of situations—and I will direct this to Ms.

Hauter, who expressed her negative view of dams—many occasions

I am aware of, those dams are what create the adequate supplies

of cold water to make sure there is water downstream for the fisheries. Is that not the case?
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Ms. HAUTER. Overall, the effect on our waterways of dams is negative. Many problems. Dams restrict the flow of water downstream.

The stagnant water that sits has effects on both fish and wildlife

in the area.

And, generally, we think that dams—there needs to be mitigation. Many of the programs have failed. For instance, in the Pacific

Northwest, where we would want to see the phasing-out of barging

and trucking of fish and the use of spill as the primary means for

juvenile fish passage, things need to be done in a better way. And

there is a whole set of scientific evaluations in this area, and it can

be done, and it can be done cost-effectively.

Mr. DOOLITTLE. Well, I would just observe that to only comment

upon the negative aspects of dams is to ignore clear facts that they

have positive, many positive benefits, not to mention the adequate

water supply and the flood control, but just even looking at the environment, and of course the recreation that they provide. But I

know, at least in our California situation, it is the presence of the

dams that ensures the water available for the endangered fish.

Now, yes, I am not saying there aren’t negative consequences, too,

but I think there are pluses and minuses, and I just want to get

that plug in.

And with that, I am afraid, since I am the only one here, I am

going to have to bring this hearing to a close.

I really appreciate the testimony that we have heard today from

you, and I hope that you will answer further questions that we

may have, which we will submit in writing and ask you to respond.

We will hold the record open for that purpose.

[The information follows:]

Mr. DOOLITTLE. We thank you for coming.

And with that, the hearing is adjourned.

[Whereupon, at 4:25 p.m., the Subcommittee was adjourned.]