```

[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

    NATIONAL ELECTRICITY POLICY: BARRIERS TO COMPETITIVE GENERATION

=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON ENERGY AND AIR QUALITY

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 27, 2001

                               __________

                           Serial No. 107-62

                               __________

       Printed for the use of the Committee on Energy and Commerce

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

                               __________

                    U.S. GOVERNMENT PRINTING OFFICE 
74-848CC                    WASHINGTON : 2001

For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001

                    ------------------------------  

                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma              BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa                    ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia             BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland     MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana                 CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California        JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                 Subcommittee on Energy and Air Quality

                      JOE BARTON, Texas, Chairman

CHRISTOPHER COX, California          RICK BOUCHER, Virginia
STEVE LARGENT, Oklahoma              RALPH M. HALL, Texas
  Vice Chairman                      TOM SAWYER, Ohio
RICHARD BURR, North Carolina         ALBERT R. WYNN, Maryland
ED WHITFIELD, Kentucky               MICHAEL F. DOYLE, Pennsylvania
GREG GANSKE, Iowa                    CHRISTOPHER JOHN, Louisiana
CHARLIE NORWOOD, Georgia             HENRY A. WAXMAN, California
JOHN SHIMKUS, Illinois               EDWARD J. MARKEY, Massachusetts
HEATHER WILSON, New Mexico           BART GORDON, Tennessee
JOHN SHADEGG, Arizona                BOBBY L. RUSH, Illinois
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              THOMAS M. BARRETT, Wisconsin
ROY BLUNT, Missouri                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 JOHN D. DINGELL, Michigan
GEORGE RADANOVICH, California          (Ex Officio)
MARY BONO, California
GREG WALDEN, Oregon
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)

                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Brent, Richard, Director of Government Affairs, Solar 
      Turbines Incorporated......................................    87
    Hall, Mark, Vice President of External Affairs, Trigen Energy 
      Corporation................................................    75
    Kanner, Martin, Coordinator, Consumers for Fair Competition..    44
    Lane, Thomas, Managing Director, Goldman Sachs...............    52
    Levy, Bruce, Senior Vice President and Chief Financial 
      Officer, GPU, Inc..........................................    25
    Magruder, Kathleen E., Vice President of Law and Government 
      Affairs, New Power Company.................................    95
    Morris, Herman, Jr., President and Chief Executive Officer, 
      Memphis Light, Gas & Water.................................    31
    Priest, Robert D., Manager, Yazoo City Public Service 
      Commission.................................................    36
    Sokol, David L., Chairman and CEO, Mid-American Energy 
      Holdings Company...........................................    18
    Starrs, Thomas J., Kelso Starrs and Associates, L.L.C........   102
    Svanda, Hon. David A., Commissioner, Michigan Public Service 
      Commission, on behalf of National Association of Regulatory 
      Utility Commissioners......................................    15
    Yacker, Marc, Marc, Director of Government and Public 
      Affairs, Electricity Consumer Resource Council.............    91
Material submitted for the record by:
    Knoxville Utilities Board and Memphis, Light, Gas & Water 
      Division, prepared statement of............................   119
    Sokol, David L., Chairman and CEO, Mid-American Energy 
      Holdings Company, letter dated August 29, 2001, enclosing 
      response for the record....................................   122

                                 (iii)

  

 
    NATIONAL ELECTRICITY POLICY: BARRIERS TO COMPETITIVE GENERATION

                              ----------                              

                         FRIDAY, JULY 27, 2001

                  House of Representatives,
                  Committee on Energy and Commerce,
                    Subcommittee on Energy and Air Quality,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:30 a.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Largent, Burr, 
Whitfield, Ganske, Wilson, Blunt, Bryant, Bono, Walden, Tauzin 
(ex officio), Boucher, Sawyer, Wynn, John, McCarthy, 
Strickland, and Luther.
    Also present: Representatives Stearns, Terry, and Pallone.
    Staff present: Jason Bentley, majority counsel; Sean 
Cunningham, majority counsel; Andy Black, policy coordinator; 
Peter Kielty, legislative clerk; Sue Sheridan, minority 
counsel; and Rick Kessler, minority professional staff.
    Mr. Barton. The subcommittee will come to order. The House 
is in session and we do expect a number of votes within the 
next hour or so. So we want to go ahead and get started. The 
Chair recognizes himself for an opening statement. Today the 
Energy and Air Quality Subcommittee holds one of a series of 
hearings dealing with our national electricity policy. While we 
await floor action on the energy package next week, it is time 
to get started discussing and hearing the issues of our next 
major bill.
    In September, members of this subcommittee can expect 
further hearings on electricity as well as a piece of draft 
legislation which will be circulated and reviewed for turning 
into a vehicle to be introduced as a markup vehicle sometime in 
early October. I am hopeful that our process, in fact, I should 
say I am certain that our process will be bipartisan, and I 
guarantee that it is going to be an open process. The future of 
our Nation's electricity system deserves this subcommittee's 
attention. Our hearings and meeting in this Congress and the 
last Congress have underscored a number of the following 
points: One, our Nation needs more participants in wholesale 
generation competition so that wholesale prices can, at a 
minimum, be stable and hopefully, perhaps, even decrease 
somewhat when supply is equal to the demand.
    No. 2, our Nation needs more transmission capacity so that 
that generated power can go where it needs.
    No. 3, this generation network needs to operate more 
effectively so that power can move better within and among 
regions and that all generators have an opportunity to actually 
have access in a free and fair fashion to the transmission 
system.
    Fourth, and finally, our States need a better functioning 
electricity system if more are to give consumers options in 
their generation provider. These are just some of the goals I 
hope to pursue as we move toward a legislative vehicle in the 
early fall.
    Today's hearing deals with the first goal, increasing the 
amount of power generated. We are going to hear from witnesses 
about barriers to generation competition. Our first panel will 
focus on the Public Utility Holding Company Act, which we refer 
to as PUHCA. Many believe this Act is no longer necessary and 
is in need of reform. I do understand that there are concerns 
about generation market power. We are going to try to address 
those in this hearing. My personal opinion is that if you get 
the transmission rules right, you have enough generation 
competitors, the entities with market power will be the 
purchasers, not the sellers.
    Our second panel today is going to discuss another 
important issue dealing with getting more power on the grid. 
Varying interconnection rules and standards bedevil independent 
power producers as they move from State to State and utility to 
utility. I am a very strong supporter of States rights. But I 
believe that in the 21st century, it is appropriate to have a 
uniform interconnection standard. Distributed generators put 
smaller facilities on the grid a lot closer to the load than a 
power plant does, thus reducing the need for new transmission 
lines, and generate more cleanly than a lot of existing plants.
    We should encourage distributed generation and make sure 
that there are no unreasonable hurdles in its way. PURPA, the 
Public Utility Regulatory Policy Act, also deserves careful 
review. We want qualifying facilities contributing their excess 
power to the grid and we want them to still have rights to back 
up power and all the protection that they have today. I am not 
sure however, that the mandatory purchase obligation should 
continue in its current form.
    Finally, we are going to look at net metering. This issue 
is of interest not only to myself, but to numerous other 
subcommittee members on both sides of the aisle. More States 
allow net metering than they do retail competition. Individuals 
with residential renewable generation onsite certainly should 
be allowed to have their electric meter run backward when they 
are contributing power and not consuming it.
    I guess the technical term that I am going to be looking 
for as we look at this issue is something really high tech, 
like, no brainer. I understand that there are a lot of issues 
to address, including the interconnection costs, who is 
responsible for buying the meter, who is responsible for 
maintaining the meter, which electric service costs get rebated 
and what happens when a consumer gives back more power within a 
billing period than he or she takes. Those are important 
issues. But the concept of net metering really is a no brainer.
    I am very confident that that particular concept is going 
to be in the bill. Later hearings are going to deal with 
transmission and recommendations of the Department of Energy 
the Federal Energy Regulatory Commission. Today is the time for 
members to begin to focus about today's electricity industry. 
It is not the same industry that it was even 2 years ago when 
this subcommittee moved a similar piece of legislation. The 
electricity industry will not be the same in the future as it 
is now. Our job is to see where we want to be and what changes 
we need in order to get there.
    If this subcommittee does its work successfully, we will 
provide an opportunity for our children to have an electric 
system that encourages new technology, investment in new 
capacity makes reliability problems workable and high prices a 
thing of the past.
    Chairman Tauzin, Ranking Member Boucher, Mr. Dingell and I 
look forward to working with members on both sides of the aisle 
to make this goal a reality, legislatively in the next several 
months. With that I would recognize my ranking member, Mr. 
Boucher for an opening statement.
    [The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Subcommittee on Energy 
                            and Air Quality
    Today, the Energy & Air Quality Subcommittee holds one of a series 
of hearings dealing with our national electricity policy. While we 
await floor action on the energy package, it is time we get started 
discussing our next major bill. In September, Members of this 
Subcommittee should expect further hearings on electricity, as well as 
draft legislation to review and discuss. I am hopeful that our process 
will be bipartisan, and I promise you it will be open.
    The future of our Nation's electric system deserves our attention. 
Our hearings and meetings in this Congress and last Congress have 
underscored the following:

 Our Nation needs more participants in wholesale generation 
        competition, so that wholesale prices can continue to decrease, 
        and supply always equals demand.
 Our Nation needs more transmission capacity, so that the 
        generated power can get where it needs to go.
 Our Nation needs its transmission networks to operate more 
        effectively, so that power can flow better within and among 
        regions, and that all competitors selling power can actually 
        compete .
 Finally, our States need a better-functioning electric system 
        if more are to give consumers options in their generation 
        provider.These will be my goals as I work with Subcommittee 
        Members to put together legislation to reform the electricity 
        industry.
    Today's hearing deals with my first goal--increasing the amount of 
power generated. We will hear from our witnesses about barriers to 
generation competition. Our first panel will focus on the Public 
Utility Holding Company Act (PUHCA), which many believe is no longer 
necessary and in need of reform. I understand concerns about generation 
market power, and I want to make sure we address them. My personal 
opinion is that if you get transmission rules set right and let enough 
people participate in generation, the entities with market power will 
be the purchasers, not the sellers.
    Our second panel today will discuss other important issues dealing 
with getting more power on the grid. Varying interconnection rules and 
standards bedevil independent power producers as they move from State 
to State and utility to utility. I am a strong supporter of States' 
rights, but I believe that in the 21st century it is ok to have a 
uniform interconnection standard. Distributed generators put smaller 
facilities on the grid a lot closer to the load than a power plant, 
reduce the need for new transmission lines, and generate more cleanly 
than a lot of new plants. We should encourage distributed generation 
and make sure that no unreasonable hurdle is in its way.
    PURPA, the Public Utility Regulatory Policies Act, also deserves a 
careful review. We want qualifying facilities contributing their excess 
power to the grid, and we want them to still have rights to backup 
power and all the protections they have today. I am not sure, though, 
that the mandatory purchase obligation should continue in its current 
form.
    Finally, we will look at net metering, which interests me and other 
Subcommittee Members greatly. More States allow net metering than do 
retail competition. Individuals with residential renewable generation 
on-site should certainly be allowed to have their electric meter run 
backward when they are contributing power and not consuming it. The 
technical term I am looking for is a ``no-brainer.'' I understand there 
are issues to address, including interconnection costs, who is 
responsible for buying the new meter, what electric service costs get 
rebated, and what happens when a consumer gives back more power within 
a billing period than he or she takes. I am confident that we can work 
these issues out.
    Later hearings will deal with transmission and the recommendations 
of the Department of Energy and the Federal Energy Regulatory 
Commission (FERC). Now is the time for Members to learn what they can 
about today's electricity industry. It is not the same industry it was 
two years ago when we passed legislation the first time. The electric 
industry also will not be the same in the future as it is now. Our job 
is to see where we want to be, and what changes we need to make in 
order to get there. If our work is successful, we will have provided 
for our children an electric system that encourages new technologies, 
investment in capacity increases, and makes reliability problems and 
high prices a thing of the past. Chairman Tauzin and I look forward to 
working with Members and stakeholders on this over the next few months.

    Mr. Boucher. Well, thank you very much, Mr. Chairman. I 
want to commend you for conducting the hearing this morning as 
we begin our examination this year of issues related to 
electricity industry restructuring. After the expenditure of a 
substantial amount of time earlier this year on the California 
electricity situation, I think it is now appropriate that we 
return to the larger issue of electricity restructuring. During 
the last Congress this subcommittee reported an electricity 
measure that focused on a range of complex matters including 
State and Federal jurisdiction, transmission concerns, 
environmental issues and competition in general. It was an 
ambitious effort and Chairman Barton worked with considerable 
diligence to have the subcommittee's bill considered at full 
committee.
    While not every member of the subcommittee supported the 
bill, it clearly helped to frame the issues that are 
fundamental to a refashioning of Federal policy for the 
electricity industry. The exercise of the last Congress was a 
constructive contribution to our work this year. And I very 
much look forward to working with Chairman Barton during this 
Congress to determine the level of support which exists for 
reporting an electricity bill, and if sufficient support 
exists, determining where consensus for that measure might lie.
    As the discussion proceeds we may find that some issues 
that were very controversial during the course of the last 
Congress are generally not before us this year. The concept, 
for example, of retail competition and the mandate for a date 
certain for access to the national transmission grid for retail 
sales, a topic that I know Chairman Barton approached with 
caution during the course of the last Congress, seems now to 
have little credence as an element of Federal legislation. 
Transmission issues, however, will be at the core of our 
consideration. In this area, the FERC has been highly active in 
recent weeks in ordering the formation of regional transmission 
organizations for broad sections of the Nation.
    I know the chairman plans to ask the FERC members to appear 
before the subcommittee in the very near future in order to 
discuss these orders. That discussion will help members 
determine what, if any, additional transmission authority the 
Congress should be addressing in legislation.
    I am particularly pleased to note the presence among our 
witnesses this morning of Kathleen Magruder, with the New Power 
Company. Her company offers an opportunity to realize broad new 
efficiencies and the utilization of electricity-generating 
facilities by bringing the benefits of real time metering to 
residential and small business consumers. I look forward to 
hearing from her about what changes in the law may be necessary 
to assure that electricity consumers have the ability to 
realize financial savings by diverting more electricity 
consumption to off-peak times.
    Of course, there are a multitude of other matters relating 
to electricity industry restructuring that this subcommittee 
will be considering, including the repeal of PUHCA, the reform 
of PURPA, transmission reliability and interconnection 
standards as the chairman mentioned, just to name a few. I look 
forward to the conversation on these measures to the testimony 
of the witnesses who are before us today and witnesses who will 
appear on our future panels as we address these and other 
matters.
    And I will conclude my opening remarks with the observation 
that as we consider Federal legislation for electricity 
industry restructuring, I think we must keep our eye primarily 
on the interests of electricity consumers. Their interests 
should be our guiding principle. And in particular, the 
interests of small consumers should be kept at the forefront.
    I want to extend a welcome to all of our witnesses this 
morning and thank the chairman for scheduling this hearing 
which begins us on a very positive track as we consider the 
possible need for Federal electricity restructuring 
legislation.
    Thank you, Mr. Chairman.
    Mr. Barton. I thank the gentleman. We would recognize the 
full committee chairman, Mr. Tauzin of Louisiana, for an 
opening statement.
    Chairman Tauzin. I thank my friend, the chairman. I want to 
begin by acknowledging with thanks and appreciation the work of 
this subcommittee, and particularly Chairman Barton and Mr. 
Boucher over the last several months. If there is any doubt 
about it, let me clear it up.
    Mr. Barton, working together with Mr. Boucher in this 
subcommittee, have the full support and confidence of the full 
committee chair. They have done remarkable work already and I 
want to highlight that. Just today, I signed and filed H.R. 4, 
the combination energy bill which we entitled the Securing 
Americans Future Energy Act, a SAFE Act, that is a product of 
five committees, but principally, the work of our Energy and 
Commerce Committee and most importantly, this subcommittee. It 
represents an incredible bipartisan effort.
    The fact that this bill passed our full committee by a vote 
of 50 to 5, unlike any other committee dealing with these 
controversial matters, is a strong indication of the way in 
which our two sides have worked on these very difficult energy 
issues. But that bill, which is now filed in the House, 
contains a number of provisions that will improve hydro, 
nuclear, clean coal and renewables, and in addition, more than 
half the bill is devoted to improving the Nation's energy 
efficiency and conservation.
    And when we pass this bill next week on the House floor, as 
we expect we will, we will have moved the central piece of the 
President's national energy policy in a fashion that builds 
upon consensus in this area. But our work is not done, and 
Chairman Barton is now charged with completing some of the work 
that he so valiantly began in the last session of Congress 
under the former chairman. And that is providing for reliable 
supply and transmission of electricity as a center piece of our 
Nations energy policy. The fact that we need one is underscored 
by the crisis in California.
    And again, I want to commend Chairman Barton for earlier 
this year laying forth some of the solutions that the 
California executive and our own executive took seriously and 
adopted by executive order, and helped ease the problems of 
consumers in California quite dramatically over the last 
several months. While we didn't end up passing that bill, so 
much of it was adopted by either Presidential or gubernatorial 
executive order that this committee deserves a great deal of 
credit for helping to relieve that serious problem in 
California.
    But now we turn to the Nation's electric problems, and 
particularly to the disunity that exists in today's electric 
power industry. Consider this: There are four types of 
utilities in this country, investor-owned, cooperatively owned, 
federally owned, and the municipal utilities, all of which 
generate, transmit, sell power to each other and to their 
customers. There are also independent power producers, the so-
called qualifying facilities, the QFs under PURPA, and 
countless sources of distributed generation which also generate 
and sell power. The various producers are governed by numerous 
laws and regulations at the Federal, State and local levels. 
And to make matters even more complex, approximately half of 
the States have already passed electricity restructuring 
legislation, in essence, opening up the retail electric markets 
to competition.
    Such competition requires of course a functioning wholesale 
market, and yet States that have not restructured do not have 
the same incentive to insure that wholesale markets are open to 
all competitors. The result is a patchwork of competing laws, 
regulations and interests that stifle the development of power 
markets and abundant competitively priced electricity. As a 
Nation, our disjointed energy policy seems to be caught between 
competing visions, which the chairman has begun to try to sort 
out, the competing vision of free markets versus central 
planning.
    What unifies us, however,is the inescapable fact that 
affordable reliable electricity is the lifeblood of this 
American society. And we want to encourage the cleanest, most 
efficient sources of power. That is where markets win, always, 
hands down. Central planning we know doesn't foster the one 
thing Americans do best, innovate, good old American ingenuity. 
You can't plan for innovation, but you can create a marketplace 
that rewards those who do things faster, smarter, cheaper, 
cleaner, more efficiently and more reliably. In recent years 
we've seen tremendous innovation in telecommunications, the 
whole digital revolution. And our Nation's economy operates 
more efficiently than at any time in our history.
    But on the other hand, a recent article in Forbes Magazine, 
Mr. Chairman, pointed out that if you take the four boxes of 
the Internet community, the new economy: PCs; systems that 
transmit the Internet, the routers and the translators, et 
cetera; the companies that do business, E-Bays, et cetera, that 
power up the systems to do business, and the manufacturers who 
put it altogether and the kinds of equipment that runs the 
Internet and provides the PC power at home for us and our 
businesses, those four boxes now consume as much electricity as 
the entire country of Italy.
    They consume more electricity, 8 percent of our Nation's 
total, than all of the metals manufacturing in our country now. 
They consume more electricity than oil and gas production, 
forestry and paper products combined. The Internet has become a 
huge part of the electric demands of our country. And if we 
want to see a revival of the Nation's economy on Wall Street 
and in the pocketbooks of Americans who are tired of being laid 
off in this new economy, we have got to power up the systems 
well.
    This committee is going to lead the way to insuring that 
this economy takes off again with some good electric power 
policy. We can't rely upon the electric system that was 
designed for our grandfathers and grandmothers simply to light 
light bulbs and run electric motors. Mr. Chairman, I don't know 
if I ever told you this. My grandfather had a light plant 
behind his house. It was called a light plant.
    Mr. Barton. He had a what?
    Chairman Tauzin. It was called a light plant. It was an 
electric generation facility.
    Mr. Barton. L-I-G-H-T.
    Chairman Tauzin. L-I-G-H-T. That's the Cajun pronunciation 
of light. The bottom line is that he was the first in our 
community to have electric lights because he built his own 
power plant. He had the first television. He built that thing 
to keep his family, you know, comfortable with lights, and 
pretty soon he was sharing electricity with his neighbors from 
his own light plant. I remember he powered up an electric wire 
fence that I once fell upon and when I was a kid, and every 
time I touched my hand or my feet, I would get shocked.
    Mr. Barton. He told me he kept trying to get you near that 
fence, but you just wouldn't go.
    Chairman Tauzin. I was out slopping hogs one night and he 
moved the fence. And I fell over it, and every time I would 
touch my hands on the ground it would hit me, and I would touch 
my little feet on the ground I would get hit. I was thinking of 
that as sort of an analogy. I hope we don't end up on that 
electric fence before we finish with this bill. But the bottom 
line is, we can't depend upon systems that were built in that 
age for those purposes. And Mr. Chairman, I want to thank you 
for beginning this series of hearings because we have now 
charged you and Mr. Boucher and your subcommittee with an 
enormous responsibility, and that is to build the electric 
power system for this century, not the ones our grandfathers 
used. Good luck to you.
    [The prepared statement of Hon. W.J. ``Billy'' Tauzin 
follows:]
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    I want to thank Chairman Barton this morning for beginning a series 
of hearings that will help us determine how to set the proper course 
for the future of our Nation's electricity system, which is so vital to 
the success of our economy and our quality of life.
    Last week, the Energy and Commerce Committee passed the most 
comprehensive energy bill in a decade, on a 50 to 5 vote. That bill, 
which came out of this Subcommittee, contains a number of provisions 
that will improve the availability of various energy sources: hydro, 
nuclear, clean-coal, and renewables. In addition, more than half the 
bill is devoted to improving our Nation's energy efficiency and 
conservation. The legislation, which we hope to pass on the House floor 
next week with bipartisan support, will form the central piece of the 
President's comprehensive National energy policy.
    Our work is not done, however. The reliable supply and transmission 
of electricity is another essential element of this energy policy. This 
fact is underscored by the crisis in California and the West over the 
past year, as well as looming electricity problems elsewhere. The 
underlying causes of these problems will not just go away.
    To assure, as our economy grows, that the nation's electricity 
customers--businesses and consumers a like--will receive the most 
reliable power at the lowest possible prices, we must first address a 
fundamental disunity that exists in today's electric power industry.
    Consider this: There are four types of utilities in this country--
investor-owned, cooperatively-owned, Federally-owned, and municipal 
utilities--all of which generate, transmit, and sell power to each 
other and to their customers. There are also independent power 
producers, so-called qualifying facilities (QFs) under PURPA, and 
countless sources of distributed generation, which also generate and 
sell power. These various producers are governed by numerous laws and 
regulations at the Federal, State, and local levels.
    To make matters more complex, approximately half of the States have 
passed electricity restructuring legislation, in essence opening up 
their retail electricity markets to competition. Such competition 
requires a functioning wholesale market. Yet states that have not 
restructured do not have the same incentive to ensure that wholesale 
markets are open to all competitors. The result is a patchwork of 
competing laws, regulations, and interests that stifle the development 
of power markets, and abundant, competitively priced electricity.
    As a Nation, our disjointed electricity policy seems to be caught 
between competing visions: free markets versus central planning. What 
unifies us, however, is the inescapable fact that affordable, reliable 
electricity is the life-blood of our society. We all also want to 
encourage the cleanest, most efficient sources of power. This is where 
markets win, hands down. Planning doesn't foster the one thing 
American's do best: innovation--good old American ingenuity. You can't 
plan for innovation, but you can create a marketplace that rewards 
those who do things faster, smarter, cheaper, cleaner, more 
efficiently, and more reliably.
    In recent years we've seen tremendous innovation in 
telecommunications, computers, the whole digital revolution. Our 
Nation's economy operates more efficiently than at any time in history. 
Why, then, are we relying on the same electricity system our 
grandparents used?
    I look forward to learning our witnesses' views about what can be 
done to modernize our Nation's electric power industry. What, 
specifically, are the barriers to competitive markets? What prevents 
innovative suppliers from selling their power to consumers?
    I also look forward to subsequent hearings, which will examine such 
topics as the role of the Federal government in ensuring efficient 
operation of electricity markets, and ways to improve the regional 
organization of the interstate power grid. I believe it will become 
clear that federal guidance and legislation are needed to ensure the 
continued availability of clean, affordable, and reliable electricity.
    I thank Chairman Barton for holding these important hearings, and I 
look forward to working with him and my distinguished colleagues, Mr. 
Dingell and Mr. Boucher, in the weeks to come as we craft legislation 
to provide for our Nation's electricity future.

    Mr. Barton. Thank you, Mr. Chairman.
    The gentleman from Ohio, Mr. Sawyer, is recognized for an 
opening statement.
    Mr. Sawyer. Thank you Mr. Chairman. I will make a very 
brief opening statement, but if I might, with your permission, 
yield to our colleague from New Jersey for a point of personal 
privilege.
    Mr. Pallone. Thank you, my colleague from Ohio. And I also 
want to thank the chairman for allowing me, if I could, because 
I have to run to the floor on an amendment. I just wanted to 
take this opportunity to introduce Bruce Levy, who is senior 
vice president and chief financial officer of GPU, Inc., which 
is an electric utility holding company headquartered in 
Morristown, New Jersey, which serves many of my constituents. 
He is on the first panel.
    Mr. Levy serves as president of GPU Capital Inc., which is 
the company's financial subsidiary. And he is also past 
president of the Electric Power Supply Association, which of 
course a lot of you know as the National Trade Association. GPU 
is involved not only in New Jersey, but in other parts of the 
country and in other parts of the world as well, and I am very 
happy that he is joining this first panel today. And thank you, 
Mr. Chairman. And yield back to Mr. Sawyer.
    Mr. Sawyer. Mr. Chairman, I'm pleased to join my friend 
from New Jersey in welcoming the entire panel and to thank you 
for this hearing. The task that we are undertaking is not new, 
as you have been leading this effort for some time. It is long, 
it is complex, it is difficult, and it is important. We are in 
the middle of a fascinating transition from a century of 
vertically integrated utilities serving local customers with 
rates set by State commissions based on a responsibility to 
serve and a rate of return regulation, to an enormously complex 
market for which our infrastructure is not well prepared. You 
understand that. You know that. And this whole subcommittee, 
over the course of the last couple of years, has gained a 
vastly more sophisticated appreciation for that.
    Acting on that is going to be difficult. California is an 
example of the failings that can occur when restructuring an 
electrical system in a State gets caught in the position of the 
chairman, halfway across that fence and you can't set down on 
either side and you're stuck in between. The opportunity that 
California has to go back and achieve a measure of stability 
and start again is important for them and something we want to 
learn from, not replicate on a national level as we build a 
framework for the 26 or 27 States that are already into their 
processes of deregulation. And to build that broad Federal 
framework within which they can act and form regional markets.
    The topics that we are going to talk about today, PUHCA and 
PURPA, and some more esoteric topics like net metering and 
highly efficient new generation technology, are all important. 
They will contribute to the solution. And with that I would 
yield back the balance of my time, and thank you again for this 
hearing.
    Mr. Barton. Thank you, Mr.--Congressman Sawyer and the 
Chair wants to commend you on the fine work you did in the last 
Congress on the bill and in the working group that helped 
prepare the bill and look forward to working with you in this 
issue.
    Let's see. The gentleman from Iowa, Mr. Ganske, is 
recognized for an opening statement.
    Mr. Ganske. Mr. Chairman, our country depends on a reliable 
supply of energy to sustain its economy and to provide 
opportunities for that economy to prosper. But the source of 
energy isn't enough to power the economy. You have to have a 
reliable and a stable system to generate and transmit 
electricity from the energy source. The electrical generation 
and transmission systems in America are the subject of the next 
several hearings of this committee. And I believe they are very 
important matters for our attention.
    I too am very interested, Mr. Chairman, in the topic of 
distributive power generation and the steps this country--this 
committee can take to expand and encourage the concept of net 
metering. I believe it can provide an opportunity to expand the 
use of solar and wind power generation on homes and in farms 
around the country. We see a lot of this already developing in 
Iowa. And finally, Mr. Chairman, I want to take this 
opportunity to welcome all the witnesses for today's hearing, 
but in particular, I recognize David Sokol, the chairman and 
CEO of Mid-American Energy Holdings Company, which is in my 
neck of the woods. Mr. Sokol is quite knowledgeable and will 
provide us with important information and perspectives. And I 
yield to my colleague from Nebraska, Mr. Terry.
    Mr. Terry. Thank you, Mr. Ganske. I appreciate the 
opportunity to join in the introduction of my friend David 
Sokol as his company, Mid-American Energy, is technically 
located in your district, David Sokol is every bit located in 
mine. In fact, I welcome my hometown's--one of my home town's 
greatest citizens, kind of our local boy made good, a graduate 
of Omaha North High, University of Nebraska at Omaha, went on 
to run a small company named California Energy, now called Mid-
American Energy. And for this panel, I don't think we could 
have a better witness.
    I have spent a lot of time with David Sokol over the years, 
whether it was that we were working together to get ice at the 
civic auditorium so UNO could start a hockey program, which by 
the way, is one of the top 15 programs in the Nation now, but 
now get to work with him in solving this country's energy 
problems.
    Mr. Barton. What does that have to do with energy?
    Mr. Terry. I will tell you. You should see those kids play. 
That is a high energy. And I will tell you what, Chairman, you 
and I--you are invited to come see UNO hockey any time. But I 
appreciate that you invited Mr. Sokol here as the chairman, of 
course, of the company that deals or builds power plants. This 
man is so passionate about having the right policy for this 
Nation, whether--especially passionate about the role of 
private capital and solving the needs and solutions and finding 
the solutions for this country.
    So thank you, Greg, for yielding to me. Thank you, Mr. 
Chairman, for allowing me to be a part of the introduction. I 
yield back.
    Mr. Barton. Mr. Ganske yields back his time.
    Mr. Ganske. I do.
    Mr. Barton. Just on Mr. Sokol, he also has one the sweetest 
wives on the high plains. Very gentle lady and----
    Mr. Terry. Probably his greatest asset.
    Mr. Barton. So we need to put that--in addition to the 
hockey team and all of that, we ought to put that into the 
record. The gentlelady from Missouri is recognized for an 
opening statement.
    Mrs. McCarthy. I am going to be brief, Mr. Chairman, and 
just submit my entire remarks for the record because I want to 
get to the important panel that we have here today. I want to 
thank you for holding this hearing. I think it's very 
appropriate. I note that the transmission issues are not being 
covered in today's discussion, but I hope a future hearing will 
indeed address them because I think they are an important 
component to any restructuring plan. And I look forward to 
hearing from the witnesses today regarding the effect that the 
Public Utility Holding Company Act and the Public Utility 
Regulatory Policies Act will have on consumer protection and 
reliability standards.
    Repealing these two laws absent a comprehensive approach 
will remove certain consumer protections which could have 
adverse consequences on the market and ultimately the consumer 
prices and reliability of electricity. I also think greater 
access to information about energy purchases can have many 
benefits, consumers can choose to purchase cleaner renewable 
energy through green pricing programs and the recent agreement 
in bond to adopt the terms of the Kyoto protocol has 
intensified our need to the use of alternative sources of 
energy to reduce emissions of greenhouse gases.
    Real time pricing is also an essential piece of consumer 
information that can provide wiser choices about energy 
consumption to reduce peak demand and energy costs. We have 
heard testimony in this subcommittee earlier this year that 
real time pricing could save $14.8 billion annually by giving 
consumers proper price signals to their energy consumption. So 
if Congress is going to lay the foundation for a competitive 
market, we must be diligent in providing certainty to market 
participants. Earlier this month when I was home in Kansas City 
I toured the trading floor of Aquila, one of the top five gas 
power marketers in the country. And I was told that it can take 
2 months to 2 years for a utility to get connection rights to 
the transmission grid.
    To compound the situation there are over 400 utilities all 
with different interconnection rules. Adding a power plant to 
the power grid has become extremely difficult because 
incumbents create barriers of entry to competition. This 
creates economic uncertainty, resulting in reduced generation 
and higher prices for consumers. I support interconnection 
rules to provide certainty to potential new investors and 
reliability and affordable prices to consumers.
    Again, Mr. Chairman I will put the entire statement in the 
record. I thank you for this hearing. I look forward to working 
with you on these important issues and I welcome the witnesses 
today who will enlighten us.
    [The prepared statement of Hon. Karen McCarthy follows:]
Prepared Statement of Hon. Karen McCarthy, a Representative in Congress 
                       from the State of Missouri
    Mr. Chairman, thank you for holding this important hearing today on 
barriers to competitive generation. I look forward to the testimony of 
our witnesses on the legislative and regulatory actions that should be 
considered to promote additional generation that will benefit consumers 
and provide greater certainty for the electric industry. It is helpful 
to have this update on electricity restructuring issues, and I am 
pleased that transmission issues will be covered in a separate hearing 
because it is one of the most critical components of any restructuring 
plan.
    We have learned valuable lessons from the dysfunctional electricity 
market in California and the West. Recent events have taught us that 
the benefits of deregulation will only be reaped if regulatory and 
legislative policies ensure sufficient competition and reliability. 
Competitive generation will benefit consumers if true competition 
exists among suppliers. In my state of Missouri, electricity prices 
this year have averaged 5.3 cents per kilowatt-hour, 23% below the 
national average of 6.9 cents per kilowatt-hour. I fear that enacting 
restructuring legislation without carefully considering the effect on 
low cost states may harm customers who have benefited from policies 
that have promoted affordable energy.
    I look forward to hearing from our witnesses today regarding the 
effect that the Public Utility Holding Company Act (PUHCA) and the 
Public Utility Regulatory Policies Act (PURPA) have on consumer 
protection and reliability standards. Repealing these two laws, absent 
a comprehensive approach, will remove certain consumer protections 
which could have adverse consequences on the market and ultimately the 
consumer prices and reliable electricity.
    To that end, I support the establishment of provisions that will 
give authority to the North American Electric Reliability Council 
(NERC) to enforce adequate reliability standards. Lower costs are not 
beneficial to consumers if they are accompanied by rolling blackouts 
and ineffective service. Retail competition should also be accompanied 
by consumer protections to prevent slamming and cramming, while 
improving consumer access to information about the energy they are 
buying.
    Greater access to information about energy purchases can have many 
benefits. Consumers can choose to purchase cleaner renewable energy 
through green pricing programs. The recent agreement in Bonn to adopt 
the terms of the Kyoto Protocol has intensified our need to promote the 
use of alternative sources of energy that will reduce emissions of 
greenhouse gases. Real time pricing is also an essential piece of 
consumer information that can provide wiser choices about energy 
consumption to reduce peak demand and energy costs. We have heard 
testimony in this subcommittee earlier this year that real time pricing 
could save $14.8 billion annually by giving consumers proper price 
signals to their energy consumption.
    If we are to have competitive electric market, we need to ensure 
that barriers are removed so that the market can function properly. As 
I have stated before, our actions at the Federal level should 
compliment the successes of the market which have evolved under natural 
gas deregulation and capture the technological advances which have 
occurred to make energy more affordable, accessible, and cleaner for 
our environment.
    If Congress is to lay the foundation for a competitive market we 
must be diligent in providing certainty to market participants. Earlier 
this month (July 7th) when I was home in Kansas City, I toured the 
trading floor of Aquila Inc., one of the top five gas/power marketers 
in the country. I was told that it can take two months to two years for 
a utility to get connection rights to the transmission grid. To 
compound the situation, there are over 400 utilities, all with 
different interconnection rules. Adding new power plants to the power 
grid has become extremely difficult because incumbents create barriers 
of entry to competition. This creates economic uncertainly resulting in 
reduced generation and higher prices for consumers. I support uniform 
interconnection rules that provide certainty to potential new investors 
and reliability and affordable prices to consumers.
    Many of the witness here today will testify about the need to 
clarify and expand the Federal Energy Regulatory Commission's (FERC) 
jurisdiction. FERC must properly enforce the laws and regulations that 
ensure the prevention of market abuses for deregulation to be 
successful. However, given its lackluster record at preventing market 
abuses in California, I am hesitant to go forward with a deregulation 
plan that expands FERC's authority. The progress achieved by Congress 
in developing a competitive market will be nullified if the agencies in 
charge of ensuring competition do not do fulfill their obligations.
    Mr. Chairman, I welcome today's dialogue as another step toward a 
measured approach for addressing electricity deregulation. I yield back 
my time.

    Mr. Barton. I thank the gentlelady from Missouri.
    The gentleman from Tennessee, Mr. Bryant, is recognized.
    Mr. Bryant. Thank you, Mr. Chairman. And I too will be very 
brief and thank you for holding these hearings. And thank you 
for your help and graciousness over the last couple of years as 
we have worked on this issue of electricity deregulation and 
the kindness you have showed to us, particularly in the 
Tennessee valley as we have worked through some and continue to 
work through some very difficult issues. Mr. Herman Morris is 
here today and I will say more about him later, but he is a 
friend and certainly an acknowledged and proven expert in this 
field, and we always look forward to his testimony and having 
him here.
    And as I said, I will introduce him at the appropriate 
time. I also want to add my welcome to Mr. Sokol also. I am a 
friend of a friend, Mr. Christiansen, who you may or may not 
know has now moved to my State and may be moving to my 
district, may become a constituent of mine, for the rest of 
you, a former member. And I know a lot about your background, 
and I certainly can we go with everything that has been said 
about you. And again, I am just pleased to have such a 
qualified panel of witnesses, both on the first panel and the 
second panel. And with that I look forward to hearing from all 
of you. And I would yield back the balance of my time.
    Mr. Barton. I just hope Mr. Sokol doesn't decide to run for 
President of the United States. It looks like he has got 
support all over the country on both sides of the aisle. The 
gentleman from Louisiana, Mr. John, is recognized for an 
opening statement.
    Mr. John. Thank you Mr. Chairman. I will pass.
    Mr. Barton. The gentleman from Kentucky, Mr. Whitfield is 
recognized for an opening statement.
    Mr. Whitfield. Mr. Chairman, I have been trying to figure 
out a way that I could say something about Mr. Sokol also, but 
since I couldn't, I look forward to the testimony. I really 
appreciate these witnesses coming in. I notice they are all the 
way from New York to Washington State. We appreciate their 
effort and I look forward to their testimony.
    Mr. Barton. I am sure his plants use Kentucky coal in some 
cases. Seeing no other member seeking recognition to make an 
opening statement, all members not present shall have the 
requisite number days to put their opening statement in the 
record. Without objection, so ordered.
    [Additional statement submitted for the record follows:]
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    Today's witnesses will address a number of issues of importance to 
electricity consumers, and I commend the Chairman for holding this 
hearing. Recent events in California serve as reminders that tampering 
with the electric industry should only be done for good reason, and 
only with caution. Just as we hope that California's bad experience 
with ``bad deregulation'' proves to be the exception, we must take care 
not to induce similar problems in other parts of the country.
    As the subcommittee returns to the restructuring debate, it is 
worth noting that some of the most prominent issues from last year's 
debate have faded. Today there is little interest in enacting a federal 
mandate for retail competition, and that is appropriate. I have always 
felt this was properly a decision best left to the states. Perhaps the 
lessons from California's faulty deregulation plan will benefit others. 
With respect to transmission issues, the U.S. Supreme Court will soon 
consider a case raising core questions about state and federal 
jurisdiction. I sense that this may dampen the enthusiasm of at least 
the litigating parties for addressing these difficult issues 
legislatively in the near term.
    The electric restructuring debate affects the fortunes of many 
industry participants and, indeed, the economic well-being of the 
country. As the familiar ``It brings good things to life'' commercial 
reminds us, electricity reliability and affordability have a profound 
impact on the quality of life of every American citizen. For decades, 
the U.S. model has been the envy of many other nations and, on balance, 
this still holds true. It behooves us to also remember the small 
consumer's interests as we proceed and to ensure the reliability of 
service at ``just and reasonable'' prices. That focus can get lost in 
the shuffle in the rush to ``update'' the law, which is exactly what 
happened in California.
    Which brings me to the subject of PUHCA repeal. The Public Utility 
Holding Company Act of 1935 was enacted, as companion legislation to 
the Federal Power Act, in order to address problems that afflicted 
consumers and investors alike. At the time, securities regulation was 
in its infancy and state utility regulation was not well established. 
The regulatory system was no match for the huge holding companies 
operating across state borders, which concentrated about 92 percent of 
investor-owned electrical capacity in the hands of sixteen holding 
companies. Shareholders were deprived of a fair return on their 
investment, or suffered outright losses when the collapse of the stock 
markets toppled the heavily indebted holding company system. Utility 
ratepayers, as captive customers of monopoly utilities, had no 
alternative but to pay whatever they were charged.
    In the years after enactment, the Securities and Exchange 
Commission's administration of PUHCA and the Federal Power Commission's 
administration of the Power Act curbed the worst of these abuses. Among 
these were the issuance of securities based on paper profits from 
inter-company transactions, and the use of the holding company to evade 
state regulation. Today, many states have strong utility commissions 
which are better able to track the flow of money between utility 
affiliates and limit cross-subsidization. Clearly the electric industry 
is undergoing massive changes and, while I have often differed with the 
SEC regarding its lax administration of PUHCA, novel questions are 
being brought before the Commission. As a result, it is fair to ask 
whether or not the statute requires modification.
    Mr. Chairman, while I do not know the answer to that question, I am 
glad that you have raised it. I commend you for holding this hearing to 
address PUHCA repeal, and look forward to working with you on this and 
other interesting matters that will be discussed today.
    I know you would be disappointed, however, if I did not sound my 
usual alarm against hasty action in this area. My father, who had a 
hand in crafting PUHCA, observed the problems which uncontrolled market 
power visited upon shareholders and consumers alike--and which required 
enactment of strong federal laws. While I hope that will never recur in 
this country, it is up to us to fully consider all the possible 
ramifications of repealing PUHCA before we act. It would be an 
unmitigated disaster if we were to modify or repeal PUHCA without 
ensuring adequate protections for ratepayers and investors. Consumers 
throughout the west would be better off today if California lawmakers 
had acted with greater deliberation in 1996. That is a lesson we should 
bear in mind as we consider changes to this important Federal law.

    Mr. Barton. We now want to recognize our first panel. If 
you gentlemen would come forward. Several of you have already 
been formally introduced to the subcommittee. We have Mr. David 
Svanda. Is that right?
    Mr. Svanda. Perfect. Yes.
    Mr. Barton. Mr. David Svanda. That shows my staff knows how 
to spell things phonetically for me. He is here from the 
National Association of Regulatory Utility Commissioners. We 
have Mr. David Sokol, who needs no introduction. We have Mr. 
Bruce Levy, Senior Vice President and Chief Financial Officer 
who Mr. Pallone introduced to the committee, of the GPU 
Company. We have Mr. Robert priest who is Manager of the Yazoo 
City Public Service Commission. Did I miss someone? I missed 
Mr. Morris. Mr. Morris is the President and Chief Executive 
Officer of Memphis Light, Gas and Water that Mr. Bryant alluded 
to I think. We have Mr. Kanner, who is Coordinator for 
Consumers for Fair Competition. And we have Mr. Thomas lane, 
who is the Managing Director of a struggling investment company 
called Goldman Sachs in a place called New York which is 
obviously a village in far northeast Texas, I guess. So 
gentlemen, welcome. Your statements are in the record in their 
entirety. We are going to start with Mr. Svanda and go right 
down the line.
    We are going to recognize each of you for, let us say, 6 
minutes and then we will have some questions. Welcome to the 
subcommittee.

  STATEMENTS OF HON. DAVID A. SVANDA, COMMISSIONER, MICHIGAN 
PUBLIC SERVICE COMMISSION, ON BEHALF OF NATIONAL ASSOCIATION OF 
REGULATORY UTILITY COMMISSIONERS; DAVID L. SOKOL, CHAIRMAN AND 
 CEO, MID-AMERICAN ENERGY HOLDINGS COMPANY; BRUCE LEVY, SENIOR 
 VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, GPU, INC.; HERMAN 
  MORRIS, JR., PRESIDENT AND CHIEF EXECUTIVE OFFICER, MEMPHIS 
   LIGHT, GAS & WATER; ROBERT D. PRIEST, MANAGER, YAZOO CITY 
PUBLIC SERVICE COMMISSION; MARTY KANNER, COORDINATOR, CONSUMERS 
 FOR FAIR COMPETITION; AND THOMAS K. LANE, MANAGING DIRECTOR, 
                         GOLDMAN SACHS

    Mr. Svanda. Good morning, Mr. Chairman, and members of the 
subcommittee. I am Commissioner Dave Svanda. I am a member of 
the Michigan Public Service Commission and also second vice 
president of the National Association of Regulatory Utility 
Commissioners, commonly known to you as NARUC. And I 
respectfully request that my full written statement be included 
in today's hearing record.
    Mr. Barton. Without objection. Two of your former 
commissioners are now in the high cotton over at FERC, so y'all 
are two short, I guess, in your national organization.
    Mr. Svanda. Our loss and certainly your gain. They are 
great additions to that organization. I am grateful, truly, to 
be here in front of you to speak to some of your issues and 
concerns. I will speak to them briefly and also reserve just a 
minute of time for some personal comment after my NARUC 
comments. High on our list is that of interconnection and net 
metering that many of you commented on in your opening 
comments. NARUC supports legislation to establish uniform 
technical standards for interconnecting new generation to the 
grid. Further, we believe that implementation of 
interconnection rules, particularly at the distribution level, 
should be by State commissions. NARUC also believes that 
individual States should not be allowed to implement rules that 
would block the good faith effort of neighboring States to move 
to a competitive structure.
    NARUC supports the deployment of distributive generation 
and combined heat and power technologies through State level 
decisionmaking on such issues as removal of regulatory 
obstacles and the provision of backup power at reasonable 
rates. NARUC further supports legislation removing Federal 
barriers to State implementation of net metering. With regard 
to PUHCA and PURPA, as a general matter, it is a well-stated 
and known NARUC policy that neither PUHCA nor PURPA should be 
repealed on a stand-alone basis or in a vacuum. NARUC believes 
that relief from these statutes should be contingent upon the 
development of truly competitive markets as determined through 
State commission and supervised restructuring programs.
    Next on market power, many regional electric markets 
throughout the country have experienced price spikes of unusual 
and unexpected proportions. These price spikes have led to a 
curtailment to a shutdown of operations of small large 
industrial customers and to increase prices for smaller 
commercial and residential customers. This high market price 
volatility has raised concerns about the integrity of the 
markets leading to calls from numerous participants, consumers 
and policymakers for heightened monitoring of these markets by 
regulatory bodies.
    In order to identify corrective policy, regulatory bodies 
need access to data such as production for generation plants, 
transmission pass schedules and actual flows. FERC is making 
great use of today's technology and data in their brand new 
market monitoring room, which I was fortunate enough to visit 
just yesterday. The market monitoring effort could be greatly 
enhanced if FERC were to make the information that they are now 
able to gather on a real-time basis available to entities such 
as State commissions and others that would be able to use the 
information effectively.
    The electric industry restructuring efforts of the Federal 
Government and the various States are based on assumptions that 
wholesale markets are workably competitive to that end. Policy 
makers must have the ability to instill confidence in an 
already skeptical public that the market is not being gamed. We 
can only instill this confidence if we work with and 
disseminate actual information. NARUC supports legislation 
introduced this week by Senator Wyden and cosponsored by 
Senator Burns as an effective way to insure both Federal and 
State regulators have the information necessary to adequately 
monitor wholesale electricity markets.
    NARUC believes this legislation would provide great 
benefits to the market and its customers and should be included 
in any comprehensive energy bill. Congress should not preempt 
legislation in the States to address market power concerns, 
including the authority to require behavioral and structural 
remedies is to address successive market power. NARUC advocates 
a continuum of options, such as accounting conventions and 
codes of conduct for the mitigation of market power, and urges 
Congress to preserve State flexibility to use these options as 
needed.
    And now, in conclusion, or as I conclude, I would like to 
take off my NARUC hat and to make just a few personal 
observations based on my Michigan experience. I'd like to 
publicly compliment your entity, the FERC, for earlier this 
month, beginning to aggressively pursue the rationalization of 
RTO formation. We look forward to many more such aggressive 
actions on your part. I would like to encourage a policy that 
allocates the full cost of interconnection to the transmission 
side of the equation, so that all interconnecting facilities 
are treated on an equitable basis.
    I would like to indicate to you that wholesale decisions 
that are made at the national level can, in fact, kill 
overnight retail restructuring efforts at the States if those 
decisions that get made nationally send price signals in the 
opposite direction from that intended by the State. I have a 
very specific Michigan example that I would be happy to share 
on questioning if you are interested.
    Finally, I would like to emphasize that there are 
interstate transmission issues that States simply cannot get 
fixed by ourselves. And I would posit to you that if we could 
get them fixed by ourselves, then why haven't we up to this 
point?
    I thank you for this opportunity to appear before you, 
happy to answer your questions regarding either my comments on 
behalf of NARUC or my personal observations.
    [The prepared statement of David A. Svanda follows:]
  Prepared Statement of Hon. David A. Svanda, Commissioner, Michigan 
    Public Service Commission on Behalf of National Association of 
                   Regulatory Utility Commissioners,
    Mr. Chairman and Members of the Subcommittee: Good morning. My name 
is David A. Svanda. I am a Commissioner on the Michigan Public Service 
Commission and First Vice President of 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 as if fully read.
    NARUC is a quasi-governmental nonprofit organization founded in 
1889. Its membership includes the state public utility commissions for 
all states and territories. NARUC's mission is to serve the public 
interest by improving the quality and effectiveness of public utility 
regulation. NARUC's members regulate the retail rates and services of 
electric, gas, water and telephone utilities. We have the obligation 
under State law to 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 that are just, reasonable and nondiscriminatory for all 
consumers.
    I greatly appreciate the opportunity to appear on behalf of NARUC 
before the House Subcommittee on Energy and Air Quality.
                    INTERCONNECTION AND NET METERING
    NARUC supports congressional legislation to establish uniform 
technical standards for interconnecting new generators to the grid. 
However, we believe that implementation of interconnection rules--
particularly at the distribution level--should be by State commissions. 
NARUC further believes that States should not implement rules that 
would block the good faith efforts of their neighbors to move to a 
competitive structure.
    Congressional legislation should ensure that States have 
flexibility to implement interconnection rules to meet local market 
conditions. As an organization, NARUC supports the development of 
distributed generation and combined heat and power through state-level 
decisionmaking on such issues as removal of regulatory obstacles and 
the provision of backup power at reasonable rates.
    NARUC further supports legislation removing federal barriers to 
State implementation of net metering. The most critical barrier 
involves the current lack of jurisdictional clarity over net metering. 
The Federal Power Act has been alleged to preempt State net metering 
programs, slowing development of this promising new approach to 
promoting competition and resource divesting.
                            PUHCA AND PURPA
    NARUC has adopted resolutions that support Congressional action to 
address the Public Utility Holding Company Act (PUHCA) and the Public 
Utility Regulatory Policies Act (PURPA) provided certain conditions are 
met. In the case of PUHCA, we believe that repeal is appropriate, but 
only as part of broader legislative aimed at developing workably 
competitive wholesale markets and only if States and FERC are provided 
guaranteed access to holding company books and records. Additionally, 
any repeal must include provisions deemed necessary to assist FERC in 
addressing the problem of abuse of market power in generation and 
transmission services.
    With respect to PURPA, we would support prospectively repealing the 
utility mandatory purchase requirements, conditioned upon the 
development of competitive electric markets and as part of broader 
restructuring legislation, not as a stand alone initiative.
    As a general matter, it is NARUC policy that neither PUHCA nor 
PURPA should be repealed on a stand-alone basis or in a vacuum. NARUC 
believes that relief from these statutes should be contingent upon the 
development of competitive markets as determined through a State 
commission supervised restructuring program.
    A particular concern we have with PURPA repeal is preemption of 
State ratemaking authority. Specifically, our concerns focus on repeal 
provisions that restrict the ability of State commissions to require 
utilities to take steps to mitigate stranded costs that may result from 
above-market contracts. These types of provisions would leave little 
incentive for utility companies to minimize costs passed through to 
customers, thus holding harmless utilities and qualifying facilities.
                              MARKET POWER
    Many regional electric markets throughout the country have 
experienced price spikes of unusual and unexpected proportions. These 
price spikes have led to curtailment or shutdown of operations of some 
large industrial customers and to increased prices for smaller 
commercial and residential customers.
    The high market price volatility has raised concerns about the 
integrity of the markets, leading to calls from numerous participants, 
consumers and policy makers for heightened monitoring of these markets 
by regulatory bodies. In order to identify corrective policy options to 
assure the public of the competitiveness and efficiency of the 
developing wholesale electricity market and its prices, regulatory 
bodies need access to data such as production for generating plants, 
transmission path schedules and actual flows. FERC is making great use 
of today's technology and data in their new ``Market Monitoring Room.'' 
The market monitoring effort could be greatly enhanced if FERC made 
this information more widely available and had access to additional 
data.
    The electric industry restructuring efforts of the Federal 
government and the various States are based upon an assumption that 
wholesale markets are workably competitive. To that end, policy makers 
must have the ability to provide confidence to an already skeptical and 
uneasy public that the market is not being ``gamed.'' This confidence 
can only be provided if regulators are able to access the data 
necessary to ensure that the market is functioning in a truly 
competitive fashion. To the extent data is currently shared among 
market participants for purposes of reliability, it should also be 
available to regulators and the public.
    NARUC supports legislation introduced this week by Senator Wyden 
and co-sponsored by Senator Burns (S. 1231) as an effective way to 
ensure both Federal and State regulators have the information necessary 
to adequately monitor wholesale electricity markets and to assure 
proper access to such information. NARUC believes this legislation 
would provide great benefits to the market and its customers and should 
be included in any comprehensive energy bill.
    Congress should not preempt jurisdiction in the States to address 
market power concerns, including the authority to require behavioral 
and structural remedies to address excessive market power. NARUC 
advocates a continuum of options, such as accounting conventions and 
codes of conduct, for the mitigation of market power, and urges 
Congress to preserve State flexibility to use these options as needed.
    Legislation should clarify: 1) the authority of the States to 
require and police the separation of utility and nonutility, and 
monopoly and competitive businesses, and to impose affiliate 
transaction and other rules to assure that electric customers do not 
subsidize nonutility ventures; 2) that States have authority to require 
the formation of appropriate State, territory, and regional 
institutions where necessary to ensure a competitive electricity 
market; 3) as market power abuse may require the application of well 
tailored structural solutions, legislation should clarify the States 
are authorized to require divestiture where appropriate and necessary; 
and 4) that State regulators have authority to ensure effective retail 
markets and should eliminate any barriers to the exercise of that 
authority by the States.
    This concludes my remarks. Thank you for giving me this opportunity 
to appear before you today. I look forward to answering any questions 
you may have.

    Mr. Barton. We thank you.
    We would now like to welcome Mr. Sokol. Your statement is 
in the record in its entirety and you are recognized for 6 
minutes to elaborate on it.

                   STATEMENT OF DAVID L. SOKOL

    Mr. Sokol. Thank you Mr. Chairman, members of the 
committee. As has been stated, my name is Dave Sokol, chairman, 
CEO of Mid-American Energy Company, a diversified international 
energy company headquartered in Des Moines, Iowa with 
approximately $11 billion in assets. We appreciate very much 
this opportunity to testify this morning. This is an extremely 
important and timely hearing because if Congress does not 
address electricity issues this year, we will not have a truly 
comprehensive national energy policy. The quality and 
reliability of our electric supply system is critical to our 
economy, and Congress cannot wait to act until political 
consensus is reached on every issue. That merely works to the 
advantage of those who take extreme positions in the policy 
arena or who prosper as a result of market failures.
    The time has come for Federal action on electricity. Mid-
American has been a leader in building consensus on 
electricity, and there are several important issues where 
substantive consensus now exists. These include prospective 
repeal of the PURPA mandatory purchase obligations, 
standardization of interconnection procedures, the 
establishment of a mandatory reliability regime and some form 
of Federal backstop authority for transmission siting, as well 
as support for FERC's ongoing efforts to promote open 
transmission access.
    Today, however, I would like to focus my remarks in support 
of H.R. 1101, which would replace the outdated Public Utility 
Holding Company Act of 1935 with a modern workable framework 
and broad investigative powers for Federal and State 
regulators. PUHCA, as you know, was passed in 1935 to cure 
abuses at a time when energy regulation was in its infancy. 
Today, all it does is limit investment in energy infrastructure 
and distort markets, thus reducing supply options for consumers 
just when the industry needs new investments most.
    Sixteen months ago, when our largest investor, Warren 
Buffet, and I discussed PUHCA repeal with Congressional 
leaders, we warned that the electricity sector was headed for a 
train wreck, either in California or in the upper midwest. We 
don't take any pleasure in being correct in that prediction. 
But I hope you fully understand why we believe so strongly that 
Congress must act. From my first hand experience in California, 
I believe that this electricity crisis can be tied to two core 
problems: The lack of adequate investment in infrastructure and 
regulatory policies that distorted the energy markets.
    PUHCA contributes to both problems. It did not stop the 
problems in California from occurring and in certain respects, 
it has exacerbated them. Let me give you two examples of how 
PUHCA is limiting investment in California. Last year, when we 
saw signs of the severe problems in California's electricity 
markets, we attempted to invest in existing and new utility 
infrastructure. But through PUHCA, we cannot acquire or control 
more than 4.9 percent equity in any of the California utilities 
or those assets regulated under PUHCA.
    Moreover, the integration requirement of the Act would have 
required us to demonstrate that we could physically intersect 
our Iowa utility system with those in California. This is an 
impossible requirement for us, or the other two thirds of 
American utilities operating east of the Rockies to meet. 
Another PUHCA roadblock would have forced mid America to become 
a registered holding company under the Act, which probably 
would have required us to separate ourselves from Berkshire 
Hathaway, or have Berkshire divest all of their non energy 
assets.
    Obviously, neither option is acceptable. Let me give you a 
second example. We own and operate geothermal power plants in 
the Imperial Valley of California, which provides California 
with 340 megawatts of baseload emission-free renewable 
electricity. We want to double the size of these facilities, 
but PUHCA stands in the way because a new transmission line is 
needed to get this electricity to market. The States utilities 
are in no financial condition to do this and we cannot because 
building the line would trigger PUHCA registration.
    This is completely absurd. A 66-year-old law prevents 
Berkshire Hathaway, one of the world's most financially stable 
companies, from investing in California's market, when the 
State's own utilities can't pay their bills. Moreover, without 
PUHCA repeal, foreign companies looking for a foothold in the 
U.S. will continue to have a significant advantage over U.S. 
utilities. Foreign companies are not restricted by the physical 
integration requirements of PUHCA on their first entry into the 
U.S. This gives them a substantial advantage over U.S. 
companies. And we are not arguing against international 
investment. We strongly support it. But an outdated law should 
not hamstring American companies and have the perverse effect 
of pushing Americans' investment overseas.
    PUHCA made sense 66 years ago when there was no other 
statutory framework to control the misuse of the holding 
company structure. That has changed. Today, the FERC and State 
agencies closely regulate utilities. The SEC retains full 
authority over securities functions. The FTC and the Justice 
Department have well-established, antitrust authority. Are 
there any good reasons not to repeal PUHCA? No.
    First, the SEC, which enforces PUHCA, has consistently 
supported its repeal on a bipartisan basis for nearly 20 years, 
calling it the agency's most intrusive and burdensome 
regulation. Second, FERC commissioners of both parties have 
supported repeal and FERC reaffirmed that position earlier this 
year in Senate hearings because PUHCA repeal will enable it to 
better promote efficient and competitive wholesale markets.
    For example, while PUHCA is premised on geographically 
limiting utility companies, FERC is working to reduce market 
concentration. PUHCA also inhibits FERC's efforts to implement 
order 2000, to establish independent regional transmission 
organizations, a goal which is supported by virtually every 
market participant.
    Third, PUHCA repeal is pro-consumer. H.R. 1101 has strong 
new consumer protections that guarantee State and Federal 
regulators full access to the books and records of all utility 
companies, not just PUHCA-registered ones. Those elements of 
our business that are regulated should be, and must be 
available to regulators to insure that our customers are 
protected.
    We support these essential provisions. Moreover, repealing 
PUHCA will encourage new investment, new ideas and new 
efficiencies in this industry. I provided committee members 
with a study we commissioned by a highly respected econometrics 
firm that used very conservative estimates in showing that 
PUHCA directly costs our economy hundreds of millions of 
dollars annually, and other studies have put these costs in the 
billions.
    Last there is strong bipartisan support for PUHCA repeal as 
has been demonstrated by the Senate Banking Committee's recent 
19-to-1 vote for their PUHCA repeal bill. Why then has PUHCA 
not been repealed yet? Because it is being held hostage to 
other issues in the larger electricity debate. We believe it is 
time to end this stalemate because the losers in this hard-
played game over PUHCA repeal have been America's energy 
consumers.
    If Congress fails to act this year, when the need for new 
investment in the industry has never been more apparent, a very 
strong negative signal will be sent to the financial community. 
At the close of the Senate Banking Committee markup of the 
PUHCA bill, Delaware Senator Tom Carper said, and I quote, I 
have only one question, why hasn't this been done before? It's 
a no-brainer.
    Mr. Chairman, PUHCA repeal is a no-brainer. I would be 
happy to answer any questions that you may have.
    [The prepared statement of David L. Sokol follows:]
  Prepared Statement of David L. Sokol, Chairman and CEO, MidAmerican 
                        Energy Holdings Company
    Mr. Chairman and members of the Committee, my name is David Sokol, 
Chairman and CEO of MidAmerican Energy Holdings Company, a diversified, 
international energy company headquartered in Des Moines, Iowa, with 
approximately $11 billion in assets. I am here today representing 
MidAmerican and other companies that support H.R. 1101 and the 
modernization of the electricity industry.
    Thank you for the opportunity to testify this morning on an issue 
of great importance both to our industry and to American energy 
consumers. I would also like to thank Representatives Ganske and Terry 
for their very kind introductions.
    MidAmerican Energy Holdings Company consists of four major 
subsidiaries: CE Generation (CalEnergy), a global energy company that 
specializes in renewable energy development in California, New York, 
Texas, and the West, as well as the Philippines; MidAmerican Energy 
Company, an electric and gas utility serving the states of Iowa, South 
Dakota, Illinois and a small part of Nebraska; Northern Electric, a 
competitive electric and gas utility in the United Kingdom, and Home 
Services.com, a residential real estate company operating throughout 
the country. CalEnergy owns and operates geothermal power plants in the 
Imperial Valley of Southern California. The company is the largest 
employer and taxpayer in Imperial County, one of the most economically 
disadvantaged counties in California.
    I would like to commend Chairman Barton and the members of the 
Committee for holding this important and timely hearing. I believe this 
hearing is so important because, at the end of the day, if Congress 
does not address electricity issues, the country cannot have a truly 
comprehensive National Energy Policy. No other issue impacts Americans 
and our economy as pervasively as the quality and reliability of our 
electric supply system. Congress cannot afford to wait to act until 
some undefined future time when consensus is reached on every 
conceivable issue related to electricity. Taking that stance merely 
works to the advantage of those who take extreme positions in the 
policy arena or who prosper as a result of failures in the markets. The 
time for federal action on electricity has come--and maybe gone by a 
little; but if Congress moves quickly it can catch up before the type 
of damage we have seen in California and the West spreads to other 
parts of the country.
    MidAmerican has been a leader in efforts to build consensus on 
electricity, and there are a number of important issues on which 
substantive consensus exists. These include prospective repeal of the 
PURPA mandatory purchase obligation, standardization of interconnection 
procedures, the establishment of a mandatory reliability regime and 
some form of federal backstop authority for transmission siting, as 
well as support of FERC's ongoing efforts to promote open access 
transmission. I would like to focus my remarks today, however, in 
support of MidAmerican's number one legislative priority: replacing the 
outdated and counterproductive Public Utility Holding Company Act of 
1935 (PUHCA) with a modern framework and broad investigative powers for 
federal and state regulators.
    PUHCA, a Depression-era law passed to cure abuses at a time when 
the SEC and state regulatory bodies were in their infancy, is today 
limiting investment in energy infrastructure, thereby reducing the 
supply options for consumers at the very time when this industry needs 
new investment most.
    In his recent testimony before the Senate Banking Committee, 
Securities and Exchange Commission Chairman-Designate Harvey L. Pitt 
stated that he saw his primary mission as the need to ``nurture a 
climate that is conducive to, and encourages, the creation of capital--
the lifeblood of innovation.'' He went on to say that ``our securities 
laws are, in the main, nearly seventy years old, and reflect a time, 
and a state of technology, light years away from what we now confront 
daily.'' Given that previous SEC Commissioners have noted that PUHCA is 
the most intrusive and burdensome regulation administered by the 
agency, and that the SEC has been recommending its repeal for almost 
twenty years, I think we can safely apply those sentiments to this Act.
    From my first-hand experience in California, I believe that its 
complex problems can be tied to two root causes: 1) lack of adequate 
investment and infrastructure in the energy sector, and 2) regulatory 
policies that distort energy markets.
    As to the first issue, FERC last year found that ``there is little 
doubt that the most crucial task ahead is to ensure that a robust 
supply enters this market, both now and in response to any future price 
signals.'' Nationwide, data from the North American Electric 
Reliability Council (NERC) project electric reserves of only 11.48 
percent in 2001, with electric demands increasing by more than two 
percent per year. Typically, a 15 percent reserve is considered to be 
the minimum to ensure reliable service. Moreover, conservative 
estimates show that more than $76 billion will need to be invested in 
the sector by the end of the decade to assure reliable service.
    With regard to the second problem--regulatory policies that distort 
energy markets--California's actions proved disastrous. In the name of 
reducing concerns about utility market power, the state either 
compelled or encouraged large-scale generation divestitures by the 
incumbent utilities and required them to purchase power in the volatile 
day-ahead spot market. The state restructuring legislation also 
mandated significant rate reductions that discouraged new entrants from 
competing for retail customers. Combined with PUHCA's limitations on 
selling electricity generated by exempt wholesale generators (EWGs) at 
retail and the inadequacy of available transmission and generation, 
these measures helped smother competition at the retail level in its 
infancy. The state also failed to address preemptively the excessive 
bureaucracy in its plant siting and environmental review procedures.
    As you consider the actions you can take to ease the energy crisis 
in California and the West, I believe you will see that PUHCA 
contributes to both of these problems. The law can and should be 
repealed, and only Congress can do so. To do otherwise would leave a 
federal statute on the books that will continue to inhibit investment 
and distort markets throughout the country. The results of California's 
failure to address these issues in advance of the onset of full retail 
competition should be a warning to Congress about the need to move 
quickly on removing barriers to investment and market entry.
    Let me provide the committee with two concrete examples of how the 
Act prevents actions that could help alleviate the California 
electricity crisis. Last summer, we at MidAmerican began to see signs 
foreshadowing the severe problems that have afflicted the California 
electricity market. The investor-owned utilities in the state had 
already begun to suffer financially from the impacts of soaring 
wholesale electricity costs and capped retail rates, and we gave 
serious consideration to a number of options that would have involved 
MidAmerican taking an equity position in the California utilities while 
working with the state to return the market to long-term viability.
    Every scenario we reviewed ran into the same roadblock--the Public 
Utility Holding Company Act. MidAmerican is exempt from the most 
intrusive regulatory restrictions of the Act because its regulated 
utility business is primarily in one state, Iowa. However, MidAmerican 
could not acquire more than 4.99 percent of the equity in any of the 
California utilities without running afoul of PUHCA on several fronts.
    First, the physical integration requirements of PUHCA would have 
required MidAmerican to demonstrate that it could physically 
interconnect its utility systems in the Midwest with those of the 
California utilities. This is an impossible standard for MidAmerican to 
meet. Any public utility, registered or exempt, operating within the 
eastern two-thirds of the United States would run into the same 
barrier.
    Second, even if we could have solved the problem of the physical 
integration requirement, MidAmerican would have been forced to become a 
registered holding company under the Act. This probably would have 
required the company to separate itself from Berkshire Hathaway or have 
Berkshire divest itself of all non-energy related assets. For obvious 
reasons, neither of those options was acceptable.
    Another example pertains to our interest in expanding our Imperial 
Valley geothermal operations. These plants currently provide the 
California electricity market with approximately 340 megawatts of 
baseload, emissions-free, renewable electricity. We would like to 
double the size and output of these facilities, providing desperately 
needed electricity to the California market. This project will require 
the construction of additional transmission lines. As you are well 
aware, the state's investor-owned utilities are in no financial 
condition to undertake this type of project. The obvious answer would 
be for CalEnergy to make the investment in the transmission lines 
necessary to connect these plants to electricity consumers. 
Unfortunately, PUHCA may stand in our way.
    Being an owner of a transmission facility in California creates 
similar PUHCA problems to investing in a California utility. Once 
again, the company would be faced with maneuvering around the physical 
integration standard and dealing with Berkshire Hathaway's diversified 
portfolio. There may be some way around these problems, and we will 
explore every option to find a way to complete this expansion. 
Nonetheless, the existence of this unnecessary, outdated law makes it 
far more difficult to invest in this critical industry.
    I hope you will take a moment to reflect on the absurdity of this. 
Berkshire Hathaway is one of the most financially stable private 
entities in the world, with a AAA bond rating. A federal law enacted 
more than 65 years ago with the intent of protecting investors keeps 
MidAmerican and Berkshire out of California's utility market and almost 
prevented Berkshire from investing in MidAmerican. At the same time, 
one California utility has declared bankruptcy and the other was 
recently unable to complete a bond issue offering junk bond premiums to 
refinance its debts because of lack of investor interest.
    California's utility companies face a long climb back to fiscal 
health and will have a difficult time raising capital for new 
infrastructure. Yet, PUHCA will prevent most, if not all, domestic 
utilities, and discourage non-utility companies, from making equity 
investments in this market. Where will needed capital come from? I 
anticipate one of three sources. First, non-utility companies could 
make these investments, but these companies will not have the benefit 
of prior experience in the industry and will be impeded by PUHCA just 
as Berkshire Hathaway is. Federal or state governments are a second 
possible source of capital, but the political issues would seem to make 
that unlikely. The most likely scenario, I believe, is that foreign 
utility companies looking for a foothold in the U.S. market will take 
long looks at these companies. Since foreign companies are not 
restricted by the physical integration requirement on their ``first 
bite'' entry into the American market, they will enjoy a substantial 
advantage over U.S. companies in the mergers and acquisitions market. 
I'm not making a case against international investment. In fact, I 
strongly support it. But outdated, unnecessary laws should not 
hamstring American companies in this competition.
    PUHCA made sense 66 years ago, when there was no other statutory 
framework to control the misuse of the holding company structure. All 
that has changed. Today, the FERC and state agencies closely regulate 
utilities. The SEC retains full authority over securities functions. 
The FTC and the Justice Department have well-established antitrust 
authority. And more information is available in the markets, with bond 
rating agencies, accounting standards, and financial disclosure 
requirements quickly punishing companies that engage in excessive 
speculative activity.
    Are there any good reasons not to repeal PUHCA? I don't believe so.
1) The SEC has consistently supported PUHCA repeal for almost twenty 
        years.
    Speaking on behalf of the SEC before the Senate Banking Committee's 
Subcommittee on Securities and Investment, Commissioner Isaac C. Hunt, 
Jr. testified: ``By the early 1980's, many aspects of 1935 Act 
regulation had become redundant: state regulation had expanded and 
strengthened since 1935, and the SEC had enhanced its regulation of all 
issuers of securities, including public utility holding companies. 
Changes in the accounting profession and the investment banking 
industry also had provided investors and consumers with a range of 
protections unforeseen in the 1935. The SEC therefore concluded that 
the 1935 Act had accomplished its basic purposes, and its remaining 
provisions were either duplicative or were no longer necessary to 
prevent the recurrence of the abuses that had led to the Act's 
enactment. The SEC thus unanimously recommended that Congress repeal 
the Act.'' Based on a comprehensive staff report in 1995, the SEC again 
recommended repeal of PUHCA, accompanied by the creation of additional 
authority to exercise jurisdiction over transactions among holding 
company affiliates. That is exactly the approach embodied in H.R. 1101.
2) Federal Energy Regulatory Commissioners have consistently supported 
        repeal.
    On March 20, 1997 then-FERC Chair Elizabeth Moler, a Democratic 
appointee, testified that PUHCA ``inhibits competition. Congress should 
eliminate these impediments. Utilities need the freedom to pursue 
structural changes without facing antiquated rules that do not easily 
accommodate current policies favoring competition.'' Independent 
Commissioner Donald Santa, Jr. added that ``this anachronistic federal 
statute no longer serves any useful purpose and, in fact, is an 
impediment to greater competition in electricity markets.'' The current 
FERC Chairman, Curt Hebert, a Republican, is also a strong proponent of 
PUHCA repeal.
    PUHCA repeal will enable FERC to continue policies to promote 
efficient, competitive wholesale markets. PUHCA is premised on 
geographically limiting utility companies while at the same time FERC 
is working to reduce market concentration.
    The limits PUHCA places on FERC's ability to promote competitive 
wholesale electricity markets are even more apparent today. For 
example, PUHCA inhibits utilities' efforts to comply with FERC Order 
2000 to establish independent regional transmission organizations 
(RTOs), yet every consumer group, industrial user group, public power 
entities and rural coops favor the establishment of RTOs to ensure the 
most efficient use of the electric transmission system and to guarantee 
that utilities do not use control of the transmission system to distort 
wholesale electricity markets.
    Many utilities, including MidAmerican Energy, are working to 
establish independent transmission companies, or ``transcos,'' that 
would provide for efficient management of transmission networks in 
large regional markets. As FERC strongly prefers that these 
organizations be large, multi-state companies, they will be subject to 
PUHCA's restrictions. PUHCA is discouraging potential investors in 
these new businesses and delaying the day we will see operational 
control of transmission fully separated from competitive market 
functions.
3) PUHCA repeal is pro-consumer.
    PUHCA was passed at the height of the Depression to remedy abuses 
of holding companies that were taking advantage of lax or non-existent 
utility regulation at the state and federal level. Its purpose then was 
to preserve and reinforce the model of a regionally vertically 
integrated utility monopoly. PUHCA did its job then. The paradigm in 
the industry has shifted, but PUHCA has not. As a result, the Act today 
narrows the range of market entrants and thereby stifles competition, 
which is turn hurts consumers.
    H.R. 1101 has strong new consumer protections applicable to more 
utilities than are currently subject to the restrictions of PUHCA. It 
guarantees state and federal regulators full access to the books and 
records of utility holding companies. We strongly support those 
provisions. Those elements of our business that are regulated should be 
available to the regulators to insure that our customers are protected. 
That is absolutely essential.
    At the same time, repealing PUHCA will allow new investment, new 
ideas and new efficiencies in the electric and gas industries at a time 
when these are needed most. Last year, MidAmerican commissioned an 
independent study by the highly respected econometrics firm Analysis 
Group/Economics. Using the most conservative possible estimates, the 
study demonstrated directs costs to the economy of hundreds of millions 
of dollars annually from PUHCA. Other surveys that have attempted to 
quantify lost opportunity costs in the industry have estimated a multi-
billion dollar annual drag on the economy from PUHCA. I am pleased to 
provide our study to members of the committee for your review.
    Any claim that Congress should not repeal PUHCA because of events 
in California is misleading and specious. All three of California's 
utilities are exempt from PUHCA's restrictions under the intrastate 
exemption, and the overwhelming majority of generators selling 
electricity in California's electric markets are also PUHCA exempt. 
California officials made a huge policy mistake in allowing their 
utilities to distribute proceeds of their stranded cost settlements 
without either requiring that revenues be set aside in some form of 
hedge against rising wholesale costs or that these funds not be 
distributed until after the rate freeze transition period was complete.
    That decision was one of many flawed aspects of the California 
restructuring plan, but it has absolutely nothing to do with PUHCA. If 
any of these utilities violated California law in their handling of 
these matters, they can and should be subject to damages and remedies 
under existing state law. Failure to regulate these utilities properly 
was may have been poor state policy, but PUHCA has nothing to do with 
those issues.
4) There is strong bipartisan support for PUHCA repeal in the other 
        body.
    On April 24th, the Senate Banking Committee voted 19-1 in support 
of PUHCA repeal. Having testified at the hearing on the bill the 
previous month, I can assure you that this was no pro forma vote. The 
hearing was well attended, particularly by senators new to the 
Committee hearing the case for PUHCA repeal for the first time.
    Why then has PUHCA not been repealed yet?
    Because PUHCA repeal is a hostage to other aspects of the larger 
electricity debate. Some stakeholders in the industry have sought to 
use PUHCA as leverage to achieve their goals in energy policy. I don't 
say that in an accusatory sense. That's the way the game is often 
played, and as I said earlier, MidAmerican has taken a leadership role 
in trying to resolve policy differences on the full range of these 
issues.
    Those efforts can and should continue, but I believe both Congress 
and the stakeholder community need to step forward and focus on what 
they support and are willing to help get passed. We need to end the 
politics of stalemate where interest groups have focused more on 
blocking progress on one another's priorities than on moving forward 
with good policy. Unfortunately, the losers in this hard-played game 
have been America's energy consumers.
    While there has been some new interest in the utility sector in the 
last two years, partly as a result of the entry of non-traditional 
investors, far more capital is sitting on the sidelines waiting to see 
if Congress will move forward with PUHCA repeal and other needed 
modernizations. I am concerned that if Congress fails to act this year 
when the need for new investment in the industry has never been more 
apparent, a strong negative signal will be sent to the financial 
community. In view of our undeniable capital needs, that would have 
far-reaching negative impacts.
    Last year, I joined Mr. Warren Buffet in discussing PUHCA repeal 
with House and Senate leaders. In those meetings, we warned that the 
energy sector was headed for a train wreck in either California or the 
Midwest. I don't take any pleasure in being right in that prediction, 
but I hope you will understand why I believe so strongly Congress must 
act now.
    The political game that has held PUHCA repeal hostage has left the 
American consumer the loser. It is time to change the way the game is 
played. I thank you for the opportunity to testify this morning and ask 
you to support H.R. 1101 and other needed industry modernizations.

    Mr. Barton. Thank you.
    Mr. Levy, we would now like to have your statement. It is 
in the record in its entirety, and you are recognized for 6 
minutes to elaborate on it.

                     STATEMENT OF BRUCE LEVY

    Mr. Levy. Thank you.
    Mr. Barton. You need to put that microphone really close to 
you, sir. And push that little--there you go.
    Mr. Levy. That works. Thank you, Mr. Chairman, members of 
the committee. I am Bruce Levy, senior vice president and chief 
financial officer of GPU. GPU, based in Morristown, New Jersey, 
is a registered electric holding company. We operate utility 
companies in New Jersey and Pennsylvania, two States that have 
completed their deregulation process, and we offer our 2 
million customers the choice to select their electric supplier.
    In addition, GPU owns international utilities in the U.K., 
Argentina and Australia, serving another 2 million customers. I 
appreciate the opportunity to appear before you today, and 
appreciate Mr. Pallone's kind introduction, and want to 
acknowledge, for the record, the hard work he has done with us 
in both local reliability issues and in PURPA repeal issues. I 
think that the points of today to discuss who to make a better 
competitive wholesale electric generation market are important 
ones that will determine whether we continue to enjoy adequate 
supplies of reliable electric power at fair prices.
    The potential upside of this is this new more competitive 
market is enormous. But so will be the cost if we fail. I will 
focus my remarks today on two Federal statutes, both which have 
outlived their usefulness and now serve as impediments to 
proper functions of competitive wholesale markets. These States 
are the Public Utility Regulatory Policies Act of 1978, PURPA, 
and the Public Utility Holding Company Act of 1935, PUHCA. As 
someone who is active in the development of PURPA-qualifying 
facilities for GPU in the past and now has the responsibility 
of over the finances of GPU a PURPA-burdened utility, who has 
long-term power contracts with over 1,600 megawatts of QF 
projects, I can argue both sides of whether PURPA was a good 
thing or a bad thing when Congress enacted it in 1978.
    But quite frankly, whether PURPA was a good or bad thing in 
1978 is not important at this time. What is important is that 
in today's power market, PURPA no longer makes sense. It is not 
needed, and in fact creates an impediment to free operation of 
the wholesale generation market. Today, electric generators QFs 
and non-QFs have access to wholesale customers under the same 
terms and conditions applicable to the utilities owning the 
transmission wires. This open access has sharply increased 
competition for wholesale sales of electricity. But it has also 
resulted in a competitive disadvantage for utilities mandated 
to purchase wholesale power from QFs at long-term rates, which 
are generally above currently prevailing market price.
    PURPA also disadvantages non-QF generators who are not 
eligible for the privilege of a guaranteed market for their 
power. PURPA was premised on utilities continuing to be the 
exclusive suppliers of electricity to all consumers within 
their franchise territory. It was never imagined that PURPA 
would apply to a world of opening transmission access for 
wholesale and retail customers.
    If a utility exits the generation business, whether by 
choice as my company has, or through regulatory order as some 
other utilities have, it is unreasonable, unfair and 
uncompetitive to require those utilities to continue to make 
new commitments to purchase QF generation, as required by 
PURPA.
    Things get even worse in some States. For example, under a 
restructuring plan adopted in New Jersey, all utilities are 
required to bid out their provider of last resort obligation, 
and thus will have no further supply obligation to customers. A 
similar case will exist in Texas when that States plant program 
starts. Requiring those utilities to make new--to make any new 
QF purchases makes no sense. In these cases, as in any other 
State where deregulation has been implemented, continuing PURPA 
impedes the transition to a competitive market. PURPA should be 
prospectively repealed, that is, existing contract rights 
expectations including the expectation of PURPA costs recovered 
by utilities, provided by current laws should be honored.
    Mr. Stearns has introduced bipartisan legislation, H.R. 
381, that would accomplish this. And I urge its inclusion in 
any comprehensive legislation you may consider.
    Another statute which needs attention is PUHCA. PUHCA has 
long outlived its usefulness and its rules are designed for 
industry that no longer exists, and may severely limit the 
ability of companies to compete in today's fast evolving energy 
marketplace. PUHCA restricts the flow of capital into new 
generation and transmission facilities and is a significant 
factor impeding the development of independent transmission 
facilities. There are many new investors anxious to participate 
in the funding and expansion of our Nation's transmission 
system.
    PUHCA has kept these investors away. PUHCA should be 
repealed. While PUHCA and PURPA repeal are key elements in 
removing impediments to a fully competitive market, there are 
other areas where changes are needed. These include extension 
of FERC-ordered, nondiscriminatory open access rules to munis, 
coops, and federally owned transmission facilities, as well as 
provisions to upgrade necessary incentives to expand the 
transmission system.
    In conclusion, there is much this Congress can and should 
do to make the competitive wholesale market function better. I 
urge the PURPA prospective repeal preservation of existing 
contracts and recovery of costs and PUHCA repeal be high on 
your agenda, and that such actions be included in any national 
energy policy. Without addressing these issues, we cannot have 
a national energy policy. Thank you very much.
    [The prepared statement of Bruce Levy follows:]
   Prepared Statement of Bruce Levy, Senior Vice President and Chief 
                      Financial Officer, GPU, Inc.
                              INTRODUCTION
    Mr. Chairman and Members of the Subcommittee, I am Bruce Levy, 
Senior Vice President and Chief Financial Officer of GPU, Inc. GPU, 
Inc., headquartered in Morristown, NJ, is a registered public utility 
holding company providing utility and utility-related services to 
customers throughout the world. GPU serves 4.6 million customers 
directly through its electric companies--GPU Energy in the US, GPU 
Power UK in England, and Emdersa in Argentina. GPU has domestic utility 
operations serving approximately 2 million customers in Pennsylvania 
and New Jersey. The company's independent power project business units 
own interests in and operate eight projects in five countries. I am 
testifying today on behalf of myself and GPU, Inc., but my views are 
consistent with the positions taken by EEI, the Alliance for 
Competitive Electricity, the PURPA Reform Group, and Repeal PUHCA Now!, 
industry organizations of which GPU is a member.
    I am particularly pleased to be here today to talk about how to 
make competitive wholesale electric generation markets work better. 
This is an important issue in determining whether we continue to enjoy 
adequate supplies of reliable electric power at fair prices to the 
consumer.
    We are currently about mid-way through the transition of the 
electric power industry from a system of defined franchise service 
territories, cost-based regulation of generation, and pervasive 
regulation of all aspects of the business, to a wholesale market 
premised on open, non-discriminatory access, market-determined 
generation prices, and independent operation of the transmission grid. 
While this transition has not been easy, it is clear that if we 
successfully navigate this transition, the industry will be forced to 
be more efficient and consumer prices will be less than they otherwise 
would have been under the old system. The upside potential of this new, 
more competitive electric industry is enormous, but so will be the 
costs if we fail.
    It is becoming clearer each day that much remains to be done by 
regulators, and most importantly, by the Congress, to ensure that this 
transition to a more market-oriented electric industry is successful. 
The problems that plague the wholesale electric power sector today can 
be ignored, but they will not go away and they cannot be entirely 
solved by the FERC or state regulators. Congress has an important role 
to play and I encourage you to exert the leadership necessary to help 
ensure viable, robust, competitive wholesale generation markets. The 
following highlights some of the issues that are important to properly 
functioning wholesale power markets, and are issues that only the 
Congress can address satisfactorily.
Repeal Federal Legislation that Hinders Competition
    Legislation enacted in an era of vertically integrated utilities 
with defined retail franchise territories makes no sense in today's 
world. Legislation is necessary to prospectively repeal section 210 of 
the Public Utility Regulatory Policies Act of 1978 (``PURPA'') and to 
repeal the Public Utility Holding Company Act of 1935 (``PUHCA''), two 
impediments to a more competitive electric industry.
PURPA
    The Public Utility Regulatory Policies Act of 1978 (``PURPA'') was 
enacted as part of the Carter Energy Plan to help alleviate the oil and 
natural gas shortages of the late 1970s. It failed to achieve these 
objectives, and today, it stands as an impediment to more competitive 
and efficient wholesale power markets.
    PURPA was intended to encourage conservation and promote the 
development of renewable fuels in the electric generation sector. It 
did this by establishing a special class of power generators, known as 
qualifying facilities (``QFs''). In general, a QF must be of a certain 
size, burn certain renewable or waste fuels, or produce steam for 
commercial or industrial use as well as electricity. PURPA requires 
utilities to buy all the electricity these qualifying facilities wish 
to sell at the utility's ``avoided cost,'' which is determined by state 
regulators under guidelines issued by the FERC.
    In drafting PURPA, Congress aimed to ensure that consumers would 
pay no more for PURPA power than for other power. Unfortunately, due to 
a confluence of factors not foreseen by the authors of PURPA, this has 
not been the case. Instead, long-term PURPA contracts continue at above 
market prices throughout the United States. And some 65 percent of 
PURPA contracts will not expire until after the year 2010.
    PURPA is an anachronism in today's power markets. Competition in 
electricity generation has been unleashed by the enactment of the 
Energy Policy Act of 1992 and the issuance of FERC Order Nos. 888 and 
889, providing for open, non-discriminatory access to utility 
transmission systems for wholesale transactions. Consequently, 
electricity generators and wholesale customers have access to each 
other under the same terms and conditions applicable to the utility 
owning the transmission wires. This open access has sharply increased 
competition for wholesale sales of electricity. But it also has 
resulted in a substantial competitive disadvantage for utilities 
mandated to purchase wholesale power at rates above currently 
prevailing market prices. PURPA also disadvantages non-utility 
generators not eligible for the special privileges of a guaranteed 
market for their power.
    PURPA was premised on utilities continuing to be the exclusive 
suppliers of electricity to all consumers within their franchise 
territories. It was never imagined that PURPA would apply to a world of 
open transmission access for wholesale and retail customers. 
Continuation of PURPA's purchased power mandate in this new open access 
world distorts competition and denies consumers the benefit of the 
lowest cost power. If a utility goes out of the generation business, as 
my company and many other utilities have decided to do, requiring those 
utilities to continue to make new commitments to purchase QF generation 
makes no sense. For example, under the restructuring plan adopted in 
New Jersey, all utilities are required to bid out the provider of last 
resort obligation and thus will have no further supply obligation to 
its customers. Requiring those utilities to make new purchases of QF 
power makes no sense. Similarly, if a utility is precluded from 
marketing energy, as utilities in Texas have been under that State's 
restructuring law, it has no use for energy delivered under a PURPA 
contract. Thus, continuing PURPA merely impedes the transition to a 
competitive market.
    PURPA also has failed to achieve one of its primary goals, to 
encourage the development of renewable energy resources. According to 
the Department of Energy's Energy Information Administration, as of 
December 31, 1998, wind turbines, solar and geothermal units together 
comprised only 3.7 percent of all installed non-utility generation 
capacity. Biomass and waste comprised another 16.1 percent. On the 
other hand, natural gas, coal and oil make up over 75 percent of the 
installed non-utility generating capacity. Thus, non-renewable sources 
of energy have been the primary beneficiaries of the PURPA mandatory 
purchase requirement, not renewables.
    PURPA should be prospectively repealed. However, existing 
contracts, rights and expectations, including the expectation of PURPA 
cost recovery by utilities currently provided by law, should be 
honored. Mr. Stearns has introduced bi-partisan legislation (H.R. 381) 
that would accomplish this. I urge its inclusion in any comprehensive 
legislation you might consider.
PUHCA
    The Public Utility Holding Company Act of 1935 (``PUHCA'') was 
enacted during the Great Depression with two primary objectives: the 
integration and simplification of complex natural gas and electric 
utility holding company systems, which then dominated the utility 
industry, and protection of investors and consumers through effective 
regulation of multi-state utilities operating through subsidiaries.
    PUHCA long ago achieved its first objective of restructuring the 
electric and natural gas industries. Consumer and investor protection 
is now the purview of other regulatory and statutory authorities, which 
did not exist 65 years ago.
    PUHCA met its first objective by dismantling and simplifying the 
organizational structure of the more than 200 complex electric and gas 
utility holding company systems in existence in the mid-1930s. These 
geographically scattered and diverse businesses were limited to the 
operation of a single integrated utility system, plus such other 
businesses as were closely related to an integrated utility system. By 
the early 1950s, according to the Securities and Exchange Commission 
(``SEC''), the agency responsible for administering PUHCA, the 
reorganization of the electric and gas utility industries was complete.
    The second objective of PUHCA--to protect investors and consumers--
was met by authorizing the SEC to regulate certain holding companies 
that remained the owner of utility subsidiaries in more than one state. 
This regulation requires advance SEC approval for many business and 
financial transactions, including the issuance of debt or equity, 
acquiring utility or non-utility assets and entering into service 
arrangements with affiliated companies.
    Even the SEC has recommended PUHCA's repeal because it is no longer 
needed and is largely duplicative of other investor and consumer 
protection authority administered by the SEC and the states. As an SEC 
report has noted, ``[a]cting under authority in the Securities Act of 
1933 and the Securities Exchange Act of 1934, the SEC has, over the 
past six decades, created a comprehensive system of investor protection 
that obviates the need for many of the specialized provisions of the 
Holding Company Act.''
    Not only has PUHCA outlived its usefulness, but it also is a 
barrier to competition. It requires fewer than 20 out of the nation's 
more than 200 electric and natural gas utilities to register and be 
subject to pervasive SEC regulations. By significantly limiting 
geographic and product diversification, and imposing numerous 
burdensome filing requirements, PUHCA severely limits the ability of 
companies to compete in today's fast evolving energy marketplace and 
deprives consumers of the full range of energy provider services and 
choices they would have if the Act were repealed. PUHCA restricts the 
flow of capital into new generation and transmission facilities and 
limits the number of new suppliers in electricity markets by 
prohibiting exempt wholesale generators from selling directly to retail 
consumers.
    PUHCA also acts as a perverse impediment to the formation of RTOs. 
Shareholder-owned utilities and FERC are working quickly to meet FERC's 
goal, established in Order No. 2000, of having RTOs operational by the 
end of 2001. However, PUHCA is an impediment to utility efforts to 
establish independent transmission companies with the scope and size 
desired by FERC. Any such company could be required to become a 
registered holding company and subject to the many restrictions and 
additional regulation under PUHCA. As our companies attempt to raise 
financing for these newly formed RTOs, they are discovering that 
PUHCA's restrictions are a significant concern to Wall Street firms and 
a barrier to investment by the very non-utility businesses that are 
``independent'' of market participants. Mr. Pickering has introduced 
bi-partisan legislation (H.R. 1101) that would repeal PUHCA. I urge its 
inclusion in any comprehensive electricity legislation that the 
Subcommittee might consider.
Extend Non-Discriminatory Open Access Requirements to Municipal, 
        Cooperatively-Owned and Federally-Owned Transmission Facilities
    In 1992, Congress passed the Energy Policy Act (``EPAct''). One of 
its most significant provisions is a requirement that, upon request, 
utilities must transmit or ``wheel'' wholesale power generated by 
others. If a utility fails to wheel when requested to do so on mutually 
satisfactory terms, the requesting party can petition the FERC for an 
order requiring the wheeling.
    In 1996, the FERC issued its landmark decision in Order No. 888, 
directing utilities to provide other users with access to their 
transmission facilities on the same terms and conditions that they 
themselves have. The purpose was to promote wholesale competition by 
providing ways for competitive generators to move their power to 
wholesale customers through open, non-discriminatory transmission 
services.
    Order No. 888, however, only applies directly to utilities subject 
to FERC's jurisdiction under the Federal Power Act--mostly investor-
owned companies. Almost one-third of transmission facilities in the 
U.S. are not subject to FERC jurisdiction, and thus, are beyond the 
open access requirements of Order No. 888. Thus, the Order No. 888 open 
access requirements are not directly applicable to federally-owned, 
municipal, or cooperatively-owned utilities, although the FERC has 
imposed a reciprocity requirement on non-jurisdictional utilities that 
seek to use the transmission facilities of jurisdictional entities. In 
order to promote greater market efficiency, competition and 
reliability, FERC's open transmission access requirements should be 
extended to all transmission-owning entities. In today's market, it 
makes no sense for there to be different rules for different 
transmission-owning entities.
Upgrade and Provide Necessary Incentives to Expand the Transmission 
        System
    Generation is of little use if the power that is generated cannot 
be moved to where it is needed, and when it is needed, instantaneously. 
``Busy'' signals are not acceptable in our business. Our increasingly 
interconnected and overloaded transmission system is what makes the 
entire electric system work (or not).
    All segments of the electricity industry are imposing tremendous 
demands on the transmission system to carry more and more transactions 
across greater distances. As a result, the transmission system is 
facing significant increases in congestion.
    On an interstate highway system overloaded with traffic, gridlock 
often results. On a transmission system with congestion, transactions 
are curtailed to ensure that the system does not become overloaded, 
limiting delivery of low-cost power and potentially resulting in a loss 
of reliability.
    Annual investment in transmission has been declining by almost $120 
million a year for the past 25 years. Transmission investment in 1999 
was less than half of what it had been 20 years earlier. Maintaining 
transmission adequacy at current levels would require about $56 billion 
in investment during the present decade. EPRI estimates it will cost up 
to $30 billion to bring the western regional transmission system back 
to a stable condition and $1 billion to $3 billion a year after that to 
maintain this condition in the face of continued growth.
    Without adequate transmission capacity to meet growing demand, 
reliability will be compromised, prices will increase, overall system 
efficiency will decline and the benefits of wholesale generation 
competition will not be realized. A regulatory regime that fosters an 
economic climate to encourage investment in transmission is necessary. 
It is time for innovative, non-cost based forms of regulation to reward 
transmission investments and operations that enhance reliability and 
greater system efficiency. A bipartisan bill introduced or cosponsored 
by six members of this Committee in the last Congress (H.R. 2786) 
provides a satisfactory framework for addressing the need for new 
investment in transmission. I urge the Subcommittee's careful 
consideration of this bill.
Establish Regional RTOs
    The biggest gap in FERC's RTO authority remains its inability to 
impose the same requirements on federal electric utilities, municipal 
utilities and electric cooperatives. These utilities operate important 
transmission facilities that are integral to RTOs throughout the 
nation. FERC has invited these entities to participate in mediation 
talks. However, because FERC lacks jurisdiction over these entities' 
transmission systems, it cannot put the same pressure on them to join 
RTOs that it has clearly demonstrated it intends to put on shareholder-
owned utilities. FERC's Federal Power Act authority must extend to all 
transmitting utilities, regardless of their ownership form.
Tax Code Provisions that Impede the Efficient Restructuring of the 
        Industry Should be Eliminated
    While I realize that tax issues are not jurisdictional to the 
Energy and Commerce Committee, I want to encourage your support for a 
number of tax law changes that are critical to assuring adequate 
investment in transmission infrastructure. With regard to RTOs, these 
organizations will succeed only if all transmission owners in a region 
join. In some areas of the country, such as the Pacific Northwest, the 
participation of all publicly owned transmission entities will be 
needed to form an effective RTO. Municipal owners of transmission argue 
they cannot join RTOs because tax code provisions preclude the 
``private use'' of tax-exempt financed utility property. These 
provisions should be modified to allow municipal transmission assets to 
be placed into an RTO without violating ``private use'' rules.
    We commend the House Ways and Means Committee for reporting 
legislation last week that largely reflects the compromise agreement 
reached between EEI, LPPC and APPA last year that would address many of 
these problems. This agreement would (1) grant ``private use'' relief 
for government-owned utilities that provide open access to their 
transmission systems, (2) grant tax relief for the sale or spin-off of 
transmission facilities to form FERC-approved RTOs or
    independent transmission companies that are part of a FERC-approved 
RTO, (3) allow continued contributions to nuclear decommissioning trust 
funds in a restructured electricity market, and (4) remove the tax on 
contributions in aid of construction.
Conclusion
    Our country needs a comprehensive national energy policy that 
ensures the adequate supply of affordable and reliable electricity. The 
removal of barriers to the wholesale generation market will go a long 
way to ensuring the supply that is essential to our modern economy that 
increasingly depends on adequate supplies of highly reliable, and 
reasonably priced electricity. Modern technologies powered by 
electricity have been responsible for as much as half of the nation's 
economic growth since the 1930s. Electric technologies have improved 
our productivity, reduced our overall energy use and enhanced 
Americans' quality of life.
    Action is needed now to ensure our country has affordable and 
reliable electricity for years to come. I look forward to working with 
this Subcommittee to achieve these objectives.

    Mr. Barton. Thank you, Mr. Levy.
    We now want to hear from Mr. Morris. And I believe you 
testified for the subcommittee in the last Congress. Is that 
correct or not correct?

                 STATEMENT OF HERMAN MORRIS, JR.

    Mr. Morris. Yes.
    Mr. Barton. That is correct. I thought I recognized you. 
Welcome again to the subcommittee, and your statement is in the 
record in its entirety, and we would ask you to elaborate on it 
for about 6 minutes.
    Mr. Morris. Thank you, Chairman Barton, and Ranking Member 
Boucher. On behalf of the Large Public Power Council, I am 
happy to appear today to discuss electric restructuring issues. 
As you know, my name is Herman Morris, and I am president and 
chief executive officer of Memphis Light, Gas & Water Division. 
I am testifying today, however, on behalf of the Large Public 
Power Council, an association of the 22 largest public power 
systems in the United States.
    LPPC members are companies that are publicly owned, not-
for-profit entities and are service-focused and committed to 
the local residence and communities that we serve. We provide 
reliable power and cost-effective affordable power generation 
transmission and distribution services that the benefit of 
which flows directly to the public power customers and 
communities.
    Mr. Chairman and members of the committee, LPPC appreciates 
your efforts to develop comprehensive electric industry 
restructuring legislation. I would also like to thank our 
Congressman, Ed Bryant, whose congressional district includes 
parts of Memphis and the customers that we serve and who has 
been a longtime friend of MLGW, and who has been kind enough to 
address the Large Public Power Council CEOs at their most 
recent meeting in May of this year in Memphis, Tennessee. We 
thank him for his interest in these issues. The LPPC supports 
the enactment of comprehensive legislation that promotes a 
competitive efficient wholesale power market that results in 
low cost reliable services to all consumers.
    I would like to comment on several issues of particular 
import to our members. We believe the reform of private use tax 
rules is essential; FERC transmission jurisdiction should be 
carefully reviewed to adapt to the unique structure and 
responsibilities of public power systems; that any legislation 
should ensure market power and merger protection for consumers; 
and that TVA's role in our region in the Southeast has to be 
addressed; market power to ensure fully competitive wholesale 
markets; Federal legislation should protect against 
anticompetitive concentration of generation ownership and 
against abuse of market power. This is particularly true if 
consumer protection laws such as the Public Utility Holding 
Company Act is to be repealed. We believe eliminating this law 
without updating the Federal Power Act would harm consumers.
    We oppose stand-alone repeal of PUHCA, unless other 
critical restructuring issues are addressed and FERC is 
provided with adequate tools to address the issues associated 
with measures, market power and RTO integration.
    Mergers. LPP supports legislation that would clarify FERC's 
authority over holding-company-to-holding-company and 
generation-only mergers and believes that FERC should exercise 
the authority necessary to ensure competitive and robust 
markets.
    Private use. Private use rules which made sense in 
regulated noncompetitive worlds are problematic in the new 
environment in which electric utilities must now work. The 
rules make it more difficult for public power to build much-
needed generation and transmission and are a barrier to 
enhancing public power's ability to deliver electricity at a 
time when our Nation faces power shortages. The Tax Code should 
be updated now so that it will help, not hinder, development of 
needed electric infrastructure and delivery of power.
    FERC transmission jurisdiction in RTOs. We support open 
access transmission--FERC-lite, as it has been labeled--as 
included in the subcommittee's bill in the last Congress. It 
would permit public power entities to provide transmission 
service and rates that are not unduly discriminatory and 
require the companies of the nonrate terms and conditions to be 
comparable to those required of investor-owned utilities. Our 
members do not support current proposals to extend FERC 
jurisdiction to transmission components of bundled retail 
rates.
    With respect to RTOs, we support a flexible framework for 
the creation of RTOs as established under FERC Order 2000 and 
believe this committee should adopt this approach. We do not 
believe public power systems, however, should be compelled to 
join RTOs. We will hear more of this on the transmission issues 
a little bit later in hearings by this body.
    As noted above, MLGW and LPPC also strongly urge this 
committee to remove statutory impediments to a competitive 
wholesale power market for TVA distributors like MLGW. But TVA 
Fence, much like the fence that Chairman Tauzin recounted from 
his youth, has a pretty dramatic impact. Likewise, the anti-
cherry-picking provision of the Energy Policy Act prevents MLGW 
and other TVA customers from buying power from other suppliers 
and prevents a mature wholesale market from developing in the 
valley. We believe as part of a comprehensive energy 
legislation package, these provisions need to be repealed 
together.
    In addition, we believe that FERC jurisdiction standards 
should be extended to include regulation and transmission and 
wholesale power rates. In addition, we have worked with other 
members in the valley to come up with consensus language which 
includes much of this, although perhaps not going quite as far 
as we would on our own. That is the nature of compromise and 
consensus.
    We support distributed generation. We support conservation 
and renewable energy resources as they have proven necessary 
for national energy supply to help maintain a diverse and 
robust supply and source for energy, renewable energy and the 
like.
    In conclusion, we appreciate the efforts of this committee. 
We appreciate the strides that have been made to advance the 
debate in the competitive market and benefits that will result 
to all consumers. The LPPC stands ready to assist, to aid and 
to offer input to this body and facilitate in a workable, 
competitive market.
    That concludes my comments to you today. I appreciate your 
attention, and I will be happy to answer questions.
    [The prepared statement of Herman Morris, Jr. follows:]
Prepared Statement of Herman Morris, Jr. on Behalf of The Large Public 
                             Power Council
    My name is Herman Morris, Jr. and I am the President and Chief 
Executive Officer of Memphis Light, Gas and Water Division (MLGW). I am 
testifying today on behalf of the Large Public Power Council (LPPC). 
The LPPC is an association of 22 of the largest public power systems in 
the United States. LPPC members directly or indirectly provide 
reliable, affordably-priced electricity to approximately 18 million 
customers, produce over 11,610,000,000 megawatt hours of generation, 
and own and operate approximately 26,000 circuit miles of transmission 
lines. LPPC members are located in states and territories representing 
every region of the country, including several states represented by 
members of this Committee--such as Tennessee, Texas, California, New 
York, and Arizona--and include several state public power agencies as 
well.
    The majority of LPPC companies perform the same functions as 
traditional vertically-integrated utilities, however, LPPC members are 
publicly-owned, not investor-owned. As a result, LPPC member companies 
are not-for-profit entities that are service-focused and committed to 
the local residents and communities we serve. Therefore, the benefits 
resulting from the reliable and cost-effective provision of generation, 
transmission, and distribution service flow directly to public power 
customers and communities.
    Mr. Chairman and members of the Committee, the LPPC appreciates 
your efforts to develop comprehensive electric industry restructuring 
legislation. I would also like to thank Congressman Ed Bryant, whose 
congressional district includes Memphis and who has been a long-time 
friend of MLGW and public power and who was kind enough to address the 
LPPC CEOs at their last meeting this past May in Memphis. We thank him 
for his interest in these issues. The LPPC supports the enactment of 
comprehensive legislation that promotes a competitive, efficient 
wholesale power market of benefit to all consumers. We believe that 
there is a need for a comprehensive energy strategy, which addresses 
market concerns, promotes fuel diversity, promotes energy efficiency 
and conservation, and encourages environmentally responsible behavior. 
The LPPC supports efforts to increase competition so long as low-cost, 
reliable service is ensured for consumers and believes that a robust 
wholesale market must be encouraged. We further believe that there 
should be environmentally responsible development of all our fuel 
sources and that unnecessary constraints on the use of any energy 
source should be removed. There is a need for hydro licensing reform, 
streamlining of environmental permits and siting decisions, and 
incentives for renewable energy, conservation and efficiency. In 
addition, my utility, MLGW and another of LPPC's members, the Knoxville 
Utilities Board (KUB), are among the largest customers of TVA and we, 
and LPPC, believe that any restructuring legislation must include a TVA 
title that would remove the many statutory impediments to a competitive 
wholesale power market in the Tennessee Valley and bring that part of 
the country in step with the rest of America.
    We appreciate the efforts this Committee has made to advance the 
debate on how to achieve a competitive market that benefits consumers 
and we would like to offer the Large Public Power Council's assistance 
in crafting legislation to facilitate competitive markets. During the 
debate on these issues in the last Congress, the LPPC provided our 
input to the Committee and contributed our views to the debate. We 
appreciate this opportunity to continue our involvement.
    In light of these overarching objectives, I would like to comment 
on several issues of particular importance to our members.
 FEDERAL LEGISLATION SHOULD ADDRESS RESTRUCTURING AND MARKET FORMATION 
                                 ISSUES
    Wholesale power markets can deliver reliable, clean and low-cost 
power, but only if the FERC, the Congress, and the states do their 
jobs. The LPPC believes that competitive regional wholesale electricity 
markets can benefit consumers. However, federal protections are 
necessary to ensure a level playing field for electric consumers and 
producers and to promote effective and sustainable competition. The 
benefits are eliminated if one competitor uses its dominant ownership 
of generation and/or transmission to stifle competition. Federal 
legislation should ensure that a mechanism is in place to protect 
against anti-competitive concentration of generation ownership and 
against abuse of market power. This is particularly true if consumer 
protection laws such the Public Utility Holding Company Act (PUHCA) are 
repealed. We believe eliminating this law without updating the Federal 
Power Act (FPA) would harm consumers. As such, we oppose stand-alone 
repeal of PUHCA if other critical restructuring issues are not also 
address and if FERC is not provided with adequate tools to address the 
issues associated with market power and holding company mergers. 
Specifically, the LPPC supports legislation that would clarify FERC's 
authority over holding company-to-holding company and generation-only 
mergers. We oppose limiting FERC's current authority to review such 
mergers and believe that such authority is necessary to ensure 
competitive and robust markets.
    In order to effectively bring benefit to the consumer and prevent 
market power abuses, the LPPC believes that Congress should take two 
additional steps. First, the Congress should confirm the authority FERC 
asserted in Order No. 2000 to order jurisdictional public utilities to 
participate in RTOs as a remedy for undue discrimination or 
anticompetitive effects, where supported by the record in a particular 
case. Second, in addition to authority FERC currently has under the 
FPA, it should be authorized to require a jurisdictional public utility 
having market power in FERC-regulated wholesale markets to submit a 
market power mitigation plan that FERC can approve, disapprove or 
modify.
    The LPPC supports the enactment of legislation that ensures 
competitive markets and provides benefit to the consumer. Such 
legislation must resolve the ``private use'' tax issue and should 
recognize the distinct nature of public power and its contribution to 
the electricity industry. Without resolution of current tax 
restrictions relating to private use, restrictions on tax-exempt bonds 
could (1) prevent public power from fully opening up its transmission 
and distribution systems for use by investor-owned utilities, (2) could 
prevent our participation in Regional Transmission Organizations 
(RTOs), and (3) will constrain our ability to make long-term sales of 
surplus power. Absent reform of private use, one of the key problems--
how to move electric power from generation to load--will continue to 
plague the system, and the objectives of comprehensive legislation, the 
development of a robust, competitive, and fair market, will not be 
achieved.
    The LPPC supports proposals to ensure that all market participants 
have access to the transmission system on a fair and open basis. 
``FERC-lite,'' as included in the subcommittee's bill in the last 
Congress, is part of such open access. It would require public power 
entities to provide transmission services at rates that are not unduly 
discriminatory and require the company's non-rate terms and conditions 
to be comparable to those required of the investor-owned utilities. We 
believe that open transmission access, including the FERC-lite 
provision, will encourage a robust and competitive market.
    The LPPC does not support unnecessary expansion of FERC 
transmission jurisdiction. The LPPC strongly opposes extending full 
FERC ratemaking jurisdiction to our public power systems. In addition, 
we do not believe that FERC jurisdiction needs to be expanded to cover 
the transmission component of our bundled retail sales, as some members 
of the Committee have proposed. Because of ``private use'' tax 
restrictions, our transmission-owning members have sized their 
transmission systems to supply their own wholesale or retail native 
loads. We have limited transmission capacity available for other 
entities. To the extent we have such capacity, we are willing to make 
it available to all comers on a non-discrimination basis, as FERC-lite 
would require. But, a rule that required us to make available to others 
transmission capacity we need to serve our native load will result in 
power curtailments or higher prices to our own customers. Any expansion 
of FERC transmission jurisdiction must respect the interests of the 
customers for whom the transmission facilities were built. The LPPC 
will spell out its approach on these issues in greater detail in its 
subsequent testimony on transmission policy before this subcommittee.
    The LPPC believes that regional transmission organizations (RTOs) 
should have a broad geographic scope, preferably be not-for-profit, 
and, in all cases, be fully independent of market participants. This 
type of organization will operate more cost-effectively and will more 
likely result in the open transmission necessary for a fully 
functioning market. The LPPC opposes granting FERC broad new authority 
to compel transmitting utilities to join RTOs. However, we support 
confirming FERC's authority to order jurisdictional utilities into an 
RTO on a case-by-case basis in order to remedy undue discrimination or 
anticompetitive conduct. We believe that RTOs should be created to 
foster competition and, as a result, the LPPC believes that RTOs must 
be independent and must be separate from all market participants.
    As noted above, MLGW and LPPC also strongly urge this Committee to 
remove the statutory impediments to a competitive wholesale power 
market for TVA distributors. The two primary statutory barriers to 
wholesale power competition in the Tennessee Valley are popularly known 
as the TVA Fence and the anti-cherry picking provisions of the Energy 
Policy Act. These provisions prevent MLGW and other TVA customers from 
buying power from other suppliers and prevent a mature wholesale market 
from developing in the Valley. We believe that, as part of 
comprehensive energy legislation, these provisions should be repealed. 
In addition, we believe that FERC jurisdiction standards should be 
extended to include regulation of TVA's transmission system and of 
TVA's wholesale power rates, as well as subjecting TVA's stranded cost 
determinations to FERC oversight. To this end, MLGW, TVA, the 
distributors and customers of the Valley have agreed to consensus 
language which we would urge the Committee to adopt in any legislation 
proposed.
FEDERAL LEGISLATION SHOULD ENCOURAGE EXPANSION OF THE MARKET AND SUPPLY 
                             OF ELECTRICITY
    The LPPC strongly supports an energy policy that encourages 
environmentally responsible use and development of the nation's diverse 
energy supply, including coal, wind, solar, hydropower, natural gas, 
biomass, landfill methane and nuclear energy. We believe that sound 
energy and environmental policy should flow from this ``fuel 
diversity'' strategy. Fuel diversity means better consumer options, 
lower power prices, and a more stable economy.
    Plans to encourage fuel diversity include classifying hydro 
electric generation as renewable energy, removing regulatory 
impediments to power plant or transmission upgrades, providing advanced 
coal generation funding, streamlining nuclear plant relicensing, 
resolving the issue of nuclear waste, and increased R & D for renewable 
energy and advanced coal technologies. Fuel diversity prevents 
dependence on one source of fuel and provides supply options from 
multiple sources during disruptions or times of price volatility on any 
one given source.
    For example, coal, is an essential part of this country's fuel mix. 
Coal accounts for over 50% of electric generation and approximately 23% 
of all the energy consumed. The continued and expanded use of coal 
contributes to fuel diversity, dampens prices, decreases reliance on 
natural gas and helps stabilize market prices. The LPPC supports the 
use of increased incentives and federal funding for more efficient, 
clean coal technologies that will lessen the impact of health-based 
pollutants and will improve efficiencies in generation.
    Hydro-electric generation is another important component in our 
fuel mix. It is emission free, has no fuel cost, and because of its 
virtually instantaneous start-up capability, provides an invaluable 
operating reserve. However, the current federal licensing/relicensing 
process for non-federal hydro projects is time-consuming, expensive, 
and extremely complex, creating an unworkable framework that imposes 
significant costs in terms of time, resources, and capital. The 
administrative costs of relicensing proceedings and licensing 
conditions imposed in these proceedings threaten to eat up much of the 
national economic benefit derived from continued operation of existing 
hydro projects. The LPPC believes reform of the current system is 
desperately needed and supports the efforts to do so.
    Renewable energy resources have proven to be a necessary element of 
the national energy supply and help maintain fuel diversity. Renewable 
energy resources have a less significant impact on the environment than 
other fuels. Renewable energy is becoming increasingly cost competitive 
and is a potentially important future resource. The LPPC believes that 
the need for federal incentives for renewable energy production is 
crucial. We support continued use of such incentives, which will 
encourage the quick installation of renewable energy resources and help 
additional technologies reach the market. However, it is crucial that 
there is parity among incentives such that they can be enjoyed by 
public power and investor owned utilities alike. To this end, we 
support efforts to develop a tradable or transferable tax credit to 
encourage development of renewable energy resources.
    The inclusion of nuclear energy is essential to a fuel diversity 
strategy. Existing plants must continue to operate safely and 
efficiently. The licenses on these facilities should be extended and 
the process for doing so should be streamlined. There have been 
significant advances in new technologies and the commercialization of 
these new options should be encouraged, as should continued R&D. 
However, for public health, safety, and economic reasons, the issues of 
nuclear waste and its long-term disposal must be addressed. Safe, 
publicly acceptable interim and long-term storage and disposal 
facilities must be developed.
    The increased use of distributed generation (DG) technologies by 
users during the West Coast crisis has been a crucial tool to shave 
peaks and to mitigate shortages, extending the time that more power is 
available between emergencies. The inclusion of distributed generation 
resources allows our energy policy to provide energy to the consumer 
while contributing to a diverse energy supply. The LPPC recommends that 
federal legislation support the use of emerging technologies and the 
increased use of established technologies such as DG. A number of LPPC 
members have been proactive in the use of this technology. For example, 
the New York Power Authority recently installed eleven combustion 
turbines (440 MW) in New York City. The purpose was to avoid 308 MW 
summer shortfall projected by the New York ISO. In addition, another 
LPPC member, the City of Tacoma responded to the energy crisis in the 
West by siting 30 diesel micro turbines. This allowed them to better 
manage their demand and continue to serve their customers without 
interruption. My own company, MLGW has proposed to TVA building new 
gas-fired generation to meet its growing demand.
                               CONCLUSION
    As the House Energy and Commerce Committee prepares to act on 
comprehensive restructuring legislation, the LPPC stands ready to offer 
our assistance. We would be happy to share proposals to properly tailor 
FERC transmission jurisdiction to the unique structures and 
responsibilities of public power systems, ensure market power and 
merger protections for consumers, and retain the appropriate level of 
flexibility for FERC as it approves new RTOs.
    In conclusion, the LPPC believes that comprehensive legislation 
addressing the deficiencies in the energy sector is necessary. We look 
forward to working with the Committee to develop comprehensive electric 
restructuring legislation that addresses our concerns, garners wide 
support and can ultimately be enacted. I will be happy to answer any 
questions you have.

    Mr. Barton. Thank you, Mr. Morris. It is a pleasure to have 
you before us again. We thank you for that statement.
    We would like to hear from Mr. Robert Priest. Your 
statement is in the record, and we would ask you to elaborate 
on it for about 6 minutes.

                  STATEMENT OF ROBERT D. PRIEST

    Mr. Priest. Mr. Chairman and members of the subcommittee, I 
am Bob Priest, manager of the Yazoo City Public Service 
Commission in Yazoo, Mississippi. I am testifying this morning 
on behalf of the American Public Power Association. I am a 
member of the APPA board of directors.
    Public power systems' first and only purpose is to provide 
reliable, efficient service to their local customers at the 
lowest possible cost. Though changes are occurring rapidly in 
our industry, publicly owned utilities have retained the 
obligation to serve the electric needs of their customers. In 
California, for example, municipal utilities retained their 
power plants dedicated to serve their native-load customers, 
and they engaged in long-term planning to satisfy demands that 
exceeded their own generation resources. This gave public power 
utilities the ability to mitigate market risk for their 
customer-owners.
    Of the over 2,000 publicly owned utilities in the United 
States, less than 400 own any generation. Of these 400, the 
vast majority must still purchase power on the wholesale market 
in order to meet their customers' demand. Only a handful of 
public power systems own enough generation to meet load in 
their service territory.
    Obviously, public power systems rely heavily on the 
wholesale markets. Unfortunately, wholesale markets are not 
effectively competitive, and in some cases are clearly 
dysfunctional. APPA has been a consistent supporter of efforts 
to make the wholesale electric markets more competitive.
    Mr. Chairman, I would like to make four central 
recommendations in my statement this morning. To remove 
barriers to generation competition, we believe Congress should 
enact legislation that, one, addresses market power by clearly 
articulating FERC's role in monitoring the market; establishing 
clear criteria to guide FERC decisions regarding market-based 
rate authority for utilities and power marketers; directing 
FERC to investigate and mitigate market power; and 
strengthening and expanding FERC's merger review process to 
allow consideration of the mergers' impact on competition.
    Two, considers changes to the Public Utility Holding Act 
only in the context of providing reasonable substitutes to 
protect consumers and promote competition that include, but are 
not limited to, the market power provisions just mentioned.
    Three, promotes the use of distributed generation by 
establishing transmission and distribution interconnection 
policies that streamline and standardize the interconnection 
process by balancing Federal, State and local authority.
    And four, resolves the dilemma posed by the private use 
restrictions on generation and transmission facilities financed 
with tax-exempt bonds.
    As I said earlier, the wholesale markets are not 
competitive, and legislation is needed to require FERC to 
promote competitive markets. From our perspective, the 
paramount role of the regulatory agency must be to protect the 
public interest and the interest of consumers. Competition is a 
means to this end, not the end itself.
    In California and throughout the West last year, we believe 
FERC lost sight of its obligation to permit only just and 
reasonable wholesale rates and its responsibility to ensure 
consumers were protected from abuses of market power. More 
recently, FERC has taken some strong steps to improve market 
conditions. At the same time, much more can be done. 
Legislation should make clear that if markets are allowed to 
set rates, FERC must ensure markets are workably competitive. 
This in turn requires clarification of the methodology and 
criteria used to make a determination that markets are 
competitive and the procedure used to establish rates in 
markets that are not competitive.
    With regard to the repeal of the Public Utility Holding 
Company Act, this should only occur in the context of a 
comprehensive energy bill and should include the consumer and 
market power protections that I have mentioned, as well as 
other preconditions discussed in our statement. We strongly 
disagree with the advocates that PUHCA be repealed. That 
statute is an impediment to competition. The continued 
relevancy and importance of PUHCA was demonstrated recently by 
the California attorney general's petition to the Securities 
and Exchange Commission to review and revoke PG&E Corporation's 
exemption from PUHCA. In its petition, the attorney general 
states, PG&E Corporation has now filed for bankruptcy after 
upstreaming billions of dollars from the utility to the utility 
holding company, the precise type of behavior identified in 
PUHCA as a primary basis for the law.
    My third recommendation, Mr. Chairman, is to establish 
interconnection policies that facilitate the greater use of the 
distributed generation. Distributed generation has multiple 
benefits, and public power is committed to accelerating its 
acceptance and use. We also want to ensure that in developing 
interconnection policies, an appropriate level of local 
authorities is preserved in order to accommodate local concerns 
and distribution systems' characteristics.
    Finally, we believe legislation should address the private 
use exemption on tax-exempt bonds. These restrictions limit the 
use of existing generation and transmission facilities in 
competitive markets. Moreover, resolving the private use issue 
will clarify how tax-exempt bonds may be used in the future and 
thereby give publicly owned facilities greater certainty and 
confidence in financing new generation. As you know, provisions 
to address this issue were included in the legislation passed 
last week by the Ways and Means Committee.
    On behalf of APPA, I want to thank you, Mr. Chairman, and 
the other members of the subcommittee who supported us in that 
effort. Thank you for inviting me to testify. I look forward to 
any of your questions.
    [The prepared statement of Robert D. Priest follows:]
Prepared Statement of Robert D. Priest, Manager, Yazoo City (MS) Public 
 Service Commission on Behalf of the American Public Power Association
    Thank you, Chairman Barton and Ranking Member Boucher. On behalf of 
the American Public Power Association, I am pleased to appear today to 
discuss important electricity issues facing the subcommittee.
    My name is Bob Priest. I am the Manager of the Yazoo City Public 
Service Commission, the local electric utility serving Yazoo City, 
Mississippi; I am also a member of the APPA Board of Directors. APPA 
represents the interests of more than 2,000 publicly owned electric 
utility systems across the country, serving about 40 million customers. 
Yazoo City is one of 24 such systems in Mississippi. APPA member 
utilities include state public power agencies and municipal electric 
utilities that serve some of the nation's largest cities. However, the 
vast majority of these publicly owned electric utilities serve small 
and medium-sized communities in 49 states, all but Hawaii. In fact, 75 
percent of our members are located in cities with populations of 10,000 
people or less.
    Public power systems' first and only purpose is to provide 
reliable, efficient service to their local customers at the lowest 
possible cost. Public power exists for a purpose, not a profit. Like 
hospitals, public schools, police and fire departments, and publicly 
owned water and waste water utilities, public power systems are locally 
created governmental institutions that address a basic community need: 
they operate to provide an essential public service, reliably and 
efficiently at a reasonable, not-for-profit price. Publicly owned 
utilities also have an obligation to serve the electricity needs of 
their customers. And, because they are governed democratically through 
their state and local government structures, public power systems 
operate in the sunshine, subject to open meeting laws, public record 
laws and conflict of interest rules. Most, especially the smaller 
systems, are governed by an elected city council, while an elected or 
appointed board independently governs others. Democratically governed, 
not-for-profit, obligation to serve--the importance of these unique 
characteristics has been highlighted by the recent events in the West. 
Under California's restructuring law, public power was able to retain 
its obligation to plan for and serve the electricity needs of our 
consumer-owners. As a consequence, municipal utilities retained their 
power plants dedicated to serve native load customers, and they engaged 
in long-range planning to satisfy demands that exceeded their own 
generation resources. This gave public power utilities the ability to 
mitigate market risk for their customer-owners.
    Understanding the underlying structure and mission of public power 
is essential in crafting balanced electricity legislation that will 
maintain industry diversity. This diversity has helped many public 
power communities in the West endure the electricity crisis with bumps 
and bruises rather than broken bones. We believe the entire nation has 
been well served by this diverse mix of publicly, privately, and 
cooperatively owned utilities, combined with federal institutions 
including the Tennessee Valley Authority and the federal power 
marketing administrations. In restructuring our industry, every effort 
should be made to ensure the preservation of this diversity.
    wholesale competition first--the role of the federal government
    The rush to restructure the electric utility industry in several 
states has truly put the cart before the horse. Retail choice programs 
adopted by states and localities cannot succeed without truly 
competitive wholesale markets. This is certainly one of many lessons 
learned in California. The fundamental characteristics of a competitive 
market include, among other things: access of buyers to numerous 
sellers; mitigation of market power; ease of entry into the market for 
new participants; a sufficient number of participants to impose 
discipline on all; and transparency of information.
    APPA has supported legislative efforts to make the wholesale 
electric market more competitive for decades. APPA was one of the major 
supporters of the transmission access provisions of the Energy Policy 
Act of 1992. On numerous occasions over the past few years, we have 
testified in support of additional legislation to ensure that the 
promises of wholesale competition become reality. In our view, 
comprehensive federal restructuring legislation must, at a minimum, 
achieve the following objectives:

 Promote more effective wholesale competition by providing 
        sufficient federal authority to ensure non-discriminatory 
        access to regional transmission facilities at fair and 
        comparable rates.
 Promote the maintenance and expansion of the nation's 
        transmission facilities including, where necessary and subject 
        to appropriate limitations, the exercise of federal siting 
        authority.
 Establish policies to maintain the reliability of the nation's 
        electricity industry through competitively neutral means.
 Eliminate market power in generation and transmission by: 1) 
        providing for truly neutral management of the nation's 
        transmission system, including allowing for federal oversight 
        to ensure Regional Transmission Organization (RTO) development, 
        independence and effectiveness; 2) clearly articulating Federal 
        Energy Regulatory Commission's (FERC) role in monitoring the 
        wholesale market, directing FERC to investigate and mitigate 
        market power, and enhancing its power to accomplish this 
        difficult task; and 3) strengthening FERC's merger review 
        process to allow for consideration of a proposed merger's 
        impact on the development of competition.
 Eliminate the tax-related impediments to competition for 
        municipal utilities imposed by the private use restrictions on 
        tax-exempt bonds while retaining local control over municipal 
        decisions.
 Consider changes to Public Utility Holding Company Act (PUHCA) 
        only in the context of providing reasonable substitutes to 
        protect consumers and promote competition.
  appa comments on issues critical to effective wholesale competition
    We commend the subcommittee for its focus on barriers to 
competitive generation in the wholesale market and look forward to 
working with the panel in developing comprehensive legislation.
Market Power, Market Transparency Rules and PUHCA
    APPA believes these three critical issues are interrelated and must 
be addressed simultaneously to achieve the goal of a workable 
competitive wholesale market. These issues highlight the important 
lessons learned from the California experience, including:

 Market structure is critical to market performance.
 Market power is a very real problem that must be addressed.
 Markets need rules and market monitors to enforce them.
 Market monitors need data.
    The paramount role of a regulatory agency must be to protect the 
public interest and the interests of consumers. Competition is a means 
to this end, not the end itself. In California and throughout the West 
over the last year, APPA believes FERC was so focused on promoting 
competition that it completely lost sight of its obligation to permit 
just and reasonable wholesale rates only after considering its 
responsibility to ensure consumers were protected from abuses of market 
power. We hope that, in clarifying FERC's mission, Congress will 
provide that, first and foremost, FERC must protect the public interest 
and the interests of all consumers.
    If markets are allowed to set rates, FERC must ensure that such 
markets are workably competitive. This begs the question, however, with 
respect to the methodology used to make such a determination, and also 
doesn't specify how rates should be established in markets that are not 
competitive. APPA believes market based rates for jurisdictional 
utilities should only be approved on a finding that the applicant will 
not possess market power and that effective and sustainable competition 
will exist in that market. The analysis must include an examination not 
only of the resources available to individual applicants and whether 
such assets could be used to set the market clearing price, but also of 
the effect of transmission constraints and how those assets fit into 
the broader market structure. Location-specific constraints must be 
taken into account, as should requirements for grid reliability. 
Further, and frequently ignored in traditional market analysis, is the 
time-sensitive nature of electricity. In some markets, an entity 
controlling a very small amount of generation can exercise market 
power.
    FERC should be given other ``tools'' in addition to those it 
already has to address market power problems. It should, for example, 
require jurisdictional utilities to submit market power mitigation 
plans for approval or modification. Its merger review process should be 
revised to require that merger approval be granted on an affirmative 
finding that the proposed merger is in the public interest as opposed 
to the current standard which only requires that the merger be 
consistent with the public interest. In reviewing mergers, FERC should 
be required to consider whether they will promote effective wholesale 
competition, or undermine it. FERC should also have the authority to 
require shared access to essential assets, including reserve/risk 
sharing mechanisms, on a non-discriminatory basis and with just and 
reasonable rates. Further, FERC should be able to preserve the 
integrity of the market through preliminary relief in order to prevent 
irreparable harm pending issuance of a final order.
    As consumer-owned utilities, APPA's members certainly believe that 
no market participant should be able to abuse market power to the 
detriment of end users. Until the debacle in the West, application of 
this principle to public power systems in wholesale markets has not 
been an issue, and therefore this specific issue has not been addressed 
by APPA. However, publicly owned utilities in California and elsewhere 
in the West have stated that they would voluntarily abide by market 
rules applicable to jurisdictional utilities. The exclusion for 
``normal'' transactions is clearly appropriate, but the extent to which 
sales by public power systems into market institutions would be subject 
to FERC oversight is unclear and could be problematic. APPA is 
confident that, if FERC clearly defines in advance the rules applicable 
to jurisdictional utilities who are responsible for the vast majority 
of all such transactions, public power systems will live within that 
framework without the need for any expansion of FERC jurisdiction.
Market Transparency
    APPA believes that legislation should ensure transparent 
information on market transactions and should grant clear authority to 
the Energy Information Administration (EIA) and the FERC to collect and 
publish appropriate data while protecting proprietary information. 
While ``proprietary information'' warranting protection must be 
narrowly circumscribed, APPA would encourage that congressional 
direction be absolutely clear that data must be collected and made 
public. Claims of confidentiality of data based on commercial 
sensitivity are already being made to limit data collection or 
dissemination. There is a danger that commercial sensitivity arguments 
will completely undermine the legitimate right of the public to this 
data. Transparency of market information is a fundamental prerequisite 
of competitive markets and necessary to protect consumers. (We would 
note that disclosure is required under the security laws, and such 
disclosure has had a salutary effect on the markets. If the SEC's rules 
did not exist today, almost every company that is subject to SEC 
regulation would claim that much of the information they are required 
to disclose today is in fact proprietary.) Congress should be very 
clear in telling EIA and FERC that close calls should be resolved in 
favor of transparency, not secrecy.
PUHCA
    APPA believes PUHCA repeal should logically be undertaken within 
the broader context of addressing market power concerns. PUHCA 
established a structure for the electric utility industry in ways that 
were intended to limit if not eliminate the abuse of market power. 
Unfortunately, debates over PUHCA repeal today suggest that consumers 
can be adequately protected if FERC and the states are given greater 
access to books and records for the limited purpose of reviewing 
electric utility rates. While such expanded authority is appropriate, 
it is by no means an adequate substitute for the protections afforded 
by PUHCA. Before PUHCA is repealed, there must be strong market power 
protections in place, regulatory gaps must be filled, and opportunities 
must be provided to ensure that transactions across the entire utility 
holding company and all of its subsidiaries can be carefully examined.
    APPA recommends giving specific authority to FERC to review mergers 
of utility holding companies as well as the disposition of generation 
assets by jurisdictional utilities and acquisition of natural gas 
companies. The FERC lacks the clear authority to review the former. 
While we believe it has the authority and responsibility to review the 
latter, it has recently declined to do so. This action has come at 
precisely the same time that utilities and utility holding companies 
are swapping assets like trading cards. A utility with a significant 
presence in generation in one region sells those assets, then buys 
similar assets in another region. Such transactions can clearly lead to 
the concentration of significant amounts of generation in specific 
geographic markets, yet no one is examining what consequences these 
asset trades will have on competition.
    FERC and state commission access to books and records of holding 
companies to prevent affiliate abuses is an inadequate substitute for 
the protections provided consumers, state commissions and others under 
PUHCA. As a practical matter, many state commissions don't have the 
resources to examine the books and records of today's extremely complex 
utility holding companies and all of their subsidiary companies. And 
even if they do, it isn't clear what remedies they can impose when the 
keeper of the funds--the parent holding company--may exist outside the 
jurisdiction of a specific state utility commission.
    Advocates of PUHCA repeal have argued that the statute is no longer 
necessary, that it is redundant with other statutes, and, incredibly, 
that it is an impediment to competition. H.R. 1101, the Public Utility 
Holding Company Act of 2001, introduced earlier this year, provides, in 
the statement of findings and purposes, the following:

 Developments since 1935, including changes in other regulation 
        and in the electric and gas industries, have called into 
        question the continued relevance of the model of regulation 
        established by that Act.
 Limited Federal regulation is necessary to supplement the work 
        of State commissions for the continued rate protection of 
        electric and gas utility customers.
    The Attorney General of California strongly disagrees with these 
two statements. On July 5 he filed a petition with the Securities and 
Exchange Commission (the agency with responsibility to enforce PUHCA) 
for review and revocation of PG&E Corporation's exemption from PUHCA. 
As stated in the petition, ``PG&E Co. [the electric operating utility] 
has now filed for bankruptcy after upstreaming billions of dollars from 
the utility to the utility holding company--the precise type of 
behavior identified in PUHCA as a primary basis for the law.'' He 
concludes his petition as follows: ``All of the primary evils addressed 
by PUHCA are relevant to PG&E Corp. [the utility holding company], 
including movement of capital and assets from its utilities to the 
holding company and affiliated, wholly-owned subsidiaries as well as 
massive investments in out-of-state non-utility activities and 
properties. The Commission has the chance, indeed the obligation, to 
address potential holding company abuses by PG&E Corp. before 
additional damage is done. The current crisis in California has been a 
catalyst for closer scrutiny of federal and state regulation of the 
utility industry. This crisis highlights the fact that Commission 
enforcement of PUHCA is still needed.''
    Clearly times have changed since PUHCA was enacted in 1935. 
Utilities have changed. But human nature hasn't. The abusive practices 
that gave rise to PUHCA more than 65 years ago have been more difficult 
to accomplish, because of the existence of PUHCA's restraint on 
corporate structure and behavior, but have not disappeared entirely. It 
may be that some elements of PUHCA need to be revised. But the 
opportunity for the California Attorney General, and perhaps others 
similarly situated in the future, to have a forum at FERC or the SEC in 
which they can examine the financial transactions within a monstrously 
complex interstate holding company structure to determine whether 
electric consumers have been abused, must not be eliminated.
Interconnection Policy
    Distributed resources, typically small generation units located 
close to the load they serve, offer a variety of benefits for 
consumers, communities, the environment, and utilities. Efforts are 
currently underway to develop new distributed generation technologies, 
enhance existing technologies, and address various technical and policy 
issues that may be hindering the deployment of distributed resources. 
Congress has taken an active interest in this issue and several 
industry restructuring proposals have included provisions to give the 
Federal Energy Regulatory Commission additional authority to order 
interconnection of distributed resources to transmission and 
distribution facilities using a uniform technical standard. Public 
power supports efforts to promote greater use of distributed resources 
so long as those efforts respect local authority and recognize the 
diverse characteristics of local electric systems.
    APPA believes distributed resources not only increases overall 
production and generation, but decreases constraints placed on 
transmission facilities, and tends to reduce problems encountered by 
vertical market power situations. While APPA supports bringing 
distributed generation facilities on line as quickly as possible, we 
remain concerned about the myths of the ``plug and play'' attitude so 
prevalent today. We support a more streamlined, simplistic approach to 
distributed generation, but not at the expense of public health and 
safety, cost-shifting, and potential reliability problems.
    APPA believes Congress should adopt transmission and distribution 
interconnection policies that provide FERC the authority to order the 
use of standardized technical interconnections. At the same time, 
Congress must preserve local authority to require any additional 
measures necessary for system reliability, safety, or other factors 
deemed to be in the public interest. That is, interconnection standards 
for distributed resources, while removing barriers to competition, 
should remain flexible. APPA has already agreed to accept additional 
FERC jurisdiction for a standardized interconnection policy; we believe 
in the appropriate amount of jurisdiction for public power distributed 
generation facilities, but, again, not at the expense of the system's 
reliability. A positive step has been taken with the introduction of 
H.R. 1945 by Representative Quinn, which, for the first time, addresses 
the concern of local utilities. (Attached is APPA's policy resolution 
supporting interconnection standards for distributed generation, 
approved by our membership June 19, 2001.)
Aggregation
    The concept of aggregation is generally more relevant to retail 
competition programs, but should be encouraged by federal legislation. 
Aggregation, however, offers an opportunity for smaller consumers in 
particular to shield themselves from wholesale market abuses and to 
promote generation competition by increasing these customers' clout in 
the marketplace.
    The early results of state retail electricity deregulation 
experiments across the country present a mixed bag for consumers, but 
one thing is already clear--consumers demand that the lower electricity 
prices and other promised benefits of competition benefit all 
customers, not just the large users. One demonstrated means of ensuring 
residential customers' participation in a competitive market is by 
establishing their right to be represented by their local government 
through community or municipal aggregation. By themselves, small-load 
or residential customers lack the power and resources to negotiate 
better deals; banding together through aggregation programs, local 
governments can wield purchasing clout on behalf of their residents for 
lower prices.
    APPA believes aggregation increases participation in restructuring 
efforts at the state level for smaller customers, creating a more 
robust market and therefore lowering electricity costs for all 
consumers. Further, APPA believes that aggregation of small-load 
customers is essential, and that municipalities and local governments--
the ones in the best position to look after the social and economic 
welfare of the community--are well suited for the job and should not be 
restricted from performing this service. APPA realizes there are still 
several obstacles to aggregation efforts in the details of the 
legislative process, including restrictions on local government 
authority, ``slamming'' or other fraudulent issues, and whether 
consumers should opt-in to a program rather than opt-out, but supports 
a strong aggregation provision in any federal legislation aimed at 
improving wholesale electricity competition. Finally, APPA believes 
that federal legislation should ensure that states do not impose any 
barriers to the formation of municipal aggregation programs.
Net metering
    APPA has no formal policy on net metering at this time, but 
realizes its potential to increase the use of renewable resources and 
provide generation alternatives, thus promoting competition. Several 
general principles should be followed when developing legislation. For 
example, APPA believes net metering is best applied to residential and 
small customers; larger and industrial customers can have more 
significant impacts on a utility's distribution system reliability. In 
addition, a qualified generating facility should utilize only renewable 
energy resources, such as solar, wind, geothermal or biomass, and 
should be considered a small facility. In addition, when applied, APPA 
believes net metering customers still retain their full obligations on 
transmission and distribution charges, and the necessary backup or 
standby charges.
    Since more than 30 states have already adopted net metering 
programs, states should have the authority to establish a different 
program, including further incentives and limitations, and states and 
local communities should be provided flexibility to allow additional 
control and testing requirements.
Public Utility Regulatory Policies Act (PURPA)
    APPA does not oppose PURPA's mandatory purchase provisions, as long 
as this is considered under a comprehensive energy bill. In addition, 
we believe stranded cost recovery under PURPA should only be addressed 
by using FERC's current process.
Private use tax restrictions
    One issue directly related to public power utilities that, if 
resolved, would improve and facilitate electricity competition is 
``private use'' tax restrictions imposed on municipal electric systems. 
Rapid changes in wholesale electricity markets have created a need to 
update private use restrictions on tax-exempt bonds used by public 
power systems to finance their electric facilities. These restrictions 
hamper public power's ability to provide access to their transmission 
lines, adjust to evolving energy policies and adapt to a volatile 
energy market, just as the nation faces power shortages, transmission 
constraints and increased reliance on electricity to fuel the nation's 
economy. These rules form a barrier to open and efficient electricity 
markets at both the wholesale and retail level, making it impossible 
for community-owned utilities to open up their transmission and 
distribution facilities to third parties.
    Bipartisan legislation (H.R. 1459), which offers a fair and 
balanced approach to several critical energy-related tax issues, has 
been introduced in the House to correct this situation. A version of 
H.R. 1459 was recently included in the Ways and Means Committee's own 
energy bill. The electricity industry understands that removing the 
private use restrictions will provide the necessary flexibility for 
those generation facilities financed with tax-exempt bonds. In 
addition, legislation is needed to clarify the rules for public power 
on the use of tax-exempt bonds for new generation facilities or 
upgrades without running afoul of the private use test. APPA 
appreciates this subcommittee's understanding of this complex issue, 
and knows this panel has always been supportive of viable solutions.
Incentives for renewable resources
    In preparing its recently-published report on public power's 
renewable profile, entitled ``Shades of Green'' (copies of which were 
previously sent to all members of this subcommittee), APPA discovered 
that public power systems have a higher proportion of renewable, non-
hydropower generation than other segments of the industry--but we still 
have more work to do. APPA applauds the idea of creating market-based 
incentives for all segments of the industry. The goal is not simply 
more generation, but a diversity of generation resources. Today, 
renewable resources remain at above-market prices; appropriate 
incentives are necessary so that all consumers benefit.
    While it is clear that additional generation is needed in this 
country, it is also clear that such generation should come from non-
traditional renewable energy sources as well as from better and cleaner 
utilization of our nation's most abundant resource, coal. 
Traditionally, Congress has turned to tax credits to provide incentives 
to industry to achieve socially desirable goals. If the goal is to 
promote renewable energy and clean coal technology development and 
utilization by the electric utility industry, then incentives must be 
provided that work for all elements of the industry.
    Tax credits can be utilized by for-profit, investor owned 
utilities, which serve about 75 percent of the nation's electric 
consumers, but cannot be used by not-for-profit publicly and 
cooperatively owned utilities that serve the balance. As a policy 
matter, it seems to make little sense to refuse to provide comparable 
incentives to ensure that 100 percent of the nation's utilities are 
encouraged to develop these resources. We have recommended ``tradable 
tax credits'' for publicly and cooperatively owned utilities. These 
tradable credits could be sold to tax paying entities at a discount to 
help them reduce their own tax liability. This concept has been 
developed by public power systems and the rural electric cooperatives 
and is supported by the entire electric utility industry; we hope this 
proposal receives favorable action in the House.
Reliability
    APPA urges the subcommittee to require mandatory involvement by all 
industry participants in a national compliance program to ensure 
continued reliability of the high voltage electric transmission grid. 
The Administration's National Energy Policy report also calls for 
enactment of mandatory reliability standards by an independent body and 
overseen by FERC to ``address the problems created by increased demands 
on the transmission system that have resulted from changes within the 
industry brought on by wholesale competition.'' Even though the United 
States has the most reliable electric system in the world, the crisis 
in the West has demonstrated the delicate balance between reliability 
and the markets within which the electric grid must operate. 
Consequently, great care needs to be taken to ensure that the current 
level of reliability is not sacrificed in any restructuring of the 
industry.
    As the industry has become more competitive, more participants have 
been executing an increasingly larger number of transactions every day. 
The focus of most of these transactions is on short-term costs rather 
than system stability. While the current voluntary system of compliance 
with reliability standards worked reasonably well in the regulated 
environment in which the industry previously operated, it will not 
continue to provide the necessary safeguards in a competitive market.
    Currently, reliability standards are established and monitored by 
the North American Electric Reliability Council (NERC), which is a non-
profit organization that monitors the electric utility industry's 
voluntary compliance with policies, standards, principles, and guides, 
and assesses the future reliability of the bulk electric systems. The 
NERC Board of Trustees has approved and begun the transformation of 
NERC to the North American Electric Reliability Organization (NAERO), 
in which participation and adherence to standards and practices would 
be mandatory. Federal legislation is required to give NAERO the 
enforcement tools necessary to ensure compliance and achieve a system 
that properly balances reliability with market pressures and decisions.
    APPA has worked actively on the NERC consensus proposal, and we 
continue to support it. However, we could also support simplifying that 
proposal so long as the basic tenets are adhered to. We do have 
concerns about reliability being delegated exclusively to RTOs, some of 
which may be for-profit entities, that would not only set the rules, 
but must comply with them.
    An item of particular importance to APPA in the consensus 
reliability legislation is a sentence developed during negotiations in 
late 2000. The sentence would clarify that FERC is granted oversight 
authority over public power systems in the regulatory title only for 
the purposes of enforcement of reliability standards. Public power 
systems support oversight with regard to reliability standards but this 
provision should not be used by FERC to impose additional regulation at 
a later date. Through an oversight, this sentence was not included in 
reliability legislation currently pending in Congress; APPA supports 
inclusion of the sentence in any House subcommittee draft legislation.

    Mr. Barton. Thank you, sir.
    We now would like to hear from Mr. Kanner.
    Your statement is in the record, and you are recognized for 
6 minutes. Well, I know you worked with our working groups, and 
I think you probably testified before the subcommittee before.

                    STATEMENT OF MARTY KANNER

    Mr. Kanner. That is right, I have.
    Thank you very much, Mr. Chairman. I want to commend you 
for focusing the first electricity hearing on barriers to 
competition, because that really is the proper focus of 
electricity legislation, ensuring that we have a wholesale 
competitive market. Using that as the screen, I would submit 
that PUHCA itself is not a barrier to competitive generation 
markets.
    As you know, in 1992, as part of the Energy Policy Act, 
Congress amended PUHCA to allow any company, any utility, to 
build, operate and invest in generation facilities anywhere in 
the country. In terms of competitive generation markets, again, 
I would submit, PUHCA is not the impediment.
    But using that focus, the question of barriers to 
competition and the relation to PUHCA is, I think, very 
instructive. If we look back to what precipitated PUHCA, one of 
the main factors was the 1929 stock market crash. Utilities had 
engaged in corporate pyramid structures, watered transactions, 
interaffiliate deals that were one of the contributing factors 
to the 1929 stock market crash. In response to that, Congress 
adopted PUHCA, in essence saying this is a regulated monopoly. 
We need to create a market structure that will facilitate 
effective competition. And at the same time, Congress passed 
the Federal Power Act setting up that regulatory structure.
    At the same time, virtually the same time, and in response 
to the same event, Congress also adopted the securities laws, 
taking a different approach. Rather than saying, we need to 
create a structure to facilitate a regulated market, Congress 
said we have to make sure we create a structure that supports a 
competitive market, but a competitive market that is free and 
fair. A free market is not the same thing as a free-for-all.
    So when Congress adopted the securities laws, they included 
a number of provisions. As you all know, the stock, bond and 
commodity exchanges essentially are among the best examples of 
free enterprise anywhere in the world, but they are not immune 
from regulation. Rather, there are rules designed to prevent 
hoarding and manipulation and systems to provide market 
monitoring; in fact, the sort of information disclosure that 
the gentlemen from Michigan suggested. There are also circuit-
breakers to prevent unexplainable, unreasonable and 
uncontrolled price fluctuations. And then there are enforcement 
actions designed to ensure that all parts uphold those rules. 
Without that sort of system, I would suggest that none of us as 
individual investors would have the confidence in the system 
that all of us do today.
    Today there is not consumer confidence in the electricity 
market, and that is, in part, what we need to address. We need 
to establish the same sort of structural protections that are 
needed to facilitate a competitive market structure in the 
electric utility industry.
    So we had one precipitating event, the stock market crash; 
two different structural paths, regulated market for the 
utility industry, competitive market for the securities 
industry. And it is my view that if we are going to change from 
a regulated market structure for the utility industry to a 
competitive market structure, then we need to put in place 
those same sort of rules, those same structural protections and 
institutions that are needed to support and sustain effective 
competition.
    Contrary to the assertion of Mr. Sokol, this isn't holding 
PUHCA hostage. This is making sure that we achieve the intent 
that this hearing is set to achieve, competitive markets.
    Let me outline for you briefly the changes that Consumers 
for Fair Competition would suggest.
    First of all, FERC needs to establish clear rules and 
procedures for deciding when a market is competitive and under 
what conditions market-based rates can be granted. What are the 
rules of the road?
    Second, FERC needs to perform the needed market monitoring 
to ensure just and reasonable wholesale rates by identifying 
market design flaws, market manipulation or market power 
abuses. I suggest this is comparable to the sort of daily 
transactional review and long-term review that the exchanges 
themselves and the SEC perform.
    Third, we need to give FERC clear authority and direction 
to take appropriate actions to mitigate and remedy market 
abuses. Again, the rare case when an Ivan Boesky or a Mike 
Milken is hauled off to jail gives us, all of us, as investors 
confidence that the system works.
    Fourth, Congress needs to preserve--to make sure that 
generation markets are competitive, needs to preserve the role 
of the States in the spin-off of rate-based generation 
unregulated subsidiaries; needs to clarify FERC's authority to 
review disposition of generation assets; needs to strengthen 
and clarify FERC's merger roles, as others have suggested.
    Fifth, Congress needs to support development of effective 
RTOs that provide true independence, proper scope and 
configuration. RTOs must possess a strong planning and system 
expansion responsibility role as well.
    Sixth, Congress must ensure that transactions between 
regulated and unregulated utility affiliates do not result in 
consumer abuse and unfair competition.
    Mr. Chairman, members of the subcommittee, I would suggest 
that if Congress takes these steps, then we will have the 
confidence of both the public and market participants that the 
system is, in fact, fair and workably competitive, and have the 
same confidence in electric markets as we have today in 
financial markets.
    Look forward to working with all of you in drafting and 
advancing legislation that achieves these objectives and 
ensures that we have eliminated the barriers to competitive 
generation markets and provides the type of structure that 
consumers, market participants and investors all need and 
deserve. Thank you.
    [The prepared statement of Marty Kanner follows:]
  Prepared Statement of Marty Kanner on Behalf of Consumers for Fair 
                              Competition
    Mr. Chairman, members of the Subcommittee, I am Marty Kanner. I am 
testifying today on behalf of the Consumers for Fair Competition (CFC), 
an ad hoc coalition of consumer and investor owned utilities, small and 
large electric consumer representatives, small business interests, and 
others. While the interests of these organizations are diverse, we are 
unified in the belief that effective competition in wholesale electric 
markets, and its associated consumer benefits, will not emerge and be 
sustainable if market power issues are not adequately addressed.
    Consumers for Fair Competition was formed to advance policies 
necessary to promote effective wholesale competition and has been 
active in the restructuring debate and efforts to block stand-alone 
repeal of the Public Utility Holding Company Act (PUHCA). CFC strongly 
believes that effective competition can provide lower rates, increases 
in efficiencies and innovation, and diversity of supply options. The 
coalition believes that these benefits will not reach consumers, 
however, if steps are not taken to properly structure wholesale power 
markets, actively monitor these markets, prevent and remedy market 
manipulation and abuse, and provide public confidence in the system.
    Electricity markets, like other competitive markets, have 
experienced price fluctuations and supply shortages. Electricity, 
however, is different. Electricity is an essential service imbued with 
a public interest. As consumers and businesses, we cannot simply decide 
to defer purchase--like we would a new car--if prices go up. Nor can we 
simply do without if there is insufficient supply. The fact that 
electricity cannot be economically stored--yet requires instantaneous 
availability--is another important distinction.
    There is another key difference between electricity and other 
``markets'': the electricity industry has a more than 100 year history 
of monopoly service. The structure, vertical integration, concentration 
of ownership--and continued monopoly status of transmission and 
distribution service (in most locales)--is a significant challenge to 
formation of a competitive wholesale power market.
    In 1935, Congress passed PUHCA to create the structural framework 
needed to support effective state and federal rate regulation. As we 
move away from wholesale rate regulation, Congress must again enact 
legislation to foster the structural framework needed for effectively 
functioning competitive wholesale power markets.
                    FOSTERING EFFECTIVE COMPETITION
    California has shown us the cost of getting it wrong. But unless we 
learn from the California experience, we are bound to repeat it. The 
California energy crisis has many contributing factors and responsible 
parties. Rather than pointing fingers, however, I want to point out the 
clear lessons that can be learned--and must be acted upon:

 Market-based rate authority cannot be granted in instances 
        where competitive markets do not exist. Sales under market-
        based rates can only be ``just and reasonable'' when 
        competitive market conditions exist. As recognized by a 
        majority of the sitting FERC Commissioners, the current rules 
        for defining markets and determining whether market-based rates 
        can be allowed is outdated and ineffective. While FERC appears 
        to be on the verge of revising its rules, this is too important 
        to be left to happenstance. Commissioners--and Commission 
        majorities--can change, and legal challenges can delay 
        implementation. Congress must direct FERC to establish clear 
        rules and procedures for defining competitive markets and 
        determining when, and under what conditions, market-based rates 
        can be authorized.
 Competitive markets require active market monitoring. There 
        were numerous warning signs that California's market was 
        dysfunctional. Regrettably, FERC ignored these signs and 
        protestations. Moreover, FERC failed to collect and analyze 
        market data and behavior in order to identify and correct 
        market design flaws. For instance, a June, 2001 report by the 
        General Accounting Office (GAO) concluded that FERC's study of 
        alleged physical withholding of electricity from the California 
        market ``was not thorough enough to support the overall 
        conclusion'' that withholding had not occurred. FERC must 
        perform the needed market monitoring to ensure just and 
        reasonable wholesale rates by identifying any market design 
        flaws, market manipulation or market power abuses.
 Market power abuses must be fully mitigated and remedied in a 
        timely manner. Allegations of market power abuse were raised 
        throughout the last two years. Had FERC acted in a timely 
        fashion, the current debate over refunds would be moot--with 
        FERC having taken remedial action to correct market design 
        flaws and mitigate market power long before the current crisis. 
        FERC must be given clear authority and direction to take 
        appropriate actions to mitigate and remedy market abuses.
 Generation concentration effects competition. California's 
        ``tight'' market showcases the ways in which concentration in 
        ownership of generation can be manipulated to reduce supplies 
        and increase prices. Economic and physical withholding of 
        generation and selective dispatch was cited by many parties as 
        a significant contributing factor to the run-up in prices. The 
        growth of the independent power producer (IPP) market has 
        provided an important infusion of competition and ``new 
        players'' into the market. However, many regions of the country 
        still have dominant utility generators, the IPP market is 
        consolidating, and utility generating assets are being sold 
        with little attention paid to the impact on concentration in 
        generation markets. Moreover, pending bills to repeal PUHCA 
        would compound this problem by eliminating the current 
        requirement, adopted by Congress in 1992, that state 
        commissions approve proposed sales or spin-offs of utility 
        rate-based generation assets. In addition to the steps outlined 
        above, Congress should (1) preserve the state role in approving 
        the sale or spin-off of rate-based generation assets, (2) 
        clarify FERC's authority to review the sale of generation 
        assets, (3) close gaps in FERC's merger review authority, and 
        (4) strengthen the FERC merger standard to ensure the proposed 
        merger will produce competitive benefits in the wholesale power 
        market.
 Transmission constraints impede competition. By now, Path 15 
        and its market and operational effects are legendary. 
        Regrettably, Path 15 is not the only transmission constraint in 
        the country, and transmission owners have little incentive to 
        relieve these constraints. Transmission siting and construction 
        is laborious--and frequently impossible. But even if those 
        problems are resolved (and they should be), transmission 
        constraints will not magically disappear. Transmission 
        constraints create smaller markets where the generation in that 
        market can extract a higher price. Relieving the constraint 
        produces more participants, more competition and lower prices. 
        Congress must support development of effective RTOs that 
        provide true independence and proper scope and configuration. 
        RTOs must possess a strong planning and system expansion 
        responsibility to ensure that constraints are expeditiously 
        relieved at the lowest possible cost.
 The straddling of regulated and unregulated businesses--and 
        the resulting potential for abusive inter-affiliate 
        transactions--remains problematic. According to the California 
        Attorney General, the transfer of billions of dollars by 
        Pacific Gas & Electric to the corporate parent contributed to 
        the utility's current bankruptcy. The California Attorney 
        General has petitioned the Securities and Exchange Commission 
        to investigate the matter and revoke PG&E's PUHCA exemption. 
        PUHCA is the only federal statute addressing utility inter-
        affiliate transactions--not only transactions between energy 
        affiliates, but also utility affiliates engaged in ``unrelated 
        activities'' such as heating and cooling, construction trades, 
        alarm systems, telecommunications, etc. Congress must ensure 
        that transactions between regulated and unregulated utility 
        affiliates do not result in consumer abuse and unfair 
        competition.
 The system must be properly structured, monitored and 
        ``policed'' if participants--and more importantly, the public--
        are to have confidence in the system. The stock, bond and 
        commodity exchanges are among the best examples of free 
        enterprise in the world. But they are not immune from 
        regulation. There are structured to facilitate free and fair 
        competition. There are rules to prevent hording, systems to 
        provide market monitoring, ``circuit breakers'' to prevent 
        uncontrolled and extreme price fluctuations and enforcement 
        actions against those parties that break the rules. It is the 
        combination of these factors that provide public confidence in 
        the system. We must establish similar public confidence in the 
        wholesale electricity market.
                 CALIFORNIA IS NOT AN ISOLATED PROBLEM
    Some might feel that California is an isolated problem, that if 
used as the basis for congressional action will merely hinder what is 
``right'' elsewhere. Unfortunately, California is not unique.
    It must be remembered that the California ``crisis'' is not limited 
to California, having spread throughout the Western United States. 
Wholesale prices in the Pacific Northwest, the Desert Southwest and 
elsewhere have closely tracked prices in California--and consumers have 
suffered rate increases as a result.
    But it's not just the West, either. In New York, New England, and 
PJM either the market institution--the ISO/RTO--or market participants 
have raised concerns about market abuse and proposed market monitoring 
and mitigation rules to remedy these problems.
                           REFUTING THE MYTHS
    A number of popular myths have arisen challenging the need for 
congressional action to adopt the positions outlined above. I would 
like to briefly respond to some of those assertions.
1. Federal action isn't needed; the states can prevent market power 
        abuses.
    Some have argued that states--through their legislature and 
commission--can take adequate steps to protect consumers and prevent 
abuse. However, the wholesale power market is subject to the 
jurisdiction of FERC--not the states--and power markets are regional in 
nature, exceeding the reach of any one state.
2. The anti-trust laws are sufficient to prevent market power abuses.
    Some have questioned the need for FERC authority on market power, 
believing that the anti-trust laws are adequate to correct abuses. 
However, the anti-trust laws alone are inadequate to foster a 
competitive wholesale market. First, the anti-trust laws are not 
designed to address market power lawfully acquired through state-
sanctioned monopolies nor to address ``transitioning'', but 
uncompetitive market structures. Moreover, it appears that the ``filed 
rate doctrine'' could immunize private utilities with FERC--approved 
market based rates from anti-trust judgments--a protection that no 
other player in a competitive market receives.
3. FERC's actions in responding to the California crisis suggest that 
        some other agency--rather than FERC--should be given the 
        authority and responsibility to oversee electricity markets.
    FERC's handling of the California crisis is certainly ripe for 
criticism. However, rather than suggesting that the agency is ill-
equipped, FERC's response highlights the importance of providing 
additional guidance--and political affirmation--to the agency. FERC has 
the needed experience to oversee wholesale markets and ensure that they 
function competitively.
4. FERC is already on the right path, and Congress need not do any 
        more.
    We have seen a refocusing of the agency in the past few weeks, but 
that action should not lead Congress to conclude that legislation is 
unnecessary. First, FERC membership can change--and these issues are 
too important to be left to a whim. Second, FERC's actions are certain 
to face legal challenge. Congress can avoid this lengthy entanglement 
by providing clear guidance and authority. Third, FERC's recent 
proposals--such as reforming market definitions--are positive, but 
those proposals can be significantly weakened as the effort proceeds.
5. Congress should repeal regulations--like PUHCA--rather than create 
        new regulations.
    First, with the possible exception of the impact of PUHCA on RTO 
formation, no clear and compelling case has been made for the 
impediment to competitive markets caused by PUHCA. Under PUHCA, any 
utility and any company can build, own and operate a merchant power 
plant anywhere in the country. All PUHCA restricts is further industry 
consolidation through limits on acquisition of utility distribution 
companies and anti-competitive cross-subsidization. I fail to see the 
competitive benefits of repealing these restrictions without 
simultaneously taking steps to promote the market structure necessary 
to support effective competition. I have attached to my statement a CFC 
document that outlines the specific conditions that we would seek to 
accompany PUHCA repeal.
    I want to emphasize that CFC's legislative suggestions, seek to 
refocus FERC. In general, we are not creating ``new'' regulatory 
authority. The majority of these actions can be done by FERC today. The 
legislative prescriptions supported by CFC are intended to eliminate 
legal uncertainty and provide a new course for FERC to meet the 
evolving shape of the industry and to restore public confidence in the 
market.
                               CONCLUSION
    Consumers for Fair Competition believes that modest legislative 
steps will translate into giant leaps forward for the development of 
effective wholesale competition. We stand ready to work with you, Mr. 
Chairman, and the members of the Subcommittee in crafting legislation 
that advances the interests of consumers and the proper functioning of 
the wholesale electricity market.
Recommended Conditions for Repeal of the Public Utility Holding Company 
                                  Act
    Consumers for Fair Competition (CFC) believes that PUHCA can be 
repealed only if accompanied by appropriate structural and regulatory 
safeguards designed to promote a competitive market structure for the 
utility industry and satisfy the underlying purposes of the Holding 
Company Act: consumer protection, effective oversight and 
accountability, prevention of undue market concentration and fair 
competition.
    CFC welcomes the opportunity to engage in a thoughtful discussion 
of PUHCA repeal and any effort to determine if repeal can be 
accomplished in a manner that advances the needs of electric consumers 
and utility competitors.
    Following is an outline of the amendments that CFC recommends. 
These amendments are directly tied to the underlying purposes of PUHCA 
and the market implications that PUHCA repeal portends.
                    MERGERS--THRESHOLD FOR APPROVAL
    PUHCA has a higher statutory threshold for merger approval than 
exists under the Federal Power Act. Under the Act, the SEC ``shall not 
approve [a merger] unless the Commission finds that such acquisition 
will serve the public interest by tending towards the economical and 
efficient development of an integrated public-utility system.'' In 
contrast to PUHCA's requirement that a proposed merger benefit the 
public interest, under the Federal Power Act, FERC must approve a 
proposed merger unless it finds that the proposal is inconsistent with 
the public interest.
    While the SEC has been less than rigorous in enforcing this higher 
standard, we believe that, in light of the increasing consolidation 
occurring in the utility industry, it is appropriate to (1) require 
that proposed mergers result in demonstrable consumer benefit, and (2) 
place the burden on the applicants to demonstrate that benefit.
    CFC proposal: Amend the Federal Power Act to condition merger 
approval on an affirmative finding that the proposed merger will 
benefit the public interest.
                     MERGERS--STANDARD FOR APPROVAL
    As noted above, PUHCA provides guidance to the SEC in determining 
whether a proposed merger is in the public interest. Specifically, the 
Act requires that it foster ``economical and efficient development of 
an integrated public-utility system.''
    While the Federal Power Act's broad ``public interest'' test 
provides the FERC with considerable latitude, we believe that the 
merger review process would benefit from specific guidance. This is 
particularly important because PUHCA currently includes a geographic 
interconnection requirement that currently prevents a number of 
potential merger combinations. We can expect to see many new, large 
mergers proposed if PUHCA is repealed. The impact of this added 
consolidation in the industry must be reconciled with Congress' broader 
goals of increased competitiveness in the electricity industry.
    Given this evolution of the industry, with an increasing reliance 
on market forces, as well as the anticompetitive impacts that broad 
interstate mergers could have on the emergence of competition in 
regional markets, we believe it is appropriate for that guidance to 
focus on the needs of an effectively competitive market. Such guidance 
will prompt FERC to consider conditioning mergers, as necessary, to 
promote effective competition (such actions could include participation 
in RTOs, conditions on use of generation in wholesale markets, or other 
measures).
    CFC proposal: Amend the Federal Power Act to expressly consider the 
effect of proposed mergers on the promotion of effective wholesale 
competition in electric markets.
                      MERGERS--CONVERGENCE MERGERS
    PUHCA restricts consolidations between electric and gas utilities 
operating in the same market (again, the SEC has been lax in enforcing 
this restriction). These ``convergence'' mergers are increasingly 
common and pose a new risk to consumers and other market participants: 
the merged utility may have an ability to influence the availability of 
fuel--natural gas--for competing generators.
    In contrast to the SEC under PUHCA, FERC's ability to review such 
convergence mergers is limited.
    CFC proposal: Amend the Federal Power Act to grant FERC clear 
authority to review convergence mergers.
                    MERGERS--HOLDING COMPANY MERGERS
    In the 1980s, in a case involving a proposed merger between two 
Iowa holding companies, FERC determined that it only had jurisdiction 
over the proposed merger of operating utilities--not mergers between 
holding companies. While the FERC later reversed its position in 
establishing its merger policy, that revision has not been tested in 
the courts.
    If PUHCA is repealed, and if FERC's original policy is upheld by 
the courts, a significant regulatory gap would ensue--with significant 
utility mergers able to escape review by any federal utility regulatory 
body.
    CFC proposal: Amend the Federal Power Act to provide clear FERC 
jurisdiction over mergers between holding companies.
                        MARKET POWER PROTECTIONS
    The Holding Company Act addresses market power--the ability of a 
market participant to set and sustain prices above competitive levels--
by placing limits on industry consolidation. As the industry 
transitions away from cost-of-service rate regulation, it becomes 
critical that effective competition exists. Without such competition, 
we will have ``unregulated monopolies'' with consumers exposed to 
market manipulation and price gouging.
    While FERC has a variety of tools as its disposal, it does not have 
specific statutory directives to provide the guidance and legal 
certainty that is needed to ensure timely and effective action. 
Moreover, some of the regulatory standards adopted by FERC--such as the 
methodology for defining relevant markets--are outdated and 
ineffective.
    CFC proposal: Amend the Federal Power Act to (1) direct FERC to 
establish standards and methods for assessing competitive markets (and 
allowing market based rates), (2) provide for market transparency and 
effective market monitoring, and (3) direct FERC to take action to 
mitigate and remedy market power.
              DEREGULATION OF RATE-BASED GENERATION PLANTS
    Private utilities traditionally built electric generation plants to 
serve retail customers within their ``state-sanction exclusive service 
territory. Power from these plants is sold at cost-based rates 
determined by the relevant state utility commission. As the wholesale 
electricity market is deregulated, some traditional utilities are 
interested in converting these existing, rate-based generation plants 
into unregulated, merchant plants that can sell power at market rates. 
Under the 1992 Energy Policy Act, utilities can convert existing 
generation plants into ``exempt wholesale generators''--but only if 
approved by the relevant state commission. The state review is intended 
to ensure that retail electric consumers--who paid for the plant--are 
appropriately protected in any asset transfer.
    Current proposals to repeal or ``reform'' PUHCA do not retain this 
requirement for state approval for deregulating existing rate-based 
generation.
    CFC Proposal: Retain the 1992 requirements for state approval for 
deregulation of existing, rate-based generation plants.
                          CROSS-SUBSIDIZATION
    Under PUHCA, diversification into unrelated business lines may be 
limited for large, multi-state utilities. PUHCA repeal will result in 
an expansion of utility diversification, which poses problems for both 
utility consumers and unaffiliated businesses competing against utility 
affiliates. Utilities frequently seek to diversify into businesses 
which utilize utility assets, including labor, paid for by ratepayers 
without obtaining compensation from the unregulated affiliate for such 
use. This shifts the true costs of the unregulated operation to the 
ratepayers and subsidizes the non-utility business thereby harming 
competition. Without proper safeguards such abuses can go undetected 
and both consumers and unaffiliated competitors will be harmed. State 
utility commissions are ill-equipped to police utility affiliates and 
prevent cross-subsidization, since the affiliate can operate in a 
different state and most state commissions lack authority to review 
non-utility business practices. Further, repealing PUHCA will eliminate 
the only federal statute that requires the true costs of affiliate 
transactions to be paid. This would leave enforcement to the states 
that may not be able to effectively police interstate operations of 
utilities and their unregulated affiliates and, at best, result in 
unequal treatment for even the utilities themselves.
    CFC Proposal: Create an effective, uniform federal standard and 
remedy to prevent utility affiliate cross-subsidization.
                  REGIONAL TRANSMISSION ORGANIZATIONS
    Ownership and operational control of interstate transmission 
facilities by multi-state, vertically integrated utilities creates 
opportunities for market manipulation and competitive and consumer 
abuses. Utilities have effectively denied access, provided inferior 
service, interrupted sales for alleged reliability concerns, and 
otherwise provided themselves preferential use of the highways of 
commerce.
    FERC Order 2000 has advanced discussions and development of RTOs. 
However, given its ``voluntary'' approach and potentially challengeable 
legal basis, we believe it is necessary to both affirm and strengthen 
the action taken by FERC in Order 2000.
    CFC Proposal: Require registered holding companies to join a FERC-
approved RTO as a condition of PUHCA repeal and amend the Federal Power 
Act to (1) affirm FERC's legal authority to issue and enforce Order 
2000, (2) strengthen provisions in Order 2000 with regard to 
independent governance and ``scope and configuration''; of RTOs, (3) 
direct FERC to require private utility RTO participation to remedy 
undue discrimination or as a condition for approval of a merger or 
market based rate request, 4) enable FERC to require public power 
systems to participate in RTOs based on a finding that the utility has 
engaged in undue discrimination to disadvantage competitors, and open 
access transmission tariffs are not likely to remedy the problem, and 
5) enable FERC to mandate federal utilities to participate in an RTO to 
remedy undue discrimination.
                             EFFECTIVE DATE
    As currently drafted, the effective date for the legislation would 
be 18 months after the date of enactment. As you know, advocates of 
PUHCA repeal argue that the legislation will promote competition. In 
contrast, CFC believes that PUHCA repeal will thwart, rather than 
hasten, effective competition. We have outlined a number of amendments 
intended to promote effective competition. However, we believe the 
efficient implementation and use of these additional provisions will be 
greatly aided by the addition of a ``carrot''--tying repeal to a FERC 
finding that effective and sustainable competition exists in the 
wholesale electricity markets.
    CFC Proposal: Amend the effective date in the legislation to 
``trigger'' repeal upon an affirmative FERC finding that effective and 
sustainable competition exists in the wholesale electricity markets.

    Mr. Barton. Thank you, Mr. Kanner.
    We now would like to hear Mr. Lane.
    Your statement is in the record in its entirety, and ask 
that you elaborate on it for about 6 minutes.

                   STATEMENT OF THOMAS K. LANE

    Mr. Lane. Thank you, Mr. Chairman and members of the 
subcommittee for allowing me to address you today. My name is 
Tom Lane. I am a managing director at Goldman Sachs, and I work 
in the Energy and Power Group there. And I have been involved 
working with the power industry and advising the power industry 
for over 10 years now. Needless to say, the industry has gone 
through some very dramatic change over that period of time, and 
it is in the midst of its most dynamic environment currently.
    The change and restructuring, we believe, will continue, 
and the evolving trend toward deregulation of the wholesale 
energy market, we believe, has many benefits for all classes of 
customers. It will enhance competition. It will lead over time 
to lower energy prices and allow participants in the industry 
to continue to attract investor capital, which is critical to 
further building out our energy infrastructure as a country.
    Elements that will continue to enhance competition over 
time are the further deregulation of generation and enhanced 
supply of generation, which is well underway; price 
transparency in wholesale and retail markets; adequate 
transmission capacity; and a regulatory environment that 
promotes growth and consolidation.
    There continue to be impediments to achieving these 
enhanced levels of competition in the nearer term; the State by 
State nature of our regulation; the California crisis has 
stalled a lot of deregulation initiatives around the country; 
and PUHCA, which has been talked about a great deal here this 
morning, continues to put a damper on activity that will lead 
to the building of stronger enterprises that will be needed in 
a more active wholesale market that will be a more challenging 
market as the electric industry becomes more commoditized over 
time.
    Referring to the deregulation trends to date, as you know, 
about half of the States around the country have accomplished 
some form of deregulation. There is increased customer choice. 
There has been a shifting of generation, both in terms of its 
unregulated status and in the ownership of those assets. There 
has been an entire new sector of participant in this industry 
over the past number of years that we refer to as the power 
growth sector, companies such as Calpine, AES, Mirant and 
Dynegy, which have been able to attract capital and build 
significant unrelated businesses that are providing an enhanced 
level of services to the wholesale market and helping to create 
a more open and liquid regional trading market. They have 
captured the interest of the financial markets. They have 
allowed new capital to come into this sector, which is 
providing the necessary capital to enhance the supply of our 
generation, which, as you all know, has been desperately 
needed.
    There are also a number of unregulated subsidiaries of 
electric utilities that are building unregulated businesses as 
well. Between these two categories of participants, they have 
raised approximately $18 billion of equity capital just in the 
past 18 months, $7 of that through IPOs.
    We believe that the shifting of generation, particularly in 
the Mid-Atlantic region has been very helpful and constructive 
as well in allowing a number of participants such as Allegheny, 
Constellation, PPL, PSEG in providing a base to further build a 
more competitive business in the future.
    With respect to M&A activity, there continues to be 
industry consolidation. We think it is inevitable going 
forward. We think it is a positive for the industry in creating 
enhanced levels of competition. Investors prefer larger market 
cap companies that offer greater financial scope and liquidity.
    The current regulatory approvals, however, do take a lot of 
time, are costly or distracting to management teams. And PUHCA 
prohibits many transactions from occurring because of its 
integration requirements. These constraints are impacting the 
pace of competition in this industry and create an uneven 
playing field. The unregulated power growth companies, for 
example, do not have a lot of these restrictions, and a number 
of them avoid transactions that would put them underneath and 
subject to these restrictions. Investors often punish companies 
that announce transactions because of these lengthy approval 
processes and the new PUHCA restrictions that sometimes come 
with certain transactions that have taken place. We believe to 
create a truly competitive, vibrant energy industry, these 
constraints should be removed.
    A couple of quick thoughts on transmission. As has been 
said, our country lacks sufficient capacity today. Electricity, 
as we know, can't be stored. There are a number of bottlenecks 
around the country. We believe this prohibits generation 
development in certain areas, and certainly results in the less 
than efficient use of our current and existing generation base. 
Expanding the system, we think, is critical. And a comment that 
I would make as it relates to the formation of these regional 
transmission entities, that the framework should ensure 
adequate returns so that they will have the ability to raise 
capital to build out and address these essential growth 
initiatives.
    In summary, the electric industry, as we all know, has gone 
through significant transformation already. The wholesale 
market is moving toward a more competitive market-oriented 
industry. The pace of progress, however, has been incremental 
because of the State by State nature of regulation and the 
overlay of PUHCA. We believe allowing industry participants to 
have these artificial restrictions removed will allow them to 
grow, combine and create actually enhanced competition in the 
wholesale market. And we think it is critically important in 
allowing these companies to attract the necessary capital to 
further build out our energy infrastructure that our country 
desperately needs. Thank you.
    [The prepared statement of Thomas K. Lane follows:]
 Prepared Statement of Thomas K. Lane, Managing Director, Goldman Sachs
                             INTRODUCTION:
    The electric utility industry is in the midst of its most dynamic 
time in recent history. It is going through significant change and 
restructuring. The evolving trend toward deregulation of the wholesale 
energy market will have many benefits for all classes of customers. It 
will enhance competition, lead to lower energy prices and allow 
participants to continue to attract investor capital. The key elements 
that will enhance competition are the deregulation of generation, 
enhanced supply of generation, price transparency in the wholesale and 
retail markets, adequate transmission capacity and a regulatory 
environment that promotes growth and consolidation. There continue to 
be impediments to achieving enhanced levels of competition in the 
nearer term. The state by state nature of regulation, the California 
crisis which has stalled momentum at the state level in many places, 
and PUHCA which has continued to put a damper on M&A activity conducive 
to building larger stronger enterprises that will be positive for more 
active, competitive wholesale markets.
                       CURRENT INDUSTRY DYNAMICS:
    The electric utility industry is going through rapid 
transformation. About half of the states have accomplished some level 
of deregulation, providing many customers with the ability to chose 
their energy provider. The status of generation is shifting both in 
terms of its now unregulated status in many jurisdictions and in the 
ownership of the assets. Unregulated Power Growth companies, such as 
Calpine, AES, Mirant and Dynegy, are building substantial unregulated 
businesses that are providing an enhanced level of services to the 
wholesale market and helping to create more liquid regional trading 
markets. These companies have captured the interest of the financial 
markets. They are positioned in the market as ``old economy'' growth 
companies characterized by high growth (25% EPS growth on average), 
broad geographic reach (many have a national or global footprint), no 
dividend, and entrepreneurial management teams. These companies have 
been accessing significant capital to build out additional generation 
and expand unregulated operations. Many are as large as the largest 
electric utility companies. They are helping to create enhanced supply 
of generation, greater industry competition and have been successful in 
drawing new equity and debt capital to the industry. There are also a 
number of unregulated subsidiaries of electric utilities that are 
rapidly growing their businesses as well. Many have shifted their 
formerly regulated generation into unregulated status (Allegheny, 
Constellation, PPL, and PSEG are examples), serving as a substantial 
base to build a larger, more competitive business in the future. Many 
investors who previously had not participated in the sector have put 
capital to work to help these higher growth entities fund needed 
incremental generation and other energy infrastructure. As a result of 
this renewed expansion of generation, most forecasts indicate that the 
country will be in balance in most regions of the country within a two 
to three year timeframe, with some regions sooner.
                        IMPACT OF M&A ACTIVITY:
    This industry has been and will continue to go through significant 
consolidation. Merger activity began in earnest in the early 1990's and 
has been consistently steady in the late 1990's and the early years of 
this decade. Further deregulation and consolidation are inevitable. The 
industry would benefit by a smaller number of larger, financially 
stronger companies. Business conditions will become more challenging in 
the years to come and having a strong financial base and financial 
capacity will be critical. Investors in particular prefer larger market 
cap companies that offer financial scope and liquidity. Current 
regulatory approvals take a lot of time and are costly and distracting 
to management teams. Further, PUHCA prohibits many transactions from 
occurring because of its integration requirements. These constraints 
are impacting the pace of competition in the industry, and create an 
uneven playing field. The unregulated Power Growth companies for 
example do not have the same restrictions that the regulated utilities 
have under PUHCA. A number of Power Growth and exempt utilities will 
not consider certain transactions to avoid becoming subject to PUHCA 
restrictions. Investors often punish companies on announcement of a 
transaction because of the lengthy approval process, which prohibits 
other strategic initiatives while waiting for necessary approvals to 
close a deal. To create a truly competitive, vibrant energy industry, 
these constraints should be removed.
                     PERSPECTIVES ON TRANSMISSION:
    The current transmission infrastructure lacks sufficient capacity 
and has numerous bottlenecks. This can prohibit generation development 
in certain areas, and can result in less than efficient use of 
currently existing generation. Expanding the system and resolving a 
number of the bottlenecking issues will enhance competition and use 
existing generation more efficiently. It will also create more 
competitive dynamics in all regions of the country. It is important 
therefore that as regional transmission entities are formed, that they 
earn adequate returns sufficient to raise capital to address these 
essential growth initiatives. Expanding generation without coincident 
expansion of transmission would prohibit the full benefits of a more 
robust wholesale market.
                              CONCLUSION:
    The electric industry has come a long way in its transformation to 
a competitive, market-oriented wholesale industry. The progress has 
been incremental given the state by state nature of the industry 
structure. The pace of progress has been hindered by the overlay of 
PUHCA, which has prevented in certain cases a nimbleness managements 
need in a competitive, commodity-oriented industry. It has also 
prohibited merger activity, which will promote larger, stronger 
entities, and in turn promote greater competition. This is a dynamic 
time in the industry and an opportunity for industry participants to 
strengthen their financial positions and competitive skills. This will 
in turn help to enhance the overall competitiveness of the wholesale 
energy and power industry, and ensure the ability to continue to 
attract the required capital to further build out our country's 
infrastructure.

    Mr. Barton. Thank you.
    The Chair would recognize himself for 5 minutes for 
questions.
    Mr. Svanda, if I heard your testimony correctly, you said 
the States should set the interconnection standard. How could 
we do that without having the Federal Government set at least 
some general minimum standards? I thought the whole point of an 
interconnection standard was to have it kind of uniform on a 
national basis.
    Mr. Svanda. Absolutely. And NARUC, and in my personal 
comments as well, support the concept of national standards. 
What I had hoped to say with regard to the States was to let us 
implement them, because at the standards level, we also 
intersect with building codes and other pieces that would be 
important for overall implementation.
    Mr. Barton. Mr. Levy, you talked in your statement at some 
length about the need for PURPA repeal, but you did say that 
existing contracts should be honored. What if the existing 
contract has an automatic rollover clause? How would you honor 
that contract?
    Mr. Levy. Well, I think if the contract has an existing 
automatic rollover, then it is truly an automatic rollover as 
opposed to an option. It would need to be honored simply 
because that rollover was probably considered in the financing 
of the original----
    Mr. Barton. So you envision a situation where there are 
some PURPA contracts that conceivably could be honored in 
perpetuity? Hopefully not many.
    Mr. Levy. I guess my reaction was more related to a 
contract--and you have seen some with 10-year terms with an 
extension for 5 more or 10 more. I imagine ones----
    Mr. Barton. So an option contract, you would say you don't 
have to honor the option?
    Mr. Levy. Again, it depends on the contract.
    Mr. Barton. I guarantee you when we get around to writing 
the bill, I am going to be beseiged by representatives of PURPA 
contractors who claim they have this need to have these 
contracts extended for long, long time periods, so I just need 
to know, a finality. How many years is enough before we put 
those folks into the open market?
    Mr. Levy. Well, having seen hundreds of PURPA contracts, 
some are not very clearly written. And I think there would need 
to be some measure to address contracts that have no term.
    Mr. Barton. So we would need a transition rule or 
something?
    Chairman Tauzin. Mr. Chairman. Would the chairman yield? I 
wanted to point out Mr. Blunt said that this is a problem of 
PURPA-tuity.
    Mr. Barton. We appreciate--first we appreciate Mr. Blunt's 
attendance. It shows that the negotiations on next week's 
energy bill are going well.
    Mr. Blunt. They are going well, Mr. Chairman, and it just 
shows how you can get recognized as a poor attender by just 
showing up.
    Mr. Barton. You have not missed a roll call vote when it 
counted. I want to go to--I want to go to Mr. Sokol since you 
talked about PUHCA repeal, but you also talked about the 
California market. We have had several of our panelists today 
talk about the need for market power protection. It is my 
understanding that the California bill, the State restructuring 
bill, one of its principal goals was to prevent market power, 
and as a consequence of that, there was forced divestiture 
requirements that the incumbent utilities in California had to 
sell their generating plants in order to get certain tax 
treatments. So given the fact that the California restructuring 
bill was designed to prevent market power, and, in fact, when 
the incumbent utilities sold to numerous companies around the 
country, in your mind is market power an issue that we need to 
worry about if we get the rules of the road right so that there 
are numerous suppliers in any given market?
    Mr. Sokol. Mr. Chairman, let me answer that in several ways 
because I think it gets to the crux of a number of these issues 
as it relates to PUHCA as well.
    Market power is an important issue. And let me be clear. We 
nor, I think, any of our associated companies have any interest 
in taking away any consumer protections. Those portions of the 
electric and gas industry that remain regulated because they 
are a monopoly must have market power considerations, and they 
must protect consumers. Access to books and records, the 
ability of State regulators to properly and fully enforce the 
rules and regulations against us or any of our competitors are 
absolutely essential. We have no interest in removing them. 
And, in fact, H.R. 1101 enhances them.
    As you stated, in California PUHCA neither stopped that 
problem from happening nor encouraged it. It is a State piece 
of regulation, bill AB 1890--it was enacted in 1996--that we as 
a company opposed because it made two fundamental mistakes. One 
of them is it locked in retail rates while leaving the 
wholesale rates open, and it did that for a very real purpose. 
The State and the utilities of that State made a decision that 
they believed that wholesale rates were going to stay very low. 
The retail rates were already among the highest in the country. 
And therefore, there was an opportunity for them to arbitrage 
between low spot market prices and the high retail prices to 
hopefully, in their mind, pay down some of their stranded cost. 
That was a State decision made in complete cooperation with the 
three utilities and State government and, in fact, a unanimous 
vote of the assembly of the senate in the State of California.
    PUHCA could do nothing to stop them for doing that. PUHCA 
in a way has exacerbated the problem, because those utilities, 
Pacific Gas and Electric is an example, are intrastate-exempt 
utilities. They are exempt in the State of California under 
PUHCA by Federal law. This claim by the Attorney General, which 
is nothing more than a political game to have the SEC look at 
that exemption----
    Mr. Barton. They play political games in California?
    Mr. Sokol. Sometimes in Iowa as well.
    Mr. Barton. Sometimes in Texas a lot.
    Mr. Sokol. It is nothing but a game, because that exemption 
is a Federal exemption. Their utility assets are intrastate; 
therefore, they are exempt from PUHCA.
    But the issue that was raised about them dividending 
dollars out again was a State regulatory issue. In fact, when 
PG&E and Edison under 1890 were established, and their 
exemptions established under PUHCA, the State required that 
they maintain their capital structure. Now, this is an 
important issue because when they then passed AB 1890 requiring 
them to divest their generation, the utilities had a huge 
inflow of capital. Had that capital been kept in the company, 
it could have been used as an offset against this very risky 
position they were taking between spot market and retail rates.
    Mr. Barton. I think that is Mr. Priest's basic point, that 
the money went upstream. It didn't stay to build more power 
plants.
    Mr. Sokol. But the State required it to go upstream. The 
State utility board did not allow that money to stay in those 
companies because it would have increased the amount of equity 
in the company under which they were allowed to recover 11\1/2\ 
percent return on equity. They wanted the equity level kept 
lower because it would be better for consumers. PUHCA did not 
allow or inhibit that transfer of capital. It was the State 
utility board that established them doing that.
    So this whole notion that PUHCA either would have protected 
them or done something to stop it is just absolutely not 
correct. What is important is the recognition----
    Mr. Barton. Finish up. My time expired about 4 minutes ago.
    Mr. Sokol. What is important is the Federal overlay setting 
the rules fairly, then the States have to enforce them 
appropriately and be responsible for the actions within their 
State. Then you will have a healthy market both between the 
States and intrastate.
    Mr. Barton. My time has expired, and the Chair recognizes 
Mr. Boucher.
    Mr. Priest. Mr. Chairman, may I make a comment? That was 
not my comment. That was the politician's comment from 
California. I never question any comments from politicians.
    Mr. Barton. I understand that. I did not imply that. I 
thought that your statement talked about--you weren't really 
all that excited about PUHCA repeal. And isn't there something 
in your statement?
    Mr. Priest. Not totally excited about it.
    Mr. Barton. We got plenty of people who are willing to make 
political statements. We do not need anybody at the panel to do 
that. In Texas, former Senator Lloyd Bentsen said politics is a 
contact sport, so we are understanding of that.
    Mr. Boucher is recognized for 5 minutes.
    Mr. Boucher. Well, thank you very much, Mr. Chairman. I am 
going to pick up with questions to Mr. Sokol also.
    I acknowledge that under the proper circumstances, it is 
appropriate for the registered companies to engage in 
businesses that are not related to the core utility business. 
As a matter of fact, I proposed the last change to PUHCA, which 
was to enable the registered companies to offer commercial 
telecommunication services, and that change was made by the 
Congress during the last decade.
    I think as we examine the question of PUHCA repeal 
prospectively, it is very important that we keep the interest 
of electricity consumers in the forefront, and I think that 
their interests should guide our decisions.
    And so let me ask you a question. I will ask it in two 
ways, and you can answer this question either way you choose. 
The first question is is PUHCA, as currently being interpreted 
by the FERC and by the SEC, in some way adverse to the 
interests of electricity consumers? Are the interests of 
electricity consumers being injured in some way by current 
PUHCA interpretation and its application in accordance with 
those interpretations? And the other side of that question if 
you choose to answer it this way is would the interests of 
electricity consumers in some way be advanced if PUHCA were to 
be repealed?
    So address the question of PUHCA appeal, if you would, from 
the vantage point of electricity consumers, and after you 
provide an answer, I am going to ask Mr. Kanner and perhaps 
others to comment as well.
    Mr. Sokol. Thank you, Commissioner.
    Mr. Boucher. Did you say ``Commissioner''? I will take the 
promotion.
    Mr. Sokol. I think PUHCA, in fact, does harm the consumer, 
and that is why we are specifically interested in it in 
addition to our ability to invest.
    No. 1, I will give you a simple example. PUHCA wants to 
concentrate market power, not distribute it. FERC has attempted 
to repeal portions of PUHCA on that very basis, that they are 
trying to distribute market power. And I will give you a 
perfect example.
    We are an intrastate utility holding company in the State 
of Iowa. The only acquisition that we can make today that is 
exempt from PUHCA--we represent 60 percent of the consumers in 
the State of Iowa--is to acquire the company that represents 
the other 30. We do not think forcing market concentration is 
in any way in the consumers' interest. And PUHCA absolutely 
does do that.
    PUHCA, second, absolutely restricts investment in this 
sector, which we think is clearly not in the consumers' 
interest, because as California has demonstrated, when a 
utility that was a AA-rated utility now has to go out and raise 
capital at 14 percent interest rates because people like us 
can't make the investment we would like to make to help that 
utility get through its issues, that clearly will get passed on 
to the consumer.
    The other--this last point I would make is PUHCA repeal is 
probably the wrong term. We are not in favor of removing any of 
the consumer protections under PUHCA. We are merely asking that 
the investment limitations with all of the appropriate 
oversight of the FERC, the SEC, FTC and the Justice Department 
stay in place, but there not be an arbitrary limitation, as an 
example in our case, where we can make investments that are 
clearly in the consumers' interest. Even if the SEC, which has 
told us they would be happy to let us do it, PUHCA, by law, 
won't allow us to do it.
    Mr. Boucher. Thank you, Mr. Sokol.
    Mr. Kanner, let me get your response, please.
    Mr. Kanner. Thank you very much, Mr. Congressman. I would 
like to answer it in a couple of ways. The first is to note 
that there is no legitimate consumer group, not Consumer 
Federation of America, Consumers Union, AARP, National Consumer 
League, et cetera, that supports stand-alone PUHCA repeal. So I 
think your answer is in part answered in that way.
    But let me address some of what Mr. Sokol raised. What 
PUHCA restricts in terms of the integration requirement is the 
acquisition of another vertically integrated or, frankly, 
distribution utility. In my view, the growth of the 
distribution utility does not inherently lead to greater 
competition. We are talking about competitive generation 
markets, and simply acquiring another vertically integrated or 
distribution utility in the case in California isn't going to 
result in greater competitive wholesale markets. It may lead to 
economies of scale and scope, and that is something that is 
worth looking at.
    However, what we are talking about--our coalition is 
saying, we can look at PUHCA repeal. We can look at eliminating 
the integration requirement as long as we put in place other 
substitute provisions that protect the interests of consumers.
    Let us take mergers as an example--to have an affirmative 
screen that proposed mergers result in net benefits and that 
they enhance competition to make sure that disposition of 
generation assets are reviewable and reviewed by FERC. Mr. 
Barton asked before about California's actions with divestiture 
of generation assets. In fact, it is my understanding that 
California's divestiture effort was not designed to address 
market power. Rather, it was designed to value those assets for 
stranded cost recovery. Had market power been the screen, we 
could have resulted in a different outcome. Had FERC had 
jurisdiction to review asset distribution, maybe that would 
have occurred.
    Mr. Boucher. Thank you very much.
    Mr. Chairman, my time has expired.
    Mr. Whitfield [presiding]. At this time, I recognize the 
chairman of the full committee Mr. Tauzin.
    Chairman Tauzin. Mr. Sokol, I am well acquainted with your 
views on PUHCA, and you and I had some long conversations about 
them. And I want to be specific. I enjoy this give and take on 
it with Mr. Kanner, but in your case your testimony basically 
tells a story. You were prepared, in effect, to consider making 
equity investments in California in the middle of this crisis 
and helping restore long-term viability to the California 
electric markets, but you basically didn't do it. You basically 
looked at PUHCA as the biggest stumbling block; was that not 
correct?
    Mr. Sokol. In three separate instances, the transmission 
line to get new generation that was requested by the State of 
California and in a personal meeting with Governor Gray Davis 
where he asked me, couldn't you possibly set up a revolving 
credit facility to help our utilities and help the State 
weather this crisis? And Mr. Buffet responded through me, we 
will be glad to do that if we can get some way around PUHCA, 
because we can't do it and have any security that would secure 
our $3 or $5 billion loan by the assets or the stock of the 
company.
    Chairman Tauzin. So you couldn't be of help when you wanted 
to be. In fact, don't you have a geothermal plant in 
California?
    Mr. Sokol. Yes.
    Chairman Tauzin. PUHCA stands in the way of your investing 
in the transmission lines that would bring that electricity to 
consumers in California around that geothermal plant; does it 
not?
    Mr. Sokol. Correct.
    Chairman Tauzin. Could you explain that; how it prevents 
you?
    Mr. Sokol. None of the utilities in the State can afford to 
put in the transmission line. We have actually requested the 
extension for going on 5 years. We can't build the transmission 
line ourselves, because we can only own 4.9 percent of it 
because we can't demonstrate either interconnection with the 
State of Iowa or any of the other exemptions, if you will, 
under the statute--under PUHCA, so that a transmission line 
that we were prepared to build, turn over full authority to the 
ISO, accept the FERC level rate of return so we can deliver 
another 340 megawatts of renewable energy----
    Chairman Tauzin. So we have got a case where a law that 
contains some good consumer protections, which you concede 
shouldn't be repealed, but also is designed in a fashion that 
prevents those who are willing to make investments to deliver 
more power, more reliable power with better transmission 
facilities, prevents you from making those investments when you 
are not only requested to sometimes, but you are eager to do it 
on other occasions; is that right?
    Mr. Sokol. Correct. There are numerous examples around the 
country.
    Chairman Tauzin. I want to do something with all of you who 
might want to participate with the time I have remaining. You 
have all made a case for this Congress acting to change some of 
the laws and rules on the electric markets. You all support 
different elements, obviously. But what I would like any of you 
to do for me today is make the case on the basis of what 
happens if we do nothing. If this committee fails to address 
some of the concerns you have raised here today, what does 
America face?
    One of the problems we have got, Americans do not really 
believe there is a problem until the prices are going crazy, 
until the lines are forming at the gas station, until there are 
blackouts. And they do not see those right now, so they don't 
think really we have a crisis.
    Make the case for me. What happens if this Congress, this 
committee, fails to deliver on some of your recommendations? 
What are some of the consequences to American consumers? Anyone 
who wants to take that?
    Mr. Levy. Well, I would like to just start with an example 
of other markets that have deregulated. We participate in 
several international markets, and the United States so far is 
the only market that, when it went to a deregulated State, saw 
prices go up. Every other single market, whether it is South 
America, Europe, Australia, some were long on power, some were 
short on power, but every single one of those markets saw 
prices drop immediately upon deregulation because many of those 
markets do not have the types of barriers to entry that we 
have.
    So I think the experience we have had over the last year 
with energy prices spiking, lots of volatility, are basically a 
measure of the inefficiencies and blockades built into our 
market. I think we will see a terrible cyclical experience in 
prices. There will be spikes. There will be drops.
    Chairman Tauzin. So your prediction is that the experiment 
to move to more competitive retail markets is going to fail if 
we do not get these barriers out of the way. We will get higher 
prices and spikes and dislocations as a result? Is that your 
answer?
    Mr. Levy. That will discourage investment.
    Chairman Tauzin. Anyone else--give me a prediction. Yes, 
Mr. Sokol.
    Mr. Sokol. If Congress doesn't act--it, quite honestly, 
should have acted--and you have heard me say this 8, 10 years 
ago. We are in an industry right now where public power and 
best-run utilities, State jurisdictional levels and Federal 
jurisdictional levels are all combating each other. That is 
silliness. We have no issue that the municipal co-ops and large 
power producers, public power producers and investor-run 
utilities, we all have to solve this problem, and we have to 
work together. If we do not, what happened in California is 
going to happen elsewhere, because we have this fragmented 
quilt-like set of Federal and State rules that are not being--
--
    Chairman Tauzin. Tell me where it starts happening.
    Mr. Sokol. It could happen in the New York area next, part 
of the Northeast. It will happen in the upper Midwest, and it 
will continue to happen in parts of the West. And I would ask 
you to think about who has lost in California. The consumer has 
lost. Two companies have serious financial problems, but the 
consumer has lost. That is who is not being protected by doing 
nothing.
    Chairman Tauzin. My time is up, but if anybody wants to add 
anything, you are certainly welcome.
    Mr. Priest. I think probably the second most important bill 
that Congress ever passed was the Energy Policy Act of 1992. 
But unfortunately, it was that act that probably made 
California's problems possible. Now, it didn't cause them, but 
made it possible because it started the process. But the act 
was not fleshed out enough to really describe what was needed 
to happen in terms of several elements.
    Now, the things we are talking about today are extremely 
important, but the critical item in making the system work and 
protecting consumers and protecting investors and protecting 
everybody is the transmission side. The 1992 Act made it 
possible for little Yazoo City to go out in the market and buy 
power from wherever they wanted to buy it, and we buy a lot on 
the spot market. We have saved a tremendous amount of money 
because of it. But it also creates problems when transmission 
gets constrained and you can't go out and buy when you need to 
buy. We paid over $2,000 a megawatt hour. We do not average 
anywhere close to that, though. Recent months, we have averaged 
about $30 of megawatt hour buying on the spot market.
    That act needs to be looked, at and the job started in 1992 
needs to be completed on it.
    Mr. Svanda. If I could, from the perspective of a State 
commissioner, what you would cause by not getting legislation 
enacted is a continuation of lack of direction across the 
spectrum on energy policy, and that lack of direction affects 
us dramatically at the State level.
    For example, the Telecommunications Act of 1996 set 
direction that we could all understand, and we all had some 
agreements or disagreements about where we are today in 
response to that. But nonetheless, we knew what the national 
goals were, and we could begin to march forward in tandem. And 
we lack that in energy policy today. At least bifurcation of 
directions that are taken across the country by various States 
with differing objectives just adds confusion to a whole number 
of issues, from investments to diversity of our national 
portfolios. And so it just all becomes very confusing without 
that very specific national direction that would guide all of 
us.
    Mr. Whitfield. Is there anyone else on the panel that would 
like to respond to Mr. Tauzin's comment?
    Mr. Morris. The LPPC has taken a position that it is really 
the consumer protections and safeguards that are critical. And 
the discussion this morning seems to reflect that PUHCA, while 
doing some things that others may take issue with, that there 
is a profound respect for those consumer safeguards. We believe 
that if those tools can remain in place, that it will go a long 
way toward alleviating some of our concerns about an ultimate 
repeal of PUHCA. We look forward to a fully competitive market. 
And there are some other details that would need to be 
addressed. But primarily, it would seem that if we can ensure 
that the consumer is protected--the customers that we serve at 
the end of the line, that we can make progress on this issue.
    But I would caution that our perspective is that first we 
ought to ensure that whatever we do does not inflict more harm. 
And I think that is part of the lesson from California, that 
whatever we do does not inflict more harm than the--that the 
medicine doesn't inflict more harm than the disease.
    Mr. Whitfield. We have gone over about 4 minutes, so at 
this time I would recognize Mr. Sawyer for 5 minutes.
    Mr. Sawyer. Thank you, Mr. Chairman.
    Let me make a quick observation. We demonize PUHCA and 
PURPA and I think perhaps by overstatement rather than intent. 
From what I hear, I hear thoughtful people talking about the 
importance of carving out elements of PUHCA that today stand in 
the way of a transition that is going on across the country. 
Many of the protections that we have in law and policy and 
precedent and practice have evolved over the last 85 or 100 
years to create a system that worked well at the time that it 
was working. It was not perfect by any means, but it got us to 
where we are today. And today we are on the threshold of a 
major national shift because for the first time, we have 
reached a point where it can happen, and presumably we have the 
technology to make it happen.
    So what we are looking for as much as anything is to find 
the places to do the kind of surgical carve-outs rather than 
trying to repeal lots of things and then trying to reenact the 
protections that might have gone with it. I may be wrong about 
that, but it seems to me there is an enormous amount of what 
has evolved over the last many decades that we want to leave in 
place.
    Having said that, I just think this has been one of the 
most extraordinary panels, Mr. Chairman, that we have had in 
the several years that we have been considering this topic.
    I would like to return to a topic that many of you have 
touched on and many of my colleagues know that I have worked 
with for several years, and that is to try to elevate and focus 
attention on the pivotal role that transmission systems will 
play in making possible the development of regional markets the 
way we all envision and hope to achieve.
    Mr. Kanner, you mentioned in your testimony that the FERC 
should ensure that RTOs have true independence from other 
market participants. I would like you to comment on the job 
that FERC has done to date in achieving that goal. Are they 
falling short of achieving the independence principle that they 
laid out in Order 2000, or are they making progress toward 
getting there?
    Mr. Lane, you testified that in order to resolve the 
bottlenecks in the transmission system, it is important for 
RTOs to earn returns sufficient to attract the capital 
necessary for new transmission projects. In a disaggregated set 
of electricity suppliers and market participants, I worry that 
transmission may itself be the most fragile element in 
attracting the kind of investment, in competing for money that 
it will require to build that interstate highway system that 
working regional markets will require so that Mr. Priest 
doesn't get isolated in Yazoo City, or any of the other cases 
of isolation that I think are likely across the country in a 
vital market.
    Those two questions for you two gentlemen. And then if 
others would care to add to it, I would appreciate it.
    Mr. Kanner. Thank you, Congressman Sawyer, and it is an 
important question. As I am sure as you and other members of 
the subcommittee are aware, in recent weeks the FERC has sent 
some RTO folks back to the drawing board in some cases to look 
at the scope of the RTO and other cases to address the level of 
independence of the governing board. We are certainly heartened 
by that. I think that the new set of Commissioners take 
seriously the functions and characteristics laid out in RTO 
2000 and are taking the steps to ensure that those are upheld.
    Our view is Congress is appropriate in reenforcing that 
role in showing, in essence, the political support, but also 
the legal clarity so that the good efforts of the Commission 
aren't undone by legal challenges. And if I could take a second 
to preempt Mr. Lane.
    Mr. Sawyer. I am going to run out of time.
    Mr. Kanner. We need to have sufficient returns to attract 
capital for investment and transmission, but no more.
    Mr. Sawyer. Mr. Lane?
    Mr. Lane. Well, I do agree with your comments. If you think 
about how this industry is being restructured from an investor 
perspective is kind of the least sexy part of the industry that 
is out there.
    Mr. Sawyer. Least sexy and perhaps most pivotal.
    Mr. Lane. Yes. And I do not disagree with that as well. And 
so the characteristics of transmission by definition will be a 
lower-growth type of business. And if you think of the return 
that investors have kind of gotten used to in the last 5 years 
in particular, the last 9 months notwithstanding, this kind of 
slow growth business is difficult to attract capital. We do 
think, however, there is a security that can attract capital. 
It is going to be yield-orientation to it. It has to have the 
ability to have a formulaic element to it so as you build out 
necessary additional transmission capacity, that gets 
incorporated into that return so that people are comfortable--
these organizations are comfortable that as they spend capital, 
they can earn that incremental return on that incremental 
capital spent.
    Mr. Sokol. I would like to make a quick comment. You 
focused on the right area. Generation, given that it is 
unregulated at this point, will solve itself. It is a supply 
demand issue. Transmission cannot solve itself, and it is one 
of the most critical issues out there. And again, it is limited 
by a whole number of inconsistent Federal regulatory regimes 
and State implementation.
    Mr. Svanda. If I may, I would certainly support that theme 
and just reemphasize the point that I made earlier. There are 
certain issues in interstate transmission that the States 
simply cannot get fixed by ourselves. We work carefully. We in 
Michigan work carefully with your home State in Ohio and view 
this issue in much the same terms and have made those comments 
very publicly in the past.
    Mr. Sawyer. Thank you for your flexibility, Mr. Chairman.
    Mr. Whitfield. At this time, we will recognize Mr. Burr for 
5 minutes.
    Mr. Burr. Mr. Lane, you talked about adequate returns 
earlier. What is an adequate return?
    Mr. Lane. With respect to transmission I am assuming that 
you are referring to, or more broadly based?
    Mr. Burr. I would say more broadly based. If you want to 
address it with transmissions specifically, I will be happy to 
have that one.
    Mr. Lane. All of us in this room are investors of some sort 
or another. And obviously, there is a risk-reward, risk-return 
element to any investment that you make.
    So as an example, if you look at the higher growth--higher 
growth entities that I referred to earlier in my comments that 
have been created, the returns that investors are anticipating 
and investing in those types of entities are far higher than a 
distribution and transmission company or in some of these other 
transmission entities that are going to be formed. In the D and 
T world, investor returns have been kind of in the low double-
digit range, and on the power growth companies, they have been 
high teens to mid-20's have been the investor expectations.
    Mr. Burr. When expectations were of 30 percent return, if 
you invested in technology companies, did that alter what 
people would look at the industry sector, transmission or any 
sector of it, and change their expectations of what it would 
require for them to make a decision to pump capital into that 
market?
    Mr. Lane. No doubt about it. Last year there was a very 
significant shift of investor dollars into the generation 
players of this industry. Telecom kind of fell out of bed last 
year.
    Mr. Burr. So the perception was there was not a capitated 
return on the generation side; therefore, Wall Street began to 
respond to it?
    Mr. Lane. I agree with your comment, yeah.
    Mr. Burr. Would it be safe to then say that Wall Street is 
driven by an unlimited opportunity versus a predetermined fixed 
rate?
    Mr. Lane. I am not sure I understood your question exactly. 
Why don't you phrase it one more time.
    Mr. Burr. If we said that we guaranteed 11 percent return 
for an investment in the transmission, does that attract the 
capital that we are going to need to upgrade our transmission 
system?
    Mr. Lane. It is somewhere in that neighborhood.
    Mr. Burr. What if we return to the 1990's of anything with 
dot com almost guaranteeing 30 percent. Would we see the 
capital flow to the upgrade of our transmission grid?
    Mr. Lane. If you guaranteed the 30 percent?
    Mr. Burr. No. If they were competing with the 1990 craze.
    Mr. Lane. The answer is yes. There is definitely a role in 
the markets for a lower-risk, lower-return investment, which is 
what transmission represents.
    Mr. Burr. Some estimates----
    Mr. Lane. Whether it is 11 percent, 12 percent, somewhere 
in that neighborhood is what we still need to ferret out with 
the investor base.
    Mr. Burr. It is driven by what investors are looking for. 
If we haven't met their threshold, the capital won't flow?
    Mr. Lane. Correct.
    Mr. Burr. Mr. Priest, let me ask you a question. Tell me 
your definition of market power, would you?
    Mr. Priest. Market power is, I guess in the simplest terms, 
the ability to increase the price above what it would otherwise 
be if people could freely go out and buy when and what they 
wanted.
    Mr. Burr. So State of California, are they a market power 
problem?
    Mr. Priest. Well, State of California created a number of 
problems. They shot themselves in the foot, as we would say in 
the South. But forcing everybody to sell their generation, No. 
1, and then buy all the energy they needed either in the hourly 
or daily market was destined to disaster. The first time you 
had major equipment outages or a pipeline explode going into 
southern California, and as soon as those events happened, 
there was such a critical shortage that anybody who had some 
capacity available could charge anything on the market.
    Mr. Burr. California has an unbelievable regulatory scheme 
for their deregulation or reregulation or controlled 
competition model depending upon what ultimately they ended up 
with. They have a tremendous regulatory scheme for it, but yet 
people believed that market powers were at play; am I correct?
    Mr. Priest. Market powers appeared to have been in play.
    Mr. Burr. Could one assume from that that since California 
took the consumer out of it, that, in fact, the consumer is the 
key to holding any market powers in check--consumers and 
choice?
    Mr. Priest. There is probably several legs on the stool, 
and obviously consumers is one of them. Choice is probably one 
of them. But having the rules designed for all the participants 
to play by is probably another one.
    And you know, if the three major IOUs in California had 
been able to manage their risks--they were prohibited by law 
from managing their risks. They were prohibited by law from 
managing their risks, and when they were unable to manage that 
risk, that is when it made it possible for people to take 
advantage of the conditions in the State.
    Mr. Burr. Is it safe to say that in California, the market 
was not allowed to be a market?
    Mr. Priest. That is probably true. There is probably a lot 
of things you could write in a book about what was wrong in 
California.
    Mr. Burr. Well, the one thing we can rest assured, 
California is usually the first. We learn a lot from it, and we 
never want to replicate it.
    I would yield back, Mr. Chairman.
    Mr. Barton. The gentleman's time has expired.
    The gentlemen from Maryland Mr. Wynn is recognized for 
questions for 5 minutes.
    Mr. Wynn. Thank you, Mr. Chairman.
    Mr. Kanner raised a couple of interesting propositions, and 
I wanted comments from the other panel members to that. He 
observed that Congress should preserve the State role in 
approving the sale or spin-off of rate-based generation assets. 
Is there anyone on the panel that has substantial disagreement 
with that proposition?
    Mr. Sokol. The proposition that the States should retain--
--
    Mr. Wynn. Retain the role of approving the sale or spin-off 
of rate-based generation assets.
    Mr. Sokol. I think that is appropriate. One of the comments 
I heard Mr. Kanner say was that he thought that FERC should 
also have a role in determining this spin-off of State-
regulated assets. I do not----
    Mr. Wynn. You are correct. He goes on to say that we should 
clarify FERC's authority to review the sale of generation 
assets, and I am not sure if those two concepts are in 
opposition.
    Mr. Sokol. I would agree that the State should retain that 
right.
    Mr. Wynn. There is a statement that we should close the 
gaps in FERC's merger review authority and strengthen FERC's 
merger standard to ensure the market will produce competitive 
benefits in a wholesale power market. I would like to get the 
reaction of the panel members to that proposition.
    Mr. Sokol.
    Mr. Sokol. I would agree. We do not, in any way, recommend 
that mergers that concentrate market power, and they could 
inflict negative confidence on consumers, we do not agree that 
they should be approved. I would point out that the SEC today, 
by the rules under PUHCA, actually in a way forces that problem 
to happen where FERC, in fact, would like to cause it not to 
happen, and the two bodies are at odds, and changing parts of 
PUHCA would, in fact, put them on both the same page.
    Mr. Wynn. I take it, then, there is pretty good consensus 
that we ought to do that in terms of strengthening FERC's 
merger authority?
    Mr. Levy. Yes. Being in the middle of a merger, I think 
FERC already has that authority. When we were negotiating our 
merger, we went through the various regulatory hurdles we were 
going to have to address, And one of them was having FERC 
approve the transaction for market power and those related 
issues. And they have done it, and they have been fairly 
thorough in their review.
    Mr. Wynn. I ask these questions because we are in an 
interesting environment where we are going toward Big 
Government and strengthening then FERC's role and the Federal 
role. If this is a consensus, that is great, but I would hate 
in a few years for people to come back and say, the Federal 
Government's role is far too intrusive.
    Clear rules and procedures for defining competitive markets 
and determining when and under what conditions market-based 
rates can be authorized. Now, we have debated this quite a bit 
up here. Again, is there a consensus that that is a proper role 
for FERC, and that FERC ought to have clearer and stronger 
rules for when they move in with market-based rates?
    Mr. Levy. You know, I think FERC has the rules. And I think 
what FERC is learning, as we are all learning as this industry 
deregulates, is how a generator that has only one generator and 
a short market could operate that generator in a way that 
creates market power. So I think that FERC needs to evolve its 
rules as we all learn how the markets work. I believe they have 
all the powers they need.
    Mr. Wynn. But no objection to market-based rate setting? 
Okay. Good.
    Mr. Kanner. Congressman, if I could just amplify 
momentarily, I think Mr. Levy and I agree on this. FERC has 
that authority and in fact as we speak is in the process of 
redefining market rules. What we are suggesting is that 
Congress, in essence, affirm that so that it is not subject to 
whim, so that the current effort isn't altered or shuttled 
aside with a change in commission personnel or a legal 
challenge.
    Mr. Wynn. I think that is a very good point. I mean, we 
wrangle quite a bit in the kind of public domain about this 
issue. We finally kind of got there with some sort of soft 
rates regulation, but--or price regulation. But it is good to 
see this consensus.
    Finally Mr. Kanner, you said that FERC must perform the 
needed market monitoring to assure just and reasonable 
wholesale rights by identifying any market design flaws, market 
manipulation or market power abuse.
    When we begin the debate over price caps, FERC came in and 
all they would say is, it is a dysfunctional market. Many of 
us, on this side of the aisle particularly, were saying, and 
what are you going to do about it? And we advocated, you know, 
market-based rates; and that did not happen. So my question is, 
if we, you know, give them this authority or mandate that they 
have this authority to do the monitoring and they in fact find 
a dysfunctional market or market manipulation, what would you 
have them do? I guess my question is, and then what?
    Mr. Kanner. I guess, Congressman, I would resist the effort 
to prescribe in statute what steps to take because it is a 
dynamic market and you want FERC to be able to respond to the 
actual circumstances. In some cases, it might be changing rules 
or--for instance, a number of years ago the SEC put in place 
price circuit breakers, where they would halt trade in a given 
stock if there was a sudden run-up. That might be an 
appropriate step. An equivalent step could be taken in 
electricity markets. In other cases, it might be defining 
different rules in terms of the scope configuration or 
authority of an RTO.
    But you are exactly right, that we first need to insure 
that FERC is gathering and analyzing market data to determine 
whether a problem exists.
    It was disturbing that the GAO reviewed FERC's analysis of 
whether there had been economic withholding in California and 
GAO determined that FERC hadn't done a rigorous enough analysis 
to make that determination. I am not suggesting that there was, 
in fact, mischief or misdeeds in California. It is that we 
don't know, and that takes away the consumer and the 
participant confidence in the system.
    Mr. Wynn. Thank you. And to kind of bring it to a----
    Mr. Barton. Yes. The gentleman's time has expired.
    Mr. Wynn. If I could have 15 seconds, Mr. Chairman.
    Mr. Barton. You can have 15 seconds.
    Mr. Wynn. Thank you.
    I just want to know, are you then saying that you believe 
FERC has adequate authority to address this market manipulation 
or market power abuses once they find them? Or do we need to 
provide some tools that are optional for them to utilize in 
these situations?
    Mr. Kanner. I think that FERC probably has the tools within 
its statute, but if we say--if Congress says, FERC, take the 
steps necessary to remedy market power, then we have affirmed 
that authority and we have given the direction, the confidence 
and the--frankly, the political backing to take the steps 
necessary.
    Mr. Wynn. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Barton. Thank you. We are always impressed by the 
gentleman from Maryland. He actually seems to understand the 
questions that he is asking, which is----
    Mr. Wynn. You are very kind, Mr. Chairman. That is not 
necessarily accurate, but you are very kind.
    Mr. Barton. The gentleman from Kentucky, Mr. Whitfield, is 
recognized for 5 minutes.
    Mr. Whitfield. Thank you, Mr. Chairman.
    Mr. Sokol, you had mentioned just a few minutes ago when I 
think Mr. Sawyer was talking about transmission being one of 
the key problem areas as we try to deal with our energy 
problems; and you said there were several contradictory laws 
that provide obstacles on transmission, solving transmission 
problems. Could you just specifically talk a little bit about 
which particular laws you are talking about?
    Mr. Sokol. Again, I will focus--I think the one that 
certainly causes us and many others the greatest issue is the 
Public Utility Holding Company Act.
    And actually, in response to also Congressman Wynn, I will 
give you an example where two utilities were merging. I don't 
think any consumer, consumers had any serious issues with them, 
nor did industry participants like ourselves, until, because of 
PUHCA, they had to demonstrate their interconnection 
capability, which FERC did not require but the SEC must require 
because of the statute on the books by those two utilities 
creating a transmission corridor by contract, by buying up 
transmission capacity between each other.
    It then created for several of us serious transmission 
issues and indirectly enhanced that merger's market power 
control because, by having that control of that transmission 
system when power is needed in a market, which means by 
definition prices are higher because it is short, they get to 
transmit power before other market participants do. And this is 
a function that both of the primary State regulatory bodies 
were opposed to that interconnection but to get the transaction 
done because of PURPA's existence had to be in place and 
ultimately got approved and went forward.
    Second, dollars need to flow into transmission. As I said 
before, generation is a commodity. It will happen if the market 
signals are there. But if the generation can't get to where it 
is needed because of transmission, that is where the real 
bottlenecks happen. That is what caused some of the upper 
Midwest problems 2 years ago.
    Mr. Buffet has made it clear he would intend to invest $10 
to $15 billion in rectifying those problems. But we cannot own 
more than 4.9 percent of any single asset under PUHCA. So, 
again, States that have asked us to come in and invest the 
dollars, we are prohibited by Federal law from doing that.
    I think the other issue is, without FERC having the clear 
authority and open transmission access rights in place, the 
State regulatory bodies are conflicted because they don't know 
what their neighboring States are necessarily going to do and 
how they are going to allow recovery for interconnections in 
their State that actually benefit consumers in another State.
    So I think there are a number of ways where the consumer is 
not benefited by today's inconsistent regulation.
    Mr. Whitfield. Thank you.
    The times we have discussed the problems in California, 
someone always brings up, I think, this pathway 15, which is a 
problem. Could some of you elaborate? I mean, is that a 
capacity problem or is that a maintenance problem or is it 
both?
    Mr. Sokol. It is capacity. It is the ability to transmit 
the power.
    An important note I would make, and it is true in our own 
system and I know in many other systems, probably GPU has some 
as well. You know, we built out the transmission and grid 
system in this country pretty much through the early 1970's. We 
have been living on that capacity ever since. We now have power 
flowing on transmission systems in the opposite direction the 
system was designed to have the power flow on. And because of 
the 1992 act, which I think made a very important step toward 
wholesale open transmission access, very little investment has 
taken place since then, though, because none of us really know 
what the rules are.
    Mr. Whitfield. All right. So we have this capacity problem. 
So, obviously, we are going to need to build some new 
transmission lines, I am assuming. Now, on natural gas 
pipelines there is Federal eminent domain authority, but we 
don't have that in the transmission area for electricity. How 
many of you feel like there should be Federal eminent domain 
authority? Or do all of you feel that way?
    Mr. Priest. Well, I think, obviously, there is going to be 
some sort of problems. Just for an example, one line that keeps 
popping up in the news from time to time is Wisconsin has been 
trying to build a line into eastern Minnesota for years, and 
they can't get it built because they are dealing with two 
different States' regulations on how it is done. So it is going 
to have to be some of that. But still the States are going to 
have to be involved with that in some way, I think.
    One of the biggest problems on getting the transmission 
built is having the system where it can be managed once it is 
built. There is more than ample reason not to build a lot of 
generation. If you have got a lot of generation that you own 
and your generation is expensive, then weak transmission links 
protect you from the outside world. So there is a strong 
economic incentive not to jeopardize your generation 
investments. And good, functioning RTOs, properly structured 
with the rights to either build or force the construction of 
transmission, would solve most of those problems.
    Mr. Whitfield. Mr. Chairman, my time has expired.
    Mr. Barton. Thank the gentleman.
    The gentleman from Oklahoma, Mr. Largent, the vice chairman 
of the subcommittee, is recognized for questions for 5 minutes.
    Mr. Largent. Thank you, Mr. Chairman.
    Once again, we are at another electricity restructuring 
hearing, and we hear from our entire panel that we really need 
to do something. The Federal Government needs to act on 
electricity. The consequences, if we don't, are dire. We hear 
voices saying that we can do this. It can be done.
    Yet, in expressing a little of my own frustration, I also 
understand that those of you at the table and in the room and 
around Washington are saying, we need to act. It is bad if we 
don't. We can do it.
    I am here to make sure that my constituency gets everything 
they want, and essentially killing any possibility that we 
really can get this done because not everybody can get 
everything they want and us to pass electricity restriction 
bill.
    Mr. Lane, I wanted to ask you, first of all, has the fact 
that the Federal Government not acted and yet held the specter 
that we are going to do something eventually frozen any 
investment in transmission or generation?
    Mr. Lane. Well, it certainly has not frozen investment in 
generation. In fact, I mentioned this whole new sector of 
companies that have developed and have become, frankly, quite 
large in terms of size that are very active in the development 
of generation that don't have these PUHCA restrictions. So, in 
many respects, PUHCA does create kind of an uneven playing 
field, because some have the restrictions, some don't.
    With respect to transmission, though, there has been a host 
of issues, not just the return element but also just 
environmental issues and the kind of State-by-State approval 
processes that have caused a lack of investment in 
transmission. But certainly there has been just overall 
uncertainty with respect to how that is going to get resolved. 
That has created a lack of investor enthusiasm in what we refer 
to as D&T companies, the distribution and transmission 
companies. You have seen their stock struggle in the last 
several years and their PE ratios, the evaluation metrics that 
investors use to value stocks at the very low end of the 
industry comparables.
    Mr. Largent. Thank you, Mr. Lane. That is a good segue into 
my next question and what I consider--you know, everybody here 
is also in agreement that the real issue is transmission and 
what do we do on transmission. And I view transmission in this 
battle to find an answer, a solution, from the Federal 
Government as kind of the Little Ram Top or Normandy or Pork 
Chop Hill or Tripoli of the entire electric restructuring bill 
that we are dealing with. And, to me, we all agree that we need 
more transmission.
    The other problem that we have currently, particularly in 
the wholesale sale area of transmission, is we have to define 
and clear up the rules of the road because that is really 
creating a lot of the complications, especially in light of the 
Northern State Power decision by the courts.
    So, my question and, really, the frustration and issue that 
I would like to put out there--I mean, how do we clearly define 
the rules of the road as it relates to bundled and unbundled 
sales? Because electricity doesn't discriminate whether it is a 
bundled or unbundled sale. Once it is--you know, the physics of 
it just don't--you can't discriminate what is bundled and 
unbundled. How do we do that, define, have clear rules of the 
road of bundled and unbundled sales without giving FERC 
additional authority? How do we do that?
    I would ask that question to any of the panelists.
    Mr. Sokol. Congressman, first of all, I agree with many of 
your comments; and transmission is where the dollars are going 
to be needed most and are lacking most. I think there is 
consensus on the bulk of these issues. I don't mean to in any 
way unfairly burden the committee, but I think what the 
committee needs to do is move industry restructuring forward, 
first of all, in a real fashion and force all the participants 
at the table to say what they have been saying. Because we 
don't actually have substantive disagreement with 90 percent of 
what is being said at this table from my standpoint and I think 
our industry's standpoint. But somebody needs to force us into 
the mode because we do have divergent, if you will, clients, 
and we need to be forced to actually put our real issues on the 
table. So I think that is one.
    The second issue is I think FERC largely does have that 
authority if it has the full direction to enforce it, implement 
it, monitor it and police it. But today that enforcement is 
largely shared with the SEC in a, frankly, very I think 
inconsistent way; and it needs to be more clarified. I think 
FERC needs more clarification than they do guidelines to a 
large extent because they have got the powers under the Federal 
Power Act.
    Mr. Largent. Okay.
    Mr. Levy. I agree that FERC has sufficient powers to 
control their jurisdictional areas, but there are many areas 
that fall outside of FERC control, mostly the federally owned 
municipal and cooperatively owned transmission companies; and I 
think there will need to be, if we want to make this a seamless 
blanket across the country, an expansion of FERC authority or 
at least, I guess, a parallel level of rules that would apply 
to Federal muni and co-op transmission companies to make sure 
that the rules are the same for all players.
    Mr. Largent. Okay. Well, let me just say I want to go to 
Mr. Svanda because I want to get your response to this issue. 
But also say that I don't think FERC's authority is sufficient, 
and I think the Northern States Power decision definitely 
complicated the issue of FERC authority. It didn't define it or 
clear it up. It made it more complicated and less sure.
    Mr. Svanda, I want to ask you about FERC authority over 
transmission but also see if you would respond to Mr. 
Whitfield's question about FERC citing authority and where you 
come down on that.
    Mr. Svanda. Sure. On the last issue first, I--and I may not 
be joined by a lot of my NARUC brethren, but I would support 
the concept of eminent domain at the national level. And I say 
that just not to beat the dead horse that I have said a few 
times in the course of this hearing, but there are issues that 
simply, in interstate transmission, that the State simply 
cannot get solved by ourselves. And that is a way to get to the 
solution. It has worked well in pipeline siting; and we would 
ask from the State level--I would ask, again, because this is 
not a NARUC position but it comes with me with my commissioner 
hat on, that we have a role in that process, that deference be 
paid to what the States have accumulated by way of knowledge on 
siting issues, that any eminent domain powers be used in a way 
that is sensitive to the issues that I think only the States 
can identify.
    But, with that said, we need ways to also get the job done 
and just get on with it.
    On the issue of transmission, well, if you could give me 
the first question again, please.
    Mr. Largent. Well, I see my time has expired. If he just 
would respond to the question. It is, basically, how do we 
clear up the rules of the road without giving FERC more 
authority than it currently has?
    Mr. Svanda. Okay. When you initially asked the question I 
was not even going to respond, because I am not certain that it 
can be done without giving some additional authority to FERC. 
When the other respondents started to add on in the direction 
of maybe we do need some additional authority there, then I got 
comfortable and raised my hand.
    I did indicate in my earlier comments again that there are 
decisions that get made, however, at the national level that 
can kill some State efforts in moving to a restructured 
marketplace.
    And you are out of time, so I am out of time. I do have a 
real specific Michigan example in that regard that I would be 
happy to share at a later time.
    Mr. Largent. Yield back, Mr. Chairman.
    Mr. Barton. The gentleman yields back the balance of his 
time.
    The Chair would--Mr. Luther, wish to ask questions?
    Mr. Luther. No.
    Mr. Barton. Mr. Stearns, a member of the full committee and 
a distinguished subcommittee chairman who has a number of bills 
on this issue, is not a member of the subcommittee but is 
recognized for 5 minutes for questions.
    Mr. Stearns. Thank you, Mr. Chairman. I appreciate your 
courtesy. Although I am not a member in the 107th Congress of 
this subcommittee, I was in the 106th; and I wanted to 
encourage you, too, on these hearings. I think you are doing a 
terrific job. I think you have been told that.
    But my point in coming down here is to talk a little bit 
about PURPA. As you know, Mr. Chairman, I have a bill which is 
H.R. 381. I have offered this same bill in the 104th, 5th, 6th 
and 7th Congress. You had my entire language made a part of 
your bill in the 106th Congress, and I think that was 
excellent. So I am down here to perhaps ask a question to Mr. 
Levy.
    It indicates, some of the information we have, that the 
cost of PURPA is costing electricity consumers about $8 billion 
a year in excess power costs; and the Resources Data 
International, RDI, places the above-market cost of purchase 
power contracts, most of which are PURPA obligations, at about 
$50 billion since PURPA has passed legislatively. So the 
argument is that, if it has cost electricity consumers $8 
billion a year in excess power costs and, in fact, the Utility 
Data Institute found that PURPA was the single largest factor 
in explaining the regional disparity in electric prices, thus 
the facts are clear that PURPA has harmed and continues to harm 
consumers with excess costs. So, Mr. Levy, we have heard 
arguments that PURPA should not occur in the absence of a 
competitive market.
    I believe Mr. Morris earlier mentioned that a competitive 
market is not yet realized and during the consideration of the 
California emergency bill QF supported a proposal to not only 
sell into the market for nonpayment but also to sell any excess 
power they may produce. In your opinion, does this indicate a 
sufficient wholesale market for QFs to sell their power?
    Mr. Levy. There is no doubt that in every market that is 
currently competitive QFs could sell their power into the 
market without limit. California was an example where we 
actually saw QFs trying to get out of their existing contracts 
so they can sell into the free market. But I know of no market 
where a--because of the 1992 Energy Policy Act, which created 
the opportunity for generators to sell to the market, I know of 
no market where a QF needs the protections of PURPA anymore to 
sell into the market.
    Mr. Stearns. So, in fact, it is an impediment to the 
competitive market. And does it make sense to condition repeal 
of a Federal mandate which impedes a competitive market only 
upon the realization of this competitive market at a later 
date?
    Mr. Levy. Well, I believe the--again, there is the line you 
draw between previous obligations that were entered into prior 
to the market developing and new obligations. There is no 
reason to have PURPA around anymore, probably hasn't been for 
many years. So we certainly believe it is appropriate to repeal 
the mandatory purchase obligations of PURPA prospectively.
    Mr. Stearns. Mr. Morris, I mentioned your name. You are 
welcome to provide any comments that you like.
    Mr. Morris. On that particular item I don't have any 
specific comments at this time, Congressman.
    Mr. Stearns. Okay. Now, Mr. Chairman, I think my point in 
being offered the opportunity to speak is just to indicate, 
which I am sure you will agree with, is the idea of the 
immediate repeal of PURPA is necessary, and I hope that the 
subcommittee will continue.
    Thank you very much, Mr. Chairman; and I yield back the 
balance of my time.
    Mr. Barton. Thank you. The ranking member says we are not--
he hopes I don't agree too quickly to that. There may be some 
constraints, but, in general, I am very much where the 
gentleman from Florida is.
    Okay, does Mr. Walden wish to ask questions of this panel?
    Mr. Walden. No, Mr. Chairman. Not at this time.
    Mr. Barton. Seeing no other member present, we want to 
thank you, gentlemen. We may have written questions for the 
record. If we do, we hope you reply quickly.
    We are going to be drafting a bill in the next 2 to 3 
weeks, and we are going to circulate that bill for discussion 
in early September. We hope to finish our other hearings and 
begin to mark the bill up in late September or early October. 
So thank you for your commentary, and we look forward to 
working with you.
    We would like to have our next panel come forward as soon 
as the first panel vacates the table.
    Mr. Luther, I was correct that you did not want to ask 
questions, is that correct? My staff thought I skipped you.
    We want to welcome our second panel. We have Mr. Mark Hall, 
who is the Vice President of External Affairs for Trigen Energy 
Corporation. We have Mr. Richard Brent, the Director of 
Government Affairs for Solar Turbines, who is here on behalf of 
the Distributed Power Coalition of America. We have Mr. Marc 
Yacker, who is Director of Government and Public Affairs for 
Electricity Consumers Resource Council. We have Ms. Kathleen 
Magruder, who is the Vice President of Law and Government 
Affairs for New Power Company. And we have Mr. Thomas Starrs, 
who is with Kelso Starrs and Associates.
    Welcome, gentlemen and lady. Your statements are in the 
record.
    We are going to start with Mr. Hall. We recognize you for 6 
minutes to elaborate on it.

 STATEMENTS OF MARK HALL, VICE PRESIDENT OF EXTERNAL AFFAIRS, 
     TRIGEN ENERGY CORPORATION; RICHARD BRENT, DIRECTOR OF 
 GOVERNMENT AFFAIRS, SOLAR TURBINES INCORPORATED; MARC YACKER, 
DIRECTOR OF GOVERNMENT AND PUBLIC AFFAIRS, ELECTRICITY CONSUMER 
 RESOURCE COUNCIL; KATHLEEN E. MAGRUDER, VICE PRESIDENT OF LAW 
   AND GOVERNMENT AFFAIRS, NEW POWER COMPANY; AND THOMAS J. 
          STARRS, KELSO STARRS AND ASSOCIATES, L.L.C.

    Mr. Hall. Thank you, Mr. Chairman. It is a pleasure to be 
here.
    My name is Mark Hall with Trigen Energy Corporation based 
in White Plains, New York. If New York City is a small village 
north of here, then White Plains is a remote outpost. Certainly 
appreciate your comments and your opening statement in support 
of the notion that uniform interconnection standards will be 
included in a markup to be coming forward.
    Trigen is an owner, operator and developer of combined 
heat, power and distribute generation projects across the 
country. We have operations in 22 States.
    And to the point that Chairman Tauzin raised in his 
remarks, I think our company is emblematic, as is many of the 
others at this table today, of this notion that we have moved 
away from a time when we had the new light plant of the 
chairman's grandfather to a time where we need to be moving 
forward with innovative technology, where we need to be pushing 
new technologies into the market place. And this hearing and 
its focus on the need to address barriers that exist to 
competitive supply of energy very much and rightly so focuses 
on the issues of moving and the problems of moving modern 
innovative technology into the marketplace.
    It is for that reason that we are pleased to support H.R. 
1945, which establishes uniform interconnection standards at 
both the distribution and the transmission levels. This bill, I 
think, very much represents a consensus position that you heard 
reflected on the first panel this morning that it strikes a 
balance between the need for uniform technical standards but 
that rightly allows the States to implement those standards, 
that allows them to determine the most appropriate way to 
insure that those standards are implemented.
    Also, the bill, H.R. 1945, includes the provision of back-
up power at just and reasonable rates for all facilities, not 
just facilities that may be QFs or small power production 
facilities under PURPA currently, but all facilities that might 
participate in a market, to allow that marketplace to be more 
competitive and to allow everyone to participate, and to the 
extent that the back-up power provisions in H.R. 1945, along 
with the interconnection provisions were adopted.
    One of the very important elements that people are trying 
to protect in PURPA would be addressed in another fashion, thus 
taking a lot of the pressure off the concerns over the 
prospective repeal of the must-sell provision of PURPA, which 
many of us are concerned with in the smaller power development 
community is the current obligation for utilities to sell back-
up power in some cases, back-up power that they don't even 
control.
    So as we move into these emerging and changing markets it 
is a bit complicated, and we need to think about modernizing 
our energy regulations to fit and work in concert with more 
modern energy technologies that can move into that marketplace.
    I would also just like to note in my testimony, address a 
number of other barriers that exist to competitive supply. 
There have been several bills that include, and I believe that 
H.R. 4 that was mentioned this morning also includes the sort 
of the full characterization of those barriers and insuring 
that agencies on an ongoing basis look at those barriers to the 
deployment of technologies such as the technologies that we use 
in our projects. We strongly encourage that kind of ongoing 
assessment of barriers and systematic addressment of those 
barriers.
    Thank you for having me here this morning.
    [The prepared statement of Mark Hall follows:]
 Prepared Statement of Mark Hall, VP, External Affairs, Trigen Energy 
                              Corporation
    Mr. Chairman and members of the Committee, thank you for allowing 
me to testify before you today on barriers to competitive generation 
and in particular in support of this committees desire to address 
legislative proposals to remove barriers to combined heat and power 
(CHP) and other forms of distributed generation (DG). My name is Mark 
Hall, and I am the Vice President of External Affairs for Trigen Energy 
Corporation, based in White Plains, NY. Trigen owns and operates some 
of the most efficient power plants in the world. We accomplish this by 
deploying CHP, DG and leveraging other modern technologies in 
innovative ways.
    Trigen currently owns, operates or otherwise manages fifty-one 
plants located in twenty-two states, and the District of Columbia. 
Trigen is the proud recipient of many prestigious awards recognizing 
our innovation, leadership in the energy industry and commitment to 
environmental protection. This includes two awards from U.S agencies: 
the Energy Star Award from the U.S. EPA in recognition of our 
leadership in CHP projects and the Climate Protection Award from the 
U.S. EPA for corporate leadership in reducing greenhouse gas emissions. 
But more important than awards recognizing our environmental 
stewardship is the fact that we would not be selected to design, build 
own or operate on-site CHP projects for our customers if we were not 
able to provide substantial economic and reliability benefits in 
addition to outstanding environmental performance.
    The nearby University of Maryland College Park is an excellent 
example. Trigen and a partner were selected by the University to build 
and operate a new state-of-the-art CHP facility for the campus as well 
as to manage the on-site utilities while working with the campus staff 
to improve overall efficiency. The project is expected to save the 
University of Maryland system $6 million dollars per year while 
reducing regional nitrogen-oxide emissions by 9,800 tons per year and 
carbon dioxide emissions by 3.5 million tons over the 20 year life of 
the contract. We were the recipient of the 1999 Project Award from the 
National Council for Public-Private Partnerships because of our ability 
leverage technology in ways that were both economically and 
environmentally beneficial to all parties.
    Despite these economic and environmental benefits, there are a 
variety of institutional and regulatory barriers that prevent CHP from 
achieving its full competitive potential. These barriers 
inappropriately reduce the economic viability of CHP projects, slow 
their development and implementation and in some cases simply make them 
impossible to complete. H.R. 1945 is an attempt to remove the 
interconnection and backup power barriers and allow Trigen and other 
companies to increase the beneficial application of CHP. Although H.R. 
1945, introduced by Rep. Jack Quinn and with an additional 13 
cosponsors covers some of the issues, there are additional factors that 
must be addressed to fully remove the barriers.
    Mr. Chairman, Trigen's plants and employees are at work every day 
showing how efficient energy production is both good for business and 
good for the environment. By removing the barriers to utilizing CHP and 
other highly efficient DG, Congress can reward investors, benefit 
consumers, strengthen our economy and clean up our air.
    The issues you have asked this panel to address are of critical 
importance to all of us. Energy sector competition is already upon us, 
with the States leading the way. The Federal government must rise to 
the task of addressing the barriers to competition that inherently lend 
themselves to national legislation, matters that cannot be responsibly 
dealt with in a piecemeal, State-by-State manner.
    H.R. 1945 is the result of many months of thoughtful work that 
reflects the benefit of numerous parties working together to arrive at 
consensus language that addresses the need for a uniform nationwide 
interconnect standard. H.R. 1945 marks a critical step in efforts to 
improve the environment and electricity markets by encouraging the 
deployment of CHP and other DG. I would like to point out that S. 933 
is the Senate companion bill to H.R. 1945. The only difference between 
the two is that H.R. 1945 includes a provision addressing tax 
depreciation that does not exist in S. 933. Trigen offers its full 
support of both.
    In addition to addressing why there is a critical need for uniform 
nationwide interconnection standards, I would also like to highlight 
four other issues that must be addressed if we want to remove the most 
formidable barriers to deploying CHP and other highly efficient DG 
technologies. They are: Backup power as related to PURPA repeal, 
clarifying tax depreciation schedules, rethinking new source review and 
establishing output-based standards. First, I will address interconnect 
standards and the immediate need for H.R. 1945.
                            INTERCONNECTION
    The National Energy Policy proposal recently released by the White 
House, like similar proposals of the last Administration, recognizes 
the economic and environmental benefits of CHP and other highly 
efficient DG systems. One formidable barrier to taking advantage of 
those benefits is the lack of uniform nationwide interconnection 
standards.
    The current process for determining the appropriate technical 
requirements for the interconnection of new energy projects with the 
distribution or transmission system is often unnecessarily lengthy and 
expensive and the specific requirements can vary arbitrarily from state 
to state, utility to utility, site to site. Incumbent utilities that 
may not want to face competition may attempt to cloak anticompetitive 
behavior in the guise of technical disagreement over interconnection. 
We recognize that it is essential for interconnections to be safe and 
reliable, but interconnection standards can be both safe and reliable, 
and uniform. Bringing uniformity to interconnection through a uniform 
nationwide technical standard will reduce uncertainty, lower costs, and 
facilitate deployment of modern CHP technology, across the country. 
Interconnection language must be sufficiently broad to help all 
generators connect to the distribution and/or transmission grids. H.R. 
1945 provides for interconnections at both levels. The language does 
not pick winners and losers, but maximizes flexibility for determining 
whether the facility is connected to the transmission grid or the 
distribution grid. In addition, it is important that the language does 
not unnecessarily infringe upon States' rights to manage their 
respective distribution grids. The benefits of uniformity require that 
the standards apply to all states.
    I think it is important to give you an example of the 
interconnection problem. Trigen has a great deal of experience 
interconnecting various sized generators with the distribution and 
transmission grid. We have done it literally dozens of times. 
Technically, it is a pretty straightforward task but in practice it can 
be a slow painful process that raises costs and delays projects that 
otherwise could be delivering important economic and environmental 
benefits. In 1998, Trigen approached a utility to request 
interconnection for a 703 kW generator to be installed in a downtown 
office building. The small system would supply the building's electric 
load and air conditioning. Yet, two years later, we were still 
negotiating with the utility over so-called ``technical'' issues. 
Months after receiving our initial request for interconnection, the 
utility asked that Trigen design a different, specialized 
interconnection. Trigen completed the new design at a significant 
additional cost. The utility rejected the design. In response, Trigen 
offered to use guidelines developed by Consolidated Edison in New York 
City, even though the ConEd guidelines were disproportionately 
burdensome and expensive given the very small size of the installation. 
The utility agreed, but after Trigen complied with these requirements, 
the utility imposed further ``technical'' restrictions on Trigen's 
ability to operate the facility. It took over two years to resolve this 
issue. The barrier related costs of completion were over $ 88,000.
    One would strongly suspect that this was anti-competitive behavior 
masquerading as technical disagreement which successfully prevented the 
unit from operating for two years. This is but one of countless 
examples. In fact, DOE published a report in May of 2000 entitled 
Making Connections that memorialized this example and numerous others 
from across the country. H.R. 1945 will address many of the 
interconnection barriers highlighted in that report. Passage of H.R. 
1945 will help manufacturers of CHP and DG technology achieve a plug 
and play economy of scale, lower costs and encourage investment in CHP 
and DG technology.
          THE SHORTCOMINGS OF H.R. 1045 REGARDING INTERCONNECT
    Like H.R. 1945 and S. 933, H.R. 1045 recognizes the need for a 
uniform interconnect standard. However, H.R. 1045 falls short of 
addressing the entire scope of that need. H.R. 1045 calls only for a 
standard for interconnect to the distribution grid. Failure to address 
transmission interconnect would result in an enormous lost opportunity 
to ensure all the same benefits H.R. 1045 seeks to achieve at the 
distribution level. Addressing only distribution would create winners 
and losers by giving utilities the ability to game the system by 
reclassifying distribution as transmission, thereby avoiding the 
uniform standards requirement. Providing standards for distribution 
only would also result in inefficient choices in that generators may 
opt for distribution interconnection only because uniform standards are 
available. Stream-lining interconnect at the transmission level will be 
one more encouragement to investing in larger scale DG like on-site CHP 
plants whose efficiencies can bring immediate large scale reductions in 
fuel consumption and emissions.
    In addition, H.R. 1045 does not include a provision addressing the 
right to back-up power at just and reasonable rates. Most CHP and DG 
assets require back-up power as insurance to the DG/CHP customer that 
they will have electricity in the event the DG/CHP asset has scheduled 
or unscheduled down time. Without a guaranty of affordable back-up 
power many DG/CHP projects will never get off the ground. I will 
address this issue in more detail below.
    Finally, H.R. 1045 includes limiting language that the DG asset 
must be designed to serve ``retail electric customers at or near the 
point of consumption''. H.R. 1945 does not include any such limitation. 
If we want to encourage the deployment of highly efficient CHP and DG 
assets we should not place any limitation on what customers are served 
or where it can be located in order to take advantage of uniformity. 
This provision would limit competition to a small range of DG assets to 
the exclusion of many others. This is the very problem Congress should 
be seeking to eliminate.
 CONCERNS REGARDING H.R. 2460, THE ``COMPREHENSIVE ENERGY RESEARCH AND 
                            TECHNOLOGY ACT''
    In H.R. 2460, a bill passed by the House Science Committee last 
week, a provision on interconnection standards for distribution was 
added during the mark up. This language raises concerns in that it has 
not been studied or analyzed by most in the distributed power and CHP 
community. In addition, the amendment does not address transmission 
interconnection.
   BACKUP POWER AND THE PROSPECTIVE REPEAL OF PURPA'S ``MUST-SELL'' 
                               PROVISION
    Hand-in-glove with the issue of interconnection standards is the 
availability of reasonably-priced back-up power. Historically, back-up 
power was guaranteed at just and reasonable rates to facilities that 
met either the Qualifying Facility or Small Power Production Facility 
definitions under PURPA. However, as technology and markets have 
evolved, the need for back-up power at rates that are just, reasonable 
and not unduly discriminatory is important to a wide-range of projects 
that might not meet these historic definitions, regardless of whether 
the project is interconnected to the transmission or distribution grid. 
H.R. 1945 remains respectful of state authority by allowing States to 
determine the just and reasonable rate for back-up power at the 
distribution level. The Bill also ensures that until there are open 
markets where a facility can competitively purchase backup power, the 
local utility must provide such backup power at nondiscriminatory 
rates.
    CHP and other DG systems rely on the ability to purchase backup 
power from the grid in the event that they temporarily fail to operate 
or must shut down for maintenance. Under current PURPA laws the local 
utility ``must sell'' backup power to qualified stand alone CHP 
facilities. Many proposed restructuring bills would repeal both the 
``must buy'' and the ``must sell'' requirements of Section 210 of 
PURPA. The ``Right to Back-up Power'' provision of H.R. 1945 is a 
safety measure that will ensure back-up power at just and reasonable 
rates if the ``must sell'' provision of PURPA is repealed and there is 
no open access to purchase of electricity in a given state. Elimination 
of PURPA's ``must sell'' requirement without the protection of the 
right to back-up power will leave new entrants and existing DG at the 
mercy of the local utility, subject to discriminatory pricing or 
outright denial of back-up power.
                       TAX DEPRECIATION SCHEDULES
    The current tax code, based on a somewhat obsolete view of the 
energy industry, currently does not allow depreciation of CHP and DG 
technologies in ways that reflect those assets' physical and economic 
lives. This inappropriate treatment can discourage investments in CHP 
and DG technology. For example, the IRS allows a gas turbine located 
inside a building for on-site generation use to be depreciated over a 
39-year period while the same gas turbine used for transportation 
(e.g., on an airplane) depreciates in one quarter of the time. The 
moving parts of the turbine used for electricity and heating may be 
replaced as many as five times while the owner continues to depreciate 
the original investment. Shortening the time over which this equipment 
depreciates would remove an impediment to investment in what is 
otherwise an efficient and environmentally beneficial technology.
    New and small turbines have different physical properties and will 
generally operate under quite different conditions than large turbine 
units employed by traditional electric utilities and, consequently, 
will have different service lives. Further, the competitive marketplace 
will force energy suppliers to replace or ``upgrade'' standing 
equipment before it fails, since installation of more efficient 
technology offers lower costs to customers and the opportunity to hold 
or capture market share for competitive energy suppliers. We expect 
that energy generation equipment will come and go in the marketplace in 
a manner that strongly resembles that of modern computers assets which 
outlive their economic lives long before they cease to work properly.
    Congress should direct the Internal Revenue Service (IRS) to set a 
depreciation schedule of seven (7) years for industrial and utility 
facilities and ten (10) years on Building CHP (BCHP) assets, which 
reflects the true technical and economic life of most systems. I have 
attached to this testimony recommended modifications to the Internal 
Revenue Code from the US Combined Heat and Power Association 
(Attachment A). Trigen is a member of the USCHPA and supports all of 
its recommendations.
                           NEW SOURCE REVIEW
    The new source permitting program known as New Source Review (NSR) 
was developed over 20 years ago to reduce air pollutant emissions. At 
the time the focus was on reducing smokestack emissions and NSR focuses 
primarily on requirements for end-of-pipe, add-on control technologies. 
Add-on controls reduce emissions but add cost and reduce efficiency.
    Over the last 20 years, we have learned that a much better approach 
to pollution control is to avoid entirely the generation of pollution 
through lower emitting processes and reduce their impact through 
increased efficiency. Pollution prevention (P2) and increased 
efficiency reduce emissions while also reducing capital and operating 
costs. They result in processes that are cleaner and cheaper with lower 
demand on all natural resources. This is clearly the direction that we 
need to move in order to achieve a vital economy and a healthy 
environment and CHP is perhaps the best example of this opportunity.
    Unfortunately, NSR does not give any credit for efficiency and 
gives little or no credit for pollution prevention. It is constantly 
driving projects away from these positive approaches and back to the 
old sidetrack of add-on controls. It discourages the application of 
existing P2 technologies and the development of new technologies. U.S. 
companies have learned that they should not invest in the development 
of cleaner and higher efficiency technologies because they will not be 
able to permit them. This is a multidimensional loss to the U.S. 
economy. In contrast, our foreign competitors have made great strides 
in these areas, which are reflected in their high efficiency use of 
energy.
    As an example, several of our recent projects have been based on a 
particular small gas turbine generator. As an electric generator only, 
the turbine is less than 30 percent efficient. However, our CHP 
applications using that same piece of equipment are anywhere from 80 to 
over 90 percent efficient. Put another way, we provide more than three 
times as much energy to the customer from the system for the same 
amount of emissions and energy input.
    It is only common sense that our regulatory system should recognize 
this energy and environmental benefit. But it doesn't. In the eyes of 
NSR, there is no difference between the two systems. Since NSR is a 
cost-based system, it is requiring us to duplicate capital investment 
to use add-on controls where we have already provided a reduction 
through efficiency. In many cases, the project ``won't pencil'' if we 
have to pay twice, and a beneficial project is cancelled.
    This fundamental flaw of NSR is only one of several ways in which 
the regulation has outlived its usefulness. The program relies on a 
variety of highly technical standards to determine which new or 
existing units will be required to apply emission controls. Over the 
years, these standards have become more and more arcane and 
contentious. The very high cost and uncertainty involved in the 
application of NSR to both new and existing units has created a huge 
disincentive for operators to maintain and improve the performance of 
these units. By holding out for the maximum possible improvement at all 
times, the program has discouraged even the normal improvement that 
should happen without regulation. By excluding the effects of pollution 
prevention and efficiency, it has excluded the best possible solutions 
from consideration and left us with proliferating lawsuits as the only 
result.
    Because CHP, by definition, produces two types of energy output 
(steam & electricity) from one fuel input, its treatment under NSR is 
especially difficult. The system sometimes tries to force us to combine 
our facilities with those of our clients in ways that are commercially 
impossible. In other cases it deprives us of credit for emission 
reductions that are legally verifiable and creditable.
    Output-based regulation, which relates the emissions to the useful 
energy produced is another regulatory concept that would help to 
address these problems. There has been growing acceptance of this 
approach as a way to send the proper signals through environmental 
regulation. Unfortunately, it seems to be difficult to integrate this 
approach into the structure of NSR.
    We have been working with the EPA for more than three years to find 
appropriate ways to achieve the universally recognized benefits of CHP 
within the NSR structure. I am sorry to report that our progress to 
date has been limited. In large part this is due to the fundamental 
structure of the program. In the end, we are forced to conclude that, 
at least for the generation of heat and power, the NSR program is a 
grandfathered regulation that has outlived its usefulness and needs to 
be replaced with a more modern and efficient regulatory structure. We 
believe that a properly designed cap and trade program that provides 
guaranteed emission reductions over the entire sector would provide 
better environmental results and encourage new, more efficient 
technology. I have attached a copy of a multi-pollutant strategy 
(Attachment B) that Trigen and four other energy companies have 
developed as a substitute for NSR as it applies to heat and power 
generation.
                         OUTPUT-BASED STANDARDS
    Currently, efficiency is measured by an input-based standard that 
measures fuel consumption as opposed to energy output. Under this 
approach, the efficiency of CHP is not recognized. By way of example, 
for every one unit of fuel consumed by a CHP plant two units of energy 
are produced steam and electricity. CHP is twice to three times more 
efficient than a typical central generation plant that only produces 
one unit of energy for every one unit of fuel consumed because it is 
not capturing the heat off the combustion process.
    The establishment of output-based standards would allow facilities 
to count their fuel to end use energy efficiency toward their 
environmental compliance requirements. Output-based standards encourage 
efficient and inherently cleaner plants. Trigen has been an active 
participant in numerous venues established to develop output-based 
standards. Trigen seeks establishment of progressive regulations that 
replace BACT and LAER with a cap and trade program coupled with a 
universal allowance allocation of pounds of pollution per megawatt hour 
of electricity produced and pounds per megawatt hour of thermal energy 
produced.
   encouraging competitive generation through investment tax credits
    Tax credits are typically offered by the Federal government to 
obtain public benefits by prompting private parties to make capital 
investments that they would not so readily make otherwise or to 
overcome other short-term barriers to otherwise feasible activities. As 
such, an investment tax credit (ITC) is a good short-term mechanism to 
promote CHP systems, which offer very significant public and private 
economic and environmental benefits, but can often be more difficult 
for the private sector to deploy than electric-only projects because of 
the complexity inherent in assembling a ``thermal load'' or set of 
heating/cooling customers.
    H.R. 2511-Section 113 proposes to amend the IRC to provide a tax 
credit for CHP property. While the general proposition is laudable, the 
language of Section 113 has two significant shortcomings and one that 
defeats the purpose of offering a tax credit from the outset. The first 
is it limits the eligible equipment to those with an electrical 
capacity of more than 50 kW. We applaud requirements for output 
efficiency but see no reasonable explanation for limiting the size of 
eligible equipment. Second, it fails to offer any credit for the 
equipment used to deliver energy output of CHP systems. In the case of 
district energy systems, the steam distribution pipes are one of the 
most capital intensive parts of the overall investment. Third, and most 
importantly, Section 113 extends the tax credit only to companies that 
use a ``normalized method of accounting''. This requirement would mean 
that Trigen would not be eligible to use these tax credits in fifty of 
our fifty-two plants. A ``normalized method of accounting'' is the 
method of accounting used by regulated power plants, very few of which 
utilize CHP and DG. This accounting limitation defeats the purpose for 
offering the tax credit in the first place. The very companies who will 
deploy CHP and DG assets are precluded from taking advantage of this 
benefit.
    Congress should direct the IRS to provide a ten (10) percent ITC 
for new thermal energy distribution systems at district energy CHP 
facilities. I have attached to this testimony recommended modifications 
to the Internal Revenue Code from the US Combined Heat and Power 
Association (Attachment A). Trigen supports all of its recommendations.
                               conclusion
    Given the inevitability of competition in the electricity market, 
and both national and global trends that will guide the future of 
energy production in this country, I believe that emerging technologies 
are serving and will serve an indispensable purpose in meeting goals of 
energy efficiency and environmental demands. I urge this committee to 
pass H.R. 1945 and to take a proactive stance on addressing the other 
concerns I have raised here today. I thank the subcommittee for the 
opportunity to appear before you. Thank you, Mr. Chairman.
                              Attachment A
                 us combined heat and power association
           Memo Committee on Ways & Means--Dated July 5, 2001
                   U.S. Combined Heat and Power Association
                                                       July 5, 2001
The Honorable William M. Thomas
Chairman
Committee on Ways & Means
U.S. House of Representatives
Washington, DC 20515
    Dear Mr. Chairman: I am writing on behalf of the U.S. Combined Heat 
and Power Association (USCHPA) to express support for the inclusion of 
tax credits and shortened depreciation for combined heat and power 
(CHP) systems in the energy tax incentive legislation now under 
development by the Ways and Means Committee.
    A wide range of interests has identified CHP as an important 
component in the United States energy future. By using an integrated 
system to meet heating, cooling and power needs, CHP can achieve much 
greater efficiencies and lower pollution than can be achieved with 
conventional, separate systems. The Bush administration has singled out 
CHP as an important efficiency technology in the National Energy Policy 
Report. The American Chemistry Council provided comments to the 
Committee on June 19, 2001 supporting CHP. The American Council for an 
Energy-Efficient Economy, working in concert with other public interest 
groups, has identified CHP as an important energy efficiency strategy.
    The members of USCHPA have worked for many years on programs and 
policies to promote CHP in industrial facilities, commercial and 
residential buildings and district energy systems. We view CHP in these 
three market segments as key to achieving the CHP Challenge of doubling 
installed capacity by 2010, committed to by both the Department of 
Energy and the Environmental Protection Agency, and recently reaffirmed 
in the Bush Administration's National Climate Change Technology 
Initiative. We have also worked with Congressional offices on the 
development of tax proposals for highly efficient CHP, including H.R. 
1045 (Wilson), H.R. 1945 (Quinn), and H.R. 2108 (Matsui). These bills 
all seek the same goal of encouraging clean and efficient CHP, but each 
takes different approaches. We have received requests for our 
association to address these differences. We hope that this response 
will be helpful as the Committee prepares to take up an energy tax 
incentive bill.
    We recommend that tax policies for new CHP include the following 
features:

1. Allow a seven (7) year tax depreciation schedule for industrial and 
    utility CHP assets. The current depreciation schedules of between 
    ten and twenty-years for energy assets do not fairly reflect the 
    useful life of most modern CHP technologies. A seven-year schedule 
    is more realistic. We expect that CHP generating assets will come 
    and go in the marketplace in a manner that strongly resembles that 
    of modern computers--assets which outlive their economic lives long 
    before they cease to work properly. This is an entirely different 
    situation from the regulated monopoly environment in which 
    economically non-competitive, but physically sound plants remain in 
    service for decades with no improved efficiency.
2. Allow a ten (10) year depreciation on Building CHP (BCHP) assets. 
    These assets are currently depreciated at 27\1/2\ years for 
    residential property and 39 years for commercial buildings. The 
    energy needs in buildings are rapidly changing as the market and 
    technology evolves. Modern BCHP systems integrate power, heating 
    and cooling using equipment for greater efficiency and reduced 
    costs. These technologies are rapidly evolving, and advances are 
    likely to make equipment obsolete before it is depreciated under 
    current schedules, discouraging its replacement with cleaner and 
    more efficient, advanced systems.
3. Provide a ten (10) percent investment tax credit (ITC) for CHP 
    thermal energy distribution property, which we recommend be 
    excluded from the shortened depreciation treatment above. This 
    thermal energy distribution infrastructure is an important element 
    in district energy systems, which supply heating and cooling for 
    buildings and industry. District energy systems, with an estimated 
    year 2010 potential of 19 Giga-Watts of CHP, are critical to 
    achieving the goal of doubling CHP by 2010. The proposed thermal 
    energy distribution investment tax credit, combined with adjustment 
    of depreciation lives for CHP production equipment in #1 and #2 
    above, encourage the implementation and expansion of CHP in 
    district energy systems.
4. Provide that the ITC noted in #3 above be assignable. Governments or 
    non-profit entities such as universities, schools and hospitals 
    that would not benefit from the revised tax treatment own many 
    district energy systems. By making the credit assignable, the 
    credit could be transferred to an entity that could make use of the 
    benefit, thus allowing the project to receive the incentive.
5. That the Federal income tax laws be amended to require that only 
    ``Qualified CHP Assets'' are eligible to take advantage of the 
    depreciation schedules noted in #1 and #2 above, and ITCs noted in 
    #3 above. For tax purposes the term ``Qualified CHP Assets'' 
    (QCHPA) should include equipment and related facilities used to 
    produce usable energy products through CHP, excluding assets used 
    to transport fuel to the generating facility. QCHPA should include 
    all equipment necessary to generate and deliver usable energy 
    products through CHP, including, but not limited to, prime movers 
    such as engines and turbines, boilers, air and water filtration, 
    pollution- and noise-control, pumps, steam delivery pipes and 
    electrical switchgear. To further define criteria to be a QCHPA, 
    the association proposes the following restrictions:
    The term ``qualified CHP asset'' refers to applications of 
technologies that achieve an average annual fuel-conversion efficiency 
meeting or exceeding the following levels:

 For systems with a total usable energy output of less than 1 
        MW per hour of power output, an efficiency of 60%,
 For systems with a total used power output of 1 MW, but less 
        than 50 MW, an efficiency of 63%, and
 For systems with a total used power output of 50 MW or 
        greater, an efficiency of 66%.
    In addition, ``qualified CHP asset'' must meet the following 
performance criteria:

 Sum of all used thermal energy products must constitute at 
        least 20 percent of the technology's total usable energy 
        output, and
 Sum of all used power must constitute at least 20 percent of 
        the technology's total usable energy output,
    Where:

 The term ``used power'' refers to electric or mechanical 
        energy generated by a technology that is used to do work. These 
        energy forms include, but are not limited to, electricity, 
        shaft power, and compressed air.
 The term used thermal products refers to any media generated 
        by a technology that transports energy in the form of a 
        difference between its temperature and that of the surrounds in 
        a useful manner. Thermal energy media include, but are not 
        limited to, hot gases, steam, hot water, chilled water, and 
        refrigerant.
    However, in the following special cases, systems do not need to 
meet the minimum, fuel-conversion efficiency requirement above:

 Retroflt technologies that generate electricity using back-
        pressure steam turbines in place of existing pressure-reducing 
        valves, and
 Technologies that recover waste heat from industrial process.
    In the event that the cost to the Treasury of these proposed 
measures exceeds acceptable levels, we recommend restricting the 
maximum size of the CHP systems that would qualify for this tax 
treatment rather than modifying other provisions.
    Thank you for your attention to these views.
            Sincerely,
                               R. Neal Elliott, Ph.D., P.E.
                                     Chair, USCHPA Policy Committee
cc: The Hon. Charles B. Rangel
   The Hon. Jim McCrery
   The Hon. Michael McNulty
                              Attachment B
      clean power group multi-emission control strategy materials
     Clean Power Group's Multi-Pollutant Emission Control Strategy
    The power generation sector is a major contributor to U.S. air 
pollution. This situation has persisted for many years despite 
regulatory efforts to address it. Although older plants contribute most 
of the emissions, attempts to remedy the problem by regulating them 
have created increasing legal problems and contention between industry 
and regulators with relatively little environmental benefit. The 
uncertainty created by this situation has made it difficult for power 
generators to make rational business decisions about future investments 
in both old and new power equipment. The existing regulatory program 
encourages traditional add-on controls rather than new plants, 
efficiency and pollution prevention approaches that are more desirable. 
Neither does it encourage renewables or conservation.
    The combination of the shortcomings of current regulatory programs, 
the need for certainty, and knowledge of upcoming requirements for 
mercury and CO2 reductions have resulted in agreement 
between industry, regulators, and environmental groups that an 
alternative multipollutant regulatory approach is needed. The broad 
parameters of such a program are generally agreed to be:

 Commitment to future emission caps on multiple pollutants.
 Implementation through a cap and trade program.
 Relief from NSR requirements.
    The Bush campaign platform included these and added support for 
renewables and other new, clean technologies.
    A number of multi-pollutant proposals have been put forward by 
entities including the EPA, industry and Congress. None to date however 
meet all of the requirements. Most focus on cleaning up and providing 
regulatory relief to the old plants while giving little economic or 
regulatory support to new cleaner plants or renewables. Many also have 
little focus on NSR reform. Focusing only on the old plants will result 
in some emission reductions but will further extend the life of old 
inefficient plants and slow the needed capital turnover to new 
technologies. The long term solution to air pollution problems requires 
a transition to cleaner and more efficient technologies, which may 
actually be delayed by the focus on old plants. What is needed is a 
program that provides both regulatory and economic change.
    The Clean Power Group has developed a comprehensive multipollutant 
approach for power generation that addresses all of these issues. It 
uses a cap and trade regulatory approach that includes old and new 
sources, renewables and conservation and replaces existing command and 
control structures with flexible market-based approaches that provide 
the same environmental benefits with greater economic and regulatory 
efficiency.
Structure of the Proposal:
    We propose continuous declining caps for SO2, 
NOX, mercury and possibly CO2 with the ``glide 
slope'' of the decline known well in advance. The caps for each 
pollutant become tighter each year. With the continuous declining cap 
we propose a cost ``circuit breaker'' that stops the tightening for 
each pollutant if the average cost of allowances exceeds a 
predetermined cost threshold. This approach provides real, measurable 
emission reductions that continue to promote new generation and 
emission control technologies. The economy is protected from 
unreasonable costs of control while environmental performance 
improvement will continue indefinitely as long as costs of reductions 
(allowances) are reasonable. BACT and LAER are replaced for all covered 
sources because the declining caps provide a better form of progressive 
emission reduction. Review of local impacts will be maintained to 
prevent hot spots. New Source Performance Standards (NSPS) will be 
maintained to ensure that there is some emission rate ``backstop''.
    Allocation of allowances will be made on a consistent output basis 
to all generators and for end use efficiency measures. Allocation in 
this manner equally rewards highly controlled and highly efficient 
generators as well as renewables and conservation, which encourages 
modernization of our nation's energy infrastructure.
Key Messages:
 The replacement of disjointed and conflicting emission control 
        policies and initiatives with a coordinated multi-pollutant 
        emission control strategy provides better environmental 
        performance at a lower cost.
 A viable multi-pollutant approach must address and encourage 
        the development of modern, cleaner, and more efficient energy 
        generation using all fuels as well as the control of emissions 
        from existing power generation sources.
 Higher efficiency and lower emitting generators using all 
        available energy sources are key to meeting long-term emissions 
        goals economically.
 A cap and trade, multi-pollutant approach can be better for 
        the environment than command and control regulations as well as 
        economically more efficient.
 Appropriately designed cap and trade programs can provide the 
        same or better environmental protection and technology-forcing 
        function as traditional New Source Review (NSR) while reducing 
        regulatory overhead, reducing total control costs and promoting 
        investment in modern, efficient energy systems.
 The gradual approach spurs the development of new 
        technologies.
 The declining cap with a cost circuit breaker could provide an 
        alternative approach to carbon mitigation that provides real 
        reductions, without a link to Kyoto and without economic risk 
        to the U.S.
 The Clean Power Group is: Calpine, El Paso, Enron, NiSource, 
        and Trigen
    For more information contact: Joel Bluestein, (703) 528-1900, 
[email protected]
     the clean power group's declining cap/circuit breaker approach
    The Clean Power Group approach builds on many of the concepts of 
current cap and trade programs while replacing some outmoded aspects of 
existing environmental regulation and incorporating components to 
encourage new technologies, efficiency and pollution prevention. The 
proposed approach is a multipollutant cap and trade approach. A cap is 
set for each pollutant and each cap declines continuously at a preset 
rate, say 10 percent per year. The approach could be applied to three 
for four pollutants.
    Figure 1 shows a hypothetical example for SO2 emissions. 
The solid blocks show the commonly proposed multipollutant approach in 
which reductions take place in large cuts. These ``over the cliff' 
reductions are very disruptive to mechanical and economic systems. It 
is difficult for many sources to comply at the same time and the result 
is labor and equipment constraints, which then cause problems in energy 
markets as well as compliance problems. At these discontinuities, the 
emission trading markets that are supposed to help the sources weather 
the change also become disrupted and are of little value.
    The glideslope approach allows compliance to take place gradually. 
The lowest cost reductions are made first and ``shared'' around the 
sector through emission trading. Compliance installations can be made 
gradually and the vendors can gear up for the demand. Emissions markets 
are established early and can provide accurate price signals to all 
involved. Not least of all, emission reductions are made earlier than 
under the ``cliff' approach.
    Perhaps the most important effect, however is the effect on 
technology development. The U.S. experience in every pollution control 
program ever instituted has been that the cost of control has been less 
than estimated in advance. This has been due to the decreasing cost of 
technology, the development of better technology, and other market 
factors (such as railroad industry changes affecting the cost of low 
sulfur coal) that were not even considered in the pre-regulation 
analysis.
    The continuously declining cap approach takes advantage of this 
effect. By instituting a known glideslope, it provides an economic 
driver for new technology to be developed and brought to market and it 
allows time for the technology to be implemented. The expectation 
therefore is that the cost of control will continue to decline. For 
this reason, there is no predetermined limit to the level of emission 
reductions. The cap continues to decline as long as reductions can be 
made within a preset cost criterion (discussed below). If history is 
any guide, we will be able to ride this technology curve to emission 
levels well below those we would dare to predict today.
    The other critical advantage is that the source of potential 
improvement is broadened by including all sources of generation. Unlike 
current emission trading programs, which include and provide allowance 
allocations only to old fossil generators, this program would allocate 
allowances on an output basis to all electric generators including new 
clean generators and renewables. Equal allocation to new generators is 
critical to support the development and commercialization of new 
technologies of all fuel types. The system would also provide 
allocations to end-use efficiency projects on an equal basis to 
generation projects. A project that reduced consumption by 10,000 MWh 
would get the same allowance allocation as a project that generated 
10,000 MWh. Allocations would also be included for the full thermal 
plus electric output of CHP facilities. Thus the market forces would 
encourage technology improvements on all technology fronts and on all 
pollutants at once.
    For sources in the program the declining cap would replace the 
existing command and control new source permitting requirements (BACT/
LAER). In the first place, these requirements do not provide 
environmental value for sources that are under a cap. Incremental 
emission reductions under an emission cap simply get shifted to be 
emitted somewhere else under a cap. Moreover, the continuously 
declining cap provides the driver for continuing reductions in the 
sector overall without prescriptive technology requirements. It does so 
more effectively and cost effectively than the existing new source 
review system, which is not doing a good job. One of the first things 
that the proposed approach does is reduce emissions from 
``grandfathered'' plants since they are typically the lowest cost 
reductions available and will be ``squeezed'' out of the cap first.
    Some control requirements (new source performance standards) will 
be maintained as a safeguard. Review of local impacts and maintenance 
of the National Ambient Air Quality Standards will also be required to 
prevent local ``hot spots''.
    As described above, each pollutant cap will be reduced by a preset 
percentage each year. The expectation is that improving technology will 
allow this to continue at a reasonable cost. However, the program 
includes a cost ``circuit breaker'' for each pollutant. The circuit 
breaker operation is illustrated in Figure 2. The circuit breaker is 
expressed as a $/ton cost. As the cap tightens, we expect allowance 
prices eventually to increase. When the allowance price (averaged over 
a year) increases to exceed the circuit breaker level, the cap stops 
tightening. The cap does not increase but stays fixed. Over time, we 
expect that technology will improve and the allowance price will drop 
below the circuit breaker level. At that time, the cap starts to 
tighten again. In this way, the system continues to push technology and 
reduce emissions within a preset cost. At the same time it gives the 
regulated community certainty over the cost of required reductions, 
since the cost of allowances will be close to the circuit breaker level 
over time.
    The declining cap/circuit breaker approach provides a simpler 
approach to regulating emissions from the power generation sector. It 
is also an approach that encourages the use of cleaner, more efficient 
technology. Most important, it provides better environmental 
performance better than existing regulatory programs. The end result is 
a diverse, stable power sector with lower emissions and lower cost than 
achievable under other approaches.
    The Clean power Group is: Calpine, Enron, Trigen, El Paso, and 
Nisource.
    For more information contact: Joel Bluestein, 703-528-1900, 
[email protected], www.eea-inc.com/cleanpower/index.htm]
[GRAPHIC] [TIFF OMITTED] T4848.001

    Mr. Barton. Thank you, Mr. Hall.
    We would now like to hear from Mr. Brent for 6 minutes.

                   STATEMENT OF RICHARD BRENT

    Mr. Brent. Good afternoon, Mr. Chairman, distinguished 
members of the committee. Thank you for inviting me to speak to 
you today.
    My name is Richard Brent, and I am the Director of 
Government Affairs for Solar Turbines, a manufacturer 
headquartered in California, the once great and now humbled 
State. We are a wholly owned subsidiary of Caterpillar and 
consider ourselves one of the leading manufacturers of 
distributed general technology.
    In my testimony today I am also representing the 
Distributed Power Coalition of America as a member of its 
executive committee.
    I would like to thank you for the opportunity again to be 
here to speak on the topic of barriers to competitive 
generation which is very important to both Solar Turbines, to 
the Distributed Power Coalition and a number of panelists that 
are here today.
    Distributed generation is a highly competitive technology 
that can efficiently contribute to increasing the Nation's 
energy supply, reduce the demand on a constrained system and 
add substantial benefits to the power grid. However, 
distributed generation must overcome numerous legal, regulatory 
and institutional barriers that currently interfere with the 
realization of its true economic potential for consumers across 
the United States.
    Distributed generation is the name given to small 
electricity generation facilities, including micro-turbines, 
fuel cells, internal combustion engines and small gas turbines 
located generally on the distribution system close to the point 
of consumption. Distributed generation can help reduce the cost 
and enhance the efficiency of our electrical system. It can 
lower the demand for the construction of large central station 
generation facilities, reduce the need for the siting of the 
difficult transmission facilities and substitute and/or 
supplement distribution facilities and reduce overall 
emissions. However, today barriers stand in the way of the 
development of this technology.
    Many of the barriers facing distributed generation are 
State-level barriers, such as discriminatory rate structures 
for standby power and exit fees designed to recover so-called 
``stranded costs'' to which the subcommittee cannot necessarily 
address directly. However, the U.S. Congress does possess the 
power to overturn some of the more important barriers facing 
distributed generation. It is in regards to those barriers that 
I have come to speak to you today.
    A number of positive legislation pieces have been 
introduced in this session of Congress, which if enacted would 
eliminate some of the barriers facing distributed generation. 
House Resolution 1045, introduced by Congresswoman Heather 
Wilson of your committee, co-authored by Mr. Issa and Mr. 
Hunter, would, amongst other things, require the Federal Energy 
Regulatory Commission to determine standards governing the 
costs, terms and conditions of interconnections between 
distributed generation and the local utility distribution 
facility. Today, development of distributed generation is 
thwarted, in part, because the potential developers do not have 
the resources to navigate the crazy quilt of varying standards 
found across jurisdictions and across utilities. Nationally 
uniform interconnection standards would go a long way toward 
helping distributed generation reach its potential.
    The method developed and adopted under the Public Utility 
Regulatory Policies Act of 1978 to establish standards for the 
regulation of rates charged by qualifying facilities should 
also be used to establish interconnection standards for 
distributed generation. That is, under PURPA, FERC promulgated 
guidelines that each State was required to follow, but State-
by-State implementation of those guidelines was left up to the 
individual States. This delegation makes sense.
    Interconnection standards should follow a similar path. 
Distributed generation offers the very real prospect of ``plug 
and play'' technology. Many distributed generation resource 
technologies have become modular and standardized as well as 
relatively easy to transport. It would be--and today is--an 
enormous waste of resources for prospective generation 
developers and end users to go from State to State to persuade 
legislators and regulators one at a time of the benefits and 
appropriate designs of standardized interconnection procedures.
    As a first step, FERC should be required to work with 
industry experts to design fair interconnection standards. The 
Institute of Electrical and Electronic Engineers has already 
begun the process of designing those uniform interconnection 
standards. Members of the Distributed Power Coalition of 
America are active participants in that collaborative process, 
which has been extremely productive. We recommend that, upon 
the enactment of some of these legislations on interconnection 
such as H.R. 1045, FERC piggyback on IEEE's efforts and appoint 
the existing IEEE working group to lead the effort to complete 
their effort and produce nationally uniform interconnection 
standards. Subject to strict time limits, FERC should then be 
required to promulgate interconnection guidelines which States 
must then be required to implement, subject to FERC's 
oversight.
    The technical aspects of interconnection are critically 
important. No less important are the standardized procedures 
and cost allocation rules that all parties involved should be 
required to follow when determining what resources will be 
required to interconnect distributed generation to the 
distribution network and how the cost of those facilities 
should be shared between the distributed generation developer, 
the end user and the utility.
    DPCA suggests two simple rules. First, when a distributed 
generation facility requests interconnection to a utility's 
facilities, the utility should not be allowed to study the 
request to death, as is often the case today. Utilities must be 
placed under strictly enforced timelines. We recommend that 
each utility be required to complete all required studies 
within 30 days of receiving an appropriately filled out 
interconnection request. Each utility must have in place 
transparent interconnection guidelines requiring the 
distributed generation developer to submit only that 
information that is necessary for the utility to determine the 
resource requirements necessary for the interconnection.
    Second, the distributed generation developer should only be 
required to pay for the interconnection facilities necessary to 
interconnect it to the grid.
    Mr. Barton. We didn't start your clock till after you had 
been talking for 2 minutes, and the other panelists to your 
left have already pointed that out. So if you could--could you 
wrap it up in the next 30 seconds? You know, even though your 
light still shows green, if you could summarize.
    Mr. Brent. I kept looking, sir. I apologize.
    Mr. Barton. I understand.
    Mr. Brent. If I may, sir, I am just about done. I lost my 
place. Okay, let me pick up----
    These facilities would include the facilities running 
between the DG facility and the point of interconnection. 
Bloated interconnection cost estimates erode the economic 
benefits DG could otherwise offer. In the exceedingly rare 
circumstances when upgrades were required to the utility's 
network beyond the point of interconnection, the distributed 
generation developer should only be required to pay his fair 
share of that cost of such network upgrades. Other users of 
those network facilities should also be required to pay their 
fair share of those costs.
    I commend to the subcommittee's attention an Arthur D. 
Little White Paper entitled Distributed Generation: Policy 
Framework For Regulators and suggest that that be considered 
part of the record.
    The subcommittee invited comments on net metering. While 
DPCA believes net metering is an important topic, we have not 
taken a position on any legislation on this issue; and so I 
will not address that today.
    Thank you for the opportunity to testify. I look forward to 
any questions.
    [The prepared statement of Richard Brent follows:]
  Prepared Statement of Richard Brent, Director, Government Affairs, 
                      Solar Turbines Incorporated
    Good morning, Mr. Chairman and distinguished members of the 
Subcommittee, my name is Richard Brent. I am Director of Government 
Affairs for Solar Turbines, a manufacturer of Distributed Generation 
technology. In my testimony today I am also representing the 
Distributed Power Coalition of America (DPCA) as a member of the 
Executive Committee. I would like to thank you for the opportunity to 
be here today, to speak on this topic, which is very important to Solar 
Turbines and to the DPCA. Distributed Generation is a highly 
competitive technology that can efficiently increase the nation's 
energy supply, reduce the demand on a constrained system, and add 
substantial benefits to the power grid. However, Distributed Generation 
must overcome numerous legal, regulatory and institutional barriers 
that currently interfere with the realization of its true economic 
potential.
    Distributed Generation is the name given to small (up to 50 MW) 
electricity generation facilities, including micro-turbines, fuel cells 
and small gas turbines, located on the distribution system, close to 
the point of consumption. Distributed Generation can help reduce the 
cost and enhance the efficiency of our electrical system. It can lower 
the demand for the construction of large central station generation 
facilities, reduce the need for difficult to site transmission 
facilities, substitute and/or supplement distribution facilities, and 
reduce overall emissions. However, today barriers stand in the way of 
the development of Distributed Generation.
    Many of the barriers facing Distributed Generation are state-level 
barriers, such as discriminatory rate structures for standby power and 
exit fees designed to recover so-called ``stranded costs,'' which this 
Subcommittee can not directly address. However, the U.S. Congress does 
possess the power to overturn some of the most important barriers 
facing Distributed Generation today. It is regarding those barriers 
that I have come to speak to you.
    Legislation has been introduced in this session of Congress which, 
if enacted, would help eliminate some of the barriers facing 
Distributed Generation. H.R. 1045, introduced by Congresswoman Heather 
Wilson would, among other things, require the Federal Energy Regulatory 
Commission to determine standards governing the costs, terms and 
conditions of interconnections between Distributed Generation and local 
utility companies' distribution facilities. Today, development of 
Distributed Generation is thwarted, in part, because potential 
developers do not have the resources to navigate the crazy quilt of 
varying standards found across jurisdictions and across utilities. 
Uniform interconnection standards would go a long way toward helping 
Distributed Generation reach its potential.
    The method used by the Public Utility Regulatory Policies Act of 
1978 (PURPA) to establish standards for the regulation of the rates 
charged by Qualifying Facilities should also be used to establish 
interconnection standards for Distributed Generation. Under PURPA, FERC 
promulgated guidelines that each state was required to follow, but 
state-by-state implementation of those guidelines was left to each 
individual state. This delegation makes sense.
    Interconnection standards should follow a similar path. Distributed 
Generation offers the very real prospect of ``plug and play'' 
technology. Many Distributed Generation resource technologies have 
become modular and standardized as well as relatively easy to 
transport. It would be--and today is--an enormous waste of resources 
for prospective Distributed Generation developers to go from state to 
state to persuade legislatures, one at a time, of the benefits and 
appropriate designs of standardized interconnection procedures. As a 
first step, FERC should be required to work with industry experts to 
design fair interconnection standards. The Institute of Electrical and 
Electronics Engineers (IEEE) has already begun the process of designing 
uniform interconnection standards. Members of DPCA are active 
participant in that collaborative process, which has been extremely 
productive. We recommend that, upon enactment of H.R. 1045, FERC 
piggyback on IEEE's efforts and appoint the existing IEEE working group 
to lead the effort to produce uniform interconnection standards. 
Subject to strict time limits, FERC should then be required to 
promulgate interconnection guidelines, which states must then be 
required to implement, subject to FERC's oversight.
    The technical aspects of interconnection are critically important. 
No less important are the standardized procedural and cost allocation 
rules that all parties involved should be required to follow when 
determining what resources will be required to interconnect Distributed 
Generation to the distribution network, and how the costs of those 
facilities should be shared between the Distributed Generation 
developer and the utility. DPCA suggests two simple rules. First, when 
a Distributed Generation facility requests interconnection to a 
utility's facilities, the utility should not be allowed to study the 
request to death, as is often the case today. Utilities must be placed 
under strictly enforced timelines. We recommend that each utility be 
required to complete all required studies within 30 days of receiving 
an interconnection request. Each utility must have in place transparent 
interconnection guidelines, requiring the Distributed Generation 
developer to submit only that information that is necessary for the 
utility to determine the resource requirements necessary for the 
interconnection. Second, the Distributed Generation developer should 
only be required to pay for the interconnection facilities necessary to 
interconnect it to the grid. These facilities generally will include 
the facilities running between the Distributed Generation facility and 
the point of interconnection with the utility. Bloated interconnection 
cost estimates erode any economic benefits that Distributed Generation 
could otherwise offer. In the exceedingly rare circumstances when 
upgrades are required to the utility's network beyond that point of 
interconnection, the Distributed Generation developer should only be 
required to pay his fair share of the cost of such network upgrades. 
Other users of those network facilities should also be required to pay 
their fair share of those costs.
    Besides interconnection, there is another important advancement 
that can be instituted at a federal level. The DPCA believes that the 
owner of a Distributed Generation facility should be able to sell the 
energy from that facility to any willing buyer. The owner ought to be 
allowed to buy, sell and consume electricity as necessary, free from 
artificial limitations. We recommend that legislation include 
provisions that ensure that right to Distributed Generation facilities.
    I commend to the Subcommittee's attention an Arthur D. Little White 
Paper entitled ``Distributed Generation: Policy Framework for 
Regulators''. The Paper clearly, effectively and concisely discusses 
the primary policy questions that are raised by Distributed Generation, 
and provides a useful framework for resolving those questions.
    The Subcommittee invited comment on net metering. While we believe 
net metering is an important topic, the DPCA has not taken any position 
on legislation on this issue; so I will not address it today.
    Thank you again for the opportunity to testify before your 
Subcommittee. I would be pleased to answer any questions you may have.

    Mr. Barton. Thank you.
    We now want to hear from Mr. Yacker. Since the gentleman 
before you took 8 minutes, we are going to give you 3 minutes.
    Mr. Yacker. As always, Mr. Chairman----
    Mr. Barton. No, actually----
    Mr. Yacker. [continuing] you are prescient in your 
analysis.
    Mr. Barton. No. You are allowed 6 minutes to elaborate on 
your written statement.

                    STATEMENT OF MARC YACKER

    Mr. Yacker. Okay. Thank you, Mr. Chairman.
    I am Marc Yacker, Director of Government and Public Affairs 
for the Electricity Consumers Resource Council, or ELCON. ELCON 
was established in 1976 and is the national association 
representing large industrial users of electricity. ELCON 
members come from virtually every segment of the manufacturing 
community.
    Simply put, ELCON and its member companies favor 
competition over regulation. Along those lines, industrial 
electricity users have recently experienced some good news and 
some less than good news. The good news is that competition in 
electricity is coming. It is inevitable. Well over 60 percent 
of the population live in States that have already decided to 
create competitive markets. The less than good news is that 
many people view the recent California crisis as an experiment 
in competition that has failed. In fact, it has failed. But the 
California experiment was an experiment in reregulation, not an 
experiment in competition. It was doomed to failure from the 
start.
    Today's hearing is on PUHCA, PURPA, interconnection and net 
metering, which I think is a no brainer. Many industry 
stakeholders attempt to portray these issues as relatively 
noncontroversial. I disagree, at least in part.
    For the past several Congresses, there has been legislation 
such as H.R. 381 introduced by Mr. Stearns, discussed earlier, 
to repeal the mandatory purchase and sale requirements in 
section 210 of the Public Utility Regulatory Policies Act, or 
PURPA. Many ELCON members cogenerate and sell electricity as 
qualifying facilities, or QFs, pursuant to PURPA. All ELCON 
members, by definition, are large electricity consumers and 
seek a varied and reliable generation base. PURPA contributes 
to that broader generation base. Accordingly, ELCON members do 
not seek legislation to repeal those PURPA Section 210 
requirements at this time.
    PURPA has succeeded in demonstrating that electricity can 
be generated by nonutility sources in an energy-efficient, 
reliable and an environmentally favorable manner. Just 23 years 
ago, utilities vehemently disputed what is now fact.
    Though PURPA has gotten some bad press, I would like to 
emphasize that PURPA's much-maligned avoided cost concept is 
not to blame. If properly implemented by State utility 
commissions, the avoided cost concept cannot cost consumers 
anything. The problem with PURPA was that utilities in the 
1980's, believing that fuel prices would increase, entered into 
long-term contracts, many for 30 years, locking them into 
fixed-price purchase agreements with cogenerators. Many shorter 
contracts were also signed. Nothing in PURPA required such 
long-term contracts. All PURPA contracts were approved by the 
appropriate State utility commissions.
    When fuel prices went down, utilities found they had 
guessed wrong and that they had above-markets contracts. This 
was not the fault of PURPA.
    I might add Mr. Stearns cited the RDI survey. Utilities 
have more above-market contracts with our utilities than they 
do with cogenerators. Until we have competitive wholesale 
markets, including fully open access to the transmission grid, 
the mandatory purchase requirements are necessary if we are to 
fully realize the potential for cogenerated power.
    It is important to note that PURPA and Section 210 are much 
more than just mandatory purchases. I cannot overemphasize the 
importance of the PURPA guarantee for back-up power during 
periods of scheduled maintenance or repair at just and 
reasonable rates, especially in States that remain 
noncompetitive. Without such a guarantee, cogenerators would be 
captive to monopolies that could charge what they wish, and the 
cogenerators would have no alternative. In States without 
customer choice, retaining the Federal guarantee for back-up 
power now in PURPA is essential if there is to be any 
investment in cogeneration capacity. Once there is a truly 
competitive retail market and cogenerators have the opportunity 
to buy back-up power in an unregulated environment, the back-up 
guarantee will no longer be necessary.
    Before I leave PURPA, I would like to make one more point. 
When Congress enacted PURPA in 1978, cogenerators and other 
qualifying facilities took Congress at its word. Significant 
investments were made based on existing Federal guarantees. 
Repealing parts of PURPA puts those who made such investments 
in good faith at a disadvantage.
    Related to PURPA is the issue of interconnection. Under 
PURPA, qualifying facilities were guaranteed the right to 
interconnect at the transmission level. But through the years, 
QFs and other nonutility generators have found that 
transmission owners often engaged in lengthy and expensive 
delaying tactics. If Congress truly wants to diversify the 
generation base to bring on new efficient, technologically 
advanced equipment and processes, for example, distributed 
generation, uniform interconnection standards at the 
transmission and distribution levels such as those in 1945 are 
not just desirable, they are essential.
    Now let me turn to the issue of PUHCA. PUHCA is the only 
Federal consumer protection statute for electricity customers 
and that is why--Marty Kanner stole my line--no bona fide 
consumer group supports repeal of PUHCA on a stand-alone basis.
    We believe that, if PUHCA is repealed, we need clear 
authority vested in the Federal Energy Regulatory Commission to 
prohibit potential anti-competitive practices involving 
regulated utilities and unregulated affiliates. Rules are 
needed to address the operational unbundling of generation, 
transmission, system control, marketing and local distribution 
functions. State and Federal regulators must have complete 
access to all books and records of all regulated entities and 
entities owned or controlled by regulated entities.
    In conclusion, ELCON and its member companies favor a broad 
Federal bill so that all electricity consumers can enjoy the 
benefits of competition under similar rulings. Interconnection 
rights and net metering must be part of that bill. Modification 
to PURPA and PUHCA are also essential, but they should be 
considered at the end of the process when we have a competitive 
and functioning wholesale and retail market, so we have a 
better idea of how to protect consumers from potentially anti-
competitive practices.
    ELCON appreciates the opportunity to testify, and we look 
forward to continued constructive dialog with the subcommittee.
    [The prepared statement of Marc Yacker follows:]
 Prepared Statement of Marc Yacker, Director of Government and Public 
            Affairs, Electricity Consumers Resource Council
    Mr. Chairman, I am Marc Yacker, Director of Government and Public 
Affairs for the Electricity Consumers Resource Council, or ELCON. 
ELCON, established in 1976, is the national association representing 
large industrial users of electricity. ELCON's member companies come 
from virtually every segment of the manufacturing community.
    ELCON's members operate in competitive, international markets. They 
require an adequate and reliable supply of electricity at competitive 
prices in a vibrant interstate marketplace. Large users of electricity 
know very well that the decisions made in this Subcommittee and by 
Congress will have a direct impact on their businesses' well being as 
well as their business decisions. ELCON greatly appreciates the 
opportunity to testify.
    ELCON and its member companies favor competition over regulation. 
They have long advocated truly open and fully competitive electricity 
markets, including retail access guaranteeing that all consumers have 
the right to choose their supplier of electricity and electricity 
services. We also believe that, just as is true for other energy 
products, a large national or even international market with consistent 
rules and standards is optimal for the sale and purchase of 
electricity. Market rules for goods produced by any manufacturer do not 
change as we move from state to state. The same should be true for 
electricity.
    Recently, industrial electricity users have experienced some good 
news and some less than good news. The good news is that competition in 
electricity is coming. It is inevitable. Well over sixty percent of the 
population live in states that have already decided to create 
competitive markets to the extent that they can absent federal 
legislation. We at ELCON believe that these competitive markets should 
come as soon as possible. The less than good news is that many people 
view California as an experiment in competition and that it has failed. 
In fact it has failed--but the California experiment was an experiment 
in reregulation, not competition. It was doomed to failure from the 
start.
    Today's hearing is on PUHCA, PURPA, interconnection and net 
metering. Many industry stakeholders view these issues as relatively 
non-controversial. I disagree, at least in part.
    For the past several Congresses, there has been legislation 
introduced by Congressman Stearns and others to repeal the mandatory 
purchase and sale requirements in Section 210 of the Public Utility 
Regulatory Policies Act (or PURPA) of 1978. Many ELCON members 
cogenerate and sell electricity to utilities as Qualifying Facilities 
(or QFs) pursuant to PURPA. All ELCON members, by definition, are large 
consumers of electricity and seek a varied generation base. ELCON 
members, therefore, do not seek legislation to repeal those PURPA 
Section 210 requirements at this time.
    PURPA has succeeded in demonstrating that electricity can be 
generated by non-utility sources in an energy-efficient, reliable, and 
environmentally favorable manner. Just 23 years ago utilities 
vehemently disputed what is now fact.
    Despite PURPA's bad press, as long as consumers are held captive to 
monopoly utilities, it is an essential law. It has produced a broader, 
more efficient, more environmentally favorable base of electricity 
generation. Due to PURPA, electricity capacity was added in smaller 
increments, thus not burdening users with paying for generators that 
proved to be much larger than necessary. And generation was funded by 
entrepreneurs with private non-regulated capital.
    I would like to emphasize that the much-maligned avoided cost 
concept is not to blame. If properly implemented by state utility 
commissions, the avoided cost concept cannot cost consumers anything. 
The problem with PURPA was that utilities in the 1980s, believing that 
fuel prices would increase, entered into long-term contracts, many for 
30 years, locking them into fixed-price purchase agreements with 
cogenerators. Nothing in PURPA required such long-term contracts. It 
should be noted that all PURPA contracts were approved by the 
appropriate state utility commission. This is another failure of 
regulation, not of competition.1When fuel prices went down, utilities 
found they had guessed wrong, and they then had above-market contracts. 
Interestingly, had PURPA not been enacted, consumers would not have 
saved any money, because utilities would have entered into similar, 
long-term contracts with other utility generators. In fact, a study 
released a few years ago showed the utilities had more above market 
contracts with other utilities than with cogenerators pursuant to 
PURPA. I have no reason to believe that data is any different today.
    That having been said, the ``mandatory purchase'' provisions of 
PURPA will be an anachronism when we finally achieve a truly 
competitive wholesale market. With regard to existing PURPA contracts, 
be they at market or above today's market, no one is suggesting that 
such contracts be rescinded. Existing PURPA contracts are and should be 
a non-issue. Similarly, those above-market contracts utilities have 
with other utilities should be protected as well. That simply reflects 
the sanctity of contracts.
    The impact of repealing the mandatory purchase provisions of PURPA 
on a prospective basis, as proposed in legislation, is virtually non-
existent. The number of new, uneconomic PURPA-based contracts being 
signed today is close to nil. The mandatory purchase provisions of 
PURPA clearly will not be needed in a truly competitive wholesale 
electricity market. But we do not yet have that.
    In discussing competitive wholesale markets, an objective Congress 
set forth in the Energy Policy Act (or EPAct) of 1992, it is important 
to note what is theory and what is fact. FERC, in Order 888, again in 
Order 2000, and once again in its RTO order earlier in July, clearly 
recognized that an open, non-discriminatory transmission system is the 
lynchpin of a competitive wholesale market. Unfortunately we are not 
there yet. Transmission owners still attempt to utilize the grid to the 
benefit of their own generation and to the detriment of others.
    In a monopoly market, or in a market in transition from monopoly to 
competition as is true for the wholesale electricity market today, 
mandatory purchase requirements are necessary if there is to be a 
market for cogenerated power. I know that this hearing is not on 
transmission issues, but I need to state, until the transmission system 
is truly open, we will not have a competitive wholesale market.
    However it is important to note that PURPA and Section 210 are much 
more than mandatory purchase. I cannot overemphasize the importance of 
a federal guarantee for back-up power--during periods of scheduled 
maintenance or repair--at just and reasonable rates in states that 
remain non-competitive. Without such a guarantee, cogenerators would be 
captive to unregulated monopolies that could charge what they wish, and 
the cogenerators would have no alternative. In states without customer 
choice, retaining the federal guarantee for back-up power now in PURPA 
is essential if there is to be any investment in cogeneration capacity. 
Once there is a truly competitive retail market, cogenerators can buy 
back-up power in the open market and the back-up power guarantee will 
not longer be essential.
    Before I leave PURPA, I would like to make one more point. When 
Congress enacted PURPA in 1978, cogenerators and other Qualifying 
Facilities took Congress at its word. Significant investments were made 
based on existing federal statute. Repealing parts of PURPA puts those 
who made such investments at a disadvantage.
    Related to PURPA is the issue of interconnection. Under PURPA, 
Qualifying Facilities were guaranteed the right to interconnect at the 
transmission level. But through the years, QFs and Exempt Wholesale 
Generators established pursuant to EPAct have found that transmission 
owners often engaged in lengthy and expensive delaying tactics. If 
Congress truly wants to diversify the generation base to bring on new 
efficient, technologically advanced equipment and processes, uniform 
interconnection standards at the transmission and distribution levels, 
with a guaranteed timetable, are not just desirable, they are 
essential.
    With regard to net metering, the practice of net metering is not 
new. Many industrials with cogeneration capacity have had net metering 
at their facilities for years. Objection comes from those who want to 
keep the generation base narrow and who utilize their monopoly power in 
any way possible to perpetuate their profitable monopoly status. I do 
not fault them. Given their responsibility to shareholders to maximize 
profits, it is an understandable course of action. But such 
exclusionary tactics are not in the best interest of consumers. And 
they are not in the best interest of our nation if we do indeed want a 
more modern electricity system.
    Regarding the repeal of PUHCA, we emphasize that PUHCA is the only 
federal consumer protection statute for electric utility customers. 
That is why no bona fide consumer group supports repeal of PUHCA either 
on a stand-alone basis or until we have truly competitive markets.
    We believe that, if PUHCA is repealed, we need clear authority 
vested in the Federal Energy Regulatory Commission to prohibit 
potential anti-competitive practices involving regulated utilities and 
unregulated affiliates. Rules are needed to address the operational 
unbundling of generation, transmission, system control, marketing and 
local distribution functions. State and Federal regulators must have 
complete access to all books and records of all regulated entities and 
entities owned or controlled by regulated entities. In addition, PUHCA 
repeal should not be effective until all states have retail access or 
until competition on a nation-wide basis is otherwise achieved. The 
need for federal regulatory authority--in FERC, the Department of 
Justice, or the Federal Trade Commission--to address market power and 
anti-competitive activities is recognized by virtually every 
stakeholder involved in electricity policy issues. Events in California 
have clearly demonstrated that short-term market power abuse can cause 
markets to quickly become dysfunctional.
    We need strong, but not excessive, federal regulatory authority to 
guarantee that electricity is available throughout the nation on a non-
discriminatory basis. It is up to this Committee and other oversight 
bodies to ensure that such regulation is not over-reaching, that it is 
encouraging and not hindering true competition.
    In conclusion, ELCON and its member companies favor a strong 
federal bill so that all electricity consumers can enjoy the benefits 
of competition. Interconnection rights and net metering must be part of 
that bill. Modification to PURPA and PUHCA are also essential, but they 
should be considered at the end of the process, when we have 
competitive and functioning wholesale and retail markets, so we have a 
better idea of how to protect consumers from potentially anti-
competitive practices.
    ELCON appreciates the opportunity to testify and we look forward to 
continued constructive dialog with this Subcommittee.

    Mr. Barton. Thank you, Mr. Yacker.
    We now want to hear from Ms. Magruder. Your statement is in 
the record. You are recognized for 6 minutes to elaborate. 
Welcome to the subcommittee.

                STATEMENT OF KATHLEEN E. MAGRUDER

    Ms. Magruder. Thank you Mr. Chairman, members.
    My name is Kathleen Magruder. I am Vice President of Law 
and Government Affairs for the New Power Company.
    The New Power Company is an entity of the likes of which 
you have not heard from before. We are a retail supplier of 
natural gas and electricity to residential and small commercial 
customers only. We do not serve large customers. We are 
headquartered in Purchase, New York, which is a suburb of White 
Plains, but we have offices in Texas, where we have our trading 
floor; and our customer care center is located in North 
Carolina. We currently serve more than 700,000 residential and 
small commercial customers in 10 different States, and we look 
forward to growing our customer base with your help.
    I think, as Mr. Hall observed, that Chairman Tauzin started 
us off on the right foot today when he talked about building an 
electric system for this century, as opposed to the one that we 
built for the last century. There are tools that are available 
today that will modernize this electric system and let the 
benefits of competition flow through all the way to residential 
consumers, homeowners, renters or folks that y'all call voters.
    It is time of use metering. Time of use metering is 
something that is available today. It could be installed today, 
except for a patchwork of legislation and regulation across the 
country that makes it, A, exceedingly difficult to install; B, 
exceedingly difficult to create a product to use around; and, 
C, just basically prevents the benefits of competition flowing 
fully through to the customer.
    What can you do to help? Congress can assure that customers 
can have these meters installed at their homes if they so 
desire. Equally important, you can assure that customers have 
the right to be billed on the data that are produced by those 
meters and that the utilities be required to settle on the data 
that come from those meters. And equally important, too, is the 
requirement that the utilities must strip out of their costs or 
unbundle from those costs metering costs for the old artifacts 
that come from that system that was created by Chairman 
Tauzin's grandfather years and years ago.
    Let me back up a little bit and tell you about this.
    This is not net metering. This is a device that regulates 
or, excuse me, records the amount of electricity that is used 
by a customer in increments of about 15 minutes. Why is that 
important? Well, right now, the old meters that are on your 
home currently record how much electricity you use during the 
period that the meter is read. Typically, your meter is read 
once a month, so you know how much electricity you use in a 
month, but you don't know when you use it. Why is that 
important? It is important because electricity costs different 
amounts to produce during the course of the day; and if you 
were able to shift your use of electricity to a time when 
electricity was cheaper, you would be able to, A, conserve; B, 
lower your bill; and, C, obviate the need for more generation 
to be built.
    That doesn't mean that generation won't have to be built, 
but it means it doesn't have to be built just to be able to 
serve the customer on the peak.
    Mr. Lane from Goldman Sachs alluded to the fact that there 
is a State-by-State patchwork means of implementing 
restructuring or deregulation for residential customers across 
the country; and you taking steps to make sure that these time 
of use meters are available to residential customers would help 
to make it clear that, at least in those States where 
competition has come, customers should have the right to have 
those meters installed.
    Something else that you can do to help with this State-to-
State patchwork approach is to require that uniform business 
rules be put into place. We currently serve customers behind 
three electric utilities in Pennsylvania. We had to build three 
different computer systems in order to be able to get bills out 
to our customers in those three different utilities. What does 
this do? Well, it leads to lower customer service because we 
have to build a different system every time we go someplace. It 
leads to higher costs because every time we build a new 
computer system it costs more money. And it keeps us out of 
districts that might otherwise want folks in there offering 
competitive services.
    I am often asked as I travel around the country, well, you 
know, I represent a rural State or I represent a rural 
district. I don't have a Manhattan in my district. I don't have 
a Dallas, Texas, in my district. How am I going to get 
competition now to my customers?
    Well, one way to do it is uniform business rules. Because 
if we don't have to recreate the wheel each time we go into a 
new market, we can get into those smaller markets at lower 
costs and a little bit quicker. So that helps the folks who are 
in rural west Texas, and it helps the folks who are in rural 
Virginia.
    Uniform business rules, as you have heard, on the wholesale 
side are equally important on the retail side; and as we look 
toward uniformity across the country we should make sure that 
it exists for retail customers as well as for wholesale 
customers.
    One other point that I would make is, as I said, you have 
never heard from an entity like the New Power Company. What we 
find as we come to these entrenched bodies that make decisions 
like independent system operators and regional transmission 
organizations is that we are not permitted a seat at the table. 
It would be great if, as you clarified the FERC's jurisdiction 
to do a number of things, you also clarify that parties such as 
the New Power Company and any other interested and affected 
party in this debate be permitted a seat at the table. Unless 
and until you hear from providers who serve your voters, you 
are not going to have the full panoply of needs fully flowing 
all the way through to the customers.
    The New Power Company intends to be around for a long time. 
The sorts of help that I have asked you for today will help 
make sure that we are able to make it into your district in a 
reasonable amount of time. We intend to continue to deal with 
the barriers to entry that are out there, but many of these 
barriers are artificially erected, and you can do a lot to help 
us knock them down.
    I look forward to your questions.
    [The prepared statement of Kathleen E. Magruder follows:]
     Prepared Statement of Kathleen Magruder, The New Power Company
    Mr. Chairman, Members of the Subcommittee, I am Kathleen Magruder. 
I am the Vice President of Government Affairs for The New Power 
Company. NewPower is a retail marketer of natural gas and electricity 
to residential and small commercial customers. We currently serve more 
than 700,000 customers in ten states. My testimony today will focus on 
the benefits that residential customers currently realize when they 
have the ability to choose a competitive provider of energy, the need 
for uniform business rules across the many states to help achieve the 
goal of the best possible products and services for energy consumers, 
and the value of time of use metering for small consumers.
    NewPower is living proof that small customers truly can benefit 
from competitive retail energy markets. Our customers enjoy a variety 
of product terms and prices which permit them to choose the package 
which best suits their energy needs. This is true despite the lack of 
any uniformity across states--or even across utilities within a state--
and the dysfunctional rules which govern the operation of the wholesale 
market. Our market presence is demonstrated in the map attached hereto 
as Attachment 1.
    While many decisions concerning restructuring of the energy 
industry are best left to state public utility commissions, there are 
several areas where Congress can be of assistance. Chief among them 
are:

 Clarify that the FERC's jurisdiction flows all the way to the 
        meter at each customer's house; mandate that no utility can 
        prohibit the installation of a qualified metering device which 
        provides time of use data; and require that utilities settle 
        and render bills based upon the data produce by time of use 
        meters.
 Mandate that the Federal Energy Regulatory Commission, in 
        consultation with the Federal Trade Commission, promulgate a 
        final rule establishing uniform business standards for both 
        wholesale and retail energy sales in competitive markets.
 Support the Federal Energy Regulatory Commission (``FERC'') in 
        its attempt to create four large Regional Transmission 
        Organizations (``RTOs'') which will govern the flow of 
        electricity across the continent.
    While this testimony addresses electric markets only, many of these 
principles apply equally to natural gas markets.
                           ADVANCED METERING
    Technology has provided tools in the form of time of use meters and 
remote management of home energy use that will give customers the power 
to manage their electricity usage and expenditures. The banking world 
provides a good analogy of how putting proper technology in customers' 
hands will lead them to adapt their behavior and better manage their 
money. Twenty years ago, the ATM card was introduced to banking 
customers and the banking world changed dramatically. In that time 
frame, individual bank customers adapted their behavior such that in 
the year 2000, more than 85% of the banking transactions which 
occurred, were achieved through some use of technology--either through 
use of an ATM card or through the internet. Time of use metering is a 
similar application of technology which will better help electric 
customers understand when they use electricity, the price consequences 
thereof, and ways to save money.
    Residential customers in this country are generally charged an 
average rate for the electricity they use. That rate is calculated 
based on a number of factors including an average cost of the 
electricity purchased over several months and an average ``load 
profile'' for residential customers in their service territory. 
Unfortunately, electricity is not generally sold in wholesale markets 
at average prices. Rather, it is sold in increments as small as 15 
minutes, each increment of which can be priced differently. For 
example, on Wednesday of this week, electricity traded in Texas for as 
little as $42.00 per MWh and much as $53.00 MWh--a 21 percent 
differential. Similarly, on Wednesday of this week, electricity in 
Pennsylvania traded for prices between $67.50 and $74.50 per MWh--a 10 
percent differential.
    In the same vein, there is probably no customer whose actual usage 
patterns are exactly the same as the load profile upon which customers' 
bills are calculated. Current utility meters tell a customer how much 
electricity he used over the period of a month. They do not reveal when 
that power was used--either all in the evening, all in the morning, 
evenly spaced across the 24 hours in a day, or all on the weekend. It 
is assumed that each customer is ``average'' and regardless of how much 
power he uses when prices are high, he is charged exactly the same as 
all his neighbors.
    Installation of advanced metering technology in the form of time of 
use meters will permit customers to know when they are using 
electricity, compare that usage data to the actual prices for usage at 
that time, and shift their usage, if they desire, to minimize their 
electric bill. By shifting some uses, such as dishwashing or clothes 
drying, to off peak periods when power is cheaper, customers can 
minimize their electric bills without any significant change in their 
lifestyle. Add to that, the capability now provided by the internet to 
control home appliances remotely, and very real load shifting can be 
achieved--if you are able to install such a meter at your home and if 
your utility is required to settle based upon the readings from that 
meter.
    Imagine that you are a customer in PJM West. If you could avoid 
using power at $74.50 instead of $67.50, wouldn't you like to be able 
to make that choice? Under existing law in most states, that option is 
not available.
    On another front, NewPower is currently conducting two pilots--one 
in Houston and one in Philadelphia--where customers have volunteered to 
have devices installed in their home which permit them to control their 
thermostats over the internet. This device will permit the customer to 
sit at her desk in her office, access her home thermostat from her 
computer terminal at work, and adjust the thermostat setting for her 
home. If you forgot to turn your thermostat up this morning before you 
left for work, this would give you the opportunity to make sure you are 
not air conditioning an empty house.
    Encouraging use of demand management techniques through deployment 
of this technology will provide a larger societal benefit than just 
lower bills. Each megawatt of usage which is shifted off the peak means 
another megawatt of usage can be added without the need for building a 
new power plant. Much focus has been placed on conservation of 
electricity this year. An equally important focus, perhaps, should be 
in shifting usage off the peak. Time of use metering and settlement on 
those meters to permit customers to enjoy the benefits of lower prices 
will help achieve both goals.
    So what can Congress do to make sure customers have the benefit of 
this new technology and to put the power into customers' hands to 
better manage their electric usage? First, Congress can clarify that 
the jurisdiction of the Federal Energy Regulatory Commission really 
does run all the way to the meter at a customer's home. That is 
important for two reasons. First, the meter at a resident's home is the 
last piece of the wholesale transaction that results in the delivery of 
electricity to a home. It is upon the readings from that meter that 
wholesale purchases and settlements are finally tallied and billed. It 
should be made clear that the FERC has the authority to order that 
qualified time of use meters may be installed at the home of any 
requesting customer. Second, settlement should be made on the basis of 
those meters. Utilities should not be permitted to force the usage of 
average load profiles on customers who choose to make use of this new 
technology.
                         UNIFORM BUSINESS RULES
    Many barriers to entry exist for competitive marketers preparing to 
enter competitive electric markets. Customer education, brand 
awareness, credit requirements, licensing obligations, tax filings, are 
but a few of the items with which a new market entrant must deal. Layer 
upon top of that different business rules for each utility in each 
state and in many instances, the barriers become insurmountable. Texas 
has made a positive step by requiring that all utilities use the same 
protocols for enrollment, billing, and other necessary processes. That 
model should be mandated for all other states.
    As an anecdote, NewPower is currently serving customers behind 
three electric utilities in Pennsylvania. Each utility has required the 
building of a completely different billing system for its customers, 
none of which can be used in any other venue. The cost of this lack of 
uniformity, of course, flows through to the customer and limits the 
savings a competitive market should be able to offer him. At the end of 
the day, marketers will evaluate the point at which further investment 
in new systems becomes intolerable and opt not to serve in that 
territory. This is especially true for utilities with small service 
territories with relatively few customers.
    An issue of specific import to marketers who serve residential 
customers is scale. Achieving scale is absolutely critical to being 
able to offer world class service and savings. Serving small customer 
accounts, which in many instances are less than $100 per month, 
requires the ability of a marketer to be able to acquire large numbers 
of customers to defray costs. The ability to spread costs over a large 
number of consumers, thus, reduces the ultimate cost to each consumer. 
Inconsistency or lack of uniformity in the business rules across 
utilities and across states only adds costs for the ultimate consumer. 
It can also lead to customer confusion as lack of uniformity compounds 
different interpretations and treatments to different marketers. 
Congress should encourage the development of uniform business standards 
in the following areas, at a minimum:

 Consumer protection rules and requirements
 Utility tariffs
 Transactional and operational models
 Utility certification and testing (e.g. aggregation, EDI, 
        trading, credit)
 Billing agreements
    What would uniform retail business rules mean for customers? First, 
the customer should see some degree of consistency regardless of the 
marketer with whom he deals. Uniform rules would ensure that a marketer 
who had been operating in Ohio brought the same customer experience to 
Texas as the marketer who had been operating in Pennsylvania. It should 
result in increased customer service quality because training for each 
state and each utility service territory could be consistent and, thus, 
more effective. It should increase the speed of market entry for 
marketers which result in increased market competitiveness for 
customers. Bottom line--it should result in lower cost and higher 
quality service for customers.
    Why would uniform business rules matter to a marketer? Put very 
simply, uniformity means a more streamlined process and lower costs 
which translates to better customer service, better products, and lower 
prices. Residential marketers exist to serve their customers. If they 
cannot offer customers innovative products and better prices, there is 
no reason for them to be there. Lowering this barrier to entry makes 
competition available to more customers. A NewPower customer who moves 
from Pennsylvania to New Jersey should not be faced with a 
significantly different customer proposition just because he has 
crossed the state line. His method of enrollment should not be 
different, the types of products available to him should not be 
different, and his method of payment should not be different--unless 
that is what he demands. Regulation and legislation should not impose 
these differences on the customer experience.
    Several groups have struggled over the last two years with the 
issue of uniform business rules. Because there is no mandate for a 
deliverable, and because retail issues have never been seriously 
discussed, NewPower is today asking that Congress insert itself into 
this process. We ask that you mandate that the FERC, in consultation 
with the Federal Trade Commission, promulgate a final rule to establish 
uniform business standards for wholesale and retail electric sales in 
competitive markets. The work of the organizations which have dealt 
with these issues over the last years need not be ignored. We would 
encourage the FERC and the FTC to impanel a stakeholder group to begin 
with the work that has already been done and proceed from there. We 
would, however, ask that the stakeholder group be comprised of 
representatives from all affected industry sectors. Too often, 
marketers who serve residential customers do not get a seat at the 
table. We should ensure that such a result does not occur this time.
                  REGIONAL TRANSMISSION ORGANIZATIONS
    On July 12, 2001, the Federal Energy Regulatory Commission issued a 
number of orders which advanced the concept of the formation of four 
large regional transmission organizations (in addition to ERCOT in 
Texas) to better facilitate the movement of electricity within the 
continental United States. NewPower applauds the Commission's 
initiative and hopes that these efforts will finally bring some 
uniformity and consistency to wholesale transactions across the 
country. Congress could help in the effort by addressing governance 
issues within the regional transmission organizations which are to be 
formed.
    It has been NewPower's experience that residential marketers, being 
new players in the game and owning no hard assets, rarely have a voice 
in governance of regional transmission organizations. Ultimately, we, 
who serve the homeowner, have perhaps the most vital interest in how 
these rules develop. For example, in PJM, NewPower is the largest 
residential marketer not affiliated with a utility in the territory. 
Because it has an affiliation to another member of PJM, however, 
NewPower is denied a full membership and has no voice on the board. 
Neither is there any similarly situated party who represents our point 
of view--or our customers' view--on the board. Congress should mandate 
that governance of regional transmission organizations should reflect 
all affected and interested parties.
                               CONCLUSION
    NewPower knows that residential and small commercial customers can 
benefit from a well structured competitive energy market. Congress can 
do several things to assure that those benefits be made available to 
customers in the quickest possible time by taking action to ensure 
that: (a) customers have the right to have time of use meters installed 
at their homes and to pay for their electricity based on the data 
produced by those meters; (b) uniform business rules be promulgated and 
implemented to facilitate uniformity for business processes in both 
retail and wholesale markets so that processes are the same across 
state lines and among utilities within a state; and (c) the four large 
RTOs proposed by the FERC be adopted with governance that adequately 
reflects all the affected players in the wholesale markets they serve. 
NewPower has attached to this document proposed legislative language to 
implement these goals and we stand ready to work with you, Mr. 
Chairman, and the members of the Subcommittee to craft legislation that 
advances the interests of end use customers in workably competitive 
wholesale and retail markets.
[GRAPHIC] [TIFF OMITTED] T4848.002

    Mr. Barton. Thank you.
    We now want to hear from Mr. Starrs. Your statement is in 
the record, and you are welcome to elaborate for 6 minutes.

                  STATEMENT OF THOMAS J. STARRS

    Mr. Starrs. Thank you, Mr. Chairman, members of the 
committee.
    My name is Tom Starrs. I am a senior partner in the energy 
and environmental consulting firm of Kelso Starrs and 
Associates LLC, based on Vashon island in Washington. My 
consulting practice focuses on the design, analysis and 
implementation of legal and regulatory incentives for the 
development of distributed generation technologies, with a 
focus on renewable technologies such as solar and wind energy.
    I also serve on the board of directors of both the American 
Solar Energy Society, which is a national non-profit membership 
organization dedicated to advancing the use of renewable 
energy, and the Schott Applied Power Corporation, which is one 
of the largest distributors of renewable energy equipment in 
the United States. I very much appreciate the opportunity to 
testify this afternoon on removing barriers on competitive 
generation.
    I should also say that I am here on my own behalf and not 
on behalf of my company or any of the organizations with which 
I am associated.
    I am going to focus my testimony this afternoon on three 
areas: the development and adoption of uniform standardized 
interconnection requirements for distributed technologies, the 
use of net metering to encourage small-scale distributed 
generation, and the use of consumer friendly contracts to 
streamline and simplify the process of interconnecting 
distributed generating facilities.
    We have heard a lot about the standardized interconnection, 
so I won't belabor the point. But I will emphasize that this 
is, in my view, one of the most significant barriers to the 
broader commercialization of distributed technologies. The 
problem arises because utilities historically have had 
substantial discretion over interconnection requirements and 
have often used that discretion to develop requirements that 
vary considerably from one to the next without appropriate 
technical or economic justification.
    I will note that these utilities' specific requirements 
were of relative little concern for the developers of large-
scale generating facilities, for example, those large 
facilities developed under PURPA whose projects were big enough 
that they could justify the cost of hiring consulting engineers 
and attorneys to negotiate projects' specific interconnection 
requirements for their facilities. But many of the folks that I 
work with develop smaller scale facilities such as residential 
rooftop solar electric cells, residential scale fuel cells or 
farm scale wind energy systems; and for these smaller scale 
facilities these costs are an absolute deal breaker.
    Utilities play a tremendously important role in our society 
by maintaining the safety and reliability of the grid, and they 
do have legitimate concerns about the interconnection of 
nonutility equipment to their networks. But they face a 
conflict of interest because they have an economic incentive to 
discourage customers from generating their own electricity. The 
more customers self-generate the less they are buying from the 
utility.
    The solution, as we have already heard this afternoon, is 
the adoption of national standards. In my view, the best way to 
go, as we have already heard this afternoon, is relying on 
appropriate authorities such as the Institute of Electrical and 
Electronics Engineers, the IEEE; the Underwriters Laboratories, 
or UL; and the National Fire Protection Association, which 
writes the national-electrical-code, or NEC.
    The States are already pursuing this approach. As figure 
one, which is included in my written testimony, indicates, over 
20 States have passed laws or enacted regulations requiring the 
development of standardized interconnection requirements for at 
least some categories of distributed generating facilities. 
However, as Chairman Barton already noted, you know, this helps 
by moving in the direction of uniformity within the States. But 
we still have the problem of State-to-State variability, and 
that is where our national standard comes into play.
    A final note on interconnection. I would like to encourage 
the committee to specifically consider different degrees of 
standardization for different size facilities, with a goal of 
plug and play simplicity for the smallest scale facilities for 
the reasons that I mentioned earlier in terms of the relative 
affordability of these costs between large and small 
facilities.
    With respect to net metering, net metering is a simple, 
inexpensive and easily administered mechanism for encouraging 
the use of small scale distributed generation. As Chairman 
Barton said, it is a no brainer. Net metering allows utility 
customers to spin their meter backwards when they produce more 
electricity than they need for their own lights and appliances.
    Net metering policies have been tremendously popular at the 
State level. Just 5 years ago, only 14 States allowed net 
metering; and most of these requirements were adopted pursuant 
to State implementation of the Federal PURPA law. Today, the 
total stands at 34 States, with four new States--Arkansas, 
Georgia, Hawaii and Wyoming--enacting net metering laws just 
this year. And that is reflected in figure two, which is also 
attached to my testimony.
    In most cases, these laws were enacted by legislation, 
although a few States have adopted it by regulation and in most 
cases with broad bipartisan support. I will note that in my 
home State of Washington, for example, the 1998 net metering 
law passed unanimously in a then Republican controlled 
legislature and was signed into law by a Democratic Governor.
    It also worth noting that both the National Association of 
Regulatory Utility Commissioners and the National Association 
of State Utility Consumer Advocates have passed resolutions 
endorsing net metering.
    One final note on net metering. There is a little-known 
fact that is fundamental to the appeal of net metering, and 
that is that the vast majority of meters that are installed on 
residential and small commercial customers property today are 
bidirectional. They are capable of measuring the flow of energy 
in either direction, and that reduces additional costs by 
allowing customers to use their existing meters.
    I am running out of time, so I am just going to mention 
briefly my third point, which is the failure to adopt 
simplified interconnection agreements and simplified procedures 
for processing interconnection requests. Again, particularly 
for small scale facilities, the goal should be to attain plug 
and play simplicity that eliminates unnecessary delays and 
inappropriate expenses. Unfortunately, many utility customers 
across the country have had the experience of contacting their 
local utility seeking information on interconnection procedures 
only to be ignored or rebuffed or otherwise discouraged. In 
response, some States have explicitly required the development 
of simplified agreements and specific timelines for the 
processing of interconnection requests.
    I thank you for the opportunity to be before you today, and 
I would be happy to answer any questions. Thank you.
    [The prepared statement of Thomas J. Starrs follows:]
 Prepared Statement of Thomas J. Starrs, Kelso Starrs & Associates LLC
    Mr. Chairman, members of the committee, ladies and gentlemen: My 
name is Thomas Starrs. I am a senior partner in the energy and 
environmental consulting firm of Kelso Starrs & Associates LLC, based 
on Vashon Island, Washington. My consulting practice focuses on the 
design, analysis and implementation of legal and regulatory incentives 
for the development of distributed generation technologies, with a 
focus on solar and wind energy. I also serve on the Board of Directors 
of both the American Solar Energy Society, a national non-profit 
membership organization dedicated to advancing the use of renewable 
energy; and the Schott Applied Power Corporation, one of the largest 
distributors of renewable energy equipment in the United States. I am 
the author of over thirty publications regarding renewable energy and 
distributed energy policy. In addition, I have made invited 
presentations on energy policy to numerous national organizations, and 
to legislative committees, public utility commissions, and state energy 
offices in over a dozen states. This is my first time testifying before 
the U.S. House. The opinions I offer here are my own and not 
necessarily those of any of the organizations with which I am 
associated. I very much appreciate the opportunity to testify this 
morning on removing barriers to competitive generation, which is an 
important element of our nation's path to greater energy diversity, 
energy independence, and energy security.
                   OVERVIEW OF DISTRIBUTED GENERATION
    Continuing technology innovation is creating new market 
opportunities for decentralized or `distributed' power generation. The 
distributed generation paradigm emerged in the early 1990s out of 
research suggesting that the use of small-scale electric generating 
facilities dispersed or ``distributed'' throughout the utility network 
provided technical and economic benefits to the electricity system that 
were not available from traditional central-station generation.
    A number of studies--including several sponsored by utilities--have 
identified direct, measurable economic benefits of having generation 
sources located close to the end user.1 Distributed 
generation reduces energy losses in transmission and distribution 
lines, provides voltage support, reduces reactive power losses, defers 
substation upgrades, defers the need for new transmission and 
distribution capacity, increases reliability of electricity supply and 
reduces the demand for spinning reserve capacity.2 In fact, 
several studies have concluded that under many circumstances 
(particularly where the utility's distribution system is operating near 
capacity) non-traditional distributed benefits are comparable in scale 
to traditional energy and capacity benefits.3
---------------------------------------------------------------------------
    \1\ See D. Shugar, Photovoltaics in the Utility Distribution 
System: The Evaluation of System and Distributed Benefits, Pacific Gas 
& Electric (July 1991); R. Lambeth & T. Lepley, Distributed 
Photovoltaic Evaluation by Arizona Public Service, 23rd IEEE PV 
Specialists Conference (May 1993).
    \2\ Howard J. Wenger, Thomas E. Hoff & Brian K. Farmer, Measuring 
the Value of Distributed Photovoltaic Generation: Final Results of the 
Kerman Grid-Support Project, Conference Proceedings, First World 
Conference on Photovoltaic Energy Conversion (December 1994), p. 793.
    \3\ See E. Prabhu, Finding High Value for Grid-Connected PV: 
Southern California Edison's Innovative Solar Neighborhood Program, 
American Solar Energy Society Annual Conference (1995); J. Oppenheim, 
PV Value Analysis: Progress Report on PV-COMPACT Coordinating Council's 
Consensus Research Agenda, American Solar Energy Society Annual 
Conference (1995); H. Wenger, T. Hoff & B. Farmer, Measuring the Value 
of Distributed Photovoltaic Generation: Final Results of the Kerman 
Grid-Support Project, First World Conference on Photovoltaic Energy 
Conversion (1994); D. Keane, Grid-Support Photovoltaics: Summary of 
Case Studies, Pacific Gas & Electric (1994).
---------------------------------------------------------------------------
    The increasing availability of distributed technologies will 
provide residential, commercial and industrial customers with 
economically viable options for using locally-available energy 
resources to meet their own electricity needs. In addition, I believe 
the public interest is best served by encouraging the use of solar 
energy, wind energy, and other environmentally-preferred renewable 
energy resources in distributed applications.
    Where the distributed technology is fueled by a renewable resource, 
it offers the additional benefit of displacing fossil-fuel generation 
or other generation technologies with greater environmental impacts. 
Solar and wind energy are the quintessential distributed resources, 
allowing homeowners, businesses and industries to capture additional 
economic value from two natural resources that flow freely and nearly 
ubiquitously over the Earth. The use of solar and wind energy requires 
no mining or processing of natural resources, no shipping or pipelining 
of a fuel, no combustion, and no pollution control. Rather, these 
resources require only the technology needed to capture and convert the 
available sun or wind into electricity or other forms of useable 
energy. Solar electric and wind energy technologies can be located 
anywhere the sun shines or the wind blows, and can be used to generate 
power on any scale, from watts to megawatts.
    From its modest start in the research and development departments 
of utilities a decade ago, distributed generation has emerged as one of 
the most-discussed aspects of the electricity industry. Electric and 
gas utilities are investing in distributed technologies; venture 
capital is pouring into companies focusing on distributed generation; 
and utility regulators are exploring the policy implications of 
integrating distributed generation into existing electric utility 
systems.
         ADVANTAGES AND DISADVANTAGES OF DISTRIBUTED GENERATION
    A recent report from the Worldwatch Institute lists eight benefits 
of distributed generation (which it refers to as ``micropower'' 
technologies). The following table describing these benefits is from 
the Worldwatch paper, with an additional column I prepared explaining 
their applicability to solar and wind energy.

                   Eight Hidden Benefits of Micropower
------------------------------------------------------------------------

------------------------------------------------------------------------
Modularity.....................  By adding or        Solar and wind
                                  removing units,     technologies are
                                  micropower system   among the most
                                  size can be         modular, available
                                  adjusted to match   from watts to
                                  demand.             megawatts.
Short Lead Time................  Small-scale power   Solar and wind
                                  can be planned,     systems have
                                  sited and built     shorter lead times
                                  more quickly than   than any other
                                  larger systems,     generating
                                  reducing the        technologies.
                                  risks of
                                  overshooting
                                  demand, longer
                                  construction
                                  periods, and
                                  technological
                                  obsolescence.
Fuel Diversity and Reduced       Micropower's more   As non-depletable
 Price Volatility.                diverse,            renewable
                                  renewables-based    resources, solar
                                  mix of energy       and wind energy
                                  sources lessens     are freely
                                  exposure to         available and
                                  fossil fuel price   cannot be
                                  fluctuations.       exhausted,
                                                      eliminating their
                                                      vulnerability to
                                                      fuel price
                                                      fluctuations.
``Load-Growth Insurance'' and    Some types of       Solar energy is
 Load Matching.                   small-scale         well correlated
                                  power, such as      with electricity
                                  cogeneration and    demand,
                                  end-use             particularly for
                                  efficiency,         summer-peaking
                                  expand with         utilities whose
                                  growing loads;      peak is driven by
                                  the flow of other   air conditioning
                                  resources, like     demand.
                                  solar and wind,
                                  can correlate
                                  closely with
                                  electricity
                                  demand.
Reliability and Resilience.....  Small plants are    Solar and wind
                                  unlikely to all     energy systems use
                                  fail                modular components
                                  simultaneously;     that are easy to
                                  they have shorter   repair and
                                  outages, are        replace, and can
                                  easier to repair,   be dispersed over
                                  and are more        the landscape.
                                  geographically
                                  dispersed.
Avoided Plant and Grid           Small-scale power   Solar energy
 Construction, and Grid Losses.   can displace        systems can be
                                  construction of     sited in locations
                                  new plants,         designed to
                                  reduce grid         maximize these
                                  losses, and delay   benefits.
                                  or avoid adding
                                  new grid capacity
                                  or connections.
Local and Community Choice and   Micropower          Solar and wind
 Control.                         provides local      energy development
                                  choice and          is usually the
                                  control and the     preferred choice
                                  option of relying   of local
                                  on local fuels      communities, and
                                  and spurring        small-scale
                                  community           applications often
                                  economic            can be permitted
                                  development.        without
                                                      environmental
                                                      impact review.
Avoided Emissions and Other      Small-scale power   Solar and wind
 Environmental Impacts.           generally emits     energy systems
                                  lower amounts of    produce no
                                  particulates,       emissions and have
                                  sulfur dioxide      a minimal
                                  and nitrogen        environmental
                                  oxides, heavy       impact.
                                  metals and carbon
                                  dioxide, and has
                                  a lower
                                  cumulative
                                  environmental
                                  impact on land
                                  and water supply
                                  and quality.
------------------------------------------------------------------------
Source: Seth Dunn, Micropower: The Next Electrical Era, Worldwatch Paper
  No. 151 (Worldwatch Institute, July 2000), p. 33 (first two columns);
  third column by Thomas J. Starrs.

    By contrast, there are relatively few disadvantages of distributed 
generation. The principal one is that distributed generation remains 
more expensive than central-station generation. For example, while 
installed cost of new central-station generating facilities is between 
$500 and $1,000 per kW, the cost of combustion-based distributed 
technologies ranges from $600 to $1,500 per kW, and the cost of cleaner 
non-combustion technologies such as solar cells, wind turbines, and 
fuel cells range from $900 to $10,000 per kW.4 It appears 
likely, however, that with mass production the cost of many distributed 
technologies will drop significantly, making them more competitive with 
central-station generation.
---------------------------------------------------------------------------
    \4\ S. Dunn, Micropower: The Next Electrical Era, Worldwatch Paper 
No. 151 (July 2000), pp. 19 & 24.
---------------------------------------------------------------------------
    The second disadvantage of distributed generation is that most 
fossil-fueled distributed technologies are not currently as clean as 
their central-station counterparts, which means that distributed 
generation does not necessarily represent an improvement in the 
environmental characteristics of the electricity industry. According to 
the U.S. Environmental Protection Agency, the electricity industry in 
the mid-1990s was responsible for approximately:

 72% of sulfur dioxide (SO2) emissions;
 33% of nitrogen oxide (NOX) emissions;
 32% of particulate matter (PM) emissions;
 23% of emissions of mercury, a toxic heavy metal, and
 36% of all human-caused emissions of carbon dioxide, the most 
        dominant `greenhouse' gas.5
---------------------------------------------------------------------------
    \5\ Comments of the U.S. Environmental Protection Agency to the 
Federal Energy Regulatory Commission, Promoting Wholesale Competition 
Through Open Access Non-Discriminatory Transmission Services by Public 
Utilities, August 7, 1995, p. 7.
---------------------------------------------------------------------------
    Innovations in larger-scale generating facilities, such as 
combined-cycle gas turbines (CCGTs), have resulted in substantial 
reduction in emissions per kilowatt-hour from these facilities. Unless 
and until distributed technologies can match the environmental 
performance of these larger-scale facilities, increased use of 
distributed generation may not provide any incremental improvement in 
the environmental characteristics of the electricity industry. For 
example, recent studies prepared for the California Air Resources Board 
and the Energy Foundation 6 indicate that the diesel-fueled 
internal combustion engines used in some distributed applications are 
60-100 times more polluting than CCGTs. Even fuel cells, when powered 
by hydrogen extracted from natural gas, may offer little if any 
environmental advantage over CCGTs.
---------------------------------------------------------------------------
    \6\ See Air Pollution Emission Impacts Associated with Economic 
Market Potential of Distributed Generation in California, Prepared for 
the California Air Resources Board and the California Environmental 
Protection Agency by Joseph Iannucci et al., Distributed Utility 
Associates (June 2000); and Can We Have Our Cake and Eat It Too?: 
Creating Distributed Generation Policy to Improve Air Quality, Prepared 
for the Energy Foundation by James Lents, Center for Environmental 
Research and Technology, University of California, Riverside 
(Distribution Draft November 2000).
---------------------------------------------------------------------------
    It is important for policymakers to understand that not all 
distributed technologies are equal from an environmental perspective, 
and that among distributed generating technologies, only solar 
photovoltaic and wind energy systems currently offer clear 
environmental benefits compared to other newer, more efficient 
generating resources. Policymakers should recognize and account for the 
significant differences in the environmental characteristics of various 
distributed technologies in determining to what extent these 
technologies deserve support. Rules encouraging the use of distributed 
technologies without regard for their environmental performance may do 
a disservice to the public. As a result, public policies should favor 
those distributed technologies that offer significant environmental 
benefits relative to other generating technologies.
           THE PUBLIC INTEREST IN A DISTRIBUTED ENERGY FUTURE
    The transition to a distributed energy future is likely to result 
in an electricity system that is less polluting and more efficient, 
reliable, and resilient.
    Distributed technologies are the electrical equivalent of the 
personal computer. Computing power used to be concentrated in large-
scale mainframe computers with access via ``dumb'' terminals at the 
end-user's location. The last two decades have seen a near-complete 
transition to microcomputers or minicomputers, each able to operate 
independently but also frequently linked to other computers to create 
electronic networks of information. Similarly, the generation of 
electric power has been concentrated in large-scale central-station 
facilities with the power transmitted, for the most part 
unidirectionally, to end-users. Increased reliance on distributed 
generation ultimately will result in a complex web of generating 
sources, with power flowing in multiple directions through the 
distribution system. Although for the foreseeable future this 
transition will not be complete, in that distributed generation will 
supplement rather than replace existing central-station generation, 
some industry analysts believe that new central-station plants on the 
order of 1,000 MW (typical of large nuclear and coal-fired power 
plants) will soon be unheard of.
    Much of the promise of the transition to a distributed energy 
future stems from potential improvements in the efficiency of energy 
conversion and in the environmental performance of the energy supply 
system. On-site generation allows the capture of waste heat, increasing 
the overall systems efficiencies of many combustion and non-combustion 
distributed technologies, including fuel cells, to as much as 80-90 
percent. In addition, some distributed technologies--with the 
exceptions noted earlier--offer substantial environmental benefits 
relative to existing energy conversion technologies. The Worldwatch 
Institute notes that micropower technologies that rely on cogeneration 
and cleaner fuels--either renewable energy or the cleanest of the 
fossil fuels, natural gas--have 50 to 100 percent fewer emissions, on a 
per-kilowatt basis, of particulates, nitrogen and sulfur oxides, 
mercury, and carbon dioxide than traditional fossil-fuel 
generation.7
---------------------------------------------------------------------------
    \7\ Micropower, pp. 36-37.
---------------------------------------------------------------------------
    The threat of human-caused climate change alone is reason enough to 
encourage the structural changes necessary to support a distributed 
energy system. Under a business-as-usual approach, the construction of 
new generating facilities would triple the carbon emissions from the 
electricity sector in developing nations alone. Widespread adoption of 
distributed renewable generation could reduce these projected emissions 
by 42 percent.8
---------------------------------------------------------------------------
    \8\ Micropower, p. 37.
---------------------------------------------------------------------------
    A distributed energy future also will help to resolve reliability 
and power quality concerns. Electricity reliability problems recently 
have reached crisis proportions, turning energy issues into front-page 
headlines for the first time in over two decades. Transmission 
constraints and capacity shortages in some regions have resulted in 
power disturbances and outages. An outage in Chicago during the summer 
of 1999 cut power to 2,300 businesses, including the entire Board of 
Trade on a mid-week afternoon.9 Supply problems in San Diego 
contributed to a doubling and even tripling of electricity prices 
during the summer of 2000.10 These problems increasingly are 
seen not as isolated instances, but as indications of a power supply 
system that has eroded as demand has grown.
---------------------------------------------------------------------------
    \9\ Micropower, p. 38.
    \10\ Testimony of San Diego Mayor Susan Golding to the Board of 
Governors of the California Independent Systems Operator (ISO) 
Regarding Wholesale Electricity Rate Price Caps (August 1, 2000).
---------------------------------------------------------------------------
    Contributing to reliability and power quality concerns are the 
increasing demands placed on the electricity system by the digital 
economy. Utilities traditionally sought to provide ``three 9's'' of 
reliability--99.9 percent availability, equivalent to about eight hours 
per year of outages. However, the proliferation of computers and other 
electronic equipment that is highly sensitive to even momentary 
disruptions in power has created a demand for ``six 9's'' or even 
``nine 9's'' of reliability. The existing distribution system is unable 
to provide this level of performance, forcing e-commerce companies and 
other participants in the digital economy to look elsewhere for their 
reliability needs. Among the options to which they turn is distributed 
generation, where innovations in power electronics, storage systems, 
and communications networks have enabled distributed technologies to 
meet the most stringent needs for power quality and reliability.
          BARRIERS TO INCREASED USE OF DISTRIBUTED GENERATION
    A recent report prepared for the National Renewable Energy 
Laboratory describes the barriers to distributed generation encountered 
in 65 different case studies, ranging from a 300 Watt solar electric 
system to a 26 MW gas turbine project.11 I was one of the 
authors of that report. In it, we identified and described a wide range 
of technical, business practice, and regulatory barriers encountered by 
the developers and owners of the distributed generation facilities.
---------------------------------------------------------------------------
    \11\ B. Alderfer, M. Eldridge and T. Starrs, Making Connections: 
Case Studies of Interconnection Barriers and Their Impact on 
Distributed Power Projects, National Renewable Energy Laboratory, 
Publication NREL/SR-200-28053 (May 2000).
---------------------------------------------------------------------------
    Technical barriers arise from utility requirements intended to 
ensure engineering and operational compatibility between the utility 
grid and the distributed generator. Most of these requirements focus on 
the utilities' safety, power quality, and power reliability concerns. 
The dominant technical barrier for most distributed generating 
technologies is the failure to adopt uniform standards for 
interconnection to the utility grid. Applicable standards for solar 
photovoltaic systems have been approved by the Institute of Electrical 
and Electronics Engineers (IEEE 929-2000), the Underwriters 
Laboratories (UL 1741), and the National Fire Protection Association 
(NEC Article 690), and these standards have been adopted in over a 
dozen states, not only for solar electric systems but also in some 
cases for other inverter-based technologies such as small wind systems, 
fuel cells, and microturbines. Comprehensive standards for a broader 
array of distributed technologies have been developed and adopted by 
several states, including California, Delaware, New York, and Texas. 
The IEEE is in the process of developing a broader technical standard 
encompassing all distributed technologies, 12 but this 
standard is a year or more away from being approved.
---------------------------------------------------------------------------
    \12\ Institute of Electrical and Electronics Engineers, IEEE P1547 
Draft Standard for Distributed Resources Interconnected with Electric 
Power Systems. See http://grouper.ieee.org/groups/scc21/1547/.
---------------------------------------------------------------------------
    Business practice barriers consist of contractual and procedural 
requirements for interconnection of distributed generation facilities. 
Among the most common complaints of owners and developers of 
distributed generation facilities is the absence of simple, 
standardized procedures among local jurisdictions and utilities for 
processing permitting and interconnection requests. According to the 
NREL study, more than 25% of the case studies cited project delays 
greater than four months. Many facility owners and developers also 
objected to application and interconnection fees that were seen as 
arbitrary and disproportionate. In one extreme case, the owner of a 
single-module solar electric system expected to produce approximately 
$40 per year worth of electricity was asked to pay up to $400 in 
application and processing/inspection fees, thereby offsetting ten 
years' worth of anticipated energy savings.13
---------------------------------------------------------------------------
    \13\ Making Connections Report, Case #26, pp. 77-78.
---------------------------------------------------------------------------
    Regulatory barriers include rate and tariff issues, including the 
imposition by utility regulators of backup or standby charges on 
distributed generation facilities; distribution wheeling charges for 
the delivery of power to wholesale or retail customers other than the 
utility itself; exit fees to discourage efforts to reduce dependence on 
utility power through self-generation or even demand-side management; 
and administratively determined buyback rates that do not reflect the 
economic benefits of distributed generation or clean power generation. 
For example, solar energy advocates had to appeal to the California 
Public Utilities Commission to prevent a utility from imposing a 
standby charge on net metering customers that would have offset nearly 
90 percent of the anticipated energy savings from a 1 kilowatt solar 
electric system.14
---------------------------------------------------------------------------
    \14\ Making Connections Report, p. 24.
---------------------------------------------------------------------------
    Another fundamental barrier to a distributed energy future is the 
apparent absence among U.S. policymakers of the political will needed 
to support the infrastructure investments necessary to enable the 
widespread adoption of distributed technologies. Upgrades to the 
distribution system are essential for proper integration of distributed 
technologies into existing electricity networks. However, many 
utilities, instead of embracing the opportunity to create the 
electrical equivalent of an ``open architecture'' system, hesitate to 
make the necessary utility investments, perhaps fearing the loss of 
physical or economic control over the electricity system. Similarly, 
many utility regulators appear reluctant to allocate the costs of 
bolstering the distribution system among all customers, perhaps fearing 
the lack of public support for such expenditures. Although these issues 
are just starting to be addressed among the states, early evidence 
suggests that much of the cost of making the transition to a 
distributed energy future will be shouldered by private developers of 
distributed generation facilities, even while the benefits of a 
renewed, more resilient distribution system accrue to the public.
          COMMENTS ON INTERCONNECTION AND NET METERING ISSUES
    My oral testimony this morning will focus on three specific areas: 
the development and adoption of uniform, standardized interconnection 
requirements for distributed generation facilities; the use of `net 
metering' to encourage small-scale distributed generation; and the use 
of `consumer friendly contracts' to streamline and simplify the process 
of interconnecting distributed generating facilities.
Standardized Interconnection Requirements
    One of the most significant barriers to the broader 
commercialization of distributed technologies is the absence of 
uniform, national technical standards for the interconnection of 
distributed generating facilities. The problem arises because utilities 
historically have had substantial discretion over interconnection 
requirements, and have often used that discretion to develop 
requirements that vary considerably from one utility to the next 
without appropriate technical or economic justification. These utility-
specific requirements were of relatively little concern for the 
developers of larger-scale generating facilities, whose projects were 
big enough that they could justify the cost of hiring consulting 
engineers and attorneys to negotiate project-specific interconnection 
requirements for their facilities. For smaller systems such as 
residential `rooftop' solar electric systems or farm-scale wind energy 
systems, these costs are an absolute deal-breaker.
    Utilities play a tremendously important role in our society by 
maintaining the safety and reliability of the grid, and as a result 
they have legitimate concerns about the interconnection of non-utility 
generating equipment to their networks. On the other hand, utilities 
face a conflict of interest because they have an economic incentive to 
discourage customers from generating their own electricity: the more 
customers self-generate, the less those customers are buying from the 
utility.
    The solution to this problem is the adoption of national standards 
developed by appropriate authorities, such as the Institute of 
Electrical and Electronics Engineers (IEEE), Underwriters Laboratories 
(UL), and the National Fire Protection Association (which writes the 
National Electrical Code, or NEC). The states are already pursuing this 
approach: As Figure 1 indicates, over 20 states have passed laws or 
enacted regulations requiring the development of standardized 
interconnection requirements for at least some categories of 
distributed generating facilities.
Net Metering
    Net metering is a simple, inexpensive, and easily-administered 
mechanism for encouraging the use of small-scale distributed 
generation. Net metering allows utility customers to spin their meter 
backwards when they produce more electricity than they need for their 
own lights and appliances.
    Under existing federal law (the Public Utility Regulatory Policies 
Act of 1978), utilities are required to interconnect with certain 
distributed generating facilities, and to purchase the excess 
electricity produced by those facilities. But under PURPA, the utility 
purchases that excess electricity at an administratively-determined 
`avoided cost' price, which is usually a fraction of the retail price 
the customer pays for power. Net metering provides a modest economic 
incentive for eligible facilities by crediting them for this excess 
electricity at the retail rate.
    Net metering policies have been tremendously popular at the state 
level. Just five years ago, only 14 states allowed net metering, and 
most of those requirements were adopted pursuant to state 
implementation of the federal PURPA law. Today the total stands at 34 
states, with four new states--Arkansas, Georgia, Hawaii and Wyoming--
enacting net metering laws just this year (see Figure 2). In most 
cases, these laws were enacted by legislation (although in a few cases 
net metering policies were adopted by regulation), and in most cases 
with broad bipartisan support. In my home state of Washington, for 
example, the 1998 net metering law passed unanimously in a then-
Republican controlled legislature and was signed into law by a 
Democratic Governor.
Business Practices
    Another fundamental barrier to the interconnection of distributed 
generating facilities is the failure to adopt simplified 
interconnection agreements and routine procedures for processing 
interconnection requests. Again, particularly for small-scale 
facilities, the goal should be to attain ``plug and play'' simplicity 
that eliminates unnecessary delays and inappropriate expenses. 
Unfortunately, many utility customers across the country have had the 
experience of contacting their local utility seeking information on 
interconnection procedures, only to be ignored or rebuffed or otherwise 
discouraged. In response, some states have explicitly required the 
development of simplified agreements and specific timelines for the 
processing of interconnection requests.
            COMMENTS ON PROPOSALS CURRENTLY BEFORE THE HOUSE
    Although today's witnesses have not been asked to focus their 
testimony on any particular bills currently in the House of 
Representatives, I am aware of several bills that contain provisions 
relating to distributed generation, interconnection standards, and net 
metering. These include:

 H.R. 1045--``Energy Self-Sufficiency Act for the 21st 
        Century'' (Mrs. Wilson). Title I of this bill requires the 
        Federal Energy Regulatory Commission (FERC) to adopt safety-
        reliability, and power quality standards for distributed 
        generation facilities, and requires utility distribution 
        companies to interconnect distributed generation facilities 
        that meet the standards and pays the direct costs of 
        interconnection. It also requires the costs, terms and 
        conditions of interconnection and subsequent service to be 
        just, reasonable and non-discriminatory, as determined by the 
        Commission. This is a simple and logical approach to creating 
        uniform, standardized interconnection requirements for 
        distributed generation facilities. I believe the enactment of 
        this provision would have a positive, market-enhancing effect 
        on the commercialization of distributed technologies.
      Title II of this bill contains an investment tax credit for 
        distributed power property or combined heat and power system 
        property. However, the definitions appear to be narrowly drawn 
        to exclude residential property (except rental property). These 
        definitions would exclude residential fuel cell systems, solar 
        electric systems, and wind energy systems on farms or ranches 
        that are metered and billed as residential customers. I see no 
        justification for excluding such facilities, which offer 
        substantial distributed benefits and environmental benefits, 
        from investment tax credits that are available to other 
        distributed generation facilities.
      Title III of this bill provides for research and development on 
        new distributed generating technologies, including various non-
        renewable technologies such as advanced natural gas turbines, 
        advanced internal combustion engines, fuel cells, and 
        microturbines but not including renewable technologies such as 
        solar, wind, and biomass technologies. Again, I see no 
        justification for excluding technologies that offer significant 
        potential for diversifying our energy resources, improving our 
        energy security, and protecting our natural environment.
 H.R. 1945--``Combined Heat and Power Advancement Act of 2001'' 
        (Mr. Quinn). Title I of this bill requires the FERC to adopt 
        rules establishing reasonable and appropriate technical 
        standards for the interconnection of a generating facility at 
        the distribution level. Generating facilities that comply with 
        the relevant rules are entitled to interconnection with the 
        distribution facilities of the local distribution utility. The 
        rules are to be administered and enforced primarily by non-
        Federal regulatory authorities. The Title also requires local 
        distribution utilities to provide backup power (or to enable 
        another entity to provide backup power using the distribution 
        utility's facilities) under just and reasonable, and non-
        discriminatory, terms and conditions. Title I also contains 
        comparable provisions for interconnection of generating 
        facilities at the transmission level.
      Title II of this bill contains an investment tax credit for 
        combined heat and power system property. This tax credit is 
        even more narrowly drawn than the proposed tax credit in H.R. 
        1045 (above), since it excludes all distributed generating 
        facilities that are not also combined heat and power 
        facilities. These definitions would exclude most fuel cell 
        systems, most biomass facilities, and all solar electric and 
        wind energy systems. Because these technologies can contribute 
        substantially to our nation's energy independence and energy 
        security, I see no reason to exclude them from the favorable 
        tax treatment.
 H.R. 954--``Home Energy Generation Act'' (Mr. Inslee). This 
        bill requires retail electric suppliers to offer `net metering' 
        arrangements to customers with eligible generating facilities, 
        including fuel cells and solar, wind or biomass facilities with 
        a generating capacity of up to 100--kilowatts. The bill defines 
        the terms and conditions under which net metering calculations 
        shall be made, including a non-discrimination provision 
        prohibiting the imposition of additional fees and charges on 
        net metering customers. It also limits the total capacity of 
        net metering facilities to two percent of the utility 
        distribution company's aggregate peak demand. Net metering 
        facilities are required to meet applicable safety, performance, 
        and power quality requirements established by certain national 
        standards-setting authorities. In addition, the bill requires 
        the FERC to develop broader standards for the interconnection 
        of distributed generation facilities up to 250--kilowatts. A 
        non-preemption provision grants states the authority to 
        establish or impose additional incentives for qualified 
        generation and net metering, beyond those in the bill. Finally, 
        the bill requires the FERC to develop simplified, ``consumer-
        friendly contracts'' for the interconnection of distributed 
        generation facilities up to 250--kilowatts.
      The language in this bill closely resembles the language enacted 
        in over a dozen states in recent years, relating to net 
        metering and interconnection of distributed generating 
        facilities. Although these state laws have varied significantly 
        in certain elements of their policies, they have been 
        remarkably uniform in extending net metering eligibility to 
        certain small-scale, renewable-fueled, customer-sited 
        generating facilities and in adopting uniform, standardized 
        interconnection requirements based on applicable IEEE, UL and 
        NEC standards. The enactment of federal legislation along these 
        lines would be the least disruptive to states that have already 
        implemented comparable legislation.
                              CONCLUSIONS
    Twenty years ago, the telecommunications industry in the U.S. was a 
cumbersome, heavily regulated business dominated by regulated 
monopolies that demonstrated little appetite for innovation. Today, the 
telecommunications industry is highly competitive and highly 
innovative, with consumers able to choose among a remarkable array of 
products offered by many different manufacturers. One of the key 
elements in that transformation was overcoming the telephone utilities' 
institutional resistance to interconnecting facilities and equipment 
from competing providers into the wireline network under fair, non-
discriminatory terms and conditions.
    The electricity industry in the U.S. is in the early stages of a 
similar transformation. The traditional paradigm of large, central-
station generating plants feeding a network of high-voltage 
transmission lines and local distribution systems in a geographic 
region, all owned by a single, vertically-integrated company, will 
evolve in the coming decades to a complex web of interconnected 
facilities for generating and storing electricity, owned by many 
different companies and even individuals. The utilities' role will 
shift to the management of electricity flowing in every direction 
through the network. Fortunately, this transition has the potential to 
provide substantial benefits for all Americans, including a more 
efficient, more responsive, more reliable, and more environmentally-
benign electricity system. But our nation's ability to make this 
transition efficiently and smoothly is threatened by the same 
reluctance on the utilities' part--except that it is the electric 
utilities this time--to integrating these facilities into their 
distribution networks. The bills currently in the House can help 
overcome this reluctance and encourage the utilities to embrace this 
new era.
    I would like to thank Congressman Barton and the others members of 
the Committee for their interest in removing barriers to competitive 
generation and for considering initiatives to encourage the development 
of viable, competitive markets for distributed generation technologies
    Thank you for the invitation to appear before you today. I would be 
happy to answer any questions the Committee may have.
[GRAPHIC] [TIFF OMITTED] T4848.003

[GRAPHIC] [TIFF OMITTED] T4848.004

    Mr. Barton. Thank you.
    The Chair will recognize himself for the first question 
period. We are only going to have one question period because 
if we are really, really lucky we can get the questions in 
before we have to go vote; and once we go vote there is 
probably going to be 5 or 6 votes. So we may be able to let 
everybody go have lunch in the next 20 to 25 minutes.
    I am going to ask Mr. Brent--I believe it is either Mr. 
Brent or Mr. Hall that talked about a consensus, a working 
group that is working within IEEE to come up with some national 
interconnection standards. Which of you talked about that? Mr. 
Hall or Mr. Brent?
    Mr. Brent. Mr. Hall talked about consensus. I talked about 
the IEEE as the working body doing the work on interconnection 
standards.
    Mr. Barton. Well, my question to both of you, how close are 
you all, this group, to consensus that actually could be put 
into legislative language if necessary to be put into a statute 
to help FERC?
    Mr. Brent. On technical standards I would propose that we 
are extremely close, and on some of the more esoteric I would 
say we are coming to closure rapidly.
    Mr. Barton. Okay. Mr. Hall.
    Mr. Hall. I think there is two different issues here. One 
is, what are the actual standards; and the IEEE is working on a 
set of technical uniform interconnection standards. It is 
important to note that the IEEE is a body made up of voluntary 
participants based on----
    Mr. Barton. I am very aware of that.
    Mr. Hall. [continuing] on consensus. And we heard testimony 
from Assistant Secretary Garmon last week on the Senate side 
that the IEEE process is not likely to complete their 
deliberations this year. However, some of the legislation that 
is before you in the bills, particularly in H.R. 1945, 
contemplates giving FERC the authority to convene bodies or use 
standards that are developed by a voluntary body like IEEE. So 
I think we are in a position right now where we have got 
consensus that establishing an authority to have uniform 
technical interconnection standards is appropriate now.
    It is also worthy to note that the language that Mr. Brent 
talked about in H.R. 1045, all of the issues addressed in that 
piece are also addressed in H.R. 1945. It just happens to also 
address transmission interconnection as well as opposed to only 
being limited to distribution levels.
    Mr. Barton. We do not have to put in the statute to the 
degree of specificity that might be necessary to actually enact 
the standard, but if we are going to draft a bill and pass bill 
in the next 2 months, and we are going to have an 
interconnection requirement, I guess my question is, how close 
are the groups that are working on this to getting their 
squabbles squabbled so that we can move forward? Are there any 
major technical outstanding issues that are not doable?
    Mr. Hall. I know specifically on H.R. 1945, practically--we 
have been working with practically every group that has any 
interest in interconnection, and I would submit that this is as 
close to a consensus piece of language as you are going to 
find.
    Mr. Barton. Well, when you go back, encourage more 
consensus more quickly so that we can use your work product.
    Mr. Hall. It would certainly be helpful if you had--if you 
were hearing directly from people that weren't before you, 
because what I heard this morning from the first panel and 
certainly from the second is that everybody seems to agree with 
this. So it would be helpful to the extent that you are hearing 
about disagreements.
    Mr. Barton. I always hear about the disagreements. There is 
no lack of people willing to tell me what they are unhappy 
about.
    Ms. Magruder, you talk about time-of-use metering. Who is 
going to pay for these time-of-use meters, and how expensive 
are they compared to existing meters there in peoples' homes?
    Ms. Magruder. I can't address the question of how they 
compare to the cost of existing meters. I can tell you that if 
you can get a full truckload--if you can get your truck loaded 
up and send your guy out to install them, technology has gotten 
the cost down to about $100 installed now.
    Mr. Barton. These horror stories of $2,000 meters are just 
that, stories?
    Ms. Magruder. There may be a $2,000 meter. It is not one 
that we would propose to put on someone's home.
    Mr. Barton. A meter you would propose to put on somebody's 
home is equivalent in cost to the existing meter, and the cost 
of the meter can be spread out over time if that were a 
consideration. So that is not a reason not to do it.
    Ms. Magruder. It is not a reason not to do it. And 
depending on the circumstances of the State restructuring law, 
it might even be something that a marketer would bear himself, 
just like MCI or some of these folks who will give you a free 
cell phone if you sign up for a year's worth of service from 
them.
    Mr. Barton. Mr. Starrs, my time is about to expire right 
now, but this is a little off the subject. But since you are 
our renewable guy and our solar guy, what is the latest cost 
number for a solar panel to put on your home in terms of 
kilowatt per hour if you wanted to run a water heater or 
something at that level? What is your kilowatt-per-hour charge 
these days?
    Mr. Starrs. It is still considerably more expensive than 
the average retail rates that customers pay. Systems are 
available on an installed cost of little as, say, $2,000 and as 
much as, say, $20,000 to $50,000 depending on how much of your 
electricity you want to offset. And those figures translate 
roughly, obviously depending on the financing, to a per-
kilowatt-hour cost of between 20 to 25 cents a kilowatt.
    Mr. Barton. Even in California or some high-cost State, 
unless you are in a remote area----
    Mr. Starrs. That was the short answer. These systems are 
basically cost-effective in California today because of 
additional incentives that California has put in place. 
California has a pretty substantial rebate program that returns 
to the customer about half the cost of the system when it is 
installed. So that, along with other incentives that have been 
enacted at the State level in California, frankly means that if 
you are building a new home in California, it doesn't make 
sense not to install a solar system.
    Mr. Barton. Thank you. My time has expired.
    The gentleman from Virginia is recognized for 5 minutes.
    Mr. Boucher. Thank you very much, Mr. Chairman.
    Mr. Hall, Mr. Brent and others who may want to comment on 
the question, if we proceed to adopt an interconnection 
standard for distributed generation, I would like your advice 
on whether we should address a couple of concerns. The first of 
those would be whether there is any limitation in size of the 
generating unit that would qualify as a distributed generation 
unit for purposes of accessing this interconnection standard. 
And the second question is whether we should have any 
particular requirements with regard to emissions or the type of 
fuel that is used in that unit.
    We do not have any definition of distributed generation 
today, not in a legal sense. I mean, we know what it means to 
talk about distributed generation with a consumer putting the 
source of his electricity very near the point of consumption. 
That is what we mean by it, but we don't have a legal 
definition, and as we draft one, should we address these 
concerns? Should we talk about the size of the unit? Should we 
talk about emissions from it? These units presumably would have 
to comply with the new source performance standards and meet 
all of the requirements of current law with regard to 
emissions. But some people, when they talk about distributed go 
beyond that. They talk about the need to have superclean units 
and green units. And I would like your advice on that set of 
considerations.
    If we write a definition, if we adopt an interconnection 
standard, to what extent should we address these other 
elements? Mr. Hall?
    Mr. Hall. I would be happy to address it. The short answer 
to both is no. It is unnecessary to either define or limit in 
any way, shape or form the size, nor is it necessary to limit 
the performance, specifically in establishing uniform 
interconnection standards. Everybody needs a set of uniform 
technical interconnection standards that they can rely on in 
interacting with our distribution and our transmission system. 
There are varying--different definitions that people might 
propose of what is distributed generation versus what is not.
    I think the future is a continuum of technologies, burning 
a variety of fuels in a whole range of settings, all of which 
should have equal opportunity to participate in the market as 
long as they are also capable of satisfying other objectives 
that we have, clean air being one, but using a limiting 
definition of a distributed generation facility. Having to meet 
a particular environmental standard is, in my mind, not the 
role of energy legislation. It is the role of environmental 
legislation and regulation.
    Mr. Boucher. Let me ask you the question, do you have----
    Mr. Barton. Would the gentleman yield just on that?
    Mr. Boucher. I would be happy to yield.
    Mr. Barton. In our bill in the last Congress, we had a size 
limitation. I don't remember exactly, but it was either 10 or 
50 megawatts, but it was not unlimited, and we had some 
opposition to that, but not a lot. We don't want to you build a 
500-baseload megawatt power plant and call it distributed 
generation.
    Mr. Hall. There are two issues that we are mixing together 
here. I think that if you are limiting your interconnection 
only to the distribution system, then you may find that there 
is an upper bound on the size that is appropriate to connect it 
to a distribution system. Is that necessary for us to, A, limit 
interconnection only at the distribution level? I would say no. 
Is it clear, the line between distribution and transmission? 
No. There are plenty of cases before FERC where various lines 
are being refunctionalized from transmission to distribution 
and distribution to transmission.
    Mr. Barton. There is probably going to be--in fact, I would 
say there is almost a certainty there will be some size 
limitation on distributed generation.
    Mr. Boucher. Mr. Brent, would you care to comment?
    Mr. Brent. Yes. My testimony called for distributed 
generation and is generally considered to be up to around 50 
megawatts in size.
    I agree with Mr. Hall in terms of the answer of no relative 
to emissions. We are of the opinion that we need to be as clean 
as we can going in and be as inclined as we are to the 
regulations in place coming down the road. Technologies will 
allow us to raise higher efficiencies. Efficiencies today are 
not considered in environmental compliance. We need to look at 
output-based standards. And I think, depending upon whatever 
fuel you use, as you meet the emerging regulations and 
guidelines for distributed generation and combined heat and 
power, we are going to answer the environmental responsibility 
for distributed generation. It is not the fuel. It is the 
ability of the technology to convert the fuel cleanly.
    Mr. Boucher. Educate me about the fuel and emissions 
generally. My understanding is that, generally speaking, new 
sources have to meet very stringent requirements for new 
sources under the 1977 Clean Air Act. If somebody wants to put 
a diesel generator on their parking lot and supplement their 
power today, can they do that? It probably doesn't meet the new 
source performance standards. So can somebody put a diesel 
generator in their parking lot under current law today? And if 
the answer to that is yes, and, in fact, that doesn't meet the 
new source performance standard, do we have to be concerned 
about people using diesel or something else that is not 
particularly clean if we are going to have a broad 
encouragement for more distributed generation by providing this 
interconnection standard?
    Mr. Brent. If I may, sir, we would prefer to be called 
reciprocating engines that burn distillate fuel. And we would 
also suggest to you that that individual who puts the 
reciprocating engine on the back of his parking lot is limited 
by the number of hours that they can run because of the amount 
of emissions that they produce. So there are already 
regulations in place today through the State regulatory and the 
Federal guidelines on how many hours they can run before they 
hit the total ton limit.
    I would suggest, again, it is not the technology. It is a 
matter of complying to the statutes that are in place today. 
There are many times when we can't get gas through a particular 
distributed generation end user, who is very concerned about 
the reliability of supply, as we have seen, unfortunately, 
happen in California with a plethora of distributed generation 
technologies going in because we have people who have suffered 
great loss for lack of electricity and are willing to put up--
--
    Mr. Boucher. We will digest that answer. I think we need to 
be cognizant of what the effect of a lot of distributed 
generation might be on air quality.
    Mr. Boucher. May I ask for 2 additional minutes? My time is 
expired.
    Mr. Barton. Without objection.
    Mr. Boucher. Mr. Yacker?
    Mr. Yacker. If I could respond to that briefly. Given the 
Cheney report, it talked about--I think it was 1,300 new power 
plants over a period of years. I would like you to reconsider 
the size limit. In particular, a concept growing in popularity 
is the idea of industrial parks, cogeneration parks--some 
people call them power parks--that would have either in whole 
or in part a generation base for that facility. It would make 
permitting easier.
    Mr. Boucher. Mr. Starrs?
    Mr. Starrs. As a designated renewables guy here, I largely 
agree with Mr. Hall and Mr. Brent, but with a couple of 
qualifications. On the emissions issue--by the way, there is a 
fair amount in my written testimony that does relate to these 
issues. I think that it is a very important issue from a public 
policy perspective. But I think we should be developing--this 
committee's jurisdiction is over the technical and nontechnical 
interconnection requirements, and those are issues for energy, 
legislative and regulatory committees. I think the air quality 
issues are very important. And frankly, I think there are going 
to be significant constraints placed on distributed 
technologies that are not currently in place now. But those 
issues are now being addressed by air quality regulators and 
other environmental regulators.
    Right now, for example, it is clearly the case that some of 
these facilities, like the diesel generators that you 
discussed, have been largely exempted from the air permitting 
requirements because typically they are used just as emergency 
backup generators, and their run times are very short. But I 
think those issues will be revisited if and when you start 
seeing those kinds of facilities for distributed applications 
where they are starting to press the limit on those run times.
    Mr. Boucher. Well, we are the people who have the 
responsibility for revisiting. Part of this subcommittee's 
jurisdiction is air quality. And so we have to consider the 
broad range of issues.
    Let me thank this panel of witnesses. I would personally 
like to spend a little more time with you--actually, they have 
been by the office. But let me conclude by saying----
    Mr. Barton. I am sure they are available for lunch.
    Mr. Boucher. That is right, but I am out of money this 
week, Mr. Chairman. But let me conclude with two comments.
    First of all, Mr. Yacker, I very much appreciate your 
recommendations to us on the question of PURPA. I agree with 
what you have said. I personally think that the interconnection 
right, the right to buy power from the grid and sell power into 
the grid, will have to be retained for qualified facilities 
until we have a fully competitive market locally where they can 
meet those needs on the open market if circumstances require. 
And my goal, as we consider PURPA in this subcommittee, will be 
to adhere to those principles.
    Ms. Magruder, I want to commend you also. I think the 
realtime metering that your technology affords brings to 
consumers of electricity the opportunity to save substantially 
on their bills by consuming power during times of lower overall 
demand. That also produces the benefit of perhaps lessening the 
number of new generating units that will have to be built by 
flattening out peaks. And you might want to supply this 
subcommittee with any estimates that you have of two things, 
and you can do this sometime in writing later.
    One would be the amount of electricity savings in terms of 
bills paid by the typical consumer if that consumer is able to 
use realtime metering. And the second would be any estimate you 
would care to make of the new generating capacity that would 
not have to be built; in other words, the avoided cost of new 
generating capacity that might arise from a broad use in the 
United States of realtime metering.
    The other thing I would suggest is that you supply to us a 
very precise set of recommendations for what we need to do to 
change the law in order to make sure that consumers have access 
to the technology that you are putting forth.
    Thank you very much. The gentleman from Oregon is 
recognized for 5 minutes.
    Mr. Walden. I have no other questions at this time.
    Mr. Barton. Seeing no other members present, again, we may 
have a few questions for the record. We hope that you would 
reply quickly, because we are going to begin drafting a draft 
in the next couple of weeks.
    This hearing is adjourned.
    [Whereupon, at 12:45 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
Prepared Statement of Knoxville Utilities Board and Memphis, Light, Gas 
                            & Water DiVision
                        INTRODUCTION AND SUMMARY
    Memphis Light Gas and Water (``Memphis'') and Knoxville Utilities 
Board (``Knoxville'') submit this statement for the record of the 
Committee's hearings on electric industry restructuring issues to set 
forth their views on the need for legislation related to the Tennessee 
Valley Authority (``TVA''). Knoxville and Memphis are two of TVA's 
largest customers, accounting for approximately 16 percent of TVA's 
power sales for resale and serving more than half a million customers.
    As distributors of electricity, Memphis and Knoxville are committed 
to providing their customers with reliable service at the lowest 
reasonable cost. Currently, however, TVA's wholesale rates to 
distributors are sometimes higher than those offered by other power 
suppliers outside of the Tennessee Valley. Yet, federal law effectively 
prohibits TVA distributors, like Knoxville and Memphis, from purchasing 
power from wholesale suppliers outside of the TVA service area. Without 
action by Congress to change this legal framework governing TVA in a 
comprehensive way, consumers within the Tennessee Valley region will 
not even have the opportunity to benefit from alternative electric 
supplies available in today's more competitive bulk power markets.
    It is certainly true that TVA is a federal public works success 
story, and Memphis and Knoxville recognize the infrastructure and 
economic benefits that TVA has contributed to the Tennessee Valley over 
many decades. It is also true that the electric industry has changed 
dramatically since TVA was created in the 1930s, and it is now time to 
reform TVA to equip it and its customers to meet the challenges and 
opportunities of the 21st century. Unlike other electric systems across 
the country as to which the Federal Energy Regulatory Commission (FERC) 
or state and local regulatory bodies can facilitate change in response 
to changing market conditions, only Congress can take the necessary 
steps to facilitate change as to TVA. TVA is a creature of federal law, 
and only federal law can change it. Accordingly, Knoxville and Memphis 
respectfully urge Congress to take the actions necessary to restructure 
TVA and extend the potential benefits of wholesale electric competition 
to the people of the Tennessee Valley region.
    More specifically, Memphis and Knoxville support the so-called 
``Consensus'' legislation developed over months of negotiations by TVA, 
municipal and cooperative electric distributors, and industrial users 
in the Tennessee Valley. Further, Memphis and Knoxville support with 
the addition of FERC jurisdiction over TVA's wholesale rates. 
Accordingly, Knoxville and Memphis respectfully request the Committee's 
consideration of the Consensus legislation and the additional provision 
regarding FERC jurisdiction over TVA's wholesale rates, which is 
essential for public accountability of TVA's rates and service and for 
fairness to consumers and other industry participants alike.
FERC Regulation of TVA Wholesale Sales
    In addition to the provisions set forth in the Consensus, Memphis 
and Knoxville urge Congress to include FERC regulation of TVA wholesale 
sales in any TVA reform legislation. Under existing law, TVA's 
wholesale power sales are not subject to any oversight by FERC or any 
other regulatory authority. The only entity with the power to oversee 
TVA is the United States Congress, and its exercise of that function as 
to core commercial matters such as the rates, terms, and conditions for 
wholesale power sales is nonexistent. TVA is a completely self-
regulated entity that sets its own rates, terms, and conditions for 
wholesale power sales without any independent review of any sort at any 
time.
    The Federal Power Act grants FERC jurisdiction over wholesale power 
sales in interstate commerce by public utilities. Rates, terms, and 
conditions of service are required to be just, reasonable, and not 
unduly preferential or discriminatory. In addition, customers have the 
right to file a complaint with FERC challenging rates or contracts as 
unjust, unreasonable, or unduly preferential or discriminatory. 
Knoxville and Memphis strongly believe that this regulatory structure 
should be applied to TVA.
    Without oversight by an independent regulatory authority, like 
FERC, TVA could charge whatever rates it wanted to charge, set terms 
and conditions of service in whatever manner it wanted to set terms and 
conditions, and otherwise use its market power in a wholly unrestrained 
fashion in its wholesale sales business. It is true that provisions in 
the Consensus legislation, such as removing the anti-cherrypicking 
provision and requiring TVA to provide open access nondiscriminatory 
transmission service, will produce some competitive options for TVA's 
wholesale customers, but it is also true that TVA will continue to 
possess market power in the wholesale sales market with respect to 
many, if not all, of its distributor customers. Thus, it is critical 
that Congress include in any legislation to reform TVA FERC regulation 
of TVA's wholesale sales rates and service.
Fair Competition and Transmission Regulation
    Foremost in any consideration of opening the Tennessee Valley to 
electric competition is the notion that TVA will have an unfair 
advantage over other wholesale power suppliers. The Consensus addresses 
this concern by removing the TVA ``Fence,'' which prohibits TVA from 
selling electricity outside of its existing service area, and the 
``anti-cherrypicking'' provision, which prohibits open access 
transmission on the TVA system into the TVA service territory.
    The Fence restriction was established when TVA was granted the 
authority to issue bonds to finance capital expenditures for its power 
programs. TVA's legal ability to compete was so restricted because of 
concerns that TVA's unique status could give it an unfair advantage 
over other wholesale power suppliers. However, under the Consensus 
legislation with FERC wholesale sales jurisdiction, the Fence would no 
longer be necessary. TVA would be subject to the same regulatory 
scrutiny as other public utilities making wholesale sales, including 
FERC and the federal antitrust laws, and would be on a similar 
competitive footing as others.
    Hand in hand with removal of the Fence, Memphis and Knoxville 
support the position set forth in the Consensus legislation that TVA 
provide the kind of open access, nondiscriminatory transmission service 
that is required today throughout the rest of the country. Current 
law--the ``anti-cherrypicking'' provision--prohibits FERC from 
requiring TVA to provide open access nondiscriminatory transmission 
service within the TVA service territory. Thus, power distributors in 
the Tennessee Valley, like Knoxville and Memphis, cannot access power 
from suppliers outside of the TVA region, and TVA remains insulated 
from the market for competitive electric supplies.
    There are also concerns with respect to TVA competing with power 
suppliers outside of the region. For example, TVA sales outside of the 
region could denigrate TVA's capacity to meet the requirements of its 
principal mission--serving the electric power needs within the 
Tennessee Valley. Further, potential competitors of TVA have asserted 
that TVA may have an unfair advantage when competing against suppliers 
that do not have the funding and support of the federal government. 
Therefore, the Consensus legislation provides that TVA will only be 
permitted to sell electricity outside of the Fence in excess of the 
demand of its customers inside the TVA service area. Moreover, FERC 
jurisdiction over TVA's wholesale sales would require TVA to abide by 
the same cost and rate rules as other wholesale sellers and would 
provide a knowledgeable forum for resolution of any complaints about 
TVA's rates and service.
    Memphis and Knoxville fully support repealing the TVA Fence and the 
anti-cherrypicking provisions. These Fence and anti-cherrypicking 
provisions have become anachronisms in this day and age of competitive 
wholesale power markets and should be repealed as set forth in the 
Consensus legislation, thereby permitting TVA to sell power outside of 
the Fence to a certain extent and permitting TVA distributors to access 
power from suppliers other than TVA. These components of the Consensus 
legislation, along with FERC jurisdiction over TVA's wholesale sales, 
are essential to bring electric industry competition to the Tennessee 
Valley and should be incorporated into any legislation on TVA reform.
Contract Reformation
    Knoxville, Memphis and every other retail electric distributor in 
the Tennessee Valley are currently parties to long-term power supply 
contracts with TVA. These contracts require no less than five, and 
often ten years advance notice for termination; otherwise they continue 
in perpetuity. Thus, even if a TVA supplied distributor were to give 
notice of contract termination today, it may not be able to purchase 
power from alternative sources until 2010. To provide competitive 
options that can actually be used by distributors in the Tennessee 
Valley, TVA restructuring legislation must include mechanisms to reform 
these contracts.
    Under the Consensus proposal, distributors of TVA power, such as 
Memphis and Knoxville, will be permitted to renegotiate their existing 
power contracts in conformance with a more competitive market and to 
facilitate access to alternative power supply options, including self-
generation, provided in a restructured TVA environment. For those 
distributors who are unable to reach an agreement with TVA, the 
Consensus provides distributors with the opportunity to cancel their 
contracts on three years notice. Additionally, each year distributors 
may, on two years notice, elect to purchase ten percent or less of 
their power requirements from another supplier. These options, 
including the three-year notice provision, provide TVA ample time to 
obtain other buyers for the power made available by a distributor's 
contract termination or reduction and, of course, allow distributors to 
take advantage of new competitive power supply options that would 
otherwise not be available as a practical matter.
TVA Debt, New Generation, and Stranded Costs
    TVA has significant debt, and consideration of TVA reforms will 
surely generate debate about how to deal with that debt, how to 
decrease it, and how to prevent TVA from increasing it unnecessarily in 
a competitive environment. The Consensus proposal addresses this 
specifically by providing electric distributors in the Tennessee Valley 
with forty-five days to review and provide comments on all TVA plans 
and projections for new electric generating facilities prior to 
acquisition. The notion here is that electric supply and disposition 
will be harmonized through a supplier/market consultative process. 
Further, the application of FERC regulation to TVA's wholesale rates 
will not permit unjustifiable increases in costs, like new TVA 
generation, where alternatives are available.
    Potential stranded TVA costs are another area of concern. The 
Consensus proposal deals with this subject in several ways. First, it 
authorizes TVA to recover stranded costs that may arise from the 
exercise by distributors of their contract reformation rights under the 
same FERC stranded cost recovery rules applicable to other wholesale 
sellers of power. This stranded cost recovery opportunity is, as 
already committed to by TVA, strictly limited to the pre-September 30, 
2007 time frame. Second, any stranded costs authorized to be recovered 
by TVA must be used in the first instance to pay down TVA's debt. And, 
finally, TVA is prohibited from using any stranded cost recovery 
revenues to pay for additions to its generation capacity.
Application of Antitrust Laws to TVA
    TVA is now exempt from the antitrust laws, yet it is clear that TVA 
has enormous market power within the Tennessee Valley. Thus, in a 
competitive power market, there would be no antitrust law protection 
for TVA customers or competitors alike from potential antitrust 
violations by TVA. Therefore, pursuant to the Consensus, TVA would be 
subject to the federal antitrust laws to the same extent as other 
governmental entities are subject to such laws--that is, injunctive 
relief would be available through a successful court action, but treble 
damages and attorney fees would not.
Repeal of TVA Regulation of Distributors
    Currently, retail distributors of electricity in the Tennessee 
Valley are regulated by TVA instead of by local governing bodies or 
state public service commissions, as is the practice elsewhere in the 
country. This means that TVA sets rates for distributors and thereby 
controls the essence of the distributors' business relationships with 
their retail customers. In a competitive electric market, it would be 
viewed as anticompetitive for a wholesale supplier to regulate retail 
distributors. To remedy this situation, the Consensus repeals TVA 
regulation of distributors subject to the election of individual 
distributors.
Conclusion
    In conclusion, Knoxville and Memphis strongly urge Congress to 
enact fundamental reforms to TVA as described above. The Consensus 
proposal was reached only after very intensive efforts on the part of 
the entities most directly affected by reform of TVA, and it is 
supported by the Tennessee Valley Public Power Association, the 
Tennessee Valley Industrial Coalition, Memphis, Knoxville, and TVA 
itself. All parties, including distributors such as Knoxville and 
Memphis, worked diligently to develop a fair and pragmatic proposal for 
reform of TVA that would best serve the interests of citizens and 
businesses in the TVA service territory. Now, however, congressional 
action is necessary. Otherwise, the Tennessee Valley region will remain 
an island of federal monopoly in a sea of competition, which does not 
bode well for electric consumers or economic development generally in 
the region.
                                 ______
                                 
                       Mid-American Energy Holdings Company
                                                    August 29, 2001
The Honorable Joe Barton, Chairman
Subcommittee on Energy and Air Quality
2123 Rayburn House Office Building
Washington, DC 20515
    Dear Chairman Barton: Thank you again for inviting me to 
participate in the Energy and Air Quality Subcommittee's hearing on 
National Electricity Policy: Barriers to Competitive Generation. It was 
a pleasure to testify before the subcommittee, and I particularly 
appreciated your gracious introduction and kind words about my wife, 
Peggy.
    Attached is my response to the question submitted for the record by 
Members of the Subcommittee. I hope this serves to educate members of 
the subcommittee on the extensive regulatory scheme that will remain in 
place after passage of legislation that includes the provisions of H.R. 
1101.
    Please feel free to contact me with any other questions about my 
testimony, PUHCA repeal or other important issues facing your 
subcommittee.
            Sincerely,
                                             David L. Sokol
                               Chairman and Chief Executive Officer
Response of David Sokol to the Question from the House Subcommittee on 
                         Energy and Air Quality
    The Subcommittee has requested a description of federal and state 
oversight of several topics: utility mergers, consumer protection, 
wholesale and retail electric rates and market power. In response to 
this question, I am very pleased to provide the Subcommittee with the 
following:
                               I. MERGERS
    The primary authorities over a merger, acquisition, sale or 
combination of investor-owned utility assets are the Federal Energy 
Regulatory Commission (``FERC'') and the utility regulatory commissions 
in the state or states where the affected assets are located. FERC's 
standard in approving a merger, as stated in the Federal Power Act, is 
that the merger must be ``consistent with the public interest.'' 
Federal Power Act Sec. 203(a), 16 U.S.C. sec. 824b(a). FERC has 
implemented this standard by examining how the merger affects rates, 
competition and regulation. If these effects are negative, FERC will 
not find that the merger is consistent with (i.e., in) the public 
interest, and the merger will not occur. Even if FERC approves a 
merger, it may impose conditions before the transaction can proceed.
    While statutory and regulatory requirements differ from state to 
state, review of a merger, acquisition or sale of investor-owned 
utility assets by state regulators generally seeks to ensure that 
assets that are used to meet a public service obligation continue to be 
used in such a manner. If the relevant state regulatory authority does 
not approve the transaction, it will not occur.
    Two additional reviews are necessary for utility mergers. Either 
the Federal Trade Commission (``FTC'') or the U.S. Department of 
Justice (``DOJ'') review mergers from a perspective of protecting 
consumers from anticompetitive harms and antitrust abuses. The 
objectives of both the Sherman Act and the Clayton Act are to preserve 
and promote competition, not competitors. Their further objectives are 
to protect the public from any failings in the market and to preserve 
competition unfettered by any restraints of trade. These statutes 
provide severe penalties, fines of up to $10 million and imprisonment 
of up to three years, for their violation. See 15 U.S.C. secs. 1-7 and 
45. Additionally, the Securities and Exchange Commission (``SEC'') 
reviews the mergers of registered holding companies but has generally 
been deferential to the decisions of FERC and the state regulators 
(``watchful deference doctrine''). Madison Gas and Electric Co. v. SEC, 
168 F.3d 1337 (D.C.Cir. 1999); Holyoke Gas & Electric Co. v. SEC, 972 
F2d 358 (D.C.Cir. 1992). Again, if a merger fails to win the approval 
of the FTC, the DOJ or the SEC, the transaction will not occur.
                        II. CONSUMER PROTECTIONS
    The consumer protections that apply to all aspects of a 
competitive, free-market economy also apply with equal force to 
electricity sales. The FTC protects consumers from misleading or 
deceitful advertising. State utility commissions, in their oversight of 
the safety and reliability of electric service, assure the public that 
meters are accurate, that utilities honor their statutory and tariff 
obligations, that restoration of service is consistent with the public 
interest, and that consumers have fair processes available to dispute 
their bills. The DOJ's antitrust authority also protects consumers from 
failures of the market in the course of its review of pending mergers. 
See 15 U.S.C. secs 1-7 and 45. Many states also have antitrust 
statutes. Under those statutes, state attorneys general have price 
oversight to assure that no market participant is selling at below-cost 
prices in order to drive a competitor out of the market. Attorneys 
general also enforce state deceptive advertising laws, as well as laws 
intended to thwart pyramid schemes and fly-by-night sellers.
                          III. RATE REGULATION
    With respect to rate regulation, the jurisdiction is divided 
between federal authority over wholesale rates (rates for sales for 
resale and transmission in interstate commerce) and state authority 
over retail rates (rates for end-use). The overall standard for 
ratemaking is that rates, no matter how they are calculated or 
determined, must be just and reasonable. 16 U.S.C. secs. 824d(a) and 
824e(a).
                            IV. MARKET POWER
    Market power is generally defined as the ability to sustain higher 
than market prices over time. In a merger context, a wide variety of 
behavioral and even structural conditions may be imposed by the FERC, 
applicable state commissions, FTC or DOJ to mitigate and prevent market 
power abuse. These remedies range from affiliate codes of conduct that 
specify the pricing of transactions between a utility and its affiliate 
(and require public disclosure of market information to competitors on 
the same basis as that information is provided to affiliates) to 
structural actions, such as excluding certain participants from certain 
markets.
                              V. H.R. 1101
    H.R. 1101 preserves this entire myriad of consumer and investor 
protections (except for the SEC) and even strengthens regulatory access 
to books and records by both federal and state regulators in sections 5 
and 6, respectively. Additionally, under H.R. 1101, mergers will remain 
subject to the same level of scrutiny, wholesale and retail rates will 
be subject to the existing levels of oversight, and all market power 
protections are completely unchanged.
    The only real change in the legal landscape as a result of the 
repeal of the Holding Company Act will be the elimination of that Act's 
restrictions on investments, delays or actual prevention of the 
offering of new products and services to consumers, barriers to the 
development of regional transmission organizations, and the elimination 
of a duplicative layer of federal regulation.

```