RUS and

Electric Utility Industry Restructuring

Karen Larsen

Rural Utilities Service

RUS Engineering Seminar

March 15, 2000

Overview

• What is Restructuring?

• Where are we headed?

• What is RUS doing?

– Inside RUS and USDA

– Federal Legislation

– FERC Initiatives

– State Activities
What is Restructuring?

• A.k.a. “Deregulation” or “Competition”

• Response to Changes in Industry

– Composition and organization - ownership,

participants

– Regulatory environment - regulation, legislation

– Operations and interrelationships

– Economics and financial arrangements

– Technology

• Combination of influences

– Competition from new entrants

– Broader economic influences

– Changes in regulation

– Technology

– Politics and ideology

What’s driving restructuring?
Where are we headed?

• Unbundling (Disintegration?) of electric service

• More competitive generation sector

• Retail choice

• Creation of regional transmission bodies (RTOs)

• Competition for other services (metering, billing, etc)?

• Greater uncertainty over supplies and prices

• Increased risks to reliability

• Expansion into new business lines

• More pressure for regulation of coops and munis

Why is RUS involved in

Electric Restructuring?

• Two primary goals guide RUS involvement

in electric restructuring activities

– to ensure the continued availability of reliable,

high quality electric service at a reasonable cost

to rural consumers; and

– to protect the integrity of the government’s loan

portfolio.
RUS Principles

• The transition must promote:

– RELIABILITY: maintain reliability of the nation’s electric systems. No harm

to the existing electric infrastructure in rural America.

– FAIRNESS:

• to all consumers--including rural Americans,

• to existing electric utilities,

• and to Federal taxpayers who support the RUS program.

– FLEXIBILITY:

– a flexible, adaptable transition process that accommodates the diversity of :

• electric utility industry participants

• state regulatory structures and policies;

• evolving industry conditions.

– The process should allow for consumer education and experimentation and

evaluation to learn from experience and to correct mistakes.

Inside RUS and USDA

• Streamlining operations and regulations

• Adding flexibility for borrowers

• Enhanced industry and regulatory analysis capabilities

• Cooperation with other USDA and Federal agencies.

• Engagement in policy debates and rural advocacy

• Working with borrowers to help them meet new

challenges

• Looking to the future - new services for a changing

environment
Federal Legislation

• Clinton Administration Bill

– Comprehensive Electric Competition Act

• announced in 1998,

• reintroduced in 1999 with added benefits for

rural America

• only legislation that addresses rural electric

service issues

Rural Benefits - CECA

• Flexible opt out

• Rural Safety Net

• Public Benefits Fund

• Rural and Remote Grants

• Renewable Portfolio Standard
Rural Benefits - CECA (more)

• Preserves right to TVA/PMA Power

• Stranded Cost Protection for RUS debt

• Recognition of RE Act policies

• Recognition of Coop structure

• Enhanced reliability

• Regional Transmission Systems and

Planning

What’s up in Congress?

• Hearings

– House:

Commerce, Judiciary, Resources,

Agriculture

– Senate:

Energy and Natural Resources

Banking

Agriculture
Major Comprehensive Legislation

 on Retail Choice

• House Commerce Committee-

– Subcommittee Bill - H.R. 2944 (Barton)

– Administration Bill (by request)

• Senate Energy and Natural Resources Committee

– Murkowski (S. 2098)

– Administration Bill (by request )

– Thomas

– Bingaman

Other Bills

• Reliability -NERC-NAERO (S. 2071)

• PUHCA

• PURPA

• Renewable Energy

• Environmental Protection

• Consumer Protection
Comparing Legislation

The Devil is in the Details

• When?

• Federal v. State

• Reliability

• Market Power

• Level-Playing Field

• Stranded Costs

• Environmental Issues

• PMAs

• Customer Protection

• Universal Service

• Taxes

• Metering & Billing

• Data

• Codes of Conduct

• Aggregation

• Exclusive Service

Territories

What’s next in Congress?

• House

• Chairman Bliley’s Amendments

• Mark up in full Commerce Committee

• Referral to other Committees and then the

Floor?

• Senate

• Hearings in April on pending bills

• More hearings (?)

• Mark up on consensus issues

• Senator Lott says not this year
 FERC Initiatives

• RUS monitors FERC activities closely

• RUS is an active participant in FERC

proceedings

– filing comments on proposed rules

– intervening in cases involving borrowers

• RUS and FERC are continuing informal

dialogue on issues relating to RUS and our

borrowers.

FERC Issues to follow

• Order 888 open access system - “fine tuning”

• ISOs

• Order 2000 RTO Rule and Collaborative

Efforts

• Merger Mania

• Rules of the Road for Generation Markets

• Federal State Relations

• Reliability

• Impacts on rural and residential customers
What’s next with FERC?

• Order 2000 RTO Collaboratives

• Fine tuning ISO rules

• Problems in Competitive Generation

Markets -

• Market monitoring

• Gaming of bidding systems

• More price spikes

• Growing concentration in generation

State Activities

• Activities by state legislatures and regulatory agencies.

• Formal comments in Arizona , Florida, and Michigan

• Informal discussions with state regulators in other

states

• Working with borrowers to help them adapt to changes

in state law and regulation

• Participation in NARUC and is involved in issues that

potentially affect cooperative borrowers

• RUS is ready to work with and on behalf of borrowers

in state proceedings.
 What’s happening in the States ?

• Retail Choice Plans

Legislation

Public Utility Commission Orders

• Ongoing studies of retail choice

• Reliability Concerns

Adequacy of generation and transmission

Distribution system maintenance and operations

• Codes of conduct and Business Practices

Retail Choice Implementation

August 16, 1999

PUC Order (4)

Legislation (20)

Not yet adopted (26)

Retail Choice Implementation
State Retail Choice Plans

• Legislation

• 21 States legislatures have required or endorsed retail

choice

Regulatory Action

• 4 State regulatory commissions have issued orders

requiring or endorsing retail choice (including Arizona

which also has legislation)

• District of Columbia has recently approved retail

choice transition

Features of Retail Choice Plans

• Coop Opt In/Out

• Stranded Cost Recovery

• Generation Divestiture

• Standard Offer/Default Service

• Regional Transmission Organizations

• Public Benefits Fund

• Renewable Energy Portfolios

• Other Consumer Protections
Coop Opt In/Out

 No opt out in 12 states:

AZ, AR, DE, ME, MD, MI, NH, NM, PA, VT, VA

 Opt in in 6 states:

 IL, MT, NV, NJ, OH, TX

 Oklahoma appears to require retail choice for coops,

but has not yet set any ground rules .

 3 state plans do not apply to coops -- CA, NY, OR

 3 states have no cooperatives -- MA, CT, RI

Meanwhile:

• 26 states did not adopt retail competition in

1998-1999

• Why not?
Who’s next?

• West Virginia?

• Michigan? (Legislation)

• Indiana?

• Minnesota?

• North Carolina?

• South Carolina ?

• Oklahoma (again?)

Electric Restructuring --Where

do we go from here?

• Restructuring will continue with or without

Federal Legislation

• Our job will be even more complex

– State retail choice implementation

– FERC Initiatives

– Industry Change

– Uncertain supply and demand situation

– Immature markets

– Surprises
Stay tuned

• Industry-Government Initiatives that will

affect coops

– NERC-NAERO

– RTOs, ISOs, Transcos

– Codes of Conduct

– Uniform Business Practices

– New Reliability Measures

Key Legislative Issues - Federal

– FERC Jurisdiction over RUS borrowers

– Federal - State Cooperation

– Stranded Cost Protection

– Rural Safety Net

– Market Power

– Reliability

– Taxes

– Transmission Siting
Key State Legislative and

Regulatory Issues

– Coop opt out/in

– Stranded cost recovery

– Universal Service

– Consumer Protection

– Competitive Services

– Codes of Conduct

– Protecting Reliability

Key Issues for Rural America

• Does electric competition deliver big savings for rural

America?

• If we build it will they come? - Will competitive interest

match growing demand in rural areas ?

• Will there be new and innovative services for rural

customers? - What will they be?

• What happens to Universal Service / Obligation to

Serve?

• Who will provide service to the most rural and remote

areas?
Next Steps for RUS

• Work with Administration, Congress, Borrowers, and

States to make sure that Rural America shares

equitably in the benefits of restructuring and continues

to enjoy reliable affordable electric service.

• Enhance opportunities for rural communities

• Assist borrowers in adapting to change

• Protect rural consumers

• Identify/develop workable solutions for rural America

Advice to Borrowers

• Be Informed

• Get Involved

• Make the Rules

• Play the Game.

• Work with RUS