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77–118CC 2002

THE ELECTRIC SUPPLY AND

TRANSMISSION ACT OF 2001

HEARINGS

BEFORE THE

SUBCOMMITTEE ON ENERGY AND AIR QUALITY

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

ON

H.R. 3406

DECEMBER 12 and 13, 2001

Serial No. 107–81

Printed for the use of the Committee on Energy and Commerce

(

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

COMMITTEE ON ENERGY AND COMMERCE

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES ‘‘CHIP’’ PICKERING, Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

TOM DAVIS, Virginia

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

JANE HARMAN, California

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

STEVE LARGENT, Oklahoma

Vice Chairman

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN SHADEGG, Arizona

CHARLES ‘‘CHIP’’ PICKERING, Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

GEORGE RADANOVICH, California

MARY BONO, California

GREG WALDEN, Oregon

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

(Ex Officio)

RICK BOUCHER, Virginia

RALPH M. HALL, Texas

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

JOHN D. DINGELL, Michigan

(Ex Officio)

(II)

2

C O N T E N T S

Page

Hearings held in Washington, DC:

December 12, 2001 ........................................................................................... 1

December 13, 2001 ........................................................................................... 99

Testimony of:

Acquard, Charles, Executive Director, National Association of State Utility Consumer Advocates ............................................................................... 164

Blake, Hon. Francis, Deputy Secretary, U.S. Department of Energy .......... 21

Breathitt, Hon. Linda K., Commissioner, Federal Energy Regulatory

Commission ................................................................................................... 31

Brownell, Hon. Nora Mead, Commissioner, Federal Energy Regulatory

Commission ................................................................................................... 35

Church, Lynne H., President, Electric Power Supply Association ............... 156

English, Glenn, CEO, National Rural Electric Cooperative ......................... 144

Gent, Michehl R., President and CEO, North American Electric Reliability Council ............................................................................................... 152

Hochstetter, Hon. Sandra L., Chairman, Arkansas Public Service Commission, on behalf of National Association of Regulatory Utility Commissioners ...................................................................................................... 105

Hunt, Hon. Isaac C., Jr., Commissioner, Securities and Exchange Commission ........................................................................................................... 99

Hyman, Leonard S., Senior Industry Advisor to Salomon Smith Barney ... 177

Johnston, Robert, President and CEO, Municipal Electric Authority of

Georgia, on behalf of the Large Public Power Council .............................. 179

Massey, Hon. William L., Commissioner, Federal Energy Regulatory

Commission ................................................................................................... 39

McCullough, Glenn L., Jr., Chairman, Tennessee Valley Authority ............ 44

Prindle, William R., Director of Building and Utilities Programs, the

Alliance To Save Energy .............................................................................. 169

Richardson, Alan H., President and CEO, American Public Power Association ............................................................................................................ 134

Rouse, James B., Director, Energy Policy, Praxair, Inc., on behalf of

the Electricity Consumers Resource Council .............................................. 160

Sokol, David L., Chairman and CEO, Mid-American Energy Holdings

Company ........................................................................................................ 128

Wood, Hon. Pat, III, Chairman, Federal Energy Regulatory Commission .. 23

Additional material submitted for the record:

Blake, Hon. Francis, Deputy Secretary, U.S. Department of Energy, letter

dated January 31, 2002, enclosing response for the record ....................... 94

Wood, Hon. Pat, III, Chairman, Federal Energy Regulatory Commission:

Letter dated February 13, 2002, enclosing response for the record ...... 88

Letter dated February 25, 2002, enclosing response for the record ...... 92

Letter dated February 28, 2002, enclosing response for the record ...... 96

(III)

(1)

THE ELECTRIC SUPPLY AND TRANSMISSION

ACT OF 2001

WEDNESDAY, DECEMBER 12, 2001

HOUSE OF REPRESENTATIVES, COMMITTEE ON ENERGY AND COMMERCE, SUBCOMMITTEE ON ENERGY AND AIR QUALITY, Washington, DC.

The subcommittee met, pursuant to notice, at 1 p.m., in room

2123, Rayburn House Office Building, Hon. Joe Barton (chairman)

presiding.

Members present: Representatives Barton, Largent, Burr,

Whitfield, Ganske, Norwood, Shimkus, Pickering, Bryant, Walden,

Tauzin (ex officio), Boucher, Hall, Sawyer, Wynn, Waxman, Markey, Gordon, McCarthy, Strickland, Barrett, and Dingell (ex officio).

Staff present: Jason Bentley, majority counsel; Sean

Cunningham, majority counsel; Andy Black, policy coordinator; Sue

Sheridan, minority counsel; and Rick Kessler, minority professional

staff.

Mr. BARTON. The subcommittee will come to order. If everybody

will find your seat.

I want to welcome the four FERC commissioners that are confirmed and our Deputy Secretary, Mr. Blake, from the Department

of Energy and our Commissioner of the TVA, Mr. McCullough. We

are glad to have you folks.

Today, we start 2 days of legislative hearings on a comprehensive

electricity bill, H.R. 3406. This bill is intended to be the subject of

a subcommittee markup next week, assuming that Congress is

going to still be in session next week, which more and more is beginning to look like a good assumption.

I want to ask our witnesses today and tomorrow to be forthright,

to be specific when talking about the bill. This is a legislative attempt to balance all the various stakeholder interests that have

been expressed in numerous hearings over, in the case of my subcommittee chairmanship, a 3-year period, and if you want to go

back further than that, you could go back 7 years when Congressman Schaeffer was subcommittee chairman and did a number of

hearings on this very same issue.

We have spent a great amount of time on both sides of he aisle

in this subcommittee reviewing electricity markets this year and in

years previous to this year. Major lessons that we learn again and

again are part of the bill before us today. No. 1, we must increase,

or at least put incentives to increase, the supply of electricity available to consumers. No. 2, we must improve the effective operation

2

of our transmission grid, and more and more that’s on an interstate

basis, not just on an intrastate basis. And No. 3, we’ve got to improve the capacity of our transmission grid.

Today, our witnesses are various Federal officials. We have the

Deputy Secretary of Energy Frank Blake before us again, and we

want to welcome you. We also have, as I said earlier, the four confirmed FERC commissioners before us, and we look forward to the

day when the fifth one, Joe Kelliher, who used to be committee

staff counsel, is also on your distinguished panel.

I want to also say that it’s good to see Chairman Wood here as

chairman. There are those today who are probably going to make

it appear that Mr. Wood and I have some differences, and we may

have some policy differences, but we have no personal differences.

If I can be personal for a minute, I have known Pat Wood for a

long, long time, and I remember three or 4 years ago he and I plotting to get tickets to the Sugar Bowl when A&M was playing Ohio

State. So we go back a ways, and the best part of our relationship,

Chairman Wood, is that the best days are ahead of us—you, as

chairman of your Commission, and hopefully me, as chairman of

this distinguished subcommittee.

Mr. WOOD. And we hope A&M will actually win the Sugar Bowl

next time.

Mr. BARTON. It would be nice if the Aggies would win a bowl

game in our lifetime. I would admit to that.

I expect that we are going to get many questions today about recent actions of the FERC, questions about Regional Transmission

Organizations, market-based rates in connection with RTOs, the

market power screen test, the suitability of transcos in an RTO future, things like that.

We also want to welcome our chairman of the Tennessee Valley

Authority. We want to thank you for coming. There is a title in our

bill that has been worked out with Congressman Bryant on the Republican side and Whitfield on the Republican side and Congressman Gordon on the Democratic side. I think it is a good title, and

I look forward to what your concerns and comments are on that

particular title of the bill.

Tomorrow, we are going to hear from the SEC. We are also going

to have our usual number of stakeholder participants. And the

problem we have is that we have got lots of stakeholders, and the

table will only hold so many people.

I want to thank Chairman Tauzin of the full committee, Ranking

Member Rick Boucher, my good friend, of the subcommittee, and

also the full committee Ranking Member John Dingell for their

help in scheduling these hearings and their cooperation in helping

us to get witnesses.

After these hearings of today and tomorrow, it is my intent to sit

down and try to sift through all the testimony and see what needs

to be changed so that we can go to markup next week. I would ask

members to prepare suggestions in legislative form for discussion

and be prepared to offer them either to myself, to Mr. Boucher or

have them drafted and ready to go to markup next week. I will be

preparing a manager’s amendment to incorporate whatever

changes I think improve the bill.

3

I see lots of people here in the audience who we have worked

with for the last few years. It is Christmastime, and so I am kind

of in the spirit of which of you have been naughty and which of

you have been nice. I don’t think anybody has been really naughty;

I can almost say I don’t think anybody has really been nice either.

So I would say to you that normally Christmastime is—some celebrate Christmas Christmas Eve, some celebrate Christmas morning, some who are not of the Christian faith celebrate Hanukkah,

but whenever and however you celebrate, I think it would be very

nice for this subcommittee to give a Christmas present early to the

country, to the full committee, if we could work together and pass

a good electricity bill sometime next week.

So with that, I would yield the balance of my time and recognize

my good friend, the distinguished 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 Subcommittee starts two days of legislative hearings on comprehensive

electricity legislation, H.R.3406. This bill will most likely be the subject of a subcommittee markup next week, if the Congress is still in.

Today and tomorrow, I ask witnesses to be forthright and specific when talking

about the bill. Keep in mind that this legislation is an attempt at a balance between

stakeholders and Members, and few compromise bills are universally loved.

The Members of this Subcommittee, on both sides of the aisle, have spent a great

deal of time reviewing electricity markets this year and in years previous. Major lessons we learn again and again are part of the bill before us today:

1. We must increasing the supply of electricity available to consumers;

2. We must improve the effective operation of our transmission grid; and

3. We must increase the capacity of our transmission grid.

First, we welcome a very distinguished panel of Federal witnesses. Deputy Secretary Frank Blake is back before us today, and I welcome you. Thank you for your

past work with this Subcommittee on Price-Anderson and your previous testimony

about electricity restructuring.

Next, we welcome back the four confirmed commissioners of the Federal Energy

Regulatory Commission (FERC). I look forward to when you come back with a full

slate of Commissioners. I commend the President’s great decision when he announced the intent to nominate Joe Kelliher to FERC.

But back to the four of you. Led by my good friend, Chairman Wood, it appears

you four have been quite busy lately. I expect you will be receiving many questions

from Members today. I, for one, ask you to address recent actions and statements

on Regional Transmission Organizations (RTOs), market-based rates in connection

with RTOs, the market power screen test , the suitability of transcos in an RTO

future, and whatever else we might be hearing about soon.

Chairman McCullough of the Tennessee Valley Authority (TVA) is also here

today. Welcome, and thanks for your help in forging agreement, within the valley,

among TVA, its distributors, as well as large and small customers.

Tomorrow, we will welcome the Securities and Exchange Commission on PUHCA

and a regulator from the State of Arkansas. Following that, we will have our usual

wide table of industry participants and observers.

I want to thank Chairman Tauzin of the full committee, Ranking Member Boucher of the subcommittee, and Ranking Member Dingell of the full committee for

their help in scheduling these hearings and implementing a fair and open process.

I thank all Subcommittee Members for the attention they have given to these

issues.

After this hearing, it will be time to work on changes to the bill. I ask Members

to prepare suggestions in legislative form for discussion and, if not accepted, for offering as an amendment during markup. I will be preparing a manager’s substitute

amendment incorporating some of the changes discussed today.

As I look out to the audience and to both sides up here, I see lots of people who

have been nice. Not too many have been naughty, at least not all of the time. While

I have no songs for you, I do hear from Santa that one of the packages under the

4

tree is a model kit for a pretty little electricity bill. My parents wouldn’t let me open

my presents early, but if we do our homework we just may get to open it next week.

I can’t imagine a more legislatively-satisfying holiday season.

Mr. BOUCHER. Well, thank you very much, Mr. Chairman. I appreciate the scheduling of 2 days of legislative hearings by the subcommittee prior to our taking further action on the chairman’s electricity industry restructuring legislation.

Given the very significant changes that have recently occurred,

both in the market for wholesale electricity and in the regulation

of that market by the FERC, it is appropriate that we take stock

of current circumstances before we take further legislative action.

These hearings provide that opportunity, and I thank Chairman

Barton for honoring the request that we made that these hearings

take place.

I very much applaud the steps designed to strengthen the wholesale electricity market, which have recently been undertaken by

the FERC. The Commission has issued notice of a proposed rulemaking to develop a uniform standard for interconnection. It has

acted to ensure membership in broad Regional Transmission Organizations by companies that own the transmission lines. It has

demonstrated, I think, a commendable determination to make the

wholesale market more functional and more predictable.

To the extent that legislation is needed to reinforce FERC’s authority in these areas, we should act. In my view, we should not

take any steps which would impede the progress that FERC is

seeking to achieve in perfecting the market for wholesale electricity

transactions. And I am frankly concerned that some of the provisions in the measure now before us might have that effect, particularly the provisions in the bill that relate to Regional Transmission

Organization membership.

I also question the appropriateness of repealing the FERC’s

merger review authority through which the Commission acts to

promote competition and address market power concerns. The removal of merger review authority is all the more troubling when

it is teamed with repeal of the Public Utility Holding Company Act,

an event which inevitably will lead to greater industry consolidation and heighten concerns about the potential to misuse market

power. Under these circumstances, the FERC’s merger review authority may be more needed in the future than it is even at the

present.

There is a clear need to encourage the construction of new transmission lines in many places around the Nation. The bill seeks to

address this need through the creation of incentive pricing for new

transmission lines and by conferring Federal authority to site new

lines in instances in which the States deny approval for that construction. Both of these provisions are highly controversial. I will

welcome the views of our witnesses, both today and tomorrow, on

whether other approaches can achieve the goal of new transmission

line construction.

In particular, I am interested in knowing whether Regional

Transmission Organizations can encourage the needed investment

under regular pricing without the use of incentive pricing. I am

also interested in learning about instances in which those supporting Federal siting authority believe that States have acted arVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00008 Fmt 6633 Sfmt 6602 E:\HEARINGS\77118 pfrm09 PsN: 77118
5

bitrarily in balancing the need for new transmission against the

other values that States have an obligation to consider. I am personally unaware of any such instances, and we did in fact inquire

about such instances in previous hearings.

The chairman’s measure focuses on a range of other complex

matters, including the balance between State and Federal jurisdiction over transmission, transmission reliability, Federal authority

over public power entities in certain circumstances and the repeal

of PURPA. While I have reservations about many of the bill’s provisions, I want to commend Chairman Barton for his single-minded

persistence in working to achieve a landmark reform in our Nation’s electricity laws and for placing before this subcommittee a

comprehensive measure that addresses the most relevant topics.

I look forward to continued conversations with the chairman and

with other members of the subcommittee as we continue to consider the best means of addressing the wholesale electricity market

and its related concerns. Thank you, Mr. Chairman, and I want to

welcome our witnesses, and I very much look forward to their testimony.

Mr. BARTON. The Chair would thank the gentleman from Virginia for that statement. It is the Chair’s intention to continue

opening statement. Mr. Shimkus has gone to vote and hopefully

will be back so that we can continue without having any interruption. The Chair would ask if Mr. Bryant wishes an opening statement.

Mr. BRYANT. Yes. Thank you, Mr. Chairman; I have one. I would

also like to thank you for holding today’s hearing on H.R. 3406 and

commend you for inviting such a distinguished panel of witnesses

representing the Federal perspective on the electricity restructuring legislation. I especially look forward to my friend, Glenn

McCullough, testifying, who is the chairman of the Tennessee Valley Authority, and I am sure Chairman McCullough would agree

that among the residents living in the Valley there is an ‘‘if it ain’t

broke, don’t fix it’’ mentality toward such legislation as restructuring our Nation’s electricity market.

However, as America’s largest public power company, TVA has—

I should say America’s largest public power company, TVA, has

provided reliable, low-cost power to all of us in the Valley for nearly 70 years, and we are happy with the services TVA provides.

However, there is a nationwide movement toward a more competitive electricity market. Several States have already deregulated

their wholesale electricity markets, and times are changing. TVA

must be prepared to change with them.

To prepare for life in a more competitive market, TVA, the region’s 158-power distributor to its customers, and industrial users,

after much negotiation, have reached a consensus on a TVA title.

The title, this consensus title, would allow the distributors to renegotiate the contracts with TVA and to buy some power outside

of the seven-state region or the so-called fence of TVA, which will

help meet the growing demand from Valley consumers.

In addition, the title would permit TVA to sell excess power at

a wholesale level outside the fence, which they cannot currently do.

Additionally, TVA’s 17,000 miles of transmission would come under

the regulation of FERC for the first time. This would help FERC

6

in their effort to form Regional Transmission Organizations to facilitate the reliable flow of power.

I feel that H.R. 3406, the Electric Supply and Transmission Act,

is the most appropriate vehicle for the TVA title, and I commend

Chairman Barton for recognizing what is in the best interest of the

Tennessee Valley and including the consensus agreement as the

TVA title in H.R. 3406. I know there are some in the power industry who want to compete with the Valley on a one-way basis. These

interests seek to create a market that favors their utilities and that

will put TVA at a competitive disadvantage. I ask my colleagues

on the subcommittee to recognize the efforts of the stakeholders

throughout the Tennessee Valley and oppose them when the time

comes up for this vote. It is very important to my constituents that

the Valley’s stakeholders be allowed to control the region’s destiny

in a restructured market.

Again, I thank the chairman for his work on the electricity restructuring issue, which I know is so important to him. And, furthermore, I want to thank him for his work on behalf of the residents and the numerous States involved in the Tennessee Valley.

Thank you.

Mr. BARTON. Thank the gentleman from Tennessee and recognize

the distinguished gentleman from California for an opening statement.

Mr. WAXMAN. Thank you, Mr. Chairman. The bill we are considering today is called Electric Supply and Transmission Act. I think

a better name might be the One Last Gift for Enron Act. This follows the $254 million gift to Enron in the Republican stimulus bill

and the long wish list of subsidies, tax breaks and deregulation

provisions Enron received in the House energy bill. Enron’s fingerprints are all over the legislation we are examining today. This bill

essentially Federalizes the Nation’s electricity transmission grid

just as Enron had advocated for years.

Five and a half years ago, Enron CEO Ken Lay testified before

this subcommittee and derided those who argued against Enron’s

vision of the future. He testified that we did not need to listen to

those who argued that Enron’s plan was untried and too risky or

that we needed to go slow. He ridiculed the arguments that service

will deteriorate or reliability will be put at risk. Mr. Lay testified

that competition in the electricity markets would cause great

things to happen. Consumers would benefit handsomely, the environment would be protected, and of course Enron would make a lot

of money.

Mr. Lay’s vision turned out to be dramatically wrong. California

and the West have suffered from skyrocketing energy prices. A new

report from the Consumer Federation of America, which I ask

unanimous consent to introduce into the record, documents doubledigit rate increases in Massachusetts, a 40 percent increase in New

York and a 50 percent rate increase in Montana over the last year.

There has even been evidence of market abuses in Pennsylvania.

And, of course, Enron itself is now in bankruptcy. Mr. Lay and

other Enron executives essentially looted the company, while leaving employees and shareholders with nothing. Even the environment seems to be suffering. As a result of restructuring, emissions

7

of nitrogen oxides and carbon dioxide were significantly higher last

year than FERC had projected just a few years ago.

The legislation we are considering should be put on display in a

museum. It is an artifact of the era when corporate America

swooned at the mention of Enron’s name. I think we need to go

back to the drawing board. The last thing we ought to do now is

pass another law that makes it easier for top executives to steal

and swindle millions of dollars from their workers and shareholders. First and foremost, we need to figure out how to prevent

future energy collapses like Enron. The answer will require more

regulation and oversight of energy marketers, not more deregulation like this legislation proposes.

We also need to be focused on how we ensure that electricity is

reliable, clean and affordable. This will require doing more to promote conservation and renewable sources of energy. Even before

the collapse of Enron many States were reconsidering restructuring. Of the 25 States that have decided to restructure, three

electric utilities, nine are now reconsidering their decisions. Nevada even repealed its deregulation law of April 2001.

I am glad we are holding today’s hearing, but clearly we need to

hold many more before we consider moving legislation. As many

people have remarked, September 11 changed our world. In its own

way, December 2, the date Enron filed for bankruptcy, fundamentally changed how we need to think about energy policy. This

should be a time for deep rest, deliberative reevaluations, not a

headlong rush to legislation to preconceived ideological theories

that fly in the face of the disastrous reality Enron-style deregulation is inflicting on millions of Americans. Thank you very much,

Mr. Chairman.

Mr. SHIMKUS [presiding]. Thank you, Mr. Waxman. Just to inform the panelists, what I plan to do is conduct my opening statement, see if other members filter back from the votes. If no one

gets here in time, then we will kind of recess in place until every

member gets an opportunity, and then we will go to the opening

statements. That is per direction of the chairman.

So I, too, want to thank the panelists here today, although I

don’t totally agree with my colleague from California. I have sat

through more energy hearings than the years that I have been

alive, seems like. And I have only been a member 5 years, so we

have really—those of us who have been on this subcommittee for

the past five or 6 years, I think we have got a pretty good handle

on energy.

But be that as it may, I will start with a prepared statement and

just say the Federal role in our Nation’s electricity system is an important one. For years, it has worked to ensure that our Nation has

reliable and affordable power, but the system that generated and

delivered that power has changed dramatically, and the Federal

Government’s role has to change to meet the challenges of this new

system.

Illinois is a very unique State. We have a deregulated market

that will allow consumers to choose their energy supplier in the

coming year. We lead the Nation in electricity produced by nuclear

power. We are among the leaders in the amount of electricity generated from coal. Greenpeace released a study last month saying

8

that Illinois is the fourth in the Nation in the amount of planned

power from solar electric systems, and Illinois will soon become a

major player in electricity generated from wind power. On top of

all that, there is a project in my district to create a hydroelectric

dam.

Illinois has a truly diversified energy portfolio. The problem is

how do we get all this low-cost power to consumers? And that is

what I think we are here for to discuss. The answer is transmission. This legislation provides incentives and an environment to

expand and update our Nation’s transmission grid. It provides for

a process for transmission siting that won’t create a bottleneck at

the States’ borders, similar to what we saw with natural gas pipelines at the California border. We have utilities in Illinois that are

begging to new transmission but are being forced to stop these

lines once they hit the State borders. This bill will remedy that.

And I say, constitutionally, in the interstate commerce clause, this

is interstate commerce.

The bill also allows for open access to transmission for all transmitting utilities. If we are to have a truly national grid that is reliable and offers a seamless way to move power from one part of the

country to another part, then it is important to have equal and

open access to all transmission. The RTO provisions in this legislation mandate participation in an RTO but doesn’t set a specific

number of RTOs. I believe this is the correct approach. RTOs are

needed to facilitate an open transmission system to move power

easily from one place to another.

This legislation has a number of other provisions aside from

what I have mentioned, but I wanted to focus on transmission, because it is most important to me. I look forward to addressing

these and other issues in these hearings, and when we mark up

this legislation hopefully before we leave before the Christmas

break.

And with that, I will yield back my time, and I will now recognize the gentleman from Iowa, Dr. Ganske, for 5 minutes—for 3

minutes.

Mr. GANSKE. Thank you, Mr. New Chairman. I want to thank

the Deputy Secretary, the FERC commissioners, the chairman of

the Tennessee Valley Authority for joining us today, as well as the

witnesses who will join us tomorrow, in particular, Mr. David Sokol

of Mid-American Energy Company, which helps to supply energy in

my Iowa district. I appreciate all of you for taking time to address

the committee.

We have an obligation to help assure that our power generation

system is ready to supply a reliable source of electricity, both for

our own safety and for the productivity of our economy. The transmission system in our country is crucial in guaranteeing a consistent and uninterrupted flow of power to our cities, towns and

rural communities. Recent events have magnified the concerns that

we have about our power supply, but even before those events

there were many steps which needed to be taken to improve our

power grid and our transmission capabilities. Our electricity power

grid is an essential part of the American economy and of our basic

infrastructure.

9

I strongly believe we need to promote the use of renewable resources. My State of Iowa has been a leader in the development of

wind energy power. I believe it is a clean, practical source of energy

which can be utilized to a much greater extent than it currently

is. Iowa is tenth in the country in the potential for utilization of

wind resources, but we are currently third in the amount of wind

energy produced. Wind turbines in Iowa already produce enough

energy to power more than 60,000 residential homes. I know that

in more temperate areas of the country solar power holds more potential.

The provisions of this legislation which would encourage the use

of net metering systems around the country are a positive step toward making the use of solar and wind generated power a more

practical alternative to the small producer. Net metering can play

an important role in facilitating the development of wind and solar

power by small producers. I commend the chairman for his leadership in including this section in the legislation, and I plan to work

with him in offering an amendment during the markup, which I

hope will serve to clarify a couple of the provisions.

I thank the chairman, and I yield back my time.

Mr. SHIMKUS. The gentleman yields back his time. Chair recognizes the other doctor, from the great State of Georgia, Dr. Norwood.

Mr. NORWOOD. Thank you very much, Mr. Chairman. I would

like to simply place my opening statement in the record, and perhaps you would reserve the amount of time I would have used for

an opening statement and extend the amount of time I will have

for questions.

So if you will do that, I will yield back to you.

Mr. SHIMKUS. I would say that is above my pay grade, so you

will have to negotiate.

With that, seeing no other members present, we are going to ask

the panelists and our guests to recess in place until we come back.

[Brief recess.]

Mr. BARTON. The subcommittee will come to order. Congressman

Hall will stop meeting and greeting. Was Congressman Shimkus

the last one to give an opening statement, do we know? Ganske?

So the last one was a Republican? Okay. The Chair would recognize Mr. Sawyer for an opening statement.

Mr. SAWYER. Thank you very much——

Mr. BARTON. The Chair is in error, and Mr. Markey was in attendance before Mr. Sawyer. The Chair would recognize Mr. Markey for a non-musical opening statement.

Mr. MARKEY. The theme is movies today, okay? You know, at the

very end, Mr. Chairman, of the 1942 Hollywood classic, Casablanca, Captain Renault, the French police inspector, played by

Claude Raines, has just pulled up to the crumpled body of the Nazi

officer that Humphrey Bogart’s character just killed. He jumps out

of his car and says, ‘‘Major Strasser has been shot.’’ Bogart looks

at him with expressionless eyes, and Renault turns to his gendarmes and says, ‘‘Round up the usual suspects.’’ That is kind of

what we are doing here today, Mr. Chairman.

In May, the majority pulled the plug on its markup of California’s emergency electricity legislation. In July and August, the maVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 E:\HEARINGS\77118 pfrm09 PsN: 77118
10

jority short-circuited efforts in the committee and on the floor to

address the electricity problems taking place in the West as part

of the comprehensive energy package. And so today we are rounding up the usual suspects to interrogate them yet again in a process which at this point appears increasingly unlikely to result in

enactment of any public law.

Meanwhile, in a hearing room right across the hall from here, in

the Banking Committee, another feature is headlining. It involves

the dramatic implosion of a company called Enron. Last year, the

company was No. 7 on the Fortune 500; today, Enron is essentially

a penny stock company reduced to bankruptcy. What happened?

Where did all the money go? This little drama is a tale of greed

and ambition with multiple plot twists, elaborate deceptions, villains and victims. It includes complex deals with mysterious insider partnerships dubbed JEDI, Chewbacca and Raptor. What a

hearing, huh?

These are accounting—there are accounting firms with apparent

amnesia about their public responsibilities and scores of Enron employees who have just seen their retirement savings evaporate as

they stood helplessly by unable to shift funds into other investments.

So I would ask, is this subcommittee going to hold any hearings

on the Enron debacle before it proceeds to mark up an electricity

bill? It seems to me there are many lessons that this subcommittee

could learn from what went wrong with Enron. Are we going to

thoroughly investigate what happened to Enron and what it means

to emerging electricity markets? Or are we going to engage in the

absurd pretense that the collapse of what was once the Nation’s

largest electricity and natural gas marketing company has nothing

to do with our electricity markets? Does anybody think that if

Enron had been the subject of greater regulatory oversight, such as

the types of rules that we require for traders in securities, traders

in futures or other financial intermediaries, that the types of financial shenanigans that occurred and took place would have been allowed to occur? I think not.

In the aftermath of the Enron collapse, I think that we need to

look very seriously at extending some greater oversight over the

trading of electricity. Right now the bill we have before us does not

address this issue. Mr. Chairman, I ask unanimous consent to address the committee for 1 additional minute?

Mr. NORWOOD [presiding]. Any objection? Mr. Markey, the chairman objects. We need to get through this so everybody will have

a turn. We have a lot of witnesses we want to hear from.

Mr. MARKEY. I know, I know, a lot of witnesses. I appreciate it,

I appreciate it.

Mr. NORWOOD. Mr. Sawyer, you are recognized for 3 minutes.

Mr. MARKEY. Excuse me. Oh, did anyone object?

Mr. NORWOOD. I did.

Mr. MARKEY. You objected, Mr. Chairman.

Mr. NORWOOD. Yes.

Mr. MARKEY. Why is that?

Mr. NORWOOD. Because we have a lot of witnesses we need to

hear from, and all of us are going to read the record to finish listening to your statement.

11

Mr. MARKEY. No, but Mr. Chairman, let me ask—point of personal privilege, Mr. Chairman. I did not schedule this hearing for

1 in the afternoon. You can’t persecute the persecuted, okay? You

are basically now holding the minority accountable for the scheduling tactics of the majority. Now that is not fair to us to wait for

weeks to have a hearing like this and then to tell us that we can’t

be extended 1 additional minute. That doesn’t show any good grace

or courtesy on your part.

Mr. NORWOOD. It doesn’t show any good grace to extend over the

time that we have all agreed to either. Mr. Sawyer, you are recognized for 5 minutes.

Mr. MARKEY. You are noted for your good grace, Mr. Chairman.

I mean it is a personal trait that you hold dear, I thought, and here

it is that you are making an exception only because, I would hate

to say it, but it seems to be personal, and the subjects which I am

raising seem to bring personal pain to you. And it is not that I

mean to have you pointed out as the person not having the hearing

on Enron, it is only that I just wanted to finish what I thought was

a relatively humorous and—— Mr. NORWOOD. Mr. Markey, you now have your other 1 minute.

Mr. Walden, you are now recognized for 3 minutes.

Mr. MARKEY. Mr. Chairman, you have moved from the jocular to

the jugular here, unnecessarily, okay? I was keeping it in a relatively light vain rather than—— Mr. NORWOOD. Mr. Walden, you are recognized for 3 minutes.

Mr. WALDEN. Thank you, Mr. Chairman. I would like to hear

from the witnesses, so in essence of time, so we can get on to the

subject at hand, I will waive the opportunity for an opening statement and would appreciate time during questioning. Thank you,

Mr. Chairman.

Mr. NORWOOD. Mr. Sawyer, you are now recognized for 3 minutes.

Mr. SAWYER. Thank you, Mr. Chairman. The struggle that we

are all going through in trying to establish functional, stable electricity markets is an important one. We can’t just sit back and

hope that markets will emerge of their own accord. They simply

won’t function without an appropriate regulatory framework to

support them, and these hearings are an important step toward establishing them.

We are in the middle of an historic transformation of vertically

integrated utilities to a system of nationwide wholesale competition

and retail competition in about half the States, merchant generators and soon RTOs. This is based on the straightforward idea that

modernizing regulation to move power from low-cost producers to

end consumers in a competitive market can result in cheaper and

more reliable electricity. But if we are going to fulfill that promise,

it seems to me we need to take steps now to update a transmission

system that has not kept pace with the changes in the way electricity is generated and regulated.

Wholesale competition has dramatically increased the number of

transactions and the amount of electricity being sent along a makeshift grid that was designed decades ago to handle a smaller number of point-to-point transactions. At the same time, investment in

new transmission has declined by an average of about $117 million

12

a year, each and every year since 1980, and the decline is actually

longer than that. It is, in short, a system in long, slow atrophy. The

result has been predictable. Congestion, rising electricity prices,

the lurking risk of blackouts as transmission gets caught in bottlenecks.

This is a recognition that in order to create functioning, competitive markets, we need to address several issues. First, we need to

redress the decline in investment in transmission. Transmission is

no longer the low-cost, country cousin enterprise that it used to be.

We need to bring rates of return in line with higher risk involved

in providing transmission—provided that transmission assets are

controlled independently to assure open access to generators.

Incentive and performance-based rates, a concern to some, do not

have to be a giveaway to the electric industry; rather they are a

smart investment, properly managed, to create viable, independent

transmission business and to make up for the shortage in capacity

in this country. Innovative rates have the potential to end up lowering electricity costs by getting rid of the price distortions caused

by transmission bottlenecks. That is not simply theory; we have experience of that in the not too distant past.

Second, we have got to encourage demand management programs through the use of new technologies to expand the capacity

of existing rights-of-way. I also believe there needs to be some form

of backstop Federal authority in siting. Providing for new lines is

an important part of relieving identifiable bottlenecks, and giving

the States time to do that, after which the FERC would have the

authority to approve projects if the States have not been able to do

so, I think is an important component.

Fourth, and finally, I believe we need to establish a single mandatory national reliability organization to create and enforce technical reliability standards that do not endanger the stability of the

grid. Moreover, I would hope that they would be empowered to create procedures to safeguard the grid itself against terrorist attacks.

I look forward to hearing from our witnesses. Thank you for your

flexibility in time and yield back whatever may remain.

Mr. NORWOOD. Thank you very much. And now I would like to

recognize our distinguished chairman of the full Commerce Committee, Mr. Tauzin.

Chairman TAUZIN. Thank you, Mr. Chairman. I want to thank

Chairman Barton for calling this hearing and for moving on this

process. This has been a labor of love for the chairman of this subcommittee, and I want to encourage you all in this endeavor. Mr.

Barton has worked for a long and hard time crafting an Electric

Supply and Transmission Act, which we are going to hear comments and suggestions and analysis on today. And I want to thank

him for that effort.

This is an attempt, literally, to comprehensively deal with the

questions of supply and transmission. Regardless of how you feel

about energy markets and whether they work or don’t work or

whether deregulation crafted properly can work well and crafted

improperly, as we saw in California, can be an absolute failure, we

know two things: That if there isn’t an adequate supply and if that

supply cannot be moved properly, that not only will the markets

fail but any attempts to properly deregulate are not going to sucVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00016 Fmt 6633 Sfmt 6602 E:\HEARINGS\77118 pfrm09 PsN: 77118
13

ceed. And so Mr. Barton has set upon a course that hopefully will

take this subcommittee forward in producing for our committee and

for the Congress a piece of legislation designed to ensure those two

elements are as abundantly available to Americans as possible.

You know, until recently, electricity was sort of taken for granted. I saw a poll in California where people were asked where electricity came from, and awfully high percentage said, ‘‘From the

wall.’’ I also saw a poll that said when people were asked about the

gasoline spikes in this country, they said, ‘‘Isn’t it remarkable that

the gas companies knew just where to put those stations right on

top of the gas supplies?’’ There is a lot of misunderstanding about electric markets and

energy markets in this country, and we all assumed that when you

turned the switch on electricity was going to be there. We never

had to worry about it. Absolutely reliable. And then we saw the

shortages in California and the West, and we saw what tremendous economic havoc it can cause to a region of the country that

is so important to our Nation. We just can’t have that happen

again, and we can’t have it happen in other parts of the country.

In a few weeks, we begin the year 2002. It will have been 10

years, a whole decade, since Congress enacted major energy legislation, which was the Energy Policy Act of 1992. In that time we

have seen competitive electric markets struggle to take hold. We

have also seen more clearly the vital connection between our Nation’s economy and a clean, affordable, reliable electric supply. And

we have come to recognize what is necessary to update the electric

system for future economic growth.

We learned, for example, that the four main structures of the

Internet system in this country, when looked at in toto, consume

as much energy as the entire country of Italy consumes—about 8

percent of our national total. For that economy to grow, we had

better have reliable sources of electricity and reliable means to deliver them to the parts of the country that require them.

So it is time for Congress to address the issue again. It is just

that simple. And when we passed comprehensive national energy

policy legislation earlier this year, we made it very clear we would

be moving electricity at a later date. The later date is here.

As a Nation, we can’t rely upon the FERC alone to do this for

us. Well, the simple truth is that on occasion FERC may think they

can solve all these problems, but there is only so much they can

do. We in Congress must give them guidance, and we must give

them the tools that they need to make sure that American ratepayers are protected and assured of affordable electric supplies for

the next 10-year period and beyond.

FERC can help us determine what to do, and that is why I am

very interested in what our FERC commissioners will say about

this bill today and why I am very pleased that you are here and

ready to help us think through the policy that will help you and

us work through the right answers.

I want to welcome Chairman Wood, and we have had a private

meeting before, and I want to thank you for agreeing to serve the

country in a hot spot. This is a tough one. And for all of you on

the Commission. We all know these are going to be tough decisions

as we move from regulated markets and shortage markets to more

14

abundant and flexible markets in the electricity marketplace of

America.

I want to also welcome Deputy Energy Secretary Frank Blake

again before our committee. We always appreciate your work with

us, Frank, and—— Mr. MARKEY. Mr. Chairman? Mr. Chairman? I would like to

make a unanimous consent request, Mr. Chairman, that the gentleman from Louisiana be allowed to consume as much time as he

desires in his opening statement.

Chairman TAUZIN. Actually, if my time is up, I am going to wrap

in one word, and that is I also want to welcome the TVA chairman

Mr. McCullough, to the subcommittee and look forward to hearing

all your testimony. I yield back any time that I may have improperly consumed.

Mr. NORWOOD. It has been an observation, generally, that the

chairman of the full committee does get about whatever time they

wish to consumer. Mr. Gordon, you are recognized for 3 minutes.

Mr. GORDON. Thank you, Mr. Chairman. I think we have already

had one interruption today with a vote. I am going to put my comments in the record so that we can move forward with these witnesses. I don’t want them to caught again.

Mr. NORWOOD. Thank you, Mr. Gordon. Mr. Whitfield, you are

recognized for 3 minutes.

Mr. WHITFIELD. Mr. Chairman, I know you will be disappointed,

but I am going to waive my opening statement.

Mr. NORWOOD. Actually, I am disappointed, Ed, but I accept

that. Mr. Hall, you are recognized for 3 minutes.

Mr. HALL. Mr. Chairman, I guess I am pleased that we are conducting these hearings. I have mixed emotions about it. I think the

one good thing that can come out of it is to get some detailed comments on the language of this legislation from the folks that are

in front of us here. All of us know a lot has happened in the 2

years or so since we marked up 2944 in this subcommittee. For

some, like California, it has been agonizing. I remember earlier in

the year how we dreaded to see August hit. August was lurking out

there, and luckily we had a fairly mild August. We are learning in

Texas, and it is not easy. And at the Federal level, we have begun

to zero in on dealing with the essential Federal issues.

For the most part, I think they are reflected in this legislation,

and while I don’t think for a minute this is a perfect bill, I think

it is a good enough bill to move to the full committee. I know the

concerns of the coops, of public power folks, of State commissions

and a lot of others, and hopefully we can work out ways to find

ways to deal with their concerns in this legislation.

One, I hope that we can get some stability and certainty to the

electric power industry and customers. I think I have used about

a minute and a half. Would I get in trouble with the chairman if

I wanted to offer to my friend from Boston my last minute and a

half?

Mr. NORWOOD. Well, after what you said about him in the last

hearing on nuclear energy, I think you ought to, and it is certainly

agreeable with—— Mr. HALL. Well, all right. I really want to do that.

Mr. NORWOOD. Go ahead.

15

Mr. MARKEY. You know, I just want to—I would like to say that

if you looked up the word ‘‘graciousness’’ in the dictionary, Ralph

Hall’s picture would be next to it. You know what I mean? This

man is just the embodiment of the wonderful spirit of collegiality

that has always characterized this committee. And I just want to

say how honored I am to serve with you and despite the fact that

you come from Texas, there is a great deal of admiration. If we

don’t produce anything up in Massachusetts, we produce a lot of

admiration for the gentleman from Texas, and I—— Mr. HALL. Can I ask you something?

Mr. MARKEY. I will be glad to yield to the gentleman.

Mr. HALL. Are you about to do me like those two boys did the

Sierra Club? They had their meeting, and they had Santa Clause

there and a little boy on each knee, and one of them said, told

Santa, he said he wanted for Christmas a bird feeder, and all those

Sierra Club people clapped. They love people that love little birds.

And the other one said, ‘‘And a couple of BB guns.’’ You are not going to do me like that, are you?

Mr. MARKEY. Where am I going now? You know, somebody has

to be Ed McMahon. Anyway, it is just great to have you all here

today.

I see vast amounts of billable hours out here, and we can’t believe what they are saying. They are really talking about marking

up right before we break for Christmas. And it is like a Godsend,

there is like hundreds of memos being faxed to energy companies

all over America putting them on alert that this committee may be

thinking about marking up—— Mr. NORWOOD. Mr. Hall, do you wish to reclaim your time now

that the time is up?

Mr. MARKEY. I think we should have the SEC investigate all

these people sitting out here collecting for what they are doing

today. Anyway, thank you, Mr. Chairman.

Mr. NORWOOD. The Chair would like to now recognize Mr.

Largent for 3 minutes.

Mr. LARGENT. Thirty minutes?

Mr. NORWOOD. Three.

Mr. LARGENT. Oh, 3 minutes. Thank you, Mr. Chairman. I do

want to commend Mr. Barton for holding the hearing today on tomorrow’s—and tomorrow’s legislative hearings on the recently introduced bill, H.R. 3406, the Electric Supply and Transmission Act

of 2001.

As many in this room know, one of my greatest concerns when

it comes to restructuring is how do we ensure an open and transparent wholesale transmission market? There are transmission

constraints throughout the system. Probably one of the most notable is the Path 15 that runs the length of California. The constraints are only magnified by the various forms of regulation of

the grid. I think the word picture that comes to mind when thinking about the grid’s current regulatory structure is swiss cheese.

I know that FERC commissioners here before us today share

similar concerns, as evidenced by their recent rulemakings and orders. And with that, Mr. Chairman, I want to yield back my time

and insert my entire statement for the record; look forward to this

hearing.

16

Mr. NORWOOD. So ordered. Thank you, sir.

Mr. NORWOOD. Ms. McCarthy, you are recognized for 3 minutes.

Ms. MCCARTHY. Mr. Chairman, I am going to put the bulk of my

remarks in the record, if you wouldn’t mind, and I thank you and

Ranking Member Boucher for holding this hearing. And I am very

much appreciative of the panel’s efforts to educate us on the need

to protect our national security and take a look at diversity and

conservation and reliability and certainty in our electric energy delivery system. I hope this committee will take a look at distributed

generation of renewable energy sources that can also be a viable

way to supplement our grid and diversify the Nation’s energy supply, because I do think diversity is the key to the future as we address electric energy needs and also global climate change.

I would like to yield back the balance of my time, Mr. Chairman,

and just put the extent of my remarks into the record.

Mr. NORWOOD. So ordered. Thank you, Ms. McCarthy.

We will postpone just for a second till the chairman gets here.

He wants to do the introductions of the panel. I expect him here

any second.

Mr. MARKEY. Mr. Chairman, could I be recognized while we are

waiting? I have like 1 more minute to go.

Mr. BARTON. Has Mr. Dingell been given an opportunity to have

an opening statement?

Mr. DINGELL. Mr. Chairman, I thank you. Mr. Chairman, I understand that, first of all, my own concerns about the Enron situation and the wisdom of proceeding with the markup before we’ve

thoroughly examined the debacle that occurred in that matter have

already been raised by Mr. Markey and Mr. Waxman. I think it is

regrettable that Mr. Markey was not given an additional minute to

conclude his opening statement, because I think it would have been

of value to us in our consideration of this matter.

I would be happy to yield Mr. Markey a minute of my time, because I share his concerns about Enron and the future of the electricity markets. I have a fine statement that I will be happy to submit for the record in order to enable the committee to accommodate

Mr. Markey and to perhaps get into the question of some of the

rascality and misfortunes that have been inflicted on so many people by the Enron debacle. While we are talking about whether or

not PUHCA and other Federal regulatory statutes should be repealed, modified and so forth, given the misfortunes and failures

and, quite frankly, the obvious abuses and perhaps even criminal

misbehavior of the Enron matter.

So I ask unanimous consent for two things, Mr. Chairman: One,

that I be permitted to revise and extend my statement and include

it in the record, and, two, that the balance of my time be yielded

to Mr. Markey.

Mr. BARTON. Will the gentleman yield?

Mr. DINGELL. I am happy to yield.

Mr. BARTON. We have the tradition on this subcommittee of letting the ranking member of the subcommittee and the full committee speak, I won’t say forever, but I try not to cut our senior

membership off. So the gentleman from Michigan, as the ranking

member of the full committee, really has such time as he may consume. And if he wishes to yield that to the distinguished member

17

from Massachusetts, that is fine with me. I don’t want us to get

into a tizzy here before we even hear from our distinguished panel.

So I am open.

Mr. DINGELL. Mr. Chairman? Mr. Chairman, I knew that your

natural grace and dignity and charm and ability and the very fine

conciliatory character that you have always displayed in your capacity would encourage you in that direction, and I want to express

to you my thanks.

Mr. BARTON. So do you wish to yield to the gentleman from Massachusetts?

Mr. DINGELL. At this time, I would ask unanimous consent I be

permitted—— Mr. BARTON. You don’t even have to ask unanimous consent; you

just yield to him, and we will put him on his good graces to be his

naturally charming self in an expeditious fashion.

Mr. MARKEY. Thank you, Mr. Chairman.

Mr. DINGELL. As always, Mr. Chairman, you are gracious, thank

you.

Mr. MARKEY. You are gracious, Mr. Chairman. I thank you. And

I think Mr. Hall is kind of the master of the metaphor of the parable within which the truth emerges, and I think his story about

the rabbits and the BB gun kind of have a certain truth.

And I was thinking what would be the analogous metaphor

which I would use, and it came to me, and it’s this: It’s the story

of the mother with her two children, and they were at the zoo, and

the children went into one of the cages and they saw a lion laying

with a lamb, and they were remarking on how beautiful it was.

And the mother was exclaiming that it was the biblical fulfillment

of the prophecy of the lion and the lamb laying together peacefully.

And along came the zookeeper, and the mother was just saying

how beautiful it was to see the lion and the lamb lying together.

And the zookeeper said, ‘‘Hey, lady, don’t get excited. We’ve got to

put a new lamb in every day.’’ And so this legislation that we debate—and Mr. Dingell and I

and I think most on our side share this view—in my opinion is

heading toward the point where we will just be feeding more lambs

into a system which, unfortunately, is broke and that we are not

going to be providing the powers to the FERC which they are going

to need in order to protect the lambs, the upstarts, the consumer,

the competitors, those that want to have a full place within this energy electricity structure, and we hope that this hearing will help

to illuminate those deficiencies. I yield back the balance of my

time.

Mr. BARTON. Does Mr. Dingell wish to continue his opening

statement?

Mr. DINGELL. You’re so gracious that I will simply rely on my authority to insert this in the record.

Mr. BARTON. Without objection.

Are there any other members who have not yet had an opportunity to present an opening statement? Hearing none, the Chair

would ask unanimous consent that all members not present have

the requisite number of days to put their opening statement in the

record.

[Additional statements submitted for the record follows:]

18

PREPARED STATEMENT OF HON. HEATHER WILSON, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF NEW MEXICO

Mr. Chairman, thank you for holding these final hearings on electricity and the

electric power industry and for bringing together these excellent witnesses on electricity issues.

The issue of electric transmission policy is very important and it is an integral

part of our energy policy. The transmission grid is an integral part of our energy

infrastructure and we need a strong, reliable, flexible energy grid to move our electricity. The events in California this past year are evidence that we need to make

positive changes to ensure that there is an adequate supply, sufficient transmission,

improved reliability, reasonable cost of our nations electricity.

I applaud the Chairman of this Committee for setting out the draft of this bill

months ago and asking for input. There are provisions in this bill that I like and

some that I have some concerns about, particularly issues impacting states rights

and the rural electric cooperatives. It appears to me that there are a number of provisions in this bill that FERC has authority to act on—they do not need additional

authority. (Examples. RTO’s and incentive rates.)

Electricity markets are regional in character. They are defined by the three electrically-separate interconnections. The Western Interconnection includes all or parts

of 14 western states and western Canada and northwest Mexico. Regional markets

require regional solutions.

States have and will continue to be major players in this nation’s electricity policy. I seek cooperative approaches that will encourage coordinated state and federal

action, not federal preemption of states.

One of our challenges is to enable states and FERC to collaborate on regional electricity issues. FERC has recognized this need in their November 9 order. We need

to amend HR 3406 to build on FERC’s initiative.

The some of the issues that need to be addressed are:

• We need to amend the reliability provisions to provide states, when acting on a

regional basis, significant say in the design and enforcement of reliability standards.

• We need to delete Section 402 that gives FERC the power to preempt states on the

siting and permitting of transmission facilities. FERC does not have the expertise, resources or local knowledge to make transmission siting and eminent domain decisions. This provision is not needed in the West. No western state has

ever denied a permit for an interstate transmission line. The major challenge

to permitting new transmission in the West is getting rights-of-way across federal lands.

• We need to rethink the preemptive powers HR 3406 would grant FERC and the

Federal Trade Commission in the areas of interconnection standards, net metering, demand response and consumer protection.

• In the case of interconnection standards, FERC may already have sufficient authority.

• In the case of demand response, many programs were put in place during the

Western electricity crisis. We are now getting valuable information from those

measures and states will be able to incorporate such information into their own

measures. Even within the West, there are important differences among the

states that need to be recognized. In the Northwest, which is reliant on hydroelectric generation, reducing total energy use is typically more important that

cutting peak load. Uniform FERC standards would not recognize such differences.

• In the case of consumer protection, states, particularly those that have moved to

retail competition, largely have in place consumer protection provisions.

• We need to ensure that FERC oversight over the rural electric co-operatives and

public power is reasonable. Except for a few isolated examples, locally owned

utilities typically do not have surplus electricity to sell. These systems do not

represent a significant presence in wholesale markets, and they have been and

will continue to be net purchasers of generation.

• Section 201 creates FERC-lite for co-op that transmit electricity. The co-op would

set the transmission rate and the FERC would review it to ensure it satisfies

the ‘‘comparability’’ standard. The co-op retain control of rate setting and FERC

expands it jurisdiction over co-op transmission rates.

• However, Section 702 would negate any notion of FERC-lite authority and should

be removed. It transfers the rate setting function from the co-op to FERC which

destroy Section 201.

I realize that HR 3406 includes provisions for retaining some state-specific requirements in these areas. However, I am concerned whenever we empower a fedVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00022 Fmt 6633 Sfmt 6621 E:\HEARINGS\77118 pfrm09 PsN: 77118
19

eral agency to make determinations of whether a state program is ‘‘equivalent to’’ or ‘‘not inconsistent with’’ we are opening the door to new intrusions by the federal

government into state authorities. While the current members of the FERC or FTC

may not exercise such authorities to second-guess states, there is no assurance that

future members of those bodies.

I am looking forward to hearing from the witnesses as we continue to work on

the state and co-op issues.

Thanks

PREPARED STATEMENT OF HON. GEORGE RADANOVICH, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Mr. Chairman, today’s hearing is a very important step towards securing America’s energy future. As this year comes to a close, we are now well into the TwentyFirst century. It is time for us to discard entrenched views and work to secure

ample, reliable and affordable energy for our future.

We are now decades from the 1930’s and the 1970’s. It is time for a change from

the paradigms of industry currying favors from political regulators, or of a cottage

industry of subsistence energy. Fair markets, consumer choice, and responsible entrepreneurship are the path to a vibrant future.

The California Electricity Crisis of the past year is only temporarily dormant. The

underlying problems remain unresolved. Already we see signs of a return to power

plant construction delays, regulatory manipulation, and consumer disregard. We are

kidding ourselves if we believe that a return to monopolies, or to the utopian proposals of the 1970’s and 80’s will provide reliable and affordable power for an industrious state of 54 million citizens.

There are many positive steps in H.R. 3406 I would like to endorse. First, electricity markets must be designed to work both in times of overabundance and of

undersupply. Consumers in California have shown their unwillingness to pay any

price for electricity as demonstrated by their conservation efforts. Title I, Section

103 is a necessary action to let the demand side, and consumers, be an active part

of the market.

Second, we learned in California, that PURPA has unintended and disastrous consequences on the prices consumers pay for electricity now and for years to come.

PURPA QF contracts represent approximately one-third of California’s outstanding

electricity debt. PURPA was written for a structure of monopoly electricity providers

and in its present form is no longer workable.

Third, PUHCA did nothing to help consumers in California’s Electricity Crisis.

Any benefits of this arcane law are not evident to consumers, although compliance

with the law does impose additional consumer costs. Since any benefits to consumers from this law no longer exist, let us repeal this law and thus its costs.

There are some aspects of this law, which I would like to see strengthened. I am

concerned that Title I, Section 102 does not mention hydroelectricity and geothermal

sources along with solar, wind and biomass. Small hydroelectric and geothermal

sources are important renewables that are available in the Sierra Nevada Mountains. The Department of Energy has estimated that there are 3,000 MW of incremental hydroelectricity, that can be responsibly developed in California alone. We

must do everything we can to secure the future of this vital resource for our nation.

I am also concerned that the net-metering section carries risks similar to those

we are trying to correct through the repeal of PURPA in that it shifts the costs of

‘‘storing’’ energy to the load serving entities. These types of transactions should be

limited to the capacity of a utility to store energy, such as by a pumped hydro

project. No benefit is gained by requiring utilities to build power plants to sit idle

waiting for cloudy or windless days.

Lastly, I believe that the comparison of our transmission system to our national

road system prior to the development of the Interstate Highway System is an appropriate one. The Federal Energy Regulatory Commission is clearly struggling with

how to put these various local systems into a unified national framework. This legislation attempts to be of help to that process by addressing issues such as RTOs,

incentive rates, and eminent domain, but it fails to provide a context for those measures.

It is time to take a chalk to a clean slate. We can be of tremendous help to this

process by providing a ‘‘bright line’’ criteria to focus the FERC on interstate transmission, and the States on intrastate distribution. A separation criteria of 100 KV

is reasonable and appropriate. We should also require that the Department of Energy provide a layout, by a date certain and with state input, for a 21st Century

National Interstate Transmission Highway of 100 KV lines and above which incorVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00023 Fmt 6633 Sfmt 6621 E:\HEARINGS\77118 pfrm09 PsN: 77118
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porates all existing transmission lines in this size range. Only transmission constructed in accordance with such a national plan should be the beneficiary of incentive rates and eminent domain.

I encourage all of the parties with interests in this legislation to abandon entrenched positions and to consider this legislation in the light of the national interest and to best help consumers have secure and affordable energy for their futures.

PREPARED STATEMENT OF HON. CHIP PICKERING, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MISSISSIPPI

Mr. Chairman, I would like to take this opportunity to bring to your attention as

well as that of the Commissioners concerns I have regarding the new interim, generation market power test the Commission adopted late last month. As I understand

it, the Commission abandoned the so-called ‘‘Hub-and-Spoke’’ generation market

power screen, which had been in place for many years and relied upon by market

participants, and adopted a new, definitive generation market power standard called

the ‘‘Supply Margin Assessment’’ test.

I have some real concerns about FERC’s action. First, I find it deeply troubling

that such an important change in policy would be ordered by FERC without any

process for public comment.

Second, the substance of the policy change itself seems ill-advised and wrong. I

don’t pretend to understand all the details or the differences between the ‘‘Hub-andSpoke’’ and ‘‘Supply Margin Assessment’’ methods. And as you know, this Subcommittee has spent a lot of time the past few years trying to understand, address,

and respond to legitimate market power concerns. We all want to avoid another

California-style mess. We all share the goal of having competitive wholesale power

markets. Addressing legitimate market power concerns is an important part of this

process. But I must tell you all that there appear to be very serious problems with

the new interim, generation market power test you have adopted.

For example, we have heard that the new test will discourage new generation investment and potentially expose other regions of the country to ‘‘California-like’’ dependence on short-term markets and power purchases. Additionally, we have heard

that the new, interim test may effectively deny most, if not all, of the nation’s investor-owned utilities that still own generation plants market-based rates in their home

states. This not only appears unfair, but also may create a perverse incentive

against longer term investments as utilities and major merchant plant developers

try to avoid being or becoming a pivotal supplier and flunking the new test in certain areas. This, combined with the blanket refund obligations you all have proposed, may actually end up increasing consumer rates, create tremendous regulatory and financial uncertainty, and lead to an unhealthy reliance on shorter term

and riskier transactions. I thought we had been down this road before and were

hoping to take a better-planned route to competitive wholesale markets.

We all want to avoid another California debacle. But in view of all the legitimate

problems that have been raised about this interim, market power test, and since you

have already announced that you will be starting a notice and comment rulemaking

proceeding to address and adopt a longer-term generation market power method—

which I encourage—I would ask that the Commission not implement or enforce in

any way this new interim method until all of its potential effects are better understood. This can only be done after the Commission receives more input from all interested parties—including state Commissioners—in a notice and comment rulemaking proceeding. In my view, reviewing the rehearing petitions, while important,

does not substitute for a full-blown rulemaking proceeding.

While I understand the Commission delayed full implementation of the new test

on December 20, 2001, I am still concerned about the thought process leading up

to the original order. Why did the Commission risk disrupting what appear to be

efficiently operating wholesale electricity markets in most parts of the country to

implement a potentially costly and problematic interim test—especially as we head

into the winter heating season? It doesn’t appear that the Commission even considered that in many parts of the country, electricity prices have been decreasing—in

some areas significantly—as new merchant plants come on line. Simply put, I don’t

see a crisis warranting such a dramatic intervention in the market that would justify such a major departure from long-standing FERC policy.

We all share Chairman Wood’s and Commissioner Brownell’s view that the ‘‘longterm success of the market model to address customers’ needs depends upon sufficient infrastructure and balanced market rules.’’ However, the new, interim generation market power test appears to be inconsistent with these important goals. If you

all want utilities to join Regional Transmission Organizations—a goal I share—this

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approach seems like an awfully indirect, punitive, and potentially dangerous way

to get there. I would ask you all to take a step back and fully consider the impact

of the new test and hear from all concerned before it has unintended and bad consequences for consumers and our nation’s electricity markets. I would hope you

would consider these concerns in a notice and comment rulemaking proceeding and

not just review the pending rehearing requests.

Mr. BARTON. The Chair now wishes to welcome its distinguished

first panel. We have the distinguished Deputy Secretary of Energy,

Mr. Blake, from the Department of Energy; we have the four FERC

commissioners, including their distinguished Chairman, Mr. Wood,

and we have the chairman of the Tennessee Valley Authority, Mr.

McCullough.

Ladies and gentlemen, your statements are in the record in their

entirety. We are going to start with Deputy Secretary Blake. Then

we will go to Chairman Wood, and I would assume each of the

other commissioners have a statement you wish to make; is that

correct? Okay. And then we will go to Mr. McCullough.

Welcome, Mr. Blake.

STATEMENTS OF HON. FRANCIS BLAKE, DEPUTY SECRETARY,

U.S. DEPARTMENT OF ENERGY; HON. PAT WOOD III, CHAIRMAN, FEDERAL ENERGY REGULATORY COMMISSION; HON.

LINDA K. BREATHITT, COMMISSIONER, FEDERAL ENERGY

REGULATORY COMMISSION; HON. NORA MEAD BROWNELL,

COMMISSIONER, FEDERAL ENERGY REGULATORY COMMISSION; HON. WILLIAM L. MASSEY, COMMISSIONER, FEDERAL

ENERGY REGULATORY COMMISSION; AND GLENN L.

MCCULLOUGH, JR., CHAIRMAN, TENNESSEE VALLEY AUTHORITY

Mr. BLAKE. Thank you, Mr. Chairman and members of the committee, and thank you for the opportunity to come before you today.

I will just briefly summarize my testimony.

The administration strongly believes that we need to continue

the work of establishing open, transparent and competitive electricity wholesale markets. This will benefit consumers, through increased supply and lower prices, and it will benefit the reliability

and security of our transmission infrastructure, an infrastructure

that is essential to our economy.

The President’s national energy policy calls for comprehensive

electricity legislation. It respects the role of the States and focuses

on the regulation of wholesale power markets and transmission in

interstation commerce. We welcome this committee’s attention to

the issues and applaud the chairman’s leadership on this matter.

As outlined in my testimony, we agree with most of the goals of

the proposed legislation, and we look forward to working with the

committee on those areas in the specifics where we might have

some disagreement.

let me close by emphasizing what we view as the importance of

following through on our nation commitment to open and transparent markets. We need to continue on a clear path forward to assure that affordable capital is available for the infrastructure needs

of our country. Thank you very much.

[The prepared statement of Hon. Francis Blake follows:]

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PREPARED STATEMENT OF HON. FRANCIS BLAKE, DEPUTY SECRETARY, UNITED

STATES DEPARTMENT OF ENERGY

Mr. Chairman and Members of the Subcommittee, I welcome the opportunity to

testify before you today on Chairman Barton’s bill, HR 3406, the Electric Supply

and Transmission Act.

The Administration believes that electricity legislation—done right—will make

wholesale power markets more competitive, strengthen the transmission grid, increase electricity supply, lower prices, protect consumers, and improve reliability.

The President’s National Energy Policy calls for comprehensive electricity legislation

that respects the role of the States and focuses on the regulation of wholesale power

markets and transmission in interstate commerce.

When the Federal Power Act was written in 1935 there was virtually no interstate commerce in electricity, there was no interstate transmission grid, electricity

markets were local, power plants were built near consumers, and electricity generation was perceived to be a natural monopoly.

The evolution of the electricity industry today presents a different picture. The

transmission grid is both interstate and international, electricity markets encompass entire regions, almost all wholesale electricity sales are in interstate commerce,

and the natural monopoly in generation has long since been disproved. The electricity industry has been swept by dramatic changes for years, investment in new

transmission and generation has lagged as a result, and legislation can significantly

reduce this uncertainty and strengthen the U.S. electricity industry. The time has

come to modernize federal electricity laws to recognize these changes.

In order to address these changes in the electricity market, the President’s National Energy Policy recommends several proposals to encourage modernization of

electricity law and foster investment in both generation and transmission. First, the

Department of Energy has been tasked with conducting an analysis of the nation’s

transmission grids in order to determine where we need more transmission and better interconnectivity and instructs DOE to consider the benefits of a national grid.

A Department of Energy report on these issues is shortly forthcoming. Second, the

Policy encourages FERC to develop a rate structure that would encourage the construction of additional transmission. Finally, the Policy instructs DOE to develop

legislation that would provide the federal government with transmission siting authority to address situations that might arise where failure to act by a state or local

government causes major constraint in an area’s transmission needs. The Department of Energy has been working with both Congress and States to develop siting

authority language that respects the role of the States as well as regional needs.

The recent electricity crisis in California and the West was a dramatic demonstration of the problems that exist under the status quo—problems that Congress can

and should address. The time has come for Congress to reduce the tremendous regulatory uncertainty facing the electricity industry, and modernize federal electricity

laws in order to make wholesale power markets more competitive, strengthen the

transmission grid, increase electricity supply, lower prices, protect consumers, and

improve reliability. We believe that Chairman Barton’s proposed legislation goes a

long way toward accomplishing these goals, and look forward to working with the

Committee on this important bill.

As to the specifics of H.R. 3406:

Title I

• The Administration agrees with the policy goals of sections 101, 102 and 103.

• The Administration supports the repeal of PUHCA, as has every Administration

since 1984.

• The Administration supports prospective repeal of the mandatory purchase obligation under PURPA and believes the legislative language should be amended to

eliminate the ownership limits on PURPA qualifying facilities.

• The Administration supports section 142 because the Administration believes that

NRC antitrust review is redundant and unnecessary and should be prospectively repealed.

Title II

• The Administration supports the policy goal of section 201 and looks forward to

working with the Committee to agree on final specific language.

• With regard to section 202, the Administration believes RTOs have great potential

to improve competition, secure reliability and ensure sensible regional coordination. To the degree RTOs serve those purposes, we support them.

23

Title III

• With regard to section 301, the Administration believes this section is an improvement over the reliability provisions of legislation approved by the Subcommittee

two years ago and approved by the Senate last year.

Title IV

• The Administration agrees that FERC transmission-pricing policies should encourage increased investment in new transmission. The Administration therefore supports the legislative proposal in section 401 to direct FERC to develop

a performance-based regulatory framework for transmission pricing. • Section 402 grants FERC limited authority to issue permits to construct or modify

transmission facilities under certain circumstances. The Administration supports this proposal.

Title V

• The Administration generally supports the language in Title V and looks forward

to working with the Committee to agree on final specific language.

Title VI

• The Administration generally agrees with the consumer protection provisions in

Title VI and looks forward to working with the Committee to agree on final specific language.

Title VII

• The Administration opposes section 702, which expands FERC’s refund authority.

The President has asked for comprehensive electricity legislation which will reduce regulatory uncertainty, make wholesale power markets more competitive,

strengthen America’s transmission grid, increase electricity supply, lower prices,

and improve reliability. We believe that this legislation is a good start on these principles and look forward to working with Congress to enact them.

At this time I would be happy to answer any questions that the Committee may

have for me.

Mr. BARTON. I think that’s the shortest administration statement

before my subcommittee in the 3 years I have chaired it. So I appreciate the support.

We will now go to the Chairman of the FERC, Mr. Pat Wood of

Texas.

STATEMENT OF HON. PAT WOOD III

Mr. WOOD. Thank you, Chairman Barton and members. When I

joined the Federal Energy Regulatory Commission earlier this summer, I did so with a sense of urgency. In the aftermath of the tortuous experience in the western markets and the impacts that it

had on customer faith in the concept of competition serving customers well, followed shortly after my ascension to the chairmanship with the bombing of the World Trade Center and the Pentagon and the implications upon what we redefined energy security

to mean and now in the aftermath of Enron and the, I think, unfair

association of its unique issues with other players in the energy

market, it is very clear to me from talking to investors, from talking to customers and everybody in between that we need to get this

industry clarified, and we need to make sure that the ground rules

for investment and for customers and for new participants are

nailed down. So I think the sense of urgency that I certainly heard

from a number of the committee members this morning is one that

I personally share at the Commission.

It is not a theory that we are talking about; it is real dollars.

With Congress and FERC, back in the mid-1980’s, the deregulation

of the other great network energy industry, natural gas, began. It

took about 7 years compared to the 9 years which we are in now,

in electricity. But since that effort was largely wrapped-up in 1992,

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tens of billions, with a ‘‘b,’’ of dollars have stayed in customer pockets because of the successful one-two punch of introducing competition and then deregulating, getting government out of the way, a

significant sector of the natural gas industry. I think that is not

theory; that is a very real model that has got a lot of application

to what the committee has before it in the chairman’s package

today.

I think that package does a lot of things. While FERC has moved

forward in the areas where we do have authority today, we certainly think there are a number of areas where our authority is either not clear or is nonexistent that are very important to completing the energy infrastructure and competition-certainty picture

that investors and customers need to have faith that their energy

markets are working well on their behalf.

I think I will list just a few of those. Certainly, the steps that

we are taking, I will be glad to discuss them along the lines that

I believe Chairman Barton laid out in his statement. But the issues

where we have no ability, such as on the issues of PUHCA,

PURPA, demand-side management—the clarification about the

issues there—and the great future of the electric industry for

small-scale distributed generation. There is a provision there that

I think is very important for setting some clear investment and

cost recovery standards for DG. The importance of open access is

not just a voluntary thing. As the court affirmed yesterday, we

have the right to ‘‘lay out’’ on a voluntary basis. With that, Chairman Barton’s bill actually says it is something that everybody

should do; that also includes Federal power agencies, which up to

now have not been as directly involved in the efforts to create a

seamless national power grid from coast to coast.

Enforcement of liability standards is important. This bill addresses that as well, which we cannot do through the current statute. The backstop of transmission expansions, while I share the

opinions of many that this may be a solution looking for a problem,

it would be nice if this happens in 10-year cycles to ensure that

good transmission concepts do not get forgotten or overlooked or

nixed by a State that may not want to have the region improved.

And, finally, certainly, the customer protections, which do not involve my agency, but the market oversight tools that are strengthened and expanded at the end of the chairman’s mark are very important provisions that I think will enhance the Commission’s ability to oversee these markets. I think we are doing quite a bit on

that effort. I would like to report on that later, but I think the

sense of urgency also applies to today’s schedule, so I will conclude

now, Mr. Chairman, and look forward to any questions from the

members.

[The prepared statement of Hon. Pat Wood III follows:]

PREPARED STATEMENT OF HON. PAT WOOD, III, CHAIRMAN, FEDERAL ENERGY

REGULATORY COMMISSION

I. INTRODUCTION

Mr. Chairman and Members of the Subcommittee: Good afternoon. Thank you for

the opportunity to speak today on the Chairman’s proposed legislation, H.R. 3406,

to restructure the electric utility industry to full, effective wholesale competition.

This industry has changed substantially in the years since Congress enacted the Energy Policy Act of 1992, moving closer to the Congressional goal of a competitive

25

wholesale electricity market. However, the transition is not complete. Infrastructure

investment suffers from the uncertainty of this long transition. Reliability is being

tested and customers are being deprived of the financial savings and other benefits

of a competitive marketplace. It is time to finish the job.

Today, I will describe briefly the significant actions taken by the Commission in

recent months to do just that, and the efforts planned by the Commission in the

future. I will identify those areas in which legislation could facilitate the Commission’s efforts. Finally, I will discuss other significant aspects of the Chairman’s proposed legislation and suggest certain modifications to the legislation.

My key point today is that successful completion of the industry’s transition requires a balancing of short-term and long-term considerations. In the short term,

we must take steps to ensure that the transmission grid is operated more efficiently

and fairly, and is expanded when appropriate. We must eliminate unnecessary barriers to entry of new generation, big or small. We must facilitate the development

of more market-based demand reduction programs. And we must take steps to ensure that the type of market problems experienced in California do not recur there

or elsewhere by establishing clear, fair, balanced market rules. Taking these steps

in the short term will give investors the certainty they need to make long-term commitments to new electrical infrastructure. Over the long term, this commitment to

sound infrastructure and sound market rules ultimately will allow us to achieve the

kind of competitive wholesale markets envisioned by the Energy Policy Act—with

choices dictated by the market, not by government.

Some argue that the short-term steps envisioned by the Commission will chill infrastructure investments, not encourage them. I disagree. People will not invest in

generation where they believe transmission owners will operate the grid unfairly,

delay interconnections of new generation or fail to expand the grid as needed. Similarly, markets characterized by a pattern of extreme price turmoil and the risk of

further governmental restrictions will not provide the certainty needed by investors.

The short-term steps described below will encourage the future stability of the markets, reduce or eliminate the risk of crisis-driven governmental interventions and,

thus, give investors the confidence to commit billions of dollars to building the infrastructure our nation needs.

II. REGIONAL TRANSMISSION ORGANIZATIONS (RTOS)

Electric power markets are regional in nature. For that reason, the Commission

has been promoting the formation and development of a small number of RTOs.

These institutions, once formed, will assure reliable minute-by-minute grid operations, optimize fair use of the ‘‘electric highway’’ by all users, plan for the future

transmission needs of the region and help long-term supply stay ahead of long-term

demand.

Two years ago, the Commission decided to move forward with RTO formation on

a voluntary basis. Although that has been a more tortuous path than originally intended, it is drawing to a close with utilities in all regions of the country coalescing

around organizations of appropriate scope, governance and configuration. But if any

party challenges this progress in courts, then Congress should make clear its intent

that these organizations are its preference. This will save the industry years in the

courts, ensure customers get the billions of dollars of savings that a competitive

power market can deliver during that time, and most importantly, rebuild to secure

and reliable levels a bedrock industry that has suffered inadequate investment in

the past decade.

Recently, the Commission clarified its policies and plans on RTOs. In an order

issued last month, the Commission indicated that it intends to complete the RTO

effort on two parallel tracks. The first track will be to resolve issues on scope and

governance in pending cases; the second track will be a rulemaking to standardize

the market design for public utilities, to be implemented by RTOs. The Commission

has also begun forming state-federal regional panels as a structured forum for constructive dialogue with state commissions on RTO development. We hope to expand

these panels in the future to discuss other joint concerns. The Commission is updating cost-benefit studies on RTOs (with input on the analysis from a diverse panel

of state commissioners) and will establish in future orders the timelines for continuing RTO progress in each region. We expect to address the RTO structure in

the large Midwestern region of the country at our December meeting.

In establishing the characteristics and functions of RTOs and the procedures for

obtaining Commission approval of an RTO, the Commission relies on sections 205

and 206 of the Federal Power Act. These sections are the Commission’s fundamental

authority for ensuring that the rates, terms and conditions of transmission in interstate commerce by public utilities are just, reasonable and not unduly discriminaVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00029 Fmt 6633 Sfmt 6621 E:\HEARINGS\77118 pfrm09 PsN: 77118
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tory or preferential. In addition, the Commission has relied on its authority under

section 203 of the Federal Power Act to review proposed transfers of operational

control over jurisdictional transmission facilities. While some may question the

Commission’s as-yet-unexercised authority to require the formation of RTOs, there

is no legitimate debate about the Commission’s authority to oversee voluntarilyformed RTOs.

I strongly support the formation of RTOs. RTOs will provide significant benefits

to electric utility customers across our Nation. I believe the best legislative approach

at this time would be for Congress to adopt a provision permitting the Commission

to require RTOs where it finds such RTOs to be in the public interest. This simple

step would avoid problems that could arise if Congress codifies extensive and cumbersome procedures for formation of RTOs and detailed standards for those RTOs;

it also would allow the Commission to adapt the RTO procedures and standards appropriately over time, as circumstances change.

Section 202 of the Chairman’s proposed legislation would codify more prescriptive

procedures. Section 202 would require all ‘‘transmitting utilities’’ (a term that includes both investor-owned utilities and public power/electric power cooperative utilities) to participate in an RTO. A utility not in a Commission-approved RTO upon

enactment of the bill must submit an application to form or join an RTO. If the

Commission finds the application does not meet the standards specified in the bill,

the Commission, in consultation with affected State authorities, must propose modifications. The Commission cannot mandate formation of, or participation in, an RTO

except under these provisions. If an applicant asks, the Commission must hold an

evidentiary hearing on the proposed modifications. Subsequently, the utility has a

right to seek appellate review, during which time the Commission’s order is stayed.

If the court finds the Commission’s decision is supported by a preponderance of the

evidence, the court must uphold the Commission’s decision. Otherwise, the Commission must order the utility to participate in its proposed RTO without modification.

If Congress decides to proceed with the more elaborate process laid out in Section

202, I have specific concerns about aspects of the provision. First, I do not support

giving a single RTO applicant the unilateral right to require an ‘‘evidentiary’’ (trialtype) hearing instead of ‘‘paper’’ hearings. While evidentiary hearings may be appropriate in certain cases, most cases can be fairly resolved much more quickly based

on paper submissions and non-trial type procedures. Further, because the provision

requires a ‘‘stay’’ of a Commission RTO order pending court review, and a Commission order likely would address one application filed on behalf of all the participants

in the region, this provision could allow a single applicant to stall the creation of

an RTO and an effective wholesale market for many years, raising costs for other

applicants and all regional electricity consumers. Formation of workable wholesale

markets will be more likely and swift without these provisions.

Second, I do not support the requirement for a ‘‘preponderance’’ of the evidence

instead of ‘‘substantial’’ evidence supporting the Commission’s decisions. The ‘‘substantial evidence’’ test has been the basis for court review under the Federal Power

Act since 1935, and I see no reason why a different standard is now needed for this

one category of cases.

Third, I see no reason for the provision resembling ‘‘baseball-type’’ arbitration,

under which the Commission either must prevail in court or accept without modification the utility’s proposal. Judicial review of Commission decisions sometimes

yields a remand to the Commission for a fuller explanation or more fact-finding, and

I see no reason to preclude that option here. In general, having RTO formation dependent upon only transmission-owning applicants, rather than all wholesale market players, leads to a less balanced and robust marketplace. A successful wholesale

market model must have strong stakeholder participation and oversight at its core.

Section 202 also specifies the standards for RTOs. These standards are drawn

partly from the Commission’s Order No. 2000. While it might be appropriate to codify some general standards (such as the basic independence requirement), other

standards and the details of implemention are not appropriate to legislate. As market circumstances and structures change, and as the Commission gains experience

with market behavior, the Commission needs the flexibility to adapt its rules over

time to ensure that markets remain robust and customers’ interests are safeguarded; a rigid, legislative codification of standards could preclude this flexibility.

If Congress does codify such standards, certain elements of section 202’s standards raise other concerns. For example, the bill requires a proposed RTO to have

‘‘sufficient generation within the RTO’s boundaries to serve the load within such

boundaries.’’ While I agree that this is desirable, exceptions may be appropriate in

certain circumstances, and section 202 should allow exceptions deemed appropriate

by the Commission.

27

The bill allows each public utility in an RTO to file ‘‘original or amended rates

concerning transmission service on such utility’s facilities.’’ This is contrary to the

Commission’s requirement in Order No. 2000 that the RTO have the exclusive right

to make rate filings related to the rates, terms and conditions of transmission services it provides to transmission customers in the region. While the Commission

found that transmission owners have the right to file to recover from the RTO their

own revenue requirements, it also found that it would be contrary to the basic RTO

independence requirement if transmission owners could control the RTO’s rate filings.

I note that section 3 of the bill would define a ‘‘market participant’’ as ‘‘any entity

that generates, sells, or aggregates electric power (other than State-ordered transition or default service) that is transmitted on the transmission system operated by

a regional transmission organization.’’ As above, I do not believe Congress should

legislate a definition of ‘‘market participant,’’ since such a definition may need to

be changed over time as we gain experience with market behavior and new types

of market institutions and activities (for instance, it excludes energy service companies that could aggregate demand and ‘‘negawatts’’ and offer price-responsive demand opportunities in wholesale and retail electric markets). Further, with respect

to the specific definition in section 3, I disagree with the provision on State-ordered

transition or default service. This provision appears to assume that, unlike other

market participants, utilities providing such services are economically indifferent to

the grid’s operation because their profits or growth potential will not depend on the

cost of their power supplies. Depending on the terms under which they provide this

service, however, utilities may have the same economic incentive as other market

participants to benefit from grid operations that provide them preferential access to

low cost supplies.

If Congress does legislate a definition, a better approach to defining ‘‘market participant’’ is the definition adopted by the Commission in Order No. 2000, which includes:

(i) Any entity that, either directly or through an affiliate, sells or brokers electric energy, or provides ancillary services to the Regional Transmission Organization, unless the Commission finds that the entity does not have economic or

commercial interests that would be significantly affected by the Regional Transmission Organization’s actions or decisions; and

(ii) Any other entity that the Commission finds has economic or commercial

interests that would be significantly affected by the Regional Transmission Organization’s actions or decisions.

18 CFR 35.34 (b)(2) (2001). This approach is more flexible than the bill’s assumption

that providers of State-ordered transition or default service always lack economic or

commercial interests that would be significantly affected by the RTO’s actions or decisions.

Finally, three other provisions raise concerns. First, the legislation would require

the Commission to accept a cost/benefit analysis submitted by an applicant to support its proposed scope and configuration, unless the Commission finds the scope

and configuration does not meet the statutory requirements by a preponderance of

the evidence. Cost-benefit analyses are easily susceptible to manipulation of assumptions and data to achieve a desired result, so any analysis should be tested

and verified rather than automatically accepted. Second, the standard for the Commission’s findings should be ‘‘substantial evidence,’’ not a preponderance. Third, the

legislation would preclude the Commission from requiring any change to the governance or scope of an RTO finally approved without condition before the law’s enactment. This provision would prevent the Commission from responding to changed circumstances warranting modifications in the RTO’s governance or scope.

III. INTERCONNECTIONS

The current lack of standardized interconnection agreements and procedures

means that every new generator can be forced to expend time and money negotiating the terms and conditions of an interconnection arrangement, before it can

have any certainty about its ability to deliver power to the grid. This uncertainty

is a significant barrier to entry for new generation.

To remedy this problem, on October 25, 2001, the Commission issued an Advance

Notice of Proposed Rulemaking (ANOPR) requesting comments on a standardized

generator interconnection agreement and procedures. The ANOPR strongly encouraged interested parties to pursue consensus on the issues and presented a model

that was used successfully in Texas as a strawman to facilitate the process. Parties

must file this Friday a document describing the consensus views and any remaining

disagreements; any additional comments are due by December 21, 2001. I underVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00031 Fmt 6633 Sfmt 6621 E:\HEARINGS\77118 pfrm09 PsN: 77118
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stand that industry is reaching consensus on many issues in the ANOPR process

but that they may request a brief extension of time to complete their negotiations.

I assure you that I will be receptive to a brief extension if it is evident that progress

is being acheived toward a consensual resolution of these issues.

The Commission expects to use the outcome of the ANOPR as the starting point

for a rulemaking to standardize interconnection protocols. This rulemaking will clarify and simplify the procedures for interconnecting new generation, thus promoting

competition and benefitting customers.

The Commission has held that interconnection is a component of transmission

service. Thus, the Commission’s authority to standardize interconnection protocols

derives from sections 205 and 206 of the Federal Power Act, under which the Commission oversees the rates, terms and conditions of jurisdictional transmission service.

Section 101 of the Chairman’s proposed legislation establishes requirements for

interconnections with distribution or transmission facilities. Section 101 addresses

the generator’s right to interconnect and its duty to pay interconnection costs, the

availability of backup power and the rates, terms and conditions for such power.

The Commission is required to promulgate the technical standards for interconnections. The Commission is also required to establish the process and procedures for

interconnection with transmission facilities. A transmitting utility or regional transmission organization is exempted from the Commission-established process and procedures upon showing that ‘‘substantially comparable interconnection procedures

and agreements have previously been filed with and approved by the Commission

for interconnection with that entity.’’ But this exemption provision would nullify the

benefits of standardization by forcing the Commission and utilities to litigate over

which ‘‘substantially comparable’’ non-standard provisions are acceptable and exempt from the standard, and keep non-standard agreements in place for years.

As stated above, standardization of rules and procedures for interconnecting all

new generation and expansions of existing generation is a good policy, both for traditional power plants and for small-scale distributed generation. This is a high priority goal for the Commission. Standardization will help minimize the costs and barriers to entry for new and expanded generation, which is critical to a robust competitive marketplace and the realization of lower electricity costs for end users.

As written, Section 101 may be overly prescriptive and impede the Commission’s

ability to adapt its approach as the industry changes over time. A more general approach may be preferable. If the current approach is retained, I suggest another

change in Section 101, pertaining to the right to backup power for generators interconnecting with distribution facilities unless the local distribution utility allows

open access to its facilities. In this context, open access is defined as access ‘‘that

is not unduly discriminatory or preferential.’’ However, the Commission found in establishing wholesale open access to public utilities’ transmission facilities that the

lack of a published tariff of rates, terms and conditions was a significant obstacle

to service. The Commission required public utilities to provide open access transmission service by tariff. Accordingly, I believe a local distribution utility must offer

open access service by tariff before it can be relieved of its duty to provide backup

power.

IV. TEST FOR GENERATION MARKET POWER

Since beginning to grant market-based rates (rate deregulation) to public utilities

in the 1980s, the Commission primarily focused on the applicant and employed a

‘‘hub-and-spoke’’ analysis to determine whether an individual entity and its affiliates have generation market power. In a hub-and-spoke analysis the applicant computes its market share of generation in a particular market. While the Commission

did not use a ‘‘bright line’’ test, it looked to a benchmark for generation market

power of whether a seller had a market share of 20 percent or less in each market.

In public deliberations shortly after I joined the Commission this summer, which

were informed in part by our experiences in California, my colleagues and I questioned the usefulness of the hub-and-spoke test as a tool to identify the potential

for the exercise of harmful market power. After reviewing the issue over the summer, the Commission instructed our staff at an Open Meeting on September 26th

to refine the hub-and-spoke test on an interim basis for future applications and for

current certificate holders’ three-year updates, while contemplating a rulemaking to

address the issue on a more permanent basis.

The revised test, the Supply Margin Assessment (SMA), improves upon the huband-spoke in two critical ways. First, unlike the hub-and-spoke, the SMA excludes

from the analysis of the relevant market those sellers who are physically precluded

from participating in that market by transmission constraints. Second, instead of

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deriving an overall market share, the SMA determines whether any part of a seller’s capacity is ‘‘pivotal,’’ i.e., must be used to meet the market’s peak demand. For example, if peak demand in a market is 100 megawatts, total capacity in the market

(including the applicant’s) is 120 megawatts and the applicant owns 60 of the 120

megawatts, the seller’s capacity is pivotal because at least 40 megawatts of the sell- er’s capacity is needed to meet peak demand. By contrast, a seller with only 15

megawatts would not be pivotal because peak demand in the market could be met

fully by other suppliers.

A company that fails the SMA screen is subject to mitigation to ensure that the

company does not exercise market power by withholding its capacity from the market. Under this mitigation, the company must offer for sale, a day in advance, any

short-term capacity which is not already committed for sale or use by the company.

The price for any such sales is based on a ‘‘split-the-savings’’ approach which divides

the economic benefits of the transaction equally between the seller and buyer. This

test is administratively preferable to the more intensive cost-of-service based calculation traditionally used, for example, to set retail rates in regulated states. The

company must also post offers to sell long-term energy products (in addition to the

daily products noted above).

This mitigation is carefully tailored to apply only to the extent necessary. For example, mitigation applies only in the specific market where the utility has market

power, and the utility (and its affiliates) are still allowed to sell at market-based

rates in any areas where they do not possess market power. The mitigation applies

only to capacity that is not committed a day in advance (‘‘spot’’ sales), and does not

affect a utility’s authorization to sell its capacity under long-term contracts. Finally,

the SMA does not apply to sales in an RTO or an Independent System Operator

(ISO) with Commission-approved market monitoring and mitigation.

The Commission soon will initiate a generic proceeding to consider long-term

changes to its analysis for generation market power. In the meantime, the SMA and

its carefully-crafted mitigation are a substantial improvement on the prior approach, while continuing to allow sellers to compete freely in markets where they

lack generation market power. I would note that the interim SMA market power

screen is subject to rehearing, and the Commission will consider carefully any requests for rehearing.

Apart from these efforts, the Commission recently proposed a new condition on

its authorization of market-based rates for electricity producers. Under this proposal, a seller would be subject to refunds or other appropriate remedies if it engages in anti-competitive behavior or exercises market power. This condition would

be triggered only when the seller engages in inappropriate conduct, not when market problems are caused by poor market rules or other generic dysfunctions. The

Commission adopted a similar condition to help address the market problems in

California and the Western United States, and is now proposing to extend the condition to public utilities elsewhere. The Commission is receiving public comments on

this proposal and will fully consider the comments before making a final decision.

V. RELIABILITY

Section 301 of the Chairman’s proposed legislation provides for Commission certification of an electric reliability organization (ERO) to develop and enforce reliability standards applicable to all users, owners and operators of the bulk power

system. The bill specifies the criteria for the ERO. The ERO would be required to

file its proposed reliability standards with the Commission, and the Commission

would need to act on those proposals within specified time periods. The ERO and

the Commission would have to rebuttably presume that a proposal from a regional

entity for a reliability standard applicable on an interconnection-wide basis is just,

reasonable, not unduly discriminatory or preferential and in the public interest. The

ERO would have authority to enforce its standards, subject to Commission review.

Section 301’s approach to reliability is a step in the right direction. Although I

have not seen problems with the current voluntary process, parties inform me that

federal legislation is needed to ensure the enforceability of the reliability standards.

While some technical clarifications or modifications to the proposed language might

be useful, as a general matter section 301 takes a reasonable and efficient approach

to this problem.

VI. TRANSMISSION JURISDICTION

A. Open Access

‘‘Separate but equal’’ transmission is inherently unequal. Transmission of electric

power is interstate commerce and should be fairly recognized as such. And all users

of transmission service should be treated equally, provided they pay for it. One need

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look no further than Chairman Barton’s home state to observe the positive impact

that having clear rules from a single regulator has had on needed investment and

expansion of the grid.

Section 201 of the Chairman’s proposed legislation would allow the Commission

to require all public utilities and transmitting utilities to offer open access transmission services. In recent years, open access transmission services by public utilities have increased competition in wholesale power markets significantly. Extending

this requirement to the large portion of the grid owned or operated by transmitting

utilities that are not public utilities will further increase competition. I believe this

can be done in a manner that respects the historic independence of certain public

power utilities while ensuring that a consistent approach is applied to all users of

the interstate grid, to further wholesale electric competition and benefit all electricity customers.

I support Section 201 but suggest minor changes. First, for reasons explained

above, section 201 should be clarified to provide that the Commission can require

open access transmission services by tariff, and can require such tariffs to be on file

with the Commission so that potential transmission customers have available for

public inspection, in a centralized place (the Commission), all open access services

being offered and the rates, terms and conditions of such services.

Second, section 201 would require the Commission to ensure that the rates

charged for open access services by a transmitting utility other than a public utility

are comparable to the rates the utility charges itself. The Commission would be

given authority to review and remand the rates for revision where necessary, but

would not have the authority to modify the rates directly. The Commission could

be given the authority to modify the rates where necessary, to prevent any delay

in the establishment of rates in compliance with section 201.

B. Stranded Costs

Section 201 also would require the Commission to authorize recovery of wholesale

stranded costs caused by a ‘‘municipalization,’’ and specifies precisely how the Commission should determine the ‘‘reasonable expectation period’’ for purposes of calculating the stranded costs. I am concerned about the latter provision, and believe

that the calculation of stranded costs should be left to the Commission’s discretion

based on all relevant circumstances in a particular case. The Federal Power Act

does not prescribe how to calculate stranded costs except in requiring that rates

must be just, reasonable and not unduly discriminatory or preferential. This statutory approach should not be changed.

C. Transmission Siting

Section 402 would allow the Commission to authorize construction or modification

of transmission facilities if it makes each of three findings: (1) the relevant State

lacks authority to approve the action, has withheld or delayed approval for more

than a year or has conditioned its approval such that the action is economically infeasible; (2) the facilities being authorized will be used for transmission of electric

energy in interstate commerce; and (3) the action is consistent with the public interest, as proposed or conditioned.

A FERC backstop such as this may well be the best decision, but there are others

that could work. Since these siting issues are largely regional, the RTO could be the

backstop instead of FERC. This keeps the relevant determinations of need, environmental issues and landowner concerns closer to the affected citizens. Or, it may be

enough to simply require states to make final decisions (pro or con) within a fixed

time-frame. Some states specifically require that a transmission line approval by

that state be shown to provide direct benefits to the citizens of that state. This sort

of provision may make it difficult for a state to approve routing of a line that has

significant regional benefits but not specific local benefits.

VII. OTHER ISSUES

A. Investigations, Refunds and Penalties

Section 702 of the proposed bill expands section 206 of the Federal Power Act to

allow the Commission to order refunds not only by public utilities but also by other

entities that provide transmission service or power to a public utility. Section 703

expands the criminal penalties authorized under section 316 of the Federal Power

Act. Section 703 also broadens section 316A of the Federal Power Act so that civil

penalties are authorized for violations of any provision under Part II of the Federal

Power Act, instead of only sections 211, 212, 213 or 214.

These provisions are helpful changes to the Federal Power Act. The recent problems in wholesale markets in California and the Western United States demonstrated the need for such changes.

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B. PUHCA

Sections 111-125 of the Chairman’s proposed legislation repeal the Public Utility

Holding Company Act of 1935 (PUHCA) and replace it with increased access by the

Commission and state regulators to certain books and records. This is appropriate.

PUHCA was enacted primarily to undo harms caused by certain holding company

structures that no longer exist. In the 65 years since PUHCA was enacted, utility

regulation has increased substantially under the Federal Power Act (including oversight of corporate restructurings such as electric utility mergers, discussed below),

federal securities laws and state laws, all of which ensure that customers are fully

protected.

C. PURPA

Sections 131-134 of the Chairman’s proposed legislation repeal prospectively the

mandatory purchase obligation in the Public Utility Regulatory Policies Act of 1978

(PURPA). As indicated in the bill’s proposed findings, PURPA’s ‘‘forced sale’’ requirement is no longer necessary to promote competition, in light of the availability

of open access transmission, and more often serves to distort competitive outcomes.

Thus, I agree that Congress should repeal PURPA but ‘‘grandfather’’ existing

PURPA contracts. To provide a smoother transition for parties which made investments under the expectations created by PURPA, it may be appropriate to limit its

repeal to those states where all generation entities have the ability to sell their output to the widest possible range of customers.

D. Mergers

Section 141 would repeal section 203 of the Federal Power Act, the authority

under which the Commission reviews proposed mergers and other dispositions of

public utility facilities. This provision may not be in the public interest. The Commission deals with the electric utility industry on a daily basis and much more

closely than the federal antitrust agencies. Thus, the Commission is better able to

identify and remedy any harmful effects of mergers and other dispositions. Our efforts do not duplicate those actually being performed today by other merger reviewing agencies. The Commission has used its section 203 authority as intended by

Congress to ensure that mergers and other dispositions are consistent with the public interest. Also, in recent years, the Commission has acted quickly on merger applications, almost always within 90 days after receiving public comments on a proposed merger.

In addition, it may be a good idea to clarify the Commission’s authority to review

mergers involving only generation facilities and mergers of holding companies with

electric utility subsidiaries. The increasing amount of competition in power generation markets makes this more than an academic question. But, to be fair, there are

other, less blunt tools that the Commission has to address generation market power.

VIII. CONCLUSION

The electric utility industry has come far since the enactment of the 1992 Energy

Policy Act. The Commission is moving ahead aggressively to achieve that legislation’s vision of fully competitive wholesale markets. Additional legislation will help

us get there faster. I support the Commission-related provisions of Chairman Barton’s proposed legislation, with the modifications described above. This legislation

will help all electric customers realize greater benefits from wholesale competition.

Mr. BARTON. Thank you, Chairman.

We now go to Commissioner Breathitt from the great State of

Kentucky.

STATEMENT OF HON. LINDA K. BREATHITT

Ms. BREATHITT. Thank you, Mr. Chairman and members of the

subcommittee. I appreciate the opportunity to appear before you

today to discuss your energy restructuring legislation. I believe it

is important for Congress and FERC to work in tandem to accomplish the critical goal of ensuring the development of a competitive

wholesale electric power market that is fair and efficient and that

benefits consumers.

While I believe FERC has made great strides in the effort to increase wholesale competition over the past several years, I welcome

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congressional guidance through legislation that assists in articulating and clarifying the steps that must be taken toward this end.

I am supportive of the policies underlying H.R. 3406, and I am

pleased to see that it is consistent with many of the comments I

have made in past hearings before this subcommittee. As I set

forth in more detail in my written testimony, I welcome congressional clarification of FERC’s authority with respect to RTOs and

expansion of our authority in the areas of civil and criminal penalties for violations of the Federal Power Act. I support the repeal

of PURPA and PUHCA, and I agree that interconnection rules

should be standardized. I also believe the bill’s approach to transmission siting represents a great improvement over the current jurisdictional scheme.

I would like to take this opportunity to highlight an aspect of

H.R. 3406 that I cannot support, and that is repeal of Section 203

of the Federal Power Act, which embodies the Commission’s merger

review authority. I don’t agree with the basic underlying premise

that FERC’s merger review is redundant. All merger reviews are

not created equal. Unlike any other agency with jurisdiction over

mergers, our agency uses a different test, and that is the public interest standard. This is significantly different and distinct from the

‘‘no harm to competition’’ review employed by other agencies, and

I urge this subcommittee to continue allowing FERC to protect the

public in this regard.

With this exception, while my testimony highlights various details on which I suggest minor changes, I believe that your work

on this document ultimately will serve to aid the Commission and

the public as we move ahead with our agenda. I didn’t address the

other topics that you said may likely come up today. I stuck to your

legislation, and I will happy to get to those others if the time

comes.

[The prepared statement of Hon. Linda K. Breathitt follows:]

PREPARED STATEMENT OF HON. LINDA K. BREATHITT, COMMISSIONER, FEDERAL

ENERGY REGULATORY COMMISSION

Mr. Chairman and Members of the Subcommittee: I appreciate the opportunity

to appear before you today to discuss the Subcommittee’s proposed energy restructuring legislation. I believe it is important for Congress and the Federal Energy

Regulatory Commission (FERC) to work in tandem to accomplish the critical goal

of ensuring the development of a competitive wholesale electric power market that

is fair and efficient and benefits consumers. While I believe FERC has made great

strides in the effort to increase wholesale competition over the past several years,

I welcome Congressional guidance through legislation that assists in articulating

and clarifying the steps that must be taken toward this end.

My testimony today will comment on H.R. 3406 and highlight specific aspects of

the proposed legislation that I consider to be especially important from the perspective of a federal energy regulator. As a general matter, I am very supportive of H.R.

3406. I have testified before this Subcommittee many times on restructuring issues,

and I am pleased that this proposed legislation is largely consistent with many of

the views I have expressed. I am also pleased that the bill would have the effect

of promoting small-scale renewable generation. As I will discuss in greater detail

below, however, there is one important exception: I do not support the proposed repeal of section 203 of the Federal Power Act (FPA).

Title I of the proposed legislation deals with electric supply. Among the provisions

of Title I, I would like to address my comments to interconnection, the Public Utility

Holding Act of 1935 (PUHCA), the Public Utility Regulatory Policies Act of 1978

(PURPA), and merger review. I have previously testified before this subcommittee

that interconnection rules should be clarified and standardized in order to ensure

that new sources of generation are able to interconnect to the transmission system.

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The Commission accelerated this process of standardization in October with the

issuance of an Advanced Notice of Proposed Rulemaking (ANOPR) addressing procedures and protocols for interconnection. The ANOPR encourages parties to reach

consensus on non cost-related issues of transmission interconnection and uses as a

‘‘strawman’’ the ERCOT model as supplemented by current Commission interconnection policy. Reports of the progress being made are positive, and I support

issuance of a NOPR as soon as possible. The Commission’s intention is to instruct

parties to take up the issues of cost responsibility for transmission interconnections

in the second phase of the transmission interconnection rulemaking.

Section 101 of the proposed legislation would decide the major issue of cost responsibility by assigning system upgrade costs to the generator. I believe these pricing decisions need to be made carefully and with consideration of the multiple factors at issue. Although this legislative process certainly is one forum for deciding

this important issue, the cost responsibility aspect might also benefit from comments and a consensus process such as the Commission plans for the second phase

of our rulemaking. I expect the second phase, dealing with cost issues, will be more

difficult and contentious; many states already are expressing their views.

Section 101 of the proposed legislation also requires the Commission to promulgate the technical standards for generators interconnecting with distribution facilities. Although it is no modest undertaking to establish national standards for distribution interconnections, I do believe reducing obstacles for small-scale distributed

generation can produce good results. Distributed generation can increase options for

consumers and would provide added reliability to the grid. Standards for all players,

as well as the net metering provisions included in this legislation, may encourage

the growth of this fledgling movement toward decentralization of the electric grid.

Of course, we should expect the states to insist on a process that allows their opinions and concerns to be heard since this section shifts jurisdiction to the federal

level.

The proposed legislation repeals PUHCA and replaces it with increased access by

the Commission and state regulators to certain books and records. I support this

legislation. The proposed legislation also repeals prospectively the PURPA mandatory purchase obligation. I support the repeal of the mandatory purchase requirement in Section 210 of PURPA. I also support proposed section 133 of the bill, which

would ‘‘grandfather’’ existing PURPA contracts.

I would like to highlight Subtitle D of Title I, which would eliminate FERC’s merger review authority now embodied in section 203 of the FPA. This is the single

aspect of this proposed legislation that I cannot support. The title itself of Subtitle

D, ‘‘Redundant Review of Certain Matters,’’ reveals my basic concern in this regard:

I do not agree that FERC merger review is redundant. All merger reviews are not

created equal. FERC’s FPA ‘‘public interest’’ standard is different from the ‘‘no harm

to competition’’ antitrust standard of the Sherman Act and the Clayton Act. The relevant information required for the type of review conducted by FERC is not the

same information required by another agency conducting antitrust review of the

same merger. While the same merger may be reviewed by various agencies, the

analyses are not parallel; standards and requirements vary from agency to agency.

I believe it is important for FERC to continue its public interest-focused merger

analysis, which looks at a merger’s effects on rates, regulation, and competition.

FERC, in its regulatory role, is particularly attuned to the issues that may arise

as a result of competition and industry consolidation, including technical issues and

new kinds of mergers that may lead to the blurring of traditional utility services

with other business lines. By acknowledging these issues, I believe that FERC has

developed a dynamic and flexible process—one that is required in today’s market.

I urge the Subcommittee to continue to allow FERC to retain the authority to protect the public in this respect.

Title II of the proposed legislation deals with transmission operation. Section 201

of the proposed legislation would allow the Commission to require all public utilities

and transmitting utilities to offer open access transmission services, extending the

requirement for open access to transmitting utilities that are not public utilities. As

I have testified on other occasions, I believe it is important to have equal and open

access to all transmission at nondiscriminatory rates and comparable terms and

conditions. At the same time, the public power sector has expressed concerns unique

to its status, and these concerns should be addressed with respect to sections 201

and 202. Chairman Wood’s testimony requests a change to the legislation to allow

all tariffs for open access transmission service be on file with the Commission. I

share the Chairman’s concerns on these issues and support his testimony in this

regard.

Section 202 addresses Regional Transmission Organizations (RTOs). There is no

more important effort underway at FERC today than the formation of RTOs. Since

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the Commission began promoting RTOs as a means to remove barriers and impediments present in wholesale electricity markets, I have been fully committed to the

goal of RTO formation. While there is room for disagreement on the best path to

attain the goal of fully functioning RTOs, FERC is very actively pursuing the completion of the development of RTOs with clear responsibilities, independence, and

sufficient scope.

When the Commission issued Order No. 2000 in December 1999, we decided to

adopt an open and collaborative process that relied on voluntary regional participation. Since that time, I have strongly urged that FERC not depart from the basic

philosophies embodied in Order No. 2000, particularly in the absence of a formal

decision to do so, informed by the views of interested parties and state commissions.

In my view, sufficient question remains over FERC’s authority to mandate the formation of, or participation in, RTOs, such that any moves on our part toward a

mandate will be counterproductive to FERC’s ultimate goals. My concern is that this

lack of clarity could lead the industry and the Commission to divert resources away

from the important task of RTO implementation, and instead toward expensive and

time-consuming litigation over FERC’s authority. I therefore support Congressional

clarification of FERC’s authority with respect to RTOs.

Proposed section 202 mandates that all transmission utilities—both investorowned utilities and public power/electric power cooperative utilities—participate in

an RTO. To the extent this direction will eliminate any existing uncertainty regarding FERC’s authority and permit RTO formation to proceed expeditiously, I support

it. Proposed section 202 also requires FERC to establish uniform market rules, including the establishment and enforcement of ‘‘seams’’ agreements. This direction is

consistent with a generic rulemaking proceeding that FERC already has announced.

While the RTO standards embodied in the proposed legislation are, for the most

part, consistent with those established in Order No. 2000, I believe it is possible

that RTO procedures and standards may need to be adapted over time. In his testimony, Chairman Wood suggests that instead of codifying detailed standards and

procedures for implementation of RTOs, additional flexibility for FERC to oversee

an adaptive process might be warranted. Chairman Wood advocates a legislative approach that would have Congress adopt a simple provision permitting the Commission to require RTOs where it finds such RTOs to be in the public interest. I believe

this approach would serve to remove existing uncertainties, while preserving

FERC’s ability to tailor its RTO program to an increasingly dynamic marketplace.

If Congress decides to take the approach of codifying RTO standards and procedures, Chairman Wood’s testimony outlines several concerns regarding (1) the right

of a single RTO applicant for an evidentiary hearing; (2) the requirement for ‘‘preponderance’’ of the evidence supporting FERC decisions; (3) the judicial review provision; (4) the requirement for a proposed RTO to have ‘‘sufficient generation within

the RTO’s boundaries to serve the load within such boundaries;’’ (5) the right of

each pubic utility in an RTO to make rate filings; (6) the definition of ‘‘market participant;’’ and (7) the preclusion of FERC modification to the governance and scope

of an RTO approved before the law’s enactment. I share the Chairman’s concerns

on these issues and support his testimony in this regard.

Title III of the proposed legislation provides for Commission certification of one

electric reliability organization to develop and enforce reliability standards for the

bulk-power system. I agree that the voluntary reliability system, which has been in

place for over three decades, should be replaced with one in which a self-regulated

independent reliability organization, with oversight by the Commission, establishes

and enforces mandatory reliability standards. I especially support the provisions of

section 216(e), which provides for sanctions and penalties for failure to comply with

reliability rules. In my view, such a change in the manner in which the reliability

of the interconnected grid is overseen and managed is required in order to ensure

a competitive bulk power market.

The provisions of Title IV direct the Commission to conduct a rulemaking to establish incentive and performance-based rate policies for expansion of transmission

networks to promote expansion of the transmission grid to support the growth of

competitive markets. Section 401 states that such policies should encourage the deployment of new transmission technologies to increase capacity of existing networks

and to reduce line losses; promote environmentally sound transmission design techniques; and promote the efficient use of transmission systems on a real-time basis.

I believe that the Commission’s transmission rate policies should encourage and promote such policy objectives. I would point out that I believe these goals may be

achieved through rate policies other than incentive or performance-based rates. In

my view, policies such as allowing a reasonable return on equity or accelerated depreciation for new technologies would act to encourage such investment.

35

Section 402 would give the Commission a ‘‘backstop’’ role in transmission siting.

I believe that this is certainly an improvement over the present jurisdictional

scheme, in which the Commission has no role in the permitting and siting of new

transmission facilities. However, as I have testified previously, my primary concern

with a backstop role for the Commission is that such an approach could result in

costly and inefficient duplication of processes, records, and efforts by the various

decisional authorities involved in transmission siting.

My preference would be for FERC to be granted federal eminent domain authority

similar to the authority the Commission exercises with respect to the siting of interstate natural gas pipelines under the Natural Gas Act. The Commission could develop procedures to ensure cooperation with the states and provide for regional participation. I believe that this more centralized approach is preferable from an efficiency standpoint, and will result in less bureaucracy and more timely decisions for

transmission providers and consumers. I am not advocating that the Commission

should have siting authority for electric distribution lines or power plants. I believe

that state governments are best positioned to make those determinations.

Finally, I would like to acknowledge the provisions of Title VII of the proposed

legislation. These provisions strengthen the Commission’s authority to assess civil

and criminal penalties for violations of the FPA and increase the level of such penalties. I have advocated such changes and believe they will greatly aid the Commission in fulfilling its regulatory responsibilities.

In conclusion, I again thank the Subcommittee for this opportunity to comment

upon the Subcommittee’s proposed legislation. As I have testified in previous hearings before this Subcommittee, the Commission must have sufficient authority to

advance its goals of achieving fair, open and competitive bulk power markets. I believe that this legislation, with the modifications I have suggested, would clarify our

authority and greatly assist the Commission in realizing the benefits of wholesale

competition.

Mr. BARTON. Thank you.

We now welcome our new Commissioner, Commissioner Nora

Brownell from the great State of Pennsylvania, from Harrisburg to

Washington. I think this is your first time to testify before this

subcommittee. Is that correct?

STATEMENT OF HON. NORA MEAD BROWNELL

Ms. BROWNELL. Actually, it is my second as a Commissioner and

then a few times as a State commissioner, but I am glad to be

back.

Mr. BARTON. We are glad to have you. Your statement is in the

record, and we will ask you to elaborate on it for 6 minutes.

Ms. BROWNELL. And perhaps the next time we come back it will

be to celebrate the passage of a comprehensive energy bill.

I am going to be quick, because I know that the committee has

a lot of questions, and there are a lot of complex issues to discuss.

But I would note that events of the past few months—September

11, the meltdown of Enron, the confusion of the consumer market—

have caused us all to evaluate what we do and how we do it. But

I believe we are at a critical juncture in the development of energy

markets that are needed to support the continued growth of a digital economy. The issues are complex, the answers are not easy, but

they are issues that have a long-term impact on our country.

We can succumb to inertia and the fear of change, and we can

leave the American public saddled with an inadequate, inefficient

electric system or we can complete the transformation of that industry into the economically competitive, reliable, technologically

vibrant marketplace that this Nation’s consumers deserve. I believe

that comprehensive energy legislation and the work that we are

doing at FERC can provide the certainty and reliability that all

stakeholders need, that consumers need to have confidence in the

36

system, that investors need to invest in the system and that new

technology providers need to introduce what I think is a vibrant

new future that we have not even seen yet.

To accomplish this, I think we need large Regional Transmission

Organizations. I think we need to ensure there is sufficient infrastructure, and we need to guarantee there are equitable, well-understood business rules that reflect the realities of a restructured

market. There is much in this bill that I support and have articulated that in my statement, and I really applaud you for your vision and the comprehensive nature of this bill. I do have concerns

over some of the limitations that this might put on FERC in establishing RTOs and the rules under which they function, and I do

have some concerns about our merger authority. But I do believe

that we can work together with this agency and the other agencies

represented here to get the answers that we need and to have this

train finally arrive at the station since it left so long ago.

[The prepared statement of Hon. Nora Mead Brownell follows:]

PREPARED STATEMENT OF NORA MEAD BROWNELL, COMMISSIONER, FEDERAL ENERGY

REGULATORY COMMISSION

I. INTRODUCTION

Mr. Chairman and Members of the Subcommittee: Thank you for the opportunity

to share my thoughts on H.R. 3406 as well as the Commission’s recent actions concerning wholesale electricity markets. We are at a critical juncture in the development of energy markets to support the growth of a digital economy. We can succumb to inertia and fear of change, and leave the American public saddled with an

inadequate, inefficient electric system. Or, we can complete the transformation of

that industry into the economically competitive, technologically vibrant marketplace

that this nation’s consumers deserve. I, for one, am committed to the latter course

of action.

Passage of a comprehensive energy bill will certainly settle the many concerns

created by the lack of a long-term energy policy for our country. I also believe the

resolution of the issues related to the restructuring of the electricity markets will,

in fact, act as an economic stimulus and unleash capital for the development of infrastructure and new technologies. I also believe that we at FERC must lay out a

clear strategy for completing the transformation of electricity markets. Not only is

investment constrained, but business plans are hampered by uncertainty. I am convinced that the prerequisite to success is creation of a clear and cogent course of

action that will bring certainty and stability for all of the stakeholders by: (1) establishing large Regional Transmission Organizations (RTOs); (2) ensuring there is sufficient infrastructure; and (3) ensuring there are equitable, well understood business

rules that reflect the realities of a restructured marketplace.

There are many provisions in H.R. 3406 that I support as consistent with this

course of action, including the call for standardization of interconnection procedures,

the establishment of minimum federal net metering standards, the repeal of the

Public Utility Holding Company Act (PUHCA) and the Public Utility Regulatory

Policies Act (PURPA), the increase in enforcement tools, and the grant of backstop

transmission siting authority to the Commission as well as the authority to require

all transmitting utilities to offer open access transmission service. I commend the

continued leadership and hard work of the members of the Subcommittee. I would,

however, suggest that Section 202, concerning the formation of RTOs, and Section

141, repealing Commission review of mergers, be amended.

II. SECTION 202—RTO FORMATION

A. RTO formation has been delayed at the expense of electricity customers

Large, independent RTOs can improve grid reliability by facilitating transmission

planning across a multi-state region, create better pricing mechanisms such as

eliminating ‘‘pancaking’’, improve efficiency through better congestion management,

and attract investment in infrastructure by facilitating regional consensus on the

need for construction. Consistent with the Energy Policy Act of 1992, the Commission has been working to foster RTOs for a number of years. So far, the Commission

37

has relied on the voluntary efforts of utilities to form RTOs, and has held mediation

and outreach to assist market participants in reaching consensus on RTO governance, scope, and configuration. Nevertheless, to date not a single RTO is up and

running.

I believe the price of doing nothing on RTO formation grows daily and that we

must move forward. The Commission has recently initiated a number of processes

to help ensure that any actions we take concerning the development of RTOs be

ones that will produce the most benefits for customers and that adequately accommodate states’ interests. First, the Commission recently hired an outside consultant

to perform an updated study of the costs and benefits of RTO formation. Second,

we have begun to consider the standard RTO design features that will best ensure

a seamless national wholesale electricity market. During the week of October 15,

2001, we held a conference to discuss the issue of standard RTO design features

with a wide range of market participants and state commissions, and we will be

doing more outreach and issuing a proposed rule on the subject. Our RTO conference demonstrated considerable consensus on a number of issues, such as congestion management, energy markets, and market monitoring. Third, we have set up

a new program within FERC under which a number of regional panels consisting

of Commission staff and state commission staff will be established to ensure better

coordination with our state regulatory counterparts on RTO development issues.

It may soon become necessary for the Commission to take more direct action to

establish mandatory RTOs. I believe the current language of the Federal Power Act

already gives us the authority to take such action, and I will encourage my colleagues to join me in exercising that authority in a prudent manner. Nevertheless,

the few who oppose RTOs would likely file judicial challenges to the exercise of that

authority, thus legislative clarification would save us all the time and expense of

litigation.

B. Section 202 would not speed development of competitive markets

Section 202 of H.R. 3406 does clarify that the Commission has the authority to

require transmitting utilities, whether investor- or publicly-owned, to join an RTO.

However, the following provisions of Section 202 would leave the Commission so

hamstrung in its exercise of this authority, that I fear we would make no greater

progress toward the development of truly competitive wholesale electricity markets

than we have under the current statute:

Narrowly prescribing Commission review of an RTO application—Section 202 limits

the Commission’s authority over the development of specific RTOs to proposing

modifications to a utility’s application to form or join an RTO. Further, the

Commission can only propose such modifications when the application fails to

satisfy a rigid and limited set of standards specified in the bill.

Allowing applicants to unnecessarily delay process—The provisions of Section 202 requiring the Commission to hold an ‘‘evidentiary’’ trial-type hearing on the proposed modifications whenever an applicant so requests and imposing a stay of

the Commission’s order whenever an applicant seeks judicial review could enable one RTO applicant to significantly delay and increase the cost of RTO formation.

Making it easier for applicants to overturn Commission orders—Section 202’s re- placement of the existing ‘‘substantial-evidence’’ standard for judicial review

under the Federal Power Act with a ‘‘preponderance-of-the-evidence’’ standard

for review of Commission modifications to RTO applications would make it easier for applicants to overturn such modifications.

C. Section 202 should be replaced with a simple affirmation of Commission authority

to issue such RTO orders as are in the public interest

I believe that Section 202 may not achieve the goals that the Subcommittee has

identified, i.e., the creation of competitive markets. Therefore, I urge this Subcommittee either to replace it with a provision simply affirming the Commission’s

authority to issue such orders concerning the establishment, design, and operation

of RTOs, and the participation of transmitting utilities therein, as are in the public

interest. I would also urge the Subcommittee to consider tax code amendments to

ensure that electric cooperatives and public power entities do not lose their tax-exempt status by transferring transmission assets over to a for-profit RTO.

III. SECTION 141-MERGER REVIEW

Section 141 would repeal Section 203 of the Federal Power Act and, thus, leave

review of mergers and other dispositions of public utility facilities to the Department of Justice and the Federal Trade Commission. While I support coordination

of federal agency review of proposed utility mergers to ensure that such reviews are

38

not duplicative or overly time-consuming, I do not believe it is appropriate to eliminate FERC review. The Commission has knowledge of the electric utility industry

that the federal antitrust agencies do not, and Commission review is necessary to

ensure that mergers and other dispositions are consistent with the public interest.

IV. OTHER PROVISIONS OF H.R. 3046

Although I would suggest changes to Sections 202 and 141, there are other provisions of H.R. 3046 that I heartily endorse.

A. Section 101 would ensure standardization of interconnection procedures and allow

consideration of an application’s effect on competition

Section 101 calls for standardization of interconnection procedures. I strongly support the development of standardized interconnection procedures, and I am happy

to report that the Commission is conducting a rulemaking to address this issue.

I further support the proposed amendment of the criteria for evaluating an interconnection application. Under the existing language of section 210 of the Federal

Power Act, the Commission may grant an application if it is in the public interest

and it would either encourage overall conservation, optimize efficiency, or improve

reliability. This bill would allow the Commission to grant an application if it were

in the public interest and promoted competition. This language allows the Commission to continue to consider conservation, efficiency and reliability, while also permitting the Commission to consider competitive goals that will truly benefit consumers.

B. Section 102’s net metering standards would remove a barrier to entry of new technology

I support the bill’s call for minimum federal net metering standards. Most utilities

have been slow to provide for net metering, and net metering is an essential step

in the development of viable markets for new technologies, such as distributed generation. The establishment of national minimum standards on which states will

build net metering programs would enable this important new technology a chance

to compete. Net metering is also a valuable tool for consumers who want to be actively involved in their purchasing decisions.

C. Sections 111-125 would appropriately repeal PUHCA

I support the bill’s repeal of PUHCA. PUHCA was necessary to address abuses

that existed a half-century ago. However, that statute has not only outlived its usefulness, it is actually thwarting needed development of our electricity resources by

subjecting registered utility holding companies to heavy-handed regulation of ordinary business activities and to outdated requirements that they operate ‘‘integrated’’

and contiguous systems. One of PUHCA’s perverse effects is that it causes foreign

companies to buy here and U.S. companies to invest overseas. Nevertheless, I appreciate the concerns of those, like the rural electric cooperatives, who have opposed

elimination of certain safeguards that PUHCA provides against market power. The

Commission is aware of the concerns of the cooperatives and of the problems with

market power in general, and we are engaged in an overhaul of our efforts at market monitoring and market power protection. I believe that Section 111-125 strikes

an appropriate balance by replacing PUHCA with increased access by the Commission and state regulators to certain books and records.

D. Sections 131-134 would appropriately eliminate prospective PURPA forced sales

I support the bill’s prospective elimination of the forced sale provision of PURPA.

PURPA was enacted out of concern over dependence on oil for electric generation.

Now, 22 years later, when a gas-fired generator can be on-line in less than two

years, and many advances are being made in distributed generation, PURPA’s subsidies for certain types of generation are no longer appropriate.

E. Section 201 would ensure non-discriminatory access to the entire transmission

grid

Section 201 would grant the Commission the authority to require all transmitting

utilities (not just those that constitute ‘‘public utilities’’ under the Federal Power

Act) to offer open access transmission service. I believe that all interstate transmission facilities should be under one set of open access rules, including the facilities owned and/or operated by municipals, cooperatives, the Tennessee Valley Authority, and the federal power market administrations and regardless of whether

they are used for unbundled wholesale, unbundled retail, or bundled retail transactions. Having all transmission under one set of rules will ensure a properly functioning and transparent transmission grid.

39

F. Section 301 will promote transmission reliability

I support Section 301, which grants the Commission jurisdiction over electric reliability organizations. The reliability of the electrical grid is critical to this nation’s safety and economy, and it is appropriate to have a greater governmental role in

reviewing reliability standards.

G. Section 402 will remove logjams to siting needed transmission

As I stated in my September 21, 2001 testimony before this Subcommittee, I believe the Commission should have backstop authority to site transmission facilities.

State-by-state siting of such transmission superhighways is an anachronism that

impedes transmission investment and slows transmission construction. There are

many models for regional planning that might be considered. For example, the

Western Governors Association has been working hard to address regional issues in

the West. Therefore, I support section 402, which allows the Commission to authorize construction of transmission facilities that are consistent with the public interest

when the state has withheld or delayed approval. But I also believe new models

may respond to siting issues in a way that recognizes state concerns while accepting

the reality that electricity planning and operations are regional, if not national, in

nature.

H. Sections 701-703 would provide needed expansion of enforcement authority

The Commission must have an expanded role in monitoring for, and mitigating,

market power abuse. The enabling statutes of the Securities and Exchange Commission and the Federal Communications Commission provide for a range of enforcement measures, such as civil penalties. I believe that providing FERC with similar

authority would send a powerful message to electricity market participants that we

take violations of the Federal Power Act just as seriously. Therefore, I support H.R.

3406’s recognition of the Commission’s refund authority over non-public utilities

that provide transmission service or power to a public utility. I also support the

bill’s increase in the level of criminal penalties allowed under Section 316 of the

Federal Power Act, as well as the bill’s authorization of civil penalties for violation

of any provision of Part II of the Federal Power Act.

V. CONCLUSION

I appreciate the enormous commitment of time and energy that the Chairman and

the other members of this Subcommittee have put into developing legislation to help

transform the electricity industry into the thriving force it should be. There are

many competing interests to be satisfied against a larger goal: the creation of a robust, viable, liquid energy market supported by an enhanced infrastructure. Our

country is well served by change leaders such as yourself. I thank you for the opportunity to share my thoughts with you.

Mr. BARTON. We now welcome Commissioner Massey from the

great State of Louisiana. He has obviously been here a few times.

Your statement is in the record in its entirety. We would ask you

to elaborate for 6 minutes. Arkansas, I am sorry, I said Louisiana—Arkansas.

STATEMENT OF HON. WILLIAM L. MASSEY

Mr. MASSEY. Thank you, Mr. Chairman. I respect and applaud

your efforts to enact electricity restructuring legislation. My view

is that without your help with changes in the law, the restructuring of the electric industry will continue to be a patchwork. Necessary transmission investments may not keep pace with the needs

of competitive markets, and this is a very serious problem. And it

will be much more difficult to maintain reliability long term.

Thus, a number of provisions of this legislation are excellent and

have my support, and I have concerns about others. In particular,

I support the provisions related to standardized generation interconnection, to ensure demand responsiveness, and those related to

mandatory reliability rules, civil penalties and transmission infrastructure and siting. I particularly appreciate your interest, Chairman Barton, in solving this knotty problem related to transmission

40

siting, and it seems to me that you have proposed a manner of proceeding that balances competing concerns and is reasonable. I applaud it, and I think it will help get necessary transmission built.

These are all excellent provisions. I support placing all transmission under one set of Federal rules. I think we have to do this.

The bill sends a strong signal that RTOs are in the public interest

and that FERC may require their formation, and I applaud this.

The legislation also includes provisions that I cannot support,

however. The Commission’s merger review authority should not be

repealed. Indeed, this authority should be strengthened to ensure

that consumers are protected from consolidations that may choke

off the very competition that we are striving to facilitate. And I

would like to associate myself with the remarks of Commissioner

Breathitt on this very point. In addition, I do not support legislatively tying FERC’s hands with respect to RTO approval standards

and hearing procedures. These should remain a matter of Commission policy that may evolve over time with the changing needs of

competitive markets.

Let me close by saying, since members of the subcommittee have

raised the Enron collapse, I am deeply concerned about the Enron

collapse. I am concerned about the 21,000 employees who are losing

their jobs, I am concerned about investors and retirees who lost

their shirts, I am concerned because Enron was the most visible

corporate symbol of energy deregulation in the world. We should be

looking at whether there are lessons here for our evolving energy

policy.

Based upon what I have seen thus far, however, the collapse was

not related to a failure in energy markets. In fact, a strong argument can be made that if Enron had focused on energy assets and

energy trading in the United States and had it accurately disclosed

profits and losses, it would probably still be humming right along.

And the energy market appeared to recover rather quickly from the

Enron collapse. We don’t know the whole story yet, but what we

know thus far indicates that the market has adjusted reasonably.

Other market participants moved into the breach. The energy market itself did not collapse.

Nevertheless, whatever lessons there are here for energy policy

and energy markets, we should heed those lessons. Perhaps the accounting standards and disclosure requirements for a public utility

should be a strengthened—perhaps we should take a look at disclosure requirements for all public utilities. I have an open mind. But

the good news here is that the short-term energy markets appeared

to adjust rather quickly to the collapse of the largest energy trading company in the world. Thank you, Mr. Chairman.

[The prepared statement of Hon. William L. Massey follows:]

PREPARED STATEMENT OF HON. WILLIAM L. MASSEY, COMMISSIONER, FEDERAL

ENERGY REGULATORY COMMISSION

Mr. Chairman and Members of the Subcommittee on Energy and Air Quality:

Thank you for the opportunity to testify on the important electricity legislation now

pending before the House and recent Commission activity promoting efficient and

reliable electricity markets.

41

I. H.R. 3406—THE ELECTRIC SUPPLY AND TRANSMISSION ACT

A. Interconnection

I am generally supportive of the provisions of Title I. Section 101 addresses interconnection standards. The Commission has made a firm decision to move forward

on developing standard procedures and agreements regarding interconnection and

will likely do so in a way that is consistent with section 101.

B. Demand response

Section 103 provides for implementation of price responsive demand programs. As

I have testified previously, markets need demand responsiveness to price. This is

a standard means of moderating prices in well-functioning markets, but it is generally absent from electricity markets. When prices for other commodities get high,

consumers can usually respond by buying less, thereby acting as a brake on price

run-ups. If the price, say, for a head of cabbage spikes to $50, consumers simply

do not purchase it. Without the ability of end use consumers to respond to price,

there is virtually no limit on the price suppliers can fetch in shortage conditions.

Consumers see the exorbitant bill only after the fact. This does not make for a well

functioning market.

Instilling demand responsiveness into electricity markets requires two conditions:

first, significant numbers of customers must be able to see prices before they consume, and second, they must have reasonable means to adjust consumption in response to those prices. Accomplishing both of these on a widespread scale will require technical innovation. A modest demand response, however, can make a significant difference in moderating price where the supply curve is steep.

Once there is a significant degree of demand responsiveness in a market, demand

should be allowed to bid demand reductions, or so called ‘‘negawatts,’’ into organized

markets along with the megawatts of the traditional suppliers. This direct bidding

would be the most efficient way to include the demand side in the market. But however it is accomplished, the important point is that market design simply cannot ignore the demand half of the market without suffering painful consequences, especially during shortage periods. There was virtually no demand responsiveness in the

California market. Customers had no effective means to reduce demand when prices

soared.

It is important for Congress to send a message that instilling a significant measure of demand responsiveness into electricity markets is in the public interest. This

legislation does just that, and I endorse it.

C. PUHCA and PURPA

Subtitle B of Title I repeals PUHCA. I am pleased that the bill appears to include

important provisions regarding state and federal access to the books and records of

holding companies and their subsidiaries.

Subtitle C of Title I repeals PURPA on a going forward basis. I would support

such repeal of PURPA if there were a mechanism to promote the development of

renewable resources, such as a reasonable portfolio standard.

D. Review of Mergers

Section 141 repeals the Commission’s authority to review mergers. I do not support this provision. As we strive to move toward competitive markets and lighthanded regulation, the Commission’s ability to remedy market power is increasingly

important. Market power is likely to exist in the electric industry for a while. It is

unreasonable to expect an industry that has operated under a heavily regulated monopoly structure for 100 years suddenly to shed all pockets of market power. An

agency such as FERC with a broad interstate view must have adequate authority

to ensure that market power does not squelch the very competition we are attempting to facilitate.

The Commission’s authority over mergers is important. We are seeing unprecedented industry consolidation now. While mergers can produce efficiencies, they can

also increase both horizontal and vertical market power. The Commission is particularly well suited to evaluate proposed mergers involving electric utilities. The Commission’s detailed experience with electricity markets and its unique technical expertise can provide critical insights into a merger’s competitive effects. In addition,

the Commission’s duty to protect the public interest is broader than the focus of the

antitrust agencies and thus allows us to better protect consumers from other possible effects of a merger, such as unreasonable costs. As the architect of Order No.

888 and the RTO Rule, Order No. 2000, the Commission must retain the authority

to condition a merger to ensure consistency with broader policy goals. And unlike

the antitrust agencies, the Commission’s merger procedures allow public intervenVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00045 Fmt 6633 Sfmt 6621 E:\HEARINGS\77118 pfrm09 PsN: 77118
42

tion and participation in proceedings critical to the restructuring of this vital national industry.

For these reasons, I would not support any weakening of the Commission’s merger authority. Indeed, to ensure that mergers do not undercut our competitive goals,

the Commission’s authority over electricity mergers must be strengthened in a number of ways. The Commission should be given direct authority to review mergers

that involve generation facilities. The Commission has interpreted the Federal

Power Act as excluding generation facilities per se from our direct authority, although that interpretation is currently before the courts. It is important that all significant consolidations in electricity markets be subject to Commission review. For

the same reason, the Commission should be given direct authority to review consolidations involving holding companies.

I am also concerned that significant vertical mergers can be outside of our merger

review authority. Under section 203 of the FPA, our merger jurisdiction is triggered

if there is a change in control of jurisdictional assets, such as transmission facilities.

Consequently, consolidations can lie outside of the Commission’s jurisdiction depending on the way they are structured. For example, a merger of a large fuel supplier and a public utility would not be subject to Commission review if the utility

acquires the fuel supplier because there would be no change in control of the jurisdictional assets of the utility. If the merger transaction were structured the other

way, i.e., the fuel supplier acquiring the utility, it would be subject to Commission

review. Such vertical consolidations can have significant anticompetitive effects on

electricity markets. Those potential adverse effects do not depend on how merger

transactions are structured, and thus our jurisdiction should not depend on how

transactions are structured. Therefore, I recommend that the Commission be given

authority to review all consolidations involving electricity market participants, however structured.

E. Open Transmission Access

Section 201 allows the Commission to require all transmitting utilities as well as

public utilities to offer open access transmission service. I am generally supportive

of placing all transmission owners under the same set of rules. I have concerns,

however, with codifying the manner in which the Commission should calculate

stranded costs. Such calculation should be left to the Commission’s discretion and

judgment.

F. Regional Transmission Organizations

Section 202 sets out a number of provisions regarding RTOs and RTO formation.

I am particularly pleased that this legislation sends a clear message that RTOs are

in the public interest. Nevertheless, I am concerned with the proposals to codify

matters such as RTO standards, hearing requirements, and when the Commission

may or may not make modifications to existing RTOs. It would be far more useful

to give the Commission express authority to require RTO formation under standards

determined to be appropriate by the Commission. This would allow standards to

evolve along with the requirements of competitive markets.

G. Reliability

Section 301 provides for Commission certification of an organization to develop

and enforce reliability standards. The industry needs mandatory reliability standards. Vibrant markets must be based upon a reliable trading platform. Yet, under

existing law there are no legally enforceable reliability standards. Compliance with

the reliability rules of the North American Electric Reliability Council (NERC) is

voluntary. A voluntary system is likely to break down in a competitive electricity

industry.

I support legislation that would lead to the promulgation of mandatory reliability

standards. A private standards organization with an independent board of directors

could promulgate mandatory reliability standards applicable to all market participants. These rules would be reviewed by the Commission to ensure that they are

fair and not unduly discriminatory. The mandatory rules would then be applied by

RTOs, the entities that will be responsible for maintaining short-term reliability in

the marketplace. Mandatory reliability rules are critical to evolving competitive

markets, and I urge Congress to enact legislation to accomplish this objective.

Section 301 seems reasonable and I support its adoption.

H. Transmission Infrastructure

Section 401 directs the Commission to adopt policies that facilitate construction

of transmission facilities needed for competitive electricity markets, and to report

to the Congress on transmission adequacy. I support these goals. I am particularly

supportive of the legislation’s specific goals such as promoting economically efficient

43

enlargement of transmission networks, including the provision of proper price signals so that new generation and transmission is built where it provides the lowest

overall cost to consumers.

I. Transmission Siting

Section 402 enacts backstop transmission siting authority for the Commission. In

previous testimony, I have recommended that Congress transfer to the Commission

the authority to site new interstate electric transmission facilities. The transmission

grid is the critical superhighway for electricity commerce, but it is becoming congested because of the new uses for which it was not designed. Transmission expansion has not kept pace with changes in the interstate electricity marketplace.

Although the Commission is responsible for well functioning electricity markets,

it has no authority to site the electric transmission facilities that are necessary for

such markets to thrive and produce consumer benefits. Existing law leaves siting

to state authorities. This contrasts sharply with section 7 of the Natural Gas Act,

which authorizes the Commission to site and grant eminent domain for the construction of interstate gas pipeline facilities. Exercising that authority, the Commission balances local concerns with the need for new pipeline capacity to support

evolving markets. We have certificated well over 15,000 miles of new pipeline capacity during the last six years. No comparable expansion of the electric grid has occurred.

I continue to recommend legislation that would transfer siting authority to the

Commission. Such authority would make it more likely that transmission facilities

necessary to reliably support emerging regional interstate markets would be sited

and constructed. A strong argument can be made that the certification of facilities

necessary for interstate commerce to thrive should be carried out by a federal agency.

Adequate grid facilities are essential to robust wholesale power markets. I am

confident that transmission will be built in sufficient quantities if siting authority

is rationalized, rate jurisdiction is clarified, and adequate cost recovery mechanisms

and risk-based rates of return are allowed.

Proposed section 402 provides the Commission with backstop siting authority to

ensure that the necessary transmission facilities are built. This provision appears

to provide appropriate respect for the siting prerogatives of the states and has my

support.

J. Federal Utilities

I have long advocated placing all transmission providers under the same set of

rules. Placing TVA, BPA and the Federal Power Marketing Administration under

Commission authority has my full support.

Section 523 permits BPA to transfer operational control of its transmission facilities to an RTO. Although I strongly support allowing BPA to participate in an RTO,

I would not limit its participation in an RTO of a specific scope as this section does.

In addition, I would recommend that Congress specifically authorize TVA and the

PMAs to participate in RTOs determined to be appropriate by the Commission.

K. Penalties

Section 703 expands the scope of civil penalties to include all of Part II of the Federal Power Act. This provision moves toward giving the Commission much needed

tools to police the markets and I support it.

II. RECENT FERC ACTION ON RTO FORMATION AND MARKETS

A. RTO Formation

The Commission has received a number of proposals to form RTOs, and has acted

on most such proposals. In general, the Commission has strongly encouraged RTOs

to grow larger and has provided guidance on independence and RTO governance.

In July, the Commission issued an order expressing its preference for no more than

four large RTOs in the nation, but has recently indicated that greater flexibility will

be allowed in RTO formation.

During October 15-19, 2001 the Commission held five days of public hearings on

a wide range of issues related to RTO formation and market design. In an order

issued November 7, the Commission indicated a desire to receive additional comment from state commissions with regard to RTO formation, and indicated that additional cost benefit analyses on RTOs would be conducted. Also, the Commission

stated its intention to standardize market design rules as appropriate. The November 7 order stated that since it is not possible for all RTOs to be in operation by

our December 15, 2001 deadline, the Commission will set out in future orders a time

44

line for continuing RTO progress in each region. I expect the Commission to act on

such orders in the near future.

B. Market-based Rates

In two orders the Commission issued November 7, 2001, we began to correct severe weaknesses in our market based pricing policy. My longstanding concerns had

been sharpened by the failure of the California market and the economic consequences that spun from it. We’ve learned that we must accurately assess market

conditions when depending on markets to discipline prices. And we must provide

adequate refund protection to customers when poorly functioning markets do not

protect them from unreasonable prices.

In AEP Power Marketing, et al., the Commission took three important steps in

our market based pricing policy. First, we concluded that our traditional market

power analysis no longer adequately protects customers against generation market

power.

Second, we announced a new interim analytic screen to protect customers until

we develop the tools we need for the longer term. That interim tool is the Supply

Margin Assessment, or SMA, and will be applied to all sales except those into an

ISO or RTO with approved monitoring and mitigation. This is a major step in the

right direction. The SMA improves on the old analysis by taking into account transmission capability and by looking to the critical notion of a ‘‘pivotal supplier’’ in a

market. When supplies are tight, prices in electricity markets can run up quickly,

especially when there is a pivotal supplier whose capacity is needed to satisfy demand. The SMA addresses that problem and does not allow pivotal suppliers to

charge market based prices. The SMA is a major improvement. Like most new policy tools, it is not perfect, but we are moving in the right direction. As with any

analytic method, it is only a snapshot of current market conditions. But if market

conditions change, parties are free to file a complaint showing that the new conditions result in a seller failing the SMA screen.

Third, the Commission applied the SMA to three sellers in the context of their

triennial updated analysis, found that they fail, and put in place innovative mitigation measures requiring the applicants to offer all uncommitted generation capacity

into the spot market. Sales will be priced at the traditional split savings adder. As

the order points out, maintaining an accurately priced spot market is the single

most important element for disciplining longer term transactions. Thus, with the

spot market mitigation in place, an applicant may freely negotiate longer term

transactions but must post on its web site a portfolio of long term products and

prices that are available.

In another order issued November 20 in EL01-118, the Commission took two additional important steps. First, we announced the start of a generic proceeding to develop new analytic methods for evaluating markets and market power on a long

term basis. I fully support launching this important initiative. Second, the order initiated a section 206 proceeding to place a refund condition in the tariffs of sellers

with market based pricing. That condition would prohibit anticompetitive behavior

and the exercise of market power. This is an improvement providing customers with

some added protection, and to that extent I support the order.

But we should do more for customers. The order fails to provide any refund protection to customers when market structure and market rules are flawed and unjust

and unreasonable rates result. The Federal Power Act states that such rates are unlawful. This is precisely the situation in which the Commission found itself in the

California proceeding. We did not make any findings of bad behavior on the part

of any sellers. We found only a market that was badly broken. The risk of a broken

market should not be placed solely on customers. Our tariff condition should provide

for refunds whenever the Commission finds that unjust and unreasonable rates are

charged.

III. CONCLUSION

I stand ready to answer questions and to assist the Subcommittee in any way.

Thank you for this opportunity to testify.

Mr. BARTON. Thank you, Commissioner.

We would now like to hear from the chairman of the Tennessee

Valley Authority. I believe this is your first time to testify.

STATEMENT OF GLENN L. MCCULLOUGH, JR.

Mr. MCCULLOUGH. Before your subcommittee, it is, sir.

45

Mr. BARTON. Yes, sir.

Mr. MCCULLOUGH. Thank you, Mr. Chairman.

Mr. BARTON. Your statement is in the record, and you are recognized for 6 minutes.

Mr. MCCULLOUGH. Thank you very much, Mr. Chairman and distinguished members of the subcommittee. I would like to thank

you, Chairman Barton, as well as Ranking Member Boucher, for

your leadership on issues relating to the supply of reliable and affordable electricity throughout the Nation. I would also like to express my gratitude and appreciation to Congressman Ed Bryant,

Congressman Chip Pickering, Congressman Bart Gordon and Congressman Ed Whitfield, all of whom sit on this subcommittee as

they have been amongst the strongest advocates for the people of

the Tennessee Valley and TVA.

We are very grateful to them for their collective support of the

TVA title. The title represents their consensus, and ours, on the

best way to comprehensively address TVA’s place in a more competitive market. I would also like to thank the Tennessee Valley

Public Power Association, the Tennessee Valley Industrial Committee for their help in drafting this important legislative proposal.

The title, which is now part of H.R. 3406, affirms TVA’s role as a

steward within the Valley region, and it maintains the integrity of

TVA’s mission. It ensures the availability of affordable electricity

for rural and fixed-income consumers in the Tennessee Valley, and

it ensures the reliability of TVA’s power supply and transmission

system.

The specific provisions of the title are discussed in my written

testimony, and TVA and its customers believe that these provisions

are in the best interest of the people and the businesses of our region. We are grateful to everyone who had a role in developing the

TVA title, and we appreciate the support it has received from members of the subcommittee.

It has been more than 2 years since a representative from TVA

appeared before this subcommittee, Mr. Chairman. In that time

there have been many changes, and truly it is a new day at TVA.

Director Skila Harris and I began serving the Valley in November

1999. Director Bill Baxter was sworn in less than 2 weeks ago. We

are committed to making TVA a more responsible and business-like

agency as we work to deliver affordable, reliable power, a cleaner

environment and a vibrant economy for the good of the people.

I would like to report to the subcommittee that TVA is stronger

operationally and financially as our entire organization prepares

for the future of competition. And I am proud to say that through

our diverse power supply, reliable transmission system, operational

and financial performance and leadership in renewable energy and

new technologies, TVA is addressing some of the key concerns in

our Nation’s energy future. While there is still much work to be

done, I am confident that TVA will add value in the competitive

marketplace as a result of our excellent business performance.

Now let me take just a couple of moments to share some of the

recent examples of the value we provide to the people in the Tennessee Valley. Through distributors of TVA power, we provide affordable, reliable electricity to 8.3 million residential consumers.

And in recent years, we have pushed TVA’s performance to new

46

levels of excellence. TVA won the 2001 Quality Cup awarded by the

Rochester Institute of Technology in USA Today for comprehensive

business improvement initiatives. During fiscal year 2001, our customer outage duration was three times better than the average of

other U.S. companies we benchmark. In 2000, TVA’s Sequoyah and

Browns Ferry Nuclear Plants were ranked as the second and third

most efficient nuclear power generators in the Nation.

TVA is providing financial value to our customers, having had

only one rate increase in 14 years. We reduced TVA’s debt by $610

million in fiscal year 2001, which is $160 million more than was

projected. We reduced TVA’s overall interest expense as a percentage of revenue to its lowest level in more than 15 years. We are

repaying the U.S. Treasury for its original investment in the TVA

power system. For fiscal year 2001, our payment to the Treasury,

including principal and interest, was $55 million. TVA does not receive any Federal appropriations.

TVA’s commitment to excellence also provides value for the environment. TVA has conducted a multibillion dollar program to further reduce nitrogen oxide and sulfur dioxide emissions from our

generating plants. By 2005, we will have reduced sulfur dioxide

emissions 75 to 80 percent since 1977. Nitrogen oxide emissions

during the ozone season will be down by 70 to 75 percent. In addition, TVA is one of the first three utilities in the Nation to offer

an accredited green power option for our customers.

In these and many other ways, TVA provides value to our customers and value to the Nation. Our priorities are closely aligned

with the issues identified in the national energy policy. By providing reliable, affordable, environmentally sound energy, TVA is

demonstrating many of the objectives outlined in this policy. I will

work very closely with you, with every member of this subcommittee as we continue to work on ways to improve affordable,

reliable energy for the Nation.

Thank you for this opportunity to appear before you today, and

I look forward to answering any questions.

[The prepared statement of Glenn L. McCullough follows:]

PREPARED STATEMENT OF GLENN L. MCCULLOUGH, JR., CHAIRMAN, TENNESSEE

VALLEY AUTHORITY

Good afternoon, Mr. Chairman and distinguished members of the Subcommittee.

I would like to thank you, Chairman Barton, as well as Ranking Member Boucher,

for your interest and leadership on issues relating to the continuous supply of reliable and affordable electricity throughout the Nation. I assure you that it is an issue

we take very seriously at the Tennessee Valley Authority.

I am pleased to be here today to discuss with the subcommittee how H.R. 3406,

the Electric Supply and Transmission Act, addresses the way in which TVA might

look in the more competitive and restructured electricity marketplace of the future.

Together with the Tennessee Valley Public Power Association (TVPPA), the trade

association representing the distributors of TVA power, and the Tennessee Valley

Industrial Committee (TVIC), which represents TVA’s large industrial customers, I

am very pleased that the Valley’s consensus language was accepted as the TVA title

in H.R. 3406. Additionally, this language is generally acceptable to the administration. The regional consensus approach, included in this title, reflects a great deal

of hard work and compromise from stakeholders throughout the Valley, and represents a common-sense approach to addressing, in a comprehensive manner, the

unique setting of TVA in the electricity marketplace. It is for this reason that I

would like to express a great deal of gratitude and appreciation to Congressman Ed

Bryant, Congressman Chip Pickering, Congressman Bart Gordon, Congressman

Rick Boucher, and Congressman Ed Whitfield, all of whom sit on this subcommittee,

47

as they have all been among the strongest advocates for TVA, TVPPA, TVIC, and

most importantly the Valley’s ratepayers, throughout this process.

A NEW DAY AT TVA

It has been more than two years since a representative from TVA last appeared

before this subcommittee. In that time, there have been many changes, and it is a

new day at TVA. We have a completely new Board. Director Skila Harris and I

began serving the Valley in November of 1999 and Director Bill Baxter was sworn

in less than two weeks ago. We are committed to making TVA a more responsible

and business-like agency as we work to deliver affordable, reliable power, a cleaner

environment and a vibrant economy for the good of the people.

I would like to report to the subcommittee that TVA is stronger operationally and

fiscally as the entire organization prepares for the future of competition. While there

is still much work to be done, I am confident that a very bright future lies ahead

for the people we are charged to serve. As a result of our hard work, I am certain

that we will succeed in the competitive marketplace as people continue to recognize

the value TVA delivers through excellent business performance.

TVA BACKGROUND

TVA, which is the Nation’s largest provider of public power, was created by Congress in 1933 to provide for flood control, navigation, and the generation of electric

power in the seven-state region of the Tennessee Valley, which includes Alabama,

Georgia, Kentucky, Mississippi, North Carolina, Tennessee, and Virginia. This mission is the cornerstone of our service across the Valley today. Together with 158 municipally and cooperatively owned distributor customers, TVA provides electricity ultimately to 8.3 million residential consumers throughout the Tennessee Valley,

while managing and developing the Tennessee River watershed and providing leadership for sustainable economic development for the people we serve.

The Tennessee River system is the fifth-largest river basin in the United States.

It stretches 652 miles from Knoxville, Tennessee, to Paducah, Kentucky, where it

flows into the Ohio River and ultimately the Mississippi. It encompasses over 11,000

miles of shoreline, 54 dams and 14 locks. About 34,000 loaded barges travel the

Tennessee River each year—the equivalent of two million trucks traveling the roads.

TVA, incidentally, no longer receives any federally appropriated funds for the management and stewardship of the Tennessee River. TVA has used power revenues for

these functions since October 1999.

TVA’s power system has a generating capacity of 30,365 MW. TVA operates 59

coal fired units at 11 plants, five nuclear reactors at three plant sites, 29 hydropower plants, and five combustion turbine plants. The Bush Administration’s National Energy Policy released earlier this year recognizes the importance of diversity

in energy supply—including new attention to promoting nuclear energy, clean coal

technologies, and renewable energy sources. TVA’s mix of coal, nuclear, hydroelectric, and natural gas-fired generation resources illustrates the value and benefits

of such diversity. In FY2001 TVA’s generation sources were approximately 65 percent fossil and combustion turbine, 29 percent nuclear, and 6 percent hydropower.

TVA provides wholesale power to 158 local power distributors and 62 directly

served customers through a network of 17,000 miles of transmission lines in the

seven state region. The TVA Act directs the three members of the Board of Directors, all of whom are appointed by the President and confirmed in the Senate, to

set TVA’s electric rates as low as feasible, while recovering the full costs of providing electricity for the Valley.

TVA’S BUSINESS PERFORMANCE

I am very proud of the way employees from throughout TVA have responded to

the call of service in the public interest throughout the Tennessee Valley. Here are

just a few examples of our most recent accomplishments:

POWER SYSTEM

• In Fiscal Year 2001, TVA transmission reliability to customers was 99.999 percent. To put that In perspective, we are three times better in terms of customer

outage duration than the average of the U.S. companies we benchmark.

• TVA won the 2001 Quality Cup awarded by the Rochester Institute of Technology

and USA Today for a comprehensive improvement initiative. The improvements

helped TVA set a best-in-industry record for transmission system operating efficiency.

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• The July 2001 issue of Nucleonics Week ranked TVA’s Sequoyah and Browns

Ferry nuclear plants as the second and third most efficient nuclear power generators in the Nation in 2000.

• On October 15, 2001, TVA broke ground on the nation’s first large-scale flow-battery energy-storage plant. The Regenesys plant, located in Mississippi, will

store electricity during off-peak periods and release it for use when the need

for electricity increases, using a chemical process to store energy.

FINANCIAL

• Fiscal Year 2001 power sales increased by 1.2 percent over sales the previous year

and interest expense was down $103 million from the 2000 fiscal year.

• TVA reduced debt by $610 million in 2001, $160 million more than projected, for

a total reduction of almost $2.4 billion since 1997. Interest expense in 2001 accounted for 23 percent of TVA revenue, down from a high of 34 percent in 1997,

for the lowest percentage in more than 15 years. TVA continues to be interested

in further cost cutting and debt reduction where warranted.

• Fiscal year 2002 budget projections estimate revenues exceeding $7—billion for

the first time in TVA’s history.

• In the fiscal year 2001, TVA sent $55 million to the United States Treasury, $20

million in principle and $35 million in interest, on the original appropriated investment in TVA. To date, TVA has returned to the Treasury $3.4 billion, including interest, on the original investment of $1.419 billion.

ENVIRONMENTAL STEWARDSHIP

• On October 4, 2001, TVA announced plans to construct five scrubbers, one each

at fossil plants in Kentucky and Alabama, and three at two plants in Tennessee. They will cost about $1.5 billion altogether and when completed will collectively reduce emissions of sulfur dioxide by more than 200,000 tons per year.

At that point TVA will have reduced total SO2 emissions by 85 percent since

1977.

• TVA is also in the midst of a $1 billion program to reduce nitrogen-oxide emissions at its plants by constructing 18 selective-catalytic-reduction systems—or

SCRs—on 25 coal-fired generating units. It is one of the most massive pollutioncontrol programs in the nation. This will reduce TVA’s NOX emissions by 70 to

75 percent during the ozone season by 2005.

• TVA is one of only three utilities in the nation to offer a fully accredited Green

Power option to its customers. Along with participating distributors, TVA offers

residential consumers 150 kilowatt-hour blocks of electricity that include a portfolio of wind, solar, and land-fill gas generation.

• TVA’s power system is setting production records, operating more efficiently and

more cost-effectively than at any time in the past three decades, and TVA has

had only one rate increase in 14 years. Affordable, reliable electric power is the

fuel of our region’s economy, and TVA is performing as a business as it delivers

power production, economic growth and environmental stewardship for the region.

THE TVA TITLE

Once again, I would like to express my appreciation for the subcommittee’s leadership on electricity issues and to you specifically, Chairman Barton, for working

closely with members from the Tennessee Valley delegation on issues relating to

TVA. As a Federal corporation, TVA plays a unique role in meeting the power supply needs of the seven-state Tennessee Valley region, and there are statutory and

regulatory issues that affect our region that are not experienced by investor-owned

utilities. As a result, TVA has been involved in extensive discussions with distributors of TVA power and industries directly served by TVA in an effort to reach consensus on the appropriate role for TVA to play in a future restructured competitive

environment. The TVA provisions that are part of H.R. 3406 reflect that consensus,

although they are still under review within the Administration. Some of the key

provisions within the TVA title in H.R. 3406 include:

Equitable Competition

• Restrictions to fair competition, such as the TVA ‘‘Fence’’ and ‘‘Anti-Cherry Picking’’ amendment will be removed simultaneously on the effective date of federal

legislation.

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TVA Power Sales

• TVA will only sell electricity outside of the existing service area at the wholesale

level. These sales will be limited to electricity that is excess to the demand of

its customers in the TVA service area.

• TVA will be permitted to sell to its existing retail customers inside the TVA service area. Only if retail open access is implemented in a distributor’s service area

will TVA be allowed to sell to new retail customers in that distributor’s service

area.

Regulation of TVA Transmission System

• TVA transmission service rates, terms and conditions will be subject to regulation

by the Federal Energy Regulatory Commission.

It would come as no surprise to any of you that TVA is a large and complex organization and quite different from any other utility in the Nation. The area in which

TVA can serve electricity is limited by law. The boundary that was established by

the 1959 amendments to the TVA Act is known as the ‘‘fence.’’ While TVA is limited

outside the fence, other utilities are limited in their ability to serve loads within the

fence. Many of these unique and complex issues may require Congressional action.

TVA’s mission, as codified by the TVA Act, is to serve the people of the Valley.

There is a key theme throughout the TVA title contained in H.R. 3406 that I would

like to emphasize—the title continually reaffirms TVA’s role as a steward within the

Valley region. The original mission is left unchanged by the title I have come here

to discuss today.

In the effort to maintain the integrity of our original mission, TVA has agreed

to several restrictions that I am certain no other utility in the country would be willing to subject themselves to. The TVA Title in H.R. 3406, creates a model where

TVA would be required to renegotiate its current contracts with all of its customers

inside the Valley in order to bring about wholesale competition. Furthermore, with

respect to sales outside the Valley, this title prohibits TVA from selling to any retail

customers outside the Valley, and allows only the sale of excess power to wholesale

customers outside the Valley.

TVA has been in the process of preparing for competition for several years. As

I mentioned earlier, we have reduced debt by $2.4 billion over the past four years,

while reducing the interest burden of our debt from a high of 34 percent of our costs

in 1997 to the current rate of 23 percent. Additionally, we have been paying debt

down while making significant upgrades to our transmission system to ensure reliability, adding peaking generation to our system, and installing significant emissions control equipment at our fossil plants across the Valley. All of these things

add up to better service to our customers. We continue to believe that when competition arrives in the Valley, we will be the low-cost choice for our customers.

Customer service has been a core component of the process of developing the consensus title. To this end, in addition to internal preparation for competition, we are

also in the midst of discussions with our customers about the future. We have offered distributors of TVA power a 10-percent partial-requirements contract and a

shorter-term contract. In doing so, we hope to promote a new relationship with our

customers through innovation and flexibility. Moreover, while some distributors are

seeking shorter-term contracts, others would like long-term contracts with more

price stability and rate security. The needs of our customers are diverse. By working

closely with distributors and knowing what each distributor plans for its future,

TVA can best serve the Valley in the competitive future.

I would like to share several basic principles that we believe are necessary, with

respect to the TVA Title, as this subcommittee moves forward: (1) that TVA legislation affirms TVA’s responsibility for the integrated resource management of the

Tennessee River and economic development; (2) ensures the availability of affordable electricity for rural and fixed-income consumers in the Tennessee Valley; and

(3) ensures the continued reliability of the power supply and the transmission system.

CONCLUSION

TVA is working hard to prepare for competition by reducing our debt, keeping our

electric rates low, and efficiently managing the Tennessee Valley’s integrated resource system. I want to assure all of you that TVA will continue to work cooperatively with Congress and the people of the Valley to ensure that restructuring is

done in a way that’s fair to TVA, to the ratepayers, to our distributors, to taxpayers,

and that it enables us to set the standard for public power in the future.

We have worked with many stakeholders, especially TVPPA and TVIC, to develop

a regional, common sense approach to restructuring. I am very proud of the progress

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we have made at TVA, and I have never been more confident that the Valley’s future is bright. I hope to continue working very closely with this Subcommittee, and

I applaud you all for your insight and leadership. Furthermore, TVA and the Administration look forward to working with Congress on the legislative provisions in

Title V dealing with TVA. Thank you again for the opportunity to appear here

today, and I look forward to answering your questions.

Mr. BARTON. Thank you, Mr. Chairman. The Chair recognizes

himself for 5 minutes for questions.

There is never going to be a good time to comprehensively try to

change an industry that is as integral to our Nation’s economy as

the electricity generation, transmission and distribution industry,

because there are always going to be vested players with status

quo special interests that they wish to protect. So there comes a

time you have to hold a number of hearings, and then you have to

look at all the record and put your best team on the field, so to

speak. And that is what the latest bill is, H.R. 3406.

Let me say with regard to Enron in that the bill that the subcommittee passed last year Enron opposed. The only CEO I have

ever thrown out of my office was the CEO of Enron, Mr. Jeff

Skilling, because he came into my office last year and basically told

me what was going to be in the bill or else, and I said, ‘‘or else,’’ and he was asked to leave. Now, we later had some substantive

discussions, but if anybody thinks that Enron can dictate what this

subcommittee does or what this subcommittee chairman does, I

have got a bridge in Brooklyn that I want to try to sell you, because that just does not happen.

And I can also say with regards to what happened at Enron that

it is amazing to me that the largest player in making the market,

Enron Online was the largest market maker for wholesale electricity, and I think I am correct in saying for natural gas too, although I may be incorrect in that, that it was larger by orders of

multiples. The day after Enron Online went blank there was no energy price spike, there were no shortages of electricity or natural

gas anywhere in this country.

And if you think about that, if you were in a town that had two

grocery stores, or maybe three grocery stores, and one was a little

Mom and Pop on the corner, and the other one was one that had

just come into town, and the other one was one that dominated the

market and had 70 percent of the market, and that grocery store

shut down. People would probably not have food the next day in

certain parts of that community. That did not happen when Enron

went belly up. The market worked. Power was presented and the

prices didn’t spike and life went on.

So I don’t think that this is a hearing necessarily going to be

dominated by what happened at Enron. Enron leveraged itself to

the hilt and engaged in some accounting practices that were very

questionable, to say the least. And we have investigators looking

at those, as does the Financial Services Committee. So if there are

corrections to be made because of what happened at Enron, so be

it, but that does not take away the need to create a national electricity system that is based on open markets that are accessible to

all.

Now let me ask a few questions to our distinguished panel. Does

everybody on the panel support the position in the bill that everybody, whether they are an IOU, a muni or a co-op, if they are enVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00054 Fmt 6633 Sfmt 6602 E:\HEARINGS\77118 pfrm09 PsN: 77118
51

gaged in the interstate transmission, has to be a part of an RTO?

Is there anybody that opposes that? Okay. Nobody is saying anything, so the Chair is going to say they are all looking at me like

they at least accept it if not support it.

Mr. MCCULLOUGH. Mr. Chairman, TVA believes that the concept

of a Regional Transmission Organization in the Southeast is desirable, and we pledge to work cooperatively with this subcommittee

toward that concept in a way that is fair to our ratepayers, our distributors and our bond holders.

Mr. BARTON. Well, the bill does make all Federal power administrations, including Bonneville and TVA, FERC jurisdictional for

interstate transmission rates.

To my four commissioners, the pending bill requires that RTOs

be up and functional 1 year after date of enactment. I am told that

the pending proposals—and I don’t want you to comment necessarily on any specific proposal—but that the proposals on RTOs

that are currently before the FERC those are in sufficient shape

that within a year after passage of this bill, if we maintain the current language, we could have RTOs up and functioning. Do you all

agree or disagree with that?

Mr. WOOD. Chairman Barton, I would agree with that.

Mr. BARTON. You would agree. And the other FERC commissioners all agree with that.

We have a title in this on reliability, which several of the commissioners, I believe, in your written—and I know the Deputy Secretary of Energy, in his statement, said is an improvement over the

past bill. Would the FERC commissioners wish to comment on the

reliability title of the bill?

Mr. MASSEY. I think it is a good title, Mr. Chairman. I think you

ought to enact it.

Mr. BARTON. Oh, well, I appreciate that.

Ms. BREATHITT. I support it and said so in my testimony and

didn’t have any recommended tweaks or changes.

Mr. BARTON. Okay. I have got 12 seconds left; I want to ask some

questions later in the hearing, if we have time, about the FERC

order on market power and the ability to set market prices. I have

had a phone conversation with Chairman Wood about this. I read,

I believe, the dissenting opinion that Commissioner Breathitt had

when that order came out. I share some of Commissioner

Breathitt’s concerns about it. It would seem to me that we would

not want to penalize a market maker or a market provider before

there has even been a complaint of market power.

And as I understand the order, just the fact that you have

enough reserve capacity so that if your reserve capacity is larger

than the peak power demand, you are deemed automatically to

have market power and to have used that market power. And to

me that is a little bit like being convicted before there has even

been a crime committed. So I have got some concerns about that.

I would let Chairman Wood comment briefly, and then I am going

to have to go to Mr. Boucher, because my time has expired.

Mr. WOOD. Thank you, Chairman Barton. The supply margin assessment test that we adopted following discussions we had since

the first day I was on the Commission, I think all four of us and

our prior colleague, Curt He ́bert, recognize that the tests that we

52

were applying to market-based rate authority, which is in effect a

deregulation certificate, in light of the California history and the

need for the Commission to do what I would characterize as a pretty dramatic response to that, is to make sure that this never happens again.

There is a balance between having a totally deregulated market,

which is what we had in the West, and the need to do what we

had to do on June the 19th, which was put a mitigation plan over

the top of every single player in the entire western half of the country. We were looking for something, or I was, certainly, looking for

something much more surgical than that, that would not be an

after-the-fact response but would in effect look at who has the ability to exercise market power, allow them to make the money and

to make, in the formula that we adopted, sufficient money, but not

allow them to go above a cloud of reasonable rates, which we are

required under the Federal Power Act to maintain a zone of reasonableness for rates in advance.

It is not a conviction of something, they are not being punished

for something, but we identify people who because of their size in

a relevant market have the ability to actually control the price of

that market and say you can do so much but not more than that.

It is to me an example of what I would hope any Federal agency

would do: get through the crisis and then look at what could in fact

be a more focused and surgical solution toward making sure that

crisis never happens in any other part of the country again.

So with the 1,200 people who have deregulation certificates,

there may be a few, as they come back through the Commission,

that because of their size are going to be subject to the supply margin assessment test. But I think that is a pragmatic response to a

situation that we want to ensure never happens again, because

customers do not need to go through what they went through in

the West again.

Mr. BARTON. Well, put me down as undecided.

Mr. WOOD. Okay.

Mr. BARTON. And we will continue to dialog on this. But the

chairman would recognize the distinguished ranking member, Mr.

Boucher, for 5 minutes of questions.

Mr. BOUCHER. Well, thank you very much, Mr. Chairman. I welcome this opportunity to have a conversation with the distinguished members of the Federal Energy Regulatory Commission

about a number of the provisions that are contained in the legislation now before us. I apologize for being absent while you made

your statements. You may have actually answered some of the

questions I will propound. I had to attend briefly a hearing in another committee, the name of which is rarely ever mentioned in

this committee, but I do apologize. It shall not be mentioned here.

I apologize for being absent.

I am interested in your views on these matters, so let me just

ask all of these questions at one time, and you can respond to those

questions that you choose to respond to as a group. First of all, I

am interested in your view with regard to a continuation of the

FERC’s merger authority. I suspect you have definite views on this,

and I would welcome those views. I happen to think that if we repeal your authority simultaneously with repealing the Holding

53

Company Act, all of the inevitable consolidation in the industry

that will occur in the wake of that will produce enormous market

power concerns, and you would then be perhaps powerless to address those if you didn’t have merger review authority. So your response to that would be welcome.

As a second matter, I am interested in your response to the provisions in the bill that would prescribe the way in which investorowned utilities and others who own transmission become members

of Regional Transmission Organizations. It strikes me as a rather

detailed prescription, and your response to those particulars would

be welcome. It may be that you would prefer a simple statement

in the legislation clearly confirming your authority to regulate RTO

membership, and if that is the case, I hope you will tell us.

As a third matter, the bill contains provisions on incentive pricing for the construction of new transmission, and my question to

you is whether that is appropriate, in your opinion, or as a possible

alternative should we specifically empower, or can you empower,

Regional Transmission Organizations to bid out that construction,

to manage the construction and in some way through its own

mechanism to achieve the goal of having new construction built in

those parts of the country where new construction is required. And

so your view with regard to incentive pricing and the alternative

of simply having the RTOs undertake the job of bidding out the

new construction would be welcome.

And, then finally, I would like to have your view with regard to

the language in the proposed statute that relates to uniform interconnection standards. I know that you have a notice of proposed

rulemaking out on that subject. Do you believe that you have sufficient statutory authority to adopt a standard? Do you need additional authority? And what is your reaction to the provision in the

bill that addresses uniform interconnection standards? Mr. Wood,

would you like to begin?

Mr. WOOD. Yes, sir, Mr. Boucher. In brief, the merger authority

issue, I probably don’t have as strong a feeling on that as my colleagues do. I think I share their general direction, but I also recognize that we are the only agency in the government that does that.

If you want that issue to continue, then it probably should be stuck

in someone else’s statute that they should have the duties that we

have, if there is a concern about inefficiency in government there.

I do think in just the brief time I have been on the Commission,

we deal with mergers rather routinely in 90 days. There are a few

examples of those that are very slow but certainly nothing like the

FCC that I know the committee has been concerned with in the

past.

The consolidation that will happen in the industry as a result of

mergers, combined with the RTO provision, and consolidation of

companies that transmit and stay regulated are probably not a big

concern; in fact, it probably will happen to recognize the economies

of scale. Consolidation of generation owners within a given market,

yes, that would be a market power concern. Quite frankly, our tests

that I just discussed briefly with Mr. Barton would, in effect, limit

those companies’ ability to exercise that market power as it works

today. But there are two things going on there.

54

RTOs, I think that looking through those provisions, and there

was some language there, but the main thing that when you look

at successful models in the country that have set up wholesale

markets that work is it is not just a transmission-owning company

game. They have the assets, but there are a lot of people that play

in that market, and the most successful models, the ones here on

the East Coast, the one in Chairman Barton’s and my home State,

and others around the world, did start very broadly from a broad

stakeholder participatory effort. And I think that the way some of

the language goes, and I mention this in my testimony on RTOs,

is a bit more focused on the right of the transmission owner to stop

something, to slow it down in court, et cetera, recognizing that

there are a lot more people here than just the transmission owners;

it is a wholesale market we are talking about.

Mr. BOUCHER. So you would prefer not to have that language in

that statute.

Mr. WOOD. Again, I think the confirming of the Commission’s authority, as Chairman Barton outlined, is helpful. It was just reaffirmed yesterday that order 2000, which made it a voluntary effort, was just reaffirmed by the local court here in the D.C. Court

of Appeals.

Mr. BOUCHER. Well, let me ask you the other side of the equation, though. Do you see anything in the statutory provisions, the

proposed provisions in this bill, that might restrict your authority

to take the kinds of steps that you are currently taking with regard

to RTO membership?

Mr. WOOD. Yes, and those are what I specifically mentioned in

my written testimony. So I could go through those, but, by and

large, certainly the haste to get into an RTO is a positive. I think

we are getting there, but, certainly, you never know until you actually get it stuck in the sand that you are there. And the nailingdown of some contours in what ought to work is positive but in

some cases could be a little more detailed than we may need 5

years from now, because these will morph over time into institutions that address the needs of their customers and of their owners.

And so my only concern is just a general statutory legislative type

concern that very specific language, while it may work today may

5 years from now be difficult. But that is not a critical ‘‘at-theheart’’ concern.

Incentive pricing, requiring bidding out, we haven’t discussed

this as a body, but I certainly would intend that it be an option

out there that should be employed anyway to ensure that the best

product for the least cost is what we get in these systems.

Mr. BOUCHER. On that note, do we need to do something statutorily to authorize the RTOs to undertake bidding out, or is this

something that their basic charters could empower them to do?

Mr. WOOD. Well, I think the basic charter of the RTO could. If,

however, you are in conflict with a State statute that says only a

regulated utility can build a power line, as opposed to a merchant

that may want to come in and invest in a power line to fix a

constraint——

Mr. BOUCHER. So some provision that affirmatively empowers

RTOs to bid out would be a helpful measure.

55

Mr. WOOD. And also follows through and says if you are in fact

the winning bidder, that you have a right to move forward under

perhaps some Federal authority to build that line. Then that, of

course, ties back into the siting issue, which I know is quite delicate and I think was addressed pretty delicately by the bill.

And your final provision was uniform interconnection standards.

Yes, we are moving forward on uniform interconnection standards

with regard to the larger power plants. But as I mentioned in my

opening statement, what the Barton bill does that we cannot do is

really allow a broad national template to be laid for the small distributed generation that I really think is a big part of our Nation’s

energy future.

Mr. BOUCHER. And you would like to be able to do that.

Mr. WOOD. Well, I think we or the Department or somebody

that—when I was at Texas, the Department gave the State a pretty nice grant of R&D money to actually get consultants to draft

those standards. So the State of Texas has them. I understand that

California and New York have similar although not exactly the

same standards. And we could do a 50-state kind of approach to

this here or you could have a very investor-friendly, kind of here’s

how it works in America approach on distributed generation, which

this bill would do. It would have the standards set nationally and

implemented by the States.

Mr. BARTON. We can possibly do a second round if members

wish.

Mr. BOUCHER. Well, thank you, Mr. Chairman. I realize this has

taken a great deal of time. This is a helpful conversation, Mr.

Wood. I thank you for those answers. And in a second round, I

would like to get the response of the other panel members to that

same set of inquiries. Thank you, Mr. Chairman.

Mr. BARTON. Gentleman from Tennessee, Mr. Bryant’s recognized for 5 minutes.

Mr. BRYANT. I thank the chairman. I would like to direct two of

my first questions to the director of the TVA Board, Glenn

McCullough. The first one, and I will give you the question and ask

you to answer it, and then I will ask you another question after

that. Keep that in mind as you answer from a timing standpoint.

One of my biggest concerns is the continuation of reliable and affordable electricity to my constituents and to the people of Tennessee. Would this language in this bill do anything to jeopardize

those issues of reliability and affordability?

Mr. MCCULLOUGH. No, Mr. Bryant; in fact, the consensus title

language that is in tact in H.R. 3406 we believe is the best language to ensure affordable, reliable power for the people of Tennessee Valley and also to have a competitive, transparent marketplace.

Mr. BRYANT. Okay. My second question would be could you explain in some detail, if you would like, to this subcommittee some

of the ways in which TVA and the distributors, the 158 customers

plus, I guess, the direct-buy customers for that matter, how TVA

has been preparing for the eventuality of a restructured electricity

marketplace?

Mr. MCCULLOUGH. Yes. Mr. Bryant, TVA is offering partial requirements contracts to our 158 power distributors. In other words,

56

we are saying to the power distributor, ‘‘You can look into the market, you can self-generate, you can go with an independent power

producer.’’ We recognize that an open marketplace offering competition and choice is desirable, and TVA wants to embrace that sort

of marketplace. So the consensus title language enables distributors to buy power from another supplier. With 2 years notice, they

can buy 10 percent of their requirements, and now they are under

full requirements contract. With 3 years length of notice, they

could buy all their power from another provider.

Second, the language in the consensus title, which is contained

in this bill, yields to FERC on oversight of transmission. That is

a compromise, but we trust the judgment of FERC on oversight of

transmission tariffs. And we feel like that that again demonstrates

TVA’s willingness to embrace a competitive and open marketplace.

Third, the merchant plan activity in the Tennessee Valley is vibrant and brisk. Many independent power producers are interested

in locating in the Valley. There is an abundance of natural gas

pipelines. We go through the FERC-ordained procedure to enable

them to access our transmission grid to deliver power to a place

where it is needed. So TVA is working cooperatively in compliance

with FERC, with the ordained procedure for independent power

producers to access our system, and, again, we think that that is

in line with the energy security needs of the country.

Those are three ways that we are embracing competition and

choice, and that language is contained in this bill.

Mr. BRYANT. Thank you. Let me ask one question to Mr. Wood,

if I could, regarding transmission siting, which is an always an

issue to me in terms of a State’s and individual rights versus efforts by government, whether it be, again, a State government or

Federal Government to site over somebody’s private property. And

there is a balance there. I would ask you to describe FERC’s authority to site, in this case, natural gas pipelines. Is it the same

broad authority necessary to effectively site interstate transmission

lines? And what do you see on behalf of—or at least chairman of

FERC, the right balance between State and regional concerns as

well as individual concerns?

Mr. WOOD. Thank you, Mr. Bryant. I am probably not the strongest advocate for Federalizing this particular issue, as you might

find either at the table or in the administration, but I think, having been a State commissioner, in fact, I am just filing an affidavit

today in a lawsuit that I am still being sued for for putting a transmission line in South Texas, so I remember these responsibilities

well and have to say from a personal level I would rather they not

follow us up here to DC. But in the purpose of balancing what is

in the best interest of the public, I would say largely, in my experience, the States have been able to address these issues.

The one instance I mention in my testimony where there might

be a concern is if a State statute, which is not the same one I had

to deal with but I understand is true in about 10 or so States, says

that you have to show there is a local benefit for the placement of

a transmission line. If that transmission line is meant to bring up

the voltage of the entire grid but you may be at the corner of a

State, it may be difficult to say that the residents of that corner

of Tennessee, in fact, are benefiting from the placement of this line.

57

That may be more for the benefit of Kentucky. But yet that is an

approval that is required by the State of Tennessee. So the regional

aspects on the regional lines really would probably be the area

where there is a problem.

On the addressing lines that rest largely within a single State,

I can’t say I have heard of any problem with that. It is when you

have got regional lines. And I would suggest, as I mentioned in my

testimony, that these Regional Transmission Organizations, which

are made up of multiple States, their commissions, some oversight

by FERC, by all the participants in those regional markets, that a

proper procedure may be to put it not at the Federal level, but at

the regional level to look at what the best siting is. The Western

Governors have set a good template in fact for how that ought to

work and that I have kind of been on record of being a pretty good

fan of.

Mr. BRYANT. Mr. Chairman, I think my time has expired.

Mr. LARGENT [presiding]. Yes, sir; your time is expired. I recognize the gentleman from Tennessee, Mr. Gordon.

Mr. GORDON. Thank you. Chairman McCullough, since you

seemed to be up to bat a little earlier, I will return to you. As you

know, the Tennessee Valley Authority was created to help control

the flooding that was devastating to a large region of the country,

as well as to help with economic development to one of the poorest

regions of our Nation. And with that, there was a Federal investment. Three years ago, Congress has mandated there will be no

more Federal dollars appropriated for the Tennessee Valley Authority. Not only that, but the TVA’s continuing to pay back that

original investment, millions of dollars to the Treasury every year,

which is appropriate, an agreement that was made.

I guess one thing that concerns me is that every river in the Nation the management is paid for by the Corps of Engineers except

for the Tennessee River, which is underwritten by the ratepayers

in that area. So it appears that not only is this a misconception

that somehow there is a Federal appropriated subsidy to TVA not

accurate, but TVA really is having to take up additional responsibilities that taxpayers take care of elsewhere. Would you want to

comment on that if I am correct or not?

Mr. MCCULLOUGH. Well, Mr. Gordon, you are correct in every

point you make. I would emphasize that while TVA does not receive any Federal appropriations, we have not in any way neglected

our responsibility to manage and develop the Tennessee River and

its tributaries. Appropriations, I believe, is your prerogative and

the leadership of Congress, as far as TVA is concerned. We are

committed to running TVA like the big business that is it, being

held accountable to you and your colleagues here on the Hill. In

fact, we benchmarked our performance in terms of water quality,

in terms of navigation, flood control.

And you are exactly correct, in 1933, the Tennessee River was

out of control, and the Tennessee Valley was flooded almost every

year. That has not been the case since the dams and the reservoirs

have been constructed. Not only that, we have affordable, reliable

power in the Tennessee Valley. And the Tennessee Valley’s economy has grown significantly, providing better jobs for the people of

the Tennessee Valley.

58

Mr. GORDON. You had mentioned earlier in your testimony about

some of the model environmental programs you were doing. Once

again, these are programs that are underwritten by ratepayers, yet

they are modeled for the entire Nation. Can you talk some more

about those environmental initiatives?

Mr. MCCULLOUGH. Yes. We have significant water quality initiatives and amebas hydro and oxygenization program in our hydroelectric facilities to ensure that the water quality in the Tennessee

Valley is among the best in the country. We are working very closely with State and Federal oversight authorities to ensure that the

water—as a matter of fact, over 4 million people get their drinking

water each day from the Tennessee River. TVA has a mandate to

ensure that it is of the highest quality. We are working on other

initiatives to modernize and in fact to generate more

hydroelectricity and at the same time have a higher quality of

water. And we are doing it all without a penny of federally appropriated dollars. We think it is our reason for being, it is our mission, and we think it is a responsible way to run the business. But

you are correct in the points you make.

Mr. BRYANT. Thank you.

Mr. MCCULLOUGH. Yes, sir.

Mr. LARGENT. Does the gentleman yield back?

Mr. GORDON. Yes. I yield back the balance of my time.

Mr. LARGENT. Mr. Shimkus from Illinois is recognized for questions.

Mr. SHIMKUS. Thank you, Mr. Chairman. Mr. Blake, two quick

questions, then I have a question for the commissioners. Does the

administration support the inclusion of currently non-FERC jurisdiction transmission owners into RTOs?

Mr. BLAKE. Yes.

Mr. SHIMKUS. And based upon the President’s national energy

policy, do you think that the Barton energy draft meets the intent

of the administration when they presented their national energy

policy?

Mr. BLAKE. I think it is definitely in line with the administration’s desire for comprehensive electricity legislation.

Mr. SHIMKUS. Thank you. For the FERC commissioners, I am interested in this seams agreement issue, and especially for the State

of Illinois in which we currently have three RTOs or we may have

three RTOs. We understand that the cost of getting electricity into

one’s home may be 5 to 10 percent of the cost per kilowatt hour.

As someone who is concerned about the competitive benefits to the

individuals in my State, can you talk me through the seams agreement, and are there things that we need to do to address this? To

tell you the truth, I am kind of confused by the whole issue. And

why I don’t just go with the chairman and then go from my left

to my right? Thank you.

Mr. WOOD. Yes, sir; let me jump in first. These are all pending,

actually, I just posted the agenda for next Wednesday for our Commission, in which we will take up the seams agreement, among

really a litany of issues relating to the structure of the wholesale

market in the Midwestern United States. So I think I might defer

to Linda and Bill, who were there actually when the seams agreements were first voted on, for giving you some specific answers.

59

Mr. SHIMKUS. That is great. Commissioner Breathitt?

Ms. BREATHITT. I need to speak generically about this, because

there is a particular seams agreement that was worked out between two parts of the Midwestern area of the U.S. But seams are

going to occur between RTOs. And the purpose of working out

seams agreements between RTOs is to minimize the flow of electricity between the seams. So the protocols don’t impede—the protocols that one RTO has don’t impede the flow of electricity from

one region to the other, from two different RTOs.

So that is one way to address the ability for power to flow from

one to the other is through a seams agreement that might address

procedures and protocols or rates even, or congestion bottlenecks.

So they can address those very important aspects, and that is what

I think will be important for us to make sure our agency encourages, because you are going to have a number of RTOs within the

United States.

Mr. SHIMKUS. If I could follow up. A good seams agreement,

could that help forestall some market power abuses? Could there

be market power abuses because of poor seams agreements and the

like?

Ms. BREATHITT. Market power abuses can occur whether you

have a seams agreement or not, and those need to be dealt with

through a number of ways. But a seams agreement, per se, may

not directly address market power. But what a seams agreement

can help minimize is the inability for power to flow easily between

regions and markets.

Mr. SHIMKUS. Commissioner Massey?

Mr. MASSEY. Mr. Shimkus, a couple of years ago, when this issue

came before the Commission, the question was whether we should

encourage a seams agreement in the Midwest or encourage the formation of a single RTO. And my vote——

Mr. SHIMKUS. And we are still debating that.

Mr. MASSEY. Yes. Well, my vote at that time was in favor of a

single RTO for the Midwest. However, a seams agreement can be

a good thing. It depends on how well it is enforced and how well

it is complied with. I think it can help to mitigate market power.

I think it can ensure that power flows freely across the seam without trading difficulties. In particular, it can help deal with the critical issue of how to manage congestion on the grid. But I think a

better solution in many parts of the country is simply to ensure

that the RTOs are appropriately sized to start with.

Mr. SHIMKUS. Mr. Chairman, my time is expired, and I will quit

my questions.

Mr. LARGENT. Yes. Mr. Sawyer from Ohio is recognized.

Mr. SAWYER. Thank you, Mr. Chairman. I just want to observe

that these exchanges I think have been extraordinarily helpful, and

I am particularly grateful that we took the time to have these hearings this week.

Let me touch on a couple of observations that you made, Chairman Wood, and one that I made. The first is that even at a time

when transactions and generating capacity has been—or investment has been growing, the transmission really has been in a very

long, slow decline. It seems to me that that is the single most deVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00063 Fmt 6633 Sfmt 6602 E:\HEARINGS\77118 pfrm09 PsN: 77118
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bilitating impediment to achieving the goal that we are all talking

about here.

At the same time, in your testimony, you suggested that infrastructure investment suffers from the uncertainty of the long transition to competitive wholesale electricity markets. I am inclined to

agree with that. Can you talk to me briefly, or other commissioners, about the steps that have been taken to increase the certainty and what steps you need from us to help you achieve it? I

would be happy to hear from other commissioners as well.

Mr. WOOD. A great question. In 1996, the Commission in what

was called Order 888, put down the first—I guess the first book of

the trilogies and said, ‘‘We are going to open these wholesale markets.’’ That now was argued before the Supreme Court shortly after

the attacks, and we expect a decision on that in the spring. Order

2000, which was the step that was taken in late 1999 says, ‘‘Not

only are we going to fix this on a utility-by-utility specific basis, but

we want to encourage the development of regional groups that look

at electricity on a regional basis, which most people acknowledge

makes a lot of sense.’’ So that was actually affirmed—that order

was affirmed yesterday by the D.C. Court of Appeals.

So now we are implementing those two orders of the Commission

on a utility basis and on a regional basis, and so those steps are

going forward. They are tediously slow, from my perspective. Investors, I know would look for somewhere else until these rules got

clarified. That is why we have now announced that we are going

to finish the trilogy with the ‘‘third book,’’ which will be saying not

only do we want these things and we think they are a good idea,

but here is what we specifically want them to do, so that investors

know these are the rules of the road for investing in a transmission

business from now for 10 years.

We were at Wall Street last week. I heard that message in

spades, even in the post-Enron—— Mr. SAWYER. We have as well.

Mr. WOOD. Yes.

Mr. SAWYER. What do you need from us to help you facilitate this

and move—— Mr. WOOD. Yes. And I am sorry I didn’t put this in my testimony, because it is an idea that I actually heard in discussions

from an exasperated participant in these markets, that no matter

what the committee does by adding incentive rates to the legislation or the Commission does to pull it all together, at the end of

the day, the bulk, say 90, 80 percent of the revenues that a transmission company would spend would be ultimately paid by—or

would be paid by a ratepayer that is retail-regulated by our colleagues at the States. The split jurisdiction between—we have jurisdiction over some of the transmission—over all the transmission

access, some of the transmission rates—encouraging transmission

to be built, with the States collecting 80 percent of the dollars, they

may not agree that it gets built.

Mr. SAWYER. Could we just have a quick commentary from other

commissioners?

Ms. BREATHITT. I think this is something that our agency can do

and you asked for something that Congress could do, but may I

spend 30 seconds on that?

61

Mr. SAWYER. Sure.

Ms. BREATHITT. State returns are often a couple or several hundred basis points over Federal returns on transmission. One thing

that the FERC can do is make those more comparable so it incents

transmission owners or transmission companies to build.

Mr. SAWYER. Others?

Ms. BREATHITT. We have heard that.

Mr. SAWYER. Other comments?

Ms. BROWNELL. I would simply add that I think we could clarify

with one simple statement or authority to establish RTOs. I agree

with my colleague on incentive rates, but you need to give incentive

rates to innovators, not for people to continue their jobs the way

they have always done them. Because that will bring the changes

that you talked about.

Mr. SAWYER. Commissioner Massey?

Mr. MASSEY. I believe that you are moving in the right direction

in placing transmission under one set of rules. I think that is critically important. Right now about 30 percent of the grid is exempt

from the open access requirements directly. No. 2, I do think it is

important for Congress to make a statement about RTOs and their

importance to evolving regional markets. It would be helpful to

have a clear statement from Congress that we can insist that these

institutions be formed. Otherwise we may continue to have a

patchwork because a particular State may, for example, have its

own statute that says you can’t transfer control of any transmission

assets in this State or any assets at all without the approval of the

State Commission. And if they withhold that approval, we may still

have a patchwork in some parts of the country. So I think it needs

to be clear that the Federal entity that is responsible for regional

markets can get this done. And, No. 3, I think we do need mandatory reliability rules.

Mr. SAWYER. Thank you for your flexibility, Mr. Chairman.

Mr. LARGENT. I recognize the gentleman from Oregon, Mr. Walden.

Mr. WALDEN. Thank you very much, Mr. Chairman. I want to

thank the chairman of the subcommittee specifically for working

with us for the inclusion of a Northwest title, because similar to

my colleagues from Tennessee and who are representing the Tennessee Valley Authority, the Northwest is indeed unique in its

power system and the way it operates and how we are working together to form regional RTO out there. So I appreciate the subcommittee chairman’s work with us on inclusion of that title.

There was a little present associated with that section of the bill,

however, that I hope to work with the full committee chairman on,

and that is the section 525 language that deals with continuation

of preference power for the DSIs in the Northwest. They have been

under enormous pressure of late because of power costs and yet

represent 40 percent of the Nation’s supply of aluminum and are

important employers in the region. My concern is that this inclusion may indeed blow up talks that are ongoing right now in the

region, and so I draw the committee’s attention to that.

I wanted to follow-up a little bit on FERC’s—the language in Section 401 that would expand oversight over transmission networks

on reliability and support. And I wonder, some of the comments I

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have received indicate that FERC already has that authority to approve incentive transmission rates that are just and reasonable. Do

you feel you need this additional authority?

Mr. WOOD. Sir, it wouldn’t hurt. I think a lot of things that were

not written in the 1992 law or in the 1935 law are subject to being

challenged by court, and my experience certainly at the State level

if issues related to ratemaking are not clear enough from the statute, they certainly become litigation targets. And if Congress

deemed that this is a good goal, and I would agree that it is a good

goal, then it would be helpful to put that in the statute, clearly

that authority is here.

Mr. WALDEN. Do you feel that it will result in construction of additional transmission facilities? I mean is there a guarantee that

comes with this for consumers?

Mr. WOOD. No, no, no. I think as with ratemaking in general,

you give somebody sufficient revenue, sufficient return, you have a

high expectation that they will deliver on that but no guarantee.

Mr. WALDEN. One of the other concerns would come out of Section 101 of the bill, the interconnection standards—and this may

have been addressed in some earlier discussions I think my colleague from Virginia raised—about whether FERC has the technical expertise to set some of these very technical standards. How

would you go about that? Are you going to rely on the IEEE standards?

Mr. WOOD. The current process that we have going on now is

very much a collaborative effort with the industry, with, quite

frankly, the Commission staff playing a catalyst and shepherding

role, getting the experts together on talking about issues of this nature. It is clearly the right way to go forward. IEEE standards— I know from having done this back in my home State, IEEE standards fill a lot of that effort, a lot of the contract revised back on

the industry standard setting bodies to that, which is referenced in

the statute.

Mr. WALDEN. I think that is all the questions I have at this time,

Mr. Chairman.

Mr. LARGENT. Okay. The Chair recognizes Mr. Markey for his

questions.

Mr. MARKEY. Thank you, Mr. Chairman, very much.

Mr. BARTON. Would the Chair suspend just a second? This will

be our last questioner before we go, because we have six votes. So

we will do Mr. Markey, and then we will recess, and then we will

come back at approximately four o’clock. I don’t see how we can do

six votes in less than that time.

Mr. LARGENT. Mr. Markey is recognized.

Mr. MARKEY. Thank you, Mr. Chairman. It seems to me that the

Enron collapse raises some fundamental questions about the nature and the adequacy of oversight over the traders who are marketing electricity. If in fact the transactions that are now raising

eyebrows wee intended to conceal trading, our investment losses,

what does that say about whether we can continue to allow these

energy trading firms to be completely unregulated? When it comes

to banks, security firms and commodities markets, we have Federal

regulators in place that have holding company, risk assessment authorities, authorities to set capital standards and margin rules,

63

audit trail and recordkeeping authorities, large trading or large position reporting requirements, and anti-fraud and anti-manipulation authorities, backed up with market surveillance systems and

enforcement powers.

But when it comes to electricity trading, we really don’t seem to

have that type of regulatory infrastructure. Don’t you think, Mr.

Chairman, that we should put such a regulatory structure in place

so that we can make sure that any future potential Enron collapse

is much less likely to ever occur.

Mr. WOOD. Thank you, Mr. Markey. One of the major features

of the RTO rule that was just affirmed yesterday by the D.C. Court

of Appeals is that we have a market monitoring section that looks

at the regional transactions on a hour-by-hour, minute-by-minute

basis. We have the ability now certain in the Northeast and your

area, as well as on down through here, with our oversight of the

markets that have already been organized up here. So you monitor

transactions on a—transaction-by-transaction basis and we do.

That information is valuable, it is very helpful. The fact that the

local monitors and at the Commission are looking at that, and on

occasion acting on that information is very helpful. We do not have

the capability across the entire country, because quite frankly the

markets across the country are not that organized. It is difficult

without an organized market to have much oversight of a lot of disparate activity.

Mr. MARKEY. What is your authority to regulate a non-utility

electricity trader like Enron?

Mr. WOOD. Well, they, actually, under the act, would be considered a public utility. The way that the utilities—they don’t own the

wires in this, but they have a marketing certificate just as I have

discussed with some other questions earlier. There are 1,200 people

that have market certificates——

Mr. MARKEY. So you believe you have existing authority.

Mr. WOOD. We do, and in the past we have waived our accounting requirements for the last 10 years of these unregulated parties,

because we don’t set their rates. The main reason we have accounting requirements is not to protect sophisticated players in the market, but to protect the customers.

Mr. MARKEY. So what are you going to put in place post-Enron?

Mr. WOOD. We just posted this afternoon—this morning—our

agenda for next week, and we were taking up an item which interestingly was work already going on to reflect the changes in accounting for derivatives and for hedging instruments that we were

looking from a ratemaking point of view but we are considering

looking at that for more of a disclosure point of view.

Mr. MARKEY. Would that allow you to look at the capital structure of Enron?

Mr. WOOD. That is an open question. That would be certainly

something we would ask the—it would be a notice of proposed rulemaking. So at the phase of asking in public——

Mr. MARKEY. Do you have the capacity and do you believe you

have the inherent authority to look at the capital structure of these

companies, if you put such a rulemaking in place?

64

Mr. WOOD. The statutory authority, yes. The technical expertise

on our staff at present to discern that, I would have to get back

to you on that, sir.

Mr. MARKEY. Mr. Massey?

Mr. MASSEY. Well, I think we have the authority to look the capital structure. Whether we should is a matter that I am open to

argument about. We certainly have the authority to take a look at

the current exemption that we had in place, as Pat says, for about

10 years, an exemption from our uniform system of account filings

for about 1,200 power marketers and sellers, because we don’t generally regulate their rates. However, we have conditioning authority that we can use in reasonable ways.

Mr. MARKEY. When you say you are open, who else would do it

but you? Who would have responsibility but you? You are the expert agency in the field of energy trading.

Mr. MASSEY. Well, we definitely ought to consider what the lessons from this are for energy trading, and I think we will.

Mr. MARKEY. Let me just—I know my time is going to run out— l just want to run down yes or no, and I would like you and the

chairman to each answer. In your opinion, do you have the power

and intent to establish, one, capital requirements? Chairman

Wood?

Mr. WOOD. I am not given enough of a question to give you a

thoughtful answer. I will be glad to do so.

Mr. MARKEY. Mr. Wood—I mean Mr. Massey?

Mr. MASSEY. I think we have the power—— Mr. MARKEY. Yes or no. I mean I am going to run out of time.

Mr. MASSEY. Yes, we have the power. I don’t know whether we

ought to establish those standards.

Mr. MARKEY. Okay. Ms. Breathitt?

Ms. BREATHITT. Mr. Markey, we have also included in a recent

rulemaking electronic trading platforms to come in under our

standards of conduct.

Mr. MARKEY. Capital requirements, yes or no?

Ms. BREATHITT. I haven’t studied that, but I—— Mr. MARKEY. Okay. That is fine. I think you should study it.

Next—— Ms. BREATHITT. I have the intent.

Mr. MARKEY. The intent, that is good. I just need you—margin

requirements, yes or no?

Mr. WOOD. Same answer.

Mr. MARKEY. Answer is?

Mr. WOOD. I will get back to you.

Mr. MARKEY. Okay. Ms. Breathitt?

Ms. BREATHITT. I haven’t looked at it, but I would have the intent to do it if we can.

Mr. WOOD. If we have the authority, I am willing to look at it.

Mr. MARKEY. Ms. Brownell?

Ms. BROWNELL. I think it is important we work with other financial oversight agencies to make sure that we having a coordinated

appropriate response, which would include, Congressman Markey

asking these questions. But in many cases, from what we have

seen, these are financial issues, so I just want to make sure that

the right agency is looking at the right thing.

65

Mr. MARKEY. They are exempted from many of those other agencies’ regulations. I mean you won’t be responsible. Auditing and

bookkeeping requirements?

Mr. WOOD. The answer to that is that we do have the authority

certainly on the physical delivery of the power, and that is what

I mentioned to you a moment ago that would be subject to our discussions next week in our open meeting.

Mr. MARKEY. Ms. Breathitt, very quickly, and then I am going

to——

Ms. BREATHITT. Yes.

Mr. MARKEY. Yes.

Ms. BROWNELL. Yes.

Mr. MARKEY. Yes.

Mr. MASSEY. I answer the same as Chairman Wood.

Mr. MARKEY. Okay. And the large trader or large position reporting, so you know what is going on in the market.

Mr. WOOD. Same answer on the accounting side. Yes, sir. I think

that is certainly something that would come up next week in our

discussions.

Ms. BREATHITT. I agree with the chairman’s response.

Ms. BROWNELL. As do I.

Mr. MASSEY. I agree, and I think we ought to take a close look

at that.

Mr. MARKEY. And, finally, anti-fraud and anti-manipulation rules

applicable to trading activities.

Mr. LARGENT. This will be the last question.

Mr. MARKEY. Okay. Thank you.

Mr. WOOD. I do understand that the other two agencies do have

authority over fraud issues, and I would certainly defer to their expertise on that. But if they don’t I am not aware that we do have

that authority. But we will certainly look for it and I will get back

to you on that.

Mr. MARKEY. Would you want that authority?

Mr. WOOD. I think anything that diminishes customers’ faith in

the efficacy of markets ought to be vested in us or somebody.

Mr. LARGENT. Gentleman’s time has expired. I yield to the chairman of the subcommittee for a brief statement.

Mr. BARTON. Before we break for the recess, I want to follow-up

on some of Congressman Markey’s questions just briefly. There is

absolutely no question that the collapse of Enron’s stock price has

wiped out many of their pensioners, many retirees around the

country. I mean it is a major, major calamity, and nobody is taken

away from that. Until this year, until this Congress, this committee

had jurisdiction over the financial industry also. So you had one

committee that had energy jurisdiction and also security jurisdiction. And both Mr. Markey and I are very unhappy that we lost

the security jurisdiction to the new Financial Services Committee.

I am not taking away from the collapse of Enron, but in terms

of the energy markets, is there any evidence that because of the

collapse of Enron and the disappearance of Enron Online, that

power was not sent where it was supposed to have been sent? Did

the market fail in the sense of energy getting to where it was contracted to go?

66

Mr. WOOD. In fact, no. No, sir. The physical deliveries of gas

have continued, and in fact I think the big story here is that the

markets really didn’t hardly hiccup at all.

Mr. BARTON. So we have got an accounting disaster with Enron

and a financial reporting disaster and probably a partnership creation problem, but we don’t have an energy market problem.

Mr. WOOD. No, I think energy markets performed admirably well

in the past couple of months on this issue.

Mr. BARTON. Thank you, Mr. Chairman.

Mr. LARGENT. Well, we will recess this hearing until four o’clock,

and I know that the chairman of the subcommittee feels Enron’s

pain.

[Brief recess.]

Mr. BARTON. If our panelists are still in the room, they could resume their seats. And if we have—do we have a member back

there, anybody? It is Mr. Norwood’s turn.

The subcommittee will come to order. When we recessed, Mr.

Markey had asked his 5 minutes of questions. We now go to the

majority,and Mr. Norwood of Georgia is recognized for 5 minutes

for questions.

Mr. NORWOOD. Thank you very much, Mr. Chairman. I am delighted about this hearing and, as others on the committee, I am

very concerned about Federal deregulation of electricity, I am concerned about its unintended consequences, and I want to take this

opportunity to see if we can’t clear up some things.

It seems to me that we all ought to be a little concerned about

deregulation of electricity. We have noted the deregulation in California, and the consequences of that was generally the cost to the

ratepayer. Enron, the poster boy for deregulation, right or wrong,

has ended up hurting people. And in my own State of Georgia, we

were one of the first States to deregulate gas. And though it looked

right, it appeared right, everything should have been right, but in

the end it turned out to be a very costly mistake to the ratepayers

in Georgia. So it is right and correct that we have great concerns

about this.

Now, just so you know where I am coming from, I come from the

State of Georgia. We are very happy with our utilities there. That

includes the coops, that includes the munis, that includes Souther

Company, that includes Georgia Power. And, frankly, the reason

we are very happy with them is that the give us very good service

at very good rates, and we want to be sure that the FERC doesn’t

do anything that it might help somebody else but at a great cost

to us locally.

I want to thank all of the Commission members for being here,

and I am going to direct my questions to the chairman in hopes

that because of time limitations the rest of you would be kind

enough to at some point in time be willing to respond too.

Mr. Wood, it has been a while since I have had as many people

as upset coming through my office here and in Augusta with you.

It has been a long time since a Federal agency has generated quite

so much concern. I have been, frankly, amazed. And in view of our

good relations with our utilities and our good relations with the

consumers, many of whom I know well as voting citizens and

friends, it is just rather been amazing.

67

Of course, I tried to defend you and tell them you were from

Texas, couldn’t be all bad. But I—— Mr. BARTON. All bad?

Mr. NORWOOD. All bad.

Mr. BARTON. All good.

Mr. NORWOOD. I sort of have stopped defending you. I read the

other day in Energy Daily, I think it was September the 26th, of

an interview, a remarkable interview that you had, and in that

interview there is a quote of yours reported in that article from the

Senate hearing that you were talking about punishing regulated

entities, regulated utilities. Now, the quote says, ‘‘A few heads on

the stakes around the campfire may make all the animals behave

a lot better in the forest.’’ Is that accurate?

Mr. WOOD. I recall saying that; yes, sir. Not in that context, I

would like to explain, but—— Mr. NORWOOD. Well, that is accurate. That is the first thing, so

I don’t have to go check the Senate record. I guess probably where

I am coming from a little bit here is I have got a great curiosity

about whose head you want to put on a stake, and I have even got

more interest in that if any of those people are friends of mine. And

I am beginning to think maybe that might be the case. In Georgia,

when we start talking about animals and campfires and forests, we

are usually talking about deer hunting. Are you a deer hunter?

Mr. WOOD. No, sir.

Mr. NORWOOD. I don’t know why I sort of suspected that. But

that is a quite a metaphor. And I want to—I am going to get back

to that in a little while, but I want to just get right at the bottom

line in here, and it is going to take a while, Mr. Chairman, so I

hope you will have a few rounds.

I am curios to know about this order from November the 20th

revoking market-based rates of two or three companies that were

singled out, one of which was Southern Company, which apparently shifts the cost of doing business from wholesale to retail and

how this is going to affect the retail customer in Georgia. Now, I

suspect that it is going to affect the retail customer in Georgia and

probably not in a good way. I would just like to make sure that

when FERC goes utility hunting they don’t end up shooting the

customer. And that is really the bottom line. I really think we all

sort of agree with that. That is really what this is about, isn’t it,

the ratepayer and trying to give them the least costly electricity

with the best service.

When you decided that you wanted to force these companies into

not being able to use market-based rates, were you aware at the

time that in Southern Company at least the profits they make by

selling power at market-based rates goes back to our retail customers to reduce their rates. At least 90 percent of the profits do.

So in the end, those profits are used by our utilities to reduce what

a member of the household might pay. I heard you talking about

customers earlier, and I am not talking here about industrial customers; I am talking about folks at home. We you aware of that

fact when you decided that market-based rates wouldn’t be good

enough for these companies, guilty or not?

Mr. BARTON. This will have to be your last question in this

round.

68

Mr. NORWOOD. I am just warming up, boss.

Mr. BARTON. I know you are just warming up, but you are 2 minutes over in this warmup period.

Mr. NORWOOD. All right. Well, could the—— Mr. BARTON. He can answer.

Mr. NORWOOD. [continuing] Chairman answer? Thank you.

Mr. BARTON. If he has a good answer. We won’t accept bad answers.

Mr. WOOD. I have several. Could I respond to the full list, sir?

Is that appropriate?

Mr. BARTON. You have got the right.

Mr. WOOD. My comment on the animals in the forest, sir, related

to people who are violating the Natural Gas Act or violating the

Federal Power Act. And if they are in the context of all the California issues, we were looking at market power and anti-competitive conduct, at physical and economic withholding of power from

the market, those type of things. Those are people who are violating the law, and those are the people whose heads should be on

the stake.

Mr. NORWOOD. And you should do that, but don’t put innocent

people’s head on the stake in the process of one-size-fits-all.

Mr. WOOD. I agree with that. We will not do that, sir. Our job

is to go through due process. In fact, we have got a number of enforcement actions at the Commission today. Some may result in the

finding of guilt, some may result in the finding of innocence, but

we go through that process first.

As to the order on November 20, we took the oldest three people

in line that we told 3 years ago we are going to look at this every

3 years and see if it still matches what is going on in the marketplace. We learned from California—as an answer to Mr. Barton’s

question a moment ago, we learned from California that you could

have a deregulated marketplace or you could have one that gets

out of control as that one did, that necessitated the Commission to

come in and put what I think, as a market-oriented person, was

a very prescriptive and I think a difficult non-market-based solution on top of that market.

What we sought to do with our new policy, which we discussed

through the summer and voted on, on September 26, at that same

meeting, and implemented on November 20 with these first three

applicants—there will be others that either pass it or don’t pass the

test, coming up at this next meeting next week—is updating a policy that we have all acknowledged is broken and does not appropriately address market power. And if the profits from the market

were being used to refund the California retail customers, our job

is to look after the wholesale market as well. Those profits are coming from a market that may have resulted in some of the wholesale

customers paying too much.

So what we are looking at here is a balance of all the customers.

I think my colleagues on the Georgia Commission are totally capable of making sure that the retail customer stays protected in that

State, but our job is to make sure that the wholesale——

Mr. NORWOOD. Not if you force the wholesale basic utility company to raise rates that they can’t help raise them because you are

forcing them to sell their generated power at a different rate; in

69

other words, at a cost rate rather than a market rate. They lose

money.

And my question was do you understand that 90 percent of that

money goes for the retail payer and helps then reduce the retail

rate?

Mr. WOOD. Yes.

Mr. NORWOOD. You understood that.

Mr. WOOD. Yes, sir, and we had that same policy in Texas when

I was a regulator, as do most States.

Mr. BARTON. We are going to have to suspend this question for

this period. So we are going to go to Mr. Waxman now for 5 minutes.

Mr. WAXMAN. Thank you very much, Mr. Chairman. Before I ask

some questions about this legislation before us, Mr. Blake, I wanted to ask you, I understand you have been deeply involved in ongoing discussions within the administration about changing the new

source review air pollution requirements under the Clean Air Act;

is that correct?

Mr. BLAKE. Yes, sir; I have been involved.

Mr. WAXMAN. The utility industry has been the strongest proponent of rolling back these important air pollution protections.

Have you met with or otherwise received the views of the electric

utilities or other industry sectors on this topic?

Mr. BLAKE. Yes, sir.

Mr. WAXMAN. And have you met with the environmental groups

on this topic?

Mr. BLAKE. Yes, sir.

Mr. WAXMAN. Will you provide to the members of this subcommittee with a list of the names and dates for all these contacts?

Mr. BLAKE. Yes, sir.

Mr. WAXMAN. I thank you for your cooperation.

In your testimony, Mr. Blake, you repeat seven goals for electricity legislation: Reducing uncertainty, increasing wholesale competition, strengthening transmission, increasing supply, lowering

prices, protecting consumers and improving reliability. I am disappointed that promoting cost effective energy conservation doesn’t

even make your list. We all know that you can’t improve reliability

by addressing supply and not demand for electricity. That is like

trying to balance the budget only by raising taxes and never controlling spending. Your testimony also calls for modernizing electricity law but not our power sources. In fact, you urge repeal of

the PURPA provision supporting renewable energy sources. Electricity legislation should promote not disadvantage clean, renewable energy sources.

And, finally, you make no mention of environmental protection.

We now have evidence that our air pollution has increased under

restructuring to date. It appears that you have fundamentally

changed our electricity system without protecting air quality from

the effects of restructuring. Does the administration believe that

energy conservation, promotion of renewable energy and environmental protection must be goals of any electricity restructuring legislation?

Mr. BLAKE. Yes, sir. And I would just comment that there are

provisions in the legislation that we noted the administration supVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00073 Fmt 6633 Sfmt 6602 E:\HEARINGS\77118 pfrm09 PsN: 77118
70

ports, such as advocating net metering as well as distributed generation. In terms of emissions increase, I am not quite sure what

the baseline comparisons are pre- and post-deregulation that would

suggest that opening up markets has resulted in greater pollution.

In fact, most of the experience over the last several years has been

the addition of new cleaner natural gas-fired turbines around the

country, and I would suspect that if you looked at a per GDP basis

that you would actually see a substantial reduction in emissions

that we gained through opening up the markets, rather than an increase.

Mr. WAXMAN. Thank you. Mr. Chairman, I have a report from

Synaps Energy Economics, Inc., a retrospective review of FERC’s

environmental statement on open transmission access, and the

summary—both the summary and the report I would like to have

the committee receive for the record.

Mr. BARTON. Could we have an opportunity to have the committee staff look at it?

Mr. WAXMAN. Certainly.

Mr. BARTON. I am sure we will put some version if not the whole

thing in, but we would like to at least review before we agree to

put it in the record.

Mr. WAXMAN. And since I have a second more, Mr. Blake, would

you agree that using energy more efficiently can boost our economy, enhance our energy security and help the environment?

Mr. BLAKE. Yes, sir.

Mr. WAXMAN. Thank you very much, Mr. Chairman.

Mr. BARTON. You still have a minute and 20 if you actually have

more—we have got the clock set at 2 minutes. It goes yellow, so

you have got a minute and a half if you still want to use it.

Mr. WAXMAN. Thank you. You are very kind, Mr. Chairman, but

I am going to yield it back for one of the other members to take

advantage of that opportunity.

Mr. BARTON. Okay. We thank the gentleman from California.

Gentleman from North Carolina, the very patient Mr. Burr, is recognized for 5 minutes.

Mr. BURR. Thank you, Mr. Chairman. Chairman Wood, what is

your definition of market power?

Mr. WOOD. The ability in a real-time market to affect price by

withholding supply.

Mr. BURR. Can that be also achieved because an entity has limited competition?

Mr. WOOD. Yes. He can withhold a certain amount of supplies,

whatever the market is. He has the ability and no competitive

check.

Mr. BURR. Could it be affected because the general capacity was

not adequate to meet the need?

Mr. WOOD. Yes.

Mr. BURR. So there are multiple reasons that there could be a

spike in price other than a company that just wanted to gouge consumers; am I correct?

Mr. WOOD. Yes, absolutely.

Mr. BURR. And the end result of that would resemble market

power abuse in every case. Price would go up because something

had happened to supply; is that correct?

71

Mr. WOOD. Correct.

Mr. BURR. And how would FERC determine on the spot—I take

for granted that there is a process that you go through. How long

would that be to determine whether there was a market power

finding?

Mr. WOOD. Well, quite frankly, it could take a year. I mean we

have been looking at the California market for quite some time.

There have been——

Mr. BURR. And what effect would that have on Wall Street’s view

of the electric industry, the companies that make it up? What effect

might that have on the availability of capital for new generation,

given that every potential charge, every potential bill that goes out

is susceptible to a refund determined by FERC over some period

of time yet to be defined?

Mr. WOOD. I think it could be a problem, and we have got—as

you may know, there is a pending item that we have out for comment from the parties on just that issue.

Mr. BURR. Has the Commission ever had a finding of market

power?

Mr. WOOD. Well, we have a pending case regarding natural gas

on that issue, but I have not——

Mr. BURR. Did we find a market power abuse in California? Is

there a finding of market power in California?

Mr. WOOD. Not from a specific player; no, sir.

Mr. BURR. Let me read Mr. Massey’s comments. I think these

were from the debate over E47. And I quote, ‘‘has concerns about

the tariff conditions, because it requires a showing of bad behavior

for FERC to order refunds.’’ He argued that ‘‘FERC has never been

able to show bad behavior, even in California.’’ Unfortunately, he

would add another test, a bad market test. But, clearly, through

the information I found, there has never been a determination of

finding of market power in California.

Mr. WOOD. That is correct.

Mr. BURR. Biggest spike in electricity pricing.

Mr. WOOD. In the electric markets; yes, sir.

Mr. BURR. Now, given that there is a mechanism that you have

proposed, FERC’s proposed, that would force the automatic refund,

would Wall Street respond differently if California were to happen

a second time with still no finding of market power?

Mr. WOOD. I was asked this question last week. Commissioner

Brownell had the opportunity to meet over 2 days with a number

of Wall Street analysts and investors. And quite frankly, the issue

of the refund authority for anti-competitive behavior I think was

viewed in its proper context, which is a customer protection issue

that, like a nuclear bomb, would never be invoked. I don’t perceive

that that is——

Mr. BURR. Well, a customer protection could also be extended to

our inability to allow people to compete to supply power within a

given power, because that created the same price spike as somebody that withholds power, right?

Mr. WOOD. I am sorry, can you repeat that, Mr. Burr?

Mr. BURR. You said earlier that you get the same result when

you limit competition in a given market. So if potentially you are

72

holding people liable, shouldn’t we hold those liable that limit competition in a marketplace, because they artificially affect the price?

Mr. WOOD. If I missed something——

Mr. BURR. I am trying to decide the scope of what FERC would

like, as a Commission, to be involved in.

Mr. WOOD. Well, I think, certainly, we would like the market to

be open and transparent and full of diverse number of players

whose——

Mr. BURR. And is it transparent when every potential sale of

electricity is susceptible to a refund under a determination that

FERC will make on an undetermined amount of time?

Mr. WOOD. I have to admit I don’t believe that this is actually

a cloud at all. I don’t think——

Mr. BURR. Well, given that there has been no finding of market

powers, why are we so insistent on this new rule that deals with

market power?

Mr. WOOD. Again, you are talking about the refund authority on

the anti-competitive?

Mr. BURR. Yes.

Mr. WOOD. The anti-competitive behavior, quite frankly, if somebody were making a business plan of making money off of anticompetitive behavior, I would expect that we would not allow them

to be in this market. And so I think those are the only people who

are going to be negatively affected by the condition that we placed

in all the power marketer certificates.

Mr. BURR. Because I am out of time, let me just turn to RTO’s

for just a second and follow Mr. Norwood with something dear to

me, and that is the GridSouth. GridSouth was approved——

Mr. WOOD. Initially; yes, sir.

Mr. BURR. Yet it is not operational. What is the problem that

FERC has with GridSouth?

Mr. WOOD. The GridSouth, again, was approved before I joined

the Commission. GridSouth was given conditional approval with

the urging that they approach their neighboring RTO proponents

in Florida and Georgia and other States to increase the scope, the

size of the relevant area over which the RTO would have control.

And so the condition for the approval was that there be sufficient

scope and——

Mr. BURR. My interpretation of Order 2000 left a tremendous

amount of flexibility on governance and market rules. But now it

seems like what we are calling for is a standard market rule. We

have approved you to do an RTO, but now we want to set some

new conditions in there so we don’t this to be operational. You have

been approved, but you have not met rules that we have yet as a

Commission to decide what they are going to be. Is that an accurate statement?

Mr. WOOD. We are engaging in a rulemaking for standardized

market designs so that we don’t have the seams issues that Commissioner Breathitt pointed out.

Mr. BURR. How long have we been in that now?

Mr. WOOD. I am sorry?

Mr. BURR. How long have we been in that process?

73

Mr. WOOD. We announced that we were doing the rulemaking on

September 26, and we intend to be complete on that by this summer.

Mr. BURR. If I heard you earlier, you, in an answer to a question—and I know my time is up, Mr. Chairman—basically said, as

it related to merger authority at FERC, that you didn’t have heartburn if that was taken away. Did I understand you accurately or

is that something you are passionate about maintaining with the

jurisdiction of.

Mr. WOOD. I think you could characterize me as thinking it is appropriate to have it at FERC, but I think Congress has a right to

put these issues where they want to put them, and I don’t have as

strong an opinion about that as Commissioner Breathitt may. So

I mean to be fair as to who might be the best one to discuss that,

I probably wouldn’t.

Mr. BURR. That is why I chose you. I thank the chairman.

Mr. BARTON. Thank Congressman Waxman. He yielded his time

to me to use at my discretion, and then recommended that you be

given his 2 minutes. So you owe——

Mr. BURR. I thank the gentleman from California.

Mr. BARTON. [continuing] you owe Mr. Waxman for that extra 2

minutes. The Chair recognizes himself for the second round of

questions for 5 minutes, and we hope that the second round we can

get all members’ questions on the record.

I want to go to Mr. McCullough, because I haven’t asked you a

question yet. I understand that the TVA is considering leasing one

or more of its unfinished nuclear power plants to a private entity,

and then the private entity would put up the operating—put up the

capital necessary to finish the plant and then lease it back to the

TVA. I am extremely, and I want to triple extremely skeptical of

such a plan. So would you like to elaborate on whether this just

some private developer’s wish list or is something you are seriously

considering ?

Mr. MCCULLOUGH. To my knowledge, we don’t have any specific

proposal that would be specific in terms of some sort of lease proposal regarding Bellafonte. I assume it would be the Bellafonte site

or perhaps Browns Ferry Unit 1 or Watts Barr Unit 2. There are

all sorts of concepts, and people who are interested in submitted

proposals to TVA we accept those and we evaluate them in a business-like manner, and we respond.

Mr. BARTON. Well, I think I would have to look at the TVA stats

written. I don’t claim to be an expert, but certainly if TVA wishes

to finish those plans and operate themselves, you have got that opportunity and that right. I would support legislation if it would require legislation. If you want to dispose of them and basically privatize them, let those plants be put up on the market for private

utilities to come in and bid and finish out. I would go that way,

but I am extremely leery to kind of have something that is half fish

and half fowl, that you have a government entity that still owns

it, it is financed by private capital, and then it is leased back to

the government entity. That does not sit well with me.

Mr. MCCULLOUGH. I recognize and I don’t disagree with the

points you make, Mr. Chairman.

74

Mr. BARTON. Okay. I want to give Commissioner Breathitt an opportunity to comment on the market-based rate authority that

came out, because it is my understanding that you had a dissenting

opinion. So I want to give you a chance to dissent, because from

what I know I share most of what you dissented about. If I can’t

be more leading than that, let me know and I will try again.

Ms. BREATHITT. Well, you have just given me an opportunity to

restate my views, and I would like to start by saying that I agree

with my colleagues wholeheartedly that the Commission does need

to come up with an improved way to determine applications for

market-based rates, that we may be in, or we are in, an era in the

evolution of electricity markets that the hub-and-spoke analysis is

probably not serving the public as it used to. So we all agreed that

we needed to come up with a new permanent way to assess applications for market-based rates.

That given, what I disagreed with, Mr. Chairman, is the interim

measure that the Commission decided upon for determining market-based rates for those companies coming up for their 3-year review and those entities asking for market-based rates for the first

time. I disagreed with the interim method. Would you like to know

why?

Mr. BARTON. Yes.

Ms. BREATHITT. I disagreed with the interim method because I

felt that it made the finding already that entities were engaging in

anti-competitive behavior without giving the entities a chance to

say that they weren’t and our Commission saying, ‘‘Yes, you were,

and here’s the cure.’’ I think back to when we approved the

AEPCSW merger, and we found, using the hub-and-spoke, that

there was a potential for market power, and the cure was that they

had to sell one power plant and that that would eliminate their

ability to exercise it. In this instance, we said that every power

plant had to go back to cost-based rates, and I felt that this interim

test was too blunt, that it didn’t make a more finely tuned assessment; that was one part. The other was that it didn’t give the parties an opportunity to say whether they thought that was the best

way we could come up with an interim approach.

And the final point that I disagreed with was that it could have

unintended consequences, which we have already seen in a new application. In another area of the country, an entity has declined to

sell power into an area where they failed the test. So the power

from that new plant will never be sold into an area in Virginia because—I don’t think that is what we intended, but——

Mr. BARTON. Well, my problem is that we are trying to create a

real national market while protecting the rights of specific States.

If they don’t want to open their markets, they don’t have to. We

are not trying to preempt that. But if you are concerned about market power, the way to prevent it, in my opinion, is to create a real

market so there are a lot of potential suppliers going into the market. You have adequate transmission capacity to get the power to

the market. You do that and no one player that is supplying power

can dominate the market. So I would rather address market from

a market initiative than from a regulatory initiative.

And any time even the best—we have got four very bright people

here. And to some extent, I know all four of you personally, and

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I have the highest opinion of your intellect and your willingness to

do good public service. But when four or five people try to develop

a market test for a nation as diverse as the United State of America, you are almost, be definition, bound to fail. And so I would err

on the side of trying to create the market, create the transmission

grid, give the States the right to oversee at the local level, and do

it that way, instead of even with the best of intentions coming up

with something almost out of the blue. I mean Mr. Wood disagrees

with that. He is frowning. I should say out of the maroon, but then

you wouldn’t like it if I said that.

So in any event, before I turn it over to Mr. Boucher, I want to

make—I asked I think in the first round of questions if everybody

supported the concept of net metering, but I want to make sure

that you all—you may not agree exactly how we are doing that metering in the bill, but the concept of net metering you support. Does

the administration support that, Mr. Blake? Okay. Does the Commission support it?

Ms. BREATHITT. Yes.

Mr. BARTON. Okay. I don’t know that TVA would have to have

a position on net metering, but it would be nice to know if you do

support it.

Mr. MCCULLOUGH. Yes, we do, Mr. Chairman.

Mr. BARTON. I thank you. The chairman recognizes Mr. Boucher

for 5 minutes.

Mr. BOUCHER. Well, Mr. Chairman, at a minimum, I think we

could do a net metering bill.

Mr. BARTON. That is a start, that is a start.

Mr. BOUCHER. Let me give the other members of the FERC,

apart from the chairman, the opportunity to respond to the set of

questions that I had propounded to the chairman earlier. And let

me just briefly mention what these are. First of all, do you support

a continuation of your merger review authority, and if so, why? Do

you support the provisions in the legislation relating to incentive

pricing as a way to encourage new transmission construction, or do

you believe that there are other ways to accomplish the task of getting new transmission lines built?

With regard to Regional Transmission Organization membership,

do you support any of the provisions in the legislation that relate

to ways that membership will be required or do you believe in the

alternative that your present processes and your present authorities are adequate to accomplish that task? And do you have any

comments with regard to the uniform interconnection standards

that are contained in the legislation? Or, in the alternative, do you

think that you can go forward with current authority in order to

promote a uniform interconnection standard? Ms. Breathitt, would

you like to begin?

Ms. BREATHITT. Yes. I would like to address your question, No.

1, with respect to mergers. If I am not already on strong record,

I would like to be placed on strong record now for asking the committee to please reconsider the language in the bill that would take

away our merger authority. As I had mentioned earlier, we use a

public interest standard. We are the only agency in merger review

that uses that standard. Other agencies use a different standard,

which is ‘‘no harm to competition,’’ and I think it is real important

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for one agency to have that standard for merger review. All mergers aren’t created equal, and we look at the effect on rates, competition and the effect on regulation. I think that is very important

for the public to have our agency as a place for that.

Mr. BOUCHER. While we are on the subject of merger review, let

me ask Mr. Massey and Ms. Brownell if they have comments concerning that. Ms. Brownell?

Ms. BROWNELL. I never thought I would say this, having been on

the other side of a merger when I worked in banking for a regulator, but I think we do need that authority. I think we look at it

through a different screen, but I think it is important that we

maintain discipline and focus and not use it as an opportunity for

people to have a shopping spree to extort commitments that do not

advantage either the merger, the shareholders or the consumers.

Mr. BOUCHER. Mr. Massey?

Mr. MASSEY. I agree with Commissioner Breathitt and Commissioner Brownell’s comments. I think an important point is we have

a very public and open process for determining mergers and all

stakeholders get to come in and tell us what they think. That is

important. It is not a closed process, and keeping it open is absolutely critical. And I agree that we have a broader standard than

the anti-trust agencies use, and at this particularly critical time I

would not recommend repealing our authority when we are promoting competitive markets. It could be that a merger would undercut the very competition that we are trying to facilitate.

Mr. BOUCHER. Thank you very much. Ms. Breathitt, would you

like to talk to the RTO issue?

Ms. BREATHITT. Yes. Because of our open architecture language

in Order 2000, we do have the ability to allow RTOs to change over

time, and I would hate to see the committee limiting our flexibility

to do that by having a very strict title. I liked your idea of addressing it and perhaps even mandating it, but keep the title simple to

allow the flexibility that is going to happen over time.

Mr. BOUCHER. Okay. Ms. Brownell?

Ms. BROWNELL. I would agree with Commissioner Breathitt. I

think it is very important that we encourage, mandate if you wish

to do that, people to join RTOs, but because of the evolutionary nature and because we do have a different evaluation, companies

should not control the process. They act in their own self-interest,

as they should, and I applaud that. We have that larger self-interest to protect the consumers and the other stakeholders, and I

think the provisions of this bill would limit that.

Mr. BOUCHER. Thank you. Mr. Massey?

Mr. MASSEY. I agree with my colleagues.

Mr. BOUCHER. Thank you, Mr. Massey. Thank you for that answer; that was terrific. You are an excellent witness. That is very

much to the point.

Ms. Breathitt, Ms. Brownell and Mr. Massey, the question of incentive pricing.

Ms. BREATHITT. That one is tougher for me, because actually it

was a controversial part of Order 2000, and we put that in there

because it was a voluntary rule, and we wanted to have some carrots. It is in the reg text. Yes, it was controversial. But I do think

that the Commission can use incentive pricing, but we need to do

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it carefully, and, as Commissioner Brownell stated earlier, we

shouldn’t just be willy nilly using incentive pricing without a good

public policy goal.

Mr. BOUCHER. Do you need any additional authority to do that?

Ms. BREATHITT. It is already in our reg text. We have made it

part of the Federal regulations.

Mr. BOUCHER. So whatever is in the bill is really superfluous in

that regard?

Ms. BREATHITT. I think so.

Mr. BOUCHER. Okay. Ms. Brownell, Mr. Massey, quickly, do you

have a response?

Ms. BROWNELL. I don’t think we need additional authority. I

would reemphasize let us use this to incent innovation, incent efficiency, incent companies who are committed to opening markets.

We have seen some interesting models in the UK where they have

used performance-based and incentive-based ratemaking to reduce

congestion through not only building new transmission but in fact

adding innovative solutions to existing transmission. So I think we

need to just not buy into the concept without addressing those very

specific policy goals.

Mr. BOUCHER. Mr. Massey?

Mr. MASSEY. I don’t think we should just throw money at transmission just for the sake of it. We ought to get some bang for our

buck. If we are going to increase the incentives for transmission,

we need more transmission to actually get built, and we need good

performance in managing those transmission assets, and we ought

to insist on it.

Mr. BOUCHER. Okay. Thank you all very much. Thank you, Mr.

Chairman.

Mr. NORWOOD [presiding]. You are welcome. The Chair now recognizes Mr. Bryant, the gentleman from Tennessee, for 5 minutes

for questions.

Mr. BRYANT. Thank you. Mr. McCullough, let me ask you a few

more questions. The changes in TVA in this bill would result in the

enactment of changes that are I think very dramatic to TVA. How

do you think that TVA and TVA distributors would fare in a competitive wholesale market?

Mr. MCCULLOUGH. Well, Mr. Bryant, I believe that, first of all,

has been taking steps, in terms of focusing on our business performance to ensure that we had a delivered price of power that was

competitive, competitive with any region in the country, to ensure

that our reliability when benchmarked against other utilities, the

best in America, compares favorably. We have worked with our distributors to provide them with some flexibility in the requirements

of their contracts. What does that—I had dinner last night with

Herman Morris, the CEO at Memphis Light, Gas and Water. We

have a proposal on the table that would enable any one of 158

power distributors to go to the market for 10 percent of their requirements with 24 months notice. They give us 24 months notice,

they can buy 10 percent of what is now total requirements contract. With 36 months notice, they can buy all of their power in the

open market from another supplier.

The way we are best preparing for competitive and open marketplace that TVA desires is by having the best practices in place in

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the way we run our business. We believe without any doubt that

TVA is competitive today and will be even more competitive in the

future. We welcome competition and choice. It needs to be done in

a manner that is consistent with the language that you and others

have made sure is in tact in this 3406. The consensus title language welcomes competition and choice, enables TVA to compete

with investor-owned utilities and other entities. Our distributors

and the consumer can choose. We welcome that, and that is why

we are very pleased that that language is in tact in H.R. 3406.

Mr. BRYANT. Now, you have testified that there will be language

in the bill that would allow these 158 distributors to purchase their

power elsewhere. Were a distributor to do this, how would their

stranded cost be determined?

Mr. MCCULLOUGH. First of all, the language says that after

2000—after September 30 of 2007, there would be no potential

stranded cost recovery for TVA. In the event that there are stranded costs—and we believe that we can wholesale. The fence should

fall in both directions. In other words, once this language is enacted into law, the distributors can choose where to buy their

power. TVA would be given the opportunity to wholesale, and I underline that word ‘‘wholesale’’ outside what is now the fenced-in

area. If stranded costs become an issue, we would yield to FERC,

and we have confidence in the wisdom of FERC to determine an

equitable stranded cost recovery mechanism.

Mr. BRYANT. As I understand this new title, new generation to

serve the Tennessee Valley load could be built by TVA but also by

the distributors, by independent power producers and by other utilities. Is this correct, and why is it important that TVA be among

those that would be allowed to build to meet its load?

Mr. MCCULLOUGH. You are correct. That language is in tact in

H.R. 3406. TVA only asks the opportunity to compete on a level

playing field with other investor-owned utilities, independent

power producers, power marketers, as the Valley’s economy continues to grow, and we hope it paces the rest of the Nation. We are

in business to serve the Valley. We feel that we ought to have the

right with the input from our power distributors. So TVA, unilaterally, would not make a decision on the need for new generation,

but as the Valley’s economy continues to grow, we feel it is only

fair that TVA would have the right to choose, if necessary, to add

new generation capacity to meet the growing demands of our Valley’s economy.

Mr. BRYANT. Mr. Chairman, my voice is about to go, and I would

yield back my time. Thank you.

Mr. NORWOOD. I thank the gentleman. Mr. Sawyer, you are recognized now for 5 minutes.

Mr. SAWYER. Thank you, Mr. Chairman. Let me return to a topic

that we have touched on in the course of these discussions in a

more specific way, and that is the need, as Commissioner Massey

put it, to make decisions and get on with the business of building

transmission capacity. The chairman has an approach in his bill

that has a three-pronged test whether or not new transmission capacity is needed. First, if the States have not acted within 12

months, the FERC determines that the project will be used for

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interstate commerce, and, third, the project is in the public interest.

Mine would trigger itself in a different way, but essentially come

down to similar kinds of decisions. It would make a determination

up front that there are transmission constraints and therefore a

need and create an annual list of such locations and then proceed

to permit that same, I suppose, arbitrary 12-month timeframe

within which the States might act, after which the FERC would

undertake this cut that the chairman would—I understandably

prefer not to have to bring to his lips.

He suggested something the Department of Energy has talked

about in terms of regional siting boards. I suppose that is a nice

way around the whole States’ rights question, but how they would

work and how we would structure them it seems to me remains

very much open. Could you, each of you, comment on the specifics

of the siting procedures that are not only before us in the course

of this week and suggest directions that we might go to reach a

structure and a procedure that in the end would let us do what

Commissioner Massey wanted to do—get on with it.

Mr. BLAKE. To start from the administration’s perspective, I

think, as you have articulated, is, first, circumscribing the authority very narrowly, using it only in the context where there is an

identified national interest. And our view is that that would be

something that we would identify in a larger national transmission

study. Second, that you try to make this a regional decision, using

presumably something like the RTO process, and that you would

only be addressing those instances where, for a variety of reasons,

the region can’t act. I mean it would be a last step backstop.

Mr. SAWYER. Would the regions have a specific set of standards

that we would determine nationally that each region would make

separately or would they set separate standards? How do you—— Mr. BLAKE. Well, I think the national interest would be identified outside of the individual regions, and then the region, presumably, would have a number of different methods for addressing that

national interest.

Mr. SAWYER. Chairman?

Mr. WOOD. There are really two things that happen in a transmission line. The first is the need. That is largely my experience

has been, although not exclusively, been kind of not a big issue.

The RTO engineers get an objective enough group of people that

everybody acknowledges they are expert.

Mr. SAWYER. Well, if we look at Southern California——

Mr. WOOD. Well, you have got the need there. The issues then

become——

Mr. SAWYER. But it was so difficult they couldn’t get to it.

Mr. WOOD. And this is exactly why the RTO function is great.

You had it on a boundary between PG&E and SoCal Edison. Well,

SoCal Edison wanted to take care of the area within SoCal Edison.

PG&E wanted to take care of the people within PG&E, but nobody

really wants to build a bridge to the other one, because there is not

a lot of money in it, there is not an incentive in it, your customers

aren’t perceived to get a real benefit from it. Too bad, actually they

would have gotten a great benefit from it had it been worked out.

But the same thing applies that even when you regionalize someVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00083 Fmt 6633 Sfmt 6602 E:\HEARINGS\77118 pfrm09 PsN: 77118
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thing to an RTO, you do get around the very parochial nature of

each utility and each transmission company taking care of itself.

Mr. SAWYER. Commissioner?

Ms. BREATHITT. I think the provisions in the bill, as I have testified, take us in a very positive step forward. Now, I had advocated,

though, for outright transmission siting authority for interstate, because one State could act within the 12 months, and another State

may not. So then you have added a year to the process.

But the other point I would like to make is that the solution isn’t

always a transmission solution. It might be more inexpensive to

build a power plant to solve congestion or it may be less expensive

to build a gas pipeline to serve a constraint. So as Mr. Blake stated, there are several ways to cure a congestion problem besides just

a new transmission.

Mr. WOOD. We would agree on that.

Ms. BROWNELL. Which I think speaks to the importance that an

impartial analysis done by an RTO would speak to, because they

would have no vested interest in either a transmission or a generation solution. Further, your suggestion, which I think DOE has already taken, to do an annual evaluation of transmission constraints and what they are costing us, because that is the point

that we haven’t really looked at, and is the invisible cost of, frankly, doing nothing with these markets.

Mr. MASSEY. And the third possible solution, in addition to a

transmission solution or a generation solution, is a demand-side solution that lightens the load. And I think the RTO planning process

can look at all three options, and on a regional basis, not just on

a State-by-State basis, but on a regional basis. What is the best regional solution? It is not always transmission.

But when transmission is the best solution, we have got to get

it sited, and I think the bill is a reasonable compromise respecting

States’ rights and the Federal responsibility to ensure that interstate markets work well. We have crossed the divide. We did that

6 years ago, and we said we wanted a market-based approach at

the wholesale level. It seems to me it is now our responsibility to

make sure those markets work well, and we can’t do that without

the necessary investment in transmission.

Mr. SAWYER. Thank you. Thank you, Mr. Chairman.

Mr. NORWOOD. I recognize myself now for 5 minutes, and Chairman Wood, if we could try to go back to where we left off.

Mr. WOOD. Yes, sir.

Mr. NORWOOD. The new FERC order that really singled out three

companies changed the formula FERC used to calculate market

power, not to mention that these companies don’t have to commit

an abuse, which drives me a little crazy. Your order includes generating capacity that is used to serve its retail customers and contracted commitments as far as generation and capacity. In short,

if the order is intended for the wholesale market, retail customers

shouldn’t be affected by principle. The biggest problem with this

test that you have set up is that it assumes that all the generation

that a utility owns is available for sale in a whole sale market and

thus included in the market power analysis.

Now, we talked about the fact that these companies could very

easily be changed to cost-based rates for market-based rates and

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that that would cost, for example, our major utility a lot of money

for which much of that money is used to keep the retail rates down.

Now, when you came to this decision, when you determined that

we were going to do this, did FERC take time to have a study or

look at how this would affect the rates of my constituents and

Georgia Power customers? Did you do any work in that area?

Mr. WOOD. We did not do a cost/benefit study; no, sir.

Mr. NORWOOD. Did FERC then go ahead and analyze whether requiring Souther Company to post its cost for the world to see would

reduce price competition and raise the prices at which Southern

Company would have to buy power; again, another cost for my constituents? Did you do a study on that?

Mr. WOOD. We didn’t do a study, but we actually are pretty familiar with the split savings approach. It has been one that the

Commission has used for a while, which is how they put the cost

of them producing the next increment, and then we split the difference between them and the customers’ cost of buying the next

increment, which is usually a number in between those——

Mr. NORWOOD. So you have a written detailed analysis of how

you determined this wouldn’t affect the ratepayer?

Mr. WOOD. No, but we have a written policy of how this process

is done and was done for 80 years before the move to market-based

rates——

Mr. NORWOOD. But you have made it so easy, you see, to take

people out of market-based to cost-based now that it is a greater

concern now. So we would like—you know, I would like to know

how you are going to help me keep from raising the rates on consumers in Georgia?

Mr. WOOD. Well, I think the most helpful thing that can happen

is—which we left specifically open, is that outside the area where

they have a dominant market share, the utilities and their affiliates can sell into those markets in the neighboring States, the

neighboring areas, and make sales into those markets in a competitive market that they don’t have a dominant control, which is I

think the goal that certainly this bill seems to be pointing toward.

Mr. NORWOOD. Well, do you—just tell me this: Do you agree forcing a company to post its cost of doing business for the world to

see will end up then for that company causing them to pay more

or less for power?

Mr. WOOD. I think their posting the costs for what it costs them

to generate is what regulated companies do every time they go to

retail rate cases. I think that data is certainly there for the Georgia

regulators and the Alabama regulators to look at when they set the

rates for the regulated retail side, and we are asking them to look

at the same data.

Mr. NORWOOD. Well, I don’t know that the Georgia regulators

post it for the world to see. We have handled it pretty well. But

you are talking about posting it for the whole damn world to see.

Mr. WOOD. Again, I think those are——

Mr. NORWOOD. And in a competitive market which you believe in

that interferes with your ability to be competitive. Let us move to

the next one because time is limited.

Mr. WOOD. Yes, sir.

82

Mr. NORWOOD. Tell me this: How many hundreds of millions of

dollars might it cost Georgia Power’s retail customer when large

corporations want to interconnect to its transmission system and

must, at least according to your November 20 order, be considered

a network resource? Example: A cost that must be borne by retail

customers again rather than the interconnecting company. How

high do our rates got to go because of that November 20 order?

Mr. WOOD. Sir, I think in fact the interconnecting of more power

plants in Georgia and in every other State will put downward pressure on the cost of power. The cost of power is probably 70 percent

of a Georgia customers retail bill and to have that be derived not

just from one company but from several companies competing

against each other in Georgia and in the neighboring States will

put downward pressure on the bills. That is the point of the whole

initiative: to open up the grid so that competitive power plants

compete against each other and drive those costs down. And there

may be some costs to upgrade the transmission grid.

Mr. NORWOOD. What do you mean maybe?

Mr. WOOD. Well, there may be. If the transmission grid has to

be added onto faster than other costs than the utilities rates are

coming down, which they do, they depreciate over usually a 15-, 20-

year life. If the cost of adding new plants is more than the cost of

the old plant, depreciating down, and there is no growth of load,

which is not true in that part of the country, there are a lot of

things that have to be true before rates go up.

Mr. NORWOOD. Well, that is similar to the story we heard in

Georgia about gas deregulation. It all makes sense when you sit

there behind a desk and work it out, but in the end, many of these

things you presume might happen, you think might happen in a

free market, actually don’t, and the problem here is when you are

dealing with electricity in this country, energy in this country, we

better be right. And you are sitting here telling me that you have

put out a marketing order November 20 and nobody had time to

do any studies, because we don’t have to worry about Georgia because we are here in Washington worrying about the country.

Somebody has to worry about what the ratepayers have to pay

at home, and I am being told by a lot of people, and it is amazing

how many people who come from different walks of life in the utility market, that many of these things that you are doing are not

going to work the way you hope and I hope they do too. They are

going to increase the cost for our ratepayers. So did you do any

studies? You said no already a couple of times.

Mr. WOOD. I have answered your question, but I think it is important to realize that monopolies generally do not favor competition, despite the very strong evidence in the wholesale gas industry

that competition has resulted in tens of billions of dollars going

back to customers. Your State has chosen to go to a retail gas experiment. That is a political decision. But the choice to open up

wholesale markets is an economic decision, and I think the evidence is uniform.

Mr. NORWOOD. Well, it wasn’t intended to be a political decision,

and my time is up. It was intended to be an economic decision, the

same as your decisions are intended to be economic decisions, and

all I am saying is when you make those decisions and you affect

83

thousands and thousands of people, then we are concerned when

you don’t have a study to back—I need more information, because

other smart people are saying you are not right. My time is up,

don’t forget where we were, I will be right back after this vote.

Mr. Chairman, Mr. Waxman would like to have the next 5 minutes.

Chairman TAUZIN. He is entitled to it, I believe.

Mr. NORWOOD. Mr. Waxman, you are recognized.

Mr. WAXMAN. Thank you very much, Mr. Chairman, both Mr.

Chairmans. Mr. Wood, the policy you advocate regarding Regional

Transmission Organizations is a bit different from the policy contained in H.R. 3406. You recommend that Congress authorize

FERC to require RTOs where it would be in the public interest.

H.R. 3406 mandates RTOs whether or not they are in the public

interest. Is that an accurate distinction between your position and

H.R. 3406?

Mr. WOOD. It is accurate, but it is not the source of my recommendations for amendment.

Mr. WAXMAN. Okay. I can see why you don’t think there ought

to be—I can see why you think there ought to be a public interest

test. If Congress or FERC chose to force States into RTOs, that

would be a pretty dramatic step. We don’t yet know how much it

would cost to establish RTOs, but it could cost tens or hundreds of

millions of dollars. These costs could be borne by States and the

private sector. Is that accurate?

Mr. WOOD. Yes, sir. All costs are borne by the customer, ultimately.

Mr. WAXMAN. Before mandating participation in RTOs, don’t we

have an obligation to ensure that RTOs make sense economically

and from a policy perspective?

Mr. WOOD. Yes, sir. And for that reason we have agreed to do

a region-by-region cost/benefit analysis for RTOs prior to implementing them.

Mr. WAXMAN. Establishing RTOs is a major Federal action, isn’t

it?

Mr. WOOD. I am not sure what those words mean, but I mean

it certainly is an important thing that we would be doing.

Mr. WAXMAN. Okay. Whenever the Federal Government undertakes something important, like a major Federal action, it is required by law to examine the potential impacts on the environment. FERC should understand this, because when it issued Order

888, FERC analyzed the expected environmental impacts of increased competition. Unfortunately, we now know that FERC’s

analysis got it wrong.

A new study by the North American Commission on Environmental Cooperation demonstrated the links between electricity restructuring, increased demand for electricity and increased air pollution. In 1996, FERC projected that emissions from power generation were most likely to fall under competition. Instead air emissions increased and by more than FERC projected in its worse case

scenario. The CEC study shows that FERC’s worse case scenario

underestimated the growth and demand from 1995 to 2000 by 4.6

percent. As a consequence, FERC underestimated emissions of nitrogen oxides by 4 percent and carbon dioxide by 8 percent.

84

Mr. Wood, since we agree there should be a sound policy basis

for RTOs prior to their establishment, I have the following question

for you: Would you commit today to updating FERC’s projection of

the environmental impact of increased competition prior to FERC’s

approval of any RTOs?

Mr. WOOD. I would not be able to agree to do that today.

Mr. WAXMAN. And why not?

Mr. WOOD. I have to look into whether actually NEPA would

apply to what is an economic regulatory action. I read the report

from the CEC that you have discussed, and I know these issues

were reviewed on the court’s original review of Order 888 and

Order 2000, and I think the Commission was found to be within

what it did appropriately the first time.

Mr. WAXMAN. Well, I am going to leave it to you to review and

see whether it is required or not, along with your colleagues. But

let me ask this of the members of the Commission. Chairman Barton in text in proposed H.R. 3406 to restructure the electric utility

industry. Enron, a Texas-based energy company, has been lobbying

for the policies in this bill for years. President Bush has endorsed

Enron’s model for electricity competition and his Department of

Energy has testified they are generally in favor of this legislation.

Reliant, another Texas-based energy company, has lobbied for the

demand reduction program under Section 103 of this bill. And, Mr.

Wood, you are a former Texas regulator, and you are working toward the goals of this bill through administrative action.

There is a lot of support for the policies we are considering today

from companies and officials from Texas. However, the bulk of the

bill before us does not appear to apply to Texas. Texas, one State

in the continental U.S. that is not affected by the transmission provisions in this legislation. Historically, Texas has been treated separately from the rest of the U.S. under the logic that electricity

does not flow across its borders. This logic is no longer true. Texas

is now connected to other States. I would like to from the members

of the Commission wouldn’t it make sense to put Texas under the

same rules that apply to Wisconsin, Georgia, California, Michigan

and every other State in the continental U.S.? And wouldn’t the

rest of us in the U.S. feel more comfortable if they were also in

there? Mr. Massey, do you want to comment on that?

Mr. MASSEY. Oh, I think it would probably make sense to do

that, yes.

Mr. BARTON. Would the gentleman yield?

Mr. WAXMAN. Let us get the commissioners, and then I will be

able to yield if I have any time.

Ms. BROWNELL. I think it would probably make sense. I would

also add that there have been a number of advocates for competitive markets who come from other States. Certainly, Pennsylvania

has a number of those advocates, and I am one of them.

Ms. BREATHITT. I think it would make sense for all interstate

transmission to be part of the new grid that this bill is trying to

create. I don’t know what it would take to do that with respect to

Texas, but I think that it should become part of the grid, just as

this bill is asking public power to become.

Mr. WAXMAN. Mr. Wood?

85

Mr. WOOD. If I didn’t think it would slow down the progress that

was made in Texas for 5 years to have FERC catch up to where

Texas is, I would probably not have a problem with it. But as one

who committed the last 6 years of my professional career to advance the ideas that I am advancing here on the Federal level, I

think putting Texas under Federal jurisdiction now would dramatically slow down the positive growth that has happened in my home

State and would not support it.

Mr. NORWOOD. Thank you, Mr. Waxman. Mr. Chairman, you are

recognized for 5 minutes.

Mr. BARTON. Well, I asked to be—I guess unanimous consent to

be briefly——

Chairman TAUZIN. I do ask to be recognized. I yield quickly to

my friend from Texas.

Mr. BARTON. I would just point out, in response to my good

friend from California’s question, you can make the argument that

it would make a lot more sense to put the same State situation in

the great State of California that we have in Texas where you have

an intrastate system with more than ample supply and an interconnection network intrastate, through ERCOT, that disseminates

power around the State in a very efficient and cost-effective fashion.

My good friend from California knows that California has an

intrastate pipeline system for natural gas that is not subject to

FERC jurisdiction——

Chairman TAUZIN. Maybe that ought to be.

Mr. BARTON. [continuing] and my recollection is that when Mr.

Green of Texas offered an amendment to make it FERC jurisdictional, my good friend from California vehemently opposed that. So

let us talk apples and apples and oranges and oranges, not apples

and oranges. And with that, I would yield back.

Chairman TAUZIN. I thank my friend. I don’t have a lot of time,

Mr. Chairman, because I have not had a chance on the first round

to ask a few questions. I am going to be very brief, but I am going

to submit some questions to you and the other commissioners in

writing.

I am deeply concerned, as a number of my colleagues on this

panel are concerned, about the order issued on November 20. I am

deeply concerned that it was issued without a process of public

comment and that we are hearing an awful lot of about some very

deleterious effects that it might have upon companies in our region

and more importantly upon consumer rates and decisions those

companies may make.

We are hearing, for example, that this new interim generation

market power test you have adopted may well discourage new generation investment. It may expose our regions of the country to the

same kind of problems California had, that it may indeed have the

perverse incentive against longer-term investments and thus put

us into a position where companies are making shorter-term and

riskier transactions in order to avoid flunking your test. Some have

said you put forward a test nobody can pass, and therefore it is met

and designed simply to punish or force some companies into an

RTO.

86

Now, I want those companies in an RTO; I think we all agree

with that. I think getting the companies to join RTOs is a worthwhile goal. I share that with you and Commissioner Brownell, but

I want to suggest to you that without having public comment, with

all of these incredible assertions we are hearing about the effects

of this order, that perhaps you might want to consider delaying the

effectiveness of this order until you have had a chance to go on notice and accept public comments and examine some of these consequences.

I join the gentleman in the chair in being very concerned about

the impact it may have on consumer rates in my part of the country. Rates are going down right now. There is no big crisis. And I

question the wisdom of putting a big change like this into effect

just perhaps to punish a few companies into joining RTOs when it

may have some pretty serious effects. Now, I will let you respond,

but I am going to ask some very specific questions on the record

in writing since I am just about out of time, I think. Chairman

Wood?

Mr. WOOD. Thank you, Chairman Tauzin. These orders, as the

others, are subject to rehearing. Rehearing is the appropriate place

for those companies and others to make comments to the Commission about these effects. The hub-and-spoke methodology, as well

as this methodology, and really all the market-based rate issues,

have always been dealt with on case-by-case adjudication and not

by rulemaking. So it is not a departure from our process to do that,

and we do have a process by which people can provide input on a

rehearing, and I think those are actually due in the next couple of

weeks for people to do so.

I have to say, as a practical matter, certainly in the South and

in other parts of the country, there is a lot of progress toward RTO

development or even independent system operators, which was the

kind of precursor to RTOs. And our order specifically said if you

are in an ISO or an RTO, that has a market monitoring, a market

mitigation function that can identify on a surgical basis anti-market, anti-competitive behavior: that is the end goal we want. We

don’t want to have to live through California again, Mr. Chairman.

We don’t want the Congress to have to be put through that test,

we don’t want the consumers or the State, to be put through that

test, and, actually, it is in a time when prices are low, when things

are more calm and peaceful that we should be putting the trip

wires that keep market power from hopping up and——

Chairman TAUZIN. I don’t deny that. I don’t deny that we ought

to be encouraging the RTO transactions. I think we ought to encourage them, and I want to help you, but I am deeply concerned

that the interim order you have put in place may have some very

damaging effects on the market in the meantime. And you ought

to hear some public comments. Whether you hear it in rehearing

or whether you delay the implementation until you have had a

chance to ferret all these questions out, we ought to have some confidence in that. None of us want to go home and say that on our

watch our Federal authority made a significant change without a

lot of public comment, that caused a dislocation of rates and generation investment in our communities when in fact we are very

87

deeply concerned about what we saw in California and it repeating

itself in other parts of the country.

I had a blackout in Louisiana, believe it or not. Energy-rich State

like Louisiana, we had one a few years ago. I can’t afford the risk

of having that happen in my State, on my watch, and I would urge

you to be extraordinarily careful about receiving the public comment and input you need before you move forward.

Mr. WOOD. We will, Mr. Chairman, and the comments on that

were extended at parties’ request until early January. So people do

have time to get that in.

Mr. NORWOOD. I thank the Chairman. I would like to close our

hearing by announcing that there will be a notice published that

will go to markup next Wednesday when we are back in town. And

I would like to close, Chairman Wood, by just telling you that I

have a lot of other questions that I am deeply sorry that we

couldn’t air them here, that I would like to get very specific answers to, and for you to note that we have noted that by joining

an RTO, a utility can make all these bad things go away with the

market order. And that suggests, perhaps, just suggests to an untrained eye that FERC’s November 20 order might have been punitive like heads on stakes and stuff like that.

Punishing companies who have not yet complied with Order

2000, an order that I know you know was voluntary, but it is really, in our view, the customers of Georgia Power who will be harmed

of public power in Georgia, a State that is very proud of what and

how we have been doing things. And I hope that hasn’t escaped the

Commission.

There is a lot I would like to tell you about deer hunting. You

know, this thing being in the woods and campfires and all that

kind of stuff, heads on stakes, it is dealing with deer hunting but

unexperienced deer hunters can run into a lot of problems in the

woods. Sometimes you are real anxious, sometimes you have got a

itchy finger, sometimes you are staring out there real, real hard

looking for that buck-only day and everything looks like it has antlers on it. And sometimes you shoot the wrong deer and you kill

that doe and you are not supposed to, and they will come along and

take your license and sometimes you are so anxious as an experienced hunter that you actually wound a buck, and they are real

dangerous when they get wounded. Those antlers and hooves will

chew you up.

So we are glad you are here, and we hope we are going to be able

to work this out, but you better pick on a lot more companies than

three if you want to do any picking, particularly when one of them

is out of the Southeast. So with that, I will adjourn this hearing

until tomorrow where we will resume the hearing tomorrow. Meeting adjourned.

[Whereupon, at 5:29 p.m., the hearing was recessed until Thursday, December 13, 2001.]

[Additional material submitted for the record follows:]

88

FEDERAL ENERGY REGULATORY COMMISSION

OFFICE OF THE CHAIRMAN

February 13, 2002

The Honorable W.J. ‘‘BILLY’’ TAUZIN

Chairman

Committee on Energy and Commerce

U.S. House of Representatives

Washington, D.C. 20515-6115

DEAR MR. CHAIRMAN: I am pleased to reply to the questions in your letter of January 14, 2002 on recent Commission actions regarding regional transmission organizations (RTOs) and market based rate authorizations. For your convenience, I’ve re- peated your question before providing an answer.

Question (1) Please describe any analyses the Commission has undertaken of the

proper scope, configuration and market rules for RTOs and of the costs and benefits

to consumers in each State of proposed RTOs and alternatives.

Following our week-long public hearings on RTO issues in October, 2001, the

Commission committed to our state commissioner colleagues and others that we

would update and disaggregate the cost-benefit studies that were done in 1999 for

Order No. 2000. On November 1, 2001, the Commission contracted with ICF to perform the analyses. The base case the contractor uses in these analyses characterizes

current utility dispatch, planning, and other industry conditions important for analyzing the economic impacts of an RTO proposal. The base case also reflects the ‘‘no action’’ alternative, i.e., status quo implementation of Order No. 888 by the Commission. The analyses include use of a modeling framework that builds scenarios needed to characterize and study the proposed RTO initiatives and produce economic impacts for use in economic cost and benefit analysis. We are consulting with a regionally diverse, interested and knowledgeable group of state Commissioners on the details of the models to make the results as accurate and meaningful as possible. Our

contractor expects to deliver the study later this month.

Question (2) As you know the Louisiana Public Service Commission issued a show

cause order to Entergy and others about why they should be allowed to join an RTO.

What have you done to resolve the concerns of state regulators in Louisiana and

other states about impacts on retail customers from utility participation in RTOs?

The Commission has worked extensively to identify and begin to solve the concerns of state regulators about impacts on retail customers from utility participation

in RTOs in all the states. Specifically, in brief, we have:

• Held five RTO national outreach workshops in March and April 2000;

• Held state-specific sessions during the Commission’s October 2001 RTO Week;

• Undertaken a cost-benefit analysis of RTOs in response to state requests;

• Begun using state-FERC panel discussions to identify and address RTO issues of

mutual concern;

• Expanded collaboration through the National Association of Regulatory Utility

Commissioners (NARUC);

• Invited and received extensive state commissioners’ on-the-record comments on a

number of regional RTO concerns.

The details on each of these below, though somewhat lengthy, show we continue

to work with state regulators to resolve state concerns about RTO impacts on retail

customers.

RTO National Outreach. In Order No. 2000, the Commission said that it would

undertake a collaborative process, one in which Commission staff would be fully engaged with transmission owners, public and non-public utilities, as well as state officials and affected interest groups, to actively work toward the voluntary development of RTOs. That process began in March and April 2000 with five national workshops, including one in Kansas City, Missouri and another in College Park, Georgia.

State Sessions During RTO Week. To continue our dialogue, we held workshops on RTOs in October 2001 and devoted various sessions to state issues. We

learned about the retail-customer concerns states have related to cost-shifting, RTO

startup costs, and independence.

Cost-Benefit Analysis. As discussed in response to question No. 1, during those

October meetings, the states asked the Commission to do a cost-benefit analysis for

each RTO region (and perhaps for each state) to determine the effect on retail customers. We began that work right away and expect to have some results by late

February 2002.

State-FERC Panel Discussions. Based on the discussion at the October 2001

workshops, the Commission decided to move on two parallel tracks to finalize RTO

issues. The first track is addressing geographic scope and governance aspects of

RTO proposals after we have consulted with state commissions. The second track

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for resolving RTO issues is a proceeding addressing transmission tariff and market

design rules for public utilities, including RTOs. This will address the issues needed

for organizations to accomplish the characteristics and functions in Order No. 2000.

The Commission has begun regional state-FERC panel discussions on RTO and

market design issues to provide a more systematic foundation for obtaining state

input. The Commission has already had state-FERC panel discussions with state

commissioners from the Midwest and Northeast and plans discussion with Southeast Commissioners on February 15. Transcripts of these discussions are placed in

the appropriate dockets. The Commission also has created a new Division of State

Relations within the Office of External Affairs.

Expanded Collaboration Through NARUC. The Commission also has reached

out to the states through the National Association of Regulatory Utility Commissioners. The Commission held two of three sessions on issues of mutual concern during NARUC’s upcoming winter meetings in Washington, D.C. On February 10, we

discussed whether wholesale and retail transmission service should be under the

same rates, terms and conditions. On February 11, we discussed how regulators can

assure an adequate capacity reserve for regional energy markets. On February 14,

we will be cosponsoring with the Department of Energy a demand response conference.

Finally, with respect to the specific concerns of the Louisiana Public Service Commission and other Southeast state commissions, I want to assure you of my commitment to carefully consider their views on these important matters.

Question (3) How does the new ‘‘supply margin’’ market power test in the Commission’s order of November 20 differ from the established ‘‘hub-and-spoke’’ test for

market power? Did the Commission conduct any study or analysis before issuing the

new market power test to determine what percentage of vertically-integrated public

utilities, if any, would be able to pass the test? Would any such utility be able to

pass the new test?

The ‘‘hub-and-spoke’’ test for generation market power computes an applicant’s

market share of installed capacity and uncommitted capacity in a particular market.

A separate analysis is required for each utility that is directly interconnected with

the applicant (relevant market). The analysis compares the installed capacity of the

applicant to the sum of the installed capacity of the applicant, all utilities directly

interconnected with the applicant, and all utilities directly interconnected with the

relevant market. A similar analysis is performed for uncommitted capacity. While

the Commission did not employ a bright line test, it used a benchmark that a seller

did not have generation market power if, on balance, a seller has a market share

of 20 percent or less in each relevant market.

The ‘‘supply margin assessment’’ (SMA) builds on and improves the established

hub-and-spoke analysis in two ways. First, in determining the geographic market,

the SMA considers transmission constraints that may prevent a seller from delivering its power to a particular buyer. Thus, the SMA can more accurately determine

what supply can reach buyers to compete with the applicant. Second, in determining

the size that triggers generation market power concerns, the SMA establishes a

threshold based on whether an applicant is pivotal in the market, i.e., whether at

least some of the applicant’s capacity must be used to meet the market’s peak demand. An applicant will be pivotal if its capacity exceeds the market’s surplus of

capacity above peak demand—that is, the market’s supply margin. Thus, an applicant will fail the SMA screen if the amount of its capacity exceeds the market’s supply margin. By contrast, under the hub-and-spoke method, an applicant would pass

the screen if its market share were less than 20 percent, even if its capacity were

pivotal. Effectively, the supply margin threshold identifies whether the applicant is

a must-run supplier needed to meet peak load in a market. Thus, the supply margin

is sensitive to the potential for the applicant to successfully withhold supplies in the

market in order to raise prices.

The Commission’s staff examined numerous options for addressing generation

market power, and a copy of a staff paper on the topic was made available to the

public on the Commission’s website following the September 26, 2001 Commission

meeting. Because the test is an objective one, intended to apply on a nondiscriminatory basis to all applicants, the Commission did not conduct a study or analysis

to determine which of the current 1200 power market certificate holders would be

able to pass the test. Whether a particular vertically-integrated public utility would

be able to pass the SMA screen will depend on the facts of a particular case. A

vertically-integrated public utility will pass the test if its capacity is not pivotal in

relevant markets; i.e., the control area that it operates or adjacent control areas.

Question (4) What findings, circumstances, or emergency conditions warranted the

Commission’s apparently sudden change of policy in the November 20 order? What

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specific findings of abuse of market power did the Commission make prior to issuing

the order?

The November 20 order was issued in response to continuing concerns raised by

intervenors in market-based rate cases (including the dockets involving AEP,

Entergy and Southern) that the hub-and-spoke analysis does not adequately assess

generation market power and, in particular, that it does not consider transmission

constraints. The issue was identified and discussed in dissenting and concurring

opinions by three of the four current FERC Commissioners in a number of orders

issued last summer. See, e.g., Sierra Pacific Power Company and Nevada Power

Company, 96 FERC ¶ 61,050 (2001); Huntington Beach Development, L.L.C., 96

FERC ¶ 61,212 (2001). In addition, the issue was discussed by the Commission at

its September 26, 2001 public meeting. As noted in response to question (3), a staff

paper discussing options for addressing market power was made available to the

public following the September 26, 2001 public meeting.

In the November 20 order, the Commission stated that it ‘‘has concluded that, because of significant structural changes and corporate realignments that have occurred and continue to occur in the electric industry, our hub-and-spoke analysis no

longer adequately protects customers against generation market power in all circumstances. The hub-and-spoke analysis worked reasonably well for almost a decade when the markets were essentially vertical monopolies trading on the margin

and retail loads were only partially exposed to the market. Since that time markets

have changed and expanded. While we intend to undertake a generic review of markets and market power in general, we conclude that in the interim a more appropriate test should be applied to ensure that customers are protected against market

power in generation. Accordingly, we have developed a Supply Margin Assessment

(SMA) screen to be used pending completion of a generic rulemaking proceeding.’’ 97 FERC ¶ 61,219 at 61,969.

Question (5) What analysis did the Commission conduct to determine whether revocation of market based rate authority could result in increased retail rates for consumers in states served by the affected utilities?

In its November 20 order, the Commission did not revoke the market-based rate

authority of the affected utilities. The Commission established cost-based mitigation

only for prospective spot market sales (i.e., less than 24 hours) within the affected

utilities’ control areas. The Commission subsequently deferred implementing price

mitigation measures pending further proceedings.

The Commission did not conduct an analysis to determine whether revocation of

market-based rate authority could result in increased retail rates. The Commission

stated in the November 20 order that the hub-and-spoke analysis no longer adequately protects customers against generation market power In all circumstances.

Therefore, it concluded that the interim SMA screen ‘‘should be applied to ensure

that customers are protected against market power in generation.’’ 97 FERC

¶ 61,219 at 61,969. Preventing the exercise of such market power benefits the retail

customers of utilities that would otherwise have to pay excessive prices for purchases from sellers with market power.

Question (6) Would a public utility that is a member of a Commission-approved

RTO be exempt from the November 20 order? If so, given that no public utility is

now a member of a Commission-approved RTO, was the order intended to penalize

RTO applicants who disagree with the Commission regarding the appropriate scope

or configuration of an RTO?

The November 20 order explains that all sales, including bilateral sales, into an

ISO or RTO with Commission-approved market monitoring and mitigation will be

exempt from the SMA and, instead, will be governed by the specific thresholds and

mitigation provisions approved for the particular markets. 97 FERC ¶ 61,219 at

61,970. As a result, a public utility that is a member of a Commission-approved

RTO would be exempt from the November 20 order to the extent that the RTO has

Commission-approved market monitoring and mitigation. The Commission-approved

market monitoring and mitigation should prevent the exercise of generation market

power in the relevant markets, thus justifying the exemption from the SMA. The

order was not intended to penalize RTO applicants who disagree with the Commission regarding the appropriate scope or configuration of an RTO. Since the November 20 SMA order, FERC has approved the MISO RTO, which currently supports

electric service to more than 8 million customers in 15 states across the Midwest

and Canada.

Question (7) The District of Columbia Circuit Court of Appeals recently held that

RTO participation under the Commission’s Order No. 2000 is voluntary. Do you believe that indirect means of ‘‘encouraging’’ RTO participation, such as revocation of

market based rate authority, are consistent with the voluntary and flexible approach of Order No. 2000?

91

The Commission’s actions are not inconsistent with Order No. 2000 and, indeed,

were taken to fulfill our responsibilities under the FPA to ensure just and reasonable rates. Because an RTO with approved market monitoring and market power

mitigation reduces sellers’ ability to exercise market power within the RTO region,

and because an RTO ensures nondiscriminatory transmission access and increases

market efficiency, it is appropriate to encourage all utilities to join an RTO and is

not necessary to require those utilities in an RTO to comply with an additional market power test such as the SMA. For utilities that do not sell in areas that have

market power mitigation in place, however, the Commission has the responsibility

under the FPA to ensure that market power cannot be exercised before it authorizes

market-based rates. Because the hub-and-spoke test no longer assures lack of market power in generation, the Commission replaced it.

Question (8) Is it appropriate for the Commission to adopt an entirely new market

power test without first holding a rulemaking proceeding with opportunity for comment? In the absence of a new rule developed out of an open process, is it appropriate for the Commission to revoke a utility’s market-based rate authority without

a hearing for that utility?

This question concerns legal issues that have been raised by a number of entities

in requests for rehearing of the November 20 order. Since these are pending before

the Commission now, under the Administrative Procedure Act and the Commission’s ex parte rule, it is inappropriate for me to respond to these questions at this time.

Question (9) We understand that the Commission has issued a stay with respect

to portions of the November 20 order, and we are pleased that the Commission will

convene a technical conference where affected parties will have the opportunity to

address the consequences of the order. Does the Commission also plan to engage in

an open notice-and-comment rulemaking process before adopting a new market

power test? If not, will each affected company be afforded an opportunity for a hearing before its market-based rate authority is revoked under a new policy?

This question also concerns issues that have been raised by a number of entities

in requests for rehearing of the November 20 order. Thus, I cannot comment on the

merits at this time.

Question (10) Our understanding is that the Commission has not delayed the implementation of that portion of the November 20 order that requires all three companies to treat unaffiliated entities seeking to interconnect as competing network

resources and to post optimum areas for the location of prospective generating facilities on their websites. Does the Commission intend to provide the affected parties

an opportunity for a hearing or comment before this requirement takes effect?

It is correct that the Commission has not delayed the implementation of that portion of the November 20 order that requires all three companies to treat unaffiliated

entities seeking to interconnect as competing network resources and to post optimum areas for the location of prospective generating facilities on their web sites.

A number of entities have raised issues regarding this aspect of the November 20

order in their requests for rehearing. The full Commission will decide at some future time how to address these questions.

Question (11) Numerous utilities have expended a great deal of time, money and

effort to develop RTO applications that meet the RTO standards under Order No.

2000. Our understanding is that Order No. 2000 established a voluntary and flexible approach to RTO formation and specifically contemplated a variety of corporate

structures for RTOs, including independent transmission companies and independent system operators. Despite this, the Commission has not approved a single

RTO, including RTOs that were previously conditionally approved by the Commission. Does this mean tile Commission has taken a narrower or different course on

RTO policy in departure from the voluntary and flexible approach of Order No.

2000?

No, the Commission had not changed course on RTO policy.

On December 19, 2001 the Commission granted RTO status to the Midwest ISO

(97 FERC ¶ 61,326). Although the Commission directed the Midwest ISO to make

certain additional filings, the new RTO received the authority it needed to begin to

operate immediately. The Midwest RTO began commercial operations and security

coordination in December 2001 and began providing service under a single tariff in

February 2002.

Question (12) Our understanding is that the Alliance RTO was conditionally approved several times prior to the order of December 19, in which the Alliance must

now consider merging with the Mid-West ISO (MISO). Please explain why the Commission has apparently changed course with respect to the Alliance and how (if at

all) this change is consistent with the voluntary and flexible approach of Order No.

2000.

As stated in the Commission’s December 19 order:

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Our earlier finding regarding the adequacy of the scope of the Alliance RTO relied, in part, on implementation of the [Inter-RTO Coordination Agreement

(IRCA)]... which was intended to provide the basis for a seamless market in the territories served by the Midwest ISO and the Alliance RTO. However, since the Commission issued its order approving the Settlement and its July 12 Order approving

Alliance RTO’s scope, the confidence of the Commission and participating state commissions in the IRCA’s ability to resolve seams issues has eroded. Specifically . . . the

Midwest ISO and Alliance Companies filed status reports which indicate that the

IRCA implementation has not progressed as expected . . . We have also taken additional continents from the various state commissions in the Midwest, and they overwhelmingly prefer a single Midwest RTO and Midwest ISO as the surviving RTO.

Another change affecting our ruling is International Transmission’s election to withdraw from the Alliance RTO, thereby shrinking the Alliance RTO and concomitantly

diminishing its scope. As a result, we can no longer conclude that the proposed Alliance RTO has sufficient scope consistent with the factors identified in Order No.

2000 . . . In sum, the Alliance RTO has not achieved the necessary close coordination

that was called for to achieve Order No. 2000’s characteristics, and in particular,

scope, that it could not achieve on its own. 97 FERC ¶ 61,327 at 62,529-530

The December 19 order is pending rehearing, so I cannot comment further.

Question (13) The Commission states in its December 19 Alliance order that ‘‘our

action should not be construed to prejudge other types of RTOs in other parts of

the country, including a structure in which a for-profit transmission company could

be an umbrella RTO.’’ If the Commission is able to conditionally approve, and then

later reject, an RTO proposal developed at great expense on the requirements of

Order No. 2000, what assurances do RTO applicants in other regions have that

‘‘rules of the road’’ will not change and prevent them from forming RTOs that satisfy the requirements of Order No. 2000?

The rules of the road have not changed. The Commission is committed to choosing

regulatory approaches that foster competitive markets whenever possible and assure

reliable service at a reasonable price. This question also raises issues that are the

subject of rehearing and I cannot discuss it further.

I hope this information is helpful. If I can be of further assistance in this or any

other Commission matter, please let me know.

Best regards,

PAT WOOD, III

Chairman

FEDERAL ENERGY REGULATORY COMMMISSION

OFFICE OF THE CHAIRMAN

February 25, 2002

The Honorable JOE BARTON

Chairman, Subcommittee on Energy and Air Quality

Committee on Energy and Commerce

U.S. House of Representatives

Washington, D.C. 20515-6115

DEAR MR. CHAIRMAN: Thank you for your letter of February 15, 2002. Your letter

cites a study issued by the Commission’s staff in December 2001 on electric transmission constraints. The study identified numerous transmission constraints across

the United States and stated that increases in transmission infrastructure investment would benefit customers by decreasing costs caused by congestion on existing

lines. You ask several questions about this study and the provisions in section 401

of H.R. 3406 on transmission pricing methods that could encourage expansion of the

transmission grid. Below are my answers to your questions.

Question 1: The Study states that Commission staff have ‘‘identified a number of

significant transmission constraints that increase costs to customers.’’ It identifies

16 specific constraints across the Northeast, the Eastern Interconnection, and the

West. It estimates that these constraints cost consumers more than $1 billion total

the summers of 2000 and 2001 combined. Please explain further why these constraints have resulted in higher electricity costs for consumers.

Answer: Transmission constraints hamper the efficient operation of markets and

increase customer costs by restricting the ability of suppliers to deliver less expensive energy into constrained ‘‘load pockets’’. This means that when customer demand inside the ‘‘load pocket’’ exceeds the capability of the transmission lines to deliver power into the area, the transmission limit may, depending on the availability

of cheaper generation outside the load pocket, shut out additional cheaper generation and force local demand to be met by more expensive generation inside the conVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00096 Fmt 6633 Sfmt 6621 E:\HEARINGS\77118 pfrm09 PsN: 77118
93

straint area. Thus, transmission constraints force customers to buy more expensive

energy because they cannot get cheaper energy over the transmission grid.

Question 2: The Study also set forth an objective to ‘‘[r]ecognize that even with

the high estimated cost of transmission investment...the overall savings in energy

could significantly benefit customers.’’ The Study apparently achieved this objective,

finding that the benefits to consumers from increased transmission investment (in

terms of the delivered price for electricity) are ‘‘potentially quite large.’’ Is substantial new investment in transmission capacity necessary to eliminate or reduce the

costly constraints identified in the Study?

Answer: In many cases, yes. The transmission constraints that were studied limit

significant amounts of low-cost power imports for many hours in each year. In most

of those cases, area reliability and total power costs would be significantly improved

by construction of additional bulk transmission lines.

For other constraints, however, transmission expansion is one option to eliminate

transmission constraints, but not necessarily the only one. Other options include

building new generation, including distributed generation, and energy conservation

within the constrained area. The Study noted that substantial additional investment

in new transmission capacity could be made with only a small impact on customer

bills, and can produce significant cost savings in the delivered price of energy into

the load pocket. Moreover, all alternatives are problematic. For example, constructing new generation necessitates finding an acceptable location for the plant,

air pollution offsets, and additional fuel supplies. A regional planning process, such

as the one contemplated in the Commission’s Order No. 2000 on regional transmission organizations, is needed to determine which alternatives are both feasible

and cost effective.

Question 3: How will the Commission’s transmission rate policies, including incentive and performance-based rate treatments, help ensure that the transmission industry attracts sufficient investment to alleviate transmission constraints on a priority basis?

Answer: A longstanding principle of the Commission’s ratemaking is that rates

must allow an opportunity for the utility to earn a return on invested capital commensurate with the returns earned by other companies facing similar risks. This

principle is intended to ensure that utilities can attract the capital they need to

build infrastructure. The Commission has authorized additional incentives for transmission investments in certain circumstances. Last year, for example, the Commission authorized a range of premiums on equity returns and accelerated depreciation

for transmission expansions completed by certain deadlines in the Western United

States. The goal of these rate incentives was to encourage urgently-needed infrastructure expansions in response to the severe electric energy shortages then facing

California and other areas in the West. As another example, the Commission has

authorized a range of rate incentives for regional transmission organizations, since

these organizations can bring greater efficiencies to power markets and benefits to

customers. I am willing to consider similar incentives or other ratemaking methods

whenever necessary to ensure that utilities and independent merchant transmission

builders can obtain the capital they need to support timely and adequate expansion

of our Nation’s infrastructure.

Question 4: Particularly given the Study’s findings regarding the benefits of increased transmission investment, section 401’s provisions for incentive and performance-based transmission rates seem to be reasonable and in the public interest. Surprisingly, opponents of transmission rate reform have claimed that section 401

would require the Commission to set transmission rates at ‘‘unjust and unreasonable’’ levels. In your opinion, would section 401 repeal, undermine, or otherwise be

inconsistent with the just and reasonable standard of the Federal Power Act

(‘‘FPA’’)? In other words, would section 401 permit or require the Commission to

charge rates that are unjust or unreasonable under sections 205 or 206 of the FPA

(either the plain text of those sections or as they have been historically construed

by the courts)?

Answer: No. Section 401 of H.R. 3406 would require the Commission to adopt by

rule:

. . . transmission pricing policies and standards for promoting the expansion and

improvement of interstate transmission networks through incentive-based and

performance-based rate treatments and other means the Commission deems

necessary or appropriate to ensure reliability of the electric system, to support

interstate wholesale markets for electric power, and expand transmission capacity needed to sustain the growth of wholesale competition.

The policies and standards established under section 401 would be required to accomplish certain goals, such as ‘‘promot[ing] economically efficient enlargement of

transmission networks,’’ ‘‘provid[ing] a return on equity that causes needed investVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00097 Fmt 6633 Sfmt 6621 E:\HEARINGS\77118 pfrm09 PsN: 77118
94

ment in transmission facilities to be made,’’ ‘‘promot[ing] the voluntary participation

in and formation of regional transmission organizations,’’ ‘‘reduc[ing] congestion on

transmission networks,’’ and ‘‘allow[ing] for accelerated depreciation for transmission equipment and facilities.’’ Section 401 requires that all transmission rates

approved after the effective date of the new rules must comply with, among other

things, ‘‘the requirement of sections 205 and 206, that all rates, charges, terms and

conditions be just and reasonable and not unduly discriminatory.’’ These provisions are consistent with the existing provisions of the FPA as applied

by the Commission and interpreted by the courts. We interpret the provisions of section 401 as clarifying authority that the Commission already has under the FPA,

in its discretion, to allow different types of non-traditional rate treatments to meet

our regulatory goals, so long as those rate treatments meet the statutory requirement that rates be just and reasonable and not unduly discriminatory or preferential. As noted above in response to Question 3, the Commission already has

taken certain actions similar to those specified in section 401. In addition, the Supreme Court has held that ‘‘rate-making agencies are not bound to the service of

any single regulatory formula; they are permitted, unless their statutory authority

otherwise plainly indicates, ‘to make the pragmatic adjustments which may be

called for by particular circumstances.’ ’’ Permian Basin Area Rate Cases, 390 U.S.

747, 776 (1968) (citing FPC v. Natural Gas Pipeline Co., 315 U.S. 575, 586 (1942)).

The Commission may set rates to achieve relevant regulatory purposes, and may do

so by including non-cost incentives to encourage behavior in the public interest.

Mobil Oil Corp. v. FPC, 417 U.S. 283, 316-17. Encouraging future supply is an appropriate factor in determining a just and reasonable rate and adequate protection

of customers. Permian Basin, 390 U.S. at 796, 815. Accordingly, section 401 of H.R.

3406 would not permit or require the Commission to allow utilities to charge unjust

or unreasonable rates under sections 205 or 206, and would provide us continued

discretion to allow non-traditional rate treatments as appropriate.

Question 5: While the Commission already has broad authority to set the boundaries of the ‘‘zone of reasonableness’’ under the just and reasonable standard, do you

agree that section 401 would provide useful clarification and direction to the Commission to tailor transmission rates to the policy goals of eliminating transmission

constraints, increasing efficiency of wholesale power markets, and reducing the overall cost of delivered power for consumers? Would section 401 help prevent non-productive challenges to the Commission’s legal authority to design rate treatments appropriate to meet these policy goals?

Answer: Ensuring development of adequate energy infrastructure is vitally important to all energy customers. One of my goals as Chairman of the Commission is

to encourage the full exercise of our statutory authority to promote such development. While I believe the FPA’s existing provisions allow the Commission to take

the types of actions addressed in section 401, some participants in the industry may

disagree. Section 401 could help reduce or forestall legal challenges on these issues.

Thus, I support the provisions of section 401.

If I can be of further assistance in this or anything else, please call me.

Best regards,

PAT WOOD, III

Chairman

THE DEPUTY SECRETARY OF ENERGY

WASHINGTON, DC 20585

January 31, 2002

The Honorable HENRY A. WAXMAN

U.S. House of Representatives

2204 Rayburn House Office Building

Washington, DC 20515

DEAR REPRESENTATIVE WAXMAN: I am writing in response to your questions during my testimony before the House Energy and Air Quality Subcommittee on December 12, 2001, as well as your letter dated January 25, 2002, regarding discussions with electric utilities, other industry sectors, and environmental groups about

the new source review (NSR) program.

I have held the following meetings regarding the NSR program. A list of the meeting attendees is enclosed.

• July 10, 2001: Natural Resources Defense Council

• July 18, 2001: Sinclair Oil Company

• July 23, 2001: Electric Reliability Coordinating Council

• July 25, 2001: The Coal-Based Generation Stakeholder’s Group

95

• August 28, 2001: WEST Associates

• August 29, 2001: Wisconsin Energy Corporation

• September 10, 2001: Edison Electric Institute

• November 28, 2001: Air Quality Coalition

Please let me know if I can be of any further assistance on this, or any other,

matter.

Sincerely,

FRANCIS S. BLAKE

Enclosure

ATTENDEES AT MEETINGS/DISCUSSIONS BETWEEN DEPUTY SECRETARY OF ENERGY

FRANCIS S. BLAKE AND REPRESENTATIVES FROM ELECTRIC UTILITIES, OTHER INDUSTRY SECTORS, AND ENVIRONMENTAL GROUPS REGARDING: THE NEW SOURCE

REVIEW PROGRAM

July 10, 2001, Natural Resources Defense Council

David Hawkins, Natural Resources Defense Council.

July 18, 2001, Sinclair Oil Company

Clint Ensign, Klane Forsgren, Albert Knoll, Dick Wilson, Lee Lampton, Richard

Meeks, and Jim McCarthy.

July 23, 2001, Electric Reliability Coordinating Council

Glenn McCullough, TVA, Anthony J. ‘‘Tony’’ Alexander, FirstEnergy, Dwight Evans,

Southern Company, Bill Coley, Duke Power, Richard M. ‘‘Dick’’ Hayslip, Haley

Reeves Barbour, ERCC, Boyden Gray, ERCC, Marc Racicot, ERCC, Jeanette Pablo,

TVA, Michael Dowling, FirstEnergy, Karl Moor, Southern Company, David Mitchell,

Duke Energy, Henry Nickel, Hunton & Williams, Terry Grauman, Hunton & Williams, and Rene Eastman, Salt River Project.

July 25, 2001, The Coal-Based Generaton Stakeholder’s Group

Irl Englehardt, Peabody Energy, Tom Kuhn, Edison Electric Institute, Fred Palmer,

Peabody Energy, James Roberts, RAG American Coal, Tom Altmeyer, National Mining Association, Tony Kavanaugh, American Electric Power, and Quin Shea, Edison

Electric Institute.

August 28, 2001, West Associates

Robbie Aiken, Pinnacle West Capital Corporation, Renee Eastman, The Salt River

Project, Don Elliott, Paul, Hastings, Janofsky & Walker, Dave Lock, Platte River

Power Authority, C.V. Mathai, Pinnacle West Capital Corporation, Gloria Quinn,

Southern California Edison, David Steele, Strategic Issue Management Group, and

Linda Stuntz, representing PacifiCorp.

August 29, 2001, Wisconsin Energy Corporation

Richard Abdoo, Darnell Demasters, Larry Bruniel, and Pat Quinn.

September 10, 2001, Edison Electric Institute

Gerard M. Andreson, DTE Energy, William A. Coley, Duke Energy, E. Linn Draper,

American Electric Power, Dwight H. Evans, Southern Company, Robert A. Fenech,

Nuclear, Consumers Energy, Thomas R. Kuhn, Edison Electric Institute, Gary L.

Rainwater, AmerenCIPS, James E. Rogers, Jr., Cinergy Corporation, Skiles W.

Boyd, Detroit Edison, Ray Harry, Southern Company, Mary D. Kenkel, Cinergy Corporation, John D. Kinsman, Edison Electric Institute, Susan LaBombard, Ameren

Services, Alfonse S. Mannato, Jr., Edison Electric Institute, Quinlan J. Shea, III,

Edison Electric Institute, Daniel V. Steen, FirstEnergy Corporation, William F. Tyndall, Cinergy, and Steven Colovas, American Continental Group.

November 28, 2001, Air Quality Coalition

Kevin O’Donovan, Larisa Dobriansky, Red Cavaney, API, Tom Kuhn, Edison Electric Institute, Tom Altmeyer, National Mining Association, Henson Moore, American

Forest Paper Association, Rose Sanders, American Chemistry Council, Mark

Whittendon, National Association of Manufacturers, and James Schultz, American

Iron/Steel Institute.

96

FEDERAL ENERGY REGULATORY COMMISSION

OFFICE OF THE CHAIRMAN

February 28, 2002

The Honorable JOE BARTON, Chairman

Subcommittee on Energy and Air Quality

Committee on Energy and Commerce

U.S. House of Representatives

Washington, D.C. 20515-6115

DEAR CHAIRMAN BARTON: This is in response to Congressman Waxman’s request

for information asked at your subcommittee hearing on February 13, 2002. He

asked me to provide a list of my contacts with Enron officials during my terms as

a commissioner at the Federal Energy Regulatory Commission (FERC) and at the

Public Utility Commission of Texas (PUCT).

As the enclosed chronology details, I first met Ken Lay on May 29, 1996, when

I was invited to present an update on Texas telecommunications and electric utility

regulation to the members of the Governor’s Business Council, an advisory group

of Texas business executives that Mr. Lay had chaired since then-Governor Ann

Richards formed the council in the early 1990’s.

The enclosed chronology reflects my best recollection of all contacts I had with

Enron officials based in part on calendars I have maintained since January 1996.

1 do not have any records prior to January 1996. 1 have not maintained phone logs

during this period. Despite this, I believe that the contacts in the enclosed chronology represent all contacts with Mr. Lay and other officials, with the exception

of Steve Kean, with whom I may have talked by phone two or three times over the

seven-year period. From my records, the first occurrence of a meeting with Steve

Kean is in 1998, but I feel certain we had been introduced sometime prior to that

date.

In addition, the enclosed chronology does not list any meetings with non-executive

Enron staff or outside attorneys, nor does it reflect contacts I may have had at legislative hearings, PUC Open Meetings, public conferences or public speeches. The enclosed chronology does not reflect several meetings I had with former Enron de Mexico President Max Yzaguirre in Texas during May, 2001 to discuss the duties of a

PUCT Commissioner.

Finally, as you prefaced your oral request with a reference to letters Mr. Lay was

reported to have written endorsing my nomination to both my current and prior positions, the letter that actually played a role in getting me an interview with then

Governor Bush in early 1995 has not been in the public record. In 1991-1993 I

worked as a legal counsel to FERC Commissioner Jerry J. Langdon, a Democrat

from Midland, Texas who had known Governor Bush for many years. Martin L.

Allday, also from Midland, was Chairman of FERC under President George H.W.

Bush, including during the time I worked for Commissioner Langdon. Shortly after

the 1994 Texas gubernatorial election, these two men wrote a letter recommending

me to Governor-elect Bush for the open PUCT position. After his inauguration, Governor Bush called me in for an interview for the position on January 27, 1995. During my interview, I observed the enclosed letter from Chairman Allday and Commissioner Langdon on his desk. He offered me the position after our interview. I accepted it, and following my confirmation by the Texas Senate on February 22, 1995, was

sworn in by Governor Bush and joined the PUCT the following day.

I trust this information satisfies the request. Please contact me if I can provide

any further information.

Best regards,

PAT WOOD, III

Chairman

Enclosures

Cc: The Honorable Rick Boucher

97

98

(99)

THE ELECTRIC SUPPLY AND TRANSMISSION

ACT OF 2001

THURSDAY, DECEMBER 13, 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, Whitfield,

Ganske, Norwood, Shimkus, Fossella, Bryant, Walden, Tauzin (ex

officio), Boucher, Sawyer, Wynn, John, Waxman, Markey, Gordon,

McCarthy, and Dingell (ex officio).

Staff present: Jason Bentley, majority counsel; Sean

Cunningham, majority counsel; Andy Black, policy coordinator; Sue

Sheridan, minority counsel; and Eric Kessler, minority professional

staff.

Mr. BARTON. The subcommittee will come to order. Today is a

continuation of 2 days of hearings on the Electric Supply and

Transmission Act of 2001. These are legislative hearings on a pending bill, H.R. 3406, preparing to go to markup next week.

Today we have two panels. Our first panel is our executive

branch witnesses. We have the Honorable Isaac Hunt, who is the

Commissioner of the Securities and Exchange Commission; and we

have the Honorable Sandra Hochstetter, who is Chairman of the

Arkansas Public Service Commission. She is appearing on behalf of

the National Association of Regulatory Utility Commissioners, better known as NARUC.

Lady and gentleman, welcome. Your statement is in the record

in its entirety. We are going to recognize you, Commissioner Hunt,

to elaborate on your statement for 6 minutes; and then we will recognize the Chairwoman Hochstetter to elaborate on her statement.

Welcome to the subcommittee.

STATEMENTS OF HON. ISAAC C. HUNT, JR., COMMISSIONER,

SECURITIES AND EXCHANGE COMMISSION; AND HON. SANDRA L. HOCHSTETTER, CHAIRMAN, ARKANSAS PUBLIC

SERVICE COMMISSION, ON BEHALF OF NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS

Mr. HUNT. Thank you, Mr. Chairman, Ranking Member Boucher,

and members of the subcommittee. I am Commissioner Isaac C.

Hunt, Jr., of the U.S. Securities and Exchange Commission. I am

pleased to have this opportunity to testify before you on behalf of

100

the Commission about H.R. 3406 and the SEC’s continuing support

for repeal of the Public Utility Holding Company Act of 1935.

The SEC continues to support efforts to appeal the 1935 Act and

replace it with legislation that preserves certain important consumer protections. In considering repeal, it is useful to review both

the history that led Congress to enact the Act in 1935 and the

changes that have occurred in the electric industry since then.

During the first quarter of the last century misuse of the holding

company structure led to serious problems in the electric and gas

industry. Abuses arose, including inadequate disclosure of the financial position, and earning power of holding companies, unsound

accounting practices, excessive debt issuances, and abusive affiliate

transactions.

The 1935 Act was enacted to address these problems. In the

years following the passage of the Act the SEC worked to reorganize and simplify existing public utility companies in order to

eliminate the problems that Congress identified.

By the early 1980’s the SEC concluded that the 1935 Act had accomplished its basic purpose and that many aspects of it had become redundant with other Federal and State regulation.

In addition, changes in the accounting profession and in the investment banking industry had provided investors and consumers

with a range of protections unforeseen in 1935. Because of these

changes the SEC unanimously recommended that Congress repeal

the 1935 Act based on its conclusion that it was no longer necessary to prevent the recurrence of the abuses that led to the Act’s

enactment.

For a number of reasons, including the potential for abuse

through the use of a multi-State holding company structure, related concerns about consumer protection, and the lack of a consensus for change, repeal legislation was not enacted during the

early 1980’s.

Because of continuing changes in the industry, however, the SEC

continued to look at ways to administer the statute more flexibly.

In response to continuing changes in the utility industry during the

early 1990’s, then Chairman Arthur Levitt directed the SEC staff

in 1994 to undertake a study of the 1935 Act that culminated in

a June 1995 report.

That report again recommended repeal of the 1935 Act, or

amendment of the Act to give the SEC broad exemptive authority

to administer the Act.

The June 1995 report also outlined and recommended that the

Commission adopt a number of administrative initiatives to

streamline regulation under the Act. The SEC has implemented

many of these initiatives.

The utility industry has continued to undergo rapid change since

publication of the report. Congress facilitated some of these

changes. Specifically the Energy Policy Act of 1992 added statutory

exemptions to the 1935 Act, which allow holding companies to own

exempt wholesale generators and foreign utility companies and

allow registered holding companies to engage in a wide range of

telecommunication activities.

101

Based on the findings in 1995, as well as the continuing pace of

change in the industry, the SEC continues to recommend that Congress appeal the 1935 Act, subject to appropriate safeguards.

Repeal of the Act is not, however, a magical solution to the current energy problems in the United States. While it can be viewed

as a part of a needed response, repeal will not directly affect the

supply of electricity due to the fact that the Energy Policy Act, as

I just mentioned, removed restrictions under the Act for investment

and generation facilities.

Repeal of the Act would, however, remove provisions that prohibit utility companies from owning utilities in different parts of

the country, and generally prevent non-utility businesses from acquiring utilities in more than one State.

If the 1935 Act were repealed, the greatest impacts would probably be the continuing consolidation of the utility industry, as well

as the entry of new companies into the utility business.

Repeal of the Act would also eliminate any impediments that

exist to other regulators’ attempts to modernize regulation of the

utility industry. For example, the FERC recently implemented new

regulations designed to create independent regionally operated

transmission grids.

As a result of FERC’s new regulations, many utilities will cede

operating control, and in some cases actual ownership, of their

transmission facilities, to newly created entities.

The status of both the new entities that will control these systems, and the status of the utility companies that will own stakes

in the new entities, raise a number of issues under the 1935 Act.

Most notably, it has been asserted that the limits the Act places

on the other business activities of a utility holding company will

create obstacles for non-utility companies to invest in or operate

these new transmission entities.

The SEC believes that it has the necessary authority under the

Act to deal with the issues created by FERC’s restructuring without impeding that restructuring. Nevertheless, repeal of the Act

would effectively resolve these issues.

In conclusion, let me emphasize that the SEC takes seriously its

duties to administer faithfully the letter and spirit of the 1935 Act

and is committed to promoting the fairness, liquidity, and efficiency

of the United States securities markets.

By supporting conditional repeal of the 1935 Act, the SEC hopes

to reduce unnecessary regulatory burdens on America’s energy industry while providing adequate protections for energy consumers.

Mr. Chairman and Members, I would be pleased to answer your

questions.

[The prepared statement of Hon. Isaac C. Hunt, Jr. follows:]

PREPARED STATEMENT OF HON. ISAAC C. HUNT, JR., COMMISSIONER, U.S. SECURITIES

AND EXCHANGE COMMISSION

Chairman Barton, Ranking Member Boucher, and Members of the Subcommittee:

I am pleased to have this opportunity to testify before you on behalf of the Securities and Exchange Commission (‘‘SEC’’) regarding H.R. 3406 and the SEC’s continuing support for repeal of the Public Utility Holding Company Act of 1935

(‘‘PUHCA’’ or ‘‘1935 Act’’). In particular, because much of the regulation required by

PUHCA is either duplicative of that done by other regulators or unnecessary in the

current environment, the SEC continues to support repeal of PUHCA. H.R. 3406

would accomplish the goal of eliminating duplicative and unnecessary regulation. As

102

1See 1935 Act section 1(b), 15 U.S.C. § 79a(b). 2See Public Utility Holding Company Act Amendments: Hearings on S. 1869, S. 1870 and S.

1871 Before the Subcomm. On Securities of the Senate Comm. On Banking, Housing, and Urban

Affairs, 97th Cong., 2d Sess. 359-421 (statement of SEC). 3The study focused primarily on registered holding company systems. There were, at the time

of the study, 19 such systems. The 1935 Act was enacted to address problems arising from

multistate operations, and reflects a general presumption that intrastate holding companies and

certain other types of holding companies, which the 1935 Act exempts and which now number

119, are adequately regulated by local authorities. Despite their small number, registered holding companies account for a significant portion of the energy utility resources in this country.

As of September 30, 2001, the 27 registered holding systems (which included 35 registered holding companies) owned 133 electric and gas utility subsidiaries, with operations in 44 states, and

in excess of 2500 nonutility subsidiaries. In financial terms, as of September 31, 2001, the 27

registered holding company systems owned more than $417 billion of investor-owned electric

and gas utility assets and received in excess of $173 billion in operating revenues. The 27 registered systems represent over 40% of the assets and revenues of the U.S. investor-owned electric utility industry and almost 50% of all electric utility customers in the United States.

the SEC has testified in the past, however, we continue to believe that repeal should

be accomplished in a manner that also preserves important protections for consumers of utility companies in multistate holding company systems.

I. INTRODUCTION

To understand the SEC’s position on repeal of PUHCA, it is useful to review both

the history that led Congress to enact PUHCA in 1935 and the changes that have

occurred in the electric industry since then. During the first quarter of the last century, misuse of the holding company structure led to serious problems in the electric

and gas industry. These abuses included inadequate disclosure of the financial position and earning power of holding companies, unsound accounting practices, excessive debt issuances and abusive affiliate transactions. The 1935 Act was enacted to

address these problems.1 The Act also placed restrictions on the geographic scope

of holding company systems and limited holding companies to activities related to

their gas or electric businesses. Because of its role in addressing issues involving

securities and financings, the SEC was charged with administering the Act. In the

years following the passage of the 1935 Act, the SEC worked to reorganize and simplify existing public utility holding companies in order to eliminate abuses.

By the early 1980s, however, many aspects of the 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 1935. The SEC therefore concluded that the 1935 Act had accomplished its basic purpose and that many of 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.2

For a number of reasons—including the potential for abuse through the use of a

multistate holding company structure, related concerns about consumer protection,

and the lack of a consensus for change—repeal legislation was not enacted during

the early 1980s. Because of continuing change in the industry, however, the SEC

continued to look at ways to administer the statute more flexibly.

In response to continuing changes in the utility industry during the early 1990s,

and the accelerated pace of those changes, in 1994, then-Chairman Arthur Levitt

directed the SEC’s Division of Investment Management to undertake a study, under

the guidance of then-Commissioner Richard Y. Roberts, to examine the continued

vitality of the 1935 Act. The study was undertaken as a result of the developments

noted above and the SEC’s continuing need to respond flexibly in the administration

of the 1935 Act. The purpose of the study was to identify unnecessary and duplicative regulation, and at the same time to identify those features of the statute that

remain appropriate in the regulation of the contemporary electric and gas industries.3

The SEC staff worked with representatives of the utility industry, consumer

groups, trade associations, investment banks, rating agencies, economists, state,

local and federal regulators, and other interested parties during the course of the

study. In June 1995, a report of the findings made during the study (‘‘Report’’) was

issued. The staff’s Report outlined the history of the 1935 Act, described the thencurrent state of the utility industry as well as the changes that were taking place

in the industry, and again recommended repeal of the 1935 Act. The Report also

103

4Sections 32 and 33 of the Act, which were added to it by the Energy Policy Act of 1992, permit, subject to certain conditions, the ownership of exempt wholesale generators and foreign

utility companies. The impact of section 32 on the electricity industry is discussed in more detail

below. Section 34, which was added by the Telecommunications Act of 1996, permits holding

companies to acquire and retain interests in companies engaged in a broad range of telecommunications activities. 5The Report recommended rule amendments to broaden exemptions for routine financings by

subsidiaries of registered holding companies (see Holding Co. Act Release No. 26312 (June 20,

1995), 60 FR 33640 (June 28, 1995)) and to provide a new exemption for the acquisition of interests in companies that engage in energy-related and gas-related activities (see Holding Co. Act

Release No. 26667 (Feb. 14, 1997), 62 FR 7900 (Feb. 20, 1997) (adopting Rule 58)). In addition,

the Report recommended and the SEC has implemented changes in the administration of the

Act that would permit a ‘‘shelf’’ approach for approval of financing transactions. For example,

during calendar year 2000, all eleven of the new registered holding companies received multiyear financing authorizations that included a wide range of debt and equity securities. The Report further recommended a more liberal interpretation of the Act’s integration requirements

which has been carried out in our merger orders. The Report also recommended an increased

focus upon auditing regulated companies and assisting state and local regulators in obtaining

access to books, records and accounts. Six state public utility commissions participated in the

last three audits of the books and records of registered holding companies. 6We do, however, have a concern about coupling PUHCA repeal with provisions that would

provide unique regulatory benefits to small groups of companies under other statutes that the

Commission administers. Section 125 of H.R. 3406 raises this concern. Section 125 appears to

address a unique set of circumstances that give rise to questions about the status of an issuer

as an ‘‘investment company’’ under the Investment Company Act of 1940. The Investment Company Act already provides the Commission with significant flexibility to deal with status issues.

We therefore see no reason for legislation to deal with such issues. More broadly, we are prepared to work with any utility holding companies currently relying on the exemption from the

definition of ‘‘investment company’’ provided by section 3(c)(8) of the Investment Company Act

if repeal of PUHCA leads to questions about their status under the Investment Company Act. 7 As we have testified previously, however, there is a continuing need to protect consumers.

Although deregulation is changing the way utilities operate in some states, electric and gas utilities have historically functioned as monopolies whose rates are regulated by state authorities.

Some regulators subject these rates to greater scrutiny than others. There is a continuing risk

that a monopoly, if left unguarded, could charge higher rates and use the additional funds to

subsidize affiliated businesses in order to boost its competitive position in other markets. Thus,

so long as electric and gas utilities continue to function as monopolies, the need to protect

against this type of cross-subsidization will remain. In view of the sophistication of contemporary securities regulation, and analysis by the public and private sectors, the best means of

guarding against cross-subsidization is likely to be audits of books and records and federal oversight of affiliate transactions. The SEC therefore continues to recommend the enactment of legislation to provide necessary authority to the FERC and the state public utility commissions relating to affiliate transactions, audits and access to books and records, for the continued protection of utility consumers. More broadly, repeal of the 1935 Act may be accomplished either separately or as part of a more comprehensive package of energy reform legislation. The SEC does

not have a preference as to whether the Act is repealed on a stand-alone basis or as part of

broader, energy-related legislation. 8See National Energy Policy: Report of the National Energy Policy Development Group at 5-

12 (May 2001) (recommending the reform of ‘‘outdated federal electricity laws, such as the Public Utility Holding Company Act’’).

outlined and recommended that the Commission adopt a number of administrative

initiatives to streamline regulation under the Act.

Since the report was published, the utility industry in the United States has continued to undergo rapid change. Some of these changes have been facilitated by

Congress. Specifically, as a result of recently-created statutory exemptions, anyone,

including registered and exempt holding companies, is now free to own exempt

wholesale generators and foreign utilities and to engage in a wide range of telecommunication activities.4 In addition, the SEC has implemented many of the administrative initiatives that were recommended in the Report.5

III. REPEAL OF PUHCA

Based on the findings in the Report as well as the continuing pace of change in

the utility industry, the SEC continues to recommend that Congress repeal the 1935

Act subject to appropriate safeguards.6 As the Report stated, regulation under the

1935 Act that affects the ability of holding company systems to issue securities, acquire other utilities, and acquire nonutility businesses is largely redundant in view

of other existing regulation and controls imposed by the market.7 Repealing the Act

is not, however, a magic solution to the current problems facing the U.S. utility industry. PUHCA repeal can be viewed as part of the needed response to the current

energy problems facing the country—notably, the Administration’s recent report on

energy policy includes a recommendation that PUHCA be repealed.8 But repeal of

the Act will not, for example, have any direct effect on the supply of electricity in

104

9While no Commission approval is required for the acquisition of an EWG as a result of the

Energy Policy Act, Commission approval is required, for example, before a registered holding

company can issue securities to finance the acquisition of, or guarantee securities issued by, an

EWG. Under the Energy Policy Act, Congress directed the SEC to adopt rules with respect to

registered holding companies’ EWG investments. Pursuant to these requirements, in 1993 the

SEC adopted rules 53 and 54 to protect consumers and investors from any substantial adverse

effect associated with investments in EWGs. Rule 53 created a partial safe harbor for EWG

financings. Rule 53 describes circumstances in which the issue or sale of a security for purposes

of financing the acquisition of an EWG, or the guarantee of a security of an EWG, will be

deemed not to have a substantial adverse impact on the financial integrity of the system. For

transactions outside the Rule 53 safe harbor, a registered holding company must obtain SEC

approval of the amount it wishes to invest in EWGs. The standards that the SEC uses in assessing applications of this type are laid out in Rule 53(c). 10See, e.g., National Energy Policy: Report of the National Energy Policy Development Group

at 5-11 (May 2001) (noting that ‘‘[m]ost new electricity generation is being built not by regulated

utilities, but by independent power producers’’). 11See FERC Order 2000, ‘‘Regional Transmission Organizations,’ 65 FR 810 (Jan. 6, 2000)

(codified at 18 C.F.R. § 35.34). 12Order 2000, 65 FR at 811.

the United States. The Act does not, for example, currently place significant restrictions on the construction of new generation facilities. As part of the Energy Policy

Act, Congress amended the Act in 1992 to remove most restrictions on the ability

of registered and exempt holding companies (as well as nonutility companies) to

build, acquire and own generating facilities anywhere in the United States. These

types of facilities—exempt wholesale generators or ‘‘EWGs’’—are not considered to

be electric utility companies under PUHCA, and, in fact, are exempt from all provisions of PUHCA. The only limitation that remains under PUHCA is one imposed

by Congress on registered holding companies—namely, that a registered company

may not finance its EWG investments in a way that may ‘‘have a substantial adverse impact on the financial integrity of the registered holding company system.’’ 9

In short, the Energy Policy Act removed restrictions on the ability of registered and

exempt holding companies to build, acquire and own generating facilities anywhere

in the United States. As a result, a number of registered holding companies now

have large subsidiaries that own generating facilities nationwide. Numerous other

companies not subject to the Act have also entered the generation business.10

Instead, repeal of the Act would eliminate regulatory restrictions that prohibit

utility holding companies from owning utilities in different parts of the country and

that prevent nonutility businesses from acquiring regulated utilities. In particular,

repeal of the restrictions on geographic scope and other businesses would remove

the impediments created by the Act to capital flowing into the industry from sources

outside the existing utility industry. Repeal would thus likely have the greatest impact on both the continuing consolidation of the utility business as well as the entry

of new companies into the utility business.

Repeal of the Act would also eliminate any impediments that exist to other regulators’ attempts to modernize regulation of the utility industry. For example, during

the past year, questions have arisen about how the Act will impact the ability of

the Federal Energy Regulatory Commission (‘‘FERC’’) to implement its plans to restructure the control of transmission facilities in the United States.11 Specifically,

in order to ‘‘ensure that electricity consumers pay the lowest price possible for reliable service,’’ the FERC recently implemented new regulations designed to create ‘‘independent regionally operated transmission grids’’ that are meant to ‘‘enhance

the benefits of competitive electricity markets.’’ 12 As a result of FERC’s new regulations, many utilities will cede operating control—and in some cases, actual ownership—of their transmission facilities to newly-created entities. The status of these

entities, as well as the status of utility systems or other companies that invest in

them, raise a number of issues under the Act. Most prominently, it has been asserted that the limits the Act places on the other businesses in which a utility holding company can engage will create obstacles for nonutility companies that may

wish to invest in or operate these new transmission entities.

The SEC believes it has the necessary authority under the Act to deal with the

issues created by the FERC’s restructuring without impeding that restructuring.

Nonetheless, repeal of the Act would effectively resolve these issues.

The SEC takes seriously its duties to administer faithfully the letter and spirit

of the 1935 Act and is committed to promoting the fairness, liquidity, and efficiency

of the United States securities markets. By supporting conditional repeal of the

1935 Act, the SEC hopes to reduce unnecessary regulatory burdens on America’s energy industry while providing adequate protections for energy consumers.

Mr. BARTON. Thank you, Commissioner.

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We would now like to hear from the Chairwoman of the Arkansas Public Services Commission, the Honorable Sandra

Hochstetter. Your statement is in the record, and we would ask

that you elaborate for 6 minutes.

STATEMENT OF HON. SANDRA L. HOCHSTETTER

Ms. HOCHSTETTER. That you, Mr. Chairman, and members of the

subcommittee. I am here today on behalf of NARUC, and we would

like to commend you for your tireless work on the issue of electric

restructuring.

We would also like to thank you for including NARUC in the discussions and process since you have been chairman of this subcommittee. Our testimony here today is a mixture of concerns, as

well as compliments.

To begin with, NARUC would like to say that we are pleased

that you did not include a section that would expand FERC jurisdiction to include unbundled retail transmission service in H.R.

3406.

We do believe that the issue of transmission jurisdiction is now

properly before the Supreme Court. Accordingly, we recommend

that Congress allow the Court to continue to rule on transmission

jurisdiction issues prior to taking any legislative action.

Second, we would like to thank you for Section 605 with respect

to retail competition. However, we do feel that you could go a bit

further to clarify that a State can determine not to implement retail competition.

The issue of whether or not that it makes economic sense for any

particular State to adopt retail competition is clearly a unique

State-specific factual inquiry that should depend upon a quantitative analysis of cost versus benefit.

We appreciate the difficulties with divergent points of view that

you have confronted to get the legislation to this point. However,

we feel like we must express significant concern with H.R. 3406 as

it is currently drafted.

First, as to interconnection standards. While NARUC supports

national technical power quality standards adopted by an appropriate technical standards organization, we must oppose the provisions found in Section 101 which provides for Federal preemption

of distribution of interconnection terms, conditions, costs, and

rates.

FERC should properly focus on transmission interconnection

standards, and not distribution. We consider this to be a safety and

reliability issue, as well as a generation supply and potential cost

shifting issue, and therefore State and local officials, and retail customers, should be responsible for working out those details.

As to net metering, while NARUC appreciates the efforts of this

committee to permit States to establish additional requirements to

those net metering standards promulgated by FERC, we must express concern and oppose the federally preemptive provisions found

in Section 102.

Once again that metering is a retail jurisdiction issue, subject to

State jurisdiction. With respect to Section 103, we support demand

management programs, but believe that retail demand reduction

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programs should be developed by the States under traditional State

jurisdiction over retail services.

Once again, these are retail consumer programs. We do feel,

however, that Congress could be helpful in the demand reduction

area by doing things in the following areas. Congress can promote

energy efficiency programs through the use of increased funding,

tax credits, in the setting of increasingly more efficient national

building codes and standards for motors, lighting, and appliances.

And additionally Congress should continue to provide funding for

energy efficiency and conservation for low and moderate income

consumers, as these are appropriate Federal programs.

On the issue of a regional transmission organization, NARUC believes that an RTO formation can provide benefits to the market

and to all consumers provided that the policies that establish RTOs

will enhance the Federal-State partnership, and provide for truly

independent RTO governance and operation with appropriate Federal and State oversight.

The Arkansas Commission, as a matter of fact, has been one of

the strongest State Commission supporters of FERC’s efforts to facilitate the formation of RTOs. However, we remain concerned that

an appropriate role for State Regulators in both RTO creation and

operation has not been formalized.

In addition, there are certain important transmission pricing

issues that need to be resolved. H.R. 3406 does not advance State

participation in any aspect of RTO governance or decisionmaking.

The mandatory participation provisions of H.R. 3406 also fail to

recognize and take into consideration that currently under State

laws utilities are generally required to obtain State Commission

approval to participate in RTOs if the membership would require

transfer of assets into the RTO.

In addition, we believe that Congress should require FERC to

recognize States’ interests in actively reviewing questions of RTO

governance. These areas would include the development and revision of market rules, reliability in planning, access to RTO market

monitoring information, and development with Federal authorities

of market power mitigation programs.

With respect to transmission reliability, NARUC has consistently

agreed that reliability should be addressed in any Federal electricity legislation. However, we believe that while this needs to

take place on a Federal level, the law should also preserve the authority of the States to set more rigorous standards when deemed

to be in the public interest.

Congress should expressly include in the legislation a savings

clause that would protect existing State authority to ensure reliable transition service, as well as a regional advisory role for the

State.

State officials ultimately will be held accountable by the public

when the lights fail to stay on. So, because of this responsibility,

we believe that we need to act effectively to ensure uninterrupted

electricity service.

With respect to siting authority, we would strongly oppose any

legislative provisions that contemplate Federal siting authority.

While the Arkansas Commission certainly understands the basis

for the recommendation by some parties that transmission siting

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authority should be vested in FERC, we would recommend that the

States, utilizing where appropriate regional mechanisms, continue

to have primary siting authority.

And then if such regional approaches once employed prove inadequate or fail, then the question of FERC’s role can certainly be revisited at that time. In conclusion, we would like to thank you

again for our ability to participate in this process.

Unfortunately, we can’t support the bill as it is currently drafted.

We don’t believe that a compelling case has been made for Federal

preemption of State retail authority. Congress can and should do

much to help the wholesale market and focus on those issues.

But it should stop short of usurping State regulatory jurisdiction

over retail matters. Thank you again, and I would be happy to answer any questions that you may have.

[The statement of Hon. Sandra L. Hochstetter follows:]

PREPARED STATEMENT OF HON. SANDRA L. HOCHSTETTER, CHAIRMAN, ARKANSAS

PUBLIC SERVICE COMMISSION ON BEHALF OF THE NATIONAL ASSOCIATION OF REGU- LATORY UTILITY COMMISSIONERS

Mr. Chairman and Members of the Subcommittee: My name is Sandra L.

Hochstetter. I am the Chairman of the Arkansas Public Service Commission. I am

here today on behalf of the National Association of Regulatory Utility Commissioners, commonly known as NARUC. I greatly appreciate the opportunity to appear

before the House Energy and Commerce Subcommittee on Energy and Air Quality

and 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 ensure 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.

Mr. Chairman, NARUC commends you for your tireless work on the issue of electric restructuring. We would also like to thank you and your staff for including

NARUC in the discussions and process since you have been Chairman of this Subcommittee. You have been willing to speak to our members on numerous occasions

and have been consistently willing to listen to our concerns.

NARUC is pleased that you did not include a section that would expand FERC

jurisdiction to include unbundled retail transmission service in H.R. 3406. We believe that the issue of transmission jurisdiction is now properly before the Supreme

Court. Accordingly, NARUC continues to recommend that Congress allow the Court

to rule on transmission jurisdiction issues prior to taking any legislative action. We

would also like to take this opportunity to thank you for section 605, which clarifies

that this legislation will not require a State to implement retail competition or require the unbundling of retail transmission.

Mr. Chairman, while we do appreciate the difficulties with divergent points of

view you have confronted to get this legislation to this point, NARUC must express

our significant concerns with H.R. 3406 as it is currently drafted. NARUC is troubled by the great extent to which the bill intrudes into areas now regulated by the

States.

I would now like to share NARUC’s views on specific provisions found in H.R.

3406. In some instances the NARUC positions may be at variance with the view of

the Arkansas Commission and I will note these distinctions.

INTERCONNECTION; NET METERING; DEMAND MANAGEMENT

While NARUC supports national technical power quality standards adopted by

appropriate technical standards organizations, we must oppose the provisions found

in section 101 which provide for the Federal pre-emption of distribution interconnection terms, conditions, costs and rates. NARUC believes that Congress should support the States’ authority to work with local distribution utilities and other stakeVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00111 Fmt 6601 Sfmt 6621 E:\HEARINGS\77118 pfrm09 PsN: 77118
108

holders, including the renewable and small generating community, to provide interconnection arrangements for self-generation units that utilize the local distribution

network. NARUC considers this a safety and reliability issue, as well as a generation supply and potential cost shifting issue, and therefore State and local officials

and retail customers should be responsible for working out cooperative solutions

that best fit the specific circumstances of connection to a distribution system. This

way the safety, reliability, and economic impact concerns of a particular project and

system are not jeopardized by a generic rule promulgated without the benefit of the

project and systems unique specifications.

While NARUC appreciates the efforts to permit States to establish additional requirements to those net metering standards promulgated by FERC, NARUC must

also oppose the Federally pre-emptive provisions found in section 102. Once again

we must stress that net metering is a retail issue subject to State jurisdiction.

NARUC 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 diversity. Therefore, the bill should be amended to

promote State implementation of net metering programs of the States’ own choosing, in the States’ own time, rather than being forced to implement minimum standards of FERC’s choosing.

With regard to section 103, NARUC supports demand management programs, but

believes that retail demand reduction programs should be developed by the States

under traditional State jurisdiction over retail services. Congressional action to provide for more robust and effective demand-side options, without FERC pre-emption

of the States, can be accomplished.

For example, Congress could promote energy efficiency programs through increased funding, tax credits, and the setting of increasingly more efficient national

building codes and standards for motors, lighting and appliances.

Congress could also promote planning strategies for maintaining a proper balance

between supply and load, which includes demand-side management techniques (including price-responsive demand mechanisms), intermittent and renewable resources, conservation/energy efficiency programs, as well as traditional supply and

transmission options. One good way for Congress to act in this area would be to authorize willing States to address these issues on a regional basis. I would note that

regulators in Arkansas, Louisiana, and Mississippi and the Entergy Corporation

supported legislation introduced by Senator Dale Bumpers in the early 1990’s,

which would have authorized States that regulated electric utilities operating under

PUHCA to conduct integrated resource planning on a regional basis. I believe such

approaches are even more appropriate now than ten years ago.

Finally, Congress should continue to provide funding for energy efficiency and

conservation for low and moderate income consumers through programs that provide education, weatherization, housing improvements, installation of higher efficiency appliances, and similar usage reduction measures.

Taken together, these options could help lower costs to consumers, reduce load,

conserve valuable resources, and lower costs to utilities, while spreading the costs

and benefits to all retail ratepayers, rather than providing benefits to just large industrial customers.

PUHCA

Congress should reform the Public Utility Holding Company Act (PUHCA), but in

doing so, should allow the States to protect the public through maintaining effective

oversight of holding company practices and expanding State access to holding company books and records, independent of any similar authorities granted to the federal regulatory bodies. NARUC believes that Subtitle B of H.R. 3406 fits within our

criteria for support.

PURPA

NARUC supports legislation to lift PURPA’s purchase requirement where a State

determines that generating markets are competitive or that the public interest in

resource acquisition is protected. However, NARUC opposes pre-empting State jurisdiction by granting FERC authority to order the recovery of costs in retail rates or

to otherwise limit State authority to require mitigation of PURPA contract costs. It

is NARUC’s position that the States that have already approved these contracts are

in a better position to address this issue than FERC.

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In section 133, FERC is directed to promulgate and enforce regulations to provide

for recovery of PURPA costs. Therefore, NARUC cannot support the PURPA provisions found in H.R. 3406.

REGIONAL TRANSMISSION ORGANIZATIONS (RTO)

On the important issue of RTOs, NARUC believes that RTO formation can provide benefits to the market and all customers, provided the policies that establish

RTOs enhance the Federal-State partnership and provide for truly independent

RTO governance and operation with appropriate Federal and State oversight. The

Arkansas Commission has been one of the strongest State commission supporters

of FERC’s efforts to facilitate the formation of RTOs. However, we remain concerned

that an appropriate role for State regulators in both RTO creation and operation

has not been formalized.

Unfortunately, H.R. 3406 does not advance State participation in any aspect of

RTO governance or decision making. The mandatory participation provisions of H.R.

3406 fail to recognize that currently, under State laws, utilities are generally required to obtain State commission approval to participate in RTOs, if RTO membership requires the utility to relinquish control or divest the transmission facilities

held in the retail rate base. For instance, the utilities whose facilities comprise existing RTOs, which are ‘‘grandfathered’’ in section 202 (h) (6) on page 64, received

State commission approval to participate in those RTOs.

Congress should require FERC, in cooperation with the States, to determine

boundaries, structure, and functions for regional transmission organizations (RTO).

The RTOs should be given sufficient authority to perform regional grid management

and expansion, while providing for efficient system operations that are built and operated in the most economical, reliable and environmentally acceptable way in order

to realize shortterm and longterm reliability as well as facilitate efficient wholesale

market transactions.

Congress should require FERC to recognize the States’ interest in actively reviewing questions of RTO governance. This would include: development (and revision)

of market rules; reliability and planning; access to RTO market monitoring information; and development, with federal authorities, of market power mitigation programs.

In addition, Congress should require that RTOs or other regional bodies have sufficient authority to conduct long term planning for their regions and, working with

the States and transmission owners, implement long-term planning that should:

1. Recognize the need for new investment in transmission facilities;

2. Assures that reliability is not compromised;

3. Reduces any decisional role for entities with unreasonable market power; and

4. Provides a cost allocation method that is objective, non-discriminatory, weighs environmental and societal risk, and ensures that costs are allocated in a proportionate manner to those that receive the benefits.

TRANSMISSION RELIABILITY

In numerous communications with this Subcommittee, both in letters and in testimony, NARUC has consistently and repeatedly expressed the belief that reliability

should be addressed in any Federal electricity legislation. Our position as to what

policies must be included in any reliability legislation have been equally consistent.

NARUC believes that Congress should mandate compliance with industry-developed reliability standards for the bulk power system, while preserving the authority

of the States to set more rigorous standards when deemed to be in the public interest. Congress should also ensure that States continue to have the authority to establish effective price signals that allow consumers to choose alternative levels of reliability and power quality. To that end, Congress should expressly include in legislation: (1) a savings clause to protect existing State authority to ensure reliable transmission service, and (2) a regional advisory role for the States.

We would like to thank you Mr. Chairman for including in Title III of H.R. 3406

the savings provisions that were substantially the similar to those savings provision

included in S.2071 which was passed by the Senate during the 106th Congress.

However, I would also like to bring to your attention that H.R. 3406 does not address a regional advisory role for the States, which is especially critical to western

States.

Reliability language should not fail to provide a continuing role for States in ensuring reliability of all aspects of electrical service, including generation, transmission, and power delivery services or results in FERC’s preemption of State authority to ensure safe and reliable service to retail consumers. State officials will

be held accountable by the public when the lights fail to stay on. Because of this

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responsibility, State officials and regulators are particularly concerned that they be

able to act effectively to ensure uninterrupted electricity service.

TRANSMISSION SITING AUTHORITY

NARUC strongly opposes any legislative provisions that contemplate Federal

siting authority. States should retain authority to site electric facilities, while Congress should support the States’ authority to negotiate and enter into cooperative

agreements or compacts with federal agencies and other States to facilitate the

siting and construction of electric transmission facilities as well as to consider alternative solutions to such facilities, such as distributed generation and energy efficiency. Here again Congress should authorize the development of regional approaches in this area.

Giving FERC eminent domain and siting authority is not a panacea. Beyond the

practical matter of the time FERC would need to be prepared to assume this new

role and the additional funds that Congress would need to appropriate to accomplish

this, NARUC does not believe that many examples actually exist, beyond anecdotal

evidence, where a State action (or inaction) is solely responsible for unreasonably

preventing a needed transmission project. Further, the numbers of examples that

may exist do not warrant Federal pre-emption in this area.

In addition, there may be alternatives to a specific transmission project. A State

may determine that a transmission line is not necessary if, for example, distributed

generation is used instead, thereby saving valuable resources and protecting citizens

from the unnecessary effects of the transmission project.

While the Arkansas Commission does understand the basis for the recommendation by some parties that transmission siting authority should be vested in the

FERC, we would recommend that the States, utilizing where appropriate regional

mechanisms, continue to have primary siting authority. If such regional approaches

once employed prove inadequate, the question of FERC’s role can certainly be revisited.

CONSUMER PROTECTION

NARUC’s members have a long standing commitment to consumer protection. Indeed, State utility commissions were established to ensure that consumers received

essential services without fear of predatory practices and pricing. Therefore, we

compliment you for your attention, Mr. Chairman, to the consumer issues that are

found in H.R. 3406. However, while we favor strong consumer protection measures,

NARUC does not believe that pre-empting the States by Federally legislating retail

consumer protections is the way to go. The States are more capable in dealing with

abuses that occur at the retail level, and in fact many, if not most, of the States

that have moved to restructure and unbundled their retail electric markets have in

place regulations or laws that address the consumer issues found in H.R. 3406. In

short, Congress should not limit State authority to prescribe and enforce laws, regulations or procedures regarding consumer protection.

NARUC believes that it would be helpful if Congress would reinforce the States’

authority to require all load serving entities to disclose generation sources and accompanying environmental impacts. Additionally, Congress should require regional

transmission organizations, system operators, reliability counsels and other regional

agencies to adopt policies that allow public access to information necessary to enable

adequate monitoring of energy markets, while also providing protection for information demonstrated to be commercially sensitive.

Mr. Chairman, in conclusion, NARUC would again like to thank you for your efforts on this legislation and for offering us an opportunity to express our views. For

your review and information I have included, as part of this testimony

(Attachment1), a copy of the NARUC National Electricity Policy that was adopted

by the NARUC membership at our Annual Convention in November.

Unfortunately, NARUC cannot support H.R. 3406 as drafted. We do not believe

that a compelling case has been made for Federal pre-emption of State retail authority. It is the position of NARUC that Congress can do a great deal to advance

and enhance the wholesale market without risking possible harm to those retail institutions that have heretofore not experienced the major dislocations that have occurred in wholesale markets.

NARUC would welcome the opportunity to work with you and your office prior

to the Subcommittee markup to address the concerns raised here today. I would be

happy to answer any questions you may have.

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ATTACHMENT 1

NARUC’S NATIONAL ELECTRICITY POLICY

I. GENERAL PRINCIPLES

The nation’s energy policy should assure adequate, reasonably priced, reliable,

safe, and environmentally sound electricity. To achieve this goal, Federal legislation

should:

1. Encourage additional fuel- and technology-diverse supply resources to meet the

nation’s growing energy demands;

2. Promote demand-side management to achieve the most efficient use of electricity;

3. Provide for reliability standards and their enforcement;

4. Assure open and effective regional wholesale markets;

5. Minimize the environmental impacts of energy generation, delivery and use; and

6. Respect, preserve and strengthen the States’ traditional roles in regulating distribution systems, planning, siting approval, reliability assurance, and consumer protection.

II. DIVERSE, PLENTIFUL AND ENVIRONMENTALLY RESPONSIBLE ENERGY SUPPLIES

A. Congress should encourage environmentally responsible electricity generation

and the increased use of renewable energy technologies as a tool to achieve fuel

diversity and greater energy security.

B. Congress should encourage domestic exploration and production of new natural

gas supplies and expansion of natural gas transmission and delivery infrastructure in an environmentally sound manner at reasonable costs, but should avoid

an overreliance on natural gas for new electric generation.

C. Coal fuels a significant portion of the nation’s electric power and is expected to

do so for the foreseeable future. However, because of coal’s air emissions, it is

important that Congress and States work together to reduce such air emissions

and encourage development of lowpolluting central station generation, including

clean-coal technology.

D. Congress or the Administration should increase the efficiency for licensing and

relicensing processes of hydroelectric and nuclear facilities, without compromising substantive environmental and safety standards.

E. Although nuclear facilities create long-term radioactive waste problems, they

should continue to play an important part of our national electric supply portfolio because they provide a significant portion of the nation’s electricity supply

and do not produce air emissions.

F. Congress needs to fulfill its commitment to provide the long-term storage of spent

nuclear fuel very quickly. To accomplish this, Congress should ensure that the

Nuclear Waste Fund revenue and appropriations are managed responsibly and

used only for the establishment of a permanent repository. Pending development of a permanent repository, it is better to store spent fuel at one (or more)

central location(s) on an interim basis than to leave it at reactor sites.

G. The States support ongoing and renewed efforts to maintain the security of nuclear power plants and prevent the proliferation of weapons-grade byproducts.

H. Congress should enact legislation to lift the Public Utility Regulatory Policies

Act’s mandatory purchase requirement, but should allow the States to determine appropriate measures to protect the public interest in resource acquisition

and to address mitigation and cost recovery issues associated with these contracts.

III. DEMAND MANAGEMENT

A. Congress should promote energy efficiency programs through increased funding,

tax credits, and the setting of increasingly more efficient national building codes

and standards for motors, lighting and appliances.

B. Congress should promote planning strategies for maintaining a proper balance

between supply and load that includes demand-side management techniques

(including price-responsive demand mechanisms), intermittent and renewable

resources, conservation/energy efficiency programs, as well as traditional supply

and transmission options.

C. Congress should continue to provide funding for energy efficiency and conservation for low and moderate income consumers through programs that provide

education, weatherization, housing improvements, installation of higher efficiency appliances, and similar usage reduction measures.

112

IV. RTOS, RELIABILITY, PLANNING & DELIVERY INFRASTRUCTURE

A. Regional Transmissions Organizations

1. Congress should require the FERC, in cooperation with the States, to determine

boundaries, structure, and functions for regional transmission organizations

(RTO).

2. Congress should require the FERC to give RTOs sufficient authority to perform

regional grid management, expansion, and efficient system operations that are

built and operated in the most economical, reliable and environmentally acceptable way to realize shortterm as well as longterm reliability and facilitate efficient wholesale market transactions.

3. Congress should require the FERC to recognize States’ rights to active participation in RTO governance. This would include development (and revision) of market rules, reliability and planning, access to RTO market monitoring information, development, with federal authorities, of market power mitigation programs.

B. Long-term planning

1. Congress should require that RTOs or other regional bodies have sufficient authority to conduct long term planning for their regions and, working with the

States and transmission owners, implement long-term planning that should:

(a) Take into account fuel diversity including renewables resources;

(b) Recognize the need for new investment in generation and transmission facilities that provides adequate reserve margins;

(c) Assure that reliability is not compromised by resource imbalances;

(d) Reduce any decisional role for entities with unreasonable generation or

transmission market power;

(e) Include broad public participation and collaboration among market participants and third party participation in offering competitive alternatives such

as demand-side and distributed generation options;

(f) Develop a cost allocation method that is objective, non-discriminatory, weighs

environmental and societal risk, and associates costs with benefits;

(g) Allow the use of competition, subject to appropriate regulatory oversight, to

encourage robust wholesale markets; and

(h) Assure adequate resources in all regions of the nation.

2. Congress should support the States’ authority over local distribution utilities to

provide interconnection arrangements for selfgeneration and generation units

that utilize the local distribution network.

C. Reliability

1. Congress should mandate compliance with industry-developed reliability standards on the bulk power system that include adequate reserve margins and preserve the authority of the States to set more rigorous standards when deemed

to be in the public interest.

2. Congress should ensure that States continue to have the authority to establish

effective price signals that allow consumers to choose alternative levels of reliability and power quality.

D. Delivery Infrastructure

1. States should retain authority to site electric facilities, while Congress should

support the States’ authority to negotiate and enter into cooperative agreements

or compacts with federal agencies and other States to facilitate the siting and

construction of electric transmission facilities as well as to consider alternative

solutions to such facilities, such as distributed generation and energy efficiency.

2. Congress should pursue policies that promote and ensure pipeline safety, and

streamline existing siting processes to increase administrative efficiency, including the coordination of all federal, State and local participation in these processes, without compromising substantive environmental and safety standards.

V. ENERGY MARKETS

A. Access to Information

1. Congress should recognize that States implementing competitive retail markets

and those with traditional regulatory structures, and Federal, State and regional agencies and organizations overseeing the development of wholesale energy markets require comprehensive and timely market information. Congress

should adopt policies that safeguard public access to information necessary to

enable the monitoring of these markets, while also providing protection for information demonstrated to be commercially, or otherwise, sensitive.

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B. Retail Markets

1. Congress should not interfere with the States’ authority over all aspects of retail

service including the authority to determine just and reasonable retail rates,

and those retail rates designed to encourage reductions in peak demand and to

encourage demand-side management options.

2. Congress should not mandate retail electricity competition.

C. Wholesale markets

1. Congress should require the FERC to promulgate clear and consistently applied

market rules that foster investment in generation, transmission and demandside management resources.

2. Congress should mandate effective and independent monitoring of the wholesale

electricity markets and empower the relevant States and federal agencies with

authority to investigate, enforce, and remedy problems resulting from the exercise of market power or other abusive behavior that distorts market operations.

Such remedies should include the use of structural remedies, codes of conduct,

or affiliate rules.

3. Congress should preserve a State’s ability to require that a utility’s retained generation be used to serve native load.

VI. ENVIRONMENTAL PROTECTION

A. Congress should assure that State and federal energy and environmental policies

be coordinated and complementary.

B. Congress should address all air emissions from all electric power generation in

ways that: 1) minimize adverse environmental impacts; 2) are comprehensive

and synchronized to reduce regulatory costs; 3) rely, to the extent possible, on

market-based trading mechanisms, and 4) identify, to the extent possible, the

net impact of resource decisions, including external factors, on public health,

the environment and the economy.

C. Congress should assist States and utilities to establish programs to phase out

power plants grandfathered under the Clean Air Act with facilities that utilize

clean coal technology or by other means, in a way that preserves the integrity

of the bulk power system and minimizes the economic impact on local areas.

VII. CONSUMER PROTECTION

A. Congress should not limit State authority to prescribe and enforce laws, regulations or procedures regarding consumer protection.

B. Congress should reinforce the States’ authority to require all load serving entities

to disclose generation sources and accompanying environmental impacts.

C. Congress should address the preservation of public benefits in any electric industry restructuring legislation. Societal costs and benefits should be studied prior

to the adoption of any particular implementation or funding mechanism.

D. Congress should require regional transmission organizations, system operators,

reliability counsels and other regional agencies to adopt policies that allow public access to information necessary to enable adequate monitoring of energy

markets, while also providing protection for information demonstrated to be

commercially sensitive.

E. Congress should reform the Public Utility Holding Company Act (PUHCA), but,

in doing so, should allow the States to protect the public through maintaining

effective oversight of holding company practices and expanding State access to

holding company books and records, independent of any similar authorities

granted to the federal regulatory bodies.

Mr. BARTON. Thank you.

The Chair would recognize himself for the first 5 minutes of

questions. Commissioner Hunt, you stated that your agency supports repeal of PUHCA you said with proper safeguards. Could you

elaborate on the proper safeguards, please?

Mr. HUNT. Yes, sir. The proper safeguards in our view would be

giving access to books and records both to State regulatory authorities and auditing powers, and access to, books and records of utilities to the FERC.

We think that is necessary for FERC to look at affiliate transactions, cross-subsidization, and for the States to have enough

power to audit the utilities in their particular States.

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Mr. BARTON. And do you consider the provisions on H.R. 3406

with regards to the safeguards to be acceptable or appropriate, or

do you think we need to enhance them in some way?

Mr. HUNT. I think they are adequate, sir, but I would accede to

FERC on that issue, because they will be the ones at the Federal

level who would really have the power under the bill to audit the

books and records of the utilities.

Mr. BARTON. Okay. Chairwoman Hochstetter, do you think that

NARUC would ever support a Federal bill?

Ms. HOCHSTETTER. Well, certainly. It would just depend on the

language within the Federal bill.

Mr. BARTON. But we have to have a Federal system, and you are

looking at the most States’ rights chairman you are going to have

on this subcommittee, and I have bent over backwards to prevent

preemption of the States’ rights in almost every title of the bill.

And you are a very eloquent spokeswoman, but basically everything in the bill to protect the States doesn’t go quite far enough

to protect the States in your written testimony, which means that

if we go far enough, we don’t have a Federal bill.

So if you were me, what would you do? Would you just throw up

your hands and say the heck with it, and let these great States

that have been out there for all these years squabbling among

themselves continue to squabble?

Or would you just pass a bill that says let FERC do it, instead

of letting the Congress do it, where you have a little input?

Ms. HOCHSTETTER. Mr. Chairman, honestly, there is much about

this bill that we can support, and I think if I were in your shoes,

I would ask NARUC for specific wording provisions, some specific

amendatory language that might be acceptable to the organization

and to individual States to address these particular preemption

concerns that I have identified.

Mr. BARTON. Well, we have been doing that for 3 years.

Ms. HOCHSTETTER. Well, we would certainly be happy to give another go at it.

Mr. BARTON. And we will be happy to give you another go at it,

but we have got about a week to let you have a go at it. I did listen

with detail to what you said, and when you talked about a savings

clause, I think we can work on that.

I don’t see a way around the RTO issue, and I just think it is

going to be real tough to create a national system if we don’t

change to some extent the status quo at the State level on a fallback position on transmission siting.

And if I heard you correctly, you said that NARUC, that if the

States can’t agree, instead of letting the FERC come in at the end

like we do, and let the FERC make the decision, your group apparently wants to create some sort of a regional arbitration panel; is

that correct?

Ms. HOCHSTETTER. Mr. Chairman, the States have been engaged

in recent discussions with FERC on creating regional advisory panels, or regional advisory boards, to work with FERC on RTO issues.

And I think that that mechanism with respect to RTO issues

could also work for transmission siting. And I also think that there

have been some approaches, particularly in the Western part of the

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United States, where groups of States have worked together to

work through transmission citing issues.

In my part of the country, which is your part of the country as

well, I am not aware of any transmission projects that have not

been able to go forward. I think that these cases may be isolated

where there have been problems.

I think it may be a spotty thing, as opposed to a universal problem that needs a universal fix. So that’s why I had respectfully

suggested that we may want to approach it in a more moderate

basis.

Mr. BARTON. Do you think that NARUC is willing to allow the

RTO body, once it is in power, to make the final siting decisions?

Ms. HOCHSTETTER. I think it is entirely possible, Mr. Chairman,

that if the States had a strong real formalized role in RTO governance decisions, then siting could become part of that process, yes,

sir. But it would depend upon the structure of our role, our ongoing

role with respect to RTO governance and operation.

Mr. BARTON. And, of course, our RTO proposal that is in the bill

gives the States that real authority in the RTO creation. You are

aware of that?

Ms. HOCHSTETTER. That’s correct.

Mr. BARTON. And you like that part of the bill?

Ms. HOCHSTETTER. Yes, sir. I think it is the ongoing involvement

on a day-to-day operational basis that we would like to see

strengthened in the bill.

Mr. BARTON. Thank you. My time has expired. The gentleman

from Virginia, Mr. Boucher.

Mr. BOUCHER. Thank you, Mr. Chairman. Ms. Hochstetter, I

share your view with respect to the need to retain State authority

over the siting of transmission lines, and frankly I don’t think the

case has been made that States have abused their discretion to site

these lines in a way that would warrant this grant of Federal

siting authority.

So we are in agreement on that. Tell me if you would what some

of the concerns that States have to consider are when the decision

is made whether or not transmission lines should be approved?

Ms. HOCHSTETTER. Yes, sir. I am glad that you asked that question. There are a number of things set out in our statute that we

must consider, in addition to getting the input of a number of other

State agencies.

There are citing issues involving historic property, landowners

rights, environmental quality, endangered species, and then on an

economic basis, there are cost benefit ramifications, in terms of

making sure that the infrastructure and its costs are in fact allocated in a manner that provides benefits to those that pay the

costs.

Mr. BOUCHER. Are you aware of any instances cited by the proponents of this grant of Federal authority to site transmission

lines, where the claim has been made that the State has acted arbitrarily in balancing these competing interests of new transmission lines on the one hand, versus the other values that you

have mentioned on the other, that the State has not engaged in a

reasonable balancing process?

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And that it has in some way its discretion to weigh these various

values and come to a decision? Are you aware of instances where

the allegation has been made of some abuse of discretion in that

regard?

Ms. HOCHSTETTER. I have honestly only heard of one antidotal

story, and I don’t have much information or knowledge on it. And

so I did find it somewhat interesting that that was a proposal in

the legislation, because from my knowledge and experience—and I

have been in this industry for 17 years—I am not aware of any line

that was necessary that has failed to be sited.

I am sure that there may be one or two examples, but I am not

aware of any.

Mr. BOUCHER. Okay. Well, I have been asking that question to

a number of witnesses who have been testifying before this subcommittee this year, and we have yet to hear examples from anyone that would suggest that States have acted inappropriately, and

would lend credence to the claim that there needs to be Federal authority in this area.

And let me just ask one additional question, and that relates to

a way in which we might encourage the investments to be made

in new transmission lines where they in fact have to be built.

A number of proposals have been put forward to address that

concern. The bill contains a new system of incentive pricing authorities for the FERC. I would welcome your view with regard to

the appropriateness of incentive pricing as a way to encourage and

incent new power line construction.

And I would also welcome your view with regard to whether or

not there might be another alternative. And that is sufficiently to

empower regional transmission organizations to bid out the construction of these lines themselves.

And perhaps ultimately to be the owner of the newly constructed

lines. Your thoughts on that alternative and whether or not that

might work?

Ms. HOCHSTETTER. Yes, sir. Thank you. I am honestly not aware

of any examples, at least in my State and in my regional of the

country, where traditional cost of service based rate making has

not be sufficient to incent transmission owners to build new transmission.

Certainly incentive rates might provide more encouragement and

inducements, but I am not aware of the fact that we are at that

point where that is absolutely necessary. I think it is something

that could be considered at some point.

But we do have to keep in mind that when you use a rate design

that it generally increases retail rates to consumers. So there is a

balancing act that has to go into the process, and I would think

that from a logical standpoint that you would start with the cost

of service basis for incremental transmission construction.

And if that didn’t work, then move to something else, but I don’t

think you have to jump over that first phase necessarily to get new

transmission constructed.

Mr. BOUCHER. Okay. Mr. Chairman, those are my questions.

Thank you very much.

Mr. LARGENT [presiding]. I thank the gentleman. The gentleman

from Illinois, Mr. Shimkus, is recognized.

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Mr. SHIMKUS. Thank you, Mr. Chairman. I will have just a brief

question for Chairman Hochstetter. Define retail. In your statement, you talked about retail issues. Define retail for me.

Ms. HOCHSTETTER. There are a couple of different definitions

that I might proffer. One is those program that have to do with

services provided off of the distribution facilities, which is what

State regulators regulate everything that is of a distribution nature.

Another definition of retail might be those rates, programs, and

services offered to residential, commercial, and industrial customers.

Mr. SHIMKUS. Is there not another definition of retail? Could

there not be retail over the transmission lines?

Ms. HOCHSTETTER. A portion of the transmission lines certainly

are involved in retail service, and of course from the standpoint of

the bundled service that we still have, a majority of the transmission service is in fact retail.

Mr. SHIMKUS. Now, if we have a generating facility in Arkansas,

and a manufacturing plant in Missouri, by the Constitutional definition that would be interstate commerce would it not?

Ms. HOCHSTETTER. That’s correct, and based on my understanding, Missouri would have to have retail open access to allow

that manufacturing plant in Missouri to buy from the merchant

plant in Arkansas.

Mr. SHIMKUS. Okay. What about Illinois?

Ms. HOCHSTETTER. Then in that scenario, that plant or the manufacturing plant in Illinois would certainly be free to purchase from

the merchant plant in Arkansas.

Mr. SHIMKUS. Would it not make an argument for our role in the

debate referencing interstate commerce to try to create that national grid as the chairman has so aptly attempting to do?

Ms. HOCHSTETTER. I agree that the division lines are somewhat

gray at times, because certainly the transmission commerce is a

mixture of retail and wholesale.

Mr. SHIMKUS. And I think that is probably the fundamental principle of what we try to address here on this committee, and as the

committee Members have stated, this is the only committee really

defined by the Constitution that deals with interstate commerce.

It is really a tough argument to make these days that wholesale,

i.e., and some retail, are not interstate commerce and should be

kept solely for the jurisdiction of the control of the State, and that’s

why we probably are going to move in some direction.

And we would rather that you be helpful than adversary, and

with that, Mr. Chairman, I yield back the balance of my time.

Mr. LARGENT [presiding]. I thank the gentleman. The gentleman

from Michigan, Mr. Dingell, is recognized.

Mr. DINGELL. Mr. Chairman, I thank you for your courtesy, and

I commend the chairman for this hearing. To the witnesses, I am

going to give you questions which I hope can be answered yes or

no.

Your testimony states this morning that repeal of the Act would

eliminate regulatory restrictions that prevent utility holding companies from owning utilities at different parts of the country, and

to prevent non-utility businesses from acquiring regulated utility.

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I interpret this as meaning that but for PUHCA, Enron could

have acquired regulated utilities. Is that correct?

Mr. HUNT. Mr. Congressman, I don’t think—that may be correct.

Enron is exempt from PUHCA now because it does not operate a

utility outside of Oregon, where it is incorporated.

Mr. DINGELL. So they could then have bought it either way?

Mr. HUNT. They could have bought another utility outside of Oregon, and they would have probably become an interstate company

obviously, and been subject to the Act.

Mr. DINGELL. So if they bought one outside?

Mr. HUNT. Yes, sir.

Mr. DINGELL. So the answer to the question then is yes. Now,

let’s look at the accounting in the Enron matter. It was celebrated

perhaps by meeting one of two tests. It was either incompetent or

it was criminal, or perhaps both.

Having said that, in that case, wouldn’t you and I now be sitting

here discussing how State regulators would be faced with the massive job of shifting through Enron’s extraordinarily complex corporate structures where evidence of cross-subsidization of non-energy investments financed by captive utility consumers?

Mr. HUNT. Mr. Congressman, as you know, my agency has just

begun a serious investigation of the Enron matter, and it would be

difficult for me to speak either about the accounting issues or anything specific about Enron until we have all the facts with respect

to our investigation.

Mr. DINGELL. Well, would you not now then be in a situation of

rubbing around through Enron’s accounting to find whether or not

there was evidence of cross-subsidization of non-energy investments being made by charging captive utility consumers for the

costs of that?

Mr. BARTON. After he answers the question would the gentleman

yield?

Mr. DINGELL. I would be happy to yield for the Chair. But isn’t

that a real possibility, and you would be here discussing that with

me this morning?

Mr. HUNT. Sir, the SEC’s Office of Chief Accountant is going to

look very seriously at, and our other accountants are going to look

very seriously and note, all the ramifications of the accounting

problems as they relate to Enron.

And I am not going to guess as to what they are going to find,

but they will be looking at the whole accounting issue with respect

to Enron.

Mr. DINGELL. I am not asking for that answer. All I am doing

is saying we would have been in the awkward position then of

probably having to be looking to see if Enron was using captive

utility consumers’ payments to subsidize cross-fertilization of investments; isn’t that right?

Mr. HUNT. That is a possibility, as I said, Mr. Congressman.

They only own one utility.

Mr. DINGELL. And as you have already told me, but for PUHCA,

they could have bought more?

Mr. HUNT. Yes.

Mr. DINGELL. Now, in the light of what we are now learning, is

the SEC confident in its earlier contention that the books and

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records protection is an adequate legislative offset for repealing

PUHCA?

Mr. HUNT. I think that FERC would be better able to handle

that. They are the ones that we would suggest should have the

books and records authority at the Federal level.

Mr. DINGELL. Isn’t it fair to observe that on securities matters

that the SEC is the premier and the major, and the principal Federal Agency dealing with securities matters?

Mr. HUNT. Yes, sir.

Mr. DINGELL. And PUHCA is, of course, a twofold responsibility

of the Federal Government; a part deals with energy, but more importantly, a part, or the principal part, deals with securities because it was directed at dealing with the outrages committed by

Mr. Ensel in the 1920’s; isn’t that right?

Mr. HUNT. Yes, sir.

Mr. DINGELL. Very good. I thank you. Mr. Chairman, I am happy

to yield to you.

Mr. BARTON. I thank you, Congressman. You know, I was talking

to the staff when you started your question, and so I may have

missed the premise. But my understanding is that Enron is not a

public utility holding company under the PUHCA.

So that what Mr. Dingell was asking you was really more of a

hypothetical question than a real time question, because they are

not subject to PUHCA.

Mr. HUNT. They are not subject to PUHCA, because they only operate utilities in one State, the State in which they are incorporated.

Mr. BARTON. And if they had been a PUHCA regulated company

would their books have been looked at in any more detail than they

should have been looked at under the reality of how they have been

regulated or been reviewed by the SEC?

Mr. HUNT. Well, the——

Mr. BARTON. The gentleman has yielded to me to let you have

a pop at answering my question.

Mr. HUNT. I think that certainly I can’t see anything different,

Mr. Chairman, with respect to the relationship between the outside

auditors and the company itself.

Mr. BARTON. I would ask for unanimous consent that the gentleman from Michigan be given an additional 2 minutes since he

yielded to me on his last 15 seconds, and obviously I have peaked

his interest by my question.

Mr. DINGELL. Mr. Chairman, I thank you, and you have helped

with the point. But the point that we come down to is under

PUHCA the Enron folks had one utility, and the Enron folks could

not under PUHCA have owned, or bought, or acquired a second

utility in another State.

And in that PUHCA precluded certain fine possibilities of serious

misbehavior by the Enron folks then; isn’t that true?

Mr. HUNT. Sir, they could not have acquired a utility in another

State without coming under the SEC’s jurisdiction under PUHCA.

Mr. DINGELL. Right. So that would have had the practical effect

then of preventing them from diversifying, right?

Mr. HUNT. They may not have minded being under PUHCA, sir.

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Mr. DINGELL. And adding a splendid new level of complexity to

some of the most obscure, murky, perhaps incompetent, or more

perhaps a plainly dishonest aggregation of corrupt bookkeeping;

isn’t that right?

Mr. HUNT. I can’t say whether it was corrupt or not, Mr. Congressman, because we have not completed our investigation.

Mr. DINGELL. Well, if it looks like a duck, and quacks like a

duck, and flies a duck, let it be said that it is a duck. And I think

here, dear friends, that we have before us a duck, or more correctly, an incorrect, incompetent, dishonest, and embarrassing

bookkeeping.

Mr. SAWYER. Will the gentleman yield?

Mr. DINGELL. I am happy to yield to the gentleman if he wants

to talk about this correct, incompetent, bookkeeping.

Mr. SAWYER. I just wondered. You do have some experience in

duck hunting don’t you?

Mr. DINGELL. I do. I also have some experience in correct and

dishonest bookkeeping.

Mr. SAWYER. Truly as an observer, I’m sure.

Mr. DINGELL. It is from observation and not from engaging in the

practice. Mr. Chairman, as always, you are courteous and kind,

and I thank you for your graciousness.

Mr. LARGENT [presiding]. The gentleman’s time has expired. I

recognize the gentleman from Kentucky, Mr. Whitfield, for questions.

Mr. WHITFIELD. Mr. Chairman, actually, I am not going to ask

any questions today.

Mr. LARGENT. Okay. All right. Then the Chair will yield to himself, as I am next in line here, and I have just one question. Actually, one comment and a question.

Mr. Hunt, I wanted to ask you, is it possible—and kind of following up on Mr. Dingell’s line of questioning, if PUHCA had been

repealed and Enron had gotten into more diverse utility company

holdings, is it not possible that it would have raised Enron to another level of scrutiny by the SEC or by FERC that perhaps would

have kept Enron out of trouble?

And I know that we are projecting into the future here, and

thinking about possibilities, but it is my belief that perhaps if

PUHCA had been repealed and Enron had gotten into where they

held more than one utility company, that possibly they could have

been scrutinized to a greater degree, and thereby avoiding some of

the problems that they now find themselves in?

Mr. HUNT. Well, we would certainly hope that if PUHCA had

been repealed FERC would have been given more power to examine the books and records of a company in the situation of Enron,

particularly if they bought utilities outside of Oregon where they

now own a utility.

So we would hope that FERC would expand its authorities and

would have given close scrutiny to a company like that with its

new powers.

Mr. LARGENT. Thank you, Mr. Chairman. Ms. Hochstetter, I

would like to ask you a question. I was surprised a little bit by

your response about cost of service rates, and that those are good

enough to construct transmission.

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Is it your belief that we have a shortage of transmission in this

country today?

Ms. HOCHSTETTER. I believe it depends upon what type of transmission service you are talking about.

Mr. LARGENT. I am talking about interstate transmission.

Ms. HOCHSTETTER. To serve the bulk wholesale power market, it

is my understanding that that is correct. I don’t know that there

is a constraint, at least in my part of the country, with respect to

serving native load customers. But certainly the system is not configured in such a manner to serve the bulk wholesale power market.

Mr. LARGENT. So we are talking about interstate transmission,

which is what we are talking about here in Washington, that you

believe that there is a shortage in transmission to serve the bulk

power grid?

Ms. HOCHSTETTER. Capacity. Maybe not necessarily a situation

where you automatically have to go toward constructing new lines.

But there are obviously as you know ways to enhance capacity

without building new lines, and siting new transmission lines.

But I am certainly aware of and would acknowledge the fact that

we will need incremental transition capacity, and probably lines in

this country. But I am not necessarily convinced that incentive rate

making is the first necessary step.

Mr. LARGENT. Well, we have heard stories and perhaps you

haven’t, of constraints—you know, Path-15 is one that we have

heard a lot about in California, where there is a significant transmission constraint, intrastate constraint in California.

We have heard of constraints in Wisconsin and Illinois, between

Chicago and Milwaukee, that there is serious constraints of transmission there. And I am just wondering if you feel like that the—

I mean, your opinion is that cost to service rates are good enough

for transmission construction today, then why aren’t those transmission lines where there are constraints being constructed?

Ms. HOCHSTETTER. I think honestly, sir, one of the reasons is

that because everyone is waiting to make investments until the

RTO structure is a known quantity, and RTOs are actually implemented, and up and running.

I think people are delaying making investments until they know

what that type of organization is going to look like. And what also

the transmission pricing policies will be coming out of FERC.

You know, they have an interconnection note going on right now,

the second phase of which will deal with incremental transition

pricing policies. So I think that once we have the RTO system configured, and these new transition pricing policies, I think you will

see folks stepping up to the bar and making transmission infrastructure investments.

Mr. LARGENT. Let me ask you a question about RTOs. I sat here

when you were talking about that, and I had actually wanted to

ask some of the panelists that we had yesterday this question.

How involved should FERC be in determining the size or number

of RTOs in this country?

Ms. HOCHSTETTER. I think they should be very involved, and I

think they should be involved in a partnership format with the

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States, which is a step that they had taken, and we commend them

greatly for doing that.

We have over the last few months begun to forge that type of

partnership in an ongoing dialog with them on RTO issues.

Mr. LARGENT. Is less better in terms of the number of RTOs?

Ms. HOCHSTETTER. I honestly think it is a region specific question, and I think that Chairman Wood has recognized that, and I

think that they have recently changed their position on four being

the perfect number. So I think it is one of those things that has

to be looked at on a region by region basis.

Mr. LARGENT. Okay. I see that my time has expired. Let’s see.

The Chair recognizes the gentleman from Ohio, Mr. Sawyer, for

questions.

Mr. SAWYER. Thank you very much, Mr. Chairman. In light of

the exchanges, Commissioner Hunt, let me just return to what I

think Congressman Barton asked earlier. You make a very specific

recommendation with regard to what you believe the role between

the SEC and FERC ought to be with regard to affiliate transactions, audits, access to books, records, and continued protection

of utility companies.

Do the provisions of the bill before us, 3406, satisfy your recommendations?

Mr. HUNT. I think so, Mr. Congressman. Obviously, you should

also get the views of FERC, and whether they think that this

power is adequately amplified in this bill for them to do the job,

because we would be—if we had our way, we would be out of this

business, and this business would belong to FERC.

Mr. SAWYER. Let me just make an observation before I move on.

It strikes me that looking to the kinds of traditional solutions provided either by the SEC or FERC with regard to Enron may not

be where we need to look.

It strikes me that Enron structured its business to operate in the

seams between the controls put in place 65 years ago, and that

those controls may not have been adequate even in the best of circumstances, but that is just an observation.

Mr. HUNT. I think part of that business was unregulated by us

and by FERC, the trading part of the business. We regulate another part and FERC regulates another part, but as to the trading

part, I think you are right. Neither of us regulates it under existing

law.

Mr. SAWYER. It is good to see you here today.

Mr. HUNT. It’s good to see you, too, sir.

Mr. SAWYER. Ms. Hochstetter, I guess I would agree with Mr.

Boucher and with you with regard to the way in which the States

have functioned, and I think to suggest that they acted arbitrarily

or inappropriately, or abused discretion with regard to siting responsibilities that they have, it is an accurate observation to say

that those kinds of things have simply not occurred.

And I think it is probably also true that any transmission that

has been needed—I can’t think of a circumstance anywhere in the

country where it has been ultimately denied as a product of siting

difficulties.

Our problem it seems to me, however, is that not just recently,

and not just waiting for RTOs to come into place, but over the last

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quarter of a century, we have seen a decline in investment, in overall transmission.

And that a transmission system designed to serve a cost of service environment, and with an obligation to serve a service territory,

has worked.

But it has not created the broader grid of the kind that the Sitting Chair was suggesting, and that the decline year in and year

out of over $100 million in investment in transmission has led to

a system that over the long term has begun to atrophy in terms

of the uses to which it has attempted to be put today.

That is to say, that for the bulk transmission and the functioning

of a real grid in regional markets instead of a series of transmission lines cobbled together to meet the needs of a grid.

Having said that, could you describe for me the kind of RTO or

kind of regional siting authority that you are talking about? Would

it function within an RTO?

Would it have the authority to bring eminent domain to difficult

siting decisions in the same way that the States can today? And

when there is disagreement between existing siting authorities

among States, who resolves it?

Ms. HOCHSTETTER. I think, sir, the vision that I had mentioned

earlier on a regional basis would probably have to by law involve

voluntary cooperation and coordination as the first step.

I am not certain that regional eminent domain authority is something that is appropriate. But I certainly think that a regional association of some sort, hand-worked through a majority, if not all

of the difficulties, and should at least be a first step, a first effort

that is made.

And to the extent that either an RTO isn’t the one siting the authority or to the extent that the States can’t achieve that.

Mr. SAWYER. When Arkansas confronted a difficult siting decision, you mentioned that you had an obligation to look at a number

of questions, and included among those was whether or not it provides service to the people affected by the siting decision.

If in fact this is an interstate transmission line, and Arkansas

disagrees with Texas and Louisiana, for example, how does that get

resolved under the structure that you envision?

Ms. HOCHSTETTER. Well, I certainly recognize that you are not

going to have a perfect scenario and that there could be problems.

I think what I am just suggesting is that let’s not jump over the

first couple of alternative methods in getting to the ultimate objective.

I certainly acknowledge, and I am just speaking on behalf of the

Arkansas Commission at this point, I will certainly acknowledge

that at some point FERC’s siting authority, or some kind of FERC

backstop, might be appropriate and might be necessary.

But I don’t think that you have to automatically go to that as

your first approach, the first step if you will, in doing that if you

like.

Mr. SAWYER. I would just submit that I believe that at least both

the bill that the chairman has worked on, and the one that I have

does give primary initial siting authority and sufficient time for the

States to act directly.

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But that that backup authority is put in place not as a first use,

but in anticipation of potential problems.

Mr. BARTON. Would the gentleman yield?

Mr. SAWYER. With whatever I have left, I would be happy to.

Mr. BARTON. I would ask for unanimous consent that Mr. Sawyer

have 2 minutes, and if you would yield 1 minute to me.

Mr. SAWYER. I would be pleased to do so.

Mr. BARTON. Let’s use that hypothetical. Let’s say you have a

three State COMPAC, and Arkansas is right in the middle, and so

we have Oklahoma and Tennessee, and we have this regional citing

authority that you talked about.

And the regional citing authority has got one representative from

the State of Arkansas, and one representative from the State of

Oklahoma, and one representative from the State of Tennessee.

And the pending transmission line is an interstate line that goes

from Oklahoma to Tennessee across the great State of Arkansas.

The regional siting authority meets and it votes 2 to 1 to build it,

the one vote being the State of Arkansas, and it says that we don’t

need it, and we don’t get anything out of it, and we vote no.

If we went to that regional siting authority could we put language in the regional siting authority that would bind the losing

State, the losing State, to exercise their State eminent authority,

right of eminent domain, even if they lose? Would NARUC accept

that?

Ms. HOCHSTETTER. Well, without checking with the NARUC officers and the NARUC board, I would have to say that I honestly

don’t know. It is an interesting hypothetical, and——

Mr. BARTON. Well, would you accept that? If you were the Commissioner representing the State of Arkansas in this three State

COMPAC, and you voted no, but the other two States voted yes,

and we were giving that State COMPAC the right to make the decision and not the FERC, would you accept that kind of a provision

acting on behalf of the State of Arkansas?

Ms. HOCHSTETTER. I honestly don’t know. I think I would have

to look at to what extent, if any, there was an impact on retail

rates.

Mr. BARTON. No, I am not talking about that. We are going to

do something.

Ms. HOCHSTETTER. I understand, sir.

Mr. BARTON. We are going to get a national grid built, one way

or the other. I want the States to have every bit of access and authority, and input possible, but at some point in time somebody has

got to pull the trigger so to speak and say we are going to build

it if it is in the regional interest.

Now, you put on the table this regional authority and that is not

a unique brand new idea.

Ms. HOCHSTETTER. Right.

Mr. BARTON. I am willing to go down that road if I can get your

group and your utility commissioners to accept that at some point

in time, even acting on behalf of your State, that you vote no, and

you still accept the overall product for the greater good.

But if you won’t accept that, if NARUC won’t accept that, then

we will keep our backup authority at the FERC level.

125

Ms. HOCHSTETTER. Well, let me answer you on behalf of the Arkansas commission, because I honestly cannot speak based on your

hypothetical on behalf of NARUC. Our Commission does not want

to be parochial, and that is one of the reasons that we have been

a strong advocate of RTOs at FERC.

And I think that we are somewhat unique, at least in our part

of the country, in our support of the RTO concept. Along these

lines——

Mr. BARTON. You have got some of the biggest merchant plants

in the country being built in your State.

Ms. HOCHSTETTER. Yes, sir.

Mr. BARTON. And you want to get that power out there.

Ms. HOCHSTETTER. Provided that we get some benefit out of that,

that’s correct. But the concept of net public interest is near and

dear to my heart and to our Commission’s heart.

And if you are looking at something on a regional basis and the

net public interest shows that the majority of the folks will benefit

from the project, I personally do not have a problem with that, and

I don’t think our Commission would.

Mr. BARTON. I will take that.

Mr. LARGENT [presiding]. The gentleman’s time has expired. I

recognize the gentleman from Tennessee, Mr. Bryant.

Mr. SAWYER. Mr. Chairman, I yielded 1 minute of my 2. Can I

have 1 minute as long as his?

Mr. LARGENT. Sure.

Mr. SAWYER. Well, probably not. Okay. Forget I asked.

Mr. BARTON. I am reinforcing your point, Mr. Sawyer.

Mr. BRYANT. Thank you. Madam Chairman, let me follow up on

that, and not to beat a dead horse here, but this is a very important issue. Coming from the State of Tennessee, let me assure you

that we probably would not vote against Arkansas in that scenario.

Ms. HOCHSTETTER. I appreciate that.

Mr. BRYANT. But we could always run it through Texas, or perhaps Missouri. This question though is that there is no question

that the President and his energy policy, and the report indicated

that we needed more infrastructure, and I don’t think that is the

issue here.

It is how we go about it, and by protecting State’s rights, and regional rights, and even individual property owner’s rights as we

talk about this process. And I am interested in your testimony as

it relates to the incentive pricing.

And a couple of times you have referred to in your statement or

in your testimony today about not leaping over the cost of service

and going right to the incentive pricing because ultimately we all

know the rate payer is going to be charged with this.

And not necessarily seeing a direct visible benefit out of that, it

is going to be difficult to accept. It is going to be very difficult in

the Tennessee Valley, where we have become accustomed over the

years to very reliable and inexpensive power, particularly to our

residential customers and our constituents.

As we move toward this restructuring my constituents are very

concerned about prices going up. So every point that is out there

where this court occur, I know that the blame for that is going to

126

come back to restructuring in general, and those in Congress responsible for it.

And I am a rate payer also, and so I don’t want to see that either. So I am intrigued that if there is truly a middle ground so

that we don’t leap over and go right to the incentive pricing.

But my question to you though is realistically—and I have always heard that that is—that people are waiting for Congress to

act to provide some ‘‘stability’’ before they start building and putting money, and investing money in infrastructure.

Can we say how we would get there without incentive pricing?

I mean, how do you say that we are not going to start out with

this, but if it doesn’t work, we will get to that, because everybody

is going to hold out until it gets to that point?

I mean, how do you reasonably get some interim steps in there

that would actually work, rather than people continuing to hold out

on building until they get the money that they want to build?

Ms. HOCHSTETTER. Yes, sir. I think that FERC is ultimately

going to need to take a lead in that, and so I think in terms of

waiting for Congressional action, it is probably waiting for Congressional action to ask FERC to move forward in coordination and in

consultation with the States to address some of these issues.

But I think that is something that could be done in a proceeding

at FERC to discuss that type of cost of service, versus incentive

rate design, and work through those issues in this consultative

process that we have begun to form with the FERC.

So I think that is something that could be handled on an administrative basis, as opposed to in Congressional legislation, just to

direct us to move forward in partnership, the States, in conjunction

with FERC on these issues.

Mr. BRYANT. I have additional time, but I know there is a very

qualified and competent second panel ready to testify, and I would

waive the balance of my time so we can move on toward our second

panel.

Mr. LARGENT. All right. The gentleman yields back his time, and

I will recognize the gentleman from Louisiana, Mr. John.

[No response.]

Mr. LARGENT. Mr. Wynn, from Maryland.

[No response.]

Mr. SHIMKUS. Mr. Chairman, I have one additional question, but

I am not up yet.

Mr. LARGENT. Well, maybe Mr. Walden would yield you time.

Mr. Walden. Mr. Chairman, I would be happy to yield to my colleague.

Mr. SHIMKUS. And I thank my colleague. For Mr. Hunt. I have

been told from some Illinois utilities PUHCA has prevented them

from refinancing bonds. Could this be true?

Mr. HUNT. Without knowing the facts of that case, Mr. Congressman, I couldn’t answer, but I would be glad to get back to you with

an answer.

Mr. SHIMKUS. Well, I don’t question them, but the final question

is if they do have an inability to refinance bonds under PUHCA at

this time, understanding how rates have gone, we could then make

a correlation that individual rate payers are not getting the advantage of the ability to refinance, and in essence are incurring higher

127

rates than they probably are, unless they were able to refinance.

Is that a fairly good analysis?

Mr. HUNT. Well, I just don’t know what PUHCA’s involvement

in that problem is, Mr. Congressman. Certainly if a utility can’t refinance, the rate payers may suffer some harm. But to the extent

that PUHCA and we had anything to do with the non-refinancing

in this instance, I can’t speak to that because I don’t know the

facts.

Mr. SHIMKUS. And if you would check to get that, I would appreciate that.

Mr. HUNT. I will try.

Mr. SHIMKUS. That is the only question I have, Mr. Chairman.

Thank you.

Mr. LARGENT. The gentleman from Oregon, does he yield back

his time? Do you have any questions?

Mr. WALDEN. I will save mine for the next panel, Mr. Chairman.

Mr. LARGENT. Okay. The gentleman from Georgia, Mr. Norwood.

Do you have any questions for this panel?

Mr. NORWOOD. No questions.

Mr. LARGENT. Seeing no other requests for questions, I will excuse this panel. Thank you, Mr. Hunt, and Ms. Hochstetter, I appreciate your testimony, and we will ask the next panel to come in.

Ladies and gentlemen, we thank all of you for your willingness

to testimony before this committee. I would ask you to summarize

your remarks in 5 minutes, and I will begin by introducing Panel

Two.

They are David Sokol, representing Mid-American Energy Holdings Company; Mr. Robert Johnston, representing the Municipal

Electric Authority of Georgia; Mr. Alan Richardson, representing

the American Public Power Association; Mr. Glenn English, an

Oklahoman, also representing the National Rural Electric Cooperative.

And Mr. Michehl Gent, representing the North American Electric

Reliability Council; Ms. Lynne Church, representing the Electric

Power Supply Association; Mr. James B. Rouse, representing the

Electric Consumers Research Council; Charles Acquard, representing the Consumers for Fair Competition; Mr. William

Prindle, representing The Alliance to Save Energy; and finally Mr.

Leonard Hyman, representing or with Salomom Smith Barney.

As I said, we welcome you and we will begin with Mr. Sokol to

present your testimony in 5 minutes, and then we will move

through the panel.

Thank you, Mr. Sokol.

128

STATEMENTS OF DAVID L. SOKOL, CHAIRMAN AND CEO, MIDAMERICAN ENERGY HOLDINGS COMPANY; ALAN H. RICHARDSON, PRESIDENT AND CEO, AMERICAN PUBLIC POWER

ASSOCIATION; GLENN ENGLISH, CEO, NATIONAL RURAL

ELECTRIC COOPERATIVE; MICHEHL R. GENT, PRESIDENT

AND CEO, NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL; LYNNE H. CHURCH, PRESIDENT, ELECTRIC POWER SUPPLY ASSOCIATION; JAMES B. ROUSE, DIRECTOR, ENERGY

POLICY, PRAXAIR, INC., ON BEHALF OF THE ELECTRICITY

CONSUMERS RESOURCE COUNCIL; CHARLES ACQUARD, EXECUTIVE DIRECTOR, NATIONAL ASSOCIATION OF STATE

UTILITY CONSUMER ADVOCATES; WILLIAM R. PRINDLE, DIRECTOR OF BUILDING AND UTILITIES PROGRAMS, THE ALLIANCE TO SAVE ENERGY; LEONARD S. HYMAN, SENIOR INDUSTRY ADVISOR TO SALOMON SMITH BARNEY; AND ROBERT JOHNSTON, PRESIDENT AND CEO, MUNICIPAL ELECTRIC AUTHORITY OF GEORGIA, ON BEHALF OF THE LARGE

PUBLIC POWER COUNCIL

Mr. SOKOL. Thank you, Mr. Chairman, for the opportunity to be

here today. I am David Sokol, Chairman and CEO of Mid-American

Energy Holdings Company, and my comments are fully endorsed

today by our largest shareholder, Warren Buffett, and his Berkshire Hathaway Company.

Before providing comments on H.R. 3406, I would like to explain

why we believe that moving forward with this legislation is so crucial. As the head of a company that provides the electrical load that

feeds industry jobs and production, we have seen a very steady

downward trend for much of this year that has accelerated in recent months.

We do not share the view of some who believe that this recession

is destined to be either relatively brief or comparatively painless.

Congress does, however, have in its power to take the steps that

will spur the economy and reassure investors and consumers in

this sector.

Passing real comprehensive energy legislation, a bill that contains electricity modernization as a fundamental component is vital

to that effort.

This perhaps could be one of the most important stimulus measures this committee can pass for the American economic recovery.

With regard to the bill, I would like to offer my comments section

by section, and under Title One of Electricity Supply, Subtitle A,

Mid-American fully supports this section.

Tough Mid-American does not have a financial stake in this area,

we believe that distributed generation should be an integral part

of the energy future of this country, and will deliver significant

benefits to consumers and the environment.

We have some minor technical concerns on the net metering language, but establishing minimum standards to encourage States to

adopt policies to promote generalization and with renewables is

clearly appropriate.

Under Subtitle B regarding the Public Utility Holding Company

Act, Mid-American strongly supports repealing PUHCA and replacing it with comprehensive provisions to enhance regulatory access

to the books and records of all utility holding companies.

129

PUHCA is the most substantial impediment to new investments

and energy infrastructure, keeping billions of dollars of new capital

out of this industry. The SEC, FERC, State Regulators, the administration, and the Democratic leadership of the Senate, have all endorsed PUHCA repeal as necessary pieces of a national energy

strategy.

It is in the words of your former colleague, Senator Tom Carper

of Delaware, ‘‘a no-brainer.’’ Subtitle C provisions regarding the

Public Utility Regulatory Act, we strongly support these provisions

as well, and we note that respective PURPA repeal is long enjoyed

by partisan support.

Under Subtitle D, the redundant review of certain matters. Section 142 eliminates the redundant review of multiple agencies over

utility mergers. This is a desirable provision, but I understand that

there is significant opposition to certain parts of the section.

At a minimum, we would recommend establishing reasonable

time limits on the FERC merger review period. Under Title II,

Transmission Operations, Section 201 embodies the FERC like

compromise, bringing non-jurisdictional utilities under limited

FERC oversight.

Mid-American was one of the first investor-owned utilities to endorse this compromise and we support this section strongly. Section

202 on regional transmission organizations, or RTOs, includes

many items that have been sought for years by advocates of a more

transparent transmission system.

First, a date certain for RTO participation; and second, placing

all uses of the system under the same tariff; and, third, independence requirements and minimum standards for RTOs.

The principles underlying this language is very sound; mandatory participation with flexible implementation. At the same time

we understand that this section has received some criticism that it

is too cumbersome, and perhaps too prescriptive.

We would suggest the work continue on the section as the bill

moves forward through the process in order to refine these very

sound concepts. Under Title III of transmission reliability, Section

301 is a streamline version of the reliability language that has

been included in earlier bills.

This language has broad stakeholder support, and Mid-American

supports and prefers this approach, and we could also accept the

section on reliability in the Daschle and Bingaman bill.

The most important thing is that we must have a mandatory, enforceable, reliability system in place. Under transmission infrastructure, Section 401 addresses two priority issues for improving

the transmission infrastructure.

Encouraging FERC to develop incentive rates for investments

and new infrastructure, and requiring FERC to conduct a rulemaking on pricing to ensure adequate capitalization of stand-alone

transmission entities.

These provisions are sound policy, and frankly shouldn’t be controversial. Some of the other policy directives toward FERC we

would characterize as clearly desirable, but not absolutely essential, and non-binding language could be appropriate.

Under Section 402, this is a very important section. Performing

siting of interstate transmission lines is an issue that only ConVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00133 Fmt 6601 Sfmt 6602 E:\HEARINGS\77118 pfrm09 PsN: 77118
130

gress can address. Every electricity consumer has a stake in fixing

transmission bottlenecks, and making for a more wholesome transmission system.

While my first instincts would usually be unfettered protection

of property rights, there must be some way to ensure that vital

transmission infrastructure gets built for this country.

The formula that you have outlined will do the job, and we would

encourage the committee to continue exploring options with the

various stated entities involved.

Under Federal Utilities, we understand that these three sections

represent consensus approaches by the stakeholders in the affected

regions, and while we are not an expert on these issues, we commend that consensus approach.

And Mid-American strongly supports Title VI and VII of the Consumer Protection and related matters. Mr. Chairman, there is one

other topic that I would like to address before I conclude, and that

is the problems at Enron.

No one should make Enron or the Enron situation an energy

issue. It is an issue of bad investments and the clear misuse of accounting. Energy markets are functioning fine without Enron.

This committee has a great history on matters of oversight investigations, and we applaud Chairman Tauzin on announcing his intentions to hold hearings on this matter. I also believe that Representative Markey has raised valid questions about the oversight

of electricity trading markets that deserve the committee’s attention.

But the subcommittee should not turn away from the task of

doing its part to aid the economic recovery modernizing the vastly

needed electricity laws and infrastructure because of the problems

at one company, no matter how high profile that company is.

The changes that you are proposing under 3406 are very long

overdue, and I would be happy to answer any questions that you

might have.

[The prepared statement of David L. Sokol follows:]

PREPARED STATEMENT OF DAVID L. SOKOL, CHAIRMAN AND CEO, MIDAMERICAN

ENERGY HOLDINGS CO.

Thank you, Mr. Chairman, for the opportunity to testify today. I am David L.

Sokol, Chairman and CEO of MidAmerican Energy Holdings Company, a global energy company based in Des Moines, Iowa. I was pleased to testify before the Subcommittee earlier this year on the topic of barriers to competitive generation, and

am appreciative that the subcommittee has allowed me to come back.

MidAmerican is a diversified, international energy company headquartered in Des

Moines, Iowa with approximately $11 billion in assets. The 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, an electric and gas utility in the United Kingdom, and

Home Services.com, a residential real estate company operating throughout the

country.

As head of a company that includes both regulated utility assets and independent,

competitive generation assets, in addition to experience participating in the alreadyderegulated energy markets in the U.K., I hope I bring a balanced perspective to

the consideration of these issues.

For the last three years, MidAmerican has taken a leadership role in attempting

to build support for reasonable, middle ground solutions to modernizing the electricity industry.

131

In that spirit, I will attempt in my testimony to point out some areas of potential

compromise that could resolve outstanding disagreements over the few remaining

areas of dispute in this legislation. It is time for all stakeholders to engage to help

resolve these issues. To do otherwise only serves the interest of those who seek to

gain advantage from the existing inefficiencies in the system at the expense of energy consumers.

Mr. Chairman, in addition to your leadership in this area, I have been impressed

by the commitment of both Secretary Abraham and the Democratic leadership of the

Senate to ensuring that electricity modernization is a core component of our national energy strategy. They recognize that attempting to create a twenty-first century energy policy without modernizing electricity laws is akin to trying to install

a high-speed rail system on seventy year-old tracks.

Before providing comments on H.R. 3406, I would like to explain why I believe

moving forward with this legislation is so critical.

As the head of a company that provides the electric load that feeds industry, jobs

and production, I have seen a steady downward trend for much of the year that has

accelerated in recent months. I do not share the view of some who believe that this

recession is destined to be relatively brief and comparatively painless.

Congress does, however, have it in its power to take steps that will spur the economy and reassure investors and consumers. Passing real comprehensive energy legislation—a bill that contains electricity modernization as a fundamental component—is vital to that effort. This perhaps could be one of the most important stimulus measures this committee can pass for American economic recovery.

With regard to the bill, I’d like to comment section-by-section:

Title I: Electric Supply

Subtitle A—Interconnection, Net Metering and Demand Management

MidAmerican supports this section.

I believe distributed generation should be an integral part of our energy future

and will deliver significant benefits to consumers and the environment. The provisions in H.R. 3406 refine the principles of a stakeholder compromise between transmission and distribution owners and independent generators that will bring greater

clarity and certainty to the interconnection process.

I know that there is some concern about addressing distribution interconnection

in this section, but members should be aware that this section only mandates that

a national technical standard be established where feasible and that generators pay

the reasonable costs of interconnection. I would recommend a technical change to

the bill to clarify the section on back-up power that we will provide to the committee

staff.

The language on net metering should not overturn existing state net metering

policies, but should establish minimum standards to encourage states to adopt policies to promote remote generation with renewables. Net metering will create some

cost shifting to customers who are not net metered under the rate design used by

most utilities today. These costs are for services that would otherwise be billed

based upon the net metered customer’s meter registration, but net metering eliminates that registration. Such costs include transmission and distribution service,

billing and other customer services, taxes and system benefits charges. Determining

the means for recovering these shifted costs is best left to the states.

Subtitle B—Provisions Regarding the Public Utility Holding Company Act

of 1935

MidAmerican strongly supports repealing PUHCA and replacing it with comprehensive provisions to enhance regulatory access to the books and records of all

utility holding companies.

PUHCA is the most substantial impediment to new investment in energy infrastructure, keeping billions of dollars of new capital out of this industry. The SEC,

FERC, state regulators, the Administration and the Democratic leadership of the

Senate have all endorsed PUHCA repeal as a necessary piece of the national energy

strategy.

PUHCA places a set of arbitrary and often counter-productive limitations on investments in the regulated energy industry. It keeps new capital and new ideas out

of the industry at a time when transmission infrastructure alone requires tens of

billions of dollars in new investment. PUHCA requires the concentration of utility

assets because of its physical integration standard, increasing concerns about market power.

PUHCA is an impediment to bringing new capital and new infrastructure into

California’s market because no entity that owns more than ten percent of any utility

in the eastern two-thirds of the country could make a significant capital investment

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in those companies or in regulated assets such as new transmission without running

afoul of PUHCA. And, finally, PUHCA provides a ‘‘first bite’’ advantage to foreignowned corporations seeking to acquire American utility assets.

Replacing PUHCA with up-to-date provisions that provide state and federal regulators with enhanced access to the books and records of all utility holding companies

is, in the words of your former colleague, Sen. Tom Carper of Delaware, ‘‘a no brainer.’’

Subtitle C—Provisions Regarding the Public Utility Regulatory Policy Act

of 1978

MidAmerican strongly supports these provisions and notes that prospective repeal

of PURPA’s Sec. 210 mandatory purchase requirement with full guarantee of cost

recovery has long enjoyed bipartisan support.

Through our CalEnergy subsidiary, MidAmerican owns geothermal energy facilities that are QF producers. While PURPA has played an important role in opening

up wholesale electricity markets, there have been cases where QF contracts anticipated higher levels of ‘‘avoided costs’’ than market conditions actually produced. At

the same time, I’m pleased to note that the recent settlement in California between

QF producers and one of the state’s largest utilities will provide consumers clean,

renewable electricity at a fraction of the cost of many of the long-term contracts for

conventional generation signed by the state.

Virtually every state in the country is looking at more market-based methods of

promoting renewable energy, and the PURPA Sec. 210 mandatory purchase requirement has become outdated.

Subtitle D—Redundant Review of Certain Matters

Section 141 of the bill eliminates the redundant review of multiple agencies over

utility mergers. While I understand that there is significant opposition to this section, I would recommend at a minimum establishing some reasonable time limit on

FERC merger review.

Placing a time limit on merger consideration would not in any way prejudice the

outcome of FERC’s proceedings, but it would provide the markets with greater certainty in making judgments on transactions.

Title II: Transmission Operations

Section 201 embodies the ‘‘FERC lite’’ compromise bringing non-jurisdictional

utilities under limited FERC oversight. MidAmerican was one of the first investorowned utilities to endorse the compromise and supports this section. ‘‘FERC lite’’ brings all owners of transmission facilities that are used in interstate

commerce under FERC jurisdiction for the purposes of establishing terms and conditions of service. FERC would also be given the authority to ensure that rates

charged by currently non-jurisdictional utilities to users of their transmission systems are comparable to the rates those utilities charge themselves.

This is a major step forward in the creation of a seamless transmission grid while

recognizing the different financial structures of different transmission owners.

Many non-jurisdictional transmission owners have already moved to place their

assets in regional transmission organizations to ensure that their customers are not

isolated from regional electricity markets. TRANSLink, the independent transmission company that MidAmerican has joined in the Upper Midwest, includes both

public power entities and a large regional rural cooperative.

Section 202 on regional transmission organizations, or RTOs, includes many

items that have been sought for years by advocates of a more transparent transmission system: 1) a date certain for RTO participation 2) placing all uses of the

system under the same tariff and 3) independence requirements and minimum

standards for RTOs. The principle underlying the language is sound—mandatory

participation with flexible implementation.

At the same time, I understand that this section has received some criticism that

it is too cumbersome and prescriptive. I suggest that work continue on this section

as the bill moves through the process in order to refine the sound concepts you have

laid out.

Title III—Transmission Reliability

Section 301 is a streamlined version of the reliability language that has been included in earlier bills. This language has broad stakeholder support. MidAmerican

supports and prefers this approach, but could also accept the section on reliability

in the Daschle/Bingaman bill. The most important thing is to get a mandatory, enforceable reliability system in place.

In recent years, as markets have become more competitive and transmission capacity more constrained, pressures on the transmission network have multiplied.

133

We were fortunate that mild weather in much of the country last year prevented

any recurrences of the reliability problems we had seen in previous years, but voluntary compliance with reliability rules by organizations that do not have enforcement authority is not a viable long-term system.

Title IV—Transmission Infrastructure

Section 401 addresses two priority issues for improving the transmission infrastructure—encouraging FERC to develop incentive rates for investments in new infrastructure and requiring FERC to conduct a rulemaking on pricing to ensure adequate capitalization of stand-alone transmission entities.

Transmission costs are pennies on the dollar of retail electricity rates, but the cost

of inadequate transmission capacity can be enormous. We need to get new transmission built to improve reliability, security and market efficiency. Incentive rates

are one way to help get new transmission in the ground.

Congress also should direct FERC to review its transmission pricing policies to

ensure that these policies will support stand-alone transmission entities. Rates of

return must be adequate to attract capital to these new entities or else the system

will deteriorate. Legislation should not dictate what rate of return that FERC provides for transmission, but FERC needs to look at this issue as it moves forward

with RTOs.

These provisions are sound policy and should be non-controversial.

Some of the other policy directives toward FERC I would characterize as desirable, but not absolutely essential. Non-binding language may be appropriate.

Section 402 on transmission siting is very important. Reforming siting of interstate transmission lines is an issue that only Congress can address. Every electricity

consumer has a stake in fixing transmission bottlenecks. My first instincts are usually unfettered protection of property rights, but there must be some way to ensure

that vital transmission infrastructure gets built.

There are several problems here. When a proposed new transmission line or upgrade crosses through a number of states, not every state will benefit equally—some will not benefit at all. In other cases, because of complex transmission flows, a constraint in one state can only be addressed only by improving facilities in an entirely

different state. Finally, a number of states are constitutionally prohibited from

using their own eminent domain authorities for facilities that do not primarily benefit the public in their own states.

The formula you have outlined would do the job. MidAmerican also has been involved in talks with state regulators about an approach that would establish joint

federal-state boards under Section 209a of the FPA to address interstate transmission issues such as new transmission line construction. If that approach would

resolve concerns expressed by others about this section, I would encourage the Committee to explore it.

Title V—Federal Utilities

I understand that these three sections represent consensus approaches developed

by stakeholders in the affected regions. While I am not an expert on these issues,

I commend you and the representatives of these regions for your hard work and the

compromises you have developed.

Titles VI and VII—Consumer Protection and Related Matters

MidAmerican supports these sections. Consumer protection should be foremost in

the Committee’s mind as it moves forward with electricity modernization. Nothing

will turn consumers against the marketplace faster than abusive practices such as

slamming and cramming. H.R. 3406 includes provisions in these areas that are very

similar to those proposed by both the Clinton and Bush Administrations, as well as

the bill introduced last week by Senators Daschle and Bingaman.

The bill’s provisions clarify states’ authority to order retail electric competition

and the rights of consumers in open states to aggregate their purchases. The bill

protects state public purpose programs, increases criminal penalties for Federal

Power Act violations and expands FERC refund authority.

In addition to these provisions, regulatory transparency and access to books and

records provide the most important consumer protections. Under the PUHCA repeal

section of this bill, both FERC and state commissions have explicit statutory authority to review the books and records of every utility holding company, not just the

limited number of companies currently covered under PUHCA.

It’s probably not often that private sector witnesses come before this committee

and ask you to pass legislation increasing the ability of regulators to look at their

books. But regulatory transparency, protection against cross-subsidization and consumer protection all make sense. Laws that arbitrarily keep investment and investors out of critical industries don’t.

134

Mr. Chairman, there’s one other topic I’d like to address before I conclude—the

problems at Enron. No one should make the Enron situation an energy issue—it is

an issue of poor investments and the misuse of accounting. Energy markets are

functioning fine without Enron.

One of the untold stories of the Enron collapse is how little impact this has had

on the regulated entities that are the direct providers of most electricity and natural

gas to consumers. Most regulated entities took steps to limit their exposure to

Enron in the weeks leading up to the company’s collapse. While lenders and traders

face liabilities as a result of their relationships with Enron, utilities managed their

potential exposure well.

I find it particularly ironic that some are trying to claim that the collapse of

Enron shows that we shouldn’t repeal PUHCA. For years, Enron was one of the

most vocal opponents of PUHCA repeal, working to keep highly regulated, established, asset-backed companies out of emerging energy markets.

Enron is not, and never had been, subject to PUHCA. And, for the most part, because of the nature of its business, it was not subject to many forms of state and

federal regulation to which public utilities would continue to be subject under this

bill.

State and federal regulators possess extensive authority over utility companies in

terms of the rates of return on investment that they allow. State regulators have

complete authority over what costs they will allow to be recovered in rates, and the

language of this bill clarifies that they have a federal right to review the books and

records of any utility under their jurisdiction.

This Committee has a great history on matters of oversight and investigations,

and I applaud Chairman Tauzin for announcing his intention to hold hearings on

this matter. I also believe Representative Markey has raised valid questions about

oversight of electricity trading markets that deserve the Committee’s attention.

I would recommend focusing on the following areas:

1) Did this situation involve abusive accounting practices?

2) Did outside auditors meet their professional obligations?

3) Were both the letter and intent of the law followed?

4) Is there adequate oversight of the trading side of the energy business and what

federal agency should have primary jurisdiction over these markets?

I believe the Committee should review these questions thoroughly and ensure that

measures to address any abuses are implemented properly. Given the scale of this

situation, I believe that if legislation is needed, there will be adequate incentive for

Congress to act. The Subcommittee should not, however, turn away from the task

of doing its part to aid the economic recovery by modernizing our electricity laws

and infrastructure because of problems at one company, no matter how high profile.

Thank you and I’ll be happy to answer any questions you may have.

Mr. LARGENT [presiding]. Thank you, Mr. Sokol.

The Chair recognizes Mr. Richardson for his statement.

STATEMENT OF ALAN H. RICHARDSON

Mr. RICHARDSON. Thank you, Mr. Chairman. It is a pleasure to

be here today, and I appreciate the opportunity to testify. I am

Alan Richardson, President and CEO of the American Public Power

Association.

We have testified before this committee a number of times myself, and managers of individual public power systems. For the

most part, public power systems are net deficient in generation.

We are dependent upon an effectively competitive wholesale market. Again for the most part, Public Power Systems are net deficient in transmission. Most of us are transmission dependent utilities.

Even those with significant transmission facilities of their own

are dependent upon others for additional transmission services. We

have a vested interest in making sure that the wholesale market

is really competitive, effectively competitive, and that it benefits

the interests of our utilities, the interests of our communities, and

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the interests of our consumers, and in fact the interest of all electric consumers across the country.

We have been strong proponents of effective wholesale competition and proponents of Federal legislation throughout these long

debates over industry restriction that have proceeded for the past

5 years.

There have been a number of very significant events that have

occurred in the last couple of years, bookmarked by the bankruptcy

of PG&E at the beginning or the end of last year, and the bankruptcy of Enron at the beginning of this year, or at the very end

of this year.

And then a series of events in between, including a change in

leadership and direction of the Federal Energy Regulatory Commission, and a real commitment by current Commissioners to try to

improve the situation in the wholesale power market.

They are taking a number of steps that we find very appropriate,

and there are things that we thought that the Commission should

have been doing in the past, and they are the kinds of things that

we have been encouraging Congress to address because of the reluctance of the Commission to act on their own behalf.

So in many cases we believe that a number of things that we

have been endorsing for Federal legislation are less necessary

today than they have been in the past, and we believe that the

Commission is on the right track and proceeding to put right

things in the wholesale power market arena.

And so for that reason, we would urge some caution in moving

forward in some of these areas. Let me address our primary concerns with respect to this legislation, and focus on those rather

than all parts of the legislation, and then answer questions later

in this hearing.

We oppose the repeal of the FERC merger review authority in

this regard, and we support the position of the administration to

preserve this authority, and in fact we would like to see it expanded to deal with the mergers of holding companies and to deal

with the consolidation and the acquisition of generation facilities.

And in fact as we have advocated for a considerable period of

time, we believe that the condition or the test that the Commission

should use is not one of whether mergers are consistent with the

public interest, but in fact whether mergers promote the public interest and promote competition.

Every merger takes a competitor out of the marketplace, and it

can have significant adverse consequences for competition, and we

believe that this authority should remain in the hands of the Commission.

We oppose the repeal of the Public Utility Holding Company Act,

and at the present time we believe that the Act has provided great

stability and financial structure to this industry.

In this period of turmoil, we believe that it would be inappropriate to repeal the act at this time. Further, we believe that it

would be inappropriate to repeal the Act until we are clear and

confident that we have created a market structure that can sustain

competition over time.

The Holding Company Act deals not only with structure, but

with protection of consumers from various abuses, and to the exVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00139 Fmt 6601 Sfmt 6602 E:\HEARINGS\77118 pfrm09 PsN: 77118
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tent that those authorities are eliminated, additional authorities

should be given to the Federal Energy Regulatory Commission to

deal with problems of market power abuses in the new marketplace.

We oppose the provisions regarding the regional transmission organizations, and in this regard I believe we are consistent with the

views that have been expressed to this committee yesterday by

members of the Federal Energy Regulatory Commission.

This is a very prescriptive provision, and today more than ever

I believe the Commission needs the flexibility to deal with changing circumstances, and this provision in our view reduces that

flexibility and does not enhance it.

And for this reason, as well as for the fact that this provision

captures public power systems as a blanket requirement for participation in regional transmission organizations, we do not believe

that it is appropriate.

We believe that the Commission has adequate authority under

the present laws to deal with these issues. We oppose the new

standard on the stranded costs provision that would apply only to

newly created, publicly owned, electric utilities.

The States are fully capable of handling stranded cost provisions

when communities desire to establish their own electric utility system, and in the event that they are not, there is a backstop with

the Federal Energy Regulatory Commission under Order 888.

We do not believe that an additional backstop created by this legislation is necessary, and further the formula that is proposed in

here for stranded cost recovery is so onerous that it will make the

creation of new publicly owned utilities virtually uneconomic.

The bill requires FERC to consider incentive rates for new transmission provisions, and new transmission facilities. We do not believe that this is necessary. We believe that the Commission has

the authority and the ability under the current standard of just

and reasonable rates, which is a zone, and not a single rate, to provide incentives that will attract capital.

We do not think that the problems in investing in transmission

have been due to a lack of capital, but they have been due to other

problems that go beyond that. Finally, the legislation subjects

wholesale power rates, and rates for transmission services provided

by publicly owned utilities to private power companies to after the

fact regulatory proceedings.

And while we support the FERC-lite provisions that were mentioned a minute ago about Mr. Sokol, this provision in the bill in

effect undoes that FERC like compromise. We do not think it is

necessary and we oppose that.

We believe that the Commission is moving in the right direction

in terms of rectifying many of the serious problems in the wholesale power market. It is pushing utilities toward RTO participation, but it is acting within its statutory limitations.

It is addressing the issue of when and under what circumstances

jurisdictional utilities may sell power at market-based rates. It is

establishing market monitoring and taking steps to ensure greater

transparency of information.

It is doing all of these things under the authority that it currently has, and we do not believe that the authority should be cirVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00140 Fmt 6601 Sfmt 6602 E:\HEARINGS\77118 pfrm09 PsN: 77118
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cumscribed, nor do we think that its flexibility to deal with these

issues should be limited.

Thank you for the opportunity to testify, Mr. Chairman, and it

is a pleasure, Mr. Largent, to appear before you, and perhaps my

final time before you. So, it is a pleasure to be here today.

[The prepared statement of Alan H. Richardson follows:]

PREPARED STATEMENT OF ALAN H. RICHARDSON, PRESIDENT AND CEO, AMERICAN

PUBLIC POWER ASSOCIATION

Mr. Chairman and members of the subcommittee, my name is Alan

Richardsonand I am the President and Chief Executive Officer of the American Public Power Association (APPA). Thank you for the opportunity to appear before you

today to discuss APPA’s views on H.R. 3406, the Electricity Supply and Transmission Act. APPA represents the interests of more than 2000 publicly owned electric utility systems across the country, serving approximately 40 million citizens.

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. Further, most publicly owned utilities are

not generation self-sufficient but depend on wholesale power purchases to meet the

retail loads of the communities they serve. Competitive wholesale markets are in

our interest and we have a very long record in support of legislative and regulatory

initiatives that promote greater real competition in these markets. Finally, almost

without exception, publicly owned utilities depend on others for transmission. Fair

terms for transmission access at just, reasonable and non-discriminatory rates have

always been critically important for public power

Public power systems’ first and only purpose is to provide reliable, efficient service

to their local customers at the lowest possible cost. Publicly owned utilities also

have an obligation to serve the electricity needs of their customers and they have

maintained that obligation, even in states that have introduced retail competition.

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.

For decades, APPA has supported legislative efforts to make the wholesale electric

market more competitive. 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 the enactment of federal

legislation that promotes competition, increases reliability, expands the transmission system, addresses market power in generation and transmission, and eliminates tax-related impediments to competition for municipal utilities.

These past few years, and especially the past two years, have been a period of

rapid and dramatic change in our industry. This change has occurred in federal and

state policies on electricity competition and regulation; in the wholesale and retail

markets for electricity; and in the minds and attitudes of consumers. The lessons

learned from these experiences should serve to guide this subcommittee and other

policy makers on any additional changes to the industry that may be necessary.

The goal of Federal restructuring legislation should be to promote competition in

the wholesale electric market for the benefit of consumers. There are several fundamental elements necessary for real competition to exist and be sustained over time.

These include: ease of entry to and exit from the market; availability and transparency of market data; a sufficient number of buyers and sellers; and effective controls to prevent the abuse of market power where possible and remedy abuses when

discovered. 1H.R. 3406 is, presumably, a bill ‘‘to benefit consumers and enhance the

Nation’s energy security by removing barriers to the development of competitive

markets for electric power...’’ H.R. 3406 falls far short of these lofty goals because

it fails to encourage the creation of an environment that is consistent with the fundamental elements that are prerequisites for competition. Indeed, H.R. 3406 represents a significant step in the opposite direction. In its present form, this bill will

neither benefit consumers nor remove barriers to competition. It does just the opposite.

Briefly stated, we oppose H.R. 3406 in its present form because:

1. It eliminates FERC merger review authority. This review is not redundant with

existing authority under the antitrust laws exercised by the Department of Justice and the Federal Trade Commission. Unrestrained and unexamined mergers

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can clearly be a barrier to the development of competitive markets. Every merger eliminates at least one competitor from the market and many mergers are

pursued precisely for this reason. FERC’s authority to review proposed mergers

should be expanded to include mergers of holding companies, transfers of generation facilities, and consolidation of electric and natural gas companies. FERC

should also retain present authority to be used as necessary to promote competition, including the authority to condition mergers and grant permission to

sell power at market based rates on membership in FERC approved regional

transmission organizations.

2. It repeals the Public Utility Holding Company Act, an important consumer protection statute, without enhancing FERC’s authority to deal with market power

problems. All agree that PUHCA repeal will result in new mergers and further

consolidation within the electric utility industry....Prescriptive that they severely limit FERC’s discretion with respect to such critical issues as appropriate

size, scope and function. Further, H.R. 3406 would prohibit FERC from conditioning approval of such things as sales of power at market based rates on RTO

membership.

3. It imposes almost insurmountable financial obstacles on communities that want

to create their own locally owned and publicly controlled electric utility by dictating the formula that must be used to calculate ‘‘stranded costs’’ incurred by

the incumbent utility. In calculating stranded costs, FERC must use as a benchmark factors that existed in 1996, factors that are not likely to bear any relationship to conditions that exist today or in the future, not the least of which

is the underlying historically installed generation capacity situation. The intent

of this section is clear—to prevent the creation of new public power systems

whether or not they advance competition, or promote lower rates and better

service for America’s electric consumers.

4. It promotes incentive rates for transmission service that are unnecessary, inconsistent with the Commission’s responsibilities to ensure only just and reasonable rates for transmission, and will certainly lead to higher costs for consumers.

5. It subjects wholesale power sales and rates charged for transmission access by

publicly owned utilities to private power companies to after-the-fact regulatory

proceedings by FERC for no legitimate public purpose.

Due to a number of recent developments, we recommend that the subcommittee

defer action on comprehensive restructuring legislation at this time. The number of

issues that now require congressional action has greatly decreased. This is due in

large part to the willingness of the current members of FERC to exercise authorities

already available to them under the Federal Power Act. We believe the current

members of FERC have a very clear vision as to what is necessary to promote real

competition and they recognize that competition is a means to promote the interests

of consumers and not an end in itself. FERC has set out, and begun to act on, an

impressive set of initiatives to establish effective wholesale competition. And while

public power systems have concerns about aspects of some of those initiatives, on

the whole, we applaud the FERC for taking action to deal with serious problems

in the wholesale markets.

Much of what APPA and others have advocated in federal legislation debates

prior to these actions by the FERC was mainly necessary in order to direct an unwilling FERC to use its existing authority appropriately. APPA has consistently

supported pro-competitive legislative proposals that would both direct the Commission to act, and provide it with the political support to do so. Thus, in light of

FERC’s new direction, it seems prudent to allow FERC to develop and implement

these stated initiatives without overly prescriptive statutory changes imposed by

Congress.

Any legislation that may ultimately be approved by Congress must first do no

harm to consumers and should, as mentioned above, build on the valuable lessons

learned in the recent past. For example, we learned from the Western electricity crisis that premature decisions to allow market-based rates, based on outdated and inadequate analytical tools and faulty assumptions, will have significant negative consequences for consumers. FERC is undertaking such a review at the present time.

An important tool at its disposal is to condition market based rate approval on participation in an approved RTO. Provisions of H.R. 3406 would eliminate this authority. If Congress is serious about promoting competition, it should applaud FERC’s

recent initiatives, not advance proposals that undermine them. The collapse of

Enron teaches us that market transparency and full access to all books, records, and

other pertinent information by regulators is essential, although there may be many

other lessons yet to be learned as the Enron story unfolds.

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We also learned that local control of public power systems continues to work extremely well. Publicly owned utilities in California and throughout the nation have

retained their obligation to serve all their customers and continue to meet that obligation with quality, reliable service at cost-based rates. About the only thing California did right was preserve local control of public power. Public power systems

have retained their generation assets and are actively planning and building to

bring additional resources on line, including significant investments in renewable

and distributed generation projects. Public power is also working to add additional

transmission capacity to the grid, particularly in key constrained areas. For example, a public power entity, the Transmission Agency of Northern California, is a

major participant in the project to upgrade California’s infamous Path 15. Despite

these proven benefits of public power, and its role in promoting both infrastructure

development and greater competition, H.R. 3406 would create a nearly insurmountable financial barrier to the creation of new publicly owned electric utilities.

Following, then, are comments on certain specific provisions of H.R. 3406, based

on the foregoing discussion. As delineated below, APPA has significant concerns

about major elements of the bill and some additional concerns regarding several

other provisions. There are also several provisions in the bill that APPA supports

and those are discussed below as well. The positive provisions of the bill, however,

do not offset its significant negative impacts.

MAJOR CONCERNS

Section 141—Repeal of certain provisions of the Federal Power Act regarding disposition of property, consolidation, and purchase of securities

This section repeals Section 203 of the Federal Power Act, thereby completely

eliminating FERC’s authority to review, approve and condition utility mergers and

asset disposition. Accelerating consolidation in the electricity industry already

threatens competition and consumers’ interests. Not only does H.R. 3406 fail to include any provisions to address generation market power, as discussed below, but

inclusion of this provision actually makes it more likely that large generation companies will get larger and be able to exercise market power. Thus, APPA strongly

opposes this section and urges its deletion.

Instead, APPA has consistently urged adoption of a higher standard that would

condition merger approval on an affirmative finding that the proposed merger will

promote the public interest, as opposed to the current standard that only requires

the merger to be consistent with the public interest. In addition, FERC’s merger authority needs to be clarified and expanded to cover mergers of utility holding companies as well as the disposition of generation assets by jurisdictional utilities and the

acquisition of natural gas companies. FERC lacks the clear authority to review the

former. While APPA believes FERC has the authority and responsibility to review

the latter, it has recently declined to do so. Removal of FERC’s merger authority

will lead to an increasing amount of mergers resulting in greater consolidation of

market power that will ultimately undermine competition.

Title I—Subtitle B Provisions Regarding PUHCA

APPA continues to oppose repeal of the Public Utility Holding Company Act

(PUHCA) unless FERC is provided clear authority and support to protect consumers

against the abuse of generation market power. PUHCA has been, and continues to

be, an important part of the structure of the electric utility industry by defining the

permissible structures of holding company formation and ensuring effective state

and federal regulation of these companies in order to protect consumers, investors

and the public interest. PUHCA is also the only federal statute that protects against

the abuse of cross-subsidization of affiliated ventures by regulated utility operations.

Cross-subsidization destroys true competition in unregulated markets and overcharges ratepayers. The repeal of PUHCA should be considered with great caution.

Unfortunately, H. R. 3406 simply repeals PUHCA without any offsetting provisions to protect consumers against generation market power or cross-subsidization

in company affiliate transactions. At a minimum, Section 113 should be amended

to allow federal and state regulators access to a broader range of pertinent information, rather than the proposed limitation of records relating to ‘‘costs’’. In addition,

APPA suggests that FERC, perhaps in consultation with the Federal Trade Commission and the Department of Justice, should retain the authority to require the

restructuring of utility holding companies where its is demonstrated that the holding company operated in a manner inconsistent with the interests of electric consumers.

Members of the subcommittee may have heard arguments from those in favor of

repealing PUHCA asserting that the Act has inhibited investment in new generaVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00143 Fmt 6601 Sfmt 6621 E:\HEARINGS\77118 pfrm09 PsN: 77118
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tion. PUHCA does not, in fact, inhibit investment in either generation or transmission. Under 1992 amendments to PUHCA, investments in generation plants can

be made by any party in any location throughout the United States. In addition,

if regulation under PUHCA is such a detriment to the ability of a private company

to grow then why has the number of holding companies regulated by the Securities

and Exchange Commission (SEC) increased. In fact, in the past eight years both the

number of registered holding companies and the number of electric customers

served by registered holding company subsidiaries has more than doubled.

Title VII—Investigation and Correction of Anti Competitive Conduct

APPA is also strongly opposed to this title’s extension of FERC jurisdiction over

public power systems. This encroachment on local authority is neither prudent nor

warranted. Public power systems have been regulated differently under federal law

for more than 66 years. This is neither an accident nor an oversight, but rather good

public policy that recognizes that public power systems operate in the public interest and are regulated at the local level. Local elected officials oversee public power

systems across the country to ensure consumers continue to receive low-cost, reliable electricity from their local providers.

Except for a few isolated examples, public power systems do not have surplus

electricity to sell. These systems do not represent a significant presence by sellers

in the wholesale markets, and public power is, and will continue to be, net purchasers of electricity. The limited volume of surplus energy from public power systems precludes their ability to set a market-clearing price—public power systems

are price makers, not price takers. There is no policy justification for reversing decades of effective, local authority.

In addition, Section 702 undermines the compromise reached in portions of Section 201, commonly referred to as ‘‘FERC-lite’’, for regulation of public power transmission facilities. Contrary to the intent of FERC-lite, Section 702 allows FERC to

retroactively set rates for transmission service.

Section 202—Regional Transmission Organizations

APPA believes that Section 202 is unnecessary and in fact counter-productive. It

should be deleted from the bill. This section proposes modification of FERC’s RTO

authority as set forth in Order 2000. It would require all transmission owners, including public power systems, to form or participate in an RTO within 12 months,

and make certain other changes to characteristics of RTOs as set out in the Order.

APPA agrees that the single most important step that can be taken to achieve the

goal of a robust transmission system is the establishment of properly configured,

truly independent RTOs that have primary planning responsibility for the regional

grids under their control. APPA continues to support FERC’s existing authority to

establish and require public utility participation in strong, truly independent RTOs

in order to facilitate the development of vigorously competitive retail markets.

FERC has maintained in Order 2000 and subsequent orders and proceedings, that

it has the authority to order RTO participation by jurisdictional utilities to remedy

undue discrimination or facilitate competition. Congress should do nothing to statutorily interfere with FERC’s development of RTOs or attempt to prescribe specific

elements and deadlines.

Section 202 represents a significant and inappropriate contraction of FERC’s existing authority and creates opportunities that will permit potential RTO participants to delay RTO formation (evidentiary hearings before FERC, FERC decisions

to be approved on appeal to the courts only if supported by a ‘‘preponderance of the

evidence’’ as opposed to the customary standard of ‘‘substantial evidence’’). The section fails to guarantee that RTOs created under this new authority will in fact promote effective competition, and because it is so prescriptive, it will virtually eliminate the opportunity for FERC to make mid-course corrections as experience is

gained regarding the creation, operation and appropriate functions of RTOs. FERC

has substantial authority under the Federal Power Act to promote the creation of

RTOs and to determine the appropriate size, scope and functions to be performed,

including the authority to condition approval of proposed mergers or market based

rate sales on membership in a FERC-approved RTO. Section 202 expressly eliminates this authority.

FERC must be allowed to proceed so that industry will have the stability that regulatory certainty in this area will provide and regulators will have the flexibility

they need to make adaptations as necessary. In addition, it is not necessary for Congress to expand FERC’s authority to order participation by public power systems,

public power will voluntarily join RTOs that are properly configured and provide

benefits for public power customers.

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Section 401—Sustainable Transmission Networks Rulemaking

Section 401 directs FERC to conduct a rulemaking on incentive and performancebased transmission rates. APPA is strongly opposed to this section because it is unnecessary and would lead to higher transmission rates. We therefore urge its’ deletion. FERC, under the Federal Power Act and Order 888, already has sufficient authority and flexibility to design transmission rates to ‘‘promote economically efficient

transmission and generation of electricity.’’ These rates remain subject to the ‘‘just,

reasonable, and not unduly discriminatory or preferential’’ standard that has been

the hallmark of FERC ratemaking authority for decades. (This standard was recently affirmed by FERC in Order 2000 on RTOs). The language in this section

would have the effect of requiring FERC to undermine that standard.

Proponents of this language have asserted that incentive pricing is necessary in

order to raise the capital needed for investments in new transmission facilities.

They argue that incentives are justified because transmission investment is risky.

This is clearly not the case. Developing new transmission facilities is clearly a difficult task. There are substantial obstacles in the siting and permitting process.

Rights of way may be denied for parochial reasons with no consideration given to

broader public interest considerations. Current transmission owners may have incentives to delay grid expansion in order to protect sales of their own generation.

These are not problems that can be overcome simply by throwing money at them.

The fact is, transmission construction and operation is not inherently risky. Transmission is the prototypical low risk, traditional, regulated utility investment that

has been very successful in attracting capital at reasonable, regulated rates of return. A good example of this is the recent Fitch Report on the new American Transmission Company in Wisconsin, a transco that began operations on January 1, 2001.

As the report points out, over 95% of this transmission-only company’s revenue re- quirement is guaranteed by recovery from its firm, network customers regardless of

changes in load, weather, etc.

The obstacle to new transmission is, in fact, the lack of siting approvals, not the

lack of available capital. Thus, this provision will do nothing to cause the construction of additional transmission facilities or add capacity to existing lines. Moreover,

APPA believes that incentive rates will undoubtedly lead to increases in overall

transmission costs, which are decidedly not in the public interest.

OTHER CONCERNS WITH H.R. 3406

In addition to the major issues of concern identified above, APPA also has serious

concerns with several other provisions in the bill as discussed below.

Section 201(a)(3)—Certain Wholesale Stranded Costs

This section would require FERC to impose wholesale stranded costs on cities and

towns that municipalize their electric service, using a prescribed formula. That formula requires the calculation of wholesale stranded cost based on ‘‘a reasonable expectation period that is based on the weighted average remaining useful life of generation assets owned or power purchased under contract by the public utility and

included in wholesale or retail rates in effect on July 9, 1996.’’ The fact that these

generation assets may have been sold, or the contracts may have been modified in

the intervening years is irrelevant. Clearly, the only purpose of this language is to

render municipalization cost prohibitive and thus deny cities and towns across the

nation the fundamental right to determine whether they will offer electricity service

themselves, or franchise that service to a private company. This is the antithesis

of the ‘‘choice and competition’’ philosophy the U.S. Congress has espoused as justification for restructuring of the electric utility industry. Moreover, FERC currently

has the authority to fairly decide wholesale stranded cost disputes on a case-by-case

basis. Thus, this provision is unnecessary and APPA strongly urges that it be deleted.

Section 525—Direct Service Industries

These provisions direct the Bonneville Power Administration (BPA) to negotiate

power sales contracts with all willing Northwest aluminum direct service industrial

customers beyond the term of the currently effective BPA power supply contracts.

This section would authorize the Department of Energy and not BPA to determine

what constitutes a ‘‘reasonable level of federal firm power.’’ The determination regarding reasonableness is to be based on an allocation of power ‘‘that will enable

such customers to operate their facilities in the Pacific Northwest in an economic

manner for the long term.’’ It would appear that the interests of a few aluminum

companies are to take precedence over all other consumers in the Pacific Northwest.

It is inappropriate for Congress to legislatively interfere with the renewal of these

contracts or to re-establish the situation where, due to wholesale price volatility,

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these companies could, as they did in the recent past, make more money re-selling

their BPA power than by producing aluminum.

Section 532—Wholesale Sales by Federal Power Marketing Administrations

This section states that all rates and charges for the sale of electric energy and

capacity by Power Marketing Administrations (PMAs) shall be the lowest possible

rates. Furthermore, the section asserts that charges to consumers will allow the recovery over a reasonable period of years, in accordance with sound business principles, of all costs incurred by the United States for the production of electric energy

sold by a PMA, including repayment of the capital investment allocated to power

and costs assigned by the Acts of Congress to power for repayment.

Section 532 is unnecessary and should be deleted. Existing criteria in federal law,

going back to the Reclamation Project Act of 1939 and the Flood Control Act of

1944, for establishing PMA wholesale power rates is sufficient and appropriately

balances the requirements to recover federal investments and maintain low electricity rates.

Section 533—Regulation of Federal Power Marketing Administration Transmission

Systems

APPA is opposed to this section which would subject PMA transmission rates to

full FERC jurisdiction, identical to that applied to ‘‘public utilities’’. APPA believes

that the current system of regulating these rates, which recognizes the inherent differences between investor-owned utilities and federal entities, is sufficient to recover

the federal government’s costs and to protect consumers’ interests.

Section 534—Accounting

Section 534 directs FERC to issue rules to ensure that PMAs utilize the same accounting principles and requirements that are applicable to public utilities, procedures for the filing of complaints with FERC to parties seeking to ensure compliance, and procedures to ensure the power generating agencies and PMAs maintain

a consistent set of books and records for purpose of debt repayment.

This section is also unnecessary and should be deleted. Federal entities are different than ‘‘public utilities’’ in many ways, including their basic purposes and obligations as prescribed in federal law. This section would set up conflicts between

those legally prescribed obligations that could increase electricity costs for consumers while providing no long-term benefit to the federal government.

Section 102—Federal Standards for State Net Metering Programs

These provisions require states, non-regulated electric utilities, and federal power

marketing agencies to implement net metering programs that meet minimum federal standards—for renewable resources (up to 250 kilowatts). If a utility fails to

implement a program within one year, then FERC establishes a program that the

utility must implement. While there can be positive benefits to net metering, such

as its potential to increase the use of renewable resources and provide generation

alternatives, net metering is essentially a ‘‘retail’’ program and should be left to

states and localities. Approximately half of the states already have some type of net

metering program in the works. If net metering is to be included in a federal bill

it should, at the minimum, grandfather existing state programs.

Section 103—Price-responsive Demand Programs

All utilities have demand reduction, load curtailment, and energy efficiency programs available now to their customers and public power systems in particular have

been very responsive to customers in this regard. APPA believes such programs are

best left to state and local entities, and this language is unnecessary. Moreover, this

provision raises a question about whether it is appropriate for the agency that regulates wholesale power markets to be, in effect, a participant in those same markets.

PROVISIONS OF H.R. 3406 THAT APPA SUPPORTS

While APPA is opposed to the overall bill in its current form, there are several

sections of the bill where APPA either supports the language as introduced, or supports the concept embodied in the provision and would seek certain modifications.

These are discussed below:

Section 201(a)(2)—Open Access Transmission (FERC-Lite)

While public power systems with transmission facilities are not anxious to be subjected to FERC jurisdiction, the limited jurisdiction contained in this section of H.

R 3406, known as FERC-lite, is an acceptable compromise and is consistent with

APPA policy. In essence, FERC-lite would extend FERC jurisdiction to public, cooperative, and federal utilities with transmission facilities interconnected to the naVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00146 Fmt 6601 Sfmt 6621 E:\HEARINGS\77118 pfrm09 PsN: 77118
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tional grid. The FERC-lite language makes the important exception, however, that

FERC would not be given the authority to set transmission rates for these non-jurisdictional transmitting utilities. Instead, FERC would determine whether the rates

they charge to others are comparable to those they charge themselves. If there were

discrepancies, FERC would remand the issue to the publicly owned utility. It is important to note that these provisions do not work unless accompanied by changes

in the federal tax code that resolve the barriers posed by the private use limitations

on tax-exempt bonds used to finance public power transmission facilities.

Title III—Transmission Reliability

APPA supports this title that represents one of the few matters relating to restructuring on which Congress could have the confidence to legislate. We appreciate

the inclusion in H. R. 3406 of additional language suggested by the North American

Electric Reliability Council and Chairman Barton’s efforts towards creating a national electric reliability organization to set and enforce reliability standards, subject

to FERC oversight.

Section 402—Transmission Siting

APPA also supports, in principle, the bill’s approach to federal siting authority as

outlined in section 402. APPA recognizes that backstop siting authority is a necessary tool to facilitate the siting of new transmission lines that are stymied by the

current balkanized, state-by-state siting approval process. Transmission lines are

necessary to support interstate commerce, as well as security interests, and thus a

federal role in the siting of these lines is appropriate. APPA would strongly urge

that every reasonable effort be made first at the local and state levels to resolve

siting issues and that federal siting authority should only be used as a last resort.

Section 101—Interconnection

APPA generally supports the provisions in the draft given the preservation of appropriate local authority. We agree with calls for a more streamlined, uniform approach to distributed generation and the use of a standardized technical interconnection, but not at the expense of public health and safety, cost-shifting, and potential reliability problems. This is one of a number of issues, however, where legislation may not be necessary. FERC already has jurisdiction under Section 210 of

the Federal Power Act (FPA) to order interconnection to any transmission facility.

In addition, the IEEE may soon adopt an industry-wide interconnection standard

that adequately preserves local (distribution) control, and FERC may soon adopt

some standardized interconnection agreements that resolve most of the issues that

have concerned the generator manufacturers and owners. The successful convergence of these events may obviate the need for Congress to act on this issue.

Title V, Subtitle A—Tennessee Valley Authority

This subtitle represents a previously developed consensus on the relevant issues

among the various stakeholders, including in particular TVA’s municipal utility distributors, TVA, and the congressional delegation representing TVA’s service territory. APPA supports the efforts of its members in this region to modify provisions

of existing law to promote overall goals of increased competition, better service and

lower rates for customers served by TVA.

Title VI—Consumer Protections

Should restructuring legislation move forward, APPA supports the inclusion of the

provisions in this title to further protect consumers. However, other provisions previously addressed, including the elimination of FERC merger review, incentive pricing for transmission, PUHCA repeal, and overly prescriptive provisions regarding

RTO formation create significant risks for consumers that are not offset or overcome

by these modest consumer protection provisions.

CONCLUSION

APPA opposes H. R. 3406 in its current form because so much of the bill is either

unnecessary or contrary to the interests of consumers and the promotion of effective

wholesale competition. Congress should either defer legislation and allow the FERC

to continue to implement its stated objectives, or address a much narrower range

of subjects necessary to fill in the gaps in federal oversight. In any event, it would

be wise to heed the lessons learned over the recent past and avoid overly prescriptive changes in federal law.

Mr. LARGENT. Thank you, Mr. Richardson. Did you like the name

of the bill? I am just looking for one thing.

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Mr. RICHARDSON. Well, the name is quite nice. I am not sure

that it lives up to its promise, sir.

Mr. LARGENT. Okay. Thank you, Mr. Richardson.

Mr. Johnston, we will let you collect yourself, and kind of come

back to you at the end. We appreciate you being here.

Mr. JOHNSTON. Thank you.

Mr. LARGENT. And now we will recognize Mr. English.

STATEMENT OF GLENN ENGLISH

Mr. ENGLISH. Thank you very much, Mr. Largent. Let me start

out by saying that I like the name of the bill. It is very nice, and

I appreciate that. The last time that I testified here with regard

to the draft legislation, I pointed out specific items that we had

concern over.

Today what I would like to address is not so much the trees as

much as the forest. I would like to step back and take a look at

this bill. The Rural Electric Cooperatives who I represent, some 35

million consumers across this country, consumer-owned and not for

profit organizations, have no issue with the objectives of this legislation.

I think we are certainly in accord with what the stated objectives

of this legislation are. But sometimes things don’t quite work the

way that we say we would like for them to work out.

A number of years ago the State legislators in California, when

they passed the restructuring bill, all thought that they were voting for cheaper power for their consumers.

They thought that this would be the results of the legislation

that was passed. Well, obviously things didn’t quite work out that

way. The concerns that we have is that the stated objectives of this

legislation don’t square with what the legislative language says

and what the legislation actually does.

I would suggest to you that instead of providing the Federal Energy Regulatory Commission with more authority, it actually restricts what the Federal Energy Regulatory Commission can do. It

takes away power from what State Regulators can do in order to

protect the public.

It makes it more difficult for the Federal Energy Regulatory

Commission to deal with disasters such as what we had in California and less publicized disasters in Montana, and even in States

that have been heralded as great success stories like Pennsylvania.

I might point out to you that not a single rural electric consumer

in the State of Pennsylvania has had anyone who has offered them

any choice in any type of competition whatsoever.

That is not what was stated and not what was promised when

it took place. It certainly makes it much more difficult for the

States to deal with protecting consumers and the local communities

in those States over whom they have a responsibility and obligation

to take care of.

The limitation on the Federal Government’s ability to protect

consumers and investors starts out with a repeal of the Public Utility Holding Company Act. Certainly that restricts the ability to

deal with market power, and there is nothing in this legislation to

take the place of that in protecting the consumers of this country,

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as was the objective of the Public Utility Holding Company Act or

is.

It repeals Section 203 of the Federal Power Act, taking away

FERC’s authority to review mergers and transfers, and the facilities again, and the ability to deal with a market power issue.

It includes four pages of detailed requirements for transmission

rates, and narrowing FERCs authority to reject transmission rates

that it believes are too high, and in fact requires the Federal Energy Regulatory Commission to pass rates that they consider to be

unjust and unreasonable.

Nor does it take any of those excessive funds and require that

those funds be used to build new transmission, which is purportedly the stated objective of this particular provision.

It includes 12 pages of detailed requirements for RTOs, restricting FERCs authority to guide the formation of RTOs in the public

interest, and making it far more difficult for FERC to change

course in response to the changes in technology or wholesale power

markets.

It includes 21 pages of detailed requirements for interconnection

standards, preempting the ongoing rulemaking and restricts

FERCs ability to encourage new generation needed for a robust,

wholesale energy market.

With regard to the restrictions on the State, Mr. Chairman, it

Federalizes net metering, and preempting the net metering provisions that have already taken place in 34 States, as well as the deliberate decisions by many of these States that net metering has

not been official to their communities.

It Federalizes the standards for interconnection for the distributed generation, preempting the interconnection provisions in several States, and the ongoing rulemaking that is taking place in

many others.

It Federalizes the standards for retail rates for energy sold to

consumers with their own generators, and evading the absolute

core of State responsibilities. Now, this is not what I think the

common perception of the members of this committee, and perhaps

not even the authors of the legislation.

This is not what I think that they want. I think that we all want

the same thing, but I do say that we have to address the legislative

language to deal with this particular problem.

And even where it says that the authority is expanded, Mr.

Chairman, that in and of itself is restrictive. In a provision, for instance, that requires the Federal Energy Regulatory Commission to

regulate the smallest of those within the electric utility industry,

that in itself limits the Federal Energy Regulatory Commission because it requires them to use very limited and scarce resources to

focus their attention on those who have the least impact, and those

where no complaint has been made, at the expense of focusing on

those who are the largest, and those where the abuses have taken

place, those where numerous complaints exist.

So I would simply suggest, Mr. Chairman, that we need to take

a hard look at this legislation in general, and look at it from a distance. Let’s make sure that the legislation language does indeed

agree with what the promise is.

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Let’s make sure when the Members of this Congress vote for this

legislation that they do have the hope and be able to have the opportunity, and realize the reality that this legislation accomplishes

what it promises. Thank you very much, Mr. Chairman.

[The prepared statement of Glenn English follows:]

PREPARED STATEMENT OF GLENN ENGLISH, CHIEF EXECUTIVE OFFICER, NATIONAL

RURAL ELECTRIC COOPERATIVE ASSOCIATION

INTRODUCTION

Chairman Barton and Members of the Subcommittee, I appreciate this opportunity to continue our dialogue on the restructuring of the electric utility industry.

For the record, I am Glenn English, CEO of the National Rural Electric Cooperative

Association, the Washington-based association of the nation’s nearly 1,000 consumer-owned, not for profit electric cooperatives.

These cooperatives are locally governed by boards elected by their consumer owners, are based in the communities they serve and provide electric service in 46

states. The 35 million consumers served by these community-based systems continue to have a strong interest in the Committee’s activities with regard to restructuring of the industry.

Electric cooperatives comprise a unique component of the industry. Consumerowned, consumer-directed electric cooperatives provide their member-consumers the

opportunity to exercise control over their own energy destiny. As the electric utility

industry restructures, the electric cooperative will be an increasingly important option for consumers seeking to protect themselves from the uncertainties and risks

of the market. I would like to thank you, Mr. Chairman, and Members of the Committee for your receptiveness to the concerns and viewpoints of electric cooperatives.

DISTRIBUTION AND RETAIL ISSUES

Title I of H.R. 3406 would: (a) grant FERC the responsibility for establishing

standards for the interconnection of distributed generation to the distribution and

transmission systems; (b) mandate net metering for some consumer-owned generation; (c) establish principles for setting rates for retail energy service to consumers

with distributed generation; and (d) grant FERC new authority to regulate demandside management programs.

NRECA is pleased that the Chairman has narrowed the language on price-responsive demand programs since the September draft. The statement that FERC programs ‘‘shall not preempt or displace existing non-Federal price responsive demand

programs’’ is critically important. Nevertheless, NRECA opposes the federalization

of these issues for several reasons.

First, electric cooperatives own 44% of the nation’s distribution system. Much of

these distribution systems are located in rural areas where the population density

is low, averaging less than 6 consumers per mile. As a result, the revenue generated

in these areas is extremely low, averaging approximately $7,000 per mile. Net metering and distributed generation interconnection programs, for instance, if formulated and implemented without a strong sensitivity and appreciation for local conditions would lead to increased electricity costs for consumers in rural areas that

could least afford to pay them.

Second, electric cooperatives have obtained $36.4 billion in RUS financing. As a

result of this financing, RUS must approve the rates and practices of distribution

cooperatives and cooperatives that own generation and transmission. Negawatt and

net metering programs and distributed generation interconnection standards have

a direct impact on these rates and practices; however, they are being federalized

without any role for RUS. This will create significant problems for cooperatives, including increased costs and the risk of conflicting regulatory obligations.

Third, these issues have traditionally been the responsibility of states and local

regulatory bodies for a very good reason: moving these issues to the federal level

makes it more difficult, or in some cases impossible, for states and local regulators

to protect the public interest. Policy decisions with respect to retail electric and distribution services can have a tremendous impact on local standards of living and

economies. It is important, therefore, for state and local regulators to be able carefully to balance local interests and to craft tightly focussed regulations of retail electric and distribution services that meet local needs. Moving responsibility over these

issues away from the local community to the federal level makes it less likely that

regulatory decisions will reflect local needs or protect local interests. Moving responsibility over these issues away from the local community to the federal level also

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makes it harder for utilities to provide reliable, universal electric service at a reasonable cost.

Moreover, NRECA does not believe that FERC has the experience or the resources

to regulate effectively matters relating to retail electric or distribution services. Over

more than 65 years, FERC and its predecessor, the Federal Power Commission

(FPC), regulated wholesale sales and transmission service. FERC has never established technical standards for the interconnection of generation at the transmission

levels, and it has never had any experience whatsoever regulating retail services or

distribution systems. FERC does not employ today a single distribution engineer.

Further, FERC is experiencing difficulty meeting its existing responsibilities today

with its limited resources. Multiplying FERC’s responsibilities by giving it new jurisdiction over retail and distribution services would spread FERC’s limited resources even more thinly to the detriment of both wholesale and retail consumers.

NRECA was pleased to see in S. 1766, the Energy Policy Act of 2002, introduced

by Senators Daschle and Bingaman, that at least some of these issues were left to

the states. While S. 1766 expressed Congress’ interest in distributed generation and

similar retail policies, the bill left it to the states and local authorities under

PURPA Title I to decide whether and how best to address those policies in light of

local conditions and interests. NRECA believes that the PURPA Title I approach is

the best way for Congress to address all of the retail issues on which it feels the

need to speak.

If Congress insists on setting mandatory federal standards for distributed generation interconnection, net metering, and demand response programs, NRECA would

be happy to work with the Chairman to adjust and focus the language to better

serve consumer interests.

PUHCA, MARKET POWER, AND FERC MERGER REVIEW

NRECA believes that existing federal processes have been insufficient either to

prevent concentration of market power or to protect consumers and competitors

from the exercise of market power. Moreover, the proposal in Title I, Subtitle B, to

repeal PUHCA, and the proposals in Sections 141 and 142 to repeal FERC’s merger

review authority and to eliminate NRC antitrust review would exacerbate existing

market power problems by accelerating the process of consolidation in the electric

industry and by making it more difficult for state and federal regulators effectively

to police market behavior.

NRECA believes that if PUHCA is repealed, it should be replaced with modern

legislation that takes a practical approach to controlling market power. Such legislation should provide regulators an array of tools that they can use to protect consumers and enhance competition in electric markets. In particular, Congress should:

• Impose on large electric utilities that seek to merge the burden of proof that their

merger is consistent with the antitrust laws if the Federal Trade Commission

(FTC) challenges the merger. The language would not change the burden of

proof in criminal cases.

• Prohibit FERC from approving a merger involving a large electric utility if the

merger would lessen competition or tend to create or perpetuate market power.

• Clarify, as does S. 1766, that FERC has jurisdiction to review mergers between

holding companies.

• Clarify, as does S. 1766, that FERC has jurisdiction to review dispositions of generating facilities.

• Authorize the FERC to take action to remedy existing market power, including

the authority to require a public utility with market power to divest generation

assets.

• Require the FERC, the Department of Justice, and the FTC to conduct an interagency study of market power in the electric industry.

• Authorize the FERC to impose civil penalties on any public utility that exercises

market power in violation of the Federal Power Act.

Only by including such provisions in restructuring legislation that repeals

PUHCA can Congress protect markets and consumers from excessive consolidation

in the electric industry and the exercise of undue market power.

PURPA

NRECA supports the Chairman’s proposal, in Title I, Subtitle C, to repeal the

mandatory purchase requirements in PURPA Section 210.

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OPEN ACCESS AND FEDERAL JURISDICTION

NRECA opposes efforts to subject electric cooperatives to the jurisdiction of FERC.

That expansion of jurisdiction would unnecessarily impose heavy financial burdens

on electric cooperatives and their consumer-owners.

To put it in perspective, FERC should have a more significant role regulating

larger electric utilities such as Entergy—whose subsidiaries own and operate more

than 14,000 miles of transmission line and sell more than 97,000,000 MWH to more

than 2,400,000 metered accounts—than it should have regulating Hickman-Fulton

Counties Rural Electric Cooperative—which owns 1 mile of transmission line, and

sells less than 120,000 MWH per year to fewer than 4,000 member-owners.

NRECA, sincerely appreciated the Chairman Barton’s efforts in the 106th Congress to limit the expansion of FERC jurisdiction over electric cooperatives by applying the comparability standard over our transmission rate terms, and conditions,

thereby establishing ‘‘FERC.’’ While NRECA opposes the expansion of FERC jurisdiction, we remained neutral on H.R. 2944, the Electricity Competition and Reliability Act, that incorporated the comparability standard.

NRECA is disappointed that H.R. 3406 does not reflect a similar understanding

of the cooperative difference. Section 702 emasculates FERC lite. While Section 201

creates the veneer of establishing the comparability standard as the basis for expanding FERC jurisdiction over transmission-owning utilities, Section 702 eviscerates the comparability concept. Under this section, rather than review cooperative transmission rates under a comparability standard, FERC would subject cooperative transmission rates to a full review under the just and reasonable standard if

there were a complaint. Rather than remand rates to boards of directors elected by

cooperatives member-consumers, FERC would set the rates itself at whatever level

FERC considers appropriate.

In addition to emasculating FERC lite, Section 702 would also, for the first time,

subject cooperatives’ wholesale rates to FERC review and regulation. At a time

when Congress and FERC are seeking to move towards a competitive wholesale

market for electric energy, Section 702 would move in the opposite direction, increasing the regulatory burden on electric cooperatives that seek to sell power in

the wholesale market. Yet, electric cooperatives have not been part of the problem.

Not-for-profit electric cooperatives have not gamed markets, they have not abused

consumers, and they have not exercised market power. It would be impossible for

them to have done so. Cooperatives do not own enough generation and are not large

enough players in electric markets to exercise market power. All together, electric

cooperatives generate only about 5% of the electric power in the country, which is

less than half of the power they need to serve their own consumers. All combined,

electric cooperatives’ sales to public utilities represent less than 1% of all sales in

the wholesale market.

Nevertheless, NRECA would like to work further with the Chairman and the

Committee to resolve any concerns they may have about FERC’s role in a manner

that minimizes the adverse impacts on cooperatives and their consumer-owners. In

particular, NRECA would like to Committee to note that S. 1766 lacks any equivalent to Section 702, and that S. 1766 includes a ‘‘bright-line test’’ exempting small

electric utilities from ‘‘FERC-lite’’ over transmission facilities without the need to

engage in expensive litigation.

REGIONAL TRANSMISSION ORGANIZATIONS

NRECA supports the formation of large, independent Regional Transmission Organizations or RTOs for all transmission owners.

RTOs, if fully independent and properly designed and operated, can substantially

mitigate the ability of transmission owners that also own generation to influence the

market for electric energy and to potentially discriminate against competitors. Because an effective RTO can operate the transmission system on a regional basis to

maximize efficiencies, it can also significantly improve reliability and reduce the potential for power market instability that can lead to price spikes.

NRECA believes, however, that the RTO provisions in H.R. 3406 have two serious

shortcomings:

1. They fail to address certain issues that must be resolved before cooperatives can

participate fully in RTOs; and

2. They sharply restrict FERC’s authority to shape RTOs in a way that strengthens

wholesale markets and protects consumers.

H.R. 3406 Must Enable Cooperatives to Join RTOs

NRECA has supported the formation of RTOs in a number of ways. NRECA submitted comments to the FERC in the rulemaking that resulted in Order No. 2000,

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and, in fact, FERC adopted several of NRECA’s recommendations. NRECA representatives attended each of the Commission’s five regional collaborative meetings

during 2000 and facilitated presentations made by individual cooperatives at those

meetings. NRECA also successfully facilitated voluntary RTO informational filings

by cooperatives even though the Commission’s regulations did not require most cooperatives to make such filings. Finally, NRECA and cooperatives in the southeastern United States have been very active in the ongoing FERC mediation that

is seeking to establish a single, large Southeast RTO.

For cooperatives to fully participate in RTOs as they clearly wish to do, and in

order for properly formed RTOs to develop, the following issues are of critical importance and must be addressed by H.R. 3406:

Full Recovery of Transmission Revenue Requirements. Transmission-owning cooperatives must obtain full, immediate recovery of their revenue requirements from

an RTO if they agree to commit their facilities to the functional control of that RTO,

as contemplated by Order No. 2000.

Comparable Inclusion of Transmission Facilities. Some transmission-owning cooperatives have had difficulty getting their transmission facilities accepted for operation/cost recovery by a future RTO on the same basis as investor-owned utilities

during the RTO formation process. Those IOUs opposing inclusion of cooperative

transmission facilities point to the radial, load serving nature of these facilities as

a reason for excluding them, overlooking the fact that they own comparable facilities

that are included in their FERC-regulated transmission revenue requirements. Cooperatives therefore favor the use of a single, consistent standard to govern the

RTO’s functional control of all transmission facilities, regardless of the owner.

Grandfathered Contracts. Many cooperatives have substantial contractual arrangements with neighboring transmission providers. These contracts take many

forms: some are among joint transmission owners, others deal with provision of both

generation and transmission, and some are transmission-only agreements (both preand post-Order No. 888). Whatever their content and form, these contracts are vital

to sustaining the cooperative’s ability to provide on-going service to their own member-owners. Transmission-owning cooperatives will not be able to join an RTO unless they have assurances that such contractual rights will not be severed without

their consent. Similarly, transmission-dependent cooperatives cannot lose access to

the transmission facilities needed to serve their member loads.

Regulation by the Rural Utilities Service. Many cooperatives have substantial

loans from, and, as a result, are substantially regulated by the Rural Utilities Service (RUS) of the U.S. Department of Agriculture. The Commission must take RUS

regulation into account and coordinate with RUS to ensure that when cooperatives

seek to join RTOs, inconsistent, inefficient regulation of cooperatives by these two

federal agencies does not occur.

85-15 Revenue Test. Cooperatives lose their tax-exempt status when more than 15

percent of their revenue is received from nonmembers. The Internal Revenue Service (IRS) has not clarified that, when a cooperative joins an RTO, the revenues received by the cooperative from the RTO will not be deemed to be nonmember income

for purposes of the 85-15 revenue test. Congress must ensure that cooperatives can

join RTOs without unintentionally violating their current not-for-profit tax status.

NRECA appreciates the Chairman’s effort to address the 85-15 issue in the September 21 discussion draft. That language, however, is inadequate to solve the problem and permit cooperatives to participate in RTOs. Since the September 21 discussion draft addresses tax issues, it should incorporate the provisions in H.R. 1601.

Cost Shifting. RTO transmission rates and tariffs should (a) mitigate cost shifting

and take into account the specific needs and characteristics of each affected region,

including costs of operation, debt, and other expenses; (b) use the same effective return-on-investment to all participating transmission owners; and (c) recognize the

goal of establishing a single non-pancaked rate structure applicable to all customers.

RTO Market Power. As transmission service remains a monopoly, and as individual RTOs assume control of larger transmission systems than individual transmitting utility owners, RTOs will possess unprecedented market power. In this context, a badly governed and operated RTO may be worse than no RTO at all. Thus,

the monopoly status of an independent RTO must be acknowledged at the outset,

and the RTO’s transmission rate structure and associated cost-of-service should be

developed using traditional cost-of-service ratemaking principles. RTOs should not

be eligible for ‘‘incentive ratemaking,’’ ‘‘performance-based ratemaking’’ or ‘‘lighthanded regulation’’ that would have the effect of increasing rates to transmission

customers without concomitant benefits or reducing independent regulatory oversight of such an RTO’s activities.

Collaborative Process. The Commission has sought to encourage RTO forming

public utilities to actively collaborate with cooperatives in order to accommodate

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their needs as consumer-owned entities. Unfortunately, in numerous instances collaboration has been nothing more than a thinly disguised effort of saying, ‘‘take it

or leave it.’’ For cooperatives to effectively join RTOs, public utilities must be required to meaningfully collaborate with cooperatives beginning with the earliest

stages of RTO formation efforts. The Commission should not fail to act when informed of RTO formation efforts that exclude cooperative participation.

NRECA would be happy to work with the Chairman and the Committee to draft

language that addresses these concerns.

H.R. 3406 Should Not Handcuff FERC

In a number of ongoing proceedings, FERC is now actively developing an RTO

policy intended to enhance wholesale electric markets and protect the public interest. Congress should not interfere with that process with overly detailed and prescriptive legislative language or by creating new procedural and substantive hurdles

for FERC to jump. Section 202 of H.R. 3406 suffers from both failings.

First, Section 202 reads far more like a regulation than a statute. It includes detailed standards for RTOs that track many of the concepts included in FERC’s

Order 2000. As a result, it sets in stone concepts that are—and should be—in a

state of flux. None of us yet knows what the wholesale markets will look like when

the transition to competitive markets is complete. We all continue to learn what approaches are most likely to support a robust wholesale market and what approaches

hinder the development of that market. Congress should not freeze the process of

experimentation now. Congress should not deprive FERC of the flexibility it needs

to respond to changing circumstances and new information. Otherwise Congress will

likely stunt the formation of wholesale markets and freeze in place inefficiencies

and inequities.

Moreover, while Section 202 includes many of the provisions of Order 2000, a

careful reading indicates that it is not a faithful recreation of the Order 2000 standards. Instead, it appears there are several ‘‘strategic’’ absences from the requirements of Order 2000. As a result, if FERC were required to approve any RTO that

met these incomplete standards, we could see many RTOs that are not independent,

that do not have adequate size or scope, that do not reflect the infrastructure needs

of the developing regional wholesale markets. Even if these holes in the statutory

standards were not intentional, they reflect the danger of being overly specific and

prescriptive in statutory language.

Finally, Section 202 imposes new procedural requirements on FERC and grants

parties before FERC new appeal remedies that they do not have in other contexts.

The combined effect of these new procedures and new remedies makes it far more

difficult for FERC to meet its statutory obligation to protect the public interest. Congress should not interfere in this manner. FERC’s existing procedures and appeal

processes are adequate in other contexts and should not be changed for the limited

benefit of transmission owners seeking to retail their market power after joining

RTOs.

ELECTRIC RELIABILITY

NRECA supports the reliability language § 301 of H.R. 3406. That language would

require FERC to approve a new North American Electric Reliability Organization

that would have the power to ensure the reliable operation of the interstate bulk

transmission grid. NRECA believes that similar legislation needs to be enacted as

soon as possible.

NRECA opposes a competing proposal that would grant authority over reliability

directly to FERC. The Commission lacks the expertise or the resources to address

reliability on its own. There are questions whether it has been able to handle adequately its existing mandate to regulate wholesale markets. Responsibility for the

reliability of the nation’s grid would strain its existing staff even further. On the

other hand, while stronger enforcement authority is needed, there is no question

that NERC has done an admirable job of setting reliability standards. Congress

should not reject an industry-based model that has worked extremely well for over

20 years.

TRANSMISSION INFRASTRUCTURE

North America needs the electric transmission equivalent of the interstate highway system. The current transmission system cannot reliably handle the dramatic

increase in transactions since the enactment of the 1992 Energy Policy Act. Transmission deficiencies are contributing to wholesale and retail electric market failures

that are harming consumers.

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1FERC has also been encouraging the submission of incentive transmission rate proposals. According to FERC in Order 2000, ‘‘we have approved five ISOs [independent system operators]

with innovative transmission pricing, but otherwise have received few innovative transmission

pricing proposals.’’ 2FERC’s Pricing Policy for Transmission Services, 59 Fed. Reg. 55,031 (1994) (codified at 18

C.F.R. Part 2); Formation of Regional Transmission Organizations, 65 Fed. Reg. 810, 913 (2000)

(codified at 18 C.F.R. Part 35).

For the following reasons, NRECA does not believe that these problems can be

solved by offering utilities high incentive transmission rates or other financial incentives to build transmission.

• FERC’s Existing Authority. FERC already has the authority to establish incentive

transmission rates. FERC issued a policy statement in 1994 that would permit

‘‘more flexibility to utilities to file innovative pricing proposals...’’ In Order

2000, FERC stated that it was ‘‘critically important for RTOs [regional transmission organizations] to develop ratemaking practices that... provide incentives for transmission owning utilities to efficiently operate and invest in their

systems.’’ 1 In testimony before the Energy and Air Quality Subcommittee on

September 20, 2001, Deputy Secretary of Energy Frank Blake stated that

‘‘FERC has great flexibility under current law to set transmission rates at a

level to attract investment.’’ Since FERC has existing ratemaking authority to

approve incentive transmission rates, legislative language is unnecessary.

• Higher Electricity Prices for Consumers. Currently, FERC has wide discretion in

determining whether a public utility’s transmission rate is reasonable. Legislative language requiring FERC to approve incentive transmission rates is designed solely to handcuff FERC by curtailing its authority to reject unreasonably high transmission rates, resulting in higher electricity prices for consumers. Also, by limiting FERC’s ability to reject unreasonable rates, Congress

grants transmission owners the opportunity to gouge consumers with unreasonably high transmission rates.

• The Investment Community Is Unconvinced. During the July 26 hearing before

the Energy and Air Quality Subcommittee, Thomas Lane, Managing Director in

Goldman Sachs Energy and Power Group, responded to Member questions and

stated that there is a role for transmission rates that include the more traditional return on investment of around 12%. Since Wall Street believes that investments will flow into the transmission sector based on the current rate structure, it is unnecessary to force FERC to rubber stamp unreasonable rates.

• Lack of Newly Constructed Transmission. Legislative language forcing FERC to

approve incentive transmission rates will not automatically result in the construction of new transmission for two reasons. First, the language fails to guarantee that transmission facilities will, in fact, be built in exchange for FERC’s

approval of incentive rates. Second, the language would require FERC to approve incentive rates for the operation of existing transmission facilities. High

rates of return associated with existing transmission facilities will act as disincentives to the construction of new transmission that is needed to support a

robust wholesale market.

• Impediment to Generation Markets. The interstate transmission system should

exist to enhance the competitive generation market not to balkanize it further.

Any approach that allows individual companies with a financial interest in the

energy market to control transmission would have the unwelcome effect of

erecting tollgates on the interstate system, thereby narrowing generation markets and protecting the existing power of local generators.

NRECA is concerned that the incentive approach would raise the rates of return

and increase the costs for consumers, the intended beneficiaries of lower prices from

competition. Also, FERC not only has that authority under existing law, but also

has been encouraging utilities to propose innovative incentive-based rate designs for

years.2 In fact, FERC recently offered utilities a 300 basis-point increase in the rate

of return and a 7-year recovery period if they would build transmission in the West

by a stated deadline.

Given FERC’s current efforts to encourage innovative rates, NRECA is concerned

that legislative language establishing only incentive rates may handcuff FERC, limiting the agency’s ratemaking discretion at a critical time in the development of a

competitive industry.

As an option to legislating higher rates of return, NRECA believes Congress

should lower the risk of building transmission. Congress should direct FERC to

allow any entity that builds a qualifying transmission project to recover its costs.

By reducing the risk, Congress could encourage institutional investors and others

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looking for low risk investments invest in improvements to the nation’s transmission

grid.

To qualify for assured cost recovery, NRECA believes that transmission projects

must:

• be identified through a regional joint-planning process that coordinates and has

oversight for the reliable operation of the regional transmission system

• be constructed according to best engineering practices

• be operated by the relevant Regional Transmission Organization (RTO)

• offer service pursuant to traditional cost-of-service principles, with the cost-ofservice analysis taking into account the low risk provided by FERC’s obligation

to assure cost recovery.

By mitigating risk, spreading the cost of new facilities broadly, and enabling new

competitors to build transmission, NRECA’s approach to new transmission helps to

ensure that the interstate highway system can be built at the lowest possible cost

to consumers.

Mr. LARGENT. Thank you, Mr. English.

Mr. Gent.

STATEMENT OF MICHEHL R. GENT

Mr. GENT. Thank you, Mr. Largent, and Chairman Barton, and

committee members. My name is Michehl Gent, and I am the

President and CEO of the North American Electric Reliability

Council, often referred to as NAERC.

I am going to restrict my comments to your Title III, which is

the provisions for reliability. We do support the reliability provisions of this bill, and we strongly urge this subcommittee to move

and approve the language as soon as possible.

The electricity industry is changing in fundamental ways. These

changes are disrupting the mechanism that has ensured the reliability of the North American electricity grid.

In order to prevent these changes from jeopardizing the reliability, we must establish a system of mandatory enforceable reliability rules. This bill does just that. As you know the industry is

in a great state of flux as regional transmission organizations are

forming and reforming, and vertically integrated companies are

separating their organizations into different business units.

It is more important than ever that an industry-led self-regulating reliability organization be created to establish and enforce

reliability standards applicable to the entire North American grid.

The electric transmission grid is a single interconnective machine

that spans the United States and Canadian borders, and having reliability rules developed and enforced by a private organization, in

which varied interests from both countries participate, with oversight by the United States by the FERC, and similar review by regulators from Canada, is a practical and effective way to develop a

common set of rules needed for the international grid.

FERC plays a critical role in protecting the security, as well as

the reliability, of the North American grid, by marshaling the industry’s best expertise as to the design and operation of electricity

transmission systems in North America.

And by serving as the point of contact for the various government agencies that are interested in national security. Yet, their

continuing ability to serve in this function cannot be taken for

granted.

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This legislation addresses this issue by authorizing FERC to certify a self-regulating electric reliability organization. This new electric reliability oversight system is needed now.

The continued reliability of North America’s high voltage electricity grid, and the security of its customers, whose electricity supplies depend on that grid, is at stake.

An industry self-regulatory system is superior to a system of direct government regulation for setting and enforcing compliance

with grid reliability rules.

The language of H.R. 3406, with the addition of a State regional

advisory body language, presents a sound approach for ensuring

the continued reliability of the Northern American electricity grid.

The reliability of North America’s interconnective transmission

grid need not be compromised by all these changes that are taking

place in our industry, provided that we have this legislation and

it is enacted now.

I would like to close by commending Chairman Barton for his

leadership on these very important electricity issues. Thank you.

[The prepared statement of Michehl R. Gent follows:]

PREPARED STATEMENT OF MICHEHL R. GENT, PRESIDENT AND CHIEF EXECUTIVE

OFFICER, NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL

Good morning, Mr. Chairman and members of the Subcommittee. My name is

Michehl Gent and I am President and Chief Executive Officer of the North American Electric Reliability Council (NERC).

NERC is a not-for-profit organization formed after the Northeast blackout in 1965

to promote the reliability of the bulk electric systems that serve North America. It

works with all segments of the electric industry as well as consumers and regulators

to ‘‘keep the lights on’’ by developing and encouraging compliance with rules for the

reliable operation of these systems. NERC comprises ten Regional Reliability Councils that account for virtually all the electricity supplied in the United States, Canada, and a portion of Baja California Norte, Mexico.

Summary

NERC supports the reliability provisions (Title III) of H.R. 3406, and strongly

urges the Subcommittee to approve this legislation as soon as possible. With or

without Congressional guidance, the electricity industry is changing in fundamental

ways. These changes are disrupting the mechanisms that ensured the reliability of

the North American electricity grid. In order to prevent these changes from jeopardizing the reliability of our electric transmission system, we must adapt how we deal

with reliability of the bulk power system. NERC and a substantial majority of other

industry participants believe that the best way to do this is through an independent,

industry self-regulatory organization with FERC oversight, modeled after the securities industry, where the Securities and Exchange Commission has oversight of several self-regulatory organizations (the stock exchanges and the National Association

of Securities Dealers).

Title III of H.R. 3406 embraces this concept, and preserves the key elements of

earlier versions of this legislation, such as H.R. 312, introduced earlier this year by

Mr. Wynn and co-sponsored by Mr. Shadegg, Ms. Eshoo and Mr. Ehrlich. Aside from

a few technical suggestions, the only suggestion for improving the reliability language of H.R. 3406 that NERC would make is to add back the provisions addressing

the establishment of State regional advisory bodies and their role in advising reliability entities and the Commission on reliability matters. This language can be

found in proposed new Federal Power Act section 215(n) of the Wynn Bill.

Just about two months ago, my colleague, David Cook, testified before the Subcommittee on the subject of reliability legislation. I will not repeat his points, but

today will focus on two questions: (1) why is this legislation needed now; and (2)

how will Title III of H.R. 3406 meet this need.

Why Is This Legislation Needed Now?

NERC sets the standards by which the grid is operated from moment to moment,

as well as the standards for what needs to be taken into account when one plans,

designs, and constructs an integrated system that is capable of being operated seVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00157 Fmt 6601 Sfmt 6621 E:\HEARINGS\77118 pfrm09 PsN: 77118
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curely. The NERC standards do not specify how many generators or transmission

lines to build, or where to build them. They do indicate what tests the future system

must be able to meet to ensure that it is capable of secure operation. NERC’s rules,

which are not enforceable, have generally been followed, but that is starting to

change. As economic and political pressures on electricity suppliers increase and as

the vertically integrated companies are being disaggregated, NERC is seeing an increase in the number and severity of rules violations. Moreover, new issues are arising that demand an institution that can act fairly, but decisively, and in a timely

manner.

Let me give you an example. Traditionally, integrated utilities operated their generators to supply both the ‘‘real’’ (MW) and ‘‘reactive’’ (MVar) power necessary to

maintain secure operation of the transmission system, and charged for these services as part of the regulated cost of service. (It’s worth noting here that control of

flows on an electric system is not accomplished by valves and switches, as in gas

or telecommunications systems, but by controlling the outputs of generators.) These

‘‘services’’ provided by generators included such things as spinning and non-spinning

reserves and system voltage support. Now with the generation function separated

from the transmission function in many cases, these ‘‘services’’ are no longer provided by a single, integrated entity, but must be arranged and paid for separately

through tariffs and contracts with generators. To assure that this is done, we need

enforceable standards that require transmission operators (including RTOs) to make

adequate provision in their tariffs and contracts for these essential reliability services. How these arrangements are made can be the subject of filings with FERC or

other regulators, but they must be made. Absent such enforceable standards, the reliability of our interconnected grids will be at serious risk.

As a result of these changes in the industry, NERC is rewriting all of its reliability standards according to a new ‘‘functional’’ reliability model that sets out

measurable and, under Mr. Barton’s proposed legislation, enforceable requirements

for entities that are responsible for performing critical reliability functions. These

new standards will place uniform requirements on those that have the responsibility

for maintaining the minute-to-minute balance between load and generation, for seeing that power flows remain within the physical limits of the system, and that grid

voltages stay within tolerance.

Let me give you another, very different example of why this legislation is needed.

NERC plays a critical role in protecting the security, as well as the reliability, of

the North American grid. Since the early 1980s, NERC has been involved with the

electromagnetic pulse phenomenon, vulnerability of electric systems to state-sponsored, multi-site sabotage and terrorism, Year 2000 rollover impacts, and most recently the threat of cyber terrorism. At the heart of NERC’s efforts has been its ability to marshall the industry’s best expertise as to the design and operation of electricity transmission systems in North America, and serve as the point of contact

with various federal government agencies including the National Security Council,

Department of Energy (DOE), the Nuclear Regulatory Commission (NRC), and the

Federal Bureau of Investigation (FBI), to reduce the vulnerability of interconnected

electric systems to such threats.

I know that this Subcommittee understands how vitally important this function

is. Yet NERC’s continuing ability to serve this function cannot be taken for granted.

NERC traditionally has been funded by contributions from its Regional Councils.

New entrants and the pressure of competitive markets have made this funding

mechanism increasingly unsatisfactory. A new funding mechanism is needed that

properly and fairly supports NERC’s activities, including its activities related to security. H.R. 3406 would address this issue by authorizing FERC to certify an electric reliability organization that, among other things, has established rules that ‘‘allocate equitably dues, fees and other charges among end users.’’ See proposed section 215(c)(2)(B)(ii).

Title III of H.R. 3406 Would Provide for an Organization Capable of Protecting the

Reliability and the Security of the North American Electricity Grid

We need legislation to change from a system of voluntary transmission system reliability rules to one that has an industry-led organization promulgating and enforcing mandatory rules, backed by FERC in the United States and by the appropriate

regulators in Canada and Mexico. Title III of H.R. 3406 would do this. Under these

provisions:

• Reliability rules would be mandatory and enforceable.

• Rules would apply to all operators and users of the bulk power system in North

America.

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• Rules would be fairly developed and fairly applied by an independent, industry

self-regulatory organization drawing on the technical expertise of industry

stakeholders. • FERC would oversee that process within the United States. • This approach would respect the international character of the interconnected

North American electric transmission system. • Regional entities would have a significant role in implementing and enforcing

compliance with these reliability standards, with delegated authority to develop

appropriate regional reliability standards.

On this latter point, H.R. 3406 authorizes the electric reliability organization approved by FERC to enter into agreements to delegate authority to a regional entity

to enforce reliability standards. H.R. 3406, however, omits provisions in previous reliability legislation, such as H.R. 312, that direct the Commission to establish a regional advisory body of State representatives to provide advice to the Commission

and the national reliability organization. See proposed new section 215(n) of the

Federal Power Act in H.R. 312. NERC would suggest that the State regional advisory body language be added to H.R. 3406.

Having an industry self-regulatory organization develop and enforce reliability

rules under government oversight as H.R. 3406 would do, takes advantage of the

huge pool of technical expertise that the industry has been able to bring to bear on

this subject over the last 30 plus years. Having FERC itself set the reliability standards through its rulemaking proceedings, even if based on advice from outside organizations, would require FERC to develop or acquire technical expertise that it does

not now have, and would dramatically expand FERC’s workload at perhaps the

worst possible time. In addition, reliability rules and market standards need to be

worked out together, using a fair and open process, in a collaborative fashion by all

segments of the industry. FERC’s adjudicative processes are ill-equipped for this.

The electric industry is in a great state of flux, as regional transmission organizations are forming and reforming, and vertically integrated companies are separating

and selling off various portions of their business. With all the uncertainty as to who

will ultimately operate and plan the interconnected transmission system, it is more

important than ever that an industry-led self-regulatory organization be created to

establish and enforce reliability standards applicable to the entire North American

grid, regardless of who owns or manages it. The self-regulatory reliability organization authorized in H.R. 3406 can help assure that grid reliability is maintained,

even while new market structures and new RTOs are being formed. Because FERC

will provide oversight of the electric reliability organization in the U.S., FERC can

ensure that the organization’s actions and FERC’s evolving market policies are

closely coordinated.

The industry self-regulatory organization authorized in H.R. 3406 also addresses

the international character of the interconnected grid. There is strong Canadian

participation within NERC now. Having reliability rules developed and enforced by

a private organization in which varied interests from both countries participate,

with oversight in the United States by FERC and with equivalent activity by provincial regulators in Canada, is a practical and effective way to develop the common

set of rules needed for the international grid. Otherwise, U.S. regulators would be

dictating the rules that Canadian interests must follow—a prospect that would be

unacceptable to Canadian industry and government alike. Or, regulators on either

side of the border might decide to set their own rules, which would be a recipe for

chaos. There are also efforts under way to interconnect more fully the electric systems in Mexico with those in the United States, primarily to expand electricity

trade between the two countries. With that increased trade, the international nature

of the North American electricity market will take on even more importance, further

underscoring the necessity of having an industry self-regulatory organization, rather

than FERC itself, set and enforce compliance with grid reliability standards.

Conclusion

NERC commends the drafters of H.R. 3406 for attending to the critical issue of

ensuring the reliability of the interconnected bulk power system as the electric industry undergoes restructuring. A new electric reliability oversight system is needed

now. The continued reliability of North America’s high-voltage electricity grid, and

the security of the consumers whose electricity supplies depend on that grid, is at

stake. An industry self-regulatory system is superior to a system of direct government regulation for setting and enforcing compliance with grid reliability rules. The

language of H.R. 3406, with the addition of State regional advisory body language,

presents a sound approach for ensuring the continued reliability of the North American electricity grid. It is also an approach that has widespread support among industry, state, and consumer interests. The reliability of North America’s interVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00159 Fmt 6601 Sfmt 6621 E:\HEARINGS\77118 pfrm09 PsN: 77118
156

connected transmission grid need not be compromised by changes taking place in

the industry, provided reliability legislation is enacted now.

Mr. LARGENT. Thank you, Mr. Gent.

Ms. Church.

STATEMENT OF LYNNE H. CHURCH

Ms. CHURCH. Thank you, Mr. Largent, and Chairman Barton,

and other members of the committee. I am Lynne Church, President of the Electric Power Supply Association, which is the trade

association representing competitive power suppliers.

This includes independent power producers, marketers, and merchant generators. The industry today comprises over 33 percent of

the Nation’s installed capacity. The draft bill generally endorses a

competitive wholesale market, which of course we want, and we

deeply appreciate the leadership that Chairman Barton and others

on this committee have shown on the issue of electric restructuring.

We support the spirit of this bill, like Chairman Barton absolutely believes in a competitive, reliable, and efficient wholesale

market. And many of the provisions of this bill further this goal by

providing either needed legislative authority, or affirmation and endorsement of authority that FERC already is implementing.

An example of this provisions include the requirement that all

transmitting utilities join regional transmission organizations within 12 months; assurance that currently non-FERC jurisdictional

utilities provide open access to their grid; the adoption of predictable, non-discriminatory interconnection standards, which are critical for the investment in construction of new generation; and recognition that there must be authority to enforce reliability standards.

While there is much in the bill to applaud, key provisions in this

legislation could hinder the ongoing evolutionary process, and hamper the development of a truly competitive wholesale market.

The new RTO procedures in Section 202 of the bill would slow

or even stop the ongoing progress of RTO development, and invite

additional litigation and foot dragging. It does this through the requirements for multiple evidentiary hearings, new cost benefit assessments, and court appeals under standards of judicial review

that are not currently applicable to the Federal Power Act.

Most critically it provides for a stay of FERC action while these

appeals are being heard. These new requirements will provide

ample opportunity for obstruction of RTO development by those opposed to truly open access grid.

A second example is the prescriptive approach taken that will

prevent progress in fine-tuning the existing ISOs and RTOs that

have been approved. It will remove much of the flexibility that

FERC and the stakeholders have to adjust and reform these market organizations as the wholesale power market inevitably

changes and matures.

A third example is that the definition of market participant is too

limited and does not recognize that transmitting organizations

compete with generators in alleviating congestion, and that default

providers to have generating assets that compete also with competitive assets.

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A fourth example is that the reliability provisions do not reflect

recent industry developments, and would hinder coordination of reliability standards and market practices.

EPSA endorses the need for mandatory reliability standards that

are broadly applicable for the entire industry.

However, this bill does not reflect that FERC must be the ultimate authority to endorse reliability standards, and that RTOs

have an important role in enforcing reliability. In addition, the industry has begun a DOE sponsored collaborative standards crosssetting process that would integrate reliability in market practices.

Ideally, this process will produce a new legislative proposal that

can be considered by the full committee next spring or next year

when it takes up this bill. If I may, I would like to discuss the

Enron situation, which has been the underlying current of this

whole discussion, and what it does and what it does not mean.

Opponents of the competition have seized upon the occasion of

the company’s fall to proclaim that electric restructuring should be

halted or even reserved. In fact, however, the most persuasive proof

of the success of competitive markets was seen in what happened

in the markets after the bankruptcy occurred.

As the FERC Commissioner stated yesterday, trading went on

without a wrinkle. Competitors immediately stepped into the void

and kept prices and supplies on an even kneel. Other trading platforms saw a significant increase in their volume and several new

trading platforms are even in the works as we speak.

And most importantly the lights stayed on. While still young, the

competitive energy markets have matured to the point where they

can withstand the departure of a once-dominant player.

And finally, members of this subcommittee, and to others involved in this debate, a word of caution. Some thought leaders, including financial analysts and commentators, have been making allegations that other competitive suppliers may be quick to follow

Enron.

We have already heard some discussion of the Cal-Pine situation

that was triggered by some quotes in the New York Times this past

weekend. Their stock dropped precipitously, although it is fortunately coming back.

Such irresponsible statements made with no real evidence and a

lack of understanding of Cal-Pine’s and other suppliers’ business

models have the potential to repeat the Enron tragedy for other

employees and stockholders unjustifiably.

The factor that ultimately brought Enron down was a lack of

confidence in their financial strength by investors and customers.

I urge caution in debating these issues to avoid casting doubt on

other companies’ financial strength without knowing the facts.

In closing, thank you for allowing me to testify for the industry

today. We look forward to continuing to work with the subcommittee to advance development of a robust competitive market.

[The prepared statement of Lynne H. Church follows:]

PREPARED STATEMENT OF LYNNE H. CHURCH, PRESIDENT, ELECTRIC POWER SUPPLY

ASSOCIATION

Chairman Barton, Representative Boucher and members of the Committee, I am

Lynne H. Church, President of the Electric Power Supply Association (EPSA) and

am here today representing EPSA’s member companies. EPSA is the national trade

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association representing competitive power suppliers, including independent power

producers, merchant generators and power marketers. These suppliers, which account for more than a third of the nation’s installed generating capacity, provide reliable and competitively priced electricity from environmentally responsible facilities

serving global power markets. EPSA seeks to bring the benefits of competition to

all power customers. On behalf of the competitive power industry, I thank you for

this opportunity to comment on H.R. 3406, the Electric Supply and Transmission

Act.

THE RATIONALE PERSISTS FOR FEDERAL LEGISLATION

We deeply appreciate the leadership that Chairman Barton and others here today

have shown on the issue of electricity restructuring and the time and energy this

subcommittee has devoted to this topic. We support the spirit of this bill—like

Chairman Barton, EPSA believes in a competitive, reliable, efficient, environmentally-friendly wholesale electricity market. Many provisions in this bill further

this goal. For example, there is the requirement that all transmitting utilities join

regional transmission organizations (RTOs). In addition, the bill will ensure that

currently non-FERC-jurisdictional utilities provide open access to the interstate

transmission grid.

We particularly endorse the adoption of predictable, non-discriminatory interconnection standards, because we cannot overemphasize how important these rules

are for investment and construction of new generation. We have been heavily involved in the regulatory process underway at FERC to resolve these issues. Your

bill could give additional impetus to this effort and shortcircuit dilatory litigation.

While there is much in your bill to applaud, key provisions in this legislation

could hinder the evolutionary process that started with Energy Policy Act of 1992,

and hamper the development of a truly competitive wholesale market. These include

language in the sections on RTOs and reliability, which I will discuss in turn.

RTO LANGUAGE WOULD SLOW PROGRESS OF RTO DEVELOPMENT

Although the bill text requires full participation by owners of the interstate transmission grid in RTOs, the provisions in Section 202 of this legislation would stop

or dramatically slow progress that is now being made towards RTO development

and invite additional litigation and foot-dragging. The provision is prescriptive and

includes requirements for multiple evidentiary hearings, a new cost-benefit assessment, court appeals under standards of judicial review not normally applicable to

Federal Power Act cases, and—most critically—a stay on FERC action while these

appeals are being heard. This new process would radically change the calculations

that companies now make when they consider how and whether to take part in the

development of an RTO.

The RTO process now underway at FERC is difficult and painful for most participants. But there is no substitute for a deliberative process that allows for the steady

evolution of market institutions and needs. We believe that the prescriptive approach laid out in the bill will stop the progress being made towards RTO development while participants take their cases to court. It will also remove much of the

flexibility that the FERC has to adjust or reform these market organizations as the

wholesale power market inevitably changes in size and scope.

We all agree that RTOs must be independent of any class of market participants

in order to be an effective, non-discriminatory manager of the interstate grid. However, the definition of market participant in this bill specifically excludes both transmission owners that do not buy or sell power and entities that own generation but

only provide default service. Transmission development clearly affects the market

value of generation and default providers have assets that influence regional wholesale prices. The blanket exclusion as it appears in the bill cannot be justified.

Lastly, the language in Title IV, Sec. 216 (a) 6 says that incentive rates should

be used to ‘‘promote the voluntary participation in and formation’’ of RTOs. While

EPSA does not, in general, object to the use of incentive rates, this particular language should be removed. The language runs contrary to the idea that RTO participation must be mandatory, and conflicts with the RTO section of the legislation.

RELIABILITY PROVISIONS DO NOT REFLECT RECENT INDUSTRY DEVELOPMENTS

With respect to the bill’s provisions related to grid reliability, EPSA endorses the

need for mandatory reliability standards that are broadly applicable to the wholesale power industry. However, the language in this bill could limit the industry’s

ability to address the challenges of the ongoing development and restructuring of

the wholesale transmission system essential for reliable, efficient and well-functioning markets. As currently drafted, the bill shifts significant aspects of standards

159

development and enforcement away from FERC to a new electric reliability organization. The text also does little to reflect the role that will need to be played by

RTOs in future market management.

Given FERC’s substantial responsibility to ensure the reliable and efficient operation of the transmission grid and the imperative to develop effective RTOs, this

makes little sense. However, developed energy standards will have an inevitable impact on bulk power transmission systems and market operation essential for reliability. Accordingly, the standard setting process outlined in the bill raises serious

concerns that failing to centralize this activity with FERC could lead to confusion

and conflicts among multiple entities.

Further, the bill fails to account for recent industry efforts to rethink the nature,

scope and organizational structure for a new standards setting process that recognizes the need to integrate reliability and market practices. On December 7th, over

125 representatives from all areas of the industry met at a DOE-sponsored conference co-facilitated by EPSA, EEI, ELCON and NEM. The forum provided an opportunity for all interested parties to begin a broader collaborative effort to consider

whether and how to combine NERC’s reform proposals with the new North American Energy Standards Board (NAESB) that the Gas Industry Standards Board

(GISB) approved on December 5th. As currently written, Chairman Barton’s legislation could preempt this important process.

Many participants in the DOE conference acknowledged the potential benefits of

merging NERC into NAESB. In a reprisal of the leadership role she assumed as

FERC Chair, Betsy Moler challenged all the parties to work on a compromise model

for a new standard setting organization. The implications of these developments are

clear: legislation should not deny FERC or industry stakeholders the opportunity to

develop new approaches to energy standards development. The DOE intends to host

another conference on January 28th to discuss the progress on resolving these

issues. Ideally, this process will produce a new legislative proposal that can be incorporated in this legislation when it is considered by the full Energy and Commerce Committee next spring.

PURPA OWNERSHIP RESTRICTIONS ARE OUT-OF-DATE

Permit me to make one last point on the legislation: the bill addresses PURPA

without repealing the current PURPA ownership restrictions. These restrictions

were initially included to encourage non-utility ownership of new power facilities

and are now out-of-date. These restrictions are not applicable to other competitive

generation, such as exempt wholesale generators, and add unnecessary complexity

and inefficiency to the generation industry. While this reform has not yet been included in the Subcommittee bill, this proposal was included in the Senate Democratic energy proposal unveiled recently and in Administration position papers. We

urge you to adopt this proposal.

A COMMENT ON THE ENRON BANKRUPTCY

While my testimony today is focused on legislation, it is reasonable to expect the

members of the Subcommittee are likely to raise questions related to the recent

tragic bankruptcy of an EPSA member company, Enron. Let me make a few comments on the matter.

In the days since the company sought protection under bankruptcy laws, there

have probably been hundreds of Enron obituaries published in news and trade papers. Some have been straightforward and thought-provoking examinations of how

a company could move so quickly from being an industry innovator to insolvency.

Others raised complex and appropriate questions about the diligence of investment

analysts or the role of public accounting firms.

However, some of these post-mortem pieces have illuminated little more than the

well-established fact that, like every entity that forges a new path to overwhelming

success, Enron made some enemies along the way. While it’s true and ironic that

the competitive markets Enron helped to foster ultimately sealed its fate, they also

worked as intended to help shield energy customers from any catastrophic consequences.

Opponents of the competition that Enron helped bring to the nation’s energy markets have seized upon the occasion of the company’s fall to proclaim that electricity

restructuring should be halted or even reversed. In fact, however, the last few

months have demonstrated exactly the opposite.

Perhaps the most persuasive proof of competition’s power was seen in what happened in energy markets immediately following the largest bankruptcy filing in U.S.

history—practically nothing. There’s no talk of a bailout, either at the state or fedVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00163 Fmt 6601 Sfmt 6621 E:\HEARINGS\77118 pfrm09 PsN: 77118
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eral level. Trading went on with the many strong competitors who immediately

stepped into the void and kept prices and supplies on an even keel.

Although the move toward open markets is still young, competitive energy markets already have matured to the point where they can withstand the departure of

a once-dominant player.

Many have used Enron’s collapse to predict an end to competitive wholesale power

markets. Missing from this chorus of doomsayers, however, are those who watch energy markets most closely. On Wall Street and at the Federal Energy Regulatory

Commission, experts understand that Enron’s decline, rather than a caution against

competitive markets, actually highlights the need to hasten their arrival throughout

the nation. These observers remain committed to opening energy markets because

they have seen the power of competition put downward pressure on prices, open new

reservoirs of supply and encourage efficiency and technology advances at every turn.

In closing, thank you for allowing me to testify here today. We look forward to

continuing to work with you to advance the development of a robust, competitive

electricity market.

Mr. LARGENT. Thank you, Ms. Church.

Mr. Rouse.

STATEMENT OF JAMES B. ROUSE

Mr. ROUSE. Chairman Barton, Congressman Largent, and members of the subcommittee, I am James Rouse from Praxair, Inc., an

industrial gases company in Danbury, Connecticut. I am here as

Chairman of and represent the Electricity Consumers Resource

Council, or ELCON, the national trade association of large industrial customers.

ELCON recognizes a functioning and competitive wholesale market is necessary to support retail competition, which is slowly being

implemented in States throughout the Nation. We continue to believe that retail competition can benefit all consumers if markets

are truly open and consumers are free to choose among suppliers

who are actually competing.

Unfortunately, too many States, California being prime among

them, purport to establish free and open retail markets, but in reality they simply have created the appearance of competition, while

operating in more or less the traditional regulatory mode.

The legislation before us today, H.R. 3406, addresses wholesale

markets. On behalf of ELCON and its member companies, I compliment Chairman Barton for introducing the bill.

However, while I believe that the legislation represents progress,

it has certain shortcomings that would deny wholesale electricity

markets from realizing their full competitive potential. Let me take

some examples.

The link issue of regional transmission organizations, transmission citing, and the repeal of PUHCA, all of which affect market

power. Customer choice in retail access are wonderful goals, but

they are worthless if the transmission system does not allow for

the free and non-discriminatory movement of electricity from sellers to buyers.

That’s why RTOs are important. FERC’s actions to date recognize that the scope and configuration of RTOs are essential to their

operation. RTOs must be large enough to mitigate market power.

The governance must be truly independent, and not subject to

undue influence from vested interests. As I have explained at

greater length in my written material, I believe that the language

in H.R. 3406 is harmful in that it constrains FERCs ability to objectively analyze a regional market, and ensure that each proposed

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regional transmission organization will in fact facilitate the most

effective movement of power.

It would encourage smaller—the bill would—smaller rather than

larger RTOs, and that is not conducive, in my opinion, to increased

competition. Similarly the language in H.R. 3406 could restrict

FERC as it continues in its efforts to provide guidance on market

design and operation.

This is an issue of vital interest to large industrial users. FERC,

under the able chairmanship of Pat Wood, needs the opportunity

to be flexible and creative. H.R. 3406 would constrain and inhibit

FERC in its current market design docket.

Turning to incentive rates, which Section 401. Let me reiterate

what others have said. ELCON has previously stated before this

committee that there is no demonstrated reason—other than perhaps greed of monopoly transmission owners—— to provide incentive rate making for construction of new transmission.

This subcommittee in an earlier proceeding heard from somebody

from Goldman Sachs, I believe, an analyst who said that investment in transmission is low risk and that traditional rates of return are sufficient to induce investment.

The recently released winter assessment by the North American

Electrical Liability Council stated that transmission capacity for

this coming winter is adequate. If FERC believes that incentive

rates are necessary, which is a decision that can and should be

made on a case-by-case basis, they have sufficient authority under

the present law.

But I have seen no study or documentation to support this far

reaching proposal to implement across the board incentives. Such

a provision will produce higher electricity prices for all consumers

as previous witnesses have stated, and it may not relieve the transmission congestion where it is truly needed.

ELCON members believe that legislation should address demand-side issues, as well as supply site issues. We view the inclusion of a price responsive demand program in Section 103 as generally positive.

But we question the need to set an arbitrary 5 percent target,

which we fear would create yet another Federal program rather

than developing a robust customer remote response or CRR market.

There is no magic or correct number for customer load response.

Individual consumers should be able to compare the value of continuing to consume electricity to manufacture their products, with

a value being paid to reduce the consumption of electricity.

We hope that this section will not result in a traditional Demand-Side Management, responses which have historically resulted only in added costs for consumers, with relatively little reduction in overall demand and virtually no reduction in the system

peaks, which is really the most critical area.

We believe that consumers, large and small, if given sufficient information, and appropriate market based incentives, will adjust

their electricity consumption accordingly.

No target or any other artificial threshold is necessary or desirable. A final note on reliability. ELCON has worked on this issue

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for nearly 5 years. We at ELCON have a simple objective; one organization charged with setting standards for both reliability and

commercial practices, and retail and wholesale standards, which

we believe those two cannot be separated.

That organization should be overseen by the FERC, and the organization’s standard setting practices should be truly fair, open,

balanced, and inclusive. The new language proposed in H.R. 3406

may be too prescriptive to achieve that goal.

In conclusion, Mr. Chairman, may I compliment you and your

staff for a valuable document. I appreciate the time that you and

your staff have spent with industrial users, and in particular,

ELCON.

And although we do not believe that this bill in its present form

contains all the answers, it does offer a sound structure from which

to proceed when the subcommittee begins mark-up.

As always, Mr. Chairman, we thank you for your continuing interest in making electricity markets more competitive.

[The prepared statement of James B. Rouse follows:]

PREPARED STATEMENT OF JAMES ROUSE, CHAIRMAN THE ELECTRICITY CONSUMERS

RESOURCE COUNCIL

Mr. Chairman, members of the Subcommittee, I am James Rouse from Praxair,

Inc., an industrial gases company headquartered in Danbury, Connecticut. I am

Chairman of, and today represent, the Electricity Consumers Resource Council, or

ELCON, the national association of large industrial users of electricity. ELCON

members represent nearly every segment of the manufacturing community and have

operations in every state.

ELCON was established in 1976, and ELCON member companies pride themselves on being among the original proponents of open and competitive retail and

wholesale electricity markets. We compete in open markets to sell our products.

Since we purchase nearly every other raw material or component needed to manufacture our products in competitive markets. Why shouldn’t we be able to purchase

electricity in competitive markets as well?

We recognize that a functioning and competitive wholesale market is necessary

to support retail competition which is slowly being implemented in states throughout the Nation. We continue to believe that retail competition can benefit all consumers if markets are truly open and consumers are free to choose among suppliers

who are actually competing. Unfortunately too many states (California being prime

among them) purport to establish free and open retail markets but in reality have

simply created the appearance of competition, while operating in the traditional regulatory mode.

The legislation before us today, HR 3406, addresses wholesale markets. On behalf

of ELCON and its member companies, I compliment Chairman Barton for introducing this bill. While I believe that the legislation represents progress, it has certain shortcomings that would deny wholesale electricity markets from realizing their

full competitive potential.

Take, for example, the linked issues of regional transmission organizations

(RTOs), transmission siting, and the repeal of the Public Utility Holding Company

Act (PUHCA), all of which affect market power. Customer choice and retail access

are wonderful goals, but they are worthless if the transmission system (which will

remain monopolistic for many years) does not allow for the free and non-discriminatory movement of electricity from seller to buyer. Given that owners of monopoly

transmission facilities will still possess and exercise market power—that is monopoly power—I cannot emphasize too strongly that some regulation is needed to ensure that the owners of transmission systems do not use their government-granted

monopoly power to the detriment of real competition and consumers.

That is why RTOs are so important. FERC’s actions to date recognize that the

scope and configuration of RTOs are essential to their operation. RTOs must be

large enough to mitigate market power. Their governance must be truly independent and not subject to undue influence from vested interests. I believe that the

language in HR 3406 is harmful in that it constrains FERC’s ability to objectively

analyze a regional market and ensure that each proposed regional transmission orVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00166 Fmt 6601 Sfmt 6621 E:\HEARINGS\77118 pfrm09 PsN: 77118
163

ganization will, in fact, facilitate the most efficient movement of power and increase

competition in wholesale markets.

The two tests proposed in this bill as a means of demonstrating adequate scope

and configuration of an RTO are both flawed. Asking an RTO to conduct a cost-benefit study is an invitation to litigation—litigation that will be based only on dueling—and probably inconclusive—cost-benefit analyses. This will not resolve the

issue quickly, nor will it necessarily resolve the issue properly. The ‘‘generation sufficiency’’ test is based on a faulty premise; it would encourage smaller rather than

larger RTOs and, furthermore, it is simply not workable for several reasons. Sufficient generation within an RTO is an irrelevant factor. In an optimally constructed

wholesale market, we would have large seamless RTOs where power can flow not

only within but between RTOs so that the most efficiently produced electricity can

reach the greatest number of consumers. A generation sufficiency test invites monopoly transmission owners to exclude from an RTO new, more efficient generation

facilities once the generation sufficiency test is met. It also fails to consider both

load increases and generation changes that could transform generation sufficiency

to generation insufficiency. I could go on, but we see no reason to hamstring or otherwise restrict FERC as it looks at proposed RTOs under the guidelines it promulgated in Order 2000.

Similarly, the language in HR 3406 could restrict FERC as it continues its efforts

to provide guidance on market design and operation. This is an issue of vital interest to large industrial users. In fact, six ELCON members, including my own company, recently submitted affidavits to FERC as part of an ELCON filing in FERC’s docket on market design, pointing out that the model now utilized by the PJM-ISO,

while favorable in many ways, should not necessarily be used as the sole template

for ‘‘best practices’’ throughout the Northeast and the Nation. At a minimum, the

existing flaws in PJM should be fixed before its platform is extended to the entire

Northeast region. FERC, under the able Chairmanship of Pat Wood, needs the opportunity to be flexible and creative. HR 3406 would constrain and inhibit FERC

in its current market design docket.

Turning to incentive rates (Section 401), let me reiterate what ELCON has previously stated before this Subcommittee. There is no demonstrated reason—other

than the greed of monopoly transmission owners—to provide incentive rate-making

for the construction of new transmission. The Subcommittee, in an earlier proceeding, heard from a Goldman Sachs analyst that investment in transmission is

low risk and that traditional rates of return are sufficient. The recently released

Winter Assessment by the North American Electric Reliability Council (NERC) stated that transmission capacity for this coming winter is adequate. There may be specific areas where new transmission is necessary to alleviate congestion. Path 15 is

an obvious example. But simply giving the monopoly transmission owners a higher

return on transmission will not motivate them enough to relieve congestion that is

now protecting their high-cost generation. If FERC believes incentive rates are necessary—a decision that can and should be made on a case-by-case basis—they have

sufficient authority under present law. But I have seen no study or documentation

to support this far-reaching proposal to implement across-the-board ‘‘incentives.’’

Such a provision will produce higher electricity prices for all consumers and may

not relieve transmission congestion where it is truly needed.

Rather than simply requiring incentive rates, first remove governmental impediments. One way to remove impediments is to offer a federal right of eminent domain

for the siting of transmission lines. There is no reason that the siting of new transmission lines should be treated differently from the siting of new natural gas pipelines. The language in HR 3406, by a providing federal backstop, is a good, though

incomplete, first step.

Turning to PUHCA repeal, this statute is the only federal consumer protection

statute for electricity consumers. No bona fide consumer group supports the repeal

of PUHCA without adequate replacement provisions. We believe that there should

be clear authority vested in the FERC to prohibit any 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 states have retail access or until competition on a nation-wide basis is otherwise achieved. ELCON and ELCON members find the language in HR 3406 lacking in this regard.

ELCON witnesses and others have long defended before this Subcommittee the

Public Utility Regulatory Policies Act (PURPA), including the need for back-up

power in non-competitive states (which we are pleased is included in this bill. I will

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make the case—very briefly—from a slightly different perspective. Utilities claim

PURPA has resulted in higher rates for consumers. By definition, this cannot happen as long as PURPA is implemented correctly. In fact industrial users value

PURPA as having brought competition to the electricity marketplace. Any higher

prices, if there were any, were the result of state-approved actions and of poor decision-making by utilities. To repeat a point ELCON witnesses have made previously:

PURPA did not create above market contracts for utilities. In fact utilities have

more above-market contracts with other utilities than they do with PURPA qualifying facilities. It is worth noting that only utilities, not consumers, are seeking the

repeal of PURPA’s purchase and sale provisions.

ELCON members believe that legislation should address demand side issues as

well as supply side issues. We view the inclusion of a ‘‘Price-Responsive Demand

Program’’ in Section 103 as generally positive. But we question the need to set a

‘‘5 percent’’ target, which we fear would create yet another federal program rather

than developing a robust customer load response (CLR) market. There is no magic

or ‘‘correct’’ number for CLR. Individual consumers should be able to compare the

value of continuing to consume electricity to manufacture their products with the

value of being paid to reduce their consumption of electricity. We hope that this Section will not result in traditional Demand Side Management responses, which have

historically resulted only in added costs for consumers and relatively little reduction

in overall demand and virtually no reduction in system peaks. We believe that consumers—large and small—if given sufficient information and appropriate marketbased incentives will adjust their electricity consumption accordingly. No target or

any other artificial threshold is necessary or desirable.

A final note on reliability. For nearly five years ELCON has worked with NERC

to craft language creating a new reliability organization that recognizes both

changes in the transmission system and changes in the electricity stakeholder community. We lately have worked with the Gas Industry Standards Board (soon to be

renamed the North American Energy Standards Board) as they too attempt to provide structure and guidance to our interstate electricity grid. We at ELCON have

a simple objective: one organization charged with setting standards for both reliability and commercial practices and retail and wholesale standards (because we believe that they cannot be separated). That organization should be overseen by

FERC. The organization’s standard-setting practices should be truly fair, open, balanced and inclusive. The new language proposed in HR 3406 may be too prescriptive

to achieve that goal.

In conclusion, Mr. Chairman may I compliment you and your staff for a valuable

document. I appreciate the time that you and your staff have spent with industrial

users. Although we do not believe that this bill, in its present form, contains all of

the answers, it offers a sound structure from which to proceed when the Subcommittee begins markup. May I observe that the State of Texas has conferred on

our Nation its President, the chairman of the FERC, and the chairman of this Subcommittee. Seldom is a single state the source of such potential for the improvement

of our country’s electricity market. And, as always, Mr. Chairman, we thank you

for your continuing interest in making electricity markets more competitive.

Mr. LARGENT. Thank you, Mr. Rouse.

Mr. Acquard.

STATEMENT OF CHARLES ACQUARD

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

subcommittee. I am Charlie Acquard, Executive Director of the National Association of State Utility Consumer Advocates. I am here

today testifying on behalf of Consumers for Fair Competition.

Our ad hoc coalition believes that Congress and the Federal Energy Regulatory Commission must take clear and significant steps

to promote the market structure needed to foster and sustain effective competition in wholesale electric markets, and its associated

consumer benefits.

The events of the past year in California highlight the imperfections in the market, and the consumer consequences of failing to

promote effective competition. CFC is pleased that the FERC has

begun to take the steps to address these problems.

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Any electricity legislation approved by Congress should affirm

and strengthen the general direction taken by FERC. Anything else

will undermine the creation of effectively competitive wholesale

markets and harm the interests of consumers.

Regrettably, H.R. 3406 fails to do this. Rather, it retreats from

current law and reasons for policy initiatives, and actually reduces

consumer protections. Specifically, CFC believes that the following

changes to this proposal are necessary to promote effective wholesale competition.

First, H.R. 3406 will repeal the Public Utility Holding Company

Act. We continue to oppose PUHCA repeal unless a company by

provisions that satisfy the underlying purpose of the Act; consumer

protection, mitigation and market power; prevention of abusive affiliate transactions; and effective regulatory oversight.

H.R. 3406 does not include these basic consumer protections.

Therefore, CFC urges the subcommittee to permit PUHCA repeal

only if other changes outlined below are simultaneously adopted, or

other steps are taken to ensure competitive wholesale markets and

non-abusive utility affiliate transactions.

Second, CFC again urges the subcommittee to strengthen the

utility merger review and ‘‘FERCs merger review authority.’’ We

believe mergers should be approved only if they promote the public

interest, resulting in discernible consumer and competitive benefits.

Rather than ensure effective scrutiny of all proposed utility

mergers, H.R. 3406 retreats from current law. Therefore, CFC

urges the subcommittee to delete Sections 141 and 142 of H.R.

3406, and instead amend Section 203 of the Federal Power Act to,

one, require utility mergers to promote the public interest to be approved.

And, two, ensure that FERC has clear authority to review mergers between holding companies, convergence mergers between gas

and electric utilities, and generation only asset sales.

Third, the CFC commends you, Mr. Chairman, for addressing the

thorny issue of RTO formation and attempting to forge a compromise. However, we do not believe that the language contained

in H.R. 3406 will permit the grid management needed to support

effective wholesale competition.

Therefore, CFC urges this subcommittee to replace Section 202

with language affirming the authority of the Commission to promote RTOs and produce clear and discernible consumer benefits.

Fourth, we continue to strongly oppose mandated incentive or

performance based rates for transmission as contained in Section

401. The Federal Power Act currently provides sufficient latitude

for adopting of incentive and performance based transmission

rates, provided that such rates be statutory and mandated, and a

just and reasonable determination.

Section 401 would effectively redefine the just and reasonable

standard and require incentive rates for transmission service. We

similarly would oppose then the inclusion of negotiated rates that

would violate the tenants of the Federal Power Act.

Therefore, CFC urges the deletion of Section 401. Fifth, CFC supports the increase in criminal and civil penalties for Federal Power

Act violations that is contained in H.R. 3406.

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However, this action does not provide the guidance and tools

needed to establish competitive markets, oversight of those markets, and remedies for market flaws, manipulation, and abuse.

CFC cannot support electricity legislation that fails to include effective market power provisions. CFC urges the subcommittee to

include provisions to, one, require the establishment of clear rules

defining the conditions necessary for competitive markets and market-based rate authority.

Two, establish information disclosure requirements and a market

monitoring responsibility. Three, direct FERC to take any action

necessary to penalize violations of market rules, correct market

flaws, and imperfections, and remedy and mitigate market manipulations and market power abuses.

And, four, remove the time restrictions on rate refunds contained

in existing law. Finally, any treatment of market power must also

address the potential for abuse in the area of affiliate transactions.

Such abuses bring with them intended harm to rate payers and

competition alike.

Neither FERC nor the individual State Commissions currently

possess the jurisdiction authority to oversee the relationship between utilities and their affiliates that engage in unregulated,

multi-State, non-poor, business operations.

With proper oversight these affiliate transactions can lead to unfair competition, and higher rates from captive customers. Therefore, CFC urges inclusion of effective mechanisms to prevent abuse

of any competitive affiliate transactions.

We propose extending Federal Trade Commission Authority and

unfair competition, and trade practices, in the energy services market. In conclusion, competitive wholesale electric markets can

produce consumer benefits.

However, those benefits will not materialize or be consistently

available if the market is not structured to ensure its competitive

functioning. FERC has taken steps since the extension of Chairman Wood to take the necessary steps.

However, the direction of the Commission can radically shift

through changed membership, judicial challenge, and political pressure. We believe that the market and consumers will benefit from

statutory support for the general policy direction of the current

Commission, providing clear statutory guidelines and tools consistent with the policies outlined in our testimony, will foster a robust and competitive market, and provide certainly to market participants, avoid unnecessary delay, and ensure that consumers benefit.

Thank you, Mr. Chairman, for this opportunity, and I would be

happy to answer any questions that the subcommittee might have.

[The prepared statement of Charles Acquard follows:]

PREPARED STATEMENT OF CHARLIE ACQUARD ON BEHALF OF CONSUMERS FOR FAIR

COMPETITION

Mr. Chairman, members of the Subcommittee, I am Charlie Acquard, Executive

Director of the National Association of State Utility Consumer Advocates. I am testifying today on behalf of the Consumers for Fair Competition (CFC), an ad hoc coalition of consumer-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 Congress and the Federal Energy Regulatory Commission (FERC) must take clear and significant steps to promote the

167

market structure needed to foster and sustain effective competition in wholesale

electric markets, and its associated consumer benefits.

The events of the past year in California highlight the imperfections in the market and the consumer consequences of failing to promote effective competition. CFC

is pleased that the Federal Energy Regulatory Commission (FERC) has begun to

take steps to address these problems, including actions to advance RTOs, refine the

screen for market-based rates and lay out conditions for approval of performancebased transmission rates. Any electricity legislation approved by Congress should

affirm and strengthen the general direction taken on these issues by FERC. Anything else will undermine the creation of effectively competitive wholesale markets

and harm the interests of consumers.

Specifically, CFC’s urges the subcommittee to include the following provisions in

electricity legislation:

• The development and application of effective market rules, oversight and enforcement for wholesale electric markets that parallels those that exist for the securities industry; • A stronger standard for approval of proposed utility mergers—and application of

that standard to all mergers, combinations and asset sales; • Formation of large, independent regional transmission organizations that possess

strong maintenance, planning and expansion responsibility; • Limitations on utility diversification and inter-affiliate transactions to protect consumers, promote fair competition, and prevent complicated transactions that

pose risks to investors; and

• Provides necessary consumer protections as part of any PUHCA repeal effort.

Regrettably, as outlined below, H.R. 3406 fails to advance these necessary policies, retreats from current law and recent FERC policy initiatives, and reduces consumer protections. CFC offers you the following detailed comments and looks forward to working with the subcommittee in making those changes necessary to ensure effective wholesale competition.

PUHCA Repeal

Title I—Subtitle B of H.R. 3406 would repeal the Public Utility Holding Company

Act of 1935 (PUHCA). As CFC has previously testified before this subcommittee, we

oppose PUHCA repeal unless accompanied by provisions that satisfy the underlying

purposes of the Act—consumer protection, mitigation of market power, prevention

of abusive affiliate transactions and effective regulatory oversight. H.R. 3406 does

not include these basic consumer protections.

CFC urges the Subcommittee to permit PUHCA repeal only if the other changes

outlined below are simultaneously adopted, or other steps are taken to ensure competitive wholesale markets and non-abusive utility affiliate transactions.

Merger Review

As detailed in prior testimony, CFC urges the Subcommittee to strengthen utility

merger review and close gaps in FERC’s merger review authority. We believe mergers should be approved only if they promote the public interest—resulting in

discernable consumer and competitive benefits. The rapid rate of industry consolidation threatens to reduce competition, frustrate market entry and create new opportunities for market power abuse by far-flung economic empires. In addition, CFC

agrees with FERC Chairman Pat Wood and the Administration that FERC merger

review should extend to holding company mergers and generation-only asset sales.

We also believe that the proposed Dynegy acquisition of Enron underscores the need

for FERC review of ‘‘convergence’’ mergers between electric and gas utilities.

Rather than ensure effective scrutiny of all proposed utility mergers, H.R. 3406

retreats from current law. Title I—Subtitle D would eliminate important merger review and conditioning authority by the FERC and Nuclear Regulatory Commission

(NRC). Repealing Section 203 of the Federal Power Act—combined with repeal of

the Security and Exchange Commission’s merger review under PUHCA—drastically

reduces effective merger review and eliminates the ability of FERC to condition proposed mergers on those actions necessary to protect the public interest and facilitate

effective competition. The Justice Department and Federal Trade Commission lack

the resources and expertise to effectively review proposed mergers and the on-going

regulatory responsibility to enforce merger conditions.

CFC also opposes Section 142 that would eliminate prospective NRC anti-trust review and allow for the waiver of existing anti-trust license conditions. Contrary to

the section’s title, this review is not ‘‘duplicative’’, since it is not performed by any

other anti-trust agency at the time of license issuance or renewal. NRC anti-trust

review has been an effective tool in securing transmission access over the years—

and the transmission agreements resulting from these reviews form much of the

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basis for the competition that exists in the wholesale electric market today. Rather

than upholding these existing transmission rights, Sec. 142 of H.R. 3406 would

allow these transmission rights to be waived, thereby undermining efforts to promote fair and equal transmission access.

CFC urges the Subcommittee to delete Sec. 141 and 142 and, instead, amend Sec.

203 of the Federal Power Act to (1) require utility mergers to promote the public interest to be approved, and (2) ensure that FERC has clear authority to review mergers between holding companies, convergence mergers between gas and electric utilities, and generation-only asset sales.

RTO Formation

CFC commends you, Mr. Chairman, for addressing the thorny issue of RTO formation and attempting to forge a ‘‘compromise.’’ However, we do not believe that

the language contained in H.R. 3406 will promote the grid management needed to

support effective wholesale competition. We believe that Section 202, while attempting to require full RTO participation, suffers from the following shortcomings:

• An unusual judicial review system is established, with the FERC RTO directive

stayed while the proposal undergoes seemingly endless rounds of review and appeal.

• The provision is extremely prescriptive and limiting. The California experience

has showed us that the competitive wholesale market is still in its infancy. Unfortunately, Section 202 limits the ability of FERC to respond to the markets

growing pains by preventing the Commission from modifying the scope, configuration, governance structure or other key elements of existing RTOs. In addition, it cannot use its other authorities under the Federal Power Act to require

RTO participation or RTO modification. This legal straightjacket will impede

the natural evolution of RTOs and the market.

• The ‘‘scope and configuration’’ standard appears to provide for self-certification by

the applicant that the RTO is ‘‘good enough’’—even if it would otherwise fail

FERC’s standard.

• A ‘‘market monitoring’’ standard that lacks effective enforcement authority. While

the independent market monitoring unit would gather information and monitor

tariff compliance, any noncompliance or structural flaws uncovered by these

units are left to the market participants to address.

CFC urges the Subcommittee to replace Sec. 202 with language affirming the authority of the Commission to promote RTOs that produce clear and discernable consumer benefits.

Incentive Rates for Transmission

As CFC testified at the Subcommittee’s October 10 hearing, we oppose mandated

incentive or performance-based rates for transmission as contained in Sec. 401 of

H.R. 3406. The Federal Power Act currently provides sufficient latitude for adoption

of incentive and performance based transmission rates—provided that such rates

meet the statutorily mandated ‘‘just and reasonable’’ determination. Section 401

would effectively redefine the ‘‘just and reasonable’’ standard and require incentive

rates for transmission service. We similarly would oppose the inclusion of ‘‘negotiated rates’’ that would violate the tenets of the Federal Power Act.

In an October 25 order, FERC highlighted the problems inherent in a blanket incentive rate directive. In that case, the applicant sought performance-based rates for

renovation of a high-voltage line. In rejecting the application, FERC determined

that the proposal did not balance risks and rewards, lacked an effective baseline

against which to measure performance, and created a perverse incentive to allow

the degradation of transmission facilities in order to then reap the later incentive

for renovation work.

CFC urges the deletion of Section 401. If the issue of incentive or performancebased rates must be addressed, then CFC would urge the adoption of either (1) a directed rulemaking for FERC to determine what actions are needed, consistent with

Sec. 205 and 206 of the Federal Power Act, to promote the efficient expansion and

improvement of interstate transmission networks, or (2) a performance-based rate

standard that mirrors the recent FERC case and determine when such rates would

produce demonstrable beneficial behavior, investment or actions that are unlikely to

occur absent such rates.

FERC Authority on Anti-Competitive Conduct

CFC supports the increase in criminal and civil penalties for Federal Power Act

violations that is contained in Title VII of H.R. 3406. However, this action does not

provide the guidance and tools needed to establish competitive markets, oversight

of those markets, and remedies for market flaws, manipulation and abuse. CFC canVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00172 Fmt 6601 Sfmt 6621 E:\HEARINGS\77118 pfrm09 PsN: 77118
169

not support electricity legislation that fails to include effective market power provisions.

CFC urges the Subcommittee to include provisions to:

• Require the establishment of clear rules defining the conditions necessary for competitive markets and market-based rate authority;

• Establish information disclosure requirements and a market monitoring responsibility;

• Direct FERC to take any action necessary to penalize violations of market rules,

correct market flaws and imperfections and remedy and mitigate market manipulations and market power abuses; and

• Remove the time restrictions on rate refunds contained in existing law.

Affiliate Transactions

Any treatment of market power must also address the potential for abuse in the

area of affiliate transactions. The repeal of PUHCA, the growth of unregulated business ventures owned and controlled by utilities and their parent companies, and the

increasingly interstate nature of affiliate operations have all fostered additional opportunities for anti-competitive self-dealing, cross-subsidization and cost-shifting.

Such abuses bring with them attendant harm to ratepayers and competition alike.

Neither FERC nor the individual state commissions currently possess the jurisdiction and authority to oversee the relationship between utilities and their affiliates

that engage in unregulated, multistate, non-core business operations. Without proper oversight, these affiliate transactions can lead to unfair competition and higher

rates for captive consumers.

CFC urges inclusion of effective mechanisms to prevent abusive and anti-competitive affiliate transactions. We propose extending Federal Trade Commission authority

to prevent unfair competition and trade practices in energy services markets.

Conclusion

Competitive wholesale electric consumers can produce consumer benefits. However, those benefits will not materialize, or be consistently available, if the market

is not structured to ensure its competitive functioning. FERC has taken steps, since

the ascension of Chairman Wood, to take the necessary steps. However, the direction of the Commission can radically shift—through changed membership, judicial

challenge and political pressure. We believe that the market—and consumers—will

benefit from statutory support for the general policy direction of the current Commission. Providing clear statutory guidance and tools, consistent with the policies

outlined in our testimony, will foster a robust, competitive market, provide certainty

to market participants, avoid unnecessarily delay, and ensure that consumers benefit.

Consumers for Fair Competition looks forward to working with you to make the

changes necessary to accomplish these objectives.

Mr. LARGENT. Thank you, Mr. Acquard.

STATEMENT OF WILLIAM R. PRINDLE

Mr. PRINDLE. Thank you, Mr. Largent, Mr. Chairman, and members of the committee, my name is Bill Prindle, and I am the Director of Buildings and Utilities Programs for The Alliance to Save

Energy.

The Alliance is a bipartisan, non-profit, coalition of business, government, environmental, and consumer leaders, dedicated to improving the efficiency with which our economy uses energy.

I would like to talk to you today about energy efficiency, and demand resources, and demand response, and that is part of the

wider world of what we called distributed resources, which includes

renewables and distributed generation in their many forms.

Now, we have known for a long time that efficiency in the other

distributed resources can often be the fastest, cleanest, cheapest

way to meet a large part of our energy needs.

And I would also just like to point out that since September 11th

that we have been forced to also consider the fact that we need to

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really need to focus more intently on the security of our energy systems.

So in that light I would add a fourth superlative and say that

efficiency in distributed resources are also the safest way to secure

our energy systems.

Overall, I would like to say that H.R. 3406, while it commendably touches on demand response in Section 103, overall we feel

that it misses a golden opportunity, an opportunity to use distributed resources and energy efficiency to make electric markets safer,

more efficient, to reduce customer bills, to reduce the risk of blackouts, and to improve air quality.

I would like to highlight some of the issues and tell you four

things that we would like to see in the bill. First, let’s take a look

at the real world and what is going on out there. Now, we see a

few good things happening out in the marketplace, but we don’t see

that matched in the way that Federal policy is going.

Now, we have seen that deficiency in distributed resources can

help reduce the risk of blackouts, and can help drive down marginal prices in wholesale markets, especially at those key peak

times, and can improve air quality.

In the State of New York, Governor Patacki has instituted programs that among other things replaced 40,000 air-conditioners

last summer, which took several megawatts off the peak.

They also worked with the ISO to encourage pilot programs and

demand response, taking several hundred megawatts again off the

peak there. The State of Texas has been an innovator in using energy efficiency for air quality compliance.

There is a new State energy code in Texas that is there largely

because there is a need to reduce NOX emissions; and even in the

State of California, regardless of who you would choose to blame

with all the problems that have occurred in California, we now

have some data on how California is working its way out.

In the last year, we know for instance that while about 2,400

megawatts of new supply have come on-line, we have also seen documentation from the energy commission that 6,600 megawatts of

demand-side resources have come into play in California.

So that is a more than 2-to-1 margin and clearly distributed resources are delivering big time when it counts. So, now let’s turn

to the Federal policy world. Earlier this year the FTC issued a report on electricity competition, and they had a chapter on demandside resources, and the sub-title of the chapter was, ‘‘The Sound of

One Hand Clapping.’’

And I think that phrase kind of sums up the situation that we

have in our electricity markets, where it is all sellers and no buyers. I mean, clearly, we wouldn’t want to run a stockmarket that

only put options and no call options.

E-Bay could not survive if only sellers and no buyers were allowed to log on to the system. This is the kind of fundamental

problem that we are facing in our electricity markets today.

There are built-in market barriers that discourage generators

and distribution companies from doing anything to reduce sales. In

fact, their profits only go up as sales go up.

So the question arises, well, what is the Federal role in this, and

why can’t the States just take care of this on their own as some

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of them have been attempting to do. I think the bottom line is that

we are trying to move toward regional and national markets for

electricity.

And in order to do that, we have to have some consistency in

market rules, and we have to have a level playing field as far as

how distributed resources are treated in these increasingly regional

markets.

And I would just ask that people in Oregon who have seen their

prices go up on an average of 30 percent in the last year because

of what happened in California, whether they think that energy efficiency and electricity matters are a State issue only.

So, let me just give you four things that we would like the committee to look at in the course of marking up this legislation. The

first is what we call a public benefits fund.

A lot of States have tried this, and more than 20 States are now

using this kind of a tool. Essentially, it establishes a very small

charge on electricity sales of typically one mil.

And what this would do is essentially replace the billion or more

dollars that has been lost in the last 5 or 6 years as States and

utilities have cut back their efficiency programs looking toward

competition.

Nobody knew what was going to happen, and a lot of States and

a lot of companies drop their programs, and this would help to replace that resource commitment. The second issue that we want

the committee to look at is an energy efficiency performance standard, and this was really pioneered in the State of Texas.

Governor Bush signed a restructuring bill that essentially required utilities to offset 10 percent of their projected load growth

with energy efficiency. I met with people from AEP and Reliant,

and TXU last week, and they are all cranked up and they are going

to spent $75 million next year on programs to implement that.

This approach would simply apply this in a modest way across

the Nation, and would establish a 1-percent target, or electricity retailers to reduce sales, a lot of flexibility and the means to do that.

And even the ability to trade among companies if one company is

not able to meet its target in a particular year.

Most pertinent to Section 103, we have several recommendations

for how to make demand response truly functional in the wholesale

market, and I won’t go into all those details.

But our written statement contains three categories of items that

we think are important to include in making demand response

markets work properly, and truly enabling customers to participate

fully.

And finally, Mr. Chairman, and members of the committee, I

would like to emphasize the importance of metering in all of this.

The meter is either the gateway or the barrier for customers to

participate effectively in these markets.

And we have a fundamental problem here in that smart metering is not in place for most customers. It is for some larger customers, but most customers are not able to use this technology.

So we need two things. We need uniform protocol for how metering is designed and installed so that there can be a national market; and second of all, we need a customer right-to-choose that allows a customer to get a smart meter installed if they want one.

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And no distribution company rule or other red tape should prevent a customer from getting that kind of choice, just as customers

should have the right to choose their power supplier.

With that, I will stop. Thank you for the opportunity to speak,

and I will be happy to answer any questions at this time.

[The prepared statement of William R. Prindle follows:]

PREPARED STATEMENT OF WILLIAM R. PRINDLE, DIRECTOR, BUILDINGS AND UTILITIES

PROGRAMS, THE ALLIANCE TO SAVE ENERGY

Mr. Chairman and members of the Committee, thank you for the opportunity to

speak with you today on energy efficiency and demand response as vital components

of electricity policy. Efficiency and demand response are the cleanest, cheapest, and

fastest ways to match electricity demand with supply, reduce price volatility, cut

electric bills for American families, prevent power outages, and improve air quality.

My name is William R. Prindle. I am Director of Buildings and Utilities Programs

for the Alliance to Save Energy, a bi-partisan, non-profit coalition of business, government, environmental, and consumer leaders dedicated to improving the efficiency

with which our economy uses energy. Senators Charles Percy and Hubert Humphrey founded the Alliance in 1977; our Chairman today is Senator Byron Dorgan,

and our vice chairs are Senator Bingaman, Senator Jeffords and Congressman Ed

Markey.

Over seventy companies and organizations currently belong to the Alliance to

Save Energy. If it pleases the Chairman I would like to include for the record a complete list of the Alliance’s Board of Directors and Associate members, which includes

many of the nation’s leading energy efficiency firms, electric and gas utilities, and

other companies providing cost savings and pollution reduction to the marketplace.

The Alliance has a long history of researching and advocating energy efficiency

policies and programs. We also have a long history of supporting energy efficiency

promotion efforts that rely not on mandatory federal regulations, but on partnerships between government and business, and between the federal and State governments. Federal energy efficiency programs at the Department of Energy (DOE), the

Environmental Protection Agency (EPA), and other agencies are largely voluntary

programs that further the national goals of environmental protection, as well as

broad-based economic growth, national security and economic competitiveness.

Electricity Restructuring So Far: The Sound of One Hand Clapping

Mr. Chairman, as we observe the record of electricity restructuring in this country, we see a mixed picture. While some parts of some markets have been restructured with varying degrees of success, overall there is a striking imbalance between

policies aimed at the supply side of the industry and those intended to employ the

resources available on the demand side, the customer side of the meter. The Federal

Trade Commission, in its report on restructuring earlier this year, aptly subtitled

the chapter on demand-side resources ‘‘The Sound of One Hand Clapping’’’, referring

to the almost total lack of focus on demand-side resources in today’s markets.

Clearly, we need to do more to make electricity markets truly competitive. Electricity policy without the proper balance between supply and demand is like a stock

market with all put options and no call options. Buyers and sellers need to be able

to participate fully in a real competitive market, and right now that is not the case

in our electricity markets. Customers are still mostly forced to take prices determined by sellers, and are not able to realize the full market value of the resource

they can offer from their own operations. We need strong and clear policies that enable energy efficiency and demand response to make the contributions they are capable of making.

Stronger policies for efficiency and other distributed resources are needed in our

electricity policy because in competitive electricity markets operating in the U.S.

today, there are built-in barriers to the development of these resources. For example: in a competitive generation market, generators have no financial incentive to

promote either efficiency or load management, and their profits increase with increases in sales and in peak demand. Additionally, under the rate designs used in

most states, wires companies profit from increased throughput, and find their profits harmed by energy efficiency programs. Because of these structural barriers, neither providers, nor load-serving entities, nor end-users see the real value that demand-side resources can provide to the market and the grid. These market barriers

make U.S. wholesale electric markets more expensive, more volatile, and less reliable than they should be.

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1 North American Commission for Environmental Cooperation, A Retrospective Review of

FERC’s Environmental Impact Statement on Open Transmission Access, 19 October 2001 2 Resolution Supporting Energy Efficiency and Load Management as Cost-Effective Approaches to Reliability Concerns, NARUC (July 23, 1999). See also, R.Cowart, ‘‘Efficient Reliability: The Critical Role of Demand-Side Resources in Power Systems and Markets,’’ published

by NARUC in June 2001. 3 NACEC, Op. cit.

4 U.S. Department of Energy. Energy Information Administration. U.S. Electric Utility Demand-Side Management 1999. http://www.eia.doe.gov/cneaf/electricity/dsm99/dsm—sum99.html

In addition to making markets fairer and more efficient, efficiency and demand

response can help solve the pressing problems facing our electricity systems, such

as:

• Increased price volatility. Electric demand has grown faster than was projected in the early days of restructuring. The Federal Energy Regulatory Commission’s 1995 projection of national electric demand through 2000 was lower

than actual experience by 4.6 percent 1. In the western, Northeast, and Midwest

markets we have seen unprecedented peak price problems. This stems from several factors, but a key is the needless ‘‘peakiness’’ of demand. These situations

have dramatically illustrated the need to manage demand along with supply.

Effective demand response programs can reduce prices through an entire power

pool, benefiting all customers. • Worsened system reliability. These peak problems have led to blackouts,

brownouts, emergency voltage reductions, and other extraordinary actions by

power pool managers from California to Chicago and New York. While it is important to boost the reliability of the grid infrastructure, it is typically faster

and cheaper to reduce the overall load on the system first. For this reason the

National Association of Regulatory Utility Commissioners has adopted a resolution urging Congress to include in energy legislation ‘‘workable mechanisms to

support cost-effective State, utility, and market participant energy efficiency

programs in order to enhance the reliability of the nation’s electric system.’’ 2

• Increased air pollution. These demand increases have increased interstate air

pollution, especially nitrogen oxides (NOX), which contribute to smog and acid

rain. The 1995 FERC projection of nitrogen oxide emissions turned out to be

4.3 percent lower than actual emissions in 2000 3. Saving energy, especially at

peak times, has an especially strong effect on reducing such air pollution.

Comments on H.R. 3406

We appreciate the fact that the Chairman has included a section in the bill on

demand response in Title 1, Subtitle A, Section 103, in recognition of the fact that

electricity markets should be truly competitive by addressing demand-side resources. While we support the general principles expressed in Section 103, we are

disappointed in the bill’s broader failure to address energy efficiency and other distributed resources, such as renewable energy. We want to emphasize that energy

efficiency and demand response, while often compatible, are different and require

different kinds of policy support. Energy efficiency can provide peak demand benefits, and demand response, which is aimed primarily at load management, can also

save energy. It thus essential to address both efficiency and demand response explicitly in H.R. 3406.

We believe that more substantial and specific measures are needed to create a

better balance between supply-side and demand-side resources. We also suggest the

Committee take advantage of the ‘‘research’’ done by the states in testing various

electricity policy options. The states have experimented with a variety of efficiency,

distributed-resource and renewable policy options in restructuring their electricity

markets. These have included public benefits funds, efficiency performance standards, and renewable portfolio standards. We support all of these as part of a balanced electricity policy, and commend them to the Committee as worthy of its consideration.

In the context of energy efficiency and demand response in H.R. 3406, we respectfully ask the Committee to consider additional provisions for the policies described

below.

A Public Benefits Fund. We need a federal public benefits fund to reverse the

decline in public benefits spending over the last several years. Over the last two

decades, states were able to use Integrated Resource Planning to generate a network of utility demand-side management programs that succeeded in avoiding the

need for about 100 300-Megawatt powerplants 4. However, utility spending on these

programs has been cut by half as the electricity industry has been deregulated. To

offset the lost benefits in reducing peak demand, cutting customer bills, helping lowincome people, and supporting the development of new technology, the Alliance supVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00177 Fmt 6601 Sfmt 6621 E:\HEARINGS\77118 pfrm09 PsN: 77118
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5 Alliance staff analysis based on: U.S. Department of Energy. Energy Information Administration. U.S. Electric Utility Demand-Side Management 1999. http://www.eia.doe.gov/cneaf/electricity/dsm99/dsm—sum99.html

ports the creation of a federal public benefits fund to support these state-based programs.

The energy efficiency programs run by states in the 1980s and 1990s have been

not only successful in their primary goal of saving energy, they have also been good

for the economy. The Rand Corporation issued a report in 2000 that quantified the

benefits of California’s utility energy efficiency programs, finding that between 1980

and 1995, utility efficiency investments generated roughly $1000 in returns for

every $1 spent. Rand also found that the overall economic benefit to the state from

these programs was responsible for 3 percent of the California gross state product

in 1995. A Public Benefits Fund would thus be an economic stimulus, helping to create jobs and new business opportunities in this time of economic uncertainty.

The fund would come from a non-bypassable charge on electricity, which would

then go to match state expenditures on energy efficiency, low income programs, renewable energy, and state-based research and development. States are spending

about $1.7 billion this year on public benefits programs, including efficiency, renewables, low-income programs, R&D, and related public goods. A federal match at this

level would raise another $1.7 billion annually. The residential share of this would

amount to about $12 per year per family-or about a dollar a month. Over time, the

savings generated by the fund will likely drive the net cost into net savings.

The benefits would be enormous; they are projected to include: 130,000 Megawatts

of electric capacity savings by 2020 (equivalent to about 400 powerplants); 1.24 trillion kWh saved over 20 years, cutting consumer energy bills by $100 billion; and

150,000 tons of nitrogen oxides emissions avoided.5

The public benefits fund is off-budget, providing an efficient way to support the

states in their efforts to respond to their mandates for reliability, clean air, and affordable energy. A dollar a month is a very small price to pay for keeping the lights

on, the air clean, and energy bills down.

An Energy Efficiency Performance Standard. The state of Texas has pioneered this approach in its electricity restructuring bill by requiring that utilities

achieve a 10% reduction in their load growth forecasts. The energy efficiency performance standard would mirror this approach at the national level by setting a

uniform national goal for energy savings that is implemented at the state level. The

requirement to achieve energy use savings would apply to electricity retailers (or

‘‘load-serving entities’’). They would report compliance to state utility regulatory

commissions (or, in the case of public power, to their governing boards), who would

be responsible for verification and enforcement. Federal agencies, including the Environmental Protection Agency and the Department of Energy, would set uniform

national energy savings measurement and verification protocols, as well as guidelines for forecasting and reporting.

The uniform national standard would require each electricity retailer to arrange

for and document modest, attainable, cost-effective savings as a percentage of sales

and peak demand. Based on two decades of state and utility experience, a 1% target

in terms of annual forecast electricity sales and peak demand is appropriate. Each

year, electricity retailers would determine the energy savings that were achieved,

according to the national protocols. Retailers would compare these savings to forecast sales, determine whether they met the 1% goal, and report this information to

the utility commission.

The annual energy savings requirement would be cumulative. That is, each retailer would incorporate past savings into subsequent years’ forecasts, and would

achieve a 1% savings target for each succeeding year based on those forecasts. A

1% annual increase in energy efficiency is a fairly modest goal that is comparable

to the savings that have been achieved under state demand-side management and

other efficiency programs. To make compliance easier, the standards and reporting

requirements could be set on a multi-year basis, as long as the overall cumulative

savings target is met.

Electricity retailers would also have programmatic flexibility to meet the performance goal. The range of traditional and newer demand-side options includes approaches such as appliance and lighting rebate programs, new construction efficiency programs, real-time metering and pricing, performance contracting, consumer

education campaigns, and low-income weatherization programs. The energy efficiency performance standard would also include a trading provision, which would

allow a retailer that exceeded the standard to sell its excess ‘‘efficiency credits’’ to

another retailer.

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Specific wholesale market rules that support distributed resource participation. Section 103 sets forth laudable goals and principles, but more specifics

are needed to fully capture the potential for demand response, energy efficiency, and

other distributed resources that this section seeks to encourage.

We recommend the Committee consider the following additional provisions in Section 103:

Demand-side Participation in Ancillary Service Markets. FERC should require that

market rules allow demand-side resources to supply ancillary services on an

equal basis with supply-side resources. The criteria for supplying ancillary services should be written in technology-neutral terms, and should not require costly telemetry and metering for individual demand-side resources whose performance could be verified on a statistical, aggregated basis.

An Efficient Reliability Standard. RTOs, reliability managers, and transmission

owners often seek cost recovery in FERC-approved tariffs for investments intended to enhance system reliability. Before granting recovery in transmission

tariffs or uplift charges that would recover those costs, FERC should require applicants to show that the benefits are broadly dispersed, and that they have selected the lowest-cost resource, including demand-side resources, reasonablyavailable to meet the need in question.

Before approving wholesale energy or transmission rates to recover the costs

of a proposed reliability-enhancing investment in transmission facilities or ancillary services, the FERC should examine the relevant wholesale market and

transmission access rules to ensure that price-responsive, distributed, and demand-side resources may compete on an equal basis with supply-side and transmission alternatives. It should require the applicant for cost recovery in rates

to demonstrate that it has taken a ‘‘hard look’’ at transmission, generation, demand-management, and other distributed resources to meet the congestion relief or reliability need in question. Before approving such rates, the Commission

determine whether:

(1) the relevant market is fully open to demand-side as well as supply-side resources;

(2) the proposed investment or standard is the lowest cost, reasonably-available

means to correct a remaining market failure; and

(3) benefits from the investment or standard will be widespread, and thus appropriate for support through broad-based funding.

FERC Authority to Approve Regional Reliability Charges. While it is understood that distributed resources and demand management investments may

be both quicker and less expensive means of enhancing reliability than remote

central stations and new transmission lines, some observers question whether

FERC has the authority to include the costs of demand-side and distributed reliability programs in wholesale rates and transmission tariffs. FERC should be

given the mandate and the authority to recover the costs of traditional transmission investments AND non-transmission alternatives in rates.

FERC should, by rule or order, require jurisdictional transmission providers

and RTOs to examine region-wide, reliability-enhancing investments in demand-side resources that would improve reliability and lower power costs.

When supported by cost-effectiveness analysis, those utilities and RTOs should

be permitted to recover those investments on the same basis as regional transmission investments, ancillary service costs, or other RTO expenses.

Standards for time-based metering and communication technology. The

electric meter is the essential gateway through which many distributed resources

are enabled, especially demand-response strategies. Without advanced metering capable of time-internal recording and digital communication, most customers will be

frozen out of the market for many demand-side resource options. At present, the

vast majority of users are neither aware that energy prices vary based on time of

day nor do they have any financial incentive to shift usage to times of lower production costs. By varying prices by time of day, and by providing users with easy access

to this price signal, users can shift usage and reduce their bills. The overall result

is a more efficient market.

With advanced metering equipment, users can get the information they need

when they need it and adjust their energy use not just to reduce their bill but to

use less energy overall. This was demonstrated by Puget Sound Energy’s efforts

begun last December to provide time-of-use information to over 400,000 of its residential customers. Strictly an informational program at its outset, Puget has reported that 79% of its residential customers and 70% of business customers had

taken action to alter their energy use and that 41% and 45%, respectively, reduced

their usage. A recent survey showed that 89 percent of participants said the proVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00179 Fmt 6601 Sfmt 6621 E:\HEARINGS\77118 pfrm09 PsN: 77118
176

gram has encouraged them to shift some of their power use to off-peak hours. Fortynine percent said they have cut their overall energy consumption.

Additionally, power-usage data indicate that variable, time-sensitive rates are

saving energy as well as shifting time of use among Puget customers. Residential

customers paying time-of-day rates shifted about 5 percent of their electricity usage,

on average, away from the morning and early evening hours when public demand

for power—and wholesale power prices—are highest. In addition, these customers

reduced their overall electricity usage in June by more than 6 percent compared to

their June 2001 usage.

Time-based metering and communications, and the new capabilities that it provides energy users, is an essential pre-requisite for the effective application of energy efficiency and demand response as resource options. It is thus important that

Congress, support the acceleration of the installation, deployment and use of advanced metering and communications technology. We ask that the Committee require in Section 103 the development of uniform national metering protocols to ensure that the new market for interval metered data and time-sensitive information

and pricing is created in a manner that is orderly, cost-effective, and not confusing

or impractical. This will ensure that those who want to pursue demand response

and related programs will not be thwarted by technology issues. The Alliance is

working with companies in this field who are forming a coalition to advance policy

that—accelerates the deployment of—these—technologies, and we will be pleased to

offer the Committee further input as it moves forward on this issue.

It is also important that customers who want to use advanced metering not be

thwarted by outdated utility rules. We thus urge the Committee to include provisions that ensure customers who want better metering are not prevented from doing

so by distribution utility rules. With national protocols in place for metering, utility

concerns about safety, accuracy, and security will have been addressed.

As with other new technologies for energy efficiency or sustainable energy use, it

is important for Congress to provide financial assistance for more rapid deployment

of advanced meters and demand response programs. We want to underscore our

support for the tax credit included in H.R. 4 for advanced metering equipment as

a vital stimulus for those who would implement the demand-response programs

under Section 103.

In summary, energy efficiency, demand response, and other distributed resources

are essential to a balanced electricity policy. We have offered several policy options,

and we hope the Committee will give due consideration to our recommendations.

Thank you, Mr.Chairman, for the opportunity to share our views with the Committee today. I will be happy to answer any questions you might have.

Mr. LARGENT. Thank you, Mr. Prindle. Mr. Hyman.

Mr. SAWYER. Mr. Chairman, is it possible to break? I would really like to hear Mr. Hyman’s testimony, but if I sit here and wait,

I am not going to get my vote in.

Mr. LARGENT. The problem is that Mr. Hyman has to leave. It

is my understanding that he can give his testimony, and we still

will have time to sprint over there and vote.

Mr. SAWYER. Okay. We are not going to be able to ask him any

questions anyway then.

Mr. LARGENT. Oh, that’s right. Yes, we are not go able to do that

anyway, no matter what we do.

Mr. SAWYER. I will read his testimony.

Mr. LARGENT. Do you have a question for him right now?

Mr. SAWYER. No, that’s all right. Thank you.

Mr. LARGENT. Mr. Hyman.

Mr. HYMAN. I will be brief. I know that you are hungry.

Mr. LARGENT. Hold on, Mr. Hyman. Tom, do you have something

specific that you want to ask him that maybe he could address in

this statement right now?

Mr. SAWYER. No, I don’t.

Mr. LARGENT. Okay. Mr. Hyman.

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STATEMENT OF LEONARD S. HYMAN

Mr. HYMAN. Thank you. Payments to the transmission sector account for about 8 percent of the electric bill. Yet, transmission

plays a crucial role in providing reliable service, and competition

is not going to work if we don’t have a robust transmission network

that brings competitive power to consumers.

The transmission sector has not kept up with the expansion of

the industry over the past 15 years. It is designed for the old utility

era, and transmission expansion plans for the next decade seem

even less adequate.

I am not proposing that we declare a problem, and then mandate

a solution consisting of building so many lines of new transmission.

We can employ new technologies that enhance the abilities of the

network to handle more traffic.

We can encourage the network operator to find ways to operate

the existing system more efficiently, and we can employ distributed

resources and market-based incentives to consumers to reduce the

stress on the network.

We can’t do any of this, however, without a regulatory system

that incentivizes the network operators to invest in the network, or

to find the best operational solution. If all an incentive does is raise

prices, it is not an incentive. It is just a give-away.

For the moment, I think the industry is mired in debates about

processes, and governance, and how to form large entities. I don’t

hear very much about business plans or about customers.

And I don’t really see how these organizations are going to expand their networks more effectively than the old power poles.

These seem to be entities with one customer that counts, and that

is the regulator, and that is not much of a change from the old regime.

Now, everyone wants to see the formation of transmission operators that are truly independent from market players. But I really

don’t see the regulators or the government officials getting to work

on concrete steps that will remove a lot of the perceived barriers

to structural separation of transmission from the rest of the utility.

There are very serious tax and accounting issues that can be

dealt with and should be. I personally would rather see truly independent transmission systems whose sole business is serving transmission customers, rather than these convoluted structures that

engender so much suspicion in the market.

Now, the proposed legislation addresses some of these issues.

Section 202, for instance, makes it clear that utilities should not

escape from the obligation to put their transmission under the control of an independent entity.

But it does not remove road blocks to really cutting the ties between the utilities and the transmission business, and it doesn’t

create an environment in which the transmission owner runs a

company whose prosperity depends entirely on its ability to satisfy

transmission customers.

And it does not deal with the disincentive to investment that

could come about by placing one’s assets under control of an entity

that is not responsible for the commercial success of these assets.

Section 216 requires FERC to establish incentive rate making

standards that would ensure reliability, as well as attract capital

178

for expansion, and this is long overdue. In other countries, utilities

run on this basis.

And I think that incentive-based regulations could encourage the

implementation of new technologies, and encourage innovative

management in financial procedures. Incentive regulation, I have

to emphasize those, has an upside and a downside, and that means

that the firm that doesn’t meet the standards comes out behind

and suffers a penalty, and that’s fine with me.

What I am not clear on is how FERC will give meaningful incentives to the transmission owners, the people who receive the returns, when the presumably non-profit regional transmission organization operates the system.

The incentives presumably should reward those who make the

decisions in order to encourage better decisionmaking and the penalties should go to those who make the poor decisions, and right

now there is going to be a disconnect.

Now, I think by focusing on specific customer friendly goals, and

by encouraging the use of the regulatory framework that promotes

an expandable and reliable transmission network, I think this bill

should contribute to the development of more competitive markets

and more reliable service.

And just as an add-on, even if you assume the most obscene returns to the transmission entities, it is only 8 percent of the bill.

You don’t really need to do very much. The customers would never

notice. My own feeling is that they shouldn’t notice.

I think it is imperative though that whatever system is devised,

it has to have an incentive to attract capital for ongoing investment

in the business. Thank you.

[The prepared statement of Leonard S. Hyman follows:]

PREPARED STATEMENT OF LEONARD S. HYMAN, SENIOR INDUSTRY ADVISOR TO

SALOMON SMITH BARNEY

Payments to the transmission sector account for less than 10% of the electric bill.

Yet, transmission plays a crucial role in providing reliable service. And competition

will not work, if we don’t have a robust transmission network that brings competitive power to consumers.

The transmission sector, however, has not kept up with the expansion of the industry, and it operates with a network designed for the old utility era. Expansion

plans for this decade seem even more inadequate. I would not, however, propose

that we declare a problem, and then mandate a solution consisting solely of building

so many miles of new lines. We can employ new technologies that enhance the ability of the network to handle more traffic. We can encourage the network operator

to find ways to operate the existing system more efficiently. And we can employ distributed resources and market-based incentives to customers to reduce stress on the

network. We can’t do any of this however, without a regulatory system that

incentivizes the network operator to invest in the network or to find the best operational solution. Right now, we do not have that, and our regulators seem far away

from proposing it.

For the moment, the industry seems mired in debates about the process needed

to form large transmission entities and to determine their governance procedures.

I do not hear much about business plans, or customer service, or specifics about how

these organizations will expand their networks more effectively than the old power

pools. These seem to be entities with one customer that counts: the regulator. That’s

not much of a change from the old regime.

Almost everyone wants to see the formation of transmission operators that are

truly independent from market players. Yet I don’t believe that regulators or government officials have yet to put into effect the concrete steps needed to remove the

perceived obstacles to structural separation of transmission from the rest of the utility. I would rather see truly independent transmission systems whose sole business

is serving transmission customers (which involves willingness to invest in new

179

wires, new technologies and even normal system maintenance), rather than convoluted structures that seem to engender suspicions in the market.

The proposed legislation addresses many of these issues.

Section 202 makes clear that utilities cannot escape from the obligation to put

their transmission under the control of an independent entity, but it does not remove any of the roadblocks to really cutting the ties between the utility and the

transmission business. It does not create an environment in which the transmission

owner runs a company whose prosperity depends entirely on its ability to satisfy

transmission customers. It does not deal with the disincentive to investment that

could come about by placing assets under control of an entity not responsible for

their commercial success.

Section 216 requires FERC to establish incentive ratemaking standards that

would ensure reliability as well as attract capital for expansion. This is long overdue. Other countries regulate utilities on this basis. Incentive-based regulation could

encourage the implementation of new technologies and encourage innovative management and financial procedures. Incentive regulation, of course, has an upside and

downside. The firm that does not meet the standards comes out behind: that is, suffers a penalty. What I am not clear on is how FERC will give meaningful incentives

to transmission owners, when the presumably non-profit regional transmission organization operates the system. The incentives, presumably, should reward those who

make the decisions, in order to encourage better decision-making, and the penalties

go to those who make poor decisions.

By focusing on specific customer-friendly goals and by encouraging the use of a

regulatory framework that promotes an expandable and reliable transmission network, this bill should contribute to the development of more competitive markets

and more reliable service. It is imperative, though, that whatever system is devised,

there is incentive to attract capital for ongoing investment in the business.

Mr. LARGENT. Thank you, Mr. Hyman.

Mr. Johnston, are you ready to give your statement?

Mr. JOHNSTON. Yes, I am.

Mr. LARGENT. All right.

STATEMENT OF ROBERT JOHNSTON

Mr. JOHNSTON. My name is Bob Johnston, and I am here today

representing The Large Public Power Council, which is a group of

the 24 largest public power systems in the country, owning 44,000

megawatts of generation, and 26,000 miles of transmission.

First of all, LPPC would like to thank Chairman Barton for his

support, continuing support, of the industry’s private use relief

needs, and we would also like to thank the Chairman for the PVA

consensus language in the bill. Our members strongly support that

language.

LPPC has supported comprehensive legislation for years, but at

the present time we are unable to support H.R. 3406 in its present

form. We have some major issues, and I would like to address three

of those today.

Uniform refund authority, Section 702. LPPC has supported the

FERC-lite industry compromise which requires us to offer open access transmission services to all parties at rates that are comparable to those that we charge ourselves, eliminating the potential

for discrimination.

But it did not give FERC full rate making authority over our

transmission, which has traditionally been at the State and local

level. However, the uniform refund authority provision completely

negates the FERC-lite provision because it gives FERC full authority to set the level of public power transmission rates, and to require refunds as it deems appropriate.

This is exactly what we thought we were avoiding when we

bought into the FERC-lite compromise. The section also gives

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FERC the authority to start proceedings to reset our wholesale energy rates for sales to jurisdictional entities and require retroactive

refunds once FERC decides what the rates should have been.

This would be the worst kind of after-the-fact regulation, where

we don’t know the rules up front, and months or years later, we

are told to make refunds. This simply doesn’t work for public

power.

When we make a sale into the wholesale energy market, those

net revenues, if any, go directly back to our customers to lower

their rates. If FERC comes back to me a year or more later and

says make a refund on a transaction, what they are effectively

doing is saying going to your end-customer and levy a charge.

That simply does not work and in effect the unintended consequence will be to remove much of public power’s excess energy

from the wholesale market, which I don’t think is in the public interest.

Regarding RTO mandates, the bill gives FERC the authority to

order public power transmission owners into RTOs, and I have a

few points regarding this mandate. Basically, the first is that we

don’t feel that it is necessary.

Virtually every one of the LPPC’s transmission owners, which

represents the bulk of public power transmission in this country,

already is in an ISO, has sponsored an RTO, or filed it, or is in

serious negotiations with other utilities to create an RTO.

Furthermore, we have unique features that must get addressed

as part of our negotiations into the RTO. We have tax issues, and

bond indenture issues, State law and State statute issues, and

probably, and most importantly, native load protection issues that

have to get addressed before we can enter the RTO.

We are successfully addressing those issues through these negotiations that we are involved in, and I particularly—my utility in

particular, SeTrans, negotiations are successfully addressing these

issues if we could be allowed to complete that process.

However, if you put a mandate in place, you are effectively removing the incentive for the parties at the table to negotiate these

issues. The bill in its present form does not require the RTOs to

accommodate these public power issues.

Further, it does not require FERC to accommodate these issues.

Therefore, if you apply the mandate, thereby removing the incentive to negotiate these issues, we don’t believe that the issues will

get successfully negotiated.

Public power will be the first to stand up and join RTOs if we

can simply be allowed to negotiate these issues, and if the RTOs

bring value, which is the last issue regarding RTOs that I would

like to mention.

We need independent, comprehensive cost benefit analysis by region for the operating expenses and startup expenses of these

RTOs so we will know the predictable costs and performance of

these RTOs.

There is a big disconnect right now between what the actual

costs and benefits that we are seeing incurred, versus the theoretical or philosophical debate regarding RTO cost benefits, and I

want to give you a specific example.

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The New York ISO originally estimated its operating costs would be $40 million. The costs today exceed $100 million. And that is

five times the annual operating budget of its predecessor, the New

York Power Pool, and these numbers are still increasing.

And this is not a unique situation. This is a common theme throughout the country. We estimate that over $1 billion has been

spent to date in RTO startups and we are just getting started.

There will be billions more spent in startup, and there will be

billions spent in operating costs, and we must be able to demonstrate to our governing bodies that RTOs will provide benefits to

our consumers who will ultimately pay this bill.

Last, mergers. If you repeal PUHCA, we need to strengthen

FERC merger authority, and not repeal it. Specifically, you should

clarify FERC’s authority to review holding company mergers and

sales of generation facilities to protect consumers from market

power abuse.

Thank you, Mr. Chairman. We appreciate you allowing us to participate in this. We look forward to continuing to work with you

and your staff to develop these important energy legislation.

[The prepared statement of Robert Johnston follows:]

PREPARED STATEMENT OF BOB JOHNSTON ON BEHALF OF THE LARGE PUBLIC POWER

COUNCIL

My name is Bob Johnston and I am the President and Chief Executive Officer of

MEAG Power, located in Atlanta, Georgia. I am testifying today on behalf of the

Large Public Power Council (LPPC), an association of 24 of the largest public power

systems in the United States. LPPC members directly or indirectly provide reliable,

affordably-priced electricity to most of the 40 million customers served by public

power. We own and operate over 44,000 megawatts of generation and 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 Subcommittee—such as Georgia, Tennessee, Texas,

California, New York, and Arizona—and include several state public power agencies

as well.

Mr. Chairman and members of the Subcommittee, the LPPC appreciates your efforts to develop comprehensive electricity legislation. The LPPC has long taken an

active and progressive role in supporting the development of a competitive, efficient

wholesale power market of benefit to all consumers. We appreciate the efforts this

Subcommittee has made to advance the debate on how to achieve benefits for electricity consumers and we would like to offer the Large Public Power Council’s con- tinued assistance in this process. 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. This session, we have testified before the Subcommittee on three other

occasions and have worked with members and their staff in a cooperative fashion.

We appreciate the opportunity to continue our involvement. We appreciate the support the Chairman has provided for our agreement on private use. In addition, on

behalf of our members from the Tennessee Valley, I want to make sure I thank the

Chairman and the Subcommittee for including the consensus language in your bill.

However, we have serious concerns other provisions with H.R. 3406, particularly

with respect to (1) mandating the participation of public power in regional transmission organizations (RTOs), (2) subjecting public power to virtually all of FERC’s

ratemaking authority through the uniform refund authority provision and (3) the repeal of FERC’s authority to review mergers and asset sales.

I would now like to comment more fully on the issues that are the focus of the

Subcommittee’s attention today.

PUBLIC POWER SYSTEMS ARE UNIQUE

What does it mean to be a public power system? Public power systems are owned

by the communities we serve, not by investors. We are not-for-profit entities, which

makes us different. Public power systems exist for a variety of reasons and were

often created in response to specific concerns. Public power systems first appeared

in the United States in the late 1800s and many were created as a part of the city

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government. In fact, many LPPC member systems continue to provide additional

services to their communities, such as flood control and natural gas, water and

wastewater services.

Initially, electric service was used for public services, such as street lights, and

was not generally available to residential customers. However, this changed rapidly

and electricity became the essential service it is today. Electricity is a vital component of our lives now and, as was demonstrated in California last summer, a cornerstone of the economy. Consumers’ confidence is shaken and there are dire consequences if electricity is not reliable and affordable. LPPC members are generally

obligated to serve their native load customers by state law and, as a result, all

available resources go first to serving those customers. Power is sold and surplus

transmission made available only if it is surplus to those needs.

Our rates reflect the fact that we are not-for-profit entities. Our rates include only

the costs of producing and delivering power to our customers and, in some cases,

payments to our governing boards or municipal entities as a component of the local

budget. Investor-owned utility rates are set to include profits paid to shareholders.

Since public power systems are locally controlled, decisions about policies such as

rates are made by people who are in touch with local concerns. The city council sets

policies for many LPPC members, while other public power systems have a separately elected or appointed utility board that governs their policies. Local control

helps ensure that we respond to community needs. In addition, since public power

systems are community based, our revenues stay close to home. This helps keep the

local economy strong. Moreover, the policies of public power systems are often designed to promote business participation and investment in the community.

My company, MEAG Power, was created by act of the Georgia General Assembly

in 1975. Now one of the nation’s largest joint action agencies and doing business

as MEAG Power, the organization is the all-requirements wholesale electricity provider to 48 Georgia municipalities. These cities formed MEAG Power and issued

over $4 billion in municipal bonds for the purchase of generation and transmission

facilities in order to ensure reliable, economical electric service.

Another LPPC member system, the South Carolina Public Service Authority

(‘‘Santee Cooper’’) was established by the South Carolina legislature in 1934 ‘‘for the

benefit of all the people of South Carolina and for the improvements of their health,

welfare and material prosperity.’’ Specifically, it was chartered because the state

needed to build a dam on the Santee River, for flood and malaria control as well

as electricity production. However, since the state lacked funds, the federal government provided financial assistance. The federal government required that the recipient of the funds be a state agency in charge of the project—and so, Santee Cooper

was created. Since that time, Santee Cooper has functioned as an independent state

agency, providing reliable electric services to the citizens of South Carolina at rates

which are lower than those of other utilities in South Carolina and lower than the

national average.

Public power systems have been created, in some instances, to resolve specific

problems and address local concerns, filling a role that an investor-owned utility

could not. For example, the Long Island Power Authority (LIPA) was established in

1986 by the state legislature to resolve a controversy over the Shoreham Nuclear

Power Plant (Shoreham) and to achieve lower utility rates on Long Island. Created

as a corporate municipal instrumentality of the State of New York, LIPA was authorized under its enabling statute to acquire all or any part of the securities or

assets of the Long Island Lighting Company (LILCO) on a negotiated or unilateral

basis and to issue lower cost, tax-exempt debt to finance the acquisition. LIPA was

able to resolve the issues relating to the Shoreham facility and acquire LILCO’s assets, as well as delivering significant rate reductions.

Public power is different from investor owned or cooperative utilities. We have a

unique mandate and unique operating conditions, as well as some statutory constraints. These must be accommodated in regulation and legislation before public

power can join in the effort to achieve consumer benefits through competition.

LPPC BELIEVES THAT THE IMPOSITION OF MANDATORY RTO MEMBERSHIP CONTAINED IN

H.R. 3406 IS UNNECESSARY.

The LPPC opposes the concept of an RTO mandate for public power. Title II, section 202, of H.R. 3406 would provide the Federal Energy Regulatory Commission

(FERC) with the authority to order all ‘‘transmitting utilities’’ to join an RTO. As

you know, public power entities are not public jurisdictional utilities under the Federal Power Act. Congress established this jurisdictional line for good reason. In contrast to investor-owned utilities that seek to return profits to their shareholders,

public power is an arm of municipal or state government, is subject to their overVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00186 Fmt 6601 Sfmt 6621 E:\HEARINGS\77118 pfrm09 PsN: 77118
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sight, has no shareholders, and is unambiguously devoted to serving its customers.

This remains true today and, as a result, public power systems must answer to state

and local governments for our actions. In addition, LPPC members have unique constraints on our ability to join RTOs.

Providing FERC with the authority to order public power systems into RTOs is

unnecessary. Such an extension of FERC jurisdiction is also unwarranted. The vast

majority of LPPC members are active participants in existing ISOs or in developing

RTOs in their region of the country, as shown in the chart attached to my testimony. For example, our New York members, the New York Power Authority and

the Long Island Power Authority, have been active participants in the New York

ISO and are working to integrate that system into a larger Northeast RTO. Three

large public power systems in the Southeast, MEAG Power, Santee Cooper, and

Jacksonville Electric Authority, are participating in the discussions to create

SeTrans in the Southeast RTO mediation. A number of public power entities have

announced that they will participate in the development of transcos—specifically,

the Salt River Project is participating in the development of WestConnect while Nebraska Public Power District and Omaha Public Power District will both join

TransLink. LPPC members typically do not own keystone transmission assets that

put them at the center of RTO development. However, public power wants to participate if it is not contrary to its customers’ interests and the requirements of state

and local law.

LPPC member systems are actively participating in the formation of RTOs. We

must, however, stress again that there are legal constraints—such as private use

tax restrictions, bond indenture requirements, and state statutory obligations—that

are unique to public power, which must be addressed before we are able to participate fully in RTOs. If this legislation is enacted as drafted, public power systems

will be mandated into RTOs without the flexibility to work through the constraints

unique to public power and without the leverage we have in voluntary negotiations.

FERC has required that transmission-owning investor owned utilities join RTOs.

We accept and, in some cases, welcome the establishment of RTOs to support competition and we want to achieve all possible benefits for our customers. LPPC members, however, lack the size and scope to create our own RTOs. As a result, we must

negotiate the terms of participation with investor-owned utilities so that our unique

constraints are accommodated. For example, my company, MEAG Power, has participated in the discussions on a Southeast RTO—‘‘SeTrans’’—with other public

power systems and investor-owned utilities. MEAG Power has an obligation under

state statute to serve our native load and, therefore, our participation in SeTrans

was predicated on an ability to preserve the capacity necessary to provide power to

these customers. Through negotiations, we believe we will be able to grandfather

in our native load obligations and obtain recognition of our pre-existing transmission rights. Under proposed SeTrans policies, we would not be required to curtail

our native load unless all other mitigation measures have been attempted. This will

allow us to fulfill our obligations to our customers imposed by state law. However,

the same solution would not work for all public power entities. Unfortunately, actions at FERC or in legislation may undercut the voluntary efforts underway in

many regions, e.g., the SeTrans RTO proposal in the Southeast, that have accommodated public power.

In a similar manner, two of LPPC’s Midwest members, Nebraska Public Power

District (NPPD) and Omaha Public Power District (OPPD), will join TransLink, an

independent transmission company that will own and operate transmission facilities. Participants include both investor-owned utilities and public power systems.

The members can either sell their assets to TransLink or lease them, in which case

they will sign an operating agreement with the transco. NPPD will continue to own

its own transmission—under state law, ownership by others is not permitted. NPPD

also retains functional responsibility vis-a`-vis its native load, another requirement

imposed by state law. In addition, NPPD can override operating directions from the

transco in the case of a public emergency.

However, were the participation of public power mandated, as provided for in H.R.

3406, these examples of transcos and RTOs would not have been created. In the

Southeast, for example, the FERC administrative law judge recently expressed a

preference for another model, GridSouth. If MEAG Power and other public power

systems were under a mandatory obligation to join this RTO, we would be in violation of our state laws. GridSouth requires all participants to sign a uniform agreement for operation of the assets, or else the participant must divest itself of the assets. At least one of the public power participants in SeTrans, Santee Cooper, would

be precluded from joining GridSouth due to the absence of the flexibility present in

the SeTrans model. Under South Carolina law, Santee Cooper is only authorized to

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tomers. In order to joining GridSouth, Santee Cooper would either sign the uniform

agreement which makes no accommodation for private use restrictions or state law

constraints or it would have to divest its transmission assets. If participation in

GridSouth was mandated, Santee Cooper would be in the untenable position of violating state law and operating contrary to its organic statute. This raises significant

legal issues, whose resolution could add years to the process of RTO formation.

However, the SeTrans model does not require that ownership of the transmission

assets transfer to the RTO and allows contracts to be negotiated on a company-bycompany basis, thereby allowing for the resolution of the unique challenges of public

power in this region.

Simply put, since public power systems have retained the legal responsibility to

meet the energy needs of their native load customers, they must maintain and retain resources to ensure the capability to supply such energy. Sufficient generation

assets and assured transmission access are required to ensure that the energy needs

of customer-owners are met in a reliable and cost effective manner. State and local

laws place requirements on public power systems not present for investor-owned

utilities. Unlike an energy marketer who wants firm transmission rights to support

a sales contract, we must preserve adequate capacity to supply our customers due

to an obligation to serve imposed by state law.

Finally, many of our members are concerned that RTO participation could lead

to increased transmission costs and unexpected operating costs which would compromise our low-cost service to our customers. Provisions in H.R. 3406 ask for costbenefit analysis to justify RTO proposals. We agree. Independent, detailed, cost-benefit analysis must be done to assure participants of predictable costs and performance which can be part of a proposed RTO. The New York ISO originally estimated

that its annual operating costs would be $40 million. However, those costs are currently $100 million (five times the annual operating budget of its predecessor the

New York Power Pool) and increasing. This results in significant charges to the

members of the ISO and, ultimately, may result in a significant rate increase for

their consumers. Public power would like to capture the benefits of competition for

our customers, but we need to make assurances to our governing entities that consumers will not bear an inordinate cost burden. The LPPC believes that good costbenefit analyses are necessary to assess the impacts of RTOs on the local or regional

market and on the customer. The costs associated with the creation of an RTO or

ISO are significant—the New York ISO incurred startup capital costs of $60 million

and approximately $80 million was spent on GridSouth before the negotiations were

abandoned. We want quantifiable benefits for our customers. We are concerned

about startup and operating costs of the RTO or ISO. Without independent, detailed, quantitative cost-benefit analysis, we will have tremendous difficulty in assuring our governing bodies that these structures benefit our customers. Our ultimate objective as public power is to ensure reliable electric service at reasonable

rates. Therefore, we urge the Chairman make certain that the benefits of RTOs and

ISOs are quantifiable and will exceed the significant costs associated with their development, startup and operation.

We believe that mandating participation in RTOs by public power is unnecessary.

The LPPC believes that this provision should be deleted from H.R. 3406. As noted

above and in previous testimony, public power has constraints that limit our ability

to fully participate in RTOs. Without resolution of the private use issues, accommodation of state and local statutory constraints, and preservation of our obligation to

serve our native load, LPPC members cannot participate in RTOs. We have generally been able to address our concerns through negotiation and compromise on an

individual basis and continue to believe that this is the optimal means for achieving

the objective of a functioning, successful RTO.

FERC-LITE ISSUES

FERC-lite and Private Use

In the past, the LPPC has supported proposals to ensure that all market participants have access to the transmission system on a fair and open basis. ‘‘FERC-lite,’’

as contained in Section 201, is such an open access policy. It would require public

power entities to provide transmission services at rates that are not unduly discriminatory and require non-rate terms and conditions to be comparable to those required of the investor-owned utilities. However, as noted above, absent adequate

private use reform, public power will be unable to provide open access transmission

service due to the existing legal constraints. For this reason, our support for the

‘‘FERC-lite’’ concept is predicated on the removal of these legal constraints. We

would ask that the bill include a provision recognizing this constraint and condition

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adoption of the requirements of FERC-lite on public power on the resolution of private use issues.

While we recognize that this Subcommittee does not have direct jurisdiction over

the private use issue, we appreciate the Subcommittee Chair’s support of the industry consensus tax agreement that was introduced as H.R. 1459 by Congressman

Hayworth. Earlier this session, the House passed H.R. 4, the Securing America’s Future Energy (SAFE) Act. H.R. 4, as passed by the House, addresses private use

issues, but contains a number of changes to the private use provisions of H.R. 1459

that frustrate the aim of opening up and expanding the transmission grid. The

Hayworth bill represented a landmark consensus agreement between public power

and investor-owned utilities forged at the request of Congress, and all parties believe it strikes an appropriate balance with respect to removing restructuring-related tax impediments. However, the private use provisions in H.R. 4 were modified

in significant ways and these changes make H.R. 4’s private use provisions unworkable—and in some respects, worse than current law—for public power. We ask the

Subcommittee’s assistance in ensuring that these key private use relief provisions

are revised and modified so the original objectives sought by this agreement are

achieved. We also ask that H.R. 3406 include language recognizing this constraint

on public power and limiting our obligations until this issue is resolved.

Uniform Refund Authority Cancels out FERC-lite

The LPPC has very serious concerns regarding the provisions contained in Section

702 of H.R. 3406, which would amend Section 206 of the Federal Power Act. The

‘‘Uniform Refund Authority’’ provisions would allow FERC to set just and reasonable

rates (and order limited refunds) for: (a) public power transmission to jurisdictional

public utilities; and (b) public power wholesale sales to jurisdictional public utilities.

This would largely negate the limitations on the Commission’s ratemaking authority

over public power transmission that are an integral part of Section 201 of the bill,

known as FERC-lite. The Uniform Refund Authority provision would subject public

power wholesale sales and transmission rates to review by FERC on FERC’s own motion or whenever such rates are challenged under Section 206. While public

power systems would be able to set their own rates in the first instance, these rates

could, at any time, be reset by FERC. If so reset, the public power system could

then be required to pay retroactive refunds. In our view, the ‘‘Uniform Refund Authority’’ provision, as drafted, cancels out FERC-lite and imposes unworkable, ‘‘after-the-fact’’ rate regulation on public power entities.

FERC-lite was designed to ensure that public power entities and cooperatives provide open access transmission services on non-rate terms and conditions that are

comparable to those required of investor-owned utilities. However, while it required

transmission rates to be non-discriminatory, it did not authorize FERC to set just

and reasonable transmission rates for such entities. But, because Uniform Refund

Authority authorizes FERC to set just and reasonable rates for any public power

transmission to a jurisdictional utility, the FERC-lite limitations on FERC ratemaking are cancelled out. Section 702 should be deleted.

Uniform refund authority also applies to public power wholesale sales to jurisdictional public utilities. We believe that giving FERC this new authority is unnecessary and likely to discourage sellers from participating in the market. The uniform

refund authority provision is backwards—rather than telling market participants

what the market rules are ahead of time, it allows FERC to start up a regulatory

proceeding, decide what the market rules are, and then apply them retroactively

and require refunds for up to 15 months. This is no way to regulate.

These provisions also pose significant practical problems for many LPPC members. As not-for-profit entities, most LPPC members do not retain surplus revenues

at the end of the fiscal year. For instance, MEAG Power operates on a one-year accounting system. Each year, any surplus revenues realized during the course of the

year are redistributed and returned to our customers. Other LPPC members may

return the surplus to their cities. What this means is that each year MEAG Power

zeros out our books. As a result, were we required to issue a refund fifteen months

after the fact, we would not have the ‘‘profits’’ to do so and would be required to

either raise our rates or levy an assessment against our customers to obtain the

funds.

FERC’S AUTHORITY OVER MERGERS SHOULD BE STRENGTHENED, NOT ELIMINATED

The discussion draft would repeal the Public Utility Holding Company Act

(PUHCA). It would also repeal FERC’s current authority to review investor-owned

utility mergers and asset sales. If PUHCA is repealed, FERC’s merger authority

under section 203 of the Federal Power Act should be strengthened, not eliminated.

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company-to-holding-company mergers, and to prevent abuses of market power. The

LPPC believes, at a minimum, that the draft should be revised to give FERC clear

authority over holding company-to-holding company mergers and over generationonly transactions.

CONCLUSION

As the Subcommittee continues to move forward with electricity legislation, the

LPPC offers our continued assistance. We would be happy to work with the Subcommittee and its staff 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. However, I must again stress that

any comprehensive electricity legislation must meaningful private use relief—either

in the same bill or in companion legislation from the tax committee—in order to be

workable.

We look forward to working with the Subcommittee on comprehensive electricity

legislation that addresses our concerns, garners wide support and can ultimately be

enacted. I will be happy to answer any questions you have.

Participation by LPPC Members in RTO/ISO Development

Austin Energy .............................................. Participate in the ERCOT RTO, which is operational

Chelan County Public Utility District .......... Participating in RTO West discussions

Clark Public Utilities ................................... Participating in RTO West discussions

Colorado Springs Utilities ........................... Was involved in early discussions on DesertSTAR and currently reviewing

TransLink and DesertSTAR proposals—no RTO activity currently in Colorado

Jacksonville Electric Authority ..................... Sponsor of the SeTrans proposal

Knoxville Utilities Board .............................. Not a transmission owner

Long Island Power Authority ....................... Participant in New York ISO, which is operational

Los Angeles Department of Water & Power Participated in the development of the California ISO Tariff; Key participant in

the Transmission Access Charge discussions; Opted not to join California

ISO

Lower Colorado River Authority ................... Participant in ERCOT RTO, which is operational

MEAG Power ................................................ Sponsor of the SeTrans proposal

Memphis, Light, Gas & Water Division ...... Surrounded by TVA; participates in RTO discussions to the degree TVA does

Nebraska Public Power District .................. Sponsor of the TransLink Transco which has filed a proposal with FERC;

TransLink has agreed to join the MISO

New York Power Authority ........................... Participant in NYISO, which is operational

Omaha Public Power District ...................... Sponsor of the TransLink Transco which has filed a proposal with FERC;

TransLink has agreed to join the MISO

Orlando Utilities Commission ..................... Was involved in the RTO discussions of Grid Florida, which is on hold pending

the Florida PSC hearing.

Platte River Power Authority ....................... Was involved in discussions on DesertSTAR; no RTO activity currently in Colorado

Puerto Rico Power Authority ........................ N/A

Sacramento Municipal Utility District ......... Opted not to join the California ISO until certain issues are resolved

Salt River Project ........................................ Participating in development of the WestConnect Transco proposal

San Antonio ................................................. Participant in ERCOT RTO, which is operational

Santee Cooper ............................................. Sponsor of the SeTrans proposal

Seattle City Light ........................................ Participating in RTO West discussions

Snohomish County Public Utility District #1 Participating in RTO West discussions

Tacoma Public Utilities-Light Division ....... Participating in RTO West discussions

Mr. BARTON. Thank you, Mr. Johnston. We appreciate you being

here. I am tempted to ask for unanimous consent to move the bill

right now since it is myself and Mr. Ganske here, and he is for the

bill, or at least he was last week. So that wouldn’t be right.

The Chair would recognize himself for 5 minutes of questions, or

until other Members, in addition to Mr. Ganske, return. I have got

so many questions that I really don’t know where to start. I am

told, Mr. Hyman, that you have to leave in about 5 minutes; is that

correct?

Mr. HYMAN. Something like that.

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Mr. BARTON. Okay. So let me kind of get you to square off

against Mr. Rouse. Mr. Rouse says that we really don’t need these

incentive rates if I understood him correctly, that there is adequate

transmission being built.

The Chairwoman of the Arkansas Public Utility Commission also

said that she wasn’t real sure that incentive rates were necessary,

although she wasn’t automatically opposed to them.

I am told that the demand for electricity is growing twice as fast

as the announced capacity increases in transmission.

So it would seem to me that we need something to get more

transmission built. So, Mr. Rouse, if we are not building the transmission that we need today according to all of the Department of

Energy and Energy Information Agency, why not try incentive

rates for transmission?

Mr. ROUSE. Mr. Chairman, I think the reason why we are not

has more to do with what local opposition has——

Mr. BARTON. Well, now, the Chairwoman of the Arkansas Public

Utility Commission said, hey, they are siting all these lines, and

so do you think a little local opposition is stopping them?

Mr. ROUSE. Well, the local opposition will vary from place to

place, and what we really need I think is not a wholesale massive

additions to the system, but rather selected areas where we have

low pockets. The PATH-15 was mentioned by Congressman

Largent.

There are areas where we need new transmission to relieve congestion, and I think as the demand there is such that we don’t

need incentive rates to get that transmission built, we simply need

either the oversight of FERC as a kind of last resort, or some way

for the States and the local authorities to overcome local opposition.

Mr. BARTON. So you would just adopt the club them to death

mentality, and let somebody come in and do it that way?

Mr. ROUSE. Well, I think the club, you say—the last resort would

have to be that there should be some authority to recognize the

need. But as far as incentive rates for the transmission, I don’t

think that would be necessary.

Mr. BARTON. Mr. Hyman, what is your response to Mr. Rouse’s

comments?

Mr. HYMAN. First of all, I think the numbers show that the capacity or the demand is growing four times as fast as the increase

in capacity. Second, my attitude—the reason that I am proposing

to use incentives is not necessarily to get someone to build a line.

I want to use an incentive to get this person to try to figure out

the best solution, and if the best solution is building a line, fine.

If the best solution is putting in some sort of facts device which actually increases the capacity of existing facilities, I want that to be

the solution.

I want to create a tariff arrangement which causes the transmission company to find the best way to solve the solution for the

customer, and that is the reason for the incentive.

Mr. BARTON. Now, let’s go to Mr. Prindle. I thought that we were

really encouraging distributed generation in our bill. You don’t

think we are. What would we have to do to get you to say yes?

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In other words, how can I get you to marry my bill? What do we

have to do, because I think we are really helping distribute generation, but you didn’t think that.

Mr. PRINDLE. Well, we are focusing on energy efficiency here. We

do recognize that there are certain provisions that do provide some

encouragement for these kinds of technologies, and we do think

that there are some opportunities that are missed.

Things like the performance standard, and the more detailed

rules under Section 103, and things like that. It is a matter of degree, I guess.

Mr. BARTON. So if we were just a little more specific, you would

like it better?

Mr. PRINDLE. Yes, a little more specific, and there is a couple of

specific provisions that we would like to see added, sure.

Mr. BARTON. Okay. Now, let’s go to my two good friends, Mr.

Richardson, and Mr. English. I probably met with you two guys, or

your association, about as much as anybody at the table, and I

have had a good dialog.

I am not being facetious. I have enjoyed it. But you all were

somewhat negative on the bill, to be polite, and I guess I would ask

Mr. Richardson how do we have a national grid if we don’t have

mandatory participation in the grid, which seems to be one of the

big bottlenecks from your group. You just don’t want to have to be

told that you have to join.

Mr. RICHARDSON. By mandatory, are you talking about national

grid in terms of regional transmission?

Mr. BARTON. Yes.

Mr. RICHARDSON. I think that Mr. Johnston’s comments were

right on target, in terms of public power’s participation. You look

at the transmission owners and public power community, and they

are participating in regional transmission organization.

Now, in terms of the mandatory participation, I think there are

a couple of problems that I have tried to address in our testimony

and in my comments. One is the very prescriptive nature of what

is in the bill, in terms of its mandate and timing, and procedural

obstacles that are available to——

Mr. BARTON. But I mean does your association—I would assume

that there are those in your association that do have some interstate transmission capacity; is that correct?

Mr. RICHARDSON. There are some that have interstate transmission capacity, and there are some in my association that are

completely transmission dependent. It makes for an interesting dynamic, but let me——

Mr. BARTON. I have only got 5 minutes, although I am the chairman. I can take more if I want to, especially since there are not

all that many people here. But I want to get the concept. I want

people to understand the concept.

We have been talking about a national grid for probably 10 to

15 years. Now, it is about time for the rubber to hit the road. We

have kind of a least common denominator bill in the Senate, which

is a great accomplishment for my friends in the Senate.

They have at least put out something. I love them for that. It is

not comprehensive, and it doesn’t address all the controversial

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issues, and as usual, it is up to the poor old nitty-gritty House of

Representatives to tackle the tough issues.

And one of the toughest issues is are we really going to have a

national grid. Mr. Richardson, do you think we ought to have a national grid on behalf of your association?

Mr. RICHARDSON. Yes, I do. I think we need to rationale——

Mr. BARTON. Okay. Thank you. Mr. English, do you think we

ought to have a national grid?

Mr. ENGLISH. Indeed.

Mr. BARTON. Okay. Now, there are two ways to do that, or three

ways. We can make it voluntary, and just pray that everybody sees

the same issue. We can put incentives, or we can go a combination

of that, but ultimately make it mandatory.

Now, I have gone around that track every way I could. I have

tried voluntary, and I have tried incentives, and I am now in the

position after 3 years of being chairman of this subcommittee, I

want to have incentives, and I want to make it voluntary, but at

the end of the day, if you have to join, you have to join.

So we give you a year to join and work out the details, and participate however you want, but at the end of the year under the

current bill, if you still haven’t joined, the FERC can tell you that

you have to. Now, with regard to the Co-Ops, we tried to make it

as easy as possible.

Mr. ENGLISH. Well, we appreciate that, too, Mr. Chairman.

Mr. BARTON. And I was told that you had a conversation with

the full committee chairman, and that on behalf of your trade association that you had a few minor things that you wanted worked

out. Well, I listened for 5 minutes and you listed a number of

minor things.

Mr. ENGLISH. Well, the point, and that is what I was attempting

to get at, Mr. Chairman.

Mr. BARTON. Well, my time has expired. Answer the question

and then I will go to Mr. Ganske.

Mr. ENGLISH. Well, the thing that I was trying to get at with

what I was saying is that I think there is agreement on the objectives. Certainly there is from us as to what you are trying to do.

The point that we are coming down to is that we think that we

are missing the mark in what we are doing. Now, you are talking

about the emphasis with regard to RTOs, and the issue of how that

is handled.

We think certainly that the Federal Energy Regulatory Commission obviously has to play that role. We think that there should be

a lot of local involvement with RTOs.

Mr. BARTON. I agree with you.

Mr. ENGLISH. In other words, a lot of what we are talking about

is process. A lot of what we are talking about also is this—and this

is particularly true for us, is this big question of independence.

Are those RTOs truly going to be independent, and is FERC

going to have the authority to make sure that they are independent, or are we going to be able to go in there and not be in

effect taken over.

And that is what this—you know, we can talk about incentives,

and we can talk about mandatory, and we can do this, and we can

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do that, but the real hang up that we are into is this question of

is it really independent. Is FERC really going to make sure—— Mr. BARTON. That the RTO is independent?

Mr. ENGLISH. Exactly.

Mr. BARTON. Okay. Well, we can work on that. My time has expired. We recognize Mr. Ganske for 5 minutes.

Mr. GANSKE. Thank you, Mr. Chairman. About a week ago I gave

a talk at the Des Moines morning rotary, and I asked the 150 people that were there how many of them either through their mutual

funds or individual investments had an exposure to Enron.

And about two-thirds of the people raised their hands, and so I

want to pursue this a little bit. I thank all of you for coming, and

Mr. David Sokol, I thank you, from coming from the Midwest.

Mr. Sokol, your testimony says that the problems with Enron

shouldn’t stop us from doing electricity legislation because these

problems are primarily about bad investments and misuse of accounting. Do you have any personal expertise to base this on, or

is that just your conjecture?

Mr. SOKOL. Thank you, Congressman. Unfortunately, yes, I do,

both directly with Enron, but more sadly in 1992, I was asked to

become president of the company that 4 months later I turned into

the SEC for serious accounting fraud that had been perpetrated

over a 5 year period.

And the Enron situation, being an active participant in the markets both that they participate in nationally, as well as directly in

the midwest, the energy markets have not been disrupted at all by

Enron’s bankruptcy.

Certainly banks, and unfortunately employees, and shareholders,

and many of the creditors of Enron, have been severely impacted.

But it is not an issue relevant to 3406. It is, however, and on behalf of both myself and Mr. Buffett, who takes these issues very

seriously, changes need to be made, because I think a follow-up effect of when a corporation the size of Enron is caught doing what

it has been doing, falls as fall and as fast as it has done, it cannot

help but harm confidence in the United States securities markets.

And that is an issue that may not be relevant in today’s hearing,

but it is unquestionably important to be acted on quickly, and

again Enron is not unusual. JWP, the company that I mentioned,

Waste Management, Sunbeam, and many others, we have lost the

obligation to follow not only the letter of accounting, but the intent

of accounting.

Mr. GANSKE. Mr. Sokol, I think it is really important to distinguish between Enron and the companies that are represented at

your table. I wondered if you could expand on that. What is the difference between your company and Enron, or the other utility companies?

Mr. SOKOL. Well, first of all, I think it is important to make a

difference. First of all, the Public Utility Holding Company Act,

which is a discussion that has been part of this conversation, did

nothing to stop Enron from doing what it was doing.

It did nothing to stop PG&E from going bankrupt in California,

and it did nothing to stop Southern California Edison from being

bankrupt in California. Enron is an independent power company,

and it happens to own a utility in Oregon.

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I think it is important to note that the only two assets that

Enron owns of any substance today that are not bankrupt is Portland General Electric, which was protected by the State Regulatory

Commission in Oregon, and not PUHCA, and interstate gas pipeline systems that Enron owns that are also regulated by FERC and

certain State regulatory bodies.

And what Enron did, and by the way, what Enron has done is

not unique in our industry. And it is not unique in a lot of industries, and it needs to be considered and looked at carefully.

They inflated earnings inappropriately, and they used off-balance

sheet treatments to avoid rating agency scrutiny, and perhaps

many other activities that we are not yet aware of. I don’t believe

that the regulated utilities in this country participate in those activities.

If they do the management and their auditors should be fined

and go to jail.

Mr. GANSKE. So, as we look at repealing PUHCA—I mean, what

kind of assurances can we give consumers?

Mr. SOKOL. Well, PUHCA actually—and with all due respect to

the U.S. Congress, we have been talking about repealing PUHCA

for 18 years. PUHCA and the distortions that are created by outdated and ineffective regulation are what create the opportunities

for the kind of accounting abuses and misuse of markets that you

are seeing with Enron.

PUHCA has nothing to do with having stopped that. What it

does stop is credible players like ourselves and others from being

more involved in the industry, and frankly helping stop things like

that from happening.

It had nothing to do to stop it, and it didn’t stop it, but the provisions of 3406 would in fact help stop it by actually making access

to all the books and records of every holding company in the

United States available to those State regulators.

As an example, Portland or the State of Oregon could have asked

for the books and records of the rest of Enron underneath 3406.

They did not have the right to under today’s regulatory regime

with PUHCA in place.

Mr. GANSKE. So let me just repeat that. Your contention is that

had the chairman’s bill been law that it might actually have helped

prevent the Enron problem?

Mr. SOKOL. I believe that’s correct.

Mr. GANSKE. Mr. English, did you want to make a comment also?

Mr. ENGLISH. I did. I think there is something that we may be

missing here a bit on the Enron thing, and I am going to agree

with you. I don’t think that PUHCA obviously didn’t prevent Enron

from happening and so forth.

But the issue that we have got moving into this environment is—

and certainly the COMPACs that our members have had, and the

impressions that we have gotten, you are dealing with a bunch of

folks that were swashbucklers.

You were dealing with a bunch of folks that quite frankly were

arrogant, and you were dealing with a bunch of folks that were

going to do it their way because they thought they had this thing

all figured out.

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And whether there were laws broken or not I have no idea, but

I think that certainly as we get into this kind of a marketplace

with competition in what has been previously been a regulated industry, I think it does attract that element.

And I would suggest to you that if you are going to repeal

PUHCA, then you darn well better put something in place to protect the consumers, or you are going to have more of this kind of

activity just because that is the kind of folks that are attracted to

this kind of a marketplace.

Mr. GANSKE. So you would agree with Mr. Sokol that the transparency provisions in this bill are pretty important?

Mr. ENGLISH. Well, I think we need to go further. I think that

we need some good solid consumer protection version. I think we

need to have an exchange. If you are going to repeal PUHCA and

say that PUHCA no longer is relevant here, then you have got to

have some solid consumer protection to make sure that they are

protected against this element.

Mr. BARTON. The gentleman’s time has expired. We may have

time to come back for a second round.

Mr. GANSKE. Thank you, Mr. Chairman.

Mr. BARTON. The gentleman from California, Mr. Waxman.

Mr. WAXMAN. Thank you, Mr. Chairman. Mr. Prindle, thank you

for your testimony today. I know that you and The Alliance to Save

Energy are widely respected for your expertise on these matters.

It is critically important for all of us to understand why the current structure of our electricity system often discourages efficient

use of energy, and why restructuring will make that problem

worse.

Would you please walk us through what has happened to investments in energy conservation over the past decade, and would you

also explain how the market structure encourages us to expand

transmission and generation even where conservation measures

would be a less expensive way to meet demand.

Mr. PRINDLE. Well, certainly. As I mentioned in my testimony,

over the last 5 to 6 years, we have lost half of the investment we

used to have in energy efficiency programs, and that is largely because States backed away from their former commitments to integrated resource planning, in which the utilities were vertically integrated monopolies.

And there was a logical framework in which if you wanted to

build a power plant, you could do analysis to see if there were demand-site options which were more cost effective before committing

to that capital investment.

Well, now with restructuring, we have a virtually fully deregulated generation sector in which a utility at the State level can’t

really say anything about generation, and can’t even determine an

avoided cost for generation because the utilities that it regulates

don’t own generation.

So we have essentially lost the framework that used to exist that

allowed for the kind of planning to make rationale resource decisions. Right now in the generation markets there is an active disincentive for generators to save energy.

And in fact if you look at California’s market, there is a lot of

evidence that very high demand and very peaky demand actually

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increases revenues to generators, and it encourages market behavior to maximize that effect.

Unfortunately, over the last summer, we have seen an 8 percent

drop in demand in this State because of energy efficiency and other

kinds of investments that have really taken the rug out from under

that kind of supply oriented behavior.

So we clearly need that kind of risk management if you will on

the demand-site to offset the inherent disincentive that exists in

the wholesale markets as they are today.

Mr. WAXMAN. Do you see anything in this bill to either provide

funds for investments in energy efficiency or establish requirements to improve energy efficiency?

Mr. PRINDLE. Well, we don’t see enough. In Section 103, there is

a provision to require FERC to foment the proliferation of demand

response programs, and we think that is a positive thing.

However, there is nothing specifically that enables energy efficiency to participate in those demand response markets. So, we

have offered some specifics to encourage that. But beyond demand

response, we think there is a need for a broader approach to encourage energy efficiency and related resources.

Mr. WAXMAN. If we don’t have a broader approach, and if we

don’t have other substantive measures in legislation, can we really

expect to overcome the market barriers to energy conservation that

you have discussed?

Mr. PRINDLE. Well, not the way that markets are running now.

As I have said, generators only make money when sales go up, and

the same is true for distribution companies as long as States continue to use a through put base regulation in which volume of sales

determines revenues and profits.

Some States have gone to a different form of performance-based

rate making where that is not the case. But right now most distribution companies again are net losers in energy efficiency programs.

Mr. WAXMAN. Well, we heard from the administration yesterday

that they support energy efficiency, renewable energy, and environmental protection. And Mr. Blake pointed to some provisions in

this bill as furthering those goals.

But in your opinion they are not enough?

Mr. PRINDLE. We certainly would like to see more in the bill, yes.

Mr. WAXMAN. I was disappointed that the majority did not grant

our request to invite a witness to speak about renewable energy

today. This bill directly addresses renewable energy, but only in a

negative way. It would repeal Section 210 of PURPA, which has allowed renewables to start to compete in energy markets.

And since we don’t have a renewable energy witness here today,

I would like to ask you, Mr. Prindle, does anything in this bill either provide funds for renewable energy, or establish requirements

to develop renewable energy?

Mr. PRINDLE. Well, I am not a renewables expert, and The Alliance has no specific position on that. We do work with a lot of our

colleagues in the renewables world through the sustainable energy

coalition, and we are equally disappointed that those folks were not

invited to testify.

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And we would suggest that at a future hearing that those folks

be included in the discussions.

Mr. WAXMAN. If I might just take another second or so. The administration agreed yesterday that they thought that the legislation should support renewable energy. Instead, I think the bill

would increase our reliance on old and polluting energy sources.

It is a critical topic, and it deserves more attention. Mr. Alden

Myer, of the Union of Concerned Scientists, is a renowned expert

on renewable energy, and I would like to ask for unanimous consent to insert his testimony into the record.

Mr. NORWOOD [presiding]. Without objection, so ordered.

Mr. WAXMAN. And I want to conclude by pointing out that a new

study by the North American Commission on Environmental Cooperation demonstrated the link between electricity restructuring,

increased demand for electricity, and increased air pollution.

And I think that we ought to keep that in mind, and I was disappointed that we didn’t have any part of this hearing devoted to

the air pollution consequences of energy legislation. So I want to

make that point for the record.

I would ask you some questions about it, Mr. Prindle, but I have

run out of time. But I assume that you agree that there is an air

pollution consequence to energy policies, and we ought to realize

that there is an interconnection between the two?

Mr. PRINDLE. Absolutely.

Mr. WAXMAN. Thank you, Mr. Chairman.

Mr. NORWOOD. I would now like to recognize Mr. Walden for 5

minutes.

Mr. Walden. Thank you, Mr. Chairman. I would like to follow up

on one of these issues of energy efficiency. I know that I have been

in small business for nearly 16 years, and every light socket that

will take a fluorescent light bulb I have put in.

And I know that a lot of people are doing the same thing in their

homes, and looking for other energy efficiency. Hasn’t energy efficiency actually gone up, Mr. Prindle?

Mr. PRINDLE. The question is whether energy efficiency has gone

up?

Mr. Walden. Yes. Isn’t the market responding, and aren’t consumers responding?

Mr. PRINDLE. Well, in the State of Oregon, it is, Mr. Walden,

largely because there has been a 20 year history of investment

through the municipal utilities, and the Bonneville Power System,

and the Northwest Power Planning Council, and now the new Oregon energy trust.

There is a sustained and now even an increasing commitment to

implementing the fundamental policies and creating the incentives,

and the market transformation programs. But in most States, we

don’t have that.

Mr. Walden. Okay. But I also know that one of the things that

spurred me along, and some of my neighbors, was a proposed increase of 46 percent by Bonneville. That kind of gets our attention

more than a—I mean, I am participating in some of the State programs, too.

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We replaced a washer and dryer, and the Energy Star Program

provides for some tax benefits for buying upscale dryers basically,

and you are going to save on energy in the long run.

But it just seems to me that the market also plays a role, and

I am a very strong advocate, and in fact I supported one of Mr.

Waxman’s amendments last spring to make more use of renewables, and demand-site reduction issues are a concern as well.

One of the troubling parts for me in this bill and in general is

that, one, there are the 29 States out there that have the so-called

net metering programs that have engaged in some of these other

programs to reduce demand and provide for efficiency.

And I want to make sure that we don’t upend their apple cart

through this. But beyond that, it is just the philosophical debate

about demand reduction. You can only go so far before you shut

down your economy, because if I am in business and I make more

money by selling off the power that I don’t consume, and not operating the plant that I have, I may be forced to do that from a financial standpoint.

But it doesn’t do much for our economy does it? And I think we

have to be careful about how much we put on that side, as opposed

to creating more generation opportunities, and a grid that works.

Mr. PRINDLE. That is a very good question, and we are very committed at The Alliance to working with the market. We have 70 associate members, many of whom are the major manufacturers of

energy efficient technology.

And I can say that the analysis that has been done does show

a net positive impact on the economy from energy technology. For

example, The Rand Corporation did a study of California’s efficiency programs, and found that for every dollar invested in efficiency that a thousand dollars on net came back into the economy.

And, in fact, in the year 2000, about 3 percent of the gross State

product was related to investments in efficiency. So we believe that

energy efficiency and a growing economy actually go hand-in-hand.

And our efficiency performance standard doesn’t purport to stop

economic growth, but only to mitigate the rate of electricity demand.

And we have seen this over the last 25 years in the economy

with a 40 percent increase in GNP with almost flat energy growth.

Mr. Walden. So there has been.

Mr. PRINDLE. And the key here is to keep the economy growing

while moderating demand growth so that we can put the cap

over——

Mr. Walden. Well, I guess that is what I was getting at initially.

I thought I had read where there has been fairly extraordinary energy efficiency, but my biggest concern is that we are going to end

up at some point in a recession and a snapback that we are going

to be right back to where we were last spring talking about blackouts again, and lack of energy supply if we are not careful.

And so I want to make sure that what we do in this bill gets us

a grid out there that will work, and a marketplace that will function that won’t end up sticking the consumers along the way.

And that gets us to some of the issues about the RTOs and I

would be curious to hear what you have to say as to that. I know

that I have heard from some of my co-ops. And I apologize for not

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being here for all of your testimony, but I am curious as to your

comments on that.

Mr. ENGLISH. I think that an assurance that it is clearly independent. I think that the regulation is there and in fact the emphasis is there in enforcement—and the concern I think is that they

are going to be swallowed up and they are going to be taken over,

and they are going to have their assets used in a manner that is

contrary to their best interests.

And so that’s where time and time again we hear this concern

arising and I don’t think that emphasis is there in this legislation,

and I don’t think we are seeing that emphasis as far as FERC at

this particular point in time, not to the degree that we would like.

Mr. Walden. My tine has expired, Mr. Chairman. Thank you.

Mr. NORWOOD. Thank you, Mr. Walden, for those very insightful

questions, and ending on time. Now I would like to recognize my

friend from Ohio, Mr. Sawyer, for 5 minutes.

Mr. SAWYER. Thank you, Mr. Chairman. Mr. Gent, NAERC is the

sector coordinator for the electric industry under the President’s

Commission on Protection of Critical Infrastructure for 1996. You

just came out this past spring with a report and recommendations.

But adherence to those recommendations is voluntary, as with

most recommendations. Are you satisfied that there is sufficient

voluntary progress in meeting those recommendations?

Do you think that it would be appropriate to build a more defined and perhaps mandatory role for an electric reliability organization to have the authority to enforce standards for protection of

critical infrastructure?

I mean, we have heard a great deal of talk about generating capacity, particularly nuclear and fuel storage dumps around the

country as weapons in place. But I am frankly just every bit as

concerned about the vulnerability of the grid to this sort of thing,

and I was wondering if you could comment on that.

Mr. GENT. Mr. Sawyer, the solution is right here in your legislation. I think that the self-regulating reliability organization can be

extended into including national security interests.

I have heard a lot from the Department of Energy and other government agencies talking about standards. We have yet to define

what they would like to have as standards. But should we decide

as a Nation that we want to have some kind of security standards,

uniform security standards, for energy facilities, we think that

needs to be debated in an open way.

And once the standards are implemented, they need to be mandatory. I think industry itself is in the best position to enforce

those standards. There would have to be government oversight like

there is in all SROs. But I think that what you are proposing in

your legislation would do that also.

Mr. SAWYER. Critical vulnerabilities, and just identifying them is

an incredibly important first step.

Mr. GENT. Yes, and it is also critically important that we don’t

create a list so that everybody knows what those are.

Mr. SAWYER. I understand. Thank you. Mr. Sokol, I wish Mr.

Hyman were still here, but let me ask you. You suggested that we

direct FERC in your testimony to review its transmission pricing

policies, and you spoke about that a little bit.

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And yet we heard from FERC yesterday that they think that

they have the authority to do what needs to be done, although they

wouldn’t mind having a little bit of additional emphasis on that restate of direction.

Could you give us a sense of how you think innovative pricing

policies would work in the business of developing the kind of ongoing reliable capital investment that the grid needs, and the kind

that Mr. Hyman talked about, and why you think that FERC may

have been so far reluctant to act on the authority that they believe

that they have?

Mr. SOKOL. Well, first, Congressman, I strongly agree with what

I think is one of the most important elements of this bill, is dealing

with transmission, because we do have a vulnerable transmission

system, both purely as an energy delivery system for this country,

remembering that it was brown from a patchwork quilt, and not as

a national system.

It grew together and it did not grow intelligently.

Mr. SAWYER. He sounds like me 4 years ago doesn’t he?

Mr. SOKOL. That’s a compliment. Thank you. The issue of incentive pricing, first of all, should not be taken as an absolute in our

view in any sense other than the recognition that as you move from

a patchwork quilt of 1,800 participants owning transmission in this

country, to 5 or 10 RTOs, or whatever the right number is, that

you have got to find a mechanism to incentivize the construction

of transmission that may not be an obvious need.

As an example, in our area, we could make additions to transmission that would allow the power to be moved to several other

States, including Iowa, to Kansas during certain peak times because of the way that load shifting has occurred over the last 20

years.

There is today no mechanism for us to be compensated or any

of the other three participants, one of which is a public power agency, to be compensated for making that addition if that power

doesn’t flow; i.e., a cooler summer, and Kansas City doesn’t necessarily need the power flow.

It may, however, be an absolutely essential piece of a redundant,

highly reliable grid system that that transmission piece be made.

And what we are really speaking to is merely that traditional

forms of finding the capital to do that may need to be enhanced,

whether that is an incentive or whether or not it is merely the recognition at State and Federal levels that putting in $100 million

here may provide something that doesn’t have direct compensation

tied to it, but national security issues.

It is a reliability issue and things of that nature. So I think that

giving FERC that ability and perhaps us all working harder to

prod them to use it where it is necessary, and explain the reasons

for it, is ultimately in the consumer’s interest. And whether we

make the investment or someone else does is really irrelevant from

our standpoint.

Mr. SAWYER. Just an observation, Mr. Chairman. It seems to me

that those kinds of investments, carefully done, and appropriately

compensated, can go a long way toward getting rid of the kinds of

price distortion practices that we saw recently caused by transmission bottlenecks. Thank you, Mr. Chairman.

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Mr. NORWOOD. Thank you very much, Mr. Sawyer. I would like

to now, and it is a pleasure now, recognize a gentleman from New

York for 5 minutes.

Mr. FOSSELLA. Thank you, Mr. Norwood. For Mr. Gent from

NAERC, and I guess a question from a New York perspective. Currently there are special rules in place for the Metropolitan region

in New York City in order to be able to quickly respond to any disturbances in the transmission system, and reduce the likelihood of

blackouts.

The rules include such things as temporarily reducing the level

of imported energy, and starting up expensive gas turbines in the

Metro region, and fuel switching at certain generating stations.

They are overseen in some cases by the Public Service Commission, and maintains a detailed familiarity with the specifics of the

New York system. I say that because as I see one of the suggestions that NAERC makes is that there will be a national standard.

And I am just more curious as to how you would envision this

one national standard, and its relationship to what New York City,

given its unique circumstances, what that relationship would be?

I guess what I am saying is that there is a sentiment that we

don’t want to see those standards or rules relaxed, and that the

standard that is ultimately implemented on a national level lower

than that, we would just be curious as to how New York City

would fare?

Mr. GENT. Congressman, I can assure you that we don’t want to

see lower standards for New York City either. NAERC was born

out of the first Northeast blackout, which centered around New

York City.

And then there was the blackout of 1997 that gave rise to the

standards that you are discussing. The legislation as it is proposed

has allowances for special situations in various regions.

And whether it be a variance or not, there will also be conditions

where somebody will have a better idea for accomplishing the same

performance. And so that is all provided for in the way of

variances.

We have had long discussions with people from New York State,

and we think that their needs and concerns can be accommodated.

Mr. FOSSELLA. So New York will basically have the flexibility to

maintain its own standards separate and apart from——

Mr. GENT. Yes, as long as there is ample demonstration that

they are not endangering the rest of the grid, which in this case

that’s not the case, they will have standards that would be acceptable to the rest of the interconnection.

Mr. FOSSELLA. Okay. Thank you. That’s all.

Mr. NORWOOD. I would recognize the Ranking Member, Mr. Boucher, for 5 minutes.

Mr. BOUCHER. Thank you very much, Mr. Chairman. We all acknowledge that we need to build new transmission lines in various

parts of the Nation, and there are some substantial differences of

opinion as to the proper approach for Congress to take in order to

encourage that.

The bill that is before us contains provisions for incentive pricing

for new transmission, and that is controversial in the minds of

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some, on the theory that incentive pricing necessarily means higher

pricing, and that has a direct effect on electricity consumers.

Others may take the position that the market can be relied upon

to attract the capital necessary for new transmission line construction, and perhaps RTOs should be affirmatively empowered to take

whatever steps are necessary to bid out the construction, and to

manage the construction, and perhaps even to own the new lines.

And I would welcome views from our witnesses, perhaps starting

with Mr. Richardson and Mr. Hyman, to talk about the validity of

that latter approach. First, I know Mr. Richardson has some problems with incentive pricing, and you might briefly comment on that

and tell us what they are.

But more to the point, I am interested in knowing whether the

capital markets can be relied upon to supply the funding that is

necessary in the event that RTOs undertake the responsibility of

building lines.

That strikes me as a very interesting approach if it has merit,

and I would be interested in knowing if it has merit. So, Mr. Richardson, let’s begin with you.

Mr. RICHARDSON. Thank you, Mr. Boucher. Yes, we do have problems with the incentive pricing provisions. Thus, what this suggests is prices that are in excess of or rates that are in excess of

just and reasonable rates that are currently authorized under the

Federal Power Act.

And that as I said in my opening comments, just and reasonable

is a zone. It is not a fixed point. And it is set within that zone to

compensate for the risk of the investment itself, and we think that

gives the Commission sufficient latitude to encourage through rates

new transmission facilities.

The suggestion that you raised with respect to regional transmission organizations and bidding out the construction of new

transmission facilities is one that I think makes a tremendous

amount of sense.

There are individual owners of transmission facilities who have

reasons not to build transmission or to maintain constraints because it is in their economic interests to do so, and that is a problem that needs to be overcome.

There is transmission that needs to be constructed because it is

in the public interest to do so. Yet, it may not be in the economic

self-interest of any single participant.

But it is in the regional interest, and Mr. Sokol pointed out an

example of where that could well be the case. If you have a regional transmission organization that has the authority to bid out

the construction, there is money in construction, and you certainly

find people to construct if you can get over the siting problems.

You could certainly raise the capital because we have been able

to raise capital for transmission facilities, including the noted constrained PATH-15 in California under the current regulatory regime.

And those facilities could then be owned by the regional transmission organization, and rates set system-wide for that organization, sufficient to cover the depth that was issued. So that seems

to me to make a lot of sense.

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Mr. BOUCHER. That is the answer that I was hoping to hear. Let

me ask you this. Do we need to do anything legislatively in order

to enable RTOs to exercise that bid out and then construct opportunity?

I think that some States may have statutes that say that the

only entities that can build transmission are the certificated and

regulated utilities. Are you aware of this circumstance?

Mr. RICHARDSON. I am not aware of that. Obviously, a backstop

would be to specifically authorize if it is in the public interest for

the Commission to do so to allow regional transmission organizations.

Mr. BOUCHER. Okay. That’s fine. Thank you. Mr. Hyman, let me

ask you this. You heard the proposed structure here—oh, I’m sorry.

Your nameplate says Mr. Hyman.

Mr. PRINDLE. Mr. Hyman was sitting to my left.

Mr. BOUCHER. I see.

Mr. PRINDLE. But if the Congressman would indulge me, I do

have something to say about that.

Mr. BOUCHER. I would be happy to hear what you have to say.

Please.

Mr. PRINDLE. Well, our forte is energy efficiency and not transmission, per se. But we do work with companies that are in the

transmission technology business. And as most people know, there

are enormous losses in the transmission system.

The old steel core transmission lines that have been out there

since the 1930’s are inefficient. They lose enormous amounts of energy, and they cause lines to sag, and hit pine trees, and cause outages. That is what almost caused the whole Western system to go

down a couple of summers ago because a line sagged and hit a tree.

There are new technologies, like composite materials, out there

that can increase the through put of transmission lines substantially. But in order to do that, there have to be incentives out there

to invest in those new higher efficiency technologies.

And so just another way of supporting the idea that some sort

of incentive needs to be there to encourage efficiency within the

transmission system, as well as the construction of new lines.

Mr. BOUCHER. Okay. Yes, Mr. English. We will conclude with

you.

Mr. ENGLISH. Very, very quickly, I just want to make the point,

two things. One is we need to establish Federal standards with regard to transmission lines, and new transmission needs to be built

of those standards.

Second, I don’t believe that we have looked at the question of

why transmission is not being built. There are a whole host of reasons. And third is we ought to open it up and let others build

transmission other than the established utilities, and invite others

to come in and build this transmission and get it done. And,

fourth—— Mr. BOUCHER. Including RTOs?

Mr. ENGLISH. Yes, indeed. Indeed. And, fourth, I think we get

down to the whole question that incentive rates, if any money is

going to be derived out of incentive rates, they must be used to

build new transmission and not for any other purpose.

Mr. BOUCHER. Okay. Thank you. Mr. Chairman, my time is up.

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Mr. NORWOOD. Thank you, Mr. Boucher. I now recognize myself

for 5 minutes. I would like to thank all of you lady and gentlemen

for being here, but I particularly want to thank Robert Johnston

for being here from Georgia.

These types of little gatherings are always very helpful to us. I

am sorry that Chairman Barton has already left, because my first

question was to him as he was talking about incentivizing people

to go into RTOs, I wondered if he would define incentive.

They can be negative and they can be positive and it is going to

be very important in my view which way we try to encourage people to do that. Perhaps all of you know that yesterday we had the

FERC Commissioners here, and Chairman Wood, and we had some

rather lengthy discussions regarding FERC orders and studies, or

maybe the lack of studies.

Now, Mr. Johnston, I want to talk to you specifically about RTOs

just for a minute. I am very concerned—and part of that is that

many of my constituents seem to be very concerned—about what

the bottom line is going to be; what effect these RTOs might have

on rates.

With respect to some of the FERC policies, I think it is for sure

that they have not measured cost benefits in regards to these

RTOs. Are you aware of any cost benefit studies that Chairman

Wood has conducted on the issue of RTOs?

Mr. JOHNSTON. I believe that they have recently initiated cost

benefit studies at the urging of many in the industry, and those are

underway. I don’t believe that there have been any impartial independent comprehensive studies done to date that I have seen.

Mr. NORWOOD. Well, he indicated that perhaps that would be in

our future, but things are moving pretty fast. I would like if we are

going to do that, I would like to see it done as soon as possible.

Is it possible that RTOs may not be as effective in some regions

of the country as they might be in other regions of the country?

Does this concern you, and if it does, now is a good time to talk

about that.

Well, we have said that those studies need to be regional and the

reason they need to be regional is that we have different cost structures, and different transmission needs, and different issues regionally.

And I know in particular the LPPC members in the Northwest,

and in the Southeast as well, both being low cost regions have concerns about out of control costs for the RTO without corresponding

benefits to offset those costs.

And when you are in a low cost State, it is a little more difficult

to—we believe it will be a little more difficult to generate a positive

cost benefit. We are not saying that it can’t be done, but we are

saying that it will be more difficult in a low cost State for obvious

reasons.

And going back to the mandatory participation in RTOs, it becomes particularly difficult for us to be mandated into an RTO that

has a negative cost benefit.

Mr. NORWOOD. So in a State like ours, we have to be a little bit

concerned, because apparently I think Georgia is doing pretty well,

and that if we aren’t very, very careful some of these good ideas

are going to end up costing our rate payers more money.

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Mr. JOHNSTON. They may.

Mr. NORWOOD. As we talk of moving into a new system, and

market place for electricity, I would like for you to take a minute

and tell us how all of this will effect my 48 cities in Georgia about

tax exempt financing?

Mr. JOHNSTON. Well, the tax laws for a long time, both Alan and

myself, and many others, have insisted that the tax laws, and the

private use provisions of the tax laws, has got to be changed, or it

is essentially a non-starter for us.

We can’t enter the RTOs and offer up our assets under the current provisions because we would violate those tax laws. Those

have got to be changed as a prerequisite to entering RTOs, even

if the RTOs are cost beneficial.

Mr. NORWOOD. Those tax laws are fairly new aren’t they? I

mean, it hasn’t always—that has been a change for you, the tax

law itself; is that not correct?

Mr. JOHNSTON. There is a current tax law that is still in a temporary form, I believe, but you could make that permanent, but

that does not take care of all of the issues that we have under the

tax code. It is the 1987 tax law that actually applies today, but we

still need to make revisions to that effectively in our RTOs.

Mr. NORWOOD. The red light is on. I am certainly not through,

and Mr. English, I am going to get into this with you in just a little

bit in the next round on the RTOs. But at this time—well, who is

next? Well, Ms. McCarthy, I believe you are next for 5 minutes.

Ms. MCCARTHY. Thank you very much, Mr. Chairman, and I

thank the panels for their expertise here today. PUHCA has been

amended three times, and I know that you are aware of that, by

the Congress to permit diversification into independent power in

telecommunications and foreign utility companies.

But each time this committee has okayed an exemption, it has

ensured that the State Regulators had a role in approving the diversification or the letter of investment, particularly whenever

State regulated existing utility assets could be involved in the new

venture.

This bill before us repeals PUHCA without any similar State

role. I am a former State legislator. So, for full disclosure, I am

coming from that particular point of view.

So it just gives the States the right to see the books, and the

records of the company.

But in light of Enron, is this enough. And also following up on

an issue that Representative Waxman raised earlier with regard to

if PUHCA is eliminated that the negative effect of that on renewables, I wonder if you would speak to what extent that there

should be incentives or a renewable portfolio standard in any comprehensive electricity restructuring legislation.

And also what you think would be a realistic goal for a RPS by

the year 2010 or 2020, so that we could have those thoughts in

mind. And I would welcome a response from any of the panelists

on both of those questions. Mr. Sokol.

Mr. SOKOL. Mine is specifically on PUHCA. The assurances that

Congress has received in the past were in fact accurate. That the

States do in fact have access to stop the types of diversification, et

cetera, within the State regulated utility.

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That would be unchanged under 3406, as well as in the

Bingamam and Daschle Senate bill, because PUHCA is merely the

books and records, and affiliate issues would actually be expanded

at the State level to all utilities today, and books, records and affiliate abuse activities only are available to PUHCA companies.

Those that aren’t—as an example, Portland General Electric,

which is owned by Enron, is not subject to the Act. So what this

Act would do is actually expand that books and records authority

to every State.

And as I mentioned before, one of the most important points that

I think to recognize in Enron is that the only new assets that

Enron has that aren’t of any substance that aren’t bankrupt today

is Portland General Electric and its interstate pipeline gas activities. And that is because both of those were protected by State regulations, and not by PUHCA.

Ms. MCCARTHY. I think that I want to clarify where I am coming

from in this question. Yes, I think the expanded involvement with

the books and assets, and all of that is important.

But the fact that the State regulators will no longer have a role

in approving diversification nor the level of investment was what

the thrust of my question was about; and, yes, it is nice that they

can go out and examine those things, and that has been expanded.

Mr. SOKOL. But States do have the ability to stop—and as an example. The reason Enron was not able to make a mess out of Portland General Electric is the State didn’t let them. Enron could not

pledge the assets of Portland General Electric.

It could not borrow money to use in its derivative activities

against those assets because of State regulation, and not because

of PUHCA. The only thing that PUHCA does today is that it stops

companies like ourselves, a Triple-A rated company, BurcherHathaway, from investing in the industry.

It does not stop a utility from making bad decisions at its holding

company level elsewhere in the industry, and I think that is a key

distinction.

Mr. ACQUARD. Congresswoman, if I may jump in here.

Ms. MCCARTHY. Yes, please.

Mr. ACQUARD. I agree with my friend that the Public Utility

Holding Company Act would not have prevented the Enron situation, but I think it is very clear or I think it is clear that what it

did prevent was the Enron situation getting worse.

And I say that because the Public Utility Holding Company Act

helps structure the industry to encourage single-State systems, and

not multi-State systems. And once you get into a multi-State system—for example, if the Enron Company had purchased another

utility, the Holding Company Act would have kicked in.

Now, I don’t know what their business plan was, but I would

guarantee you, or I can almost guarantee you that they did not get

into other utilities because they did not want to get covered by the

Public Utility Holding Company Act.

And there are many ramifications of that, one of which is nonenergy related businesses they would have to sell off. So if they

were involved in any non-energy related businesses, if they purchased a second utility, then they would have had to have spent

off some of the other businesses.

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So it is not so much—the beauty of the Public Utility Holding

Company Act is not what it does. It’s what it prevents from being

done.

Ms. MCCARTHY. I think that was my concern all along, because

in a multi-State Holding Company, how does the State control that

big company if we eliminate PUHCA? And I very much appreciate

your response to that.

I would also like to hear your thoughts on renewables if we

eliminate PUHCA. What kind of portfolio should we have, and how

do we put incentives in to make sure that we have reached reasonable goals in 2010 and 2020?

It is a part of the solution that we seek for energy security in

this Nation, and that we get off our dependence on imports and we

start looking at renewables. And in particularly in electric utility

restructuring the obvious has been studied and is there, and on a

small scale happening, and so how do we increase that by incentives if we are going to eliminate PUHCA?

Mr. ACQUARD. Well, again, as perhaps wanting to be heard on

this, as one of the largest renewable energy generators in the

world, PUHCA has not either helped or inhibited renewable generation because it is a non-regulated entity.

And we have just announced an expansion of 170 megawatts of

our renewable energy in California, and we have well over a thousand megawatts of renewables around the world. PURPA on the

other hand, on a prospective basis being removed, we don’t believe—and again as one of the largest players in the industry, we

don’t believe that it will in fact slow down renewable generation as

long as open transmission access is in fact achieved through a bill

like 3406.

So that we actually have the right to get on to the grid system

and utilize the grid system with fair and reasonable rates. We

would certainly be in favor of a renewable utilization standard, either in the State level or the Federal level. But since it would be

self-benefiting, I probably should not give a level.

Ms. MCCARTHY. Do you have an estimate on goals in 2010 and

2020, realistic goals?

Mr. SOKOL. Realistic goals on the order of 6 to 7 percent would

be certainly encouragable.

Mr. NORWOOD [presiding]. Thank you, Ms. McCarthy. Your time

has expired.

Ms. MCCARTHY. I’m sorry, Mr. Chairman. You have been most

gracious.

Mr. NORWOOD. That’s all right. I understand.

Ms. MCCARTHY. I thank you very much.

Mr. NORWOOD. The gentleman from Oklahoma is now recognized,

Mr. Largent, for 5 minutes.

Mr. LARGENT. Thank you, Mr. Chairman. As one who has been

following this debate for a number of years, it is interesting to me

to hear a number of our panelists in their testimony this morning.

It seems like not that long ago that we were hearing that whatever we do in restructuring that we don’t hand FERC too much authority, and that is a very bad thing. And maybe that was a

Hecker-lead FERC, and we don’t want to give them too much authority.

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And now it is a Pat Woods led FERC, and we are hearing don’t

be too prescriptive to FERC on how RTOs are formed, and so and

so forth. And it used to be that when we started talking about a

comprehensive restructuring bill that we could click off about 3 or

4 things that there was fairly broad agreement on.

And like right out of the bat it was PUHCA and repeal. Done.

Interconnection. Done. Reliability standards. Done. Those were like

the easy things. Now, let’s get into the harder things, in RTO formations, and so on and so forth. Transmission.

And now we are back to where the PUHCA repeal is even controversial. I mean, there is a number of our panelists who have testified that it is a bad thing that we repealed PUHCA.

I guess my question that I don’t have for any specific panelist,

but I would be glad to listen to, is why now that we don’t want to

be too prescriptive when we talk about RTO formations.

Why shouldn’t that be the responsibility of Congress? Lynne?

Ms. CHURCH. Well, Mr. Largent, I think that FERC already has

a tremendous amount of jurisdiction, although there are challenges

to that jurisdiction, to enable the markets to go forward, and to enable the establishment of RTOs.

And while we have always encouraged making sure that FERC

had adequate jurisdiction, I think now what is being seen by some

who are opposed to a competitive market is that FERC is really

trying to exercise that authority.

And now there is pushback from those who really do not want

to see that exercise done. I think that has resulted in this reversal.

Mr. LARGENT. But at the same time, you are just one election

away from seeing that change again potentially, right? I mean, why

wouldn’t you just want to statutorily say this is how we are going

to form RTOs and this is what they should look like?

Ms. CHURCH. I don’t want to statutorily say that.

Mr. LARGENT [presiding]. I know. I am saying why don’t you?

Ms. CHURCH. Because I believe that FERC, even under Chairman Hecker, and certainly under Chairman Moeller, and under

Chairman He ́bert, and now Chairman Wood, have all agreed that

we have to move forward.

And they have all tried in various ways, and dependent upon

what the atmosphere was at that time, to move forward toward

setting up RTOs in really regional vibrant markets. I think the circumstances both in the industry and in the make-up of the Commission, and in the make-up of Congress, have changed enough

that now we are seeing a recognition that FERC has a tremendous

amount of authority and expertise, and perhaps they should be

doing or exercising that themselves without a lot of restrictions.

But at the same time, we are now seeing the push back I think

from those who are really concerned about their exercise of that jurisdiction.

Mr. LARGENT. Well, the other question that I had was—and this

is a little bit baffling to me, too—that I know that we have had

panelists here just this year that have come and testified, Goldman

Sachs and so far, and saying that one of the reasons that new

transmission is not being constructed is because there is incentive

to do that.

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That the rate of return that is allowed by FERC is not high

enough, and so that is kind of what has spawned the incentivebased rate. Everybody is shaking their head like that didn’t happen. I was right here and the gentleman was sitting in that chair

who said it.

He maybe wasn’t from Goldman Sachs, but that was what he

said, and we can get the testimony from anyone who wants to disagree with me. But anybody have any comments on why incentivebased rates won’t be helpful in building new transmission in this

country?

Ms. CHURCH. Well, if I could just follow up on that one as well.

I think incentive rates have a role, and I think FERC has adequate

authority right now to decide when it would be appropriate.

But I think the main reason that we have not seen more transmission bills was the uncertainty of what was going to happen in

the markets, and whether or not RTOs are going to be put in place,

and how quickly.

And so that uncertainty has had a cost, and second, of course,

the siting issues. That while no one has been able to cite a case

here where a State has turned down a transmission grid, we know

that getting a transmission line sited is very, very difficult, and

very time consuming.

And to the extent that it could be expedited by having a fallback

from FERC to exercise some authority, I think that it would be

very helpful.

Mr. LARGENT. Anybody else want to comment?

Mr. SOKOL. Yes, sir. Congressman, I think the issue of incentive

rates really kind of fall into two categories, and it is about definition of who is going to determine the need for the asset.

And if in today in our service territory, or I think in any municipal service territory, if for us to service our customers we need a

transmission line, we build it, and we find a way to get it sited and

we get it built.

The question is that with a national grid system, where there are

pieces of the system that need to be built to help a lot of folks, and

not necessarily my customers, if you are going to leave the rules

unclear, you are going to have to incentivize somebody to come in

and take the risk that it will get used.

Or you are going to have to have a body that determines its need

and determines how it is going to get paid for. If you do the latter,

capital will show up to do that. But it is a bit like adding a lane

on to an interstate. Is it for everybody’s good, and then who pays

for it, or are you going to make it a toll road.

Most likely the person that puts in the toll road will expect a

higher return because he is running the risk that it will get used.

And I think we are going to need a mixture of those two, but either

will solve the problem.

A good portion of which really should be just resolved by having

the rules set out so that FERC, or an RTO, or someone can determine the need, and assess the costs reasonably to all the parties

involved in the RTO, and build it. That capital will be there if

those rules are clear.

Mr. LARGENT. Mr. English.

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Mr. ENGLISH. In answer to your previous question, I think with

regard to the FERC issue, basically what it comes down to is that

this legislation is trying to regulate the regulators, and I don’t

think that you can do that very well through the legislative language.

You may be able to do that with the administration of programs,

but if you have got regulators out there and you don’t like what

they are doing, and you want to regulate in their place, then you

ought to get rid of them.

And Congress can try to regulate directly. I don’t think that is

going to work, but that would be the approach. If you look at this,

this is Congress trying to tell FERC that you have got to do this

or you have got to do that.

I would suggest to you that if that is what this committee wants

to do, it would be far more appropriate, and far more effective, and

certainly better for the Nation, if you simply called FERC up here

and tell them this is what we think you ought to be doing.

But to eliminate their discretion and to tell them specifically

what you are going to do, then you are trying to take their place,

and you are trying to regulate for them.

Now, we have had—I would totally agree with you that you have

serious disagreements, depending on who the Commissioners are

and what actions are taken.

You know, we have disagreed with some, and in some cases we

thought they were doing a great job. And they are making their

call, but that’s the reason that I think that it is far more appropriate to express displeasure in that manner rather than through

legislation.

Mr. LARGENT. Mr. Acquard.

Mr. ACQUARD. Just to give you a real world example. A couple

of weeks ago we had our annual conference up on Philadelphia,

and my folks traveled out to PJM, which many consider one of the

most successful operating RTOs today.

And one of the questions that my members asked was do you

need incentive rates and siting authority to do your job, and they

said absolutely not. We are operating properly without them. So

the short answer to your question is that they are not needed.

Mr. LARGENT. Well, I guess my only argument to that, and specific to that area of the country, is that it took—and I think that

this is fairly analogous, is that it took forever to get another natural gas pipeline built to the northeast part of the country because

of all of these issues that we are talking about, and that we are

trying to address in electricity.

So it is an issue. I mean, they can tell you that it is not a problem to deal within their RTO, but when you are trying to connect

hopefully what will be a national power grid, that’s where the problem comes in, and that is what we are supposed to be dealing with.

We are not supposed to be getting into what happens in the

State of Pennsylvania. That’s Pennsylvania’s issue. What we are

talking about is making sure that we have an interconnected national bulk power grid.

Mr. ACQUARD. And then didn’t think that was a problem either.

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Mr. LARGENT. Well, I can tell you that there is a lot of people

that are having trouble moving power across their grid that would

disagree with that. Mr. Chairman, I yield back.

Mr. NORWOOD [presiding]. Thank you, Mr. Largent. Mr. Wynn,

you are now recognized.

Mr. WYNN. Thank you, Mr. Chairman, and I thank the panelists

for coming here today. Let me ask first kind of a general question.

Is there anyone on the panel who strongly opposes bidding out the

construction of new facilities? Is there anyone that says that that

is a real problem?

Mr. JOHNSTON. As a matter of fact, the southeast SeTrans model

that we are negotiating with the other Southeast utilities does just

that.

Mr. WYNN. Okay. Great. The next question is that I believe that

it was Mr. Richardson who said that he felt that in terms of incentive pricing that FERC had enough authority under just and reasonable to accommodate the concerns that were raised.

Apparently, Mr. Sokol, do you disagree with that? I don’t want

to kind of point a finger at you, but I just wanted to find out if

there was disagreement with that analysis?

Mr. SOKOL. Under the historic structure, no, I don’t disagree.

Mr. WYNN. Is there anyone that feels strongly that we should not

grandfather in State and net metering?

[No response.]

Mr. WYNN. I believe, Mr. Richardson, that you said that there

needed to be—that in the absence of PUHCA, there was at least

some momentum toward repealing PUHCA, but in the absence of

PUHCA, there needed to be some market or some protection for

consumers against abusive market power. What did you have in

mind?

Mr. RICHARDSON. Well, first of all, just to clarify a point earlier.

APPA at least has been consistently opposing or has been acknowledging the fact that the modifications of the Public Utility Holding

Company Act are probably in the cards in this debate over industry

restructuring.

So in that sense there has been a consensus that the Holding

Company Act is an issue that needs to be addressed, but repeal is

not something that we have supported. And in fact, as you said, we

have endorsed the proposition that if you are going to take away

the consumer protection provisions of the Holding Company Act

that they need to be replaced by something else.

And the something else is that those other things need to be expanded in FERC authority in dealing with the holding company

mergers, in addition to the authority that FERC already has; and

a reexamination of the standards under which FERC examines

mergers.

Perhaps the preservation of the authority to disband the holding

company and the so-called death sentence provision of the holding

company. If it is found that a holding company is operating utilities

or operating in ways that are detrimental to the interests of consumers, as well as other market power provisions that we have

identified in previous testimony.

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Mr. WYNN. I appreciate that, and if I could impose upon you, or

have someone from your group send me those alternatives in writing, I would appreciate that.

Mr. RICHARDSON. We would be happy to. There is a number of

other issues; affiliate abuse, protections, and so forth, and I would

be happy to do that.

Mr. WYNN. I would like to get that. Also, I believe you said that

you believe that in terms of access to records that it is too narrowly

drawn with respect to only costs. What additional government

records do you believe that Federal regulators ought to have beyond the, quote, costs?

Mr. RICHARDSON. It appears to us that the access to books and

records, assuming that the State Commissions are not asleep at the

switch and are doing what needs to be done to look at the books

and records, the provisions allow them to look at books and records

only with respect to rates charged.

Now, how broad is that or how narrow is that, that’s an issue

that certainly would be subject to interpretation, but it is not clear

to me that it goes all the way to affiliate transactions, and potentials for affiliate abuses.

Transactions to the holding companies, and structure, and the financial posture and structure of the holding company itself rests

over on top of the operating utilities.

So it is not clear that all of those books and records that have

to do with the operations of the holding company actually could be

obtained under the provisions that are in this provision.

Mr. WYNN. If I could impose upon you again to provide me with

that information, I would appreciate it.

Mr. RICHARDSON. I would be happy to.

Mr. WYNN. I won’t impose again, but I thought that was useful.

Now, I guess the final point that I would just make is that we are

giving or proposing to give FERC broad authority, but it seems like

we are narrowly construing the authority in that critical area.

So I think that it is important that we have the maximum ability

to look at all of the records. The imposition of wholesale strategy

and costs by FERC; I have a concern about that. Is there anyone

that has a concern about whether or not States ought to be——

Mr. RICHARDSON. Well, if you are referring to the section on the

wholesale costs for——

Mr. WYNN. Right.

Mr. RICHARDSON. In cases where communities would like to establish their municipal electric utility system, we are very concerned about that. That is a provision that is in our view completely unnecessary, and would make the creation of new public

power systems, or even the exploration of new public power systems cost prohibitive.

States have the authority to deal with this issue, and FERC is

a back stop to deal with this issue on a case-by-case basis. Additional legislation is not necessary. In fact, it is counterproductive.

Mr. WYNN. Thank you very much. I see that my time is up.

Thank you, Mr. Chairman.

Mr. NORWOOD. Thank you, Mr. Wynn. Mr. Markey, you are now

recognized.

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Mr. MARKEY. Thank you, Mr. Chairman, very much. Mr. Richardson, if Enron had been an SEC regulated registered holding

company, it would have had to have undergone prior SEC review

of its corporate and capital structure, including its equity, its debt,

and its relationships with its affiliates; is that right?

Mr. RICHARDSON. That’s correct.

Mr. MARKEY. Now, do you think that the SEC would have granted prior approval to the types of disclosure documents, capital

structures, and insider deals with all of those shadowy partnerships that we have been reading about?

Mr. RICHARDSON. It seems unlikely.

Mr. MARKEY. Now, PUHCA also restricts the ability of registers

to diversified into unregulated business areas; isn’t that correct?

Mr. RICHARDSON. Yes, it is.

Mr. MARKEY. And even in those areas where Congress has authorized some diversifications—exempt wholesale generation, foreign utility investments, telecommunications—that Congress has

placed certain restrictions on such investments in order to protect

utility operating companies from failed diversifications; is that

right?

Mr. RICHARDSON. Yes, they have.

Mr. MARKEY. Now, your testimony suggests that the only real

benefit of repealing PUHCA is that it allows large multi-State utility holding companies to merge and grow even larger by acquiring

operating utility companies all over the country, and to diversify

into other non-utility businesses; is that correct?

Mr. RICHARDSON. Yes.

Mr. MARKEY. So if we do what H.R. 3406 recommends, what is

to prevent the next Enron from being a large utility holding company and the bankruptcy of that company from harming utility

consumers in a crisis far worse than the collapse of Enron?

Mr. RICHARDSON. In my view, very little, and I think that is the

point that Mr. Dingell was making earlier today about what if the

Act were repealed and Enron were to become a holding company.

Mr. MARKEY. Well, great minds think alike.

Mr. RICHARDSON. Yes, they do, sir.

Mr. MARKEY. If I can restate that now. Now, Mr. Sokol, the SEC

was not regulating Enron on-line as a broker dealer; isn’t that correct?

Mr. SOKOL. Nor as a public utility holding company.

Mr. MARKEY. So, Enron on-line was not subject to the provisions

of the Securities Exchange Act that are normally applicable to

broker dealers, and these include holding company risk assessment, large trader reporting, capital rules, margin requirements,

audit trails, broker-dealer record keeping, front running, and other

anti-manipulation and anti-fraud rules.

So, Enron was not subject to any of those rules as far as I understand the situation.

Mr. SOKOL. Well, first of all, Congressman, as you know, I am

not a defender of Enron by any stretch of the imagination. But I

believe that Enron is subject to the rules of every public company,

and of proper disclosure of its financials, and proper and full disclosure to its investors of the risks, and all information necessary for

intelligent investment decisions.

211

And so I think certainly a large portion of the SEC rules, Enron

was subject to, and should have been responding to.

Mr. MARKEY. Well, do you think that this subcommittee should

consider regulating the over-the-counter markets in which Enron

operated, including both the markets for physical delivery of electricity and the OTC electricity derivatives markets?

Mr. SOKOL. I think it definitely at a minimum should hold hearings and very seriously look at those issues, in addition to potentially revamping the methods for the criminal and civil penalties

for improper disclosure, both for company management, as well as

auditors.

Mr. MARKEY. Do you agree that if we repeal PUHCA that we

need to retain and strengthen FERC’s merger review authority so

that the market power issues are dealt with?

Mr. SOKOL. Well, I think first of all that PUHCA clearly should

be repealed, and as you said yourself, and I think Congressman

Dingell indirectly as well, PUHCA did absolutely nothing.

In fact, in many ways as Congressman Sawyer said, PUHCA allowed an Enron to exist, and it in no way resisted it. As to merger

powers, we are completely fine with FERC’s review of mergers.

There are redundant merger review processes, and the only request we would have is merely that there be some level of time

commitment to review them in a prompt way and make a decision.

But market power issues clearly should be a major consideration

in those reviews.

Mr. MARKEY. Does anyone on the panel think that FERC should

not have strengthened review powers over mergers if PUHCA is repealed?

[No response.]

Mr. MARKEY. Earlier on, Mr. Sokol, you said that what Enron

had done with respect to its accounting practices, its off-balance

sheet items, and its special purpose limited partnerships, is not

unique in the energy business. How widespread are these practices?

Mr. SOKOL. Well, I would say that of companies like Enron, and

again the non-regulated sides of the business, it is more widespread certainly than is helpful. I think we are already seeing

other companies unwind similar activities.

Mr. MARKEY. Well, what other companies are doing that right

now?

Mr. SOKOL. Well, yesterday, El Paso announced that it would unwind two of its off-balance sheet partnerships that were very similar to what Enron had. Again, El Paso is not a Public Utility Holding Company Act company, and PUHCA did not in any way prohibit them.

And I believe that there are other folks in that sector that have

used accounting treatments that perhaps shouldn’t be used in the

future.

Mr. MARKEY. Okay. And, Mr. English, Glenn, back when you

served in Congress, you had jurisdiction over the CFTC over there

at the Agriculture Committee, and during that time you may recall

that Congress passed the Futures Trading Practices Act of 1992.

And that authorized the CFTC to exempt over-the-counter derivatives from regulation as futures, and this exemption was furVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00215 Fmt 6601 Sfmt 6602 E:\HEARINGS\77118 pfrm09 PsN: 77118
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ther expanded during the last Congress when we passed the Commodity Futures Modernization Act.

Now as a result of those laws, the CFTC has virtually no jurisdiction over the OTC derivative markets, and hence over the activities of companies like Enron.

Mr. ENGLISH. Well, I hope that you also remember when I was

chairing that subcommittee that I strongly objected to that and felt

that those derivatives should be regulated.

Mr. MARKEY. Well, I am ready to serve up the great truth. Let

me finish. I have the big home run pitch coming.

Mr. ENGLISH. Okay. Don’t make it too slow now.

Mr. MARKEY. Okay. I have to try and speak as slowly as they do

in the Southwest right now in setting up this pitch. So in light of

that, do you think we should consider giving FERC additional authority over electricity trading markets and related derivative markets so that there is some Federal regulation over these things in

view of the fact that at that time you had great reservations about

granting those exemptions?

Mr. ENGLISH. And given that previous experience, I would say

whole-heartedly, yes. I don’t think there is any question that we

need to focus more attention on these derivative devices that are

used to in effect evade any kind of oversight, and that is basically

what we are talking about here.

Mr. MARKEY. Does anyone on the panel disagree with Mr.

English?

Ms. CHURCH. Yes, sir.

Mr. MARKEY. Okay.

Ms. CHURCH. While I am not suggesting that it is inappropriate

for certainly Congress and the regulators to relook at the issue, I

would just strongly remind the Congressman and the rest of the

panel that Enron’s core business of electricity trading—their platform, and their other trading—was not what brought them down.

It was not their problem. Their problem was in their debt leverage and in their disclosure process. In fact, their trading was in

fact their crown jewel, which was providing the cash-flow, and ultimately it was the discipline of that trading market and the fact

that the counter-parties lost confidence in Enron’s financial status.

Mr. MARKEY. So, what you are saying here for the record then

is that none of the debt, none of the problems, were in any way related to the trading practices that were going on. You are ready to

go on the record and say that?

Ms. CHURCH. Yes.

Mr. MARKEY. None of it?

Ms. CHURCH. Yes, that is my understanding.

Mr. MARKEY. So what did cause it, just so we can all understand

it if it wasn’t that?

Ms. CHURCH. I think it was a lack of financial confidence that

was due to their disclosure about the level of debt which was not

what had been known before. And particularly in their off-balance

sheet partnerships, and the fact that there was increasing concern

about their disclosure in their financial statements. That is what

started the spiral eventually that I think brought them under.

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Mr. MARKEY. I thank you, Mr. Chairman, for your tolerance. I

would just say that I think that a lot of their bad debt was related

to obviously this diversification strategy in my opinion.

And obviously derivators in the words of many people on Wall

Street are really just like nuclear weapons out there; and that if

not understood—and we know that there isn’t a single CEO in

America that I know of that really understands derivatives, which

is why the higher 27 year olds that went to MIT, and who go

summa cum laude degrees in advanced math, and so they really

don’t understand them.

So to say that they are over here in this OTC derivatives marketplace, and somehow or other the marketplace will work out, with

no oversight whatsoever, I think is a very dangerous game to play.

And I thank you, Mr. Chairman.

Mr. NORWOOD. Yes, sir, Mr. Markey, and let the record show

that to get back into your good graces you got 10 minutes of questioning done.

Mr. MARKEY. I thank you, Mr. Chairman.

Mr. NORWOOD. If the panel would indulge us, we would like to

ask a couple of more questions, and in a very limited time, to 3

minutes, and if we can have that understanding, I am going to

slam the gavel down in 3 minutes.

And so if you would be kind enough to answer just a couple of

more questions. Mr. Walden, you have 3 minutes.

Mr. Walden. Well, Mr. Chairman, for your good graces, I would

like 13, but I will take three. I wanted to follow up on PURPA because we have heard about it from the perspective of its importance to spawn these alternative energy production facilities.

But isn’t there another side to PURPA? I mean, I have got a few

of those contracts in my district, and for 3 years I have heard from

some of those who have been ‘‘stuck’’ with them from the buying

side, and that it has been a burden on consumers, and on the rate

payers because the rate was higher than the market and they were

locked into those agreements.

Can you speak to that, because I think we have got to get a balance here on making sure that the renewables that we put on-line

are affordable to the rate payers.

Ms. CHURCH. I will speak to PURPA if I may. I think the mandatory requirement to buy that is in the bill really no longer makes

a lot of sense in this market.

Mr. Walden. You mean in the law?

Ms. CHURCH. In the law.

Mr. Walden. Not in the bill?

Ms. CHURCH. Sorry, not in the bill. Correct. The law currently

has a mandatory take requirement from utilities, and in this day

and age, and in this type of market, that really does not make

sense.

And we have not opposed eliminating prospectively the musttake provision. There is one problem with the bills dealing with

PURPA, in that it does not eliminate the ownership restrictions

that are also currently in the bill. Excuse me, currently in the law.

But generally PURPA—has PURPA really spawned the competitive industry? I think it has had a great deal of success in bringing

214

renewable facilities on-line, and I think it will continue, but I think

that the must-take provision no longer makes sense.

Mr. Walden. Another topic is that we have heard a lot about

Enron’s problems, and how once their revenues were recalculated

and their off-balance sheet debt was brought into play, and then

it all began to link to one another, and as the debt appeared to increase, it triggered other requirements.

And then the credit ratings went down, and it just got away like

a chain reaction. Then I noticed in the news recently that California is saying that they want to renegotiate the contracts for

power that they just entered into earlier this year, which triggered

some companies to begin to put forward that their revenues might

be less than anticipated if that occurs.

And as a result, I think it was Cal-Plan if I have got this right,

and their stock began to tumble. Can any of you speak to what is

going on in California, because we spent all spring trying to figure

out what it was, and then about the time the market started to correct, they decided to enter into long-term agreements.

And I predicted then that they would be back once the market

straightened out complaining about these horrible long-term agreements that they were ‘‘forced’’ to enter into.

Are we now beginning to see a sort of new bludgeoning over

these agreements?

Ms. CHURCH. Yes, sir, I believe you are, and we are unfortunately. The powers that be in California took the correct step in

January and February when they entered into long term contracts

to supply most of the power.

Unfortunately, their timing was terrible. It was much too late,

and——

Mr. Walden. After they had denied the utilities the ability to do

the same thing within a prior year period, right?

Ms. CHURCH. That’s correct.

Mr. Walden. So they entered the market at the wrong time and

into agreements that were long?

Ms. CHURCH. That’s correct. There were suppliers publicly offering the utilities long-term contracts at 5 cents, and 51⁄2 cents, or

6 cents, in the summer of 2000.

And had those utilities been allowed by the State Regulators at

that time and the State Legislature to do that, we would not have

been in the situation we were.

The Governors group bought at the top of the market, and those

are contracts that are bilateral contracts. They are enforceable contracts. I have heard many of the suppliers say that they are willing

to discuss renegotiating those contracts if it results in mutually

beneficial results.

But those are enforceable contracts, but they in hindsight, the

Governor moved too slowly.

Mr. NORWOOD. Thank you, Mr. Walden. Your time is up. Sorry,

gentlemen. Mr. Boucher, you are recognized for 3 minutes.

Mr. BOUCHER. Thank you, Mr. Chairman. I have one question,

and Mr. Acquard, I will pose this to you. Those who are advocating

a removal of the Federal Energy Regulatory Commissions’ authority to review mergers argue that the function of promoting competition can be performed very adequately by the Department of JusVerDate 11-MAY-2000 11:29 Apr 12, 2002 Jkt 010199 PO 00000 Frm 00218 Fmt 6601 Sfmt 6602 E:\HEARINGS\77118 pfrm09 PsN: 77118
215

tice, or the Federal Trade Commission, one or the other of which

would have jurisdiction in the event of mergers.

Tell me—and this is for the benefit of the record, which we will

share with other members. What is it that the FERC can do, and

is uniquely positioned to do that these anti-trust enforcement agencies are not?

Mr. ACQUARD. I think basically that they have an understanding

of the energy industry. The FTC and the Department of Justice

does not have that understanding. So we believe that it is important that FERC continue to have a role in those mergers.

The concern ultimately is that unless you take a close look at the

mergers, and you have added authority on mergers, that we are

going to turn into a Bell system, turning to the telecommunications

area, where we will have fewer and fewer competitors, and we will

not have an agency that fully understands the industry that they

are regulating.

Mr. BOUCHER. So FERC has special knowledge which can and is

brought to bear on merger reviews?

Mr. ACQUARD. Absolutely.

Mr. BOUCHER. A deeper knowledge than the anti-trust agencies

possess?

Mr. ACQUARD. Absolutely.

Mr. BOUCHER. And FERC can utilize this knowledge to promote

competition more effectively than the anti-trust review can promote

it?

Mr. ACQUARD. That’s correct.

Mr. BOUCHER. Thank you, Mr. Acquard, and thank you, Mr.

Chairman.

Mr. NORWOOD. Thank you, Mr. Boucher. I recognize myself for

3 minutes. Mr. Johnson, you have 48 cities in your association in

Georgia. Now, over the past 20 to 25 years how much money has

your operation spent in investing in transmission infrastructure to

serve those customers?

Mr. JOHNSTON. We have between $300 and $400 million of tax

exempt bond investment in transmission in Georgia.

Mr. NORWOOD. And under this new system are you going to be

able to guarantee those customers that they will not experience a

brown-out when merchant plants in other States sell and transfer

electricity through Georgia transmission systems, and say up to

Mr. Markey’s area?

Mr. JOHNSTON. Not unless we can successfully negotiate a native

load protection provision that we are negotiating. But without that,

we would not be able to guarantee delivery, no.

Mr. NORWOOD. Now, if you have brown-outs and you can’t guarantee that delivery, who are we going to holler at? Are we going

to be mad at you or are we going to be mad at the RTO?

Mr. JOHNSTON. Well, I know that there is going to be a lot of hollering going on, and I probably have plenty of it directed to me, and

there will probably be plenty of it directed at you and others.

Mr. NORWOOD. Well, Congressman Barton just pointed out that

they would be hollering at me, too. So, you seem to think that the

rate payers, the native load customers, should be given some kind

of priority consideration?

216

Mr. JOHNSTON. Yes, because frankly they have paid for that system, and they are subject to the bond debt for the life of that debt,

and why shouldn’t they have priority. It was built for them.

Mr. NORWOOD. You are talking about incentives that Congressman Largent was talking about. Had you known years ago that

this $300 to $400 million that you had invested in transmission

lines were going to be taken away from you and perhaps you could

only use it when somebody else says you could use it, would you

have had an incentive to build that transmission line?

Mr. JOHNSTON. No, we would not.

Mr. NORWOOD. And if we do have RTOs, there had better be

some incentives for new transmission?

Mr. JOHNSTON. Yes.

Mr. NORWOOD. And it needs to be incentives that we think will

last a few years and not be taken away as we might be talking

about doing that now, and with that, I yield back the balance of

my time, and I yield the chair to the dcairman.

Mr. BARTON. Thank you. I am not going to ask any questions. It

is 1:15 and I could debate with each of you and say something

funny, and you could come back with something smart, and all of

that.

We know where you are, and we appreciate you being here. We

have been messing with this issue for—you could say for the last

10 years. We certainly have been trying to do something for the

last seven, and I have been trying to do something for the last

three.

The bill before us is not a perfect bill, but it is a real attempt

at a balanced approach that tries to balance all the concerns that

you put on the table. We are going to continue to work with you.

I don’t think some of you are as opposed to the bill as you have

said today based on what you have said off the record.

But I am not going to put you on the record when you said to

keep it off the record. I am going to check with Chairman Tauzin.

It looks like the House is going to be in session next week. We are

coming in at 6:30 next Wednesday, and we will be here all day

Thursday.

My intention is to schedule opening statements on the mark-up

Wednesday afternoon late, probably about four o’clock, and then go

to mark-up on Thursday. That is an intention, and that is not a

declaration. I need to check that with the chairman, and obviously

I need to check it with Mr. Boucher and Mr. Dingell.

I would like to get this bill out of the subcommittee next week

if we have time to do it, so that we can set it up to go to the full

committee. I really want this Congress to move a comprehensive

electricity restructuring bill.

I think the time has come and I think we are close to consensus,

and there will never be the perfect time. I mean, if we wait 6

months or a year, there is always going to be something else.

The only real alternative in my mind to doing something close

to what we have got on the table would be a very slimmed down

bill that just gave explicit authority to FERC to do what they wanted to do.

And in my opinion that is an abrogation of the Congress to legislate. The Congress legislates and the executive branch implements,

217

and too many Congresses have punted to the executive branch because we are not willing to make tough choices on issues that there

is not total consensus.

So, I do appreciate each of you individually, and I do appreciate

the groups that you represent. I would encourage you and your

staffs to work with the member staffs and the leadership staffs on

constructive ideas to perfect the bill, in terms of amendments and

things that need to be added and deleted because it is now intention this afternoon to the opening statements next Wednesday, and

go to mark-up on Thursday.

So I want to thank you for your attention and thank you for your

participation, and with that, this hearing is adjourned.

[Whereupon, at 1:18 p.m., the subcommittee was adjourned.]