U.S. GOVERNMENT PRINTING OFFICE

60–356CC WASHINGTON : 1999

THE ELECTRICITY COMPETITION AND RELIABILITY

ACT

HEARINGS

BEFORE THE

SUBCOMMITTEE ON ENERGY AND POWER

OF THE

COMMITTEE ON COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

ON

H.R. 2944

OCTOBER 5 and 6, 1999

Serial No. 106–66

Printed for the use of the Committee on Commerce

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COMMITTEE ON COMMERCE

TOM BLILEY, Virginia, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

Vice Chairman

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

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

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

THOMAS C. 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

JAMES E. DERDERIAN, Chief of Staff

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON ENERGY AND POWER

JOE BARTON, Texas, Chairman

MICHAEL BILIRAKIS, Florida

CLIFF STEARNS, Florida

Vice Chairman

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

TOM BLILEY, Virginia,

(Ex Officio)

RALPH M. HALL, Texas

KAREN MCCARTHY, Missouri

THOMAS C. SAWYER, Ohio

EDWARD J. MARKEY, Massachusetts

RICK BOUCHER, Virginia

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

ALBERT R. WYNN, Maryland

TED STRICKLAND, Ohio

PETER DEUTSCH, Florida

RON KLINK, Pennsylvania

JOHN D. DINGELL, Michigan,

(Ex Officio)

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C O N T E N T S

Page

Hearings held:

October 5, 1999 ................................................................................................. 1

October 6, 1999 ................................................................................................. 161

Testimony of:

Bailey, Hon. Vicky A., Commissioner, Federal Energy Regulatory Commission ........................................................................................................... 58

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

Commission ................................................................................................... 65

Brice, Rutherford ‘‘Jack,’’ Member, Board of Directors, AARP ..................... 240

Casten, Thomas R., President and Chief Executive Officer, Trigen Energy

Corporation .................................................................................................... 270

Church, Lynne H., Executive Director, Electric Power Supply Association 192

Cooper, Mark N., Director of Research, Consumer Federation of America . 247

Cowart, Richard H., Director, Regulatory Assistance Project ...................... 255

English, Glenn, Chief Executive Officer, National Rural Electric Cooperative Association ............................................................................................. 201

Glauthier, Hon. T.J., Deputy Secretary of Energy, U.S. Department of

Energy ............................................................................................................ 16

Hawkins, David G., Director of Air and Energy Programs, Natural Resources Defense Council ............................................................................... 211

He

 ́

bert, Hon. Curt L., Jr., Commissioner, Federal Energy Regulatory

Commission ................................................................................................... 69

Helton, William, New Century Energies, representing Alliance for Competitive Electricity ......................................................................................... 162

Hoecker, Hon. James J., Chairman, Federal Energy Regulatory Commission ................................................................................................................. 51

Kanner, Marty, Coalition Coordinator, Consumers for Fair Competition ... 251

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

Commission ................................................................................................... 76

Mayben, William R., President, Nebraska Public Power District, representing Large Public Power Council ........................................................ 196

Moler, Elizabeth Anne, General Counsel, Americans for Affordable Electricity .............................................................................................................. 243

Nevius, David R., Vice President, North American Electric Reliability

Council ........................................................................................................... 167

Owens, David K., Executive Vice President, Edison Electric Institute ....... 182

Popowsky, Irwin ‘‘Sonny,’’ Pennsylvania Consumer Advocate Office of

Consumer Advocate, representing the National Association of State

Utility Consumer Advocates ........................................................................ 119

Rao, Rajeshwar, President, Indiana Municipal Power Agency, representing Transmission Access Policy Study Group .................................. 215

Richardson, Alan H., Executive Director, American Public Power Association ................................................................................................................. 169

Segal, Scott H., on behalf of the National Alliance for Fair Competition .... 275

Smith, Marsha H., Commissioner, Idaho Public Utilities Commission,

representing the National Association of Regulatory Utility Commissioners ............................................................................................................ 102

Smith, Tom, Director, Texas Public Citizen ................................................... 268

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(IV)

Page

Material submitted for the record by:

Bailey, Hon. Vicky A., Commissioner, Federal Energy Regulatory Commission, responses to questions of Hon. Joe Barton .................................. 143

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

Commission, responses to questions of Hon. Joe Barton ........................... 147

Brice, Rutherford ‘‘Jack,’’ Member, Board of Directors, AARP, responses

to questions of Hon. Joe Barton ................................................................... 312

Church, Lynne H., Executive Director, Electric Power Supply Association,

responses to questions of Hon. Joe Barton ................................................. 310

English, Glenn, Chief Executive Officer, National Rural Electric Cooperative Association, responses to questions of Hon. Joe Barton ..................... 309

Glauthier, Hon. T.J., Deputy Secretary of Energy, U.S. Department of

Energy, responses to questions of Hon. Joe Barton ................................... 155

He

 ́

bert, Hon. Curt L., Jr., Commissioner, Federal Energy Regulatory

Commission:

Responses to questions of Hon. Joe Barton ............................................. 140

Responses to questions of Hon. Vito Fossella ......................................... 142

Hoecker, Hon. James J., Chairman, Federal Energy Regulatory Commission:

Responses to questions of Hon. Joe Barton ............................................. 132

Responses to questions of Hon. Vito Fossella ......................................... 138

Responses to questions of Hon. Ed Bryant ............................................. 140

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

Commission, responses to questions of Hon. Joe Barton ........................... 146

Nevius, David, Vice President, North American Electric Reliability Council, responses to questions of Hon. Joe Barton ........................................... 305

Owens, David, Executive Vice President, Edison Electric Institute, responses to questions of Hon. Joe Barton ..................................................... 298

Popowsky, Irwin ‘‘Sonny,’’ Pennsylvania Consumer Advocate Office of

Consumer Advocate, representing the National Association of State

Utility Consumer Advocates, letter dated October 18, 1999, enclosing

response for the record ................................................................................. 153

Rao, Rajeshwar, President, Indiana Municipal Power Agency, representing Transmission Access Policy Study Group, responses to questions of Hon. Joe Barton ............................................................................... 313

Richardson, Alan, Executive Director, American Public Power Association, responses to questions of Hon. Joe Barton ........................................ 300

Smith, Marsha H., Commissioner, Idaho Public Utilities Commission,

representing the National Association of Regulatory Utility Commissioners, responses for the record ................................................................. 149

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THE ELECTRICITY COMPETITION AND

RELIABILITY ACT

TUESDAY, OCTOBER 5, 1999

HOUSE OF REPRESENTATIVES,

COMMITTEE ON COMMERCE,

SUBCOMMITTEE ON ENERGY AND POWER,

Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m., in room

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

presiding.

Members present: Representatives Barton, Bilirakis, Stearns,

Largent, Burr, Whitfield, Rogan, Shimkus, Wilson, Pickering,

Fossella, Bryant, Hall, McCarthy, Sawyer, Markey, Pallone, Gordon, Rush, Wynn, Strickland, and Dingell (ex officio).

Staff present: Joe Kelliher, majority counsel; Cathy Van Way,

majority counsel; Miriam Erickson, majority counsel; Ramsen

Batfarhad, economic advisor; Sue Sheridan, minority counsel; and

Rick Kessler, minority professional staff.

Mr. BARTON. The Subcommittee on Energy and Power will please

come to order.

Today, we are going to begin the first of 2 days of hearings on

H.R. 2944, which is a comprehensive piece of legislation to restructure the utility industry and the generation and transmission of

electricity in the United States.

The Chair wishes to inform all members that we are going to adhere to regular order. We will recognize the ranking members and

the subcommittee chairman and the full committee chairman for a

5-minute opening statement today. All other members will be recognized for 3 minutes. If there are members not present, their

statements will be put into the record in their entirety. Tomorrow,

we don’t plan to have opening statements other than a brief introduction of our witnesses.

The Chair would like to recognize the distinguished ranking

member, Mr. Hall, for his opening statement.

Mr. HALL. Mr. Chairman, thank you, and members of the committee. We have reached a milestone in the subcommittee’s consideration of restructuring legislation with this legislative hearing

today. This is a hearing that we have needed and that we have

looked forward to.

I want to congratulate Chairman Barton. His efforts have really

been tireless. He has made trips to all parts of this country to hear

people and to keep an open door and to bring this subcommittee

to the point we have reached here today, this morning.

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And you have shown and extraordinary amount of leadership,

Mr. Chairman, working with all of us and attempting to move this

legislation through, to give the committee the right to work its will,

and regardless of what the final outcome is of this legislation, your

efforts, Chairman Barton, have advanced the public debate and our

understanding of these very difficult and complex issues. I think

you have done us a real service already.

I plan to listen carefully to the witnesses over the next 2 days

to see whether we can find a common ground on which to move forward. I have particular concerns over what authority FERC should

have in determining shape of the bulk power market of the future—is my time up already? Your beeper works—and I am

pleased that you have asked the entire Commission to appear before us today.

I believe their expertise and insights will be particularly valuable

at this point in our consideration of the legislation. They, like us,

are of different minds about many of the issues before us, but unlike us, they have spent many, probably more, waking hours examining and deliberating these issues, and I am sure their testimony

will be informative and instructive to us.

Other witnesses represent States and State officials. State preemption is a huge issue in this legislation. As a former county

judge and former State senator, I have a strong bias against preemption of State authority. Preemptive provisions in this legislation will have to be accompanied by compelling reasons for exercising Federal preemptive authority, and that is what we will probably hear today.

By singling out these issues, I by no means intend to signal that

other issues are not as important and deserve less attention. Our

time and that of the witnesses is limited here today. It is more important that we hear from the witnesses.

With that, Mr. Chairman, I yield back my time and thank you.

Mr. BARTON. We thank the distinguished member from Texas

and recognize Mr. Stearns for a 3-minute opening statement.

Mr. STEARNS. Five minutes?

Mr. BARTON. Three.

Mr. STEARNS. Mr. Chairman, thank you. I think when we look

at this restructuring of some of the major issues, I think there is

a consensus for prospectively repealing the Public Utility Regulatory Policy Act and provide for recovery of mandated costs, repeal

the Public Utility Holding Company Act, apply FERC authority

over non-jurisdictional entities, ensure transmission reliability, retain State authority to order competition, and encourage competition through State reciprocity.

You know, I think this bill that we have looks at most of these

core issues and addresses them. Now, not everybody is going to be

happy with this bill. When we come to restructure an over $200 billion industry, you are not going to strike a perfect masterpiece on

the first brushstroke.

I wanted to point out, Mr. Chairman, Michigan has an interesting program called Electric Choice. It is a multiphase program

allowing the States to adopt lessons learned in competition. The

first bid phase alone brought in 117 requests from customers,

power marketers, and associations to participate as competitive

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electric providers. In Illinois, 430 of Comed’s business customers

have signed up to receive power from other registered suppliers.

So, competition also affects States that haven’t deregulated.

And the States are doing an excellent job. If we are to enact Federal legislation on this issue, we have to respect their hard work

and success. As I said earlier, we don’t have a perfect bill on the

first attempt, but I am sure through the hearings like today, we

will.

Our purpose today is to hear everybody, get their input, and to

go and try to fine tune our efforts and understand what it takes

to get a more perfect regulatory bill.

Judging from the people in the audience and the people standing

out in the line, I can say that this must affect a lot of people, Mr.

Chairman, so I hope that we move deliberately, and, most importantly, we respect some of the States who have already started reform in our approach to this bill.

And I yield back.

Mr. BARTON. We thank the gentleman from Florida.

I would like to recognize the gentleman from Ohio, Mr. Sawyer,

for a 3-minute opening statement.

Mr. SAWYER. Thank you very much, Mr. Chairman. Thank you

for your conduct of these proceedings throughout this year. It has

been a long and I think constructive year, and thank you also for

the introduction of a comprehensive bill to serve as a baseline for

where we go to from here.

We really are at a critical juncture. I guess I would agree somewhat with the gentleman from Florida. I don’t expect to find a perfect bill. I do hope that we can find a consensus bill, one that perhaps not everyone is happy with but which we can share some

hope for that will work over time.

And that is really what is at stake here. Over the past century,

electricity has powered virtually a second American revolution and

has defined who we have become in this century. Through law and

practice and policy, sound regulation has made this possible. It has

evolved over time. And that century-old system, quite to the contrary of some of the rhetoric we heard at the beginning of the year,

has served us well, I believe. It has brought us to the juncture that

we are at today.

I think it is also fair to say that properly arrayed competition

will bring better service at lower prices to the vast majority of

Americans. Our job is to develop a regulatory framework in such

a way that it accommodates changing technologies in a dynamic,

competitive set of markets. The key to success, in my view, will be

the adequacy of the transmission system. The grid is the backbone

and the lifeline of competition.

The structure of the network really exists only as a product of

evolutionary happenstance over the last century. It works. Various

transmission components border upon one another, and electricity

flows between them. But as a system, it was never designed as

part of coherent regional transmission plans, which is what we

need to build into the future.

The legislation that we are working on needs to anticipate that

to handle the enormous flow of electricity across broad geographic

areas and to anticipate the variability of the need for capacity and

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at the same time to allow it to grow and be fully maintained and

physically secure. A grid that lacks capacity or that limits growth,

limits commerce.

To encourage the growth of those markets, I believe that Federal

legislation should promote new investment so that the grid can

grow responsibly, and the Federal framework must embody several

basic principles. First, it should encourage the formation of RTOs,

regional transmission organizations, but not mandate the structure

of the transmission business. We have all said one size does not fit

all, but a single template to meet the needs of diverse markets is

going to be a difficult thing to undertake, and we may well all not

hit it right the first time. We should anticipate the need for it to

change.

We should encourage the expansion of transmission investment.

We should expressly recognize the importance of expansion and the

necessity and cost of maintaining and improving the reliability of

electric service. It seems to me that——

Mr. BARTON. The gentleman’s time is unfortunately expired. By

unanimous consent, the gentleman from Ohio is recognized for another 1 minute.

Mr. SAWYER. I would be happy to——

Mr. BARTON. I like what you are saying, so I want you to keep

going.

Mr. SAWYER. Okay. I am trying to go as fast as I can. I am saying a whole lot less than what I have got down on the paper here.

Mr. BARTON. I understand.

Mr. SAWYER. I appreciate the chairman’s flexibility.

The Congress should set standards for establishing rates to cover

transmission costs and to provide incentive to encourage the expansion of the grid.

It is also important, it seems to me, that transmission systems

not be subject to shifting and contradictory regulatory jurisdictions

and the requirements that come about as a result of that. It seems

to me that FERC ought to have jurisdiction over all transmission.

It may not be the same jurisdiction that it has today, but it should

be broad jurisdiction, including unbundled transmission sold at retail. It should be expanded to cover all transmission service and

interstate commerce; in short, to create a classic level playing field.

Everybody ought to be involved in that regardless of the original

genesis of their generating business.

I recognize the chairman has set some more goals. I am going to

truncate what I have to say—the rest of what I have to say and

insert it in the record. But just let me suggest that Federal legislation ought to ensure that transmission networks grow in step with

competition. If they can’t do that, if we can’t build a prospective opportunity for this system to change, it seems to me that we will

have missed the opportunity that the competition presents.

With that, Mr. Chairman, I thank you for your flexibility and

yield back what small fraction of time I may have left.

Mr. BARTON. We thank the gentleman from Ohio.

We now recognize one of the most tireless members for restructuring, Mr. Largent of Oklahoma.

Mr. LARGENT. Thank you, Mr. Chairman. I want to commend

you, your staff, the committee staff for the professional and open

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manner in which H.R. 2944, the Electricity Competition and Reliability Act, has been assembled. To reach the point of holding today

and tomorrow’s much anticipated hearing on the bill before us, the

subcommittee this year has held 11 hearings and received testimony from 92 witnesses examining the myriad of issues that constitute electricity restructuring.

Having worked on comprehensive electricity restructuring for

over year, it is critical that Congress pass Federal legislation in the

very near future to compliment the retail competition plans that 24

States have already enacted. My own State of Oklahoma, a State

with relatively low electricity costs, has recognized the benefits

that will flow from a competitive marketplace and has adopted its

own restructuring legislation. The importance of Oklahoma’s own

retail competition plan, when coupled with Federal legislation promoting wholesale competition, should result in what is tantamount

to a second land rush in terms of the beneficial economic impact

it will have attracting new business to my State.

At a national level, competition will grant consumers the ability

to reduce their electricity bills by choosing their electric provider.

Savings are estimated to be the equivalent to a 5 percent income

tax cut for a family of four. What about the examples of other monopoly industries? Following the deregulation of long distance telephone service, airlines, trucking, and railroad, the lowest price reduction was 28 percent.

Taxpayers will also save money. The National Taxpayers Union

concluded that electric restructuring could save the Federal Government anywhere from $31.4 billion to as much as $75.6 billion

over the next 5 years.

Witnesses before this subcommittee have stressed the fact that

electrons do not distinguish between State or service territory

boundaries. Electricity is an industry that is basically interstate

commerce. We need to recognize this phenomenon and create a

Federal regulatory structure that will provide a much more consistent national power grid. By doing so, we can design a national

reliability standard to prevent regional reliability lapses such as

those that occur during the blackouts in the Midwest this past

summer.

I commend my colleagues on the subcommittee for their thoughtful insight and constructive input on this legislation. I will remind

you that there have always been skeptics when Congress tackled

complicated deregulatory efforts in the past, but Congress has been

successful to the surprise of the naysayers. Now is the time to

move forward.

I yield back my time, Mr. Chairman.

Mr. BARTON. We thank the gentleman from Oklahoma.

The gentleman from Massachusetts who has also been tireless in

his efforts to open up the electricity grid, along with Congressman

Largent, Mr. Markey is recognized for 3 minutes.

Mr. MARKEY. Thank you, Mr. Chairman. Powerless probably

more than tireless.

I have watched with growing discomfort over the last 4 months

as what began as an attempt to break down the regulatory barriers

that have protected electric utility monopolies from competition has

been transformed into legislation which would effectively defend

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and extend the power of the existing monopolies and stifle the

emergence of competition. This is an astounding and deeply troubling transformation. It is as if the majority, having lost sight of

the original objective, now has resolved simply to redouble its efforts to get a bill.

What kind of a bill? The product that has emerged from the majority’s internal discussions might best be called the electric futility

legislation for it likely will render futile the best efforts of competitors to enter into the monopolist’s closed markets and prevent consumers from getting lower prices through real price competition.

It pains me to reach this conclusion for I strongly support Federal legislation to promote competition in the electric utility industry. In fact, there may be no one on this side of the aisle who more

strongly supports the objective of enacting Federal restructuring

legislation, and I have always felt that it is not a partisan issue.

I have tried to work closely with the gentleman from Oklahoma,

Mr. Largent, the majority whip, Mr. DeLay, so that we can do it

on a bipartisan basis.

Unfortunately, something seems to have gone very wrong with

the product before us. This is really not a competition bill any

longer; it is a monopoly bill. It does not demonopolize the utility

industry; it deregulates the monopolies in a manner which will free

them to engage in a wide array of unfair, predatory, and manipulative practices; practices which would stifle the emergence of competition and leave consumers paying more than they should for

their electricity.

Let us look at some of the specific problems with this bill. It fails

to give FERC authority to monitor, investigate, and correct anticompetitive behavior in generation markets. It repeals PUHCA 12

months after enactment, before the provisions intended to promote

competition are in place, before many States can enact any new authorities that might be required, and without giving FERC and the

States the full books and records authorities they will need to protect ratepayers against cross subsidies. It fails to address the ability of utilities to leverage revenues and resources from their monopoly functions to subsidize competitive ventures which allow the

monopolies to unfairly compete against independent businesses.

It would allow for the creation of a two-tiered system of transmission use in which utilities could grant themselves preference for

their own use and competitors would be unable to fairly, effectively,

and efficiently utilize the transmission grid. It would allow utilities

to reclassify transmission facilities as distribution and thereby

evade FERC jurisdiction even when such facilities are truly part of

the interstate network.

Mr. BARTON. I hate to interrupt the gentleman. I am not quite

as thrilled to hear what he is saying—but he has the right to say

it. But if he could sum it up in about 1 more minute, we would appreciate it.

Mr. MARKEY. It is a long list——

Mr. BARTON. I understand.

Mr. MARKEY. [continuing] but I will get—I can go to the highlights.

It would allow a closed club of utility monopolists to control and

dominate regional transmission organizations and would not give

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RTOs the powers needed to assure open and efficient operation of

the transmission system. It directs the utilities to provide competitors with interconnection and then fails to expressly preclude utilities from favoring their own generation plans over those of competitors in future connection requests. It inserts a poison pill into

the consensus reliability language by allowing States to develop reliability standards that may conflict with the national standards.

There is no effective environmentally sustainable renewable energy

generation technology or energy efficiency language in the bill.

In whole, this bill heads in just the opposite direction on just

about every point. I do not believe that this stance musters as an

anti-monopoly bill which ultimately is what competitors and consumers will need if they are to get the full benefits of a national

electricity marketplace.

I thank you, Mr. Chairman.

Mr. BARTON. We will put the gentleman from Massachusetts as

an undecided on the bill, correct?

The gentleman from Illinois, Mr. Shimkus, is recognized for 3

minutes.

Mr. SHIMKUS. Thank you, Mr. Chairman. Now that we have had

our dose of sunshine for this morning, I want to thank you for

working together on this draft legislation. I do say draft legislation

and just want to remind folks here in the audience and people to

testify that we sat probably for 2 months in a working group,

which was bipartisan by invitation. Maybe two members of the

democratic aisle came and attended those religiously—Congressman Hall, Congressman Sawyer.

Then I know the chairman very openly, when we dropped the

first draft and also the second draft, asked for a bipartisan meeting

to talk over the individual aspects of the draft legislation but was

told no by my colleagues and friends on the other side, which is

frustrating for me to hear all the problems with the draft legislation but not the willingness to come and sit down at a table to address these issues.

So, I want to commend my colleague and chairman for doing the

best he can to work through a lot of these issues. We have moved

great distances from a date certain aspect of the last Congress to

a point where that is not even going to be an aspect mentioned as

far as part of the legislation. I think that is positive. In the State

of Illinois, we have moved great distances based upon an Illinois

deregulation bill.

I plan on asking numerous questions today and tomorrow outlining some concerns with the legislation, but I do want to thank

the chairman for the reciprocity language that has been changed

based upon the second draft, especially for the State of Illinois.

There are some issues that, again, I will address as far as there

are some Illinois that still think the grandfather clause needs to be

strengthened to avoid accidental Federal preemption. I am hearing

from Commerce Commission that some provisions still preempt

State authority such as section 702 on net metering and section

101(e) on sections designed to give FERC authority to determine

the function of power lines.

I am also hearing about fair competition between propane dealers and electric coops. Are coops cross subsidizing their propane

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business particularly in States where they are self-regulated or is

that just a perceived threat? I hope we get some answers in these

2 days of hearings. I think this should be examined.

There are additional issues which I plan on bringing up, but in

the interest of time and efficiency, I will yield back my time and

listen closely to the testimony today.

Thank you, Chairman Barton.

Mr. BARTON. Thank the gentleman from Illinois.

And we recognize another distinguished gentleman from Illinois,

Mr. Rush, for a 3-minute opening statement.

Mr. RUSH. Thank you, Mr. Chairman.

Mr. Chairman, let me begin by commending you for the work

that you have done to bring this important and significant legislation to the attention of the subcommittee.

I think all of us will agree it has not been easy, in terms of the

number of consumers that will be affected. It could be easily argued that electricity restructuring is the most important work that

the Commerce Committee has taken on since the deregulation of

the telecommunications market. Those that were involved in that

debate may recall that it was not until much work had been completed that legislation was finally passed out of the subcommittee

and then the full committee, and eventually it was passed on the

floor.

Mr. Chairman, I know the work that you have done. We have

worked together on a number of issues regarding this legislation.

Let me just say that the legislation before us accomplishes many

things. It clarifies State and Federal jurisdiction under the Federal

Power Act. It codifies FERC Order 888, and it provides for the formation of the regional transmission organizations, just to name a

few things.

That said, Mr. Chairman, I must admit that I am not convinced

that H.R. 2944 really accomplishes competition and reliability. For

now, I will reserve judgment. I will listen intently to the testimony

of the witnesses, and I will attempt to ask the appropriate questions. I will do this, Mr. Chairman, not to expose what the bill does

not do but really to ensure that what we do do from this committee

really and truly benefits our consumers.

Having said that, I am ready to move forward with the work of

electricity restructuring but only if we do as the title of the bill

suggests: Provide electricity reliability and electricity competition

in addition to enhancing consumer service and consumer protection.

Thank you, Mr. Chairman. I yield back the balance of my time.

Mr. BARTON. Thank you, Congressman.

We now recognize the distinguished gentleman from North Carolina, Mr. Burr, for a 3-minute opening statement.

Mr. BURR. Thank you, Mr. Chairman. I thank you for this hearing, but, most importantly, and not to slight our other panelists, I

thank you for the opportunity to have five FERC commissioners

here to testify.

Mr. Chairman, it was Thomas Jefferson that said, ‘‘I am not an

advocate of frequent changes in laws and constitutions, but laws

and institutions must advance to keep pace with the progress of

the human mind.’’ We have an obligation to our Founding Fathers.

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That was a warning to us all that as the human mind progresses,

we have a responsibility as legislators to make sure that the system changes, the Federal system. We did that with the Telecommunications Act earlier this decade, and I think that to not accomplish this task would be a failure to what our Founding Fathers reminded us of.

I am extremely complimentary of you, Mr. Chairman, for perseverance as we have gone through this process. It has been a long

road with many hurdles, and I think that we have reached a point

where I am glad to say that we can move forward, and I am optimistic about the outcome. I think that this truly reflects the hard

work of staff, of members, and of industry.

It is also refreshing to see that you have reached across the aisle

as it relates to the participation by Mr. Brown, Mr. Wynn, and specifically, Mr. Sawyer, and others. I have personally co-sponsored

Mr. Sawyer’s transmission language, because I believe that it is the

right language to have in place. I also realize that what we have

today is not a final product, but it is a framework, a framework

that all members can work within to find the right vehicle that can

be created out of that.

Today and tomorrow we will solicit the advice, the instructions

of our witnesses to try to refine it, to make sure that we have the

right tools in place, and to discard those things that aren’t needed.

We will remove Federal barriers yet to competition, and we will

create new incentives for competition.

Mr. Chairman, I am optimistic at the opportunity. I realize that

there are varying views of what competition is. Some believe that

competition can only be created when a Federal agency has the

ability to regulate every step of competition. I am on the other end

of that spectrum. I believe that without the free flow of electricity,

not only from companies to consumers but without the regulatory

burden of a Federal agency, will you in fact have true competition.

So, I encourage my colleagues to work to refine this language. I

commend the chairman and the ranking member for this hearing,

and I yield back the balance of my time.

Mr. BARTON. Thank the gentleman from North Carolina.

I would now like to recognize the distinguished ranking member

of the full committee, the gentleman from Michigan, for a 5-minute

opening statement.

Mr. DINGELL. Mr. Chairman, you are most courteous. I will try

and comply with your wishes.

First of all, Mr. Chairman, I commend you for holding legislative

hearings on this bill, H.R. 2944 of which you are the sponsor. It

is a lengthy and comprehensive proposal dealing with issues of utmost importance to this very essential industry and its customers,

and it warrants our very close attention.

Today and tomorrow, members are going to be hearing some severely conflicting testimony on the merits of what has been included in the bill, what has been omitted, and how its various provisions fit together. This last issue is not unimportant since the bill

appears to draw on a number of prior proposals, and legislation of

this significance must be internally consistent.

Mr. Chairman, as you know, I have been concerned that members of this committee have a sufficient grasp of the complex subVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 E:\HEARINGS\60356 txed02 PsN: txed02
10

ject before us as they sift through the different arguments to determine what, if any, restructuring legislation should be enacted on

the Federal level by the Congress. There has not been much agreement amongst the different elements of the industry, consumer

groups, State and Federal regulators, and other interested parties.

I want to commend you for your effort to build the consensus

necessary for legislation of this magnitude. The road to enactment

is long, and it is important for members to find common and durable ground before reporting the bill. The issue is difficult, it is complex, and it is controversial.

If a consensus does not emerge from these hearings and if members on both sides of the aisle are comfortable going forward to a

markup, then we will address those questions as they should be.

However, if this is not the case, there will be little merit in forcing

a markup simply to meet an arbitrary deadline. To do that guarantees us a fine fight and little opportunity of accomplishment.

It is not unusual, I would note, for major legislation to require

many Congresses to mature. Notwithstanding the wishes of some

of our honored guests, the time for enactment of legislation that

will serve the broad public interest may not yet have arrived.

I want to thank you for the courtesy for your staff has extended

to the minority in developing the witness list, and I look forward

to hearing from the witnesses. It is important that we should have

a complex piece of legislation heard with sufficient witnesses to

gather broad cross section of the views as a people. I regret consideration of other legislation on the floor this week is not going to

give me the time to spend at these hearings as I would like.

I would like to note that many questions remain to be addressed:

reliability, whether or not conservation or environmental provisions

should be included, consumer concerns, stranded costs, State responsibilities, State actions taken, State actions pending, job security, antitrust questions, needs to address the concerns of different

components of the industry, including public’s, TVA, Bonneville,

and many others, and to do so in a way that takes care of the concerns and the needs of all.

This is not a simple industry; it is one which is composed of

many different kinds of components, serving different customers in

different ways in different parts of the country under different regulatory systems. And I would hope that as we go forward, we will

consider that the impacts of this matter may not be simple.

I do thank you for your courtesy to me, Mr. Chairman, and I

commend you for that way in which you are proceeding. Thank

you.

Mr. BARTON. I thank the gentleman for that opening statement.

We would now like to recognize the gentlelady from New Mexico,

Congresswoman Wilson, for a 3-minute opening statement.

Ms. WILSON. Thank you, Mr. Chairman, and I won’t take 3 minutes.

I wanted to commend you for having this hearing and also for

producing a bill in a way that was very open to input from all of

the members of this committee and even those outside of this committee, and I appreciate that.

I think all of us recognize that this is an extremely complicated

issue. There are a number of different facets to it, and the intent

11

of all of the members of this committee and also the Chair is to

get this right, to make sure that a bill that eventually merges from

this Congress enhances competition while protecting consumers

and ensuring there is universal access to electricity for all Americans, including Americans in rural areas.

I just wanted to thank the chairman for holding this hearing and

moving this bill forward, and I know there are many more things

we have yet to work out, but I appreciate his leadership.

Thank you.

Mr. BARTON. I thank the gentlelady from New Mexico. The Chair

would recognize the gentleman from Kentucky, Mr. Whitfield, for

a 3-minute opening statement.

Mr. WHITFIELD. Mr. Chairman, thank you very much. I understand we have already had 11 hearings and 92 witnesses, and I

want to commend the chairman for being very open in this process.

I am delighted this morning that I have a young woman from my

hometown of Hopkinsville who is serving as one of the commissioners who will be testifying this morning, and I know that, along

with her, both of us will be looking at this legislation and its impact on Kentucky which has some of the lowest electricity rates in

the Nation. Also, 95 percent of our electricity is generated by coal

fire processes, and any legislation on deregulation that passes obviously we are going to be very concerned about its impact on coal

and on our rates.

And, so I look forward to the testimony this morning, and thank

you for giving me the opportunity to be here.

Mr. BARTON. I thank the gentleman from Kentucky.

We are prepared to recognize the gentleman from New Jersey or

we can go to Mr. Bryant and give you a few minutes to get settled.

We recognize the gentleman from Tennessee, Mr. Bryant, for a

3-minute opening statement.

Mr. BRYANT. I want to thank you, Chairman Barton, for this opportunity today to address this issue. I really do appreciate all the

work that you have put into making this an open, deliberative

process, and also I want to specifically thank you for honoring your

commitment to do those things. You have been very kind to all of

us, always ready to listen to what we have to say, and I especially

appreciate your concern with those of us from the Tennessee Valley.

I do believe that the free market and increased competition can

lead to better service and lower prices for consumers. However, I

want to ensure that the thousands of residents and businesses in

the rural areas across the country, not just in the Tennessee Valley, but across the country are not forgotten in this move to restructure. Our agricultural communities and small towns rely on

reasonable electricity rates to keep their farming, their industries,

and their small businesses alive.

As we work on this legislation, we must safeguard that balance

between State and Federal Governments and must not create an

immense Federal bureaucracy, such as FERC, in the name of deregulation. We must preserve both private and public power and

promote diversity in generating sources from coal, natural gas, and

nuclear to renewables such as hydroelectric and solar energy.

12

Although this legislation is concentrated on the national electricity picture, we must also recognize the differences as well as the

similarities between regions of our country. I believe that we

should give primacy to regional solutions. The one-size-fits-all Federal legislation would not recognize our different needs.

My home State of Tennessee is unique, because it is the only

State in the country where wholesale competition cannot occur

without Federal action, even though the Tennessee Valley Association has been very successful over the years in the region with

helping out on navigation and the environment and flood control.

I do not view myself as the primary defender of the TVA; rather,

I believe that it is my role to be the defender of the citizens of Tennessee. I believe that we can craft legislation which will maintain

inexpensive and reliable power for the people of our region.

Again, I want to thank Chairman Barton for his leadership on

this particular legislation, and I look forward to continuing to work

with the members of this subcommittee and the full committee to

craft the right solution for restructuring, and I would yield back my

time.

Mr. BARTON. I thank the gentleman from Tennessee for those

words, and also thank him for the work that he has put into the

TVA section of the bill. He has done yeoman’s work in that area.

I now recognize the gentleman from New Jersey, Mr. Pallone, for

a 3-minute opening statement.

Mr. PALLONE. Thank you, Mr. Chairman. I have many concerns

regarding this bill, but I heard your 3-minute warning there, so I

am cutting back some of what I was going to say.

I did want to say, though, that including my own State there are

24 States that have already restructured their electric utility sector, and I think we have to be extremely careful not to damage

these States efforts or cause them to redo their legislation. Any

grandfathering language must be crafted with the utmost care, and

I hope our witnesses will address the implications of the provisions

in the chairman’s mark on States that have already passed restructuring legislation.

On State Federal jurisdiction, H.R. 2944 appears to essentially

codify the 8th Circuit Court of Appeals decision which held that

FERC cannot bar utilities from giving first priority in transmission

service to their native load before providing capacity to other parties. This could jeopardize firm transmission service. The decision

also could jeopardize mergers that depend on a reservation of firm

transmission service.

In terms of reliability, the legislation has incorporated so-called

consensus language. Some utilities believe, however, that this language is based on out-of-date models and goals and would undermine market efficiency and optimization. Any legislation we write

should foster true competition and provide non-discriminatory access to the Nation’s electric grid.

Overall, this bill does not appear, in my opinion, to be a true

competition bill, and it seems that many entities and groups I have

heard from agree that RTOs, regional transmission organizations,

or ISOs, independent system operators, should encompass larger

geographic regions to reduce the potential for market power abuses

and to foster true competition. If market power is being exercised,

13

we must examine the process and rules under which the system is

operating. Over 100 organizations have written and/or called me to

express their concerns in this regard.

The other issue that is most important to me critical is environmental protection, and this bill is clearly lacking in environmental

protection provisions. We cannot let this sector restructure at the

cost of polluting our environment and endangering people’s health.

Fourteen Republicans have sent a letter to Chairman Barton emphasizing support for and demanding inclusion of environmental

protections, and I will elaborate more upon this tomorrow when we

have experts testify on this topic.

But on a related note, though, over 100 groups have written supporting the inclusion of a renewable portfolio standard and the

public benefits trust, but these are not in the chairman’s mark.

These provisions go hand-in-hand to ensure universal service and

promote the use of clean energy sources. Charges for public benefits have long been in consumers’ utilities bill, and they would not

be newly imposed.

So, I have highlighted, Mr. Chairman, some of the initial major

issues that concern me with regard to this version of the chairman’s mark, but clearly we all need time to examine the legislation

more thoroughly, in my opinion, at both the macro and micro levels. I am interested in hearing out witnesses’ analysis of the bill.

Thank you, Mr. Chairman.

Mr. BARTON. Thank you, Congressman Pallone, and we—the

Chair shares several of the concerns that you have addressed, and

we hope this legislative hearing and the time right after it we can

work together on some of these issues.

Seeing no other members present who have not yet been given

an opportunity to give an opening statement, the Chair would recognize himself for his 5 minute opening statement.

The bill before the subcommittee is a very different bill than the

bills that we have considered earlier in this session. This bill has

no Federal mandate. This bill does not preempt States in areas historically reserved to be regulated by the States. This bill does focus

on the core Federal issues that States have little or no ability to

address.

We held our first hearing on this issue more than 4 years ago.

Since then we have held 32 hearings, received testimony from 331

witnesses. This year we have held 11 hearings and heard testimony

from 92 witnesses. There was one thing that every witness we have

heard from this year has agreed upon, and that is that the need

for the Congress to act in this session on electricity legislation.

There was another clear message from the hearings that we have

held this year: The States have little or no ability to address certain core Federal issues, such as interstate commerce, foreign commerce, reliability of the interstate transmission grid, open access to

the interstate transmission grid, the role of the Federal utilities in

competitive electric markets, Federal and State jurisdiction, and reform of Federal electric and tax laws. Only the U.S. Congress can

address these core Federal issues.

Some would say that we have deliberated too long. Mr. Markey

says that he does not want any more seminars on electricity, and

I agree. He just wants a final exam, and I agree with that also.

14

If I were at Indianapolis, I would say, ‘‘Ladies and gentleman, start

your markup pens. The time has come to act.’’ The situation is clear: Change is sweeping across the electricity industry. States are opening their retail electric markets. Some

utilities are voluntarily divesting themselves of generation; others

are merging. New entrants are buying utilities. Federal electric

laws that were written in most cases more than 60 years ago are

simply not adequate for today’s situation. Those Federal laws were

based on the premise that States would always regulate retail electricity rates. That premise is no longer valid. There is a cost to inaction. If Congress does nothing, problems that exist under the status quo will remain. Reliability will be at

risk. The transmission system will remain subject to four different

sets of rules. Transmission owners will retain the ability to discriminate against their competitors, and incentives to invest in

transmission will remain inadequate. Consumers will be exposed to

slamming and cramming by electric marketeers. The privacy of

consumer information may not be assured, and consumers will not

be assured access to the information that they need to choose

among competing retail electric suppliers. The Public Utility Holding Act of 1935 will continue to discourage new entrants into the

electricity industry. The mandatory purchase obligations of PURPA

will remain in force and may require utilities to sign contracts to

purchase power at above market rates. Disincentives in the Federal

tax law will discourage State and municipal utilities and rural electric cooperatives from opening their transmission systems and retail markets. Payment of the Bonneville Power Administration’s

unrecovered power costs will remain taxpayer liabilities. The Tennessee Valley will continue to be the only region in the country

where wholesale competition is prohibited, and distributors in the

region will continue to be forced to buy their power solely from the

Tennessee Valley Authority.

Ladies and gentleman, any one of these reasons is sufficient for

the Congress to pass electricity legislation in this session of Congress. So, once again, I say, ‘‘Ladies and gentleman, please start

your markup pens.’’

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. MICHAEL BILIRAKIS, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF FLORIDA

Thank you, Mr. Chairman.

First, I would like to thank you for scheduling two legislative hearings on your

bill, H.R. 2944, the Electricity Competition and Reliability Act. There is little doubt

that electricity restructuring is extremely complex. In 1999 alone, our Subcommittee

has held eleven hearings and received testimony from 92 witnesses on the broad

range of issues surrounding electricity restructuring.

Mr. Chairman, you should be commended for your attempt to draft a consensus

restructuring bill. This was a truly herculean undertaking, and I appreciate your

efforts to solicit the views of the Energy and Power Subcommittee members before

introducing H.R. 2944.

As we continue to consider the restructuring of our electricity industry, it is important for us to have a thorough understanding of the impact any restructuring

legislation could have on our current system. In this regard, I am anxious to hear

the testimony of our witnesses.

They have a wide range of expertise, and I am sure their comments will provide

us with some additional guidance on the complex issue of electric utility restructuring. Their analysis of H.R. 2944 should be very useful in our Subcommittee’s discussions.

15

Mr. Chairman, I look forward to our continuing dialogue on H.R. 2944 and electricity restructuring.

Thank you, Mr. Chairman.

PREPARED STATEMENT OF HON. TOM BLILEY, CHAIRMAN, COMMITTEE ON COMMERCE

Mr. Chairman, I am happy to be at today’s legislative hearing on H.R. 2944. As

you know, I have been a supporter of comprehensive electric utility restructuring

since the early days of the 104th Congress and supporter of competition in the electric utility industry prior to the enactment of the Energy Policy Act of 1992.

Throughout this debate I have been concerned about one thing, that all consumers

benefit. I have said many times both publicly and privately that consumers, not utilities, should be front and center in any restructuring debate.

As I look at the proposal before us, and listen to the testimony of the witnesses

I will be concerned about one thing: ‘‘How does it impact consumers?’’ I want restructuring legislation to work for the suppliers, new entrants and incumbent utilities, for the reliability of the national grid—and ultimately for consumers. I believe

our nation’s retail customers have been captive ratepayers for too long.

I am hopeful that the federal government will be able to choose its supplier someday soon. The government is a big customer. Taxpayers will surely benefit when the

Federal government starts to lower its monthly bill. Federal savings from restructuring are calculated at billions of dollars, so if there are any budgeteers in the

room, I hope you are paying attention.

Mr. Chairman, I am happy to see you taking this important step and look forward

to working with you as this bill moves through the Committee process.

Thank you.

PREPARED STATEMENT OF HON. ALBERT R. WYNN, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MARYLAND

Mr. Chairman, I want to thank you for holding these hearings on electricity deregulation. The deregulation of the electricity industry is a critical issue that will

affect every American. Today most of us take for granted the fact that our homes

are temperature controlled, our lights turn on and off at the flip of a switch, and

our appliances, fax machines and computers operate at our command. We do not

think about where our electricity comes from or how it gets to our homes and offices.

Yet electricity is a fundamental part of our day—without which most of us could

not easily function.

A critical issue that we must consider is the role of the federal government and

the jurisdiction of the states. The federal government clearly has a role but we must

make sure that this role is limited to addressing only the truly federal issues. We

should ensure that the interstate transmission system is adequate and reliable and

remove barriers to competition such as PURPA and PUCHA.

Electricity deregulation legislation should not expand FERC jurisdiction into

areas current under state jurisdiction or give FERC new authority that would undermine a competitive electricity marketplace. New regulatory authority given to

FERC should be very limited and clearly defined. We don’t need to ‘‘reregulate’’ if

the underlying goal is to promote free markets and competition.

Any federal bill should refrain from dictating to states the details associated with

implementing retail competition. Metering, billing, affiliate rules, consumer protection, universal service and a host of other issues should be left for resolution at the

state level by lawmakers and regulators who are familiar with the specific needs

of their states.

In Maryland, for example, our legislature passed in April an electric restructuring

law that is very comprehensive. It will become even more detailed as the Public

Service Commission provides the rules for implementing the legislation. Neither

Maryland, nor any of the other 23 states that have enacted restructuring laws

should be forced to go back to the drawing board re-write the rules for electricity

deregulation issues that clearly fall within their jurisdiction and have already been

dealt with by their state legislatures.

Our task is to find just the right balance that will encourage competition, yet

leave the states with the flexibility they need to formulate plans best suited to their

citizens.

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PREPARED STATEMENT OF HON. BILLY TAUZIN, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF LOUISIANA

Mr. Chairman, the legislation before us today is a good first step toward achieving

competitive retail electricity markets nationwide. However, it proposes the outright

repeal of PURPA upon ‘‘date of enactment.’’ Unfortunately, this has significant negative implications for the many PURPA facilities that are in my Congressional district.

Many companies in my district built PURPA plants because they needed the electricity and steam to operate their manufacturing plants. They built these QFs

(Qualified Facilities) because they could produce alternative forms of electricity for

less than the price charged by the local utility. Low cost energy is essential to their

competitiveness in domestic and international markets.

While it is true that QF reliance on ‘‘PURPA contracts’’ has created an artificial

electricity wholesale marketplace, PURPA does provide QFs with important protections that should be preserved—at least until our electricity markets are competitive.

These protections include guaranteed access to interconnection, standby/back up

maintenance power at just and reasonable prices, mandatory power purchase requirements and PUHCA exemptions. If we choose to abruptly withdraw these safeguards before realizing a competitive electricity retail marketplace, then we will

have seriously compromised QF ability to secure debt financing of their operations.

Frankly then, PURPA protections are needed now and will continue to be necessary

until there is a competitive electricity retail market that will allow QFs the flexibility and choice that usually accompany competition. .

Don’t get me wrong Mr. Chairman, I am in favor of repealing PURPA. However,

I am inclined to support language which phases out the effect of PURPA over time

as proof of retail competition across the country becomes more evident. Such language, I believe, would be fairer to the QFs than a provision repealing PURPA on

date of enactment. At the same time, it would also make clear that the wholesale

market inefficiencies created by guaranteed contracts are on the way out.

I look forward to working with you to reach a satisfactory outcome.

Mr. BARTON. With that, I am going to welcome our first witness,

but before that, I noticed that we have all five of our FERC commissioners, and you all look very uncomfortable all scrunched up

out there in the front row. We will be very happy to let you use

the majority lounge. You can hear our first witness and hear the

questions and answers and make some phone calls. You are welcome to continue there in the audience, but if you wish to—and I

am sure the minority would welcome you into their lounge too; this

is not a partisan—if some of you want to go to the left and some

to the right, that is okay. But you are welcome, because we will be

with the gentleman from the Department of Energy for probably

the next hour or so. Okay?

Mr. Glauthier, we want to recognize you as our first witness of

our legislative hearings. As the distinguished member of the Department of Energy and the No. 2 person at the Department of Energy, the Deputy Secretary of Energy, you have had quite a bit to

do with the formulation of the Department’s comprehensive bill.

And although we are somewhat saddened that we couldn’t have

Mr. Richardson, we are delighted that we have you. So, we are

going to recognize you for such time as you may consume, and then

we will have some questions for you.

Welcome to the committee.

STATEMENT OF HON. T.J. GLAUTHIER, DEPUTY SECRETARY

OF ENERGY, U.S. DEPARTMENT OF ENERGY

Mr. GLAUTHIER. Thank you, Mr. Chairman, Mr. Hall——

Mr. BARTON. And you need to really put that microphone close

to you, sir.

17

Mr. GLAUTHIER. Thank you, Mr. Chairman, Mr. Hall, Mr. Dingell, and other members of the subcommittee. Thank you for inviting me here today to present the administration’s views on H.R.

2944, the Electricity Competition and Reliability Act.

At the same time the Federal Energy Regulatory Commission

continues to promote competition in the wholesale markets, 24

States have now adopted electricity restructuring proposals that

allow for competition at the retail level. Almost every other State

has the matter under active consideration. The Clinton administration believes that this is a positive development. Competition, if

structured properly, will be good for consumers, good for the economy and good for the environment. However, the full benefits

promised by competition can only be realized within an appropriate

Federal statutory framework. What we do at the Federal level and

when we do it, will have a profound impact on the success of State

and local retail competition programs.

Mr. Chairman, I want to commend you and the other members

of this subcommittee for the effort you are putting forth. Many of

the issues are complex and controversial. Nevertheless, it is vitally

important to consumers, the economy, and the environment that

these issues be resolved in an appropriate manner.

I also want to thank you for the courtesy which you and your

staff have shown to myself, Secretary Richardson and other members of the Clinton administration. I believe that working together

in a bipartisan fashion, the administration and members on both

sides of the aisle can achieve a result that will benefit all Americans.

Let me begin with three points: First, it is critical that Congress

pass comprehensive electricity restructuring legislation soon; second, restructuring legislation can succeed only if it is developed on

a bipartisan basis, and, third, although the bill includes some encouraging provisions, the administration cannot support H.R. 2944

in its current form, but we are willing to work together to achieve

legislation that we can all support.

As the States continue to move forward, the absence of action at

the Federal level is creating significant uncertainty in the increasingly regionalized power and transmission markets. The fact is, if

we don’t act, the benefits from State restructuring programs will be

limited.

At the very least, Congress needs to extend FERC jurisdiction to

all major transmission owners; it needs to clarify FERC’s authority

with regard to the formation of regional transmission organizations; it needs to authorize the development and enforcement of

mandatory reliability standards to enable FERC to prevent incumbent utilities from using market power to inhibit competition; to

ensure that public benefits programs, including renewable energy,

low-income assistance, and energy conservation are not lost as a result of the transition to competition, to eliminate statutory impediments to State competition programs, and to enable competition to

thrive in the regions served by Federal utilities.

Electricity restructuring is not a partisan issue. Members on

both sides of the aisle have offered thoughtful and meaningful proposals that merit consideration, including a bipartisan bill introduced earlier this year by Congressmen Largent and Markey. Mr.

18

Chairman, we encourage this subcommittee to continue your efforts

to develop a bipartisan bill that will enable Congress to enact comprehensive restructuring legislation that can be supported by the

administration.

We commend you for including a number of positive provisions

in H.R. 2944, such as those intended to enhance reliability, protect

consumers, and promote aggregation. Clearly, your legislation addresses many of the key issues that need to be included in a comprehensive electricity restructuring bill. However, we believe that

H.R. 2994 should be modified to establish the necessary ground

rules and adjustments required for the transition to competition.

Given the time constraints of this morning, I would like to focus

my comments on four important issues: First, market power; second, FERC jurisdiction over transmission; third, regional transmission operators, and, fourth, public benefit programs. My written

testimony contains a more detailed discussion of the administration’s views on H.R. 2944.

First, on market power. The primary goal of Federal electricity

restructuring legislation must be to aid the transition to competition in a manner that allows consumers to benefit through lower

rates. However, significant rate savings cannot be achieved if effective competition fails to develop.

Open transmission access and the creation of independent regional transmission organizations should go a long way toward

achieving competitive markets. However, access to transmission is,

by itself, not enough. Utilities that own substantial amounts of

generation in a region or strategically located facilities may be able

to influence prices and inhibit the entry of new competitors

through horizontal market power.

Mr. Chairman, we are disappointed that H.R. 2944 fails to provide FERC with sufficient authority to address market power. We

recommend that the bill be modified to incorporate the market

power provisions in the administration’s bill.

The second area I would like to speak to is jurisdiction over

transmission. FERC Orders No. 888 and 889 have had a tremendous positive impact in promoting wholesale competition by requiring jurisdictional utilities to provide competitors access to transmission facilities under rates and terms comparable to those provided to itself. The administration supports the provisions in H.R.

2944 which extend FERC’s authority to the transmission facilities

owned by previously non-jurisdictional utilities.

We are concerned, however, that H.R. 2944 can balkanize the

regulation of transmission in light of a recent 8th Circuit Court of

Appeals decision. FERC may be unable to prevent a utility providing transmission services that are bundled with the retail sale

and distribution of power from discriminating against other electricity suppliers in favor of its own generation.

State regulators, which would have jurisdiction over bundled

transmission services, may not have sufficient incentives to adequately police a utility’s use of its transmission lines.

Mr. Chairman, we strongly urge you to reevaluate this provision.

We are not suggesting that FERC should regulate the rates for

bundled transactions, but FERC should have the ability to ensure

that all competitors have equal access to transmission resources.

19

The third area I would like to speak to is regional transmission organizations. Properly sized, independent, regional transmission

organizations can provide significant benefits, including the enhancement of reliability and the promotion of more efficient and

competitive markets.

The administration is encouraged that H.R. 2944 would require all transmitting utilities to join RTOs and we generally support the

standards for RTO formation laid out in the bill. We are concerned,

however, that the legislation limits FERC’s discretion in approving

an RTO. It is important that FERC be able to require the formation of an RTO that would be optimal for a particular region. The fourth area is public benefits. Mr. Chairman, we commend

you for recognizing the need to address renewable energy in restructuring legislation. We support both the extension of the Renewable Energy Production Incentive program for municipal and

cooperative utilities and wind and biomass tax credits for investorowned utilities. However, more does need to be done, such as the

inclusion of a renewable portfolio standard. The progress we have

made in renewables could be partially lost during the transition to

competition because these technologies have not yet achieved full

cost competitiveness.

In addition, we continue to be concerned that retail competition

could lead to reduced support for programs that provide important

public benefits. A public benefits fund, which provides matching

funds to the States for low-income assistance, energy efficiency programs, consumer education, and the development and demonstration of emerging, clean technologies, should alleviate these concerns.

In conclusion, Mr. Chairman, while the States are proceeding with their restructuring programs, all eyes are on Congress to

learn what signals the wholesale and retail markets will receive.

This committee’s leadership has been essential and will continue to

be. Although we cannot support H.R. 2944 in its current form, the

administration’s approach to comprehensive restructuring legislation has many elements in common with your proposed legislation.

And I know that several members of this subcommittee, on both

sides of the aisle, have put forth proposals that also merit serious

consideration.

We are confident that a bipartisan bill can be reported out of the

subcommittee soon. Secretary Richardson and I, as well as our

staff, and other members of the administration stand ready to assist you and the other subcommittee members in this vital endeavor. Only by working together can we take the steps that are necessary to provide consumers with the full benefits of competition.

Thank you, Mr. Chairman.

[The prepared statement of Hon. T.J. Glauthier follows:]

PREPARED STATEMENT OF T.J. GLAUTHIER, DEPUTY SECRETARY, U.S. DEPARTMENT

OF ENERGY

INTRODUCTION

Mr. Chairman, thank you for inviting me today to present the Administration’s

views on H.R. 2944, the Electricity Competition and Reliability Act. DOE, the Agency responsible for formulating and implementing the Clinton Administration’s energy policies, is a strong proponent of comprehensive Federal electricity restructuring legislation. On April 15, Secretary Richardson transmitted to Congress the

20

1The Administration transmitted CECA to Congress in two separate parts. The first part,

which was introduced by Congressman Bliley and Dingell (upon request) as H.R. 1828 on May

17, includes all of the non tax-related provisions in the Administration’s proposal. Both parts

were introduced in the Senate by Senators Murkowski and Bingaman (upon request)—S. 1047

and S. 1048—on May 13.

Comprehensive Electricity Competition Act (CECA) 1—the Administration’s vision

for the role the Federal government should play in the transition to competition.

At the same time FERC continues to promote competition in the wholesale markets, 24 states have now adopted electricity restructuring proposals that allow for

competition at the retail level. Almost every other state has the matter under active

consideration. The Clinton Administration believes that this is a positive development. Competition, if structured properly, will be good for consumers, good for the

economy and good for the environment. Companies that had no incentive to offer

lower prices, better service, or new products will now compete for customers. Consumers will save money on their electric bills. Lower electric rates will also make

businesses more competitive by lowering their costs of production. By promoting energy conservation and the use of cleaner and more efficient technologies, greenhouse

gas emissions will be reduced, as will emissions of conventional air pollutants. However, the full benefits promised by competition can be realized only within an appropriate Federal statutory framework. What we do at the Federal level, and when we

do it, will have a profound impact on the success of state and local retail competition

programs.

Mr. Chairman, I want to commend you and the other members of this Subcommittee for the effort you are putting forth in an attempt to enact comprehensive

electricity restructuring legislation. Many of the issues are complex and controversial. Nevertheless, it is vitally important to consumers, the economy and the environment that these issues be resolved in an appropriate manner.

I also want to thank you for the courtesy which you and your staff have shown

to me, Secretary Richardson and other members of the Clinton Administration. I believe that working together, in a bipartisan fashion, the Administration and members on both sides of the aisle can achieve a result that will benefit all Americans.

Let me begin with three points:

• It is critical that Congress pass comprehensive electricity restructuring legislation

sooner, rather than later.

• Restructuring legislation can succeed only if it is developed on a bipartisan basis.

And

• Although the bill includes some encouraging provisions, the Administration does

not support H.R. 2944 in its current form. We would like to work with you to

achieve a version of restructuring legislation that we could all support.

FEDERAL ACTION IS CRITICAL

While some state competition programs are already in effect, tens of millions of

additional consumers will soon have the ability to choose their power in those states

implementing retail competition programs over the next 2-3 years. As the states

continue to move forward, the absence of action at the Federal level is creating significant uncertainty in the increasingly regionalized power and transmission markets. The fact is, if we don’t act at the Federal level, the benefits from state restructuring programs will be limited.

• First, competition is not going to work if transmission lines operate under different sets of rules and requirements. It is essential that all wholesale and retail power marketers have non-discriminatory access to the wires that transport

their product. While the Federal Energy Regulatory Commission (FERC) has jurisdiction over the transmission of electricity in interstate commerce, FERC’s

authority is somewhat limited. Congress needs to ensure that all major transmission facilities are, to the extent practicable, subject to comparable FERC

open access requirements.

• Second, independent regional transmission organizations (RTOs) will help promote efficient, competitive and reliable markets. However, FERC’s authority

over, and ability to require, RTO formation remains uncertain. Congress must

address these uncertainties.

• Third, as we move to a more competitive environment, the reliability of our bulk

power systems can no longer be entrusted to voluntary standards. Significant

support has developed for a proposal to have an electric reliability organization,

overseen by FERC, establish mandatory reliability standards. Congress should

authorize the development and enforcement of mandatory reliability standards.

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• Fourth, restructuring efforts won’t succeed if competitive markets are not developed. While open transmission access and the formation of independent regional

transmission organizations should go a long way towards changing the monopoly structure of the electric utility industry to competition, the fact is that some

utilities may have horizontal market power as a result of their control over a

substantial amount of generating capacity, enabling them to crowd-out potential

competitors and keep the price of power artificially high. Congress must empower FERC to prevent incumbent utilities from using market power to inhibit

competition. • Fifth, existing programs that provide support for renewable energy and other important public benefits were designed for a system of regulated markets. Congress should act to ensure that these public benefits are not lost as a result of

the transition to competition. • Sixth, certain Federal statutory provisions may impede the efforts of the states

and FERC to promote competition. Congress needs to eliminate these impediments and modernize those statutes which are inconsistent with the development of fully competitive markets. • Seventh, the statutes governing the operation and regulation of Federal utilities—

the Tennessee Valley Authority (TVA) and the Federal Power Marketing Administrations (PMAs)—must be revised to allow for effective competition in the

regions they serve.

Mr. Chairman, the Federal government clearly has an important role to play in

the transition to competition. While the states are moving forward rather briskly,

Congress has yet to act. The Federal government needs to send the appropriate signals about what the rules of the road will be in this new world of competition. Instead, we are sending signals of confusion.

The electricity markets are crying out for the certainty that is necessary before

essential investments are made. Generating capacity reserve margins have significantly tightened. The construction of new major transmission facilities has dramatically slowed. Aging distribution facilities are beginning to wear out.

Several regions of the country have experienced major problems in recent summers. As the heat and humidity rose, some utilities found it increasingly difficult

to meet consumer demands. Spot prices for electricity rose dramatically. Elected officials and utility executives made urgent public appeals for conservation. Factories

were forced to shut down their operations and send workers home. Some areas experienced rolling blackouts. Other areas lost power due to failures in overworked and

outdated distribution facilities. While it is difficult to attribute all of these problems

to the uncertainties surrounding the transition to competition, they clearly have

played a significant role. In short, Mr. Chairman, we can’t afford to wait until the

107th Congress to do what needs to be done now.

NEED FOR BIPARTISAN APPROACH

The electricity sector is our nation’s most capital-intensive industry, holding assets with a book value of approximately $700 billion. In addition, electricity affects

our everyday lives and businesses. It is not at all a stretch to point out that access

to power can sometimes be a matter of life and death. This is a major industry that

is in the process of a monumental transition.

Very few major congressional initiatives are accomplished in the absence of a bipartisan approach and with cooperation from both ends of Pennsylvania Avenue.

Mr. Chairman, electricity restructuring is not a partisan issue. Members on both

sides of the aisle have offered thoughtful and meaningful proposals that merit consideration, including a bipartisan bill introduced earlier this year by Congressmen

Largent and Markey. DOE encourages you to continue your efforts to develop a bipartisan bill that will enable Congress to enact comprehensive restructuring legislation that can be supported by the Administration.

COMMENTS ON H.R. 2944

Mr. Chairman, we commend you for including a number of positive provisions in

H.R. 2944, such as those intended to enhance reliability, protect consumers and promote aggregation. Clearly, your legislation addresses many of the key issues that

need to be included in a comprehensive electricity restructuring bill. However, we

believe H.R. 2944 should be modified to establish the necessary ground rules and

adjustments required for the transition to competition.

I would like to take a few minutes to discuss, in some detail, the Department’s

views on four important issues: (1) market power; (2) FERC jurisdiction over transmission; (3) regional transmission operators; and (4) public benefits programs.

Thereafter, I will briefly comment on H.R. 2944’s treatment of several other items.

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Market Power

The primary goal of Federal electricity restructuring legislation must be to aid the transition to competition in a manner that allows consumers to benefit through

lower rates. However, significant rate savings can’t be achieved if effective competition fails to develop.

Open transmission access and the creation of independent regional transmission organizations should go a long way towards achieving competitive markets. However, access to transmission is, by itself, not enough. Utilities that own substantial

amounts of generation in a region or strategically located facilities may be able to

raise prices above competitive levels and inhibit the entry of new competitors

through horizontal market power. Because electricity markets are becoming increasingly regional and multi-regional, state regulators cannot adequately address market power issues. As a result, it is essential that the Federal government, as the

guardian of interstate commerce, be able to take aggressive action during the transition period to ensure that utilities are unable to use horizontal market power to control prices and impede competition.

The antitrust laws are not, by themselves, sufficient to address the market power problems a newly-restructured electricity industry may face. The traditional regime

of rate-of-return regulation has led to high concentrations of ownership of generation facilities regulation. As the Department of Justice recently noted in testimony

before this Subcommittee:

The antitrust laws do not outlaw the mere possession of monopoly power that

is the result of skill, accident, or a previous regulatory regime. Antitrust remedies are thus not well-suited to address problems of market power in the electric power industry that result from existing high levels of concentration in generation or vertical integration.’’ FERC currently has the authority to condition merger applications to remedy po- tential market power. Absent a merger application, FERC’s only other available tool

to address market power is to deny a request for market-based rates. However, denying such requests could severely impede the Commission’s ability to promote

wholesale competition.

To ensure that the development of competition is not hindered by the exercise of market power, the Administration’s legislation would authorize FERC to remedy

concentrations of market power in the wholesale market, including the authority to

order the divestiture of assets, if market power is found. In addition, our bill would

enable FERC to provide backup market power remedies for the retail market, at the

request of a state. This is important because some states seeking to open their markets to retail competition may not have clear statutory authority to remedy market

power problems in their state or have jurisdiction over facilities in other states that

may be the cause of a market power problem. Mr. Chairman, we are disappointed that H.R. 2944 fails to address horizontal

market power. We recommend that the bill be modified to incorporate the market

power provisions in the Administration’s bill.

Jurisdiction over Transmission

FERC Orders No. 888 and 889 have had a tremendous positive impact in promoting wholesale competition by requiring jurisdictional utilities to provide competitors access to transmission facilities under rates and terms comparable to those provided to itself. Unfortunately, FERC’s open access authority does not directly extend

to non-jurisdictional utilities, such as most cooperative and municipal utilities, as

well as TVA and the PMAs. The Department supports the provisions in H.R. 2944

which extend FERC’s regulatory authority to the transmission facilities owned by

previously non-jurisdictional utilities.

We are concerned, however, about FERC’s ability to prevent discriminatory transmission access as a result of a recent 8th Circuit Court of Appeals decision—Northern States Power v. FERC. In that case, the Court essentially ruled that FERC has

no authority to prevent a utility from denying access to others in favor of its own

bundled retail sales.

H.R. 2944 states that FERC would have authority only over the unbundled transmission of electricity that is sold at retail, while state regulators would have jurisdiction over transmission when it is part of a bundled retail sale. It is necessary

that all transmission owners and all transmission services be subject to similar

rules and requirements. The distinction in H.R. 2944, in light of the 8th Circuit decision, would balkanize the regulation of transmission and could have a potentially

chaotic impact on the development of competitive markets. FERC would be unable

to prevent a utility providing transmission services that are bundled with the retail

sale and distribution of power from discriminating against other electricity suppliers

in favor of its own generation. State regulators, which would have jurisdiction over

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bundled transmission services, may not have sufficient incentives to adequately police a utility’s use of its transmission lines, especially if the competing supplier were

seeking access to sell power to consumers located in another state.

Mr. Chairman, we urge you to reevaluate this provision. Whether transmission

is bundled or unbundled, it is essential to the development of competitive markets

that all competitors have non-discriminatory access to the facilities.

Regional Transmission Organizations

Properly sized, independent, regional transmission organizations (RTOs) can provide significant benefits, including the enhancement of reliability and the promotion

of more efficient and competitive markets. FERC’s recent Notice of Proposed Rulemaking, which encourages transmission-owning utilities to participate in RTOs, is

a positive step. However, this voluntary approach does not ensure that appropriate

RTOs will be developed.

The Department is encouraged that H.R.2944 would require all transmitting utilities to join RTOs and we generally support the standards for RTO formation laid

out in the bill—(1) independence, (2) appropriate scope and regional configuration,

(3) operational control over all transmission facilities comprising the RTO, (4) responsibility for planning transmission additions and upgrades, and (5) other standards FERC determines are in the public interest.

We are concerned that the legislation limits FERC’s discretion in approving an

RTO. While an RTO might meet the standards set out in the legislation, it might

very well not be the optimal RTO for a particular region. However, H.R. 2944 would

prohibit FERC from disapproving a less-than-optimal proposal as long as the proposed RTO met the statutory standards. In addition, FERC’s hands would be tied

with regard to RTOs approved prior to the date of enactment. Although a previously

approved RTO might require alteration due to changes in circumstances, FERC

would be powerless to alter it. In addition, this provision could have a chilling effect

on FERC’s grants of approvals for new RTOs prior to the date of enactment, if

FERC knows that it could not require changes to an RTO following the date of enactment of the legislation.

Moreover, although we support the concept of incentive pricing policies in certain

limited situations, it is unclear why FERC should be required to establish a pricing

policy designed to encourage transmitting utilities to form RTOs (and extend the

policies to already existing RTOs), when the legislation already requires transmitting utilities to join RTOs. It is important to remember that transmission will continue to be a monopoly function. Any deviation from cost-of-service ratemaking

should be limited to exceptional circumstances.

Public Benefits

While retail competition has the potential to increase renewable energy’s share of

the electricity market, the inherent uncertainty of the transition to competition, the

recognition of important environmental and energy diversification benefits from renewables, and the fact that existing Public Utility Regulatory Policies Act requirements are incompatible with competition and ineffective under present market conditions suggest that Federal policy towards renewable electricity should be revisited

in the context of restructuring.

Mr. Chairman, DOE commends you for recognizing the need to address renewable

energy in restructuring legislation. We support the extension of both the Renewable

Energy Production Incentive (REPI) program for municipal and cooperative utilities

and the wind and biomass tax credits. However, more needs to be done; otherwise,

the progress we have made in renewables could be partially lost during the transition to competition because these technologies have not yet achieved cost-competitiveness. The inclusion of a renewable portfolio standard would provide marketbased support for the development and deployment of renewable energy technologies. Unlike the mandatory purchase provisions of PURPA, this approach would

be consistent with competitive electricity markets.

In addition, we continue to be concerned that retail competition could lead to reduced support for programs that provide important public benefits. Under cost-ofservice regulation, programs supporting and promoting research and development,

energy efficiency and low-income assistance were supported, in part, through utility

rate structures. As utilities prepare for competition, they will be unwilling to include

in their rates the cost of programs not included in the rates of their competitors.

A public benefits fund, which provides matching funds to the states for low-income

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2The Administration’s public benefits fund proposal also includes a rural safety net in the unlikely event that competition adversely impacts rural areas. 3To avoid inadvertent impacts on small consumer-owned systems, the Administration bill excludes entities with existing loans made or guaranteed under the Rural Electrification Act from

merger review requirements.

assistance, energy efficiency programs, consumer education and the development

and demonstration of emerging, clean technologies, should alleviate these concerns.2

Other Issues

Mr. Chairman, while I cannot comment on each and every provision in H.R. 2994, I would like to briefly discuss several additional issues.

• Target Date/Opt-Out—Mr. Chairman, the Department recognizes that since Chairman Bliley dropped his insistence on Federally-mandated competition, the

debate over restructuring legislation has shifted to other issues. Nevertheless,

we continue to believe that there is substantial merit to establishing a target

date for the implementation of retail competition and requiring state utility

commissions and non-regulated municipal and cooperative utilities to hold proceedings to examine the benefits or costs of adopting retail competition programs. I know we both share the opinion that competition, if it is structured

properly, will benefit all classes of consumers. Most, if not all, state utility commissions and non-regulated utilities would likely come to the same conclusion

after a thorough examination. • Transmission Siting—We are pleased that H.R. 2944 recognizes that regional solutions to transmission siting issues are both appropriate and necessary. In

addition, the Administration has no objections to providing FERC with authority to order transmission-owning utilities to expand their facilities, as long as

state siting authority is not diminished. • Reliability—As I discussed earlier, one of the most critical elements of comprehensive electricity restructuring legislation is the need for mandatory reliability standards. The reliability title of H.R. 2944 closely mirrors the language

included in the Administration’s legislation and language proposed by the North

American Electric Reliability Council. We believe the differences between these

proposals can be resolved. • Consumer Protection—H.R. 2944 contains several vitally important consumer protection provisions, including items related to information disclosure, consumer privacy and measures designed to prohibit marketers from engaging in

slamming and cramming practices. We fully support these provisions. • Mergers—We are pleased that H.R. 2944 retains FERC’s authority under Section 203 of the Federal Power Act to review utility mergers and extends FERC’s jurisdiction over mergers that involve generation-only and utility holding companies. Utility mergers are not necessarily anti-competitive. However, it is vital

that FERC— the regulatory agency with significant experience with and understanding of electricity markets—be able to prohibit or condition a merger that

would have a deleterious impact on retail or wholesale competition.3

• Reciprocity—The Administration believes that each state should have the authority to determine whether to prohibit a utility not fully subject to retail competition requirements from participating as a marketer in that state if the state

has implemented retail competition. Recognizing that H.R. 2944 instead imposes a Federal reciprocity requirement, we believe the requirement would be

ineffective. By allowing utilities not subject to retail competition to avoid the

reciprocity limitation by simply filing an open access plan with a state utility

commission, the legislation could very well allow utilities that file sham proposals to escape the intent of the reciprocity provision. We think this provision

should be modified.

• Aggregation—Mr. Chairman, the Administration commends you for including

Section 541 in H.R. 2944. This provision will help entities that are interested

in aggregating to increase consumers’ purchasing power and enable them to

reap the full benefits of retail competition.

• Interconnection—We welcome the inclusion of a Federal interconnection standard in H.R. 2944. Distributed power and combined heat and power technologies

can enhance both reliability and the environment. We believe a more expansive

approach than that included in the bill is required. Interconnection should not

be restricted based on ownership or the ability to serve nearby facilities. In addition, we believe that regulatory and tax barriers that inadvertently discourage

the use of these technologies should be addressed.

• Federal Utilities—We are pleased to see that the key issues associated with

Federal utilities which the Administration believes need to be addressed in reVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00028 Fmt 6633 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
25

structuring legislation, as well as the general approach to resolving these

issues, are included in H.R. 2944. Although Title VI of the legislation differs in

certain limited respects from the Administration’s proposed restructuring legislation, both bills share the same goal—enabling competition to thrive in the regions served by Federal utilities. We believe the differences between the two approaches can be resolved. • Private-Use Prohibition—We agree that it is necessary to resolve the issues surrounding the tax treatment of debt issued by municipal utilities to enable

them to fully participate in competitive markets. The small differences between

the provisions in H.R. 2944 and the Administration’s proposed legislation

should be easily bridged.

CONCLUSION

Mr. Chairman, while the states are proceeding with their restructuring programs, all eyes are on Congress to learn what signals the wholesale and retail markets will

receive. This Committee’s leadership has been essential and will continue to be. Although we do not support H.R. 2944 in its current form, the Administration’s approach to comprehensive restructuring legislation has many elements in common

with your proposed legislation. And I know that several members of this Subcommittee, on both sides of the aisle, have put forth proposals that merit serious

consideration.

We are confident that a bipartisan bill can be reported out of the Subcommittee

soon. Secretary Richardson and I, as well as our staff, stand ready to assist you and

the other Subcommittee members in this vital endeavor. Only by working together

can we take the steps that are necessary to provide consumers with the full benefits

of competition.

Mr. BARTON. We thank the gentleman from the Department of Energy for his testimony. The Chair would recognize himself for 5 minutes for questions.

Mr. Secretary, I would like for you, in your own words, to define market power.

Mr. GLAUTHIER. Market power is the ability of an entity to set prices, to exercise control of the pricing or terms of availability of

services in a market.

Mr. BARTON. Okay. I think you are very aware that 24 States have done something on electricity restructuring. Haven’t most of

those States addressed market power in their State bills?

Mr. GLAUTHIER. Our concern is as we move forward, we feel we

need a Federal consistency, a national consistency, and that the

Federal Energy Regulatory Commission has some ability to assure

that market power isn’t used in regional markets, which cross

State boundaries.

Mr. BARTON. Okay. Are you—with the exception of the Tennessee Valley Authority and the Bonneville Power Administration, which

are Federal utilities that are not at all regulated now by the

States, are there any other situation where there is market power

concentrated across a region that you are aware of? I shouldn’t let the staff give you the answer, but he is a good guy, so we will let him this time.

Mr. GLAUTHIER. Well, multistate holding companies certainly have control of assets across wide regions.

Mr. BARTON. But there is—I have seen no study that is interstate that indicates, again, with the exception of the Federal utilities, which we do address in our bill, that there is a concentration

of market power. And I do see that in every State that has acted,

many but not all of those States have addressed market power in

some way. So, while I share your concern in the abstract for market power, when we look at the actual market in the United States

for electricity, I see no compelling reason to give the Federal GovVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00029 Fmt 6633 Sfmt 6602 E:\HEARINGS\60356 txed02 PsN: txed02
26

ernment an authority that it has never had before. Would you like

to comment on that?

Mr. GLAUTHIER. Well, we are also talking about a situation of

open competition which has never existed before. And what we are

asking is that the Federal Energy Regulatory Commission have the

authority to ensure that market power is not abused. But we are

not expecting that it is going to have to intervene in many cases.

This is a question of having the oversight and the ability to ensure

that markets will operate.

Mr. BARTON. But the very—and I am not going to belabor this,

because we have got a lot of other testimony and a lot of other

questioners—but the very intent of the legislation before us is to

create competition, to put more players into the market both in

terms of having the opportunity to sell and to generate. And you

have to assume that there is no public utility commission, no Governor, no State legislature in the country that says, ‘‘Yes, we want

to concentrate market power for our customers.’’

I mean, if I didn’t think the States and their regulatory bodies

weren’t cognizant of this potential problem, I would be right with

you, but since I have talked to many of them and they are very cognizant of it and very concerned about it, I don’t think that we need

to put in a Federal market power provision. But having said that,

there is one vote for the bill before the committee now, and that

is mine, and it takes at least 16 to pass.

Let me go to the RTO provision of the bill pending before the

subcommittee. You said some very nice things about our RTO provisions, and I want to thank you. But you expressed a concern that

we limit FERC’s discretion to force what you call the optimal regional transmission organization. I don’t think this is a surprise to

you, but that was intentional. We wanted to limit the FERC’s discretion, and so my question to you: Why would you assume that

five commissioners, as well-informed and well-intentioned as they

may be, would have more perfect knowledge than the market participants themselves that are creating the RTO? So long as we require the utilities to participate in an RTO, what is wrong with setting the guidelines? And as long as the participants themselves certify and FERC agrees that they meet those guidelines, why not let

them create in their own way, to use your term, the optimum RTO?

Mr. GLAUTHIER. Transmission access I think is going to be one

of the greatest keys to success of this program overall. If you don’t

have open access to transmission, then the rest of the elements of

competition are not going to work. The FERC commissioners, while

there are five of them, are confirmed by the Senate and do represent the informed perspective of the community. Their ability to

look at the patterns that exist in different markets, different regions, we think is important to be able to oversee these regional

organizations that will emerge.

Mr. BARTON. Well, my time has expired. I didn’t hear you say

you thought they would do a better job. So, I ought to quit while

I am ahead on that.

We are going to recognize the gentleman from Ohio, Mr. Sawyer,

for 5 minutes.

27

The gentleman from Ohio, Mr. Sawyer, who was here before the

gentleman from Illinois and the gentleman from Tennessee, although the gentleman from Ohio did leave, but he did come first.

Mr. SAWYER. I promised you I would come back, Mr. Chairman.kay

Mr. BARTON. Okay, so you are recognized first.

Mr. SAWYER. Thank you. Thank you very much.

Thank you very much for your testimony today and for the obvious depth of thought that you have put into not only the bill that

is before us but to a number of the other proposals that are with

us today.

If my numbers are right, the current transmission network is

somewhere in the neighborhood of 150,000 miles, however you

want to measure that. And my understanding is that NERC is anticipating a growth over the next 10 years of some 6,000 additional

miles. It seems to me that that substantially understates what likely growth in peak load will be over the next 10 years, particularly

if we have the kind of competition for access to transmission that

I think we are talking about here. Would you agree that basic assessment?

Mr. GLAUTHIER. Well, I am not sure whether it is miles that will

increase or the capacity along many existing routes, but there certainly will be a substantial amount of transmission utilized in this

new competitive market.

Mr. SAWYER. Well, let me put it another way. Would you agree

that the transmission grid, as it is currently constituted, is constrained?

Mr. GLAUTHIER. Yes.

Mr. SAWYER. And would you agree that it is really not designed

to—it was never designed to perform the tasks that it may be

called upon to fulfill in a market environment?

Mr. GLAUTHIER. Yes, that is true.

Mr. SAWYER. In that sense, is it your belief that it is even possible to design an optimal template that would fit within what may

be determined as existing markets? How would you decide what a

market is? How would you call upon the commissioners to choose

what a market is?

Mr. GLAUTHIER. We would expect them to look at markets in regional contexts. We think that there will be broad regional patterns, and that is one reason that we encourage the formation of

planning mechanisms that would allow planning for new transmission capacity, for example, to be done on a regional basis while

still respecting the States’ role in selecting individual sites and

making those decisions.

Mr. SAWYER. My interest in trying to anticipate what an appropriate Commission role might be is to recognize that the markets

that might have been anticipated even 10 years ago are different

today from what they would have been 10 years ago had we put

such a vehicle in place. And it is almost certain that they will be

substantially different from—in 10 years from where they are

today.

And it is for that reason that I have real discomfort in talking

about putting in place and fixing an optimal design for a regional

market that may not even exist as a regional market 10 years from

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now, particularly as the technology changes to make possible the

continued rapid expansion of what we think of as regions. Would

you agree with that?

Mr. GLAUTHIER. Yes. Yes, we would.

Mr. SAWYER. In that sense, then let me ask you: When you say

that you support limited incentive pricing policies; that you don’t

in the sense that you don’t understand the need for it if in fact the

Commission is in a position to order the formation of RTOs to serve

markets that may change substantially even within a span of time

as little as 10 years.

Mr. GLAUTHIER. Well, we think there is a need for FERC to have

flexibility to oversee this system and to be able to adjust as

changes take place.

Mr. SAWYER. Can you tell me why you have more faith in the capacity of FERC to see 10 years down the road than the ability of

pricing policies to change to reflect changed demand and changed

architecture of a regional market?

Mr. GLAUTHIER. Well, pricing policies will probably drive the proposals that come to FERC. As the planning is taking place within

a region, the local and State governments have very strong roles

in making those decisions. We do not envision FERC developing a

master plan for the country and imposing that, but rather trying

to set a set of procedures or rules in place that will help ensure

that there is an active process going on everywhere to ensure that

this kind of transmission develops.

Mr. SAWYER. Just very briefly, do you see a role for pricing policy

in nurturing that growth and evolution?

Mr. GLAUTHIER. We have not built incentives—pricing incentives

into our proposals. Our sense is that there will be a strong incentive for development for competitors that want to enter these markets. Whether they need actual pricing incentives to develop this,

we have not made a decision. We haven’t come to that as an element that we have supported.

Mr. SAWYER. Thank you, Mr. Chairman.

Mr. BARTON. Thank you, Congressman Sawyer.

We recognize the distinguished vice-chairman, Mr. Stearns of

Florida, for 5 minutes.

Mr. STEARNS. Thank you, Mr. Chairman.

The administration bill gives FERC extraordinary powers to

order divestiture. How many regulatory agencies have the power to

completely restructure the industries they regulate, including the

power to order divestiture?

Mr. GLAUTHIER. I am not sure how many industries have that.

What we are talking about is——

Mr. STEARNS. I don’t think you can name one, and yet the administration is giving FERC this extraordinary power. So, I need

you to justify it.

Mr. GLAUTHIER. What we are talking about is trying to be sure

that there is an independence between the generation assets of a

system and the transmission assets, so that a utility not be able

to use its position in the transmission market to favor its position

with generation; that if we are going to have open competition, we

have got to have the transmission system be open to all offers.

29

Mr. STEARNS. Well, I don’t see any precedence for what you are

doing here, what the administration is doing. Now, I know you personally probably don’t have a big stake in this, but you are here

defending the administration’s proposal, so I think many of us are

just sort of a little dumbstruck here that the administration give

FERC so much extraordinary powers, and there is no precedent

that I can see to do this. And I don’t—I missing something. You

are not making the case why FERC has to have these extraordinary powers.

Mr. GLAUTHIER. Certainly we have seen divestitures come from

the court system, from the Judiciary in different markets. In this

case——

Mr. STEARNS. Yes, but isn’t that antitrust law? That is antitrust

law. That is not coming from a Government agency.

Mr. GLAUTHIER. Well, in this case what we are dealing with is

a set of companies and a whole marketplace which has grown up

over decades under a regulatory environment which we are now

talking about changing.

Mr. STEARNS. Couldn’t the courts do that today?

Mr. GLAUTHIER. We would rather have a planned transition than

leave this to the courts. Under today’s regulatory environment,

where there is a monopoly that is governed or sanctioned by State

law, the market power is legitimate; it is appropriate; it has arisen

naturally. What we are talking about is trying to change this so

that there will be free and open competition in this market.

Mr. STEARNS. Well, staff has pointed out to me that what you are

allowing is like if we take, for example, the FAA. They could go in

and break up United Airlines or they could go in and break up U.S.

Air, and that is the kind of authority that the administration is allowing FERC to have and which you are defending here this morning.

So, we don’t see any precedence for it, and we are alarmed that

you are giving FERC that power when it really should be to the

courts, and so I think our point today, and which it appears we disagree with the administration, is this is an extraordinary power to

order divestiture, which we are a little worried about here.

Mr. GLAUTHIER. If I could make one point, and that is that any

authority that FERC would have to take those kinds of actions is

premised on a determination that there is market power in a particular area that does allow a company to exercise that kind of pricing control in a market. If in fact the utilities take the actions,

open up the regions for competition, then those conditions will not

exist, and there will not be any ability for FERC to make those

kinds of orders.

Mr. STEARNS. Wouldn’t you agree that you are establishing a

new precedence here? It is like saying the FAA can start to go in

and break up airlines and that is a new precedent.

Let me go on here. In your testimony, you have reservations concerning the jurisdiction clarification in section 101. FERC proscribes similar language in Order 888. Why do you disagree with

the Commission which has the experience in this area?

Mr. GLAUTHIER. I am not familiar with the section referenced.

101 is——

30

Mr. STEARNS. Section 101 is to allow FERC to determine all

transmission.

Mr. GLAUTHIER. I am sorry, could you repeat the question?

Mr. STEARNS. In your testimony, you have reservations concerning the jurisdiction clarification in section 101. FERC proscribes similar language in Order 888. Why do you disagree with

the Commission which has the experience in this area?

Mr. GLAUTHIER. If this is referring to the 8th Circuit Court decision last spring, our legislation was drafted before that decision

came out, and since the decision we want to clarify our position

here and be sure that FERC would have the authority to guarantee

that there is access to the transmission.

As I said in my oral statement, we are not proposing that FERC

regulate or decide the rates in bundled transactions but that it be

able to have oversight to assure access to those transmission lines.

Mr. STEARNS. Before I give back my time, Mr. Chairman—my

time is expired—but basically I think that he is criticizing something that is really not in your bill.

Mr. BARTON. We thank the gentleman from Florida, and we want

to thank the distinguished Deputy Secretary for being honest. I

couldn’t—if somebody said, ‘‘What does section 302 of the bill do,’’

I would have to be honest and say I would have to look at the summary before I commented on it. So, we actually appreciate your

being honest enough to say, ‘‘What does 101 do,’’ although it is the

first section in the first title.

The gentleman from Texas, Mr. Hall, is recognized for 5 minutes.

Mr. HALL. You know, Mr. Chairman, it seems to me that one of

your renditions or it may have been in one of your letters from the

chairman—I am not sure, I saw it somewhere—where you had a

carrot out there to those States enticing them in. It seems like the

easiest and the surest way and put some type of a structure there

that tells them that if they don’t take that carrot, they darn well

better—should. That is a nice way to treat the States. I think we

may resurrect that.

And, Mr. Deputy Secretary, we have a long way to go on this bill,

and we are all sitting here with the hard solemn knowledge. The

chairman knows it better than anyone that if one senator doesn’t

like one paragraph in this that they can stop that bill this year,

and we are back here the next year. But this is a process we have

to move along, and I think the gentleman from Florida, though, got

us into the question about restructuring and what the States had

done, how many had done it, and how many still need to do it.

My State passed a bill, the State of Texas—I think you are well

aware of that—and in the recently passed restructuring legislation

down there in Austin, the Texas legislature enacted a generation

market power provision that generally required utilities with more

than 20 percent of the generation in the State to auction the capacity over the 20 percent threshold for as long as it exceeded 20 percent. That is a mandate or instruction to the State. Do you have

an opinion on how that applicable—and how workable that approach would be to Federal laws?

Mr. GLAUTHIER. I don’t have a specific opinion on whether we

should have that in the Federal law, but in terms of consistency

of the Federal statute and that type of a State statute, as long as

31

the State is taking actions of that sort, then we would not expect

FERC would make any finding that there will be a market power

situation that would require them to take any additional action at

the Federal level.

Mr. HALL. So, it doesn’t give you any heartburn at all?

Mr. GLAUTHIER. No, it doesn’t.

Mr. HALL. Well, in the event that this subcommittee does not get

together—and it is my understanding from the chairman that he

would like to pass a bill out. It is also my understanding that he

would like to get it as strong a voice to the Chairman Bliley, because he might get another letter back from him if it is not the

way—wasn’t it in Othello, the merchant of Venice where they said,

‘‘Oh, that mine enemy would write me a letter.’’

Mr. BARTON. I don’t think that is germane to the witness.

Mr. HALL. Okay, I will get back.

But in your testimony, you outlined a number of reasons why the

Federal Government ought to enact restructuring now, right now,

and that is what the chairman is trying to do. I don’t know how

much of a stonewall he is up against, because we have to navigate

the full committee rules of the floor, the Senate, and, there, one

person, if they just stand up and make an inquiry, they almost kill

any of the bills that are going get over there this late.

So, I guess we have to think in these terms, whether we like to

or not. You outlined a number of reasons why we ought to do it,

but if we are unable to do it on a comprehensive package in this

Congress, what kind of a bare bones package should we enact that

probably—that might navigate the Senate? You work both sides.

Mr. GLAUTHIER. The one thing that Secretary Richardson said to

me this morning before I came up was, ‘‘Urge them to go ahead and

act quickly; let us move ahead.’’ We are not prepared to decide

where we might fall back. At this point we would like to support

comprehensive legislation, work with the full committee to move

that ahead.

Mr. HALL. That is a good answer, but be thinking about a fallback position, because I think it is going to come around.

I yield back my time, Mr. Chairman. I have some other questions, but I will put them in the record and ask that they be—space

be left at this structure for my question to go in.

Mr. BARTON. I thank the gentleman from Texas, and I would

make the point before we recognize Mr. Largent, it goes back to

something that I said. The Chair, and I think the members of the

subcommittee, share the administration’s concern about perceived

market power, but we are simply unconvinced that the States don’t

share that concern, and the States that have acted in different

ways have addressed market power. California required divestiture; Texas did not; Pennsylvania did not, but they are addressing

it.

So, there is not a need for a Federal one-size-fits-all on the

States that have yet to act. If the States that have acted have addressed it, why do we think that the States that have not yet acted

but might, if we pass a Federal bill eliminating the barriers, would

not address it themselves? Before I recognize Mr. Largent, do you

want to——

32

Mr. GLAUTHIER. If I may, if adjacent States, for example, have

not acted, then even though your own States has taken actions, the

market there may be impacted; it may not really be the opportunity to get the advantages of competition. If the States have

acted, then the sorts of authorities we are talking about for FERC

would not have any effect, because there wouldn’t be any remaining problem for them to have to act about.

Mr. BARTON. Okay. The gentleman from Oklahoma, Mr. Largent,

is recognized for 5 minutes.

Mr. LARGENT. Mr. Glauthier, let me ask you a follow-up question

to the chairman’s remarks. What authority would a State have to

mitigate market power that existed across its State border? In

other words, generation facilities that are of the same company

that cross State lines, what ability would one State have to mitigate that market power that existed across its border?

Mr. GLAUTHIER. That is an excellent example, and that is one of

the concerns we have; that it seems the State’s authority stops at

its State border.

Mr. LARGENT. But electricity does not stop at the State border,

is that correct?

Mr. GLAUTHIER. That is absolutely correct.

Mr. LARGENT. Which is why we are here today.

Let me—in your testimony, on pages—the bottom of page 6 and

the top of page 7, you are talking about ‘‘as a result, it is essential

that the Federal Government, as the guardian of interstate commerce, be able to take aggressive action during the transition period to ensure that utilities are unable to use horizontal market

power to control prices and impede competition.’’ When you say

‘‘during the transition period,’’ what kind of period of time are you

talking about?

Mr. GLAUTHIER. We are not sure how long it will take to transition into a fully competitive working market. Certainly, the first

few years we expect there will be some bumps in the road, and

maybe some transitional actions will be required that would not

have to be long-term actions. Some of our provisions go for 10 to

15 years in our bill. It really will depend, whether you are talking

about things that require capital investments and take some time

or whether they are more operating changes that can phased in

rather quickly.

Mr. LARGENT. So, one of the ideas that I floated before the hearing—just throw out right now—is that I think most experts would

say the transition period would be somewhere between 3 and 5

years to get to a fully competitive market. Is it possible to institute

some sort of market power tools, placed in FERC hands, that would

sunset after a certain period of time, as we have gotten into a more

competitive market?

Mr. GLAUTHIER. I think the concept is a concept that is good that

we ought to work with a bit. Whether the exact period would differ,

for example, for different kinds of actions, such as the planning and

action process in investing in new transmission facilities, which

will take some time, might differ from those actions that focus on

the market and the behavior for pricing and offerings in a particular market or electricity for retail customers. But I think the

idea is a good idea, and we ought to take that into consideration.

33

Mr. LARGENT. Well, one of the market power tools that the administration proposes, that, frankly, I am not a fan of, is the ability

to order divestiture. But one comment I would make about that,

one of my colleagues earlier, Mr. Stearns, mentioned, or tried to

make the comparison between FAA being able to order divestiture

of United Airlines or American Airlines and trying to compare that

with FERC ordering divestiture of the Southern Company. That is

hardly comparing apples to apples since the Southern Company,

other IOUs, have been granted a monopoly status, whereas American Airlines and United have not. So, I don’t think that is a fair

comparison.

But I want to go on down on page 7 in your testimony. You talk

about FERC’s only other available tool—this is to address market

power and wholesale markets—is to deny a request for marketbased rates. Now, many people, before FERC had Order 888, suggested that there could be market power existing in the wholesale

market, and so FERC needed to have a tool at its disposal to address market power and wholesale, and one of them was to deny

market-based rates; in other words, stay with the cost-based rates

and deny market-based rates. Has the FERC ever utilized that tool

in its history since Order 888? Have they ever denied market-based

rates as a result of market power?

Mr. GLAUTHIER. I don’t believe they have since 888, but you may

have to ask that question again to the next panel——

Mr. LARGENT. Okay.

Mr. GLAUTHIER. [continuing] to get a definite answer.

Mr. LARGENT. Thank you.

My last question, Mr. Chairman, goes back to the Public Benefits

Fund. You make a case for the administration’s position on the

Public Benefits Fund. Twenty-four States have already moved and

done something, including Oklahoma, on deregulation. Have all 24

States addressed the Public Benefits Fund?

Mr. GLAUTHIER. No, not all of them have, and there has been

some variety among those who have—different lengths of time, for

example, that a Public Benefit Fund would exist. So, we think it

is important to have one that would be consistent and applicable

across the country.

Mr. LARGENT. Okay. Thank you, Mr. Chairman. I yield back.

Mr. BARTON. I am sorry, Mr. Largent. I was engaged in a staff

conversation. You yielded back your time, all right.

The gentleman from Illinois, Mr. Rush, is recognized for 5 minutes.

Mr. RUSH. Thank you, Mr. Chairman.

Mr. Deputy Secretary, I want to commend you on your testimony

and answers to the questions this morning. I think you have been

very forthright and illuminating in terms of the administration’s

position.

H.R. 2944 repeals PURPA without establishing renewable energy

portfolio standards. However, the bill does provide for tax incentives regarding the use of renewable energy. In your opinion, which

provision would generate the greatest amount of competition while

also acting as the greatest incentive for the use of renewable energy?

34

Mr. GLAUTHIER. We favor a renewable portfolio standard; think

that that provides the support for these not yet fully mature technologies that are going to be increasingly important in our electricity sector. We also support the tax incentives and would like to

see both implemented.

Mr. RUSH. Section 542 of the bill will give FERC jurisdiction over

distributed generation facilities, which are defined as electric power

generation facilities of 50 megawatts or less. Such FERC authority

appears to be a departure from previously established jurisdiction

boundaries, and they seem to be in contradiction to section 101 of

the bill. Might this provision be seen as a preemption of State authority?

Mr. GLAUTHIER. I believe the authority for the distributed power

is really to be sure that there is the ability to look at the systems

as an integrated system and to incorporate all of the power that

would be in a market.

Mr. RUSH. Well, let me ask, are there any other areas regarding

distribution reliability where FERC jurisdiction would be appropriate?

Mr. GLAUTHIER. The local distribution systems are not under the

authority of FERC. So, FERC’s authority would really stop when

the power ends the transmission—long-term transmission system

and enters the local distribution utility.

Mr. RUSH. So, in answer to the question then, there aren’t any

areas regarding distribution reliability where FERC jurisdiction

would be more appropriate or that will allow FERC to address

issues of reliability.

Mr. GLAUTHIER. I don’t believe there are. I think you are right.

Mr. RUSH. Do you think that this is an appropriate——

Mr. GLAUTHIER. We think that it is important for the States to

deal with this, so we are having a meeting, a regional meeting, in

the Midwest, in Chicago, at the end of this week.

Mr. RUSH. Yes, I am supposed to testify. I will be a part of that

meeting on Friday.

Mr. GLAUTHIER. So, we are looking forward to try to deal with

that and to get more ideas developed in that area.

Mr. RUSH. Are you concerned about the epidemic of blackouts

that occurred over the summer?

Mr. GLAUTHIER. We are concerned about that, and Secretary

Richardson this summer announced a six-point plan to try to deal

with that.

Mr. RUSH. And so you are—the position of DOE right now is we

still want to leave it at the—leave this issue of reliability at the

State level without any Federal intervention at all, any Federal

guidelines or standards?

Mr. GLAUTHIER. No, I am sorry, I didn’t mean to leave that impression.

Mr. RUSH. Please don’t.

Mr. GLAUTHIER. Reliability is one of the primary reasons we feel

there is a need for Federal legislation, and that we need to move

from what is today a set of voluntary standards on reliability to a

set of mandatory standards across the country. As we see deregulation or increased competition occur, we are going to see more and

more participants in the market at all levels. It is going to be more

35

important to have a uniform and enforceable set of reliability

standards for the industry.

Mr. RUSH. Thank you, Mr. Chairman.

Mr. BARTON. Thank you, Congressman Rush.

It seems like we recognize the gentlemen from Illinois in conjunction. So, this time we go from the democratic gentleman from Illinois to the republican gentleman from Illinois, Mr. Shimkus, for 5

minutes.

Mr. SHIMKUS. The dynamic duo of the committee, Mr. Chairman.

Mr. BARTON. That is right.

Mr. SHIMKUS. I am pleased to follow my colleague from Chicago.

It is great to have you here, and I think we are focusing on a

major concern based on the administration’s bill. We know that

there are no market power provisions in H.R. 2944 other than the

RTOs, because the hearing record seems to have been made that

they clearly are not necessary, if you have sat in all the hearings

that we have had.

My State addressed market power through a mandatory ISO.

How would you think my State would feel if a restructuring bill

was passed, signed into law, that then took away their authority

based upon FERC’s power in determining market power?

Mr. GLAUTHIER. Well, I think if the State authority has acted to

really assure that there is competition occurring——

Mr. SHIMKUS. Well, wait—really assure? What do you mean by

‘‘really assure?’’ I mean, based—the dilemma we have here is you

trust the Federal regulators; I trust my public utility commission.

Now, I guess the question is, is that your position? Do you trust

the Federal regulators over the State public utility commission?

Mr. GLAUTHIER. We look to the State commissions to act first

and to try to incorporate the programs that they have already decided to put in place, in many cases, or that States will be deciding

to put in place, and we are looking to FERC to have an oversight

authority to guarantee that as the States act we don’t end up with

a patchwork of programs that are inconsistent or where some——

Mr. SHIMKUS. Tell me why the administration’s position is willing to destroy the deregulation bill in the States of Illinois based

on superimposing FERC regulation with respect to ISOs and market power? Why are you willing to give up a State that has moved

to address all these concerns addressed in a deregulatory bill based

upon the assumption that the RTOs, or in this case a mandatory

ISO, will not address the concern of market power?

Mr. GLAUTHIER. Well, first, I don’t agree with the premise that

we are going to change the State program.

Mr. SHIMKUS. Well, it does, though, in Illinois. It will cause the

players to then claim that the rules have been changed, and based

upon that rule they can go and have this law dismissed.

Mr. LARGENT. Would the gentleman yield just for a second?

Mr. SHIMKUS. The gentleman will yield.

Mr. LARGENT. I don’t want to defend the administration’s position—he can do it himself—but I believe in the administration’s bill

that the only time the FERC would come in would be at the request of the State of Illinois. The State of Illinois would have to petition the FERC to come in and to look at unmitigated market

power.

36

Mr. SHIMKUS. Well, we are going to see if that is the administration’s position.

Mr. BARTON. We appreciate the gentleman from Oklahoma defending the administration’s position. This is truly bipartisan and

bicameral process.

Mr. SHIMKUS. Well, I don’t have an answer, first.

Mr. GLAUTHIER. Well, part of the answer I wanted to give is

that——

Mr. LARGENT. Well, isn’t Mr. Largent correct in defending the administration?

Mr. GLAUTHIER. Yes, he is. Yes, and we appreciate the assistance.

In market power, that is the State would have to make the petition.

Mr. SHIMKUS. But has the administration addressed—asked my

public utility commission? I mean, in promoting the Federal—in

the administration bill, have you raised this to the public utility

commissions of the various States?

Mr. GLAUTHIER. There certainly have been conversations with

the——

Mr. SHIMKUS. The State of Illinois?

Mr. GLAUTHIER. Well, with NARUC. I am not sure that the——

Mr. SHIMKUS. Yes, or no; State of Illinois?

Mr. GLAUTHIER. I can’t guarantee that.

Mr. SHIMKUS. Okay. I think—okay. Do you have anything else

that you want to add.

Mr. GLAUTHIER. I just wanted to make the statement that the requirements we are talking about are intended not to replace the

State actions but to follow on. If the States’ actions for some reason

are not termed sufficient—and I understand the concern you have

about who makes the decision——

Mr. SHIMKUS. And my time is expired. I will just say that the

State of Illinois went through a very tedious process to move to

competition, and as people know on this committee that I am going

to be guarded to make sure that the work done in the State of Illinois is not tubed by any interests, either interstate or intrastate.

So, with that, I yield back my time, Mr. Chairman.

Mr. BARTON. All right. They are not called the Fighting Illini for

nothing, Mr. Secretary. Mr. Shimkus is stalwart in his defense of

the State of Illinois, just stalwart.

We would recognize the gentleman from Massachusetts, Mr.

Markey, for 5 minutes.

Mr. MARKEY. Thank you, Mr. Chairman, very much.

And we are operating obviously in terrain that has been trod before—divestiture authority is well established as a Federal power.

Obviously, the Department of Justice, under antitrust laws can

force divestiture, and the Federal Trade Commission, under antitrust laws, can force divestiture. The Nuclear Regulatory Commission, under the Atomic Energy Act, can force divestiture. The Securities Exchange Commission, under PUHCA, can force divestiture.

So, this is—not only is it not unprecedented, it is deeply woven into

the fabric of the relationship between the Federal Government and

the States.

37

So, Mr. Secretary, I would like to ask you to very specifically,

looking at the Barton bill on FERC jurisdiction over the transmission system, what will happen to the transmission system and

energy market if section 101 of the Barton bill is enacted?

Mr. GLAUTHIER. Our concern is that the transmission systems,

the regional systems, may develop in a pattern that is not optimal

for individual markets, and we want the FERC to have the responsibility to oversee that, be sure that in fact the open access, that

is the objective of full competition, will be available.

Mr. MARKEY. Are you familiar with the market concentration

provisions of the Texas law and whether it could serve as a model

for the Federal law?

Mr. GLAUTHIER. I am not personally familiar with the details of

it.

Mr. MARKEY. Do you think it makes sense for the Federal law

to be weaker than the Texas law?

Mr. GLAUTHIER. No, in principle, I don’t.

Mr. MARKEY. Do you think that—do you believe that transmission owners will form adequate RTOs without clear FERC authority?

Mr. GLAUTHIER. No.

Mr. MARKEY. What do you think about incentive transmission

pricing? Why do transmitting utilities need incentives to join RTOs

when some already are in RTOs, and the bill already requires

those that are not in one to join one?

Mr. GLAUTHIER. We are not sure that there is any incentive

needed for that. We have not proposed an incentive of that sort.

Mr. MARKEY. Do you think that—so, you should believe that the

RTOs should have open membership requirements?

Mr. GLAUTHIER. Yes, we do.

Mr. MARKEY. You do. Are you concerned about the prospects for

utilities to favor their own generation in interconnection to the

transmission system?

Mr. GLAUTHIER. Yes, we are.

Mr. MARKEY. Do you think that we need interconnection language in the Barton bill in order to ensure that we can prevent

against such activities by utilities?

Mr. GLAUTHIER. Yes, similar to what we have in the administration bill.

Mr. MARKEY. Now, Chairman Hoecker points out in his testimony that the Barton bill actually would prevent FERC from ordering transmitting utilities in Texas to provide open access to

their transmission systems. Do you share his concerns about this

type of exemption?

Mr. GLAUTHIER. I am, as I said, not specific with the details with

the Texas one, but we do share his concerns in general about this

area.

Mr. MARKEY. Do you think that we should welcome Texas into

the Union?

In terms of the electricity restructuring debate, it is understandable that Alaska would argue that it is not one of the 48 contiguous

States as you try to construct a national model. My objective, ultimately, is to make sure that all of the lower 48 are included and

that this national market too be.

38

And, finally, Mr. Chairman—Mr. Secretary, if we were to grant

FERC market power authority but then sunset that authority in 5

years, couldn’t the incumbent utility monopolists sue to block competition from coming and then run the clock out until FERC

couldn’t use its market power authority?

Mr. GLAUTHIER. I think we would have to look very carefully at

any possible transition rule so that there isn’t potential for abuse.

Mr. MARKEY. Thank you, Mr. Chairman.

Mr. BARTON. Thank the gentleman.

We recognize the gentleman from North Carolina, Mr. Burr, for

5 minutes.

Mr. BURR. Thank you, Mr. Chairman. I learned a lot in that last

exchange out of all the times that we have been through debates

on electricity.

I think I finally figured out where my good friend, Mr. Markey,

is. He is in a touch pinch in New England, because he needs lower

prices. He just doesn’t want to let the marketplace do it. He would

like it to be mandated that you have lower prices regardless of

what the cost of generation. Regardless of where you get it from,

let us just make sure that everybody absorbs the cost of the problem in New England. Let us create another problem everywhere.

And there is a real important key to it—you have to have a Federal regulator to accomplish it. It does not happen with State regulators. You can’t link it together, and I am not so sure that that

is not where the administration is also.

Let me ask you: Define competition for me.

Mr. GLAUTHIER. Competition, in my view, is the offering of products or services at availabilities and prices where the consumers

are able to make their selection, where there is an opportunity to

choose among those competing——

Mr. BURR. So, choice is a very important thing for competition.

Mr. GLAUTHIER. Yes, sir.

Mr. BURR. And is more choice better than less choice?

Mr. GLAUTHIER. Yes.

Mr. BURR. And is competition good?

Mr. GLAUTHIER. Yes, it is.

Mr. BURR. Is choice good?

Mr. GLAUTHIER. Yes.

Mr. BURR. Tell me about consumers in Tennessee? Do they have

choice?

Mr. GLAUTHIER. Not currently.

Mr. BURR. Should they?

Mr. GLAUTHIER. That is a part of our proposal and a part of this

bill, as well.

Mr. BURR. And how much choice will they have?

Mr. GLAUTHIER. Well, it is going to be up to the individual municipal utility systems or the coops to decide whether they want to

participate under our bill.

Mr. BURR. What would be an abuse of market power? You talked

about the abuses to market power. Tell me what one of those

abuses would be?

Mr. GLAUTHIER. Well, one abuse would be if a utility in a region

is able to dominate the local systems——

39

Mr. BURR. So—and I don’t want to interrupt you—but if you

have competition by your definition, which is choice, you can’t have

abuse of market power, can you?

Mr. GLAUTHIER. If you are really offering choices, that is right;

if there is the opportunity for choice. That is what we are trying

guarantee.

Mr. BURR. So, the only way to have an abuse of market power

is if you have an instrument that stands in the way of choice in

the marketplace.

Mr. GLAUTHIER. An instrument or an ownership pattern or some

of other control that does it.

Mr. BURR. Now, would that control be excessive regulatory authority by the FERC?

Mr. GLAUTHIER. We think that that is a technique to try to help

assure that we don’t have the kind of control that we are worried

about. We worried about——

Mr. BURR. Give me an instance where a Federal regulatory agency encouraged and created competition versus stymied and destroyed competition.

Mr. GLAUTHIER. The Department of Justice and the Federal

Trade Commission, of course, are doing this all the time.

Mr. BURR. Now, would they be a good one to put in charge of

merger?

Mr. GLAUTHIER. We think that FERC has a degree of technical

expertise in understanding this market that puts them in the appropriate role here.

Mr. BURR. So, in every case but this one, they would be the correct authority.

Well, I thank you for your answers. Mr. Chairman, I yield back.

Mr. BARTON. The Chair would recognize the gentlelady from Missouri, if she is ready, or we can go to another Republican and then

when you are ready come to you. Are you—do you want some time?

Okay.

Then we recognize the gentlelady from New Mexico, Congresswoman Wilson, for 5 minutes.

Ms. WILSON. Thank you, Mr. Chairman.

I wanted to ask you some questions related, really, to a statement in your testimony. You say, ‘‘What we do at the Federal level

and when we do it will have a profound impact on the success of

State and local retail competition programs.’’ And the questions I

have really have to do with how we make this transition from regulated to market-driven power, and, as you know, the Department

of Energy not only deals with this as a policy issue but as a consumer in my State of New Mexico.

The Department of Energy is actually one of the largest industrial users of power in Albuquerque, New Mexico, because you control the contracts for Kirkland Air Force Base. And for those of you

who aren’t aware of it, Kirkland uses about 65 megawatts of power

in New Mexico. It is one of the largest industrial users, and that,

to put it in context, is the city of Santa Fe, our capital city, uses,

on average, about 88 megawatts of power. We are talking about a

large industrial user.

The Department of Energy has applied to move to market power

for Kirkland Air Force Base immediately even though State law,

40

passed by the State legislature, says that we are going to transition

to that starting with retail consumers and small businesses and

just individual customers in 2001 and industrial consumers in 2002

so that we don’t shift costs from large industrial users to schools

and individual users and small businesses.

Is it the Department of Energy’s position that you can enter a

competitive marketplace before every other industrial user in the

State of New Mexico?

Mr. GLAUTHIER. My understanding is that the contract you are

discussing is a wholesale contract, and our application to FERC follows the procedures for that. We do want to be sure that our actions follow the appropriate actions for all entities there.

Ms. WILSON. There is a Federal law that also says Federal agencies must comply with State law and that no Federal appropriation, whether through the Department of Defense or the Department of Energy, can be used outside of the context of State law,

which prohibits industrial users from going to market power until

2002. Is it the Department of Energy’s position that this law

doesn’t apply?

Mr. GLAUTHIER. No, it is not. It is my understanding that that

law applies to retail sales again, and we certainly want to be sure

that we are doing everything within the confines of the law and appropriate policy.

Ms. WILSON. Is it your position then that you are not an industrial user?

Mr. GLAUTHIER. My understanding is this is a wholesale contract

and not an industrial, retail contract with public service in New

Mexico.

Ms. WILSON. And since it is a wholesale contract, what you are

saying is that the State law passed in 1999 does not apply to you.

Mr. GLAUTHIER. This is a different category than retail sales.

Ms. WILSON. New Mexico is going to competitive market power

in a phased way—2001 for retail, 2002 for large industrial users.

Is it your position, then, that the Department of Energy is neither

of those?

Mr. GLAUTHIER. That is my understanding; that we are a wholesale customer and so do not fall within those groups.

Ms. WILSON. And, so you don’t have to comply with any of the

State law passed in 1999?

Mr. GLAUTHIER. What we are trying to do is to move toward competition and to do it within the prescriptions that apply to wholesale sale. So, that act does not apply.

Ms. WILSON. So, the circumstance then is that the largest industrial user of power in the State of New Mexico is the Department

of Energy and that you feel you are not covered by State law. Is

this then going to be the position of the Department of Energy or

of the administration on every other Federal Government user of

power as we move to retail competition in the States?

Mr. GLAUTHIER. I think our position will be that we have to adhere to all of the appropriate laws and policies that relate to whatever categories our contracts fall under. In this case, it is a wholesale sale. I don’t know what the other categories or other situations

would be.

Ms. WILSON. Thank you, Mr. Chairman.

41

Mr. BARTON. The Chair wants to let the gentlelady know the

subcommittee’s on the side of the schoolchildren and the small consumers in the great State of New Mexico, and I bet we will get the

administration to be on that same side. I just have a feeling since

Secretary Richardson used to represent New Mexico that we can

work that problem out. I think we can.

Does the gentlelady from Missouri wish to be recognized now?

Ms. MCCARTHY. I thank you, Mr. Chairman, very much for your

indulgence, and I apologize to the panelist for missing his testimony. My State of Missouri’s campaign finance law was before the

Supreme Court, and I, having advocated for campaign finance reform while a State legislator and now again in the Congress, felt

compelled to be there.

But with 24 States in some stage of deregulation of electric energy, including my own, what has DOE seen as a successful model

of deregulation, and what—would you please share with us what

you—to what you—what attributes are in a success model for any

State?

Mr. GLAUTHIER. I don’t believe we have actually pointed to any

individual State and said ‘‘This is the example.’’ What we see are

elements in the patterns across the country which are strong and

constructive steps toward competition and toward opening up these

markets. We like to encourage the States to take actions that seem

appropriate to them and be sure that the overall pattern is moving

forward.

Ms. MCCARTHY. Then it sounds like you are quite willing to let

States proceed to devise their own models of deregulation and have

a kind of a hands-off approach until perhaps all States have completed that task, then take a step back and decide what role the

Federal Government has at all in this process, if any.

Mr. GLAUTHIER. We would like to encourage the States to develop their own plans and programs, and what we want to do is

be sure that there is an appropriate Federal oversight authority to

step in if needed in those selected cases.

Ms. MCCARTHY. And at what date out in the future would you

want that authority?

Mr. GLAUTHIER. The way we have introduced our bill it would be

to ask each State to make a formal decision by 2003——

Ms. MCCARTHY. No, no, that is not my question, but perhaps you

are getting to the answer; I apologize if I interrupted. But I don’t

see a role for you now at all. I think States are perking along and

doing just fine. Now, there is no one perfect model yet, but, as you

indicated in your answer to me, eventually we would be able to

take a look at what works well for the States or regions or applications.

But I guess the real thrust of my question is why do we need you

involved at all in this? I think that is what I need to hear, and if

you have already answered that a dozen times before I got here,

I apologize; just be succinct. And at what point do you need to be

engaged? I don’t believe you need to be engaged at this point at all.

But is there sometime out there, perhaps if the States don’t work

cooperatively as a region or as groups, that you would need to be

engaged?

42

Mr. GLAUTHIER. I think one example would be the transmission

access area where if States are moving toward competition themselves, but there are inconsistencies among States within a region

and a concern that some utilities are not getting access to the

transmission facilities in a neighboring State to be able to sell to

customers, then that kind of action is the sort of thing we think

that FERC should have the authority to look at to see whether any

additional steps are needed. That could happen soon. That could

happen early as some States move ahead to implement their programs.

Ms. MCCARTHY. So, at what point, then, do you want FERC engaged in this process? Only at the point when States can’t get

along?

Mr. GLAUTHIER. We would like FERC to have the authority now

to begin to oversee the way these programs are being implemented

and think that it will be important to have them involved from the

beginning.

Ms. MCCARTHY. Would you explain what you mean by involved,

because I think that is where some of this cooperation breaks

down? I think there is a fear that you—that FERC will come in

and try to tell States what to do when States are out there doing

what they know best and think is right. And I don’t want to be a

party to some confrontation that isn’t necessary.

Mr. GLAUTHIER. A couple of examples. One would be in the reliability area. We think there is a need for reliability standards that

would be developed and enforced nationally. That ought to start

now. It ought to begin as we are seeing this market bring in more

and more——

Ms. MCCARTHY. But haven’t we been doing that?

Mr. GLAUTHIER. We have voluntary standards right now. There

are no mandatory reliability standards.

Ms. MCCARTHY. Why do we need mandatory ones, if the voluntary ones are working. Is there a problem?

Mr. GLAUTHIER. Yes, we think there is a problem. This summer,

for example, the power outages certainly demonstrated some kinds

of problems. As we see markets open up, we will have more and

more entrants, more diversified kinds of companies offering services in generation and transmission and then local distribution. All

of that is going to increase the uncertainty of the reliability, and

we need to be sure that we have got the ability to keep the lights

on and make sure everyone is getting the services that they deserve.

Ms. MCCARTHY. Don’t you think that the public service commissioners, or whatever they are called in the respective States, also

feel that way?

Mr. GLAUTHIER. Yes, and we actually would think they would encourage this; that the reliability standards are something I believe

they support.

Ms. MCCARTHY. Why do they need you, if that is the case?

Mr. GLAUTHIER. A lot of it is on an interstate basis. It is not

within any single State, and so you really have large regions of the

country interconnected in a way that has to be overseen more

broadly.

43

Ms. MCCARTHY. We are doing that now in many parts of this

great Nation. I live in Missouri; I get my energy from Kansas. It

seems to work just fine. I guess I am hoping that we engage you

in a role where you actually are problem-solving but not creating

problems, because I happen to think it is working very well out

there. We have got wonderful rates in the Midwest, and there

aren’t a whole lot of people complaining about it.

Mr. GLAUTHIER. In the reliability area, for example, our expectation would be that the organization would grow out of what we

have now with the National Electric Reliability Council; that it

would have a strong role of the States; that it would not be at war

with the States, but rather would be a way for States to participate

together and help set these standards and be sure that they are in

place in a way that everyone who participates in the market really

has to follow.

Ms. MCCARTHY. I thank you. I very much appreciate those

thoughts, and I appreciate what you are saying, and I welcome

that. I wanted to hear that this was going to be cooperation with

States that are already out there doing it, not a Federal imposition

of how to do it, but yet a partner in making sure that the customer

is well served.

And, Mr. Chairman, I apologize for going over my time limit.

Mr. BARTON. No, ma’am, we were delighted to have you go over

your time, because you echoed much of what I said. I don’t want

to spook you, but it sounded—it was like gentle rain on the plain

in the spring to hear your thoughts. So, we appreciate that very

much. We will be happy to add you as an original co-sponsor; in

fact, the only co-sponsor of the bill.

We recognize the gentleman who represents the top 20

undefeated Mississippi State Bulldogs for 5 minutes for questions.

Mr. PICKERING. Thank you, Mr. Chairman, and I want to commend your efforts in putting this legislation together and having

this hearing today. And in a spiritual sense, ‘‘Blessed are the

peacemakers in the legislative context.’’ Too often it is ‘‘Blessed are

the peacemakers for they have all been shot.’’ And I hope that is

not the case here, as we try to compete—I mean, balance a competing interest in the regions and look at the issues.

I am going to take a little bit of a different tack than the other

members. I am actually going to ask questions as it relates to the

legislation.

Mr. Secretary, in H.R 2944, the subcommittee chairman’s legislation, he amended section 203 of the Federal Power Act to expand

FERC reviews of sale of power plants and transmission facilities by

State and municipal utilities, cooperatives, and Federal electric

utilities. Now, why he expands that authority, he also limits the

time to 90 days of that review. What is your view, your opinion,

of that? Is it necessary to expand the authority into those other

areas? Do you support that? And what is your view of limiting the

time?

Mr. GLAUTHIER. We do support the expansion into these other

utilities that have been non-jurisdictional utilities. On the timeframe, I would like to defer to the next panel and ask them. We

think that it is certainly important to be sure that the decisions

44

can be made with enough information in front of them, and I don’t

want to presume that or speak for them.

Mr. PICKERING. Well, why is there a need for Federal review of

these sales into, for example, cooperatives or municipal utilities?

Could we not maintain under current jurisdiction with the timetable to assure a timely review and decision with a certainty of

markets as we go into this transition? Why do you need to go into

these other areas where FERC currently has no jurisdiction?

Mr. GLAUTHIER. Our feeling is that we need to be sure that the

access and market power issues can be addressed—the ones we

have been discussing for some time this morning—that all utilities

in the market really have to be following the same guidelines, the

same rules. So, having them all a part of the same system will be

important.

Mr. PICKERING. Do you see the potential for a municipality or a

cooperative to have market power?

Mr. GLAUTHIER. In certain areas, there are large coops, there

are—there is the possibility.

Mr. PICKERING. Another question deals with mandatory RTOs.

Now, FERC is going forward in its NOPR based on an incentivebased approach, non-mandatory approach. Do you favor a mandatory RTO or incentive-based approach to achieve the type of transmission organization necessary to promote competition?

Mr. GLAUTHIER. We think that the utilities will want to join

RTOs. I don’t believe there is a need to provide strong incentives

or the type we talked about earlier that is in this bill. In terms of

mandatory RTOs, I personally doubt that there will many occasions

where utilities have to be directed to join an RTO. I think that it

is more important that we have the FERC involved in overseeing

RTOs to be sure that they are appropriately sized for the regions

that they are dealing with; that there is a rate structure.

Mr. PICKERING. So, are you saying that a mandate is not necessary? Incentives would be sufficient with FERC participation, cooperation, counsel?

Mr. GLAUTHIER. I think a mandate is necessary as a fall-back,

but that it will not be operative very often; that, in fact, utilities

will come forward and join RTOs, but I think you need a mandate

there as a guarantee for some small percentage of systems.

Mr. PICKERING. Let me give you another example of whether

mandatory—a mandate is necessary or not. In telecommunications—which I realize is different, but there are some parallels—

we gave an incentive approach for local phone companies to open

their markets and in return if they opened their markets, they

could get into long distance—a non-mandatory approach but an incentive-based—if you do this, you will receive freedom to go into

other markets. Bell Atlantic is about to petition to open its market

in New York and other regional companies are preparing to do

that.

As the market forces and the convergence, as well as the consolidation of that market takes place, it seems to be that both regulatory incentives and market pressures are achieving the objectives

without a mandate. Now, if that is the case in telecommunications,

why would that not be the case in electric utilities?

45

Mr. GLAUTHIER. Congressman, I am not sure I understand the

example exactly, because a few years ago with the break-up of

AT&T, you seemed to have the break between local distribution

and long distance, which is somewhat similar to our local distribution utilities and the transmission.

Mr. PICKERING. So, if you put in the open access requirements,

if you eliminated the vertical integration issues of market power

and you gave incentives to do so with reliability and transmission

organizations that would be appropriate, do you need mandates?

Mr. GLAUTHIER. Well, the mandate I think in this industry is the

parallel to the court order. The reason that it is a mandate we are

talking about for the transmission——

Mr. PICKERING. But you are confusing long distance with what

we did in local. The legislation was different than what the AT&T

consent decree did.

Mr. GLAUTHIER. Yes, but I believe what we are talking about

here is really a requirement to be sure that the transmission access

is available to everybody; that transmission is not being used as a

point of leverage with generation assets alike, and so to guarantee

that transmission assets are independent and available to everybody there does need to be some requirement.

Mr. PICKERING. Mr. Chairman, I know my time is up. Could I

have one additional question? And this deals with the reciprocity

clause and the chairman’s legislation. Are you familiar with that?

Mr. GLAUTHIER. Yes, I am.

Mr. PICKERING. And what are your views of the reciprocity clause

in the proposed legislation? Do you support it, oppose it? Is there

a way to improve it? And should it be State-specific rather than

broadly based?

Mr. GLAUTHIER. It is important to have the clause. We do support the reciprocity clause, and it needs to be able to be used on

an interstate basis so that if a utility in one State has its market

opened up to competition, it is going to be able to compete in the

markets with those utilities that are trying to enter its market.

That may cross State bounds.

Mr. PICKERING. But as far as the specific legislation proposed, do

you support the reciprocity language or would you narrow it to

make it on a State-by-State basis?

Mr. GLAUTHIER. The——

Mr. PICKERING. If you understand my question. If I need to clarify or ask a better question, I can try.

Mr. GLAUTHIER. Well, the position in our own legislation is that

the State would make the decision on reciprocity, and I think that

that clarifies my response.

Mr. PICKERING. The Barton proposal would require every utility,

if they have assets in other States that are open, if they have a

closed State, to submit a petition in support of competition in the

State that is closed before their facilities in other States could participate in an open, competitive market. Do you support or oppose

that approach?

Mr. GLAUTHIER. Okay, our approach is to support giving the

States the discretion and not the Federal Government the authority over that.

46

Mr. PICKERING. I think I understand your position. Thank you,

sir.

Mr. Chairman.

Mr. BARTON. We thank you, Congressman Pickering.

Deputy Secretary Glauthier, we will have other written questions

for you, but there are no other members present that have not had

an opportunity to ask at least oral questions. So, we are going to

excuse you. We appreciate your presence today. We want to commend you and the Department—oh, whoa, I didn’t see Mr. Bryant;

I am sorry.

Mr. BRYANT. Well, now that you have recognized me, I will——

Mr. BARTON. I am sorry, Congressman Bryant.

Mr. BRYANT. Let me just ask, if I could——

Mr. BARTON. Five minutes.

Mr. BRYANT. [continuing] just a couple of questions in regard to

some environmental issues. The administration bill and the Pallone

bill set a Federal renewable portfolio standard of 7.5 percent by the

year 2010. Is that realistic?

Mr. GLAUTHIER. Yes, we think it is.

Mr. BRYANT. A number of the States already have established

their own individual standards in this area. Is there a need to clarify State authority to impose renewable portfolio standards?

Mr. GLAUTHIER. We think there is a need for a national standard, and what we proposed is one that would have trading credits,

if you will, so that if a State, one area, can build renewable capacity more easily than another, more competitively, then it can be

done there, and the overall requirement can be met. And, so it

would not have to met State-by-State; that is, physically, by assets

in each State.

Mr. BARTON. Would the—could the gentleman from Tennessee

yield?

Mr. BRYANT. I would be happy to yield.

Mr. BARTON. You answered Congressman Bryant that the 7.5

percent mandated renewable was realistic, but my staff just told

me in order to meet that target by the year 2010, 50 percent of all

new generation that is built between now and then would have to

be renewable. Do you really think that we can build 50 percent of

the expected new generation capacity with renewable energy

sources in the next 11 years?

Mr. GLAUTHIER. Maybe we need to share some of our detailed

projections. The information I have is that 14 percent of the new

capacity would have to be renewable. So, it may be that some of

our expectation is also co-firing of existing coal fire capacity, for example, with biomass or some other changes that would help to

meet the target.

Mr. BARTON. Okay. Well, we expect an expanding market. Perhaps your projectors expect a contracting market, so that might be

why you only get at 14 percent. But we will work on that.

I yield back to the gentleman from Tennessee.

Mr. BRYANT. Thank you, Mr. Chairman. I did want to comment

on that when I ask a couple of more questions, just in a summary

conclusion.

But just a couple of other questions. Does the administration

support the bill introduced by Mr. Waxman to amend the Clean Air

47

Act to require older coal power plants in the Midwest and the

Southeast to meet new performance standards?

Mr. GLAUTHIER. We have not taken a position on that legislation

yet.

Mr. BRYANT. And do you know when you might?

Mr. GLAUTHIER. No, I don’t have any prediction or estimate.

Mr. BRYANT. Okay. Does the—have you taken a position on the

Clean Air Act provisions of the Pallone bill, which sets national

emission standards for nitrogen oxide particulates, carbon dioxide,

and mercury? In June, Secretary Richardson said the administration believed that these clean air amendments should not be included in electricity legislation. Is that still the position?

Mr. GLAUTHIER. Yes, the administration’s view is it should not

be included in the electricity restructuring legislation but should be

dealt with in consideration of the Clean Air Act.

Mr. BRYANT. Well, I appreciate that.

I just tell you from the standpoint of what I am hearing, and

again I am focusing on the Southeast, but, you know, I hear other

things too. In these—the renewable standards, as our chairman indicated, just don’t appear to be realistic, maybe even up here, but

certainly from what I am hearing back in my area. It is just not

reasonable at this point, that number. While we are all committed

to going that direction, we are concerned as this deregulation process unfolds that we not go overboard on this with unattainable

standards. We are going to be asking in particular the TVA to compete again in a deregulated world—and Mr. Whitfield is not here—

but a good part of the power is generated through coal by our

plants, and we are already dealing with clean air standards and

trying to go that direction, but I think we are going to need greater

transition periods and a little bit more flexibility in those areas.

Mr. GLAUTHIER. We are more optimistic. I understand we are at

about 2.3 percent renewables already, so the next 10 years our projection is that we can get to 7.5 percent, although it is a bit ambitious. That is why we have built in a cost cap in our proposal, as

well, so that if it is more expensive than the 1.5 cents per kilowatt

hour that we have built in, that would take effect, and we would

not see people spending higher amounts of money just to meet a

target.

Mr. BRYANT. Thank you for your efforts there, and would yield

back my time.

Mr. BARTON. Thank the gentleman.

We noticed that we are graced with the presence of the distinguished Congressman from Staten Island, New York, the Republican parties own Vito Fossella who says he has no questions but

he has this cryptic note that says, ‘‘Go Yankees.’’

I would point out that the Dallas Stars beat the Buffalo something-or-anothers in hockey, and the San Antonio Spurs beat the

something-or-nothing Knickerbockers from New York.

Mr. FOSSELLA. Go Yankees.

Mr. BARTON. Does the gentleman wish to ask any questions?

Mr. FOSSELLA. No.

Mr. BARTON. Okay. Mr. Shimkus says he has one question before

we let this gentleman go.

48

Mr. SHIMKUS. Yes, I want to be the kinder, gentler Shimkus and

apologize for getting so excited.

I want to go back to really the same issue, trying to understand

if they are the RTOs, whether it be ISOs or whether they are

transcos; ISOs being what Illinois has opted for, in fact, made mandatory to ensure against market power. Why is that not enough

to—two additional questions—what additional powers are needed

and how does cost-based rates help in this discussion?

Mr. GLAUTHIER. It may be that the provisions there for the—in

the Illinois statute for transmission will do the job, and what we

want is for FERC to have the authority just to be able to oversee

that and be sure that it doesn’t—that nothing more is needed.

There is market power that can exist at the generation level or the

link between generation and retial sales, so it is not all in transmission, but it may be the position of the utility in the marketplace

that is still restricting competitive choice, competitive options. And,

so that aspect of market power also needs to be addressed.

Mr. SHIMKUS. What about cost-based rates? Is that—how do you

see that being helpful in the market power debate?

Mr. GLAUTHIER. Well, of course, we all want to move away from

cost-based rates and really see——

Mr. SHIMKUS. But it is being promoted by folks as a solution to

the market power, at least in the short-term, however you define

that.

Mr. GLAUTHIER. It may have a role in a transition period in some

cases, but it is certainly something we want to move away from as

an overall pattern. So, I would look at that as a potential transition

action or step.

Mr. SHIMKUS. Thank you, Mr. Chairman. I yield back.

Mr. BARTON. Since we have let a Republican ask one more question, we are going to let a Democrat ask one more question. Mr.

Sawyer. But this will be the last question before we release this

witness.

Mr. SAWYER. Thank you, Mr. Chairman.

With a number of questions, we have been talking about how

this transmission system can grow and accommodate an uncertain

future. Can you comment on siting decisions and the administration’s point of view with regard to decisions, particularly in circumstances where a State might not be the direct beneficiary of

siting decisions that were nonetheless needed in order to evolve a

transmission system?

Mr. GLAUTHIER. We think that siting decisions ought to be addressed somehow in a regional context. We would hope the States

would work together to try to deal with those questions. Ultimately, the authority rests with each State on the individual siting

decisions, but we want to encourage the planning and cooperation

on a regional basis.

Mr. SAWYER. In that sense, do you think it should be different

from natural gas pipeline siting decisions?

Mr. GLAUTHIER. Yes.

Mr. SAWYER. Why?

Mr. GLAUTHIER. Really based on the historical patterns that over

the decades in which the utility industry has grown up, the States

49

have had the authority, and so it has never been done really on a

regional basis.

Mr. SAWYER. I am really not trying to—do you believe that is

compatible with regional markets and the growth and evolution of

the grid needed to serve them?

Mr. GLAUTHIER. What we would like to do is encourage regional

cooperation and for regions to work together on the questions of

new capacity additions, new transmission expansions, and those

siting decisions naturally will be a part of that. But we would like

to see it done in a way that still respects the States’ individual authorities, as well.

Mr. SAWYER. Thank you, Mr. Chairman.

Mr. BARTON. Thank you.

Now, we do want to release this witness.

Mr. MARKEY. Mr. Chairman?

Mr. BARTON. The gentleman from Massachusetts?

Mr. MARKEY. Is it possible that I could ask an extra question, as

well?

Mr. BARTON. Yes. I don’t want to let the pandora’s box too open.

We have got two more panels today and a series of votes in the

next 4 or 5 minutes, but the gentleman from Massachusetts has

certainly been a positive contributor to the dialog. Final exam time

is almost here, so if you like—if you could just ask 1 or 2, though.

Mr. MARKEY. Thank you, Mr. Chairman. I appreciate it.

Earlier, the gentleman from North Carolina suggested that I

don’t trust markets and I just want more Government regulating,

because I have higher rates in New England, and therefore want

to raise rates again down in North Carolina.

And I would like to respond to that.

Mr. BARTON. Well, let us don’t pick a food fight between Massachusetts and North Carolina right now, if possible.

Mr. MARKEY. I don’t think that this will be considered a food

fight. This will be—you know, my wife always tells me, ‘‘You have

two choices in life: reenactment or reconciliation.’’

Mr. BARTON. Okay.

Mr. MARKEY. And reenactment, very bad—reenactment is very

bad.

Reenactment leads to escalation. So, this is an attempt at reconciliation, which is good, very good.

Mr. BARTON. Oh, Okay.

Mr. MARKEY. We should always be trying to achieve it.

Mr. BARTON. Well, just notice that I am in the middle here.

Mr. BURR. The gentleman from Massachusetts won’t mind if I

stay seated for this, will he?

Mr. MARKEY. That is okay.

So, first, I do trust markets, but I don’t trust monopolies. And

one thing I have discovered over the years is that markets are very

inefficient when it comes to eliminating Government-granted monopolies. It just doesn’t happen. Government action is sometimes

needed to break up a monopoly and create a real market,

because——

Mr. BARTON. This is supposed to be a question.

Mr. MARKEY. I understand that, but sometimes I find that the

best questions are in the form of answers.

50

Mr. BARTON. We will put the gentleman on one of the panels if

he wishes.

Mr. MARKEY. Well, let me ask you this, Mr. Gauthier: Do you

find it curious that all the organizations representing consumers

and competitors oppose the Barton bill, while the incumbent monopolists like it? That is more pointed than I wanted to make it,

but——

Mr. GLAUTHIER. There are elements we think need to be added

to the bill to provide consumer protection.

Mr. MARKEY. But is that an interesting—do you think it is accidental that all the competitors and consumers are on one side, and

the monopolists are on the other side?

Mr. GLAUTHIER. It is an interesting observation. We think there

needs to be some perfection of the bill before we can support it.

Mr. MARKEY. Okay, good. Well, that will be our goal then, and

I thank you, Mr. Chairman, for allowing me to ask that question.

Mr. BARTON. All right. Seeing no other member who wishes to

ask one more question, we are going to release this witness.

We want to thank the administration and the Department for

your cooperation, and we do look forward to working with you. I

told the Secretary this, and I want to tell you this: We really appreciate the staff and their cooperative attitude in working with our

staffs.

So, you are released from this subcommittee.

Now, we have a series of votes. We have 3 to 4 votes. That is

going to take probably 30 minutes. So, we are going to recess for

lunch, because we have to, not because we want to, and we will reconvene at 1:30. And if nobody else is in the room, I want myself,

and—which I will be here—and the FERC commissioners, okay?

So, we are recessed until 1:30 Eastern Daylight Savings Time.

[Whereupon, at 12:34 a.m., the subcommittee recessed, to reconvene at 1:31 p.m., the same day.]

Mr. BARTON The subcommittee will come to order.

We actually have all the commissioners here I think. We want—

well, we have got one more here.

We want to welcome the distinguished Federal Energy Regulatory Commission to the Subcommittee of Energy and Power.

Today, we are going to start off with the Chairman, the distinguished Mr. James Hoecker, then we are going to go from the

Chairman’s left or the committee’s right—to Ms. Bailey, Ms.

Breathitt, Mr. Hebert, and Mr. Massey.

We are going to recognize each of—your written statements are

in the record in their entirety, and we are going to recognize each

of you for such time as you may consume, which I am a little bit

leery of doing since some of you are from the South and talk slowly. But we really do want to hear your comments, but I would encourage you to try to limit them to 5 to 10 minutes so that we can

have some time to ask questions.

So, Mr. Chairman, you are recognized, and then after you we will

go with Ms. Bailey and then right on down the road.

51

STATEMENTS OF HON. JAMES J. HOECKER, CHAIRMAN, ACCOMPANIED BY HON. VICKY A. BAILEY, COMMISSIONER;

HON. LINDA KEY BREATHITT, COMMISSIONER; HON. CURT L.

HE

 ́

BERT, JR., COMMISSIONER; AND HON. WILLIAM L.

MASSEY, COMMISSIONER, FEDERAL ENERGY REGULATORY

COMMISSION

Mr. HOECKER. Thank you, Mr. Chairman. Chairman Barton,

members of the subcommittee, it is again a privilege for me to appear before you; this time, in general support of H.R. 2944.

Mr. Chairman, I recognize the difficulty of sorting through the

complex facets of electric restructuring to find the appropriate combination of forward-looking initiatives that will serve the American

energy consumer well, doing neither too much nor too little, employing Federal authority effectively but not excessively. We share

with you a faith in the benefits of competition and in the ability

of public policy to ensure that there is an efficient and equitable

market structure within which competition can flourish. I, therefore, applaud your desire to enact legislation, and I pledge to help

you do so.

I agree with the Deputy Secretary that electricity markets require certainty now more than ever, that demands on the system

require a boost in generation reserve margins and transmission capacity, and that the Congress should now speak to how it would

have this industry evolve in the future.

In response to the Energy Policy Act of 1992 and our own Order

888, competition is growing in electric generation and marketing

sectors. New challenges to system reliability are more in evidence.

The time has therefore arrived to strengthen the platform upon

which competition and reliability must stand. And by that I mean

non-discriminatory access to the integrated network of high voltage

transmission.

For 2 years, I have testified before both Houses of Congress that

the newly competitive bulk power market needs legislative assistance to do four things: To place all electric transmission under the

Commission’s jurisdiction for purposes of ensuring non-discriminatory access to transmission services; second, to clarify and reinforce

the Commission’s authority to promote regional transmission organizations; third, to protect the integrity of transmission service

through mandatory reliability rules established by self-regulating

organizations subject to FERC oversight, and, fourth, to reform the

Public Utility Holding Company Act.

Now, although I recognize that the administration and this committee have a much broader restructuring agenda than does our

Commission, I am pleased to say that H.R. 2944 takes these four

key issues I have mentioned head on, and with some reservations,

I would say it does a good job.

In my written testimony, I make several suggestions for your further evaluation, but let me highlight a few before I close. First,

State regulators, appearing on the next panel as the National Association of Regulatory Utility Commissioners, would give utilities a

chance to avail themselves of the opportunity to join an RTO voluntarily but would then allow the FERC to require a utility to join

an RTO if that utility had not done so voluntarily.

52

Now, that is my position, as well. Our proposed rule already sets

forth a timetable for voluntary utility actions in this connection.

However, I view the statute mandate that you propose as a very

sound alternative.

Second, three of my colleagues and I asked the Congress to help

us ensure that all uses of the transmission system are treated comparably in the face of a troublesome recent decision in the 8th Circuit Court of Appeals. An addition to the bill is suggested in my

testimony to address this problem.

And, third, I note that other pending legislation would enhance

the Commission’s authority to address market power outside the

context of mergers, and I support such measures. As the Commission moves toward light-handed regulation, its ability to monitor

the market and to identify and address exercises of residual market power becomes ever more important.

In conclusion, my objective is to help create a market structure

that ultimately will allow markets, and not regulators, to determine the price of wholesale electric power. You will notice, I am

sure, that the members of the Commission do not entirely agree on

how to get to competitive electricity markets. We do agree that

competition is the goal, however. We do agree that RTOs have substantial benefits, that reliability must be protected, and that market power must be constrained in the context of mergers and elsewhere.

The question for the subcommittee, and in fact for our Commission as well, is how proactive and supportive we should be in pursuit of these objectives.

Mr. Chairman, I thank you for the opportunity to offer my views

here this afternoon, and I look forward to your questions.

[The prepared statement of Hon. James J. Hoecker follows:]

PREPARED STATEMENT OF HON. JAMES J. HOECKER, CHAIRMAN, FEDERAL ENERGY

REGULATORY COMMISSION

Mr. Chairman and Members of the Subcommittee: Good morning. My name is

James J. Hoecker, Chairman of the Federal Energy Regulatory Commission. Thank

you for the opportunity to appear before you today. My testimony will address the

need for Federal electricity legislation generally and the provisions of H.R. 2944 in

particular.

In prior testimony before this and other subcommittees of the House of Representatives, I have recommended that Congress enact legislation to address several matters that are critical to achieving fully competitive, reliable wholesale electric power

markets. These include placing all electric transmission in the continental United

States under the same rules for non-discriminatory open access and comparable

service; reinforcing the Commission’s authority to foster regional transmission organizations; establishing mandatory reliability rules to protect the integrity of transmission service, relying on a self-regulating organization with appropriate Federal

oversight of rule development and enforcement; providing the Commission with appropriate authority to remedy market power; and, reforming the Public Utility Holding Company Act (PUHCA).

As discussed below, the provisions of H.R. 2944 advance a number of these policy

goals. I commend you, Chairman Barton, for developing this bill. I will suggest some

additions and modifications for your consideration.

I. INTRODUCTION

Traditional regulation of electricity sales for resale in interstate commerce—i.e.,

the wholesale or ‘‘bulk’’ power market—has been based on the recognition that electric utilities were operating as natural monopolies. Consequently, during most of

this century, federal agencies addressed market power and ratepayer interests, not

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53

of-service rates. In the 1980s and early 1990s, however, several developments in the

electricity generation sector indicated that the interests of utility ratepayers could

be better protected by competition in wholesale power markets than by cost-based

regulation. The benefits of replacing traditional regulation with competition became

evident in other industries, such as trucking, railroads, long-distance telecommunications and natural gas. In the Energy Policy Act of 1992, Congress took important

steps toward competition in wholesale power markets, by providing the Commission

with greater authority to order transmission owners to transmit power for other

buyers and sellers in the wholesale market, and by modifying PUHCA to eliminate

a key barrier for new generators entering these markets. Electric generation units

built and operated independently of traditional utilities had already proved to be

competitive and reliable parts of the electric system.

Consistent with these changes in the industry, the Commission in 1996, through

a major rulemaking called Order No. 888, ordered open, non-discriminatory access

to the transmission facilities of public utilities for wholesale market participants.

This open access obligation prohibits public utilities from discriminating against

competitors’ transactions in favor of their own wholesale sales of power. Order No.

888 has enhanced competition in wholesale power markets significantly, although

it has not opened the grid to competition entirely.

Today, the promotion of competition and reliable service among power suppliers

in wholesale markets remains the Commission’s primary goal in this area. The

Commission’s fundamental regulatory objectives are: (1) to substitute competition

for price regulation in wholesale power markets to the extent possible; and (2) to

ensure that transmission service is made available under non-discriminatory terms

and conditions so as to enable competition among suppliers of electricity in these

markets. Transmission facilities form an integrated, interstate grid that is essential

for delivering power, in the same way the interstate highway system allows trucks

to deliver other commodities across state boundaries pursuant to private contracts.

The transmission grid, however, is owned by individual utilities and, absent regulation, these utilities can effectively prevent the use of these facilities by their competitors. Thus, regulation of transmission is necessary to ensure open access, nondiscrimination and reasonable rates. Effective regulation of the relatively small

transmission portion of the utility business (it accounts for about only three to four

percent of the average price of energy delivered to the home) enables competition

in the much larger generation sector to produce sizeable ratepayer benefits.

The Commission is seeking to use its current authority to promote competitive

wholesale markets. The Commission has also made a determined effort to assist

states choosing to pursue retail market competition, which ultimately will succeed

only if there is a competitive wholesale market. However, most of the federal regulatory framework dates from before competition became significant in this industry

and, in some key respects, now impedes these efforts. I therefore support Federal

legislative reforms that will better enable the Commission to promote competition

and reliability in wholesale markets as well as facilitate retail competition initiatives, as appropriate.

II. TRANSMISSION ISSUES

A. Open Access

Fair and open access to reliable transmission service is an essential predicate to

competition in bulk power markets. Congress expressly recognized this fact in the

Energy Policy Act of 1992, by giving the Commission limited new authority under

Federal Power Act (FPA) section 211 to require utilities to provide transmission

service to others on a case-by-case basis. The Commission later, in Order No. 888,

relied primarily on its traditional authority to prevent undue discrimination when

it ordered public utilities to provide generic open access to their transmission facilities. The Commission concluded that Order No. 888 was necessary to support competition in wholesale power markets.

I view Section 102(a)(1) of H.R. 2944 as a confirmation that the open access provisions of Order No. 888 are completely consistent with Congressional goals. H.R.

2944 would clarify the Commission’s authority to require open access transmission

services under FPA sections 205 and 206, and would apply this clarification to any

‘‘rule or order promulgated by the Commission before, on, or after’’ the bill’s enactment. I support this provision as eliminating any remaining uncertainty about the

Commission’s authority to adopt the Order No. 888 open access transmission requirements.

H.R. 2944 would extend the Commission’s open access authority to all ‘‘transmitting utilities,’’ as defined by the FPA. Under current law, the open access obligations

of Order No. 888 apply only to transmission facilities owned or operated by ‘‘public

54

utilities,’’ as defined by the FPA. In other words, approximately one-third of the

transmission grid in the contiguous 48 States is not subject to the Commission’s

open access requirements, even though these facilities are generally integrated with,

and are integral to the operation of, the rest of the network. This portion of the grid

is owned primarily by federally-owned utilities, electric cooperatives that are financed by the Rural Utilities Service, and some municipal utilities. While some of

these entities have chosen to offer open access transmission service voluntarily,

many others do not. These gaps in open access to the transmission grid inevitably

impede the development of fully competitive wholesale power markets. Only federal

legislation making all utilities subject to the same open access requirements can

remedy this problem. I believe that all transmitting utilities should be subject to the same transmission rules. Open access to a seamless transmission grid by all electricity suppliers is essential if the Congress and the Commission intend to guarantee that buyers and

sellers of electricity have as many choices as possible. I note, however, that H.R.

2944 narrows the definition of transmitting utilities to exclude certain utilities that

transact within the Electric Reliability Council of Texas (ERCOT). While the Commission does not have authority to regulate transmission within ERCOT as it does

elsewhere, it has had authority since 1978 to order transmitting utilities, including

those that transmit within ERCOT, to provide transmission services in some circumstances under FPA section 211. Although used sparingly, this authority has

been used to promote competitive access. Central Power & Light Co., et al., 17

FERC ¶ 61,078 (1981); City of College Station, Texas, 86 FERC ¶ 61,165 (1999); TexLa Electric Cooperative of Texas, Inc., 69 FERC ¶ 61,269 (1994). The proposed

change in definition would exempt those utilities that transact only within ERCOT

from the current, limited section 211 authority as well as the broader open access

authority addressed in H.R. 2944 itself. The Congress should leave the Commission

with section 211 authority in this area.

B. Regional Transmission Organizations

In Order No. 888, the Commission encouraged, but did not require, the formation

of independent system operators (ISOs). The Commission found that ISOs would

promote broader, regional power markets and provide greater assurance of non-discrimination. Since 1996, six ISOs have been established (in California, the mid-Atlantic states, New England, New York, the Midwest, and Texas). Four of these are

currently operational.

The Commission is now seeking to address the remaining impediments to full

competition, which fall largely into two categories. First are the engineering and

economic inefficiencies inherent in the current operation and expansion of the transmission grid. For example, each separate transmission operator makes independent

decisions about the use, limitations, and expansion of its part of the grid, but the

interconnection of the separate transmission systems causes each such action to immediately affect other parts of the grid. With the increase in competition, the grid

is being stressed by many new entrants and by new transactions using two or more

systems in a region, presenting challenges to the historical approach to maintaining

the reliability of separate, but interconnected, systems. Also, competitive markets

must evolve into regional markets if they are to thrive, and the efficiency gains of

competitive markets will be imperiled unless regional solutions are used for pricing

transmission services and managing regional constraints and expansion needs.

The second category of impediments are the continuing opportunities for transmission owners to unduly discriminate in the operation of their transmission systems so as to favor their own or their affiliates’ power marketing activities. In the

wake of Order No. 888, many market participants continue to allege, and the Commission has in some cases confirmed, that transmission service problems related to

discriminatory conduct remain.

To address these impediments, the Commission has proposed new rules to promote the voluntary formation of regional transmission organizations (RTOs) such as

ISOs and independent companies that own and operate only transmission facilities

(transcos). Such institutions are encouraged to form in the near future, under a

schedule specified in the proposal. Notice of Proposed Rulemaking on Regional

Transmission Organizations, 64 Fed. Reg. 31,389, FERC Stats. & Regs., ¶ 32,541

(1999).

An RTO is an organization formed to administer the operation of the transmission

system on behalf of all the participants in the market. It may be a for-profit or nonprofit institution but it must be independent of all other financial interests of power

market participants. It should cover an appropriately configured region and have

adequate operational control over the transmission grid. If properly designed, an

RTO can ensure the non-discriminatory operation of the transmission grid, elimiVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00058 Fmt 6633 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
55

nate pancaked transmission charges for using transmission systems owned by different utilities, reduce and better manage congestion on the transmission lines, and

facilitate transmission planning on a multi-state basis.

Section 103 of H.R. 2944 would require each transmitting utility to establish or join an RTO by January 1, 2003, and to file an application for its proposed action

with the Commission by January 1, 2002. I fully support the bill’s goal of having

utilities participate in an RTO.

However, I offer the following suggestions for improving H.R. 2944’s provisions on RTOs. First, I would advance the deadline for participation in RTOs by at least one

year, so that consumers can begin receiving the substantial benefits of RTOs much

sooner. Because transmission systems are already regionally integrated, economic

efficiency gains from the coordinated operation of transmission over a broad geographic area are readily attainable. It is therefore increasingly difficult to justify delaying such benefits to the public. The Commission’s RTO proposal calls for RTOs

to be operational by December 15, 2001. Second, let me address proposed FPA section 202(h)(2), which addresses the

standards RTOs must meet. Although the topics of the four standards proposed for

FPA section 202(h)(2)—independence, geographic scope and configuration, operational authority and expansion—are generally consistent with key considerations

identified in the Commission’s proposed rule, I believe the bill should not attempt

to codify detailed prescriptions for each of the four policy standards. The Commission has yet to evaluate all of the comments submitted on its proposed rules. As

importantly, competitive markets will continue to evolve in ways that are difficult

to predict. Detailed standards that appear appropriate today may be inappropriate

in future years. For example, the bill ‘‘deems’’ the requirement for independence to

be met when market participants own passive, nonvoting interests or 10 percent or

less of the voting interests. It is not appropriate to lock the details of these standards into statutory text, given the possible need to adapt the standards to future

changes in the industry before the FPA is again modified. I recommend a somewhat

different approach; namely, that the Congress should preserve the Commission’s

discretion to adapt policy to changing circumstances, especially with respect to administering the key policies of independence and regional scope and configuration.

The Commission as well as the institutions we regulate need the ability to adapt

to changing market conditions and to changing regional needs.

Third, under Section 103 of H.R. 2944, the Commission must approve an application to join or establish an RTO if the RTO meets the prescribed standards. It specifically prohibits the Commission from requiring a utility to participate in a different RTO. Although I believe the Commission must and will apply standards fairly and promptly, the language in the bill could be construed as allowing the Commission only to approve or disapprove an application, but not to modify it. To ensure

that RTOs yield their expected benefits as soon as possible, and consistent with the

Commission’s authority under other FPA sections, such as sections 203, 205 and

206, the Commission should have the procedural flexibility to work with the applicants to modify a flawed proposal, instead of simply disapproving a deficient or noncomplying application and thereby imposing the burden of reapplication. Further,

the concept of RTOs, while sound, is a work in progress and the Commission should

be able to approve such applications subject to conditions when necessary to make

them consistent with the public interest.

Finally, Section 103 of H.R. 2944 states that ‘‘[t]he Commission shall encourage

incentive transmission pricing policies’’ for RTOs. Section 103 states that such pricing policies include incentives for transmitting utilities to form RTOs, as well as incentives for RTOs to eliminate rate pancaking, to minimize cost shifting and to encourage adequate investment in and expansion of the transmission grid. I support

these goals. The Commission has already solicited comment on whether and how to

employ such incentives in the context of the ongoing RTO rulemaking.

C. Reliability

The changes in the industry in recent years have created a need for new tools

for ensuring the reliability of the transmission grid. In the past, reliability was addressed through the voluntary cooperation of transmission owners. Today, industry

participants increasingly recognize that cooperative efforts among transmission-owning utilities may not be sufficient in a competitive environment, and that a mandatory system for ensuring the reliability of the grid is needed. This recognition has

caused the industry to begin seeking the Commission’s involvement on reliability

issues, even though the Commission has not regulated system reliability historically

and it has no express authority to do so. For example, while the Commission has

authority to address discrimination in jurisdictional transmission services, it has no

explicit statutory role in setting or reviewing particular reliability standards or in

56

ensuring the security of the electrical system or the adequacy of supply. That was

left largely to the industry and the States.

As I have testified previously, Congress should make compliance with appropriate

reliability standards mandatory. There appears to be an industry consensus that it

can continue to work collaboratively to develop reliability standards, using a process

in which all market sectors are fairly represented. I believe that, if the standardsetting process is representative of all stakeholders, a high degree of self-regulation

is appropriate. However, sufficient Federal oversight will be needed to ensure that

the standards set by that process are adequate, not unduly discriminatory or anticompetitive, and enforceable, and to ensure that enforcement of the standards is effective and fair.

Section 201 of H.R. 2944 meets these reliability concerns. Section 201 also recognizes the role of the States in ensuring the reliability of local distribution facilities

by preserving existing State authority over local distribution facilities unless the exercise of such authority would unreasonably impair the reliability of the bulk power

system. I believe that any Federal legislation should also preserve for the States any

reliability practices that they have historically engaged in with respect to bundled

transmission in their jurisdictions, provided that such practices are consistent with

the applicable regional or national standards and such reliability practices do not

unduly impair competition in bulk power markets.

D. Undue Discrimination and Comparability

In Order No. 888, the Commission required public utilities to offer transmission

service to third parties under the same rates, terms and conditions as the utilities

applied to themselves for their own wholesale and retail sales of generation. Further, load-serving utilities thereafter were to take transmission service for their

wholesale sales of generation under the same tariff as everyone else. In other words,

the Commission required ‘‘comparability’’ of transmission services for a public utility

and its transmission customers. Comparability is critical to ensuring that competition in power markets is not distorted by preferential or discriminatory transmission

services.

A recent court decision may have placed a cloud on the Commission’s ability to

ensure comparability and support competition. The appellate court decision in

Northern States Power Co., et al., v. FERC, No. 98-3000 (8th Cir., May 14, 1999,

rehearing denied, September 1, 1999), if interpreted and applied broadly, may prevent the Commission from enforcing rules that provide for comparable terms and

conditions of service for all users of transmission, including pro rata curtailments

of transmission service used by a utility for in-state ‘‘native load.’’ Arguably, this

court decision may allow one state to require its utilities to establish a preference

for in-state uses of the transmission grid to the detriment of consumers in other

states whose utilities depend on comparable access to electricity supplies over the

same transmission facilities. If states can effectively establish preferential transmission services for the utilities they regulate, the wholesale power markets will become balkanized and competition in those markets could wither.

I suggest revising Section 101 of H.R. 2944 to address this concern. In particular,

I suggest adding a provision at the end of FPA section 201(a), as modified by section

101(b)(1) of the bill, stating that:

In regulating the transmission of electric energy under any provision of this

Part [Part II of the FPA], the Commission shall have exclusive authority to establish rates, terms and conditions of transmission service that are just, reasonable and not unduly discriminatory or preferential, including rates, terms and

conditions that prevent or eliminate undue discrimination or preference associated with a public utility’s or transmitting utility’s own uses of its transmission

system to serve its wholesale and retail electric energy customers.

Such a provision would clarify the Commission’s authority to ensure that transmission services within its exclusive jurisdiction are provided on a basis that is comparable to, i.e., no less favorable than, other transmission services provided by a

transmitting utility, and that competition among power suppliers is not distorted.

E. Expansion of the Transmission Grid

Section 105 of H.R. 2944 would allow the Commission, upon application, to order

a transmitting utility to enlarge, extend or improve its transmission facilities. Before doing so, the Commission would be required to refer the matter to a joint board

for recommendations on the need for, design of, and location of the proposed expansion. The provision retains the states’ traditional siting authority.

I do not see a current compelling need for the Commission to be given the authority specified in section 105 of H.R. 2944. Instead, my expectation is that RTOs will

help address many issues concerning expansion of the transmission grid including

57

the need for new facilities and who pays for them. However, even if an RTO were

to recommend system expansion, nothing could be done without the cooperation or

acquiescence of state siting authorities. Nothing in H.R. 2944 proposes to alter that.

III. MERGER REVIEW AND MARKET POWER

Under FPA section 203, the Commission must review proposed mergers, acquisitions, and dispositions of jurisdictional facilities by public utilities, and must approve such transactions if they are consistent with the public interest. In evaluating

the public interest, the Commission considers a transaction’s effects on competition,

rates, and regulation.

The Commission’s jurisdiction over mergers is currently limited in certain ways.

First, the Commission has no direct jurisdiction over transfers of generation facilities. It can review transactions involving a public utility only when they involve

other facilities that are jurisdictional (such as transmission facilities or contracts for

wholesale sales). Second, the Commission lacks direct jurisdiction over mergers of

public utility holding companies that have electric utility subsidiaries. While the

Commission has construed such mergers to involve jurisdictional indirect mergers

of public utility subsidiaries of the holding companies, or changes in control over the

jurisdictional facilities of the public utility subsidiaries, the FPA is not explicit on

this point. Section 401 of H.R. 2944 would address both circumstances appropriately, clarifying that the Commission has jurisdiction over transactions involving

only generation facilities and mergers of holding companies. I support these amendments.

Section 401 of H.R. 2944 also would require the Commission to act on mergers

within five months or, for good cause shown, an additional three months. Since the

Commission issued its Merger Policy Statement in December 1996, the Commission

has taken final action on nearly all mergers within five months after receipt of a

complete application. Those actions included review of complex electric and gas-electric mergers, some of them quite large and unprecedented. Therefore, I would expect

the proposed deadlines to be adequate, with one caveat. Occasionally a merger

raises numerous and genuine issues of material fact that necessitate extensive factfinding in a hearing context. For example, out of the 30 merger applications filed

since issuance of the Commission’s Merger Policy Statement, the Commission has

acted on 23 of them (the other seven having been filed only recently) and needed

to establish an evidentiary hearing with respect to only three of them because there

were material facts in dispute. In such cases, the Commission needs more time to

resolve such factual disputes than H.R. 2944 would allow. In those infrequent instances when material facts are disputed, an artificially short deadline would leave

the Commission with little recourse other than to reject the application.

I note that other pending legislation would enhance the Commission’s authority

to address market power outside the context of mergers. For example, the Administration’s proposed bill, H.R. 1828, would allow the Commission to address market

power in retail markets, if asked to do so by a state lacking adequate authority to

address the problem. It would also give the Commission explicit authority to address

market power in wholesale markets by requiring a public utility to file and implement a market power mitigation plan. H.R. 2050, sponsored by Congressmen

Largent and Markey, also contains provisions that would allow mitigation of market

power, to the benefit of competition and consumers. Such provisions are particularly

desirable in the circumstances where a State lacks adequate authority to address

market power issues and seeks FERC’s assistance. As the Commission moves toward light-handed regulation, its ability to monitor the market and to identify and

address exercises of residual market power becomes more important.

IV. PUHCA

Adopted over 60 years ago to restrain the growth and power of large utility holding companies, PUHCA requires some utilities to comply with restrictions that are

not entirely compatible with today’s bulk power competition. In some instances,

PUHCA encourages the very concentrations of generation ownership and control

that undermine competitive power markets. It discourages asset combinations that

could be pro-competitive. Thus, PUHCA should be reformed, with one major caveat.

Reform legislation should ensure that both the Commission and States have adequate access to the books and records of utilities and their affiliates, to protect

against affiliate abuse and ensure that captive consumers do not cross-subsidize entrepreneurial ventures. Sections 511-524 of H.R. 2944 would satisfy these concerns.

58

V. CONCLUSION

Competition is growing in the electric generation and marketing sectors, in re- sponse to the Energy Policy Act of 1992 and the Commission’s efforts to remove barriers to competition. My objective in seeking legislation is to create a market structure that ultimately will allow markets—not regulators—to determine the price of

wholesale electric power. Effective regulation of transmission facilities that are essential for delivering power is critical to ensuring that consumers continue to receive increasing benefits from competition in power markets. Likewise, effective restraints on the exercise of market power in these newly competitive electricity markets is essential to advancing competition. Thank you again for the opportunity to offer my views here this morning. I would be pleased to answer any questions you may have.

Mr. BARTON. Thank you, Chairman. We would now like to hear from Commissioner Bailey.

STATEMENT OF HON. VICKY A. BAILEY

Ms. BAILEY. Good morning, Mr. Chairman and members of the subcommittee. I thank you for inviting me, along with all of my colleagues, to testify this morning on H.R. 2944, the Electricity Competition and Reliability Act of 1999. Having joined the Commission 61

⁄2 years ago, the electric utility industry the Commission regulates today bears little resemblance

to the industry I first encountered as a Federal regulator in 1993. Competition in the marketplace is now clearly the driving force. Electric utilities can no longer afford to be stodgy, conservative enterprises of earlier years. Management is increasingly entrepreneurial in spirit and action. Shareholders as well as ratepayers increasingly are demanding decisive action to promote transaction-related revenues and to cut costs.

I have been reluctant to call for sweeping Federal energy restruc- turing legislation, and I have been reluctant to champion prescriptive, industry-wide action by the Commission. My concern is that

any such overreaching action will stifle the type of industry innovation and flexibility that has marked the last few years. I am extremely hesitant to support any major piece of legislation or rulemaking that would lock into place a 1999-vintage vision for the industry when that vision might very well be overtaken by technological as well as other advances in future years. Competition requires that industry participants enjoy the oppor- tunity to take chances and possibly to make mistakes. But while

I encourage risk-taking, and generally favor fewer layers of regulatory review rather than more, I remain mindful of the vital role

that utility services provide in the everyday lives of the people of

this Nation. America’s consumers and industries must remain confident that electric service will remain as reliable as ever. And all

of the pro-competitive rhetoric of enlightened commentators and

Government officials will amount to nothing if the benefits of competition, through lower prices or increased product offerings, ultimately do not work their way down to all consumers. In my judgment, H.R. 2944, taken as a whole, does a very good job of threading the needle, allowing utilities to develop their own

competitive business strategies, while ensuring that competitive

miscalculations do not impair the reliable operation of the grid or

limit the availability of low-cost energy services. I commend the

subcommittee for its thoughtful and comprehensive review of the

issues confronting the many participants in the marketplace, and

59

its crafting of compromise legislation that represents a careful balance of various concerns and positions.

Let me comment briefly on four of the specific elements of the

bill.

One, mergers. The recent trend of consolidation in the increasingly competitive electric utility industry will not abate and probably will accelerate. I also expect new and different kinds of merger

proposals, involving different kinds of business combinations, to be

presented to the Commission.

I am concerned about the pace of Commission review of the

merger applications filed with us. I believe it is inconsistent for the

Commission to promote competition on the one hand, while on the

other hand failing to respond in a timely and more predictable

manner to the efforts of regulated utilities to restructure themselves in a manner that, in their judgment, is best able to respond

and adapt to competitive realities. I hope that the possibility of

delay or uncertainty in the review of merger applications does not

act to inhibit corporate initiatives and innovation.

I sense this same concern in the language of section 401 of H.R.

2944 that limits the time for Commission review to, at most, 240

days from the date of filing. At present, the Commission already

is acting on the vast majority of merger applications within that

timeframe. Nevertheless, a legislatively mandated 240-day time

cap for Commission decision could affect the Commission’s processing of harder cases involving the proposed combination of larger

utilities.

It effectively eliminates all but the most abbreviated of evidentiary hearings in merger cases. Many commentators undoubtedly will criticize the loss of procedural options currently available

to the Commission; I, however, will not. Contested issues of policy

and fact can, in almost all merger circumstances, be decided on the

basis of the written pleadings filed for the Commission’s consideration. And while I am not attached to any single duration of any

limitation, I do not find it unreasonable to expect the Commission

to act in a timeframe consistent with Congress’ view as to the need

for timely and predictable action.

As to the rest of section 401, which expands the Commission’s

merger authority in certain respects, I add my skepticism as to the

need for Commission authority to consider the effect of any proposed merger on retail markets. In recent years, State commissions

have refrained from asking the Commission to intercede in this

area, and have demonstrated that they are quite competent to address the retail implications of proposed utility mergers. I see no

reason to add an additional layer of regulatory review.

On the issue of regional transmission organizations, I appreciate

section 103 of H.R. 2944, in its reference to encouraging utility innovation and individual design in the formation of RTOs. But I am

deeply concerned by a mandate that compels filing by all utilities

by January 1, 2002 and RTO participation by January 1, 2003.

I believe that the Commission already possesses sufficient authority under existing law to encourage transmission-owning utilities to cooperate voluntarily with their neighbors to advance regional solutions to lingering competitive and operational problems

in wholesale power markets. I would much prefer to allow utilities

60

to continue the rapid pace of utility restructuring and to work out

among themselves and with their customers, with encouragement

from the Commission or Congress rather than a legal directive,

how best to design regional markets that serve all interests in an

efficient and competitive manner.

The vast majority of transmission-owning utilities already are

members of regional transmission institutions—i.e. in California,

New England, New York, the Mid-Atlantic, the Midwest and most

of Texas—or are actively engaged in discussions to form some such

type of institution. I support congressional and Commission action

that works to encourage this type of regional cooperation, especially

with transmission-owning utilities that currently are not public

utilities subject to the Commission’s regulation and oversight.

I suspect that transmission-owning utilities increasingly will find

it difficult, from many different perspectives to refrain from such

cooperation. But I do not support congressional or Commission action that, whether phrased subtlety or more overtly, makes the decision for utilities to turn over operational control of the transmission facilities they own to someone else.

For all of these reasons, I believe that a mandate to join a RTO

by a date certain is unnecessary and ill-advised. In my judgment,

the other provisions of section 103 give transmission-owning utilities all of the incentive they need to participate in an RTO of their

choosing.

On the issue of reliability, competition cannot be at the expense

of reliability. I have been very impressed with the efforts of the

North American Electric Reliability Council and the regional councils that NERC administers to ensure the continued integrity and

reliability of the electrical grid. The electric utility industry and the

customers it serves are in a much better position to assess and ensure the continued reliability of electric service.

I have refrained from calling out for additional regulatory authority over reliability. Nevertheless, as wholesale power markets

become increasingly competitive, and strains are imposed on the

continuing reliability of the electrical grid planned and designed for

a less competitive, more vertically integrated environment, close cooperation with reliability organizations and State and local authorities become imperative.

For this reason, I have no objection to the language found in section 201 that would clarify the Commission’s oversight role by directing it to approve the formation and governance of a self-regulating electric reliability organization. Nor do I object to the Commission’s review of mandatory reliability standards and its appellate-type review of implementation and enforcement disputes.

My only hesitation with respect to the reliability provisions of

H.R. 2944 would be the Commission’s ability to entertain a much

larger share of reliability-based issues and disputes, which might

have to be decided in close to real-time. My hope is that the need

for Commission intervention will be lessened by increasing respect

for and adherence to mandatory reliability rules and additional incentives to invest in and expand badly needed transmission capacity.

Finally, I am pleased to see legislative language in section 101

of H.R. 2944 that clarifies the boundaries between Federal and

61

State jurisdiction over different aspects of electricity supply and delivery. The clarifying language, for the most part, adopts the jurisdictional dividing lines adopted by the Commission in its Order

Number 888 rulemaking. Those lines, for the most part, have been

accepted by industry participants and State regulatory commissions. This is important in order to eliminate the jurisdictional turf

battles and protracted court disputes over ambiguous congressional

delegations, in order to ensure that the benefits of increased competition flow through to consumers as quickly and comprehensively

as possible.

With that, thank you for the opportunity to present my views on

this important piece of Federal legislation, and I would be happy

to answer any questions you may have.

[The prepared statement of Vicky A. Bailey follows:]

PREPARED STATEMENT OF VICKY A. BAILEY, COMMISSIONER, FEDERAL ENERGY

REGULATORY COMMISSION

Introduction

Good morning Mr. Chairman and Members of the Subcommittee. I thank you for

inviting me along with all of my fellow Commissioners to testify this morning on

H.R. 2944, the Electricity Competition and Reliability Act of 1999.

I joined the Commission six and one-half years ago. The electric utility industry

the Commission regulates in 1999 bears little resemblance to the industry I first

encountered as a federal regulator in 1993.

Competition is now clearly the driving force leading the utility industry to restructure. Electric utilities are no longer the stodgy, conservative enterprises of earlier

years, favored primarily by widows and orphans. Open access transmission and negotiated, market-based rates are in. Preferential and discriminatory access, and

years’-long hearings to assess cost structures and cost allocations, are on their way

out. Utility executives are increasingly entrepreneurial in spirit and action; shareholders and ratepayers increasingly are demanding decisive action to promote transaction-related revenues and to cut costs.

Utilities have responded to the advent of competition in a number of different

ways. One business strategy is to concentrate on core, niche services. A number of

utilities have reached the conclusion that they can best respond to competitive

forces by concentrating on their ‘‘wires’’ business; i.e., focusing on electrical transmission and distribution. These utilities have decided to sell off their generating assets—sometimes at a price far in excess of book value, with the proceeds often going

to reduce or eliminate their exposure to uneconomic or ‘‘stranded’’ generation investment. Other utilities have decided to focus their efforts on power generation and

marketing.

Another business strategy is to remain vertically integrated and to offer an array

of different utility products and services. Some utilities have reached the conclusion

that they can best flourish in a competitive environment by getting larger and developing economies of scale. For this reason, the Commission has received numerous

applications in recent years from utilities proposing classic ‘‘horizontal’’ combinations at the same level of the market (generation, transmission). Other merger applications reflect a recent trend toward ‘‘convergence’’ or ‘‘vertical’’ combinations between electric and natural gas utilities. I expect these trends to continue—indeed,

accelerate—and I would not be surprised to see future convergences between electric

utilities and other types of industries, such as telecommunications and Internet providers.

Finally, electric utilities are increasingly finding that it is in their best interest

to cooperate voluntarily with their neighbors to develop regional institutions that

promote reliable operation of, and non-discriminatory access to, the grid.

Who can best claim credit for these dramatic developments? To some extent, we

regulators and legislators can. Congress can be quite proud of its legislative accomplishments, such as the Public Utility Regulatory Policies Act of 1978, that (despite

unfortunate side-effects) introduced competition into the wholesale power supply

market by encouraging the entry of non-traditional, independent power producers.

Moreover, the Energy Policy Act of 1992 greatly accelerated the development of competitive markets by offering power suppliers additional ways to reach willing buyers.

This Commission can be proud of its efforts in recent years—such as the promotion

62

of non-discriminatory, open access transmission service—to ensure that the benefits

of increased competition are not confined to only a few of the largest industry participants.

But, in my judgment, industry participants themselves deserve most of the credit for the restructuring of the industry and the competitive evolution of the market.

Despite a reputation for conservatism, electric utilities have not been hesitant to

adopt bold new strategies to take advantage of the opportunities that competition

has to offer. Frankly, I have seen little industry resistance to the pro-competitive,

open access policies initiated by federal and state legislators and regulators. To the

contrary, I have been impressed by the degree of sophistication and innovation

adopted by different utilities in different regions of the country to respond in different ways to competitive pressures and opportunities. For this reason, I have been reluctant to call for sweeping federal energy restruc- turing legislation. And I have been reluctant to champion prescriptive, industrywide action by the Commission. My concern is that any such overreaching action

will stifle the type of industry innovation and flexibility that has marked the last

few years. New ideas and concepts for utility governance and operation are being

brought to my attention every week. Some of them will flourish, and others will undoubtedly prove unacceptable. I have no grand design for the utility industry of the

next millennium. I am extremely hesitant to support any major piece of legislation

or rulemaking that would lock into place a 1999-vintage vision for the industry,

when that vision might very well be overtaken by technological or other advances

in future years.

Competition requires that industry participants enjoy the opportunity to take

chances and, possibly, to make mistakes. But while I encourage risk-taking, and

generally favor fewer layers of regulatory review rather than more, I remain mindful of the vital role that utility services provide in the everyday lives of the people

of this nation. America’s consumers and industries must remain confident that electric service will remain as reliable as ever. And all of the pro-competitive rhetoric

of enlightened commentators and governmental officials will amount to nothing if

the benefits of competition—through lower prices or increased product offerings—

ultimately do not work their way down to all consumers.

In my judgment, H.R. 2944, taken as whole, does a very good job of threading the

needle—allowing utilities to develop their own competitive business strategies, while

ensuring that competitive miscalculations do not impair the reliable operation of the

grid or limit the availability of low-cost energy service. I commend the Subcommittee for its thoughtful and comprehensive review of the issues confronting the

many participants in the marketplace, and its crafting of compromise legislation

that represents a careful balance of various concerns and positions.

I continue to comment briefly on a few of the specific elements of the bill.

Mergers

I have already explained my belief that the pace of merger activity in the electric

utility industry will not abate and, probably, will accelerate. I also expect new and

different kinds of merger proposals, involving different kinds of business combinations, to be presented to the Commission.

I have expressed my concern on numerous occasions as to the pace of Commission

review of the merger applications filed with us. I believe it would be inconsistent

for the Commission to promote competition on the one hand, while on the other

hand failing to respond in a timely and more predictable manner to the efforts of

regulated utilities to restructure themselves in a manner that, in their judgment,

is best able to respond and adapt to competitive realities. I hope that the possibility

of delay or uncertainty in the review of merger applications does not act to inhibit

corporate initiative and innovation.

I sense this same concern in the language of section 401 of H.R. 2944 that limits

the time for Commission review to, at most, 240 days from the date of filing. At

present, the Commission already is acting on the vast majority of merger applications within that time frame. Legislative language imposing a time cap will not affect in any significant manner the Commission’s processing of the ‘‘easy’’ merger

cases it receives for review.

It will, however, affect the Commission’s review of harder cases. I suspect that

the industry is increasingly exhausting the limited scope of potential mergers that

present little concern for their effect on competition, rates and regulation, and will

increasingly present to us mergers of larger utilities that will attract a significantly

higher degree of opposition and analytical scrutiny. The Commission already has set

two such merger applications—involving American Electric Power and Central and

South West in one case, and Western Resources and Kansas City Power & Light

in another—for hearing; those cases are awaiting decision by the administrative law

63

judges and, ultimately, by the full Commission. The Commission will face similar

pressure to set other large mergers—such as those recently proposed by Northern

States and New Century in one recent announcement, and PECO and Commonwealth Edison in another—for lengthy, trial-type hearings.

A legislatively-mandated 240-day time cap for Commission decision effectively

eliminates all but the most abbreviated of evidentiary hearings in merger cases.

Many commentators undoubtedly will criticize the loss of procedural options currently available to the Commission; I, however, will not. Contested issues of policy

and fact can, in almost all merger circumstances, be decided on the basis of the

written pleadings filed for the Commission’s consideration. While I am not attached

to any single duration (180 days? 240? 365?) of any limitation, I do not find it unreasonable to expect the Commission to act in a time frame consistent with Congress’

view as to the need for timely and predictable action.

As to the rest of section 401, which expands the Commission’s merger authority

in certain respects, I add my skepticism as to the need for Commission authority

to consider the effect of any proposed merger on retail markets. This extension of

authority appears to be counterproductive to the goal of more expeditious action on

merger applications. The Commission has made it clear that it will consider the effect of a merger on retail competition if the applicable state commission articulates

that it is without jurisdiction or lacks the ability to consider such retail competitive

effects. In recent years, however, state commissions have refrained from asking the

Commission to intercede in this area, and have demonstrated that they are quite

competent to address the retail implications of proposed utility mergers. I see no

reason to add an additional layer of regulatory review.

Regional Transmission Organizations

I find much to appreciate in section 103 of H.R. 2944, dealing with regional transmission organizations. Specifically, I appreciate its reference to encouraging utility

innovation and individual design in the formation of RTOs. But I am deeply concerned by a mandate that compels filings by all utilities by January 1, 2002 and

RTO participation by January 1, 2003.

I believe that the Commission already possesses sufficient authority under existing law to encourage transmission-owning utilities to cooperate voluntarily with

their neighbors to advance regional solutions to lingering competitive and operational problems in wholesale power markets. I would much prefer to allow utilities

to continue the rapid pace of utility restructuring, and to work out among themselves and with their customers—with encouragement from the Commission or Congress rather than a legal directive—how best to design regional markets that serve

all interests in an efficient and competitive manner.

The vast majority of transmission-owning utilities already are members of regional transmission institutions (in California, New England, New York, the MidAtlantic, the Midwest and most of Texas) or are actively engaged in discussions to

form some such type of institution. These developing regional institutions are taking

several different forms (most notably, for-profit transcos that own and operate transmission facilities, or not-for-profit independent system operators that do not own the

facilities under their operational control). I support Congressional and Commission

action that works to encourage this type of regional cooperation—especially with

transmission-owning utilities that currently are not ‘‘public utilities’’ subject to the

Commission’s regulation and oversight. I suspect that transmission-owning utilities

increasingly will find it difficult, from many different perspectives (reliability, business, etc.), to refrain from such cooperation. But I do not support Congressional or

Commission action that, whether phrased subtlely or more overtly, makes the decision for utilities to turn over operational control of the transmission facilities they

own to someone else.

For all of these reasons, I believe that a mandate to join a RTO by a date certain

is unnecessary and ill-advised. In my judgment, the other provisions of section 103

give transmission-owning utilities all of the incentive they need to participate in a

RTO of their choosing. For example, the section on RTO independence (revised FPA

section 202(h)(2)(A)) would afford utilities the discretion to design organizational

structures that would allow market participants to retain passive, non-voting interests in the RTO, or own up to 10 percent of the voting interests in the RTO. This

provision would allow for a great deal of innovation and flexibility among different

types of RTOs in different regions of the country.

Moreover, I support initiatives of the type found in revised FPA section 202(h)(6),

which would encourage the Commission to confer ‘‘incentive transmission pricing

policies’’ on transmission-owning utilities which decide to participate in RTOs. If

Commission-designed encouragement is sufficient, I doubt many utilities would be

64

able to resist the type of incentive-based pricing policies that would operate as a

lure to RTO entry.

Reliability

As I have already explained, competition cannot be at the expense of reliability.

Historically, the critical matter of protecting the integrity of the electrical grid has

been left in the first instance to the industry itself. The Commission has interceded

when necessary to ‘‘keep the lights on’’ or, in recent years, to ensure that reliabilitybased operating practices do not interfere with the availability or quality of non-discriminatory open access transmission service.

I have been very impressed with the efforts of the North American Electric Reliability Council and the regional councils NERC administers to ensure the continued

integrity and reliability of the electrical grid. The electric utility industry and the

customers it serves are in a much better position to assess and ensure the continued

reliability of electric service than federal regulators lacking intimate familiarity

with the details and complexities of remote transmission paths.

I have refrained from calling out for additional regulatory authority over reliability. Nevertheless, as wholesale power markets become increasingly competitive,

and strains are imposed on the continuing reliability of the electrical grid planned

and designed for a less competitive, more vertically-integrated environment, close

cooperation with reliability organizations becomes imperative. For this reason, I

have no objection to the language found in section 201 of H.R. 2944 that would clarify the Commission’s oversight role by directing it to approve the formation and governance of a ‘‘self-regulating electric reliability organization’’ (ERO). Nor do I object

to the Commission’s review of mandatory reliability standards and its appellate-type

review of implementation and enforcement disputes.

In addition, as electricity markets become increasingly competitive, close cooperation with state and local regulatory authorities with oversight over the reliability

of local distribution facilities become imperative. For this reason, I have no objection

to the language found in section 201 that would clarify the authority of states and

local authorities to ensure the reliability of local distribution facilities. Because I am

generally wary of additional layers of regulatory review that may add to uncertainty, I am very appreciative of the language of revised section 217(n) of the FPA

that ensures that such authority would not be exercised in a manner that could impair the reliability of bulk power systems.

My only hesitation with respect to the reliability provisions of H.R. 2944 would

be the Commission’s ability to entertain a much larger share of reliability-based

issues and disputes, as envisioned in section 201, in light of its limited resources

and general unfamiliarity with these issues (which might have to be decided in close

to ‘‘real-time’’). My hope is that the need for Commission intervention will be lessened by increasing respect for the mandatory rules of the EROs the Commission approves. And the availability of ‘‘incentive transmission pricing policies’’, referenced

in section 103 of H.R. 2944, limited to transmission-owning participants in RTOs

that act to promote reliable transmissions operations and encourage investment in

and expansion of transmission facilities, should act as a significant incentive to minimize any reliability-based disputes.

Federal/State Jurisdiction

Finally, I am pleased to see legislative language in section 101 of H.R. 2944 that

clarifies the now-murky boundaries between federal and state jurisdiction over different aspects of electricity supply and delivery. The clarifying language, for the

most part, adopts the jurisdictional dividing lines adopted by the Commission in its

Order No. 888 rulemaking; those lines, for the most part, have been accepted by industry participants and state regulatory commissions. I believe it is important,

whenever possible, to eliminate jurisdictional turf battles and protracted court disputes over ambiguous congressional delegations, in order to ensure that the benefits

of increased competition flow through to consumers as quickly and comprehensively

as possible.

In light of recent litigation on the subject of comparability of service, I would add

one more clarification. That addition would clarify that the Commission’s jurisdiction over unbundled transmission service is exclusive, and that the Commission retains the authority to protect against undue discrimination or preference in the provision of transmission service to all transmission users. Such clarification would codify existing Commission policy by allowing it to require that a transmission-owning

utility offer transmission service to others that is comparable to (i.e., no worse than)

the service it provides to itself.

Thank you for the opportunity to present my views on this important piece of federal legislation. I am happy to answer any questions you now may have.

65

Mr. BARTON. Thank you, Commissioner.

Before we recognize Commissioner Breathitt, I want to remind

the other commissioners we do have all your statements in their

entirety in the record, and I think most of the subcommittee have

read them.

The Chairman did an excellent job of summarizing within a reasonable time. Commissioner Bailey’s remarks were well taken, but

they took about 15 minutes. So, the other three commissioners, we

don’t want to constrain you, but we hope that you could summarize

in 5 to 10 minutes.

Ms. Breathitt.

STATEMENT OF HON. LINDA KEY BREATHITT

Ms. BREATHITT. Thank you, Mr. Barton. I do admit that I am a

Southerner, and I might talk a little slower, but I do have a summary of my testimony, and it is four double-spaced pages.

Good afternoon, and I do sincerely thank you for inviting me and

my colleagues to appear before you today to discuss the need for

Federal electricity legislation and the provisions of H.R. 2944.

Let me begin by commending you, Mr. Chairman, and other

members of the subcommittee and your staffs, for crafting what I

consider to be a comprehensive and important piece of legislation

that certainly has gotten the attention of virtually everyone in the

electric industry, including the administration and State and Federal regulators. The efforts of this committee have advanced the

level of electricity discussion, and that is a good thing.

I believe that Federal electricity legislation, such as H.R. 2944,

is needed to address the uncertainty that seems to exist in the industry. Much of the uncertainty surrounds issues such as statutory

authority, jurisdiction, and the need for and effect of wholesale and

retail competition. The guidance and clarification offered by the

legislation will enable the Commission to further its goals of

achieving a fair, open, and competitive bulk power market.

My written testimony addresses 5 specific aspects of the legislation, and this afternoon I would like to briefly summarize these.

The first is open access transmission. The Commission has

worked diligently for several years to open the Nation’s electric

transmission system for the provision of non-discriminatory transmission service to all wholesale buyers and sellers. However, certain impediments to full open access remain, and I believe that section 102 of the bill addresses one of those impediments by providing the Commission authority to require open access transmission on the part of State and municipal utilities and rural electric cooperatives. Many of these entities have already filed open access reciprocity tariffs with FERC, and I believe this provision

would result in a more cohesive transmission grid and will greatly

facilitate open access.

The second issue is regional transmission organizations, which

we have come to call RTOs. On May 13, in a unanimous decision,

the Commission issued its Notice of Proposed Rulemaking on

RTOs. The Commission found that RTOs would beneficially address many of the operational and reliability issues now confronting the industry. In the NOPR, the Commission sought to acVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00069 Fmt 6633 Sfmt 6602 E:\HEARINGS\60356 txed02 PsN: txed02
66

complish its objective of forming RTOs by strongly encouraging voluntary participation by public utilities. The voluntary approach for RTO formation outlined in the NOPR was, in my opinion, a fundamental aspect of our proposal. Section

103 of the bill would require all utilities to join an RTO by a certain date. I continue to prefer the voluntary approach at this time

and believe there is considerable support among stakeholders for a

voluntary approach. And, as Chairman Hoecker just said, we do

agree that RTOs can bring many benefits to competitive markets. The third issue is expansion of the interstate transmission facilities. One of the most important issues facing the electric industry

is the need to enhance or expand the transmission grid. Section

105 of the bill proposes to address this by authorizing the Commission to rule on applications filed by transmitting utilities to expand

facilities after consultation with regional joint boards comprised of

effective State and Federal agencies. Because certificate authority

does reside with the States, I believe a FERC role would be confusing, although I support regional cooperative efforts. The fourth issue is electric reliability. Section 102 of the bill would provide the Commission with authority pertaining to the formation of a self-regulating electric reliability organization and the

development of enforceable reliability standards. I believe that

emerging competition in the electric industry necessitates a change

in the manner in which the reliability of the grid is overseen and

managed, and I believe that the current system should be replaced

by a model similar to that proposed in the bill. And the final issue that I address in more detail in my written testimony is merger authority. Section 401 of your bill authorizes

the Commission to review proposed mergers of facilities of all electric utilities, including State and municipal utilities, rural cooperatives, and Federal electric utilities. This section also extends the

Commission’s merger authority to include generation companies. I support the provisions of this section. I believe the Commission

is uniquely situated and eminently qualified to perform this important task. Given the changing nature of the industry, I believe it

is essential that the Commission continues to evaluate utility

mergers and that the scope of our merger authority be extended as

you have proposed. Furthermore, I believe the proposed time limit proposed in the

bill is reasonable but should be modified to allow the Commission

additional time to review in a public hearing context the occasional

merger application that raises issues of material fact. In conclusion, let me again commend this subcommittee for crafting an important bill. I appreciate this opportunity to share

my thoughts, and I will look forward to your questions. [The prepared statement of Hon. Linda Breathitt follows:]

PREPARED STATEMENT OF LINDA BREATHITT, COMMISSIONER, FEDERAL ENERGY

REGULATORY COMMISSION

Chairman Barton and Members of the Subcommittee: Good morning. My name is Linda Breathitt and I am a Commissioner of the Federal Energy Regulatory Commission. Thank you for inviting me and my colleagues to appear before you today

to discuss the need for Federal electricity legislation and the provisions of H.R.

2944, the Electricity Competition and Reliability Act of 1999.

Let me begin by commending you, Mr. Chairman, and other Members of the Subcommittee for crafting what I consider to be a comprehensive and important piece

67

of legislation that will certainly advance the development of competitive wholesale

and retail electricity markets in this country.

I believe that Federal electricity legislation, such as H.R. 2944, is needed to address the uncertainty that seems to exist in the industry. Much of the uncertainty

surrounds issues such as statutory authority, jurisdiction, and the need for and affect of wholesale and retail restructuring. I believe H.R. 2944 will, in large part,

allay the uncertainty. Furthermore, the guidance and clarification offered by the legislation will enable the Commission to further its goals of achieving a fair, open,

and competitive bulk power market.

I am unable today to address each provision of H.R. 2944. Therefore, I would like

to comment briefly on five specific aspects of the proposed bill: (1) open transmission

access; (2) regional transmission organizations; (3) expansion of interstate transmission facilities; (4) electric reliability; and (5) merger authority.

Open Transmission Access

The cornerstone of the Commission’s efforts to create an open, non-discriminatory

electric transmission system is the requirement that all public utilities that own,

operate, or control interstate transmission facilities provide transmission service

over their facilities to all wholesale buyers and sellers on a non-preferential basis.

Such non-discriminatory open access to transmission services is essential to the development of competitive wholesale bulk power markets. Despite the Commission’s

efforts, however, certain impediments to full open access remain. One such impediment is that a significant portion of the Nation’s transmission grid is owned and

operated by utilities not subject to Commission open access requirements. Section

102(b) of H.R. 2944 amends the definition of ‘‘public utility’’ in section 201(e) of the

Federal Power Act (FPA) to include transmitting utilities, other than Federal power

marketing administrations and the Tennessee Valley Authority, for purposes of regulating transmission rates, terms, and conditions. I believe this provision would result in a more cohesive transmission grid and will greatly facilitate open transmission access.

Regional Transmission Organizations

On May 13, 1999, in a unanimous decision, the Commission issued its Notice of

Proposed Rulemaking (NOPR) on Regional Transmission Organizations (RTOs). In

the NOPR, the Commission found that appropriate regional transmission institutions can address many of the operational and reliability issues now confronting the

electric industry. Specifically, we found that such institutions could: (1) improve efficiencies in transmission grid management; (2) improve grid reliability; (3) remove

the remaining opportunities for discriminatory transmission practices; (4) improve

market performance; and (5) facilitate lighter handed regulation.

The Commission proposed, among other things, to establish fundamental characteristics and functions that RTOs must satisfy. Furthermore, we proposed that all

public utilities that own, operate, or control interstate transmission facilities make

certain filings pertaining to participation in an RTO. Specifically, utilities not already participating in an approved Independent System Operator (ISO) would make

one of two alternative filings with the Commission by October 15, 2000. First, a utility may propose to participate in an RTO that satisfies the minimum characteristics

and functions and that will be operational no later than December 15, 2001. Alternatively, a utility may make a filing that describes its efforts to participate in an

RTO, any existing obstacles to RTO participation, and any plans and timetables for

future efforts to participate in an RTO. A public utility that is already a member

of an existing ISO would make a filing no later than January 15, 2001 that explains, among other things, the extent to which the ISO in which it participates

meets the minimum characteristics and functions for an RTO.

In the NOPR, the Commission sought to accomplish its objective of forming RTOs

by encouraging voluntary participation by public utilities. In this light, as indicated

above, the Commission proposed, as part of its filing requirements, a process for a

utility to describe in an alternative filing any efforts to participate in an RTO, reasons it has not participated in an RTO, any obstacles to RTO participation, and any

plans the public utility has for further work toward participation in an RTO.

The voluntary approach for RTO formation outlined in the NOPR is, in my opinion, a fundamental and crucial aspect of our proposal. I believe that a certain

amount of flexibility is necessary on the part of the Commission as utilities move

toward forming RTOs. Therefore, it is important to me that public utilities have an

opportunity to identify and explain any obstacles or restrictions they face in joining

an RTO.

Section 103 of H.R. 2944 would require all transmitting utilities to establish or

join an RTO by January 1, 2003. I believe that Congress should not impose, at this

68

time, a mandate for utilities to join an RTO, but rather should encourage voluntary

participation. There is considerable support among stakeholders for a voluntary approach.

Section 103 of H.R. 2944 also proposes certain standards that RTOs must meet.

In his testimony to the Subcommittee today, Commission Chairman James J.

Hoecker recommends that Congress take a somewhat different approach. Given that

the Commission has yet to evaluate all of the comments submitted on its RTO

NOPR, Chairman Hoecker suggests that Congress should not lock the details of

these standards into statutory text given the possible need to adapt the standards

to future changes in the industry before the FPA is again modified. I agree with

Chairman Hoecker that Congress should preserve the Commission’s discretion to reflect changing circumstances in specific RTO requirements and standards.

Expansion of Interstate Transmission Facilities

One of the most important issues now facing the electric industry is the need to

enhance or expand the transmission grid. The success of the Commission’s goals of

transmission open access and wholesale competition depends on an adequate and

reliable supply of transmission capacity. Since the issuance of Order No. 888 in

1996, there has been a tremendous increase in the amount of wholesale electric

power being traded. Open access and industry restructuring, both at the wholesale

and the retail levels, have caused demand for transmission capacity to soar. As a

result, the Nation’s transmission grid is struggling to keep pace with the industry’s

rapid growth. The increased usage is imposing tremendous strain on the system.

The Commission must take deliberate action to encourage the industry to address

this situation.

Section 105 of H.R. 2944 proposes to address grid expansion by authorizing the

Commission to order a transmitting utility to expand its transmission facilities,

upon application of an electric utility or transmitting utility. Furthermore, this section would create joint boards consisting of State and Federal agencies to make recommendations to the Commission pertaining to transmission system expansion. In

his testimony, Chairman Hoecker states that he sees no compelling need for the

Commission to be given the authority specified in Section 105 of H.R. 2944. I agree

with Chairman Hoecker on this point. It is my belief that RTOs will play a significant role in system expansion.

In my opinion, the transmission system is not keeping pace with growing demand

in the bulk power market. The reason for this is that the industry is increasingly

unwilling to make transmission-related investments given the uncertainties that

exist in an industry still in the midst of restructuring and the risk of earning inadequate returns on new transmission investments. I believe the Commission must

address this problem in two ways. First, the Commission must ensure that its transmission pricing policies conform to the changing electricity marketplace and that

transmission owners or operators are encouraged to file innovative pricing proposals. Second, the Commission must adopt policies that will provide proper incentives to market participants and other investors to expand and enhance transmission facilities. Both of these objectives will be addressed, as they pertain to

RTOs, at least, in the new FPA section 202(h)(6) as proposed in section 103 of H.R.

2944. This would be a reasonable starting point for the Commission to consider the

effect its current transmission pricing policies have on the evolving electric industry

and the need for a more incentive-based approach.

Electric Reliability

Section 201 of H.R. 2944 amends the FPA to provide the Commission with specific

authority pertaining to the formation of a self-regulating electric reliability organization and the development of enforceable reliability standards. Many in the industry, including the North American Electric Reliability Council (NERC), recognize the

lack of clear Federal authority for establishing or enforcing reliability standards for

the electric industry and the importance that electric reliability be maintained as

the industry is restructured. I believe that emerging competition in the electric industry necessitates a change in the manner in which the reliability of the interconnected electric system is overseen and managed. The present model of voluntary

compliance by electric utilities of regulatory rules and criteria established by NERC

and its member Regional Reliability Councils has worked effectively for over three

decades. However, given the profound changes taking place in the industry, I believe

this voluntary system should be replaced by a model similar to that proposed in

Title II of H.R. 2944. Such a model would retain many of the features of the current

system that has been so effective in the past, while adding necessary oversight and

enforcement mechanisms. There is a compelling need for such Federal authority and

I support the provisions of this section.

69

Merger Authority

Section 401 of H.R. 2944 amends the FPA to authorize the Commission to review

proposed mergers and disposition of facilities of all electric utilities and transmitting

utilities, including State and municipal utilities, most rural electric cooperatives,

and Federal electric utilities. This section extends the Commission’s merger authority to include generation companies and clarifies the Commission’s merger authority

over holding companies. Furthermore, the section establishes time limits for the

Commission to review merger applications.

I support the provisions of this section. The Commission is charged under Section

203 of the FPA to evaluate public utility mergers and dispositions to determine

whether such actions are consistent with the public interest. I believe the Commission is uniquely situated and eminently qualified to perform this important task.

The Commission and its Staff possess extensive knowledge of and expertise in the

electric industry. Given the changing nature of the electric industry, I believe it is

essential that the Commission continues to evaluate public utility mergers and that

the scope of our merger authority be extended as proposed in this section.

As for the time line proposed in section 401(a)(4) of H.R. 2944, I believe the Commission has shown repeatedly that it processes merger applications within the prescribed 150-day period. However, I agree with Chairman Hoecker that occasionally

a proposed merger raises issues of material fact that must be resolved in a public

hearing context. In these instances, I believe the Commission would need additional

time in which to process the application.

Conclusion

In conclusion, I believe that Federal legislation is needed to address uncertainty

that exists in the industry. For the most part, I believe that H.R. 2944 accomplishes

this objective. However, there are certain provisions of the proposed legislation that

should be revised. I have identified a few such instances.

Congress has a considerable opportunity in this session to pass meaningful legislation that will expand competition in the wholesale and retail electric markets. I

urge Congress to avail itself of this opportunity. I look forward to continuing the

dialogue with the Subcommittee on this important legislation.

Mr. BARTON. Thank you, Commissioner.

We would now like to hear from Commissioner He

 ́

bert.

STATEMENT OF HON. CURT L. HE

 ́

BERT, JR.

Mr. HE

 ́

BERT. Thank you for the opportunity to appear before you

today. Chairman Barton’s invitation specifically asked me to address whether there is a need for Federal electricity legislation,

and, if so, why?

In the interest of time, I have modified my comments, and I ask

and answer a more narrow question: Does FERC need Federal electricity legislation? Not necessarily.

For investor-owned utilities, FERC has adequate existing authority to create a competitive market; more accurately, I should say

allow a competitive market to form. One area Congress could speak

to involves the Federal power marketing agencies—the Bonneville

Power Administration and the Tennessee Valley Authority. The effort involves untangling the transmission from the generation and

the financial and legal commitments these agencies may have

made. Change also involves the matter of tax exempt financing and

the problem of preference customers and the so-called fence within

which bodies, such as TVA, operate. Therefore, it will take time to

sort out. I would prefer selling off their transmission assets instead

of additional jurisdiction.

For the investor-owned side, the economics of the industry already push companies into restructuring. Generation now operates

as a true business. FERC has extended market-based rates from

merchant generators to services traditionally provided by utilities.

In Order Number 888, the Commission declared new entry into

70

generation will receive market-based rates for all practical purposes. Transmission, the highway of electricity, will remain regulated and will operate as a utility.

The next step must come from Federal Energy Regulatory Commission. Our rate setting encourages utilities to sit still and do

nothing. We all but prohibit companies from engaging in the transmission business. We also keep new investors out. In allowing utilities to recover original cost, less depreciation on facilities about 30

years old, FERC says to a potential entrant, ‘‘You cannot afford to

buy these facilities for their value.’’ It also tells integrated utilities,

‘‘You won’t get anything for your assets, so if you sell, you will be

asking for shareholder opposition.’’

To cure that, FERC must grant an acquisition adjustment that

reflects the economic benefits transmission facilities will bring to

the table. On the other hand, policies that force sellers to return

ratepayers any and all gains from a sale negate the good in the acquisition adjustment. FERC and the states must allow shareholders to reap at least half the profits of the sale of transmission.

FERC can do this.

Higher rates of return to reflect greater risk of transmission

would encourage restructuring for existing facilities, as would

shorter depreciation to account for the likelihood of distributed generation and other technological changes that may render facilities

obsolete before the end of their physical life. FERC can do this.

Most important for the future, restructuring, competition, and innovation come down to expansion. Business has a simple way of

handling new facilities—incremental pricing. Arbitrary as it might

seem from a theoretical point of view, making the new customer

pay the cost of the interconnection brings certainty at the least

cost. Existing customers can rest assured, once they have paid

their freight, that a new customer would not saddle them with

more.

All of this and more FERC can accomplish by exercising its authority under Section 205 of the Federal Power Act. Since the

1940’s, the Supreme Court has held that nothing in the act binds

the Commission to any particular formula, as long as we balance

the interests of consumers with that of the utilities. Were we to do

that here, we would institute the kinds of incentives and performance-based rates that will allow a separate transmission business

to form and thrive. A separate transmission business, a clean

break, in the words of the Federal Trade Commission staff’s comments in the RTO NOPR, forms the best foundation for competition

in generation and low prices to the customer.

Other impediments to restructuring exist, some of which you correctly blame FERC for, even apart from rates. For example, utilities complain that FERC takes too long to rule on applications to

dispose of facilities, of the type that utilities will have to file in

order to form RTOs. Congress, in theory, can legislate an end to

delay. Better yet, FERC itself can and should accelerate the process.

I think we should put a provision into the Final RTO Rule that

we will act on those applications within 6 months. FERC should

use its existing discretion. FERC’s review of mergers could delay

formation of RTOs.

71

The current draft of the Barton bill in front of us today, that we

are speaking about, expands FERC’s jurisdiction over mergers by

including generating facilities. The August 4 draft would have

eliminated FERC review of mergers. FERC should get out of the

merger business. I have always said good mergers should be approved in 6 months, and bad mergers should never happen. Utilities are not exempt from the antitrust laws of this great Nation.

DOJ, FTC, the SEC all take a look—FERC is not an antitrust

agency.

We hear clamor in another area: reliability. The argument goes

that competition, meaning cost shifting—or cost cutting, excuse me,

will slight the long-term investment in reliability. Therefore, critics

caution, Congress must step in. I disagree completely, that the two

considerations must pull in different directions. Here, again, FERC

has authority to act.

We can supplement performance-based rates to include reliability, another word for quality. When I served as commissioner

and chairman in Mississippi, we included the minimum reliability

as one measure of performance on which the utilities can earn profit. We at the FERC could adopt the same measure as part of the

rate plans under section 205 of the Federal Power Act. Adding reliability to performance-based plans means quicker action than having a self-regulating organization establish standards with appeals

to FERC, because we would make the utility’s economic interest coincide with the public interest. Here, again, FERC has the existing

authority to act.

I noted with approval of the reports that this draft of the bill rejects FERC’s mandates and favors incentives. When I read the

draft, I saw that in fact the authority for FERC to mandate RTOs

fell away, and the bill directs FERC to offer incentives. So far, so

good.

I pause, however. Under the draft bill, Congress, not FERC,

mandates RTOs. For the industry, a mandate robs companies of

the initiative, whether the compulsion comes from a law or from an

administrative rule. Moreover, the draft requires FERC to consider

existing transmission organizations in certifying RTOs. This prevents progress. The most ardent advocates of existing ISOs concede

that these organizations represent, at best, a step toward the ultimate goal of true independence. In short, everyone agrees ISOs

must evolve. This bill freezes the status quo with existing ISOs. I

would allow ISOs to exist, though I find them falling short of the

RTO criteria of independence. Instead, I would clear the way toward the goal: truly independent transmission companies.

This leads to my next topic, incentives. Everyone knows I favor

them. To work effectively, however, incentives must induce, not

sugar coat compulsion. If Congress mandates RTOs, at best, you

turn precisely designed economic measures that proponents must

tie to specific results into rewards for obeying the law. At worst,

you rob incentives of their meaning. We must ask ourselves: Does

the seller to a distress sale really negotiate the price?

Companies deserve no reward for obeying the law. I wonder how

we would design proper incentives for past or even existing conduct. Since ISOs must evolve into better organizations, we should

provide the incentive only for the better organizations. You could

72

solve the problem by inserting a sunset date for ISOs to become

truly independent. Once we freeze ISOs as the preferred institutions, we have stopped in its tracks the evolution of the industry. I did want to comment on something that Deputy Secretary Glauthier said in regard to incentives and RTOs. He said—and I

am pretty sure it was within one sentence—that we don’t need incentives and that utilities will join RTOs on their own and that

mandates are needed. Well, those are three different things, and

they can’t all be true, because you either need incentives or you

need mandates or everyone joins voluntarily. And let us not forget how we did solve some of our Clean Air Act problems. The SOX and NOX credit showed incentives worked

gracefully and wonderfully are working today, and I insist we

rethink that in the electricity area. We must treat transmission as a business. Regulation treats transmission as politics with committees, debates, and compromises, and as law with complaints, litigation, and appeals.

Treating transmission as a business means rescinding regulations

that prevent business people from operating transmission as a viable enterprise. Your predecessors gave FERC broad authority to establish just and reasonable rates. The courts have given deference

to our expertise. Let us use that tool, and let competition flourish.

In short, let FERC let go. Over the last 2 years we have changed the debate from historical regulatory prescription and mandate to that of empowerment

through economic persuasion. Since you are seeking my counsel, I

will be a bit more bold than usual. I do need the help of Congress.

I have made it clear to the members of this committee on the occasion I have had to speak with them that your intentions are not

clear at the Federal Energy Regulatory Commission. I have invited

oversight and believe this to be a step in the right direction. You

and your predecessors have given us the right tools. I need you to

ensure they are being used properly.

Thank you, and, Mr. Chairman, I do apologize if I went a little

longer than expected. Myself and Commissioner Bailey are not accustomed to being in the majority.

[The prepared statement of Hon. Curt L. He

 ́

bert, Jr. follows:]

PREPARED STATEMENT OF HON. CURT L. HE

 ́

BERT, JR., COMMISSIONER, FEDERAL

ENERGY REGULATORY COMMISSION

Thank you for the opportunity to appear before you. Chairman Barton’s invitation

specifically asked my colleagues and me to address ‘‘whether there is a need for Federal electricity legislation, and if so, why . . .’’. The letter also requested comment on

specific provisions of the Barton Bill and solicited alternate language, if possible.

I have publicly stated on many occasions that I will comment on the need for legislation only if asked. Since, Mr. Chairman, you have done so, I will give you my

views to the full extent of my thinking, as it pertains to FERC. I will comment in

general on certain provisions in the Bill and will not presume to propose alternate

language, as I have had but a few days to read this massive Bill. I will, of course,

gladly go into detail in response to questions.

Does FERC need Federal electricity legislation? Not necessarily. For investor

owned utilities, FERC has adequate existing authority to create a competitive market. More accurately, I should say allow a competitive market to form. Enough authority at the state level exists to allow competition to spread there and to include

publicly owned utilities.

The one area Congress could speak to involves the Federal power marketing agencies, the Bonneville Power Administration and the Tennessee Valley Authority.

While I think it desirable to cover that part of the picture, I think Congress can

73

wait until the rest of the country sorts out its restructuring and the affected regions,

the Northwest, Southwest and Southeast, have an opportunity to consider the complex issues. The effort involves untangling the transmission from the generation and

the financial and legal commitments these agencies may have made. Change also

involves the matter of tax exempt financing and the problem of preference customers and the so-called ‘‘fence’’ within which bodies, such as TVA, operate.

For the investor owned side, the economics of the industry already push compa- nies into restructuring. Generation now operates as a true business. FERC has extended market based rates from merchant generators to services traditionally provided by utilities. In Order No. 888, the Commission declared new entry into generation will receive market based rates, for all practical purposes. Transmission, the

highway of electricity, will remain regulated and will operate as a utility. As we saw in other industries, beginning with the airlines, a business and a util- ity use opposite approaches. A CEO of a business looks at value, innovation and opportunity; a CEO of a utility looks at cost, rate base and rate of return. In visits

to my office, officials of integrated utilities have expressed the desire to tackle one

or the other—looking for profits in generation or engaging in strategically important

transmission. Witness as well some utilities, such as Duke Energy and the Southern

Company, buying generation that others, such as New England Power Company and

Consolidated Edison Company, sell off. As I wrote in an article in the Public Utilities Fortnightly last year, ‘‘The fruit of divestiture has ripened.’’ The next step must come from FERC. Our rate setting encourages utilities to sit still. We all but prohibit companies from engaging in the transmission business. We

also keep new investors out. In allowing utilities to recover original cost, less depreciation on facilities about 30 years old, FERC says to a potential entrant, ‘‘You cannot afford to buy these facilities for their value.’’ It also tells integrated utilities,

‘‘You won’t get anything for your assets, so if you sell, you will be asking for shareholder opposition.’’ To cure that, FERC must grant an acquisition adjustment that

reflects the economic benefits transmission facilities will bring to the table. On the

other side, policies that force sellers to return to ratepayers any gains from a sale

negate the good in the acquisition adjustment. FERC and the states must allow

shareholders to reap at least half the profits from sale of transmission.

Higher rates of return to reflect greater risk of transmission would encourage re- structuring for existing facilities, as would shorter depreciation to account for the

likelihood of distributed generation and other technological changes that may render

facilities obsolete before the end of their physical life. Most important, for the future, restructuring, competition and innovation come down to expansion. We have all seen statistics showing transmission investment has

declined to a trickle (if not less). Primarily, a pricing scheme that requires all customers to pay for all facilities creates arguments. It leads to controversies. Why

should I, an existing customer, pay for a new line, when I have all I need? On the

other side, I, as a new customer, want everyone else to supplement my costs, so of

course, everyone should contribute to my line!

Business has a simple way of handling new facilities: incremental pricing. Arbitrary as it might seem from a theoretical point of view, making the new customer

pay the entire cost of interconnection brings certainty at the least cost. Existing customers can rest assured, once they paid their freight, that a new customer would

not saddle them with more. New customers will have to calculate the full cost of

their ventures and will plan accordingly. Once they commit to a price, they will see

the transaction through. I add here, parenthetically, that incremental pricing will

still leave some controversy, when opposition to construction or upgrade stems from

other considerations.

All of this, and more, FERC can accomplish by exercising its authority under Section 205 of the Federal Power Act. Since the 1940’s, the Supreme Court has held

that nothing in the Act binds the Commission to any particular formula, as long

as we balance the interests of consumers and utilities. Were we to do that here, we

would institute the kinds of incentives and performance based rates that will allow

a separate transmission business to form and thrive. A separate transmission business, a ‘‘clean break,’’ in the words of the Federal Trade Commission Staff’s comments in the RTO NOPR, forms the best foundation for competition in generation

and low prices to the customer.

Other impediments to restructuring exist, some of which you correctly blame

FERC for, even apart from rates. For example, utilities complain that FERC takes

too long to rule on applications to dispose of facilities, of the type that utilities will

have to file in order to form RTOs. Congress, in theory, can legislate an end to

delay. Better yet, FERC itself can and should accelerate the process. I think we

should put a provision into the Final RTO Rule that we will act on those applications within six months. FERC should use its existing discretion. Moreover, the AuVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00077 Fmt 6633 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
74

gust 4th draft would have eliminated FERC review of mergers. Currently, FERC’s

review of mergers could delay formation of RTOs. The August 4th draft had a good

idea.

We hear clamor in another area: reliability. The argument goes that competition, meaning cost cutting, will slight the long-term investment in reliability. Therefore,

critics caution, Congress must step in. I disagree completely that the two considerations must pull in different directions. I also disagree completely that Congress

must take the lead. Here, again, FERC has authority to act. Remember, in a business, the management looks at profit margins, not low cost. Earning a profit entails quality service; or, more accurately, several layers of quality

service, depending on how much the consumer wants to pay. In any event, entrepreneurs must meet minimum criteria. In most instances, take electric appliances,

for example, a close relative to the electric industry, Underwriters Laboratory, a private group, sets standards that companies adhere to without the need for one word

of legislation. Why? Society makes it in the interest of appliance manufacturers to

do so.

We can supplement performance based rates to include reliability, another word for quality. When I served as a Commissioner and Chairman in Mississippi, we included the minimum reliability as one measure of performance on which the utilities

earned profit. We at the FERC could adopt the same measure as part of rate plans

under section 205 of the Federal Power Act. Adding reliability to performance based

plans means quicker action than having a self-regulating organization establish

standards with appeals to FERC because we would make the utility’s economic interest coincide with the public interest. Here, again, FERC has existing authority

to act.

Furthermore, taking the regulatory approach makes meeting the goal more dif- ficult. Coercion means utilities would resist, at the Commission and in the courts

of appeals. If we compensate companies for their additional risk taking and bold action, we align the economic interest and the public interest. We would not need to

discuss authority for FERC or legal issues of the type this hearing will debate.

Again, as I wrote in my article, ‘‘FERC must let [the ripe fruit] fall from the tree.’’ I said at the outset of this testimony that existing institutions can deal with mu- nicipal utilities and cooperatives. Having served in the Mississippi Legislature, I

know that cities, counties and districts exist as creatures of the state. Under the

Mississippi Constitution, as in other states, the Legislature exercises tight control

over the affairs of political bodies within its boundaries. The Legislature must authorize taxes and expansion of municipalities into new areas. With that leverage,

state legislatures can enact laws to place public transmission agencies on the same

track as investor owned. FERC, of course, might think it can do it too, and, under

the Barton Bill, we would have the jurisdiction. I think, however, that the elected

legislatures, closer and more accountable to the people, know better than FERC,

how to accomplish restructuring in their areas. The August 4th draft directed the

FERC to give ‘‘maximum practicable deference’’ to state commissions, which would

be preferable to mere deference. After all, we all agree that low prices to the customer remains the paramount end. Restructuring forms but a means to that end.

I see no need for legislating on the cooperatives. The strong economy and changes

in the law give cooperatives incentives to pay off their debts to the Rural Utilities

Service. If this trend continues, as we have seen at FERC, many will become public

utilities under FERC regulation. If FERC enacts incentives for transmission, more

will volunteer. In this market of deregulated generation, cooperatives and municipals, with their local roots, will see their niche as serving the people’s need for

transmission. I do not think that they could compete nationally as generators with

the large investor owned companies. As I have said repeatedly, if FERC incents,

they will come. I think the municipals and cooperatives will, too.

Now I will turn what, to me, form the major features of the Bill: incentives and

flexibility. The approach the proposed legislation takes holds great interest to me.

From the beginning of my tenure at FERC, I have spoken out forcefully in favor

of encouragement and incentives and against mandates. Even with my vision of an

independent transmission company as the model for RTOs, I favor allowing other

forms of organizations to exist. I would just give incentives to RTOs that exhibit

true independence.

I noted with approval the reports that this draft of the Bill rejects FERC mandates and favors incentives. When I read the draft I saw that, in fact, the authority

for FERC to mandate RTOs fell away, and the Bill directs FERC to offer incentives.

So far, so good.

The fine, print, however, makes me wonder about the direction the Bill is heading. Section 103 requires all transmitting utilities to establish or join an RTO, albeit

of their own design by 2003. Paragraph (2) establishes criteria and wisely says that

75

independence encompasses separation of control, but could include passive ownership and 10% voting control or lower. I agree with the idea that independence requires separation of legal control and tolerate passive ownership and 10% voting

control. I acknowledge that 2003 extends by almost one year the deadline the RTO

NOPR has for voluntary RTOs to begin operation. I pause, however. Under the draft Bill, Congress, not FERC, mandates RTOs. For the industry, a mandate robs initiative, whether the compulsion comes from a law

or from an administrative rule. Moreover, the draft requires FERC to consider existing transmission organizations in certifying RTOs. This prevents progress. The most

ardent advocates of existing ISOs concede that these organizations represent, at

best, a step toward the ultimate goal of true independence. In short, everyone

agrees ISOs must evolve. This Bill freezes the status quo with existing ISOs. As I said at the outset, I would allow ISOs to exist, though I find them falling short of

the RTO criterion of independence. Instead, I would clear the way toward the goal:

truly independent transmission companies. This leads to my next topic, incentives. Everyone knows I favor them. To work effectively, however, incentives must induce, not sugar coat compulsion. If Congress

mandates RTOs, at best, you turn precisely designed economic measures that proponents must tie to specific results into rewards for obeying the law. At worst, you

rob incentives of their meaning. We must ask ourselves, does the seller to a distress

sale really negotiate the price? Although I support incentives as providing proper direction and motive, I oppose an indiscriminate application of incentives. The draft Bill requires incentives for existing ISOs, rewards they do not need and that I would deny them. I said earlier

exiting ISOs fail the independence test. Besides that, why increase rates for past

conduct that occurred anyway? Some of the past conduct occurred under the compulsion of law. Companies deserve no reward for obeying the law. I wonder how to design proper incentives for past conduct. As with grandfather provisions for existing

ISOs as RTOs, giving the same incentives to ISOs defeats the purpose of restructuring. Since ISOs must evolve into better organizations, we should provide the incentive only for the better organizations. Once we freeze ISOs, we have stopped in

its tracks the evolution of the industry. You could solve the problem by inserting a sunset date for ISOs to become truly independent. The draft Bill has nothing in it. If you wanted to enact something and

chose a date (without being arbitrary), you should save the incentives for organizations that get to the end state earlier. On that score, I note that this Bill removed

the date for retail competition, a step that I applaud.

If I may, please let me conclude with a discussion of one more provision that I think illustrates the distinction between my approach and that of the draft Bill. I

agree with the goal, I raise questions about the means. The draft Bill enmeshes the government in reliability to a greater extent than

now, or necessary. FERC will have to certificate a reliability organization, hear appeals of controversies over reliability and establish mandatory rules. The model for

this comes from the Securities and Exchange Commission with self-regulating stock

exchanges. I dare say I am not an expert in stocks, but I can see something like

that for a market in which unsophisticated and unsuspecting investors may lose

their life savings.

Here, however, we have a better solution. We deal with sophisticated businesses.

This reality allows for performance based rates as the insurer of reliable operations.

Reliability has two components: safety and adequate capacity. Both of these, or the

lack of them, affect the bottom line of a business. My suggestion then is to create

a climate in which that occurs in transmission. Specifically, tie profits to performance—safe performance and an adequate number of transactions. Give transmission

companies business plans to meet. Favorable earnings result from good results,

losses from poor management. Clearly, we don’t need legislation to do that. FERC

has the authority to institute performance based rates. We did it in Mississippi. The

Public Service Commission put three criteria into the final plans. Two of them fall

directly under the category of reliability, and one indirectly. Earnings depended on

the number and duration of interruptions, customer satisfaction (using actual complaints) and price into which we factored sales transactions. The companies figured

out how to set and meet reserve margins, safety standards and capacity goals. We

aligned the private economic interest with the public interest. FERC can do that

now. We said in the RTO NOPR that we would consider it. Why enmesh FERC in

details that it has no expertise or resources to devote? Instead of engaging in proceedings lasting years and years debating reserve margins and capacity needs,

FERC, every few years, would review performance plans and fine tune them.

Congress should leave it up to FERC to get restructuring right. I think we must

treat transmission as a business. Regulation treats transmission as politics, with

76

committees, debates and compromises and as law with complaints, litigation and appeals. Treating transmission as a business means rescinding regulations that prevent business people from operating transmission as a viable enterprise. Your predecessors gave FERC broad authority to establish just and reasonable rates. The

courts have given deference to our expertise. Let us use that tool and let competition

flourish. In short, let FERC let go.

Thank you.

Mr. BARTON. Well, I am sure you wrote it for 5 minutes, but you

spoke it for about 12 minutes. That is just—but I listen at about

the 12-minute speed, so that is okay.

Last but not least, the Honorable Commissioner Massey, and you

are recognized for such time as you may consume.

STATEMENT OF HON. WILLIAM L. MASSEY

Mr. MASSEY. Thank you, Mr. Chairman. I will try to be brief, because I am going to endorse in large part many provisions of your

bill.

It is my view that the enactment of this legislation with certain

amendments can ensure an open, seamless, and highly reliable

interstate transmission grid that will in turn facilitate vibrantly

competitive power markets.

Why should Congress act now? Simply stated, legislation is necessary to facilitate the removal of barriers that undercut the economic promise of competition. Market and grid access uncertainties

that flow from such barriers can stifle investment in necessary generation and exacerbate price volatility. Residual market power, a

patchwork of grid rules, or rules followed merely on a voluntary

basis, can smother embryonic competitive markets.

Legislation can resolve these uncertainties, and since all power

sold at wholesale is ultimately consumed at retail, it is important

to understand that efficient wholesale markets are a necessary

predicate to efficient retail markets.

Thus it is my view that H.R. 2944’s provisions subjecting all

transmitting utilities to one set of rules should be enacted. Provisions requiring transmission owners to join RTOs by a date certain,

in my judgment, are in the public interest. However, detailed legislative standards for such institutions that may need to evolve over

time are unnecessary.

Provisions authorizing the private reliability standards organization to promulgate mandatory rules should be enacted. Under the

legislation, the Commission would certify that organization and

rely substantially on its expertise. The Commission would not develop the rules but would rely upon the private organization to do

so. This is in the public interest.

Market power can smother embryonic competitive markets. I

would suggest that H.R. 2944 be amended with language from H.R.

1828 and H.R. 2050 authorizing the Commission to examine and

address market power in wholesale and retail markets in certain

circumstances.

A recent 8th Circuit Court of Appeals decision sanctions a state

policy granting a preference for in-state uses of the interstate grid.

It is roughly analogous to a State reserving the interstate highway

system exclusively for vehicles licensed in that State. It allows discrimination against interstate transactions. If broadly applied, this

decision could balkanize the grid. I recommend that Congress enVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00080 Fmt 6633 Sfmt 6602 E:\HEARINGS\60356 txed02 PsN: txed02
77

sure that there is no discrimination against interstate users of the

grid. Chairman Hoecker has suggested language in his testimony

to fix this problem which I heartily endorse.

In summary, I suggest that any legislative reforms focus on facilitating policy choices that will lead to large and robust competitive markets. Open access rules followed by all grid owners will

help. Regional transmission organizations will facilitate large regional markets, and mandatory reliability rules will ensure that

power is delivered reliably to consumers.

I thank you for your attention this afternoon, and I would recommend the enactment of H.R. 2944 with the modifications noted

in my testimony.

Thank you, Mr. Chairman.

[The prepared statement of Hon. William L. Massey follows:]

PREPARED STATEMENT OF WILLIAM L. MASSEY, COMMISSIONER, FEDERAL ENERGY

REGULATORY COMMISSION

Mr. Chairman and Members of the Energy and Power Subcommittee: My name

is William L. Massey. I have served as a Commissioner of the Federal Energy Regulatory Commission since 1993. I welcome this opportunity to testify with respect to

H.R. 2944, the Electricity and Competition Act of 1999. I congratulate Chairman

Barton for introducing this important legislation.

I. INTRODUCTION

At this juncture in the transition to competition initiated by the Energy Policy Act

of 1992 and Order No. 888, Congress can take the steps necessary to ensure an

open, seamless and highly reliable transmission grid that will in turn facilitate vibrantly competitive power markets.

By making the entire interstate transmission grid, regardless of ownership, subject to open access rules, legislative reform can ensure nondiscriminatory access on

a nationwide basis. Congress can ensure grid reliability by authorizing a private reliability standards organization that will promulgate mandatory reliability rules. By

requiring all grid owners to form appropriately configured regional transmission organizations (RTOs), legislation can help mitigate residual vertical market power,

capture for consumers the operational efficiencies created by grid regionalization,

and promote large and robust power markets. By authorizing the Commission to

mitigate horizontal market power in wholesale or retail markets that may arise

from pockets of generation concentration, Congress can ensure that the price for

power is determined by the forces of competition rather than by market manipulation.

Why should Congress act now? Simply stated, legislation is necessary to facilitate

the removal of barriers that undercut the economic promise of competition. Market

and grid access uncertainties that flow from such barriers can stifle investment in

necessary generation and exacerbate price volatility. Residual market power, a

patchwork of grid rules, or rules followed merely on a voluntary basis, can smother

embryonic competitive markets.

Although the prospect of mandatory grid reliability rules appears to enjoy broad

industry support, under current law there is no clear path to achieve this goal.

Moreover, roughly one third of interstate grid facilities are by law not subject directly to the Commission’s pro-competitive policies and standards prohibiting discrimination.

In addition, existing jurisdictional uncertainties may make it difficult to ensure

full industry participation in RTOs. Without full participation, the substantial procompetitive benefits such institutions can facilitate will be available only on a patchwork basis.

Legislation can resolve these uncertainties that now hamper efforts to facilitate

competitive wholesale markets and ensure a reliable national grid. And since all

power sold at wholesale is ultimately consumed at retail, it is important to understand that efficient wholesale markets are a necessary predicate to efficient retail

markets.

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II. COMMENTS ON H.R. 2944

At the outset, let me generally associate myself with the testimony of Chairman Hoecker. He and I appear to be generally of a common mind on appropriate legislative reforms.

H.R. 2944 effectively addresses most of the issues mentioned in my introductory comments. The issues it resolves are complex and challenging ones, and I commend

Chairman Barton for placing this bill before the House of Representatives. Although my testimony will focus primarily on legislative reforms that will facili- tate wholesale competition, I would like to note briefly for the record that I support

retail competition as well. Although wholesale competition is beneficial for consumers in any event, its full promise will not be achieved in the absence of retail

customer choice.

A. One Rule for All Transmitting Utilities (Section 102)

This legislation extends the Commission’s authority to the grid facilities of all transmitting utilities, including federally-owned utilities, electric cooperatives and

municipal utilities. This provision will ensure the benefits of the Commission’s open

access rules to the users of these facilities. I support this important provision.

Although state regulators in Texas have done a commendable job promoting com- petition within Texas, I would not further limit federal jurisdiction over ERCOT facilities. Accordingly, I would not recommend the enactment of the bill’s language

eliminating the Commission’s section 211 jurisdiction over ERCOT.

B. Mandatory Reliability Rules (Section 201)

A strong industry consensus appears to support legislation to facilitate mandatory reliability rules. Such rules would provide a firm grid foundation for competitive

markets. Section 201 provides that a private standards organization, composed of

a broad and balanced cross-section of industry representatives and other experts,

would promulgate mandatory rules subject to federal oversight. The North American

Electric Reliability Council (NERC) has impressive expertise in this area, and it is

my assumption that it will make the internal organizational structural changes, if

any, that are necessary to qualify as the private standards organization envisioned

by this bill.

It is my view that enactment of this provision is essential to maintaining grid reliability in a competitive era.

C. Regional Transmission Organizations (Section 103)

I strongly support this section’s imperative that all transmitting utilities participate in RTOs, and I highly commend Chairman Barton’s foresight in recognizing the

value of such institutions and requiring universal participation. There is, however,

little justification in my view for delaying mandatory RTO participation until 2003.

Utilities are already aware that the Commission through its RTO Notice of Proposed

Rulemaking has sent an unmistakable signal that the Commission intends for an

RTO to form in every region of the country by December 15, 2001.

I am confident that the Commission would promulgate rules that meet the legislation’s goals with respect to independence, scope and configuration, corporate form

(for-profit and not-for-profit institutions), operational authority and efficiency. I see

no reason for Congress to be prescriptive about such issues, or to provide detailed

legislative standards for institutions that may need to evolve over time. I would,

therefore, suggest the elimination of detailed legislative provisions describing RTO

standards and features.

Given the legislation’s mandate for RTO participation, I do not understand its rationale for financial incentives for utilities to form RTOs. The need to comply with

federal law should be incentive enough, and joining bonuses would appear to be unnecessary. In addition, they are not free, and are paid for by grid users in the form

of higher rates. I do, however, support incentives for good performance, measured

by reliability, sound congestion management, solid plans for necessary grid expansion, customer satisfaction and similar standards. Well designed performance-based

rate incentives would be good public policy.

With regard to determining appropriate RTO scope and configuration, I would

prefer that the legislation rely upon the Commission’s expertise to determine and

apply appropriate factors. If, however, factors are to be specified in legislation, I

would add a provision allowing the Commission to apply ‘‘any other factor that the

Commission determines will promote competitive bulk power markets, reliability

and efficiency.’’

Moreover, I am assuming that transmission owners must join an RTO of appropriate scope and configuration, as determined by the Commission, in order to be in

compliance with the legislation. Thus, I do not fully understand the legislative adVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00082 Fmt 6633 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
79

monition that the Commission shall have no authority to point the utility toward

a particular RTO. Absent circumstances I cannot envision, if a utility proposes to

participate in an RTO in an inappropriate region (e.g., geographically separate from

its operations), the Commission should have the authority to require participation

in an appropriate RTO region. I would suggest that the legislation be clarified in

this respect.

D. Mergers and Market Power Issues (Section 401)

The amendments to the Commission’s authority to review mergers of generation

facilities and holding companies are excellent and should be enacted.

For the bulk of mergers that raise no serious market power concerns, the specified

deadlines for Commission action would be reasonable. Indeed, the Commission has

moved expediently on mergers since issuance of our 1996 Merger Policy Statement.

For mergers that do appear to raise market power concerns, however, a hearing before an administrative law judge is sometimes required to resolve factual issues. For

such cases, I do not believe that legislative deadlines are appropriate. The Commission is always under pressure to move merger cases through the process as quickly

as possible, consistent with thorough review. In such cases, a tight statutory deadline may lead to an ill-considered and hasty approval of an anti-competitive merger,

or the unreasonable rejection of a merger that might otherwise be reasonably approved after more thorough review.

Like Chairman Hoecker, I note favorably that both H.R. 1828 and H.R. 2050

would authorize the Commission to examine and address market power in both

wholesale and retail markets under certain circumstances. Retail markets will be

regional markets that do not respect state boundaries, and it may be difficult for

some states to evaluate retail market power in regional markets without federal assistance. Thus, these are important provisions. For robust competitive markets to

develop and thrive, any residual market power should be recognized and appropriately mitigated.

E. Discrimination Against Interstate Transactions

Imagine you are driving around I-495, the Washington beltway, and a severe constraint develops due to a traffic accident. Let’s assume that the State of Virginia

has a policy that favors Virginia motorists. Virginia troopers require all vehicles

without Virginia tags to exit immediately so that only Virginia-licensed drivers can

travel on the beltway. Maryland applies the same discriminatory policy on the beltway to favor Maryland-licensed motorists. This would impede commerce and would

be completely chaotic and unacceptable on interstate highways.

Unfortunately, a recent decision of the 8th Circuit Court of Appeals, Northern

States Power Co., et al. v. FERC, sanctions this same discriminatory scenario on the

interstate electron highway. The court sanctions a preference for in-state uses of the

interstate grid. During a constraint, wholesale transactions can be cut so that the

local utility can favor its own in-state customers.

Power markets are regional, and do not respect state boundaries. A state-by-state

balkanization of the interstate grid would be chaotic and unworkable, just like the

hypothetical scenario on the beltway.

Congress should clarify the Federal Power Act to guarantee that all grid users

are subject to the same rules, and cannot be bumped off the interstate electron highway by an in-state preference. Chairman Hoecker has suggested clarifying legislative language, which I heartily endorse, in his written testimony.

F. Miscellaneous Issues

Let me in closing comment briefly on three other issues addressed by H.R. 2944:

• I agree with the thrust of the provisions promoting renewably energy, and would

endorse virtually any approach that does not distort the competitive marketplace. A portfolio approach is also a reasonable concept.

• I agree with H.R. 2944 that PUHCA should be repealed, while strengthening the

‘‘books and records’’ authorities of FERC and state regulators.

• Regional approaches for the siting of transmission wires are an excellent idea, and

appear to track the bill’s mandate for regional transmission operations.

III. CONCLUSION

I appreciate this opportunity to comment on H.R. 2944, and will be pleased to answer any questions.

Mr. BARTON. Thank you, Commissioner. I am glad we saved you

for last. That is a good way to end the FERC testimony, because

80

I agree with you—we ought to enact H.R. 2944 with modifications,

as long as I agree with the modifications.

We are going to recognize Mr. Burr of North Carolina first, because he has a pending engagement at 2:30, for 5 minutes for questions.

Mr. BURR. Thank you, Mr. Chairman, and it is with our Governor as it relates to the disaster in North Carolina, so I appreciate

the chairman’s indulgence.

I wish I could say that this panel is different than any that we

have had before on electricity deregulation, but it is not. There are

differing opinions, differing views, and the reality is that we can’t

all be right. Somebody is right, somebody is wrong, and it is somewhere in between or maybe that is where the process is supposed

to send us.

Commissioner Bailey, let me ask you, your supportive of the 240-

day merger language. Let me ask you, if we were to modify the bill

to say at the end of 240 days the lack of any FERC decision then

automatically approved the merger, would you still be supportive

of that language?

Ms. BAILEY. The lack of a decision by FERC would automatically

accrue——

Mr. BURR. Approve.

Ms. BAILEY. Approve.

Mr. BURR. Because the current language says at the end of 240

days if FERC has done nothing, the merger is denied. How about

if we say the merger is approved?

Ms. BAILEY. Well, I think either case is a little difficult to agree

with. I wouldn’t dispense with the role as far as FERC is concerned

in our merger analysis. My issue is just that it takes entirely too

long, whether the issue—whether the merger is approved or disapproved.

To actually say—I have never said that I was in favor of such

a decisionmaking process where anything would be automatic. I

think that is very difficult to do with these kinds of cases. So, I

guess I would say I would probably not be in favor of such a remedy other than to say that I think whatever duration this Congress

would put on FERC, I think they would be willing to follow and

willing to do, and the resulting decision will be what it will be.

Mr. BURR. Let me ask Commissioner Bailey, because I think you

asked specifically that there be flexibility at the end of that 240

days for the tough cases—excuse me, I am sorry, Breathitt. I apologize, Commissioner. Let me ask you, how many mergers has FERC

approved in 240 days?

Ms. BREATHITT. At the last Commission meeting, Commissioner

Massey actually announced the tally. We have had 30 mergers—

isn’t it, Bill—since we have—in the last—well, since we have

had——

Mr. MASSEY. For mergers that have been filed since the 1996

merger policy statement, 22 out of 25 have been processed within

roughly 150 days. The 3 that were not processed within 150 days

were set for hearing and have taken longer than that. But that is

88 percent that have been processed within 150 days.

Ms. BREATHITT. So, the few that, since I have been at the Commission, which is 2 years, we have only set several for hearing, and

81

those are the instances that I said in my testimony, I would ask

the committee to amend their language to give us that extra time

that we would need for those mergers that we felt presented specific facts, material facts that required extra time for us to consider.

Mr. BURR. So, with the exception of Commissioner He

 ́

bert, 240

days to make a decision is acceptable to you.

Ms. BREATHITT. Yes, I think that is doable.

Mr. BURR. I would tell you that the financial markets work on

a much smaller timeframe, and that it is the unpredictableness of

240 days which goes to the heart of what you said one of the objectives that FERC oversight should be to stimulate the development

and use of technology. If I understood you correctly, Commissioner

Bailey, you said that oversight was needed to stimulate the development and use of technology. Am I correct?

Ms. BAILEY. I made reference to technology from the standpoint

of trying to hold back from locking in a 1999 vintage vision because

of technological and other advances.

Mr. BURR. Let me just ask all of you to comment, and that will

be my last question, Mr. Chairman. How does current FERC oversight stimulate the development of and the use of technology in the

marketplace?

Mr. HOECKER. Well, Congressman, I would offer this answer. I

think that competition will stimulate technology. I think competition is what we are all after, and I think, to the extent that distributed generation or fuel cell technology, microturbines, or other

kinds of gas-based technologies for electric generation want to come

into the market, they need to be supplied with markets.

How do they get to those markets? They get there through open

access transmission, and without that, without access to markets,

those technologies are not going to be as economically

supportable——

Mr. BURR. So, in an open marketplace, in retail competition, that

does not stimulate the use of new technology? Only FERC can

stimulate the use of new technology? Only FERC oversight?

Mr. HOECKER. No, I don’t think that is what I said. I said our

goal was promoting competition. It is competition. It is the market.

And I think you and I agree on this, that it is the market that will

stimulate technological developments.

Mr. BURR. And the last comment, Mr. Chairman. Everybody has

mentioned reliability, and I think that that is at the heart of every

member of this committee. I would ask you, is there a greater degree of reliability with more competition or less competition?

Mr. HOECKER. Congressman, my answer would be competition

means a greater degree, and we have had that experience on the

gas side with open access to gas, interstate gas transportation. We

have a much higher level of reliability, and I expect similar developments on the electric side, as well.

Mr. BARTON. Gentleman’s time has expired.

The gentleman from Texas, Mr. Hall, is recognized for 5 minutes.

Mr. HALL. Thank you, Mr. Chairman.

Chairman Massey, I agree with you in saying that you have support for this bill with several amendments, and there is little I

could add in the paper. I watch the ads in the paper for cars that

82

are for sale, particularly antique cars, but I am always concerned

when they say, ‘‘1958 Buick, restorable.’’

Mr. MASSEY. I am too, Mr. Hall.

Mr. HALL. We can restore it if they give us enough money and

a good enough body, right?

Mr. MASSEY. Right.

Mr. HALL. And the chairman’s been generous with his time on

that. So, let me—Mr. Chairman, you note in your testimony about

transmission pricing incentives; that the Commission has asked for

comments on the RTO rulemaking on incentives, and starting with

you, Mr. Chairman, give me just a snapshot view of where you are

in your thinking on this issue.

Mr. HOECKER. Our proposal in the RTO rulemaking is to explore

various kinds of incentives that will stimulate more efficient economic behavior by utility transmission owners in the context of

RTOs. We mention performance-based rates, congestion pricing,

various kinds of things like risk-adjusted rates of returns, things

that would encourage better use of transmission and make utilities

more willing to access the capital markets to expand the grid

where necessary and so forth.

We are in the process of analyzing our comments now, and I expect to have a protracted conversation with my colleagues about

where we go from here on that issue, but it is an important one.

Mr. HALL. Ms. Bailey, on pages 8 and 9 of your testimony, you

seem to disagree with the chairman on the need for a deadline of

the utilities to join an RTO, and you say you believe utilities need

the time and flexibility to innovate. If you have a different vision,

and apparently you do, from the chairman, of what a restructured

bulk power market should look like or just a different way of getting there, which is it? Or is it both?

Ms. BAILEY. My disagreement with the chairman may be just in

how to get there. I agree with him wholeheartedly as to the efforts

that this Commission has put forward to move toward a competitive bulk power market. To the extent that you have mentioned the

mandate issue, I just believe that there is the ability to have more

flexibility and innovation as a result of technology and ideas, how

that might advance things as opposed to being prescriptive and

making a generic timeframe.

Mr. HALL. Mr. He

 ́

bert, do you want to add to that or you have

any different view? I would be surprised if you didn’t.

Mr. HE

 ́

BERT. Congressman Hall, I do, and I appreciate you giving

me the opportunity to answer it.

I think it is ultimately important that we provide incentives,

whether it be accelerated depreciation, increased rates of return

based on risk, acquisition adjustment, or other incentives, quite

frankly, that we haven’t even thought of at this point. And it does

go back to Congressman Burr’s question to a certain degree, too,

because he was asking about technology and how do we provide for

technological advances?

Well, we do that through competition, but he had a very good

question in asking whether or not FERC can provide it. Well, no,

sir; FERC cannot provide it. Competition can provide it. I know

someone earlier was looking for a definition of competition, which

is where supply and demand can meet, but when they start to meet

83

that is exactly when you get the investment necessary to try create

technological advances much like we have seen after the Green decision in telecommunications. But FERC has to take the initiative

and provide the economic incentive to do so.

Mr. HALL. You used the, I think, your view of separate transmission business on page 4 of your testimony, and when you use

the FTC’s word, quote a ‘‘clean break,’’ unquote, do you mean the

total separation of transmission from generation, including ownership and control?

Mr. HE

 ́

BERT. Yes, sir; that is what it means.

Mr. HALL. Full go.

Mr. HE

 ́

BERT. Absolutely. That would make it truly independent.

Mr. HALL. And on page 5, is it your view that FERC should no

longer review mergers?

Mr. HE

 ́

BERT. Yes, sir; it is.

Mr. HALL. Time limitation on FERC mergers—I think the gentleman from North Carolina got into that—resolve any of your concerns?

Mr. HE

 ́

BERT. It does in the sense that I think it is better than

what we currently have, although I will have to step back one moment and commend the Chair and the Commission for doing a good

job here in the recent past on mergers.

My point is this though: Utilities are not exempt. They have no

immunity from antitrust laws, and I have yet to be convinced by

anyone that there is anything in market power concerns that they

can’t be taken care of otherwise, through the DOJ or the FTC, or

under the Public Utility Holding Company Act and the SEC. So,

my point is, why duplicate this service if indeed it is not necessary?

We are not an antitrust agency, but we do have some in the United

States.

Mr. HALL. I think my time is up or I would ask the chairman

if he would like to answer that.

Mr. Chairman, would you like to make comment on Mr.

He

 ́

bert’s——

Mr. HOECKER. Well, I of course appreciate——

Mr. HALL. I thought he was pretty generous in acknowledging

that in some things you had done a good job.

Mr. HOECKER. Well, I think that is one for our side, but I am——

Mr. HALL. It still 3 to 2, isn’t it?

Go ahead.

Mr. HOECKER. That is the story, isn’t it?

I am very anxious that this Commission continue to process

merger applications responsibly and quickly to the maximum extent we can. We have lived up to our promise to the public in our

policy statement 3 years ago, but I do think that whereas the antitrust agencies look periodically at the electricity market, the bulk

power markets, and the consequences of mergers for competition,

we do it systematically.

We are experts in that area. We understand how those industries

and those companies work, and we think we are much more capable of conditioning mergers in a way that will allow them to go forward with some fine-tuning rather than the kind of more dramatic

antitrust type solutions that you get from antitrust agencies.

84

And I would add that I take exception to Commissioner He

 ́

bert’s

characterization. It is very clear in our case law that we are responsible for looking after antitrust type concerns in the context of

our regulation.

Mr. HALL. Thank you, Mr. Chairman.

Mr. BARTON. Thank you.

The gentleman from Florida, Mr. Bilirakis, is recognized for 5

minutes.

Mr. BILIRAKIS. Thank you, Mr. Chairman.

I wasn’t here for an opening statement, and I would just merely

add to all of the others that may have been commending and congratulating the chairman to the effect that he has been just about

as fair as anybody could possibly be up here and always openminded and listen to all of us. There are some areas that have not

been satisfactorily as far as some of us are concerned, but it hasn’t

been because he had closed mind to those ideas.

One of the areas that greatly concerns me, and I am just not

clear on, is section 102, the open access for all transmitting utilities. It seems that under those provisions FERC will be able to

order electricity be delivered to retail customers even if a State has

not elected to have retail competition.

We worked awfully hard on the date certain idea and we thought

we had that issue resolved, and then this language pops up. So, I

guess I would ask all of you your opinion. Should I, from my view

point or from the view point of those who are concerned, been concerned about the date certain concept and open access? Should I be

concerned? Do you feel that that provision gives FERC the authority, to order retail competition in closed States? Mr. Chairman?

Mr. HOECKER. Congressman Bilirakis, I don’t think that that

provision is designed to do that. I view 102 as an endorsement of

the Commission’s initiative in Order 888, which requires open access to bulk power facilities, i.e., high voltage transmission. Sometimes high voltage transmission is delivered directly off the grid to

what would arguably be a retail-type customer. Order 888 is very

clear that we would presume a distribution function in those instances so that States would maintain jurisdiction and be able to

do such things as recover retail transition costs.

So, I think that it is clear, and it is certainly our intention, and

it is the way I read the bill, that we leave regulation of the distribution function and access to the retail markets to the States.

Mr. BILIRAKIS. Well, but subparagraph 2, notwithstanding paragraph 1, ‘‘The Commission may issue an order that requires the

transmission of electric energy directly or indirectly to retail electric consumers who are served by local distribution facilities that

are subject to open access.’’ And I will admit I am not quite clear

on those last three or four words. I mean, it seems to be pretty direct.

Mr. HOECKER. If the transaction is going directly to a retail customer, we can ensure that the transmission is available to complete

that transaction.

Mr. BARTON. Would the chairman yield?

Mr. HOECKER. Yes, sir.

Mr. BARTON. If Mr. Largent can answer a question for the Deputy Secretary, I think I can answer a question for the Chairman

85

of the FERC Commission. The key phrase there is ‘‘subject to open

access.’’ So, in a closed State, you are not subject to open access,

and that is the key phrase. So, to pick a State out of the air—Florida—which is not subject to open access at the State level, FERC

would not have jurisdiction, if that eases the gentleman’s mind.

Mr. BILIRAKIS. Well, it would ease it I think if we took another

look at the language and change it in such a way so that this concern is addressed.

And if FERC orders the utility to expand its transmission capabilities, who should pay for that expansion, Mr. Chairman?

Mr. HOECKER. Well, that is a good question.

Mr. BILIRAKIS. I gather the previous one was not.

Mr. HOECKER. Your questions just keep getting better.

The bill provides for authority for the Commission to order expansions subject to State siting authority. I believe I said in my

written testimony we didn’t believe, or I didn’t believe, that that

was necessary for us to have. But if the grid is expanded, usually

the ratepayers or the wholesale customers in the locale of—in the

service territory of—the utility that is either expanding or in whose

territory the expansion occurs will pick up the tab, which is a problem if the expansion is made for the benefit of ratepayers in another jurisdiction or another service territory.

So, you raise a very, very difficult question. And it is one reason

why we think that regional institutions, like RTOs, where utilities

can work these kinds of problems out and allocate those costs on

an equitable basis is very important.

Mr. BILIRAKIS. Well, I guess my time is up. It amazing that 5

minutes went that quickly, but that is what it is.

All right. Thank you, Mr. Chairman.

Mr. BARTON. Thank you, Chairman Bilirakis.

Recognize the gentleman from Ohio, Mr. Sawyer.

Mr. SAWYER. Thank you, Mr. Chairman.

I am struck by the last comment in light of the final question

that I asked before we broke for lunch. I remember the Deputy Secretary, when I asked him about siting decisions, suggesting that we

could get all the States together and they could sort of work it out.

That was my reaction too. I was tempted to ask him if that would

work sort of like the multi-State, low-level, nuclear waste compact,

but I didn’t have the heart to do it.

How do you envision resolving precisely the kind of siting difficulties that clearly are a part of this business? You have authority

in terms of natural gas; that is difficult enough. Do you see the

need for similar kinds of authority with regard to electric transmission?

Mr. HOECKER. Well, I believe the Secretary’s response was that

there wasn’t a history of Federal siting authority on the electric

side, and I think that one could certainly make an argument that

in a competitive market, where the interstate traffic and electrons

are so much more important than they used to be, that some regional or Federal authority to site transmission might be very helpful.

Rather than recommend that, however, I have put my eggs in

the RTO basket or in some equivalent regional organization or

compact that will be able to bring together the people with the

86

most identifiable and likely common needs in a region in terms of

getting to loads, getting generation to market, and let them decide

what the appropriate expansion of the system is.

Mr. SAWYER. Are there other comments from other commissioners?

Ms. BREATHITT. I will add from my prior experience as a State

commissioner that siting is held near and dear to the hearts of

State commissions. If we did it at FERC, it would require changing

the Federal Power Act, and I agree with the chairman that I am

not advocating doing that.

You will probably hear from the next panel, from NARUC, how

they feel about siting, and I know that some have called for a comparable siting authority with respect to electricity that we have in

gas, but I think regional consultation with RTOs, with State commissions in the region where the power lines may need to go

through, could be an answer to facilitate expansion.

Mr. SAWYER. Let me ask another question. When we talk—the

chairman used the term expansion with the service territory of the

utility making the expansion. In a competitive environment what

do we mean by ‘‘service territory?’’

Mr. HOECKER. That is a good question—I am sorry. In a classic

sense, of course, a service territory is——

Mr. SAWYER. I know what it was. I am trying to figure out what

it is going to be and how some of these old structures that worked

well in a rate of return, obligation to serve environment will work

in a competitive market.

Mr. HOECKER. There will continue to be utilities who are loadserving entities who have distribution and are obligated by State

or local law to serve all the customers in that area.

Mr. SAWYER. So, you are talking about a distribution definition.

Mr. HOECKER. Right. At the bulk power level, you are absolutely

right. You have merchant generators who can sell anywhere in the

marketplace under whatever contracts they can get, and that does

tend to change the concept of a service territory.

Mr. SAWYER. Let me ask one more question. Well, I will tell you

what, I will wait for a second round. We are starting to——

Mr. BILIRAKIS [presiding]. I don’t know whether there is going to

be a second round or not; it is up to the chairman. So, without objection, you are recognized for an additional minute.

Mr. SAWYER. We have talked a great deal about the formation of

RTOs and the mandate that appears to depart from the where the

NOPR was heading. I am concerned about once formed are they

presumed to serve a useful purpose in the same configuration for

all time or are there—do you anticipate vehicles for shifting the design, and if that is the case, why not allow a much more voluntary

formation than the one that I have heard several people talk about

here today? How do you envision that changing?

Mr. MASSEY. Well, my view is we need to get them up and going

in every region of the country, and our policy provides that they

should not build in any features that would prohibit their evolution

over time. They may very well evolve. They may change shape;

they may get larger; they may move from an ISO structure to a

transco structure, and it is the Commission’s official policy that the

87

RTO itself not build into its structure any features that would inhibit its evolution to a more efficient structure over time.

Mr. BILIRAKIS. Very, very briefly, please, Tom.

Mr. SAWYER. I will pause, thank you.

Mr. BILIRAKIS. All right, good. Thank you.

Mr. Rogan.

Mr. ROGAN. Mr. Chairman, I do have a couple of questions, but

I am pleased to yield to my friend from Ohio for a follow-up.

Mr. SAWYER. I appreciate the gentleman’s generosity, but I wanted to pose a question. I don’t think we are going to get a much

more involved answer at this point, but I think it is a question that

deserves an answer as we move in building consensus legislation.

So, I thank the gentleman.

Mr. ROGAN. Thank you, Mr. Chairman, and, Mr. Chairman, I

also echo your comments earlier and wish to associate myself with

them in commending Chairman Barton for the yeoman’s work that

he has put into this particular effort. I welcome all of the witnesses.

I would like to get the opinion of each of the commissioners as

to how we should—or how you anticipate FERC would deal with

transmission over non-interstate commerce lines; in other words,

non-contiguous States? Maybe I can just start at the end.

Ms. BAILEY. When you say non-contiguous, how FERC would

deal with transmission?

Mr. ROGAN. Yes.

Ms. BAILEY. That is the crux of our open access; our Order 888

is open access. I am not quite sure where your question is——

Mr. ROGAN. Well, I am really asking, under the terms of this bill,

if this bill were to become law, how would FERC, in your opinion,

deal with regulating transmission that would be not over interstate

commerce, traditional interstate commerce?

Ms. BAILEY. To the extent you are talking about PMAs or TVA,

BPA, those kinds of entities——

Mr. ROGAN. Yes.

Ms. BAILEY. [continuing] that we have not—okay. I previously

probably have not taken a stand myself on that position, but to the

extent that we are trying to move toward what you would call superhighway in electricity, I think there I would have to say, yes,

they need to be brought into the fold.

So, to the extent that I am sure you have probably already been

in discussions, and this bill is probably a consensus, and these entities are aware, I am supportive of what you have in there. So, I

think to the extent that we want to avoid the swiss cheese factor

and the patchwork of access, I think it is key that we probably

move in this direction.

Ms. BREATHITT. I had mentioned earlier that a lot of the non-jurisdictional entities, such as the Federal PMAs and coops, that

transmit electricity have filed reciprocity, open access tariffs with

us, but I agree with my colleague, Commissioner Bailey, that to

have what we call, when we talk about a seamless grid, that 30

percent of the—roughly the 30 percent of transmission that is not

included in our tariffs eventually should be and probably sooner

rather than later.

Mr. ROGAN. Mr. Chairman?

88

Mr. HOECKER. Congressman, I think my colleagues have hit the

nail on the head. The nubs of it, I think, are that it is hard to

imagine transmission that isn’t in interstate commerce. There is a

lot of transmission that isn’t jurisdictional to the FERC for legal

reasons, but almost all of it is part of an integrated grid over which

electrons flow in and out of States, in and out of power marketing

agencies, in and out of municipal systems, and what we are suggesting is that we provide a uniform standard of comparable service and access to all that transmission, and without exception, and

that is the way we will get to a workable market.

Mr. ROGAN. Thank you.

Mr. HE

 ́

BERT. Thank you, Congressman Rogan. When I take the

approach looking at BPA and TVA, I take a little different thought

process and try to come up with a business solution, and it is my

thought that we can resolve it without having additional jurisdiction coming to FERC, and that would be to get them to sell of their

transmission assets to a jurisdictional utility, and therefore we

would—it would accomplish the same end but through a different

means. So, that would be my preference, and I have made that

clear.

I know you, as a former State legislator, understand when it

comes to munis that you have got other tax issues of local and

State concern that come up.

Mr. ROGAN. Thank you.

Mr. MASSEY. My thinking, Congressman, is that they would be

just like the interstate grid, interstate transmission, and would be

subject to the provisions of Order 888, which requires open access

service, unless the Congress specifies a different way for us to regulate those systems.

The idea is creating the largest markets possible all across the

country, and that is a function regulators of interstate commerce,

which is what we are, can facilitate. A State can open its borders

to competition, but it is very hard for that single State to ensure

grid access in the surrounding States. Only federal regulators can

do that and eliminate any swiss cheese effects.

Mr. ROGAN. Mr. Chairman, thank you. I yield back.

Mr. BARTON I thank the gentleman from California.

We recognize the gentlelady from Missouri for 5 minutes for

questions.

Ms. MCCARTHY. Thank you very much, Mr. Chairman.

I wanted to ask some clarification on how the regional transmission organizations that utilities join work with the transmission

agencies that States join. Are they the same? Because if a utility

regional—utilities join a former regional transmission organization,

is it States that have to belong to that? I am a little confused.

My only other experience with interstate compacts was with the

idea that Congress had at one point in time that if the States decided where to send the level nuclear waste, that would be the best

solution, and it didn’t work. So, could one of you clarify for me from

the bill how these would work, these regional transmission siting

agencies that States join, and then the regional transmission organizations that the utilities join?

Mr. HOECKER. Regional transmission organizations are

either——

89

Ms. MCCARTHY. Well, let me make it clear. What if Missouri

joins with New York, and that becomes our regional transmission

siting agency, but our utilities in our two States don’t join with

those parties. The New York utilities join with Connecticut, and

the Missouri utilities join with Texas? Well, who is talking to

whom, and how does this all work?

Mr. HOECKER. Okay. Our proposed rule would have contiguous

utilities joining together in a regional transmitting grid.

Ms. MCCARTHY. Oh, so you are going to do this by rule.

Mr. HOECKER. Well, we are proposing to urge utilities to do it

voluntarily, but we have set some baseline criteria for how these

organizations ought to work and when they should begin to form.

Ms. MCCARTHY. So, why do we need two different ones then, if

you are going to tell the utilities to join in these contiguous States

an the States to join in these contiguous States? Are we not—are

we really opening competition? I guess that is where I am coming

to.

Mr. HOECKER. That is a good question. There are I think four or

five States now—Wisconsin, maybe Illinois, a couple of other

States—that have actually told their utilities to join a FERC-authorized regional transmission organization. Transmission is regulated at the Federal level. What we are trying to do is to create

a broad market at the bulk power level, which is basically highvoltage transmission and energy sales and purchases between utility companies. And that will create access at the wholesale level

that will facilitate what the States do at the retail level.

Ms. MCCARTHY. Is it fair to presume that you, in a sense, will

control competition, then, by the way you design these things?

Mr. HOECKER. Well, we are asking the utilities to design it. We

are finding in many States, including California, and the States

within PJM and NEPOOL, which have now got an RTO, that State

regulators have been very influential in how these organizations

are governed, what their policies are, how the wholesale transmission entity interacts with competition at the retail level.

So, this is really an opportunity, as I view it, for regions and for

States to put their imprint on the bulk power market in a way that

they can’t now. They can engage in—help engage in regional planning activities for expansion of the transmission grid that we were

talking about earlier, enhancing reliability measures, ensuring

that——

Ms. MCCARTHY. So, let me ask a question. So, my Missouri utilities will, based on your rule, likely join with other utilities right

in the Midwest region. You are going to——

Mr. HOECKER. In some logical, economic, and physical marketplace, yes.

Ms. MCCARTHY. So, you will control that competition there——

Mr. HOECKER. I don’t think——

Ms. MCCARTHY. [continuing] and that will——

Mr. HOECKER. I am sorry. I didn’t mean to interrupt.

Ms. MCCARTHY. But what if they wanted to join with Texas or

somebody else? I mean, that is not contiguous nor logically in the

region, but it might make good economic sense.

Mr. HOECKER. Well, it would have to be a contiguous marketplace.

90

Ms. MCCARTHY. I am sorry?

Mr. HOECKER. One of the propositions in our proposed rule—and

of course we are still taking comment on this and evaluating that—

is a regional scope and configuration that for an RTO to operate

appropriately and to be acceptable, it should replicate in some

sense a historical, physical, and commercial marketplace that already exists—utilities that do transactions with each other. If Missouri finds itself in a position of sharing a common interest in

terms of utility commerce with Texas, it need only make that argument to us, and we will decide whether in fact that is the case.

Ms. MCCARTHY. Yes, and that is my point—you will control competition. I happen to think, though, by the way, with Missouri

being a low-cost State, that just staying in the Midwest and making sure we all work together, which seems to be working well now,

will continue. It ain’t broke out there. We don’t need to fix it. But

I am just wondering who is in charge here.

And, Mr. Chairman, thank you for indulging me with these questions.

Mr. BARTON. Thank you, Chairwoman—I mean, Congresswoman.

Mr. Pickering is recognized for 5 minutes.

Mr. PICKERING. Thank you, Mr. Chairman.

Let me ask just a quick question of each of you first to put things

in context, and I am just going to ask a question, do you support

or oppose an incentive-based RTO approach or a mandatory RTO

approach? And, so if we could start with Commissioner Bailey, do

you support mandatory RTO or an incentive-based approach?

Ms. BAILEY. Incentive-based, to use your words, incentive-based.

Mr. PICKERING. Ms. Breathitt—if that is the correct way to pronounce it?

Ms. BREATHITT. My opening statement reflected that I think a

voluntary approach is the best course to be on at this time.

Mr. PICKERING. Chairman?

Mr. HOECKER. I believe in supporting incentives in the right context. If your question is should incentives be the only mechanism

for creating these institutions, I would have to say no.

Mr. PICKERING. So, you would support a combination of a mandatory stick at the end as well as incentive-based approach.

Mr. HOECKER. Well, even voluntary. I think that a lot of utilities

find competition to be in their interest.

Mr. PICKERING. So, you—are you saying that there is a way to

structure a voluntary, incentive-based approach without a mandatory approach?

Mr. HOECKER. Well, that is what we have proposed. I don’t know

if I would call it incentive-based entirely, but there are certainly

incentives that we are going to seriously consider.

Mr. PICKERING. Commissioner He

 ́

bert?

Mr. HE

 ́

BERT. Incentive-based or voluntary. I am not sure if you

are using those synonymously. I know Commissioner Breathitt had

said voluntary. So, I guess to specific I would say incentive-based.

Mr. PICKERING. Commissioner Massey?

Mr. MASSEY. I support incentives for good performance once the

RTOs are formed. Performance-based rate incentives sound like a

good idea to me. The customers get good performance that way.

91

With respect to joining bonuses, I am not in favor of joining bonuses. I do believe——

Mr. PICKERING. How would you define a joining bonus?

Mr. MASSEY. I would define it as giving some sort of a financial

sweetener to a utility to entice them to join an RTO. My concern

is that someone has to pay for those, and it is the customers of the

utility through higher rates, and if we can achieve the formation

of RTOs without increasing rates in that way, that would be my

preference. But once they are formed, I do believe that we should

find ways, through performance-based rates, to incent good performance.

Mr. PICKERING. Let me clarify in one additional way. If you don’t

believe in bonuses, do you believe in sanctions or penalties if they

don’t form RTOs or mandates to force formation of an RTO of a

specific size or specific criteria?

Mr. MASSEY. I would like to see RTOs form in every region of the

country, and——

Mr. PICKERING. Does that mean FERC should have the authority

to mandate that?

Mr. MASSEY. Well, the Commission has market-based rate authority, for example, which might be——

Mr. PICKERING. So, just a clean, clear answer yes or no. Do you

support a FERC authority to mandate RTOs?

Mr. MASSEY. Yes, I do.

Mr. PICKERING. Okay. So, 4 to 1, is that correct? Incentive voluntary approach versus a mandated approach?

Mr. HOECKER. Well, let me clear about this.

Mr. PICKERING. Maybe 3 to 2.

Mr. HOECKER. I think we are going to explore with the industry

ways to get our desired goals through a voluntary approach, but

that the Commission may find it necessary in some instances in

the future to explore other kinds of approaches.

If, for example, Congressman, all the utilities in your part of the

country were to join an RTO and began to enjoy the benefits of that

regional marketplace, but one or two utilities with key transmission facilities refused to join or refused to fill in the blank spots,

the Commission is confronted with a tough policy choice there.

Mr. PICKERING. Okay. Let me now go into the details or the substantive if you were to take an incentive-based approach. Now, the

chairman, Chairman Barton, has included some incentives that

were included in a bill by Mr. Sawyer that would give incentives

to form the RTOs or the transmission organizations. Do you support those provisions, and what in addition should be included in

legislation to give the greatest opportunity for a voluntary, incentive-based approach to work?

Let me start, first, with Commissioner He

 ́

bert, and then, Chairman, if you want to add anything and anybody else on the panel.

Mr. HE

 ́

BERT. Thank you, Congressman Pickering. I have supported incentives, as you know, and I have had a conversation, as

well, with Congressman Sawyer, and he knows that I do support

that and think that is exactly the direction that this Commission

should move in.

If we do it voluntarily, not only do we save ourself the time in

not having to get out and mandate these, we also save our time,

92

because through the incentive process, you are not going to have

the lawsuits that you would otherwise have through trying to force,

such as you have right now with 888 and northern States. It is the

better route to take. It is an easier route to take, and with everything being as unclear as it is right now, I see no reason to go in

that direction.

But the exact incentives that you are looking for would be something in the neighborhood of accelerated depreciation, an increased

return on equity based on risk, an acquisition adjustment. Because

in the end, when you are looking at the acquisition of those assets,

there are two things that have to be answered. The selling company wants to know how much of it can they keep? In other words,

the stockholders want to know how much of it can they keep? My

suggestion is that you allow them to keep half of it; the other half

would go to the ratepayers. When it comes to the other side, the

acquiring company wants to know what type returns they are going

to be able to make, and you need to also answer what the valuation

will be based on when it comes to their rate of return.

Mr. PICKERING. Chairman?

Mr. HOECKER. I believe 202(h) is the provision you are looking

at, and I find the list of potential incentive transmission pricing

policies listed there to be pretty attractive, and we are going to be

sorting through those and figuring out how we can make that or

something similar work.

I would say, however, that the provision appears to provide incentives to transmitting utilities to form RTOs, and I suggest that

the bill may be internally inconsistent in the sense that there is

a mandate and then this incentive provision. I, frankly, think that

utilities are going to want to get in the transmission business or

set up a separate transmission company if they think that is going

to be a viable and competitive and economically sound line of business, and that is what we ought to focus on—inducing good performance, as Commissioner Massey says, but also making it clear

that these new companies are going to be able to attract capital in

the marketplace, expand the grid where necessary, and that they

are not going to be penalized in their rates of return because of the

establishment of a transmission company.

Mr. PICKERING. How would you resolve the internal conflict?

Mr. BILIRAKIS [presiding]. We are running out of time here, Chip.

Mr. PICKERING. I yield back.

Mr. BILIRAKIS. I would hope that what they are telling us is that

the bill’s language should be changed in that regard, and I suppose

that is where you were.

Mr. PICKERING. Yes, they were going in the right direction.

Thank you, Mr. Chairman.

Mr. BILIRAKIS. Mr. Largent to inquire.

Mr. LARGENT. Thank you, Mr. Chairman.

Mr. Hoecker, does the FERC currently have the authority to address market power in the wholesale markets?

Mr. HOECKER. We have authority to address market power most

specifically when we review mergers, when we set rates and terms

and conditions of service. I think that our market power review is

inherent in the Federal Power Act, but that there are, I think,

some limitations in terms of the kinds of remedies we can achieve

93

and how we can address market power concerns in a more competitive environment when utilities are required to change their conduct and not to, for example, operate their transmission to favor

their own generation.

Mr. LARGENT. Is the wholesale market not competitive today? Is

that what you are saying?

Mr. HOECKER. I don’t think it is entirely competitive, no.

Mr. LARGENT. And why not?

Mr. HOECKER. Well, I think it is—I think, first of all, there are

big parts of the wholesale market that are not subject to open access or part of the interstate——

Mr. LARGENT. Like TVA or munis or——

Mr. HOECKER. Yes, I think that is certainly a big question as to

how we could possibly assure against the exercise of market power

in those instances.

Mr. LARGENT. What about in areas that FERC does have authority over the transmission with IOUs? Have you, at the FERC, have

you guys looked at cases where you believe market power has existed, but you felt like that your remedies have fallen short?

Mr. HOECKER. Well, RTOs maybe, you can view that as one example. The fact is that utility companies have come through this

century as largely vertically integrated companies with transmission distribution and generation and that will, quite understandably, work in the market in ways that will favor the biggest

return on all those assets together.

RTOs are one way of separating or functionally disaggregating

parts of the industry so that there is more competition, there is

more confidence in the impartiality, shall we say, of the operation

of the transmission system. Without remedies like that separation

and I very seldom bring up the ‘‘D’’ word, because it is kind of a

red flag, but without those kinds of remedies, we have to resort to

things like cost of service ratemaking and to treat utility companies

as if we were in the 1960’s instead of on the verge of a new millennium and a market economy for energy.

Mr. LARGENT. Well speaking of that, have you guys ever had to

do that? In other words, revoke somebody’s market-based rates as

a penalty for exerting market power?

Mr. HOECKER. Well, we have granted market-based rates in hundreds of instances, but we have said, for example, that in certain

geographic areas or certain markets where competition cannot be

shown in the generation area, we would not grant market-based

rates.

Mr. LARGENT. You have done—you have denied——

Mr. HOECKER. We have done that, yes.

Mr. LARGENT. Okay. Let me ask you another question, and that

is that different regulatory schemes found within Mr. Barton’s bill

on transmission, on bundled versus unbundled sales. Is that workable? I mean, how can you do that?

Mr. HOECKER. Are you talking about section 101?

Mr. LARGENT. What section is that?

Mr. HOECKER. The jurisdictional provision.

Mr. LARGENT. I think it is section 101.

Mr. HOECKER. Yes.

94

Mr. LARGENT. Where you have a State PUC regulating transmission for bundled sales and FERC regulating transmission of

unbundled sales, and how do you do that on a national grid? I

mean, is that workable?

Mr. HOECKER. It is difficult. I think that the Federal Power Act

speaks to our jurisdiction over transmission and says very little

else. But over the years, we have accommodated the States, and

they have generally regulated the rates, terms and conditions of

service or transmission that is bundled in a retail transaction. And

I think that that is an effort to strike a balance over the use of facilities that we share jurisdiction over arguably. And that works

okay if we can all agree.

Mention was made earlier and in my testimony about the 8th

Circuit decision that would allow States to, rather than curtail

their own native load or their own retail markets, to prefer those

and to curtail somebody else, and that is on the transmission level.

That decision is somewhat problematic, because in Order 888 we

said that all uses of the transmission should be comparable; that

is, if a utility finds itself constrained in terms of transmission and

has to curtail, it should do that pro rata across all uses of that

transmission. This court decision appears to say that that is an interference with the retail marketplace even though we are talking

about transmission.

It is a very confusing area, and if that decision were applied very

broadly, I think there is a substantial risk of some serious balkanization of the wholesale marketplace. And, quite frankly, I think a

competitive marketplace where everyone gets the same treatment

in terms of use of the wires, is the best protection that State retail

customers and State commissions have, and I hope we can persuade them of that.

Mr. LARGENT. Mr. Chairman, I see my time is up. I want to take

advantage of this excellent panel and hopefully get a chance on a

second round of questioning.

Mr. BILIRAKIS. Well, that is really up to Mr. Barton. I do know

that the next panel has been sitting very patiently since 10 o’clock

this morning, but that is up to the chairman and whatever he

should decide to do.

Mr.—he has gone to Norfolk?

Mr. Markey to inquire.

Mr. MARKEY. Thank you, Mr. Chairman. Thank you very much.

Mr. BILIRAKIS. Your time started a few seconds ago.

Mr. MARKEY. Thank you, Mr. Chairman.

Welcome, sir. I would like to examine the Barton bill and have

you look at section 101 and ask whether or not you believe that

that section codifies the recent 8th Circuit decision and, if so, what

impact that would have on FERC’s ability to prevent utility monopolies to grant themselves preferential service for their own use and

prevent competitors from fairly, effectively, and efficiently utilizing

the transmission grid?

Mr. HOECKER. Well, arguably, you can certainly read the 8th Circuit decision as doing just that. Whether this language—I think

this language basically codifies what we said in Order 888, which

is that to the extent transmission is bundled within a retail service,

to that extent, we would defer to the States in terms of the regulaVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00098 Fmt 6633 Sfmt 6602 E:\HEARINGS\60356 txed02 PsN: txed02
95

tion of rates and terms and conditions of service, provided—and

this is a big provided—provided that all uses of the transmission

system are comparable and that a utility applies its curtailment

policies, for example, on a prorated basis to the all the uses. The

8th Circuit departs from that formulation, but I don’t necessarily

see this language adopting that.

Mr. MARKEY. You don’t—so you don’t—in your view, section 101

does not undermine the Commission’s comparability standard?

Mr. HOECKER. I don’t think it has to, and I think that the

Commission——

Mr. MARKEY. You don’t think it has to? I mean, is it clear that

it does or doesn’t or would you need—do you need to be clarified

or are you going to leave it for a court decision? Does the 8th Circuit have to go in and clarify? I mean, what do you mean it doesn’t

necessarily have to?

Mr. HOECKER. Well, I would put it this way: The call here that

States have authority over that portion of transmission that is bundled within a retail service was a call that this Commission made

in 1996, and if the principles of comparability are adhered to by

providers of transmission, I don’t think that that necessarily has

an adverse effect on our competitive objectives.

If, however, like the 8th Circuit decision, this jurisdictional call

is leveraged into the kind of discriminatory practice that you are

talking about, that is a problem. I don’t necessarily think that this

language necessarily gets us to that point, but it certainly lays the

predicate for it. I agree with you.

Mr. MARKEY. Okay. Now, the RTO provisions of the Barton bill

appear to tell the FERC to accept utility RTO proposals but give

FERC no other options. Is that a correct assessment?

Mr. HOECKER. I am very sorry; would you please say that again?

Mr. MARKEY. I said that the RTO provisions in the Barton bill

appear to tell FERC to accept utility RTO proposals but give the

FERC no other options. Is that your reading of the Barton language?

Mr. HOECKER. Yes, I think that it pretty much says if the utility

proposal conforms to the criteria in the statute, that we should accept it.

Mr. MARKEY. Okay. So, under the RTO proposal, can FERC reject an RTO that is too small, not sufficiently independent, or without adequate authority?

Mr. HOECKER. Under the legislation, I think we could. It does

refer to scope and configuration, and I am assuming that we would

have to be clearer and more detailed in the statute in implementing that provision.

Mr. MARKEY. So, you think you would have sufficient latitude,

then, to foster an RTO that satisfies the minimum conditions under

the language?

Mr. HOECKER. Yes. The real problem I have is that it is not clear

that 2, 3 years hence these are necessarily going to be all the appropriate minimum conditions that might be desirable from a commercial standpoint.

Mr. MARKEY. Okay. So, in you mind, what would be the reason

for providing incentives to an RTO that is already in existence?

96

Mr. HOECKER. I think that the view I have of incentives generally runs to encouraging utilities to engage in the most efficient

economic behavior. Certainly, whether or not they are in RTOs, we

would want them to do that, but in particular I think that the benefits of RTOs and the benefits of incenting utilities to perform better is worth it to this Commission, and hopefully the Congress, to

sweeten the pot a little bit.

Mr. MARKEY. If I am correct, do you establish the FERC——

Mr. BILIRAKIS. The gentleman’s time is up. Now, how much further?

Mr. MARKEY. I have one question.

Mr. BILIRAKIS. One question with a very brief answered required.

Mr. MARKEY. If I am correct, the established FERC position is to

eliminate rate pancaking. Is the provision on incentive rates or

phasing out pancaking at odds with FERC policy?

Mr. BILIRAKIS. Brief response, please.

Mr. HOECKER. I don’t think it is.

Mr. MARKEY. You don’t think it is.

Thank you, Mr. Chairman.

Mr. BILIRAKIS. Mr. Bryant, who has been waiting very patiently.

Mr. BRYANT. Thank you, Mr. Chairman. I will be brief. I want

to yield the balance of my time to my colleague from Oklahoma.

But, Mr. Chairman, I have a question regarding H.R. 2944 and

its allowance to TVA to sell wholesale power outside the so-called

fence. Could TVA get FERC approval to charge market-based rates

for these sales outside the fence? And, if you could, could you answer that for me in writing?

Mr. HOECKER. I would be delighted to do it in writing.

Mr. BRYANT. Okay. And, second, my concern is that we deregulate—we truly deregulate as best we can, realizing there is a need

for some regulation. What—could you answer again in writing

what you anticipate under a Barton-type bill to be the growth in

the size of your organization? I assume you are going to need additional manpower, funds, and so forth. If you could give us somewhat of a reasonable projection based on a Barton-type bill.

Mr. HOECKER. I will do the very best.

Mr. BRYANT. Is that feasible? Okay.

And at this time, I would yield the balance of my time to Mr.

Largent.

Mr. LARGENT. Thank you, my friend from Tennessee.

Mr. He

 ́

bert, I wanted to ask you one question about part of your

testimony on page—well, what page is it; there is not a number on

it. But you said that earlier existing ISOs failed the independence

test. Could you comment on that?

Mr. HE

 ́

BERT. Yes, thank you, Congressman Largent. The ISOs as

we know them today, the very genius in the ISO itself is in the

name—independent system operator—where they are anything but

truly independent, because you have a stakeholder group who is

going to make the decision when it comes to planning and forecasting and the organization itself. And to become completely independent my suggestion is that we move toward an independent

transmission company that has total separation from operation and

control. We have someone who is in the transmission business.

97

Now, as you know, and you and I have had private conversations, and it is my testimony and my belief that at rates of return

of under 10 percent certainly we are not going to get people in the

transmission business, so we have got to give pricing signals to get

them in the business. Now, the way for us to do that is through

the incentive process, and you will have people come to the table.

I have people come to my office and speak with me privately. I had

a gentleman in my office I was speaking about earlier today who

had $50 billion who was ready to put one together. These people

are ready to do it, but they are not going to do it for less than 10

percent when on the open market they can make 12 and 15 and

18 every day.

Mr. LARGENT. Well, the current—the ISOs that exist today, do

they not have consumer advocate groups that are part of the board

or——

Mr. HE

 ́

BERT. Yes.

Mr. LARGENT. But you are saying that they don’t—it is the IOUs

or the stakeholders that dominate the board is what you are saying.

Mr. HE

 ́

BERT. Well, the consumer groups are one of the stakeholders. You also have the companies themselves. You have stakeholder groups which are defined by the ISO themselves.

Mr. LARGENT. But I am talking about consumer advocacy groups

that are not stakeholders in transmission or—I mean, there is not

consumer groups that are stakeholders in owning generation assets

or transmission assets or distribution assets, are there? I mean,

you said that consumer groups are stakeholders. In what sense? As

ratepayers?

Mr. HE

 ́

BERT. No, in the sense—let me give you California, for example. You have consumer advocates, which I don’t know how

many seats they hold currently on the committee, but they hold

seats on the committee.

Mr. LARGENT. Right.

Mr. HE

 ́

BERT. Which is a committee of 25, I believe.

Mr. LARGENT. Well, I guess when I heard you say stakeholders,

I assumed you meant that people who were regulating themselves.

Consumer groups aren’t regulating themselves other than being

ratepayers. You see what I am saying? I mean, if a consumer advocacy group is sitting at the table, now there may be an issue about

the ratio of IOUs versus consumer groups that throws the balance

to what I term stakeholders, and that may be an issue. Maybe that

is what you are talking about in terms of losing independence. Is

that what you are saying?

Mr. HE

 ́

BERT. Well, I guess part of the problem you and I are getting into is semantically in that I have become quite confused on

exactly what a consumer group is, be it from my days in the State

legislature to chairman of the State commission, to here. What is

a consumer group to one is certainly just an advocate for an interest to another, as you know. You know that; you deal with on a

daily basis.

But the ISOs themselves are not independent to the extent that

you don’t have total separation from operation and control. The operators are still players in controlling the ISO itself. When it comes

98

to an independent, for-profit transmission company, you have total

separation.

Mr. LARGENT. I gotcha. Okay, thank you, Mr. Chairman.

Mr. BILIRAKIS. Mr. Hall, do you have a further question for

these—the chairman is in the other room, and he wants to ask

some questions, and—he does not prefer to go into a second round.

Mr. HALL. You mean, he wants a round and——

Mr. BILIRAKIS. No, his round—he hasn’t had his round yet.

Mr. HALL. Well, we don’t want one either.

Mr. BILIRAKIS. He wants to ask questions from the first round,

but I am willing to recognize members of the panel for one question

each, if they would like, until he comes in. I hereby recognize you.

Mr. HALL. Mr. Chairman, if we would be allowed to submit questions and the panel would agree to answer them within a week, because we may be marking this up in a week or 10 days.

Mr. BILIRAKIS. By all means. That of course is a request of the

panel regarding all questions.

I would ask this then: Some charge that H.R. 2944 codifies the

northern States power decision and balkanizes transmission regulation by providing for State regulation of the transmission used in

retail sales—the subject we were on a few minutes ago that Mr.

Largent went into. In your view, does H.R. 2944 codify the northern States decision or does it codify Order 888, and does it in fact

balkanize transmission regulation?

Mr. Chairman?

Mr. HOECKER. In my view, my reading of the bill is that it codifies the jurisdictional call in 888. It doesn’t necessarily codify the

decision.

Mr. BILIRAKIS. Any further quick responses to that? Mr. He

 ́

bert?

Mr. Massey?

Mr. MASSEY. Mr. Chairman, I would not legislate that division

of authority. That is the call we made in Order 888, but it would

concern me somewhat to legislate it, because I am not sure what

flows from that, and it may be that it would lead to a further balkanization of the marketplace that we would see over time as

things develop. So, my preference would be not to legislate that distinction between bundled and unbundled transactions.

Mr. BILIRAKIS. Mr. He

 ́

bert?

Mr. HE

 ́

BERT. Thank you, Mr. Chairman. As to Northern States,

I would have to agree with the chairman—I think it is a very close

call. I don’t know. It would be my thought initially that it does not

codify the Northern States’ case. However, when it comes to 888,

it does not in fact codify 888, but what it does do is codify the authority to issue 888.

Mr. BILIRAKIS. Any further comments?

Ms. BREATHITT. With respect to bundled versus unbundled retail

sales, I would think that at some point in time the other 25 States

will probably make decisions to have retail open access, at which

time there won’t be any more bundled retail sales; that would go

away. If you had it in the legislation, it may become outdated.

Mr. BILIRAKIS. Yes, well, it is an area that needs to be clarified,

certainly.

Mr. Sawyer, do you have anything you want to offer?

Mr. Bryant?

99

Mr. Largent?

Mr. Chairman?

Mr. BARTON. Thank you, Mr. Chairman. I would like to ask my

5 minutes of questions now.

Mr. BILIRAKIS. By all means, please do so.

Mr. BARTON. I want to thank the entire Commission for being

here this afternoon. I have a few fairly simple questions.

First, I want to ask if the Commission is generally supportive of

the provisions in the current draft on Bonneville and the TVA in

terms of FERC authority that is extended to those Federal utilities?

Mr. HOECKER. I am.

Ms. BREATHITT. I am.

Ms. BAILEY. I am, also.

Mr. MASSEY. Yes, I am too.

Mr. HE

 ́

BERT. I am, Mr. Chairman, with the exception—I think

what you are trying to accomplish is the right thing; however, I

have told you privately, as well, I think the best way—and I understand bills are made of compromises—but the best way would be

to sell of those transmissions assets to a jurisdictional utility instead of increasing the authority that FERC has.

Mr. BARTON. Okay, I understand that.

Second, we have got several members of the subcommittee on

both sides of the aisle that are very concerned about FERC jurisdiction over the transmission system in terms of cooperatives and

municipals. We have put in a small transmitting utility exemption.

We also encourage distributed generation facilities. Currently, it is

at 50 megawatts, and I am getting a lot of complaints that that is

too big. Does the Commission have a number that you would feel

comfortable with, if we took that from 50 megawatts and took it

down to a smaller number? And if you do, I would sure like to hear

your number.

Mr. HOECKER. Mr. Chairman, I know that I don’t have a number.

I think that interconnection for small distributed generation is certainly appropriate. I don’t know what the feasible cutoff would be

from a statutory perspective.

Mr. BARTON. Okay. Does the number 10 megawatts strike a bell

with anybody? Or you just don’t want to say?

Ms. BAILEY. I think from the standpoint of a 50 megawatt, I

think there are some power plants that can be 50 megawatts, so

that is why you are getting some feedback probably on that.

Mr. BARTON. Yes. And we realize that we have been too generous, and we—we, I; I am not going to blame the subcommittee

for this. Okay.

What about the provisions we have put in on self-certification for

cooperatives if they send a letter to the Commission that they are

not FERC jurisdictional? Have you all—that they are not a transmission cooperative and they are not going to be FERC jurisdictional. We have tried to make that as simple and as easy as possible, because the cooperative said that they didn’t have the funds

to hire high-priced attorneys and things like this. Have you all

looked at those provisions, and, if so, are those acceptable to the

Commission?

100

Mr. HOECKER. Speaking for myself—we haven’t talked—but we

have instances in other statutes for self-certification, and I think

that we could make that work. We have provided waivers from

open access for small cooperative utilities even if they owned transmissions. So, it is something that we have some sympathy for.

Mr. BARTON. Okay. Three of you are former State regulators, and

if I were to summarize the dispute between the subcommittee in

terms of how to reach the goal of competition, there is one group

that thinks we ought to defer as much as possible to the States and

be as circumspect as possible in terms of additional authority at

the Federal level. And that is where the current draft is. There is

another group that feels like that we need more direct Federal

intervention to get to the market that everybody supports.

In your opening statements, all of you were generally supportive

of the thrust of the bill, which does not have a Federal mandate

in terms of a date certain, and it does defer generally to the States

in any area that it can. Are you all comfortable with that approach?

Mr. He

 ́

bert?

Mr. HE

 ́

BERT. Mr. Chairman, if I may, the August 4 draft used

the term ‘‘maximum practical deference’’ to the States, which I

thought was preferable to the language of this one. I think you just

the term ‘‘deference.’’ So, if I had to choose the language of the two,

being a former State legislator and State chairman, I would suggest that ‘‘maximum practical deference’’ would be preferable.

And a lot of that would have to do with which boulevard you

take. Which end of the boulevard are you going down, and if you

are going down the one which takes you toward mandates, then

you probably don’t want to give as much deference. But if you are

going toward voluntary incentive-type systems and RTOs, then

maximum practical deference I believe would work and be in the

best interest.

Mr. BARTON. Any other Commissioner, Ms. Breathitt?

Ms. BREATHITT. I haven’t read NARUC’s comments that will be

proffered soon by my friend, Marsha Smith from Idaho, but the history of the Commission working well with the States to work out

the difficulties where our jurisdiction butts up against their jurisdiction, it is fairly well defined in the Federal Power Act. To be a

little bit more direct, unless there is something that I don’t know

at this point, I think your current bill keeps those lines well divided.

Mr. BARTON. Last—oh, Mr. Chairman—Hoecker?

Mr. HOECKER. I just want to make an observation, Mr. Chairman. I don’t think over the last half dozen years you will find a

commission that is more deferential and accommodating to State

interests. This integrated industry that we are talking about today

affects both Federal and State interests profoundly, and we try to

accommodate them in a variety of ways. We have been deferential

in terms of their ability to recover stranded costs. We have been

deferential in terms of their jurisdiction over bundled retail service.

We are deferential in terms of their ability to regulate reliability

at the retail level, and even in some transmission areas, I would

be deferential. We are deferential in terms of their ability to have

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tial in terms of how we try to facilitate retail competition. And we

have really, I think, gone more than the extra mile in that regard.

But make no mistake about it, what we are talking about here

is regulation of an interstate—of interstate commerce in electricity,

and at some point I think there has to be a recognition that there

is a large Federal interest at stake here and that we need to take

action at the wholesale level to make competition happen.

Mr. BARTON. Mr. He

 ́

bert, and then my time is expired.

Mr. HE

 ́

BERT. Mr. Chairman, just one other quick observation.

Mr. BARTON. We will let Ms. Bailey—Commissioner Bailey—we

are going to give everybody a shot now. So, you all waited a long

time. That is why we wanted all five of you here.

Mr. HE

 ́

BERT. Just a quick observation. As you know, once we

start arguing what the intent of Congress was or is, we have to

look at clarifying language, and whatever you pass, if you do pass

something, if you come out with deference, I can guarantee you

there will be a day at the FERC, at the Commission table, where

someone argues they didn’t mean maximum, they mean practical,

they just meant mere deference, because they had the opportunity

to do something else.

Mr. BARTON. Okay.

Mr. HE

 ́

BERT. Thank you.

Ms. BAILEY. Mr. Chairman, let me just suggest that the issue of

deference is because traditionally, historically, the bulk of the jurisdiction has been with the States. The States are very critical to

your vision and our vision of this competitive electricity competition bill and reliability legislation that you have here.

Legislation that just transfers more authority to FERC is not

useful in this process, I think, to the extent that what you are seeing now is the result of successes of the initiatives that FERC has

done and that should be built upon, and I think the States are at

the point where they could help us do that. So, I am definitely in

the camp where with cooperation and collaborative efforts with the

States, I think is very necessary.

Mr. BARTON. Thank you. Thank you, Mr. Chairman.

Mr. BILIRAKIS. Thank you, Mr. Chairman.

I think we have completed the questioning from the panel here,

and thanks so much. You have been very, very patient and very

busy people, and you have sat here very patiently through these

many hours. We appreciate it. You have been an awful lot of help.

Thanks, Mr. Chairman, and members of the Commission.

The next panel will also have been most patient. The Honorable

Marsha Smith, commissioner of Idaho—with the Idaho Public Utilities Commission, representing the National Association of Regulatory Utility Commissioners, and Mr. Irwin ‘‘Sonny’’ Popowski,

Pennsylvania Consumer Advocate Office of Consumer Advocate,

Harrisburg, Pennsylvania, representing the National Association of

State Utility Consumer Advocates.

If they would come forward, please.

Let us have a little bit of order. The hearing has not ended.

Your written testimony has already been presented and a part

of the record, and I will set the clock at 5 minutes. Obviously, I

won’t cut you off if you go over it to some degree. You have been

102

very patient. We appreciate your taking the time, both of you, to

be here.

And we will recognize Ms. Smith to present her testimony.

STATEMENTS OF MARSHA H. SMITH, COMMISSIONER, IDAHO

PUBLIC UTILITIES COMMISSION, REPRESENTING THE NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS; AND IRWIN ‘‘SONNY’’ POPOWSKY, PENNSYLVANIA

CONSUMER ADVOCATE OFFICE OF CONSUMER ADVOCATE,

REPRESENTING THE NATIONAL ASSOCIATION OF STATE

UTILITY CONSUMER ADVOCATES

Ms. SMITH. Mr. Chairman, thank you for this opportunity to be

here today. I really appreciate it. And the first thing I want to say

is to thank the chairman for his hard work on the bill that we are

considering today and to thank the staff of the committee, the subcommittee, for being always available and attentive to listen to the

State concerns, which have been many. So, we really appreciate

your hard work.

This is a lengthy bill with many provisions, and of course it is

not possible to address them all in 5 minutes, so I am going to hit

on a few key provisions that are still very important to us.

First of all, we strongly support reliability legislation. There is a

need to move from the current voluntary system to a mandatory

system. Title II will have our unqualified support if a glaring omission is corrected. And that glaring omission is that there is no role

for State policymakers in the process outlined. And there must be

a role for the State policymakers in reliability. Who gets the calls

when the lights go out because of transmission system trouble?

Governors and State public utility commissions, that is who. It will

not be acceptable to tell folks at home to call FERC or Congress

or a national reliability organization. This is not only good policy

but just plain common sense.

We propose two additions to the reliability section of the bill. Our

proposed language is attached to my written testimony. First, we

suggest a savings clause for those States which now exercise authority to ensure reliability. Don’t take from the States, which already exercise their existing authority to deal with their specialized

concerns.

Second, we suggest a statutory process for a State advisory role

at the regional level. Recently, opponents of the advisory role have

raised the specter that it will balkanize and be another layer of

regulation. All you have to do is look at the successes in the western interconnection to know that the opposite effect will occur. This

will be a process to efficiently and cooperatively address, at the regional level, the concerns that arise at a regional level. It is not another decisionmaker or level of regulation or bureaucracy.

The two provisions we propose have widespread support. You already have letters from numerous groups representing a wide variety of interests nationwide. Please add these provisions to the bill.

We really appreciate the evidence that our earlier comments

were heard and that there is no mandate for States to implement

retail competition by a date certain. Nearly half the States have

acted to date; others will follow in an appropriate manner and at

a time that is right for them. So, it makes little sense to us, and

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we oppose the provisions of the bill that impose hard reciprocity.

That is a detriment to States trying to create the most active and

efficient retail competition.

Why limit the choices their consumers can enjoy? Why limit offsystem revenues that can lower rates? If the purpose of the legislation is to lower consumer electric bills, then reciprocity does not belong in it. Furthermore, interconnections also go beyond national

boundaries. So, to the extent that reciprocity is also imposed on an

international basis, it causes difficulty for States that have boundaries with Canada and Mexico.

On distributed resources, I want to point out that many States

are strong supporters of distributed resources and technologies,

and some believe that those are the future of this industry. A 1998

NARUC resolution supporting greater consistency in terms and

conditions of interconnection of small scale generating units demonstrates our support.

Unfortunately, the provisions of section 542, dealing with special

rules for distributed generation, will not encourage or facilitate the

development of these technologies. Instead, they are likely to create

more problems and probably delay and hamper the deployment of

distributed resources.

Interconnection on the local distribution level is a State and local

concern. It has serious consequences for distribution reliability.

FERC is not the correct entity to oversee these types of interconnections. The State commissions are in place to address these

very local concerns, and will be able to do so faster and with better

results, because they are aware of different concerns that may

apply to different systems. A statement by Congress expressing a

Federal policy to encourage distributed technologies would be positive. The provisions of section 542 may be disastrous. Public safety

is at issue as well as electric reliability at the local level.

I am very pleased to see that responsibility for the formation of

regional transmission organizations, or RTOs, has been placed on

the industry and the regions. All of the regions of the Nation are

actively engaged in forming or working toward forming the right

regional body in terms of geographic scope and governance structure. I do share some of Commissioner Bailey’s concerns with the

dates that are in the bill and believe that they may not be realistic.

I would like to emphasize that State jurisdiction over retail services must be retained regardless of the facilities used. System

maintenance, planning, and siting are core State responsibilities

and must remain so. We are concerned with legislating the FERC’s

seven factor test out of Order 888. Instead, we urge a wholesaleretail test, a transaction test, not a wires classification test.

The bill could also be enhanced by the provisions to secure public

benefits that may otherwise be lost. NARUC supports maintaining

programs that support energy efficiency, renewable technology, research and development, universal service, and low-income assistance.

With that, Mr. Chairman, I would commend to you the written

comments, which in more detail outline our concerns with the bill

but recognizing that it is a good place to start.

[The prepared statement of Marsha H. Smith follows:]

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PREPARED STATEMENT OF MARSHA SMITH, COMMISSIONER, IDAHO PUBLIC UTILITIES

COMMISSION AND VICE CHAIR, NATIONAL ASSOCIATION OF REGULATORY UTILITY

COMMISSIONERS

Mr. Chairman and Members of the Subcommittee: My name is Marsha Smith. I

am a Commissioner on the Idaho Public Utilities Commission and Vice Chair of the

National Association of Regulatory Utility Commissioners (NARUC) Committee on

Electricity. I also serve NARUC as a member of the Ad Hoc Committee on Electric

Industry Restructuring. In addition, I am Chair of the Committee on Regional Electric Power Cooperation (CREPC), a committee of the Western Interstate Energy

Board (WIEB). WIEB is an organization of 12 western States and 3 Canadian Provinces. 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. Within

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

serve the public interest by seeking to improve the quality and effectiveness of public regulation in America. More specifically, NARUC is comprised of those State officials charged with the duty of regulating the retail rates and services of electric,

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

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

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

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

which are just, reasonable and nondiscriminatory for all consumers.

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

United States House of Representatives, Committee on Commerce, Subcommittee on

Energy and Power regarding H.R. 2944, the ‘‘Electricity Competition and Reliability

Act.’’ I commend the Chairman for holding this hearing and for the work and effort

by you and your staff to produce this legislation. NARUC and its members appreciate the complexities you have confronted while trying to get H.R. 2944 to this

juncture. We would also like to thank you for your consideration of our views

throughout this process and your efforts to reach a compromise on issues important

to the States.

Since the beginning of the debate in Congress regarding electric industry restructuring NARUC has been guided by a set of basic principles in the transition to competitive retail electricity markets. A general theme of these principles is that the

States should have jurisdiction over components of the competitive retail electricity

market, including reliability and FERC jurisdiction should be focused upon components of the competitive wholesale electricity market. To this end our principles are

intended to support State restructuring initiatives and to provide customer choice

while ensuring the continued provision of adequate, safe, reliable and efficient energy services at fair and reasonable prices at the lowest long-term cost to society.

In light of the local impact that restructured retail markets will have, State commissions and legislatures should decide whether, when and how local markets

should be opened to greater competition. We would like to express our appreciation

for your decision to not include a date certain mandate in H.R. 2944.

A brief summary of NARUC’s restructuring principles:

• The safety, reliability, quality and sustainability of services must be maintained

or improved;

• All consumers must share the benefits of structural improvements and be protected from anti-competitive behavior, undue discrimination, poor service and

unfair service practices;

• Public benefit programs must be maintained, including those which support energy efficiency, renewables technologies, research and development, universal

service and low-income assistance; and

• States and State commissions must be afforded the flexibility to determine retail

electric policies, including the content and pace of restructuring programs and

retail stranded cost determinations.

Based on these basic goals, NARUC believes that Federal legislation could enhance restructuring initiatives by:

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

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

Federal Power Act;

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

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

105

• Affirming States’ authority to regulate retail power delivery services regardless of

the facilities used, thereby eliminating the threat of customers bypassing the

local distribution network;

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

retail electric services, including retail transmission services;

• Authorizing the voluntary formation by States of regional regulatory bodies to enable States to address regional transmission and system operation concerns;

and

• Reaffirming a State role in reliability.

I would now like to devote the remainder of my time to discussing H.R. 2944.

DISCUSSION OF PENDING LEGISLATION

Title I—Open Transmission Access

Section 101 of this Title provides that the States shall have the authority to require retail competition or unbundling of transmission and distribution. The Federal

Energy Regulatory Commission (FERC) is given exclusive jurisdiction over

unbundled retail transmission but is specifically denied jurisdiction over bundled retail sales of electricity subject to State regulation. The Section permits States to impose charges on retail services for public purpose programs. It also gives FERC the

authority to determine whether a particular delivery facility is FERC jurisdictional

or State jurisdictional, using the 7 factor test found in Order 888. When making this

determination, FERC shall give ‘‘deference’’ to the position taken by the State.

NARUC supports the provision found in this section that affirms State authority

to implement retail competition and is pleased that the bill denies FERC jurisdiction over bundled retail rates and services. However, we also support legislation

that affirms State authority to regulate retail power delivery regardless of whether

the facilities are transmission or distribution. Accordingly, while we applaud H.R.

2944 for preserving State authority over bundled services, we also support State authority to regulate all services provided retail consumers on an unbundled basis, including transmission.

Additionally, NARUC supports the provisions of H.R. 2944 that affirm State authority to: impose non-bypassable charges to support stranded benefits including implementation of programs to promote energy efficiency, renewable energy resources,

and support for low income consumers; implement programs to promote energy efficiency and renewable energy resources, and to support low-income and rural consumers; and ensure that all market participants adhere to appropriate health, safety, reliability and consumer protection standards. However, NARUC also supports

the inclusion in legislation of workable mechanisms to support State public benefits

programs that consider a Federal-State partnership with broad-based competitively

neutral funding mechanisms, and Federal support to assist and encourage the

States to develop and implement public purpose programs that meet the needs of

the States and the Nation. In addition, we continue to support funding for public

purpose research and development programs based upon taxes and tax credits and

non-bypassable system charges.

Concerning the identification of facilities as ‘‘transmission’’ or ‘‘distribution’’,

NARUC has serious reservations regarding the workability of provisions in H.R.

2944 that codify the FERC Order 888 seven factor test. Application of this standard

can hardly result in an intelligible ‘‘brightline’’ between State and Federal jurisdiction as the Supreme Court directed over 30 years ago. We believe that the retail/

wholesale test removes uncertainty and avoids the need to categorize every piece of

wire in the nation when it is necessary to draw the transmission/distribution distinction. NARUC also supports legislation that would authorize States to form voluntary regional bodies to define the character of transmission facilities.

In Section 102, the bill extends FERC jurisdiction to ‘‘transmission utilities’’ defined as ‘‘any entity (including State and municipality) that owns or operates facilities used for transmission’’ of electricity. The Section also authorizes FERC to address recovery of stranded wholesale costs.

NARUC has not taken a position on the extension of FERC jurisdiction to nonjurisdictional entities or wholesale stranded cost recovery. However, we would like

to reiterate our opposition to FERC authority over the recovery of any retail stranded costs, an issue now being litigated in the United States Court of Appeals.

Section 102 also includes a provision that authorizes FERC to order retail transmission services on behalf of retail customers served by an open access distribution

company. While NARUC does not have a specific position on this issue, in general

we support Federal transmission policies that assist States in voluntarily opening

retail markets.

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Section 103 of H.R. 2944 requires transmitting utilities to establish or join a Regional Transmission Organization (RTO) by January 1, 2003. Under this section

FERC may approve, but not require, the establishment of such RTOs. NARUC supports legislative language that leads to the voluntary formation of ISOs. However,

we believe that legislation should clarify the authority of State and Federal regulators to require that transmission owners transfer control of systems to ISOs,

where necessary to ensure a competitive market, in the event voluntary action is

not effective. In addition, NARUC supports legislation authorizing formation of voluntary regional bodies to address transmission system issues.

This Section also includes a savings clause allowing State commissions to address

transmission issues, including maintenance, planning and siting, ‘‘in a manner consistent with this Act and FERC decisions under this Act.’’ We believe it to be fundamental that legislation regarding retail electric competition affirms the authority of

States to regulate retail power delivery services regardless of facilities used. This

provision, as drafted, does not meet this fundamental principle. Maintenance, planning and siting are core responsibilities of the States, and must remain so, and not

to FERC jurisdiction under the FPA.

In Section 104 of this bill Congress authorizes the formation, under FERC approval and oversight, of interstate compacts for regional transmission siting.

NARUC supports legislation authorizing formation of voluntary regional bodies to

address transmission system issues such as the definition of transmission and distribution facilities, operation of transmission systems (including supervision of ISOs

and PXs), system planning, transmission pricing and facilities siting. However, our

policy on voluntary regional bodies does not contemplate FERC approval and oversight. Additionally, we believe transmission siting must remain State jurisdictional.

Section 105 of H.R. 2944 gives FERC authority to order the expansion of transmission facilities, subject to State and local laws concerning property rights and

siting, upon utility application and requires FERC to convene a joint board for the

purpose of receiving recommendations before transmission expansion may be ordered. NARUC has a long history of support for FERC authority to convene joint

boards. However, NARUC does not support FERC authority to order expansion of

transmission facilities if that authority preempts State authority over siting, system

planning or retail power delivery services.

TITLE II—RELIABILITY

The reliability of the nation’s electric system is one of the most important issues

in this debate, and NARUC believes that Federal legislation must indeed address

this subject. Federal legislation should facilitate effective decision-making by the

States and authorize States to create regional mechanisms for the purpose of addressing transmission reliability issues.

NARUC cannot support reliability legislation that fails to provide a role for States

in ensuring reliability of all aspects of electrical service, including generation and

power delivery services, or results in FERC preemption of State authority to ensure

safe and reliable service to retail consumers. To that end, we recently sent to the

Subcommittee two amendments to the reliability title to safeguard State jurisdiction

to secure safe, reliable and adequate service for retail consumers. These amendments included a savings clause to protect current State commission authority over

retail service reliability except for actions that harmed reliability, and a provision

to establish a voluntary regional body of State officials to advise industry-based reliability organizations. Unfortunately, neither amendment was included in H.R. 2944.

While we appreciate inclusion of the bill’s savings clause to protect State authority

over distribution, it is clearly inadequate to remove legal clouds over State regulation of transmission-related issues.

We continue to urge the Subcommittee to include our amendments in this legislation. Further, we are prepared to consider alternative formulations of State role provisions as this legislation moves forward, whether as part of a broader bill or as

a stand-alone reliability bill. However, the inclusion of no meaningful role for the

States in addressing reliability issues is simply unacceptable.

NARUC, however, does support workable mechanisms to assist energy efficiency

programs that enhance reliability. We believe that construction of new power lines

is not the only way to strengthen our reliability system. All alternatives must be

on the table, including initiatives on the customer’s side of the meter.

In attachment 1 of this testimony, I have provided the Subcommittee with amendments that addresses the State’s concerns.

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TITLE III—CONSUMER PROTECTION

Section 301 requires that the Federal Trade Commission (FTC), in consultation

with FERC, the Department of Energy (DOE), and the Environmental Protection

Agency (EPA), issue rules for disclosure to retail consumers. NARUC supports initiatives leading to minimum, enforceable uniform standards for disclosure and labeling but believes that such activities should occur primarily at the State level. Therefore, NARUC would support consultation with State commissions as well as FERC,

DOE and EPA in any legislation creating a Federal role.

Section 302 deals with consumer privacy issues, and while NARUC does not have

a specific position on consumer privacy, NARUC believes that Federal legislation

ought to affirm State jurisdiction over the terms and conditions of retail service.

Section 303 addresses FTC rules against slamming and cramming and a savings

clause for State disclosure rules that ‘‘are not inconsistent with’’ FTC requirements.

NARUC does not currently have a formal position on slamming/cramming issues but

we would support language that affirms State authority to ensure adherence to consumer protection standard.

Section 304 expresses a sense of Congress that States should ensure universal

service to all consumers. NARUC’s principles on restructuring affirm our view that

universal service must be maintained in all restructured markets.

TITLE IV—MERGERS

Section 401 modifies FERC’s authority over mergers by adding time limits for decisionmaking, authorizes FERC to address mergers at the holding company level,

and directs FERC to assess the impact of mergers on wholesale and retail markets.

It also extends FERC’s authority over disposition of utility assets to include direct

authority over generating facilities rather than indirect authority over wholesale

power supply.

NARUC supports a Federal merger policy where both Federal and State regulators (i.e. State commissions and the FERC) thoroughly evaluate mergers to assess

their impact on competition, access to transmission and distribution facilities and

ultimately on electric rates. We believe that the role of economic regulators should

complement review by antitrust agencies to adequately protect the public against

market power abuses. NARUC also supports merger policies where State commissions have primary responsibility to assess retail impacts of the merger. FERC

should support the States in this regard, particularly when the State commissions

in question lacks adequate State law authority.

TITLE V—PROMOTING COMPETITION

Sections 501 and 502 of H.R. 2944 would establish reciprocity provisions restricting sales into retail markets that are open to competition. NARUC opposes these

reciprocity provisions. Reciprocity limits consumer choices and potential savings.

Federally mandated reciprocity provision will result in harm to retail customers. In

the case of a State with retail access, a reciprocity provision may remove potential

suppliers of lower cost power. In a State without retail access, a reciprocity provision may eliminate opportunities for off ‘‘ system revenues that could be used to reduce customers’’ rates. In either case, consumers are worse off under reciprocity.

In short, if the purpose of electric restructuring is to save money for electric consumers then a reciprocity provision should not be in the bill.

Sections 511-524 and 531-533 address PUHCA and PURPA. NARUC supports reform or repeal of PUHCA as competition becomes effective through comprehensive

legislation. We support mechanisms that maintain State and Federal authority over

holding company practices and preserves consumer protection provisions of recent

legislation ‘‘ the 1992 Energy Policy Act and the 1996 Telecommunications Act.

NARUC also supports reversal of the Ohio Power decision and State access to books

and records. We oppose the legislation’s provisions that grant FERC authority to exempt holding companies and their affiliates from State books and records requirements.

With regard to PURPA, NARUC supports legislation to lift PURPA’s purchase requirement where a State has made a finding that the acquisition of generating capacity is subject to competition or other acquisition procedures that protect the public interest with respect to price, service, reliability and diversity of resources. Additionally NARUC strongly opposes the provision in H.R. 2944 that grants FERC authority to preempt the States by ordering the recovery of costs in retail rates.

Section 541 authorizes aggregation of acquisition of power by retail consumers in

open retail markets, ‘‘notwithstanding any provision of State law’’. NARUC has

taken no specific position on aggregation, but in general supports exclusive State

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authority over the regulation of rates, terms and conditions of retail electric services.

Section 542 requires FERC to issue regulations requiring a local distribution utility to interconnect with distributed generation facilities presumably preempting

State interconnection policies. While NARUC believes that access to the electric supply market by small-scale distributed resources can offer important public benefits

(mitigating market power, furthering innovation, easing transmission and distribution constraints, increasing resource diversity, and expanding customer choice),

NARUC does not support FERC preemption of State interconnection policies. State

commissions should be the agencies responsible for removing unnecessary barriers

to interconnection.

TITLE VII—ENVIRONMENTAL PROVISIONS

Sections 701 and 702 establish a renewable energy production incentive, and provide for net metering, with a savings clause that permits the State to impose a cap

on net metering. NARUC supports the inclusion of legislative provisions affirming

a national commitment to continued commercialization and supply of renewables. If

Congress adopts minimum national standards, such as a renewable portfolio standard, NARUC supports the use of tradable credits as one market-compatible mechanism to meet such standards. However, States should have flexibility to apply and

supplement any Federal standards.

NARUC also believes that it is the role of State commissions and legislatures to

choose to adopt net metering measures. It is the role of Congress and FERC to remove legal barriers to State implementation of net metering that may be contained

in the Federal Power Act or PURPA.

TITLE VII—INTERNAL REVENUE CODE PROVISIONS

The only comment that we have with regard to this Title concerns Section 803.

NARUC supports the provision to allow deductibility of decommissioning costs.

CONCLUSION

Mr. Chairman, in conclusion let me again thank you and your colleagues on the

Subcommittee for allowing NARUC to participate in the legislative process, not only

through my appearance here today, but in our informal discussions as well. Respectfully, let me state that we do not support the enactment of H.R. 2944 as currently

drafted. The bill’s failure to adequately provide a role for the States in the area of

reliability is enough to require us to withhold our support at this time.

In 1978, Congress enacted five bills comprising the National Energy Act, which

for the first time injected the Federal government into retail electric and natural

gas service issues. Virtually all of those statutes, with the exception of PURPA, have

been either repealed or consigned to irrelevancy. Congress is now poised to repeal

PURPA, completing its repudiation of the 1978 legislation’s involvement in retail

utility markets.

We urge Congress to keep the lessons of the National Energy Act in mind as it

considers further retail legislation. We strongly support the decision to abandon pursuit of the date-certain mandate. Having made that decision, we now urge you to

focus the attention of the Congress on areas where new Federal laws can facilitate

State restructuring efforts and on areas where the Federal government can work

in partnership with the States to continue support for important public purposes

such as R&D, low income assistance, renewable energy technologies, and energy efficiency.

If Congress chooses to act, Federal legislation should preserve broad State authority to implement these policies flexibly in response to the conditions in local retail

markets. The development of retail customer choice should be implemented in a

manner that respects these differences. In our view, that can only happen if decisionmakers closest to these conditions—State commissions and legislatures—enjoy

the flexibility to adapt pro-competitive policies to the needs of local retail consumers. In the weeks and months ahead, I and my colleagues look forward to continue working with Congress and with all interested parties to develop workable

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

I have provided two attachments to my written statement for your review and

consideration. Attachment 1 is the NARUC supported reliability amendment for inclusion in Title II. Attachment 2 is an analysis of H.R. 2944 with NARUC supported

policy statements for each Title and relevant sections.

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Mr. BILIRAKIS. Thank you. Thank you very much for all that, Ms.

Smith.

Mr. Popowsky, please proceed.

STATEMENT OF IRWIN ‘‘SONNY’’ POPOWSKY

Mr. POPOWSKY. Thank you, Mr. Chairman.

My name is Sonny Popowski. I am the consumer advocate of

Pennsylvania, and I am testifying on behalf of the National Association of State Utility Consumer Advocates, or NASUCA.

NASUCA is an organization of State utility consumer advocate offices from 39 States and the District of Columbia. We are charged

by our respective State laws with representing utility consumers

before State and Federal regulatory agencies, courts, and legislative bodies.

First, I would like to thank Chairman Barton and the members

and staff of this subcommittee for consistently seeking the input of

NASUCA members as representatives of retail electric consumers

in our respective States in each step of your deliberations. We

heartily endorse your efforts to ensure that the voices of the consumers who ultimately will pay the bill for electric restructuring

are heard in this debate.

We believe that the success of your efforts in this monumental

task will be judged not by the size of the financial gain to any particular segment of the electric industry but rather by the impact on

the reliability and price of electric service to America’s electricity

consumers.

With respect to the first two questions that the witnesses were

asked to address, the need for Federal legislation and the necessary components of such legislation, NASUCA agrees that Federal legislation is required in at least two areas: reliability and

market power. But as I and other members of NASUCA have testified on several prior occasions, we do not believe that a Federal

mandate for retail electric competition in all States by a date certain is either necessary or appropriate.

We believe that the individual States are in the best position to

determine whether and when to open up their electric industries to

one of the various forms of retail electric competition that are being

implemented today in numerous States. On the other hand,

NASUCA members recognize the limitations of State authority and

therefore the need for Federal legislation in such areas as reliability and market power.

120

With respect to reliability, I have had the honor to serve for the

last 2 years as 1 of 2 consumer representatives on the Board of

Trustees of the North American Electric Reliability Council, or

NERC. I believe that NERC is an outstanding organization that

has done a magnificent job of maintaining the reliability of our Nation’s electric system, but as the members of NERC and virtually

all industry participants agree, the basic voluntary structure of

NERC cannot be sustained in an increasingly competitive electric

industry.

There is a need for Federal legislation to establish an independent electric reliability organization that can develop and enforce mandatory reliability rules subject to the oversight of the

FERC. NASUCA supports Federal legislation that would accomplish this goal, such as the language contained in H.R. 2944, with

the caveat that such legislation must clearly preserve the role of

States in maintaining the reliability, safety, and adequacy of electric service within their State’s borders.

With respect to market power, NASUCA supports Federal legislation that would strengthen the ability of the FERC to ensure

open, fair, and non-discriminatory access to transmission facilities.

Federal legislation should give FERC clear authority to monitor the

development of competitive markets and the authority to take necessary steps to remedy anti-competitive abuses. We would respectfully suggest that H.R. 2944 be amended to include stronger market power provisions, such as those included in H.R. 2050, which

was introduced by Mr. Largent and Mr. Markey and in the administration bill.

Now, H.R. 2944 requires the establishment of regional transmission organizations, or RTOs, but does not give FERC the direct

authority to establish such organizations. In addition, while the

legislation properly requires that the RTO must be independent of

market participants, the section goes on to state that the independence requirement can be met, for example, even if a market participant owns as much as 10 percent of the voting interest in the RTO.

NASUCA would urge the elimination of such exceptions to the

independence requirement, as they could lead to the domination of

RTO governance by a particular industry segment. The hallmark

of a successful RTO in NASUCA’s view is total independence from

the financial interests of any particular market participant or market segment.

NASUCA also submits that additional transmission pricing incentives are not necessary in order to encourage the development

of competitively neutral, independent RTOs.

In addition to the need to address market reliability and market

power, NASUCA would also support Federal legislation that establishes basic standards for consumer protection and universal service as long as such standards do not preempt efforts of the States

to provide stronger protections and universal service benefits to

consumers.

Finally, in this regard, NASUCA would note that consumers’ efforts in achieving competitive benefits at the Federal level would

be enhanced by the establishment of a FERC Office of Consumer

Council. The establishment of such an office was included in the

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August 4, 1999 discussion draft that was submitted to this subcommittee but was not included in H.R. 2944, as introduced.

Now, in my prepared written testimony, I have compared some of the specific provisions of H.R. 2944 to the consumer checklist for

Federal legislation that was presented to this subcommittee by

NASUCA president, Fred Schmidt, on July 22, 1999. And we hope

that you will keep these principles in mind as you go forward with

the legislative process. Again, NASUCA appreciates the opportunity to comment on this bill and on the principles that we believe should be contained in

any Federal electric restructuring legislation. We look forward to

continuing to work with you, the members of the committee, and

your staff in developing policies and legislation that will truly benefit all consumers.

Thank you.

[The prepared statement of Irwin ‘‘Sonny’’ Popowsky follows:]

PREPARED STATEMENT OF SONNY POPOWSKY, CONSUMER ADVOCATE OF THE COMMONWEALTH OF PENNSYLVANIA ON BEHALF OF THE NATIONAL ASSOCIATION OF

STATE UTILITY CONSUMER ADVOCATES

Chairman Barton and members of the Subcommittee on Energy and Power: My

name is Sonny Popowsky. I am the Consumer Advocate of Pennsylvania and the Immediate Past President of the National Association of State Utility Consumer Advocates (NASUCA). NASUCA is an organization of state utility consumer advocate offices from 39 states and the District of Columbia, charged by their respective state

laws with representing utility consumers before state and federal regulatory agencies, courts, and legislative bodies. I have been asked by you to testify on behalf of

NASUCA regarding 1) the need for federal electricity legislation; 2) the specific elements that should be included in any federal legislation; and 3) the provisions of

H.R. 2944, the Electricity Competition and Reliability Act of 1999, that are of particular interest to NASUCA.

Before addressing these questions, I would like to thank Chairman Barton and

the members and staff of this Subcommittee for consistently seeking the input of

NASUCA members, as representatives of retail electric consumers in our respective

states, in each step of your deliberations. While we do not necessarily agree with

all of the provisions of H.R. 2944 or, for that matter, any of the legislative proposals

that have been introduced in this Congress, we heartily endorse your efforts to ensure that the voices of the consumers who ultimately will pay the bill for electric

restructuring are heard in this debate. We believe that the success of your efforts

in this monumental task will be judged not by the size of the financial gain to any

particular segment of the electric industry, but rather by the impact on the reliability and price of electric service to America’s electricity consumers.

With respect to your first two questions—the need for federal legislation and the

necessary components of such legislation—NASUCA agrees that federal legislation

is required in at least two areas: reliability and market power.

As I and other members of NASUCA have testified before the House and the Senate on several prior occasions, we do not believe that a federal mandate for retail

electric competition in all states by a date certain is either necessary or appropriate.

We believe that the individual states are in the best position to determine whether

and when to open up their electric industries to one of the various forms of retail

electric competition that are being implemented today in numerous states. On the

other hand, NASUCA members recognize the limitations of state authority and

therefore the need for federal legislation in such areas as reliability and market

power.

With respect to reliability, I have had the honor to serve for the last two years

as one of two consumer representatives on the Board of Trustees of the North American Electric Reliability Council (NERC). I believe that NERC is an outstanding organization that has done a magnificent job of maintaining the reliability of our Nation’s electric system. But as the members of NERC and virtually all industry participants agree, the basic voluntary structure of NERC cannot be sustained in an

increasingly competitive electric industry. There is a need for federal legislation to

establish an independent electric reliability organization that can develop and enforce mandatory reliability rules, subject to the oversight of the Federal Energy RegVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00125 Fmt 6633 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
122

ulatory Commission (FERC). NASUCA has endorsed legislative language that would

accomplish this goal, with the caveat that such legislation must preserve the role

of states in maintaining the reliability, safety and adequacy of electric service within their state’s borders.

NASUCA also supports federal legislation that would strengthen the ability of the FERC to ensure open, fair and non-discriminatory access to transmission facilities,

including authority to establish independent and competitively neutral regional

transmission organizations. Federal legislation should give FERC the authority to

monitor the development of competitive markets and to remedy anti-competitive

abuses.

In addition to the need to address reliability and market power, NASUCA would also support federal legislation that establishes basic standards for consumer protection and universal service, as long as such standards do not preempt efforts of individual states to provide stronger protections and universal service benefits to consumers. Finally, in this regard, NASUCA would note that consumers’ efforts in achieving competitive benefits at the federal level would be enhanced by the establishment of

a FERC Office of Consumer Counsel. The establishment of such an Office was included in the August 4, 1999, Discussion Draft that was submitted to this Subcommittee, but was not included in H.R. 2944 as introduced. NASUCA would urge

that the creation of such an office be included in any final legislation that addresses

electric restructuring at the federal level. Turning to the specific provisions of H.R. 2944 that are of greatest interest to NASUCA, I would like to compare those provisions to the ‘‘Consumer Checklist’’ for

federal legislation that was presented to this Subcommittee in testimony presented

by NASUCA President Fred Schmidt of Nevada on July 22, 1999. As stated by Mr.

Schmidt, the NASUCA Consumer Checklist represents a roster of principles that we

believe should be reflected in any federal legislation to ensure that electric restructuring benefits, rather than harms, consumers. Those principles and the extent to

which we believe they are consistent with the provisions of H.R. 2944, are set forth

as follows:

1. Federal Preemption: Federal legislation should permit states to adopt retail competition statutes or rules. There should not be a federal mandate for states

to require retail competition by a date certain.

H.R. 2944 does not mandate retail competition by a date certain. NASUCA fully supports the decision to leave this fundamental decision to the states.

2. Stranded Costs: Retail stranded cost issues should be left to states.

H.R. 2944 generally leaves stranded cost issues to the states. NASUCA supports this reservation of critical state authority.

3. Market Power: Legislation should provide FERC with specific authority to mon- itor the development of competitive markets, to eliminate undue concentrations

of market power in any relevant market, and to remedy anticompetitive conduct

or the abuse of market power by any player, incumbents, affiliates, or new market entrants. These powers should include the authority to order divestiture or

other structural remedies when necessary.

NASUCA respectfully submits that H.R. 2944 does not adequately address market

power issues. NASUCA strongly urges that market power provisions such as those

included in the Administration Bill, H.R. 1828, and the Largent/Markey Bill, H.R.

2050 be included in any final legislation.

4. Transmission and ISOs: Legislation should authorize FERC to require ISOs or

other independent and competitively-neutral regional transmission operation organizations. Legislation should authorize FERC to rectify transmission policies,

practices or prices which create a competitive advantage for services offered by

the transmission provider or affiliates.

H.R. 2944 requires the establishment of regional transmission organizations

(RTOs) by transmitting utilities by January 1, 2003, but does not give FERC the

authority to establish such organizations. In addition, while the legislation, in Section 103 properly requires that the RTO must be independent of market participants, this section goes on to state that the independence requirement can be met,

for example, even if a market participant maintains passive ownership or owns as

much as 10 percent of the voting interest in the RTO. NASUCA would strongly urge

the elimination of such exceptions to the independence requirement from market

participants as they could easily lead to the domination of RTO governance by a

particular industry segment. The hallmark of a successful RTO in NASUCA’s view

is total independence from the financial interests of any particular market particiVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00126 Fmt 6633 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
123

pant or market segment. NASUCA also submits that additional transmission pricing ‘‘incentives’’ are not necessary or appropriate in order to encourage the development of competitively neutral independent RTOs.

5. Reliability: Legislation should authorize FERC to review the reliability require- ments imposed by an independent North American Reliability Organization to

promote reliability of electric supply.

H.R. 2944 contains a reliability section similar to that endorsed by NERC and a number of utility organizations. NASUCA supports the language with the addition

of a savings clause clarifying that states have a vital role in maintaining the reliability, safety and adequacy of electric systems within each state’s borders. The savings clause in Section 201 of H.R. 2944 is inadequate because it only refers to state

jurisdiction over local distribution facilities.

6. Consumer Protection: Legislation by Congress should adopt provisions which would set minimum standards for basic consumer protections. States should retain authority to set additional or more stringent or more specific standards.

The draft includes many of the protections suggested by NASUCA, including pro- tection from cramming and slamming, consumer privacy, and supplier information

disclosure. NASUCA would support additional provisions that would establish minimum federal standards in such areas as credit collection activities and service quality standards. In all such cases, these federal standards should be viewed as floors

that can be strengthened by state actions to protect consumers.

7. Universal Service: Legislation should adopt universal service standards and principles as part of any restructuring.

The legislation appropriately includes a sense of the Congress that every retail customer should have access to electric energy at reasonable and affordable rates.

The legislation does not contain specific standards or principles in this regard, however. NASUCA would seek to work with members of this Subcommittee to develop

provisions that would insure that all Americans can have access to safe, affordable

electric service.

8. Aggregation: Aggregation of small customers should be encouraged. Federal leg- islation should not preclude states from facilitating the aggregation of small customers by any entity.

H.R. 2944 contains language clarifying the authority of municipalities and other entities to aggregate retail customers. NASUCA submits that all barriers to such

aggregation efforts should be eliminated.

9. Mergers: Legislation should specifically revise merger standards to require a net benefit to consumers. Legislation should expand FERC merger authority to include combinations that are currently outside FERC jurisdiction, such as electric

communications and electric-gas mergers.

NASUCA would respectfully urge stronger FERC review authority over mergers, including language that would require mergers to provide a net benefit to consumers.

10. PUHCA: PUHCA should be addressed only as part of comprehensive restruc- turing legislation. Waiver of certain PUHCA provisions should be conditioned on

holding companies (i) being subject to effective competition in every state in

which they operate, or (ii) divesting all of their generation assets. In addition,

legislation should provide FERC with current PUHCA authority to review affiliate transactions, provide state and federal access to books and records, and

limit diversification.

The legislation does include repeal of PUHCA as part of comprehensive restruc- turing legislation and provides state and federal access to books and records. It does

not, however condition repeal on the existence of competition or divestiture of generation assets or provide FERC with current PUHCA authority to limit diversification.

11. PURPA: Legislation should not waive Section 210, the PURPA mandatory pur- chase obligation, unless protections are in place to insure that utility generation

is subject to effective competition.

PURPA is repealed, but there are no provisions insuring that utility generation is subject to effective competition. Again, NASUCA appreciates this opportunity to comment not only on H.R. 2944, but on the overall principles that we believe should be contained in any federal restructuring legislation. We look forward to continuing to work with you in developing policies and legislation that will truly benefit all consumers.

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Mr. BILIRAKIS. Thank you very much, Mr. Popowsky.

Ms. Smith—well, I guess, maybe to both of you—I would just say

that through our subcommittee’s review of electric restructuring, I

have stressed—and I might add that the chairman was always

willing to listen—that any restructuring legislation must take into

account the unique factors that exist in each State.

For instance, in my home State of Florida, Florida is a peninsula

with interconnections to other States only along our northern border. Florida’s electrical loads are concentrated in central and southeast Florida, but much of the generation is in the north, which

means that there is a dominant north to south flow of power and

not a uniform flow of power in all directions. Florida has no generating fuels native to the State. All fuels have to be brought into the

State—oil, coal, nuclear, and natural gas. Florida’s vulnerability to

natural disasters, such as hurricanes, pose an additional threat to

our State’s electric system, and I might just add that approximately 90 percent of our consumers are residential consumers as

it gets to business or industrial, if you will, and I know that that

figure probably applies to a few other States, but I would say that

that is kind of a unique feature as attributable to Florida.

So, I guess my question goes—and you can see I would like to

think that you can see that utility restructuring would present

under those kind of circumstances many challenges to a State that

would have those unique factors. So, the question that I would

have is do you think that this bill, as it now is written, preserves

a State’s ability or Florida’s ability or any States’ ability to deal

with each of the unique characteristics adequately?

Ms. Smith?

Ms. SMITH. Well, Mr. Chairman, I guess that is why we strongly

advocate the addition of our savings clause and our State advisory

role with the reliability section. You know me, I have been here before stressing how unique the Northwest is, and that is true. And

that is why I strongly believe that we have to work together as regions and as interconnections.

There is no national electric grid. There is a western interconnection grid; there is ERCOT. If Texas didn’t want to be part of the

Union electrically, they don’t have to be. And then there is the

eastern interconnection, which I am sure from your point of view

looks a little different than from mine in the West where I look

east and I see one interconnection.

So, that is why I strongly advocate that as a way to preserve a

policymakers input into processes that will be important in terms

of reliability.

Mr. BILIRAKIS. Mr. Popowsky, do you have——

Mr. POPOWSKY. I would agree. I think that is the best example

of where you, particularly a State like Florida, would want to be

careful to ensure that as long as you are not operating in a way

that is inconsistent with Federal reliability standards in some way

that would harm interstate commerce, certainly the issues that are

faced by the Florida commission and all of you in Florida, with respect to reliability, you want to turn to your commission and turn

to your State government first. So, we would support the concept

that the legislation should include language that would preserve

the role of the States in reliability.

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Similarly, with respect to—generally, with respect to issues like

consumer protections universal service, we think that there is a

role for the Federal law to play in developing basic standards, but

we think that the States ought to be permitted to enhance those

protections on behalf of their consumers.

Mr. BILIRAKIS. And you speak on behalf of NASUCA when you

say that.

Mr. POPOWSKY. Yes.

Mr. BILIRAKIS. Thank you.

Mr. Sawyer, to inquire.

Mr. SAWYER. Thank you, Mr. Chairman.

You both have been strongly recommended to me to answer the

question that I have been asking this afternoon: how best to preserve an appropriate State role in terms of siting decisions for

transmission, while making sure that reluctant States, or those

who see no internal benefit, are not in a position to impede the development and evolution of a sound regional grid.

Ms. SMITH. Well, Mr. Sawyer, I think I sound like a broken

record. I think the answer does lie in a regional approach through

a properly formed RTO with the State advisory body, and I think

in our interconnection, I think everyone sees the necessity of working together, because we are interconnected, and an Idaho power

path in eastern Idaho has operating limitations placed on it, because if it puts too much power over it, a path in southern California goes down. So, we understand that we are interconnected.

We also have an active wholesale market in north-south transfers of power. So, it is beneficial to all of us when power can move

north and south, and it moves both directions depending on the

time of the year and the load.

So, from my view in the West, the answer lies in having a strong

regional body with State advisory role so that all——

Mr. SAWYER. Who should create that region?

Ms. SMITH. No——

Mr. SAWYER. Not no, who?

Ms. SMITH. Oh, who? I thought you said, ‘‘Should you?’’ Well, I

think your voluntary—your approach is correct to allow the industry in the first instance to work it out. It is a struggle, and I won’t

try and minimize the struggle that it is. And we are going through

it now. We just had an all-day meeting on what kind of government

structure is appropriate, and there wasn’t a resolution yet, but we

are working on it. I believe the Midwest, the Northeast, I think all

regions are working on that, and I think eventually the right answer, depending on physical operation of the system and the market where trading and buying and selling is occurring, will emerge.

Mr. SAWYER. Mr. Popowsky, you are representing a State just—

a hypothetical State that is not a participant, and you nonetheless

are the locus of a proposed transmission facility. How best should

your State’s voice be preserved without standing in the way of the

ability of surrounding States to benefit from this investment?

Mr. POPOWSKY. That is not as hypothetical a question as you

suggest, and I think there were some people who thought that

there ought to be a power line from Ohio to New Jersey, and that

those of us in Pennsylvania who had a little problem with that

were being provincial.

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Mr. SAWYER. I wasn’t thinking of any State in particular.

Mr. POPOWSKY. But I think that the planning—and I agree with

Commissioner Smith—I think the planning, and I think the prior

witnesses said that the planning has to be done on a regional basis.

We are in this together. We have to try to develop regional transmission plans that benefit all of us in Ohio, New Jersey, Pennsylvania, Maryland.

The problem then becomes once you develop a regional plan,

when you get to the actual physical siting, I don’t think you can

take that authority away from the people who are closest to where

that line is going to be sited. That was really one of the big problems in Pennsylvania. Even if you have an agreement that there

ought to be a power line, when you decide whose orchard it goes

through, whose historic sites it runs through, whose neighborhoods,

that is an issue that I think has to be decided at the State level,

and hopefully if we have regional plans that benefit everyone, then

we can—those local concerns can be accommodated, but I think the

actual physical siting still has to be done at the State level.

Mr. SAWYER. Is there a Federal role in that to resolve differences?

Mr. POPOWSKY. I think there can be a Federal role in facilitating

that regional—the regional planning issues and the regional development issues. I think that if people perceive that there is a benefit

overall to these kinds of improvements in the transmission facilities, then they might get built better, but I think that you still

need to—when you draw that line, you need to—that final decision

has to be made at the State level.

Mr. SAWYER. Thank you, Mr. Chairman.

Mr. LARGENT [presiding]. I am going to yield myself 5 minutes

since it was my turn.

Commissioner Smith, you talked about the States, 24 States,

have move forward. When will we see the State of Idaho move forward with electricity restructuring?

Ms. SMITH. That cold day in Hell?

Mr. LARGENT. Ah. Gosh, I read all your testimony about wanting

to induce competition, what is wrong with Idaho? We can’t have

competition there?

Ms. SMITH. Well, when you sit with the lowest rates in the country and there are no studies to show you will be better off, it is difficult to get your legislature to move anywhere but back.

Mr. LARGENT. What are the rates for Idaho?

Ms. SMITH. Our residential customers generally pay less than 5

cents a kilowatt hour.

Mr. LARGENT. Okay.

Ms. SMITH. Our industrial customers are less than two.

Mr. LARGENT. Your residential customers are 5 cents per kilowatt hour?

Ms. SMITH. Yes.

Mr. LARGENT. What is Oklahoma? Six? About six. And we have

already moved forward. So, well, I guess I just wanted to kind of

place some of your comments and your testimony in context with

what is actually taking place in Idaho, which is awfully cold in

Idaho.

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Ms. SMITH. Well, I am here to testify on behalf of States of the

Nation generally as represented by the NARUC.

The other important consideration that you have to understand,

when you talk about electric power in Idaho, you are also talking

about our water resources in the Snake River and water rights,

and nothing brings people out of their chairs faster than the idea

that existing water rights may be altered by some change in the

operation of the dams on the river. So, it is much more complicated

than the price of power for our State, and I think it is going to take

us a lot longer to work those——

Mr. LARGENT. Can you, as a State commissioner in Idaho, deal

effectively with Bonneville issues or is that something that has to

be done at the Federal level?

Ms. SMITH. Mr. Chairman, that has to be done at the Federal

level. There is a Northwest Power Planning Council which has

members appointed by the four Northwest States, but they don’t

have real regulatory authority over Bonneville.

Mr. LARGENT. One of your comments that you have said that

‘‘NARUC can’t support H.R. 2944, as it is currently drafted. The

bill’s failure to adequately provide a role for the States in the area

of reliability is enough to require us to withhold our support at this

time.’’ Could you explain that? I mean, I guess I heard Mr.

Popowsky on the one hand say that we needed to have mandatory

reliability standards, and——

Ms. SMITH. And I agree with him on that.

Mr. LARGENT. Okay, so what are you talking about?

Ms. SMITH. I am talking about adding the two provisions—a

State savings clause and the State advisory role. And language is

attached to my testimony. We have been working on it for the last

year and a half. I think there is still some work going on on just

exactly how the savings clause should read, but the State advisory

role language is nailed down pretty good. It has strong support.

NERC does not oppose it and thinks its inclusion could be beneficial. So, I think those are the two provisions that we are speaking

of on the reliability section.

Mr. LARGENT. Well, does it make sense to have 50 different reliability standards on a grid that we are trying to say is a national

grid? I mean, we now have the capacity to wheel electricity across

State lines. Does it make sense to have 50 different reliability

standards?

Ms. SMITH. No, it wouldn’t, Mr. Chairman, and that is not what

we are advocating. If you read the State advisory role language, it

would empower Governors to appoint members, and if those State

policy people could agree on an interconnection-wide proposal or

recommendation, then we would ask FERC to give that deference,

but that is a very specialized circumstance, and that is why I am

saying it is a process whereby regional concerns can get solved at

the regional level more efficiently than they could be solved at the

Federal level.

Mr. LARGENT. If in Federal legislation there is provisions that

provide for non-bypassable fees that could be used for everything

from universal service or environmental issues or low-income heating, why do we have to have Federal language specifying public

benefits? I guess what I heard in your testimony was, on the one

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hand, you don’t trust the Federal Government to do anything; leave

it up to the States. But when it came to public benefits funds, and

there was renewables and some other issues, you want the Federal

Government to jump in there and make sure that we get that in.

Ms. SMITH. Well, Mr. Chairman, I hope I didn’t say we don’t

trust the Federal Government not to do anything, but I did say

that we encourage and NARUC supports workable measures to encourage energy efficiency, encourage the development of renewables

technologies, to keep research and development going, and to promote universal service and have low-income assistance.

Mr. LARGENT. The States don’t do that?

Ms. SMITH. Some States do do that, not all States.

Mr. LARGENT. Does your State do it?

Ms. SMITH. We have never seen the need to have low-income assistance other than on a voluntary basis where customers choose

to add extra dollars to their bills.

Mr. LARGENT. What about public benefits?

Ms. SMITH. I guess, by public benefits—well, we have energy efficiency programs. We have low-income weatherization programs,

those types of things, yes.

Mr. LARGENT. So, you basically have tailored something that fits

Idaho?

Ms. SMITH. Yes, but what has happened in the Northwest is we

have moved away from a State-by-State approach, and we now

have a regional approach in the Northwest Energy Efficiency Association, NEEA. So, we do it on a regional basis now.

Mr. LARGENT. You like having it on a regional basis.

Ms. SMITH. Yes. I think if you are looking toward the markets

of the future, you want to have these on a regional basis.

Mr. LARGENT. And wouldn’t that be preferable to a national

basis?

Ms. SMITH. I think we would appreciate the support of the Federal Government in implementing those programs, and some of

them, frankly, would have national, applicable——

Mr. LARGENT. So one size fits all.

Ms. SMITH. No, not necessarily.

Mr. LARGENT. Oh, okay. Well, my time has expired.

Gentleman from California.

Mr. ROGAN. Mr. Chairman, thank you.

Following up on the chairman’s federalism issue, it raised a point

there have been a number of people that have suggested that any

consumer protection legislation ought not be dealt with on the Federal side; it ought to be left up to the States. And I am just wondering, Mr. Popowsky, what are your feelings about that?

Mr. POPOWSKY. We would have no objection to Federal legislation

that would establish minimum basic standards at the Federal level

for some of the issues that are addressed in 2944, like slamming

and cramming. We would just want to make sure that those standards could be enhanced and supplemented at the State level to address specific State concerns so that States would not be preempted

from having additional protections for consumers in those areas.

Mr. ROGAN. Your suggestion would be that in Federal legislation

there essentially be a floor established——

Mr. POPOWSKY. That is right.

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Mr. ROGAN. [continuing] that States could not go under but were

free to buildupon.

Mr. POPOWSKY. That is correct.

Mr. ROGAN. Are there any other areas that you would want to

see addressed in Federal legislation?

Mr. POPOWSKY. Well, as I said in my testimony, I think we need

Federal legislation on the reliability issue, again, with the caveat

that there are specific State issues that have to be addressed at the

State level, and we would also support market power provisions

that would address market power problems at the wholesale level

that could not be addressed by individual States.

Mr. ROGAN. Ms. Smith, do you want to weigh in on that?

Ms. SMITH. No.

Mr. ROGAN. I wish everybody was as brief in their answers as

you are, and, in fact, Mr. Chairman, on that happy note, I will

yield back. Thank you.

Mr. BARTON I thank the gentleman from California.

Now, Mr. Sawyer, have you asked questions? Okay.

The Chair would recognize himself for the last 5 minutes of questions.

Mrs. Smith, welcome for the second time to the subcommittee on

this issue. Have you studied or your association studied the Bonneville title of the draft before us?

Ms. SMITH. Mr. Chairman, I haven’t specifically.

Mr. BARTON. Okay. You are aware, though, that it is what the

region—you said you believe in regionalism, and I assume you are

aware that we put in what your region wanted on Bonneville.

Ms. SMITH. If you did that, then I shouldn’t comment.

Mr. BARTON. Okay. So, you should say something nice about that

part of our bill.

Ms. SMITH. Thank you very much.

Mr. BARTON. There you go. Okay.

And I am told that in terms of the specific policy items that

NARUC has put on the table, we have addressed every one in a

positive way except the issue of States setting their own reliability

standards. Can you tell me how many States currently set their

own reliability standards?

Ms. SMITH. Mr. Chairman, I don’t know that States specifically

set their own reliability standards.

Mr. BARTON. Well, they don’t, except for one.

Ms. SMITH. Is that New York?

Mr. BARTON. The Empire State.

Ms. SMITH. Yes. Well, they have specific concerns with the little

island we call Manhattan.

Mr. BARTON. But, I mean, should we let one tail, even a big tail

like the Empire State, wag the entire 49 other, or 47 other States,

if we exclude Alaska and Hawaii, in terms of State reliability

standard setting? Shouldn’t we go with the 49 as opposed to the

1 State and then try to address that on a specific basis?

Ms. SMITH. I think, Mr. Chairman, that it may—there may be

other States that also exercise some local reliability concerns, and

I think there is probably room in the process, particularly if it is

built around regions and RTOs.

Mr. BARTON. We encourage participation in RTOs.

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Ms. SMITH. Yes. And I believe that kind of a structure will allow

room to accommodate——

Mr. BARTON. And we allow for regional standards in the current

draft. So, I think we are——

Ms. SMITH. I think we are——

Mr. BARTON. [continuing] same page there.

Ms. SMITH. [continuing] kind of on the same page.

Mr. BARTON. Yes.

Ms. SMITH. We would like to see the——

Mr. BARTON. I think we are not only on the same page, I think

we are in the same paragraph. We are not just maybe on the exact

sentence structure.

Ms. SMITH. That is true.

Mr. BARTON. Okay.

Mr. Popowsky—am I saying that right?

Mr. POPOWSKY. Yes, that is right.

Mr. BARTON. Oh, good. The consumer protections in the bill, I assume you have looked at those?

Mr. POPOWSKY. Yes.

Mr. BARTON. I am getting some feedback. I just had a meeting

with one of the members of the subcommittee, and they are expressing kind of a generic unease, but when I ask for specific

changes to improve the consumer protection, I have not been given

any definitive proposals. I did not read your testimony, so you may

have had some specifics in there. Could you elaborate on any enhanced consumer protection that you might feel we need to put in

the next draft before we go to markup?

Mr. POPOWSKY. Well, basically, there were some additional areas

that were in our comments that we filed at the last meeting concerning, for example, credit and collection standards, service quality standards. Mainly the point is, as what I tried to make with

Mr. Rogan, which is that we support the idea that the FTC should

be able to establish consumer protection standards at the Federal

level. We think they could be expanded in a couple of the areas

that we cited in our testimonies, but it is important to us also that

they be viewed as floors rather than as ceilings, and we volunteer

in our testimony to work with the committee to determine if there

are any other specific provisions that are necessary.

Mr. BARTON. Okay, now we have some input that we ought to

drop consumer protection from the Federal title, because that is

something the States can handle. I happen to believe we ought to

have some Federal consumer protection items in the bill, as does

Chairman Bliley. He is very strong on that.

But to take the devil’s advocate position, would your association

accept if we were to drop as a Federal item the consumer protection and just put some language in that says we encourage States

to take up that gauntlet?

Mr. POPOWSKY. No, we would prefer the approach—the general

approach that you have taken, which is to identify consumer protections that ought to be recognized at the Federal level, use those

as a floor, and perhaps to expand the categories that you have covered in your testimony—I am sorry, in your bill, rather than drop

it. That would be our preference, as long as it is a floor, not a ceiling.

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Mr. BARTON. Okay. I have got one more question; I want to make

sure I understand it before I ask it.

The staff has asked me to ask a question about State aggregation

rights, and I am not sure I totally understand it. But should the

States, in your opinion, Mr. Popowsky—it has been a long day—

be able to discriminate against aggregators? For example, should

the State of Texas be able to bar cooperatives from aggregating and

the State of Louisiana be able to give municipalities a preference

by allowing forced aggregation?

Now, I don’t understand what I just asked you, so if you don’t

understand it either, we are even. But there is apparently a concern about States doing aggregation different in different States if

we don’t have Federal aggregation language, which we do have in

our current draft.

Mr. POPOWSKY. Generally, I would—our position is we would like

to eliminate any barriers, certainly any barriers to aggregation. Beyond that, we are not looking to have a Federal rule, I think, that

would force aggregation. We would look to—we think different

States have done it differently. I think many of our members have

a preference for what is called opt-out aggregation where a municipality could aggregate its consumers and then have them opt-out

of that. But the key here is to make sure that there are no unnecessary, in fact, no barriers to aggregation.

Mr. BARTON. What if a State has a State barrier against aggregation? Should the Federal Government preempt that State aggregation provision in this legislation?

Mr. POPOWSKY. I don’t think NASUCA has addressed that, but

at this point we would just say that there should certainly be no

Federal barriers to aggregation. We also have resolutions that

would support dropping State—we would encourage States to drop

those barriers. I can’t say that we have—that we would ask the

Federal Government to step in——

Mr. BARTON. So, if we, in order to foster competition and to foster

the creation of markets, if we had a Federal preemption against

State aggregation barriers—I am beginning to understand my

question now—your association would at least be neutral and could

possibly be supportive of that.

Mr. POPOWSKY. I would say we don’t have a position on that, because it just—that particular question hasn’t come up. Like I said,

we would support of elimination of Federal barriers on

aggregation——

Mr. BARTON. I got what you——

Mr. POPOWSKY. [continuing] and we would like to eliminate State

barriers as well.

Mr. BARTON. There are no Federal barriers on aggregation, but

we want you to help us take down some of these State barriers

against aggregation.

Mr. POPOWSKY. Well, we would be happy to work with you on

that, if you are aware of——

Mr. BARTON. Okay, that is a good answer.

Mr. POPOWSKY. Thank you.

Mr. BARTON. Okay. Does Mr. Pickering wish to ask questions of

this panel?

Mr. POPOWSKY. I have no further questions.

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Mr. BARTON. Does Mr. Sawyer have one last question? Okay,

does Mr. Rogan? Okay.

We want to thank you two panelists. We are going to continue

our hearing tomorrow, I believe at 10 a.m., and we have two panels, each has 6 or 7 people—9 and 8. Okay, so we are going to have

a long day of enlightenment tomorrow from the private sector.

The hearing is recessed until 10 a.m. tomorrow morning in this

room.

[Whereupon, at 4:15 p.m., the subcommittee recessed, to reconvene at 10 a.m., Wednesday, October 6, 1999.]

[Additional material submitted for the record follows:]

RESPONSES OF HON. JAMES HOECKER TO QUESTIONS FROM JOE BARTON, CHAIRMAN,

SUBCOMMITTEE ON ENERGY AND POWER

Question 1. H.R. 2944 clarifies Federal and State jurisdiction, providing for FERC

jurisdiction over transmission used for unbundled retail sales, and for State jurisdiction over transmission used for bundled retail sales. Is this clarification needed, and

does the bill draw the jurisdictional line properly?

Response. On its face, the Federal Power Act (FPA) assigns the Commission jurisdiction over all facilities for the transmission of electric energy in interstate commerce by public utilities. Nevertheless, consistent with the historical practice of including the costs of transmission used to service retail markets or ‘‘native load’’ in

state-regulated bundled retail rates, Order No. 888 held that the Commission has

jurisdiction over transmission used for unbundled retail sales, and that States have

authority over transmission used for bundled retail sales. It was the Commission’s

view that, until the advent of retail competition where transmission becomes

‘‘unbundled,’’ this was the most workable arrangement. These determinations, made

in 1996, are currently pending before the Court of Appeals for the District of Columbia Circuit.

As I view it, H.R. 2944 seeks to codify this 1996 interpretation. I believe that codification of the Commission’s jurisdiction over transmission used for unbundled retail

sales is appropriate. Such jurisdiction is necessary to ensure that all unbundled

transmission is provided on a comparable basis to all users of the bulk power grid

and to avoid balkanization of transmission access, with different interstate transmission rules established by each state that moves to retail choice.

However, codification of State jurisdiction over bundled retail transmission is appropriate only if it is accompanied by other legislative language that ensures the

Commission’s ability to require non-discrimination in the uses of the transmission

grid. Regrettably, the Commission’s stance in Order No. 888 is now being used to

hamper its ability to ensure comparable transmission services for all uses of the

grid, including service to native load. A recent appellate court decision may have

placed a jurisdictional cloud over the Commission’s authority to achieve Order No.

888’s goals of non-discrimination in the provision of transmission services. See

Northern States Power Co., et al., v. FERC, No. 98-3000 (8th Cir., May 14, 1999,

rehearing denied, September 1, 1999) (NSP). This decision, if interpreted and applied broadly, may allow the States—through their jurisdiction over transmission

used for bundled retail sales—to establish preferential terms and conditions for the

bundled transmission services they regulate compared to the terms and conditions

available to other transmission users. In other words, the historical regulatory practice enshrined in Order No. 888 of treating transmission used as part of a native

load service differently from transmission used for other bulk power transactions,

including service to other utilities’ native load, makes demonstrably less sense in

a competitive wholesale marketplace.

There are two ways to address the potential problems that could arise from the

NSP decision. The first is to add a specific provision to H.R. 2944 to clarify the Commission’s authority to ensure that transmission services within its exclusive jurisdiction are provided on a basis that is comparable to, i.e., no less favorable than, other

transmission services provided by a transmitting utility. This clarification is necessary to remove the potential for future balkanization of the interstate transmission grid. Accordingly, my testimony suggested revising Section 101 of H.R. 2944

to add a provision at the end of FPA section 201(a), as modified by section 101(b)(1)

of the bill, stating that:

In regulating the transmission of electric energy under any provision of this

Part [Part II of the FPA], the Commission shall have exclusive authority to esVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00136 Fmt 6633 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
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tablish rates, terms and conditions of transmission service that are just, reasonable and not unduly discriminatory or preferential, including rates, terms and

conditions that prevent or eliminate undue discrimination or preference associated with a public utility’s or transmitting utility’s own uses of its transmission

system to serve its wholesale and retail electric energy customers.

This approach to addressing the NSP comparability problem is necessary if H.R.

2944 codifies State authority over bundled retail transmission or if the bill is silent

on this matter.

The second way to address the NSP problem is not to codify State jurisdiction

over bundled retail transmission and instead to expressly grant the Commission authority over all transmission, including what is now called bundled transmission.

While the Commission’s interpretation of State jurisdiction in Order No. 888 reflected an analysis of existing law and a recognition of the long-standing historical

role of states in regulating transmission associated with retail sales, the industry

has evolved significantly since Order No. 888 was issued. If dual (Federal-State) regulation of the transmission system results in a State-mandated preference for bundled transmission services and the balkanization of transmission access, with different rules established by each State and by the Commission, the Congress should

need to broaden the Commission’s jurisdiction to address this problem. It is my understanding that a legislative amendment has been proposed by the Americans for

Affordable Electricity that would take this approach and make my proposed clarification unnecessary.

In sum, I urge the Congress to avoid further litigation and potential transmission

discrimination problems by, at a minimum, adopting my proposed revision to section

101(b)(1) of H.R. 2944. Alternatively, the Congress may want to consider explicitly

giving the Commission jurisdiction over all transmission, including transmission

used for bundled retail sales.

Question 2. In your view, does section 102(a)(2) of H.R. 2944 amend section 212(h)

of the Federal Power Act to authorize FERC to order retail wheeling to a consumer

served by local distribution facilities in closed States? Is there a need to clarify the

definition of ‘‘open access’’ in the legislation?

Response. I interpret section 102(a)(2) as authorizing the Commission to order retail wheeling only to consumers in those states that have required their utilities to

provide open access over the utilities’ local distribution facilities, i.e., to consumers

in those states that have adopted retail choice. Of course, retail wheeling to these

consumers may require wheeling by utilities in closed states and I interpret H.R.

2944 as allowing the Commission to order this service. The cited provision states

that, notwithstanding the existing provisions of section 212(h)(2), ‘‘the Commission

may issue an order that requires the transmission of electric energy directly or indirectly to retail electric consumers who are served by local distribution facilities that

are subject to open access.’’ The bill defines ‘‘open access’’ with respect to local distribution facilities as meaning that the ‘‘local distribution company that owns, controls, or operates the facilities offers not unduly discriminatory or preferential access

to the facilities.’’ The bill does not alter the states’ authority to decide whether or

not to order retail open access. Transmission ‘‘open access’’ should be given the

meaning the Commission gave it in Order No. 888.

Question 3. Some charge transmission owners are redesignating transmission facilities as distribution facilities in order to avoid FERC open access requirements.

Have you seen examples of such efforts by utilities? Are these utility efforts being

supported by State public utility commissions?

Response. As retail competition is implemented, there arises a need to draw a distinction between transmission and local distribution facilities. Several utilities in

various states have filed with the Commission proposals to classify certain facilities

as either transmission or local distribution. Consistent with Order No. 888, each of

these proposals was reviewed previously by the relevant State public utility commission as to the appropriate classification. Order No. 888 prescribed a general sevenfactor test which defines what types of facilities would constitute transmission facilities subject to Commission jurisdiction or local distribution facilities subject to State

jurisdiction. The Commission has issued six orders granting deference to State commissions who properly adopted the seven factor test. These cases did not involve

substantial reclassifications.

Recently, the Commission has received four cases involving application of the

seven-factor test by the State of Illinois. These involve substantial reclassifications

to local distribution and the Commission is still reviewing these proposals. If a proposed reclassification could impair the availability of open access services, the Commission would be concerned and would consider this possible adverse effect in evaluating the proposed reclassification.

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Question 4. H.R. 2944 includes an exemption from FERC regulation for small transmission owners. Do you believe this exemption is appropriate? Do you have

any comments on the specific exemption provisions in H.R. 2944? Response. Section 102(b) of H.R. 2944 would require the Commission to adopt

rules allowing an exemption from Commission regulation for certain transmitting

utilities. The bill lists certain criteria for exemption, which are similar to the Commission’s criteria for waiving Order Nos. 888 and 889, and would allow the revocation of an exemption in the event of changed circumstances. The bill also specifies

streamlined procedures for applicants to seek and obtain an exemption.

The bill’s exemption provisions are reasonable. While the Commission is strongly committed to the policies of open access transmission services and competition in

wholesale markets, I believe H.R. 2944’s exemption provisions can be implemented

without undermining those policies.

Question 5. FERC does not regulate transmission systems operated by State and municipal utilities and cooperatives, which are some of the largest systems in the

country. State and municipal utilities oppose FERC regulation of transmission

rates, and want to retain that authority. If State and municipal utility transmission

systems continue to be unregulated could they shift power costs onto their transmission rates? Could they discriminate against competitors? Response. With the exception of services ordered under section 211, transmission

systems owned by state utilities, municipal utilities and cooperative-owned utilities

are self-regulated or are regulated by a state agency such as the public utility commission or public service commission. If such a utility were to charge other users

more than its own cost of transmission, it would result in discriminatory rates for

other users. When such a utility charges competitors more for transmission than it

charges itself, it would give the utility’s generation a competitive advantage that

was not based on actual differences in generation cost. In Order No. 888, the Commission addressed the potential for such cross-subsidization and discrimination by public utilities. The Commission required public

utilities to offer transmission service to others at the same rates, terms and conditions that public utilities apply to themselves, and to take Commission-jurisdictional

services under the same tariff available to others. This ‘‘comparability’’ requirement

is an important tool in preventing public utilities from using their control of transmission facilities to discriminate against their competitors in power markets. As a matter of clarification, let me address several concerns that I have heard

voiced about proposed FERC jurisdiction over municipally- and cooperatively-owned

transmission. First, most public power entities do not own transmission and depend

on open access to the transmission of others. Second, some cooperatives are concerned about potential interference in their local distribution functions. The Commission has no interest in regulating in that area. Third, a primary concern of many

transmission-owning public power entities is the threat to tax-exempt financing that

open access and federal rate regulation represent. I believe that all transmission

should be operated under the same rules, and that the tax rules should be adjusted

to accommodate that result. Finally, some small cooperatives and municipallyowned utilities have raised concerns about the cost of FERC regulation. I believe

the provisions of H.R. 2944 concerning exemptions for small transmission owners

reasonably address this concern in a manner that is consistent with our open access

policies.

Question 6. Should FERC regulate transmission that is not in interstate commerce—such as transmission in noncontiguous States and territories?

Response. Transmission that is not in interstate commerce consists principally of

two types of transmission. First, such transmission includes transmission within

noncontiguous States and territories, such as Alaska and Hawaii. While I do not object to Congress giving the Commission the authority to regulate the rates, terms,

and conditions of transmission within noncontiguous States and territories, I do not

believe that it is essential for the Commission to have such authority. It is essential

that all interconnected transmitting utilities be subject to the same transmission

‘‘rules of the road,’’ and that all electricity suppliers have access to a single, seamless transmission grid over which to transact business. This is what allows wholesale buyers and sellers of electricity to have choices. Within the lower 48 States,

where the transmission systems are interconnected, the Commission’s pro-competitive regulation is necessary to achieve this end.

Second, the Commission has historically construed the transmission of electric energy wholly within the Electric Reliability Council of Texas (ERCOT) as not being

in interstate commerce, and thus has treated the utilities performing such transmission as not being public utilities so long as they do not otherwise engage in Commission-jurisdictional activities. Two of the four investor-owned ERCOT utilities

(West Texas Utilities Company and Central Power and Light Company) operate

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both within and outside ERCOT and are public utilities subject to the FPA. The

other two investor-owned utilities in ERCOT, Houston Lighting & Power (HL&P)

and Texas Utilities Electric Company (TU), are not considered public utilities. A settlement agreement approved by the Commission in 1987 under section 211 of the

FPA required certain ERCOT utilities to construct specified asynchronous direct

current interconnections between utilities in ERCOT and utilities in the Southwest

Power Pool. Central Power and Light Co., et al., 40 FERC ¶ 61,077 (1987). A provision in the order approving the settlement stated that ‘‘HL&P and TU shall use the

HVDC interconnections for any purpose, including the purchase, sale, exchange,

wheeling, coordination, commingling or transfer of electric power and energy in

interstate commerce.’’ A section 211 order does not subject a utility to Commission

jurisdiction for any other purpose. Thus, unlike similar entities elsewhere in the

country, these utilities are not considered public utilities under sections 205 and 206

of the FPA.

In my testimony before the Subcommittee, I noted that H.R. 2944 would narrow even further the Commission’s limited authority over ERCOT transmitting utilities—by denying the Commission the authority under section 211 of the Federal

Power Act (as amended by the Energy Policy Act of 1992) to order transmission by

those utilities that otherwise transmit only within ERCOT. In my testimony, however, I also stated: ‘‘I believe that all transmitting utilities should be subject to the

same transmission rules. Open access to a seamless transmission grid by all electricity suppliers is essential if the Congress and the Commission intend to guarantee that buyers and sellers of electricity have as many choices as possible.’’ I urge

that the Congress at least retain the limited authority that the Commission presently has under section 211 of the Federal Power Act with respect to ERCOT utilities.

Question 7. NARUC proposed amending the reliability title of H.R. 2944 to au- thorize individual States to establish reliability standards. What is your position on

this proposal? How many States regulate transmission reliability? Would 50 different reliability standards improve reliability? How would 50 different standards

affect interstate commerce?

Response. The NARUC proposal, as drafted, would reserve to States the right ‘‘to take action to ensure the reliability, adequacy, or safety of electric facilities within

the state except where the exercise of such authority has a material adverse impact

on the reliable operation of the bulk power grid.’’ This proposal is broader than H.R.

2944’s provision, which would preserve existing State authority over local distribution facilities unless the exercise of such authority would unreasonably impair the reliability of the bulk power system. Of the two approaches, I find H.R. 2944’s provision to be more appropriate. However, I also believe that Federal legislation could

preserve for the States certain reliability practices that they have historically engaged in with respect to bundled transmission in their jurisdictions. Federal reliability laws should ensure that such State practices are consistent with the applicable regional or national standards and that such reliability practices do not unduly

impair competition in bulk power markets.

According to a recent survey by the North American Electric Reliability Council

(NERC), three states have specific jurisdiction over bulk power grid security and operation and have established reliability standards through the Regional Reliability

Councils. Moreover, many states have maintenance and inspection standards for

transmission facilities, and some states establish generation reserve requirements.

Again, these measures are developed in coordination with the Regional Reliability

Councils.

I do not read the reliability language included in H.R. 2944, even without the

NARUC savings clause, as preempting those legitimate State roles. States would

still be able to act to protect the reliability of local distribution, but they must do

so consistent with the rules that apply across the transmission system. Having said

that, I emphasize that it is essential that rules be established on a regional basis

(as they are now) in order to prevent one state from inadvertently interfering with

the reliability of service or the resource decisions made by retail customers in another state. Fifty different sets of reliability standards could create problems for

interstate commerce and for maintenance of grid reliability. Individual states cannot

guarantee reliability of the interstate grid.

Question 8. What is your view of the transmission pricing provisions of the bill

introduced by Mr. Sawyer (H.R. 2786)?

Response. Section 5 of H.R. 2786 would add a new section 215 to the FPA. This

section would require the Commission to permit recovery of all costs associated with

transmission service, including expansion costs. It also would require consideration

of costs and benefits to interconnected transmission systems caused by the creation

of a regional transmission organization (RTO). Under H.R. 2786, rates, terms and

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conditions must promote economically efficient transmission, the expansion of transmission networks, the introduction of new transmission technologies and provision

of transmission services by RTOs, prevent cost shifting to rates for services outside

the jurisdiction of the Commission, and be just and reasonable and not unduly discriminatory. The Commission is further required by the proposed legislation to issue a rule within 180 days of enactment that would provide incentives to transmitting utilities

to promote the voluntary participation and formation of RTOs without having the

effect of forcing utilities to join, and extend such incentives to existing RTOs, limit

the charging of multiple rates for transmission service, provided that a transition

mechanism or period is allowed, minimize shifting of costs among existing customers, encourage efficient and reliable operation of the grid through congestion

management, performance-based ratemaking, or incentive rates, and encourage efficient and adequate investment and expansion of the transmission system. The bill would require the Commission to allow negotiated rates, and would allow the Commission to grant market-based rates only where it finds that relevant geographic and product markets for transmission services or for delivered wholesale

power are subject to effective competition. I believe the pro-competitive objectives of Mr. Sawyer’s transmission ratemaking provisions are appropriate and laudable. I subscribe to the notions that we should

incent economically efficient behaviors by utilities, prevent cost shifting, and encourage transmission owners to alleviate, not prolong, system congestion and alleviate

rate pancaking. I nevertheless believe that the transmission pricing provisions of H.R. 2786 may be too prescriptive. The standards under the FPA already allow the Commission to

consider most, if not all, of the issues addressed in H.R. 2786 (e.g., incentives for

utilities to join RTOs, congestion management, performance-based ratemaking, enlargement of adequate transmission investment). However, the FPA gives the Commission flexibility to determine appropriate ratemaking methodologies that are just,

reasonable and not unduly discriminatory. This flexibility allows the Commission to

craft rate approaches that suit specific facts and companies, and which will most

effectively reduce the role of regulation in a competitive market. Several provisions of H.R. 2786, however, could be construed to preclude the Commission from adequately protecting transmission users. For example, the bill requires the Commission to allow negotiated transmission rates and prescribes a specific test for market-based transmission rates. In addition, the bill can be read to

require rates that harm ratepayers because it appears to require recovery of all

costs incurred, even those that were imprudently incurred. Under current law, the

Commission does not permit recovery of imprudently incurred costs. I believe that

these provisions could unduly hamper the Commission in its efforts to protect competition and consumers.

I am also concerned that over-emphasis on creating incentives to expand the grid

may lead to distortion of the market, where alternatives to expansion, such as construction of new generation or investment in energy efficiency technologies, would

cost less. Again, this is an issue that calls for fact-specific consideration and solutions.

I believe that appropriate incentives can be structured to create the proper market signals under current law. The Commission is exploring just such incentives in

our Notice of Proposed Rulemaking, RM99-2.

Question 9. Some criticize the length of FERC merger proceedings. How long does

it take FERC to approve mergers?

Response. The Commission has been highly responsive to the increasing number

of requests for merger authorization. In December 1996, the Commission issued its

Merger Policy Statement, and made a commitment to act on mergers within 90 days

of the close of a 60-day public comment period, or within 150 days total. Since making that commitment, the Commission has received 31 merger applications and

acted on 24 of them (setting three for hearing). One application was withdrawn and

the other six have been filed only recently. The Commission has met its target of

action within 150 days consistently. In fact, in a number of cases, the Commission

has acted much more quickly.

As noted, the Commission set only three of these 24 cases for hearing. The cases

set for hearing generally involved mergers of large utilities, with potentially significant effects on competition, and raised genuine issues of material facts.

Question 10. H.R. 2944 amends section 203 of the Federal Power Act to expand

FERC review of sales of power plants and transmission facilities by State and municipal utilities, cooperatives, and federal electric utilities. Currently, those sales are

not subject to review by FERC, DOJ, or FTC. Is there a need for federal review of

these sales to ensure market power issues are addressed?

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Response. Your question contains two elements: (1) whether the Commission

needs jurisdiction over transfers of generating facilities; and (2) whether the Commission needs authority to review transfers of facilities by non-public utilities.

As to first aspect of the question, I believe that this Commission should have direct jurisdiction over transfers of generation facilities. Concentration of generation

assets may directly and seriously affect competition in wholesale markets, and our

review of such transactions is critical to protect the public interest. I discuss this

further in my answer to Question 11, below.

As to the second aspect of the question, the Commission has not requested an expansion of its jurisdiction to cover review of transfers of facilities by non-public utilities. I would note that the Commission has jurisdiction under section 203 over a

public utility’s purchase or sale of jurisdictional facilities, an authority which would

apply to some transfers of facilities by non-public utilities to public utilities and vice

versa. Apart from these circumstances, Commission review of facility transfers

among non-public utilities could also help to protect the public interest in competitive markets. The generation and transmission assets of certain non-public utilities

are extensive, and the sale and redeployment of these assets could adversely affect

competition, depending on the extent of other facilities controlled by the acquirer

and on other circumstances.

Question 11. The Burr bill (H.R. 67) and the Sawyer bill (H.R. 2786) repeal section 203 of the Federal Power Act. What is your view of this proposal?

Response. I strongly oppose repeal of section 203. This authority is an essential

element of the Commission’s pro-competitive policy. In reviewing a merger, the

Commission assesses the effects on competition, on rates, and on regulation. In most

cases, the primary issue is the effect on competition. Consistent with its overarching

goal of promoting competition in wholesale power markets, the Commission seeks

to ensure that mergers will not harm competition. If a merger is likely to harm competition, mitigation of this potential harm is required in order to ensure that the

merger is consistent with the public interest. Under this authority, the Commission

has prevented competitive harm by providing other market participants with access

to the transmission facilities of the merger applicants, thus ensuring that the merger does not reduce the competitive options available to wholesale buyers and sellers.

Similarly, the Commission has accepted commitments by applicants to turn over

control of their transmission facilities to independent system operators (ISOs), as a

way of ensuring the merger did not cause competitive harm. The Commission also

has required rate protection for captive customers. These and other conditions and

commitments imposed or accepted by the Commission have provided substantial

benefits to the public and, thus, ensured that the mergers were consistent with the

public interest.

Although some have argued that our review is unnecessary in light of the authority of the Department of Justice and the Federal Trade Commission, I do not agree;

this Commission’s expertise and its role in working with energy markets distinguishes it from the functions of antitrust enforcers. Our day-to-day involvement

with the electric industry gives us a valuable and detailed understanding of electricity markets as they are shaped by the transmission grid. This expertise can provide critical insights in assessing a merger’s effects on competition. Second, this

Commission’s authority to protect the public interest encompasses not only the effect of a transaction on competition, but also its effects on the rates consumers pay.

Since certain aspects of the electric power industry, such as transmission, are not

subject to effective competition, the broader scope of the inquiry conducted by the

Commission helps to protect consumers from effects not considered by the antitrust

agencies. Third, our procedures permit public participation in a timely process to determine the public interest, in a way antitrust enforcement does not. This public review process remains important in today’s electric industry, given the vital importance of the industry to American citizens and the national economy.

Question 12: H.R. 2944 allows TVA to sell wholesale power outside the region but

provides for FERC regulation of such sales. Could TVA get FERC approval to charge

market-based rates for these sales?

Response. The Commission has explained in a number of cases in recent years

the criteria that it applies in deciding whether public utilities may make power

sales at market-based rates. The Commission allows power sales at market-based

rates if the seller and its affiliates do not have, or have adequately mitigated, market power in generation and transmission and cannot erect other barriers to entry.

In order for a transmission-owning public utility or its affiliate to demonstrate the

absence or mitigation of market power, and in particular the absence or mitigation

of transmission market power, the transmission-owning public utility must have on

file with the Commission an open access transmission tariff for the provision of comVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00141 Fmt 6633 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
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parable services. The Commission also considers whether there is evidence of affiliate abuse or reciprocal dealing. If the Commission were called upon to decide whether TVA were entitled to make

power sales at market-based rates, I believe that the Commission would be likely

to apply these same criteria. I cannot at this juncture, however, in the absence of

any factual record (including submissions both from TVA and from other interested

parties on, for example, TVA’s market power in generation and transmission) conclude whether TVA would or would not be able to meet these criteria.

Question 13. H.R. 2944 directs FERC to approve a transmission surcharge on use

of the BPA transmission system for electric sales in the Pacific Northwest. Would

it be difficult to fashion this surcharge?

Response. No. Designing a surcharge which would permit BPA to recover shortfalls in power sales revenues from transmission system users would not be difficult.

Of course, BPA would be required to fully support its proposed surcharge in order

for FERC to carry out its responsibility under H.R. 2944 to accept, reject, or modify

the surcharge.

RESPONSES OF HON. JAMES HOECKER TO QUESTIONS FROM HON. VITO FOSSELLA

Question 1. It is my understanding that FERC wants jurisdiction over ‘‘retail

transmission’’ which means it will have to deal directly with retail customers. What

facilities does FERC have in place to deal with retail customers in terms of servicing

their needs, resolving complaints etc. when it now has virtually zero information

about local loads and local conditions.

Response. The Federal Power Act places interstate transmission services under

the Commission’s jurisdiction. Pursuant to Order No. 888, the Commission established open access terms and conditions for all jurisdictional transmission services,

including transmission of power that will ultimately be delivered to a retail customer as an unbundled, separate service. However, the Commission also emphasized

that Order No. 888 did not affect or encroach upon state authority in such traditional areas as the authority over local service issues, including reliability of local

service, authority over utility generation and resource portfolios, and administration

of integrated resource planning. Order No. 888, FERC Stats. & Regs. ¶ 31,036 at

31,782 (1996). As a practical matter, in a retail competition environment, power destined for delivery to retail customers is delivered, on their behalf, to the local distribution company which completes the delivery service under state jurisdiction. In

Order No. 888, we established procedures that allow state commissions to request

waiver of the standard transmission terms and conditions to the extent necessary

to accommodate their retail access programs. To date, this arrangement is working

very well. The Commission therefore does not seek or need particular facilities or

resources to deal directly with the needs of individual retail consumers of electricity.

Question 2. New York City is unique. It’s needs are unique. And to be frank, I

am concerned that by enforcing a national standard for reliability, this may result

in lowering the standard for some places, such as New York City, since it may prove

too costly to reinforce other system’s to NYC’s level. How would you envision

FERC’s national reliability standard differing from New York State’s reliability

standards. In your opinion, would these differences hurt the consumers in New

York? If FERC had jurisdiction over reliability of the transmission system, how

would FERC coordinate efforts with the states especially during times of system

emergencies like storm outages? A concern that I have, and a concern of my city

and state, is that FERC might order recovery of the transmission system in its entirety thereby diverting restoration crews away from restoring services to retail customers. This could result in an inefficient use of resources and delayed recovery

after a storm.

Response. I believe the Commission’s potential role in overseeing the establishment of bulk power reliability organizations and standards does not infringe or compromise in any way the ability of states to ensure the reliability of electric distribution systems on behalf of retail customers. In fact, the system for developing reliability standards under the provisions of H.R. 2944 is very similar to the system

currently used. Standards are now, and will continue to be, developed by market

participants through regional and national self-regulating organizations. Local and

regional protocols are developed and agreed to at the regional level. Reliability protocols that states rely on during emergencies are, and should continue to be, coordinated with regional organizations that represent other parts of the interconnected

grid. The primary differences between the current system and the system contained

in H.R. 2944 are that the rules would be enforceable and there would be avenues

for appeal or review of rules by parties, including states, who believe that the rules

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are not providing the best protection of the reliability of their service or that the

rules are discriminatory. These kinds of procedural protections would be to the benefit of New York customers as well as others. The State of New York would continue

to have the ability to protect the security, adequacy and safety of local service in

New York.

FERC does not now have, nor would it have under the provisions of H.R. 2944,

a role in emergency responses such as restoration of services after storm outages. I agree with you that New York City has unique needs. However, its location at the intersection of three ISOs and reliability councils makes it evident that the reliability of bulk power service to the city will depend on effective and uniform maintenance of reliability standards, not just in New York, but across the grid. As the marketplace becomes more diverse and competitive, voluntary industry compliance with

reliability standards needs to be buttressed with a limited degree of federal oversight and enforcement power.

Question 3. Does FERC believe it should have the full authority to order the building and siting of new electric transmission lines despite the objections of the

host state(s)? Does FERC believe that the language included in Section 105 of the

second draft bill, which amends Section 216 of the Federal Power Act would remand

this power to FERC and take it away from the states? Response. H.R. 2944 would not give the Commission authority to order the siting of new transmission lines. This type of land use regulation, i.e., certifying the use of particular land for purposes of transmission facilities, is exercised by the States

(although the Commission has similar authority for purposes of certificating natural

gas pipelines and non-Federal hydroelectric facilities). As I stated in my testimony,

I do not see a current compelling need for the changes specified in section 105 of

H.R. 2944 at this time.

I will note that the Commission currently has authority to order the enlargement of transmission capacity in conjunction with an order to provide transmission services under section 211 of the FPA. However, the Commission must terminate an

order to enlarge capacity if the transmitting utility has failed, after making a good

faith effort, to obtain the necessary approvals or property rights under applicable

Federal, State and local laws. The Commission also has imposed on public utilities

a similar obligation to enlarge transmission capacity if necessary to meet their open

access obligations under Order No. 888. The latter were imposed pursuant to the

Commission’s authority to remedy undue discrimination under FPA sections 205

and 206.

Section 105 of the second draft bill would provide authority to order construction in a new section 216 of the FPA. Section 216 would require the Commission, before

exercising its authority under that section, to refer the matter to a joint board, including one or more representatives from each affected State. I believe that the ability to expand transmission capacity in appropriate ways will be key to competition

and efficient wholesale power markets. An effective regional planning effort, which

could be accomplished by regional transmission organizations, could complement

and assist state siting proceedings.

Question 4: Section 532 of the bill deals with Recovery of Costs—stranded costs

per se. As you may know, New York has agreements in place with all relevant parties involved that results in a sharing of these costs. The first batch of these agreements are set to be renegotiated in 2001, and then the following in 2003. Would

the language contained in this section or anywhere else in this legislation preempt

the agreements NY already has in place or give FERC authority to preempt these

agreements? Do you feel that any FERC involvement in any future negotiations

would create any obstacles or delays for this process that is already running fairly

smoothly in NY?

Response. Section 532 provides that, with regard to any legally enforceable obligation entered into or imposed pursuant to section 210 of the Public Utility Regulatory

Policies Act of 1978 prior to the date of enactment of the bill, the FERC ‘‘shall promulgate and enforce such regulations as may be required to assure that no utility

shall be required directly or indirectly to absorb the costs associated with such purchases from a qualifying facility after the date of the enactment of this Act.’’ I do

not read Section 532 or any other section of the bill to preempt the agreements New

York already has in place that would result in a sharing of the costs associated with

purchases from a qualifying facility. Nor would it give FERC authority to preempt

these agreements. Because the bill is silent as to its effect on preexisting agreements such as those you describe, I believe that the bill has no impact on such preexisting agreements.

Further, I do not feel that FERC involvement in any future negotiations would

create any obstacles or delays for the process that you indicate is already running

fairly smoothly in New York. To the contrary, I believe that the FERC would enVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00143 Fmt 6633 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
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courage negotiated agreements to address the cost recovery issue. The Commission

has expressly encouraged such agreements in the past and has allowed the recovery

of a utility’s costs incurred pursuant to such an agreement.

I suggest, however, that section 532 be clarified to ensure that utilities may agree

to enter into such agreements in the future. As currently written, section 532 could

be interpreted to bar a utility from negotiating such an agreement regardless of the

benefits of such a settlement.

RESPONSES OF HON. JAMES HOECKER TO QUESTIONS FROM HON. ED BRYANT

Question 1. Would the Tennessee Valley Authority be able to make sales outside

the fence at market-based rates?

Response. The Commission has explained in a number of cases in recent years

the criteria that it applies in deciding whether public utilities may make power

sales at market-based rates. The Commission allows power sales at market-based

rates if the seller and its affiliates do not have, or have adequately mitigated, market power in generation and transmission and cannot erect other barriers to entry.

In order for a transmission-owning public utility or its affiliate to demonstrate the

absence or mitigation of market power, and in particular the absence or mitigation

of transmission market power, the transmission-owning public utility must have on

file with the Commission an open access transmission tariff for the provision of comparable services. The Commission also considers whether there is evidence of affiliate abuse or reciprocal dealing.

If the Commission were called upon to decide whether TVA were entitled to make

power sales at market-based rates, I believe that the Commission would be likely

to apply these same criteria. However, I cannot at this juncture, and in the absence

of any factual record (including submissions both from TVA and from other interested parties on, for example, TVA’s market power in generation and transmission),

conclude whether TVA would or would not be able to meet these criteria.

Question 2. What would be the budgetary effect on FERC under a bill such as

H.R. 2944?

Response. It is extremely difficult for me to quantify precisely how implementing

such a bill will impact the Commission’s resources. We are a small agency but one

which is working diligently to anticipate many of the fundamental changes occurring in the energy industry. Assuming the Commission were to be authorized to act

in the areas specified in H.R. 2944, some increase in our budget request would be

likely, especially in the early stages of staffing these efforts. For example, the Commission has traditionally had no responsibility to review or oversee any aspect of

the reliability standards process, so we would have to augment our engineering staff

to handle these tasks.

Our very preliminary estimates are that $5 to $17 million per year would likely

be sufficient to implement the Administration’s proposed legislation on electric restructuring. We would expect that the costs may be toward the higher end of this

range during initial implementation and then decline over time. H.R. 2944 would

cost somewhat less because, for example, it does not contain a provision requiring

the Commission to receive and act on State filings on the decision of whether to

allow retail choice.

Any estimate I would supply you is necessarily dependent on what array of

FERC-related provisions any new legislation might contain; consequently, it is

somewhat premature to examine our expected staffing needs and other costs in

depth at this time. The Commission will make every effort to minimize the costs

of its oversight functions and is currently reengineering its processes to obtain

greater productivity from the public’s investment.

RESPONSES OF HON. CURT L. HE

 ́

BERT, JR. TO QUESTIONS FROM HON. JOE BARTON

Question 1. H.R. 2944 clarifies Federal and State jurisdiction, providing for FERC

jurisdiction over transmission used for bundled retail sales, and for State jurisdiction over transmission used for bundled retail sales. Is this clarification needed, and

does the bill draw the jurisdictional line properly?

Response. H.R. 2944 codifies the jurisdictional split the FERC made in Order No.

888. I find the clarification helpful, in that Congress would endorse FERC’s call, but

not necessary. Under the current Federal Power Act, the FERC has jurisdiction over

transmission that occurs separately from a retail sale and the states have jurisdiction over the transmission portion of a bundled retail sale. I think the bill drew the

proper jurisdictional line.

141

Question 2. In your view, does section 102(a)(2) of H.R. 2944 amend section 212(h)

of the Federal Power Act to authorize FERC to order retail wheeling to a consumer

served by local distribution facilities in closed states? Is there a need to clarify the

definition of ‘‘open access’’ in the legislation?

Response. The current text is confusing. By stating that FERC could order transmission to a customer that purchases from distribution facilities subject to open access, it appears that the authority would apply only to states that introduced competition. In that case, no need exists for the amendment. FERC would control the

transmission portion of the unbundled retail sale and the state the distribution.

Moreover, without a definition of open access, and in context of other references

in the bill to open access as being in the context of Order No. 888, one could argue

that, if the utility is subject to open access, as all IOU’s under Order No. 888, FERC

may order wheeling even in closed states.

Substituting ‘‘retail competition’’ for ‘‘open access’’ would make the provision most

clear.

Question 3. Some charge transmission owners are redesignating transmission facilities as distribution facilities, in order to avoid FERC open access requirements.

Have you seen examples of such efforts by utilities? Are these utility efforts being

supported by State Public Utility Commissions?

Response. I have read anecdotes of that occurring. I have no evidence that any

reclassification has, as its purpose, avoidance of FERC requirements. Indeed, if

FERC follows my recommendation on incentives and for-profit RTOs, that kind of

evasion would not happen.

Question 4. H.R. 2944 includes an exemption from FERC regulation for small

transmission owners. Do you believe this exemption is appropriate? Do you have

any comments on the specific exemption provisions in H.R. 2944?

Response. As a believer in incentives, performance based rates and for-profit

transco’s, I think it inappropriate to exempt small transmission owners from FERC

jurisdiction. In a world of command and control, the issue of burden arises. With

incentives, however, the industry would focus on economic benefits and opportunities, which should inure to all participants in interstate transmission. I would not

favor exemptions.

Question 5. FERC does not regulate transmission systems operated by State and

municipal utilities and cooperatives, which are some of the largest systems in the

country. State and municipal systems oppose FERC regulation of transmission

rates, and want to retain that authority. If State and municipal utility transmission

systems continue to remain unregulated could they shift power costs onto their

transmission rates? Could they discriminate against competitors?

Response. As I said in my testimony, State and municipal utility systems, and to

an extent, cooperatives, must answer to their Legislatures and State governments.

Therefore, FERC need not regulate them; under most State constitutions, authority

exists to prevent publicly owned systems from engaging in undesirable behavior. In

addition, under my vision of truly independent RTOs, State and municipal members

could not survive by raising prices for transactions or discriminating.

Question 6. Should FERC regulate transmission not in interstate commerce—such

as transmission in non-contiguous States and territories?

Response. No, because these areas would not form part of a national grid, having

no connections to the ‘‘lower 48’’ States.

Question 7. NARUC has proposed amending the reliability title of H.R. 2944 to

authorize individual States to establish reliability standards. What is your position

on this problem? How many States regulate transmission reliability? Would 50 different standards improve reliability? How would 50 different standards affect interstate commerce?

Response. I think that neither FERC nor the States should prescribe reliability

standards. As I stated in my testimony, reliability should form one of the factors

in performance based rates. I think each plan with each RTO should have its own

standards, depending on regional factors. In Mississippi, our Public Service Commission negotiated individual plans for each of our utilities.

Question 8. What is your view of the transmission pricing provisions of the bill

introduced by Mr. Sawyer (H.R. 2786)?

Response. I favor incentives and performance based rates, with no guarantees of

cost recovery, but with the opportunity to keep profit within a range. I think that,

theoretically, we might move to market based rates, but not in the foreseeable future.

Question 9. Some criticize the length of FERC merger proceedings. How long does

it take to approve mergers?

Response. I rely on the information in the Chairman’s response.

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Question 10. H.R. 2944 amends section 203 of the Federal Power Act to expand

FERC review of sales of power plants and transmission facilities by State and municipal utilities, cooperatives, and Federal electric utilities. Currently, these sales

are not subject to review by FERC, DOJ or the FTC. Is there a need for Federal

review of these sales to ensure market power issues are addressed?

Response. No. For state and municipal utilities, the DOJ or FTC would review

the sales, if any impact on interstate commerce resulted, unless the state action doctrine applied. Under that judge-made law, the authorities in the States would closely supervise the transaction. If Congress wants to overrule the state action doctrine,

I think it better to do so generically, not just in electricity.

For Federal utilities, I would imagine Congress would need to authorize sales, as

public funds built them. In that case, Congress would consider all the implications,

or Congress could authorize the antitrust agencies to review these issues. They, not

FERC have the expertise and the ability to collect information quickly.

Question 11. The Burr bill (H.R. 667) and the Sawyer bill (H.R. 2786) repeal section 203 of the Federal Power Act. What is your view of this proposal?

Response. I favor it, as I testified at the hearing on October 5. The DOJ and FTC,

not FERC, have the expertise in antitrust and the experience in mergers. Also, both

are accountable for their actions to Congress and the American people.

Question 12. H.R. 2944 allows TVA to sell wholesale power outside the region but

provides for FERC regulation of such sales. Could TVA get FERC approval to charge

market-based rates for those sales?

Response. Yes, if TVA, as a new entrant in the region, had no market power in

the area in which it makes its sales.

Question 13. H.R. 2944 directs FERC to approve a transmission surcharge on the

use of the BPA transmission system for electric sales in the Northwest. Would it

be difficult to fashion this surcharge?

Response. I disagree with the notion of imposing a transmission surcharge for

sales. I dislike subsidies. In any event, FERC does not have the resources to fashion

a surcharge that would have to take into account all the interests involved. We

would have to balance the interests of transmission customers in proper price signals and the preference customers in low prices. I think we would distort the market. Right now, the best FERC can do in reviewing BPA rates is to take a quick

look as to whether the agency will meet its repayment schedule that Congress establishes. I think that FERC would act no better in this instance, either.

RESPONSES OF HON. CURT L. HE

 ́

BERT, JR. TO QUESTIONS FROM HON. VITO FOSSELLA

Question 1. It is my understanding that FERC wants jurisdiction over ‘‘retail

transmission’’ which means it will have to deal directly with retail customers. What

facilities does FERC have in place to deal with retail customers in terms of servicing

their needs, resolving complaints, etc. when it now has virtually zero information

about local loads and local conditions?

Response. FERC does not want jurisdiction over transmission at retail. The Barton bill codifies the jurisdiction FERC asserted in Order No. 888 over interstate

transmission of energy when the customer in a state with retail competition purchased from someone besides the local utility. Order No. 888 left the distribution

portion in the hands of the State. Therefore, the State, not FERC, will continue to

deal with local loads and local conditions in retail sales.

Question 2. New York City is unique. Its power needs are unique. And to be frank,

I am concerned that by enforcing a national standard for reliability, this may result

in lowering the standard for some places, such as New York City, since it may prove

to be too costly to reinforce other systems to NYC’s level. How would you envision

FERC’s national reliability standard differing from New York State’s reliability

standards? In your opinion, would these differences hurt the consumers in New

York? If FERC had jurisdiction over reliability of the transmission system, how

would FERC coordinate efforts with the states especially during times of system

emergences like storm outages? A concern I have, and a concern of my city and

state, is that FERC might order recovery of the transmission system in its entirety

thereby diverting restoration crews away from restoring services to retail consumers. This could result in an inefficient use of resources and delay recovery after

a storm.

Response. I oppose FERC having authority to establish reliability standards. I

also think that the current system, involving private regional reliability councils establishing the standards needs reform. I favor injecting reliability standards in the

performance based rate plans I advocate for utilities. In particular, each plan for

each Regional Transmission Organization would contain a target for reliable perVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00146 Fmt 6633 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
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formance. I envision interested parties negotiating the issue, along with the other

factors in the plan for presentation to FERC. Each RTOs earnings would rise or fall

on how well it does. Therefore, in the case of storms, rather than have FERC order

deployment of crews, the RTO would find it in its economic interest to do the best

job it could.

In any event, it is my belief that even my colleagues favoring a FERC role would

not necessarily establish the same standard for the whole Nation or fashion maximum, rather than minimum standards. I also do not envision FERC directing crews

in storms, even if we received authority over reliability.

Question 3. Does FERC believe it should have the full authority over the building

and siting of new electric transmission lines despite the objections of the host

state(s)? Does FERC believe that the language in Section 105 of the second bill

draft, which amends Section 216 of the Federal Power Act would remand this power

to FERC and take it away from the states?

Response. I oppose giving FERC authority to approve building and siting of transmission facilities. I think FERC could better give economic incentives for transmission expansion and upgrade. We should reform our pricing policy that looks at

cost recovery, rather than economic value and efficiency. Several bills, including the

Barton bill, contain provisions for incentive pricing. I think in that way, FERC

would encourage a more efficient transmission system through the market.

I think Section 105 does not take away siting authority from the States. That section gives utilities the opportunity to reverse a FERC order requiring expansion, if

the necessary State or local agencies deny permits.

Question 4. Section 532 of the bill deals with Recovery of Costs—stranded costs

per se. As you may know, New York has agreements in place with all relevant parties involved that result[] in a sharing of these costs. The first batch of these agreements [is] set to be renegotiated in 2001, and then the following in 2003. Would the

language contained in this section or anywhere else in this legislation preempt the

agreements NY already has in place or give FERC authority to preempt these agreements? Do you feel that any FERC involvement in any future negotiations would

create any obstacles or delays in this process that is already running fairly smoothly

in NY?

Response. Section 532 states that any FERC rule would apply prospectively.

FERC has refused to compel renegotiation of PURPA contracts and, in fact, preempted states, such as California, from abrogating existing PURPA contracts.

As for FERC’s role in renegotiations, it would depend on the wishes of the State.

For example, last fall, New York, through Chair Maureen Helmer of the Public

Service Commission, asked for FERC’s help in renegotiating the PURPA contracts

of New York State Electric and Gas Company, an upstate utility. Eventually, the

New York Commission brought the parties together, without FERC’s involvement.

RESPONSES OF HON. VICKEY A. BAILEY TO QUESTIONS FROM HON. JOE BARTON

Question 1. H.R. 2944 clarifies Federal and State jurisdiction, providing for FERC

jurisdiction over transmission used for unbundled retail sales, and for State jurisdiction over transmission used for bundled retail sales. Is this clarification needed, and

does the bill draw the jurisdictional line properly?

Response. I think this clarification is useful. The clarifying language adopts, for

the most part, the jurisdictional dividing lines adopted by the Commission in its

Order No. 888 rulemaking; those lines, for the most part, have been accepted by industry participants and state regulatory commission. I believe it is important, whenever possible, to eliminate jurisdictional turf battles and protracted court disputes

over ambiguous congressional delegations, in order to ensure that the benefits of increased competition flow through to consumers as quickly and comprehensively as

possible.

In light of recent court litigation on the subject of comparability of service, cited

in Chairman Hoecker’s response, I have no objection to an additional clarification

that would further codify existing Commission policy. That policy, based on the

Commission’s authority to protect against undue discrimination or preference in the

provision of transmission service, requires that a transmission-owning utility offer

transmission service to others that is comparable to (i.e., no worse than) the service

it provides to itself.

Question 2. In your view, does section 102(a)(2) of H.R. 2944 amend section 212(h)

of the Federal Power Act to authorize FERC to order retail wheeling to a consumer

served by local distribution facilities in closed States? Is there a need to clarify the

definition of ‘‘open access’’ in the legislation?

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Response. I recall this question coming up during the question and answer session of the FERC Commissioner panel of the October 5 hearing on H.R. 2944. The explanation we received from the Committee is that section 102(a)(2) does not authorize

the Commission to order wheeling to retail customers in ‘‘closed’’ states (that have

not adopted retail competition). I am fine with this explanation. If, however, there

is some perception of ambiguity in the reference to ‘‘local distribution facilities that

are subject to open access,’’ I have no objection to a clarification that explains that

the Commission’s authority to order retail wheeling is confined to consumers in

‘‘open’’ states that have adopted retail competition.

Question 3. Some charge transmission owners are redesignating transmission fa- cilities as distribution facilities, in order to avoid FERC open access requirements.

Have you seen examples of such efforts by utilities? Are these utility efforts being

supported by State public utility commissions? Response. I am aware that some utilities are redesignating transmission facilities as distribution facilities. The Commission occasionally reviews such a redesignation

in the context of utility filings that reflect the rate consequences of such a redesignation; in these circumstances, the Commission is very deferential of the state commission’s characterization of transmission and distribution facilities. Such deference

to state designations of transmission and distribution facilities is contemplated in

Order No. 888 (which adopts a 7-factor test for analysis). Obviously, the redesignation of a facility from transmission to distribution acts to remove that facility from aspects of Commission regulation. But I am not in a position to assess the motivation of any such T/D redesignation, or to suggest that any

such undertaking is one merely to evade Commission jurisdiction (such as a direction to provide open access, non-discriminatory service).

Question 4. H.R. 2944 includes an exemption from FERC regulation for small transmission owners. Do you believe this exemption is appropriate? Do you have

any comments on the specific exemption provisions in H.R. 2944? Response. I have no problem with the exemption provisions in H.R. 2944. They reflect, for the most part, the Commission’s existing practice. Specifically, the Commission already waives the requirements of Order Nos. 888 (to provide open access

transmission service) and 889 (to participate in an Internet-based transmission information system and to separate transmission from wholesale merchant functions)

for transmission-owning utilities that are small and/or own limited and discrete

transmission facilities.

Question 5. FERC does not regulate transmission systems operated by State and municipal utilities and cooperatives, which are some of the largest systems in the

country. State and municipal utilities oppose FERC regulation of transmission

rates, and want to retain that authority. If State and municipal utility transmission

systems continue to be unregulated could they shift power cost onto their transmission rates? Could they discriminate against competitors?

Response. I am in agreement with Chairman Hoecker’s response to this question.

I add that a number of government-owned and cooperative-owned utilities already

have consented to follow the open access requirements applicable to transmissionowning public utilities subject to Commission regulation, in order for themselves to

be eligible for ‘‘reciprocal’’ open access service. In addition, an increasing number of

cooperative-owned utilities are buying out their debt to the U.S. government

(through the Rural Utilities Service of the U.S. Department of Agriculture) and are

thus voluntarily acceding to Commission jurisdiction over their rates and terms of

service.

Question 6. Should FERC regulate transmission that is not in interstate commerce—such as transmission in noncontiguous States and territories?

Response. A series of court cases through the decades have established that all

transmission in the continental (lower 48 states of the) United States—with the exception of transmission within the Electric Reliability Council of Texas—is in interstate commerce. I am in agreement with Chairman Hoecker’s response to this question as it relates to the activities of ERCOT utilities.

Question 7. NARUC proposed amending the reliability title of H.R. 2944 to authorize individual States to establish reliability standards. What is your position on

this proposal? How many States regulate transmission reliability? Would 50 different reliability standards improve reliability? How would 50 different standards

affect interstate commerce?

Response. As a general matter, I much prefer fewer layers of regulatory review

rather than more. Nevertheless, I have no objection to legislative language of the

type found in section 201 of H.R. 2944 that would clarify the authority of states and

local authorities to ensure the reliability of local distribution facilities. As electricity

markets become increasingly competitive, close cooperation with state and local regulatory authorities with oversight over the reliability of local distribution facilities

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become imperative. Well-publicized power outages in the last year (such as in San

Francisco, New York City, and Chicago), due to isolated inadequacies in local distribution infrastructure, suggest that federal regulatory oversight, in itself, cannot

assure the continued reliability of local service. Moreover, I am appreciative of limiting language, such as that found in revised section 217(n) of the FPA, that acts

to ensure that any such exercise of state or local authority cannot ‘‘unreasonably

impai[r] the reliability of the bulk power system.’’

Question 8. What is your view of the transmission pricing provisions of the bill introduced by Mr. Sawyer (H.R. 2786)? Response. Among the many transmission pricing provisions of Mr. Sawyer’s bill, my principle interest lies in those that would offer incentives to transmitting utilities for engaging in various types of Commission-favored activities. I support the use

of incentives to promote—rather than compel—participation in regional transmission organizations. As I explain in my written testimony, I favor the use of incentives that encourage utility innovation and individual design, rather than federal

legislation that compels utility RTO filings and participation by a date certain. I

also favor incentives that act to promote reliable and efficient transmission operations and that encourage investment in and expansion of transmission facilities. As Chairman Hoecker explains, however, the Commission already retains the flexibility under the Federal Power Act, as currently written, to pursue much or all

of these behavior-based policy objectives.

Question 9. Some criticize the length of FERC merger proceedings. How long does it take FERC to approve mergers? Response. Chairman Hoecker’s response provides the raw data. The vast majority of the merger applications the Commission receives are processed in a timely manner. Nevertheless, I fail to understand why the Commission cannot process all

merger applications in a timely manner (say, 150, 180 or 240 days at most) that

will provide the type of predictability and uniformity necessary to allow utilities to

restructure themselves in a manner that, in their judgment, is best able to respond

and adapt to the same competitive forces that the Commission is attempting to promote.

The trend toward utility consolidation is accelerating. The Commission is starting to receive a number of merger applications involving larger utility applicants. These

applications likely will attract numerous interventions and vigorously-argued calls

for extended evidentiary hearings, for numerous ‘‘pro-competitive’’ conditions to approval, or for outright rejection. My understanding is that financial markets and developing business strategies cannot await over a year of uncertainty while the Commission parses through the various options.

Question 10. H.R. 2944 amends section 203 of the Federal Power Act to expand

FERC review of sales of power plants and transmission facilities by State and municipal utilities, cooperatives, and Federal electric utilities. Currently, those sales

are not subject to review by FERC, DOJ, or FTC. Is there a need for Federal review

of these sales to ensure market power issues are addressed?

Response. Frankly, I do not perceive a gap in regulatory oversight over utility

asset sales that requires an expansion of federal jurisdiction. Market power issues

currently are being addressed by the Commission, in its continuing assessment of:

(1) the utility mergers and asset sales over which it currently does have authority

to review; and (2) utility requests to sell power at wholesale at negotiated, marketbased rates. Moreover, the Commission is actively monitoring the competitive operation of wholesale power markets. If the Commission detects the presence or exercise of market power, it retains the authority to adopt utility-specific corrective action. (Similar market monitoring and enforcement activity currently is undertaken

in regional markets by the regional transmission institutions that the Commission

already has approved.)

Question 11. The Burr bill (H.R. 667) and the Sawyer bill (H.R. 2786) repeal section 203 of the Federal Power Act. What is your view of this proposal?

Response. To date, I have refrained from advocating the outright repeal of section

203 of the Federal Power Act. I agree with Chairman Hoecker to the extent he responds that the Commission retains a unique and vital regulatory role under section

203—but only if that role is exercised in a timely manner (say, no more than 150-

240 days). If Commission merger review extends beyond that limited time frame,

I believe Commission merger review becomes counter-productive, as it would inhibit

the ability of utilities to take advantage of competitive opportunities and to develop

pro-competitive business strategies.

Question 12. H.R. 2944 allows TVA to sell wholesale power outside the region but

provides for FERC regulation of such sales. Could TVA get FERC approval to charge

market-based rates for these sales?

Response. I have nothing to add to Chairman Hoecker’s response to this question.

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Question 13. H.R. 2944 directs FERC to approve a transmission surcharge on use of the BPA transmission system for electric sales in the Pacific Northwest. Would

it be difficult to fashion this surcharge? Response. I have nothing to add to Chairman Hoecker’s response to this question.

RESPONSES OF HON. WILLIAM L. MASSEY TO QUESTIONS FROM HON. JOE BARTON

Question 1. H.R. 2944 clarifies Federal and State jurisdiction, providing for FERC jurisdiction over transmission used for unbundled retail sales, and for State jurisdiction over transmission used for bundled retail sales. Is this clarification needed, and

does the bill draw the jurisdictional line properly?

Response. I believe that a clarification of Federal and State jurisdiction over the

uses of transmission is necessary, but I fear that the one that is proposed in H.R.

2944 will lead to a further balkanization of the interstate grid. As Chairman

Hoecker points out, the historical regulatory practice adopted in Order No. 888 of

treating native load uses of transmission differently from all other uses of transmission makes less sense in a competitive wholesale market environment. Efficient

electricity markets require that all grid users be subject to the same rules. Different

transmission rules set by individual states will result in discriminatory access and

a balkanization of the markets that are now developing. My preference would be to

broaden the Commission’s jurisdiction to include all uses of transmission, whether

bundled or unbundled, so as to ensure that the Nation’s transmission grid will support efficient electricity commerce.

Question 2. In your view, does section 102(a)(2) of H.R. 2944 amend section 212(h)

of the Federal Power Act to authorize FERC to order retail wheeling to a consumer

served by local distribution facilities in closed States? Is there a need to clarify the

definition of ‘‘open access’’ in the legislation?

Response. I endorse Chairman Hoecker’s response to this question.

Question 3. Some charge transmission owners are redesignating transmission facilities as distribution facilities in order to avoid FERC open access requirements.

Have you seen examples of such efforts by utilities? Are these utility efforts being

supported by State public utility commissions?

Response. I endorse Chairman Hoecker’s response to this question. I would also

make two additional points. First, I would be deeply concerned if the Commission’s

review of reclassification proposals indicated that such reclassifications were being

accomplished to avoid Commission jurisdiction and open access requirements. Second, I would like to point out that, in addition to impairing the availability of open

access transmission service, strategic reclassifications can result in the addition of

distribution charges on certain generation facilities and thereby make those assets,

or service from those assets, more costly than the transmission provider’s own generation assets or services.

Question 4. H.R. 2944 includes an exemption from FERC regulation for small

transmission owners. Do you believe this exemption is appropriate? Do you have

any comments on the specific exemption provisions in H.R. 2944?

Response. I endorse Chairman Hoecker’s response to this question.

Question 5. FERC does not regulate transmission systems operated by State and

municipal utilities and cooperatives, which are some of the largest systems in the

country. State and municipal utilities oppose FERC regulation of transmission

rates, and want to retain that authority. If State and municipal utility transmission

systems continue to be unregulated could they shift power costs onto their transmission rates? Could they discriminate against competitors?

Response. I endorse Chairman Hoecker’s response to this question. I believe that

all transmission in interstate commerce, regardless of ownership, should be directly

subject to the Commission’s open access policies. I would also like to mention that

under Order No. 888’s reciprocity provisions, a number of non-jurisdictional transmission providers have filed open access tariffs with terms and conditions that are

consistent with Order No. 888.

Question 6. Should FERC regulate transmission that is not in interstate commerce—such as transmission in noncontiguous States and territories?

Response. I endorse Chairman Hoecker’s response to this question.

Question 7. NARUC proposed amending the reliability title of H.R. 2944 to authorize individual States to establish reliability standards. What is your position on

this proposal? How many States regulate transmission reliability? Would 50 different reliability standards improve reliability? How would 50 different standards

affect interstate commerce?

Response. I endorse Chairman Hoecker’s response to this question. I would add

as a caveat that, because effective electricity markets do not respect state boundVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00150 Fmt 6633 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
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aries, we should strive for as much regional or national uniformity in reliability

standards as possible.

Question 8. What is your view of the transmission pricing provisions of the bill introduced by Mr. Sawyer (H.R. 2786)? Response. I endorse Chairman Hoecker’s response to this question in most respects. I would like to be clear, however, that I do not favor financial bonuses or

incentives to entice transmission owners to participate in RTOs. As I discussed in

my testimony, such bonuses are not free. They are paid for by transmission system

users, and ultimately by consumers, in the form of higher electricity rates. I do,

however, favor performance-based incentives where clearly defined performance

standards are met or exceeded by transmission operators.

Question 9. Some criticize the length of FERC merger proceedings. How long does

it take FERC to approve mergers?

Response. I endorse Chairman Hoecker’s response to this question.

Question 10. H.R. 2944 amends section 203 of the Federal Power Act to expand

FERC review of sales of power plants and transmission facilities by State and municipal utilities, cooperatives, and federal electric utilities. Currently, those sales are

not subject to review by FERC, DOJ, or FTC. Is there a need for federal review of

these sales to ensure market power issues are addressed?

Response. I endorse Chairman Hoecker’s response to this question.

Question 11. The Burr bill (H.R. 67) and the Sawyer bill (H.R. 2786) repeal section 203 of the Federal Power Act. What is your view of this proposal?

Response. I endorse Chairman Hoecker’s response to this question. I feel strongly

that repeal of the Commission’s merger authority is not in the public interest, and

particularly not during the massive industry consolidation now underway.

Question 12. H.R. 2944 allows TVA to sell wholesale power outside the region but

provides for FERC regulation of such sales. Could TVA get FERC approval to charge

market-based rates for these sales?

Response. I endorse Chairman Hoecker’s response to this question.

Question 13. H.R. 2944 directs FERC to approve a transmission surcharge on use

of the BPA transmission system for electric sales in the Pacific Northwest. Would

it be difficult to fashion this surcharge?

Response. I endorse Chairman Hoecker’s response to this question.

RESPONSES OF HON. LINDA K. BREATHITT TO QUESTIONS FROM HON. JOE BARTON

Question 1. H.R. 2944 clarifies Federal and State jurisdiction, providing for FERC

jurisdiction over transmission used for unbundled retail sales, and for State jurisdiction over transmission used for bundled retail sales. Is this clarification needed, and

does the bill draw the jurisdictional line properly?

Response. The clarification given in H.R. 2944 pertaining to Federal and State jurisdiction over transmission is consistent with the findings made by the Commission

in Order No. 888, which was issued in 1996. In that ruling, the Commission determined that it has jurisdiction over unbundled retail transmission, and that States

have jurisdiction over bundled retail transmission. Therefore, it is appropriate for

Congress to amend the Federal Power Act (FPA) as proposed in section 101(b)(1)

of H.R. 2944. However, as Chairman Hoecker contends in his response to this question, if such an amendment is made, additional legislative language is necessary to

ensure the Commission’s ability to require non-discrimination in the uses of the

transmission grid. Chairman Hoecker has suggested, both in his written testimony

before the Subcommittee and in his response to this question, specific language to

be added at the end of FPA Section 201(a), as modified by H.R. 2944. I concur with

Chairman Hoecker that such additional language would be necessary.

Question 2. In your view, does section 102(a)(2) of H.R. 2944 amend section 212(h)

of the Federal Power Act to authorize FERC to order retail wheeling to a consumer

served by local distribution facilities in closed States? Is there a need to clarify the

definition of ‘‘open access’’ in the legislation?

Response. Section 102(a)(2) amends Section 212(h) of the FPA to clarify FERC authority to order transmission of electric energy to retail electric consumers served

by local distribution facilities subject to open access. It is clear to me that, as drafted, section 102(a)(2) would apply only to those States which have enacted retail

open access. In other words, FERC would have authority to order retail wheeling

only in ‘‘open’’ states, not in ‘‘closed’’ states. As far as the definition of ‘‘open access’’

used in the legislation, I concur with Chairman Hoecker that transmission open access should be given the meaning the Commission gave it in Order No. 888.

Question 3. Some charge transmission owners are redesignating transmission facilities as distribution facilities in order to avoid FERC open access requirements.

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Have you seen examples of such efforts by utilities? Are these utility efforts being

supported by State public utility commissions?

Response. The issue of transmission/distribution reclassification is one that concerns me, and I might add is a relatively new area brought about by retail open

access plans. As Chairman Hoecker mentions in his response, several utilities have

filed with the Commission proposals to classify certain facilities as either transmission or distribution. Some of the recent filings propose substantial reclassifications of transmission facilities as distribution facilities. As these cases are pending

before the Commission, it would be inappropriate to discuss them. However, I believe these are important cases that deserve careful attention by the Commission.

Question 4. H.R. 2944 includes an exemption from FERC regulation for small

transmission owners. Do you believe this exemption is appropriate? Do you have

any comments on the specific exemption provisions in H.R. 2944?

Response. I concur with Chairman Hoecker’s response to this question.

Question 5. FERC does not regulate transmission systems operated by State and

municipal utilities and cooperatives, which are some of the largest systems in the

country. State and municipal utilities oppose FERC regulation of transmission

rates, and want to retain that authority. If State and municipal utility transmission

systems continue to be unregulated could they shift power costs onto their transmission rates? Could they discriminate against competitors?

Response. In my written testimony before the Subcommittee I contend that, despite the Commission’s diligent efforts to create an open, non-discriminatory transmission system, certain impediments to full open access remain. One such impediment is that a significant portion of the Nation’s transmission grid is owned and

operated by utilities not subject to Commission open access requirements. I support

section 102(b) of H.R. 2944, which amends the definition of ‘‘public utility’’ in the

FPA to include transmitting utilities and provides FERC authority over the transmission systems of State and municipal utilities and rural electric cooperatives. I

believe this provision would result in a more cohesive transmission grid and will

greatly facilitate open transmission access. I believe the potential exists for any regulated or unregulated transmission system to shift costs inappropriately and discriminate against competitors. However, I prefer to believe that discriminatory practices are the exception rather than the rule. Nevertheless, it is important that

FERC have jurisdiction to regulate the transmission rates, terms, and conditions of

these utilities.

Question 6. Should FERC regulate transmission that is not in interstate commerce—such as transmission in noncontiguous States and territories?

Response. I concur with Chairman Hoecker’s response to this question. In particular, I believe the success of open, non-discriminatory transmission access depends on the consistent application of transmission rules across the interconnected

grid. To this end, I reiterate Chairman Hoecker’s request that Congress not deny

the Commission the limited authority it now has under section 211 of the FPA to

order transmission by utilities within ERCOT.

Question 7. NARUC proposed amending the reliability title of H.R. 2944 to authorize individual States to establish reliability standards. What is your position on

this proposal? How many States regulate transmission reliability? Would 50 different reliability standards improve reliability? How would 50 different standards

affect interstate commerce?

Response. I concur with Chairman Hoecker’s response to this question. In particular, I support the reliability provisions in Title II of H.R. 2944, which, among

other things, adds a new section 217(n) to the FPA preserving State and local authority to ensure the reliability of local distribution facilities within the State, except where the exercise of such authority unreasonably impairs the reliability of the

bulk power system. As Chairman Hoecker states, H.R. 2944, as drafted, would not

prevent States from acting to protect the reliability of local distribution, as long as

they do so in a manner that is consistent with the rules that apply across the transmission system.

Question 8. What is your view of the transmission pricing provisions of the bill

introduced by Mr. Sawyer (H.R. 2786)?

Response. I concur with Chairman Hoecker’s response to this question.

Question 9. Some criticize the length of FERC merger proceedings. How long does

it take FERC to approve mergers?

Response. I believe that such criticism is unwarranted. As I indicate in my written testimony, the Commission has shown repeatedly that it processes merger applications within the 150-day period prescribed in our 1996 Merger Policy Statement.

As Chairman Hoecker notes in his response to this question, of the 24 merger applications the Commission has acted on since 1996, only 3 were set for hearing. The

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remaining applications were consistently processed within the prescribed time period.

Question 10. H.R. 2944 amends section 203 of the Federal Power Act to expand

FERC review of sales of power plants and transmission facilities by State and municipal utilities, cooperatives, and federal electric utilities. Currently, those sales are

not subject to review by FERC, DOJ, or FTC. Is there a need for federal review of

these sales to ensure market power issues are addressed?

Response. As stated in my written testimony, I support the provisions of section

401 of H.R. 2944, which authorizes the Commission to review proposed mergers and

disposition of facilities of all electric utilities and transmitting utilities, including

State and municipal utilities, most rural electric cooperatives, and Federal electric

utilities. Given the changing nature of the electric industry and in order to protect

the public interest, I believe it is essential that the Commission continue to evaluate

public utility mergers and that the scope of our merger authority be extended as

proposed in section 401 of the bill.

Question 11. The Burr bill (H.R. 67) and the Sawyer bill (H.R. 2786) repeal section 203 of the Federal Power Act. What is your view of this proposal?

Response. I join Chairman Hoecker in strongly opposing repeal of section 203 of

the FPA. I believe the Commission’s authority to review public utility mergers is

vital to the public interest. Furthermore, I am convinced that the Commission is

uniquely situated and eminently qualified to assess a proposed merger’s effects on

competition, rates and regulation. Given the Commission’s special expertise and

knowledge of the electric industry, I believe that retention of the Commission’s

merger authority is absolutely necessary.

Question 12. H.R. 2944 allows TVA to sell wholesale power outside the region but

provides for FERC regulation of such sales. Could TVA get FERC approval to charge

market-based rates for these sales?

Response. I concur with Chairman Hoecker’s response to this question.

Question 13. H.R. 2944 directs FERC to approve a transmission surcharge on use

of the BPA transmission system for electric sales in the Pacific Northwest. Would

it be difficult to fashion this surcharge?

Response. I concur with Chairman Hoecker’s response to this question.

RESPONSES OF MARSHA H. SMITH, COMMISSIONER, IDAHO PUBLIC UTILITIES COMMISSION, ON BEHALF OF THE NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS TO QUESTIONS FROM HON. JOE BARTON

Question 1. The Administration proposes a public benefits fund financed by a new

$3 billion tax on electric generation. This proposal is based on a theory States will

slash public benefits programs as they open retail electric markets. 24 States have

opened their retail markets. How many slashed their public benefits programs? How

many strengthened their programs? Is a Federal public benefits fund needed if

States maintain public benefits programs?

Answer: NARUC is currently in the process of producing a database to track the

various policy elements found in each State restructuring plan. This database is not

yet completed to the extent that would allow us to give a definitive answer. However, the initial research we have done appears to show mixed results depending

upon the specific program in a particular State. Some States have increased some

programs and decreased others, while other States made no changes to the way they

handled public benefits programs.

While we expect States to continue playing an important role in maintaining public benefits, NARUC believes there is a Federal role as well. Our policy on public

benefits in restructured utility markets supports the inclusion in Federal legislation

of ‘‘workable mechanisms to support State and utility public benefits programs.’’ In

developing these mechanisms, we believe that Congress should focus its attention

on the following goals:

• A Federal-State partnership, building upon state and utility expertise in designing and implementing electric service and public purpose programs, and leaving

the greatest possible degree of flexibility and regulatory oversight to individual

States;

• Such programs may be designed, supported, and delivered through the nation’s

electric system, using broad-based, competitively-neutral funding mechanisms,

subject to regulatory oversight; and

• Federal support should be made available to assist and encourage the states to

develop and implement public purpose programs that meet the needs of the

States and the nation.

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Further, we believe that there is a National interest in diversity of generation re- sources, including necessary and appropriate public interest research and development, to support a continuing Federal role in this area during and after the restructuring process.

Question 2. Under the Administration bill, only certain public benefits programs are eligible for Federal matching grants—low income assistance, energy conservation, consumer education, research and development programs that provide environmental benefits, and rural assistance. Should Congress limit the ability of States to

fund public benefits programs? Answer: NARUC’s position, independent of the Administration’s specific proposal,

is that Congress should not limit the ability of States to fund public benefits programs by either restricting the mechanisms used to support such programs or limiting their scope.

Question 3. H.R. 2944 clarifies State authority to impose public purpose charges to fund programs of their own design, even if no State jurisdictional facility (such

as distribution) is used. Do you believe this approach is preferable to a Federal public benefits fund?

Answer: NARUC strongly supports legislation that removes any doubt that States can establish funding mechanisms for public benefit programs. We believe that

there is also a Federal role in this area, consistent with the principles described in

our answer to Question 1 above.

Question 4. The Pallone bill (H.R. 2569) includes a Federal public benefits fund

different from the Administration’s proposal. The bill sets different limits for State

public benefits programs, imposes a new distribution tax instead of a new generation tax, and is twice as large ($6 billion instead of $3 billion). What is NARUCs

position on the public benefits provisions of H. R. 2569?

Answer: NARUC has taken no position on the size of any Federal public benefits program that restructuring legislation would establish. Again, as our answer to

Question 1 states, we do believe that there is a Federal role in this area that goes

beyond the removal of barriers to State programs.

Question 5. Some witnesses support including market power provisions in elec- tricity legislation, authorizing FERC to order divestiture if it determines an electric

supplier has generation market power. Does NARUC support these proposals? Do

States have authority to address generation marketpower? Answer: First of all, Congress should not preempt State jurisdiction to address market power issues. We believe that divestiture is not the only option available to

mitigate market power in the generation market. State regulators must have at

their disposal a continuum of options for the mitigation of market power, and accordingly, we urge Congress to preserve State flexibility to use these options as

needed. Legislation should clarify the authority of States to use accounting conventions and codes of conduct, which may be sufficient safeguards in some cases. Legislation should clarify the authority of the States to require and police the separation

of utility and non-utility, and monopoly and competitive businesses, and to impose

affiliate transaction and other rules to assure that electric customers do not subsidize non-utility ventures. Legislation should clarify that States have clear authority to require the formation of appropriate state and regional institutions where necessary to ensure a competitive electricity market. As market power abuse may require the application of well-tailored structural solutions, legislation should clarify

that the States are not restricted in their authority to require divestiture where appropriate and necessary. Additionally, Congress should also clarify that States have

the ultimate and meaningful authority to ensure effective retail markets and should

eliminate any barriers to the exercise of that authority by the States.

Second, concerning the scope of FERC’s authority to address market power issues,

Congress may well conclude that FERC should have a similar array of options to

apply in specific cases. We believe that any new authority granted the Commission

to address issues within its jurisdiction should complement the work of the States

and such other Federal agencies as the Federal Trade Commission and Department

of Justice and not preempt or restrict actions taken at the State level.

Question 6. How many of the 24 States that opened their retail markets addressed

generation market power issues? Some States—Texas, California, New York, and

the New England States—included generation market power provisions. Others—

New Jersey and Pennsylvania—did not.

Answer: Our preliminary analysis of State restructuring policies indicates that

many States have provided their regulatory commissions with the array of options

described in our answer to Question 5. While we haven’t been able to conduct an

exhaustive analysis of State restructuring legislation since we received the Subcommittee’s questions, we can report that States that have restructured retail markets have provided their regulators with the authority to order divestiture of genVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00154 Fmt 6633 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
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eration facilities directly or as a condition for the recovery of stranded costs (Maine,

New Jersey, Nevada, Delaware, Arkansas, Massachusetts, Connecticut), the authority to require separate subsidiaries for regulated and non-regulated businesses (Nevada, New Jersey, Rhode Island, Connecticut, New Hampshire, Ohio, Virginia,

Maryland, Maine), the authority to require functional separation of competitive and

regulated businesses (i.e. the model adopted by FERC in Order No. 888) ( Illinois,

New Jersey, Arkansas), and the authority to revoke subsidiary licenses for market

power abuses (New Jersey).

Question 7. The Administration bill authorizes FERC to provide backup market

power remedies for retail markets at the request of States lack of authority to remedy market power. Do States lack authority to remedy marketpower issues? Answer: As our answers to Questions 5 and 6 indicate, States do not lack authority to remedy market power abuses that are within their jurisdictional authority

under the Federal Power Act. Any legislation Congress considers that affects the allocation of jurisdiction must not restrict the ability of States to monitor market behavior and impose remedies necessary to protect consumers from market power

abuses.

Question 8. H.R. 2944 clarifies Federal and State jurisdiction, providing for FERC jurisdiction over transmission used for unbundled retail sales, and for State jurisdiction over transmission used for bundled retail sales. Is this clarification needed, and

does the bill draw the jurisdictional line properly? Answer: NARUC believes clarification of Federal and State jurisdiction is needed. However, the bill does not draw the jurisdictional line properly. We support a jurisdictional division based upon the bright line distinction between wholesale and retail services: FERC would exercise jurisdiction to regulate wholesale power transactions, including the transmission services necessary to complete such transactions,

and States would exercise jurisdiction to regulate retail power transactions, including the transmission and distribution services necessary to complete such transactions. Jurisdiction, including ratemaking authority, should not shift based upon

State decisions to allow customer choice. Accordingly, NARUC does not support the

bill’s allocation to FERC of regulatory authority over unbundled retail sales. Similarly, we oppose other proposals that would be even more preemptive of State authority to regulate services provided retail customers, such as the proposals by

Americans for Affordable Energy (AAE) and FERC Chairman Hoecker that would

give FERC exclusive jurisdiction to regulate all retail transmission services, whether

bundled or unbundled. Members of Congress should understand what these proposals ask it to do: provide a distant FERC exclusive authority to regulate prices and conditions of service provided by facilities that were planned and constructed

to serve retail customers, that have been paid for by retail customers, and that

criss-cross the fields, towns, forests and waterways owned by or adjacent to retail

customers.

Our proposal (retail authority to the States, wholesale to the FERC) is not a formula for chaos, or balkanization of the grid, or a crazy quilt. Rather, the situation

described in Elizabeth Moler’s testimony for AAE (i.e. the difference between transmission service in Virginia and West Virginia) is directly attributable to the decision

FERC made in Order No. 888 to assert jurisdiction over unbundled retail transmission services. Had FERC not done so, regulatory jurisdiction would now be uniform in Virginia and West Virginia—both State commissions would regulate transmission services provided retail customers whether bundled (West Virginia) or

unbundled (Virginia).

Nor is it unusual for State and Federal regulators to share regulatory authority

over facilities used for services provided in both jurisdictions. Indeed, this was the

very state of affairs in the electricity industry beginning in 1935 when Congress

first adopted the wholesale/retail distinction. Similar situations occur in the telecommunications industry where plant and equipment is used for both local and

long-distance services. In sum, Congress should clarify the Federal Power Act to ensure that services provided to retail customers remain subject to State authority.

Question 9. Some charge transmission owners are redesignating transmission facilities as distribution facilities to avoid FERC open access requirements. Have you

seen examples of such efforts? Are any such utility efforts being supported by State

public utility commissions?

Answer: NARUC is aware of recent reports claiming that transmission owners are

using the ‘‘seven-factor test’’ adopted by FERC in Order No. 888 to ‘‘refunctionalize’’

their facilities. We are also aware of suggestions that this process is resulting in

the conversion of facilities from Federally-regulated transmission to State-regulated

distribution. Finally, we understand that the implementation of the seven-factor test

is occurring in State regulatory proceedings where State commissions are making

findings that are then implemented through FERC’s Order No. 888 open-access tarVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00155 Fmt 6633 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
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iffs. However, while we have not had time to conduct an exhaustive evaluation of

State decisionmaking in this area, we can report the following: The Illinois Commerce Commission conducted extensive time consuming pro- ceedings to apply the seven-factor test to its jurisdictional utilities. As Order No.

888 requires, the work conducted by the Illinois staff involved detailed analyses of

diagrams and descriptions of the facilities comprising each utility’s power delivery

system. Application of the seven-factor test in Illinois resulted in some significant

reclassification of facilities from transmission to distribution—up to 40% in the case

of Commonwealth Edison. The Illinois staff is convinced that their Commission applied the test as FERC intended in Order No. 888, and that if there is a problem,

it is attributable to the test itself.

Similarly, the New York Public Service Commission conducted a classification pro- ceeding to develop rules that categorize utility facilities consistently with FERC’s

Order No. 888 policies, focussing its attention on cost allocation and revenue impact

issues, i.e. how the application of FERC’s policies, supplemented with additional

technical factors tailored to local conditions, would affect consumer rates. Importantly, while the rules developed in this proceeding have not been fully implemented, the New York commission undertook its analysis with the goal of supporting competitive markets in the State, not to restrict access or deny service. Some observations on the issue of refunctionalization:

• First, NARUC did not support the adoption of the seven-factor test by Order No.

888. We believed at the time that contrary to the Supreme Court’s long-standing admonition that there be a ‘‘bright-line’’ between State and Federal jurisdiction, the ‘‘seven-factor test’’ would lead to case-by-case, power line-by-power line

jurisdictional determinations based upon weighing and reweighing of the factors. In other words, it was our view that a multifactor test could only lead to

differing outcomes in different cases. It would appear that in this respect, Order

No. 888 is operating exactly as FERC intended: State commissions are making

case-by-case determinations in the first instance based upon application of the

seven factors, and the results then go to the Federal level to be implemented

via tariff. • Second, from the perspective of retail competition, it is not clear that

refunctionalization (to the extent it’s occurring) is necessarily being undertaken

to avoid open-access requirements as much as it is to shift costs from the Federal to State jurisdiction. In open access States, transmission owners that also

provide distribution services (i.e. the vertically integrated utilities formerly providing bundled services) must provide open access service to retail customers regardless of the character (transmission or distribution) of the specific facilities

used to deliver the power. Accordingly, if the entire retail transaction is subject

to one jurisdictional authority at the State level (covering transmission and distribution services), refunctionalization can provide no escape from open access

requirements. • Third, our proposal to allocate jurisdiction based on how facilities are used rather

than through case-by-case application of seven technical factors restores the

bright line and limits the opportunity to shift facilities from one side of the jurisdictional line to the other. Clearly, an allocation of jurisdiction based upon

wholesale (FERC) and retail (State) service avoids the case-by-case problems of

the seven-factor test while preserving the categorization of facilities as State,

Federal or joint that has existed for decades.

Question 10. Should FERC regulate transmission that is not in interstate com- merce—such as transmission in noncontiguous States and territories? Answer: As a preliminary matter, the extension of FERC authority to reach trans- mission services that are not in interstate commerce may raise constitutional issues

concerning Congress’ authority under the Commerce Clause. Regardless of constitutional concerns, NARUC opposes the extension of FERC au- thority that displaces, directs or preempts State authority. At this point, no one has

made the case that FERC’s authority should be extended to include transmission

services provided in Alaska, Hawaii, or Texas as this question would imply.

Question 11. Should States be able to discriminate against aggregators? For exam- ple, should one State be able to bar cooperatives from aggregating, while another

State gives municipalities a preference by allowing forced aggregation?

Answer: NARUC has taken no position on whether Federal legislation should address the specific issue of aggregation. However, we have a long-standing position

that matters involving rates and conditions of service to retail consumers should be

addressed at the State level. Accordingly, NARUC does not support legislation that

preempts State authority over retail services. Finally, we believe that the State legislatures and commissions have adequate authority and interest to work out fair

and equitable aggregation rules and procedures without Federal involvement.

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Question 12. H.R. 2944 includes aggregation language barring States from discriminating among aggregators. Have any of the 24 States that opened their retail

electric markets discriminated against aggregators? If so, please identify the States

and describe the discriminatory provisions.

Answer: As stated in our answer to Question 11, we believe that issues affecting

retail electric service should be addressed at the State level. Issues concerning eligibility standards to aggregate retail purchases should be addressed in State legislatures and regulatory commissions.

Question 13. Mr. Brown introduced a bill (H.R. 2734) to grant municipal governments a preference in aggregating consumers, by permitting them to aggregate consumers without their express consent and preempting State laws that do not have

opt out aggregation provisions. What is NARUCs position on H.R. 2734?

Answer: NARUC has taken no position on H.R. 2734.

Question 14. Some States established their own renewable portfolio standards. Is

there a need to clarify State authority to impose renewable portfolio standards?

Answer: There is a need to clarify State authority to impose renewable portfolio

standards. Congress should make clear that State-adopted RPS programs are permissible under Federal law, i.e. not preempted or precluded by such statutes as the

Federal Power Act or PURPA, or the Commerce Clause.

Question 15. H.R. 2944 includes net metering provisions. Who should pay for new

meters—the consumer, the local distribution company, or the retail electric supplier? Who should own the meters?

Answer: These issues should be left to the states, who should continue to have

authority over distribution networks.

Question 16. Contractors propose amendments to provide for Federal regulation

of cross-subsidies in distribution rates, require States to develop codes of conduct

to prevent cross-subsidies and limit use of names and logos by utilities, and provide

for enforcement of these prohibitions by State public utility commissions. What is

your view of these proposals? Do States have sufficient authority to address crosssubsidy issues, or is Federal legislation necessary?

Answer: NARUC reiterates its position that retail activities should remain within

the jurisdiction of State commissions. Federal legislation should clarify the authority

of the States and territories to require and police the separation of utility and nonutility, and monopoly and competitive businesses. Congress should also clarify that

State and territorial regulators have the ultimate and meaningful authority to ensure effective retail markets and should eliminate any barriers to the exercise of

that authority by the States and territories. It is inappropriate to force small businesses and other such aggrieved parties to take their complaints to Washington for

resolution. States have complaint processes to deal with local concerns. States have

instituted rulemaking proceedings to impose affiliate transaction and other rules on

monopoly utility companies under their jurisdiction to assure that electric customers

do not subsidize non-utility ventures. Current State restructuring efforts are providing critical tools to assist State and territorial regulators in addressing market

power and issues of unfair competition.

October 18, 1999

The Honorable JOE BARTON

Chairman

Subcommittee on Energy and Power

Room 2125 Rayburn Building

Washington, D.C. 20515-6115

DEAR CHAIRMAN BARTON: Thank you for your letter of October 8, 1999, and thank

you again for inviting me to testify on behalf of the National Association of State

Utility Consumer Advocates (NASUCA) at your Subcommittee Hearing on October

5, 1999. As I stated at that hearing, NASUCA sincerely appreciates the willingness

of you and your staff to reach out in your deliberations to NASUCA members as

the representatives of retail electric consumers in their respective states. NASUCA

looks forward to continuing to work with you and other members of Congress as you

go forward with the consideration of legislation in this vital area.

In response to the specific questions in your October 8, 1999 letter, NASUCA

would respond as follows:

Question 1. Why do you believe a Federal electricity bill must include market

power provisions? States have authority to address generation market power issues

as they enact retail competition laws, and may order divestiture, as some have done.

Also, antitrust law applies to electric utilities in competitive markets.

154

Response. Like electrons flowing on the grid, market power extends beyond state

boundaries. Individual states do not have jurisdiction over companies or assets outside of their state borders. Antitrust laws do not adequately address market power

lawfully obtained, as through the former legal and regulatory structure that existed

for almost 100 years.

Question 2. Should States be able to set transmission reliability standards that

supercede national and regional standards. How many States set transmission reliability standards? I understand New York is the only State that regulates transmission reliability. If New York is the only State that issues such standards, how

can it be an essential State function?

Response. States do have a vital role in maintaining the reliability, safety, and

adequacy of electric systems with each state’s borders. All states address reliability

issues in some way, even if they do not have specific regulations regarding ‘‘transmission reliability.’’ It is NASUCA’s position that states should retain authority to

address all reliability matters within their state boundaries as long as their actions

are not inconsistent with the actions of the new North American Electric Reliability

Organization or the Federal Energy Regulatory Commission with respect to bulk

power transactions in interstate commerce.

Question 3. Why tie PUHCA repeal to divestiture? In my view, PUHCA is a barrier to entry. Why should existing utilities have to sell their generation to get out

from under PUHCA? How much of U.S. generating capacity is operated by subsidiaries of registered holding companies? How much of U.S. generating capacity are

you proposing to divest?

Response. NASUCA does not tie PUHCA repeal to divestiture. Rather, NASUCA

urges the Congress not to repeal PUHCA without first insuring that holding companies are subject to either effective competition or effective regulation where effective

competition does not exist. NASUCA does not have statistics regarding generating

capacity that you requested, nor does NASUCA propose a specific level of divestiture.

PUHCA still contains structural protections, vital reviews of affiliate transactions,

and the federal means to order divestiture of one or more portions of a business in

order to protect consumers and promote the public interest. It also prohibits utility

holding companies from acquiring utility companies that provide monopoly distribution service in disparate regions.

NASUCA provides several options regarding means for protecting consumers and

competition from this occurrence. Divestiture of generation is only one potential

mechanism; NASUCA would expect that a showing of competitive retail generation

markets for small customers in each state in which the utilities have service territories would be the primary means to address this potential problem. In addition,

regulators of distribution services in each state would need to ensure that there is

effective regulation to prevent utilities from gaining an unfair advantage at captive

consumers’ expense.

Question 4. How many of the 24 States that opened their retail markets addressed

generation market power issues? Some States—Texas, California, New York, and

the New England States—included generation market power provisions. Others—

New Jersey and Pennsylvania—did not.

Response. NASUCA does not maintain a database that would enable a prompt response to this question. In Pennsylvania, there is, in fact, a section on ‘‘Market

Power Remediation’’, 66 Pa.C.S. § 2811.

Question 5. The Administration bill authorizes FERC to provide backup market

power remedies for retail markets at the request of States lack of authority to remedy market power. Do States lack authority to remedy market power issues?

Response. As noted in the answer to Question Number 1, states may lack authority to address some market power issues that arise beyond their borders, but that

can have an impact within their borders. NASUCA would agree that states should

be permitted to request FERC ‘‘backup’’ on market power issues that are beyond the

states’ own authority to address.

Response. Again, NASUCA thanks you for the opportunity to provide continued

input on these issues. If you have any questions about NASUCA’s position on these

or any other electric restructuring issues, please contact NASUCA’s Executive Director, Charles Acquard at 202-727-3908.

Sincerely yours,

IRWIN POPOWSKY, Consumer Advocate of Pennsylvania

Immediate Past President, NASUCA

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RESPONSE OF HON. T.J. GLAUTHIER, DEPUTY SECRETARY OF ENERGY, TO QUESTIONS

OF HON. JOE BARTON

Question 1. The Burr bill (H.R. 667) and the Sawyer bill (H.R. 2786) repeal section 203 of the Federal Power Act. What is your view on this proposal?

Response. We oppose the repeal of Section 203 of the FPA. As we transition from

a period of monopoly utility service to competition in the wholesale and retail markets, it is imperative that we act to eliminate the impediments to competition. While

utility mergers and consolidations are not per se inappropriate, some do have the

potential to reduce competition. We need to ensure that mergers and consolidations

don’t actually reduce competitive pressures.

Determining whether a merger will be anti-competitive requires regulators and

antitrust enforcers to make predictive judgements. These judgements are frequently

difficult, and are certainly more difficult in an industry, such as electricity, where

there are no fully competitive markets to use as a benchmark to determine whether

a proposed merger will harm consumers.

It is important that the Federal Energy Regulatory Commission (FERC), with its

significant expertise, retains its authority to ensure that proposed mergers are in

the public interest. Section 203 provides FERC with the flexibility to craft appropriate policies and procedures dealing with mergers in the electric power industry

over which it has jurisdiction. Section 203 also gives FERC the ability to place conditions on its merger approvals and to exercise continuing jurisdiction over the

merged entities. This authority plays a significant role in preventing anticompetitive

mergers, particularly during the transition period to competition.

Question 2. States have authority to address generation market power issues as

they enact retail competition laws, and may order divestiture, as a number of States

have done. Also, antitrust law applies to electric utilities after States cease regulating retail rates. Why is it necessary to give FERC a broad grant of discretionary

authority to restructure the industry and order divestiture?

Response. The Administration bill would give FERC the authority to address

wholesale market power problems. States do not have jurisdiction over sales of electricity in the wholesale market and consequently lack authority to address possible

wholesale market power problems. FERC, under the Administration bill, would have

backup authority to address retail market power problems. This authority can only

be triggered at the request of a state. This backup authority is needed because a

state may not have adequate statutory authority or jurisdiction to address market

power that harms its consumers.

As we make the transition to competition, ownership patterns and transmission

constraints in a particular region may result in consumers being denied access to

an adequate number of generators. This situation may allow the dominant firm to

raise price above competitive levels to those consumers. In those instances, it is absolutely critical that FERC be given the necessary authority to mitigate market

power. The Administration bill would give FERC the authority to mitigate market

power, after a public proceeding, only in those instances where it is found that a

utility can exercise market power. This is not a broad authority to ‘‘restructure the

industry.’’ It is an authority to protect consumers from market power. The ultimate

goal of the Administration’s market power provisions is to ensure that consumers

realize the benefits of competition. A failure to address adequately possible market

power problems may result in replacing regulated monopolists with unregulated

ones.

The antitrust laws do not outlaw the mere possession of monopoly power. In other

words, the antitrust laws cannot challenge the structure of a market. For example,

if, after the advent of competition, a utility possesses a 90 per cent share of a market, the antitrust laws are powerless to prevent this firm from charging monopoly

prices. In order for a monopolist to violate the antitrust laws, it must engage in ‘‘bad

acts,’’ which are defined as exclusionary conduct designed to enable a firm to gain

or maintain a monopoly. Charging high prices is not considered exclusionary conduct and is therefore not an antitrust violation.

Question 3. The Administration bill gives FERC extraordinary powers to order divestiture. How many Federal regulatory agencies have the power to restructure the

industries they regulate, including the power to order divestiture?

Response. Section 11 of the Public Utility Holding Company Act (PUHCA) provides the SEC with the authority to require a utility holding company to simplify

its corporate structure, including the authority to require divestiture. In addition,

the FCC has the authority to require divestiture. The FCC has issued orders and

promulgated regulations authorizing divestiture in those instances when the agency

determines that divestiture is necessary to preserve competition.

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It is important to keep in mind that the electric power industry is fundamentally different from other industries. All electric energy produced by all interconnected

generating stations must continuously and instantaneously balance the aggregate

energy being consumed by all users. Electricity cannot be economically stored. Market power remedies, such as divestiture, were probably not necessary in those industries that did not develop from government-sanctioned monopolies.

Question 4. The Administration bill would authorize FERC to order divestiture to

mitigate generation market power. Aren’t there less intrusive means of mitigating

market power, such as reregulating retail rates charged by suppliers? Response. It is important to note that divestiture is not the exclusive remedy that FERC would have at its disposal to address market power under the Administration

proposal. FERC may find that there are other remedies that adequately mitigate

market power. Re-regulating rates may not necessarily be a ‘‘less intrusive’’ means

of mitigating market power. Rate regulation is very costly and burdensome. It requires complex rules and constant oversight and examination of a utility’s sensitive

records. There are constant battles over, among other things, accounting rules and

proper allocation of costs. After more than a century of experience with price regulation in this industry, there is a strong consensus—which forms the foundation of

the efforts to restructure the industry—that markets are superior to price regulation.

Divestiture is a common remedy used by the federal enforcement agencies to rem- edy likely market power caused by an anticompetitive merger. This remedy, in the

merger context, preserves the competition that otherwise would have been lost.

Once the assets necessary to preserve competition are sold, there is no government

oversight of the firm. The market establishes the prices at which the firm’s products

or services are sold.

Likewise, in a restructured electric power industry, FERC would seek divestiture only when necessary to give customers an adequate number of suppliers from which

to choose. Once the assets are sold that are necessary to ensure that there is competition, the market sets the prices at which energy is sold.

Question 5. You testified antitrust laws are not sufficient to address generation market power issues. Describe a market power abuse that would not violate the

antitrust law.

Response. The mere possession of monopoly power does not constitute a violation of the antitrust laws. For example, an incumbent utility with a significant share of

the market may be able profitably to raise price above competitive levels to consumers. This firm’s choosing to exploit its market power by raising its prices above

competitive levels would not constitute an antitrust violation.

Question 6. The Administration proposes a public benefits fund financed by a new tax on electric generation. This proposal is based on a theory States will slash their

public benefits programs as they open retail electric markets. 24 states have opened

their retail markets. How many slashed their public benefits programs? How many

strengthened their programs? Why is a Federal public benefits fund needed if States

maintain public benefits programs?

Response. The Administration’s proposed public benefits fund does not envision

any taxes. Rather, a public benefits charge (capped at 1

⁄10 of a cent per kilowatthour) would be established by FERC to generate an amount sufficient to meet requests made by State and tribal governments for matching funds (subject to a $3

billion/year national cap) to support eligible public purpose programs. If no state or

tribal government sought matching funds, no fees would be collected.

In addition, a wires charge of up to .17 mills per kwh would be available if the

Secretary of Energy were to determine that competition has adversely impacted

rural consumers. The rural safety net would be administered through the public

benefits fund.

Of the states that have adopted restructuring programs, six states have decreased

their funding for energy efficiency programs and eight states have increase funding

for these programs.

Expenditures for public purpose programs have generally declined in recent years.

For example. spending on demand-side-management programs in 1998 were approximately half the level of 1994 expenditures.

Many, but not all, states that have opened their retail markets have arranged to

continue funding of public purpose programs for a limited time period. A federal

public benefits fund would provide all states with an incentive to maintain such programs through 2015. Federal encouragement is appropriate given that the benefits

of public purpose programs often extend beyond state boundaries.

Question 7. Legislation introduced by Mr. Pallone (H.R. 2569) includes a Federal

public benefits fund different from the Administration’s proposal. The Pallone bill

sets different limits for State public benefits programs, imposes a distribution tax

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instead of a generation tax, and is twice as large ($6 billion instead of $3 billion).

What is the Administration’s position on H.R. 2569?

Response. The Administration agrees with the intent of H.R. 2569—to provide a

mechanism to promote expenditure on public benefits programs. Both proposals authorize the collection of a fee to help pay for State public purpose programs.

With regard to the assessment of the fee, the Administration believes that a

charge on generation is more appropriate. Many distribution companies are very

small. A charge of as much as 2.0 mills per kilowatt-hour, as proposed in H.R. 2569,

would represent a significant increase in the costs of distribution. An additional

charge of up to 1 mill (as the Administration has proposed) would not have nearly

the same effect on the costs of generation.

With regard to the size of the Federal contribution to public benefits fund, the

Administration believes that the Federal contribution of $3 billion and the contribution of the states at another $3 billion would be sufficient to cover what was being

recovered in rates prior to the transition to more competitive markets. However, we

also note that the charge envisioned in H.R. 2569 would be reduced by 50% of the

amount of any wire charge imposed by a state for eligible public purpose programs.

Therefore, the amount collected under H.R. 2569 is unlikely to be double the

amount collected under the Administration bill.

Question 8. Some argue Federal electricity legislation should not include any consumer protection provisions, and should rely on States to address these issues. Why

should consumer protection provisions be included in Federal legislation.

Response. The Administration believes that, generally, most consumer protection

issues are best addressed by the states. Nevertheless, it is important to recognize

that, in a competitive environment, marketers headquartered in various states will

be competing for customers. State regulatory authority over unscrupulous marketers

will be somewhat limited. That is why the Administration bill includes provisions

designed to prevent retail suppliers from engaging and slamming and cramming

practices. I understand that H.R. 2944 contains similar provisions.

Question 9. H.R. 2944 clarifies Federal and State jurisdiction, providing for FERC

jurisdiction over transmission used for unbundled retail sales, and for State jurisdiction over transmission used for bundled retail sales. Is this clarification needed, and

does the bill draw the jurisdictional line properly?

Response. One of the reasons Congress needs to enact electricity restructuring legislation is to ensure that FERC’s open access rules apply to all significant transmission owners. FERC’s current authority is limited under the Federal Power Act

and, potentially, as a result of a recent 8th Circuit Court of Appeals Decision in the

Northern States Power v. FERC case. If wholesale and retail competition are going

to effectively develop, FERC must have the ability to ensure that all significant

transmission facilities are subject to open access requirements. H.R. 2944 could be

interpreted as limiting the applicability of FERC’s open access rules to unbundled

retail transmission; leaving a significant portion of transmission exempt from these

open access requirements. The bill needs to be modified to eliminate this uncertainty and ensure that the open access rules apply to all transmission.

Question 10. You criticize H.R. 2944 because it does not provide for FERC regulation of transmission used to make bundled retail sales. Did the Administration bill

grant FERC that authority? My understanding it did not. How can you criticize H.R.

2944 for not including something the Administration bill did not propose?

Response. The Administration’s proposed legislation is silent with regard to

FERC’s authority over bundled retail transmission. However, our bill was transmitted to Congress prior to the 8th Circuit’s decision in the Northern States case.

This decision raises serious questions about the potential effectiveness of FERC’s

open access rules. Certainly, legislation must clarify that FERC has sufficient jurisdiction to ensure that utilities don’t use their transmission facilities to discriminate

against other marketers.

Question 11. FERC does not regulate transmission systems operated by State and

municipal utilities and cooperatives, which are some of the largest systems in the

country. State and municipal utilities oppose FERC regulation of transmission

rates, and want to retain that authority. If State and municipal utility transmission

systems continue to be unregulated could they shift power costs onto their transmission rates? Could they discriminate against competitors?

Response. If FERC were to have the authority to ensure that municipal and cooperative utilities’ transmission rates are just, reasonable and not unduly discriminatory, these utilities will be on the same footing as public utilities are today, and will

be unable to use their transmission systems to advantage their power systems.

Question 12. Should FERC regulate transmission that is not in interstate commerce—such as transmission in noncontiguous States and territories?

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Response. The Administration believes that FERC should regulate only transmission that is in interstate commerce. Constitutional questions might arise should

FERC’s jurisdiction be extended to transactions not in interstate commerce.

Question 13. What is your view of the transmission provisions of the bill introduced by Mr. Sawyer (H.R. 2786)?

Response. The Administration agrees with Mr. Sawyer that transmission is a key

element of promoting wholesale and retail competition. However, we are concerned

about several provisions in the bill.

First, H.R. 2786 requires FERC to allow transmitting utilities to recover all costs

incurred in providing transmission service. We believe that, while this is generally

the appropriate policy, FERC must retain authority to review costs to ensure that

they are appropriate for inclusion in rates.

Under H.R. 2786, transmission rates must be established to accomplish a number

of different policy goals. We believe that these are laudable goals. However, we don’t

believe they should be statutorily mandated. FERC has the expertise and experience

to set pricing policies appropriate to the transmission industry. On the other hand,

permitting negotiated transmission rates, as H.R. 2786 does, could result in discrimination among users of the transmission system.

The Administration also agrees that FERC should encourage innovative pricing

policies. However, we have concerns regarding incentive pricing to encourage participation in a regional transmission organization (RTO). The Administration believes that FERC should have the authority to require such participation, as it may

not be possible to ensure a fully competitive electricity market without RTOs. For

the same reason, the Administration is concerned with H.R. 2786’s goal of voluntary

RTO formation. In addition, there is no requirement that RTOs be independent of

market participants. We agree with FERC that independence is an RTO’s most important characteristic.

Question 14. H.R. 2944 includes an exemption from FERC regulation for small

transmission owners. Do you believe this exemption is appropriate? Do you have

any comment on the specific exemption provision in H.R. 2944?

Response. The Department of Energy supports an approach which exempts, from

FERC jurisdiction, transmission facilities owned by municipal and cooperative utilities which are not essential to efficient, reliable and competitive interstate power

markets.

Question 15. NARUC proposed amending the reliability title of H.R. 2944 to authorize individual States to establish reliability standards. What is your position on

this proposal? Would 50 different reliability standards improve reliability? How

would 50 different standards affect interstate commerce?

Response. The issue of how best to incorporate a role for the states in bulk power

system reliability is complex. Certainly, a system of 50 different standards would

not improve reliability, and would have an adverse impact on interstate commerce.

We support a continuation of the dialogue between NARUC and NERC and other

stakeholders to develop provisions that would allow for an appropriate state role.

Question 16. The reciprocity provisions of the Administration bill would grant

States, municipal utilities, and cooperatives the power to regulate interstate commerce. 3,000 different entities would regulate interstate commerce (there are 2,000

municipal utilities and over 900 cooperatives). Is that wise? Since reciprocity is regulation of interstate commerce, isn’t it better it be a Federal rule?

Response. While it is true that reciprocity requirements regulate interstate commerce, authorizing states and non-regulated municipal and cooperative utilities to

impose reciprocity requirements is consistent with the approach taken by H.R. 2944,

which leaves many matters related to interstate commerce subject to state and local

regulation.

Question 17. You argue that utilities could avoid the reciprocity provisions in H.R.

2944 by filing sham open access plans with their State public utility commissions.

How do you propose to address the situation where a multistate utility operates in

both open and closed States? Should the utility be denied access to retail markets

in the open States it has historically served?

Response. The Administration does not believe that a multistate utility should be

penalized if it serves a state that requires competition and a state that has yet to

require competition. However, the reciprocity provisions included in H.R. 2944,

which apparently are intended to discourage utilities from acting to inhibit the introduction of retail competition, enables a utility to avoid the reciprocity restrictions

simply by funding a competition plan with its state commission. There is no mechanism to ensure that the plan filed by the utility is a serious proposal and that the

utility will make an effort to allow its customers access to the benefits of retail competition

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Question 18. The Administration bill includes a Federal date certain with an opt

out—a flexible mandate. Why do you believe the flexible mandate is needed? The

real pressure on States to open their retail electric markets comes from competition

with other States for economic development. The flexible mandate will result in a

lot of litigation, and may not accelerate State action. Response. The Administration believes that retail competition, if structured properly, will benefit consumers, the economy and the environment. We also believe that

most, if not all, state public service commissions and non-regulated municipal and

cooperative utilities would concur if they held a proceeding to review the matter.

The flexible mandate approach encourages states and non-regulated utilities to implement retail competition programs but recognizes that unique local issues might

require a different approach.

We disagree with your assumption that the ‘‘flexible mandate will result in a lot of litigation . . .’’ The opportunities for challenging the decision of a state public serv- ice commission or a non-regulated utility to opt-out are limited.

Question 19. A number of States have established their own renewable portfolio

standards. Is there a need to clarify State authority to impose renewable portfolio

standards, or is there no doubt States have such authority? Response. We are unaware of any challenges to the authority of states to adopt renewable portfolio standards. In addition, we believe states would have the ability

to impose a renewable portfolio standard and require a higher amount of renewable

generation if a Federal renewable portfolio standard is enacted. The Administration believes that the limited programs that have been adopted in a small number of states cannot provide the significant national benefits that would

result from the adoption of a national renewable portfolio standard that requires all

retail sellers to cover 7.5% of their sales with generation from eligible renewable resources by 2010.

Question 20. Does the Administration support the bill introduced by Mr. Waxman to amend the Clean Air Act to require older coal power plants in the Midwest and

Southeast to meet new source performance standards (H.R. 2900)?

Response. The Administration has not yet taken a position on H.R. 2900.

Question 21. The Administration bill includes aggregation language similar to the aggregation provisions in H.R. 2944. Have any of the 24 States that opened their

retail electric markets discriminated against aggregators? If so, please identify the

States and describe the discriminatory provisions. Response. Maryland, which adopted retail competition legislation, prevents mu- nicipalities from acting as aggregators. In addition, it is not entirely clear that all

states permit the rural electric cooperatives operating within their borders to aggregate on behalf of their distribution customers.

Question 22. Mr. Brown introduced a bill (H.R. 2734) to grant municipal govern- ments a preference in aggregating consumers, since it permits them to aggregate

consumers without their consent. What is the Administration’s position on that bill?

Should municipalities have an advantage in aggregating over churches, social and

charitable organizations, and others?

Response. The Administration believes that aggregation is an important tool to

ensure that residential and small commercial electricity consumers reap the full

benefits of retail competition programs. It is the Administration’s position that municipalities and all other entities should be able to aggregate groups of consumers.

At the same time, we don’t believe that any aggregator should be able to force a

consumer to be served by that entity. We don’t read the Brown bill as forcing any

consumer to be served by a municipal aggregator.

Question 23. The Administration bill includes interconnection provisions similar

to H.R. 2944. Will these provisions lower barriers to entry for new power plants?

Response. Interconnection standards in the Administration bill apply specifically

to small-scale distributed generation facilities and combined heat and power facilities. These provisions lower a potentially important barrier to entry for those new

power plants that fail within these categories. Unwarranted impediments to interconnection provide a means for incumbent utilities to prevent entry and exert market power. Moreover, interconnection standards vary widely from utility to utility

thereby discouraging widespread use of distributed generation. For these reasons,

the Administration proposes a provision to establish and implement national uniform, and non-discriminatory technical interconnection standards for the hookup of

distributed power generation systems to distribution utilities.

Question 24. The Administration bill promotes interconnection of ‘‘small scale electric power generation facilities’’ of undefined size, and H.R. 2944 promotes interconnection of distributed generation facilities of 50 megawatts or less. Should distributed generation facilities be of unlimited size? Are there reliability implications

if these facilities are too large?

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Response. We believe that distributed power is likely to play a significant role in

meeting customer needs in restructured electricity markets. The Administration bill

does not set a specific size threshold for distributed generation facilities because we

believe that the definition of a ‘‘small-scale electric power generation facility’’ should

be determined based on technical considerations. A working group under the Institute of Electrical and Electronics Engineers is already developing a voluntary industry standard for interconnecting distributed power with electric distribution and

subtransmission systems, and plans to have a complete draft ready by March 1999

to start the consensus process. We understand that the current draft envisions voluntary standards applicable to facilities up to 50 megawatts in size, but this is

clearly subject to further technical deliberation.

Question 25. The Administration bill includes net metering provisions similar to

H.R. 2944. Who should pay for new meters—the consumer, the local distribution

company, or the retail electric supplier? Who should own the meters?

Response. The Administration believes that questions concerning the ownership

of and payment for distribution meters should be addressed at the state level. In

this regard, meters used for net metering are no different from other distribution

meters. However, given the national interest in increased use of renewable energy

technologies, the Administration’s restructuring proposal would insure that net metering service is made available to consumers in all parts of the country who wish

to install small-scale renewable energy technologies.

(161)

THE ELECTRICITY COMPETITION AND

RELIABILITY ACT

WEDNESDAY, OCTOBER 6, 1999

HOUSE OF REPRESENTATIVES,

COMMITTEE ON COMMERCE,

SUBCOMMITTEE ON ENERGY AND POWER,

Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m. in room

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

presiding.

Members present: Representatives Barton, Stearns, Largent,

Burr, Whitfield, Shimkus, Wilson, Pickering, Fossella, Bryant, Ehrlich, Hall, McCarthy, Sawyer, Markey, and Wynn.

Staff present: Joe Kelliher, majority counsel; Cathy Van Way,

majority counsel; Miriam Erickson, majority counsel; Ramsen

Betfarhad, economic advisor; Elizabeth Brennan, legislative clerk;

Sue Sheridan, minority counsel; and Rick Kessler, minority professional staff member.

Mr. BARTON. The Subcommittee on Energy and Power of the

Commerce Committee will come to order.

Today is a continuation of a hearing that we began yesterday, a

legislative hearing on the pending piece of legislation, H.R. 2944.

Today we are going to begin hearing from groups out in the country that have an interest in this. I think we have a total of 17 witnesses in two panels, and I believe that we have accepted every

witness request from every member of the subcommittee on both

sides of the aisle.

I will make this announcement periodically during the day, as

more members show up, but it is unlikely we will go to markup

next week because the full committee is going to try to mark up

a Superfund bill that Congressman Oxley is working on in his subcommittee, but it is the Chair’s intention to spend the rest of this

week and next week getting input from members and interest

groups on specific legislative language and specific changes to H.R.

2944, and then the following week—not next week, but the week

after next—to schedule a markup. And I will do that in conjunction

with Chairman Bliley and Congressman Hall and Congressman

Dingell in terms of actually scheduling a date certain for a markup.

But it is my intention to do that not next week but the week after

next.

With that, we want to begin to hearing testimony. We are going

to start with Mr. William Helton, which is somewhat different.

Normally, we go from the Chair’s left to right, but we are going to

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go from the Chair’s right to left because that is the way we have

it in the witness list.

So, Mr. William Helton is with New Century Energies, and he

represents the Alliance for Competitive Electricity.

Your statement is in the record in its entirety. We ask that you

summarize it in, let’s say, 6 minutes. How about that?

Welcome to the committee.

STATEMENTS OF WILLIAM HELTON, NEW CENTURY ENERGIES, REPRESENTING ALLIANCE FOR COMPETITIVE ELECTRICITY; DAVID R. NEVIUS, VICE PRESIDENT, NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL; ALAN H. RICHARDSON, EXECUTIVE DIRECTOR, AMERICAN PUBLIC POWER ASSOCIATION; DAVID K. OWENS, EXECUTIVE VICE PRESIDENT,

EDISON ELECTRIC INSTITUTE; LYNNE H. CHURCH, EXECUTIVE DIRECTOR, ELECTRIC POWER SUPPLY ASSOCIATION;

WILLIAM R. MAYBEN, PRESIDENT, NEBRASKA PUBLIC

POWER DISTRICT, REPRESENTING LARGE PUBLIC POWER

COUNCIL; GLENN ENGLISH, CHIEF EXECUTIVE OFFICER, NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION;

DAVID G. HAWKINS, DIRECTOR OF AIR AND ENERGY PROGRAMS, NATURAL RESOURCES DEFENSE COUNCIL; AND

RAJESHWAR RAO, PRESIDENT, INDIANA MUNICIPAL POWER

AGENCY, REPRESENTING TRANSMISSION ACCESS POLICY

STUDY GROUP

Mr. HELTON. Mr. Chairman and members of the subcommittee,

I am Bill Helton, chairman and chief executive officer of New Century Energies. New Century Energies serves over 1.5 million electric and 1 million gas customers in portions of six western States,

including Colorado, New Mexico, Texas, Wyoming, Kansas, and

Oklahoma. Three of the States we operate in—New Mexico, Oklahoma, and Texas—already have adopted customer choice legislation.

We support providing customers with a choice of their electric

supplier and are working in our other States to achieve that very

objective.

I also am testifying today on behalf of the Alliance for Competitive Electricity, an organization of 11 investor-owned utilities

formed nearly 4 years ago for the purpose of promoting Federal restructuring legislation to foster a more-competitive electric industry.

Ten of our 11 members operate in States that already have

adopted retail choice plans. Now, these States include: California,

New Mexico, Texas, Oklahoma, Michigan, Pennsylvania, New Jersey, Massachusetts, Rhode Island, New Hampshire, Maine, Virginia, and Arkansas.

The Alliance has endeavored to be an interested, credible broker

on many difficult restructuring issues.

Mr. Chairman, as you know better than anyone, addressing the

Federal issues associated with restructuring the $220 billion electric industry has proven to be complex, controversial, and mostly

thankless task.

I personally want to take this time to thank the committee for

its time and energy, attention, and perseverance, and, in many

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cases, good humor that you have brought to bear on this issue, and

for doing the hard work that needs to be done to get to the finish

line.

I also want to thank you and your staff for listening to our ideas

and our suggestions and our comments on the August 4 staff discussion draft.

Mr. Chairman, H.R. 2944 is not a perfect bill, from our perspective, but it is a good one that fairly addresses most Federal electric

industry restructuring issues in a reasoned and balanced way.

At your very first hearing on electric industry restructuring

issues in this Congress, you asked a distinguished panel of witnesses whether, if certain key Federal restructuring issues could be

addressed, but not all of them, would it make sense to pass a good,

albeit not perfect, bill.

Three of your witnesses all indicated that it was important not

to let the perfect be the enemy of the good, and there was an urgency to dealing with a number of restructuring issues, including

reliability. That was good advice then and that is good advice

today.

As we work toward implementing customer choice in the three

States that we serve that have adopted this as their policy, it is

becoming increasingly clear that, despite the primary role the

States must play, the States do not have the jurisdiction or the authority to do all that is necessary.

For example, the States cannot deal with the Federal barriers

that now stand in the way of a more competitive industry, including PUHCA and PURPA.

The States cannot clarify State/Federal jurisdictional ambiguity

that threatens FERC order number 988 and State restructuring

plans.

The States, additionally, cannot extent FERC’s transmission regulation, including FERC’s open access policies, to non-FERC jurisdictional transmission owners, including TVA and the PMAs.

The States cannot reform the PMAs or the TVA to allow the consumers they serve to obtain the benefits of a more-competitive electricity market.

The States cannot insure the reliability of the interstate transmission grid.

And, last, the States cannot establish a new regulatory regime

governing the transmission system that ensures open, non-discriminatory access.

The States cannot do these many things that need to be done to

bring all consumers the benefits of a more-competitive electric industry. So, regardless of your position or your State’s position on

retail customer choice, much must be done in Congress in order to

help smooth the restructuring path.

We believe that your bill satisfactorily addresses most of these

core Federal issues. In particular, we are pleased the way the bill

addresses uniform regulation and open access for all transmission

owners. We are pleased the way it addresses the clarification of

State/Federal regulatory jurisdiction. We are pleased with the bill’s

assist in insuring reliability of the bulk power system. We are also

pleased in the way it addresses that States should be given explicit

authority to impose charges on jurisdictional activities. Also, the

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bill does a good job in addressing FERC’s regulation that it should

be extended to PMA’s TVA energy sales rates.

The bill adequately covers the repeal of PUHCA and PURPA.

Mr. Chairman, these issues that I have mentioned must be at

the core of any comprehensive Federal electric industry restructuring legislation, and all are addressed satisfactorily in H.R. 2944.

We remain concerned, however, over the private use and the coop tax relief provision contained in H.R. 2944 and believe that

BPA, TVA, regional transmission organization, reciprocity, merger

review, aggregation, and interconnection provisions can be improved without fundamentally changing your intent.

We will be developing perfecting legislative language to accomplish those improvements.

H.R. 2944 does a great deal to mitigate market power. The bill

requires utilities to turn over operational control of their transmission systems to an independent RTO that allows customers to

band together——

Mr. BARTON. Mr. Helton, can I ask you to summarize. You have

gone past your 6 minutes.

Mr. HELTON. Yes, sir.

Mr. BARTON. We want to move this panel on.

Mr. HELTON. In conclusion, Mr. Chairman——

Mr. BARTON. Very good. Fast learner.

Mr. HELTON. I want to thank you and the other members of the

subcommittee for the good work that you have done. H.R. 2944 reflects your tireless efforts to seek compromising consensus. From

any perspective, it is basically a good bill worthy of support.

[The prepared statement of William Helton follows:]

PREPARED STATEMENT OF BILL HELTON, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER, NEW CENTURY ENERGIES, ON BEHALF OF THE ALLIANCE FOR COMPETITIVE ELECTRICITY

I. INTRODUCTION

Mr. Chairman and Members of the Subcommittee, I am Bill Helton, Chairman of

the Board and Chief Executive Officer of New Century Energies. New Century Energies serves over 1.5 million electric and natural gas customers in portions of six

Western states, including Colorado, New Mexico, Texas, Wyoming, Kansas and

Oklahoma. Three of the states we operate in, New Mexico, Oklahoma and Texas,

already have adopted customer choice legislation. We support providing customers

with a choice of their electric supplier and are working in our other states to achieve

that objective.

I also am testifying today on behalf of the Alliance for Competitive Electricity, an

organization of 11 investor-owned utilities formed nearly 4 years ago for the purpose

of promoting federal restructuring legislation to foster a more competitive electric

industry. Ten of our 11 Members operate in states that already have adopted retail

choice plans. These states include California, New Mexico, Texas, Oklahoma, Michigan, Pennsylvania, New Jersey, Massachusetts, Rhode Island, new Hampshire,

Maine, Virginia, and Arkansas. The Alliance has endeavored to be an interested,

credible, broker on many difficult restructuring issues.

Mr. Chairman, as you know better than anyone, addressing the federal issues associated with restructuring the $220 billion a year electric industry has proven to

be a complex, controversial, and mostly thankless, task. I personally want to thank

you for the time, energy, attention, perseverance, and good humor that you have

brought to bear on this issue and for doing the hard work that needs to be done.

I also want to thank you and your staff for listening to our ideas, suggestions, and

comments on the August 4 staff discussion draft.

Mr. Chairman, H.R. 2944 is not a perfect bill from our perspective. But it is a

good one that fairly addresses most federal electric industry restructuring issues in

a reasoned and balanced way.

165

At your very first hearing on electric industry restructuring issues in this Con- gress, you asked a distinguished panel of witnesses whether if certain key federal

restructuring issues could be addressed, but not all of them, it would make sense

to pass a good, albeit not perfect, bill. Three of your witnesses, former Deputy Secretary of Energy and former FERC Chair Elizabeth Moler, former FERC Commissioner Michael Naeve, and former Deputy Secretary of Energy Linda Stuntz all indicated that it was important not to let the perfect be the enemy of the good and that

there was an urgency to dealing with a number of restructuring issues, including

reliability. That was good advice then, and it remains good advice today.

II. THE ROLE OF CONGRESS

As we work toward implementing customer choice in the three states we serve

that have adopted this as their policy, it is becoming increasingly clear that, despite

the primary role the states must play in restructuring the electric industry, the

states do not have the jurisdiction or the authority to do all that is necessary. For

example, the states cannot deal with the federal barriers that now stand in the way

of a more competitive industry, including PUHCA and PURPA; the states cannot

clarify state/federal jurisdictional ambiguity that threatens FERC Order No. 888

and state restructuring plans; the states cannot extend FERC’s transmission regulation, including FERC’s open access policies, to non-FERC jurisdictional transmission

owners, including TVA and the PMAs; the states cannot reform the PMAs or the

TVA to allow the consumers they serve to obtain the benefits of more competitive

electricity markets; the states cannot ensure the reliability of the interstate transmission grid; and the states cannot establish a new regulatory regime governing the

transmission system that ensures open, non-discriminatory access, while providing

the incentives necessary to upgrade and expand that system. The states cannot do

these many things that need to be done to bring all consumers the benefits of a

more competitive electric industry. So, regardless of your position, or your state’s

position, on retail customer choice, much must be done in Congress in order to help

smooth the restructuring path.

We believe that your bill satisfactorily addresses most of these core federal issues.

In particular, we are pleased with the provisions addressing the following:

• Uniform Regulation and Open Access for All Transmission Owners—While

investor owned utilities are subject to FERC regulation of the rates, terms and

conditions applicable to the provision of transmission service, municipal and

state utilities, co-ops, TVA, and the PMAs are not. As a consequence, only about

70% of all transmission is subject to FERC regulation, including wholesale open

access requirements. This creates an untenable situation. FERC jurisdiction

should be extended to all transmission owners in the lower 48 states. With the

possible exceptions of TVA and BPA, which continue to be treated as ‘‘special’’

in certain respects, H.R. 2944 would satisfactorily accomplish this.

• Clarification of State/Federal Regulatory Jurisdiction—As we move to a

new regulatory system in which the various components of electric service are

‘‘unbundled,’’ it is clear that the Federal Power Act, which was written at a time

when retail sales were ‘‘bundled,’’ needs to be updated. A clear new ‘‘bright line’’

between state and federal regulatory jurisdiction needs to be drawn. States

should be given exclusive regulatory authority over bundled retail sales, over

the retail sale component and the local distribution service component of an

unbundled retail sale, and over the ‘‘service’’ of delivering retail electricity.

FERC should be given exclusive jurisdiction over the transmission component

of an unbundled retail sale and should retain its exclusive jurisdiction over

wholesale sales and transmission. This ‘‘bright line’’ was spelled out in FERC

Order No. 888, and it represents a reasonable and fair division of regulatory

authority. H.R. 2944 adopts this position.

• Help Ensure Reliability of Bulk Power System—Our existing voluntary reliability organizations have served us well. However, with the advent of EPAct,

FERC Order No. 888 and retail competition, the transmission system is being

stressed as never before. In addition, there are hundreds of new entrants in the

electric market that make it more difficult to manage the system using voluntary reliability standards. Virtually all industry participants believe strongly

that new, enforceable, reliability standards need to be adopted to help ensure

that our transmission system continues to operate safely and reliably. Consensus reliability legislation has been developed by the NERC, and is, in most

material respects, included in H.R. 2944.

• States Should be Given Explicit Authority to Impose Charges on Jurisdictional Activities—States, in carrying out their exclusive jurisdiction over retail sales and local distribution, should be given explicit authority to require the

166

payment of charges deemed necessary to recover retail transition and stranded

costs; to ensure adequate supply and reliability; to assist low-income customers;

to encourage environmental, renewable energy, energy efficiency or conservation

programs; to provide for assistance to electric utility workers adversely affected

by restructuring; and to encourage research and development. H.R. 2944 would

do this.

• FERC Regulation Should be Extended to PMA and TVA Energy Sales

Rates—The PMAs and TVA essentially regulate their own rates. In the new,

competitive wholesale and retail marketplace, this is an anachronism that could

lead to unfair competition. FERC jurisdiction should be extended to PMA and

TVA sales. Both wholesale and retail sales of capacity and energy should be covered. In addition, the FERC should use Federal Power Act rate making and accounting standards to carry out this new authority to ensure that both IOUs

and federal power agencies are regulated in a similar manner. H.R. 2944 takes

significant steps toward accomplishing this.

• The Public Utility Holding Company Act of 1935 (‘‘PUHCA’’) Should be

Repealed—PUHCA is serving as an impediment to competition. It should be

repealed. H.R 2944 adopts consensus language that would repeal PUHCA one

year after the date of enactment.

• The Purchase Mandate in the Public Utility Regulatory Policies Act of

1978 (‘‘PURPA’’) Should be Repealed and Costs Recovered—PURPA has

long outlived its usefulness. It is costing consumers billions of dollars a year in

excess power costs and is inconsistent with competitive generation markets. The

purchase mandate in section 210 of PURPA should be prospectively repealed;

existing contracts protected; and full recovery of PURPA costs assured. H.R.

2944 includes the Stearns consensus legislation that would accomplish this.

• Transmission Policies Should be Updated—EPAct, FERC Order No. 888, and

FERC’s Regional Transmission Organization (‘‘RTO’’) Notice of Proposed Rulemaking have created unparalleled regulatory uncertainty with respect to the

interstate transmission of electricity. Congress should establish clear standards

with respect to RTOs, while giving industry the flexibility to develop appropriate independent organizations to manage the operation of transmission facilities. H.R. 2944 establishes a framework that would accomplish these important

objectives. We believe, however, that some changes to the RTO language may

be appropriate and we hope to work with the Subcommittee on these as the

process goes forward.

Mr. Chairman, these issues that I have mentioned must be at the core of any comprehensive federal electric industry restructuring legislation, and all are addressed

satisfactorily in H.R. 2944. We remain concerned, however, over the private use and

coop tax relief provisions contained in H.R. 2944 and believe that the BPA, TVA,

RTO, reciprocity, merger review, aggregation and interconnection provisions can be

improved without fundamentally changing your intent. We will be developing perfecting legislative language to accomplish these improvements. Some of our members also are concerned about the merger provisions of H.R. 2944. These provisions

would expand FERC authority to review the retail aspects of mergers and asset dispositions, ostensibly for purposes of addressing market power concerns. Such power

is already resident, both in authority and practice, in the Department of Justice and

the Federal Trade Commission under existing antitrust laws. The addition of duplicate review of areas that are currently beyond FERC jurisdiction raises concerns of

opportunities for market meddling, a problem that will stifle full competitive development.

I am sure others have concerns that the bill does not go far enough in expanding

FERC authority over transmission (thereby displacing the states) or that not enough

is being done to address ‘‘market power,’’ a flexible term that is being used to justify

a whole host of utility market restrictions.

H.R. 2944, in fact, does a great deal to mitigate market power. Your bill:

• requires utilities to turn over operational control of their transmission systems to

independent RTOs, something Congress has never required of any other network industry;

• allows customers to band together to aggregate load, thereby gaining negotiating

leverage; and

• establishes uniform federal interconnection standards, thereby increasing competition.

At the same time H.R. 2944 increases regulatory authority in these areas, it carefully preserves the array of authorities that already exist. For example, your bill

does not:

• displace or preempt state authority to regulate retail rates;

167

• eliminate or curtail FERC authority to regulate wholesale rates; • diminish in any way Department of Justice or Federal Trade Commission authority under existing antitrust laws or limit private rights of action under these

laws.

What advocates of ‘‘market power’’ amendments are asking you to do is to disable particular competitors, not enable competition. I urge this Subcommittee not to get into the business of favoring one competitor over another.

III. CONCLUSION

Mr. Chairman, I again want to thank you and the other Members of the Sub- committee for the good work that you have done. H.R. 2944 reflects your tireless

efforts to seek compromise and consensus. From any perspective, it is a good bill

worthy of support.

Mr. BARTON. Thank you, Mr. Helton. Be advised that all your testimony is in the record. Many mem- bers have reviewed that, so we ask to try to hold to the 6 minutes.

I thank you for your testimony. The next is Mr. David Nevius, vice president of the North American Electric Reliability Council from Princeton, New Jersey. Welcome. You have 6 minutes. Your full testimony is in the record.

STATEMENT OF DAVID R. NEVIUS

Mr. NEVIUS. Thank you very much. NERC applauds the subcommittee chairman for including the NERC consensus reliability language in title II of H.R. 2944. We

also commend the other members of the subcommittee who have

advanced other bills containing the NERC consensus language.

I have submitted the prepared remarks for the record, in which

we support prompt enactment of reliability legislation contained in

title II of H.R. 2944, with just a few modifications, and we have

alerted your staff of where those issues are.

Being part of this large panel, with another panel to follow on

the second day of your hearings, I am going to be very brief.

My single but very, very important message to you all is: we

need reliability legislation now.

Without the ability to enforce compliance with mandatory reliability rules fairly applied to all participants, we may not be able

much longer to keep the interstate electronic grids operating reliably.

Thank you. I look forward to your questions.

[The prepared statement of David R. Nevius follows:]

PREPARED STATEMENT OF DAVID R. NEVIUS, VICE PRESIDENT, NORTH AMERICAN

ELECTRIC RELIABILITY COUNCIL

The North American Electric Reliability Council (NERC) firmly believes that

there is an urgent need for Federal legislation to establish an independent, industry

self-regulatory electric reliability organization (ERO) to ensure the continued reliability of the interstate (and international) high-voltage transmission grids. These

grids are critical to public health, safety, welfare, and national security throughout

North America.

Title II of H.R. 2944, ‘‘Electric Reliability,’’ would establish such an ERO that

would develop and enforce mandatory reliability rules, with FERC providing oversight in the U.S. to make sure the ERO and its affiliated regional reliability entities

operate effectively and fairly. Similar oversight would be provided by government

entities in Canada and Mexico. NERC applauds the Subcommittee chairman for including the NERC consensus language in Title II of H.R. 2944. NERC also commends other members of the Subcommittee who have advanced bills containing the

NERC consensus language.

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Three issues need further consideration in H.R. 2944:

FERC Authority to Establish Interim Standards and Procedures—H.R.

2944 includes two additions to the NERC consensus language that are problematic.

These additions direct the Commission to: (1) establish interim reliability standards

if it suspends any previously approved standards, pending development of new

standards; and (2) establish interim procedures or governance or funding provisions

if it suspends any previously approved provisions, pending development of new provisions. NERC believes that this language needs further work. The underlying philosophy of a self-regulatory organization is that it be afforded every opportunity to

make any necessary modifications to its own standards and procedures before a regulatory body steps in to establish standards and procedures on its own. This is doubly important in the case of the ERO because it is intended to have shared oversight

by governmental bodies in Canada, Mexico, and the United States. Any such interim

standards established by the Commission could have negative reliability or trade

impacts on Canada or Mexico, on which they would have no opportunity for input.

There may be helpful guidance for resolving this issue in the securities industry

context. For example, Section 19 (c) of the Securities and Exchange Act provides the

SEC with the power to modify a self-regulatory organization’s rules, but does so in

a manner that (1) gives the self-regulatory organization an opportunity to modify

its own rules and (2) specifies detailed procedures calling for notice and public participation that the SEC must follow. The nature of these procedures encourages the

self-regulatory organizations to modify their own standards and procedures, rather

than have something imposed by the SEC. NERC is working with other supporters

of its consensus language and will offer proposed alternative language to the Subcommittee staff for consideration.

Role of the States—Recently, proposals have been made to add language to the NERC consensus language defining the role of States in ensuring reliable electric

service to retail consumers. This is an important and complex issue that must be

resolved. Representatives of industry organizations and the States are working to

resolve this issue literally as we speak, and NERC strongly supports these efforts. Avoiding Statutory Ambiguities—Provisions of the existing Federal Power Act contain definitions that create an ambiguity as to the scope of the reliability title.

For example, Section 201(f) states that no provision of Part II of the Federal Power

Act applies to the United States, a State, or any political subdivision thereof, or to

any agency of any of those unless the provision expressly so states. The reliability

title is clearly intended to apply to all entities, regardless of ownership. To avoid

such ambiguities, NERC suggests adding a phrase at the beginning of what would

be new Section 217(b)(1) [H.R. 2944, page 34, line 19] to read: (b) Commission Authority—‘‘Notwithstanding any other provision of the Federal Power Act, . . .’’ Such

an addition would allow the provisions of Title II of H.R. 2944 to stand alone and

independent of any existing or future provisions of the Federal Power Act.

NERC supports prompt enactment of any legislation containing Title II—Electric

Reliability of H.R. 2944. The existing scheme of voluntary compliance with industry

reliability rules for the high-voltage grid system is simply no longer adequate. The

rules must be made mandatory and enforceable, and fairly applied to all participants in the electricity market. Even after enactment of this reliability legislation,

it will take some time to complete the necessary rule making and gain the required

approvals before the ERO can actually begin operation. The longer it takes to establish this new system, the greater becomes the risk and magnitude of grid failures.

The users and operators of the system, who used to cooperate voluntarily under

the regulated model, are now competitors without the same incentives to cooperate

with each other or comply with voluntary reliability rules.

NERC is seeing a marked increase in the number and seriousness of violations

of its reliability rules, yet there is no recourse under the current voluntary model

to correct this behavior.

Market participants are increasingly asking FERC to make decisions on reliability

issues for which FERC does not have either the technical expertise or direct, clear

statutory authority. The indirect, limited authority FERC does have regarding reliability applies to only two-thirds of the Nation’s transmission facilities-co-ops, municipalities, the federal power marketing administrations, the Tennessee Valley Authority, and ERCOT utilities are outside its jurisdiction—and FERC has no authority in Canada or Mexico.

The bottom line is that not a single bulk-power system reliability standard can

be enforced effectively today, by NERC or the Commission.

NERC urges the members of the Energy and Power Subcommittee and the full

Commerce Committee to push ahead aggressively with this much needed reliability

legislation. The continued reliability of North America’s high-voltage electricity grids

and all the customers who depend on them are at stake.

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In Closing...

• A new electric reliability oversight system is needed now. • An industry self-regulatory system is superior to a government system for setting

and enforcing compliance with grid reliability rules. • Title II—Electric Reliability of H.R. 2944, with just a few modifications, will allow

for the timely creation and oversight of a viable self-regulatory reliability organization. • The longer it takes to establish this new system, the greater becomes the risk and

magnitude of grid failures. • The reliability of North America’s interconnected transmission grids need not be

compromised by changes taking place in the industry, provided reliability legislation is enacted now.

Mr. BARTON. You really learn rapidly. The chairman is going to be so pleased with my stewardship here. Thank you, Mr. Nevius. Next we have Mr. Alan Richardson, executive director of the

American Public Power Association from Washington, DC.

STATEMENT OF ALAN H. RICHARDSON

Mr. RICHARDSON. Thank you, Mr. Chairman. I was going to ask for the balance of Mr. Nevius’ time until I heard the applause.

Mr. BARTON. I think there would be an objection.

Mr. RICHARDSON. It is a pleasure to be here again testifying be- fore you. APPA believes that there is a need for and supports the enactment of comprehensive Federal restructuring legislation that facilitates State electric utility restructuring initiatives by clarifying

Federal areas of jurisdiction that remove interstate commerce and

Federal tax code barriers to competition.

We believe Congress should pass legislation because these issues

are solely within the jurisdiction of the Federal Government, and

Federal legislation is essential to put in place the industry structure that will make wholesale competition and retail deregulation

plans work effectively.

The key to effective and sustained competition is putting in place

the proper structure, and the key to the proper structure is getting

transmission right.

I think the requirements are quite simple. We need large regional transmission grids that mirror regional power markets. The

grids must be operated, maintained, planned, and constructed on

a competitively neutral basis. That is, they must be completely

independent, and they must encompass all facilities that comprise

the interconnected grid.

There are several provisions of the bill that would make it difficult to achieve these objectives. For example, FERC’s jurisdiction

over vast amounts of transmission facilities may well diminish if

these facilities with State acquiescence are redefined or

refunctionalized as State jurisdictional distribution facilities.

More troubling to us, FERC is not given the authority to establish regional boundaries. Incumbent utility proposals for RTOs are

more likely than not to have boundaries dictated by the competitive

interests of the generation owners and not by the regional markets.

We think the only way to get there is to permit FERC to establish

these borders to give all stakeholders reasonable time in consensus

negotiations to create RTOs that match those borders, ensure a

process that protects the rights and interests of participants, and

provides backstop authority for the Commission, as appropriately

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conditioned, as indicated in my testimony, to get the job done if the

negotiations fail to produce the appropriate result.

Another problem that we see with H.R. 2944 is that it undermines the essential requirement of independence and competitive

neutrality of RTOs. Passive ownership of up to 10 percent voting

interest per participant will not guarantee independence—in fact,

just the opposite.

Incentive rates for the creation of RTOs and extending incentives

to participants in existing RTOs is, in our view, inappropriate;

however, incentives are appropriate to remove constraints and reward superior performance.

H.R. 2944 is deficient in dealing with utility mergers and addressing generation horizontal market power. While reasonable

steps should be utilized to prevent protracted proceedings, in the

end protecting the public interest is far more important than expedited consideration of proposals to advance private corporation interests.

Protecting the public interest includes preserving the opportunity

for full evidentiary hearings to analyze merger proposals where

that is necessary.

We do support the expansion of FERC’s authority over holding

company mergers and the required consideration of how proposals

brought to the Commission could affect competition in transmission

and generation markets. However, the benefits of these changes

may well be more than offset by the changes in the merger review

process and the unreasonably short deadline set for intervener participation in Commission proceedings.

Horizontal market power should also be addressed. Generation

power may not be a long-term problem, but it is a significant problem in the transition phase because we start with such high degrees of concentration in particular markets, aggravated by significant transmission constraints.

FERC should be able to deal quickly and effectively with the exercise of generation market power. It should be given a toolbox of

potential remedies to deal with these issues that remain at its disposal until it reports to Congress that the transmission system is

regional in scope, competitively neutral, and adequate to provide

competition in generation markets throughout the country.

Finally, the expansion of full-blown jurisdiction over transmission facilities of publicly owned utilities contained in this legislation appears to us to be a solution in search of a problem.

Jurisdiction beyond that absolutely necessary to ensure comparability is unnecessary.

Those are our concerns. Let me identify a few issues that we support.

We do support the reliability title strongly. There are still some

glitches to be worked out, but we believe it is essential that it be

included and that it be passed.

We support the aggregation provisions and are pleased that units

of State and local government are specifically authorized to perform this function for their own citizens.

We support the renewable resource provisions, although with

some reservations, as noted in my statement.

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And we support, most of all, H.R. 2944’s proposed resolution of

public power’s private use problem. Private use is a critical problem for public power with taxing and financing transmission and

generation facilities. If it is not addressed, many of these systems

will be forced to opt out of competition, because if they do not opt

out they put their consumers, communities, and bondholders in

jeopardy. However, over time, opting out is simply politically impossible; therefore, we are in a bind.

H.R. 721, the Bond Fairness and Protection Act, is a fair and equitable resolution to the problem. It has been incorporated, for the

most part, in H.R. 2944. We believe this is a very positive step forward in resolving this real problem. We hope the original language

of that bill, H.R. 721, can be restored, and we hope no further

changes in that legislation are permitted as this or a successor bill

moves through the subcommittee.

Mr. Chairman, thank you for the opportunity to testify. I appreciate it. And I look forward to answering your questions.

[The prepared statement of Alan H. Richardson follows:]

PREPARED STATEMENT OF ALAN H. RICHARDSON, EXECUTIVE DIRECTOR, AMERICAN

PUBLIC POWER ASSOCIATION

Mr. Chairman, members of the subcommittee, my name is Alan Richardson. I am

the executive director of the American Public Power Association. APPA is the national service organization representing the interests of the nation’s nearly 2,000

publicly owned, locally controlled, electric utilities, providing electric service to nearly 40 million Americans.

You have asked us to address four questions. First, whether APPA believes there

is a need for Federal electricity legislation. Second, if so, why Congress should pass

such legislation. Third, what specific elements should be included in such legislation. And fourth, to discuss the provisions of H.R. 2944, the Electricity Competition

and Reliability Act .

NEED FOR FEDERAL LEGISLATION

APPA has consistently advocated the enactment of comprehensive Federal electricity restructuring legislation that facilitates state electric utility restructuring initiatives by clarifying state and Federal areas of jurisdiction, and that removes interstate commerce and federal tax code barriers to competition that are solely within

the jurisdiction of the U.S. Congress.

There is only one reason for Congress to enact comprehensive electric utility restructuring legislation—to promote competition for the benefit of all consumers. The

overriding objective must be to restructure the industry in a way that has a high

probability of benefiting all classes of customers with no degradation of reliability

of service.

The abuse of existing market power, aggravated by the accumulation of ever increasing control over transmission and generation in the hands of an ever decreasing number of players is the biggest single obstacle to the realization of this objective and the creation of robust competition in the electric utility industry.

Evidence that both of these factors exist—abuse of existing market power, and the

ever increasing control over essential facilities in the hands of decreasing number

of players—abounds. Attached to my statement is a list, on a year-by-year basis, of

investor-owned utility mergers and acquisitions, plant acquisitions, transactions involving Foreign utilities, and holding companies established. The sheer magnitude

of the change in the structure of the industry in the past two years alone is overwhelming. Even more significant is the accelerating pace of this change. In the first

nine months of 1999 alone, investor owned utilities have announced or consummated 30 mergers or major acquisitions, compared to 12 the year before.

There is nothing coincidental about this trend. It can be traced directly to the

open transmission access provisions of the Energy Policy Act of 1992, the aggressive

implementation of that Act by the Federal Energy Regulatory Commission two

years later, combined with state legislative restructuring initiatives that began less

than five years ago. As FERC tried to break open the transmission grid to promote

wholesale competition, and states have tried to create an environment conducive to

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retail competition, the vertically integrated investor owned utility monopolies, while

paying lip service to competition, have been taking dramatic steps to consolidate

their control of both the transmission grid and the generation market.

As noted by Albert A. Foer, president of the American Antitrust Institute, Inc.,

in his article ‘‘Institutional Contexts of Market Power in the Electricity Industry’’

published in the May, 1999 issue of The Electricity Journal, ‘‘the ongoing wave of

utility mergers, apparently in strategic preparation for restructuring, has the potential to nullify the objective of opening up markets. Many mergers involving adjacent

geographic markets appear to be aimed at expanding the incumbency advantages

prior to restructuring.’’

The evidence of the abuse of market power, and the urgent need to address it

through Federal restructuring legislation, is abundantly clear from the hearing

record of this subcommittee. The vast majority of witnesses with very diverse constituencies and interests that have appeared at subcommittee hearings over the

past three years have pleaded for legislation to address this problem. Virtually alone

on the other side of this debate of whether market power problems exist are the

investor owned utilities. They deny the existence of significant market power problems, counsel against any legislation to deal with such problems, and seek further

protection.

WHY SHOULD CONGRESS ENACT LEGISLATION?

The market power problems that exist, as well as those that we can now predict

with a great degree of certainty, can only be addressed by Congress. These are

interstate commerce problems that simply cannot be addressed by the individual

states.

Federal antitrust laws work well to remedy problems in mature markets. But

they are not well suited to guide the transition to competition for industries, such

as the electric utility industry, that start from highly concentrated monopolies. Antitrust laws alone cannot convert such industries to ones that are capable of being

controlled by competitive forces. Our antitrust laws are very useful tools to address

market power problems after they have been identified. But they are not particularly useful in identifying and rooting out the causes of these problems.

The identification of such problems in any modern industry is hard, but in the

electric utility industry, this is not simply hard, it is extremely difficult. Electricity

is a real time product. It is literally consumed as it is produced. It cannot be stored.

This makes transactions in the electricity market very vulnerable to subtle discriminations such as capacity reservations on existing transmission facilities and manipulation of such seemingly innocuous events as unscheduled maintenance of strategically located generation and transmission facilities. For these reasons, the antitrust

agencies have generally favored structural remedies. And have testified before this

subcommittee in that regard.

Congress held out the promise of competitive wholesale electric markets when it

enacted the Energy Policy Act of 1992. This promise was reaffirmed when the Act

was implemented aggressively by the Federal Energy Regulatory Commission. But

FERC has now acknowledged that its approach, reflected in Order 888, is deficient

in many respects. Its current proceeding on regional transmission organizations is

an attempt to address some of these deficiencies. Other deficiencies are apparent as

well, including the absence of solid, clear legal authority under which FERC can effectively remove obstacles in the interstate commerce of electricity. Only Congress

can address these problems.

Congress should also act to ensure the reliability of the electric utility system.

Voluntary reliability standards are no longer adequate. In this area, at least, there

is a consensus among all of the stakeholders that Congressional action is required,

even though some disagreements still persist with respect to the role of the states

and state utility commissions.

And finally, Congress must act to address U.S. Tax Code provisions that are inconsistent with the new utility environment being brought about by state restructuring legislation. Public power’s ‘‘private use’’ problem is a clear example of this.

The operational limits imposed on publicly owned utilities with facilities financed

by tax-exempt bonds by statutory private use requirements are simply incompatible

with the demands of the new market. These limits must be removed.

WHAT SHOULD BE INCLUDED IN FEDERAL RESTRUCTURING LEGISLATION?

From APPA’s perspective, the following essential elements should be included in

Federal restructuring legislation:

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• Provisions that clarify federal law to ensure that FERC has jurisdiction to enforce

comparability in transmission services on facilities that are in fact part of the

national grid. • Provisions that broaden the criteria used by FERC in the review of proposed

mergers, expand the authority of FERC to review holding company to holding

company mergers, transmission company mergers, and significant sales of generation assets, and enable the Commission to address market power problems

by means up to and including asset divestiture. • Provisions that expand the authority of FERC with respect to the creation of regional transmission organizations that are truly independent, and sufficiently

broad in scope and configuration to promote efficient and non-discriminatory

power markets, while taking into account the specific, unique characteristics,

rights and obligations of publicly owned utilities. • Provisions to address ‘‘tax transition’’ problems arising because provisions of the

U.S. Tax Code are out of sync with state restructuring legislation. With the exception of the last item, H.R. 2944 falls far short of what must be included in Federal legislation. For this reason, APPA opposes H.R. 2944 in its

present form.

We are well aware that what we believe must be included in Federal legislation is seen by some as an expansion of regulation that is incompatible with deregulation

and creation of an open, competitive market. APPA disagrees. Expanded regulation

in some areas is in fact a prerequisite to expanded competition in others. As Albert

Foer observed in the article to which I previously referred: Experience with examples of deregulation teaches that competitive markets do

not materialize just because theoreticians believe they are good or because there

are basic economic characteristics of a market that make it possible to perform

more efficiently. Rather, competitive markets are deeply embedded in social, intellectual, legal, and political institutions. Transitions from regulation to competition, therefore, are not likely to work out very well unless the institutional

framework is also being changed in parallel ways. Transitional problems must

not be dismissed as if they don’t affect future institutional relationships. The

transition can create a life of its own, leading to outcomes that were never envisioned.

We are extremely concerned over the institutional framework that is currently evolving, unchecked for the most part by either FERC or the states. Expanded regulation in the areas identified above are absolutely essential through this transition

period to put in place the right institutional framework that will carry us from regulated, vertically integrated monopolies of today, to the deregulation of the bulk

power market tomorrow.

That expanded regulation in some areas is not only compatible with but essential for competition in others is obvious from a review of the transmission access provisions of the Energy Policy Act of 1992. Congress correctly concluded that competition in the bulk power market could not occur unless it expanded the authority of

the Federal Energy Regulatory Commission in the regulation of interstate transmission facilities. Congress had the wisdom to understand that expanded regulation

was required to promote competition in the bulk power markets. We hope Congress

demonstrates the same wisdom today, and takes the steps necessary to ensure that

the promise of competition it held out in 1992, becomes a reality as we move into

the next millennium.

COMMENTS ON H.R.2944

H.R. 2944 is a lengthy and complex piece of legislation. We are still reviewing its

provisions to determine their ultimate effect. However, we have set forth below our

concerns with respect to several parts of this legislation, together with recommended changes. Our comments are not organized in the order of their priority

to public power. Instead, they follow the order in which these issues arise in H.R.

2944.

Section 101—Clarification of State authority regarding retail electric competition; clarification of Federal and State jurisdiction.

APPA believes that the States and the self-regulated publicly owned utilities

should retain the authority to decide if, when and how to go to retail competition.

The legislation preserves these rights. However, in attempting to create a bright

line distinguishing Federal and State regulatory jurisdiction, two provisions of H.R.

2944 combine to eviscerate FERC jurisdiction over significant components of the

interstate transmission network.

Section 101(b)(1)(B) does not allow FERC regulation over bundled retail sales of

electric energy. Section 101(e) allows for a FERC determination of whether a parVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00177 Fmt 6601 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
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ticular facility qualifies as transmission or distribution, but requires FERC to give

deference to State commission decisions. When these provisions are combined, this

section cuts FERC out of the regulation of significant amounts of transmission access and use over bundled sales. If this section is interpreted to allow a preference

for bundled firm load over unbundled firm load on the same transmission system

under emergency situations, then it is clearly inappropriate. Such an interpretation

would undermine the goals of promoting competition and standardizing regulation

of the national grid. To avoid FERC regulation and to frustrate effective competition in the bulk power market, investor owned utilities are hard at work ‘‘refunctionalizing’’ their assets.

What was transmission and therefore subject to FERC jurisdiction yesterday, is

being redefined or refunctionalized as distribution, putting those facilities under

state commission jurisdiction in order to evade FERC regulation tomorrow. As noted

in a paper written by Whitfield A. Russell, president, Whitfield Russell Associates,

‘‘Refunctionalization of Transmission Assets Under FERC Order 888: Impact on

Market Power,’’ ‘‘refunctionalization presents an opportunity for transmission owners to charge vastly different rates (and to offer delivery services on vastly different

terms and conditions) to similarly situated retail and wholesale customers (both

generators and consumers).’’ (A copy of Mr. Russell’s paper is attached to this testimony.) APPA members have witnessed this refunctionalization trend as well. Roy Thilly,

the current president of APPA and the Chief Executive Officer of Wisconsin Public

Power, Inc., in testimony at a workshop on market power and consumer protection

sponsored by the Federal Trade Commission on September 13, 1999, stated that

‘‘one Wisconsin utility has asked our PSC to find that there is virtually no transmission in our state. This utility would refunctionalize more than 80% of its transmission system to distribution, gutting its obligation to transfer control to an ISO.’’

The objective of this action, according to Mr. Thilly, is clear. It is ‘‘to avoid giving

up control and to create an anticompetitive buffer between customers and the market.’’

APPA supports the ‘‘function’’ approach in H.R. 2944 (and FERC Order No. 888)

to determine which facilities are part of the transmission network and therefore

subject to FERC jurisdiction, and exclude facilities that constitute part of the distribution network. However, the process must be carefully and consistently administered to ensure that it does not permit abusive refunctionalization actions. While

it may be appropriate for FERC to give ‘‘due consideration’’ to State commission determinations regarding the function and purpose of specific transmission facilities,

requiring that they defer to these determinations is extremely problematic. We urge

the subcommittee to amend section 101(e) by substituting ‘‘due consideration’’ for

‘‘due deference.’’

Section 102—Open Access for all Transmitting Utilities.

Public power systems own approximately 8% of transmission facilities at voltage

levels of 138kV or higher. These facilities are widely dispersed across more than 100

public power systems, and most of these facilities are not part of the backbone

transmission grid but are an instead part of local distribution networks. For the

most part, those publicly owned utilities that own significant transmission facilities

that constitute part of the interconnected grid have voluntarily filed open access tariffs. We believe it is difficult on public policy grounds to sustain the proposition that

publicly owned transmission facilities should be subject to FERC jurisdiction. Such

Federal preemption of local authority in order to regulate a very limited amount of

transmission when the owners of those facilities are already providing comparable

service appears to us to be a solution in search of a problem.

We are pleased that H.R. 2944 proposes to minimize the expansion of FERC jurisdiction over publicly owned transmission facilities by permitting FERC to waive jurisdiction over transmitting utilities whose transmission facilities are ‘‘limited and

discrete’’ and ‘‘do not form an integrated grid,’’ and for ‘‘small’’ publicly owned transmitting utilities (annual sales of 4 million megawatt hours or less) that are ‘‘not

part of a centrally dispatched power pool.’’

Presumably, the objective of expanding FERC jurisdiction over publicly owned

transmitting utilities is to ensure that the transmission services they provide to

third parties are comparable to the services they provide themselves. We believe

that this objective can be achieved by limiting FERC jurisdiction to the non-rate

terms and conditions of service for publicly owned transmitting utilities that do not

obtain a FERC waiver. FERC jurisdiction over rates of publicly owned transmitting

utilities could conflict with the responsibilities of those utilities to abide by revenue

requirements contained in their bond covenants, and could also conflict with state

legal and constitutional requirements.

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APPA recommends that FERC jurisdiction over public power systems that do not obtain waivers should be limited to non-rate terms and conditions to ensure they

are comparable to the transmission services that private power companies are required to offer under their open access tariffs. FERC jurisdiction over rates and revenue requirements for public power systems should be limited to ensure comparability. Where FERC determines that rates are not comparable or are discriminatory, it could remand the rate to the local regulatory authority for review and revision as necessary. Public power systems would therefore retain local control over

rate making and revenue requirement decisions.

Section 103— Regional Transmission Organizations

The Regional Transmission Organization (RTO) provision is designed to ensure that every transmitting utility will be in a RTO by 2003. This is a positive step,

but there are serious problems with the timing, conditions for FERC approval, and

the absence of FERC authority to correct problems after the RTO deadline passes. APPA continues to support the authority of FERC to establish and require utility participation in strong, truly independent RTOs in order to facilitate the development of vigorously competitive regional power markets. The legislation should provide such authority as well as appropriate criteria to govern its use. In addition to

such issues as independence, size and scope of RTOs, the statutory criteria should

accommodate the unique characteristics and legal requirements of public power to

ensure that public power’s participation by FERC order is not inconsistent with

state laws and constitutional requirements. Furthermore, the additional criteria for

public power participation must be consistent with bond covenant requirements and

not impair control of local system operations or reliable and economic service to the

public served by publicly owned facilities for whose benefits public funds have been

expended. Lastly, the criteria should not require public power systems to participate

in certain ISOs or RTOs in cases where they have been mandated as part of state

legislation to promote retail competition and such legislation has preserved the right

of public power systems to determine whether or not to join such entities.

The deadlines established, filings by January 1, 2002, participation by January

1, 2003, will delay by at least two years the current rulemaking actions of FERC

(Docket No. RM99-2-000) to promote an open and more competitive bulk power market through the creation of RTOs. FERC proposes that all public utilities that own,

operate or control interstate transmission file proposals for an RTO by October 15,

2000, and that RTOs be operational by December 15, 2001, more than a year earlier

than required under H.R. 2944. This delay is totally unnecessary. But it is inconsequential when one considers the opportunity for additional delays in the creation

of RTOs provided by this legislation. If enacted in its present form, H.R. 2944 will

delay the formation and effective operation of RTOs for several years beyond 2003.

Section 103 requires that a stay be issued whenever a FERC RTO order is challenged through a petition for rehearing before the Commission, or subsequently is

challenged in court.

We urge the subcommittee to consider carefully the consequences of this provision

of H.R. 2944. Consider, for example, what would have occurred if FERC had been

required to stay the implementation of Orders 888 and 889. These orders were

issued in April, 1996. Petitions for rehearing were filed, granted by FERC, and certain modifications were made in the initial orders. Thereafter, these orders were

challenged in an appeal that is now pending before the U.S. Circuit Court of Appeals for the D.C. Circuit. The case has not yet been argued. It is extremely complex, with multiple parties. No decision is expected until at least the fall of 2000.

Then, of course, there is the possibility of Supreme Court review and/or a remand

to FERC for reconsideration of specific issues. If Congress had directed that these

orders must be stayed pending appeals, we would not yet have seen even the limited

progress toward more competitive bulk power markets that these orders have

brought about.

Under current law, the Commission has the discretion to stay its orders during

appeal. We believe it should retain this discretionary authority with respect to RTO

orders. APPA also recommends that the deadlines proposed for RTO filings and formation should be reconsidered. Deadlines give comfort to those seeking to delay the

process, and the prospect of mandatory stays of FERC orders provides a potent

weapon for those determined to frustrate the creation of RTOs.

Even more troubling than these timing problems, however, are the criteria established for FERC consideration of proposed RTOs. There are several characteristics

that must be part of any RTO. It must be independent to ensure that those who

control transmission cannot exercise vertical market power. It must have boundaries that are rational, and that prevent the balkanization and gerrymandering of

the grid. It must take into consideration the needs of all stakeholders, including,

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the needs of public power transmitting utilities, to ensure fair and equitable treatment of all. In addition, while it may be appropriate for FERC to provide incentives

for performance, it is not appropriate for FERC to provide incentives for participation. And finally, it is absolutely essential to clarify FERC’s legal authority to ac- complish these objectives, and to order the creation or reconfiguration of RTOs, consistent with the characteristics set forth above, if the proposals brought forward do

not achieve at the outset, or over a reasonable period of time, the desired results.

Section 103 is deficient in all of these areas.

APPA notes the following deficiencies and problems with the provisions of section 103 of H.R. 2944 (set forth in the order in which they appear in this section and

not necessarily in their order of importance to APPA):

• FERC is directed to approve an RTO application filed by a single transmitting

utility if it meets certain criteria. Given the massive consolidation occurring

through mergers and acquisitions, single utility RTO proposals are a distinct

possibility. The proposed criteria do not require the effective broad participation

of all affected stakeholders, particularly wholesale customers. The absence of

substantial customer support for a RTO filing indicates that the RTO business

plan reflects monopoly needs, not market needs. • The Commission may approve proposals that do not meet all standards but are

consistent with such standards. Since the Commission cannot order the creation

of RTOs, it may feel compelled to accept proposals that do not fully satisfy those

conditions and therefore will not effectively promote the development of a more

competitive bulk power market. Further, this is an invitation to delay through

litigation over what constitutes substantial compliance. Since FERC cannot

order participation in a RTO that is not of the transmitting utility’s choice, and

a finding of non-compliance must be stayed through the appeals process, utilities determined to prolong the RTO creation process have every opportunity to

do so. Clearly, this will result in the failure of this legislation to achieve the

desired results of RTO creation and participation in a timely fashion. • The ‘‘independence’’ standard will not produce RTOs that are in fact independent

of market participant control over operations. Permitting passive ownership interests, and ownership of ten percent of voting interest (page 20, lines 2 through

16) must be deleted. So-called ‘‘passive’’ ownership is not innocuous. In filings

in FERC Docket No. RM99-2-000, the Edison Electric Institute concedes that

a ‘‘passive’’ ownership carries with it a fiduciary relationship to the passive

owners. The management and board of for-profit transcos will be fully aware

of the impact of their decisions on the generation interests of the ‘‘passive’’ owners. There will be an inherent conflict of interest with respect to decisions related to unaffiliated generation assets that compete head-on with the generation

interests of the transco’s ‘‘passive’’ owners. A ten percent voting interest in a

company with widely held stock would essentially permit the ten percent owner

to control corporate affairs. Two private power companies, each with ten percent

voting interest, would clearly permit those two companies to control the corporation. APPA is opposed to the ownership provisions that purportedly qualify

but in fact undermine the independence standard. The legislation should be silent in this regard and permit the Commission to decide (and if necessary reconsider) what is permissible in terms of both passive ownership and voting interests. • The conditions regarding scope and configuration are appropriate, but are problematic when considered from public power’s perspective. Given the limited

amount of transmission facilities owned by publicly owned utilities, it will be

difficult if not impossible for them to develop, on their own, RTOs that ‘‘comprise an appropriate scope and regional configuration.’’ Of necessity, they will

be forced to participate in RTOs constructed by (and perhaps with passive ownership and controlling voting interests held by) investor owned utilities. There

is no requirement that a collaborative process be established that will protect

the rights of these systems. Indeed, there is no guarantee against (and based

on past practice every reason to be fearful of) RTO proposals developed by private power companies that: operate against the interests of public power; do not

accommodate public power’s unique characteristics and legal requirements; may

be inconsistent with state laws and constitutional requirements under which

public power systems operate; are not consistent with public power’s bond covenants; and impair public power’s control over local systems operations or their

ability to provide reliable and economic service to the public served by them and

for whose benefit public funds have been expended to develop publicly owned

facilities. Finally, to comply with this legislative directive, some public power

systems may be faced with the unreasonable choice of submitting a proposal to

FERC to join what amounts to a RTO created by state legislation to promote

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retail competition where that same state legislation has reserved to them the

right to decide whether or not to participate. In those cases, FERC approval

could amount to a Commission directive changing a RTO approved by the Commission prior to enactment of this legislation, something expressly prohibited in

the legislation itself.

• Incentive transmission pricing policies to promote RTO formation are expressly

authorized, and such incentive prices are to be extended to participants in existing RTOs. APPA strenuously opposes rate incentives, performance based rates,

and relaxed FERC regulation offered as inducements to public utilities to participate in RTOs. Incentives should only be provided for performance, not participation.

• The Commission is permitted to withdraw approval previously granted if the RTO

fails to comply with provisions of the legislation. But what happens then? The

Commission is expressly prohibited from requiring utilities from participating

in a different RTO than the one it proposes. It is absolutely essential that this

deficiency be recognized and addressed.

• Finally, this section in combination with other provisions of the legislation that

will contract the scope of FERC jurisdiction over facilities that are in fact part

of the integrated transmission grid, is likely to produce entities that are RTOs

in name only, but without much of a functional transmission grid to actually

administer.

In 1978, when Congress was considering President Carter’s National Energy Policy Act, it came close to expanding FERC authority to require transmitting utilities

to provide open access. In the end, Congress acceded to the pressure of private

power companies, and the authority given to FERC was so encumbered with unreasonable and unrealistic conditions that the authority presumably granted to the

Commission could never be exercised. This mistake was finally corrected 14 years

later as part of the Energy Policy Act of 1992. We fear that the same fate, and failure, will occur with respect to the creation of RTOs under this section. This provision will not get the job done. The RTO proposals brought forth by private power

companies if this provision is enacted will not promote competition. Instead, they

will further entrench the control over transmission in the hands of a relatively few,

very large private power companies. Wholesale customers, retail customers in states

that have opened their markets, and independent power producers will suffer. If the

past is prologue, it will be at least a decade before Congress returns to this issue

and finally takes the steps necessary to create the RTOs or other grid management

institutions required to ensure that all industry participants have full, fair and nondiscriminatory access to interstate transmission facilities.

Title II—Reliability

It is important at the outset to reflect on the ultimate goal of uniform reliability

standards to govern interstate commerce in electric transactions. First, electricity is

too important to our society to permit voluntary reliability standards for individual

utilities, that may or may not be followed depending on the economic consequences

of any particular opportunity. And second, our society simply cannot permit the existence of inconsistent rules governing the real-time operation of the interstate bulk

power market. Uniform rules, applicable to all, that can be enforced, are essential.

APPA has been an active participant in the construction of industry consensus

language contained in Title II that establishes an independent, industry self-regulatory electric reliability organization, transitioning the present North American

Electric Reliability Council (NERC ) to the North American Electric Reliability Organization (NAERO), to ensure the continued reliability of the interstate high-voltage transmission grid. We were also signatories to the recent letter to Chairman

Barton that expressed concern with the specific language of the proposal put forth

by the National Association of Regulatory Utility Commissioners (NARUC) regarding a state savings clause. We note that H.R. 2944 has included language that creates a state savings clause related to the reliability of local distribution facilities.

As noted previously, through refunctionalization the relatively limited facilities that

are today identified as distribution facilities can be greatly expanded to include facilities that are in fact part of the interconnected grid. If this is permitted to occur,

the significant benefits anticipated from the enactment of the reliability provisions

in H.R. 2944 will be diminished. We look forward to continuing to work with the

state entities and the Subcommittee to develop language that reasonably addresses

these legitimate state concerns in a manner consistent with the intent of the placing

of responsibility for bulk power system reliability in the hands of a self-regulating

reliability organization.

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Title III—Consumer Protection

These sections guard against unfair trade practices and are generally consistent

with APPA policy related to consumer protection. However, protecting consumers

from abuses in a competitive market assumes the existence of such a market. That

assumption is highly suspect in the current environment, and unlikely to change

under the environment that would be created if H.R. 2944 is enacted without significant modification. APPA supports strong consumer protection provisions, but we

believe that the most significant protections Congress can provide consumers is the

creation of an industry structure that will in fact create a competitive market. We

believe we can put considerable trust in a truly competitive market. But we do not

have such a market at present. We do not believe such a market will arise under

the laws as they now exist, and we are even more skeptical that they will arise

under the laws as they are proposed to be restructured and revised by H.R. 2944.

Title IV—Mergers

Section 401—Electric Company Mergers and Disposition of Property.

APPA strongly opposes the changes regarding the authority of FERC with respect

to its review and approval of mergers and asset disposition. We cannot support this

legislation unless FERC’s current authority to review mergers through full evidentiary proceedings is not only preserved but expanded to address both existing

and incipient market power problems.

Under existing law, FERC must approve disposition of certain assets (which may

or may not include generation facilities) by ‘‘public utilities’’ after ‘‘notice and opportunity for a hearing’’ if the proposed disposition is ‘‘consistent with the public interest.’’ The first draft of this legislation proposed to eliminate FERC’s authority in this

area entirely. H.R. 2944 is an improvement over the draft proposal in that it preserves this authority, clarifies the uncertainties regarding FERC jurisdiction over

the transfer of generation assets, extends jurisdiction to include holding company

systems that include electric utility companies, and requires consideration of the effect of such transfers on competition in wholesale and retail markets. Expanding the

reach of the Commission is absolutely essential, and requiring consideration of the

effects on competition of such transfers is an improvement over the provisions of existing law.

Unfortunately, these improvements are more than offset by the prohibition of onthe-record evidentiary hearings. Under current law, FERC has the discretion to utilize both ‘‘paper’’ hearings with or without an opportunity for oral comments, or onthe-record evidentiary proceedings, depending on complexities of each specific case.

H.R. 2944 would eliminate the option of evidentiary hearings. Instead, those challenging a proposed merger or other disposition of assets, would have 60 days within

which to file written and oral comments. FERC would then have 90 days (and up

to an additional 90 days) to issue its order. Existing law, deficient as it is, is far

better than what is proposed in H.R.2944.

If Congress truly intends to protect all electric consumers from abuses of market

power, it must first preserve the procedural protections of the review process by not

eliminating the opportunity for evidentiary proceeds, second, expand the types of

transactions subject to FERC review, and third, expand the scope of the Commission’s review to require consideration of how proposed mergers and acquisitions will

affect wholesale and retail competition. Further, in reviewing mergers, FERC should

be directed to employ a ‘‘net positive benefit test,’’ not simply the ‘‘no net harm’’ test

currently utilized. Unless proposals brought before FERC actually produce net positive benefits and enhance competition, they should be rejected.

Finally, FERC’s authority to address existing market power problems must be expanded. Concentration of market power in generation is already a problem, and

likely to become an even greater problem in the near future. For the past several

years, we have had a surplus of generation. That surplus is quickly disappearing

nationally, and has already disappeared in some regions. At the same time, some

industry participants have been able to acquire vast amounts of generation resources, and through these acquisitions they will be able to exercise generation market power in the future.

APPA believes that these problems can only be addressed by providing FERC

with additional authority to deal with generation market power. Generation market

power may well be a transition issue. This would certainly be the case if we are

able to achieve, through federal legislation, large, regional and totally independent

grids that are able to remove constraints through the construction of additional

transmission. This, combined with ease of entry into the generation markets, may

eliminate, over the long term, generation market power.

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However our starting point is one of high degrees of generation concentration in

specific markets that also have significant transmission constraints. The consequence of these two factors is higher prices and poorer service for consumers.

What is required is clear authority for FERC to deal quickly and effectively with

the exercise of generation market power.

Remedies here can be temporary, not permanent. They need not have a long term

impact on the ownership or control of utility assets. However, they should address

the temporary market distortions. For example, ‘‘temporary’’ divestiture of generation could occur through an auction procedure for capacity for limited periods of

time. Or FERC might impose cost-based rates for generation where market power

exists. What is required is to transform FERC from an arcane price-setting agency

to an agency with an affirmative duty to structure and oversee the bulk power market to ensure that it will be effective and sustain competition over time. APPA recommends that FERC be provided with a ‘‘toolbox’’ of potential remedies to deal with

generation market power. The toolbox should include the ultimate tool of divestiture

authority. Just as the hangman’s noose truly focus the attention of the condemned,

the prospect of mandatory divestiture as a last resort to address generation market

power would focus the attention of those with generation market power. Perhaps it

will never be used. But having it available in the ‘‘toolbox’’ is essential. After a reasonable transition period, FERC could be directed to report to Congress. Such a report should include whether transmission organizations have captured the proper

geographic scope, whether they are competitively neutral, and whether they provide

for effective competition markets throughout the country. When these conditions are

met, generation market problems may well have been effectively addressed, and the

‘‘tools’’ placed in the FERC ‘‘toolbox’’ might then be removed.

Section 402—Elimination of Review by The Nuclear Regulatory Commission

APPA was the leading proponent of Congressional enactment of Section 105 of the

Atomic Energy Act. With the exception of the transmission access provisions of the

Energy Policy Act of 1992, this provision of law has done more to open transmission

access to wholesale customers than any other act of Congress, including the antitrust laws.

Today, many private utility owners of nuclear facilities are selling or proposing

to sell these assets to a few domestic and Foreign corporations. These nuclear facilities are large—ranging from several hundred to over one thousand megawatts of capacity. Collectively, nuclear facilities provide nearly 15 percent of the total generation capacity available in the United States.

As operating licenses for these facilities are transferred from incumbent owners

to an ever decreasing number of domestic and Foreign operators, an evaluation of

whether such transfers will create or maintain situations inconsistent with the antitrust laws seems more, not less, relevant. Repealing the antitrust review authority

of the NRC, combined with other aspects of H.R. 2944, will contribute to the consolidation and abuse of market power in the hands of a few entities. As the initial advocate of this provision of law, and consistent with APPA’s concerns over the total absence of effective controls of market power in H.R. 2944, APPA objects to this section.

While we object to the repeal of this provision of consumer protection legislation,

we believe that conditions previously imposed in reviewing the antitrust consequences of granting construction permits and operating licenses for nuclear power

generation facilities must be enforced. H.R. 2944 preserves these conditions, and

their enforcement. While we strongly object to the repeal of this provision of law,

if that were to occur, conditions previously imposed must be preserved and enforced.

Title V—Promoting Competition

Section 501—Retail Reciprocity

APPA has no policy on this provision but urge further consideration. Presumably,

the reciprocity requirements that prohibit utilities that do not provide retail customer choice in their own service areas from engaging in retail markets where

choice is permitted, are intended to promote competition. However, this provision

could actually limit the number of competitors in a particular market, thereby producing the opposite of what is intended. As a practical matter, these requirement

can be easily avoided if utilities prohibited from dealing directly in another state

work through a power marketer that is not so limited. If this is not an option, the

reciprocity requirements might operate as a backdoor mandate for retail competition. For all of these reasons, we suggest that this provision be reconsidered.

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Subtitle B—Public Utility Holding Company Act of 1935

The Public Utility Holding Company Act of 1935 has been more important than

any other Act of Congress in regulating the structure of the electric utility industry.

Unlike other regulatory statutes, the Holding Company Act requirements are passive. It defines permissible structures of holding company formation in order to ensure effective state and federal regulation of electric utility holding companies, and

it does so in an attempt to protect consumers, investors and the public interest. This

statute has been an outstanding success. Its repeal or modification should be considered with great caution.

APPA opposes repeal of the Holding Company Act on a stand-alone basis, that

is, outside of the framework of comprehensive, industry restructuring legislation.

However, APPA will not object to repeal of PUHCA, provided that repeal is coupled

with strong market power provisions. Such provisions are not included in H.R. 2944,

and therefore APPA opposes PUHCA repeal as proposed in this legislation.

More acceptable to APPA than the provisions of H.R. 2944 are proposals in other

legislation pending before this Congress that provide for prospective repeal in 18

months from enactment, not the 12 month period contained in this legislation.

APPA is also concerned that H.R. 2944 restricts regulatory access to books and

records of holding companies to review only costs incurred, as opposed to permitting

a broader review of total operations. We believe this restriction is inadequate to protect the consumer interest. Further, not only are adequate consumer protection provisions lacking in this section of the bill, but the weakening of market power protections throughout the legislation make the repeal of PUHCA unacceptable even

though it would occur as part of broader comprehensive restructuring legislation.

Section 541—Aggregation

This section authorizes entities, including political subdivisions within a state, to

aggregate consumer electric needs. We strongly support this provision and urge that

it be preserved in any legislation adopted by this subcommittee. One consistent concern of residential consumers across the country is that they will be shut out of the

benefits of competition. Noted economist and one of the fathers of deregulation in

this country, Alfred Kahn, in a recent speech at an EEI-sponsored meeting in Chicago, stated that he sees few signs that the deregulation of the electric utility industry will provide benefits for small customers any time in the near future. Aggregation, particularly of small consumers, provides a solid, consumer-oriented tool that

could provide options for residential and small business customers. APPA supports

this provision so long as it expressly preserves the rights of states and political subdivisions to aggregate the electric needs of their citizens.

Title VI—Federal Electric Utilities

More than a quarter of APPA members purchase power from the Tennessee Valley Authority and the various Federal power marketing administrations. We support

regionally-based solutions that address the unique characteristics and relationships

that TVA and the Federal power agencies have with their wholesale customers. The

provisions in this section are generally consistent with the goals of APPA policy for

maintaining the existing TVA and PMA structure as closely as possible with current

law. With respect specifically to the Federal power marketing administrations, we

do not believe that legislation is necessary to maintain the current cost-based rate

structure. In fact, including such language in the legislation raises questions regarding cost-based rates for these entities, and provides opportunities for opponents of

the Federal power program to advance proposals to change the cost structure of

these agencies from cost-based to market based rates. For these reasons, APPA supports deleting the PMA sections dealing with PMA rates altogether. Inclusion of language that simply restates current practices only invites amendments to change

such practices.

Title VII—Environmental Provisions

Existing law providing incentives for public power investment in renewable energy must be maintained and enhanced. H.R. 2944 preserves the Renewable Energy

Production Incentive Program (REPI), and restricts it to public power systems and

other non-profit developers of renewable energy. Even though this provision is little

more than a reaffirmation of existing law, APPA supports this aspect of the legislation. However, the legislation would and should not exclude landfill methane gas recovery from eligible biomass projects.

APPA believes that increased use of available resources can be best achieved

through competitively neutral incentives that treat public power entities on an

equivalent basis as non-public power entities. Incentives should be structured to assist power generating entities to overcome existing barriers to increased renewable

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energy use and deployment of other green technologies. Incentives should be structured to provide comparable benefits to each region of the country and allow power

generating entities to be most responsive to the needs and preferences of their customers and the competitive market. The incentives should be easy to administer and

provide sufficient documentation for easy verification. To the extent REPI is retained, it should be changed to address the uncertainty of annual congressional appropriations and funding.

APPA proposes a two-prong approach to encouraging renewable energy development in the public power community. The first is to address the existing authorized

REPI program by providing funding to cover current project recipients. Under law,

REPI participants are eligible for ten-year payments calculated at 1.5 cents per

kWh of electricity generated from eligible projects. We propose that Congress direct

DOE to make current REPI project sponsors whole, and that sufficient funds be allocated to cover all eligible projects. Funds could be allocated by any number of

mechanisms including: 1) one-time lump sum appropriation; 2) creation of a trust

fund/escrow account funded at a level sufficient to allow the revenues to grow over

time to cover project costs; or 3) accelerated appropriations to provide advance funding for future REPI payments, similar to the Clean Coal Program.

Part two of the package involves the creation of new incentives available to nontaxpaying entities that do not participate in the revised REPI program. The option

we prefer is the creation of refundable production tax credits under the Treasury

Department that could be exchanged with other utilities. Non-taxpaying entities

would be eligible to claim a tax credit similar to the Section 45 credit. Specifically,

the amount of credit is not effected by the amount of federal tax liability, rather,

it would be calculated along the same guidelines as the Sec. 45 and REPI projects.

As with these two programs, a participant would be given a refund based on a 1.5

cents (adjusted for inflation) per kWh of electricity generated from renewable energy

projects.

Title VIII—Tax Provisions

While APPA appreciates the fact that H.R.2944 maintains the structure or

H.R.721 as the appropriate means to resolve public power’s ‘‘private use’’ problem

that has arisen from the current incompatibility of U.S. tax laws and state restructuring demands, we are very concerned that what has been included in H.R. 2944

modifies provisions of H.R. 721 in a few significant ways. H.R. 721 has been carefully crafted to address public power’s private use problem with full consideration

of the interests and concerns of all market participants. H.R. 721 has been co-sponsored by more than 85 members of the House of Representatives, from both political

parties spanning the broad reach of the political and ideological spectrum.

H.R. 2944 incorporates the major elements of H.R. 721 but restricts the legitimate

use of tax-exempt financing by publicly owned utilities for certain purposes in the

future beyond the restrictions already contained in H.R. 721. At the same time, H.R.

2944 proposes to vastly expand the tax subsidies available to investor owned utilities with respect to nuclear decommissioning expenses and the tax treatment of decommissioning funds in event of sale of nuclear facilities. The provisions relating to

nuclear decommissioning expenses not only go far beyond what has been proposed

by the Administration, but go beyond provisions found appropriate by the House

Ways and Means Committee and included in tax reform legislation enacted by Congress before the August recess and recently vetoed by President Clinton. This lack

of symmetry in treatment of public and private power tax issues is troubling.

These ‘‘tax transition’’ issues are not within the jurisdiction of the House Commerce Committee. Because they are obviously part of the electric utility restructuring debate, and because members of Congress will look to members of this subcommittee and the full committee for guidance on how all of these restructuring

issues should be addressed, we are very pleased that for the most part H.R. 721

was incorporated in H.R. 2944. Their inclusion in H.R. 2944 sends a strong signal

to committees of jurisdiction regarding the preferred approach to dealing with these

matters. We appreciate Chairman Barton’s desire to reconcile the tax code problems,

and his desire to address the private use problem using the basic framework of H.R.

721.

The provisions of H.R. 721 are an extremely fair and reasonable resolution of public power’s private use problem. APPA insists that this problem be addressed. Unless we are convinced that this problem will be addressed, and that it will be addressed in a fair and equitable manner either as part of comprehensive restructuring legislation, or on a stand-alone basis, we will strongly oppose any federal

electric utility restructuring legislation.

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Conclusion

APPA supports comprehensive Federal legislation to promote competition in the

electric utility industry. H.R. 2944 in its present form will not achieve this goal. It

fails to address serious market power problems. It is a step backward in its treatment of FERC review of utility mergers and the further accumulation of market

power by private power companies. It purports to establish Regional Transmission

Organizations. But the promises it holds for the creation of truly independent, broad

RTOs that will promote competition in the bulk power market cannot possibly be

met given the criteria established for their approval by FERC, and the absence of

real authority for FERC to help structure the industry in ways that will promote

competition and benefit consumers.

APPA opposes H.R. 2944 in its present form. At the same time, APPA wants Congress to enact legislation that promotes competition and ensures that the benefits

of competition—lower rates and better service—will be experienced by all electric

consumers. APPA will continue to work with Congress to achieve these results.

Mr. BARTON. Thank you very much.

Next we will hear from Mr. David Owens, executive vice president of Edison Electric Institute.

Your full statement is submitted for the record and you have 6

minutes. Welcome.

STATEMENT OF DAVID K. OWENS

Mr. OWENS. Thank you, Mr. Chairman.

Good morning, Mr. Chairman and members of the subcommittee.

EEI supports Federal legislation that removes Federal barriers

to competition, facilitates State restructuring actions, addresses

critical transmission and reliability issues, and applies the same

rules to all competitors.

We believe that H.R. 2944 makes significant progress toward

achieving some of these goals. On others we have some concerns

and suggestions.

My written testimony outlines EEI’s views on specific provisions,

so I will just mention a few highlights for you.

We commend the chairman for removing Federal barriers to competition by removing PUHCA and reforming PURPA. In addition,

the bill addresses a number of important transmission and reliability issues. For example, it would establish a self-regulating reliability organization and extend FERC transmission jurisdiction

over all transmission facilities. We certainly believe that is an important step in the right direction.

We also commend the chairman for recognizing that expansion of

transmission capacity is critical. However, the bill’s provisions, unfortunately, do not achieve this important goal. Similarly, the bill

recognizes the need to expedite FERC’s merger review, but, at the

same time, the merger provisions would result in more government

regulation.

We are concerned with some key areas of H.R. 2944. First, the

bill fails to develop the same rules for all competitors. It would

allow, for example, Federal utilities, government-owned utilities,

and co-ops to use their current subsidies to construct new generation of transmission facilities in a competitive market. This would

simply give these entities a tremendous advantage over their competitors.

Simply put, the market would follow the subsidies, and government share of the electricity market undoubtedly would increase.

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Second, the bill would reregulate, not deregulate, in several

areas.

H.R. 2944 would expand Federal regulation by establishing a

deadline for the formation of regional transmission organizations

and by increasing FERC’s merger authority.

Electricity markets are robust today. Given the degree of remaining Federal and State regulation, we believe neither of these provisions is necessary or desirable.

Third, the bill would intrude into State jurisdiction over retail

electric service on a number of issues, including interconnection

standards, net metering, aggregation, and retail reciprocity.

As members of this subcommittee well know, 23 States are moving forward with their own restructuring plans. They certainly

should not be forced to revisit key provisions.

Similarly, the remaining States are considering their own plans,

and they certainly want their flexibility to maintain the development of these areas.

We look forward to working with the chairman and other members of the subcommittee to improve these areas of the bill.

Finally, we commend the chairman for not making H.R. 2944 a

vehicle for micro-managing competition with punitive market restrictions. You heard some of those from Mr. Richardson.

We are pleased that the bill does not expand FERC authority to

order utility divestiture, nor does it impose competitive handicaps

on utilities and their affiliates.

Proponents of punitive market restrictions claim there are not

enough competitors in the market. Nothing could be farther from

the truth. There are thousands of electricity suppliers already in

the marketplace, plus big, well-known, national companies, including some of the world’s large oil and gas companies. They are certainly very active in this market.

Proponents of punitive market restrictions also claim that competitors will not be able to reach consumers. They ignore the continued tight Federal and State regulation of essential utility facilities. These are the transmission lines which will ensure all competitors nondiscriminatory access to utilities’ wires. And they ignore the continued State regulation of the utility affiliate transactions.

The ability to bring lower prices or better service to consumers

is what competitive markets are all about. Market share, alone,

simply does not equal market power. Suppliers cannot be equalized

in competitive markets. As long as there is nondiscriminatory, open

access to provide consumers with a choice of suppliers and no company can manipulate prices or shut others from the marketplace,

consumers will find the best combination of price and services to

meet their needs.

As I have stated, EEI strongly believes that H.R. 2944 makes

significant progress toward achieving important public policy goals,

while falling short on others.

We commend the chairman for his efforts to develop a workable

electricity bill. We look forward to continuing to work with him and

members of this committee.

Thank you for this opportunity to provide our views. I certainly

look forward to your important questions.

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[The prepared statement of David K. Owens follows:]

PREPARED STATEMENT OF DAVID K. OWENS, EXECUTIVE VICE PRESIDENT, EDISON

ELECTRIC INSTITUTE

INTRODUCTION

I am David K. Owens, Executive Vice President of the Edison Electric Institute

(EEI). EEI is the association of U.S. shareholder-owned electric utilities and industry affiliates and associates worldwide. A super-majority of EEI’s members have established EEI’s approach to competition in the electricity industry, although a few

members disagree with some elements of that approach. We are pleased to have the

opportunity to testify before the Subcommittee on H.R. 2944, the Electricity Competition and Reliability Act. EEI supports federal electricity legislation that removes federal barriers to com- petition, facilitates state restructuring actions, addresses critical transmission and

reliability issues and applies the same rules to all competitors. We believe that H.R.

2944 makes significant progress toward achieving some of these goals, while falling

short on others.

We commend the Chairman for the inclusion of provisions on issues that only the federal government can address, including PUHCA repeal and PURPA reform; facilitating state restructuring initiatives by resolving federal/state jurisdictional

issues; and addressing a number of transmission and reliability issues, including establishment of a self-regulating reliability organization and extension of FERC

transmission jurisdiction over all transmitting utilities. And, we commend the

Chairman for not making H.R. 2944 a vehicle for micromanaging competition with

punitive market restrictions.

However, we do have concerns with H.R. 2944 in a number of key areas. It fails to develop the same set of rules for all competitors by continuing—and in some

cases expanding—federal subsidies to government-owned electric utilities, electric

cooperatives and federal electric utilities, and allowing the use of these subsidies in

competitive markets. It expands federal regulation by establishing a deadline for regional transmission organizations and increasing FERC’s merger authority. The bill

also would intrude into state jurisdiction over retail electric service and raise implementation concerns in some areas, including interconnection standards, net metering, aggregation and establishing new FTC standards. We look forward to working

with the Chairman and other Members of the Subcommittee to improve these areas

of the bill.

We would like to share with the Subcommittee our views on the specific provisions contained in H.R. 2944.

TITLE I—OPEN TRANSMISSION ACCESS

Federal/State Jurisdiction

Section 101 of H.R. 2944 would clarify state authority to order retail competition and to impose nonbypassable charges for public purpose programs. This section also

would clarify federal/state jurisdiction over components of an electricity sale, as well

as distribution and transmission facilities. We believe that federal legislation needs

to address these jurisdictional issues to help reduce uncertainty in electricity markets, and we support their inclusion in H.R. 2944.

Open Access Transmission

Section 102 of the bill would clarify the authority of the Federal Energy Regulatory Commission (FERC) to require all transmitting utilities to provide open access transmission service and to authorize recovery of transition costs arising from

any requirement to provide open access transmission. Regarding transition costs, we

believe the legislation can be enhanced by the clarification of congressional intent

regarding the recovery of transition costs under FERC Order 888. There is a need

for certainty in this area—certainty that can be provided only by legislative direction.

EEI strongly supports requiring all transmission providers to be subject to FERC

transmission jurisdiction to facilitate efficient use of our nation’s transmission system, and we commend the Chairman for including this provision. It does not make

sense, from a regulatory standpoint or from a competitive standpoint, to have a significant portion of the transmission system operating under a different set of rules,

or in some cases, no rules at all.

However, Section 102 does not extend FERC transmission jurisdiction over the

federal electric utilities, including the Tennessee Valley Authority (TVA), the Bonneville Power Administration (BPA) and the other federal Power Marketing AdminisVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00188 Fmt 6601 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
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trations (PMAs). While this authority is addressed in Title VI of the bill, we recommend that Section 102 be modified to include the federal electric utilities so that

all transmitting utilities are covered in this particular section. Title VI is likely to

be referred to other committees with jurisdiction over the PMAs and TVA, and those

committees may make significant changes to the title.

Section 102 also would allow certain transmitting utilities to exempt themselves

from FERC transmission jurisdiction if they meet certain criteria. We are concerned

that the self-certification process for exemption could be abused. FERC already has

the authority to grant waivers from its transmission regulations to small transmission providers and has granted such waivers in the past. We would reiterate

that all transmission needs to be subject to uniform regulation.

Regional Transmission Organizations

Section 103 of H.R. 2944 would require each transmitting utility to establish or

join a regional transmission organization (RTO), effective January 1, 2003. EEI supports a flexible, market-based approach to grid regionalization that applies to all

transmission providers. We oppose the federal deadline by when utilities must join

an RTO.

As any stakeholder involved in the development of the six independent system operators (ISOs) already approved by FERC can attest, the establishment of RTOs is

an arduous, time-consuming process that requires a satisfactory resolution of many

contentious, critical issues among many interests. Several of the approved ISOs

were developed from existing tight power pools; other RTOs will not have this advantage and will be more difficult and take longer to construct. Imposing an artificial deadline on the creation of RTOs will reduce flexibility in evolving transmission

markets.

In addition, this federal mandate appears to ignore the tremendous progress already being made at FERC with regard to its notice of proposed rulemaking on

RTOs. FERC’s proposed RTO rule will further facilitate the voluntary development

of RTOs.

Section 103 also would require FERC to approve an RTO application if FERC determines that the RTO meets specific standards outlined in the bill. We agree with

the Chairman that if an RTO meets specific standards, including the ones outlined

in the bill, FERC should approve the RTO. We recommend that the standards be

expanded to include FERC consideration of cost and cost recovery.

However, we are extremely concerned about the provision that would allow FERC

to impose any other additional standards it wants on an RTO. We believe Congress

should establish RTO standards so prospective RTO participants understand the requirements the RTO must meet in order to obtain FERC approval. Otherwise, prospective RTO participants will be trying to establish an RTO under a cloud of uncertainty that FERC can second guess their decisions by repeatedly modifying RTO

standards.

Section 103 would direct FERC to encourage incentive transmission pricing policies for RTOs. This language is essentially the same as the incentive pricing provision in H.R. 2876, introduced by Representative Sawyer. We propose that this provision be modified to extend these incentives to all transmitting utilities, as H.R. 2876

provides, not just those in RTOs. We also support the additional transmission proposals in H.R. 2876. We strongly support reform of FERC’s transmission pricing policy, and we appreciate congressional encouragement of reforms.

FERC’s current transmission pricing policy does not provide sufficient incentives

for construction of critically needed new transmission facilities throughout the country. FERC must reform its transmission pricing policy to facilitate transmission construction in order to assure the continued expansion of competitive markets. In the

long run, reliability will suffer, and consumers will be harmed, if new transmission

capacity is not built.

Expansion of Interstate Transmission Facilities

Section 105 of H.R. 2944 is intended to help expand interstate transmission facilities. Unfortunately, while we agree with the intent, we are concerned that the section does not achieve its objective. Under this section, a transmitting utility may

apply to FERC for an order to expand its transmission. If the utility is unable to

obtain the necessary state permits to build the transmission line, the utility may

ask FERC to rescind its order.

The chief problem with this section is that the FERC order has no teeth and does

not resolve the growing difficulty of obtaining necessary siting permits from a state

that may realize little benefit from a transmission line being built to serve interstate commerce. Section 105 requires FERC to consult with a joint federal/state

board before issuing an order to build, but the joint board does not have any siting

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authority either. Without these teeth, there is no incentive for a utility to seek a

FERC order.

We believe that addressing the substantial barriers to expanding the interstate transmission system is probably the most critical transmission policy issue. Without

new transmission construction, electricity suppliers and regulators will find themselves fighting increasingly pitched battles over who gets priority for use of an increasingly scarce resource.

TITLE II—ELECTRIC RELIABILITY

EEI participated in the stakeholder process to develop the consensus reliability legislation sponsored by the North American Electric Reliability Council (NERC).

Like the other stakeholders, we believe that new, enforceable reliability standards

need to be adopted to help ensure our interstate transmission system continues to

operate safely and reliably in competitive markets. We support the inclusion of the NERC consensus language in H.R. 2944, and we appreciate the Chairman’s support for this proposal. We would like to comment on

the bill’s most important modification to the NERC proposal. H.R. 2944 adds a savings clause preserving state authority to ensure the reliability of local distribution

facilities. While the states have legitimate reliability concerns, it is important that

the self-regulating reliability organization have clear responsibility for assuring the

reliability of the interstate bulk power system. Otherwise, the end result may be

to weaken overall reliability due to confusion and conflict over who has authority

over what reliability responsibilities. EEI, along with other stakeholders, is continuing to work with state entities to develop compromise language to address the

states’ concerns.

TITLE III—CONSUMER PROTECTION

Sections 301, 302 and 303 would require the Federal Trade Commission (FTC) to

promulgate rules addressing electric supplier information disclosure, consumer privacy and unfair trade practices (slamming and cramming). We support measures to

protect consumers as they take advantage of choices in a competitive electricity

market. Our primary concern with these sections is their potential to preempt existing state restructuring plans. These sections are among the provisions in the bill

that tread into state jurisdictional matters relating to retail electric service.

TITLE IV—MERGERS

Section 401 of H.R. 2944 addresses FERC merger authority, while leaving intact merger review by the Department of Justice and the states. On the one hand, the

section attempts to expedite FERC’s merger review by establishing a timetable for

FERC action and substituting the hearing requirement with a procedure for oral

and written presentation of views. This appears closer to the approach taken by the

Department of Justice. We strongly agree that regulatory review of utility mergers

must be expedited, streamlined and simplified. It makes no sense that the BPAmoco merger—creating one of the world’s largest oil and gas companies—could be

approved on two continents in less than 100 business days while utility mergers can

drag on for two years without resolution. We appreciate that BP Amoco operates

in a competitive market, but monopoly utility functions will still remain regulated

at both the federal and state levels after a merger to ensure access to essential facilities and to protect consumers.

On the other hand, Section 401 would substantially expand FERC authority by authorizing FERC review of any disposition of generation facilities and holding company mergers, which are not currently within FERC jurisdiction. We are concerned

that this language moves in the wrong direction by expanding regulation. A growing

number of utilities are selling their generation facilities in order to focus on other

business opportunities or to satisfy state restructuring plans. These dispositions of

assets are subject to state review. There is no need for additional FERC review

under Section 401, which would potentially slow down the move to competition in

some states.

Section 401 also would expand FERC authority by requiring FERC to examine a

merger’s impact on competition in retail markets, another area already subject to

state review. FERC examines a merger’s effect on wholesale competition, but requiring FERC to examine the impact on retail markets clearly intrudes on the states’

jurisdiction and unnecessarily duplicates existing regulation.

We understand that some entities argue for even more burdensome utility merger

review. They want electric utilities to be subject to higher merger standards than

any other industry, even though utility mergers already are subject to more regulation than literally any other industry. Proponents of these draconian proposals claim

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that utility mergers will dramatically reduce the number of competitors. We would

point out that there are thousands of suppliers who currently participate in electricity markets, with many new entrants—among them the world’s largest oil and

gas companies—getting into the market. Claims that the electricity market will

somehow lack competitors are both ludicrous and blatantly inaccurate.

TITLE V—PROMOTING COMPETITION

Retail Reciprocity

Section 501 would impose a mandatory reciprocity provision on the states. We believe the section should be modified to clarify state authority to impose reciprocity

requirements on suppliers if a state chooses to do so. Otherwise, this section as currently written would preempt existing state restructuring plans in a number of

states, including California, which consciously chose not to impose reciprocity requirements on suppliers in their state restructuring plans. We would prefer a provision which facilitates, rather than intrudes, into state decisions relating to reciprocity.

Public Utility Holding Company Act (PUHCA)

Subtitle B of Title V would repeal PUHCA 12 months after enactment and substitute a new act giving FERC and state regulatory commissions access to the books

and records of holding companies and affiliates. PUHCA is an impediment to competitive markets that only Congress can address, and we strongly support inclusion

of this subtitle in H.R. 2944. PUHCA was enacted in 1935 during the New Deal in

response to conditions in the electricity industry at that time. However, like everything else, the electricity industry has obviously changed over the past 60 years, and

it is time that PUHCA be changed to recognize this fact.

Public Utility Regulatory Policies Act (PURPA)

Subtitle C of Title V would reform PURPA by repealing prospectively the mandatory purchase obligation, protecting existing contracts and providing for the recovery

of federally mandated, FERC jurisdictional PURPA costs. We strongly support inclusion of these provisions in H.R. 2944, including those addressing PURPA cost recovery. A federal statute that forces utilities to purchase power at above-market prices,

regardless of whether they need that power—and consequently forces consumers to

pay billions of dollars more for power than they otherwise would—cannot be justified in a competitive market.

Aggregation

Section 541 of the bill would preempt all other federal and state laws addressing

aggregation, except those relating to undue discrimination and preferential treatment, to allow any entity, including an electric cooperative or municipality, to aggregate retail consumers in open states.

EEI believes that consumers who have retail electric choice should be able to

choose any qualified supplier they wish, including one that aggregates them with

other customers. However, we oppose any government-initiated slamming that

would force all customers in a particular area or group to switch suppliers, even if

they later have the opportunity to opt out of such a forced switch. We are concerned

that the preemptive provisions of Section 541 would allow a municipality, cooperative or other entity to force an entire group of customers to switch suppliers.

In addition, we are concerned that the provisions in Section 541 that preempt

state law are so broad that they could undo other important public policies. For example, these provisions appear to allow an electric cooperative or municipality that

is required by state law to operate only within its own discrete service territory to

jump the fence and compete outside that service territory.

We would be pleased to work with the Chairman to modify the language of this

provision to assure that any service provider in open states may aggregate consumers who voluntarily choose to purchase electricity from that provider, consistent

with applicable rules for obtaining electric service.

Interconnection

Section 542 would give FERC the authority to order interconnections to utility

distribution systems for distributed generation facilities. Distributed generation obviously will play an increasingly important role in meeting consumers’ power needs

in a competitive market. EEI, along with other groups, is working with the Institute

of Electrical and Electronics Engineers (IEEE) to develop a uniform interconnection

standard regarding reliability and safety issues relating to distributed generation facilities. IEEE is the organization that has the technical, engineering, reliability and

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safety expertise to assure the standard results in the safe integration of distributed

generation into the distribution system. We have several concerns with Section 542. First, the bill defines a distributed

generation facility as a facility of 50 megawatt capacity or less that is designed to serve retail electric consumers at the facility. Fifty megawatts is a lot of power; a

facility this size is not one that average consumers would install in their homes or

small businesses to meet their basic power needs. Fifty megawatts would be large

enough to meet the peak electricity demand of a small city of roughly 6,000 homes.

Utilities do not connect 50-megawatt generation facilities to their distribution systems; instead, these would have to be connected to bulk-power transmission systems. Forcing a utility to connect 50-megawatt generation facilities to its distribution system would create serious reliability and safety problems. Second, Section 542 would give FERC authority to order utilities to increase their distribution capacity in order to carry out a FERC interconnection order. This is a

clear intrusion of federal authority into the states’ traditional regulation of distribution service. At the same time, Section 542 does not address the crucial issue of who

pays for any required upgrade in distribution capacity. While FERC would be able

to order distribution upgrades, the authority for allowing the recovery of the cost

of such upgrades would remain with state commissions, with no assurance of any

cost recovery. We believe authority to order distribution upgrades should remain

with the states, which regulate distribution activities.

TITLE VI—FEDERAL ELECTRIC UTILITIES

Electricity restructuring cannot achieve its anticipated results unless the rules governing competition treat all competitors alike. This proverbial ‘‘level playing

field’’ among different types of electricity providers requires similar tax and regu- latory treatment, similar access to investment capital and similar access to preference right power on behalf of our respective consumers. If the current subsidies

available to public and cooperative power are available to be used to construct new

generation or transmission facilities in a restructured electricity marketplace, then

we will have multiple sets of competitors operating under multiple different sets of

rules. Shareholder-owned utilities would be at considerable disadvantage in such an

environment, not because other competitors are more efficient or better managed,

but because they have better access to government subsidies. Unfortunately, Title

VI does not address these issues; in fact, the title would make matters significantly

worse.

Subtitle A—Tennessee Valley Authority

Section 602 repeals certain provisions of the Federal Power Act dealing with interconnections, wheeling and portions of the TVA Act establishing the ‘‘fence’’

around TVA’s service area. Section 603 limits TVA’s sales to retail customers, authorizes the sale of ‘‘excess’’ TVA power and electricity exchanges outside its service

area and applies various Federal Power Act requirements to TVA.

TVA is a heavily subsidized government utility. Permitting TVA to sell its sub- sidized power beyond its service area raises the specter of unfair competition and

undermines this bill’s purpose of promoting real competition in electricity markets.

The section provides no meaningful guidance on how TVA power is to be sold. Section 604 provides that TVA may issue bonds for new or enhanced generating facilities if TVA determines they are necessary to supply the demands of distributors and retail consumers. In tandem with Sections 602 and 603, this means that

TVA can sell its subsidized power over the fence and then issue bonds to build capacity to meet its internal needs. TVA has plenty of generating capacity, as evidenced by its easily meeting power needs on sixteen record degree days during this

summer’s extraordinary heat wave and drought. The only reason for Section 604 is

to permit TVA to acquire new generating capacity for anticipated sales beyond its

service area. We believe there is no reason for TVA to build new capacity in a competitive generation market.

TVA operates under a $30 billion debt ceiling established by Congress and currently has outstanding obligations of roughly $26 billion. These bonds are not guaranteed by the full faith and credit of the United States government, but they are

perceived as such by bond rating agencies and investors. The federal government

has never allowed a wholly owned federal corporation to go bankrupt and those who

sell and own bonds are banking on an ‘‘implied guarantee’’ that does not exist.

Nonetheless, this association with the financial strength of the federal government

gives TVA bonds an AAA rating and enables TVA to borrow at rates substantially

below those of similarly situated utilities.

A ten-year plan TVA issued two years ago articulated a goal of reducing TVA’s

debt by half over the ensuing decade. TVA has made little progress towards this

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goal and, in fact, has already slipped two years in its timetable. Allowing TVA to

slip even further into debt courts fiscal disaster. We believe Congress should take

TVA at its word and lower its debt ceiling along the schedule outlined in its tenyear plan.

Section 605 permits TVA to renegotiate its long-term contracts with distributors.

This is fair to the distributors who must now give ten years notice before they can

leave TVA’s system or buy power from other vendors. These contracts effectively

preclude the entry of new competitors in the Tennessee Valley. It will take some

time for TVA to renegotiate these complicated agreements with 159 distributors and

even longer to agree on the treatment of stranded costs, as outlined in Section 608.

At a minimum, TVA’s over-the-fence sales should not begin before these agreements

are reached and outside competitors have the same access to Tennessee Valley customers that TVA has to customers on the other side of the fence.

Section 609 applies federal antitrust law to TVA but not the sanctions that make

such laws effective. We believe TVA should be covered in the same manner as other

utilities.

Section 612 says that Subtitle A ‘‘shall be interpreted and implemented in a manner that does not adversely affect bonds issued by the Tennessee Valley Authority.’’

We cannot imagine a larger loophole. It puts the interests of TVA’s bondholders

ahead of those of America’s taxpayers, the true owners of TVA. This section should

be removed.

Without changes, Subtitle A would unleash an enormous subsidized electricity

vendor into the competitive marketplace this legislation is supposed to create. It

does not address TVA’s staggering debt and, in fact, encourages TVA to borrow still

more. It equips TVA with special exemptions from law and, in its final section, essentially absolves TVA of the most basic regulatory constraints.

Subtitle B—Bonneville Power Administration

Section 623 would authorize Bonneville Power Administration (BPA) to impose a

surcharge of up to $100,000,000 per annum on its transmission customers. These

revenues would be used to pay off debt Bonneville has incurred in acquiring generation capacity. The surcharge could ostensibly only be imposed if Bonneville projects

‘‘that available financial reserves in the Bonneville Power Administration Fund attributable to the power function will fall below $150,000,000.’’ The section also provides for FERC oversight.

We strongly oppose this surcharge. Since federal transmission regulation began

in the 1930s, policy has been that those who use power pay for its generation and

those who use transmission capacity pay only for transmission. Under Section 623,

in many cases, transmission customers would be forced to pay for electricity that

someone else actually uses. There also would be situations where the transmission

customer paying the surcharge would be paying for generating capacity acquired to

compete against its own. In truth, BPA’s current customers—more than two thirds

of whom are industrial facilities—can easily afford to cover BPA’s generating costs:

It would require a rate increase of less than two tenths of a cent per kilowatt hour.

Section 625 authorizes ‘‘acquisition of new major generating resources.’’ We believe this is a good example of ‘‘mission creep.’’ BPA was established to sell the

power produced at 29 federal hydroelectric facilities on the Columbia River system.

It has gradually metamorphosed into a utility with a much larger role in the Pacific

Northwest. We believe BPA should return to its mission and concentrate on marketing and distributing the power from federal dams. There is no rationale for BPA

to acquire or construct new thermal generating capacity in a competitive environment when other suppliers are willing to do so.

Like the similar provision in the TVA subtitle, Section 626 applies federal antitrust law to BPA but without the economic penalties other entities face. If BPA

wants to be a player in competitive markets, it should face the same laws and penalties that other players face.

Section 627 calls for ‘‘encouraging the widest possible diversified use of electric

power at the lowest possible rates to consumers consistent with sound business principles.’’ (emphasis added). We believe the foundation principle of BPA should be

what it is for virtually every other federal agency responsible for the management

and sale of the public’s resources: To achieve for America’s taxpayers the best possible price or ‘‘fair market value’’ whenever public assets are sold.

The federal government routinely sells coal, oil, natural gas, timber and other assets. The prime responsibility of agencies like the Minerals Management Service,

the Bureau of Land Management and the Forest Service is to ensure receipt of ‘‘fair

market value’’ when the public’s assets are sold. There are open and public bidding

procedures under which the high bidder wins. There is administrative and judicial

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review and close congressional oversight. These programs bring to the Treasury billions of dollars per year in revenue. No such regimen covers BPA’s sale of electricity produced at federal generating facilities. We are referring here not to the preference right power sold within BPA’s

traditional service area but to the power BPA sells outside the Pacific Northwest

or ‘‘over the fence.’’ This power is sold through nonpublic negotiations and the prices

are not released. No other federal assets can be sold in this way. Imagine the umbrage in Congress if the Department of the Interior sold coal or oil tracts through

a secret process and at a secret price.

We propose a system for the ‘‘over the fence’’ sale of Bonneville power, one mod- eled after the successful systems for selling other federal assets. Nothing less will

ensure taxpayers that government is receiving top dollar on the sale of their assets.

TITLE VII—ENVIRONMENTAL PROVISIONS

We commend the Chairman for not including a mandatory renewable energy port- folio standard in H.R. 2944. A renewable portfolio standard is a hidden tax on all

consumers that would force them to pay more for electricity. Polls demonstrate that

many consumers will voluntarily pay more to purchase electricity from renewable

energy sources, and consumers in open states should have this option. We believe

the Chairman has included more appropriate incentives to promote renewable energy, including the renewable energy production incentive and the renewable energy

tax credit.

Net Metering

Section 702 of H.R. 2944 addresses net metering service. Again, net metering re- lates to the provision of retail electric service; these issues are being addressed by

the states, and Section 702 is an intrusion in state jurisdiction. Further, net metering should apply only to the energy portion of the bill and not relieve a consumer

from paying other charges on the bill, including those for public policy purposes and

distribution services.

TITLE VIII—PROVISIONS RELATING TO INTERNAL REVENUE CODE

For competition to work, Congress needs to address the artificial competitive ad- vantages provided by the tax exemptions and tax-exempt financing used by government-owned utilities and electric cooperatives when competing against other electricity suppliers, so that all competitors can participate in open markets under the

same set of rules. For this reason, EEI has concerns with section 801 and 802 of

the bill.

Business Activities of Mutual or Cooperative Electric Companies

Section 801 would remove the requirement that electric cooperatives and similar

organizations pay taxes on income from sales to nonmembers to the extent that income exceeds 15% of revenues. Federal subsidies have been given to electric cooperatives on the argument that they are nonprofit organizations serving only their

owner-members.

We believe that section 801 goes too far when it allows electric cooperatives to

retain their tax-exempt status while making an unlimited amount of sales to nonmembers. Also, we do not feel it is warranted to permit electric cooperatives to exclude debt written-off as an exclusion from the 85% member income test.

Tax-Exempt Bond Financing of Certain Electric Facilities

EEI has major concerns with section 802 because it provides expansive relief to

government-owned utilities, even if they do not fully open to competition, and allows

them to issue new tax-exempt bonds for new transmission and generation facilities

that will compete with privately owned, taxpaying entities. These provisions also

would provide substantial loopholes allowing government-owned utilities to sell electricity for profit outside their service territories without paying income taxes on

these sales. The provisions would distort competitive electricity markets by helping

government-owned, subsidized utilities to expand at the expense of tax-paying electricity suppliers.

In contrast, the Administration has proposed a much different approach to dealing

with the tax consequences of electricity restructuring. Their proposal would grandfather outstanding bonds for government-owned utilities that offer choice to their

consumers, but would eliminate the ability to issue any tax-exempt debt in the future for all facilities involved with transmission or generation of electricity. Legislation (H.R. 1253) introduced by Representative English takes a similar approach as

the Administration, but would take the additional step to tax profits on sales made

outside of a government-owned utility=s service territory. EEI believes either of

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these approaches is more equitable than H.R. 2944 as they provide for competition

to take place on a more level playing field. Consumers deserve to receive true market signals as they choose their electric supplier. Subsidized power does not give

them the true signals of efficiencies and lowest costs.

Nuclear Decommissioning Costs

EEI strongly supports section 803 of the bill, the provisions of which were intro- duced by Representative Jerry Weller (H.R. 2038). The need for this section results

from the evolution from a regulated environment to a competitive electricity market.

Because of this structural change, the tax treatment of nuclear decommissioning

funds is not clear under current law. In addition, restructuring has brought regulatory and market forces to bear upon continued ownership of nuclear power plants,

resulting in transfers and sales of these plants. In some instances, state restructuring laws require divestiture of power plants. These activities have triggered un- foreseen tax consequences that, if not corrected, could force the early shutdown of

nuclear units that cannot be sold, resulting in the loss of jobs and a reduction of

energy supply. The provisions in this section will address needed reforms to U.S. tax law associ- ated with decommissioning of nuclear power plants in a deregulated market by: (1)

eliminating the cost of service requirement; (2) defining nuclear decommissioning

costs and clarifying that all such costs are currently deductible; (3) allowing for the

transfer of nonqualified funds to a qualified decommissioning fund; and (4) providing for the tax-free transfer of these funds when nuclear assets are sold to a nonregulated entity.

Renewable Energy Tax Credit

EEI supports section 804, which would extend the tax credits for electricity gen- erated by wind and biomass.

OTHER ISSUES

In addition to commenting on what is in H.R. 2944, we want to commend the Chairman for what is not in the bill. Of utmost importance, we are pleased that the

bill does not grant FERC new authority to order utilities to divest their assets nor

does it impose competitive handicaps on the ability of utilities and their affiliates

to offer new services and products.

Federal legislation should protect competition, not competitors; it should not be- come a vehicle for favoring new entrants by breaking up or otherwise handicapping

the ability of existing utilities to compete. Recent polls conducted by EEI show that

91 percent of American consumers believe that their current electricity supplier

should remain in the mix of competitors from which they can choose. Any evaluation of market power issues must look to where the electricity industry is rapidly heading, not to where it has been, or even where it is right now. Proponents of draconian market power proposals act as though monopolistic utilities

are about to be completely deregulated to run amok in a competitive market. To the contrary, in competitive electricity markets, utility monopoly functions will continue to remain regulated at both the federal and state levels to ensure all competitors access to essential facilities and to ensure that distribution utilities do not

cross subsidize or provide unfair preferences to their affiliates. A number of different federal and state statutes address potential market power problems. In addition, state restructuring plans are addressing potential market power concerns. And, let’s not ignore what is already occurring in evolving competitive electricity markets: thousands of competitors currently exist, with many more large, established companies with significant name recognition entering the market. Tens of

thousands of megawatts of new generation is being planned, which will be constructed and brought on line much more quickly than in the past. In addition, utilities are selling tens of thousands of megawatts of their own generation. Market share simply does not equal market power. As long as consumers have a choice of suppliers, a company can serve a large portion of the market without

having the ability to manipulate prices or prevent other suppliers from competing.

In competitive markets, sellers offer different advantages to consumers, and they

cannot be equalized. The ability to bring lower prices or better services to consumers

is what competitive markets are all about.

CONCLUSION

We support legislation that removes federal barriers to competition, facilitates

state restructuring activities, addresses critical transmission and reliability issues

and applies the same rules to all competitors. We believe that H.R. 2944 makes significant progress toward achieving some of those goals, while falling short on others.

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We commend the Chairman for his continuing efforts to develop a workable electricity bill, and we look forward to continuing to work with him and other Members

of Congress to address our concerns with H.R. 2944.

Mr. BARTON. Thank you, Mr. Owens.

We would now like to hear from Ms. Lynne Church, who is executive director of the Electric Power Supply Association and, just as

a personal aside, is an expert on traffic congestion in northern Virginia.

Ms. CHURCH. Mr. Chairman, you are stealing my speech.

Mr. BARTON. Welcome. Your statement is in the record and we

give you 6 minutes to summarize it.

STATEMENT OF LYNNE H. CHURCH

Ms. CHURCH. Thank you.

Good morning, Mr. Chairman, Mr. Hall, and members of the

committee.

My name is Lynne Church. I am the executive director of the

Electric Power Supply Association, which is the national trade association for the competitive power supply industry, including

power marketers and non-regulated generators active in the United

States, as well as U.S. global markets.

I thank all of your for the opportunity to present my testimony

and our analysis of H.R. 2944.

The bill focuses primarily on the wholesale marketplace. While

EPSA’s vision of the future certainly demands a national competitive market for electricity, there is a very broad consensus that additional Federal legislation is needed to promote truly competitive

wholesale power markets.

We do not yet have full comparability of rates, terms, and conditions for interstate transmission service. Barriers to entry for new

market participants remain. It may surprise the subcommittee, but

many of EPSA’s members actually believe the wholesale market is

getting less, not more, competitive.

The long-term success of your effort will be linked to a simple

question: does this law make wholesale power markets more robust, more fair, and more competitive? This question has real-world

implications for your constituents and consumers, in general.

Just last week, for example, the local electric utility, PEPCO, announced a 7 percent rate reduction. Fully half of this reduction is

attributed to cost savings associated with increased reliance on the

wholesale markets.

H.R. 2944 is complex, and EPSA clearly agrees with many of the

provisions; however, one area of significant concern relates to the

regulatory oversight of the interstate transmission grid. If this legislation is to be pro-competitive, it must make absolutely clear that

all users of the interstate system are subject to a consistent set of

rules overseen by a national regulatory body.

Unfortunately, in three separate provisions, the bill unnecessarily subjects the interstate grid to potentially intrusive State control. Any one change would be problematic, but the combination of

the three has the potential to defeat the creation of a truly competitive and efficient marketplace.

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The bill clarifies that Federal authority is limited to unbundled

power sales, or those sales where customers are billed separately

for power generation and transmission services.

For those 24 States—we count 24—which have adopted a framework of retail competition, all power sales are essentially becoming

unbundled. In those States, Federal authority will extend to all

uses of the interstate grid. However, as long as some States opt

against retail choice, this legislation will perpetuate a system

where large portions of the interstate grid will remain outside of

Federal control and subject to State control. And those States that

have moved to competition may well be penalized in terms of serving their customers.

It is akin to suddenly turning an eight-lane superhighway into

a bumpy country road once it reaches a political boundary of a

State.

This jurisdictional split will create risk in the marketplace and

may lead some States to engage in ill-conceived attempts to protect

in-State consumers at the expense of out-of-State power users.

To use the highway analogy again, imagine what would happen

if northern Virginia decided to mitigate road congestion during

rush hour by permitting only cars with Virginia tags on its highways and excluding DC and Maryland drivers from its roads during those hours.

The subcommittee needs to recognize that our grid is truly interstate from an engineering standpoint, and even small disruptions

can have broad impact.

For example, we believe that a poorly managed effort to curtail

400 megawatts of power flowing between Ontario and Michigan

this past July led ultimately to the dramatic price spike in Illinois,

Indiana, and Ohio that we have read about, and to hundreds of

millions of dollars in unnecessary costs.

This distinction between unbundled and bundled uses of the

transmission grid is an artificial and unnecessary one. It is fundamentally at odds with the concept of full comparability and an

effort to promote a robust competitive power place.

The other two areas of which I speak are the areas dealing with

grid reliability and the determination of transmission versus distribution assets.

The bill in those areas further interjects State regulators in

issues that are best considered at a national level.

In a number of other areas, the legislation has been significantly

improved since the initial draft in August, and we appreciate the

Chair and the committee’s and the staff’s role in listening to us and

including some of these provisions.

Particularly, the bill’s language on mergers, regional transmission organizations, and new plant interconnections are very

positive steps. They do not resolve all our concerns, but they are

definitely a step in the right direction. And I refer you to the text

of my written comments for some suggested refinements to those

provisions, as well as to the PURPA and renewable power section.

Some subcommittee members have expressed opposition to any

new authority to FERC, yet, we do not believe that FERC needs

a greatly expanded role. Instead, the Commission’s existing authority needs to be clarified and FERC’s role encouraged to evolve.

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Competitive power markets will continue to rely on an interstate grid that is a monopoly provided service. As such, these markets

will require the presence of an effective watchdog, and FERC is, realistically, the only agency equipped to handle this responsibility. To summarize, enormous consumer benefits can be achieved

through the enactment of pro-competitive wholesale power legislation, but the system today is broken. Without action by this Congress, your constituents and consumers, generally, will be threatened with unnecessary market volatility and higher prices for

power.

[The prepared statement of Lynn H. Church follows:]

PREPARED STATEMENT OF LYNNE H. CHURCH, EXECUTIVE DIRECTOR, ELECTRIC

POWER SUPPLY ASSOCIATION

Mr. Chairman, Ranking Minority Member, and Subcommittee Members, my name is Lynne H. Church, Executive Director of the Electric Power Supply Association

(EPSA). EPSA is the national trade association that represents the leading competitive power suppliers—including power marketers and developers of competitive

power projects—active in the U.S. and global energy markets. On behalf of the competitive power industry, I thank you for this opportunity to present our analysis of

your legislation to restructure the electric power industry, H.R. 2944, the Electricity

Competition and Reliability Act.

The Goal of Legislation: Building a Robust, Competitive Wholesale Power Market

As you know, H.R. 2944 focuses primarily on the wholesale marketplace. While EPSA’s vision of the future demands a national, competitive retail market for electricity, our experience in today’s wholesale markets underscores the potential value

of your legislative efforts. As testimony before the Subcommittee has made clear, there is a broad consensus that much still needs to be done. True comparability of rates, terms and conditions

for interstate transmission service for all classes of customers has yet to be

achieved. Barriers to entry for new market participants remain. The monopoly providers of transmission services are learning to use their systems in ways that can

be at odds with a competitive marketplace. It may surprise the Subcommittee that

many of EPSA’s members actually believe the wholesale market is getting less, not

more competitive.

The long-term success of your effort will be linked to a simple question: does this

law make wholesale power markets more robust, more fair and more competitive?

While issues in the wholesale market directly concern electric power distribution

companies, power producers and marketers, this question has real world implications for your constituents. Just last week, for example, the local electric utility

PEPCO announced a seven percent rate reduction. Fully half of this reduction is attributed to cost savings associated with increased reliance on wholesale markets. We

believe the impacts on consumers are direct: more competition, more benefits; less

competition, less benefits and higher costs.

H.R. 2944 Splits Jurisdiction Over the Interstate Market and Could Increase Risk

H.R. 2944 represents a complex policy proposal and we recognize that the legislative process will result in a stream of changes and new ideas. We look forward to

working with the Subcommittee as this process unfolds and are optimistic that our

collective efforts can result in critically needed, pro-competitive legislation.

While EPSA clearly agrees with many provisions in the legislation, there are

issues that need further action or alternative solutions. As one area of significant

concern, we raise the issue of regulatory jurisdiction over the operation of the interstate transmission grid. If this legislation is to be pro-competitive, it must make absolutely clear that all users of the interstate system are subject to a consistent set

of rules overseen by a national regulatory body. Unfortunately, in three separate

provisions, the bill unnecessarily subjects the interstate grid to potentially conflicting and disruptive regulatory control. Any one change would be problematic, but

the combination has the potential to defeat the creation of a truly competitive and

efficient marketplace.

First, the bill clarifies that federal authority is limited to ‘‘unbundled’’ power

sales. An unbundled sale is one where a customer is billed separately for power generation and transmission services. ‘‘Bundled’’ sales are where a customer gets a single bill for electric service and typically has no choice of power provider.

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As states move to retail competition, all power sales essentially become unbundled: this is critical to the concept of customer choice. Hence, in a world where

all the states have embraced retail competition (as 24 have done already), federal

authority extends to all uses of the interstate grid. On the other hand, as long as

states opt against retail choice, your legislation perpetuates a system where some

uses of the interstate grid are subject to state control, while others are in a national

system. In many states, ‘‘bundled’’ uses of the interstate grid amount to 80% or more of the transactions on the interstate grid. As written, this legislation has the possible

effect of reducing the interstate grid—our interstate highway system for power—

from an eight lane super highway to a dirt road. In addition, this jurisdictional split

may permit some states to engage in ill-conceived attempts to protect instate consumers at the expense of out-of-state power users. Continuing with the highway

metaphor, imagine what would happen if Northern Virginia decided to mitigate road

congestion by permitting only cars with Virginia license plates on its highways during rush hour? The Subcommittee needs to understand that, regardless of legal jurisdiction, our grid is truly interstate and even small local disruptions can have broad impacts. For

example, we believe that a poorly managed effort to curtail 400 Mw of power from

flowing between Ontario and Michigan led ultimately to a dramatic price spike in

Illinois, Indiana and Ohio last summer and to hundreds of millions of dollars in unnecessary costs for consumers.

The distinction between unbundled and bundled uses of the transmission grid is

an artificial and unnecessary one. Separate treatment and regulatory oversight

makes impossible a system of consistent rules and comparability with respect to

transactional rates, terms and conditions. Such a split in jurisdiction creates potentially overwhelming commercial risk. It also is fundamentally at odds with any effort to promote a robust competitive wholesale power marketplace.

In two other areas, as part of the sections dealing with grid reliability and the

determination of transmission assets, the legislation interjects state regulators in

issues that are best considered at a national level. Rules governing grid reliability,

for example, have regional, national and commercial impacts. Allowing fifty states

broad rights to ‘‘adjust’’ these rules to reflect local concerns is a formula for potential chaos in the wholesale marketplace.

In addition, there is growing concern in the marketplace that, through a process

known as ‘‘refunctionalization,’’ the owners of transmission assets will attempt to reclassify these transmission facilities as elements of the distribution network. In

part, such actions will be taken to avoid federal oversight. This effort, it is feared,

will effectively shrink the physical marketplace and result in potentially increased

congestion and supply disruptions. If transmission owners are allowed to appeal to

local interests and authorities for these determinations, a consistent set of rules will

be impossible and erosion of the interstate transmission system could result. While

the perspective and advice of local authorities can be invaluable, the legislation

must make clear that local concerns cannot trump the national interest.

H.R. 2944 Includes Improved Market Power Provisions, But More Work Needed

In a number of other areas, the legislation has significantly improved since the

initial draft was released in early August. Three such provisions relate to the bill’s

language on mergers, regional transmission organizations (RTOs) and new plant

interconnection with the interstate grid. While not resolving our concerns with respect to the abuse of market power in the marketplace, these provisions represent

a step in the right direction.

Even in these areas, however, we encourage you to adopt further refinements. For

example, independent control is absolutely essential to the operation of a commercially acceptable RTO. However, the legislation defines any RTO where participants

each own less than ten percent of voting stock as ‘‘independent.’’ This language

should be changed—an RTO where six transmission owners control 60% of the voting rights meets few market participants definition of ‘‘independent.’’ As another example, we note that the bill’s provisions to ensure that the non-discriminatory interconnection of new power plants improve on the status quo. Nevertheless, the process

outlined in the legislation is still insufficiently streamlined to have a significant,

positive impact.

Lastly, we urge the Subcommittee to ensure the capability of federal regulators

to react in near ‘‘real-time’’ and with direct, but light-handed, remedies to allegations of market power abuse. EPSA members do not see the courts or anti-trust

laws as a viable approach to resolving market power issues on a day-to-day basis.

The markets and participants are changing rapidly. Litigation, especially when antitrust laws are involved, is unwieldy, extremely expensive and unlikely to lead to a

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rapid resolution of concerns. Given these circumstances, justice delayed will mean

justice denied for many market participants. While some Subcommittee members have expressed opposition to any new author- ity at FERC, we do not believe that FERC needs a greatly expanded role. Instead,

the Commission’s existing authority needs to be clarified and FERC’s role encouraged to evolve. Competitive power markets will continue to rely on an interstate

grid that is a monopoly-provided service. As such, these markets will require the

presence of a effective watchdog and FERC is realistically the only agency equipped

to handle this responsibility. States acting on their own cannot serve this role. On

the contrary, acting on their own, states could exacerbate the problems facing the

industry.

Additional PURPA and Renewable Power Provisions are in Order

Before closing, we would like to comment on two other sections in the legislation, relating to PURPA and renewable power. For some time, EPSA has supported the

prospective repeal of PURPA’s mandatory purchase obligations, linked to the introduction of competitive retail markets. If PURPA is amended in federal law, there

must be explicit recognition and preservation of existing PURPA contracts. We also

endorse your efforts to guarantee the recovery of PURPA contract costs as appropriate federal policy. However, such cost recovery must be explicitly related to the

honoring of existing contracts. Lastly, EPSA urges the repeal of the ownership re- strictions on PURPA Qualifying Facilities (QFs). In 1992, the Congress placed no such restrictions on Exempt Wholesale Generators (EWGs) and the time has come

for similar treatment for QFs.

EPSA also endorses additional support for renewable resources. The bill’s Renewable Energy Production Incentive is unfairly focused on non-profit companies. This

program should be expanded to cover all types of companies. Alternatively, the tax

credit for renewables included in the legislation should be expanded to include the

full range of technologies covered by the Incentive program (i.e., ‘‘solar energy, wind,

biomass, or geothermal’’).

Conclusion

EPSA’s members are very appreciative of this opportunity to share with the Subcommittee our views of your legislation and the state of competition in wholesale

markets. We look forward to working with the Subcommittee and the full Committee to ensure the creation of critically needed, pro-competitive legislation.

To summarize, enormous consumer benefits can be achieved through the enactment of pro-competitive wholesale power legislation. We are not advocating intrusive ‘‘re-regulation,’’ as some might claim. Rather, we advocate light-handed, consistent oversight of all competitive aspects of the industry with appropriate enforcement policies and national regulation of the monopoly interstate transmission network. Today, the system is broken. Without action by this Congress, your constituents will be threatened with unnecessary market volatility and higher prices for

power.

Mr. BARTON. Thank you.

We now want to hear from Mr. William Mayben, who is the

president of Nebraska Public Power in Columbus, Nebraska. He

represents the Large Public Power Council.

Your statement is in the record. We welcome you. We hope that

when Texas A&M plays Nebraska in a month that there is a power

outage in the big red machine on the football field, but certainly

not in the utility grid.

Mr. Mayben.

STATEMENT OF WILLIAM R. MAYBEN

Mr. MAYBEN. Nebraska has been known to have a power outage

in the second half for just a strategic thing.

Thank you, Mr. Chairman.

Nebraska Public Power District is a vertically integrated electric

utility that serves about 1 million of the 1.6 million people that live

in Nebraska. That does not sound like very much, based upon some

of the numbers I have been hearing, but for us it is pretty important.

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The Large Public Power Council is represented by 21 of the largest publicly owned State and locally owned electric utilities in the

country. We have about 6 million customers in total, about 44,000

megawatts of generation, and about 25,000 miles of high-voltage

transmission lines.

Now, we distinguish ourselves from the dominance of the electric

utility industry in that we do not engage much in mergers—in fact,

none at all—and, for the most part, we are not interconnected with

either one of ourselves, so we truly depend upon the national grid.

The Large Public Power Council applauds the chairman’s efforts

in bringing together a comprehensive bill to deal with deregulation

of the electric industry. As it is formed, we believe for the most

part, it will be very beneficial for the consumers throughout the

United States.

We have two fundamental issues with regard to the bill, as it is

drafted, and we are really pleased with the way it is going, but we

have a little bit of problems. Our problems are pretty well laid out

in the details of my prepared testimony.

The first thing we have problems with is in the private use area.

As you know, private use was really imposed upon public power entities issuing tax-exempt debt to construct transmission lines and

power plants back in the 1986 Tax Reform Act. That act clearly

was passed in contemplation of the regulated monopoly utility industry that we had at that point in time.

As we go forward with deregulation, it is clear that that act does

not fit a segment of the electric utility industry very well, and we

believe that it has to be addressed.

Fundamental limitations that we face are that we can only issue

or we can only take about 10 percent of the output of our generation or our transmission and use it in an open competitive market,

or derive only about $15 million a year in the engagement of the

wholesale market.

We believe the transmission issue that is most troublesome to

us—and, by the way, we support very strongly the work that is

necessary to create a robust transmission system throughout the

United States. We think that is the key to a competitive market,

and we think if we can accomplish a competitive market, many of

the other things that we are concerned about with regard to market power will be ameliorated, to some extent.

A fundamental problem is that public power is different than investor-owned utilities. We are required, for the most part, to abide

by the statutes and the rules that are set forth in our legislatures

and in our home communities, and those rules are contrary to the

rules that the investor-owned utilities can abide by with Federal

jurisdiction.

We believe that the bill needs to recognize that public power is

different, that the rules that we are asking for with regard to jurisdiction by the Federal Government recognizes our situation.

With regard to the creation of RTOs, the public power entities

support that, and we believe very strongly that they should be a

part of the regional transmission organizations. But, again, we believe that we need to be given the recognition of the uniqueness of

public power in terms of becoming members of the RTOs.

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We are concerned, at this stage of the game, that, if we do not have that kind of recognition, we will find ourselves without the

ability to participate in the RTOs, and we think that the market

will be affected by our absence. So we urge you to contemplate that

we be given some special consideration. In conclusion, again we applaud the chairman and the committee for coming forth with a comprehensive bill. We think it is the step

in the right direction. We would like to work with you as much as

we possibly can to see to it that our particular needs are addressed. [The prepared statement of William R. Mayben follows:]

PREPARED STATEMENT OF WILLIAM R. MAYBEN, PRESIDENT, NEBRASKA PUBLIC

POWER DISTRICT ON BEHALF OF THE LARGE PUBLIC POWER COUNCIL

My name is William Mayben, and I am President of the Nebraska Public Power

District. I am testifying today on behalf of the Large Public Power Council. We appreciate the efforts that Chairman Barton and this Committee have made to assemble a comprehensive electric industry restructuring bill that aims to benefit all consumers. Today I would like to comment specifically on several aspects of Chairman

Barton’s bill that are of paramount importance to our members.

The Large Public Power Council (‘‘LPPC’’) is an association of 21 of the largest

state and locally-owned electric utilities in the United States. Our members serve

approximately 6,000,000 retail customers, and own and operate over 44,000

megawatts of generation. In addition, we own and operate in excess of 24,000 circuit

miles of transmission lines. LPPC’s members are located throughout the country in

states including Washington, Texas, Arizona, California, Florida, Georgia, New York

and Tennessee.

We have reviewed Chairman Barton’s bill, and overall, we believe the bill takes

some positive steps towards encouraging a competitive and healthy electricity market. We do support the comprehensive approach to restructuring reflected in the

bill, but have some specific concerns regarding several provisions. As I will outline

in my testimony, we believe that any comprehensive restructuring bill must both

satisfactorily resolve the private use issue and recognize that the federal government must not regulate state and municipal agencies as if they were private corporations. Given these overarching principles, I will focus my comments on several

aspects of the bill that are of the greatest interest to our consumers, who will ultimately either bear the brunt of, or enjoy the benefits of, federal legislation. Those

issues are private use restrictions, proposed new powers for FERC that would extend to public power transmission, and participation in Regional Transmission Organizations (RTOs).

Private Use

I will begin with the most compelling issue for LPPC’s members and consumers

today—private use restrictions. Private use restrictions form a serious barrier to

open competition and consumer choice. Failure to provide relief from some of these

restrictions will preclude many public power systems from opening their systems to

full competition and could result in higher rates for consumers. Such a result would

be contrary to the goal of providing a competitive market that is open to all who

wish to participate, ultimately to the benefit of all consumers. Unless public power

systems are provided with private use relief, many of us will not be able to be full

participants in a competitive marketplace and thus would have little stake in advancing federal restructuring legislation. We would like to work with this Committee to craft fair, effective and comprehensive restructuring legislation—but it

must be comprehensive. We cannot support federal restructuring legislation without

effective private use relief.

Background

By way of background, public power systems have no practical source of external

financing other than the municipal debt markets. Unlike private companies, public

entities cannot issue stock. The private use rules that apply to our financing, most

recently revised by Congress in the 1986 Tax Reform Act, were promulgated prior

to the advent of a competitive electric industry. The rules provide that no more than

the lesser of 10 per cent, or $15 million, of power generated by a power plant financed with tax-exempt debt, or transmission capacity of a transmission line financed with tax-exempt debt, may be sold to a private entity under a customer-specific contract. In simpler terms, the rules preclude us, for most transactions, from

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providing open access transmission and distribution services and from offering competitive prices for power sales.

In the regulated monopoly world that existed prior to competition, this restriction

was problematic but manageable. In a competitive world of open transmission access, it has very serious consequences for our members, their customers, and investors. Here’s what the private use rules mean in a competitive environment, which

already is a reality in the wholesale market and which is becoming a reality in the

retail market in nearly half of the states :

1. In its recent Notice of Proposed Rulemaking, FERC has strongly encouraged

that all transmission-owning utilities participate in Regional Transmission Organizations (RTOs). Furthermore, Chairman Barton’s bill and a number of other legislative proposals contemplate mandating participation in RTOs. We support the development of RTOs as important to the establishment of competitive markets that are

both efficient and reliable. At the same time, private use rules may act to preclude

effective participation of public systems in an RTO. A public power system that joins

an RTO will not be able to issue new tax-exempt bonds to finance transmission facilities that have been turned over for operation by the RTO, thereby raising costs

to all users. Moreover, a public power system that wishes to join an RTO and has

issued tax-exempt bonds for transmission after July 9, 1996, will have to redeem

those bonds with higher cost debt or interest on those bonds will become taxable—

again, raising costs for the utility and its customers.

2. In a competitive environment, large customers will seek and obtain special tailored contracts to meet their specific needs, just as they do in buying any product.

If outdated private use rules remain intact, a public power utility may be unable

to offer such a contract, even to customers in its own service territory that it has been

successfully serving for decades. This could deny that customer the best choice in

the market, and will lead to loss of customers for the utility for reasons that have

absolutely nothing to do with price or quality of service.

3. If a public power system loses a customer in a competitive environment (and

all utilities will lose customers), the public system may be unable to re-market the

generating capacity it had built to serve that lost customer as a result of the private

use rules. Thus, any excess capacity that a public system has may become idle and

unproductive for the economy solely as a result of the private use tax rules. Inability

to resell the capacity can lead to significant financial losses and reductions in overall economic efficiency. The bottom line: the remaining customers of that utility

would pay higher costs.

In summation, penalties for public power consumers come in the form of higher

rates for customers, at a time when competition is supposed to be reducing rates.

The consequences for public power’s investors are equally undesirable. Public power’s investors include a broad spectrum of people who have invested in this debt to

fund their retirements, college educations, and other needs. These investors hold

more than $70 billion in outstanding tax exempt debt issued to finance generation,

transmission and distribution facilities, and rely on the ability of public power systems to repay them through the sale of power from the assets they financed. Failure

to address private use issues places these investments in jeopardy, as it may cause

downgrades of public power bonds and lead to increased turbulence in the public

power debt market. This in turn may impact other segments of the municipal debt

market, upon which states, cities and towns rely to finance necessary infrastructure.

Uncertainty in these markets leads to higher borrowing costs, all of which ultimately will be absorbed by investors, citizens and customers.

Treatment of Private Use in the ‘‘Electricity Competition and Reliability Act’’

For the reasons I have just outlined, we believe Chairman Barton has advanced

the prospects for workable restructuring legislation by providing relief from private

use restrictions in his bill. Chairman Barton’s bill would allow publicly-owned utilities to elect to permanently forego the ability to issue future tax-exempt debt to

build new generating facilities. In return, the bill would grandfather existing taxexempt debt incurred to build electric power facilities and permit the electing systems to operate outside of current restrictive private use rules. In this way, publiclyowned utilities will be able to bring the full benefits of competition to their customers. Those utilities that do not elect to terminate issuance of tax-exempt debt

would remain subject to modified private use rules.

We believe, and are pleased that Chairman Barton agrees, that a fair marketplace

that invites all to participate cannot exist without meaningful relief from private

use restrictions. I should note that we do have some technical concerns about a few

recent modifications to the private use provisions of Chairman Barton’s bill. I will

be happy to address these in greater detail at the Committee’s request.

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Transmission Policy

I would now like to turn to transmission issues that will be important for our

members in an increasingly competitive market—assuming Congress provides us

with the private use relief needed to participate fully in that market. Since its inception, the LPPC has focused on transmission policy as a critical issue for its members. The LPPC was the first group of transmission owning utilities to express support for open transmission access in the debates preceding the Energy Policy Act

of 1992. At the same time, we led the way in developing and promoting regional

transmission entities as a mechanism to manage and operate the transmission system in an open access environment.

The LPPC would like to continue to provide leadership in making changes to the transmission system that will enhance competitive markets. As such, we would like

to work with the Committee to develop transmission policies that ensure nondiscriminatory access to public power transmission facilities while recognizing that

it is not feasible to govern access to investor-owned and public power transmission

by identical rules. We are concerned about provisions in Chairman Barton’s bill that

give FERC the same authority over transmission rates charged by state or local

agencies as it has over private corporations. Such an expansion of FERC authority

is flawed policy. By definition, State and local agencies are not private, for-profit

corporations. They should not be regulated as such. For example, FERC’s cost of

service ratemaking methodology—which relies on concepts such as rate of return on

equity—is inappropriate for public power systems whose external financing comes

exclusively from debt. Also, in many instances, state and local bond covenants held

by public power systems include coverage ratios that require transmission revenues

in excess of the level FERC will allow under standard cost of service ratemaking. We recommend that the Committee not give FERC general ratemaking authority over public power transmission rates. If the Committee thinks additional FERC authority in this area is necessary, it should be limited to authority to require public

power systems to file the same type of open access tariff public power systems now

file voluntarily under the ‘‘safe harbor’’ procedure used to qualify for reciprocity

under Order No. 888. This new authority would be limited to requiring that public

power transmission utilities offer non-rate terms and conditions of transmission

service comparable to those that investor-owned utilities are required to offer under

their open access tariffs. With respect to rates, FERC’s authority would be limited

to ensuring that a public power system’s transmission rates are comparable to the

rates it charges itself. Thus, on rates, FERC could require that public power transmission owners not discriminate in favor of their own sales services, but could not

set or review such owners’’ revenue requirements or the level of rates. Attached to

our testimony is a proposed amendment that carries out this objective. We have similar concerns about provisions that mandate membership in RTOs.

LPPC believes that an evolutionary—and not revolutionary—approach is needed to

ensure the continued delivery of reliable, affordable electricity to consumers. Furthermore, as FERC has recognized, public power faces difficult issues in participating in RTOs. These must be addressed before a national system of RTOs can be

put into place. As I touched on previously, private use restrictions present a barrier

for participation by public power systems. Furthermore, many public power entities

operate under additional legal and operational requirements that affect their ability

to participate in the ownership of an RTO or to transfer ownership or operations

of their transmission facilities to an RTO. These requirements include provisions in

state constitutions, state and local laws, and bond covenants that vary from system

to system.

For these reasons, we are unable to support any provision giving FERC authority

to require public power systems to join RTOs unless in addition to addressing such

issues as independence, size and scope of RTOs, the statutory criteria requires the

RTO to accommodate the unique characteristics and legal requirements of public

power. This will ensure that public power’s participation by FERC order is not inconsistent with state laws and constitutional requirements and with bond covenant

requirements. In addition, FERC RTO requirements should not impair control of

local system operations or reliable and economic service to consumers served by

publicly owned facilities. Lastly, the criteria should not authorize FERC to require

any public power system to join an RTO if the state in which the public power system operates has chosen not to mandate that its public power entities (which are

instrumentalities of the state) participate in RTOs.

Conclusion

As the Commerce Committee acts on this bill, we stand ready to offer our assistance and support to the Committee. We are hopeful that other Committee members

can support the work that Congressmen Barton, Largent, Markey and others have

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already done on the issue of private use. We also offer our assistance to the Committee in developing workable transmission policies that recognize the unique responsibilities and obligations of publicly-owned utilities.

As pleased and reassured as we are regarding Chairman Barton’s leadership on

the private use issue, I must again caution the Committee that LPPC’s members

will not be able to support restructuring legislation that does not provide meaningful private use relief—either in the same bill or in companion legislation from the

tax committees. We recognize that the Commerce Committee’s jurisdiction does not

permit it unilaterally to deal with all pending tax and non-tax restructuring issues;

however, we are confident that the Commerce and Ways and Means committees can

work together to effectively resolve this issue.

In conclusion, the LPPC believes that the Committee continues to move in a positive direction on electric power competition issues. We look forward to working with

you to ensure that private use provisions similar to those endorsed by Chairman

Barton are enacted by this Congress, and through that effort, offer our assistance

in supporting this Committee’s efforts on broader restructuring issues, including

transmission policy.

Thank you for the opportunity to testify before you today.

Mr. BARTON. Thank you, sir.

The Chair wants to announce they have just called a vote on the

floor. It is on approving the journal. We are going to continue the

hearing. If there is a fast member who can get over and vote and

get back, I will turn the chair over, but I am going to continue the

hearing.

We want to hear from our next witness, the former Congressman

from the great State of Oklahoma, Mr. Glenn English, who is now

representing a National Rural Electric Cooperative Association.

Mr. English, welcome to the committee. Your testimony is in the

record in its entirety. We recognize you to summarize it for 6 minutes.

STATEMENT OF GLENN ENGLISH

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

that. Let me just say that we are very pleased to be here today and

have an opportunity to address H.R. 2944.

Restructuring, we feel, brings a new responsibility to electric cooperatives around this country. It is an increasingly important option we feel that consumers will need and desire, and we want to

applaud the effort by the chairman and by the committee to work

with electric cooperatives to make sure that we are able to fulfill

that responsibility.

Let me also say, Mr. Chairman, there are really four key items

that electric cooperatives would like to focus the committee’s attention on at this particular time.

While there are a number of other elements within the legislation that we address in our written testimony, and some that are

of a technical nature that we would urge to be considered and

looked at, the four items that we particularly want to focus the

committee’s attention on today deal with the guaranteed right of

consumers to aggregate and right of electric cooperatives to serve

those consumers; second, to minimize the unnecessary regulatory

burdens on consumer-owned electric cooperatives; third to put all

electric utilities in the same ball park as far as the services that

they can offer to consumers; and fourth, we want to permit electric

cooperatives to work together to serve consumers more efficiently.

The first issue with regard to the right to aggregate, we want to

commend the chairman for the legislation and his addressing of

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this issue. We feel that certainly the legislation moves in the right

direction as far as dealing with that particular concern.

The second issue, the summary signal, that the intent was for

electric cooperatives with limited transmission facilities to be able

to, in an uncomplicated way, obtain exemption from the jurisdiction

of the Federal Energy Regulatory Commission. We feel that is a

very laudable intent by the legislation, since there are some 400

small electric distribution cooperatives who use high-voltage lines

to provide retail service to their widely disbursed rural consumers.

Now, these facilities have no impact—I want to repeat, no impact—on the transmission grid, and for that reason should not

have to undergo any type of expensive or prolonged regulation by

the Federal Energy Regulatory Commission.

With that in mind, we would urge the chairman and the committee to work on the language, itself, to clarify the issue and to

state in detail, if possible, a simple, inexpensive exemption process

to provide the small distribution cooperatives with the kind of certainty that they are going to need in dealing with the process.

Let me also say, Mr. Chairman, we took note of the fact that the

Federal Energy Regulatory Commission is authorized to review

mergers not only among the large entities, the mega-mergers of

this country, but between cooperatives, as well.

We were somewhat puzzled by that inclusion in the language of

the legislation, quite frankly, because these are, for the most part,

small entities.

In fact, when FERC needs to be focusing its attention on the

mega-mergers that are taking place and the impact that that is

going to have as far as consumers around this Nation, it appears

that this is diverting resources and attention to deal with people

who have little or no impact as far as the market power issues of

this country are concerned.

In particular, we have been calling for even a heavier review of

some of these mega-mergers that have been taking place in this

Nation, and we still feel that the bill unduly restricts FERC’s authority to look at those mega-mergers.

In particular, from a size standpoint, Mr. Chairman, to make my

point about the fact that this is somewhat puzzling, if you took all

the generation and transmission capabilities of all electric cooperatives all across this country and merged the whole group together,

they still would not be as large as the American Electric Power

Company’s assets.

Second is the fact that these electric cooperatives generate power

for their own use for their own membership. If you take all the

electric generation capability that we have among our membership,

it still only covers about half of all the electric power needs of individual cooperatives. Since nearly all that is committed to our membership, it really does not leave much available for any of our members who may wish to become players in an open market to be

much of a factor, so that really does not make much sense.

The other thing that I would call to the committees attention,

mergers by rural electric cooperatives, G&Ts, are already under review by the Rural Utilities Service. Any of those that have an RUS

loan are required to undergo review and approval before they can

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take that action, so there is already Federal review at that particular point.

To simply add the Federal Energy Regulatory Commission is an additional burden on electric cooperatives as a second review at the

Federal level, and also as a diversion of much-needed resources for

the Federal Energy Regulatory Commission to be focusing on what

is the real issue, and that is the mega-mergers and the market

power that is going to truly have an impact on the marketplace in

this country. We would like to work with the committee to see if there is some

way we can address this issue, and to deal with the fact that cooperatives that are small and self-power primarily are the only

members, and other cooperatives already subject to Federal merger

could not be dealt with.

Mr. Chairman, I see my time has expired. I do want to address several other issues, but I hope to be able to do that during the

question period, and particularly I would like to address the issues

pertaining to propane. Some of the issues have been raised of our

good friends of the propane industry regarding subsidies and taxes. Thank you, 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 Committee, 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 consumerowned, not for profit electric cooperatives.

These cooperatives are locally governed by boards elected by their consumer own- ers, are based in the communities they serve and provide electric service in 46

states. The more than 32 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. Consumer- owned, 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 cooperatives 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 the electric cooperatives.

The title of the bill before the Committee, H.R. 2944, is The Electricity Competition and Reliability Act. We applaud the intention of the Chairman and the Committee to ensure true competition in the electric utility industry. We are evaluating

each provision of the bill on the basis of whether it enhances or impedes competition, and whether it supports or impedes the ability of electric cooperatives to continue to meet the needs of our consumer-owners in that restructured industry.

At the beginning of my testimony, I would like to focus on a few key issues that

we believe must be addressed if NRECA is to be able to support H.R. 2944. In the

second part of this testimony below, I will discuss a number of other elements in

the bill about which we are concerned. We intend to continue to work with the Committee and Congress to try to address those issues. In the third part of my testimony I will also note a few simple changes we recommend to fix technical problems

in the bill.

KEY PRIORITIES

NRECA and the electric cooperatives seek legislative language that would guarantee consumers access to the ‘‘cooperative option.’’ We were looking to see if H.R.

2944 would:

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• guarantee consumers the right to aggregate and the right of electric cooperatives

to assist those aggregation groups; • minimize unnecessary regulatory burdens on consumer-owned electric cooperatives; • put all electric utilities on an level playing field with respect to the sale of nonelectric products or services; and • permit electric cooperatives to work together to serve their consumers more efficiently. On the first issue, the discussion summary of ‘‘Major Changes’’ released last week indicated that the Chairman’s intention in H.R. 2944 would be to clarify the authority of cooperatives to aggregate retail customers. And, we were pleased to see, the language of H.R. 2944 does, indeed, clarify the authority of cooperatives to aggregate retail consumers. On the second issue, the summary signaled the Chairman’s intention to give dis- tribution cooperatives with limited transmission facilities—utilized only for the distribution of electric service—an uncomplicated way to obtain an exemption from the

jurisdiction of the Federal Energy Regulatory Commission (FERC). This is a laudable intent. More than 400 small electric distribution cooperatives

use high voltage lines to provide retail electric service to their widely dispersed

rural consumers. These facilities have no impact on the transmission grid, and

should not be subject to expensive, unnecessary FERC regulation. We were disappointed to see, however, that the language of H.R. 2944 was not consistent with the discussion summary. Although the summary described an uncomplicated self-certification process to exempt these distribution cooperatives from

FERC jurisdiction, H.R. 2944 subjects these small distribution cooperatives to a

complicated and uncertain process that does not accomplish the Chairman’s goal. Congress should not use FERC regulation as a barrier to small cooperatives and new entrants into the market place. We believe it is possible to create a simple, inexpensive, exemption process that provides small distribution cooperatives with the

certainty they need. On this same issue, we were concerned that both the discussion summary and the bill language would authorize FERC to review mergers between cooperatives. In previous testimony before this Committee and the House Judiciary Committee, NRECA has expressed concern that mega-mergers in the electric utility industry

could lead to undue market concentration that would harm competition, reduce the

quality of electric service, and raise prices for consumers. For that reason, we welcomed the bill’s restoration of FERC authority to review public utility mergers. And,

as I discuss in the second section of this testimony, below, we are concerned that

the bill still unduly restricts FERC’s ability to review these mega mergers. At the same time, however, we are concerned that the bill also requires cooperatives to obtain FERC approval before they can merge. I want to emphasize the unnecessary burden that this provision imposes on electric cooperatives and their

member-consumers without providing any benefit to the objectives of the legislation.

Of course, we recognize the Committee’s wish for a uniform approach to merger

review, but there are legitimate differences that the Committee needs to recognize

between mega mergers that could harm the development of competition for electric

energy and mergers between small, member-owned electric cooperatives.

First, because of their small size and member-focus, mergers between cooperatives

simply do not have the same impact on the competitive market as do mergers between large investor-owned utilities. If all of the generation and transmission cooperatives were merged into one national entity, that entity would not be as large

as AEP—American Electric Power.

Moreover, cooperatives are selling most of the power they produce to their own

members because they were formed to bring their members a reliable, affordable

source of power, not to speculate in open markets or to make a profit. Even if they

wanted to get involved in the open market, most generation and transmission cooperatives could not. Nationally, generation and transmission organizations generate only about half of the electricity required by their member systems. They do

not have the uncommitted or merchant power supplies required to become major

players in energy markets.

Second, mergers between cooperatives are also already subject to extensive review. Any merger of electric cooperatives requires the approval of their memberowners. And, any merger involving a cooperative with outstanding Rural Utilities

Service (RUS) financing is subject to comprehensive review by RUS.

Instead of protecting the public interest, FERC review of cooperative mergers only

makes it more difficult for cooperatives to meet their obligation to meet the power

supply needs of their member consumers at the lowest possible cost. And, because

of their small size, there are times when cooperatives can operate more efficiently,

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acquire power at lower costs and reduce market risks for their members by joining

with their neighboring cooperatives. Congress should be encouraging consumer-owned electric cooperatives to work to- gether to provide better service for their member-consumers, not subjecting them to

new regulatory burdens. We would like to work with the Committee to draft an exemption from FERC

merger review for those cooperatives that are small, sell power primarily to their

own members and other cooperatives, or are already subject to federal merger review.

The second issue I want to raise today is the need for Congress to provide some consistency with respect to the non-electric businesses in which sellers of electric energy can engage. Today, investor-owned utilities, municipal utilities, electric cooperatives, power marketers, and other participants in the retail electric market are subject to different limitations on their ability to participate in the market for non-electric products and services. Those differences are unbalancing the playing field in the electric

energy market and increasing costs for consumers. More and more, competitors in the electric energy market will be attracting con- sumers by offering packages of products and services. Consumers may be buying

their electric energy, their natural gas or propane, their cable television, and their

local telephone service from the same company. If one class of participants in the electric energy industry is denied the right to offer services that other participants can offer, it will be unable to meet the needs

of consumers interested in packaged offers. So limited, that class of participants will

be at a distinct disadvantage. We would like to work with the Committee to draft language that would ensure that all participants in the electric energy industry are on an equal footing. Such

language would not give sellers or distributors of electric energy the right to sell

any particular product or say that states have to allow any seller or distributor of

electric energy the right to sell any other product or service. All it would say is that

states have to treat all providers equally. This language is particularly important if Congress chooses to repeal PUHCA. Proponents of PUHCA repeal have argued that it makes no sense to impose artificial restrictions on the lines of business that certain utilities can engage in based

solely on the form of those utilities’’ corporate structure. That logic applies here as

well.

Now, you are probably already hearing from some who are pressing for restric- tions on cooperatives. In recent weeks, for example, a number of propane gas

spokesmen and their hired Washington-based lobbyists have circulated misrepresentations on Capitol Hill, charging electric cooperatives with unfair competition in the

provision of propane service.

These spokesman claim that cooperatives utilize low-interest funding from the

Rural Utilities Service to set up propane companies that compete unfairly by selling

propane at ‘‘below market’’ prices, and that cooperatives are able to do so because

those propane operations are ‘‘cross-subsidized.’’

Let me put that notion to rest right here and now. Electric cooperatives may not,

by law, cross-subsidize a subsidiary organization, be it propane, provision of water

and sewer utility services, Internet access, satellite television service or home security services. All costs of subsidiaries are allocated to those subsidiaries or those

subsidiaries are operated with separate staff and facilities.

Electric cooperatives that enter the propane business generally enter because

their consumers request it or because existing small propane organizations approach

the cooperatives to take over the business. The resultant propane businesses operate

to recover costs, not profits, and their rates reflect that.

Some charge that cooperatives providing diversified services are able to compete

at an advantage because they ‘‘don’t pay taxes.’’ It is true that most cooperatives

pay no federal income taxes on their electric business because they are tax-exempt

companies and because they operate on a not-for-profit basis. But, when cooperatives engage in most diversified businesses, they must pay unrelated business income tax on any profit they make from those businesses. Moreover, if the cooperatives pass any revenue from those diversified businesses to their consumer-owners

as dividends, the cooperatives’’ members must pay income taxes on those dividends.

Further, cooperatives and their subsidiaries pay every other business, personal

property, transaction, sales, or other tax that every other business entity pays.

I just wanted to make that clear. Cooperatives are different from corporations and

proprietorships and partnerships in a number of ways: they are organized by and

for consumers; they operate as non-profit entities; their sole focus is the provision

of services to their consumers and responding to requests for services from those

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consumers. In the realm of state and local taxes, though, they are exactly the same

as every other business.

This is important to bear in mind in the restructuring of the electric utility industry. Because cooperatives are consumer-owned and consumer-driven organizations

with a history of success in providing services, consumers look to their cooperatives

to provide additional services necessary for the their communities. Limitations on

the ability of cooperatives to continue to provide these services, to provide services

that every other electric utility can provide is a restriction on the ability of consumers to provide for themselves.

The last issue I want to focus on today is the need for electric cooperatives to

work together to meet consumer needs.

Let me give you an example. In Georgia, electric cooperatives serve a number of

Kroger supermarkets. Kroger, for reasons of efficiency, wishes to receive one bill for

the electric service for all of its stores.

When Georgia moves to competition, a single large power marketer or investorowned utility could probably provide that service directly. It would have the geographic scope and resources to be able to do so. But it would not have any local

relationship with the individual Kroger stores or the communities in which they operate.

On the other hand, the several electric cooperatives now serving the Kroger markets do have that long standing relationship with the stores and their communities.

But, because more than one cooperative would have to work together to provide a

common service, they might not be able to provide that consolidated bill directly

without violating federal antitrust laws.

Instead, they would have to expend the resources to organize a joint venture specifically to provide that service. And even so, they could inadvertently violate federal

antitrust law.

Federal antitrust law was just not written with consumers or cooperative consumer organizations in mind, and the law sometimes gets in the way of common

sense. The kind of cooperation that could better serve consumers—in this case, both

Kroger and the cooperatives other members—was not contemplated by the law.

I recognize that this is not the jurisdiction of this Committee, but I also recognize

the Committee’s interest in all of the issues related to true competition in the electric utility industry. I’m not suggesting that cooperatives be exempt from antitrust

provisions. I am pointing out to the Committee that the competitive bar is higher

for small entities than it is for large, interstate and international utilities.

ADDITIONAL AREAS OF CONCERN

While the three issues emphasized above are NRECA’s key priorities, there are

a number of other issues in the bill that are of concern to electric cooperatives and

their members. As this bill moves through the legislative process, we intend to continue to work to address these issues. For the convenience of the Chairman and the

Committee, I’d like to discuss these matters sequentially as they appear in the bill,

rather than in any priority order.

Findings

H.R. 2944’s ninth finding states:

Federal programs to benefit rural consumers have succeeded, and rural America

has been electrified. However, rural America pays some of the highest electric

rates in the country. Competition will assure reliable, reasonably priced rural

electric service.

This finding is inaccurate. Rural America pays high electric rates because it costs

more per consumer to provide distribution service, not energy. To serve their members, rural utilities must string far more wire and cross far more rugged country

than the suburban and urban utilities. Rural electric cooperatives serve an average

of 5.76 consumers per mile of line. By contrast, investor-owned utilities average

34.85 consumers per mile of line and municipal utilities average 47.76 consumers

per mile of line.

Restructuring will only bring competition to sales of electric energy, not distribution or transmission. Thus, even if competition lowered energy costs, it would not

have any effect on distribution costs, the largest contributor to rural consumers’’

high energy costs.

There is also significant question whether restructuring will bring benefits to

rural consumers. A draft study by the Department of Agriculture, and studies completed by the American Gas Association, the Competition Policy Institute, and several universities have all found that competition could actually raise rates in rural

communities and largely rural states.

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Experience in states that have already restructured also cast doubt on this Find- ing. Pennsylvania has often been touted as the state whose electric restructuring

efforts have brought choice to the most consumers. To take advantage of that choice,

Pennsylvania’s electric cooperatives opened up their systems ahead of schedule to

allow every one of their members the right to choose his or her electric supplier.

Yet, there is not one alternative supplier of electric energy today willing to offer

competitive service to those cooperatives’’ members. The benefits of competition

have not reached Pennsylvania’s rural communities.

Regional Transmission Organizations

NRECA has several concerns with § 103 of the bill concerning regional trans- mission organizations (RTOs)

Mandatory Participation

NRECA has long been supportive of voluntary RTOs. As NRECA has stated in its comments on FERC’s Notice of Proposed Rulemaking on RTOs, NRECA believes

that properly designed RTOs can provide significant system benefits, increasing reliability and reducing the ability of transmission owners to exercise market power. Mandatory RTOs, however, as provided by H.R 2944, pose several risks to the re- liability of the system and to the healthy operation of energy markets. We hear from

our members that the only thing worse than no RTO is a bad RTO. An RTO put

together too fast, without full agreement of all industry participants and without

adequate review from FERC is a prescription for problems. A bad RTO can make

it easier for transmission owners to exercise market power, to favor their own generation, to restrict the flow of power across the RTO, or to raise transmission prices

unreasonably. By mandating the formation of RTOs at short notice, and by restricting FERC’s ability to regulate the structure, type or form of an RTO, the language

now in H.R. 2944 could make the formation of bad RTOs far more likely.

Independence

We are pleased that the standards for regional transmission organizations in

§ 103 of the bill require RTOs to be independent of all market participants. We are

concerned, however, that H.R. 2944 requires FERC to accept as ‘‘independent’’ RTO

structures that we believe could continue to allow large utilities to exercise undue

control over their transmission facilities. That could require FERC to accept RTOs

that retain, or even exacerbate, existing problems with reliability and market

power.

Moreover, pursuant to its Notice of Proposed Rulemaking on RTOs, FERC is currently holding a public process to develop appropriate standards for RTOs. All interested parties, including utilities, consumers and even Wall Street, are now filing

comments and reply comments with FERC. Among other issues addressed in those

comments is the appropriate definition of ‘‘independence.’’ H.R. 2944’s definition prejudges that process and imposes its own definition in the absence of a public process.

We would like to see the definition of ‘‘independence’’ deleted from § 103 of the

bill.

Incentive Pricing

We have a similar concern with respect to the subsection in the bill addressing

‘‘Incentive Transmission Pricing Policies.’’ That section requires FERC to encourage

incentive transmission pricing policies for RTOs. As with the issue of ‘‘independence,’’ appropriate pricing policies for RTOs is currently subject to public debate at

FERC. The issue has arisen not only in the context of the RTO Notice of Proposed

Rulemaking, but also in the context of at least one pending case on an individual

RTO’s rates.

Again, we think that H.R. 2944’s provision has inappropriately pre-judged the

proper result of an ongoing public process. We would like to see the standards in

this section made voluntary for FERC so that FERC is free, when it has completed

its current investigation, to apply the rule that it finds most likely to serve the public interest.

Electric Reliability

I would like to thank the Chairman and the Committee for including in H.R.

2944, with only minor amendments, the electric reliability language that was adopted by the NERC Board of Trustees. NRECA, and a coalition of other industry participants, believe that the language adopted by the NERC Board comprises the best

option now possible to provide for the continued reliability of the bulk power system.

Rather than express concerns with the language in the bill, I would instead ask

the Committee to resist requests to further amend the language. There are those

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who oppose certain aspects of the language, or who would like a greater say in the

operation of the electric reliability entity or the bulk power system than the language allows, and NRECA and the coalition are continuing to talk to those interests

to see if a compromise can be worked out.

We respectfully request that the Committee not make further changes to the reli- ability language until that group can reach agreement. Otherwise, the fragile consensus that has developed within the industry on the NERC language could dissipate, and result in failure to enact much needed legislation to preserve reliability.

Mergers

As I mentioned in the main part of my testimony, NRECA is very pleased that H.R. 2944 restores FERC merger review. As I have testified to before this Committee and the House Judiciary Committee, unfettered mega-mergers in the electric

utility industry pose a significant threat to the development of competition in the

industry. Unfortunately, while H.R. 2944 does restore FERC merger review, it also appears to reduce the opportunity for public scrutiny of mergers and to hamper FERC’s ability to protect the public interest. First, H.R. 2944 replaces the current hearing process with a simple comment pe- riod. By doing so, H.R. 2944 reduces the transparency of the merger review process

and denies FERC and the public the access to information they need to properly

evaluate the potential competitive impact of the proposed merger. Second, H.R. 2944 also establishes strict deadlines that would hamper FERC’s

ability to thoroughly review large utility mergers. Some of these mergers involve

international companies with hundreds of subsidiaries and affiliates, billions of dollars of assets in a dozen or more states, and millions of consumers. The time limits

imposed by H.R. 2944 would not give FERC sufficient time to evaluate the impact

that such mergers would have on the $220+ billion electric industry. NRECA continues to believe that it is in the public and consumer interest for

FERC to have full authority to conduct a public review of mega-mergers between

public utilities that could eliminate or limit competition in the marketplace.

The Committee should understand that electric cooperatives do not oppose all utility mergers. Mergers can be a legitimate business strategy to respond to changing

markets and changing market conditions. Since 1996, FERC has given its blessing

to approximately 30 utility mergers and many more are pending. NRECA has requested hearings in only two of those proceedings. In fact, NRECA has supported the application of loosened review requirements for

mergers between smaller entities that could increase competition in the market

place by creating a new company that can compete more effectively without being

large enough itself to exercise market power. NRECA would be happy to work with the Committee and Congress to develop lan- guage that would achieve the proper balance between protection of the public interest and the encouragement of efficiency in the industry.

Public Utility Holding Company Act of 1935

As I have said in previous testimony, NRECA believes that it is a mistake to re- peal the Public Utility Holding Company Act of 1935 (PUHCA). PUHCA protects

both electric consumers and competition in the electric utility industry by helping

to ensure that public utilities do not grow too large or complex to be effectively regulated.

If the Committee nevertheless intends to go forward with PUHCA repeal, NRECA strongly urges the Committee to consider the approach taken in the bill sponsored

this Congress by Representatives Steve Largent (R-OK) and Ed Markey (D-MA),

which takes a sensible approach. Their proposal would repeal the consumer protections in PUHCA only for those utilities that operate in states where competition has

already been implemented. That approach would provide competition a better

chance to put down roots and start to grow before any public utilities were freed

from PUHCA’s protective provisions.

Interconnection

NRECA recognizes that the development of new distributed generation tech- nologies and the interconnection of such facilities to the grid are increasingly important. Cooperatives have made extensive use of existing distributed generation technologies and have been actively working to study new distributed generation technologies and to develop new applications where distributed generation can improve

reliability and lower costs for consumers.

Cooperatives have also been involved in parallel efforts to develop standards for

the interconnection of distributed generation technologies with the grid. One is

being conducted by the Institute of Electrical and Electronic Engineers and the

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United States Department of Energy (DOE). The other is being conducted by the

National Association of Regulatory Utility Commissioners (NARUC) and is funded

by the DOE. Just this week, NRECA submitted comments on a Draft Report to

NARUC on interconnection issues.

Nevertheless, NRECA is concerned that the substantive provisions of § 542 of H.R.

2944 could impose unnecessary costs on electric utilities and their consumers. Moreover, the section’s requirement that FERC develop interconnection standards is

probably premature. It would likely preempt the efforts now pending before the Institute of Electrical and Electronic Engineers and NARUC, and the tight deadline

could require FERC to act before it or the industry fully understands the effects

that developing distributed generation technologies will have on the safety and reliability of the interconnected grid.

Other PMAs

NRECA is concerned that § 632 of H.R. 2944, ‘‘Wholesale Power Sales By Federal

Power Marketing Administrations,’’ gives FERC the unnecessary and inappropriate

authority to change rates set by the power marketing administrations.

Today, the PMAs are required to set their rates to recover their costs, as those

costs are defined by Congress. They propose their rates to the Secretary of Energy

who then submits them to FERC for review. Because the PMAs rates must be set

according to very specific statutory requirements, FERC does not today have the authority to modify the PMAs rates. Instead, if FERC is concerned about something

in the rates, it can only reject the rates and remand them to the PMAs. That ensures that the final development of the rate is set by the regulatory entity most familiar with the costs that have been recovered and the statutory mandates with regard to the rates.

We would like to see all of § 632 deleted.

Net Metering

Section 702 of H.R. 2944 requires retail electric providers to make net meters

available to consumers that have installed eligible on-site generating facilities.

NRECA believes that net metering imposes an unreasonable obligation on electric

consumers to subsidize those who install self-generation.

The policies require utilities to pay consumers retail price for wholesale power.

That is an even higher subsidy than the ‘‘avoided cost’’ price provided by PURPA.

The policies also require utilities to pay high costs for what is generally low-value

power. Power from wind and photovoltaic systems is intermittent, cannot be scheduled or dispatched reliably to meet system requirements, and is expensive to integrate into the system.

Further, net meters cause customers to under pay the distribution and other fixed

costs they impose on the system. A utility has to install sufficient facilities to meet

the peak requirement of the consumer and recovers the costs of those facilities

through a kWh charge. When the net meter rolls backwards, it understates the total

kWh consumed by the customer, and thus under recovers the utility’s costs.

Finally, net meters can be deliberately or inadvertently ‘‘gamed.’’ Consumers with

self-generation can lean on the system by drawing power at times when it is expensive for the utility to provide it and then run down the meter by self-generating at

times when the utility does not need the power. That can be a problem with windmills particularly because wind is often calm in the hot times of day when system

demand peaks, and then picks up again in the cool evenings when system requirements are low.

Environmental

We are pleased that Section 701 of H.R. 2944 was revised from the discussion

draft to ensure that the Renewable Energy Production Incentive (REPI) program is

available only to not-for-profit electric cooperatives and municipally-owned entities

that generate electric energy for sale using solar, wind, biomass or thermal energy.

In addition, we applaud deletion in H.R. 2944 of a cap of $50 million through 2004,

which had appeared in the discussion draft.

Internal Revenue Code

While the 85/15 tax issue is addressed in H.R. 2944, it falls short of what is needed to address issues raised in a restructured electric utility marketplace. For example, the language fails to address revenue from unbundled electric activities (including metering, billing and service charges), revenues from asset sales, and revenue

from diversified businesses provided the business is operated on a cooperative basis.

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TECHNICAL ISSUES

In addition to the substantive issues discussed above, there are a few technical

fixes that need to be made to ensure that the language in the bill actually achieves

its intended purposes.

Public Purpose Charges

Section 101(d) of the bill provides that it does not affect the authority of a State

or municipality to require public purpose charges. The section serves an important

purpose, but appears to leave out some electric cooperatives.

There are three categories of electric utilities that may need to collect public purpose charges. The first—state-regulated electric utilities—includes all investorowned utilities and a few cooperative utilities that operate in states where they are

subject to state regulation of their rates. The second category is municipal utilities,

who are not regulated in most states. The third category is cooperatives who, like

municipal utilities, are not regulated in most states. Section 101(d) takes care of the

first two categories, but not the third: non-state regulated cooperatives.

We would be happy to suggest to the Committee a very simple fix to address this

oversight.

Definition of Transmitting Utility

Section 102(d) of the bill includes a new definition of transmitting utility. It has

been amended to include utilities that own transmission not used for wholesale

sales. In H.R. 2944, an additional parenthetical has been added at the end that has

not appeared in prior drafts: ‘‘(other than facilities subject to an order of the Commission under section 210 or 211).’’

That parenthetical appears to be a partial transposition of language in the definition of ‘‘public utility’’ that states ‘‘other than facilities subject to such jurisdiction

solely by reason of section 210, 211, or 212.’’

The parenthetical creates a cyclical definition problem. Sections 210 and 211

apply to transmission facilities owned by transmitting utilities. If ‘‘transmitting utility’’ does not include entities that own facilities subject to §§ 210 and 211, then there

are no transmitting utilities.

Reciprocity

Section 501 of the bill provides for retail reciprocity. It attempts to ensure that

any utility that seeks to compete for other utilities’’ consumers provides its own consumers with choice. In order to prevent efforts to bypass the reciprocity provision,

the bill also applies to entities affiliated with electric utilities.

NRECA believes that Congress should not have to mandate reciprocity requirements. A national mandate inappropriately imposes rules on those individual states

that believe their consumers interests are better preserved through open competition than through reciprocity requirements.

Rather than focus on the merits of a reciprocity requirements, however, I would

rather ask this Committee to make a technical fix to the section that should eliminate some unintended consequences of the bill.

As drafted, the provision applies to ‘‘affiliates,’’ but the term ‘‘affiliate’’ is not defined in the Federal Power Act. It is unclear, therefore, how the section will be applied. Depending on a court’s interpretation of ‘‘affiliate,’’ the provision could either

be too broad, or too narrow.

For example, under one definition of ‘‘affiliate,’’ it would only include two companies, one of which owns an interest in the other. Under this definition, ‘‘affiliate’’

would not apply to two companies with common ownership. A utility could therefore

evade the reciprocity requirements by creating a holding company and put power

marketing and distribution functions in two sister subsidiaries.

On the other hand, ‘‘affiliate’’ could be interpreted broadly to include any two companies that share significant interests, in each other, or in a third company. FERC

has adopted this interpretation of affiliate in certain contexts. Under this definition,

there is a risk that two cooperatives that each have an ownership interest in a common generation and transmission utility could be considered affiliates. If that happened, the reciprocity provision could prohibit a cooperative in one state from competing for consumers in that state because the cooperative’s G&T also served a cooperative in other states that had not moved to competition. The reciprocity provision

could apply even though the two distribution cooperatives involved had no ownership interest in each other and no common owners.

We would be happy to work with the Committee to insert a definition of ‘‘affiliate’’

that would eliminate the potential for over inclusiveness or under inclusiveness.

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CONCLUSION

Mr. Chairman, all of us harbor many concerns regarding the restructuring of this basic, essential, complex industry. The Committee and you—in particular—Mr.

Chairman, have been attentive and receptive to the concerns of 30 million electric

cooperative consumers.

This bill does not contain everything that electric cooperatives would like to see in a restructuring bill. We have outlined some of those concerns as an attachment

to my testimony. We will continue to work with the Committee and with the Congress to ensure that electric cooperative concerns are met. That is how the legislative process works. Given the discussions that we have had with you, Mr. Chairman, and with the Committee, we are confident that some of these concerns will

be worked out, and that the intentions of the discussion summary will be clarified

in final bill language, and on the basis of that, electric cooperatives do not object

to moving this bill forward. It is, of course, possible that proposals to change this legislation will make parts of it totally unacceptable to electric cooperatives, and in that case, we would have

to oppose those changes and, possibly, the legislation. Again, that’s the way the legislative process works.

I appreciate the opportunity to discuss H. R. 2944 and these very important mat- ters with the Committee today. Electric cooperatives will continue to be available

to the Committee to bring true competition to the electric utility industry and to

ensure that the benefits of that competition flow equitably to all electric consumers. I would be happy to answer any questions.

Mr. BARTON. Thank you, Mr. English. We now want to hear from Mr. David Hawkins, who is the director of air and energy programs at the Natural Resources Defense

Council.

Your statement is in the record in its entirety, and we would rec- ognize you for 6 minutes to summarize.

STATEMENT OF DAVID G. HAWKINS

Mr. HAWKINS. Thank you, Mr. Chairman. I would like to make two points this morning. The first is that we have a huge remaining air pollution problem from electric generating in this country, and the second is that we should address

that problem as part of a restructuring program.

First, the nature of the air pollution problem. Contrary to expectations some 30 years ago when Congress first expressed itself on

controlling pollution from electric generation and their sources,

many existing power plants that were in operation 30 years ago are

still in operation, and they are still operating under outmoded pollution control rules and not meeting modern environmental performance standards, and yet they are competing against facilities

that are required to meet modern environmental performance

standards—in our view, competing unfairly.

But first the environmental issue. The electric generating industry, as a result of these policies, these flawed policies, is the single

largest sector that is responsible for some of the most pervasive remaining air quality problems in this country.

Electric generating is responsible for over two-thirds of the Nation’s sulfur dioxide emissions, and around a third of nitrogen oxides, mercury, and carbon dioxide.

Now, these pollutants are responsible for what we call a Pandora’s Box of health and environmental harm. They are responsible

for fine particles that contributes to tens of thousands of premature

deaths in the U.S. each year; smog that plagues our major cities

and causes respiratory attacks in children and in seniors; acid rain

that still damages lakes, streams, forests, and monuments; regional

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haze that spoils trips every year for millions of people who visit our

national parks; nitrogen emissions that help over-fertilize productive estuaries, including the Chesapeake Bay, Long Island Sound,

Pamlico Sound, and Pamlico Sound, and the Gulf of Mexico, leading to dead zones where aquatic life perishes; and mercury contamination of lakes and streams that has led over 40 States to

issue continuing advisories against the consumption of fish that

store this toxin; and, finally, carbon dioxide—the pollutant that you

cannot get away from—carbon-dioxide-driven climate change that

threatens to create disruptive weather patterns and sea level rise

that modern human civilization simply have never experienced.

The second point is: why address these issues now?

First, delaying addressing these issues is not going to make Congress’ job any easier. These issues will have to be addressed, and

they will not get easier by simply trying to brush them away right

now. What it would do is increase the environmental damage associated with delay, and also prolong uncertainty.

Second, a failure to address today’s balkanized emission rules

will leave in place an industry structure where fair competition is

simply not possible.

Today, the amount of pollution resulting from producing a megawatt hour of electricity varies widely from State to State. Nitrogen

oxide emissions in States range from below two pounds per megawatt hour to over eight pounds per megawatt hour. Sulfur dioxide

emissions range from below four pounds per megawatt hour produced to a high of over 20 pounds per megawatt hour.

Now, these policies are a direct result of the patchwork of regulations that, in effect, operate as a subsidy to dirtier generators.

Because all markets are connected by wires, different pollution

standards promote a survival of the filthiest market, where plants

that are the dirtiest bid power at the cheapest prices and are able

to increase their market share.

But these market distortions really do not deliver large consumer

benefits. The price differences caused by different pollution requirements are quite small, usually on the order of 2 to 3 mills per kilowatt hour or less. But these small differences in a competitive marketplace are enough to give dirtier producers a decisive market advantage in many areas.

A generation performance standard would be a reform that

would create a level playing field for generators. The standard

would define the amount of pollution that could legally be emitted

for a kilowatt hour of electricity and would treat all players fairly,

and it would directly reward cleaner, more-efficient generators and

remove the subsidy that current policy provides to dirtier ones.

Congressman Pallone’s Fair Energy Competition Act, H.R. 2569,

contains such an approach and we support it.

A final benefit of setting the environmental ground rules for this

industry is that it would provide a clear road map for business in

planning long-term investments. The history of the clean air program has developed as a series of unconnected initiatives, typically

focused on a single pollutant. Today, we can look over the next 10

to 15 years and realize there will be a number of additional environmental problems that will have to be addressed. But if we pursue the traditional approach, no one can say with certainty which

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pollutants will be addressed first, how deep the reductions will be,

and in what order the steps will occur.

As a result, business planners today must approach their invest- ments by making educated guesses about future environmental requirements.

Billions of dollars are changing hands as generation plants are sold under State restructuring programs. One thing we can say for

sure is someone is guessing wrong. By enacting integrated cleanup programs, Congress could provide both certainty and reduce the tendency to prolong dependence on

existing, outmoded plants through the traditional process of applying end-of-the-pipe cleanup devices normally aimed at controlling

only one pollutant. Now, the chairman and the ranking member’s State, Texas, has recognized the value of addressing both of these issues together,

and recently enacted legislation in Texas has addressed air pollution directions as part of a cleanup program. We commend that example to the committee, but point out that no State can solve its

problems alone; hence, the need for Federal policy. Thank you.

[The prepared statement of David G. Hawkins follows:]

PREPARED STATEMENT OF DAVID G. HAWKINS, DIRECTOR, AIR & ENERGY PROGRAMS, NATURAL RESOURCES DEFENSE COUNCIL

ELECTRICITY GENERATION AND AIR POLLUTION

Today, electric generation imposes an enormous burden of air pollution on the American public and the great bulk of that pollution comes from plants that are not

required by federal, state, or local policy to meet technically feasible, affordable

modern environmental performance standards. This policy failure stems from decisions made in Congress nearly thirty years ago. In the 1970 Clean Air Act Congress required that all new powerplants and other large pollution sources be designed to minimize air pollution using state-of-the-art

techniques. But the Act exempted existing plants from this performance requirement. Instead existing plants, if controlled at all, were required to clean up only to

the degree needed to address local air quality problems.

There were several reasons for this approach. First, most air quality problems

were perceived as local. Second, at the time, the electric power industry was mostly

a local one. Third, the exemption was assumed to be temporary—Congress believed

existing plants would retire and be replaced by new ones meeting modern performance standards.

Now, nearly 30 years later, we know that the facts on the ground have changed.

We know now that many of our most threatening air pollution problems are not

local—they are regional, national, and even global. Our electric generating industry

is rapidly becoming a national industry with all parts of the country connected by

wires over which the product can move anywhere in the lower 48 states. And those

powerplants that were supposed to retire have kept on running like the Energizer

Bunny. As a result, pollution from electric power generation is a dominant cause

of nearly all our most pressing air quality related problems.

Four pollutants cause a host of public health and environmental damage: sulfur

dioxide, nitrogen oxides, mercury, and the pollutant no one can get away from, carbon dioxide, the dominant greenhouse gas. Electric generation in the U.S. is the

largest single source of these four horsemen of air pollution. Electric powerplants

release over 2

⁄3 of total U.S. emissions of sulfur dioxide, and over 1⁄3 of each of the

other three pollutants. These pollutants are responsible for a Pandora’s box of

health and environmental harm:

• fine particles, that contribute to tens of thousands of premature deaths in the

U.S. each year;

• smog that plagues our major cities, and causes respiratory attacks in kids and

seniors;

• acid rain, that still damages lakes, streams, forests, and monuments;

• regional haze, that spoils trips to national parks for millions of visitors annually;

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• nitrogen emissions that help over-fertilize estuaries, including the Chesapeake

Bay, Long Island Sound, Pamlico Sound, and the Gulf of Mexico, leading to

dead zones where aquatic life perishes;

• mercury contamination of lakes and streams that has lead 40 states to issue continuing advisories of the fish that store this toxin;

• and, carbon dioxide driven climate change, that threatens to create disruptive

weather patterns and sea-level rise that modern human civilizations have never

experienced.

This plague of pollution problems is a product of the grandfather loopholes in current federal law that allow 30, 40 and 50-year plants to keep operating without

meeting modern performance standards. The patchwork of lenient or nonexistent

rules at the state and local level has created pollution havens where grandfathered

plants can engage in domestic environmental dumping, distorting fair energy markets.

As we move to modernize the electricity market economically, we must accompany

it with modern environmental performance measures. A central purpose of electric

industry restructuring legislation is to create a free and fair, competitive market for

energy services. But fair competition is impossible in an environment where air pollution performance requirements are balkanized. Because all markets are connected

by wires, different pollution standards promotes a ‘‘survival of the filthiest’’ market,

where plants that are the dirtiest bid power at the cheapest prices and increase

their market share.

These market distortions do not deliver consumer benefits. The price differences

caused by different pollution requirements are quite small—usually 2-3 mills per

kilowatt-hour or less—but these small differences are enough to give dirtier producers a decisive market advantage in many areas. The market distortions also discourage investment in new, cleaner, more efficient generation and in renewable resources.

Under the current rules, an entrepreneur who seeks financing for, say, a clean,

high-efficiency natural gas plant can point out that it emits no sulfur, no mercury,

and much less nitrogen oxides (NOX) and carbon dioxide (CO2) than the competition.

But, with the partial exception of sulfur (for which allowance programs exist under

the acid rain law), this superior environmental performance has no economic value

in the market place. The financier wants to know whether the plant will be able

to run more cheaply than the competition. If the competition is a group of grandfathered coal-fired powerplants, the answer often will be no and the new plant may

not be financed.

To address the egregious health, environmental, and economic flaws in the current air pollution control programs a number of bills have been introduced in Congress. Notable examples include Congressman Pallone’s ‘‘Fair Energy Competition

Act of 1999’’ (H.R. 2569), and the Waxman-Boehlert ‘‘Clean Smokestacks Act’’ (H.R.

2900). These bills establish industry-wide caps on tons of each of the ‘‘four-horsemen’’ pollutants: sulfur dioxide (SOX), NOX, CO2, and mercury. The caps on SOX

and NOX would provide building blocks for meeting health-based smog and fine particle standards and would reduce acid rain further. The mercury cap would attack

the largest single remaining U.S. source of this pollutant. And the CO2 cap would

return emissions to 1990 levels—the target set in the 1992 Rio Climate Treaty that

the U.S. has ratified.

With the exception of mercury, for which there are both local and regional concerns, these bills would implement the cap through a marketable permit program

where power generators could trade their clean-up obligations to meet the caps in

the most efficient manner. A ‘‘generation performance standard’’ would create a

level playing field for generators—the standard would define the amount of pollution that could be legally emitted for a kilowatt-hour of electricity. This system will

directly reward cleaner, more efficient generators.

In contrast to the current situation, if these bills were law, a developer of a new

clean powerplant would be able to show direct tangible economic benefits from its

reduced environmental impact. Because the new plant would be able to generate

electricity below the law’s ‘‘generation performance standards,’’ for every kilowatthour sold, the plant would produce another profit-making product: emission allowances that can be banked or sold on the market. This additional revenue stream

would make financing such projects that much more attractive.

A final benefit of these integrated pollution cleanup bills is that they provide a

clear roadmap for business in planning long-term investments. The history of clean

air progress has developed as a series of unconnected initiatives, typically focused

on a single pollutant. Today we can survey the next 10-15 years and be confident

that additional measures will be pursued to reduce the four horsemen pollutants.

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But if we pursue the traditional approach, no one can say now with confidence,

when, how deep, and in what order these important steps will occur.

As a result business planners must approach today’s investments by making edu- cated guesses about environmental requirements. Billions of dollars are changing

hands as generation plants are sold under state restructuring programs. One thing

we can say for sure is that someone is guessing wrong. By enacting integrated

cleanup programs Congress could both provide certainty and reduce the tendency

to prolong dependence on existing outmoded plants through the traditional process

of applying end-of-pipe cleanup devices normally aimed at controlling only one pollutant.

In short, we know we need to reduce a range of damaging pollutants from the electric generating sector; we know how to do it; and we know that failure to take

these steps as part of restructuring legislation will increase damage, prolong uncertainty, and encourge unfair competition. Mr. Chairman, your committee has jurisdiction over both the economic and environmental performance of this industry. We

urge you and your colleagues to avoid an arbitrary separation of these interdependent issues. Instead we hope you will seize the opportunity to demonstrate

that Congress can address the key issues that face the industry and the public in

a manner that produces a cleaner, more efficient, more sustainable, and more competitive industry that delivers energy services for lower costs.

Mr. BARTON. Thank you very much. Next we will hear from the final member of this panel, Mr. Rao,

president of Indiana Municipal Power Agency. Welcome. Your full testimony has been submitted for the record, if you would summarize. You have 6 minutes.

STATEMENT OF RAJESHWAR RAO

Mr. RAO. Thank you, Mr. Chairman and members of the committee.

My name is Rajeshwar Rao. I am the president of the Indiana Municipal Power Agency. IMPA is a political subdivision of the State of Indiana, created

in 1980 to allow its 31 municipal members serving 250,000 people

to jointly finance, develop, own, and operate electric generation,

transmission, and local facilities in Indiana.

We are relatively unique because we own $50 million worth of transmission facilities that make us jointly own Cinergy’s transmission grid, and also obtain transmission from others to meet the

needs of our members.

I am here today to testify on behalf of the Transmission Access Policy Study Group. TAPS is an informal association of transmission-dependent utilities in 29 States created to promote open,

equal, nondiscriminatory access to the Nation’s electric transmission grid. IMPA and other TAPS members have been buying and selling

electricity in wholesale markets for more than 20 years. We know

from first-hand experience that merely declaring that there should

be competition and open access does not make it so.

After decades of operating particularly integrated monopolies,

the industry will not magically transform into one characterized by

vigorous competition without decisive action from Congress to restructure the industry for competition.

TAPS believes that Federal restructuring legislation is needed to

make retail competition work for consumers. However, if we are serious about electric competition, it is absolutely critical that we get

the basic structure right and provide the tools needed to ensure

that Federal legislation achieves its promise of true and fair competition in the electric power marketplace. Only then we can enVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00219 Fmt 6601 Sfmt 6602 E:\HEARINGS\60356 txed02 PsN: txed02
216

sure that restructuring will lead to lower prices for all consumers

across the Nation.

Basic concerns about how H.R. 2944 fails to meet and fully address transmission market power are covered in my written statement, and in the oral statement of APPA and CFC, also. But I

want to use my time to answer important questions which were

asked yesterday.

There are several questions I can answer with real-life examples.

I will try to cover some of them in my 5 minutes, but would like

to share the other examples later if time permits.

Question one: are RTOs needed? Absolutely. You will not get

competition without it. For example, TAPS members, Oklahoma

Municipal Power Authority, have been trying to purchase 15

megawatts from Duke Energy Trading and Marketing for the summer of 2000. Although Duke requested transmission from a competitor nearly a year ago, the competitor has refused to answer,

stating only that transmission of this small amount of power is

under study.

There is no way to know if this is a stall because there really

is not a mere 15 megawatts of transmission capacity available, or,

on such a huge system, whether they are improperly holding the

capacity. We do not know.

Under these circumstances, it is not surprising in this situation,

where transmission limitations preclude access, OMPA received

only seven responses, most of which were transmission contingent

to its recent RFP which it sent to 100 suppliers. With an RTO, the

transmission decisions that are critical to competition would be

made by the independent RTO, assuring they will be non-biased.

Rather than re-regulation, RTOs are an essential step toward the

more lightened FERC regulation.

Next question: will voluntary RTOs work? No. Transmission

owners will not voluntarily relinquish their current ability to use

their ownership and control of transmission to prefer their own

generation. For example, TAPS member Florida Municipal Power

Agency has worked hard to get most of the market participants in

the State, including the co-ops, power marketers, the developers of

big power, utility and board to support creation of some form of

RTO. However, these efforts are currently at stalemate by the opposition of the two largest utilities, who control 90 percent of the

transmission in the State.

If utilities can join and shape their own RTOs, will that work?

No. To do their job in promoting competition, RTOs must be large

and rationally configured, not configured to increase the market

power of participating utilities.

For example, I have a picture here showing the midwest and connecting to the east coast. AEP, back in the map, is located in the

Ohio/Indiana/Virginia area. They tried to negotiate participation in

the midwest ISO, the blue section, but after some time, after about

a year, they said that they would rather form their own Alliance

RTO and created a barrier.

I want to give you some examples of how AEP’s transmission is

a barrier to Cinergy. BOTH AEP and Cinergy have generation located in the Ohio valley where there is surplus power.

217

It is cheaper to transmit electricity to the white section, but, on the other hand, by creating a barrier, AEP differentiated the generation facilities owned by Cinergy and AEP, making Cinergy generation facilities more expensive than AEP generation facilities. Since the red light is on, I am going to stop here, but I have sev- eral true, real-life examples of market power in both generation

and transmission. I will respond to questions later.

Thank you, Mr. Chairman.

[The prepared statement of Rajeshwar Rao follows:]

PREPARED STATEMENT OF RAJESHWAR RAO, PRESIDENT, INDIANA MUNICIPAL POWER

AGENCY ON BEHALF OF TRANSMISSION ACCESS POLICY STUDY GROUP

Good morning, Mr. Chairman and Members of the Subcommittee. My name is Rajeshwar Rao. I am President of the Indiana Municipal Power Agency (IMPA).

IMPA is a political subdivision of the state of Indiana created in 1980 to allow its

31 municipal members to jointly finance, develop, own and operate electric generation, transmission, and local facilities to provide for their electricity needs. IMPA’s

31 member municipalities currently serve approximately 250,000 people. IMPA is relatively unique because we are both a transmission owner and a trans- mission dependent utility. IMPA has invested some $50 million in transmission facilities that are part of a Joint Transmission System in Indiana, through which we

have rights over the entire Cinergy transmission system. At the same time, IMPA

is a transmission dependent utility with respect to access for our member municipal

systems connected to the AEP transmission grid, and access to our ownership share

of a Louisville Gas & Electric generation facility in Kentucky. Because of this dual role, IMPA is keenly sensitive to the importance of estab- lishing a transmission system that is open, fair and non-discriminatory. As a result,

we have been aggressive advocates of establishing fully independent Regional

Transmission Organizations (RTOs) that are fair to both transmission owners and

transmission users. Nothing short of a totally ‘‘color blind’’ RTO that treats all

transmission owners and users the same, regardless of who owns particular transmission facilities, will succeed in achieving Congress’s goal of establishing a truly

competitive market place for electricity.

I am here today to testify on behalf of the Transmission Access Policy Study

Group (TAPS). TAPS is an informal association of transmission dependent utilities

and other supporters in 29 states created to promote open, equal, non-discriminatory access to the nation’s transmission grids. IMPA, like the other municipal, cooperative and investor-owned utilities, and municipal joint action agencies that are

members of TAPS, must depend on the use of transmission systems of large

vertically-integrated utilities in order to reach alternative sources of power supply

for our consumers. TAPS members have been active in wholesale markets for some

20 years, and have been on the ‘‘bleeding edge’’ of efforts to obtain transmission

service, open access, and RTOs. We know from first hand experience that, given the

crucial role of transmission and the current industry structure, merely declaring

there to be choice will not magically transform the electric industry to one where

the price of generation is determined by the invisible hand of vigorous competition.

TAPS has concluded that the only way to get to a competitive electricity industry

is by restructuring the industry to provide the transmission and market structure

needed to allow competitive forces to work. We believe federal legislation is needed

to achieve this critical objective, but it must be the right legislation. If the Chairman and the Subcommittee are serious about electricity competition, we need to

work together to get the basic structure right, and to provide tools to ensure that

the intended transformation stays on course. Watered-down or halfway measures

simply won’t work. Compromise on the key issues of industry structure will do far

more harm than good.

The proposed Electric Competition and Reliability Bill, H.R. 2944, describes its

purpose as ‘‘benefit[ting] American electric consumers through lower electric rates,

higher quality services, and a more robust United States economy by encouraging

retail and wholesale competition in electric markets . . .’’ TAPS shares the Chairman’s goals. However, TAPS is concerned that H.R. 2944 will not achieve this purpose. Indeed, provisions of the bill appear likely to induce precisely the opposite effect: strengthening the grip of monopolists, and exposing consumers to electricity

prices disciplined by neither the competitive market nor regulation.

Specifically, TAPS believes the bill fails to provide the transmission and market

structure needed to support competitive wholesale and retail markets. We urge the

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Subcommittee to amend H.R. 2944 to ensure that the bill serves its pro-competitive

purposes.

With regard to transmission, the Subcommittee should:

1. Grant FERC the authority to require, without delay, participation in truly inde- pendent and rationally configured large, regional transmission organizations; 2. Prevent transmission owners from evading inclusion of facilities in RTOs by cre- ative reclassification of high voltage transmission facilities to distribution; and 3. Place regulatory responsibility for transmission service clearly in FERC’s hands. With regard to generation market power, the Subcommittee should:

1. Empower FERC to take steps to remedy and prevent the exercise of market power and market manipulation; and

2. Eliminate or revise the proposed unworkable time limits on FERC merger review and clarify FERC’s authority to review mergers involving generation-only facilities.

TRANSMISSION

1. FERC needs authority to require strong, independent, broad regional RTOs.

H.R. 2944 correctly recognizes that the current regimen of control of transmission by individual vertically-integrated utilities must change to be compatible with competition, and that a regional transmission organization is the structure needed in

a competitive electric industry. While TAPS applauds the Chairman for recognizing

the need for RTOs, we are concerned that the proposed RTO provision is so compromised as to largely defeat the intended pro-competitive purposes. • Independence: RTOs are critical to removing control of the transmission facili- ties, which all competitors need to use to reach the market, from the hands of one

set of market participants that can use that control to favor themselves. Instead,

control of transmission should be placed in the hands of a competitively neutral,

independent body. The proposed legislation starts out by correctly recognizing that

RTOs ‘‘must be independent of all market participants, and no market participants

may exercise control over the operation of the [RTO].’’ However, it then compromises

the ‘‘bedrock’’ RTO concept of independence by expressly defining it to ignore retention of 10% of the voting shares and unlimited non-voting ‘‘passive’’ interests that

include rights to ‘‘participate in major corporate changes’’ to the RTO. Adoption of

such lax standards means that the RTO will never be fully independent of market

participants, leaving self-favoritism and undue discrimination a continuing and

ever-present threat. In an RTO with 5 participating transmission owners, each of

whom retained a 10% voting share, the transmission owners could hold a 50% voting interest. Instead of legislating plainly non-independent RTOs, the Sub- committee should insist on RTOs that achieve a clean structural break,

completely separating transmission control from generation interests. • Scope/pancaking: As FERC has recognized, RTOs can facilitate competition by ending the current system of balkanized markets, where an additional

‘‘pancaked’’ rate (or toll) must be paid whenever a transaction crosses the boundaries from one transmission owner to the next. In contrast, RTOs would permit competitors to sell their electricity goods throughout a broad regional market by payment of only a single ‘‘non-pancaked’’ charge. By expanding the market, RTOs can

increase the number of buyers and sellers that can transact with each other, enhancing competition and reducing market power. H.R. 2944 threatens to undermine

this critical RTO role by giving at least tacit approval to the concept of RTOs comprised of just a single utility, preventing FERC from requiring utilities to join an

RTO other than the one they propose (unless the bill’s standards are not met), and

permitting pancaked rates to continue for a ‘‘transition’’ period. Given the delayed

implementation of this provision, pancaked rates could well be in place during the

critical first years and indeed decade of retail competition, or not eliminated at all

in the case of single utility RTOs. Also lethal to competition are gerrymandered

RTOs designed by a group of vertically integrated transmission owners to enhance

their market power by creating barriers to competitors. H.R. 2944 seems to foster

such anticompetitive RTOs, rather than give FERC clear authority to ensure that

RTO boundaries are dictated by the scope of regional markets, not by individual

company desires to protect the value of its generation or achieve a competitive advantage. The Subcommittee should grant FERC express authority to require

participation in RTOs that have a large regional scope designed to facilitate competition and enhanced reliability, and to eliminate pancaked rates.

As noted by APPA, the statutory criteria will need to accommodate unique

characterizations and legal arguments of public power.

• Authority to require construction/incentives: The proposed legislation correctly acknowledges the RTO role in planning additions, but gives RTOs no role in

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requiring construction of grid expansions. Instead, the legislation endorses the use

of incentive rates to induce transmission owners to construct (as well as to join

RTOs). Bribing transmission owners is neither a necessary nor an appropriate

means to ensure the transmission infrastructure needed for competition. Indeed, the

costs associated with such inducements not only needlessly saddle consumers with

excessive costs, but undermine the competitive forces RTOs are intended to promote

by paying one group of competitors monopoly rents for their transmission. The best

way to induce construction is to fully separate transmission from generation interests, so decisions to expand are not influenced by how the expansion affects the

value of the transmission owner’s generation. Providing RTOs the authority to cause

needed construction by the transmission owner or others opens the doors to marketbased means to get the needed transmission constructed efficiently—by bidding out

construction to third parties. Instead of endorsing incentives, the Committee

should strengthen the RTO’s authority to require construction and enable

FERC to evaluate the best means to ensure prompt construction of needed

grid additions.

• Delayed implementation/incomplete remedies: H.R. 2944 as proposed puts

RTO formation on a slow track. Transmitting utilities need not join until January

1, 2003 and even that date may be postponed ‘‘pending any proceeding under this

section or Section 313,’’ the Federal Power Act’s judicial review section. A recalcitrant transmission owner can postpone for years the date when it must finally join

an RTO and relinquish its ability to use ownership and control of transmission to

benefit its generation sales. In the meantime, it can use its potent power to choke

off competitive retail markets in their infancy. The provision for ‘‘transitional’’

pancaked rates further removes from consumers the benefits RTOs are intended to

provide. The RTO provision is also weakened by the absence of clarity on key points,

such as what happens if a transmitting utility does not join an RTO, and what happens if FERC does not initially approve the proposed RTO or withdraws its approval. Particularly given FERC’s RTO Rulemaking, the legislation should

require prompt formation of RTOs, and give FERC the tools to demand adherence to the provision.

2. Provisions are needed to prevent transmission owners from evading inclusion of

facilities in RTOs.

The proposed legislation sets forth a seven-factor test for distinguishing transmission from distribution facilities, and requires FERC to give maximum deference

to a state’s determination. This provision lends itself to abuse that could result in

empty RTOs, thus gutting the interstate transmission infrastructure necessary to

support vigorous wholesale and retail competition. RTOs will not provide the needed

neutral infrastructure if transmission owners are allowed to create competitive barriers by restricting the facilities to be subject to RTOs. Given the regional nature

of RTOs, equity demands that there be consistency from state to state, utility to

utility, in defining the facilities subject to the RTO. Finally, removal of needed

transmission facilities from RTO control by artificial reclassification will impede the

RTO’s ability to reliably and efficiently operate the grid.

TAPS members have seen ‘‘7-factor test’’ filings being made around the country

as a means to escape FERC’s open and non-discriminatory access requirements, and

to retain effective control over transmission while ostensibly surrendering facilities

to an RTO. In one such filing, Wisconsin Public Service Company sought to reclassify to distribution all but 124 miles of its nearly 1500 miles of high voltage transmission lines now subject to FERC open access tariffs, leaving only 7 of its 33 interconnections with other utilities subject to FERC transmission regulation. Although

that filing was withdrawn in response to political pressure, others have followed the

same tactic. For example, Commonwealth Edison has refunctionalized 40% of its formerly transmission facilities (including 345 kV facilities) to distribution.

TAPS submits that these evasion tactics, which threaten to undermine the effectiveness of the RTO provision, as well as FERC open and non-discriminatory access

requirements, should be stopped. The bill should include a presumption, rebuttable

by clear and convincing evidence, that non-radial lines in excess of 60 kV be classified as transmission. Such a standard would be consistent with my experience regarding the typical function of non-radial facilities of such voltage.

2. FERC must be responsible for regulating interstate transmission.

For electricity competition to be successful, it is essential that FERC have authority to establish one set of rules for the use and operation of the nation’s interstate

transmission system. The Eighth Circuit, however, recently undermined FERC’s

ability to do so. The court ruled that states can set their own rules for the transmission of ‘‘bundled’’ retail sales (traditional retail sales where the price for power

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is ‘‘bundled’’ with the price of transmission and distribution services) and favor

these in-state users when there is insufficient transmission capacity. Northern

States Power v. FERC, 176 F.3d. 1090 (8th Cir. 1999).

Under NSP, each state can set its own rules for transmission of bundled retail

sales within that state, without regard to what other states do and without regard

to FERC’s rules, while FERC is limited to setting rules for wholesale and

‘‘unbundled’’ (choice) retail uses. No regulatory body would have authority to ensure

a coherent scheme for the use and allocation, among all users, of what is necessarily

the single transmission network. Think what pandemonium would occur if the interstate highways posted two sets of speed limits, one for in-state cars and the other for cars going out of state. Think

how many crashes would occur if the state established a different regime for preferred in-state cars to switch lanes—they need not look or signal, because they are

to be accorded priority. Imagine further that a state could establish a rule that if

there was congestion, in-state cars would be permitted to pass, while out-of-staters

would have to wait on the side of the road until the traffic subsided. Interstate commerce would plainly be impaired.

As we move toward competition on a state-by-state basis, it is essential that

FERC be authorized to establish a single scheme for use of the grid that does not

relegate use of the grid for wholesale sales or retail choice programs to second class

citizen status. Consumers will not switch suppliers if they cannot rely on obtaining

power. The absence of a clear, unified set of rules would also enable one state to

cripple choice programs in a neighboring state, by according in-state bundled sales

a higher priority than unbundled deliveries to its neighbors.

TAPS believes NSP to be wrongly decided under the current Federal Power Act,

which provides FERC authority, without limitation, over transmission in interstate

commerce. (We understand that FERC is considering seeking Supreme Court review.) The proposed bill, however, defines FERC jurisdiction as encompassing

wholesale and unbundled retail transmission, while carving out expanded state authority over transmission of bundled retail sales. In this way, the proposed bill legislates at best confusion, and at worst NSP’s absurd and counterproductive result.

TAPS urges that the bill recognize that there can be only one set of rules for all

users of the interstate transmission network, and those rules need to be set by

FERC.

GENERATION MARKET POWER

1. FERC should be empowered to take steps to remedy and prevent the exercise of

market power and market manipulation.

The structure and physics of the electric industry make it extremely challenging

to transform into a robustly competitive industry, where market forces rather than

regulation set generation prices. Not only do today’s vertically-integrated monopolists have the ability to use their vertical market power derived from owning and

controlling the transmission highways to foreclose others from competing to economically and reliably serve their load, but ownership of generation tends to be

highly concentrated within geographic markets. Electricity is an enormously complex networked industry, in which operation of generation affects transmission

availability for competitors and electricity must be produced at the same time as

customers need it because it typically cannot be stored. These characteristics create

many hidden opportunities to manipulate and control the market. Large incumbent

utilities, which dominate various markets as a result of their history as state sanctioned monopolists, are in a position to effectively foreclose competition.

Getting to real competition in a highly monopolistic industry with the complexities of electricity supply is a major undertaking. In the long run, properly structured, truly independent, large regional RTOs, which have the authority to plan and

implement necessary grid additions, can go a long way toward mitigating market

power concerns by expanding the market and eliminating constraints. However,

elimination of constraints will not happen overnight, or necessarily even in the first

decade after effective RTOs are up and running. Either due to the existence of

transmission constraints and natural geographic barriers, or due to the existence of

artificial barriers and walls created by vertically-integrated organizations, generation market power does exist within geographic regions of the country and will continue to exist, even with RTOs. FERC needs the authority to identify and impose

adequate remedies to correct such market power problems if there is to be effective

competition.

Thus, to ensure the competitive infrastructure needed for competition to flourish,

Congress will need to transform FERC from a price-setting agency to one with clear

and specific responsibility to ensure that interstate markets for electricity are and

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remain vigorously competitive for the benefit of all consumers. FERC needs explicit

authority to take whatever actions are necessary to remedy generation market

power problems that threaten emerging competitive markets, particularly in the

likely-to-be-lengthy transition period. This authority must include a variety of tools

that FERC can employ where necessary, including requiring the auction of capacity

for periods of at least four years; cost-based rates; public disclosure of information

(including transparent pricing); shared access to assets or services on a nondiscriminatory basis at reasonable rates; or, where other measures prove insufficient, divestiture of assets for fair value. Unfortunately, H.R. 2944 makes no effort to address

this critical structural issue.

Because of the interstate nature of the grid and emerging markets, individual states will be powerless to effectively address this problem. Given the technical complexity of the industry and its real time nature, this task will be best accomplished

by empowering FERC to meet its new responsibilities rather than relying on slow

and expensive antitrust litigation, at least through the transition to mature competitive markets. Indeed, the Department of Justice and the Federal Trade Commission have conceded that antitrust laws alone are not adequate to address pre-existing market power. Above and beyond FERC’s RTO and merger authority, the Subcommittee should grant FERC new authority to move quickly and decisively to

eliminate undue generation market power as it arises, and to impose stiff penalties

for market manipulation, in order to make such manipulation a very risky venture.

2. The proposed unworkable time limits on FERC merger review should be revised and FERC’s authority to review mergers involving generation facilities should be

clarified.

TAPS applauds the Chairman for maintaining FERC authority to review mergers, and abandoning the approach taken in the draft bill of stripping that critical authority from FERC. Given the potential for mergers to increase market concentration

and restrict competition at the time FERC and the Congress are attempting to promote wholesale and retail competition, preserving this important function is vital. TAPS is concerned, however, that the time limits proposed to be placed on FERC

review will nevertheless de facto deprive the public of effective FERC review of

mergers. Unlike the Department of Justice and the Federal Trade Commission,

FERC operates without the benefit of the powerful Hart-Scott-Rodino information

tools. In addition, FERC review is an open process, involving the public who can

provide real world experience that can assist in evaluating the merger. Granting

FERC merger authority, while depriving it of the time to gather and analyze the

information needed to meaningfully assess the likely impact of the merger on competition, is a bad compromise that threatens to undermine the competitive industry

structure the bill is intended to promote. Indeed, the time limits may well encourage

merger applicants to be slow to provide the Commission (much less intervenors)

with the essential information, cloaking it with claims of confidentiality and the

like.

TAPS recognizes that the Subcommittee may be concerned that the current sys- tem creates the potential for effective denial of mergers by delay. The answer, however, is not establishing unworkable time limits that negate FERC review of mergers with significant competitive consequences. Rather, an alternative approach

needs to be developed that affords FERC the opportunity to do its job well, while

respecting the reasonable needs of merger applicants. For example, the legislation

could require FERC to expedite approval of non-controversial mergers, and could

provide procedures, including information requirements for applicants, which will

help expedite the more difficult to analyze mergers. In addition, TAPS recommends that the Subcommittee clarify FERC’s jurisdiction over mergers of generation-only companies, to ensure FERC review of all mergers

and acquisitions that can affect the structure of the electric industry. The absence

of such clarification invites evasion of FERC authority. TAPS appreciates this opportunity to present its views on H.R. 2944 to the Subcommittee.

Mr. BARTON. Thank you, Mr. Rao. I will now recognize myself for 5 minutes, and maybe longer. And let me just say, as many of you have testified before and been here,

it is good for us to continue to move on. Most members have the

statements, so if some members missed your testimony, they will

get back for the opening comments, or at least for the questions,

but it is, I think, better for all of us as we keep moving on in the

hearing so that we can get to the second panel eventually.

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Let me start.

You know, I have heard from the Illinois Municipal Electric

Agency that generation market power, horizontal market power,

will be a problem in a deregulated electric industry. Some of you

have testified to that.

There are no market power provisions in H.R. 2944 other than

RTOs, because the hearing record seems to have made it clear that

they are not necessary, based upon our previous hearings.

When I asked the DOE witness yesterday about this issue, he

could not explain the problem.

Mr. Rao, in your written testimony, it also does not explain the

problem, although I think maybe you touched on it in some of your

questions and probably will have more real-life examples to share,

and so there is a frustration evident in my search for an answer.

Some people say there is a problem, but there is a refusal to explain technically how it becomes a problem, so I would like to ask

this question to Mr. Rao and Mr. Owens, to explain the problem

clearly and directly for the subcommittee and answer these questions directly.

Exactly why cannot RTOs mitigate horizontal market power?

And are there circumstances where generation market power exists

today?

Mr. Rao, why don’t we begin with you?

Mr. RAO. I have an example for the second part of the question,

and then I will go back to the first part of the question.

Generation market power is the ability of one or a few utilities

to increase the price above the level that would apply in a competitive market with many competitors.

The combination of high concentration levels resulting from development of this industry and State-sanctioned monopolies coupled with transmission limitations creates the situation where, in

many places in the country, there is clear market power, and utilities are willing to take steps to keep it that way.

To give you an example, Florida is a peninsula with high growth

load coming into the State. There is about 38,000 megawatts of

load at present in Florida, and only 3,600 megawatts of limited import capability, and there are two major utilities that own about 75

percent of generation to meet that load.

Recently, one of the subsidiaries of Duke Energy, wanted to build

a merchant plant in Florida with about a mere 500 megawatt capacity. They wanted to build in one of the municipalities which is

a member of TAPS.

When Duke Energy’s subsidiary asked the public service commission for approval, the two investor-owned utilities with the 75 percent generation market power intervened to stop that project, and

when they did not succeed, when the commission approved that

particular proposal, they even took it to the Florida Supreme

Court. It is right now pending.

It says that the utilities with existing market power will try to

stop new entrants.

Mr. BARTON. That is an example. Of course, we all know that

Florida is almost, for some aspects, almost not considered part of

the continental United States because it is a peninsula. So how

about inside the mostly contiguous 47 other States?

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I am in trouble. I am not going to run nationwide, I will tell you

that.

Mr. RAO. I do have another example which exists within the—

not necessarily Florida.

Mr. BARTON. Could you briefly, because I want to get Mr. Owens’

answer to this question, also.

Mr. RAO. Yes.

Mr. BARTON. Just give me the location and the company.

Mr. RAO. Eastern Wisconsin has the same type of situation with

a 10,000 megawatts of load and 1,200 to 1,300 megawatts import

capacity, almost all of which is controlled by three major utilities

in eastern Wisconsin.

These three utilities together control more than 90 percent of

generating capacity——

Mr. BARTON. But there are three utilities that have competition

in that market, or would have?

Mr. RAO. They are——

Mr. BARTON. I mean, you are talking about three different producers.

Mr. RAO. Three different producers.

Mr. BARTON. Let me move to Mr. Owens. I have got the ranking

member here bugging me to move along.

Mr. Owens?

Mr. OWENS. You asked the question whether regional transmission organizations would help mitigate market power, and I

would say yes, they would.

The issue of market power, if I might just break it down into two

components, first, one area relates to what we call ‘‘vertical market

power,’’ and historically that has related to your access to the

transmission system.

All investor-owned utilities are required by law to provide nondiscriminatory access to the transmission system under FERC’s implementing Order 888. Certainly regional transmission organizations would seek to make sure that access to the grid is proper.

In addition, you asked a question relating to horizontal market

power. Horizontal market power, many folks generally relate that

to your ability to control the generation market.

As I indicated in my oral remarks and in the written statement

that I provided for the record, there is an explosion of participants

in the bulk power supply market. There are no barriers to entry

to that market. We have thousands of independent power producers.

As others have indicated, there is a significant opportunity for

generators to locate in all aspects of this market, so I do not believe

that there is the existence of horizontal market power.

Now, to the degree that there is, the States are well equipped to

deal with those issues. I do not believe that there is a need for additional Federal authority to deal with the issue of horizontal market power.

Mr. BARTON. Thank you, Mr. Owens.

I would like to turn now and recognize for 5 minutes the ranking

member of the subcommittee, Mr. Hall.

Mr. HALL. Thank you, Mr. Chairman.

I am not pushing you, but I do have an 8 dinner meeting.

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And, Ms. Church, I will give you some wisdom from the 1930’s.

Will Rogers said the way to solve the highway traffic problem was

to require all automobiles to be paid for before they could get on

the highway.

So you can imagine how bad it is now. I wish he could see it

today. Will Rogers would not like anybody, would he?

I am not confused. I guess I am still confused, but I am trying

to listen to this panel and glean from what you say what you mean

and what you want.

I have heard Mr. Helton say we will be developing the proper

amendments, and Mr. Nevius said we need reliability legislation

now, and I do not know whether this requires some amendments

or not. Ms. Church said the bill subjects certain aspects to intrusive State control. Mr. Owens said we have some concerns and objections, repeal PUHCA and reform PURPA and the bill repeals

both. Mr. Mayben said the bill fails to treat all parties alike. Mr.

English—I had to leave before I got to listen. I tried to listen to

all of his, but I sure did not want to miss an important vote over

there. But we urge the chairman to work on language.

How many of you are for the bill just like it is? How many of

you are for the bill with a few amendments, not to completely restore the automobile, but just—1, 2, 3, 4, 5, 6. I count 12.

Well, let me see. Mr. Helton, let me ask you some questions here,

if I might.

Your statement says H.R. 2944 is not a perfect bill but a good

one, right?

Mr. HELTON. That is correct.

Mr. HALL. And your testimony lingers long on the merits of the

legislation. Let me ask you about some of the problems that you

have with this legislation and, if you can—and maybe you cannot—

give me a yes or no answer, or tell me you cannot answer it.

On TVA, the bill preserves TVA consumers first call on cheap

power, permits TVA to build a new generation of facilities, and allows TVA to sell outside the valley. Do you support that or not?

Mr. HELTON. Do not.

Mr. HALL. And Bonneville, the bill would permit Bonneville to

recover its stranded costs through a surcharge on transmission consumers that would raise costs for other users, such as California

consumers who use the system for retail purchases. Do you favor

that as written?

Mr. HELTON. Under reasonable terms, probably yes.

Mr. HALL. You would have to have an amendment there though?

Mr. HELTON. Yes.

Mr. HALL. State preemption—the bill imposes a Federal hard

reciprocity provisions. This would reduce the number of suppliers

from whom the consumers in open States could purchase and preempt State laws to the contrary. Do you support that?

Mr. HELTON. We would like to amend that one, as well.

Mr. HALL. Okay. That is one you do not like and two to amend.

Do you support the provision on RTO mandates? The bill includes a Federal mandate requiring transmission owners to join a

regional transmission group by the year 2003 and setting specific

criteria for FERC appeal. Do you support that?

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Mr. HELTON. Generally, yes. The specific criteria is the area of

concern.

Mr. HALL. Okay. You cannot give me a yes or no on that?

Mr. HELTON. Cannot.

Mr. HALL. FERC merger authority—the bill expands FERC’s

merger authority to include transmissions involving generation facilities and holding companies. Do you support that as written?

Mr. HELTON. Yes.

Mr. HALL. That is the first unequivocal yes, is it not?

Mr. HELTON. No, sir. I think—didn’t I do that on the first one?

Mr. HALL. You may have. Yes.

Mandatory interconnection to local distribution systems—this bill

gives distributed generators of a considerable size, up to 50

megawatts, the right to interconnect with local distribution companies. Do you support that?

Mr. HELTON. No.

Mr. HALL. And then, let me see, your statement indicates that

your coalition will be developing perfecting language. Do you have

a time on when you are going to submit that language and you are

going to give it to the chairman? He has been very open with us,

and he will immediately send it on to us. Do you have those

amendments ready?

Mr. HELTON. Almost.

Mr. HALL. Okay. I think my time is up. I have two more pages

of questions here, but I will get back to you maybe. Thank you.

Mr. BARTON. As long as we do not run past 8, we are going to

be fine with Mr. Hall.

I will now turn to my colleague from Kentucky, Mr. Whitfield, for

5 minutes worth of questions.

Mr. WHITFIELD. Thank you very much.

Mr. English, in your testimony you focused on some of the major

concerns of the co-ops, and I noticed that in your testimony you

also talked about some concerns about section 103 of the bill relating to the regional transmission organizations, and I was just wondering if you could elaborate on that a little bit more?

Mr. ENGLISH. Mr. Whitfield, our association strongly supports

voluntary RTOs. We do feel that that is an important element. We

are also concerned, I might say, about the fact that RTOs are regulated by the Federal Energy Regulatory Commission, and, as far as

members of RTOs, that seems to be the appropriate way for us to

address that, particularly as you are dealing with some of the

smaller entities such as electric cooperatives.

We think that the RTO provision that is contained in the bill,

which also allows for members to set up their own RTOs, is one

that has some promise. We would like to do some work and, I suppose, like the other members here on the panel, we probably have

got some ideas in mind for amendments. But that is the position

that we take on RTOs.

Mr. WHITFIELD. Okay. And then I had not heard a lot of discussion about this net metering issue. Could you elaborate on that just

a little bit?

Mr. ENGLISH. Well, as far as any net metering, it has to do with

those who also may be—consumers who may be generating some

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power on their own and may be able to sell it back through the

grid.

The issue, I guess, is what is the net between the two.

Mr. WHITFIELD. Right.

Mr. ENGLISH. That, as I understand it, while it may sound good

on paper, may have some real difficulties in the real world as you

attempt to integrate that into the process and the grid, itself.

Mr. WHITFIELD. Okay. All right. Thank you.

Now, Mr. Hawkins, yesterday, when the Administration testified,

and then when Secretary Richardson had testified on this previously, and even Carol Browner testified, they all sort of took the

position that this restructuring legislation was not the right place

or the right format to get into additional environmental legislation,

and particularly on CO2 reduction mandates and so forth.

That is still their position, but your organization obviously still

feels that you want to pursue this; is that correct?

Mr. HAWKINS. Our organization and many other organizations

believe that we should address the air pollution problem from this

industry while we address its economic performance, and this is

not the first instance that we have disagreed with the administration.

Mr. WHITFIELD. And will you all be supporting the Pallone-Waxman amendments in this area if they come forth with those, as

they have discussed?

Mr. HAWKINS. Yes, sir.

Mr. WHITFIELD. Okay. Now, as you know, I represent an area

that uses a lot of fossil fuel to generate its electricity, and one thing

that is frequently referred to is that these coal-fired utility plants

in the midwest and southeast are uncontrolled and that they are

exempt from the Clean Air Act requirements, and yet all of these

plants are required to comply with the national air ambient quality

standards. All of them are required, under the Clean Air Act, to reduce their sulfur dioxide emissions by 50 percent below the 1985-

1987 levels. The 1990 amendments also require these plants to reduce their nitrogen oxide emissions by approximately 40 percent

below existing levels, and they would also be subject to any reductions on the EPA’s proposed fine particle and 8-hour ozone standards. I know that there is a problem with that in the courts right

now. But they do meet a lot of environmental standards and are

required to do so. So would you elaborate a little bit on the concern

that you have about these plants?

Mr. HAWKINS. Yes, sir.

The State of the law is that plants that were in operation before

1970 are treated fundamentally differently than plants that have

been built in the last 30 years and plants that will be built tomorrow.

Modern plants are required to generate electricity meeting stateof-the-art performance standards in terms of how clean you can

generate electricity. Older plants are not required to do that. Older

plants are allowed to rely on a patchwork of regulations that differ

from State to State, and, as a result, the facts are clear: the power

produced from an older plant pollutes sometimes 3, 4, 5 times as

much as a competitor’s power from a modern plant.

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We think that that is an outmoded policy and one that is still

causing a lot of environmental harm.

Mr. WHITFIELD. But you do not deny that they are meeting the

legal requirements that they must meet today?

Mr. HAWKINS. Well, the trade press and some of the daily press

have been filled with reports in the last several months about inquiries as to whether, in fact, some of these plants are complying

with their legal obligations; specifically, whether they are complying with their obligations to seek a permit when they make certain major changes in the operations or the physical aspects of

their facilities.

We are aware that the New York attorney general has sent notice letters stating his conclusion that a number of these companies

are, in fact, violating the law, and we have read trade press reports

that the USEPA is carrying on its own investigation.

So no, sir, we do not think it is clear that they are meeting all

legal obligations.

Mr. WHITFIELD. But even if they are, you still would like to see

the law changed as it relates to them?

Mr. HAWKINS. That is correct.

Mr. BARTON. The gentleman’s time has expired.

The Chair recognizes the gentleman from Ohio, Mr. Sawyer, for

5 minutes.

Mr. SAWYER. Thank you, Mr. Chairman, and thanks to our entire

panel.

Let me turn first to Mr. Nevius. First of all, thank you very

much for all of the work that NERC has done. It has been important and central to a lot of the legislation that we have.

I am assuming that you fully subscribe to the notion that electric

supply could deteriorate over the long term if transmission capacity

does not keep pace with growth and demand?

Mr. NEVIUS. The reliability of the electric grids could certainly be

at risk if we do not have a way to enforce mandatory standards.

The issue of electric supply involves other things in addition to the

amount of transmission, including the amount of generation and

what kind of demand side measures of programs.

Mr. SAWYER. Of course. But transmission——

Mr. NEVIUS. But transmission——

Mr. SAWYER. [continuing] adequacy is in strength, no matter how

much generation exists, if it is not adequate? You would agree with

that, I am sure?

Mr. NEVIUS. Yes.

Mr. SAWYER. The amount of transmission that is planned for the

next few years, however, is substantially less than we talked about

even a few years ago. Am I correct in that?

Mr. NEVIUS. The amount that has been planned to be added has

continued to decline over the last 10 to 15 years.

Mr. SAWYER. Let me ask you, with regard to NERC’s comments

on the RTO, NERC asserted that transmission rates must provide

incentives to get the right amount of transmission infrastructure

built. Do you agree with NERC that we must ensure that enough

transmission capacity is available to prevent short-circuiting competition?

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Mr. NEVIUS. I guess the comments that we made regarding RTOs

and also the adequacy of transmission indicate that various proposals to provide incentives in one form or another are certainly

not inconsistent or incompatible with the self-regulatory reliability

concept that is contained in title II, and we are not proposing specific pricing or incentive mechanisms, themselves.

Mr. SAWYER. I understand that, but it is your assertion that incentives are useful and necessary?

Mr. NEVIUS. They can be. Yes.

Mr. SAWYER. Yes. Thank you very much.

Ms. Church, I understood yesterday that the deputy secretary of

Energy said that incentives are not necessary to attract transmission investment. Do you agree with that?

Ms. CHURCH. We agree. We believe that in some cases incentives

may be appropriate. We think the whole system really needs to be

re-looked at, because it was developed for a system that is changing substantially.

Mr. SAWYER. For very different purposes.

Ms. CHURCH. Yes.

Mr. SAWYER. Yes. I agree.

Can you speak to your notion of what incentives might be useful,

helpful, necessary?

Ms. CHURCH. I would be glad to provide the member with some

comments to elaborate on that.

Mr. SAWYER. That would be great. Thank you.

Ms. CHURCH. Thank you.

Mr. SAWYER. I am assuming, from what you have said, then, that

you would agree that if more robust transmission networks do not

develop, that the whole notion of how we go about achieving the

level of competition we are trying to achieve simply cannot take

place?

Ms. CHURCH. Well, I believe it can be ameliorated by the development of RTOs. For example, one of the things that we have seen

over the last several summers are curtailments of large amounts

of power that have a cascading effect on the rest of a whole region,

and the example I used in my testimony was the Michigan/Ontario

incident.

Mr. SAWYER. Sure.

Ms. CHURCH. If the midwest had a large RTO, it would have

helped to internalize those constraints, and it may have prevented

the curtailment of 400 megawatts.

Mr. SAWYER. The real problem there was high delivered prices

and not necessarily high generated prices.

Ms. CHURCH. But the whole reason was that power was unable

to move into that area. In curtailing to alleviate a 400 megawatt

constraint, 4,000 megawatts were actually curtailed, which kept

power from coming in from New York and PJM into the midwest,

which created a shortage of generation, which, of course, drove the

prices up.

We believe we do need new transmission, but the existence of

good RTOs would alleviate a lot of the problems that we are seeing.

Mr. SAWYER. Thank you very much. I see my time has run out.

Mr. SHIMKUS [presiding]. Thank you. Your time has run out.

Thank you very much.

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Now I will recognize the gentleman from Oklahoma, Mr.

Largent, for 5 minutes.

Mr. LARGENT. Thank you, Mr. Chairman.

Mr. Richardson, I would like to ask you, one of the things you

talked about was the independence of RTOs. Is it your opinion that

the ISOs that are currently in existence are independent?

Mr. RICHARDSON. Ones that are in existence, ones that are being

proposed are not—you cannot give a yes or no answer to that because each has different characteristics. Some are, some are not.

Mr. LARGENT. Okay. Let me ask you a question about market

power. Can you talk to us a little bit about market power? I will

give you my opinion here—market power exists because of physical

realities of where generation is located, talking about horizontal

market power, and physical constraints that exist because of the

transmission lines that currently exist.

Talk to us about the transient nature of market power, in your

opinion.

Mr. RICHARDSON. Thank you for asking that question.

Mr. Shimkus, if the record is incomplete with respect to market

power, then that is our fault that we have not provided sufficient

examples.

I would point, as examples, to the preamble of the regional transmission organization preamble from the Federal Energy Regulatory

Commission, where they say open access is insufficient, the need

for independent system operators is clearly demonstrated, and then

they go on to give actual examples of abuses of market power

where there are clear findings of problems in the abuse of market

power by vertically integrated utilities where they favor their own

generation because they control transmission. They give examples

of situations where there have been allegations of abuses of market

power. They note that in some cases individual companies—my

members and others—are afraid to come forward for fear of retribution. So they suggest that perhaps we are seeing only the tip

of the iceberg of the abuses of market power.

It is a marvelous piece of information. I hesitate to overburden

this committee with further paper, because I have already done a

pretty good job of that in my prepared testimony, but it is a very

good piece that I think demonstrates the problems of market power

and the remedies that are needed.

Now, when we are looking at market power, we have what I regard as institutional market power problems that arise from the

vertical integration of our utility industry historically.

Regional transmission organizations, if they are properly structured and have the right boundaries that do not game the system

by creating, rather than eliminating, constraints between high-and

low-cost systems are the solution, and we need to move forward

with those, and we should do so first in a collaborative fashion.

We strongly believe that the Commission in the end may need

the authority to order utilities to participate in such organizations

because that may be the only way to rationalize and get rid of the

vertical market power that currently exists.

Horizontal market power, as I said in my opening statement, the

ability to use vast amounts of generation to affect prices for consumers, not—because generation affects the way the transmission

230

system works, and so, by constraining generation by unscheduled

outages of generation facilities can have economic consequences in

the marketplace that need to be addressed, but I think this is probably a transitional issue. It is not necessarily one where FERC

needs authority that exists in perpetuity, as I suggested in my oral

statement. Perhaps what FERC needs is a tool box of remedies up

to and including the dreaded ‘‘D’’ word, that being a divesture of

capacity through a capacity auction for a period of time until these

problems are addressed.

Other tools can be used, up to the point where they can come

back and report to the Congress that the industry has been restructured, and that is really what we are talking about. We are

talking about the structure of the industry, and that is why independent system operators are so critically important.

It is the structure that we have to get right. The Holding Company Act structured our industry for 60 years. now we are talking

about taking that down. We are looking at a new structure, and

this is an opportunity for this Congress truly to get the structure

right.

These opportunities do not come along very often. That is why

we want legislation now. We see the industry restructuring itself

and we are concerned that the monopolists are controlling the restructuring of the industry, not policymakers who are looking out

for the interests of the public.

I hope that—I got a little bit on my soap box, sir.

Mr. LARGENT. That is okay.

Mr. RICHARDSON. But I hope I addressed the question.

Mr. LARGENT. Mr. English, I want to give you a chance to address the issue of propane.

In what way does the Federal Government place limits on co-ops

today in terms of their ability to expand their business opportunities? What is the mission of a rural electric co-op?

Mr. ENGLISH. Well, I think the mission of electric cooperatives,

whether they are in rural areas or any other area, is one of meeting the needs of the consumer members, the people who choose to

come together and make their purchases through the entity of a cooperative.

Mr. LARGENT. Meeting what needs? Their electricity needs?

Mr. ENGLISH. Whatever needs they may have.

Mr. LARGENT. Any need?

Mr. ENGLISH. Exactly.

Mr. LARGENT. Cable, DVS, propane——

Mr. ENGLISH. Exactly.

Mr. LARGENT. [continuing] groceries?

Mr. ENGLISH. As I used the example before this committee once

before, to deny consumers the opportunity to do it for themselves,

and that is basically what we are talking about, or do it as a group

for themselves, is like denying someone to opportunity to grow tomatoes in their back yard garden and eat them. That is like saying

you have got to sell them to the grocery store and buy them from

the grocery store. You cannot eat your own tomatoes.

That is basically the same process that we are talking about

here.

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But as far as whether we are talking about propane or whether

we are talking about any other service from the standpoint of an

electric cooperative and recognizing the fact there are all kinds of

different cooperatives—housing cooperatives, you have got farmer

cooperatives, you have got a wide variety of different cooperatives

in this Nation today—it also should be recognized, the fact that, for

instance, under the Rural Utilities Service, any loans are specifically restricted only for electric utility service.

If they, in fact, use those funds for any other purpose other than

for the infrastructure or assets of the electric utility, itself, they

would be in violation of a loan agreement. Not only could they be

declared ineligible for the loan, but they could also be declared—

have the loan called at that particular time.

Mr. SHIMKUS. Has the gentleman answered your question?

Mr. BARTON. Well, we have Congressional courtesy. We let

former Members speak a little bit longer than the other panelists.

Mr. SHIMKUS. Overruled by the chairman.

Just remember that, my friends on the left. I tried to get over

there.

Mr. ENGLISH. In addition, I might add this also gets into the

question of tax exemptions. Electric cooperatives are not for profit

and are governed by the Internal Revenue Service. As such, should

they, in fact, cross-subsidize, as some have argued, then they would

be in violation of their—with the regulations of the Internal Revenue Service and could lose their tax-exempt status.

There are procedures for anyone who suspects that such violations are taking place to proceed, whether it be with the Rural

Utilities Service or whether it be with the IRS.

And also, very quickly, let me say that any other businesses outside electric service, they would be subject to the unrelated business income tax, which is a Federal tax at the corporate level.

So there are taxes with regard to any of these other businesses,

whether it be propane or whether it be anything else with regard

to any margins that might result from that.

Those margins, by the way, could not go back to an electric cooperative as far as the rates are concerned. It would have to go back

to the membership, itself, and they, too, would pay income tax on

that.

Mr. SHIMKUS. He is going to have to throw me out of the chair.

I am going to move on. Thank you very much.

I move to the gentlewoman from the State of Missouri, Ms.

McCarthy, for 5 minutes.

Ms. MCCARTHY. I thank the chairman, and I would like to thank

the witnesses for their presentation today.

I would like to explore a concept with you that is still troubling

to me as we move forward, and that is how, as we move forward

into this new era of competition, do we achieve the efficiencies and

also the environmental goals that we have obligated ourselves to

worldwide?

My worst fear is that, as we open up competition, industry will

look more and more to the cheapest sources of fuels in order to

compete, those perhaps being the more traditional uses of coal and

others that we know make our cities hard to breathe in and cause

the EPA great concern as far as air quality.

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Is there enough in this measure on encouraging uses of indigenous energies, those that are renewable and clean? Do we need to

add a renewable portfolio standard, as we have sometimes talked

about? Is the incentive program, as currently proposed, enough?

And what about a public benefits fund so that we are encouraging

conservation and low-income assistance, as well?

How do we set a standard in the world where we move to efficiency to lower costs for consumers, but also to a better environment?

I know, Mr. Hawkins, you spoke to this briefly in your testimony.

I would like to begin with you, but I would like to hear from any

other member of the panel who is interested in sharing these

thoughts with us so that we can come together and propose language that would make this work.

Mr. HAWKINS. Well, thank you, Congresswoman McCarthy.

Yes, our coalition of organizations supports three critical environmental measures: the public benefits trust that you mentioned, to

support existing investments in efficiency, low-income services, and

other public benefits; the renewable portfolio standard—both of

those will be addressed in the second panel; and, finally, achieving

an environmental performance cleanup.

On that last point, the way I would try to answer your question

is the way that this industry will be incented to improve its performance is by making good performance valued in the marketplace.

In my testimony, I point out today’s situation, which is problematic. An entrepreneur that wants to build a new high-efficient,

clean power plant goes to investors, and that entrepreneur can

point out that the power plant may emit very little sulfur dioxide,

may emit very little or no mercury, may emit far below the required control levels for nitrogen oxides, and may emit much less

CO2 than other competitors.

But the investors are not interested in that. Investors are interested in what is your bottom line bus bar costs and how does it

compare to your competition. And if your competition is an old

grandfathered power plant that is able to continue to burn dirty

fuel because of balkanized pollution control rules, the investor says,

‘‘Sorry. Great idea. Come back later.’’ And the plant doesn’t get

built.

So the way to deal with this is to put a generation performance

standard in the law which treats all generators equally, and says,

‘‘When you produce a megawatt hour of electricity, that is a useful

social service and you are going to get a certain allocation of pollution allowances to meet those needs.’’ Now the entrepreneur comes

in, has this super-clean plant, and he or she can say to the investor, ‘‘When I generate a megawatt hour of electricity, I am generating an additional revenue stream because I am going to have

credits that can be sold into the market, and that really makes my

investment a more-attractive opportunity for you,’’ and that will

tend to make the answer be yes to build that plant.

Ms. MCCARTHY. Thank you.

Ms. Church?

Ms. CHURCH. I think, generally, that enactment of comprehensive wholesale legislation will benefit the environment. We would

233

certainly like to see, over time, comparability between the older

and the newer plants, and we definitely believe that, where credits

are being allocated, that newer entrants do need to have an opportunity to get those credits and they need to be reallocated periodically.

And on renewables, we do think that there are some amendments that could help strengthen the bill. The current bill tries to

provide symmetry between the tax credits that are already in the

law and benefits to public power.

There are still a number of renewable sources that fall through

the cracks on that attempted symmetry, and we do think some refinements are needed there.

Ms. MCCARTHY. I thank you. And I see that I have run out of

time. Thank you, Mr. Chairman.

Mr. SHIMKUS. Thank you. And I recognize the chairman of the

subcommittee, Chairman Barton, for 5 minutes, or however long as

he wants to take.

Mr. BARTON. No, no. Five minutes.

Just an observation before I start my questions. I used to sit out

in the audience during the natural gas debate in the early 1980’s

about decontrolling natural gas, both in the House and in the Senate, and I felt I knew the answer and I was so smart, and if those

ignorant Senators and Congressmen would just let me do it, we

could solve that problem. And now I am over here and I wish I was

over there, because I feel like, you know, what are we going to do,

because everybody that has testified today has had some very good

points.

So I used to be a lot smarter when I was sitting out there than

I am when I am sitting up here.

Let me start off with an easy question. The current draft before

us has a distributed generation size cap of 50 megawatts. We are

told by a lot of people that is a little bit too large. Is there a better

number, Mr. Owens, that you would like to see our third draft go

to on distributed generation?

Mr. OWENS. Well, I certainly think 50 megawatts is just an extreme. I do not have a specific number, but I think if you we going

to start, you certainly should start at something significantly scaled

down. Let’s say perhaps five megawatts could be an upper limit.

Mr. BARTON. Five to ten. Mr. Richardson, do you have a position,

your group have a position on that?

Mr. RICHARDSON. Mr. Chairman, my group does not have a position. I was struck at the size of 50 megawatts when I first read

through H.R. 2944. It seemed to me to be quite large.

Mr. BARTON. Okay. Let me ask you a question, Mr. Richardson,

again on market power.

Mr. RICHARDSON. Yes, sir.

Mr. BARTON. Yesterday, the Clinton administration’s witness, the

deputy secretary of Energy, really enforced upon the subcommittee

that we needed to take the Administration’s provision on market

power, which would allow the FERC to require forced divestiture.

I am not of that persuasion. I think you know that, having come

to our working group. I am concerned about, if there truly is market power, we need to do something, but I do not see why the

234

States are not the solution. Didn’t California have market power

provisions in their State law?

Mr. RICHARDSON. They have divestiture requirements.

Mr. BARTON. But it was a State decision?

Mr. RICHARDSON. Yes, it was a State decision.

Mr. BARTON. Doesn’t Texas have market power provisions in its

law?

Mr. RICHARDSON. Yes.

Mr. BARTON. Okay. Doesn’t Pennsylvania?

Mr. RICHARDSON. I am not that familiar with Pennsylvania’s legislation, but I believe you are correct.

Mr. BARTON. Just for the subcommittee’s edification, we are

going to address market power. If we need to put a political fix in,

so be it, but, before we decide on a political fix, we ought to really

look at what is happening in the States, and every State that has

acted in some fashion has addressed market power, and we really

should think carefully, in my opinion, before we put a Federal fix

on market power in if the States are taking—are already handling

that.

Now, Mr. Richardson, you said something that really struck me.

You did not give a specific example. You said you did not want to

burden the subcommittee with more paper. Well, burden us. If you

know of a specific example where a utility generator withheld generating capacity at a critical period simply to drive the price up

and exercised market power, I would like to know that.

Mr. RICHARDSON. We will give you examples of the combination

of the abuse of transmission and generation.

Mr. BARTON. Well, your specific example, though, was you talked

about horizontal generation power, where a particular utility could

withhold generation from the system to—I think you used the word

‘‘game’’ the system.

Now, I know we have had some transmission bottlenecks. I am

familiar with most of those. I won’t claim I am familiar with all

of them. But I have not heard before somebody make the allegation

that a generator withheld generating capacity during a peak period, and I would be interested in it, and I know former Chairman

Dingell would be interested in it. That is one of his big concerns.

So we would really like to have that.

Now, Mr. Hawkins, I want to ask you a question. You are the

witness that says we ought to put in some Clean Air Act provisions

for the grandfathered power plants. If we do not put those in, are

you going to recommend a vote against any bill?

Mr. HAWKINS. We certainly will look at the entire bill, and if the

bill does not contain provisions which provide assurances that this

restructured industry will protect the environment, then yes, we

would recommend the members to vote against the bill.

Mr. BARTON. My understanding is, under the current Clean Air

Act, we have Federal standards. We do grandfather some of these

older power plants that burn some of the coal.

Could a State put in a tighter standard on those grandfather

plants, or does the Clean Air Act preempt that?

Mr. HAWKINS. A State could put in a standard as a matter of

law. The problem is that the State could not protect its air quality

just by regulating the sources within its State.

235

Mr. BARTON. My point is, under the current Clean Air Act, if

that is a problem, the State of Ohio, to pick a name out of the air,

or the State of Illinois, to pick another State out of the air, they

could set tighter standards for those plants, could they not?

Mr. HAWKINS. They could, but they would be ineffective

because——

Mr. BARTON. But they could do it? They could do it. The answer

to that is yes.

My time has expired and I yield back to the gentleman from Illinois.

Mr. SHIMKUS. Thank you. And, for Mr. Richardson, if you would

provide that information.

Mr. RICHARDSON. We will do that.

Mr. SHIMKUS. I just wanted to get the commitment on the record

that you would provide that information to the chairman.

Mr. RICHARDSON. Yes.

Mr. SHIMKUS. Now I recognize the gentleman from Florida, Mr.

Stearns, for 5 minutes.

Mr. STEARNS. Thank you, Mr. Chairman.

This is directed to Lynne Church. Just a clarification. I think

earlier staff indicated that you made the assertion that, I think in

the PURPA language that I have, it does not explicitly protect existing contracts; is that true?

Ms. CHURCH. I said that in my written testimony. Correct. Yes.

Mr. STEARNS. I just wanted to read from page 79 of the bill that

I have that says, ‘‘Existing rights and remedies not affected,’’ page

79—‘‘Nothing in this section affects the rights or remedies of any

party with respect to the purchase or sale of electric energy or capacity from or to a facility determined to be a qualifying small

power production facility,’’ and so forth.

And it says, ‘‘Pursuant to any contract or obligation to purchaser

to sell electric energy or capacity in effect on the date of the enactment of this act.’’ So——

Ms. CHURCH. Well, we would like to see some language that specifically provides symmetry between protection of the utilities for

their recovery of stranded costs that are tied to above-market

PURPA contracts with the obligation, therefore, to continue to supply to pay under the existing contract.

Mr. STEARNS. Well, from what I just read to you, it appears that

they have these remedies in place in the bill that I have, so, I

mean, I think your initial statement might not be correct. Do we

agree on that?

Ms. CHURCH. We will certainly look at it again, sir.

Mr. STEARNS. Okay. You proposed granting FERC jurisdiction

over transmission used to make bundled retail sales.

Ms. CHURCH. Correct.

Mr. STEARNS. What is the position of the States on this issue?

Ms. CHURCH. NARUC has filed comments that, as I understand

it, disagree, and I think that the reason that we believe it is very,

very important is that, while the States are very well-meaning—

and I certainly do not attribute any malevolence to their view—

they are taking—they tend and have the opportunity, under the

way the law is being interpreted, to take very parochial views,

which can have the impact of adversely impacting neighboring

236

States, and certainly preventing the market from operating the

way it should.

The example I would use is the one that underlies the Northern

States Power case, the 8th circuit case, which I think has brought

this to the fore, where the Minnesota law required the utility to

curtail a firm transportation contract on its transmission system in

order to protect its ‘‘native load.’’ Well, the contract that they curtailed was, in fact, power that was moving to the next State, Wisconsin, to serve their native load.

And so what we need to realize is that the system, even now, and

even more so in the future, as States open up, is going to be relied

upon to serve residential customers.

And I think the second view that there is general misunderstanding, both sometimes on the Commission’s level and in the

general public, that curtailment of transmission automatically is

going to end up turning off the lights. That is not correct.

What it really means is that sometimes, where a contract is curtailed, the recipient of that contract is going to have to go into the

hourly market for more expensive power, but most times it does

not mean the lights actually go out.

Mr. STEARNS. Mr. Richardson, you say that H.R. 2944 eviscerates

FERC’s jurisdiction over the transmission system. Now, this is not

what FERC told us yesterday. FERC told us that H.R. 2944 codifies Order 888. So let’s be clear what you are asking here.

You want Congress to go beyond Order 888 and give FERC jurisdiction over a larger part of the transmission system than it is asserted in Order 888? Is that not correct?

Mr. RICHARDSON. I do not believe so, Mr. Chairman.

There are a couple of issues here. One, I, frankly, get rather confused when I look in that language in that section, bundled and

unbundled services. There are a couple of problems that we have

with——

Mr. STEARNS. Just let me interrupt you for a second.

Mr. RICHARDSON. Yes, sir.

Mr. STEARNS. Just the way I laid the question out, do you agree

or not? Do you want me to read it again?

Mr. RICHARDSON. Well——

Mr. STEARNS. In other words, my question——

Mr. RICHARDSON. Yes. Please do.

Mr. STEARNS. Is that not correct? You are saying that——

Mr. RICHARDSON. Second part, Mr. Stearns, the refunctionalization issue that I mention in my testimony gives the utilities

the opportunity—and I think it is pretty well documented in another item that I included with my testimony—to remove facilities

that are currently FERC jurisdictional by refunctionalizing them

from the function of transmission to the function of distribution.

Now, that certainly diminishes the authority of the Commission

over facilities with respect to which they currently do have jurisdiction.

Mr. STEARNS. Okay. Has FERC been approving those classifications?

Mr. RICHARDSON. I am not sure of the status of those classifications. The language of the—I can give you instances, for example,

in Wisconsin of a proposal to take nearly 80 percent of transVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00240 Fmt 6601 Sfmt 6602 E:\HEARINGS\60356 txed02 PsN: txed02
237

mission out of FERC’s jurisdiction, converting it to State jurisdiction. There are other examples in the article that I presented.

Of particular concern to us is the requirement that FERC defer

to those State commission decisions, and, as I believe Ms. Church

said a moment ago, there are concerns about parochial treatment.

Mr. STEARNS. Okay. Mr. Chairman, my time has expired.

I thought I would bring to the attention of the committee a ‘‘USA

Today’’ advertisement on Friday, September 17, in which there is

probably no need for electric if this is true. It says, ‘‘Tired of high

electric bills? How about no electric bills? This machine will give

you free electricity for the rest of your life.’’

Mr. RICHARDSON. I will take two.

Mr. STEARNS. It says it capitalizes upon the fourth law of motion—now, to my knowledge there are only three—and it utilizes

energy previously thrown away so that you will have free electricity for the rest of your life. So if anybody wants a copy of this

ad, here is an opportunity for free electricity.

Mr. BARTON. TVA will be selling those in the lobby.

The gentleman from Mississippi, Mr. Pickering. Five minutes.

Questions only.

Mr. PICKERING. Thank you, Mr. Chairman.

Let me just ask a number of the panelists the same question. Let

me first start with Mr. English.

Upon reviewing the draft in its current form, could you support

or would you oppose, and what are the three primary concerns that

you have with the legislation in its current form that would need

to be addressed to obtain your support if you do not support it at

this current time?

Mr. ENGLISH. As I stated in my previous testimony, Mr. Pickering, the thing that we are most concerned with is unnecessary

regulations with regard to achieving the goals pertaining to the

question of the regulatory burden under FERC. We do have concerns. We do not really think it makes much sense as far as merger

authority under FERC.

We are concerned that in a restructured environment that we

have, in effect, electric cooperatives be able to provide all the services that any other electric utility can provide, and also we want

to make sure electric cooperatives can work together to be able to

provide and meet the same needs, particularly from a billing standpoint, that other electric utilities can.

Mr. PICKERING. Just a quick follow-up. How many of your States

or how many of your co-ops operate in States where there is no

State regulatory authority or jurisdiction at the present time?

Mr. ENGLISH. I would need to submit that for the record, but

roughly—I had better submit it for the record. I think it is half to

three-fourths, somewhere in that neighborhood.

Most States view electric cooperatives from the standpoint that,

since they are consumer-owned, they elect their own board of directors from the consumers, they regulate themselves, unlike other

utilities.

Mr. PICKERING. It has actually been a pretty good system, hasn’t

it?

Mr. ENGLISH. Worked extremely well. I am not aware of complaints from States that provide for this process.

238

Mr. PICKERING. I believe Mississippi is one of those.

Mr. ENGLISH. It is, indeed.

Mr. PICKERING. Let me ask Ms. Church the same question that

I first asked Mr. English.

Would you support or oppose the current draft? And what are the

three primary things that would need to be addressed if you do not

currently support the legislation?

Ms. CHURCH. We believe, as I said before, there are a lot of

things in the bill that we really like; however, the three provisions

that we think give State commissions an undue opportunity to intrude onto the interstate grid may lead us to a position where we

would not be able to support.

We do believe that those provisions, particularly the distinction

between bundled and unbundled, is a critical flaw in the bill.

Mr. PICKERING. And would you currently support the legislation?

Ms. CHURCH. We certainly support the passage of legislation. We

think it is needed. But we do think this bill does need some revisions.

Mr. PICKERING. Mr. Owens, would you support or oppose the current draft?

Mr. OWENS. I think the current draft needs some refinements,

and I would put them in probably two large categories. One large

category, I am certainly very troubled by the aspects that deal with

public power, the TVA, the Bonneville, the co-op revisions, and the

municipal provisions.

New generation and transmission should be subject to the same

rules. Subsidies should not be used to distort the marketplace, so

I would suggest a major improvement in that area.

The second area that I am troubled about is the expansion of

FERC’s authority, particularly with respect to the merger provisions. I particularly believe it is unnecessary to have FERC dabble

in the area of retail competition issues. Similarly, I do support

flexibility in regional transmission organizations.

And then, finally, I have some difficulty with the net metering

requirements in the bill which could be fine-tuned, as well as the

aggregation aspects, and then the inter-connection requirements,

the 50 megawatt standard and the requirement that FERC can require that the distribution system be expanded.

Mr. PICKERING. Thank you, Mr. Chairman.

Mr. BARTON. Thank you, Mr. Pickering.

Mr. Wynn has arrived, and so we will yield to Mr. Wynn 5 minutes for questions.

Mr. WYNN. Thank you, Mr. Chairman.

Unfortunately, I did not have the opportunity to hear the testimony, so it would probably be presumptuous to start asking questions. I will defer.

Mr. BARTON. It would be very Congressional for you just to pitch

right in.

Mr. WYNN. I am going to try to start a new precedent.

Mr. BARTON. An informed questioner. How about that?

Is Mr. Ehrlich here?

Mr. SHIMKUS. He has left, Mr. Chairman.

Mr. BARTON. Okay.

239

Mr. SHIMKUS. Mr. Chairman, may I just ask that we can get

some more questions submitted on the record——

Mr. BARTON. Yes.

Mr. SHIMKUS. [continuing] for written response from the panelists?

Mr. BARTON. Yes. We are not going to do a second round of questions.

Mr. SHIMKUS. Right. I understand.

Mr. BARTON. Okay.

Congressman Tauzin asks unanimous consent on his behalf to

submit a statement for the record. Is there objection to all members

of the full committee, not just the subcommittee, being given unanimous consent to put a statement in the record on this issue?

[No response.]

Mr. BARTON. Hearing none, so ordered.

Let me, before I release this panel, reiterate what I said at the

beginning.

We are going to have one more panel today. We are not going

to go to markup next week because of the pending markup of the

Superfund bill at the full committee, but it is the Chair’s intention,

again, in consultation with Chairman Bliley and Mr. Hall and Mr.

Dingell, to try to schedule a markup the week after that. So, all

of these concerns that have been expressed by this particular

panel, we encourage you to do two things: No. 1, put them in legislative language; No. 2, find a champion on the subcommittee, preferably two champions, one on the republican side and one on the

democrat side, and submit them—get your champions working, and

then submit the language to Congressman Hall and myself so we

can review it, because I do intend to put together a subcommittee

substitute that we will mark up the week after next.

So the time has come to stop being concerned and start being

constructive in putting these issues into language that the subcommittee members on both sides of the aisle can take a look at.

Again, thank you for your testimony. You are excused.

As soon as they have vacated the premises, we want to hear from

our second panel.

Lady and gentlemen, we welcome you to the subcommittee. We

are going to start with Mr. Brice and work our way through to Mr.

Segal. Each of your statements is in the record in its entirety. We

are going to recognize you to summarize it in 6 minutes, and we

are going to start with Mr. Jack Brice, who is a member of the

board of directors of the American Association of Retired—is it People or Persons?

Mr. BRICE. We just say ‘‘AARP’’ now. We changed the name legally.

Mr. BARTON. So it is just——

Mr. BRICE. But prior to that it was ‘‘persons.‘‘

Mr. BARTON. Persons. Okay. AARP. We could say ‘‘real people.’’

How about that? Anyway, we welcome you, sir, and you are recognized for 6 minutes.

240

STATEMENTS OF RUTHERFORD ‘‘JACK’’ BRICE, MEMBER,

BOARD OF DIRECTORS, AARP; ELIZABETH ANNE MOLER,

GENERAL COUNSEL, AMERICANS FOR AFFORDABLE ELECTRICITY; MARK N. COOPER, DIRECTOR OF RESEARCH, CONSUMER FEDERATION OF AMERICA; MARTY KANNER, COALITION COORDINATOR, CONSUMERS FOR FAIR COMPETITION;

RICHARD H. COWART, DIRECTOR, REGULATORY ASSISTANCE PROJECT; TOM SMITH, DIRECTOR, TEXAS PUBLIC CITIZEN; THOMAS R. CASTEN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, TRIGEN ENERGY CORPORATION; AND SCOTT

H. SEGAL, ON BEHALF OF THE NATIONAL ALLIANCE FOR

FAIR COMPETITION

Mr. BRICE. Good morning. We thank Chairman Barton and the other members of the committee for inviting us to present our

views on the consumer protection provisions within H.R. 2944, the

Electricity Competition and Reliability Act. We will confine our remarks to the provisions contained in title

III of the bill, as well as to the sections in title V dealing with aggregation. However, as representatives of residential consumers,

we also share some of the concerns surrounding the market power

provisions voiced by other panelists over the past 2 days.

In short, AARP wants to ensure that residential customers benefit from competition, that strong consumer protection provisions

are in place, and that electric utility service is available to all.

AARP believes that residential customers should benefit from restructuring; unfortunately, residential customers are simply not as

attractive to utilities as industrial customers are.

Mr. Chairman, we feel one means to strengthen the position of

residential consumers is through aggregation. Aggregation will

allow residential consumers to pool their respective electricity

needs, enabling them to negotiate lower rates from a power provider and benefit from the outset.

AARP also supports a Federal role in facilitating aggregation in

States that have opened their markets to competition.

H.R. 2944 recognizes the importance of aggregation, as well.

The bill provides residential consumers with flexibility, allowing

that any entity that aggregates consumers may acquire retail electric energy on an aggregate basis.

As we have suggested before, residential consumers would further benefit if aggregation was offered on an opt-out basis. The optout provision would ensure that a majority of under-served consumers could reap the benefits of lower rates.

For competition in the electric industry to work, strong consumer

protection laws must be applied to the sale of electricity in restructured industry. We are pleased that title III of H.R. 2944 is devoted

to addressing consumer protection concerns.

Mr. Chairman, the anti-slamming and anti-cramming provisions

will go a long way toward addressing these abuses.

AARP is also pleased that the need for information disclosure is

increasingly understood by policymakers and reflected in H.R.

2944. The bill includes provisions outlining the kind of information

that supplies must present to consumers when offering services.

Many of the details that we have urged to be included in billing

statements are included in this section.

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Further, the legislation clarifies that States may impose additional requirements. This kind of consumer information floor is

what we have been seeking.

Further, we applaud Chairman Barton for striking a delicate balance between the protection of individual privacy and the need to

make aggregate consumer information available to promote competition.

AARP values the individual’s right and ability to control the

movement of personal information. We are pleased that provisions

in H.R. 2944 recognize that right by requiring prior written approval before personal information can be disclosed.

We also support the provision in H.R. 2944 that requires local

distribution companies to make aggregate consumer information

available to retail electric suppliers upon request.

By facilitating the transfer of this type of information, residential

consumers are more likely to be offered choice.

While we are pleased overall with the consumer protection provisions included in H.R. 2944, AARP would still like to see a truth

in billing requirement adopted to supplement the information disclosure provision. AARP is concerned that, in a competition environment, less-attractive customers will be adversely affected.

H.R. 2944 recognizes universal service through a sense of Congress, but places the full burden on a State to collect fees and implement the program.

AARP believes that there is still a role for the Federal Government in ensuring that electric service is provided to all consumers.

AARP is pleased with the attention Chairman Barton has devoted to residential consumers in H.R. 2944. The consumer protection and aggregation provisions should benefit consumers, but only

if adequate market power provisions are put into place to ensure

that competition becomes a reality.

And, finally, AARP hopes that, as legislation moves toward passage in the House, the provisions we have discussed today remain

intact or are improved. We urge this committee to remember that

residential consumers will benefit from restructuring only if aggregation is facilitated, strong consumer protection provisions are enacted, and electric service is ensured for all.

Again, Mr. Chairman, we thank you for inviting us to testify.

[The prepared statement of Rutherford ‘‘Jack’’ Brice follows:]

PREPARED STATEMENT OF RUTHERFORD ‘‘JACK’’ BRICE, MEMBER, BOARD OF

DIRECTORS, AARP

Mr. Chairman and Members of the Committee: My name is Jack Brice and I am

a member of AARP’s Board of Directors. We thank Chairman Barton and the other

members of the Committee for inviting us to present our views on the consumer protection provisions within H.R. 2944, the ‘‘Electricity Competition and Reliability

Act.’’ We will confine our remarks to the provisions contained in Title III of the bill

as well as to the section in Title V dealing with aggregation. However, as representatives of residential consumers we also share some of the concerns surrounding the

market power provisions voiced by other panelists today.

AARP’s membership has a vested interest in the move towards competition now

underway in the electric utility industry. For everyone, electricity is a basic necessity of modern life. The cost of this necessity, however, can comprise a significant

portion of an average consumer’s personal expenditures. In fact, energy costs can

take up to as much as 5 percent of the median-income household’s monthly budget.

Older Americans are particularly vulnerable to rapid increases in energy prices. Although older persons consume approximately the same amount of residential energy

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as non-elderly Americans do, they devote a higher percentage of total spending to residential energy. Among low-income older families, an average of 17.5 percent of

their income is spent on residential energy. Too often, low-income older persons are

faced with the choice of risking their health and comfort by cutting back on energy

expenditures or reducing spending for other basic necessities. In testimony AARP presented to this Committee earlier this year we discussed generally our concerns surrounding the move to retail competition. We questioned

the claims that retail competition would bring about substantial rate reductions for

all ratepayers, including the elderly. We also expressed hope that consumers would

receive the corollary benefits of the ability to shop among competitive providers, and

to take advantage of a new array of products and pricing options. We concluded that

the fate of residential consumers in a restructured electric industry will depend on

whether the new market structure gives them a fair chance to receive the benefits

of competition, ensures that their interests are represented in the market, and provides fundamental protections against abuse. Residential ratepayers, and particularly older Americans, face very significant risks—and few, if any, assured benefits—in the move to retail competition in the

electric power industry. These risks go beyond the ability to benefit from choice.

They also include risks associated with confusion, deception and fraud. AARP is pleased that H.R. 2944 addresses these risks. Our testimony today will focus on how elements of Chairman Barton’s bill support AARP’s goals to:

• Ensure that residential customers are among the first to benefit from competition;

• Provide strong consumer protection provisions; and

• Establish a comprehensive universal service policy, including a guarantee of affordability.

Residential Customers First

AARP believes that residential customers should benefit from restructuring. Unfortunately, residential consumers are simply not as attractive to utilities as industrial customers are. Discussions between AARP staff and representatives of electric

utilities, industrial consumers and regulators have highlighted the fact that residential consumers are not likely to reap the full benefits of restructuring during the

initial years of competition. The ability to aggregate, however, will help to bring

some benefit in the short-term.

Aggregation will allow residential consumers from like communities or associations to pool their respective electricity needs, enabling them to negotiate lower

rates from a power provider and benefit from the outset.

AARP supports a federal role in facilitating aggregation in states that have

opened their markets to competition. H.R. 2944 recognizes the importance of aggregation as well. The bill provides residential consumers with flexibility, allowing that

any entity that aggregates consumers may acquire retail electric energy on an aggregate basis. As we have suggested before, residential consumers would further

benefit if aggregation were offered on an opt-out basis. The opt-out provisions would

ensure that a majority of underserved consumers could reap the benefits of lower

rates. Rep. Brown has introduced the concept of a residential opt-out aggregation

system in his ‘‘Community Choice for Electricity Act of 1999.’’

Consumer Protection Laws

For competition in the electricity industry to work, strong consumer protection

laws must be applied to the sale of electricity in a restructured industry. Low-income, non-English speaking and elderly consumers, in particular, will need very

strong consumer protections to prevent abuse in the competitive market.

We are pleased that Title III of H.R. 2944 is devoted to addressing consumer protection concerns. Attacking the problems of slamming and cramming, while providing for information disclosure and privacy restrictions is to be commended.

If enacted, the anti-slamming and anti-cramming provisions of the Chairman’s

legislation will go a long way towards addressing these abuses.

AARP is pleased that the need for information disclosure is increasingly understood by policymakers and is reflected in H.R. 2944. The bill includes provisions outlining the kind of information that suppliers must present to consumers when offering services. Many of the elements that we have urged be included in billing statements, such as price information, description of charges, and information regarding

interruptibility of service are included in this section. Further, the legislation clarifies that states may impose additional requirements. This kind of ‘‘consumer information floor’’ is what we have been seeking.

Further, we applaud Chairman Barton for striking a delicate balance between the

protection of individual privacy regarding information exchange and the need to

make aggregate consumer information available to promote competition. AARP valVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00246 Fmt 6601 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
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ues the individual’s right and ability to control the movement of personal information. We are pleased that the provisions in H.R. 2944 recognize that right by requiring prior written approval before personal information can be disclosed.

We also support the provision in H.R. 2994 that requires local distribution companies to make aggregate consumer information available to retail electric suppliers

upon request. By facilitating the transfer of this type of information, residential consumers are more likely to be offered choice.

While we are pleased overall with the consumer protection provisions included in

H.R. 2944, there are certain areas that need further attention. In earlier testimony

we detailed the importance of adopting a ‘‘Truth-in-Billing’’ requirement to supplement the information disclosure provision. AARP suggested that a comprehensive,

easy-to-read billing statement each month would help alleviate consumer confusion,

making consumers more likely to become participants in the competitive marketplace. This provision is missing from H.R. 2944.

AARP also supports the creation of a consumer database housed at the FTC to

assist residential customers in obtaining information about retail electric utility providers, including aggregators. Additionally, the creation of an Office of Consumer

Counsel within the FERC, as outlined in an earlier draft, would assist consumers.

Finally, as large aggregators, utility companies and power marketers are likely

to operate on an interstate basis, it is incumbent upon the Congress to ensure that

they meet certain threshold operational requirements and that deceptive, fraudulent

or other illegal behavior not be not tolerated.

Universal Service

As we have said previously, electric utility service is essential. Therefore, one of

the cornerstones in any restructuring effort is the requirement that electric utility

service be universal and affordable. A universal service policy must ensure basic

electric service at a level of consumption that would meet the needs of residential

ratepayers for lighting, heating, cooling, cooking, and recreation. In our view, affordability means that electricity rates do not strain the household budget.

AARP is concerned that in a competitive environment, less attractive customers

may be adversely affected. H.R. 2944’s only recognition of universal service is

through a ‘‘Sense of the Congress’’ provision. Unfortunately, such a declaration

places the full burden on the states to collect fees and implement the program.

AARP believes that there is still a role for the federal government in ensuring that

electric service is provided to all consumers. At a minimum, federal involvement

should include participation on a Federal-State Joint Board that would oversee a

program funded by a fee placed on all generators of electricity.

Conclusion

AARP is pleased with the attention Chairman Barton has devoted to residential

consumers in H.R. 2944. The consumer protection and aggregation provisions should

benefit consumers, but only if adequate market power provisions are put in place

to ensure that competition becomes a reality.

AARP hopes that as legislation moves toward passage in the House, the provisions we have discussed today remain intact or are improved. We urge this Committee to remember that residential consumers will benefit from restructuring only

if aggregation is facilitated, strong consumer protection provisions are enacted and

electric service is ensured for all.

Mr. Chairman, the work that you have done to highlight many of the inherent

problems in the move to a deregulated environment is to be commended. H.R. 2944

is a big step in the right direction. AARP looks forward to continuing our active participation in this debate on both the federal and state level and to working with you

in crafting solutions that will ultimately benefit not only our members, but the nation as a whole.

Mr. BARTON. Thank you, Mr. Brice.

We would now like to hear from The Honorable Betsy Moler, the

general counsel for Americans for Affordable Electricity and a

former deputy secretary of Energy and commissioner at the FERC.

Ms. Moler?

STATEMENT OF ELIZABETH ANNE MOLER

Ms. MOLER. Thank you, Mr. Chairman and members of the subcommittee. It is a pleasure to be before the subcommittee again

today.

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I am testifying on behalf of Americans for Affordable Electricity,

or AAE. AAE is a diverse coalition of over 200 member organizations. Their common bond is support of a more competitive electric

marketplace. We appreciate the opportunity to testify.

AAE believes there is an urgent need for Congress to enact legislation to modernize the laws governing this Nation’s electricity

business. Many of the laws currently on the books, as you have recognized, Mr. Chairman, are impeding progress toward a more-competitive electric marketplace.

AAE supports customer choice. Since Chairman Bliley took customer choice off the table, as he said, as a legislative priority in

this Congress, we have turned our focus to improvements in the

wholesale electricity marketplace that will further competition.

My testimony today focuses on wholesale issues; however, I do

want to reiterate our support for customer choice, as well as legislation that would give all customers the right to aggregate their

electricity purchases, whether or not they are located in States that

provide customer choice.

We believe that H.R. 2944 is a well-intentioned piece of legislation; however, we do not support enacting it in its current form because we believe it will serve to inhibit competition, rather than to

promote it.

In the brief time I have today, I want to focus on one aspect of

H.R. 2944 that is particularly troublesome, the transmission jurisdiction provisions.

Section 101 purports to clarify the respective role of Federal and

State jurisdiction, but in doing so it creates new barriers to competition. We need to have all transmission under one set of rules,

and we need to separate the transmission function from the sales

function in order to make electricity markets more open and competitive.

Let me explain.

Section 101 clarifies that FERC has authority over unbundled

transmission of electric energy sold at retail, while State regulatory

authorities have authority over any bundled sale of electric energy.

This same standard is being applied today, although it is being

challenged in the DC circuit litigation over Order 888.

In Order 888, FERC determined it had jurisdiction over so-called

‘‘unbundled transmission’’ in interstate commerce by public utilities. Thus, in States that have adopted customer choice, the use of

the transmission facilities is under FERC’s jurisdiction. However,

the same type of facility is not under FERC’s jurisdiction in States

that have not adopted customer choice.

What does this mean in the real world? You have a crazy quilt

of jurisdictional lines. FERC has authority over transmission lines

in States that have adopted customer choice, while State regulators

have authority over exactly the same type of facilities in States

that have not adopted customer choice.

Virginia, for example, has adopted customer choice legislation,

while West Virginia has not. The Virginia transmission lines are

subject to Federal regulation, while the West Virginia lines are not.

This simply does not make sense any more. All transmission

lines that are part of the interstate network must be under FERC’s

jurisdiction and subject to the same type of open access requireVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00248 Fmt 6601 Sfmt 6602 E:\HEARINGS\60356 txed02 PsN: txed02
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ments. Split jurisdiction over the interstate grid simply does not

make sense.

Based upon experience since Order 888 was issued, AAE firmly believes that we need to put all uses of the interstate transmission

grid under the same rules. The same open access tariff should

apply to wholesale transmission transactions and to both bundled

and unbundled retail transmission.

We have submitted legislative language with my testimony today to treat all transmission lines the same, whether they are used for

bundled or unbundled retail sales.

Let me explain and emphasize this is not back-door customer

choice. The text of the amendment makes it very clear FERC does

not have any authority to require customer choice. That choice

would remain with the States.

The amendment addresses two other issues we believe are also

critical. First, it would require all uses of the transmission system

to be under the same open access tariff. Utilities would be required

to take service under an Order 888 type tariff just like everyone

else. That is not the case today. Second, it would require utilities to separate their transmission

and electric sales functions.

This approach is not some wild idea that we dreamed up overnight. It is the same approach that FERC applies now for natural

gas pipelines. Order 636 put all shippers under the same tariff and required

pipelines to separate their transmission and sales functions. It

works.

The proposal dovetails with the reliability section of the bill. Frankly, I cannot reconcile the reliability section with the provisions in section 101 that limit FERC’s authority over transmission

lines.

Nothing is more critical to the Nation’s economic well-being than a reliable power supply. This is a classic interstate commerce issue. Individual States cannot guarantee reliability of the interstate grid. FERC must have the authority to do so. We urge the subcommittee members to take an evenhanded ap- proach to writing this vitally important piece of legislation. We

support restructuring legislation that will address these anachronistic laws such as PUHCA and PURPA, provided that new mechanisms are put in place to encourage open competitive markets. Thank you for allowing AAE to testify.

[The prepared statement of Elizabeth Anne Moler follows:]

PREPARED STATEMENT OF ELIZABETH ANNE MOLER ON BEHALF OF THE AMERICANS

FOR AFFORDABLE ELECTRICITY

Mr. Chairman and Members of the Subcommittee: It is an honor to appear before

you today. My name is Elizabeth Anne Moler. I am a partner in the law firm of

Vinson & Elkins, L.L.P. I am testifying today on behalf of Americans for Affordable

Electricity, or AAE. AAE represents over 260 member organizations; their common

bond is support of more competitive electricity markets. The diverse coalition includes commercial, residential and industrial energy consumers, utility and non-utility generators, power marketers, other energy providers, citizens groups, school administrators, and others.

We appreciate the opportunity to testify on H.R. 2944, Chairman Barton’s recently introduced Electricity Competition and Reliability Act.

AAE believes there is an urgent need for Congress to enact legislation to modernize the laws governing this Nation’s electricity business. Much has changed since

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1992 when Congress passd the Energy Policy Act. Since then, events in the marketplace, and actions undertaken by both Federal and State regulators have partially

reshaped this vital industry. Now inaction by the Congress is frustrating further

progress toward an even more reliable, efficient, competitve industry for our Nation.

Many of the laws currently on the books are impeding progress toward a more competitive electricity marketplace. AAE supports customer choice. We favor legislation that would give all customers the right to choose their electricity supplier by a date certain. Since Chairman Bliley

took customer choice ‘‘off the table’’ as a legislative priority for this Congress, we

have turned our focus to improvements in the wholesale electricity marketplace that

will further competition. Most of my testimony today focuses on wholesale issues.

However, I want to reiterate our support for customer choice as well as legislation

that would give all customers the right to aggregate their electricity purchases

whether or not they are located in states that provide customer choice. We believe that H.R. 2944 is a well intentioned piece of legislation. However, we do not support enacting it in its current form because we believe it will serve to

inhibit competition rather than promote it. In the brief time I have today, I want

to focus on one aspect of H.R. 2944 that is particularly troublesome. Section 101

purports to ‘‘clarify’’ the respective role of federal and state jurisdiction. But in doing

so it erects new barriers to competition. We need to have all transmission under one

set of rules. And we need to separate the transmission function from the sales function in order to make electricity markets more open and competitive. Let me explain. Section 101 would clarify that the Federal Energy Regulatory Commission (FERC) has authority over ‘‘unbundled transmission of electric energy sold at retail’’ while

state regulatory authorities have authority over ‘‘any bundled retail sale of eletric

energy, to any local distribution service component of any unbundled retail sale of

electric energy, or to any retail sale component of any unbundled retail sale of electric energy’’. What would this mean in the real world? You would have a crazyquilt of jurisdic- tional lines where FERC would have authority over transmission lines in states that

have adopted customer choice, while the state regulators would have authority over

exactly the same type of facilities in states that have not adopted customer choice.

Virginia, for example, has adopted customer choice legislation while West Virginia

has not. The Virginia transmission lines would be subject to Federal regulation

while the West Virginia lines would not. It would make more sense to have all

transmission lines that are part of the interstate network be under FERC’s jurisdiction and subject to the same type of open access requirements. Split jurisdiction

over the interstate grid just doesn’t make sense. Frankly this crazyquilt exists today and is causing significant problems in whole- sale markets. FERC Order No. 888, issued in April, 1996, required utilities to ‘‘open

up’’ their transmission lines. They were required to file open access transmission

tariffs and to take transmission service for their own new wholesale sales under the

tariff. The Commission determined that it had jurisdiction over so-called

‘‘unbundled’’ transmission in interstate commerce by public utilities. Thus, in states

that have adopted customer choice, the use of transmission facilities to serve retail

customers is under FERC’s jurisdiction. However, the same type of facility use is

not under FERC’s jurisdiction in states that have not adopted customer choice. (The

Commission’s determination that it lacked jurisdiction over the transmission aspects

of bundled retail sales is being challenged today—31

⁄2 years later—in the Order No.

888 litigation that is before the D.C. Circuit.) Based upon our experience since

Order No. 888 went into effect, AAE firmly believes that we need to put all uses

of the interstate transmission grid under the same rules. The same open access

transmission tariff should apply to wholesale transmission transactions, and to both

bundled and unbundled retail transmission.

We are submitting an amendment as an attachment to my testimony that would

treat all transmission lines the same, whether they are used for bundled or

unbundled sales. Let me emphasize that this is not ‘‘back door’’ customer choice. The

text of the amendment makes it very clear that FERC does not have any authority

to require customer choice; that choice would remain with the states.

The amendment addresses two other issues that we also believe are critical. First,

it would require all users of the transmission system to be under the same open

access transmission tariff. Utilities would be required to take service under an

Order No. 888-type tariff, just like everyone else. Second, it would require utilities

to separate their transmission and sales functions.

This approach is not some wild idea that we thought up overnight. It is the same

approach that FERC uses for natural gas pipelines. Order No. 636 put all shippers

under the same tariff, and required the pipelines to separate their transmission and

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sales functions. It works. States still have the authority to determine whether to

adopt customer choice; some have while others have not. The natural gas marketplace is truly open and competitive. Congress should ensure that electricity markets

are equally efficient and competitive.

This proposal will also enhance the usefulness and effectiveness of other provisions in H.R. 2944. This is particularly true for the reliability section. Title II gives

FERC jurisdiction over a new electric reliability organization. The reliability organization is charged with the responsibility of developing binding reliability ‘‘organization standards’’ for the ‘‘bulk-power system’’.

Frankly, I cannot reconcile the reliability section with the provisions in Section

101 that limit FERC’s authority over transmission lines. Nothing is more critical to

the Nation’s economic well being than a reliable power supply. This is a classic

‘‘interstate commerce’’ issue. Individual states cannot guarantee reliability of the

interstate grid; FERC must have the authority to do so.

Section 103 requires all transmitting utilities to join a Regional Transmission Organization (RTO). AAE has not taken a position on this particular proposal. However, RTOs will be much more effective if FERC has authority over all transmission

lines, not just those used for wholesale transactions and unbundled retail transactions.

The aggregation issue is also important. In the absence of a date certain for customer choice, AAE advocates allowing customers in both ‘‘open’’ and ‘‘closed’’ states

to aggregate their purchases. The ABC grocery store chain, or the RAH RAH university alliance, should be able to aggregate their purchasing power to purchase electricity for multiple locations in multiple states. Without such a provision millons of

residential and commercial customers will be unable to enjoy the benefits that competition will bring and H.R. 2944 should provide.

AAE supports legislation that will address these vitally important transmission

market power issues. Our July 22 testimony addressed PUHCA, PURPA, grid management and reliability. Our position on those issues remains the same.

We urge the Subcommittee Members to take an even-handed approach to writing

this vitally important piece of legislation. We support restructuring legislation that

will address anachronistic laws, such as PUHCA and PURPA, provided that new

mechanisms are put in place that encourage open, competitive markets.

Thank you for allowing AAE to testify.

Mr. BARTON. You are very welcome. We are just delighted that

you testified, and we liked your testimony, actually. Do not agree

with it all, but we liked the way you gave it.

We are going to hear from Mr. Mark Cooper, who is director of

research with the Consumer Federation of America.

STATEMENT OF MARK N. COOPER

Mr. COOPER. Thank you, Mr. Chairman. And I also speak today

on behalf of Consumers Union, who has signed onto our testimony.

With well over half the electricity in this Nation sold in States

that have restructured their industry, consumers’ electricity bills

will be increasingly determined by the actual performance of markets. Unfortunately, the promise of lower prices and more choices

at the State level is being undermined by the failure of the interstate market to support effective competition.

Only Federal authorities can order and oversee the interstate

market, we believe, according to seven principles. We fear that the

legislation before the committee will deregulate the industry without de-monopolizing it. Unless amendments are made, it will make

matters worse, not better, because consumers will be denied the

benefits of competition while they are subject to abuse of market

power by incumbent utilities who are no longer restrained by regulation.

The seven principles are straightforward, and I will deliver these

in seven sentences, because they are simple amendments.

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Federal legislation should make a clear commitment to universal service, defined as the availability to all Americans of electricity

services at rates that are just, reasonable and affordable. Market power and generation must be eliminated. Federal au- thorities must ensure that generation markets are free of the exercise of market power. Simply put, antitrust authorities, who already have broad powers to oversee these markets, should make an

affirmative finding that the market is competitive, workably competitive, before they are deregulated. Simple finding. Third, open highways of commerce are necessary. The authority of the Federal Energy Regulatory Commission to require the national grid be operated in a reliable and open manner must be

clarified and sharpened. All utilities should be required to participate in transmission organizations that have no interest in generation or energy service markets and include representatives of all

customer classes.

Fourth, residential consumer sovereignty must be promoted. Fed- eral legislation should require States to facilitate aggregation. At

the very least, it should require that no State or local statute prohibit or hinder consumers from aggregating their purchase of electricity to all types of organizations, including cooperatives and

units of local government. Fifth, all consumers should benefit from competition. No utility should have the opportunity to enjoy the benefits of competition

outside of its service territory until consumers within its service

territory also have the benefits of competition. Before a company

enjoys the benefits of being provided relief from Federal regulations, at home it should ensure that its own markets are open to

competition. Competition is the replacement for regulation. Sixth, financial transactions must be sound. Basic oversight has to be applied to financial transactions and commodity markets on

a national basis, such as certification and licensing of brokers, and

establishment of margin requirements, which should be imposed on

electricity as a commodity, which is, in fact, a very, very special

and precious commodity. Seven, electricity restructuring should not result in any degrada- tion in environmental quality. Congress should ensure that performance standards, portfolio requirements, whatever instruments

you prefer should be available to ensure that, as a result of the increase in production from certain facilities, there is no resulting

degradation in the environment. Those are seven principles. I believe we can state those very, very clearly and specifically, and that is the way we think the

interstate market should be——

Mr. BARTON. It was more than seven sentences though. I lost count at about 20. But they were seven principles. Continue with your statement.

Is it concluded?

Mr. COOPER. Thank you, Mr. Chairman. [The prepared statement of Mark N. Cooper follows:]

PREPARED STATEMENT OF MARK N. COOPER ON BEHALF OF CONSUMER FEDERATION

OF AMERICA AND CONSUMERS UNION

Mr. Chairman and Members of the Committee, my name is Dr. Mark N. Cooper.

I am Director of Research at the Consumer Federation of America. I appreciate the

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1Consumer Federation of America is the nation’s largest consumer advocacy group, founded in 1968. Composed of over 250 state and local affiliates representing consumer, senior citizen,

low-income, labor, farm, public power, and cooperative organizations, CFA’s purpose is to represent consumer interests before the congress and the federal agencies and to assist its state

and local members in their activities in their local jurisdictions.

Consumers Union is a nonprofit membership organization chartered in 1936 under the laws

of the State of New York to provide consumers with information, education and counsel about

goods, services, health, and personal finance; and to initiate and cooperate with individual and

group efforts to maintain and enhance the quality of life for consumers. Consumer’s Union’s income is solely derived from Sale of Consumer Reports, its other publications and from noncommercial contributions, grants and fees.

opportunity to appear before you today to offer our views on federal legislation to

restructure interstate electricity markets. Consumers Union joins in these views.1

LEGISLATION IS NECESSARY TO ENSURE EFFECTIVELY COMPETITIVE INTERSTATE

MARKETS

With well over half the electricity in the nation sold in states that have restructured their industries, consumers’ electricity bills will be increasingly determined by

the actual performance of electricity markets. This unparalleled transition for an industry that is so vital to the national economy and has such a large impact on consumer pocketbooks must be made to result in a market that will truly benefit American consumers. Unfortunately, the promise of lower prices and more choices at the

state level is being undermined by the failure of the interstate market to support

effective competition.

In order for any market to function properly there must be an effective supplyside, an effective demand side, and open highways of commerce in between so that

transactions can take place. The interstate market is failing consumers and competitors in all three areas. These market failures allow incumbent utilities to preserve

their monopoly and frustrate the flow of competitive electricity.

The objective of restructuring is to replace traditional regulation with market

forces. In many instances, however, consumers have been hurt because regulation

has been removed before market competition exists. The result has been the unfettered exercise of market power. Evidence of the abuse of market power in interstate

markets is abundant. Electricity has been withheld from markets to inflate prices.

Electricity has been hampered from flowing across state borders by self-interested

foreclosure of transmission facilities. Manipulation of financial transactions and

speculative deals have driven prices far above reasonable levels at critical moments.

Barriers have been erected by some states that prevent consumers from effectively

expressing their demands in the marketplace.

Federal legislation is critically necessary to correct this series of dramatic failures.

Only federal authorities can order and oversee the interstate market. The market

must be restructured according to seven principles.

• A commitment to universal service

• Elimination of market power in generation

• A reliable national grid operated on principles of non-discrimination

• Meaningful choice for residential consumers

• Equal opportunity all consumers to benefit from competition

• Sound financial transactions

• Environmental preservation

UNIVERSAL SERVICE MUST BE ENSURED AND ENHANCED

The ultimate goal of restructuring in the electric utility industry should be to ensure and promote universal service in a more efficient manner than at present. Affordable and reliable service to the public is the ultimate goal; competition is the

means to that end. Federal legislation should make a clear commitment to universal

service defined as the availability to all Americans of a reasonable level of electricity

service at rates that are just, reasonable and affordable.

MARKET POWER IN GENERATION MUST BE ELIMINATED

As the transition to competitive markets begins, incumbent utilities still dominate

the generation market in many areas and at critical peak periods when supplies can

become extremely tight. Federal authorities must ensure that the generation market

is competitive and free from the exercise of market power. Antitrust authorities

have broad powers to prevent the abuse of market power. The Federal Trade Commission should be required to make an affirmative finding that markets are workably competitive before federal regulatory authority is relaxed.

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OPEN HIGHWAYS OF COMMERCE ARE NECESSARY

At this point in time, many incumbent utilities still own generation and the transmission system, which provides opportunities for vertically integrated monopolies to

use their market power in transmission to foreclose others from competing in the

generation market. Separating ownership of generation from transmission and distribution is the best method of preventing abuses. Independent operation and control over the transmission network is necessary to ensure reliability and open, nondiscriminatory access to the transmission system for all parties.

The authority of the Federal Energy Regulatory Commission to require the national electricity gird to operate in a reliable and open manner needs to be clarified

and sharpened. All utilities should be required to participate in transmission organizations that have no interest in generation or energy service markets and include

representatives of all customer classes on the governing board. The infrastructure

for the market must be competitively neutral and operated as a common carrier.

The boundaries for these transmission organizations should be dictated by the scope

of regional markets of sufficient scale to promote competition.

RESIDENTIAL CONSUMER SOVEREIGNTY MUST BE CREATED

In order for consumers to have the opportunity to benefit from the competitive

marketplace for electricity they must have the ability to make informed choices. Aggregation is crucial to creating an alternative for residential consumers; education

is crucial to effective choice.

Federal legislation should require states to facilitate aggregation; at the very

least, it should require that no state or local statute should prohibit or hinder consumers from aggregating their purchases of electricity. Therefore, federal legislation

should require that no state or local statute or regulation or other state or local

legal requirement prohibit or have the effect of prohibiting the ability of consumers

to aggregate their demand through all types of organizations including cooperatives

and units of local government.

Instrumental in the ability of consumers to benefit from a competitive market is

the ability to make informed choices. Information must be provided in a readily understandable manner that allows consumers to make comparisons between sellers

in terms of price, terms and conditions (such as fees, contract terms and minimum

payments), the services that are being provided and the type of electricity that is

being used. Post-purchase remedies must be facilitated by clear identification of the

seller, provision of a toll-free telephone number and policies to prevent abusive marketing practices, such as slamming, cramming and the bundling of regulated and

unregulated services.

EQUAL OPPORTUNITY FOR ALL CONSUMERS TO BENEFIT FROM COMPETITION MUST BE

PROVIDED

No utility should have the opportunity to enjoy the benefits of competing outside

of its service territory until the consumers within its service territory have the opportunity to benefit from competition.

Before a company may enjoy the benefits of being provided relief from regulations

intended to promote the public interest, such as PURPA and PUHCA, there should

be a showing that the generation market in which they are based is competitive.

If they are not subject to competition at home, the potential abuses that these statutes were intended to prevent remain a threat to consumers.

FINANCIAL TRANSACTIONS MUST BE SOUND

Markets must have confidence in the financial transactions that trigger the exchange of goods and services. The electricity market has been plagued by defaults,

questionable deals (daisy chains) and misleading transactions. Prices have not been

transparent. Terms and conditions have been unclear. Electricity is unlike most

other commodities in that it cannot be stored and moves according to unique physical laws. When financial transactions break down, the electricity market can be severely disrupted.

The basic oversight that is applied to financial and commodity markets—such as

certification, licensing and bonding of sellers, establishment of margin requirements,

regulation of financial instruments and disclosure of transactions, publication of

prices, etc.—should be applied to the electricity commodity market by an existing

federal financial agency. A study of additional steps necessary to ensure the smooth

functioning of the electricity market should be conducted.

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ENVIRONMENTAL PRESERVATION

Electricity restructuring should not result in any degradation in environmental

quality. Reliance on market forces may increase the use of generation resources that

do not directly bear the full cost of the environmental burden they place on society

(i.e. they impose negative external environmental costs). Congress should ensure,

through performance standards, portfolio requirements, credit trading, or direct

funding that environmental quality is preserved and improved.

Mr. BARTON. Okay. Thank you.

We want to now hear from Mr. Marty Kanner, who is the coalition coordinator for the CS for Fair Competition, which is different

than the Americans for Affordable Electricity. See, we have all

these good groups here before us today.

So we will put your statement in the record and encourage you

to summarize it in 6 minutes, please, sir.

STATEMENT OF MARTY KANNER

Mr. KANNER. Certainly, Mr. Chairman. And, if nothing else, your

efforts have fostered a plethora of organizations, coalitions, and initials.

I would like to start my testimony, Mr. Chairman, with the concluding statement from the executive summary of EEI’s testimony.

‘‘As long as consumers have a choice of suppliers and no company

can manipulate prices or shut out other competitors, consumers

will find the best combination of prices and services to meet their

needs.’’ Mr. Chairman, I could not agree more strongly that that

is exactly the end state that we seek to achieve. The difference,

however, is quite sharp.

Edison Electric Institute and their members and many of their

members and allies would argue that we simply step away and let

the markets take care of themselves. I think we would all agree

that the financial markets—the New York Stock Exchange is one

of the best examples of free markets anywhere in the world, but

I do not think we would say that Morgan Stanley, Michael Milken,

and the Bass brothers should be able to regulate the system on

their own; that we need the SEC as an oversight agency to ensure

there is not market manipulation, consumer and investor abuse, or

other things antithetical to that competitive end state that we seek

to achieve.

A number of you have asked important questions that I would

like to answer.

Mr. Shimkus asked whether RTOs can mitigate horizontal market power, and the answer, Mr. Chairman, is absolutely yes, but

we need to make sure that those RTOs, in fact, are independent,

have clear and robust authorities, and are of geographic scope that

achieves the desired aim.

Mr. Chairman, the provisions in your bill I believe do not achieve

that objective, because they allow the transmission owners to continue to set the rules of the market and do not have that independent authority to look at it and say, ‘‘No, not good enough.’’ And

then, second, as a number of witnesses have suggested, even if we

create the perfect RTO, if we remove from the jurisdiction of those

facilities a vast share of the transmission lines in the country, then

we do not have that open highway of commerce that most of us believe is necessary.

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Another question was whether there are examples of generation market power. The answers are clearly yes. In California, where

they have opened retail markets, after doing so and where, Mr.

Chairman, as you noted, generation assets were divested, you had

substantial price increases, you had the State-created ISO and

State-created power exchange, as well as the investor-owned utilities that used to own the generation go to the Federal Energy Regulatory Commission and say, ‘‘There is an exercise of generation

market power.’’ The State, itself, had no authority to control and

regulate those price spikes, and, had there not been price caps in

place, consumers would have seen a doubling of their monthly electric bills.

Those are the sorts of examples we want to avoid, not institutionalize.

You asked, Mr. Chairman, if States can do it alone, and you noted that a number of States have required asset divestiture.

While that is true, I note that in the main the objective in those

divestiture examples was to create evaluation for stranded cost recovery, not to address market power. The effect was that assets were bundled and you just changed the name of the owner. You still had the same concentration levels

in those relevant power markets. We did not divvy up the pie, if

you will. One important exception, however, is your State of Texas, where they expressly said, ‘‘We want to make sure that we have competitive generation markets,’’ and created some mechanisms that I believe form a very workable model at the national level, that we say

we want to make sure the generation markets are competitive. Have the utilities file their own mitigation plans, and then have an impartial third party look over those and determine whether

they are acceptable or not.

Mr. Chairman, I would encourage you to provide for all consumers the competitive benefits and choices that it looks like consumers in Texas will be able to have.

Mr. Chairman, as it has been noted by several witnesses, we

need legislation. The current market is not properly functioning,

and those retail markets that have opened up won’t realize the

benefits that those States tried to create if we do not, in fact, have

a competitive market structure.

Consumers for Fair Competition has put together model legislation to address these issues. We would encourage you and your

staff to review those and work cooperatively with us and the members of the committee to make sure that the intended benefits of

a competitive market are, in fact, realized.

[The prepared statement of Marty Kanner follows:]

PREPARED STATEMENT OF MARTY KANNER ON BEHALF OF CONSUMERS FOR FAIR

COMPETITION

Mr. Chairman, Members of the Subcommittee, I am Marty Kanner. I am testifying today on behalf of Consumers for Fair Competition (CFC), a coalition of small

business interests, power marketers, consumer and investor owned utilities, small

and large electric consumer representatives and environmentalists. Chairman Bliley

has repeatedly called for putting consumers front and center in the restructuring

debate, and the members of CFC want Congress to pass legislation that will enable

electric consumers to realize the benefits of competition. As underscored by a recent

letter sent to Congress by more than 100 organizations, which I have attached to

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my testimony, legislative action is imperative to correct the significant failures in

the wholesale electric market and create the open highway of commerce needed for

state retail competition efforts to succeed.

As I have testified before, this is not an infant industry in which business success

is decided by innovation, entrepreneurial prowess and efficiency. We are attempting

to restructure an industry of government-sanctioned monopolies that control the

vast majority of generation, transmission and distribution facilities and associated

customer information. Despite the Energy Policy Act and other efforts to infuse competition in the wholesale market, the reality is that there is not robust competition

in the market today:

• System constraints and market manipulation have caused wild price volatility

and price spikes that—had retail consumers not been insulated by price caps—

would have led to outrageous electric bills and an outcry for action;

• Large, vertically-integrated utilities have a chokehold on the transmission system

and all users and uses of the grid don’t operate under the same tariff;

• Many regional power markets are dominated by a single or small handful of players, that can dictate prices and shut out competitors;

• The continuing wave of utility mergers are likely to accelerate this consolidation;

and

• Utilities continue to leverage ratepayer-provided funds and resources to enter new

business lines through unregulated affiliates that compete unfairly with small

and large businesses.

As CFC has previously testified before this subcommittee, Congress must pass

legislation to achieve a market in which these structural flaws are remedied so that

consumers have many choices, competitors are not unfairly disadvantaged, and competitive market forces prevent consumer abuse and market manipulation.

H.R. 2944, if enacted in its current form, would not create the vibrant competitive

market that consumers want and need. In fact, it would be a step backward.

Transmission

The nation’s transmission grid is the highway of commerce. Even in the states

that have adopted retail competition, consumers won’t be able to effectively choose

among suppliers if those suppliers cannot gain access to the market. Despite the

progress made in the Energy Policy Act of 1992, the transmission network remains

a two-class system, with transmission owners granting themselves first-class service

while competitors are relegated to the end of the line. All users of the transmission

grid must operate under the same tariff and have the same tariff choices.

Today, each utility’s transmission network, despite a certain amount of reliability

coordination, is operated largely as if it were an isolated island. This unnecessarily

constrains and contracts markets. By acting in their own self-interest, owners can:

• reserve the majority of transmission capacity for their own use (which use is not

effectively subject to FERC comparability standards);

• hide retail and wholesale charges in bundled rates and create a lack of transparency in the transmission market;

• operate the system to favor its own (or affiliates’) wholesale or retail marketing

function,

• take actions ostensibly for reliability purposes—such as congestion management

and emergency curtailment procedures—in a discriminatory and anti-competitive manner,

• impede the development of and sales by competing power suppliers; and

• fail to make transmission investments that would alleviate congestion and promote the competitive market.

Provisions in Section 101 of H.R. 2944 erode existing transmission access standards and drastically reduce the amount of transmission that would even be part of

the interstate grid. A recent decision in the 8th Circuit has crippled FERC’s vaunted

‘‘comparability’’ standard. Section 101 would codify this decision by granting the

states exclusive jurisdiction over bundled transmission service. Such action effectively limits application of open access policies to the 10-15 percent of transmission

capacity that are surplus to a utility’s own needs.

The impact of this provision on bundled transmission service is compounded by

subsection (h) which facilitates the reclassification of transmission facilities as distribution—outside the scope of comparability requirements. Such reclassification can

also result in discriminatory cost-shifting to entities receiving service on these reclassified lines.

Combined, these provisions dramatically shrink the transmission network and

cripple interstate commerce. It would be like allowing parts of the interstate highway system to be reclassified as county roads that then have toll gates erected. If

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these provisions are not changed, even the most robust RTO provision would not

create the open system needed for competitive electricity markets. Unfortunately, H.R. 2944 does not advance effective RTOs.

CFC believes that control of the nation’s transmission system must be transferred to truly independent bodies that encompass the broadest geographic regions and

have strong authority to operate, plan, maintain and expand the transmission system. Such entities must provide for the functional separation of the monopoly transmission and market functions. It is imperative that all users of the system have

equal, and non-discriminatory access to the nation’s grid. The provisions of section 103 do not break the utility stranglehold on the trans- mission system nor foster the open markets that must be achieved:

• Utilities are allowed to structure RTOs to serve their own interests rather than

having an independent referee promote RTOs based on the interests of the market. Section 103 fosters a ‘‘take it or leave it’’ approach. While utilities are required to establish or join an RTO and the FERC is given standards by which

to judge these filings, the Commission cannot require formation of or participation in an RTO if the filing fails to meet the standards. Thus, utilities could

file inadequate RTOs and FERC is left with the choice of accepting ‘‘half a loaf’’

or rejecting the filing and retaining the flawed status quo. • The bill doesn’t foster true independence. By allowing 10 percent voting interests to pass the ‘‘independence’’ test, a small handful of utilities within an RTO can

hold a majority of the voting interests. This is hardly a separation of the ownership and control of transmission and generation and creates a loophole that

guts the underlying purpose of the RTO. • Bill encourages, small, numerous RTOs. H.R. 2944 encourages smaller, more nu- merous RTOs that will encourage ‘‘pancaking’’ rates and increase costs for consumers. • RTOs would become an exclusive club. The provision allows transmission owners

to shut out new market entrants, end-users and transmission dependent utilities from the RTO process. • The RTOs responsibilities are limited—we cannot allow monopolists to set the

rules of the market. The provision allows RTOs that have no meaningful author- ity, simply administering rules and procedures established by the transmission

owners. The provision fails to provide authority over associated generation that

is essential for transmission regulation. Moreover, the bill is silent on which entity—the RTO or the transmission owner—will calculate available transmission

capacity and reserve requirements and implement curtailment and reliability

procedures. • Transmission incentives send the wrong signal. Cost based pricing is the proper norm for monopoly services. We do not believe that incentive rates are needed

or appropriate to induce formation of RTOs, eliminate rate pancaking, or minimize cost-shifting. The failure to invest in transmission has more to do with the

strategic and financial value in sustaining transmission bottlenecks than the

lack of ‘‘incentives’’. While congestion pricing can be used to reflect true transaction costs and encourage new investment, utilities should not be rewarded for

providing an essential, monopoly service. Transmission incentives are not needed.

Failure to provide an open highway of commerce, in which all users operate under

the same tariff and have the same tariff choices, will raise rates, frustrate competition and lead to the further balkanization of the system.

Market Concentration

In the electric generation market, market boundaries are determined largely by

transmission constraints—physical limitations on transfer capabilities. Within these

boundaries, it is common for an incumbent utility to own more than 40 percent of

the generating capacity. At this level of concentration, economists recognize that the

dominant firm can set and control prices above what would occur in a truly competitive market.

Despite a significant increase over the past few years in the construction of nonutility generation, such facilities still represent a comparatively small fraction of

total generation. Moreover, potential developers of such facilities often face a diverse

set of entry barriers. For example, incumbent utilities displace competitors in the

queue to connect new power plants to the grid. They also own the prime sites for

future plant location (often adjacent to existing plants). In addition, in many states,

only utilities themselves can request and receive the necessary regulatory permits.

Even if new, independent plants can be built, it will be years—and there will need

to be considerable growth in demand—before competitive suppliers will break the

lock of the dominant player and markets will begin to operate competitively.

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CFC supports the provisions of the DeLay-Markey bill of last Congress, which

grants FERC affirmative authority to investigate and remedy undue concentration,

as an effective means for addressing this problem. Alternately, Mr. Chairman, your

state of Texas adopted provisions that provide a workable model for federal legislation. We would encourage you to provide consumers throughout the nation the same

assurances of competitive generation markets that Texans will enjoy.

In addition, Congress must eliminate discriminatory standards for interconnection

with the grid. We cannot allow utilities to advantage their own generation projects

to the detriment of new market entrants.

Mergers

The various procedural limitations on merger review established by H.R. 2944 effectively eliminate meaningful review.

There are certainly potential utility mergers that do not warrant timely and extensive review. However, for many mergers, the time limits and elimination of hearings and cross-examination will severely limit the ability to analyze the competitive

impact of the proposed merger. While there are time limits under the anti-trust

laws in merger reviews, I would highlight that those same laws have robust data

filing and discovery requirements.

We would urge you to delete the procedural limits in H.R. 2944. If the merger

review process is to be truncated, then data filing and discovery requirements analogous to that which exists under the anti-trust laws must be established.

Affiliate Transactions

By straddling regulated and unregulated markets, utilities can cross-subsidized

their competitive, unregulated activities with revenues and resources provided by

captive ratepayers. Not only do such actions harm consumers, they harm the countless small and large businesses that the utilities unfairly compete against.

The information disclosure and consumer privacy provisions of H.R. 2944 are important steps in addressing some of the underlying problems in affiliate transactions. However, more is needed. While state commissions can review and regulate

the practices of utility affiliates providing energy services, they are unlikely—or

often unable—to review the activities of utility affiliates in energy related enterprises targeting residential and commercial markets for electrical, mechanical, air

conditioning and heating and fuel supply markets. State Commissions already act

on behalf of consumers. Now they need the direction and authority to act on behalf

of existing competitors in a deregulated retail energy market.

Congress recognized the need to prevent anti-competitive cross-subsidization in

the 1996 Telecommunications Act. Congress should not set a lower standard of fair

competition for the energy market than it did for the telecommunications market.

CFC urges Congress to prohibit cross-subsidization, adopt model structural and behavioral standards for state commissions and establish a cause of action for abusive

affiliate practices. We believe the limitation on books and records under the PUHCA

provisions are a step in the wrong direction.

Conclusion

The current system is not working, and action is needed to correct market deficiencies and promote competition.

Congress must make a clear choice: advance the interests of monopolists, or the

interests of consumers and competition. These are not issues that can be balanced

or compromised. In order to achieve the benefits of competition, we must eliminate

the anti-competitive vestiges of the old, regulatory system.

Mr. Chairman, we appreciate your openness to improving amendments and look

forward to working with you and the members of the Committee to develop a bill

that advances a competitive electric marketplace.

Mr. BARTON. Thank you, Mr. Kanner.

We would now like to hear from Mr. Richard Cowart, who is the

director of the Regulatory Assistance Project.

Mr. Cowart?

STATEMENT OF RICHARD H. COWART

Mr. COWART. Thank you, Mr. Chairman.

I guess I should emphasize that I speak today as someone who

for 12 years sat as the Chair of a State Public Utility Commission,

and my views are my own.

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As is obvious to the members of the committee, the subject of

electric restructuring is no longer a theoretical one. The States

have clearly been the laboratories of democracy in this transformation, and the good news now is that Congress can learn from

what has been going on throughout the Nation.

A review of this bill reveals that much has been learned from the

policy debates and experiences of the States.

Provisions in the bill on consumer protection, electric product disclosure, net metering, and a number of the transmission and reliability provisions are commendable. In other areas, though, it

seems that key lessons from recent experiences around the country

are not being dealt with in Congress.

In particular, the draft bill does not adequately address the challenges we now face in maintaining environmental quality, universal service, and electric system reliability. And in my short time

with you today I am going to focus on reliability.

We know that this is the most important goal of the American

electric system. Customer polls consistently reveal that keeping the

lights on reliably is the top priority that people have for the electric

system, and it is the No. 1 concern that they have about industry

restructuring.

In recent months, it has become clear that the reliability of the

Nation’s electric system is under great strain. Outages, power

warnings, price spikes, rolling brownouts—I think you know the

litany of events that have occurred in all regions of the country

over the past 2 or 3 years, and particularly during the summer

peak periods.

The North American Electric Reliability Council, which likes to

speak quietly on such things, is starting to warn that we face a

real reliability problem, and I heard Mr. Nevius say this morning

that we need reliability legislation now.

The common response to the events that we are discussing here

has been a call for more construction of more energy supply facilities—90,000 megawatts, 100,000 megawatts, 120,000 megawatts of

new generation is often called for—along with the accompanying

gas pipeline capacity and electric transmission capacity to serve

this growth in output and throughput.

But there really are three elements to the equation, and the bill

only deals with two of them. The three elements are: generation,

transmission, and end uses. We need to focus for a moment on the

end use issues.

The reliability problem that we now face is, in large measure, the

result of rapid load growth over the past decade, coupled with a serious falling off in efficiency and demand side management measures by the Nation’s utilities.

According to the EIA, electric consumption grew by 31 percent

over the past decade. In the critical summer peak period, growth

has even been more dramatic—a 56,000 megawatt increase between 1993 and 1997, alone.

This is the electrical equivalent of adding the entire six-State region of New England to the Nation’s peak demand every 18

months, and that process is continuing.

Unfortunately, while this demand has been rising, utilities have

been dramatically reducing their investments and their achieveVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00260 Fmt 6601 Sfmt 6602 E:\HEARINGS\60356 txed02 PsN: txed02
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ments in cost-effective energy efficiency and demand side management programs.

And we should pause for a moment to remind ourselves that

these utility efficiency programs have, in fact, been very successful.

In the early 1990’s, energy savings were rising annually at double-digit rates, costs of power reduction averaged 2.1 cents per kilowatt hour, and peak load reductions of up to 29,000 megawatts

were attained.

But with the advent of competition all this has turned down

sharply. Total utility spending on demand side management and

achievements in this area have dropped in half, and the achievements that were expected to be attained by now have also been

dropped in half.

Utilities in 1993 expected that we would be now able to clip our

peak demand by 55,000 megawatts. That has been reduced to

25,000, leaving an efficiency gap of about 30,000 megawatts.

Just imagine for a moment what an extra 30,000 megawatts of

non-polluting——

Mr. BARTON. Mr. Cowart, would you suspend? We are not going

to take this away from your time. I would just make an announcement to the subcommittee. I am told we have three 15-minute

votes, and I count three more witnesses after Mr. Cowart at 6 minutes each. That is 18 minutes.

So at the conclusion of Mr. Cowart’s testimony we are just going

to put a little firewall right there between Mr. Cowart and Mr.

Smith and take a lunch break and we will reconvene at 1:30. But

we are going to finish with Mr. Cowart, take a break, come back

at 1:30. Every member of the audience has to be back in the same

seat at 1:30, and then we will hear from Mr. Smith, Mr. Casten,

and Mr. Segal.

Continue, Mr. Cowart.

Mr. COWART. All right. Thank you.

Imagine what an extra 30,000 megawatts of non-polluting capacity could have achieved to forestall the blackouts and power outages that we have been seeing over the past couple of summers.

The potential for energy efficiency investments in this country is

by no means exhausted, and the good news is that it would save

a lot of money, it would leave a lot of money in the pockets of

American households and at the bottom lines of American businesses.

There are a number of important provisions in this bill to

strengthen the reliability of the electric grid, but when you are trying to keep up the water level in a big reservoir, you might need

some bigger pumps and you might need some bigger pipes, but it

is also smart to see if the water on the other end is just leaking

into a hole in the ground.

We need to go out and work on energy efficiency, Mr. Chairman,

as part of the restructuring of the electric industry.

Now, the good news, in conclusion, is that the States have been

working on these issues, and there are good models out there, both

for the provision of energy efficiency services and also for the provision of renewable energy services to American consumers.

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I would commend the committee’s attention to the work the

States have been doing in this area, and I would recommend that

you add provisions to support those measures to this legislation.

[The prepared statement of Richard H. Cowart follows:]

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Mr. BARTON. Thank you, Mr. Cowart.

The subcommittee stands in recess until 1:30.

[Brief recess.]

Mr. BARTON. We are going to go ahead and start. We had a malfunction of the House automatic teller machine, so there was a

move to record the rule on health care by actual old-fashioned roll

call vote, and, unfortunately, I am a ‘‘B,’’ and before I knew about

it they were past me, so I had to wait. I apologize.

Mr. SAWYER. Mr. Chairman, is this an electric reliability problem?

Mr. BARTON. It has been pointed out that there was a transmission access problem.

Actually, what happened, Mr. Barcia got a new voting card

today. Our members are given these electronic voting cards. They

put his name in it as Arcia, not Barcia. So when he recorded his

vote, the electronics of the machine tried to find Arcia and went

crazy because there is no Arcia, to it melted down the system, looping, trying to put the ‘‘no’’ vote of Arcia where there was no person.

So they have corrected that problem.

Mr. Smith, your testimony is in the record in its entirety, and

we recognize you for 6 minutes. I know it will surprise some of the

audience, but you were my witness, which has got to be something

of a first for me, having a representative of Public Citizen testify

at my request.

Welcome.

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STATEMENT OF TOM SMITH

Mr. SMITH. Mr. Chairman, I am honored. And thank you very

much for your invitation. I am proud to be here.

I run Public Citizen’s Texas office. As you know, we are a national nonprofit consumer organization, founded over 25 years ago

now by Ralph Nader, and we are here today to talk about our concerns about electric utility deregulation.

Before I begin, I would like to say thank you to you, Mr. Chairman, and other members of this committee because there are a

number of provisions in this bill that we recognize as being here

because people like myself or others in the environmental community have asked for them—your disclosure section, the net metering

section, your privacy and slamming and cramming sections, and,

although we do not think they go far enough, the renewable sections that begin to encourage it through extensions of various tax

credits.

I have basically five themes I want to talk with you about today.

And let me begin by saying, for those of us in Texas and around

the Nation who are looking at electric utility deregulation, the test

is really who is going to benefit. Is Bubba going to benefit, or is

it the big boys?

And what we see today is that there is not enough in this bill

for Bubba to really benefit yet, and it seems to us it is kind of like

crossing the stream. You have gotten about three steps out into the

middle of the stream and the path is not clear to the dry bank on

the other side, and if we do not get some more stones in the middle

of that stream, we are all going to get wet and wish we would

never have started to cross.

And so what I would like to do today is visit with you about some

of those other stones that we think we can put in the stream that

will get us to a place that may be better for us all.

First, let me go through the five or six big themes I want to talk

about, and then I will come back and hit them in greater depth.

The first is, as you have heard across the table today, there is

a lot of interest in aggregation. We think the most cost-effective

way to serve the average residential consumer is through opt-out

aggregation like they have in Ohio and Massachusetts, where a

group of people is aggregated together and then has the opportunity to leave and go out if they choose to play in the retail market.

The second big issue for us we think is reducing pollution from

our power plants and not choking our kids in the future. It is important to recognize that over two-thirds of the coal plants in this

country are grandfathered and do not meet today’s current standards. And if we were to require them to meet those standards,

three-quarters of significant pollution that is choking our cities

would be eliminated. We think that this is an opportunity to clean

up the air over our cities.

We think that we need to ensure that new energy sources are developed for our future. And, as we mentioned, we appreciate the renewables portion of your bill, but we think the way to go about it

is through a renewables portfolio standard and a small public benefit trust fund.

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We think that we need to enhance competition, if possible, and

help consumers save money through enacting strong energy efficiency provisions.

And, last, we need to prevent just uncuffing the monopolies and

give consumers new tools and strong tools to assure that we are

able to deal with market power.

Let me go to the first point.

We think that the problem with the aggregation provision that

is in your bill today is that it puts all the transaction cost on those

that are not going to be able to afford them—the associations or

the local government agencies that may choose to try and put together a package of electricity to sell to consumers.

And what it does is it creates an impenetrable barrier of high

marketing and transaction costs that will functionally prevent that

kind of aggregation from benefiting any except the trade associations and perhaps a few rural communities.

Many States have taken a look at this issue and have said the

cost of switching a customer is high, and so high that we think the

way to go about it is what they have done in Ohio and Massachusetts—allow the community to have a great debate and say, ‘‘Do we

want to serve the customers within our boundaries?’’ And if, after

that debate, the answer is yes, then everybody in that community

is part of that buying club and you have professional help in making a choice among the various offers made to that community for

power.

And then, if somebody wants to go out and buy at retail, they

have the opportunity to do so and can opt out and go play in the

retail market.

Why is this important? After competition in Texas, 60 percent of

us are still with AT&T. Most of us do not care enough about the

nuances or the various differences in price to go out and shop. This

is a real opportunity to lower the costs for everybody in that community.

The second thing we want to talk about, an incredibly important

part of the issue for us is air pollution.

As I mentioned, two-thirds of our power plants are grandfathered. And, Mr. Barton, you asked a darned good question. Why

is this not a State issue?

In Texas we said, ‘‘We are going to clean up our grandfathered

power plants, require them to reduce emissions by 50 percent.’’ And

we decided that this—the reason we did this was because it was

the most cost-effective way to reduce pollution in our State, far less

expensive than even getting our cars inspected, and significantly

less costly than buying reformulated gasoline or low-emission vehicles. It was a bargain that was worth doing.

But the problem is, what you heard time and time again from

people in Texas is, ‘‘This is going to make us uncompetitive in the

national market.’’ That is why it is important that we set the

standard across the United States to be the same.

If we were to adopt the current Federal new source performance

standard, there would be dramatic reduction in pollution in the

eastern United States. The ‘‘New York Times’’ reported on August

28 that if we adopted the Federal new source performance standard and cleaned up all those old power plants, industrial NOX in

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New York City would drop by 80 percent. That is the implication

of this.

And if we do not do that, what we do is we drop our generating

portfolio to the dirtiest common denominator, and we can do better

than that.

Recently, a study came out—yesterday—called ‘‘Out of Breath’’

by a coalition called ‘‘Clear the Air.’’ This will be distributed to you

all soon. It basically documents that 153,000 times a year somebody goes to the emergency room due to asthma. Power plants are

the largest single cause of this.

And, last, I would make the argument that we need to do something better for renewable resources. The renewable portfolio

standard would set a national goal that would enable us to have

energy independence, be able to reduce the cost of these resources,

be able to produce a product we can sell to the emerging countries

who are not yet hooked up to the grid, and get us away from the

single fuel dependence that we are rushing toward at headlong

speed because everybody is buying and building natural gas plants.

I am old enough, as you are, Mr. Chairman, to have been in

Texas in the days when we could not get natural gas for our power

plants, and that caused us to make the mistakes that have caused

us to have the stranded cost problem today, to build those nuclear

plants, to build those coal plants, and to go down the wrong path.

But the wrong path does not need to be replicated, and we are

about to do that unless we require fuel diversity in our mix, and

we believe that having a set-aside of 10 percent for renewable energy by 2010 is a good way to do that and a cost-effective way.

Thank you for your time, and thanks for the invitation.

Mr. BARTON. Thank you, Mr. Smith.

We now want to hear from Mr. Tom Casten, who is president

and CEO of Trigen Energy Corporation headquartered in White

Plains, New York, but I am told he is a constituent or at least a

personal friend of Congresswoman Karen McCarthy of Missouri,

who wanted to introduce you to the committee, but she is apparently still on the floor in the roll call vote. So when she comes back,

if she comes back and this panel is still here, we will give her an

opportunity to brag on you a little bit.

Your statement is in the record in its entirety, and we recognize

you for 6 minutes to summarize it.

STATEMENT OF THOMAS R. CASTEN

Mr. CASTEN. Thank you, Mr. Chairman. I am going to leave my

statement in the record and you can look at the things there.

I was struck this morning by your comment that it was easier

on this side, and that you and the panel have to wrestle with competing ideas and philosophies and sort something out of all of this.

I think I can provide one comment that might help you sort

through those competing ideas, and then—you before have complimented people on providing facts as part of their answer, and I

would like to present a couple facts.

One of the things that I have heard on this and earlier panels

very consistently is that we have one point that we all agree about:

we do not want competition in our part of the business. I completely agree with that. I find it is a horrible, evil force for any

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businessman. I lay awake at night trying to think about how to innovate and how to cut my costs, and I cannot get that done. We

have to give up profits. And I would be very pleased if this bill

would simply say, ‘‘Nobody can compete with Tom Casten.’’ And I

would thank you for that.

My suspicion is that that is——

Mr. BARTON. We do not have anybody from Nebraska on the subcommittee or that would probably be an amendment.

Mr. CASTEN. My suspicion is that the goal of this panel and, indeed, the Congress is not to prevent people from competing with

Tom Casten, and I do not think it should be to prevent people from

competing with the members of the Edison Electric Institute or the

American Public Power Association or the TVA or the RUS, but

that the real goal is for you to unleash competition and get at the

innovation.

With that said, let me present a couple facts.

I am that competition. As we sit here, there are some 200 small

generators that we have installed in the last 20 years running in

about half the States in the country—those that do not have laws

against it.

We have 32 power plants in 18 States that serve multiple users,

and I would just like to go through the facts of what those competitive power plants do in hopes that that might give this committee

some idea of why you are going through all this heavy lifting and

how big the goal is at the end of the day.

In 1998, those 31 power plants put out 46 percent of the criteria

pollution that EPA said would have come from producing the same

heat and power in a conventional way.

They save more than 30 percent of the fossil fuel that would

have been burned doing it in a conventional way.

They are technology and fuel independent. We burn coal, we

burn gas, we burn oil, we burn biomass, we burn municipal waste.

I do not think Congress needs to tell us what to burn. We will burn

whatever is cheapest if you give us the chance to compete.

Now, the common thing that I see in the press and I hear people

talking about is to portray this whole process as what benefits will

go to the individual as a purchaser of electricity in their home, and

I think that is important, and competition will help those people,

but I think it is the wrong question.

I would like to review with you where the benefits go from our

plants.

In Philadelphia, our 150 megawatt cogen plant provides the thermal energy to virtually every educational institution, every higher

educational institution—people like University of Pennsylvania,

Drexel, Thomas Jefferson—and that lowers the cost of tuition and

education.

In Tulsa, Oklahoma, we provide that kind of savings to all of the

city buildings.

In Kansas City, we provide it to city, State, county, and Federal

buildings. Kansas City even uses us as a way to meet their air

quality rules, because we are so much less polluting that they do

not have to force carpooling. So the benefits go to lowering the

taxes that people pay for government.

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We serve some 26 hospitals, and we save them between 20 and

40 percent of what they would have paid, and this lowers the cost

of medical care to everybody.

If those benefits are not persuasive, I can tell you that we do

some really important things. In Golden, Colorado, we cut down

the cost of making a can of beer.

Those benefits go to everybody.

What I believe is in front of this panel is to understand what can

happen if you continue with your good work and get a bill passed.

Our estimates are that the U.S. consumer will save more than

$100 billion a year with competition. Our estimates are that the air

quality will come into compliance everywhere just through competition.

We believe that the competitiveness of every U.S. manufacturer

will improve by reducing the cost that they pay for energy.

I just leave you with a thought. Where would we be today without competition in other places? Maybe only 60 percent of the people still stay with AT&T, but I suspect 60 percent of the people in

this room have a cell phone because Craig McCall could compete

and was not forced not to.

Where would we be in computers if Michael Dell was not allowed

to compete and say, ‘‘I have got a different way to do it’’?

The challenge that I think this panel has is to get a bill out that

will let everybody compete, and then just stand back and enjoy, because it will be fun to watch.

Thank you.

[The prepared statement of Thomas R. Casten follows:]

PREPARED STATEMENT OF THOMAS R. CASTEN, PRESIDENT AND CEO, TRIGEN ENERGY

CORPORATION

Mr. Chairman and members of the Subcommittee, thank you for allowing me to

testify before you today on H.R. 2944, the Electricity Competition and Reliability

Act of 1999.

My name is Tom Casten, and I am the CEO of Trigen Energy Corporation. Trigen

specializes in generating energy very efficiently. We own and operate the most efficient power plants in the world, and our stock in trade is combined heat and power,

or CHP.

We have thirty-three projects, with operations in nineteen states, Canada and

Mexico. We joint venture with many companies, including electric utilities such as

Cinergy and Pepco. Since I last testified before this subcommittee, Trigen has announced several major new projects and has won two very satisfying industry

awards, including an award from the National Council for Public-Private Partnerships and the Power Plant of the Year Award from McGraw-Hill.

Mr. Chairman, our projects and our people are at work every day showing how

efficient energy production is both good for business and good for the environment.

By restructuring the electricity industry, Congress can reward investors, benefit

consumers, strengthen our economy and clean up our air, land, and water. As you

know, I’ve had the privilege of appearing before this Subcommittee and other House

committees to share my thoughts on the important economic and environmental

benefits of electricity restructuring. Rather than restate those comments, I have attached copies of my previous testimony to these remarks and ask that they be made

part of the record of this hearing.

Chairman Barton and the Members of the Subcommittee, thank you for pushing

forward on electricity restructuring. This is an issue of critical importance to our

industries, to the wholesale and retail consumers of electricity, and to the global

competitiveness of the United States. Competition is already upon us, with the

States leading the way. The Federal government must rise to the task of completing

this nationwide effort by addressing those barriers to competition that inherently

lend themselves to national legislation, matters that cannot be responsibly dealt

with in a piecemeal, State-by-State way.

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It is evident that H.R. 2944 is the result of painstaking, thoughtful work that re- flects the benefit of numerous hearings, consultations, examination of issues by the

Subcommittee’s working group, and input by incumbents and independents, the

States, the Administration, consumer groups and others. H.R. 2944 marks a critical

step in efforts to improve electricity markets and we offer our support for its enactment.

As I read the bill, it strikes me, however, that the current language should be modified with regard to the following five issues: interconnection, PURPA repeal,

CTC’s , depreciation schedules, and tax incentives. I’ll discuss the changes we think

you should make, and have attached to my testimony specific amendatory language

for your consideration.

Interconnection

H.R. 2944 correctly recognizes the economic and environmental importance of new distributed generation, including CHP systems, by addressing the central issue of

interconnection. Current charges for interconnection can be prohibitively and unreasonably expensive, and requirements vary arbitrarily from State to State, utility to

utility, site to site. Incumbents who do not want to face competition often attempt

to cloak anticompetitive behavior in the guise of technical disagreement over interconnection. It’s essential for interconnections to be safe and reliable, but let’s take

the market gamesmanship out of electrical engineering. Bringing uniformity to

interconnection through national technical standards will reduce uncertainty, lower

costs, and facilitate deployment of modern generation, including CHP technology,

across the country. Interconnection language must be sufficiently broad to help all appropriately sized generators connect to the distribution grid. I am concerned, however, that the

present language of§ 542 may be too limiting, and will retard the ability of the na- tion to realize the substantial economic and environmental benefits offered by CHP

and other new generators. For example, the present language apparently does not

apply to third-party owned systems, systems currently designed to serve wholesale

customers, or systems designed for off-site sales of electricity. It should give you

some sense of the unduly narrow scope of the current language to note that it would

appear to benefit few of my company’s projects. Let me give you an example of the interconnection problem. We know how to interconnect generators with the distribution grid. We have done it literally dozens

of times. Technically, it is a pretty straightforward task. In 1997, my company approached a Maryland utility to request interconnection for a 703 kw generator to

be installed in a downtown Baltimore office building. The small system would supply the building’s electric load and air conditioning. Yet, two years later, we were

still dickering with the utility over so-called ‘‘technical’’ issues. Months after receiving our initial request for interconnection, the utility asked that Trigen design a different, specialized interconnection. Trigen completed the new design at an additional cost of $44,000. The utility rejected the design. In response, Trigen offered

to use guidelines developed by Consolidated Edison in New York City, even though

the ConEd guidelines were disproportionately burdensome and expensive given the

very small size of the installation. The utility agreed, but after Trigen complied with

these requirements, the utility imposed further ‘‘technical’’ restrictions on Trigen’s

ability to operate the facility. These disagreements have only recently been resolved,

at a great cost to Trigen and our customer. One would strongly suspect that this

was anti-competitive behavior masquerading as technical disagreement which successfully prevented the unit from operating for two years. H.R. 2944 would not fix

this sort of problem, and thus needs to be amended.

Prospective Repeal of PURPA’s ‘‘Must-Sell’’ Provision

H.R. 2944 would repeal both the ‘‘must buy’’ and the ‘‘must sell’’ requirements of Section 210 of PURPA. Trigen does not challenge elimination of the ‘‘must buy’’ provision, but the ‘‘must sell’’ provision absolutely should not be repealed until all retail

markets are competitive and until back-up power can be purchased competitively.

That’s not the case now, and until those fundamental changes are made, the utility

should continue to be required to provide back-up power for qualifying facilities. The

current language of § 531 would harm competition. Elimination of PURPA’s ‘‘must

sell’’ requirement before laws are changed to allow new facilities to purchase backup power competitively will leave new entrants at the mercy of the local utility, subject to discriminatory pricing or outright denial of back-up power. Let’s not take a

step backward.

Elimination of Competitive Transition Charges

Trigen recognizes that utilities should be able to recover prudently incurred, legitimate and verifiable stranded costs that cannot be reasonably mitigated. HowVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00277 Fmt 6601 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
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ever, States should be required to consider reducing the stranded cost charge on an

electric consumer which efficiently produces energy on-site by a fuel cell or a combined heat and power, distributed power or renewable power facility. Such a provision would be consistent with an overall agenda of promoting clean and efficient

power generation without imposing a mandate on States. Trigen believes that the

relevant language contained in section 101 of the restructuring proposal submitted

by the Administration would be an appropriate amendment to this legislation.

Tax depreciation schedules

The tax code currently does not allow depreciation of CHP and distributed generation technologies in a way that matches how the technology is actually used. This

inappropriate treatment discourages investments in these technologies. For example, the IRS allows a gas turbine located inside a building for on-site generation use

to be depreciated over a 39-year period. The same piece of equipment used for transportation (e.g., on an airplane) depreciates in one quarter of the time. The moving

parts of the turbine used for electricity and heating may be replaced as many as

three times while the owner continues to depreciate the original investment. Shortening the time over which this equipment depreciates would remove an impediment

to investment in what is otherwise an efficient and environmentally beneficial technology.

The Administration’s restructuring proposal included a provision that would

shorten the depreciation period to 15 years. While we were grateful for the Administration’s recognition that new distributed generation and CHP systems should not

be subject to a depreciation period of 39 years, the approach failed to recognize that

a one-size-fits-all class life for energy equipment is a fundamentally flawed approach

which will grow increasingly anachronistic by the month.

New and small turbines have different physical properties and will generally operate under quite different conditions than large turbine units employed by traditional

electric utilities and, consequently, will have different service lives. Further, the

competitive marketplace will force energy suppliers to replace or ‘‘upgrade’’ standing

equipment before it fails, since installation of more efficient technology offers lower

costs to customers and the opportunity to hold or capture market share for competitive energy suppliers. We expect that energy generation equipment will come and

go in the marketplace in a manner that strongly resembles that of modern computers ‘‘ assets which outlive their economic lives long before they cease to work

properly. Because these new and efficient technologies have different ‘‘actual’’ lives,

they should not be subject to a single class life in the code. Accordingly, we have

attached to this testimony modifications to the Internal Revue Code which would

add new schedules of class lives for key energy generation technologies.

Combined Heat and Power Investment Tax Credit

Tax credits are typically offered by the Federal government to obtain public benefits by prompting private parties to make economic choices that they would not so

readily make otherwise. As such, an investment tax credit is a good short-term

mechanism to promote CHP systems, which offer very significant public and private

economic and environmental benefits, but can often be more difficult for the private

sector to deploy than electric-only projects because of the complexity inherent in assembling a ‘‘thermal load’’ or set of heating/cooling customers. We believe it is appropriate to enact a short term tax credit to assist deployment of new, modern generation while longer term solutions to competitive barriers are being developed, such

as adjustments to the depreciation schedule, as discussed above. To be clear, to the

extent the depreciation treatment of CHP is corrected, we do not believe that a tax

credit will be necessary. However, to the extent a lesser fix is chosen for the depreciation treatment of CHP, the tax credit would remain an important short-term incentive for CHP system deployment.

Conclusion

Given the inevitability of competition in the electricity market, and both national

and global trends that will guide the future of energy production in this country,

I believe that emerging technologies are serving and will serve an indispensable

purpose in meeting goals of energy efficiency and environmental demands. I urge

this subcommittee to pass a strong, balanced restructuring bill reflecting the concerns I have raised here today. I thank the subcommittee for the opportunity to appear before you. Thank you, Mr. Chairman.

Mr. BARTON. Thank you, Mr. Casten. We appreciate your work

that you have done in your company providing services for the communities that you are in and appreciate your testimony.

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Now we would like to hear from our last witness, Mr. Scott

Segal. Apparently, he is just representing Bracewell and Patterson.

STATEMENT OF SCOTT H. SEGAL

Mr. SEGAL. Yes, we are a potent player in the electricity area.

Mr. BARTON. The only law firm that has its own lobbyist just on

this issue. That is pretty interesting.

Mr. SEGAL. The new alternative energy source.

Mr. BARTON. Actually, I am told you are representing contractors. Your statement is in the record in its entirety. We recognize

you for 6 minutes.

Mr. SEGAL. Thank you, sir.

Good afternoon, Chairman Barton and members of the subcommittee. My name is Scott Segal, and I am an attorney with the

law firm of Bracewell and Patterson here in Washington and a

proud native of the great State of Texas, I might add.

I also serve as outside counsel for the Air Conditioning Contractors of America, and we are appearing today on behalf of the National Alliance for Fair Competition, of which ACCA is a member.

The alliance is composed of 10 trade associations, and was

formed especially to draw attention to the problems of small service

contracting businesses with respect to unfair competition from public utilities and their unregulated affiliates. Many of our members

are family owned and operated companies.

As the subcommittee has considered electricity restructuring legislation, I know that each of you has been barraged with information on a bewildering array of topics, such as stranded cost, transmission access, and the like. The Alliance is concerned that in this

thicket of complexities the issue of cross-subsidization and other

forms of anti-competitive conduct and their impact on small businesses has been lost.

My job today is to attempt to clear away the underbrush and

present you with a simple message: Congress must address crosssubsidization and related unfair monopoly practices if you are to

create a framework in which competition can flourish, and you can

do so without giving undue power to Federal regulators or interfering with State prerogatives in this area.

Mr. Chairman, what is this whole debate about electricity restructuring all about? Well, in my view it is about creating the conditions for competition in the electric power industry so that the

American consumer will benefit from more choice, better service,

and lower prices. The members of our alliance strongly support full

competition. We are fully accustomed to competition, do not seek

subsidies or special treatment in order to compete. Similarly, we do

not believe that utility affiliates competing in service industries

should enjoy cross-subsidies derived from their parent companies’

monopoly power. To allow these practices to go unchecked will destroy, or at least potentially harm, the goals of full competition,

and, subsequently, shortchange consumers.

We do not oppose utility diversification. In fact, we welcome the

competition. However, ensuring vigorous competition and benefits

to consumers will take place only if the legal framework ensures

the competition is open rather than dominated by the vestiges of

this monopoly status.

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I would illustrate my point—and with all due respect to Mr.

Casten—ours are member companies that do not fear competition.

We think we are competition.

I brought along with me a local telephone directory, which I

would now like to read into the record. No, just kidding. This is a

local telephone directory from northern Virginia. If you look up air

conditioning contractors in here, there are 31 pages of listings. If

you look up electric utility, there is one—not page, one listing.

The point I am trying to make is: do we want the market for energy services to look more like the former or the latter? We know

competition and are not afraid of it.

Mr. Chairman, I know that as you have proceeded you have been

rigorous limiting the content of the bill to matters in which Federal

action is necessary. I submit to you that establishing some standards in the area of affiliate transaction meets this litmus test.

First, antitrust law, a traditional area of Federal responsibility,

does not address cross-subsidization and related practices adequately. There is a long-established role for the Federal Government in antitrust policy; however, both the Department of Justice

and the Federal Trade Commission have testified that antitrust

laws are ill-suited to addressing existing market power resulting

from the previous regulated monopoly status of electric utilities;

therefore, existing antitrust law is not sufficient. Indeed, this Congress recognized the need to enact stringent affiliate safeguards in

the Telecommunications Act of 1996.

Our alliance seeks only to assure that minimal protections

against market power abuse are enacted and that States remain

free to achieve these ends in the manner they see fit.

Second, unregulated competitive affiliates will operate across

State lines. Suffice to say that electric utilities exist across State

lines and they offer affiliate services across State lines, so a national solution is justified.

Further, the availability and application of State remedies to

claims of competitive harm is uneven, at best, and even within

States there is typically a division of authority between State

PUCs, which are charged with protecting ratepayers, and antitrust

enforcement agencies, which are charged with enforcing restriction

on anticompetitive practices.

We go to either one, and both say we are going to the wrong

agency, and that can get frustrating for a small business.

Ultimately and fortunately, we believe that Federal guidance on

cross-subsidization and self-dealing will complement rather than

supersede State action. The alliance is simply seeking to ensure

that competitive issues confronting small business and the people

they serve do not fall between the cracks.

I want to make crystal clear, we are not asking the subcommittee

to dictate the details of State codes of condition; rather, we seek

broad policy principles that are essential to guaranteeing competition while continuing to allow the States the utmost freedom to innovate.

Accordingly, our members believe that the legislation can be improved by the addition of a few minimum standards.

First, a clear prohibition on cross-subsidization of competitive affiliates.

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Second, a requirement that States develop codes of conduct and

that they be applied to all affiliates, but note I say that States develop it.

Next, a requirement that competitors harmed by cross-subsidies and anticompetitive conduct have recourse to State PUCs.

And, last, a requirement that enforcement include a remedy for harm to competitors occasioned by such unfair competitive practices.

Again, I must emphasize our alliance is not advocating that Con- gress prescribe the details of codes of conduct for utility affiliates,

nor are we asking that Congress provide broad new powers to Federal agencies like the FERC or anybody else. Rather, we are asking

that Congress set broad policy goals which represent a minimum,

a floor, to ensure free and open competition.

Well, as they say in the refrigeration business, we just hope you

do not freeze us out of the bill.

I thank the members of the subcommittee for this opportunity to

appear before you today, and we look forward to answering any

questions you may have.

[The prepared statement of Scott H. Segal follows:]

PREPARED STATEMENT OF SCOTT H. SEGAL ON BEHALF OF THE AIR CONDITIONING

CONTRACTORS OF AMERICA AND THE NATIONAL ALLIANCE FOR FAIR COMPETITION

Good morning Chairman Barton, Congressman Hall and members of the Subcommittee on Energy & Power. My name is Scott Segal and I am an attorney with

the law firm of Bracewell & Patterson here in Washington, D.C., and serve as outside counsel for the Air Conditioning Contractors of America (ACCA). I’m also appearing today on behalf of the National Alliance for Fair Competition (NAFC), of

which ACCA is a member. The National Alliance for Fair Competition is composed

of ten national trade associations. NAFC was formed specifically to draw attention

to the problems small businesses face with respect to unfair competition from public

utilities and their unregulated affiliates.

The organizations which comprise NAFC consist, overwhelmingly, of small, private sector businesses engaged in the design, supply, sale, rental, installation and

servicing of electrical and mechanical products, equipment, and systems, as well as

providing energy fuels. These firms operate in residential, commercial and industrial markets. While a few larger firms are included within the group, the majority

of businesses are small. Many are family owned and operated.

As the Subcommittee has considered electricity restructuring legislation, I know

that each of you has been barraged with information on a bewildering array of topics such as stranded costs, transmission access, the role of the federal power administrations, and others. Each issue has its own complexities. NAFC is concerned that

in this thicket of complexities, the issue of cross-subsidization and other forms of

anticompetitive conduct and their impact on small business has been lost. My job

today is to clear away the underbrush and present you with a simple message: Congress must address cross-subsidization and related unfair monopoly practices if you

are to create a framework in which competition can flourish, and you can do so

without giving undue power to FERC or interfering with state prerogatives in this

area.

During the course of the Subcommittee’s hearings on this issue, you have been

presented with testimony from contractors and other working people regarding the

types of practices that allow incumbent utilities to unfairly leverage their market

power in competitive markets, such as heating, ventilating, air conditioning and refrigeration (HVACR) services. I do not intend to revisit these issues in detail, but

provide a representative list of the types of conduct that concern small business including cross-subsidies to and preferential treatment of affiliates. This encompasses:

shared customer data, equipment, vehicles and personnel, cost-shifting, marketing

data, free advertising for affiliates, preferential referrals, discriminatory access and

pricing of services, and similar uncompensated transfers of tangible and intangible

benefits.

I will focus my testimony on the following points: (1) cross-subsidization and other

anticompetitive practices harm consumers and competition; (2) there is a need for

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1See <http://www.pepco-services.com/>.

2 Promulgation of New Rules Governing Activities Between Affiliates, Public Utility Commis- sion of Texas, Project No. 17459, 23 Tex. Reg. 5294 (May 22, 1998).

federal legislation to create a framework for competition and precedent for doing so;

(3) Congress can set minimum standards to achieve the goals of competition without

stifling state innovation; and (4) H.R. 2944 does not currently go far enough to address these issues.

Getting Back to Basics: Creating the Conditions for Competition

I would like to return to first principles for a moment. What is the debate over

electricity restructuring all about? It’s about creating the conditions for competition

in the electric power industry so that the American consumer will benefit from more

choice, better service and lower prices. The members of the NAFC strongly support

full competition. We are fully accustomed to competition and do not seek subsidies

or special treatment in order to compete. Similarly, we do not believe that utility

affiliates competing in service industries should enjoy cross-subsidies or other advantages derived from their parent company’s monopoly power. To allow these practices to go unchecked will destroy your goals of full competition and subsequently,

short change consumers.

As a deregulated retail market for electricity takes shape, incumbent utilities feeling competitive pressure are increasingly driven to diversify into energy services

and other affiliate activities. For instance, if you go to the Pepco webpage, you will

find a link to Pepco Energy Services. This webpage states, ‘‘Pepco Energy Services

is backed by the strength, stability and commitment of its parent company, which

has a 100-year history of delivering quality customer service.’’ 1 The same webpage

describes Pepco Energy Services’ ability to design and install HVACR systems, lighting and other energy equipment, and a full range of services performed by contractors today. NAFC does not oppose this diversification, and in fact, welcomes the

competition. We are, however, concerned that as many regulators have recognized,

‘‘there is a strong incentive for regulated utilities or their holding companies to subsidize their competitive activity with revenues or intangible benefits derived from

their monopoly businesses . . .’’ 2

In creating a framework for competition, the Subcommittee must be mindful of

the background against which you are legislating. Competition is not starting from

the level playing field characteristic of a newly developing market, but rather, with

regulated monopolies. Ensuring vigorous competition and benefits to consumers will

take place only if the legal framework ensures that competition is open rather than

dominated by the vestiges of this monopoly status.

As I mentioned, the NAFC believes that cross-subsidization and other anticompetitive practices are bad for consumers and bad for competition. Here’s why:

• Bad for Consumers: Cross-subsidization and preferential self-dealing will artificially increase the costs of the regulated utility as costs incurred for the benefit

of the affiliate are shifted to the regulated firm. These higher costs will be

passed on to consumers in increased prices in the regulated market. In addition,

these practices will increase costs in unregulated markets like those for HVACR

services by displacing innovative, lower-cost suppliers and entrants with a higher-cost affiliate of the incumbent utility which can undercut pricing due to the

subsidy that it enjoys.

• Bad for Competition: Competition thrives in an environment where numerous entrants compete on choice, price and quality of service for consumers. Yet, as we

make the transition to a competitive environment, there are strong incentives

for regulated utilities or their holding companies to subsidize their competitive

affiliates with revenues or intangible benefits derived from monopoly businesses. These benefits allow the affiliates to drive lower-cost providers from the

market and to deter new entrants into the market. This results in less competition and less choice for consumers.

To illustrate my point, I have brought along with me today a local telephone directory. In this Northern Virginia directory, I find thirty-one pages of entries for

HVACR contractors. By contrast, I find only one entry under ‘‘electric company.’’ Do

we want the market for energy services to look more like the former or the latter?

Why is Federal Legislation Necessary?

Mr. Chairman, I know that as you have proceeded to develop consensus legislation you have been rigorous in attempting to limit the content of the legislation to

matters in which federal action is necessary. I submit to you that establishing some

standards in the area of affiliate transactions meets this litmus test.

279

3 Electricity Competition: Market Power, Mergers and PUHCA, before the Subcommittee on Energy & Power of the Committee on Commerce, U.S. House of Representatives, 106th Cong. (May

6, 1999) (statement of Mr. Douglas A. Melamed, Antitrust Division, United States Department

of Justice, and statement of The Honorable Mozelle Thompson, Commissioner, Federal Trade

Commission).

• Antitrust law, a traditional area of federal responsibility, does not address crosssubsidization and related practices. While the federal government shares au- thority over enforcement of the antitrust laws with the states, there is a longestablished federal role due to the impact of competition policy on interstate

commerce. Yet in testimony before this Subcommittee, representatives of the

Antitrust Division at the Department of Justice and the Federal Trade Commission, the principal agencies charged with enforcing the antitrust laws, have testified that the antitrust laws are ill-suited to addressing existing market power

resulting from the previous regulated monopoly status of electric utilities.3

Therefore, leaving the competitive implications of market power abuses affecting small business to the antitrust laws is not sufficient. Indeed, this Congress

recognized the need to enact stringent affiliate safeguards in the Telecommunications Act of 1996 to prevent the opportunity for market power abuses by the

Bell operating companies to the benefit of their affiliated competitive businesses. Some of these provisions included requiring separate affiliates, biennial

audits, restrictions on joint marketing, prohibitions on preferential treatment to

name just a few. By contrast, NAFC seeks only to assure that certain minimal

protections against market power abuse are enacted and that states remain free

to achieve these ends in the manner that they see fit.

• Unregulated, competitive affiliates will operate across state lines. The presence of

these unregulated affiliates in several states will present new difficulties for individual state commissions, and it is unlikely that the limited jurisdiction of

state bodies will be well-suited to ensure fair and open competition when

multistate holding companies are involved. State commissions frequently lack

the authority and resources to pursue these issues effectively. It is unrealistic

to expect a nationwide energy market to develop without national legislation to

ensure true, fair retail competition.

• The availability and application of state remedies to claims of competitive harm

is uneven at best. Because the electric power industry has been regulated for

most of this century as a local monopoly, state regulators have been concerned

primarily with issues related to ratepayer protection and ensuring an appropriate rate-of-return. In the newly emerging competitive environment, there will

be an increasing need to pay close attention to issues of competition and competitive harm occasioned by unfair practices such as cross-subsidization.

• There is a division of authority between state PUC’s, charged with protecting ratepayers, and antitrust enforcement agencies charged with enforcing restrictions on

anticompetitive practices. Indeed, in some states, affiliate codes of conduct have

been held not to apply to all competitive affiliates, but only to marketing affiliates.

• Small business is often left without an effective remedy for competitive harm. As

a result, small businesses harmed by anticompetitive practices are often left

without a remedy. While state PUC’s have the ability to deny a rate increase

or, in an extreme case, impose a fine, these remedies have little meaning for

competitors harmed by cross-subsidization and related practices. As previously

noted, the antitrust laws are similarly ill-equipped to address concerns arising

from existing market power. Therefore, those harmed by anticompetitive practices are left without a remedy.

• Federal guidance on cross-subsidization and self-dealing will complement rather

than supersede state action. In moving from an electric power industry characterized by local monopolies to one in which there is unfettered competition, the

NAFC is simply seeking to ensure that competitive issues confronting small

businesses and the people they serve do not fall between the cracks. I wish to

make crystal clear that we are not asking this Subcommittee to dictate the details of state codes of conduct. Rather we seek to see enacted certain broad policy principles that are in our view essential to guaranteeing the creation of a

free and open competition while continuing to allow the states the utmost freedom to innovate to achieve these policy objectives.

H.R. 2944 and the Need to Address Affiliate Safeguards

To the extent that H.R. 2944 addresses affiliate transactions, please refer to Title

V of the bill, and in particular in sections 513, 514 and 516. Sections 513 and 514

of the bill take the important first step of ensuring that federal and state regulators

280

have access to the books and records of utilities and related companies for the purpose of assessing costs incurred to protect ratepayers. Section 516 of the bill entitled

‘‘Affiliate Transactions’’ serves merely as a savings clause which states that nothing

in the legislation shall preclude the application of other existing law to determine

whether costs of an activity performed by a related company may be recovered in

rates. In other words, this provision preserves the status quo.

Yet, as I have detailed above, the status quo is not sufficient to promote truly

open competition in energy services markets, and this will ultimately be to the detriment of the American consumer. The lack of federal or state protections that provide an adequate remedy in these areas and the increasingly interstate nature of

these operations demands congressional attention. Accordingly, the members of the

NAFC believe that federal legislation should at a minimum take the following modest steps, including:

• a clear prohibition on cross-subsidization of competitive affiliates;

• a requirement that states develop codes of conduct and that they be applied to

all affiliates equally;

• a requirement that competitors harmed by cross-subsidization and other anticompetitive conduct have recourse to the state PUC for a remedy; and

• a requirement that enforcement include a remedy for harm to competitors occasioned by such unfair competitive practices.

Again, I must emphasize that the NAFC is not advocating that the Congress prescribes the details of state codes of conduct for utility affiliates. Nor are we asking

that Congress provide broad new powers to federal agencies such as the FERC.

Rather we are asking that Congress set certain broad policy goals to ensure free

and open competition in the market for energy services which are inextricably

bound up with this debate. These broad policy goals represent basic tenets of a competitive marketplace which Congress has seen fit to protect before to ensure that

the benefits of competition are available across the country. The states have, and

should continue to, be free to devise innovative solutions to achieve these basic objectives of competition.

I thank the Members of the Subcommittee for the opportunity to appear before

you today. I hope that many of you will agree that some congressional action in this

area is appropriate, and look forward to answering any questions that you may

have.

Mr. BARTON. We do appreciate that. You may get a chilly reception on your use of metaphors, but we are going to work on it.

Thank you, Mr. Segal, for that testimony.

The Chair is going to recognize himself for 5 minutes for questions.

Mr. Brice, you used a term that I am not familiar with in your

testimony. You talked about you wanted a ‘‘truth in billing’’ requirement. Could you, in layman’s terms, express to me what

‘‘truth in billing requirement’’ means in terms of this bill?

Mr. BRICE. I think what we are—I am at a loss, myself, to really

explain what that means.

Mr. BARTON. Well then just give it to us for the record, because

Congressman Hall did not know, I did not know, my staff did not

know. Whoever wrote your testimony hopefully does know.

Mr. BRICE. Yes, I am sure they do.

Mr. BARTON. And we are open to it, if we understand what it is,

because who can be against truth in billing? I mean, it kind of, on

its surface, appears to be a good idea. So if you will just get that

to us for the record.

Mr. BRICE. Yes, Mr. Chairman.

Mr. BARTON. Okay.

Ms. Moler, I am going to ask you a cheap shot question, but I

am going to tell you up front that it is a cheap shot question, because I do not mean it personally, but I was struck by some of the

terminology in your testimony. You talked about the crazy quilt of

regulation.

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Who was the chair of FERC in 1996?

Ms. MOLER. I was.

Mr. BARTON. You were.

Ms. MOLER. Yes, sir.

Mr. BARTON. Okay. I thought so. When was FERC Order 888

issued?

Ms. MOLER. In 1996, when I was the chairperson.

Mr. BARTON. In 1996, when you were Chair. Now, remember, I

told you up front this is a cheap shot question.

Ms. MOLER. I will not give you a cheap shot answer. I will give

you a serious answer.

Mr. BARTON. I know. Do not we codify, if the bill before us were

to become law, do not we codify the crazy quilt regulatory scheme

that FERC Order 888 put in place in 1996 when you were chair

of the FERC?

Ms. MOLER. Mr. Chairman, as my statement acknowledges,

Order 888 applies to wholesale transactions and to unbundled retail transactions. It does not apply to bundled retail transactions.

Mr. BARTON. I mean, that is what——

Ms. MOLER. At the time we issued the order, there was one State

that had customer choice enacted. The world has changed very,

very significantly since Order 888 was enacted. So I am and Americans for Affordable Electricity believe that at this point, with the

industry having evolved the way it has evolved, that you need to

go farther than Order 888.

Mr. BARTON. But you admit——

Ms. MOLER. I recognize that it does codify Order 888. I recognize

that, sir, but I also——

Mr. BARTON. So I am in agreement with where you were in 1996.

I am just not in agreement——

Ms. MOLER. Well, I am hoping you will come along.

Mr. BARTON. [continuing] yeah with where you are in 1999.

Ms. MOLER. I am hoping you will come along. The crazy quilt

that has evolved has very little happening under the Order 888 tariffs, and we simply need to go farther at this point to encourage

further competition. But it does codify it. Yes.

Mr. BARTON. Okay. Well, I do not mean that personally, you

know. I want you to know that. I would not—that just kind of

struck me the way you put it that I needed to chastise you a little

bit, but I understand——

Ms. MOLER. Well, one of the challenges in these jobs is you have

to look at changed circumstances——

Mr. BARTON. That is true.

Ms. MOLER. [continuing] to figure out what the appropriate response is under the changed circumstances.

Mr. BARTON. Now let me ask you another question. And this is

not a cheap shot question. Why will not the bill, as it is drafted—

we have mandatory participation in RTOs. They have to join

RTO’s. We give the States regulation of bundled rates, and the

States I think—I think the States will do a better job of looking

at that issue than the group that you represent do—and we still

have the Federal antitrust regulatory scheme that is in generic

law. So why won’t that combination of mandatory RTO participation, State regulation of bundled sales at retail, and Federal antiVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00285 Fmt 6601 Sfmt 6602 E:\HEARINGS\60356 txed02 PsN: txed02
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trust law that is still on the books, why doesn’t that solve the market power problem if there is a market power problem?

Ms. MOLER. Until you require everyone to be under the same

rules for transmission, you are not going to get the much-revered

level playing field.

Mr. BARTON. But the RTO is regional.

Ms. MOLER. The RTO would not require all of the utilities’ use

of its system to be subject to its requirements.

Mr. BARTON. But it does require every utility who participates in

that RTO to be subject to the rules for that RTO.

Ms. MOLER. Sir, there are many RTOs—ISOs now—for which the

vast majority of the utilities’ use of its transmission system are not

under their jurisdiction.

Mr. BARTON. Okay. Well, I——

Ms. MOLER. I was stunned, frankly, when I learned this. I, too,

thought we had done a great thing with Order 888, and I still believe it was a great thing.

Mr. BARTON. Well, you did a good thing.

Ms. MOLER. But what we are learning in the actual——

Mr. BARTON. We are doing a great thing in our bill. You did a

good thing in Order 888.

Ms. MOLER. Well, I encourage you to even greater greatness.

Mr. BARTON. Okay.

Ms. MOLER. What we have learned is that until you put all of

the uses of the same kinds of facilities under the same rules, that

you are not going to get comparability and you are not going to get

the kind of competition that will serve the public.

Mr. BARTON. Okay. I want to ask Mr. Smith a question because

my time has expired, and then I am going to go to Ms. McCarthy,

if she wants to introduce Mr. Casten after the fact.

Mr. Smith, you talked about an opt-out preference for aggregation, which sounds to me suspiciously like forced municipal aggregation. Why are you not satisfied with our opt-in aggregation provision which gives people the voluntary right—and not just city governments, but any group to aggregate in a State that is open?

Mr. SMITH. I was hoping you would ask me that question.

Mr. BARTON. I bet you were. That is why I asked it.

Mr. SMITH. And the other argument, of course, that I expected

was, ‘‘Well, is not this just State-sanctioned slamming.’’ I think

there are two answers to that. One is, we are not going to make

anybody change unless the community has a great and robust debate over whether or not they ought to serve as that aggregator.

And the genius of democracy is at the smallest levels, where people can have that debate as to whether or not they do want to create a new municipal utility or whether their county government

should serve them, or out in the rural areas of Texas, beyond

where you and I both live, whether or not the school district or the

councils of government perhaps could serve them at lower cost.

And I think that is the—in our question, in our minds, as we

have begun to look at this as to whether or not we are better off

in those instances having new municipals created, or what opportunities this gives us, that debate is what gives us comfort that it is

not just forced municipalization.

The other key component to this, sir, is——

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Mr. BARTON. You could have a 51/49 debate, though, or a 52/48.

Mr. SMITH. You sure could.

Mr. BARTON. I mean, there is—democracy is a wonderful thing,

but I see votes on the floor almost every week that are 218 to 217,

or very close to that.

Mr. SMITH. And I am usually on the losing side of it, but I understand that democracy——

Mr. BARTON. Well, we want to keep it that way.

Not really. I retract that.

Mr. SMITH. And, Mr. Barton, the other thing that scares me to

death is putting this to a vote when you have got the big utilities

having the right to fund the elections against you. I understand

that this is a big issue, and it is a gut call for all of us that we

think is worth doing.

But I think that is the point. We think it is worth doing, and,

as people have looked at how to make this work best for consumers, there are those situations where new creations of government make the best sense. That was what happened two generations ago when our grandfathers electrified most of Texas or, in my

case, Illinois.

They looked at the fact the most cost-effective way to do this was

with a public aggregator.

Mr. BARTON. Well, we are for aggregation. Our bill has got, I

think, a very strong and defensible aggregation provision in it. I

am just not sure we want to go to the opt-out version that your

group supports.

Mr. SMITH. And the reasons that we think that it is superior are

two. One is it eliminates that solicitation and transaction cost that

is essentially a barrier that prohibits many municipalities from

going out and trying to aggregate and then switch consumers, because that has been an incredibly difficult thing, as we have seen,

in just about every State that has gone to competition, to get people to move.

And, second——

Mr. BARTON. Be concise, because my time expired about 5 minutes ago.

Mr. SMITH. And that is probably the most concise thing is the

cost barrier is so high that, unless you do it the other way—and

the other point that I wanted to make is we do give people who

want to go out and play in the retail market, who think there is

a better deal out there for them, the opportunity to leave and go

out and buy in the retail market, to join associations like mine or

AARP or the big business association and go out and buy in those

groups if they want to, or buy in the retail market, and so it is the

best of both worlds, we think.

Mr. BARTON. Okay. The gentleman from—well, first the

gentlelady from Missouri. Does she wish to formally introduce Mr.

Casten to the committee?

Ms. MCCARTHY. Mr. Chairman, I am going to brag about him

when it is my turn to ask questions.

Mr. BARTON. Okay. Then we are going to recognize the gentleman from Ohio, Mr. Sawyer, for 5 minutes for questions.

Mr. SAWYER. Thank you, Mr. Chairman.

284

Let me go back to Commissioner Moler and go back to the dead

horse I keep beating in terms of transmission.

I hope it is not a dead horse, Mr. Chairman.

It seems to me that one of the things we keep hearing in one

form or another is that people are deeply concerned about equality

of access, and to make sure that transmission is not used as a conscious tool in advantaging one supplier over another, and in the

end wind up cutting off markets.

It seems to me that you are probably a veteran of the California

transmission wars. In fact, it was the head of the California Commission who at one point said that 100 years of transmission wars

made the ISO a psychological necessity. That was before RTOs.

Putting those wars behind us, could you look into the future and

speculate on what the success of stand-alone transmission entities

might look like, the kind of things that the Transmission Alliance

is talking about five, 10 years into the future?

Ms. MOLER. I believe that there are substantial pressures on utilities to look at what their core businesses are going to be. There

is some interest in the industry in developing stand-alone transmission companies.

One of the challenges that we have in the industry today, as I

look at it, and as my clients look at it, is that not all uses of that

system are on the same tariff, and so there are dramatic differences in access, terms, and conditions, rates, preferences, all

those kinds of things in terms of use of the same kinds of facilities.

Mr. SAWYER. Are you describing, in effect, the arenas of regulatory reform that would be required to enable the success of these

kinds of structures?

Ms. MOLER. I believe that, in order to have a fully competitive

market, transmission will continue to be a monopoly for the foreseeable future. I do not think we want two sets of wires down the

interstate highways.

Distribution I believe will continue to be regulated by the States

for the foreseeable future. And what we are seeing now is a diminution in wholesale transactions. We are seeing the wholesale market is not functioning well at all. We are seeing less trading now

on NYNEX, for example, than you saw just a year ago. Things are

headed in the wrong direction.

An economist I talked to yesterday said that he believes that on

most systems that less than 10 percent of the use of the transmission lines is subject to Order 888 requirements. I was stunned

by that number.

We have got to have more happening—same kinds of facilities,

under the same set of rules.

Mr. SAWYER. Do we need to encourage investment?

Ms. MOLER. Absolutely.

Mr. SAWYER. Can you talk about the kind of encouragement that

we ought to provide?

Ms. MOLER. Americans for Affordable Electricity does not have a

particular position on incentive rates versus traditional rate-making approaches. I think there is some experimentation going along.

I can tell you from experience that it is difficult to develop an

incentive rate structure that really works.

285

Mr. SAWYER. In one point in your testimony you analogize to—

is it Order 668?

Ms. MOLER. Order 636 is the gas equivalent.

Mr. SAWYER. That is what I meant, the natural gas order. Does

that analogy extend to citing decisions, as well? Should it? And, if

not, what is the solution to the conundrum that we face with regard to——

Ms. MOLER. AAE does not have a position on this. I, personally,

have testified before this committee that I believe there should be

Federal siting of electric lines that is analogous to the siting under

section seven of the Natural Gas Act.

Mr. SAWYER. Thank you very much. I appreciate your flexibility,

Mr. Chairman.

Mr. BARTON. The Chair is turning the Chair over to Mr. Largent,

and the Chair recognizes Mr. Largent for 5 minutes for questions.

Mr. LARGENT [presiding]. Thank you, Mr. Chairman.

I want to ask your question, first of all, to a distributive generator, and that is Mr. Casten with Trigen.

One of the questions our chairman has been asking is about this

50 megawatt language that is in the bill and what would be an appropriate number.

You are a distributive generator. What would be a fair number

if it was something less than that?

Mr. CASTEN. I believe that you should eliminate the number and

describe what it is you are protecting. You cannot get a right number.

What I would suggest is that a distributive generation facility be

defined as one that is designed and primarily used to provide electricity to its host, and that if you are doing that you have the right

to an interconnect that is a standard and that is safe, but it is equitable for the size differences between things, because that is——

Mr. LARGENT. Is there a certain size, Mr. Casten, that has to be

interconnected to a transmission versus a distributive distribution

system?

Mr. CASTEN. Yes, there is, but it is going to vary by utility by

utility, and I think Congress shouldn’t get anywhere close to the

electrical engineering. We can work that out. But the point is that

if you can connect to the local distribution system you ought to

have the right to do it if primarily there to provide services for that

entity.

Mr. LARGENT. Okay.

Mr. CASTEN. Coming back to the earlier question, I think everybody is focused on a view that the world will continue to generate

its power centrally and it will all go through the transmission system. I predict that the big competitive force will be transmitting

energy through gas pipelines, oil trucks, coal, and it will be made

at the other end of the line, and that is what will put the pressure

on the transmission lines to behave.

Mr. BARTON. Will the gentleman yield just to follow up on that?

Mr. LARGENT. Sure.

Mr. BARTON. We thought about a functional definition instead of

a discrete number, and the reason we do not have a functional definition is that we are told that there are some fairly creative utiliVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00289 Fmt 6601 Sfmt 6602 E:\HEARINGS\60356 txed02 PsN: txed02
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ties out there and distributive generators that can game that definition.

Are you satisfied that there are attorneys adequate enough to the

task to come up with a functional definition that can withstand the

gamesmanship?

Mr. CASTEN. I am reasonably satisfied, and we will submit the

best shot we can that would do that. The gaming is severe right

now.

Mr. BARTON. Okay. Thank you. Thank you, Mr. Largent.

Mr. LARGENT. Let me ask Mr. Kanner, Marty, I want to ask you

a question about the remedies for market power. If FERC had ability to address—market power, does it have to be divestiture? That

is the first question. Or does divestiture have to be one of those

tools that they have in their box?

No. 2, if you say it does need to be in the tool box, does it have

to be permanent divestiture?

And then, three, because most people have viewed the market

power issue as being sort of transitional, maybe over a 3- to 5-year

period of time, does the potential exist to say that we could sunset

FERC’s ability to address market power after, say, a 5-year window?

Mr. KANNER. Thank you, Congressman. Those are all very important and valuable clarifications.

We do not advocate forced divestiture of all utility generation. It

is simply not real. And we do think that it is a useful tool, as a

tool of last resort, but there are many other things that can be

used. I note that in the State of Texas, where they do not prescribe

asset divestiture, they do have a system where the utilities, in essence, auction off the capacity from generation, or some portion of

it, for a set period of time, and I think that is a very effective tool

to both foster the competition that we need and address market

power. So it is sort of a ‘‘twofer’’ if you will.

And I think that, as they did in Texas, some of those remedies

can, in fact, be sunset. I would urge the committee, while we have

our ideal language that does grant FERC that last resort mechanism of divestiture, that the Texas model is also a very valuable

one for the committee to look at.

One of the keys there is that the utility, itself, prescribes its mitigation plan, as you did in the bill that you offered with Mr. Markey, so the utility says, ‘‘Here is what we propose to do,’’ and then

the Commission reviews whether it is adequate, and the bill can

prescribe what some of those tools can be.

Mr. LARGENT. Okay. The Chair is going to give himself 1 more

minute, since the chairman took some of my time, and I wanted

to ask Ms. Moler a question.

I think Mr. Sawyer talked about the analogy that you used between what we did—and I wasn’t here, unfortunately, which is why

I ask the question—the analogy between gas transportation and

what we are attempting to do in terms of regulating the transmission lines and not having, you know, the FERC regulate

unbundled retail sales and States regulate bundled sales.

How did that work with gas and how do you see—I mean, can

you kind of enlighten us on that analogy a little bit?

287

Ms. MOLER. The very short course in the evaluation of the natural gas rulemakings would go something like: first, FERC tried to

have some special programs where you could have customer choice

if you wanted it. They were reviewed by the courts. They were

found to be discriminatory. FERC then eventually, in Order 636,

required all gas pipelines to develop tariffs that would provide open

access, same terms and conditions for everyone, use the gas pipeline, and also required the sale of the natural gas to be separated

from the transmission as far as the corporate arrangement is concerned.

It did not go beyond the city gate, so a lot of States still have

bundled sales, so it is possible to have both bundled and unbundled

transmission subject to the same rules as far as the interstate aspects of it are concerned.

And the gas market has been relentlessly competitive since that

time.

Mr. LARGENT. Okay. I am going to yield to the next questioner,

but I would like to get maybe a 1- or 2-page summary of what you

just said, and maybe a few more details on that, if you would not

mind.

Ms. MOLER. I would be happy to do so.

Mr. LARGENT. Thank you.

Who is next? Ms. McCarthy from Missouri?

Ms. MCCARTHY. Thank you, Mr. Chairman, and thank you for

your generous use of time. I hope that we can all be granted the

same.

I wanted to begin, first of all, by welcoming back Mr Casten.

When you visited with us the last time, as we were having discussions about what would be in the perfect bill, you mentioned to me

that there are, in fact, at least in our State, and perhaps in others,

laws that impede companies from competing, and you were very

enthusiastic about us taking up and passing a bill.

But does this bill that we are looking at, if it were enacted as

it is currently drafted, really solve or exacerbate problems you are

facing in trying to conduct your business today in Missouri? And

I would like any other panelist to reflect on that, as well.

And I would like to ask a second question to you, Mr. Casten,

to Mr. Cooper and Cowart, and that is one that I asked an earlier

panel today. Does the Barton bill provide sufficient guarantees that

renewable power providers will be able to compete successfully in

a deregulated market, and would it, indeed, improve reliability in

a restructured market?

Mr. Casten, thank you again. I am quite proud, as is my county

executive, of the work you are doing. In fact, she was just in New

York on a national panel that ‘‘Forbes Magazine’’ sponsored talking

about the public/private partnership that you have established in

our community. It is a great model to us all.

But my concern, as a member of this committee, is to make sure

whatever we do at the Federal level enhances that, does not impede it, and, therefore, speaks correctly to it.

Thank you.

Mr. CASTEN. Thank you for the question.

There are a series of barriers that we face that I wrote about in

chapter eight of my book, and I am not sure how many of them you

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can deal with at the Federal level, but I will just take off some of

the ones that are there.

Fifteen States make it illegal for a third party to generate power,

and I think that the Federal Government in the bill could say everybody can generate power.

There is a law in Missouri, as you know, that is an anti-flip-flop

law which has been used that if you have once been supplied by

one supplier, you cannot flip to another one. That is a pretty effective way to shut off competition, and that needs to be affirmatively

stated.

The largest problem that distributed power faces is interconnection, and it is a boring electrical engineering thing, and I appreciate the panel dealing with it, but it is consistently used to say,

‘‘We have got to have these safety standards that are appropriate

for a 1,000 megawatt nuclear plant apply to everything that comes

on line.’’ As the chairman of the West Chester Putnam Boy Scouts,

we are trying to put in a 12-cabin campground that is sustainable,

and we want to put up 12 kilowatts of photovoltaic, and the local

utility has been given the right to force us to spend $30,000 testing

the interconnect. They have no standards.

Well, you have got net metering in the bill, but if you do not get

the interconnect standards set by an impartial agency, then net

metering won’t help.

So get the interconnect. I do not think that you can get one bill

that does everything the first time. I think you have done a great

job as far as you have come. It can be improved, of course. But get

it started, and then, with 2 years in, come back and fix up some

other things.

Your second question was: does it give enough help to the renewables?

Ms. MCCARTHY. To compete successfully.

Mr. CASTEN. To compete successfully.

Ms. MCCARTHY. And provide reliability.

Mr. CASTEN. Okay. I think that it gives enough with the interconnect to take 2 years and see what happens.

I am struck by Fredrich von Hayek, who said that the affairs of

human beings became so complicated that nobody could predict

what they would do, about 30,000 years ago.

And so the minute you change the rules and open it up to competition, I am looking over my back, because somebody is going to

figure a way to do it cheaper, and I think renewables will—see

what happens for a couple years and then adjust it, is my advice.

Ms. MCCARTHY. Mr. Cowart?

Mr. COWART. All right. I will take my turn.

First, I would like to make an observation about distributed resources, generally. We tend to concentrate on distributed generation as an important goal, as an important public value as we move

into a more competitive environment, and I agree with Mr. Casten

that distributed generation can be a really important resource for

the Nation.

But efficiency resources are also distributed. They are modular.

They can be manufactured at scale. And they produce, in an electrical sense in terms of providing electrical service to end users,

much of the same benefits as distributed generation.

289

We need to remember to support both distributed efficiency and

distributed generation as we go forward.

To answer your question about renewables, I do not believe the

bill does do enough to ensure the healthy future for renewables

that the Nation will need.

With respect to reliability, as I said earlier in my remarks, I am

very concerned, in fact, that we are missing the boat on reliability.

We are leaving out of the equation here one-third of the picture—

that is the efficiency with which electricity is ultimately used,

which drives the problems that we are seeing in transmission and

in generation adequacy.

And I know the question will be asked: well, why is that a Federal issue? Why is energy efficiency a Federal issue?

Probably 10 times today, maybe more, I have heard people say

that reliability is a regional issue, that incentives ought to be given

to support new transmission investments, and incentives need to

be given to open up the market for the construction of new generation.

Because the grids that we all are connected to are regional in

scope, the physics of those grids dictate that what happens somewhere else on the grid is going to affect reliability everywhere and

the price everywhere. And, for that reason, it just doesn’t make—

it is not logical, and we are leaving a lot of money on the table if

we say that an RTO or other reliability organization has the authority to mandate the construction of new transmission for reliability purposes, or we can raise the reserve margin across an entire region for reliability purposes, which are going to raise costs

to everybody.

But we do not have a mechanism at the regional level to support

enhanced investments in energy efficiency which could achieve the

same reliability goal less expensively.

Ms. MCCARTHY. Mr. Chairman, I know that time has expired,

but I know there are a couple of other panelists who would like to

speak to the reliability question that I raised. May I have an extension of time?

Mr. LARGENT. The gentlelady has had an extension of time, but

yes, if you would like to have one more response, that would be

fine.

Ms. MCCARTHY. Yes. Mr. Segal, I think you wanted to speak, and

then Mr. Cooper.

Mr. SEGAL. Thank you, Congresswoman.

Ms. MCCARTHY. Or whomever.

Mr. SEGAL. It will be a real short answer for us.

We are not here to talk about the renewables portfolio or anything like that. As service contractors, the bottom line is this with

respect to what is in the bill: the bill has a good first start in some

areas with respect to open books and records, but, frankly, that is

not much of a start.

In order to actually fix the problem with respect to cross-subsidization, getting into unregulated affiliate markets, there need to

at least be broad principles articulated within the bill, as there

were in earlier drafts. There need to be broad principles that include a clear prohibition and cross-subsidization, because, just like

this committee recognized in the Telecommunications Act of 1996,

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there are not sufficient protections in existing antitrust law with

respect to competition in unregulated markets. There need to be at

least some mechanism to make sure that these small businesses—

really, the small business discussion item for this bill, these small

businesses do not fall through the crack because there is no enforcement mechanism in place to make sure that they are not

crushed by utilities as they try and move into unregulated markets.

Ms. MCCARTHY. Mr. Smith?

Mr. LARGENT. Maybe we can have the rest of the panelists submit their responses in writing. We have got to move on. There is

a reception in here at 4, I am told, so we have to keep moving.

Ms. MCCARTHY. First things first.

Mr. BARTON. The gentleman from Illinois, Mr. Shimkus, is recognized for 5 minutes.

Mr. SHIMKUS. Thank you, Mr. Chairman.

Mr. Kanner, will you please describe for me horizontal market

power? Just define it. I am having a hard time getting it defined

the last couple days. Can you do that?

Mr. KANNER. Sure. It would be where, in a given market all trading the same thing or selling the same thing, the ability of an entity or a group of entities to raise and sustain prices above what

would occur in a competitive marketplace.

So, in other words, if it is office supplies, I could sell pencils for

whatever I want and there is no one else that can effectively cut

my ability to do so.

Mr. SHIMKUS. And so, in the term of power instead of office supplies, it would be controlling the price?

Mr. KANNER. In terms of power, it would be two summers ago

in California where the generators in southern California were able

to raise the prices 3,500 percent in some of the ancillary services

market and sustain those prices because there were only four players.

Mr. SHIMKUS. Why cannot a quality, independent RTO approved

by FERC, which, based upon my understanding, would require

open access, why can they not control or mitigate this type of market power?

Mr. KANNER. Again, in California during those price spikes there

was a qualified ISO approved by FERC in place, and that entity

went to FERC, went to a Federal regulator, to ask for help to resolve the problem.

You simply have markets that get defined by transmission constraints, and within those markets, if you do not have enough players, then you do not have the competitive price check that I think

we are all looking for.

Mr. SHIMKUS. Ms. Moler, always pleased to see you again after

attending so many hearings. Do you want to add to this for me?

Ms. MOLER. The only thing I would add to it, Marty—I believe

that Marty, Mr. Kanner, has correctly described the answer to your

market power question.

A qualified RTO can work if all transactions from all of the entities participating in the RTO have to be under the same rules. A

lot of the RTOs that are already approved by FERC do not—the

tariffs do not apply to utilities’ sales, bundled sales to their own

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customers, so they are first in line and they are not even on the

tariff.

So they are a good start. Some of the RTOs would do that, I

might add. But you have got to have all uses of the transmission

system covered.

Mr. SHIMKUS. If the FERC required for the system to be open—

and we are talking physics here—and people put power on the grid

and the consumer pulls power down, it is in a pool, and so the producer has a record of how much they are putting on the grid, the

consumer has a record of how much they are pulling down, and

those interact, and if the grid is open, how is there horizontal market power?

We do not know where those electrons are going. That is my

point.

Ms. MOLER. The electrons all get mixed up. Right.

Mr. SHIMKUS. I mean, that is the point. In the physics of this in

this debate, we cannot follow it from the producer to the consumer.

All we know is that it is going to a pool and people are pulling it

down, and we are going to individually contract with a producer.

So if the FERC requires that the ISO or the RTO or the transco

is opened, why doesn’t this system work? People are telling me

they need more tools than that.

Ms. MOLER. I believe that truly open access, where it covers all

the transactions on that grid, is a very effective remedy for market

power. I view that as a market power initiative.

When people talk to this subcommittee and advocate market

power remedies, I believe that truly open access, as described in

the amendment that we submitted today, would accomplish that.

Mr. SHIMKUS. And, Mr. Casten, do you want to just add to that

debate on the physics?

Mr. CASTEN. The only point I would say is that the issue that

people are concerned about came about because there was no price

signal to the consumers, and so we want to be careful trying to

solve a problem with legislation. We can get the wrong problem.

The consumers did not see that high price and could not do anything about it. Hopefully, in a competitive market consumers will

say, ‘‘I do not want to pay $3,500 a megawatt hour right now. I will

do something else.’’ That will solve some of the market power from

the other end.

Mr. SHIMKUS. As we saw with the price spikes in the midwest,

there has been numerous entries now into the generation, or at

least proposals on the board to fulfill the void.

Thank you, Mr. Chairman, for being so generous with the time,

and I yield back the balance of my time.

Mr. LARGENT [presiding]. The chairman wants to announce that

any and all members who have additional questions can submit

those in writing for the panelists, and we will get responses.

I recognize the gentleman from Massachusetts.

Mr. MARKEY. Thank you, Mr. Chairman, very much.

One thing I have learned is I never get in between Steve Largent

and a reception.

We are going to keep that consecutive game streak going here,

you know what I mean?

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You know, here is the thing that I try to keep in the back of my

mind, which is that these are monopolies, you know, and it is a

deep-seated pathology. Okay? It really is. And you are what you

eat, and when you eat monopoly profits for that long it is going to

be hard to change, and there is a kind of a paradox when you deal

with monopolists, when you legislate in that area, which is that it

takes more regulations to put on the book in order to break up the

monopoly than already existed beforehand, but it is toward the goal

of making sure that all the rest of these competitors can get in, and

once all the competitors are in and secure then you can take all the

regulations away and then you do not need any at all.

But breaking down 100 years of pathology is not easy, so you

have got to go through that process to turn it into a healthy, balanced, normal marketplace, which most other parts of the economy

have.

So what I would like to ask—first, Ms. Moler, I will try to get

all my questions in to Ms. Moler and Mr. Kanner—is why is it that

in the testimony today all the people representing retail consumers

and industrial consumers and independent power producers and

power marketers and other competitors have very serious problems

with the Barton bill, the transmission, the RTO, the merger, and

the other market-power-related provisions, and all the monopolies

support the Barton bill?

Why is that, Ms. Moler? What, in your opinion, do you think it

is about the Barton bill that——

Ms. MOLER. I would hazard a guess that they do not believe that

the monopoly power has been appropriately constrained.

Mr. MARKEY. What do you think, Mr. Kanner?

Mr. KANNER. Well, Congressman, I think we can say that very

clearly all of the proponents of markets and competition and consumers believe that Congress needs to and must address these sets

of issues if we are going to receive the intended benefit to competition.

Mr. MARKEY. Okay. Now, Mr. Kanner and Ms. Moler, earlier one

of the witnesses from the last panel mentioned some specific examples of instances in which incumbent utility monopolies had exercised market power, including Florida Power and Light, AEP, and

some utilities in Wisconsin.

Are you familiar with any real-world examples of market power

problems? Can you point to any States, regions, Mr. Kanner?

Mr. KANNER. I think you can. I used earlier the example in California, which is, to me, the starkest, where there were dramatic

price increases in the ancillary services market of some 3,500 percent and it was limited there because the computer could only

enter four digits, so it was $9,999. So that is a very clear example.

I think we have had market power examples elsewhere where

these new generators that Mr. Shimkus mentioned are desirous of

building new plants, but they are told that they are last in line because the utility’s own plants get to grandfather and be cued up

first for interconnection, and the longer you wait, not only do we

forestall that competitive market, but the cost of interconnection,

because of the impact on the system, goes up, and ultimately those

projects can be uneconomic, not viable.

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Mr. MARKEY. Mr. Cooper, could you give me the nightmare scenario? Could you briefly?

Mr. COOPER. Well, the nightmare scenario I think occurs in reality in California. If you think about what happened there, the

State of California could not make a market on its own and had

to turn to the FERC and say, ‘‘We need some relief.’’ The simple

fact of the matter is that this is an interstate market. The nearest

competitive power may be across the State border, and the State

cannot—the entity that has that power can, in fact, be operating

in both States.

Imagine the screaming and shouting if the State of California

tries to tell a generator in Nevada who is withholding his power

in California that they have to sell it into the State. It cannot happen. They would just scream and shout and say they crossed the

State border.

This is an interstate market. The transmission grid is a highway.

This is the highway of commerce.

Imagine if you are a vegetable producer in Texas who says,

‘‘Look, let’s put up a toll booth at the State border and turn back

all the trucks that might come from California with fruit in them.’’

This is a nightmare system.

You have to have a supply side, a demand side, and a highway

of commerce in between, and clearly that highway is an interstate

highway and it is an interstate market.

Mr. MARKEY. Ms. Moler, let me ask you a question.

Does section 101 of the Barton bill codify the 8th circuit decision

which held that FERC cannot bar utilities from giving first priority

in transmission to serving their native load even if this undercuts

their obligation to provide firm transmission service to other parties?

Ms. MOLER. I believe that section 101 does codify the 8th circuit

decision. The FERC——

Mr. MARKEY. And what impact does that have on FERC’s ability

to prevent utility monopolies to grant themselves preferential service for their own use and prevent others from fairly, effectively, and

efficiently utilizing the transmission grid?

Ms. MOLER. FERC would have no authority to look at the bundled transactions that you describe.

Mr. MARKEY. None at all?

Ms. MOLER. Correct. The reliability provision does talk about

FERC having authority over ‘‘bulk power facilities.’’ And, as I said

in my prepared statement, I cannot reconcile the bulk power sections and the jurisdictional sections.

I noticed that NERC today proposed to solve that by saying, notwithstanding any provision of the Federal Power Act, this reliability authority would be up and running, but section 101 does

amend the Federal Power Act.

Mr. MARKEY. Thank you.

Thank you, Mr. Chairman.

Mr. LARGENT. Thank you.

I recognize the gentleman from Tennessee.

Mr. BRYANT. Thank you, Mr. Chairman.

Again, let me thank you for just continuing to hold these various

hearings on this very important issue.

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Today we have had two very representative panels, and I appreciate their testimony. Unfortunately, I have been in and out today

with another subcommittee hearing with the Surgeon General in

one, and also on the floor talking about health care, which is another very important issue, certainly one of the day.

In order to avoid duplication, since I have not heard all of your

testimony, I am not going to wade in and try to ask you additional

questions, but, Mr. Chairman, I would ask that we be given a few

days and maybe we could submit questions in writing if we have

any additional questions.

Mr. LARGENT. Yes. Without objection.

Mr. BRYANT. Thank you.

And, again, thank you for your presence here today.

I yield back the time.

Mr. LARGENT. And the gentleman from Texas is recognized for 5

minutes, Mr. Hall.

Mr. HALL. Mr. Chairman, thank you.

I have noticed that there are not very many people asking Mr.

Smith any questions, and I left—I had to leave and go and come

back, and I have been going to see where Mr. Markey was. He goes

and comes and then come back revved up and ready to go.

Are you the same one they call ‘‘Smitty’’ down in Austin, Texas?

Mr. SMITH. Mr. Hall, I am that same Smitty.

Mr. HALL. The same one that came to my office and told me everything I was doing wrong——

Mr. SMITH. And hope to do that again.

Mr. HALL. Well, I enjoyed you. You are a class guy.

Mr. SMITH. Thank you.

Mr. HALL. And you just say what everybody else says, so—but

I noticed that some here represent AARP, some Americans for Affordable Energy, coalition coordinator for Consumers for Fair Competition, Consumer Federation of America, and then you represent

everybody else. You represent the public citizen, right?

Mr. SMITH. Right. That is what I try and do.

Mr. HALL. I have a quick question to ask everybody, but I will

ask you first. How has this bill been implemented in Texas that we

just passed there? How is it working?

Mr. SMITH. Well, it is good and bad and ugly, and the——

Mr. HALL. In that order?

Mr. SMITH. Yes. I think our Public Utilities Commission has done

a great job of doing rulemaking on this.

The bad news is that we did not anticipate a number of the problems in the bill and we did not get language tight enough in a

number of key areas, some of which you have been talking about

today.

Mr. HALL. It was amazing to get a bill with the vote you got

down there, right?

Mr. SMITH. Well, especially in the House. And it was a bill that

was heavily worked, and we got tremendous—almost everybody,

with the exception of Public Citizen and the consumer groups, were

in support of the bill, and the chairman and the House did a tremendous job down there. And we got an awful lot in that bill. I do

not mean to be belittling it. We just did not think that this was

a good idea.

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But the ugly part and the part that I think is really important

here in this conversation is what we did not really understand was

that the way we set up the ISO, the ball has been stolen from the

Public Utilities Commission on a number of critical matters regarding reliability, access to transmission, the data collection about consumers and how consumers get shifted around.

And so when you all do your ISOs, unless you—our goal would

be to have them done publicly, but if you do have these regional

ISOs, make sure you have a significant majority of consumer representatives on those boards that control them; otherwise, the same

big old boys that have been running the system are going to continue to control who gets access and you will continue to have monopolies really running the system.

Mr. HALL. Part of your presentation was to assure we are not

just benefiting the big boys.

Mr. SMITH. Yes. That is the essence of it.

Mr. HALL. You recommended allowing communities to buy at

wholesale for their citizens, and you said to help protect residential

consumers you should consider adding a provision called ‘‘community choice.’’ There is a provision on aggregation, but community

choice you say is different. How is different from the provision the

that chairman put in his bill?

Mr. SMITH. We had a robust discussion a few minutes ago about

this, and——

Mr. HALL. Okay. I won’t—if you have covered that, I won’t go

into it.

Mr. SMITH. But let me give you the short version, and that is

that what happens then is the community gets together, votes on

whether to create a new public power entity or buy power for its

consumers, and then we think gets the wholesale deal.

In Texas, what we found was that when people went out to

wholesale they were getting 20, 28 percent reductions in price. The

best in the country right now, the best market in the country right

now in Pennsylvania, the star market, it is only an 18 percent difference from what it was before they did deregulation.

We believe that wholesale gets you better deals for the average

consumer, and that is the key message that we have got, so that

is why we are suggesting that you give the community choice and

then you give the people the opportunity to opt out if they would

like to do so.

Mr. HALL. Are you for this bill?

Mr. SMITH. No, sir, I am not. As I mentioned earlier, I think it

is a—there are a couple good things in it, but it needs to go further.

Mr. HALL. All right. You are not for the bill.

Mr. Brice, do you support this bill?

Mr. BRICE. With some revision.

Mr. HALL. All right. Betsy?

Ms. MOLER. With some change.

Mr. HALL. Do you all have the same opinion?

Mr. BARTON. I have seven amendments. By the time we are done

with the amendments, it will not look like the original bill, that is

for sure.

But we need legislation.

296

Mr. HALL. Who was it that asked a while ago and they gave us

all the things that were wrong with it, and I whispered to the

chairman, ‘‘Ask him what is right about that.’’

Mr. BARTON. That was our strongest supporter.

Mr. HALL. Well, you cannot fault this chairman. He has laid it

out there and we can take shots at it and can restore it and correct

it maybe. I hope we can.

Mr. Kanner?

Mr. KANNER. With some substantial changes, substantial.

Mr. HALL. Mr. Cowart?

Mr. COWART. Also with substantial changes. I think it can be restored, frankly.

Mr. HALL. Maybe I have not got enough time for you to tell me

what. Go ahead. Go ahead and tell me. You are just against it like

it is and you do not think it is repairable?

Mr. COWART. No. I said I think it could be repaired. There are

some very significant, positive elements in this bill, and it is just

the very important parts of what ought to be done aren’t included

at all.

Mr. HALL. Mr. Smith, you have already spoken. You have not

changed?

Mr. SMITH. Have not changed in the last five witnesses.

Mr. HALL. Mr. Casten?

Mr. CASTEN. Given a choice between this bill and no bill——

Mr. HALL. You, in your testimony, seemed to have wanted a

smaller bill. You think the time is not right, or something?

Mr. CASTEN. No, I did not mean that at all.

Mr. HALL. Did I misunderstand you?

Mr. CASTEN. Yes, sir.

Mr. HALL. Okay.

Mr. CASTEN. Given a choice between this bill and nothing, I

wholeheartedly support passing the bill.

Mr. HALL. Okay.

Mr. CASTEN. I think there are some more barriers that have not

been dealt with and they could be added, but you are in the right

direction, sir.

Mr. HALL. Well, you know, we are at the subcommittee level and

we will have a new chairman when we get to the committee. I do

not know in whose hands and what those hands want to do with

this bill when it gets there. And Rules is going to have an awful

lot to say about it, the Speaker will have a whole lot of input at

the Rules Committee, and when it gets to the floor—we are a long

way from the bill. But I agree with you—I think it is better than

no bill, and that with some real helpful amendments that we can

maybe restore this vehicle.

Yes?

Mr. SEGAL. Mr. Hall, I have got good news and I have got bad

news.

Mr. HALL. Give me the bad news first.

Mr. SEGAL. Bad news first is, as the bill is currently drafted, the

service contractors cannot support it. But the good news is, all we

have to have is a cross-subsidization provision in with broad principles and we can support pretty much any other bill, no matter

297

what it says about all their transmission problems, doesn’t matter

as long as there are good, broad principles on our issue.

Mr. HALL. To get that one thing, how many votes up here can

you deliver?

Mr. SEGAL. I will answer that question. We have chapters in

every Congressional District in every State, air conditioning contractors, alone, 4,000 of them, and we will mobilize——

Mr. HALL. It is already getting to be winter now. How about the

people in the wood business?

Have you got any people——

Mr. SEGAL. Electricians, plumbers, you name it, they are going

to kill me because I am leaving somebody out, but every service

contractor that is facing unfair monopoly based competition, we are

absolutely willing to support a bill that contains adequate provisions on cross-subsidies.

Mr. HALL. Mr. Chairman, I asked to be last because I wanted to

go out in good nature and real gratitude to you, and I say this in

all sincerity, for the openness, that your door has absolutely been

open to everyone, and you have traversed this Nation back, forward. I have asked for hearings in Honolulu. You have turned

those down. I did not like that.

But I think that we owe you a great debt of—hell, I am the only

one up here.

I am in slapping distance, so I have to be for him.

We do thank you for the way you have engineered this, and I am

honored to be a part of it with you.

I yield back my time.

Do you want me to take another 30 minutes?

Mr. BARTON. No, no. I think we are—we were supposed to have

been out of the room at 3, because they are getting ready for an

Armey reception at 4.

Let me close the hearing. I want to thank you, Congressman

Hall. You have been polite to me. This is a team effort, and I could

not ask for a better ranking member than you in terms of being

open and congenial and forward-thinking in trying to reach the

goal.

I want to compliment the full committee ranking member, Mr.

Dingell, for all of his accessibility and his willingness to listen and

make sure the process goes forward.

Chairman Bliley has been very supportive of the hearing process

and moving toward delineation of the issues. So it is a team effort.

I want to thank this panel. I apologize. Because of the lateness

of the day and the votes, we did not have all of the subcommittee

back to hear your testimony, but it is in the record and we are

going to be looking at it.

As I have told this first panel, my intention is to go to markup

the week after next, so, Mr. Casten, who said he had some language on functional distribution, we need to look at that, and I

know Mrs. Moler’s group has got some discrete language. I know

Mr. Kanner’s group has. Try to get a champion on each side of the

subcommittee to bring it forward. I am going to sit down with Congressman Hall as soon as we get all that in, go through and see

if we need to change the current draft before we go to markup, or

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whether we want to go to markup and then have a log of amendments. But we are going to have an open markup process. The one thing that I am going to discourage is subcommittee members coming into the markup having not shown their amendments to anybody. I cannot prevent that from coming up for a vote.

It is an open process. But I am going to tend to be very negative

on amendments that have not been shopped and have not been

shown to both sides of the aisle in terms of them being accepted

into whatever the legislative vehicle is. Our subcommittee is well versed in the issue, well educated on

both sides of the aisle. This is a big, big issue. I think it dwarfs

telecommunications. I think it is more complex than natural gas

deregulation was. So we need the best minds working on these

issues, giving us the legislative language, and then I have got confidence, between the kinds of members we have on both sides of the

aisle that are dedicated to trying to get a good bill, we can come

up with a good bill. I do not disagree with most of your testimony, quite frankly, that this is—you know, not too many of you are categorically for the bill

as it is, but with some changes. The key is going to be, you know,

how do we balance those changes in the good for the country. I have told the republicans on the subcommittee when we meet,

‘‘I want suggestions on good public policy,’’ and then we are going

to have to make some political decisions, but I want suggestions on

good public policy so that, if we start with good public policy, when

we have to make a political decision to get the votes, at least the

base underline is good public policy. So I know you have got interest groups and I know your interest has got to be preeminent in your presentation, but when you go

back and make your reports tonight or tomorrow to the trade

groups that you represent, try to get them to think about not just

what is best for you, but what is best for good public policy, because we have got a chance in the next 2 weeks to mark up a bill

that restructures an industry that has never been in any type of

a competitive market for over 100 years, and that is a real opportunity, and we ought to take advantage of it in this session of Congress. I thank this panel. You are adjourned, and the committee is ad- journed. [Whereupon, at 3:20 p.m, the subcommittee was adjourned, to re- convene at the call of the Chair.]

[Additional material submitted for the record follows:]

RESPONSES OF DAVID K. OWENS, EXECUTIVE VICE PRESIDENT, EDISON ELECTRIC

INSTITUTE TO QUESTIONS OF HON. JOE BARTON

Question 1. Some witnesses suggest including Clean Air Act amendments in elec- tricity legislation based on the Waxman bill (H.R. 2900) or the Pallone bill (H.R.

2569). What is your position on these bills? Response: EEI does not support including Clean Air Act amendments in electricity restructuring legislation. Any provisions affecting air emissions from electric generating sources should be part of an overall reauthorization of the Clean Air Act

which applies to all industries, rather than done piecemeal in other legislation. Electric generating plants already face uncoordinated, overlapping and inconsistent programs under the Clean Air Act, probably the most complex of environmental statutes. Adding more requirements outside of the Clean Air Act structure would only

make matters worse. Additionally, the air emissions included in both the Waxman

and Pallone bills are addressed in the existing Clean Air Act, and implementation

299

of the statutory programs is underway or currently under development. It would be

premature to add other requirements outside of the Clean Air Act before all the existing Clean Air Act provisions are fully implemented and the impact on overall air

quality fully realized.

Question 2. You assert FERC has no authority over holding company mergers. If so, why did AEP and CSW submit their merger for FERC approval? Do you expect

PECO Energy and Unicom to submit their merger for FERC approval? H.R. 2944

does not expand FERC regulation if it merely clarifies existing authority. Response: The Federal Power Act does not grant FERC explicit authority over mergers of holding companies. In fact, FERC’s assertion of jurisdiction over holding

company mergers is relatively recent. Many disagree with its position as a matter

of law. But, as a practical matter, litigation of this issue during the pendency of a

merger could delay merger approval for years. Approvals of utility mergers already

take too long. Thus, as a practical matter federal restructuring legislation needs to

resolve this issue, just as it should resolve other issues where FERC jurisdiction is

ambiguous. However, we are opposed to expansion of FERC merger authority over

holding companies.

Question 3. Mr. Rao proposes establishing a rebuttable presumption that nonrad- ical lines in excess of 60 kilovolts are transmission facilities. What is your reaction? Response: FERC’s seven part test, which is accepted in the Barton bill, properly concludes that a variety of factors need to be considered to correctly distinguish

transmission from distribution. FERC developed this test in Order No. 888 after

considering comments from all interested parties. FERC concluded that no single

factor, not even voltage, is sufficiently important to be a primary measure of the

nature of a given facility. Under the current FERC approach, FERC will give great

deference to state determinations applying the seven part test. Mr. Rao’s approach

might well deny states authority over facilities that really serve a distribution function.

Question 4. Mr. Rao gives examples of IOUs redesignating transmission as dis- tribution in order to avoid open access requirements. Why did Commonwealth Edison reclassify 40% of its transmission as distribution? Why did Wisconsin Public

Service Company try to reclassify over 90% of its transmission as distribution? Response: Every proposal to clarify what is transmission and what is distribution is subject to regulatory review and approval by state regulatory commissions and

FERC. FERC established the seven part test for identifying transmission facilities

in Order No. 888 because it recognized that restructuring could require utilities to

revise precisely how they accounted for transmission and distribution facilities

based on whether or not an asset was actually being used for a transmission or distribution function in a competitive context. FERC recognized, for example, that open

transmission access could utilize facilities which utilities had traditionally treated

as distribution for accounting and regulatory purposes. The requirement of open access distribution in state restructuring plans similarly could cause utilities to take

a new look at how they classified various facilities. In fact, states such as Illinois

have required utilities to refunctionalize as part of their restructuring legislation.

In Order No. 888 FERC also described the process and factors it would use to review these classifications. This process provides for public input, and deference to

state determinations about the proper classification of transmission and distribution

facilities within each state. However, FERC makes the final decision on all of these

requests. No utility can unilaterally transfer facilities from one category to another.

In short, this process is a natural response to the changing use and regulation of

the utility delivery system that is fully regulated by FERC and the states.

Question 5. You state Congress should authorize States to impose reciprocity,

which would give States the power to regulate interstate commerce, by denying outof-state electric suppliers access to their retail markets. Are you concerned States

may abuse this power? For example, New Jersey could use its reciprocity power to

deny the access of coal utilities to its retail markets.

Response: With the modification we suggest, the only criteria which a state could

use to require reciprocity involves whether a utility has applied for or provides open

access distribution. A state could not impose environmental or other restrictions

under this reciprocity approach.

Question 6. You state TVA provisions ‘‘absolves TVA of the most basic regulatory

constraints.’’ Under the status quo, TVA is not regulated, it has a closed transmission system, it sets its own transmission rate and power rates, Federal law requires its customers to buy from TVA, and antitrust law does not apply to TVA.

H.R. 2944 opens TVA’s transmission system, provides for FERC regulation of TVA

transmission and power sales outside the region, gives TVA customers a choice, and

applies antitrust law to TVA. What is a better deal for TVA, the status quo or H.R.

2944?

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Response: The phrase you quote in your questions refers to Section 612 of H.R. 2944, which says that Subtitle A ‘‘shall be interpreted and implemented in a manner that does not adversely affect bonds issued by the Tennessee Valley Authority.’’

We believe that this extraordinarily broad loophole virtually voids many of the regulatory provisions that might otherwise apply to TVA under other sections of H.R.

2944.

We also do not believe the goal of fair competition is advanced by allowing TVA

to carry its subsidies and exemptions over the fence into competitive wholesale markets. If TVA is to be an active competitor in the electricity marketplace, it should

play by the same rules as other active competitors.

RESPONSES OF ALAN RICHARDSON, EXECUTIVE DIRECTOR, AMERICAN PUBLIC POWER

ASSOCIATION TO QUESTIONS FROM HON. JOE BARTON

Question 1. You say H.R. 2944 eviscerates FERC jurisdiction over the transmission system. That is not what FERC told us yesterday. FERC told us H.R. 2944

codifies Order 888. Let’s be clear what you are asking for—you want Congress to

go beyond Order 888 and give FERC jurisdiction over a larger part of the transmission system than it assessed in Order 888. Isn’t that correct?

Response. APPA’s view is not that H.R. 2944 eviscerates all FERC jurisdiction

over the transmission grid. Rather, as I testified previously:

[I]n attempting to create a bright line distinguishing Federal and State regulatory jurisdiction, two provisions of H.R. 2944 combine to eviscerate FERC jurisdiction over significant components of the interstate transmission network.

Section 101(b)(1)(B) does not allow FERC regulation over bundled retail sales

of electric energy. Section 101(e) allows for a FERC determination of whether

a particular facility qualifies as transmission or distribution, but requires FERC

to give deference to State commission decisions. When these provisions are combined, this section cuts FERC out of the regulation of significant amounts of

transmission access and use over bundled sales. If this section is interpreted to

allow a preference for bundled firm load over unbundled firm load on the same

transmission system under emergency situations, then it is clearly inappropriate. Such an interpretation would undermine the goals of promoting competition and standardizing regulation of the national grid. [emphasis added]

The bill’s attempt to establish a bright line between state and federal jurisdiction

is likely to balkanize the grid and to lead to protracted litigation of the new divide.

As private power companies seek to protect themselves from competition, they could

use the extension of slate jurisdiction over facilities and the bright-line prohibition

on FERC inquiry into the comparability of bundled retail service to unbundled

wholesale service to establish effective barriers to competition.

Section 101 will prompt utilities to forum-shop, seeking to transfer assets to state

jurisdiction where the regulatory climate is favorable and the objective is to protect

their generation and merchant functions from competition.

APPA does not seek to extend direct FERC authority over the transmission of

electric energy, as part of a bundled retail sale. However, the Commission must

have the authority to ensure that all users of the transmission grid receive comparable, non-discriminatory access to the grid, whether the sale is characterized as

a bundled retail sale, an unbundled retail transaction, or a sale for resale in interstate commerce. Chairman Hoecker has in fact sought just such a clarification in

his testimony, illustrating that H.R. 2944 in fact does not codify Order 888. Rather

it constricts the scope of the Commission’s existing jurisdiction.

H.R. 2944 here raises two issues of grave concern to APPA. First, if transmission

facilities are refunctionalized to ‘‘local distribution,’’ it becomes much more difficult

to make the case that such facilities must be controlled and operated by RTOs. The

results may be RTOs that lack operational control over the entire bulk transmission

grid. An RTO’s ability to perform each of the functions identified by FERC and

those identified within H.R. 2944 would clearly be impaired if, for example, a major

portion of the grid’s Available Transfer Capability, is controlled not by the RTO, but

by local utilities. Of equal importance, an RTO’s ability to expand the grid in response to the needs of all transmission customers will be hobbled by dependence on

each local utility to upgrade non-RTO facilities.

Second, the bright line between bundled retail and unbundled FERC-jurisdictional

transactions would appear to foreclose inquiry by FERC (or by a wholesale customer

in a court of competent jurisdiction) into the comparability of the transmission services afforded by a local utility to its bundled sale retail customers in comparison to

the rates, terms and conditions of transmission access afforded to wholesale transmission customers. One must remember that none of the independent system operaVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00304 Fmt 6601 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
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tors now in operation or the RTOs now envisioned by the industry intends to operate the entire grid—from generator busbar to customer meter. Thus, comparability

of the wholesale and retail delivery services provided by the local utility is still an

issue of great concern to public power. For the most part, APPA members are interconnected at sub-transmission voltages through facilities that may or may not be

operated by RTOs. Thus, our members will remain subject to discriminatory conduct

by private power companies. Reliance upon state Commissions to ensure that public

power systems receive comparable access would result in increased regulation, as

states are forced to take on functions now performed at the federal level. In addition, one can anticipate a proliferation of differing regulatory regimes among the

states governing local transmission access. While each state properly must design

and implement its own program for retail choice, standardization of the rules for

local transmission access under a FERC-jurisdictional tariff is essential for the creation of large and liquid regional power markets.

Question 2. One thing we have heard loud and clear the past four years is the

need to respect the States. You propose granting FERC jurisdiction over transmission used to make bundled retail sales. What is the position of the States on this

issue?

Response. APPA has been among those urging Congress to respect the rights of

the States (and their political subdivisions) regarding if, when and how to address

retail competition. In our view, they, are better positioned than Congress to address

these issues. This is why we have consistently, opposed a ‘‘date-certain Federal

mandate’’ for retail competition. At the same time, we have endorsed Federal legislation to sort out the difficult jurisdictional issues necessary to make wholesale competition (competition in interstate commerce) work as intended, and to lay the foundation for effective retail competition in those states that have or may in the future

proceed down that path. Theoretically, every electron in the grid flows in interstate

commerce. We have never suggested that Congress could not endorse this expansive

view of what constitutes interstate commerce, only that it should not. The problem

then is how to draw reasonable boundaries between those issues subject to FERC

jurisdiction, and those that should be left to the States. Transmission has historically been used to define the boundary, and, following Order 888, this has given rise

to questions regarding FERC jurisdiction over transmission for bundled retail sales

and unbundled wholesale sales. We believe that there should be comparability with

respect to access, use and price for transmission services without regard to whether

the facilities are used for bundled retail sales or unbundled wholesale sales. We believe this was one of many goals of Order 888.

Congress should make it clear that FERC has full jurisdiction over all elements

of transmission in interstate commerce, including the use of subtransmission and

distribution voltage facilities that are needed to accomplish the transmission of energy at wholesale. To the extent that the Congress determines that the states

should retain jurisdiction over the transmission portion of bundled retail sales, Congress should also find that such jurisdiction is shared with the Commission. Where

there is a conflict between state commissions and FERC under the Federal Power

Act, the interests of the state should give way to the extent that they create a barrier to interstate commerce.

If we do not have uniform treatment of transmission facilities there will be wide

disparities in treatment of similarly situated customers. For example, citizens of

State A served by a publicly owned electric utility that purchases power at wholesale and unbundled transmission service from a private power company could be

treated differently from other citizens in the same state who are retail customers

of the same private power company simply because the IOU’s transmission costs are

bundled together with the power and distribution components of the retail bill. The

opportunities for discriminatory treatment with respect to transmission access, use

and charges in such situations are apparent.

We do not speak for the States on this issue, and therefore cannot provide a definitive answer regarding their position.

Question 3. You oppose FERC deference to the States in determination of transmission and distribution facilities, which is the approach FERC laid out in Order

888. Is FERC giving too much deference to the States? Can you give examples? You

indicate utilities are trying to reclassify facilities. Is FERC agreeing to this reclassification?

Response. In Order No. 888, the FERC announced that it had jurisdiction over

all facilities necessary to complete a wholesale transaction, without regard to whether such facilities were labeled ‘‘transmission,’’ ‘‘distribution’’ or ‘‘local distribution.’’

The Commission stated that it would apply a seven-factor test to determine what

facilities were ‘‘distribution’’ facilities for purposes of determining the federal/state

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jurisdictional split when a sale is made to a retail end user and that it would defer

to state regulators’ determinations of what facilities are distribution.

In the real world, under the guise of applying the seven-factor test, owners are

seeking to ‘‘refunctionalize’’ (reclassify) substantial amounts of their existing transmission facilities in an attempt to remove these facilities from FERC jurisdiction.

As of yet, the states and FERC would appear to have properly applied the sevenfactor test. Recent utility initiatives give us great pause, particularly in light of the

language proposed in H.R. 2944.

In one recently filed application to the FERC, a major transmission owner in Illinois has proposed to refunctionalize approximately 40% of its total transmission facilities to distribution. Although details in the filing are sketchy, it appears that almost all 138 kV and below facilities would be ‘‘distribution’’ facilities if FERC approved the application. Only 345 kV and above facilities would remain transmission.

Another transmission owner in Wisconsin submitted a filing to its state regulatory

agency under which only 124 out of a total of 1,474 pole miles of existing transmission should remain transmission. The remaining 1,350 miles would be reclassified as ‘‘distribution.’’ The filing would have left only seven of the owner’s 33 interfaces available for transfer to a RTO.

In Order No. 888 FERC has stated that it will defer to state commission determinations. While such deference may be appropriate in the determination of what

facilities constitute ‘‘local distribution’’ or ‘‘transmission’’ facilities, these proceedings

do not take place in a regulatory vacuum. Restructuring presents many states with

a substantial loss of regulatory jurisdiction to FERC (in the area of RTOs and transmission), to a self-regulatory NAERO (in the realm of reliability), and to largely unregulated markets (in the area of generation and marketing). State regulators will

have a strong incentive to capture jurisdiction, by extending their purview from

local distribution to the transmission of electric energy, even where such transmission is of an interstate or multi-state character. Owners also have a strong incentive to retain control of such facilities rather than transferring them to an RTO.

The refunctionalization of facilities from transmission to distribution raises significant issues, including:

• Would refunctionalization of transmission to distribution mean that FERC has no

jurisdiction over these ‘‘distribution’’ facilities?

• Will these ‘‘distribution’’ facilities become subject only to state jurisdiction?

• Will operational control of these ‘‘distribution’’ facilities be transferred to the

RTOs as originally planned or will owners retain full operational control over

such facilities?

• Will these ‘‘distribution’’ facilities no longer be subject to the requirements of

Order No. 888?

• Will these ‘‘distribution’’ facilities no longer be subject to any of FERC’s open access or comparability requirements?

• Will state regulators determine rates, terms and conditions under which wholesale customers have access to these ‘‘distribution’’ facilities, including whether

owners can reserve significant portions of the capacity of these facilities for reliability purposes (i.e., CBM), impose load ratio restrictions on the use of such

facilities, adopt non-comparable allocation or curtailment schemes or otherwise

impose rates, terms or conditions that would discriminate against and limit customer access to such facilities?

• Will states that have different or conflicting economic interests use their new authority to balkanize regional markets, e.g., to prevent the transmission of lowcost energy to ‘‘downstream’’ states or to prevent the transmission of energy

deemed to be insufficiently ‘‘green?’’

• Will customers be exposed to a vertical rate pancake if they are served by ‘‘distribution’’ facilities or are purchasing from a generator connected to the grid by

‘‘distribution’’ facilities? If so, will the sum of the vertical pancake exceed the

owner’s current transmission rate?

The functional approach to differentiating between transmission and distribution

facilities makes sense, so long as it is applied taking into account these and other

questions. It is appropriate for FERC to consider state commission determinations,

but requiring FERC, by statute, to give due deference to state commission determinations at the very least is an invitation to litigation.

Question 4. Mr. Rao proposes establishing a rebuttable presumption that nonradial lines in excess of 60 kilovolts are transmission facilities. What is your reaction?

Response. A rebuttable presumption based on the size of the facilities as proposed

by Mr. Rao would be appropriate. We have not addressed what the appropriate

threshold should be.

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In light of our concerns with the refunctionalization of transmission facilities to local distribution, we agree that a lower voltage threshold provides greater assurance that utilities will not be able to create barriers to competition. A rebuttable

presumption would also allow a transmitting utility to petition for the exclusion of

specific facilities or classes of facilities from transmission.

Congress might consider, for example, the restructuring legislation recently en- acted in Wisconsin. According to The Energy Daily, Friday, October 8, 1999, page

2, Wisconsin’s Reliability 2000 legislation contains language that classifies anything

above 130 kilovolts as transmission and puts the burden on a utility to explain why

lines in the 50-130 kilovolt range should not be classified as transmission.

Question 5. You say ‘‘it is difficult on public policy grounds to sustain the propo- sition that publicly owned transmission facilities should be subject to FERC jurisdiction.’’ I agree that small public transmission systems should be exempt from FERC

jurisdiction, and H.R. 2944 does that. Why should large public transmission systems

like New York Power Authority be exempt from FERC regulation? Why shouldn’t

these large systems be fully open? Response. As noted in our testimony, APPA appreciates the fact that H.R. 2944 limits FERC jurisdiction over small publicly owned transmitting utilities. The specific comment in our testimony, that is quoted in this question is based on a number

of factors. For example, most of the large public power systems that own substantial

amounts of transmission facilities have voluntarily filed tariffs with FERC or a Regional Transmission Group that provide for comparable transmission service, are

participants in ISOs (such as is the case with the New York Power Authority), or

both. The transmission facilities of these utilities are fully open. In addition, publicly owned transmitting utilities are subject to FERC open access transmission orders under amendments to the Federal Power Act contained in the Energy Policy

Act of 1992. Further, APPA supports the expansion of FERC authority to require

all transmitting utilities to participate in RTOs. However, as noted and more fully

explained in our testimony, the exercise of this authority with respect to publicly

owned utilities must take into account the unique conditions and characteristics of

publicly owned utilities. Therefore, based on what publicly owned utilities have already done to provide comparable treatment, what they may be required to do on

a case-by-case basis under provisions of the Energy Policy Act of 1992, and what

we believe should occur with respect to RTO formation and participation, additional

FERC jurisdiction appears unnecessary. However, to the extent Congress concludes

that FERC jurisdiction over publicly owned transmitting utilities should be expanded, we urge that such regulation be as light-handed as possible to ensure comparability without imposing unnecessary regulatory burdens.

Question 6. You want to limit FERC regulation of large public transmission sys- tems to non-rate terms and conditions. If large public systems retain rate authority,

they could shift power costs into transmission rates, and would have an incentive

to shift costs if their power costs were above-market. Should publics be able to shift

power costs into transmission rates?

Response. Shifting power costs into transmission rates is inappropriate. For the

reasons set forth in our testimony, we do oppose FERC jurisdiction over public

power transmission rates. jurisdiction over rates and revenue requirements should

be limited to ensure comparability. Comparability encompasses standards of reasonableness and non-discrimination. We stated in our testimony that ‘‘where FERC determines that rates are not comparable or are discriminatory, it could remand the

rate to the local regulatory authority for review and revision as necessary. Public

power systems would therefore retain local control over rate making and revenue

requirement decisions.’’ [emphasis added]

Question 7. You say market power issues ‘‘simply cannot be addressed by the individual States.’’ Did California reduce generation market power? Did the New England States reduce generation market power? Did Texas reduce generation market

power?

Response. In fact, the states have a major role to play in the control and mitigation of market power, through the conditions and directives they impose on utilities

during the restructuring process. States, for example, have used utility generation

divestiture to ensure there are multiple owners of deregulated generation assets

within their state. Without such state action, their restructuring efforts risk the creation of unregulated monopolies.

Once the divestiture has occurred, most states will find it difficult if not impossible to mitigate market power, because electric power markets generally extend far

beyond the boundaries of a single state. Texas, with its DC voltage interconnections

to other states, is, like Alaska and Hawaii, an obvious exception. Even a state as

large as California is overwhelmingly dependent on electric power imported from

other parts of the west. In fact, throughout much of the year, imports set the marVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00307 Fmt 6601 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
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ket price for power sold into the California market. Thus, concentration in the electric generation market in a region, particularly where coupled with control of scarce

import capacity, presents a risk from the exercise of market power in these ‘‘downstream’’ markets. If the concentration is in the upstream (and out-of-state) region,

regulators in downstream states have few if any tools to deal with such concentration.

States lack the power to halt the trend of mega-mergers intended to create large,

regionally dominant generation suppliers. Neither can the states effectively halt the

creation of multi-state holding companies whose complex financial and business relationships are difficult for even federal regulators to decode. This problem will become even more serious if the current restrictions on the scope and configuration

of utility holding companies are eliminated by the repeal of the Public Utility Holding Company Act.

Question 8. Should individual States have the authority to establish transmission

reliability standards? Would fifty different state standards improve reliability? What

would be the impact on interstate commerce?

Response. States have had the authority to regulate the plans and actions of the

utilities within their borders with regard to reliability standards for several decades

as a part of the voluntary industry self-governance system known as the North

American Electric Reliability Council (NERC). The NERC system functions through

several regional grids that really reflect the engineering of the system and have little relationship to state political boundaries. This system worked to produce the

most reliable electric system in the world while the industry functioned through the

geographic monopolies regulated primarily at the state level.

Since the passage of EPACT in 1992, when Congress opened up the national electric transmission grid to promote greater wholesale competition and exchange, those

geographic borders have been become even less relevant to the control and flow of

electricity around the country. The industry, with an unprecedented level of cooperation, decided that the voluntary system no longer fulfills the reliability needs

of the system, and that a self-regulatory organization (NAERO) with federal enforcement powers was needed to provide the proper level of focus on the reliability of

the system. This focus on national reliability standards is also needed to support

the expected increase in market activity that will be carried out over the system.

There is nothing in the industry consensus language, which is included in H.R.

2944, that undermines the states’ abilities to regulate the actions of utilities operating within their borders with respect to reliability standards for transmission and

distribution delivery of electric power to retail customers in their state.

Fifty sets of different state reliability standards could undermine the reliability

of the interstate electricity transmission system. The national standards that the

NAERO process envisions will reflect state and regional input throughout the process. States should not have the authority to establish standards that affect the national standards for transmission reliability necessary to create an effective and

properly functioning interstate transmission grid. If states are allowed to create

standards that negatively affect national transmission reliability, it could undermine the goals of promoting electric competition in interstate commerce.

Question 9. You assert H.R. 2944 prohibits FERC merger hearings. H.R. 2944

does not eliminate hearings and maintains the discretion of FERC to hold hearings

when it believes doing so is necessary to build a record to base a decision on. Do

you believe FERC has to hold hearings under current law? How many of the 30 recent mergers were set for hearings?

Response. I attempted to be very precise in my testimony. I did not state that

H.R. 2944 prohibits FERC merger proceedings. I did state that ‘‘H.R. 2944 would

eliminate the option of exidentiary hearings.’’ [emphasis added] Section 203 of the

Federal Power Act provides for ‘‘notice and opportunity for hearing.’’ H.R. 2944

would delete this language, and substitute language providing for ‘‘notice and a 60-

day opportunity for oral or written presentation of views . . .’’ There is a significant

difference between an opportunity for a hearing, which may include everything from

no hearing, to a paper hearing, to a full-blown evidentiary hearing, on one hand,

and the much more limited opportunity for oral or written presentation of views on

the other. In our view, the opportunity for oral and written presentations provided

in H.R. 2944 does not encompass evidentiary hearings. For the reasons set forth in

our testimony, we do not believe FERC should be prohibited from requiring such

hearings. We are concerned over the potential for mergers to frustrate rather than

promote competition. FERC has found this to be the case in its evaluation of certain

merger proposals.

While every merger takes at least one competitor out of the market, some mergers

may promote greater competition and benefit consumers. Therefore, we do not beVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00308 Fmt 6601 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
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lieve FERC must hold an evidentiary hearing in every merger proceeding that

comes before it, but we do believe it must have the opportunity to do so. According to research done by FERC Commissioner Massey and presented at a recent Commission meeting, of the 30 merger applications received since the FERC

adopted its new and streamlining procedures, five were received within the last five

months and have not yet been processed. Of the remaining 25 cases, only three were

directed to be set for hearing. These three were: American Electric Power and Central and Southwest; Western Resources and Kansas City Power & Light; and Allegheny-Duquesne. In the latter case, the applicants were offered the option of going

to hearing or accepting a set of conditions to address and mitigate market power

concerns. That merger was subsequently placed on hold (in our view, for reasons

unrelated to FERC’s action). Thus, only two of the last 30 major merger applications

have been to full evidentiary hearings. Examples of expeditious consideration include Scottish Power, which received FERC approval to acquire PacifiCorp within

98 days of its filing at FERC, and the MidAmerican Energy and CalEnergy merger;

which was approved in 93 days.

FERC has a self-imposed 150-day deadline for processing merger applications.

Clearly, many merger applications can be handled within that time, but some clearly cannot. The Federal Power Act directs FERC to review mergers and only approve

those that are consistent with the public interest. It is simply, not possible, and in

our view not appropriate, to ask FERC to examine extremely complex transactions

and determine whether they are indeed consistent with the public interest, and to

do so within time constraints legislated by Congress.

RESPONSES OF DAVID NEVIUS, VICE PRESIDENT OF THE NORTH AMERICAN ELECTRIC

RELIABILITY COUNCIL TO QUESTIONS FROM HON. JOE BARTON

Question No. 1: Is there a way to provide for enforceable reliability standards

without providing for some additional Federal authority to enforce standards? Can

private organizations such as NERC assume police powers or compel transmission

owners or bulk power users to join NERC? Can there be enforceable reliability

standards without a Federal role?

Answer: No, I don’t believe it is possible to have enforceable reliability standards

without some additional Federal enforcement authority, for three reasons. First, the

Federal Energy Regulatory Commission has jurisdiction over the wholesale sale of

electricity in interstate commerce and the transmission of electricity in interstate

commerce. FERC does not have clear jurisdiction over issues dealing with reliability.

Following the Northeast blackout in 1965, legislation was introduced in Congress

that would have given the Federal Power Commission (FERC’s predecessor) clear

authority and responsibility over reliability matters. But Congress never adopted

that legislation. Instead, the industry formed what would become the North American Electric Reliability Council to coordinate industry standard setting on a voluntary basis, with compliance based on ‘‘peer pressure.’’ There were no enforceable

reliability standards, but that approach has served North America well for more

than three decades. It is the emergence of competition in the electric industry that

now calls that approach into question.

Second, FERC does not have jurisdiction over all entities that must interact to

maintain the reliability of the interstate, international high voltage electric transmission system. FERC does not have jurisdiction over the utilities within the Electric Reliability Council of Texas, the Tennessee Valley Authority, the Federal power

marketing administrations (Bonneville Power Administration, Southeastern Power

Administration, Southwestern Power Administration, and Western Area Power Administration), the municipally- and state-owned utilities, and the rural electric cooperatives that have financing from the Rural Utilities Service. Those entities account for approximately 30 percent of the transmission assets in this country.

Third, policing and enforcement is inherently a governmental function. Absent

governmental authorization, such as exists in the securities laws for the stock exchanges and National Association of Securities Dealers to operate under Securities

and Exchange Commission oversight, NERC cannot assume police powers nor can

it compel transmission providers or bulk power system users to become members.

For these reasons, NERC proposes creation of an independent industry self-regulatory reliability organization under FERC oversight. This plan follows the self-regulatory models of the securities industry. The new organization would have the authority to set and enforce mandatory reliability standards. This approach capitalizes

on the electric industry’s technical expertise in this highly complex area, while also

providing the governmental presence needed to assure the fairness and validity of

the enforcement process.

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Question No. 2: There are some differences between the proposed NERC reliability language and the reliability provisions of H.R. 1828. Please provide comments on

those differences, and indicate whether you believe H.R. 1828 is an improvement

over the NERC proposal.

Answer: The reliability provisions of H.R. 1828 are essentially the same as the NERC reliability language, with three significant exceptions. (Section 601(a) of H.R.

1828 would add a new section 218, dealing with reliability, to the Federal Power

Act; the section references below are to that new section 218.)

The first important difference deals with governance of the new industry self-reg- ulatory organization. The NERC language provides for governance by a ‘‘board wholly comprised of independent directors.’’ H.R. 1828 (section 218(e)(4)(E)) changes that

to governance by a ‘‘board of no more than eleven members, one of whom shall be

appointed by the Secretary of Energy.’’ That change is unacceptable to NERC and

the coalition that is supporting the NERC language. The fundamental premise of

the NERC reliability legislation is to have an industry self-regulatory organization operating under government oversight. Permitting the Secretary of Energy to designate a representative on the board would put the government into the organization itself More importantly, the NERC proposal calls for independent directors, that

is, directors who do not have an interest in other market participants. This independence requirement is omitted in H.R. 1828. This omission has consequences even

beyond the Department of Energy and could transform the board for the new reliability organization from an independent one to a ‘‘stakeholder’’ board—a significant

change. The Federal power marketing administrations, for example, are part of the

Department of Energy. The Secretary of Energy, therefore, is not ‘‘independent’’

from other market participants, but is a stakeholder in the industry. Finally, the

high voltage transmission system is international in nature. The proposed new reliability organization provides a means for interests from the U.S., Canada, and, as

appropriate, Mexico, to participate together in reliability standards development and

enforcement. The provision of H.R. 1828 that would place a representative of the

United States government in the governing structure of the new reliability organization has already raised significant questions from Canadian participants. The second significant difference between the NERC language and H.R. 1828 con- cerns the treatment accorded Federal power marketing administrations, the Tennessee Valley Authority, the Bureau of Reclamation, and the Corps of Engineers,

as well as requirements of the Nuclear Regulatory Commission. Section 218(k) of

H.R. 1828 states:

‘‘Any actions taken under this section by the Commission, the Electric Reliability Organization, and any Affiliated Regional Reliability Entity shall be consistent with any statutory or treaty obligation of a Federal Power Marketing

Administration, the Tennessee Valley Authority, the Bureau of Reclamation and

the Corps of Engineers and any Nuclear Regulatory Commission requirements.’’

There is no comparable provision in the NERC language, and NERC sees no basis

for including such a provision. The provision appears to establish an additional substantive standard that any actions by the self-regulatory organization must meet for

these identified electric market participants. NERC knows of no reason why these

entities should be given special status when it comes to reliability, or why these entities should not be bound by the same reliability rules that would bind all other

participants in the electricity markets. The Commission, the Electric Reliability Organization, or an Affiliated Regional Reliability Organization cannot change a statutory or treaty obligation of these entities, any more than they can change any other

law to which other electric industry participants may be subject, including, for example, clean air laws. NERC therefore recommends that this provision not be included in any reliability legislation that moves forward.

The third significant difference between the NERC language and H.R. 1828 concerns the application of the antitrust laws. Under the NERC language, activities of

the Electric Reliability Organization and its Affiliated Regional Reliability Entities,

as well as the activities undertaken in good faith under the rules of those organizations by members of those organizations, are rebuttably presumed to be in compliance with the antitrust laws. Under the provisions of H.R. 1828 (section 218(o)), the

conduct of the Electric Reliability Organization, its Affiliated Regional Reliability

Entities, and members of those organizations, to the extent that conduct is undertaken to develop or implement an Organization Standard that is approved by the

Commission under other provisions of the legislation, would not be deemed illegal

per se. Such conduct would be judged on the basis of its reasonableness, taking account all relevant factors affecting competition.

NERC believes that the antitrust provisions of H.R. 1828 are too restrictive. More

than in any other industry, the cooperative actions of participants in the electric industry are crucial to being able to maintain the reliable operation of the transVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00310 Fmt 6601 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
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mission grid. Market participants should not have disincentives to engaging in the

necessary cooperative behavior. By establishing the presumption, although rebuttable, that the actions of the reliability organization and its regional affiliates are

legal, NERC’s approach offers the needed assurance to industry participants that

engaging in the cooperative actions necessary to maintain a reliable bulk power system will not subject them to antitrust liability. The presumption of antitrust law

legality is justified by the oversight authority given to FERC over the reliability organization’s governance procedures and development and enforcement of standards. NERC therefore recommends that the original antitrust provisions of the NERC language be substituted for those in section 218(o) of H.R. 1828. If this cannot be

accomplished, several technical issues in this H.R. 1828 language should at least be

addressed. These include:

1. Omission of ‘‘enforcement’’ from protected activities. The H.R. 1828 language states that conduct undertaken to ‘‘develop or implement’’ standards is not

deemed illegal per se, but it makes no mention of ‘‘enforcement.’’ The responsibilities of the Electric Reliability Organization and its affiliates and members

are to ‘‘develop, implement, and enforce’’ reliability standards. ‘‘Enforcement’’

should be included as a protected activity. 2. Focusing the ‘‘reasonableness’’ language exclusively on effects on competition. H.R. 1828 specifies that conduct is to be ‘‘judged on its reasonableness, taking

into account all relevant factors affecting competition (emphasis added).’’ Some

of the activities of the Electric Reliability Organization, its affiliates and members in setting and enforcing standards for the reliable operation of the grid will

likely have the effect of restricting competition, because that is necessary in

order to maintain reliability. Having such activity judged based only on matters

affecting competition eliminates half the equation. While we recommend retention of the original NERC language, if any 66 reasonableness’’ standard is to

be included, NERC strongly recommends that the language be revised to include impacts both on competition and reliability. Alternatively, the standard

could be one of ‘‘reasonableness, taking account of all relevant factors,’’ without

highlighting any particular factor.

3. Limitation of antitrust protection to actions ‘‘approved by the Commission under

subsection (O).’’ NERC recommends that this clause be deleted. Otherwise, this

language raises at least two significant issues. First, what are the implications

of this language for standards that are adopted and enforced on an emergency

basis prior to ‘‘approval’’ by FERC? Second, is any antitrust protection available

under the language of H.R. 1828 for an existing Organization Standard that is

suspended under subsection (0(3)(b)?

In addition to these three significant differences, H.R. 1828 provides for an Electricity Outage Investigation Board within the Department of Energy (section 602 of

H.R. 1828). This additional governmental agency is unnecessary. Both the NERC

language and H.R. 1828 would establish the Electric Reliability Organization as an

independent, industry self-regulatory organization, with FERC overseeing that organization. An Electricity Outage Investigation Board within DOE would simply duplicate the efforts of the new reliability organization and FERC.

The remainder of the differences between the NERC language and the reliability

provisions of H.R. 1828 are of either a clarifying or conforming nature. NERC has

no objection to those other changes.

Question No. 3: There are concerns about how transmission constraints impede

interstate electric sales. Where are the major constraints—which States and regions

have the worst constraints? How do these transmission constraints limit interstate

commerce in electricity?

Answer: Transmission constraints limit interstate commerce in electricity because

they restrict the amount of power that can be moved from one part of the country

to another at a particular time. The constraints arise from the physical configuration of the generation and transmission facilities. The constraints can be one of

three different kinds—thermal limits, voltage limits, or stability limits.

• Thermal Limits: Thermal limits establish the maximum amount of electrical current that a transmission line or electric facility can conduct over a specified

time period before it sustains permanent damage by overheating or before it

violates public safety requirements. System operators must constantly monitor

actual flows throughout the network to ensure that the power flows do not exceed these limits. Operators must also monitor for ‘‘contingency’’ limits, that is,

to ensure that the power flow on any one facility will not exceed its limit following the sudden loss (outage) of any other facility. (Since electrical power

flows readjust instantaneously, the system must at all times be operated in this

preventive mode.)

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• Voltage Limits: System voltages and changes in voltages must be maintained

within a range of minimum and maximum limits. Voltage limits establish the

maximum amount of electric power that can be transferred without causing

damage to the electric system or customer facilities. A widespread collapse of

system voltage can result in a collapse of portions or all of the interconnected

network. • Stability Limits: The transmission network must be capable of surviving disturbances (e.g., generators tripping off, lightening strikes, wind damage to conductors) through the transient and dynamic time periods (ranging from milliseconds to several minutes) following a disturbance. All generators connected to

ac interconnected transmission systems operate in synchronism with each other

at the same frequency (nominally 60 Hertz). Immediately following a system

disturbance, generators begin to oscillate relative to each other, causing fluctuations in system frequency, line loadings, and system voltages. For the system

to be stable, the oscillations must diminish as the electric systems attain a new,

stable operating point. If a new, stable operating point is not quickly established, the generators will likely lose synchronism with one another, and all or

a portion of the interconnected electric systems may become unstable. The results of generator instability may damage equipment and cause uncontrolled,

widespread interruption of electric supply to customers. NERC’s Planning Standards and Operating Policies set parameters within which the system must be designed and operated in order to avoid exceeding any of these

limits.

Twice a year, NERC reports on its assessment of the reliability of the electric sys- tem for the upcoming season, examining both generation adequacy and transmission

adequacy. While the location of transmission constraints can vary from time to time,

depending upon how the system is configured, what load is being served, and what

generators are online, the NERC reliability assessments give a general picture of

where transmission constraints are likely to occur. I have attached a copy of NERC’s

1999 Summer Assessment (released June 1999) to my answers. The summaries of the Regional assessments, beginning at page 21 of the Summer Assessment, give

a general indication of where transmission constraints can be expected under base

case conditions, However, as conditions depart from the base case either because of

equipment outages or higher-than-expected demand, transmission constraints may

be more severe or arise in other areas than indicated in the report. As stated in

the Executive Summary of the 1999 Summer Assessment, ‘‘[i]mprovements to the

transmission system are not keeping pace with the demands being placed on the

system.’’

Question No. 4: What is your position on the FERC proposed rules on RTOs? In particular, do you think the pricing provisions will encourage expansion of transmission and remove constraints?

Answer: NERC told FERC in comments filed August 23, 1999, that properly functioning RTOs could help the industry deal with the challenges it faces, but that

RTOs were not the whole answer. NERC identified four challenges facing the electric industry: the current balkanization of the transmission grid; the mismatch between how business is arranged and how power actually flows; transmission pricing

and compensation issues, and the huge increase in the number and complexity of

transactions. With regard to transmission pricing, NERC said the following:

‘‘Transmission rates must provide incentives to get the right amount of transmission infrastructure built. The cost of transmission is a relatively small part

of the overall price of delivered power. We must make sure that shortages of

transmission capacity do not restrict power flows and limit the benefits that

otherwise could be achieved from competitive electricity markets.’’

In the notice of proposed rulemaking, FERC expressed a willingness to be flexible

about transmission rates and to entertain incentive rates as an inducement to get

companies to join an RTO. The Commission did not directly take on the linkage between transmission rate reform and needed expansion of the transmission system.

NERC believes that this is a subject that the Commission will need to take on directly. I have attached a copy of NERC’s comments to these answers.

Question No. 5: H.R. 1828 and H.R. 2050 authorize compacts to plan and site

transmission lines. Do you think States will delegate their siting authority to such

regional bodies?

Answer: NERC thinks it unlikely that states will delegate their siting authority

to regional bodies in a way that effectively deals with siting new transmission, although regional planning efforts may be productive. In certain parts of the country

(New England, for example) there is considerable experience in states working together to address regional problems. But the problems facing the industry today are

often siting new lines between what have been traditional regions. NERC’s Annual

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Ten-Year Reliability Assessments cite a number of examples of these difficulties. I

have attached a copy of NERC’s Ten-Year Reliability Assessment for the period

1998-2007 to these answers. Unless the regional bodies were sufficiently large to include what are now ‘‘boundary’’ problems, giving a regional body siting authority

may not be effective.

Moreover, siting new transmission lines has become one of the most contentious

issues facing state authorities. NERC does not believe that state authorities would

willingly give up control over matters that their citizens feel so strongly about.

One additional factor is increasingly present. Federal land management and resource agencies are playing a growing role, for example under the Federal Land

Management Policies Act, in deciding whether and where additional transmission

facilities can be built. Regional compacts would not be effective in these circumstances unless federal agencies are willing and able to turn over their own

siting authorities.

RESPONSES OF GLENN ENGLISH, CEO, NATIONAL RURAL ELECTRIC COOPERATIVE

ASSOCIATION TO QUESTIONS FROM HON. JOE BARTON

Question 1. You propose removing limits on cooperative business activity. My understanding is Federal law imposes no limits on cooperative business activity, and

any limits are set by State law. Do you agree? If so, aren’t you really asking Congress to preempt State cooperative laws?

Answer. The Public Utilities Holding Company Act (PUHCA) places federal barriers on the diversification activities of investor-owned-utilities. State laws tend to

provide the barriers to the diversification activities of electric cooperatives. If Congress is going to remove the barriers provided by PUCHA for the largest utilities

in the land, it should also remove the barriers for the electric cooperatives.

Question 2. One thing we have heard loud and clear the past four years is the

need to respect the States. States have authority to remove limits on cooperative

business activity. If States have the authority and the willingness to address this

issue, why should Congress preempt them?

Answer. State laws limiting electric cooperative business activity were created for

an earlier time. If there is to be no changes to federal laws governing the electric

industry, there is no need to change state laws limiting electric cooperative business

activity. However, if competition is to be the result of changed federal laws, then

it makes no sense to allow barriers to continue to exist to prevent members of electric cooperatives from providing themselves with the diversified services they want

through their cooperative. Cooperatives are an important segment of the electric industry, and thus, an important constituency for the Commerce Committee. To make

competition truly vigorous, people will need the authority to provide the level of

service they want for themselves through an electric cooperative.

Question 3. Do you believe only cooperatives should qualify for an exemption from

FERC transmission regulation or should municipal utilities or IOUs with small

transmission systems also be eligible for an exemption?

Answer. Electric cooperatives are consumer-owned. If you take service from an

electric cooperative, you are a member-owner of that cooperative, and have a voice

in the operation of it. That is completely different from investor-owned-utilities that

are operated to make a profit from customers for the benefit of absentee stockholders. The difference is truly significant for the concept of regulation. Courts and

Public Service Commissions across the nation have repeatedly held that consumers

can operate their own consumer-owned systems according to their own needs without the necessity of being protected by an agency of the Government. Local ownership, local control and local autonomy are a more powerful force for consumer protection than absentee regulators.

Additionally, true, effective competition for retail electric service cannot be imposed by a remote, heavy handed, federal bureaucracy attempting to force every

supplier to be the same as every other supplier. Retail competition will come from

differences among participants, and from the ability of participants to be different

and to offer different and new ideas, and from the ability of participants to appeal

to different market niches and to address unique local circumstances. Size is definitely a significant consideration; other issues are the extent of integration of the

transmission facilities with the bulk power system and the ownership structure.

Question 4. You propose exempting cooperatives from FERC merger review because cooperatives are so small that mergers are unlikely to raise market power

issues. Should mergers involving other small electric utilities also be exempt from

FERC review?

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Answer. Electric cooperatives should be exempt from FERC merger review in part because they are small; in part because they are consumer-owned, and in part because they are subject to merger review at the Rural Utilities Service (RUS), a federal agency within the U.S. Department of Agriculture, as a consequence of loan

funds for the construction of electric facilities in rural areas. As the mortgage holder, RUS has the ability to prevent a merger, or suggest alterations to merger terms.

Subjecting electric cooperatives to merger review by two federal agencies with dissimilar agendas is a prescription for trouble.

As regards FERC’s responsibility for protecting against market power, NRECA

and the American Public Power Association (APPA) jointly filed a petition at FERC

suggesting a moratorium on investor-owned-utility mergers in excess of 1,000,000

customers until Congress completes its work in creating a competitive environment

for retail electric sales. FERC did not act on the petition. Small system mergers are

of much less risk to the market than large system mergers and should be subject

to different standards of review.

If two consumer-owned systems want to merge, why should FERC be involved?

Consumers do not need FERC to protect them from themselves in a merger case.

Question 5. RUS does review cooperative mergers, but my understanding is they

do so from the point of view of a banker and are only concerned about loan recovery.

Does RUS consider market power issues when they review cooperative mergers?

Answer. The principle focus of RUS in a merger case seems to be the repayment

of the loan, the value of the mortgage and, furthering the objectives of the rural

electric Act, which is intended to insure affordable, reliable electricity to consumers.

Moreover, additional federal review of cooperative mergers, focused on market

power, is unnecessary in part because cooperatives are so small. RUS is the mortgage holder on about $32 billion in loans to electric cooperatives to provide facilities

to serve people in rural areas. The American Electric Power Company (AEP) sold

more electric power last year than all the electric cooperatives in the nation combined. The repayment of the RUS loan and the value of the mortgage is affected

by market power in that electric cooperatives do not have market power in the sense

that they can dominate a market.

Question 6. You express concern about the States setting individual transmission

reliability standards. Would 50 different transmission reliability standards improve

reliability? Would 50 different standards burden interstate commerce?

Answer. Fifty different bulk transmission system reliability standards would not

accommodate reliability or interstate commerce. NRECA supports a continued state

role in preserving reliability of the local distribution systems

RESPONSES OF LYNNE H. CHURCH, EXECUTIVE DIRECTOR, ELECTRIC POWER SUPPLY

ASSOCIATION TO QUESTIONS FROM HON. JOE BARTON

Question 1. You propose granting FERC jurisdiction over transmission used to

make bundled retail sales. What is the position of the States on this issue?

Response. We presume that the states’ position on this issue will vary from state

to state, with some opposing and some supporting. In 24 states, for example, retail

competition in electricity markets has already been embraced. A key element of this

process is the decision to ‘‘unbundle’’ the components of electricity transactions and

separate the costs of generation from those associated with transmission and distribution services. For these 24 states, therefore, there will be no direct long-term

impact from the change in legislative policy that we propose.

The lack of direct impact, however, does not imply that these 24 states or the remaining states will be indifferent to this issue. In many states, the cost of power

to consumers will be increasingly and directly linked to access to a viable, robust

wholesale power market. A state that relies on an interstate wholesale market has

to be vitally concerned about the codification of rights for other states to place the

equivalent of toll booths on the interstate electricity grid. Thus, any state that has

come to rely on competitive wholesale markets should be very concerned by the bill’s

clear split in regulatory authority over the interstate grid.

Experience has shown that even small disruptions or curtailments of transmission

at distant locations can result in dramatic price impacts. During the hearing process, one Subcommittee member stated that he trusted his own state’s public utility

commission more than he trusted FERC. This is not a correct reflection of the issue

at hand. The proper question is whether a policymaker trusts another state’s public

service commission more than the FERC.

Many states, we believe, are coming to recognize the value of a single regulatory

body to have oversight responsibility and set consistent ‘‘rules-of-the-road’’ for the

interstate grid. At an earlier Subcommittee hearing, representatives from Ohio and

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Pennsylvania said as much in response to members’ questions. What these states

are realizing is that; without consistency, there will be no investor confidence; without confidence, there will be no robust, competitive wholesale power market; and

without a robust, competitive wholesale market, many of the consumer benefits

promised during the state’s debate over retail restructuring will not appear.

Question 2. You say H.R. 2944 interjects States into FERC determinations of transmission and distribution facilities, by providing deference to State views. Don’t

States already have a role in such determinations? FERC granted them a role 3

years ago in Order 888, but providing for deference to State views. Response. EPSA believes absolutely that the States have a role to play in these determinations. However, whether the states have a role is not the critical issue for

EPSA members. Our concerns center on the extent of this involvement and, most

critically, whether local interests and issues will be allowed through a legal guarantee of ‘‘deference’’ to trump the general, national interest. As a simple way to address these concerns we have suggested that the legislation be amended to include

the phrase ‘‘provided such action is not contrary to the public interest’’ at the end

of Section 101 (e).

It is true that FERC agreed to grant deference to the states on these issues in Order 888. However, we believe that there is an enormous qualitative difference between a decision made by an independent regulatory body to grant deference to an

entity and a requirement of deference included in public law. In general, EPSA

would express concern or opposition to the specific language of Orders 888 and 889,

were the Subcommittee to choose to codify the decisions embodied in those orders

as law. These orders are complex and the public context is evolving. In the gas industry, for example, the Commission’s Special Marketing Programs led to Orders

436 and 451, which led in turn to Order 636. Law, on the other hand, is often relatively static and inflexible. EPSA is concerned that legislating deference to the

states, as drafted, will create a legal straightjacket for FERC and obstruct the public interest.

Question 3. You oppose FERC deference to the States in determination of transmission and distribution facilities, which is the approach FERC laid out in Order

888. Is FERC giving too much deference to the States. Can you give examples? You

indicate utilities are trying to reclassify facilities. Is FERC agreeing to this reclassification?

Response. As stated above, EPSA does not oppose some deference by the FERC to state commissions. The question centers on the degree of deference and whether

local issues are allowed to trump the national interest.

It is impossible today to answer the question as to whether FERC is giving ‘‘too much’’ deference to the states. The issue of ‘‘refunctionalizing’’ transmission assets

is a relatively new one and is currently before the Commission in at least one case.

Until FERC acts, we cannot say.

However, we strongly believe that this is a very significant issue and threat to

the interstate grid. As competition takes hold, utilities may attempt to shift assets

between state and federal jurisdiction as one way to exercise market power.

Evidence is mounting that transmitting utilities have already begun to abuse

FERC’s ‘‘seven part test.’’ The American Public Power Association recently released

a report by Whitfield Russell Associates with some troubling statistical information

on this new trend. According to the report, commonwealth Edison of Chicago recently refunctionalized 40% of its net transmission plant, almost all of it to distribution, including some 345 kV facilities. Sierra Pacific Power has refunctionalized 50%

of its transmission system, while Wisconsin Public Service Corporation (WPS) recently filed with the state public service commission to classify virtually all of its

transmission assets as distribution. If accepted by the Wisconsin Public Service

Commission, only 124 pole miles of facilities, out of 1,474 pole miles reported on

WPS’s 1998 FERC Form 1, will remain subject to the Commission’s open access tariff.

FERC may or may not agree with these efforts to refunctonalize transmission assets. However, regardless of the specific decisions ultimately made, it makes little

sense to codify an unqualified policy of deference to state decisions. If such language

were in the Federal Power Act today, we would have no doubt that its effect would

be to tilt the decision making process further away from the pursuit of positive, national policy.

Question 4. You say ‘‘States acting on their own’’ can’t address generation market

power? Did the New England States reduce generation market power? Did Texas

reduce generation market power?

Response. Many states have attempted to address market power issues. Some

plans have been more effective than others. In New England and in California, state

action has resulted in the divestiture of significant electric power generation capacVerDate 16-FEB-2000 08:32 Mar 01, 2000 Jkt 010199 PO 00000 Frm 00315 Fmt 6601 Sfmt 6621 E:\HEARINGS\60356 txed02 PsN: txed02
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ity, which has broadened the ownership base of the existing asset base and reduced

vertical integration in local power markets. In Texas, there was an attempt to reduce the concentration of ownership of generation assets, but the effort may fail.

While the intention was to limit generation ownership to no more than 20% of the

market, loopholes included in the legislation seem to permit at least one utility to

continue to own almost 40% of the current installed capacity in ERCOT with little

likelihood that significant divestiture will occur.

Notwithstanding the success (or lack thereof) of state attempts to mitigate market

power, there were always be a need for a multi-state or national authority. Without

question, the electricity grid is interstate. For the foreseeable future, the grid will

be composed of regulated monopoly companies, many of which are and will continue

to be vertically integrated with generation capacity. Actions taken in one state can

directly affect the price paid for power in another state. For example, the dramatic

price spikes in the Midwest wholesale market this past summer were linked to a

curtailment of transmission capacity along the U.S.-Canadian border.

Given the rapidly evolving nature of the electric power industry, it is impossible

to predict where and how market power will be exercised. However, as long as the

grid and wholesale markets are interstate, it will be impossible for any state to fully

protect its customers from anti-competitive out-of-state activity. In fact, a state may

find itself unable even to identify or document the use of market power from events

beyond its boundaries, much less counter or remedy it. As a result, we have endorsed the Administration’s legislative language as an appropriate, minimalist legislative solution to the general issue of market power.

Question 5. You testify EPSA members do not see the courts or antitrust laws as

a viable approach to resolving market power issues. What do you mean? Are you

saying the market power problems you are worried about don’t rise to the level of

antitrust law violations or it takes too long to bring an antitrust action?

Response. Antitrust laws represent a powerful tool to address market power.

However, this tool, in general, is extraordinarily expensive to apply and, when used,

slow to achieve results. For example, the electricity trade press reported last summer about a court decision supporting a group of municipal utilities in an antitrust

action against an investor-owned utility on an allegation of discriminatory access to

the grid. When you read the article, you discover that (1) the order to open the utility’s system originated in 1980, (2) the discriminatory activity occurred in 1989, (3)

an earlier court agreed with the municipalities in 1993, and (4) notwithstanding the

latest court action, the investor-owned utility is still denying that the recent decision is final.

Subcommittee members need to understand that the electric power industry is

rapidly and dramatically changing. Companies are entering and exiting the industry

on an almost daily basis. These companies cannot rely a process that takes a decade

or more for justice to unfold.

In addition, we do not expect that every instance where the issue of market power

raised to require a court suit for resolution. In some instances, the issues may be

minor and need only a modest regulatory intervention to address. Some anti-competitive activities may be, frankly, inadvertent and more a result of mindset (‘‘this

is the way we’ve always done it’’) than a conscious decision to advantage the monopoly provider. Without flexibility in policy and the ability to resolve these issues in

near ‘‘real-time,’’ the advantage of those with potential market power will only increase. If one company understands that its competitor lacks the financial wherewithal to survive a lengthy legal battle, a clear advantage lies with the stronger

company.

RESPONSES OF JACK BRICE, MEMBER, BOARD OF DIRECTORS, AARP TO QUESTIONS OF

HON. JOE BARTON

Question 1. Some propose deleting the consumer protection provisions from H.R.

2944, arguing State have authority to address these issues. Should consumer protection provisions be included in Federal legislation?

Response. Unquestionably, consumer protection provisions should remain in Federal legislation. In testimony before your Subcommittee, AARP stressed the importance of consumer protection provisions in federal electric utility restructuring legislation. We view the Title III provisions in H.R. 2944 that address ‘‘slamming,’’

‘‘cramming,’’ information disclosure and privacy as a necessary consumer protection

floor. Absent federal guidelines, consumers could be subjected to the types of deceptive and misleading practices that have plagued the telecommunications industry.

Further, we hope that states will act independently to strengthen the provisions you

have introduced in the federal bill.

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AARP is not alone in its support of federal consumer protection provisions. Both

federal and state-based consumer advocacy groups have publicly stated the need for

a federal role in this area. For example, at the October 5 & 6 hearings on H.R. 2944,

the National Association of State Utility Consumer Advocates (NASSUCA), the Consumer Federation of America (CFA) and the Regulatory Assistance Project (RAP) all

testified in support of Title III.

AARP believes that for competition in the electric utility industry to work, strong federal consumer protection laws must be applied to the sale and service of electricity in a restructured environment to prevent abuse in the marketplace. Title III

of H.R. 2944 supports that belief and should be retained in any subsequent versions

of the bill.

Question 2. You support municipal opt outs, or forced aggregation, such as pro- posed by Mr. Brown. Why should municipalities have a preference in aggregation? Response. AARP supports the residential opt-out aggregation concept in Mr. Brown’s (D-OH) legislation, H.R. 2734. We do not however, embrace the exclusivity

givens to municipalities in the bill. In actuality, AARP prefers the language currently in H.R. 2944. In discussions with Members of the Subcommittee and staff

over the past two months, we have been promoting a more expansive definition of

aggregation than the one proposed by Mr. Brown. We believe that Title V of H.R.

2944 achieves that goal by allowing ‘‘any entity that aggregates consumers’’ to acquire retail electric energy on an aggregate basis. However, as we testified on October 6, we would like to see opt-out aggregation facilitated rather than an opt-in plan. Opt-out aggregation would ensure that a majority of underserved consumers could reap the benefits of lower rates. Both opt-out

aggregation and expanding the number of groups eligible to aggregate are consistent

with AARP’s overall goal of ensuring that residential customers benefit from competition in the electric utility industry.

Question 3. You say that H.R. 2944 places the ‘‘full burden’’ of universal service programs on the States. Isn’t that where the burden is now? Outside of programs

like LIHEAP and weatherization, isn’t universal service a State responsibility? Response. You are correct, Mr. Barton. Currently, the burden of maintaining uni- versal service programs is fully on the shoulders of the states. While not necessarily

ideal, ensuring electric service to all has been manageable in large part due to the

monopolistic nature of the industry. AARP is concerned that a competitive marketplace will displace the existing ‘‘obligation to serve,’’ putting more pressure on the

states to monitor the delivery of power to all residents. Federal programs like LIHEAP and weatherization do provide some needed as- sistance in today’s utility environment. However, the annual battles over adequate

appropriations for these necessary programs leaves doubt that the programs can

continue to exist in their current forms. More certainty is needed. AARP supports

a universal service program, administered by a Joint Federal-State Board and funded by a per kilowatt hour charge that is assessed to all providers of electricity. We

strongly suggest that this assessment come from general revenues and not become

a line-item on consumers monthly billing statements.

TRUTH-IN-BILLING REQUIREMENT

This section is in response to your question to Jack Brice at the October 6 hear- ing. You inquired as to what AARP meant by ‘‘truth-in-billing’’ as neither you nor

Mr. Hall ‘‘could be opposed to ‘truth-in-billing.’ ’’ As AARP has testified to previously, we envision that a ‘‘Truth-in-Billing’’ require- ment will make it easier for consumers to read their monthly billing statements,

recognize who is providing service, what they are paying for it and who they can

call if they have questions. We believe that such a provision will reduce the

incidences of ‘‘slamming’’ and ‘‘cramming’’ and that it will complement the information disclosure provisions of H.R. 2944 nicely.

RESPONSES OF RAJ RAO, INDIANA MUNICIPAL POWER AGENCY TO QUESTIONS OF HON. JOE BARTON

Question 1. You propose ‘‘complete separation of transmission control from generation interests.’’ Do you propose mandatory divestiture of transmission?

Response. TAPS does not propose mandatory divestiture of transmission. Rather,

TAPS proposes that FERC be given the authority to require transfer of the control

of transmission facilities (along with sufficient control over generation to permit reliable operation of such transmission facilities) to an RTO with broad regional scope.

TAPS proposes that FERC be empowered to require divestiture of transmission only

if it finds it necessary to achieve truly independent RTOs.

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The complete separation of transmission from generation interests discussed in TAPS’ testimony refers to the critical RTO characteristic of independence, not particular corporate forms. We feel strongly that the RTO must be structured so that

no transmission owners (or other market participants) can control or influence the

RTO. Thus, we oppose the provisions in H.R. 2944 that permit market participants

to retain up to 10% of voting interests and unlimited ‘‘passive’’ interests (which include a voice in certain decisions) as severely undermining the fundamental concept

of an independent regional grid. TAPS has not taken a position on the transco vs. ISO debate. Both structures can

work if they are truly independent, have the appropriate and broad geographic scope, and have authority to operate, plan and expand the transmission system.

Question 2. You propose granting RTOs authority to require construction. Do you propose giving RTOs authority to site transmission lines? Response. While TAPS would not object to giving RTOs authority to site trans- mission lines, RTO siting authority is not a part TAPS’ RTO proposal, nor is it necessary to the TAPS proposal. Rather, what is critical is that the RTOs have the authority to identify the transmission upgrades necessary to meet the needs of all

users and for system reliability, and to require implementation of those upgrades

by the existing transmission owners or others, e.g., by bidding out construction to third parties (a non-regulatory, market-based solution to ensuring construction of

needed transmission). The RTO or the entity responsible for construction would

need to obtain whatever siting approvals are required. TAPS assumes that the

RTOs finding that an addition was necessary to meet regional needs would assist

in the siting process. I note that while TAPS does not now have a position on siting authority, I person- ally believe that federal siting authority could assist in assuring that the transmission needed to support competitive interstate power markets is constructed.

Question 3. You propose granting FERC jurisdiction over transmission used to make bundled retail sales. What is the position of the States on this issue?

Response. TAPS believes that it is essential to the bill’s intent of facilitating retail competition that FERC be clearly given authority over all transmission service,

whether bundled or unbundled. As explained in our testimony, competition cannot

develop on a state by state basis if one state has the authority to grant a higher

priority to ‘‘bundled’’ power deliveries to its citizens, while relegating unbundled

transmission to out-of-staters to second class status. TAPS recognizes that some

states are seeking this authority, but we believe such efforts are short-sighted. At

its core, this issue is not a state vs. federal matter, but rather a state vs. state issue

that demands a federal solution.

Question 4. You say H.R. 2944 allows large incumbent utilities to foreclose com- petition. Can utilities foreclose competition without violating antitrust law? Response. Yes, as A. Douglas Melamed, Principal Deputy Assistant Attorney General, Antitrust Division, Department of Justice, testified before your Subcommittee

on May 6, 1999 (at 6):

Let me now turn to the issue of market power. Because of the existing structure of the electric power industry, there are likely to remain significant market

power problems in the transmission and generation of electricity, even as the

industry is restructured to increase the role of competitive market forces.

The authority of the Department of Justice to enforce the antitrust laws with

respect to the electric power industry does not sufficiently address the ability

of electric utilities to exercise market power that can thwart free competition

within the industry. The antitrust laws do not outlaw the mere possession of

monopoly power that is the result of skill, accident or a previous regulatory regime. Antitrust remedies are thus not well-suited to address problems of market

power in the electric power industry that result from existing high levels of concentration in generation or vertical integration.

For example, if one utility, by virtue of its history as a state-sanctioned monopolist, owned most of the generation within a market area, and there was limited

transmission capacity to import power from alternative sources, merely declaring

there to be choice would relegate consumers to purchasing their essential electricity

requirements from the worst of all worlds—a deregulated monopolist that would be

free to increase price above the level that would result from effective competition.

Foreclosure of competitors would result from past regulatory regimens and past decisions about the siting and construction of generation and transmission that created the current topography of the transmission grid, not necessarily a violation of

the antitrust laws.

Indeed, market power can be conferred by ownership of strategically-located generating units which, because of the configuration of the transmission system and the

location of generation in a given area, ‘‘must run’’ for reliability purposes (e.g., to

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1The portion of the underlying report that describes ‘‘bidding behavior’’ has been withheld

from the public at this time on grounds of confidentiality. See Review of Reserves and Operable

Capability Markets: ‘‘New England’s Experience in the First Four Months, Preliminary Draft

dated October 1, 1999, by Peter Cramton, Professor of Economics, University of Maryland and

President of Market Design Inc.

maintain voltage levels under particular conditions). Without violating the antitrust

laws, the owner of such ‘‘must run’’ units is in a position to take advantage of its

market power by ‘‘naming its price’’ (acting as a monopolistic ‘‘pricing maker,’’ instead of a competitive ‘‘price taker’’) during time periods when the unit ‘‘must run’’

units even in otherwise deregulated generation markets.

Question 5. You testify that ‘‘individual states will be powerless to effectively ad- dress this problem.’’ Did California reduce generation market power? Did the New

England States reduce generation market power? Did Texas reduce generation market power?

Response. Mere divestiture of one utility’s generation, in bulk, to a different owner in an effort to quantify and reduce stranded costs does not reduce generation

market power. While the presence of the California ISO and ISO-New England have

the effect of reducing market power, significant generation market power remains.

Indeed, reports submitted to or by the new institutions illustrate that neither California nor the New England States, acting individually or in concert, have eliminated the generation market power that threatens to deprive consumers of the benefits of competition.

For example, the March 9, 1999 ‘‘Second Report on Market Issues in the California Power Exchange Energy Markets,’’ prepared by the Market Monitoring Committee of the California Power Exchange, and filed at FERC in AES Redondo Beach,

L.L.C., et al., Docket Nos. ER98-2843, et al., reports continuing exercise of market

power. See, for example, the report’s description of bidding behavior (at 57, empha- sis in original): [M]any of the generators sometimes bid as if they have market power, rather than as price-taking competitors. To put this another way, not only did the generators have the ability to affect the market price at times, but they also acted

to exercise that market power The report also states (at 64) that ‘‘at various times most of the new owners of

generation divested by the California investor-owned utilities ‘‘held back substantial

amounts of capacity from the PX Day-Ahead market. The amount offered (at any

price) in the PX market was often much less than the firm’s effective capacity.’’

While the authors of the report did not have enough information to identify precisely why capacity was withheld, the report observes (at 64): ‘‘To the extent that

there was withholding of capacity from the PX market, whether to meet anticipated

ISO demands or deliberately to raise prices, it would have the effect of further raising prices in the PX market.’’ The report concluded (at 66-67) that ‘‘during some

hours there was considerable potential for generators to exercise market power in

the PX market . . . At these and other times, some [generation owners] bid in a way

that is consistent with an attempt to exercise market power, and prices were high

at these times.’’ The report warned (at 68) that forces ‘‘if not countered, may lead

to more frequent and more severe episodes of high prices in the future.’’ Significantly, as reported in the oral testimony before the Subcommittee of Marty Kanner

on behalf of the Consumers for Fair Competition, investor-owned utilities in California have sought FERC assistance in restraining the exercise of market power in

California.

Similarly, notwithstanding deregulated generation markets, ISO-New England

had to invoke Market Rule 15 (imposing temporary price caps) more than 100 times

this past summer to correct market deficiencies. At the request of ISO-New England, FERC recently approved ISO-NE authority to impose interim price caps to correct market flaws during periods of capacity shortage, noting (at 4): ‘‘Generators, it

appears, are bidding strategically to set the market clearing price during [capacity

shortage] conditions. At these times, all bids must be selected so there is no effective

price limit on the bids.’’ 1 ISO New England, Inc., FERC docket No. ER99-4002-000,

issued September 30, 1999. Significantly, the New England Conference of Public

Utilities Commissioners submitted comments on September 22, 1999 supporting the

interim caps, explaining (at 1-2): ‘‘NECPUC has worked hard to ensure that ISO

New England has the authority and tools necessary to monitor the electricity markets for design flaws, competitiveness and efficiency.’’

The recognition by the New England States that they cannot alone ‘‘solve’’ continuing and significant generation market power problems is further highlighted by

NECPUC’s August 23, 1999 comments to FEC in the RTO rulemaking proceeding,

FERC Docket No. RM99-2-000 (at 17-18, emphasis added, footnote omitted):

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Th[e market monitoring] function should be expanded to include mitigation

of market flaws and power, and not be limited merely to monitoring the markets. The Commission proposes that the RTO be required to monitor markets

for transmission services, ancillary services and bulk power to identify design

flaws add market power and propose appropriate remedial actions . . .

We agree that it is essential for an RTO to monitor the markets. However,

to be effective, RTOs must have unequivocal authority to enforce violations of

market standards and back those findings with real sanctions and penalties.

Failure to have such authority will, at best permit, and at worst encourage,

anti-competitive activities by market participants. Those anti-competitive activities could easily negate the efficiency and cost savings gained by opening up

competitive wholesale markets.

Therefore, in addition to the monitoring requirements proposed by the Commission, NECPUC strongly recommends the adoption by RTOs of formalized

market power monitoring and mitigation rules such as those available to ISO

New England. Market Rule 13 authorizes ISO New England to impose sanctions when market participants, through their actions, threaten to impair shortterm reliability or competitiveness of the regional market, and Market Rule 15

allows ISO New England to use emergency corrective actions to remedy market

design and implementation flaws. Adoption of such rules by an RTO will . . .

help assure that RTOs meet the Commission’s goal of a competitive market.

As the NECPUC comments highlight, generation markets are regional and, with

limited exceptions, are not confined to a single state. A state has limited ability to

address what is necessarily a multi-state problem. Indeed, a growing number of utilities span multiple states and even multiple regions. No one state has jurisdiction

to solve the problem. By analogy, assuming the big three automobile manufacturers

were engaged in price fixing, you wouldn’t want to deny the Department of Justice

the authority to sue because a single state could do so. The same is true here.

The portion of Texas covered by the Electric Reliability Council of Texas, which

is connected to the integrated North American grid only by DC ties, is one of those

exceptional circumstances where the electricity market is more confided. Some of

the approaches adopted in the Texas legislation, such as the provisions for divestiture and capacity auctions, could be effective tools to reduce market power. However, for those states that are part of the Eastern or Western Interconnections, state

efforts to address what are inherently regional market power problems (as acknowledged by NECPUC) are likely to be far less effective than federal authority to address market power.