[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
ELECTRICITY COMPETITION--Volume 1
=======================================================================
HEARINGS
before the
SUBCOMMITTEE ON ENERGY AND POWER
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
MARCH 18, 1999--EVOLVING FEDERAL AND STATE ROLES
APRIL 22, 1999--RELIABILITY AND TRANSMISSION IN COMPETITIVE ELECTRICITY
MARKETS
MAY 6, 1999--MARKET POWER, MERGERS, AND PUHCA
__________
Serial No. 106-63
__________
Printed for the use of the Committee on Commerce
U.S. GOVERNMENT PRINTING OFFICE
55-641 CC WASHINGTON : 1999
COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois 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 RALPH M. HALL, Texas
CLIFF STEARNS, Florida KAREN McCARTHY, Missouri
Vice Chairman THOMAS C. SAWYER, Ohio
STEVE LARGENT, Oklahoma EDWARD J. MARKEY, Massachusetts
RICHARD BURR, North Carolina RICK BOUCHER, Virginia
ED WHITFIELD, Kentucky FRANK PALLONE, Jr., New Jersey
CHARLIE NORWOOD, Georgia SHERROD BROWN, Ohio
TOM A. COBURN, Oklahoma BART GORDON, Tennessee
JAMES E. ROGAN, California BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ALBERT R. WYNN, Maryland
HEATHER WILSON, New Mexico TED STRICKLAND, Ohio
JOHN B. SHADEGG, Arizona PETER DEUTSCH, Florida
CHARLES W. ``CHIP'' PICKERING, RON KLINK, Pennsylvania
Mississippi JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York (Ex Officio)
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
(Ex Officio)
(ii)
------------------------------
C O N T E N T S
__________
Page
Hearings held:
March 18, 1999............................................... 1
April 22, 1999............................................... 149
May 6, 1999.................................................. 239
Testimony of:
Clark, Susan F., Commissioner, Florida Public Service
Commission................................................. 99
Cordaro, Matthew, President and Ceo, Nashville Electric
Service.................................................... 217
Glazer, Craig A., Chairman, Ohio Public Utility Commission... 94
Gordon, Kenneth, Senior Vice President, National Economic
Research Associates........................................ 355
Hoecker, Hon. James J., Chairman, Federal Energy Regulatory
Commission................................................. 160
Hunt, Hon. Isaac C., Jr., Commissioner, Securities and
Exchange Commission........................................ 270
Iannucci, Joseph, Distributed Utility Associates............. 212
Kahn, Joshua A., Kahn Mechanical Contractors................. 342
Kanner, Marty, Coalition Coordinator, Consumers for Fair
Competition................................................ 335
King, Chris, Chief Executive Officer, Utility.com............ 312
Kurtz, Michael L., General Manager, Gainesville Regional
Utilities.................................................. 320
McCoy, Paul D., Senior Vice President, Commonwealth Edison... 187
Melamed, A. Douglas, Principal Deputy Attorney General,
Antitrust Division, Department of Justice.................. 254
Moler, Elizabeth Anne, Vinson & Elkins....................... 18
Naeve, Clifford M., Skadden, Arps, Slate, Meagher and Flom... 37
Nevius, David R., Vice President, North American Electric
Reliability Council, Princeton Forrestal Village........... 200
Persico, Vincent A., Co-Chair, Special Committee on Electric
Utility Deregulation, Illinois General Assembly............ 81
Quain, John M., Chairman, Pennsylvania Public Utility
Commission................................................. 90
Rogers, James E., Vice Chairman, President and Chief
Executive Officer, Cinergy Corporation..................... 306
Rose, Kenneth, Senior Institute Economist, National
Regulatory Institute....................................... 347
Schmidt, Fred, Chief of Bureau of Consumer Protection, Office
of Attorney General, State of Nevada....................... 182
Smith, Douglas W., General Counsel, Federal Energy Regulatory
Commission................................................. 276
Smith, Marsha H., Commissioner, Idaho Public Utility
Commission................................................. 105
Stalon, Charles G., Cape Girardeau, Missouri................. 31
Stuntz, Linda G., Stuntz, Davis & Staffier................... 24
Szwed, Stanley F., Vice President, Transmission, First Energy 190
Thompson, Hon. Mozelle W., Commissioner, Federal Trade
Commission................................................. 261
Tighe, Mary Elizabeth, Vice President, Statoil Energy, Inc... 329
Utter, Trudy, Vice President and General Manager, Tenaska
Power Services Company..................................... 196
Yurek, Gregory J., President and CEO, American Superconductor
Corporation................................................ 205
Material submitted for the record by:
American Public Power Association, prepared statement of..... 147
Edwards, T. Graham, Chairman, Large Public Power Council,
letter dated November 23, 1999, enclosing response for the
record..................................................... 499
Farmer, Richard M., prepared statement on behalf of the SEC
Roundtable Group........................................... 393
Hoecker, Hon. James J., Chairman, Federal Energy Regulatory
Commission, letter dated June 11, 1999, to Hon. John D.
Dingell, enclosing response for the record................. 231
Nevius, David R., Vice President, North American Electric
Reliability Council, Princeton Forrestal Village:
Letter dated September 2, 1999, enclosing response for
the record............................................. 422
Response to questions of Hon. John D. Dingell............ 490
Repeal PUHCA Now! Coalition, prepared statement of........... 385
Szwed, Stanley F., Vice President, Transmission, First
Energy, letter dated September 3, 1999, enclosing response
for the record............................................. 493
(iii)
EVOLVING FEDERAL AND STATE ROLES
----------
THURSDAY, MARCH 18, 1999
House of Representatives,
Committee on Commerce,
Subcommittee on Energy and Power,
Washington, DC.
The subcommittee met, pursuant to notice, at 11:06 a.m., in
room 2123, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Tauzin, Bilirakis,
Stearns, Largent, Burr, Whitfield, Norwood, Rogan, Shimkus,
Wilson, Shadegg, Pickering, Fossella, Bryant, Ehrlich, Bliley
(ex officio), Hall, McCarthy, Sawyer, Pallone, Wynn, and
Strickland.
Also Present: Representative Barrett.
Staff present: Catherine Van Way, majority counsel; Joe
Kelliher, majority counsel; Donn Salvosa, legislative clerk;
Sue D. Sheridan, minority counsel; Rick S. Kessler, minority
professional staff member
Mr. Barton. The Subcommittee of Energy and Power of the
Energy and Commerce Committee will come to order.
We know that there are still individuals who are trying to
get into the room, and we would hope that that process would
continue in an orderly fashion. We are about 7 minutes past the
scheduled start time. A quorum is present. We wish to begin.
Today's hearing is entitled Electricity Competition: The
Evolving Role Between the Federal and State Governments. Today,
the Subcommittee on Energy and Power is holding the first of a
series of hearings on electricity restructuring. It is very
important that the subcommittee hear from the witnesses that we
are going to hear from today. I personally believe that market
competition is coming, and I personally believe that that is a
good thing.
Today's hearing will focus on the Federal and States
regulatory role. It will review whether the dramatic changes
that have been occurring in the States and within the industry
require changes to Federal law, and if so, it will consider
what elements perhaps should be included in any Federal
legislative changes.
Dramatic changes have occurred since the subcommittee first
began considering electricity deregulation legislation in 1995.
Since that time, 18 Statesn, with 45 percent of the country's
population, have decided to open their retail markets. Another
12 States, with 23 percent of the population, including my home
State of Texas, are going down that road. Just yesterday, the
Texas Senate passed, in a bipartisan and overwhelming fashion,
a comprehensive bill to deregulate the electricity markets in
the great State of Texas.
If all 12 of the States that are considering legislation
open their markets this year, 68 percent of the national retail
market will be opened. Given the competition among States for
economic development and jobs, that figure can only grow. I
personally believe that this activity is due, in large part, to
the hard work in the past of full committee Chairman Bliley and
former subcommittee Chairman Dan Schaeffer of Colorado along
with ranking member Ralph Hall. They set the ball in motion 4
years ago, and I doubt that anyone in this room had any idea so
much change could occur so rapidly in such a short amount of
time.
We hope to examine the effects of those changes between the
States and the Federal Government today. There is substantial
consensus on how to approach some of the core Federal issues. I
hope consensus can be reached on other issues in the hearings
in the coming weeks ahead. I plan to work closely with my good
friend Ralph Hall and all other subcommittee members to forge a
bipartisan agreement on the elements of electricity
legislation. I intend to draft, at the conclusion of these
hearings, if there is consensus, a comprehensive bill to open
the United States' electrical generation and transmission
system to true open market competition.
Today, we have two distinguished panels of witnesses. Our
first panel is composed of experts who were Federal electric
policymakers earlier in their professional careers. We will
hear from a former FERC chairman; a former Department of Energy
deputy secretary; another Department of Energy deputy
secretary; and two other former FERC commissioners. One of our
witnesses led the Bush Administration's National Energy
Strategy, which resulted in the Energy Policy Act of 1992.
Another developed the FERC's open access policy and led the
Clinton Administration's development of comprehensive
electricity legislation.
These witnesses have decades of experience in electricity
policy matters. Their testimony will help the subcommittee
focus on the core Federal issues that can only be addressed by
the U.S. Congress.
Our second panel is composed of prominent State regulators
and legislators, who represent a wide range of views on
electricity restructuring. Some of the witnesses come from
States that have opened their markets; one comes from a State
that is grappling with the question of whether or not to open
its retail market, and still others come from States who want
to continue to rely on regulation rather than on competition.
This panel, the second panel, will help the subcommittee
learn how the States have been changing their emphasis, and
they will help us to determine which issues the States are in
the best position to address. Today's hearing is the start of a
serious evaluation of the prospects for enacting comprehensive
legislation opening our power generation and transmission to
real market competition. The witnesses' testimony and their
answers to the numerous questions of the subcommittee members
will determine if the time is right for Federal legislation in
this area.
I am hopeful--and yes, I am optimistic--that the answer is
yes. I look forward to hearing the testimony of the witnesses.
With that, I would welcome an opening statement from my
distinguished ranking member, Mr. Hall.
Mr. Hall. Mr. Chairman, I thank you for convening the
hearing here today and for the very cooperative effort and
thrust that you have extended. I think this is our first
hearing in about 18 months. I know you and I have had other
hearings and private hearings and discussions, and we have even
been out of State to visit with groups. You have been very kind
and generous with your time, and I think you are a great
chairman. We have nine other new members of the subcommittee
who were not exposed to the education that we received during
the hearings in the last Congress, so profound changes in
utility regulation are continuing to take place in the States
and at the Federal level since this subcommittee last met on
this issue. We need to update ourselves, I think, on all that
has happened since then, and that means that it is going to
have to be a working committee, and you have certainly
indicated your willingness to give us that leadership.
Let me give you an example from the table of contents of
one of the major trade publications out last week. The headings
read, and I quote, Texas bill modified with new stranded cost
provisions; Arkansas lawmakers schedule vote on reform
legislation; deregulation bill passes New Mexico Senate, may
raise environmental concerns; Maryland legislators and counties
at odds over deregulated tax provisions; and finally, Virginia
Legislature passes reform plan; Governor expected to sign. Mr.
Chairman, you have relayed the actions of the Texas Senate as
of yesterday, and I liked the way you put it. Mr. Pallone
questioned the way you put it. You entitled it the great State
of Texas, and he wondered why we always put the great State of
Texas, and I must take a half a minute to tell him about one of
the real Texas heroes, Ensign Gay of Torpedo Squadron 8, who
was the sole survivor of the Battle of Midway. The Battle of
Midway won the war in the Pacific.
Ensign Gay was from Texas, but he always said do not ever
ask anybody if they are from Texas, because if they are, they
will tell you.
And if they are not, there is not any reason to embarrass
them.
But Mr. Pallone is a good member of this committee and
would make a good Texan, and we certainly would take him
anytime.
Mr. Barton. He is an honorary Texan just by being here
today.
Mr. Hall. Right.
With nearly half the States having already gone forward on
restructuring and others, obviously, in the pipeline, I think
it is clear that the States are willing and able to move
forward. A lot of credit should go to our former Chairman, Dan
Schaeffer, for building the fire that set these State
activities in motion, and it seems to me that we should now
shift our focus away from the States and concentrate maybe more
on what needs to be done within our current jurisdiction over
electricity at the Federal level to facilitate rather than to
interfere with whatever decisions the States are going to make.
In our early discussions, I think you set the right
approach for these hearings by posing this question: is there a
need for Federal electric restructuring legislation, and if so,
what should it contain? I do not know how you could cover it
any better than that. I heartily agree that these hearings
should go forward and with that premise, as we gather the
facts, and by conducting thorough and objective hearings, we
will determine whether there is member sentiment now to move
the legislation and the direction we move it and how we move
it.
I agree with another of your earlier statements to the
effect that if there is to be legislation, we want it to be a
member-driven bill. I must also say, though, that other than
being a member-driven bill, we need the input of these good
people who are testifying before us here today and both of the
groups that will be testifying. We need the input of the men
and women of industry, whom we are going to have to make this
go once we put it onto the books of this country.
We want a business decision--I do, and I think the chairman
does and most of us do--rather than a Congressional decision,
and we will get that by having these hearings, having this
testimony, having you all work together to bring us some
decisions that we can put into the act and pass.
To your goals and objectives, I would add that in all of
our deliberations, it is kind of silly almost to say this, but
we need to be fair. You know, fairness needs to enter into it.
I never saw anything that I did not really believe could be
deregulated. I am sorry for what happened to the airlines, and
I think greed caused a lot of that not to go exactly the way we
wanted it to, but I believe in deregulating. If we are fair to
the customers of investor-owned cooperative and public power
systems, fair to the utility stockholders and citizens of
public power systems in their capacity as owners and the owner-
members of the rural electric cooperatives and fair to all of
their employees, fairness is something that as a chairman, I
know that has been your goal and the golden rule that you have
followed since you have been chairman and since you have been
on the committee.
We just need to be fair to the new entrants in the utility
business, the non-utility generators; the marketers of electric
power and those who are promoting the new technologies. It is
these new entrants who create the promise of more efficient
markets and lower electric costs to our constituents; that must
be our goal. Fundamental fairness will require a delicate
balancing of interests and ensure a good outcome. If we adhere
to these goals and objectives, Mr. Chairman, I believe that if
we choose to do a bill, it will be one we can all be proud of.
So today, we embark on an effort to find the answers to
those questions with a slate of witnesses who know more about
the intricacies of these issues than any of us will ever know
or probably will want to know or be able to know. The first
panel consists of men and women who have had distinguished
careers in public service and have learned and dealt with the
public policy issues of electricity from inside the government
and are now in the private sector. So that gives them two views
of it.
The second panel, with one exception, is made up of State
regulators, people who are on the front lines in this ongoing
debate of whether to restructure the electric utilities. These
two panels will give us different perspectives of utility
restructuring. For those of us who have participated in the
hearings of the last Congress, we will be listening carefully
to understand better the changes that have occurred since this
subcommittee last dealt with this issue. For those members new
to the committee, I hope the witnesses will help you to
understand better the tough and difficult questions that are
raised in utility restructuring at the Federal level.
Before I close, let me say a word to the first panel. In
asking you to share your expertise, we are kind of putting you
in an awkward position in some ways. You have client interests,
many who have strongly held opinions about the content of
restructuring legislation. It is extraordinarily difficult to
find individuals of your character who are not already employed
or retained by someone with an issue in this case to come and
share your opinions with us today. We invited you here--the
chairman invited you here--not as advocates but to help the
committee learn. You are men and women of the highest
integrity, and I know that you will do your best job you can,
and for that, you have my deepest appreciation.
Mr. Chairman, with that, let me yield back the balance of
my time and thank you for this beginning today on a rough and
rocky road but a very important road that can lead to lower
rates for all the people all across this country.
I yield back my time.
Mr. Barton. Thank you.
Some of you may know that Congressman Hall has been a
little under the weather lately, but I can tell that he is
getting back on his feet. That is the longest opening statement
he has made in about a month.
Mr. Hall. I yielded back my time.
Mr. Barton. He is feeling better.
The Chair would recognize the distinguished full committee
chairman, the Honorable Tom Bliley of Virginia for an opening
statement.
Chairman Bliley. Thank you, Mr. Chairman, and thank you for
holding this timely hearing on electric utility restructuring.
I believe this is the Congress when we will pass a customer
choice bill, so it is important that we begin examining this
issue early. Make sure there is no doubt about where I am
coming from. I will state up front that I believe retail
competition in electricity markets is good.
Through competition, consumers see lower prices, better
service and greater investment and innovation in technology. I
further believe all consumers should be given the ability to
choose their own power companies, regardless of the size of the
consumer or who they are served by today. I also believe that
they should be given that choice sooner rather than later. The
energy marketplace has evolved a great deal since the Energy
Policy Act of 1992, and consumers have benefited from those
changes. However, it will not be able to continue to evolve,
and consumers will continue to be denied benefits, as long as
Federal and State laws are standing in the way.
Since the Commerce Committee first began its consideration
of electric utility restructuring in 1995, those who are
fearful of competition have worked hard to try to stop it or
slow it down. These forces have argued that there are no
benefits from retail competition and that we are moving too
fast. Well, since we have been working on this for 5 years now,
we can hardly be accused of moving too fast, and the fact that
retail competition benefits consumers and lowers prices has
been shown over and over again.
The Department of Energy said last year competition would
save consumers $20 billion per year; others have estimated
more. More importantly, this is not merely theory but reality.
Consumers who have choice, in States like Pennsylvania and
California, are already saving money with even greater savings
likely when each of those States is through the transition
period. However, there are still those who oppose Federal
action, and I am sure they will come up with lots of new
reasons why we should not move this year. To them, I say what
are you waiting for? Retail competition is inevitable. Rather
than continuing to fight, it is time for everyone to end the
rhetoric, roll up their sleeves and get to work on passing a
plan which will benefit all Americans.
I want to hear people's concerns and make sure we get it
right, but I do not think there is any concern so great or
difficult that it should keep us from moving forward. Now is
the time to act; I look forward to hearing the testimony of the
witnesses, and I thank you, Mr. Chairman, for yielding me the
time.
Mr. Barton. We thank the distinguished chairman. We would
recognize the distinguished gentleman from New Jersey, Mr.
Pallone, for an opening statement.
Mr. Pallone. Thank you, Mr. Chairman.
Since my good friend Mr. Hall started talking about the
great State of Texas, I have to tell a little story. It has
taken me awhile, Ralph, to get to the point where I understand
this Texas phenomenon, but I was thinking when you mentioned
that about when I was first elected or a couple years after I
was elected. Greg Laughlin was here then, and he had just had a
child, or his wife had just had a child, and I was just having
my first child, and he was horrified because I told him that my
daughter was going to be born in Washington, at Columbia
Hospital, and he, like, looked at me horrified, and he said you
cannot do that; you cannot do that. You have to put your wife
on a plane and bring her back to the State of New Jersey,
because, you know, I could never have a child who was not born
in the State of Texas; it is absolutely necessary that you get
her on this plane.
And I tried to explain to him that it did not matter.
Mr. Barton. What is funny about that?
Mr. Pallone. I think I will stop there, Mr. Chairman.
I am beginning to understand this phenomenon. It takes
awhile.
Anyway, I just wanted to thank the chairman and the ranking
member for holding this hearing, and I was pleased to see the
chairman mention that this was the first in a series of
hearings on this topic, because I think it is important to have
several hearings this Congress on the issue of electricity
restructuring.
And let me also say, to emphasize, if I could, the care
with which we need to consider the issues before us. Americans
spend about $220 billion each year on electricity. Thus,
decisions Congress makes with respect to electric industry
restructuring will affect the lives of all Americans and must
be made with attention to potential impacts on industry and
consumers alike.
Electric industry restructuring has the potential to
deliver real benefits to our economy and to our citizens in the
form of lower costs, better technologies, more choice and new
products and services, and we also can help our basic
industries better compete in global markets. There are,
however, Mr. Chairman, some difficult public policy issues
involved in how this potential is realized, and the basic
tenets that I feel that I bring to the restructuring debate
focus on environmental and consumer protection. We must ensure
that any and all decisions we make with respect to
restructuring at the Federal level do not require consumers to
choose between cheaper energy and a degraded environment, and
no consumer, whether a resident of an inner city or a rural
township, should be disenfranchised.
Along those same lines, all utility workers and share
owners should be treated equitably; further, all consumers
deserve full disclosure from energy providers about the price,
source and environmental content of the energy products and
services that they are purchasing.
I wanted to talk a little bit about my home State of New
Jersey, which recently enacted legislation that will deregulate
the electric market. All residents in New Jersey will be able
to choose their electricity suppliers by August 1 of this year,
and the New Jersey legislation requires the State utilities to
cut rates by 10 percent over a 3-year transition period and
directs the State Board of Public Utilities to set shopping
credits that are designed to encourage competition and allow
for greater consumer savings.
I hope that our witnesses will provide their perspective on
the effectiveness of mandating price cuts and whether the
anticipated benefits outweigh the associated costs. The New
Jersey plan also provides for stranded cost recovery; maintains
a social safety net through a societal benefits charge; and
recognizes the nexus between the electric power industry and
the environment through a renewable energy mandate and
environmental disclosure rules for energy providers. But I have
to say that, in my opinion, New Jersey's law does not go far
enough to protect the environment and consumers and, for these
reasons, as long as the Federal Government continues to attempt
to address restructuring, it must, as part of its
consideration, provide some national measures to protect the
health, welfare and environment of the entire Nation.
We also must determine the most effective and appropriate
methods for ensuring national reliability as well as equitable
transmission provisions and, at the same time, we must, of
course, ensure that we do not undo the progress that States
have made. In the last Congress, I introduced legislation aimed
at implementing uniform environmental standards that would
apply to all electric generators, regardless of where they are
located, and I was very pleased that every member of the New
Jersey House delegation, both the Democrats and Republicans,
cosponsored this bill, H.R. 2909, and that the bill attracted
more cosponsors and bipartisan support than any other electric
industry restructuring legislation.
And I think this support reflects the concerns of
constituents and electric consumers everywhere. Consumers want
to realize the economic benefits of electric industry
competition but not at the expense of being exposed to dirtier
air or living with a system that translates weak, unfair
environmental standards and the ability to pollute into a
competitive advantage.
Now, I am going to be reintroducing an updated version of
this legislation during this Congress. In addition to uniform
environmental standards for all utilities nationwide, the bill
will include tough, meaningful and enforceable disclosure
provisions, a kind of truth-in-labelling law for electric
energy, among other provisions.
We will hear today from representatives of the States from
different regions of the country who have different priorities.
Individual States clearly have the right and responsibility to
establish their own game plans for introducing energy
competition, and I want to hear from States that believe they
need our help as to what kind of assistance they would need
from the Federal Government and which, if any, of the
legislative proposals that have been introduced might serve as
a vehicle for addressing their concerns.
And finally, if I could say, as more and more States move
toward competition, it seems to me that the Federal Government
should examine whether and work to ensure that competition is
fair; reliability is maintained; and the rules include
environmental standards. I am looking forward to the witnesses
today, and I hope that they will clarify the capacity in which
they are speaking before our subcommittee and the perspectives
they bring.
I strongly believe that we have a responsibility to
adequately represent the public interest, and I certainly hope
my concerns will be heeded in determining appropriate witnesses
for future hearings. I think you know, Mr. Chairman, that there
was some concern today that the environmental and consumer
protection interests were not represented on the panel, and I
do not want to dwell on that, but I hope that in future
hearings that we will make sure that we do include them.
Mr. Barton. Well, I thank the gentleman from New Jersey,
and we will certainly guarantee that this is not the only
hearing, and we will let you suggest witnesses, and I am almost
certain we will put them before the subcommittee. So we want a
comprehensive set of hearings, and that means all interests
must be heard from.
The Chair wants to gently remind members who have not yet
made an opening statement that technically, they are supposed
to be 3 minutes or less. We are not going to hold you to that
today, because this is a very serious hearing issue that we are
undertaking, so we want to give every member an opportunity to
have their full views, but it would be nice if they could
generally come within the 3 to 4 minute period.
With that, we want to hear from the gentleman from the
gorgeous State of Georgia. It will take him 3 minutes to say
hello probably. Mr. Norwood.
Mr. Norwood. You are right, Mr. Chairman, but thank you,
however, for giving me some time. I am honored to be on your
subcommittee, and I am pleased that you are having these
hearings. It is going to be a pleasure to serve with you as we
try to solve these problems. I guess I would like to associate
myself with your opening remarks, where you said I personally
think market competition is coming; and then, you went on to
say I personally think that is a good thing, and I certainly do
agree with you, other than to say that competition is here; it
is not just coming, and that is one of the reasons that the
great State of Georgia has a 21 percent rate less than the
national average, because we are already dealing with
competition.
And then, I would like to associate myself with the remarks
of my friend Mr. Hall. He pointed out numerous times that any
final bill that we had had to be fair, and I want to just say
up front any final bill where we use a one-size-fits-all
situation that tends to lower the electric rates in New Jersey
at the expense of raising the electric rates in Georgia will
not fall under the heading of fair, and it will tend to make me
real pillish on this subject, and I hope we do not get into a
situation like that.
Last, I want to associate my remarks with the chairman of
the full committee, Mr. Bliley. Mr. Bliley said that he thought
every American should be able to choose his own power company,
and I agree with him, and I believe he wants to do that because
it promotes competition, and I am glad to hear him come out
with that. That actually promotes what the whole Commerce
Committee is about. We are promoting choice in the Energy and
Power Subcommittee, Mr. Chairman, but over in the Health and
Environment Subcommittee, we are promoting choice there, saying
that actually, every American ought to be able to choose his
own doctor, and I am sure that if they want to choose their
power companies, he is going to agree with me that they would
probably want to be able to at least choose their own doctors
as well.
So the Commerce Committee is moving in the right direction,
Mr. Chairman. Let me thank the panel witnesses for being here
and taking their time. I know they are busy, and their input,
clearly, on electricity deregulation is going to be appreciated
by all of us. They are experts in the area, and we need to hear
from them.
Now, what is expected to be a series of hearings, I am sort
of pleased that we are hearing the States' perspective first.
In my view, that is the most important perspective. Like on so
many issues of national concerns, the States have already taken
the lead on electricity deregulation, and that is certainly, in
my view, how it ought to be. Whenever we, in Congress, try to
fix something from up here, whether it is educating our
children or policing the streets or deregulating the electric
utility industry, we tend to drift, and we drift always, it
seems to me, toward a one-size-fits-all solution, and I fear
greatly that that is not going to work real well for
electricity restructuring.
Certainly, the approach that California wishes to pursue is
not necessarily the best approach for Georgia, where, again, I
repeat that our rates are 21 percent below the national
average. The point is that at least 18 States are now in the
process of opening up their electricity markets to competition
at their own pace. The consequences of that, both good and bad,
are now becoming evident, and States are able to make judgments
as they see fit. With Federal mandates on timelines and other
restrictions, this experimentation would not at all be
possible. I also strongly believe that a date certain on
implementation amounts to a Federal mandate on the States.
When it comes to retail competition, the best thing that we
can do at the Federal level, generally, is to stay out of the
States' way. Of course, there are things that we can and should
do at the Federal level. Even the Securities and Exchange
Commission agrees that PUHCA should be repealed, and PURPA is a
Jimmy Carter-era liberal nightmare that, frankly, never should
have been put into place the first time.
We also need to find a way to help the utilities to recover
stranded costs, and we need to clarify exactly what is Federal
and what is State jurisdiction, but the Federal involvement
should be focused and should be limited.
Now, Mr. Chairman, these are very important issues. They
need to be addressed. I am excited about the possibility that
we are going to do this under your leadership, and I thank you
once again for having this hearing and the many others I know
you will have in the future. Thank you, Mr. Chairman, for that
extra minute.
Mr. Barton. Thank you for that soft-spoken, moderate
statement, Mr. Norwood.
Mr. Hall. Mr. Chairman, if I have any time left, could I
yield it to the gentleman from Georgia?
Mr. Barton. I think the gentleman from California, Mr.
Rogan, has an inquiry of the Chair.
Mr. Rogan. Thank you, Mr. Chairman.
In that I have another hearing that I must run off to, in
the event that I am unable to return during the base of opening
statements, may I have unanimous consent from this committee to
allow my opening statement to be submitted for the record?
Mr. Barton. Without objection, so ordered.
Mr. Rogan. Thank you, Mr. Chairman.
[The prepared statement of Hon. James E. Rogan follows:]
Prepared Statement of Hon. James E. Rogan, a Representative in Congress
from the State of California
I thank the Chairman for holding this hearing on electricity
restructuring, which is one in a series of such hearings. I trust we
will have a constructive dialogue today and throughout this process on
how to protect and enhance a free market system in our nation's
electricity industry.
Mr. Chairman, I join you in your desire to see changes in our
electricity industry makeup. The federal government should seek greater
competition and increased opportunities for families and businesses to
save on their electricity bills. Only by breaking the barriers
established by our current system can our electricity industry keep up
with the market and technological changes expected in the 21st century.
For some time, I have worked to see this goal realized, and
protected, in California. Just a few short years ago, California's
electricity industry suffered with rates that were 50 percent higher
than the national average. Entrepreneurs and businesses were fleeing
the state. Further, efforts to protect our state's environment were
suffering due to uncertainty about the timing and structure of
competition in electricity markets.
California is ahead of Washington on many issues, and our progress
in creating a competitive electricity market is no exception. In 1996,
as Majority Leader of the California State Assembly, I worked to pass
AB 1890.
This bill established a four-year changeover period in California's
electricity industry. It was intended to protect the reliability of
electric services and the interests of large and small consumers.
Further, it was designed to enhance the ability of market participants
to transition into the new market in a way that would keep rates
consistent. I note for the record that AB 1890 passed both houses of
the California Legislature with no dissenting votes.
In two weeks, Mr. Chairman, we will celebrate the one-year
anniversary of my state's shift from the monopolistic electricity
industry of old to an open competitive market. And one year later, I am
pleased to report that the shift is working well. Electricity customers
have reliable and innovative options of service. We have taken steps to
protect our environment, and we are moving into the competitive market
phase.
Businesses are returning to California to reap the benefits of a
competitive electricity market. Large and small consumers have access
to competitively-priced electricity rates. In addition, all consumers
have the ability to monitor the price of power. Residential and small
consumers are enjoying a ten percent decrease in rates, and even
greater savings are projected when the transition is completed in the
year 2002.
In California, and in 17 other states, large investments have been
made in an effort to create a new, competitive electricity market. As
we have seen in California, the dividends from these investments are
being realized by our families, businesses, and environment. I am sure
my colleagues from other states can attest to similar results.
Mr. Chairman, it is my hope that the success of California's
electricity restructuring legislation serves as inspiration to those
states who have not yet embraced this concept. The entire nation should
be afforded the same benefits. However, as we work to craft federal
legislation to this end, it is key that we not undo the progress made
in California and other states. Let us not punish those progressive
states who have seen the future and responded to it.
Mr. Chairman, as we embark down the road of providing all Americans
a competitive electricity market, I urge that we work together to
protect the great strides California has made through state law.
I thank the Chairman.
Mr. Barton. The Chair would recognize the gentleman from
Ohio, the Honorable Tom Sawyer, for a statement.
Mr. Sawyer. Thank you, Mr. Chairman.
I notice that a number of our membere s are feeling better
this morning.
Mr. Barton. That is true; very true.
Mr. Sawyer. I am going to be brief. I just want to thank
you for beginning this series of hearings. I absolutely agree
with virtually all of my colleagues in recognizing the
importance of those hearings and the work that we are
undertaking here.
In no small way, what we are really doing is to ask
ourselves to deal with an enormously complex mix of policy and
practice and law and regulation that has evolved in 50
different States and nationally across this country for the
entire century of the electric industry. That evolution that
has brought us to the current juncture has yielded the most
reliable, universal, accessible electric industry in the world,
and it did not happen by accident, and I would submit that it
did not happen through a series of bad business decisions that
leave us, today, at an untenable juncture but, rather, that
were brought to where we are today as much as anything because
of the enormous change that has taken place within the electric
industry and the change in technology that has made it possible
for this to happen.
In short, restructuring is happening today not because it
must but, for the first time, because it can. I absolutely
agree that this enormous diversity and mix of generating
capacity and distribution and transmission across this country
does not lend itself to one size fits all, but it all has to be
done within a national framework that makes it possible, for
the first time, for what used to be specific State
jurisdictions and even specific service territories to operate
together in a way that benefits industrial and residential and
commercial consumers; but more than that, not just the
consumers but the fabric of the economy of which electricity is
such an important part: the communities and the regions that
are the kind of economic beneficiaries that Mr. Norwood spoke
of in his statement.
In short, I think what it really comes down to is what the
chairman of the full committee said, and that is our first
obligation is not only to do it within a foreseeable period of
time but to do it well and to take care to get it right. It is
our first obligation.
With that, Mr. Chairman, I thank you again for this hearing
and yield back the balance of my time.
Mr. Barton. We thank the gentleman from Ohio.
We would now like to recognize the lady from the Land of
Enchantment, the great State of New Mexico, the Honorable
Heather Wilson, for an opening statement.
Ms. Wilson. Thank you, Mr. Chairman.
I am looking forward to this hearing and particularly the
issue of the interrelationship between Federal legislation and
what the States are already doing in leading the way with
respect to State deregulation and how, in an environment of
competition, this will change those State and Federal roles
with respect to things like reliability; what are the standards
for entering into the grid; reciprocity with respect to States
that are deregulated or are not deregulated and may have
companies who are selling power to other States, which is
clearly an interstate commerce issue and also the question of
access to reliable, low-cost power for all customers and
consumers.
We talk about the great benefits of competition, and I,
too, believe there are tremendous benefits to competition. We
also need to make sure that people have access to those
benefits. It is great if we can get reliable, low-cost power to
manufacturers, but if you cannot get power in Truth or
Consequences, New Mexico at a low-cost rate or even a high cost
rate, then we have not served the citizens that we were elected
to serve. So all of these things require thought and balance,
and I am looking forward to hearing the testimony today.
Thank you.
Mr. Barton. Thank you.
We would now like to hear from the gentleman from the
Volunteer State, Mr. Bryant of Tennessee.
Did Mr. Bryant leave? He volunteered to leave, did he not?
I think it is time to go to the Sooner State of Oklahoma,
then, and hear from Mr. Largent.
Mr. Largent. Thank you, Mr. Chairman.
I will submit my entire statement for the record and just
make a few brief remarks. This is a big issue. Close to $250
billion a year is spent on electricity, and it is going to be
hard; I do not think there is any question about that. The old
saying, though, is that anything worth having is worth working
for, and I think creating a competitive market in the retail
electric industry is worth working for, and I can tell you that
as a professional athlete, my foot speed was often referred to
as glacial, and the electric deregulation bill has moved at
glacial speed over the last Congress, but I sense that it is
roiling to a slow boil in this Congress, and I look forward to
working in a bipartisan manner on this issue.
We have been in an effort to meet with all of the members
on this subcommittee, Democrat and Republican alike, to develop
a member-driven bill on electricity deregulation and have met
with a very positive and favorable response from members on
both sides of the aisle. You have heard a lot about competition
already in the opening statements, and I think I know just a
little bit about competition. We talk a lot about competition
driving prices down and creating better service and more
choice, more opportunities, more technological advances, and I
believe all of that will happen in the electric industry.
In fact, one of the things and buzzwords that you heard in
telcom deregulation that you are now hearing in electricity is
about creating the level playing field, and I know just a
little bit about playing on a level playing field, because I,
in fact, for 14 years, played on a perfectly level playing
field, and there are tremendous benefits in doing that, and I
think that that is a worthy goal as we talk about moving to a
competitive field in the electric industry.
This is an issue that is going to be great for all
Americans, regardless of their party stripe or where they live,
and I think that the effort has to be made at the Federal
level. I think that it is great that the States are continuing
to move forward. But what would have happened if we had moved
forward in a piecemeal fashion on the airline deregulation or
telcom deregulation, where we deregulated long distance calls
or airline prices one State at a time? It is absolutely
untenable and not defensible at all.
And so I think it is important that here at this hearing,
we have an opportunity to discuss what role the Federal
Government plays in moving toward a restructured market. And
with that, Mr. Chairman, I would just say, again, thanks for
the opportunity to be here, and I look forward to this hearing.
[The prepared statement of Hon. Steve Largent follows:]
Prepared Statement of Hon. Steve Largent, a Representative in Congress
from the State of Oklahoma
Mr. Chairman, I want to thank you for holding the first in a number
of hearings on electricity restructuring. Bringing retail competition
to every American is one of the most exciting and substantial courses
of action we can take to impact peoples lives for the better.
I believe that kicking things off with a discussion of what the
state's are already doing to bring competition to their customers is a
good way to open the debate. However, it is just as important to
recognize that a number of substantial issues exist over which states
simply do not have jurisdiction. Inevitably, the debate will be
centered around those issues in which both the federal government and
the states share jurisdiction and how those issues are resolved. These
broad questions of jurisdiction are among those I am sure our panelists
will make clearer in their testimony today.
As complex as the issue of restructuring can be, I am glad that in
my discussions with all the members of the subcommittee I have found
that partisanship does not appear to be among the challenges we will
face. We may share different views on restructuring given where we are
geographically, but not based on where we fall on the political
spectrum. Any debate focused on resolving policy differences, and not
exacting political pain, is a debate that can result in changes that
make America a better place.
While I am very excited about restructuring and optimistic about
our chances for success this Congress, I understand that there are
those who oppose allowing monopolies to compete and customers to choose
who they buy their electricity from. We all remember making calls to
Grandma on a black rotary phone for $1 a minute and paying 3 times more
to fly to go see her over Christmas. Competition has given us cellular
phones (with clearer connections) for 10 cents a minute and all kinds
of supersaver airline rates for you to choose from. These are exactly
the type of innovations and cost savings we have to look forward to
from deregulating our electricity monopolies.
Removing the federal restrictions and making other changes
necessary to allow states to continue to move toward competition will
not be easy. It can be like a Rubik's Cube sometimes with all the
competing issues and constituencies, but there are not many things in
this world worthwhile doing that come easy. I am committed to doing
everything in my power to help the Chairman get this done, and get it
done right. I look forward to hearing from our distinguished panelists
as to how we may get it done and get it done right. Thank you, Mr.
Chairman.
Mr. Barton. Good; we certainly plan on the all-NFL Hall of
Famer going deep numerous times as these hearings progress.
We would like to hear from the all-star third baseman from
the Congressional baseball team from the State of more Miss
Americas than any other State in the Union, the great State of
Mississippi, Mr. Pickering.
Mr. Pickering. Mr. Chairman, after that introduction, I do
not know if I should say anything else, but when Texas and
Mississippi align together, we can do great things.
I do want to commend the chairman for having this hearing
but also for the approach that he is taking on this issue, an
open process where everyone has a seat at the table, getting
all of the industry representatives, consumers as well as, on a
bipartisan basis, all members involved. I look forward to
listening to all of the panels today and working through that
open process to reach the consensus necessary to pass
legislation to get to the eventual objective of competition and
choice but to do it in a way that maximizes State flexibility
and the role there as well as to address the issues that we
must solve as we move forward, removing the barriers;
conforming Federal policy where necessary; and getting to the
end objective of competition and choice, lower price and
eventual legislation.
I thank the chairman again.
Mr. Barton. We thank Mr. Pickering.
We would like to hear from the last person in the
Congressional All-Star Game to actually hit a home run, the
catcher, from the fighting State of the Illini, Mr. Shimkus of
Illinois.
Mr. Shimkus. Thank you, Mr. Chairman.
I, too, would like to submit my full text for the record
and just want to say we have had numerous hearings on this in
the last Congress, and, you know, I hope we have many hearings
this Congress but not nearly as many as we had in the last
Congress.
And I really wanted to welcome State Representative Vince
Persico, who is going to be on the second panel, and encourage
my colleagues to hear his whole statement and stay around for
questions. Illinois has moved, and it is a process that I think
people will want to hear about how Illinois addressed this
issue, and it may be a guideline from which to move State-by-
State and also, eventually, find the areas in which the Federal
Government needs to move in that area.
I will also question other panelists on the price spikes of
last year in the Midwest and ask some questions on how, maybe,
Federal regulation could avert another similar activity as what
we saw last year.
Again, I would like to thank Representative Persico for
traveling all the way from Illinois, and I yield back the
balance of my time.
[The prepared statement of Hon. John Shimkus follows:]
Prepared Statement of Hon. John Shimkus, a Representative in Congress
from the State of Illinois
Good morning Chairman Barton and to the two panels of witnesses. It
is good to be here this morning. I am very interested in hearing the
testimony today and learning what issues are to be governed by the
States, the federal government and by both.
Before I continue, however, I want to welcome one of the panel
witnesses. State Representative Vince Persico. Representative Persico
serves in the Illinois General Assembly and was a key player in
Illinois' efforts to restructuring its industry. His role as Co-
Chairman of the Special Committee on Electric Utility Deregulation will
provide our panel with much needed incite. On behalf of the Energy and
Power Subcommittee, welcome Vince and thanks for flying out to DC this
week.
Mr. Chairman, as I mentioned earlier, I want to learn today exactly
what role the States play in restructuring and what role the federal
government will play. I also understand that some roles will be shared.
I know these issues are complex, but we must begin to sort it all out.
I also hope that today's hearing will answer some question I have on
price-spikes. As most people in this room know, last summer the Midwest
experienced power shortages and price spikes that cost our utilities
millions and threatened the reliable flow of electric power. I plan to
explore with our witnesses today whether or not federal electricity
reforms will enhance or hinder the chances for price spikes and power
shortages in the Midwest.
Some key questions I have are: Are the states doing all they can to
encourage new generation? Are the states promoting interstate
transmission rules that develop competitive markets? And what is the
role for the federal government in siting transmission, if any?
Mr. Chairman, FERC studied the price spikes last year and released
its report which stated that lack of generation capacity and
transmission constraints were two key factors which likely caused our
crisis. My theme today is to investigate how or if federal electric
restructuring can help the Midwest avoid price spikes in the future. I
yield back the balance of my time.
Mr. Barton. We thank the gentleman.
We would now like to hear from the distinguished vice-
chairman from the great State of Florida and the home of the
prior national championship Florida Gators, although
Congressman Stearns did not go to Florida, he represents them
well.
Mr. Stearns?
Mr. Stearns. Well, thank you, Mr. Chairman.
After listening to the introduction of the gentleman from
Mississippi, I thought there was nowhere else to go but down.
I think what is important to realize is we have had a big
debate about energy deregulation now in the last Congress, but
you know, and I say this to all of my colleagues on both sides,
we have accomplished a lot in terms of developing a consensus
with the distinguished gentleman from Colorado, Mr. Schaeffer;
we had all of those hearings.
But I think all of us have a better understanding now how
to deal with PUHCA and PURPA, and I think there is almost
unanimous opinion that these should be repealed. We now have a
better feel with stranded costs, how to deal with that, and I
think we are left with, perhaps, out of all of the issues,
there are two issues that perhaps are paramount, and that is
dealing with transmissions, ISOs, and the second thing is
market power: what do you do with a company that has and owns
and operates the transmission lines, and how do you continue to
deregulate when you have market power in place?
So I think if we have these discussions and these debates
and these hearings, Mr. Chairman, we will be able to develop a
consensus on these, and then, I think we will be ready to start
deregulation, but I think, as many members have pointed out, we
have 18 States with 45 percent of the country's population have
already enacted laws or adopted final regulatory orders opening
up their retail markets, so, in some many cases, we have the
States moving forward, and the Federal Government, I think, can
provide incentives to continue that deregulatory process,
because States historically, historically, have had the
principal responsibility to address all of these regulatory
electrical issues, including consumer protection, public
benefits, universal service; and so, frankly, my colleagues, I
think we are poised to develop a bill, and I thank the chairman
for the hearing.
Mr. Barton. I thank the gentleman.
We would like to hear from the distinguished gentleman from
Maryland for an opening statement, Mr. Wynn.
Mr. Wynn. Thank you, Mr. Chairman.
I am very appreciative of this hearing, and I am anxious to
hear from the witnesses, so I am going to forego an opening
statement. I would like permission to submit at a later date.
Mr. Barton. Without objection.
We would like to hear from another gentleman from the
Terrapin State, Mr. Ehrlich, for an opening statement.
Mr. Ehrlich. Sweet 16.
Mr. Barton. The Sweet 16; that is true.
Mr. Ehrlich. Winner this evening, Mr. Chairman.
I can take a hint from the chairman as well, and I will
submit an opening statement for the record.
Mr. Barton. I thank the gentleman.
We now go to the great State of Arizona. Is Mr. Shadegg
still here? He is missing in action. He was here.
Then, Mr. Fossella? Mr. Fossella of New York.
Mr. Fossella. I have nothing to add.
Mr. Barton. That is the first time New York has had nothing
to add; I can tell you that.
All right; Mr. Burr of North Carolina, the Tarheel State.
Mr. Burr. Mr. Chairman, in an effort not to give away where
I am on this position, I think I will forego any opening
statement.
But I do thank the chairman for his willingness to start
these hearings back up, and I hope that every member, on both
sides of the aisle, will take this challenge in a serious way.
This is not an easy issue. There are some very tough decisions,
and hopefully, through these hearings, we can, for once, find
the right solutions to them, and I yield back.
Mr. Barton. We would now like to hear from the
distinguished subcommittee chairman of Health and Environment,
also from the great State of Florida, Mr. Bilirakis.
Mr. Bilirakis. Thank you, Mr. Chairman.
Mr. Chairman, first, I would like to take a moment to
welcome Susan Clark, a commissioner of the Florida Public
Service Commission, to the subcommittee this morning and
welcome Ms. Clark back to Washington.
Mr. Chairman I, too, commend you for holding this hearing.
Mr. Chairman, we sometimes overlook or forget the fact that we
hold these hearings to learn. I know that we are all human
beings, and quite often, we are predecided on issues. But
hopefully, at least during the hearings, we are openminded
enough to learn. Mr. Stearns has already shared with us that 18
States have enacted laws. We all know that. Another 12 are
considering similar actions. Some have made the statement that
all States have to be a part of this deregulation; otherwise,
it will not work. Well, I am just not sure that this is the
case. I think that it is just very important that we go into it
with an open mind. There are a lot of tough issues. Some issues
affect some States more than they do others, and unless we do
our job objectively and have an open mind, we are liable to run
into another case of unintended consequences to something that
might seem really good at this point in time.
In any case, Mr. Chairman, thank you for holding the
hearing. Again, I trust we will continue to learn on this
subject. Thank you.
Mr. Barton. And I believe our last opening statement of
members present will be from the great State of Kentucky, Mr.
Whitfield.
Mr. Whitfield. Mr. Chairman, thank you very much. I had the
opportunity to be involved in deregulation of the airline
industry, the railroad industry and the trucking industry and
was really an advocate for the deregulation of all of those
industries, but I also recognize that certainly in the case of
the airlines and railroads, some small communities did suffer
as a result of deregulation.
I am from a very rural State. We have, I guess, about the
second lowest rates in the country, and many constituents ask
the question, well, how can we really benefit from
deregulation? And then, I noticed just recently the Department
of Agriculture came out with a study indicating that in their
analysis, energy prices would increase in about 12 or 13
States: Alabama, Colorado, Idaho, Indiana, Kentucky,
Mississippi, Montana and others. So I am delighted we are
having these hearings, because I recognize there are strong
arguments on each side, and I know that with the witnesses we
have scheduled all of us will be able to make a better decision
on whether or not deregulation is truly beneficial for the
entire country.
Mr. Barton. I thank the gentleman from Kentucky.
All members not present will be given the requisite number
of days to put an opening statement in the record. Seeing no
other member present who has not been given the opportunity, we
will conclude with the opening statements. At subsequent
hearings, we do not plan to have opening statements except from
the Chair and the ranking member and the full committee
chairman and the full committee ranking member if they are
present.
[Additional statement submitted for the record follows:]
Prepared Statement of Hon. Karen McCarthy, a Representative in Congress
from the State of Missouri
Thank you Mr. Chairman. I would like to commend our Chairman and
Ranking Member for convening this hearing today. Elevating our
awareness and increasing our knowledge of electric utility deregulation
is critical. Having the opportunity to communicate with and learn more
from our expert panelists today will be of great value as we proceed
with the last major deregulation requiring Congressional action.
Addressing the deregulation of the electrical industry in a manner
which is fair to consumers, assures reliability, and promotes fair
competition is a goal which we all share. In the process of
accomplishing these objectives, it will be vital that we at the federal
level not overtly intrude upon state jurisdictions which are the
primary regulatory body for public utilities. Legislation from the
federal level should complement state laws and regulatory efforts not
stifle creativity and innovation. We must be sure that the date certain
is realistic for state compliance.
In many instances, the states have been the successful laboratories
for change. Federal actions will need to incorporate the best model to
effectively produce a national system based upon equity for all. The
State of Missouri is a lower-cost State. We are below the national
average in our rates, both commercial and residential. Missouri was one
of the 23 Low Cost Electric State Coalition asking that their concerns
be considered by Congress. I am interested in testimony that will
demonstrate how we can best assure that these states maintain their
lower-cost position.
Through hearings such as this one, we are able to enhance the
education of all parties involved as stakeholders in the deregulation
of electricity. I am committed and know that my colleagues are
committed to accomplishing deregulation in a manner that produces
satisfactory results, not chaos. Deregulation of electricity must be
done well, for the heat and lights necessary for comfort and commerce,
and in emergency instances for survival.
I look forward to the testimony of our expert panelists today and
our committee's subsequent dialogue and debate regarding the critical
issues associated with electric utility deregulation.
Thank you, Mr. Chairman.
Mr. Barton. We would like to welcome our first panel of
witnesses to please come forward at this point in time. We have
before us the Honorable Elizabeth Moler from Vinson & Elkins.
We have the Honorable Linda Stuntz, who is representing Stuntz,
Davis & Staffier. We have the Honorable Charles Stalon; we have
the Honorable Mike Naeve. All of these individuals are former
FERC Commissioners or Deputy Secretaries of Energy in various
administrations.
Ladies and gentlemen, we welcome you. Your entire
statements are in the record in their entirety. We are going to
start with Ms. Moler and give you 7 minutes to summarize your
statement, and then, we will go right down the line.
Ms. Moler?
STATEMENTS OF ELIZABETH ANNE MOLER, VINSON & ELKINS; LINDA G.
STUNTZ, STUNTZ, DAVIS & STAFFIER; CHARLES G. STALON, CAPE
GIRARDEAU, MISSOURI; AND CLIFFORD M. NAEVE, SKADDEN, ARPS,
SLATE, MEAGHER AND FLOM
Ms. Moler. Thank you, Mr. Chairman and members of the
subcommittee.
It is an honor to appear before you today and to be asked
to testify on my favorite subject. I have testified before this
subcommittee many times. This is my first time as a private
citizen. Though I do have clients who are engaged in the
electricity business, the subcommittee asked me to appear
before you to give my own views about the need for Federal
electricity legislation.
Mr. Barton. If you could make sure the microphone is on;
flip that switch. Is it on?
Ms. Moler. Now, it is.
Mr. Barton. Okay; the power of electricity.
Ms. Moler. It is good to keep mikes on as well as the
lights on, yes, sir.
The views I am presenting today are my own and do not
necessarily reflect the views of my clients, nor have they paid
me for my presentation. I have four basic points to make. I
also identify 10 core elements of what I believe can and should
be enacted as bipartisan consensus Federal restructuring
legislation.
First, there is a need to act. Congress last enacted
electricity legislation in 1992. 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 industry for our country.
Second, this is not rocket science. Though the industry is
an economic giant and produces the lifeblood of our modern
economy, the issues pertaining to reform legislation are really
quite basic, and they are ripe for action.
Third, the industry needs your leadership. Something magic
could happen if a bipartisan group of members makes a serious
effort to write a consensus bill.
Fourth, the elements of consensus legislation have broad
support in the private sector.
Ten core elements of Federal restructuring legislation are
apparent if one looks at the array of restructuring proposals
that have been introduced so far this Congress and during the
last Congress. Enacting legislation composed of these core
elements is a very worthy, achievable goal. These elements
include mandating customer choice; ensuring reliability of the
grid; repealing the Public Utility Holding Company Act;
repealing the Public Utility Regulatory Policies Act,
substituting instead a market-oriented approach to renewable
power; updating the Federal Power Act; requiring all owners of
interstate transmission lines to provide open access
transmission under the Federal Power Act; providing the Federal
Energy Regulatory Commission authority to address market power
issues; providing consumers with reliable, user-friendly
information about the sources of their power; supporting
research and development funding; and finally, recognizing that
electricity markets are now regional and facilitating regional
solutions to problems.
Let me elaborate briefly. It is not surprising that an
electric industry structure that was appropriate for the 20th
Century needs fine-tuning to best serve the public in the 21st
Century. Federal laws governing this industry no longer promote
the public interest; rather, they inhibit the development of a
rational, competitive U.S. power industry.
As several members of this subcommittee have observed, 18
States have approved plans to give customers of some of their
utilities customer choice. Other States are on the verge of
acting. But even in those States that have acted, not all
customers have the benefit of customer choice, because some
utilities are not included in the program. While there has been
considerable progress, the glass is, at best, half full. Those
problems need to be solved.
Progress in the States does not mean Congress should not
act; rather, Congress must act, or there will be an increasing
likelihood of volatile markets and even catastrophic
transmission system failures.
Let me turn to two of the elements that I addressed in my
prepared statement; first, mandating customer choice. Congress
should pass legislation providing all customers the ability to
shop for their electricity supplier by a date certain. The date
is negotiable; the principle is not. I personally would choose
April 15, 2001. That is sufficient time for State regulatory
authorities to act to establish an appropriate regulatory
regime if they have not already done so. I like April 15 rather
than January 1, because something good should happen on that
date for a change.
I congratulate the States that have enacted customer choice
for their leadership and would grandfather those programs.
Three years ago, I testified before the Senate Energy and
Natural Resources Committee in favor of mandated customer
choice that would give States the ability to opt out if they
made a determination on the record that customer choice is
contrary to the interests of their consumers. I still advocate
that point of view. Last year's administration bill dubbed this
the flexible mandate. I believe it is a reasonable middle
ground upon which a consensus piece of legislation could be
built as well. In order to opt out, State authorities would
have to make a determination on the record that customer choice
would be detrimental to their consumers.
As part of any industry restructuring, utilities should
have an opportunity to recover prudently incurred, legitimate,
verifiable stranded costs that cannot be mitigated. Every State
implementing customer choice, except one, has provided for full
stranded cost recovery.
While I personally regard stranded cost recovery as an
essential element of a fair transition, I do not believe
stranded cost recovery needs to be Federalized. The States have
and should deal with this issue.
Ensuring reliability of the grid: it would be easy to be an
alarmist on the subject of the fragility of our Nation's
transmission system. I do not want to be an alarmist, nor do I
want to understate the serious nature of the situation. Rather,
I want to stress the need to address the issue promptly and
responsibly. Your former colleague and subcommittee chairman
recently chaired a task force that stressed the need for
reliability legislation. They came to a unanimous conclusion
that reliability legislation is urgently needed. I would urge
you to pay attention to that report and to act positively on
their recommendations.
Mr. Chairman, in my prepared statement, which I have
submitted for the record, I have tried to outline a proposal
that I believe could form the nucleus of much-needed
legislation. In conclusion, I would urge you and your
colleagues to roll up your sleeves; to talk to each other and
commit yourselves to action. It is a vitally important public
policy area that is worthy of your time and effort. This need
not be a partisan issue; there is bipartisan support for
legislation at the highest levels in the Congress and in the
administration. We have had 4 years of oversight hearings and
policy discussions. It is time to enact something.
Thank you.
[The prepared statement of Elizabeth Anne Moler follows:]
Prepared Statement of Elizabeth Anne Moler, Partner, Vinson & Elkins,
L.L.P.
Mr. Chairman and Members of the Subcommittee: It is an honor to
appear before you today, and to be asked to testify on my favorite
subject. I have testified before this Subcommittee many times; this is
my first time as a private citizen. Though I do have clients who are
engaged in the electricity business, the Subcommittee asked me to
appear before you to give my own views about the need for Federal
electricity restructuring legislation. Therefore, the views I am
presenting today are my own, and do not necessarily reflect the views
of my clients.
I have four basic points to make. I also identify ten core elements
of what I believe can and should be enacted as bipartisan, consensus
Federal restructuring legislation.
First, there is a need to act. Congress last enacted electricity
legislation in 1992. 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
industry for our Nation.
Second, this is not rocket science. Though the industry is an
economic giant and produces the lifeblood of our modern economy, the
issues pertaining to reform legislation are really quite basic. And
they are ripe for action.
Third, the industry needs your leadership. Something magic COULD
happen if a bipartisan group of Members makes a serious effort to write
a consensus bill.
Fourth, the elements of consensus legislation have broad support in
the private sector. Ten core elements of Federal restructuring
legislation are apparent if one looks at the array of restructuring
proposals that have been introduced so far this Congress, and last
Congress. Enacting legislation composed of these core elements is a
very worthy, achievable goal. These core elements include:
Mandating customer choice;
Ensuring reliability of the grid;
Repealing the Public Utility Holding Company Act;
Repealing the Public Utility Regulatory Policies Act,
substituting instead a market-oriented approach to renewable
power;
Updating the Federal Power Act;
Requiring all owners of interstate transmission lines to
provide open access transmission under the Federal Power Act;
Providing the Federal Energy Regulatory Commission authority
to address market power issues;
Providing consumers with reliable, user friendly information
about the sources of their power;
Supporting research and development funding; and
Recognizing electricity markets are now regional and
facilitating regional solutions to problems.
Let me elaborate, and in doing so I will address the issues you
asked me to address in your letter of invitation.
It is not surprising that an electric industry structure that was
appropriate for the 20th Century needs fine-tuning to best serve the
public in the 21st Century. Yet, the basic organic statutes governing
the industry, the Federal Power Act (FPA) and the Public Utility
Holding Company Act (PUHCA), have really not been comprehensively
updated since the 1930's. They are now archaic and in need of reform.
The Public Utility Regulatory Policies Act (PURPA), enacted in 1978,
paved the way for new competitors to enter the electric generating
business. The same statute also established the Federal policies that
currently apply to renewable sources of power. PURPA's requirements
have now outlived their usefulness. The Energy Policy Act of 1992
(EPAct) recognized the changed circumstances in the industry, and paved
the way for wholesale competition. But more needs to be done in order
for the Federal laws to be compatible with State initiatives and to
encourage a more efficient and competitive industry. Indeed, in today's
evolving industry structure, this array of Federal statutes no longer
promotes the public interest; rather, it inhibits the development of a
rational and competitive U.S. power industry.
As of today, authorities in eighteen states have approved plans to
give customers of some of their public utilities ``customer choice'';
that is, consumers will have the ability to choose their power
supplier. Virginia is the most recent state to enact such a program.
Other states, notably Maryland, Michigan, New Mexico, Ohio, and Texas
are on the verge of acting. But even in those states that have acted,
not all of the businesses and individual customers have the benefit of
customer choice because some utilities are not included in the program.
While there has been considerable progress, the glass is at best half
full. Many, many customers are served by utilities that do not allow
them to shop for power. In California, for example, the municipally-
owned utilities are not a part of the state's restructuring plan
because of concerns about the loss of tax exempt financing if they
provide open access. Those problems need to be solved.
Electrons do not recognize state or corporate boundaries.
Electricity is an industry that is fundamentally in interstate
commerce. Congress needs to act to recognize this fact, and to provide
a Federal regulatory scheme that will provide a much more seamless
national power grid. Progress in the states does not mean the Congress
should not act; rather, Congress must act or there will be an
increasing likelihood of volatile markets and even catastrophic
transmission system failures.
Earlier I outlined the core elements of what I believe could be a
solid, comprehensive, consensus based restructuring initiative. I would
like to discuss each element in somewhat greater detail.
1. Mandating customer choice
Congress should pass legislation providing all customers the
ability to shop for their electricity supplier by a date certain. The
date is negotiable; the principle is not. I personally would choose
April 15, 2001. That is sufficient time for state regulatory
authorities to act to establish an appropriate regulatory regime if
they have not already done so. I like April 15, rather than January 1,
because something good should happen on that day for a change.
I congratulate the states that have enacted customer choice for
their leadership, and would grandfather their programs. Three years ago
I testified before the Senate Energy and Natural Resources Committee in
favor of mandated customer choice that would give states the ability to
``opt out'' if they made a determination that providing customer choice
is contrary to their interest. I still advocate that point of view.
Last year's Administration bill dubbed this the ``Flexible Mandate''
and I would urge you to give it serious consideration. I believe it is
a reasonable middle ground upon which a consensus piece of legislation
could be built. In order to ``opt out,'' state authorities would be
required to undertake a regulatory proceeding and compile a record that
customer choice would be detrimental to their customers. I personally
do not believe that is likely, but states should have the flexibility
to make such a finding.
As part of any industry restructuring, utilities should have an
opportunity to recover prudently incurred, legitimate, verifiable,
stranded costs that cannot be mitigated. Every state implementing
customer choice except one has provided for full stranded cost
recovery. While I personally regard stranded cost recovery as an
essential element of a fair transition, I do not believe stranded cost
recovery needs to be ``federalized.'' The states have, and should, deal
with the issue.
2. Ensuring reliability of the grid
It would be easy to be an alarmist on the subject of the fragility
of our Nation's transmission system. I do not want to be an alarmist;
nor do I want to understate the serious nature of the situation. Rather
I want to stress the need to address the issue promptly and
responsibly.
Your former colleague and Subcommittee Chairman, the Honorable
Philip Sharp, recently chaired a Task Force reporting to the Secretary
of Energy on Electric System Reliability. The Task Force was very
broadly based; it had the widest possible range of industry
participants and observers. They came to a unanimous conclusion that
reliability legislation is urgently needed. Their final report stated:
There is a sense of urgency throughout this report. Driven by
the expectation of billions of dollars in annual savings to the
Nation's economy, the electricity industry is in a transition
from a highly regulated industry dominated by monopoly
utilities to an industry that will rely, in large part, upon
competitive commercial markets at both the wholesale and retail
levels. The industry is unbundling, and the old institutions
for reliability are no longer sufficient. We are already in the
middle of our journey toward a restructured electricity
industry. However, the new policies and institutions needed to
assure electric reliability are not yet in place. Until such
policies and institutions are in place, substantial parts of
North America will be exposed to unacceptable risk.
. . . The Congress, for example, urgently needs to clarify
the FERC's authority over an electric industry self-regulating
reliability organization and expand the FERC's jurisdiction for
reliability over the bulk-power system.
They stressed:
These steps must be taken soon. Indeed, the Task Force
believes that the primary challenges to bulk-power system
reliability are presented by the transition itself, rather than
by the end state of competition. Failure to act will leave
substantial parts of North America at unacceptable risk.
The Administration has been working with the North American
Electric Reliability Council and others on legislation to provide FERC
with authority to oversee and enforce mandatory electric reliability
standards. I cannot overstate its importance; if we are to keep the
lights turned on it must be enacted. If it is not enacted, Congress
will be considered part of the problem, rather than part of the
solution.
3. Repealing the Public Utility Holding Company Act
I do not believe PUHCA any longer serves a useful purpose. It
should be repealed. In conjunction with its repeal, Congress should
ensure that FERC and State regulators have access to the books and
records to insure that captive customers are not subsidizing affiliated
corporate business ventures. PUHCA repeal legislation should be part of
a comprehensive restructuring bill.
4. Repealing the Public Utility Regulatory Policies Act and
substituting instead a market-oriented approach to renewable
power
PURPA provided a much needed impetus for the development of an
independent power industry. It is no longer useful and should be
repealed. I would do so prospectively, honoring existing contracts. In
its place, I would substitute a modest renewable portfolio standard,
coupled with tax incentives for renewable resources.
5. Updating the Federal Power Act
The Federal Power Act is replete with anachronisms. It should be
updated. An essential element is to ensure that FERC has authority to
provide interstate transmission for transactions that are ultimately
retail sales.
6. Requiring all owners of interstate transmission lines to provide
open access transmission under the Federal Power Act
There are many examples of power lines that are interstate in
nature that are not subject to Federal Power Act jurisdiction and
regulated by FERC. They should be. Transmission lines owned by
municipalities, and the Federal Power Marketing Administrations
(Bonneville, Southeastern, Southwestern, and Western), and the
Tennessee Valley Authority should be regulated under the Federal Power
Act just like those owned by other utilities. While I served at the
Department of Energy, we established a special advisory committee to
develop reform proposals for TVA, and worked with the Northwest
Governors' Transition Board on reform proposals for BPA. Like you, I
look forward to analyzing the conclusion of that process when the
Administration's new restructuring package is forwarded to the
Congress.
In addition to the Federal Power Act jurisdiction, the Congress
also needs to address the private use and tax exempt bond restrictions
to enable municipal and cooperative utilities to provide open access
and customer choice. While the subject area is not within this
Subcommittee's jurisdiction, it is important to note that the fabric of
open access transmission looks a lot like Swiss cheese--there are holes
in the cloth. In particular, the tax writing committees need to address
the private use restrictions that limit use of facilities constructed
with tax exempt bonds. Use of existing generating capacity for sales
outside a municipal utility traditional service territory and use of
existing transmission lines to provide open access transmission should
not upset existing tax exempt financing arrangements.
7. Providing the Federal Energy Regulatory Commission authority to
address market power issues
Competitive markets work well only if you have lots of competitors.
There need to be appropriate regulatory authorities in place that
provide Federal regulators authority to address market power issues. I
recognize that this is a particularly thorny area. Nonetheless, I
believe that FERC should be given authority to address market power
issues in order to ensure that competition flourishes.
Five years ago, generation asset divestitures were unheard of in
the utility business. Now, sales of generating assets are recognized as
providing corporations and stockholders with very positive returns on
their investments. They are also providing much needed financial
restructuring tools so that utilities can develop a business strategy
that is compatible with serving customers and positive balance sheets.
I would also encourage the Subcommittee to provide FERC with
additional authority to encourage a more rational structure for the
interstate transmission grid. It needs to undertake reforms in
transmission pricing so that the private sector will continue to invest
the necessary resources in grid infrastructure. Increasingly utilities
are looking at divesting assets and forming independent transmission
companies, or ``transcos.'' I would provide FERC with authority to
require integrated utilities that are not members of a regional
transmission organization (either an Independent System Operator or a
transco) to join one.
8. Providing consumers with reliable, user friendly information about
the sources of their power
Customers who are interested in learning about the source of their
power should be able to do so. Utilities should not be able to claim
that they are selling ``green'' or renewable power unless they are.
California, for example, has instituted a successful consumer
information program. On the other hand, power marketers should not have
to contend with different requirements in each state. A federal program
designed to ensure truth in advertising if companies make claims about
the source of their power should be enacted. The disclosure
requirements need not be elaborate, nor expensive to comply with, in
order to provide customers with reliable information.
9. Supporting research and development funding
Support for research and development in the electric technology
area has plummeted in the wake of restructuring. State regulators
should have clear authority to impose a surcharge on distribution in
order to support research and development. At the Federal level, I
would focus on beefing up the DOE's electric R&D portfolio.
10. Recognizing electricity markets are now regional and facilitating
regional solutions to problems
As I said earlier, electrons know no state or corporate boundaries.
But the Federal-State system does not provide good regional solutions.
Transmission planning and transmission siting are two excellent
examples of things that need to be coordinated on a regional basis.
Some have advocated Federal transmission siting legislation. Interstate
pipelines are sited by the FERC under the Natural Gas Act; it should
and could work for interstate transmission lines. I personally would
favor such a move. If this Subcommittee cannot muster the support for
Federal siting authority, at a minimum I would urge you to clarify that
states can exercise authority on a regional basis and would encourage
them to do so. For example, facility siting authorities should be able
to get together and plan transmission facilities on a regional basis
without running into concerns that their planning efforts will run into
federal preemption. The Interstate Compact provisions in the
Administration bill would clearly help.
Conclusion
Mr. Chairman, I have tried to outline a proposal that I believe
could form the nucleus of much-needed legislation. I would urge you and
your colleagues to roll up your sleeves, talk to each other, and commit
yourselves to action. It is a vitally important public policy area that
is worthy of your time and effort. This need not be a partisan issue;
there is bipartisan support for legislation at the highest levels in
both the Congress and the Administration.
We have had four years of oversight hearings and policy
discussions. It's time to enact something.
Mr. Barton. Thank you.
I would like to welcome now the Honorable Linda Stuntz,
who, in addition to being a former Deputy Secretary of Energy,
I believe was a former counsel for the Republicans on this
committee at one point in time. It was all downhill since then,
right?
STATEMENT OF LINDA G. STUNTZ
Ms. Stuntz. That is where I learned everything I ever knew
about this subject, Mr. Chairman.
Thank you so much for inviting me back. It is a great
privilege, and it is one that I respect. I, too, have clients
in many aspects of this industry, but you asked me to come here
and give you my judgment myself as was my privilege to do on a
more regular basis some time ago, and that is what I am here to
do today.
Mr. Barton. You really need to pull that microphone up to
you, Ms. Stuntz.
Ms. Stuntz. Okay; there is no switch on mine, so I do not
know.
My message today to you, I hope, is simple. You do need to
legislate in the area of electricity, and second, I believe
that you can legislate. I think all that work under Mr.
Schaeffer's leadership that you all helped the effort in
crafting the Paxon-Largent compromise of last year has really,
although it may not have made it very far in terms of the
legislative process schematic, it has enabled us now to
identify, and hopefully you, issues on which there is
sufficient consensus that legislation is possible.
In my written testimony, and I would suggest to you today
that there are five. I think you are going to hear some of them
in common across most of us. First is the reliability issue. I
think it is very important to empower a reliability
organization that can set mandatory rules of the road. Right
now, there are no such things. There is no entity or enterprise
that can set a binding reliability rule. Now, that was okay
when it was sort of a club, and people could take care of each
other, because that is the way it worked in the previous
scheme. It is not okay now. In fact, there are issues as to
even whether funds can be collected. They are having difficulty
doing that. So that needs to happen.
Second, we need to clarify Federal and State jurisdiction.
It is not clear that the States can, in fact, require access to
their local distribution systems. There are lawyers' issues
related to the scope of the Federal Power Act and the extent to
which it may preempt the States. It would help the States move
forward, empower them, if that clarification were provided. It
has been done in Paxon-Largent; it is done in Mr. Burr's
legislation, I believe, and there really should not be any
dispute about that.
Third, FERC's jurisdiction does need to be extended to all
transmission. If we are going to have an interstate market for
electricity that is backed up by a reliable, efficiently run
grid, all transmission, regardless of who owns it, ought to be
accessible on the same terms and conditions. And again, I do
not really think that should be too controversial, although I
do not minimize that for some for whom FERC regulation has not
been fully applicable, this will require a change in business.
Fourth, we need to repeal the Public Utility Holding
Company Act. It is difficult to explain. That statute, as you
know, is the province only of a few people, including my
colleague here at the end of the table who can actually explain
it out loud, but it affects everything that any utility company
does: every business decision they make; the issuance of debt;
how they are going to structure it; whether or not they can
enter competition. It has outlived its usefulness; it is
distorting competition, and it should be repealed.
Finally, we need to prospectively repeal PURPA, preserving
the existing contracts on which a lot of investment has been
based, and there is a Federal responsibility, I believe, to
provide for recovery of those costs, because it was a Federal
obligation that was imposed on the utilities to enter into
those contracts. Mr. Stearns has introduced legislation in the
last Congress and, I believe, in this Congress to do that. I
think it has bipartisan support, and I think that would be an
easy module to put in your legislation.
These are things that only Congress can do. If you do not
do them, they will not be done. They are things that are
necessary for you to do to remove barriers to State action; to
allow the States to move forward with the competitive choice
programs of their choice. I think it would be nice to have a
date certain; I do not think it is essential, and I am quite
persuaded that it is not legislatively possible. It is not in
the Senate, and I do not think there is consensus on this
committee. So, although, as I said, it may be useful, it also
complicates the legislative effort, because you have to start
worrying about grandfathering: what will we grandfather; what
will we not grandfather.
By not moving to a federally mandated date certain, we do
not have to get into that issue, and I honestly do not think
you have to go there to provide a lot of benefits for consumers
and to get the Federal Government out of the way to improve the
electricity market and allow the competition to move forward.
I would conclude simply by saying that there are many of
those--and you know them, I am sure--that have sought to hold
electric restructuring legislation hostage until everything is
done. There was a boss I had at one time who used to caution me
against letting the perfect be the enemy of the good. I would
encourage you in the same way. There may be things that turn
out that need to be done later. I talked about a couple of them
in my written testimony, one dealing with the issue of FERC's
merger review approval; another dealing with transmission
policy, about which I am greatly concerned. I do not think our
current policies encourage anybody to invest in new
transmission or to use it more efficiently. I think it is all
based on the notion that we have to be concerned about
allocating a scarcity, and that is no way to run transmission.
It is also true that you can get in big trouble if you have
a transmission outage. You do not get much benefit if you use
transmission efficiently. That is encouraging transmission
owners to always err on the side of perhaps maintaining more
capacity reserves than they need. That is not a good way to go
about moving to a competitive marketplace, but I do not think
that there is a remedy that has clearly been proposed for that;
I think we need to do some more homework on that and allow FERC
and some of the agencies that are dealing with this every day
to develop the solutions before we try to legislate in that
area.
With that, Mr. Chairman, I will cease and look forward to
your questions.
[The prepared statement of Linda G. Stuntz follows:]
Prepared Statement of Linda G. Stuntz, Stuntz, Davis & Staffier, P. C.
Thank you for the opportunity to testify before you at this
critical time in the restructuring of this nation's electricity
markets.1 There is no more complex, capital intensive or
vital industry than the electric industry. Little wonder then, that
despite some 30 days of House hearings, over one dozen Senate
``workshops'' and the introduction of no less than 28 bills dealing
with at least one aspect of this issue in the last Congress, only one
bill (S. 621 repealing PUHCA) was reported from Committee and no bill
reached the floor. The good news, I believe, is that all this work was
not for naught. Although controversy remains over many issues,
consensus is emerging on certain issues, and in one area in
particular--reliability--it becomes clearer every day that the lack of
federal legislation is posing real risks. Thus, my message to you today
is simple.
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\1\ The views expressed herein are solely my own, and are not
offered on behalf of, nor should they be attributed to, any other
person or firm.
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1) There is a need for federal legislation.
2) There is, or can be, sufficient consensus to allow you to enact
the needed legislation this Congress.
the electricity industry today
As illustrated by the chart below, in no industry is there a larger
or more diverse number of suppliers.
[GRAPHIC] [TIFF OMITTED] T5641.001
Fueled, in part, by passage of the Energy Policy Act of 1992, which
effectively created a competitive wholesale generation market, the
share of nationwide generating capacity from non-utility generators
(NUGs) has more than doubled from 3.6 percent in 1987 to 8.5 percent in
1997. In fact, since 1990, non-utility generators have contributed over
half of all new investment in generating facilities.
Utilities also are no longer the only sellers of electricity. As
illustrated in Figure 2, sales growth by power marketers has increased
dramatically in the last three years.
[GRAPHIC] [TIFF OMITTED] T5641.002
In the first quarter of 1995, power marketers sold slightly less
than three million megawatt hours, about the power required for one
million homes. By the second quarter of 1998, that amount had grown to
almost 501 million megawatt hours, enough to power almost 210 million
homes. The Federal Energy Regulatory Commission (FERC) has approved
nearly 500 power marketing entities. Of these, some 115 are posting and
reporting sales.
state action
As a result of the Energy Policy Act of 1992, and actions by the
FERC implementing that Act, a wholesale purchaser of electricity (for
example, a municipal utility) can obtain electricity from any supplier,
and have that power transmitted to it over the transmission systems of
any utility that is FERC jurisdictional. (The transmission systems of
the PMAs, TVA, municipal utilities and co-ops are not FERC-
jurisdictional, although FERC has sought to apply reciprocity
requirements and in some cases has some limited oversight). Retail
sales and the distribution of electricity are matters of state
jurisdiction. Thus, although wholesale customers can obtain power from
any supplier, retail customers traditionally could purchase power only
from their local utility, which, in exchange for undertaking the
obligation to serve all consumers at a regulated rate, was given by
most states an exclusive retail franchise.
Starting in about 1994, the states began to consider in earnest
whether the benefits of the emerging competitive wholesale market
should be extended to retail consumers. As of today, 14 states have
enacted legislation to provide retail customers with the option to
choose any supplier they wish; four states are pursuing customer choice
by means of state commission developed programs; legislation is pending
in four additional states and virtually every state has considered
whether and how it should adopt customer choice.
[GRAPHIC] [TIFF OMITTED] T5641.003
As a result of all this activity, more than 50 percent of the
population of this country lives in states that have adopted firm
customer choice plans. That being said, there is substantial variety
among these state plans. As examples:
* Some require or strongly encourage divestiture of generation.
* Some ``unbundle'' distribution service and require competition in
such services as billing and metering.
* Some require utilities to turn over control of their transmission
systems to Independent System Operators (ISOs). One has created
a power exchange separate from an ISO. Others have combined
these functions.
* Some have established programs to support renewable energy.
* All, save one, have provided the opportunity for utilities to recover
fully the costs of investments made and costs incurred that
were approved under the prior regulatory regime.
* All have given municipal and cooperative utilities the opportunity,
but not the requirement, to participate in customer choice
programs.
what congress needs to do
With this background, and with our evolving experience in wholesale
and retail electricity competition, it is clear that Congress needs to
do certain things.
1. Reliability
No organization currently has the ability to set and enforce
binding rules necessary to ensure continued reliability. This is a
problem that Congress must remedy. Last year, a Department of Energy
Task Force led by a former chairman of this Subcommittee, the Honorable
Philip Sharp, completed a study on the matter of reliability in the
restructured electricity industry. Mr. Sharp did not mince words in his
preface to this report:
Driven by the expectations of billions of dollars in annual
savings to the Nation's economy, the electricity industry is in
a transition from a highly regulated industry dominated by
monopoly utilities to an industry that will rely, in large
part, upon competitive commercial markets at both the wholesale
and retail levels. The industry is unbundling, and the old
institutions for reliability are no longer sufficient. We are
already in the middle of our journey toward a restructured
electricity industry. However, the new policies and
institutions needed to assure electric reliability are not yet
in place. Until such policies and institutions are in place,
substantial parts of North America will be exposed to
unacceptable risk.
The good news is that many of the parties that contributed to this
Task Force Report, including public and consumer-owned utility
representatives, ELCON, Enron, DOE and state representatives, worked
over a period of many months to develop consensus reliability
legislation that would provide the new policies and institutions needed
to assure electric reliability in the emerging restructured industry.
This language was recently adopted by the North American Electric
Reliability Council (NERC) by a near-unanimous vote. This then is
module one of necessary federal legislation on electricity
restructuring.
2. Clarify State/Federal Jurisdiction
Currently, the dividing line between what is subject to federal
regulation and what is subject to state regulation is unclear. Some
argue, for example, that the states do not have the ability to order
customer choice because states do not have authority over transmission
in interstate commerce. FERC, however, is prohibited from ordering
retail wheeling. Thus, there is, some contend, a ``gap'' in the current
jurisdictional scheme.
There are other confusions. In Order 888, FERC took the position
that it has the authority to regulate the transmission component of
``unbundled'' retail sales. Some states disagree. Moreover, some who
agree with FERC believe that FERC also has jurisdiction over the
transmission component of ``bundled'' retail sales and should be
exercising this jurisdiction.
Until and unless these ambiguities are resolved, there will be
litigation, uncertainty and conflict between and among the states and
FERC, and other elements of the electric industry. To resolve this
uncertainty, legislation such as was set forth in the Paxon-Largent
draft of last year and the Bingaman bill in the Senate (S. 1276) should
be enacted. Among other things, states would be given secure
jurisdiction over all retail customers through a more clearly-defined
distribution jurisdiction, and FERC's authority over transmission in
interstate commerce, including the transmission component of unbundled
retail sales, would be confirmed.
3. Extend FERC's Jurisdiction to Encompass All Transmission Facilities,
Including Transmission owned by the PMAs, Munis, Co-ops and TVA
We cannot have the efficient, reliable interstate transmission grid
necessary to support a competitive electricity generation market and
increased customer choice unless the entire grid is operating under the
same rules and conditions. The great majority of co-ops and municipal
utilities do not own substantial transmission, but those who do should
provide access to those facilities on the same rates, terms and
conditions as apply to transmission owned by investor-owned utilities.
The same should be true for transmission owned by TVA, BPA and other
Power Marketing Authorities.
Again, the Paxon-Largent draft of last year contained provisions to
accomplish this. These should be the third module of federal
legislation.
4. Repeal PUHCA
There is no reason whatsoever to retain this statute and many
reasons to repeal it. Every day it remains on the books, it distorts
competition and investment in the electric and natural gas industries.
Its principal focus of encouraging ``integrated'' utilities (growth
through contiguous expansion) actually is in conflict with antitrust
objectives which seek to limit the presence of any one firm in a given
geographic market. PUHCA repeal legislation as introduced last year in
the House and the Senate, and included in the Paxon Largent draft
should be the fourth module of federal legislation.
5. Prospectively Repeal PURPA Purchase Mandate, Preserve Existing
Contracts and Provide for Recovery of PURPA Costs
There is no place in a competitive generation market for a federal
statute that mandates that utilities (even utilities that have divested
all their generation) purchase power from certain favored generators. A
vestige of the Carter-era Energy Plan, PURPA inadvertently demonstrated
that non-utilities could generate electricity and that generation could
be competitive. PURPA, however, has largely failed in its stated
purposes, which were to encourage energy conservation and more
generation from non-fossil fuel resources. The substantial majority of
PURPA projects are fossil-fuel powered. Moreover, because of a
complicated government-dictated pricing scheme dependent on our ability
to accurately predict energy prices (tried and failed more than once)
PURPA is now costing consumers billions of dollars every year for over-
priced power. It is time to put this to an end. However, the
investments made based upon PURPA should be honored, and the federal
government, which imposed this purchase obligation on utilities, should
ensure that these utilities are able to recover these costs
Legislation to make these reforms to PURPA has been introduced in
the House by Mr. Stearns and in the Senate by Messrs. Mack and Graham.
Similar legislation was included in Paxon-Largent, and should be
included in any federal legislation.
That is it. Doing just these five things would remove critical
federal barriers to customer choice, competition and innovation in the
electric industry.
issues for the future: what congress may need to do
While I believe that there is at present insufficient consensus to
enact legislation in areas other than the five that I have addressed
above, growing concern in two areas, in particular, compels me to bring
these to your attention and offer my views.
1. Mergers
Section 203 of the Federal Power Act requires that FERC approve the
disposition of any jurisdictional facilities in excess of $50,000.
Thus, in addition to the traditional antitrust approvals required from
the Department of Justice or the FTC, an entity disposing of
jurisdictional electric facilities must obtain FERC approval. FERC has
made valiant efforts to manage this responsibility in a manner
compatible with the restructuring electric industry, but I, at least,
have come to the conclusion that change is necessary. While an $80
billion merger of two oil giants can be approved in a matter of months
(or so it appears) mergers involving utilities one-tenth that size (or
less) are taking years. In the natural gas pipeline industry, as to
which FERC has no similar section 203 authority, substantial
consolidation has taken place and continues to occur in the aftermath
of wellhead deregulation and open access transportation in order to
obtain economies of scale and scope. Consolidation in the electric
industry, as it has in the natural gas pipeline industry, is being
driven by deregulation, technology evolution and growing competition.
Consumers will not obtain the full benefits of competitive generation
markets unless the process of consolidation and industry
rationalization is allowed to go forward.
Mr. Burr has introduced legislation that would repeal section 203.
Personally, I think this makes sense. I believe that section 203 FERC
review is largely redundant to the reviews that are done by Justice and
the FTC. However, I suspect that this is too big a step at this time.
Instead, I would suggest a look at the referral process used in the
United Kingdom. Borrowing from that process, section 203 could be
amended to require that proposed merger proponents file information
with the FERC, and that FERC be given a set time (perhaps four or five
months) to analyze that information and make a recommendation to the
antitrust authorities. In this way, the antitrust authorities would
have the benefit of FERC's special expertise, but FERC would not be in
the position of trying to recreate antitrust and market power expertise
that resides already with the antitrust authorities. Most importantly,
the industry realignment necessary and appropriate to provide more
efficient, lower cost service to consumers in the new, restructured
industry can go forward without undue delay and redundant reviews.
2. Transmission Policy
With your permission, I would like to submit with this statement a
paper entitled ``Transmission, Congestion, Pricing and Incentives,''
authored by Leonard S. Hyman, a senior Industry Advisor at Salomon
Smith Barney. This paper was presented at a conference in New York on
February 3, 1999. I would like to do this because I believe this little
paper provides you with more and better information about what is right
and wrong with our current transmission policies than anything else I
have seen. Taking a step back from the current raging debates over ISO
vs. Transcos, Mr. Hyman documents that transmission expansion has not
kept up with growth in the market, and that current transmission policy
provides little incentive to invest in new transmission or deploy new
technologies to improve the capacity or efficiency of the system.
Although Mr. Hyman comes down on the side of independent, for-profit,
transmission companies as opposed to non-profit ISOs, this may be less
important than getting the underlying regulatory structure right so
that two things are known: 1) who is responsible for maintaining an
adequate, efficient transmission system; and 2) those investing in
increasing the capacity or performance of the transmission system will
earn a reasonable return.
If these two matters are not resolved, we will all be spending our
time talking about how to manage the symptoms of inadequate
transmission capacity rather than providing to all consumers the full
benefits of a competitive generation market.
conclusion
Thank you again for the opportunity to offer my views. I know it
will not be easy, but I encourage this Committee to assemble and move
the five-part legislation that I have outlined. As with most
legislative efforts, it will not be all that everyone, or perhaps even
anyone, wants. It may be too much for some. It would, however, remove
critical federal barriers to the advance of competition in the electric
industry, while providing the new reliability institutions and
protocols necessary to maintain and enhance the reliability of electric
service. Other issues will be raised, such as transmission policy and
mergers, but seeking to address these issues at this time will doom the
legislative effort to failure. These issues are simply too far from
consensus or are insufficiently developed to determine whether the
legislative prescription being sought is addressing the right problem.
``Doing the doable,'' and the necessary that only the Congress can
do is an important next step to unleash competitive generation markets
and deliver the benefits of those markets to all consumers. I welcome
the opportunity to work with this Committee toward this end.
Mr. Barton. We thank you.
The Chair has a pending engagement with the Texas
Congressional delegation lunch. I am going to excuse myself. I
have read the two statements of our next two testifiers. I will
be back for the question period. So I would recognize Mr.
Stalon and then turn the Chair over to the vice-chairman, Mr.
Stearns.
STATEMENT OF CHARLES G. STALON
Mr. Stalon. Good morning, Mr. Chairman; thank you for the
opportunity of making a statement. At the expense of some
redundancy, I will repeat some of the arguments that have been
made earlier but start from a slightly different perspective.
The principal feature of the modern electric industry that
allowed proponents of electric industry restructuring to make a
persuasive case for that restructuring is the nature of the
modern transmission grid. The growth of extensive
interconnections among electric utilities of North America, and
I emphasize it is a North American grid, not the U.S. grid
only, but the growth of extensive interconnections among
electric utilities of North America and the continent-wide
standards for the use of that grid permitted substantial
expansion of trade among utilities in the 1970's and the
1980's.
The success of that trading demonstrated to all but the
most skeptical that the creation of competitive markets for
generating services was feasible and that the inherited system
of regulating the industry as an end to end monopoly was no
longer necessary or desirable. In the Energy Policy Act of
1992, the Congress took a crucially important first step in
restructuring the industry. A second step is sorely needed.
I want to mention very briefly three issues that I consider
to be critical. First, the one that has already been mentioned
twice and deserves a third and perhaps a fourth emphasis: In
order to create efficient markets for electricity and preserve
reliability in the system and to preserve certain key features
of the current system for creating and enforcing rules
necessary to make the system work well, three things have to be
dealt with and dealt with fairly quickly. First, the industry
needs an organization that can credibly promise to create and
enforce reliability standards for the planning, construction
and use of the North American grid. Congressional action is
necessary to empower such an organization. The North American
Electric Reliability Council on which we have depended in the
past can no longer make such a credible promise.
Second, transmission lines are not generally considered to
be good neighbors. In fact, to everyone other than electrical
engineers, they are just ugly. Their benefits, however, are
great, and they are essential to the efficient and reliable
operation of the electric industry, and the only plausible
assumption on which to build public policy is that the Nation
will need to build more of them.
These facts focus attention on the need to reallocate
regulatory responsibility for overseeing the planning,
construction and use of the U.S. component of the North
American grid. The Federal Power Act allocated regulatory
responsibilities between the States and the Federal Government
for a concentrated and intensely regulated electric utility
industry, and it did so at a time when using the grid to buy
and sell power was a limited activity practiced only among
utilities and even in that role was severely limited by the
incentives confronting the utilities.
That allocation has remained essentially unchanged since
the initial enactment of the Federal Power Act in 1935. It is
not likely that the transmission assets needed for efficient
and reliable industry performance can be constructed under the
existing allocation of regulatory powers and responsibilities.
Third, there exists an urgent need to impose unambiguous
responsibility on the Federal Energy Regulatory Commission for
creating and maintaining efficient and reliable bulk power
systems in the U.S. and to encourage the continued integration
of the U.S. regional systems and to integrate those systems
with those of Canada and, increasingly, with Mexico.
To permit the FERC to fulfill these responsibilities, the
Congress must grant the agency significant new powers. Such
powers should include regulatory oversight and empowerment of
the North American Electric Reliability Organization, which is
the proposed replacement for the North American Electric
Reliability Council, and give the FERC also strengthened powers
to oversee the market rules for the operation of interconnected
areas.
My testimony elaborates to some degree on this, and I would
close merely with one observation: it is apparent to all
careful observers that progress toward efficient electricity
markets has slowed substantially in the last year; I would say
the last year or two. Restructuring continues, but the process
is increasingly reflecting the bargaining power of different
parties in different parts of the Nation more than it reflects
an attempt to create efficient and reliable markets. We need to
remind ourselves that the objective is to replace the
regulation of natural monopolies with efficient markets for
generating services and not to replace the regulation of
natural monopolies with the regulation of rivalrous
oligopolies.
Congressional action is needed to reenergize this process
and to make clear the objectives for the regulators.
I thank you.
[The prepared statement of Charles G. Stalon follows:]
Prepared Statement of Charles G. Stalon 1
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\1\ A Resume is attached at the end of the statement.
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Introduction
The principal feature of the modern electric industry that allowed
proponents of electric industry restructuring to make a persuasive case
is the modern transmission grid. The growth of extensive
interconnections among electric utilities of North American and
continent-wide standards for use of that grid permitted substantial
expansions in trade among utilities in the 1970s and 1980s. The success
of such trading demonstrated to all but the most skeptical that
creation of a competitive marker for generation services was feasible,
and that the inherited system of regulating the industry as an end-to-
end monopoly was no longer necessary or desirable. In the Energy Policy
Act of 1992 (EPACT) the Congress took a crucially important first step
in restructuring the industry. A second step is sorely needed.
Three Critical Issues
In order to create efficient markets for electricity and to
preserve key features of the current system for creating and enforcing
rules necessary for electric industry reliability, three ``needs'' call
for Congressional attention very soon. They are:
One. The need for an organization that can credibly promise to
create and enforce reliability standards for the planning, construction
and use of the North American grid. Congressional action is needed to
empower such an organization. The North American Electric Reliability
Council (NERC) can no longer make such a promise.
Two. Transmission lines are not generally considered to be good
neighbors. In fact, to everyone other than an electric engineer they
are ugly. Their benefits, however, are great. And they are essential to
the efficient and reliable function of the electricity industry. The
only plausible assumption on which to build public policy is that the
nation will need to build more of them.
These facts focus attention on the need to re-allocate regulatory
responsibilities for overseeing the planning, construction, and use of
the U. S. component of the North American grid. Transmission remains a
natural monopoly and, consequently, extensive regulation remains a
necessity. The Federal Power Act (FPA) allocated regulatory
responsibilities between the states and the federal government for a
concentrated and intensely regulated electric industry, and it did so
at a time when using the grid to buy and sell electric power was a
limited activity, practiced only among utilities, and even that role
was severely limited by the incentives confronting utilities. That
allocation has remained essentially unchanged since 1935 when the
Federal Water Power Act of 1920 was made Part I of the Federal Power
Act and Parts II and III were added to impose federal regulation on
certain interstate activities of investor-owned utilities. It is not
likely that the transmission assets needed for efficient and reliable
industry performance can be constructed under the existing allocation
of regulatory powers and responsibilities.
Three. The need to impose unambiguous responsibility on the Federal
Energy Regulatory Commission (FERC) for creating and maintaining an
efficient and reliable the bulk power systems in the U.S. and to
encourage the continued integration of the U.S. regional systems and
the integration of these systems with those of Canada and Mexico. To
permit the FERC to fulfill these responsibilities the Congress should
grant to the agency significant new powers. Such FERC powers should
include regulatory oversight of a new North American Electric
Reliability Organization and strengthened oversight of market rules so
that the rules in interconnected control area are complementary and
will produce efficient outcomes.
Permit me to discuss each issue in turn.
I. On the Need for Federal legislation to Empower a new North American
Electric Reliability Organization (NAERO).
For a competitive generating industry to fulfill its theoretical
promise, there must exist an organization that can credibly promise the
beneficiaries of the system--and that includes almost every person,
firm and government in North America--that it can create and enforce
standards on all parties who build, operate, and/or use the North
American grid that will provide, at a minimum, the level of electric
industry reliability to which we have become accustomed. The North
American Electric Reliability Council (NERC) is the organization to
which we now look for the creation and enforcement of such standards.
As I noted earlier, that organization cannot credibly make the needed
promise in the new industry.
In particular, the NERC relies on peer pressure as its principal
enforcement tool; it has no ability to impose financial or other types
of penalties on industry participants who dishonor the rules. That
enforcement system worked tolerably well in the system in which
regulated, large vertically-integrated utilities, government-owned and
investor-owned, dominated the industry. But even in that environment
failures occurred. Such a ``voluntary'' system cannot be expected to
work when entrepreneurial, competitive generators dominate the
generating sector.
To its great credit the NERC has recognized that fact and has
worked diligently for the last several years to develop a proposal for
the Congress that can replace the NERC with a new organization (NAERO)
with greater powers. That proposal should be before you soon, if it has
not already arrived. That proposal deserves your serious and immediate
consideration.
When designing the powers of the NERC replacement and the powers of
government regulators to oversee this new organization, it is important
to keep in mind that reliability as we have come to know it in North
America requires much more than the enforcement of a set of technical
standards. Bulk power system reliability, on which reliability of
service depends, is best seen as the cooperative production of a public
good, to use the jargon of economists. Examples of public goods are
national defense, light houses and medieval town clocks. The essence of
a public good is that it cannot be withheld form one individual without
withholding it from all. The public good called ``bulk power system
reliability'' is produced by the control area operators, each of whom
accepts a responsibility to buy certain inputs, commonly called
ancillary services, that make it possible for all of them collectively
to maintain a low probability of system failure. It is this
``agreement'' among control area operators to share the cost of
producing reliability that deters ``free riding.'' This ``agreement''
takes the form of mutual acceptance of the NERC reliability standards.
Perpetuating this agreement is vital to the future of the industry,
since each control area operator faces strong incentives to free ride,
that is, minimize its expenditures for such services and let other
control area operators bear the cost.2
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\2\ In California these ``inputs to reliability'' have been grouped
under six heading, ``Regulation,'' ``Spinning reserves.'' Non spinning
reserves,'' ``Replacement reserves,'' ``Voltage support/reactive
power,'' and ``Black start capability.'' All six services are provided
by generators. The first four are procured by the Independent System
Operator (ISO), the control area operator for that portion of
California served by competitive markets, in competitive bidding. The
last two are acquired by the ISO by contract. Markets in other states
are using different categorizations of such services and different
models for producing reliability.
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Background for reliability recommendation
Power failures are one of the many inconveniences of modern life.
Keeping the frequency of such failures relatively small is an important
objective of managers and regulators of the electric industry. Power
failures occur for many reasons, but it is convenient to group them
into two types, failures of distribution systems and failures of bulk
power systems.3 Failures of distribution systems are caused
primarily by weather-related phenomena, such as ice storms,
thunderstorms, hurricanes, and tornados that break distribution lines.
Such power outages are usually localized, and planning and actions to
minimize the frequency and duration of them are management
responsibilities of individual utilities. In contrast, failures of a
bulk power system can cause power outages for users on many
distribution systems simultaneously, and there is little that managers
of individual utilities can do to protect their customers from them.
Consequently, the reliability of each utility's services depends
critically on the reliability of the bulk power system from which the
utility receives its power. In 1965 an equipment failure in Ontario
caused a complete loss of power in New York and Boston within seven
minutes. In 1996 a failure later ascribe to a transmission line in
Northern California overheating and sagging into trees caused a loss of
power in nine states.4 The Secretary of Energy's letter to
the President of August 2, 1996 on this topic noted that an earlier
failure on July 2, 1996 caused a loss of power to 2 million customers
in 14 states.
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\3\ A bulk power system is defined as a set of generators and the
transmission lines that interconnect them and, in turn, connect them to
users and distribution companies. Such a system is commonly called an
``interconnection,'' or ``grid,'' although the latter term is also used
to describe the transmission network and connected generators of a
single utility. The word ``interconnection'' has two common
definitions: originally it meant a transmission line or set of
transmission lines connecting one utility to another. The original
meaning is still common. A second meaning is an alternating current
transmission network in which all generators operate synchronously. The
second definition encompasses the first.
\4\ See, ``Blackout a Caution Sign on Road to Deregulation,'' New
York Times, August 19, 1996, p. A.7 for a description of the August
1996 blackout.
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The role of control area operators. Creating efficient, competitive
power markets in an electric industry composed of interconnected
control areas requires the existence of some agency with authority to
define, impose and enforce rules for the operation of all control areas
so interconnected. It has been noted that ``the pursuit of self-
interest, unrestrained by suitable institutions, carries no guarantee
of anything except chaos.'' 5 In no part of the economy is
this lesson more relevant than in the North American electric industry.
As the industry evolves from one dominated by vertically-integrated
utilities into one with competitive power markets and non-utility
generators the system of coordinating institutions that has worked
acceptably well to restrain and guide self-interested decision makers
of intensely regulated firms must now be reconstructed to restrain and
guide self-interested decision makers of competitive generating
companies, competitive power merchants and competitive brokers.
---------------------------------------------------------------------------
\5\ Lionel Robbins, The Theory of Economic Policy in English
Classical Political Economy: (Macmillan & Co
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In an isolated system, such as one on a small island, one utility
company may own the bulk power system and all distribution companies
that take power from it. In that case, the task of reducing the
frequency and duration of bulk power system failures is a management
task. The more common case, whether on a large island or on a
continent, is that generators and transmission lines of many companies
are interconnected. In such a bulk power system, no single utility
company has the capability of implementing rules to minimize the
frequency and duration of bulk power system failures. Planning policies
and operating rules must be imposed on decision makers in each control
area for the benefit of all. Such plans and rules might be imposed by a
government or by collective actions of the interconnected firms. In the
North American electric industry the latter approach has been used.
Collective actions by interconnected firms can continue to play a
significant role in the new system, but adding financial penalties to
the reliability agency's enforcement quiver will require the
endorsement of the Federal government, as well as Canadian and Mexican
governments when the penalty is to be levied on industry participants
in those nations.
Currently, the coordination of generators and transmission assets
is done by 150 or so control area operators. In each control area, the
control area operator is required to operate the area's generating
plants and transmission lines in conformity with rules created to
ensure that the systemic results of the individual actions of all
interconnected control area operators provide reliable service to all
users in the interconnection. In operating these assets the control
area operators' are expected to balance two objectives, economic
efficiency and reliability.
This description of the reliability system makes clear that because
generators and the transmission lines to which they are connected do
work as a machine, any discussion of one without the other can be
justified only as an expository convenience. Any proposal for creating
competitive power markets in which entrepreneurs are free to build
generators and sell power into competitive markets must include a plan
for the construction and operation of transmission lines that make a
competitive market possible. Furthermore, it must be recognized that
operation of a transmission system means operation of the generators
attached to the transmission lines.6 Still further, when
large users connect directly to the grid, rather than to the lines of a
distribution company, the control area operator will, for both
reliability and efficiency reasons, want direct communications with
such users.
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\6\ Existing technology does permit some direct controls that
retard power flows over particular lines. Phase shifters, in
particular, can be installed and operated to limit flows over
particular lines. Technology on the horizon promises other control
devices. However, a free flowing transmission system has desirable
stability characteristics, so those who place a high value on
reliability demand a heavy burden of proof from those who want to
install such control devices. If the industry finds it difficult to
build additional transmission lines, or to upgrade the old ones, it is
likely the industry will expand the role of direct control devices.
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II. On the Need for Re-allocating Regulatory Responsibilities
State regulators and many other have often characterized the FPA
(and the Public Utility Holding Company Act) as legislation designed to
``fill the Attleboro gap.'' The ``Attleboro gap'' was the ``gap'' in
the system of utility regulation opened by the Supreme Court in 1927 in
Public Utility Commission v. Attleboro Steam & Electric Co. (273 U.S.
83 (1927)) when the court determined that states could not regulate the
terms of an interstate transaction of a utility. Since states could not
regulate such transactions and the Federal government did not regulate
them, users could not be protected from the monopoly power of a utility
engaged in such transactions.
While this description of the FPA oversimplified reality, the
statement does convey some basic insights into the FPA. First, the
intent of the legislation was, in part at least, to preserve the powers
of the states to regulate utilities effectively by imposing federal
regulation on those matters which the States could not regulate
effectively. For example, the last phrase in Section 201(a) states, ``.
. . such Federal regulation, however, to extend only to those matters
which are not subject to regulation by the States.'' Second, the FPA
explicitly limits the jurisdiction of the Federal regulator. In Section
201(b) the Federal regulator is explicitly denied jurisdiction over
``facilities used for the generation of electric energy,'' ``facilities
used in local distribution'' and over ``the transmission of electric
energy in intrastate commerce, or over the facilities for the
transmission of electric energy consumed wholly by the transmitter.''
7
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\7\ The FPA allows the FERC to order a utility to connect its
transmission facilities with those of ``one or more persons engaged in
the transmission or sale of electric energy, to sell energy to or
exchange energy with such persons.'' This authority is limited by
requiring the Federal regulator to find that the utility subject to the
order would not be ``unduly burdened'' and that the order would not
``impair [the utility's] ability to render adequate service to its
customers.'' (FPA Section 202(b))
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Of utmost importance to the current debate, the FPA does not permit
the Federal regulator to order a utility to build transmission
facilities (except for the very limited purpose of establishing an
interconnection with another utilities (See footnote 7.) nor does it
permit the Federal regulator to grant a utility eminent domain rights
to build transmission facilities if the utility wants to build. These
powers were left with states in the original FPA and the remain with
the states.
This assignment of regulatory responsibilities is almost certain to
cause serious inefficiencies and probably reduced reliability. The FERC
has plenary powers to price unbundled transmission services of
investor-owned utilities, and in the competitive market all
transmission services of such utilities will be unbundled. Furthermore,
the modern grid often requires that a line be built in one state when
the initial benefits accrue largely to persons in another state.
Obviously, the state asked to approve such a transmission line will
resist. There will always be an alternative to building a particular
line. The consequences of inadequate transmission capacity is
increasing transmission congestion and less efficient forms of
competition.
Gaining the benefits of an efficient transmission system in an
environment of hostility to transmission lines, especially new ones,
calls for constructive compromise in two senses: In one sense, Some
responsible agency must make a defensible decision that there exist a
need for the investment and then make a defensible decision on exactly
where the line should be built, recognizing both the need and the
environmental and social costs. This dimension of the problem is not
new. Regulators have been making these difficult decision for decades.
Shifting this decision process from the states to the federal regulator
would merely change the locus of decision power. It is the essential
second compromise that is new. Many states will vigorously oppose a
shift of these decisions to the federal regulator. Some compromise
between national and local interests needs to be developed.
An attractive proposal surfaced in the 1980s. It was created by
Commissioner Ashley Brown of the Ohio Public Utility Commission who was
Chairman of the Committee on Electricity of the National Association of
Regulatory Commissioners.8 His proposal recognized that the
need determination might be made by the federal regulator and the
actual routing of the line could be made by the state regulators. The
federal regulator would be required to specify the beginning and ending
point and perhaps some points in between. The task of the state
regulators would be to determine the precise route of the facility.
---------------------------------------------------------------------------
\8\ See Ashley Brown, ``The Balkans Revisited: a Modest Proposal
for Transmission Reform,'' The Electricity Journal, vol. 2. 1989.
---------------------------------------------------------------------------
III. On the Need for Federal Action to Ensure That Regional Markets
Integrate to a Rational and Efficient North American Market.
Substantial progress has been make in creating efficient markets in
the former tight power pools of New England and PJM and in two large
states, New York and California. Much work, however, remains to make
those market as efficient as they ought to be. There remain two large
states with a potential for creating reasonably efficient markets,
Texas and possibly Florida. All other states are too small to create an
efficient market within their state's boundaries. In my judgement, the
California and PJM markets, the largest now in existence, are too
small. The 150 control areas in North America need to be consolidated
into less than 20 regional markets.
Creating 20 or fewer markets, each of which can claim efficiency,
is a necessary condition but not a sufficient condition to have an
efficient electric industry. Those regional markets cannot be permitted
to balkanize themselves by creating market rules and transmission
pricing practices that deter efficient integration of the regional
market into North American markets.
The nation is not likely to get a truly efficient electricity
market unless the Congress or the federal regulator has the power to
insist on the development of large control area and on market rules
that integrate the regional markets. Although the FERC is now testing
the capability of FPA Section 202(a) to define the boundaries of
regional markets, and the agency may find more power in that Section
than I currently see, the ambiguity of that section persuades me under
the best of circumstances it will take a several court rulings to
establish its power. Congressional action could make it clear to all
that the FERC is charged with and has the power to insist on large
regional control areas and on market rules that harmonize markets in
the different regions.
IV. Concluding Thoughts
It is apparent to all careful observers that progress towards
efficient electricity markets has slowed substantially in the last year
or so. Restructuring continues, but the process reflects the bargaining
power of the different parties in different parts of the nation more
than it reflects an attempt to create efficient markets.
We need to remind ourselves that the objective is to replace the
regulation of natural monopolies with efficient markets for generating
services, not to replace the regulation of natural monopolies with the
regulation or rivalrous oligopolies.
Congressional action is needed to re-energize the process and to
make clear the objectives.
Mr. Stearns [presiding]. I thank the gentleman.
The Honorable Mike Naeve is next.
STATEMENT OF CLIFFORD M. NAEVE
Mr. Naeve. Thank you, Mr. Chairman.
First, in response to the story told by Mr. Hall, I wish
you would pass on to him that I began my testimony by telling
the committee that I am from Texas.
I very much appreciate the opportunity to testify today. I
would like to begin by discussing what is happening outside
this committee room. The electric power industry is changing at
a phenomenal rate. Even as we meet today, the pace of change is
increasing. This change is being driven by competitive forces.
These competitive forces have been unleashed by Congress
through the enactment of PURPA, the Energy Policy Act; through
FERC through Order 888 and a great many other individual cases;
by responsible State regulators and State legislators; and even
by neighboring jurisdictions, such as the Canadian provinces of
Ontario and Alberta, who are restructuring their markets.
These competitive forces have reached irresistible
proportions. They are driving the industry to reshape itself to
fit the new competitive model. By way of example, many
vertically integrated utilities are today beginning to
disaggregate their businesses into the wires business,
generating business, marketing business and so forth. Just
within the last 2 years, over 50,000 megawatts of generating
capacity have been auctioned off by previously vertically
integrated utilities.
The competitive forces are encouraging the entry of new
market participants into this industry. These new market
participants bring both investment capital, but more
importantly, they bring intellectual capital to this industry.
The forces have caused a great many mergers and consolidations
among a variety of participants in the industry. These mergers
are driven by the need and the competitive pressures to lower
costs and find economies of scale.
And finally, these competitive forces are forcing the
rationalization of the transmission system, through the
formation of regional transmission organizations: ISOs and,
hopefully, Transcos.
Having set this process in motion, it cannot be reversed--
nor should it. But we must see the process through to the end,
and we must do so in a way that enables us to capture the
benefits of competition while protecting against decreases in
the reliability of service during the transition.
In my prepared testimony, I have recommended a number of
legislative changes that Congress could make to facilitate this
transition. I have divided my recommendations into two broad
categories. The first category includes those steps that
Congress can take to simply get the Federal Government out of
the way of the process. It is ironic that it was Federal law
and Federal regulators that kicked off the transition to a
competitive market. And yet, other aspects of Federal law now
preclude us from realizing the full benefits of competition.
Therefore, I believe the most important thing that this
committee can do is to clean up the Federal Government's own
back yard. This includes repealing PUHCA, reforming PURPA,
bringing TVA and PMAs under FERC's transmission jurisdiction
and directing them to participate in RTOs, regional
transmission organizations.
My second category of recommended legislative changes
consists of additional steps Congress can take to facilitate
competition. These include giving FERC transmission siting and
eminent domain authority and giving FERC transmission
jurisdiction over public utilities. I recognize that these
proposals and many of the proposals recommended by my
colleagues on the committee are not without political
controversy. If, in your judgment, it will take time to build a
consensus to take these difficult steps, then you have no
choice but to build that consensus and to take the time to do
it.
But I do have one suggestion, and that is do what you can
now, while building the consensus needed on the remaining
issues. The greater the competitive pressures that you unleash
today, the easier it will be to finish the job tomorrow. In
each of these steps I have described, any one of them will
further increase the pressure on the industry, further change
the industry, and as the industry changes, it becomes easier to
enact the other steps.
For the past 5 years, the search for a comprehensive bill
has been a formula for inaction. Since there is much you can do
right now, I would respectfully suggest that you just do it.
Thank you; and Mr. Hall, I did begin my statement by saying
I am from Texas.
[The prepared statement of Clifford M. Naeve follows:]
Prepared Statement of Clifford M. (Mike) Naeve
introduction
I am pleased to testify today before this Subcommittee on electric
utility restructuring issues. I served as a Commissioner of the Federal
Energy Regulatory Commission (FERC) from 1985 to 1988, and I have
represented a wide variety of clients in the electric utility industry
in the 11 years since then.1 While at FERC I was actively
involved in numerous FERC initiatives to make natural gas markets more
competitive. I believe that consumers have reaped considerable benefits
from the resulting competitive commodity market that has developed in
the natural gas industry. I likewise believe that the expansion of
competitive forces in electric markets will bring about tangible
consumer benefits. I hope that my testimony will be helpful to this
Subcommittee as it considers legislation to accelerate the pace of
electric restructuring.
---------------------------------------------------------------------------
\1\ Attached as Exhibit A to this testimony is a statement of my
qualifications.
---------------------------------------------------------------------------
I and my law firm represent a number of electric utilities,
independent power producers, power marketers and other participants in
the electric power industry. These clients have diverse views on the
need for comprehensive federal legislation. My testimony today
represents my own views, and cannot be ascribed to any other person or
entity. My practice is not focused on legislative activity. Instead, my
practice focuses almost exclusively on restructuring transactions in
the electric industry, and on the regulatory and antitrust issues
associated with those transactions. In the interest of full disclosure,
attached as Exhibit B to this testimony is a list of the significant
publicly disclosed transactions in which my firm currently is engaged.
traditional federal and state roles
Since the passage of the Federal Power Act (FPA) and Public Utility
Holding Company Act (PUHCA) in 1935, the division of regulatory
authority in the electric utility industry between the federal and
state levels has been relatively static. Certain responsibilities have
been assigned exclusively to one level or the other, while other
responsibilities have been shared between both levels. The primary
allocation of responsibility has been as follows:
Exclusively State
retail sales
distribution of electricity
generation of electricity
resource planning
transmission siting
Exclusively Federal
wholesale sales (FERC)
interstate transmission of electricity (FERC)
limited authority over interconnections (FERC)
corporate structure (SEC)
nuclear operations and safety (NRC)
Shared State and Federal
mergers (States, FERC, SEC, NRC, DOJ/FTC)
disposition of assets (States, FERC, DOJ/FTC)
issuance of securities
SEC regulates issuance of securities by registered holding
companies and subsidiaries
States regulate issuance of securities by all other
utilities
FERC regulates issuance of securities if states do not
The two major statutes affecting the industry that have been
enacted since 1935--the Public Utility Regulatory Policies Act (PURPA)
and the Energy Policy Act (EPAct)--have removed certain generation
facilities from certain types of regulation, but have not disturbed the
above allocation of jurisdiction.
traditional industry structure
Investor-owned utilities range in size from a few very large,
integrated holding companies spanning multiple states to a great many
small companies operating in part of a single state. All investor-owned
utilities are under FERC's jurisdiction for transmission and wholesale
transactions. Until the last few years, investor-owned electric
utilities for the most part were vertically integrated, franchised
monopolies. Because the utilities had exclusive retail franchises,
there was no competition for retail sales to speak of. And, because
utilities controlled access to their transmission facilities, there was
very little competition for wholesale sales either.
Co-existing with investor-owned utilities are numerous publicly-
owned entities that were formed to provide utility services to various
classes of customers. These include TVA, BPA and other federal Power
Marketing Agencies (PMAs) that own and operate significant generation
and transmission facilities. Also included are municipal and state-
owned utilities, as well as rural and other cooperatives created
pursuant to the Rural Electrification Act. Many of these entities also
own considerable transmission assets. Each type of publicly-owned
entity is subject to a different regulatory scheme. No publicly-owned
entity, however, is directly regulated by FERC.2
---------------------------------------------------------------------------
\2\ These entities are subject, however, to FERC's authority to
order transmission under Sections 211 and 212 of the Federal Power Act.
---------------------------------------------------------------------------
As demand for electricity grew and utility systems expanded, these
public and investor-owned utilities began to interconnect with one
another, primarily for reliability purposes, i.e. to provide service in
the event of emergencies and to purchase and sell power needed to serve
load. These interconnected systems, in turn, formed the backbone of
large regional transmission grids. Until recently, however, control of
the regional grids has been balkanized among the diverse owners of
transmission facilities that collectively made up the grids. Not only
has the control been divided among the numerous entities but a number
of regulatory schemes have been applied to the various owners of the
grid, depending upon whether the owner is an investor-owned utility, a
PMA or a publicly-owned utility.
the electric industry is in transition
In the last few years, legislators and regulators have enacted
programs that have given the electric industry strong incentives to
rethink and restructure the way that they do business. The first step
was the passage of PURPA in 1978, but most of the steps have been taken
in this decade. These steps include:
The passage of the EPAct in 1992. This Act (1) created the
Exempt Wholesale Generator (EWG) exemption from PUHCA; (2)
granted FERC more explicit authority to order access to
transmission facilities under Sections 211 and 212 of the
Federal Power Act; and (3) created the Foreign Utility (FUCO)
exemption from PUHCA.
The issuance by FERC of Order No. 888, which requires
utilities to provide nondiscriminatory open access to their
transmission facilities. FERC has taken a number of other
procompetitive actions on a case-by-case basis, frequently
relying upon its conditioning authority in mergers.
The efforts by the SEC to provide more flexibility under
PUHCA, which have been limited by the strict confines of this
antiquated statute.
The enactment of restructuring legislation and regulations by
a number of states.
In response to these important policy changes, the traditional
vertically integrated structure of the industry has started to come
undone. Regulators and industry participants are beginning to view the
electric utility industry as consisting of at least five distinct lines
of business: (1) generation; (2) wholesale sales; (3) retail sales; (4)
transmission; and (5) distribution. Some of these business activities,
such as transmission and distribution, must continue to be regulated in
some fashion as natural monopolies, at least until technological
advances permit greater competition. Under the right circumstances,
however, other business lines, such as generation and wholesale and
retail sales, can be carried out on a competitive basis. Indeed, the
generation business already is very competitive, and the wholesale
sales sector is not far behind. The retail sales market also is
becoming increasingly competitive as the states implement
restructuring.
In response to the programs implemented by state and federal
legislators and regulators to facilitate and encourage competition, the
utility industry has changed rapidly. Four significant changes in the
traditional industry structure have emerged:
Disaggregation
First, as generation and sales markets have been opened up to
competition, a number of utilities have begun the process of
disaggregation and separation of their regulated wires businesses from
the other businesses that can operate in competitive markets. This
process, which is a natural consequence of the opening up of generation
and sales to competition, also has been spurred by state and federal
regulations to prevent owners of wires businesses from using their
natural monopolies in those regulated businesses to benefit themselves
unfairly in the competitive markets.
Entry of Non-Utility Participants
Second, hundreds of new entities, such as independent power
producers and power marketers, have entered the competitive generation
and sales markets. While some of these entities are merely affiliates
of utilities formed as part of the disaggregation process, many are
completely new players with no previous connections to the electric
utility industry.
Consolidation
Third, in the last few years there have been a flurry of mergers of
electric utilities, independent power producers, power marketers and
other market participants. These mergers are a natural response to the
onset of competition. In the old regulated cost of service regime,
utilities had less incentive to be efficient, given that all prudently
incurred costs could be recovered through rates charged to customers
who had no alternative suppliers. As markets have become more
competitive, utilities and other market participants have vastly
increased incentives to explore all alternatives for reducing costs and
improving services. Mergers frequently create the opportunity for scale
economies that make suppliers more competitive in the new cut throat
world. Even small savings, when applied to high sales volumes, can
result in significant benefits both to shareholders and customers.
Mergers also are a natural response to the disaggregation of
vertically integrated utilities. Absent a merger, a smaller utility
that divests its generating assets could become so small as to lose its
ability to finance its remaining transmission and/or distribution
business on reasonable terms and conditions. A merger between utilities
that are divesting generation provides the combined entities with
greater financial strength, as well as with scale economies.
Regional Control Over Transmission
Finally, there has been a change in the operations and control of
the regional transmission grids. Transmission systems are most
efficiently and reliably operated on a regional basis. Several
utilities have placed the operations of their transmission systems
under the control of an independent system operator (ISO). Other
utilities have begun the process of creating incentive-driven
independent transmission companies (Transcos). FERC has actively
encouraged the formation of both ISOs and Transcos, as well as other
forms of regional transmission organizations (RTOs).
The statistics tell the story of this dramatic evolution of the
electric utility industry:
Since 1997, 23 utilities have divested generation facilities
representing more than 50,000 MW of generation capacity, and
several other utilities have announced their intent to follow
suit.
Through the end of 1998, FERC has issued 560 power marketers'
authorizations.
Since 1997, 6 ISOs have been formed, covering the transmission
systems of California, Texas, the eastern United States from
Maryland north through New England, and a large part of the
Midwest. Several other ISOs and Transcos are in various stages
of development.
Since 1995, almost 20 states have enacted statutes or
promulgated regulatory schemes requiring restructuring. 24 more
states currently are considering electric restructuring in
regulatory proceedings or proposed legislation.
Since 1995, there have been 23 electric utility mergers
consummated, and over a dozen more have been announced and are
in the process of obtaining the necessary regulatory approvals.
There have been numerous other combinations involving
independent power producers, power marketers and other industry
participants.
Since 1995, total wholesale sales by power marketers have
increased from 27 million MWh to 2.3 billion MWh in 1998.
implications of restructuring
It may be too late to ask the question, but it is worth considering
whether all the change that we are experiencing is a good thing. In my
view, while the process has been somewhat uneven, on the whole we are
on the right track. My experience has been that when competition is
substituted for regulation, efficiency improves, innovation increases,
and supply and demand become more closely balanced--all of which work
to the benefit of both shareholders and consumers. Although vertically
integrated companies do provide consumers with scope and scale
economies, I believe the benefits of competition will more than offset
the efficiencies that may be lost through disaggregation.
I do not mean to say that there is no future role for regulation.
When the circumstances do not permit effective competition to exist,
regulation is necessary to ensure that market participants do not abuse
their market power. Even in markets that are competitive, some type of
oversight is necessary to ensure that markets continue to operate
competitively. For example, to the extent that an entity that owns a
regulated wires business also participates in a competitive generation
or sales market, regulation of some type is necessary to ensure that
the entity does not use its market power in the wires business to give
it an unfair advantage in the competitive market.
The current transition toward disaggregation allows the benefits of
competition while retaining regulatory oversight where needed. By
disaggregating the industry into separate sectors, those sectors that
are competitive can operate with a minimum of regulation, while those
sectors that are not competitive can continue to be regulated.
Another issue that frequently is raised in connection with electric
utility restructuring is the potential impact on reliability of
service. There are two principal elements to reliability. The first is
the reliable and secure operation of regional transmission grids, and
the creation and implementation of rules to promote such reliable and
secure operation. The second is the ability to construct new facilities
to ensure that there is enough generation and transmission capacity
available to satisfy customer demand.
With respect to the first element, restructuring can only help. The
trend towards centralizing control of the regional transmission grids
under a single regional operator instead of under several owners with
differing interests and incentives will allow better decisions
regarding the operation and maintenance of the grid. This should result
in more reliable operations.
With respect to the construction of new facilities, it is too early
to tell for sure how the competitive model will work in comparison with
the command and control type regulation that has been used in the past.
I do know, however, that under any model investments will not be made
unless the investors believe that it will be profitable to do so. I
also know that, under the old system, there have been relatively few
investments in facilities by regulated electric utilities in recent
years. This is illustrated by the supply shortage that occurred in the
Midwest last year, which was a result of the failure of the old system
to provide the proper incentives for investment in generation
facilities. I believe that a competitive market is more likely to
provide the correct incentives for investment. Again, this is
illustrated by the example of the Midwest, where several new
unregulated merchant plants have been announced in the wake of last
year's supply shortage.
additional legislative steps
The changes that have occurred over the last few years are
phenomenal. I would not have expected at the beginning of the decade to
see such rapid progress. The question that Congress now must face is
whether the existing incentives that have driven the changes are
adequate to complete the job, or are additional policy changes
necessary to see the transition through to the end. Congress also must
consider whether the pace of change has been or will be fast enough, or
whether additional steps are necessary to accelerate the process.
In my view, federal regulators are doing as about as good a job as
they can under the current statutory framework, as are many state
regulators. There are a number of additional legislative steps that
only Congress can take, however, to facilitate the process and maximize
the benefits of restructuring. These steps fit into two broad
categories: (1) elimination of existing federal impediments to
restructuring (i.e. getting the federal government out of the way); and
(2) creation of additional regulatory tools to facilitate
restructuring. I discuss below possible legislative action that could
be taken in each of these categories.
Elimination of Barriers
1. Repeal of PUHCA. In my view, the single greatest existing
barrier to industry competition and restructuring is PUHCA. This Act
was passed at a time when large holding companies were engaging in
suspect securities transactions and taking advantage of the limited
reach of state regulatory commissions over interstate transactions.
PUHCA was decidedly successful in breaking up those holding companies
and putting an end to their abuses. It is not needed today, however. As
the SEC Staff found in 1995, securities laws have advanced considerably
since 1935, and the Federal Power Act, which was passed in conjunction
with PUHCA, has filled the regulatory gap. Furthermore, state public
utility regulatory laws and agencies have improved significantly since
1935.
In proposing the repeal of PUHCA, I am arguing against my own self
interest. A major part of my practice in the past several years has
consisted of advising clients how to structure transactions in ways
that will pass muster under PUHCA. All too often, however, I have seen
PUHCA act as a barrier to efficient restructuring transactions, or else
cause transactions to be structured in a suboptimal way.
The manner in which PUHCA favors or disfavors transactions is
almost completely random. PUHCA makes it easier for a domestic utility
to acquire foreign utility assets than U.S. utility assets. It
significantly restricts successful non-utility businesses from
acquiring utility assets or offering utility services. It also
restricts utilities from investing in the businesses they know best--
utility businesses--while, for the majority of companies, imposing no
restrictions on investments in unrelated businesses. PUHCA also
prevents EWGs from competing directly for retail electric sales.
PUHCA frequently is mistakenly described as protecting against
anticompetitive combinations. That description is mistaken. Very large
utility transactions can be completed without any PUHCA review
whatsoever, while small transactions may simply be impossible to
complete under the Act's arcane standards. Further, in its
administration of PUHCA, the SEC almost universally defers to other
states and federal regulators to evaluate competitive issues.
PUHCA also frequently is mischaracterized as a consumer protection
statute. Again, this description misses the mark. While PUHCA requires
the SEC to regulate certain transactions between utilities and their
affiliates, the effect of SEC regulation frequently is to preempt FERC
or the states--which have greater resources and expertise--from
regulating the same transactions that effect rates charged to
consumers. The relatively few consumer protection tools found in PUHCA
are duplicative of, and inferior to, the consumer protection powers of
FERC and the state regulators.
Finally, repeal of PUHCA is not solely of interest to public
utilities. While PUHCA repeal certainly would benefit traditional
utilities, it also would benefit independent power producers and other
entities that are interested in participating in the electric utility
market. PUHCA has the effect of keeping out of the market all potential
participants who cannot qualify for an exemption or who are unwilling
to become registered holding companies--which in and of itself places
severe restrictions on market participation. Repeal of PUHCA would
permit efficient transactions to occur, would allow transactions to be
structured in the most rational way and, most importantly, would allow
a host of new competitors to own utility assets and compete to provide
utility services.
2. Amendment of PURPA. When PURPA was passed in 1978, it played a
very important role in opening the generation market to competition,
which was the first step in the transition away from the vertically
integrated utility structure. Now that we are much further down the
road, however, there are two aspects of PURPA that need to be
reconsidered.
First, PURPA obligates utilities to purchase electricity from
qualifying facilities (QFs). This mandatory purchase obligation was
crucial in 1978 to force utilities to purchase power from independent
power producers. It no longer is needed in today's market for new
generation, where most utilities have all but abandoned the field, and
state regulators are skeptical of generation that is added without
going through competitive procurement. The mandatory purchase
obligation is the very antithesis of competition and is fundamentally
inconsistent with the creation of competitive markets. This obligation
should be eliminated on a prospective basis.3
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\3\ Elimination of the obligation to purchase should be prospective
only. Large investments of capital already have been made based on
existing contracts, and those contracts should not be abrogated.
---------------------------------------------------------------------------
Second, PURPA limits the ability of electric utilities to invest in
QFs. This too was an important feature of the Act in 1978, when the
goal was to encourage independent ownership of generation. Again,
conditions have changed enough today so as to nullify the concern
underlying the ownership restriction. The generation market now is
highly competitive, and there is no reason to restrict utility
ownership of any type of generation facility. Indeed, in 1992 Congress
saw no reason to restrict utility ownership of EWGs.
The PURPA ownership restrictions have had another unintended
consequence. PURPA not only limits utility investments in QFs, but it
also limits QF owners' investments in utility assets. Once a QF owner
purchases utility assets, it becomes either a utility or a utility
holding company, both of which are restricted by the FERC regulations
implementing PURPA from owning more than 50% of a QF. Thus, for
example, Cal Energy has been forced to divest a portion of its
ownership interests in its QFs as a consequence of its purchase of
MidAmerican--an electric utility holding company.
As a consequence, PURPA should be amended to revise the ownership
restrictions. Utilities who have retail franchise monopolies probably
still should be limited in their ability to own QFs from which they
purchase power, but otherwise utilities should be permitted to own QFs.
3. Amendment of Atomic Energy Act Foreign Ownership Prohibition.
The Atomic Energy Act (AEA) currently includes a prohibition against
foreign ownership of nuclear generation. This restriction has inhibited
a number of transactions that have involved foreign companies. Again,
the result has been a less-efficient transition toward a restructured
industry.
As many U.S. utilities are exploring ways to divest their interests
in nuclear plants, there is much to be gained by permitting
knowledgeable foreign companies to compete to acquire nuclear
facilities. I am not suggesting that there are not important national
security concerns associated with the foreign ownership of nuclear
generation, nor am I recommending that these concerns not play a role
in determining whether and how foreign ownership should be permitted.
However, the prohibition contained in the current law makes no sense to
me. There surely must some way to permit foreign ownership without
jeopardizing national security. There are sophisticated nuclear power
technologies employed by utilities in England, France, Japan and other
Western allies. Our domestic nuclear industry could benefit from the
knowledge and experience of these utility companies without endangering
national security.
4. Include TVA and PMAs in the Transition. Another stumbling block
in the path to competition has been TVA, BPA and other PMAs. These
entities, particularly BPA and TVA, dominate their regions. Yet they
have lagged behind the private sector in restructuring, and have
represented a significant impediment to the creation of regional
transmission entities in their regions. It is not necessarily the case
that these entities actively oppose a national transition to
competition. Rather, their underlying statutory schemes are not easily
adaptable to the new competitive model.
Congress has two choices for dealing with this problem. First,
these entities could be privatized. This automatically would cause them
to fit under the same regulatory scheme as the rest of the industry and
would permit them to follow the same transition to competition.
I recognize that this may be a difficult step to take. At the very
least, however, legislative changes should be implemented to ensure
that TVA, BPA and the other PMAs join the path toward competition
rather than act as impediments to the transition process.
First, the provision of transmission by these entities should be
brought under FERC's jurisdiction. It is important for competition that
all interstate transmission fall under a common regulatory scheme.
While the federal utilities have filed transmission tariffs that are
similar to the open access tariff required by FERC, the fact that FERC
does not have direct jurisdiction over them makes a big difference in
how they are required to behave.
Second, legislation should be written that makes clear that TVA,
BPA and the other PMAs are required to join ISOs or other regional
transmission organizations within a reasonable amount of time. As I
previously discussed, lack of federal utility participation has made it
difficult for regional transmission organizations to get started in
regions where they are located.
Tools to Facilitate Restructuring
The most important step for the federal government to take is to
eliminate existing barriers to restructuring and get out of the way.
The proposals that I have identified above are intended to achieve this
objective. In addition, there are some affirmative steps that Congress
could take to facilitate efficient restructuring. Included are the
following:
1. Federal Authority Over Transmission Construction and Siting.
There is one significant mismatch in the allocation of authority
between the federal government and the states. On the one hand, FERC
has jurisdiction to regulate the rates and terms and conditions for
transmission service. On the other hand, the states have the authority
to approve the siting and construction of transmission facilities. The
lack of FERC jurisdiction over transmission siting represents a major
distinction between the two principal statutes that FERC
administrates--the Federal Power Act and the Natural Gas Act. FERC is
responsible for authorizing interstate natural gas pipeline
construction under the Natural Gas Act.
In the past, transmission was built largely to upgrade the
reliability of service by vertically-integrated electric utilities to
their retail franchise monopoly customers. In that circumstance it made
some sense for state commissions, who were primarily responsible for
regulating the provision of service to the retail franchise monopoly
customers, to have jurisdiction over transmission additions. Today,
however, the primary need for transmission is to permit or enhance
interstate wholesale transactions and competition, and to enhance the
reliability of the interstate grid. FERC more properly is the overseer
of transmission additions for this purpose.
Second, it increasingly is the case that the benefits of
transmission construction may fall primarily outside of the state where
most of the construction occurs. For example, if a utility located in
one state constructs a transmission line in another state to connect it
with a source of supply, it may be that the majority of the benefits go
to one state while the majority of the construction occurs in another
state. Under these circumstances it may be difficult to obtain the
necessary permits from the adjoining state, which has no incentive to
approve the construction.
The effect of the different allocation of siting responsibility
between the Natural Gas Act and the Federal Power Act can be seen in
the amount of construction activity in the two industries. Both
industries have been transformed in the last decade into competitive
industries where the construction of new facilities is vital to
increasing competition. Yet, while there has been substantial
construction of new interstate pipeline facilities in that time, there
has been comparatively little construction of transmission facilities.
It no longer is appropriate for decisions over transmission
construction and siting to be made on a state level. Instead, that
authority should be moved to FERC, consistent with its authority under
the Natural Gas Act. Similarly, FERC should be given the power of
eminent domain for the construction of transmission facilities,
consistent with the grant of eminent domain under the Natural Gas Act.
This way decisions regarding new transmission facilities can be made
with a view towards achieving the best results on a regional or
national basis rather than on a parochial basis, and those decisions
can be carried out effectively to enhance competition.
2. Encouragement of RTOs. As I testified previously, control over
the operation of transmission facilities is increasingly being shifted
to regional entities, whether ISOs, Transcos or other forms of RTOs. In
my view, this is a good trend. Competition in sales markets is enhanced
when entities are able to transmit electricity on a regional basis at
non-pancaked rates. More importantly, reliability is enhanced when
transmission operators control flows over the entire regional grid
rather than over fragmented segments, and when investment decisions are
based on regional needs.
Furthermore, for the same reason that I favor competition, I am
inclined to believe that incentive driven Transcos should be preferable
to ISOs. A Transco will have more incentives to operate and expand its
facilities and consider all resource options in an efficient manner
than an ISO that is not primarily motivated by operating the
transmission system in a way that maximizes profits.
I do recognize, however, that many believe that it is easier to
form an ISO governing the transmission systems of several entities than
it is to form Transcos, although there are Transco proposals currently
under development. Given the benefits of regional transmission
operation, I believe that ISOs at the very least can be useful
transition vehicles for eliminating the balkanization of control over
regional transmission grids.
Given the rapidly evolving nature of regional transmission
organizations, I am hesitant at this point to recommend that the
Congress mandate any particular path. Our learning on the issue may not
be advanced enough for any particular solution to be locked in today.
Instead, we need to leave in the flexibility for paths not yet apparent
to be pursued.
There are, however, several impediments to the formation of
regional transmission organizations that should be removed. I have
discussed some of these previously, but I will address them again with
particular emphasis on their relationship to the formation of regional
transmission entities.
PUHCA ownership restrictions. Among its numerous impediments
to competition is the impact of PUHCA on the formation of
regional transmission entities--particularly Transcos. Any
large regional Transco will cover a multistate area. Yet PUHCA,
which would apply to the ownership of a Transco, would place
restrictions on the private ownership of such an entity. The
solution is to repeal PUHCA.
Transmission constraints. In some regions there are
transmission constraints that place significant limits on the
amount of power that can flow through certain facilities. The
result may be fragmented transmission systems that cannot
easily be integrated into a regional system. States may be
reluctant to act to relieve such constraints solely to improve
the interstate grid, and likely will become more reluctant in
response to a request by a regional transmission operator where
the apparent benefits to that state may be even more remote.
The solution is to give FERC siting and eminent domain
authority for the construction of transmission facilities.
Nonjurisdictional transmission owners. Some regions are
dominated by transmission owners that are not subject to FERC's
jurisdiction, and who are either reluctant to participate in
regional entities or cannot so participate as a matter of law.
For example, it is difficult to form an ISO in a region where
there is a large federal utility, such as BPA in the Pacific
Northwest and TVA in the Southeast. Similarly, public power
systems are concerned that participation in an ISO might cause
the loss of their tax-exempt status. The solution is to bring
the federal utilities under FERC's jurisdiction and otherwise
require their participation in regional transmission entities,
as I previously have testified. FERC also should be given
jurisdiction over transmission services provided by the other
public power entities that currently are beyond FERC's reach. I
recognize that so extending FERC's reach probably requires
additional steps to eliminate barriers to participation by
these entities in RTOs, such as revisions in the tax code to
protect these entities existing financing.
congress should not enact a comprehensive bill if that would delay
action on important individual components
I feel compelled to make one final point, although I acknowledge
that it is politically naive. There are a number of important actions
that Congress can take to encourage competition that are completely
unrelated to each other. In my view, Congress should enact as many of
these as it can right away, even if that means that others have to be
put off until later. Even if only one component can be enacted at this
time, that component should be enacted. We now are in a crucial stage
of the transition, and should do everything we can to move it along. If
we wait until all parties can agree on all aspects of a comprehensive
bill, it very well may be that the bill will be passed too late to have
the intended effect.
Whether it is repeal of PUHCA, amendment of PURPA, or any of my
other proposals, Congress should act now on those issues that it can
agree on even as it struggles with other more difficult issues. Any
steps that it can take will benefit consumers and market participants,
and Congress should do everything that it can to effect those benefits.
Mr. Stearns. I thank the witnesses. Let me open up by just
making an observation from listening to your testimony. First
of all, it appears that all of you seem to agree that we need
Federal electric legislation. I think that is trying to look
where we all can agree, and also, all of you agree that the
existing statutory authority that we have in place is
inadequate to assure, I guess, perhaps, this deregulatory
process and also the continued reliability of the transmission
system. Do any of you disagree with that?
No; okay. With those two premises in place, it seems to me
in listening to the testimony, one of the areas of disagreement
is the date certain. The Honorable Linda Stuntz has indicated
that she thinks it is not mandatory, and the Honorable Moler
has indicated she thinks it is. I would like to take off, just
if you would, from that point of view and hear each of you, in
a very short amount of time, say strongly why you think a date
certain is very important and why it is not, and we will just
go across the panel, because I think that has been one of the
contentious issues among members, and so, to reiterate again,
if you might start off, Ms. Moler, to describe why date certain
is important.
Ms. Moler. I believe a date certain is important because
there are large sectors of the country where there is virtually
nothing happening. I would respect, ultimately, a decision that
any State regulatory commission made or any State legislature
made if it were to determine that it did not want to have
customer choice, but I believe that that determination should
be made on a record where citizens have an opportunity to
participate, and they would have to compile a record that would
compellingly decide why competition is bad.
Fundamentally, I believe that it would be very difficult to
compile such a record, but if they make it, that is fine with
me.
Mr. Stearns. And FERC would have the environment?
Ms. Moler. No, I would have a very simple certification to
the Commission that we have looked at this, and we have decided
that we do not want to do it, and then, any challenge to the
State's determination would be done under State law.
Mr. Stearns. Okay; Ms. Stuntz?
Ms. Stuntz. Thank you, Mr. Stearns.
I believe it is not a critical element of legislation,
first, because nearly half the country is already in a State
that has adopted choice, so we are already, depending on your
statistics, 45 or 50 percent of the country is there; that does
not include Texas or Ohio, which I know are looking hard at
this. So I believe that number will go up before the end of the
year.
Second, of the States where nothing or less is happening, I
believe many of those are low-cost States who legitimately view
this as not necessarily in their interest to do, and I think it
is hard for us to say from the Federal level that they are
wrong and they should be preempted.
And I guess third is I think if this market expands, and I
think we are seeing signs of this already, brings to consumers
the benefits that I expect that this is going to happen on its
own, so that--and you see signs of that in the paper if you
read about what is going on in Maryland or Virginia. They talk
about, well, Pennsylvania has done this, and we need to get
with this, because we might lose economic development
opportunities.
And, I guess, finally, as I said, I do believe it will be
the poison pill in your legislative effort.
Mr. Stearns. Okay.
Ms. Stuntz. And I think the perfect will be the enemy of
the good.
Mr. Stearns. Do you think if you had two States that did
not want to comply with a date certain that you could develop
reciprocity incentives between them? What you are indicating,
like in the State of Maryland, it is going to change because of
survival, because the economics----
Ms. Stuntz. Right.
Mr. Stearns. [continuing] is going to other States.
Okay; Charles Stalon?
Mr. Stalon. I would draw a distinction between the role of
very large players, large users, and creating efficient markets
and very small users, and I would not insist that the States
have a date certain for allowing smaller users to enter the
competitive market. I would let them have substantial freedom,
perhaps complete freedom, to make that decision.
But large users are quite different. It is very difficult,
almost impossible, to create an efficient competitive market
unless you have sensitivity to prices among the buyers. As long
as the buyers and the distribution companies who are required
to sell to the users at an average price, the only demand curve
they can bid into the market is a perfectly vertical one, which
creates the terrible problem of price spikes. So I would
mandate a date certain for large users, so we could get their
buying skills into this market as a constraint on price spikes
and as an intensifying pressure in a competitive market.
Mr. Stearns. Mike Naeve?
Mr. Naeve. Thank you.
First, let me state that I believe in retail choice. I
think it is good public policy. I have watched as Congress has
attempted to build a consensus on retail choice. The concern
that I have is that the longer it takes to build this
consensus, the more difficult it becomes to enact legislation.
While we are waiting to enact retail choice legislation, each
State or a great many States are adopting their own programs. I
believe those programs should be grandfathered.
But as you build those programs, the complexity of the
legislative process becomes more difficult, both because you
tend to lose support for the process but also because it
becomes very difficult to draft a bill that decides what is
grandfathered; what is not; what are the parameters; which
programs do you change or do you not change?
I would also say I have been involved in the State retail
choice programs in several States, and it is very complicated:
questions about demand credits; questions about what do you do
with load pockets; so forth. It is a more complicated issue
than I previously thought. So I would say retail choice is a
good thing, but my primary concern is waiting for a consensus
for retail choice has caused us to lose the opportunity to do a
great many other good things, and if we were to do those other
good things, I think the forces of competition inevitably would
cause retail choice to be a consensus in this country.
Mr. Stearns. I thank the witnesses, and now, questioning
from the ranking member, the gentleman from Texas, Mr. Hall.
Mr. Hall. I thank you, and I guess, Ms. Moler, you have
been a real leader on thinking through competition, and we are
very happy to have you here today, as we were happy to have you
in Texas when you were the----
Ms. Moler. Thank you, sir.
Mr. Hall. [continuing] speaker there for us.
If I understand your testimony, on the one hand, it seems
you seem to say on page 4 of your testimony that there are
problems with some State plans, but since munis are not
included, you also seem to call for a hard mandate requiring
States to adopt retail competition by 2001, and I do not know
which one of those to pursue, but I have read later where you
seem to soften your testimony by saying opt out is a good idea
and that you would grandfather existing retail competition
laws.
I do not really want to put you on too much of a spot, but
I guess my question is whether or not you favor a real hard
mandate or an opt out, and do you favor a clean grandfather for
the State action or something else, and if it is something
else, what would that be?
Ms. Moler. I would favor a mandate, but I do not think it
could fairly be called a hard mandate. I would grandfather
generically those States that have acted. I would not try and
figure out whether the fact that the California Legislature
included some water projects in its legislation somehow made
that an unworthy program. I would simply grandfather actions by
States that have enacted customer choice, and I would, as I
have said earlier, respect a determination made on the record
by an appropriate State regulatory authority, presumably the
PUC, that customer choice is detrimental to the citizens in
that State.
Mr. Hall. You would require that to be proved by the
States?
Ms. Moler. Pardon, sir?
Mr. Hall. Was that the part where you were talking about
competition and your proposal to have the States carry the
burden of establishing, on the record----
Ms. Moler. Yes, sir.
Mr. Hall. [continuing] that competition would be harmful.
I guess my problem with that is would that--and I ask you
as an attorney--would that lead to a final decision that would
make it appealable?
Ms. Moler. Yes, it would; they would certify that to the
FERC. I do not think it is necessary to have it appealable at
the Federal level. I would just leave the normal State
machinery in place for appealing State regulatory decisions.
Mr. Hall. There would have to be a final decision by
someone, somewhere, sometime, though, that would be appealable
by the court, and would that not lead to the courthouse? And
that is where something like that is going to wind up.
Ms. Moler. We are headed there in many respects in this
business. The restructuring statutes have been appealed even
without a mandate in a number of States. So that is not a new
problem.
I also think that establishing a mandate for customer
choice and then having the States take some sort of voluntary
action is consistent with the Constitutional questions that
have arisen under the Prinz v. United States, the Brady Bill
Supreme Court decision.
Mr. Hall. Linda, do you have any comments on that? I think
you--go ahead. I am not trying to tell you what to say, but I
would like to hear it.
Ms. Stuntz. Well, thank you, Mr. Hall. I actually agree
with Mr. Naeve. I support retail choice, but for the reasons I
said and I think he articulated very well, I do not believe any
mandate, frankly----
Mr. Stearns. Could you move your microphone just a little
closer?
Ms. Stuntz. I do not believe any mandate is essential--a
date certain--is an essential component of necessary Federal
legislation.
Mr. Hall. What are the complicating factors in a date
certain?
Ms. Stuntz. I do not think it is necessary, although I,
too, think retail choice is the right policy, and I think it is
going to happen; I think it is happening, and it will happen
more quickly if we get rid of some of the Federal barriers.
Mr. Hall. Mr. Stalon?
Mr. Stalon. I guess I agree with what Linda has said. I
think it will happen, and I am very much in favor of it
happening. I would like to see all consumers with a choice. But
I am most impressed with a need to get the large ones in to
make the markets work well. Once the markets are working and
working fairly well at the wholesale level, it is much easier
to persuade legislators to have choice at the retail level for
smaller customers.
Mr. Hall. My time is up, Mike. I will get back to you in a
little bit.
Mr. Stearns. I am pleased to recognize the chairman of the
committee, Mr. Bliley.
Chairman Bliley. Thank you, Mr. Chairman.
For all of you, everyone seems to believe that retail
competition is inevitable. Why? Is it because competition is
better for consumers than regulation or what? We will go from
the left to the right.
Mr. Naeve. I think that is the basic answer. I think
competition--there are many aspects of this industry, perhaps,
that cannot be made competitive, but there are aspects that can
be: the marketing of power; the ownership of generation; the
construction of generation. These are parts of the industry
that can be made competitive. And a part of those components
becoming competitive is giving customers the choice to decide
who they are going to buy from. So I think it is a part of the
competitive landscape if we believe that competition is better
than regulation; in those parts of the industry where we can
introduce competition, then, this is a part of the landscape.
Chairman Bliley. Does anybody disagree with that?
Well, good.
There are many States that would prefer Congress to do
nothing with respect to retail choice and kind of let the
market evolve. Can retail markets evolve without some Federal
or State action? Are there barriers to national retail
competition?
Ms. Moler. I think all four of us have testified to the
fact that there are significant impediments in existing law to
retail competition, yes.
Chairman Bliley. So we will have to have Federal
legislation at some point in time.
Ms. Moler. The State legislature in the Commonwealth of
Virginia, to my knowledge, cannot amend the Federal Power Act,
PUHCA, et cetera.
Chairman Bliley. No; Dominion Resources would like it very
much if they could. But unfortunately, they cannot.
Does wholesale competition provide consumers with the
lowest prices, the best service and the greatest degree of
innovation, or do we need to move to retail competition?
Mr. Stalon. I would insist we must move to retail
competition and fairly quickly for all of the large users in
order to make wholesale competition work and work efficiently.
If buyers cannot respond when prices change, and they are
continually required to buy at regulated rates which are
averages over some period of time, the buyer for them, the
utility, is required to submit a perfectly inelastic demand
curve.
Look at the recent studies in California where the demand
curve is perfectly vertical as submitted by the distribution
utilities. It is very difficult to have an efficient market
with a perfectly vertical demand curve.
Chairman Bliley. Well, but there is a corresponding
argument. If you have the big users and are able to bargain and
to get better prices, what about the other side of that coin
which says, well, if that happens, then, the little guys are
going to have their rates increased to make up the slack?
Mr. Stalon. No, I do not think that is true at all. In a
competitive market, if you take a cut on one side, you cannot
arbitrarily charge someone else unless you have monopoly power.
If we take away the monopoly power of the generators, I am not
concerned about that.
Chairman Bliley. Does anybody take exception to what he
said?
Mr. Naeve. No, I do not take exception. I will point out
that in a tightly regulated market, there are a lot of built-in
cross subsidies. As markets become competitive, many of those
cross subsidies may evaporate, so you can see cost shifts from
one customer class to another. It is not necessarily a result
of competition; it is a result of getting rid of cross
subsidies.
I will also add that I do not think there is disagreement
among us as to whether retail competition is the right policy.
Nor do I think there is disagreement among us as to whether or
not you need legislative changes. I think the only disagreement
is which legislative changes are needed to get us there, and
how can we get there the quickest? And some of us think there
should be a Federal mandate; some of us think there should not
be; and I must admit I am a little in between. I think we
should do what we can first; unleash competition. I think the
mere force of that competition will drive us toward retail
competition, and if, in the long run, we do not get there,
then, I think we should consider a Federal mandate, but I think
once you unleash competition, it forces the industry to change.
In fact, that is already happening now. There are
tremendous changes in this industry because of the changes that
were enacted by this Congress a decade ago, a little bit less
than a decade ago. And I think if we could do some of these
other things now, we are going to see a continued movement, a
momentum toward greater and greater competition, and that will
drive the industry and the States to retail competition very
quickly. It is already happening. If it does not, we need to
look at mandates.
Chairman Bliley. Thank you; I see my time has expired, Mr.
Chairman.
Mr. Stearns. I thank the gentleman.
The Chair recognizes the gentleman from New Jersey, Mr.
Pallone.
Mr. Pallone. Thank you, Mr. Chairman.
I wanted to ask Ms. Moler and also Ms. Stuntz a couple of
questions. I know that in the next panel, we have two witnesses
who are going to say that they oppose a Federal mandate to
deregulate their States' retail electricity industry, and we
have, I guess, 23 States who have stated their concern that
retail competition will result in higher costs for their
consumers. You have kind of gotten into this a little bit, but
I wanted to, if you would, tell us why you think, if you do,
you know, why should we force these States to deregulate if
they do not think it is a good idea, and are there compelling
price or transmission or delivery problems in these States that
warrant intervention by the Federal Government?
I know, Ms. Moler, you kind of touched on that a little
bit, but I wanted you, if you could, both of you, to respond a
little more fully.
Ms. Moler. Many of the States have initiated some kind of
regulatory proceeding. In many cases, those regulatory
proceedings are just sort of meandering and have not come to a
conclusion that retail competition is contrary to the interests
of their consumers. In many instances, it is not likely that
those regulatory proceedings will ever get to a final
conclusion, so that those who are interested in customer choice
really do not have anywhere to go. They are stymied.
So I believe that if States do not want to have
competition, I would respect that as a determination by the
State regulatory authorities, but I would make them put that on
the record. I believe, furthermore, that having to go through
such a proceeding and make those kinds of determinations will
force very significant changes in the industry in those States
that are now just stymied. There is no other major market in
this country where consumers cannot choose from whom they want
to buy, whether it is bananas or automobiles, and there is no
compelling technological or engineering reason in this day and
age why consumers need to be protected and prohibited from
exercising their choice of from whom they buy electricity.
Mr. Pallone. So the lack of clarity about what the States
are doing in itself is sort of a negative in your opinion?
Ms. Moler. Yes, sir.
Mr. Pallone. Okay; would you like to respond, Ms. Stuntz?
Ms. Stuntz. Thank you, Mr. Pallone.
I do see it a little differently. I believe most States are
looking at this, and I think they are looking at this
seriously, and I guess I do not, at this point, see the need to
preempt a State decision that it may not be in the interests of
that State at this time to move forward. Some States--I know
New Jersey just enacted legislation this year; Ohio; I know one
of the issues out there, and it is not unique, has been a
question of taxes. Many of--much of Ohio's school funding came
from taxes that were levied on utility sales, and they
suddenly, if you are going to put this into a competitive
environment, you can no longer tax utility property at a hugely
different rate, which meant you had to make up for those
revenues, and it has been a big problem that is going to take
some time to work through. I hope they will work it through; I
hope they will pass a law this year, but I think it is just an
illustration of the difficulty, I think, for the Federal
Government to say now is the time; here is the date; have it
done by then.
And every State plan is different in some respects, and I
think, to echo what Mr. Naeve said, I really think if we get
some of the barriers out of the way; for example, clarify that
the States can do this so that they cannot be taken to court on
an issue of Federal Power Act preemption if they choose to move
ahead. I think that would be a very helpful thing for us to do
to let the States move forward who want to move forward.
Mr. Pallone. Well, let me--in your testimony, Ms. Stuntz,
you stated that--you said this committee need not tackle now
those issues as to which consensus is remote, the issues are
not yet ripe, or the issues are only loosely related to
restructuring. What kind of issues would you put into that
category? And, you know, why do they fall into those
categories?
Ms. Stuntz. Well, I would certainly say date certain is one
of those in which I do not think a consensus can be forged
soon, and there are others. I personally do not think Congress
knows enough yet or anyone knows enough yet to say Congress
should authorize FERC to order people into transmission
organizations of a particular type. I am not sure that there is
consensus on a renewal portfolio standard. I think there are
efforts underway that may result in that. I think there is some
good work that potentially needs to be done: things like fuel
diversity for our generation mix is an important policy issue,
but I am not sure we have consensus yet on exactly what the
mechanism should look like; how it should be funded. The States
are doing it different ways, and those are some examples of
issues that I think may be too hard to deal with right now.
Mr. Pallone. Okay; thank you.
Thank you, Mr. Chairman.
Mr. Stearns. I thank the gentleman.
The Chair is pleased to recognize the gentleman from
Georgia, Mr. Norwood.
Mr. Norwood. Thank you very much, Mr. Chairman.
I would like to again associate my remarks at the beginning
with Ms. Stuntz and Ms. Moler. My views today are my own.
But the difference is for both of you that I admit freely
that I am influenced greatly in my views by my clients, all
650,000 of them in the Tenth District of Georgia.
Now, I am going to ask you some questions that I am going
to ask as kindly and gently as I can, and I would like the
record to reflect that I am smiling, not frowning. I do not
intend to impugn your motives or your character, and I am going
to ask these same questions to every panel that comes before us
in this great debate.
Now, I would like for each of you for the record, really so
that the committee can better understand your testimony, state
for me whether you are receiving compensation by a client or a
coalition of clients to lobby Congress on electricity
restructuring. Either end.
Ms. Moler. Mr. Norwood, I am a registered lobbyist for the
Enron Corporation. I serve as counsel to the----
Mr. Norwood. For which corporation?
Ms. Moler. Enron.
Mr. Norwood. Enron.
Ms. Moler. Enron Corporation, a Texas corporation.
Mr. Norwood. Okay.
Ms. Moler. I----
Mr. Norwood. I am glad the chairman is not here. Go ahead.
Ms. Moler. [continuing] serve as counsel to a group known
as Americans for Affordable Electricity. However, and I also do
work for an alliance of companies who are interested in forming
a regional transmission organization. And it is early in my
practice, and I hope to have more clients one of these days.
Mr. Norwood. And I hope you do, too, Betsy, and I hope you
do not take this question personally.
Ms. Moler. I do not take it personally.
Mr. Norwood. Thank you.
Ms. Moler. I understand the public interest behind the
client.
Those clients have not paid me for the time, nor will I ask
them to do so, for the time I have spent during this testimony.
Mr. Norwood. I understand that.
Linda?
Ms. Moler. And indeed they probably disagree with some of
the things I have said.
Ms. Stuntz. Mr. Norwood, I am counsel to a group called the
PURPA Reform Group, which has advocated the prospective repeal,
cost recovery of the Public Utility Regulatory Policies Act. I
am a registered lobbyist for Southern California Edison
Company, and I am on the board of American Electric Power
Company.
Mr. Stalon. I am not being paid by anyone to participate in
this hearing. I am a member of the Board of Directors of ISO
New England; I am a member of the California Market Monitoring
Committee, and I have many other interests in the utility
industry and clients in the past from the utility industry.
Given my age, I have been withdrawing from the consulting
business, and so, currently, I only have one, and that one is
not in the United States.
Mr. Norwood. The implication in the question is not about
this hearing. I know none of you are being paid to come here;
you are doing it because you are good Americans. But what I am
after is if you are actually lobbying during this debate over
the next 4 or 5 months.
Yes, sir?
Mr. Naeve. I am not being paid to lobby Congress on these
issues. I represent a great many companies that have positions
on these issues, because I am involved in a lot of transactions
in this industry. They are largely mergers, asset divestitures,
that sort of stuff, and I am sure my clients in those
transactions have views on all of these issues. I also am quite
confident that, given the breadth of that client base, that
they have very diverse views.
Mr. Norwood. I appreciate your answer, and I presume you do
not represent or lobby any coalition.
Mr. Naeve. I do not.
Mr. Norwood. Okay.
Mr. Naeve. And I attached to my testimony a list of the
transactions I am currently in and the parties in those
transactions, but I have not consulted with them on their views
and----
Mr. Norwood. Now, here is the second question, which is the
zinger. Now, this is not personal, but I need an answer. If you
are lobbying a coalition of clients, will you identify for this
committee the major sources of funding for your coalition? Who,
in fact, are the biggest financial participants? And last, if
you lobby for a coalition, does your coalition favor a Federal
solution or a continued State experimentation?
Ms. Moler. Mr. Norwood, as I said previously, I am
registered as a lobbyist for the Enron Corporation. They are
the largest supporter of the Americans For Affordable
Electricity. That group, however, does have many, many active
corporations and public interest groups that are in favor of a
Federal solution to this issue.
Mr. Norwood. Enron is in favor of a Federal solution.
Ms. Moler. Yes, sir.
Mr. Norwood. Well, I guess all Americans need to be a
member of the Affordable Electricity. We all want to be part of
that.
Ms. Moler. We welcome your membership.
Mr. Norwood. I mean, everybody wants cheaper electricity,
do we not?
Linda, could you explain for us?
Ms. Stuntz. Yes, sir, and this is filed in our lobbying
registration form. The PURPA Reform Group does advocate a
Federal solution, because only the Congress can reform PURPA.
It is about 12 members at the moment, including a number of
investor-owned utilities and Edison Electric Institute, ranging
from Florida Power Corporation, Central Maine, GPU, Duke,
SEMPRA Energy. I am going to get in trouble if I forget one of
them now but----
Mr. Norwood. No, you will not with me. The idea is that you
went to work for the right people, because your views happen to
work very well with theirs on having a Federal solution. That
is the way you ought to do it.
Ms. Stuntz. I have always been in favor of reducing the
U.S. Code; thank you.
Mr. Norwood. Mr. Stalon, do you have any comment at this
point?
Mr. Stalon. No, I do not.
Mr. Norwood. Mr. Chairman, I am going to ask this question
every time, and here is the problem: in an industry that moves
around $250 billion a year, which is a lot of money, it attends
to attract a lot of lobbyists when Congress starts to interfere
in their business, understandably so. And I would suggest
perhaps our committee ought to, if they can find anybody, an
expert in this area to testify before us at each hearing that
is not a lobbyist.
Mr. Stearns. I thank the gentleman from Georgia.
A couple of things I might comment. First of all, all the
background and their lobbying interests are already disclosed
in their resumes, which are part of the packages that each of
us have. The second thing is, for example, some of these folks,
including the Honorable Moler, Elizabeth Moler, actually wrote
the Clinton Administration's bill. If she was working for EEI
or a co-op or a municipal, no matter where, we would have her,
because experts do not necessarily live on a mountaintop. You
are going to have to go to industry and say, by golly, what do
you know and give us your opinion.
And so, my point would be is that we are going to find with
these individuals that their expertise was developed somewhere
and somehow. But I appreciate what the gentleman is referring
to, but I would point out that the staff has assured me that
all of these people were selected on the basis of their
knowledge, and any questions you have, you certainly can look
in their resumes.
Mr. Norwood. Mr. Chairman, I was not impugning anybody,
their character. I knew they were based on their knowledge. But
surely, in this large country, there are enough people with
knowledge that we can have come before us that are not
lobbyists, and I would ask for unanimous consent that my
question and the answers be placed in the written record just
prior to the testimony.
Mr. Stearns. Agreed.
Mr. Norwood. I yield back the----
Ms. Moler. Mr. Norwood, I would also point out that I am a
retiree, so I am here on behalf of Federal retirees.
Mr. Stearns. There you go.
All right; the Chair is pleased to recognize the gentleman
from Ohio, Mr. Sawyer.
Mr. Sawyer. Thank you, Mr. Chairman. I have really enjoyed
the testimony this morning, and I have particularly been
gratified by the focus that every one of the witnesses has
brought to the largely unresolved and, in some cases,
unaddressed questions of how we deal with the infrastructure of
transmission in this country.
Let me just ask you a basic question. Is it your belief
that all infrastructure, whether currently owned by an IOU or a
public power entity or a co-op be treated in essentially the
same way in terms of FERC's authority to regulate?
Ms. Moler. I would treat all transmission----
Mr. Sawyer. I am speaking specifically of transmission.
Ms. Moler. Transmission infrastructure the same and put it
under the same Federal Power Act amended, obviously, set of
rules and also the same reliability rules, which is vitally
important.
Mr. Sawyer. Ms. Stuntz?
Ms. Stuntz. I would agree with that.
Mr. Sawyer. Everybody?
Mr. Naeve. I endorse that.
Mr. Stalon. I endorse that as well.
Mr. Sawyer. There are some who have suggested that FERC
ought to have the authority to order generating entities to
join a particular regional transmission organization. Do you
subscribe to that? And if you do, how will FERC know which is
best for any individual generating portfolio on a case-by-case
basis?
Ms. Moler. My testimony focuses on this issue. I do not
think of it in terms of generating entities; I think of it in
terms of transmission entities, and I would give the Commission
authority to order those who are not currently a member--
integrated transmission companies, because that is where the
vertical integration raises the market power questions, but I
would have them be able to order those who are transmission
entities are part of integrated companies----
Mr. Sawyer. Right.
Ms. Moler. [continuing] to join a regional transmission
organization of their choice.
Mr. Sawyer. Of their choice?
Ms. Moler. Yes, so only those who are not currently
members----
Mr. Sawyer. But that is the crux of my question.
Ms. Moler. Right.
Mr. Sawyer. You are not suggesting that FERC would assign
them to a particular----
Ms. Moler. I would not have FERC draw the lines on the map,
no, sir.
Ms. Stuntz. I think I agree with that, but I have a little
concern about, getting back to why we care about RTOs in the
first place, which is market power. And I guess I would rather
FERC say these are the rules in order to protect against abuse
of market power and leave it to the utilities, the transmission
owners and the generation owners to decide how they are going
to address that. And I understand that RTOs can include both
transcos and ISOs, which is important, because I do not think
we know yet which is the right way to do this, but I am
thinking also about some small utilities that may own
transmission, and is there some line that should be drawn at
some point? Is there a market power issue raised by a small,
integrated utility that requires a FERC remedy? And I just do
not know the answers to that.
Mr. Stalon. I would disagree on this point with Ms. Moler.
I think the FERC must have the authority to draw lines, to
define transmission regions and markets, the edges of markets.
One thing seems to be very clear: we now have approximately 150
control areas on the North American continent; we probably need
less than 20. There needs to be a merger, and somebody has to
draw those lines, and I do not know of any other agency that
can draw the lines other than the FERC. And so, I would draw
the lines; define the regional organizations and insist that
every significant player in those regional organizations be
integrated by communications and perhaps also operating rules
and perhaps for other reasons with the control area operator,
whether it be a transco; whether it be an ISO or a transco that
is an ISO.
However we choose to do this, someone has to draw the
lines, and I do not know of another agency other than the FERC
that could do so.
Mr. Sawyer. Mr. Naeve?
Mr. Naeve. Well, I agree with the other panelists that we
do need regional transmission organizations. We do not need so
many as we have now. We need a very small number. I think it is
more than for just market power reasons. I think it very much
helps in reducing market power, but I also think it is for
reliability reasons. I think we get more rational transmission
investments; we can better plan the grid, and we can better
operate the grid if done so on a regional basis.
With respect to legislation, I think we need to encourage,
and the FERC is encouraging, the formation of regional grids. I
think they have a lot of power, frankly, they are not using.
For example, in merger cases, there are pending merger cases
today where we could force the creation of very large regional
organizations if they choose to do that.
So I think they have a great deal of power. I also, as I
mentioned in my prepared remarks, think one of the most
important things we can do to facilitate the creation of RTOs
is to get the Federal agencies in it. In the Pacific Northwest,
Bonneville is a giant. They dominate the system. There have
been attempts to create RTOs out there, and the difficulty of
integrating Bonneville into that RTO has been a huge problem.
Likewise, TVA sits right in the middle of the southeastern
United States with tremendous transmission assets. It is a
pathway between markets, and if with Federal legislation
requiring TVA to participate in RTOs, that would greatly
facilitate the formation of large regional RTOs.
Mr. Sawyer. Mr. Chairman, I appreciate your flexibility on
those answers.
Is it possible that we might have a second round with this
panel?
Mr. Stearns. If members would like it, we will have a
second round.
Mr. Sawyer. Thank you.
Mr. Stearns. I thank the gentleman. I just wanted to
clarify that what Mr. Norwood indicated in his request, I want
to interpret his request that his oral statement will appear in
the record in accordance with the point or at the point in the
record where he said it.
At this point, we will recognize a gentleman from
Tennessee, Mr. Bryant.
Mr. Bryant. Thank you, Mr. Chairman.
I would like to ask the panel about a concern I have that
would it be possible that low-cost providers may raise their
rates in a competitive environment? And also, I guess, do you
believe in a competitive world, electricity suppliers will have
that ability, will truly have the ability to sell to some
customers at prices higher than the market? Anybody want to
jump in?
Mr. Naeve. In a competitive world, there will be a market
price, and that market price may fluctuate from hour to hour,
day to day, season to season. And there will be times when low
cost providers who today are regulated at a price that is very
low will be able to sell their power at prices higher than they
receive today. At other hours, they will sell their electricity
at prices lower than what they receive today. On average, I
believe prices will be lower than they are today, because
competition is a better regulator than regulation.
And there is also, I think, a misunderstanding that if we
have competition, what we will have is an averaging of pricing
throughout regions or an averaging of pricing throughout the
United States. If that is all we do, it is not worth doing. I
think what we will have is a lowering of prices, because
competition will drive prices down.
Mr. Bryant. Let me ask you another question. You spoke
about--you felt that Federal regulation ought to require TVA to
participate in the RTOs. What impact will that have on TVA and
its consumers?
Mr. Stalon. I draw a distinction between the retail
activities and the wholesale activities. Integrating the
transmission system of TVA and Bonneville into the North
American network and subjecting it to FERC regulation would
permit more efficient trades, but nothing changes at the
distribution level unless you approve it. The Bonneville
structure would still benefit the Bonneville area to the extent
that it does today. We are not, to my knowledge, discussing the
changing of the distribution sector of the industry. It will be
subject to the same regulation that it is today.
Mr. Bryant. Mr. Naeve, do you have any additional comment?
Mr. Naeve. I would agree with that. Today, there are
prohibitions against selling power to certain TVA distribution
customers. You can integrate TVA into an RTO and not upset
those prohibitions. Now, I would say down the road, perhaps you
should do away with those prohibitions as well. That may cause
TVA to incur stranded costs, just like we might impose stranded
costs on any other utility, but that is the price of
competition, and we should find ways to deal with that.
And I do think it is good policy to permit recovery of
stranded costs. In this case, TVA, the stranded costs may
belong to the Government.
Mr. Bryant. Let me ask, again, whoever wants to answer
this. We seem to all agree that something is going to happen
either at the Federal level or the State level and that retail
competition is inevitable. This being the case, would one of
you like to describe some of the things that companies are
doing to prepare for this competition and also describe,
perhaps, some of the products or services that you believe
might be available in a competitive marketplace that are not
available today?
Ms. Moler. I think that companies that are facing
competition, and I do serve on the Board of Directors of the
Unicom Corporation, though I am not retained by them to lobby
in any way, shape or form, have looked at their assets. They
are selling assets at the present time that are not performing
as well as they would like. They are working very hard to take
the assets, such as Unicom's nuclear fleet, and have them
perform much more efficiently and have made significant
progress there. They are also investigating a wide variety of
non-regulated business opportunities, and just one of the
things that needs to happen with the repeal of the Public
Utility Holding Company Act, for example, is to free up
corporate structures so that they can invest in new lines of
business and have the kind of creative opportunities that are
now precluded from entering into if they are PUHCA-registered
utilities.
There are just any number of efficiency opportunities and
new kinds of businesses that they are anxious to get into.
Ms. Stuntz. Yes; I would just add that as Mr. Naeve
mentioned, there are some more than 50,000 megawatts of
formerly utility-owned generation that is being divested.
Utilities are saying people who invest in my company are
looking for a stable rate of return; a regulated rate of
return. The generation business is not going to provide that
anymore, right, because it is competitive, and I do not think I
want to be in that business, so I am going to get rid of those
assets; I am going to focus on my wires business. I mean, that
has been one, I think, emerging strategy.
Others are looking at diversification. They are looking
into energy services, and I think consumers are going to get
tremendous benefits from people now looking to offer them
bundled packages of, you know, we are not going to be electric
or gas; we are going to be lighting or heating or cooling and
put it together in a way, or maybe it is going to be onsite, a
lot of people, you know, whether it is fuel cells or
distributed generation, more control over your energy future.
You may not have time to monitor or run home because it is
a peak price at 12 in the day, and you might want to throttle
down your refrigerator or your air conditioning, but people
will do that for you, and it is already happening, certainly at
the commercial level, where you can see chains like McDonald's
and department stores now coming together in one building and
one provider for their units all across the country.
It is just beginning to unfold, but it is very exciting,
and I think it is going to continue to accelerate.
Mr. Stearns. I thank the gentleman.
The Chair is pleased to recognize the gentleman from
Oklahoma, Mr. Largent.
Mr. Largent. Thank you, Mr. Chairman.
I would just say that I guess I have a little different
view than my friend from Georgia about our witnesses today. I,
frankly, admire people who have enough knowledge that they can
market it and make a living as well.
Ms. Moler, I wanted to ask you a question about what I
referred to as kind of a rogue study that was conducted by the
USDA, kind of released prematurely, that reflected that some
States would not benefit from competition. Do you have any
comments about that?
Ms. Moler. Like you, I was quite curious about the USDA
study. I got a copy of it from a reporter. They are a wonderful
source of information and misinformation as well.
I have personally read the USDA study that purports to show
that there will be significant increases in costs from retail
competition in a number of States. While I was in my prior life
at the Department of Energy, we did what was then the most
comprehensive analysis of what would happen in a competition
scenario. It was released as the supporting analysis for the
Comprehensive Electricity Competition Act. It was a region-by-
region study of the benefit of competition, and it showed that
in every region of the country, all classes of consumers would
benefit from competition.
I believe that there is considerable controversy within the
administration over the USDA study, and I am very much looking
forward to the really expert analysts at the Department of
Energy, and there are some terrific people there, who are
committed to doing unbiased analyses, coming to grips with the
assumptions in the USDA study.
It seems to imply that you are going to deregulate
distribution, for example. I know of no one who is seriously
talking about that. So I do not worry about what happens from
deregulating distribution, and I do not think that is a valid
assumption.
Mr. Largent. Ms. Stuntz, let me ask you a question. Can you
just tell us, for the record, who the largest generator of
electricity in this country is, what single entity is the
largest single generator of electricity?
Ms. Stuntz. You know, I should know that. I believe it is
the Southern Company but----
Mr. Largent. Actually, I think it is the Tennessee Valley
Authority.
Ms. Stuntz. Probably.
Mr. Largent. It is the largest generator of electricity.
Ms. Stuntz. I believe you.
Mr. Largent. So, in light of that, if you do not have a
date certain, how do you deal with TVA and Bonneville in
particular and States that they serve?
Ms. Stuntz. I see them somewhat different questions, Mr.
Largent. I think you do have to deal with TVA and Bonneville.
You have to deal with their transmission systems; you have to
deal with wholesale competition, getting them firmly engaged in
that, which they are not yet, and ultimately, I think you will
have to deal with retail competition, and I think that is going
to be hard to do. I am sure you are aware that TVA has a debt
in the neighborhood of $27 or $28 billion. That is the reality
you have to deal with.
The BPA is facing a whole lot of issues. I think they are
close to deciding that they are going to separate generation
from transmission, which I think would be a good thing. I think
it would make it easier for their transmission to be put into
an RTO or to become part of the national grid. I do not believe
TVA is close yet, and I think it is very important for the very
reason you say: their size, their location, that they cannot be
left outside.
But I am not sure that we are close enough yet to be able
to work through those issues, to say that needs to be done
right now, because I think it will further delay legislation
and prevent some good things that could be done in the near
term from being done.
Mr. Largent. Ms. Moler, I wanted to ask you about--in your
testimony, you talk about market oriented approach to renewable
power. Would you say that the administration's proposal that
was submitted last year is a market-oriented proposal to
renewable power?
Ms. Moler. Yes, I believe it is a market-oriented.
Mr. Largent. It is not a mandate?
Ms. Moler. It is both, and I believe it is possible to have
both.
Mr. Largent. A market-oriented mandate?
Ms. Moler. Yes, sir.
Mr. Largent. Okay; could you explain that? That is unique.
Ms. Moler. It is market-oriented in the sense that it would
require any entity that sells power to have, eventually, 5.5
percent of its portfolio from renewables. However, and that is
the mandate part. The market part is that if that entity does
not own those particular generating sources, it could buy
credits, renewable credits, on the market just as we do now
with Clean Air Act SO2 credits.
So, it has a trading scheme in it. In that sense, it does
not say that you, ABC Utility, have to have 5 percent or 4
percent or 3 percent of your power from renewable. You could
trade for your credit.
Mr. Largent. Okay; Mr. Chairman, if I could just have one
additional minute----
Mr. Stearns. Without objection.
Mr. Largent. [continuing] The question I wanted to ask you,
it seems to me that I recall that there was some aspect of the
proposal from the administration that actually took some of the
savings from moving to a retail market and spent that--I mean,
that savings came to the Federal Government in some capacity.
Do you know what I am talking about?
Ms. Moler. The administration believes that the Federal
Government would be a huge beneficiary from retail
competition----
Mr. Largent. As a consumer; I understand that.
Ms. Moler. [continuing] as a consumer, but there was not
any transfer payment of the sort you are describing.
Mr. Largent. And one last question, was the renewable
portfolio, was that sunset in----
Ms. Moler. It had a date certain 5.5 percent by the year
2010. It also, if the price of the credits reached a certain
level, it would have said okay, that is enough. So it had a
cap.
I would also, if I may, mention the administration is
developing a proposal on both Bonneville and TVA. We had an
advisory committee that looked at considerable length at the
TVA while it was in the administration. They came up with a
proposal for restructuring TVA. I believe, though I have not
talked to them, the administration is refining that proposal,
and it will include provisions, instead of the placeholders,
with respect to Bonneville, that were in last year's
legislation. There will hopefully be a more refined proposal
that should give you a good starting point for integrating
Bonneville and TVA.
Mr. Largent. Mr. Chairman, thank you, and if we have a
second round, I have some other questions. But I would like to
say thank you to all of our panelists and particularly Ms.
Moler, because I think she has really added a lot of impetus in
keeping us moving forward by, you know, putting together the
administration's proposal.
Ms. Moler. Thank you.
Mr. Stearns. The Chair intends to let every member present
ask the first round. Then, we are going to give the panel a
personal convenience break.
And then, we are going to do a second round at Mr. Sawyer's
request. So, we have got Mr. Pickering, Mr. Shimkus, Mr. Burr
and Mr. Whitfield. Then, we are going to take a little break.
And then, we will come back for one round of second questions.
Then, we will go to the second panel.
Mr. Pickering for 5 minutes.
Mr. Pickering. Thank you, Mr. Chairman.
I have two directions or two questions that I would like to
ask. One is a followup on the cost shifting concern.
Ms. Moler, you mentioned that you did a regional analysis
when you were at the DOE. It must be my sense, from what I have
heard on the Department of Agriculture study, that it was a
State-by-State analysis. Given the nature of my State, being
very rural, Mississippi, one of the States mentioned in the
USDA study, can you see, in some instances, if we go to
competition, could a rural State like Mississippi, which is now
a low-cost State, could you see some cost shifting and higher
costs and that type of situation.
If you could please respond.
Ms. Moler. The DOE's economists and other modelers did the
study. I cannot claim to have any personal expertise in this
area, although I have read it in detail. It was not a State-by-
State study, though I believe that they are doing the analysis
now and have a collaborative between the various analysts in
the Government to look State-by-State.
I believe that, as I stated earlier, that each State should
be able to choose its own destiny as far as whether to have
retail competition is concerned, and if they have real problems
to determine on the record that competition would be
detrimental to the citizens. As I have said, I would respect
that.
I do not believe, however, that it is likely that
competition would be bad for consumers. I believe that you can
deal fairly with the stranded costs and transmission issues and
come out ahead, with lower costs for all customer classes,
State-by-State.
Mr. Pickering. Does the rest of the panel share that view
that in a State like Mississippi, that it, too, would benefit
from competition?
Mr. Naeve. I would have to say in the short run, I have
done no analysis, so I do not know. In the long run, I tend to
believe that all customers will benefit. In the short run, I
cannot say.
Mr. Stalon. I guess I would add, again, that I have done no
detailed analysis here, but a reality of a competitive market
in the short run is that if you have a barrier between the two
markets, and you remove the barrier, prices will tend to
equalize, which means that they will go up in a low-price area,
and they will come down in a high price area. And it was the
nature of the old utility system that there were quite
remarkable differences in cost from area to area because of
accidents of history when things were built.
And I think it is inappropriate to look in the short term
here and ask yourself what are the incentives being provided to
minimize costs over a long term.
Mr. Pickering. Excuse me; you realize that Congress runs in
the short-term, every 2 years.
Mr. Stalon. But we are creating an industry that will, we
hope, in the future act with a longer-term time horizon than it
has in the past, and it has a long time horizon even in the
past.
I cannot make a flat assertion that there is not somebody
in the Nation who will lose because of this process, although I
think the effort has been made to make sure that everybody is a
winner.
Mr. Pickering. Let me just say that that is a concern that
we are going to have to address, each of us in our own
respective districts. I do believe in the benefits of
competition. We just want to see if there is a flexible way
that will minimize any harm while we maximize the benefit.
Having said that, let me ask a question to see if we can
reach a consensus among this panel, and let me ask the date-
certain question in a little bit different manner. Previously,
it was asked who supports a date certain; what kind of date
certain? Let me ask the pragmatic question that I think Mr.
Naeve hits at the heart of, and that is if we do not have a
date certain, whether it is, as Ms. Moler recommends, a State
opt-out; I believe Mr. Stalon was talking about a mandate, but
it would apply to the class or the size of the utility.
Let us remove all date-certain mandates, whether it is by
State or by size, and if we had a core element of a bill that
established an organization for reliability; that clarified the
Federal Power Act concerning retail wheeling; that removed
barriers such as PUHCA; prospectively removed PURPA; tried to
look at any other issues such as jurisdictional issues on
stranded costs, leaving that to the States; if we could not
reach consensus on a date-certain, would all four panelists
still support moving forward on that core framework that I just
outlined?
Ms. Stuntz. I certainly would.
Mr. Stalon. I would with one exception, and it is that by
not having adequate demand elasticity in the market, we may end
up with some uncomfortable price spikes after we move to
competitive markets.
Mr. Pickering. If we did not have a mandate.
Mr. Stalon. If we did not succeed in attracting or
compelling all of the large users into that market so that they
can provide demand elasticity, we could end up with
uncomfortable price spikes.
Mr. Naeve. I support making as much progress as soon as you
can make it, and if that is what we can do now, I would say let
us do that. And I think if you were to do that, it would
further increase competition in the market, and that
competition would drive down prices and would create additional
pressure to bring about retail competition in the States that
do not have it.
Mr. Pickering. Ms. Moler?
Ms. Moler. I have stated my position on the mandate. I also
think you need to address market power issues. That was not in
your list.
Mr. Pickering. If you add that to the list?
Ms. Moler. Then, I would not let the perfect be the enemy
of the good.
Mr. Pickering. Thank you, Mr. Chairman.
Mr. Stearns. The next on the list is Mr. Shimkus of
Illinois, but our senior member, Mr. Bilirakis, may be seeking
recognition.
Congressman Bilirakis, do you have another engagement? I am
sure Mr. Shimkus would yield to you.
Mr. Bilirakis. No.
Mr. Stearns. Mr. Shimkus for 5 minutes.
Mr. Shimkus. Thank you, Mr. Chairman.
And it was good to see Ms. Moler here again, because as
this is my second term, and I cut my teeth in the last Congress
and, of course, being with the administration, I think you help
educate and move this process along, and I just--a short note.
I think Mr. Largent's question on cost shifting is something
that I addressed a lot in the last Congress was I think the
administration would always see moving the energy dereg as a
way to mitigate the additional costs of global warming. Now,
there is nothing ever written down, but I have heard the
administration state that if we have increased costs under the
Kyoto Accords, the saving, the mitigation would be energy
dereg, and I just throw that out; I will not ask for a comment,
but we had discussed that numerous times.
There were two things I wanted to address briefly, and I
hope I can get both of these out. One deals with regional
pools, and one deals with merchant plants. So I am going to
talk on the regional pools issue, and Mr. Pickering is here,
and I think this addresses the price spikes and some of the
concerns. Of course, being from the Midwest, we had the price
spikes last year, and during that, the PJM pool, which we all
know is the Pennsylvania, New Jersey, Maryland pool, there is a
lot of criticism that that pool did not do its duty to help the
Midwest, and you all know the argument that they held--they
thought they were going to have the demand, so they held their
pool, and it turns out that they did not need it.
I am interested in your short, concise comments on the
export rules of the PJM or just, as we move to energy dereg,
what do we need to do at the Federal level to preclude this
from happening? Why do we not just go down the line, starting
with Ms. Moler?
Ms. Moler. I believe that you need much more transparent
markets. I believe that you need to have much more clearly
defined capacity rights in the transmission system. That is why
I think it is very important to have integrated companies be a
part of some sort of regional transmission organization so that
they take service under the regional transmission
organization's tariff for their bundled load as well as for
their wholesale load.
By doing that and getting much more flexible, fungible
transmission rights and congestion management, which you will
get as a result of those regional transmission organizations,
you will have a much more fluid flow of power between pools.
And you also have to deal with and have the same reliability
rules of the road apply across the board, so that individual
companies cannot cheat.
Mr. Shimkus. Does anyone else have anything to add to this
question?
Mr. Stalon. I would differ with one particular point. I do
not support the extensive development of capacity rights in the
transmission grid. That grid has traditionally been allocated
10 minutes at a time or 5 minutes at a time under continuous
control. It must continue to do that. Assigning firm
transmission rights that are real rights rather than financial
rights will greatly expand the need for transmission assets for
the system to function and function reliably.
What we need, I think, primarily are bigger control areas.
As big as PJM is, and it is the largest control area we have,
it is not big enough. We need to expand it with larger control
areas. The border problem becomes less troublesome and more
easy to handle.
Mr. Shimkus. Anyone else?
I would like to move to merchant plants if I may. Some
States require a certificate of need from merchant plants, and
they make the argument that the rate-payers are at risk, and
so, they do not approve plants where, in today's environment,
only the shareholders would be at risk. Do you have any
comments on what we should do at the Federal level with the
issue of merchant plants?
Mr. Naeve. Well, obviously, if you are going to have a
competitive market, you do not want to create barriers to
entry, and if some States adopt siting requirements that limit
entry, of course, in the long run, it is their consumers who
will pay. I must say, I have not personally come across this as
a major problem, because I think as we move to a competitive
market, most States recognize that there is a need to build new
generation; most welcome new generation. So I have not seen it
as a problem but----
Mr. Shimkus. There is a recent case in Florida where the
incumbent utilities tried to block construction of a Duke
merchant plant on this very basis, so there is obviously that
possibility out there.
Ms. Moler. I would congratulate the regulators in Florida
who have determined that Duke should be allowed to build that
plant. In order to have a competitive market, you need
competitors.
Mr. Shimkus. Great.
Mr. Barton. Mr. Burr of North Carolina for 5 minutes.
Mr. Burr. I would like to welcome all four of you here,
especially Ms. Moler and Ms. Stuntz, to have you guys back.
Let me just--Ms. Moler, you make it very clear in your
testimony that you do not feel that there is a Federalization
of stranded cost recovery needed; that that is a State issue.
Let me ask: if there was a date-certain in a piece of
legislation, do you believe that that changes whether there is
any Federalization of that stranded cost?
Ms. Moler. No, sir, I do not.
Mr. Burr. Ms. Stuntz, how about you? Clearly, you made some
comments on PURPA that you believe that our actions as it
related to PURPA make us obligated, then----
Ms. Stuntz. Right.
Mr. Burr. [continuing] to participate in the stranded
costs. Do you believe that a date-certain would move that
marker one way or the other?
Ms. Stuntz. I do believe that if the Federal Government is
going to mandate a date-certain, it takes upon itself more
responsibility for determining how retail stranded costs are
going to be dealt with, because they have taken the choice out
of the States' hands in terms of what the time should be, and,
I mean, I have heard this argued both ways. It just seems to me
that if the Federal Government is going to make that choice, it
does take upon itself more responsibility to do that.
Now, with respect to PURPA and possibly things like Federal
nuclear decommissioning funds, I think those are already
Federalized, and I really think it is the Federal Government's
obligation to make sure that in the competitive transition,
those responsibilities are carried forth.
Mr. Burr. You said in your testimony that repeal of Section
203 was too big a step. Can you just elaborate on that a little
bit?
Ms. Stuntz. Well, I said I agree with you personally,
because I believe that for consumers who truly enjoy the
benefits of a competitive market, we cannot continue to have a
utility industry that looks like it did when we had exclusive
retail franchises. I think I had a triangle in my testimony
that talks about the 200 and some investor-owned utilities,
more than 1,000 co-ops. I mean, this industry has got to
rationalize; there has to be consolidation; there have to be
mergers and acquisitions, and I believe under Betsy's
leadership and subsequent, the FERC has tried to find a way to
accommodate that necessary consolidation, but I, for one, think
the process is bogging down; that it is duplicative now of the
FTC and Justice reviews that should go forward. They have the
antitrust expertise, and I would basically leave it to them,
since they regulate this activity in the rest of our economy,
to let them do this in this area as well. But I suspect we need
to do more educating on that, and what I tried to set forth was
a potential half-way measure that would at least, perhaps,
allow this consolidation to occur when I----
Mr. Burr. Certainly, my hope to repeal Section 203 is not
indicative of the past leadership at FERC and the participation
of commissioners. And one quick followup to that for each of
you. FERC in the future: bigger, smaller, the same? Those are
the only three choices.
Ms. Moler?
Mr. Stalon. Going to be bigger.
Mr. Burr. Bigger?
Mr. Stalon. Yes.
Mr. Burr. I guess my question, let me say should it be
bigger, smaller or the same?
Mr. Stalon. It should be the same.
Mr. Burr. Ms. Moler?
Ms. Moler. If you repeal the Public Utility Holding Company
Act, there are some functions that the Commission will need to
perform. They are well-recognized in the PUHCA repeal
legislation. And the Commission's resources are taxed like lots
of agencies' resources. I give my successor Jim Hoecker,
Chairman Hoecker, credit for trying to reinvent many of their
processes, and the thing I worry about most there is burnout of
the best people.
Mr. Burr. Bigger, smaller or the same?
Ms. Moler. I think it depends on how successful the
reinvention effort is.
Mr. Burr. Okay.
Ms. Moler. Most likely--I said bigger with respect to
PUHCA, though.
Mr. Burr. Ms. Stuntz?
Ms. Stuntz. I believe it does not need to get bigger. I
think it is hard to make it smaller. But remembering that they
also regulate things like natural gas and hydroelectricity and
oil pipelines, where I think there are opportunities to make it
smaller--in electricity, I think we would be doing well to keep
it the same.
Mr. Burr. Mr. Naeve?
Mr. Naeve. It will change. Their mission will change, and I
must say I, at this stage, cannot tell you whether they will
need more people or fewer people to carry out that mission, but
it will be a much different agency than it is today. There will
be certain functions that they carry out today that they will
continue to carry out, but they will be relieved of the
obligation to regulate wholesale markets. They also will be
given the responsibility, though, to protect competition, to
make sure that the preconditions are there for competition.
Mr. Burr. I see my time has run out.
Mr. Barton. Yes; we have a pending vote, and we have got
two other members. I want to try to get both members' questions
in in the first round, so then, we can go vote; let them take a
break; and then come back.
So I am going to recognize Mr. Bilirakis for 5 minutes, but
Mr. Burr will be given an opportunity in the second round.
Mr. Bilirakis. Thank you, Mr. Chairman.
Ms. Stuntz, utilities, in many States, certainly in
Florida, have been obligated to sign numerous long-term
contracts under PURPA. Let us get into PURPA. Is there any
reason why Congress should not act to repeal this mandatory,
and I underline mandatory, purchase obligation--and at the same
time ensure the recovery of those Government-mandated costs?
And I mean eliminate it not necessarily tied into deregulation.
Why should it be tied in? I cannot really believe that we, in
our infinite wisdom, passed that type of a thing awhile back.
Ms. Stuntz. I do not remember that you were on the
subcommittee at the time.
Mr. Bilirakis. I may not have been. Hopefully, I was not at
the time.
So go ahead.
Ms. Stuntz. And I think there is really a consensus on
that. It is just a question of what it gets linked to.
Mr. Bilirakis. There is a consensus that we can eliminate
PURPA regardless of deregulation? Because last year's
legislation basically said as soon as a State opts in, then,
PURPA is eliminated. That need not be the case, is it?
Ms. Stuntz. Well, I do not think so, but as I said, I think
there are still some who would link it either expressly or say
it cannot go until we get other parts of this restructuring.
Mr. Bilirakis. Yes, blackmail kind of a thing, right?
Ms. Stuntz. Yes.
Mr. Bilirakis. Well, all right, but do you think that is
wrong? It can be done without it being tied in.
Ms. Stuntz. I certainly think so.
Mr. Bilirakis. Should it be done?
Ms. Stuntz. I think so.
Mr. Bilirakis. Ms. Moler? Now, you indicated earlier, and I
wrote it down; you said you would respect that if a State
decided to opt out. So apparently, you are flexible insofar as
the States coming on board by a date-certain.
Ms. Moler. Yes, I am.
Mr. Bilirakis. All right; that being the case, how would
you feel about PURPA being eliminated now rather than later?
Ms. Moler. I believe, as I said, that there are some core
elements of a package that can be moved. I do not believe that
PURPA will move on its own, nor should it.
Mr. Bilirakis. Nor should it?
Ms. Moler. No, sir.
Mr. Bilirakis. Why? Because you do not think that the
others will move without it?
Ms. Moler. PURPA is our statement at the present time of a
policy in favor of renewables, and if you repeal PURPA, I would
make whatever statement the Congress wishes to make with
respect to renewables policy----
Mr. Bilirakis. Okay.
Ms. Moler. [continuing] as a part of a comprehensive
restructuring bill.
Mr. Bilirakis. All right; so, you might tie it into
renewables but not necessarily to the date-certain.
Ms. Moler. No, as a part of a comprehensive restructuring
bill. Whatever you all can put together, but there is clearly a
need to do as much as you can possibly do.
Mr. Bilirakis. Frankly, I am very pleased with your
testimony, all four of you. You seem to be very flexible in
that regard. You feel that it needs to be done and should be
done but do as much as can be done and then tackle the tough
parts.
Yes, sir.
Mr. Naeve. I would first say, as I stated earlier, do what
you can when you can.
Mr. Bilirakis. Yes.
Mr. Naeve. If you can do this now, do it.
I would add one thing. I think you need to do more than
prospectively repeal the purchase obligation. I think there are
other things in PURPA you can do, and one of the more important
things is to change the ownership restrictions. Right now,
utilities and utility holding companies cannot own more than 50
percent of a QF. That may have made sense back when we were
trying to encourage independent power development. When
Congress passed the Energy Policy Act, though, we decided that
was not important anymore; we did not put that restriction on
the ownership of exempt wholesale generators. I think we should
go back and take it off of QFs.
Mr. Bilirakis. I want to be fair to Mr. Whitfield, sir, and
the chairman wants to really finish up this first round, so
maybe I will just cut you off, and we can continue in the
second round, because obviously, I want to hear what you have
to say and Mr. Stalon too.
I am going to yield back for that reason, Mr. Chairman.
Mr. Barton. Thank you, and the Chair would recognize Mr.
Whitfield for 5 minutes, and we have got about 7 minutes to
vote, which means we have about 10 minutes actually, because
they give us about 3.
Mr. Whitfield?
Mr. Whitfield. Mr. Bilirakis, I have always been a fan of
yours; thank you.
We all know that one of the major opponents to deregulation
are the rural co-ops, and I think, in a nutshell, they are just
concerned that if you go to deregulation, they are going to
have to discount their rates in order to keep their large
industrial customers; and then, the concern is that they are
going to raise the rates on the residential users, because they
are going to have to make up at least some revenue somewhere.
Now, what arguments would you all make to the rural co-ops
as to why they should support deregulation?
Mr. Stalon. I would make one quickly. The traditional
justification for REAs as distribution utilities is unchanged
by anything we are doing, and I just simply do not see why all
users of electricity, especially large users, should not pay
the competitive market price for electricity, and we can only
determine that price with a competitive market.
Ms. Moler. I also believe that they should clearly be given
authority to deal with transition costs just as I would have
any other utility deal with transition costs, and if they need
to do exit fees in order to get from here to there in terms of
a transition, that would be fine with me as well.
Ms. Stuntz. I think you have asked one of the hardest
questions of this whole issue, and it is one we have struggled
with. I guess where I come out is I think if a rural co-op
wants to continue to do what it has historically done as, you
know, not a big owner of generation, not a G&T, because they
are different, and provide that distribution function, I think
there is a real role for them to play, continuing to do that.
Choice could be provided through aggregation if they thought it
desirable, but if they want to stay in that role, and their
owners are happy with that, I would sort of come down and say
okay, that is fine.
I think the tougher issue are larger co-ops, particularly
the G&Ts, who, in many cases, are not in great financial shape;
who are very concerned about what this transition is going to
mean for them but for whom it seems to me it is essential that
they be part of the process; that they need to allow their
customers choice; their transmission needs to be put into the
system with everyone else's, and we deal with the debt issues
like we are dealing with stranded cost issues for other
utilities.
Mr. Barton. Would the gentleman yield on that?
Mr. Whitfield. Yes.
Mr. Barton. Just as an elaboration.
Would it not be possible for a co-op to at least
collectively and in this new era bargain for a better supplier?
Would that not----
Ms. Stuntz. Oh, absolutely.
Mr. Barton. They would not be disadvantaged, and it is
possible they could actually be advantaged.
Ms. Stuntz. No, absolutely, Mr. Barton, and I think that is
one of the tough things now is because they can do that now,
and many of them, as wholesale buyers, are doing it very
effectively. So sort of stopping your wholesale competition for
them in many respects is the best of all worlds.
Mr. Barton. Okay; we have 3 minutes until the vote.
Mr. Whitfield. Well, there is more than one component to
the cost charge of the co-ops and, for that matter, utilities,
and one component is the cost of the supply itself, and that is
what we are talking about with competition here. Would the
industrials have access to lower-cost supplies? Because many
co-ops do not own generation but buy their power themselves,
they may not incur additional costs by allowing those
industrial users to go out and buy directly from other
suppliers.
There are other costs, such as the costs of the
distribution system itself; the cost of manpower and so forth.
They can continue to allocate those costs as they do today
because in many cases, those industrial customers are still
going to need their wires serviced.
Mr. Whitfield. Mr. Chairman, I am in a tough district, and
I cannot miss a vote so----
Mr. Barton. Okay; we are going to recess until 2. We are
going to go vote, and we will reconvene at 2. We want this
panel to come back, because a number of members want a second
round of questions.
[Brief recess.]
Mr. Barton. As is usually the case, the people who wanted a
second round of questions are represented as empty chairs. But
we are going to go ahead and reconvene; it is 2; there are two
members present, so a quorum is present.
The Chair is going to recognize himself for 5 minutes of
questions. I will get the clock turned on.
I want to ask a question to our two former FERC
dignitaries. Most observers indicate to handle the transition
rules and to handle the reliability issue that we need an
expanded role for the FERC. I question the wisdom of making
that a permanent expansion, so my question to Mr. Stalon and
Mr. Naeve, what is your opinion of transition rules that give
FERC an expanded role but do it in a sunsetted fashion?
Mr. Stalon. The principal reason for giving the FERC any
particular authority here is so that the new international
reliability regulatory organization can impose financial
penalties on players in all three nations. The principal
weakness of the NERC today is that it relies entirely on peer
pressure in order to get its rules obeyed, and peer pressure,
obviously, is not adequate; it has not always been adequate
even in the old system when it was a club.
It is clearly not adequate with a lot of entrepreneurs in
the game, and it seems to me that the FERC will have an ongoing
oversight rule, because there will be appeals, and somewhere or
the other, the appeals of parties have to get to some point
where a government agent--it could be a court--says yes, this
is a correct form of behavior; the reliability organization is
behaving in accordance with its charter and exercising powers
that we have explicitly approved and doing it in the right way.
So I think that role is a never-ending role now for some
agency, and I cannot think of one better than the FERC for
that.
Mr. Barton. Mr. Naeve?
Mr. Naeve. I will defer to people who have spent more time
studying this subject, but I am not completely convinced that
more legislation is required to give FERC an important role in
reliability. FERC has jurisdiction over transmission service,
and every reliability rule that is adopted has an effect on
transmission service. So, through its jurisdiction over
transmission services and over the grid, FERC has indirect
jurisdiction over reliability. I think if we were to have a
reliability organization that is independent; that is composed
of a variety of participants in the industry or has an
independent board, FERC would be in a position to give
substantial deference to their recommendations and would not
have to become directly involved in reliability issues.
To the extent that those reliability issues have an effect
on nondiscriminatory transportation, FERC could serve as an
appellate body to look at them and review them; but again, as
long as they are recommended by an independent board, I think
they would be in a position to give tremendous deference to an
independent board.
As to the issue of penalties and the ability to impose
penalties, to the extent that you have large, regional
transmission organizations, and those penalties are embedded in
their operating tariffs and procedures, I would think those,
too, would be jurisdictional to FERC and that they perhaps
would have the ability to authorize the imposition of penalties
and have jurisdiction over them without additional legislation,
but again, I am prepared to defer to people who have spent more
time studying that subject.
Mr. Barton. Ms. Moler, you are a former FERC commissioner
also. Do you wish to have an opinion on this question?
Ms. Moler. Yes, I do. I think it is, as my prepared
statement says, I think it is essential to give the Commission
expanded jurisdiction for reliability over the bulk power
system. That is not a conclusion that I, alone, have. While I
was at the Department of Energy, former Secretary of Energy
O'Leary did establish a very broadly based group of individuals
who struggled with the reliability issue for a couple of years
under Phil Sharp's leadership, and they are very, very firm in
their conviction that additional authority is needed here.
Mr. Barton. But does the additional authority need to be
permanent? See, my view is if you really believe markets will
work, you may need an expanded FERC authority to get to that
perfect world, but once you get to there, it is no longer
necessary, except perhaps on a monitoring or an appellate
basis, you know, occasionally. But I am willing to give
additional authority, but I am not yet willing to do it
permanently and expand the power permanently.
Ms. Moler. The markets that we are talking about working
really are generation markets, and the transmission grid is the
facilitator, if you will, and you have to make sure that on a
long-term basis, that everybody plays by the same rules, and I
do not believe that we can foresee the loss of the monopoly
that is transmission.
Mr. Barton. Okay.
Ms. Moler. That still has not happened in the gas area many
years after we have had increased competition in the natural
gas area.
Mr. Barton. And my time has expired.
Ms. Stuntz, did you want to----
Ms. Stuntz. Mr. Barton, if I may just add, I have a little
different take on that, maybe, because I am not at FERC, but I
do support the legislative proposal that has been worked out by
the industry and a lot of shippers and interested consumers,
and I do not really see it as necessarily adding to FERC's
authority. What it would do is it actually empowers an
independent organization to set these rules. You have to have
FERC as a backstop, because otherwise, you have a
Constitutional problem under the delegation clause.
But if we do not do that, then, I agree with Mr. Naeve. I
think FERC could do it through top-down and start setting rules
for every grid all over the country, for every interconnection.
That would be a very central thing. I think they could probably
do that now if they had to. I think it would be much better to
have this independent organization with deference procedures
that are embedded in it, for example, to the Western Systems
Coordinating Council, and FERC plays only a necessary backstop
role to make sure that the arrangement is Constitutional.
Mr. Barton. Okay; Mr. Bilirakis for 5 minutes.
Mr. Bilirakis. Mr. Chairman, I am not sure that anybody on
this panel is not for deregulation. It is a case, again, of how
it is done and how it affects our States. Let us face it; we
are Representatives, and how it affects our States, is our main
concern, after all.
And the gentleman from Oklahoma mentioned, that you have
got to deregulate by a date certain, and everybody has got to
be regulated by that particular date. I guess that is what
Steve is saying. And I just wonder, why is that the case? You
have your high priced States, and you have your low-priced
States. In Florida, and I mean to get parochial, is different.
We have a peninsula that sticks out there, and the energy that
comes in the State is transmitted from the northern border.
And Florida is a low price State. I am not picking on New
York, but if New York is a high price State, then, deregulation
might be better for their consumers. Why does it mean that just
because it is good for New York's consumers, it is good for
Florida's consumers? Ms. Stuntz, can you describe a scenario
for us? Let us say deregulation goes into effect, and some
States, as is the case now, have deregulation in effect, and a
few States do not have it in effect. Let us say maybe Georgia
and Alabama, which border on Florida, have deregulation in
effect.
Now, what kind of a scenario might we expect as far as
Florida is concerned? How would the Florida consumers be
benefited by their being forced to deregulate when, the Public
Service Commission and the State legislature have turned it
down in the past, in the distant past, in the more recent past?
Linda, I am not sure the question is a clear one but----
Ms. Stuntz. Well, I think the argument for a date-certain
is that you would have more uniformity; that maybe in some
instances, you know, judgments based on parochial concerns are
not the best judgments in the national interest, and that sort
of once you require them to do this by a certain date, and I do
not know that we are really so far apart, because I think at
some point, a flexible mandate or an opt-out, or I do not want
to put words in your mouth, is not so different than what we
are saying, which is that it is probably a good idea, but you
are going to have to give States an opportunity to take into
account local needs, and if they do not want to go now, as long
as they have considered it in a good faith fashion, that may be
enough.
At some point, I mean, maybe that is the way that lets us
get out of this, because I think that in the end, it is very
hard to say that the people would----
Mr. Bilirakis. But if it were the case, where we would have
more flexibility opting out off opportunities, you are not
going to have the uniformity that you mentioned.
Ms. Stuntz. Well, I think it will happen over time. I think
it is a question of timing. I mean, right now, California is
open; Pennsylvania is soon going to be open; Massachusetts is
open. You know, I have not noticed any huge problems that we
could say other people should be open; other people should be
open sooner, and maybe their consumers would benefit sooner,
but I think in the end, you know, it is happening for 50
percent of the population already on a schedule; Virginia has
said now no later than 2007.
Mr. Bilirakis. Should we allow it to just continue
happening rather than mandating it from this ivory tower?
Ms. Stuntz. You know, I do not think this is the most
important issue. I think that you can without being adverse to
consumers.
Mr. Bilirakis. You mean deregulation is not the most
important issue or the mandate?
Ms. Stuntz. No, I think the date-certain is not the most
important issue.
Mr. Bilirakis. Yes.
Ms. Stuntz. Deregulation, you have already deregulated
generation effectively in the Energy Policy Act of 1992 and
wholesale markets, and the question is is that going to be
expanded to retail customers? And if so, when? And who is going
to make that decision? And what are individual retail customer
choice programs going to look like? And how many of those
decisions do you want to make? And how many do you want to
leave to the good folks who are coming up later? And those are
hard questions.
Mr. Bilirakis. Thank you a lot.
Thank you, Mr. Chairman.
Mr. Barton. Well, as the chairman of the ivory tower
subcommittee, I would like to recognize my ranking member, Mr.
Hall, for 5 minutes.
Mr. Hall. I will not take the 5 minutes. I just would point
up some questions because I do not know what has been asked,
and we have another panel waiting, and we have beat on these
folks for a long, long time here.
But, Mr. Stalon, I appreciate the concern that you showed
about the need for new transmission capacity to make the
competitive market work. I did not totally understand some of
the things that you said, and I am going to write you a letter
and ask you for that if I might. We had a lot of warning signs
in the real world last summer and then in the form of a DOE
blue ribbon task force, both of which tell us that the system
might lack the capacity to function reliably. I think I am
correct in understanding you, Mr. Stalon, that you recommend
Congress enact legislation to set up a Federal authority, FERC
or some other entity, with sitting authority that would preempt
State and local authority.
Is that your position?
Mr. Stalon. The States, no, I would not agree with that
wording. We are asking that the powers of the existing
organization, which are being eroded dramatically by
competitive forces be reestablished, and the reestablishment of
those powers to set and enforce standards must now be
accompanied by the ability to levy financial penalties. So we
need a new international organization to carry out the
functions that the old one carried out fairly well for the club
of big utilities.
Mr. Hall. With sitting authority that would preempt State
and local authority.
Mr. Stalon. My proposal, as embodied in my written
testimony, was a compromise proposal to leave with the States
the power to determine the precise route of a new transmission
line after the Federal Government, the FERC, has made a finding
of need for the line and perhaps specified several points on
the line that must be interconnected but leave the details to
the States.
Mr. Hall. Okay; I will ask more pointed questions to you in
writing, and I thank--is it all right, Mr. Chairman, that we do
that? It will save me time.
I think I know what you are saying. I will go back and
reread the testimony.
Mr. Nave, your testimony seems to make a case for Federal
authority over the transmission construction, and you used a
Gas Act provision as a semi-model or something, and my
questions to you will be if the Gas Act provisions are the
model, what changes are you going to have to make to make it
fit electricity if any, and those are some of the questions I
will ask you. You need not answer them now.
In the interests of time, I will yield back the balance of
my time.
Mr. Barton. You do not want him to give you a partial
answer now?
Mr. Hall. Oh, he will give me a full answer a little bit
later.
Mr. Barton. The Chair recognizes Mr. Largent of Oklahoma.
Mr. Largent. Ms. Moler, one of the statements you make in
your report or your testimony, it says that support for
research and development in the electric technology area has
plummeted in the wake of restructuring. It seems to me that, I
mean, it sort of flies in the face of what we are trying to
talk about in a competitive market that technology and research
would actually increase as your competitors are seeking market
share and new services.
Ms. Moler. The difficulty is that in the prior regulatory
regime, States imposed R&D and other public benefits kinds of
requirements on the regulated utilities. Now that the regulated
utilities are out competing with, in the States that have
customer choice and open access, are out competing with those
who do not have similar obligations, they have cut support for
R&D very significantly. State regulators have expressed a major
concern with this phenomenon. They have developed a proposal
that is similar to what happened under the telecom bill, where
States could impose an R&D charge, if you will, that would be
an across-the-board charge done as an add-on on distribution
rather than on the utility, so that everybody would have to pay
it.
Mr. Largent. Would it not be better to wait until we
actually are in a totally deregulated market and see if
competition does not drive technology as opposed to on the
front end, imposing an R&D tax on, you know, end users?
Ms. Moler. My proposal, as I said, is one that was
developed by the State regulators. I would leave it up to them
to monitor the efforts in their States and determine whether
such a charge is necessary.
Mr. Largent. Yes?
Ms. Moler. The Federal role should be performed by the
Department of Energy-supported R&D.
Ms. Stuntz. Mr. Largent?
Mr. Largent. Yes.
Ms. Stuntz. I am the chairman this year of the Electric
Power Research Institute, which has been the umbrella
organization coordinating the electric utility industry's
research enterprise, and it is a real issue. Particular types
of research, I would say, have been more effective than others.
It tends to be longer-term, higher-risk things that it was
easier to fund when you were not facing competition for utility
contributors. EPRI is struggling right now to come up with a
proposal that it could present to you. I would say on behalf of
the committee that there is not uniform support within EPRI for
that particular matching fund proposal. It has got goods and
bads, but it is something that I think will need to be
addressed, because it is one of the many mechanisms that worked
in the old regime that is not necessarily going to work in the
new regime.
Mr. Largent. Yes; okay.
Ms. Moler, could you explain how your opt-out works? And
the other question I wanted to ask about that is did you look
at other flexible, date-certain options beside the one that you
chose? I mean, is this a subjective thing that has taken, say,
well, we just do not feel like doing it? We will go on record
in saying we do not feel like doing it?
Ms. Moler. The provision is fully drafted and was presented
when the administration's bill was transmitted to the Congress
last year, and the mechanism is actually fairly simple, you
know; State authorities would write to the Federal Energy
Regulatory Commission and say we have determined we are not
going to do this. It is not hard.
Mr. Largent. So it could be a totally subjective thing; not
necessarily a----
Ms. Moler. They would have to have a record that would back
up their determination. Their determination that they did not
want to do it would not be challengeable as a matter of Federal
law, and so, whatever is the ordinary mechanism under the State
regime would apply for challenging decisions of the Public
Service Commission, presumably, and that is a fairly well-
settled body of law, how one goes about doing that.
Mr. Largent. But basically, what you are saying is that
would be a fairly easy thing for a State to do to just opt out.
Ms. Moler. A self certification, if you will, is the
concept.
Mr. Largent. Okay.
Thank you, Mr. Chairman.
Mr. Barton. The gentleman from Ohio is recognized for 5
minutes.
Mr. Sawyer. Thank you, Mr. Chairman.
It is probably fair to say that some regions of the country
are having difficulty in transmission constraints and that in
no small part, that is due to the difficulties just simply in
siting transmission facilities. With transmission facilities
being used in terms of large bulk sales over long distances in
ways that they may well not have been designed for,
increasingly, the business of siting new facilities will become
even more important and more difficult. Do you have thoughts on
how the Congress, in legislation that deals broadly with these
kinds of questions, might address that specific kind of problem
State-by-State?
A State might well be even expected to be reluctant to
build transmission facilities that will not directly benefit
their populations. Can you talk about that for a moment?
Mr. Naeve. For the very reasons that you mentioned, I
recommended in my testimony that we transfer to FERC, as we did
in the Natural Gas Act, the responsibility for siting and the
power of eminent domain for interstate transmission facilities.
That is not to say that local interests should be ignored, and
indeed, FERC does not ignore local interests when they site
natural gas transmission facilities. They have a great many
local hearings; they hear from all of the affected
environmental agencies. There is a great deal of local input
into the process.
So the local concerns are taken care of, but nonetheless,
the decisions to build the line in the first place are made on
a regional basis or a national basis, the national need. And
then, once those decisions are made, then, you have to factor
in local consideration and environmental issues when you are
doing the siting, but the decision to go forward is done on a
national or regional basis.
Mr. Sawyer. Any other points of view on the question?
Ms. Moler. Mr. Naeve and I did not consult on this ahead of
time. On page 11 of my prepared testimony, I made a very
similar proposal to emulate the Gas Act, the Natural Gas Act
jurisdiction for Federal siting authority.
If you cannot muster the support for that, at a minimum, I
would urge you to clarify that States can exercise authority on
a regional basis and to encourage them to do so. The
administration bill has an interstate compact concept in it
that is worthy of thought. One of the hopes I hold out for
these large regional transmission organizations that we are
trying to either compel or induce into being is that they will
begin to plan and think regionally, and if you can build a
regional consensus that this new capacity is necessary, I have
hope, but it is tempered with a hard dose of reality that
transmission companies will undertake to build new
transmission.
It is incredibly expensive and incredibly difficult to do
so, and they do not get paid enough to make it worth their
while these days to do that.
Ms. Stuntz. Mr. Sawyer, that was the point I wanted to
make. I think this may be a useful proposal, but even under the
Natural Gas Act now, it is getting increasingly difficult to
site this stuff, so there are siting issues. But you have got
to have the right incentives, and right now, I agree with what
Betsy said. It is extremely expensive, and frankly, I do not
think transmission pricing is--nobody is encouraged to do it.
Mr. Stalon. I would agree that no one is encouraged right
now to do it, but I would also, and I did in my proposal,
postulate that the States are going to be very resistant to
build when the principal benefit is to someone outside the
State, and I can give examples where transmission in the
western system is needed, and it ought to be built in Idaho,
and the principal beneficiaries are Southern California and
Arizona. By the way, it was never built.
My proposal would give to the FERC the power to make the
finding of need, and that would impose a legal obligation on
the State, and the Federal agent could also specify several
points on the route to make sure that the objective is achieved
and then let the details of the routing be left to the States.
Mr. Sawyer. Thank you, Mr. Chairman.
Mr. Barton. Thank you.
Mr. Sawyer. Thank you all very much.
Mr. Barton. The Chair would observe that there are 3 or 4
young men in the far back corner who are having entirely too
much fun for such a serious hearing, and I am going to deputize
the lovely young lady, Ms. Ireland, to serve as their detention
monitor, and they are going to be required to write down the
answers to the questions they just missed verbatim for the next
30 minutes, and that will be deducted from their client billing
for monitoring this hearing.
The Chair would recognize Mr. Burr of North Carolina for 5
minutes.
Mr. Burr. Mr. Chairman, I do not know who is more
challenged: the members to come up with more questions or for
you guys to rephrase the answers that we did not get the first
time, but I will try to go to some new areas other than to
rehash things.
Let me ask you: do any of you believe NERC's draft
reliability language? Do you believe that there exists
consensus on that language?
Mr. Stalon. I do not. It was a compromise within the NERC,
and I am sure that if every member who voted for that
compromise was to write his own, parts of that would be
missing. I know I would have left out certain parts of that and
changed it, so yes, it was a compromise piece of legislation,
proposed legislation.
Ms. Moler. I would say it is a lot like when Congress
passes legislation by a very lopsided majority to a small
minority. You have decided it is the best you can do, and it is
in the public interest to go ahead. You would have written your
bill differently, just as Mr. Hall would have written his bill
differently, but you have decided it is a good thing to do, all
considered.
And I think it is like consensus building in any
organization.
I'm sorry, Mr. Hall would have written his billed
differently, but you decided it is a good thing to do, all
considered. I think it is like consensus building in any
organization.
Mr. Burr. Mr. Stalon, let me ask you a question. How much
capital will chase the industry without any Federal
legislation?
Mr. Stalon. I am sorry, I don't understand the question.
Mr. Burr. How much available capital in the marketplace
will be made available to the entities, those generators out
there, if, in fact, there is not Federal legislation that
clears up some of the laws and the hurdles that exist on the
books?
Mr. Stalon. Well, I don't have any concern that we will
create adequate generating capacity. I think firms can borrow
that money. The capital is there.
Mr. Burr. You feel that the capital is sufficient even with
the hurdles still in place?
Mr. Stalon. Right.
Mr. Burr. Even with the hurdles? But the price is going to
be unnecessarily high, the industry is going to be
unnecessarily inefficient. Do we accelerate the availability of
capital when we move to that open marketplace?
Mr. Stalon. I think you lower the cost of capital. In the
American economy, capital is almost an unlimited supply. It is
the cost that matters. And by making the industry more
efficient, you will lower the cost of capital to key players,
because it gives them more security. But they can live in an
inefficient market and they can borrow money to produce in the
inefficient market.
Mr. Burr. Mr. Naeve, did you want to----
Mr. Naeve. Well, I generally agree with what Charles said.
I would focus, though, on other parts of the industry as well,
not just the generation sector. And there are a variety of
potential participants in this market who would have capital
and intellectual capital to bring to bear on it, if they were
permitted to do so, but are precluded from doing so under the
Public Utility Holding Company Act.
Mr. Burr. Ms. Moler, let me go back to you for a second. I
want to follow up on what Steve Largent raised. When you came
on behalf of the Administration's plan last time, I left with
the impression that opt-out was a very difficult process for a
State to go through, but, in fact, States would have to prove
that there was no benefit at all, from a rate standpoint, to
their consumers in their marketplace in their State. I heard of
something a little bit different from that with your response
to Congressman Largent. I'm allowing an opportunity for
clarification. Is it one or the other, or somewhere in the
middle?
Ms. Moler. I think it's a simple process. In most States,
determinations by regulatory bodies are given a presumption of
validity, just as they are under the Federal statute. And if
the PUC said ``We've decided not to do this, because we don't
think it would be good for our consumers,'' I do not believe--
first, that would be fine under the way the administration's
bill is drafted so there would not be any Federal mandate
imposed upon that State. I don't think it is a difficult
process at all.
Mr. Burr. If the administration does what is rumored, and
that is that their next bill incorporates a 10-percent
renewable, you feel like they would be headed in the wrong
direction. Would that be an accurate statement?
Ms. Moler. I think that is a little steep.
Mr. Stalon. Ten percent is a little steep, or being an
accurate statement is a little steep?
Ms. Moler. I have not kept up on the rumor mill about the
administration. I will say, I shy away from that, because I
have very strict restrictions these days. I can't talk to them
about what they are up to. I was very comfortable with where
the administration bill was last time. I don't know what else
they might be putting in a bill that would make it so that you
still had significant consumer benefits from the piece of
legislation, which I think is important. So I don't have a
judgment at this point.
Mr. Burr. You made a statement, and I appreciate the
chairman's indulgence; you made a statement earlier that the
inaction of Congress is holding the marketplace back. I don't
disagree with you, but I guess I would ask you, do you believe
that this administration is ready and willing to deal with
Congress to move legislation?
Ms. Moler. Yes, I do. I have nothing but the highest
respect for Secretary Richardson's negotiating skills. They are
legendary around the World, and I believe that they will come
prepared to come to the table and work with the Congress to
enact legislation.
Mr. Burr. But you would counsel us to negotiate and not
necessarily just to blindly accept?
Ms. Moler. I have nothing but the highest respect for this
Congress' negotiating skills either. I think you are a fair
match.
Mr. Burr. I thank the chairman.
Mr. Barton. Thank you. I have one final question, then we
are going to let the panel go. When I was in graduate school,
my two favorite subjects were economics and marketing, and
every case study always started with the assumption, assume a
perfect market. We never have a perfect market in the real
world, but we always study to assume a perfect market, so
you've got perfect knowledge and perfect allocation of marginal
costs. But, we have an opportunity to create a more perfect
market, if we can move this legislation. And, I want to ask
Mrs. Moler directly, but anybody can answer it; it would seem
to me in trying to create a more perfect market that you would
want some Federal guidelines on stranded costs, because, while
it's true most States are allowing some stranded cost recovery
as they act, it is theoretically possible that some States
would not, and if you were in a situation where you had States
that were interconnected and had a greater likelihood that they
would be transmitting power, if one State did their stranded
cost recovery a totally different way or the impact was
disproportional, wouldn't that cause quite a bit of problem?
So you indicated, Ms. Moler, you didn't think stranded
costs necessarily need to be a part of a Federal bill, and it
would seem to me it would almost have to be a part of a Federal
bill.
Ms. Moler. The States in New England, which have all
enacted customer choice, all have very different stranded cost
recovery mechanisms. We have a practical experience with
adjoining States having very different stranded cost recovery
mechanisms. I am not aware that it has been a problem there, so
I don't see why in the future it would be a problem.
Mr. Barton. That's a fair answer. Anybody else?
Mr. Stalon. I would endorse that by saying the difference
in rates shows up in the distribution charges, and that is
still a monopoly, which will permit you to sustain those
different rates.
Ms. Moler. Right.
Mr. Stalon. The energy market will be competitive, and such
differences need not be and could not be sustained.
Mr. Barton. But if you take a State like California that
pretty well allowed stranded cost recovery up-front, so their
utilities got quite a bit of money, they can then use that
money to go into the marketplace and buy power plants and do
things that in States that allow stranded cost recovery over an
extended period of time, they don't have that opportunity. It
creates an imbalance, at least the appearance of an imbalance.
That's my point.
Mr. Naeve. I would say this. I think governments, like
people, should take responsibility for their actions. To the
extent that restructuring is mandated by a State legislature or
a State public utility commission, I think the responsibility
is theirs for deciding how they are going to deal with the
consequences of their action, namely, the stranded cost. I
think if the stranded cost in a particular case is the bi-
product of a Federal mandate, then the Federal Government
should take, in part, responsibility for that.
Mr. Barton. I could go down that line, too.
Well, I'm going to excuse this panel. We will have other
questions for the record. We do very much appreciate your time
and your expertise on this issue, and I'm sure that you will be
called on again, if not formally, informally to give us your
advice. Thank you very much.
Ms. Moler. Thank you for the opportunity to appear. This is
my idea of a good time.
Mr. Barton. Yes, well. It's my idea of a time, I don't know
how good of a time. It is interesting.
We would like to call our second panel now, please. We have
the Honorable John Quain, who is the Chairman of the
Pennsylvania Public Utility Commission; the Honorable Craig
Glazer, Chairman of the Public Utility Commission of Ohio; we
have the Honorable Vincent Persico, who is the Co-Chairman of
the Special Committee on Electric Utility Deregulation for the
Illinois General Assembly; we have the Honorable Susan Clark,
the Commissioner from the Florida Public Service Commission;
and the Honorable Marsha Smith, the Commissioner for the Idaho
Public Utility Commission.
Welcome. Your testimony is in the record in its entirety.
We are going to recognize each of you for approximately 7
minutes to elaborate on it. Mr. Persico, I am told, has a plane
at 4 o'clock. Is that correct?
Mr. Persico. Correct.
Mr. Barton. So we are going to let you go first, and we are
going to give the panelists an opportunity to question you
before we allow the others their opening statements, so that
you can catch your plane.
Does anybody else have a place to catch?
Ms. Smith. At 5:30.
Mr. Barton. You are 5:30. You don't count.
Ms. Clark. Six o'clock.
Mr. Barton. Okay. But the earliest is the 4 o'clock plane,
right?
Mr. Persico. Correct.
Mr. Barton. So we are going to recognize you for 7 minutes
and then give the panel an opportunity to specifically ask
questions to you and then you can be excused, since it is 2:45.
So, Mr. Persico?
STATEMENTS OF HON. VINCENT A. PERSICO, CO-CHAIR, SPECIAL
COMMITTEE ON ELECTRIC UTILITY DEREGULATION, ILLINOIS GENERAL
ASSEMBLY; JOHN M. QUAIN, CHAIRMAN, PENNSYLVANIA PUBLIC UTILITY
COMMISSION; CRAIG A. GLAZER, CHAIRMAN, OHIO PUBLIC UTILITY
COMMISSION; SUSAN F. CLARK, COMMISSIONER, FLORIDA PUBLIC
SERVICE COMMISSION; AND MARSHA H. SMITH, COMMISSIONER, IDAHO
PUBLIC UTILITY COMMISSION
Mr. Persico. Thank you, Mr. Chairman, and members of the
committee for the opportunity to present testimony before the
subcommittee on this very important issue. Hopefully, I can
bring another perspective to the debate on this issue, because
for one thing, not only do I represent the 39th District of
Illinois, which is in a western suburb of Chicago, but also,
for 6 months a year, I try to harness a different kind of
energy, and that is teaching seventh graders government and
history, and you know how lively 12 and 13 year olds can be.
Plus, I am one of the few, I guess, members in the whole United
States that have actually voted on this particular issue, and
we went about it in a somewhat different way. Besides my role
as a regular member in the general assembly, I was appointed as
Co-Chairman of the Electric Utility Deregulation Committee, a
special committee established 2 years ago to help guide our
members to through the debate of deregulation and restructuring
of the electric industry in our State.
The Committee is unique in the sense that it is made up of
equal numbers of Republicans and Democrats, and has one Co-
Chairman from each party. The leadership of the General
Assembly in Illinois felt that this was the best approach to
take, because, first of all, we had to draft a bill that was
not only good for the State of Illinois, but also a bill that
we could go back to our respective caucuses and have it pass in
the law. And that's precisely what happened. After 4 years of
debate in the legislative process, the Illinois General
Assembly passed the Electric Service Consumer Choice and Rate
Relief Law of 1997, in November of that year, and our former
Governor, Jim Edgar, signed it into law in December.
Historically, the retail electricity industry has been the
policy and regulatory responsibility of the States, whether it
was in the establishment of the traditional rate base rate of
return regulatory system which served our States and Nation
well for over 75 years, or in the most recent review and
adjustments made to that system. State policymakers have
established that the interests of their constituents can be
best served by the exercise of local control over the electric
industry. Each State has unique characteristics which bear on
how the industry operates within its borders and boundaries,
and State legislators, Governors and regulators have always
been in the best position to oversee that process on the retail
level. My own State of Illinois provides an excellent example
of the wisdom of this approach. Illinois is diverse in many,
many respects. Not only do we have a huge urban metropolis in
the city of Chicago, but we have small and medium sized towns
throughout the whole State, and a very large agricultural area.
We also have a very diverse people, a mixture of races, creeds
and colors, and we are in many ways the microcosm of the whole
United States. In the same way, we also run the spectrum in
terms of the electricity industry. Commonwealth Edison serves
the city of Chicago and most of Northern Illinois, and is one
of the largest investor-owned electric companies in the United
States. Prior to the passage of our law, it also had some of
the highest electricity rates in the Midwest, rates which can
be traced back to its concentration of nuclear generating
capacity. In other parts of Illinois, we have electricity
companies which have much lower prices, because they generate
power with one of their most abundant resources, which is coal.
We have larger customers served by municipal electric companies
and rural cooperatives. Again, the Illinois electricity
industry is very representative of the industry in the Nation
as a whole.
The point of the description of the State is to emphasize
that as policymakers in Illinois, we cannot even govern our
State with the one-size-fits-all approach, especially when it
comes to restructuring our electric industry. Our challenges
were unique to our State, and we were successful in meeting
them only because we had the necessary familiarity with the
issues, the stake holder and the constituents which were
affected.
I have attached supplemental material to my testimony in
the form of a two-page layman's summary of the law which we
passed in 1997. If you examine the issues which we have
highlighted in that summary, I believe that you will find most
of the restructuring issues which are being addressed at the
State level. These include such major issues as the timing of
customer choice, the recovery transition costs, and the
provision of delivery service. Also included in our law were
such issues as maintaining the obligation to serve, how to deal
with entrance to the marketplace, consumer education and
protection, restructuring of our utility tax system, and a host
of other public benefit issues, including protections for
utility industry employees. I can tell you from literally
hundreds of hours of personal experience that in each of these
areas, Illinois policymakers and stake holders struggled to
craft solutions which were very unique to our own State.
I would also like to take this opportunity to point out
that Illinois is not alone in meeting the challengings of
restructuring the electricity industry. Now, like two dozen
other States have taken on either legislative or regulatory
action, or both, to begin the process of moving from a
traditional monopoly electricity industry to the new
competitive environment. More will follow. So the States have
definitely stepped up to the plate and met this challenge. We
simply ask that you let us continue this process and assist us
when necessary. While some States have taken a regulatory
approach to restructuring their electricity industry, we, in
Illinois, decided early on to address the matter with a
comprehensive legislation, and our product is probably the most
comprehensive law passed by any State. As you can see from the
summary, we tackled every major issue involved in the debate,
as well as a host of minor ones. When some State legislators
have merely adopted a list of general principles and then asked
their State public utility commissions to turn them into
reality, we, in Illinois, opted to have our elected legislators
make the critical policy decisions which are found in our law.
Our regulatory commission and other State agencies were charged
with implementing these decisions, and that process is well
underway as we speak. In fact, we are progressing toward the
first phase of opening our mark on October 1, 1999, and we will
meet that deadline.
The decision made by our legislative leaders and Governor
to take the comprehensive legislative route reflects the
necessity of crafting unique solutions to the challenges
presented by our State's diversity, as I outlined at the
beginning of my remarks. Other States have chosen other
approaches which work better for them. They and we should have
the ability to make these choices, both in the overall approach
and the details of our work product. If there ever was an area
of public discourse where one side does not fit all, it is in
the deregulation and restructuring of the electric utility
industry.
And, finally, after a long and difficult process of
education, discussion and legislation, we, in Illinois, passed
a law which we believe will bring the benefits of competition
in the electricity industry to all citizens of our State. We
passed a law which is comprehensive in its approach and
balanced in its provisions. We believe it will provide an
orderly transition for all the industry stake-holders from the
old world to the new. In short, we, in the Illinois General
Assembly, are convinced that it is the best possible law for
Illinois. I would urge you to respect that judgment by taking
no Federal action which would have the effect of changing our
law or disturbing a very delicate balance that we have so
crafted.
And, with that, I will be happy to answer any questions.
[The prepared statement of Hon. Vincent A. Persico
follows:]
Prepared Statement of Hon. Vincent A. Persico, Illinois State
Representative
Thank you, Mr. Chairman, and Members of the Committee, for the
opportunity to present testimony here today before this Subcommittee on
the important issue of the evolving federal and state roles in
fostering competition in the electricity industry. My name is Vince
Persico and I represent the citizens of the 39th District in the
Illinois House of Representatives. I live in Glen Ellyn, Illinois,
which is a suburb of the City of Chicago. In the Illinois House of
Representatives I serve as Co-Chairman of the Electric Utility
Deregulation Committee, a special committee established two years ago
to help guide our Members through the debate over deregulation and
restructuring of the electricity industry in our state. The committee
is unique in recent Illinois legislative history in that it is bi-
partisan, has one Co-Chairman from each party and is made up of equal
numbers of Republicans and Democrats. The leadership of our General
Assembly felt that such an approach provided the best chance of success
in terms of producing legislation which could pass both the House and
Senate and be approved by our Governor. And that is precisely what
happened. After a full year of debate and legislative process, the
Illinois General Assembly passed The Electric Service Customer Choice
and Rate Relief Law of 1997 in November of that year. Governor Jim
Edgar signed the bill into law the next month.
State Role in Electric Regulation
Historically, the retail electricity industry has been the policy
and regulatory responsibility of the states. Whether it was in the
establishment of the traditional rate-base, rate-of-return regulatory
system which served states and the nation well for over 75 years or in
the more recent review and adjustments made to that system, state
policymakers have established that the interests of their constituents
can best be served by their exercise of local control over the
electricity industry. Each state has unique characteristics which bear
on how the industry operates within its boundaries and state
legislators, governors and regulators have always been in the best
position to oversee that process on the retail level. My own state of
Illinois provides an excellent example of the wisdom of this approach.
The State of Illinois is diverse in many, many respects. We have an
urban metropolis in the City of Chicago, we have fast-growing suburban
areas which provide their own special challenges for policymakers, and
we have lots of medium-sized and small towns and agricultural areas. We
are also a diverse people, a mixture of races, creeds, colors and
nationalities which reflects the nation as a whole. In many ways,
Illinois is a microcosm of this country. And, in this same way, we also
run the spectrum in terms of the electricity industry. Commonwealth
Edison Company serves the City of Chicago and most of Northern Illinois
and is one of the largest investor-owned electricity companies in the
United States. Prior to passage of our law, it also had some of the
highest electricity rates in the Midwest, rates which can be traced to
its concentration of nuclear generating capacity. In other parts of
Illinois, we have electricity companies which have much lower prices
because they generate power with one of our most abundant resources--
coal. We also have large numbers of customers served by municipal
electric companies and rural co-operatives. Again, the Illinois
electricity industry is very representative of the industry in the
nation as a whole.
The point of this description of our state is to emphasize that as
policymakers in Illinois, we cannot even govern our own state with a
``one-size-fits-all'' approach, especially when it comes to
restructuring our electricity industry. Our challenges were unique to
our state and we were successful in meeting them only because we had
the necessary familiarity with the issues, the stakeholders and the
constituents which were affected.
The Need for Changes to the State Role
I am of the opinion that the basic policy decision which you, as
federal legislators, should make in terms of deregulating and
restructuring the electricity industry is to maintain the traditional
division of responsibility between the retail and wholesale aspects of
the industry. For many of the reasons which I outlined above, states
are best equipped to govern the retail electricity industry which
operates within their boundaries. This is true on both a constitutional
and a practical basis. The federal government, through the Federal
Energy Regulatory Commission and any potential national transmission
reliability body, is best equipped legally and practically to handle
the wholesale, interstate commerce side of the industry.
However, there may be issues which arise during the course of the
transition from the traditional electric utility industry to the new
competitive marketplace where the federal government should act to
assist the states and its own regulators so that they can better
perform their roles in the overall system. There may well be some areas
where only the Congress can act to clear up ambiguities or remove
roadblocks to a smooth transition. These areas may include interstate
transmission, federal power marketing administrations, repeal or reform
of the Public Utilities Holding Company Act and other issues. However,
the emphasis should always be on assisting the states who remain the
primary drivers of the changes taking place in the retail electricity
industry.
State-Level Restructuring Issues
I have attached supplemental material to my testimony in the form
of a two-page layman's summary of the law which we passed in 1997. If
you examine the issues which are highlighted in that summary, I believe
you will find most of the restructuring issues which are best addressed
at the state level. These include such major issues as the timing of
customer choice, the recovery of transition costs and the provision of
delivery services. Also included in our law were such issues as
maintaining the obligation to serve, how to deal with new entrants to
the marketplace, consumer education and protection, restructuring of
our utility tax system and a host of public benefit issues, including
protections for utility industry employees. I can tell you from
literally hundreds of hours of personal experience, in each of these
areas Illinois policymakers and stakeholders struggled to craft
solutions which were very unique to our state.
I would also like to take this opportunity to point out that
Illinois is not alone in meeting the challenges of restructuring its
electricity industry. Nearly two dozen states have now taken
legislative or regulatory action, or both, to begin the process of
moving from the traditional, monopoly electricity industry to the new
competitive environment. More will follow. The states have definitely
stepped up to the plate and met this challenge head on and will
continue to do so because it is of critical importance to each of our
constituents and to the various state economies. We simply ask that you
let us continue this process and assist us when necessary.
The Illinois Approach
While some states have taken a regulatory approach to restructuring
their electricity industries, we in Illinois decided early on to
address the matter with comprehensive legislation. And our product is
probably the most comprehensive law passed by any state. As you can see
from the summary, we tackled every major issue involved in the debate
as well as a host of minor ones. Where some state legislatures have
merely adopted a list of general principles and then asked their state
public utility commissions to turn them into reality, we in Illinois
opted to have our elected legislators make the critical policy
decisions which are found in our law. Our regulatory commission and
other state agencies were charged with implementing those decisions and
that process is well under way as we speak. In fact, we are progressing
toward the first phase of opening our market on October 1, 1999 and we
will meet that deadline.
The decision made by our legislative leaders and governor to take
the comprehensive legislative route reflects the necessity of crafting
unique solutions to the challenges presented by our state's diversity
as I outlined at the beginning of my remarks. Other states have chosen
other approaches which work better for them. They, and we, should have
the ability to make those choices, both in our overall approach and in
the details of our work product. If there was ever an area of public
discourse where one size does not fit all, it is in the deregulation
and restructuring of the electricity industry.
Conclusion
After a long and difficult process of education, discussion and
legislation, we in Illinois passed a law which we believe will bring
the benefits of competition in the electricity industry to all the
citizens of our state. We passed a law which is comprehensive in its
approach and balanced in its provisions. We believe it will provide an
orderly transition for all of the industry's stakeholders from the old
world to the new. In short, we in the Illinois General Assembly are
convinced that it is the best possible law for Illinois. I would urge
you to respect that judgment by taking no federal action which would
have the effect of changing our law or disturbing the balance contained
therein.
summary of the electric service customer choice and rate relief law of
1997
Customer Choice of Supplier
By May 1, 2002, all Illinois electricity consumers will be able to
choose their electricity supplier. On 10-1-99 customer choice is
phased-in beginning with the ability to obtain direct access to
alternative suppliers given to industrial customers with loads of 4
megawatts or larger and aggregated commercial loads of 9.5 megawatts or
larger. On that same date, one-third (1/3) of all other commercial and
industrial customers get choice based on a lottery. On 12-31-2000, the
remainder of commercial and industrial customers get choice. The
residential class gets choice on 5-1-02.
Rate Reductions
Illinois utilities are divided into two categories for purposes of
rate reductions. Those above the current Midwest average residential
rate must reduce their rates for residential customers by 15% on August
1, 1998 and an additional 5% on May 1, 2002. Utilities (except CILCO)
below the current Midwest average must reduce residential rates by 5%
effective 1-1-98. Additional 5% reductions are scheduled for 10-1-2000
and 10-1-02 if those utilities are not below the Midwest average on
those dates. CILCO rates must be reduced 2% on 1-1-98, 2% on 10-1-2000,
and 1% on 10-1-02.
Utilities will receive credit against any rate reductions under
this law for rate decreases ordered by the Illinois Commerce Commission
in regulatory proceedings before the effective dates of the reductions.
The Commission cannot alter rates during the phase-in period except in
case of financial emergencies for utilities. If utilities have excess
earnings during the transition, they must share them with their
customers. Rate reduction provisions apply to all companies with more
than 12,500 customers in Illinois.
Transition Costs
The bill uses a ``lost revenues'' methodology to determine the
amount of transition costs which utilities can recover from customers
during the change from a regulated to a competitive environment. The
amount of the charge is calculated by first determining the amount of
revenues lost to the utility when a customer leaves its system for a
new electricity supplier, and then subtracting from that figure the
value of the now-available power previously used by the former
customers. Also subtracted is the amount of the charge which that
customer still pays to the utility for delivery of the power from the
new supplier. Finally, a ``mitigation'' factor is subtracted. This
factor reflects the amount of cost-reduction for which the utility is
directly responsible and the number subtracted increases during the
transition. After all the subtractions, the number which remains is the
transition charge which the utility can collect from the departed
customer. 2006 is the final year of recovery of transition costs by
utilities. Transition costs are paid only by those customers leaving
the utility's system.
Obligation to Serve
Utilities have a continuing obligation to provide traditional,
bundled service to customers who do not wish to shop for power.
Residential customers who leave the host utility are allowed to return
without penalty but cannot switch again for 24 months.
Transition Funding
Often referred to as ``securitization,'' this transition funding
mechanism allows utilities to lower their cost of debt. Upon petition
by a utility, the Illinois Commerce Commission can issue a Transitional
Funding Order which the utility could then use to secure financing and
raise funds to pay down transition costs. Up to 20% of the monies can
be used for costs such as employees transition, billing and metering
transition and ISO start-up. Transitional funding ends in 2006.
Delivery Services
While the generation aspect of the electric industry is
deregulated, the transmission and distribution functions remain
regulated. In order to facilitate competition, however, the bill
provides mechanisms to establish non-discriminatory delivery of power
by local distribution utilities.
Independent System Operator
In addition to unbundling delivery services from power generation
and using non-discriminatory transmission techniques, eventually
utilities will have to turn over operation of their transmission
systems to an independent system operator who will run the system in
order to institutionalize the fairness concepts. Illinois utilities
must seek to become part of a regional independent system operator plan
or, if none is available, establish an in-state ISO. In the meantime,
Illinois utilities must ``functionally unbundle'' their generation,
transmission and distribution operations.
Municipal Utilities and Cooperatives
The bill allows municipal electric utilities and electric
cooperatives the right to decide for themselves whether to become part
of the competitive power supply market. These customer-controlled
entities can elect to open their current territories to competition or
remain in their current status. If they seek customers from other
suppliers, they automatically subject their own territories to
competition.
Alternative Retail Electric Suppliers
Alternative Retail Electric Suppliers (ARES) will be allowed to
compete for the customers of current Illinois electric utilities. They
must first meet minimum certification requirements and along with their
competitors comply with a Code of Conduct set out in the bill.
Consumer Education and Protection
Working with suppliers, the Illinois Commerce Commission will
develop materials which will be sent to all electric consumers in the
state seeking to educate such consumers on the new competitive electric
supply system. Additionally, a new Consumer Utilities Unit will be
established in the Attorney General's Office to deal with complaints
regarding the new system and the state's consumer fraud statute is
amended to be consistent with a customer choice environment.
Public Utilities Act Amendments
Several provisions of the state's Public Utilities Act are amended
to streamline the current regulatory process and make it more amenable
to a competitive electricity environment. These include such areas as
removal of least-cost planning requirements, options for utilities to
do away with fuel adjustment clauses and making utility reorganization
and financial activities less cumbersome and time-consuming.
Taxes
The state's revenue-based utility tax system is completely revamped
under the bill in order to treat all suppliers equally and maintain
revenue neutrality as closely as possible. Except for a transitional
period where large customers will pay utility taxes based on the old
percentage of gross receipts basis, the state will move to a ``use''
tax system where charges are based on consumption of electricity rather
than revenues. This will be the case not only for state utility taxes
but for municipal taxes as well. Additionally, the state's Invested
Capital Tax as it applies to electric utilities is replaced by a usage
based tax. Finally, a usage based infrastructure maintenance fee system
is established for the imposition and collection of fees associated
with the use of public right of way for delivery of electricity.
Environmental Provisions
The bill mandates disclosure to customers of sources of power and
amounts of pollutants. On a quarterly basis, suppliers must inform
customers of the known sources of the power which they are supplying,
such as coal, nuclear, wind, etc. They must also list the known amounts
of pollutants such as carbon dioxide, sulfur dioxide and nitrous oxide
which come from those sources. Also, funds to promote renewable energy
resources and clean coal technology are created and paid for by charges
to customers. An energy efficiency fund is also established with the
money for same coming from suppliers of electricity. Effective 1-1-98.
Assistance to Low-Income Customers
The legislation establishes a fund to supplement federal money
received for energy assistance to low-income consumers. When fully
implemented the fund will generate over $75 million per year.
Additionally, a long-term planning process is put in place which will
develop a permanent low-income energy assistance program for the new
customer choice environment. Effective 1-1-98.
Utility Employees
Provision is made for assisting utility employees in the event of
dislocations resulting from moving to a competitive electricity market.
These include severance pay, retraining, outplacement and voluntary
retirement plans. Utilities must develop workforce reduction plans if
dislocations occur.
Other Provisions
The 250+-page bill includes a myriad of other provisions, each of
which has individual importance to stakeholders in the electricity
industry. These include the ability of utilities to engage in billing
experiments before and during the transition to competition, options
for customers to elect real-time pricing of their power supply, and
safeguards on the reliability of the transmission and distribution
functions.
Mr. Barton. Thank you, Mr. Persico. Does any member of the
subcommittee have specific questions for Mr. Persico? Does
anyone, because I want to excuse him if there are no specific
questions.
Mr. Hall. I take it, Mr. Persico, that you and all the
others of you, that none of you favor a Federal mandate
requiring States to enact any kind of a specific type of retail
competition plan on a specific time table? You all five are in
agreement on that, aren't you?
Mr. Persico. Well, I think it would be out of my place to
recommend a certain time table for Utah or Idaho, or whatever
State. I mean, Illinois has a time certain in the year 2002,
all industry and all residential customers will have the
ability to choose. And, again, it was through major hours of
negotiations where we literally sat in a room this large with
80 to 90 people and we went point-by-point, because what we
first did is we gave them 12 guidelines. We wanted obligation
to serve in there. We wanted protection for utility employees.
We wanted to cover the issue of transition costs--I mean,
stranded costs. So we sat down and said, ``This is what we
want,'' and then we hashed it out and debated and discussed,
and finally came up with a bill that fit Illinois.
Mr. Hall. Your State's act, right?
Mr. Persico. Pardon me?
Mr. Hall. Your State has acted?
Mr. Persico. Yes, it passed it in 1997.
Mr. Hall. So you would want an unconditional grandfather
under your State's plan?
Mr. Persico. Without a doubt.
Mr. Hall. Okay.
Mr. Persico. I think we crafted a very delicate balance of
a very good piece of legislation that is unique to Illinois,
and I believe other States should be given the same
opportunity.
Mr. Hall. Do I get some kind of a ``yes'' from all five of
you when I asked----
Mr. Barton. Well, let's try to be specific to Mr. Persico
so we can let him go. We are going to give you time to----
Mr. Hall. I'm trying to leave, too. I've got a 5:10 flight.
Seriously, he can hold up his hand as quick as the other four
do. I don't want to defy the chairman, not this early in the
game, anyway. I said, I take it that none of you favor a
Federal mandate requiring States to enact a specific type of
retail competition plan on a specific time table. That's right,
isn't it?
Mr. Quain. Representative John Quain from Pennsylvania. I
don't----
Mr. Hall. I'll get you later, John.
Mr. Quain. Okay.
Mr. Hall. You would hold your hand up to that?
Mr. Persico. I don't favor a one-size approach fits all.
Mr. Hall. I yield back my time.
Mr. Barton. Before we let Mr. Persico go, does Mr. Shimkus
have a question for him, since he represents your State?
Just a specific question for him and Mr. Burr also has a
specific question.
Mr. Shimkus. What can the Federal Government do to help
prohibit the price spikes that we experienced in Illinois last
year, question No. 1?
Mr. Persico. These are issues, again, that we struggled
with. And one of the things that is in the Illinois bill is we
eliminated the fuel adjustment cost, which meant that when we
had those price spikes in Illinois last Summer, where they were
buying it 4, 5, 10 times over the original cost, they couldn't
pass it on to the consumers. And so, many utilities which,
through discussion and debate and agreement, agreed to
eliminate this fuel adjustment clause, because everybody was
giving in on each side, it meant that the consumers, both at
the industrial and residential level, were not affected by it.
So how you do that on a more national level is something that
this committee and Congress, as a whole, are going to struggle
with.
Mr. Shimkus. But you can see how that is a critical role
for the Federal Government to get involved with?
Mr. Persico. Yes.
Mr. Shimkus. The last question. Illinois addressed low-
income assistance in its law. Should the Federal Government do
the same?
Mr. Persico. Again, I think what you decide is important,
and what we decided in Illinois were those 12 guiding
principles, and one of them was assistance to low-income
customers. And as a result of that piece of legislation, we
enacted, I believe, a forty cent charge per month on a
customer's bill, for a residential customer, which went into a
low-income assistance program which generates around $75
million a year to provide assistance, as well as, I believe,
like $50 million to $55 million in Federal assistance. So we
felt, as a General Assembly, that that was important. By the
same token, we also felt that any restructuring act, that we
would pass that reduction by law for residential customers as
well as industrial customers. For example, we had a 15 percent
rate cut which took effect last August 1998 that what ever the
customer's bill was as of July 1998, it was 15 percent less in
their August bill and from then on, and another 5 percent in
2002.
Mr. Shimkus. And let me ask one last question. If the
Federal bill changes one comma, colon, or period in the
Illinois law, what does that do to the Illinois restructuring
law that you all passed?
Mr. Persico. Well, again, it was a very delicate balance
with each giving and taking, or whatever they felt was
necessary. For example, one of the things that we are
struggling with right now is--and we knew that it was coming,
and that's why we set up a special commission to study that
problem; was the school districts and the municipalities in
certain areas where they have these nuclear generating plants
would be adversely affected, because the value of those plants
would dramatically go down. And so, right now we are trying to
craft a piece of legislation that again will be very difficult
to pass the Illinois General Assembly on how to help out these
school districts and municipalities. So if you came in with a
one-size-fit-all, and so on, it could very much upset this
balance that we're still struggling with ourself.
Mr. Shimkus. What about the severability clause that you
all have?
Mr. Persico. Again, I'm not an expert on this, but we did
have a clause in there that if one part was found
unconstitutional, that everything would found.
Mr. Shimkus. Not just unconstitutional.
Mr. Persico. That it wouldn't work. It wasn't going to----
Mr. Shimkus. But if the Federal Government preempted any
part of your statute, isn't that correct?
Mr. Persico. I believe that's correct.
Mr. Shimkus. We would want to follow-up and make sure we
can get that into the record.
Mr. Barton. Does Mr. Burr have a question for Mr. Persico?
Mr. Burr. Just one quick question. Do you believe it's
possible for Congress to pass a comprehensive piece of
legislation that, in fact, does not preempt you and does not
require grandfathering, but eliminates many of the Federal
hurdles that have been identified?
Mr. Persico. I guess we started at the same page almost. We
had people on all sides of the spectrum on either end, and we
finally were able to craft a piece of legislation through 2
years of very hard work and 2 years of compromise. Yes, I think
the Federal Government does have a role, you know, whether
through the wholesale transmission lines or the PURPA Act, or
so one, eliminating and repealing the PURPA Act. I think you
definitely do have a role. This is my humble opinion, I think
if you come in and say that every State has to do this by this
certain date, I think it is going to be very difficult to craft
that kind of piece of legislation. I think you're going to have
a hard time selling it to your members.
Mr. Burr. Clearly, a date certain would be preemptive. And
I'm talking about, do you think it's possible for us to do a
bill that's comprehensive, that addresses the Federal hurdles,
that's not preemptive?
Mr. Persico. Yes, I do.
Mr. Burr. I'm going to deal back, Mr. Chairman.
Mr. Barton. Thank you, Mr. Persico. We are going to excuse
you so that you can catch your airplane. We are going to resume
regular order. We will hear from Mr. Quain, Mr. Glazer, Ms.
Clark, Ms. Smith, and then we'll allow each member to question
them in turn.
Mr. Persico. Thank you, Mr. Chairman, and members of the
committee.
Mr. Barton. We appreciate your testimony. Mr. Quain, you're
recognized for 7 minutes.
STATEMENT OF JOHN M. QUAIN
Mr. Quain. Thank you, Mr. Chairman, and members of
subcommittee. Let me answer the question that was asked
earlier. I do favor a time-line mandate in Federal legislation
for States to act. Although, I believe that should be far
enough in advance to allow each State to craft a solution
individual to its own needs. Listening to Mr. Persico talk, it
sounded very much like my State in the sense that we have some
of the highest costs to utility providers in Pennsylvania and
some of the lowest cost providers in the Nation. And when we
sat down to look at the electric choice process, we began at
the Public Utility Commission in Pennsylvania in 1995, and by
the Summer of 1996, we had concluded as a group that generation
was no longer a natural monopoly and, as a result, should not
be regulated as such, but transmission and distribution should.
But with the findings in that report, the Governor of
Pennsylvania, Tom Ridge, one of your former colleagues,
requested that I convene a group of stake-holders to see if we
could identify problems, reach a consensus piece of legislation
to present to the Pennsylvania General Assembly that would
handle all the issues from the various prospectives on such a
complex and difficult matter. And we did just that. We had
certainly our electric utilities in the room, we had our rural
electric co-ops, we had labor, environmentalists, low-income
consumers, residential consumers, small business advocates,
large industrial consumers, marketers, independent power
producers, and the like, and I'm sure I've missed some. But we
had 50, 60 people sitting around a table, and in over a 2-month
period of time, we reached a piece of consensus information,
that all agrees was a good way to open the market in
Pennsylvania. So the center to that was the environmentalist
who wanted us to put provisions in the statute that we believe
were in conflict with Federal law, so we parted ways on that
singular issue.
Having done that, we moved to the General Assembly and we
had a lobbying effort that was rather unique. We had large
industrial customers sitting in their representives office with
small and low-income consumers. We had marketers and brokers
sitting in with industrial users, as well as IOU's, all saying
the same thing; this is a good way to open up the Pennsylvania
market. In October 1996, the General Assembly passed the bill
in both Houses without amendment. In December 1996, the
Governor signed it into law.
Now, as of January 1, 1997, the details for implementing
the electric choice law moved to the Pennsylvania Public
Utility Commission. We had, under the law, an obligation to
open the market by January 1, 1999. I am pleased to report that
over the last 2 years, we have gone through that transition
process. On January 1, 1999, the market for 66 percent of all
consumers in Pennsylvania opened, and we believe, in our humble
opinion, it is a tremendous success story. Let me just give you
some basic facts. Beginning in July, when we asked people to
begin to enroll for the first 66 percent of capacity available
under electric choice, out of 5.2 million customers in
Pennsylvania, electric customers, 2,000,000 signed up and said,
``We want to learn more.'' And as time passed, about 1.2
million of those 2,000,000 customers actually participated in
the choice process, actually went out and looked for
alternative suppliers. Now this is a maturing marketplace. We
are 2 months into the first 66 percent of our electric choice
program. At this date, over 400,000 Pennsylvania citizens and
businesses--I'm sorry, just under 400,000. That represents
approximately 33 percent of all winter peak load in
Pennsylvania are now shopping for alternative energy in the
State. Once we passed the legislation, we, of course, had to
handle such issues as stranded investment and the other
restructuring issues, and we brought each of our electric
utilities in for a prolonged rate case proceeding. At the
conclusion of those rate case proceedings, there were, of
course, a number of appellate actions which challenged the
Commissions authority, rights and obligations to enter the
orders that it did.
We then turned around and sought to settle the five major
electric utility cases in Pennsylvania so we could avoid
litigation. Why did we do that? Because we believe that the
marketplace needs certainty. The greater the certainty, the
greater the market, the greater fluidity, the greater
competition will occur in Pennsylvania. And we were successful
in five our of five cases negotiating results that all the
parties, with very few exceptions, have signed off on.
So today in Pennsylvania, in 1999, if not a single person
shops in 1999, rates will go down by $458 million in 1 year,
and at the same time, low-income funding has gone up 122
percent, as compared to what it was under traditional
regulations. We have sustainable energy funds that will be
funded to the tune of $60 million over 5 years. We have
announced $1.1 billion of additional investment and generating
capacity in Pennsylvania in 1999 alone. In additional to that,
we have rate caps in place under the negotiated settlements
which last years in Pennsylvania. And just looking at the
energy component that rate payers pay, which you normally see
our energy cost rate, which is a direct flow-through, by
tapping those costs through negotiated settlements, we project
the citizens avoid $8.7 billion, what would otherwise be
automatic pass-through under traditional regulations. And we're
excited about the possibility of electric choice in
Pennsylvania. We look to open up the remainder of the market in
1 year. We have a tremendous amount of consumer education left
to do. There is a transition process, there is a need to have
States develop their own plans to fit the nature of the
demographics, but to say that regulation is a suitable
substitute where competition can and should exist, to me, makes
very little sense. Regulation was only intended to be a
surrogate where competition could not exist. And if generation
competition can exist in the United States, it should, and, as
a result, free market enterprise should be allowed to develop
and regulation should pull back. That is the philosophy which
we are operating under, and we think we are beginning to see
very quickly the benefits of that philosophy in Pennsylvania.
I'm happy to answer any questions. Thank you.
[The prepared statement of John M. Quain follows:]
Prepared Statement of John M. Quain, Chairman, Pennsylvania Public
Utility Commission, on Behalf of the Commonwealth of Pennsylvania
Good afternoon, Mr. Chairman and members of the Subcommittee. Thank
you for your kind invitation to speak on the role of state regulators
in restructuring the electric industry. I come before you today to
discuss the Pennsylvania Public Utility Commission's (``PaPUC'') role
in electric industry restructuring, and the steps taken by the PaPUC to
foster competition in electric energy generation. I will also discuss
the effects these steps have had on the PaPUC's traditional role in
electric regulation, and identify issues the Pennsylvania Public
Utility Commission believes should continue to be addressed by the
states as the electric industry changes.
Retail electric competition in Pennsylvania is a success story. It
represents the vision of our Governor, Tom Ridge, the will of our state
General Assembly, and the cooperation of all of the parties involved in
the process. Pennsylvania's Electricity Generation Customer Choice and
Competition Act 1 (``Competition Act'' or ``Act'') was
signed into law by Governor Tom Ridge on December 3, 1996. The Act
provides for a careful transition to full retail generation choice by
January 1, 2001. Sixty six percent of retail electric customers in all
classes are already eligible to choose their electric generation
providers. After January 1, 2001, all retail customers will have the
opportunity to choose their electric generation provider. The purpose
of the Act is to open up the electric generation market for competition
in Pennsylvania. Transmission and distribution services continue to be
regulated by the F.E.R.C. and the PaPUC, respectively.
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\1\ PA H.B. 1509, Session of 1995, 66 Pa.C.S. Sec. 2801 et seq.,
``The Electricity Generation Customer Choice and Competition Act'',
effective January 1, 1997.
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Pennsylvania's Act provides for a four-year transition and phase-in
period to prepare utilities, shareholders, consumers and regulators to
achieve the maximum benefits of competition. This phase-in period began
on April 1, 1997, and will continue to January 1, 2001, at which time
transition to full customer choice will be complete. The purpose of the
phased transition was to permit our traditional, vertically integrated
utilities a chance to file restructuring plans functionally unbundling
their services while allowing all parties to grow into competition. The
transition has been challenging, but it has also been a success. Retail
customers now have the choice of who will provide their electricity.
As I come before you today, more than 1.2 million customers in
Pennsylvania are eligible to shop for electricity. I should note that
even if one single customer did not select an alternate supplier,
Pennsylvania ratepayers will still save approximately $458 million in
guaranteed rate reductions over the next year by virtue of the
economies of restructuring and mandatory rate relief. However, I am
pleased to report that approximately 400,000 customers say they have
already switched to a competitive market supplier. Those who have
elected to remain with their traditional utility have also made a
choice--a choice that was not open to them before the passage of this
innovative and dynamic legislation. Pennsylvania's consumers are
leading the nation in exploring the benefits of electric choice. These
numbers are a strong indication that Pennsylvania is well on its way to
developing a viable competitive electricity market.
The Act was the result of a considered process. Prior to
facilitating the stakeholder process that led to the Pennsylvania Act,
the PaPUC undertook an investigation into retail competition
2 which concluded after two years of extensive testimony.
Among other things, the investigation confirmed that restructuring the
electric industry at the retail level would be a formidable challenge.
On the most basic level, it is imperative to balance full retail access
and customer choice with the need to assure utilities and their
shareholders a reasonable level of financial stability. Pennsylvania's
Competition Act provides a reasonable opportunity for utilities to make
the transition to retail competition and customer choice while
preserving their financial stability through the opportunity to recover
stranded costs--utility assets rendered uneconomic by the move to
competition.
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\2\ See, Report and Recommendation to the Governor and General
Assembly on Electric Competition: From the Investigation into Retail
Competition, PaPUC Docket No. I-940032 (July 3, 1996). http://
www.pa.us/PA--Exec/Public--Utility/electric--competition
---------------------------------------------------------------------------
In its role as arbiter and adjudicator in each of the restructuring
proceedings which have taken place since the effective date of the Act,
the PaPUC has analyzed all the evidence submitted in favor of and in
opposition to each company's stranded costs and has led negotiations
among all parties addressing the appropriateness of each company's
proposed stranded cost recovery. Ultimately, the PaPUC adjudicated the
stranded cost issue for each utility in a way which has proved fair to
both the consumers and the utility shareholders.
The Act also contains a clear set of directives that electric
system reliability must be maintained at present levels, or it must
exceed those levels. The PaPUC has issued competitive safeguards in the
nature of a proposed rulemaking and continues to ensure that utilities
adhere to this mandate. Further, the Act guarantees that all consumer
protections now in place under the Pennsylvania Public Utility Code and
its attendant regulations will continue in the new era of customer
choice. The role of the PaPUC in this regard continues, as the
Commission modifies its regulations as necessary and adjudicates
consumer complaints. The PaPUC has also implemented the universal
service provisions contained in the Act, and will continue to do so
through the issuance of orders and the promulgation of regulations as
necessary.
Electric industry competition and restructuring transcends state
borders. Many of the electricity generation providers licensed to do
business in Pennsylvania are located outside of our Commonwealth.
Pennsylvania's Competition Act recognizes that the interconnected
electric system is a regional and national as well as a state resource.
The PaPUC is committed to working with the federal government and with
other states in the region to accomplish the goals of industry
restructuring, open access and competition. I would be remiss if I did
not point out that to date, the cooperation which the Commission has
received from the Federal Energy Regulatory Commission has been
exemplary and indeed indispensable. Open communication and cooperation
between the states and the federal government, as well as within
regions, is essential to realize the full potential of competition.
Regional cooperation is also necessary to maintain system reliability.
Pennsylvania prefers that each state be allowed the opportunity to
set its course into retail competition; however, we recognize that
there will be those states who choose not to act. We therefore submit
that the implementation of retail competition on a national basis by a
date certain is a logical and equitable approach that the PaPUC
endorses. In order to insure that all states are subject to the same
competitive forces and that no state is disadvantaged by the creation
of a new market, reciprocity, nationally and regionally, is imperative.
Accordingly, any federal legislation which is enacted should contain a
reciprocity clause.
Notwithstanding the recognition that federal legislation providing
for retail competition is necessary, Pennsylvania's Competition Act
reflects our desire to maintain a necessary measure of control of our
state's destiny in this area. Accordingly, it is our hope that any
federal legislation would allow the states an opportunity to act on
their own by a date certain and would ``grandfather'' existing state
legislation to the extent that a states' actions are not inconsistent
with the principles of open access, on a non-discriminatory basis, for
all of the market participants. We have provided draft language on this
subject as an attachment to this testimony.
Additionally, the PaPUC's proposed language includes specific
language addressing Pennsylvania's desire to have any federal
initiative preserve the states' authority to collect taxes on energy
provided to end users situated within the states, regardless of the
source or its location. One of the stated goals of the Pennsylvania
legislation was to make competition ``revenue neutral'' with respect to
tax matters. The proposed language would ensure that any federal
legislation also remains ``revenue neutral'' as applied to the states.
In the event that federal legislation is drafted which does not
contain a grandfathering clause, the PaPUC submits that the legislation
should preserve the states' authority to enforce regulations to
implement the requirements of the Act, to the extent feasible, without
compromising the legislative intent to open up retail competition on a
state, regional and national basis. Particularly, the PaPUC believes
that any issues relating to system reliability, universal service,
retail stranded costs and consumer protections should remain within the
states' jurisdiction. Pennsylvania has successfully addressed these
issues through its Competition Act and the issuance of Commission
orders and regulations, and we hope any federal legislation will
preserve our authority to do so.
The consensus-building process that led to the adoption of
Pennsylvania's Competition Act was intense, sometimes contentious, but
ultimately very rewarding for Pennsylvania's consumers and, I believe,
for the electric industry. Managing the transition from regulation to
increased competition has been our greatest challenge. However, we are
confident that our efforts will result in benefits for all
Pennsylvanians, as they have access to safe, reliable and efficient
service at competitive prices. We will continue, as a state, to do
everything within our power to make electric competition work for
Pennsylvania and for the region. We look forward to cooperating with
Congress in an effort to further the goal of customer choice in
electric energy.
I thank you for your attention, your consideration, and I await
your questions.
Mr. Barton. Thank you, Mr. Quain.
We would now like to hear from the Honorable Mr. Craig
Glazer from the great State of Ohio. Your statements in the
record in its entirety, and we'll give you 7 minutes to
summarize.
STATEMENT OF CRAIG A. GLAZER
Mr. Glazer. Okay. Thank you, Mr. Chairman, and members of
the committee. It is a great honor to testify before you on the
subject of evolving Federal and State responsibilities in
electric competition.
My name is Craig Glazer. I'm the Chairman of the Public
Utilities Commission of Ohio, and have served in that role for
the last 8 years and under three Governors, at this point.
I have to sort of let you in on a little bit of a secret.
One of your esteemed colleagues on this committee,
Representative Tom Sawyer--unfortunately, he's not here; used
to work for us. He worked at the Commission many, many years
ago, and we still find memos from him----
Mr. Barton. He's complained about that repeatedly. No, he
spoke very positively of it. I think you have 4 or 5 Ohioans on
this committee, so I think your State's position is going to be
well represented when we get to the mark-up.
Mr. Glazer. Well, that's good. That's good. We like it that
way, and we consider ourselves one of the other great States,
along with the great State of Texas. I've also worked with your
esteemed minority counsel. I spent many years in the law
library at Vanderbilt University trying to figure out this
thing called the ``Interstate Commerce Clause'' years ago.
We are something of a bellwether for the national mood, as
you all know. On election night, Ohio is one of the swing
States that people watch to get a feeling for what's happening
in the national elections. By the same token, McDonald's and
Wendy's test markets products in our cities and towns, and so
we kind of consider ourselves sort of a good indicator as to
where the national mood is. And like Pennsylvania and Illinois,
we also were something of a microcosm of the Nation. We have
high costs and low costs in the same State. We're both a large
energy producer and a large energy consumer. We are coal State.
We are also a natural gas producing State. We have strong
transmission systems, have two competing ISO's going in our
State at the same time, and we have more registered holding
companies under PUHCA, the Public Utility Holding Company Act,
than just about any other State. So we have a great interest in
these issues.
Where are we at? Well, it's interesting. Literally, we are
in the throws of trying to pass electric deregulation in our
State. We feel the heat from my esteemed colleague, Chairman
Quain, from Pennsylvania. The Governor just last week
announced, ``We want to get this done,'' and the House and
Senate are in intensive discussions. I literally was faxing
back amendments this morning to proposed legislation. With that
being said, how do you get your hands around this and what can
the Federal Government do. That's sort of the questions I heard
this morning. I'd like to propose a path that would avoid some
of the mandate problems, of date certains, but also be very
constructive, I would argue, in moving this issue forward.
Because, I think this is a Federal and State partnership and
think there are important things this Congress can do to move
this forward without stepping over the line and mandating the
States that might not want to move forward.
We've got to come up, in my opinion, with a harmonized plan
that moves forward and serves individual State goals, but has
incentives, the things that the Federal Government might want
to see happen, as well. But I would definitely--First, I'm
going to talk about what I would recommend you not do and then
talk about what you might do.
What I would recommend you not do is pull out any one piece
of legislation, repeal the Public Utility Holding Company Act,
for example, and do nothing else. It think that that would be
huge mistake, and there's a lot of reasons for that. I think,
instead, you ought to borrow a page from your own
Telecommunications Act of 1996, which set up a checklist for
States to follow, some incentives for things to happen, but
also provided for some State flexibility. And I think I would
argue that that might be the key here, and I can talk about
that in a minute. But let me go back to sort of what you
shouldn't do and why, taking PUHCA for a minute, I think it
would be a mistake to just rip up PUHCA, to just repeal it on
its own. Let's look at PUHCA for a minute. Well, it addressed a
number of issues that we are still talking about today, issues
this Congress dealt with in 1935 that are still issues today.
PUHCA had provisions about corporate structure. We're still
talking today about corporate structure; should people be in
this business or that business. It was an issue back then, an
issue today. PUHCA talked about cross-subsidization from
competitive businesses into monopoly businesses, from one
business into another. That's also a subject we're still
talking about today. PUHCA was concerned about the
effectiveness of State regulation on the monopoly parts of the
business. There are provisions in PUHCA that deal with that.
That is also something we are still dealing with today. And,
frankly, the statute is not exactly ancient. This Congress just
modernized it in 1996 as it related to electrics going into the
telephone business. PUHCA, in effect, was a market power
statute, because it dealt with many of these same issues. Is it
the right statute for the 1990's? Absolutely not. Does it need
modernization? Absolutely, it does.
With that being said, my fundamental point is, I think, the
biggest mistake would be to just rip it up without addressing
the market-power issue in some other way. And it is for those
reasons I ask the committee to consider sort of a different
approach where you would, in fact, adopt a checklist approach.
How would that work. Let's take PUHCA. PUHCA has line of
business restrictions, its got merger restrictions, et cetera.
Those would be lifted under this model, once the individual
States certified that they had appropriate protections under
State law that addressed abuses in market-power by large multi-
state holding companies. So a State that has moved toward
retail competition, those utilities operating in that State
would be free of PUHCA, as long as there, in fact, was some
other market-power protection that the State legislature or
State commission had come up with. For a State that doesn't
want to move toward retail competition at all, PUHCA could also
be lifted for those States, but those States would certify that
the effectiveness of State regulation would still be available
over a large multi-state holding company. They would certify
that issue. Just like in the Telecom Act, we certify that
certain things have happened, and then the FCC, in fact, takes
some action. So, too, would I suggest you could use that model.
Now, what happens if one State says, ``Well, I don't want
to play, I just want to be a hold-out``? I'd be willing to say,
if there's one State holding out, and it's holding out in a way
that's having an adverse effect on other States, then and only
then should there be some kind of override provision, some kind
of preemption provision. And there is language in the Federal
Telecom Act that dealt with that. With a State that just didn't
want to move forward, the FCC then had some authority to move
forward.
But under this checklist approach, you could craft a number
of things. You could give incentives for the very issues that
you raised. You could give incentives for independent
transmission. You could give incentives for States to resolve
stranded costs in a fair way. You could address all of these
issues and have the States make certifications of them, rather
than have this one-size-fits-all solution being decided here
inside the beltway. The bottom line is I think we can work
through this issue, I think we can find the appropriate
balance. You did it in the Telecom Act. It hasn't worked
perfectly, but it's a very sound piece of legislation, and I
think if you adopt an approach like that, you might be able to
accomplish some of the ends. I stand ready to work with this
committee on putting some of these ideas into action.
[The prepared statement of Craig A. Glazer follows:]
Prepared Statement of Craig A. Glazer, Chairman, Public Utilities
Commission of Ohio
Chairman Barton and Committee Members: It is a great honor to
testify before you on the subject of the evolving Federal and State
roles in electricity competition. My name is Craig Glazer and I have
had the honor of serving over the past eight years and under three
Governors as Chairman of the Public Utilities Commission of Ohio. In
fact, my appointing authority and former boss, George Voinovich, now
serves as a U.S. Senator in this Congress as does my former Cabinet
colleague, then Ohio Lieutenant Governor now U.S. Senator Mike DeWine.
I bring you greetings from the Buckeye State, which, coincidentally, is
in the throes of legislative debates on this very topic this week. I
want you to know that these are my comments and not necessarily those
of the Public Utilities Commission of Ohio.
As you may know, our state is something of a bellwether for the
national mood. We are often one of the swing states that is closely
watched on election night. By the same token, McDonald's and Wendy's
often test market products in our cities and towns since Ohio is
considered a good testing ground of the tastes and fancies of the
nation.
Not surprisingly, the same is true with the issue of electricity
competition. We are something of a microcosm of the nation on this
issue: we have high-cost and low-cost power in the same state; we are
both an energy producer and energy consumer; we have large reserves of
both coal and natural gas; we have strong electric transmission
systems; we have two different ISOs forming with a border which slices
our state in two; and we have more registered holding companies subject
to the Public Utility Holding Company Act (PUHCA) than any other state.
For all these reasons, we consider ourselves something of a bellwether
with some unique perspectives from being both a high-cost and low-cost
state.
Although only seventh largest in population, Ohio is the fourth
largest energy consumer in the nation. We are very much part of the
industrial heartland of the nation and our steel and auto industries
have retooled and have taken on the international competition. Because
of our heavy industrial base, the issue of electric competition is very
important to us. Ohio has high electric costs in the northern part of
our state (up to 12 cents per kWh), and much lower costs in the
southern part of the state. However, we are surrounded by states such
as West Virginia, Kentucky and Indiana, which have lower costs still.
Even more pressing, at least two states which border us, Michigan and
Pennsylvania, are aggressively moving forward with restructuring
implementation.
For the third year in a row, our state is attempting to pass
comprehensive restructuring legislation. The leadership of the House
and Senate of the state legislature are involved, and our Governor, in
his State-of-the-State message just last week, indicated that the time
to move forward is now. We've tried to learn from the good and bad of
the states around us. The proposal now on the table, put forward by a
bipartisan working group of state legislators, calls for a number of
things:
a. The commencement of full retail competition on 1/1/01;
b. A ``black box'' approach to stranded costs wherein a specific
company-by-company time period for recovery of revenues is set
forth in legislation, thus avoiding protracted proceedings;
c. An aggressive stance on ensuring against abuses of market power
harming competitive markets. A number of tools are put in place
by legislation including: mandatory independent operation and
separation of transmission from generation; elimination of
pancaked transmission rates; large shopping credits designed to
provide an approximate 10% up-front savings for residential and
commercial customers if they switch providers; an auctioning
off of default customers after the transition period to avoid
the incumbent realizing the horizontal market power associated
with incumbency; and, incentives for divestiture;
d. Various state tax reforms to ensure a level playing field between
in-state and out-of-state generators.
We are hopeful that this proposal will be passed by June of this
year enabling us to meet the 1/1/01 start date.
I firmly believe that there is a role for BOTH state and federal
legislation in the area of restructuring of the electric industry. I
want to compliment this particular Federal Energy Regulatory Commission
under the leadership of Chairman Jim Hoecker, and with an excellent
group of Commissioner, for reaching out and working with the states.
There is a dual role here that, if we get it right, can lead to a
success story for the nation.
As I mentioned, I firmly believe there is a role for both the
states and the federal government. Because the provision of electric
service has BOTH interstate and intrastate qualities, I think it
critical that we come up with a harmonized plan that moves forward and
serves individual state goals while recognizing the national and
international nature of the markets being created. To pull out any one
piece, be it PUHCA repeal, PURPA repeal, or the imposition of mandatory
date certains without examining the complex role of how the pieces all
fit together, would be a mistake. For this reason, I urge the House not
to pass stand-alone PUHCA repeal or mandatory date certain legislation
at this time. Rather, I suggest the crafting of a complementary role
for states and the federal government similar to that embodied in the
Telecommunications Act. The 1996 Act hasn't worked perfectly; there
have been state and federal conflicts. But the Congress correctly
recognized a dual role with states setting local interconnection
agreements and arbitrating disputes on local matters concerning same,
and the FCC, after mandatory state consultation, ultimately passing on
the national issue of the Regional Bell Operating Companies' (RBOC)
entry into long distance. The basic framework of the Act was sound,
although the FCC and individual states have gotten in trouble when they
pushed too hard one way or the other and tried to occupy the field
rather than recognize the delicate state/federal role.
I think we can achieve a similar harmonized role if we look to and
adopt the basic structure of the Telecommunications Act passed by this
Congress in 1996.
Let's look at PUHCA for a moment. PUHCA basically provided for a
corporate structure of this industry which revolved around ``home
town'' utilities locally based rather than spread across the country.
PUHCA, through its geographic integration requirements and line of
business restrictions, was, in effect, a market power statute--one
designed to address the market power abuses as well as the investor
abuses of the 1930's multi-state holding companies. After all, one
cannot forget that a big part of PUHCA was the recognition of the
otherwise inability of the states to properly regulate a large multi-
state holding company operating through many subsidiaries in multiple
jurisdictions so as to prevent abuses of markets and customers. In
fact, the statute was just modernized in 1996 by this Congress to
include a section to address the complex issues of cross-subsidization
that can arise when electric companies enter the telecommunications
market. The statute certainly isn't a perfect one--it definitely needs
modernization, but that's my whole point. We shouldn't just rip it up
without carefully ensuring that the market power issue, which can so
harm competitive markets, is addressed. The same holds true for PURPA
or provisions of the Federal Power Act.
It is for these reasons, that I ask the Committee to consider a
``checklist'' approach to federal legislation as was done in the
Telecommunications Act of 1996. PUHCA line of business and other
restrictions would be lifted once the states certified that they had
appropriate protections under state law that address abuses of market
power by a large multi-state entity in a state moving toward
competition. For a state not moving toward retail competition, the
state would certify that the effectiveness of state regulation over a
large multi-state holding company is not impaired. There could also be
a safety valve for federal preemption of a state if the state's actions
in not certifying lead to a ``one-state holdout'' that is having an
adverse effect on interstate commerce.
There has been much talk about the FERC and the states developing
incentives for companies that take steps to structure themselves in a
way which fosters independent transmission. Companies that participate
in ISOs or otherwise eliminate pancaking of rates and improve
reliability through large multi-state Transco's should get credit for
that under the checklist approach, leaving clear incentives in federal
relief from statutes if the underlying goals are met. Through a
checklist approach, the Congress would be fostering movement toward a
restructured industry, providing a clear path to the industry itself
and indicating its intent to be flexible and respectful of individual
state policies rather than holding a gun to the heads of industrial
states or centralizing the solution for the country inside the halls of
FERC, the SEC or this Congress. I would be happy to work further with
this Committee on the development of such a checklist approach.
I also want to briefly discuss the issues of setting a mandatory
date certain for retail electric competition nationwide. At some point,
the forces of competition are going to force a state to open up its
markets. But that shouldn't be done through Congressional fiat, but
rather through the actions of the marketplace and the inevitable
demands that customers will place on the system. Thus, I would
discourage a date certain approach in favor of a state opt-out
approach, so long as the state's actions do not unduly harm the
interests of other states. I have much respect for the interests of the
low-cost states. I have low-cost power in my own state. But, at some
point, in order to maintain a state's competitive position, the low-
cost generating plants will have to be replaced and then this issue
would be faced. It is in no ones interests to have investors passing
over investing in a particular state in the process.
For all these reasons, I encourage a harmonized approach through
the development of a checklist, with state certification and
appropriate overrides for an errant state's refusal to cooperate if
such refusal has a serious impact on interstate commerce and is
affecting the states around it. Regional oversight would be encouraged,
and a harmonized patchwork would be developed that would avoid the
problems of a one-size-fits-all solution on one hand, or the dangers of
total inaction on the other.
I look forward to working with this Subcommittee on these concepts
in the weeks and months to come. Thank you for this opportunity to
testify today.
Mr. Barton. We thank you, Commissioner.
Now, I would like to recognize the Honorable Susan Clark
from the Great State of Florida and the Chair noticed with
great sense of envy the show of public affection you gave to
Congressman Bilirakis as he left the hearing room earlier. We'd
hope you would extend that to all the other members of the
subcommittee at the appropriate time.
Your entire statement is in the record and you are
recognized for 7 minutes.
STATEMENT OF SUSAN F. CLARK
Ms. Clark. Well, for a minute, I'm speechless, but if I
turn to the substance of what I want to say, I think I may
recover a bit.
Obviously, we disagree on the mandate. And I'm going to put
that aside, because I think we've had questions on that and
I'll await any questions on that particular issue. I would only
point out that what savings you might realize depends on where
you start from. If you are a high cost State, you are likely to
recognize much more savings than one that is a low cost State.
And I know with interest, the savings that were articulated
with respect to deregulation in Pennsylvania, I would only
point out to you that recently we approved a rate decrease in
Florida for Florida Power and Light that will represent over $1
billion in savings to Florida customers of FP&L over 3 years.
That isn't to say, I think that is justification for continued
regulation, but I would only point out that we continue to look
at how our companies provide power and continue to look at
whether or not it is at the appropriate price. But let me tell
you what we do agree on, and I think there are a number of
things that you can do, Congress should do, and let me start
with the first one, and that has to do with reliability. I
think you will get agreements that there needs to be some
Federal legislation with respect to liability. And I believe
that authorizing a self-regulating reliability organization to
establish mandatory standards for reliability and operations of
the Nation's transmission system are in order. There is a need
for mandatory compliance with reliability standards and a
provision of explicit authority for FERC and for States to
enforce those necessary standards. I would note that we have
been working with Bonnie Suchman and we have worked with FERC.
There is a sticking point on the language on the savings clause
with respect to what jurisdiction and the authority the States
might have with respect to reliability. And on that point, I
would remind you that when the lights go out, it's not likely
that they will call you all, it's not likely they will call up
here to Washington; they are going to call our Governor, and
the Governor is going to, in turn, call us at the Public
Service Commission. So, in course, we feel if we are going to
be held responsible for it, we should have some responsibility
in that area. The other thing is, with respect to market-power,
I think there are areas in which we will need your assistance
in ensuring that there is not an abuse of market power. We
recommend, for instance, authorizing, but not mandating, the
formation of voluntary regional transmission organizations or
other kinds of entities to promote regional reliability and
fair and nondiscriminatory open access.
You know that FERC, at this time, has undertaken a
proceeding to hear from the States on that subject and
hopefully come to some resolution with respect to those areas
that would like their help and those areas that they think need
further guidance. I can tell you that in Florida, in response
to FERC's concern about the fairness and nondiscriminatory
nature of the transmission system, we have workshops, where the
transmission owning utilities, the transmission dependent
utilities, and all interested parties are trying to work out
exactly how we can manage, and by that I mean plan and operate
the transmission system in Florida, to the advantage of
everyone. I attended one of those workshops this last Monday
and I can tell you that there is movement on the part of
transmission owning companies to accommodate those concerns, so
that we can have a truly fair and nondiscriminatory open
process.
With respect to PUHCA reform, I think it's appropriate to
repeal PUHCA, provided that there are other measures to guard
against market power abuses. And the repeal of PUHCA should
include a provision that State commissions and FERC continue to
have access to holding company books and records.
Finally, I agree with the idea that PURPA should be
repealed. I would note that our commission hasn't taken a
formal position on this, at this point. But, it would seem if
you were going to have an open competitive market for
generation, a mandatory obligation to purchase is inconsistent
with that. I would point out that I think we should be careful
in any PURPA legislation, with respect to mandating stranded
cost. I think that PURPA contracts should be handled in the
same way utility investment is handled that might be stranded.
There should be an obligation to mitigate those costs. I
believe the State commissions are in the best position to deal
with stranded cost. They are likely to have been involved in
the decision in the first place, with respect to those
investments or the contracts. And so, they have some ideas as
to the way they may be mitigated and the fairness of the
recovery, with respect to them.
I suppose I'm here as one of those States that has not
moved forward with retail competition and, at this point, there
is nothing on the horizon with respect to State legislation to
do that. But, I would point out that we have been a leader in
bringing competition to our regulated industries, when we think
it's a good idea. We have had competition in the wholesale
market importer since the late 1970's. We have what is called a
broker system. We mandated the formation of the broker system
and then provided incentives to utilities to buy and sell their
power on that system, so the lowest cost generation would be
the next generation to be dispatched at any time.
Also, with respect to telecommunications, we passed our
Telecommunications Deregulation Act in 1995. We found local
competition would be beneficial, and so we moved to introduce
that competition.
I make those comments today in response currently to Ms.
Moler's comments, with respect to mandating retail competition.
In my mind, it assumes that State regulators and State
legislators will not move to do that, when it is in the
interest of the people of the State they represent. I think
that's a false premise. We will move to do that when we see the
benefits of it. And with that, I will turn my time over to Ms.
Smith.
[The prepared statement of Susan F. Clark follows:]
Prepared Statement of Susan F. Clark, Florida Public Service Commission
Mr. Chairman and members of the subcommittee: Good afternoon. My
name is Susan Clark. I am a Commissioner on the Florida Public Service
Commission and Chair of the Committee on Electricity of the National
Association of Regulatory Utility Commissioners, commonly known as the
NARUC. Today, I am here representing the Florida Public Service
Commission (Commission). I have submitted a written statement that I
respectfully request be included in today's hearing record.
I understand this subcommittee may soon be dealing with profound
issues surrounding changing the electric utility industry. You have
asked me to offer my opinion as to what issues require federal
intervention to restructure this industry, what areas are best left to
state authority, and what areas are best addressed by joint state/
federal authority. Before responding, I would like to take just a few
brief minutes to give the historical backdrop and explain why we find
ourselves at this junction in reforming the electric industry. For over
a half century, state public utility commissions (PUCS) have been
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, and to ensure that such
services are provided at rates and conditions which are just,
reasonable and nondiscriminatory for all consumers.
The Energy Policy Act of 1992 (EPAct) injected a mandatory open
access requirement for the transmission system that acted as a catalyst
to promote and encourage wholesale competition. Wholesale competition
is the sale and purchase of bulk power between utilities and suppliers
which will ultimately be delivered to the end-use customer by regulated
companies. Both before and after the competitive changes brought about
by the EPAct, the U.S. has enjoyed the most economical electricity
rates among the Western industrialized nations not heavily dependent on
hydropower. Times and fashions change, of course, and now the electric
utility industry is one of the last regulated industries to undergo the
transformation from a monopoly franchise to an open access system.
States are taking the lead in promoting this change when the state PUC
and legislature have judged it to be in the public interest.
Some seventeen states have gone beyond the EPAct and have adopted
retail electric restructuring programs that enable end-use customers to
choose among energy suppliers while ensuring the safety, reliability
and quality of electric services. A substantial number of other states
are examining whether and when to permit retail access.
While some argue that this level of activity is insufficient, the
states that have adopted retail open access electricity programs are
home to nearly half of the nation's population. All this activity has
taken place within the last three years, and I believe states will
continue to pursue restructuring programs if those programs benefit the
retail customers.
The states pursuing retail open access are acting with great care
and precision to ensure the continued reliability of electric services,
universal access to retail services and public benefits previously
provided by a vertically integrated industry. Careful review of these
activities discloses that state restructuring initiatives contain many
common elements: customer choice, functional unbundling, pricing
reform, stranded cost recovery, protection of public benefits, market
power mitigation, and mechanisms to support emerging regional markets.
It should also come as no surprise that the timing and implementation
of such initiatives differ from state to state in ways that reflect
local customer needs and other market realities including such factors
as climate, demographics, indigenous resources, environmental impacts,
past choices of technology, current resource preferences, system
capacity, geography, and form of utility ownership--to name a few.
It is just this attention to detail that warrants that the states
continue to have the ultimate responsibility for deciding if and when
retail competition is permitted. I strongly believe that it would be a
mistake for any federal legislation to require a mandated date certain
for retail competition. Clearly, a federally mandated one-size-fits-all
approach cannot and will not account for the unique concerns and
circumstances of the individual states. We have seen confusion created
by the federalization of the telephone industry. Therefore, my most
important message as a regulator of a state that is taking a more
deliberative view of retail competition is to not force a federal
mandate on us. Recently, commissioners from 23 states (The Low-Cost
States Initiative) addressed a letter to members of Congress confirming
this stance.
essential elements of federal legislation
Federal Energy Regulatory Commission's (FERC) Order No. 888
spurred the creation of a competitive wholesale power supply market and
is still in the early stages of development. We believe it prudent for
Congress to not risk disrupting these policies through prescriptive
national models, but rather consider targeted and focused legislation
that facilitates state restructuring efforts. Congress can take steps
to help the states by removing uncertainty and reducing the prospect of
tortuous litigation. I believe there are four areas where federal
action would be helpful in facilitating electric restructuring. These
four areas include reliability, market power, and PUHCA and PURPA
reform. Let me address each one of these in some detail.
As I mentioned earlier, the EPAct opened up the transmission grid
to promote wholesale competition. Retail competition has imposed even
more demands on the nation's transmission system in terms of more
transactions, greater power flows, and therefore higher risks of power
interruptions and system failures. It is important to keep in mind that
the overwhelming number of transmission lines that have been
constructed were primarily designed to serve native retail load. Over
time, utilities extended transmission lines to import and export
limited amounts of power and to help backup each other's electrical
control areas. The system was not designed to act as a huge seamless
network to transmit bulk electric power around the nation, but FERC
Orders 888 and 889 specifically intend for these systems to perform
this function.
Historically, regional coordination councils have operated
voluntarily in geographic areas with interconnected transmission or
control areas to maintain reliable and uniform standards for all users
of the transmission system. These voluntary and regional councils
operate under the auspices of the North American Electric Reliability
Council or NERC. Again, these are voluntary associations with the
common objective of maintaining a safe and reliable transmission
system.
However, with the increased volume of users and new competitive
users of the system, the NERC recognized the need for a more open and
representative council that would balance the needs of both the
historical owners of the system (i.e. the regulated utilities) and the
new competitive users created by FERC Orders 888 and 889. The NERC has
worked on legislation that would authorize this self-regulating entity
to establish mandatory standards for reliability and operations of the
nation's multi-transmission regions.
Both the NERC and the NARUC have concluded that Federal legislation
would be useful in this area. In fact, the NERC has voted to move
forward with specific language this year. While I do have some concerns
about the specific NERC legislation because of its lack of mention of
any role for the states in ensuring planning and operational
reliability, I am personally convinced that any authorizing legislation
to give certain regulatory powers to the NERC is needed. Any such
legislation should explicitly confirm the public interest in
transmission grid reliability, the need for mandatory compliance with
reliability standards, and a provision of explicit authority for the
FERC and the states in cooperation to enforce the necessary standards.
I emphasize the cooperative nature of this task. This kind of focused
legislation would further the goals and objectives of the FERC Orders
and therefore encourage wholesale competition.
As you consider reliability legislation, I would encourage you to
remember that the state commissions are the ones that have the ultimate
responsibility for keeping the lights on, and we are the ones who are
held accountable when the lights go out. When there is an outage of an
essential service like electricity, utility customers do not call, nor
should they be expected to call, the NERC, the FERC or the DOE. Rather,
customers call the staff and commissioners of the individual state
PUCs. Our legislative leaders and governors also call us to find out
when the problem will be resolved.
Secondly, Federal legislation should authorize, but not mandate,
the formation of voluntary regional transmission organizations or other
kinds of entities to promote regional reliability, and fair and
nondiscriminatory open access. Some movement in this direction is
happening with the recent announcement by the FERC that it intends to
consult with the states to explore such organizations. The DOE recently
transferred its authority under Section 202(a) of the Federal Power Act
to the FERC with the stated purpose in its news release to, ``provide
the FERC with the authority to establish boundaries for ISOs, or other
appropriate transmission entities which could aid in the orderly
formation of properly sized transmission institutions and enhance the
development of ISOs in a rational, comprehensive manner.'' The FERC
recently issued a Notice of Consultation to pursue this stated
objective. I am optimistic at this time that the voluntary and
cooperative approach that I am advocating will be championed by the
FERC.
The third area in which federal legislation would be helpful is in
repealing the Public Utility Holding Company Act (PUHCA) and the Public
Utility Regulatory Policies Act (PURPA) provided certain conditions are
met. As you may recall, the PUHCA statute was established during the
1930s to give regulatory oversight to multi-state utility holding
companies. With today's dramatic transformation of this industry and
the many mergers and acquisitions that are occurring, the PUHCA appears
to have outlived its usefulness. The PUHCA law probably is inconsistent
with the goals of a highly competitive wholesale and retail market, but
states do not have the authority to grant waivers or exempt utilities
from the provisions of this act. There is, however, concern that some
states may not have the authority to address market power issues. In
light of this concern, Congress should specify in any repeal of the
PUHCA that state commissions and FERC have access to holding company
books and records.
Finally, with respect to PURPA, I would recommend that this statute
be repealed, but that any existing contracts not be abrogated. Please
note that our Commission has not formally addressed this particular
point, however, so my comments here are my own. This statute derives
from the late 1970s when this law required utilities to purchase power
from qualifying cogeneration facilities at full avoided costs. Now,
with a vibrant wholesale market, this requirement simply burdens retail
customers with long-term power obligations that are usually above
market rates. However, any legislation on this issue should preserve
state utility commissions' authority to require electric utilities to
mitigate costs associated with above-market contracts.
helpful elements of federal legislation
Florida has not taken steps to introduce retail choice.
Nevertheless, we recognize that other states have found such
restructuring efforts to be in their best interests. To that end, we
believe legislation should be aimed at assisting those states' efforts
by:
Affirming states' authority to order and implement retail
access/customer choice programs free from the threat of
preemption under the Commerce Clause or the Federal Power Act;
Affirming states' authority to impose wires charges to support
the recovery of stranded costs, state-sponsored energy
efficiency and/or environmental programs, and universal service
programs;
Clarifying state jurisdiction to regulate rates, terms and
conditions of unbundled retail transmission services;
Affirming states' exclusive jurisdiction over the rates, terms
and conditions of retail electric services.
With these issues resolved legislatively, while continuing to
accord states the discretion to determine whether, when and how to open
retail electricity markets to competition, states would be confident of
their legal authority to move forward on restructuring efforts. Without
these changes, states contemplating market reforms may find themselves
in the position of states like Michigan and New Hampshire where federal
court litigation, although not yet successful in attacking state
programs, has slowed restructuring processes.
conclusion
While many believe that wholesale competition provides the vast
bulk of any uncaptured economic efficiencies for ratepayers, I respect
the fact that many states have concluded that additional benefits are
to be gained from direct retail access. In Florida, we are carefully
watching the more experimental states to learn what models work and
what lessons are applicable to Florida. At this time, neither the
Commission nor the Florida legislature has opted to initiate the
necessary changes to permit retail access. Just last week however, the
Commission did approve a petition for determination of need for the
state's first merchant power plant that will be constructed to compete
on the wholesale level. While still subject to judicial review and
approval of our governor and cabinet, this project is a major step in
promoting ever greater wholesale competition in Florida.
The states are now performing their historic role as laboratories
to test how the words ``greater competition for retail consumers'' can
be turned into real-world services that customers will buy. As the FERC
moves forward in its implementation of Order 888, the state commissions
and legislatures must be allowed to continue to experiment with retail
access, including customer choice initiatives. As the consequences of
competitively-based wholesale markets become clearer, states are
putting in place complementary retail policies which are adapted to
regional market conditions. State commissions are developing and
implementing compatible retail policies which preserve reliability,
prevent the stranding of ``public goods,'' ensure consistency with
environmental values, minimize cost shifting, provide for stranded cost
recovery, and most importantly, improve economic efficiency. Over time,
states will work together, as some are now doing, to devise and
implement regional institutions to adapt their regulatory
responsibilities to the reality of regional power markets.
If Congress chooses to act in this area, any federal legislation
should preserve broad state authority to implement these policies
flexibly in response to the conditions in local retail markets. The
development of retail customer choice should be implemented in a manner
that respects these differences. In our view, that can only happen if
decision makers closest to these conditions--State commissions and
legislatures--enjoy the flexibility to adapt pro-competitive policies
to the needs of local retail consumers. In the weeks and months ahead,
my colleagues and I look forward to working with Congress, with our
colleagues at the FERC, 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.
Mr. Barton. Thank you, Ms. Clark. We would now like to
recognize last, but not least, the commissioner from the great
potato State of Idaho----
Ms. Smith. That's right.
Mr. Barton. Ms. Smith, and point out that when Congressman
Craig was in the House, he had a photograph, and I don't know
if he still does, on his Senate office wall of Marilyn Monroe
in an Idaho potato sack.
Ms. Smith. Well, I think everyone would look good in an
Idaho potato sack.
Mr. Barton. Well, Ms. Monroe did look very good in a burlap
Idaho potato sack.
Ms. Smith. Just eat them spuds.
Mr. Barton. Your testimony is in the record in its entirety
and you're recognized for 7 minutes.
STATEMENT OF MARSHA H. SMITH
Ms. Smith. Thank you, Mr. Chairman, and members of the
committee. It's a great honor to be here. Although I would note
that airline deregulation may work differently, my ticket here
was $1,764. But, you're worth it.
Mr. Barton. Doubt that.
Ms. Smith. Well, maybe I'm worth it.
Mr. Barton. That's definitely true.
Ms. Smith. I just want to make some brief remarks,
basically reacting to comments that I heard earlier today in
opening statements and from questions of members, because, like
you say, my comments are in the record. And I am definitely
here as a State that's not going to retail competition anytime
soon. And I guess I'd like to point out first of all, in my
mind, competition is not a goal. Competition is a tool, just
like regulation is a tool. And the question is: when and where
do you use which tool to bring adequate, reliable, and
reasonably price electric service to consumers.
Many opening remarks seem to be based on the assumption
that retail competition in this industry will benefit all
Americans. And I don't believe that's a foregone conclusion or
a self-fulfilling prophecy. Instead, I would like to turn that
back to you, as a challenge: if you're going to do something,
it has to benefit all Americans. And I think that's a big
challenge.
And, of course, the key is: first do no harm. So far in the
past 3 years plus of working on this issue, Idaho hasn't found
a way to make that happen for our citizens, so that they will
all benefit. We enjoy some of the lowest electric rates in the
Nation, due in part to a longstanding active wholesale market
in the northwest and the west, a market that existed before the
Energy Policy Act of 1992, and I might add a market that's
essential to Idaho as a net power importer.
Another key to our uniqueness in the northwest is the
predominance of hydroelectric generation, both publicly owned
and privately owned dams, immense in scale and generation
output, both, of course, not without its own set of concerns
and problems. Given our circumstances, Idaho has adopted a go
slow approach. Just because we've said be cautious, don't rush
into it, and know what you're doing before you do it, doesn't
mean we haven't done anything.
As pointed out in my written remarks, the Public Utilities
Commission has instituted several pilot programs with our
investor-owned utilities. Results of one showed some savings in
the first year of a 2-year pilot, and a change in the wholesale
market meant there were no savings for those participants in
the second year and, therefore, they were not anxious to have
the pilot continued. And at its end, it was terminated. In
another pilot, they got no one to sign up for it.
So, I guess another approach we took for which the
Commission was criticized is for a large industrial customer.
We allowed them for half of their load to be priced at a market
rate. In other words, they buy and sell power through their
local utility, but the utility does it at their direction, and
they're essentially playing the market. Reports are that
they've learned a lot. They may be marginally ahead price-wise.
The price varies, so sometimes they're up and sometimes they're
down. But, the important thing they told me to point out was
that this contract has been operating in a time of
exceptionally good water conditions, where power is plentiful,
low-cost power is plentiful in the wholesale market. So,
everybody is kind of concern what happens when we don't have a
good water year and low cost power isn't plentiful. Because, if
they're barely saving money now, we don't know what will happen
in the future. And if this sophisticated large industrial
customer can't save a lot of money, we worry for the other
customers.
The region has also been very active. I think several years
ago, the four Governors of the northwest States, Washington,
Oregon, Idaho, Montana, developed a regional review committee
that gave several recommendations. And out of that has come a
subscription process for the power of Bonneville Power
Administration, which, as you know, is a large Federal power
marketing entity in our region. So the region hasn't been
inactive and has been going forward in the manner that they see
might benefit our citizens.
We've, also, been working hard on the area of
interconnection. The western interconnection has a group that
works regularly together, called the Committee for Regional
Electric Power Cooperation or CREPC. We meet at least twice a
year on these important issues. It includes Canadian provinces
and also some States of Mexico, because the interconnection is
international in scope. And I think one of the most important
things that Ms. Moler mentioned in her list today, but which
she didn't emphasize in her oral comments, was that you should
recognize the regional nature of markets and allow regional
solutions. And I'm a strong proponent of that, because I think
the west has a system set up to address issues of a regional
nature that come up and to see that the region solves its own
problems.
Mr. Chairman, I said I wanted to be brief. I found your
questions very interesting, and I enjoy that interaction. So,
I'll just close with the comments of one of my colleagues in
Montana, who when I said I was coming here to do this and did
he have any suggestions, he said, well, for sure, there
shouldn't be a Federal mandate. He said, every State should be
free to do it, even like Montana, to do it in the wrong way at
the wrong time.
Thank you, Mr. Chairman.
[The prepared statement of Marsha H. Smith follows:]
Prepared Statement of Marsha H. Smith, Idaho Public Utilities
Commissioner
Good morning. I would like to thank Chairman Barton for this
opportunity to address the United States House Subcommittee on Energy
and Power. This valuable process of defining our respective roles in
the evolving era of electric restructuring will serve the best
interests of the American public.
The first issue I've been asked to address this morning is a review
of the State role in electric regulation. Idaho law requires the
regulation of investor-owned electric companies, of which there are
three, but not municipal and cooperative electric providers. Eighty
percent of Idaho citizens are served by regulated investor-owned
electric companies. Idaho's electric companies are protected from
encroachment by other service providers through the state's Electric
Supplier Stabilization Act. Unless the incumbent provider consents to
allow service by other providers, it has an exclusive right to serve in
the geographic area assigned to it.
In its regulatory authority, the Idaho Public Utilities Commission
has quasi-legislative and quasi-judicial as well as executive powers
and duties. In its quasi-legislative capacity, the Commission sets
rates and makes rules governing utility operations. In its quasi-
judicial mode, the Commission hears and decides complaints, issues
written orders similar to court orders and may have its decisions
appealed to the Idaho Supreme Court. As an executive agency, the
Commission enforces state laws affecting the utility and transportation
industries.
Idaho residents consistently enjoy some of the least expensive
electric service in the nation, according to surveys conducted by the
National Association of Regulatory Utility Commissioners (NARUC), the
Edison Electric Institute and the Energy Information Administration of
the U.S. Department of Energy.1
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\1\ Attachment #1
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According to NARUC, Idaho's electric utilities--Idaho Power Co.,
Avista Utilities and PacifiCorp (application on file to merge with
ScottishPower)--ranked 1st, 6th and 25th among the investor owned
utilities nationwide with the least expensive rates for residential
customers during the 1996-97 winter season.
Our role, then, as state utility regulators is to ensure our
citizens continue to enjoy affordable, adequate and reliable service
from providers, which are assured a fair, reasonable and just return on
their service to and investment in Idaho.
The second issue I have been asked to address this morning concerns
any ``dramatic changes'' occurring at the state level and within the
electric industry which may require changes to the state role in
regulating our electric service providers.
Let me begin by saying that electrically, Idaho is in the Northwest
and part of the Western Interconnection. The key to the uniqueness of
the Northwest is its hydro predominance, both federally- and privately
owned dams immense in scale and generation output. In addition there is
a major federal presence in transmission and an already advanced
integration of power markets. The Western Interconnection will continue
to be, in essence, electrically separated from other Interconnections
in North America. Thus, the power market for western consumers is
defined by the boundaries of the Western Interconnection.
As far as any ``dramatic changes'' occurring at the state level and
within the electric industry, there really haven't been any as far as
Idaho is concerned. Initially in Idaho, as the national debate over
restructuring the electric industry heated up, there seemed to be a
sense of urgency to figure out what was happening before we got run
over. Now that some states have taken steps, however, many problems and
unintended consequences seem to have arisen even in states that
actively sought to restructure in their belief it would be a real
source of relief from high costs. The blush is off the rose, so to
speak, and low cost states feel a little more comfortable stating
openly the real doubts we have had from the outset.
As a low-cost energy state, Idaho has been and remains very
interested in the role federal and state policy makers have in
restructuring the nation's electric industry. And while our perspective
and concerns may appear somewhat unique to members of this committee,
particularly those esteemed members from high-cost energy states, I can
assure you that nearly half the states in the Union 2 share
Idaho's concerns and they too are determined to play a vital part in
defining and fulfilling these roles.
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\2\ Low Cost Electricity States Initiative signed by the
Commission's of Alabama, Florida, Georgia, Idaho, Indiana, Kentucky,
Louisiana, Minnesota, Mississippi, Missouri, Montana, North Carolina,
North Dakota, Oklahoma, Oregon, South Carolina, South Dakota,
Tennessee, Utah, Virginia, Washington, West Virginia and Wisconsin.
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The Low Cost Electricity States Initiative 3, in brief,
states, ``As a restructured electric industry becomes a reality in many
parts of the nation, little attention has been given to the concerns of
low cost states . . . these low cost states are being pressured into
opening their electric industries to competition with little or no
consideration of the effects on native retail customers.''
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\3\ Attachment #2
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This is an important document and I strongly encourage the members
of this committee who may not already be familiar with it to study the
Initiative closely as it represents the views of 23 states.
Because we could not find a clear potential for significantly lower
rates, the Idaho Public Utilities Commission in 1996 issued Order No.
26555 (Case GNR-E-96-1) which stated that we should be ``cautious with
respect to an outright deregulation of Idaho's electric markets.''
Because our citizens already pay some of the lowest electric rates in
the nation, deregulation may actually result in lower quality of
service. We also believe that deregulation has the potential to
introduce significant rate volatility--something we know from past
experience that customers do not like.
Before proceeding to the third and final topic of discussion this
morning, I would like to take a moment to address the Committee's
inquiry pertaining to what specific restructuring issues are best
addressed at the state level. Let me just say that the decision on
whether to authorize retail competition with a state remains and must
continue to remain a state decision.
This brings me to the third issue you have asked me to address . .
. a review of the steps taken by Idaho to open its retail markets.
It has been almost two years ago that I appeared here and reported
to this subcommittee that our Legislature had appropriated $100,000 to
fund a committee to study electric restructuring. Their work has led to
a series of generally negative conclusions indicating a feeling that
electric restructuring is more likely a source of peril than of benefit
for the state of Idaho. The legislative report 4 also
vigorously reinforces my earlier testimony to this subcommittee that
water resource questions of the sort unlikely to even appear on the
national scale are of vital importance to any consideration of electric
restructuring in Idaho as well as for other Northwest states.
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\4\ Attachment #3
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In it's final report to the Idaho Legislature, the legislative
committee formed and funded to study electric restructuring made seven
recommendations. The first two of these seven recommendations are
strong position statements that best sum up the political and, perhaps,
social position in Idaho toward electric restructuring. Recommendation
One: ``The Committee recommends that our Congressional delegation
vigorously oppose further deregulation at the federal level.''
Recommendation Two: ``The Committee recommends that no state
legislative actions be taken at this time that would encourage retail
electric power restructuring.''
The Idaho legislative committee on electric restructuring has been
extended by the current Legislature, but their focus seems to have
become even more clearly, how can Idaho protect itself from
restructuring.
Although Commission Order No. 26555 encouraged a cautious approach
to electric restructuring for Idaho, it also encouraged utilities and
other interested groups to continue to make innovative proposals. The
Idaho Commission has approved several utility pilot programs that allow
for limited tests of retail access.
Two of these pilot programs were conducted by Washington Water
Power Co., now known as Avista Utilities, and the third was conducted
by the Idaho Power Co. The two Avista pilot programs targeted
industrial, commercial and residential customers. The two programs
combined had a total eligible customer base of 5,581. Of that base, the
two pilots attracted 66 participants. Out of fairness, it should be
noted that 61 participating customers did realize some small savings in
the first year of the retail pilot. Those savings, however, had
completely disappeared by the pilot's second year of operation. The
pilot program offered by Idaho Power Co. to 11 of its industrial
customers failed to attract even one participant.5
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\5\ Attachment #4
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The Commission has also approved a special contract between Idaho
Power and its largest customer that some opponents claimed was a de
facto restructuring pilot. The contract allows Idaho Power's largest
customer--constituting 20-percent of Idaho Power's total load--to shop
on the market, through an Idaho Power employee, for half its power
needs.
Early results of this contract seem to indicate that even this
major customer, whom one would expect is sophisticated enough to fend
for itself in a market environment, has not fared any better during the
first few months of trying the market than it would have with regulated
rates. It is important to note that the Northwest has experienced
banner water conditions since the approval of this contract. Thus,
power has been plentiful and low priced on the wholesale market. If
this type of customer doesn't benefit under these favorable
circumstances, what will happen to the majority of Idaho's small
commercial and residential customers as they try to cope with real
market choices?
The Idaho Commission will continue with a number of efforts aimed
at bringing our state closer to full and informed participation in a
restructured electric environment 6, but past programs and
their numbers graphically illustrate the definite lack of interest for
electric restructuring in Idaho and other low-cost energy states.
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\6\ Attachment #5
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Given this resistance by state lawmakers, a coalition of 23 states
and customers overcome with a complete and utter lack of interest to
engage in pilot programs imitating free-market conditions, we in Idaho
do not feel federal authorities should simply impose a ``one size fits
all'' mandate on the theory that deregulated electric conditions may--
and I emphasize the word ``may''--benefit some customers in the high-
cost energy states . . . states that comprise less than half of the
country.
It is the role of citizens and authorities at the state level, and
where appropriate, the regional level--not federal lawmakers, agencies
or commissions--to decide and shape this issue according to our own
energy use patterns, geography, market dynamics, values and interests.
If Congress is to consider electric restructuring legislation, a
``Northwest Chapter'' should be incorporated to address the unique
situation and circumstances of Idaho and her Pacific Northwest
neighbors. This Northwest Chapter must also include provisions for the
future of the Bonneville Power Administration.
Most importantly, the states must have assurances that any federal
legislation will not force local utilities to renounce their native
service areas in order to survive in a restructured environment. And
finally, if you determine that some federal electric restructuring
policy is unavoidable, we implore you to develop this policy to allow
for regional differences. The states can work out regional differences
within the context of broad federal policy guidelines, but without
federal interference.
In closing, I would again like to thank you for this opportunity to
address the subcommittee. Idaho has taken a proactive approach to
determining what will work best for Idaho industry and Idaho consumers.
We are a fiercely independent sort in Idaho and while we believe the
federal government should address broad principles that are of national
necessity, the details of implementing those principles and other
matters that are local and regional in nature really belong and must
remain under state jurisdiction.
Attachment 1
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Mr. Barton. Sounds like a Texan talking, if you ask me.
The Chair's going to recognize himself for 5 minutes and we
expect to vote any time between 3:30 and 4, so, hopefully, we
can get one round in before we break. Unless there's just a
huge interest, we'll only ask one round of questions of this
panel and then let the rest be in writing. So, I'm going to
recognize myself for 5 minutes.
Commissioner Smith, you obviously have come from what we
call a low cost State, so it's not exactly a surprise that you
tend not to want a Federal role in this issue, at this point in
time. But, I think that you're aware that Idaho did participate
in a comprehensive review of this issue, along with three other
States: I think Washington, Oregon----
Ms. Smith. Montana.
Mr. Barton. [continuing] and Montana. What were the
findings of that comprehensive review?
Ms. Smith. Well, I didn't bring the entire list with me.
The Bonneville subscription process was one of those I
mentioned. I believe they also had a finding that the region
should go to retail choice by July of this year or next year. I
would say the only State in the region that's enacted
legislation has been Montana, and they did not choose the date
in the regional review.
Mr. Barton. What was the conclusion of the regional review
about the need, if any, for Federal legislation in this area?
Ms. Smith. I don't recall that. Perhaps, you have a better
idea than I do right now.
Mr. Barton. Well, my staff has the idea that it said that
there was some Federal legislation necessary.
Ms. Smith. Well, and I think that's correct. And we've
heard the areas of Federal legislation that need to be
addressed. The Holding Company Act, the PURPA purchase
requirement, I think, are some things that are in Federal law
now that only Congress can fix.
Mr. Barton. Again, the staff----
Ms. Smith. And, I guess, the other item that I think I
mentioned when I testified here not quite 2 years ago was that
we need some help with the Bonneville Power Administration, in
how to deal with that Federal entity as the region
restructures, because only Congress can address some of the
requirements and restrictions.
Mr. Barton. Well, again, we're not here to be argumentative
and we know that your State, as any low-cost State, is going to
be less than effusive about the Federal position preempting
anything in your State. But, this comprehensive review, at
least according to my staff, did indicate that you needed some
changes in the Federal Power Act and the Bonneville Power
Administration that would require Federal legislation. So, even
in a low-cost State like yours, there has been some political
input, at least at the gubernatorial level, that you might
support some change without going whole hog into the issue.
Ms. Smith. Absolutely. I think you're entirely correct,
that the northwest does need help in dealing with Bonneville. I
think what we'd like to work toward is having a place for what
we have been calling the northwest chapter in any legislation
that Congress would draft, that would then directly address the
specific and unique concerns that deal with those agencies in
our area.
Mr. Barton. Now, my general question to the other three
panelists that are still with us: is there anyone at the table
that doesn't support any type of Federal legislation at all
this year? Ms. Clark, would Florida's position be----
Ms. Clark. Well, I have indicated to you the areas that I
think that you need to act: in reliability market power, PUHCA
reform, and PURPA repeal. I guess I would characterize it as
you need to clear out the brush, so that we can move forward,
as is appropriate for us to do.
Mr. Barton. Mr. Glazer and Mr. Quain?
Mr. Glazer. As I indicated, Mr. Chairman, in my remarks, I
think you can do actually the whole hog, if you will, but do it
in an incentive based way, such as was done in the
Telecommunications Act. And that way, you can respect the
rights of the low-cost States, but still put some stamp on
moving forward on the national issues.
Mr. Barton. Okay. Mr. Quain?
Mr. Quain. I find myself being very much in agreement with
many of the comments of the first panel, that I think it's
appropriate to move forward with Federal legislation. I would
go farther than some of my colleagues sitting at this table,
but I think a lot of the discussion you had in the first panel
gave you good ideas as to what needs to be done and I think
it's appropriate that you do it.
Mr. Barton. Now, with respect to the grandfathering issue
in a State like Pennsylvania or a State like Illinois that has
acted or is in the process of acting, some of the issues that
both those two States mentioned in their testimony was low-
income energy assistance. So, I would assume that if we pass a
Federal statute, that grandfathered States, specific activities
within State boundaries may preempt some of the transmission
issues, because of the interstate nature of the interconnection
and the reliability, that that would be an acceptable
grandfather compromise. And, again, I'm only talking in general
terms, now. But, as long as we didn't tell you how to dot the
Is and cross the Ts on how you do low-income energy assistance
or be too specific on stranded costs recovery, if you've
allowed for stranded cost recovery and we focused on the
interstate aspect of the electricity generation and
transmission system, your State would tend to find that
acceptable. Is that a fair statement?
Mr. Quain. I think that's a fair statement, Mr. Chairman.
I'd be happy to work with you on the details of that. Some of
those issues seem to fall into the general transmission
category at first blush, that may have unintended impacts on a
delicate balance in our legislation, just as Mr. Persico talked
about it in Illinois. But, I think it's a general proposition,
that's correct.
Mr. Barton. Well, I can assure that, as the representative
of the States, my State of Texas has moved the bill out of the
State Senate yesterday. It has a number of provisions on low
income energy assistance and market allocation, and I don't
think Congressman Hall or myself intends to preempt those. So,
we're very aware that if the States have acted and it's not
directly an opposition to the goal of the Federal legislation,
we see no reason to preempt that.
My time has expired. I recognize the gentleman from Ohio,
Mr. Sawyer, for 5 minutes.
Mr. Sawyer. Thank you, Mr. Chairman. Welcome, Craig Glazer.
I used to work where he works and----
Mr. Barton. He was bragging on you when you weren't here.
He was.
Mr. Glazer. I've got some secret memos of yours still in
the file.
Mr. Sawyer. That was 25 years ago. In any event, I wasn't
here for the testimony. I read some of your testimony. And so,
I'm reluctant to consume a lot of time asking questions. Let me
ask you, though, Craig, you mentioned incentives for fostering
independent transaction. Could you develop that a little bit
more for us?
Mr. Glazer. I think if we borrow the telecommunications
model, there could be incentives for companies that went
forward with independent transmission, that separated out
transmission, from generation. And that would be part of the
checklist and that would get them some PUHCA relief or some
other additional incentives. Those are the kind of things that
I was talking about.
Mr. Sawyer. Do you have strong feelings about the design of
independent transmission entities or do you believe we should
simply describe characteristics that we'd like to see and let
them develop as they will region by region?
Mr. Glazer. Well, Representative, it's an excellent
question. And there was discussion earlier about the price
spikes in the Midwest that were felt in Illinois and felt in
Ohio. The Federal Energy Commission did a report on what caused
that and what's the prospect of the future and the Ohio
Commission did a report, as well.
The Federal Energy Commission, I'm not criticizing them.
The report was excellent. But, it said, it was a one-time
thing. I don't think we have to be concerned about. We actually
found, no, this really could happen again and in a retail
environment could really then affect customers. And your
constituents start calling you, as they'll call us when they
see their bill fly up.
Part of the problem we found is there are no rules for of
road. There are separate transmission companies. There are five
just in Ohio. There are five different toll booths to move
power just from Cincinnati to Akron, Ohio. And there's no rules
of the road. I sort of analogize it to the air traffic control
system. Imagine if the air traffic controllers, each worked for
a different airline, and had an incentive to move their planes
from their airline, as opposed to having some neutral system--
--
Mr. Sawyer. Sounds like Europe.
Mr. Glazer. [continuing] and then imagine on top of that
that all of them around the country had a different set of
rules. The planes are flying and nobody knows what the rules of
the road are. That's kind of where we are in transmission.
Mr. Barton. That sounds like Congress.
Mr. Glazer. And the Federal Energy Commission says they
don't feel that there's a debate whether they have enough
authority from this Congress to move forward to deal with that
issue. We think it's got to be solved.
Mr. Sawyer. Let me ask--take a different task here. I don't
know whether you saw Energy Daily today. There is an article I
don't want you to comment on. It's Ohio IOUs take stock hit
over State deregulation bill. And I think their point is that
Ohio, being--sitting there betwixt and between now for an
extended period of time, with legislation on the table that
gives some people heartburn and the cures aren't there yet and
being uncertain about whether or not it's going to be able to
move forward, has had this kind of consequence.
Mr. Glazer. Yes.
Mr. Sawyer. Without commenting on that, at some point, it
seems to me that we run the same risk nationally, having
legislation that--in many different forms, where we don't move
and, yet, the market and the technology and the economy is
moving all around us. Would any of you care to comment on
problems that that might create within the industry, itself?
Mr. Glazer. The only comment I would make on that, I think
it's a very good point, that's why I sort of had suggested this
checklist approach. There's some broad Federal things you want
to see happen: independent transmission, some easing of the
PUHCA restrictions; but, then, still having the flexibility to
deal with the specific problems of Florida, of the northwest,
of Pennsylvania. There might be a way around having to tackle
this very difficult issue, a date certain. And what is that
date? Is that the same date in Ohio as it is in Idaho?
I wouldn't want to be in your shoes, having to make that
decision.
Mr. Sawyer. Well, Pennsylvania, it's yesterday; in Ohio,
it's tomorrow; and in Idaho, it's never; right?
Thank you, Mr. Chairman.
Mr. Barton. Okay. Mr. Quain, do you want to comment on it?
Mr. Quain. Well, I just had the comment that I think if you
set the date certain out far enough and make it clear that
you're going to give the States individual opportunities to
craft a piece of legislation that makes sense for their
jurisdiction, I think you've accomplished the best of both
worlds, because I think you do run the risk, without a date
certain, that you do get a patchwork type of approach to this
and we end up with the same kind of problems with market
barriers that Chairman Glazer talked about in the transmission
system. And they ought to be avoided. We ought to have a free-
flowing, open marketplace, but give each State plenty of time
to develop their own solutions as to how we get there.
Mr. Sawyer. Thank you, very much.
Mr. Barton. We recognize the gentleman from Oklahoma for 5
minutes.
Mr. Largent. Thank you. Ms. Smith, a question I have for
you is, we refer to Idaho as a low cost State. Does that also
mean that your cost of production is low?
Ms. Smith. The costs that we have related to electric that
are low are generation costs and transmission costs. Actually--
--
Mr. Largent. So, generation costs are low?
Ms. Smith. Our generation costs are low. I think right now
they're probably below the wholesale market. Our transmission
costs are low. We found that out when we tried to create
INDIGO. But, however, I would note that our distribution costs
are significantly above the national average, because of our
low density and our terrain.
Mr. Largent. Right. The question I have for you, then--I
mean, I guess I'm taking the opposite view of our Chairman, who
concedes we understand why low-cost States would not want to
participate in a competitive market. I don't understand that.
If you are the low cost producer in a competitive marketplace,
you have a distinct advantage in a competitive field. You've
got a lot of States to choose to sell to, if you can get to a
competitive market. You're the low cost producer. Why wouldn't
you want to compete and earn money? I mean, that's the nature
of a de-monopoly, that you can do that.
Ms. Smith. And I agree. And I've often wondered if I were
sitting on the Board of one of my investor utilities and one of
my goals was to maximize the company's profits, why wouldn't I
divest my generating assets, thumb my nose at the State Public
Utility Commission and the State legislature and make all the
money I could in the wholesale market. I guess from a
regulator's point of view, the rates are based on a return that
the Commission allows. Maybe the company could make more money
in the market; I'm not sure. But, you see the dilemma.
Mr. Largent. Not yet. I'm trying.
Ms. Smith. It's a distinction of whether you're looking at
it from the point of view of an investor of a utility company
and whether you're looking at it from the point of view of a
customer in Idaho. Is that something, if you're the customer,
that you want your utility to do.
Mr. Largent. Okay, let me ask you this question: would
deregulation cause the cost of production to increase?
Ms. Smith. I don't think so. And I guess I would say that
in the market we have today, when there is surplus power by one
of our investor-owned utilities, they do sell that on the
market, and those revenues are then used to keep our rates
lower for the regulated side of the company.
Mr. Largent. So, you like to compete when it benefits you?
Ms. Smith. That's right.
Mr. Largent. Well, of course. I mean, that's true for
anybody. But, I guess what I'm not understanding is, you have
low cost of production. And you go into a unregulated market or
a free market, where you have competition, you still have low
cost production. And now, you are the low cost producer. That's
the term we hear all the time in free enterprise. You want to
be the low cost producer. So why would a low cost producer in
the electric generating industry not want to compete, when
you've got so many opportunities? I don't get that.
Ms. Smith. Well, I think you have to distinguish between
the wholesale market and the retail market.
Mr. Largent. That's what we--we've already----
Ms. Smith. Right. Wholesale is deregulated.
Mr. Largent. We're there; right. We're talking about
retail. And so what I'm saying is to your customers, who are
paying a low cost, your cost of getting that electricity to him
does not go up in a competitive market. So, you don't have to
raise the rates. You still get to produce it at the same cost.
You see what I'm saying?
Ms. Smith. Well, the other complicating factor, I think
that always snags our legislators is water rights and the
issues of river governance, because as I stated before, in an
average water year, 60 percent of our State's electricity is
generated by hydro projects. And I think Montana has
deregulated in Montana Power, their generating assets. And I
believe that they're finding that there are some complications
with priority rights over the use of that water and the
availability of the water. So, it's not just the price of power
that you tinker with when you're dealing with, basically,
hydroelectric system. And that's one of our legislation's major
concerns.
Mr. Largent. That's above our pay grade for sure, because I
think God is in control of that water issue. But, are we going
to get another round?
Mr. Barton. I don't----
Mr. Largent. I have one short question.
Mr. Barton. Well, then ask it right now, because we are
expected to vote in the next 15 minutes. And I think once we
break for voting, we won't be able to come back.
Mr. Largent. Okay. This question is for Ms. Clark. You were
talking about Ms. Moler's comments. But, I'm trying to figure
out if, say the administration bill passed to deregulate
electricity and they had a opt out for a State. Why would you
be opposed to that, when you would have the ability, and it
sounds like its fairly easy, for your permission to say, you
know, we've decided that our State is not going to benefit from
that and so we elect to opt out of this? Why would that--why
would you be opposed to that?
Ms. Clark. Let me answer it this way. First of all, if
those were our choices, you're either going to mandate or opt
out, we certainly want the opt out.
Mr. Largent. Well, it's a mandate with an opt out clause.
Ms. Clark. Well, I know there is, in some legislation,
that's a pure mandate.
Mr. Largent. Yeah, right. Okay, we're talking about the----
Ms. Clark. We're moving up the ladder of what's acceptable.
What I take issue with is the premise that State commissions
and State legislators will not make the move to retail
competition, when they see it as in the best interest of the
customers in their State. And I agree with what Ms. Smith said,
competition, in itself, is not the goal. The goal is to get
lower rates, adequate and reliable service to your customers.
Mr. Largent. Are commissioners in the State of Florida
elected or appointed?
Ms. Clark. No, we are appointed.
Mr. Largent. Well, I would say that as an appointee, you're
probably not as sensitive as somebody who would be elected.
But, I agree with you, I think that you are sensitive to--I
mean, I think that your serving the public in the capacity that
you're----
Ms. Clark. Well, let me point out, and I'm not sure if you
were here, we have had competition in the wholesale market in
Florida since the late 1970's.
Mr. Largent. Yeah, I heard you say that.
Ms. Clark. We saw the benefit of that. We moved more
quickly than you all did to introduce competition into
telecommunications.
Mr. Largent. Right, I heard you say that.
Ms. Clark. And we are now taking further steps to assure
that our transmission in Florida achieves better the goal of
nondiscriminatory and open access. And we're dealing with the
issue of merchant plant.
Mr. Largent. And did you benefit from moving to wholesale
deregulation in the State of Florida?
Ms. Clark. You bet. In 1978, I think that was the year, and
then up through the early 1990's, when we took----
Mr. Largent. And did you benefit from deregulating telecom?
Mr. Barton. We do need to recognize Mr. Shimkus, here.
Ms. Clark. Well, I think there's still a debate going there
and just let me say, the demographics of Florida are such that
some of our elderly population don't feel that they've
benefited from it.
Mr. Largent. Thank you, Mr. Chairman.
Mr. Barton. The Chair would recognize Mr. Shimkus for 5
minutes.
Mr. Shimkus. Thank you, Mr. Chairman. As many of you know,
Illinois was very close to rolling blackouts last summer. One
of the clear problems that the FERC report pointed out was that
transmission constraints reduced the ability of utilities to
move power where it was needed. To address this problem, the
administration's bill and Congressman Largent's bill have
included provisions to set up regional transmission planning
agencies.
Would your State consider joining voluntary regional
transmission planning agencies, even if that meant giving up
some authority to site transmission?
Mr. Quain. Pennsylvania, yes.
Mr. Shimkus. Good answer.
Mr. Glazer. That's hard to top, if you like that answer. We
are a member of a regional transmission organization. I'm not
sure that organization has to go so far as to actually locate
lines in people's backyards, because as Commissioner Clark
mentioned, at the end of the day, they're going to call the
Governor and they're going to call us. And giving them the name
of a regional transmission organization to call to complaint
about that is just not going to satisfy them.
Mr. Shimkus. But, you understand the problem in Illinois
last summer?
Mr. Glazer. Very much so. We had the same problem.
Mr. Shimkus. Right. And for us, it was getting through the
transmission lines that kind of crossed the State of Ohio.
Mr. Glazer. Well, we actually think it was Pennsylvania
that was the problem. We are cooperating. They were not
cooperating. But putting that aside, again, I think,
Representative, the problem is we have this patchwork system,
but we don't have any rules of the road. It's like the air
traffic control system operating----
Mr. Shimkus. But, you know, when you make that argument,
you're making the argument for a Federal role.
Mr. Glazer. I agree. I am suggesting a Federal role on
transmission. I don't think it has to go so far as to literally
siting the lines. That's figuring out whose backyard the line
goes in. But, I am totally in agreement that the Federal
Government needs a role in transmission----
Mr. Barton. Would the gentleman yield? You're saying you
support something, I think, that former FERC Commissioner
Stalon talked about, where the Federal role is to say there is
a need and it is the State role to dictate the siting of the
transmission line?
Mr. Glazer. I'd certainly be willing to work out something
along those lines. I think that we need to take a broader view
of the need for lines, than just the not in my backyard
syndrome.
Mr. Barton. Right.
Mr. Shimkus. Can we go to--let's go to Florida and then
let's go to the great State of Idaho, where my brother lives.
Ms. Clark. I'm not quite sure how to answer that, because
siting transmission is a very difficult problem. Our commission
has a responsibility for finding a need for a transmission line
and then it goes to a separate siting board to determine where
it goes. Last time we sited a transmission line where we said
there was a need, it did not get built, because they couldn't
get through the litigation and all the problems of putting it
in my backyard. I don't know if you'll be any more successful.
Mr. Shimkus. I'm going to have a follow-up question to
this, so Ms. Smith----
Ms. Clark. But, I would just say, I would urge you to be
aware of that issue, the difficulty of siting transmission.
Mr. Shimkus. Ms. Smith?
Ms. Smith. I guess I just want to first say that I don't
think the western interconnection operates in the same
patchwork manner that apparently there exists in the Midwest.
So, I just want to clear up that and state that electrically,
the western interconnection is separate from the east, so you
can do anything you want.
Mr. Shimkus. Okay, let me follow up with this question.
Ms. Smith. Because, it's people in the east.
Mr. Shimkus. Let me follow up with this question. Isn't it
true, though, that in the west, in your area, Bonneville has
got 80 percent of the transmission grid?
Ms. Smith. That may be true for the northwest as a whole.
But, if you look at the map, you will see that there is very
little Federal transmission in Idaho and most of ours is owned
by investor-owned utilities, which has given rise to the big
debate of how you do this RTO. And one way around constraints,
some of the investor owners say, is let's look at a for-profit
transco., which would have the incentive to build the line,
because they're going to make money.
Mr. Shimkus. Let me follow up: it is most likely that
Congress will not take away the duty of siting from the States.
However, if the Federal Government does not site lines and the
States are reluctant to move forward, how will high quality
regional markets be established?
Mr. Glazer. Let me jump in to say I think you need to give
the FERC some clear authority, relative to these regional
transmission organizations, so that we get out of this debate
that we're in, as to do they have authority or not. I would
strongly suggest that that is a key to getting effective
wholesale markets; and with effective wholesale markets, then
effective retail markets can happen. Without effective
wholesale markets, you can pass all the retail laws you want,
all the date certains you can, it won't work. So, we've got to
get the wholesale structure, and really that is something for
Congress to do.
Mr. Quain. I think you're exactly right, Representative. I
think that's the problem in a nutshell. If we're going to move
toward a new paradigm, we've got to let go of the old and we've
got to be willing to talk about new structures. And the way I
heard your question, you didn't say the States were going to
give up all rights; you said would you be willing to give up
some. I mean, we have to start talking about new ways to look
at the movement of power in a reliable fashion, which also
provides cost benefits to the consumer. And you can't hold on
to old paradigms just because you're afraid to let go and try
something different. To have that kind of discussion, to sit
down and look at those details and determine whether it's a
better way to handle a developing marketplace is absolutely
appropriate.
Mr. Barton. The Chair recognizes the gentleman from Texas,
Mr. Hall, for 5 minutes.
Mr. Hall. Mr. Quain, I'll let you answer what you've tried
to answer for me a while ago. Go ahead.
Mr. Quain. Well, I thought the question was, do we all
agree there should not be a Federal mandate for a time line
certain, and I think there ought to be.
Mr. Hall. That's one. And you're uncertain, I reread your
testimony to this.
I'll stay on the issue that we're on here about
transmission capacity. I think most of you heard the testimony
of the first panel and you heard Mr. Stalon, who expressed his
concern about new transmission capacity, in order to have a
competitive market. He just felt like you had to have it. And I
may or may not have misread his testimony as to his
recommendation that Congress enact legislation to set up a
Federal authority. And did I understand, Mr. Glazer, that's
what you think they ought to do?
Mr. Glazer. I seem to recall there were two different
Federal authorities he was talking about. If he was talking
about a regional transmission organization, some independent
transmission organization, I totally agree with him, and making
that same argument.
Mr. Hall. Are you saying ``transition'' or
``transmission?''
Mr. Glazer. Transmission, I'm sorry; transmission. If he
was talking about physically some Federal organization
physically siting lines, that's all bound up in local zoning
and local issues, and they want to hear from somebody locally
on that. So, I think that, frankly, would be stepping over the
line, if you did that.
Mr. Hall. Well, I couldn't detect in any of his testimony
any practical suggestion, if he had his way to craft the
Federal authority. I think what you're saying there certainly
carries that out. But, then Mr. Naeve, also, went on to talk
about making a case for Federal authority. He didn't say
transition or permanent or what. And he cited the Gas Act and
you remember I asked him if he could tell us the difference in
using it for electricity, if it's the Gas Act, and I'll have
some questions to send to him on that.
Now, the other witnesses were, I guess, kind of all over
the place on whether or not the country could truly realize the
benefits of competition, if FERC, and that was kind of the
suggestion of the first gentleman, Mr. Moler, or some other
national entities--he said FERC or another national entity--
couldn't fully realize the benefits, unless some of those
people were given the authority to site new transmission lines.
And you may have hit on the answer to it, to give somebody some
initial transitory authority, but leave it with the States,
leave it with the local people.
So, you know, it's pretty easy to understand from the
viewpoint of just a purely economic theory, that it might
easiest just to turn it over to feds and let them have full
power. But, that would be a very controversial political
decision. I know the chairman here remembers well that we've
had difficult deciding a permanent nuclear repository site in
one State, let alone punishing all the other 49. So, I just
don't think that would sell. But, I think we do well--and I may
send some more questions to you about some more suggestions
that you have about an initial thrust that would be transitory
only. Maybe something good comes out of these hearings.
Mr. Barton. Wouldn't that be a revelation.
Mr. Hall. And I thank you for your visit by my office
yesterday--the day before yesterday. I'm sorry I wasn't there,
because I enjoyed your testimony. I believe in Atlanta and
maybe Chicago. I don't know, where you at Chicago--Atlanta? You
testified in Atlanta?
Ms. Clark. It was in Atlanta. I don't think it was in
Chicago, but it's hard to remember.
Mr. Hall. It was another nice looking lady in red, then. I
think I've asked everything that I don't intend to ask in my
letter. Thank you, Mr. Chairman.
Mr. Barton. We recognize the distinguished vice chairman,
Mr. Stearns, for 5 minutes.
Mr. Stearns. Thank you. Thank you, Mr. Chairman. Of course,
my colleague from Florida, Mr. Bilirakis, already recognized
the Honorable Susan Clark. And so, I'm belatedly----
Mr. Barton. She gave him a smooch when he left the hearing
room. And I'm told that's why you came back.
Mr. Stearns. That's why I came back. Let me ask you: do you
know all about--I mean, you studied the Clinton proposal for
deregulation of energy, Susan?
Ms. Clark. I have looked at it. But to be honest, you know,
you get so many things in between, I can't remember the details
of it, and there have been so many other issues. Unless I have
it right before me, I don't----
Mr. Stearns. Oh, I understand.
Ms. Clark. So, I'd be willing to try and answer your
question.
Mr. Stearns. Well, let's just try it. The two things that I
think are controversial are the portfolio standard and the
Public Benefits Fund. And I think I was going to ask you and I
was going to ask all the witnesses what their impressions are
of that. Maybe if you would care to----
Ms. Clark. With respect to the portfolio standard, as I
recall it, it increases costs to Florida, because it calls for
some percentage of renewables.
Mr. Stearns. And it mandates it.
Ms. Clark. Right. And while we are the sunshine State,
there are problems with solar energy, as far as its cost
effectiveness. We don't have any wind to speak of either. Well,
just to indicate that that kind of mandate would not bring
costs down in Florida.
Mr. Stearns. Okay. Marsha Smith?
Ms. Smith. I think that probably the issue is, as
Commissioner Clark had said it, it probably won't bring costs
down. But I guess the judgment call for policymakers is, is it
something that's good for us, even if it cost us money. And I
guess in my State, it's hard for me to imagine us getting
public benefits program, unless Congress told us we had to. So,
if you think that's a good thing, then maybe Congress should
tell us we have to.
Mr. Stearns. Well, what the President is proposing is
through this Public Benefits Fund, a national transmission tax
and then distributing these funds to the States, if they
provide matching funds.
Ms. Smith. Right.
Mr. Stearns. And so what we're trying to get a feel for, if
you support that idea, if so, why, and if not, why not?
Ms. Smith. Well, it's a terrible dilemma for me,
personally, here, because I suspect that a majority of Idaho
legislature would not support that. But, I, personally, think
there may be some benefit to it.
Mr. Stearns. So, you, personally, support it, but you don't
think your State legislature would?
Ms. Smith. I don't think so.
Mr. Barton. Would the gentleman yield on that?
Mr. Stearns. Yes.
Mr. Barton. Well, Pennsylvania and Illinois both have a
State low income or public benefits funds. So why would we need
to have a Federal fund, also? Wouldn't that be an area we'd
just let the States do what they want to do? Wouldn't that
solve your problem?
Ms. Smith. Well, I think the Public Benefits Trust Fund
that I think Mr. Stearns is speaking of is something different
from a low income assistance program that's on a State level.
Mr. Barton. But, they go toward the same general purpose.
It would just balance the needs of the less affluent in those
States, in some way.
Ms. Smith. Well, I think the public purposes, as I
understand it, is to encourage the development of renewables or
alternative energy sources and research and development, as
opposed to helping individual low income consumers.
Mr. Stearns. Of course, once you set up a government fund,
you sometimes don't know where it's going to go.
Ms. Smith. That's true.
Mr. Stearns. Mr. Glazer, maybe you would like to comment,
as well as Mr. Quain.
Mr. Glazer. Thank you. Two things on that, and they're sort
of two different things. This Public Benefits Fund and then the
portfolio standard, as I understand it----
Mr. Stearns. Those are the two that I----
Mr. Glazer. Two, yes, and----
Mr. Stearns. [continuing] want to know what you feel about
it.
Mr. Glazer. Okay. This Congress actually has a Public
Benefits Fund, in the form of the LIHEAP program, the Low
Income Home Energy Assistance Program, and, frankly, my State
and some other States are very dependent on that program. We
would have people literally going cold in the winter without
that program.
The fear is that that program, because of various other
Federal requirements, gets cut and there's nothing put in its
place. So, perhaps if there was some kind of ability to put a
wires charge, we could get out of this every 2 year debate
about the LIHEAP program, which has been difficult for the
Congress and difficult for the States.
The issue of a portfolio standard, which goes to do we have
renewables, to me, that's a national energy security issue. And
I think this Congress is uniquely qualified to render a
judgment on that. We did have energy security problems in the
1970's and we went to war in the Middle East. So, I don't think
we should just brush away that on the grounds that it may cost
us some money. I think it's really an issue to consider, in
terms of international energy security and national energy
security.
Mr. Quain. I thank you. I think this is one that's clearly
best handled by the States. We do have a low income energy
assistance program built into our statute and to all of the
settlements I talked about. We do not have a portfolio
requirement in the law. But, I would note that when we sat down
and negotiated each of the settlements for the five major
electric companies in Pennsylvania, we came up with one, and we
came up with one that was a little different and funded a
little differently for each of the five, taking into note that
the specific characteristics of that utility and the goals that
that fund was trying to reach. It's different in Philadelphia
than it would be in the western part of the State, out near
Allegheny County. So, I think my preference on that would be to
let that one to the States.
Mr. Barton. I thank the gentleman from Florida. I recognize
the gentleman from Ohio, Mr. Strickland, for 5 minutes.
Mr. Strickland. Thank you, Mr. Chairman. Mr. Glazer, you
said, I think correctly, that Ohio is a microcosm of the
Nation. And as you know, in Ohio, we have low cost energy
regions and high cost energy regions. I happen to represent
what is a low cost energy region. So, I assume my question to
you, if Ohio is a microcosm, means that there are such
conditions existing across the Nation.
Is it possible or are you concerned that deregulation in
Ohio will result in the electricity cost for some of the low
cost regions, which tend to be the poorer parts of the State of
Ohio, will actually increase, while they may be reduced in
higher cost parts of the State?
Mr. Glazer. Representative, it's an excellent question. In
fact, it is an issue in the Ohio General Assembly right now and
it's essentially going to tear the General Assembly apart on
just that very issue. I don't see it, though, as being a
situation where, oh, if we do this, rates automatically go up
in the southeastern Ohio, for a couple of reasons. One is
although southeastern Ohio is low cost, there, in fact, is
lower cost around us, in Kentucky and West Virginia. And the
national wholesale market is even cheaper today than the rates
that your constituents in southeast Ohio pay. So, there's some
room to move there, to even go lower. Also, we're looking at
rate caps, some protection for the low cost regions. For
example, American Electric Power, we would put a rate cap on,
so they cannot see an increase for a period of time.
Over the long term, one of the concerns is if we don't move
at all, what happens is the investment community just says,
we're not going to invest in generation, in those States that
are just closed. And, in fact, an AEP or utilities like that
start disinvesting in southeastern Ohio. And, in fact, then,
service goes bad and rates then potentially can go up.
So, I think we have to take some steps to protect the low
cost areas of the State. I am very concerned about those. And I
think we can achieve that proper balance. It's an excellent
question.
Mr. Strickland. I would like to ask our friend from
Pennsylvania, have there been regions in Pennsylvania where
consumers have actually experienced an increase in what they
have paid versus--prior to deregulation?
Mr. Quain. We have in our legislation, in our law, rate
caps for all of our electric utilities in Pennsylvania. And
it's a two-piece rate cap. There's a generation rate cap that
runs generally the length of your stranded investment recovery
and there's a separate transmission distribution rate cap for
local line rates. So, if you choose to do nothing or you choose
to stay with your host utility, your rates are capped.
Interestingly enough, one of the major players that we've
seen in the early parts of our choice marketplace are renewable
energy companies coming in that say, I will sell you green
energy and, yes, it's more expensive than what you're currently
paying now under rates--we started this whole process, because
we thought they were too high, and they're more expensive than
that, but we will guarantee you that it's green energy. It's
compatible with the environment. And lots and lots and lots of
people are buying it. So, in that instance, the rates are going
up. But, it's their choice to do that. They have the protection
of the rate caps not to make that decision. But, they're
consciously doing it, because they want to use energy that's
environmentally compatible.
Mr. Strickland. And Mr. Glazer, one other question. As you
know, my region has coal mines.
Mr. Glazer. Yes.
Mr. Strickland. And I'm interested in your opinion, as to
the effect of deregulation on the coal industry. And if the
other panel members would have thoughts about that, as well, I
would be interested in what they may think.
Mr. Glazer. Representative, I'm really glad you're asking
me this question this morning. I thought Mr. Pallone would come
after me on environmental stuff from New Jersey.
I actually see deregulation as having a huge benefit for
the coal industry, because where does low cost power, which
they'll be such a demand for, come from. It comes from coal.
We've got to make sure we deal with these environmental issues,
in a way it doesn't make coal obsolete, which would be a
disaster. But, in fact, I see it as a great benefit for the
coal industry and for the coal miners, because all these States
around us, Pennsylvania, Illinois, are looking for low cost
power. That comes from the coal fields in southeastern Ohio.
Mr. Strickland. Thank you, sir. And I'll try to deal with
my friend, Mr. Frank Pallone. Help you out there. Thank you.
Mr. Barton. We thank the gentleman from Ohio. And may I ask
the gentleman from North Carolina to bring us home; bring us
around home, third base, and home run down at the home plate.
Mr. Burr. The pressure is tough.
Mr. Barton. I know. The Tar Heel State can deliver.
Although North Carolina didn't exactly shine in the NCAAP
tournament.
Mr. Burr. The word is Duke.
Mr. Barton. My team didn't even make it, so--five minutes.
Mr. Burr. Mr. Glazer, tell me what significant difference
the Ohio Commission's position would be, other than yours. You
made a note in your testimony, ``I speak as an individual and
not as the Commission.''
Mr. Glazer. It was just a CYA here, if you will. We didn't
actually have the time to vote on these comments as a
Commission, sir.
Mr. Burr. But not--your views are not inconsistent with
what's going on in Ohio?
Mr. Glazer. No, they are not.
Mr. Burr. Thank you. Ms. Clark, let me just ask you a real
bold question. Do you believe that there's any generating
company out there that can bring to Florida cheaper prices than
what you have today?
Ms. Clark. You mean the average price?
Mr. Burr. I'm talking about is there anybody out there,
given that we went to retail competition that could supply
Florida customers cheaper than they currently pay for
electricity.
Ms. Clark. Well, you need to remember, we price on average
cost. And I'm sure there are marginal cost plants and the new
plants are going to be lower cost. I would point out to you
that I think those benefits come from wholesale competition.
The question is how much more benefits come from retail
competition.
Mr. Burr. If one believed that to be really a solution,
then I would suggest that Mr. Glazer wouldn't have--as a matter
of fact, I might even go to Mr. Quain, because I think
Pennsylvania had the biggest disparity between high price and
low price power of any State. Am I right, Mr. Quain?
[Witness nodded yes.]
Mr. Burr. And given that there's wholesale capabilities to
buy, you would think that they wouldn't have a disparity of
that kind, wouldn't you?
Mr. Clark. A disparity in cost from different plants?
Mr. Burr. A disparity in what the consumer pays.
Mr. Stearns. Would the gentleman yield just to follow up
what you said? I think he's asking what the average residential
family pays, kilowatt per hour----
Ms. Clark. Right.
Mr. Stearns. [continuing] is pretty good, relative to New
Hampshire and New York.
Ms. Clark. Florida, yes.
Mr. Stearns. But, if we had retail competition, do you
foresee the average residential customer getting it cheaper
than it is today?
Ms. Clark. Not necessarily.
Mr. Burr. All right. Let me rephrase my question in the way
it was asked.
Is it possible your customers might get lower cost
electricity?
Ms. Clark. Again, I would point out that you need to make a
distinction between if you introduce it in wholesale
competition and you're assuring that the next unit you dispatch
is the least cost unit, then everyone benefits from it. You
spread the cost across the whole body of ratepayers.
Mr. Burr. Ms. Smith, is it true that Bonneville does supply
some power to Idaho?
Ms. Smith. Yes. About 20 percent of customers in Idaho are
served by either cooperative or municipal utilities. And while
some of those own a small amount of generation, most of them
are full requirements customers of Bonneville, which means they
take power wholesale from Bonneville at a preference rate.
Mr. Burr. Would you have any objection if Congress passed a
bill that required Bonneville, over some period of time, maybe
5 years, to pay back the Federal Government and to recover that
through the power cost of their sale price?
Ms. Smith. I believe Bonneville is paying back the Federal
Government. I've sat at lengthy meetings, where they discussed
their revenue and their debt payment and how they're going to
cover it. So, I believe that Bonneville is paying back the
Federal Government.
Mr. Burr. Actually, I would challenge you on that. I've
heard the same statements by them and, unfortunately, on the
balance sheet, there's very little effort. As a matter of fact,
I don't believe that we can give Bonneville away today, as a
Federal entity, that there's any power concern out there that
we can turn it over to and that they would accept it.
But, let me ask you about--Congressman Crapo, I think,
drilled in and said, you can't reach much lower prices than you
have in Idaho. So, I'll give you that. Do you believe that if
Idaho were to stay closed, but everywhere else stayed open,
should the investor owners in Idaho be able to sell into the
other States?
Ms. Smith. Absolutely.
Mr. Burr. So, reciprocity would both you, if you didn't
open up your market, but--and other States said to your
investor owners, sorry, if you're not--if your State isn't
open, then you can't sell into ours.
Ms. Smith. Well, I wouldn't see why a State, which
advocated competition, both wholesale and retail, would want to
foreclose the opportunity of their citizens to buy from anyone,
who had the lowest price. So, to me, I don't understand that
kind of thought.
Mr. Burr. I guess we would have trouble understanding why a
State, who had the lowest cost, would close their State from
retail competition.
Ms. Smith. Well, like I pointed out in my response earlier,
when you're dealing with a hydro system, it's not just the
price of power that people are worried about, and it's all
these other things they haven't figured out how to manage in
that transition.
Mr. Burr. But, you wouldn't see an inequity in the fact
that you chose not to open your marketplace, and your investor
owners were not offered the opportunity to sell into other
States? You would see a problem with that?
Ms. Smith. Well, I would not understand the State that
opened that said we're foreclosing some people from
participating in selling to our customers, especially if those
are entities that maybe could provide the lowest cost energy.
Mr. Burr. I'll wait and try to ask you some further
questions written, because I think just your actions sort of
answers the questions for me, as far as Idaho's position.
Currently, it's fairly easy for that to happen or for people to
understand it. It doesn't make much sense to me.
Mr. Barton. We know North Carolina and Idaho can disagree
agreeably. So, let's wrap this up, Ms. Clark has a plane to
catch at 5.
Mr. Burr. I thank the chairman and I thank all of the
witnesses. And the attempt here is not to highlight the
differences, it's to really figure out where the consensus is;
but more importantly, as we proceed forward, either as States
or as a Congress, to find out how we do it right. And I thank
the chairman.
Mr. Barton. That's correct. The Chair would ask unanimous
consent that a statement by the National Retail Federation be
put in the record. It's been reviewed by the staff and both the
majority and minority, and there's no objection.
Do I hear an objection from any of the members?
[No response.]
Mr. Barton. Hearing none, so ordered.
[The statement follows:]
Prepared Statement of The National Retail Federation
The National Retail Federation is the world's largest with
membership that comprises all retail formats and channels of
distribution including department, specialty, discount, catalogue,
Internet and independent stores. NRF members represent an industry that
encompasses more than 1.4 million U.S. retail establishments, employs
more than 20 million people--about 1 in 5 American workers-and
registered 1998 sales of $2.7 trillion. NRF's international members
operate stores in more than 50 nations. In its role as the umbrella
group, NRF also represents 32 national and 50 state associations in the
U.S. as well as 36 national associations representing retailers abroad.
NRF's vision of the way in which electricity will be purchased in
the future is quite simple. A large network of electricity generators
and power marketers will sell electricity to end-users across the
country, either directly or including power marketers, at prices set by
the competitive markets. Prices will be determined as they are with any
other commodity, based on supply and demand, through both spot and
future markets. Power will be purchased from power plants across the
country, transported through transmission systems operated by
independent systems operators and delivered through distribution
companies which will appear, to consumers, to resemble today's public
utility companies. Distribution and transmission companies will remain
regulated monopolies for the foreseeable future.
Our view of the future is a FEDERALLY deregulated electric industry
in which:
All customers benefit from deregulation.
Deregulation is achieved through universal direct access,
rather than a government-mandated pool approach.
Direct access occurs simultaneously for all customers. If
technical constraints require that, in a few instances, direct
access to be phased-in, the phase-in will not disadvantage any
class of customers.
Generation, transmission, and distribution services, are
unbundled, either functionally or through divestiture.
Smaller electric consumers participate in the competitive
market place through aggregation.
Stranded cost recovery is shared equitably by utility
customers and by utility shareholders.
All Customers Will Benefits From Federal Deregulation. Deregulation
will lead to a competitive environment which will benefit all
customers. The benefits to be derived from competition are evident in
the federal deregulation of the natural gas, airline, trucking and
telecommunications industries. When pressure builds for electric rate
relief, regulated monopolies react by giving relief to large customers
who threaten to self-generate or to leave the service area of the
monopoly. Everyone else pays for the benefit received by the few
customers who have the economic power to negotiate discounts.
A deregulated environment will not allow for such distortion
of the competitive market. NRF member companies want to
purchase electricity competitively so that they can share in
the benefits of competition at the earliest possible time. NRF
members also want their customers, the residential electric
consumer, to share equally in those benefits. After all,
retailers benefit whenever their customers have additional
disposable income.
Competition Is Best Achieved Through Universal Direct Access.
Direct access to competing generators of electricity provides
consumers with the incentives necessary to participate in the
competitive marketplace. Those incentives are muted in the
poolco approach which has been proposed in some states. Direct
access, whether through bilateral contract or through
aggregation, provides the opportunity for a willing buyer and a
willing seller to set prices through competitive negotiation,
rather than relying on a price auction controlled by utilities,
which could distort free market pricing. Mandatory pools will,
in essence, result in a shift from multiple utilities within a
state to a single larger utility. Such a shift will not create
competition and does not drive prices down. The pool approach
will most likely lead to a re-regulation rather than to
deregulation. If pools develop they should develop through the
action of market forces rather than as a result of government
mandate.
Direct Access Should Occur Simultaneously For All Customers.
In the few instances where technical constraints might prohibit
immediate direct access for all customers, no class of customer
should be disadvantaged by any resulting phase-in of universal
direct access. In those instances where a phase-in is
necessary, it should be implemented in such a way which will
benefit all classes of customers simultaneously.
Unbundling is Necessary to Promote Competition. Unbundling,
whether it is functional unbundling or unbundling through
divestiture, is necessary to insure that utilities do not
unfairly shift generation expenses to their transmission and
distribution functions, or otherwise give unfair advantage to
their generation components, which will be to the detriment of
true competition.
Smaller Electric Consumers Can Participate in the Competitive
Market Through Aggregation. Some consumers, especially large
consumers, will aggregate off of their own facilities in a
given area. Other consumers, including small commercial and
residential consumers, will aggregate with a number of
unrelated companies or individuals in a geographic area.
Aggregation could provide participants an average rate
reduction of 18 percent. Innovative planning such as
aggregation will define the electricity market in years to
come, insuring that electricity consumers, large and small,
will benefit from competition.
Stranded Cost Recovery Dominates Much Of the Electricity
Utility Deregulation Debate. We do not believe that utilities
are entitled to total stranded cost recovery. Stranded Costs
caused by government mandate should be recovered to the extent
utilities are unable to mitigate those costs. Stranded costs
caused by bad management decisions should not be recovered.
We envision a burst of competitive pricing as deregulation
becomes a reality. This will be followed by a period of
reflection as consumers and electric generators analyze the
effect of this new pricing. As competition forces utilities and
other power suppliers to become more efficient, as stranded
costs are dealt with and as competition encourages innovation
in load management and conservation techniques, electricity
prices will enter into a period of long, steady decline and
savings will increase over a period of many years.
In Conclusion, the National Retail Federation looks forward to
the development of a federally deregulated electric market
throughout the United States which will provided competitive
benefits for all consumer classes on a non-discriminatory basis
through customer choice. The Congress is encouraged to enact
legislation which will facilitate nationwide retail competition
as soon as possible and which will insure that federal
regulatory activity will not impede competition.
Mr. Barton. We want to thank you, ladies and gentlemen, for
testifying. We will work with the minority next week to
determine the next hearing on this issue, and we hope that we
will be able to reach agreement, as to the subject and the time
and be able to announce that sometime next week.
The next hearing the subcommittee is going to convene is on
the Iraqi oil for food program that's been sanctioned by the
United Nations. There will be additional questions for each of
you in the record. We appreciate your timely response.
And this hearing is adjourned.
[Whereupon, at 4:15 p.m, the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Prepared Statement of American Public Power Association
The American Public Power Association, the national service
organization representing the interests of the nation's 2,000
community- and state-owned, not-for-profit public power systems,
commends Chairman Barton on restarting the hearing and discussion
process on the details of electricity competition. Sorting out the
appropriate federal and state roles in this matter is among the most
important activities that can be undertaken in order to move the
process forward.
Public power systems have long played a vital, pro-competitive role
in the electric utility industry, and APPA supports the enactment of
federal legislation that removes federal barriers and encourages the
creation of retail competition. Since the first municipal systems were
established over 115 years ago, public power has fostered competition
by serving as a comparison ``yardstick'' for consumers against which to
judge the performance of private utilities. Today, APPA's members are
actively participating in efforts at the state and local level to
implement retail choice initiatives. Public power associations in
several states have endorsed ``customer choice'' initiatives under
consideration by their respective legislatures. In addition, cities
like Cleveland, Ohio, and Lubbock, Texas, have had ``door-to-door''
retail competition in place for decades.
With this in mind, APPA believes the following issues are
appropriate and necessary to deal with at the federal level:
ensure there are no federal legal impediments to state and
local decision-making regarding retail competition and clarify
jurisdictional questions, while preserving the traditional
authorities of state and local governments over retail electric
service;
mitigate market power through provisions such as a revised
merger standard that provides FERC with clear authority to
condition proposed mergers on divestiture of such generation
and transmission facilities as necessary to prevent market
power in any relevant geographic or product market;
remove federal tax impediments on public power systems'
ability to compete and participate in independent regional
transmission organizations by including the provisions
contained in H.R. 721, the Bond Fairness and Protection Act;
provide clear and specific authority to require the creation
of strong, truly independent regional transmission
organizations in order to facilitate the development of
vigorously competitive regional power markets;
maintain or enhance the reliability of the electric system by
including the industry consensus language which assists in the
transition of the North American Electric Reliability Council
(NERC) to the North American Electric Reliability Association
(NAERO);
address regulatory impediments to hydropower's competitive
position in a restructured marketplace;
ensure that electricity is available to all consumers at a
reasonable price through options such as municipal aggregation
programs;
encourage cost-effective renewable energy without prescribing
quotas;
promote energy research and development.
The balance of the detailed decisions should be left up to state
and local authority.
Examples of decisions better left to the states include:
When (or 10 the state can realize benefits from choice and is
prepared to move to retail competition;
Determination of reasonable stranded cost recovery for
generation assets;
The percentage (if any) that electricity providers are
required to generate from renewable resources, including
hydropower;
The level at which all participants in the electricity market,
including non-traditional power providers, are required to
contribute toward the costs and other obligations of public
interest programs;
Deference to regional and customer decisions in certain areas
of the country served by federal power marketing
administrations on how best to deal with those entities in a
restructured environment. These regional approaches should be
encouraged and respected by Congress in any federal
restructuring legislation. In the Pacific Northwest, for
example, issues regarding the Bonneville Power Administration
involve a multitude of complex and interrelated concerns.
Stakeholders in this region, including public power systems,
are in the best position to develop consensus solutions to the
unique concerns affecting their region. The same is true in the
Tennessee Valley, where TVA power distributors, TVA, and the
Department of Energy are developing a consensus proposal on how
best to deal with the complex issues surrounding the evolution
of TVA in competitive markets;
Maintaining ultimate decision-making authority over customer
safeguards and service quality protections;
Determination of which ancillary services should be opened to
competition, such as metering and billing functions in order to
retain the highest levels of accuracy, customer privacy, and
public safety.
RELIABILITY AND TRANSMISSION IN COMPETITIVE ELECTRICITY MARKETS
----------
THURSDAY, APRIL 22, 1999
House of Representatives,
Committee on Commerce,
Subcommittee on Energy and Power,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:05 a.m., in
room 2322, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Bilirakis,
Stearns, Largent, Burr, Whitfield, Norwood, Shimkus, Pickering,
Bryant, Ehrlich, Bliley (ex officio), Hall, Sawyer, Markey,
Gordon, Wynn, and Dingell (ex officio).
Staff present: Cathy Van Way, majority counsel; Joe
Kelliher, majority counsel; Donn Salvosa, legislative clerk;
Sue Sheridan, minority counsel; and Rick Kessler, minority
professional staff.
Mr. Barton. If the subcommittee could come to order, we
would like to start the second in a series of hearings in the
electricity restructuring issue. Today's hearing is on
reliability and transmission and how that will help us to a
competitive electricity market.
I want to welcome everyone today. The changes sweeping the
electric industry in recent years have been nothing short of
incredible. The industry is rapidly transforming itself from a
highly regulated industry to one where competition plays a
driving role. I believe this trend toward retail competition is
irreversible. At the same time it is becoming apparent it is
time for our Federal laws and regulations to catch up where the
marketplace is headed.
As Chairman Bliley has said and I have said, the question
before the Congress has shifted from whether Congress should
pass legislation to open retail markets, to when Congress
should pass such legislation. Today we are going to examine
what the scope of Federal legislation should be with respect to
reliability and transmission.
When I accepted the gavel at the beginning of this
Congress, one of the goals we set for the subcommittee was to
pass a comprehensive bill that lowers electricity prices for
consumers by promoting competition. Toward this end, we are
going to hear today from witnesses about two issues that are
critical to restructuring. Those issues, as I said earlier, are
transmission and reliability. They are certainly issues that
are not unfamiliar to this body.
From the input that we have received from the largest and
smallest consumers and everyone in between, reliability is a
very big concern. The question that is raised time and time
again is, Who will I call when our lights go out? It is a
simple question, but it is an important question. Similarly,
while everyone recognizes competition changes the way we need
to think about reliability, it does not necessarily imperil it.
In fact, separating generation, which will be competitive, from
transmission and distribution, which are likely to remain
regulated, will have a positive impact on reliability.
As the system changes, I believe we need Federal
legislation to provide for enforceable reliability provisions.
There is a broad consensus that continued reliance on voluntary
reliability standards is not viable and will lead to
significant reliability problems. Consensus is forming around a
self-regulating organization certified by the FERC that will
develop reliability standards ultimately enforced by the FERC.
Today we are going to take a close look throughout the
reliability proposal developed by the North American Electric
Reliability Council, or NAERC.
Similarly, for competition to truly flourish, we must make
sure that our transmission system is genuinely open and is
governed by one set of rules. It is clear that EPAct and Order
No. 888, went a long way to make access to the transmission
system more open. However, most of today's testimony verifies
that complete open access to transmission lines has not
arrived.
We hope to hear some suggestions today about how to assure
our interstate transmission lines are as open as possible so
that consumers can reap the benefits of competition. We look
forward to hearing from all of our witnesses today.
[The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Subcommittee on Energy
and Power
The changes sweeping the electric industry in recent years have
been nothing short of incredible. The industry is restructuring itself
with every diversification, with every merger, and with every voluntary
and involuntary divestiture. I believe the trend towards retail
competition is irreversible.
As Chairman Bliley and I have said many times before, the question
before Congress has shifted from ``whether'' Congress should pass
legislation to open retail markets to ``when.'' Today we examine what
the scope of Federal legislation should be with respect to reliability
and transmission.
When I accepted the gavel at the beginning of this Congress, one of
the goals we set for this Subcommittee was to pass comprehensive
Federal electricity legislation that lowers electric prices for
consumers by promoting competition in retail markets. Towards this end,
today we are going to hear from two panels about two of the most
talked-about issues related to the restructuring of the electricity
industry in this country. The issues are transmission and reliability
and they are certainly not unfamiliar to this body.
From the input we have received from the largest and smallest
electricity consumers, and everyone in between, reliability is one of
the biggest concerns. The question that is raised time and time again
is, ``Who will I call if my lights go out?'' It is a simple question,
and it is important. Importantly though while everyone recognizes this,
we must change the way we think about reliability, it does not
necessarily imperil it. In fact, separating generation which will be
competitive and suppliers will be looking to cut costs from
transmission and distribution which are likely to have a positive
impact on reliability.
I believe Federal legislation will provide for enforceable
reliability provisions. There is a broad consensus that continued
reliance on voluntary reliability standards is not viable, and will
lead to significant reliability problems. Consensus has developed
around developing a self-regulating organization certified by FERC that
will develop reliability standards ultimately enforced by FERC. I
believe we should take a close look at the work done by the North
American Reliability Electricity Council.
Similarily, for competition to truly flourish, we must make sure
our transmission system is genuinely open and is governed by one set of
rules. It is clear that EPAct and Order 888 went a long way to make
access to the transmission system more open. However, most of today's
testimony verifies that access to transmission lines are still subject
to problems. I hope to hear some suggestions today about how to assure
our interstate transmission are as open as possible.
I look forward to hearing from all of the witnesses on both of
these important issues and learning from what they have to tell us.
Mr. Barton. Now I would like to recognize the distinguished
ranking member of the full committee, the gentleman from
Michigan, the Dean of the House of Representatives, Mr.
Dingell, for an opening statement.
Mr. Dingell. Mr. Chairman, I thank you. Mr. Chairman, I
commend you for holding today's hearings. These hearings will
touch on one of the most important issues in this entire debate
on electrical utility restructuring.
Historically, the United States has enjoyed the most
reliable electric transmission system in the world. It also has
enjoyed the cheapest and the best service. This gives a
tremendous advantage to ordinary citizens, residential
dwellers, business and consumers alike and also to American
industry. It is a major factor in the high competitiveness of
the American economy.
The electrical utility industry faces changes on every
front, all of which bear upon the issue of reliability. About
20 States are now at some stage of switching over to retail
competition. This raises question about how generation reserves
will be maintained and how adequate transmission capacity will
be preserved under even more competitive circumstances. It is
evident already that reliability in certain areas of the
country may be jeopardized by constraints in the transmission
system at a time when building new lines is more difficult than
ever.
Last summer we saw real stress on the system and we came
very close to serious trouble, including major blackouts and
brownouts, particularly in the Middle West.
On the environmental front, the timing of new regulatory
requirements is going to result in plants being temporarily
shut down. This means that reliability is going to again be
stressed. I would note this threatens to occur at the worst
possible time in the need to maintain the system's reliability.
And that is something to which EPA and others who are pushing
for changes in the system could better direct their attention.
Last summer, as I mentioned, the Midwest experienced real
difficulties which should be unsettling to anyone concerned
with electric reliability and the well-being of consumers.
Although we did not have blackouts, these were narrowly averted
and only then because a number of customers were curtailed and
because things like rolling cutbacks occurred. Utilities in
this region did it by the book, but that did not lessen the
inconvenience and the costs to those whose service was
interrupted.
I would note that a lot of wholesalers got into the
business and a fair number of them were incapable of delivering
power at the time and under the terms that their contracts
required. I think that is something we better take a look at
because I would note that in most instances, the bills before
us, and other proposals, impose less requirements for good
character, financial capability, and other things important
than do the requirements of State law with regard to
beauticians.
Let us look a little bit at what happened last year. Only a
small volume of power was sold at spectacular prices but those
were in the range of $7,000 per kilowatt hour. In California,
they went $9,000 and more per kilowatt hour. These price spikes
should warn us that we can ill afford to take the stability of
our electrical utility system for granted in a time of power
change, particularly as it appears that the level overall of
reserves is falling.
State regulators and utilities in the Midwest are braced
for another difficult summer. And it behooves all of us to
closely examine the forces at work in this rapidly changing
marketplace.
I want to commend you again, Mr. Chairman, for holding this
hearing. And I want to tell you how important it is that we
look to see what is going to occur with regard to the question
of reliability of service. Clearly, this must be one of the
committee's central concerns as it considers--as it continues
its deliberations on these matters. Again, I commend you and I
thank you, Mr. Chairman.
[The prepared statement of Hon. John D. Dingell follows:]
Prepared Statement of Hon. John D. Dingell, a Representative in
Congress from the State of Michigan
Today's hearing touches on one of the most important issues in the
electric restructuring debate. Historically, the United States has
enjoyed the most reliable electric transmission system in the world.
This is a tremendous advantage to residential and business consumers
alike, and one which we simply must maintain.
The electric industry faces change on every front, all of which
bear on reliability.
About twenty states are at some stage of switching over to retail
competition. This raises questions about how generation reserves will
be maintained, and how adequate transmission capacity will be
preserved, under ever more competitive circumstances.
It is evident already that reliability in certain areas of the
country may be jeopardized by constraints in the transmission system,
at a time when building new lines is more difficult than ever.
On the environmental front, the timing of new regulatory
requirements will result in plants being temporarily shut down, which
threatens to occur at the worst possible time in terms of the need to
maintain the system's reliability.
Last summer the Midwest experienced difficulties which should be
unsettling for anyone concerned with electric reliability and
consumers' wellbeing. Although we did not have blackouts, these were
narrowly averted and only because certain customers were curtailed.
Utilities in the region did this by the book, but that did not lessen
the inconvenience and cost to those whose service was interrupted.
And while only a small volume of power sold at the spectacular
prices in range of $7,000 per kilowatt hour, these price spikes serve
notice that we can ill afford to take the stability of our electric
system for granted in this era of rapid change. State regulators and
utilities in the Midwest are braced for another difficult summer, and
it behooves all of us to closely examine the forces at work in this
rapidly changing marketplace.
I thank the chairman for holding this hearing and for focusing on
what certainly must be this Committee's central concern as it continues
its deliberations on the future of the electric industry.
Mr. Barton. Thank you, Mr. Dingell.
We recognize the distinguished gentleman from Kentucky, Mr.
Whitfield, for an opening statement.
Mr. Whitfield. Mr. Chairman, thank you very much. Although
I was not in Congress at the time, I was involved in
deregulation of the airline industry, the railroad industry,
and the trucking industry, all of which I supported. And when
you represent an area of the country that has some of the
lowest rates in the country for electricity, you want to
proceed with these hearings with an open mind but also to look
closely at issues like reliability and others and their impact
on the district that you represent.
So I am delighted that we are continuing these hearings and
particularly today to focus on reliability. I noticed that we
have two panels of nine witnesses, all of whom have a lot of
experience in this area, and I know that their testimony will
be quite helpful to us as we proceed to explore this
opportunity of deregulation. I yield back the balance of my
time.
Mr. Barton. Thank you. I recognize the distinguished
ranking member, Mr. Hall.
Mr. Hall. Mr. Chairman, thank you very much. I think
today's hearing on transmission and reliability issues is
probably one of the most important hearings that we will have
today as we address the Federal Government's role in the
restructuring of the electric utility industry.
It seems to me that the issues that are before us today are
not mandates and the dates certain are the real centerpiece of
what might be contained in any Federal legislation. Reliability
has got to be the one word that we can't give up on, our right
to rely or someone to call in case it fails. And quality. And,
of course, quality is the end word for reliability and
transmission.
So I am glad to see us get away from talking about mandates
and dates certain and all of that and get to what the real
centerpiece of what this thing is. These are unique Federal
issues, issues that can only be dealt with by Congress, and
what we ultimately do will have profound implications on
reliability, and that is reliability of the power system and
the viability of all the stakeholders that use it.
Now, Mr. Chairman, I expect that there will be a number of
questions and additional issues raised here today that are
going to need even some further examination, which will lead us
into other questions and answers that we need to seek to make
the puzzle fit together. While I am not a fan of endless
hearings, I think we owe it to ourselves to make certain we
have a good grip on all the policy options. It looks as if we
need it. If it looks that way, why I know and hope you will
schedule such additional days as are required to develop a
thorough and complete record.
I know you, Mr. Chairman, and I know your background. I
know that you have been recognized as engineer of the year in
your own State, that you have an inquiring mind--and I am
buttering you up here.
Mr. Barton. Keep buttering.
Mr. Hall. You are enjoying it, aren't you?
Mr. Barton. It is good.
Mr. Hall. And the courage to act. You know, those are
ingredients that a good chairman needs. Believe me, Joe Barton
has every one of those. So it is a pleasure to work with him
and take this information. That is the reason we have the
interest in this legislation. That is the way you attracted
``his honor'' here to testify for us today, so it is too
important to the economic well-being of this country not to
build a complete and accurate record and that is what we are
doing.
I think we need the best minds to come before us and the
consequences of not doing it and not doing it right can be very
unfortunate. Speaking of the best minds, we have some of them
here today, Mr. Chairman. Thank you for being here, and other
witnesses. I want to issue a special welcome, if the chairman
hasn't already done it, to Trudy Utter of Garlington, Texas,
who is on our second panel.
I yield back the balance of my time, Mr. Chairman, unless
you would like me to talk about you a little more, but I think
I read it just exactly as you wrote it.
Mr. Barton. I don't think the recording clerk got it down,
though.
Mr. Hall. Would you like a second reading?
Thank you, Mr. Chairman.
Mr. Barton. Thank you, Congressman Hall. The Chair would
like to recognize the distinguished gentleman from the great
State of Tennessee, Mr. Bryant, for an opening statement.
Mr. Bryant. Thank you, Mr. Chairman. I was going to echo
the remarks of Mr. Hall up to the point where he started
talking about you, and then I realized what we had was two
Texans here. I looked down there at Ed Markey from
Massachusetts, and we kind of shook our heads. I just want
Texas fans to realize there would not be a Texas were it not
for Tennessee, Sam Houston, David Crockett, and all those good
volunteers we sent down there to help them out.
Mr. Barton. Amen to that, brother.
Mr. Bryant. Amen. Along that line, I do want to echo what
Mr. Hall and Mr. Whitfield said, and others I am sure had said
before I arrived, about this issue being an important one--
along with the cost, I think, low cost, I think reliability is
the other key to any system that we go to in restructuring. I
am just pleased to be here today and also to welcome Matthew
Cordaro, a friend I have known from years past in Nashville. He
is the President and CEO of the Nashville Electric Service and
will be testifying today on behalf of the Large Power Council.
I look forward to hearing from Matthew and the other
distinguished members of this panel, and would simply remind
all of you that, as you know the business of Washington--we are
at various meetings throughout the day, and at times you will
see us come and go, and it is not anything that you should view
as disrespectful. It is just that we can only be at one place
at one time. We unfortunately are scheduled to be at other
hearings throughout the Capitol area today, so if we have to
leave, that is our reasoning or excuse early on; but again, we
thank you and look forward to hearing from your distinguished
panel. Mr. Chairman.
Mr. Barton. Thank you. I might point out that my relatives,
way back when, came from eastern Tennessee but they got to
Texas about 1840.
Does the gentleman from Massachusetts, Mr. Markey, wish to
make an opening statement?
Mr. Markey. Thank you. Thank you, Mr. Chairman, very much.
As we move from the era where the wholesale demonopolization of
the electricity marketplace, which was enacted and ultimately
implemented pursuant to the Energy Policy Act which was passed
out of this committee in 1992, to an era of retail competition,
it is very important for us to deal with the issues of
reliability. That is, guaranteeing that the lights don't go out
or dim in people's homes, that their television sets work, that
they are never interfered with, that industries don't have
unfortunate interruptions of their service. After all, that is
what the American economy is all about. And I think that is
really where our committee once again comes into play.
We have an opportunity to make sure that as we break down
these State and relatively small regional conglomerates and
create national marketplaces, we have to make sure that as
electricity is being wheeled around the country, that there are
guarantees that the system is going to be reliable, that all
parts of it understand that they have a responsibility now to
other parts of the country to guarantee that the electricity is
flowing into every home, every industry in the United States.
And toward that goal, I have been able, without question,
to partner with a great Texan, a man whom I admire, and I think
someone who as a partner is somebody who I believe will help to
give us the leadership which we need. And, of course, I am
speaking here of Tom Delay, the Majority Whip, who has
introduced with me a piece of legislation on these issues to
guarantee----
Mr. Barton. Is he a member of this subcommittee?
Mr. Markey. You have got to have a Texan to be in this
fight. I feel a little bit like I am at the Alamo a lot of the
time, coming in from another State. So I am looking for all the
help I can get. These Texans are tough.
So, Mr. Delay and I have introduced a piece of legislation
that would establish authority over the North American
Electricity Reliability Council and the regional reliability
councils, enhance FERC's authority to deal with market power
abuses that could degrade reliability, and create incentives
for new transmission siting. It seems to me that this is the
kind of thing that our subcommittee is uniquely qualified to be
able to deal with.
As we move from smaller, more isolated regional and State-
based electricity networks to national networks, in turn we
have a responsibility to make sure that these national networks
in fact are effective.
I thank you, Mr. Chairman. I share the gentleman from
Texas, Mr. Hall's admiration for your knowledge in these areas.
I think that we are really kicking off this subject with just
the right kind of hearing today and I look forward to working
with both of you toward the goal of resolving this issue this
year. I thank you, Mr. Chairman.
Mr. Barton. Thank you, Congressman Markey. We recognize Mr.
Burr from North Carolina for an opening statement.
Mr. Burr. Thank you, Mr. Chairman. I would be remiss if I
didn't also highlight your good qualities and follow up on Mr.
Bryant's suggestion that had it not been for Tennessee, there
would have been no Texas, and had there not been the kind gift
of North Carolina, there would have been no Tennessee. So now
that we have gotten to the front of the food chain----
Mr. Markey. Can I say something here? I am going to put in
a word for Plymouth Rock here.
Mr. Burr. If you can bring that rock in. I have learned one
valuable thing this morning: why Texans wear boots and high
pants.
Mr. Barton. I think he has gone to meddling now. Time is
up.
Mr. Burr. I do, on a serious note, want to thank the
chairman for the continuation of this process. I believe moving
forward is the thing for us to do. We have a great set of
witnesses today to hopefully guide us through, and I only wish
that the answer to the reliability question were as easy as the
lights that somebody in the back of the room cutoff just a few
minutes ago and very quickly cut back on but. It is not that
simple to identify where the problem is, and in many cases the
problem exists before you know there is one.
And I think that one of the responsibilities of the
industry and of the Congress is as we move forward to better
understand how to have the safeguards and to hopefully take--
Mr. Hoecker, your first paragraph where you said, ``Let markets
not regulators, determine the price of,'' and you had
``wholesale power,'' and I think our attempt is just to say
``power.'' I am confident the markets can do it and that we can
have the assurances of reliability and the effectiveness of our
transmission system.
And with that, I yield back, Mr. Chairman.
Mr. Barton. Thank you, Congressman Burr.
We now recognize the gentleman from Ohio, Mr. Sawyer. I am
interested to see how he is going to talk about his State in
the beginnings of the great State of Texas.
Mr. Sawyer. Mr. Chairman, while I live in Ohio, my family
first came to this country through Virginia, one of those dates
that you memorized in your history books. I have always
hesitated to talk about that and I discovered why when Kika de
la Garza told the story that he loved to tell. I am sure you
know about when he was first asked, when he first came to the
Congress, by the daughters of Texas how long his people had
been in this country, and he paused for a moment and smiled and
said, ``Well, it is kind of hard to tell. You see, first, we
lived in Spain. We lived so many places. We lived in Spain and
we lived in Mexico. Then we actually lived in the Republic of
Texas and then we lived in the Confederacy, and then finally
lived in the State of Texas and, you know, we never left the
land. We settled in 1604.'' It puts things into perspective for
all of us as you might----
Mr. Hall. I think my uncle Christopher knew your people.
Mr. Sawyer. To get back to the topic, one of my staff
clipped an item that noted trade journal, Rolling Stone, in
which John ``Cougar'' Mellencamp observed that in the thirties,
rural electrification brought electricity to rural dwellers and
with that came radios, record players, music. According to
Mellencamp, his upcoming tour will be called the ``Rural
Electrification Tour.'' In many ways, he is trying to take from
one era and build into another. It is exactly what we are
trying to do.
I have a longer opening statement that I would like to
offer for the record, but I just want to make one observation;
and that is, today's transmission structure works but it works
largely by the accident of physics and not through any
particularly well-crafted, thoughtful, far-seeing vision of
what an effective transmission system ought to look like. It
really comes about because various service territories, rate of
return, regulated entities, really abut up against one another,
and it provides the capacity for product to move.
In that sense, it seems to me that it is very much like the
condition of the U.S. highway system prior to the 1950's. Yes,
people could get from one place to another and it worked
reasonably well, but it was wholly unsuited to the kind of
commerce that developed in the fifties and sixties and since
then. With the growth of the interstate highway system, the
highway system became a backbone of commerce in the United
States and, in many ways, created personal freedom that allowed
communities to grow and develop in wholly natural ways. But
those systems followed the siting of the interstate highway
system, that growth.
We face a similar circumstance here where the development
and growth of a transmission system can be the genuine backbone
of competition in this industry as it evolves in the next
century. It is that which it seems to me offers the greatest
opportunity for an effective and flexible Federal framework
within which that private growth can take place.
How well we do that is really going to be at the heart of
how well we succeed in this large national undertaking of the
deregulation and restructuring of a large and complex century-
old business. We have the strongest economy on Earth. It is in
no small way due to the effectiveness of that system that has
grown to this point, and how well we nurture that growth in the
coming century may well depend on how well we do this job here.
With that I conclude my comments and thank you, Mr.
Chairman, for your latitude in offering----
Mr. Barton. Thank you.
I recognize the gentleman from Oklahoma who has been one of
the strongest advocates for this issue and has worked
tirelessly on it for many years. Mr. Largent of Oklahoma.
Mr. Largent. Thank you, Mr. Chairman. Thanks for having
this hearing. We have got a number of issues to work on. I am
excited that we are developing the momentum. The question is
not whether we are going to do electricity restructuring, it is
just when. And I think reliability is one of those issues that
is important to everybody.
And so I look forward to hearing from both panels this
morning on what we need to do to make our transmission system--
if in fact moving to a restructured environment actually can
improve reliability and transmission innovations. So thank you
for holding this hearing and I look forward as we continue the
march forward on electricity restructuring.
[The prepared statement of Hon. Steve Largent follows:]
Prepared Statement of Hon. Steve Largent, a Representative in Congress
from the State of Oklahoma
Thank you, Mr. Chairman, for continuing the forward momentum of
comprehensive restructuring of the electricity industry monopoly with
this hearing on reliability and transmission issues in a competitive
market.
When those with concerns about the federal role in electricity
restructuring ask why we need to move at the federal level--ensuring
nationwide system reliability is among the best of reasons. In fact,
now that 21 states have moved toward a restructured marketplace it is
critical that reliability provisions be enacted at the federal level.
While I believe that the need exists for strengthened reliability
provisions regardless of whether you support federal restructuring
legislation, I also believe that it should be a vital part of any
restructuring bill that this subcommittee considers later this summer.
I think the witnesses today can enlighten us on all the major
issues associated with reliability and transmission in competitive
markets, beginning with FERC Chairman Hoecker. In addition, I look
forward to hearing about more pure market solutions to increasing
reliability and transmission capabilities. These solutions include
superconductor technologies that maximize current transmission
capacities by reducing line losses and distributive power advances that
place the generation closer to the end user. I look forward to their
testimony.
Last week, Secretary Richardson unveiled the Administration
Electricity bill and I believe momentum grows each day that this
Subcommittee sits down and works through these issues. I think we will
soon discover that we can move a good, fair, bipartisan bill to the
floor because there is more that joins us then separates us. The
importance of reliability of our electrical energy is something I think
we can agree on.
Thank you once again Mr. Chairman.
Mr. Barton. Thank you. Does the gentleman from Georgia, Mr.
Norwood, wish to make an opening statement?
Mr. Norwood. No, Mr. Chairman. Thank you very much for
having the hearing. I would like to offer my statement for the
record. It is very lengthy, but frankly I have talked so much
this week I am tired of hearing myself talk so I will pass.
Mr. Barton. The audience appreciates that, I am sure.
Does the gentleman from Illinois, Mr. Shimkus, wish an
opening statement?
Mr. Shimkus. Thank you, Mr. Chairman. Thank you for holding
this hearing. I just look forward to hearing today how the
regional transmission organizations, expanded NAERC authority,
and additional FERC authority will help address price spikes.
Of course, Illinois experienced those last year. I think it
would be a good day to get some questions answered. So I want
to welcome Chairman Hoecker, and I look forward to the
testimony.
Mr. Barton. Being no other members present--oh, I am sorry.
I didn't see Mr. Wynn. I apologize.
Mr. Shimkus. He is small.
Mr. Barton. I recognize the distinguished gentleman from
the great State of Maryland, Mr. Wynn, for an opening
statement.
Mr. Wynn. Thank you, Mr. Chairman. I will be brief. Let me
also applaud you for holding these hearings and continuing this
process of moving this forward.
I am particularly interested in today's hearing because I
think it hits on an area where we may in fact have a
significant Federal role. We are looking at a system that was
designed around a regional concept of transmission. We are now
entering an era in which we will be looking at a very different
interstate, a national interstate system, larger amounts of
electricity traveling longer distances. And I think that will
pose new challenges in the area of reliability. I am very
excited to hear the witnesses and would like to submit a full
statement at a later time.
Mr. Barton. I want to apologize to Congressman Wynn. I
recognized two Republican Congressmen who came in after you. I
sincerely didn't see you. I apologize.
Mr. Wynn. No problem.
Mr. Barton. The Chair, taking a very careful look around
the room, I see no other members present. All members that are
not present will have the requisite number of days to put a
written statement in the record. All members present who wish
to elaborate on their statements will do so without objection.
[Additional statement received for the record follows:
Prepared Statement of Hon. Cliff Stearns, a Representative in Congress
from the State of Florida
Thank you Mr. Chairman. As always is the case, I commend you for
the decision to hold a hearing on this subject, and for your diligent
work on the broader topic of energy-related matters. Today's hearing is
timely considering the current State and Federal efforts toward
restructuring.
At the heart of the Federal debate are the issues of transmission
and reliability. They are the cornerstone of the electric utility
industry. Put simply, Americans expect power to reach their homes and
turn on the lights each and every time they flip a switch.
In developing a Federal approach to competition, we have an
obligation to consider the merits of competition and its effect on the
reliability of the system. The current scheme is remarkable. System
reliability is achieved by a dynamic and intricately crafted framework.
The organization chiefly responsible for this transmission framework
and the reliability of bulk electric systems in the US is the North
American Electric Reliability Council, or NERC.
The best and most important features of the NERC is that it was
developed by the utilities, not by the government, and that it depends
entirely upon itself for guidance and regulation. But there is a
drawback in that NERC does not enforce compliance with reliability
standards because it lacks enforcement power. Additionally, FERC is not
authorized to enforce reliability standards.
Given increasing competition in the electricity industry, some
propose that we establish a new self-regulating reliability
organization subject to FERC certification and oversight that would
develop enforceable reliable standards. A number of legislative
proposals provide for enforcement of reliability standards by a FERC-
certified self-regulating organization.
Another key issue in this discussion will surely be the fact that
the transmission system is not subject to the same set of rules. FERC
is only authorized to regulate the transmission systems owned by
investor-owned utilities. FERC does not regulate the other 34% of the
transmission system owned by the Federal electric utilities, State and
municipal utilities, and rural electric cooperatives. Additionally,
distributive generation technology presents the question of how to
interconnect this dispersed generation with the traditional
distribution grid.
Many believe that a competitive market would better operate if the
transmission market were fully open and subject to one set of rules.
This would require legislation to amend the Federal Power Act and other
laws.
Transmission owners are collaborating to create regional
transmission organizations, or RTO's to manage and operate the
transmission grid and provide nondiscriminatory access to the grid.
RTO's are proposed as one response to address concerns that internal
practices and procedures would be inadequate to prevent manipulation of
transmission systems to limit competition in generation. FERC is
expected to issue a notice of rulemaking on RTO's in the near future.
This may provide guidance, however some fear that FERC may exceed its
authority under current law in the rule.
Clearly a consensus is developing that the transmission and
reliability are foremost in the list of issues Congress must deal with
in formulating a Federal deregulation strategy. I anticipate a fruitful
and enlightened debate today, I welcome our panels and I look forward
to their testimony. Again, I commend the Chairman of the Subcommittee
for his work on this issue.
Mr. Barton. The Chair would now like to recognize our first
witness, the distinguished Chairman of the Federal Energy
Regulatory Commission, The Honorable James Hoecker, and your
statement is in the record in its entirety. We will recognize
you for such time as you may consume.
We will just simply say as a personal aside that it has
been a pleasure to share the dais of several events with you in
the last 3 months, and I am sure we are going to continue to do
so in a very cooperative and congenial way. The floor is yours.
STATEMENT OF HON. JAMES J. HOECKER, CHAIRMAN, FEDERAL ENERGY
REGULATORY COMMISSION
Mr. Hoecker. Thank you, Mr. Chairman, and members of the
subcommittee. It is a pleasure to be here today to discuss the
current restructuring of the electric power industry. I, too,
commend you, Mr. Chairman, and members of the subcommittee for
focusing on this critical development involving the Nation's
most capital-intensive industry.
As you requested of me, I plan to testify this morning on
matters related directly to electrical reliability and
transmission issues. Of course, these are precisely the issues
that concern the Commission most in its continuing effort to
promote competitive bulk power markets, and you certainly have
my commitment, Mr. Chairman, that the Commission will support
this subcommittee's investigation of these issues in any way
you think is appropriate.
Competition is growing in wholesale power markets in
response to the Energy Policy Act of 1992, technological and
business developments and the Commission's effort to remove
barriers to competition and let markets, not just regulators,
determine the price of wholesale power.
Wholesale competition will provide substantial benefits to
industry and to consumers. Among other things, it offers the
prospect of reduced prices for end users, even where retail
choice is not available, by lowering the cost of power
purchased for them by utility suppliers.
But getting to competitive markets is a journey that is not
without its complications, however. The Commission's Order No.
888, which in 1996 made open nondiscriminatory transmission
access an important feature of the bulk power market, did not
solve all problems. Significant impediments to full competition
in wholesale markets remain. Even for utilities already subject
to the requirements of Order No. 888, there remain substantial
concerns about the use of transmission to deny access to
competing sellers of power. Moreover, substantial gaps remain
in the availability of open access transmission service
nationwide.
Approximately one-third of the Nation's integrated
transmission grid is, with limited exception, not subject to
the Federal Power Act or to the Commission's open access
requirements. These gaps reduce the trading opportunities and
prevent customers from realizing the full benefits of
competition. And although the laws of physics and the growing
number of bulk power transactions mean that wholesale markets
tend to operate across States and regions, management of the
transmission system which supports this trade is not regional
in most parts of the country. So competition and efficiency
benefits are consequently being lost.
Ironically, Mr. Chairman, even the arrival of competition
itself, for all its promise, creates some new problems. Because
there are many more bulk power transactions and because
transmission facilities are increasingly used in ways not
contemplated when they were planned and built, the need for
better congestion management and more efficient pricing and
regional planning is likewise increasing.
But, most importantly, reliability of electric service, so
vital to the Nation's economy and the welfare of individual
citizens, may be challenged in significant ways.
Assigning responsibility for maintaining transmission
system reliability is more problematic in a dynamic environment
where market participants have competing or conflicting
commercial interests in how the grid is to be operated.
Well, what are the solutions? In my view, it would be a
mistake to resurrect Federal command and control regulation as
our policy goal. The FERC's basic policy continues to be to
substitute competition for wholesale price regulation where
possible, and to maximize competition in bulk power markets by
facilitating access to transmission services everywhere.
It is consistent with these objectives and the competitive
goals set by Congress in the Energy Policy Act that I commend
to you a select few Federal legislative proposals:
The Congress should first provide that all transmission
facilities in the lower 48 States must operate under the same
general open access transmission rules that apply to investor-
owned utilities.
Second, it should promote regional management of the
transmission grid by clarifying the Commission's authority to
establish new regional transmission organizations.
And third, it should establish a fair and effective program
to protect reliability of the transmission system.
The administration's proposal and various House and Senate
bills have addressed these matters. To my mind, development of
regional transmission organizations or RTOs that have real
control of grid operations, that are independent of commercial
interests of market participants and that cover a large market
area represent the most effective and expeditious way to view
these issues together and to begin developing solutions.
Now, in conclusion, I recognize that these proposals may be
misperceived as extraordinary or unnecessary expansions of
Federal regulatory powers, contradicting what we at the
Commission otherwise are saying about greater reliance on
markets and lighter-handed regulation.
And not surprisingly, perhaps my view is quite different
and it is different for three simple reasons. First, as I noted
in my written testimony, the Commission is already heavily
involved in all these areas, often because the electric
industry or its customers seek our assistance. Second, the
Commission has been careful to recognize the views and to
accommodate the legitimate regulatory interests of States. And
most importantly, Mr. Chairman, the Commission is aggressively
promoting competition and wholesale markets, not more onerous
regulation, as our primary policy objective.
I want to thank you, Mr. Chairman, again, for asking me to
be here this morning and for the opportunity to offer my views
on this important topic, and I would be pleased to respond to
any questions you may have.
[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: I am pleased to
appear before you today to discuss key aspects of the current
restructuring of the Nation's electric power industry, namely
reliability and transmission issues. Thank you for this opportunity.
The Federal Energy Regulatory Commission (Commission or FERC) is
fully engaged in the critical task of promoting competition in the
wholesale or ``bulk power'' market, consistent with the goals of the
Energy Policy Act of 1992. To achieve these goals, the Commission's
fundamental regulatory policies are to substitute competition for price
regulation in wholesale power markets to the extent possible, and to
regulate essential transmission facilities so as to enable competition
in power markets. Today I will address the progress the Commission and
the industry have made in creating an efficient, reliable, fair, and
transparent wholesale market, and identify the important ways in which
the Congress can further assist the Commission in completion of this
important task.
My testimony will focus on three key issues for advancing robust
competition--open access to all transmission facilities, efficient
regional operation of transmission facilities, and mandatory
reliability standards. First, there remain important gaps in the
availability of open access transmission service nationwide, which, if
left unaddressed, will impede the development of competition and
prevent wholesale customers from realizing the full benefits of
competition. Second, bulk power markets operate regionally and should
be governed to foster competition and efficiency by increasing the
trading opportunities of many participants. However, management of
transmission systems is not regional in most cases, and thus the
benefits of full competition may be lost. Third, the reliability of
electric service, so vital to our Nation's economy, may be threatened
by the difficulties of assigning responsibility for transmission system
reliability in a dynamic environment where participants have competing
or conflicting commercial interests in how the grid is administered.
The Commission is increasingly asked to exercise its existing, but
inadequate, statutory authority to ensure compliance with industry
standards. To fully realize the competitive goals set by Congress in
the Energy Policy Act of 1992 and promoted by the Commission since
then, additional legislation in these areas is needed.
The Status of Open Access Transmission
The Commission works to ensure a well-functioning bulk power
market. It oversees sales of electricity by ``public utilities'' to
other utilities--that is, wholesale transactions. ``Public utilities''
mainly include investor-owned utilities and exclude the federal power
marketing administrations, municipal utilities, and most rural electric
cooperatives. Moreover, the Commission does not regulate sales to
consumers or electric local distribution services. Those retail
services are generally regulated by the states. The electricity prices
paid by retail consumers nevertheless include the cost of any power
purchased by their utility suppliers in wholesale markets. So,
competition in bulk power markets ultimately benefits consumers by
reducing the cost of power supplied to them, whether or not a state
chooses to allow retail competition.
The Commission's pro-competitive approach tracks what is occurring
in the industry itself. Once characterized universally as heavily
regulated, vertically-integrated monopolies, public utilities have been
increasingly subject to the forces of competition over the past two
decades ago, due to various economic, legislative, and technological
developments. Congress gave competition a strong boost in the Energy
Policy Act of 1992, increasing the Commission's authority under section
211 of the Federal Power Act to order transmission service in
appropriate circumstances.
The Commission fostered the development of competition by adopting
light-handed regulation for power suppliers shown to lack market power.
Specifically, the Commission began allowing such power suppliers to
sell at market rates instead of rates determined by the Commission
based on the cost of service. To date, the Commission has authorized
market-based rates for literally hundreds of power suppliers, including
power marketers and traditional investor-owned utilities.
Understandably, competition in bulk power markets will never be
vibrant unless wholesale sellers are able to deliver power to any
buyers in the market. Access to buyers is key. In the electric
industry, transmission facilities make this possible. These facilities
form an interstate grid for delivering power, in the same way the
interstate highway system allows trucks to deliver other commodities.
There are important differences, however. Electricity cannot be stored.
It is delivered instantaneously over an integrated network of wires and
a transaction between two parties can affect the capacity of the system
and the transactions of others. Most importantly, the electrical grid
is owned by individual utilities and, absent regulation, these
utilities can effectively prevent the use of these facilities by their
competitors.
Several years ago, the Commission recognized that competition in
wholesale markets was being inhibited by the lack of non-discriminatory
access to transmission facilities. Sellers owning transmission
facilities were stifling competition by discriminating against others
seeking to use their transmission facilities, either by denying or
delaying transmission service or by imposing discriminatory rates,
terms and conditions for service.
Consequently, the Commission in 1996, through a major rulemaking
called Order No. 888, ordered open (non-discriminatory) access to the
transmission facilities of public utilities. Order No. 888 is an
exercise of the Commission's duty under sections 205 and 206 of the
Federal Power Act to ensure non-discriminatory transmission services.
Since I last testified before this Subcommittee in October 1997,
the pace of change among utility companies has continued to accelerate.
The Commission has reviewed and acted upon 18 major utility mergers.
Fully ten percent of the Nation's electric generation plants have been
divested by traditional electric utilities. Electric utilities and gas
pipeline or distribution companies have combined to form major energy
concerns. The number of power marketers and independent generation
facility developers entering the marketplace has continued to rise,
placing additional competitive pressure on traditional utilities. Five
independent system operators (ISOs), three of which are currently
operational, have been established to operate entire regions of the
transmission system. Three state legislatures now require their
utilities to join a regional transmission entity. Trade in bulk power
markets has continued to increase significantly and the Nation's
transmission grid is being used more heavily and in new ways. Finally,
18 state legislatures have enacted legislation to initiate, or set a
date for, retail electricity competition. In other words, the industry
is changing to meet the strategic and economic challenges of the
competitive marketplace.
Yet, despite the successes of Order No. 888 in fostering
competition, not all potential market problems have been addressed. The
remaining impediments to full competition fall largely into two
categories. First are the engineering and economic inefficiencies
inherent in the current operation and expansion of the transmission
grid, inefficiencies that are hindering fully competitive power markets
and imposing unnecessary costs on electric consumers. Changes in trade
patterns and industry structure have made it more difficult to maintain
reliable grid operations, manage transmission congestion, and plan for
expansion of transmission facilities. Without further reform,
traditional pricing and transmission practices will likely hinder the
further development of competitive and efficient bulk power markets.
Among these impediments are the ``pancaking'' of transmission access
charges from one system to the next, the absence of clear and tradeable
transmission property rights, and the virtual absence of a secondary
market in transmission service.
The second category of impediments consists of 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. As profit-maximizers,
utilities that control monopoly transmission facilities and also have
power marketing interests have every incentive to deny equal quality
transmission service to competitors. Order No. 888 addressed many forms
of undue discrimination by requiring public utilities to separate
transmission and power marketing functions, to take transmission
service under the same tariff as available to other transmission
customers, and to abide by standards of conduct that prohibit the
preferential treatment or sharing of information between the utility's
transmission and power marketing functions.
In the wake of Order No. 888, however, many market participants
continue to allege, and the Commission has in some cases confirmed,
that transmission service problems related to discriminatory conduct
remain. Allegations relate to standards of conduct violations and
manipulations of the operation of transmission systems to frustrate
power marketing competitors, for example by the imposition of
transmission curtailments on congested lines. As might be expected in
maturing commodity markets, there is a great deal of mistrust among
market participants with respect to the fairness of the system. The
pace and scope of restructuring and the future of certain companies
therefore remain uncertain. Nothing is more detrimental to shareholder
values than uncertainty.
These issues represent a challenge to the industry and to the
Commission. Although the Commission is committed to full competition in
wholesale markets and will pursue that goal through all reasonable
means, Congressional action may prove critical to our ability to reach
that goal.
Gaps in Open Access
Order No. 888's mandate for open access transmission has key
omissions. The Commission's authority does not apply to Federal power
marketing administrations, municipal utilities, and most rural electric
cooperatives. While the Commission has authority to require these
entities (``non-public utilities'') to provide transmission service
based on a case-specific application under section 211 of the Federal
Power Act, it lacks authority to generically order all of them to offer
service under open access transmission tariffs.
Approximately one-third of the Nation's integrated transmission
grid is beyond the reach of Order No. 888's open access requirements.
For example, because the Federal power marketing administrations that
own transmission (such as the Bonneville Power Administration and the
Western Area Power Administration) and the Tennessee Valley Authority
are not public utilities, their transmission systems are beyond the
Commission's authority to require open access. Similarly, many
municipal utilities and cooperatives control transmission but need not
comply with our open access rules. In fact, approximately 70,000
circuit miles of interstate transmission--over 30 percent of all
interstate transmission--are not subject to the Commission's open
access authority. An additional 7,000 miles of intrastate transmission
within the Electric Reliability Council of Texas (ERCOT) is beyond our
open access authority.
Non-public utilities are nevertheless encouraged to offer open
access transmission service under the concept of ``reciprocity.'' In
other words, when these utilities take transmission service under a
public utility's open access tariff, they must also offer reciprocal
service to the public utility, unless the public utility or the
Commission waives this requirement. Several non-public utilities have
begun offering open access service under a FERC-filed tariff. However,
many transmission-owning non-public utilities still do not offer open
access service.
Efficient markets in network industries generally require that all
service providers be subject to the same rules. This gap in the
availability of open access service on the interstate grid raises
serious questions about how competitive and efficient the interstate
power marketplace can become. Gaps in open access to the grid can cause
customers to pay more than they should for power. There is little more
that the Commission can legitimately do to address this problem under
existing law.
Only a change in the Federal law can effectively address this
difficult gap in the availability of open access transmission. Such
legislation need not unnecessarily intrude into the activities of these
entities. In fact, the experience of those non-public utilities that
have voluntarily adopted open access tariffs demonstrates that open
access service consistent with the Commission's requirements is as
workable for non-public utilities as for public utilities, although
appropriate legislation is needed to address related tax consequences.
However, the benefits of competitive access will be delayed until
transmission access is universal. The Administration's proposed
legislation addresses these issues, by extending Federal Power Act
jurisdiction over the rates, terms and conditions for transmission
services provided by non-public utilities that own, operate, or control
transmission facilities under the same terms that apply to public
utilities.
Regional Transmission Organizations
The wholesale electric business is changing rapidly from many
smaller local markets to fewer, larger regional markets that usually
span multiple states. Power sales in these large markets involve use of
all the high-voltage power lines in a region. I believe it is
essential, for reliability as well as for commercial reasons, that all
of the transmission lines in a region be under the operational control
of a single operator that has no financial interest in the more
lucrative generation market. I call them Regional Transmission
Organizations (RTOs). RTOs can include ISOs of the transmission system
as well as independent transmission companies (transcos) that own and
operate the system.
Grid regionalization is not a new concept. Bulk power reliability
has been maintained for almost 40 years by voluntary regional industry
councils. The Commission encouraged Regional Transmission Groups (RTGs)
in the early 1990s to engage in regional planning. Order No. 888
encouraged, but did not require, the formation of ISOs. However, the
increasing need for such regional organizations is evidenced by the
fact that, without a regulatory or statutory mandate, the industry has
already proposed or implemented RTOs in California, the mid-Atlantic
states, New England, New York, and the Midwest.
If properly constituted and truly independent, RTOs will be a major
step in addressing obstacles to competition and obtaining major
efficiencies. First, RTOs will ensure that vertically-integrated
transmission-owning utilities do not discriminate in favor of their own
generation over another seller's generation. Second, RTOs can be
structured to eliminate pancaking of transmission rates that raises the
cost of moving power across multiple utility systems. Third, RTOs that
have the proper tools can better manage transmission congestion, reduce
the instances when power flows on transmission lines must be decreased
to prevent overloads, and effectively solve short-term reliability
problems. Fourth, RTOs can facilitate transmission planning across a
multistate region and, by operating the grid as efficiently as
possible, may give confidence to state siting authorities that new
transmission facilities are proposed only when truly needed.
Significantly, the Commission also will be more inclined to defer to
the planning, pricing and control area decisions of an RTO if it fairly
represents the interests of all stakeholders through open membership
and fair governance procedures.
To achieve these benefits, the development of RTOs must focus on
three criteria. First, RTOs must have real control of the grid, to
ensure that use of the grid is efficient and non-discriminatory.
Second, RTOs need to be independent of the commercial interests of
market participants, so that decisions are accepted by all stakeholders
as non-discriminatory and fair. Finally, RTOs need to include a large
area, to allow a truly regional market to develop to the full extent
desired by market participants. When RTOs meet these criteria,
consumers will begin benefitting from the greater competition in
broader, more vibrant wholesale markets.
RTOs can provide these benefits while taking account of state and
regional preferences and circumstances. RTOs do not require a one-size-
fits-all approach and can be custom-designed. The Commission has
recognized the need to be flexible in how these organizations are
established, in order to accommodate local concerns. For example, in
considering RTO policy, the Commission has solicited state views
extensively, including by holding eleven hearings--nine of which were
outside Washington. The Commission also intends to provide additional
opportunities for consultation.
The Commission is poised to act on RTOs generically. A generic
instruction from the Congress would dispel uncertainties about the
Commission's authority to order establishment of, and participation in,
RTOs to promote efficient operation of bulk power markets. I feel
confident that the Commission will preserve the ability of utilities
joining an RTO to take into account the regional needs in various parts
of the country, as well as flexibility to select the organizational
format that will serve the region best. In my view, the
Administration's proposed legislation addresses these concerns
appropriately. A clear directive would enable the Commission to proceed
to develop efficient, reliable regional power markets, which will
significantly lower the cost of power to consumers, without the
likelihood of court challenges.
Reliability
Let me turn next to reliability. In the past, regulators and
industry participants relied upon voluntary industry organizations to
establish reliability standards and practices. The regional reliability
councils and the North American Electric Reliability Council (NERC)
were composed primarily of the transmission-owning public utilities.
These companies could and did rely upon voluntary cooperation and peer
pressure for compliance. The approach worked well before the advent of
competition and the Nation's electricity system became the envy of the
world.
Competition in power markets increased concern that reliability
rules could not be set or enforced in the same manner. Power markets
today have extraordinary numbers of participants and numbers of
transactions. The Secretary of Energy's Task Force on Electric System
Reliability reexamined the consequences of these developments in
detail. In brief, new and expanding demands for service on the system
change operating conditions and the increasing number of sellers make
it harder to stay competitive in many instances. Faced with competitive
pressure, some participants may be prompted to cut corners on
reliability.
The importance of reliability in America's supply of electricity
has never been greater, however. The Secretary's Reliability Task Force
recently observed that, as our economy becomes more dependent on
computers and other electronic tools, power disruptions pose an ever-
greater threat to productivity and even health and safety. The Task
Force also found that ISOs are significant institutions for ensuring
electric system reliability, and that bulk power systems can and should
be operated more reliably and efficiently when coordinated over large
geographic areas. Many observers, including NERC and the industry
itself, have concluded that a mandatory system for reliability is
needed to ensure that competition does not compromise the dependability
of our Nation's electricity supply.
With the possibility of noncompliance with voluntary standards, and
the current lack of clear authority for anyone to mandate compliance
with reliability rules, industry participants have initiated several
proceedings at the Commission to address specific reliability issues.
In several cases, the industry has asked the Commission to adopt
stopgap measures and to decide the lawfulness of new reliability
measures under Federal Power Act standards ordinarily used to review
rates and commercial practices. However, a Commission finding that
reliability measures meet these Federal Power Act standards does not
ensure that the measures are themselves sufficient to maintain system
reliability.
In 1998, for example, NERC initiated a proceeding seeking
Commission review of NERC's new procedures for reducing power flows to
prevent overloads on transmission lines, so-called transmission loading
relief (TLR). The Commission concluded that these procedures affected
the terms and conditions of transmission service provided by public
utilities because they determined which commercial transactions would
be curtailed to prevent overloads. The Commission required these
procedures to be filed and told the affected utilities to take
additional steps to ensure that the procedures were non-discriminatory.
Similarly, another Commission proceeding was filed by industry
participants to address NERC's ``tagging'' requirements. NERC's rules
required transmission users to provide transmission operators with a
variety of information about their transactions, such as the source of
the power being transmitted, so that transmission operators could take
quick, appropriate action when necessary for reliability purposes. In
that case, the collection of information, by itself, did not change the
terms and conditions of open access service provided by public
utilities and, thus, did not need to be filed. However, the Commission
held that public utilities still had to provide service according to
the terms and conditions in their open access tariffs, unless and until
they sought and were granted permission to apply different terms and
conditions of service.
Finally, the Commission this month accepted on an experimental
basis the beginnings of an entire set of regional reliability
standards, proffered by industry participants. The Commission had
previously never entertained such a request. This approach was proposed
by the Western Systems Coordinating Council (WSCC), the regional
reliability council covering the western United States. WSCC's proposal
was contractual. Transmission providers could voluntarily sign
contracts with the WSCC, agreeing to abide by the WSCC's reliability
rules, and require generators connected to their transmission
facilities to abide as well. Violations of the standards would result
in penalties or other sanctions, subject to the Commission's review.
Several reliability standards were filed with the Commission, which
said it would defer to the WSCC's expertise, largely because of the
representation enjoyed by diverse industry segments in the WSCC's
processes. The Commission's limited role in this instance is to ensure
the reasonableness of rates, terms and conditions of transmission
service and to offer to mediate any disputes about possible violations.
Congress should make compliance with appropriate reliability
standards mandatory. Despite the Commission's cautious acceptance of
the WSCC's proposal, it recognizes that it is incapable of ensuring
that reliability rules apply to all industry participants or that there
is a widely-accepted process for adopting and enforcing reliability
rules in this diverse power market. 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. Sufficient Federal oversight will then be needed to
ensure that the standards maintain sufficient system reliability and
are not unduly discriminatory or otherwise anticompetitive.
The broad support for both the WSCC filing and the reliability
legislation proposed by NERC and included in the Administration's bill
demonstrates the industry's recognition that federal reliability
legislation and oversight will be important to the future integrity of
electric service. It is nevertheless important to note that the
Commission's role in a new reliability regime is largely reactive and
does not impinge on the industry's ability to set its own standards and
to apply them through a fair stakeholder process. By enforcing
industry's agreements, the Commission can, however, prevent market
participants from ``free-riding'' on the reliability efforts of others.
I would emphasize, in conclusion, that the states will also
continue to play an important role in maintaining the reliability of
electric service. Federal legislation should respect this role by
striking an appropriate balance that permits states to continue their
traditional activities in a manner consistent with the industry's
mandatory reliability standards.
Transmission Siting
The construction of new transmission facilities, whether to serve
local or regional needs, may represent an important means of obtaining
the efficiency benefits of greater competition. As the Secretary's
Reliability Task Force found, the reliability benefits of transmission
enhancements can benefit many states, not just those where the
facilities are sited. The grid is therefore being used increasingly for
regional transactions. Even though the grid is being used increasingly
for regional transactions, the siting of transmission and generation
facilities is nevertheless subject to state law. In evaluating grid
expansions, however, states may have difficulty balancing local impacts
with regional benefits. State-by-state planning and the siting of
transmission facilities that are used increasingly to support regional
markets may be an obstacle to sensible grid development.
The answer is not to federally preempt this traditional state role.
I believe instead that it would be beneficial to develop institutions
that engage in regional planning and siting of transmission facilities,
taking into account the interests of all affected market participants
and states. This type of institution could adopt a broad perspective of
decisionmaking on proposed transmission expansions and fairly balance
the local impacts and regional benefits of such expansions, as well as
the suitability of transmission versus generation development. While
such regional entities would be novel, the benefits of regional
transmission planning may justify such an effort. The Administration's
legislation provides one vehicle for balancing these interests, either
by authorizing interstate compacts to form regional transmission
planning agencies or by convening joint federal-state meetings to
consider transmission capacity additions. I also suggest that RTOs
could perform a similar planning function, although this would only be
advisory to state siting authorities under existing law.
Conclusion
Competition is growing in the electric industry, in response to the
Energy Policy Act of 1992 and the Commission's efforts to remove
barriers to competition and to let markets--not regulators--determine
the price of wholesale electric power. However, significant impediments
to full competition remain.
As I stated before this Subcommittee in 1997, I believe that
Federal legislation is needed to: establish a fair and effective
program to protect bulk power reliability; bring all transmission in
the lower 48 states within the Commission's open access transmission
regime; and, clarify the Commission's authority to provide for regional
management of the transmission grid through RTOs.
Aspects of the Administration's proposal and similar legislation
addressing these issues have been criticized by some as expansions of
Federal regulatory powers that are inconsistent with the themes of
greater reliance on markets and lighter-handed regulation. I disagree.
Consistent with the competitive goals of the Energy Policy Act of 1992,
the Commission is aggressively promoting competition in wholesale
markets. Competition in these markets offers the greatest potential
consumer benefits because the cost of generation facilities is the
largest part of the cost of electricity to ultimate consumers, far
larger than the cost of transmission. Wholesale competition, however,
cannot achieve its full potential without improved access to the
interstate transmission grid and universal adherence to reliability
rules. Thus, effective regulatory oversight of transmission and
reliability is a critical prerequisite to greater competition in
wholesale power markets. The Commission's objective, in the final
analysis, is to create market structures that will permit it to cede
important economic decisionmaking to the marketplace and to substitute
light-handed regulation and market monitoring for traditional command
and control regulation.
Federal action to ensure reliability and promote effective regional
market mechanisms in the near future--whether from the Congress or the
Commission--will be needed to establish a fully competitive wholesale
power market environment for the benefit of all electricity buyers,
including residential consumers. Wholesale competition will lay the
groundwork for retail competition, where adopted, and continue to
ensure efficiency and fairness even where retail access is delayed. I
continue to believe that one cannot, in this time of industry
transition, be both a believer in competition and an agnostic about
market structure.
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, Mr. Chairman. I am going to
recognize myself for 5 minutes and the question rounds will be
5 minutes. We are only going to have one round because we have
the next panel, I think has seven or eight people on it, and we
want to give ample opportunity for them.
My first question, Mr. Chairman, is a general question. Do
you think that Congress needs to act in a comprehensive way or,
as some have said, if we could not do anything and let the
States handle this issue?
Mr. Hoecker. Mr. Chairman, I think the issues that I have
outlined are issues that the States individually are incapable
of addressing because they involve transmission and market
issues that transcend State boundaries and cover entire
regions. Comprehensive legislation implies that you would
address retail competition. The Commission really takes no
position on those issues. We are, however, hopeful that
comprehensive legislation is not sufficiently slow in
developing and passing, that the particular solutions that I
have talked about would be delayed inordinately.
Mr. Barton. Do you feel that in the reliability area, that
the agency that you head needs to have the ultimate authority,
as opposed to some of these voluntary associations that have
sprung up around the country?
Mr. Hoecker. Mr. Chairman, I think the basic system for
developing reliability standards and ensuring the security of
the system and the adequacy of generation over the years is a
fundamentally sound one. That is, the industry has the
expertise and certainly the commercial motivation to ensure the
reliability of the system by developing appropriate standards.
The question arises as to how the voluntary or self-
regulating organizations will be structured: Who will oversee
the appropriateness of those governance structures and who will
review the standards that are developed to ensure that they
have no adverse implications for open access transmission and
that they are fairly administered and uniformly enforced?
Our role, I think, would be primarily a reactive one and a
light-handed oversight role, not the ultimate authority in the
sense perhaps that you mean it. We want to make sure that the
industry continues to do the excellent work that it has done in
the past, but that it is not defeated in its goal of ensuring
reliability by the fact that the market is so much more
competitive and dynamic now than it has been historically.
Mr. Barton. Do you see any benefit in giving the FERC the
authority to help set up the system and to set up the ground
rules and then sunset the authority over, as you put it, light-
handed oversight, so we would put some provision in that gave a
national agency like the FERC the ability to go out and
interconnect, coordinate, and set up the system, but at a date
certain that went away and the systems in place became self-
regulating?
Mr. Hoecker. I think to a large extent it would be self-
regulating in any event. I think that the development and
adoption of standards and the application of those standards to
the marketplace will be an ongoing process to reflect how the
market changes and how trading patterns challenge the
reliability of the system. Under those kinds of conditions, I
believe that there may be a continuing role for the Commission
in reviewing those standards over time.
I don't believe it is simply a matter of creating a
governance for the NERC of the future and then stepping aside.
I subscribe to basically what the administration's bill
suggests, and that is an ongoing role.
Mr. Barton. My time has expired. I have got one last
question. What is your position or the FERC's position on
extending authority to organizations like the Tennessee Valley
Authority and the Boneville Power Administration, other PMAs,
some of the co-ops and municipals right now that the FERC
doesn't have authority over?
Mr. Hoecker. Mr. Chairman, I believe that all transmission
in the country should be operated under the same open access
rules. To the extent Federal power marketing agencies own,
control, and operate transmission--and they don't all--to the
extent that municipalities own transmission--and they all do
not--I think that they should be subject to the open access
requirements of Order No. 888 and the Federal Power Act. That
is not to say that our Commission desires to regulate municipal
utility operations. We simply want to make sure that the
transmission system operates uniformly and efficiently.
Mr. Barton. The Chair would recognize the gentleman from
Ohio, Mr. Sawyer, for 5 minutes.
Mr. Sawyer. Thank you, Mr. Chairman. Mr. Chairman, in
today's environment, transmission development is not easy even
as it exists. There is a whole question of siting problems and
the political and public relations difficulties that accompany
all of that. But it seems to me that one of the abiding
problems, at least in the current environment, that by
comparison to other kinds of investment, the transmission has
an inherently more difficult capacity to generate a rate of
return on that investment, making capital formation a specific
problem that attends to transmission investments.
In the environment that you imagine and that we are moving
toward, how do you see the incentive for growth and development
not of the first-tier markets but of second-tier markets and
beyond, where in fact there may actually be gaps of adequate
transmission and capacity today?
Mr. Hoecker. As I travel the country, Congressman, I have
heard a great many concerns about the need to expand the
transmission system or to site new generation, either to
enhance reliability or to improve transmission capability, and
I think that as we contemplate the disaggregation, if you will,
of the industry and operating transmission on a kind of stand-
alone basis, either under a wires company operation or through
some sort of independent system operator, we need to provide
mechanisms for attracting capital to expand the system as
appropriate. There are a number of things that will facilitate
that. Certainly, we need good pricing of transmission, pricing
that recognizes the value of transmission under conditions of
constraint or congestion and encourages the market to fund
projects to expand transmission where there could be some
commercial advantages in doing that.
We at the Commission may contemplate in the future things
like performance-based ratemaking in the context of regional
transmission organizations. We are open-minded about how to
address this issue at the Commission, but I certainly think
your concern is a legitimate one, and we want to ensure that
transmission as a stand-alone enterprise remains a viable part
of the business and maybe even a growth part of the electric
power business.
Mr. Sawyer. I gather from what you have said, both in your
answer to prior questions and your opening statement and now,
that you are not wedded to any single governance structure but
perhaps you would see those evolving to meet the different
circumstances in which the need for transmission finds itself
in various parts of the country. Am I right in that assumption?
Mr. Hoecker. That is absolutely right. I am very hopeful
the Commission will issue a proposal in the next several weeks
that will invite comment in part on that very issue. It is my
personal wish that that proposal provide for flexibility in
terms of how regional organizations are structured in the
future.
Mr. Sawyer. Am I not correct that in the Senate in
testimony there, you endorsed the idea and suggested it here as
well today, that FERC should have the authority to order
transmission entities to participate in a specific
organization, transmission organization?
Mr. Hoecker. I think a clarification of our ability to do
that would be appropriate. Our authority currently,
Congressman, is our authority to remedy undue discrimination
and anticompetitive effects. We think that gives us the ability
to address these kinds of problems regionally, just as it did
give us the ability to require open access. But it would be
very helpful if Congress were to make it real clear in this
regard.
Mr. Sawyer. It is not absence of authority today, but one
that may not be sufficiently clear in your view?
Mr. Hoecker. That is right.
Mr. Sawyer. Good timing.
Mr. Barton. You have one last question?
Mr. Sawyer. No, that is fine, thank you.
Mr. Barton. The Chair would recognize the gentleman from
Kentucky Mr. Whitfield, for 5 minutes.
Mr. Whitfield. Thank you, Mr. Chairman.
You mentioned in your testimony that the Secretary of
Energy's Reliability Task Force recently observed that as our
economy becomes more dependent on computers and other
electronic tools, power disruptions pose an ever greater threat
to productivity, and even health and safety. And then
emphasizing the importance of this issue, you go on and you
talk about earlier this month the Commission accepted on an
experimental basis some regional reliability standards
specifically with the Western Systems Coordinating Council.
Would you elaborate on that a little bit and maybe also
just talk specifically about some of the reliability rules that
they propose?
Mr. Hoecker. The WSCC proposed four reliability standards
for us and I believe intends to submit additional ones in the
future. They did so to obtain our approval that these standards
were just and reasonable under the Federal Power Act. We did
not review the standards for their adequacy from purely a
reliability standpoint. We don't really have that authority. It
is a matter of trying to ascertain whether their proposals
would in any way impact the open access regime that the
Commission has promoted.
And what we are finding is that, despite our historic lack
of authority in the area of reliability and governance of WSCC
or any other regional authority, we are requested by the
industry, both the utilities and their customers, to help
ensure the fundamental fairness of these standards which have
distinct commercial implications if they are misapplied or if
they end up denying or limiting access to transmission.
Mr. Whitfield. But the Commission has agreed to sort of
provide oversight. My understanding, this is voluntary.
Mr. Hoecker. Completely voluntary, yes.
Mr. Whitfield. And that you all did formally agree to
provide some mediation or arbitration to determine if they
violated their agreements?
Mr. Hoecker. That is correct. Fundamentally there is an
appeal process within the WSCC, as I understand it. If there is
a violation of one of these standards and if the dispute cannot
be resolved, we would act as--I suppose you would view it as
sort of an appellate court.
The procedures that we envision and that WSCC envisions
involve alternative dispute resolution, and we think that that
is a capability that we have and have developed at the
Commission, and we can play an important role as a forum for
dispute resolution, but that is probably as far as this
Commission is capable of going under existing law.
Mr. Whitfield. This is the only regional reliability
council that has made a proposal like this?
Mr. Hoecker. Of this kind, yes.
Mr. Whitfield. Mr. Chairman, I yield back the balance of my
time.
Mr. Barton. The Chair would recognize the distinguished
member from Michigan, Mr. Dingell, for 5 minutes.
Mr. Dingell. Mr. Chairman, I thank you very much. Mr.
Chairman, welcome to the committee.
Mr. Hoecker. Thank you.
Mr. Dingell. I noted with some interest that you talked
about a number of arguments where the Commission has raised
issues relative to getting greater authority over transmission
organizations. You have not suggested that you wanted
additional authorities over the public power organizations,
have you?
Mr. Hoecker. Yes, I have. In my testimony I recommend to
the Congress that approximately 33 percent of the transmission
systems that is owned by Federal power marketing
administrations, by municipal and cooperatively owned
utilities, be subject to the Commission's open access rules.
Mr. Dingell. TBA, Boneville?
Mr. Hoecker. Yes, sir.
Mr. Dingell. All of them?
Mr. Hoecker. Yes, sir.
Mr. Dingell. Not now, but at your convenience, would you
submit to the committee a list of the real problems in the
marketplace that FERC cannot address under your current
authority and what those problems might be?
Mr. Hoecker. I would be pleased to do that.
Mr. Dingell. And the Energy Policy Act of 1992 has been in
place a relatively short time, as has FERC Order No. 888. What
specific events or items of information cause you to conclude
that these are not sufficient to get the job done?
Mr. Hoecker. Well, I should clarify that we believe Order
No. 888 and open access are a big success.
Mr. Dingell. What evidence do you have that these two
authorities do not give you sufficient capacity to address the
questions with regard to the matters that we are discussing
this morning, reliability, your authority over the agencies?
Mr. Hoecker. Well, first of all, reliability is
historically something the Commission has never overseen. There
is no express authority in the Federal Power Act for the
Commission to review reliability standards or in any way to
review the organizational governance structure of NERC.
Mr. Dingell. You want authority to regulate the
reliability?
Mr. Hoecker. We want authority to review standards, to
oversee the process of applying those standards, and to be a
backstop enforcer, enforcement body, if the industry cannot
resolve its disputes voluntarily. But fundamentally, the system
we contemplate will still be self-regulating, much as the
Nasdaq market is regulated by the SEC--very passively.
Mr. Dingell. NERC specifically raises concerns in their
reliability assessment about the impact of EPA's NOX
rule upon reliability. Do you have any concern over this
matter?
Mr. Hoecker. Well, we are generally aware of the EPA
processes. There is a State implementation process going on
now.
Mr. Dingell. Do you have any concerns about this having
impact on reliability? Yes or no?
Mr. Hoecker. I have some concerns.
Mr. Hoecker. Are they serious, or are they trivial?
Mr. Hoecker. I really don't know at this point.
Mr. Dingell. Have you done anything to inquire as to what
the basis for those concerns might be and whether they are
serious or not?
Mr. Hoecker. We have not investigated the NOX
standards that are being developed by the EPA. Apparently those
are due to be published and implemented later this year.
Mr. Dingell. Don't you think it would be a good idea that
you should do so?
Mr. Hoecker. We definitely keep an eye on those.
Mr. Dingell. You know they are going to be coming out and
the time for you to comment to EPA is now past. How are you
going to communicate to EPA these will raise questions to
reliability if you have not already done so within the time
limits for your comments?
Mr. Hoecker. I would say first and foremost it historically
has not been our job to govern the reliability process, that we
never focused on the standards that are developed by the
industry.
Mr. Dingell. But this will impact the standards that are
being developed by the industry, will it not?
Mr. Hoecker. I don't know that.
Mr. Dingell. You don't know that. But would you make an
inquiry, please, into this? I am going to submit to you a
letter and ask you to make a very careful analysis of this
matter and report back. I would hope, Mr. Chairman, the record
could remain to so we could get to this point.
Now, you talk extensively about reliability in your
statement, page 2. You say the reliability may be threatened by
difficulties in assigning responsibility for transmission
system reliability in a dynamic environment. The Commission is
increasingly asked to exercise its existing, but inadequate,
statutory authority to ensure compliance with industry
standards.
Doesn't that tell you that maybe you ought to be taking a
hard look at how this matter is going to impact the reliability
of service to different categories of wholesale and retail
customers?
Mr. Hoecker. Reliability is a concern for everyone,
including our agency.
Mr. Dingell. If EPA's orders and changes in their
requirements impact that, you should have a concern, should you
not?
Mr. Hoecker. I think we should all be concerned.
Mr. Dingell. All right. Now, you ordered nondiscrimination
in access to the transmission facilities of public utilities.
That did not apply to the publics; it applied only to the
private companies. Is that right?
Mr. Hoecker. Yes.
Mr. Dingell. You have indicated to me it should apply to
the publics as well as the privates, but you have no authority
to do so.
Mr. Hoecker. Yes, sir, none.
Mr. Dingell. I noted at page 6 your comments are rather
speculative and you don't really have any answers for us. You
say, ``The remaining impediments to full competition fall
largely into two categories. First are the engineering and
economic inefficiencies in the current operation and expansion
of the transmission grid, inefficiencies that are hindering
fully competitive power markets and imposing unnecessary costs
on electric consumers.'' Is that speculation, or is that hard
fact?
Mr. Barton. This will have to be the last question, Mr.
Dingell.
Mr. Hoecker. We have seen evidence of these kinds of
inefficiencies in the governance of the transmission system. We
have seen complaints about the exercise of market power.
Mr. Dingell. You don't treat a complaint as a fact, do you?
You treat it as a complaint. There is a difference.
Mr. Hoecker. We treat it as a complaint, absolutely.
Mr. Dingell. So the fact you are receiving complaints means
you are receiving complaints, not that there is a factual
basis.
Mr. Hoecker. We have investigated many of these complaints.
We have issued orders in some cases, and the Commission is
preparing to investigate some of these concerns generically. I
imagine that as we build a record we will have a deeper
understanding in the kinds of concerns you express.
Mr. Dingell. How long do you figure that will take?
Mr. Hoecker. Probably the rest of this year.
Mr. Dingell. Okay. And in the meantime, you are supporting
the administration's proposal?
Mr. Hoecker. I clearly support certain aspects of it that I
mentioned this morning.
Mr. Dingell. Thank you.
Mr. Barton. We all support certain aspects of it. That is a
fair answer. I thank the gentleman from Michigan. We can keep
the record open. I notice he had about 10 other pages
earmarked. I think there will be more written questions.
Mr. Burr is recognized for 5 minutes.
Mr. Burr. Welcome, Mr. Chairman. Let me ask you, the views
you have shared with us, is that the consensus of the entire
Commission?
Mr. Hoecker. That is always a difficult question. I feel
very confident in saying that our policy goals are to promote
competition, not regulation; that we want to examine very
seriously the idea of regional grid management; that we believe
open access should prevail everywhere; and we are all keenly
interested in enhancing the ability of the industry to ensure
reliability.
Mr. Burr. You have made some very strong suggestions about
an increased regulatory role for FERC, and I guess the question
is simple: Do all commissioners believe that that is the way to
go?
Mr. Hoecker. I don't think that that is quite what I said.
I think that we are asking for is some additional authority in
some specific areas that will allow us to promote competition.
In the long run, that means less regulation or lighter-handed
regulation.
Mr. Burr. Is there anything in the 1992 Energy policy Act
that requires RTOs to be constituted as ISOs versus transcos or
vice versa?
Mr. Hoecker. As far as I know, the Energy Policy Act
doesn't address the issue at all.
Mr. Burr. Could you have a basis for believing a transco
cannot comply with the requirements of the Federal Policy Act?
Mr. Hoecker. I have no basis for believing that.
Mr. Burr. Let me ask you, do you think that the Commission
has the authority under the Federal Power Act as it now stands
to require public utilities to join RTOs?
Mr. Hoecker. I think a strong argument could be made that
it does.
Mr. Burr. Do you believe it, or do you believe there is a
strong argument?
Mr. Hoecker. I believe it.
Mr. Burr. Would that be the consensus of the Commission?
Mr. Hoecker. I don't know. That is a very tough question to
answer.
Mr. Barton. Will the gentleman suspend? To give you a
little time to think about the answer, we are going to continue
the hearing during this vote. I have sent several members to
vote and hope they will be back. I want all members to know we
are not going to suspend the hearing.
Mr. Hoecker. Thank you. I think that some of my colleagues
have the same degree of confidence I do. I think some of my
colleagues have publicly expressed doubts about that. I believe
that the law is not precise, which is why I have said in my
testimony this morning that if the Congress believes that
regional transmission organizations, whether transcos or
independent system operators or independent scheduling
administrators or whatever it might be, could enhance
reliability, improve regional planning, de-pancake the rates in
the transmission system and so forth, that it should support
expressly our authority to help make that happen.
Mr. Burr. Let me ask you specifically about one area and an
issue that is on the table, and I certainly will not delve into
the decision that FERC has got as long as you dealt with it,
the decision by the administrative law judge as it relates to
the California RTO and the cut in the ROE of Southern
California Edison. I think you are familiar with this
situation?
Mr. Hoecker. I am, generally, yes.
Mr. Burr. Combining the loss of the ROE and the judge's
denial of administrative and general expenses the company said
it will incur for transmission operations, Southern California
Edison charges that the ISO membership will effectively cost it
$41 million on an annual basis. A Wisconsin Electric Power
representative agreed that at 9.68 ROE, if it was allowed to
stand, would discourage companies from joining RTOs; and the
article goes on to say that, in fact, this case has been
pending, I believe, since 1997.
Is that an accurate article?
Mr. Hoecker. I am not sure about how long it has been
pending, but the initial decision was just issued and hasn't
come to the Commission yet.
Mr. Burr. March 31. I guess my question would be probably
twofold. One is the assessment by the gentleman from Wisconsin
Electric, is it an accurate statement that if companies can't
see these as anything other than a financial drain, which would
cause a capital flight, not a capital infusion, into the
transmission areas, and they look at extended periods of
indecision by FERC on the requests to set rates, what real
belief would we have that we could ever move to this in
anything other than a forced manner?
Mr. Hoecker. Well, I am sure you appreciate that I can't
comment on this, the facts of this case in particular, because
it is pending before the Commission. But let me make a couple
of observations.
I would emphasize, as I did in my response to Congressman
Sawyer, that the Commission's interest is in ensuring that the
transmission portion of the industry, and, indeed, the entire
industry, remains economically vital; and that typically means
healthy rates of return appropriate to the risks and costs
associated with providing particular services.
I believe that you would find our Commission in complete
agreement that the last thing we want to do is to promote
competition through regional transmission organizations in any
way that is going to result in a less-than-vibrant transmission
system or industry.
Mr. Burr. Would the Chair like to go to the other side?
Mr. Barton. If you have one more, but I need to let
Congressman Hall question before he runs to vote.
Mr. Burr. Let me say that I intend to follow up with the
other commissioners on some of the specific questions, since
the chairman has left the ability to and certainly thank you
and look forward to the next panel.
Mr. Barton. The Chair recognizes the distinguished ranking
member, Mr. Hall, for 5 minutes.
Mr. Hall. Mr. Chairman, I am reading page 9 of your
testimony, and you mention that the intrastate transmission
within Texas, ERCOT, is beyond our to access authority.
What kind of consultation have you had with the Texas
Commission on how ERCOT and their ISO is operating and is
working?
Mr. Hoecker. I have talked with Chairman Wood on a number
of occasions. He and I share common interests in this area of
regional transmission organizations. I know that competition is
on the minds of a lot of Texas legislators right now.
We think that what Texas is doing in this area is very
progressive, very helpful for Texas; and we applaud what they
do.
Mr. Hall. Do you think that the ISO is operating very well
there then?
Mr. Hoecker. I think it is, as much as I know about it. Of
course, it is not a FERC jurisdictional transmission system, so
my understanding is perhaps pretty general. But I believe it is
an independent system operator that is providing some increased
rationality at the transmission level.
Mr. Hall. Does it appear to you to be viable, both power
markets operating in Texas? Have you had a chance to----
Mr. Hoecker. I really don't know. I would suspect very
strongly, Congressman, that to the extent the independent
system operator in Texas can reduce rate pancaking across ERCOT
and can promote better planning and reduce barriers to
commercial trades, that that will indeed add to the vibrancy of
the wholesale markets there.
Mr. Hall. If you are not satisfied with the information you
have, either on a personal basis or through those who work with
you, would it be okay if I bombarded you with a lot of good
favorable information?
Mr. Hoecker. Absolutely. That would be fine with me.
Mr. Hall. Do you see any need to make a priority out of
extending FERC's jurisdiction to ERCOT?
Mr. Hoecker. No.
Mr. Hall. Good. I yield back my time. That saves me some
postage. I will go vote.
Mr. Barton. All right. I am going to continue the hearing
until we have the cavalry come to rescue me to go vote. What
happens if we pass a bill that does not give FERC or another
agency the authority to regulate for transmission reasons the
TVA and the power administrations? Or ERCOT in Texas, for that
matter.
Mr. Hoecker. Two things happen. No. 1 is that the
Commission will continue to promote open access on those
transmission systems through the concept of reciprocity under
our Order No. 888. Under that process, the Bonneville Power
Administration, for example, has filed with us an open access
tariff that we find to be acceptable, consistent with our open
access regime.
Other power marketing agencies have not so participated in
our process. So the consequence of that, second, is that the
competitive bulk-power marketplace will have some barriers
related to a possible inaccessibility of transmission systems
owned by nonjurisdictional entities, and the result of that, to
my mind, is some degree of inefficiency.
Mr. Barton. Well, comment on the open systems and the
municipally owned systems. Right now I think, it is safe to
say, I would characterize them as not very open. Would you
comment on that?
Mr. Hoecker. Well, I don't know if any of those systems
provide open access under Order No. 888. I would have to check
that, but I don't think that is the case.
To the extent, however, that they--and there may be some
that actually have required transmission service from an open
access utility--they are obligated by our rule to return the
favor.
Mr. Barton. There are a lot of these opt-in, opt-out
provisions. Can you apply in a Federal bill, a municipal power,
the authority, for example, to opt out in terms of opening
their market, but force them to opt in in terms of transmission
across their system?
Mr. Hoecker. It may be the difference between retail and
wholesale. Not all municipal or cooperatively owned systems own
transmission, and we are focused on opening the transmission
systems that they do possess. Whether they would, in addition,
be able to opt out of other forms of access at the retail level
is something we really don't take a position on.
But--well, we just don't take a position on that.
Mr. Barton. Okay. You don't want to speculate?
Mr. Hoecker. Not particularly.
Mr. Barton. This is just our first hearing.
Mr. Hoecker. I will come prepared with more speculations
next time.
Mr. Barton. Let us go to another touchy subject. There are
some rumors that certain PMAs use their transmission system
rates to actually absorb generation costs. That is one reason
that their costs are so low. Does FERC take a positive or a
negative view of that? And if you are given authority to set
those rates, to regulate those rates, how would you look at
generation costs going into transmission?
Mr. Hoecker. Well, Mr. Chairman, I haven't given that a lot
of thought, but I think we want to have sources of generation
competing in a fair market on the basis of their costs and
their efficiencies, and not being subsidized by other
functions. I think that that would be the most efficient
approach.
I am not familiar with the particular situation you allude
to, but transmission needs to be priced separately. Generation
needs to compete on the basis of its costs separately.
Mr. Barton. Okay. Let us switch gears a little bit. Do you
believe the FERC should have the authority to order a
transmission owner to join a regional transmission
organization?
Mr. Hoecker. Well, it certainly would expedite our process,
I must say. I think we at this point are focused on encouraging
the industry to create regional markets and to form regional
transmission organizations in their own economic interest and
in the interest of the access of their generation and
independent generation to regional markets.
We think the bottom line here is fair competition, and
ultimately if we don't have regional organizations--and this is
my opinion--we will not have the kind of broad competitive
regional markets that will produce the greatest efficiencies,
or the greatest savings for consumers.
Mr. Barton. My final question, as the cavalry is arriving
here, does the FERC have a position in terms of whether we
should go with the transco organization system or an ISO
system?
Mr. Hoecker. Mr. Chairman, we have approved 5 independent
system operators already. We have not had proposed to us yet a
transco or an independent transmission corporation, and the
Commission has taken no position yet on whether one corporate
form or another is to be preferred.
Frankly, one of the purposes of our coming initiative will
be to explore that very issue, and I at this point see no
inherent reason for us to be prescriptive and to say one versus
the other should be required.
Mr. Largent. [presiding] Mr. Hoecker, I would like to ask
you a couple questions, if I could, about--every member of this
committee so far, as long as I have been here, has been talking
about reliability standards, enforceable reliability standards.
Give me 3 or 4 examples of what a reliability standard would
be?
Mr. Hoecker. Well, a reliability standard might relate to
how transmission is reserved and under what conditions or how a
particular transaction might be curtailed or what priorities
for uses of the transmission system might be applied in
curtailing uses.
If the system becomes overloaded, for example, or
congested, and there is a threat to reliability, the
transmission-owning utilities through voluntary agreements now
would agree to engage in certain practices to curtail loads,
particular end-users, to redispatch their generation in a
certain way, to try and relieve the constraint, or to get power
to particular customer groups or regions that might be deprived
of power.
It is an extremely elaborate system. That is sort of a
lawyer's answer, not an electrical engineer's answer,
obviously; but I think that these standards have both a high
degree of technical sophistication, from the standpoint of
managing the system, and a lot of commercial implications in
terms of who gets to use the system and under what
circumstances.
My staff just put in front of me the kinds of criteria that
WSCC asked us to take a look at. In our recent order we
approved them as being just and reasonable. Things like
operating reserves and disturbance control criteria require
control areas to maintain specified levels of operating
reserves and to be able to recover from a disturbance within 10
minutes. That goes partly to generation adequacy and how that
generation is redispatched.
Control performance standards, operating transfer
capability criteria. Pretty technical stuff. Frankly, the
expertise for developing these standards exists in the
industry. It has always existed there, and we would, even under
the kinds of proposals that I am suggesting, continue to rely
on the industry to develop and apply those standards. We just
want to make sure it is done fairly.
Mr. Largent. Basically, what you are talking about is rules
of the road, pull over, yield, stop, those types of issues in
transmission.
Mr. Hoecker. That is a good analogy.
Mr. Largent. What about reliability standards in the other
aspects of the electric industry, generation, distribution.
Does FERC have any authority in those areas?
Mr. Hoecker. Reliability at the retail level, in terms of
generation adequacy and the functioning of the distribution
system, has historically been largely a State concern, and as I
suggested, I think, in my testimony, we want to make sure that
even though we have Federal oversight of the development of
standards, that the States continue to play this important
role.
That relates to everything from requirements to trim trees
and transmission line maintenance and certain kinds of response
criteria like the ones I have alluded to here, to actually,
perhaps, some additional requirements on transmission
reliability as well.
I think it is a concern the States have expressed that
their historic role in ensuring reliability for the ratepayers
in their jurisdictions not be curtailed because of this new
Federal oversight regime that we are talking about today.
Mr. Largent. All right. But when we talk about reliability,
I guess I am thinking of the Mrs. O'Leary who lives in
Congressman Markey's district, or everybody's district really.
When they think of reliability, they want to make sure when
they flip that light on, it comes on. That goes beyond just
transmission. It has to do with generation and distribution as
well.
So how do you coordinate all of those functions under the
administration's bill, for example?
Mr. Hoecker. I am not sure the administration's bill is
very express about that. I think the administration's bill is
focused on transmission reliability at the bulk-power level in
the wholesale marketplace. I think there is a lingering
question there about States, but the fact is that the industry
and the regional reliability organizations that exist now and
who would continue to exist under the administration's
legislation would have a coordinating function with appropriate
State agencies to ensure that the lights would stay on at Mrs.
O'Leary's house.
I think for the most part that can be dealt with at the
State level by itself through public service commissions and
other agencies responsible for retail reliability.
Mr. Largent. Let me ask you one other question. One of the
things you have talked about in your testimony is expanding the
ability or authority of FERC, basically, to apply Rule 888 to
the areas that you cannot currently, the TVA's and Bonnevilles
and municipalities, some of the co-ops.
Is there any concern--Mr. Dingell brings this question up
all the time in terms of the Tucker Act, the takings act--is
there any concern that that might apply in expanding FERC's
authority in areas it doesn't currently have, that the Tucker
Act may come into play?
Mr. Hoecker. I really don't know how to answer that. I
would be pleased to look at that question. I think that our
focus is on having uniform, accessible and efficient bulk-power
markets on an integrated system that includes transmission not
regulated by the Commission, and that those markets are not
going to be ultimately very efficient without eliminating that
jurisdictional difference.
Mr. Largent. Is it your view that moving to a competitive
market will improve reliability?
Mr. Hoecker. That is my firm belief. As a matter of fact,
we had a similar experience on the natural gas side when we
ordered interstate pipeline systems to provide open access on
behalf of others, and there were a good many apprehensions
about whether that would threaten reliability of the interstate
grid; and in fact reliability problems have diminished
significantly in a competitive environment.
I think this is not something to be taken lightly, that we
can't just assume that reliability happens. It takes a lot of
work in which the industry needs to have a key role. But I see
no reason why we cannot create mechanisms to ensure that we can
have our competitive cake and reliability too.
Mr. Largent. Are you aware of any technological advances
that are right on the horizon as we move to a restructure of
electricity competitive industry that will improve reliability?
Mr. Hoecker. Well, there is a great deal of talk these days
about distributed generation, and as gas turbine technology
gets smaller, more efficient, the availability of smaller
efficient generation, that may generate power off the grid, or
that could be placed in strategic locations on the grid to
boost reliability, is probably the main technological
innovation. It is one--the gas turbine--is one innovation that
is both driving competition and also may be one of the ultimate
solutions to maintaining reliability of the system.
There are lots of other things that are talked about,
including super-conductive transmission wire and so forth, but
I am not sure what the reliability implications of that might
be.
Mr. Largent. Do the gentleman from Kentucky or Ohio have
any other questions?
Well, Mr. Chairman, thank you for being with us here this
morning. We appreciate your testimony and your time. We look
forward to the committee working with you as we move toward
restructuring electricity. Thank you.
The Chair would call forward at this time the second panel.
Mr. Shimkus. Mr. Chairman, I have two quick questions.
Mr. Barton. This is highly unusual, but if you don't mind,
Mr. Chairman, we have just a couple quick questions from the
gentleman from Illinois.
Mr. Shimkus. I am a highly unusual member, so it is fitting
that I should break with procedures.
Real quick, in your testimony you state that even though
the grid is being used increasingly for regional transactions,
the siting of transmissions and generation facilities is,
nevertheless, subject to State law.
My question is, how are the regional planning agencies
going to site better than the States?
Mr. Hoecker. Well, planning and siting are two different
things. I think that if you have regional transmission
organizations and you plan for expansion of the transmission
system or additional generation in ways that are most
efficient, that is to suggest that projects are truly needed
and not simply an attempt to pad a utility's rate base, that
State siting authorities may be more predisposed to cite those
facilities.
I don't suggest that regional transmission organizations
necessarily have siting authority, but that proposal has been
made.
Mr. Shimkus. Thank you. I am going to go rapidly. Some
believe one factor in the Midwest price spikes were the
Pennsylvania, New Jersey, Maryland pool export rules that
cutoff power transfers from PJM to the Midwest. Do you believe
that that was one of the factors in the price spikes?
Mr. Hoecker. I don't recall that specifically. I think that
there were a number of problems identified in our report.
Imports of power from various regions, from Ontario, from the
Southeast through Tennessee Valley Authority and from the East
were congested, and sometimes power was not available in a
timely fashion and where it could have been. That certainly was
a major contributing factor.
Mr. Shimkus. And I don't have the report on the price
spikes that you all followed up on, but you know that the
industry and a lot of the individuals think that there was some
export rules that were a factor. Everybody who followed this
issue knows there were a lot of factors.
I would ask that we be allowed to ask questions in writing
on this issue.
Mr. Hoecker. Absolutely.
Mr. Shimkus. And to follow up on this issue. Because the
question for us in that experience last year is if those export
rules can be attributed to some of the problems with the power
spikes, those export rules would, I think, by definition impose
an undue burden on interstate commerce which would be something
we would have to address.
Mr. Hoecker. Mr. Shimkus, let me suggest that although
there are a number of complicated factors behind the price
spikes in the Midwest last summer, there have been some very
good market responses, that we are guardedly optimistic about
this summer; but that if we are thinking long-term, that the
kinds of issues you have just raised can be addressed very well
through a regional transmission organization and their planning
function.
Mr. Shimkus. I would agree there has been some market
responses, like the planning for new generation facilities. I
am at a loss to understand the market responses in transmission
and distribution. Do you know of any that have revolved in that
area?
Mr. Hoecker. They are long-term. I have talked with the
Governor of Wisconsin and other parties in the Midwest, and
they are beginning to work cooperatively to try to develop some
long-term transmission expansion solutions, which are
appropriate in various locales, obviously. But the response's
that will solve or at least minimize the chance of that sort of
thing happening again----
Mr. Shimkus. I guess we will find out this summer,
hopefully not.
Mr. Hoecker. [continuing] are pretty complicated.
Mr. Shimkus. I would like to thank my colleague, Mr.
Largent, for pulling me back. I yield back the balance of my
time.
Mr. Barton. Did the gentleman from Oklahoma ask his
questions?
Mr. Largent. Yes, I did.
Mr. Barton. Mr. Whitfield, you had your questions. Mr.
Sawyer, you had your questions.
Mr. Sawyer. Thank you.
Mr. Barton. We are going to let you go have lunch, Mr.
Hoecker. We are going to hold the rest of the audience captive
in the next panel. Thank you. We will have written questions
for the record. Thank you for your attendance. We would like to
welcome our next panel. If there are individuals in the room
that want to leave, we would encourage you to expedite your
egress from the room.
We want to welcome our second panel to our reliability and
transmission hearing.
We have from my left, Mr. Fred Schmidt, the chief of the
Bureau of Consumer Protection, the office of the Attorney
General of the great State of Nevada; Mr. Paul McCoy, senior
vice-president for Commonwealth Edison from Chicago, Illinois.
We have Mr. Stanley Szwed, who is the vice president for
transmission, First Energy, in Akron, Ohio. We have Ms. Trudy
Utter, who is the vice president and general manager for
Tenaska Power Services in Arlington, Texas, and either is a
constituent or lives near my constituency. We are very glad to
have you here. And Mr. Dave Nevius, who is the vice president
of the North American Electric Reliability Council from
Princeton, New Jersey. Mr. Greg Yurek, the president and CEO of
American Superconductor Corporation. We have Mr. Joseph
Iannucci, did I get that right----
Mr. Iannucci. Close enough.
Mr. Barton. Distributed Utility Associates in Livermore,
California. And last but certainly not lease, Dr. Matthew
Cordaro, President and CEO of Nashville Electric Service. We
want to welcome all you gentlemen and lady. We are going to put
your statements in the record in its entirety. Since we have
such a large panel, we are going to ask that you summarize it
in 5 minutes. We are going to start with Mr. Schmidt and work
our way south and then come back and have questions.
Mr. Schmidt, you are recognized for 5 minutes.
Mr. Hall. Mr. Chairman, I just got here. You didn't ask us
all to go back through all those acts of bragging on you before
this committee again?
Mr. Barton. No, we sure didn't. We could put you out on the
panel.
Mr. Barton. Mr. Schmidt, you are recognized for 5 minutes.
STATEMENTS OF FRED SCHMIDT, CHIEF OF BUREAU OF CONSUMER
PROTECTION, OFFICE OF ATTORNEY GENERAL, STATE OF NEVADA; PAUL
D. MCCOY, SENIOR VICE PRESIDENT, COMMONWEALTH EDISON; STANLEY
F. SZWED, VICE PRESIDENT, TRANSMISSION, FIRST ENERGY; TRUDY
UTTER, VICE PRESIDENT AND GENERAL MANAGER, TENASKA POWER
SERVICES COMPANY; DAVID R. NEVIUS, VICE PRESIDENT, NORTH
AMERICAN ELECTRIC RELIABILITY COUNCIL, PRINCETON FORRESTAL
VILLAGE; GREGORY J. YUREK, PRESIDENT AND CEO, AMERICAN
SUPERCONDUCTOR CORPORATION; JOSEPH IANNUCCI, DISTRIBUTED
UTILITY ASSOCIATES; AND MATTHEW CORDARO, PRESIDENT AND CEO,
NASHVILLE ELECTRIC SERVICE
Mr. Schmidt. Thank you, Mr. Chairman. I am Fred Schmidt,
the Consumer Advocate from the State of Nevada. As the chief
Deputy Attorney General in my State, I oversee a division that
handles utility consumer advocacy as well as antitrust laws and
consumer protection laws in my State.
Today, I am here on behalf of the National Association of
State Utility Consumer Advocates, or NASUCA. It is a national
organization of which I currently serve as president. Its
membership encompasses 39 different States and the District of
Columbia. The background of the organization is such that each
member is empowered by State legislation to represent utility
consumers in their individual states. We have members from the
States of most of the members of this committee.
It was a little bit difficult for me to leave and get to
Washington today for this hearing, but this hearing is very
important, and I commend the chairman for holding it. The
reason it was difficult is like in many States, my State is in
the process of marathon-type hearings on electric restructuring
to our retail market in early 2000.
I am in the middle of both Public Utility Commission
hearings and legislative hearings for that purpose. But one of
the things that my experience in the State of Nevada has taught
me is there are certain things that you cannot do at the State
level. Although our national organization generally stands for
principles of promoting and developing different States' rights
issues that we all are involved in, there are certain things we
believe, even as a national organization, that can only be done
on a Federal level. Your topic today is one of those.
Reliability of the Nation's transmission system is of
paramount importance to the consumers that we represent in our
organization. First and foremost, as we all agree, the lights
must continue to go on regardless of what system of electric
competition is developed, either in an individual State or on a
national basis.
We that represent the States are most interested in
maintaining at least the current level of reliability, if only
for the simple reason that each of us will be held responsible
if and when lights don't go on.
I hope you will keep this in mind as you work through the
solution to the challenge, because markets in many instances do
not answer those questions.
For half a century, NERC, or the North American Electric
Reliability Council, and its member organizations have played a
vital role in promoting and maintaining reliability of the
system. However, historically, NERC has been a closed club
whose membership has been dominated by private utilities. That
exclusive membership relationship will not work in an
environment where you allow increasing competition.
To its credit, NERC has recognized the need to permit
greater representation in its organization, on its boards of
directors, and expanded its membership in the last year to
include representation of consumers. In fact, my colleague from
Pennsylvania, Sonny Popowsky, who is a consumer advocate, the
Attorney General's office, in that State, now sits on the NERC
Board and our executive director of our association in
Washington is an observer. We also serve on many of their
committees.
I am here to tell you today that we support the efforts to
date by NERC to expand their representation within their
organization, and to recognize that additional changes in that
organization, which has historically assumed responsibility for
reliability that we have today in the system, but there are
three changes that I want to point out to the committee that
are necessary as we move to an increasingly competitive
environment.
First, developing a national reliability organization that
will continue the vital functions now performed by NERC is
essential. This must be done in a competitively neutral manner
and must recognize the paramount concerns of consumers in the
reliability of the electric system.
Second, NERC must be governed by an independent board of
directors in order to function in a competitively neutral
manner. It cannot be dominated or controlled by any particular
independent group or segment.
Third, we believe that FERC should have clarifying
authority to review reliability requirements which NERC or any
successor organization will impose and ensure that those
requirements are adopted and implemented and followed in a
manner that benefits consumers.
I will leave the remainder of my remarks in for the record
on recommendations, along with two resolutions, Mr. Chairman.
Mr. Barton. We can give you another minute, if you want to
put the recommendations in the record, because I think those
are important.
Mr. Schmidt. The other recommendations that I wanted to
address in my written comments to you this morning relate to
this concept of the type of regional organizations that are
developed or being developed in different States. They are
generally referred to as independent system operators or
regional transmission organizations. Several ISOs have recently
been approved by FERC. Oddly, I think it is interesting to
point out to the committee that none of these ISOs are
identical, neither their roles, characteristics, or legal
structures.
In fact, if you look at the Nation and how it has developed
on a retail competitive basis, the regions of the country, New
England and the mid-Atlantic States that have actually
aggressively implemented competition to date on a retail basis,
are regions that have effective type ISOs or power pools to
govern the interrelationships among the utilities that cross
State borders, whether it is mid-Atlantic States, PJM. In other
States of the country struggling to develop retail electric
competition, like my own States and States in the Midwest, the
Southeast and the Northwest, there are not these types of
organizations.
Mr. Barton. What are your recommendations?
Mr. Schmidt. My recommendation is FERC needs to have
authority to develop requirements to join the organizations,
and those organizations in different regions of the country
need to be independent in nature from the traditional
structures in which they exist in order to develop effective
competition.
[The prepared statement of Fred Schmidt follows:]
Prepared Statement of Fred Schmidt, Consumer Advocate, State of Nevada
and President, National Association of State Utility Consumer Advocates
My name is Fred Schmidt and I'm the Consumer Advocate from the
State of Nevada. As a Chief Deputy Attorney General for the State of
Nevada I oversee a division which advocates for utility consumers and
enforces antitrust and consumer protection laws. I am here today
testifying on behalf of the National Association of State Utility
Consumer Advocates (NASUCA). I currently serve as president of that
organization.
NASUCA is an organization of 42 state utility consumer advocate
offices from 39 states and the District of Columbia charged by their
respective state statutes to represent utility consumers before federal
and state utility commissions and before federal and state courts. For
the most part, consumer advocates represent residential and small
commercial consumers. As such, NASUCA members are intricately involved
in electric utility restructuring debates in their states and, through
NASUCA, in Washington, D.C. NASUCA greatly appreciates the opportunity
to testify today and commends you for holding this hearing.
I. Introduction
To be perfectly honest, it wasn't easy for me to make it here
today. In my state of Nevada we are in the midst of marathon
legislative hearings on Public Utility Commission regulatory
proceedings to enable Nevada to open our retail electricity market to
consumer choice by early next year. I mention this for two reasons.
First, even without federal action the states are moving forward and I
encourage you not to interfere or retrospectively fiddle with their
decisions. Second, my experience in Nevada--and I'm certain that my
viewpoint is shared by consumer advocates across the nation--makes it
abundantly clear that there are certain issues states cannot deal with
and need federal intervention. Reliability and transmission issues--
along with market power issues--are three of those critical issues that
the federal government must deal with to ensure that consumers--small
consumers--benefit from electric restructuring.
In fact, NASUCA has called on the federal government to act on
these issues. We understand that electrons do not respect state borders
and with all the merger activity going on--including mergers with
foreign companies--neither do companies. We support action in these and
other areas so much that we stood with Secretary Bill Richardson and
Congressmen Markey, Burr and Largent, last week at the introduction of
the Administration's bill, not so much to endorse all of the specific
provisions but to encourage Congress to act on several critical issues.
There are areas, however, where we believe that Congress should not
act. I know we are not here today to discuss them but they can be
summarized briefly: Congress should not impose a date certain mandate
on states and Congress should not create a federal stranded cost
mandate or backstop. These are two absolute legislative no-no's that
Congress must respect.
Let me now turn to the topic at hand--reliability and transmission.
II. Reliability
The reliability of the nation's electric system is of paramount
importance to the consumers represented by the members of NASUCA. First
and foremost, the lights must continue to go on when the switches are
flipped under any new scheme or ``good enough'' should be left alone.
We representing the states are most interested in maintaining our
current reliable system if only because we will be held responsible if
and when the lights go out. I hope you will keep this in mind as you
work through the solutions to this challenge.
For almost 30 years, the North American Electric Reliability
Council (NERC) and its member organizations have played a vital role in
promoting and maintaining the reliability of the nation's electric
system. However, NERC was historically a closed club whose membership
was dominated by private utilities. Such an exclusive membership
arrangement will not work in an increasingly competitive environment.
To its credit, NERC has recognized its need to permit greater
representation on its Board of Directors and has expanded its
membership to include representation by consumers. My colleague
Pennsylvania Consumer Advocate Sonny Popowsky now sits on the NERC
Board and NASUCA Executive Director Charles Acquard is an Observer.
Other NASUCA members serve on various NERC Committees.
NASUCA supports the efforts taken to date by NERC to expand
representation within that organization, but recognizes that additional
changes will be necessary to preserve reliability in an increasingly
competitive environment. These changes include:
Developing a national reliability organization that will
continue the vital functions now performed by NERC. This
function must be done in a manner that is competitively neutral
and recognizes the paramount concerns of consumers in a
reliable electric system.
Establishing an independent Board of Directors that will
govern NERC (or any successor national organization) in a
competitively neutral manner that will benefit all consumers
and that will not be dominated or controlled by any particular
industry participant or segment.
Clarifying FERC authority to review the reliability
requirements imposed by NERC (or any successor national
organization) and to ensure that such requirements are adopted
and implemented in a manner that benefits all consumers.
A copy of our resolution on this issue is attached.
Legislative language has been developed that is reasonably
consistent with these principles. It is my understanding that Dave
Nevius from NERC will describe them in detail at today's hearing.
NASUCA will support this language with one additional caveat. That is,
it is important for Congress to clarify the continuing and vital role
of the state in maintaining the reliability, safety, and adequacy of
the electric systems within the state borders. As long as the states do
not act in a manner that interferes with NERC's or FERC's requirements
in interstate commerce, the states must not be preempted from taking
action to ensure that the lights stay on within their borders.
III. Transmission/ISOs
Turning now to the issue of transmission, the reliability of the
nation's electric supply depends on a high level of coordination among
transmission facilities and generation facilities. Transmission
facilities currently exhibit characteristics such as high fixed costs,
difficulties in siting, and complex interactions affecting their
integrity and available capacity. These characteristics suggest that
transmission will require continued regulation for the foreseeable
future.
These characteristics allow transmission operation to materially
affect the development, existence and continued efficiency of a
competitive market for delivered electric power and the services it
provides. Simply stated, open, fair, and nondiscriminatory transmission
access is critical to developing and maintaining a competitive electric
market. Without it, transmission owners will game the system and thwart
competition.
To encourage open access, Congress and several states are actively
considering or implementing legislation which would affect the
reliability, price, availability and competitive neutrality of the
transmission grid by introducing competition between and among electric
generators. Much of this legislation calls for the creation of new
institutional arrangements known generally as ``Independent System
Operators.'' In fact, a variety of ISOs have recently been approved by
FERC. Oddly, none of these ISOs are identical in their roles,
characteristics or legal structures.
NASUCA believes that all ISOs, as well as any other entities
charged with or assuming operations control of a regional portion of
the transmission grid, must meet the following requirements:
All ISOs or related regional transmission organizations should
be truly independent from the financial interests of individual
generation and transmission owners, marketers and customers.
These organizations should have plenary authority over the
operation of the interconnected transmission system, including
the loading and unloading of lines for reliability purposes.
This independence may be influenced by provisions affecting
governance and scope of ISO authority, but can only be ensured
by appropriate regulatory oversight over practices, tariffs,
rules requirements and procedures employed or enacted by the
ISO.
Such regulatory oversight should encourage and facilitate
effective dispute resolution, but must maintain basic due
process protections, including the right of appeal for all
parties affected by any practice, tariff, rule, requirement or
procedure employed or required by the ISO or related entity.
Such oversight and due process should also include the ability
to address issues related to the independence of the ISO or
related entity.
Regulatory oversight must be coordinated and balanced to
protect federal and state interests.
ISOs must be required by statute or regulatory oversight to
meet strict standards of economical operation and investment,
minimization of prices to consumers, open and comparable
access, competitive neutrality and public accountability.
The cost of the ISO and other related entities must be just
and reasonable, and shared by all users in an equitable, non-
discriminatory and competitively neutral manner.
There must be a clearly defined and substantial role for
consumer advocates and other stakeholders in the governance
and/or oversight regarding the ISO or related entity.
Any powers or authority delegated to the ISO to prevent,
identify and mitigate the exercise of market power must not
preempt the application of antitrust law to address illegal
anticompetitive acts carried out by transmission owners or
other market participants.
All ISOs and related entities must enforce compliance with
reliability rules and protocols promulgated by the North
American Reliability Council or any duly authorized successor
organization by all members, customers, users, and owners of
transmission.
A copy of our resolution on this matter is attached.
IV. Conclusion
Crafting a new regulatory scheme that mixes competition in
generation and other electric utility services with continued
regulation of transmission and distribution services is a formidable
challenge that requires cooperation and coordination between federal
and state governments. States have and will continue to move forward to
develop retail competition plans that best meet the needs of their
residents. However, its clear that they cannot do it alone. They need
the federal government to resolve issues that cross state borders.
Two of the most important issues that the federal government must
consider are the subject of this hearing today. NASUCA encourages this
Committee and Congress to move forward on reliability and transmission
issues consistent with the principles I have just outlined. Failure to
do so may harm consumers. After all, why restructure the electric
industry if consumers don't reap the benefit of our efforts?
Again, I thank you for this opportunity to testify today on behalf
of NASUCA, and I look forward to your questions.
Mr. Barton. Thank you.
Now I would like to hear from Mr. Paul McCoy, who is the
vice president for Commonwealth Edison in Illinois. We will put
your statement in the record in its entirety and recognize you
for 5 minutes.
STATEMENT OF PAUL D. MCCOY
Mr. McCoy. I appreciate the opportunity to appear before
this panel this morning. It is fair to say that fully
competitive markets are unlikely to emerge in the power sector
unless we get the transmission governance structure question
right.
At Commonwealth Edison we have come to the conclusion that
the structure most likely to stand the test of time is the
following: the evolution of independently owned for-profit
transmission companies, or ITCs, divested from the vertical
integrated utilities from which they came, which operate--and
this is the important piece--operate under the policy and
regulatory oversight of regional transmission organizations, or
RTOs. These RTOs can clearly be the existing ISOs with their
charters modified.
We view these ITCs as the institution of choice to manage
systems more efficiently and effectively and to expand it where
necessary, to implement economic pricing, and congestion
management and to rationalize and consolidate the numerous
generation control areas that currently exist.
On the other hand, ITCs are unlikely to be created as
quickly as people would like through the necessary step of
divestiture unless regulators can ensure rates of return and
tariff structures compatible with competitive business
practices.
We view regional transmission organizations as the
inheritors of the policymaking functions currently scattered
among the existing ISOs and the NERC reliability councils. What
we are saying very simply is we see from our model the
consolidation of these two entities into a single RTO oversight
structure for the Nation.
We don't see the RTOs as having actual operational
responsibility, but instead ensuring that those who operate the
system under their oversight do so competitively in a
nondiscriminatory fashion and with no degradation in electric
reliability.
The RTOs needs to have a geographic scope far greater than
reflected in current oversight structures, like the current
ISOs. Even the Midwest ISO, which is the largest ISO filed so
far, would be much more effective if its geographic scope were
further increased. To ensure that this occurs and that the RTOs
assume the current NERC functions and the expanded ones that
have been discussed around the country, we support legislation
that empowers a self-regulating reliability organization to
impose reliability standards, enforce those standards, all
under the regulatory backstop and oversight of the FERC.
We believe, furthermore, that markets in power need to be
created from regions like the central part of the United
States, where they don't really exist at all. As in the case of
RTOs, markets for power need to have broader geographic
boundaries than they currently do in order to comprise broader
markets and greater opportunity to foster market power
liquidity, price discovery and management of financial risk.
In summary, we believe the opportunity exists to reevaluate
the first phase of U.S. power sector restructuring, especially
at the wholesale level, learn from that experience we have had
so far, and create the public and private institutions that
maintain the historic separation of operational and regulatory
function.
Mr. Chairman, that concludes my remarks.
[The prepared statement of Paul D. McCoy follows:]
Prepared Statement of Paul D. McCoy, Senior Vice President,
Commonwealth Edison Company
Good Morning. I appreciate the opportunity to appear before the
members of this Subcommittee. It has been the historical duty of the
members of this panel to give legislative form to national energy
policy. Today's debate can hopefully contribute substantive
recommendations to the very complex issue of restructuring the U.S.
transmission system to serve competitive markets for power.
Reliability, transmission and competitive markets can be said to
represent the foundation of power sector reform. They are at the core
of the concerns we have in the Mid-west, where we continue to debate
and refine the structure and governance of the institutions that will
best serve the consumers as well as the private and public utilities of
the region. I would note, at the outset, that our electric sector
history and operational traditions are different from those of the
East, which long ago found a consensus to manage its power systems in
tight pools that centrally dispatch electricity. Hence the caution you
will detect in my remarks as to generalized, Federal policy solutions
to the issues that we are collectively addressing, and must resolve.
Retail competition has been slow in coming to our region. Today, as
a matter of fact, Illinois is the only Mid-western State to have
actually enacted a restructuring law. By the terms of that law, some of
our customers will begin to exercise choice in electricity suppliers in
October 1999. All of our customers will have that choice in the year
2002. To accommodate this very fundamental change in our region's power
sector, and to create robust markets for power, we are required to
address and resolve structural and managerial issues on a timetable
more pressing than that of our neighbors, but with consequences for
those beyond our borders.
At the forefront of our present deliberations is the requirement to
ensure non-discriminatory access to the transmission system for
competitors serving both wholesale and retail customers. This is
fundamentally a structural matter. It goes to the core of how
responsibilities should be divided between an Independent System
Operator (ISO) and the owners of the grid. On this issue, we believe
that in the end the system that will be sustainable will be the one
that separates operational and merchant functions from those of policy
and regulation. It is our view that owners of the wires are likely to
be the best operators of the grid, and, that successor organizations to
the present ISOs are likely to be the necessary regional arbiters of
the public interest.
The public interest should be so interpreted as to encourage,
through unequivocal economic signals, the divestiture of transmission
assets from presently integrated utilities. But, it should be
recognized that divestiture of critical assets is one of the most
fateful steps that a vertically integrated utility can take. To do so,
the utility must have ironclad assurances that its willingness to
virtually eliminate public policy concerns about the exercise of market
power, will create for its spun-off transmission company a reasonable
opportunity to earn something better than traditional rates of return.
In sum, we believe that the grid should be owned and operated by
independent, for-profit transmission companies (ITCs). The regulation
and oversight of ITCs should be assigned to Regional Transmission
Organizations (RTOs). The RTOs would combine functions currently
scattered among multiple ISOs and among regional reliability councils
that, as presently drawn, represent institutions of sub optimal size
and scope, although they are the best structures that have been
constructed to date. The system resulting from this structural
separation of duties would, in our view, reconfigure the mandates that
are most appropriate to each of the players in the marketplace.
We believe that divested ITC's will encourage the participation,
under common rules, of transmission systems that are not currently
under FERC jurisdiction. Public power and cooperative entities have
expressed concerns about potential incompatibilities between their
governance and participation in a transmission market made up
principally of for-profit transmission companies. The ITCs herein
proposed, operating under the public policy oversight of RTOs should go
a long way in alleviating the residual concerns of public/non-profit
market participants, perhaps to the extent of avoiding the need to
consider FERC jurisdiction.
We would summarize the division of labor between the above-named
institutions as follows:
------------------------------------------------------------------------
ITC RTO
------------------------------------------------------------------------
Owner of the wires........................ Arbitrator of Conflicts
Transmission System Operator.............. Dispatch Policy Maker
Manager of Congestion..................... Assignor of Transmission
Rights
Implementor of Constraint Resolution...... Director of Constraint
Resolution
Manager of System Expansion............... Regional Planner
Security Coordinator...................... Security Overseer
Power Exchange Operator/Coordinator....... Market Monitor
------------------------------------------------------------------------
Structural reform of the transmission system will have cascading
consequence. Among these will be at least the following:
1. Significant consolidation of existing control area 1
offices and staff of the broadly-defined Mid-west, that are now
responsible for ensuring the flow of power. This
rationalization of the system will minimize procedural
differences among systems, facilitate the participation of new
competitors, and increase the operational and economic
efficiency of transmission services.
---------------------------------------------------------------------------
\1\ The reliability council region of MAIN has 13 control areas,
ECAR has 15, MAPP has 16. An optimal system for the geographic region
represented by MAIN/MAPP/ECAR could be operated by no more than a dozen
(or less) control areas.
---------------------------------------------------------------------------
2. Replacement of pro forma tariffs, filed under FERC Order 888, with
tariffs that more accurately reflect the cost of energy and
transmission 2. Market-driven locational marginal
price regimes, along with economic means of managing
congestion, would replace tariff rates.
---------------------------------------------------------------------------
\2\ Pro forma tariffs have essentially been replaced by market
pricing regimes in the Mid-Atlantic region (PJM), in New England
(NEPOOL), in New York, and in California. They remain in effect in most
of the rest of the U.S.
---------------------------------------------------------------------------
3. Replacement of current network and point to point transmission
service, with service based on point to point transactions
only. This system would increase the ability to price service
equally among all market participants, reduce gaming potential,
and eliminate the appearance of discriminatory behavior on the
part of transmission owners.
4. Creation of exchanges for spot forward and futures trading of power.
A competitive power sector is unlikely to emerge from the
present restructuring process unless it also contains highly
liquid and robust power exchanges. These exchanges are urgently
needed in regions such as the Mid-west which has none. In
addition, regions that have such exchanges as institutional
aggregates of the ISO, might also benefit from the creation of
second-generation exchanges that operate independently of the
ISO, and accommodate trade beyond current ISO borders. Markets
for power, like RTOs and NERCs, may need to outgrow traditional
physical and structural boundaries in order to secure for
consumers economic benefits greater than achievable in
presently constituted regions.
5. Development of more effective/more timely processes to build
transmission lines. Price-sensitive power markets will provide
reliable signals for the economic expansion of the transmission
system, initially for the purpose of alleviating line-specific
constraints. It will be in the public interest to consider and
efficiently approve investments that reduce system costs and
consumer prices. The interstate natural gas pipeline system has
already demonstrated the clear and present benefits of
regulator--encouraged new construction. Similar approaches will
prove essential to the optimal performance of the transmission
system. It would be well, in our view, if Congress could
clarify Federal-State jurisdictions, in this area, to achieve
objectives important to both.
In conclusion, we see the need for further Federal attention to the
structure and governance of the transmission system. Given the
advantage of permitting further experimentation than has been possible
so far, we would, at present, support expansion and clarification of
flexible FERC authority. Specific to reliability, we support
legislation that empowers the FERC to enforce the reliability standards
that are to be delegated to RTOs, through the national oversight
organization, the North American Electric Reliability Organization.
We recognize that further legislation could become necessary in the
future, in order to codify consensus on optimal transmission management
models. For now, what seems to us essential, is movement away from the
existing market fragmentation, and from tariffs that are incompatible
with competition in the retail markets for electricity.
Mr. Barton. Thank you. We would now like to hear from Mr.
Szwed, who is also a vice president. He is Vice President of
Transmission at First Energy, Akron, Ohio. I understand you
have a little different idea from Mr. McCoy. 5 minutes.
STATEMENT OF STANLEY F. SZWED
Mr. Szwed. Thank you very much for this opportunity to
testify. I am Stan Szwed, vice president of transmission for
First Energy Corporation. First Energy is the largest electric
utility in Ohio, serving over 2.3 million customers in Ohio and
Western Pennsylvania. We and our customers, suppliers, and
employees are constituents of at least six members of the full
Commerce Committee, including Representative Tom Sawyer of
Akron, where First Energy is headquartered.
I am here on behalf of my company and seven other major
transmission providers who have endorsed my testimony here
today. They include Allegheny Energy, Consumers Energy, Duke
Energy, Entergy Corporation, Northern States Power, Public
Service Electric and Gas, and Southern Company. Together, these
companies form or account for more than 96,000 miles of
transmission lines. If you were to put all that wire together,
it would wrap the Earth about four times.
Mr. Chairman, let me say that we share your commitment to
competition and less intrusive regulation. There are
differences of opinion even amongst ourselves about the best
means to accomplish these goals, but we do agree on one
essential point, government should not mandate market
structure. I think we heard here today that clearly
transmission is the backbone of the electric power system, not
only for maintaining reliable service but being that necessary
component to create robust competitive power markets. In
considering potential legislation, we urge your support for the
following 5 principles: one, to allow for a market-driven
business-oriented resolution to transmission issues; two, the
voluntary development of transmission institutions, practices,
and investment necessary to support changing electric markets;
three, the continued ability of the market to determine the
structure of regional transmission organizations; four,
encouragement for expansion of transmission investment; and,
five, uniform rules for all owners of transmission.
Transmission customers, producers, traders and suppliers
and ultimately the public will benefit if transmission systems
are given the chance to run as incentive-driven business
enterprises and succeed on the basis of the value that they
bring to the marketplace. It bears noting that the investors on
which transmission providers must rely for billions of dollars
in scarce capital are an indispensable part of the marketplace
that must be satisfied.
The value proposition for transmission investment, the
incentive for entering, remaining or expanding in the
transmission business, has also changed. There is a need to
attract new investment and introduce new technology.
Transmission systems must improve and grow to be able to keep
pace with the thousands upon thousands of new transactions that
will take place every day with broader electric competition.
As a rough indicator of that, I have a chart to my left
that describes in a very rough way, the increase in
transactions that has taken place since 1994. This is
significant as the trends, in my mind, are going to continue as
we move toward more fuller competition. What this means is we
need to continue to provide for investment, investment in
physical facilities, investment in people, to operate these
systems, and investment in appropriate procedures to maintain
integrity of the system.
A concern I have is that the future structure of the
transmission business could become more of a regulatory
question than a business question. The result could be that the
attention, priority, and focus of transmission business leaders
will be diverted on regulatory initiatives, rather than sharply
focused on improving their service to customers.
Again, myself and the companies that have endorsed my
testimony are here to help and offer constructive comments. The
companies endorsing this testimony are proudly all over the map
on what they think is the best organization option for
transmission business. Some, such as Public Service Electric
and Gas, are already members of ISOs, and Allegheny Energy has
indicated they are willing to join an ISO. Others, including
Entergy, Northern States and Consumers, are pursuing other RTO
options that are more efficient for their respective areas and
businesses. We at First Energy are currently seeking regulatory
approval to separate our transmission assets from our baselines
of business, setting up a subsidiary for future divestiture
into a larger regional independent transmission company.
The companies endorsing this testimony want the flexibility
to do what makes the most sense for each, now and in the
future.
In conclusion, I want to emphasize that incentive-driven
transmission entities with appropriate government oversight,
not prescriptive regulation, will better accommodate the future
market. Again, I would like to thank you, Mr. Chairman. We
welcome the opportunity to work with you to encourage greater
competition in electric markets.
[The prepared statement of Stanley F. Szwed follows:]
Prepared Statement of Stanley F. Szwed, Vice President-Transmission,
FirstEnergy Corp.
Mr. Chairman: Thank you very much for the opportunity to testify
before the Subcommittee today.
I am Stan Szwed, Vice President of Transmission for FirstEnergy
Corp. I am here on behalf of my company and other transmission
enterprises whose names appear on the list appended to my testimony.
FirstEnergy is the largest electric utility in Ohio. We serve 2.3
million customers in Ohio and western Pennsylvania, and by one measure
are the twelfth largest investor-owned utility in the country. We have
annual revenues of approximately $5.5 billion and approximately $1.2
billion invested in transmission assets. We and our customers,
suppliers and employees are constituents of at least five of the
Members on this Committee, including Representative Sawyer of Akron,
which is where FirstEnergy is headquartered.
On behalf of these companies, let me say we are here to be
constructive. Mr. Chairman, we know that you and Chairman Bliley want
competition in the electric industry, and we have some ideas we think
will be helpful. We share your commitment to competition and especially
to less intrusive regulation. There are differences of opinion, even
among ourselves, about the best means to accomplish those goals. But we
do agree on an essential point: government should not mandate market
structure.
Because transmission systems are the backbone of electric systems
and the key to vigorous markets in electricity, transmission regulation
must leave room for transmission owners to attract necessary
investment, acquire or redeploy assets efficiently, and improve
transmission infrastructure now and into the future. If transmission
owners are not able to attract investment to improve transmission
infrastructure, then the very backbone of the restructured industry
will not be strong enough to support your vision of market competition.
Unfortunately, we have not yet seen any legislative proposal that will
encourage or permit reform of transmission regulation along these
lines. In fact, some proposals on the table would be counterproductive.
I commend you for devoting this hearing to transmission and
reliability issues. From my perspective, it has been surprising that
transmission issues have not been the subject of more discussion at
this stage of the restructuring debate in Congress. Because
transmission service is a critical element both in the development of
broad and robust markets for power and in reliable electric supply,
ensuring the proper resolution of the debate about transmission
regulation is important. Many assume that there will be competition in
generation services, and some can even envision the day when generation
sales are fully deregulated. Ironically, however, conventional wisdom,
when it considers transmission and reliability at all, assumes only
that regulation must increase. This impulse, in my judgment, should be
checked because it is likely to be counterproductive. The best way to
improve transmission service and with it reliability, is to let market
participants devise and implement new arrangements for providing
service, new investment, new methods, and new technology.
The companies endorsing my testimony own many of the largest
electric transmission systems in the Eastern Interconnection. The
Eastern Interconnection is a technological marvel, a ``grid'' comprised
of interconnected electric systems stretching roughly from the Atlantic
Ocean west to the Rockies and from the Gulf of Mexico north to Hudson
Bay. One of three in North America, this Interconnection grew over the
years almost completely as a result of voluntary effort, and the
majority of facilities comprising the interconnection are privately-
owned. Let me emphasize: this happened largely without the government.
The future of these vital interconnected systems is very much in the
balance, and this hearing is part of an important historical record. I
am honored to contribute to that record and, as I mentioned, grateful
to you and your colleagues for the opportunity.
My colleagues in the transmission business and I know transmission
networks are the racetrack on which competition in electricity is and
will be run. We have a vital self-interest in assuring that the rules
of the track encourage or at least permit fair and more vigorous
racing. We also share a strong conviction that the public interest
requires nothing less.
Transmission customers, electricity producers, traders and
suppliers--and ultimately the public--will benefit if transmission
systems are encouraged to run as incentive-driven business enterprises
and to succeed on the basis of the value that they bring to the
marketplace. It bears noting that the investors on which transmission
providers must rely for billions of dollars in scarce capital are an
indispensable part of the marketplace that must be satisfied.
Principles and Overview
To capture the efficiencies and benefits of competitive electric
markets and supporting transmission systems, we implore you to allow
for and promote market solutions. Your decisions in a federal
electricity bill will significantly influence the structure and
treatment of electric transmission assets, the level of new investment,
and the scope and quality of transmission service for the future. Thus,
we urge that policy development adhere to the following principles:
1. A market-driven and business-oriented resolution to transmission
issues;
2. The voluntary development of transmission institutions, practices,
and investment necessary to support changing electric markets;
3. The continued ability and flexibility of the market to determine the
structure of Regional Transmission Organizations;
4. Encouragement for expansion of transmission investment; and
5. Uniform rules for all owners of transmission.
If we do not continue to improve our transmission systems and
reform the regulation of those systems, the nation will not have a
competitive marketplace as vigorous as the one you envision.
Transmission systems must improve and grow to be able to keep pace with
the thousands upon thousands of new transactions that will take place
every day with broader electric competition. It is also important to
remove obstacles to restructuring the transmission business. One
notable obstacle is the Public Utility Holding Company Act, which
should be repealed.
In your letter of invitation to appear today you asked a number of
good questions. In answer to those questions, we have developed the
following overview.
Transmission providers are successfully meeting the
challenging opportunities associated with increased competition
in wholesale power markets. There has been tremendous change
and progress since the Federal Energy Regulatory Commission
(``FERC'' or ``the Commission'') issued and implemented its
Orders 888 and 889.
The marketplace should take precedence over regulation in
determining the structure and scope of the transmission
business in the future. In a competitive marketplace, all
transmission providers, such as the Tennessee Valley Authority
and the Bonneville Power Administration as well as investor-
owned companies, should be subject to the same legal and
regulatory requirements.
The industry is developing the commercial infrastructure
necessary to accommodate even greater competition. Initiatives
are underway with the North American Electric Reliability
Council (``NERC'') to balance evolution into the future
competitive industry with the commitment to continue to provide
reliable service. This progress should not be pre-empted by
those seeking to mandate RTOs.
Regional Transmission Organizations (``RTOs'') are operating
and, more important, are continuing to evolve. Therefore, RTO
structures should have the flexibility to adapt in a timely
manner as the market changes and as the industry changes. To
deny this flexibility could be to damage or impair the progress
of the RTOs already underway.
The pace of change is accelerating. Industry and the markets,
instead of regulation, should have the first opportunity to
design the institutions and practices that will be needed to
accommodate the changes and further competition.
The ``value proposition'' for transmission investment--or the
incentive for entering, remaining, or expanding in the
transmission business--also has changed. There is a need to
attract new investment and to introduce new technology, such as
the new Flexible Alternating Current Transmission Systems
(``FACTS'') devices.
Only a business orientation for transmission business units
and RTOs will enable those institutions to attract the
investment they need. RTOs that have a market-driven, business
focus coupled with profit incentives are best positioned to
make the appropriate investment in the transmission business.
Consequently, if Congress legislates on the subject of the
structure of transmission business units or RTOs, it should
make clear its preference for market solutions over regulatory
solutions.
Development of Transmission Networks
We are at the doorstep of a new stage of development of the
transmission system. During the first stage about 100 years ago, at the
birth of electric service, there were small plants near densely-
populated areas, and the power didn't have to go very far. From today's
perspective, this was really a pre-transmission period. In the second
stage, as technology developed early in this century, power companies
could start building big generating plants and sending the power to
their customers across longer distances over transmission lines. But
these lines were set up to handle a vertically-integrated company's own
customers, not customers beyond the immediate territory.
In the third stage, from the post-World War II period until recent
years, as the country became more reliant on electricity and we needed
greater reliability, companies started to interconnect their
transmission lines to handle emergencies and provide power to one
another in times of shortages.
We are in the waning days of the fourth stage now. Today the
transmission system, although designed for another purpose, is being
relied upon to provide power to an increasing number of customers, not
just for emergencies and for reliability, but as a standard commercial
practice. Congress planted the seed for this fourth stage by enacting
the Energy Policy Act of 1992 and providing explicit authority to the
Commission to order, after affording an opportunity for an evidentiary
hearing, that transmission lines be opened for wholesale transactions.
The Commission's Orders 888 and 889 required wholesale transmission on
a generic basis.
Transmission transactions have increased significantly over the
past five years. Transmission systems are being asked to do much more
today than they were just a few years ago. Handling the increase in
transactions is a challenging technical task. Transmission providers
must respond rapidly to problems, and that often requires ready capital
for improvements.
The fifth stage will bring choice to every electric customer.
Twenty states already have committed themselves to retail competition,
and several more appear to be poised to move in that direction this
year.
From the standpoint of someone who is selling transmission
services, that opportunity is music to my ears. It is a terrific
business opportunity. There is no question that we will have to invest
in more transmission capacity, not only to ensure reliability, but also
to have the kind of markets that can and should emerge. As would any
prudent business manager, we will invest wisely, not building more
capacity than needed, but building enough to serve our customers' needs
well.
Now let's turn to the policy choices you have in front of you at
this juncture, and I will tell you where we stand in contrast to some
of the other ideas that have been advanced. You may well face a choice
between mandatory transmission entities and voluntary ones; between a
transmission system that is responsive to the demands of the market or
one that is born from a rigid, government-imposed model.
It is beyond question that the transmission system will need to
grow, which means that you must cultivate the conditions for growth.
Transmission is most likely to grow properly if: you allow it to
operate as an incentive-driven business; you let business and the
market determine growth; you let the market figure out what size makes
sense for a particular regional transmission entity, and whose
transmission systems become part of the entity; and you prevent the
government from mandating new transmission structures.
Some legislative proposals would grant the Commission new authority
to order RTO membership without necessarily requiring the Commission to
exercise that new authority. Many ask what harm there could be in
giving the Commission an additional tool to ensure the ``right''
industry structure result. In fact, the question whether the Commission
should stretch the limits of its current authority is being debated
now. It is a credit to the Commission that the Commissioners are
carefully weighing their options. Anyone who has followed the public
statements of the Commissioners in the past several months knows how
seriously they are looking at the options.
There appears to be an appropriate reluctance on the part of the
Commissioners to mandate a particular result. To a greater or lesser
degree, the Commissioners have addressed the need for the industry to
take the lead in RTO formation. There has also been some helpful
commentary from economists, Wall Street analysts, numerous state
regulators, and others to the effect that a market orientation for the
new transmission entities will get the best results in terms of
improving service, maximizing throughput, introducing new technology,
and expanding the networks. One economist, Dr. Tom Lenard of the
Progress and Freedom Foundation, in urging the Commission not to
mandate RTOs, observed:
The Commission should provide a framework in which
transmission market institutions have an opportunity to evolve
efficiently. This has not been possible under the pervasive
regulatory framework that has existed for 60 years. It will
also not be possible if all utilities are now forced to adopt
the ISO or, for that matter, any other single institutional
structure.1
---------------------------------------------------------------------------
\1\ Thomas M. Lenard, ``Getting the Transcos Right,'' The
Electricity Journal, November 1998, p. 52.
---------------------------------------------------------------------------
Yet, the question remains: what is the harm in providing the
Commission additional regulatory authority? The likely harm is that the
future structure of the transmission business could become a regulatory
question rather than a business question. The result could be that the
attention, priority, and focus of transmission business leaders will be
diverted on regulatory initiatives rather than sharply focused on
improving their service to customers. If you seek to move away from
regulation and toward competition in the electric industry, you should
seek to avoid this countervailing, inconsistent focus on still greater
regulation for the transmission business.
Industry Initiatives: Developing Efficient Alternatives
The companies endorsing this testimony are proudly all over the map
on what they think is the best organizational option for the
transmission business. We have a responsibility to determine for our
customers and our shareholders what will work in our own situations,
and in each company's case that determination may be something
different. For example, at FirstEnergy, we intend, assuming regulatory
approval, to separate our transmission assets from the rest of the
company to form a separate transmission subsidiary. This subsidiary is
just an intermediate step en route to what we hope will be a large,
independent regional transmission entity (``transco'') regulated by the
FERC. We want to form an RTO capable of being an independent transco
right from the start. We are working with several other utilities in
the East and Midwest under the rubric of the ``Transmission Alliance.''
The Transmission Alliance companies have come together and hope
soon to seek approval from the Commission of a structure for a broad
RTO that would maximize operational efficiencies and throughput while
minimizing costs and providing excellent reliability. We will be
motivated by a desire to provide outstanding customer service and to
seek a balance between customers, shareholders, employees, and
regulators. As an entity that both owns and manages its assets, we will
be able to raise the capital and operating funds we need to maintain,
operate, and expand the transmission system. We will be flexible to
expand as dictated by the market, and will have market incentives to
add value and services for the benefit of customers. The investment
community has made it clear to us that since the idea of a stand-alone
company in the electric transmission business is untested, we will have
to win approval for transmission rates or ``prices'' that will enable
us to earn an appropriate compensatory return. I want to emphasize the
amount of time and the intensity of effort required from scores of
people to design new transmission institutions and to win necessary
regulatory approvals. These efforts are not undertaken lightly, and
they are most serious.
I want to emphasize that in appearing before you today with the
endorsement of several companies, I am not advocating transcos
exclusively and I am not advocating a mandate for transcos or
divestiture. Other companies, such as Public Service Electric & Gas are
already members of ISOs; others, such as Allegheny Energy, have
indicated their willingness to join an ISO. Several other companies are
pursuing other RTO options. Entergy Corporation, for example, asked the
Commission to declare that its transco concept is consistent with the
Commission's governing rules on independence and governance. Still
other transmission providers, such as Southern Company and Duke Energy,
which already are serving broad geographic areas at low single-system
rates, are persuaded that the millions of dollars and thousands of
employee hours invested in ``functional unbundling'' in compliance with
Orders 888 and 889 deserve more than two years in operation before
being judged as inadequate or before policymakers draw any firm
conclusions as to the effectiveness and efficiency of the wholesale
marketplace. As these companies point out, the volume of transactions
has increased several fold and the reported customer satisfaction is
generally high. Also, while the volume has steadily increased the
reliability remains very high, which should be a hallmark of the new
transmission structure.
There are different levels of electric industry restructuring
taking place across the country. While the goals may be the same, the
pace of change and the nature of the requirements may vary. The
companies endorsing this testimony want the flexibility to do what
makes the most sense for each, now and in the future. By affording the
Companies this opportunity, you will be doing what makes the most sense
for reliability, customers, and competition.
Conclusion
We know there are people arguing that for customers to have options
on where to buy their power, you have to let the government reorganize
the nation's transmission ownership and/or control. The theory is that,
unless the government or a proxy for the government wrests control of
transmission from self-interested companies and forces them into new
entities devised by the regulators, claims of discrimination will
persist; customer choice will not come to pass; transmission investment
and expansion will wither; and reliability will suffer.
We reject that bleak portrait of capitalism, and our experience in
a marketplace that has already been serving merchant transactions for
many years proves that it is wrong. Incentive-driven transmission
entities with appropriate government oversight can accommodate the
future market. Your new marketplace will do better without a new
regulatory mandate.
Again, I would like to thank you for the opportunity to present our
views here today. At this critical juncture in the development of
America's transmission networks, with major legislation and regulatory
initiatives pending, we welcome the opportunity to work with you to
encourage greater competition in electric markets and to forge the
necessary supporting positive changes in transmission regulation.
Mr. Barton. Thank you. Before I introduce our next panel,
the Chair wishes to make an announcement that I should have
made earlier. We have established a working group on this issue
that Congressman Chip Pickering of Mississippi is going to
chair. It is bipartisan. We are going to meet informally. If
there are groups in the audience that wish to appear before
that, if you will get with the committee staff, we will arrange
it. Since we are going to have a number of hearings on these
issues in the next month and a half, we want to give as wide an
opportunity for members to be educated and as wide a
possibility of forum. We are going to have a parallel track of
our formal hearings and then have these informal brown bag
lunches and sessions where members can come from both sides of
the aisle, and we will have a specific topic for each session
so that members can have an opportunity to have a little bit
more give and take in a little bit more informal environment.
Congressman Pickering is going to chair that and we are very
hopeful that all members of the subcommittee will take
advantage of that opportunity.
We will now hear from Ms. Trudy Utter, the vice president
and general manager of Tenaska Power Services Company down in
Arlington, Texas. My understanding is that she has even another
idea on how to do this.
Ms. Utter. Of course I do.
Mr. Barton. This is probably the best idea, since it is
from Texas.
Ms. Utter. I think that is exactly right, Mr. Chairman. I
appreciate your remarks, and I appreciate the warm welcome from
Mr. Hall and from yourself. Both of you are neighbors of mine,
so I appreciate that warm welcome. I have to confess, though, I
am originally from Tennessee; but I am going to go ahead and
say this since Mr. Bryant is not here: I wasn't born in Texas,
but I got there as fast as I could.
Mr. Barton. We appreciate that.
STATEMENT OF TRUDY UTTER
Ms. Utter. Thank you for the warm welcome. I am vice
president of Tenaska. My company is an independent power plant
developer and a power marketer. My company exists strictly
because the Congress of the United States decided that the
power market in the United States needed competition. We are
not affiliated with any regulated utility. As an independent
power developer, we have built 750 megawatts of cogeneration
and independent power in the United States and another 1,500
megawatts under development or under construction.
As a power marketer, we are an extensive user of the
physical transmission system. As an example, we do all of the
buying and selling of electric power for the Public Utilities
Board of Brownsville, Texas, a 200-megawatt municipal utility
in the southernmost part of the continental United States.
I have provided written comments and answers to your
specific questions. I wanted to talk just briefly about some of
the things that are most important to us as a wholesale
competitor in this business.
We believe competition works and markets work. And no one
cares more about reliability than we do. Reliability for us is
not just keeping the lights on, but our economic future and
existence depend on the reliability of the electric network.
We believe that FERC and Order No. 888, as well as the
Energy Policy Act of 1992, took us way down the road in this
marathon that we are running to try to get to a deregulated or
a competitive wholesale part. However, as I understand--and
Lord knows you can tell by looking at me I don't run
marathons--but I heard at the end of the Boston Marathon, there
is a hill called Heartbreak Hill. I feel like that is where we
are in terms of getting to a fully competitive electric
wholesale market or retail market.
There are big barriers between where we are today and the
end of the race, and there are a number of us standing at the
bottom of the hill right now just essentially running in place.
Some of those barriers are a preference for native load of
incumbent transmission owning utilities. As a power marketer,
that has been a great concern for us.
As a developer of power plant projects, we consistently
have trouble interconnecting with existing transmission
companies and have trouble with predictable and reasonable
transmission rates for long-term service. We believe that the
answer to these issues can be solved through regional and
independent transmission companies whether those are RTOs,
ISOs, ITCs. We aren't as concerned about what the structure is
as long as they are regional and independent.
We have had a significant experience with the Texas ISO, as
Mr. Hall mentioned earlier, and our experience has been
extremely positive. That is a system where we do have both
independent and regional representation on the transmission
system, and it has worked extremely well.
We believe that you have to have the right tradeoff between
a region that is big enough to create efficiency but small
enough to maintain sufficient engineering and technical detail
to ensure that you have optimization of a system.
We believe that Federal action needs to be taken to clarify
FERC's role in this matter and that we want to make sure that
FERC has the authority to maintain a fair, competitive, and
reliable market. We think this needs to be done quickly because
if it is not done quickly, those of us who are standing at the
bottom of Heartbreak Hill are going to run out of water or air,
one or the other. And so we want to make sure that at the end
of this race that the people that are still standing are the
creative, entrepreneurial companies that are bringing
competition to this business and that we don't just find
ourselves with a deregulated, but not a competitive, market.
Thank you for your time and I look forward to your questions.
[The prepared statement of Truddy Utter follows:]
Prepared Statement of Trudy Utter, Vice President and General Manager,
Tenaska Power Services Company
Good morning, Mr. Chairman and members of the Subcommittee. I thank
you for your kind invitation to speak to you today. My name is Trudy
Utter and I am vice president and general manager of Tenaska Power
Services Co., a FERC-licensed power marketing company which is an
affiliate of Tenaska, Inc. Tenaska Power Services specializes in
trading physical power and is one of the largest non-utility users of
transmission in the Eastern US and Texas. In addition to being involved
with natural gas and electricity marketing, Tenaska Inc. is a developer
of independent power projects with three U.S. plants in operation for a
total of approximately 750 MW and an 830 MW gas-fired plant in Texas
that is currently being constructed. Tenaska serves on the Board and
Executive Committee of the National Electric Reliability Council
(NERC), on the boards of four regional electric reliability councils
and two regional transmission associations.
Tenaska is also a board member company of the Electric Power Supply
Association (EPSA), a trade association that represents competitive
power suppliers, both marketers and developers of competitive power
projects. While I am here today representing Tenaska, my statement
reflects the consensus views held by the EPSA membership.
Before I address directly the questions posed to me in your letter
of invitation, let me make two general points:
1. There is a need for federal legislation. While we believe that
significant progress has been made under FERC's Order 888, many issues
remain to be resolved. The wholesale power market is expanding, new
generation is starting to be built and the promise of technical
innovation, lower prices and better services is becoming reality.
Nevertheless, many issues related to competition and transmission
structure and reliability cannot be dealt with piecemeal by the states,
nor fully resolved within FERC's existing legal authorities.
2. Prompt action is critical. In order to maintain reliability and
ensure a healthy wholesale market, we need competitive forces to take
hold fully. Without a coherent, robust market framework, entrepreneurs
will not make the investments needed to build new power plants or
transact for necessary supplies.
With the emergence of competitive markets in states and regions
around the country, the picture becomes more and more clear. In Texas,
for example, where competitive markets are starting to emerge (even
though more has to be done), almost 9,000 MW of new plants have been
proposed in a region with a peak demand of 52,000 MW. In many other
areas of the United States, state regulatory commissions are predicting
and planning for physical shortages. If you build a competitive
framework, entrepreneurs and capital will come.
The Committee has posed six questions. Let's consider these in
order:
1) Is there a need to provide for enforcement of mandatory reliability
standards?
Yes. The reliability of the system is at least as important in a
competitive framework as it has been historically. We can no longer
rely on good will or the good faith efforts of market participants to
protect reliability, since the operation of the electrical system will
have a direct impact on the financial health of possible competitors
and all customers. A lack of system reliability will have a financial
impact on marketers, generators and consumers, and it should have a
financial impact on the transmission operators as well. Tenaska and
EPSA endorse the stakeholder-developed legislative proposal for a new
North American Electric Reliability Organization (NAERO). Legislation
is needed to enable the start-up of this replacement to NERC.
2) Should FERC jurisdiction be extended over non-jurisdictional
transmission systems?
Yes, although this is less critical today due to the high voluntary
participation of non-jurisdictional transmission owners within the
framework of Order 888. Because electricity moves at the speed of
light, the transmission system operates as a physical unit, with little
respect for political or corporate boundaries. If the market is to work
well, on a truly non-discriminatory basis, the regulatory framework
should reflect the physical one. An interconnected utility cannot
physically ``opt out'' of the transmission network. However, a utility,
acting on its own, can disrupt commerce on that network. If we allow
arbitrary and discriminatory curtailment and line loading relief
policies or local price distortions for access and service, we can
create a regional (if not national) nightmare for market participants.
While not urgent today, federal legislation would be helpful.
3) Should all transmission systems be governed by the same set of
rules?
While greater uniformity and consistency is necessary, there is
room for some variation. As mentioned earlier, we endorse the
legislation to create NAERO, which encourages uniformity on a national
or interconnection-wide basis, but allows for variances to deal with
extreme or unique local circumstances. Increased consistency across
utility service territory and regions will clearly promote system
reliability. Consistent rules will also promote broader market
opportunities and the liquidity necessary to dampen price volatility.
For many of the same reasons outlined in the answer to question
two, consistent regional or national policies can help prevent
discriminatory activity. The NAERO proposal should be adopted. FERC
should be encouraged to streamline, coordinate and encourage efficient
transmission operation on a regional or national basis. Federal
legislation is needed.
4) Are steps needed beyond Order 888 to eliminate the ability of
transmission owners to discriminate against their competitors?
Yes. While Order 888 provides an important framework for reducing
the possibility of discrimination, it has not and will not by itself
prevent discrimination. Market power, both vertical and horizontal, is
real and truly significant. If the purpose of competitive restructuring
is to reduce cost and improve services, then there must be ease of
entry into the market for all participants and the guarantee of quick
justice in those instances where market power is abused.
We remain concerned that true comparability--which would treat the
transmission owners' ``native load'' the same as any other customer--
has yet to be achieved. We need full comparability in transmission
rates, terms and conditions of service. All users of the transmission
system should take service (scheduling, reserving and paying for
service) under the same tariff. In addition, non-discriminatory rates
are of little concern to a prospective power plant developer who is
denied interconnection or who is overcharged for this service.
FERC has endorsed the functional separation of vertically
integrated electric utilities. While we do not endorse mandatory
divestiture of utility assets as a general policy, the voluntary
divestiture of generation assets in many states has helped remedy a
number of issues, including the valuation of stranded costs and
concerns about vertical market power. It may be appropriate to give
FERC the authority to order partial asset divestiture as a response to
the illicit exercising of market power.
As a competitive market grows, we hope that the role of the
Commission in the marketplace will diminish. In the meantime, however,
it is critical for all market participants to have confidence that the
Commission is capable of identifying discriminatory activity and has
the tools to respond appropriately. The Commission recognizes the need
to protect consumers against the abuse of market power and they should
be encouraged to do so. While we urge the Committee to avoid being too
prescriptive, legislation is needed.
5) Is there a need for regional transmission organizations (RTOs) and,
if so, how should they be structured?
Yes, there is a critical need for RTOs. These organizations are not
a panacea, but will provide a partial remedy to many of the issues
already raised. A large RTO can offer market consistency over a broad
geographic area and serve as a one-stop shop for transmission
customers. In general, RTOs should be as large as possible, recognizing
the need to reflect some regional differences or technical constraints.
Tenaska has had significant experience with the ERCOT ISO in Texas.
This system has functioned extremely successfully as a one-stop shop,
with a fairly simple structure and at low cost to the market. This RTO
is appreciated by the many market participants who depend on it, and it
is hard to imagine the Texas competitive power market functioning very
well without this kind of organization.
In structure, RTOs must be truly independent, and this independence
must extend throughout the organization, such as to the committees
where facts are gathered and positions formulated. An RTO cannot be
subject to control by a dominant stakeholder. While we believe that
bigger is generally better, we also believe that market forces and
operational requirements should influence the appropriate RTO size--
form should follow function.
One issue that must be addressed within the RTO is the question of
mistakes made by the RTO which have financial impact on market
participants. Decisions made by the RTO will have direct impact on the
market and can, if incorrect, inadvertently undermine an innocent
company. As these transmission organizations develop, it will be
critical to respond quickly to claims of financial injury and to
provide a speedy and appropriate remedy.
We believe that FERC currently has the authority to order the
creation of RTOs and we encourage them to do so actively. Federal
legislation would be helpful, however, to ensure that this policy is
clearly stated.
6) Is there a need to improve the process used for transmission siting?
Yes. As is obvious, we believe that the transmission grid is a
national, not local, asset. Final decisions on siting must fall to a
governmental entity capable of balancing the needs of multiple
political jurisdictions, such as is the case with construction of
natural gas pipelines. We encourage Congress to adopt legislation which
vests FERC with primary jurisdiction over major new transmission siting
and planning decisions, perhaps subject to a requirement that FERC
involve regional or state siting authorities. As part of the planning
process, the Commission should take into account the fact that
transmission and generation assets can often act as substitutes for
each other. Siting new generation in some instances will be a more
cost-effective remedy to transmission congestion than additional
transmission facilities. Legislation is needed to streamline and
structure the siting process.
Conclusion
Members of the Subcommittee, I have appreciated the opportunity to
appear before you today and address these very important questions.
Once again, I encourage you to act deliberately and with speed to
protect the growth and development of competitive power markets in the
United States. Competition is already bringing substantial benefits to
all consumers of electric power. Congressional action can help ensure
that the benefits from competition of lower costs, better services and
improved technology continue to flow to the American consumer.
Mr. Barton. Thank you. We now want to hear from our fourth
vice president in a row, Mr. Dave Nevius, who is the vice
president for North American Electric Reliability Council,
which is a group that has taken on a larger role as competition
has evolved. Your statement is in the record in its entirety
and we recognize you to summarize it in 5 minutes.
STATEMENT OF DAVID R. NEVIUS
Mr. Nevius. Thank you, Mr. Chairman. My written testimony
as well as the remarks I will make here today are going to
focus exclusively on reliability, not on the structure of
regional transmission systems or markets. The interstate high
voltage transmission system, which is the backbone of the
Nation's electricity infrastructure, is extremely critical to
public health, safety, welfare, and national security, as well
as enabling robust competition in electricity markets in the
United States and throughout North America.
As wholesale and retail electricity markets become more
competitive, these interstate transmission systems is being
used in new and different ways that promote competition. As Mr.
Szwed said, the number and magnitude of electricity
transactions that are using the system are increasing
dramatically, and new types of electricity suppliers, like
Trudy's organization, are using the transmission system to
offer innovative electricity products and services. These and
other changes are being brought about by competition and
electricity restructuring are unique and challenging but the
reliability of the transmission system need not be compromised
provided appropriate steps are taken.
As others have mentioned, for over 30 years NERC and its
member regional reliability costs have worked cooperatively and
effectively to revive the essential reliability standards for
electric utilities to make sure that the interconnected
electric grids remained reliable and that the lights stayed on.
This voluntary system for setting and encouraging compliance
with industry reliability standards is simply not sustainable
in the increasingly competitive electricity industry that we
have today and that we see evolving before us.
NERC's current voluntary arrangements need to become
mandatory and applied fairly to all participants in the
electric industry. An independent blue ribbon panel formed by
NERC in addition to a Department of Energy task force that was
chaired by one of your former colleagues, Phil Sharp,
independently concluded that a single independent self-
regulating organization is the best way to develop and enforce
compliance with the highly technical rules of the road needed
to keep the interstate transmission system operating reliably
as it accommodates the demands of competitive markets. Both of
these groups, the NERC blue ribbon panel and Phil Sharp's task
force, concluded that Federal legislation was needed to grant
the necessary statutory authority to the FERC to approve and
oversee such an independent self-regulating reliability
organization in much the same way that the Securities and
Exchange Commission oversees the stock exchanges and the
national association of securities dealers.
In effect, the role of the independent self-regulating
organization drawing on the vast technical expertise that
exists in the industry will be to set and enforce compliance
with reliable standards. On the other side, the Commission's
role, as Mr. Hoecker alluded to earlier, would be to ensure
that the process of developing and enforcing these rules is
fair and open and does not unnecessarily intrude on the
developing competitive markets.
The standards developed and enforced by the self-regulating
reliability organization would apply to all owners, operators,
and users of the interstate high voltage transmission system.
That includes the power marketing administrations, TVA,
municipals, co-ops, and even the systems in ERCOT. Working with
a wide variety of public and private sectors stakeholders, NERC
has developed an industry consensus legislative proposal. To
establish such an independent self-regulating organization, the
principal provisions of this proposal are, one, to establish a
single independent self-regulating reliability organization
modeled after the national association of securities dealers;
two, to accredit this self-regulating organization by the FERC;
three, to provide for the authority of this organization to set
and enforce compliance with reliability standards throughout
North America with oversight in the U.S. by FERC recognizing
the comparable and coordinated oversight will be needed from
the governments of Canada and Mexico; and, last, a requirement
for the organization to delegate certain implementations and
enforcement authorities to affiliated regional reliability
entities with special deference to regional entities organized
on an interconnection-wide basis such as the Western Systems
Coordinating Council and the Electric Reliability Council of
Texas. This language is supported by a broad coalition of
industry organizations and stakeholders, including the American
Public Power Association, the Canadian Electricity Association,
Edison Electric Institute, the Electric Power Supply
Association, the Electricity Consumers Resource Council, Enron
Corp., and the National Rural Electric Cooperative Association.
In addition, the groups that are supporting this consensus
language are working with the States to address some concerns
regarding the States' role in the context of the proposed
independent self-regulatory organization. They are working to
reach agreement on some clarifying language that can be added
to the NERC consensus proposal. NERC urges the subcommittee's
support of the consensus language that will ensure the
continued reliability of the Nation's interstate electric
system as we move forward with competition.
Thank you very much, and I look forward to answering your
questions.
[The prepared statement of David R. Nevius follows:]
Prepared Statement of David R. Nevius, Vice President, North American
Electric Reliability Council
About NERC
The North American Electric Reliability Council, or ``NERC,'' is a
not-for-profit industry group formed after the Northeast blackout in
1965 to promote the reliability of the high voltage electric
transmission system. NERC works with all segments of the electric
industry as well as customers to develop standards and encourage
compliance for the reliable operation of the electric grid system
throughout North America. NERC comprises ten regional reliability
councils that account for virtually all the electricity supplied in the
United States, Canada, and a portion of Baja California Norte, Mexico.
NERC's mission is to promote the reliability and adequacy of bulk
electric supply by the electric systems of North America--that is ``to
keep the lights on.''
Summary
The interstate high-voltage transmission system--the backbone of
the nation's electricity infrastructure--is critical to public health,
safety, welfare, and national security, and enables robust competition
in electricity markets in the United States and throughout North
America.
As wholesale and retail electricity markets become more
competitive, the transmission system is being used in new ways that
promote competition. The number and magnitude of electricity
transactions using the system are increasing dramatically, and new
types of electricity suppliers are using the transmission system to
offer innovative electricity products and services. Although the issues
surrounding these and other changes being brought about by competition
and electricity restructuring are unique, the reliability of the
transmission system need not be compromised, provided appropriate steps
are taken.
The existing voluntary system for setting and encouraging
compliance with industry reliability standards for these transmission
systems has worked well for nearly 30 years, but is not sustainable in
today's increasingly competitive electricity industry. The rules
regarding reliability must be made mandatory and enforceable, and those
rules must apply fairly to all entities that own, operate, and use the
transmission system, regardless of who owns those entities or whether
they are currently regulated by the Federal Energy Regulatory
Commission.
The mechanism for making the rules mandatory and enforceable within
the United States is legislation that would provide for an independent
self-regulatory organization, under government oversight, to develop
the reliability rules and enforce compliance with these rules. We
expect analogous government oversight will be developed in Canada and
Mexico.
Working with a wide variety of public and private sector
stakeholders, NERC has developed an industry consensus legislative
proposal to establish such an independent self-regulatory organization.
A copy of the consensus reliability language is attached to my
testimony.
The NERC proposal follows the model of the Securities Exchange
Commission (SEC) in its oversight of securities industry self-
regulatory organizations (the stock exchanges and the National
Association of Securities Dealers).
The principal provisions of the NERC consensus legislative proposal
are:
Establishment of a single, independent, self-regulating
electric reliability organization (SRRO), modeled after the
National Association of Securities Dealers (NASD);
Accreditation of this SRRO by the Federal Energy Regulatory
Commission (FERC);
Authority for the SRRO to set and enforce compliance with
reliability standards throughout North America, with oversight
in the U.S. by FERC, as the SEC oversees NASD; and
Requirement for the SRRO to delegate certain implementation
and enforcement authorities to affiliated regional reliability
entities, with deference to regional entities organized on an
Interconnection-wide basis.
This language is supported by a broad coalition of industry
organizations and stakeholders, including American Public Power
Association (APPA), Canadian Electricity Association (CEA), Edison
Electric Institute (EEI), Electric Power Supply Association (EPSA),
Electricity Consumers Resource Council (ELCON), Enron Corp., and the
National Rural Electric Cooperative Association (NRECA).
In addition, the groups supporting the NERC consensus language are
working with the states to address some state concerns regarding their
role in the context of the proposed independent self-regulatory
reliability organization, and are working to reach agreement on
specific language to be added to the consensus proposal.
Precursors to Change
For three decades, NERC and its member Regional Reliability
Councils have worked cooperatively and effectively to provide the
essential reliability standards for electric utilities to make sure the
lights stayed on. The introduction of wholesale and retail competition
into the electric industry and its consequent restructuring are
recasting these long established arrangements and requiring a ``new
model'' to assure a reliable supply of electricity to North America's
homes and businesses. NERC's current voluntary arrangements need to
become mandatory and applied fairly to all participants in the electric
industry.
Efforts began in 1992, following passage of the Energy Policy Act,
to transform NERC from a voluntary industry organization that used
``peer pressure'' to encourage compliance, which worked in a regulated
utility context, into a mandatory compliance organization that is
needed for a competitive electricity industry.
The Need for Federal Legislation
Both NERC and the U.S. Department of Energy support the need for
federal reliability legislation. As part of its efforts to stay ``ahead
of the curve'' during this period of dramatic change in the electric
industry, NERC asked a ``blue ribbon'' panel of experts to recommend
the best ways to set, oversee, and implement reliability policies and
standards in a competitive and restructured industry. The panel
recommended, among other things, that NERC develop specific federal
legislation to create an industry self-regulating reliability
organization with responsibility and sufficient authority to set and
enforce compliance with reliability standards. DOE's own Electric
System Reliability Task Force to the Secretary of Energy Advisory
Board, chaired by former Congressman Phil Sharp, independently
concluded that federal legislation was needed to grant more explicit
statutory authority to the Federal Energy Regulatory Commission to
approve and oversee a single, international, self-regulating
reliability organization.
For the last year, NERC has worked aggressively to develop and
implement a number of specific action plans, including preparation of
draft reliability legislation, that will transform NERC from a
voluntary system of reliability management to one that is mandatory
with the backing and support of governments. Reaching consensus on
legislative language that everyone could support was a difficult but
crucial step in the continuing transformation of NERC. The
overwhelmingly favorable vote of NERC's Board, comprising a broad and
diverse cross section of electric market participants, represents a
strong and unified commitment to this specific legislative language.
What would this legislation do?
This legislative language is designed to ``keep the lights on'' as
the Nation reaps the benefits of competitive electricity markets. It
creates an independent self-regulatory reliability organization that
will set and enforce rules for running the interstate, high-voltage
electric transmission system.
This self-regulatory organization, with oversight in the U.S. by
FERC, would operate in much the same way that the securities industry
regulates itself through the stock exchanges and NASD with oversight by
the Securities and Exchange Commission.
The organization would apply the reliability rules equally to all
that own, operate, or use transmission facilities, whether they are
investor-owned utilities, municipalities, co-ops, the Federal
government through the power marketing administrations, independent
power producers, power marketers, or end-use customers.
What the legislation does NOT do
It does NOT interfere with the States'' traditional regulation
of the reliability of local distribution of electricity and
service to retail customers;
It does NOT interfere with the States'' traditional regulation
over the siting and certification of transmission lines and
generating plants; and
It does NOT interfere with the States'' traditional regulation
of the generating reserve margins for their local utilities.
Why legislate now?
Competition is growing rapidly in the interstate electricity
market, and new electricity suppliers are making significant new uses
of the interstate transmission system. Historically, the transmission
system was designed to move power from a utility's generators to its
own load centers. Interconnections between utilities were established
for emergency situations, to share installed generation reserves, and
to take advantage, from time to time, of their neighbors'' lower cost
generation.
Now the interstate transmission system is being called on to move
vast amounts of electricity from one region of the country to another
(and between the U.S. and Canada and Mexico.) Also, the number of
participants in the marketplace has greatly expanded, and the number of
transactions on the system each day has increased several fold.
How was reliability maintained in the past?
Historically, utilities worked cooperatively to maintain the
reliability of the interstate transmission system. The rules for
running the system were not mandatory, and the only enforcement
mechanism was one of ``peer pressure.'' Nevertheless, it worked quite
well.
With the coming of competition, utilities that once cooperated with
each other are now competitors. And there are more of them as well as
many different types of electricity suppliers.
FERC has mandated that the public utilities subject to its
jurisdiction file open access tariffs. Parts of these tariffs overlap
with the reliability rules NERC has established for maintaining the
integrity of the grid and keeping the lights on. Because there is no
current enforcement mechanism for the reliability rules, complaints are
increasingly being taken to FERC concerning the reliability rules.
Without an independent self-regulatory organization, decisions about
maintaining the reliability of the grid will increasingly be made by
FERC instead of by industry experts in this technically complex area.
Why this form of legislation?
It is important for FERC to be given an oversight role, because
that is the mechanism by which the enforcement authority (which is
inherently a governmental function) can be delegated to the independent
self-regulatory organization. Absent the government oversight, the
independent organization would not be in a position to enforce its
rules because of the antitrust laws. And absent legislation, certain
owners and operators of transmission (municipalities, co-ops, the power
marketing administrations, the Tennessee Valley Authority and utilities
in ERCOT) would not be brought within the mandatory reliability
requirements of the proposal. With this legislation, those with the
technical expertise will be able to set and enforce the technical
standards needed to ensure reliability of the interstate high-voltage
transmission system. FERC, in a backstop or oversight role, will ensure
fairness, due process, and overall compatibility with the public
interest.
Governance of the New Independent Self-Regulatory Organization
One of the key questions that the Electric Reliability Panel and
NERC wrestled with was how the new organization (the North American
Electric Reliability Organization or ``NAERO'') should be governed. In
July 1998, the Board approved a plan to transition to a board made up
solely of nine independent directors. That plan included adding nine
new ``independent'' members to the existing 37-member board and having
them serve as part of an expanded board until legislation was enacted.
What has NERC Done to Prepare for the Transition to a New Self-
Regulatory Structure?
NERC has been working actively over the last year on a number of
initiatives that will allow it to be transformed into this independent
SRRO:
Restated Mission and Expanded Membership
Opened process for developing and approving standards
Added 9 independent directors to Board (to take over after
legislation is enacted)
Broadened representation on committees
Established Market Interface Committee to consider impact of
reliability standards on competitive market
Developed Compliance Enforcement Program Pilot
In Summary
NERC urges the Subcommittee's support for this consensus
legislative proposal to ensure the continued reliability of the
nation's interstate electricity system because:
A new electric reliability oversight system is needed to
ensure continued reliability of the interstate high-voltage
transmission system while supporting robust competition in
electricity markets;
An independent, industry self-regulating system, modeled after
the National Association of Securities Dealers, is preferred
over direct federal regulation;
The governing board of the new organization will be made up
solely of independent members; and
U.S. legislation is needed for the creation and empowerment of
``NAERO.''
Thank you for the opportunity to appear and I look forward to your
questions.
Mr. Stearns. [presiding] Thank you. Mr. Greg Yurek for your
opening statement.
STATEMENT OF GREGORY J. YUREK
Mr. Yurek. Thank you, Mr. Chairman. My name is Greg Yurek,
chairman and CEO of American Superconductor Corporation, a
leader in developing commercial applications for superconductor
technology for the electric power industry.
Thank you for this opportunity to offer a technologist's
perspective on how the Congress can advance our national
interests in electric system reliability. The debate over
whether competition will improve or degrade the reliability of
the power grid is misplaced. It does not address a number of
other factors that have put us on a collision course.
During the current long economic expansion, we have seen
not just load growth but a major load shift back to our cities.
The areas where new facilities are most needed are also those
which are most difficult to get siting rights for because of
the cost of environmental and community pressures.
The regulatory uncertainty associated with restructuring
and the prospect of distributed generation have made planning
almost impossible. The bottom line is that investments in the
grid have been deferred for years. We must take this debate
beyond issues of institutional reform structuring governance.
Fundamentally, the reliability problem is physical. Our
power grids are capacity constrained and subject to congestion,
and no change in Federal laws can alter the natural laws that
cause this reality. If competition is to yield low-cost
reliable power for American consumers, we must aim to do better
than merely manage congestion and price it effectively. We must
overcome congestion through investment in new technologies and
physical facilities. The key to success in the competitive
transformations of both the telecommunications and natural gas
industries lay an expanding network capacity. The case of
electricity is no different.
Strengthening power grids with conventional technologies
will be problematic at best. I believe that superconductors
offer one of the most promising approaches to meet this
challenge. Breakthrough discoveries in the mid-1980's in the
field of high temperature superconductivity, or HTS, have made
possible an extremely high capacity new form of wire. This HTS
wire can play a similar role for electric power grids as
optical fibers have played in communications. Already HTS wire
is capable of carrying more than a hundred times as much power
as conventional wires. Wires of this form that we are
manufacturing and are available today take up as much
electricity as this large copper conductor. The change is here.
It is available today. This enables some truly revolutionary
electric utility applications such as high capacity
transmission cables.
These applications are not in the remote future. A year
from now Detroit Edison will employ the first superconducting
cables in a live utility grid at one of its urban substations.
In this demonstration project, three HTS cables containing a
few hundred pounds of superconducting wire will be inserted
into existing conduits in the station. They will replace the
capacity of nine conventional cables containing 18,000 pounds
of copper wire that carry 100 million watts of power, 100
million watts of power now carried through these new wires.
This urban retrofit project will show how HTS cable could
multiply the capacity of utility grids without costly and
disruptive excavation. As production volume grows and costs
fall, I believe the same wire and cable technology will spread
to suburban installations and eventually regional transmission
facilities. The technology is here today. It is being deployed
very soon.
Already today, superconductors are found in a commercially
proven product known as ``superconducting magnetic energy
storage,'' or SMES. A SMES power quality system uses
electricity stored in a superconductor coil to protect large
industrial customers from voltage sags and brief outages. A new
application of this same technology called ``distributed SMES''
involves placing several of these devices on a weak grid to
provide stabilization during brief but critical transient
events. This offers a powerful and cost-effective new way to
improve reliability.
Like most technologists, I am an optimist. I believe that
creative minds in a free market will respond to competitive
opportunities with a whole array of new technologies. The
stresses on the grid tell us that we do not have the luxury of
time. Congress can use technology-neutral incentives to
encourage new investment to strengthen the grid in much the way
that section 706 of the Telecommunications Act calls for
deployment of advanced telecommunications capability.
I have three brief recommendations. First, setting power
quality standards would unleash powerful market forces and
establish a real market environment for many promising
technologies to address what is become a very expensive
problem. More and more our Nation's power requirements are
driven by sensitive silicon chips, so a clean power signal is
more important than ever.
Second, we can speed the deployment of promising new
technologies like HTS cable while respecting local
environmental concerns by putting in place a streamlined
Federalized procedure for siting new interstate transmission
lines that fall below a certain threshold of environmental
impact.
And third, the testing of new technologies in real world
environments must be accelerated to speed their
commercialization. For this reason, there may be a place for
tax or other incentives to support multiple demonstrations.
Thank you for this opportunity to testify and present these
recommendations, and I would be pleased to respond to any
questions.
[The prepared statement of Gregory J. Yurek follows:]
Prepared Statement of Gregory J. Yurek, President and CEO, American
Superconductor Corporation
Introduction
Good morning. My name is Gregory Yurek and I am President and CEO
of American Superconductor Corporation. American Superconductor
participates in a competitive worldwide industry focused on developing
commercial uses for high-temperature superconductors (HTS) discovered
in the mid-1980s. We are a leading developer and manufacturer of high-
capacity HTS wire for electric power industry applications. I would
like to congratulate the Committee for conducting this timely hearing
on the critical reliability challenges facing our nation's power grid.
Let me also thank you for offering me the opportunity to present a
perspective on the role that new technologies can play to address these
concerns.
Across the country, competition in wholesale and retail electricity
markets is intensifying. As this occurs, utilities are undergoing the
most far-reaching changes in structure and governance in the industry's
history. The purpose of these structural reforms is to make the
electric system more efficient and responsive to consumers. But
restructuring has prompted concern that, if these reforms are not
thought through carefully, they could undermine the reliability of
electric service that Americans have come to expect. It is not useful,
however, to focus on the impact of one factor, the advent of
competition, on electric system reliability. Rather, the threat to
reliability arises from a complex set of challenges utilities face at
many levels.
The Threat to Reliability: Planning and Operational Challenges Facing
Utilities
Electric industry restructuring is taking place against a backdrop
of strong and sustained national economic growth. This cycle of
expansion has brought not just rapid load growth but shifting load
patterns; much of the new electricity demand is concentrated in fast-
growing urban areas. These are precisely the locations where social and
environmental pressures make siting major new electric generation and
transmission facilities most difficult. Important grid investments to
cope with load growth have been deferred for years because of a climate
of regulatory uncertainty. The prospect of new types of small-scale
generation, which may eventually compete against grid-supplied power,
has further complicated long-range planning.
Other difficult operational issues loom. Power quality is
increasingly important; our shift to a high-technology manufacturing
base has made customer requirements for a clean power signal much more
exacting than in the past. Even the possibility of new mandates arising
from global environmental treaty obligations could put a premium on
energy efficiency, forcing further changes in utility strategy. Each of
these challenges poses complex problems. Utilities must grapple with
all of them simultaneously, all while facing pressure to hold the line
or even reduce rates to consumers.
Electric Transmission: The Importance of Capacity
Reforms in industry structure and governance will be necessary but
not sufficient to address these challenges. The most powerful
legislative body cannot rewrite the physical laws that explain the
fundamental problem of inadequate grid capacity. In order for these
competitive reforms to produce benefits for American consumers in the
form of reliable, low-cost power, it will be necessary to do more than
find efficient ways to apportion the costs of grid congestion. Instead,
it will be necessary to solve the problem of congestion. I believe this
obstacle can be overcome through the deployment of new technologies to
expand the power grid's fundamental capacity to handle new and
unplanned power flows.
The idea that transmission capacity is the key enabler of
competition becomes clear when we consider its role in other network
industries. The revolution in telecommunications would have been
impossible without the vast increase in ``bandwidth'' or capacity
brought on by fiber optic cable, as well as digital technologies that
allowed more intensive use of the radio spectrum. The renaissance of
the interstate gas market since the open access reforms of the 1980s
required substantial investment in a robust and flexible,
interconnected network of interstate pipelines. We simply cannot expect
to foster broader regional electricity markets in the 21st century if
we continue to rely on electricity transmission pathways and
technologies built to accommodate local traffic patterns of the mid-
20th century.
Superconductivity: An Overview
This testimony presents an overview of superconductors, and
introduces a family of emerging technologies that hold special promise
to strengthen power grids by revolutionizing the electric industry's
most basic building block: wire itself. Superconductivity is a basic
property of materials that causes them, when cooled, to lose all
resistance to the flow of electrons and to carry far more electricity
than copper or aluminum conductors. The ability to achieve this state
of electrical losslessness makes it possible for superconducting wire
to carry electricity with very high efficiency, and to store
electricity indefinitely. This, in turn, opens the possibility of
designing a new generation of electric system components that will be
far more compact, powerful and efficient than their conventional
counterparts.
Superconductivity is not a new phenomenon. Low-temperature metallic
superconductors were discovered in 1911. However, the cost of cooling
these materials to near absolute zero using liquid helium made it
impractical to consider their use in electric power grids. In 1986 and
1987, however, researchers discovered a new family of revolutionary,
ceramics-based superconductors that operated at much higher
temperatures. These so-called high-temperature superconductors or HTS
materials can be cooled with inexpensive and environmentally benign
liquid nitrogen. These discoveries have made it economically feasible
to use superconductors to build high-capacity cables, extremely compact
and powerful motors, and efficient and environmentally benign
transformers that will protect utility grids from the propagation of
dangerous fault currents.
American Superconductor's core product is a new type of HTS wire
that will be at the heart of each of these applications. We are
currently manufacturing 250 kilometers per year of HTS wire that
carries approximately 100 times more current than a conventional copper
wire of the same cross-section. We work with leading electrical
equipment manufacturers through strategic alliances to develop electric
industry applications for this wire, and are continuing to make
progress in both wire performance, cost reduction and applications
development. To facilitate our path to commercialization, we recently
committed to double our wire production over the next twelve months on
the way to a much larger scale-up in the near future.
Early in the history of the HTS industry, the federal government
recognized the tremendous opportunity these materials offered to
strengthen electric power grids and improve reliability while shrinking
the environmental footprint of the power sector. The government also
recognized the need to ensure a strong American position in what has
become a hotly competitive global industry. The Department of Energy
has played a key role in fostering commercial applications for HTS
through its Superconductivity Partnership Initiative program. In the
comparatively short span of a decade tremendous strides have been made,
and the fruits of this industry-government collaboration are now
imminent, as the first commercial-scale demonstrations of HTS motors
and cables are scheduled to take place over the next 9-18 months.
In the following sections, this testimony describes a project
involving one of these applications, HTS cable, in somewhat more
detail. It also describes the application of low-temperature
superconductors in energy storage coils used in combination with HTS
power leads. This application has an established commercial record in
industrial power quality applications, and will soon be employed to
enhance transmission reliability.
Superconducting Cable
The most visible customer demonstration of HTS technology to date
will occur in a substation of the Detroit Edison Company one year from
now. In this project, Pirelli Cables and Systems N.A. of Columbia, SC
will build and install a three-phase, 24-kilovolt, 2400-ampere AC cable
system in the Frisbie Station, a 1930s-era facility located in the
inner city of Detroit. The neighborhood surrounding Frisbie is slated
to undergo a series of revitalization projects over the next few years,
including new hotels, casinos and two professional sports stadiums. The
Pirelli cables will use HTS wire supplied by American Superconductor
and cooling systems supplied by Lotepro Corporation. Working with
Detroit Edison personnel, Pirelli will remove nine 400 foot copper
cables, containing over 18,000 pounds of copper, that currently run
through a conduit bank underneath the station. In their place, three
high-capacity HTS cables containing an estimated 250 pounds of
superconductor wire will be installed in the existing conduit bank,
providing equivalent capacity but leaving six additional conduits
available for future expansion or alternative uses.
The Frisbie project will illustrate an ``urban retrofit'' concept
originated by EPRI (formerly known as the Electric Power Research
Institute). Under this concept, it is envisioned that urban utilities
could replace conventional copper cables with high-capacity HTS cables
in much the same way that telecommunications companies have replaced
copper with fiber-optic cables over the past decade, literally
multiplying the capacity of their existing infrastructure. This
strategy is expected to be particularly useful for utilities serving
older, densely-settled areas where underground construction is
especially complicated, as it would enable utilities to avoid the
costs, delays and environmental intrusions associated with excavation
in city streets. These factors often dominate the total cost of a cable
installation. Furthermore, the use of high-capacity HTS cables may
eliminate the need to upgrade system voltages, enabling utilities to
avoid the high costs associated with replacing and re-rating
transformers.
In the future, HTS cable could be applied more broadly as further
improvements in performance and reductions in cost take place.
Deployment of HTS cable is likely to begin in high-value situations
such as congested urban centers, spreading later to suburban areas
where community pressure mandates the underground placement of
transmission lines, and eventually to longer, regional transmission
facilities. An attribute peculiar to superconductors allows them to
carry twice the capacity, with zero electrical loss, in a DC mode of
operation as compared to AC. Because HTS cables will be able to carry
much larger currents at lower voltages, superconductivity may
facilitate the concept of point-to-point DC electricity ``pipelines.''
Indeed, older, abandoned gas and oil pipelines might serve as ideal
conduits for projecting large amounts of electricity directly into
congested urban pockets using superconductors.
Superconducting Magnetic Energy Storage
I would now like to turn to an application for superconductors that
is a proven commercial technology. One of the most intriguing
attributes of superconductors is their ability to store electricity
indefinitely, without degradation. A Superconducting Magnetic Energy
Storage (SMES) system stores a powerful current in a supercooled
electromagnet. This current flows around a coil of wire endlessly with
no electrical loss. It can be instantly reinjected into an electrical
circuit, for example, to boost voltage in the event of a line
disturbance. Commercially available SMES systems sold by American
Superconductor store nearly 3 megajoules (megawatt-seconds) of energy,
and have amassed a track record of over 30 unit-years of successful
operation in a variety of industrial customer settings. Packaged in a
trailer for mobility, these devices employ conventional low-temperature
helium-cooled magnets. Recent installations also incorporate HTS
current leads to carry power in and out of the magnet, an advance that
has sharply improved the efficiency and cut the cost of the system.
To date, these systems have been used to provide power quality
protection to large industrial customers and other large users of
electricity with processes that are highly sensitive to voltage
disturbances. The need for such a solution has intensified over the
past decade as conventional manufacturing technology has been
supplanted by modern, microprocessor-controlled equipment. The trend
toward high technology in manufacturing has resulted in higher
industrial productivity and improved process control. However, because
of the low tolerance of microprocessor chips for voltage deviations, it
has also made many large manufacturers more susceptible to disruptions
in their operations resulting from even very brief voltage
disturbances. The cost of such disruptions to U.S. industry, in terms
of lost productivity, idled labor, damaged equipment, cleanup and other
costs, has been estimated at more than $10 billion per year. While many
industrial backup power systems are premised on the need to protect
against a long-term blackout, the fact is that most voltage
disturbances on the North American grid are very short-term in nature--
usually less than 0.5 seconds, and almost always less than two seconds.
SMES technology, making use of the highest-density form of power
storage in existence, represents a new kind of power quality solution
to enable large industrial customers to maintain continuous operations.
Distributed SMES: Using Superconductors to Solve Network Problems
Recognizing the building concern about electric system reliability,
we have developed several promising new applications based on proven
SMES technology to address the growing need to maintain and improve
utility-level grid stability in the face of changes being brought on by
utility deregulation and competition. We anticipate the first
commercial sales of these new superconductor applications in the near
future.
To understand the important role that superconducting storage can
play, it is important to recognize that the transmission capacity of
many utility grids is limited, not by total steady-state flow capacity
(which is subject to thermal limitations), but rather by their ability
to handle very short, so-called ``transient'' events. Sudden changes in
flow patterns--caused by transmission facility outages, as well as
sudden shifts in loads and power plant operations--can pose the risk of
voltage instability, causing component failures and the threat of
cascading outages. To minimize this risk, accepted utility practice
calls for actions to avoid exposure to contingencies that can result in
voltage instability. Such actions, which can include generating plant
redispatch or forgoing the sale of transmission service, can impose a
substantial economic penalty. New technologies to relieve these voltage
stability limitations could increase the Available Transfer Capability
(ATC) on a given system. In this way, these new technologies could
postpone the need for new investments in transmission facilities, and
offer utilities and their customers a powerful and economical way to
leverage the benefits of competition among power generators.
The key to this new application for SMES technology involves the
strategic placement of multiple units at critical locations on a grid,
in a configuration known as ``Distributed SMES'' or ``D-SMES.'' During
transient events that might otherwise cause voltage instability, each
individual unit responds by injecting large amounts of real and
reactive power, instantaneously, at its particular location. These
distributed, instantaneous injections of real and reactive power offset
the increased system losses and the corresponding low voltage caused by
the altered flow path. By providing a critical boost to the system both
during the fault and following clearing of the fault, they allow the
transmission grid to avoid a voltage instability situation. The
combination of attributes represented by D-SMES--large quantities of
real and reactive power, instantaneously available at many distributed
locations--is unique, and enables a solution to the problem of grid
stabilization that is both faster, more accurate and less expensive
than conventional alternatives.
Legislative Recommendations
While I believe that advances in superconductivity are of
fundamental importance, I do not come before the Committee to advocate
specific legislation to promote any particular technology. These
superconducting technologies are far from the only ones being developed
to address the challenge of grid reliability; advances in power
electronics, metering and communications, and other areas also offer
the promise of improved electric system performance. Distributed
generation, as well, can be counted on to make a significant
contribution to alleviating demands on the grid. However, it would be
an error to assume that distributed generation by itself will solve the
problems of system-level reliability. Regardless of the future growth
of distributed generation, our urbanized society will require a robust
grid to ensure universal access to reliable and economical power, based
on diverse energy sources, with acceptable local and regional impacts
on the environment.
The best way to strengthen and ensure the reliability of the grid
is not to prescribe particular technology paths, but to remove
commercialization obstacles to the technologies competing to meet this
need. Technology-neutral legislation aimed at promoting reinvestment in
the grid can harness market forces, allowing the market to select the
mix of winning technologies and strategies. Accordingly, I ask the
Committee to consider the following legislative recommendations:
1. Initiation of power quality standards. Traditionally viewed as
distinct issues, the problems of grid-level reliability and
distribution-level power quality are converging. This has resulted from
the ``siliconization'' of energy loads and the transition to
competitive retail market frameworks. Clear, equitable and enforceable
power quality standards, appropriate to local needs and conditions,
will cure what could be considered a form of market failure. They will
create a market-based framework for new services and investment in
technology solutions to improve the quality of grid power.
In the absence of clear standards, power quality problems lead to
finger-pointing between utilities, customers and equipment
manufacturers, but no satisfactory solutions. Utilities should not be
burdened with unreasonable standards where most of their customers can
tolerate existing levels of system power quality. Existing power
quality conditioning equipment such as SMES, flywheels, UPS systems and
distributed generation make it economically feasible to offer
differentiated levels of power quality to different customers.
Clear and unambiguous power quality standards would have the effect
of defining and explicitly limiting utilities' service obligations. For
those customers who have more demanding power quality requirements than
are prescribed, the standard will remove ambiguity and place on the
customer the obligation to obtain the services or technology solution
to protect its electric load. In turn, standards would foster a market
environment in which providers of these services and technologies
compete to provide them at least cost to end users. Bringing market
discipline to bear on the problem of power quality would ensure that
the total cost of utility system upgrades, customer expenditures and
power quality-related economic losses is minimized.
2. Incentives for low-environmental-impact transmission. One of the
most difficult and intractable obstacles to expanding the electric
power grid over the past ten to fifteen years has been the political
and social infeasibility of siting new overhead transmission lines.
Such projects have provoked community opposition because of concerns
among landowners about the property value, visual and health and safety
impacts of new construction. While American consumers generally support
competition and choice to power markets, we have become more insistent
on maintaining and improving the quality of our environment, and it is
likely that proposals to build major new lines to serve regional, as
opposed to local, needs will continue to encounter stiff community
opposition.
New technology solutions such as HTS cable could make an enormous
difference in meeting the challenge of expanding transmission. HTS
cables will be compact and thermally independent, allowing them to be
placed in unobtrusive underground pipes and obviating the need for
large rights-of-way. Advanced cable designs will provide shielding from
the effects of EMF. It is of great significance that, while electric
transmision line construction has slowed drastically, over the last
twenty years, some 500,000 miles of fiber optic cable has been laid in
the United States without arousing public opposition, largely because
it has been installed in compact, unobtrusive underground rights of
way.
Accordingly, the Congress should consider legislative mechanisms to
facilitate the siting of new transmission facilities with favorable
environmental impacts. For example, the Congress could establish a
streamlined, federal siting process for new electric transmission lines
carrying power in interstate commerce, where the environmental impacts
of the project fall below a specified threshhold. To attract financial
investment in such facilities, the Congress could also consider
exempting these projects from conventional forms of rate regulation.
3. Incentives for additional demonstration projects illustrating
advanced technologies. Actual demonstration projects, such as the HTS
cable project in Detroit, will play a crucial role in establishing the
reliability of new technologies for use in electric utility systems.
However, utilities cannot be expected to embrace a new technology on
the strength of a single demonstration in a single operating mode.
Multiple trials will be required in different operating modes and
voltage levels, accumulating to many operating years of experience.
Ultimate customers--the utility companies, competitive power generators
or manufacturers who will incorporate HTS equipment into their
operations--must develop familiarity with the technology and see how it
will impact the operation of their systems. Only through field trials
such as the Detroit Edison cable project will the operational benefits
of these new systems, as well as the demands imposed by them, be fully
understood.
Successful commercialization of these new technologies will yield a
tremendous payoff to the nation in the form of improved electric system
reliability and a commercial leadership position for America.
Therefore, it is appropriate for the Congress to consider tax or other
financial incentives to encourage the deployment of a range of new
technologies that enhance grid reliability.
Conclusion
As this hearing evidences, there is tremendous concern about the
potential for competition and market forces to undermine the
reliability of the electric system. In fact, the marketplace response
to electric industry restructuring suggests equally that there is
tremendous potential to enhance electric system reliability with a
range of new technologies offered by new players. Among these, I happen
to believe that superconductivity is of fundamental importance. The
development cycles for silicon chips and optical fibers have shown that
innovations based on new materials, while they can take longer to
achieve their impact in the form of commercially available products,
can have the most pervasive economic and social effects in the long
run. We expect superconductor-based technology to follow a course
similar to these other innovations as the 21st century unfolds.
For some time, electric industry restructuring initiatives have
focused predominately on extracting the benefits of competition in the
generating sector. The wires segment of the business has been perceived
as being somehow less susceptible to innovation. Increasingly, however,
as price spikes recur and occasional outages expose the weaknesses of
traditional technology, the electric industry is recognizing the need
to expand its ability to deal with broader and more variable power
flows. If the promise of a truly continental power market is to be
realized, an ``electricity superhighway'' featuring high-capacity,
environmentally unobtrusive transmission cables and other ancillary
equipment will be required. Not unlike optical fiber, superconductor-
based technologies may be the key enabler to allow this forecasted
revolution to occur.
Thank you for the opportunity to present this testimony.
Mr. Stearns. Thank you. Mr. Joseph Iannucci.
STATEMENT OF JOSEPH IANNUCCI
Mr. Iannucci. I am Joe Iannucci from California. I am the
principal of Distributed Utility Associates, a small consulting
firm specializing in distributed generation. We have clients
around the world, small and large utilities, technology
development companies, research organizations, various
regulatory agencies. And occasionally I am introduced as the
father of distributed generation. I am not so sure about that,
but perhaps if there were a paternity suit, I might be
convicted. I am not sure.
I have been asked to take you outside of the box and show
you my world of distributed resources, small generation and
storage, integrated seamlessly into the utility system of the
future. In fact, the SMES unit mentioned just before would be
an example of one of those units.
Let me define a distributed utility for you. It is really
very simple. It is just the existing utility system with little
bits of generation in storage out in the distribution system.
And I will explain why they are in the distribution system in a
moment.
But this very simple definition belies the fact that it has
very profound implications. And we will come back to those
implications. It is not a technology play. I don't need any new
technologies. I would be very happy to have my friend's
superconducting magnetic energy storage system, but I could
just as easily use reciprocating engines, small gas turbines,
anything that is small, clean enough and able to be sited in
the distribution step.
It is really a value proposition. It is a new way of
looking at the utility of the future and trying to make the
most of what we have. It is putting things exactly where they
should be placed for good reasons, either to take up peaks or
take advantage of combined heat and power applications. There
are many reasons. And it is based not on building larger and
larger power plants--we have wonderful large power plants and
large transmission systems--but rather based on the economies
of mass production. It is a completely different way of looking
at the utility business. It is from the outside in rather than
from the inside out.
Perhaps an analogy to the computer industry would be
helpful in explaining why this might have some profound
implication. What makes more sense a large mainframe computer
or a thousand little PCs? That is kind of a silly question.
They each have their uses. If you need to do some massive
calculations, you really want to have a mainframe computer.
They are wonderful, fast dollars per computation. The speed is
incredibly fast, and it is the way you should be doing massive
computations. However, if you are looking for maybe a little
bit more flexibility, more modular investment, ways to tailor
the computations to exactly what needs to be done, these seem
to have taken over this market. Yes, there are still
mainframes. This is the analogy I would like to draw to
distributed resources. I love the central station power
systems. I love the transmission systems. It gives us very low
bulk power cost, but I believe it should be supplemented with
distributed resources, distributed generation and storage. Much
the same way the PCs have revolutionized our computer industry,
small distributed resources may do the same thing to our
utility business.
Let me explain now what distributed generation and storage
has to do with your topic today, reliability and transmission.
First of all, let us look at the investments that utilities
have made historically and recently in generation,
transmission, and distribution. Where has this money gone?
Sure, there has been a lot of money put into generation. There
has been some money been put into transmission. But the largest
single investment is in distribution.
What does that mean for distributed resources? That means
that if you put a distributed resource into the distribution
system, you have the possibility of getting three benefits for
the price of one. First of all, of course, you can use that as
a central station asset. You get a signal from the central
station asking you to put that power plant on. You can do that.
You can also reduce the transmission line loadings, maybe get
more congestion reductions, maybe improved reliability of the
transmission system, and also you can help yourself in the
distribution side. You can save investments in the wires. Only
if you put it in the distribution system, can you get all three
of those benefits. The benefits flow uphill, not downhill.
So what would you do from the transmission point of view?
You could put in more distributed resources and perhaps avoid a
little bit more transmission investments.
And this is true anywhere. This isn't just specific to
California where I live; but in the utilities that I work with
around the world, South Africa, for instance, we see the very
same problems, the very same issues where putting things in at
the distribution level help the most. Reliability the same way.
Most of our reliability problems come from the distribution
side, not from generation or transmission. And finally, there
is also a competitive force for distributed resources.
Customers can use distributed resources themselves to solve
their own power quality problems, to manage their own bills, to
make all of their energy, and it can also serve as a ceiling
for rates in a competitive environment.
If I can just give a few suggestions, specific suggestions
as to what might be done. I would really like this committee to
consider the role and potential importance of distributed power
in the electric utility restructuring legislation that you will
be seeing this year. I know it is an unusual request to look
from the outside in, but the customers are out there waiting
for you to represent them and to make sure the distributed
resources have a fair place at the table in this legislation.
I also would like emission rules that are written primarily
from the standpoint of large power plants to be reconsidered
with regard to small power plants. We can take advantage of the
increased efficiencies of distributed power putting it in the
distribution system, and we can also encourage States to allow
full and open-market competition, work with the IEEE in
developing their interconnection standards and work toward a
DOE line item on distributed utility to really figure out some
of these problems.
[The prepared statement of Joseph Iannucci follows:]
Prepared Statement of Joseph Iannucci, Principal, Distributed Utility
Associates
Mr. Chairman and members of the Technology and Energy and Power
Subcommittee, I am Joseph Iannucci the principal of Distributed Utility
Associates, a consulting firm specializing in distributed power. Our
clients include many utilities and technology vendors, national
research organizations and regulatory agencies.
Thank you for the opportunity to testify today on reliability and
transmission and my views on why distributed power may be critically
important to these two issues. In the interest of time, I will
summarize my remarks and respectfully request that the full text of the
testimony be submitted for the record.
I have come before this subcommittee to share a Distributed Utility
vision of the future for the national electric supply and delivery
system. Small electric generation sources in the utility delivery
system should be considered as an alternative to traditional
transmission and distribution investments, to improve customer service
and reliability. It is my opinion that the opportunities which the
Distributed Utility concept affords must be included in the electric
utility industry restructuring debate and that new policies may be
required to fairly evaluate distributed power.
The Distributed Utility concept is the beneficial inclusion of
small (from kilowatts up to ten megawatts in capacity) generation and
storage installations into the electric distribution system. These
units may be owned and operated by utilities or by customers, but
generally can increase reliability, reduce costs, increase efficiency
and reduce emissions. By coordinating the operation of these
distributed power units and the central power plants, we can reduce
utility expenditures and increase value to customers. I have attached a
brief vision paper on a Distributed Utility future which details this
concept.
Perhaps an analogy to the distributed utility concept from the
computer world would help. Which is more valuable, a main frame
computer or a thousand desktop PCs? The answer of course depends on the
task at hand. If massive calculations are involved the mainframe wins
hands-down; but if personal convenience, modular investments,
flexibility and reliability are desired, the multiple desktop units are
hard to beat. Distributed resources pose the same challenge to
utilities that personal computers presented to the computer industry
over a decade ago.
Small computers aren't less expensive than mainframes (per
computing unit), but they do allow more of us to use our own computers
and be more productive. Similarly, by using small power sources
precisely where and when needed, both customers and utilities can
potentially reduce their costs. Utilities can use distributed
generation to make electricity while simultaneously avoiding or
deferring costly transmission and distribution equipment upgrades.
Customers benefit from more reliable service, reduced bills and the
possibility of meeting their combined heat and power needs.
Completing the computing analogy, large and small power plants can
complement each other. The utility of the future could be mostly large
power plants remote from the consumers, supplemented by small local
power supplied for distribution system reinforcement, added
reliability, and additional customer services.
Over the last few years, there has been tremendous progress in the
small modular power technologies. Small generation, modular storage
units, and targeted demand management (here collectively called
distributed resources) have caught the attention of the utility
industry. Small gas turbines, improved reciprocating engines, fuel
cells, photovoltaics, wind turbines, batteries, and composite flywheels
have started down the path to commercialization. Even commonplace
standby generators at customer sites are receiving a second look as
cost effective sources of power. Just as important are the recent
advances in the facilitating technologies needed to make the small
generation units integrate seamlessly into utility systems. Smart
controllers, flexible dispatch algorithms, improved interconnection
techniques, expanded use of sensors and communications will each in
their own way contribute to the accelerated inclusion of distributed
resources into our electric delivery systems.
Packaged with the existing grid, distributed power can create more
reliable electric service and meet increasing customer demands for high
quality uninterruptible power, so supermarkets and other facilities can
continue operating during severe weather and other unforeseen
circumstances.
Technology advances, environmental concerns, deregulation, and
increased customer choice all seem to be pointing toward a future where
small generation sources could become an important part of the utility
of the future.
But for all of the promise and potential, distributed power has yet
to find its way into substantially common practice. Several barriers
remain before the concept will become widespread. Today's rules were
drafted with yesterday's technologies and monopoly utility system in
mind.
Advocates of distributed power see the major impediments to be:
Reliability is currently defined from the utilities'
standpoint rather than from the customers' view
Lack of uniform and consistent utility interconnection rules
and requirements
Emissions policies developed for large central power plants,
not taking into account credits for combined heat and power or
transmission and distribution inefficiency
Equitable standby and exit fees and business mechanisms for
evaluating and sharing (between utilities and customers) the
``wires'' benefits and responsibilities of distributed
generation.
It is time to shape federal regulations and policies to include the
likelihood of widespread distributed power. The best Federal role at
this point is to help adjust yesterday's rules for today's competitive
marketplace and distributed technologies. While many of these issues
are at the state level, the Federal government can help provide
consistency on a number of points:
1. Consider the role and potential importance of distributed power in
electric utility industry restructuring legislation;
distributed generation may be an important market power issue
since it sets a logical ceiling for rates; exit charges,
standby fees, and stranded cost recovery should be designed to
neither unfairly penalize customers wishing to use distributed
resources, nor leave utilities with unrecoverable investments
already made on their behalf.
2. Support emissions rules which encourage efficient use of fossil
fuels, for instance by rewarding net emission reductions from
combined heat and power and reduced line losses
3. Encourage states to allow full and open market competition in
distributed resources, including both customer and utility
ownership and operation
4. Support IEEE in developing and establishing safe, equitable and
effective electrical interconnection rules
5. Work toward a DOE line item for Distributed Utility research,
development and demonstration; an annual budget of $10,000,000
could do much to explore the full value of the concept, and
accelerate the distributed resources market.
6. Encourage, and support if needed, field tests of substantial
distributed power grid penetration to allow seamless
integration of distributed generation and storage assets
7. Consider using a reliability definition which represents the
customers' point of view, not the grid's
8. Consider holding more extensive hearings on distributed generation
to better evaluate its potential importance
The Distributed Utility Vision
Joseph Iannucci, Distributed Utility Associates, April 22, 1999
The vision of a distributed utility future incorporates distributed
resources to optimize customer needs, large power plants, and delivery
of our electricity. This approach would take advantage of the
locational differences in the cost of delivering service, use of local
fuels, and customer energy efficiency opportunities. Many distributed
generation and storage technologies are capable of playing a major
role: fuel cells, reciprocating engines, small and micro-turbines,
modular storage and renewables of all types. Natural gas is likely to
be the leading fuel due to its low cost, wide availability and minimal
emissions.
Distributed power systems can and will be put in by customers (or
by Energy Service Companies for customers), and by utilities for a wide
range of site-specific reasons and benefits. While utilities have much
to gain by taking the lead in implementing distributed generation and
storage, customers are even more motivated (since their rates include
substantial utility imposed electricity delivery costs) and less
encumbered by regulation and other institutional barriers.
Distributed power will change the way electric power systems will
be designed and operated. In the traditional utility system electric
power is generated in/purchased from large central stations. Power
flows via multiple transmission lines to the distribution network and
then to the load. In contrast, the distributed utility concept
supplements the large power plants with many small resources located
throughout the entire distribution system serving customer loads.
Distributed power economics are driven more by their value, not
merely by producing power at the lowest cost per kilowatt-hour.
Electric utility generation planning and operation in the past sought
to minimize the cost of electricity production, with minimal attention
to the substantial costs of delivery and little regard to the
additional benefits which on-site generation and storage can provide
customers. When the entire investment in generation plus wires, plus
customer benefits are included, the best solution for all involved may
not be the one with the lowest cost per kWh, but rather the one which
minimizes all costs, including wires upgrades. A prime example would be
dispatch of a customer's existing standby generators; the energy costs
of those units are very high, yet their occasional use a few hours per
year is frequently the lowest cost way for a utility to provide
incremental supply.
The ultimate vision of a distributed power future would include
significant levels (for instance 5 to 30% of total capacity) of
distributed generation, 5 to 10% of distributed storage, and 15 to 20 %
combined heat and power; these distributed units would follow the local
load swings as much as possible, leaving the baseload demand for
central plants to satisfy. The remainder of the energy is made by
clean, efficient, central station plants operating near their optimal
design points. The central and distributed portions are designed to be
complementary to each other in terms of dispatchability and reliability
and are operated in a coordinated manner via contractual arrangements
between all parties. The flexibility and portability of distributed
power technologies will supplement the low energy costs and stable
operational characteristics of our central power plants.
The markets for distributed power will be significant domestically
and for export markets especially to areas with weak infrastructures.
If 25% of all load growth in the US were distributed power,
costing an average of 500$/kW, about $7 billion of hardware
would be installed annually; in addition there would be fuel
supply contracts, ongoing hardware maintenance service
contracts, additional customer services, and increased
research, development and demonstration efforts each year;
distributed power could easily be a $10 billion per year
business in the US alone.
If only 1% of all existing industrial and commercial loads
were to convert annually to distributed power at similar
capital costs, this would be a $2 billion per year market.
Technologies are also being developed to address residential
markets.
On a global basis the need for reliable modular power is much
greater than in the US; some estimates for economically viable
markets outside of the US are as high as 75 GW per year. If
exports by US firms are one fourth of this market, this would
represent another $10 billion per year.
Each of these markets could be accelerated by decreasing
reliability of central supply, accelerated deregulation, lower
cost distributed power technologies, concerns for global
warming, etc.
The joint optimization and coordinated operation of the generation
and delivery of energy benefits its many stakeholders; first and
foremost it will provide lower energy costs to consumers. Performance
based regulation will reward wires utilities with increased utilization
of their transmission and distribution assets. This asset utilization
can be translated into lower costs to consumers and higher profits to
shareholders. When performance based ratemaking is applied to the local
distribution companies it creates a real incentive for economic
investment in infrastructure, and allows the distributed power option
to be added to the tools of the distribution planner. A broad range of
Energy Service Companies will have significant presence in the
distributed generation and storage market including forward thinking
gas companies wanting to diversify and sell more gas. Society benefits
from the more efficient delivery and use of energy.
Many of the major Energy Service Companies players are the
unregulated side of utilities. Much of the distributed power
opportunities will be catalyzed by the Energy Service Companies through
customers rather than by the regulated utilities. However, with
appropriate regulation in place utilities will have a revenue
generating mechanism to take advantage of the significant opportunities
of asset utilization obtainable with distributed generation and storage
technologies.
The key to siting distributed power is location, location,
location. This means taking advantage of the added local value of
distributed generation and storage, for example deferring transmission
and distribution investments while relieving local and systemwide
demand peaks at the least cost. The concept also includes use of local
fuels (including renewables), providing remote power, pursuing combined
heat and power opportunities, and site-specific reliability and power
quality improvements.
The vision of the distributed utility includes many stakeholders,
technologies, and fuels because they each have their place either
economically or environmentally. Energy Service Companies and electric
delivery companies, gas companies and technologies vendors should all
participate because the system can not be optimized by any of them
singularly. They each need information or services from the others. The
distributed fossil technologies and renewables communities can be
natural allies in jointly working towards simplifying interconnection
rules, changing utility standard practices, net metering, minimizing
standby charges, avoiding transition charges, etc.
Mr. Stearns. Thank you. Dr. Matthew Cordaro.
STATEMENT OF MATTHEW CORDARO
Mr. Cordaro. Thank you. Good afternoon. I really appreciate
this opportunity to address you. I am president and chief
executive officer of Nashville Electric Service, the tenth
largest public system in the country, and I am here this
morning on behalf of the large Public Power Council, which is
an association of 21 of the largest State and locally owned
retail and wholesale electric power systems in the U.S. LPPC
members as a whole own and operate over 44,000 megawatts of
generation, or about 11 percent of the Nation's capacity and
own and operate in excess of 24,000 circuit miles of
transmission lines.
The LPPC, since its inception, have focused on transmission
policy as a critical mission for its members. We were the first
group of transmission owning utilities to support open
transmission access in debates preceding the passage of the
Energy Policy Act of 1992, and 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.
We believe that as competition unfolds, any transmission
model must meet the needs of our customers, provide a reliable
and cost effective delivery system, and provide for open access
to facilitate wholesale competition. If we are going to create
a transmission model that will achieve those goals, we must
adhere to a few basic guidelines as we move through the
legislative and regulatory process.
First, any proposal for the future of the system must have
as its foundation ensuring that there will continue to be a
high degree of reliability of the power grid. We support the
development of an independent self-regulating entity which will
have the ability to set and enforce mandatory reliable
standards and we favor the adoption by Congress of the
consensus proposal on reliability.
The transmission system must provide open access to
competitive generation in order to facilitate cost-effective
customer access to a competitive energy supply, although this
must be accomplished in a manner that does not increase
transmission costs to existing customers. The transmission
system must include full and fair participation by publicly
owned electric systems. LPPC member systems have a number of
characteristics that distinguish them from their private
counterparts. These include State or local charter limitations,
IRS private use restrictions among others.
In particular, the private-use provisions of the Internal
Revenue Code must be changed to allow public systems that own
transmission to fully participate in ISOs, transcos, or
whatever entities emerge. Absent such statutory action, there
will be significant gaps in these entities in many areas of the
country.
The transmission system must provide for open and
nondiscriminatory access and transparency and independence in
operation of the system. Given recent concerns, this should
become a high priority.
Transmission owners should be provided full-cost recovery
but not windfall profits. Transmission rates have historically
been cost based. Any transmission proposal must continue to
encompass this basic concept and avoid the potential for
windfall incentives as a result of asset churning or market
base pricing.
Transmission policy should provide for and encourage
regional solutions, not nationally imposed mandates. The
Federal Government FERC and State governments should all work
to provide the tools and environment for the appropriate
regional solutions to emerge, which capture the uniqueness of
the physical, political, and economic circumstances of any
region.
Now to say a little bit about jurisdictional issues.
Addressing the question of whether every transmission owner
needs to be regulated in precisely the same manner, we believe
the answer is no, and let me explain why. Public owners of
transmission are not currently subject to full rate regulation
under the Federal Power Act. However, most of us are subject to
the open-access provisions of the Energy Policy Act of 1992. In
fact, the majority of our members have adopted open-access
tariffs and voluntarily submitted such tariffs to FERC.
The goal of the Energy Policy Act in FERC Order No. 888 is
to ensure that transmission owners provide access to their
systems on the same basis as they provide it to themselves, the
principle of comparability. I am not aware of any incidence
where an LPPC member has been charged with an unfair or
discriminatory denial of access to its transmission system.
If additional Federal regulation of State and locally owned
transmission is thought to be necessary, we recommend that
Congress use the approach adopted by FERC in the Santee Cooper
case. As such, public systems should file open-access tariffs
with FERC, and FERC should review such tariffs to ensure that
they meet the same standards of open access and comparability
applicable to all.
As owners of significant transmission assets, we are ready
to work with your committee and the Congress to develop the
necessary legislation to ensure reliable and vibrant
transmission network operated in accordance with the principles
I describe today.
I thank you for the opportunity to participate in today's
hearing. I would be happy to answer any questions that you may
have.
[The prepared statement of Matthew Cordaro follows:]
Prepared Statement of Matthew Cordaro, President and CEO, Nashville
Electric Service On Behalf of The Large Public Power Council
Good morning. My name is Matthew Cordaro, and I am the President
and Chief Executive Officer of the Nashville Electric Service. I am
here this morning on behalf of the Large Public Power Council
(``LPPC''). I am pleased to have this opportunity to comment on a
matter of critical importance to our customers, the future of the
transmission system as we move into a competitive environment.
Introduction
The Large Public Power Council (the ``LPPC'') is an association of
21 of the largest governmentally owned retail and wholesale electric
power systems in the country. LPPC members directly serve approximately
6,000,000 retail customers and own and operate over 44,000 megawatts of
generation, or about 11% of the nation's capacity. In addition, we own
and operate in excess of 24,000 circuit miles of transmission lines.
Our members are located throughout the country, including my own state
of Tennessee as well as California, New York, Texas, Washington,
Florida, Georgia, Nebraska, and South Carolina.
The LPPC has since its inception focused on transmission policy as
a critical issue for its members. The LPPC was the first group of
transmission owning utilities which expressed 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 believes that any model for the operation and management
of the nation's transmission system must permit us to:
meet the needs of our customers;
provide a reliable and cost-effective delivery system; and
provide for open access to facilitate wholesale competition.
In considering these three basic goals, the LPPC has developed
criteria which need to guide us through the legislative and regulatory
process as competition in the industry unfolds.
Transmission policy must ensure the continued high degree of
reliability of the power grid. The continued reliability of the
interconnected grid is of paramount importance. Any proposal
for the future of the system must place this principle at its
foundation. We support the development of an independent, self-
regulating entity which will have the ability to set and
enforce mandatory reliability standards. Through our broader
trade association, the American Public Power Association we
have participated in the process which has developed the
consensus reliability proposal, and we favor its adoption by
Congress.
The transmission system must facilitate cost effective
customer access to a competitive energy supply. The LPPC has
historically supported the principle of open access
transmission, since it benefits customers. The LPPC supports a
competitive generation market and believes open access is
necessary to facilitate such competition. This is, however, not
necessarily the same as supporting an ubiquitous, liquid
generation market with a robust transmission system, which may
increase transmission costs to existing customers without
benefiting them through lower power costs.
The transmission system should include full and fair
participation by publicly owned electric systems. LPPC member
systems have a number of key legal characteristics that
distinguish them from their private counterparts: state or
local charter limitations, IRS private use restrictions,
prohibition from participating in stock owning entities, and
various local oversight bodies. It is imperative that any
participation of publicly owned systems. In particular, Mr.
Chairman the private use provisions of the Internal Revenue
Code must be changed to allow public systems to participate
fully in ISOs, transcos or whatever entity emerges. Absent such
statutory action, there will be significant gaps in these
entities in many areas of the country.
The transmission system must provide for open and non-
discriminatory access, and transparency of operation of the
system. FERC's current policies on ISO formation are designed
to accomplish two primary objectives: the elimination of
discrimination in transmission use and the promotion of more
economic wholesale transactions through the elimination of
pancaking of rates. Orders 888 and 889 address discrimination
in transmission use but do not require unbundling. The FERC
must currently rely on transmission users to initiate and
prosecute expensive challenges to incumbent transmission owners
in order to monitor problems. Given the recent concerns over
potential misuse of the transmission system, the independence
and transparency of the transmission system operations and the
need to separate generation interests should become a higher
priority.
Transmission Policy must provide transmission owners with full
cost recovery while avoiding windfall profits. Transmission
rates have historically been regulated and cost based. Any
transmission proposal must continue to encompass these
concepts, which become even more important in an environment
that must deal economically with congestion and the expansion
of the system. Any proposal that allows for or encourages
potential ``windfall'' incentives based on concepts such as
market pricing should be discouraged.
Transmission policy should provide for and encourage regional
solutions, not nationally imposed mandates. The LPPC opposes
any nationally mandated solution to transmission system issues
which does not accommodate local and regional differences and
solutions. The federal government, FERC, and state governments
should all work to provide the tools and environment for the
appropriate regional solutions to emerge which capture the
uniqueness of the physical, political, and economic
circumstances of any given region.
Jurisdictional Issues
LPPC members own and operate the bulk of the transmission that is
owned by state and locally owned public power systems in this country.
While the Federal Power Act exempts public power from the economic
regulation provided for in Part II for profit making entities, most of
us are subject to the open access provisions of the Energy Policy Act
of 1992 (EPACT). In fact, the majority of our members have gone beyond
that and have adopted open access tariffs and voluntarily submitted
such tariffs to FERC. Such filings assure that the access provided for
in our tariffs meets the standards of comparability and reciprocity
that FERC requires.
I am not aware of any instance where an LPPC member has been
charged with an unfair or discriminatory denial of access to its
transmission system. Notwithstanding that, some have said that our non
profit systems need to be subject to the same type of economic
regulation by FERC as profit making transmission owners. This is both
unnecessary and unwise. It calls for an added layer of regulation where
none is needed, and it fails to recognize the fundamental difference
between a nonprofit government owned entity whose rates are set by
elected officials and a profit making entity whose rates are set by
private individuals.
If additional federal regulation of state and locally owned
transmission is thought to be necessary, we strongly recommend
codification of the approach used by FERC in the Santee Cooper case and
with other public power open access filings. FERC should have the
authority to review public power open access tariffs for the purpose of
assuring they meet the test of open access and comparability, but
should not require such public entities to require the same FERC
approval process for transmission rates to which profit making entities
are subject.
Conclusion
The members of the Large Public Power Council and the millions of
customers we serve strongly believe that the purpose of restructuring
and deregulation of the electric utility industry must be to benefit
customers. This includes maintaining a high degree of reliability of
the interconnected grid, and optimal use and operation of the
transmission grid.
As owners of significant transmission assets, we are ready to work
with your Committee and the Congress to develop the necessary
legislation to ensure a reliable and vibrant transmission network,
operated in accordance with the principles I've described today.
I thank you for the opportunity to participate in today's hearing,
and I'd be happy to answer any questions you may have.
Mr. Stearns. Thank you, Dr. Cordaro. Let me start with you
since you just finished. Correct me if I am wrong. You had
indicated that you don't need FERC to regulate in your area; is
that correct?
Mr. Cordaro. Yes, not at variance with what the existing
situation is today. In essence, we have been voluntarily
cooperating with FERC in enacting transmission tariffs which
are comparable to the tariffs which they do have direct
jurisdiction over. And we recommend a continuation of that
process.
Mr. Stearns. Do you want Congress to act to open the TBA
transmission systems so you have access to other wholesale
power suppliers?
Mr. Cordaro. Yes.
Mr. Stearns. Mr. Nevius, do you believe the proposed
reliability legislation represents a dramatic expansion of
FERC's authority?
Mr. Nevius. No.
Mr. Stearns. I am asking questions that are easy to answer
for you folks here.
Mr. McCoy, some favor creation of transcos rather than
ISOs. However, there are different kinds of transmission
owners: Federal agencies, State agencies, municipal utilities,
rural electric cooperatives, and IOUs. Can transcos be formed
with these different kinds of owners? Do you know of examples
of entities with that kind of mixed ownership? How long would
it take to form a transco with mixed ownership?
Mr. McCoy. Our belief is you can form a transco with mixed
ownership. It would take some financial and business
engineering, perhaps the formation of a limited liability
company, for the obvious reason that public authorities can't
divest assets, in effect. But there are structures that can
combine investor-owned assets and public power assets under a
single governance structure operated as a coherent unit.
Nothing, obviously, has been filed along those lines; but I
am aware of discussions that have involved utilities, IOUs in
the upper Midwest and at least one large public power entity
toward that end.
Mr. Stearns. How could the Federal Government own a part of
a private company?
Mr. McCoy. I am not a tax expert or an expert in financial
engineering. I am not aware that the Federal Government can own
a part of a private company. But you can set up a limited
liability company----
Mr. Stearns. If you take Bonneville, how could they join a
transco?
Mr. McCoy. They can join a transco by pledging their assets
to be managed by a transco in turn for having a say in the
management of the limited-liability company.
Mr. Stearns. Mr. Szwed, your testimony suggests that FERC
should be granted more authority over everyone but yourself.
You say FERC should have more authority over TVA, BPA, PMAs,
State and municipal utilities and cooperatives; but you say
FERC should have no authority to require you to join ISOs.
Mr. Szwed. In response to that, first of all, the first
part of that in asking that all of the various transmission
providers and owners, I think it is important from our
perspective that all of those groups be placed and play, if you
will, under the same rules. And that is not quite the case
today. Step one.
In response to the second part of the question, we really
believe that as these regional transmission organizations are
forming, that it is important for the market to work toward
shaping these things and to create them in a way that is
responsive to the market. And I don't think there is one cookie
cutter approach as yet as all of these are evolving. We have
several ISOs in operation. We have various transmission
entities, be they independent transmission companies or
regional transmission organizations that are on the drawing
board coming to FERC for review and approval and so forth, that
it isn't at this point in time a one type of construct or one
approach that would be appropriate, given the nature of the
industry and competitive markets continuing to evolve.
Mr. Stearns. My time has expired. The ranking member, Mr.
Hall.
Mr. Hall. Mr. Chairman, thank you. Mr. Szwed, you might
have told him what that woman sent a note to her teacher for a
young boy starting the first grade said; he is a sensitive boy
and for her never to try to govern him in any way. If he did
anything wrong to slap the boy next to him. He said that would
frighten him. Is that what his testimony said?
I will pick up on some of your other testimony, Mr. Szwed.
You stated on page 2 the best way to improve transmission
service and with that reliability is to let market participants
devise and implement new arrangements for providing service,
new investment, new methods and new methodology. Is there a
government role; and if so, what is it or should the government
just stand by?
Mr. Szwed. I think, first of all, in terms of our belief
and certainly from First Energy's point of view, we believe in
an independent transmission company concept, a business
orientation toward transmission. And we see that as being
important because that is a vehicle whereby investment and
people and infrastructure can best be obtained. And those
independent transmission companies, in my mind, would continue
to be regulated by FERC. So from the standpoint of the role of
the regulatory authorities, those types of entities would, in
fact, still be under FERC jurisdiction.
Mr. Hall. What would the participants be doing now
differently than they are doing now that might improve
transmission service or legislation?
Mr. Szwed. Clearly in today's industry, there are a number
of activities that are under way to work toward ensuring
reliability. We have heard from Mr. Nevius about the activities
of NERC, and myself, and many of my colleagues have been
actively involved in ensuring that there are standardized
practices and rules with respect to reliability, a lot of that
going on to set the rules of the road. The second thing is
there are, and have been, as we have seen in the development of
RTOs and some of the ISOs that are in operation, that there are
entities that have been put in place, many of them coming about
from the restructured power pools and so forth. But you also
have a lot of entities that are working toward pursuing
regional organizations on a voluntary basis, and my feeling is
that will continue.
Mr. Hall. In your testimony on page 6--I am reading from
it--FERC has endorsed the functional separation of vertically
integrated electric utilities. While you don't endorse
mandatory divestiture of utility assets as a general policy,
you say the voluntary divestiture of generation assets in many
States has helped remedy a number of issues, and you show some,
including the valuation of stranded costs which is a biggie
here and concerns about the vertical market power.
You say it may be appropriate to give FERC the authority to
order partial asset divestiture as a response to the illicit
exercising of market power. Where do you draw the line there?
Ms. Utter. It is a tough question, Mr. Hall. I think the
biggest problem we have today is a number of parties have one
foot in and one foot out of the regulated environment. And the
suggestion that we have is that the limited amount of
divestiture should be used only when there is a proven event of
market power abuse. I would suggest today that a very large
percent of the number of utilities in the U.S. are not abusing
their market power and even the ones who are are doing it not
because they are evil but because they just, frankly, have an
economic incentive to do so; and where they are abusing that
economic incentive, we believe that a limited level of
divestiture ordering should be allowed for FERC to have the
authority to prevent these kind of abuses. Again, as I said
earlier in my remarks, if we don't have these kinds of problems
out of the way now, long term we are not going to have a
competitive market.
Mr. Hall. Do you think everybody can get together on what
that standard ought to be where we can translate it into some
type of legislative form?
Ms. Utter. It is awfully tough to legislate it. It is kind
of like the old saying I will know it when I see it. It is a
situation of where there are proven abuses; and I think that
should be a high standard frankly. I think there should be a
high standard; but where you have utilities that do things like
denying transmission service in favor of their own native load
requirements in violation of FERC rules, those are the kinds of
things where there should be a clear ability for FERC to
penalize them through a divestiture or order a divestiture as a
way to prevent their market power or expansion of their market
power. Again, I believe that authority should be very limited,
but it has to be effective.
Mr. Hall. Thank you.
Mr. Stearns. I thank the gentleman. The gentleman from
Oklahoma, Mr. Largent.
Mr. Largent. Thank you, Mr. Chairman. Mr. Szwed, I was
looking at your testimony and listening to your remarks this
morning. And you had five points that you made, and you began
with allowing market-driven solutions, continue to allow market
to determine certain aspects and then the last one you said was
uniform rules of transmission. It almost seems like those are
opposed to one another. You are asking for market-driven
solutions but uniform rules. The only way you get to uniform
rules is with Federal regulation, is it not?
Mr. Szwed. That was point number 5 in my testimony, in my
remarks, uniform rules for all owners of transmission. And
that, in our mind, is putting all of the players under the same
jurisdictional base where today that isn't necessarily the
case. There are different transmission providers like we have
discussed here that aren't subject to cost regulation today and
that type of thing. And in order to ensure an evenness, if you
will, across all of that, that it would be important for the
various public power authorities to perhaps be part of the same
kind of considerations that we as all of the other investor
owners are today.
Mr. Largent. But that is not really a market-driven
solution then, is it, if we are having uniform rules?
Mr. Szwed. I am looking at it from the standpoint of where
we are starting on this point. As we move and restructure into
what the transmission businesses of the future are going to be
in terms of regionalization, moving away from individual
companies, smaller companies but more to a regional expansion
of the grid today, we see the development of independent system
operators. We see the development of regional transmission
organizations and it is in those categories that I really think
that we don't have necessarily the final end-state answer of
how the ultimate structure of the business ought to be and what
size it ought to be and that type of thing. And I believe that
those types of entities need to evolve and to evolve based on
the marketplace.
Mr. Largent. In your testimony, you also talked about
expanding geographically the territory of a regional
transmission organization, and yet at this very time your
company is involved in basically splitting the State of Ohio in
half. Can you explain how that works? We are trying to get to
that era. Can't we all just get along? And then in Ohio we have
this situation where this very State of Ohio has been split in
two, one side by your company.
Mr. Szwed. I think that is an interesting question. I don't
see the issue of Ohio being split in half or there being a
problem in Ohio. I see there being an opportunity to have a
number of utilities in the State of Ohio that are participating
in an organization which we have called the Transmission
Alliance. You also have entities in Ohio that are participating
in another organization called the Midwest ISO. And in the
context of allowing voluntary organizations to form that may
have similarities but also may have differences in philosophy
on structure or governance structure or how to move to an end
state, I kind of view that as more of an opportunity to help
shape what the ultimate or end state of this business for
transmission might be. I think the ideas of both groups have
merit, but I don't view it as a problem or as a negative. I
view it as a means to how we are propelling the transition and
the restructuring of the transmission.
Mr. Largent. What we are dealing with is transmission, and
if we are going to draw the lines of these RTOs based an
ideological preferences as opposed to just natural geography,
doesn't that create a whole new set of problems?
Mr. Szwed. I am not sure that just looking at any one State
that a one-State ISO or anything like that is a natural
geography. The geography might actually be based on the markets
which might span several States or parts of several States for
which that transmission entity or that marketplace would be
best served.
So I don't think it is appropriate to necessarily say that
a State boundary is the end all in terms of where the line
should be drawn. I think as time goes on markets will develop,
markets will evolve, and the appropriate structures for
transmission, I believe, will follow along with that.
Mr. Largent. How does the State of Ohio concur with your
opinion on that?
Mr. Szwed. I think you would have to ask them.
Mr. Largent. What is your impression?
Mr. Szwed. I think there have been issues raised by various
folks in the State of Ohio; and as I said, I don't see this as
a problem. I see it as an opportunity to craft, hopefully, the
right kind of business structure for transmission in the
future.
Mr. Largent. Mr. Chairman, if I could ask one additional
question of Mr. McCoy.
Mr. Stearns. Go ahead.
Mr. Largent. Mr. McCoy, in forming transcos, how do you see
that evolving when you have got different type of transmission
owners? In other words, you have got IOUs that own
transmission. You have municipalities. You have some co-ops.
You know, then you have got the Federal Government that owns
transmission lines. How do you see them coming together and
forming a transco in that kind of alliance? Doesn't that create
some peculiar problems?
Mr. McCoy. It does create peculiar problems. As I mentioned
earlier, it will take some business engineering, but there are
some business models, especially through the use of limited
liability companies, leveraged partnerships where obviously a
public entity with assets in the public realm can't sell those
assets, offer to merge them with private assets, but they can
contribute the assets to the management pool under which a
limited liability company manages and in so doing they have a
say in how that company is run. Perhaps not as great a say as
someone who has contributed the actual assets, but certainly a
say. There are workable models, I believe, if people sit down
and put their heads to it.
Mr. Largent. Thank you, Mr. Chairman.
Mr. Stearns. The gentleman from Ohio, Mr. Sawyer.
Mr. Sawyer. Thank you, Mr. Chairman. Let me just do a
couple of follow-ups on what Mr. Largent was asking about. Mr.
Szwed, Mr. McCoy has been asked twice the question about mixed
ownership. The ownership structure that you envision is a
little bit different. How do you respond with regard to the
same kind of problems in the structure you propose?
Mr. Szwed. We have a group of utilities called the
Transmission Alliance that has, in fact, been trying to deal
with that very structure, where there are utilities that
perhaps are interested in divesting their assets and beginnings
of the formation of an independent transmission company and
there are others who perhaps would just like to see the
operations of their systems be handed over to an independent
entity. We have devised a structure with that group of
utilities to provide for that kind of a structure and an
opportunity for those who choose not to divest on day one an
opportunity to divest down the road.
The second thing is if it isn't a divestiture, perhaps
another way from a financial standpoint to allow for a public
authority or another entity to be part of that might be a
consideration of transferring control of operation of assets,
but it could be through some financial lease arrangement as
well where the assets are leased to that transmission company
entity and put under their control. I agree with Mr. McCoy.
There are financial vehicles and ways to accommodate those kind
of things as we move down the road.
Mr. Sawyer. Is it fair to say then when you talk about the
financial structure or an end state for all of this, you may
not be talking about a singularity; you may be talking about a
variety of different approaches that work depending--would work
better or less well depending on the circumstances and the
nature of the markets they seek to serve?
Mr. Szwed. I don't think any of us know exactly what that
end state is going to be, but I do think there are some
fundamentals necessary to continue to make transmission in
whatever structure that is viable and that is appropriateness
in terms of pricing and so forth and the right kind of signals
to investors to attract necessary capital for future investment
as well as people and other aspects of infrastructure to make
it a viable business and to continue to provide for reliability
and the robustness of our power markets, particularly as we
move into more and more competition.
Mr. Sawyer. You mentioned in the same breath the ability to
attract capital and the critical question of reliability. And
perhaps Mr. Nevius can join in in this or others. But I am
particularly interested in what your sense of the needs of the
transmission system are, what in terms of size and cost and
then your sense of the ability of different structures to
attract interest, Wall Street interest, investor interest, at a
time when the margin may be substantially less than other
components of this industry or other kinds of investments in
general. It seems to me that has critical implications both for
governance structures and for reliability. Could you comment on
that?
Mr. Szwed. Different systems obviously have different
needs. I know from our system, from our own First Energy system
standpoint, we, every year continue to put our significant
capital dollars into various equipment to replace aging
equipment or to provide for enhanced reliability and customer
service.
Mr. Sawyer. But you do that with an obligation to serve.
You do that in an environment where you have an obligation to
serve. We are talking about a very different kind of
environment.
Mr. Szwed. In terms of an independent transmission company,
there is no question that there is going to be competition for
investors' dollars. So from the standpoint of attracting
investment, competitive returns need to be there, the right
kind of pricing to provide an opportunity to earn. Rational
returns that would attract investment is important and
something that needs to be considered as we continue this
dialog on transmission.
Mr. Sawyer. Mr. McCoy? Mr. Nevius?
Mr. Nevius. From the standpoint of reliability, regardless
of the structure, competition, the financing of these regional
organizations, what we are looking to do is see that there is a
common set of rules by which they are operated, the rules of
the road which Mr. Largent referred to earlier, and that those
be enforced even-handedly, fairly, no matter who is
participating in that regional transmission organization. If
the transmission system for whatever reason is not capable of
handling all of the commercial trade that would like to take
place, then the rules will specify who gets to use or how much
trade can be accommodated safely, but it won't jeopardize the
reliability of the grid. This is where you need to make a
distinction between the adequacy of the transmission system,
are there enough wires, whether they be superconducting or more
traditional wires, and how those existing wires are used within
their safe operating limits which is the security of the grid.
Mr. Yurek. If I could put perhaps another angle on this,
the question about how does private sector get involved. Think
of Corning Glass who started investing in the development of
optical fibers in 1967, built up plants in North Carolina by
the end of the 1970's, no customers. And then the deregulation
of the telecommunications industry happened in the early
1980's. 1982 a new company called MCI showed up at Corning
Glassworks in North Carolina and said can we order a hundred
thousand kilometers of optical fiber. And the rest is history.
So you had a convergence of new technologies, new environment.
I am not a policy expert so I can't tell you what policies
work best or not but that is a good place to look in terms of
new technology. In terms of reliability, many different
technologies, one I mentioned already superconducting magnetic
energy storage.
We are going to be putting our SMES units on large scale
transmission grids throughout the United States and by just
injecting some real and reactive power in a distributed fashion
through a transmission grid, you bring up two things. One is
the increase in reliability instantly. Another one is increase
in transfer capability of those grids. So whether it is
superconductor technology or other technologies--and I think
there are many different ways to play this--let us give it a
chance and that convergence of new technologies and a
deregulated open environment has to win. It has won before. It
can win again.
Mr. Sawyer. Mr. Chairman, thank you for your flexibility. I
am just wondering if there is anyone else who would have
comment on that question of physical needs and the ability to
attract capital to meet that.
Mr. McCoy. I will make a brief comment, Mr. Sawyer. I think
what Mr. Nevius said is critically important. In a capital
intensive industry like the transmission business, I think
airlines are in the same boat. What's happening now in ComEd
isn't exactly this position. We make the necessary investments
in the transmission assets that our obligation to serve
requirements dictate.
But we are not making speculative investments because the
rules, quite frankly, are unknown. I think there would be more
willingness to make outfront investments like Mr. Yurek
described in fiber optics if, indeed, the rules were very well
codified, standardized, and backed up by law.
Mr. Sawyer. Thank you. Those are all helpful responses. I
appreciate that.
Mr. Stearns. Thank you. The gentleman from Florida, Mr.
Bilirakis.
Mr. Bilirakis. Thank you, Mr. Chairman. I have a couple of
generic questions; but before I go into those, I just wanted to
hitchhike on Mr. Sawyer's question. Regarding the exciting
technology having a profound impact on the transmission of
power, are there Federal barriers that prevent the widespread
use of new transmission and distribution technologies? And if
there are, maybe very briefly, because I do want to get into
some of the other things, if there are, can you share them with
us.
Mr. Yurek. Again, I am not a policy expert so it is hard
for me to identify what those barriers might be, but generally
speaking in that regulated environment that we are dealing with
here, where's the MCI of power? How does the MCI of power come
into being? In this regulated environment, it doesn't. So if
there is an ability to buy power from one region and take it
through a direct current electricity pipeline to another region
and make money in that process, that can come into existence if
we peel away some of the regulations that exist today. So I
would reverse it, I think, a little bit from----
Mr. Bilirakis. Regulations that exist today could be
barriers, and constraints. Can you share with the committee in
writing some of those particular problems? We have got to know
the adverse effects, if you will, of our past and present.
Mr. Yurek. We will do that.
Mr. Bilirakis. Thank you. How many of you believe that
Congress should pass in some form electricity deregulation? All
of you? From the eyes of transmission, from the eyes of
reliability, you still feel that we should do it?
Ms. Utter. Yes.
Mr. Bilirakis. Do all of you feel that way? Show of hands.
Mr. McCoy. I'm not sure what the question is.
Mr. Bilirakis. Deregulation. Electricity restructuring.
Well, I guess it is a yes or no at this point.
Mr. Schmidt. The answer, I think, Congressman, is not
whether it is yes or no for deregulation, but for different
components of it. I think it is important to look at the
comprehensive issue, but I don't think Congress needs to act to
deregulate the industry. That is occurring throughout the
country on a State basis.
Mr. Bilirakis. Well, do the rest of you who put up your
hands disagree with that statement? Yes, sir?
Mr. McCoy. I would agree with that statement.
Ms. Utter. I disagree somewhat. I disagree from the extent
that the States doing this piecemeal is the wrong way to do it
if you are trying to approach this business as we are from a
national market perspective. And so we believe that some parts
of the business as was expressed earlier absolutely need to
stay regulated and don't need to be deregulated. But there are
some additional steps that need to be taken.
As I said earlier, I believe FERC is capable of doing that;
but I think their authority needs to be clarified and in some
limited cases expanded to further deregulate, but we believe
that because generation is still somewhat regulated and
somewhat deregulated, we are not developing as fast as we could
be to a competitive market because liquidity isn't being
created. There isn't production being put into a liquid
commodity market right now because the vast majority of it is
still under regulation.
Mr. Bilirakis. Would we be holding this hearing on
reliability and particularly as it involves transmission if we
were not, you know, really concerned these days with
deregulation, with electricity restructuring? In other words,
if we weren't--if we weren't even concerned with electricity
restructuring and deregulation, are there still adequate
reliability problems out there? Does existing statutory
authority exist to ensure continued reliability of the
transmission system, et cetera, for the panel?
Mr. Nevius. My answer would be yes because of what is
happening on the system.
Mr. Bilirakis. Yes, that we still would need this kind of
hearing, but not yes that existing----
Mr. Nevius. Yes, that we need this hearing and we need to
be addressing the question of legislation to give FERC
authority to accredit and oversee a self-regulating reliability
organization. As I mentioned in my remarks earlier, what we
have been doing for 30 years on a voluntary peer pressure basis
is not sustainable.
Mr. Bilirakis. So existing statutory authority is
inadequate to ensure.
Mr. Nevius. Yes.
Mr. Bilirakis. Regardless of whether we were talking about
deregulation or not.
Mr. Nevius. Yes.
Mr. Bilirakis. Mr. Iannucci, do you agree with that?
Mr. Iannucci. Not quite. Since most of the reliability
problems really come from the distribution side, I think we
could solve 100 percent of the transmission reliability
problems and still have 90 percent of the problem. So whatever
we can do to make it easier to put in distributed resources if
they truly can help, the reliability at the customer level from
the customers perspective, which I think is what we should be
doing, whatever we can do there to help to get regulations into
place that will allow easier interconnection, more equitable
standby fees, exit charges, things like that will help the
reliability from the customer's standpoint.
Mr. Bilirakis. I am not the chairman, nor am I sitting-in
chairman today, but I think it is very important that we hear
varying perspectives. Forgive me Mr. Chairman, if I have taken
advantage here, but our State of Florida, is very limited in
terms of transmission capability and so much of the answer
might be distribution, local distribution. And so if you could,
in writing, share your ideas, Mr. Iannucci and the rest of you
in that regard, it would be very, very helpful. Thank you very
much.
Mr. Iannucci. I would be happy to.
Mr. Stearns. I thank the gentleman. The gentleman from
Massachusetts, Mr. Markey, is recognized.
Mr. Markey. Thank you. Mr. Yurek, if I may, because I am so
proud that you are headquartered up in Massachusetts, you have
been developing superconductive wires that, as you noted in
your testimony, are capable of carrying 100 times as much power
as conventional copper wire.
To what extent could a transmission owner alleviate
constraints in its transmission system by replacing its old
copper wires with your new superconducting wires?
Mr. Yurek. Well, the use of these wires in a cable for
transmission purposes means that you can increase the power
capacity of existing rights-of-way by at least three to five
times, so that you have the ability now to transfer a lot more
power through that given right-of-way. Getting siting rights
for new rights-of-way takes a long time and maybe you will
never get them.
So here is a capability to increase power capacity of
existing corridors, and, quite frankly, those corridors might
not be the existing transmission lines. They might be gas
pipelines through which one can pass a large quantity of power
to relieve congestion. So if you have that open environment,
now you have the opportunity to bring this technology to bear.
Mr. Markey. If you could hold up the two wires that you
have here, can you give us a comparison of the amount of power
lost over a conventional copper transmission, your blue wire
that you have there, distribution wire, compared to your new
superconducting wire? What is the difference in terms of how
much energy is lost just going out of the wires as it is being
transmitted?
Mr. Yurek. Well, for the transmission distribution system
altogether, about 8 percent of all the electricity that comes
from the generator is lost to resistance.
Mr. Markey. Through the wires.
Mr. Yurek. Through the wires, the transformers, and other
parts of the transmission and distribution system. We can
reduce that almost to nothing with the superconducting wires
because they have no resistance. If we use direct current, that
is absolutely zero resistance. With alternating current that is
typically used, there is some loss, but we are very, very low
in those losses. So we have an extra benefit in terms of energy
savings.
Mr. Markey. So in the future, if we had those new wires
that were laid by the utilities, it would reduce by 8 percent,
to begin with, the number of new generating facilities that had
to be constructed from whatever the given number of new
megawatts that had to be constructed in our country. We would
know that there was 8 percent less loss over the wires; is that
correct?
Mr. Yurek. If you go to the full-scaled implementation,
that would be the case, of course. But somewhere in between.
You are still talking about very large numbers, and the
Department of Energy has documented those numbers. So there is
certainly the tremendous potential for energy savings.
Mr. Markey. Now, in your prepared statements, you urge
Congress to employ technology-neutral incentives to encourage
new investment in the grid, such as power quality standards,
streamline procedures for low environmental impact transmission
technologies, and incentives for multiple demonstrations of new
technologies to speed their commercial acceptance.
Can you walk through each of these proposals and explain to
us what exactly you would recommend that Congress include in
our legislation?
Mr. Yurek. In terms of power quality standards, we know
that in the U.S. alone, the Department of Energy, Electric
Power Research Institute numbers, put the losses due to
industrial downtime because of glitches in the delivered power,
at tens of billions of dollars per year. So there are huge
losses there. There are no power quality standards that are in
existence. I think we ought to take a look at that and put
those standards in place.
You can pay higher prices for your electricity and get
premium power. If you are not interested in that, you can pay a
lower rate. But a clean power signal is the key here.
The siting of interstate transmission lines, again, I think
in the open environment, where we can create an MCI of power,
whatever regulations or legislation would be required to do
that, I think we ought to be looking at that pretty carefully.
Then new technologies, whether is distributed generation or
distributed SMES in other technologies, fuel cells, we need to
give them a chance. If there is an environment that promotes
that, let us get those demonstrations under way.
Mr. Markey. Mr. Chairman, could I say that back in 1981-82
on this committee, when we were debating breaking up AT&T,
while they had won many Nobel Prizes for basic research, they
really weren't that good in applied. The truth of the matter is
that once AT&T was broken up and Sprint had their commercials,
you remember with the pin dropping, because they had a fiber
optic network, at that point AT&T had yet to purchase their
first square foot of fiber optic wire, because they were a
monopoly. They didn't have to change. They didn't have to
adapt. They didn't have to include the new technologies.
Once we broke them up, though, and there was real
competition, they had to move because Sprint and MCI and others
were moving ahead. Much the same things are possible here. The
more competitive the environment, the more paranoia you build
into the older companies, the more they are forced to adopt the
new wires and technologies that make the whole system more
efficient.
That would be my one hope out of all of this, that we could
create the understanding of the analogy between ultimately, you
know, telephone, cable, and electricity, the three wires. It is
a tale of three wires going into homes. They are the best of
wires and the worst of wires, you know.
What we have to do is ensure that we construct the dynamic
by which we upgrade these wires to the maximum efficiency for
consumers. I thank you for having the hearing and yield back
the balance of my time.
Mr. Sawyer. Mr. Chairman, it is a far, far better thing we
do today than we have ever done before.
Mr. Stearns. I think we have exhausted our questions. We
want to thank very much the panel. We know how busy you are. We
appreciate hearing from experts.
The subcommittee is adjourned.
[Whereupon, at 1:04 p.m., the subcommittee was adjourned.]
[The following was received for the record:]
Federal Energy Regulatory Commission
Office of the Chairman
June 11, 1999
The Honorable John D. Dingell
Ranking Member
Committee on Commerce
U.S. House of Representatives
Washington, D.C. 20515-6115
Dear Congressman Dingell: Thank you for your letter of May 18,
1999, regarding my testimony at the April 22, 1999, Subcommittee on
Energy and Power hearing on reliability and transmission in competitive
electricity markets.
Enclosed are my responses to the questions you submitted.
I hope this information is helpful. If I can be of further
assistance in this or any other Commission matter, please let me know.
Sincerely,
James J. Hoecker
Chairman
Enclosure
responses to questions from congressman john dingell
Question No. 1: Your testimony for the April 22, 1999 hearing on
reliability and transmission issues states that ``despite the successes
of Order No. 888 in fostering competition, not all potential market
problems have been addressed.''
The first category of impediments you identify are ``engineering
and economic inefficiencies inherent in current operation and expansion
of the grid, inefficiencies that are hindering fully competitive power
markets and imposing unnecessary costs on electric consumers.''
Please provide specific examples of these engineering and economic
inefficiencies, and describe their effects on electricity markets.
Answer: About three weeks after I testified before your
subcommittee, the commission unanimously approved the Notice of
Proposed Rulemaking (NOPR) on Regional Transmission organizations
(RTOs). The NOPR (copy attached) was motivated, in part, by a growing
commission concern that the continued existence of certain major
``engineering and economic inefficiencies'' could hinder FERC's ability
to promote reliable grid operations and competitive bulk power markets
throughout the country. These. inefficiencies include: developments
that threaten reliability under emerging competitive conditions in the
bulk power market; inaccurate determinations of available transmission
capability (ATC); inefficient management of transmission congestion;
inefficient or inadequate planning and expansion of new transmission
facilities; and pancaking of transmission access charges. Order No. 888
does not purport to address these issues in any direct way. I will
discuss each of these sources of inefficiency in turn.
Reliability. As the industry moves to competitive power markets, we
are seeing the entry of many new market participants, dramatic
increases in unbundled power sales and shifts in electrical flows. As a
result, the nation's bulk power system is being stressed in ways that
have never been experienced before. Such stresses have always existed
to some extent, but in the past they could be more readily accommodated
through voluntary ad hoc agreements because there were fewer industry
participants and they generally did not compete against each other in
any significant way.
At present, the industry's ability to maintain reliable grid
operation is affected, and often impeded, by two factors. One is the
existence of many separate commercial entities that use the grid and
directly or indirectly affect its operation or expansion. These
entities frequently have differing interests in how reliability
standards are developed and administered. Unfortunately, there is no
single institution with authority to ensure mandatory compliance with
reliability standards. The second factor is an increasing ``reluctance
on the part of market participants to share operational real-time and
operational planning data with TPs [transmission providers].'' \1\ This
is not surprising because information that is needed for reliability
purposes will often have commercial significance.
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\1\ NERC, Reliability Assessment 1998-2007, p. 39.
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The industry is working hard to grapple with these emerging
reliability issues and, as I stated in my testimony, the commission is
supporting these efforts despite a lack of clear legal responsibilities
in this area. In the past year we have dealt with the Western System
Security Council's proposal for contractual enforcement of reliability
rules (see Western Systems Security Council, 87 FERC para. 61,060
(1999)), NERC's tagging requirements for keeping track of information
about transactions (see Coalition Against Private Tariffs and Western
Resources, Inc., 83 FERC para. 61,015 (1998), order on reh'g, 84 FERC
para. 61,059 (1998)), and NERC's efforts to develop fair and efficient
methods for relieving overloaded transmission facilities in the Eastern
Interconnection (see North American Electric Reliability Council, 85
FERC para. 61,353 (1998), order on reh'g, 87 FERC para. 61,161 (1999)).
However, each of these cases illustrates the need for a better scheme
for the private development of reliability requirements and the
limitations on the Commission's jurisdiction with respect to
reliability issues. To the extent institutions that ensure reliability
do not change to keep up with developments in the increasingly
competitive electric industry, I fear that reliability or competition
will be compromised.
Available Transmission Capability. A second source of inefficiency
in grid operation involves the calculation of available transmission
capability (ATC). A transmission provider needs to be able to tell
potential customers how much of the commodity it can carry, and
potential customers must be able to rely upon that information.
However, there are three factors hindering accurate ATC calculations.
One is the lack of the necessary information. ATC is calculated by
individual system operators, but the transfer capability on each
utility system is affected by transactions on neighboring integrated
systems. Transmission providers may post ATC numbers on OASIS only to
find that transmission capability that they assumed would be available
actually does not exist because of scheduling decisions taken by other
transmission providers elsewhere on the grid. It is almost impossible
for an individual transmission owner to calculate reliable ATC numbers
when it operates only one part of a larger interconnected grid. A
second factor that complicates ATC calculation is the amount of
transfer capability that a transmission provider can legitimately
reserve to back up generation capacity in its service territory. This
is referred to as Capacity Benefit Margin (CBM). The Commission
recently decided a case where it found that a transmission provider
improperly denied a request for transmission service on the grounds
that its CBM requirement eliminated ATC, i.e. the ability to provide
transmission service at a certain level, on its system. (See El Paso
Electric Company, 87 FERC para. 61,202 (1999)). The third factor is
discrimination. Since the issuance of Order No. 888, we have received
numerous formal and informal complaints from non-affiliated
transmission customers who allege that transmission providers
discriminate in favor of their own merchant operations when calculating
and posting ATC numbers. These are described more fully in the answer
to Question No. 5. I believe that the development of the competitive
market and the delivery of associated consumer benefits will be slowed
until more efficient and accurate methods are in place for determining
ATC.
Congestion management. The way transmission congestion is managed
is a third source of inefficient grid operation. With the exception of
the three operational ISOs, curtailment decisions in the Eastern
Interconnection are made primarily through transmission loading relief
(TLR) procedures. The TLR procedures are a set of administrative (i.e.,
non-market) protocols designed to relieve congestion on overloaded
transmission facilities. The combination of shifting flow patterns and
TLR protocols has led to a dramatic increase in the number of required
curtailments. For example, NERC has reported that its TLR procedures
were invoked 329 times between July 1997 and October 1998 on the
Eastern Interconnection.\2\ Curtailments understandably generate
commercial disputes and may be inefficient.
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\2\ North American Electricity Reliability Council, Interim Market
Interface Committee, Minutes of Jan. 12 and 13, 1999 meeting, Exhibit
D.
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Effective congestion management depends on operating the system
with the needs of broad regional markets in mind. The lack of regional
approaches consequently causes inefficiency. It is difficult for one
transmission owner to identify and implement redispatch options when
the physical limitations and cost effective options for relief exist on
other transmission systems that are beyond their reach.\3\
Additionally, with multiple and independent operators of the grid,
individual users and owners have unclear and conflicting rights to the
grid. This makes it difficult to establish congestion markets which,
like any other markets, cannot develop in the absence of clear and
enforceable rights.
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\3\ Commonwealth Edison, Interim Report on Non-Firm Redispatch,
Docket No. ER98-2279, December 17, 1998, at 4, 10.
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I believe that current TLR procedures are cumbersome, inefficient,
and disruptive to bulk power markets because they rely exclusively on
physical measures of flows with no attempt to assess the relative costs
of different congestion management options. Moreover, when (as is often
the case) TLR actions are taken by a transmission provider that has an
affiliated power market participant, the suspicion is that the action
is motivated by competitive rather than reliability concerns. For these
reasons, while we have encouraged NERC to move beyond TLR, we also
recognize that there are limits to NERC's ability to replace the non-
market TLR procedures with a more efficient, market-based approach to
congestion management in the absence of viable regional organizations.
Transmission planning and expansion. The existing process for
transmission planning and expansion is a fourth source of grid
inefficiencies. While the factors involved in transmission planning
have historically made grid expansion difficult, the level of
uncertainty about where and how much to expand facilities has increased
with the increasing number and complexity of unbundled transactions and
the shifts in generation dispatch patterns. Uncertainty has also
increased because generation developers are reluctant to disclose their
plans for future capacity additions and utilities are reluctant to
speculate on whom or where their suppliers might be. This all makes
modeling of potential transactions and flows for transmission analysis
virtually impossible.\4\
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\4\ NERC, ``Reliability Assessment, 1998-2007,'' September 1998, at
39.
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One troubling consequence of this uncertainty has been a noticeable
decline in planned transmission investments. NERC recently reported
that the level of planned transmission additions is significantly lower
than five years ago despite an overall increase in load growth and
unbundled transmission service.\5\ While this could simply reflect
better utilization of the existing grid or the fact that new generation
is locating closer to load, I am concerned that it may also reflect an
incompatibility of existing planning institutions with the new market
realities and that the existing approach to transmission pricing may
not sufficiently encourage the investments needed to improve the
reliability and efficiency of the grid. Inadequate investment also
could be a major impediment to the development of regional bulk power
markets.
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\5\ Id. at 7.
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Pancaked transmission rates. The pancaking of transmission access
charges is a fifth (and major) source of inefficiency in grid
operation. Transmission customers have generally paid an access charge
to each transmission provider along the contract path of a transaction,
resulting in multiple transmission charges across several transmission
systems. This raises the cost of power transactions and makes it
difficult to create region-wide power markets. As a result, the
geographic scope of power markets is restricted and market
concentration is unnecessarily high. I believe that competition and
economic efficiency would be clearly enhanced if all buyers and sellers
of power were able to access each other over the geographically wide
transmission systems that exist today but which are balkanized by
current rate structures. This would require eliminating the current
system of additive transmission access charges and replacing it with a
single access charge that gives transmission customers access to the
entire regional grid.
Question No. 2: The testimony also states that ``Changes in trade
patterns and industry structure have made it more difficult to maintain
reliable grid operations, manage transmission congestion, and plan for
expansion of transmission facilities.'' Please describe these changes
and the resulting difficulties, and give examples.
Answer: The U.S. electricity industry has recently experienced
major structural changes. For example, since August 1997, approximately
50,000 MW of generating capacity have been sold (or are under contract
to be sold) by utilities, and an additional 30,000 MW is currently for
sale. This represents about 10 percent of U.S. generating capacity.
These divestitures are typically part of state ordered retail
competition programs. As retail competition spreads to more states, I
expect to see more of these plant divestitures.
Almost all the major developments in the industry are traceable
directly or indirectly to technological advances in natural gas turbine
technology and to new generation of plants that are being developed and
operated by firms other than traditional utilities. It is competition
among all sources of generation that the Commission wishes to
facilitate through its bulk power policies. Such developments reflect
the strategic decisions of some companies to functionally disaggregate
their operations, to concentrate their activities in one area of the
business, or to reallocate resources to new enterprises such as energy
services.
Order No. 888 and the associated restructuring have helped to spur
a dramatic growth in the volume of trading in the wholesale electricity
market. In the first quarter of 1995, there were 8 power marketers
(either independent or affiliated with traditional utilities) with
total quarterly sales of 1.8 million MWH. By 1998, there were 491 power
marketers. By the second quarter of 1998, 108 active trading power
marketers had total quarterly sales of 513 million MWH.
Entry of new participants and dramatic increases in the volume of
unbundled power flows has lead to significant shifts in the pattern of
flows on the Nation's high voltage grid. In its 1998 summer assessment
of bulk power reliability, NERC observed that:
Throughout the Regions, parallel path flows from increased
electricity transfers are stressing the transmission systems.
These flows are at magnitudes and in directions not anticipated
at the time the systems were designed . . . The transmission
system will be required to operate under unprecedented, and
sometimes unstudied, conditions.\6\
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\6\ NERC, ``1998 Summer Assessment: Reliability of Bulk Electricity
Supply in North America,'' May 1998, at 2-3.
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These changes have exacerbated the operational and economic
inefficiencies already described in response to Question 1. Reliability
is more challenging in the face of unstudied new conditions, congestion
management is more difficult as the transmission grid is used in new
and increased ways, ATC is more difficult to calculate due to increased
demand and varying regional flows, and planning is made more difficult.
Question No. 3: Your testimony also states ``Without further
reform, traditional pricing and traditional transmission practices will
likely hinder the further development of competitive and efficient bulk
power markets.'' You cite as examples ``the `pancaking' of transmission
access charges from one system to the next, the absence of clear and
tradeable transmission property rights, and the virtual absence of a
secondary market in transmission service.''
Please explain these problems and their effects on the electric
markets, and how you believe these problems can best be remedied.
Answer: As discussed in response to Question 1, transmission
customers have generally paid an access charge to each transmission
provider along the contract path of a power trade, resulting in
multiple transmission charges across several transmission systems. This
makes it difficult to create region-wide power markets in which new
competitors can enter in hopes of serving customers at lower cost. As a
result of such economic barriers to entry, the geographic scope of
power markets is restricted and market concentration is unnecessarily
high. I believe that competition is clearly enhanced if all
transmission customers are able to access larger numbers of generators
over a wide geographic region. This requires eliminating the current
system of additive transmission charges and replacing it with a single
access charge that gives transmission customers access to the entire
regional grid. To date, non-pancaked transmission access charges have
been a feature of all five ISOs that the Commission has approved. In
the NOPR, the Commission proposed that all RTOs offer a single, non-
pancaked access charge.
A secondary market for transmission capacity is also important. The
resale of rights to use essential facilities has promoted greater
efficiency and higher utilization in other industries such as
railroads, gas pipelines and telecommunications. Secondary markets help
reduce the risk of market participation by providing a vehicle for
reselling transmission rights, for example when capacity is not needed
or power transactions go sour. Secondary markets also provide a means
of helping to ensure that scarce capacity is allocated to its highest
valued uses. Secondary markets, however, require well-defined tradeable
property rights to a regional grid. These do not exist in the current
regime of network and point-to-point transmission service on utility
specific transmission facilities.
Question No. 4: For questions one (1) through three (3), please
explain the extent to which the Commission has attempted to address
these problems under its current statutory authority. Please
specifically address the extent to which the Commission can use its
authority under section 211 of the Energy Policy Act of 1992 (EPACT)
and Order 888 to address these concerns. If you believe the Commission
needs additional statutory authority, please explain what now authority
is needed and how it would improve the commission's ability to address
these problems.
Answer: The Commission has taken several actions to improve the
engineering and economic efficiency of the transmission grid. In 1993,
the Commission issued a policy statement encouraging the formation of
regional transmission groups (RTGs), which were defined as a voluntary
organizations of transmission owners, users, and other entities
interested in coordinating transmission planning (and expansion),
operation and use on a regional and inter-regional basis. (Policy
Statement Regarding Regional Transmission Groups, FERC Stats. & Regs.
para. 30,976 (1993)) The commission summarized the benefits of such
entities as enabling the market for electric power to operate in a more
competitive and thus more efficient manner; providing coordinated
regional planning of the transmission system to assure that system
capabilities are adequate to meet system demands; decreasing the delays
that are inherent in the regulatory process, resulting in a more
market-responsive industry; and resolving technical transmission issues
(e.g., loop flow). The Commission has approved five RTG proposals,
although their limited role may now be overtaken by industry and
regulatory developments.
In 1994, the Commission issued a transmission pricing policy
statement which encouraged RTGs to address transmission pricing and
offered to provide more latitude to RTGs than to individual utilities
for innovative pricing proposals, and which recognized that issues such
as loop flow required a regional approach. (Inquiry Concerning the
Commission's Pricing Policy for Transmission Services Provided by
Public Utilities Under the Federal Power Act, 59 F.R. 55031 (November
3, 1994), FERC Stats. & Regs., Regulations Preambles para. 31,005)
Then, two years later in Order No. 888, the commission encouraged the
industry to consider the formation of independent system operators
(ISOs), and gave specific guidance on characteristics and functions in
the form of 11 principles. The Commission has issued orders approving
or conditionally approving five ISOs.
Most recently, the Commission has issued its RTO NOPR. In this
NOPR, the Commission proposes to encourage all transmission providers
to participate in independent regional transmission institutions. I
believe that such institutions can facilitate improved reliability,
more accurate determinations of ATC, more efficient congestion
management, more efficient planning and expansion decisions, and a
reduction in pancaking of transmission access charges.
In acting on the ISO proposals that have been filed, the Commission
has used its basic authorities under sections 205 and 206 of the
Federal Power Act (FPA) to address some of the problems discussed,
e.g., congestion management and rate pancaking. However, it is the
existence of the regional institution itself, i.e., the structural
change in the industry through the formation of an ISO or other type of
RTO, that permits the identified problems to be addressed most
effectively, and thus far formation of these institutions has been
voluntary. As I stated in previous testimony, it would be helpful for
the Congress to clarify the Commission's authority under sections 205
and 206 of the FPA to order public utilities to participate in an RTO.
As I further testified, Congress should also give the commission
authority to regulate the transmission facilities of non-public
utilities (e.g., the power marketing administrations (PMAs), public
power and electric cooperatives) in the same way it regulates the
transmission facilities of public utilities. This would include
authority to order non-public utilities to participate in RTOs.
With respect to section 211 of the FPA, the Commission can and has
used this authority to require transmission providers to provide
transmission service. while section 211 applies to public utilities as
well as non-public utilities that own and operate transmission
facilities, it can be used only on a case-by-case basis in response to
an application by an entity (or entities) seeking specific transmission
service. Because of its focus on transmission applications, Section 211
is not an efficient authority to rely upon for the Commission to remove
industry-wide engineering and economic inefficiencies that are regional
in nature.
Additional statutory authority would be useful in at least three
specific areas. First, as noted above, it would be helpful to clarify
the Commission's authority to order public utilities to participate in
RTOs. Second, as also noted above, additional statutory authority is
needed to make all transmission system owners subject to the same rules
for the provision of transmission services. Efficient markets in
network industries generally require that all service providers be
subject to the same rules. Currently, approximately one-third of the
Nation's integrated transmission grid is beyond the reach of Order No.
888's open access requirements. Third, additional statutory authority
is needed to make compliance with reliability standards mandatory.
Currently, the industry operates under a system of voluntary standards
that have worked well in the past. However, with increasing numbers of
competitive transactions taking place, the reliability of the Nation's
electric system requires an enforceable set of reliability standards.
Question No. 5: Your testimony describes a second category of
``impediments'' consisting of ``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.'' The testimony also states that ``In the
wake of Order No. 888, however, many market participants continue to
allege, and the Commission has in some cases confirmed, that
transmission service problems related to discriminatory conduct
remain.''
Please describe these cases and the actions the Commission has
taken to rectify such problems.
Answer: In the Commission's recent RTO NOPR, these cases and the
commission's response are discussed in detail(see RTO NOPR, pp 58-85).
The Commission is aware of allegations of unduly discriminatory
behavior through formal complaints that are filed with the Commission,
informal complaints that are made by telephone to the Commission
staff's enforcement hotline, and assertions that are made in other
public forums, such as comments in response to technical conferences we
have held or in pleadings filed in cases before us. Although the
Commission's staff attempts to help the parties resolve informal
complaints, only formally filed complaints receive an official
Commission response.
The allegations fall into several categories: the calculation and
posting of the available transmission capability in a way that is
favorable to the transmission provider's electric merchant functions
and unfavorable to competitors; improper information sharing between
the transmission provider and its affiliated merchant functions in ways
that favor the merchant function over competitors, in violation of the
Commission's standards of conduct; favoritism toward the transmission
provider's merchant function during times of transmission congestion
and constraints; and transmission providers who do not maintain
accurate and useful electronic information (OASIS) sites, which tends
to disadvantage competing marketers wishing to have access to the
transmission system.
Upon receiving a formal complaint, the Commission investigates and
makes findings. In cases where it has identified unduly discriminatory
behavior, it takes appropriate action under sections 205 or 206 of the
Federal Power Act. For example, in one case (Washington Water Power
Company, 83 FERC para. 61,282 (1998)), the Commission found that a
transmission provider had offered its power marketing affiliate a
transmission service that was not generally available to everybody. The
Commission ordered that the transmission provider's marketing affiliate
forego any profit it made on the transaction for which it obtained
unduly preferential service and not to engage in any market-based rate
sales over the transmission provider's system for 180 days. In another
case involving two public utilities, the Commission found that the
transmission providers had improperly withheld transmission capacity
for the benefit of their merchant functions. The Commission ordered the
recalculation of available transmission capability and offering that
capacity in a non-discriminatory manner. Wisconsin Public Power Inc.
System v. Wisconsin Public Service Corporation, et al., 83 FERC para.
61,198 (1998).
In addition to acting in response to specific complaints, the
Commission has taken other actions to address opportunities for undue
discrimination. In Order No. 888, the Commission imposed certain
standards of conduct requirements to ensure that transmission owners do
not preferentially favor their power marketing affiliates (i.e., do not
unduly discriminate against competitors). The Commission has also
recently held a public conference on the Capacity Benefit Margin issue,
which some parties have alleged is being used in an unduly
discriminatory manner in the calculation of available transmission
capability. Finally, the Commission recently issued its RTO NOPR which
is intended to encourage all public utilities to transfer control of
their transmission system to an independent Regional Transmission
organization, which would eliminate the opportunity for discriminatory
conduct.
Question No. 6: The testimony also states that ``Allegations relate
to standards of conduct violations and manipulations of the operation
of transmission systems to frustrate power marketing competitors, for
example by the imposition of transmission curtailments on congested
lines.''
Does the Commission agree or disagree with such allegations? What
has the Commission done in response to such complaints? Please provide
specific examples.
Answer: The Commission can only agree or disagree with specific
allegations to the extent they are brought to us in a formal complaint
and we have conducted an investigation. The Commission has found
standard of conduct violations with respect to at least four public
utilities. (For a more detailed discussion, see the RTO NOPR, pp. 77-
80). I am aware of many additional allegations made informally. While
these additional allegations have not been substantiated through a
formal process, I believe that it is reasonable to assume that such
practices are more prevalent than reflected in formal complaint
filings.
Question No. 7: Your testimony also states ``there is a great, deal
of mistrust among market participants with respect to fairness of the
system.''
Is this statement based on specific complaints filed with the
Commission? If so, how has the Commission responded?
Answer: In this newly competitive environment, where substantial
capital is at risk in developing new electric generation and competing
for market share, the reliable, open, and non-discriminatory operation
of the transmission system takes on unprecedented significance. The
Commission had repeatedly been urged to ensure that all users of the
system receive fair and comparable treatment from the transmission
owners. Many market participants do not take this for granted. My
statement is based upon many sources of information available to the
Commission, and they are discussed in detail in the RTO NOPR. (see
pages 58-83). Specifically, the Commission has received formal and
informal complaints, written and oral comments in the course of public
proceedings such as technical conferences (Docket No. RM95-9-003) and
our ISO Inquiry (Docket No. PL98-5-000), and petitions for rulemaking
(such as filed in Docket No. RM98-5-000) and other pleadings filed with
us. The number of assertions we have heard indicates a perception by
many market participants that transmission providers who also have
electric merchant functions can and do find ways to favor their
merchant functions and disadvantage market competitors.
The Commission has responded by trying to ensure strict compliance
with the functional unbundling requirements of Order No. 888. As
discussed with respect to questions above, the commission has expended
considerable efforts reviewing and issuing orders with respect to the
standards of conduct filed by public utilities. The Commission has also
taken strong action in response to formal findings of violations of the
functional unbundling requirements. Most recently, the Commission has
issued its RTO NOPR which encourages organizational separation of
transmission and merchant functions, which is probably the most
effective step that could be taken to reduce mistrust.
Question No. 8: For questions five (5) through seven (7), please
explain the extent to which the Commission has attempted to address
these problems under its current statutory authority. Please
specifically address the extent to which the Commission can use its
authority under section 211 of the Energy Policy Act of 1992 (EPACT)
and Order 888 to address these concerns. If you believe the Commission
needs additional statutory authority, please explain what new authority
is needed and how it would improve the Commission's ability to address
these problems.
Answer: The Commission has used its authority under sections 205
and 206 of the FPA to remedy instances of undue discrimination and
undue preference that it has found. Most prominently, the Commission
used its authority under sections 205 and 206 of the FPA to remedy
undue discrimination as the basis for requiring all public utilities to
provide open access transmission and to functionally unbundle their
generation and transmission services. Section 205-206 authority,
however, does not apply to public power, the PMAs, and most electric
cooperatives.
In addition to sections 205 and 206, the commission in the RTO NOPR
relied in part upon section 202(a) of the FPA, which was recently
delegated to the Commission by the Secretary of Energy. While section
202(a) applies to public utilities as well as non-public utilities, it
is primarily a provision for voluntary coordination of utility
facilities.
With respect to section 211 of the FPA, the Commission can and has
used this authority to require transmission providers to provide
transmission service. However, there are at least two difficulties in
relying upon section 211 as a remedy for the remaining opportunities
for undue discrimination identified in response to Questions 5-7 above.
First, the instances of undue discrimination that are now complained of
do not usually involve an outright denial of transmission service, or
arguments about rates, terms or conditions of the service to be
provided; rather they are more likely to involve more subtle sharing
and manipulation of transmission availability information by the
transmission provider, or curtailment of existing transmission service,
that disadvantages marketers competing for sales. Second, section 211
can be used only in response to specific applications for transmission
service and it requires a time-consuming procedural process--an
application for an order under section 211 may not be made until 60
days after the applicant has made a request to the transmission
provider and the Commission must issue a proposed order prior to
issuing a final order. Many transactions today are done on a short-term
basis and the opportunities are lost unless transmission can be secured
quickly.
Additional statutory authority would be useful to clarify the
Commission's authority to require all public utility transmission
owners to participate in RTOs as defined in our recent NOPR. The
complete separation of the transmission and generation operations of
utilities is the best, and perhaps the only, way to remove the
opportunities and incentives for transmission owners to favor their
generation interests, and to allow all market participants to trust in
the fairness of the system. our recent RTO NOPR attempts to encourage
RTO participation through voluntary efforts. If this approach is not
successful, however, it would be beneficial to have clarified FERC's
authority to require such participation.
In addition, Congress also should give the commission authority to
regulate the transmission facilities of non-public utilities (e.g., the
power marketing administrations (PMAs), public power and electric
cooperatives) in the same way it regulates the transmission facilities
of public utilities. This would include authority to order non-public
utilities to participate in RTOs.
MARKET POWER, MERGERS, AND PUHCA
----------
THURSDAY, MAY 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, Norwood, Coburn, Rogan, Shimkus, Pickering,
Fossella, Bryant, Bliley (ex officio), Hall, McCarthy, Sawyer,
Markey, Pallone, Rush, and Strickland.
Staff present: Catherine Van Way, majority counsel; Joseph
Kelliher, majority counsel; Jeffrey Krilla, majority counsel;
Ramsen Betfarhad, economic adviser; Donn Salvosa, legislative
clerk; Sue D. Sheridan, minority counsel; Consuela M.
Washington, minority counsel; and Rick Kessler, minority
counsel.
Mr. Barton. The hearing on electricity competition with
special emphasis on market power, mergers and PUHCA by the
Commerce Committee's Subcommittee on the Energy and Power will
come to order. This is the third in a series of hearings that
we are holding on the electricity industry in this country.
At this time, I would recognize the distinguished full
committee chairman, the Honorable Tom Bliley of Virginia, for
an opening statement.
Chairman Bliley. Thank you, Mr. Chairman. And I want to
commend you for holding this hearing on mergers, market power
and PUHCA. Under your leadership today, this subcommittee is
examining some of the most complex and difficult issues arising
from the electricity power markets transition and regulation to
competition.
Our Nation's resolve to protect competitive markets from
anticompetitive practices is alive and well on this panel. For
over a century antitrust laws have been a bulwark against
anticompetitive practices that may tempt market participants to
seek a profit at the cost of distorting markets. In order that
the benefits of competition and the electricity power market go
directly to consumers, the electricity power market must be
open, robust and competitive.
Enforcement of antitrust laws will ensure that. Yet on the
road to fuller competitive electricity, market power
considerations, especially during the transition period,
require careful examination. Today many utilities have either
vertical or horizontal market power or both.
That market power is sanctioned by the regulatory regime
under which the utilities have historically operated. Vigilance
in a review of mitigating policies to ensure that market power
is not abused during the transition are required. The first
Federal role enacted, addressing market power abuses in the
electric power industry exclusively, was PUHCA in 1935.
I have heard some good arguments that the time has come for
PUHCA repeal. I have said it before, and I will say it again, I
do not view a stand-alone PUHCA legislation bill as an answer.
The committee has addressed PUHCA repeal as but one piece of a
greater effort for the comprehensive restructuring of the
industry. I will be interested in what our witnesses have to
say about that today.
And, again, Mr. Chairman, I thank you for holding this
hearing. I look forward to hearing the testimony of the
witnesses.
Thank you very much.
Mr. Barton. Thank you, Chairman Bliley.
We would now ask the gentleman from Ohio, Mr. Sawyer, would
you like an opening statement?
You are going to yield to Mr. Pallone of New Jersey.
The distinguished gentleman from New Jersey is recognized
for an opening statement.
Mr. Pallone. Thank you, Mr. Chairman. Mr. Chairman, I just
wanted to raise, initially, a process concern. I agree that it
is time to move the restructuring debate forward, and I think
we have to do so in a sound manner. But I hope that future
hearings will not lump together substantial and complex issues
such as the ones being discussed today.
I think our hearing record has to be updated because this
is a rapidly changing industry, but we also have to be
comprehensive. And for this reason, I don't understand why
market power and PUHCA are being discussed in the same hearing.
It also forces 12 witnesses to be digested in one sitting.
As you know, there is also another hearing going on
upstairs on MTBE, which makes it difficult to, you know,
actually sit through both hearings because we have them at the
same time. So I would hope that in the future we could separate
these topics and shorten the witness list and try to spend more
time, if you will, on individual aspects rather than lump them
all together as today, particularly when we have another
hearing at the same time.
I wanted to say that I do look forward to hearing from our
witnesses whether they think PUHCA should be repealed
immediately as a stand-alone provision or whether it should be
part of a comprehensive package. I also would like to know
whether today's witnesses believe that PUHCA utilities are
turning to investments abroad, which I keep hearing, whether
domestic investments are simultaneously declining, and whether
these conditions could be due to barriers created by an
outdated PUHCA.
Further, I would like to know from our witnesses whether
they believe that the industry will consolidate along the lines
of generation, transmission and distribution companies, and if
so, what types of effects this might have on consumers as well.
In terms of market power, I would like to know from our
witnesses whether the basis for review of market power would be
better placed with the Justice Department or with the FERC, the
Federal Energy Regulatory Commission.
I have some questions I would like to submit for the record
and would ask that official responses also be submitted for the
record, Mr. Chairman. And I will, unfortunately, be going back
and forth between these two hearings that we are having today.
Thank you.
Mr. Barton. Thank you, Mr. Pallone. Let me simply say,
before I give my opening statement on your process concern, I
understand the frustration about being on two subcommittees at
one time. I understand that. I understand that we have a large
number of witnesses collectively and individually on the panel.
I understand that.
Our problem is that we have had short workweeks.
On this particular hearing, we postponed it and rescheduled
it from last week, because we turned out not to have votes on
Friday, and it was both the majority and minority members'
request that we postpone it. We also had several requests for
additional witnesses from both side of the aisle, so that is
why we have such a large panel.
It is my intention to have a fairly aggressive schedule of
hearings. In fact, I hope to have at least one a week, and we
may try to do two a week if we can find a subcommittee hearing
room.
We have also started a supplemental process. Congressman
Pickering is going to chair a working group where people can
come in and address both members and staffs on both side of the
aisle, in addition to the formal hearing process. We are going
to try to give every view an opportunity to be heard and give,
as you put it, a comprehensive record, have that be developed.
So I share that. But just the mechanics of doing some of
these things, sometimes we have to compress and do things in an
imperfect way, but there is no intent to prevent any member on
either side from making sure that they are fully educated and
their members and their staffs, and also that all sides of the
issues are heard.
Mr. Pallone. Thank you.
Mr. Barton. Okay?
The Chair would recognize himself now for an opening
statement. As I just told the gentleman from New Jersey, this
is the third, but certainly not the last, of a number of
hearings that we are going to hold on the issue of electricity
deregulation and electricity restructuring. It is my intention
to have at least one formal hearing a week on this issue. We
may be able, in some weeks, to do two. We do want to move
forward in an aggressive fashion with an aggressive schedule.
I want all the members of the committee on both sides of
the aisle to be as informed as possible about the subject of
restructuring. And we are going to work very cooperatively with
staffs on both sides to make sure that the topics are relevant
and the witness lists are comprehensive.
On the other hand, we don't want to be repetitive, and if
possible, we don't want to have the hearings be so long that
people won't attend in the latter parts of the hearing.
With that in mind, our next hearing is going to be on the
role of the Federal electric utilities, with emphasis on the
Tennessee Valley Authority. We have announced that hearing for
next week.
We intend to have at least 4 more days of hearings, and in
those hearings we intend to address the issues of public
utilities--the Public Utility Regulatory Policy Act,
environmental concerns that members on both sides have raised,
the issue of stranded costs, the issue of consumer protection,
and the status of restructuring the various States that have
begun to move forward.
We also hope to take a look at the some of the innovations
that are occurring in the electricity generation transmission
and distribution sector of the economy. And at the minority's
request, which I fully support, we intend to hold a hearing on
the administration's bill that has been introduced as a
courtesy in the House by Chairman Bliley and former Chairman
Dingell.
Today's topic, market power, is a very good topic that
needs to be addressed. I personally believe that all consumers
should be allowed to purchase goods and services in the
electricity sector of the economy in a competitive environment.
I think that is preferable to having to purchase them as we do
today in a regulated environment only.
With competition, consumers can vote with their feet, so to
speak. If their utility company charges too much or they are
unhappy with the service or products offered in a truly
competitive market, they can move to a competing supplier or a
competing service officer. However, consumers will not be able
to fully exercise their rights if electricity suppliers are
able to and in fact do exert what we know as ``market power.''
It will come as a surprise to no one today that I believe
in free markets. It is my understanding and my hope that most
members of the subcommittee also believe in free markets. I
personally believe that government should be as uninvolved as
possible in our day-to-day decisions. In that vein, when
considering deregulating the electricity market, I believe that
we have to establish fair rules under which competition can
flourish; and then, as with most governments, it is the
government that governs the least that governs the best. We
should get out of the way and let the market operate.
The key is getting the rules right to begin with and making
sure during the transition period, from regulation to full-
blown competition, that consumers are not harmed. I might say
as an aside that that is a very, very difficult proposition to
legislate in a statutory fashion.
My goal is for all consumers in the United States to be
able to reap the full benefits of market competition. With that
in mind, I am going to be very interested to hear what our
witnesses today have to say, especially if they have--if they
believe that existing antitrust and merger authority under
Federal law, as it is today, is sufficient to protect consumers
during the transition period. Perhaps they may tell us that we
need to amend those laws; perhaps they may tell us that we need
additional statutory authority.
Finally, today, we are going to hear about the Public
Utility Holding Company Act. It is not as vibrant as it once
was, but it still provides some important consumer and investor
protection. I don't believe it should be repealed in its
entirety without first giving consumers the greatest protection
of all, the ability in an open market to choose their power
supplier.
I appreciate the testimony that we are about to hear. I
appreciate the hard work that the staffs on both sides have put
into making this hearing possible. And I appreciate the
witnesses that have agreed to voluntarily testify before us.
I would now like to recognize the distinguished ranking
member, Mr. Hall, for an opening statement.
Mr. Hall. Mr. Chairman, thank you. You have covered it very
adequately. And sometimes I think we have had so many of these
hearings that I will just say opening statement Number 47 or
Number 46, and in this computerized day, they can just pick it
up and put it in the record and go on.
I just want briefly to thank you for building a full and
complete record; it is very important that we do so. While
these hearings may seem like they are a little time-consuming
and a nuisance sometimes to those of us who sit here and
participate in them and have to sit here and listen.
We are eternally grateful to you men and women who have to
prepare for these and have to set aside some time for us. Many
of you have to travel for these hearings, and each one of these
is not a new experience to you, but they are a continuation of
what this panel sits through and hears.
But that is the way you do it, and it is very important for
Federal and State regulators that we have these hearings, and
for the courts as they try to discern the intent of Congress.
We owe it to our constituents as customers, to the men and the
women in the electricity business to be as thorough as
possible, and that is what we are trying to do.
I thank you, Mr. Chairman, and I yield back my time.
Mr. Barton. Thank you, Congressman Hall.
We would like to recognize the gentleman from Kentucky, Mr.
Whitfield, for an opening statement.
Mr. Whitfield. Mr. Chairman, I am going to waive my opening
statement.
Mr. Barton. Okay. Does the gentleman Ohio, Mr. Sawyer, wish
an opening statement at this time?
Mr. Sawyer. If I could, please, Mr. Chairman. I don't
intend to read a long statement.
I just wanted, first, to associate myself with the
discomfort that the gentleman from New Jersey expressed, but to
offer an appreciation for the logistical difficulties that you
face, Mr. Chairman.
I want to disagree with the gentleman from Texas only
insofar as, while these may seem like they are time-consuming,
I think the timing is enormously worthwhile. And that while the
work that goes on on the Federal level, by comparison to the
work that is going on within the States may not look as
complicated, it is indeed every bit as complicated, because we
have the responsibility to try to bring together in large
regional markets effective competition within a flexible
framework that recognizes the enormous differences that we are
going to hear about in detail next week when we talk about the
Federal utilities.
I am particularly interested today in the topics that you
have brought together in terms of market power and mergers and
PUHCA. They may not overlap so much with one another as they
abut end to end, and they do affect one another in ways that go
directly to the question of whether or not real competition is
actually possible.
In that sense, my continuing interest in transmission as
the framework within which a Federal action is appropriate,
recognizing that transmission is the key to vigorous markets
and reliable service and real and effective competition.
Without that kind of useful interconnection, competition indeed
could suffer.
In that sense, it is probably the single most important and
connecting focus among the topics that have taken place so far
and that you have planned for at least the immediate future.
Let me just say in closing that it is a pleasure to have
here on our panel an old friend, Ike Hunt, a Securities and
Exchange Commissioner. He comes to those responsibilities from
the deanship of the University of Akron Law School and a
distinguished career in addition to that.
We are pleased to have him here.
Thank you, Mr. Chairman.
Mr. Barton. Thank you.
We would recognize Mr. Rogan of California for an opening
statement.
Mr. Rogan. Mr. Chairman, thank you. Thank you for calling
this hearing.
Mr. Chairman, I ask unanimous consent that my opening
statement be made a part of the record.
Mr. Barton. Without objection.
Mr. Rogan. Mr. Chairman, further, in my opening statement,
I make reference to two letters sent by members of the
California delegation to Chairman Bliley. And may I also ask
unanimous consent that those be included as part of the record?
Mr. Barton. Without objection. We will have to show those
to the minority. But I don't think they will object.
Mr. Rogan. In that they are signed by all the Democrats as
well as Republican members, I trust that there won't be
objection.
Pending no objection, Mr. Chairman, I am happy to yield
back the balance of my time.
[The prepared statement of Hon. James E. Rogan follows:]
Prepared Statement of Hon. James E. Rogan, a Representative in Congress
from the State of California
I thank the Chairman. Mr. Chairman, today we begin the complex
discussion of how to infuse a greater level of competition into our
utility industries. The greatest aspect of any electricity
restructuring package must empower consumers by providing them with
market-based options in the electricity industry.
As in any market, consumer protections in the electricity industry
must be established. However, as we examine existing and future utility
regulations, we must evaluate at what point federal industry
regulations actually inhibit consumers. A clear example of excessive
market limitation is the Public Utility Holding Company Act. PUHCA was
created 65 years ago to mitigate the concentrated control of vast
utility empires in a few hands. In 1935, there was a need for PUHCA, as
utility rates skyrocketed and state regulations were powerless to
prevent further harm to consumers. PUHCA limited the ability of large
holding companies to cross-subsidize or establish vertical market
power.
While PUHCA may have been effective in the past, this archaic law
was not designed with competitive markets in mind. As we seek methods
for sound free-market principles to drive our electricity companies,
PUHCA may impede entry into electric generation by the very businesses
that would invigorate the industry.
Mr. Chairman, Presidents Reagan, Bush, and Clinton all have been
concerned that PUHCA would effectively prevent nationwide retail
electric competition by limiting new market entrants. I share these
concerns, and look forward to learning how we can change our current
policies so that real competition can be infused into our electricity
market.
Mr. Chairman, I would now like to focus my comments on an issue
vital to the state of California. As you know, California has begun its
four-year plan to transition the state's electricity market into a
free-market system.
This plan, A.B. 1890, was designed to protect the reliability of
electricity services and the interests of large and small consumers.
Further, it will enhance the ability of participants to transfer into
the new market in a way that would keep rates consistent. As Majority
Leader of the California State Assembly at the time A.B. 1890 was
crafted, I am pleased to note that both houses of the California
Legislature passed this bill with no dissenting votes.
Last year, I worked to garner the signature of every Member of the
California House delegation on a letter to Commerce Committee Chairman
Bliley. This letter, dated March 20, 1997, urged that any federal
electricity reform legislation would not preclude California from fully
implementing the electricity restructuring plan laid out in AB 1890.
Our delegation was unified in its desire to keep AB 1890 intact.
A few things have changed in our delegation since this letter was
written. However, one thing remains clear: the delegation still fully
supports AB 1890. I request unanimous consent to insert into the record
another letter to Chairman Bliley dated April 26, 1999, which is signed
by every new Member of the California House delegation. This letter
affirms their support for A.B. 1890 as well.
I thank the Chairman, and look forward to working with my
colleagues to provide competition in the electricity market in
California and in every state.
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Mr. Barton. The gentleman from Massachusetts is recognized
for an opening statement.
Mr. Markey. Thank you, Mr. Chairman, very much.
In the year 1776, Adam Smith published his classic defense
of free market economies, The Wealth of Nations, and in that
work is contained a passage which I think quite aptly describes
the situation that this subcommittee faces as we consider the
issues of electricity competition, utility market power and
mergers.
Adam Smith warned, ``Were the officers of the Army to
oppose with the same zeal and unanimity any reduction in the
numbers of forces with which master manufacturers set
themselves against every law that is likely to increase the
number of their rivals in the home market; were the former to
animate their soldiers in the same manner as the latter inflame
their workmen to attack with violence and outrage the proposers
of any such regulation, to attempt to reduce the Army would be
as dangerous as it has now become to attempt to diminish in any
respect the monopoly which our manufacturers have obtained
against us.
``This monopoly has so much increased the number of some
particular tribes of them that, like an overgrown standing
Army, they have become formidable to the government, and upon
many occasions intimidate the legislature. The member of
parliament who supports every proposal for strengthening this
monopoly is sure to acquire not only the reputation of
understanding trade, but great popularity and influence with an
order of men whose number and wealth render them of great
importance.
``If he oppose them, on the contrary, and still more if he
has authority enough to be able to thwart them, neither the
most--neither the most acknowledged probity, nor the highest
rank, nor the greatest public services can protect him from the
most infamous abuse and detraction, from personal insults, nor
sometimes from real danger, arising from the insolent outrage
of furious and disappointed monopolists.''
More than 200 years after those words were penned, Adam
Smith's warning still rings true. We sit here today surrounded
by the standing armies of the utility monopolists, who stand
ready to battle with great zeal any effort to increase the
numbers of their competitors. And they will heap praise and
other rewards on those members of parliament who are willing to
support their proposals for strengthening or maintaining their
monopoly and react with insolent outrage to any attempt to
disappoint their schemes for perpetuating their monopoly.
And so that is the central challenge before this
subcommittee today. Do we believe in Adam Smith's vision of
free markets and competition or do we stand with legions of the
monopolists?
In my view, any Federal electricity restructuring
legislation must address the prospect that electric utility
mergers, excessive utility market power or untrammeled utility
diversification into new lines of business might harm
electricity consumers, harm competition and energy or other
markets or undermine the emergence of a fully competitive
electricity market.
While much has changed since the 1930's when the Public
Utility Holding Company Act was enacted to curb the outrageous
abuses associated with the large multistate utility holding
company monopolies of that era, we still need to address the
potential for market power abuses as we make the transition to
a competitive generation market.
Without proper protections, utilities who control
generation, transmission and distribution assets easily could
be attempted to engage in self-dealing transactions with their
affiliates, cross-subsidize unregulated business ventures at
the expense of the captive consumers in their monopoly
transmission or distribution businesses or exploit their
continued market dominance to impede the growth of effective
competition.
Already the accelerating pace of utility mergers raise the
specter of giant mega-utilities that could control electricity
in gas markets and effectively bar new market entrants from
vying for customers. We, therefore, need to give the FERC the
tools to address the potential for anticompetitive actions by
utilities.
While our antitrust agencies can do much to address some of
the potential problems that we may face as we move to
competition, we must recognize that the utility industry is
just beginning to move from a government-sanctioned monopoly
toward a competitive market, and that even in the new
competitive environment, there are still going to be some
aspects of the business, such as transmission and distribution,
that remain regulated monopolies.
We, therefore, need the expert regulatory agency for the
electric utility industry, the FERC, to be involved in
addressing these market power issues. And in the last Congress
Republican Majority Whip Tom Delay and I introduced legislation
aimed at giving FERC the powers needed to address market power
and anticompetitive mergers.
In addition to this legislation, we also clearly need to
assure that the State regulators have access to books and
records and other information they will need to supplement
Federal actions in this area.
I thank you, Mr. Chairman for allowing me to make my
opening statement. I yield back the balance of my time.
Mr. Barton. We thank the gentleman from Massachusetts. And
we are glad that he has read The Wealth of Nations; that is
good to know.
We would recognize the gentleman from Tennessee, Mr.
Bryant, for an opening statement.
Mr. Bryant. Thank you, Mr. Chairman. I would waive my
opening statement.
Mr. Barton. We would recognize the distinguished gentleman
from Oklahoma, Mr. Largent, who, rumor has it, is about to
introduce a very good piece of legislation for an opening
statement.
Mr. Largent. Washington is full of rumors.
Thank you, Mr. Chairman. This really is an important
hearing. I think of all the issues that we look at as we study
electricity restructuring, market power may be one of the most
critical. We are going to hear about creating competition,
level playing fields, divestitures, vertical, horizontal,
cartel-like market power. But the real key for Congress to--the
goal should be--in terms of market power is striking balance,
balance between government regulation and allowing the free
market to work.
And, of course, if you are coming from the side of limited
government, we want to hear from the FTC, we want to hear from
the Justice Department, how do the current antitrust laws stand
up in a free market world, in a competitive electricity market.
And so, Mr. Chairman, I am anxiously awaiting the
testimony, and will yield back the balance of my time.
Mr. Barton. I thank the gentleman from Oklahoma.
The gentleman from North Carolina is recognized for an
opening statement, if he so wishes.
Mr. Burr. The gentleman would only thank the chairman for
the continuation of these hearings and, hopefully, for their
conclusion in the not-too-distant future. And I yield back.
Mr. Barton. Okay. Seeing no other members present, all
members not present who wish to put an opening statement in the
record, by unanimous consent that will be ordered.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Cliff Stearns, a Representative in Congress
from the State of Florida
Thank you very much, Mr. Chairman. I am pleased to have the
opportunity to hold this hearing and listen to our distinguished panel.
In this hearing, we will examine the issues related to market power,
mergers, and PUHCA. Consideration of the energy deregulation question
demands that we consider market power issues. These considerations are
of great significance during our current transition from reliance on
regulation to increased reliance on competition.
Before we begin, I would first like to welcome a member from our
second panel, Mr. Michael Kurtz, General Manager of Gainesville
Regional Utilities, in Gainesville, Florida. Today he is testifying as
a representative public power entities, particularly in Northern
Florida. I look forward to his testimony.
As most of us know, market power is the ability of a firm or a
coordinated group of firms to profitably price above the competitive
level for an extended period of time. This power can be accumulated or
abused through both vertical and horizontal arrangements (including
mergers.) Market power can result in higher prices, inefficient
allocations of scarce resources, and distortions of consumer choices.
While States regulators have taken a variety of approaches to
address market power, today we will primarily concern ourselves with
Federal authority to address market power. Does Congress need to pass
legislation giving Federal or State regulators additional authority to
address utility market power? I hope our panelists can shed some light
on this question.
The Public Utility Holding Company Act of 1935 was enacted to
simplify utility holding company systems. PUHCA's approach was to
reform the industry structure by creating many more non-affiliated
utilities, limiting the ability of large holding companies to recreate
themselves, and establishing new regulatory rules to prevent the
remaining holding companies from evading regulation.
PUHCA was not designed with competitive markets in mind. I question
the need for it. The past three Administrations have proposed PUHCA
repeal. In fact, Mr. Chairman, my comprehensive electric restructuring
legislation, the Electric Energy Empowerment Act of 1999, repeals
PUHCA. I look forward to our panelists' opinions on the need for PUHCA
repeal.
Again, I appreciate the opportunity to hear from our witnesses on
these important issues of market power, mergers, and PUHCA. Thank you,
Mr. Chairman.
______
Prepared Statement of Hon. John D. Dingell, a Representative in
Congress from the State of Michigan
Today's hearing attempts to cover a lot of ground concerning
matters of central importance to the electric restructuring debate.
Protecting consumers from the raw exercise of market power has always
been a concern of the Congress, and it is an appropriate focus for the
Subcommittee.
During the 1920's and '30's, Congress carefully studied the
expansion of the utility industry and the quality of service it
provided to consumers. After years of investigations, Congress enacted
two statutes--the Federal Power Act and the Public Utility Holding
Company Act of 1935--to protect consumers and shareholders, and to
ensure that no company could manipulate the marketplace.
The concerns Congress responded to then--affiliate abuses, self-
dealing, cross-subsidization, and exploitation of captive consumers--
are the same concerns we must be wary of today. In addition, in states
which have opened up their retail markets, market power can be used to
undermine competition, producing the worst of all worlds--unregulated
markets dominated by one or more companies in a position to manipulate
markets to their own advantage and to the consumer's detriment.
At the Subcommittee's last hearing, Chairman Hoecker of the Federal
Energy Regulatory Commission suggested that, in light of changes in the
marketplace, Congress needs to provide the Commission with new
authorities to remedy discriminatory practices. The Administration bill
contains several amendments to the Federal Power Act which are very
interesting. Although I am not necessarily opposed to these, I would
observe that some of the suggestions--authority to order divestiture
and to mandate participation in transmission organizations--are of a
profound nature. We should not enact such changes on the basis of
economic theory or conjecture, but only on the basis of a thorough
record clearly describing the nature and extent of market abuses, and
the resulting need for such far-reaching ``reforms.'' The Federal Power
Act and PUHCA were not lightly undertaken, and any proposal to
significantly amend these laws should be equally well founded.
Finally, I would like to say a few words about PUHCA. I have a
passing interest in this statute, which is little understood and
perhaps insufficiently appreciated. If I ran a registered holding
company, I'm sure I would chafe at the Act's restrictions--and it may
be that PUHCA deserves reexamination in light of current market
conditions. Congress has carefully crafted several limited exemptions
from the Act in recent years, based on a thorough understanding of both
the purpose and the likely effect of such changes. To date, these
exemptions seem to be working well, and I am not opposed to further
discussion of the Act's role in today's markets.
However, it is inappropriate to consider major changes to PUHCA on
the basis of a hope and a prayer that competition will automatically
replace its consumer protections. It is also the case that PUHCA has
important implications for the securities markets and for shareholder
protection, and this is proper subject for the Subcommittee on Finance
and Hazardous Materials.
I commend the Chairman for beginning to address these important
issues today, and look forward to the witnesses' testimony.
Mr. Barton. We want to welcome our first panel today. The
first panel is a group of distinguished members of the
administration, we have Mr. Douglas Melamed, who is the
Principal Deputy Attorney General of the Antitrust Division of
the U.S. Department of Justice. We have the Honorable Mozelle
Thompson, who is a Commissioner of the Federal Trade
Commission. We have the Honorable Isaac C. Hunt, who is a
Commissioner of the Securities and Exchange Commission. And
last, but not least, we have Mr. Douglas W. Smith, the General
Counsel of the Federal Energy Regulation Commission.
Welcome, gentlemen. Your statements are going to be entered
into the record in their entirety. We are going to start with
Mr. Melamed, and give you approximately 5 minutes. But if you
take a little bit longer, that is acceptable. And we will just
go right down the line.
So, Mr. Melamed, you are recognized for 5 minutes.
STATEMENTS OF A. DOUGLAS MELAMED, PRINCIPAL DEPUTY ATTORNEY
GENERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE; HON.
MOZELLE W. THOMPSON, COMMISSIONER, FEDERAL TRADE COMMISSION;
HON. ISAAC C. HUNT, JR., COMMISSIONER, SECURITIES AND EXCHANGE
COMMISSION; AND DOUGLAS W. SMITH, GENERAL COUNSEL, FEDERAL
ENERGY REGULATORY COMMISSION
Mr. Melamed. Thank you, Mr. Chairman.
Good morning, members of the subcommittee. I appreciate----
Mr. Barton. You need to put the microphone very close to
you.
The gentleman from Massachusetts.
Mr. Markey. I was just going to make that request.
Mr. Melamed. I appreciate the opportunity to speak to you
about some of the issues relating to market power in the
electric power industry.
Mr. Barton. You actually need to speak into the microphone.
You need it close and you need to speak into it.
Mr. Melamed. I will keep working at it.
With sales totaling more than $200 billion annually in the
United States, it would be hard to overstate the importance of
the electric power industry to the American economy and to
American families. All of us have a stake in eliminating
obstacles to efficient and economical generation and
transmission of electricity.
It has become possible, with improved technology, to
generate electric power efficiently with much smaller
generating plants than those typically relied upon in the past.
There is, thus, a growing consensus that the generation segment
of electric power supply could become more efficient and
economical under competitive market forces.
The transmission and distribution segments, on the other
hand, will likely retain their natural monopoly characteristics
for the foreseeable future. The challenge, thus, is to foster
vigorously competitive generation markets within the context of
regulated transmission and distribution monopolies.
Many States are moving to open their retail markets to
competition. It is thus important that Congress consider the
need for Federal legislation to address possible market power
problems that could impede the efforts to increase competition
in this industry. The key to retail competition in the electric
power industry is a well-functioning wholesale market, and
because wholesale markets are regional in nature and subject to
Federal regulation, legislation to remove impediments to
competition in wholesale markets must be undertaken at the
Federal level.
Let me now outline the views of the Department of Justice
about the basic components of such legislation. 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 antitrust laws do not prohibit the mere possession of
monopoly or market power that is the result of skill, accident,
or a previous regulatory regime. I think this point responds to
some of the concerns that were raised earlier this morning by
both Chairman Barton and Congressman Pallone.
Antitrust remedies are thus not well-suited to address
problems of market power in the electric power industry that
result from existing higher levels of concentration and
generation or from existing vertical integration. We believe,
therefore, that regulators--FERC, in particular--should be
given additional tools to remedy market power problems that are
found to exist.
The provisions that would give FERC clear authority to
remedy possible market power problems are an important part of
the administration's recently unveiled Comprehensive
Electricity Competition Act. Let me explain why.
Owners of electric power transmission facilities in the
U.S. commonly also own generation facilities, and their control
over transmission gives them the ability to thwart competition
in generation. Owners of transmission have the incentive and
the ability to favor their own generation facilities and to
restrict access to transmission facilities by the generation
facilities of competitors.
FERC took a historic step toward addressing this problem in
1996 by enacting Order 888, which requires that all utilities
over which FERC has jurisdiction provide open and
nondiscriminatory access to transmission facilities for
wholesale buyers and sellers. Monitoring and enforcing
compliance with regulations against discrimination are
particularly difficult, however, when quality of service is as
time-sensitive as it is in electric power.
Because power is sold on an hourly basis, market dynamics,
and thus the incentive and ability to exploit market power, can
shift over the course of each day making it virtually
impossible to intervene before conditions have changed. There
is thus no way to ensure that a transmission owner will not
operate its transmission assets in a manner that favors its own
generation and thereby impairs competition.
Regional system operators are a promising solution to this
problem. The administration proposal calls for amending the
Federal Power Act to make clear that FERC has the authority to
acquire transmission utilities, to turn over operational
control of those facilities to a regional, independent system
operator. Such a structural remedy can eliminate the ability of
the owner of monopoly transmission facilities to act
anticompetitively by ensuring that transmission services are
provided by a neutral entity that has no stake in any
particular generation facility and thus has no incentive to
discriminate against competitors.
It is critical that ISOs be large enough to operate the
transmission system efficiently and reliably. The provision in
the administration proposal authorizing FERC to establish
minimal criteria for the approval of ISOs would allow FERC to
reject those that are too small to operate the transmission
system reliably and efficiently.
High concentrations of ownership or generation capacity may
allow the exercise of market power in another way, even if
competition is permitted in wholesale and retail markets. The
administration bill would give FERC the authority to mitigate
such market power in wholesale markets, as well as backup
authority to remedy market power in retail markets upon
requests from a State if the State determines that it lacks the
authority to remedy a retail market power problem.
Consistent with the Department's strong preference for
structural remedies for competitive problems--responding, I
might add, to Congressman Largent's comment a moment ago--FERC
would be given express authority to order divestiture of
generation facilities to the extent necessary to mitigate
market power after consultation with the department and the
Federal Trade Commission.
Let me conclude my testimony by briefly discussing possible
reform of the Public Utility Holding Company Act of 1935. The
administration opposes stand-alone repeal of the act. In our
review, the interlocking nature of the system of Federal laws
regarding utility regulation, including PUHCA and the Federal
Power Act, makes it preferable that those statutes be amended
either as part of comprehensive restructuring legislation, or
concurrently with such legislation, rather than on a piecemeal
basis.
The administration's restructuring legislation includes a
repeal of PUHCA, but the bill also includes several other
measures designed to protect consumers from potential holding
company abuses.
In closing, we are confident that truly competitive
electricity generation will surpass regulation in efficiently
allocating resources and maximizing consumer welfare. And we
look forward to continuing to work with the subcommittee on the
important issue of market power.
I will be pleased to answer whatever questions you may
have. Thank you.
[The prepared statement of A. Douglas Melamed follows:]
Prepared Statement of A. Douglas Melamed, Principal Deputy Assistant
Attorney General, Antitrust Division, Department of Justice
Good morning, Mr. Chairman and Members of the Subcommittee. I
appreciate the opportunity to speak to you about some of the issues
relating to market power in the electric power industry.
With sales totaling more than $200 billion annually in the U.S., it
would be hard to overstate the importance of the electric power
industry to the American economy and to American families. All of us
have a stake in eliminating obstacles to efficient and economical
generation and transmission of electricity.
The electric power industry developed historically from a patchwork
of isolated and vertically integrated electric utilities, each
generating and distributing electric energy to consumers in relatively
compact service areas. Advances in technology over time made power
generation more efficient on a larger scale and made transmission of
electric energy possible over long distances. These advances encouraged
interconnection among utility transmission networks, initially for
enhanced reliability and then for improved economy of service.
More recently, it has become possible, with improved technology, to
generate electric power at efficient cost levels with much smaller
generating plants. There is now a growing consensus that the generation
segment of electric power supply could become more efficient and
economical under competitive market forces. The transmission and
distribution segments, on the other hand, will likely retain their
natural monopoly characteristics for the foreseeable future. The
challenge, then, is to foster vigorously competitive generation markets
within the context of regulated transmission and distribution
monopolies. It is in pursuit of the goal of promoting competitive
generation markets that the Administration submitted its comprehensive
electricity restructuring bill to Congress last month.
In thinking about restructuring, it is important to remember that
the electric power industry has a number of unique characteristics that
distinguish it not only from basic manufactured goods markets, but also
from other network industries such as telecommunications. The product--
electric energy--cannot be stored; and consumer demand for it varies
widely from season to season, from day to day, and from hour to hour.
Actual quantities generated must continuously and instantaneously match
widely varying consumer demand.
In addition, the flow of energy over an electric power network
cannot economically be directed through switches to follow a particular
path, so in the power grid of today and the immediate future, energy
will flow along the path of least resistance. Therefore, the actual
physical delivery patterns for electricity may not match the
contractual arrangements for sale of electricity, and successful
transmission will depend on the relative output levels of all
generators on the power grid.
Many states are moving to open their retail markets to competition.
It is thus important that Congress consider the need for federal
legislation to address possible market power problems that could impede
the efforts to increase competition in the electric power industry. We
believe that the bill that the Administration submitted to Congress
comprehensively and adequately addresses the market power issues about
which we are all concerned.
The keys to retail competition in the electric power industry are
well-functioning wholesale markets. Although much progress has been
made in this regard, there is more to be done. Because power markets
are regional in nature, federal legislation to remove impediments to
competition in these markets is necessary.
In what follows, I will outline the views of the Department of
Justice about the basic components of such legislation. I will first
give a brief overview of enforcement activity by the Department in the
electricity industry. I will then discuss some of the market power
problems facing the industry and legislative proposals that we believe
are necessary to address them. And I will conclude by discussing
possible reform of the Public Utility Holding Company Act of 1935.
Enforcement Activity of the Antitrust Division
The Antitrust Division has long played an important role in
protecting and promoting free and open markets in the electric power
industry. A seminal antitrust case in this industry was an enforcement
action brought by the Antitrust Division under the Sherman Act to stop
the Otter Tail Power Company from monopolizing the retail distribution
of electric power in its service area in Minnesota, North Dakota, and
South Dakota. Otter Tail owned the transmission lines in its service
area, and one of the means it employed to monopolize the market was to
refuse to transmit, or ``wheel,'' power over its lines to municipal
utilities competing with it for local distribution. In 1973, the
Supreme Court upheld a lower court order requiring Otter Tail to wheel
power to the municipal utilities, ruling that the electric power
industry was subject to the antitrust laws even though it was also
subject to regulation by the Federal Power Commission.
The Division has brought two recent enforcement actions involving
the electricity industry. The first was an action against Rochester Gas
and Electric (``RG&E'') concerning a contract between RG&E and the
University of Rochester in which RG&E promised to sell electricity to
the University at reduced rates in exchange for the University's
promise not to compete against RG&E in the sale of electricity to
consumers.
The case had its origin in the very high regulated electricity
rates in New York in the early 1990s. In response, the New York Public
Service Commission opened a proceeding to permit utilities to set
prices through individual negotiations with certain customers rather
than according to a tariff filed with the state.
In the meantime, the University of Rochester, a major industrial
customer of RG&E, was examining ways to reduce its energy costs. The
University had a decades-old facility that produced steam for heating
and cooling campus buildings. The University determined that it could
build a more efficient plant to meet its steam needs and also produce--
or cogenerate--more electricity than it needed as a byproduct. New York
State law expressly permitted the University to sell the plant's excess
electricity to other users, in competition with RG&E.
The new plant was never built. Instead, RG&E and the University
entered into an agreement. In part, the agreement resembled a simple--
and legal--requirements contract, under which RG&E agreed to supply the
University with electricity at discounted rates and the University
agreed to ``remain a customer of RG&E for all of its power needs' for
seven years. But the agreement did not stop there. It also contained a
seven-year restriction, unrelated to RG&E's sale and the University's
purchase of electricity, pursuant to which the University promised
``not to solicit or join with any other customers of RG&E to . . .
provide them with electric power . . . from any source other than
RG&E.''
The Division brought an action under the Sherman Act against RG&E,
challenging the agreement not to compete between RG&E and the
University. This action was resolved by a consent decree that prohibits
RG&E from entering into agreements not to compete, with certain limited
exceptions (for example, contracts to sell a business).
The second action was a challenge of the merger of Pacific
Enterprises (``Pacific''), a California natural gas utility, and Enova
Corporation (``Enova''), a California electric utility. The Department
was concerned that, as a result of the merger, the combined Pacific/
Enova would have the incentive and ability to use its natural gas
transportation monopoly to withhold gas or gas transportation from
competing gas-fired electric plants that competed with Enova. Gas-fired
plants are generally the most costly to operate, and they set the price
for all electricity sold during times, such as summer, when electricity
demand is at its highest. The complaint alleged that Pacific/Enova
would, by restricting the access to natural gas of certain competing
gas-fired plants, be able to raise their costs and thereby to increase
electricity prices to California consumers. The complaint further
alleged that Pacific/Enova would have an incentive to do so because it
is a low-cost producer of electricity and would therefore stand to
profit from any increase in the price of electricity.
The settlement requires Enova to divest its largest low-cost
electricity plants. Once this is accomplished, the merger will no
longer create incentives for Enova to raise electricity prices. Enova
is also required to provide notice to and obtain the approval of the
Department should it wish to acquire or manage certain California
electric power facilities in the future.
Market Power
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. In the
Administration's electricity bill we have, therefore, granted
regulators the tools to remedy market power problems that may be found
to exist.
The provisions that would give FERC clear authority to remedy
possible market power problems are an important part of the
Administration's recently unveiled Comprehensive Electricity
Competition Act. Let me explain why.
Transmission Access
Owners of electric power transmission facilities in the U.S.
commonly also own generation facilities, and their control over
transmission gives them the ability to thwart competition in
generation. Owners of transmission have the incentive and the ability
to favor their own generation facilities and otherwise to restrict the
access to transmission facilities by the generation facilities of
competitors. Such discrimination can take the form of denying
competitors in electricity generation access to the transmission
monopolist's services or offering less favorable terms than those
provided to its own generation facilities. The FERC took an historic
step toward addressing this problem by enacting Order 888, which
requires that all utilities over which FERC has jurisdiction provide
open and nondiscriminatory access to transmission facilities for
wholesale buyers and sellers.
Monitoring and enforcing compliance with regulations against
discrimination are particularly difficult, however, when quality of
service is as time-sensitive as it is in electric power. Because power
is sold on an hourly basis, market dynamics--and thus the incentive and
ability to exploit market power--can shift over the course of each day,
making it virtually impossible to intervene before conditions have
changed. There is thus no way to ensure that a transmission owner will
not operate its transmission assets in a manner that favors its own
generation.
Independent Regional System Operators (``RSOs'') are a promising
solution to this problem. RSOs are entities that operate the
transmission grid independent of the interests of the owners of the
generation facilities. The Administration proposal calls for amending
the Federal Power Act to clarify that FERC has the authority to require
transmission utilities to turn over operational control of transmission
facilities to a regional independent system operator. FERC would also
be given the authority to set other requirements pertaining to RSOs as
needed to serve the public interest. Such a structural remedy can
eliminate the incentive and ability of the owner of monopoly
transmission facilities to act anticompetitively by ensuring that
transmission services are provided to competitors by a neutral entity
which has no stake in any particular generation facility and thus has
no incentive to discriminate.
It is critical that RSOs be large enough to operate the
transmission system efficiently and reliably. The provision in the
Administration proposal authorizing FERC to establish minimum criteria
for the approval of RSOs would allow FERC to reject RSOs that may be
improvements over the status quo but are too small to operate the
transmission system reliably and efficiently.
Optimally-sized RSOs can also help to mitigate market power that is
the result of high concentrations of ownership of generation assets.
RSOs can do so by eliminating transmission rate pancaking and thereby
enlarging geographic markets. Rate pancaking occurs when a transmission
customer is forced to pay separate rates for a transaction that crosses
multiple transmission systems, even though the total costs of the
systems would produce a rate, if the systems were treated as one, that
is lower than the sum of the ``pancaked'' rates. Pancaking results in
total transmission prices that do not accurately reflect the actual
cost associated with a particular transaction. It thus distorts
competition both by increasing transmission prices and by tending to
insulate nearby generation facilities from what might otherwise be more
vigorous competition from more distant facilities.
Large regional RSOs can also internalize certain transaction costs,
such as those associated with loop flows, as well as play an important
role in the control and management of constrained transmission
interfaces, particularly those which significantly impact competition
in regional power markets. Poorly managed, competitively significant
constraints can hinder transactions across the interface and invite
anticompetitive manipulations of the interface. We fear that, without
independent operation of the transmission grid, regulators will be
unable to address adequately the almost certain flood of complaints of
self-dealing that will undoubtedly allege manipulations of posted
available transmission capacity and abuses of the native load
preference that is granted utilities under Order 888.
Some transmission owners may decline voluntarily to turn over
control of their transmission facilities to an ISO. Given the
importance of ensuring that the transmission system operates in a
nondiscriminatory and efficient manner, it is critical to competition
in the electricity industry that legislation clarify FERC's authority
to order transmission owners to join FERC-approved RSOs.
Generation Market Power
High concentrations of ownership of generation may allow the
exercise of market power, even if there is competition in wholesale and
retail markets. The Administration bill would give FERC the authority
to mitigate market power in wholesale markets, as well as backup
authority to remedy market power in retail markets upon request from a
state if the state, in the course of implementing a retail competition
plan, determines that it has insufficient authority to remedy a retail
market power problem. Consistent with the Department's strong
preference for structural remedies for competitive problems, FERC would
be given express authority to order divestiture of generation
facilities to the extent necessary to mitigate market power, in
consultation with the Department and the Federal Trade Commission. The
authority would be implemented by requiring generators with market
power to submit a mitigation plan, which FERC could approve with or
without modification.
Giving FERC the necessary tools to remedy market power in
generation is critical because vertically integrated electric utilities
have typically had market power in their distribution areas, and
significant pockets of market power may remain after wholesale and
retail competition are widely introduced. We do not know the extent to
which this will be the case after restructuring occurs, but if it turns
out that there are significant post-restructuring market power
problems, FERC must be given the necessary tools to address them.
PUHCA Reform
I would like to conclude my testimony by briefly discussing
possible reform of the Public Utility Holding Company Act of 1935
(``PUHCA''). During the Great Depression, a handful of large multi-
state corporations that controlled a significant amount of electricity
generation and transmission collapsed. Congress responded by enacting
PUHCA. This legislation split up the companies and imposed certain
restrictions on utilities operating in more than one state. The result
has been an industry dominated by vertically integrated utilities
regulated by state commissions.
The Administration opposes standalone repeal of PUHCA. In our view,
the interlocking nature of the system of federal laws regarding utility
regulation, including PUHCA and the Federal Power Act, makes it
preferable that these statutes be amended either as part of
comprehensive restructuring legislation or concurrently with such
legislation, rather than on a piecemeal basis.
The Administration's restructuring legislation includes a repeal of
PUHCA. However, the bill also includes several measures designed to
protect consumers from the potential for holding company abuses such as
cross-subsidization. These measures should include enhanced merger
review by FERC, additional state and federal access to holding company
data, and the market power provisions I discussed earlier. The
Administration believes that it is important to approach electricity
restructuring issues comprehensively in order for Congress to be able
to evaluate the context in which changes in PUHCA are to take place.
Conclusion
We are confident that truly competitive electricity generation will
surpass regulation in efficiently allocating resources and maximizing
consumer welfare. Moreover, we believe that the Administration's
electricity bill comprehensively addresses the competitive issues that
will arise in a restructured market, and establishes the framework
through which truly competitive markets can thrive. We look forward to
continuing to work with the Subcommittee on the important issue of
market power.
Mr. Barton. Thank you, Mr. Melamed.
Before I recognize Mr. Thompson, I actually have The Wealth
of Nations here. And I hope people can see that it has been
used. I have actually read it. I want to quote from a little
bit different part. I want to quote from chapter 2 for my good
friend, Mr. Markey, because I think it goes to the purpose of
this hearing today.
It says, ``Man has almost constant occasion for the help of
his brethren, and it is in vain for him to expect it from their
benevolence only. He will be far more likely to prevail if he
can interest their self-love in his favor and show them that it
is for their own advantage to do for him what he requires of
them.
``Whoever offers to another a bargain of any kind proposes
to do this. Give me that which I want and you shall have that
which you want is the meaning of every such offer, and it is in
this manner that we obtain from another the far greater part of
those good offices which we stand in need of. It is not from
the benevolence of the butcher, the brewer or the baker that we
expect our dinner, but from their regard to their own self-
interest.''
That is why we are here, to see if we can get an open
market. And copies of this book are available. They can be
purchased.
All right. With that, I would welcome Mr. Thompson. We are
going to set the clock at about 7 minutes, because it is really
not fair to ask you gentlemen, I think, to summarize in 5
minutes.
So, Mr. Thompson.
STATEMENT OF HON. MOZELLE W. THOMPSON
Mr. Thompson. Thank you. And good morning Chairman Barton
and members of the committee. I am pleased to appear before you
today to present testimony concerning the important topic of
deregulation in competition in the electric power industry.
We have submitted the Commission's full prepared statement
for the record, but I am compelled to say that my testimony
today in response to questions is my own and doesn't
necessarily represent the views of the Commission or any other
commissioner. The staff of the Commission has, in the past,
commented to the FERC on the importance of wholesale
competition and on the appropriate analytical framework for
evaluating mergers.
The Commission has also provided comments to a number of
States on the importance of considering the impact of market
power as they introduce retail competition in the electric
power industry. Consistent with that role, on September 13 and
14 of this year, the Commission will further assist States and
localities by holding a public workshop on market power and
consumer protection considerations in the electric power
industry.
Now, my colleague from the Department of Justice has
described numerous enforcement actions in this area in his
written testimony, so I won't discuss the FTC's own activities.
But I can state that the FTC's experience shows that vigorous
market competition provides consumers with the benefits of low
prices, good products, and greater innovation.
In principle, these benefits should be available to
electric power consumers as a century of regulation gives way
to competition; however, these benefits will not be achieved
without appropriate action to alleviate market power impacts.
The starting point for competition in the electric power
industry is not the level playing field of a newly developed
market. Instead, we are starting with what are essentially
regulated monopolies; ensuring that consumers receive the
benefit of deregulation, they would be greatly affected by the
ability of the energy market to move toward a more open and
competitive stance.
How that occurs is largely dependent on factors presented
in each case, but in all cases, a recognition of market power
issues is critical to achieving competitive benefit.
While the Federal antitrust laws are not a panacea for all
competitive concerns, their application can help in this
transition by making sure that mergers don't aggravate market
power problems or shield incumbent companies from new
competition. The antitrust laws can also help by preventing the
use of anticompetitive acts and practices such as predation,
raising rivals' costs and discrimination in granting access to
essential facilities by companies seeking to inhibit
competition from new entrants or suppliers.
It is important to note, however, that current antitrust
laws do not directly address the conditions present in the
energy market where market dominance results from decades of
regulation and is not accompanied by the above-described unfair
tactics. To address these conditions, the administration
proposes to give FERC authority to address existing market
power and remedy it in the wholesale power markets.
We agree that FERC, in consultation with the antitrust
agencies, should have available the array of potential
antitrust remedies, including ordering companies, to divest
generation assets to several buyers in order to decrease the
company's market dominance.
However, remedying existing market power in the retail
segment is more problematic. Anticompetitive conduct would be a
predicate for antitrust action against retail market power, yet
local distribution monopolies may be able to exercise their
power to the detriment of consumers without having to engage in
clearly anticompetitive behavior.
At present, the proposed energy reform efforts would leave
States with substantial regulatory responsibilities for local
energy distribution. Yet regulating retail competition will
likely entail reviewing the distribution and marketing power of
companies across State lines in regional markets. It is
unlikely that most States are well equipped to protect
competition in these types of situations. Federal antitrust
agencies, working in consultation with FERC, can help by
contributing assessments of market power and the methods and
principles that we use to analyze mergers and unfair methods of
competition.
The remedies applied to these cases can also be applied to
alleviate the market power problem. The Federal antitrust
agencies can contribute to ensuring that newly deregulated
energy markets are open and competitive.
Now, the two types of market power that are of antitrust
concern as we move to retail electric competition are, first,
horizontal market power, permitting prices to be raised above
competitive levels for an extended period; and second, vertical
market power that could easily be exercised through
discriminatory access to transmission which today largely
remains a monopoly.
The final market power issue concerns mergers. For example,
mergers between generating firms may create market power that
could be exercised by withholding capacity in order to drive up
rates; while mergers at the retail level between electric
utilities, or between utilities and independent retail
marketers, could harm existing or potential competition.
Deregulation in a number of industries has shown us that it
can provide substantial benefits to consumers. And while we
have similar hopes in the electric power industry where market
forces have had an effect on firms long accustomed to the
slower, sheltered pace of regulated life, the potential for
consumer savings and increased choice is not guaranteed.
Vigorous antitrust enforcement will be an essential tool
for ensuring competition, especially in the formative years as
the regulatory grasp is loosening. In particular, strong merger
enforcement will be necessary to ensure that deregulation does
not result in the accumulation and abuse of private market
power.
The Commission stands ready to meet its enforcement
responsibilities and looks forward to working cooperatively
with the FERC and the Department of Justice to protect the
consumer gains that should follow the introduction of market
forces to the electric power industry.
Thank you.
[The prepared statement of Hon. Mozelle W. Thompson
follows:]
Prepared Statement of Mozelle W. Thompson,1 Commissioner,
Federal Trade Commission
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\1\ This written statement represents the views of the Federal
Trade Commission. My oral presentation and responses to questions are
my own, and do not necessarily represent the views of the Commission or
any other Commissioner.
---------------------------------------------------------------------------
i. introduction
Mr. Chairman and members of the Committee, the Federal Trade
Commission is pleased to appear before you today to present testimony
concerning the important topic of deregulation and competition in the
electric power industry, and how deregulation may raise issues of
market power. We will also discuss the issue of mergers in an industry
undergoing deregulation. The staff of the Commission has in the past
commented to the Federal Energy Regulatory Commission (``FERC'') on the
importance of wholesale competition 2 and on the appropriate
analytical framework for evaluating mergers.3 The Commission
has also provided comments to a number of states on the importance of
considering the impact of market power as they introduce retail
competition in the electric power industry.4 To further
assist states and localities in examining these issues, on September
13th and 14th of this year, the Commission will hold a public workshop
on market power and consumer protection considerations in the electric
power industry.
---------------------------------------------------------------------------
\2\ See Comment of the Staff of the Bureau of Economics, Federal
Trade Commission, ``Promoting Wholesale Competition Through Open Access
Non-discriminatory Transmission Services by Public Utilities, Recovery
of Stranded Costs by Public Utilities and Transmitting Utilities,''
Dkt. No. RM96-6-000 9 (Aug. 7, 1995) (``BE/FERC I'').
\3\ See Comment of the Staff of the Bureau of Economics, Federal
Trade Commission, ``Inquiry Concerning Commission's Merger Policy Under
the Federal Power Act,'' Dkt. Nos. RM95-8-000 and RM94-7-001 (May 7,
1996) (``BE/FERC II'').
\4\ For the Commission's most recent state comment, see Comment of
the Staff of the Bureau of Economics of the Federal Trade Commission
Before the Alabama Public Service Commission, Dkt. No. 26427,
Restructuring in the Electricity Utility Industry (Jan. 8, 1999). Other
recent comments have been submitted to the Louisiana Public Service
Commission, Dkt. No. U-21453 (affiliate transactions) (Oct. 30, 1998);
the Public Utility Commission of Nevada, PUCN Dkt. No. 97-5034
(affiliate transactions) (Sept. 22, 1998); the Mississippi Public
Service Commission, Dkt. No. 96-UA-389 (Transco proposal) (Aug. 28,
1998).
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The FTC is a law enforcement agency whose statutory authority
covers a broad spectrum of the American economy, including the electric
power industry. The Commission enforces, among other statutes, the FTC
Act 5 and the Clayton Act, 6 sharing with the
Department of Justice authority under Section 7 of the Clayton Act to
prohibit mergers or acquisitions that may ``substantially lessen
competition or tend to create a monopoly.'' 7 In addition,
Section 5 of the FTC Act prohibits ``unfair methods of competition''
and ``unfair or deceptive acts or practices,'' thus giving the
Commission responsibilities in both the antitrust and consumer
protection areas. The Commission also provides advice and guidance on
competition issues, based upon its substantial experience in applying
antitrust principles across many different industries.
---------------------------------------------------------------------------
\5\ 15 U.S.C. Sec. Sec. 41-58.
\6\ 15 U.S.C. Sec. Sec. 12-27.
\7\ 15 U.S.C. Sec. 18.
---------------------------------------------------------------------------
The FTC's experience has taught the Commission that competition
between market participants will ordinarily provide consumers with the
benefits of low prices, good products, and greater innovation. In
principle, these benefits should be provided in the electric power
industry as a century of regulation gives way to competition. However,
these benefits will not be achieved without appropriate action to
alleviate market power impacts.
There are huge resources at stake in this industry. Total industry
revenues are estimated at $200 billion a year, and total industry
capital investment is around $700 billion, or almost 10% of total U. S.
capital investment. If the levels of cost savings and technological
improvements in this industry approach those attained in other
previously deregulated industries, many consumers likely will be
substantially better off in terms of lower prices and increased
choices.8 But these potential savings and innovations will
not appear automatically. Proper application of antitrust principles
and enforcement should ensure that the benefits of competition reach
consumers.
---------------------------------------------------------------------------
\8\ See R. Crandall and J. Ellig, Economic Deregulation and
Customer Choice: Lessons for the Electric Industry, Center for Market
Processes at 2-3 (1996) (within 10 years of substantial deregulation,
prices in the natural gas, long distance telecommunications, airlines,
trucking, and railroad industries decreased between 25 and 50 percent
while quality of service improved). Of course, these benefits were not
spread evenly among all consumers, and some previously subsidized
service may have been negatively impacted.
---------------------------------------------------------------------------
ii. regulatory background in the electric power industry
In order to evaluate the impact of market power issues in the
electric power industry and to better understand the role of the
antitrust agencies in addressing market power, it is important to
review the unique history of this industry. For most of this century,
the electric power industry has been heavily regulated because the
industry was perceived to be a natural monopoly. In an effort to
minimize costs, the industry was organized as a series of local,
vertically integrated monopolies. For the most part, the power company
owned the generation, transmission, storage, and distribution systems.
Each of these local monopolies had market power, but it was market
power that was controlled by federal and state regulatory bodies.
Mergers were allowed to take place without regard to market power
because regulation prevented market power abuse, and many of these
mergers would have been prohibited in a nonregulated industry.
Technical and organizational innovations in the last decade may
have made room for competition in the generation and sale of electric
power. However, the starting point for competition in the electric
power industry is not the level playing field characteristic of a newly
developing market. Instead, we are starting with regulated monopolies.
Ensuring that consumers receive the benefits of deregulation may be
greatly affected by the ability of the energy market to move to an open
and competitive stance rather than one dominated by newly unregulated
monopolies. How that occurs is largely dependent on the factors present
in each case. In some instances, for example, there may be no
transition problem because easy entry at the generation and
transmission levels will eliminate most market power. In other
instances, however, competitive constraints on existing market power
may be only modest at best. In all cases, however, a recognition of
market power issues is critical to achieving the benefits of
competition.
While Federal antitrust laws are not a panacea for all competitive
concerns, their application can help in this transition to competition
by making sure that mergers do not aggravate market power problems or
shield incumbent companies from new competition. The antitrust laws can
also help by preventing the use of anticompetitive acts and practices
such as predation, raising rivals' costs, and discrimination in
granting access to essential facilities, by companies seeking to
inhibit competition from new entrants or suppliers.
It is important to note, however, that current antitrust laws do
not directly address the current conditions in the energy market where
market dominance resulting from decades of regulation are not
accompanied by the above-described unfair methods of competition. To
address these conditions, the administration proposes to give FERC
authority to assess existing market power and remedy it in wholesale
power markets. The array of potential remedies could include ordering
companies to divest generation assets to several buyers in order to
decrease the companies' market dominance. However, remedying existing
market power in the retail segment is more problematic.
Anticompetitive conduct would be a predicate for antitrust
enforcement against retail market power, yet the local distribution
monopolies may be able to exercise their power to the detriment of
consumers without having to engage in clearly anticompetitive behavior.
At present, all proposed energy reform efforts would leave states with
substantial regulatory responsibilities for local energy distribution.
Yet regulating retail competition will entail reviewing the
distribution and marketing of electric power across state lines in
regional markets. It is unlikely that states will be well-suited to
protect competition in these types of markets.
The federal antitrust agencies, working in consultation with FERC,
can significantly contribute to an assessment of existing market power,
even though our current enforcement activities do not directly address
this issue. First, the analytical methods and principles that we use to
analyze mergers and unfair methods of competition are equally
applicable to an existing market power problem in a wholesale or retail
electric market. Second, the remedies applied to merger and non-merger
cases can also be applied to alleviate existing market power. In sum,
concerns about existing market power in this formerly monopolistic
industry are appropriate. The federal antitrust agencies can contribute
to ensuring that newly deregulated energy markets are open and
competitive. The Commission looks forward to working in consultation
with FERC, along with the Department of Justice, to address market
power issues.
iii. some specific concerns
Economic theory and experience with other industries tell us that
the transition from regulated monopolies to competition is not an
automatic process `` doing it right requires actively promoting
competition and guarding against practices that stifle competition. For
several reasons, the previous accumulation and potential abuse of
market power may blunt the competitive potential of deregulatory
efforts.
First, because industry participants have become used to a
regulatory environment, some may attempt to protect or duplicate many
of the comfortable aspects of that environment. Where they are
accustomed to being a local monopoly and using the regulatory process
to bar or disadvantage new entry, industry members may attempt to use
monopolistic or cartel behavior (such as information-sharing) to
protect their entrenched positions after deregulation. A monopolist
will not ordinarily welcome new entry, and issues of access or
structural realignment designed to promote access will have to be
considered with those incentives in mind.
Second, the transition from regulation to competition is never
instantaneous or complete. Market participants may find themselves
subject to inconsistent requirements. Some participants may become
subject to market forces while others remain regulated, or different
participants may be subject to different regulations. It may be
inefficient and unfair to have different regulatory rules apply to
direct competitors. In the electric power industry, for example,
potential anticompetitive behavior may be monitored by FERC, state
public utility commissions, or the federal antitrust agencies,
depending on the pace and mix of deregulatory efforts. In a
deregulatory environment, it is important to provide consistent
competitive analysis and review.
Third, regulatory bodies may have policy goals other than
competition that warrant consideration in the transition to a
competitive environment. In the electric power industry, for example,
universal lifeline service 9 at low cost is an important
public policy goal. Another important policy goal in the electric power
industry is environmental protection. These considerations usually fall
outside the scope of traditional antitrust analysis. Accordingly, some
continuing regulation or other special provisions may be needed to
ensure that other policy goals are taken into account.
---------------------------------------------------------------------------
\9\ In the electric power and telephone industries, regulatory
agencies require providers to offer basic, low-cost service that may be
subsidized by consumers who purchase additional services.
---------------------------------------------------------------------------
Fourth, removing entry and capital expenditure controls from an
industry subject to a long period of regulation will unleash pent-up
demand for corporate restructuring. Resulting consolidations may be
procompetitive or competitively neutral, or they may instead be an
illegal attempt to acquire market power.
These four conditions imply that the antitrust laws will have to be
applied flexibly to address the issues that arise in transitional, or
formerly regulated, industries. Regulatory regimes are usually
established in response to some market failure, perceived or actual,
that makes market forces inadequate to protect consumers and promote
efficiency. Even if a consensus exists that the existing regulatory
schemes are unresponsive or ineffective, or that technology obviates
the need for regulation, the impact of regulation on the industry
structure, incentives, and expectations requires that the antitrust
agencies be especially sensitive in applying antitrust rules while
market forces regain primacy.
Applying antitrust rules with special care does not, however, mean
a ``hands off'' approach. The consumer and efficiency gains from
deregulation could be jeopardized without appropriate antitrust
enforcement during and after deregulation. The goal is to see
regulation replaced with competition, not with collusion or dominant
firm behavior. Here, the antitrust laws' flexibility is a major
advantage. Antitrust jurisprudence unfolds on a case-by-case approach,
constantly adapting to new information and new experiences. Where, as
here, the deregulated world will be significantly different from the
experience of most industry participants, it is difficult to know in
advance what oversight will work best. The difficulty of predicting how
the industry will look in the future suggests that fixing government
oversight policy in concrete at an early stage could be
counterproductive. In this type of uncertain environment, flexible
antitrust enforcement may be particularly important.
Although the decision about how to proceed has potentially
substantial economic consequences for consumers, we will not comment on
the method and scope of regulatory reform, but will state that strong
antitrust oversight of the industry will and should remain vital no
matter what course of deregulation is chosen.
iv. market power issues
As previously stated, no matter how deregulation proceeds, market
power issues must be addressed if the benefits are to accrue to
consumers. Two kinds of market power are of antitrust concern as we
move to retail electric competition. The first is horizontal market
power, permitting prices to be raised above competitive levels for an
extended period, and the second is vertical market power that could be
exercised through discriminatory access to transmission, which today
largely remains a monopoly.10
---------------------------------------------------------------------------
\10\ As previously noted, in addition to already-existing market
power, market power can be acquired through merger.
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A. Horizontal Market Power
Horizontal market power in this context refers to the ability of
one or more electric generating or retailing firms to raise prices
above competitive levels for an extended period of time. Horizontal
market power results in higher prices, inefficient allocations of
scarce resources, and distortions of consumer choices. Concerns about
horizontal market power in generation during deregulation have been
heightened by the pioneering British deregulatory experience, as well
as experience with the initial efforts in the United States. Following
the implementation of electric industry restructuring in the United
Kingdom, researchers determined that the two private generating firms
that dominated the industry were exercising market power.11
These findings prompted subsequent orders for divestiture of generation
capacity. Very recent evidence from the initial deregulatory efforts in
California indicates that market power problems in generation also
exist there.12
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\11\ Green, R. J. and Newbery, D., ``Competition in the British
Electricity Spot Market,'' 100 J. Pol. Econ. 929 (1995). See also Alex
Henney, ``The Mega-NOPR: A Brit Crosses the Pond to Explain What's
Happening at FERC,'' Pub. Utils. Fort., July 1, 1995 at 29; ``U.K.'s
National Power, Powergen Must Sell Off Up to 6000 MW, Lower Rates,''
Elec. Util. Wk., Feb. 21, 1994.
\12\ The Market Monitoring Committee of the California Power
Exchange, Second Report on Market Issues in the California Power
Exchange Energy Markets, at 67 (March 9, 1999) (``there is evidence
that some generators were successfully exercising their market power
during high-demand hours'').
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B. Vertical Market Power
In addition to horizontal market power, effective antitrust
oversight will require close examination of the incentives and ability
of a vertically integrated transmission monopolist, whose rate of
return is regulated, to evade the regulatory constraint in order to
earn a higher profit. Its participation in an unregulated market may
give it the means to do so, either by discriminating against its
competitors in the unregulated market or by shifting costs between the
regulated and unregulated markets.13
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\13\ See Brennan, T., ``Why Regulated Firms Should Be Kept Out of
Unregulated Markets: Understanding the Divestiture in United States v.
AT&T,'' 32 Antitrust Bull. 741 (1987), and ``Cross Subsidization and
Cost Misallocation by Regulated Monopolists,'' 2 J. Reg. Econ. 37
(1990).
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The vertical relationships in this industry are different from
those in almost all other industries that have not experienced long
periods of pervasive regulation. The important issue this industry
structure raises is how to ensure that the benefits of new competition
in power generation actually reach the consumer. A key to effective
competition is to provide open access 14 for independent
generators to vertically integrated transmission and distribution
systems so that lower prices in generation are passed on to consumers.
The problem is that a vertically integrated transmission monopolist
ordinarily would have an incentive to discriminate against independent
generators. As a result, consumers might be deprived of the benefits of
an independent generator's lower costs. While one solution could be
requiring vertically integrated companies to be split up so that
transmission entities would not be controlled by generating companies,
large scale forced divestiture could prove costly in terms of complex
legal liability issues for existing contracts and the sacrifice of
potentially important economies of scope and vertical
integration.15 Consequently, the method chosen by both the
states and FERC to assure open access and efficient pricing in the
transmission and distribution grids is to require that products be
unbundled and to require that the pricing decisions of the vertically
integrated firms be transparent.16 If correctly done, this
unbundling should prevent a monopolist from discriminating against
independent power generators and from shifting costs to the regulated
portion of its business.17
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\14\ Open access refers to the principle that a monopoly owner of
transmission or distribution assets must make them available to
independent generators at price and service levels equal to those
provided to its owned generators. FERC has focused on behavioral rules
for open access and on developing mandatory common information sources
concerning supply and transmission conditions. See BE/FERC I at 15-16.
\15\ A number of utilities have followed a path of voluntary
divestiture in order to compete more effectively in the deregulated
climate. See Comments of Pacific Gas and Electric Company on
Divestiture of Generation Facilities, ``Order Instituting Rulemaking on
the Commission's Proposed Policies Governing Restructuring California's
Electric Services Industry and Reforming Regulation,'' Dkt. No. R.94-
04-031 (Mar. 19, 1996).
\16\ See FERC Order 888, Dkt. RM958-000.
\17\ Brennan, T., ``Cross Subsidization and Cost Misallocation by
Regulated Monopolists,'' 2 J. Reg. Econ. 37 (1990).
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Two methods of unbundling currently are being used by regulators in
the electric power industry. For wholesale sales of interstate
transmission of electricity, FERC requires ``functional'' unbundling,
whereby it orders a transmission monopolist to grant open access and
charge the same prices to independent generators that it charges
internally to its own generator plants. A number of states (with
concurrence from FERC), on the other hand, have opted for what the FTC
staff has termed ``operational'' unbundling, in which an independent
system operator is established to operate the transmission and
distribution grids to insure open access and transparent pricing while
the monopolist retains ownership of the physical assets.18
The operational unbundling plan may work to preserve economies of
vertical integration, internalize loop flow externalities, and assure
transparent investment signals for potential investors 19
while eliminating the strategic opportunities of the monopolist
20 to favor subtly its own generating capacity.21
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\18\ See BE/FERC I at 3.
\19\ Operation of a transmission system by an independent system
operator should assist investors in distinguishing between high
transmission prices caused by physical bottlenecks at peak demand
periods and high prices caused by the exercise of market power.
\20\ Because supply and demand for electricity are so time-
sensitive, even the slightest delay in transmission can have a serious
impact on the reliability of any generator. A regulatory agency might
find it very difficult to implement functional unbundling because of
the difficulty of monitoring the numerous individual transactions
nationwide to prevent degradations of contracts between independent
generators and wholesale purchasers. See BE/FERC I at 5-9.
\21\ A third possibility considered by some states is to create a
``Transco,'' a for-profit, independent transmission company affiliate
that would operate the transmission grid (which would continue to be
owned by the transmission company) and would be subject to
nondiscrimination rules. In comments to the state of Mississippi, supra
n.4, staff noted that Transcos may present particularly difficult
governance questions, are likely to be biased against remedies to
transmission congestion that involve new generation, and may not
provide greater operating efficiencies than independent system
operators.
---------------------------------------------------------------------------
Consistent with economic theory regarding potential competition
concerns of this nature, numerous independent producers and large
industrial users have alleged discriminatory conduct in the operation
of transmission facilities.22 The FTC staff has commented on
some of these issues in the past, 23 and stands ready to
provide further assistance if called upon.
---------------------------------------------------------------------------
\22\ See, e.g., ``Petition for a Rulemaking on Electric Power
Industry Structure and Commercial Practices and Motion to Clarify and
Reconsider Certain Open-Access Commercial Practices,'' filed with FERC
by Altra Energy Technologies, Inc. and others on March 25, 1998. Aside
from the question of compliance with FERC Order 888, there is a
question about the breadth of its application. While FERC orders
generally apply broadly to all energy sales involving interstate
commerce, Order 888 does not apply to transmission by traditional
vertically integrated utilities to accommodate ``native'' load.
Transmission to accommodate native load accounts for a large portion of
total transmission. Order No. 888, 61 Fed. Reg. at 21552.
\23\ BE/FERC I.
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C. Mergers
As previously noted, the final market power issue concerns mergers.
For example, mergers between generating firms may create market power
that could be exercised by withholding capacity in order to drive up
rates, while mergers at the retail level, between electric utilities or
between electric utilities and independent retail marketers, could harm
existing or potential competition.
Following deregulation, horizontal mergers are more likely than
vertical mergers in the electric power industry, given the current high
level of vertical integration.24 Our merger analysis is not
industry specific; it is designed to apply across all industries.
Nonetheless, this industry, like all industries, has certain unique
features that would require that the analysis be applied in a flexible
manner. Using the analysis described in the Horizontal Merger
Guidelines, jointly developed by the Commission and the Department of
Justice, 25 the enforcement agencies assess whether the
proposed transaction would harm consumers of any relevant product or
service through increased prices, lower quantity, quality or service
levels, or reduced technological innovation.
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\24\ Vertical mergers with fuel suppliers are a prominent
exception. The Commission's recent settlements in CMS and PacifiCorp
addressed concerns with raising rivals' costs. See CMS Energy Corp.,
FTC File No. 991 0046 (consent agreement accepted for public comment,
Mar. 18,1999); PacifiCorp, FTC File No. 971 0091 (consent agreement
accepted for public comment, Feb. 17, 1999). The proposed consent order
in PacifiCorp was withdrawn when the acquisition was abandoned.
\25\ U.S. Department of Justice and Federal Trade Commission,
Horizontal Merger Guidelines, 4 Trade Reg. Rep. (CCH) para. 13,104
(Apr. 2, 1992), as amended, April 8, 1997. FERC announced that it would
follow the principles in the Guidelines in its own analysis of utility
consolidations. See Inquiry Concerning the Commission's Merger Policy
under the Federal Power Act, RM96-6-000, 61 Fed. Reg. 68,595 (Dec. 18,
1996).
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Defining the relevant product and geographic markets is the first
step in determining where any potential anticompetitive effects will be
felt. A relevant product market is one in which consumers of the
product would not switch to an alternative product in numbers
sufficient to make a small but significant increase in price
unprofitable.26 Similarly, a relevant geographic market
comprises the locations of all of the alternative suppliers to which
customers would likely turn if prices of the relevant product rose by a
small but significant amount.
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\26\ Specifically, the markets are defined by asking whether a
hypothetical monopolist could raise prices by a ``small but significant
and nontransitory'' amount, such that not enough buyers would switch to
alternatives to make the price increases unprofitable. If the price
increases would not be profitable, the relevant market is too narrowly
defined. See Merger Guidelines Sec. 1.11.
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In many industries, the more distinctive and important inquiry
concerns the relevant product market, where the consumers' substitutes
are determined. In the electric power industry, both product and
geographic markets may prove difficult to define with absolute
precision. Within the overall electricity market, discrete electricity
product markets will need to be defined, taking into account, among
other things, time, reliability, and interruptibility. The more
difficult issue in this industry may be defining the relevant
geographic market. As open access to the transmission and distribution
grids becomes the norm, consumers will be able to turn to ever more
distant sources of electricity. The geographic market is unlikely to be
national in scope, but may include parts of Canada or Mexico during
some periods. But establishing the relevant markets may be more
complicated because changes in the definition of the product market
also change the scope of the geographic market.27
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\27\ Electricity cannot be stored in any measurable quantities; it
must be generated as it is consumed. Also, demand varies substantially
not only seasonally but by time of day. Thus, the substitute sellers of
electricity to any given consumer may be a number of firms offering
subtly different products. Some consumers may want guaranteed
reliability, while others may opt for interruptible power at lower
prices. Some consumers may choose to defer power consumption to off-
peak hours in return for lower prices. Each of these consumer decisions
affects the definition of the relevant product market and may affect
the number of potential suppliers in that market.
---------------------------------------------------------------------------
Once markets have been determined, the participants and their
market shares must be identified. A market that is divided evenly among
many participants will rarely have the potential for abuse of market
power.28 The Merger Guidelines use a measure of market share
distribution called the Herfindahl-Hirschman Index to determine the
concentration of firms in the industry. In this industry, as in others,
however, antitrust analysis goes significantly beyond the mere
calculation of market shares. Certain economic characteristics may make
this industry susceptible to cartel behavior at a level of
concentration different from the point at which we would otherwise be
concerned. A careful and thorough analysis of each transaction must
therefore be undertaken once the relevant markets and market shares
have been determined. If experience suggests that this industry is
particularly subject to cartel behavior, or that mergers indirectly
promote cartel behavior, then threshold levels of concern indicated by
market shares may need to be adjusted.
---------------------------------------------------------------------------
\28\ Other things being equal, an acquiring firm will find it more
difficult to engage in anticompetitive conduct, either unilaterally or
in conjunction with others, in an unconcentrated than in a concentrated
market. See Merger Guidelines Sec. 2.0.
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Entry and efficiencies are factors that are given considerable
emphasis in the Guidelines. If entry into a market is easy, post-merger
market participants likely will be unable profitably to increase prices
above the pre-merger level. Entry analysis in the electric power
industry poses a number of difficulties. The size of an efficient
generating plant has decreased significantly but it still may take
longer than the Guidelines benchmark of two years to enter at that
level. Siting and environmental problems may complicate and delay entry
at any level. Excess capacity and the decommissioning costs of nuclear
power plants are important factors to consider. The ease of entry in
this industry may vary from case to case as relevant markets change.
For instance, available sites for new building may be more abundant in
some areas than in others, making entry quicker and less costly.
The potential for anticompetitive effects does not end the inquiry
in a typical merger investigation. Where the potential for
anticompetitive effects is a close question, the potential efficiencies
generated by the merger must be considered. Cognizable efficiencies may
include economies of scale, integration of production facilities, plant
specialization, and lower transportation costs.
The antitrust agencies have long considered efficiencies as
relevant to the exercise of their prosecutorial discretion when
deciding whether to challenge a transaction. In a close case, an agency
may refrain from challenging a merger if it appears that the merger
would generate substantial efficiencies. After a series of Commission
hearings on Competition Policy in the New High-Tech, Global Marketplace
indicated concern with how the antitrust agencies consider efficiencies
in evaluating mergers, the Commission and the Department of Justice
published a revised efficiency section for the Guidelines.29
---------------------------------------------------------------------------
\29\ U.S. Department of Justice and Federal Trade Commission,
Revised Section 4 of the Horizontal Merger Guidelines (Apr. 8, 1997).
---------------------------------------------------------------------------
Efficiencies may have particular significance for the electric
power industry. In an industry that has been pervasively regulated for
many years, efficiencies are likely to play an enhanced role in
motivating restructuring after deregulation. Where capital mobility was
once circumscribed by regulators, firms will now be able to pursue the
most efficient, market-determined structure.30
---------------------------------------------------------------------------
\30\ For instance, independent generators that have acted as
maverick firms may be able to acquire additional capacity quickly, thus
enhancing their ability and incentive to lower prices. Firms with an
inefficient mix of generating plants for their markets (e. g., more low
cost coal fired plants and fewer flexible natural gas fired plants in a
market with highly volatile time of day demand peaks) may be able to
alleviate this inefficiency by adjusting their capacity to the demand.
---------------------------------------------------------------------------
v. conclusion
Deregulation in a number of industries has proven to be beneficial
to many consumers and the competitive process. The deregulated
industries generally exhibit lower prices, increased quality and
quantity of goods and services, and heightened innovation. The electric
power industry is currently experiencing substantial deregulation.
While it is unclear whether that process will be driven by the states
or by the federal government, the outcome in either case should be that
market forces will have an effect on firms long accustomed to the
slower, sheltered pace of regulated life.
The potential for consumer savings and increased choice is
enormous, but it is certainly not guaranteed. Vigilant antitrust
enforcement is an essential component of a market economy, especially
in the formative years after the regulatory grasp is loosened. In
particular, strong merger enforcement is necessary to ensure that the
inevitable restructuring does not result in the accumulation and abuse
of private market power. The Commission stands ready to meet its
enforcement responsibilities to protect the consumer gains that should
follow the introduction of market forces to the electric power
industry.
Mr. Barton. Thank you Mr. Thompson.
We would now like to hear from the Honorable Isaac Hunt,
who is a Commissioner with the SEC. Mr. Hunt, your statement is
in the record in its entirety. We would ask you to attempt to
summarize it in 7 minutes.
STATEMENT OF HON. ISAAC C. HUNT, JR.
Mr. Hunt. Yes, sir. Thank you. Chairman Barton----
Mr. Barton. And speak--you know, those microphones really
are very directional.
Mr. Hunt. Sorry.
Mr. Barton. Thank you.
Mr. Hunt. I am pleased to have this opportunity to testify
before you this morning on behalf of the SEC regarding the
Public Utility Holding Company Act of 1935. The Commission
continues to support efforts to repeal the 1935 act and replace
it with legislation that preserves certain important consumer
protections.
In the first quarter of this century, the electric and gas
utility industry had developed serious problems through the
misuse of the holding company structure. The 1935 act was
passed by Congress to address these problems. Reorganization
and simplification of existing public utility holding companies
in order to eliminate those abuses was a major part of the
SEC's work in the years following passage of the 1935 act.
By the early 1980's, the SEC concluded that the 1935 act
had accomplished its basic purpose and that its remaining
provisions to a large extent either duplicated other State or
Federal regulations or otherwise were no longer necessary to
prevent the recurrence of the abuses that lead to its
enactment.
The SEC concluded that many aspects of the 1935 act
regulation had become redundant. State regulation had expanded
and strengthened since 1935, and the SEC had enhanced its
regulation of all issuers of securities, including public
utility holding companies. In addition, institutional investors
such as pension funds and insurance companies had become more
sophisticated and demanded more detailed information from all
issuers of securities than was previously available.
Also changes in the accounting profession and the
investment banking industry had provided investors and
consumers with a range of protections unforeseen in 1935;
therefore, the SEC unanimously recommended that Congress repeal
the statute.
Because the potential for abuse through the use of
multistate holding company structures and related concerns
about consumer protection continued to exist and because of the
lack of consensus for change, repeal legislation was not
enacted in the early 1980's. Since that time, however, the SEC
has continued its effort to administer the 1935 act flexibly to
accommodate developments in the industry while adhering to the
basic purpose of the statute. In addition, Congress has created
a number of statutory exceptions to the regulatory framework of
the 1935 act.
In the summer of 1994, in light of regulatory and other
changes taking place in the utility industry, the SEC staff, at
the direction of Chairman Arthur Levitt, undertook a study of
regulation of public utility companies that culminated in a
June 1995 report. Based on the report, the SEC has recommended
that Congress consider three legislative options for
eliminating unnecessary regulatory burdens.
The preferred option is repeal of the 1935 act accompanied
by the creation of additional authority at the State and
Federal level to permit the continued protection of consumers.
The Federal Energy Regulatory Commission should have the
authority to exercise jurisdiction over transactions among
holding company affiliates. The FERC and State utility
commissions should be able to review these transactions by
having access to books and records. This course of action will
achieve the economic benefits of unconditional repeal and also
protect consumers.
The SEC, of course, is aware that the proposals of
comprehensive reform of energy legislation are under
consideration by Congress. Representative Stearns and Burr of
this committee introduced two of these proposals, H.R. 1587 and
H.R. 662. Repeal of the 1935 act could also be accomplished as
a part of this overall reform. The SEC respectively defers to
the judgment of Congress as to whether the public interest is
better served by separate repeal of the 1935 act or repeal as
part of a larger legislative initiative.
The continuing efforts to restructure the utility industry
raise major competitive issues relating to the market power of
utilities. The 1935 act was intended to address, among other
things, the concentration of control of ownership of the public
utility industry.
These issues were considered by the SEC staff report. The
act requires the SEC to disapprove the utility acquisition if
it will tend toward concentrated control of public utility
companies in a manner detrimental to the public interest or to
the interest of investors or consumers.
Traditionally, the SEC's analysis of utility acquisitions
includes consideration of Federal antitrust policies. However,
the SEC is not the only agency that reviews the potential
anticompetitive effects of utility acquisitions. In many
instances, proposed utility acquisitions are subject to FERC
and State approval.
Like the SEC, the FERC must consider antitrust implications
of matters before it. The potential anticompetitive effects are
also reviewed by the Department of Justice and the Federal
Trade Commission. In recent years, the SEC has looked to all of
these regulators for their expertise in certain operational
issues, including the competition issues. In particular, the
SEC has looked to these regulators in matters where the
combined entity resulting from a merger would have control of
key transmission facilities and of surplus power.
Although the SEC does independently assess the transaction
under the standards of the 1935 act, we have generally relied
upon and ``watchfully deferred'' to the FERC's greater
expertise regarding issues related to utility competition;
therefore, repeal of the 1935 act is unlikely to affect how
market power issues are reviewed at the Federal level.
While the 1935 act provides an additional layer of
regulatory approval for certain utility mergers, the
Commission's reliance, where appropriate, on other regulators
for the key market power determination, makes its review of
market power issues largely redundant.
I would be pleased to answer your questions, Mr. Chairman.
Thank you.
[The prepared statement of Isaac C. Hunt, Jr. follows:]
Prepared Statement of Isaac C. Hunt, Jr., Commissioner, Securities and
Exchange Commission
Chairman Barton, Ranking Member Hall, and Members of the
Subcommittee: I am pleased to have this opportunity to testify before
you on behalf of the Securities and Exchange Commission (``SEC''). The
SEC continues to support repeal of the Public Utility Holding Company
Act of 1935 (``1935 Act''). Repeal should be done in a manner that
eliminates duplicative regulation while also preserving important
protections for customers of utility companies in multistate holding
company systems.
i. introduction
The electric and gas utility industry had developed serious
problems in the first quarter of the century through the misuse of the
holding company structure.1 The 1935 Act was enacted to
address these problems. Reorganization and simplification of existing
public utility holding companies in order to eliminate those abuses was
a major part of the SEC's work in the years following passage of the
1935 Act.
---------------------------------------------------------------------------
\1\ These abuses included inadequate disclosure of the financial
position and earning power of holding companies, unsound accounting
practices, excessive debt issuances and abusive affiliate transactions.
See 1935 Act section 1(b), 15 U.S.C. Sec. 79a(b).
---------------------------------------------------------------------------
In the early 1980's, the SEC unanimously recommended that Congress
repeal the statute.2 The SEC concluded that the 1935 Act had
accomplished its basic purpose and that its remaining provisions, to a
large extent, either duplicated other state or federal regulation or
otherwise were no longer necessary to prevent recurrence of the abuses
that led to its enactment. Many aspects of 1935 Act regulation had
become redundant: state regulation had expanded and strengthened since
1935, and the SEC had enhanced its regulation of all issuers of
securities, including public utility holding companies. In addition,
institutional investors such as pension funds and insurance companies
had become more sophisticated and demanded more detailed information
from all issuers of securities than was previously available. Changes
in the accounting profession and the investment banking industry also
had provided investors and consumers with a range of protections
unforeseen in 1935.
---------------------------------------------------------------------------
\2\ See Public Utility Holding Company Act Amendments: Hearings on
S. 1869, S. 1870 and S. 1871 Before the Subcomm. on Securities of the
Senate Comm. on Banking, Housing, and Urban Affairs, 97th Cong., 2d
Sess. 359-421 (1982) (statement of SEC).
---------------------------------------------------------------------------
Because the potential for abuse through the use of multistate
holding company structures, and related concerns about consumer
protection, continued to exist, and because of a lack of consensus for
change, repeal legislation was not enacted in the early 1980s. Since
that time, however, the SEC has continued its efforts to administer the
1935 Act flexibly to accommodate developments in the industry while
adhering to the basic purpose of the statute. In addition, Congress has
created a number of statutory exceptions to the regulatory framework of
the 1935 Act.3
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\3\ Most recently, Congress enacted the Telecommunications Act of
1996. Pub. L. 104-104, 110 Stat. 56 (1996). The Telecommunications Act
permits registered holding companies, without prior SEC approval under
the 1935 Act, to acquire and retain interests in companies engaged in a
broad range of telecommunications activities.
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ii. the sec's study
In response to continuing changes in the utility industry in recent
years, and the accelerated pace of those changes, Chairman Arthur
Levitt directed the SEC's Division of Investment Management in 1994 to
undertake a study, under the guidance of then-Commissioner Richard Y.
Roberts, to examine the continued vitality of the 1935 Act. The study
was undertaken as a result of the developments noted above and the
SEC's continuing need to respond flexibly in the administration of the
1935 Act. Its purpose was to identify unnecessary and overlapping
regulation, and at the same time to identify those features of the
statute that remain appropriate in the regulation of the contemporary
electric and gas industries.4
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\4\ The study focused primarily on registered holding company
systems, of which there are currently nineteen. The 1935 Act was
enacted to address problems arising from multistate operations, and
reflects a general presumption that intrastate holding companies and
certain other types of holding companies which the 1935 Act exempts and
which now number more than one hundred, are adequately regulated by
local authorities. Despite their small number, registered holding
companies account for a significant portion of the energy utility
resources in this country. As of December 31, 1998, the nineteen
registered holding companies owned more than $170 billion of electric
utility assets, approximately 25 percent of all assets owned by
investor-owned electric utilities. Electric utilities owned by
registered holding companies served 26.4 million customers, or
approximately 22% of all electric customers in the United States.
---------------------------------------------------------------------------
The SEC staff worked with representatives of the utility industry,
consumer groups, trade associations, investment banks, rating agencies,
economists, state, local and federal regulators, and other interested
parties during the course of the study. In June 1995, a report of the
findings made during the study (``Report'') was issued. Based on these
findings, the SEC has recommended, and continues to recommend, that
Congress repeal the 1935 Act. At the same time, however, the SEC also
recommends enactment of legislation to provide necessary authority to
the Federal Energy Regulatory Commission (``FERC'') and the state
public utility commissions relating to affiliate transactions, audits
and access to books and records, for the continued protection of
utility consumers.
There are several reasons why the SEC supports conditional repeal
of the 1935 Act. As the Report indicates, portions of the 1935 Act,
such as those governing issuance of securities, acquisition of other
utilities, and acquisition of nonutility businesses by registered
holding companies, largely duplicate other existing regulation and
controls imposed by the market. Nevertheless, there is a continuing
need to ensure the protection of consumers.
Electric and gas utilities have historically functioned as rate-
regulated monopolies, and there is a continuing risk that a monopoly,
if left unguarded, could charge higher rates and use the additional
funds to subsidize affiliated businesses in order to boost its
competitive position in other markets (``cross-subsidization''). So
long as electric and gas companies continue to function as monopolies,
the need to protect against the cross-subsidization of nonutility
businesses will remain. The best means of guarding against cross-
subsidization is likely to be audits of books and records and federal
oversight of affiliate transactions.
Utility rates are regulated by state authorities, and some
regulators subject these rates to stricter scrutiny than others. A
survey of state regulation, undertaken in conjunction with the study,
revealed that the states may not have adequate authority to perform
audit and review functions with respect to multistate holding
companies. The provisions of the 1935 Act provide significant
assistance to these states in their effort to protect utility
consumers. Earlier efforts to repeal the 1935 Act may have failed
because they did not address this potential ``regulatory gap'' in
consumer protection.
iii. proposals to repeal the 1935 act
Repeal of the 1935 Act may be accomplished either separately or as
part of a more comprehensive package of energy reform legislation. Four
bills have been introduced in both Houses of Congress that provide for
the repeal of the 1935 Act, either as part of comprehensive energy
restructuring or on a stand-alone basis. H.R. 1587, introduced by
Congressman Stearns on April 27, 1999, and H.R. 667, introduced by
Congressman Burr on February 10, 1999 (collectively, the ``House
Bills''), would repeal the 1935 Act as part of broader energy-related
legislation.5 For example, the House Bills would provide the
FERC with the right to examine books and records of registered holding
companies and their affiliates that are relevant to costs incurred by
associated utility companies, in order to protect ratepayers. The House
Bills would also provide an interested state commission with access to
such books and records (subject to protection for confidential
information), if they are relevant to costs incurred by utility
companies subject to the state commission's jurisdiction and are needed
for the effective discharge of the state commission's responsibilities
in connection with a pending proceeding. Finally, the House Bills would
provide a transition period in which states, utilities and other
parties affected by the change in the regulatory regime could prepare
for the new regime. The House Bills accomplish many of the goals of the
conditional repeal contemplated by the SEC.
---------------------------------------------------------------------------
\5\ S.516, which was introduced in the Senate on March 3, 1999,
would also repeal the 1935 Act as part of broader energy-related
legislation. S.313, which was introduced in the Senate on January 27,
1999, would repeal the 1935 Act on a stand-alone basis. The 1935 Act
repeal provisions in the Senate and House bills are, in substance, the
same, except that H.R. 1587, among other things, would exempt from its
provisions holding companies currently exempt from registration under
the 1935 Act. These differences may require further analysis.
---------------------------------------------------------------------------
As the SEC has stated in testimony on bills introduced in the last
Congress to repeal the 1935 Act, the House Bills do not give the FERC
the authority it needs to oversee transactions among affiliates in
holding company systems and, in this respect, do not reflect the SEC's
preferred legislative option.6 Provisions granting access to
books and records provide the FERC and the state commissions with the
authority they need to identify affiliate transactions and their terms
and effects on utility costs and rates. However, the potential for
cross-subsidization and consequent detriment to consumers remain, and
the SEC believes that it is important for the FERC to have the
flexibility to engage in more extensive regulation, if necessary. As a
result, the SEC continues to support a broader grant of authority to
the FERC to oversee these transactions, including, if the FERC deems it
appropriate, prior review and approval of affiliate transactions.
---------------------------------------------------------------------------
\6\ See The Public Utility Holding Company Act of 1997: Hearings on
S. 621 Before the Senate Comm. on Banking, Housing, and Urban Affairs,
105th Cong., 1st Sess. (1997) (testimony of Isaac C. Hunt, Jr.
Commissioner, SEC); and Regarding Repeal of the Public Utility Holding
Company Act of 1935: Hearings on S. 621 Before the Senate Comm. on
Energy and Natural Resources, 105th Cong., 1st Sess. (1997) (testimony
of Barry Barbash, Director, Div. of Investment Management, SEC).
---------------------------------------------------------------------------
The SEC notes that the Report recommended a transition period of at
least one year in duration. The National Association of Regulatory
Utility Commissioners has since suggested that a longer period is
necessary, in view of the fact that many state legislatures only meet
biennially. The SEC would have no objection to a longer transition
period.
iv. other recommendations
Two other legislative options were recommended by the SEC staff
Report: complete repeal of the 1935 Act and a grant of broader
exemptive authority under the 1935 Act to the SEC.
The SEC believes that complete repeal, the second legislative
option, is premature, because the monopoly power of the industry has
not yet been completely erased and because of the inconsistent pattern
of state regulation described above. Some commentators contend,
however, that the states have the ability, if they choose to exercise
it, to create regulatory structures that will protect utility consumers
in holding company systems to the same extent as they are protected by
the 1935 Act. Complete repeal, like conditional repeal, would require a
reasonable transition period. As noted above, some states may need a
period of at least two years to enact new legislation or to add
resources to meet the additional regulatory burden that would accompany
unconditional repeal of the 1935 Act.
The third option is to provide the SEC with more authority to
exempt holding company systems from the requirements of the 1935
Act.7 An expansion of exemptive authority would not, of
course, achieve the economic benefits of conditional or unconditional
repeal of the 1935 Act, or simplify the federal regulatory
structure.8 Further, this option would continue to enmesh
the SEC in difficult issues of energy policy.
---------------------------------------------------------------------------
\7\ The SEC's current exemptive authority is considerably narrower
than the exemptive authority under other federal securities laws. A
model of broader exemptive authority is contained in section 6(c) of
the Investment Company Act of 1940, 15 U.S.C. Sec. 80a-6(c), which
grants the SEC the authority by rule or order to exempt any person or
transaction from any provision or rule if the exemption is necessary or
appropriate in the public interest and consistent with the protection
of investors. See also section 206A of the Investment Advisers Act of
1940, 15 U.S.C. Sec. 80b-6a; and section 36 of the Securities and
Exchange Act of 1934, as recently amended by the National Securities
Markets Improvement Act of 1996, 15 U.S.C. Sec. 78mm (same).
\8\ In the past, the SEC has testified before Congress with respect
to concerns that arose after the decision by the U.S. Court of Appeals
for the District of Columbia Circuit in Ohio Power v. FERC, 954 F.2d
779 (D.C. Cir.), cert. denied, 113 S.Ct. 483 (1992). See Registered
Holding Company Transactions: Hearing on the 1992 Ohio Power Decision
Before the Subcomm. on Energy and Power of the House of Representatives
Comm. on Energy and Commerce, 103d Cong., 2d Sess. 35-48 (1994)
(testimony of Richard Y. Roberts, Commissioner, SEC). The legislative
repeal options discussed above would eliminate the problem of
conflicting SEC and FERC decisions that were the subject of that
decision.
---------------------------------------------------------------------------
The SEC understands that many believe that repeal of the 1935 Act
should be accomplished as part of a more comprehensive package of
energy reform legislation. Repeal of the 1935 Act could also be
considered as part of this overall reform. The SEC respectfully defers
to the judgment of Congress as to whether the public interest is better
served by separate repeal of the 1935 Act or repeal as part of a larger
legislative initiative.
v. market power issues
The continuing efforts to restructure the utility industry raise
major competitive issues related to the ``market power'' of utilities.
The 1935 Act was intended to address, among other things, the
concentration of control of ownership of the public-utility industry.
These issues were considered by the SEC's staff in the Report.
Section 10(b)(1) of the Act requires the SEC to disapprove a
utility acquisition if it will tend toward concentrated control of
public-utility companies in a manner detrimental to the public interest
or the interest of investors or consumers.9 Traditionally,
the SEC's analysis of utility acquisitions under section 10(b)(1)
includes consideration of federal antitrust policies.10 More
specifically, the anticompetitive ramifications of an acquisition have
traditionally been considered in light of the fact that public
utilities are regulated monopolies subject to the ratemaking authority
of federal and state administrative bodies.11
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\9\ The SEC must also consider whether the purchase price is
reasonable; whether the purchase will unduly complicate the
capitalization of the resulting system; and whether the transaction
will serve the public interest by tending toward the economic and
efficient development of an integrated public-utility system.
\10\ Municipal Electric Association v. SEC, 413 F.2d 1052, 1056-07
(D.C. Cir. 1969) (section 10(b)(1) analysis ``must take significant
content'' from ``the federal anti-trust policies''), cited in City of
Holyoke v. SEC, 972 F.2d 358, 363; Environmental Action, Inc. v. SEC,
895 F.2d 1255, 1260 (9th Cir. 1990) (``Federal antitrust policies are
to inform the SEC's interpretation of section 10(b)(1)'').
\11\ Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17,
1993), citing Northeast Utilities, Holding Co. Act Release No. 25221,
request for reconsideration denied, Holding Co. Act Release No. 26037
(Apr. 28, 1994), remanded sub nom. Cajun Electric Power Cooperative,
Inc. v. SEC, 1994 WL 704047 (D.C. Cir. Nov. 16, 1994).
---------------------------------------------------------------------------
However, the SEC is not the only agency that reviews the potential
anticompetitive effects of utility acquisitions. In many instances,
proposed utility acquisitions are subject to FERC and state approval.
Like the SEC, the FERC must consider antitrust implications of matters
before it.12 In addition, the potential anticompetitive
effects are also reviewed by the Department of Justice or the Federal
Trade Commission.
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\12\ See Gulf States Utilities Co., v. FPC, 411 U.S. 747 (1973).
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In recent years, the SEC has looked to all these regulators for
their expertise in certain operational issues, including competitive
issues. In particular, in matters where the combined entity resulting
from a merger would have control of key transmission facilities and of
surplus power. Although the SEC does independently assess the
transaction under the standard of the 1935 Act, we have generally
relied upon the FERC's greater expertise regarding issues related to
utility competition. The Court of Appeals for the District of Columbia
Circuit has stated that ``when the SEC and another regulatory agency
both have jurisdiction over a particular transaction, the SEC may
`watchfully defer' to the proceedings held before--and the result
reached by--that other agency.'' 13
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\13\ Madison Gas and Electric Company v. SEC, 168 F.3d 1337, (D.C.
Cir. 1999); City of Holyoke v. SEC, supra note 10, citing Wisconsin's
Environmental Decade, Inc. v. SEC, 882 F.2d 523 (D.C. Cir. 1989).
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Therefore, repeal of the 1935 Act is unlikely to effect how market
power issues are reviewed at the federal level. While the 1935 Act
provides an additional layer of regulatory approval for certain utility
mergers, the Commission's reliance, where appropriate, on other
regulators for the key market power determination, make its review of
market power issues largely redundant.
vi. administrative action
The SEC continues to support a comprehensive approach to reform of
the 1935 Act. The SEC has implemented many of the numerous
administrative initiatives that were recommended in the Report to
streamline regulation.14 Despite the effects of these
initiatives, changes in the utility industry are resulting in increased
activity under the 1935 Act, especially in the area of mergers and
acquisitions, diversification and affiliate transactions. Hence,
continuation of the 1935 Act in its present form will require
additional resources. Moreover, during 1998, mergers resulted in the
formation of three new registered holding companies. The options of
conditional repeal or an expansion of the SEC's exemptive authority
also raise the issue of resources. At present, sixteen full-time
professional SEC employees are employed in the administration of the
1935 Act. Their work includes (1) analysis and disposition of various
transactions for which the 1935 Act requires prior SEC authorization,
(2) status issues under the 1935 Act, (3) audits of holding company
systems and related companies, and (4) drafting and implementation of
rulemaking proposals to reflect changes in the utility industry and in
financial regulation. Repeal of the 1935 Act would not achieve
significant cost savings for the federal government, particularly if
some of these responsibilities were carried out by the FERC. Expanded
exemptive authority, on the other hand, could require greater
resources, in view of the need to evaluate and implement broad requests
for exemptive relief.
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\14\ The Report recommended rule amendments to broaden exemptions
for routine financings by subsidiaries of registered holding companies
(see Holding Co. Act Release No. 26312 (June 20, 1995), 60 FR 33640
(June 28, 1995)) and to provide a new exemption for the acquisition of
interests in companies that engage in energy-related and gas-related
activities (see Holding Co. Act Release No. 26313 (June 20, 1995), 60
FR 33642 (June 28, 1995) (proposing rule 58) and No. 26667 (Feb. 14,
1997), 62 FR 7900 (Feb. 20, 1997) (adopting rule 58)). In addition, the
Report recommended changes in administration of the Act that would
permit a ``shelf'' approach for approval of financing transactions,
relax constraints on utility acquisitions and streamline the approval
process for such transactions. The Report also recommended an increased
focus upon auditing regulated companies and assisting state and local
regulators in obtaining access to books, records and accounts.
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The SEC takes seriously its duties to administer faithfully the
letter and spirit of the 1935 Act, and is committed to promoting the
fairness, liquidity, and efficiency of the United States securities
markets. By supporting conditional repeal of the 1935 Act, the SEC
hopes to reduce unnecessary regulatory burdens on America's energy
industry while providing adequate protections for energy consumers.
Mr. Barton. Thank you, Commissioner Hunt.
We would now like to welcome Mr. Douglas Smith, who is the
General Counsel for the Federal Energy Regulatory Commission.
Again, your statement is in the record in its entirety, and we
would ask you to try and summarize in 7 minutes.
STATEMENT OF DOUGLAS W. SMITH
Mr. Smith. Thank you. Good morning, Mr. Chairman and
members of the subcommittee. My name is Douglas Smith, and I am
the General Counsel for the Federal Energy Regulatory
Commission. I am here today as a Commission staff witness and
do not speak for the Commission as a whole or for individual
members of the Commission.
I appreciate the opportunity to discuss with you today the
important matter of competition policy in the electric
industry, and particularly, the issues of market power,
mergers, and the Public Utility Holding Company Act.
The traditional regulatory approach in this industry was to
accept that electric utilities were natural monopolies and to
address market power and protect ratepayer interests primarily
by relying on cost-of-service rate regulation. In recent years,
however, we have recognized that generation is not a natural
monopoly. In the Energy Policy Act of 1992, Congress strongly
endorsed competition in wholesale power markets with amendments
to the Federal Power Act and the Holding Company Act.
The Commission shares this overarching goal of promoting
competition in wholesale electricity markets, having concluded
that vigorous competition, as opposed to traditional forms of
price regulation, can best protect the interests of ratepayers.
The Commission has pursued procompetitive goals by ordering
open access to transmission facilities in Order Number 888 and
in its policies on mergers and market-based wholesale rates.
Competition in bulk power markets can be frustrated,
however, by the exercise of market power. Market power may take
many forms including, most notably, control of access to
transmission facilities necessary to deliver electricity,
concentration in generation markets, or control of inputs to
generation such as fuel.
Market power considerations related to ownership and
control of transmission facilities are at the core of Order
Number 888's open access transmission policies. Fair and open
access to reliable transmission service is an essential
predicate to competition in bulk power markets. Effective
regulation of the relatively small transmission sector enables
competition, with its consequent ratepayer benefits, in a much
larger generation sector.
The Commission is seeking further improvements in the
transmission arena to support fully competitive wholesale power
markets. Of particular importance, it is exploring how it might
promote the formation of regional transmission organizations
that have operational control over a region's transmission grid
and are independent of the financial interests of power market
participants. Such regional transmission organizations can
enhance competition by reducing rate pancaking, eliminating
opportunities for bias in transmission operations and allowing
for more efficient and reliable operation and planning of the
transmission grid.
The Commission also considers market power issues in
reviewing applications for mergers or other jurisdictional
transactions. In assessing whether a proposed merger is
consistent with the public interest, the Commission considers
factors including the effect of the merger on competition and
the effect of the merger on rates. If a merger would create or
enhance market power, the Commission has authority to condition
approval of a merger so as to mitigate any anticompetitive
effects.
As Congress considers legislative reforms relating to the
electric industry, it should consider whether regulators will
have the range of tools necessary to address market power
problems that may threaten competition. With respect to
transmission, for instance, FERC Chairman Jim Hoecker recently
testified before this subcommittee in favor of extending open
access requirements to all transmitting utilities in the lower
48 States, clarifying FERC authority to provide for independent
regional management of the transmission grid, and establishing
a fair and effective program of mandatory reliability
standards.
Let me turn briefly to the Holding Company Act. As a
general matter, as you have heard, the Securities and Exchange
Commission regulates registered utility holding companies,
while the FERC regulates the operating electric utility and gas
pipeline subsidiaries of the registered holding companies. The
DC Circuit's Ohio Power decision limiting FERC review of the
prudence of interaffiliate contracts left a gap in FERC's rate
regulation of electric utilities. The result is that utility
customers served by registered holding companies have less rate
protection than customers served by nonregistered systems.
Any legislation to reform or repeal the Holding Company Act
should ensure that FERC and the States have adequate authority
to examine the books and records of all companies in a holding
company system that are relevant to reviewing the costs
incurred by an affiliated electric utility.
As we continue to move toward bulk power markets in which
price is set predominantly by the market rather than by
regulators, we must ensure effective regulation of essential
transmission facilities and the mitigation of market power.
These issues require careful attention from Congress, FERC, the
antitrust agencies and our State counterparts. The Federal
statutory regime should protect customers by combining
procompetitive policies with the regulatory tools necessary to
constrain market power effectively.
Thank you. I would be glad to take any questions.
[The prepared statement of Douglas W. Smith follows:]
Prepared Statement of Douglas W. Smith, General Counsel, Federal Energy
Regulatory Commission
Mr. Chairman and Members of the Subcommittee: Good morning. My name
is Douglas Smith, and I am the General Counsel for the Federal Energy
Regulatory Commission. I am here today as a Commission staff witness,
and do not speak for the Commission itself or for individual members of
the Commission. Thank you for the opportunity to appear before you
today to discuss competition policy in the electric industry, and
particularly the issues of market power, mergers and the Public Utility
Holding Company Act of 1935 (PUHCA).
One of the Commission's overarching goals is to promote competition
in wholesale power markets, having concluded that effective
competition, as opposed to traditional forms of price regulation, can
best protect the interests of ratepayers. Market power, however, can be
exercised to the detriment of effective competition and consumers.
Thus, the Commission regulates transmission service, mergers, and
wholesale power rates so as to prevent the exercise of market power in
bulk power markets. As Congress considers electricity legislation, it
will be important to ensure that appropriate and effective tools are
available to address market power issues if competition is to continue
to grow in the bulk power markets.
i. market power
In enacting Part II of the Federal Power Act (FPA) in 1935, one of
the primary Congressional goals was to protect electric ratepayers from
abuses of market power. In furtherance of this goal, Congress directed
the Commission to oversee sales for resale and transmission service
provided by public utilities in interstate commerce. Under sections 205
and 206, the Commission must ensure that the rates, terms and
conditions of these services are just, reasonable, and not unduly
discriminatory or preferential. Under section 203, the Commission must
review proposed mergers, acquisitions and dispositions of
jurisdictional facilities by public utilities, if the value of the
facilities exceeds $50,000, and must approve such transactions if they
are consistent with the public interest. The Commission's regulation
under these sections applies only to ``public utilities,'' which mainly
include investor-owned utilities and exclude the federal power
marketing administrations, municipal utilities, and most rural electric
cooperatives.
The traditional regulatory approach was to accept that electric
utilities were natural monopolies, and to address market power and
protect ratepayer interests primarily by relying on cost-of-service
rate regulation.
In the 1980s and early 1990s, industry developments indicated that
the interests of ratepayers could be better protected by competition in
generation markets than by cost-based regulation for wholesale sales.
The benefits of competition in place of traditional regulation were
increasingly evident in other industries, such as trucking, railroads,
telecommunications and natural gas. Also, prompted by a range of
economic, legislative and technological factors, some competition among
generators already had begun developing in the electric industry. One
key factor was the Public Utility Regulatory Policies Act of 1978
(PURPA), which opened the door for non-utility generators.
In the Energy Policy Act of 1992, Congress strongly endorsed
competition in wholesale power markets with amendments to the FPA and
PUHCA. The Commission has pursued this pro-competition focus by
ordering open access to transmission facilities in Order No. 888, and
in its merger and wholesale rate policies. The Commission's primary
focus has shifted from cost-based ratemaking to creating the conditions
for robust competition. This transition has required the Commission to
pay increasing attention to issues of market structure, market power
and market monitoring.
Competition in bulk power markets can be diminished or blocked by
the exercise of market power. Market power may take many forms,
including control of access to transmission facilities necessary to
deliver electricity, concentration in generation markets, or control of
inputs to generation such as fuel.
Market power problems can result in higher prices to customers. For
example, absent regulation, a vertically-integrated utility could
prevent its competitors in wholesale power markets from using its
transmission facilities to deliver power to buyers. Buyers then would
have fewer competitive options and, as a result, may have to pay higher
prices. Similarly, a utility with a large enough share of the
generating capacity in a market can raise prices by withholding supply
from the market. A utility that controls enough of an input to power
production (such as pipeline capacity for delivering natural gas to
power plants) can achieve the same result.
Market power can be created or enhanced by mergers. Mergers can
eliminate a competitor from the market and concentrate control of
generating assets. Mergers can also enhance vertical market power, by
giving the merged company a new or increased ability and incentive to
restrict inputs to power production.
Discussed below are five key market power issues: transmission
market power; market-based rates for sales of power; mergers of public
utility facilities; State regulation of market power; and possible
legislative reforms.
A. Transmission Market Power
Market power considerations related to ownership and control of
transmission facilities are at the core of the Commission's open access
transmission policies. Fair and open access to reliable transmission
service is an essential predicate to competition in bulk power markets.
Effective regulation of the relatively small transmission sector (which
accounts for 10% of overall utility costs) enables competition, with
its consequent ratepayer benefits, in the much larger generation sector
(which accounts for 60% of total utility costs).
In the Energy Policy Act of 1992, Congress broadened the
Commission's authority under section 211 of the FPA to require
transmission service on a case-by-case basis. This legislation, as
implemented by the Commission, helped to expand the trading
opportunities of wholesale sellers and buyers. However, the Commission
concluded that competition in wholesale markets still was being
inhibited by the lack of non-discriminatory access to transmission
facilities. Generation sellers owning transmission facilities were
stifling competition by discriminating against competing sellers that
sought to use their transmission facilities, either by denying or
delaying transmission service or by imposing discriminatory rates,
terms and conditions for service. The Commission recognized that it
needed to act generically to provide for open access transmission if it
was to meet the Congressional goal of developing competitive wholesale
markets.
Consequently, the Commission in 1996, through a major rulemaking
called Order No. 888, ordered open (non-discriminatory) access to the
transmission facilities of public utilities. Order No. 888 allows
transmission customers to obtain service that they could not previously
obtain, and to secure those services more quickly and with more
certainty about rates, terms and conditions. This open access
obligation prohibits public utilities from discriminating against
competitors' transactions in favor of their own wholesale sales of
power.
In Order No. 888, the Commission also encouraged, but did not
require, the formation of independent system operators (ISOs) to
promote broader, regional power markets and provide greater assurance
of non-discrimination. Since then, six ISOs have been established (in
California, the mid-Atlantic states, New England, New York, the Midwest
and Texas), and four of these are currently operational.
The Commission is seeking further improvements in transmission
access and grid operation to support fully competitive wholesale power
markets. Of particular importance, it is exploring how it might promote
the formation of regional transmission organizations (RTOs) such as
ISOs and independent companies that own and operate transmission
facilities (transcos). An RTO that covers an appropriately configured
region, has adequate operational control over the transmission grid,
and is independent of the financial interests of power market
participants, can address obstacles to competition by reducing rate
pancaking, eliminating opportunities for bias in transmission
operations, and allowing for more efficient and reliable operation and
planning of the transmission grid.
As FERC's Chairman Hoecker testified before this Subcommittee two
weeks ago, legislation on transmission issues is needed to ensure the
full development of wholesale competition and maintain our high
standard of reliability. Specifically, Chairman Hoecker recommended
legislation that would: bring all transmission facilities in the lower
48 states within the Commission's open access transmission rules;
clarify the Commission's authority to promote regional management of
the transmission grid through regional transmission organizations; and,
establish a fair and effective program to protect bulk power
reliability. Addressing these transmission-related issues should be a
priority in any legislative reform agenda.
B. Market-Based Rate Review
To promote competition, the Commission allows market-based rates
for wholesale sales of electricity when an applicant shows that it and
its affiliates lack or have mitigated market power. In evaluating
horizontal market power for these purposes, the Commission
distinguishes between new generating facilities and existing
facilities. For sales from new generating facilities, the Commission
applies a rebuttable presumption that the applicant lacks generation
market power, but intervenors may present specific evidence to the
contrary. For sales from existing generating facilities, the Commission
uses a case-specific analysis of whether the applicant and its
affiliates control a significant share of the total generation capacity
that can be accessed by the utilities directly interconnected to the
applicant or its affiliates. The Commission's general benchmark for
concern is a market share of 20 percent or more.
In evaluating vertical market power for these purposes, the
Commission considers the extent of the applicant's control of any
inputs to power production. Most applicants for market-based rates lack
significant control of such inputs and thus present no vertical market
power concerns. The Commission analyzes the control of transmission
facilities separately from other sources of vertical market power and,
for purposes of market-based rates, currently accepts compliance with
Order No. 888's open access requirements as adequate mitigation of
transmission market power.
If an applicant or its affiliates appear to have market power that
has not been mitigated, the Commission generally will deny market-based
rates. Alternatively, the Commission may preclude the use of an
applicant's market-based rates in specific geographic areas in which
the applicant fails to demonstrate a lack of market power, or may
impose other appropriate conditions on the use of market-based rates.
Should the Commission identify market power problems after market-
based rates have been authorized, it can revoke market-based rates and
return to cost-of-service regulation. This remedy does not eliminate
the underlying market power but, instead, relies on price regulation to
mitigate the potential for its exercise.
C. Merger Review
The Commission considers market power issues in reviewing
applications for mergers or other jurisdictional acquisitions or
dispositions of assets. In a merger policy statement issued in December
1996, the Commission stated that, in assessing whether a proposed
merger was in the public interest, it would consider the effects of the
merger on competition, on rates and on regulation. The Commission
sought to streamline its merger review process and to reduce filing
burdens on merger applicants by adopting the Department of Justice/
Federal Trade Commission merger guidelines as the framework for
analyzing a merger's horizontal effects on competition. These
guidelines set out five steps for analyzing mergers, based on: (1)
whether the merger would significantly increase market concentration;
(2) whether the merger would result in adverse competitive effects; (3)
whether entry would mitigate the merger's adverse effects; (4) whether
the merger would result in efficiency gains not achievable by other
means; and (5) whether, absent the merger, either party would likely
fail.
The Commission's merger policy statement also described a
conservative analytical screen for quickly identifying mergers unlikely
to raise horizontal market power concerns. The screen analysis focuses
on the first step identified in the DOJ/FTC guidelines, i.e., whether
the merger would significantly increase concentration. The screen
analysis relies on a ``delivered price'' test to define relevant
markets and the suppliers that can deliver power to affected customers
at competitive prices. If the screen analysis shows that the proposed
merger will not increase market concentration by more than 100 HHI
points in a moderately concentrated post-merger market (defined as
1,000 to 1,800 HHI points) or 50 HHI points in a highly concentrated
post-merger market (defined as exceeding 1,800 HHI points), the
Commission will not set the matter for hearing to further consider
competitive effects.
The Commission's analysis of vertical market power concerns is
similar. A vertical merger is unlikely to harm competition unless the
merged company has the incentive and the ability to affect prices or
quantities in the upstream (input) market and the downstream
(electricity) market. For example, a company must be able, and have an
incentive, to restrict service or raise prices for an input such as
natural gas pipeline capacity and, as a result, restrict service or
raise prices in supplying wholesale power.
If a merger will create market power or enhance the applicants'
market power significantly, mitigation of these effects is required in
order to ensure that the merger is consistent with the public interest.
Section 203 of the FPA gives the Commission authority to approve a
merger conditionally, i.e., subject to ``such terms and conditions as
it finds necessary or appropriate to secure the maintenance of adequate
service and the coordination in the public interest of facilities
subject to the jurisdiction of the Commission.'' In order to mitigate
merger-enhanced market power, the Commission has conditioned merger
approvals on measures such as providing others with access to the
merged company's constrained transmission facilities, and restricting a
fuel-supplying affiliate from giving information to its power-selling
affiliates about fuel deliveries to competing power sellers.
The Commission's jurisdiction over mergers and acquisitions is
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). Thus, although concentration of
generation assets may directly affect competition in wholesale markets,
transactions involving only generation assets may not be subject to FPA
review.
Second, the Commission lacks direct jurisdiction over mergers of
public utility holding companies. While the Commission has considered
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.
These jurisdictional gaps could be usefully addressed in the course
of legislative reform.
D. State Issues
Chairman Barton's letter of invitation for this hearing asked that
I address the states' ability to effectively address market power
issues. The states are well aware of the potential harm caused by
market power. To wit, the National Association of Regulatory Utility
Commissioners (NARUC) has issued a resolution on market power in a
restructured electric power industry which finds that market power
abuses ``can diminish the economic gains to consumers from a
restructured electric power industry, in which long-term consumer
interests require that neither incumbents nor new entrants gain or
retain unfair market advantage.'' The resolution also concluded that
``after-the-fact antitrust enforcement may not be sufficient to protect
against market power abuses in the transition from monopoly to
competitive markets.''
As States address market power issues in the context of, for
instance, merger reviews and retail competition initiatives, certain
limits on their ability to protect against market power abuses may
become significant. The extent of this concern is best explored with
witnesses testifying on behalf of the States. However, I will briefly
mention three issues. First, electricity markets are becoming larger,
regional markets, and individual states may find themselves
geographically limited in their ability to identify and remedy market
power problems. Second, state regulators may lack the state law
authority or resources needed to tackle new and challenging market
power issues. Third, transmission and wholesale sales in interstate
commerce may affect retail competition but are within exclusive Federal
jurisdiction.
In such circumstances, the States may seek Federal assistance in
addressing market power problems in regional electricity markets. The
Commission, to the extent of its existing authority, can serve as a
backstop for States in circumstances where a State lacks adequate
authority and seeks FERC's assistance. For example, FERC has stated its
willingness to assess a merger's effects on retail competition if asked
by an affected state commission lacking adequate authority under state
law. However, in this example, there may be insufficient authority--
State or Federal--to address market power in retail markets.
E. Legislative Reforms on Market Power
As we seek to rely primarily on competition as opposed to
traditional price regulation to protect the interests of ratepayers,
regulators must have the range of tools necessary to address market
power problems that may threaten competition. Reforms to the Federal
statutory scheme are appropriate to permit regulators to keep up with
the new market power challenges.
The Administration's newly-proposed bill addresses a number of
market power issues. With respect to transmission, the bill would
permit the Commission to extend its open access requirements to non-
public utilities in the lower 48 States, would clarify the Commission's
authority to promote regional management of the transmission grid
through RTOs, and would establish a fair and effective program of
mandatory reliability standards. Chairman Hoecker testified recently in
favor of such changes.
The Administration's bill also would close the gap in the
Commission's jurisdiction over mergers involving only generation
facilities, and would clarify that holding companies with electric
utility subsidiaries cannot merge without Commission review. The bill
would further allow FERC to address market power in retail markets, if
asked by a state commission lacking adequate authority to address the
problem, and would give the Commission explicit authority to address
market power in wholesale markets by requiring a public utility to file
and implement a mitigation plan. Each of these reforms also deserves
careful consideration as you consider legislation to promote
competitive electricity markets.
ii. public utility holding company act
As a general matter, the Securities and Exchange Commission (SEC)
regulates registered utility holding companies while FERC regulates the
operating electric utility and gas pipeline subsidiaries of the
registered holding companies. The agencies often have responsibility to
evaluate the same general matter, but from the perspective of different
members of the holding company system and for different purposes. FERC
focuses primarily on a transaction's effect on utility ratepayers. The
SEC focuses primarily on a transaction's effect on corporate structure
and investors.
Under section 32 of PUHCA (added by the Energy Policy Act of 1992),
FERC must determine whether an applicant meets the definition of an
exempt wholesale generator and thus is exempt from PUHCA. With minor
exceptions, the SEC continues to make PUHCA exemption determinations
under other provisions of PUHCA.
In the area of utility rates, the SEC must approve service, sales
and construction contracts among members of a registered holding
company system. FERC must approve wholesale rates reflecting the
reasonable costs incurred by a public utility under such contracts.
This last example of overlapping jurisdiction has been a subject of
concern. In 1992, the United States Court of Appeals for the District
of Columbia Circuit held, in Ohio Power Company v. FERC, 954 F.2d 779
(D.C. Cir. 1992) (Ohio Power), that if a public utility subsidiary of a
registered holding company enters into a service, sales or construction
contract with an affiliate company, the costs incurred under that
affiliate contract cannot be reviewed by FERC. The SEC has to approve
the contract before it is entered into. However, FERC cannot examine
the reasonableness or prudence of the costs incurred under that
contract. FERC must allow those costs to be recovered in wholesale
electric rates, even if the utility could have obtained comparable
goods or services at a lower price from a non-affiliate.
The Ohio Power decision has left a significant gap in rate
regulation of electric utilities. The result is that utility customers
served by registered holding companies have less rate protection than
customers served by non-registered systems. If the contract approval
provisions of PUHCA are retained, this regulatory gap should be closed
to restore FERC's ability to regulate the rates of utilities that are
members of registered holding company systems.
Setting aside the Ohio Power issue, let me address PUHCA more
broadly. PUHCA was not crafted with competitive electricity markets in
mind. For example, acquisitions by registered holding companies
generally must tend toward the development of an ``integrated public-
utility system.'' To meet this requirement, the holding company's
system must be ``physically interconnected or capable of physical
interconnection'' and ``confined in its operations to a single area or
region.'' This requirement tends to encourage geographic concentrations
of generation ownership. Similarly, although the 1992 amendments
providing for exempt wholesale generators removed regulatory obstacles
to new entrants in the wholesale generation market, these new
generators cannot compete, under the current exemption, for retail
sales in markets where States have provided retail competition.
Any legislation to reform or repeal PUHCA, however, should ensure
that the Commission and the States have adequate authority to examine
the books and records of all companies in a holding company system that
are relevant to costs incurred by an affiliated utility. This type of
authority will provide a new, effective tool to protect against
affiliate abuse and ensure that remaining captive consumers do not
cross-subsidize entrepreneurial ventures.
iii. conclusion
Competition in electricity markets will not effectively protect
ratepayers if some market participants can exercise market power. Thus,
as we continue to move toward more competitive power markets and remove
regulatory controls over sales of power, we must ensure effective
regulation of essential transmission facilities and the mitigation of
market power. These issues require careful attention by Congress, FERC,
the antitrust agencies and our State counterparts. The Federal
statutory regime should protect consumers by combining pro-competitive
policies with the regulatory tools necessary to constrain market power
effectively.
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, Mr. Smith.
The Chair recognizes himself for the first 5 minutes of
questions.
I didn't hear your verbal statements, however, I did scan
your written testimony last evening, but I won't swear that I
read them verbatim. I didn't see this definition of market
power.
Can any of you gentlemen define for me the area that we
would have under consideration when trying to determine if
there is a market power violation and what the variables are
that would be considered in trying to determine whether
something should be done to lower market power?
That is the easy question.
Mr. Melamed. That is the right one for me then.
Chairman Barton, I think the concept of market power that
would be appropriate here is the same as the concept ordinarily
used in antitrust enforcement, and that is market power is
defined as the power of an individual firm to raise prices--
profitably to raise and maintain prices above competitive
levels.
As a practical matter, a likely condition of market power
is that the firm is not subject to sufficient checks by rivals,
by alternatives vying for the patronage of its customers, to
discipline its price and require that its price be at
competitive levels.
Mr. Barton. Does anybody else want to take a crack at that?
Okay.
Mr. Smith. I would just note that there are a number of
different kinds of market power that we need to be concerned
about. One, in this industry, is control over essential
transmission facilities. This has been at the core of a lot of
the Commission's activities in recent years, with the
Commission making sure that there is open access to the
essential facilities needed to participate in competitive
markets.
The second obviously is concentration in generation
markets, where the issue is whether the markets are
sufficiently concentrated that players could withhold
generation and raise prices.
Mr. Barton. Well, by definition, under current situations
in most localities with 100 percent market power, you only have
one electric supplier to your home or your business. And the
whole goal of this operation is to give people choices so that
there are multiple suppliers for each home; and I think
transmission access is key to trying to have true competition.
But I don't think that we can adopt a deregulation bill
with a definition of market power that is similar to what the
Supreme Court had for pornography: They don't know how to
define it, but they know it when they see it. I mean, that
tends to put the onus on the market, and if we take the first
gentleman, his definition, he seemed to allude to kind of an
activity test that you have to determine what the average
market price should be, and then make some determination if for
some reason it is higher than that. So I know that is a very
difficult question.
But I would really appreciate it if you would set some of
the best minds in your Commissions to working on it, and for
the written record, give us a little bit more definition.
Mr. Thompson, did you want to say something before I ask my
second question?
Mr. Thompson. I appreciate your caveat, but I think what is
important to recognize: You are right, we are in a situation
where you already have essentially monopolies on a regional or
a local basis. The real question is, how do they move toward
competition, and do they move toward it in a timely fashion in
a way that also permits other competitors to come in.
So you are right in noting where we are right now. The
reason that we talked about the importance of the tools that
are used to mitigate the impacts of market power is how other
competitors come into the market and how you level the playing
field so that they can get access not only to essential
facilities, but also provide the array of services and price
that consumers want to see.
Mr. Barton. So you want more of an openness, ease of entry,
availability to the market?
Mr. Thompson. I think that is going to be an important
feature. But it is also important to recognize--and what is
hard to deal with in this issue is that I recognize that in
various parts of the country, you have different situations,
depending on each region. So you are going to have to provide
some flexibility in order to adjust to the given conditions and
the particular monopoly that is in existence.
Mr. Barton. My time has expired. I want to ask one question
and again this may be something you want to submit for the
record. But I think the General Counsel from FERC hit on
something about there has to be transmission access. And I am
toying with the concept, and if we get to a situation where we
are able to draft a comprehensive bill, that we should put in
some sort of a petition process so that there can be a petition
made to the relevant Federal agency that existing transmission
capacity is insufficient to allow true competition, that the
Federal Energy Regulatory Commission, the Federal Trade
Commission or whatever Federal agency has jurisdiction would
certify that there is a need for additional transmission
capacity, and leave it up to the States to go through the
siting process and the allocation process.
Is that concept of trying to give additional expedited
access in terms of additional transmission--is that something
that you gentlemen think could be a part of a comprehensive
bill?
I have never seen such distinguished witnesses seem to be
at a loss for words for such simple questions.
Mr. Smith. I will pipe in.
Clearly, physical facility-related transmission constraints
are a restraint on competition. And in some places, as I am
sure you are aware, the issues about the role of the States and
the role of the Federal Government in transmission siting are
complex and politically complicated.
One thing I would mention is that the Commission is hopeful
that, with the growth of regional transmission organizations as
independent operators and planners for the transmission system
in a region, these organizations will have the credibility to
make the kinds of findings that you are talking about. They
would make an independent judgment about whether particular
transmission facilities are necessary for either reliability
reasons or market efficiency reasons. Having an independent
regional judgment about that might have the same kind of effect
I think you are talking about--giving some impetus to the
States to proceed with projects that might not be in the sole
interest of that State, but would be in the interest of
competition more generally.
Mr. Barton. Well, my concept is to let the Federal level
make a determination based on a petition that there is a need,
but then let the State or regional officials do the siting and
the capacity allocation so that you don't impinge on State's
rights and the regionality that you talked about.
If you all want to give some additional thought to that.
Would you like to say something, Mr. Melamed, before I
recognize Mr. Hall?
Mr. Melamed. If I could briefly, Chairman Barton.
You are quite right that access to transmission is the key,
the critical element here if there is going to be real
competition at retail or in generation. One approach is a
regulatory approach such as FERC Order 888, and elaborated on
the way that you suggested; and to the extent that that is
necessary to enhance access, that would be a desirable step.
But the administration's position and the Antitrust
Division's position would be that it would be preferable to try
to do structural remedies wherever possible to avoid the need
for increasingly intrusive regulation. And therefore, giving
FERC the authority to turn operational control of transmission
over to the independent regional system operators and thereby
removing centers for obstructions to access, we think, would be
an important and valuable alternative to regulation and a
superior one to regulation to achieve that same objective.
Mr. Barton. My only point is you may need additional
capacity. It may not just be a legal constraint. It may
actually be a physical constraint.
Mr. Melamed. I agree with that.
Mr. Barton. The gentleman from Texas, Mr. Hall, is
recognized for 5 minutes.
Mr. Hall. Thank you, Mr. Chairman. I guess I direct my
question either to Mr. Smith or Mr. Melamed.
The administration bill authorizes FERC to order
divestiture of utility assets if they are requested to do so by
a State. And I think you all seem to support that. How would
this work in case of a multistate utility, where various State
commissions might have differing opinions about, say, for the--
even the need for divesture; and do they all have to agree, or
can one ask for divesture and they get it? How does that work?
I might ask Mr. Smith of the FERC if you would answer.
Mr. Smith. It depends whether the administration bill is
written to preempt the State role in that decision. And I
honestly don't know whether it is written that way or not. One
could write it either way so that one needed to get concurrent
approvals from the States in order to make the divestiture
happen or that the Federal Government could order divestiture
notwithstanding the views of the States.
I don't know which way it is written, but I suspect it is
intended to be preemptive. But I don't know that.
Mr. Hall. You don't have any opinion on that or any
suggested wording for amendments that might bring it into an
area that would be a little easier and more understandable? If
you do, give them--submit them for the record.
Mr. Hunt, you state in your testimony on page 4 that the
best means of guarding against cross-subsidization is likely to
be audits of books and records and Federal oversight of
affiliation transactions. Tell me why this can't be
accomplished by State regulatory authority. Can it, and if it
can't, why can't it?
Mr. Hunt. Well, we think that as an overall Federal policy
matter, giving the audit power and books and records and
inspection power to the Federal Energy Regulatory Commission
makes sense. It would make for a more uniform examination of
the books and records and perhaps a more uniform determination
of the issues that arise in acquisitions and other things than
if a multi-state holding company were only overseen on a State
by State basis.
Mr. Hall. You do that in the name of uniformity?
Mr. Hunt. I think so, yes, sir. I think the Commission
thinks there is still a role for Federal regulatory activity in
the whole area of utility production and regulation, although
we clearly believe that the role for the SEC is probably a day
that has come and passed, but that the FERC and the Department
of Justice and the Federal Trade Commission in terms of
anticompetitive aspects and the FERC in terms of regulating
transmissions still have a significant role to play.
Mr. Hall. Any other opinions on that?
Mr. Smith. I would just comment from the FERC perspective--
--
Mr. Hall. Yes.
Mr. Smith. [continuing] from the FERC perspective, and I
would assume that the State issues parallel our issues.
We have many utilities in this country that have market-
based rate authority, but many of them also still have cost-
based rates that we regulate. And in order to effectively
assess the prudence of costs that utilities are seeking to
include in cost-based rates when they are engaging in
transactions with holding company affiliates, which are not
arm's length transactions, we feel that we would need access to
the books of the affiliates.
Right now, from FERC's perspective, it is the electric
utility itself and not its affiliates that are jurisdictional.
So the idea is to make sure that we can get the books and
records from the affiliate to assess whether the costs are
prudently incurred and should be included in cost-based rates.
I think the States have the same kind of concern about
their ability to reach the books and records of affiliates.
Mr. Hall. Okay. I thank you. I yield back my time.
Mr. Barton. The gentleman from Texas yields back his time.
The gentleman from Oklahoma, Mr. Largent, is recognized for
5 minutes for questions only.
Mr. Largent. Thank you, Mr. Chairman.
Mr. Smith, what current authority, regulatory authority,
does FERC have over generation?
Mr. Smith. We regulate wholesale power rates and we
regulate jurisdictional mergers and dispositions of assets. We
don't directly regulate generation; States regulate generation
facilities.
Mr. Largent. Can you give me an example of either a
horizontal or a vertical power, market power exercised legally,
that would fall outside of current antitrust laws?
Mr. Smith. Do you mean Federal Power Act review or the
antitrust laws more broadly?
Mr. Largent. More broadly. The antitrust laws, yes.
Mr. Smith. I would defer to Mr. Melamed. But I think the
antitrust laws would apply to all of these transactions, the
way they do to the transactions in the economy generally.
Mr. Largent. Mr. Melamed, if you want to comment on that. I
am trying to find out--give me an example of a vertical or
horizontal market power being exercised legally that would fall
outside of antitrust laws that are currently on the books.
Mr. Melamed. Okay. Leaving aside the question of whatever
regulatory constraints there might be, if a monopoly generation
facility increased prices and exercised market power, or a
monopoly transmission facility increased prices, or under some
circumstances, sought to favor its own generation facility in
transmission, those forms of conduct that simply reflect the
ordinary exercise of lawfully existing market power that is
created today, lawfully----
Mr. Largent. Wait a minute. We are talking about a
competitive market so you have got somebody exercising market
power by raising their prices at a time that they have got
competitors in there that are competing with them on a price
basis.
So why--I mean, how would that work? I don't even
understand, in a free market situation, how that would be an
exercise of market power, how that would even be logical to do.
Mr. Melamed. What you are suggesting, Congressman, is that
it may be that if--that once competition is permitted, there
will be sufficient competitive constraints, there won't be
market power--no firm will have it because it will be
constrained by competition.
Mr. Largent. No, what I am saying is, there could be market
power exercised vertically or horizontally, but not legally,
that would fall outside of the bounds of what we already have
on the books that could be approached by your department as an
antitrust behavior.
Mr. Melamed. Let us imagine that we permit competition, we
deregulate the wholesale market, and it so happens that there
is only one major generation facility capable of serving a
particular set of customers----
Mr. Largent. Wait. That is not even rationale, because the
whole idea is the reason that we can go to a retail competitive
market is because we can wheel power from other generators that
are outside a geographic area.
Mr. Melamed. If the transmission facilities are
sufficiently open and the technology----
Mr. Largent. Which is what every bill--which is what we are
all about. I mean, this whole issue is about open access, so
assume open access.
Mr. Melamed. If we have adequate open access and the
technology is sufficiently robust, then it is the case that
there should not be market power because the generation
facilities will be subject to competitive constraints from
other generation facilities, and we wouldn't have an exercise
of market power.
I thought your question was imagining, what if there were
market power, could it be exercised in a way that could not be
reached or prohibited by the antitrust laws. And the answer to
that question is, yes. If there is--if there is existing market
power, by reason of an industry structure that arose lawfully
in the past, the antitrust laws don't prohibit increasing
prices or otherwise merely exercising market power.
Mr. Largent. I heard several people testify, well, if they
have all of the generation facilities and they can kind of
collude and raise prices or lower generation in an effort to
raise prices, that clearly is antitrust behavior; or if you
have somebody that has a vertically integrated system so they
own generation transmission and distribution, and they can just
say, well, we control this area, so we will limit access. That,
again, would clearly be antitrust behavior, especially in a
restructured environment that is illegal currently.
So what I am trying to drive at, why do we need to have or
grant FERC authority and generation where they have very
limited authority today; why do we need to grant FERC authority
to order divesture in a competitive market? That is my
question.
Mr. Melamed. Well, the authority is needed, I believe,
because if there are circumstances in which some of your
assumptions don't apply, if there is a situation which because
of technological or perhaps unregulatable problems in the
transmission network, there are generation facilities that have
market power, there is no way the antitrust laws can eliminate
that market power.
Similarly, we believe FERC should be given authority to
require turning over control of transmission facilities to
regional operators because that should be superior to
regulatory access requirements as a means of ensuring that the
transmission facilities will not be used in a way so as to
perpetuate market power.
Mr. Barton. We are going to have to reclaim the time. We
have a floor vote on the House floor, the adoption of the rule
on the Kosovo supplemental. I have sent Congressman Stearns to
vote. And we intend to continue the hearing without taking a
break.
The Chair would recognize Mr. Sawyer for 5 minutes.
Mr. Sawyer. Thank you, Mr. Chairman. Unless Mr. Stearns is
going to vote for me, I have to take a break myself as well.
Mr. Barton. I think we can get your 5 minutes in.
Mr. Sawyer. Okay. Thank you.
Let me just ask generally, transmission, per se, is clearly
at the heart of much of what we are talking about here,
particularly with regard to the last question. A lot of
different kinds of structures for ownership and governance of
transmission entities have been proposed, ranging from those
where separate transmission companies with separate ownership
would be established, and the divesture that you are talking
about, and others where there would continue to be shared
ownership.
Can you comment on your sense of whether or not one is
better than another, whether the differences across the country
would suggest different structures in different places, and how
you would propose to establish, if not regulation, then
oversight of those kinds of structures.
Mr. Smith. Sure.
The Commission has undertaken a series of 11 public
meetings around the country over the course of the last year on
the general topic of regional transmission organizations and
independent system operators. And there are a variety of views
about whether one form, one corporate form, or one governance
form, is preferable to another.
I think where I would come out personally--and this is
something where the Commission is still working through its
policy development--is that there are three key issues. One is
that the organization have operational control over the
transmission facilities. They can also own them. I don't think
they need to own them, but they need to have sufficient
operational control so that you could be confident that there
isn't a bias issue, and you are getting the regional benefits.
Second is that the organization needs to be independent of
the people buying and selling in the electricity market, so
that you don't have the reality or even the perception of bias
in the operation of the transmission system.
And the third is that it needs to be of a sufficient
regional scope that you get the regional benefits, addressing
issues such as rate pancaking, reliability issues, and loop
flows. The larger the area, typically, the more benefit you get
from the organization.
So I think those are the three pillars on which our
policies are going to develop, and we will have to wait and see
where we come out on the details.
Mr. Sawyer. You have seen the kind of reliability standards
that the so-called consensus standards that have come forward.
Are those sufficient by themselves? Are they sufficiently
flexible to adapt to changing circumstances or do you think
voluntary standards are sufficient?
Mr. Smith. I think we have switched topics slightly.
Mr. Sawyer. Yes, we have.
Mr. Smith. I just wanted to make sure.
Mr. Barton. It is allowed by a member to switch topics.
Mr. Smith. Okay.
Mr. Sawyer. And your use of the word ``slightly'' was very
generous.
Mr. Smith. Chairman Hoecker, when he was here a couple of
weeks ago, testified in favor of the general approach, that has
been approved by the North American Electric Reliability
Council and that has been endorsed in the administration's bill
of establishing a system for developing and enforcing mandatory
reliability standards. I think that is an essential element to
making the transmission system reliable and making these
markets work.
Mr. Sawyer. Let me go back to the chairman's question,
because it really is where those two questions that I was
asking about link up, and that is, the question of State
regulatory authority and the question of whether the States
have sufficient disinterest and interest in the broader system
to undertake the difficult matter of siting and expenditures
necessary to build a strong and reliable and interactive
transmission system.
I have taken the view that it probably makes more sense to
do that in a way that crosses those State jurisdictions and
recognizes the central role that the transmission plays in
building regional markets.
Could you comment on that?
Mr. Smith. I have two comments: One is that, as I mentioned
earlier, I think the Commission is hopeful that as these
regional transmission organizations grow, they will have a role
in disinterested, neutral multistate planning for transmission
expansion; and not that they would get to preempt States, but
that that would be a useful input to State decisionmaking on
whether they should proceed with transmission siting and the
State regulatory approvals.
The other thing I would mention is that the
administration's bill has in it a provision with regard to
interstate regional compacts, which is another way of trying to
get the States to work together on difficult transmission
siting issues.
Mr. Sawyer. If I can just have one more question.
Mr. Barton. I don't see anybody here to object, so----
Mr. Sawyer. You could.
Mr. Barton. No. You are asking very good questions.
Mr. Sawyer. Let me ask you whether you have concerns about
the opposite side, not bringing together transmission
facilities, but the places where there are gaps in sufficient
transmission in order to serve as isolated markets.
Do you see that as a problem, the potential for isolated
markets and, perhaps, even to atrophy economically for lack of
sufficient transmission service and sufficient competition to
make that real? Does that make sense?
Mr. Smith. Yes. There is a real concern about what get
referred to as ``load pockets,'' which are areas where, because
of the configuration of generation and transmission, there are
very few generators or owners of generation that can serve a
particular load--either all the time or during peak conditions
or during some significant period of time.
There are a variety of kinds of solutions to that problem.
One is additional transmission facilities that essentially
expand the market so that power can flow in and out of what
used to be a load pocket more freely. The second might be
additional generation within the load pocket. And the third
might be divestiture of the existing generation within the load
pocket.
For instance, if there was only one owner within the load
pocket that had traditionally been subject to cost of service
regulation and, for instance, a State wanted to move to retail
competition, one approach might be to require divestiture of
the generation within the load pocket to 3 or 4 or 5 companies
that could compete with each other within the load pocket, so
you would be less concerned about whether or not it was
interconnected with the larger region.
Mr. Sawyer. Mr. Chairman, I am going to have to go, or I am
going to miss my vote. Let me just say, I have a couple of
other questions I am interested in: the role of FERC in terms
of mergers; and the duplicative roles with other agencies and
whether or not that might be better served by limiting the
number of agencies that operate in that way; and finally, I
really was interested in the sense that Mr. Thompson talked
about, how distribution facilities can yield specific kinds of
market power without direct anticompetitive practices and how
you would propose to address those.
But I don't have time to sit here and listen to the answer,
or I am going to miss my vote.
Mr. Chairman, if I might submit those questions later. I
would appreciate the opportunity to do that.
Mr. Stearns [presiding.] Without objection.
Mr. Sawyer. Thank you.
Mr. Stearns. Normally we recess, but we wanted to continue
since we have a full schedule here; and so I am standing in for
the chairman, Mr. Barton. And I will get my questions, and
hopefully other members will come back and we can continue
here.
Let me give you a hypothetical question here. Utility X
controls 80 percent of the generation in a State; that State
opens its retail markets to competition and ceases retail rate
regulation. There are barriers to entry. Transmission is
constrained, and siting merchant plants is difficult. Utility X
starts to set retail prices at levels above the market levels.
All it does is, it raises its prices--no exclusionary behavior,
no attempt to gain 100 percent of the market, no unfair trade
practices.
Under current law, what can your agency do to stop utility
X from charging high prices?
Mr. Thompson.
Mr. Thompson. This is similar to the question that--I
regret that Congressman Largent left, because you are exactly
pointing out one of the problems and one of the reasons why you
need to be able to address market power in a little bit broader
way than you would under normal antitrust law. Because right
now, in those circumstances, if--let us say they don't raise
the problem prices, but keep the prices the same, affecting
prices from dropping, then right now one of the problems that
you have is that absent any real action, there is probably a
hole in the antitrust law.
Mr. Stearns. There is a hole in the antitrust law?
Mr. Thompson. We can't necessarily get to that problem
because there is not a predatory practice in and of itself or
any other unlawful conduct.
The problem that you have within the industry is that you
have these essentially regulated monopolies that are going to
be unregulated, and they can more or less sit there because
they have--they have reached this critical mass; and by the
fact that they have such a large share of what there is right
now, it provides a disincentive for other competitors to come
in.
So even through things like legitimate contracts, through
the power of reasonable rates that--they can delay the ability
of other competitors to come in, that is going to be
significant, and that is why FERC needs--I think it would be
helpful to have them be able to address market power to create
the appropriate climate for competition in the event that there
is inability for others to enter simply because of the
dominance of one or two within a given market.
Mr. Stearns. Let me ask the counsel. Mr. Smith, what would
your response be?
Mr. Smith. Well, under current law, the Federal Energy
Regulatory Commission wouldn't have any authority over that
issue, because I assume you are talking about sales at retail,
which are not subject to Federal Power Act review.
I would just note that under the bill that the
administration has proposed, I think it is a two-step process.
The first step would be for the State itself to identify the
problem and take whatever action it had the authority to take
to remedy that problem, which could include things like
requiring divestiture of the generation assets so that there
would be multiple people competing in that region.
Mr. Stearns. Without the State asking, nothing would
happen?
Mr. Smith. Even under the administration bill, I believe
that is right. The trigger for FERC being able to step into a
retail market problem would be the State identifying a market
power problem that it didn't have the authority to remedy.
Mr. Stearns. Okay.
Mr. Melamed, do you have something that you would like to
add?
Mr. Melamed. No, I think the answers thus far have been
correct.
I might want to amend an implication that one might draw
from the way Commissioner Thompson phrased the answer. I think
the term ``hole in the antitrust laws,'' to the extent it
suggests an inadequacy of those laws or a problem with them, I
would disagree with. I think there are very good reasons why
the antitrust laws wouldn't reach the hypothetical that you
pose, and that is why I think the administration's bill
properly puts remedial authority in the FERC.
But, otherwise, I agree with what was said.
Mr. Stearns. You don't think there is a hole in the
antitrust law?
Mr. Melamed. Not if that is not meant to be a criticism of
the antitrust laws.
Mr. Thompson. I stand corrected there in his
characterization.
Mr. Stearns. One proposed Federal remedy for mitigating
market power is reimposition of rate regulation by FERC. If
FERC is granted that authority, should it be able to set retail
rates as well as wholesale rates? Would merely regulating
wholesale rates be an effective remedy?
Why don't we start with Mr. Commissioner Hunt, maybe if you
would like to, or we can go to the General Counsel.
Mr. Hunt. Well, sir, when you are talking about market--
first of all, the Commission really regulates the activities of
the holding companies rather than the operating affiliates.
Mr. Stearns. Okay.
Mr. Hunt. That is FERC. And as to the anticompetitive
aspects, it is probably DOJ and the Federal Trade Commission.
Mr. Stearns. Mr. Melamed.
Mr. Hunt. What we really look at has been the security
issuances of the holding company and how those affected either
consumers or investors, but in terms of the rates and the
structures of the operating facilities, we really don't have
much to do with that.
Mr. Stearns. Thank you.
Mr. Melamed.
Mr. Melamed. Frankly, Congressman Stearns, I think that
question is best addressed to Mr. Smith.
The Justice Department's perspective on this is principally
a concern with ensuring that there are structural measures
taken to maximize the likelihood of competition, and thereby to
minimize the need for ongoing rate regulation.
Mr. Stearns. Mr. Smith, would you like to comment?
Mr. Smith. Sure. I think there will be authority for FERC
at the wholesale level and States at the retail level to
reimpose cost-of-service-based price regulation, if they find
market power. The question is whether that sort of policy is
the direction we want to go. The question is, do we want to go
back to a cost-of-service regime, or is the policy goal really
to have competition without market power.
Mr. Burr. Would the gentleman yield for one quick question?
Mr. Stearns. Surely.
Mr. Burr. Is it FERC's opinion that they have the power to
do that on retail today?
Mr. Smith. No.
Mr. Burr. Do you have the power on retail today to set a
rate?
Mr. Smith. No.
Mr. Burr. Thank you.
Mr. Stearns. There has been some question about generation
and transmission entry. So this is a question I think, Mr.
Smith, that you can help me with. Do you believe entry into
generation and transmission is easy; or are there significant
barriers to entry, and what can Congress do to eliminate
barriers to entry and generation--barriers to entry into
generation and transmission?
Mr. Smith. Clearly, I think the most important barrier to
entry for new generators is the issue of transmission access.
And the Congress has established and then the Commission has
followed up on an aggressive policy of bringing open access to
transmission regulation.
I wouldn't say that eliminates all barriers to entry. One
of the issues we heard when we went around the country to talk
about regional transmission organizations, for instance, was
whether new entrants were confident that they were going to get
an entirely fair deal from transmission owners who were also
competitors in the generation market. And I think one of the
benefits of moving to independent regional transmission
organizations is that you deal with that confidence issue that
will encourage people to enter.
Mr. Stearns. I thank you. My time has expired.
The gentleman from Massachusetts is recognized for 5
minutes.
Mr. Markey. Thank you.
Mr. Melamed, if the Justice Department's ability to bring
an antitrust case in the Microsoft situation was dependent upon
a request from the attorney general of the State of Washington
to request that you begin it, because he or she did not believe
that they had the capacity to bring the case, how long do you
think you would have waited for the attorney general in the
State of Washington to make that request against them?
Mr. Melamed. Well, I can't literally answer that question,
but I understand the thrust of it.
I think there may be one important difference, Congressman
Markey, though, between the kind of situation that you have in
mind and the issue in the administration's proposed bill with
respect to FERC's authority--I take it you are addressing
FERC's authority to require mitigation of market power to solve
a retail problem. The difference is this.
In the energy situation, we would be talking about the
question of whether FERC should exercise Federal authority to
solve a retail problem that takes place in an individual State,
and that raises a question of whether the State might have, in
effect, an opportunity first to decide whether to request that.
In a case like the Microsoft case, and obviously many
others, the concern is with national or regional or sometimes
global markets, rather than simply a retail problem in an
individual State; and naturally the appropriate role for the
States in the case of larger markets, I think would be less
than it might be in this situation.
Mr. Markey. But the situation would be the same; that is,
that the biggest utility would also be the biggest employer in
the State, the same that Microsoft is the biggest employer in
Washington State? And so waiting for the political dynamic
whereby any particular attorney general has the ability--has
the gumption, the nerve, to risk his career by knowing you are
taking on the most powerful company is sometimes problematic.
That is my only point.
Let me ask this--an unlikely, too, from my own personal
experience. It is counterintuitive for politicians to take on
the biggest employers in their State; it happens occasionally,
but rarely.
Mr. Smith, in your testimony, you note that the FERC lacks
jurisdiction over transfers of generation facilities and other
mergers of public utility holding companies. Take Mr. Largent's
question, and then take this generation issue, and take New
England or take some region and explain how a company might be
able, through control of its generating--of the generating
capacity to block competition within a region.
What would the dynamics be that would make that possible?
Mr. Smith. I am not sure I exactly understand the question.
But let me take a crack at it, and tell me if I am getting it
right.
Mr. Markey. If there were other generators inside of a
region or outside of a region, seeking to get in, but there was
a powerful generating monopoly, we would say for this purpose,
what would that monopoly look like that would make it
impossible or difficult for other generators to reach their
ultimate customers?
Mr. Smith. Well, I guess most importantly I would say, if
it owned transmission as well as generation, it would at least
potentially have the ability to bias transmission access.
Mr. Markey. What if they did not own transmission?
Mr. Smith. Well, if they don't own transmission, then I
think the issue is a facilities-related issue which is, is
there a dominant generator within the area that can be served
on the existing transmission grid to serve whatever customer or
customers you are worried about?
If----
Mr. Markey. Again--let me ask the question further. So if
they don't own the means of transmission, but they just are
still the dominant generator, is there a case that could be
made that there would still be monopoly power?
Mr. Smith. Yes.
Mr. Markey. How is that created?
Mr. Smith. It may be concentration that already exists.
Mr. Markey. But I say if other generators can reach their
ultimate customers over independently owned transmission lines,
isn't there a marketplace which is created that--that wouldn't
lead to lower prices and a collapse of the dominant position of
the generator? Or would you argue that there is another
scenario where the independent generator would not be able--the
smaller generator would not be able to reach customers?
Mr. Smith. I wouldn't argue that. I think the key issue is
access to the market for people that want to compete with a
dominant generator.
Mr. Markey. Is that a transmission question or a generation
question?
Mr. Smith. I think it is a transmission question.
Mr. Markey. But not necessarily--so that would satisfy--so
you are saying that you would need the power, the FERC would
need the power to come in where there was a concentration of
generation and transmission power in a single regional company,
but not if that did not exist?
Mr. Smith. To state the extreme case, if there were no
transmission constraints and you had a dominant generator and
one generator that owned all the plants in New England, but
people from New York and PJM and Chicago could reach customers
in New England, I don't think you would have a problem.
That is not the real fact pattern. The fact is, you have
some combination of transmission facilities with their own
constraints and generation ownership within the markets defined
by those transmission constraints, and there may or may not be
dominance.
Mr. Markey. So might divestiture of generation be needed to
address transmission market power questions?
Mr. Smith. I think our view is probably not. I mean that
one can address transmission market power by requiring open
access and making sure that it is effective.
Mr. Markey. But that would probably be the power FERC would
have to--is that correct, as a backstop incapable of
accomplishing that goal?
Mr. Smith. Yes, I guess what I would say is that the
strongest case for authority to order divestiture of generation
is that in areas where transmission is constrained in, to take
an example, a load pocket, if there is concentration within the
load pocket, there are two cures. One is make sure it is not a
load pocket, by building new transmission so other people can
get there; or by requiring divestiture of the generation owners
so there are multiple people competing within the load pocket.
Mr. Markey. So you could deal with it by using either
alternative, but one or the other would have to be exercised in
order to ensure that the other generator----
Mr. Stearns. The gentleman's time has expired.
Mr. Markey. Thank you, Mr. Chairman.
Mr. Stearns. Mr. Whitfield, the gentleman from Kentucky, is
recognized for 5 minutes.
Mr. Whitfield. Thank you very much, Mr. Chairman. I just
have a couple of questions.
As you all know, the public utility companies, like TVA and
Bonneville Power and others, are not subject to antitrust laws,
nor are they really regulated by FERC. And I am just wondering
if you had any opinion on that as it relates to deregulation.
Mr. Smith. I will give you our views.
Our chairman testified before this subcommittee several
weeks ago in favor of legislation that would bring all of the
transmission facilities in the lower 48 States under FERC
jurisdiction for purposes of ensuring open access, and that
would include the transmission facilities owned by the
federally owned utilities.
Mr. Whitfield. Any views on the antitrust laws?
Mr. Melamed. Generally speaking, we believe that the
antitrust laws should be applied uniformly throughout
industries and to all industries, and therefore, support the
administration proposal for a conditional repeal of PUHCA. But,
of course, as I stated in my prior testimony, that shouldn't be
done piecemeal; it should be done only if the other regulatory
changes, particularly enhancement of FERC's authority, are also
enacted so that we don't leave a regulatory gap.
Mr. Whitfield. Thank you very much.
I would like to yield to the gentleman from North Carolina.
Mr. Burr. I thank the gentleman from Kentucky.
Let me ask you, Mr. Smith, you just went through a scenario
with Mr. Markey and you basically said there were two options
as it related to making sure that market power didn't exist as
you opened up potentially a monopoly.
Let me ask you, is there a third option that you can think
of? You mentioned two; can there be a third?
Mr. Smith. Give me a hint.
Mr. Burr. Well, is it possible that if you successfully
created level competition, an outside concern might look at
building a new generation facility within the same territory
that you have defined as a market power situation, that could
only be addressed through a regulatory means?
Mr. Smith. Yes. I would say that is right. Fundamentally,
the issue is you need to have more competitors than you have
now. That can be done by eliminating transmission constraints
or----
Mr. Burr. We know as soon as we open it up, we take every
monopoly that is out there, and they are now competing against
each other; and that is not counting the people who weren't in
it before because it was a monopoly who could get in the
business of owning and operating a generation facility,
correct?
Mr. Smith. Certainly, you could have new entrants.
Mr. Burr. Out of the three choices, how long would you give
the competition creating a new generating facility before you
would look toward a regulatory fix or an enforcement fix?
Mr. Smith. I think that building new generation facilities
within a load pocket has potential, but there are a couple of
issues. One is, because you need to build a new plant, there is
some time required just to build it. Second, often load pockets
are in urban areas, and there may be other kinds of constraints
on building new facilities, like, for instance, air pollution.
Mr. Burr. I think--the last natural gas facility I heard
about I think the construction time was down to 6 months. Is
that about right?
Mr. Smith. I don't know. But they are getting simpler, so
you can build them faster and faster.
Mr. Burr. Mr. Chairman, may I ask, am I also next in line
or----
Mr. Stearns. That is correct, Mr. Burr, you are next in
line after Mr. Whitfield.
Mr. Burr. I will just continue on if you would watch the
clock for a minute.
Mr. Melamed, I want to compliment you on your testimony. It
was one of the most thorough and best I have ever heard. Did
you write it?
Mr. Melamed. Did I write it? Well, Milton Marquis, sitting
over there, and I wrote it, yes.
Mr. Burr. Let me ask you, who had to review that testimony
before you gave it?
Mr. Melamed. It was reviewed through an interagency
process. I don't know exactly.
Mr. Burr. Was it reviewed by any other agency?
Mr. Melamed. Yes.
Mr. Burr. What? Which?
Mr. Melamed. I don't know which ones, but others interested
in this matter.
Mr. Burr. I think you probably have a pretty good idea.
Could you guess for us?
Mr. Melamed. I think the Department of Energy, the NEC,
maybe FERC. I don't know, but--I literally don't know, I didn't
participate in that aspect.
Mr. Burr. Have you ever visited a generation facility?
Mr. Melamed. On business? No.
Mr. Burr. Have you ever gone to a transmission center where
they----
Mr. Melamed. No.
Mr. Burr. [continuing] move power and account for it?
Mr. Melamed. No.
Mr. Burr. How about any of the other panelists? Mr. Hunt?
Mr. Hunt. Yes, sir.
Mr. Burr. Transmission, generation or both?
Mr. Hunt. Generation.
Mr. Burr. Mr. Smith?
Mr. Smith. Generation.
Mr. Barton. Mr. Burr, I have been to all of those.
Mr. Burr. And I feel like you will have the opportunity
again, Mr. Chairman.
Commissioner Thompson.
Mr. Thompson. I have never visited, but I have had--I spent
a lot of time financing them.
Mr. Burr. I do too. It is called a monthly bill. That is
one of the reasons I am somewhat passionate about finding a new
way to bring competition into it.
Let me ask you, Mr. Smith, since Order 888, how many times
has FERC regulated the wholesale price?
Mr. Smith. I am not sure exactly what you mean. We----
Mr. Burr. I wasn't sure what you meant when you said FERC
had the ability to set pricing.
Mr. Smith. We continue to do cost-based regulation on a
significant fraction of wholesale sales.
Mr. Burr. But FERC is not out there, nor do you anticipate
that you have the ability to set the wholesale price; am I
correct?
Mr. Smith. Well, we set cost-based rates for some wholesale
sales.
Mr. Burr. Okay.
Mr. Melamed, you mentioned a couple times the dominant,
market dominant company. Could you name one for me? Out of all
of the monopolies that are out there today, could you name a
company that you, as the Department of Justice, looking at the
antitrust laws--if we were to open this up, name one company
that you would consider to be a market dominant company the day
we opened.
Mr. Melamed. Obviously you are referring to this industry?
Mr. Burr. Well, yes, the electric industry.
Mr. Melamed. Right. Well, how about Rochester Gas and
Electric? We brought an antitrust case against them on the
premise they were a monopoly.
Mr. Burr. I understand that. But do they--under your
definition of a market dominant company that you described very
passionately, would that define Rochester Gas?
Mr. Melamed. Well, frankly, I don't recall that I used the
term ``market dominant.'' I may have used ``market power'' or
``monopoly.'' Those have precise meanings in antitrust and
economics, and the answer is yes.
Mr. Burr. Let me rephrase the question. Do you see any
company out there today that, if we were to open up, create an
open market for retail sales, that would be so dominant that
the Department of Justice would be concerned about their
existence in its current form?
Mr. Melamed. We see--to the extent we have been involved in
this industry, a number of local electricity producers and
transmission companies that appear at the moment to be
monopolies.
Mr. Burr. We are only talking about generation now.
Mr. Melamed. Okay.
Mr. Burr. Transmission is still going to be a regulated
entity of FERC. We are going to assume, like Mr. Largent did,
that FERC is going to do such a wonderful job that, in fact,
the lines are going to be open. If you and I wanted to sell
power, we could do it.
Mr. Melamed. Right. The question then is, what will the
world look like, assuming that there is deregulatory
legislation passed and legal barriers to competition have
relaxed, for which we don't have a complete answer. One of the
things that is a fundamental underpinning of antitrust
enforcement is, it depends on very careful case-by-case
scrutiny of the facts.
Our point is that we don't know enough yet as a Federal
Government agency, frankly, to be able to say with assurance
there will be no problems in transmission, there will be no
problems in generation, and therefore, that there will be no
market power problems to worry about. That is why we believe
FERC should have the authority in the event that after
deregulation, upon investigation, it turns out that there are
individual problems of market power or monopoly power that
can't be remedied without some kind of a further effort to
mitigate market power.
Mr. Burr. So the only entity that can give us the assurance
that the retail marketplace will operate correctly is a Federal
entity versus the marketplace?
Mr. Melamed. No, no, no, I don't believe I said that.
The administration bill, as I am sure you know, provides
FERC with specific authority with respect to concerns about
residual market power at the generation level affecting
competition at retail. FERC's authority to require mitigation
will be dependent upon a request from a State, after the State
had determined that it did not have adequate resources to deal
with the problems. At the wholesale level, across the State
lines, which are regional in nature, FERC, we believe, should
be given that authority without depending on awaiting a State
referral.
Mr. Burr. I thank the witnesses. I yield back.
Mr. Stearns. The gentleman's time has expired.
Mr. Strickland is recognized for----
Mr. Strickland. No questions.
Mr. Stearns. No questions.
Mr. Pickering is recognized for 5 minutes.
Mr. Pickering. Thank you, Mr. Chairman.
And I would like to follow up on some of the questions that
both Mr. Largent and Mr. Burr had concerning possible or
potential concentration and generation.
Mr. Smith, do you have any type of market test, that you
would say would be a threshold trigger as to a percentage of
generation capacity in a given market, that would cause you to
have concern that would then possibly kick in a divestiture
requirement?
Mr. Smith. It is a compound question. We do have some
standards, some policies, with regard to assessing whether
generators or utilities have market power. We have one that we
apply for the purpose of determining whether a generator should
be allowed to use market-based rates, as opposed to cost-based
rates. And we have one that we use in assessing mergers that
will involve concentration of generation.
We have adopted the DOJ-FTC merger guidelines as the basis
for doing the merger review. We have a significantly simpler
analysis that we use for purposes of market-based rates.
Mr. Pickering. Which is? What is that test?
Mr. Smith. It is called the ``hub-and-spoke test.'' You
essentially figure out the market share of the applicant within
the area defined by the service territory of the applicant
itself and all of the utilities that abut the utility. And I
think the market-share test for worrying about market power is
20 percent in that region.
Mr. Pickering. Okay. If you have open access--and I believe
that there is somewhat of a consensus among the panel that open
access requirements in a competitive world with new legislation
should address most of the market power questions, is that
correct, without having to go to the additional step of having
divestiture; is that a correct assumption of the panel's views?
Mr. Smith. It is an oversimplification of my views.
I would say that there----
Mr. Pickering. You want maximum power; is that correct?
Mr. Smith. No. But I think, as I said----
Mr. Pickering. Or flexibility?
Mr. Smith. [continuing] in my testimony, we need enough
authority to deal with the range of problems that we would
encounter.
Let me give you a specific example, which is where there is
open access, but there aren't sufficient transmission
facilities. Going back to the example of load pockets, there
are areas--and it has come up already in California and New
York City both at wholesale and at retail--where there are one
or only a few generators within an area that can be effectively
served because of transmission constraints in those areas. What
we have done in California for the so-called ``must-run units''
is to retain cost-based rates.
As I understand it, in New York City, there was a State
concern about market power in the city of New York itself. They
wanted to go to retail competition, and they required
divestiture of Con Ed facilities within the city so that there
would be multiple parties competing within the load pocket.
Mr. Pickering. Let me follow up by asking, if open access
is one of the primary tools, the other tool that the
administration seems to be proposing on both the transmission
and generation side would be an RTO organization.
Walk me through how an RTO would work and address market
power issues as the administration or you see it.
Mr. Smith. As we talked about a little bit earlier, there
can be a variety of forms of an RTO, but the essential
characteristics are that, either by transferring ownership to a
new organization or by transferring operational control of
transmission facilities to a regional organization, you would
have one regional operator of a transmission system, and that
one of the essential purposes of this is to make sure that the
operation of the transmission system is independent of the
interests of the people who are selling power in that market.
Mr. Pickering. Now, would a transco, would it be sufficient
if you had a transco within that structure that would be
structurally separated--nondiscriminatory open access? Could
you have the safeguards sufficient that you could go with a
transco approach?
Mr. Smith. If what you mean by a transco, which is the
commonly accepted usage, is that you transfer both operational
control and ownership to the new organization and you could
meet the other tests of independence and sufficient regional
scope, then, yes, I would say that would satisfy that test.
Mr. Pickering. If you don't transfer ownership.
Mr. Smith. Then it looks more like what we have called, to
date, ``independent system operators.'' And we think both of
those models are certainly in play. To date, the Commission in
Order 888 set forth 11 principles on ISOs, and we have acted on
five ISO proposals.
We have one pending transco proposal.
Mr. Stearns. The gentleman's time has expired.
We will just conclude. The chairman of the subcommittee has
a few questions.
Mr. Barton.
Mr. Barton. I just have two questions, but I want to thank
you all first for your attendance.
Mr. Hunt, you have gone strangely unasked about your
testimony.
Mr. Hunt. Yes, sir.
Mr. Barton. And I thought you gave an excellent statement,
a very strong statement about PUHCA repeal with appropriate
safeguards in terms of regulatory authority. You said that it
reflects the unanimous support of the SEC commission.
Does it also reflect the unanimous support of the Clinton,
administration more broadly?
Mr. Hunt. I don't think so, Mr. Chairman. I think the
administration's view is that PUHCA repeal ought to be
considered as part of an overall energy legislative reform,
rather than on a stand-alone basis. It is our view at the
Commission that, with the proper safeguards and the appropriate
additional powers given to FERC and to the States, stand-alone
repeal would not harm investors or consumers at all. But we
perfectly understand the other point of view that it ought to
be part of an overall energy legislative reform package.
Mr. Barton. Okay, thank you. And we do have a
representative of the FERC here, so this question is to the
other three gentlemen, if you care to comment.
FERC Order 888, if you listened to our good commissioners,
they seem to be very proud of that and they go out of their way
to comment on how excellent a regulatory order it is. Do you
other gentlemen think that in and of itself that that is all
that needs to be done in the area of vertical interaction and
transmission access, or are there other statutory steps that
should be taken as we look at comprehensive review?
Mr. Hunt. I think that is going to have to depend on where
the technology goes and what the industry looks like as we try
to deregulate. I think--as I understand 888, it is a great
order. But I think that the industry is evolving so fast that
it is going to be hard to know where we ought to go in the long
term.
Mr. Barton. You would say on behalf of the SEC, it could be
improved upon in legislation?
Mr. Hunt. Well, I wouldn't presume to say it could be
improved upon, but it could be seriously looked at and maybe
improved.
Mr. Barton. Don't you assume that if we seriously look at
it, we are going to improve it?
Mr. Hunt. I assume in the wisdom of Congress everything can
be improved that you look at.
Mr. Barton. That is good.
Does either of you other two gentlemen wish to comment on
FERC 888?
Mr. Melamed. Just, I guess, to repeat really what I may
have attempted to say earlier. That order is a regulatory order
that seeks by regulation to require open access to
transmission. It is always difficult to, by regulation, ensure
that access is truly nondiscriminatory and truly open to
competitors, and that is why we support the administration's
proposal to give FERC the authority to require the transfer of
control of a transmission facility to independent operators,
because that is structural change that we think might in some
cases be necessary to improve on a mere regulatory approach.
Mr. Barton. Mr. Thompson?
Mr. Thompson. I would agree with that in the sense that it
is important to recognize there are a couple of things that are
happening within this market. We don't know where it is going
to go, but I think it is important while you are addressing
what could happen right now that you provide sufficient tools
to address the possible problems that we already begin to see.
As I already mentioned, we have already received questions
from States about how to open up markets, what are the
antitrust issues, and what kind of remedies should be
available.
That is why it is important at this stage, while you are
taking a comprehensive look at this, to provide the maximum
amount of tools. It is possible that the open access, that open
access may do a lot. But I would also caution not to
underestimate the weight of inertia; and second, that if the
importance of deregulation is to provide consumers with the
benefits of competition, we should do what we can to make sure
that those benefits come on sooner rather than later.
And what I am concerned about is that if we are not careful
and we don't provide adequate tools, then the degree of inertia
and even some of what appear to be legitimate practices, but
under the context of market power, could go unaddressed for a
long period of time.
Mr. Barton. Thank you. And I don't want my friends at FERC
to think we are not supportive of FERC 888. It is a good rule.
But I think it can be improved upon, and I think it needs to be
statutorily.
Thank you, Mr. Chairman.
Mr. Stearns. I thank the chairman.
Does anyone else have concluding comments?
Mr. Burr is recognized.
Mr. Burr. Just a couple of quick questions, Mr. Chairman,
since mergers were included, and I feel mergers are somewhat of
a catalyst for competition in many cases. Let me ask you,
Commissioner Thompson, is there an average number of days that
the FTC--for the normal merger process, do you know what the
average days are that it takes for mergers to move through the
process at the FTC?
Mr. Thompson. I don't want to give you an answer off the
top of my head, because it depends on the circumstance; but we
do have rules about when the timeframes are triggered. But some
transactions are a lot more complicated than others, and we
work with the parties to try to alleviate the concerns that we
have.
Mr. Burr. One of the debates that we will have throughout
the formation of a bill is, what do we do with the merger
responsibility? Is it shared, is it concentrated at FERC,
exactly what do we do, and though FERC has gotten better, I
think one of the last ones was that it took 14 months just to
put together the hearings for the mergers.
And I guess my question would be to you, Mr. Thompson,
given your position with the Federal Trade Commission, mergers
that take that long for the hearing process, what do they do to
stimulate that level of competition?
Mr. Thompson. I guess I am reluctant to comment on FERC's
process, because I don't know it well enough, but what I would
say is the following: that I think it is in everyone's interest
when you are looking at a merger that has strong potential
consumer benefits of competition, that we try to provide those
benefits as quickly as possible.
And what I would also say is that we have developed and we
expect to continue our close relationship with FERC and DOJ so
that we can provide the appropriate guidance and the process
moves along smoothly.
Mr. Burr. Is that a process that you would feel
comfortable, focusing just at the Department of Justice and the
Federal Trade Commission, given the high degree of expertise
with mergers of companies throughout this country?
Mr. Thompson. Well, I do know that there is--I believe the
administration proposal provides that we have a consultative
role with FERC.
Mr. Burr. I am asking if you and the Department of Justice
have a primary and sole role for merger decisions, what is your
comfort level with that?
Mr. Thompson. I think at this stage that what is important
is that FERC has 60 years of experience in dealing with the
complicated policy issues in energy. And I think, working
together will ensure that consumers benefit. What I would hate
to see is a circumstance where, because anyone is compelled to
reinvent the wheel, that we wouldn't have the benefits of both
of our expertise.
Mr. Burr. I am confident that the Federal Trade Commission
and the Department of Justice would consult with every expert
in the field on a merger. And I am sure that that is a practice
that you utilize today.
The question is, where should the primary jurisdiction for
the decision and who should be the engine for driving the
process? And I guess my question is, since the Federal Trade
Commission does that regularly, do you feel comfortable doing
it in the electricity industry in the future?
Mr. Thompson. Well, I can say that we are supportive of
FERC's primary role here.
Mr. Burr. I thank you. And I thank the chairman and yield
back.
Mr. Stearns. I thank the member.
Mr. Pickering is recognized briefly.
Mr. Pickering. Thank you, Mr. Chairman.
Just to follow up quickly with Mr. Smith on merger and
acquisition authority. One thing that we are seeing in
telecommunications with mergers and acquisitions when we go to
competition is the unpredictability, the uncertainty, the
delays, sometimes extortion of companies involved on
noncompetitive grounds.
Would you support FERC having timetables, by which they
would have to approve or disapprove mergers and acquisitions--
let us say, 120 to 180 days, that would give certainty as we go
into a competitive marketplace?
Mr. Smith. The Commission adopted timetables to address
precisely the kinds of concerns you are talking about in a
merger policy statement in December 1996.
Mr. Pickering. Do you follow those timetables on a regular
basis?
Mr. Smith. Yes, we have had, I think, 23 merger
applications since the issuance of the policy statement which
was 2\1/2\ years ago. The timing that it provided for was that
we would act on merger applications that did not require a
hearing within 5 months. We have a few cases that have just
come in, so the 5 months hasn't run, but all of the cases that
we have acted on, we have acted on within that 5-month
timeframe.
And I believe in 2 or 3 of those cases, the merger raised
complicated competition issues and, therefore, was referred to
hearing.
Mr. Pickering. So since you have an internal policy of
timetables, you would not object to statutory deadlines in a
legislative approach at the same time that would conform and be
consistent with your principles that you set out internally?
Mr. Smith. Well, I would be worried about such timetables
if the result was that mergers would be approved at the end of
the timeframe if no action had been taken. I think that
addressing market power issues explicitly in the context of
mergers is an important enough requirement that you wouldn't
want failure to act within a statutory timeframe to be deemed
as approval of the merger.
Mr. Pickering. And the last and quick question. Again,
going back to generation and possible divestiture, you
mentioned the issue of load pockets as an example where you may
have a problem with market power and concentration. If we
limited your ability to look at divestiture of generation to
where load pockets exist, would that be an appropriate
limitation?
Mr. Smith. It would be hard to write that legislation,
because ``load pockets'' isn't a very precise term, and I think
the notion of having authority where there is market power in
essence takes into account the definition of the market itself.
So if you have a little geographic market with few players, you
are more likely to find market power. If you had a big market
and a lot of players, you would be very unlikely to find market
power.
Mr. Pickering. Thank you, Mr. Chairman.
Mr. Stearns. The gentleman's time has expired.
Mr. Sawyer, do you have a brief comment?
Mr. Sawyer. Just a brief comment.
Mr. Stearns. Sure.
Mr. Sawyer. I want to return to Chairman Barton's question
about the sufficiency of who could repeal with safeguards. It
seems to me that PUHCA's central role today is the product of,
now, 60 years of policy and practice and law on both Federal
and State levels that interact in very complex ways.
And, Commissioner Hunt, your answer to the chairman in that
PUHCA repeal with sufficient safeguards could stand alone, I
take it is largely from the SEC point of view and not from the
point of view of the way in which PUHCA, over the last 60 days,
has been interwoven with a lot of other precedent practice law
and so forth on every level?
Mr. Hunt. Well, Congressman Sawyer, we think that first,
yes, that is the SEC's position growing out of our 60 years of
administering the statute. But, I think what we have found in
the last 10, 15 years in administering the statute is that,
with the change in the industry and the way the power can be
generated and transmitted now, some of the definitions in the
statute no longer make no sense, such as the definition of an
``integrated power system.''
So those things lead to some difficult interpretation on
the part of our staff in terms of how we administer the statute
in light of the present facts and circumstances.
Again, what we are trying to do is administer the act so
that the regulated holding companies, and there are about 19 of
them, can compete on a level playing field with the
nonregulated, mostly interstate holding companies, in the area
of new activities and new acquisitions.
Mr. Sawyer. Thank you very much.
Mr. Stearns. I thank my colleagues. And I thank very much
the first panel got the time and the energy. We appreciate very
much your bearing with all of our questions and now we will
call up the second panel.
Mr. Stearns. Good morning and--afternoon now. May I have
your attention? We are going to start the second panel. Before
we do, of course, I would like to welcome a member from the
second panel, Mr. Michael Kurtz, General Manager of the
Gainesville Regional Utilities, in Gainesville, Florida. I
represented Gainesville in Congress for 4 years. And he, of
course, is testifying as a representative of public power
entities, particularly in northern Florida. And so I look
forward to his testimony.
I want to welcome Mr. James Rogers, the Vice President and
Chief--Vice Chairman and President and Chief Executive Officer,
Mr. Chris King, Ms. Mary Elizabeth Tighe, Mr. Marty Kanner, Mr.
Joshua Kahn, and Mr. Kenneth Rose and Mr. Kenneth Gordon.
I want to welcome all of you. And I appreciate your
patience as we got through the first panel. So let me have all
of you start with your opening statement, and we might just
start with--the full statement will be part of a record. Since
we have eight of you, we would appreciate if you would
summarize what your opening statement is; then we can move
forward with our questions.
Mr. Rogers, we will start with you.
STATEMENTS OF JAMES E. ROGERS, VICE CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER, CINERGY CORPORATION; CHRIS KING, CHIEF
EXECUTIVE OFFICER, UTILITY.COM; MICHAEL L. KURTZ, GENERAL
MANAGER, GAINESVILLE REGIONAL UTILITIES; MARY ELIZABETH TIGHE,
VICE PRESIDENT, STATOIL ENERGY, INC.; MARTY KANNER, COALITION
COORDINATOR, CONSUMERS FOR FAIR COMPETITION; JOSHUA A. KAHN,
KAHN MECHANICAL CONTRACTORS; KENNETH ROSE, SENIOR INSTITUTE
ECONOMIST, NATIONAL REGULATORY INSTITUTE; AND KENNETH GORDON,
SENIOR VICE PRESIDENT, NATIONAL ECONOMIC RESEARCH ASSOCIATES
Mr. Rogers. Thank you very much. Good morning. Mr. Chairman
and members of the subcommittee, I am Jim Rogers, President and
CEO of Cinergy Corp., an investor-owned public utility holding
company based in Cincinnati. We serve about 1.4 million
electric and 450,000 gas customers in Indiana, Ohio and
Kentucky. We are a wholesale marketer and trader of gas and
electricity in the emerging national commodity markets for
those commodities.
We are also one of the lowest-cost suppliers in the
country, being the second lowest production cost of our
generation, the 25 largest companies in the country. I want to
thank you for giving me the opportunity to appear here today to
share my views on issues concerning market power, mergers and
the Public Utility Holding Company Act.
As you know, I have testified before this subcommittee on
several occasions on the tremendous benefits that customer
choice and competition will bring to the consumers of electric
power in the U.S. Cinergy has been and is today an enthusiastic
supporter of increased competition in the industry, and we look
forward to the day when all consumers are free to pick their
energy supplier.
We have been, as you all know, a pioneer in our advocacy
and actions. We were one of the first companies in the country
to voluntarily open up our transmission grid to give equal
access to all who want to ship across it. And we have been an
advocate for customer choice in our home States. I have lived
in Texas long enough to know and learn the west Texas rule, and
that is where pioneers get the areas, often the settlers get
the land.
And so I am here today to testify to make sure that all
people in this industry and new entrants have an equal
opportunity to get the land. Although my testimony addresses
all issues, I am only going to focus on the Public Utility
Holding Company Act.
But a quick note on market power. We are an advocate of
ISOs. We are a member of the Midwest ISO. We believe that
regional transmission organizations facilitate robust,
efficient, reliable wholesale markets and are critical to the
robustness of those markets. And it is very consistent with the
goals of the Energy Policy Act of 1992, and in my judgment will
alleviate most of the market power concerns if all companies
are participating in RTOs in this country.
Now, let me quickly turn to PUHCA. It was enacted 64 years
ago when the utility industry was in its infancy. Congress
sought to reform the industry by limiting registered holding
companies to integrated systems. The Chairman of the SEC--and I
think his words say it best--noted that, except in time of war,
the Federal Government has never imposed such total control
over any industry as that imposed on the electric utilities by
PUHCA.
As you all heard this morning from SEC Commissioner Hunt,
the SEC completed its review of PUHCA in 1981, and it conducted
a second study of the statute in 1995. Both of these studies
found that the statute had become obsolete, and recommended to
Congress that PUHCA be repealed. These are bipartisan
conclusions that PUHCA is duplicative of existing State and
Federal protection for investors, as well as consumers.
The bottom line is that PUHCA has not only outlived its
usefulness, but also imposes unnecessary delays in
decisionmaking, increases operating costs, limits competition,
and prevents utilities from offering new products and services
to the market. In other words, it is both anticonsumer and
antishareholder. Those are strong words.
Those are strong words, and there is certainly no ambiguity
in that statement, but let me say it is based on my experience
as a former consumer advocate at the State level and a former
Federal regulator and my past 10 years' experience as a CEO of
a Fortune 500 energy company. It is anticonsumer and
antishareholder.
The most urgent reason for repeal of PUHCA in my opinion is
the inherent impediment and outright prohibition of new
competitors into the emerging energy markets in stark contrast
with the Policy Act of 1992. Let me give you three quick
examples.
PUHCA's retained earnings limitations have impeded
Cinergy's ability to bid on generation.
Mr. Stearns. We just have eight people, so I need you to
keep within the 5 minutes. If you'd be so kind just to
summarize your remaining statement.
Mr. Rogers. I will be delighted to do that. I have been
around long enough to know how to follow instructions. In
conclusion, Cinergy supports a legislative clarification of the
FERC's authority to promote RTOs as a means to alleviate market
power.
We also call on you to repeal PUHCA. We believe it should
either be part of a comprehensive reform or a separate piece of
legislation such as Senate Bill 313 which was reported out of
the Senate Banking Committee of February on a bipartisan basis.
Clearly, companies like ours are precluded from
participating in generation sales. We are precluded because of
the limitations for participating in privatization efforts
around the world. We are limited in our ability to increase
shareholder value, and we are limited in our ability to grow.
I don't believe we can afford to wait indefinitely on
moving any aspect of electric deregulation, however necessary
and compelling it may be, until everyone agrees on all
components of a comprehensive bill.
The Energy Policy Act of 1992 was a step in the right
direction to a robust, wholesale market. It wasn't
comprehensive. We should take the next step now to create
competitive markets, and my only cautionary last remark would
be, we should not let the quest for perfection become the enemy
of progress in 1999.
Thank you.
[The prepared statement of James E. Rogers follows:]
Prepared Statement of James E. Rogers, Vice Chairman, President and
Chief Executive Officer, Cinergy Corp.
Chairman Barton and members of the Subcommittee, I am Jim Rogers,
Vice Chairman, President, and Chief Executive Officer of Cinergy Corp.,
an investor-owned public utility holding company based in Cincinnati,
serving about 1.4 million electric and 450,000 gas customers in
Indiana, Ohio and Kentucky. I want to thank you for giving me the
opportunity to appear here this morning to share my views on issues
concerning market power, mergers, and the Public Utility Holding
Company Act (PUHCA). As you know, I have testified before this
Subcommittee on several occasions on the tremendous benefits that open
competition will bring to the consumers of electric power in the United
States. Cinergy is an enthusiastic supporter of increased competition
in our industry and we look forward to the day when we can compete for
retail customers everywhere in the country.
However, meaningful competition will require federal legislation in
two key areas: (1) legislation to promote Regional Transmission
Organizations (RTOs), which will alleviate most, if not all, market
power concerns presented by the restructuring of the nation's electric
industry; and (2) legislation to repeal PUHCA, which is a barrier to
the efficient consolidation of the industry and otherwise a barrier to
entry in the newly emerging merchant generation and marketing business.
I will discuss each of these items in the context of addressing the
issues you have raised today.
market power
Mr. Chairman, three markets are affected by a traditionally
vertically integrated electric utility: the generation of electricity,
the transmission of electricity and the distribution of electricity to
its ultimate consumer. Since the rates, terms and conditions of
transmission will remain jurisdictional to the FERC, and distribution
will remain under the jurisdiction of the state Public Utility
Commissions, the potential for abuse of vertical market power (the
ability to use dominance in one market to manipulate prices in a linked
market) in a restructured electric industry is limited to the
generation of electricity.
Mr. Chairman, the move to a more competitive wholesale and retail
market in the generation of electricity will require a fundamental
restructuring of the operation of traditional, vertically integrated
utilities in this country. Specifically, to appropriately address
legitimate concerns of vertical market power by incumbent utilities,
regulatory policy must provide for separation of control of
transmission of electricity from control of generation of electricity.
Separation of control of transmission from generation is effected
when an incumbent utility's transmission assets are placed under the
operation and control of an RTO. Cinergy is accomplishing this
separation through the formation of, and its participation in, the
Midwest ISO, which is the only FERC approved RTO in our region. While
Cinergy recognizes that there may be a certain amount of disagreement
among utilities on the appropriate structure of an RTO, we believe that
the FERC is the appropriate forum to determine issues concerning
interstate transmission of electricity. To the extent existing federal
law leaves any uncertainty with respect to FERC's authority to promote
the creation of RTOs, we urge Congress to act now to eliminate such
uncertainty and to make it clear that FERC is authorized to take the
necessary steps to facilitate creation of appropriate RTOs.
Cinergy does not believe that horizontal market power--the ability
to control prices over a substantial period--exists with respect to the
wholesale electric market in the Midwest. The substantial dollar losses
suffered by some utilities last June constitute strong evidence that
those utilities lacked the ability to control wholesale prices at that
time. We further believe that the reduction of transmission rate
pancaking, that will occur when appropriate RTOs are in place, will
make the generation market even more competitive by improving the
ability of many sources of generation to compete in areas now dominated
by a single large utility. At this time, absent barriers to entry or an
ability to sustain changes in pricing, Cinergy believes that efforts by
the government to specifically allocate market shares would be
premature.
Further, Cinergy supports measures taken at the FERC, and by many
state commissions, to institute codes of conduct to ensure that market
knowledge from the regulated operations are not used to unfairly
advantage non-regulated affiliated marketing companies. Cinergy
believes that these behavioral prohibitions, along with an aggressive
FERC complaint procedure, can ensure a fair and open market for
generation among all suppliers including utility affiliated marketing
companies.
mergers/consolidations
Cinergy's 1994 merger, which has been very beneficial to customers
and shareholders alike, took approximately two years to receive all
government approvals. How many other industries, regulated or
otherwise, are delayed or prevented from achieving the synergies and
cost benefits from consolidation because of such a cumbersome
regulatory review process? As the industry is restructured, serious
consideration must be given to removing some of the layers of
duplicative merger reviews and allow a quicker, more streamlined
process. To do otherwise is to deprive consumers and shareholders of
the benefits of mergers and consolidations. As we discuss below, repeal
of PUHCA can go a long way toward facilitating the more efficient
development and consolidation of our industry.
repeal of puhca
Mr. Chairman, as you know PUHCA was enacted 64 years ago when the
utility industry, as we know it today, was in its infancy. Congress
sought to reform the industry by limiting registered holding companies
to ``integrated'' systems and by requiring holding companies to file
extensive financial information with the SEC and secure Commission
approval before engaging in a variety of transactions. In practice, the
integration requirement limits registered holding companies to
operating in geographically proximate states. The Chairman of the SEC,
Arthur Levitt, has noted the observation that, except in time of war,
the Federal government has never imposed such total control over any
industry as that imposed on electric utilities by PUHCA.
Of course, much has changed in the financial structure, technology
and capability of the electric utility industry since PUHCA was enacted
over half a century ago. In the last 20 years, there have been a series
of studies undertaken on PUHCA and its effects on both providers and
customers in a rapidly evolving utility industry. In 1977, in response
to an inquiry by the then Chairman of this Subcommittee, John Dingell,
the General Accounting Office (GAO) found that the objectives of the
statute had been achieved and that the financial problems associated
with the structure of the utility industry had been rectified. The GAO
recommended that the SEC undertake a more comprehensive examination of
PUHCA to determine if Congress needed to reform the statute.
The SEC completed its review of PUHCA in 1981 and conducted a
second study of the statute in 1995. Both of these studies found that
the statute had become obsolete and recommended to Congress that PUHCA
be repealed. The 1995 SEC Report found that the regulatory system
imposed by PUHCA ``imposes significant costs, in direct administrative
charges and forgone economies of scale and scope, that often cannot be
justified in terms of benefits to utility investors.'' The SEC
concluded that the effects of PUHCA on the current electric utility
system ``are truly detrimental to both investors and consumers.''
The bottom line is that PUHCA has not only outlived its usefulness,
but also imposes unnecessary delay in decision-making, increases
operating costs, limits competition, and prevents utilities from
offering new products and services to the public. In other words, it is
both anti-consumer and anti-shareholder.
Mr. Chairman, the most urgent reason for repeal of PUHCA is the
inherent impediment and outright prohibition of new competitors into
the emerging energy markets. Several concrete examples are worth
noting.
First, as illustrated in the attached materials, PUHCA's retained
earnings limitations have impeded Cinergy's ability to bid on
generation opportunities that are priced beyond our retained earnings
cap. Many states have authorized their utilities to sell off
generation. The disaggregation of generation creates opportunities to
bring in new market entrants, with increased competition and more
choices for consumers in a commodity deregulation environment. This
PUHCA restriction prevents consumers from receiving the lower prices
which would result from increased competition in the newly emerging
merchant generation business.
Second, as also illustrated in the attachment, many international
acquisitions are beyond our reach because of the retained earnings cap.
Missed investment opportunities include the ability for Cinergy to
participate in the privatization of other country's energy markets. We
believe this bar unfairly impacts on Cinergy because other companies
are able to make these acquisitions. In addition, Cinergy is unable in
some instances to promote the international energy development policies
favored by the United States government.
Third, because of PUHCA's requirement that all registered holding
companies operate in a close geographic proximity, Cinergy is limited
in its ability to compete with foreign companies for domestic
acquisitions. Consequently, while PUHCA's requirement would bar Cinergy
from merging with, or acquiring, PacifiCorp, a foreign company such as
Scotish Power, not subject to PUHCA, could acquire PacifiCorp or even
Cinergy without violating the PUHCA restrictions.
Finally, PUHCA restricts holding companies from many internal
investments in generation, gas and electric transmission and
distribution. Certainly, this is the only industry that so stifles
global competition and investment under rules over 60 years old.
Moreover, PUHCA also means regulated companies must spend an inordinate
amount of money on paperwork and personnel to comply with the statute's
burdensome provisions which the SEC has long ago determined to be
outdated, ineffective, and unnecessary.
Over time the ongoing damage imposed on registered companies by
PUHCA can affect their ability to compete in the market place and
expand their business. For example, at the end of 1994, when Cincinnati
Gas & Electric and PSI Energy merged to form Cinergy, the combined
company had a market value of $3.6 billion while the top five energy
companies had an average value of $9 billion. Four years later,
Cinergy's value had grown to $5.8 billion while the big five's value
had grown to an average of $17.4 billion. Despite our growth, the gap
between Cinergy and the top five energy companies has gone from $5.4
billion to $11.2 billion.
One of the most enduring myths associated with PUHCA is that the
statute somehow prevents utilities from exercising undue market power.
However, in reality, PUHCA actually requires market concentration and
thereby produces market power. The statute's integration requirements
and geographic restrictions prevent utilities from entering other
markets and competing against local utilities. FERC Chairman Hoecker
has testified that ``in some instances it (PUHCA) encourages the very
concentrations of generation that are anathema to competitive power
markets and discourages asset combinations that could be pro-
competitive.'' The Administration's Statement which accompanied the
release of its Comprehensive Electricity Competition Act last month
agrees that many of PUHCA's requirements, such as the requirement that
a holding company operate a single integrated system, ``are not
compatible with a more competitive electricity market.''
It should be remembered that PUHCA essentially was created to
address investor abuses and was never intended to provide rate
protections for electric consumers. PUHCA cannot be realistically
deemed a consumer protection statute for the utility industry when, out
of approximately 3,000 electric and gas utilities, only 18 of these are
registered holding companies subject to PUHCA. In today's electric
utility market, a wide variety of other government entities such as the
Federal Trade Commission, the Department of Justice Antitrust Division,
the FERC's assessment of market power issues during its merger and
acquisition review, as well as state public utility commission
proceedings, are in place and have adequate power and authority to
address any market power or anticompetitive concerns that may arise.
The repeal of PUHCA merely removes an outdated and unnecessary
statutory bar to certain mergers by registered holding companies and
thus allows them to seek governmental approval for mergers on the same
basis as other utilities.
conclusion
In summary, Mr. Chairman, Cinergy supports a legislative
clarification of the FERC's authority to promote RTOs as a means to
alleviate market power concerns, as well as the repeal of PUHCA in a
manner generally consistent with the SEC's 1995 recommendation. We
believe this repeal should either be part of a comprehensive reform or
a separate piece of legislation, such as S.313, as reported out of the
Senate Banking Committee in February on a bipartisan basis.
As you know, Cinergy has long supported a choice of electricity
suppliers for all consumers and we continue to do so. However, I don't
believe we can afford to wait indefinitely on moving any aspect of
electric deregulation, however necessary and compelling, until everyone
agrees on all components of a comprehensive bill. We should not let the
quest for perfection become the enemy of progress. Repeal of PUHCA, and
clarification of FERC's authority to promote RTOs, should happen
immediately.
Thank you for your consideration.
Attachments
Largest Merchant Plant Acquisitions Have Been Beyond Cinergy's ``PUHCA Reach''
----------------------------------------------------------------------------------------------------------------
Project
Total Cost Retained Cost as a
Acquirer/Developer MW ($ Percent Earnings % of
millions) Equity ($ Retained
thousands) Earnings
----------------------------------------------------------------------------------------------------------------
Edison Mission...................................... 1,896 $1,800 100 $2,882 62
Sithe............................................... 4,117 1,720 100 3,967 43
U.S. Gen Co. (PG&E)................................. 4,009 1,590 100 2,531 63
PP&L................................................ 2,614 1,586 100 323 491
Enron............................................... 1,037 1,100 100 2,138 51
AES................................................. 1,424 950 100 798 119
FPL Group........................................... 1,185 846 100 2,116 40
Southern............................................ 3,065 801 100 4,164 19
AES................................................. 3,956 781 100 581 134
Keyspan............................................. 2,168 597 100 722 83
----------------------------------------------------------------------------------------------------------------
Largest Merchant Plant Acquisitions Have Been Beyond Cinergy's ``PUHCA Reach''
----------------------------------------------------------------------------------------------------------------
Project
Total Cost Retained Cost as a
Acquirer/Developer MW ($ Percent Earnings % of
millions) Equity ($ Retained
millions) Earnings
----------------------------------------------------------------------------------------------------------------
Sithe............................................... 1,983 $536 100 $3,950 14
NRG (NSP subsidiary)................................ 1,456 505 100 1,399 36
Duke................................................ 2,645 501 100 3,256 15
Southern............................................ 1,776 480 100 4,164 12
Southern............................................ 984 462 100 4,164 11
Dynergy (DYN & NRG JV).............................. 951 356 50 106 168
NRG (DYN & NRG JV).................................. 951 356 50 1,399 13
NRG................................................. 1,360 355 100 1,399 25
----------------------------------------------------------------------------------------------------------------
Largest Independent Power Projects Have Been Beyond Cinergy's PUHCA Reach
----------------------------------------------------------------------------------------------------------------
Project 1997 1998
Developer/Project/Country Cost ($ Percent Total Credit Credit
millions) Equity Megawatts Rating Rating
----------------------------------------------------------------------------------------------------------------
GE Capital/Paiton/Indonesia......................... $2,600 13 1,230 .......... AAA
Edison Mission/Paiton/Indonesia..................... 2,600 40 1,230 P1 P1
AES/Yangcheng/China................................. 1,800 25 2,100 Baa3 Baa3
Siemens/Jawa Power/Indonesia........................ 1,700 50 1,220 .......... AA1
CMS/Ennore/India.................................... 1,600 100 1,886 Ba3 Ba3
CMS/Jorf Lasfar/Turkey.............................. 1,500 50 696 Ba3 Ba3
Southern/Pilillipines............................... 1,400 92 1,200 Baa1 Baa1
Enron/Sarlux/Italy.................................. 1,350 45 551 Baa2 Baa2
Southern/Hin Krut/Thailand.......................... 1,300 28 1,400 Baa1 Baa1
Edison Mission/SAB Energy/Sicily.................... 1,300 49 512 P1 P1
Sithe/San Roque/Phillipines......................... 1,100 43 345 .......... ..........
Siemens/Hanfebg/China............................... 1,050 40 1320 .......... AA1
Sithe Energies/Everett, MA/USA...................... 1,000 100 2,800 .......... ..........
InterGen/Mauben/Phillipines......................... 812 46 812 .......... ..........
Edison Mission/Bo Nok/Thailand...................... 800 40 367 P1 P1
Entergy/Saltend/UK.................................. 800 100 1,175 Baa3 Baa3
InterGen/Meizhou Wan/China.......................... 755 70 724 .......... ..........
Texaco Global Gas & Power/API Energia/Italy......... 750 24 276 .......... ..........
AES/Puerto Rico..................................... 700 100 454 Baa3 Baa3
AES/India........................................... 633 100 420 Baa3 Baa3
Constellation Power (BGE)/High Desert/U.S. (Cal.)... 600 50 700 A1 A1
----------------------------------------------------------------------------------------------------------------
Electric T&D Privatization--Largest International Acquisitions By U.S. Utilities--All Beyond Cinergy's Reach
----------------------------------------------------------------------------------------------------------------
Rating-- Most
Acquirer/Project/Country Yr. Cost ($ Ownership Equity Paid year of Recent
Acq. billions) Percentage Purchase Rating
----------------------------------------------------------------------------------------------------------------
GPU/Midlands/UK....................... 1996 2.6 50 $500M Baa2 Baa2
Cinergy/Midlands/UK................... 1996 2.6 50 $500M Baa2 Baa2
CSW/SEEBOARD/UK....................... 1996 2.5 100 $827M P2 P2
AEP/Yorkshire Elec./UK................ 1997 2.4 50 $360M P2 Baa2
PSC Colorado/Yorkshire Electricity/UK. 1997 2.4 50 $360M A3 A3
Dominion Resources/East Midlands/UK... 1996 2.2 100 ........... (P)Baa1 (P)Baa1
Entergy/London Electricity/UK......... 1997 2.1 100 $400M .......... Baa2
Reliant (H.I.)/Electropaulo 1998 1.8 11.75 $245M A3 Baa1
Metropolitana/Brazil.................
AES/Electropaulo Metropolitana/Brazil. 1998 1.8 11.37 ........... Baa3 Baa3
Southern/SWEB/UK...................... 1995 1.7 49 ........... Baa1 Baa1
PacifiCorp/PowerCor/Australia......... 1995 1.6 100 ........... A2 A2
Texas Utilities/Eastern Energy/ 1995 1.6 100 $500-600M P1 P(Ba1)
Australia............................
PSEG/Rio Grande Energia/Brazil........ 1997 1.5 33 $498M A3 Baa2
Reliant (H.I.)/Corelca/Columbia....... 1998 1.3 32.5 $146M A3 Baa1
Enron/Elektro Elec./Brazil............ 1998 1.27 100 ........... Baa2 Baa1
Entergy/Citipower/Australia........... 1996 1.2 100 $294M Baa2 Baa2
Southern/BEWAG/Germany................ 1997 1.2 26 $335M Baa1 Baa1
Utilicorp/United Energy/Australia..... 1995 1.2 50 ........... Baa3 Baa3
----------------------------------------------------------------------------------------------------------------
Mr. Stearns. Thank you. Mr. King, you are recognized for 5
minutes.
STATEMENT OF CHRIS KING
Mr. King. Thank you. Good morning, Mr. Chairman and
committee Members. My name is Chris King. I am CEO of a new
company in California called Utility.com. I'd like to introduce
you to it briefly.
We are the first utility company based entirely on the
Internet and we are formed in a partnership with idealab which
started eToys. We offer deregulated power at a discount of up
to 15 percent to about 10 million residents and small
businesses in California today, advertizing and signing them
up, providing customer service and everything else over the
Internet. Customers can do their bills there. They can pick the
day of the month they get their bill. They can pay
electronically with e-mail and other innovations.
I appreciate your invitation today. First, I would like to
urge you to do what you can to promote the availability of
Americans throughout the country to choose their electric
company. Energy is typically the third highest household
expense, and other than water, the only one remaining where
consumers can't choose their provider. According to the Federal
reserve, every day we delay electric competition costs
Americans over $100 million.
Before we can count those savings, we need to address some
of these market power issues. Just as we have an unusual
perspective on how to sell power, we have some unique
perspectives on market power. I am not going to talk about
transmission, for example, but I would like to talk briefly
about two other forms.
The first is the power of incumbency. The reason this issue
is important because consumers won't see the projected savings
and other benefits of competition if competition doesn't
happen. The success of our economy comes from the crucible of
competition, and in that truly competitive environment, any
company that doesn't use every opportunity at its means to
reduce cost or improve importance each and every day is at real
risk of losing customers. If you don't have that risk of
customer loss, you're not going to make those changes.
The other market power issue is that of one group market
participants over another. This is like a cartel where, for
example, oil producing countries withhold production that
causes gasoline prices to rise. In electricity, power producers
in partially competitive markets have this power over end
consumers. This occurs during the peak hours of the summer and
raises prices to as much as a hundred times their normal summer
level.
The reason is simple. Typical consumers pay the same price
for power no matter when they use it. So producers can raise
the price as high as they want during those system peaks. That
is because existing electricity meters record only total use.
Consumers then have to pay the average rates, including those
high prices, whether they use that peak energy or not.
In concluding, I would like to propose two solutions to
these two issues. Regarding the first, the power of incumbency,
it is essential that policymakers create an absolutely level
playing field. Consumers have to have total freedom of choice,
and no company should be permitted to use regulated assets to
compete for providing competitive services.
The second, regarding the cartel power of generators, is a
solution that clearly lies in technology. Via the Internet,
companies like ourselves can provide technological tools that
enable consumers rather than generators to set electricity
prices, even at those times of system peak.
They can offer new electronic meters, replacing those that
were originally designed about the same time PUHCA was
originally enacted, and there are other technologies coming
out, including one we offer which is a thermostat that
customers can control over the Internet to deal with those peak
prices.
This is important. The California Power Exchange did a
recent study where they found that if consumers reduce peak
energy use by only 3 percent on the hottest days of the summer
they would save over $8 million a day.
So to sum up, we would urge you to promote the availability
of electric choice; second, to propose model rules for an
absolutely level, competitive playing field; and, third, ensure
that consumers have unfettered access to new technologies to
take advantage of the benefits of this market.
Thank you.
[The prepared statement of Chris King follows:]
Prepared Statement of Chris King, Chief Executive Officer, utility.com
Utility.com is pleased to offer the following testimony regarding
market power issues in restructuring of the electric industry. Our
testimony focuses on defining market power, the risks to consumers
inherent in market power, mitigation steps the States have taken, the
role of the Federal Government in preventing the abuse of market power,
and, of particular note, the capabilities of modern technologies,
including the Internet and advanced metering, and how those
technologies are a critical tool for consumers in their ability to
combat market power.
Background
Utility.com is an Energy Service Provider registered with the
California Public Utilities Commission. The company is one of only
three competitive providers actively marketing to small business and
residential consumers throughout California. It is also the first
company to apply for licensing in Nevada's competitive electricity
market. Utility.com has been an active participant in regulatory
proceedings throughout the U.S., contributing expertise on technical
and economic issues associated with providing meaningful electricity
choices to small consumers.
To begin, Utility.com strongly supports the principle of customer
choice. Customer choice will result in consumer savings that have been
projected to be as high as 40 percent (U.S. Federal Reserve and
Citizens for a Sound Economy Foundation), as well as consumer access to
a host of new and innovative energy-related products and services.
i. defining market power
Market power, generally, is that situation in which market
participants are able to earn ``excess profits'' as a result of market
inefficiencies. Two generic types of market power occur in the electric
industry: vertical and horizontal. A third type, similar to that
enjoyed by a commodity cartel, is caused by the limitations of today's
installed information technology; this type allows power generators, as
a class of market participants, to earn excess profits at times of
system peaks by taking advantage of the lack of demand response by
consumers--which, in turn, is a result of the lack of information. The
information consumers need to exercise the demand side of the supply
and demand equation is greater detail on usage--such as how much is
during peak times--and on pricing--such as how much more expensive is
power at those times.
Vertical market power results when a single participant, generally
the incumbent utility, controls all or most elements of the electricity
value chain in a way that prevents economically efficient consumer
decisions. This value chain starts with power production, extends
through transmission and distribution, and concludes with revenue cycle
services, including billing, metering, and customer service. By owning
all elements of the value chain, a single market participant can raise
prices above competitive levels. That participant can also exert market
power by controlling a single, scarce element, such as transmission or
distribution wires, or even detailed energy usage information.
Horizontal market power results from the geographical or breadth of
services scope of a market participant that provides that participant
with certain competitive advantages. A common example is leveraging
resources deployed for one service to reduce the costs of entry for
another. In electricity, for example, a utility could use its service
trucks and personnel to support services similar to but unrelated to
the distribution of electricity, such as appliance maintenance. Since
other companies do not have the same opportunity--i.e. an appliance
repair company cannot use its trucks and personnel to perform
electricity system maintenance--the utility's horizontal market power
gives it a competitive advantage.
Cartel-like market power differs from vertical and horizontal
market power in the sense that, instead of being a situation in which a
single company has market power, it is one in which a group of
companies have market power as compared to consumers. Electricity is
unique in two respects that result in this cartel-like market power.
First, power cannot be stored; with few meaningful exceptions
1, power production and use must be balanced every four
seconds. Accordingly, during the peak hours of the year, almost all the
power plants in an area are running, and very few plants are available
to serve the last few kilowatts of demand. Second, even though this
lack of producers results in very high power costs, consumers have no
reason to reduce their usage, since they pay a price that is averaged
over the year. Thus, generators can charge as much as 75 times the
normal rate for energy.2 Moreover, all producers are paid
these high, marginal clearing prices in those markets, such as
California or the U.K., where most (California) or all (U.K.) power
must flow through the officially-approved exchange.3
---------------------------------------------------------------------------
\1\ Power can be stored in very limited amounts in batteries and in
a small number of ``pumped-storage'' hydroelectric facilities;
together, these account for less than one percent of U.S. electricity
requirements.
\2\ According to the Staff Report to the Federal Energy Regulatory
Commission on the Causes of Wholesale Electric Pricing Abnormalities in
the Midwest During June 1998, prices reached $7,500 per MWh in summer
1998, compared to typical peak hour prices of $100 per MWh.
\3\ In California, all power served by the regulated utilities must
be purchased from the California Power Exchange, which now accounts for
approximately 88 percent of all power used in the service areas of the
regulated utilities; in the U.K., all power must flow through the
Electricity Pool of England and Wales (``the Pool'').
---------------------------------------------------------------------------
Economics professors Frank Wolak of Stanford University and Robert
Patrick of Rutgers University studied such market power in the U.K. and
found that the lack of price signaling to power users enables
generators to manipulate market prices for energy and capacity,
resulting in excess profits.4 They found that the lack of
price signals provided via time-of-use or hourly (half-hourly in the
U.K.) metering has resulted in serious market inefficiencies in the
U.K., including forcing consumers to pay high market prices--sometimes
exceeding $1,500 per MWh --during peak periods:
---------------------------------------------------------------------------
\4\ The Impact of Market Rules and Market Structure on the Price
Determination Process in the England and Wales Electricity Market,
Frank Wolak and Robert H. Patrick, June 1996
---------------------------------------------------------------------------
One of the problems in the United Kingdom is that most
electricity consumers, including all residential customers, pay
a price for electricity to their retailer that does not change
in response to half-hourly variations in the market-clearing
price of electricity. Consequently, under the current system a
very high market price brings about little, if any, demand
reduction, because the final consumer of electricity does not
pay this price for its electricity.5
---------------------------------------------------------------------------
\5\ Press Statement, Stanford Center for Economic Policy Research,
Professor Frank Wolak, January 17, 1997.
---------------------------------------------------------------------------
ii. consumer risks resulting from market power
Throughout human history, open competitive markets have
consistently delivered lower prices and greater innovation than
regulated monopolies. The success of such markets motivates the current
trend in the States toward adopting retail electricity competition.
Market power, if not mitigated, presents two dangers. First, in the
absence of effective competition, the desired price and innovation
benefits of competition will not materialize. Consumers will not
exercise choice, or their choices will not be economically efficient.
Second, with the restraints of regulation removed, companies with
market power could charge even higher prices and earn excess profits if
consumers have no effective tools to combat that market power.
Three examples of market power in electric competition are of
particular import. The first is the vertical market power of companies
who own all the major elements of the electricity value chain in a
limited geographic region, including generation, transmission,
distribution, and revenue cycle services. Such vertical market power
has been addressed extensively in electric restructuring proceedings in
the States and at the Federal level, with consensus that generation,
transmission, and distribution must be unbundled from one another, with
or without divestiture requirements. Without equal and non-
discriminatory access to transmission and distribution systems, the
jurisdictions have agreed, there can be no effective competition
between power generators.
The second important example is horizontal market power in which
regulated and competitive utility functions are cross-subsidized,
intentionally or not, and which results in anti-competitive effects.
One such situation is the provision of standard offer or default
service where some or all of the costs, such as revenue cycle services,
are embedded in regulated distribution rates. In this situation,
competitive suppliers are at a major disadvantage; they must recover
all of their revenue cycle service costs from competitively provided
services, while the competitively provided energy--standard offer
service--does not include those costs.
Another such situation of horizontal market power is the sale of
competitive services such as advanced metering or any other competitive
service, where the sale uses the regulated utility's name. In this
case, the brand equity inherent in the name, and the association of
that name with electricity services, reduces the company's cost of
acquiring a new customer or selling a new service to an existing
customer. Because the customer places a value on this brand equity, the
customer is willing to pay more for service. For example, in
Pennsylvania, all small businesses and residential customers would save
10 percent on their electricity by switching to a wide range of
competitive suppliers, yet over 80 percent of these customers have not
switched suppliers. On average, these non-switching customers are
paying approximately $100 per year for name brand and other incumbency
equity. Naturally, customers should be allowed to choose freely to pay
extra for brand equity and do so in almost all competitive markets. The
difference is that, in those other markets, customers are not required,
by government-regulated monopoly, to take a portion of their service
(electricity distribution and, so far, at least some revenue cycle
services) from the named entity.
One actual customer story illustrates the strength of this brand
equity. A friend of utility.com suggested to his brother-in-law that
the latter sign up for service from utility.com to obtain savings on
his electric bill. By way of background, the brother-in-law is very
bright; in fact, he was a Rhodes scholar and was well aware of the
California Public Utility Commission's educational efforts regarding
deregulation. The friend explained that, under the rules of electric
competition, the regulated utility is still responsible for repairing
service after outages and ensuring reliability. Nevertheless, the
Rhodes scholar mistakenly believed that his service might somehow be
less reliable if he switched to utility.com.
The States have developed varying approaches to mitigating such
horizontal market power of incumbency and brand equity. One approach is
to allow utilities to use their names for unregulated competitive
affiliates, provided they disclose clearly that those affiliates are
not the same as the regulated utility, operate completely
independently, keep entirely separate accounts, and obtain no financial
benefits from the regulated entity, including credit--a key requirement
in wholesale electricity markets. In the spirit of compromise,
utility.com does not oppose the ability of utilities to continue to use
their names under these conditions.
Utility.com believes the more important issue is to prevent any
cross subsidies and ensure meaningful customer choice. Simply put, 100
percent of the costs of any competitive service provided by a regulated
utility should be allocated to that competitive service and,
conversely, to the extent a customer chooses not to take a competitive
service from the regulated utility--for example standard offer
service--that customer should not have to pay any of the costs
associated with providing that service, including all power acquisition
costs and all revenue cycle service costs (to the extent the
competitive supplier provides any revenue cycle services). The
principle is straightforward: customers should pay for all of what they
buy from a regulated utility and should not have to pay for anything
they do not buy from a regulated utility. In addition, to the extent
possible, customers need to be educated that the reliability of their
service will be exactly the same, regardless of their electricity
provider.
The third important example of market power is that of the cartel-
like market power of power generators. In this case, during times of
system peak, consumers are forced to pay excess prices because there is
no demand response in spite of excessive wholesale power prices. This
occurs because, except for the less than one percent of customers that
have time-of-use or hourly meters, consumers have no awareness that
wholesale prices are so high. These small consumers simply pay the
same, averaged price throughout the year--including the very high costs
incurred during the system peak hours. A similar effect occurs with
respect to the cost of reliability, which is the price that grid
operators must pay for backup reserve energy and other ancillary
services (functions regulated by the FERC). As with electric
competition as a whole, where more offerings are made to large
electricity users, small consumers are the ones who suffer from not
having the advanced metering that allows them to respond to price
signals and--if they so choose--to avoid paying the high costs of on-
peak power.
The result of this lack of price signals is that consumers pay very
high prices for very inefficient use of capital invested in power
plants. Electric generating plants are among the least efficiently-used
capital in the country, operating on average only 46 percent of the
time.6 This low figure compares to average industrial
capacity utilization in the U.S. of about 83 percent. Improving this
efficiency represents one of the most important sources of savings in
the deregulated electric industry. History shows that price signals
will accomplish this result. For example, following deregulation the
U.S. airline industry increased its capacity use from 48 percent to 73
percent, over a 50 percent improvement.7
---------------------------------------------------------------------------
\6\ Financial Statistics of Investor-Owned Utilities, Energy
Information Administration, 1996.
\7\ Statistical Yearbooks, 1980 and 1996, U.S. Department of
Commerce, supplemented by data from InsideFlyer magazine, a periodical
focused on airline frequent flier programs.
---------------------------------------------------------------------------
iii. mitigating market power through new technology
Fortunately, new technology enables competitive electricity
suppliers such as utility.com to deliver, and consumers to take
advantage of, capabilities that can help combat market power. The first
of these, the Internet, enables very low cost information sharing and
data exchange. The second, low cost advanced metering, enables
consumers to respond to high peak power costs and, should they choose,
just say no to paying for those costs by reducing energy consumption at
those times.
Internet: Utility.com has pioneered the use of the Internet in
retail electricity sales and customer service. Via the Internet,
utility.com can recruit, sign up, serve, bill, and support customers at
costs that are as much as 90 percent lower than traditional utility
customer service costs. Utility.com collects information that enables
it to forecast peak power consumption and offer savings commensurate
with those estimates. Via its website, utility.com educates its
customers regarding the use of energy and peak energy and how those
customers can reduce such usage.
Innovative metering: Utility.com also works with CellNet Data
Systems, Inc. (``CellNet'') in offering innovative metering technology
to its customers. CellNet is a wireless data services company with
facilities in several states. CellNet provides metering and
communications services using wireless and other networks in eight
states to all sizes of utility customer. At a cost as low as one to two
dollars per month, CellNet's advanced metering services are affordable
to even the smallest energy users.
Wireless technology also enables many other data services,
including smart, communicating thermostats. These devices are the
homeowner's equivalent of a building energy management system, but at a
cost and level of simplicity suited for the small consumer.
This technology exists and is being deployed in scale today. Over
two million residential, commercial, and industrial energy users now
have their meters read remotely via radio technology as often as every
five minutes. With their meters on line, these customers now have the
technology in place to receive several new services, some of which are
already being offered to them by utility.com.
These energy consumers can now receive detailed energy usage
information to help them better manage their bills. Utility.com gives
them the choice of which day of the month they receive their bills,
perhaps the first of the month for Social Security recipients. They
could receive an energy budget, updated daily. In some cases, they no
longer have to call the utility to report an outage--and, after an
outage, the utility knows for sure that the customer's power is back
on. Utility.com customers receive off-peak discounts for charging
electric vehicles and just to use energy more efficiently. Utility.com
even prepares an analysis that shows them how much energy each of their
major appliances uses.
Utility.com believes that mitigating market power and making new
technologies available are two of the most important ways for customers
to realize the full benefits of competition. It enables customers to
reduce costs and increases the number of choices utility.com can offer
them. For example, utility.com's ``ModernMeterTM'' records consumption
by time-of-use and collects additional information.
Savings: Utility.com's ModernMeter enables customers to respond to
changing power market prices and to reduce costs by shifting load. This
important opportunity to realize savings is not available to customers
who do not have time-of-use or hourly meters. Even though market energy
prices change hourly, those customers without ModernMeters are charged
the same price per kilowatthour regardless of their time of use. The
customer whose usage peaks at 6:00 a.m. pay the same price as the
customer whose usage peaks at 6:00 p.m. However, with ModernMeters,
utility.com customers are saving as much as several hundred dollars per
year (typical savings are approximately $100 per year).
Choice: ModernMeters enable utility.com's customers to take
advantage of innovative rate options, such as time-of-use pricing.
Indeed, choice of pricing scheme is one of the few meaningful choices--
increasing customer savings by up to 15 percent as compared to averaged
rate pricing. Unlike with other products, electricity customers are not
able to choose based on product quality or performance. The ability to
choose a pricing scheme that best suits their pattern of use is one of
the most useful choices a customer has. Without advanced metering,
these choices are not available.
iv. mitigating market power through demand response
Consumer demand response has great potential as a tool to mitigate
wholesale price spikes. Such spikes typically occur during critical
peak times when systems reserve margins are reduced. Regarding the
Midwest wholesale price spikes in June 1998, a demand reduction of ``as
little as five percent could have reduced wholesale prices by 80 to 90
percent.'' 8 California's competitive wholesale market, the
Power Exchange (``PX''), has exhibited similar price responsiveness to
customer demand; on July 28, 1998, for example, wholesale prices
increased by 83 percent from noon to 1 p.m., even though demand
increased by less than two percent.9 In an internal study,
the PX found that as little as a three percent reduction in peak demand
could save almost $8 million per day during the summer critical peak
period.10
---------------------------------------------------------------------------
\8\ Robert Levin, Senior Vice President, New York Mercantile
Exchange; testimony before the House Commerce Energy and Power
Subcommittee, July 15, 1998.
\9\ California Power Exchange, Historical Hourly Energy Prices,
www.calpx.com, July 28, 1998.
\10\ Analysis of Prices on August 3, 1998, internal study by the
California Power Exchange, March 1999.
---------------------------------------------------------------------------
Significantly, wholesale price spikes--in the absence of demand
response--are not an isolated problem confined to events in the
Midwest; deregulating markets around the world, including the United
Kingdom and Australia, have experienced such wholesale price
spikes.11 Importantly, such price spikes are not any
different from the regulated past; they simply allocate the cost of the
peaking power plants--many are used less than 100 hours per year--to
the hours in which they are used (under regulation, those costs are
averaged over the year and paid by all customers, regardless of whether
they are using energy at times of system peak). Moreover, every
customer benefits from reductions in hourly wholesale prices, even
though the peak demand reductions are provided by only a subset of
customers.
---------------------------------------------------------------------------
\11\ The Impact of Market Rules and Market Structure on the Price
Determination Process in the England and Wales Electricity Market,
Frank Wolak and Robert H. Patrick, June 1996
---------------------------------------------------------------------------
Demand response has great potential to mitigate price spikes in the
ancillary services markets as well. In California, such prices have
reached $9,999 per MWh.12 Utilities have always called on
customer load reductions during critical peak times through curtailable
and interruptible rates, resulting in thousands of megawatts of
additional peaking power in the U.S.13 Until recently
regulators have placed little emphasis on demand-side bidding for
ancillary services. However, the Office of Electricity Regulation
(``OFFER'') in the U.K. recently introduced proposed market changes
that include making it easier for customers to bid ancillary services
into the wholesale market. OFFER found that such bidding could improve
market efficiency. Similarly, the Market Surveillance Committee of
California's Independent System Operator has called for increased
ability for market participants to bid into the ancillary services
market;14 demand-side bidding would be a simple and cost-
effective source of ancillary services bidders.
---------------------------------------------------------------------------
\12\ Preliminary Report On the Operation of the Ancillary Services
Markets of the California, Independent System Operator (ISO), Market
Surveillance Committee of the California ISO, August 19, 1998.
\13\ Impact of Demand-Side Management on Future Customer
Electricity Demand: An Update, Electric Power Research Institute,
September 1990.
\14\ Op. cit., Executive Summary Recommendations.
---------------------------------------------------------------------------
Federal agencies have already called for further emphasis on
demand-side activities as an important tool to mitigate market power.
For example, the Deparment of Justice and Federal Trade Commission
advocate time-of-use rates as one of the two most important ways of
combating anti-trust issues and market power--the other being open
transmission access.15
---------------------------------------------------------------------------
\15\ Statement of A. Douglas Melamed, Principal Deputy Assistant
Attorney General, Antitrust Division, U.S. Department of Justice,
before Judiciary Committee, U.S. House of Representatives, June 4,
1996; Comments of the Federal Trade Commission, Texas Public Utilities
Commissions, Summer 1998.
---------------------------------------------------------------------------
Customer Response to Price Signals: In contrast to some common
beliefs, customers do change their demand for electricity depending on
its price, just as they do for other products--making it an effective
tool to mitigate the cartel-like market power of generators. Such price
responses have been documented in a wide range of studies going back to
the early 1980's. For example, Pacific Gas & Electric (``PG&E'')
conducted a series of studies of customer load shifting under voluntary
time-of-use rates for all customer classes over several years beginning
in 1983. All of these studies demonstrated significant load reductions
during peak periods. Of particular note is the study of such rates for
residential customers, where PG&E found an average 21 percent reduction
in peak use among program participants.16 This reduction is
much larger than the amounts needed to influence significantly
wholesale price spikes, which usage must be in the two to five percent
price range to yield significant savings. EPRI surveyed scores of time-
of-use pricing studies conducted during the 1980's; these studies found
consistently that customers shift load to off-peak time periods in
response to higher peak prices, with residential customers having the
greatest inclination to shift load.17 Now, with retail
competition, competitive suppliers such as utility.com have the
opportunity to promote such pricing to consumers.18
---------------------------------------------------------------------------
\16\ Load Shifting Under Voluntary Residential Time-of-Use Rates,
Douglas Caves et al., The Energy Journal, October 1989, p. 84.
\17\ Op. cit.
\18\ Many utilities have offered time-of-use prices to consumers,
but the utilities have had little or no incentive to sign-up such
customers as their profits were not affected either way. Retail
competitors have the profit motive to seek out and educate customers.
---------------------------------------------------------------------------
Studies of real-time pricing have revealed similar and equally
compelling results. Studies of large commerical and industrial
customers found price elasticities as high as 0.35 (that is, a 3.5
percent decrease in consumption for every 10 percent increase in
price).19 Virginia Power found in its study that large
commercial and industrial customers, ``reduced their on-peak load
during the `critical' days by approximately 40%''! 20
---------------------------------------------------------------------------
\19\ Customer Response to Real-Time Pricing in Great Britain, Kathy
King and Peter Shatrawka.
\20\ Variable Pricing Simplified, John F. Caskey and Kurt W.
Swanson, Proceedings of the Annual International Distribution
Automation/Demand Side Management Conference, January 1992.
---------------------------------------------------------------------------
As noted above, residential customers are especially price
sensitive. Fewer, but some, real-time pricing studies have been
conducted on these customers. The results are consistent with studies
of time-of-use pricing for residential customers and real-time pricing
for commercial customers. An example is American Electric Power's
(``AEP'') study. AEP used technology that automatically responded to
price signals, making it as simple as possible for customers to benefit
from real-time prices. An example is automatic adjustment of the
thermostat in summer: 72 degrees for low electricity prices, 74 for
medium, 76 for high, and 80 for critical peak prices. Peak demand
reductions were dramatic: between 50 and 60 percent during peak times--
and savings even more so: customers in the program saw bill savings of
approximately $175 per year.21
---------------------------------------------------------------------------
\21\ AEP Giving the Customer Control of the Meter, Quad Report,
Consumer Energy Council of America Research Foundation, April/May 1994.
---------------------------------------------------------------------------
vi. federal role in mitigating market power
Regarding the role of the Federal government, utility.com supports
a balanced approach. The States have made a good start in implementing
retail competition. It is in the national interest, and therefore
appropriate for Federal intervention, to ensure that all Americans have
access to choice of electric supplier and that such choice is available
in a free and open market; that there is a level competitive playing
field. To balance the roles of the States and Federal government,
utility.com supports the following:
1) Allow the States to continue to exercise local jurisdiction
regarding the implementation of retail competition.
2) Provide the States with guidance regarding market power and other
issues, including ``model regulations'' that ensure the
mitigation outcomes described above. Even without legislation,
the Federal Energy Regulatory Commission (``FERC'') should
develop model regulations for the separation of utility
functions, the proper allocation of costs between competitive
and regulated functions, low-cost and open access to detailed
usage and pricing information by consumers, and adequate
consumer protections, which model regulations the States could
then use in their own deliberations.
3) Immediately address one of the critical cost barriers faced by
competitive suppliers, which is the high transaction costs that
are caused by the use of differing data formats and data
transport mechanisms in each distribution utility service area.
The States are already beginning to converge on the use of the
Electronic Data Interchange formats of the Utility Industry
Group. By adopting these formats, the FERC would provide
additional leadership in achieving nationwide standards and,
thus, reducing transaction costs. This would be similar to the
leadership FERC showed in adopting the Gas Industry Standards
Board (``GISB'') and Open Access Same-time Information System
(``OASIS'') standards. Adopting such standards would also
result in greater access to information by consumers.
4) Encourage the States through financial and other incentives to,
first, provide consumers with the ability to choose their
electric suppler and to, second, adopt regulations that
mitigate market power and ensure a level competitive playing
field. One such incentive would be a reciprocity rule for
participation by regulated entities in the competitive markets
of other states. Another would be preferred access to Federal
renewable energy and energy research funding for those states
allowing competition and implementing ``level playing field''
competition rules.
vii. conclusion
Electric deregulation has great promise, as it has in other
industries, for reducing prices and unleashing markets to develop
innovative products and services. Market power--vertical, horizontal,
and the cartel-like market power of power generators in the absence of
demand response--threatens to reduce or eliminate the great potential
for the benefits of competition. Utility.com urges the Federal
Government to work closely with the states on model regulations, the
promotion of advanced metering, and other methods to combat and
mitigate market power.
Utility.com greatly appreciates the opportunity to comment.
Mr. Stearns. Thank you, gentleman. Mr. Kurtz, welcome.
STATEMENT OF MICHAEL L. KURTZ
Mr. Kurtz. Mr. Chairman, thank you very much for your kind
comments today. For the other Members of the committee, I am
Michael Kurtz. I am the general manager for Gainesville
Regional Utilities in Gainesville, Florida, a municipally owned
utility.
I am here today on behalf of the American Public Power
Association, representing the interests of over 2,000 public
power systems serving one out of every seven electric consumers
in the United States.
My remarks today summarize what is contained in our written
testimony that has been submitted for the record. A discussion
about market power is really a discussion of how to develop an
effectively competitive marketplace.
As public power utilities purchase nearly 70 percent of the
power to serve their ultimate customers, which is roughly 40
million people in the United States, the competitive future of
the electric power industry is critical to us.
The conditions for competition in any market include the
existence of many buyers and many sellers, freedom of entry and
exit for competitors and access to available market
information. However, when market power exists, none of these
criteria can be fulfilled; and it will be difficult, if not
impossible, to develop vigorous, competitive markets sustained
over time. Yet high levels of market power are exactly what we
have in our industry today.
The electric utility industry in the United States is
dominated by private, vertically integrated, regulated
monopolies with approximately 80 percent of the Nation's
generation resources controlled by incumbent utilities and
their affiliates. These same investor-owned utilities also own
about 70 percent of the high voltage transmission lines for
transmitting power throughout the United States.
Some have said that Congress and regulators should let the
market determine the future structure. What these folks really
mean when they say this is let the monopolies determine the
market structure. We disagree. Competitive markets do not
require heavy regulatory or antitrust scrutiny. But electricity
is not a competitive market, at least not yet.
Some States that have taken steps toward addressing market
power within their borders by requiring divestiture of
generation by vertically integrated, industrial-owned utilities
for example. While such actions are very important, there is
still a clear Federal role in fostering competition that
extends far beyond what individual States can accomplish.
Congress should address issues that are necessary for
retail competition to work but which cannot be completely
resolved by a single State or even a group of States. We need
new, federally implemented market power protections because we
are talking about transforming an industry made up of
monopolies into an industry with many competing sellers and
buyers.
In the case of electricity, the monopoly exists now, and
the first requirement we have is to eliminate the monopoly
structure to creation of a competitive market.
Addressing market power issues in this industry presents
unique challenges. We believe FERC is best positioned to deal
with these challenges. The first step that must be taken is to
strengthen FERC's merger review process.
We believe mergers are a defense against the advent of
competition, and today's merger mania is a direct conflict with
the objective of creating competitive generation markets out of
a highly concentrated industry.
If competition is the goal, then mergers need to be
considered in a way that prevents them from setting back the
emergence of competition. Newly proposed mergers should be
denied unless the benefits to consumers can be shown to
outweigh the adverse impact of eliminating a potential
competitor from the marketplace.
Enhanced merger review authority would address further
concentration of control of the Nation's generation resources.
However, much must be done to address the existing market power
problems that we have today. Those who control the market today
will seek to maintain their control at the expense of potential
competitors. That is why there must be strong structural
remedies to guard against both new and existing market
concentration. This includes FERC authority to intervene on
their own initiative where market power develops and requires
the divestiture of generation facilities when essential to
address the abuse of existing market power.
In addition, FERC should be able to prevent increased
concentration in power markets when generators are sold by one
utility and acquired by another.
Controlling transmission market power is equally important.
Private utilities that control vast amounts of the Nation's
transmission systems have a long history of anticompetitive
practices, despite congressional and regulatory actions to open
up the Nation's transmission grid and produce a competitive
bulk power supply market by the transmission owners to instill
exercise control over their facilities in a way that favors
their own generation resources, placing power generators and
bulk power purchasers at a competitive disadvantage.
The only way to ensure that the Nation's transmission
assets are managed in a way that facilitates the development of
retail competition----
Mr. Stearns. Mr. Kurtz, we just need you to wrap it up, if
you would.
Mr. Kurtz. Yes, Mr. Chairman--facilitates the development
of retail competition is to insure that the entire transmission
system is in the hands of truly neutral entities that will
treat all competitors the same.
It is important to understand that public power utilities
will be restricted from participation in future independent
transmission organizations, which we believe are important to
have, unless Congress enacts legislation to address private use
restrictions.
The Bond Fairness and Protection Act, a bill introduced in
the House as H.R. 721 by Representatives Hayworth and Matsui,
and in the Senate, Senate 386, by Senators Gorton and Kerrey,
is a fair and reasonable solution to the private use problem.
While this is not an issue within the committee's
jurisdiction, we would welcome your support in seeing that it
is resolved in a way that is fair to industry participants.
Mr. Stearns. All the written statements will be part of the
record, so I just urge the witnesses just to summarize if they
could.
Mr. Kurtz. Mr. Chairman, I guess as a final comment, based
on prior discussion, I do want to make sure that I state that
APPA does support the North American Electrical Reliability
Council consensus legislative language on reliability and urge
Congress to incorporate that language in any restructuring
package.
Thank you.
[The prepared statement of Michael L. Kurtz follows:]
Prepared Statement of Michael L. Kurtz, General Manager, Gainesville
Regional Utilities On behalf of the American Public Power Association
Introduction
Good Morning, Mr. Chairman and members of the subcommittee, I am
Michael Kurtz, General Manager of Gainesville Regional Utilities in
Gainesville, Florida.
Gainesville Regional Utilities, or GRU, is a municipal utility
located in north central Florida. As a multi-service utility owned by
the City of Gainesville, GRU offers electric, natural gas, water,
wastewater, and telecommunications services to over 75,000 customers.
We have 750 employees and an annual operating budget of over $180
million.
I am here today on behalf of the American Public Power Association
(APPA). APPA is the national service organization representing the
interests of over 2,000 municipal and other state and local government-
owned utilities throughout the U.S. While APPA member utilities include
state public power agencies, and serve many of the nation's largest
cities, the majority of our members are located in small and medium-
sized communities in every state except Hawaii. APPA members serve
about fourteen percent of all kilowatt-hour sales to ultimate consumers
in the U.S.
Market Power Policies Are the Foundation of Competition
Our association greatly appreciates the opportunity to testify
before the subcommittee today regarding market power--an issue that is
at the very heart of the debate over electricity industry
restructuring. A discussion about market power policy is really a
discussion of how to develop an effectively competitive marketplace. As
public power utilities purchase nearly 70% of the power used to serve
their ultimate customers--nearly 40 million people in the U.S.--the
competitive future of the electric power industry is critical to us.
The key ingredients for effective competition in any market include
the existence of many buyers and sellers, freedom of entry and exit for
competitors, and access to available market information. However, the
presence of market power and concentration means that none of these
criteria can be fully achieved. In fact, true competition can be
defined as the absence of market power, for when a competitor can also
set the rules for the game, you cannot have true competition.
Yet, high levels of market power are exactly what we have in our
industry today. The electric utility industry in the United States is
dominated by private, vertically-integrated, regulated monopolies, with
approximately 80% of our nation's generation resources controlled by
incumbent utilities and their affiliates. These same investor-owned
utilities also own about 70% of transmission lines of 138 KV or
greater. Since such levels of market power and concentration are
antithetical to competition, it is evident that we have a long way to
go from where we are today to achieve structural competition in this
industry.
Some have said that Congress and regulators should let the market
determine its future structure. What they really mean is: let the
monopolists determine the market's structure. APPA disagrees.
Competitive markets do not require heavy regulatory or anti-trust
scrutiny--but electricity is not a competitive market, at least not
yet.
A transition from today's industry to a workably competitive
marketplace will not just happen with the stroke of a pen signing state
or federal restructuring legislation. As Federal Energy Regulatory
Commission (FERC) Chairman James Hoecker has said, ``Good markets don't
just happen, they are developed, structured, created.'' If we want to
change the structure of this industry from monopoly to competition, the
regulatory regime implemented by the federal government and the states
must change as well. Not only do we need to guard against increased
market dominance by today's incumbents, but it is also vitally
important that we work to eliminate existing levels of market power
that are certain to limit or inhibit the development of competition. A
successful transition will require strong protections against market
power abuses for consumers as well as rigorous oversight and
enforcement that can transform the highly concentrated industry we have
today into a vigorously competitive marketplace that offers meaningful
benefits to electricity customers.
A Challenge for Congress
Some states have taken steps toward addressing market power within
their borders. For example, the State of Texas is considering
restructuring legislation that takes an important step toward
addressing generation market power by mandating that a power generation
company cannot own and control more than 20 percent of the installed
generation capacity within a qualifying power region. While such
actions, alone, are very important, there is still a clear federal role
in fostering competition that extends far beyond what individual states
can accomplish.
Ultimately, the role of federal legislation should be to facilitate
state decisions to implement retail competition by addressing issues
that are necessary for retail competition to work, but which cannot be
completely resolved by a single state or even a group of states.
Transmission in interstate commerce, for example, has been regulated by
the federal government for decades. Regional generation markets extend
far beyond state boundaries. As a practical matter, an individual state
cannot regionalize the transmission grid and make it independent from
generation, nor can states effectively address the generation market
power of large multi-state or multi-national utilities. It is clear
that these issues fall squarely within the purview of federal
legislation.
Antitrust Laws Alone Are Not Enough
Why do we need new federally-implemented market power protections
at all? Because we are talking about transforming an industry made up
of state-sanctioned monopolies into an industry with many competing
sellers. Existing antitrust laws are insufficient to support this
market transformation. The antitrust laws focus on the correction of
abuses of a competitive market structure by those who would attempt to
create a monopoly. In the case of electricity, the monopoly has existed
and been sanctioned by the state, and the first need is to eliminate
the monopoly structure through creation of a competitive market. Since
today's vertically-integrated utility companies will bring much of
their existing market dominance into the restructured electricity
industry of the future, there will need to be a regulatory agency that
can detect and deal with abuses expeditiously in order to create and
maintain an environment where competition can develop.
The problem of moving from a monopoly structure to a competitive
market is made more complex by the importance and unique
characteristics of electricity. Electricity, because of its unique
public service element and pervasive nature is not like other
infrastructure industries that have been deregulated. First,
electricity is an essential service for which there is no substitute.
Consumers need electricity at virtually all times for health and safety
and to enable businesses to operate. Second, the provision of electric
service is a ``real time'' business. With minor exceptions, electricity
cannot be purchased in times of surplus and stored for times of
potential shortage. This fact substantially increases opportunities for
market manipulation. Third, the generation and transmission aspects of
this industry are highly interdependent. The way in which generation
facilities are operated can significantly affect the capacity of
transmission lines to allow electricity to be imported into an area.
These factors--the lack of substitute products for many, the real-
time nature of the business, and the interdependence of transmission
and generation--combine to create numerous and difficult-to-detect
opportunities to exercise market power at particular locations, during
particular seasons or times of day. The fact that the transmission
system is often controlled by the same vertically integrated utilities
that also control substantial amounts of generation makes manipulation
of the system virtually inevitable.
For these reasons, addressing market power issues in the
electricity industry presents unique challenges related to recognizing
and addressing market power abuses that we believe FERC is best
positioned to deal with in a new competitive environment. To succeed,
however, FERC's authority under the Federal Power Act must be expanded.
While the antitrust laws should remain in effect to allow for longer-
term review, FERC also needs augmented authority to prevent
anticompetitive activities from occurring, and to deal with them as
they develop.
In the past, FERC has focused on regulating the prices of monopoly
providers of wholesale electric service to protect consumers. This
oversight was necessary because vigorous competition has not existed to
control prices. For deregulation to work and consumers to benefit, we
must be sure that competitive pressures will, in fact, exist. As we
move to competitive markets, FERC's mission must change from setting
reasonable rates to a responsibility to establish and maintain workably
competitive electricity markets. This major change in focus will
require clarifying the authority of FERC to take a number of actions to
eliminate existing market power, to prevent the development of
increased market power, and to act swiftly to prevent market power
abuses.
Strengthened Merger Review--Consideration of the Effects on Emerging
Competition
One important area where consumers need more protection relates to
the merger review process. Rather than streamlining filing
requirements, we should expand the scope of merger standards to ensure
that today's mergers do not thwart tomorrow's competitive markets.
Concentration in ownership of electric resources in this country is
increasing at an unprecedented rate as today's utilities engage in
mergers to assure themselves a strong position in a competitive
marketplace. The rapid pace of this trend toward consolidation is
clear--since 1997, 33 mergers were proposed, and 22 completed. In
contrast, only nine were proposed during the three years prior to that,
1994-1996.
Mergers are a defense against the advent of competition, and
today's merger-mania is in direct conflict with the objective of
creating competitive generation markets out of a highly concentrated
industry. If competition is the goal, then mergers need to be
considered in a way that prevents them from setting back the emergence
of competition. Toward that end, newly proposed mergers should thus be
denied, unless the benefits for consumers not otherwise obtainable
through other means are shown to outweigh the adverse impact of
eliminating a potential competitor from the marketplace. Where
significant concentration in ownership of generation already exists
without a merger, FERC should have authority to require divestiture or
to solve the problem by other means.
Early last year, Joel Klein, Assistant Attorney General for the
Antitrust Division of the U.S. Department of Justice, addressed
concerns about the impact of the increasing trend toward mergers in a
presentation before FERC. He noted that, ``. . . utilities may see this
as a time when they have a window of opportunity in which to consummate
mergers. Mergers with little immediate anticompetitive effect can
nonetheless frustrate the emergence of competition. For example,
incumbent dominant firms could pick off competitors in their infancy,
or even before they become competitors . . . Missed opportunities for
the emergence of competition at the outset of the transition are
forever lost, with potentially substantial social costs.''
These considerations have been echoed by FERC Chairman James
Hoecker, who has explained, ``While the Commission has aggressively
encouraged a more competitive industry . . . it must ensure that
mergers are not a vehicle to enhance market power.''
Perhaps the best and most visible example of how today's merger
proposals can lead to anti-competitive future market dominance is the
proposed merger of American Electric Power Company (AEP) and Central
and Southwest Corporation (CSW). The combination of these companies
would create one private utility serving 4.6 million customers across
eleven states, from Virginia and Michigan to Oklahoma and Texas, in a
swath nearly spanning the entire Eastern Interconnection. It is no
understatement to say that this merger would have far-reaching
structural effects on bulk power markets. The merged company would
control 38,000 MW of generating capacity, an amount equivalent to
nearly half of public power's entire installed capacity nationwide.
Moreover, if approved, it may well set off a chain reaction of new
electric utility mega-mergers as smaller competitors seek to merge to
match or exceed the size of the AEP-CSW combined company.
Such proposed mergers, if approved, will have the effect of
predetermining the structure of the industry before state and federal
regulators can implement a coordinated strategy to foster and enhance
competition in the electric industry at the wholesale and retail
levels. FERC and other regulatory agencies will have little power to
turn back the clock to ensure a competitive environment, and the
available options for defining and protecting the public interest will
then be limited.
Because it is difficult at times to project what the impacts of
today's decisions will be on an unknown and still-developing future
market structure, APPA has suggested that a temporary moratorium on the
largest electric mergers may be in order. In the absence of such a
moratorium, it is important at a minimum to recognize that today's
merger decisions are integrally related to the goal of competitive
markets-and that FERC's merger review process must begin to take this
fact into account by fully examining the effect of proposed mergers on
competition.
Continued Concentration in Generation Markets Will Prevent the
Emergence of Competition
Enhanced merger review authority is designed to address further
concentration of control of the nation's electric generation resources.
However, much must be done to address the existing control over
generation that is now largely in the hands of a relatively small
number of privately-owned utilities.
State policies that restrict the amount of generation that can be
owned by a single corporate entity are a very important step in the
right direction--but the next step has to be to ensure that the company
that purchases the generation, a company located over state lines for
example--does not then exercise the generation market power that the
state statute was designed to guard against. Simply transferring
ownership from one entity to another does not do enough to achieve the
goal of a less concentrated market that is more conducive to effective
competition. Because electricity markets are regional, state
restrictions on the ownership of generation can go a long way. Yet,
unless each state throughout the entire region enacts the same type of
policy, ownership of generation in that market will remain highly
concentrated, and consumers throughout that region will face limited
choices and pay higher prices for power.
For those who control generation now, you can be sure that the
incentives exist to maintain this control as we move into a more
competitive marketplace. Florida is seeing this first-hand as Florida
Power & Light Company (FP&L) has launched a campaign to undermine
potential competitors through strident opposition to the development of
a new 500 MW wholesale plant that is to be jointly built by Duke Power
Company and one of our members, New Smyrna Beach Utilities Commission.
This plant meets widely-recognized power supply needs, was originally
proposed back in 1997, and has been approved by the Florida Public
Service Commission. FP&L's response to the potential competition has
been to launch a legal strategy designed to bring the plant to a halt
on the grounds that the power generated by the project is not needed.
But while they are protesting that additional capacity is not needed,
they just announced plans to expand their own generation capabilities
by 20 percent--or 5,600 MW--over the next decade to meet projected
future energy needs.
In this case, we have a state commission that has acknowledged a
need for additional capacity to meet growing needs. We have a new power
project proposed over two years ago that has been approved by the state
commission. Then, the incumbent came out with its own plan to add new
generation capacity in recognition of these growing demands. It then
undertook a legal strategy designed to kill a potential competitor's
plan to build a much-needed new plant that will help advance the
competitiveness of the wholesale market, and bring prices down for
consumers by providing a much-needed alternative source of power.
Clearly, as in this case, those who control the market today will
seek to maintain their control at the expense of potential competitors.
If our goal is a truly competitive marketplace, the face of today's
monopolistic industry has to change. That is why there must be strong
structural remedies to guard against both new and existing market
concentration. This includes FERC authority to intervene where market
power develops, and if needed, cause the corporate separation of
generation from transmission when necessary to effectively address the
abuse of market power. In addition, FERC should be able to prevent
increased concentration in power markets when generators are sold by
one utility and acquired by another. Without rigorous oversight-- and
divestiture authority as a last resort--market power abuses will choke
competition before it can get a toehold in this industry. Again,
because these markets are regional in nature, federal regulatory
involvement is needed to protect consumers from the anticompetitive
effects of market concentration throughout each region.
Market Power Resulting From Vertical Integration: Transmission
Facilities Must Be Managed by Truly Neutral Entities
Private utilities that control vast amounts of the nation's
transmission systems have a long history of denying municipal utilities
access to their systems, or providing access at highly discriminatory
rates and unfair terms. Despite congressional and regulatory actions to
open up the nation's transmission grid and produce a competitive bulk
power market through enactment of the Energy Policy Act of 1992 and the
issuance of FERC Orders 888 and 889, private transmission owners
continue to control essential transmission facilities in ways designed
to prevent competition. They are able to exercise control over these
facilities to favor their own generation resources, placing power
generators and bulk power purchasers, including public and consumer-
owned utilities, at a competitive disadvantage.
One of the lessons of the Energy Policy Act is that the only way to
ensure that the nations' transmission assets are managed in a way that
facilitates the development of retail competition is to ensure that the
entire transmission system is in the hands of truly neutral entities
that will treat all competitors the same. Achieving this end will
require enabling FERC to mandate that all transmission owners
participate in an independent Regional Transmission Organization, and
beyond that, to mandate divestiture of transmission from generation if
necessary to prevent abuses. In fact, the Federal Trade Commission has
proposed the latter to FERC, suggesting that transmission operations be
separated from ownership of generating plants in order to eliminate the
incentives that exist for transmission owners to favor their own
economic interests and evade regulatory constraints.
An important example of recent transmission market power abuse
occurred in the State of Wisconsin where Wisconsin Public Service
Corporation and Wisconsin Power and Light Company used their control of
significant transmission resources in the area to prevent one of our
members, Wisconsin Public Power Incorporated (WPPI) and other smaller
utilities from importing low-cost power from outside the state. In
doing so, Wisconsin Power and Light even disregarded an earlier FERC
directive to more equitably recalculate its available transmission
capacity. In the end, not only did WPPI have to incur significant costs
to gain access to the grid, but these private utilities enjoyed the
benefits of their unfair actions for over a year before a FERC ruling
brought these blatantly anticompetitive practices to an end.
Further evidence of abusive transmission practices can be seen in
the June, 1998 price spikes in the Midwest, which caused spot market
prices for electricity to soar from their normal level of about $25 per
megawatt-hour to as much as $7,500 per MWh. In response, FERC Chairman
James Hoecker later said that part of the answer to the kind of market
confusion that occurred in the Midwest is the creation of independent
system operators. This finding was amplified in the Ohio state
regulators' report on this topic issued on November 19, 1998. The Ohio
regulators contend that such price spikes are likely to recur unless
institutions essential to a fair and competitive market are put in
place. Large independent regional transmission organizations (RTOs),
and separate independent power exchanges to provide real-time price
information are the essential ingredients, they go on to explain.
In the end, some of the clearest evidence of such abuses can be
seen in my own State of Florida. While the Energy Policy Act and Order
888 require that all transmission owners provide the same transmission
service to their competitors that they provide to themselves, FP&L has
tried to undermine wholesale competition and FERC's comparability
requirements by refusing to provide network access to the Florida
Municipal Power Agency, which represents 27 municipally-owned electric
utilities in the state. Network transmission is a type of transmission
service that provides greater flexibility than point to point service--
and is a service that FP&L has always provided for itself. In response,
FERC ruled that FP&L, under Order 888, was prohibited from refusing
this service, and an antitrust lawsuit is now pending.
In terms of our transmission system, Florida is virtually an island
unto itself with very little access to transmission capacity from
outside the state. The majority of the transmission in our state is
controlled by FP&L, which has been leading the opposition to statewide
efforts to create an independent transmission administrator. Without
FERC authority to mandate participation in independent transmission
organizations, those who stand to gain from the status quo will
continue to resist efforts to implement pro-competitive changes to
allow for neutral transmission management.
The transmission solution most in the public interest is the
creation of truly independent system operators or other institutions
that are controlled by the public and operated on a not-for-profit
basis. Such entities will not just be independent from market
participants, but just as importantly, will be responsive to the
concerns of all stakeholder groups. Such institutions, whether they
simply control the transmission grid or own the transmission
facilities, would enjoy the trust and confidence of the public, act in
the public interest to pursue the most cost-effective solutions to deal
with transmission constraints, and provide the lowest cost for
consumers.
It is important to note that APPA does not support the development
of private, investor-owned utility (IOU) affiliated or controlled
Transcos as an answer to these problems. Despite the arguments advanced
for private, for-profit, Transcos either affiliated or otherwise
controlled by IOU generators, they will not achieve the desired end of
a truly competitive, economically efficient, lower cost, fair and open
transmission grid, and should be rejected. They will not be truly
competitive because they will lack the requisite independence from the
parent corporation. They will not be economically efficient because
they will not encompass a sufficiently broad geographic area. And, they
will not produce a fair and open transmission grid because they will
not incorporate the transmission facilities of publicly-owned and
consumer-owned utilities. Higher costs will occur because the IOU
owners of transmission hope to spin off their transmission facilities
to newly created Transco companies at market value, not at book value.
The owners of these facilities would reap windfall profits from such
transactions that would be paid for by all electric consumers.
While not the optimal solution, APPA has not rejected the concept
that large, private, for profit Transcos that have no affiliation--
absolutely none--with generation and marketing interests could resolve
transmission access and use problems in a fair and impartial manner.
However, even these truly independent Transcos would be natural
monopolies that must be overseen by FERC to prevent transmission market
power abuses.
For all of these reasons, APPA strongly supports amendment of the
Federal Power Act to make explicit the Commission's authority to
mandate participation by transmitting utilities in properly structured
RTOs. Once formed, it is equally essential that FERC have the authority
and budgetary resources to oversee the conduct of these RTOs, and where
necessary, modify their governance, structure and geographic scope to
foster and sustain open, fair and competitive electric power markets.
In addition, it is important to note that public power utilities
will be restricted from participation in future independent
transmission organizations unless Congress enacts legislation to
address the private use restrictions on our bonds. Municipal electric
utilities that have issued tax-exempt bonds to finance their facilities
under the old regulated monopoly framework face tough and potentially
costly options for operating in the new restructured legal environment.
If municipal utilities enter the competitive arena and violate the
private use restrictions, tax-exempt bond financing on facilities
utilized by private parties becomes retroactively taxable, leading to
immediate bondholder lawsuits. The Bond Fairness and Protection Act, a
bill introduced in the House as H.R. 721 by Representatives Hayworth
(R-AZ) and Matsui (D-CA), and in the Senate as S. 386 by Senators
Gorton (R-WA) and Kerrey (D-NE), is a compromise solution to the
private use problem. If enacted, this legislation will accomplish two
objectives: 1) Clarify existing tax laws and regulations regarding the
private use rules so that they will work in a new competitive
marketplace, and; 2) Provide encouragement for public power utilities
to open their transmission or distribution systems, thereby providing
choice to more consumers. These bipartisan bills have gained strong
support in Congress, garnering 25 co-sponsors in the House and 15 co-
sponsors in the Senate since introduction earlier this year.
Congressional action in this area is urgently needed--particularly to
address the needs of municipal systems in states that have already
adopted restructuring plans.
Opposition to Stand-Alone PUHCA Repeal
APPA strongly believes that future repeal of the Public Utility
Holding Company Act (PUHCA) must take place only in the context of a
comprehensive electricity industry restructuring bill. PUHCA was
enacted as a companion to the Federal Power Act in 1935 to, among other
things, plug regulatory gaps created by multi-state holding companies
that had--and still have--the ability and incentive to manipulate their
books. Because of the interrelatedness of these statutes-any
legislation regarding PUHCA should be fully coordinated with changes in
the Federal Power Act to protect consumers.
Stand-alone repeal of the consumer protections afforded by PUHCA
will unleash today's vast multi-state holding companies from public
accountability before the structure of a competitive market is
developed. It will enable today's monopolies to garner even greater
amounts of market power through mergers and widespread diversification,
and the existence of such significant concentrations of market power is
sure to inhibit, if not prevent, the advent of structural competition
in the electricity industry.
In addition, stand-alone PUHCA repeal presents unacceptable risks
for captive electric consumers who do not have alternative service
options if their utility's diversification efforts fail, or worse, non-
regulated ventures are subsidized with captive ratepayer funds, and
they are left to pay the price.
While many argue that PUHCA is an imperfect and perhaps outdated
statute that is in need of reform, it is clear that the statute's goals
of preventing market power abuses and harmful utility interaffiliate
and diversification activities have great relevance to developing
markets today. Even though the statute is ineffectively enforced by the
Securities and Exchange Commission (SEC), it still provides valuable
passive restraints on the formation of holding companies that extend
the effect of the law far beyond the 15 multi-state holding companies
that now fall under its direct purview.
Far from being irrelevant, PUHCA has recently provided channels
through which to challenge the anti-competitive and anti-consumer
effects of the proposed AEP/CSW merger. APPA and the National Rural
Electric Cooperative Association have filed a Motion to Intervene with
the SEC regarding the proposed merger on the grounds that it has failed
to meet three important tests of PUHCA, which require that the merged
company, 1) have its assets physically interconnected or capable of
physical interconnection; 2) be confined in its operations to a single
area or region, and; 3) not be so large as to impair the advantages of
localized management, efficient operation and the effectiveness of
regulation. These requirements have helped bring to light meaningful
questions about the market dominance the merger would create, and its
potentially devastating effects on the emergence of competition across
several regions of the country.
Reliability
The reliability of the integrated and interdependent electric
system is extremely important to health and safety and the viability of
our economy. In the monopoly paradigm of the past, reliability has been
protected by mutual back-up arrangements among utilities, and a
regional reliability council structure. However, this system of
cooperation and mutual assistance lacks both clearly enforceable rules
and sanctions and competitively neutral entities to determine and
enforce the rules on a non-discriminatory basis. This voluntary
approach to reliability will not work in an increasingly competitive
market. Reliability rules and their enforcement can have significant
competitive impacts, and it is essential that reliability be maintained
and enhanced in the transition to competitive markets.
APPA supports the North American Electric Reliability Council's
(NERC's) consensus legislative language on reliability, which will
create a self-regulating reliability organization that would be
overseen by FERC. The mission of this new organization would be to
ensure that reliability rules are applied equally to all electricity
providers. APPA urges Congress to incorporate this language in any
future restructuring package.
Market Information
Restructuring legislation must also account for the importance of
market information in a competitive marketplace. Private utilities'
efforts to maintain confidential rate agreements threaten to place
serious restrictions on the availability of market information in the
electricity industry. Market information is necessary to guard against
abuse of market power in the form of predatory pricing, and to ensure
that retail customers do not pay disproportionate rates due to deals
made to secure lucrative commercial or industrial contracts. Informed
consumer choices depend on the availability of market information--it
is a vital component of any competitive market.
Protections Against Anti-Competitive Affiliate Transactions
Another role for FERC in protecting consumers should involve the
prevention of preferential transactions between affiliates, including
discriminatory access to essential information, below cost transfer
pricing, or other anticompetitive arrangements.
If there is any doubt that anti-competitive affiliate deals will
occur with seriously anti-competitive results, consider a recent case
where a utility instructed its power marketing affiliate to check its
OASIS Web site the following day at a certain time. At the appointed
time, the utility posted an offer to sell a certain quantity of
installed capacity and energy for a specified term at a particular
price. The utility posted the offer for thirty minutes, and its
affiliate requested all of the megawatts posted. In response, FERC
issued a clarification on its rules barring affiliate favoritism, and
said, ``Such a tip is market information that a utility cannot
selectively disclose to an affiliate.''
New competitors will not stand a chance in a restructured
electricity industry if the relationships between utilities and their
affiliates are not guarded carefully.
Conclusion
In the end, market power policy is comprised of the many elements
that are required to create the market structure upon which competition
can be developed and sustained. Without strengthening merger review,
prohibiting undue concentration in the ownership of generation,
providing for neutral management of our nation's transmission
resources, ensuring that reliability rules are enforced fairly,
ensuring the availability of market information, and preventing harmful
interaffiliate transactions, we believe that federal legislation to
provide for competition in this industry is certain to fail. The
consequences to consumers will be severe--and the overriding goal of
providing lower costs and more choices in the electricity industry will
never be realized.
APPA is a member of a broad coalition that includes organizations
representing large and small utility consumers, small business and
environmental interests that has been working to educate policymakers
about the importance of market power issues in the debate over
electricity industry restructuring. Our coalition, the Consumers for
Fair Competition, represented here on the panel today, has developed a
detailed proposal related to many of the issues I have raised today
that we would be glad to share with you, Mr. Chairman, as your
subcommittee proceeds with its review of market power issues.
Again, thank you for the opportunity to testify before you here
today, and allowing us to share our view that market power policy is
the key to a successful transition to effective competition in the
electricity industry.
Mr. Stearns. Okay. I thank the gentleman.
Ms. Mary Elizabeth Tighe, your opening statement for 5
minutes.
STATEMENT OF MARY ELIZABETH TIGHE
Ms. Tighe. Yes, sir. Good afternoon, Mr. Chairman and
members of the subcommittee. I am Mary Beth Tighe, vice-
president of regulatory affairs for Statoil Energy. Statoil
Energy is one of the largest independent power marketers in the
United States.
We have ownership interests in existing and planned
generating plants, and as the first company licensed to sell
competitive electricity in the State of Pennsylvania, we serve
retail customers in both Pennsylvania and New York.
Statoil Energy is also a board member of the Electric Power
Supply Association, a trade association that represents
competitive power suppliers, both power marketers and
developers of competitive power plants. While I am here today
representing Statoil Energy, my statement reflects the
consensus views of the EPSA membership.
First, let me propose a definition: I would define a market
as consisting of many sellers and many buyers who are trading a
commodity that has a value to the participants. If you accept
my definition, then you are likely to accept my proposition
that a market does not exist if there are few sellers. Therein
lies my biggest concern.
If we allow unbridled market power to be exercised by any
participant in these marketplaces, we will have created not a
market, but rather an unregulated monopoly.
Congressional action is critical to the development of
truly competitive markets. If the progress toward competitive
markets is generated by piecemeal restructuring with
inconsistent policies and guidance, the possibility of market
power abuses increases, and with it, the need for direct and
intrusive regulation.
If Congress helps create a sound framework for a
competitive, national marketplace, you limit the likelihood of
anticompetitive abuses and the long-term need for intensive
regulatory intervention, and you will increase the ability of
the market to benefit all consumers.
In the electric power industry, market power flows from the
electric utilities' historic position as a regulated monopoly
with an exclusive franchise territory. The advantages of
incumbency accrue at all levels in the chain through a control
of key physical assets and products, control of relationships
with customers and control of entry by new competitors.
Some concerns will surface within the marketplace
traditionally regulated by the FERC such as interstate
transmission rates and access, and other issues will be
confined to the markets that have historically come under the
auspices of the State.
Areas where concerns about market power are likely include
first transmission access. Notwithstanding FERC's commitment to
competitive markets, the incumbent utility monopolies have in
many cases superior access terms and conditions of use of the
transmission system than their competitors.
The second area where market power exists is in the
relationship between power generation and retail sales. In many
States, the traditional patterns of ownership which have
concentrated generation assets in a relatively few companies,
many of which also continue to be the holders of critical
transmission assets. This traditional pattern remains
unchanged, and this affects the ability of competitive
wholesale and retail marketers to secure power supplies for
their customers.
A third area where market power is manifest is in brand
names and customer information. During the decades that
government policy excluded competitors, the incumbent utility
has had a unique opportunity to build brand name identity and
goodwill with customers.
Market power can also impact competitive generation
services and retail sales. Competitive services related to the
sale of electricity, including metering, billing, and customer
care, are essential to establishing customer relationships and
offering innovative services and products. These services have
been and continue in many States to be the exclusive domain of
the incumbent utility.
The exercise of market power in any of these areas denies
consumers the benefits of competition. Any effective response
to market power must recognize the split jurisdiction of power,
of power markets.
FERC must have the authority to investigate and remedy
possible market power abuses. In addition, the commission needs
to be empowered to assist the States in circumstances where the
States are unable to address these issues either because of
statutory limitations or due to the fact that the root causes
of these concerns may be interstate.
Elements of an effective strategy at the Federal and State
level include, first, to separate competitive and
noncompetitive services. It is not unusual to encounter a
utility transmission company with its competitive wholesale
power supplier, regulated retail utility, and unregulated
retail marketer operating from the same offices and using the
same operating personnel and customer information systems.
Appropriate separation and meaningful standards of conduct
governing the relations and transactions between the monopoly
and its competitive affiliates should be adopted and enforced.
Second, equip the regulators with the tools to detect and
eliminate market power. Market power does not advertize itself.
Detection requires monitoring and monitoring requires access to
data. Regulators should have the authority to prohibit
participation in the market by those with market power and
impose limitations on ownership or use of essential resources.
Third, develop a transmission grid built around the
principles of transparency, comparability, and independence.
The management of the transmission system and the question of
comparable access are critical to the development of
competitive markets in the mitigation of market power.
Fourth, conduct careful analysis of the impacts of mergers
on the marketplace, including the effects on retail markets and
the emerging markets.
Fifth, provide incentives to encourage divestiture. While
we do not advocate mandatory divestiture of generation assets,
we do recognize that divestiture of some or all of the
utility's generation assets may have benefits, and these have
been listed in detail in my written testimony.
We encourage the subcommittee to craft language that
focuses on market power. We note that the administration
proposal includes legislation specifically targeted at market
power.
I am wrapping up, sir.
Mr. Stearns. Okay.
Ms. Tighe. This language represents a strong starting
point, and we commend it to the committee. It is, however,
impossible to divorce this part of the legislation from other
decisions taken with respect to restructuring. We need to deal
with the issues related to transmission grid and reliability.
We need to continue to believe that a competitive national
marketplace, driven by a date certain, is a central element to
the most effective strategy to remedy market concerns. Giving
consumers a choice of their electricity supplier is the most
effective and ultimate consumer protection and will go a long
ways to dealing with market power abuses.
Thank you.
[The prepared statement of Mary Elizabeth Tighe follows:]
Prepared Statement of Mary Elizabeth Tighe, Vice President, Regulatory
Affairs, Statoil Energy, Inc.
Good morning, Mr. Chairman and members of the Subcommittee. I thank
you for your kind invitation to speak to you today. My name is Mary
Elizabeth Tighe and I am Vice President of Regulatory Affairs for
Statoil Energy, an integrated energy company engaged in the production
and sale of natural gas and electricity-based products and services
throughout the United States. Through its two FERC-licensed power
marketing subsidiaries, Statoil Energy Trading, Inc. and Statoil Energy
Services, Inc., Statoil Energy is one of the largest wholesale power
marketers in the United States. Statoil Energy also has ownership
interests in existing and proposed electric generation projects.
Statoil Energy was the first Electric Generation Supplier licensed to
competitively sell electricity in Pennsylvania. The company serves
retail electric customers in Pennsylvania and New York.
Statoil Energy is also a board member company of the Electric Power
Supply Association (EPSA), a trade association that represents
competitive power suppliers, both marketers and developers of
competitive power projects. While I am here today representing Statoil
Energy, my statement reflects the consensus views held by the EPSA
membership.
overview
There is no competition without competitors. To smooth the way to
customer choice and competitive markets, lawmakers and regulators must
address several key transition issues. Competitive markets won't ``just
happen.'' They demand effort and oversight. Creating effective
competition requires regulators to be vigilant on mergers and on
affiliate codes of conduct, and to consider incentives to encourage
divestiture.
Congressional action will be critical to the development of truly
competitive markets. If the progress towards competitive markets is
driven by piecemeal restructuring with inconsistent policies and
guidance, the possibility of market power abuse increases, and with it,
the need for direct and intrusive regulation. If the Congress assists
the creation of a sound framework for a competitive national
marketplace, you limit the likelihood of anti-competitive activities
and the long-term need for intensive regulatory intervention.
addressing incumbents' market power
Beginning in the 1980s, as a result of the Public Utility
Regulatory Policies Act (PURPA), a new generation of power plant
developers began competing to win the right to build generating
facilities and supply electricity to utilities. This began the process
of restructuring the electric utility industry, culminating today in
the evolution of competition and more customer choice.
The benefits of competition are simple: replacing the monopoly with
multiple competing sellers will lower costs and increase innovation.
But merely authorizing competition does not produce effective
competition. Decades of government protection have given utilities the
advantages of incumbency. If these advantages have the effect of
excluding or discouraging competitors, the utilities will continue to
have market power, or the ability to skew market prices.
Introduction to Market Power
Market power exists when a firm (or a group of firms acting
together) can control the price of its product or service for a
sustained period, undercutting potential competitors or increasing
profits without experiencing an unacceptable loss of sales. Courts
often define market power as the ability to control prices or to
exclude competition.1 Evidence of market power is evidence
of too few competitors.
---------------------------------------------------------------------------
\1\ See, e.g., United States v. E.I. du Pont de Nemours & Co., 351
U.S. 377, 39192 (1956).
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There are two types of market power--vertical and horizontal.
Vertical market power: Traditional utilities are the only
``vertically integrated'' members of the electricity industry. This
means they are involved in every aspect of the industry: generation,
transmission, distribution and aggregation. Because two of these
functions, transmission and distribution, remain monopolies, there is
the risk that utilities can leverage their control over monopoly assets
to gain advantages in competitive markets. For example, utilities that
control the transmission and distribution highways can grant special
access to their own competitive products to the detriment of others.
This practice is known as the exercise of ``vertical market power,''
because it is facilitated by the utility's vertically integrated
status.
Horizontal market power: A separate problem is that in any one
industry sector, such as generation or transmission, the utility might
play a dominant role. In a given region, for example, a utility might
own 80 percent of all the generation assets able to operate during a
particular hour. This dominance might exist for innocent reasons; for
example, the utility has had a historical obligation to build
sufficient generation to meet its load. However, it can be detrimental
to competition for one company to control a large share of the market.
This control is known as ``horizontal market power'' and can enable the
generation owner to keep prices above normal, competitive levels. Some
people argue that, in time, the incumbent's share of the market might
diminish as other entrants build power plants. Yet, because
construction takes several years and the success of entry attempts is
hard to predict, there is cause for concern.
In the Electric Utility Industry, Market Power Flows from the Utility's
Historic, Regulated Advantages
The advantages of incumbency accrue at all levels: control of key
physical assets and products, relationships with customers and entry
barriers facing competitors.
Transmission-derived market power: Some people argue that
transmission owners no longer can favor their own generation facilities
because FERC rules now require owners to share their facilities with
competitors on a nondiscriminatory basis. This is an oversimplification
that too often has been proven untrue. For example, the transmission
system was designed to support generation facilities currently owned by
utilities, rather than subsequent facilities built by generation
competitors. Similarly, transmission facilities serving an area may be
limited so that the entity controlling generation facilities within the
constrained area (or load pocket) will have market power.
Notwithstanding FERC's commitment to competitive markets,
comparable access to the transmission grid by all market participants
has yet to be achieved. Today, the incumbent utility monopolies have,
in many cases, superior access, terms and conditions of use of the
transmission system. With few exceptions, the utilities or their agents
determine who gets access to the transmission system. The transmission
owner can utilize the system on a more advantageous basis than their
competitors, affording themselves greater flexibility and
profitability. For example, the transmission utility decides who will
be curtailed and for how long when it determines such action is needed
for reliability. Transmission utilities determine the terms and
conditions on which new generators may connect to the transmission
grid.
Power-generation and retail sales: If newcomers to the retail
electricity sales market cannot build generation rapidly or obtain a
contractual right to generation owned by others, they cannot compete in
a retail market. Building plants may take a few years and will involve
practical obstacles, such as limited access to generation sites and
time-consuming siting requirements. During this interim period, the
incumbent could strengthen its hold on the market.
Regulators will have to remain wary about the concentration of
generation ownership and the possibility of price manipulation,
especially during periods of peak demand. In a number of states,
competitive restructuring has been accompanied by the divestiture of
generation assets, which has generally broadened the base of ownership.
In many states, however, the traditional patterns of ownership, which
have concentrated the ownership of generation assets in relatively few
companies (many of which continue to hold the critical transmission
assets), remain unchanged. In these circumstances, it will be essential
for the federal and state regulators to reduce barriers to entry and
guarantee comparable access to the grid for new market participants.
Brand names and customer information: The risks of market power are
not confined to the control of physical facilities. During the decades
that government policy excluded competitors, the incumbent utility had
an opportunity to build brand name identity and goodwill with
customers. Moreover, the incumbent utility has acquired over the years
an unmatched knowledge of its customers' consumption patterns.
Competitive generation services and retail sales: Competitive
services related to the sale of electricity (including metering,
billing and customer care) are essential to establishing customer
relationships and offering innovative products and services. If the
incumbent utility controls access to the customer through monopoly
provision of these services, the retail market cannot develop.
solutions to the market power problem
It's not enough to declare that electricity markets are open and
that certain functions such as generation are competitive. The new
markets must be structured with rules that will assure that competition
will be robust and work to the benefit of consumers. Solutions to
market power are simply an effort to create, preserve or strengthen
competition. Key solutions include:
1) Separating competitive and noncompetitive services: In each
market, the incumbent utility has built-in advantages. To prevent these
built-in advantages from distorting future competition, the following
conditions, at a minimum, should prevail:
competitive services must be provided by an affiliate that is
separate from the provider of noncompetitive services, with no
opportunity for preferential treatment of the affiliate;
the noncompetitive affiliate (such as the transmission or
distribution company) should not share essential resources
(e.g., personnel or equipment) with its competitive affiliate;
and
the appropriate standards of conduct governing the relations
and transactions between the monopoly and its competitive
affiliates should be adopted and enforced.
In particular, a utility should not be able to share with its
affiliate any customer information--gathered during the decades of
utility monopoly--unless the information is made available to all (with
the customer's permission) on the same terms.
2) Equipping the regulators with the tools to detect and eliminate
market power: Like any improper activity, market power does not
advertise itself. Detection requires monitoring, and monitoring
requires access to data. For example, to guard against the manipulation
of commodity prices and availability, regulators might require market
participants to supply, on a confidential basis, information on
transmission and generation availability during all hours of the year,
on hourly and seasonal prices, or on buyers' bids and sellers' offering
prices. As is the case with stock and commodity exchanges, this
information must be readily available at a low cost to regulators and,
where appropriate, members of the public. Finally, regulators should
have authority to prohibit participation in the market by those with
market power and impose limitations on ownership or use of essential
resources.
3) Developing a transmission grid built around the principles of
transparency, comparability and independence: On April 22, this
Subcommittee held a hearing on the issues of transmission management
and reliability. As we have already stated, the management of the
transmission system and the question of comparable access are critical
to the development of competitive markets and the mitigation of
possible market power. During the hearing two weeks ago, Trudy Utter
from Tenaska Power Marketing, Inc., testified on the need for federal
legislation and remedies to ensure full and true comparability. Rather
than to repeat this testimony here, we commend and endorse the views
represented by Tenaska, which is also an EPSA member, power marketer
and competitive power plant developer.
4) Employing a careful analysis of mergers: Once rare, utility
mergers are becoming increasingly popular strategies to position for
retail competition. Yet, their effect on retail competition is not well
understood. What we do know, however, is that mergers can provide a
unique opportunity to assess the competitive implications of industry
consolidation on retail competition. Federal and state regulators must
ensure that their approval of utility mergers enhances, rather than
dampens, emerging markets.
Regulators must pay special attention to the effect of mergers on
new retail markets, such as the markets for retail sales, metering and
customer service. Some mergers may result in innovative products, such
as combined electricity, gas and telecommunications products.
Regulators must ensure, however, that merged companies are not allowed
to exercise the rights to government-created benefits, such as control
of needed transmission or distribution rights-of-way, to the detriment
of other market participants.
5) Considering incentives to encourage divestiture of key assets:
Divestiture means selling off some portion of a utility's assets to a
third-party buyer. Discussions of divestiture center on separating the
utility's competitive and noncompetitive services so that the utility
cannot use its control of its noncompetitive assets, such as the
transmission system, to gain undue advantages for its competitive
assets, such as its power plants. The most intense scrutiny has focused
on generation divestiture, in which the utility sells some or all of
its generating assets but remains in the transmission, distribution and
aggregation businesses. Alternatively, if a utility wants to be a
generation services company, it would divest its transmission and
distribution assets.
The ownership of generation assets going forward is a key decision
in the process of restructuring. Some states are considering an ``in
between'' approach, in which a utility's generating plants are
deregulated but not sold or transferred to an independent party. In
this instance, if the utility is not restructured to separate
competitive from non-competitive services, the utility retains a
generating monopoly, only now one that is no longer regulated.
While EPSA does not advocate mandatory divestiture of generation
assets, it does recognize that divestiture, or the spin-off of some or
all of a utility's generation assets, can offer important benefits.
These include:
elimination of vertical market power;
reduction in horizontal market power by replacing a single
generation monopoly with multiple competing generators;
accurate establishment of a market value for the generation
assets for purposes of calculating stranded costs; and
potential collection of a sale price in excess of net book
value, thereby lowering stranded costs, reducing the transition
period and improving the customer's ability to obtain lower
prices for electricity services in a competitive marketplace.
State and federal policymakers should consider the implementation
of appropriate incentives to encourage divestiture. In addition, it may
be appropriate to give FERC the authority to order partial asset
divestiture as a response to the illicit exercising of market power.
a comment on the repeal of puhca
In addition to the questions of market power and merger policy, the
Subcommittee requested input with respect to the possible repeal or
reform of the Public Utility Holding Company Act (PUHCA). Many allege,
and we generally agree, that PUHCA is an ineffective response to the
threat of market power from large electricity holding companies and
that the law unnecessarily complicates the financial management and
opportunities of a number of companies. This Subcommittee is currently
considering a comprehensive effort to restructure the electric power
industry. Clearly, such a bill will present an opportunity to update
and improve the regulatory tools that ensure competitive markets. In
such a bill, we would recommend the adoption of language that would
reform PUHCA.
While we agree that PUHCA reform is necessary, we do have concerns
that reform legislation may create an unintended burden on a number of
companies that are today largely unaffected by PUHCA's regulatory
structure. It is important that the ``reform'' of PUHCA not
inadvertently ensnare new companies and market participants in a web of
unnecessary regulatory oversight. As this Subcommittee develops
legislation, we would like the opportunity to work with you to prevent
this outcome.
legislative recommendations
As our testimony makes clear, concern over the possible abuse of
market power is not confined to one sector of the industry or one
aspect of the marketplace. These issues can surface at many points in
the market path from generator to consumer. Some concerns will surface
within the marketplace traditionally regulated by FERC (e.g.,
interstate transmission rates and access). Other issues will be
confined to aspects of the market that have historically come under the
control and scrutiny of the states.
Any effective response to market power must recognize this
jurisdictional split. FERC must have the authority to investigate and
remedy possible market power abuses. The commission, in addition, needs
to be empowered to assist the states in circumstances where the states
are unable to address these issues, either because of statutory
limitations or due to the fact that the root causes of these concerns
may be interstate. The Administration proposal, unveiled last week,
includes legislation specifically targeted at market power that follows
this model. This language represents a strong starting point and we
recommend it to the Subcommittee.
While we encourage the Subcommittee to craft language that focuses
on market power, it is impossible to divorce this proposal from other
decisions taken with respect to industry structure. As mentioned
earlier and discussed during hearing two weeks ago, reforms in the
management of the transmission grid and grid reliability are important.
In addition, we continue to believe that a competitive national market
for electricity, driven by a federally authorized ``date certain,'' is
a central element of the most effective strategy to remedy concerns
about market power abuse. As long as there are captive customers,
cross-subsidization and cost-shifting can occur. Give consumers a broad
right to choose their power supplier and a whole host of problems are
solved.
We appreciate this opportunity to testify before the Subcommittee
on policies related to market power, mergers and PUHCA. We look forward
to working with the Subcommittee as you craft legislation that can
create a robust, competitive national marketplace for electricity.
Mr. Stearns. I thank the lady.
Mr. Kanner, your opening statement for 5 minutes.
STATEMENT OF MARTY KANNER
Mr. Kanner. Thank you, Congressman Stearns. I'd like to
commend Chairman Barton and Chairman Bliley for their vision in
recognizing the importance of these issues and scheduling
today's subcommittee hearing.
The potential benefits, both economic and consumer
benefits, of vibrant competition in the electric utility
industry are real and substantial, but those benefits won't be
realized if the issues raised today are not addressed in
Federal restructuring legislation.
I would urge the members of the subcommittee to remember
that the goal of restructuring legislation is not deregulation
for its own sake but, rather, the advancement and achievement
of effective competition. If we address the market power
issues, then consumers can realize those benefits.
If this were an infant industry, market forces alone might
be sufficient to discipline anticompetitive practices, and I
can envision that in-State where market forces are the
sufficient check on potential anticompetitive practices, but it
is important to remember the starting point.
Incumbent utilities have significant advantages that accrue
as a result of the historic regulatory system. If this were a
race, when the starting gun sounds, we can't allow for some
parties to start that race at the 80-yard line in a hundred-
yard sprint while others are told to start at the beginning and
run the high hurdles.
Concerns about market power are not hypothetical. The
problems are real and the problems are substantial. Congressman
Burr, you asked what quantifies a dominant player in the
electric utility industry. I will tell you that the economists
for California's investor-owned utilities determined that those
companies would possess undue market power even after divesting
themselves of 50 percent of their thermal generation within the
State. So it depends on the level of concentration and the size
of the market.
Similarly, regulators in Ohio determined that last summer's
price spikes in the Midwest were exacerbated by the lack of
effective competition and tools to respond immediately to
demonstrated anticompetitive behavior.
While States can take steps to reduce the opportunities for
market power abuses, States cannot address these issues on
their own because power markets are regional in scope and much
of the utilities' assets and operations are outside the scope
of a single State review.
If competition is the objective of restructuring
legislation, then we must address the significant potential for
anticompetitive practices and consumer abuses in the transition
to a fully competitive market.
All utility mergers should be screened for their impact on
the emerging market. Tools must be established to mitigate
undue market concentration. Operation of the transmission grid
should be vested with independent bodies that have clear
authority to control, maintain, and upgrade the system. Rules
must be established to prevent utilities from unduly favoring
and underwriting their unregulated affiliates, and the
liability concerns should not be exploitable for commercial
gain.
On repeal of the Public Utility Holding Company Act, we do
not believe that repeal can occur on a stand-alone basis
because it runs counter to the agenda for restructuring
legislation. Stand-alone repeal will have substantial
anticompetitive and anticonsumer repercussions and retard the
development of a vibrantly competitive market.
However, PUHCA could be repealed in a restructuring bill if
coupled with the market power protections that we have outlined
in our testimony.
The Consumers for Fair Competition has assembled provisions
to address these concerns, and these provisions were assembled
from previously introduced legislation. We look forward to
working with the members of the subcommittee in incorporating
these provisions in any restructuring bill that you move
through the Congress.
Thank you, Congressman Stearns, for this opportunity to
testify.
[The prepared statement of Marty Kanner follows:]
Prepared Statement of Marty Kanner on Behalf of Consumers for Fair
Competition
Mr. Chairman, members of the Subcommittee, I am Marty Kanner. I am
testifying today on behalf of the Consumers for Fair Competition, a
coalition of small business interests, power marketers, consumer and
investor owned utilities, small and large electric consumer
representatives, and environmentalists.1 While the interests
of these organizations in the broader restructuring debate are diverse,
we are unified in the belief that consumers must be afforded
protections against anti-competitive behavior during the transition to
a competitive marketplace. Moreover, it is clear that effective
competition will not emerge and be sustainable if market power issues
are not adequately addressed.
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\1\ American Public Power Association, Electricity Consumers
Resource Council (ELCON), Enron, Friends of the Earth, Madison Gas &
Electric, Missouri River Energy Services, National Association of State
Utility Consumer Advocates (NASUCA), Northern California Power Agency,
Ohio Municipal Electric Association, Transmission Access Policy Study
Group (TAPS), Wisconsin Public Power Inc., National Alliance for Fair
Competition (members include: Air Conditioning Contractors of America,
Air Conditioning & Refrigeration Wholesalers Association, Associated
Builders and Contractors, Independent Electrical Contractors, Petroleum
Marketers Association of America, Plumbing, Heating and Cooling
Contractors--National Association, National Electrical Contractors
Association, Sheet Metal and Air Conditioning Contractors National
Association)
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Consumers for Fair Competition (CFC) was formed to advance policies
necessary to promote effective competition and to provide the intended
consumer benefits of lower rates, increases in efficiencies and
innovation, and diversity of supply options. The coalition believes
that the intended benefits of competition will not reach consumers if
steps are not taken to address the market dominance of incumbent
utilities. The coalition commends you, Mr. Chairman, for recognizing
the importance of these issues and scheduling today's subcommittee
hearing.
Since its inception, the coalition has focused only on market power
issues. CFC developed a core set of market power principles by which
the group would judge any restructuring proposal (the principles are
attached as Appendix A). In addition, CFC has mobilized support against
stand-alone repeal of the Public Utility Holding Company Act (PUHCA),
testified before the Senate on PUHCA repealed, and worked with members
of Congress to craft solutions to potential market power abuse.
Over the past six months, members of CFC have worked to assemble
model legislation on market power issues. The coalition turned to
existing legislation for the many good solutions to market power
problems that are already in the public domain. I have attached this
model legislation to my testimony, and encourage its consideration by
the subcommittee.
Fostering Competition
Some in the restructuring debate argue that any action to address
market power concerns is unneeded and inappropriate--that you shouldn't
re-regulate in deregulation legislation. They assert that market power
problems do not exist in the electric utility, or that market forces
will resolve them if they do exist.
First, it should be remembered that, given the continued monopoly
status of transmission and distribution, continue regulation is
necessary. Second, I would urge you to remember that the goal of
restructuring legislation is not deregulation, but rather effective
competition. Market forces cannot mitigate anti-competitive practices
if a dominant player can block or discriminate against new market
entrants. Competition in the electric utility industry will not occur
simply by declaration. As noted by Federal Energy Regulatory Commission
(FERC) Chairman Hoecker: ``Good markets don't just happen, they are
developed, structured, created.''
Incumbent utilities did not earn their market advantages through
innovation, efficiency and market savvy. Rather, these advantages are
an outgrowth of the historic regulatory system. As you know,
historically the vertically integrated industry was considered a
natural monopoly and regulated as such. Consequently, levels of market
concentration and corporate behavior that would raise concerns in other
industries were accepted as outgrowths of this ``natural monopoly.''
Utilities received exclusive retail monopoly franchises, and vertical
integration--with a single company serving as the sole provider of all
three functions of the electric utility industry (generation,
transmission and distribution)--was accepted and encouraged.
If this were an infant industry, market forces alone might be
sufficient to discipline anti-competitive practices. However, the
starting point is vitally important. The historic structure of the
electric utility industry provides incumbent electric utilities with
unearned advantages that are inconsistent with, and contrary to, the
creation and continuation of an effectively competitive market. If
competition is the objective of restructuring, then any restructuring
legislation must address the significant potential for anti-competitive
practices and consumer abuses in the transition to a fully competitive
market.
As noted economist Alfred Kahn put it: ``what is the best possible
mix of inevitably imperfect regulation and inevitably imperfect
competition?''
Anti-Competitive Impacts of Market Power
Given the structure and operations of the electric utility
industry, the opportunities for market power abuse are pervasive--and
often subtle.
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--a
concentration level at which economists assume an ability of a dominant
firm to set and control prices above what would occur in a truly
competitive market.
It is not simply total installed generation capacity that is
important. Because of the physical nature of system operations, some
generation assets hold disproportionate strategic value--their
operation may increase the carrying capacity of a vital transmission
link, provide peaking capacity that largely sets market prices, or
provide ``high-value'' ancillary services. Ownership of these
facilities provides opportunities for anti-competitive behavior in a
sub-market of the industry. Thus, while a generating company may
possess a small percentage of total generation in a given geographic
market, it may dominate a particular product sub-market within the
region.
Despite a significant increase over the past few years in the
construction of non-utility 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. Frequently, incumbent utilities own the prime real estate for
plant location (often adjacent to existing plants). In addition, in
many states, only utilities themselves can request and receive the
necessary regulatory permits.
The vertical integration of most utilities provides another set of
opportunities for anti-competitive practices. Despite enactment of the
Energy Policy Act of 1992 and subsequent issuance of FERC Orders 888
and 889, incumbent utilities can manipulate their ownership and control
of transmission facilities to favor their own generation, block power
sales by other entities, reduce total supply of generation (and thereby
increase prices) and even block development of new generation. This
becomes particularly acute at the growing number of constrained
transmission interfaces.
Incumbent utilities are also able to leverage their regulated
operations to advantage their unregulated affiliates. Proprietary
information on customer load patterns and energy needs can be
transferred exclusively to affiliate power suppliers. Similarly,
utilities can refer customers to their affiliates for installation and
maintenance of HVAC equipment and other demand-side measures. Finally,
utilities can cross-subsidize their unregulated affiliates through the
market value of using the utility's name, logo or personnel, or by
misallocating overhead expenses from the affiliate to the regulated
utility.
These are not hypothetical concerns. The problems are real and
pervasive:
Economists for California's investor-owned utilities
determined that those companies would possess undue market
power even after divesting 50 percent of their thermal
generation within the state.
Last summer's price spikes in the Midwest were exacerbated by
the lack of effective competition and the lack of tools
available for immediate response to demonstrated anti-
competitive behavior, according to a study done by the Public
Utility Commission of Ohio.
Price spikes of 3500% in California's ancillary services
market were caused by undue market power according to filings
by two California investor-owned utilities.
Rules for the PJM-ISO on governing how power plants tie into
the grid discriminate against new market entrants, include
unreasonable delays and are seen as a significant barrier to
entry.
ISO-New England's congestion management system was approved by
a governance structure that the FERC has rejected as
inequitable.
The independent governing board for the PJM-ISO complained to
FERC that the utility-controlled operating committee was
allowing the transmission system to be manipulated for anti-
competitive purposes.
Utilities have been cited for disclosing critical market
information to affiliates--in violation of ``Chinese walls''
required by FERC.
Utility commissions, small businesses and new market entrants
have uncovered instances in which utilities have unfairly
cross-subsidized their affiliates.
Power marketers, new market entrants, utilities and others
argue that transmission owners have gained competitive
advantages by withholding transmission capacity for the stated
purpose of native load service or reliability.
Some cite the public disclosure of such abuses as ``proof'' that
the current regulatory system adequately policies the market. However,
many market participants and observers believe these instances are
simply the, albeit sizable, tip of the iceberg--with multiple
undetected anti-competitive practices occurring for each uncovered or
acknowledged infraction.
States Cannot Adequately Address Market Power Issues
If it is accepted that steps are needed to assure the transition to
a competitive market, it is important to ask: Can these problems be
addressed by state regulators?
CFC believes that a thorough analysis of this question concludes
that state action alone is not adequate to assure the development and
continuation of a competitive market.
While states can play an important role in addressing potential
anti-competitive and anti-consumer behavior, states alone cannot
prevent competitive abuses:
Power markets are regional in scope. The party engaging in
anti-competitive actions in state X, may be located in state
Y--outside the legal authority of state X's regulatory
commission.
States that have adopted retail competition have generally
relinquished regulatory control over generation within the
state. If problems later emerge in the operation of in-state
generation, the commission may have no authority to address the
problem.
Many utility operations span multiple states. Often state
regulators have limited access to the books and records of out-
of-state operations of these utilities.
Control and operation of the nation's transmission network is
largely outside the scope of state regulation. While states can
mandate or encourage in-state utilities to join regional
transmission organizations, states cannot approve or oversee
such entities--only FERC can.
Several states have encouraged utility divestiture of
generation, but such action is usually done as a means of
valuing assets for stranded cost determinations--not for market
power mitigation (in fact, such divestitures have largely left
intact the same level of generation market power). Once
divested, the state has no control over the operation of the
divested generation.
States can have a parochial interest in protecting an in-state
company--even if such action is contrary to the interests of a
competitive regional market.
As you know, the restructuring bill pending in Texas includes
several provisions intended to address market power. However, while
that action is noteworthy, the situation in Texas is unique--because of
ERCOT--and cannot be easily replicated in other states for the reasons
cited above.
Federal Action Needed to Facilitate Competitive Markets
Concluding that state authorities are insufficient to address
market abuses does not in itself justify new federal authorities. An
affirmative answer to that question must be based on a rigorous
assessment of existing federal statutes.
First, it must be remembered that the current federal regulatory
structure--like state utility regulation--was established for the old
regulated monopoly framework. Actions are needed to adapt that system
to the desired competitive end-state.
Today, FERC can deny a merger request or market-based rate
application, or find that a utility fails to meet the ``just and
reasonable'' test. However, the conditions that FERC can impose are not
expressly delineated. Moreover, the Commission does not have clear
policy guidance--other than vague ``public interest'' language--in
determining what outcomes and objectives should be promoted.
Consumers for Fair Competition has identified several areas where
FERC's regulatory mission and authorities must be altered to promote
effective competition.
1. Mergers--As you know, utilities are merging at an unprecedented
rate. Since the mid-1990's, 24 utility mergers have been completed, and
12 additional mergers are pending at FERC. While mergers can bring
efficiencies of size and scope, improved efficiencies and reduced rates
are frequently not the result. According to a recent report by Anderson
Consulting, less than half of the energy utility mergers over a 10 year
period were profitable for shareholders. More troubling for the future
of the competitive market, these mergers are often a mechanism for
further consolidation of resources that potentially increases anti-
competitive opportunities.
Under the Federal Power Act, FERC has clear authority to review and
condition proposed utility mergers. In addition, the Department of
Justice and Federal Trade Commission can review utility mergers under
the anti-trust statutes. However, these agencies have largely deferred
to the FERC in reviewing mergers.
CFC does not believe that FERC merger review authority should be
eliminated, with utility mergers left exclusively to Justice and FTC.
The complexities of the electric utility industry argue for merger
review by a regulatory organization intimately familiar with the
industry. If FERC review were eliminated, that expertise (and staffing)
would need to be added to the anti-trust agencies. Second, mergers
often include conditions that require on-going regulatory oversight.
The anti-trust agencies are not regulators capable of such on-going
review.
For these reasons, CFC believes that, along with FTC and Department
of Justice authorities left intact, continued FERC merger review is
essential. Moreover, CFC believes that FERC's merger authority should
be revised in several ways. First, the FERC standard for reviewing
mergers should be expressly expanded to make competitive impacts the
primary ``screen.'' If a merger advances competition--either on its own
or through FERC-imposed conditions--it should be approved; if it
potentially frustrates competition, it should be rejected. Second,
certain types of utility mergers and acquisitions--``convergence''
mergers between electric and gas utilities and mergers between utility
holding companies--can be structured to escape FERC review. These
regulatory gaps should be closed. Third, mergers should be scrutinized
to ensure that they will produce continuing net consumer benefits, not
simply advance company empires and egos.
CFC has coupled provisions from the Bumpers-Gorton and
Administration bills to accomplish these objectives.
2. Market Concentration--As noted above, as a result of the
regulatory structure of the past, some incumbent utilities unduly
dominate their regional energy market. But this problem goes beyond
``incumbent'' utilities. As a result of some utility asset divestiture
plans, some non-utilities have acquired the market dominance once held
by the utilities. In New England, a non-utility acquired all the
generation assets of the largest regional utility. The price spikes in
California cited above were due to market power exerted by the new
owners of the incumbent utilities' divested assets. While the general
energy market in California may not be unduly concentrated, many of
these sub-markets--which in turn set the price for the general energy
market--are overly concentrated.
If the market is unduly concentrated, market discipline cannot
check anti-competitive behavior, the dominant market player can exact
excessive profits, and consumers will suffer.
Economists have long established that regulation is needed as a
substitute where competition does not or cannot exist. The question is
what form of regulation is most appropriate to redress undue market
concentration and restore competitive equilibrium?
Some have argued that continued application of the anti-trust laws
is sufficient. Consumers for Fair Competition disagrees. While
continued application of the anti-trust laws is appropriate, the short-
comings of this approach must be recognized:
Anti-trust laws address explicit anti-competitive behavior;
not existing structures that are inconsistent with competition
Anti-trust actions occur after competitive harm has occurred,
Actions under the anti-trust laws are time-consuming and
costly. For new market entrants, the delay of relief can be a
prescription for business failure.
We cannot wait for market failure to take the steps needed to
foster competition.
Various policy options exist to address undue market concentration.
Consumers for Fair Competition supports the approach taken last
Congress by Representatives DeLay and Markey. In that legislation, FERC
is given the authority and direction to mitigate undue market power.
When FERC finds such anti-competitive concentration, it is authorized
in clear terms to reimpose rate regulation and deny the dominant market
player the use of market-based rates. FERC is also authorized to
require the entity to participate in a regional transmission
organization that will eliminate vertical market power. Only if these
tools are inadequate to combat the market dominance is FERC authorized
to order asset divestiture. As a practical matter, we do not believe
that FERC will likely need to exercise its divestiture authority, but
having this ultimate sanction--the club in the closet--ensures that the
less intrusive steps proposed in the DeLay-Markey bill function
properly.
The denial of market rates is the central feature of this
provision. First, it is proper economic practice. Market-based rates
can only produce efficiencies and competitive pressure to lower costs
if there is, in fact, a competitive market. In the absence of such
competition--when one entity or group of entities dominant a market--
then market rates will simply produce monopoly profits. Second, the
denial of market-based rates will compel utilities to submit their own
market power mitigation plans in order to regain market-based rates. It
should be noted that this same doctrine was used in deregulating the
rail industry under the Staggers Act, where rate regulation is imposed
on any shipper that dominates a market.
3. Transmission Operation--The vertical control of the electric
utility industry is largely incompatible with the needs of the
competitive market. Despite the progress that has been made as a result
of the Energy Policy Act and FERC Orders 888 and 889, the nation's
transmission grid fails to operate on a non-discriminatory and
comparatively neutral basis and fails to fully promote or support a
competitive generation market.
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 its own self-interest, owners can:
reserve the majority of transmission capacity for its own use
(which use is not effectively subject to FERC comparability
standards),
operate the system to favor its own (or affiliates) generation
or retail marketing operation,
utilize reliability objectives--such as congestion management
and emergency curtailment procedures--in a discriminatory and
anti-competitive manner, and
fail to make transmission investments that would alleviate
congestion and promote the competitive market.
CFC believes that ownership and control of the nation's
transmission system must be transferred to truly independent regional
bodies with strong authority to operate, plan, maintain and expand the
transmission system. Such action will:
ensure all market participants have equal and
nondiscriminatory access to transmission services;
facilitate competition by eliminating rate pancaking and
expanding the physical scope of markets;
eliminate opportunities for the exercise of vertical market
power,
reduce horizontal market power in generation by expanding the
size of the power market (and thereby reducing the comparative
generation ownership of each regional participant), and
insure that transmission additions occur to eliminate bottle-
necks, improve reliability and facilitate construction of new
generation.
CFC believes that the language contained in the DeLay-Markey bill
can be refined to achieve these aims.
4. Utility Affiliate Transactions--The former monopoly status of
utilities (and continued monopoly operation of distribution systems)
provides anti-competitive opportunities in the ways that utilities and
their unregulated affiliates interact. Utilities can:
provide affiliates with preferential and discriminatory access
to important information on power and non-power sales
opportunities;
purchase goods or services from affiliates at above-market
rates;
provide affiliates with goods or services at below-market
rates;
perform various administrative services for the affiliate that
are charged to the parent company or regulated utility; and
provide the affiliate, at no cost, with the considerable
market value associated with the company name and logo.
Such actions harm consumers by having captive distribution system
ratepayers cross-subsidize the utilities unregulated affiliate venture.
Such actions also harm competitors by providing utility affiliates with
an unearned and anti-competitive advantage.
Congress recognized these concerns and adopted several provisions
in the Telecommunications Act of 1996 to ensure proper affiliate
relations. These provisions establish ground rules for inter-affiliate
relations and establish an enforcement mechanism. CFC urges adoption of
parallel provisions in any electric utility restructuring bill.
5. Reliability--As long as parties with a commercial commodity
interest retain exclusive control of system reliability, opportunities
will exist to manipulate legitimate reliability objectives for
commercial advantage.
Establishment of FERC oversight of mandatory reliability
requirements (and the security coordinators that do the implementation)
will both promote a reliable electric system and competitively neutral
reliability standards. The members of CFC support the consensus
proposal developed by the North American Electric Reliability Council
(NERC) and urge its adoption.
Stand-Alone PUHCA Repeal
You will hear assertions that the Public Utility Holding Company
Act (PUHCA) is no more than an out-dated statute intended to protect
investors from fraudulent securities practices. Don't be misled.
Congress enacted PUHCA as a sister statute to the Federal Power Act.
PUHCA establishes passive restraints on the structure of the electric
utility industry in order to mitigate the formation and exercise of
market power, preclude practices abusive to captive consumers and
competitors, and facilitate effective regulation.
Rather than ushering in competition as repeal proponents would have
you believe, stand-alone repeal will have substantial anti-competitive
repercussions and retard the development of a vibrantly competitive
market.
The members of CFC recognize that the current administration of
PUHCA has clear limitations. However, its underlying purposes--the
mitigation of market power and prevention of anti-competitive and anti-
consumer utility diversifications--remain relevant today. CFC believes
that PUHCA could and should only be repealed as part of a broad
electric restructuring bill that contains the market power provisions
outlined above.
Conclusion
Effective, sustainable competition will not automatically emerge in
the absence of regulation. Regulation can--and should--be relaxed for
those markets and products that are subject to effective competition.
However, given the historical operation and structure of the electric
utility industry, competition in all sectors and regions will not occur
simply by legislative declaration.
To promote the transition to competitive electric markets, steps
must be taken to remove the vestiges of the former regulatory system
and its accumulated opportunities to exercise market power. Once done,
the transition to competition can occur and the need for active
regulation will subside.
Mr. Stearns. I thank the gentleman.
Mr. Kahn, you are recognized for 5 minutes for your opening
statement.
STATEMENT OF JOSHUA A. KAHN
Mr. Kahn. Thank you. Good morning, Mr. Chairman, members of
the subcommittee. My name is Joshua Kahn, and I am vice-
president for service and control systems of Kahn Mechanical
Contractors, a family owned and operated heating, ventilation
and air conditioning contractor located in Dallas, Texas.
On behalf of our company, its 21 employees and the
primarily small and medium-sized businesses that make up the
heating, ventilation and air conditioning, or HVAC, contracting
industry across this country, I would like to thank you for
calling this hearing. The issue of market power, and in
particular, the impact of market power abuses on small
business, is of vital important to my industry.
I appear before you today as a member of the Air
Conditioning Contractors of America, ACCA, a nonprofit trade
association representing firms that design, install, service
and repair HVAC equipment for residential, commerical, and
industrial customers.
With roots dating back to the turn of the century, ACCA is
the largest organization of HVAC contractors in the Nation.
ACCA represents more than 9,000 member-companies through
national membership, as well as local members through 68 State
and local chapters.
For the past several years, ACCA and its members have taken
every available opportunity to speak to Members of Congress,
their staffs, State regulators and others regarding the need to
address the potential for market power abuses in Federal
legislation.
We have been joined in this effort by many other building
trade associations in our industry and related industries
through the National Alliance for Fair Competition. I would
also wish to express ACCA's support for the testimony being
offered by the Consumers for Fair Competition, a larger, more
diverse coalition, of which ACCA also participates.
Initially, let me say that ACCA and its members are
foursquare behind congressional efforts to enact comprehensive
Federal legislation, to open retail electricity markets to
competition. We believe in competition and the lower costs and
innovation it brings, but I am also here to caution you that in
order for the benefits of competition to be realized, Congress
must act to prevent cross-subsidization and other forms of
anticompetitive conduct.
While I am neither a lawyer nor economist, I am glad to
have this opportunity to share my views on why cross-
subsidization, preferential deals for utility affiliates, and
other anticompetitive conduct harm HVAC contractors, other
small businesses, and eventually, the consumer.
Cross-subsidization and other anticompetitive conduct harms
competition in small business. As the electric power industry
is restructured, utilities will operate in a range of regulated
and unregulated businesses. In my home State of Texas, there
are numerous examples of utilities entering unregulated
businesses, such as HVAC contracting. To gain market share,
they often resort to uneconomic strategies.
In one instance, the utility affiliate was selling consumer
service contracts at 20 to 30 percent below market rates. While
ACCA is not opposed to utility diversification, without
appropriate safeguards there are increased incentives to cross-
subsidize regulated and unregulated activities. This will harm
captive consumers, as well as the promises of open competition.
Therefore, it is critical that appropriate safeguards be in
place to prevent utilities from using their regulated
operations to unfairly create economic advantages for their
unregulated lines of business.
One of the greatest challenges we face is the absence of
sufficient safeguards to prevent utilities from using assets
paid for by the rate payers to cross-subsidize unregulated
affiliates through the use of service tools, trucks, personnel,
and overhead that is misallocated from the affiliate to the
regulated business. Transactions between the affiliate and the
regulated business that are not conducted at arms length
provide additional opportunities to shift resources.
Another significant problem is the shared use of the
utility's name and logo by the unregulated affiliates. This
strategy transfers significant marketing value to the
unregulated affiliate by creating an incentive to overinvest in
the brand name of the regulated business. This overinvestment
enhances the marketing power of the unregulated affiliate at
the rate payers' expense. The Federal Trade Commission economic
staff has noted this problem repeatedly in comments to State
regulators.
Finally, marketing leads, load patterns, preferential
referrals to utility affiliates and other information acquired
due to monopoly status are being provided to unregulated
affiliates on a preferential basis. This use of the last
vestiges of monopoly power works to the severe disadvantage of
fair competition.
This threatens competition and is particularly harmful to
small business in two ways. First, the ability to cross-
subsidize and provide other unfair competitive advantages to
unregulated affiliates means that the affiliate is not bearing
its own costs of providing service.
Because the affiliate is not carrying its own weight, it
can provide service at less than the cost of an otherwise
equally efficient and often more experienced competitor. While
this may initially lower costs for consumers, it inevitably
results in driving independent competitors from the market.
When this happens, prices will start to rise again, as
there is no longer any choice for competitive price pressure to
keep the costs down. Less choice and higher prices are exactly
the problems that increased competition is supposed to prevent.
As I said earlier, I am not an economist, but I do know that
subsidies are bad for competition.
Second, while cross-subsidization and other anticompetitive
practices are bad for everyone up and down the food chain, the
impact will be greater for small business. Absent safeguards to
prevent anticompetitive conduct, small businesses lack the
resources to fight unfair competition and will be among the
first to suffer.
Let me be clear. Small business does not need, nor do we
seek, special protection from competition. We stand ready to
compete and do so every day in a highly competitive industry of
large and small companies. What we do ask, however, is that the
utilities do not subsidize their affiliates with resources paid
for by the rate payer.
One quick sum comment about this. Many members have asked
about the application of existing antitrust law. I am not a
lawyer, but I do understand that the existing laws do not cover
the new fact patterns that give rise to the competitive abuses
encountered by small business.
More importantly, Congress needs to be mindful that the
aggrieved parties are small businesses which invariably lack
the necessary resources to prosecute an antitrust action which
will last for several years. Utilities have deep pockets and
can prolong such suits until the meager resources of affected
small businesses are exhausted.
One very final comment to drive my point home. How would
you feel as a Congressman if you were required to make a
monthly contribution to a candidate seeking to take your place
in Congress? That is exactly how I feel when I pay my utility
bill, knowing that these dollars can be used to compete
unfairly against me.
[The prepared statement of Joshua A. Kahn follows:]
Prepared Statement of Joshua A. Kahn On Behalf of the Air Conditioning
Contractors of America
Good morning Mr. Chairman and members of the Subcommittee. My name
is Joshua Kahn, and I am Vice President for Service and Control Systems
of Kahn Mechanical Contractors, a family owned and operated heating,
ventilation and air conditioning (``HVAC'') contractor located in
Dallas, Texas. On behalf of our company, its 21 employees and the
primarily small and medium-sized businesses that make up the heating,
ventilation and air conditioning (``HVAC'') contracting industry across
this country, I would like to thank you for calling this hearing. The
issue of market power, and in particular the impact of market power
abuses on small business, is of vital importance to my industry as the
Congress considers federal legislation to restructure the electric
power industry.
I appear before you today as a member of the Air Conditioning
Contractors of America (``ACCA''), a nonprofit trade association
representing firms that design, install, service and repair heating,
ventilation, air conditioning and refrigeration (HVACR) equipment for
residential, commercial and industrial customers. With roots dating
back to the turn of the century, ACCA is the largest organization of
HVACR contractors in the nation, representing more than 9,000 member
companies through national membership as well as local members served
through 68 state and local chapters. For the past several years, ACCA
and its members have taken every available opportunity to speak to
Members of Congress, their staffs, the Administration, state regulators
and others regarding the need to address the potential for market power
abuses in federal legislation to restructure the electric power
industry. We have been joined in this effort by many other building
trade associations in our industry and related industries through the
National Alliance for Fair Competition. I also wish to express ACCA's
support for the testimony being offered today by the Consumers for Fair
Competition, a larger, more diverse coalition in which ACCA also
participates.
Initially, let me say that ACCA and its members are foursquare
behind congressional efforts to enact comprehensive federal legislation
to open retail electricity markets to competition. We believe in
competition and the lower costs and innovation it brings. But, I am
also here to caution you that the benefits of competition will not be
realized if Congress does not act to prevent cross-subsidization and
other forms of anti-competitive conduct. While I am neither a lawyer
nor economist, I am glad to have this opportunity to share my views on
why cross-subsidization, preferential deals for utility affiliates, and
other anti-competitive conduct harm HVACR contractors, other small
businesses, and eventually, the consumer.
Cross-subsidization and Other Anticompetitive Conduct Harms Competition
and Small Business
As the electric power industry is restructured, utilities will
operate in a range of regulated and unregulated businesses. In my home
state of Texas, there are numerous examples of utilities entering
unregulated businesses such as HVACR contracting. To gain market share,
they often resort to uneconomic strategies. In one instance, the
utility affiliate was selling consumer service contracts at $15 to $40
below market rates. While ACCA is not opposed to utility
diversification, without appropriate safeguards there are increased
incentives to cross-subsidize regulated and unregulated activities in
ways that harm to captive consumers as well as the promises of open
competition. Therefore, it is critical that appropriate safeguards be
in place to prevent utilities from using their regulated operations to
unfairly create economic advantages for their unregulated lines of
business.
One of our greatest challenges we face is the absence of sufficient
safeguards to prevent utilities from using assets paid for by the
ratepayer to cross-subsidize unregulated affiliates through the use of
service tools, trucks, personnel or overhead that is misallocated from
the affiliate to the regulated business. Transactions between the
affiliate and the regulated business that are not conducted at arms
length provide additional opportunities to shift resources.
Another significant problem is the shared use of the utility's name
and logo by the unregulated affiliates. This strategy transfers
significant marketing value to the unregulated affiliate and, as the
Federal Trade Commission economics staff stated, creates an incentive
to cross-subsidize by over-investing in the brand name of the regulated
business in order to enhance the marketing power of the unregulated
affiliate.
Finally, marketing leads, load patterns, preferential referrals to
utility affiliates and other information acquired due to monopoly
status are being provided to unregulated affiliates on a preferential
basis. This use of the last vestiges of monopoly power works to the
severe disadvantage of fair competition.
This threatens competition and is particularly harmful to small
business because:
Bad for Competition: The ability to cross-subsidize and provide other
unfair competitive advantages to unregulated affiliates means
that the affiliate is not bearing its own costs of providing
service. Because the affiliate is not ``carrying its own
weight,'' it can provide service at less than the cost of an
otherwise equally efficient and often more experienced
competitor. While this may initially lower costs for consumers,
it inevitably results in driving independent competitors from
the market. When this happens, prices will start to rise again,
as there is no longer any choice or competitive price pressure
to keep the costs down. Less choice and higher prices are
exactly the problems that increased competition is supposed to
prevent. As I said earlier, I am not an economist, but I do
know that subsidies are bad for competition.
Bad for Small Business: While cross-subsidization and other anti-
competitive practices are bad for everyone up and down the food
chain, the impact will be greater for small businesses. Absent
safeguards to prevent anti-competitive conduct, small
businesses lack the resources to fight unfair competition and
will be among the first to suffer. Let me be clear, however.
Small business does not need nor do we seek special protection
from competition. We stand ready to compete, and do so every
day in a highly competitive industry of large and small
companies. What we do ask, however, is that the utilities do
not subsidize their affiliates with resources paid for by the
ratepayer who, I might add, includes us.
Federal Legislation is Essential to Address Market Power Abuses
Although some states have enacted affiliate transaction rules
through their state public utility commissions (``PUC's'') to address
cross-subsidization and other forms of anti-competitive conduct, we
need help from you.
First, federal legislation to restructure the electric power market
will accelerate the development of unregulated affiliates in several
states. In many instances, the authority of state commissions to access
the books and records of out-of-state affiliates is quite limited.
Access to books and records of both regulated and unregulated
businesses are essential to identify cross-subsidization. Yet,
statutory limits on the authority of state PUC's to audit and sanction
companies engaged in anti-competitive practices is hampering effective
enforcement. Such authority must be granted at the federal level.
Second, the regulation of anti-competitive conduct in interstate
commerce has long been the role of the federal government. While
antitrust laws should certainly continue to be applied, additional
federal authority is necessary to create an environment in which
competition can prosper. As a small businessman, I can tell you that
the antitrust laws alone will not get the job done. Very few small
businesses can afford the time or tremendous cost to bring an antitrust
case against a major corporation. Congress recognized this reality as
recently as 1996 in the Telecommunications Act that included provisions
to address concerns about market power and anti-competitive practices
by the Bell companies.
Finally, ACCA believes that there is an important federal interest
in having uniformity in this area. It has frequently been said that
electricity doesn't stop at state borders. Neither will the competitive
practices of multi-state utility holding companies that will have an
even greater multi-state presence than they do today. Federal
legislation must recognize this fact if it is to be meaningful in
curbing anti-competitive conduct.
Addressing Anti-competitive Conduct in Federal Legislation
This brings me to my final point--what should Congress do to ensure
effective competition and the unintended consequences to small
businesses?
ACCA endorses the approach put forward by Consumers for Fair
Competition that includes the essential ingredients for promoting
competition and safeguarding against anti-competitive conduct.
Comprehensive federal legislation should include: (1) separation of
unregulated affiliates or subsidiaries; (2) a requirement to maintain
separate books and records with proper cost allocation mechanisms and
public access to such records; (3) require arms length transactions
between utilities and their affiliates; (4) prohibit preferential
treatment of affiliates, including marketing leads; (5) prohibit
transfers of tangible and intangible assets that are not fully
compensated; and (6) prohibit cross-subsidization. Of course, these
provisions must be joined with effective an enforcement mechanism,
either through FERC, another federal agency or by empowering the
states.
Conclusion
As Congress contemplates the framework for competition that would
be established through comprehensive federal legislation, I urge the
members of this Subcommittee to enact appropriate safeguards to govern
affiliate transactions. With these safeguards, the best competitors--
whether large or small--will flourish, and consumers will benefit.
I thank you again for allowing me to appear before you today and
would be happy to answer any questions you may have.
Mr. Stearns. I thank the gentleman.
And Mr. Rose, you are recognized for 5 minutes for your
opening statement.
STATEMENT OF KENNETH ROSE
Mr. Rose. Thank you, Mr. Chairman. My name is Kenneth Rose.
I am with the National Regulatory Research Institute at Ohio
State University.
I should state most of our funding comes from the public
utility commissions around the country, and I do not speak for
any of those commissions or the National Association of
Regulatory Commissioners or Ohio State University. I am
speaking for myself today.
What I would like to concentrate on is the definition of
market power. Basically, if you want to have to sum it up in
one line, it is what every supplier wants, but won't admit it
to you.
It is something that anybody wants, and in fact, that is
the great genius of Adam Smith's book 200 years ago was to
recognize that everybody was after that, but that there was a
self-correcting process that prevented anybody from being able
to acquire market power and charge something other than what
was the market price.
The problem market power comes in is when something goes
wrong with that self-correcting process. The invisible hand
isn't working anymore, to use Adam Smith's term. Actually, I
thought we were all going to have to swear on the wealth of
Nations when I was watching earlier proceedings.
If you have to sum it up in one sentence--I have this in my
testimony--is that market power in the electric supply industry
is the ability of suppliers or a group of suppliers to raise
and maintain the price that is significantly above a
competitive level.
There are two words I would like to just point out there:
one is, maintain it. You have to be able to do it for an
appreciable amount of time before it really rises to a level
that somebody ought to get concerned about. Also, it has to be
significant. There are probably many players in many markets
today that have some level of market power, but we are not too
concerned about it because it is relatively small and the
overall impact on the economy is relatively small. We don't
bring the full force and weight of the Federal Government on
every small amount of market power.
We also say, I actually wasn't going to bring this analogy
up because I thought it may not be polite to raise it, but
since the Chairman raised it about the definition of
pornography, I would just like to posit it. It is probably
actually the opposite.
Market power is probably the opposite of that old saw about
pornography. Pornography is something you can't define, but
everyone knows it when they see it or it is the eyes of the
beholder, I suppose.
Market power is just the opposite. I can define it fairly
specifically. I can give you a formula to tell you what it is.
It is P minus MC divided by P, with P being the price, MC being
the marginal cost, basically meaning it is a percentage that
you can mark up above marginal cost.
But the problem is I am not always sure if you are actually
looking at it when you see it. That is the problem. It is
almost the opposite of that. It would be very precisely
defined. Every intermediate textbook has a fairly precise
definition of what market power or monopoly power is, but it is
very, very hard to look at that and tell you exactly what it
is.
Part of the problem is how do you define the market. How
big is the market; what product is it that you are looking at;
what is the marginal cost; do we have the information to be
able to do that. All those questions come into play when you
are trying to decide whether or not there actually is a
presence of market power.
Now, there are two different types of market power that you
heard a lot about, of course. There is the vertical market
power which is basically transmission and distribution. We have
heard a lot about transmission, but I probably come more from a
State perspective. So I would like to just add that
distribution is also a problem, but when they are actually not
allowing fair access to their systems and horizontal being
within the same market, say in generation, for example.
Because entry is so important, I would just like to give
two examples of where entry may be an important consideration
here then. Well, two examples I should say, but we can't go
into a lot of detail. One is really a Federal issue at the
transmission level, a State issue at the distribution level,
and that is access that you have heard a lot about already
today. Independence and access to transmission and distribution
is key. It is critical in this; and everybody, even utilities,
will recognize this.
Let me just point out, though, that having an RTO that
allows access isn't the whole thing. It is also having access
back to the retail customers, really is what the concern is;
and that is really the key.
What I see is what FERC has been doing is an evolving
process, going from monopolies being the worst case down
through the functional unbundling of 888, down to the RTOs of
transferring the operation to somebody else who doesn't have an
interest in the commodity and then perhaps eventually even some
utilities talking about a fully independent transmission
system.
I will skip the horizontal market power. I realize I am
going to get the cane in a second here. So let me just say
that----
Mr. Stearns. I just appreciate the gentleman would
summarize.
Mr. Rose. Yes. At the State level all that really matters
from a market power perspective is that the States are not
forgotten, that they play a key role in working with the
Federal regulators in order to be able to monitor the markets
and take action if they view anything; and I would argue also
that any comprehensive reform at the Federal level that you do
that you get the structure of the market correct. That is key.
[The prepared statement of Kenneth Rose follows:]
Prepared Statement of Kenneth Rose,1 The National Regulatory
Research Institute, Ohio State University
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\1\ The views and opinions expressed here are the author's and do
not necessarily state or reflect the views, opinions, or policies of
The National Regulatory Research Institute (NRRI), Ohio State
University, the National Association of Regulatory Utility
Commissioners (NARUC), or funding organizations of the NRRI.
---------------------------------------------------------------------------
Due to a combination of technological change that makes competitive
generation possible and belief that competition is a better regulator
than government, state and federal authorities have been moving toward
allowing competitive generation markets to develop. However,
competitive markets do not spontaneously erupt out of nothing, nor can
they develop or thrive if significant impediments exist. Markets
develop through the complex influence of necessity, desire,
technological feasibility, a desire to improve the human condition,
imagination, and the social and institutional rules that govern the
behavior of the market participants. This last influence is where
states and federal legislators and regulators are crucial. They are
today laying the foundation that a competitive market is, hopefully,
being built on. The reason that market power is a critical issue is
because it forms the foundation on which the competitive markets will
develop, or fail.
What is Market Power?
Market power in the electric supply industry is the ability of a
supplier or group of suppliers to raise and maintain a price that is
significantly above a competitive level. This allows the supplier or
suppliers to earn economic profits in the long run that, while perhaps
beneficial to the firm or firms that possess market power, are socially
inefficient. In order to obtain this market power and earn economic
profit, the supplier or suppliers would have to prevent or discourage
entry by other firms in the market. If there is relatively easy entry
by other firms, then it is less likely that the firm will be able to
maintain its market power. For this reason, market power can be thought
of as a market structure issue.
The focus, therefore, must be on developing a market structure that
permits reasonable entry into competitive markets by all qualified
suppliers. Reasonable entry means fair access to customers without
subsidies or special favors being given to any particular supplier,
including incumbent utilities, alternative utility suppliers, or new
entrants. It also means that potential barriers should be removed that
prevent entry by the various suppliers so that no supplier has a
special advantages in terms of access to customers. Whether a supplier
chooses to enter a market is a function of the technology, investment
costs, and potential barriers that may exist from incumbent firms and
regulations. The rules and regulations governing structure and entry
should allow suppliers to vie for customers based on their individual
merit. In short, the objective is to ``level the playing field,'' but
not to give preferential treatment to any particular player.
There are basically two primary types of market power in the
electric supply industry, vertical and horizontal market power.
Vertical market power exists when a transmission or distribution owning
company can favor itself or its own affiliate in the provision of a
competitive service. This is a barrier to entry that prevents other
suppliers from having fair access to customers. These barriers may be
price, such as from an excessively high transmission fee, or non-price,
such as from a burdensome and excessive amount of conditions and
qualifications to use the transmission network. This vertical market
power allows a single supplier or group of suppliers a significant
strategic advantage in terms of access to customers that other
suppliers simply will not be able to obtain.
The second primary type of market power occurs within the same
competitive service, for example, generation service, and is referred
to as horizontal market power. This can occur when a supplier or group
of suppliers is able to influence the price of the competitive product.
The most commonly cited example of this is when a firm has a large
share of the market or is ``dominate'' and faces competition from much
smaller or ``fringe'' firms. The problem with this simple example is
that size of the firm or its market share alone is not an indicator of
market power. A firm with a large share in a market that new entrants
are able to enter and exit from with relative ease (that is, low or no
sunk costs), will unlikely have market power. It is possible that a
generation supplier could have considerable market share but little of
no market power.2
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\2\ Conversely, a supplier may have a relatively modest market
share in the overall generation market but significant market power in
some smaller market niche where it has a more significant market share,
for example, peak capacity at certain times of the year. This
illustrates the importance of properly defining the relevant market.
---------------------------------------------------------------------------
Having said that size and market share alone are not synonymous
with market power, it should be noted that it sure helps to be large
and have significant market share to be able to exercise some degree of
market power. In general, having a significant market share is a
necessary but not sufficient condition for the presence of market
power. It would be difficult for a relatively small player in a market
to acquire a sufficient degree of market power to be of concern. For
example, most travelers know that flying to or from cities with a
single dominate carrier cost more than travel to or from a city that
has several choices. It has been argued that the problem is not just
that the carrier is large and has most of the market, but that the
limited number of gates and airport access deter entry by other
carriers. Obviously, the carrier has to be large enough to occupy the
market and be able to get passengers to where they want to go.
In the developing competitive electric supply industry, many
incumbent electric utilities will begin with considerable generation
market share in what was their former service territory. However, the
relevant market will, in most cases, be much larger than the former
service territories of the incumbent firms (assuming vertical market
power is minimized). Also, because of required or voluntary
divestiture, the incumbent utility may have sold or spun-off its
generation to an autonomous firm. As a result, the incumbent utility
may not necessarily be the supplier with horizontal market power, but
it could be the new owner of the generation assets, a much larger
neighboring firm, or an entirely new entity. As will be discussed, the
focus should be on removing or not creating entry barriers for
alternative suppliers to challenge firms in a market, what ever their
origin, to deter potential market power problems.
In summary, it is a basic assumption of economics that no single
firm or group of firms is able to unilaterally affect the competitive
market price. If they are able to use some means to control prices,
then they have some amount of market power. As noted, they must be able
to significantly affect the market price and be able to sustain it for
an appreciable amount of time for it to rise to the level of a problem
that warrants government intervention.
How Can Market Power be Detected?
While the definition of market power can be straightforward,
detecting its presence is relatively more complicated. The commonly
used measures by antitrust regulators and others are market
concentration measures. The most common of these is the Herfindahl-
Hirschman Index or HHI which is calculated as the sum of the squared
market shares. Another commonly used method is derived from the
definition of market power, that is, an estimate of the amount that
prices exceed marginal cost. It is usually assumed that in a perfectly
competitive market that price will approximate supplier marginal costs.
The Lerner Index is simply the markup of price over marginal cost
expressed as a percentage of the price. For example, if the Lerner
Index equals 0.5, then there is a 50 percent price markup over marginal
cost; if it equals 0.02, there is a two percent markup of price. If the
Index equals 50 percent, it may indicate significant market power and
require some action; if it is only two percent, it is unlike to raise
any calls for government action.
Both the HHI and Lerner Index have particular estimation
difficulties. To determine HHI, it must first be decided what products
are in the market in question and which firms are in this market. For
electric power this may be very complex, for example, is it base load
capacity, peak, non-peak, spot market, etc.? An even more difficult
question is what is the relevant geographic area? Is it the service
territory, the state, or some broader to be determined region? The
Lerner Index main estimation problem is determining marginal cost.
While marginal cost can be easily explained in theory, in practice it
is never ``known'' with certainty but estimated using a proxy variable.
Moreover, as the industry becomes more competitive, reliable data will
become more difficult to obtain. Already, while generation data on
utilities is still available (albeit, generally with a two year lag),
there is relatively little information on new entrants.
The HHI and Lerner Index by themselves are not sufficient to
definitively indicate market power. In practice, these types of
measures are used preliminarily as screening tools to decide if further
investigation is needed.
Computer simulation models are another means to analyze potential
market power problems. These models are commonly used in merger
analysis to determine the effect on the market after the merger. They
can also be used to simulate actual existing market conditions to
predict behavior patterns. These models are promising, but are very
complex and are only as good as the assumptions that are used to create
the model and the data to derive results. Another promising means of
analysis is experimental simulations. This usually involves a small
group of ``players'' that are observed while they simulate various
market conditions. While these experiments provide insights to
policymakers of potential problems to be aware of or better market
structures to use, they cannot hope to address all the complexities of
an actual dynamic market.
Finally, empirical or econometric analysis are becoming more
important in antitrust analysis. This involves collecting detailed data
from actual market transactions from various distinct markets. These
data are compared using statistical analysis to determine whether
different market conditions (for example, number or presence of
competitors) affect the price, holding other factors constant, such as
transportation costs. In electric power supply markets, however, it may
be some years before there is sufficient data to analyze and for
markets to have sufficiently evolved.
It is probably wise to not pin our hopes on one specific type of
market analysis, but be prepared to use a battery of tests and measures
with frequent market monitoring as competitive markets develop.
What Safeguards or Remedies are there for Limiting Market Power?
Most policymakers involved with this issue understand that it is
much easier to create a structure that prevents market power while
restructuring is occurring than trying to correct problems later on.
The cited measurement problems can be avoided or at least mitigated
through structural means to avoid market power problems in the first
place. Antitrust regulators also understand this when they conduct
merger reviews as a form of preventive measure. If a finding suggests
that there is a significant probability that market power will likely
result, a merger will either be rejected outright or approved on a
condition that mitigation actions are taken first, such as divestiture.
For this reason, most states that have passed restructuring legislation
have tried to put into place a structure that avoids market power
problems and fosters the development of competitive markets.
The question then becomes, what characteristics of a restructured
electric supply industry would most likely provide the intended result
of robust competitive markets that will bring about the expected
benefits to consumers? The quick answer is to create a structure that
allows fair entry by all suppliers. Two issues identified below are
critical to the development of competitive markets and are being
addressed by states and the Federal Energy Regulatory Commission
(FERC).
1) Vertical Market Power Issue: Independence of the ``Wires''--If
suppliers are prevented from delivering their power to retail customers
under reasonable terms and conditions, this results in a significant
entry barrier. With respect to transmission, clearly the single most
important aspect is independence of the operation and control of the
transmission system. The clearer the separation of the selling of
competitive services, or ``merchant'' function, is from the delivery,
or ``wires'' function, the less likely there will be market power
abuse. It is matter of degree how effective different ways of
separating these two functions are. ``Functional unbundling'' of the
sort that FERC required in its Order 888 and by some states is simply
not as effective as divestiture of generation (or transmission and
distribution) where the transmission company has no financial interest
in selling power. FERC is currently investigating the use of ``Regional
Transmission Organizations' or RTOs to further its goal of more
independent transmission systems.3
---------------------------------------------------------------------------
\3\ FERC, Docket No. RM-99-2-000.
---------------------------------------------------------------------------
If independent system operators are the answer for transmission,
then the same is probably true for distribution. Some states will have
complete or nearly complete divestiture of generation or at least non-
nuclear generation. Will these states have better results than those
that continue to have vertically integrated companies? Only time will
tell, but it stands to reason that what FERC has learned concerning
transmission independence is transferrable to distribution. The states
that do not have complete divestiture will have to rely on open
distribution rules and functional separation. Not only is this more
complex, but may not be as effective at preventing abuse as is
divestiture.
The problem, which I have no solution for, is how to achieve a goal
of real independence. FERC probably cannot order it and it is not clear
if states have the authority either. Even if it were clear that a state
had the authority, actually passing legislation would be another
matter. Legislation with this requirement would probably receive
considerable political opposition from companies that did not want to
divest. The states that passed legislation with divestiture of some or
all generation were able to bargain for it on other details of the
restructuring package, primarily stranded costs. Of course, it is too
late for FERC and some other states that already passed legislation
without it to use stranded cost as an incentive.
In a recently published article, Commissioner William Massey of the
FERC stated well the dilemma FERC and the states face on the issue of
independence:
. . . we want to mitigate the vertical market power that mere
functional unbundling has not reached. A transmission owner
that owns generation has the financial incentive to use its
transmission facilities to favor sales of its own generation.
This is a strong economic incentive, and some utilities will
not want to give up the opportunities to exercise vertical
market power. Thus, they will attempt to test our commitment to
the concept of independence.4
---------------------------------------------------------------------------
\4\ William L. Massey, ``Policy on Regional Transmission
Organizations: Five Pitfalls FERC Must Avoid,'' The Electricity
Journal, March 1999, p. 14.
---------------------------------------------------------------------------
2) Horizontal Market Power Issue: Incumbent Utility Advantages--
Barriers to entry may also result from strategic advantages that
incumbent firms, when they remain the principal supplier in a market,
will have simply because they are the incumbent. This provides the
incumbent firm with an advantage relative to others in the market. If
the incumbent firm is able to charge a higher price for essentially the
same competitive service, this may a case of horizontal market power--
may be, since it is a fair question as to whether a company, with a
name that is very recognizable to most customers because it was or is
related to the company that was the regulated monopoly for many years,
should be able to capitalize on its name recognition. It may become a
problem when for-profit, unregulated affiliates advertize or send
material using a similar name and maybe the same logo to entice
customers to switch to them (at the same time customers are still
receiving bills from the regulated distribution company with the
similar name and logo). Some states have adopted codes of conduct to
address this affiliate relationships and issued rules concerning the
use of the corporate name and logo.
As long as there is a reasonable distinction between the regulated
company and unregulated affiliate, this ``branding'' issue is not a
major obstacle to competitive market development. States need to be
able to address this issue in a manner that makes sense in their state.
Over time, this brand recognition advantage will wear off as other
suppliers become more familiar to customers.
Another potential advantage incumbents may have depends on what a
state decides to do with customers that do not make a specific choice
of suppler.5 It has been observed that, for various reasons,
most customers do not make any choice. Even the natural gas and
electric choice programs with the highest rates of choosing customers
still have seventy percent or more customers that have not yet made a
choice. Is this a problem? The answer depends on who you ask. Obviously
incumbent utilities believe that these customers should be assigned to
them or their generation affiliate. Competing suppliers believe that
they should have a fair shot at serving these customers at market
prices. These customers obviously have to be assigned to some supplier,
nobody wants them to be unserved. Also, most impartial observers would
agree that these customers should not be denied the benefits of a
competitive market.
---------------------------------------------------------------------------
\5\ These non-choosing customers have been referred to by several
different names in different states. These terms include default,
standard offer, or last resort customers.
---------------------------------------------------------------------------
The reason that this is a market power issue is because of the
pricing that these non-choosing customers may receive. These customers,
in the absence of any provisions being made for them, may be charged a
higher price for the same service. The incumbent firm, fully aware that
a large segment of customers will make no specific choice, will
continue to charge these customers a price above the competitive level.
The fact that the incumbent firm can charge above market prices for
essentially the same service and maintain a significant market share
restates the very definition of market power discussed earlier; that
is, market power is the ability of a supplier or group of suppliers to
raise and maintain a price that is significantly above a competitive
level.
There are three choices states face when deciding what to do about
non-choosing customers. First, they can be assigned to the incumbent
firm. If the incumbent is still a vertically integrated firm with its
own generation, that company may continue to serve the non-choosing
customers as it did in the past. If the former utility divested its
generation, then either the distribution company contracts for the
supply or the customers are given to the new owner of the generation or
the generation affiliate of the distribution company (usually the
former utility). The price may be a standard offer that is determined
by the commission (Massachusetts for example) and may be adjusted based
on market conditions or the price may be based directly on some market
indicator (California during the transition period is an example).
When a state decides that it does not want to just assign non-
choosing customers to the incumbent or its affiliate, it may consider a
second alternative, random assignment. The Federal Communication
Commission (FCC) faced a similar problem after the breakup of AT&T when
there was a large proportion of non-choosing customers for long
distance service. The FCC assigned customers based on the market share
each provider had among the customers that did choose. Georgia will
soon use this method to select natural gas suppliers for non-choosing
customers in the implementation of the state's gas
deregulation.6 In Georgia, the number of retail non-choosing
customers assigned to a particular gas marketer is based on that
marketer's share of the total market served by all marketers. Under
this type of program, customers are warned that they would be assigned
a provider if they did not make a choice (which usually encourages
customers to make a choice) and, of course, customers are not forced to
stay with that company if they wanted a different provider. The logic
is that customers are assigned according to those that did or are
choosing. This also creates an incentive for the various market
participants to work very hard to convince customers to choose them,
since they will then have a higher portion of the non-choosing
customers in the assignment allocation. 7
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\6\ Georgia Public Service Commission, Rules of Georgia Public
Service Commission, 515-7 Gas Utilities, Chapter 515-7-4, ``Random
Assignment of Customers,'' December 30, 1997. This is the Commission's
rule issued under authority from ``The Georgia Natural Gas Competition
and Deregulation Act of 1997.''
\7\ The base used to calculate the market share, either the share
of choosing customers or share of all customers, can have a major
impact on the suppliers' share of non-choosing customers. Obviously,
basing in on all customers will tend to favor the incumbent more that
basing it on customers that did choose if there is a high proportion of
non-choosers.
---------------------------------------------------------------------------
Another alternative to simply giving the customers to the
incumbent, a third option for non-choosing customers, is to conduct an
auction to determine who will serve these customers. There are several
ways to use auctions to select the supplier of these non-choosing
customers. The Maine Public Utilities Commission plans to conduct an
auction to determine the ``standard offer'' supplier.8 The
plan is to conduct an auction to choose three or more retail suppliers
to provide standard offer service in each utility's service territory
in the state. The selected suppliers will be those with the lowest bid
price. The marketing arm of each incumbent utility may serve no more
than 20 percent of its service territory. Utilities will still have
billing, collections, and enrollment responsibilities for the standard
offer suppliers. Standard offer suppliers' names will be disclosed to
customers, but will not interact directly with customers.
---------------------------------------------------------------------------
\8\ Maine Public Utilities Commission, Chapter 301--Standard Offer
Service, rule adopted April 1998, amended February 1999.
---------------------------------------------------------------------------
Ohio has had two auction proposals. A proposal made last
year9 would have divided the state's current utility service
territories into Retail Marketing Areas (RMAs). At the beginning of
retail competition, the Ohio Public Utilities Commission would conduct
a bidding process to determine which suppliers serve non-choosing
customers in each RMA. Winning suppliers would be based on the
qualified suppliers that submitted the lowest price for each RMA. The
current proposal in Ohio 10 divides the non-choosing load of
each current utility service territory into equal ten blocks. Bidders
would submit bids for one or more of these blocks of ten percent. The
auction would be conducted by a third party selected and supervised by
the Commission. Winners would be based on the lowest price and would be
selected through a simultaneous, open auction. Customers would pay the
average price of the winning bids and winning bidders would be paid
their bid price. The winning suppliers would serve customers for one
year The auction would not begin until after the transition period has
ended when utilities are collecting transition costs and would
terminate when the Commission determines that there is no longer a need
for the auction, depending on the market's competitive status. The
suppliers identities are not revealed to the customer (customers are
informed of the price and that it was determined through an auction
process). The customer simply continues to receive a bill from the
distribution company.
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\9\ Companion bills were introduced in 1998 in both the Ohio House
(H.B. 732) and Senate (S.B. 237). Both bills expired at the end of last
year.
\10\ Companion bills in the Ohio House (H.B. 5) and Senate (S.B.
3). Both are currently under consideration in House and Senate
Committees.
---------------------------------------------------------------------------
Pennsylvania plans to use a combination of all three approaches,
that is, incumbent assignment, random assignment, and an auction. In
the case of PECO Energy Company,11 the company (the
incumbent utility) will be the ``provider of last resort'' for all
customers in its service territory that do not choose an alternative
supplier. However, beginning January 1, 2001, 20 percent of all of
PECO's residential customers, determined at random, are to be assigned
a supplier other than PECO. The supplier for this ``Competitive Default
Service'' is to be selected based on a commission-approved energy and
capacity market price bidding process. PECO and its affiliates cannot
bid or be a part of another suppliers bid. The entire customer group
will be a single bidding block and will be bid annually (unless changed
by the commission). To qualify for this bidding process, a supplier
will have to provide at least two percent of its energy supply from
renewable resources and increase that amount in increments of 0.5
percent annually (the commission may lower the percentage if the
renewable energy sources increase the cost of the entire block by more
than two percent over the cost without the renewable energy sources).
Bids cannot exceed the generation rate cap for the transition period.
For non-choosing customers still served by PECO that were not selected
for the auction, PECO is required to price residential service between
the auction price and monthly rate based on power pool prices. This
price also cannot exceed the generation cap (``shopping credit'').
---------------------------------------------------------------------------
\11\ From the settlement between the company and the Pennsylvania
Public Utility Commission, ``Joint Petition for Full Settlement of PECO
Energy Company's Restructuring Plan and Related Appeals and Application
for a Qualified Rate Order and Application for Transfer of Generation
Assets,'' Docket Nos. R-00973953 and P-00971265, April 1998.
---------------------------------------------------------------------------
In addition, there are market share thresholds in the PECO
settlement that triggers a random assignment process. Beginning January
1, 2001, if less than 35 percent of all PECO residential and commercial
customers have selected to receive generation service from the PECO
affiliate or alternative suppliers (including customers assigned to the
auction group), then for the number of customers necessary to reach a
35 percent target will have a supplier determined by random selection
on a one-time basis. After January 1, 2003 the percent threshold is
raised and a random assignment process is used until 50 percent of all
residential and commercial customers are assigned to either the PECO
affiliate or alternative supplier.
Other states, such as Nevada and Missouri, have also either
proposed or are discussing an auction process for non-choosing
customers. While many design questions need to be addressed, an auction
has the advantage of actually determining a price through a competitive
process (assuming, of course, that the auction is well designed).
Through random assignment or through an auction process, both are more
consistent with the goal of developing competitive markets than a
simple bequest or donation of these customers to the incumbent firm
because it is the incumbent.
Assigning non-choosing customers to suppliers other than the
incumbent firms has come under heavy fire from, not surprisingly,
incumbent firms. Their main argument is that selecting a supplier for
these customers is taking a choice away from customers, that is, not
choosing is the choice the customer made. Implicit in this argument is
that all non-choosing customers are not making a choice because they
are content with the incumbent firm. However, it is highly unlikely
that all these customers fit this profile. Other reasons likely include
not wanting to spend the time and expense to search for information and
deciding on which supplier to select (transaction costs), confusion
over the array of options, and the savings are (or are believed to be)
too small to bother with. No choice is exactly what it looks like, no
choice, and may occur for many reasons.
Another argument is that it is paternalistic or ``government
deciding what is best'' for a customer to assign them to a supplier
other than the incumbent. After all, the whole point of a retail choice
program is to allow customers a choice. This assumes, however, that the
state has no obligation to assist customers in the move from regulated
monopolies to competition. These customers have to be assigned to a
supplier, whether it is the incumbent or alternative. It should be kept
in mind that with most competitive customer choice programs, customers
are free to choose a supplier of their choice at any time. Also, if
customers are to be assigned to a supplier, they are usually warned
before the change is made and allowed some time to make a selection
(including the incumbent supplier). No one is forced to purchase
generation service from a particular supplier they do not want. In
fact, having no choice is what the former system of regulated
monopolists was about, where customers could only buy from the state
sanctioned utility.
Simply put, customers did not pick the incumbent utility that is or
originally served them, the state or municipality did. There is no
compelling reason why the incumbent firm should inherit these customers
simply by default. All suppliers should be required to compete with
each other for the customers business, like firms in competitive
markets usually do. This insures that no supplier, incumbent or
alternative supplier, has an advantage in terms of access to customers.
Like brand name recognition, this reluctance of customers to make a
choice will also wear off. It should be expected that, over time, an
increasing proportion of retail customers will make a specific
choice.12 However, this may take several years and some
customers may not choose after a decade or more. But the specific
assignment of non-choosing customers probably does not need to be made
for more than the first several years of a customer choice program.
---------------------------------------------------------------------------
\12\ As an example of how AT&T's market share declined since the
breakup, see Zolnierek, James and Rangos, Katie, ``Long Distance Market
Shares, Third Quarter 1997,'' Federal Communications Commission,
January 1998.
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State Role in Addressing Market Power
Two aspects of addressing market power are best done by state
public service commissions and state attorneys general--retail market
power assessment and market performance assessment. These are best done
at the state level, because the state public service commissions have
the legal authority to monitor and, if necessary, regulate retail
markets. (FERC, of course, has jurisdiction of wholesale markets.)
State public service commissions may, in some states, also have the
authority to address retail market power problems directly by ordering
divestiture of generation from transmission or perhaps retail marketing
from transmission and distribution. Where a state commission does not
have this authority, it could be granted to them by their state
legislature.
State public service commissions and state legislatures can, as
part of a state restructuring statute, encourage or require utilities
providing direct retail access to expand their geographic markets by
joining an Independent System Operator or some other form of a Regional
Transmission Organization. (FERC, again, has jurisdiction over the form
and approval of these ISO or RTO.) State commissions can also help to
reduce barriers to entry that might occur from the strategic advantages
noted earlier that incumbent firms will have, such as codes of conduct
to address affiliate relationships, rules concerning the use of the
corporate logo, and assignment of non-choosing customers. States,
through the public service commissions and siting agencies, can ease
entry impediments to new suppliers through licensing and siting law
reforms. Finally, a state commission can address market performance and
consumer protection concerns by monitoring deceptive advertising claims
and, if they wish to go even further, by providing a neutral source of
comparative pricing and service information for retail customers.
What can the federal agencies do to assist the states in their role
of monitoring competitive markets and competitive trade practices?
There should be a clear recognition of the appropriate role of the
states.13 Also, there needs to be recognition that state
agencies are, after implementation of the state's law, acting under
clearly articulated pro-competitive state policies and are actively
supervising retail markets. This deserves deference from federal
agencies that are also involved, the Federal Energy Regulatory
Commission, the Federal Trade Commission, and the Department of
Justice. Indeed, ongoing cooperation is already developing among these
groups.
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\13\ The Federal Trade Commission and The National Regulatory
Research Institute are holding a joint workshop on this topic this
September in the offices of the FTC.
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Finally, Congress can provide state commissions with full and
complete access to books and records of holding companies with both
regulated and unregulated affiliates and subsidiaries. Without such
access to books and records, state commissions cannot regulate
affiliate transactions to prevent cross-subsidies from the regulated
(that is, transmission and distribution) markets to the unregulated
markets. Those utilities with captive customers would be able to
transfer costs to those customers and unfairly leverage this advantage
in competitive and unregulated markets.
Conclusion
Some may argue that if there is a competitive market, you don't
have to worry about market power. However, minimizing potential market
power is a prerequisite to the development of a competitive market. If
a flawed structure is put in place, a structure that is being shaped
today, we will not see the full benefits of competition. Also, if there
are inadequate remedies available to state and federal regulators, then
they will not be able to respond to future market power problem that
may arise. This is restructuring not deregulation of the entire
industry. Many aspects of the industry will remain regulated and others
we are trying to back out of nearly a century of cost regulated
monopolies. The competitive market that emerges will be the culmination
of state and federal actions (or inactions). The structure of any
market is guided by the rules and regulations that make it possible. If
there are obstacles, market participants will look for ways, maybe even
inefficient ways, to find a way around them. Clearly, like it or not,
the future structure of the electric supply business is in your hands
and those of state legislators and federal and state regulators.
Mr. Stearns. I thank the gentleman.
And Mr. Gordon, you are recognized for your opening
statement for 5 minutes.
STATEMENT OF KENNETH GORDON
Mr. Gordon. Thank you, Mr. Chairman. My name is Kenneth
Gordon. I am a senior vice-president at National Economic
Research Associates. I am a former chairman of the
Massachusetts and the Maine Public Utility Commissions, and I
am currently consulting on matters pertaining to these
industries.
I have long been and I remain a strong advocate of
wholesale and retail electric competition, and I took a leading
role in efforts to introduce retail competition in
Massachusetts while I was chairman there.
As you have heard many times, there are two broad areas of
concern with respect to market power and the introduction of
competition, horizontal and vertical. First, as to vertical.
The FERC's work on open transmission access already begun
in orders 888, and related orders has paved the way for
wholesale competition and toward efforts in the States to
introduce retail competition. Regulatory assurance of an open,
nondiscriminatory access to essential facilities for incumbents
and new entrants alike is critical.
Once such access has been assured, in my view. The critical
perquisite for competition is in place, and further efforts to
manage the competitive process are as likely to subvert the
goals of competition as to advance them.
Assuring independent control and nondiscriminatory access
to transmission is critical, but it is the beginning, not the
end, of the FERC's responsibilities in this area. Important
tasks that are as yet uncompleted include deciding the proper
role for ISOs and for private for-profit transmission companies
and determining the relationship between them.
ISOs provide independent control and oversight and can be
used to begin the process of regionalization. It is necessary
to create a broad and open electricity market.
Transcos that cover a sufficiently broad market area have
the potential to respond directly to economic signals for
investment in transmission and to charge and respond to prices
that reflect the cost of transmission use and transmission
congestion.
However, the efficient evolution of the transmission
organization over the longer term depends critically on the
development of regulatory structures that properly reflect
marginal costs of transmission and that provide appropriate
investment incentives for transmission. The current embedded
cost approach being used at the FERC is wholly inadequate to
this task. In my view, this is a critical priority and should
be the FERC's top assignment in fostering competition.
Now briefly with respect to horizontal market power.
Policymakers are properly concerned that firms not be able to
exercise market power where entry is not feasible and where
there are too few firms, but it is important to state at the
outset that market share does not equate to market power,
especially in an industry with this regulated history.
Even with only a few firms, if entry is truly open, firms
are unlikely to have market power for very long. The fact that
market shares erode only over time and not instantly is
certainly cause for watchfulness, but not for immediate
intervention.
In my view, appropriate oversight of horizontal market
power should come under the traditional antitrust agencies,
DOJ, and the Federal Trade Commission. The attempt in
restructuring is to reduce regulation in generation in
marketing of electricity as competition becomes feasible.
FERC plays an important role with respect to transmission
and, hence, entry conditions but should not be expanding its
regulatory mandate into a market that is clearly becoming more
competitive all the time, nor should policymakers attempt to
jump start competition, i.e., lower concentration by forcing
customers to make affirmative choices or explicit
reaffirmations of their current choice or otherwise divvying up
the market among the would-be competitors.
Arbitrarily assigning customers to a supplier amounts to
regulatory slamming, something you have heard about in the
telecommunications industry. It doesn't make customers very
happy; but more fundamentally, such processes do not jump-start
competition; rather, they short-circuit it. No one has to go
through the process of winning customers through lower prices
or better service. Regulators should not be dictating the
industry structure as we begin the competitive process.
On other issues, I have testified in the past that PUHCA
should be repealed. I still agree with that. I would add that
for PURPA, and with these kinds of guidelines in mind, I think
the move into a competitive marketplace should yield real
benefits to consumers.
Thank you.
[The prepared statement of Kenneth Gordon follows:]
Prepared Statement of Kenneth Gordon, Senior Vice President, National
Economic Research Associates
i. introduction
The Federal Energy Regulatory Commission's (``FERC's'') efforts,
particularly in response to the Energy Policy Act of 1992, to increase
competition in generation markets on the wholesale level has ``paved
the way'' for the states' introduction of retail competition by
requiring open, nondiscriminatory access to transmission (in FERC Order
No. 888) and by addressing issues surrounding Regional Transmission
Operators--whether they are Independent System Operators (``ISOs'') or
Independent Transmission Companies (``Transcos''). Many states are now
in the midst of a historic restructuring of their electricity industry
to provide for retail competition in their state, which would allow
consumers to choose their generation provider. Most other states are
actively considering whether to embark on this restructuring process.
I have long been, and remain, an advocate of wholesale and retail
electric competition and I took a leading role in the introduction of
competition in Massachusetts when I was Chairman of the Department of
Public Utilities. I applaud federal and state policy makers' and
regulators' efforts in introducing competition in electricity markets.
Competition, properly introduced, impels inns to seek and adopt new
and better ways of doing business, and also ensures that the resulting
efficiency gains are passed through to customers in the form of lower
prices and better service. What is needed is real people, making new
investments, creating new organizations, introducing new products and
services, and doing so in response to market forces, not regulatory
imperatives. After all, the creation of new types of organizations and
new products and processes--which wholesale and retail competition in
electricity markets could provide--is the most powerful form of
competition, and is much more important over time than textbook notions
of price competition alone.
Retail competition can provide the important benefit of allowing
consumers to make their own consumption decisions in electricity
markets. No longer would utilities and regulators need to make these
decisions on consumers' behalf. Consumers are well able to make many,
many choices every time that they go to a grocery, hardware, or
department store or when they buy a new house, car, or insurance. I see
no reason why consumers should not be perfectly able to choose for
themselves in electricity markets as well. I should add here that
consumers can reasonably ``choose not to choose'' by deciding that they
prefer to stay with their traditional provider. As long as prices are
designed in ways that provide ``competitive parity'' and accounting,
behavioral, and, if needed, structural safeguards are in place,
consumers should be completely free to choose for themselves whether
they wish to switch providers.
The basic problem with attempts to administer in detail how
competitive markets evolve is that the result of this ``managed
competition'' may be to develop ``markets''--by handing new entrants
market share without requiring them to persuade customers that they
have a better offering--that make no sense to anyone but the ``central
planner'' that developed the ``market.'' To obtain the maximum benefits
of competition and reduce regulatory costs, market forces should
substitute for, and not simply add to, regulation. Economic reasoning--
as well as prudence and appropriate humility with respect to anyone's
ability to discern the optimal future--suggests that policy makers at
all levels should focus primarily on ensuring openness of entry and
choice for consumers.
ii. horizontal and vertical market power
Policymakers are properly concerned that utilities wishing to
operate in traditional or newly competitive markets not be able to
exercise market power, regardless of how it arises. As I have already
noted, regulators will continue to regulate the transmission and
distribution systems.\1\ For policies that support and promote
efficient competition, it is critical to understand what market power
is, and just as important, what it is not.
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\1\ These problems are special but not unique. The reform of the
interstate natural gas market offers an interesting analogue to the
opening of electricity markets to competition. For most of the gas
industry's history, pipelines were regulated transporters and sellers
of natural gas. A series of FERC orders in the 1980s and 1990s led
interstate pipelines to unbundle their merchant and transportation
functions and eventually to spin their merchant functions down into
unregulated marketing affiliates. Many of these pipeline affiliates,
such as Enron, have been quite successful.
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From the traditional economic perspective, market power is the
ability of a single firm or a group of firms profitably to restrict
output and raise prices above competitive levels for a significant
period of time. The virtue of this definition is that it puts the focus
of concern where it should be--on the consumer. Monopoly pricing in
excess of cost (or competitive equilibrium prices) harms consumers:
they are denied the benefits of consumption that would more than cover
their opportunity costs. As a result, society's resources may not be
allocated efficiently. Productive efficiency may suffer as well when
firms are sheltered from full competition, and if so, the waste
involved will ultimately be borne by consumers.
A. Horizontal Market Power
Horizontal market power concerns arise when there is only one
(unregulated) firm, or when a few firms hold a large fraction of the
market and where the competitive pressure arising from actual or
potential entry by new firms is not sufficient to limit the firms'
ability to profitably restrict output and raise the price. In
electricity markets, horizontal market power issues concern whether
competition in the generation market in a region will be effective--
that is, will some firm or firms in the market have market power such
that prices are higher than a frilly competitive result?
Market share is not equivalent to market power. If the incumbent
cannot raise prices or restrict output without losing market share--
because markets are open and choice is available to consumers--then
there is no significant market power. Moreover, incumbency by itself
does not necessarily confer market power. First, and critical to
establishing market power is that competitors not be able to enter the
market. Regulation of the essential transmission and distribution
systems is aimed directly at making sure potential competitors can
enter the market.
The most important consideration in assessing horizontal market
power is the ease of entry (openness) of the market. Other criteria,
such as market shares and concentration ratios, can be used to measure
the results of the process but taken by themselves they give no
indication of whether those entrants are more efficient than incumbents
or whether consumers are better off. And, indeed, antitrust regulators
use market share analysis only as a first step (or screening test) in
deciding whether further market power analysis is merited. Market share
is by no means a conclusive indicator of market power, and is likely to
be a particularly misleading indicator of horizontal market power when
applied to industries with a history of legal monopoly.
Market share analysis and similar criteria can be difficult to
actually implement. When market boundaries are blurred, the analyst's
decision about whether or not to include particular groups of
competitors in the market power analysis can arbitrarily determine the
outcome of the market structure investigation. In electricity markets
the market boundaries are likely to be particularly difficult to draw
and therefore the analysis of ``effective competition'' will be
controversial. This is another practical reason for policy makers to
focus primarily on openness and choice rather than attempting to
prescribe how the market will evolve.
In a competitive generation market, competitors will be forced to
compete strongly based on price and perhaps such features as
``greenness'' or other value-added services that the electricity is
bundled with. Reliance on market forces and technological changes (more
efficient generating unit technologies, increased availability of
distribution generation, changing transmission technologies, etc.) can
provide dynamic efficiencies that can benefit consumers. In addition,
compared to the current regulatory model, competitors will be less able
to use the regulatory process strategically to improve their
competitive position or to raise rivals' costs.\2\ Policy makers should
reject calls for forced divestiture and other extreme measures, unless
these calls are warranted by sound economic analysis.
---------------------------------------------------------------------------
See Bruce M. Owen and Ronald Braeutigam, The Regulation Game:
Strategic Use Of The Administrative Process (Cambridge, MA: Ballinger
Publishing, 1978) and Thomas G. Krattenmaker and Steven C. Salop,
``Anticompetitive Exclusion: Raising Rivals' Cost to Achieve Power Over
Price,'' 96 Yale Law Journal 209 (1986).
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Nevertheless, the appropriate antitrust authorities, the Department
of Justice and the Federal Trade Commission, will need to carefully
monitor electricity power markets and address horizontal market power
issues in the generation business if and when they come up.
B. Vertical Market Power
Vertical control issues relate to the ownership and control over
neighboring stages of production and distribution. Vertical market
power, a leading concern in the regulation of utilities and their
affiliates, refers to the possibility that a firm could exercise its
horizontal market power at one stage of the production process (such as
transmission or distribution) to influence price and output at another
stage, such as generation and retail sales, or in new markets. This
assumes that entry will not sufficiently police price-increasing
behavior in those markets.
The principal vertical market power concern in the industry has
been that integrated transmission and distribution owners would use
their control of bottleneck facilities to favor sales of their own
generation over sales of their competitors. Unless properly regulated,
entities that own wires and retailing affiliates could use their
control of the wires to favor their retail affiliates. At the federal
level, this concern has been largely addressed by FERC Order Nos. 888
and 889, as well as by the continuing formation of ISOs and similar
institutions. On the state level, policy makers and regulators have
addressed these issues primarily by requiring functional unbundling or,
in a few cases, by requiring or encouraging divestiture.
In the electric restructuring debate, policymakers and/or
regulators must determine whether an ISO or Transco should own and
operate transmission and must determine what accounting, behavioral,
and structural safeguards are necessary. If a vertically integrated
firm competes to market energy services in its service territory,
policymakers would also determine whether codes of conduct are needed
and would develop accounting procedures to address cost allocation
issues.
Policymakers and regulators should balance the need for an
effective boundary between regulated and competitive businesses with
the need to allow all participants in the new markets to exploit as
fully as possible whatever efficiencies they have. If efficiencies from
vertical integration are lost, then consumers will ultimately be worse
off. Incumbent utilities should be able to compete against new entrants
during the current period of rapid change in the electric utility
industry. In the short-term, however, there is a significant
(demonstrated) risk that regulators will seek to micromanage incumbent
utilities' activities by engaging in ``command and-control''
deregulation.
While it is understandable that regulators would want to ``get the
details right'' given the scrutiny that they will be under as electric
restructuring proceeds, the administrative costs of command-and-control
deregulation are likely to be substantial. Much more importantly,
adverse efficiency and competitive effects are also likely. Efficiency
effects could include lost economies resulting from mistaken vertical
disaggregation or the loss of scope economies through unnecessary
limits on resource sharing. Competitive effects could include increased
prices resulting from effectively foreclosing some efficient
competitors (e.g., incumbent utilities) from competing fully in a
market.
C. Open Access to Essential Transmission and Distribution Facilities Is
Needed
For the foreseeable future, the delivery or wires portion of the
business is likely to remain an essential facility for most buyers and
sellers of electricity.\3\ If competition in the generation and
marketing of electricity is to thrive, there must be open and
nondiscriminatory access to the transmission and distribution wires. In
implementing open access, nondiscriminatory transmission, regional
transmission operators, whether they are organized and operated as ISOs
or Transcos (private, profit-based companies), will play a critical
role. For both ISOs and Transcos, federal (and state) policies should
emphasize the role of independence and regionalization. An ISO or
Transco with a high degree of independence, and the authority to
operate the transmission grid as a unified network would help assure
that the transmission network operates in a way that serves the users
of the network, without unduly favoring the interests of any particular
user. The ISO's or Transco's operations must be governed and operated
as an independent stand-alone activity, which can be achieved through
functional separation of transmission from the generation and
distribution aspects of utilities' businesses and independent
governance of the ISO or Transco. The size of the transmission
organization should be large enough to exploit any available economies
of scope or scale, and to allow the development of as wide a
competitive marketplace for electricity as feasible. If the electricity
market is balkanized, consumers will not enjoy the full benefits of
competition.
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\3\ An essential facility is an input to which all competitors must
have access on reasonable terms if they are to be able to compete in
the market.
---------------------------------------------------------------------------
While ISOs are viewed by many as more feasible and desirable to
implement in the near term, some form of Transco may be more effective
in operating and expanding the transmission system over time because,
if regulated appropriately, the incentives facing these businesses may
be more conducive to efficient operation of and investment in the
transmission infrastructure.\4\ In any event, the structure and
governance of ISO's and Transco's are likely to adapt and change over
time, in ways that cannot be completely anticipated up-front and
therefore policy makers should expect that competition and deregulation
will be a long term process and that changes and adaptations are likely
in the area of transmission operation and governance.\5\ Therefore,
highly prescriptive solutions are inappropriate at this stage of the
process.
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\4\ While ISOs will operate transmission systems, they would not
own transmission assets and therefore may find the actual upgrade and
expansion of the transmission network to be a challenging task.
\5\ Clifford Winston insightfully points out that ``Economic
deregulation does not happen overnight. It takes time for lawmakers and
regulators to dismantle regulatory regimes, and then it takes more time
for the deregulated industries to adjust to their new competitive
environment. . . . Deregulation is a long-term process from which
society will continue to reap benefits as firms continue to adjust to
free market competition and as more industries are more fully
deregulated.'' Clifford Winston, ``U.S. Industry Adjustment to Economic
Deregulation,'' Journal of Economic Perspectives, Summer 1998, pp. 89-
110.
---------------------------------------------------------------------------
For the state regulated distribution ``wires'' business, where
ownership of the distribution wires remains part of the vertically-
integrated utility business, the transmission and distribution systems
will also have to be functionally separated from the operation of
competitive generation and retail services. In particular, regulation
must ensure that the competitive functions do not receive preferential
treatment from the regulated functions. Under the traditional
regulatory and industry structure, regulators have developed policies
to address affiliate relations issues--and these approaches will need
to be adapted in order to address functional unbundling issues as
electric restructuring progresses.
iii. comments on proposed bills
Some provisions of the proposed bills are quite sound and are
likely to provide benefits for consumers. The focus of this testimony,
however, is to discuss those aspects of the proposed bills, with an
emphasis on the Administration's Comprehensive Electricity Competition
Act (``CECA'') and the Markey-DeLay Electric System Reliability Act of
1998 (``Markey-DeLay''), that could harm rather than help consumers. My
point of departure is that policy makers should rely on markets to
reveal consumer preferences and provide incentives to competitors.
After all, a primary strength of markets (and the main reason for
relying on them instead of regulation whenever and wherever possible)
is their ability to efficiently discover what consumers want and
effectively respond to consumer demand.
A. Generation Should Be Treated Like Any Other Competitive Business
Once Necessary Markets And Institutions Are In Place
Open markets should become the major source of protection for
consumers except where monopoly arrangements are deliberately continued
(e.g., the wires portions of the business). Energy utility regulators
should withdraw from detailed oversight once they have opened entry
into formerly regulated markets because such regulatory oversight is
likely to become unnecessary and even counterproductive as competition
unfolds. The Administration's bill, for example, goes too far in
authorizing FERC to remedy market power in wholesale and retail
markets. FERC should focus on ensuring that open-access,
nondiscriminatory transmission service is available so that actual or
potential entry into generation markets can act as a check on the
behavior of competitors in generation markets. Attempting to remedy
market power may have been a part of FERC's historic regulated industry
responsibilities, but the goal is to make the electricity marketplace
more like that for other commodities and services. If intervention is
necessary to address market power issues, the established agencies for
the purpose should be relied upon.
The introduction of wholesale and retail competition for the
electricity commodity is likely to increase efficiency in the
production and sale of electricity--perhaps somewhat modestly in the
short term, but much more substantially in the longer term-as market
processes displace the heavily regulated, central planning oriented
procedures used by utilities and most regulators until very recently.
The evidence available from other industries to date suggests that as
regulation's role recedes, innovation and dynamic efficiency get a
significant boost. Ultimately, that is the long-term wellspring of
customer benefits.
This view suggests that there will be a continuing--albeit
changing--role for regulation of those aspects of the transmission and
distribution businesses as long as they retain natural monopoly
characteristics. But the generation business should become a
competitive business, subject to the same oversight as other
competitive businesses.
B. State Regulators Have (Properly) Relied Primarily on Functional
Unbundling to Address Vertical Market Power Issues
The role of regulation will change as electric restructuring
continues. An important ongoing role of regulation will be to oversee
the conduct and performance of regulated firms, who may also compete in
competitive markets, either directly or through affiliates. While the
role of regulation will change as competitive electricity commodity
markets emerge, experience in the telecommunications and natural gas
industries indicates that a primary reliance on accounting and
behavioral rules--supplemented, as needed on a case-by-case basis, by
structural safeguards--can adequately address vertical market power
concerns.
When a utility's energy marketing affiliate operates in the
utility's service territory, there are two broad areas of legitimate
regulatory concern. The first is the utility's control over the
transmission system, to which potential competitors must have access if
they are to reach their customers. Recognizing the key role of the
transmission system, the FERC directed utilities to create open access
tariffs in Order No. 888. Regulators, utilities and others are in the
process of designing a framework for transmission that should offer
effective means to remove utilities' opportunities to leverage their
ownership of these facilities and to foreclose upstream rivals from
downstream markets, while preserving reliability and a foundation for
the development of an efficient competitive electricity market. Major
federal issues, as yet unsolved, are how to price transmission so that
it supports efficient and competitive markets, and second, how to
ensure that the appropriate investments in transmission are made to
provide a firm basis for future competition. The FERC is not without
important problems to solve.
The second concern, access to the distribution system, is the
province of state policy makers and regulators. Each state
restructuring plan must address these issues through unbundling and
related requirements. Particularly important for state regulators is
overseeing the unbundling of rates. A final concern is that, without
proper regulation, the utility might be able to shift costs from the
unregulated portion into the regulated portion of its business, and
recover those costs through regulated rates. Major issues in this
process, yet unsolved, are how to price transmission so that it is used
efficiently to support competitive markets, and second, how to ensure
that appropriate investments in transmission are made to provide a firm
basis for efficient competition in the future.
Appropriate accounting controls and codes of conduct to govern the
relationship between the parent utility and its marketing affiliate are
necessary. Such codes are being designed and implemented in many
states. For example, in Order No. 888, FERC concluded
In light of the competitive changes occurring in today's electric
industry, we believe that the only effective remedy is non-
discriminatory open access transmission, including functional
unbundling and OASIS requirements, and that it is within our
statutory authority to order that remedy. (P. 114)
However, in some jurisdictions, proposed affiliate rules are likely
to do more harm than good, because they go too far. Many proposed
policies will force consumers to bear the cost of increased regulation
and to forego the benefits of scale and scope economies that the new
regulations would sacrifice. Proposed regulations should be subjected
to an incremental cost-benefit test. When contemplating the possibility
of structural restrictions on top of codes of conduct and accounting
controls, the proper comparison is whether the additional protection
gained outweighs the foregone benefits of increased scale or scope
economies. The fact that some regulation is necessary and beneficial
does not mean that more regulation is always better. Indeed, a
significant reason behind the shift to greater reliance on markets is
that we have had overly extensive regulation of industry operations.
C. Policy Makers Should Not Dictate Industry Structure
An essential element of a competitive market is that any firm
wishing to enter the market can do so bringing with it whatever special
capabilities or resources it may apply to the task of serving
customers. By this process the efficiencies associated with scope and
scale are discovered and realized. Only by relying on markets in which
inns are free to make decisions about what to produce will this
discovery take place. The 1997 Economic Report of the President noted:
An insufficiently appreciated property of markets is their ability
to collect and distribute information on costs and benefits in
a way that enables buyers and sellers to make effective,
responsive decisions. As tastes, technology, and resource
availability change, market prices will change in corresponding
ways, to direct resources to the newly valued ends and away
from obsolete means. It is simply impossible for governments to
duplicate and utilize the massive amount of information
exchanged and acted upon daily by the millions of participants
in the marketplace. (p. 191)
Over-reliance on structural and behavioral restrictions short
circuits that process, and thereby forces society to forego the
benefits of the lower incremental costs that can be achieved through
resource sharing. Where regulated inns are involved in these processes,
regulations preventing anti-competitive behavior are necessary and
protections for captive ratepayers remain appropriate. But the
protection can and should be accomplished without unnecessarily
sacrificing available economies.
D. PUHCA Should Be Repealed
Intensive regulation of public utility holding companies is no
longer needed and therefore the Public Utility Holding Company Act of
1935 (``PUHCA'') should be repealed. The legislation approved by the
Senate Banking Committee, which is incorporated into the
Administration's bill, provides a generally reasonable approach
regarding the repeal of PUHCA. Repealing PUHCA is appropriate because
it is no longer needed and is actually acting to slow the competitive
transformation and recapitalization of the electric and gas industries.
As part of the repeal of PUHCA, CECA would expand FERC's and the
states' access to the book and records of the holding company and its
regulated utility affiliates. This approach is generally appropriate
because FERC and the states can use this information to identify cross
subsidization and cost shifting issues that would cause regulated
utility customers to pay excessive rates for regulated services. I am
concerned, however, that CECA's approach goes too far in giving FERC
and the states access to the books and records of non-utility
affiliates of the holding company that compete in competitive markets.
I do note that CECA provides for ``exemption authority'' that the FERC
could use to exempt certain non-utility affiliates from the ``books and
records'' requirements, but am still concerned the FERC not be enabled
to explore in non-regulated, competitive areas. Focusing on the books
and records of the utility holding company and its regulated affiliates
is clearly appropriate and CECA should reflect this principle.
E. Enabling Competition is Desirable, Creating it is Not.
Once consumers are able to choose their provider of electric
generation services for themselves, consumers will have the opportunity
to make choices that formerly were made by utilities and/or regulators.
There is a limited but important role for government interventions
aimed at reducing the search and information costs for consumers.
Requiring information disclosure, such as the equivalent of product
labeling, by identifying the fuel mix of the power that they are
aggregating or generating is one example.
Policy makers should focus on information disclosure and essential
facility pricing issues. This provides a basis for competitive markets
to develop naturally. By contrast, regulators should avoid overly-
prescriptive policies, such as ``competitive auctions'' of retail
customers that ``choose not to choose.'' While `auction'' or
``competitive bidding'' processes can very effectively identify the
market price at a point in time, these processes are not necessarily
effective in identifying a price that makes sense over a period of
time. Thus, auction prices could quickly become substantially out of
date if energy prices, inflation, or interest rates were to change. In
contrast, setting the ``shopping credit'' based on wholesale
electricity costs, adjusted to reflect the costs the utility avoids as
a result of it no longer providing ``aggregation'' services to
customers that shop, could reflect dynamic changes in market
conditions. This, in essence, is the approach that California uses and
is preferable to ``competitive auction'' processes or administratively
determining the ``shopping credit.''
F. PURPA Should Be Repealed and Renewable Standards May Not Be Needed.
I favor repealing the Public Utility Regulatory Policies Act of
1978 (``PURPA''), especially with respect to the ``must-buy''
provisions of Section 210. While PURPA surely played an important role
by providing a ``gateway to entry'' for some non-utility generators
during a period when the barriers to entry into the generation market
were high, this ``leg up'' carried a very high price tag and is no
longer needed. Therefore those provisions of PURPA should be repealed.
Of course, this should not affect existing contracts.
I also recommend caution when considering CECA's federal renewable
portfolio standard. In a competitive market, some proportion of
consumers are likely to prefer purchasing ``green'' electricity (e.g.,
electricity generated from solar, wind, geothermal, or biomass
sources). Some early evidence in Massachusetts, where retail choice has
generally been stalled due to mispricing, is encouraging in this
respect. In several pilot programs, green power has been selected by a
significant number of customers. Given the potential attractiveness of
electricity generated from renewables, I see no reason to artificially
skew the choices available to consumers by mandating their use. I would
also caution that it will be difficult to establish a renewable
standard on a national basis given the considerable differences among
regions; for example, a particular renewable standard might be
relatively easy for some states (say, Maine, where I live) to meet,
while the same standard could be difficult and costly to meet in other
parts of this country.
G. Competitive Parity Among Market Participants
It is very important that all utilities and new entrants should be
treated in as symmetrical a manner as practicable. Efficient
competition requires that all incumbent and prospective firms be given
equal opportunities to compete for customers. This means that new
entrants should have the same opportunities as incumbents to succeed
while, at the same time, incumbents are not unduly restricted in their
market activities.
As formerly regulated utility markets become competitive, it will
become increasingly important that all utilities, regardless of
ownership form and tax status, compete on a level playing field. Going
forward, it will also be very important that all utilities, whether
they be investor-owned, municipally or publicly owned, or cooperatives,
be able to compete with all other competitors on an equal-opportunity
basis. The Administration's bill begins the process of moving toward
competitive parity and symmetry among different types of utilities. For
example, CECA would: (1) amend the IRS codes to prohibit municipalities
from issuing tax exempt bonds for transmission and generation; and (2)
extend FERC transmission jurisdiction to currently non-regulated
utilities. Thus, CECA provides a good starting point in leveling the
playing field among different types of electric utilities.
iv. policy objectives in electric industry restructuring
The main public policy reason for restructuring the electricity
industry and allowing the entry of competitive providers of generation
is to enhance consumers' welfare. The criterion for evaluating
restructuring policies should be the impact that these policies have on
consumers. Unfortunately, it is all too easy to lose sight of consumers
in the policy making process. There can arise a point at which policies
become ``pro-competitor'' rather than ``proconsumer.'' The assumption
that what is good for competitors (read: new entrants) is good for
consumers is a common error, but it is a bad principle on which to make
policy. Policy makers should formulate their electric restructuring
based on the following objectives:
A. Consumer Benefits Should Be the Primary Criterion for Judging
Competition Policies
The appropriate test for competition policies is whether or not
they lead to benefits (lower prices, better quality, service
innovation, etc.) to consumers, and not whether one or another
competitor benefits from their adoption. As a former regulator, I would
emphasize that the focus should always be on the consumer and whether
or not consumers experience real economic benefits from a particular
policy.
B. Policy Makers Should Focus on Providing Openness for New Competitors
and Enable Choice for Consumers
Policy makers must provide openness in generation markets so that
choice is available to consumers. If policy makers focus primarily on
providing openness and choice for consumers, they will find that they
need not prescribe precisely how the market will develop instead
markets would be used to discover consumer preferences and wants, as
well as optimal industry organization.
Electricity markets that have previously been closed to consumer
choice by franchise or similar regulation must be legally opened, so
that competitors can provide their products and services to consumers
where they believe that profitable market opportunities are present.
Among the firms offering their services should be the incumbent
electric utilities, so long as the regulated utility's operations
continue to be regulated so that competitive activities are not cross-
subsidized and do not have inappropriate access to information as a
result of its affiliation with a regulated utility. Once openness and
choice is present, the generation business should be treated in the
same ways as other competitive businesses, i.e., through antitrust
oversight by the Department of Justice, the Federal Trade Commission,
and related state agencies.
C. The Dynamic Benefits of Competition Cannot be Fully Anticipated Up-
front
Markets encourage the relentless search for efficiency that is
essential to competitive success in global markets, and also provide
the means to discover what consumers really want. Markets reward
innovation--the search for and discovery, development, adoption and
commercialization of new products, services, organizational structures,
processes and procedures--that meets market demand. Successful market
innovation requires risk taking, research, experimentation, and
testing. Needless to say, for every innovation that is successful in
the market, there are many ``dry holes'' and ``blind alleys'' that fail
to meet the market test. This can apply to incumbents as well as new
entrants.
Market structures should evolve through customers' demands and
firms' responses to them, not by statutory or regulatory planning and
design. If regulators succeed in creating an effective open-access
competitive environment, then those firms which are most efficient at
attracting and meeting the needs of consumers will be successful. Even
more importantly, consumers will be able to get the products and
service that they want at favorable prices. But the real economic
benefits of increased economic efficiency will only come as firms
reorganize their structures and operations. This takes time--and some
patience on the part of policy makers and regulators.
On the other hand, if markets are not efficiently opened to entry,
no amount of handicapping the incumbent, or giving a leg up to
entrants, will guarantee a more efficient result for consumers. Indeed,
the success of less efficient providers is more likely. That outcome
would be the antithesis of what the drive to open markets to consumer
choice is all about. In short, policies that strive to enhance the
efficiency of the competitive process will be helpful, while policies
that directly influence specific industry structures and outcomes will
not, and should be avoided.
Dynamic, flexible, and practical regulation is needed during the
transition to efficient competition in generation markets. There is no
direct path from ``regulation'' to ``competition.'' Policy makers and
regulators are up to the task of providing a flexible and practical
transition to a restructured electric utility industry but must become
more effective at triage--by identifying and addressing the truly
important issues (e.g., providing openness and choice for consumers),
and not get bogged down in designing the specifics of future markets.
D. Policy Makers and Regulators Should Allow the Efficiencies that
Vertically Integrated, Multiproduct Utilities Can Provide To
Benefit Consumers
Electric utilities have traditionally been organized as vertically
integrated, multiproduct firms because it has facilitated coordination
of the generation, transmission, distribution and sale of electricity.
As vertically integrated firms, utilities have traditionally provided a
single bundled utility service. An electric utility's primary product,
for example, has been the bundled utility service that it provides to
its retail customers, rather than the variety of potentially separate
services that comprise basic utility output. Electric utilities have
often provided a variety of incidental services to customers (e.g.,
appliance sales and service, fiber optic installations, trenching
services, high-voltage services, etc.), that could either be purchased
from the utility or from a non-utility provider. In short, vertically
integrated electric utilities have been multiproduct firms for many
years. Now, with increased competition emerging, policy makers and
regulators must search for ways to maintain or replace the economies
that have resulted from vertical integration while accommodating
efficient--and ``fair''--competition.
Many aspects of a utility's or a utility affiliate's participation
in competitive markets raise controversial issues, and an appropriate
mix of regulatory affiliate standards, accounting and cost allocation
procedures, and behavioral codes of conduct can be used to address
these issues. Only in relatively rare cases, would structural
solutions, such as divestiture, be needed, and should only be used if
less intrusive approaches fail.
E. Policy Makers Should Not Tilt the Competitive Pressures that Firms
Face
Reliance on competitive markets is based on the principle that
firms that can produce most efficiently (based on forward-looking
costs), and bring the most value to consumers, should (and will)
prevail. Thus, a real economic advantage in satisfying the needs of
consumers possessed by one competitor, but not by others, is not anti-
competitive. It simply reflects the different skills and endowments
that each and every firm brings to the market, including differences in
their overall cost of doing business. In competitive markets, firms,
like people, are not just peas in a pod. Moreover, one of the most
important lessons of competitive markets in other restructured
industries is that today's advantage can be a fleeting phenomenon.
Success either in entering the market, or in retaining any existing
market share, is not guaranteed.
Policies that distort the competitive pressure faced by some firms
would weaken the efficiency of competition. This might be good for some
competitors but would raise the prices paid by consumers and would
reduce social welfare. Policy makers should seek to promote consumer
welfare via efficient competition, and should be careful not to
artificially promote the competitive interests of any particular
category of competitors. Pro-consumer policies provide strong
incentives for efficiency, which benefits consumers (by providing low
prices) and society (by encouraging efficient use of resources).
Policies that artificially limit the competition faced by some firms
would weaken the robustness and efficiency of competition and would
thereby allow competitors to earn economic rents. This might be good
for the ``competitors'' but would raise the prices paid by consumers
and would reduce social welfare.
F. Consumers Need to Be Protected from Unfair Practices
Regulators continue to have a legitimate role in protecting
customers from deception and other unfair practices. Early evidence
from unbundled energy markets is that some residential customers can be
vulnerable to fraud. Slamming and cramming are also problems consumers
may face as firms compete vigorously for business. Safeguards will be
important here. Finally, improving consumers' access to information on
the choices that are and will be available to them is an important part
of consumer protection.
v. conclusion
Providing openness (ease of entry) and choice for consumers is
critically important. Where entry is easy, incumbent firms will be
unable to exercise market power, and where entry is artificially
difficult (or impossible) they may well be able to exercise market
power to the detriment of customers.
Most critical to facilitating competition in generation and
retailing is ensuring that the regulated wires--clearly essential
facilities at the present time--are available on reasonable terms to
all buyers and sellers in the newly opened market. Regulators will
continue to have a critical role in ensuring transmission and
distribution access, and there must be appropriate and continuing
oversight. Once legal barriers are removed, and an appropriate
regulatory structure for the wires monopoly is achieved, the major
elements necessary for competition to ensue are in place. From that
point on, competitors' claims of inequitable treatment or unfairness
require an empirical demonstration and should no longer be taken at
face value.
Mr. Barton. I want to thank you for your testimony. I did
again scan all your testimony last evening, and so the fact
that I wasn't here for most of the verbal summary doesn't mean
that I haven't looked at it, and I am very appreciative of it.
The Chair is going to recognize ranking member Mr. Hall for
the first 5 minutes of questions.
Mr. Hall. Mr. Chairman, thank you. Mr. Kanner, your
testimony seems to conclude that States can't deal with market
power problems on their own and that some Federal authority and
Federal intervention, Federal oversight, are absolutely
necessary. Is that your position?
Mr. Kanner. That is correct, Congressman Hall. Your State
of Texas is in a unique position where, with the ERCOT system,
the market is defined by the different system, and the bill
pending in your legislature includes a number of provisions to
deal with market power, including pretty effective tools that
don't require divestiture. But that is a unique situation. In
most States, the market is much bigger than that single State.
Mr. Hall. Well, maybe I ought to ask Mr. Kahn, but is that
bill going to pass in the Texas legislature?
Mr. Kahn. You probably know what the Texans are doing
better than I. The only thing that I would like to add to that
is that----
Mr. Hall. No, they don't like Federal intervention down
there.
Mr. Kahn. No, they certainly don't, not in Texas; but I can
state that our PUC only has control over what the regulated
side of the business does. They don't have any control over the
unregulated affiliates.
Mr. Hall. Well, I get back to Mr. Kanner, if he thinks--do
you think the States that have already adopted retail
competition plans have just missed the boat with their
legislation or what position are they in now? Texas still has
it in front of them. Are you telling me something different,
that it is simply beyond the State's ability to accomplish, and
why?
Mr. Kanner. Some of the States did address it to a certain
extent. Some States looked at divestiture of generation, but
that was normally used as a tool for valuing assets for strand
cost determination, not specifically to address market power.
Although, again, there are some exceptions.
It is largely outside the State control for a couple of
reasons. One, once they establish retail competition they no
longer have control over those generating assets. They are not
rate regulated anymore.
Second, the transmission system is multistate in nature and
regulated by FERC; and in many cases, the party that has the
potential to exercise market power can be located outside the
State's boundaries. So a State act says we want retail
competition, and it is an entity located two States over. That
is the, quote, ``offending party.''
Mr. Hall. You oppose the stand-alone PUHCA repeal, don't
you?
Mr. Kanner. Correct.
Mr. Hall. Does PUHCA have some harmful effects on the
marketplace? Do you agree or disagree with that?
Mr. Kanner. Well, I would agree that the tools that PUHCA
establishes don't correspond perfectly to today's fact
situation.
Mr. Hall. Is the harm more to consumers or to companies who
are constrained by the statute?
Mr. Kanner. My own personal view is that the constraints on
the companies are not overwhelming. I think we can come up with
a better structure for looking at it than PUHCA currently has,
but I don't think the constraints are overwhelming.
Companies can build generation facilities under the EPAct
provisions anywhere in the country. They can invest overseas.
They can get into a number of different business lines under
the SEC standards. So I don't believe the limitations are
excessive or inappropriate.
Mr. Hall. Mr. Gordon, I think I gleaned from some of your
statements that the administration's bill goes too far in
authorizing FERC to remedy market power in wholesale and retail
markets; is that right?
Mr. Gordon. Yes, I think that is probably not necessary.
Mr. Hall. And what effect would the administration's bill
have on competition, and could the new FERC's authority on
divestiture and on original transition groups backfire on them?
Do you think it will?
Mr. Gordon. Do I think it will backfire? I think it simply
is unnecessarily intrusive in a process. That as long as the
transmission end of it is dealt with properly and the antitrust
authorities maintain the oversight that they can, I think the
simple thing is you don't need to go beyond that.
Mr. Hall. All right. Mr. Chairman, I want to ask for a
unanimous consent, if I might, that statements by interested
parties that have asked me to put something in the record, that
we be allowed--that are not witnesses, be included in the
record, if we submit them to you timely.
Mr. Barton. Subject that we need to make sure that they are
pertinent and germane to the hearing. You know, all these
adulatory----
Mr. Hall. Adulterous?
Mr. Barton. No, no, no. All of these very favorable
telegrams from your constituents may not be rendered relevant
to the record, but if it is relevant to the record, we will put
it in by unanimous consent.
Mr. Hall. If they brag on you, it is the same telegram,
though.
Mr. Barton. Well, that is probably relevant to the record
then.
Mr. Hall. Let me go out and come in again. If I have
statements that we think are pertinent, that need to be in the
record, I ask unanimous consent that they be entered.
Mr. Barton. Yes, without objection.
Mr. Hall. I yield back.
Mr. Barton. Gentleman from Oklahoma, Mr. Largent, is
recognized for 5 minutes.
Mr. Largent. Thank you, Mr. Chairman. Mr. Kanner, I wanted
to ask you, should the FERC have the authority to order
divestiture?
Mr. Kanner. We do adopt in our model legislation the
delayed market provision that gives FERC that authority. I
point out, though, Congressman Largent, that it is the club in
the closet that's the last resort that we frankly don't expect
would be needed to be used, that the first conditions would be
FERC requiring a party to participate in the regional
transmission organization or denying market-based rates if
there is not a competitive marketplace, and only if those tools
were insufficient would it have that divestiture authority. And
frankly, I think that authority is there so that the company
says, all right, you won't give me market-based rates, I need
to come forward with my own mitigation plan. I know the club in
the closet that you have, so here is what I am going to do.
Mr. Largent. Is FERC authority to order divestiture--is
that something that is going to be critical only during the
transition period or principally during the transition period
so that if we had to do something, if we had to put divestiture
in, it is something we could sunset after, say, a period of 3
or 4 or 5 years.
Mr. Kanner. I believe mostly likely it would be something
only used during the transition period. The question of in
terms of sunsetting is if in some way there was a
reconstitution that somehow escaped review, would you want that
authority there? But our expectation is that these are
transition mechanisms that allow us to get to and then sustain
that competitive market.
Mr. Largent. Now, Mr. Gordon, in your testimony you said
that we just need to make sure that there is open access,
thereby it produces a competitive marketplace and then just
allows the market to work.
Mr. Gordon. That would be my starting point. I do think
that getting a transmission truly available to everybody on an
exactly equivalent basis is the core to making this market
work. An ISO attempts to do that. Various versions of so-called
transcos also attempt to do that, perhaps in conjunction with
some kind of an ISO that hasn't been completely worked out yet.
And that is the way I would think we need to go. It amounts to
functional unbundling of the transmission.
The question of whether you need to go beyond that and
actually separate it legally is something that I actually have
a somewhat similar position on. I don't think so. If it should
prove that ISOs don't work or are somehow insufficient, then I
might be prepared to go to that stage because I do think that
is critical.
I would also say in passing that once control over
transmission that you own has been taken away from you,
effectively, so you can no longer use it as a strategic
resource, I have to wonder why the board of directors would
still be interested in having it.
Mr. Largent. Yeah. That is a good question.
Mr. Kahn, I wanted to ask you a question about this issue
of cross-subsidization. You probably have not had an
opportunity to read Utility.com's testimony. I did. And in
there it talks about one approach is to allow utilities to use
their names or branding for unregulated competitive affiliates,
provided they disclose clearly that those affiliates are not
the same as the regulated utility, operate completely
independently, keep entirely separate accounts, and obtain no
financial benefits from the regulated entity, including credit.
Would you find that palatable?
Mr. Kahn. Well, I appreciate all of those other caveats.
Name recognition in my industry is one of the things that I
most possess. If I were to sell my business today to that
particular utility, what they would be buying is my name and my
customers. That is all I have. Skills are obtainable. So, yes,
that would be a problem for me.
Mr. Largent. Would that be a show stopper for the
contractors?
Mr. Kahn. I can assure you that for the independent
contractors it would, only from the standpoint that 12 times a
year I get an opportunity to write a check to that company. I
know that company intimately, and namesake and logo is
something that is a very valuable thing in my industry.
Mr. Largent. Even with the transparency in the pricing and
with the separation of the books and there is absolutely no
cross-subsidization, you just have goodwill that is cross-
subsidizing now.
Mr. Kahn. I appreciate the fact that you could put fine
lines on there. I can read fine lines in a McDonald's coffee
cup that says the coffee is hot, but that lady still got money
in her pocket when she spilled it in her lap.
Mr. Barton. Would the gentleman yield on that?
Mr. Largent. Yeah.
Mr. Barton. But if you take your position, you are in
effect saying that somebody who has gone to the time and the
difficulty and all of the hard work to develop a brand name
identity, can't make use of it. And I personally don't think
that is fair.
Mr. Kahn. No, I agree. But that the fact brand name
identity was contrived with monopoly power, that is my
perspective. They had the advantage of all of these years to
have contrived that name.
Mr. Barton. But the point is that we are looking
prospectively, and how they obtained it. We can't hold it
against them forever that in the time period that they obtained
their brand name, everyone was monopolized. I mean, that is the
way the world was for the first hundred years.
Mr. Kahn. I guess one point that was just brought to my
attention again, the utility is certainly not going to be
prohibited from using that for their own purposes. What we are
talking about is in these unrelated businesses, these arms-
length businesses.
Texas Utilities has never been in the air conditioning
business before. Now that they want to go into that business,
that is fine. I have no problem competing against them. Why
should they be able to take advantage of the name ``Texas
Utilities'' to beat me over the head?
Mr. Barton. If we literally listen to your interest group
on this issue, your position is probably unconstitutional
because as long as we put all the caveats that Congressman
Largent that, you know, you can't have credits, and it has to
be totally separate arms-length transaction. I don't see how
you can prohibit somebody from licensing the use of their name.
I know where you are coming from, but I just don't see how you
can----
Mr. Kahn. [continuing] Justify that point? Again, I was
reminded, ACCA, my trade association, has done some analysis on
the benefit of namesakes; and I would be happy to get you the
information about that.
Mr. Barton. The gentleman's time has expired but I took
some of his time.
Mr. Largent. I just have one follow-up question, and that
is, the issue of just allowing the State PUCs, who are already
enacting codes of conduct, and then you got antitrust relief,
which I know could be very costly and time consuming for the
guy that has got, you know, he is his only employee; it is a
family business.
I understand that, and I am sympathetic with that argument;
but in reality, couldn't the States really develop these codes
of conduct and kind of the rules of play on a State-by-State
basis and we not do anything at the Federal level?
Mr. Kahn. Well, you bring up two different points there.
First, I appreciate your sympathy on the antitrust issue, that
for me, 21 employees, man, I am lucky to get here to
Washington. It is tough enough to run an air conditioning
business, much less prosecute an antitrust case against a
utility company.
With regard to the crossing State lines issue, I really
have to go back to my point that the States have control over
what that regulated arm does within their State. As soon as
they move to Oklahoma, for example, what is the Texas Public
Utility Commission going to do to enforce what happens in
Oklahoma?
Mr. Largent. Well, they won't, but Oklahoma will. What I am
saying is rather than you coming and making your case in
Washington, DC, which I know is the easiest way to do this
because you can do kind of a one-size-fits-all and it will
cover all fifty States--you only got to lobby one place and
that is here--you are going to have to lobby in fifty States,
and so you may lack a certain uniformity from State to State,
and that creates a problem; but again, we are not stepping on
the States. But you will have effectively, your trade
organization and members of it in those individual States, will
have the opportunity to lobby their individual----
Mr. Kahn. And we have obviously. But again, when a
competitor from outside of my State comes into my State, what
power does my State have over that unregulated business?
Mr. Barton. Gentleman's----
Mr. Largent. I was just going to say, when they are doing
business in your State, they would have regulatory authority.
Mr. Kahn. Not the PUC.
Mr. Barton. You all can continue this conversation in the
cloak room.
Mr. Largent. Thank you, Mr. Chairman.
Mr. Barton. The gentleman from Ohio is recognized for 5
minutes.
Mr. Sawyer. Thank you, Mr. Chairman.
Mr. Gordon. Could I follow up?
Mr. Barton. Let us go on, if you want to allude to that,
and give Mr. Sawyer his time.
Mr. Sawyer. I was going to give him some time, but I have
to tell you, it reminds me of Roger Penske, who was a great
racing driver in his youth and a great owner throughout most of
his adult life, and he was asked what he attributed his great
success to and he said the ability to read the rules. What do
you mean? He said it is where I can find an unfair advantage.
And the truth of the matter is, I mean that is what we are
all struggling for here is we talk about level playing fields,
and yes, that is the least we will accept; but what we would
really like in our heart of hearts is an unfair advantage.
I really want to--I am sorry Mr. Largent left because I
think he really hit squarely on the button. Some of the
difficulty with goodwill--that goodwill exists in a rate-of-
return regulated obligation to serve--service territory, and as
soon as you move beyond, that really doesn't exist in the same
terms; and even the terminology with which we construct this
unfair perception is grounded in a previous era.
When we talk about rate payers being forced to pay to
subsidize, they are not rate payers. They are customers who
aren't being forced to choose anybody. They can really go and
choose in a far more open market if that is, in fact, the idea.
Having said that, I tend to support the idea that we don't
want to have unfair cross-subsidization, but that is extremely
difficult to do. And we need to think through with great care
how each of the States can look at the internal financial
workings of the companies involved so that they can determine
where that cross-subsidization exists. I would be very
reluctant to see that done on a Federal level just because of
the size and magnitude of all of that.
I just want to make an observation. I was really intrigued
by Commissioner Thompson's comment about how distribution
facilities yield monopoly power without resorting to
uncompetitive practices, and it seems to me that the testimony
we had among our last two commentators really got--had some of
that.
Mr. Rose, welcome from Columbus. At some point I hope you
can illuminate what, in fact, is going on in Ohio
restructuring. Texas, I think, looks transparent by comparison
to the meetings that have been going on in Ohio.
Mr. Rose. I should say I have been working with the Ohio
legislators--and I am not speaking for them as well--but we
have a contract to help them develop this year's legislation as
well as last year's as well.
Mr. Sawyer. And maybe next year's.
Mr. Rose. And next year.
Mr. Gordon. Could I add I have also testified in Ohio on
these issues, and treatment of codes of conduct in Ohio, as in
other States, is fairly extensive. Logo issues, affiliate
transaction issues, cross-subsidy issues are the subject of
intensive examination, and I think the home State regulator for
whatever the utility is will be likely to be quite alert to any
cross-subsidy that may be attempted.
Mr. Sawyer. Let me go back to the last comment that you
were both addressing with regard to distribution and access to
real choice among providers.
Mr. Rose, you have championed the notion of putting
together lotteries so that customers who did not make an
affirmative choice would be distributed among potential
providers. Mr. Gordon, you sounded like you opposed that.
Mr. Gordon. You picked the right pair to address your
question.
Mr. Sawyer. I guess my question comes down to again a
question of market power. I would like you to discuss this, but
I particularly would like you to concentrate on deciding on who
gets to be in the lottery. Among those who are potential
providers, what thresholds for being eligible you would have to
meet, or do you simply have to register? If I have made no
effort, do I simply get to gain market access by filling out a
form, or do I have to qualify in some way?
Could we just take a moment to have a brief conversation
between these two on that topic?
Mr. Rose. Let me, first of all, just correct one thing.
What I would favor is actually an auction where anybody who is
qualified would participate in the lottery, is preferable to
doing nothing in my view, which is somewhat similar to what FEC
did in the mid-'80's after the AT&T breakup and that Georgia is
now going to do for its gas utilities, which is a random
assignment of customers.
The way the random assignment works is that in order to
qualify for any allocation of those nonchoosing or default
customers or provider of last resort, they all have different
names in different States. The way that is allocated is based
on your market share of those customers who did choose, or in
the FCC case it was a market share of those customers who did
choose, and the Georgia case it is the market share of the
whole market, which has different ramifications obviously for
whether that favors the incumbent or whether it is favors the
new entrants.
But that is how you get in. You have zero market share,
then you don't get anything, and presumably there is some kind
of a threshold that anybody has to have almost on every
program, and every State has this. And let me add, too, this is
purely a State issue in my view. This is not a Federal issue,
this is something that every State has to look into and decide
for themselves.
Mr. Sawyer. That was going to be my last question.
Mr. Gordon. My objection to it is that it basically short-
circuits the market. It doesn't necessarily offer a better
service. And it also doesn't rely on consumer choice, which I
think is the linchpin to all of this. Consumers won't all
change instantly, but they will change as they learn and as
they are offered better deals. That generates the real
benefits.
That is what electric restructuring was all about in the
first place; real investment, doing things better, figuring out
a better bundle of services. All of that has to be done to
generate any real improvement in economic welfare. Otherwise
you are just shifting customers around to different people.
That does reduce concentration but it misses the point of the
competitive process.
Mr. Rose. Let me respond to that, it is very important----
Mr. Barton. The gentleman will have to claim the time here.
Mr. Rose. [continuing] nobody is taking the customer away
from anybody and no customer at any time is being assigned to
somebody they don't want. And in the FCC example customers got
a warning that they would be placed in this random allocation
if they didn't choose. That spurred a lot of people to decide.
If I recall correctly, that is when I picked my long-distance
provider.
The other thing is that it was one free switch back, so if
I got assigned to a provider I didn't like, I can go back, it
didn't cost me anything. So nobody is ever forced to be with
anybody.
I realize that has been in Ohio. I am very sensitive to
this because we are fighting this battle right now. It has been
grossly mischaracterized, the auction procedure that is in
there, in the Mead-Johnson proposal this year, and it is also
very different than last year, by the way.
In this case, now the customers would never even know who
is supplying the kilowatt hours to them. It is not like last
year where they would. There is no direct interface. It is
looking at 10 percent loads of the default customers. They are
getting allocated. The customers still sees their bill from the
company that sends them the bill today.
Mr. Sawyer. In large measure, would you both then agree
with the notion that although Mr. Thompson's observation may
have some merit, that it is most appropriately a State issue
when it comes to questions of distribution?
Mr. Rose. Yes, I agree.
Mr. Gordon. I agree with that.
Mr. Sawyer. Thank you, Mr. Chairman.
Mr. Barton. It is a strange feeling when the witnesses
outnumber the members by about 3 to 1. We have got to be
careful here.
I have a 1:30 meeting with one of the commissioners on the
Nuclear Regulatory Commission. So I am going to recognize
myself for a few questions and then turn it over to Mr. Burr.
The left end of the panel as I look at it, I don't want you to
all to feel unloved that all the questions have been down here.
I want to ask Mr. Rogers a question. Do you think that the
FERC should be given the authority to require transmission
owners to join ISOs?
Mr. Rogers. My judgment is, RTOs are very important to
creating a robust wholesale market, and that the FERC's
authority should be clarified in this area. And that is
critical, I believe, and consistent with the underlying policy
of the Energy Policy Act of 1992.
Mr. Barton. Are you for a FERC mandate or for more of a
voluntarily incentivized system?
Mr. Rogers. I am more for incentives, but I am also for
conditioning authority. I think there are circumstances because
where they may recognize market power as a result of a merger
or some proposal that they have to approve, I believe the
commission should have the authority to condition the approval,
for instance, of a merger. Were they to eliminate market power,
they would then join the RTO.
Mr. Barton. Okay. What about PUHCA? I assume you would
support PUHCA being repealed?
Mr. Rogers. I would say that would be an understatement.
Mr. Barton. An understatement. Is PUHCA, as it is currently
configured, a barrier to entry for utilities that are thinking
about building additional generation capacity?
Mr. Rogers. It is a significant impediment for us, for
instance, in terms of we are limited. Even though our balance
sheet allows us, PUHCA limits our ability to invest in merchant
plants. It limits our ability to compete for generation. It
limits our ability to invest internationally, even though our
balance sheet allows us to do it.
I will tell you the most important distinction. Foreign
companies, they come into this country and buy utilities, and
then under PUHCA we are precluded. An example of that is
Pacificorp. which was acquired by Scottish Power. Under PUHCA
we couldn't even compete for that business or for that----
Mr. Barton. Competing to buy the----
Mr. Rogers. To buy.
Mr. Barton. [continuing] what the foreign entity bought?
Okay.
Mr. King, could you describe briefly your modern meter
technology that you have been using and how that might help in
going into a competitive market?
Mr. King. Sure.
Mr. Barton. Did somebody already ask you that? I wasn't
here for the whole time. I was told they haven't. It is really
creative.
Mr. King. It is a solid state meter, fully electronic. It
includes wireless modems in it. So it communicates over radio
communications, sending the meter readbacks eventually to us
over the Internet, and records the information every 5 minutes.
And what is important about that is that customers who don't
want to pay the high price of peak energy don't have to, and
they can save significantly on their bills.
Mr. Barton. Does your meter technology have the ability to
do what is called reverse metering?
Mr. King. Some flavors of it do, where you can do net
metering if the customer produces power onsite as well, if they
have solar panels, for example.
Mr. Barton. Okay.
Mr. King. I would like to address this in the context of
market power. We talk about no cross-subsidization, but under
the rules right now in California we provide meters for those
customers. We pay all the costs of doing so, including reading
those meters and so on. The way it is set up now, those
customers have to continue to pay the utility for metering
services within their bundled distribution rate as part of
their monopoly distribution.
Mr. Barton. They pay them and then they pay you too?
Mr. King. They pay twice.
Mr. Barton. You think that is unfair?
Mr. King. Yes, somehow.
Mr. Barton. Okay. I am going to yield back the balance of
my time to recognize Mr. Burr to chair the remainder of the
hearing. He has the full power and authority that such
chairmanship has.
I want to thank the panel, and I apologize for requiring
eight of you to be at the table. We kept having additional
members want additional witnesses. We started out, this panel
was going to have 5 witnesses, and it was 6 and then it was 7
and then it was 8, and there was even a request late for there
to be even another 1 or 2. So I do apologize for each of you to
be here in such a large group.
Mr. Burr [presiding]. I also apologize to this panel for
running in and out. But we are going to have quite a day on the
floor, I think, before it is over, and we are all trying to
figure out exactly how it is going to happen. So please accept
everybody's apology.
Let me go to you, Mr. Kurtz, real quick, because if I
understand from your testimony, you believe that FERC ought to
have the ability to mandate everybody in the ISOs, correct?
Mr. Kurtz. Yes, we do.
Mr. Burr. Does that include municipals that own
transmission?
Mr. Kurtz. Well, that may very well be possible as a
necessity in the future, in large part publicly owned
organizations. There is going to be a struggle clearly between
local control----
Mr. Burr. Can you pull that mike a little closer to you?
Mr. Kurtz. Clearly one would recognize the struggle between
local control and being controlled at the Federal level with
small organizations. From my standpoint, you are not going to
run into that greatly through members of the American Public
Power Association, because generally most of them are
distributing companies only. They are very few, very large
organizations in the American Public Power organization.
Mr. Burr. But there are some that own transmission?
Mr. Kurtz. There are some that own, and for there to be an
expectation, if there is the ability I think to have a dominant
position, that they would forever expect to be excluded from
that consideration I think may be unrealistic.
Mr. Burr. So your answer would be, yes, you think that
municipals that own transmission should be included under the
FERC's ability to force them into ISOs?
Mr. Kurtz. I think if they are dominant players in the
industry that should be considered.
Mr. Burr. Let me go back. If there are municipals that own
transmission, should they be included under the same brush that
you said the rest of the industry should as it relates to
FERC's power with ISOs, with them?
Mr. Kurtz. Well, the reason why I would hedge on that is
because you have different levels of transmission. For
instance, take Gainesville, Florida. We are not a dominant
player in the transmission world. We are generally a local
company.
And, therefore, you have publicly owned organizations whose
transmission or subtransmission or high voltage distribution do
not play a significant component, nor could it be considered a
significant component in the transfer of power into and out of
regions, I would submit much different than the Tennessee
Valley Authority.
Mr. Burr. Would FERC agree with your assessment that it
wouldn't affect other people's ability to deliver power?
Mr. Kurtz. FERC has, if I remember correctly, a seven-step
evaluatory process where they determine the difference between
whether transmission is significant enough to be transmission
or whether it is local distribution. So there is a methodology
FERC uses for making that evaluation.
Mr. Burr. How about you, Mr. Rogers, the same question?
Mr. Rogers. It would be my judgment, as a former Deputy
General Counsel of the FERC, that they would include municipal
transmission under their definition. And it would be my
recommendation, as a matter of public policy, that all
transmission, whether it is a public agency that owns it or the
government that owns or it is an investor-owned, it all ought
to be included, because the critical point about an RTO is to
have increased reliability to all the potential customers on
the grid, and that requires participation by everybody and
nobody should be allowed to be an island.
Mr. Burr. With few exceptions, don't most of the proposals
and most of the initiatives agree on what it is we need to do,
the thing that is lacking? We use different words to describe,
but is it confidence that the marketplace will work in a
competitive way?
Mr. Rogers. I think that is a fair characterization.
Mr. Burr. So the challenge for this committee, as we move
legislation, is to assure from you all the way down to Mr.
Gordon and to the companies and, more importantly, to the
capital markets across the country, that the free flow of
electricity can happen from point A to point Z without
interruption, which means that you can't exclude anybody.
Whether the decision is made to empower FEC or whether we
choose to go another avenue, you can't have one size over here
and another size over here. It has to be predictable and make
sense.
Mr. Rogers. I would agree with that.
Mr. Burr. How important is it--let me ask you, from the
standpoint of Cinergy, how important is it that the capital
markets perceive the change that we make--potentially make as a
tremendous opportunity for their capital to be invested?
Mr. Rogers. I would say from a capital market perspective,
they want to see a truly competitive market. When you have a
hybrid market, you have the great possibility that capital
invested, the returns would be uneven in that situation.
Mr. Burr. Where is the capital injection going to be used?
Mr. Rogers. My judgment is, is you look at the amount of
distribution we own in this country and the amount of
transmission and generation, most of the capital in the future
will go into the generation part of the business, which in my
judgment should be deregulated completely, and would be under
most State plans as well as Federal.
Second, and this is a very critical point, Congressman, I
believe--and you can study what has happened in the U.K. and
the National Grid Company there--if we have regional
transmission organizations, significant capital would be put
into the transmission system, which would improve an already
very reliable system but would enhance the reliability over
time.
Mr. Burr. Mr. Kurtz, I don't want you to think that I
disagree with you on your statement. I am not sure where I am
on the question of the transmission right now, but I do find it
troubling from the first panel that there is not an expectation
of new generation.
And I guess I would ask anybody who would like to comment,
if we get it right, I realize that that is a big if, but let us
assume that we get the ideal bill, do we have no generation?
Yes, sir.
Mr. Rogers. I would be quick to say in the Northeast they
identified about 6,000 megawatts of new generation needed, and
there is already on the drawing board today 24,000 megawatts.
So you have significant capital money in project, in the
innovation of American industry moving into that region.
In our region, you may remember the problems that we had
last summer, which was really a price fluctuation in the
market. Let me just show you how quickly the markets responded.
We have already seen instances where companies from other
regions of the country are coming into our region proposing to
build gas turbine units to deal with these perceived market
shortages.
The point is, markets are very efficient and they work
quickly, and where people see opportunities, they invest the
money, and that translates into putting generation on the
ground when it is needed in the future.
Mr. Burr. Which is competition?
Mr. Rogers. Which is what competition is all about.
Ms. Tighe. Yes, really just to echo that, in those places
where there is demand, we are definitely seeing new generation
projects being developed. Actually, we have a compilation of
some of these projects and we would be happy to provide that to
you.
One of the key things here is that it is important that the
structure of those regional transmission organizations be done
properly, so that there will be ability to interconnect with
the transmission system on a fair basis, and that the decisions
made and the operation of the transmission grid will be fair to
these new generators. That is an important factor as developers
consider where they are going to locate.
Mr. Sawyer. Mr. Chairman, might I piggyback on your
question----
Mr. Burr. I would be happy to yield.
Mr. Sawyer. [continuing] and turn back to the question of
capital formation around transmission per se. I have great
confidence that generation will be able to do that. You,
throughout the history of regulated utilities, have been
largely competing with one another for capital. That has been
really the terms of competition.
I am concerned that transmission in an uncertain
environment, a blend of both Federal oversight, State siting
responsibilities, and the degree to which States become
important links in transmission without benefiting directly
from the siting and investment in those transmission
facilities, I am concerned about the uncertainty of that and
their ability to attract sufficient capital to maintain and
grow the system into real competition.
Did that make sense to you and, if so, can you comment on
it from the point of view of transmission per se?
Mr. Rogers. I think you have raised a very important set of
issues around what will transmission look like in the future.
My comment will be that you will see, and you have already seen
it, ISOs formed in California and in New England and the mid-
Atlantic and the Midwest. You will see regional transmission
companies developed, some as ISOs, some as TRANSCOs, but at the
end of the day they will become initially in some regions and
then they will combine, because the flow of electricity is not
bound by State lines. It is not bound by regions.
And what is going to happen? Think about the history. The
history is this: Every utility that has been developed over the
last 75 years primarily built transmission to get power from
the plants to their distribution grid. In a competitive world,
all of these little individual islands, and that is what RTOs
do, get connected up, and so the ability to move power. So when
you have power over here, it is enhanced dramatically if you
built the right transmission between the areas.
And we have worked hard as separate companies to do this,
and that is part of our tradition and that is part of good
business. But the other reality, and this is your point, the
most important reality is in a new competitive world there have
got to be incentives to beef up the transmission grids.
Mr. Sawyer. Exactly.
Mr. Rogers. And those have to be done, and there has to be
a coordinated effort between the incentives on the Federal
level, because it only makes sense for the FERC to regulate
what is interstate commerce transmission. But there needs to be
some coordinated mechanism in the siting of transmission,
because let me tell you one of the difficult most things to do
today is build a new transmission line, and we need to build
new transmission lines to facilitate the growth of this
country.
Mr. Sawyer. And without that the ability to attract capital
and doing all of those good things that you just described
could be substantially limited?
Mr. Rogers. Well, it becomes very difficult to attract
capital if you have difficulty in getting approvals and getting
the construction done. I mean it does create a problem, but the
truth of the matter is, capital will be there if we have clear
guidelines in terms of the interface between the regulation and
the incentives on the Federal level and the siting on the state
level.
Mr. Sawyer. Thank you.
Mr. Gordon. Could I add a point?
Mr. Burr. Yes, sir.
Mr. Gordon. I wanted to say that I agree with everything
that Jim has to say there, but I think there is one piece that
has to be solved, I mentioned it earlier, and that is the
pricing mechanism for transmission and the oversight regulation
that exists for it. It has to have in it some incentive for
whoever the transmission owner is to look for where the new
transmission is needed and then to build it. There has to be a
driver.
Otherwise you are back in the world where engineers look at
the system and decide what is needed next. That was probably
okay in the earlier era. In fact, it was very successful in the
New England region for a long time, but I don't think it will
carry a competitive era forward. So the FERC really does have
to address that and address it sooner.
Mr. Burr. That was probably the design in your area, and I
would ask you, how much did the transmission lines contribute
to the price spike that happened?
Mr. Rogers. Well, we had an unusual set of things coming
together last summer in the Midwest. And I mean we had a
tornado knock out one of the nuclear units in northern Ohio, we
had some unplanned outages, and plus we had peaky weather. The
fact of the matter is, we had adequate capacity, but the
psychology of markets sometimes drives prices.
The FERC did an investigation of this and came back and
said these are the bumps in the road to a competitive market.
My judgment is, and I feel very strongly about this, our
company has got a very strong transmission system. In fact, we
have been named one of the five delivery points for all new
future contracts, even though we don't have the largest
transmission system in the Midwest.
My judgment is, if we would have had an effective ISO in
the Midwest last summer, we would not have had the problems
that we had. So I am one of those people that believe the
sooner we can get these ISOs in place or some form of RTO, the
better off we are and the smoother the road will be to
competition.
Mr. Sawyer. Did you have a further comment?
Mr. Rogers. Yes, sir, Congressman, I think a very
instructive example of how money flows into the transmission
grid is to look at what is going on in the U.K. When they
privatized the U.K., which was the government-owned operation,
and they already had a national grid because they ran it as a
government operation, the amount of money that the national
grid company has invested in transmission to facilitate the
flow and to deal with these load pockets, it has been amazing
the amount of capital that has been put into that system and
the efficiency and the reliability in the system today,
fundamentally better than it was when the government ran it.
My judgment is, in this country our transmission grid will
be fundamentally better in a world of RTOs than in the world
that we are in today.
Mr. Sawyer. Thank you, Mr. Chairman. I appreciate your
latitude on that.
Mr. Burr. The Chair would recognize the gentleman from
Oklahoma.
Mr. Largent. Thank you.
Mr. Gordon, I want to come back to you real quick on this
subject of ordered divestiture, because I know in your
testimony you said we just need to have open access and allow
the markets to work. Is it your opinion that if we do this
thing right and we have good open access and it is working, we
have competition, having language in there that would allow
FERC to order divesture, would that be a bad thing?
Mr. Gordon. You know, my instinct is to say you really want
to not force people to do things unless you absolutely have to
force them. If you would like to see which way the industry
structure would settle out in a competitive environment--and I
can't imagine what economy of scale there is going to be, but
there might be one--there might be a reason not to do it unless
you absolutely had to. So I think my own preference would be
not to require it.
Mr. Largent. Okay. Mr. Rogers, I had a question for you. I
have been trying to think this through from a utility
perspective. If you had the option to choose a TRANSCO versus
an ISO, speak to me from kind of a utility's perspective on why
you might prefer one over another.
Mr. Rogers. Because I am such a strong believer in
competitive markets, I would like to see the markets become
robust sooner rather than later. We have been part of the
process of building an ISO in the Midwest. Because of all of
the issues related to ownership and debentures, it takes a long
time to put a TRANSCO organization together. Because sooner is
better than later in creating this competitive market, we have
opted for an ISO, but we clearly see in our future converting
that into a TRANSCO.
It is also my opinion that companies that primarily support
TRANSCOs, are unwilling to go to ISOs in the short run, don't
really want regional grids at all, and so it is a stalling
technique. And so from my standpoint we need to move into ISOs
sooner. We are going to learn a lot, it is going to help us
transition to TRANSCOs. It is going to allow us to work through
the mortgage debenture issues, the State regulatory issues in
terms of ownership and splitting it out of your rate base, in
which your rates are set for in the State level.
So I think you get an effective regional market working
sooner, but we have to be clear about the goal line. The goal
line ultimately is going to be a TRANSCO, because to get the
rewards and the risks in better balance, I think long term
having an independent TRANSCO company--I think the U.K. is a
wonderful example of how that works . You are going to see
significant investments to beef up the system because it will
be in the interest of the entire system, not necessarily the
interest of one company.
Mr. Largent. It seems like it sort of flies in the face of
experience that you want to appoint a committee, which is what
an ISO would basically be, a political committee, to move the
ball down the court quickly. But I guess I understand what you
are saying, and I never really thought about the fact that you
move from an ISO on into a TRANSCO. I personally think
TRANSCOs, if I were a utility I would prefer to be dealing with
somebody that is working either on a for-profit or not-for-
profit basis operating that transmission system.
Mr. Rogers. Let me tell you our board of directors
struggled with this as we felt our way through, and I think we
reached the conclusion, and that is why in the ISO in the
Midwest that we are involved with, there is a provision that
allows it to convert to a TRANSCO.
If you live through the experience we lived through last
summer in the Midwest, with the volatility and the reliability
issues that were raised, I believe a lot of people that don't
want to see competition happen in this country, the first thing
they say, if there is any reliability problem that is
attributable to competitive markets. So if you believe, as I
do, that competitive markets are the right answer, you want to
reduce the probability of reliability problems. In my judgment
you can set guidelines for this independent system operator
that allow the market to work and allow the transmission to
work.
And as I said, I don't think we would have had the degree
of the problem we had in the Midwest last summer if we would
had had a functioning ISO. I also agree with you that
ultimately the TRANSCO is the right structure, but if you are
committed to getting a competitive market, you have got to
think first about reliability, and an ISO will be very
effective in the short run in making sure that we have a very
reliable system as we make this transition over the next 5 to
10 years for the competitive market.
Mr. Largent. Mr. Chairman, if I could indulge just one more
thing. I have read the testimony of utility.com, and Mr. King,
I would like you to make a brief comment. The thing that I
really found fascinating, and it was really an angle that I
never had read before or thought of before, was the
environmental impact of having individual metering, advanced
metering of your retail consumers, so they could optimize their
consumption at low-cost times and back away when there is high
cost times, and the environmental effect that that has of
operating utilities at peak efficiencies. And could you just
comment on that?
Mr. King. Sure. It really has a huge impact. Up to now
under the industry, power plants have been built to meet the
peak day of the summer, and consumers have been given no reason
to reduce their consumption at those times. So unlike most
markets where you have the supply and demand curve, people
weren't asked whether they wanted to pay those high prices, and
the solution was just build more and more power plants.
By giving them this choice, they don't even have to make
big reductions in those. They can have a major impact on the
efficiency of the industry. In fact, right now the power
industry operates at only about 46 percent capacity, because
you have got these power plants that sit around and only are
used for 10 or 20 or 100 hours a year. And that efficiency
could go up about by as much as 50 percent, by some estimates,
just by letting consumers have that choice and having the
technology that records when they use the power.
Another part of the environmental aspect of that is that
many of those peaking plants tend to be the dirtiest plants in
terms of emitting air pollution. So there is additional major
benefit from avoiding the use of those power plants.
Mr. Largent. Thank you, Mr. Chairman.
Mr. Burr. Let me ask one final question, if I could, and I
would segue into it off of the ISO issue that is on the table,
and only make a point that I would hope that we could find a
way to allow FERC, if we choose FERC to be the determining
factor on ISOs, to expedite the process of not only the
formation but the asset valuation.
And I go back to a recent thing in California where
companies are still trying to determine whether the dollars
that they claimed are, in fact, the dollars that they are
credited with by FERC. And I think it gets back to not only the
capital issue, it gets back to business planning, it gets back
to how we evaluate the success or failure of the ISO and of the
transmission grid.
And I will use that to segue into mergers. Clearly I throw
on the table to anybody who would like to comment, is there a
need in the future, assuming that we find the right legislation
to accomplish retail open access, for FERC to be involved in
any primary way in the determination of mergers? Ms. Tighe.
Ms. Tighe. Thank you. Yes, we believe that they should be,
that in fact they should have the ability to examine mergers,
not only for a wholesale impacts but also impacts on the retail
markets.
Mr. Burr. Mr. Kurtz.
Mr. Kurtz. We do believe that FERC should now and should
continue to be involved in evaluating mergers. You know, there
is a lot of discussion about if we get the right legislation,
if this, if that. I think one of the points of our testimony is
that we are not there by a long shot yet, and we have a long
way to go and there are a lot of things we need to do to get
there. And, therefore, to get to the answers to the ``ifs,'' we
have got to make sure that FERC has the regulatory ability to
deal with those.
If we have a drawback in the future or anomalies in the
future, FERC needs to be able to continue to oversee that
process and we believe strongly they should continue to do
that.
Mr. Burr. I would remind you and others that I don't think
there are any members that are proposing the deregulation of
transmission of many of the areas that we concentrate on,
saying here are concerns. We still expect, because we are not
changing FERC's involvement, for there to be the correct
oversight of those areas.
I think that one can question whether the attempt is to
deregulate or reregulate the generation, and I think there is a
huge difference in that that we will deal with based upon the
great testimonies of you and others who have come before this
committee, some 36 before you, and what members have been able
to learn from those testimonies.
Mr. Gordon.
Mr. Kurtz. Mr. Chairman, if I may.
Mr. Burr. Excuse me?
Mr. Kurtz. The point is it is really hard to separate.
There seems to be a lot of discussion about separating
generation from transmission. The fact is, electric systems
operate as a dynamic system, I come from the State of Florida.
The State of Florida is a very long, narrow State. It has
transmission that runs up and down. The predominant load in the
state of Florida is in south Florida.
Depending on what generation that you are operating, even
if you have absolute and total complete access to transmission
in the State of Florida, depending on where the load is and
where you operate generators in, you can break up the State of
Florida on a real-time dynamic stability basis if you have the
outage of a unit, if you have the outage of a certain
transmission corridor.
And so for us I guess to intellectually not recognize the
electrical link and the dynamics of an electric system between
the generators and the transmission, and to assume that you can
just say we are going to regulate transmission and we are going
to deregulate generation, if we end up with a system where
everybody chooses to put generation in north Florida, all of
the transmission is deregulated, all of the load is in south
Florida, electrically you are not going to have a reliable
system to do that.
Mr. Burr. Clearly I would hope that companies that go in to
build generation would locate that new generation in an area
that, one, the load is; two, that they have confidence in the
transmission grid. But I think you raise another question, and
that is that there are infrastructure needs in our transmission
grid around the country, and I don't think anybody argues with
us on that.
I think it will take movement of a retail bill for there
ever to be the investment that is needed in the transmission
grid, to upgrade it.
Mr. Gordon.
Mr. Gordon. Yes, my preference is, as you heard earlier, is
to try and not to expand into the generation market the FERC's
authority. We want to deregulate to the extent that we possibly
can. To the extent that somebody is gaming the transmission
system through operating the generation in a way that it is out
of the usual order, that is a kind of a horizontal issue that
an antitrust agency might have to look at.
But I would still leave it at that level and not try to
have the FERC regulating a market that hopefully we are making
competitive. So there is a horizontal market power problem to
be overseen there, and it may be subtle and require
sophisticated engineering understanding of how a unified
electrical system works, but I think it should be handled on
that basis rather than on regulating the whole market.
Mr. Burr. Anybody? Mr. Rogers.
Mr. Rogers. I would just make one comment. Since our
company is a product of a 20-month approval process where we
had to go to three different States and the FERC and the SEC
before we became Cinergy--and by the way, as a footnote, our
utilities still keep their names. All of our nonregulated
businesses are under the name Cinergy, not Public Service
Indiana, not Cincinnati Gas and Electric, for some of the
reasons that we talked about earlier today.
But this is my point, the FTC and the Justice Department
have deadlines on how quickly they can deal with the merger.
They could go up or down. On the BP, British Petroleum-Amoco
merger, 6 months. They can go up and down. And that created a
company between $50 and $100 million of market capitalization.
The largest company in our industry is less, about $20 billion.
Chrysler, Daimler-Benz, Exxon, Mobil, do you want to talk about
large combinations? They don't go through a 20-month approval
processes, they get done in less than 6 months. The capital
markets put a huge penalty on utility combinations because of
the uncertainty.
And quite frankly it is a burden on the managements of the
companies trying to put them together, because of the
uncertainty and the length of the period for approval. My point
to you is this: FERC has the authority today, and I can clearly
see situations where the FERC, and particularly dealing with
market power issues, should have the authority to eliminate the
market power, whether it is some limited divesture or requiring
them to be part of an RTO, which has the effect, quite frankly,
of eliminating some of the problem.
But the fact of the matter is, is that virtually every
merger at the FERC has taken 18 months to 2 years to get done.
There needs to be, and, yes, they have imposed on themselves
time lines, but I think it would be incumbent upon you to
facilitate the process, good for the capital markets, good for
consumers, to say to the FERC, ``This is what your authority
is, this is what you look at, and you get it done in 6
months.''
Then I think you facilitate a consolidation that is going
to happen in our industry. The one thing that nobody has talked
about today as they worry about market power, we have 3,000
sellers of electricity in this country. We have one of the most
fragmented markets in the world, our companies, and I compete
all around the country. I compete with companies that are $30,
$40, and $50 billion dollars market capitalization and my
company is only $4 billion, and I am considered a big company
in the U.S.
Mr. Kanner. I wanted to add, it is a very valid question,
whether FERC needs to be the lead agency in merger review. Our
feeling is it does, both to look at the competitive effects, as
others have suggested, we need to add that to it, but we also
need to make sure that some of the regulatory gaps, some of the
mergers or potential combinations that are outside FERC review
are captured.
And Mr. Largent's amendment of last year addressed some of
these issues. Holding company to holding company mergers, we
believe that is appropriate. The reason for FERC being in the
lead is their expertise, as Mr. Rogers said, in the merger. In
a utility merger conditions will be imposed looking at things
like RTO participation or potential divestiture, and FERC is
going to be the agency that is going to oversee the
implementation of that. So it is appropriate for them to be the
merger review entity, since they are still going to end up
being the enforcement entity.
Mr. Burr. Where would your confidence level with the FTC
and DOJ be in their divestiture determinations between the BP-
Mobil? I mean clearly they are not the Department of Energy. I
am sure as they go through their evaluation, they consult very
closely with not only the Department of Energy but others as it
relates to the monopoly that might be created, the marketplaces
that they might have tremendous advantages without divestiture.
And I would ask you then, what is the difference in what
they currently do and what we would ask them to do, if they
were the primary agency on electric merger?
Mr. Kanner. The difference would be is that the oil
industry hasn't been subject to 90 plus years of rate
regulation, and it is that history that FERC has had as the
primary regulator that is the difference here.
Mr. Rogers. May I comment on that, because I think there
ought to be clarity around that point?
Mr. Burr. Yes, sir.
Mr. Rogers. Just make this comment. I mean when you file
for a merger, you have to have Hart-Scott-Rodino approval. And
in an early part of my life when I worked for Enron, one of the
things we had to do is, it didn't require FERC approval but it
did require Hart-Scott, and there were issues in terms of in
the gathering fields, in production areas, being required to
spin off some gathering facilities or some of the lines in that
area.
The reality of life is you get very extensive review of
what you do at the FTC under that approval process, as well as
the Department of Justice today defers to the FERC. That is the
way it has been in the past; it doesn't mean that is the way it
should be in the future. And quite frankly, the Department of
Justice and FTC have done a very good job in dealing with these
issues, and the combinations are significantly bigger than the
ones that we would be contemplating in this industry in the
future.
Mr. Burr. Ms. Tighe, you will be the last one.
Ms. Tighe. Mr. Burr, you brought up the issue of
infrastructure investment, particularly in the transmission
system, and the fact that will be needed. We very much see that
as part of the role of the properly structured RTO. And it is
also clearly within the authority of FERC to see that that
responsibility is structured properly within the RTO.
And I think we would go even farther to say that in order
to implement that needed investment in the transmission
infrastructure, that FERC should have the responsibility for
transmission siting, of course in coordination with the States
and the regions, but they should be the one that provides the
overall coordination for the transmission siting so we will
have this consistency and uniformity from region to region.
Mr. Burr. I thank you, as I do the rest of the witnesses,
for your willingness to come in to share your information. And
I know that you can't judge the interest of this subcommittee
by the number of members who are here because a lot of them are
on the floor debating amendments as we sit here. But clearly
this is a subject that will be--we will have more hearings on
before we see movement, but I am hopeful that we can begin to
work with everybody that has an interest to see whether in fact
a bill can be reached, one that is good for not only the
companies but the consumers and the consumer groups that are
concerned.
And this hearing is now adjourned.
[Whereupon, at 2:18 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Prepared Statement of the Repeal PUHCA Now! Coalition
Mr. Chairman and Members of the Subcommittee: The Repeal PUCHA Now!
Coalition is pleased to submit this testimony to address the need to
repeal the Public Utility Holding Company Act (otherwise known as
PUHCA). The Repeal PUHCA Now! Coalition is a group of electric and gas
companies which has supported enactment of legislation repealing PUHCA
as recommended by the Securities and Exchange Commission in a report to
Congress in 1995. Member companies include registered and exempt
electric and gas utility holding companies restricted under PUHCA. The
Repeal PUHCA Now! Coalition believes it is essential that PUHCA repeal
legislation be enacted into law this year. Simply put, repealing PUHCA
repeals an Act that serves as a barrier to competition, a barrier to
state restructuring efforts and a barrier to consumer benefits.
The Coalition commends the Subcommittee for conducting a hearing on
PUHCA so that the need and urgency for repeal may be made again this
Congress. The Coalition respectfully believes that the subjects of
today's hearings, ``Market Power, Mergers, and PUHCA,'' need not be
linked to examine vigorously the separate issues of each. As discussed
below, the Coalition believes that PUHCA repeal must be considered
independently, on its own merits. PUHCA repeal is not a market power/
merger issue. Indeed, keeping the 64-year old statute in place
frustrates competition, is a barrier to entry, and actually promotes
industry concentration. When this occurs, the case for repealing PUHCA
now is overwhelming.
i. introduction
As everyone here knows, the electric utility industry is changing
rapidly. Twenty states have now enacted laws or regulations
restructuring retail electric markets affecting 58% of the U.S.
population. Other states are considering similar measures. As
electricity markets become more and more competitive, the strictures
and limitations of PUHCA are not compatible with the current state of
the industry. PUHCA is outdated, duplicative and no longer serves the
interests of consumers or investors. PUHCA has become a regulatory
anachronism, a barrier to competition and innovation. It imposes
unneeded restrictions, significant costs, and confers no real benefit.
The time to act to repeal PUHCA is now and the Repeal PUHCA Now!
Coalition urges the Congress to pass PUHCA repeal legislation as soon
as it can reasonably be done.
PUHCA repeal should not be held hostage to the important debate
about the potential further restructuring of the electric industry, or
whether comprehensive federal electricity legislation is needed to
benefit all consumers nationwide. From state to state and here in
Washington, the members of the Repeal PUHCA Now! Coalition have been
very active in this debate. But the Congress must realize that electric
utility restructuring issues impact all stakeholders in the electric
utility industry, not just the eighteen (18) active registered holding
companies and one hundred fifty-one (151) exempt electric holding
companies. These electric utility restructuring issues deserve serious
study, discussion and debate. This discussion and debate is well
underway in the Congress. Already this Congress, there are no less than
seven bills currently pending in the Congress that would in some
respect restructure the electric utility industry, and other bills,
including the Administration's, are expected to be introduced soon. As
this reflects, the issues are as contentious as they are complex. As a
result, no meaningful consensus has emerged on whether, or even if,
Congress should enact comprehensive electricity legislation. A truly
durable consensus will not develop overnight. Thus, the Repeal PUHCA
Now! Coalition strongly urges that the debate on future electric policy
move forward separately from consideration of PUHCA repeal legislation.
Keep in mind, Mr. Chairman, that serious debate and discussion of
these global electric policy issues has only developed in the last two
Congresses. Conversely, a full merits review of PUHCA repeal started
over seventeen years ago. In 1982, during a Republican Administration,
the SEC found that PUHCA's statutory objective had been achieved and
recommended PUHCA repeal to a Congress composed of a Republican Senate
and a Democratic House. In the intervening seventeen years, the case
has been overwhelmingly built to show that conclusion was correct. In
1995, during a Democratic Administration, after conducting another full
study of PUHCA's relevance, including significant public participation,
the SEC again concluded that PUHCA was no longer needed and that, with
appropriate consumer protection provisions to assure effective
regulation of utilities, repeal was the preferred option.
The Repeal PUHCA Now! Coalition agrees. The SEC's 1995 supporting
analysis is clear and irrefutable. Indeed, it has now been over twenty-
five years that the agency accomplished the goals Congress set for it
when the PUHCA was passed in 1935. We agree with the SEC that leaving
PUHCA in place burdens the industry and the agency, and does so at a
cost to society that far exceeds any potential benefits.
Repealing PUHCA is important not just to the companies that for
over 64 years have borne the burden of its regulatory requirements, and
whose ability to respond to existing competition is handicapped by that
Act, but to other utilities--gas and electric--as well. On this issue,
gas and electric registered holding companies are united: we all need
the ability to respond more freely and flexibly to market opportunities
emerging daily as the States restructure retail electric markets and
respond to vigorous competition in the wholesale markets.
Similarly, companies now exempt from the Act's requirements--again
both gas and electric--also seek repeal. The potential application to
them of the Act's full strictures, and the current imposition of limits
on their ability to serve customers geographically or through
additional utility services, hinders innovation and frustrates an
exempt holding company's ability to compete in wholesale and retail
markets.
While the future structure of the electric industry remains open to
debate, there is a much clearer picture with respect to the natural gas
industry. The gas industry has already experienced significant and
historic regulatory and competitive changes. All the gas registered
companies now face competition in virtually every facet of their
business. Yet they remain subject to additional regulation over their
lines of business, corporate structures and financing that their
competitors do not have. PUHCA's regulations impose higher costs and
less flexibility, handicapping them in meeting the demands of intensely
competitive gas markets. Suffice it to say, repeal of PUHCA, with
appropriate consumer safeguards, is essential in letting these gas
companies compete and develop innovative products and services, while
the regulatory agencies and legislatures, including Congress, consider
further changes in energy policy as applied to the electric industries.
ii. the burden of puhca
Registered holding companies face burdensome and limiting
requirements under PUHCA. These burdens, which create severe
disadvantages when compared to other industry participants, include:
We are limited to serving utility customers in a ``single
integrated'' utility system, which seriously restricts the
geographic scope of our utility operations. As a result, we are
hampered in offering services to others, even in our core
business, either by significantly expanding our operations or
investing in other utilities, as can be done by non-holding
companies.
We generally need prior approval from the SEC before our
affiliates and subsidiaries can enter into contracts with each
other. The SEC determination of the terms (including whether
the contract will be at market rates or at cost) is binding on
rate regulatory agencies. As a result, opportunities to save
some costs or to operate with efficiencies, available on short
notice, cannot always be seized.
We, and our non-utility subsidiaries, generally cannot issue
or sell securities, or alter the rights and powers of security
holders, without prior SEC approval. As a result, our capital
structures are much more limited; and our ability to take
advantage of financing opportunities, especially in dynamic
capital markets, is more limited; and we cannot use several
types of securities now widely accepted as appropriate
throughout the rest of our industries.
Without special SEC approval, we cannot diversify into other
lines of business--under existing SEC interpretations, we are
limited to the single utility business, plus only such other
businesses as ``reasonably incidental, or economically
necessary or appropriate'' to the operation of an integrated
utility business. Even with some recent SEC initiatives,
business opportunities that would help additional economic
development in our service territories, and even businesses
that if allowed to operate freely would save our customers
money, may be foreclosed. In addition, where exemptions do
exist, they often contain technical requirements that prevent
the use of efficient business structures and often restrict or
limit how registered companies can employ shareholder capital.
PUHCA places severe restrictions on registered holding company
acquisitions of natural gas distribution companies. The SEC has
consistently refused to view an electric system and a natural gas
system as capable of constituting a ``single integrated public utility
system''. The agency allows electric registered holding companies to
``retain'' a gas system only if the demanding standards of the Section
11 ``ABC Clauses'' are met. This requirement effectively precludes an
existing electric registered holding company from acquiring even a
neighboring gas system and enjoying the competitive convergence
benefits enjoyed by numerous combination (electric and gas) exempt
holding companies. A registered holding company could potentially
satisfy the ABC clauses only if it acquired or merged with an existing
combination company.
Even the exempt companies, although free of virtually all of the
specific corporate restrictions in PUHCA, are limited to serving
utility customers in a specific geographic area, lest they lose their
exemption. They also must be concerned about diversification, because
the SEC has the power to revoke their exemption under the so-called
``unless and except'' clause.
Although they were important at the time of the Act's passage, the
stringency and severity of these restrictions make little sense today,
especially as the utility industry is restructuring. In the 64 years
since 1935, securities markets have become much more effective and
efficient. The SEC's other authorities under the Securities Act of
1933, the Securities Exchange Act of 1934, and the Trust Indenture Act
of 1939 assure that investors receive appropriate information and can
make informed decisions. Moreover, there is extensive financial and
corporate information available commercially through hundreds of
magazines, newsletters, on-line computer services, and network sources,
enabling the markets to respond within hours of significant events.
Rating agencies, such as Moody's and Standard & Poor's, constantly
evaluate our management, financial integrity, and operations and rate
us accordingly. As a capital intensive industry dependent on the
financial markets and being sensitive to the costs of such capital, we
are committed to maintaining financial flexibility through a strong
capital structure and favorable securities ratings by such agencies.
Similarly, the utility regulatory commissions, both FERC and the
State Commissions, have clearer authority than was in place in 1935.
The standardization of utility accounting, better staffing and more
clearly defined requirements have all made rate regulation more
effective.
In light of the changes the electric industry is experiencing
today, and expressly in light of the authority that already exists in
the SEC, FERC and the State Commissions regarding the securities
markets and rate matters, PUHCA has become redundant regulation. It
lacks the flexibility to allow the companies to adapt to new
circumstances. Its model of the utility industry simply no longer
comports with the reality of what the industry is doing, and what FERC,
the State legislatures and State Commissions would like us to do. We
need permanent relief today from the unnecessary regulatory burdens
imposed by the Act.
iii. debunking the myths about puhca
There is strong bipartisan support for PUHCA reform. In the last
two Congresses, PUHCA repeal bills have had cosponsors from both sides
of the aisle. Both Democratic and Republic Administrations, dating back
to the Reagan Administration, support PUHCA repeal. While not everyone
may agree on all the details of potential federal electric utility
restructuring legislation, there is strong support that the time for
PUHCA to be repealed or reformed is now. With this in mind, it may be
helpful to address several of the last gasp arguments repeal opponents
still make.
MYTH No. 1: PUHCA Prevents Utilities from Exercising Market Power.
This hearing today appears to link PUHCA with merger and market
power issues. Such appearance might lead policy makers to conclude
erroneously that PUHCA repeal will create market power abuses. Contrary
to the myths about PUHCA preventing the exercise of market power, PUHCA
actually perpetuates market concentration. Companies subject to PUHCA
are confined within geographic boundaries consistent with the
``integration'' standard. While at one time this was considered a way
of stopping growth, and enabling federal and state utility regulation
to mature, it has instead led to a concentration of the utility market.
This market concentration that occurs in a monopoly situation serves to
impede competition and frustrate state restructuring programs. If PUHCA
stays in place, it will only perpetuate a monopoly situation for those
consumers in that service territory.
Now the Coalition realizes that some have asserted that it is
essential to retain PUHCA in order to limit what they call
``concentration of market power'' as the electric industry
restructures. Those who make that assertion either do not understand
the role PUHCA has played, or willfully misstate it. As stated earlier,
PUHCA is a corporate structure and securities statute. Its main goal
was corporate simplification, not establishing or setting specific
rates for utility services. We cannot emphasize enough that PUHCA's
existing provisions actually increase the likelihood of concentrations
in particular markets, because the ``integration requirements'' and
geographic restrictions of the Act limit both registered companies and
exempt companies to retail utility holdings in particular areas, and
restricts the ability of more distant companies to acquire, construct
or operate facilities that could compete with the local utility. PUHCA
effectively keeps new entrants out of markets, and keeps registered
companies from engaging in competitive lines of business. Indeed, PUHCA
as it stands requires utilities to limit acquisitions to nearby
utilities--ones that can be integrated or that do not result in a loss
of exempt status. Those nearby utilities are the ones most likely to
have presented the possibility of competition.
PUHCA was originally enacted to prevent abuses by utility companies
by restricting growth and advancements at a time when there were little
or no state or federal utility regulatory controls available. While
this approach served us well in 1935, it is now outdated and serves as
an impediment and a barrier to a competitive market, especially at the
retail level.
PUHCA was not designed as and is not a utility or rate regulation
statute. PUHCA is primarily a law dealing with corporate governance and
securities issues. Aside from the fact that it has outlived its
usefulness because of changes in the way we regulate and review
securities transactions, PUHCA might be viewed as an energy matter only
from the standpoint that the companies it governs happen to be in the
energy sector. Regulating public utilities when they provide
electricity services to consumers is governed by other significant
laws. These laws, most notably the Federal Power Act, the Natural Gas
Act, and other state utility laws, deal with the rates consumers pay
for electricity and gas services. PUHCA does not. In fact, PUHCA repeal
bills in the last two Congresses, with their consumer protection
provisions, actually will help public utility regulators do their
ratemaking job at both the federal and state levels. To withhold PUHCA
repeal from moving forward due to concerns about market concentration
in a time when competition in the retail market is rapidly moving
forward sends conflicting policy signals. Competition is good, unless
you are a registered holding company. Over the long-term, a
competitive, free market provides low prices and efficiencies for our
consumers, but long-term consumers benefits will be prevented to
consumers served by the 18 active registered holding companies.
Myth No. 2: Repealing PUHCA Will Create a Regulatory Gap.
Repealing PUHCA will not create a regulatory gap, it will eliminate
one. Ever since the U.S. Supreme Court issued the Ohio Power decision,
PUHCA's requirements that affiliate contracts be ``at cost'' have
prevented FERC and state regulators from applying a market test to
lower costs of services for wholesale and retail consumers in most
cases. This decision, in large measure, has protected utilities' costs
in rate bases and, to a significant degree, has preempted FERC and
state regulators from disallowing the recovery of certain costs. With
the repeal of PUHCA, this regulatory gap will be eliminated once and
for all. The rate regulators, at both the wholesale and retail levels,
properly will have the authority to determine the allocation and
reasonableness of costs incurred by the utility in the provision of
necessary services and whether or not such costs should be recovered in
rates. Currently PUHCA hinders such rate regulation.
Yet, despite the need to repeal this outdated act, many are
concerned that repeal of PUHCA is a repeal of consumer protections.
This is simply not true.
It is important to remember that there are more than 3,000 entities
currently providing electric and gas service to consumers. Of these,
approximately 170 are holding companies. However, approximately 151
holding companies are exempt from PUHCA, leaving PUHCA to regulate the
18 active registered holding companies. Repealing PUHCA does not mean
these registered holding companies will no longer be regulated. It only
means they will be regulated under other a number of statutes,
including all state public utility laws, the Federal Power Act, and the
Natural Gas Act. There will be no regulatory gap if PUHCA is repealed.
Yet the cries continue that PUHCA cannot be repealed because it
protects consumers. What about the majority of individuals who are
served by utilities not covered by PUHCA? Who is currently protecting
them?
Repealing PUHCA will not hurt consumers, but retaining the status
quo will. If a consumer is served by a company regulated under PUHCA,
that company is restricted from entering into competitive transactions,
expanding into new business areas and improving efficiencies that could
benefit the consumer. While the protections that various PUHCA repeal
bills provide for consumers are clear, we should also note the
benefits.
In fact, stand alone PUHCA repeal bills introduced in the last two
Congresses continue to provide protection for consumers, but eliminates
unnecessary agency duplication and deletes arcane provisions that no
longer serve a public interest purpose. These repeal bills actually
improve certain important aspects of federal and state utility
regulation if enacted in the current regulated market conditions. Some
have indicated that this may be financially burdensome to states;
however, the ongoing restructuring of the electric utility system has
imposed significant new responsibilities on the states, involving
numerous companies and issues. The states have been in the lead in
taking on these responsibilities. Surely, with the experience the
states have had to date with restructuring issues, they will be able to
effectively deal with any potential resource issues.
Various stand alone PUHCA repeal bills also fully provide for
protection of consumers by providing access to books and records, by
maintaining accountability procedures, providing for review of
affiliate transactions and continued FERC and State commission rate
regulation and audit authority. These are a far more direct means of
addressing market concerns and protecting consumers than PUHCA of 1935
can provide in today's regulated market.
The Repeal PUHCA Now! Coalition recognizes that some state
commissioners and other ratepayer advocates have expressed concern that
state authority would not be sufficient to obtain the necessary
information for proper discharge of state regulatory action. They are
concerned that there would be a continuing need, after repeal of PUHCA,
for federal audit authority and federal oversight of system
transactions that would pass costs through to ratepayers. The Coalition
understands those concerns. We also understand the significant
difference between repealing the Act while providing for certain
safeguards, and simply transferring the existing burdensome
requirements to a new forum. We believe PUHCA repeal legislation can
fully address these concerns and include provisions to provide
appropriate access to books and records. The Coalition is fully
prepared to work with the Congress to assure that a final bill includes
provisions that would implement any necessary consumer safeguards.
With regard to books and records, all utility companies know full
well that the books and records of the utility company must be
available to regulators for their review. The burden will remain on a
utility to demonstrate that its proposed rates are just and reasonable.
Similarly, we understand and can accept a review of the books and
records of those affiliates that deal with the utility company and that
would thereby pass costs through in rates. Regulators should have
access to all information that is relevant in reviewing and
establishing rates for electric services. However, there are
undoubtedly some affiliates in a diversified company that will not pass
costs through to ratepayers, or whose activities are so removed from
the utility activities that access to their books and records would be
of no legitimate value for ratemaking or cost allocation purposes. The
key test is what access is actually necessary for the effective and
proper discharge of the regulatory authority involved.
As to the oversight of affiliate transactions, again we understand
the interest of regulators in reviewing those transactions involving
the utility, and which will cause the incurrence of costs to be passed
through to ratepayers. Indeed, many state regulatory commissions
already review transactions between a utility and its affiliates, and
no further authority is needed. Here again, to the extent it affects
rates, we do not oppose reasonable affiliate transaction provisions in
a PUHCA repeal bill. However, we can also envision a number of
transactions between affiliates completely apart from the operating
utility companies, and which would not cause the incurrence of costs to
the utility. Where the affiliate contractual arrangements are not
related to costs to be incurred or passed through in the utility's
regulated rates, separate regulatory review of the interaffiliate
transactions would be unnecessary.
Myth No. 3: More Utilities Will Merge If PUHCA Is Repealed.
As noted earlier, the competitive transformation of the utility
industry is underway. Twenty states have now enacted restructuring
legislation or regulations. Similar to every other heavily regulated
industry that has undergone a competitive transition, some
consolidation of service providers is inevitable. But contrary to myth,
consolidation will not occur exclusively because of PUHCA repeal, and
whatever consolidation takes place will not escape significant
regulatory review and oversight.
It is important to recognize several facts about mergers and market
power assertions if PUHCA is repealed. First, the very same expert
agencies and departments who today substantively review mergers will do
so after PUHCA is repealed. FERC will retain all of its merger
authority. It has recently updated its merger policy in light of
changes occurring in the electric utility industry. Without PUHCA, FERC
will still review future mergers unconstrained by any new Ohio Power or
other similar regulatory conflicts at the federal level. State
Commissions will still have their authority to approve, block or
condition mergers that they have today under state law. State
legislatures that wish to require that a utility company operating in
that state must be incorporated in that state and remain fully subject
to the state's authority regarding its securities and other corporate
matters, can continue to do so. PUHCA's repeal will have no effect on
that. The Department of Justice will retain its antitrust authority,
and the FTC its Hart-Scott-Rodino authority. The only thing that will
change when PUHCA is repealed is that after all of those approvals are
given, the SEC will no longer have the unnecessary and duplicative
regulatory burden of again stating its deference to the decisions the
regulatory agencies have already reached.
Mr. Chairman, let us be clear: when PUHCA is repealed, no merger
will occur without the same full regulatory scrutiny that occurs today.
If there are efficiencies and benefits to be gained, those mergers
should go forward. If there are not, there is ample regulatory
authority in the hands of knowledgeable regulators to stop them.
The Repeal PUHCA Now! Coalition recognizes there is concern that
states may not have the resources necessary to handle these new
responsibilities. But again, the Coalition notes that the additional
resources needed to handle the activities of 18 companies is nothing
compared with the responsibilities of regulating the remaining electric
and gas utility companies that do not come under the purview of PUHCA.
It seems this problem is one of ensuring that this type of review
occurs, not by whom it is done.
Simply put, we believe that the nation's state and federal
regulators have the ability to review potential mergers and protect the
consumer. There is no failure of federal and state utility regulation
requiring PUHCA to stay in place to review the inevitable consolidation
of the utility industry. In fact, removing the SEC from reviewing
mergers does not mean these assurances go away.
Myth No. 4: PUHCA Cannot Be Repealed Until Retail Competition Is
Established.
Effective retail competition can not be established unless and
until PUHCA is repealed. PUHCA's requirements and restrictions unduly
limit and burden virtually any utility company owning or operating any
utility assets for the production, transmission, transportation or
distribution of electric energy or manufactured or natural gas within
the United States. As discussed more fully below, not Congress, the
states, or the FERC can create a truly competitive environment with
PUHCA remaining in place.
In reviewing the issues that may need to be addressed this year,
Congress should keep in mind the level of activity concerning retail
choice in the states and at the FERC. As you know, almost every state
currently has some type of electricity restructuring proceedings
underway. Twenty states have implemented retail competition frameworks,
some on a phased-in basis.
Congress has wisely given the states and FERC significant time and
latitude in picking the pace, method and means for achieving retail
competition. This approach has allowed the states to proceed with
retail competition tailored to their own regional circumstances. This
has provided Congress and regulators critical information and
experience to make informed decisions about any potential comprehensive
federal legislation.
Based upon the evidence to date, the states that are restructuring
are in fact moving forward without federal intervention. From
California to New York, Arizona to Arkansas, Maine to Maryland, the
states have passed laws or regulations to establish retail competition.
Thus, the real question for the Congress to focus on is whether the
sixty-four year old statute is impeding the numerous state initiatives
to restructure retail electric markets. Does PUHCA help or hurt the
existing and future efforts to establish state ordered retail
competition?
In the Coalition's view, keeping PUHCA in place will hurt state
ordered establishment of retail electric competition. Simply put, the
scope of retail competition will be artificially constrained and
truncated by a number of PUHCA's regulatory restrictions. Let us give
you several examples.
PUHCA forbids domestic Exempt Wholesale Generators (``EWGs'') from
selling power at retail. As a result, many low-cost generation
suppliers refrain from making retail sales because of PUHCA-related
concerns. This applies to all entities--whether registered, exempt or
non-holding companies. Indeed, any generation supplier wishing to avoid
a holding company structure would face potential PUHCA jurisdiction if
it were to setup a subsidiary and that subsidiary were to make retail
sales.
Registered holding companies interested in making retail sales from
facilities that are distant from their franchised retail service areas
must face the geographic constraints of PUHCA's ``integration''
standard, which, as noted above, generally restricts registered company
``utility'' operations to a regional scope. This means, for example,
that a registered holding company based in the Eastern U.S. would be
effectively excluded from selling retail power from a facility located
in California. Similarly, an exempt holding company can risk its exempt
status by undertaking non-EWG sales outside the geographic boundaries
defined by Sections 3(a)(1) and 3(a)(2). Thus, for example, a utility
holding a Section 3(a)(1) ``intrastate'' exemption cannot make
substantial retail sales outside the state where the utility is
incorporated and conducts most of its utility business. This does not
promote economic efficiency or a robust retail generation market.
In addition, many state restructuring laws call for or are
contemplating the separation of generation and transmission/
distribution assets into separate corporate entities. This aspect of
restructuring can cause particular problems for both registered and
exempt holding companies. Think about it: can a 64-year-old piece of
legislation be applied to a different utility business than was
conceivably envisioned in 1935? PUHCA was not designed to be flexible.
PUHCA mandates a single geographically and operational integrated
structure, not well adapted to an evolving industry as a result of
federal and state restructuring competition initiatives. As noted
earlier, PUHCA isolates electric and gas systems to limited, discrete
geographic areas. The requirement under PUHCA that registered holding
companies maintain a single, integrated utility business has quickly
become problematic as governmental entities and a growing competitive
market pressures companies to restructure. As electric utilities are
compelled by state legislation, regulation or competitive forces to
either ``unbundle'' utility functions and assets in an effort to
restructure their businesses along product lines or comply with
corporate unbundling requirements, the conflicts with PUHCA are
becoming acute.
PUHCA controls this ``unbundling'' process unnecessarily. Yet the
``unbundling'' already has begun as a result of the twenty state
restructuring plans already enacted, the Public Utility Regulatory
Policies Act of 1978 (``PURPA'') and the Energy Policy Act of 1992
(``Policy Act''). This ``unbundling'' has produced significant new
players with geographically widespread utility properties. Since the
new players under PURPA and the Policy Act are exempt from PUHCA, how
can PUHCA's geographic integration requirements be significant and
necessary to this changing industry?
There is another aspect of PUHCA's integration requirements, which
may be at odds with retail competition unbundling of functions and
services. Registered holding company systems are required to operate in
an integrated manner. This requirement has led to centralized electric
system planning, construction, and the use of (a) companies providing
common management, financial, accounting and planning services, among
other services, for all companies, utility and non-utility alike, in
the same system, (b) fuel companies serving various affiliated
companies and (c) companies operating power plants for various
affiliated companies. In addition, for registered holding company
systems and their integrated operations, it has been a prevalent
practice to have common officers, and in many cases, common directors
among affiliated companies. Will these integrated planning, service and
personnel requirements be appropriate and workable in a disaggregated
and competitive electric business where flexibility is necessary?
A number of registered holding companies have divested or are
planning to divest their electric generator assets and will operate in
restructured systems where their retail customer base will be open to
competition. It is unclear that the integration standard will have any
relevance under such circumstances.
For multistate registered holding company, PUHCA is a major concern
as states move forward to competition. PUHCA restricts our ability to
compete. This is attractive to our ``unregulated'' competitors as they
move forward unimpeded. PUHCA restricts the types of business we can
invest in, where we can invest and how much capital we can deploy.
Restricted investments, required integration systems and financial
prohibitions severely impact our structural and financial ability to
respond to a rapidly moving competitive retail market. If a level
playing field is sought, for a competitive market, PUHCA stands out as
a significant barrier to achieving this goal.
Technology is another issue. PUHCA was adopted in a world without
computers, without reliable transmission systems, without regional
power pools, without reliable long-distance communication. Technology
was one reason for PUHCA's geographic integration limits. Obviously,
technology has passed PUHCA, and its integration requirements by.
A prominent feature of current FERC policy and most state
restructuring frameworks is the establishing of so-called Regional
Transmission Organizations (``RTOs'')--whether they are an independent
transmission company (``Transco'') or an Independent System Operator
(or ``ISO''). These RTOs typically assume in some fashion control of
the regional or statewide electric transmission grid in order to assure
further non-discriminatory access and efficient, reliable system
operation.
PUHCA presents a potential regulatory dilemma for some RTOs, since
these entities may, depending on the facts, fall under the definition
of ``electric utility company'' under Section 2(a)(3) of PUHCA--that
is, an RTO will ``operate facilities used for the generation,
transmission, or distribution of electric energy for sale . . .''
Indeed, in order to perform their mandate effectively, RTOs must
necessarily exercise operational control over transmission grid
facilities.
RTOs are not the kind of public utility entities that PUHCA was
designed to regulate. They will not exercise market power. They raise
no issues regarding ratepayer harm; rather, they will facilitate
ratepayer interests by promoting regional electricity markets. Yet
because RTOs could, under certain circumstances, be deemed to be PUHCA
``electric utility companies'', any person or company which might be
regarded as exerting a ``controlling influence'' over an RTO could in
turn be deemed a ``holding company'' potentially subject to full PUHCA
regulation. This is a very real concern. To be sure, the SEC Staff has
issued a no-action letter concurring that the California ISO is not a
PUHCA ``electric utility company'' because it is an ``instrumentality''
of the State of California, based on the State legislature's
restructuring directive. However, the means of RTO creation varies from
region to region, and most RTOs will operate on a regional, rather than
a statewide basis. The PUHCA uncertainties associated with the
structure and operations of RTOs may cast a regulatory cloud over a
vital aspect of state and federal restructuring efforts. It is unclear
how the SEC will deal with this critical issue, especially now that
most of the RTOs that have been approved to date have been and are also
power pools, which have not been regarded as creating a holding company
structure for member utilities. Thus, on the one hand, RTOs will be
critical to successful restructuring efforts. On the other hand, PUHCA
may impede RTOs from developing regionally, with broad-based
membership.
The corporate or functional unbundling features of current
restructuring programs can also be highly problematic for utilities
holding a Section 3(a)(2) exemption. Section 3(a)(2) provides an
exemption for holding companies that carry on the bulk of their utility
activity at the parent company level, with only minor utility
subsidiary operations. Thus, for example, if a parent utility company
must transfer to a subsidiary company substantial generation assets to
comply with state initiated restructuring law, it may no longer qualify
for a Section 3(a)(2) exemption, since the bulk of its utility
operations may now be conducted downstream at the subsidiary level.
In addition, restructuring mandates may effectively compel a
utility to create a new holding company over generation, transmission/
distribution, and non-utility subsidiaries, as a means of assuring
effective corporate separation of utility functions and safeguarding
against potential cross-subsidization. The creation of such a top-tier
holding company with no utility assets of its own, however, precludes
retention of a Section 3(a)(2) exemption (which requires that the
parent holding company also be a utility company).
In sum, over the long-road PUHCA will hinder state restructuring
efforts. PUHCA is an entry barrier, impeding robust retail competition.
State driven restructuring presents potential problems for the ability
of registered companies to comply with PUHCA's requirements and compete
in newly created retail markets. Registered companies are subject to
the ``integration'' standard, which demands, among other things, that
utility operations be component parts of a vertically integrated
system. This standard clearly clashes with emerging competitive systems
based on unbundled service, independent system operators, and power
exchanges. And ironically, state restructuring will likely endanger
certain utilities' existing exemptions and thus require them to become
registered holding companies.
Leaving PUHCA intact as state restructuring proceeds will create
perverse incentives, as companies recreate ``PUHCA Pretzels''--
especially regarding transmission assets--to comply with PUHCA's broad
reach, restructure their products and services, and to compete in
retail electricity markets. This federal barrier to state enacted
retail competition reforms can only be removed by the Congress. That is
why PUHCA repeal legislation should be signed into law this year.
iv. conclusion
In conclusion, the Repeal PUHCA Now! Coalition believes it has
addressed the various issues of concern that have been raised about
repeal of this statute which, as the SEC has noted, is outdated and no
longer needed. Consumer protections will still be provided, market
power problems are not compounded and regulatory guardians will still
vigorously oversee the exercise of market power through rate reviews
and merger activities. If we are for fair wholesale and retail
competition, where numerous firms compete under similar regulatory
restrictions, then removal of PUHCA is a key component to a competitive
atmosphere. We urge the Congress to repeal PUHCA this year.
______
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Response of David R. Nevius, Vice President, NERC to Questions From
Hon. John D. Dingell
Question 1. In its Reliability Assessment: 1998-2007, the North
American Electric Reliability Council (NERC) specifically raises
concerns about the impact of the Environmental Protection Agency's
(EPA) September 24, 1998 final rule for reducing regional transport of
ground-level ozone (also known as the NOx SIP call) upon
reliability.
(a) In developing the NOx SIP call, did EPA consult with
NERC regarding the impact of the SIP call on the supply adequacy and
overall reliability of our nation's electric system?
Answer: NERC was not consulted by EPA concerning the potential
supply adequacy and overall reliability of the electric system in
developing the NOx SIP Call.
(b) If NERC was consulted, which of NERC's views incorporated into
EPA's rule and which were not?
Answer: NERC was not consulted.
Question 2. I understand that NERC has been studying the potential
effect of the NOx SIP call upon adequacy and reliability.
(a) At this time, does NERC believe the SIP call will affect supply
adequacy and overall reliability in the 22 state-region covered by
EPA's rule, and, if so, will the effect be negative or positive?
Answer: NERC's reliability analysis has yet to be completed (see
answer to Question 2d below). However the primary impact on supply
adequacy and overall electric system reliability would result from
changes in the availability of generation. Generally speaking, if
generation availability is increased, reliability of the power supply
is improved, and if availability is decreased, reliability suffers. One
of the issues being investigated in the study is the validity of EPA
estimates of the amount and location of generation that will be
unavailable to accommodate the retrofits needed to comply with the May
1, 2003 deadline for meeting the EPA regulations.
One of the primary NOx reduction technologies is the use
of selective catalytic reduction (SCR) equipment. Retrofitting
generators with SCR equipment may require extensions to scheduled
outage times and therefore increase generation unavailability.
A survey of ECAR Region generation owners concerning their
NOx SIP Call compliance plans indicate that about 20,000 MW
more capacity will use selective catalytic reduction (SCR) technology
than projected by EPA.
EPA estimated total scheduled outage time of 5 weeks, for
generation undergoing SCR retrofits. More recent theoretical studies by
the Ozone Attainment coalition (OAC), the Utility Air Regulatory Group
(UARG), and Zinder--Cichanowicz (consultants to UARG and Edison
Electric Institute) estimate total outage time ranging from 6 to 9
weeks. The ECAR survey results indicate expected total outage times at
6-8 weeks based on quotes from equipment vendors.
(b) Could the NOx SIP call have a greater impact on
supply adequacy and overall system reliability in some regions of the
SIP call area than in others?
Answer: Yes. Each NERC Region has a different generation mix, and
each has a different level of generation that would require the
installation of NOx reduction equipment, so the potential
for reliability impacts varies from Region to Region. Recent analysis
by the MAIN Region on the potential impacts does not indicate any
adverse impact to reliability caused by NOx mitigation
retrofits. That work was based on a survey of generation owners in the
MAIN Region. However, MAIN's generation mix includes a higher
percentage of nuclear generation than ECAR, which is more heavily
impacted by the NOx SIP Call. Therefore, the reliability
impacts in the ECAR Region may be more significant.
(c) Could the NOx SIP call adversely affect supply
adequacy and system reliability in states outside the SIP call area?
Answer: Yes. The Eastern Interconnection of North America
electrically behaves as one system, without regard to political
boundaries of countries, states, or NERC Regions. Movement of
generation resources across the Interconnection is subject to the laws
of physics and the physical limitations between portions of the
Interconnection. What happens in one location of the Eastern
Interconnection affects the rest of the Eastern Interconnection.
The below figure shows the states subject to the NOx SIP
Call.
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The SERC Region contains a number of states subject to the SIP
Call, but also, all or parts of four other states are in the SERC
Region. If the reliability of SERC as a whole is adversely impacted,
those other states may also feel the impact. The same is true for
states in the MAPP and SPP Regions, which are also part of the Eastern
Interconnection. As such, the NOx SIP Call could adversely
affect supply adequacy and system reliability in states outside the SIP
call area.
(d) Will NERC issue a report on the impact of the NOx
SIP Call on adequacy and reliability? If so, when? If not, why not?
Answer: Yes. The NERC Reliability Assessment Subcommittee (RAS) is
in the process of conducting a screening study of the potential impacts
to short-term power supply and reliability.
The screening analysis will focus on 4 Regions--ECAR, MAAC, MAIN,
and SERC (see figure below).
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The study methods will analyze:
Weekly available installed reserve margin
Loss-of-load expectation (LOLE)
Support from remainder of Eastern Interconnection
Change in LOLE for each scenario
Available data (NERC Generating Availability Data System, NERC
Electricity Supply & Demand)
Used simplifying assumptions
The goals of the screening study are to:
Examine range of retrofit level scenarios using probabilistic
reliability analysis techniques
Minimize variation in other assumptions
Perform a comparative analysis of range of critical
assumptions
--Transfer capability interaction
--Length of retrofit time
--Reliance on Interruptibles
Build groundwork for detailed analysis
The NERC Board of Trustees has also endorsed RAS conducting a
detailed study of the short-term power supply impacts of the
NOx regulations in collaboration with the Edison Electric
Institute (EEI).
Question 3. For this summer, the Michigan Public Utilities
Commission has already stated its official concerns about reliability
due to the prospect of electricity supply inadequacy. On June 19, 1997,
in testimony before the Energy and Power Subcommittee, you cited NERC's
MAIN region, as an area where system adequacy was a concern.
Specifically, you cited the projected unavailability of 4,700-6,500 MW
of nuclear generating capacity and the limited ability of the region to
import power. The following summer, shortages of electricity in the
MAIN and ECAR regions, which are comprised of Michigan and other mid-
Western states, resulted in spot market price spikes as high as nearly
$7,500 MWh.
(a) As the electric utility industry moves closer to a market
framework, could such price spikes become more commonplace?
Answer: NERC does not have extensive expertise in markets and the
reasons for price spikes. The FERC staff conducted an investigation of
the reasons for the price spikes (Staff Report to the Federal Energy
Regulatory Commission on the Causes of the Pricing Abnormalities in the
Midwest during June 1998). In the Executive Summary of this report the
FERC staff said:
``what some have called a price `spike' was an extraordinarily
high, but rather narrow and short-lived increase in wholesale spot
market prices.'' The report goes on to say ``. . . the particular
combination of events that led to the magnitude of the June 1998 price
increases is not likely to recur, although wholesale prices can be
expected to rise and fall as a result of the dynamics of supply and
demand.'' The report also identifies issue areas for policy makers and
others to focus on to prevent a recurrence of these events.
(b) Has NERC identified a problem with capacity and system adequacy
in its ECAR region?
Answer: In its soon to be issued 1999 Summer Assessment, NERC
reports for ECAR that: ``With the ongoing outage of the Cook Nuclear
Units (2,060 MW total) ECAR's operational capacity margin is only
slightly improved from last summer. However, there is a greater
likelihood this year that power will be available from neighboring
Regions.''
ECAR, in its 1999 Assessment of Load and Capacity states: ``The
ECAR Members expect capacity margins in the region to be 10.8% during
peak demand this summer compared with 9.3% last summer. The increase in
capacity margin is a result of ECAR Members bringing existing
generating capacity back on line and installing new capacity. Under
peak load conditions, ECAR will likely need to utilize supplemental
capacity resources (contractually interruptible loads) and imports of
power from outside of ECAR) to meet its projected peak demand. Severe
weather (abnormally hot and humid) or unexpected generator outages and
the unavailability of power from outside the region could make it
necessary to curtail additional load, beyond contractually
interruptible loads and demand side management.''
(c) Could EPA's NOx SIP call, which will result in both
short and long-term losses of generating capacity, further exacerbate
such price spikes?
Answer: As indicated above, the NOx SIP call could
increase the unavailability of generation in some areas to the point
that reliability will be adversely impacted. NERC is not in a position
to speculate on whether or not such increased generation
unavailability, if it does occur, would result in price spikes.
(d) While curtailment generally refers to the physical loss of
power, isn't it possible that EPA's NOx SIP call could
result in effective curtailments by driving the price of electricity so
high that it is beyond the ability of the average customer to afford?
Answer: This is not NERC's purview.
Question 4. In your prior testimony before the Subcommittee, you
pointed to the inadequacy of the transmission system in the MAIN
region, which includes Michigan's upper peninsula, with regard to the
ability of that region to import power.
(a) Should EPA's NOx SIP call result in generation
losses that require the import of large amounts of electricity into the
MAIN region, are you aware of any EPA proposal to increase the ability
of the region to import power?
Answer: NERC is not aware of any EPA proposal to increase the
ability of the MAIN Region to import power. However, MAIN's Regional
analysis of the potential impacts of the NOx SIP Call does
not find detrimental impacts on power supply that would warrant import
of large amounts of electricity into the MAIN Region.
(b) What would it take, in terms of money, time, and effort, to
remedy the transmission problems in the MAIN region?
The transmission situation in MAIN is not as critical this summer
as indicated in my prior testimony (1997) primarily because of the
reduced requirement for imports from outside the region. As stated
above, MAIN's Regional analysis of the potential impacts of the
NOx SIP Call does not find detrimental impacts on power
supply that would warrant import of large amounts of electricity into
the MAIN Region.
Question 5. In its analysis of the costs and benefits associated
with the NOx SIP call, EPA asserts that existing utility
boilers can be retrofitted with pollution control equipment during
normal planned outages. Others, including affected utilities, contest
that assumption, claiming that retrofit activities cannot be completed
solely within the scope of normal planned outage periods.
(a) Has NERC assessed the potential for retrofit activities to
result in additional outage periods for affected utility boilers? If
not, why not?
Answer: The NERC Reliability Assessment Subcommittee (RAS) is
currently guiding the screening study on potential reliability impacts
of the NOx SIP Call mentioned in 2(d) above, which assesses
the impact of outage extensions on utility boilers NOx
mitigation plans. This detailed study is expected to be completed by
September at which time the results will be reported to the NERC Board
of Trustees.
(b) If NERC has performed such an assessment, please provide a
detailed summary of your analysis.
Answer: NERC will be glad to keep you and your Staff appraised of
the results of both the screening study and the detailed study on the
potential reliability impacts of the NOx SIP Call.
______
FirstEnergy
Akron, Ohio
September 3, 1999
The Honorable Joe Barton
Chairman, Subcommittee on Energy and Power
U.S. House of Representatives
2264 Rayburn House Office Building
Washington, D.C. 20515
Dear Chairman Barton: On behalf of FirstEnergy Corp., enclosed is
my response to the questions posed in your August 11, 1999, letter.
Thank you for the opportunity to respond to these important questions.
I understand my response will become part of the hearing record from
your subcommittee's April 22, 1999, hearing on transmission and
reliability.
Let me state again how important I believe transmission is in
creating consumer benefits, improving reliability, and spurring
competition as you and we envision. Simply put, our nation's
transmission infrastructure must grow in order to accommodate the
increasing number and the different kinds of transactions occurring in
the increasingly competitive electric generation market. There has been
little if any significant expansion of our nation's transmission
network for decades. For competition to work, the system that delivers
the product--the transmission networks--must expand. They will only
grow through new investments, not through new regulations. Congress
must do its part to create an environment that encourages investment in
transmission improvements, reduces regulatory burdens, and allows for
the voluntary development of transmission institutions, especially
business-oriented institutions that will be motivated to provide the
best possible service for their customers.
In the months following your April hearing, transmission has
become, for a variety of reasons, an even higher profile issue in the
electric industry restructuring debate. For example, the following all
occurred after the April hearing:
On May 13, the Federal Energy Regulatory Commission (``FERC'' or ``the
Commission'') issued a Notice of Proposed Rulemaking (NOPR)
with respect to the formation of regional transmission
organizations (RTOs). In essence, the NOPR calls for utilities
to voluntarily join RTOs that meet certain minimum criteria, or
to justify to FERC why they will not do so.
On June 3, FirstEnergy joined American Electric Power, CMS/Consumers
Energy, Detroit Edison and Virginia Power in the ``Alliance''
filing for what would enable the first-ever independent
transmission company or ``transco.'' In our judgement, the
Alliance filing has spurred debate both within the FERC and
Congress about future transmission entities and sets forth a
positive model for the kind of voluntary, business-oriented
regional transmission entity my testimony supported. As we
discussed when I met with you in July, the Alliance RTO will
be: made up of the transmission facilities of all the foregoing
companies; privately owned; governed by a board appointed by
its owners (as is customary for business enterprises);
independent (in ownership and governance) of electric
generation companies and other users of the system; and,
privately operated. From our perspective, the proposal meets
all of the criteria the Commission outlined in its RTO NOPR.
This independent entity will generate revenue solely by
providing transmission service to generators, marketers and
other users of the system, providing it every incentive to
support vigorous competition for electric sales by its
customers.
On July 28, the Commission granted a request for Declaratory Order by
Entergy Corporation for a single-company transco. Entergy would
retain passive ownership in the transco, which would be under
the control of an independent board.
Throughout this year, concern has steadily increased from industry
observers about the returns being permitted on transmission
assets. For example, a ruling of an Administrative Law Judge
with the Commission, in effect, ``penalizing'' Southern
California Edison Company for having joined the California ISO,
has drawn criticism from users of the transmission system and
transmission providers alike.
The East, South and Midwest--including your home State of Texas--
experienced a record-breaking heat wave that sent demand for
energy soaring to all-time highs in numerous cities, affecting
service reliability and price in some areas. Without question,
expanded and improved transmission networks would have eased
constraints.
Several financial analysts commented recently to the Commission on its
RTO NOPR. Analysts from Solomon Smith Barney, one of the major
investment banking institutions in the world, stressed the need
for incentives for new transmission investment: ``[t]he
problem, as we see it, is that the existing regulatory scheme
has contributed to the problems, by inhibiting both capital
investment and innovation, and the solution is to apply
incentive ratemaking of some sort across the board.'' I have
enclosed a copy of the comments of Solomon Smith Barney for
your review.
On August 4, Congressman Tom Sawyer, whose opinion on transmission
issues I know you value, introduced H.R. 2786, the proposed
``Interstate Transmission Act.'' The Sawyer bill is consistent
with our principles of proposed transmission expansion,
allowing voluntary participation in RTOs, allowing for
business-oriented transmission entities, and reducing
regulation. Among other things, the bill authorizes incentive-
based transmission pricing, prohibits FERC from mandating RTO
participation, and eliminates FERC's authority to review
mergers and condition orders on participation in an RTO.
Voluntary RTO formation continues to work. According to statistics
complied by the Edison Electric Institute, more than 60 percent
of electric customers in the U.S. are either served by an
operating RTO or soon will be. Moreover, as of August 1, 1999,
more than 70 percent of the total customers and more than 70
percent of the MWh sales of investor-owned utilities were
covered by an RTO that already has been approved or proposed.
In addition, FirstEnergy has worked to educate Members and staff on
transmission issues by joining six other utilities in a coalition to
promote the principles for transmission growth and improvement outlined
in my April 22 testimony. Many other transmission providers not
formally part of our coalition are supportive of our efforts. We
believe this is the first group devoted solely to transmission issues.
We are pleased that you made time to meet with us before the release of
your draft legislation. On behalf of the group, let me again formally
offer you our assistance in your work.
Thank you for your consideration of my views. Good luck with your
efforts.
Sincerely,
Stan Szwed
Vice President
Enclosures
Responses to Questions for the Record from Chairman Barton
Question 1. Your testimony suggests there is no need for
enforceable reliability standards, and market participants should be
free to ``devise and implement new arrangements.'' Do you believe
continued reliance on voluntary compliance with reliability standards
is a good idea? If not, how can reliability standards be made
enforceable without Federal legislation? Can NERC compel market
participants to join it? Can NERC assume enforcement powers?
Response. My testimony was intended to address a somewhat different
set of issues. In my testimony, I did not specifically address
reliability, but was addressing the best way to improve transmission
service. Reliability is an important part of transmission service in
that customers expect and need electric power to be delivered when they
need it. Reliability in a formal definition is the degree of
performance of the elements of the bulk electric system that results in
electricity being delivered to customers within accepted standards and
in the amount desired.\1\ Focusing on improving transmission service
will result in improved service for customers, including improved
reliability. The best way to improve transmission service is to let
market participants devise and implement new business structures and
arrangements for providing services, new investment, new methods, and
new technology.
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\1\ From definition of reliability in ``Glossary of Terms,''
prepared by the Glossary of Terms Task Force, North American Electric
Reliability Council, August 1996.
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The evolution of the reliability infrastructure of the North
American interconnected electric system from NERC to NAERO to create a
self-regulating reliability organization is one example of market
participant's ability to be responsive on a voluntary basis to ensure
grid reliability in a more regionalized and competitive market.
Although the NERC to NAERO evolution has widespread support, the
NERC/NAERO organization cannot compel market participants to join it or
to assume enforcement powers. Federal legislation is needed to provide
the legislative authority for NAERO under the regulatory jurisdiction
of the Federal Energy Regulatory Commission (``FERC'' or ``the
Commission'') in the United States. Although FirstEnergy supports the
NERC consensus language, with which you are familiar, legislation
introduced by Congressman Sawyer (H.R. 2786) contains provisions that
are shorter and less prescriptive than the NERC draft.
Question 2. Your testimony calls for a ``market-driven and
business-oriented resolution to transmission issues.'' Are you calling
for an end to FERC regulation of transmission rates?
Response. No. It is appropriate for FERC to continue to regulate
rates for transmission service. Without sufficient competition for bulk
delivered power, transmission will continue to have the characteristics
of a natural monopoly. However, it may be possible in the future, given
sufficient competition for delivered bulk power, to reduce or eliminate
transmission rate regulation. Congressman Sawyer's bill, H.R. 2786,
envisions that possibility.
FERC should encourage transmission investment to support a robust
transmission network to achieve open access goals. Alternatives for
encouraging investment in the transmission system could include: allow
a higher rate of return for investment in new assets, accelerated
depreciation for new transmission investments, eliminate revenue
credits for non-firm transmission services, permit an acquisition
premium on purchased transmission facilities, ``and'' pricing for new
lines or technological additions, tax advantaged transfer for asset
movement, incentive rate recovery and light handed regulation.
Your draft bill released in July and H.R. 2786 both provide for
incentive rates. I am grateful that this critical concept of incentive
rates has made its way into your legislative language.
What I meant by a ``market-driven and business-oriented resolution
to transmission issues'' is primarily that transmission owners should
be free to decide the most appropriate corporate form, structure,
geographical shape and ownership that they will need to meet the
evolving energy market. Barely two years ago, only 10 States had
enacted retail choice laws. Now more than half of all States have done
so. Major announcements about electricity generation are being made
nearly every day. And no one knows the effect distributed generation
will play in the market. It is critical to permit flexibility,
experimentation and customization of each transmission entity to
reflect regional needs, market variations and transition requirements.
Transmission institutions need to be able to adapt quickly in such a
volatile marketplace, just as transmission systems are able to adapt
quickly to rapid load changes.
As the Global Power Group of Salomon Smith Barney, one of the
world's leading investment banking institutions, put it in its comments
to the Commission in response to the Commission's Notice of Proposed
Rulemaking (``NOPR'') on Regional Transmission Organizations
(``RTOs''), ``The real value of the new, commercially-incentivized
transmission company might come from its ability to offer an unimagined
new set of product offerings or its ability to do so much more with
existing assets.''
Question 3. The State of Ohio is concerned your transco proposal
will split Ohio into two RTOs, the Alliance transco and the Midwest
ISO. How do you address the State's concerns?
Response. As I stated at the April 22 hearing in response to a
question from Representative Largent, I believe that RTOs need not
follow State boundaries and should not be determined by State
boundaries. RTOs should develop in response to market dynamics.
Electricity flows according to the laws of physics. It doesn't stop
at the State line. Except as to the consequences of the old system of
monopoly franchises, State boundaries are almost wholly unrelated to
patterns in electric generation, transmission and use.
The operating companies of Ohio's investor-owned utilities are
aligned with Regional Transmission Organizations:
Midwest ISO--Cincinnati Gas and Electric (operating company of
Cinergy).
Alliance RTO--Ohio Edison, the Cleveland Electric Illuminating Company
and the Toledo Edison Company (operating companies of
FirstEnergy Corp.) and Columbus Southern Power and Ohio Power
Company (operating companies of American Electric Power)
Not Currently Committed to an RTO--Dayton Power and LightAllegheny
Power.
As shown on Attachment 1 to this response, approximately 74% of
customers served by IOUs in Ohio will take transmission service from
the Alliance RTO, 12% will take service from IOUs not now committed to
an RTO and 14% will take service from the Midwest ISO.
Ohio's recently enacted electric restructuring legislation imposes
a starting date for competitive retail electric service on January 1,
2001. Further, Ohio's electric utilities are required to transfer
control to a FERC-approved RTO that would be operational by December
31, 2003. However, the legislation does not require participation in a
particular type of RTO. Finally, the legislation does not require the
elimination of pancaked transmission rates, rather it requires
minimization of these rates.\2\
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\2\ Section 4928.12.(A)(3) of the Ohio Revised Code.
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Question 4. At the hearing you stated you did not see a problem
with Ohio transmission systems being operated by two different
entities, the Alliance transco and the Midwest ISO. Are these proposals
consistent with the FERC proposed rule on RTOs, specifically the
provisions relating to scope and regional configuration? The proposed
rule favors RTOs that encompass contiguous areas and encompass a highly
interconnected portion of the grid.
Response. FERC's draft rule proposes that RTOs must be of
sufficient scope and regional configuration to permit the RTO to
perform its required functions and to support efficient non-
discriminatory power markets. The proposal of Alliance RTO satisfies
this proposed requirement.
By any measure, the proposed Alliance RTO is large. The Alliance
RTO will serve a combined area of 124,000 square miles in nine states,
encompassing a population of 26 million people and representing a load
of approximately 67,000 MW. The Alliance RTO would provide ``one-stop
shopping'' for transmission service over 43,000 miles of transmission
lines. By these and other measurers, the Alliance RTO, if approved,
would be one of the largest RTOs in the nation.
The proposed Alliance RTO is contiguous. It will be of sufficient
size and configuration to perform effectively the RTO functions
described in the Commission's proposed rule on RTOs.
The proposed Alliance RTO encompasses a highly interconnected
portion of the transmission grid.
Further, as the Commission observed in its Notice of Proposed
Rulemaking:
There is likely no one ``right'' configuration of regions.
One particular boundary may satisfy one desirable RTO objective
and conflict with another. The industry will continue to
evolve, and the appropriate regional configuration will likely
change over time with technological and market developments.\3\
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\3\ Notice of Proposed Rulemaking, Regional Transmission
Organizations, Docket No. RM99-2-000, IV FERC Stats. & Regs. para.
33,730.
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Seams issues are unavoidable unless there is a single RTO for each
interconnection. Such an arrangement is impractical at best since the
operational requirements for this type of transmission network are
beyond today's technology. Even if this problem could be solved, at
some point combining additional systems would reduce efficiency and
raise costs. The better alternative would be to allow the market place
to voluntarily form RTOs in response to the needs of transmission
customers with the appropriate incentives. This will result in RTOs
that provide the needed services in efficient and cost effective
manner.
Question 5. There are different kinds of transmission owners--
Federal agencies, State agencies, municipal utilities, rural electric
cooperatives, and IOUs. Could a transco be formed with these different
kinds of owners? Are there examples of entities that have that kind of
mixed ownership? How long would it take to form a transco that had that
kind of mixed ownership?
Question 6. How difficult would it be for non-profit entities such
as Federal agencies, State agencies, municipal utilities, and rural
electric cooperatives to join a transco? If so, is an ISO the only
option in regions with large non-IOU transmission systems?
Question 7. In some regions, such as the Pacific Northwest and the
Tennessee Valley, the Federal transmission system predominates. Can the
Federal government have an ownership interest in a private for-profit
transmission company? Does the Federal government have an ownership
role in other for-profit ventures?
Response. Based on the similarities and interrelations of the
issues they pose, I have taken the liberty of answering questions 5, 6
and 7 in one combined answer.
We believe that a Transco can be formed with different types of
owners. A transco-based RTO can incorporate passive ownership or
limited ownership interests in the RTO in exchange for transmission
assets. This could provide an opportunity for some Federal agencies,
State agencies, municipal utilities and rural electric cooperatives to
participate in an RTO. Governments currently invest in private
securities. However, I can see the potential for concerns if a
governmental entity with a financial interest also has a regulatory
role with respect to the entity or its competitors. Also, I can see the
potential for concerns if participation in an RTO by a governmental
entity creates an unfair competitive advantage.
While the Alliance RTO has not yet been confronted with this
issues, were we to face the question, we would probably consider a non-
IOU entity as a potential partner in an RTO generally on the same bases
on which we have considered IOUs as potential partners in an RTO. Many
of the issues you raised are issues that would have to be resolved by
the non-IOU entities.
The current restructuring of the electric industry, i.e. the sale
of generation facilities, creation of RTOs and the unbundling of
electric service at the state level, begs the question whether the
Federal government's ownership in larger power-marketing agencies
should be privatized. As I am sure you are aware, privatization of
electric facilities, including transmission facilities has been a major
feature of electric industry restructuring abroad. At the same time, I
recognize the many policy and political questions that are subsumed
within the question of privatization.
[GRAPHIC] [TIFF OMITTED] T5641.129
The Large Public Power Council
November 23, 1999
The Honorable Joe Barton, Chairman
Subcommittee on Energy and Power
Committee on Commerce
U.S. House of Representatives
2123 Rayburn House Office Building
Washington, DC 20515-6115
Dear Chairman Barton: On April 22, 1999, Dr. Matthew Cordaro,
former President and CEO of Nashville Electric Service, provided
testimony before the Subcommittee on Energy and Power on behalf of the
Large Public Power Council (LPPC) regarding ``Electricity Competition:
Reliability and Transmission in Competitive Electricity Markets.'' On
August 11, 1999, you forwarded follow-up questions to Dr. Cordaro
requesting that responses be filed for the record on or before
September 3, 1999.
Prior to receipt of your follow up questions, Dr. Cordaro had left
Nashville Gas and Electric to become CEO of the Midwest ISO. It has
recently come to my attention that responses to your August 11, 1999
questions were not provided to the committee. On behalf of the LPPC, I
am submitting the attached responses to your questions. I sincerely
apologize for the delay.
Please let me know if I can provide you with any additional
information.
Sincerely,
T. Graham Edwards
Chairman, Large Public Power Council
responses of lppc to follow up questions from chairman joe barton,
subcommittee on energy and power
The following questions were directed to Dr. Matthew Cordaro,
former CEO of Nashville Electric Service, who testified before the
Subcommittee on Energy and Power on April 22, 1999. Dr. Cordaro
provided testimony on behalf of the Large Public Power Council (LPPC)
regarding ``Electricity Competition: Reliability and Transmission in
Competitive Electricity Markets.''
Question 1: Your testimony states a majority of LPPC members have
adopted open access tariffs and submitted them to FERC. Please indicate
which LPPC members have submitted open access tariffs, and indicate the
disposition by FERC of these tariff submissions.
Response: Open access transmission tariffs have been filed with and
accepted by FERC for the following LPPC members: South Carolina Public
Service Authority; Omaha Public Power District; New York Power
Authority; Colorado Springs Utilities; Orlando Utilities Commission;
and Salt River Project
For the Committee's information, a number of LPPC members either
serve territories outside of FERC's jurisdiction (i.e., in Texas or
Puerto Rico), have no significant transmission facilities, or have an
open access transmission tariff but have not filed it at FERC.
Question 2: What is LPPC's position on the FERC proposed rule on
RTOs?
Response: Set forth below is the executive summary of the comments
filed by LPPC in Docket No. RM99-2-000, FERC's proposed rulemaking
regarding RTOs.
LPPC supports initiatives that: (1) provide greater access to
competitive wholesale power markets; (2) ensure open access, non-
discriminatory, transmission service; (3) improve reliability and
increase efficiencies in the management and operation of the nation's
transmission grid; and (4) ensure delivery of services to consumers at
the lowest reasonable cost. To the extent these objectives can be
achieved through the voluntary formation of RTOs, LPPC endorses the
Commission's proposed rule. The final rule, however, must ensure that
RTOs fully accommodate the existing legal obligations of public power
utilities, and the Commission will need to provide RTO participants
with significant flexibility to design and implement RTOs.
A. Obligations of Public Power Entities that Seek Participation in an
RTO Must be Accommodated
Federal, state, and locally-owned electric utilities, which own and
operate a significant portion of the nation's interconnected grid, are
subject to a number of legal obligations that will substantially affect
the scope of their participation in an RTO. These obligations are
imposed by, among other things, state constitutions, bond covenants,
IRS private use regulations, and federal, state, and local laws. The
effect of these legal obligations vary from utility to utility and, in
LPPC's view, it would not be feasible for the Commission's final rule
to specifically address each of these legal requirements and their
potential impact on public power participation in RTOs. LPPC believes
the final rule should, however, set forth a general requirement
mandating that all RTOs accommodate the legal and practical constraints
applicable to public power entities. LPPC's comments stated that any
RTO proposal that cannot demonstrate that a good faith effort was made
to accommodate public power participation should be rejected as
discriminatory, unjust, and contrary to the public interest.
B. RTOs Must be Independent of Market Participants
LPPC strongly agrees with the Commission's assertion that ``[a]n
RTO needs to be independent in both reality and perception.'' \1\
Without independence, market participants cannot be assured that an RTO
will provide non-discriminatory transmission service. In its comments
to FERC, LPPC stated that the Commission should approve only those
ownership structures that can be adequately regulated and policed in
order to ensure that RTOs will not provide preferential service to
affiliated owners of the RTO. Further, although LPPC believes the final
rule should provide flexibility to RTO participants to determine an
appropriate form of governance, all governing structures must ensure
that no class of market participants is treated preferentially or
allowed to unduly influence a governing board's decisionmaking
processes.
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\1\ RTO NOPR at 33,726.
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C. RTOs Must Result in Consumer Benefits
Providing incentives for utilities to participate in RTOs requires
a balancing of costs and benefits, and the benefits of RTO formation to
consumers must outweigh the attendant costs. For that reason, LPPC's
comments stated that, if the Commission does provide incentives for
utilities to participate in RTOs, these incentives should be provided
only if there are demonstrable corresponding public benefits.
Similarly, LPPC's comments argued that if the Commission approves
performance-based rate proposals, productivity objectives should: (1)
reflect achievement of certain public interest outcomes; and (2) be
based on performance factors that have been negotiated between the RTO
and transmission customers. If proposed performance factors are not the
product of consensus, LPPC argued that the Commission should approve
such rates only after the RTO has demonstrated that the use of
performance-based rates would result in significant consumer benefits.
Question 3: Could municipal utilities join transcos formed by IOUs?
Municipal utilities and cooperatives own power plants jointly with
IOUs, why can't you own a transco jointly with IOUs?
Response: The state and local laws that created each of LPPC's
members and the federal, state, and local laws that continue to
regulate them differ significantly both in scope and degree of
regulation. Moreover, most relevant federal, state and local laws do
not specifically address the authority of public power entities to
participate in the large, regional transmission organizations
envisioned by the Commission. The application of each of these laws to
the issue of public entities' participation in RTOs therefore usually
is not clear. To further complicate the matter, a significant body of
case law exists in each state construing that state's constitution and
statutes with respect to the scope of authority and duties of public
power entities. While this case law does not specifically address
public power entities' authority to participate in RTOs, it
nevertheless may carry precedential weight in determining the scope of
that authority under state law. Consequently, to assess its ability to
engage in any of these arrangements, each LPPC member must consider the
requirements of its state constitution, state and local law, bond
covenants, charters, and other legal obligations, as well as the case
law that construes these authorities.
Additionally, Section 141 of the Internal Revenue Code (``Code'')
imposes limitations on the use by non-governmental entities of public
power electric facilities financed with tax exempt bonds. These
``private use'' limitations significantly limit the form and extent of
participation by public power systems in RTOs. While the Internal
Revenue Service issued regulations in January 1998 that provided some
relief from these limitations (``1998 Temporary Regulations''),\2\ the
regulations are in effect only until January 2001, and they fail to
address fully the constraints imposed by the Code's private use
limitations on public power entities' RTO participation. For example,
the temporary regulations, did not provide the same relief to issuers
of new tax exempt bonds. Those issuers remain subject to the same
constraints on offering open access transmission and RTO membership as
were in effect before the 1998 Temporary Regulations. Issuers of new
bonds thus are not free to provide open access transmission or join
RTOs on the same terms as other public power systems or investor-owned
utilities. Moreover, the Temporary Regulations are in fact temporary--
they expire by their terms on January 21, 2001. No public power system
with transmission facilities financed with tax exempt bonds can
prudently commit itself to providing unrestricted open access
transmission or to surrender control of its transmission system to an
RTO without retaining a clear right to terminate open access
transmission services to non-governmental entities and to regain
control of its transmission system after January 20, 2001.
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\2\ Treas. Reg. Sec. Sec. 1.141-7T & -8T.