SPEAKERS CONTENTS INSERTS
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THE EFFECTS OF ELECTRIC DEREGULATION ON RURAL AREAS AND AN EXAMINATION OF LEGISLATIVE PROPOSALS
GENERAL FARM COMMODITIES, RESOURCE
CONSERVATION, AND CREDIT
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
MAY 26, 1999
Serial No. 10621
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Printed for the use of the Committee on Agriculture
COMMITTEE ON AGRICULTURE
LARRY COMBEST, Texas, Chairman
BILL BARRETT, Nebraska,
JOHN A. BOEHNER, Ohio
THOMAS W. EWING, Illinois
BOB GOODLATTE, Virginia
RICHARD W. POMBO, California
CHARLES T. CANADY, Florida
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
HELEN CHENOWETH, Idaho
JOHN N. HOSTETTLER, Indiana
SAXBY CHAMBLISS, Georgia
RAY LaHOOD, Illinois
JERRY MORAN, Kansas
BOB SCHAFFER, Colorado
JOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
Page 3 PREV PAGE TOP OF DOCJOHN COOKSEY, Louisiana
KEN CALVERT, California
GIL GUTKNECHT, Minnesota
BOB RILEY, Alabama
GREG WALDEN, Oregon
MICHAEL K. SIMPSON, Idaho
DOUG OSE, California
ROBIN HAYES, North Carolina
ERNIE FLETCHER, Kentucky
CHARLES W. STENHOLM, Texas,
Ranking Minority Member
GEORGE E. BROWN, Jr., California
GARY A. CONDIT, California
COLLIN C. PETERSON, Minnesota
CALVIN M. DOOLEY, California
EVA M. CLAYTON, North Carolina
DAVID MINGE, Minnesota
EARL F. HILLIARD, Alabama
EARL POMEROY, North Dakota
TIM HOLDEN, Pennsylvania
SANFORD D. BISHOP, Jr., Georgia
BENNIE G. THOMPSON, Mississippi
JOHN ELIAS BALDACCI, Maine
MARION BERRY, Arkansas
Page 4 PREV PAGE TOP OF DOCVIRGIL H. GOODE, Jr., Virginia
MIKE McINTYRE, North Carolina
DEBBIE STABENOW, Michigan
BOB ETHERIDGE, North Carolina
CHRISTOPHER JOHN, Louisiana
LEONARD L. BOSWELL, Iowa
DAVID D. PHELPS, Illinois
KEN LUCAS, Kentucky
MIKE THOMPSON, California
BARON P. HILL, Indiana
WILLIAM E. O'CONNER, JR., Staff Director
LANCE KOTSCHWAR, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
KEITH WILLIAMS, Communications Director
Subcommittee on General Farm Commodities, Resource Conservation, and Credit
BILL BARRETT, Nebraska, Chairman
JOHN A. BOEHNER, Ohio,
NICK SMITH, Michigan
FRANK D. LUCAS, Oklahoma
SAXBY CHAMBLISS, Georgia
JERRY MORAN, Kansas
Page 5 PREV PAGE TOP OF DOCJOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
DOUG OSE, California
ROBIN HAYES, North Carolina
DAVID MINGE, MN,
Ranking Minority Member
BENNIE G. THOMPSON, Mississippi
DAVID D. PHELPS, Illinois
BARON P. HILL, Indiana
EVA M. CLAYTON, North Carolina
EARL POMEROY, North Dakota
TIM HOLDEN, Pennsylvania
SANFORD D. BISHOP, Jr. Georgia
JOHN ELIAS BALDACCI, Maine
C O N T E N T S
Barrett, Hon. Bill, a Representative in Congress from the State of Nebraska, opening statement
Clayton, Hon. Eva M., a Representative in Congress from the State of North Carolina, prepared statement
Minge, Hon. David, a Representative in Congress from the State of Minnesota, opening statement
Stenholm, Hon. Charles W., a Representative in Congress from the State of Texas, opening statement
Page 6 PREV PAGE TOP OF DOCWitnesses
Argo, Gene, president, Midwest Energy
Beyer, Wally, Administrator, Rural Utilities Service, U.S. Department of Agriculture
Campbell, Charles, department of finance and economics, Mississippi State University
Freshwater, David, department of agricultural economics, University of Kentucky
Goldberg, Gary, chief executive officer, American Corn Growers Association, representing the Alliance for Rural America
Mazur, Mark, Acting Policy Director, Office of Policy, Department of Energy
McClure, John, vice-president, strategic planning and governmental affairs, Nebraska Public Power District
Johannis, Hon. Mike, Governor of Nebraska, statement
USDA Analysis Effects on Rural Areas From Electric Industry Restructuring
THE EFFECTS OF ELECTRIC DEREGULATION ON RURAL AREAS AND AN EXAMINATION OF LEGISLATIVE PROPOSALS
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WEDNESDAY, MAY 26, 1999
House of Representatives,
Subcommittee on General Farm Commodities,
Resource Conservation, and Credit,
Committee on Agriculture,
The subcommittee met, pursuant to notice, at 10:01 a.m., in room 1300, Longworth House Office Building, Hon. Bill Barrett (chairman of the subcommittee) presiding.
Present: Representatives Smith, Lucas of Oklahoma, Moran, Thune, Jenkins, Ose, Hayes, Minge, Thompson of Mississippi, Phelps, Clayton, Holden, Bishop, and Stenholm [ex officio].
Also present: Representative Berry.
Staff present: Dave Ebersole, senior professional staff; Michael Neruda, subcommittee staff director; Russell Laird, Callista Bisek, Wanda Worsham, clerk; Russell Middleton, and Howard Conley.
OPENING STATEMENT OF HON. BILL BARRETT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEBRASKA
Mr. BARRETT. The hearing of the Subcommittee on General Farm Commodities, Resource Conservation, and Credit to review the effects of electric deregulation on rural areas and to examine legislative proposals will now come to order.
The subcommittee meets today to review the possible effects of a federally-mandated deregulation of this Nation's electric power generation, transmission, and distribution system. Although I use the word ''deregulation'' to describe the hearing this morning, a quiet look at the administration's proposal on deregulation confirms that ''restructuring'' is a more accurate description of that which is being proposed.
Page 8 PREV PAGE TOP OF DOC At the request of the Clinton administration, Chairman Bliley and Mr. Dingell of the Commerce Committee, last week, introduced H.R. 1828. The bill has been referred to this committee and four others as well. So while it is a short title, the Comprehensive Electricity Competition Act could be accurate in that it may invite competition, if enacted. Having been referred to five committees of the House, it certainly must be comprehensive.
Even though the bill contains a Federal mandate to change the way consumers get the power to run their homes and their businesses, this bill seems to me to be a far cry from deregulation. But don't misunderstand. I am not, today, endorsing a Federal mandate of electric power deregulation, currently ongoing in the States. I believe few of us here in the Congress understand the broad implications such changes may bring to our economy and I am especially concerned about the effects electric power deregulation or restructuring, if you wish, may have on our rural areas.
First we will hear from the administration, Wally Beyer and Keith Collins, of the Department of Agriculture, and Mark Mazur of the Department of Energy. The second panel is composed of two academic experts who have examined this issue in depth. We will also hear from two persons intimately involved in bringing electric power to rural America. And the subcommittee will hear from a representative of a producer organization representing an alliance of rural interests that share many of my own concerns about these proposals. And I certainly do look forward to today's testimony.
I wish now to recognize the ranking minority member of the subcommittee, the gentleman from Minnesota, Mr. Minge.
OPENING STATEMENT OF HON. DAVID MINGE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MINNESOTA
Mr. MINGE. Thank you, Mr. Chairman. I think that all of us join you in your observations about the importance of adequate electric service to rural America and the concerns about the impact of deregulation on our regions.
Page 9 PREV PAGE TOP OF DOC One point I would like to emphasize is that the Federal Government over the past 60 years has very carefully and consistently promoted the construction and the maintenance of electric service in rural America. It is one of the great accomplishments of the New Deal that rural America was ultimately electrified. We also know that, as we move towards deregulation in the different sectors of our economy, the competitive forces do not favor the more remote areas of our country but, instead, replace them at risk.
And the question really is, with respect to electricity, if we are going to have deregulation, how can we ensure that our rural communities and, most of all, the farms and the ranches in the outlying areas continue to have electric service at reasonable rates. And I look forward to your comments and our discussion this morning. Thank you.
Mr. BARRETT. Thank you, Mr. Minge.
If there are any statements by Members, they may be included in the record at this time.
[The prepared statement of Mrs. Clayton follows:]
PREPARED STATEMENT OF HON. EVA M. CLAYTON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH CAROLINA
The unprecedented prosperity presently being enjoyed by tens of millions of Americans has largely eluded rural America. This fact is well known to those of us who represent rural Americans. Sadly, this fact is little known and hardly noticed by the rest of the country. Nevertheless, these are hard times in rural Americaespecially for family farmersand Federal public policy makers must exercise extreme caution about non-agricultural policy gambits that will have unintended, negative impacts on rural America.
I and many of my colleagues who represent rural Americans fear that the current Congressional debate over federally dictated electricity deregulation may result in just such an outcome: untended negative impacts on rural America in the form of higher utility bills, poorer service and no real consumer choice. For those of us who represent rural Americans, the present debate over electricity rate restructuring is deeply worrisome.
Page 10 PREV PAGE TOP OF DOC First, for my urban and suburban colleagues, let me paint a picture of how tough times are in rural America. In 1933in the midst of the Great Depressionfarmers received $3.53 a hundredweight for their hogs at market. That is $47.92 in today's dollars. $47.92! In the last quarter of 1998, the market price for hogs was below $10 a hundredweight. While Chicago may have at once been the ''hog butcher'' of the world, North Carolina today could vie for a share of that title. The crisis in rural America is hardly confined to hog farmers.
Low prices and extreme weather conditions have contributed to the worst farm crisis in recent history. Passage in 1996 of the Federal Agricultural Improvement and Reform Act, while turning back Depression era price supports and providing farmers with freedom to choose which commodities to produce, have focused new light on issues such as crop insurance, risk management, and opening overseas markets through new trade agreements and passage of fast track legislation. With diminished expectations for many commodity prices, net farm income is forecast at $43.6 billion in 1999, $1 billion lower that forecast in December, and $2.4 billion lower than the $46 billion estimated for 1998.
My concerns over the direction of the Federal electricity deregulation debate are numerous, My rural constituents can not afford utility price increases. Yet that is what they will experience according to a USDA internal staff study. My state, North Carolina, is among nineteen of America's most rural states that the USDA study concludes will be the losers under almost any federally-decreed deregulation plan. Proponents of deregulation insist a panacea is at hand with deregulation. USDA disagrees. My hard-pressed constituents are likely to be paying higher utility bills.
Second, I am concerned about the flight of large industrial power users to out-of-state providers that leaves my constituents stranded and having to bear the cost of supporting the incumbent municipal and co-op systems that dot North Carolina and have served by state so well. Previous experiences with other deregulation experiments, airline and telephones, for instance, suggest there will be no consumer choice available to rural residential customers. In terms of electricity, the factory is going to leave town with rural residential customers left to pickup the bill. Finally, I am concerned that the Federal Government may pre-empt the prerogatives of North Carolina to tailor a state-based restructuring plan that is best suited to the needs of my state. I understand how Federal deregulation benefits large corporate consumers. I am yet to be convinced that it holds any promise for North Carolina, my constituents, or rural Americans everywhere.
Page 11 PREV PAGE TOP OF DOC In closing, let me return to the USDA internal staff study done by the Department's Chief Economist. There is much undo controversy over this study. The controversy is not a concern of mine. The study's conclusions are. It's the substance of these conclusions that command my attention. Experience tells me those conclusions have a certain logic and obviousness to them. Members of this Congress who represent rural Americans should not be distracted by this controversy. Rather, they need to be very focused on what rural America stands to lose if Congress rushes to reshape America's electricity marketplace. My constituents can't afford higher electricity bills.
Mr. BARRETT. I again recognize the Honorable Wally Beyer, Administrator, Rural Utilities Service, U.S. Department of Agriculture, accompanied by Dr. Keith Collins, Chief Economist, USDA; and Mr. Mark Mazur, Director of the Office of Policy, Department of Energy. Mr. Beyer, you may proceed.
STATEMENT OF WALLY BEYER, ADMINISTRATOR, RURAL UTILITIES SERVICE, ACCOMPANIED BY KEITH COLLINS, CHIEF ECONOMIST, U.S. DEPARTMENT OF AGRICULTURE
Mr. BEYER. Thank you very much, Mr. Chairman and members of the committee, for inviting us here. I am the Administrator of Rural Utilities Service, a rural development agency of the Department of Agriculture. I appreciate the opportunity to appear today to share the views of Rural Utilities Service on the challenges of delivering affordable, reliable electric service in a rapidly changing regulatory and market environment.
I would like to start by thanking the subcommittee, not only for the invitation today, but for your continued strong support for the entire Rural Utilities Service. Together we are helping build rural America, their local economies, with quality telecommunications; electric, water, and waste water infrastructure; and improving health care and education through distant learning and telemedicine projects. In total, RUS has an outstanding loan portfolio of more than $42 billion to more than 9,000 rural entities. Without your support, rural America would be a very different place.
Page 12 PREV PAGE TOP OF DOC I can think of no better time to focus attention on the rural electric challenge. Last week marked the 63rd anniversary of the signing of the Rural Electrification Act. While rural America has changed greatly because of and since the passage of that landmark legislation, many of the challenges remain. Distance, geography, low population density, demographics, and terrain all make rural utility services difficult to provide and to access affordable, critically important capital funding.
In providing access to capital, RUS is more than just a lender. It is a credit support agency as well. This fiscal year alone, RUS will finance more than $1 billion in rural electric infrastructure. For every Federal $1 RUS directs to the rural electric infrastructure, $3 additional private sector are leveraged. On average, over the last 5 years, the private-public partnership has resulted in more than $3 billion being invested annually in rural electric infrastructure. A modern electric infrastructure sustains and helps develop the rural economy. Today the RUS holds $32 billion in loans to rural electric systems.
While we are proud of our accomplishments, we know that our work is not done. Rural systems are simply more expensive to operate and maintain. Plant improvements remain expensive and capital costs are more expensive on a per-consumer basis for rural systems than urban areas. As we look to the future, we know that RUS public-private partnership must continue. In a competitive marketplace, RUS credit support and leveraging of private capital investment will be even more valuable.
As Congress continues in consideration of electric restructuring legislation, it is critically important to remember the program interests of this committee and the United States Department of Agriculture. Continued support for affordable capital and credit support to leverage private capital for rural electric systems through the Rural Utility Service is essential to assuring restructuring legislation does not harm rural America.
This is a time of great regulatory and market changes. These changes could have profound effects on rural electric providers as well as loan security of the $42 billion Rural Utilities' loan portfolio. As electric restructuring unfolds, the RUS is keenly focused on maintaining both quality service and taxpayer loan security.
Page 13 PREV PAGE TOP OF DOC Mr. Chairman, I am pleased to support the administration's electric restructuring legislation, titled ''The Comprehensive Electric Competition Act.'' RUS made significant contributions to this landmark legislative proposal. No restructuring plan currently before Congress is as complete or is as sensitive to rural concerns than the President's bill.
I support this legislation because a national restructuring strategy is required. One way or another, restructuring is coming. At this point, 18 States have passed restructuring legislation. Twenty-five States have restructuring studies underway and three other State public service commissions have initiated restructuring actions. All rural systems face difficulties due to a low population density; a lack of economies of scale; customers which are generally older, less affluent; and fewer industrial, commercial consumers per residential consumer. It simply costs more to serve rural America.
In considering electric restructuring legislation, I urge the committee to keep in mind the significant program interests of the United States Agriculture and the investments of the American taxpayer in rural electrification. America has a world-class energy delivery system. It is a system which most American take for granted. Our economic strengths and productivity are directly tied to the availability of reliable electric power.
Restructuring the regulatory and market regime of 100-year-old electric utility industry is a complex task. There are no simple solutions. As we have learned in many other deregulation, restructuring efforts, there are risks and rewards associated with every action. Congress has made a good-faith effort to address rural concerns in a competitive marketplace. It will be no different in the electric restructuring.
As the Administrator of the Rural Utility Service and as a former manager of a rural electric cooperative, I believe that the administration's legislation, that provides an appropriate mix of policies, will address the continued reliable, reasonably cost, service into rural America. I again thank you for the opportunity to be here and, with your permission, I would ask that my full statement be recorded in the record.
Page 14 PREV PAGE TOP OF DOC [The prepared statement of Mr. Beyer appears at the conclusion of the hearing.]
Mr. BARRETT. That will, in fact, be done. Thank you very much, Mr. Beyer.
Mr. BEYER. Thank you.
Mr. BARRETT. Mr. Mazur.
STATEMENT OF MARK MAZUR, ACTING DIRECTOR, OFFICE OF POLICY, DEPARTMENT OF ENERGY
Mr. MAZUR. Thank you. Good morning, Mr. Chairman and members of the subcommittee. My name is Mark Mazur and I am the Acting Director of the Office of Policy at the Department of Energy. The Department today welcomes the opportunity to testify regarding the impact of electric restructuring and retail competition on rural America.
The Clinton administration supports consumer choice and competition among power suppliers for four specific reasons. First, it will lower electricity rates. Second, it will make American businesses more competitive. Third, it will spur the introduction of new products and services. And, fourth, it will reduce the emissions of traditional air pollutants and greenhouse gases. On April 15, Secretary Richardson transmitted to Congress the Clinton administration's Comprehensive Electricity Competition Act, which sets out our vision for the appropriate Federal role to enhance the benefits associated with retail competition. As Mr. Beyer has stated, the administration's proposal was developed by the Department of Energy with the active participation of the Agriculture Department and other agencies.
The administration believes that rural America will benefit from a more competitive electricity industry. These benefits would be enhanced by elements of the administration's proposed legislation, which responds to specific rural needs and concerns. My testimony today will first discuss the administration's analysis of the likely effects of competition on consumers. And then, second, I want to focus on some specific provisions of the administration's bill which enhance the benefits available to rural America.
Page 15 PREV PAGE TOP OF DOC I understand that we have provided the committee a pre-print version of the supporting analysis for our proposed legislation.
The specific results come from work done by the Policy Office at the Department of Energy using a sophisticated model of the Nation's electricity system. Overall, we estimate that a competitive electricity market will save American consumers at least $20 billion per year by 2010. Moreover, our analysis projects that retail competition will result in lower prices to residential consumers in all regions and States throughout the projection period. And all regions of the country will, on average, have lower priced electricity.
Competition under the administration's bill will lead to significant benefits to rural consumers. Competition provides a powerful incentive to increase the efficiency and responsiveness of rural electricity suppliers. Rural consumers will benefit from a greater variety of services and from the ability to choose their power supplier, all while continuing to receive their electricity services through the existing distribution network.
I would like to turn to five specific rural-friendly provisions in the administration proposal. First, what we call a flexible opt-out approach. The administration bill would provide each State public service commission in each unregulated cooperative and municipal utility with the opportunity to opt-out of competition if they find their consumers to be better served by an alternative policy or by the current regulatory system. This approach encourages retail competition, while ensuring that States and nonregulated utilities can implement an approach that meets their unique needs. It also addresses concerns of some States and nonregulated utilities that a one-size-fits-all approach to retail competition could lead to increased costs.
The second element that is a rural-friendly provision is the renewable portfolio standard. Retail competition has the potential to significantly increase renewable energy's share of the electricity market because it will allow environmentally conscious consumers to effectively vote with their wallets and purchase green power. But the uncertainty of the transition to competition and the recognition of important environmental benefits from renewables led the administration to propose a Federal renewable portfolio standard, an RPS. This would require all electricity sellers to cover 7.5 percent of their electricity sales by 2010 will generation from nonhydroelectric sources, renewable sources, such as wind, solar, biomass, and geothermal energy.
Page 16 PREV PAGE TOP OF DOC Rural America is likely to benefit substantially from this RPS. Our results indicate that biomass and wind energy resources will account for the vast majority of renewable electricity produced in response to the administration's proposed RPS program. These resources are located almost exclusively in rural America and this chart gives an indication of where the wind resources are.
The darker red is the excellent; lighter red is good; and brownish is moderate. You can see they are located primarily in rural areas. In fact, some of my colleagues have taken to saying that the RPS stands for the rural portfolio standard. Likely rural impacts associated with the RPS include increased economic development, job creation, higher local property tax revenues, enhanced agricultural production, and increased land value.
The third element that is specific to rural areas in the administration's bill is the rural safety net. The administration believes electric restructuring will benefit rural America. However, some have expressed concerns that some rural consumers could be harmed. As a result, the administration bill includes a rural safety net which would be available should the expected benefits from competition not be realized. Under the safety net provision, a national wires charge of up to 0.17 mills per kilowatt hour would be available to generate funds if the Secretary of Energy, in consultation with the Secretary of Agriculture, determined that competition had adversely affected rural consumers. At its full level, the rural safety net would provide over $650 million per year to help rural consumers. Since the adverse impacts of competition, if any occur, are likely to be localized, the safety net should be sufficient to meet all reasonably foreseeable contingencies.
A fourth element that is specific to rural America is the Rural and Remote Power Grant. Some rural and remote communities are not connected to the major power grids or have transmission constraints. These communities may not be able to access competing suppliers and not benefit completely from competition. To help residents of these remote areas, the administration proposal would authorize appropriations for grants to address electricity needs of small, remote communities.
Page 17 PREV PAGE TOP OF DOC And a fifth element that is primarily aimed at rural areas is the retention of cost-based Federal power. We know many rural communities served by electric cooperatives and municipal utilities receive the benefits of cost-based preference power generated at Federal dams and marketed by the Power Marketing Administrations and TVA. The administration proposal retains the existing polices for distribution and pricing of this preference power, which would continue to be sold at cost-based rather than market prices. This policy reflects the administration's goal of implementing competition in a manner that benefits consumers in all regions of the country and those served by all types of utilities.
Mr. Chairman, we believe our approach goes a long way toward meeting the requirements to update the statutory framework for the electricity sector in a manner that is appropriate for the 21st century. In the administration's view, this is not an issue that inherently involves a conflict among regional interests or groups. If restructuring legislation at the Federal level is handled in the manner proposed by the administration, both rural and urban consumers in all areas of the country can benefit. I would be happy to answer any questions that you or the other members may have. Thank you.
[The prepared statement of Mr. Mazur appears at the conclusion of the hearing.]
Mr. BARRETT. Thank you very much. Thanks to both of you.
Mr. Beyer, first, to the matter of a USDA study, of electricity or electric deregulation that was widely reported in the press I think earlier this year and I think the USDA indicated that it was a work-in-progress. And, since then, we have heard that the study does not exist. Could you elaborate?
Mr. BEYER. Mr. Chairman, with your permission, I would like Keith to address that. Dr. Collins.
Mr. COLLINS. Thanks a lot, Administrator Beyer. [Laughter.]
Page 18 PREV PAGE TOP OF DOC Mr. Barrett, since you got right to that in your opening question, it might merit a minute or two to respond. At USDA, there was an analysis conducted last fall and through the winter. That analysis was done as an internal document to provide service to the Rural Utility Service. The Rural Utility Service has an immense responsibility within the administration and all across America to look out for the interests of rural electric co-ops and rural consumers. And they have a broader rural development responsibility. Our job, as economists at USDA, is to provide them with some advice so they can perform their function of advice within the administration.
So our Office of Energy did conduct an analysis of retail competition. Probably one of the most, what I thought, one of the most important sentences in that report, one that should get the highest regard, was on the cover, which said ''Draft. Not for release or quotation.'' Unfortunately, that got about the least regard of any sentence in the report. [Laughter.]
But that was a draft report that we provided for the Rural Utility Service to help them understand risks that the rural sector might face. And that is an important concept: risks. It is not a most likely scenario. It is not the administration's view of what will happen under retail competition. It is not an analysis of the administration's bill that has just been released. It was analysis based on a specific set of assumptions to show what might happen under a somewhat low probability set of assumptions, what might happen to rural electric rates.
So we did do that analysis. We have never maintained that a study does not exist. In fact, I even put out a press statement back in early April when this was being widely quoted in some of the newspapers that it, in fact, did exist and the genesis of it.
Mr. BARRETT. Will that be made public at any point in the future?
Mr. COLLINS. I can't really answer that. I don't know. I think, at this point, it served its primary function which was to take a look at, under a certain set of assumptions, what could happen, and whether we thought there was a basis for justifying the rural safety net provisions in the administration's bill. That rural safety net provision is in the administration's bill.
Page 19 PREV PAGE TOP OF DOC Within the administration, that study that was conducted by our Office of Energy was not well-received. There was a general consensus, I think, that the assumptions underlying it were unduly pessimistic and, as a result of that, there was not much interest in having it released. So that is where we stand at this point.
Mr. BARRETT. Was there a cooperative effort in that effort to provide that document to the Department? A cooperative agreement with, let us say, the University of Kentucky? Was that the same agreement?
Mr. COLLINS. Well, to explain what is behind this report, there was a cooperative effort with the University of Kentucky and with the University of Missouri. The Office of Energy, which I might say I had no responsibility for until last fall when, you may recall, that last summer's research title of the farm bill mandated that the Office of Energy be relocated in the Office of the Secretary. It was at that point last fall that I became responsible for this office. And this work was well underway.
So, prior to my involvement in this, there was a cooperative agreement that was awarded to the University of Missouri and to the University of Kentucky for staff, a researcher at the University of Kentucky and a principal investigator at the University of Missouri to conduct this work. In addition to that, there were services provided by a private consultant, On Location, Inc., which ran the POEMS and Tradeelec models. I do not believe that the USDA contributed costs or I don't believe that my area, the Office of Energy, contributed costs to On Location, Inc. But we did provide I think a total of about $90,000 to the University of Missouri and to the University of Kentucky.
Mr. BARRETT. Thank you. My time is about ready to expire, but let me quickly go to the briefing materials that we have, the committee has copies of the January, 1999 materials in which I think there was a briefing with USDA senior officials.
Were either of you present at that briefing?
Page 20 PREV PAGE TOP OF DOC Mr. COLLINS. Yes.
Mr. BARRETT. And what were the results?
Mr. COLLINS. We were both present at that briefing. Essentially, the results summarized probably what is in the one or more documents that you have. Essentially, it laid out a set of assumptions, which were different than the Department of Energy's assumptions. They were more conservative. They were more likely to produce a negative outcome than the Department of Energy's assumptions.
They, for example, showed that there would be no efficiencies in transmission or distribution. They showed that any particular gains that rural electric co-ops might accrue because of higher wholesale prices do not get passed on to the co-op members. There were conservative assumptions about stranded costs recovery. So the set of assumptions was presented and then the results. And the results basically showed, and I want to emphasize this, they showed that, without question, retail competition would benefit the Nation as a whole, largely benefit the Nation as a whole.
And, beyond that, then, it looked at State results. It showed that, for the Nation as a whole, there would be, on average, over the projection period about a 5 percent decline in retail electric prices in the United States. And that contrasts quite differently with the Department of Energy, which I believe has a 16 percent decline over their projection period. Both show declines in retail prices nationally. Both show large benefits to retail consumers nationally. A difference is that we showed more States having higher average prices than the Department of Energy showed.
Mr. BARRETT. My time is up. Thank you very much. Mr. Minge.
Mr. MINGE. Thank you. In reflecting what has happened with telephone service in the rural Midwest, I am very concerned about any deregulation in electric energy. Because what we see is that exchanges are being placed up for sale or perhaps even abandoned because they are not considered to be economical and there has not been the investment in modern telephone equipment. And the consequence is that rural areas do not have the type of service that allows them to be participants in our Nation's economy. Businesses that need high-grade telephone service don't have that service and they are not willing to be in communities that can't provide that service.
Page 21 PREV PAGE TOP OF DOC And I am very concerned that, as we move into the next century and we see electric wires having the capacity to deliver more than just electricity and we see the needs for different types of electrical service quite possibly, that this investment that is necessary to keep our rural areas a part of the 21st century economy will not be made, if we are going to a competitive model.
And I would just like to ask if you feel, within the administration and it is not just this administration. It would be any administration that the perspective that you have, Mr. Beyer, for the Rural Utility Service, has given the consideration that is necessary to offset what you might find from your friends over at the Department of Energy?
Mr. BEYER. Well, Mr. Chairman, Congressman Minge, we certainly have a concern and the concern is expressed in the legislation, actually. The President's bill is really the best game in town from the standpoint of addressing a potential adverse effect to rural systems. The principles of deregulation and restructuring are pretty much the same in any industry. It is going to be focused on where the profits are. And that is where the capital is going to go and that is where the entrepreneurs are going to go.
Now where there is not any profit, who is going to be there? That is the issue. And the rural systems just must be maintained to pick up that void, which is happening, like you say, in the telecommunications program. No question about it. It is going on. It is continuing.
Mr. MINGE. Mr. Beyer, maybe I could just recast that slightly. There have been proposals to sell the Power Marketing Association and even the transmission lines. And I am wondering, is this something that you see that we can stand firm on that the Power Marketing Administrations and what is necessary there in order to provide preference power to rural electric cooperatives and others that are in low density areas can be avoided so that we do not have these various features of our current Federal electric policy dismantled to the disadvantage of our rural communities and our farming and ranching communities?
Page 22 PREV PAGE TOP OF DOC Mr. BEYER. Well, Congressman Minge, the President's bill does not propose to sell the PMAs. The fact of the matter is, you are right on target on that one. There are 516 rural electric systems that receive part of their power needs from TVA or the PMAs. And it is a very critical part of the entire strategy that helps rural America provide quality service at reasonable rates. And the President's bill does not call for that to be interrupted. And we are very pleased about that.
Mr. MINGE. One concern that I also have is the so-called cherry picking problem and how we adequately deal with this problem and then what this does to some of our rural electric cooperatives where the largest loads are the ones that they are at risk of losing and, without those loads, they don't have the quantity of electricity that they are selling to cover their fixed costs and keep that fixed cost reasonable for their rural customers. And, from what I have seen, in the telecommunications area, we have tried to equalize the resources available for rural telecommunications service through the Universal Rate Fund and the Universal Service Fund.
But here we are looking at electricity and the expectation is there is money that is going to have to come from the U.S. Treasury. And, of course, as we have seen over the last few years, depending upon the U.S. Treasury for money to make the rural electric service competitive is kind of a dicey proposition. And it would certainly be much better for the rural sectors of our country if they did not have to look to the U.S. Treasury but, instead, could look to something like the Universal Service Fund. Is there any consideration that has been given to that?
Mr. BEYER. Yes, sir, there is a rural safety net provision in the administration's legislation that is there to address adverse impacts. And cherry picking, I agree 100 percent, there is going to cherry picking. No question about it. If there is a profit center, somebody is going to be there. Not only cherry picking, but bypassing systems. And the safety net provision in the administration's bill can address that and mitigate any adverse effects, not unlike the telecom program Universal Service. There is a high-cost-to-serve mitigation in the telecom industry that we know about that and we can pattern it. We don't have to reinvent the world on this thing. There are things like that existing in telecom and there is a provision like that in the administration's bill.
Page 23 PREV PAGE TOP OF DOC Mr. MINGE. Thank you. I see my time is up.
Mr. BARRETT. Thank you, Mr. Minge. I want to take a moment to announce that the ranking member of the full committee on Agriculture has joined us, Mr. Stenholm of Texas. Charlie, would you care to make a statement?
STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. STENHOLM. Well, thank you, Mr. Chairman. Mr. Collins, I hope that you will not feel too defensive over that draft of yours, because I happen to be one that believe that you may be a lot more accurate than you or others think you were in 20, 30 years from now. So don't be as defensive about whatever leaked out and got out and what-have-you. It might turn out to be pretty good information down the line. But, having said that, I really hope that we as a Congress and the administration can truly go slow and make sure that the assumptions that we are making today are going to have the desired effect.
I don't think there is any doubt, based on previous history, that the Nation as a whole might do better and probably will do better with deregulation. Clearly large consumers will do much better, if the theory holds. The concern that some of us have is how will the small consumer, whether it be in rural America or whether it be in the inner cities, are going to fare. Who is going to maintain the lines, the cost associated with transmitting the power? A lot of questions are left to be answered. And I know as we go through the legislative process that those are questions that are going to have to be looked at seriously.
The safety net interests me a lot. I happen to believe that, if this goes as the more enthusiastic ones among us that believe that deregulation solves everything, if they prevail, that we are going to end up right back where we were in the 1930's as far as rural America is concerned with the need of an REA, someone to come in and to subsidize those who cannot receive power at their farm and ranch at a price that is market-competitive. I think that is going to be inevitable.
Page 24 PREV PAGE TOP OF DOC And, therefore, I think we ought to look at that with an open eye and learn from our experience of the 1930's and remember that not everyone supported rural electrification in the 1930's and the 1940's. In fact, it was a very difficult political fight and we fought it over and over. And even when I managed a rural electric cooperative for about 9 years in the 1970's, we still had our fights. But they gradually went away as the electric utility industry began to realize that things are changing, times are changing and that there are places for rural electrics and there are places for investor-owned and we learned to work together and to cooperate and it has been a much better electric delivery system since we stopped fighting.
But let me raise a little warning flag. Mr. Minge asked a question regarding telephones. Take a look at the safety net that was put in the so-called E-rate that would have guaranteed that rural schools and rural hospitals might have access to computer technology. Look at the controversy that is around that today as many members of this body are calling that a tax and saying that is something that should not be done. Again, the whole concept was a safety net to make sure that rural schools, rural hospitals, small towns would have the same access to the technology and the communications that is so vitally necessary if you are going to participate in this international marketplace. Just look at the controversy surrounding that and then ask yourself what will be the situation if it proves that safety net needs to be bigger than any of us are thinking today?
Having said all of that, Mr. Chairman, I would just finish the way I started in saying I think we need to proceed with caution. I think we need to proceed with looking at all studies and perhaps averaging out the more optimistic from the most pessimistic and eventually coming up with an answer that might ultimately work for the betterment.
I get a little concerned when I hear people saying this is going to be good for all America. Clearly, a cheap food policy, which is what we have been operating for a long time, is good for all America. But it is darned sure not good for rural America, as we see what is happening today all across the country with the prices we are receiving for that which we are producing in a marketplace that is basically deregulated. We had better learn how to participate in that market before we go into it and that is something I know that our rural electrics and our investor-owneds, as we look to this answer, are going to be doing a lot of and we with them.
Page 25 PREV PAGE TOP OF DOC One last comment, it is interesting to me and this is what puzzles me a little bit because most of the States are saying let us deregulate before the Feds do. Most folks want this left to the State-by-State, they seem to think. But it is interesting, at least down in Texas, they are telling the folks down there in the Texas legislature, we have got to go ahead and deregulate, because if we don't, the Feds are going to do it to us. Up here, we have got to go ahead and do it, because if we don't the States are going to do it and they are not going to do it exactly right. Who is leading this lobbying charge? [Laughter.]
Mr. BARRETT. Thank you, Charlie. The gentleman from Tennessee, Mr. Jenkins.
Mr. JENKINS. Thank you, Mr. Chairman. Mr. Chairman, I think the gentleman from Texas, Mr. Stenholm, is very knowledgeable about this subject and I think the gentleman from Texas is very charitable with his comments with respect to what is going to happen in the future.
I would like to address a question to Mr. Mazur.
You say that one of the four things that the administration bill will do and I am not going to pick on the administration bill. I will pick on any deregulation bill that we bring up here and discuss but one of the things that you say it is going to do is lower rates in every section of this country. Now I have seen estimates that ratepayers are going to save is the figure $30 billion?
Mr. MAZUR. We estimate a little bit over $20 billion in about a decade's time.
Mr. JENKINS. All right. Now there are no with this bill or any of the other bills there are no new energy sources, no new capacity of any great consequence, no nuclear plants, no coal-fired plants envisioned. I want to know how this bill or any other bill we have got the same capacity. We have got to, in some parts of this country, very efficient utilities. We may have some that are somewhat inefficient. But I want to know exactly how that $20 billion a year is going to be saved.
Page 26 PREV PAGE TOP OF DOC And then I want to ask about one of the other elements of this plan and that is to lower the emission gases because I know that that, from my own experience, I know that is going to be a tremendous cost to the utility industry around this country and to the ratepayers.
But, without considering that, tell me exactly how we are going to save $20 billion a year.
Mr. MAZUR. First, by harnessing the power of competition, you really provide the appropriate set of incentives for electric utilities, cooperatives, municipally owned utilities to set their operations up as efficiently as possible. Under the traditional regulated monopoly situation, if a company incurred additional costs, generally they get to pass along a chunk of those costs to the consumers. What
Mr. JENKINS. Could you give us a concrete example of that? One of those costs?
Mr. MAZUR. For instance, if a power plant were only partially built and didn't quite get done, say a nuclear power plant or another plant, some of those costs could end up in the rate-base and the consumers could end up paying for that.
Mr. JENKINS. So instead of the ratepayers for that utility paying them, we are going to spread them across the Nation.
Mr. MAZUR. No, what we are doing is setting up a system of competition among power generators. What that will do will be to provide a powerful bottom-line incentive for companies to be as efficient as possible, to bring out any sort of duplicative costs that they may have, to be as efficient at delivering those electricity services, generating electricity and getting electricity to their customers as possible.
Mr. JENKINS. All right. How much is that going to save every year?
Page 27 PREV PAGE TOP OF DOC Mr. MAZUR. The analysis that we presented to you or to your staff earlier today or yesterday details that. I don't have the actual dollar amounts in front of me, but that is provided in the analysis.
Mr. JENKINS. OK. But that is not the $20 billion. How are we going to save the rest of it?
Mr. MAZUR. Let me explain. There are basically four elements. I don't have the dollar figures for each of these elements. But there are basically four elements that drive this competition. First I said, there are going to be incentives to be more efficient at generating electricity. In some sense, you will squeeze additional productivity out of your existing assets.
Second, you are going to have companies pursue more efficient pricing policies peak time pricing, other types of pricing to level out their load and make better use of their capacity. What you have right now in many utilities is a very high load at certain times of the day, but that load could be spread out over the entire day to make more efficient use of that
Mr. JENKINS. Let me ask you, sir, we can do that with the individual utilities around this country right now, can't we? Without any deregulation. If we want to squeeze those inefficiencies out, we can do that.
Mr. MAZUR. In general, there is no incentive for individual utilities to pursue those opportunities under our regulated monopoly system. Under competition, that incentive will be in place and actually hit at the bottom line of those companies. And we think competition provides a very powerful incentive for people to allocate their capital appropriately and make the best use of it.
Mr. JENKINS. Let me ask you this and, quickly; I know my time is running out but where did we get the information upon which you have based these answers? Did it come from the utility people around this country or did it come from the Department of Energy and did those people who made those estimates, did they have extensive experience?
Page 28 PREV PAGE TOP OF DOC Mr. MAZUR. The Department of Energy uses a, I think it is called, a policy office of electricity modeling system. It is a very sophisticated model of the Nation's electricity system. It incorporates all the generators, all the transmission facilities in the country. We have an Office of Electricity and Natural Gas that has a lot of expertise in it, a lot of human capital, with people who are very expert at running these models, understanding the industry. We have also reached out to other agencies to have them look at this, worked some with the economic agencies in the administration, and also we have presented numerous times at conferences the workings of this model to try and get some sense from academics, others, whether we are making the appropriate types of assumptions in our modeling.
Mr. JENKINS. Thank you, sir, and thank you, Mr. Chairman. My time has expired.
Mr. BARRETT. Mr. Phelps.
Mr. PHELPS. Thank you very much, Mr. Chairman. I commend you on the opportunity to have a hearing today on such a strategic subject. Gentlemen, I don't have a question for any particular one of you. Maybe a statement and maybe some reaction. I participated in the Illinois legislature in passing deregulation of electric industry just a couple of years ago and that State is sort of just observing, as we implement what we passed, enacted, hopefully, the positive results which it was supposed to amount to about a 15 percent reduction for consumers' bills over a few years period after the 21st century begins here, 2, 3 years. So we are realizing now some of those positive results and watching it very closely.
I probably would add my concerns that my colleague and one of the leadership's wisdom, Mr. Stenholm, has already pointed out in that we do proceed with caution, maybe even short of proceeding if we find out other elements are influencing a policy that should not be even pursued, short of what we find out with these sorts of hearings.
My first skepticism is about why the overall theme, the things that I have read, in my mind, comes to one statement in the policy of trying to present this legislation, would be rather than do nothing, doom is predicted. That sort of puzzles me.
Page 29 PREV PAGE TOP OF DOC What I am saying is that if almost over half the States, if I understand it, have enacted some sort of deregulation initiative, such as my own State, which was one of the first and more comprehensive legislations, what is the doom if nothing else happens, other than what the States have already proceeded enacting? Someone tell me, if you can, what can we expect if all these States are saying, such as Illinois, you are going to have 15 percent cheaper rate to the consumer, even in a rural area, which I represent don't be deceived. Though I am from Chicago, IL, I am about 400 miles south so we are in a rural area in my district so what is the doom? Can anybody tell me? If nothing happens.
Mr. MAZUR. In general, the States have taken the lead in restructuring their electricity industries. The administration's bill recognizes that and allows States a lot of latitude in restructuring their industry within their borders. But we need Federal legislation in order to enhance the benefits of competition for everybody in the country. We need to improve market access and participation. And what we are trying to do in the legislation is provide a level playing field so that all transmission operators have fairly similar rules, so that transmission can't be used as a bottleneck to prevent competition.
We have, in the bill, some changes to Federal tax law to remove some impediments toward distributed power and to allow municipal utilities, publicly owned entities, to participate in competitive markets. We have changes in the legislation so that TVA and the Power Marketing Administrations can operate in a competitive atmosphere. We need national legislation to improve the reliability of this system. A State-by-State approach really doesn't give you the reliability you need from a nationwide electricity grid. And, basically, the framework that we are operating under for a Federal electricity system is six decades old, and we need to update that to reflect the state of the industry today.
In general, we think that you need Federal legislation in order to get the full promise of the benefits of competition and that, while individual States can make movements in that direction, in order for the whole Nation to benefit from that, you really need Federal legislation.
Page 30 PREV PAGE TOP OF DOC Mr. PHELPS. Any others want to add to that? Is that good enough for you? Although those were well-outlined and probably with good intentions I fail to recognize yet, by taking a national initiative, how all the positives you brought to our attention maybe could already be achieved if we let the rest of the States that are trying to move forward in the same kind of legislation that may not come up with the same type of results.
Now, grant you, I would like to see, possibly, if we identify whatever additional protections we could guarantee through Federal legislation that would establish anything that would identify abuse of market power and some of the competition that Federal barriers might now be in place could be eliminated. Maybe we could recognize those things and let States proceed, but I guess I don't know what the doom is because nothing changes in the equation other than just for the existing utilities with a source of generation of power, as Mr. Jenkins pointed out. I fail to see, by just this initiative, how we are all of a sudden going to answer the problems that are out there in the age-old based utility systems or whatever else might exist, short of what we can do from removing Federal barriers to promote competition while the States move.
You have failed to convince me. What is the doom?
Mr. MAZUR. I guess just the real short answer, since I know time is almost up or is up, is that electrons don't respect State borders and really you can't have 50 individual States doing their independent restructuring law and expect to have a system that operates with the reliability, with the efficiency that we have come to expect from our national electricity system.
Mr. PHELPS. While I realize my time is over, but the borders to the State, that is what the distribution system is supposed to overcome. So I am confused on what the brightness of taking a Federal initiative would be, short of State's enacting. I hope we can learn more. Thank you.
Page 31 PREV PAGE TOP OF DOC Mr. BARRETT. Mr. Smith.
Mr. SMITH. Thank you, Mr. Chairman. I guess I would start out with my question to you, Mr. Mazur. In your estimates of a $20 billion savings 10 years from now, are you including the higher taxes for more Federal bureaucracy? I guess my comment would be what this proposal seems to do is deregulation on a State basis, but it is overwhelming new regulation on a Federal basis.
And it looks to me, in just a short look at the bill, that you have a bunch of new bureaucracies, including a Residential Electricity Consumer Database; an Office of Indian Energy Policy and Programs; an Electric Reliability Organization; an Affiliated Regional Reliability Entities; an Electricity Outage Investigation Board; a Joint Board for the Public Benefit of Funds. Regulations that are going to, quote, ''Assure provisions of uniform access; provisions and regulations; reliability to assure the reliability of transmission systems.''
Let me start with this question. What is the increased cost to FERC under your proposal? How much bigger and how much bigger budget is FERC going to have to have?
Mr. MAZUR. First, I would say, in general, we don't expect the bureaucracy to increase as a result of this initiative. Many of the items that you discussed, the Reliability Board, for instance, is already
Mr. SMITH. Are you saying no increased cost to FERC with this new responsibility of oversight?
Mr. MAZUR. I said I guess what I was thinking is, first, no additional bureaucracy at the Department of Energy. It is not our intent to increase the bureaucracy there. In the case of FERC, FERC is financed by well, self-financed. And, to the extent that they do have additional responsibilities
Mr. SMITH. Well, what does self-financed mean? It means consumers pay them.
Page 32 PREV PAGE TOP OF DOC Mr. MAZUR. Basically, yes.
Mr. SMITH. Yes. So what is the increased bureaucracy and expansion and cost of FERC? Is that included in your cost, as you come up with $20 billion savings?
Mr. MAZUR. We don't have an estimate of that, but, for sure, it would be a very small amount compared to a $20 billion savings, a very small amount.
Mr. SMITH. Very small, but you don't know whether it is $2 billion a year or nobody has calculated the
Mr. MAZUR. Very small does not mean $2 billion, sir.
Mr. SMITH. What does it mean?
Mr. MAZUR. It means probably in the small millions.
Mr. SMITH. You are going to have to do away with the State regulatory oversight of utilities and call on national oversight for uniform transmission, new environmental regulations in the transmission of electricity, an oversight of all of the grids nationwide, and you are going to have FERC oversee this with only a few million a year increased costs?
Mr. MAZUR. First, we are not getting rid of the State public utility commissions or State oversight under this Federal restructuring legislation. The legislation focuses on the generation of electricity. The distribution to your house would be pretty much the same as it is today.
As far as the additional resources needed at FERC, we are going to have to get back to you on that. We believe it to be a very small portion of the current savings.
Mr. SMITH. OK, how much will it cost cooperatives, PMAs to meet the new regulatory requirements?
Mr. MAZUR. Again, we would have to get back to you on that exact amount.
Page 33 PREV PAGE TOP OF DOC Mr. SMITH. But when you come up with your $20 billion savings 10 years from now, didn't you consider the increased cost that ultimately consumers are going to have to pay either in increased taxes
Mr. MAZUR. What we tried to do was include all the costs and benefits of this. Our $20 billion estimate is actually quite conservative.
Mr. SMITH. Well, so do you have a list of these costs? That is what I am trying to ask you. What are some of the costs in your calculations that you estimated?
Mr. MAZUR. We are going to have to get back to you on the exact numbers.
Mr. SMITH. But you do have a listing of estimated costs to consumers? The increased cost to FERC that is self-financed by every taxpayer in this country contributing to it through higher utility rates or whatever? I mean, it seems to me that to know where we are going has got to look at how much this new Federal oversight is going to cost in terms of the ultimate savings in terms of consumers. How much more will residential consumers have to pay in taxes and higher electric bills? Is that part of the cost estimate that you can get back to us on?
Mr. MAZUR. We will get back to you and give you as detailed breakdown as we can.
Mr. SMITH. You would also create a host of new regulatory programs, including the information disclosure requirements, net metering requirements, a new NOX Cap and Trade Program. Have all those been taken into consideration as far as the additional costs?
Mr. MAZUR. OK, first, the NOX Cap and Trade Program is EPA's system so that is already basically current law. We are trying to make it work a little bit better.
Page 34 PREV PAGE TOP OF DOC Second, the consumer information provision is required so that consumers can make an informed decision as to who they think their power provider should be. This is the type of broadly accepted Government activity that the Federal Trade Commission and others do all the time. If you go to your appliance vendor and you see a sticker on it that says here is how much electricity this water heater would use over the course of a year, that is Government-provided information. That is relatively cheap and we wouldn't expect that to be very costly.
Mr. SMITH. Does the proposed legislation set some kind of a deadline for the States to either move ahead or come under Federal mandates?
Mr. MAZUR. The administration's proposal has a 2003 opt-out date so that States would be expected to either chose retail competition or opt-out by January 1, 2003.
Mr. SMITH. And, to the extent that you can or would, would you furnish the chairman so other members of the committee can see your analysis of additional costs, based on ultimate net savings?
Mr. MAZUR. Sure.
Mr. SMITH. Thank you, Mr. Chairman.
Mr. BARRETT. Mrs. Clayton.
Mrs. CLAYTON. Thank you, Mr. Chairman. Thank you for having this hearing. Obviously, those of us who live in rural areas are concerned for personal as well as societal reasons is that, generally, we know in the market-driven area that the concentration of a market and having the population means that competition, obviously, has a greater opportunity. And the reason why we have cooperatives in the first place is because rural areas defy that normal business principal. The scarcity of the population, the infrastructure has to be paid, the cost efficiency is just not there in terms of and I also wanted to say that I think the caution that was admonished by the ranking member is appropriate.
Page 35 PREV PAGE TOP OF DOC But tell me what the safety that overcomes that principle in rural areas to assure us in rural areas that we shouldn't be worried when you have competitive pricing that it will not leave a lot of people stranded because just the cost of providing to those of us who live 5 miles apart from each other. Either one of you. Both of you talked about a safety net. Mr. Mazur.
Mr. MAZUR. I guess we will try a tag-team approach. I will take first crack at this.
Basically, small consumers aren't unique to rural areas. Residential consumers in rural areas grew up with the same demand characteristics for electricity as residential consumers in other places. Because the distribution system that reaches rural areas is already in place and the restructuring legislation doesn't change that at all, you don't expect there to be a deterrent to competition. You don't have to build new lines out to the farms, ranches, rural consumers to serve them.
And the administration's proposal has several provisions in there that will help assist small rural consumers. First, the plan allows for the aggregation of loads. So, very much like rural electric cooperatives and municipal utilities do already, they aggregate the loads of groups of like-minded consumers.
And, second, the plan authorizes the Secretary of Energy to compile a database so that consumers can make informed judgments about who they want their electric generator to be.
And, third, there is a rural safety net provision, which we have discussed, that could provide $600 million
Mrs. CLAYTON. What is it? What is it? What is it? It sounds like you have got holes in that safety net. [Laughter.]
But surely you can't describe. But tell us what it is.
Page 36 PREV PAGE TOP OF DOC Mr. BEYER. Congresswoman, let me try to explain it. Last time I was before the House committee, you asked that same question and
Mrs. CLAYTON. I wasn't satisfied then either. [Laughter.]
Mr. BEYER. I know. I apologize for that. We didn't have it in the bill at that time, frankly. It is in the bill now and it is a part of it.
Mrs. CLAYTON. What does it say? What does it say?
Mr. BEYER. Well, it says that any adverse effect the Secretary of Agriculture has a role in deciding adverse effects, No. 1, along with the Secretary of Energy, in setting up a safety net. Now the safety net is in. The details of the safety net are not identified in this legislation.
Mrs. CLAYTON. Apparently not. That is what I am trying to get.
Mr. BEYER. The provision to establish one, however, is and that is the critical part of it.
Mrs. CLAYTON. And the provision to establish one is that we have the Secretary of Agriculture, he is there and he will determine if there is
Mr. BEYER. With the Secretary of Energy, yes. So it is a concurrent issue.
Mrs. CLAYTON. Well, with all due respect to the current Secretaries, that is fine. But that doesn't give us much assurance if there are not criterias for their determination is that you are saying that that will be done because these two individuals have authority to do it. No standards are articulated. No outcomes are articulated. You are just putting the provisions there.
That doesn't give me any comfort, in a rural area.
Mr. BEYER. Well, of course that is what Congress is for. I mean, if you want it stronger, you need to address that issue. I can tell you that it is not really that complicated to set one up. NECA, which is the National Exchange Carriers Association, has a high-cost mitigation provision in the telecommunications universal service pool, that could be similar to the electric system. Based on average costs of providing
Page 37 PREV PAGE TOP OF DOC Mrs. CLAYTON. Let me just get you to use the balance of your time to contrast what would be the advantage of I guess the co-op opting-out or doing the competitive pricing and what would consumers get as a result if they either did the apparently you made the assumption competitive pricing means they would have reduced costs, but if they opt-out, what are we talking about in terms of the utility companies, the co-ops opting-out?
Mr. BEYER. The opt-out provision is a State provision. The State would have to opt-out, as I understand the legislation. And unregulated utilities, yes. So they could choose to opt-out.
Mrs. CLAYTON. So, if they did, what will happen?
Mr. BEYER. I would assume they would maintain their current status wherever they are.
Mrs. CLAYTON. Why would there be an advantage? What is the advantage and disadvantage to that?
Mr. BEYER. I am not sure. I am not sure I can answer that question. I don't know. They may choose not to. Yes.
Mr. MAZUR. I think, in general, some unregulated utilities, co-ops, or municipally owned utilities may think that their consumers would be harmed by competition and this just gives an opt-out so that their consumers could not be made worse off by competition. It effectively they can maintain the status quo if that is desirable or they could avail themselves of competition if they think that is beneficial. So it really is a no-lose situation; that is the idea behind the provision.
Mrs. CLAYTON. My time is up.
Mr. BARRETT. Mr. Ose.
Mr. OSE. Thank you, Mr. Chairman. Mr. Hayes, before he left, wanted me to share with you that he was going to yield his time to me also. Does that work? [Laughter.]
Page 38 PREV PAGE TOP OF DOC Mr. BARRETT. The gentleman from California is recognized for 5 minutes. [Laughter.]
Mr. OSE. Thank you, Mr. Chairman. I appreciate your generosity.
I want to go back to Mrs. Clayton's point on the opt-out thing. I am not quite sure I understand what it is the administration thinks is broken here. Can somebody tell me is it the administration's position that the electric grid or the distribution system or the market is broken in some States? Mr. Mazur.
Mr. MAZUR. Sure. In general, we don't think that the system is
Mr. OSE. How about specifically?
Mr. MAZUR. OK. Let me start over, then. The administration's bill does not affect the distribution of electricity to an individual's residence, to a business, to a commercial enterprise. What it does do, it does provide the opportunity for consumers to choose what their generation source will be; who their generator would be. What we think that will do is lower the cost of electricity to the consumer because it would harness the force of competition. So what it does: it brings not that the system is completely broken but it can improve or enhance the system by providing lower costs, better service.
Mr. OSE. OK, now, the reason I asked that question is on page 4 of your testimony
Mr. MAZUR. Yes.
Mr. OSE. There is a statement and I quote actually I read ''While the Department of Energy lacks the expertise to provide a full economic analysis of direct and spillover benefits to rural economies, information from projects currently under development and from previous analyses indicates that such benefits are likely to be significant.'' Now, that tells me you don't know.
Page 39 PREV PAGE TOP OF DOC Mr. MAZUR. Actually, the context of that statement is under the renewable portfolio standard. And the point we are trying to make there is that we think the renewable portfolio standard will provide significant benefits to rural communities, but we don't have the modeling capability to know how much additional biomass would be generated, for example, for co-firing at a coal facility and where in the United States that would be done and where the farm income might increase. And so we defer to the USDA folks for that type of an analysis.
Mr. OSE. OK, I am from California. We have gone through this debate at the State level. We are a couple of years into it, Mr. Chairman. It seems to be working effectively. This opt-out provision, I have to say I have got to find it here I was kind of amused while I was reading it, but the opt-out provision here we are; page 3 says that the administration bill would require each State public service commission and then it gives every locality or supplier an option to opt-out.
I am confused, Mr. Mazur. You want us to pass legislation that effectively gives everybody the opportunity to opt-out at their local level?
Mr. MAZUR. It is not that everybody has the opportunity to opt-out at the local level. That States can choose not to implement the competitive regime in their borders if they think their consumers will be better served by, say, the current system.
Mr. OSE. Isn't that the current situation?
Mr. MAZUR. That is the current situation for the competition. However you can't opt-out of some of the changes that are included in the Federal legislation.
Mr. OSE. Let me ask the question more directly. Do you know the California market better than the public utilities commission of California?
Mr. MAZUR. No. I don't think we need
Mr. OSE. Do you know the market in Iowa better than the Iowa public utilities commission?
Page 40 PREV PAGE TOP OF DOC Mr. MAZUR. No. And that is part of the reason for having an opt-out provision is that States that believe their situation is unique and that they would be better served by something other than a fully competitive electricity system have the option to maintain that.
Mr. OSE. Is there some reason we need to aggregate this authority to Washington under this legislation, by your experience, in terms of some failure at the State level?
Mr. MAZUR. I think what we are trying to do with this restructuring legislation is to enhance the benefits of competition throughout the Nation and that having 50 individual States go 50 separate ways doesn't necessarily improve the reliability of the system; doesn't deliver the environmental benefits that we think are important; doesn't deliver the full benefits of competition to all the consumers of the Nation.
Mr. OSE. So there has been a failure somewhere, because you have identified a problem. Where does that failure occur? Tell me the State so I can go visit with my colleague from that State and
Mr. MAZUR. I think what we are trying to do is make sure that consumers in your State and all other States can get the full benefits of competition. We need to remove some of the impediments in the Federal law in order to make that occur.
Mr. OSE. My State has that, though. We adopted it at the State level.
Mr. MAZUR. Your State has some of the benefits of competition, but we think that you could actually do better if some of the Federal legislation were modified to address the current system.
Mr. OSE. I would enjoy continuing this discussion. I promised my friend from Tennessee an opportunity to ask a question.
Page 41 PREV PAGE TOP OF DOC Mr. JENKINS. Is there time left?
Mr. BARRETT. Mr. Jenkins, you have probably 30 seconds.
Mr. JENKINS. We talked about the lower rates. You estimated $20 billion per year. And you spoke of one of the four parts of this would be the lower emission gases. Now that is done, of course, controlled by the EPA at the present time. Why do we need to have this sort of scheme in order to lower emission gases?
Mr. MAZUR. Actually, we think that the administration's proposal would lower both greenhouse gas emissions and traditional air pollutants by improving the efficiency of power plants and by the operation of provisions like the renewable portfolios and the Public Benefit Fund and so on.
Mr. JENKINS. How much is it going to cost us to lower those emission gases?
Mr. MAZUR. The entire bill we estimate to save $20 billion per year. So that is a net of plus or minus
Mr. BARRETT. The gentleman's time has expired. Mr. Bishop.
Mr. BISHOP. Thank you very much, Mr. Chairman. Let me thank you for holding this hearing. I have been very, very impressed by the skepticism of my colleagues on this committee and I certainly want to wholeheartedly associate myself with that skepticism.
I feel very much like we are being offered to put it in straight south Georgia terms a pig in a poke. I feel like what is being offered here is, in more evangelical terms, pie in the sky. And just listening to what originally sounded like a conflict between agencies, with the Department of Energy on one hand and the Department of Agriculture on the other hand, with a briefing that was submitted to the Secretary, indicates to me that nobody really knows what this is going to do, if it happens. And, God forbid, I hope it doesn't. I think we might be moving a little bit too fast.
Page 42 PREV PAGE TOP OF DOC And I want you to have an appreciate for my skepticism. I come from Georgia and a rural part of Georgia where there many co-ops and municipal systems who are concerned that they may have stranded costs. We have had some fairly new nuclear and coal-fired generation plants that have been built and I am just not sure that they will be able to service the debts. Add to that just about 3 or 4 years ago, our rural cooperatives tried desperately to get the cooperation of our Federal Government here to refinance their debt at the then-lower interest rates. And we were rebuffed in that effort, which would certainly have served our consumers well.
I might indicate that we appreciate very much the cooperation from USDA. They supported that effort in the aid of our rural utilities. But the Department of Treasury and the rest of the administration didn't seem to want to go along with that. And then the next thing that they were faced with, shortly after that, was the proposal to sell the PMAs which would have, again, adversely impacted them.
Now if this legislation goes through, my colleagues have pointed out the additional Federal regulation and additional costs for complying with those regulations that our rural electric utilities will have to add to the costs that they will pass on. And then we find this briefing to the Secretary that raises the same concerns that we have had all along, that if you bother something that we don't believe is broken, particularly in the rural utilities areas where we are serving our consumers very efficiently and, according to this briefing, it is going to have adverse impact.
And I hear you say, well, no, that is not going to happen. Our model, whatever that is and whatever assumptions you based it on, seemed to suggest that it will be a win-win for everybody. But we are just not that optimistic.
Back in the Georgia legislature, we had a saying when we felt like we were about to get had. It said, hold still little fish while I gut you. I feel like you are asking the rural communities and the rural utilities to hold still while we have our entrails removed from us with this deregulation. And I just don't think it is a good idea. And I don't have a question for you. [Laughter.]
Page 43 PREV PAGE TOP OF DOC I am just echoing the concerns that I hear from our rural utilities and the skepticism that I have heard from around this table this morning. And I hope that you can take that back to wherever these pie-in-the-sky, pig-in-a-poke ideas originated and let them know that we are, indeed, very, very skeptical.
Mr. BARRETT. Mr. Thune.
Mr. THUNE. Thank you, Mr. Chairman. And, members of the panel, I appreciate the opportunity to discuss this subject. It is one that is very important in my State of South Dakota, probably about as rural a State as you will find across the country. And there is a good deal of concern about this particular issue and what it might mean for consumers in our State.
And if I am covering some old ground, forgive me for digressing. I missed some of the earlier discussion. But as I understand the administration's proposal, a State could elect not to participate in a Federal restructuring scheme. And I guess I am wondering how a State like South Dakota, which has expressed little or no interest whatsoever in retail deregulation, how would a State like ours be impacted, should it choose not to participate? And would a State like ours be able to retain its current rate levels?
Mr. MAZUR. The flexible opt-out provision in the administration's bill would allow a State like yours to hold a public hearing and determine that the consumers would be better served by their current system and, effectively, not have competition in that State. That is allowed, yes.
Mr. THUNE. But what would you anticipate in terms of impact as far as rate structure?
Mr. MAZUR. I guess the best guess would be pretty much what you are projecting currently, that you would expect no change or very little change.
Mr. THUNE. Anybody else care to comment on that? Let me ask another question, then. It also, I think, as a part of the administration's proposal, requires electricity sellers to include no less than 7.5 percent of their respective sales to come from nonhydroelectric sources. What is the administration's basis for that percentage?
Page 44 PREV PAGE TOP OF DOC Mr. MAZUR. The current percentage of these sources of renewables is somewhere between 2 and 3 percent of total generation. The notion of having a 7.5 percent renewable portfolio standard by 2010 is that you could encourage sufficient growth among renewable sources, for instance wind energy or biomass, during that time to hit that target or get very close to hitting that target.
Mr. THUNE. With that requirement, I mean, would you expect, then, to, when you talk about it, how would you expect cooperatives in small isolated municipalities to be able to meet those requirements?
Mr. MAZUR. The requirement is not that every single generator has to generate exactly 7.5 percent itself. There would be effectively a trading system so that companies that generated more than 7.5 percent could trade those for additional credits to companies that generate less than 7.5 percent. We would expect that many of the as you see from this chart here about the wind resources, many of the rural areas actually have the best wind resources in the United States. And we would expect them to take advantage of that. Similarly for a biomass, where we think that would be another one of the large beneficiaries of the renewable portfolio standard. Almost exclusively in rural areas. So I guess we think that, for those reasons, they would benefit rural areas.
Mr. THUNE. I have always thought that, in our part of the country, you had real good wind, too, but I was told that our wind isn't so good because it is gusty. We don't have the steady winds, but I know it is a very windy area of the country and, hopefully, someday, we will figure out a way to harness that. But I guess I just, one final question and then coming back to the previous point in dealing with States that might choose not to participate. How would a State actually get out? You said they could hold a hearing. What would, eventually, what is the mechanism for them to not be included?
Mr. MAZUR. My understanding is that they would hold a hearing and then file a certificate with, I believe, FERC, but I am not sure about that, but file a certificate with someone to opt-out.
Page 45 PREV PAGE TOP OF DOC Mr. THUNE. And is that an elective on their part or does it have to be approved? I mean, does FERC then is the matter of filing after they have held the hearing, filing exempt them from the
Mr. MAZUR. I believe it is fairly automatic. It is just the filing portion, yes.
Mr. THUNE. It is. Well, again, this is an issue which I know has been kicked around here for a long time, and echoing back I think to what Mr. Ose was discussing earlier, it does seem to me that certainly States are in a position to determine what is in their best interests and, frankly, I think that a preferred method of dealing with this would be to allow States and some States that have already gone down that track some of them have find out what their experience is before we proceed with I guess, I am not sure why I see the need for Federal legislation in this area. But I appreciate your being here today and giving us an opportunity to ask some of the questions about the administration's proposal. There are some other pieces of legislation that are circulating here on Capitol Hill and, at least to date, I haven't found any of them that I think are very much in the interest of rural parts of the countries, areas like that, which I represent.
So I thank the panel and yield back the balance of my time, Mr. Chairman.
Mr. BARRETT. Mr. Thompson.
Mr. THOMPSON. Thank you, Mr. Chairman, and I appreciate your leadership on conducting this hearing. I would like to tailor my comments specifically to the area I represent, which is the Mississippi Delta. And I would like for someone on the panel to tell me whether or not my area, under this proposed legislation, whether or not the consumers would pay more for electricity or less.
Mr. MAZUR. Our analysis indicates that the residential consumers in all of the lower 48 States would pay less. We don't have it broken out by smaller geographic regions, but for the State as a whole, the State of Mississippi would see residential consumers do better.
Page 46 PREV PAGE TOP OF DOC Mr. THOMPSON. So you don't have the answer?
Mr. MAZUR. Not that specific answer, no.
Mr. THOMPSON. All right. At what point do you think you could have that answer?
Mr. MAZUR. We can try to get an answer for the record, but I think we are really pushing the capabilities of our modeling in order to get State-level at this point. But we will see what we can get for you.
Mr. THOMPSON. Well, there is a reference in the summary that certain parts of the country would pay more for service and it makes reference to the South as being one of those areas. And I would under restructuring are you
Mr. MAZUR. Is that the Department of Energy's analysis, sir?
Mr. THOMPSON. Well, it is the briefing to senior USDA policy officials. [Laughter.]
Mr. COLLINS. That is a study that we talked about earlier, Mr. Thompson.
Maybe to expand on Mr. Mazur's comment, the Department of Energy study showed that, on average, retail electric rates would be the same or higher in only three States. That was Oregon, Washington, and Montana. So from their reported study, Mississippi would not have higher rates, on average.
The study that you are referring to is a draft document that was done to look at a high-risk scenario so that the Rural Utilities Service, so that the Secretary of Agriculture, might see potential risks under a low probability eventuality. That particular study did show that in Mississippi there would be a slight increase in electric power rates. But, again, that would be a low-probability scenario.
Mr. THOMPSON. So you disagree with the Department of Energy at this point.
Page 47 PREV PAGE TOP OF DOC Mr. COLLINS. Absolutely not, I just explained how both conclusions can be compatible. There are two different scenarios under two different possible cases. Mr. Mazur's report is the administration's most likely scenario.
Mr. THOMPSON. Well, I hear two things, but I appreciate your interpretation. [Laughter.]
And let me say for the record that a lot of people have come to me saying competition is good. And I think, properly structured, it could be. And I look for continued discussion around it. I am not convinced that what we have put before us today would get us there and, as one former Speaker said, all politics is local and it would be very difficult for me to go back to constituents of the second congressional district, saying I want you to think real high of me. I just raised your utility rates. And expect to come back. I think we have to really give additional thought and research to what we are discussing here and, Mr. Chairman, I would basically want to be associated with the comments of all of my colleagues on this committee who have expressed skepticism on what we have heard this morning.
Thank you very much.
Mr. COLLINS. Mr. Chairman, can I make a comment on Mr. Thompson's comment?
Mr. BARRETT. The gentleman is recognized for 5 minutes.
Mr. COLLINS. I have been listening to this for some moments here about the skepticism that is being expressed. I would like to point out a couple of things. First of all, that in the world we are in now, we have wholesale competition. That is a recent event. That has already begun. That is in process. There is wholesale competition.
In the world we are looking at in the future under this bill, there is going to continue to be regulated distribution systems, regulated transmission systems and all restructuring is adding is retail competition. So there are a lot of benefits and a lot of changes that are going to occur from wholesale competition alone.
Page 48 PREV PAGE TOP OF DOC On top of wholesale competition, we are having States pursuing, on their own, retail competition. So I think wholesale competition has benefits and has price effects around the Nation. On top of that, States opting for retail competition, on their own, apart from Federal legislation, is going to bring benefits and costs around the country, but mostly benefits.
On top of that, we are talking about a third development and that is Federal legislation to guide what is already happening in States pursuing retail competition. And as to the question of why you should have Federal legislation, it strikes me that there are several fundamental issues at hand and ones that this committee ought to be very interested in because they really focus on rural areas, and that is the social effects and the economic effects that could result, particularly in rural areas and in low-income areas nationwide. Some of those can be addressed by States individually, but this legislation provides a mechanism to transfer dollars around the Nation to perhaps even bring more dollars than States can bring to the picture.
I am talking about the Public Benefits Fund which can be targeted to low-income households, and the rural safety net that we have already talked about that can be targeted to low-income households in rural areas facing high cost of service. We have provisions for Rural and Remote Community Grants, in addition to that. And, in addition to that, we have the renewable portfolio standard, whose benefits are largely going to go to rural areas. Now these are things that I don't think are going to happen if States go on their own, individually, down the path that we are on. Those are broad-based provisions that cut across the Nation as a whole and, in my mind, justify Federal legislation.
On top of that, there are other more technical things that I am not familiar with such as reliability standards that we have discussed. Now it seems to me that when you have got a whole lot of these power pools around the Nation that have been operating for years and years under a certain way and then you open up retail competition piecemeal on a State-by-State basis, you have a possibility for people trying to be competitive and stress the system, push the system for more than it can achieve. That is what competition means. And it seems to me that providing reliability standards for the Nation and ensuring that reliability, ensuring that transmission across the system that wasn't built to handle retail competition is an important function for the Federal Government and the Federal legislation.
Page 49 PREV PAGE TOP OF DOC And, last, we have talked a lot about stranded cost recovery, are these rural utilities going to be able to recover stranded costs? It seems to me that the administration's legislation importantly deals with stranded cost recovery by providing assurance that stranded cost recovery will occur, not in a piecemeal ad hoc way from State-to-State, but in a way that is equitable across the Nation.
So, those are just a few comments to respond to your concerns, which I think are legitimate, for your consumers. I think an important part of this legislation is to provide mechanisms to deal with the adverse consequences that might occur in States such as Mississippi.
Mr. BARRETT. Mr. Berry.
Mr. BERRY. Thank you, Mr. Chairman. I too appreciate you having this hearing and I would begin by saying it is good to see my former colleagues from the Department of Agriculture. That is no slight to the Department of Energy. But I think it would be difficult for you to find two men that I have greater respect for their judgment and decisionmaking than Wally Beyer and Dr. Keith Collins. In fact, if you all told me this is a good idea, I would have trouble believing it, but I would want to. [Laughter.]
And I guess people make fun of me all the time because I tell them I am just a poor dirt farmer from Arkansas and not the smartest guy that ever was, but I can go back to one thing that has happened in my home State that I know to be true and it gives me a great deal of concern. As the investor-owned utilities there prepared for deregulation, which has now been legislated in the State, the service to the rural customers became terrible. At one time it was the best I think that there was available anywhere. But now it is absolutely pathetic.
And our rural customers that are on that system are having a terrible time being served. They have had outages that last sometimes for two or three days. When you are running a business of any kind, that is a difficult situation. And I am very concerned and I suppose that this legislation would provide certain standards for service which is one of the things. I think price is a concern, but also a dependable system. And we don't want to see our rural system degenerate under this condition to the point where we just don't get served or we have such poor service we turn back into Third World countries.
Page 50 PREV PAGE TOP OF DOC So I would be interested in what you all think about that.
Mr. BEYER. Mr. Chairman, Congressman Berry, thank you for those nice comments. We think a lot of you, too.
The mix of rural benefits would mitigate any of that, really. And the safety net that is in here proposed in the legislation would help a rural system maintain that service as well. There are going to be studies and studies and studies, and this is a macro-event for this country. There is absolutely no question about that. It is going to be a macro-event and it is going to take a while.
I would expect to see a lot of property changes. These investor-owned utilities are going to sell their rural areas that are not profitable. It is happening already. Not unlike the telecom system that arethey are dumping their rural properties if they are not profitable. They are not willing to invest to maintain a higher level of core service in the telecom industry as well and I would expect that to probably happen in the electric as well. So your local rural electric may be able to pick up some of those properties and provide better service. That is a phenomena that may happen.
The other thing that I would offer to you is I don't think there is a person alive today that knows how this thing is going to happen. There are going to be studies and studies and studies. But, really, that is what Congress is about, to evaluate not only the studies, but the common sense and the direction of the policy of the country in this area. And that is my comfort in the whole thing.
This is an event that I, too, believe that there needs to be Federal legislation at this point to establish some fairness in the stranded cost recovery. Certainly in reliability. When this thing turns to strictly profit, some of these entrepreneurs are going to be shipping blocks of power across 10 regional pools that exist in this country. That is how we grew up. There is not that much strength. There are going to be some risks taken. As already has, have experienced some of that. So Federal legislation is certainly required for reliability standards. And, of course, the rural safety net to ensure that rural America is not left out of this thing.
Page 51 PREV PAGE TOP OF DOC So I think that you certainly have some concerns about the thing and you should have, really. But the administration bill provides a mix of rural benefits that I think is going to satisfy all those concerns.
Mr. BERRY. Thank you. I don't have any more questions, Mr. Chairman.
Mr. BARRETT. Thank you. Before excusing this panel, some of the comments that have been made. I want to exercise a prerogative of the Chair and ask one further question. You talked about offsetting the competitive pricing out in rural America, you talk about the safety net Mr. Beyer, you mentioned it again which would be needed to provide the funding. We are talking about, I believe, $1 billion in 2000 and about $2.4 billion in 2015. And the explanation that we got from accompanying the bill and I quote ''A natural wires charge could generate up to $680 million at projected electricity generation levels in 2010. It would be available in the unlikely event that rural consumers should suffer an adverse impact from competition.'' And I believe USDA has suggested that the wires charge would not generate enough money. Is that what am I missing?
Mr. COLLINS. Mr. Barrett, the premise of your question went back to the numbers that were in that unreleased USDA document that
Mr. BARRETT. Correct. [Laughter.]
Mr. COLLINS. That showed that the total higher electric charges for rural consumers would go from $1 billion to $2.4 billion, depending on the year, over a 15-year period.
Now, again, that is a high-risk, low-probability scenario. So, first of all, you would have to dampen that down by some amount to get what might be a most-likely case. Using the Department of Energy's analysis, it would be very minimal. There is even the prospect that the rural safety net would not be triggered at all and there would be no general assessment on retail consumers. It would only occur if the Secretary of Energy and the Secretary of Agriculture, in combination, found that there was a significant adverse effect from retail competition.
Page 52 PREV PAGE TOP OF DOC And you have to look at this rural safety net not in isolation. Yes, there is a provision for $500 to $700 million at most per year to help rural consumers in high-cost-to-serve areas, but in addition to that, there are a number of the other things that I just mentioned. There is the Public Benefits Fund which will help low-income households. That works on a State matching program. States would match Federal funds. There is also the other provision such as opt-out which we have had some discussion here about today. If the State sees that its consumers are going to have, through a public proceeding, much higher prices, then they might choose to go the opt-opt route.
There is also provision for stranded cost recovery, which is also going to help allay some of these higher costs that utilities might face.
Mr. BARRETT. If I could interrupt, what would happen if the necessary funds were not generated? What happens then?
Mr. COLLINS. Well, then you wouldn't fully, wholly compensate all the rural areas that might face higher costs. This is not unlike what happens in any industry that has highly regulated and segregated markets that all of a sudden become freer and more competitive. To take the case of agriculture as an example, what have we fought for the last 10 years is multilateral trade liberalization to try and reduce the barriers, the protectionism, the insulation of markets all around the world. There have been winners and loser when we have done that.
Mr. BARRETT. Where would you suggest that the funds might come from? The deficit funds might come from?
Mr. COLLINS. Well, I think States would have some responsibility on their own to generate some of those funds. I mean, we are talking about a national assessment. People in New York City or Los Angeles compensating rural consumers, I won't say Nebraska, because you have public power, but in other States in the Midwest. And so there is reasonably going to be a limit on how much you can impose on those consumers. And, so, beyond that you might have States contribute.
Page 53 PREV PAGE TOP OF DOC Mr. BARRETT. Could you foresee the Federal Government coming to the rescue in that kind of a scenario?
Mr. COLLINS. Well, that could always happen. Who would have thought the Federal Government would have come up with $6 billion for American farmers last year? I mean, I can't predict how that would happen down the road. Retail competition is going to take years to unfold, just like telecommunications deregulation has taken years to unfold. And, hopefully, the protections and institutions for it to occur in a way that benefits people will come about. But it is going to take some years.
So what you are asking me is will the Federal Government step in at some point years down the road and provide some additional assistance? I don't know the answer.
Mr. BARRETT. But it is certainly within the realm of possibility.
Mr. COLLINS. It is within the realm of possibility.
Mr. BARRETT. Yes. Thank you very much. I appreciate it.
Mr. COLLINS. Yes, sir.
Mr. BARRETT. And I appreciate all of the witnesses today, and the valuable information you all provided. Thank you for taking the time and the trouble to be with us.
I would like to introduce the next panel. At this point, we have Mr. John McClure, who is vice-president of the Strategic Planning and Governmental Affairs of the Nebraska Public Power District. We have Mr. Gary Goldberg, chief executive officer of the American Corn Growers Association, representing the Alliance for Rural America. We have two academics: Dr. David Freshwater of the Department of Agricultural Economics at the University of Kentucky and Dr. Charles Campbell, the Department of Finance and Economics, Mississippi State University. And, finally, Mr. Gene Argo, president of Midwest Energy from Hays, KS.
Page 54 PREV PAGE TOP OF DOC Gentlemen, as you are situated, I would recommend that we start with Mr. McClure. Proceed at your leisure. And I think you understand the 5-minute rule. When the yellow light goes on, be concerned. When the red light is on, it should be all over, but we will give you a few extra seconds. Mr. McClure.
STATEMENT BY JOHN McCLURE, VICE-PRESIDENT, STRATEGIC PLANNING AND GOVERNMENTAL AFFAIRS, NEBRASKA PUBLIC POWER DISTRICT, COLUMBUS, NE
Mr. MCCLURE. Thank you, Chairman Barrett and members of the subcommittee. I would like to quickly summarize my testimony here today and I certainly hope the written portion is put into the record. I will just try to hit some of the highlights.
To begin with, Nebraska is somewhat unique as has been mentioned. We are served by all consumer-owned electric utilities, but we are a very rural State and we do have concerns about what the impacts of deregulation will be. In fact, it has been mentioned, it is restructuring, in many ways it is reregulation, and in some instances, very extensive reregulation of the industry.
First, if we could refer to some of the attachments to my testimony, I think a picture could be worth 1,000 words here. If you look at attachment 8 on page 17, you can see the basic segments of the industry: generation, transmission, and distribution. And, as been mentioned earlier, it is the generation component that has been significantly deregulated, beginning with the Energy Policy Act of 1992. That has helped to produce lower priced generation at wholesale around the country. But the issue here really is what are the impacts of retail deregulation of the industry?
I think the key lesson to be learned from looking at other industries that have been deregulated is that when you talk about competition, when you talk about deregulation, you are talking about winners and you are talking about losers. And the concern and the very important purpose of this hearing is to reflect on the fact that rural America has tended to be a loser in many deregulations and what can be done to make sure that, with the deregulation of something as essential as electricity, that we don't have an experience that is adverse to the consumers in rural America.
Page 55 PREV PAGE TOP OF DOC Let me turn because we have been doing a 3-year study in Nebraska, which will be wrapped us this year to some of the data that we have been able to turn up in looking at other industries that have been deregulated in our State. And my guess is for the members of this subcommittee, there would be similar experiences in each of those States.
On page 14 of my testimony, attachment No. 3 shows what has happened with air service in the State of Nebraska, again on the theme that deregulation and competition produce winners and losers. Omaha has been a winner and consumers who fly out of there get great service, very competitive prices. The rest of the State has seen a significant decline in the availability of air service, as the chairman well knows, even in spite of efforts to maintain essential air service in that part of the country.
On page 15, you can see what has happened since 1996 with deregulation of the telephone industry in the State of Nebraska. Again we see winners and we see losers. If you look at the two major companies in the State right now, residential consumers have seen the price go up for local service. If you look at the remainder of the State, the aggregated small communities, the price has gone up for residential communities. All of these deregulations were brought to us with the promise that everyone was going to be a winner. And I think we are hearing that again in this latest proposal on deregulation of the electric industry.
On the next page, you can see what has happened with deregulation of the railroad industry in Nebraska. Since 1982, we have lost about 25 percent of rail track in Nebraska. It has primarily been in the rural areas. So now we have grain elevators in small communities no longer having rail service. This phenomena is not unique to Nebraska. It is what has happened around the country.
I would like to point out that what we need to be looking at is to clearly protect rural consumers. What happens in the rural area is essential to local economies as well as the national economy. The production of low-cost food products for this Nation and the ability to sell that in international markets is absolutely critical. We need to make certain that the kinds of adverse impacts that have happened in rural areas with other deregulations do not happen to the electric consumer.
Page 56 PREV PAGE TOP OF DOC There are four points I would like to make along that line. First, that rural areas are more adversely affected than urban areas. Second, because electricity is essential for all Americans and a deregulated market may decrease reliability and increase prices for rural consumers and for small consumers, we have to proceed very carefully and cautiously.
There is a role for the Federal Government and for Congress and that is to address essential policy issues such as the administration bill does in the area of Power Marketing Administrations, which are very valuable to the rural areas and to small public consumers. That needs to be protected and made available at cost. In addition to small consumers and rural needs is a need to address the private use issue, to keep low prices available for rural and small consumers of public systems.
Finally, it is important and I think you have heard a lot of this today that we look at it on a State-by-State basis. And I would draw your attention to attachment No. 2 on page 13 where you see what the distribution of average retail prices throughout this Nation. I am highly skeptical, as this subcommittee has been, that everyone is going to benefit if we go to retail choice in this country. For example, earlier the Congressman from Illinois mentioned what had been done there on a State basis. You can see at the time this data came out, they were the 39th highest cost. There is a concern in Wisconsin, which is the ninth lowest cost, that cheap power from that State may be shipped into Illinois to the disadvantage to those consumers.
So I think this subcommittee has asked all the right questions. I think it is appropriate to be skeptical. There will be winners and losers. And we need to make certain that rural America doesn't take it on the chin again. Thank you.
[The prepared statement of Mr. McClure appears at the conclusion of the hearing.]
Mr. BARRETT. Thank you.
Page 57 PREV PAGE TOP OF DOCSTATEMENT OF GARY GOLDBERG, CHIEF EXECUTIVE OFFICER, AMERICAN CORN GROWERS ASSOCIATION, REPRESENTING THE ALLIANCE FOR RURAL AMERICA
Mr. GOLDBERG. Thank you, Mr. Chairman and members of the subcommittee. I am Gary Goldberg, the chief executive officer of the American Corn Growers Association and I am speaking on behalf of both the ACGA and the Alliance for Rural America. The Alliance currently consists of the National Farmers Organization, Federation of Southern Cooperatives, Women Involved in Farm Economics, National Association of Farmer-Elected committeemen, and the American Corn Growers Association. The Alliance represents the interests of more than 200,000 farm and rural families.
The issues of electricity restructuring are complex, especially from a rural perspective. Lightly populated areas of this country do not see the same benefits to deregulation as our urban cousins. It costs more to service rural areas and those costs are almost always passed along, burdening us with higher expenses. One need only look at the now-infamous initial draft report of the U.S. Department of Agriculture study on the effects of electric industry restructuring on rural States that came out in March. This report showed that 19 mostly rural States would pay higher electric rates and have slower economic growth under restructuring. Nebraska was one of those rural States.
This why the American Corn Growers Association and the Alliance for Rural America continues to advocate a carefully thought out and realistic approach to this whole issue so that farmers and rural people are not adversely affected. The ACGA and the Alliance believes that the issue of electricity restructuring is best left to the States to decide. This allows more direct input from rural and farm constituencies and greater accountability.
So far, 18 States have enacted restructuring legislation, with an additional 22 States looking at the issue through studies and the legislative process. We recognize that the issue is here to stay. But we continue to adhere to the fact that States can better serve the local communities without Federal interference.
Page 58 PREV PAGE TOP OF DOC If, however, legislation does come out of Washington in some form, the ACGA and the Alliance for Rural America oppose any federally-mandated date-specific provisions and any restrictions on incumbent electrical power companies from having the same rights to compete as the new entrants on the market. If true competition is to work, every company that can service the consumer must be allowed to do so without any impediments or restrictions. This includes both co-ops and investor-owned utilities, both of which currently serve rural Americans. Artificial jump starts and other measures that give an unfair competitive advantage to new companies will handicap the existing utility companies and will reduce true competition. This will not bring about true choice for the consumer.
Aggregation is another issue that needs to be addressed. Whether group marketing of electrical power is advantageous is to be seen. If forming marketed groups will provide more reliability and consumer savings, then it should become an option. But forcing or mandating aggregation is not in the best interests of the ratepayer and we will strongly oppose any provision in any Federal restructuring legislation.
American agriculture producers are big users of electricity to dry our grain, protect our livestock, power our irrigation systems, and service our families. The current depression in agriculture makes it increasingly difficult to deal with the potential for higher electric rates when we do not have the ability to pass those higher costs on to the consumer. The burden to restructure the electric power industry should not be on the shoulders of farm and rural customers, especially when the consumer is not clamoring for restructuring. After all, restructuring is not consumer-led, it is industry-led.
The American Corn Growers Association and the Alliance believes that restructuring can only succeed if it accomplishes the following: No. 1, benefits farmers and rural Americans by lowering electricity prices and spurring the development of new products and services. No. 2, does not include date-specific enactment of electricity deregulation and allows States to proceed with caution and careful deliberation. No. 3, allows States to take the lead in implementing electricity restructuring legislation. No. 4, permits utilities to maintain all former service areas and allows affiliates to use their name and logo of parent utilities which will ensure true competition amongst all retail electric companies. And, No. 5, that utility restructuring should not be used as a means to amend the Clean Air Act, especially when it comes to mandatory increased NOX reductions and back-door implementation of the global climate change treaty.
Page 59 PREV PAGE TOP OF DOC Agriculture producers have a great deal at stake if electricity restructuring becomes a financial drain on rural communities and rural customers. The American Corn Growers Association and the Alliance for Rural America appreciates this opportunity to share our views and concerns with the committee and we would be happy to answer any questions. Thank you.
[The prepared statement of Mr. Goldberg appears at the conclusion of the hearing.]
Mr. BARRETT. Thank you.
STATEMENT OF DAVID FRESHWATER, DEPARTMENT OF AGRICULTURAL ECONOMICS, UNIVERSITY OF KENTUCKY, LEXINGTON, KY
Mr. FRESHWATER. Thank you, sir. I would like to thank you for inviting me to testify before the hearing this morning. I have been involved in rural economic development for almost 20 years and that is the reason that I became interested in electricity deregulation.
I am very encouraged by the fact that you are holding this hearing, because it has been quite a time since anybody has paid much attention to the fact that there will be winners and losers in this process. It is like every other form of public policy: some people win, some people lose. And I do believe that, on aggregate, deregulation will have a positive effect on the Nation, but there will be winners and losers in this process.
In the study that we did in Kentucky, we looked at three levels of winners and losers: State differences between high-cost and low-cost States; rural/urban differences; and, then, a difference between high-income and low-income consumers. And I think all of those things are important aspects to think about.
Page 60 PREV PAGE TOP OF DOC If you think about the State differences, what we are talking about here is creating markets where markets didn't exist; moving power from one State to another State. The way markets work is by an arbitrage process. People who are willing to pay more get the good or service. People who are willing to pay less don't get it. So it is only going to be natural, at least in the short-run, that States like Kentucky that have very low rates are going to see power flow out of Kentucky in States like Illinois that have relatively higher rates. That is the whole point of this exercise. So I am very unpersuaded by the DOE analysis that says that Kentucky will, indeed, enjoy lower electricity rates.
I think it is important to think about how market power is going to influence this process and the capacity of the transmission system to move power from place to place, because those are things that we don't understand. If you talk to the electrical engineers who are involved in this, the transmission grid wasn't designed to do what we are asking it to do and its capacity to move big blocks of power isn't as clear as people would like to think it is.
If we turn to this rural/urban difference, I think you find that, in most States, there are multiple distribution companies, each with their own cost structure. In Kentucky, for example, the difference between the lowest cost part of the State and the highest cost part of the State is about 50 percent. So we have big variability within States and, typically, what we find is that, in rural areas, costs are higher for all the reasons that people have alluded to before.
And nothing that I have seen suggests that the differential between rural and urban rates will be reduced as a result of these changes. In fact, I think it is likely to increase. One of the reasons will be, as Mr. Minge suggested, a loss of industrial load due to cherry picking. The investor-owneds will cream off the big loads that are easy to service. There is going to be a loss of cross-subsidies that are inherent in the existing rate structures. And I think there is going to be some potential load shedding by the investor-owned utilities who have better opportunities than serving rural places.
Page 61 PREV PAGE TOP OF DOC Those are all direct effects. I think it is also important to think about economic development impacts. One of the biggest advocates for economic development in rural areas up-to-date has been the power company. Power companies have wanted to build load. The way they built load was by industrial recruitment programs. They no longer have that incentive. Now they can sell their power into the market. If they do get a company to move to the community, they have no assurance that that company is going to buy power from them. So I think what you are going to see is a fairly major reduction in economic development activity by generating companies because it is not in their interest any more.
In the urban areas, there is probably going to be the capacity to make that up. I just don't see in most rural places the ability to put in place an economic development professional to offset the role that those power company people played.
The other point which I think has been lost in a lot of this is we tend to talk about average benefits and there is no average person or perhaps there is an average, but most people are above average and most people are below average or half the people are above and half the people are below average, by definition. And when you look at average savings as a result of deregulation, I am not sure what it tells you, especially for something like electricity.
If you look at the income share going to power for poor people, it is far higher than it is for rich people. And if you think about discretionary income in a poor person's budget, it isn't there. So even a relatively small increase in the price of power can have a devastating impact on their budget. So if power prices go down, poor people benefit more. If power prices go up, they lose more, too.
When we looked in Kentucky, what we found in the rural areas was high incidences of poverty in some parts of the State and a high incidence of poverty was also highly associated with either substandard housing or living in a mobile home. Both of those things in our State tend to be heated by resistance electric heaters. That means that the costs for those people are going to be incredible, especially if you go to real-time electricity pricing, which is one of the things that has to be built into this process if consumers are going to respond to price cycles. That means that power prices spike in the winter when it is really cold. People will have a choice between not eating and staying warm. And I think that is a piece that we have tended to ignore. And it is also a problem in urban core areas, wherever you have substandard housing, you are also likely to have electric heat.
Page 62 PREV PAGE TOP OF DOC In conclusion, we put six core questions in our study at the end of it and I think all of those questions still apply at this national level. And I urge you to pay attention to them.
And my last point would be that when you consider the amount of time that was spent by the Congress and by State and Federal Governments thinking about welfare reform, before we undertook welfare reform, and that impacted a relatively small portion of the population. And then you look at how little time has been spent thinking about electricity deregulation which impacts everybody and I would argue it probably impacts the poor more than welfare reform did I think it is an incredible misallocation of resources. Thank you.
[The prepared statement of Mr. Freshwater appears at the conclusion of the hearing.]
Mr. BARRETT. Thank you, sir.
STATEMENT OF CHARLES CAMPBELL, DEPARTMENT OF FINANCE AND ECONOMICS, MISSISSIPPI STATE UNIVERSITY, MISSISSIPPI STATE, MS
Mr. CAMPBELL. I am afraid I was reading Dr. Freshwater's mind when I wrote my notes because he said most of them, but I will say them again. I do thank you for inviting my testimony today.
I come from an electricity background. I was at Madison Gas and Electric for some time. And I do distrust people who are going to make electricity policy and think that they can turn a switch in Maine and produce electricity in California. Because it doesn't work that way. There are a lot of things that people are talking about that don't work that way and I would hope that we all take a real close look at the reality of how electricity functions before we start making decisions.
Page 63 PREV PAGE TOP OF DOC I want to speak specifically to the impacts of electric restructuring or what I call retail access on rural electric co-ops and I will emphasize those co-ops in Mississippi. The impacts on rural electric co-ops are likely to come from a number of sources, but at least in Mississippi, will not come in the form of lower electricity prices, I believe, at least not for residential and small commercial customers. To the extent that retail access does even out regional differences, as the proponents have maintained, that would suggest to me that low-cost States like Mississippi may actually end up with higher prices in order to even those things out.
I worry about studies that come up with numbers at this point and, as a person who has done a lot of economic modeling, I would suggest to you that you not question the answers of economic models, you question the assumptions. If you look very closely at the assumptions and how realistic they are, then that tells you whether to look at the answers or not.
The rural electric co-ops, or EPAs as we call them in Mississippi, who have large industrial customers are likely to lose those customers. In fact, it has been some time ago, but I do remember sitting at dinner with some industrial heads of companies who their whole conversation was geared towards we have to get out of the co-ops because we want to go find cheaper electricity. And this whole movement seems to have been driven by industry, not by consumers. Those industries that are large and in rural areas help reduce the cost of electricity to rural customers because they are what are called high-load factor, high-demand customers.
Once you remove those because of cherry picking, there is no other result than higher prices for the remaining customers. It has to happen. Lower load factor customers will have higher prices.
As large industrial customers leave the co-ops, a number of other things are likely to follow. First, the historic cross-subsidization in favor of small commercial and residential customers will likely disappear, particularly if we go to retail access at an individual basis and we unbundle the cost structure, then we will begin to see even more increases in residential and small commercial customers. If all customers have full retail access, then co-ops will still have to maintain backup power for customers on their lines.
Page 64 PREV PAGE TOP OF DOC And if we truly have a dynamic, competitive system and I don't believe we can have pure competition but if we do have a fairly dynamic, competitive system, that means there will be generators coming into business and generators going bankrupt. And as they do and their customers are left in the lurch, someone has to cover that load. That means it is going to be the wires company, which is going to be the co-op.
Also, if you are going to unbundle rates, you have to have much more complex metering and distribution equipment, which means higher costs, again, for the co-ops. Those co-ops who own generation and transmission facilities are also likely to be faced with stranded costs. We have some in Mississippi. Unlike the situation with an investor-owned utility, you are not faced with the question of who is going to bear this cost, the customer or the stockholder, because, with a co-op, they are one and the same. So the co-op customers are going to bear those costs.
That brings me to another point. During all the discussions of retail access, outside of this room, that I have heard, co-ops have seldom been addressed and co-ops are very, very different than IOUs. IOUs are profit oriented. They are stockholder oriented. They are profit-driven. Coops are customer-owned. They are not profit-driven. And, in fact, they are very similar to what proponents of retail access call aggregators. Now they already aggregate load. So, to the extent that something like this occurs, it would be nice if they could continue to be aggregators, in the sense that they have been.
My purpose is not to say stop retail access, because I don't think it can be stopped. My purpose is to say that if you are going to adopt rules or you are going to pass legislation, you need to carefully consider the historic role and functions of rural electric cooperatives and you need to make these decisions with full information, with complete knowledge, and with specific intent to change those coops, because they will be changed drastically.
Page 65 PREV PAGE TOP OF DOC [The prepared statement of Mr. Campbell appears at the conclusion of the hearing.]
Mr. BARRETT. Thank you.
STATEMENT OF GENE ARGO, PRESIDENT, MIDWEST ENERGY, INC., HAYS, KS
Mr. ARGO. Thank you and good morning. My name is Gene Argo. I am president and general manager of Midwest Energy and I want to thank you for the opportunity to testify as a rural energy provider.
Midwest Energy is a rural energy cooperative. We serve 35,000 electric customers with over 10,000 miles of distribution and transmission lines. This equates to 3.5 customers per mile of line. We also serve 43,000 natural gas customers and 2,000 propane customers. These customers are located in 39 counties covering over 21,000 square miles.
No one knows for sure what the exact impact of electric deregulation will be in the rural communities or the urban communities for that matter. Midwest Energy, however, has taken the position, as a rural energy cooperative, that our customers will and have already benefitted from competitive markets. There have been more change in our energy business over the last 5 years than in the previous 60. We recognize that change is accelerating and often difficult to accept. No one has ever said that change in this industry would be easy or perfect, but competitive markets do bring benefits for customers, both urban and rural. Midwest Energy believes that prices will become more competitive, choices will increase, and utility companies have and will become more innovative.
As we continue to examine deregulation of the electric industry, it is important to understand the very significant difference between the energy commodity and the delivery systems that are in place and required to deliver the service.
Page 66 PREV PAGE TOP OF DOC For many, if not most rural cooperatives, the cost of the commodity is well over half of the overall cost of the electric bill. It is this portion that will initially be subject to competitive forces and is the focus of the current restructuring movement. Suppliers will compete to earn customers' business.
In addition to the commodity, the other significant component of utility bills is the cost to deliver the service. There is no question that delivery to sparsely populated rural areas has for decades cost more on a per-customer basis. I doubt that will change and it is independent of the cost of generation. But we should not let the higher cost of rural delivery blind us to the opportunities presented by competitive supply options. Our rural cooperative distribution system is owned by our members and should be operated to their advantage. Rural electric distribution cooperatives do an excellent job of controlling delivery costs while providing quality service.
Competition in the service delivery area will and in some cases has already surfaced. Construction, maintenance, billing, and other services are at risk. New technology such as dispersed generation may even replace high-cost rural delivery system in some situations. This can and will continue to occur with or without legislation or deregulation. Rural electric providers can and will take necessary steps to protect assets and provide value with good service and reasonable prices. Whether as a result of pending open markets or good business strategies, Midwest Energy and others have already initiated this process.
For example, the steps Midwest Energy took to increase member value under new business conditions began after the passage of the Energy Policy Act of 1992, FERC Orders 636, 888, and 889. These steps included the divestiture of older, costly base load generation in favor of flexible energy and capacity agreements with a major supplier. Several years ago, Midwest Energy made the decision to sell several generating facilities. The decision was financial in that it was going to take an excessive amount of investment to upgrade these facilities to meet our pool requirements. This decision was made easier with deregulation on the horizon.
Page 67 PREV PAGE TOP OF DOC In 1997, Midwest Energy initiated an open access program designed to offer more choices to all classes of customer, beginning with the unbundling of electric bills into transmission, distribution, and generation. In the near future, we plan to offer optional rate plans, including a green power plan using environmentally friendly generation, an index rate plan tied to farm commodity prices or to the price of oil, or a fixed rate plan. All of these will be offered as choices to customers.
Last year, our company established a marketing affiliate to give our members the opportunity to participate in margins not previously available. This affiliate is now competing in several States, selling an energy commodity to industry, small business, and residential customers, both inside and outside our regulated service territory.
For the last 6 years, we have continued to address potential competition by upgrading and increasing services in the areas of technology, construction, maintenance, marketing, organizational improvements, and customer choice. The point is, rather than do nothing and predict doom, we suggest rural energy providers strive to develop business strategies for a new era, designed to add value in open markets. After all, in our case, co-op members own the system. We owe them nothing less. As a rural energy provider with first-hand experience of the actual impact of open markets, I sincerely thank you for the opportunity to testify before you today.
[The prepared statement of Mr. Argo appears at the conclusion of the hearing.]
Mr. BARRETT. Thank you very much. And thanks to all of you. Very, very good testimony.
Mr. McClure, I noticed in the largest newspaper in our State, recently a comment made by Mr. David Sokol, you are well-acquainted with him as well. He is with MidAmerican and you, in your testimony, made reference to MidAmerican. And he made some very revealing statements. First, he said that Nebraskans in a deregulated market could see rate increases of up to 30 percent. Would you agree?
Page 68 PREV PAGE TOP OF DOC Mr. MCCLURE. He was talking about a scenario where the benefits of public power would be taken away and, yes, there would be that kind of an increase. I do agree.
Mr. BARRETT. He also suggested that perhaps deregulation, under full deregulation, 20 to 30 companies could deliver electric services to the whole country. Would you agree or disagree?
Mr. MCCLURE. It is certainly possible that we will see the generation continuing to aggregate. The attachment 1 to my testimony shows what the mergers have been in the States surrounding Nebraska since 1991. Companies such as Utilicorp have gone from being a $1.1 billion to a $16 billion enterprise as they continue to merge with other utilities. So we are seeing a massive concentration of major players in the marketplace.
Mr. BARRETT. Mr. Campbell, I was interested in a couple of your comments as well. You were talking about, of course, the co-ops spreading the costs throughout a system and the farmer or the rancher out at the end of the line, of course, could also receive the same basic power as everyone else. Do you also assume that retail competition would bring a less reliable service to the system or not?
Mr. CAMPBELL. Well, there are several pieces to this answer. The first is, overall, yes, I think reliability is going to be strained. One of the reasons I think it is going to be strained is if you look in our part of the country, base load units, on average, run about 30 years. Those are old units. There is absolutely no incentive to increase base load at this point and under the scenarios I have seen, virtually everybody is going to be investing in peaking load units. As the older base load units degenerate and are not replaced, we are going to face more and more problems with smaller and smaller reserves. I think in the Southeast, we are already down to about 17 percent. So that is a reliability problem.
A second reliability problem comes from the fact that if you look at planning, any large utility will tell you that planning transmission and generation go together. They are not separate events. And you can in fact change your transmission system to compensate for less generation. You can change your generation system to compensate for less transmission. Once you begin having lots and lots of generators popping up here and there, you are going to lose some of that ability. So that is also going to hurt some reliability.
Page 69 PREV PAGE TOP OF DOC Finally, in terms of required reliability, when you get down to the customer level, in order for you to get on A plan or B plan, I would assume, if we are truly going to unbundle everything, we are going to be asking customers to look at lower levels of reliability than they have before as a tradeoff for lower costs. And I am not sure how much they are going to like that.
We talked about consumer choice, this being a choice thing, like with telephones. I am not real thrilled with my choices in telephones. I have seen California electric bills. I am not real thrilled at the prospect of getting one of those either.
I worked in the electric industry for 4 years. I have a Ph.D. in economics. I have done energy economics. I have done economic modeling. And I don't think I am smart enough to pick my generator. We have people in my town who cannot afford local telephone service now that we are deregulated and the local telephone service has gone up in price. What are they going to do if the same thing happens with electricity? You can do without a telephone. So I have some problems.
Maybe they are all right. Maybe I am totally wrong. I hope so. Maybe electricity prices are really going to go down and we will all be thrilled. They said the same thing about airlines and my ticket was $985 to get me here.
Mr. BARRETT. We appreciate your presence even more. [Laughter.]
The new Governor of my State of Nebraska, Governor Mike Johanns, submitted a written statement to the subcommittee. I thought it was an excellent statement and I refer to it. He talks about electric power is a much different commodity from about any other use, with the possible exception of food. He says that the Federal Government cannot expect to come up with a restructuring law that works in all 50 States. He goes on and I quote: ''Every State has unique characteristics that will make a Federal model unworkable, unfair, and costly to consumers.''
Page 70 PREV PAGE TOP OF DOC Would any of you care to comment on that statement? Is there any violent disagreement with that statement from members of this panel?
Mr. CAMPBELL. I think that there is something to what the gentleman from the Department of Energy said with respect to needing some sort of national framework, that individual States may be able to do all right within their State, but they are still going to have to go across borders and there are still going to be reliability concerns. So I understand their concern about wanting if you are going to do this then have some sort of a Federal framework. I am not sure how deep that framework has to go, though.
Mr. FRESHWATER. Could I add a little to that?
Mr. BARRETT. Dr. Freshwater.
Mr. FRESHWATER. It seems to me that the real need for a Federal role is in transmission, because if this market process is going to work, you have to be able to move the power from one place to another place. Beyond that, I think there is no reason that the State policies can't work out the distribution issues and work out most of the generation issues. But you really do need to think about how you are going to manage a transmission system that was designed to move small amounts of power from one utility to another utility in basically off-peak periods and convert it to a system that allows big blocks of power to be moved long distances because that is what we said we want to do when we got into deregulation.
Mr. BARRETT. Thank you. Very quickly, because I know my time is gone, assuming that we do move ahead with this restructuring, what should the tax treatment be for any bond issues of consumer-owned utilities? And perhaps, Mr. McClure, is that something that you could address?
Mr. MCCLURE. Well, currently there are bills and companion bills in both the House and the Senate I believe it is H.R. 721 in the House that helps address the transition that needs to be accommodated from a more monopolistic world to a more competitive world. And there will have to be some assistance there, some changes in the law, to make things happen. And that really needs to be addressed right now because, as has been mentioned by several witnesses, wholesale generation is in a competitive market right now and that issue needs to be addressed presently.
Page 71 PREV PAGE TOP OF DOC Mr. BARRETT. Thank you very much. Mr. Minge.
Mr. MINGE. Thank you. I would like to just pick up on the last question. I think that all of the participants in this industry are very suspicious of each other and I know I have heard from rural electric cooperatives that they are concerned that if this particular bill moves in its current fashion, that municipals will have the resources to stronger resources to take customers from rural electric cooperatives. And so there is this constant tension between what is necessary, what is fair, and then what is going to give one player in the process kind of a leg up on another player. Could you address that?
Mr. MCCLURE. Sure. As a matter of fact, I have testified in our State legislature in opposition to some territorial initiatives of the municipalities and in support of the rural utilities. But from a financial standpoint, I don't think that that legislation will in any way give municipalities a significant upper hand to go take rural territories. The dollars involved in the acquisition of distribution facilities are really rather minimal in most instances. So I think that issue has been raised and I don't think it is as significant as some of the rural a handful of the rural entities have tried to suggest that it is.
Mr. MINGE. Well, we invite you then to come to Minnesota and share your analysis with our rural electric co-op.
Mr. MCCLURE. I understand. I understand that your State has been very active on the issue.
Mr. MINGE. Yes. Turning to a different topic, I am very concerned with how we structure the deregulation to try to assure the rural areas of our country adequate levels of service and, going on into the future, competitive service so the rural areas remain a part of our national economy. I am sure that all of you have heard the reference to the Buffalo Commons and other rather disparaging terms about the Plains States and even parts of the Midwest prairie area.
Page 72 PREV PAGE TOP OF DOC And, from my perspective, part of this means that we have to have a national commitment to a basic infrastructure and it is not just the interstate highway system. It includes telecommunications; it includes energy. And these energy services have to be available on a fairly uniform basis nationwide. Otherwise, what we are doing is we are essentially saying that certain regions of the country will be second-class regions economically.
And I asked earlier about the Universal Service Fund in the telecommunications area and whether there isn't something that we can establish that would be analogous to that with respect to electricity and try to do it outside of an appropriation from the Federal Treasury. Because, as all of you have watched over the last 20 years, the Rural Electric Program in particular, has been the victim of unrelenting attacks by some of my colleagues and some of the folks down at the White House. And we can't constantly have to battle to salvage a fairly minimum portion of the Federal budget for helping low-density areas with their electric service when rural areas are increasingly a smaller part of the Nation's population. It is just, politically, it is a pretty precarious position to be in.
Is there something that we could put into this legislation that is currently being considered that you feel would put us on a long-term basis for an equitable participation in energy services for the indefinite future? And I am not sure who could best address this. Mr. Freshwater, you appear to be the academic member of the panel, so if you could quickly comment and then if others see another dimension that you might not have picked up on.
Mr. FRESHWATER. There is a disadvantage to sitting in the middle. It seems to me that the real problem is less the cooperatives and more the people who are now currently served by investor-owneds in rural areas because it doesn'tfrom talking to admittedly a relatively small number of people in the investor-owned industry, they see that as a not-very-profitable area to serve just as they did in the 1930's. So if anything, I guess I would argue that you may want to think seriously about a reinvigorated role for the Rural Utilities Service.
Page 73 PREV PAGE TOP OF DOC I am really skeptical of Universal Service Funds because what this process is going to require is it is going to be just like your telephone bill, there is going to be a line on your power bill that says tax for something that you don't see any direct benefits for. And just as what happened with the telephone system when they tried to bump that tax up so that they could do all of the things that they wanted to do at the rural hospitals and rural schools, there were huge howls of outrage that this tax was too high.
I think the argument that you make is correct, we have a national commitment to some sort of minimum level of infrastructure. Everybody gets the mail delivered in some way, shape, or form. Everybody gets some kind of road to drive on. And, I think increasingly, power and telephone are seen as not luxuries, but essential things, at least access to them. Whether you could actually have the resources to buy into the telephone system
Mr. MINGE. We could say access at a reasonable price.
Mr. FRESHWATER. Right. Yes. And that would be my suggestion.
Mr. BARRETT. The gentleman from Kansas, Mr. Moran.
Mr. MORAN. Mr. Chairman, thank you and I appreciate you and the ranking member holding this hearing. I am pleased to know that this legislation has been referred to this committee because I think it has significant impact upon our constituencies in rural America and particularly agriculture. I also would welcome my friend and neighbor Mr. Argo who lives down the street from me in Hays, KS. He has been an integral of western Kansas, central Kansas and his company is well-regarded and provides a great service at affordable prices to many of my constituents and I appreciate Mr. Argo taking the time to share his expertise with us today.
Mr. ARGO. Thank you.
Mr. MORAN. Many of kind of the topics I wanted to talk about have been at least touched upon by the panelists and by the questions that have preceded me. What is the answer to this access fee issue? It seems to me that, as I listen to my constituents to try to learn about these issues, the concern is that the rural customers 10 miles out in the country at the end of the line, how is he or she going to be served and what is the cost going to be for that service? Dr. Freshwater indicated a lack of support, enthusiasm for an access fee. Is there an alternative? And I guess what you were telling Mr. Minge is that maybe it comes from additional subsidization of rural either transmission or generation, which leads to one of my other questions, is there inefficiencies that are created by the subsidization that has occurred in the past that we ought to be worried about that have been built into the system that may be increased if that is the direction we go in making certain that affordable access is available across the country? Any takers? Dr. Campbell?
Page 74 PREV PAGE TOP OF DOC Mr. CAMPBELL. I am always concerned when I hear people talk about efficiency as though that is the only goal in life because there is efficiency and there is equity and they need not go in one direction or the other. Sometimes equity is better. But I don't think the concern I think Mr. Argo sort of led up to this a while ago. The concern is not that the customer is out at the end of 15 miles of line. That is the distribution system and that is not the problem we are talking about. The concern is that if the customer is a small residential customer, he has no market power and if he goes out to choose his power generator, he has not got much clout. He has got a terrible load pattern. He doesn't consume much. He is nobody.
What we are concerned about is that they somehow manage to stay with a group that is large enough to have some clout. And Midwest Energy is an example of a co-op that has got clout. So if we could keep them together with an organization that can keep a load factor that is high enough that they can go out and bargain, that is the critical issue. And the problem that we have is, I think the real crux of the problem, is that when you have cherry picking and you have load factors particularly if you have got a lot of farmers you have got irrigation equipment or you have got dairies, load factors are terrible. And when you lose those big industrial customers, now you are an aggregator, but you don't have any load factor to bargain with. So it becomes very difficult for you. And I am not sure what the answer to that is, but I think that is the real problem.
Mr. MORAN. It is not geography. It is not the number of miles out in the country.
Mr. CAMPBELL. Right.
Mr. MORAN. It is the size of the consumption. The amount of consumption by the consumers.
Mr. CAMPBELL. And the patterns.
Page 75 PREV PAGE TOP OF DOC Mr. MORAN. Mr. Argo.
Mr. ARGO. Thank you. Good point. And I think that is something we really need to understand that the delivery infrastructure is a different animal than the commodity and, true, different customers' load patterns are different. I should point out that co-ops are natural aggregators. We do this. We buy power every hour and we do it in the best interests of our customer. I should point out that that probably will become much more critical. It will become much more critical in an open access market. But we think we are good enough to compete.
I think that there are a lot of co-ops. We have heard that there are what? over 850 distribution co-ops in the United States. There may be some inefficiency there. Coops with clout are generally those with the larger customer base. And there is nothing written anywhere that says co-ops cannot merge and become more effective and act in the best interests of their members. And I think that is a very important point. You will notice in a lot of companies, whether they are co-ops or IOUs, the last 7 years have been doing things to become more competitive and deliver better services. And I think management is a real key issue in a deregulated market and I think deregulated market will bring a lower price to the rural consumer.
Mr. MORAN. So you would anticipate with deregulation an increasing trend toward mergers among co-ops?
Mr. ARGO. I would hope so, because, obviously, there are some efficiencies of size, for one thing, that they can take advantage of.
Mr. MORAN. Mr. McClure.
Mr. MCCLURE. Well, I just wanted to thank you. I wanted to emphasize the point that was made which is with small consumers and with many agricultural operations, the nature of the load pattern is such that even the aggregation of a lot of people with like load patterns doesn't make them collectively more attractive in the marketplace. There is some incremental gain, but they still have, in some cases, load patterns that will not be that attractive to energy suppliers.
Page 76 PREV PAGE TOP OF DOC Mr. MORAN. And, therefore
Mr. MCCLURE. And, therefore, some of the benefits that may be suggested by bringing a lot of people together may not accrue. If you can get diversity in there, it is those high load factor customers that want to be pulled out and treated separately and say, give me the best deal because my plant runs at a steady high capacity, continuously. That is the cheapest plant to serve.
Mr. MORAN. Mr. Chairman, thank you.
Mr. BARRETT. Thank you. And thanks again to the members of this panel. I think this testimony is very insightful. Well done. And we appreciate your attendance very, very much. The Chair would ask unanimous consent to allow the record of today's hearing to remain open for 10 days to receive additional material and supplementary written responses from witnesses to any question posed by a member of the panel. Without objection, it is so ordered.
This hearing is now adjourned.
[Whereupon, at 12:38 p.m., the subcommittee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
Statement of Wally Beyer
Mr. Chairman and members of the Subcommittee, my name is Wally Beyer, I am the Administrator of the Rural Utilities Service (RUS), a Rural Development agency of the United States Department of Agriculture. I appreciate the opportunity to appear today to share the views of the Rural Utilities Service on the challenges of delivering affordable and reliable rural electric service in a rapidly changing regulatory and market environment.
MORE THAN 60 YEARS OF PROGRESS
I would like to start by thanking the subcommittee not only for the invitation, but for its continued and strong support of the entire Rural Utilities Service. Together, we are helping strengthen local economies in rural America with quality telecommunications, electric, water and wastewater infrastructure, and improve health care and education through distance learning and telemedicine projects by providing more than $42 billion in financing to more than 9,000 rural entities.
Page 77 PREV PAGE TOP OF DOC I can think of no better time to focus attention on the rural electric challenge. Last week marked the sixty third anniversary of the signing of the Rural Electrification Act. While rural America has changed greatly because of and since, the passage of that landmark legislation, many of the challenges remain. Geography and low population density make rural utility service difficult to provide and access to affordable, critically important capital.
This fiscal year, RUS will finance more than one billion dollars in rural electric infrastructure. That commitment from Congress and the administration will unlock billions of dollars of private sector investment. Every Federal dollar RUS directs to rural electric infrastructure, leverages three private sector dollars, on average, over the last five years, the public/private partnership resulted in more than three billion dollars being invested annually in the rural electric infrastructure. Today, the RUS holds $32 billion in loans to rural electric systems. Even with this significant commitment to a rural electric infrastructure, demand for RUS electric financing exceeds available program dollars by $1.3 billion.
While we are proud of our accomplishments, we know that our work is not done. Rural systems are simply more expensive to operate and maintain than systems in urban areas. Plant improvements are expensive, and capital costs are more expensive on a per consumer basis for rural systems. As we look to the future, we know that RUS public/private partnership must continue. In a competitive marketplace, RUS credit support and leveraging of private sector investment capital will be more valuable than ever.
VISION OF THE FUTURE
This is a time of great regulatory and market change. These changes could have a profound effect on rural electric service providers as well as loan security issues in the Rural Utilities Service loan portfolio. As electric restructuring unfolds, the RUS is keenly focused on maintaining both quality of service and taxpayer's loan security.
Page 78 PREV PAGE TOP OF DOC As we enter this new era of restructuring, affordable access to capital will be of growing importance to rural electric systems. Accordingly, we are working to enhance the competitiveness of our borrowers and the flexibility and usefulness of our program. We are reforming our program regulations to be more customer friendly; focusing on loan security in a new customer choice competitive environment; and eliminating non-productive oversight, antiquated controls and approvals. To take advantage of a favorable credit market, and to prepare for a new marketplace, we are emphasizing Reform, Re-invention and Responsiveness.
Consistent with the spirit of re-invention, RUS continues to streamline its policies, offering borrowers more flexibility in financing, speedier response times, and 64 years of experience dedicated to quality electric service to rural Americans.
Mr. Chairman, I support the administration's electric restructuring legislation, the Comprehensive Electricity Competition Act. The RUS made significant contributions to this landmark legislative proposal. No restructuring plan currently before the Congress is as complete or as sensitive to rural concerns as is the President's bill.
I support this legislation because a national restructuring strategy is required. One way or the other, restructuring is coming. 18 states have passed restructuring legislation, 25 states have restructuring studies underway, and 3 other state public service commissions have initiated restructuring action.
While States have significant interests in the restructuring debate, pursuing restructuring on a state by state basis can not address nation-wide concerns, that can only be addressed through Federal legislation exclusively. With its flexible mandate, the administration's bill appropriately balances important state interests with Federal concerns which include ensuring that rural citizens share in the benefits of restructuring.
The administration's legislation is a balanced bill which contains several important provisions important to rural America including:
Page 79 PREV PAGE TOP OF DOC a flexible mandate, which allows states and unregulated electric cooperatives and municipal utilities to opt out of retail competition;
a renewable portfolio standard that represents a potential opportunity for American agriculture to produce renewable sources of energy and gives American farmers a new income opportunity;
a requirement that the Federal Energy Regulatory Commission (FERC) consider the consumer-owned nature of rural electric cooperatives, the tax exempt status of cooperatives and the program interests and loan security of RUS;
important emphasis on reliability standards;
provisions to ensure the recovery of stranded investment;
intervener status for the Secretary of Agriculture in FERC proceedings affecting RUS borrowers;
authorization for a rural and remote generation grant program; and
authorization for a Native American electric grant program.
Perhaps most important, the President's legislation is the only restructuring bill that incorporates specific rural-friendly provisions. The bill provides for a rural safety net of about one half billion dollars in the first year, growing to more than $600 million if necessary to help mitigate any adverse economic effects of restructuring on rural consumers.
The President's bill maintains access to preference power. 516 electric systems receive power from the Power Marketing Administrations (PMAs) and the Tennessee Valley Authority (TVA.) Also, rural systems will benefit from programs financed by the public benefits fund which will match state efforts in low income assistance, consumer education, conservation and technology development. In addition, over the long term, increased demand for biomass fuels will create new markets for agriculture products.
Page 80 PREV PAGE TOP OF DOCRURAL INTERESTS IN RESTRUCTURING
In considering electric restructuring legislation, I urge the subcommittee to keep in mind the USDA's program interests and the investments of the American taxpayers in rural electrification.
The RUS provides financing to more than 750 rural electric systems. RUS borrowers serve 25 million of the 54 million Americans who live in the 80 percent of our nation that is rural. Our borrowers serve 523 of the 540 highest poverty counties in the nation. It simply costs more money to serve rural consumers.
As important, the subcommittee should appreciate that it is already very difficult to provide electricity to rural areas. Rural electric systems face daunting challenges even in a stable regulated environment. Those challenges do not disappear in a competitive environment.
For instance, all rural systems face difficulties due to low population density, lack of economies of scale, customers which are generally older and less affluent, and fewer industrial and commercial customers per residential customer.
As compared to urban systems, according to USDA and Department of Energy data, RUS borrowers receive one-eight the revenue dollars per mile of line. Also on a per consumer basis, RUS borrowers:
require 22 percent more distribution investment capital;
incur 31 percent more operating and maintenance costs;
pay 27 percent more in power delivery costs; and
earn 45 percent less in operating revenues.
Rural electrification has always been a difficult and risk-filled endeavor. Our agency exists in large part because the commercial marketplace was unable or unwilling to serve many rural Americans at a price that was affordable and conducive to economic development. The need for this agency will be heightened in a competitive environment. However, under the administration's bill, I am confident that the rewards substantially outweigh the risks and the legislation contains the tools to manage successfully and mitigate that risk. The most dangerous strategies for rural America would be for Congress to take no action or to enact legislation without the rural friendly provisions contained in the administration's bill.
Page 81 PREV PAGE TOP OF DOCPREPARING FOR THE FUTURE
RUS continues to study the effects on rural areas of competitive and regulatory policies in the electric, telecommunications and water industries. We have worked closely within USDA and with other Federal and state agencies, and with industry experts, to study potential risks to RUS loan security and rural economic development. We will continue that work.
America's longstanding partnership with rural communities to help provide safe, reliable and affordable power will be more important than ever in an increasingly competitive environment. One thing is certain, there will be a continuing need for the Rural Utilities Service loan program, credit support, engineering expertise, and quality assurance it provides to rural America.
Restructuring the regulatory and market regime of a 100-year old electric utility industry is a complex task. There are no simple solutions. As we have learned in other major restructuring efforts, there are risks and rewards associated with every action. In those efforts, Congress has made good faith efforts to address rural concerns in a competitive marketplace. It will be no different in electricity restructuring. An appropriate mix of policies is required, including specific protections for rural consumers to ensure that all Americans benefit from restructuring. As the Administrator of the Rural Utilities Service and as a former manager of a Rural Electric Cooperative, I believe that the administration's legislation provides that appropriate mix of policies.
RESPONSES TO REPRESENTATIVE CLAYTON'S QUESTIONS
Do you agree with the findings of your own Chief Economist that rural States, many of which have not benefited from our growing economy, may actually see their electricity prices rise? If not, what specific data, other than generic reports saying the costs of electricity will decline, do you have to support your conclusions?
As I stated during the hearing, there are many studies attempting to predict what will happen in a competitive retail electric market. As far as the findings of the analysis performed by the Office of the Chief Economist, it is a draft. It also does not analyze the effects of the administration's restructuring bill. While the findings have not been vetted or reviewed, they do validate the need for a rural safety net, special care when dealing with rural systems and the opt-out provisions of the administration's bill.
Page 82 PREV PAGE TOP OF DOC Retail competition is here, like it or not. Regardless of studies, I do believe that many rural areas are at great risk of higher rates, if Congress doesn't enact the President's legislation which contains many rural safeguards. From my personal experience, I know currently that highs cost to serve rural areas are at greatest risk of rate increases if competition is ushered in unconditionally. The administration's bill contains a number of policy protections retains existing preference power policies and provisions, to protect consumers in low cost, and rural areas.
Why has the USDA study not been released? What about the study do you disagree with? Methodology? Conclusions? Has the USDA done further study?
The study you refer to is not complete. It is only in draft form containing initial findings. The study was based on a complex model to project prices in various areas under competitive scenarios. It has been a useful tool to the Rural Utilities Service in understanding risk and formulating the policies in the administration's bill to mitigate those risks.
I firmly believe that Congress must act to ensure rural consumers are protected. States are currently pursuing retail competition, many without addressing rural concerns. Federal legislation, like the Administration's bill, containing rural protections can ensure equity for rural electric consumers throughout the nation. To prepare for our changing regulatory and market conditions, I have directed the RUS Financial Services Staff to monitor potential risks to the RUS loan portfolio and help RUS program managers develop policies to prevent loss and reduce risk.
Do you agree that if the price of electricity increases in rural areas that economic growth will suffer in these areas?
The chances are very likely that increased electric costs, as well as a growing gap between rural and urban rates, for industrial and commercial customers can slow, or at worst, suppress economic development. It is commonly accepted that industrial and commercial ratepayers will most likely see lower electric prices in competitive markets. They are the profit loads in an electric system. The problem comes when unbridled competition moves industrial and commercial rates lower, at the expense of residential rates moving higher. Residential customers have less ability to sustain rate increases than larger customer loads. The administration's proposed rural safety net would protect residential consumers, if such an instance occurred.
Page 83 PREV PAGE TOP OF DOC If Rural Electric Coops start to lose revenue, as the study suggests, would the American taxpayer be forced to pay higher taxes to cover the REC $31 billion loan guarantee portfolio thereby minimizing the net savings other areas of the country may receive?
Recovery of RUS loans is addressed in the administration's bill. The administration's proposal would authorize FERC to set rates to help recover RUS stranded cost, that otherwise is unrecoverable by the service provider. Also, if a distribution cooperative is not regulated by a State and cannot recover its stranded cost, the administration's bill permits the cooperative to appeal to FERC in some instances, for assistance in recovering its stranded cost.
The Rural Safety Net provision in S. 2287 (administration's bill) provides for the DOE to decide whether restructuring has harmed rural areas. Shouldn't this decision and program be at RUS, which already is set up to address rural concerns? Wouldn't this avoid inter-agency squabbling and duplication of costs?
Although the collections and disbursements allocated for the rural safety net in the administration's bill are above and beyond that marked for other public benefits, it is still part of the larger Public Benefits Fund. Rural safety net policy will be set in consultation with the Secretary of Agriculture. RUS will assist the Secretary of Agriculture in this role. The RUS will lend its full cooperation, expertise and knowledge of rural America to this effort.
The administration's bill requires FERC to take into account the multi-tier structure of rural electric cooperatives, their tax exempt status and USDA/RUS program interests. The RUS does not have clear statutory authority to enforce open access regulations on non-borrowers and borrowers.
RESPONSES TO REPRESENTATIVE HAYES' QUESTIONS
Does the Department concur with the findings of its own Chief Economist that rural States, many of which have not benefited from our growing economy, may actually see their electricity prices rise? If not, what specific data do you have to support your conclusions?
Page 84 PREV PAGE TOP OF DOC The administration believes that all consumers can benefit from retail electric competition if structured. The administration's bill lays out a road map to that end. Furthermore, if such benefits are not achieved, the administration's bill contains a number of provisions, including a rural safety net, to help ensure rural America shares in the benefits of retail electric competition.
The Department of Energy's analysis of retail competition takes into account many of the regulatory and program proposals contained in the administration's bill.
Why has the USDA study not been released?
The USDA analysis is a work in progress. It has not received any peer review or clearance within the administration. I wish to also point out that the analysis takes a look at what can happen in an unbridled, competitive marketplace. It is not an analysis of the administration's bill. In a sense, it attempts model outcomes in absence of various measures and protections in the administration's proposal.
Does the Department agree that economic growth in rural areas will suffer if electricity prices increase?
As I have responded to other Members on this question, the chances are very likely that increased electric cost for industrial and commercial customers or a growing gap between rural and urban rates can slow, or at worst, suppress economic development. It is commonly accepted that industrial and commercial ratepayers will most likely see lower electric prices in competitive markets. They are the profit loads in an electric system. The problem comes when unbridled competition moves industrial and commercial rates lower, at the expense of residential rates moving higher. Residential customers have less ability to sustain rate increases than larger customer loads. The administration's proposed safety net would protect residential consumers, if such an instance occurred.
As the USDA study suggests, if Rural Cooperatives begin to lose money as a result of deregulation, would the American taxpayer be responsible for the REC $31 billion loan guarantee portfolio?
Page 85 PREV PAGE TOP OF DOC If a RUS borrower loses money under any circumstances, it can place our loans at risk. That is why the RUS is acting pro-actively to prepare borrowers for competition by encouraging mergers, efficiencies and by reducing regulatory cost and delay. The administration's proposal attempts to avoid losses from competition and protect taxpayer investment by including a number of provisions throughout the bill to avoid risk to, or recover RUS investment. They include opt-out ability, a rural safety net, instructing FERC to take into consideration the multi-tier nature of cooperatives, their tax exempt status and USDA interests in mandating open access and other proceedings affecting RUS borrowers. The bill also permits FERC to use its authority to help recover RUS stranded cost.
If competition and greater consumer choice within the electric utility industry are the objectives, are ''opt out'' provisions in the best interest of rural areas?
Some States and some non-jurisdictional utilities may wish to opt out of retail competition if it believes there customers will be better served otherwise. The administration's bill has a number of incentives such as the public benefits fund and other programs, for States to transition to retail competition. But most importantly, it does not force a State into action contrary to the best interest of its consumers.
The Department's RUS division is already in existence and responsible for ensuring rural consumers continue to benefit from at-cost electric generation at federally owned facilities. Does the Department support Federal proposals that duplicate the mission of RUS at other agencies?
The RUS has over 65 years of experience in rural electrification. The administration's bill carefully designed to include consultation with RUS and USDA when program interests are affected and to avoid duplication of the RUS mission.
Statement of Mark Mazur
Page 86 PREV PAGE TOP OF DOC Good morning, Mr. Chairman and members of the subcommittee. My name is Mark Mazur and I am the Acting Director of the Office of Policy at the Department of Energy. The Department welcomes the opportunity to testify today regarding the impact of electric restructuring and retail competition on rural America.
The Clinton administration supports consumer choice and competition among power suppliers because it will (1) lower electricity rates, (2) make American businesses more competitive, (3) spur the innovation of new products and services and (4) reduce the emissions of traditional air pollutants and greenhouse gases. On April 15, Secretary Richardson transmitted to Congress the Clinton administration's Comprehensive Electricity Competition legislation, which sets out our vision for the appropriate Federal role to enhance the benefits associated with retail competition The Administration bill was recently introduced in the House of Representatives by Congressmen Bliley and Dingell, upon request.
. The administration's proposal was developed by the Department of Energy, with the active participation of the Agriculture Department and other agencies. As Deputy Secretary of Agriculture Richard Romminger has stated, this bill is more sensitive to rural concerns than any other restructuring plan ever put before Congress.
The administration recognizes that the prospect of electric restructuring has created anxiety for some living in rural areas. However, we believe that rural America will benefit from a more competitive environment. These benefits would be enhanced by the administration's proposed legislation which responds to specific rural needs and concerns.
My testimony today will briefly discuss the administration's analysis of the likely effects of retail competition on consumers. Thereafter the testimony will focus on the provisions of the administration's bill which enhance the benefits available to rural America.
The administration has provided the Committee a preprint version of the Supporting Analysis for the proposed legislation. The specific results derived from the Supporting Analysis come from the Policy Office Electricity Modeling System (POEMS), a sophisticated model of the nation's electricity system, which considers all individual sources of power and all transmission and distribution entities.
Page 87 PREV PAGE TOP OF DOC Overall, we estimate that a competitive electricity market will save American consumers at least $20 billion per year by 2010. Our analysis projects that retail competition will result in lower prices to residential customers in all regions and States throughout the projection period. When prices paid by commercial and industrial customers are included in the comparison, average prices are lower under competition in all regions of the country and in 45 of the 48 states included in the modeling analysis. While the analysis indicates that not all classes of consumers would see lower prices from retail competition in Montana, Oregon and Washington, a modest alternative strategy can assure benefits from competition to all customer classes. With a appropriate strategies to implement competition, the administration believes that even these three states, one of which has already passed its restructuring plan, can assure benefits from competition to all customer classes.
RURAL-FRIENDLY PROVISIONS OF THE ADMINISTRATION PROPOSAL FLEXIBLE ''OPT-OUT'' APPROACH
The administration bill would require each state public service commission and each unregulated cooperative and municipal utility to conduct a public proceeding and provide consumers with the opportunity to purchase power from the supplier of their choice by January 1, 2003, unless they find that consumers would be better served by an alternative policy or the current regulated monopoly system. This approach encourages retail competition, while ensuring that States and non-regulated utilities have the opportunity to implement an approach that meets their unique needs. It also addresses the concerns of some States and non-regulated utilities that a one-size-fits-all approach to retail competition could lead to increased costs. This proposal provides rural America with a strong protective mechanism. If a state regulatory commission or unregulated rural electric cooperative determines competition will have an adverse impact on consumers, they can choose to opt-out.
RENEWABLE PORTFOLIO STANDARD
Retail competition has the potential to significantly increase renewable energy's share of the electricity market, because it will allow environmentally-conscious consumers to support green energy technologies by voting with their wallets. Nonetheless, the inherent uncertainty of the transition to competition and the recognition of important environmental and energy diversification benefits from renewables suggest that Federal policy towards renewable electricity should be addressed in the context of restructuring. To this end, the administration is proposing a Federal Renewable Portfolio Standard (RPS) that would require all electricity sellers to cover 7.5 percent of their electricity sales with generation from non-hydroelectric renewable sources such as wind, solar, biomass or geothermal energy by 2010.
Page 88 PREV PAGE TOP OF DOC Rural America is likely to benefit substantially from the RPS. The POEMS results indicate that biomass and wind energy resources will account for the vast majority of renewable electricity produced in response to the administration's proposed RPS program. These resources are located almost exclusively in rural America.
Likely rural impacts associated with the RPS include increased economic development, job creation, higher local property tax revenues, enhanced agricultural production, and increased land values. While the Department of Energy lacks the expertise to provide a full economic analysis of direct and spillover benefits to rural economies, information from projects currently under development and from previous analyses indicates that such benefits are likely to be significant. A preliminary analysis by Department of Agriculture (USDA) economists of the administration's 1998 legislative proposal, which included a somewhat lower RPS, estimated that net farm income would have increased by almost 0.8 percent per year when the standard was fully implemented. USDA economists have indicated that growth in net farm income due to biomass opportunities would be somewhat higher under the 7.5 percent RPS included in the administration's proposal released this year.
The impacts of wind power development on rural income were not considered in this analysis and remain a subject for future study. The POEMS results show an increase of 59 billion kilowatthours in wind power generation in the Competitive scenario relative to the Reference scenario in 2010a development that would lead to more than 2,000 direct (permanent) jobs to run the wind farms and more than 8,000 person-years of direct employment to build them. None of these estimates reflects multiplier effects on local employment or fees paid to landowners.
Wind projects will also make an important contribution to the local tax base, easing the burden on other taxpayers. For example, a single new 35-megawatt project in Culbertson County, Texas, is producing $400,000 in annual tax revenue, or over 10 percent of the county's total property tax revenue. More than 650 projects of the same size would be needed to provide the increase in wind generation projected in the POEMS analysis of the administration plan.
Page 89 PREV PAGE TOP OF DOCRURAL SAFETY NET
While the administration believes electric restructuring will benefit rural America, some have expressed concerns that rural consumers could be harmed. As a result, the administration bill includes a ''rural safety net'' which would be available should the expectations associated with competition not be realized. Under the safety net provision, a national wires charge of up to .17 mills per kwh would be available to generate funds if the Secretary of Energy, in consultation with the Secretary of Agriculture, determines that competition has adversely impacted rural consumers.
In combination with other rural-friendly policies included in the administration proposal, the rural safety net provides an appropriate amount of protection compared to standard indicators of rural electricity expenditures. For instance, rural distribution cooperatives currently sell roughly $16 billion worth of electricity annually. According to data collected by the Rural Utilities Service, approximately one-third of this value represents the distribution function that is directly affected by retail competition. Thus, at its ceiling level, the rural safety net by itself could cover more than 15 percent of the total distribution costs of all rural electric cooperatives within the United States.
There are, of course, many alternative measures of rural electricity expenditures. For example, the Energy Information administration's latest Residential Energy Consumption Survey reports over $18 billion in electricity expenditures by residential electricity consumers classified as rural, without regard to the type of utility providing service. However, since the adverse impacts of competition, if any, are likely to be highly localized, the resources provided in the administration's proposed safety net should be sufficient to meet all reasonably foreseeable contingencies regardless of how the rural electricity expenditure base is defined.
RURAL AND REMOTE POWER GRANTS
The benefits associated with retail competition derive from consumer access to alternative power suppliers. However, some remote communities are not connected to the major power grids or have transmission constraints that merit particular attention. These communities face high costs associated with the addition of transmission and distribution facilities and may not be able to access competing suppliers. This could pose a significant barrier to economic development. Unfortunately, some remote communities are not eligible for loans from the Rural Utilities Service because of dim prospects for repayment. To help residents of remote areas, the administration proposal would authorize appropriations for grants to address the electricity needs of small, remote communities.
Page 90 PREV PAGE TOP OF DOCRETENTION OF COST-BASED FEDERAL POWER
Many rural communities served by electric cooperatives and municipal utilities receive the benefits of cost-based preference power generated at Federal dams and marketed by the Power Marketing Administrations. The administration proposal retains existing policies for the distribution and pricing of Federal preference power. This power will continue to be sold at cost-based rates rather than market prices. This policy reflects the administration's goal of implementing competition in a manner that allows consumers in all regions of the country served by all types of utilities to benefit from restructuring
Mr. Chairman, we believe that our approach, as outlined in the administration's proposed legislation, goes a long way towards meeting the requirement to update the statutory framework for the electricity sector in a manner appropriate for the 21st century. In the administration's view, this is not an issue that inherently involves a conflict among regional interests or groupsif restructuring legislation at the Federal level is handled in the manner proposed by the administration, both rural and urban consumers in all areas of the country can benefit.
I would be glad to answer any questions you or the other committee members may have.
Statement of Gene Argo
Good morning. My name is Gene Argo. I am president and general manager of Midwest Energy, Inc. I thank you for the opportunity to testify as a rural energy provider.
Midwest Energy is a rural energy cooperative. We serve 35,000 electric customers with over 10,000 miles of distribution and transmission line. This equates to 3.5 customers per mile. We also serve 43,000 natural gas customers and 2,000 propane customers. These customers are located in 39 counties, covering over 21,000 square miles.
Page 91 PREV PAGE TOP OF DOC No one knows for sure what the exact impact of electric deregulation will be in rural communities, or urban communities for that matter. Midwest Energy, however, has taken the position as a rural energy cooperative, that our customers will and have already benefited from competitive markets.
There has been more change in our energy business over the last 5 years than in the previous 60. We recognize that change is accelerating and often difficult to accept. No one has ever said that change in this industry would be easy or perfect, but competitive markets do bring benefits for customersboth urban and rural. Midwest Energy believes that prices will become more competitive, choices will increase, and utility companies have and will become more innovative.
As we continue to examine deregulation of the electric industry, it is important to understand the very significant difference between the energy commodity and the delivery systems that are in place and required to deliver the service.
For many, if not most rural cooperatives, the cost of the commodity is well over half the overall cost of the electric bill. It is this portion that will initially be subject to competitive forces and is the focus of the current restructuring movement. Suppliers will compete to earn customers' business. Too many critics assume that every high priced supplier will be guaranteed a place at the table; that high cost power will simply flow to low cost states in some sort of cost averaging and everyone's place in the market will be preserved. Frankly, I am not aware of any other competitive market where the high priced providers were guaranteed a right to my business. Only if they improve efficiency and lower costs will they remain in the market.
In addition to the commodity, the other significant component of utility bills is the cost of the delivery service. There is no question that delivery to sparsely populated rural areas has for decades cost more on a per customer basis. I doubt that will change, and it is independent of the cost of generation. But we should not let the higher cost of rural delivery blind us to the opportunities presented by competitive supply options. Our rural cooperative distribution system is owned by our members and should be operated to their advantage. Rural electric distribution cooperatives do an excellent job of controlling delivery costs while providing quality service.
Page 92 PREV PAGE TOP OF DOC Competition in the service delivery area will and, in some cases, has already surfaced. Construction, maintenance, billing and other services are at risk. New technology such as dispersed generation may even replace the high cost rural delivery system in some situations. This can and will continue to occur with or without legislation or deregulation.
Rural electric providers can and will take necessary steps to protect assets and provide value with good service and reasonable prices. Whether as a result of pending open markets or good business strategies, Midwest Energy and others have already initiated this process.
For example, the steps Midwest Energy took to increase member value under new business conditions began after the passage of the Energy Policy Act of 1992, and FERC Orders 636, 888 and 889.
These steps included:
The divestiture of older, costly base load generation in favor of flexible energy and capacity agreements with a major supplier. Several years ago, Midwest Energy made the decision to sell several generating facilities. The decision was financial, in that it was going to take an excessive amount of investment to upgrade these facilities to meet power pool requirements. This decision was made easier with deregulation on the horizon.
In 1997, Midwest Energy initiated an Open Access program designed to offer more choices to all classes of customer, beginning with the unbundling of electric bills into transmission, distribution and generation components. In the near future, we plan to offer optional rate plans including a green power plan using environmentally friendly generation, an indexed rate plan tied to farm commodity prices or to the price of oil, and a fixed rate plan. All of these will be offered as choices to customers.
Last year our company established a marketing affiliate to give our members the opportunity to participate in margins not previously available. This affiliate is now competing in several states, selling an energy commodity to industry, small business and residential customers both inside and outside our regulated service territory.
Page 93 PREV PAGE TOP OF DOC For the last 6 years, we have continued to address potential competition by upgrading and increasing services in the areas of technology, construction, maintenance, marketing, organizational improvements, and customer choice.
The point israther than do nothing and predict doom, we suggest rural energy providers strive to develop business strategies for a new era, designed to add value in open markets. After all, in our case, coop members own the system. We owe them nothing less.
As a rural energy provider with first hand experience of the actual impact of open markets, I sincerely thank you for the opportunity to testify before you today.
Statement of Charles A. Campbell
THE BASIC ARGUMENTS
Many arguments have been made for immediate and complete retail access. In general, those arguments begin by indicating the technology currently exists to carry energy thousands of miles to retail customers. In such a case allowing competition will lower the prices to all consumers. By allowing electricity consumers to choose their own supplier, they will be able to find the best supplier for their own specific needs at the cost they are willing to pay. It is further argued that by allowing consumers to make these choices, suppliers will have to please the customers to survive. This means suppliers will have to keep their costs down and look for new ways to provide power at lower prices. It also means that just as in the telecommunications industry, suppliers will provide more choices and new products (possible in terms of varying reliability or load management programs) for consumers. Consumers will be able to switch providers if they do not receive satisfactory service, suppliers will be forced to increase reliability.
In these ways, it is argued, prices will be lowered for all consumers, but particularly for commercial and industrial customers. Those savings will then be passed along to consumers of the commercial and industrial products and services. The lower prices for goods and services will stimulate higher demands and this will result in more jobs and benefits for local communities. In addition to the overall savings, it is finally argued that retail access will equalize regional differences, which are currently quite substantial. Thus, everyone is better off and the only losers are stockholders of utilities.
Page 94 PREV PAGE TOP OF DOC Unfortunately, these arguments cannot be proven and may be at least partially based on faulty assumptions. It is generally assumed everyone will switch immediately and together. It is also assumed consumers will have the equipment and knowledge to make (and take advantage of) informed decisions and consumers will be willing and able to monitor those decisions on a frequent and consistent basis. It is assumed there will be no problems in planning transmission and distribution facilities to coordinate with unregulated generators. Smaller companies, made up primarily of generators using gas fired turbines, are assumed to be able to take over the entire load of the national electric system and no replacements will be necessary for current baseload units. It is erroneously assumed that only stockholders in IOUs will bear the burden of stranded costs. Finally, it is assumed ''the playing field will be made level''. This means all barriers to entry must be immediately eliminated, public generation of electricity must be stopped (via privatization), no further directives with respect to how, where or when to provide electricity will be mandated by federal or state authorities, and firms in the business will all act like pure competitors. These are heroic assumptions and before full retail access is finalized, legislators and regulators should carefully examine each of those assumptions.
While it is possible that increased competition in the electric industry will lower costs, it is also possible that such a move will confer its benefits in a highly selective manner on a relatively few number of generating firms to the detriment of particular consumers.
The purpose of this discussion is not to argue against retail access. At this point such an argument, however, factual or logical, is pointless. Retail access will be a fact of life in the future. The major concern in this report is that neither legislators nor regulators appear to have considered rural electric cooperatives as different from IOUs. Electricity prices in Mississippi are very competitive so Mississippi consumers are not likely to benefit substantially from the change to retail access. Benefits could be distributed across the country in a very uneven manner. Residential and small commercial consumers (both in EPAs and in IOUs) in states like Mississippi are likely to bear most of the transition costs of the change and are unlikely to experience significant gains in return.
Page 95 PREV PAGE TOP OF DOC With few exceptions, analysts and commissions generally agree the ability to pursue the concept of retail access is primarily the result of changes in generation technology that have occurred over the last two decades rather than a sudden realization electrical generation is not necessarily a monopoly. It should also be noted that these technological changes (along with wholesale competition made possible by them) are largely responsible for the fact that electricity prices (adjusted for inflation) have been in general decline since about 1982. In other words, prices are likely to decline after retail access, but prices assumably will decline without retail access too.
There are substantial questions about implementing retail access in Mississippi. Mississippi has a large number of cooperatives and municipalities (about 45 percent of customers). It is important to understand the existing relations of those cooperatives and municipalities with current Mississippi utilities and determine how those relations will affect the transition. Given the nature of those cooperatives and municipals it is also necessary to consider the exact nature of retail access. How complete must retail access be? Should retail access extend down to the cooperative or municipal companies ultimate consumer?
It is also important regulators recognize the importance of market power in distorting ''market prices''.
There are also a number of questions of responsibility which also have to be resolved. For example, if consumers are given complete choice with respect to generator, who will bear responsibility to be the supplier of last resort, or will the concept of universal service be abandoned? Competition is a dynamic system. This means if it is really functioning suppliers will be entering the market as others fail and exit the market. If this is the case, which firms are responsible for servicing customers who lose their provider.
The question of how system reliability will be effected as retail access begins on the grid has still not been resolved, nor has the question of who would best control such a transmission system or how it would be controlled, maintained, planned and expanded.Most analysts also agree the wire related functions of transmission and distribution will necessarily remain monopolies. The major changes for the wire functions will be the regulation of transmission facilities solely by FERC and the questions of where transmission facilities end and distribution facilities (and therefore state regulatory power) begin.
Page 96 PREV PAGE TOP OF DOC The point of the discussion has been to suggest the issue of retail access is not so simple as has been indicated and that, except in the case of a state with higher than average electric rates, there is little to gain by proceeding immediately rather than waiting. A state with below national average electric rates has little to lose by waiting to implement retail access until the unresolved issues have been resolved and until the experience of those states who feel compelled to shift to retail access immediately have demonstrated best and worst practices. The best policy for such states may be to learn from the mistakes of those who must go first and wait for the playing field to be leveled, for it surely will not be leveled immediately. This means individual states should be given the ability to make their own decisions with respect to whether, when, and how to implement retail access.
Finally, it is suggested the role and function of rural electric cooperatives be considered carefully. Full and complete retail access has the potential to change rural electric cooperatives radically and any such change should be made only with complete knowledge, full consideration, and intent.
Statement of David Freshwater
Of all the major regulatory changes over the past decade, electricity deregulation has the potential to have the greatest impact on the nation. Not only do we all use electricity directly but the amount of capital invested in generating, transmitting and distributing electricity is so large that changes in investment patterns will have profound impacts on capital investment for decades. What is significant, given the magnitude of the changes that have already taken place, is how little public debate there has been over the types of changes we want to see. At the national level virtually all the changes have come about as a result of regulatory rule making, not by statute. While some states have passed new laws to deal with electricity regulation, most have not. And despite the fact that sufficient change has taken place to make going back to the old structure impossible, we still have little idea what the new system should be.
Page 97 PREV PAGE TOP OF DOC Electricity deregulation was advanced initially as a way to capture increased efficiencies by letting market forces replace rules for the industry. A major impetus has been advances in generation technology and falling natural gas prices that make small combined-cycle gas turbines the most efficient new source of power. This upset one of the key underpinnings of the old regulatory system - the natural monopoly nature of generation. Prior to the 1990's bigger power plants had always produced power at lower cost than smaller plants so it was possible to argue that it was better not to have competition because losses from inefficient regulation would be more than offset by lower actual costs of power. New combined cycle plants promised the chance to unbundle generation from transmission and distribution (which still have natural monopoly characteristics) and eliminate the hidden costs of regulation.
Numerous models promise significant net national benefits from deregulation. I personally believe that there will be long term net national benefits from deregulation, but I also believe that these benefits will not be uniformly distributed and that some people and places will be worse off as a result of the changes. This is not an uncommon situation. Every policy change results in winners and losers and the aim of public policy should be to make changes that while helping the majority do not impose huge burdens on the minority, or, if significant losses cannot be avoided, find ways to compensate the losers from the benefits that flow to the winners .
In thinking about the net national benefits, it is important to clarify those that come from change in regulatory structure from those that are the result of new technology. Thus switching from coal or oil fired generators to new combined cycle gas turbines provides the opportunity to significantly lower generation costs in many parts of the country. But this switch could have been made under the old regulatory structure, so it is inappropriate to consider any gain from a switch in generation technology as part of the benefits of deregulation. On the other hand, to the extent that rate of return regulation encouraged over-investment in physical plant and inefficient operation of that plant, then deregulation and competition should take credit for these benefits.
Page 98 PREV PAGE TOP OF DOC Economists believe in laws of supply and demand . Markets work best when both supply and demand are responsive to price changes. But so far most of the regulatory change has been on the supply side. One of the more important sources of gain from deregulation is an increase in price-responsiveness by customers. Even under the old rules, large industrial customers always had the opportunity to modify demand as power became scarce. By agreeing to interruptions in service, a firm could buy power most of the time for lower rates than if it purchased firm power. But the disadvantage to the purchaser was that the power company could reduce the flow of power to the firm when demand increased from other customers.
Under the new rules, large wholesale customers have a much stronger incentive to adjust their use of power in ways that reduce consumption when prices are high and use more when prices are low. While the technology exists to allow residential customers to do the same, it involves retrofitting houses with new sophisticated meters and changing state regulations to make major changes in how electricity is priced to the homeowner. As long as the homeowner pays a flat rate for power they have no incentive to curtail use when generating capacity is constrained. And until this incentive is put in place we will require greater investments in reserve generating capacity which lowers the net benefits from deregulation.
Environmental consequences of deregulation are also uncertain. In the past regulators were able to encourage power companies to promote conservation programs as lower cost alternatives to new generation capacity. Now generation companies have an incentive to increase demand, not curtail it. Conservation will occur only if customers adjust behavior to limit demand because they face higher prices for power. Without real-time pricing conservation is unlikely to be a factor for most households.
Another aspect of deregulation that is becoming increasingly apparent is the need to reorganize the transmission grid to allow power to flow more easily. The transmission grid was not designed to move large blocks of power on a regular basis so this is a complicated engineering and management problem. It is fairly clear that there has to be some separation of generation and transmission functions to prevent the transmission system from being used as a way to prevent competition. It is also clear that transmission resources have to be managed by regional organizations to allow efficient power flows. But one consequence of this type of change is that increasing the ability of the transmission grid to move power long distances may put some real limitations on its ability to serve local demand. Historically, native load has received preferential treatment but in a price driven system it may be necessary to restrict the transmission of power to local customers if there is a higher value exchange that also needs scarce transmission capacity.
Page 99 PREV PAGE TOP OF DOC Benefits from deregulation will not be evenly distributed. Three different dimensions are important to consider. First is the difference in impacts between high cost and low cost states. Second is the difference in impacts between urban and rural areas within a state. Third is the difference in impacts between high income and low income individuals.
One of the main effects of deregulation has been to allow customers to buy power from someone other than their local utility. The other side of the change is that utilities now have the right to sell power outside their geographic service territory. While power sales took place under the old system they were between utilities. Now wholesale customers have the right to buy power from anyone. Simple trade models tell you what should happen as a result. Given that the supply of electricity is fairly constant in the short run, (it takes time to build a new generator and put it on line) we would expect power to flow from low price areas to high price areas. This should raise the cost of power in low cost states and reduce the cost of power in high cost states. What becomes interesting is how much the prices change. If you look at generating capacity in the low cost states it is considerably less than in the high cost states; so it is unlikely that prices in the high cost states will fall a lot. In addition transmission system constraints limit power flows from high cost to low cost states so we are not going to see a uniform national price. This increase in out of state sales and purchases has to take place. The free flow of power is required by FERC as one of the key elements in the deregulation strategy. Further, the owners of power companies with generating facilities in low cost states will demand that company managers wheel power to maximize profits and customers in high cost states want access to lower cost power.
While differentials in power costs between states are well recognized, the existence of large price differences within states are less often discussed. For example, within Kentucky the cost of residential power in the cheapest part of the state is almost half the cost in the most expensive part of the state. In general rural areas have higher power costs than urban areas. This has been a longstanding phenomenon. One reason the Federal Government became involved in producing and distributing electricity in the 1930's was because investor owned power companies considered rural areas as having too little profit potential. That was at a time when farm sizes were smaller and the number of farm customers per mile of line was greater than today.
Page 100 PREV PAGE TOP OF DOC Rural rates are high because, population density is low, the demand for electricity is highly variable both by time of day and by season of the year, and in many places the terrain and climate is inhospitable for line construction and maintenance. But rural rates are lower than they likely will be under deregulation because a public policy choice was made a long time ago to subsidize rural customers. The subsidies occur in a number of ways including, preferential access to Federal power, initial funding for the creation of rural electric cooperatives, and the decision to price power at a single rate within a given use class. This last point is perhaps the most important. For a given utility a household in a dense urban area now pays the same rate as a household in a very remote part of the service area. However it costs far more to distribute power to the rural household than the urban one. If deregulation really means customer choice for everyonenot just the large industrial customers, urban households will have a strong incentive to find a new distribution company or get rural residents to pay the full costs of receiving power. As power companies try to control costs they are shedding workers and a logical consequence is that when service interruptions occur the least valuable customers will be the last to have power restored which could decrease service reliability in rural areas.
Indirect impacts of deregulation on rural places may be just as important as the direct ones. Many rural places in the Southeast and Midwest have significant amounts of manufacturing employment. In the past power companies have been major promoters of economic development in rural places in order to improve the economics of serving them. By adding manufacturing plants to the load the power company could spread fixed costs and create a more stable demand pattern. For the community this meant more jobs and income. Deregulation eliminates this incentive. A utility can no longer be certain that if it recruits a firm to a community that it will be chosen to provide the power. Further instead of engaging in recruiting it may be more profitable to sell power into the grid and ignore the local economy.
INCOME CLASS DIFFERENCES
Page 101 PREV PAGE TOP OF DOC The third major difference in impacts is between wealthy and poor people. In the study we did in Kentucky the price changes were not large in absolute dollar terms for an average household which means that families should be able to absorb the increase. But when we looked at income distribution figures by census tract and matched them to type and condition of home a different picture occurs. Not surprisingly you find that for poorer households the share of income spent on electricity is higher than for wealthy ones. You also find that discretionary income is lower, so there may be less ability to absorb a price increase without cutting some other major expenditure category like food or health care. You also find that in areas where there are poor people there is also a far greater incidence of mobile homes and substandard housing. Both categories of housing tend to have poor insulation and in Kentucky they are typically heated by electricity, which means they are even more susceptible to a price increase. If these households also face real-time pricing of power, as well as a general increase in rates, the budgetary consequences in months where temperatures are extreme could be severe.
In our 1997 study of deregulation impacts in Kentucky we closed with a series of questions that I believe are still central to developing good public policy. For that reason I offer them again .
Given their low population density, to what extent will competition occur in rural areas and to what extent will it lead to a greater convergence of electricity rates among regions within the state than is now the case?
How will rural areas served by cooperatives fare relative to areas served by either investor-owned or municipal systems? In particular, do different types of company have differing incentives in terms of pricing strategies and concern with reliability at the distribution level?
What is the magnitude of the average price increase that Kentucky will face as wheeling allows more power to be moved from region to region? How high will wheeling charges be, and will transmission constraints limit the flow of power? What types of stranded cost policies will be adopted in other regions, and how will these policies affect the demand for power from Kentucky? As more power is wheeled through the transmission system will it affect the local reliability of the power supply?
Page 102 PREV PAGE TOP OF DOC To what extent are projected efficiency gains the result of utilizing short term surplus capacity in the form of existing reserve generating facilities, versus true efficiencies from reorganizing the electricity system?
To what extent will rate differentials be preserved to allow manufacturers in Kentucky to retain access to low-cost power? If rate differentials narrow, how will this affect Kentucky's economic development strategy and its prospects?
To what extent will the changes in electricity regulation benefit the national economy and will improvements in the national economy be able to offset the negative effects within Kentucky?
Statement of Gary Goldberg
Mr. Chairman and Members of the General Farm Commodities, Resource Conservation and Credit Subcommittee, I'm Gary Goldberg, chief executive officer of the American Corn Growers Association (ACGA) and also speaking on behalf of the Alliance For Rural America which consist of the National Farmers Organization, Federation of Southern Cooperatives, Women Involved in Farm Economics, National Association Farmer Elected Committees and American Corn Growers Association representing the interest of more the 200,000 farm and rural families.
The issues of electricity restructuring are complex, especially from a rural perspective. Lightly populated areas of this country do not see the same benefits to deregulation as our urban cousins. It costs more to service rural areas, and those costs are almost always passed along, burdening us with higher expenses. One need only look at the initial draft report of the U.S. Department of Agriculture study on the effects of electric industry restructuring on rural states that came out in March. This report showed that 19 mostly rural states would pay higher electric rates and have slower economic growth under restructuring. One of those rural states was Nebraska. This is why the American Corn Growers Association and the Alliance continues to advocate a go-slow approach to this whole issue.
Page 103 PREV PAGE TOP OF DOC The ACGA and Alliance believe that the issue of electricity restructuring is best left to the states to decide. This allows more direct input from rural and farm constituencies and greater accountability. So far, eighteen states have enacted restructuring legislation with additional 22 states looking at the issue through studies and the legislative process. We recognize that the issue is here to stay, but we continue to adhere to the fact that states can better serve the local communities without Federal interference.
If however, legislation does come out of Washington in some form, the ACGA and Alliance opposes any federally mandated date specific provisions and any restrictions on incumbent electrical power companies from having the same rights to compete as the new entrants in the market. If true competition is to work, every company that can service the consumer must be allowed to do so without any impediments or restrictions. Artificial jump-starts or other measures that give an unfair competitive advantage to new companies will handicap the existing utility companies and reduce true competition. This will not bring about true choice for the customer.
Aggregation is another issue that needs to be addressed. Whether group marketing of electric power is advantageous is yet to be seen. If forming marketing groups will provide more reliability and consumer savings, then it should become an option. But forcing or mandating aggregation is not in the best interests of the ratepayer and we will strongly oppose such a provision in any Federal restructuring legislation.
American agriculture producers are big users of electricity to dry our grain, protect our livestock, power our irrigation systems and service our family. The current depression in agriculture makes it increasingly difficult to deal with the potential for higher electric rates when we do not have the ability to pass our higher costs on to the consumer. The burden to restructure the electric power industry should not be on the shoulders of farm and rural consumers, especially when the consumer is not clamoring for restructuring. After all, restructuring is not consumer lead, it is industry lead.
Page 104 PREV PAGE TOP OF DOC The ACGA and Alliance believes that restructuring can only succeed if it accomplishes the following:
Benefits farmers and rural Americans by lowering electricity prices and spurring development of new products and service.
Does not include date specific enactment of electricity deregulation and allows states to proceed with caution and careful deliberation.
Allows states to take the lead in implementing electricity restructuring legislation.
Permits utilities to maintain all former service areas and allows affiliates to use their name and logo of parent utilities, which will ensure true competition among all retail electricity companies.
The American Corn Growers Association and Alliance for Rural America appreciate this opportunity to share our views and concerns with the Committee. We would be happy to answer any questions at this time. Thank you.
Statement of Hon. Mike Johanns, Governor of Nebraska
I am pleased to submit this statement to the Subcomittee on General Farm Commodities, Resources Conservation and Credit of the Committee on Agriculture, on the impact of electric utility deregulation on rural communities. I commend Chairman Barrett and Ranking Member Minge for holding such a timely and important hearing. Restructuring the electric utility industry is clearly a fashionable topicnearly half of the States have moved in some fashion to restructuring their respective electricity sectors, and a few other large States, notably Texas and Ohio, may soon follow suit.
But other States remain skeptical. Indeed, several of the states with low electricity costs continue to ask: What's in it for us? Experiences with deregulationincluding the airlines, telecommunications industries, and railroadscertainly provide justification for such skepticism. From the State level, I watch with great interest what Washington is doing. Amid the hearings and legislative proposals, of course, the Clinton administration recently unveiled its own plan to restructure the electric utility industry.
Page 105 PREV PAGE TOP OF DOC As you know, Nebraska is unique. Nebraskans have a longstanding tradition of enjoying the benefits of what I commonly refer to as public power100 percent of State residents receive their electric power from municipalities, public power districts, and rural electric cooperatives throughout the State. No other Stan make that claim. At the beginning of the century, Senator George Norris fought to create public power to give us local control and keep rates low. Today that tradition continues, and Nebraskans are better off because of it, paying some of the lowest electric rates in the Nation.
Still, like so many other states, Nebraska is studying its own options for restructuring in response to competitive markets. Indeed, the Nebraska Legislature is currently reviewing this issue, and expects to issue a report later this year. The report could lead to Nebraska's own plan for retail competition. By what date certain this could happen is, of course, uncertain at this time, but this is exactly the way States should proceedwith their own time table with no Federal mandates that set a schedule. In this respect, Nebraska is not unique. The fact that so many states have moved forward on restructuring should quickly give pause to any Member of Congress that still thinks a Federal mandate with a date certain is the right thing to do.
This is why I can commend the administration for proposing their own comprehensive plan to advance the debate over how the electric utility industry should be restructured, but I remain concerned over the existence of any mandate, flexible or otherwise. This implies that State and local governments cannot or will not act without Federal intervention. In fact, state restructuring initiatives prove that a Federal mandate of any sort is simply not necessary.
Nebraska, with its special concentration of public power systems, is particularly concerned about such proposals. But Nebraska is not alone in this regardpublic power, delivered through municipal electric utilities, exists in every single State except Hawaii. Indeed, one of every four consumers nationallynearly 70 million Americansreceives power from consumer-owned electric systems or member-owned rural electric cooperatives. These are locally owned assets that for more than 115 years have made enormous contributions to the Nation's economic prosperity and that of our states, cities, and rural areas. Their local ownership and not-for-profit mission makes them very different from private companies. Public power requires different solutions to the challenges of the new marketplace envisioned by restructuring advocates.
Page 106 PREV PAGE TOP OF DOC The Federal Government cannot create one restructuring model and expect all 50 States to follow it. Every state has unique characteristics that will make a Federal model unworkable, unfair, and costly to consumers.
Public power's first and only purpose is to provide reliable, efficient service to their local customers at the lowest possible cost. Like hospitals, community schools, water, parks, police, and fire departments, these ''public power'' systems are locally created institutions that address a basic community need: they operate to provide an essential public service at a reasonable, not-for-profit price. Public power systems are governed democratically through their state and local government structures. They operate in the sunshine, subject to open meeting laws, public records laws and conflict of interest rules. Most, especially the smaller systems, are governed by an elected city council, while an elected or appointed board independently governs others.
Local power customers are direct stakeholders in the utilities' operations and future. In turn, public power utilities are community institutions with community-wide goals. As state and local government organizations and entities, they boost economic development, return taxes and make in-lieu-of-tax payments to states and communities, and lower citizen costs through coordination of services with other government entities. Local electric systems give citizensas direct stakeholdersopportunities to participate in service, financial, and operating decisions. For purposes of competition, they serve as an important yardstick against which to measure the price, service, reliability, and performance of private power companies.
While restructuring of the electric industry and introducing competition will likely give some consumers new choices in terms of their purchase of electric power, consumers have always had a choice between creating their own public power systems or awarding franchises to private power companies. This choice should be maintained for all citizens.
I am concerned that consumers served by local and regional electric systems may be overlooked in Federal legislative and regulatory proposals. That is why my colleagues and I in the Governors' Public Power Alliance support the following electric utility restructuring principles:
Page 107 PREV PAGE TOP OF DOC Several issues are solely within Federal jurisdiction and must be addressed to open the door to retail competition and foster the development of competitive markets.
The cornerstone of Federal policy should be a commitment to respect state and local decision-making.
It is inappropriate for the Federal Government to preempt state and local restructuring efforts. Instead, the Federal Government should respect the traditional prerogative of state and local authorities to regulate retail utility transactions and support their efforts.
Any Federal legislation should facilitate state and local decisions regarding retail competition.
Federal barriers to competition should be eliminated.
Federal legislation is needed to establish additional protections against the establishment and abuse of market power.
Several of these same principles are also found in the administration's proposal. For example, I commend the Department of Energy for strengthening market power protections. I appreciate the provisions that allow any entity, including a municipality, to aggregate customers. And I endorse the administration's support of renewable energy resources. I emphasize, however, that all decisions regarding fuel use should be made at the local and state level.
I would also be remiss if I did not offer comments on a very serious problem facing public power. While I fully understand the Committee on Agriculture does not have jurisdiction over tax matters, this is important not only to Nebraskans, but to the millions of public power customers across the country.
Substantial portions of generation, transmission, and distribution facilities owned by public power systems are financed through the sale of tax-exempt bonds. These bonds, like bonds for all types of governmental purposes, carry with them restrictions on the amount of private use allowed for those facilities. While sound tax policies may warrant certain restrictions on private use of public facilities, public power facilities have been singled out for unduly restrictive treatment.
Page 108 PREV PAGE TOP OF DOC These private use restrictionswhich previously had a negative, but survivable, impact on the financing of community owned and operated electric output facilities, in their new form, and in the new competitive environmentwill restrict the financing of governmental facilities far beyond the intention Congress expressed in the Tax Reform Act of 1986. The restrictions are also contrary to the goals of the Energy Policy Act of 1992, and will impermissibly infringe upon the historical and fundamental right of citizens to act as a community and utilize their own best judgment to provide government services.
The Clinton administration should be commended for tackling this difficult issue. I am encouraged to see the Administration proposal seek to ''modify'' and revise tax-exempt bond rules as part of electric utility restructuring ''so that consumers benefit from competition.'' As I understand it, the proposal, to encourage public power systems to implement retail competition, states that outstanding bonds previously issued to finance generation and distribution facilities would continue their tax-exempt status ''even if the issuer implements retail competition.'' Similarly, bonds issued to finance transmission facilities would also continue their tax-exempt status ''even if private use resulted from allowing nondiscriminatory open access'' to those facilities, including, for example, participation in an independent system operator.
However, the same proposal seems to prohibit public power systems from building both generation and transmission facilities in the future with tax-exempt bonds (interest on bonds ''would not be exempt''). While I appreciate the political debate surrounding this issue, I am particularly concerned about the essence of this provision: community owned electric systems, especially the majority of the small systems around this country, could no longer exercise their right at local control and regulation, and may be unnecessarily burdened by an overly restrictive proposal.
A similar legislative proposal has been offered in both the House and Senate. The Bond Fairness and Protection Act, introduced in the 106th Congress by Senators Slade Gorton and Bob Kerrey in the Senate (S. 386), and by Representatives J.D. Hayworth and Bob Matsui in the House (H.R. 721), is a fair and reasonable solution to the problems posed by the private use restrictions on public power bonds.
Page 109 PREV PAGE TOP OF DOC The bills, companion measures in both houses, provide state and locally owned utilities with two options for obtaining the necessary level of relief they need to enter competitive electricity markets without jeopardizing the tax-exempt status of outstanding bonds or raising rates. The bill also requires those taking this relief to make significant concessions on the future use of tax-exempt bonds by giving up the right to issue such debt for generation facilities, but retaining the same right to issue debt in the future for transmission and distribution facilities.
I appreciate the opportunity to submit this statement for the record. I look forward to working with the committee on these and other matters important to rural America.
Statement of John C. McClure
Thank you Chairman Barrett and members of the subcommittee. I am John McClure, vice-president of strategic planning and governmental affairs of the Nebraska Public Power District (NPPD). I commend you for convening this hearing today for the purpose of receiving testimony on the critical questions surrounding the potential impacts of electric deregulation on rural America.
NPPD maintains a keen interest in this issue because of our history in Nebraska. The State of Nebraska has charted a unique course in the evolution of its electric utility industry. All electric customers in Nebraska receive their service from consumer-owned power entities which include: (1) public power districts, (2) municipal electric utilities, or (3) member-owned rural electric cooperatives. Our state's requirement for wholesale wheeling created competition in the wholesale power market in Nebraska nearly a quarter century before it was mandated by Federal law in the Energy Policy Act of 1992.
NPPD is the state's largest public power entity in terms of generation, transmission, and customers served directly and indirectly and the fifth largest public power generator in the nation. Approximately 70 percent of NPPD's business is wholesale. NPPD works in close partnership with 24 rural public power districts and co-ops and 48 municipal systems to provide their total electric requirements. More than half of all Nebraskans are served directly or indirectly by NPPD's generation, transmission, or distributions facilities.
Page 110 PREV PAGE TOP OF DOC In preparation for a more competitive marketplace, NPPD is working with its wholesale partners and plans to transfer a significant number of small retail communities primarily to our rural wholesale distribution partners to enhance operating efficiencies and to support other initiatives designed to make the electric industry serving rural Nebraska work collectively in a more effective manner.
NPPD understands rural Nebraska. It is the lifeblood of our organization. The economic well-being of rural Nebraska is inextricably linked to the success of NPPD in providing reliable, competitively priced electricity and other services to our wholesale and retail customers.
Today, many investor-owned electric utilities are seizing the opportunity to merge and consolidate into vast multi-state, if not international, operations. See Attachment #1 for changes around Nebraska. Providing electric service is but one of many economic interests of those operations. In contrast, NPPD is keeping its focus sharply trained on meeting the electric energy requirements of all of our customers. Our customers own the electric utility and publicly elect our board of directors. Public power entities have no stockholders and pay no dividends but share any profits in the form of lower prices for our customers. Many Nebraska utilities, including NPPD, trace their very existence to the historical fact that investor-owned electric utilities found it uneconomic to extend service to many rural areas of our state that we are collectively serving economically today.
COMPETITION MEANS WINNERS AND LOSERS
It is long past time to recognize and address the effects of the deregulation of essential public services on rural communities. Some economists and policy advocates would have us believe that the sweeping elimination of governmental constraints on enterprises that provide essential public services will usher in an era of plenty for all concerned. While we must never shirk from our responsibility to review and eliminate outdated economic regulation, we must also recognize that the mere absence or reduction of regulation does not necessarily bring robust competition with enhanced choices and lower prices for all consumers.
Page 111 PREV PAGE TOP OF DOC First and foremost, competition means winners and losers. Clearly, there have been winners in every deregulation, both providers of services and customers. However, there have also been losers. All too often, the loser of previous Federal initiatives to deregulate public services has been rural America. Reduced commercial air service, abandoned rail lines, and an inadequate communications infrastructure are the sorry legacy of previous endeavors to gain economic efficiency via Federal deregulation without adequate regard for the adverse impacts on rural citizens.
The provision of electric energy is unquestionably an activity imbued with the public interest. Reliable and affordable electric energy service is absolutely essential to the economic survival of rural citizens who today are struggling to cope with reduced services while selling into highly competitive international agricultural markets. This nation can ill afford to once again deregulate an essential public service and let rural America fend for itself against the vagaries of the marketplace.
The deregulation of the electric utility industry is a complex matter that defies simple solutions. Any transition to a more competitive retail electric marketplace must recognize that rural America does not have the market characteristics to always allow it to receive the full benefits of competition. Because of a lack of concentration and market power compared to that present in metropolitan areas or areas with large industrial customers, rural America will again find itself on the short end when the economic benefits of electric deregulation are doled out by the market.
The private sector's general reluctance to adequately provide basic services in rural areas in Nebraska was recognized decades ago in the electric power industry and public power districts were organized to fill the breach. Today, we can be proud that the reliability and cost effectiveness of electric power in rural Nebraska is recognized nationally. See Attachment #2 for average costs for each state. Electricity prices in Nebraska are now more than 20 percent below the national average, in spite of large sparsely populated areas and significant electric irrigation pumping loads during the summer electric peak. In fact, some of the rural power entities which we serve have less than two customers per mile of line.
Page 112 PREV PAGE TOP OF DOC Agriculture is important not only to rural economies but also to the entire nation. Globally, American agricultural exports positively impact the U.S. trade balance. Domestically, American agriculture brings high quality, low cost food for our citizens. Electricity is a critical input for efficient agricultural productivity and for certain applications there may be no practical substitute energy source. This is especially true in parts of Nebraska where irrigation pumps powered by electricity provide essential water to crops during approximately six weeks a year when peak electrical demand occurs and throughout the year for various livestock operations. It is unlikely that retail electric choice will produce attractive alternatives for powering this critical need in the rural areas.
Retail electric competition has not been adopted in Nebraska and has few advocates. However, we are currently in the final seven months of a three-year legislative study on deregulation of the industry. While most electric utilities in Nebraska are looking for opportunities to improve their performance, Congress should be careful not to craft a deregulation solution for a problem that simply does not exist in many states. Furthermore, we must be careful not to raise rates in low cost states, such as Nebraska, or degrade reliability. Any Federal legislation addressing retail electric competition should allow states to chart their own course with no mandate from Washington.
FEDERAL DEREGULATION OF ESSENTIAL PUBLIC SERVICES: THE NEBRASKA EXPERIENCE
There is a wealth of important information which can be garnered from other industries which have been deregulated. Over the past two decades, Federal policy makers embarked on a policy of scaling back or eliminating multiple layers of economic regulation that have been in place for most of this century. An examination of the results of their labors will be the subject for public policy researchers for decades to come. While some of the initiatives to deregulate essential public services are fairly recent (eg. Communications Act of 1996), it is not too early to begin an objective review of the results of these efforts.
Page 113 PREV PAGE TOP OF DOC Although my testimony today does not present an exhaustive treatment of this subject, I would like to direct the subcommittee's attention to a brief overview of certain Federal deregulation initiatives and the related impact on the State of Nebraska, which has large areas with small populations.
Airlines: The Nebraska airline markets amply demonstrate the winners and losers nature of deregulation. On a statewide basis, the number of passengers boarding commercial flights (enplanements) is up nearly 60 percent over the past twenty years. However this statistic masks the fact that enplanements are no longer possible in places like Columbus or Sidney, Nebraska due to the complete evaporation of all commercial air service in those communities. Prior to deregulation, over 5,000 passengers boarded commercial flights at those airports each year.
Attachment # 3 shows the 13 air markets in existence at the time of deregulation and the percentage change in number of enplanements from 1978 through 1996. All markets suffered a decline in number of enplanements with the exception of Lincoln, which increased slightly and Omaha which increased extensively. Enplanements over the past 20 years in Omaha are up 88 percent while in Lincoln they are up a mere 8 percent. The 11 other air markets in Nebraska have all suffered a profound deterioration if not total loss of commercial air service. As noted above, the Columbus and Sidney markets were eliminated entirely.
In the 11 Nebraska air markets outside of Omaha and Lincoln, total enplanements are down 67 percent. Prior to deregulation, over 130,000 passengers boarded commercial flights annually in Nebraska's small cities. Today that figure is less than 45,000 passengers and is declining annually. Indeed, were it not for Congressional appropriations to a Federal subsidy program for small communities known as the Essential Air Service program (EAS), commercial airline service in the state's small communities would likely exist only in memory.
In short, the 13 Nebraska air markets in existence in 1978 have now dwindled to 11 markets with only one of these (Omaha) showing significant growth and vitality. A principal effect of airline deregulation in Nebraska has been a radical shift in service away from the smaller communities to the Omaha market. At the time of deregulation, roughly 72 percent of all Nebraska enplanements occurred in Omaha with about 28 percent occurring in Lincoln and the other small Nebraska communities. According to the most recent published data, the Omaha market now controls over 85 percent of all Nebraska enplanements (Attachment # 4).
Page 114 PREV PAGE TOP OF DOC Communications: An adequate supply of reliable and affordable electrical energy and the establishment of a high capability communications infrastructure are the twin pillars of effective economic development. Notwithstanding the quality of basic services, many smaller Nebraska communities do not have a portfolio of communications services even remotely comparable with those offered in the larger urban markets. Professor John Allen, sociologist at the University of Nebraska studied these issues extensively and was the co-author of a number of studies published in recent years. Allen concludes that although rural Americans are active participants in the information age communications technologies, ''the liability of geographic isolation which has historically plagued rural areas still exists.'' *Telecommunications and Economic Development in Rural Communities*; Published by the
Rural Policy Research Institute at the University of Missouri; June 16, 1995
With each passing year the communications gap grows ever wider. Rural Nebraskans, whose interests are so often overlooked, today find themselves without adequate communications infrastructure to optimize commerce, healthcare, and education opportunities. As this gap expands, we are finding the infrastructure deficiency (relative to urban markets) to be both detrimental to existing businesses and to efforts to attract new industries.
In addition to problems relating to inadequate or non-existent communications services in low density rural markets, a clear price shift for basic local telephone services is now occurring. Once again, it is the smaller consumers who are bearing the burden of the shift (Attachment # 5).
Railroads: Passage of the Railroad Revitalization and Reform Act of 1976 and the Staggers Rail Act of 1980 effectively deregulated most of the rail market. These measures led the way in lifting barriers for new entry, easing the abandonment of unprofitable lines, and enabling rail companies to set rates to meet competition (or lack thereof) in specific market niches. In fact, some shippers, such as NPPD, have benefited from lower coal transportation costs as a result of deregulation.
Page 115 PREV PAGE TOP OF DOC The most notable negative impact of rail deregulation in Nebraska has been the abandonment of nearly 2,000 miles or nearly 25 percent of active rail lines providing freight service to grain elevators and other customers in rural parts of the state since 1982. While some of the abandoned lines have ultimately been reactivated by other rail companies, the trend is unmistakable. Attachment #6 shows the number of active miles of rail line abandoned in Nebraska each year since 1970. Attachment #7 shows the dwindling number of miles of active rail track in the state.
It should come as no great surprise that an examination of the communities most adversely impacted by rail line abandonments has been the smaller rural communities in the state.
INDUSTRY STRUCTURE AND MODELS OF COMPETITION
Before re-writing the rules of electric power regulation, it is important for policymakers to understand the major components of the electric power industry and how each is affected by regulatory and market considerations (Attachment # 8).
Retail competition in the electric power industry simply means granting consumers the right to select the generating company or marketer that will supply the electricity they consume. The local distribution utility that currently delivers power to the consumer will not change and there will not be duplicative sets of wires running to each consumer. More often than not, power marketing companies will be the firms actually competing against the traditional electricity supplier for the consumer's business. Although power marketing firms typically do not generate electricity, they are adept at acquiring the rights to a supply of electricity from existing generating companies and then marketing the power supply to end users utilizing the existing transmission and distribution networks which are expected to generally remain monopolies.
A little over a year ago, the State of California opened up the retail electric markets served by its largest investor-owned electric utilities. Within three weeks of the opening of those markets, ENRON, one of the nation's largest energy marketing firms, announced that it would abandon all efforts to serve residential or small commercial customers in California. Henceforth, its marketing efforts were to be directed to the largest industrial concerns only. Most other energy suppliers quickly followed suit or dropped out of the California market altogether. Of the roughly 300 firms that registered to supply electricity in the newly deregulated California markets, the overwhelming majority have moved to inactive status or dropped out all together. Indeed, less than a dozen firms remain today marketing to residential or small commercial customers.
Page 116 PREV PAGE TOP OF DOC Three weeks ago, MidAmerican Energy, a multi-billion dollar energy company launched a retail competition pilot program for all residential and small commercial customers in Council Bluffs, Iowa - a community located just across the Missouri River from Omaha, Nebraska. Despite advance promotion, the only a new company now offering competitive service in Council Bluffs is MidAmerican Services - a wholly owned marketing affiliate of the MidAmerican Energy holding company.
If the major national power marketing firms are unwilling to market electricity to residential consumers in California where retail prices are nearly double those in Nebraska (Attachment # 9) and if their unwillingness to market in a residential pilot program in the relatively populous Council Bluffs market is an indication of interest in this lower cost region, what hope is there that rural consumers will win anything under a retail electric competition regime in a state like Nebraska where electric prices are low?
Finally, as noted earlier, the State of Nebraska implemented open access transmission policies decades before the Federal Government imposed such policies on the investor-owned electric companies throughout the U.S. As a result, Nebraskans have enjoyed the financial benefits of a wholesale electricity market. However, we must make certain that current efforts to create independent transmission systems do not adversely impact the rights of customers for whom the facilities were originally built.
Rural areas are more adversely impacted by deregulation than urban areas.
Electricity is an essential service for all Americans and a deregulated market may decrease reliability and increase prices for rural consumers and small customers.
The protection of rural electric consumers and small customers requires continued access to Federal Power Marketing Administration power at cost and reasonable modifications of private use restrictions such as H.R. 721, The Bond Fairness and Protection Act of 1999.
Page 117 PREV PAGE TOP OF DOC The unique circumstances of each state, including electricity costs, require that retail competition decisions be made at the state level and not mandated by the Federal Government.
That concludes my testimony2I want to thank Mike Foley, NPPD Corp. Planning Analyst, for his assistance in the preparation of this
testimony and the attachments.
. I would be pleased to respond to your questions and comments. Thank you.
"The Official Committee record contains additional material here."