SPEAKERS CONTENTS INSERTS
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ELECTRIC INDUSTRY DEREGULATION IN RURAL AREAS
WEDNESDAY, MARCH 25, 1998
Committee on Agriculture,
Subcommittee on Forestry, Resource
Conservation and Research,
House of Representatives,
The subcommittee met, pursuant to call, at 9:30 a.m., in room 1300, Longworth House Office Building, Hon. Larry Combest (chairman of the subcommittee) presiding.
Present: Representatives Barrett, Smith, Everett, Lucas, Hostettler, Chambliss, Emerson, Pickering, Jenkins, Cooksey, Dooley, Farr, Stabenow, John, Peterson, Clayton, Minge, Baldacci, Berry, and Goode.
Staff present: Dave Ebersole, Russell Laird, Callista Bisek, Wanda Worsham, Anne Simmons, and Russell Middleton.
OPENING STATEMENT OF HON. LARRY COMBEST, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. COMBEST. The hearing will come to order.
Good morning and welcome to everyone here. I would like to thank our witnesses for their time, effort, and preparation to discuss this important issue with us this morning.
The purpose of this hearing is to examine and discuss the possible effect that electric industry deregulation could have on the rural areas. The Committee on Agriculture, and specifically our subcommittee, has jurisdiction over rural development issues.
Page 2 PREV PAGE TOP OF DOC Therefore, it is our role and responsibility to be very parochial when it is appropriate and examine the effects that certain issues may have on agriculture and the economies of the rural areas that we serve.
Since electricity is something that is basic to everyday life, and is also very essential in doing business in agriculture, I believe it is vital that we examine changes in the structure of this industry very closely.
That is what we are here to do today. As we all know, legislation has been introduced in Congress to require all States to deregulate by the year 2000. This legislation has been debated extensively in the Commerce Committee.
There has been much speculation among the public and in the media regarding the changes for passage of this legislation, and even the chances for this legislation even being actively debated on the floor of the House. We are also all aware that this legislation is tentatively scheduled for floor action in late April.
With that in mind, it is incumbent upon us to discuss any ideas for how rural areas need to be treated under this deregulation scenario and what it would take for this situation to not have a negative impact on these areas.
I look forward to exploring such ideas this morning. I, again, appreciate very much the time that was taken in preparation and your appearance before this subcommittee. I look forward to your testimony and to the discussion and questions.
I would recognize Mr. Dooley for any comments that he wish to make.
OPENING STATEMENT OF HON. CALVIN M. DOOLEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
Mr. DOOLEY. Thank you, Mr. Chairman.
I will be very brief. I thank you for holding this hearing. I would just say from a California perspective where we have undergone deregulation, it is interesting that it might provide a model and some examples of how we can move forward on a Federal deregulation.
Page 3 PREV PAGE TOP OF DOC From a farmer in parts of my area in central California, we were actually seeing rates being offered that are significantly lower than what we were paying prior to deregulation.
So, that provides some financial incentive for many of us to be very encouraged about the potential for Federal deregulation.
As it deals with rural co-ops, what we are also finding in California is that there are some opportunities for rural co-ops, electrical co-ops, taking a little bit of a different approach and actually finding ways in which they are basically an aggregator of customers and actually becoming more of a marketing co-op and a distribution co-op and not necessarily be involved as closely in the actual power generation.
I am optimistic about the potential for agricultural interests to see some benefits under a well-thought out and well-designed electrical deregulation.
I thank you for holding this hearing.
Mr. COMBEST. Thank you, Mr. Dooley.
Any Members who have statements, their entire statements will be certainly added to the record without objection. If there is a pressing short comment that Members might want to make; Mr. Barrett.
OPENING STATEMENT OF HON. BILL BARRETT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEBRASKA
Mr. BARRETT. Thank you, Mr. Chairman.
Thank you for holding this hearing because deregulation of the electric utility industry is certainly going to impact all of us in one way or another. I think it is good that we are here today to learn a little more about how the impact is going to hit and affect rural parts of this country.
If the history of other deregulation is any teacher, I think we know rural America could be adversely impacted by deregulation. This issue certainly deserves our close attention.
Page 4 PREV PAGE TOP OF DOC As a matter of fact, in the public power area, Nebraska is in a very unique position as most of you here know. It is the only all-public power State in the nation. We began developing public power decades ago because investor-owned utilities out there were not serving the States' rural customers.
However, this unique structure has not limited our utilities from providing quality, reliable, and inexpensive service to rural areas. In fact, Nebraska has one of the lowest average electric rates in the country.
In addition, the State has had wholesale deregulation since the 1960s, long before the Federal Government mandated it in, I believe, 1992. Currently, Nebraska is considering how best to implement consumer choice within the realities of the State. I look forward to hearing the testimony today on proposals to manage deregulation within the public power structure, and of course the general issue of how deregulation could impact all of rural America.
Thank you, Mr. Chairman.
Mr. COMBEST. Thank you.
Mr. Berry, comments?
OPENING STATEMENT OF HON. MARION BERRY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ARIZONA
Mr. BERRY. Thank you, Mr. Chairman.
Thank you for holding this hearing. I think I share the concerns of most members of this subcommittee that we just want to do the best we can to be sure that rural America does not end up on the short end of the stick. We need to do everything we can to gather as much information as possible and try to ensure that.
Mr. COMBEST. Thank you, Mr. Berry. Mr. Everett.
OPENING STATEMENT OF HON. TERRY EVERETT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ALABAMA
Page 5 PREV PAGE TOP OF DOC Mr. EVERETT. I will try to be brief, Mr. Chairman.
Let me make a general observation that although share owner utilities serve about 60 percent of rural electric customers, they do not appear to be represented here today.
I would also like to make reference to a 1998 GAO Report requested by Senators Lugar and Harkin to explore the ways to operate RUS loan programs more efficiently. I will submit some of those recommendations for the record, Mr. Chairman.
[The the prepared statement of Mr. Everett follows:]
I make these comments with the understanding that the subcommittee's focus and jurisdiction here today is the Rural Utilities Service and its long-term relationship with rural customers throughout the Nation. In my district alone, Rural Utility Co-ops serve 272,924 customers. However, investor-owned utilities also supply a large portion of electricity to my rural constituents. We must be mindful of how rural America's electric power needs are met.
With regard to the January 1998 GAO report on the Rural Utility Service, the issues raised in the report may warrant consideration by this subcommittee, including the need to ensure that RUS assistance is in fact going to rural America. As electric power deregulation moves ahead, we must take care to ensure that rural American's electric power needs will be delivered cost-effectively. I appreciate the chairman's interest in this matter.
Mr. COMBEST. Mr. Minge.
OPENING STATEMENT OF HON. DAVID MINGE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MINNESOTA
Mr. MINGE. Thank you, Mr. Chairman.
I would simply like to observe that we have two outstanding witnesses this morning. Mr. Beyer has worked long with this program in North Dakota. Mr. English was formally the Chair of this subcommittee and certainly brings to bear a vast amount of experience, wisdom, and insight.
Page 6 PREV PAGE TOP OF DOC I look forward to the comments from our witnesses.
Mr. COMBEST. Thank you. Mr. Lucas.
Mr. LUCAS. Thank you, Mr. Chairman.
I simply wish to express my appreciation for this hearing. I look forward to the comments from my esteemed predecessor this morning.
[The prepared statements of Chairman Smith and Mrs. Chenoweth follow:]
STATEMENT OF HON. ROBERT F. (BOB) SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OREGON
Thank you, Mr. Chairman for calling the hearing this morning to consider the effects of electric power deregulation on the economies of rural America.
It is critical this committee understand fully the positive as well as the potential negative effects of any legislation that may eventually come before the full House of Representatives later this yearor some time in the future. A few States have taken this leap into retail competition of its electric power utilities and the services they offer American consumers. Some of those states may already be reevaluating their decisions, so it is necessary for us, when looking at a national deregulation bill, to be more careful before we take the same leap of faith.
I was prepared this morning to ask questions about the administration's apparent unwillingness to seek a place at the table in the deregulation debate, but I noticed in this morning's Washington Post that the Clinton administration may now be ready to offer the Congress its views on electric deregulation.
If it was accurate, I am heartened by the Post story, which indicated the administration would endorse some kind of rural safetynet in any deregulation legislation. I suppose I am somewhat disappointed, however, that it appears our own agency, USDA's Rural Utilities Service, was not a significant player in the administration's plans since there is only a single mention of any announcement in the testimony we will hear this morning.
Page 7 PREV PAGE TOP OF DOC One other issue also concerns me. After enactment of the 1996 farm bill, I understand there were some critical press stories about a provision in that bill to help the Secretary of Agriculture deal with problem loans in the RUS portfolio. It seems to me this statutory change is a useful tool for assisting mergers and accommodating problem debtors. I am interested in learning more about whether or not this authority has yet been used and , if so, what the experience has been. It would seem such authority would be especially helpful in these times of deregulation. I want to make certain the Secretary has the authorities he needs to ensure an orderly process in dealing with RUS' loan portfolio, and so I will have a couple of questions in that regard.
Thank you, Mr. Chairman, and I look forward to this morning's hearing.
STATEMENT OF HON. HELEN CHENOWETH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF IDAHO
I would like to thank Chairman Combest for scheduling this hearing to review the effect of electric deregulation on rural areas.
As Congress considers the issue of electric deregulation, we must be extremely careful, and ensure that the consumers' needs, both in safety and cost, come first. We in the Pacific Northwest have a great deal to lose.
Mr. Chairman, it is important that we maintain the benefits that we enjoy in the Pacific Northwest. This means that we must protect the preference of the public utilities and direct services industries in current law. Additionally, I remain committed to the general preferences enjoyed by the Pacific Northwest which has resulted in clean, low cost, reliable energy.
Equally important, though, is the protection of State sovereignty over its water. This necessarily includes the ability of the State to require a Federal license to comply with its laws.
Time and time again, Idaho has been put into a position of having to defend its ownership of State water. I will not support, and will actively oppose, any efforts that leaves open even the possibility of the dilution of Idaho's sovereignty over its water.
Page 8 PREV PAGE TOP OF DOC As responsible lawmakers, it is apparent that we urge caution and follow the process of electricity deregulation closely.
Mr. COMBEST. I would like to recognize our witnesses who I would invite to come to the table; Mr. Wally Beyer and the Honorable Glenn English.
Mr. Beyer is the Administrator for the Rural Utilities Service at USDA.
Mr. English is chief executive officer and general manager for the National Rural Electric Cooperative Association.
Mr. Beyer, I would invite you to begin. Then Mr. English may follow you.
Thank you for coming today.
STATEMENT OF WALLY B. BEYER, ADMINISTRATOR, RURAL UTILITIES SERVICE, U.S. DEPARTMENT OF AGRICULTURE
Mr. BEYER. Thank you very much, Mr. Chairman and members of this subcommittee.
It is an honor to be here. I really appreciate the opportunity to visit with you all about the electric deregulation restructuring issue. I will make my remarks very brief, Mr. Chairman, in appreciation of time.
The Department of Agriculture has been with RUS and with the predecessor, REA, directly involved in bringing safe, affordable, reliable power to rural areas for more than 60 years.
Since the inception of the Rural Electrification Program in 1936, the USDA has made more than $56 billion in loans and loan guarantees. Few actions by the Federal Government have improved the quality of life, created more potential for rural development or more fully integrated rural areas into the national economy.
The Rural Electrification Act literally empowered rural America. The success of that 60-year-old effort revealed by the fact that nearly all Americans have electric service, that so many of us take for granted at the flip of the switch.
Page 9 PREV PAGE TOP OF DOC Today, our mission is as important as ever. The fundamental challenges of distance, geography, and population density remain. Rural electric infrastructure is simply more expensive to maintain, operate, and replace than comparable urban infrastructure. RUS is needed more today than even before in upgrading, replacing, and improving rural infrastructure, and providing critical credit support for leveraging of private capital. On a 5-year average, there are $3 billion a year invested in rural infrastructure.
One-third of that is loaned from RUS and USDA. Two-thirds are critical leveraging from the private sector. Without the RUS lending program, rural America would certainly be a different place.
The Energy Policy Act of 1992 opened the wholesale markets to competition. At least 10 States have legislative retail electric competition. USDA continues to bring the rural perspective to the development of the President's energy agenda.
The administration is confident that a properly structured retail market will benefit consumers in all parts of the Nation. Nevertheless, the administration is mindful that the benefits of competition may not occur in all rural areas of the country.
Accordingly, a rural safety net should be established to address any untended consequences arising from the transition to retail competition. There are three additional issues that the Rural Utilities Service is concerned about.
No. 1 is reliability. This country has the highest quality, most reliable energy delivery infrastructure in the world. That certainly must be maintained and strengthened in an environment of competition and profit-driven infrastructure.
Stranded investment is another issue that the agency, USDA, is very concerned about. We have today, about $30 billion in our loan portfolio in electric infrastructure. We are very concerned about stranded cost recovery. We feel that must be ensured.
Page 10 PREV PAGE TOP OF DOC Access to capital investments. As the electric utility industry continues to move through a period of change, availability of capital for infrastructure financing will be more important than ever, particularly in high cost to serve areas.
Private capital leverage simply must be continued. RUS is working aggressively to find solutions for the remaining handful of financially troubled generation and transmission systems.
The policies of the 1970s and 1980s, which encouraged investment in expensive nuclear and other large scale generating facilities have resulted in some financially stressed borrowers.
I am pleased to report to you today that we are actively working with six financially stressed borrowers as opposed to 15 just 3 years ago. We are making progress.
With the authority granted by Congress, RUS has a new tool to facilitate refinancing and we will continue to work together to develop longterm solutions to the remaining financially stressed borrowers to enhance loan security and to better position the rural infrastructure in a new competitive environment.
Mr. Chairman, that concludes my brief remarks. I appreciate the opportunity to being here. I look forward to some questions from the committee.
[The prepared statement of Mr. Beyer appears at the conclusion of the hearing]
Mr. COMBEST. Thank you very much, Mr. Beyer.
Mr. English, please proceed.
STATEMENT OF HON. GLENN ENGLISH, CHIEF EXECUTIVE OFFICER AND GENERAL MANAGER, NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION
Mr. ENGLISH. Thank you very much, Mr. Chairman.
Page 11 PREV PAGE TOP OF DOC It is a pleasure to be back home again. I spent a lot of hours in this committee room over about a 20-year period. I am delighted to see a lot of familiar faces, but I see some new faces that were not here when I left.
It is always a pleasure to come back to the House Agriculture Committee. As you know, this is my first opportunity to come back and to visit.
Mr. COMBEST. We are glad to have you back.
Mr. ENGLISH. Well, thank you very much. That is kind of you.
First of all, what I would like to do is set the stage a little bit. We have not had an opportunity to visit with this committee. There are a lot of new members on this committee; a little bit about where the electric cooperatives are; what we are all about; and make sure that we have a good foundation and understanding as to what our role is in rural America and the rest of America as well for the future.
First of all, there are a thousand electric cooperatives in 46 States across this country. These are not-for-profit groups. They are privately owned. They are owned by the consumers themselves; not by the Federal Government. Of course, there are some 30 million consumers across the country that receive their electric power from electric cooperatives. Now, electric cooperatives came into being, as most of the members of this subcommittee know, simply because of the fact that others would not provide that electric power.
There was a case in which consumers came together and went in partnership back in the 1930s with the Federal Government. Due to the financing by the Federal Government, they were able to provide electric power to people who could not get big power companies to provide it for them.
Now, many of the concerns that we had back some 60 years ago, quite frankly, still exist. There is a big difference between, for instance, the cost that big power companies have as opposed to electric cooperatives in delivering that service.
Page 12 PREV PAGE TOP OF DOC The bottom line is we have some 35 consumers per mile that the big power companies have on their lines while electric cooperatives have less than six consumers per mile.
The cost of providing that amount of power to those people averages some $1,900 per consumer for electric cooperatives, while it only cost about $1,500 per consumer as far as the big power companies are concerned.
Finally, there is the issue of revenue. There is far less revenue that is provided to the electric cooperatives per mile because of this lack of density; some $7,000 per mile, while as far as the big power companies are concerned it is some $60,000 in revenue.
So, there is a vast difference both in the cost to provide that power and the amount of revenue that comes into electric cooperatives because we serve primarily rural ares. Also, we serve those areas in rural America that other people did not want to serve in the past.
Now, we have seen some situations in which some areas have developed. Through the assistance of this committee, to a great part, we have seen some economic development take place throughout rural America.
Now, some of these areas have developed either large industries that are now getting their power from electric cooperatives or other areas that have developed economically. The bottom line is we do see some areas now that big power companies would like to serve.
Of course, if they do serve those people, that means the cost goes back up for the other people they do not want to serve in rural America.
So, I think this has been one of the most successful programs that this committee has ever been a part of and certainly has ever initiated, and one that I think this committee can take great pride in.
Now, as far as the changes that are being talked about, certainly the Commerce Committee has been holding a number of hearings throughout this country, mostly in big cities, dealing with the issue of restructuring.
Page 13 PREV PAGE TOP OF DOC However, we have not really heard from rural America. We have not heard much in the way of focus on what impact these change would have on people living in rural America. I think that certainly this committee is to be commended for beginning to focus the attention of the Congress on those particular issues.
You know one of the vice presidents from DuPont made the statement several months ago when I asked why DuPont was supporting so strongly the restructuring of the electric utility industry.
His response was, well, the big dog eats first. Certainly, as we have seen changes that have taken place over the last 20 years, many times it is the big dog who eats first. It is the big dog who receives the benefits. It is the big dog who ends up with the lower cost. Many times it is rural American people who are residential, small business consumers who do not receive those kinds of benefits.
Certainly those of you who sit on this committee are very familiar with many times that rural America is left out and that has an adverse affect as far as their economic development in general.
Basically, the bottom line has to come down to this question of any changes that are made in the electric utility industry, who is going to benefit? Will all Americans benefit? Will all regions of the country benefit?
Will the adjustments that are made, whether it is in State law or Federal law, will they be done in such a way to give those kinds of assurances? Quite frankly, we are concerned with the lack of attention that seems to be focused on that at this point.
In fact, what we are seeing today is most of the attention is with the assumption that these kinds of benefits will be derived by all people throughout this country. What we are also seeing is that there are an awful lot of consumers in this country that are not taking that for granted.
Page 14 PREV PAGE TOP OF DOC We are beginning to see some polling that is being done around the country on a lot of just ordinary Americans, residential, small business consumers, that do not seem to share that kind of assumption.
In fact, on February 17, the Moore Information Group did some polling in this country. They came up with a majority of the voters believing that electric restructuring will mean higher rates for ordinary consumers and bigger profits for utilities.
That skepticism seems to be borne out with a number of other polls that we see around this nation. We, in fact, are seeking that skepticism expressed in silence. One of the FERC Commissioners remarked that the silence from ordinary consumers is deafening with regard to this issue. I think it is that skepticism that we are seeing expressed through that silence.
Also, I think there is this question on reliability. It is one that this committee has to be very concerned about. After all, even though we have less than six consumers per mile that are being served by electric cooperatives.
Certainly we serve only about 11 percent of the consumers all across this country. We do see some 44 percent of all of the electric line across this country being provided by electric cooperatives.
So, you have got a lot of polls and a lot of wire out there and a lot of infrastructure. Reliability has to be an issue that is of concern.
Quite frankly, Mr. Chairman, the system that has been built, not just by electric cooperatives, but that has been built by the electric utility industry across this country is one that was not designed to do what we are going to ask it to do.
No one can tell you for sure that, that reliability is going to hold up. That we will have the same level of reliability that we have had in the past. We have had experts, engineers, within the electric utility industry from the investor-owned utilities, municipals, as well as electric cooperatives who have expressed grave concern about this.
Page 15 PREV PAGE TOP OF DOC This is an area, too, that given the amount of infrastructure that is under the jurisdiction of this committee, this committee may want to take a very hard look at.
Let me also say that we need to take into account the fact that much of the changeI know my good friend, Mr. Dooley, up there who I have served with, expressed California and the changes that are taking place there.
We are very hopeful that we are going to see the consumers in California receive the benefits that I know that those who were involved in the passage of that legislation intended.
We are a little bit concerned about one of the quotes that was made by one of the principle authors of that legislation, State Senator Stephen Pease, who said recently that the whole concept and idea of the California legislation was not to benefit residential consumers, but instead was to benefit industrial customers.
His quote is, ''The idea was not to have a bunch of competitors suddenly flooding the market. We knew there was not enough potential savings for the little guys. We just tried to keep them from being harmed.''
We are hopeful that if the Congress is going to take this issue up, it does a little more than just hope that the little guy does not get harmed; that the residential small business consumer should be able to expect more from their legislators than just hoping that they will not be harmed.
After all, this system is not broken, Mr. Chairman. We have got to also recognize the fact that the electric utility system in the United States is in fact the most reliable in the industrialized world.
Not only is it the most reliable in the industrialized world, but also it has some of the lowest rates. There are only about two other industrialized countries that compete rate-wise with the United States and the low rates we have.
Page 16 PREV PAGE TOP OF DOC On top of that, the United States is the only country, the only country, in the industrialized world who have seen their electric utility rates going down for the last decade. That indicates that this is a system that is working well. It is not a system that has had problems.
It is a system that is in fact delivering great benefits to consumers. It would indeed be a shame to see changes made that would end up with a less reliable system and with many consumers that are receiving higher rates than they do today. That can certainly take place.
The people that are most likely to fall victim to that, Mr. Chairman, are those people that quite frankly live in rural America. The residential, small business people in rural America are the ones most likely to least be eligible or feel the benefits of competition.
They have never really been the focal point of big power companies in the past. I think it is unreasonable to expect that they would be in the future. Let me also point out that Mr. Chairman we also have some concerns with regard to the impact on rural America with assuming an unfettered retail competition.
Some of the concerns we have is with regard to some of the industries and businesses that have been developed in rural areas which definitely have an impact in offsetting what some of the lower costs are for residential and small business consumers.
That is particularly true of some of those who live in the more remote areas. After all, in many of these areas, some of the larger industry that is being served by electric cooperatives account for a major portion of the electric power that is being sold in that region.
If suddenly they decide to shift to a different provider, that means that the rates for the ordinary consumer, the residential, small business consumer, will go up. The costs have to be met. That is the reality that would have to be faced.
There are those, quite frankly, who would like to relegate electric cooperatives to serving the most rural people in this country and with those with the least amount of income. That I think has to be of concern to all members of this subcommittee.
Page 17 PREV PAGE TOP OF DOC A study that was recently done by Dr. David Freshwater, who is an economics professor, and in fact he has a Ph.D. in agriculture economics at the University of Kentucky. He recently look at the State of Kentucky and came up with the fact that the rural areas are more costly to be served, which is the reality we all understand. That higher distribution costs may overwhelm any competitive benefit in the form of lower costs for electricity.
There are some real concerns, I think, that this committee should have about how this might impact on rural America as opposed to some of the more urban areas around this Nation. Another area that this committee is concerned about of course delves into the area of some of those that are economically disadvantaged in this Nation.
This committee has jurisdiction over the Food Stamp Program and certainly understands the reality that this is one of the necessities of life. Well, 26 percent of all households in this Nation earn $20,000 or less.
People living in rural America, some 35 percent of the households are served with consumers of $20,000 or less. Rural America has long had a disproportionate share of those who are economically disadvantaged, low income people.
Obviously, those people spend a greater percentage of their income with regard to the necessities of life; food, shelter. Electric power is not far behind that. I think we all understand, and certainly the members of this subcommittee who have long dealt with issues around the Food Stamp Program, that these disadvantaged people must receive consideration with these changes as well.
Well, the changes in market places could force families to go without heat in the winter time. Certainly the elderly in some of the southern regions of the country without air conditioning in the summer time could be life threatening.
There is no question that today the existing system provides an obligation for power companies, whether they be investor-owned utilities, municipals, or electric cooperatives are to care for those people.
Page 18 PREV PAGE TOP OF DOC There are allowances made. That is something that is worked through. What needs to be understood with the changes that are going to be made, no one in the electric utility industry will be responsible for any of those people.
You will certainly see people that will fall through the cracks, so to speak. That needs to be addressed I think in any State legislation or Federal legislation that takes place in this Nation.
Let me also say, as was pointed out by Mr. Dooley, that in the State of California, we are seeing some rather unique changes. In looking to the future, the question comes in about how, with these kinds of changes in the law, do you provide assistance or benefits to just the ordinary consumer; that residential, small business consumer?
Is there some way, for instance, that they can compete with the big dogs of DuPont or some of the larger industries in this country that are the primary, the major force behind many of these changes that are taking place? What we have seen develop in California and in the State of New York are two rather unique responses to that.
In the State of California, 11 of the agriculture cooperatives that represent the growers and producers in that area have come together and just recently incorporated and formed the California Electric Users Cooperative.
Now, this new electric cooperative is not one that has any wires and polls. It is a cooperative that is formed specifically for the purpose of combining purchasing power and giving people the opportunity to have the kind of muscle in the market place that would give them a chance to have a good rate.
Now, there are some 10,000 members of these cooperatives who will initially benefit from this kind of a change. But they are planning on expanding that, as I understand it, to some 40,000 growers all throughout the State of California; running from the northern part of California down into southern California.
Page 19 PREV PAGE TOP OF DOC Now, this new electric cooperative will begin purchasing power for those consumers at the end of this month, March 31, when California initiates this new change.
In New York City, some consider that to be a strange place for an electric cooperative, particularly if you think about it in your traditional terms of rural electric cooperatives. There, the housing cooperatives have come together.
They, too, have formed an electric cooperative. Those housing cooperatives are combining their purchasing power just in the same manner as those in the rural areas of California.
There are some 500,000 people who potentially will be a member of the electric cooperative in New York City. They, too, will use that as a means of purchasing power and combining their market power to put them in a position to demand out of the market place a fair return.
Electric cooperatives throughout this country are ready to work with any such group, and certainly work with this committee as we try to deal with some of these changes in making certain that residential and small business consumers have the opportunity to benefit from these changes.
Also, Mr. Chairman, one further point that I would make is to emphasize to this committee that one size does not fit all. That each and every State is a little bit different. What works in New Hampshire is not likely to work in Texas or Alabama.
What works in the Northwest probably will not suit the needs of the people in the Northeast. We have to take that into account. So, any Federal law that might be implemented should in fact recognize the fact that each State is going to need flexibility.
In fact, not every State is likely to benefit; not only individuals, but the states themselves. We have seen this with some of the statements that have recently been made. For instance in 1997, the Department of Energy's Energy Information Administration identified the Pacific Northwest and the Midwest as two regions of the country in which competitive prices may actually be higher than the regulated prices.
Page 20 PREV PAGE TOP OF DOC I think that has to be understood that some regions of the country have very low cost power. They are very likely to see that change place. In Montana where the law has just been changed, we have seen the power generator in Montana which has hydro as well as coal-fired, they are contemplating selling all of their generating capacity to an out of State firm.
The people in Montana now, as I understand it, are becoming very concerned that in fact that power is going to go out of the State and be sold in some higher cost markets such as California, while rates in Montana will likely soar.
They are looking now at how they might pull that legislation back, recraft it, and look at it a little bit differently. So, there are a lot of implications. The States should be given the flexibility and opportunity to address those and deal with what is best for those states; what works best for the consumers in that State.
So, we would plead with the Congress that it would not be wise to have some federally mandated date-certain a State must act in or any kind of mandate as to exact some straightjacket that they attempt to place the States in as far as what that legislation will look like. I think that would obviously work to the disadvantage of an awful lot of consumers; in particularly, a lot of people in rural America.
The bottom line is, Mr. Chairman, we are ready to work with Congress as we have been working with the States in making whatever adjustments in changes. I would certainly be the last to say that the electric utility industry in this country cannot be improved. I think it certainly can.
I would be the last to say that the system we have in this country cannot be improved. It certainly can. That has to be done with the recognition and understanding that this system is working very well. It is providing great rates.
We are seeing falling rates as one of the best in the industrialized world. So, I guess I would leave you, Mr. Chairman, with the fact that please do not screw it up. We will be happy to work with you in making any changes you want.
Page 21 PREV PAGE TOP OF DOC Thank you, Mr. Chairman.
[The prepared statement of Mr. English appears at the conclusion of the hearing.]
Mr. COMBEST. We will certainly try not to.
Mr. ENGLISH. I thought maybe you would feel that would be the proper thing.
Mr. COMBEST. When this discussion started, actually I guess it has now been years ago, the proponents, the people whose idea it was to move toward electric deregulation, I said, what needs to be done?
These were people who spent a lot of their time looking at this. Basically, the one sentence answer was well, it is competition. We need to deregulate electricity so that we can have broader competition. That will be good for the consumer.
Obviously, it goes well beyond just that. It has been I think that basic one line description to the general public that has certainly gotten people in my district concerned about what does that impact mean for them.
Representing a district with not huge companies, but a lot of small businesses and certainly residential users, farmers, and ranchers, everyone, including the public, private, and electric coops have all indicated to me a concern about what kind of a negative impact the movement in electric deregulation might have.
No one is hugging this and saying it is a wonderful idea without, as has been expressed here, the need to move very cautiously and I might say maybe slowly. Certainly the business community, farmers, ranchers, and residential customers have indicated their concerns, looking at it from a competitive standpoint.
They are not going to be the ones on the top of the list for competition that people are going to rush out and chase after them to get their business because they are not big users and could be the big losers in the end.
Page 22 PREV PAGE TOP OF DOC Let me ask you both, either under U.S. Department of Agriculture regulations or restrictions or from the Rural Electric Cooperative Associations themselves, Mr. English, is there anything today that prohibits a company, investor-owned or public-owned utility, from moving into a rural area that is serviced today by a rural electric cooperative? Is there anything in the law that prevents that?
Mr. BEYER. Well, Mr. Chairman, I will take a crack at that. There are a number of states with territorial laws. So, there are, if I could characterize it as certified areas, exclusive areas that preclude competition, actually, the purpose of it is the conservation to capital so you do not duplicate facilities.
There are a number of States. I do not remember how many there are in all, but I know in my home State there is a territorial law that everybody is trying to break now. That has been very useful in the past in providing service to the hard to serve, high cost to serve areas.
So, that is one thing that is in place that prohibits an alternative supplier from stepping over the line so-to-speak and cherry picking. In the advent, as the new market competition for profit infrastructure is molded, that is going to start to break down in my opinion.
It would be very hard to hold a little island somewhere where you say nobody can come in, unless there is some Federal direction. That is why, you know, I think this thing is a very macro issue, as everybody knows, in this country.
It is very, very critical. It is going to be critical into the next millennium. It needs to be done with a great amount of care and, in my judgment, some tweaking by Congress to make sure that we do not end up with energy have-nots in high cost to serve areas and energy haves in profit centers. That is where we are going, I believe.
Mr. COMBEST. Mr. English.
Page 23 PREV PAGE TOP OF DOC Mr. ENGLISH. Mr. Chairman, I would agree.
I would overall, generally speaking, States have taken the action to make sure that we do not have duplication facilities. Obviously, that is a high cost item. Some States we do find some flexibility in that.
I know in the chairman's town of Lubbock, that there is some duplication where you have on one side of an ally you may have a line running by one power company. On the other side, you may have an electric cooperative or somebody else that has lines. You do have this kind of duplication. I think that these kinds of changes raise the question as to whether or not you want to open that door or not. Obviously, that would increase tremendously the amount of cost if you start having different power companies that next to each other are running wires down a road trying to reach different customers.
So, that would be something that I would think the committee would want to look at and look at very closely if you are going to do anything as far as Federal law is concerned. I think most people assume that is not going to happen.
That States in their laws or the Federal Government will prevent that kind of waste from taking place. You know, I think it is something that has to be looked at. It has to be considered. It is a problem.
We do see today in some cases in which we have the type of cherry picking. That is of concern, I think, for us in rural areas and I think for this committee, given the amount of investment that you have made through the years on rural development, of seeing one particular group, whether it is municipal, or whether it is an investor-owned company, running a line down a road to reach one particular industry or one particular group and pulling that out.
Of course, that increases the cost of delivering the power to everyone else. I know that has happened in my home State of Oklahoma. We have some turf battles that take place within the States today. So, it is quite likely to happen if it is not addressed.
Page 24 PREV PAGE TOP OF DOC Mr. COMBEST. Of the total number of rural coops that you would be familiar with, let's say through your Association, what percentage of those produce their own power? I am presuming that the percentage of those that do not buy power.
Mr. ENGLISH. Right. Across the Nation, Mr. Chairman, roughly half of the power that is used by electric cooperatives is produced by those electric cooperatives. This means the other half, of course, has bought elsewhere.
Mr. COMBEST. Thank you very much. Mrs. Clayton.
STATEMENT OF HON. EVA M. CLAYTON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH CAROLINA
Mrs. CLAYTON. Thank you, Mr. Chairman.
Thank you also for holding this meeting. I think it is important that those of us from rural communities have the opportunity to focus on what the impact of deregulation would be on rural areas.
Mr. Chairman, I am going to ask that my full statement be put in the record, if I may.
[The prepared statement of Mrs. Clayton follows:]
Good morning. I would like to thank Chairman Combest and Ranking Member Dooley for holding this hearing on an issue that will have a significant impact on not only my district, but also my State and other rural areas in the United States.
The motivation for me to seek an assignment with the Agriculture Committee was that it provides one of the best opportunities for me to improve the quality of life for residents of my area, the First Congressional District of North Carolinalocated in the eastern part of the Statea primarily rural and economically disadvantaged area.
As we in the Congress go through our cost cutting, deficit reducing, budget balancing exercise, that is the message that I intend to press among my colleagues. Farmers and other Americans who live outside the big city limits were important in this nation's past, and are vital to this nation's future, especially the small, family-owned businesses.
Page 25 PREV PAGE TOP OF DOC Unfortunately, because their important role has not been recognized, rural communities in the United States are crumbling and decaying. In the 10-year period from 1980 to 1990, more than half of our Nation's rural counties declined in population. The average unemployment rate for rural areas during that same time period was almost 9 percent! By 1990, almost a quarter of all farm households had incomes below the poverty linemore than twice the national average. In my area alone, the average poverty rate is 26 percent.
It is important to recognize that the long-term economic health of rural America depends on a broad and diverse economic base which requires investment in rural businesses, infrastructure, housing stock and community facilities.
The major factors that inhibit rural economic development stem from the very characteristics that singularly define rural areasisolation from metropolitan areas, low population density, small economies of scale, dependence upon a single industry and limited municipal capacity.
These factors leave many rural areas without the necessary resources not only to plan, but also to develop basic services that attract competitive and profitable industries. Those of us who are decisionmakers from rural areas are strongly committed to stimulating rural economic development by any and every means possible.
When you add electricity deregulation into the equation, the answer is not so simple. In my view, the vitality of rural infrastructure is at stake here.
I support the measured and deliberate deregulation of the electric industry. Competition is good, but not at the expense of rural consumers. North Carolinians are served by a variety of electricity suppliers: North Carolina Power, Carolina Power and Light, Duke Energy, numerous rural electric cooperatives and the North Carolina Municipal Power Agencies No. 1 and No. 2. In fact, over 215,697 eastern North Carolinians are served by 15 different rural electric coops just in and around the first district. I strongly believe that there is a place in the world for all of them. To bring competition into a market just for competition's sake, without regard to the benefit for the public good, is irresponsible.
Page 26 PREV PAGE TOP OF DOC I am open and receptive to change and am actively seeking methods to improve America for all Americans, but I will not accept changes that ignore and unduly hurt rural America and the disadvantaged.
Previous deregulation of other industries such as aviation, cable television and telephone service has been a mixed blessing, but most often than notthe large commercial customers and the urban dwellers received the most benefit.
My goal through the deregulation process is to ensure that all North Carolinians, rural or urban, rich or poor, residential or commercial, have unfettered access to reliable and fairly priced electricity in an arrangement that suits their needs. The statistics speak for themselvesthe people that the coops serve in my District have an average per capita income of $13,535 which is almost 28 percent less than of the entire State, $19,585, and 31 percent less than the national average, $20,165. Twenty-one percent of those 215,697 people served by electric coops live in povertynamely 45,296 people. These are the people I am talking about that will be hurt if the electricity deregulation process is anything like that of telecommunications.
When deregulation occurs, it is essential that we look at the following three areas: consumer parity, shareholder parity and rural and/or low-income universal service guarantees. Consumer parity is extremely important for all customers should be given the ability to choose among the suppliers, whether the consumer is connected to electric lines owned by a municipal government, an electric cooperative or a share-holder owned utility.
Supplier parity is also critical. All providers, whether they be a municipal government, a cooperative, a shareholder-owned utility or independent generator must be treated equally under the lawincluding regulation and taxation.
Universal service guarantees are indispensable for rural and low- income customers in case the market does not provide these special-need consumers with lower prices and better service. Any assistance for these populations should be targeted to them and not their supplier and should be based on need. The Federal legislation must also address stranded cost recovery, market power and private use restrictions.
Page 27 PREV PAGE TOP OF DOC Suppliers must be able somehow to recover their stranded costs, i.e. those costs incurred serving customers that are presently incorporated into the base rate, such as transition charges, securitization bonds, power pools and exit fees, but will no longer be recoverable once retail access is mandated.
With regards to market power, consumers must be protected from the forces exerted by economies of scale, vertical integration and consolidation.
The 1986 Tax Reform Act strictly limited private use and participation in any publicly financed electric facility. Deregulation would erase the lines between municipal customers and investor-owned utilities customers. We must be certain that all involved are restructured so the present contradiction that exists is erased since private utilities could use the municipal tax-exempt facilities to serve municipal customers while the municipal utility could not use private facilities to serve current private customers. The playing field should be level.
I will not accept changes that are dangerous to the stability of the American way of life. We must get beyond partisan politics and move to the high ground of principleserving all Americans fairly.
Mrs. CLAYTON. Also I ask permission that the Alliance To Protect Electricity Consumers' statement be put in the record.
Mr. COMBEST. Without objection.
[The information appears at the conclusion of the hearing.] Mrs. CLAYTON. In today's, I guess it is the Washington Post, Mr. Beyer, is an indication that the administration has now I guess developed some principles for the proposal that is moving forward.
In your analysis as you say you are making an analysis of what the impact of deregulation would make on rural areas. How much of that has been part of the promulgation of the principles that are now being proposed by the administration?
Page 28 PREV PAGE TOP OF DOC Can you now tell if indeed the cost of that delivering service in rural areas would be higher? If not, why not?
Mr. BEYER. Well, thank you, Congresswoman Clayton and Mr. Chairman. We have participated. USDA has participated. I have personally participated in the administration's Intergovernmental Task Force back in the spring.
This thing started for us at least back in April or May. We have been trying to bring, and I think with a certain amount of success, the rural perspective to the debate. We start from the proposition that the rural electric system in this country is less than 10 percent of the electric infrastructure from the standpoint of commerce dollars.
It is a $212 billion industry. The rural electric family in totality is less than 10 percent of that. I use the expression sometimes you have to fall off a building to get attention just because you are so small.
Mrs. CLAYTON. Does that suggest that your input is not reflected in this report?
Mr. BEYER. I just read this, this morning as you have. I did not realize it was going to be put out today. I have not had the opportunity to reflect on really what is in it. What I have seen, I think you are going to like some of it.
The President is going to call for a rural safety net if needed to support high cost serve areas. There are some stranded cost language in there that I think will be beneficial to the rural segment of the industry as well as others.
As I understand it, the President is not calling for privatization of the Federal power marketing agencies. That is a big plus. I think that the other thing that new EPA standards are not going to be a part of the President's package.
I think that is a plus. I think there will be some pluses. My point is I think deregulation can work very well, as long as there is some Federal policy tweaking that Congress can bring to it. I think it will be OK.
Page 29 PREV PAGE TOP OF DOC Mrs. CLAYTON. I am supposing that you are going to make some recommendations for that. Let me ask you about the Universal Service Fund Proposal as it is being proposed by your agencies.
Could you provide us the written details of and description of that proposal, including when your opinion was needed, how it would work, and what the details of that would be?
Mr. ENGLISH. Yes, ma'am.
Mrs. CLAYTON. You can provide it to all of us.
Mr. ENGLISH. Sure. I will provide you with whatever we have. That is not a problem.
The problem is if there is not a universal service developed. It is in a conceptual mode at this point. We are in the process of doing a study in fact with the Department of Energy to try to quantify some of the negative impacts in high cost to serve areas. That is not complete yet. We are working on that.
Mrs. CLAYTON. I know my time is up.
I just want to let you know that I know in North Carolina I may have more rural customers that are on cooperatives and what else. I have 15 cooperatives serving more than 215,000 persons in my area.
Also, when it comes to a disadvantage, I think we indeed have moved to 27 percent of our population is below poverty. So, the rate of electricity is a basic like food and shelter. So, this is essential as we deregulate that.
We indeed consider that you are going to have parts of the station dysfunction in very basic ways if they cannot have access to that. Mr. English.
Mr. ENGLISH. Yes. Mrs. Clayton, if I could respond to that very quickly. There are a couple of items. First of all, I think this committee needs to know as well that I have been instructed by the Board of Directors of the National Rural Electric Cooperative Association that we are to be consumer oriented in this entire endeavor. We are to focus on that as we never have before. Let me hit a couple of things very quickly. There is no question that you are talking about the same folks that are going to be needing assistance with regard to electric power in this country that you talk about for the Food Stamp Program.
Page 30 PREV PAGE TOP OF DOC Mrs. CLAYTON. Right.
Mr. ENGLISH. Those are the same folks. There is not going to be much difference. Second, I would hope that this committee, as a result of that, and given the fact that a much greater portion of these, a percentage of these folks are going to be in rural America as opposed to urban America that you need to focus on that in the Agriculture Committee.
This is an area that I would hope the Agriculture Committee would look at very hard as to how we do this and how it is done uniformly across the State. You are going to have the same problems here that you have had with the Food Stamp Program in trying to equalize that between the States.
So, it is something you all are pretty much up to speed on already. That is in your jurisdiction. That is your ballpark. It is the same kind of stuff. It is going to have to probably be addressed in just about the same kind of a manner.
The second has this issue of stranded costs. I want to be very candid with you. There are some very legitimate stranded costs with the electric utility industry. Let me also say to you there is a bunch of folks that are looking at the whole stranded cost issue as a way of getting a profit out of stranded costs. How are we going to make money off of stranded costs? That is going to be a ripoff of the consumers of this country.
Quite frankly, I think we already have had one State, and I will say it right out, the State of California, in which consumers have been ripped off with regard to what has passed in that State under those laws.
You have got over $20 billion that the ratepayers of the State of California are going to pay on top of the bills that they already have on this issue of stranded costs. It is a very major question as to whether or not that is legitimate.
This is an area that you need to look at and look at very closely. We would strongly argue that there should be fairness. There should be balance. These things need to be approached in a very skeptical manner. I hope this committee keeps that in mind as well.
Page 31 PREV PAGE TOP OF DOC Now, the other part of this is as a result of some of these kinds of charges, that is the reason you have recently stories in the U.S.A. Today, I believe, is in the last of January in which they were stating in there that the ordinary consumer in the State of California, even though the State law mandates you have a 10 percent reduction, that those people are unlikely to have any kind of chance, any kind of an opportunity, for lower rates in the State of California, the ordinary consumer, until anything before the year 2020.
It is very questionable as to whether they are going to see much in the way of relief at that point. So, I think that those of you who are concerned about making improvements in the electric utility industry, those of you who I know feel very strongly that competition will provide benefits.
I think that is a legitimate position. It is not going to happen unless you truly take a hard look and write some safeguards in and making certain that, that kind of an environment is going to exist.
That you do not give big power companies, in particular, that is what we are talking about, a chance to come in and get a profit out of stranded costs. So, you are going to have to get involved.
This is one of those issues you have to roll your sleeves up and you are really going to have to dig into it to make that kind of determine. The States are going to have to do that as well.
Mr. COMBEST. Mr. Barrett.
Mr. BARRETT. Thank you, Mr. Chairman.
Mr. Beyer, you just indicated some surprise in the announcement made and also the article in the Washington Post this morning. Just as a matter of interest, I guess, what is behind this surprise announcement, in as much as this thing was moving along and, I thought, taking a normal course?
Page 32 PREV PAGE TOP OF DOC Mr. BEYER. Mr. Chairman and Congressman Barrett, if I illustrated some surprise, it really is not warranted. It has been under development for 8 or 10 months. It was just a matter of how it was going to come together.
There are some real huge issues here that DOE has been dealing with. In support of that, I would say they have done a remarkable job of bringing all of this stuff together. The issue of federalism versus State rights is a foundation issue that has always been surfacing on most every element of this thing.
So, I am not surprised. We have known it was going to come out soon. I was just kind of surprised to see it come out today. It was in the making for a long time. Frankly, I am glad to see that it is out so that we can get this stuff on the surface and get going with it.
Mr. BARRETT. The best I understand it, this is to be completed by, what, 2003? Is that the time period?
Mr. BEYER. That is what I understand, yes.
The other thing you might be interested in being from Nebraska, there is as I understand it, and I really have not had a chance to digest this thing. As I understand it, there is a State opt-out provision in the recommendations of the administration.
Mr. BARRETT. There is an opt-out, I believe, but it is prefaced on whether or not consumers would be better served by an alternative policy.
Can you in any way explain that? I sure cannot.
Mr. BEYER. No. I cannot explain that.
There are a lot of things. This was a huge issue, as you know. The States are going to be very interested in it and should; the low cost States in particular. The high cost States are basically on the coasts.
The low cost States are in the middle. Idaho, for example, I think is the lowest cost State. Those folks in Idaho are not going to be too interested in their low cost power going somewhere else. This is going to be a big issue.
Page 33 PREV PAGE TOP OF DOC Mr. BARRETT. Well, as I indicated, my State is one of the lowest averaged costs as well. My constituents are very, very excited about this issue. We have been getting along very well. It is the most unique State in the entire Nation; all public power. It is working very, very well.
Mr. BEYER. Well, let me say that about 20 years ago, in North Dakota where I am from, we tried to get public power district legislation in the State and failed. So, we know Nebraska very well.
Mr. BARRETT. What about the fact that the proposal apparently says that deregulation must yield real benefits to residential and small business customers, ''must yield benefits?'' What are the consequences? Explain this to me, if you can.
Mr. BEYER. I really cannot.
The only thingI have run a rural electric system for 30 years. I can tell you it is a very difficult challenge to maintain a quality, reliable, reasonably priced system in high cost to serve areas, as you know. You are from Nebraska.
When this thing goes to a market-based for profit infrastructure, the large loads are going to be the ones that the alternative suppliers are interested in; the commercial, industrial.
If there is profit there, then that is where they are going to go. They are going to go where the profit is. There is no profit in western Nebraska. There is certainly no profit in a lot of the central States in the western part of the mid-States.
Those are high cost to serve areas. If competition comes at all, I would be very surprised. The fact of the matter is, if I can quote you from the telecommunication infrastructure; the February issue of U.S. News and World Report, outlines in human terms what deregulation may mean to rural areas. It points out that in Arizona alone, 5,000 rural Americans remain involuntarily phoneless.
Page 34 PREV PAGE TOP OF DOC The spokesman for one of the largest for-profit telecommunications companies was quoted as asking, ''Why should we be spending money in expensive high rural areas when we need to upgrade our networks in the cities to compete with our competitors?''
I think that kind of says it all. This much needed capital is going to flow to where the profits are. I think in the long term, the issue of the availability of reasonably priced capital for these high cost to serve areas is going to be a real issue.
You folks have the public power districts in Nebraska. So, if you can maintain that, you are probably going to be OK, but the rest of the country does not have that.
Mr. BARRETT. If we qualify in the opt-out.
Mr. BEYER. If you qualify in the opt-out, yes, sir.
Mr. BARRETT. Thank you.
Thank you, Mr. Chairman.
Mr. COMBEST. Ms. Stabenow.
Ms. STABENOW. Thank you, Mr. Chairman for holding this hearing on a very, very important issue.
In Michigan, we have in my district, rural, urban, and suburban areas. But rural electric cooperatives have been a very important part of electricity for an important part of my constituency.
I am hearing a lot from the agriculture community in my State; a great concern about what deregulation means for the rural area. What I am hearing from you today really is that you share their concerns in that total deregulation is really not what you are talking about, but some kind of a hybrid that has some flexibility State-to-State.
Michigan now is proceeding on deregulation at a State level in some form. You talked earlier, Mr. Beyer, about the safety net in the President's proposal. I wondered if you might describe what that looks like in your mind when we look at some kind of a hybrid, not just across the board national deregulation.
Page 35 PREV PAGE TOP OF DOC Mr. BEYER. Well, thank you.
If you think about the telecommunication legislation deregulating that and where we are now with the FCC promulgating rulemaking, one of the big issues in the rulemaking is dividing up that universal service pot.
That is really the big issue now. In the case of the telecom industry, it is about a $20 billion pool with the majority of it being toll separation where the long distance companies depend upon the wires or the infrastructure to the consumer.
They have to get access to the consumer. They are accessing it by the telephone systems. Local exchange carriers are what they are called. That is a huge issue. That model is not that complicated.
There is another component to it that the National Exchange Carriers Association [NECA] operates. This thing was created by the telecom industry itself. The NECA part of it that I think about has two focuses.
First of all, the high cost to serve and high cost of operation maintenance. Today, the electric cooperatives are 25 percent higher cost to serve per consumer from a capital standpoint.
They are 34 percent higher to operate and maintain. Those two basic bench marks could be used to establish a universal service support mechanism. That is just one idea or one thing that could be tweaked to make this thing work.
I am in full support of that. The electric infrastructure in this country is not that efficient. We are burning coal in our coal plants that is 25 percent efficient. That is not good. It is kind of like burning gasoline.
A gallon of gas is about 20 percent efficient in our automobiles. We drive half the automobiles in the world and use half the gasoline. We are a very inefficient society. There does need some attention in a national energy policy, I believe.
Page 36 PREV PAGE TOP OF DOC The energy demands, on commerce in this country is half a trillion dollars. It is about $500 billion. The electric industry is about $212 trillion; just a little bit less than half. It is a big part of our economy.
We need to pay attention to more efficiencies in the system. The deregulation could help us move towards that. It is, in my judgment, going to need a little tweaking for high cost to serve areas so that we do not end up with energy-haves and energy-have-nots.
Ms. STABENOW. The challenge really, as you indicate, is in the areas like the rural communities where I guess right now I would question is it broken? What are we trying to fix in some of the areas of the country?
I am wondering, Mr. English, if you could speak also from your standpoint of cooperatives. The Universal Service Fund, is there something beyond that, that you would see?
Mr. ENGLISH. I think the Universal Service Fund really takes on two contexts. What we have talked about in the past on universal service has been infrastructure. What does it cost to build wires, polls, and get service out to individuals in very remote areas?
Certainly, that will continue to be costly. With 44 percent of all of those wires and polls in the country being served by electric cooperatives, we are extremely concerned about the upkeep on that and how that is built in.
As I have said, with these kinds of changes, I think it takes on a little different context as well. That gets into this question of how do you address those people who may not be able to afford electric power? It is the affordability issue.
The question of this extending not just in rural America, but into urban America. You can go a few blocks from here, from where this hearing is being held and I can assure you, there is no one going to be pounding on the doors of those people asking to sell them electric power.
Page 37 PREV PAGE TOP OF DOC The question is how do we address those kinds of issues. That was the reason I mentioned it in my opening statement. This comes very, very close to what this committee deals with in the way of food stamps.
Certainly, I think this committee has the experience and the know how to best address those kinds of issues of universal service on both sides of the fence.
Ms. STABENOW. Thank you, Mr. Chairman.
Mr. COMBEST. Mr. Lucas.
Mr. LUCAS. Thank you, Mr. Chairman.
If I could, Glenn, followup on that and comments in your opening statement. There are those out there who it would be said perhaps want, it appears, to leave rural areas out of the competition and let electric cooperatives have the niche of serving the poor, the rural poor. What do you say to that?
Mr. ENGLISH. Well, I think the real issue that we come down to is the question of whether those people deserve service. Now, there is a disagreement within the Congress on that. I know there was when I was here.
We have got some Members who, quite frankly, say, hey, if those folks cannot afford service, if they are not willing to pay higher rates, if they do not want to keep up all of those wires and polls they got there, they ought to move to town. Well, I do not think that sentiment is what most folks on this committee feel like.
I think that is how you have that responsibility now of working through that. I think it has to be addressed. What we have the responsibility for is the fact that we have got an awful lot of consumers out there that own all of these electric cooperatives.
We are privately owned. We are going to respond to those consumers and try to make certain that we meet their particular needs, both in the reliability issue and with regard to the question of other services that they may need to carry out those responsibilities.
Page 38 PREV PAGE TOP OF DOC We are finding in some cases in which, under the State law, there is an effort by some of the big power companies to restrict what these consumer owned entities can do. Now, I know, Mr. Lucas, your philosophical because and you feel very strongly that people should take care of themselves.
That they have got a responsibility to look out for themselves and no one should come in and require them to do something other than take care of their own needs. That they should be able to stand up and take care of themselves.
That is very much what this whole cooperative principle is all about. That is how this whole thing got developed, as you are very familiar.
You have a lot of very independent people out there in rural America who said, hey, if the big power companies are not going to serve us, we will do it ourselves. And they did come together.
They got some help from the Federal Government. That is true. But they principally did it themselves. They own it themselves. They govern it themselves. It is local controlled. It is the whole bit.
Now, what we are seeing take place now in California and in New York City, and it appears that this is gathering some momentum is to use this mechanism, this cooperative mechanism, minus the wires and the polls for electric cooperatives as a way of consumers being able to empower themselves to take over their self reliance.
Let us not fool each other folks. What we are talking about here is eliminating consumer protection laws. These State regulations that have been in place that set the rates, they were put there as a consumer protection law.
We are talking about PUCA. That is a consumer protection law to protect folks against these huge holding companies. That is way back in our history. We are talking about tripping that away.
Page 39 PREV PAGE TOP OF DOC So, what we are seeing now is some folks are saying, hey, we can use this cooperative mechanism as a way of taking care of our own needs. We can use this cooperative mechanism as making sure that we get a fair deal in the market place. Quite frankly, we are eagerly working with groups to do that. We have helped in New York City. We have helped in the State of California in developing those kinds of cooperatives.
It is that kind of self reliance with the changes that are taking place in the States today that we think cooperatives are going to fill a much bigger niche in this kind of environment than what we have even in the past. It is the same principle used the same way.
Mr. LUCAS. A followup question, Glenn, focusing on your old stomping grounds in Oklahoma in and in my territory. Oklahoma has always been considered, I think, pretty much a low cost State in this area.
The State Legislature passed legislation in 1997 to create competition by July of 2002. A lot of folks talk about California and other States. Do you have any thoughts about the legislation that the Oklahoma Legislature has enacted?
Mr. ENGLISH. I think that is a prime example of a State. Oklahoma and electric cooperatives were a big part in developing that in your alma mater, the State Legislature. What they did develop was a plan that fit Oklahoma's needs.
Our electric cooperatives feel very confident that this is going to enable them to better serve those consumers that own electric cooperatives in the State of Oklahoma. That plan is different than California.
It is going to be different than what is done in the Northeast. We just want to make sure that we recognize that Oklahoma is different and other States are different. Certainly, Nebraska is different. Nebraska is going to need the flexibility to be able to devise a system that takes care of Nebraska's needs just as Oklahoma did, just as California did, and just as New York has done.
Page 40 PREV PAGE TOP OF DOC Mr. LUCAS. Thank you, Glenn and thank you, Mr. Chairman.
Mr. COMBEST. Mr. Farr.
Mr. FARR. Thank you, Mr. Chairman.
Welcome back to your old room. When I entered here as the most Freshman Member of this subcommittee, you were sitting in the Chair and I was sitting in the bottom spot. You left. The Republicans took over. Now, I can sit right next to the chairman. Some things for some people have changed.
You talked about being innovative in your testimony. I appreciate your discussion about California. I represent an area that I think is moving in the direction that maybe we have not even discussed here.
I represent an area of my county that has no wires. It is the Big Sur coastal region. So, what people have done is they have essentially done self help by using solar panels and generators. They have television sets on satellite dishes. They have fax machines because they do it by cellular phones.
They have washing machines and dryers. I mean they can pull the current either off the cellular plates or the backup generators. So, they do not depend on anybody. They do not pay any electric rates to anybody.
It reminds me that as we move away, I mean I have heard testimony that in a few years, each house will generate its own electricity. That we really will not need this system of having to be linked up to everybody else through innovation.
It seems if that is possible, then people will start using it because essentially they control it then. I mean you run away from this ability, then how do you charge folks? Probably an analogy is that in California, we have a lot of rural areas that are on septic systems.
What we moved to was a septic maintenance system. They were not hooked up to sewers. So, you could not charge them a sewer cost. What they needed was a professional management of a septic system which folks from the urban areas moving to rural did not know how to do.
Page 41 PREV PAGE TOP OF DOC You are talking a lot about innovation and the ability to use cooperatives to be innovative. I support that. Frankly, I think cooperatives can be greener. We need to be greener. I think cooperatives can be more cost effective. We need to be more cost effective.
Do you really see this innovation with cooperatives being able to play a role in innovation and being able to move towards essentially, if indeed we are going to be generating electricity on the spot or power on the spot, that cooperatives can play that role?
Mr. ENGLISH. Well, there is no question about it.
In fact in electric cooperatives, we have a research at NRECA that has been involved with fuel cells for instance. We have got an awful lot of our members that live in very remote rural areas.
If you look at it just from the pure economics of building a line in some of the most remote areas of this Nation. So, we are developing ways in which you may be able to have a fuel cell that will be able to provide the electric power for those consumers without building those wires from the polls that we have talked about on this infrastructure.
There is a lot of other innovative ways that we are attempting, through the electric cooperatives to make sure that we are able to address a lot of those needs that, in many cases, are very uniquely rural.
Certainly, we think a lot of that innovation will apply to a lot of different kinds of cooperatives. You were mentioning the fact that we do have a lot of consumers in this country who, quite frankly, let's put the cards on the table prefer green power.
They are willing to pay a premium. We have talked about low cost power, but they are willing to pay a premium because of their concern for the environment as to how that power is being produced.
I know we have got a number of our members in the Northeast part of the country, New England. They are creating such. Each one can be different. It is up to those consumers who own it to decide how they want to use it.
Page 42 PREV PAGE TOP OF DOC Mr. FARR. Do you think the cost of that green power, that solar power, that alternative power, and the other types of innovations that are coming out of battery innovations like the electric car and things like that will be used?
I mean, the price is going to come down just like it has with computers. Will we be able to have a affordable sustainable unit in our life time?
Mr. ENGLISH. Well, let me just say that NRECA would not be making these investments unless we thought that it would benefit our consumers. That is what we are in the business of doing.
I am not a scientist. I cannot tell you with each of the technologies that are being examined as to whether it will be considered affordable.
All I know at this particular point is that there are people in this country who are extremely concerned about their environment who are willing to pay a premium for their power. They want to form a cooperative to have the ability to purchase that kind of power. I think they should have that right.
Mr. FARR. If the American consumer wanted to retrofit their house for solar power and some type of generator, and assuming the local building ordinances could do that, can you get off the grid and not have to pay any electric power fee then if you do not use any?
Mr. ENGLISH. It is my understanding and I guess depending on the State law. It depends on the local building codes. If people had such a mechanism or wanted to purchase such a mechanism or develop such a mechanism, there is no requirement that they have to buy power from anyone today.
Mr. FARR. Therein is the future. Thank you.
Mr. COMBEST. Mr. Chambliss.
Mr. CHAMBLISS. Thank you, Mr. Chairman.
Page 43 PREV PAGE TOP OF DOC Gentlemen, I appreciate you all being here today. Mr. English, I cannot help but think as you talk about not screwing this thing up, that when my folks in my district see me on a Monday or a Friday in the district instead of in Washington, they always say what are you doing here?
I say, look, as long as I am here we cannot be screwing things up, up there for you. I agree with you. I hope we do not screw this up.
Mr. ENGLISH. I have got great faith in this committee, Congressman. I do not think this committee would do such a thing.
Mr. CHAMBLISS. I have got real concerns about where this is going. Mr. Chairman, I do appreciate you holding this hearing. I think it is interesting that the Commerce Committee which has primary jurisdiction of this issue has had some 30 hearings, I believe, or maybe in excess of that.
Not one of which has brought forth the issue of what is going to happen to rural America with deregulation. Like Mrs. Clayton, I have got a number of EMCs in my district. I have got about 14 that serve 370,000 consumers.
I represented a cooperative for 25 years. During which time I had the opportunity to learn a lot about the utility industry and at the same time, work very closely with my IOU and my munies, both from a competitive standpoint as well as a sharing standpoint.
Georgia Power Company does serve an awful lot of folks in rural areas. While we are not hearing from them today, Mr. Chairman, I do hope somewhere down the road, we will involve the munies, as well as the IOUs in this process because they do serve quite a bit of rural America also.
We have got a little bit of a unique situation in Georgia in that we do have a territorial bill, Mr. Beyer. We also have an integrated transmission system. That territorial bill has eliminated a lot of those lines being duplicated from a distribution standpoint.
Page 44 PREV PAGE TOP OF DOCITS has pretty well eliminated duplication from a transmission standpoint. We still have some real problems with what is going to happen on deregulation. Thank goodness all three of my power suppliers have the stranded cost problem that brings them all together and we are not fighting.
So, we do have a common issue that has got to be dealt with. You raised a really good point, Mr. English, when you say that this cherry picking issue is serious from the standpoint of another power supplier coming into our State and cherry picking and leaving the residential customers to hold the bag.
It is even more serious from a standpoint of what is it going to do to the rural electric cooperatives and the other GNTs with their stranded cost issue. I do not know what our number is, but we have got several billion dollars' worth of debt out there that the Federal Government is really the shareholder in from the standpoint of rural electric cooperatives.
If we are not very careful in how we handle this issue of stranded cost and the other crucial issues here, the taxpayer is the one that is going to come out and maybe getting the lower utility rate.
We do not want to be in the same position of having of the bail out rural electric cooperatives the same way we had to do the S&L industry. So, I think it is a very, very sensitive area that we are dealing with. I think you folks have got a pretty good handle on where we are.
I think you have been very candid in what you have said here this morning. I appreciate that.
With respect to where we are going to be in rural America down the road with deregulation, Mr. English, I heard you allude a little bit to the fact with regard to cherry picking, that we need to be careful and what not.
I want you to broaden that a little bit. Both of you may want to comment on this. Where do you see is if we go to deregulation along the lines of what is being thought, both from the administration's standpoint, as well as the various bills in Congress?
Page 45 PREV PAGE TOP OF DOC Where are we going to be 10 years from now from a supply standpoint of electric in rural areas? What kind of costs are we looking at when you think about the supply and you think about where these bills may be leading us? Can you broaden your discussion on that a little bit?
Mr. ENGLISH. Let me address a couple of points that you made if I could.
Mr. CHAMBLISS. Sure.
Mr. ENGLISH. One is the stranded cost issue. Certainly, electric cooperatives, as I mentioned, have stranded costs just as investor owns have stranded costs. Just as many in the municipal arena have stranded costs as well.
We all do. There are some very legitimate costs. Investments that were made as the result of what states told us that we should serve in the way of a territory. You are very familiar with that. We developed the power generation based on what those expectations were based on the kind of growth that you think is going to take place so you can meet those kinds of needs.
All of that is a part of the legitimate costs. The other point that you made is not just those electric cooperatives that the Government better look out for in the stranded cost arena.
We are already seeing is the fact that the tax code is a way that the big power companies write off those codes. So, if the electric cooperatives take a loss, sure it may be public and you see it with regard to a loss; the inability to pay a loan that the Government has made.
On the other side of the fence though, what you do not see is through the tax code, many of those costs are written off just as surely. In fact, to really underscore that point is get into the nuclear arena, which I know that you are familiar with in the State of Georgia.
Page 46 PREV PAGE TOP OF DOC When you get in to the nuclear arena, there is not a rural electric cooperative that owns a nuclear power plant. We have got a little bitsy piece of several power plants around this country. We have had some real problems with that recently.
Certainly working with Wally Beyer we are sorting this out. Keep in mind that this is part of a bigger power plant. If the electric cooperatives have some losses with the nuclear power plant, you have got much, much bigger losses taking place with the big power companies, but they write theirs off through the tax code.
Does that affect the bottom line of the Federal Government any different? Absolutely not because basically it means revenue is not flowing in either case. Either you cannot pay your loan or you cannot pay your taxes.
Either way, it comes down the same way. Well, this is a problem. This is a stranded cost. This is something that affects the Government. If you get into the cherry picking issue, you also I think raise the question of what happens with a lot of these loans that we have which power generation was built.
You have lines that were built. You had all of these investments made. In many cases, as the result of the urging of this committee and the Congress, we have also had those electric cooperatives involved in developing the very business that exist out there through the Economic Development Program.
They have come to that area. So, a substantial investment has been made by the Government already. Then if someone reaches in through a change in the laws and is able to pluck out that particular large industry, obviously the costs are still there. Some is going to have to bear that cost. It either is going to be the rate payers who are going to see their rates sky rocket as they attempt to pay for those costs, the investment that was made with that big industry, or you are going to see the Federal Government and the tax payers take a hit because of the fact that they are not able to pay off their loans because the fact is the rates would be totally unreasonable.
Page 47 PREV PAGE TOP OF DOC Those are the two issues that have to be dealt with. How do we come to grips with that. How do we deal with that. Is there some other way in which we can make certain that everyone benefits. That is really the bottom line of what this issue is.
It makes it a lot tougher from a legislature perspective. It would be a lot more fun just to simply come up and say, hey, you States go out here and solve all of these problems. We have done that a time or two.
Believe it or not, when I was in Congress I saw that happen. Well, we will just let the States do it. We will push it off on the states. It is the States' problems. They can solve all of these problems.
We do not know the answer, but let them figure it out, but we have solved the problem on the Federal level, but we have pushed it to the States. This is the same thing that concerns me a great deal with regard to this issue.
This is a very complicated issue. It is a very difficult issue. If you are going to do it right, if you are going to address the fact that we have got a very reliable system. It has got some very low-cost power in this world. Then you are going to have to exercise some real knowledge and great care. You are going to have to do your homework.
You are going to have to work at it. You are going to figure out how do we make sure that these kinds of problems do not take place. How do we make sure that the consumers of this country do not get ripped off?
How do we make sure the tax payers do not get ripped off? All of that stuff needs to be bought out. Quite frankly, I have not seen that kind of effort being put into this discussion by the Congress.
I am hopeful that we will come to grips with that. This committee has a major investment from a responsibility standpoint and from an authorization standpoint historically in the huge infrastructure out there that has been built.
Page 48 PREV PAGE TOP OF DOC There is 44 percent, all of those wires and polls that are out there. Nobody else, no other committee in this Congress has this kind of responsibility. All of that is with the Federal Government through the Department of Agriculture.
It, I think, behooves this committee to look very carefully at what kind of impact all of these changes are going to have.
So, I hope that you will become very involved in this process. The electric cooperatives will be delighted to work with you. I know that the same thing is true of the Department of Agriculture to make sure that everyone is treated fairly in this matter.
Mr. COMBEST. Mr. Goode.
Mr. GOODE. Thank you, Mr. Chairman.
I, too, want to say thanks to you for holding this hearing. I have listened with interest to the comments by Mr. Beyer and Mr. English. I would like to ask Mr. Beyer this.
I read the article in the Washington Post discussed earlier about increasing the cost of electricity for I believe it is called the Public Benefits Fund. Tell me how much that would be on the average home owner on an annual basis, how much that would cost.
Then on the general services user, small business, and then the industrial user; how much is that fund just for the average one?
Mr. BEYER. Mr. Chairman and Congressman, as I read it, just a little bit this morning, it sounds to me like it is one-tenth of a mill on all generators.
Mr. GOODE. It would not be much.
Mr. BEYER. It would not be much on the consumer.
That is as I understand it at this point. This stuff is really in the development stage. Congress is going to have their say in all of this as it progresses along.
Mr. ENGLISH. Because if you do it on a per kilowatt hour basis, the really big users would pay a lot more. There are not too many electrical costs based strictly on a per kilowatt hour basis.
Page 49 PREV PAGE TOP OF DOC Mr. BEYER. If it is imposed on a kilowatt hour basis, it would be an across the board type of thing. The more used, of course, the more you would contribute to it.
Mr. GOODE. You said in response to Ms. Stabenow's question that you got into the safety net for rural areas. I represent a largely rural area. You said that might occur. What circumstances do you think that, that might would be come a reality?
Mr. BEYER. Congressman, I wish I could sit here and say that is going to happen. This is a huge issue that is going to be debated for a long time, I believe. It is a method that Congress could use to support high cost to serve areas.
There are many different ways you can do it. To me, it is just a little tweaking. We are not talking about a budget buster here at all I do not believe. Having not quantified any of this, I preface it by saying that.
That would be, to me, it would be a method of ensuring that in the end there would be some quality, reliable, reasonably priced services all through America; all over.
Mr. GOODE. To both you and Mr. English, if you would both comment. I can tell you a lot of my users, just like the Representative from Georgia, are concerned about what this is going to do to the residential rate payer.
We have a lot of cooperatives in the Fifth Congressional District of Virginia. We have also got the investor-owned utilities; a lot of rural residential customers. I was looking at a letter just a minute ago from a gentleman on one of those companies lines.
He is very concerned about what this is going to do. He is elderly. He is 80 years old. He does not want to be out there shopping around for residential retail service. What can you say to lessen his fears or should I tell him he had better be worried?
Mr. BEYER. Well, Congressman, if I were talking to him, I would tell him that the best thing he could do is get his Congressman involved in this issue.
Page 50 PREV PAGE TOP OF DOC Mr. GOODE. Glenn, do you share that same opinion?
Mr. ENGLISH. I wish I had said that.
I think he has good reason to be concerned. We do not know right now what the legislation is going to look like in any individual State, much less what Congress might do, until we see that detail and see whether or not anyone really has addressed him.
I would just simply point out to him that I think that this breaks a little bit differently than just rural/urban. What it may break is commercial, industrial versus residential, small business.
Mr. GOODE. I think that is really where this thing breaks. You are going to see an awful lot of people in urban areas that are residential folks that are going to have the same kind of problems that people in rural areas do who are residential.
It is mainly the fact that they are not going to be the target of competition or what competition there is may not be that much than we see in telecommunications. We all know how well that has worked.
I mean, can you tell me with regard to AT&T, Sprint, and some of the other providers of long distance service who has got the cheapest rate. Is there any Member sitting up here on this dais that can tell me that? You can tell me who gives the most frequent flyer miles, yet you cannot tell me what the rates are.
Mr. ENGLISH. Well, you are going to see the same thing with regard to electric power, only it is going to be far more complicated for the ordinary residential and small business consumer. I think that is what really goes into this.
Part of the role may be for electric cooperatives to provide in the future is going to be the fact that the consumers are the ones that own it. The consumers are the ones that really run it. This whole business of self reliance, and I think there is a strong feeling for that, not only on the Republican side, but the Democratic side as well. You are empowering people. You are giving them the opportunity.
Page 51 PREV PAGE TOP OF DOC This may be a mechanism in which they can get somebody who has some expertise in this business to tell me straight what is going on here. Where do we get the best deal? How do we combine our purchasing power?
How do we know for sure who is shooting straight with us? How do we in fact make sure that some of these huge entities, and keep in mind we are seeing these mega-mergers taking place in the electric utility industry now.
They are not doing it just because they think they are going to be more efficient. It is all about bucks. Who has got the big bucks is the one who is going to dominate the market place or dominate the region.
If we are big enough, we can squeeze anybody else out because we have got deeper pockets. That is the kind of thing that the ordinary residential, small business consumer, rural, and urban American is going to be fighting against.
Mr. COMBEST. Mr. Pickering.
Mr. PICKERING. Thank you, Mr. Chairman.
I want to thank you for having this hearing today. This is an extremely important subject for my district and for the country. My district is somewhat unique in that I have all components of this debate, registered investor-owned utilities, as well as cooperatives, TVA, public power.
So, we have a little mix of all; primarily a rural district with heavy energy use in our forest products and other manufacturing segments. I also today feel a little bit like a rural customer kind of at the end of the line as a new Member.
Bill Jenkins and I have already worked out a compromise. Arch Manning's youngest son, Eli Manning, we will get him to Ole Miss and they can keep TVA. I did want to followup on some of your comments; particularly on universal service.
I wanted to know or better understand, are you advocating using the analogy or the example of food stamps? Are you advocating direct payments to individuals like a power stamp or electric stamp, or will there be direct payments to the cooperatives and the companies?
Page 52 PREV PAGE TOP OF DOC Mr. ENGLISH. First of all, Mr. Pickering, just to let you know, I started even further at the end of the line than you did. I was right next to the recorder when I came into this committee. You do work your way through it. Do not take heart from that.
Second, no. I think that is an issue that is going to have to be resolved. The thing that really strikes me about it is the fact that these are many of the same people that you deal with, with food stamps on this committee.
I think this committee can play a key role in this entire issue should it choose to assert itself on a lot of these different fronts. You all have the background and the knowledge. These are the folks that you are used to working with. Goodness knows, this committee is very familiar with all the flaws of the Food Stamp Program and all of the problems, and all of the things that do not work about it.
So, I cannot think of anyone who is better equipped to address this. As I mentioned a little earlier, and as the Administrator pointed out, you are really dealing with two issues on universal service.
One is going to be this infrastructure issue and how do we make certain that, that 44 percent of the lines that are out there that are being operated by electric cooperatives, how do you make certain that this stuff continues to operate with the same level of efficiency that it is now?
Then you have got this other issue of affordability and how do we make sure that it is affordable? California has gone at it from the standpoint that every consumer pays a little bit on their electric bill.
That is going to be used, and I am not quite sure, to answer your anticipated question. I am not quote sure how they are going to handle that as far as each of those consumers. If you look at the purchasing power of every one of those consumers, I mean, do you really think that they are going to get the same rate as one of the large aircraft industries or any of those folks that are down there in Silicon Valley, all of the big computer firms?
Page 53 PREV PAGE TOP OF DOC Are they really going to get the same rates as those folks? Absolutely not. The question is, how can you make certain that they have an opportunity to have rates that are in some way comparable. We need to work on that. This is an ideal committee I think to address it.
Mr. PICKERING. You are not taking a particular position on how that universal service will be administered.
Mr. ENGLISH. No.
Mr. PICKERING. Whether it would be to companies or to individuals.
Mr. ENGLISH. Right. I think that is true. There may be a number of innovative ways that we can explore that. That may be a group that you can put together an electric cooperative and block purchase power on their behalf if they wish to participate in that. That may be another way of keeping those costs down.
Mr. PICKERING. As far as jurisdictional issues on stranded costs, should that be a State issue, or should it be Federal, or some combination or both?
Mr. ENGLISH. Well, first of all, I think this committee should have some jurisdiction on that issue as well. I think it is going to have a big impact with regard to RUS loans. It is going to have a big impact on rural America.
Again, the stranded cost issue, as it is being approached right now, is on a State-by-State basis. Obviously you do not have the uniformity. I think that we need to see a strong focus by the Congress on the issue of stranded costs and how people are treated.
I would strongly urge that we keep in mind that we want to deal with the stranded cost issue so that it has the least, the least amount of impact with regard to those rate payers. I would hope that would be a factor in here that would be considered as well.
Mr. PICKERING. Some are proposing for public power and cooperatives an option to opt into competition or some type of flexible approach. Do you support that type of proposal?
Page 54 PREV PAGE TOP OF DOC Mr. ENGLISH. What I support is that each State should have the right to decide for themselves what is the best approach for them to take. For some States, that may work well. Other states it may not.
What I am most concerned about is the whole date certain where the Congress insists that States have got to act whether they are ready to act, whether they find it to be in their best interest or not. I think that is a bad approach.
Mr. PICKERING. To a certain degree, especially for public power and cooperatives, that would take Federal legislation because it is under Federal jurisdictions. So, States can address those utilities that are under their jurisdiction. To provide the option, for example, for TVA to opt into competition, would you support that proposal?
Mr. ENGLISH. Yes. If you are talking about TVA, it is a little bit different. I can understand where you are coming from. For most of our cooperatives that is not the case. It would not affect us in that manner.
Now, we have had some States that have said, well, cooperatives can either participate in this or not. If you do not want to go out and compete, well we will fence you off and you do all of this kind of stuff. That concerns me a good deal.
Mr. PICKERING. Well, I look forward to working with you. My District Director is Jim Huff, the former head of the REA in the Bush administration.
I worked closely with Chris McLane over on the Senate side when we tried not to mess telecommunications up too badly. I do look forward to working with everyone here and coming up with the right flexible approach to this issue.
Mr. ENGLISH. I have a great deal of respect for Mr. Huff. I hope you give him my best.
Mr. PICKERING. Thank you.
Mr. COMBEST. Mr. Jenkins.
Page 55 PREV PAGE TOP OF DOC Mr. JENKINS. Thank you, Mr. Chairman.
Mr. English, you spoke about the potential for a rivalry between industrial customers and residential customers. Unfortunately, is there not also the prospect that we are going to be divided or are we going to be rivals regionally as a result of the efforts of deregulation?
Mr. ENGLISH. I think that is absolutely correct as was pointed out by the Department of Energy. I think that you have got some regions of the country that are definitely looking at the prospects that their rates will go up.
I think the Montana experience is recently the case. So, regionally you are right, competition works both ways.
Mr. JENKINS. I have seen a map that shows that there are 21 States in this union that have a residential kilowatt per hour rate of under 7.5 cents. There are 15 States that have a rate between 7.5 and 9 percent and 14 States that have a rate over 9 percent.
Now, for those of us who live in the areas where we are under the 7.5, I see it as an effort to fix something that as we say in the hills it ain't broke. Do you feel that, that is the case?
Mr. ENGLISH. I think you are absolutely right.
If we were just looking solely at the issue of well, does our State either likely to have lower rates or are they likely to have higher rates.
If you looked at nothing else except that, then you are absolutely right in what you are saying. The fact of the matter is there are a lot of other issues that are kicking up the waters and we have had a lot of pressure from a lot of people.
Mr. JENKINS. I am certainly sympathetic with those areas that have the rates over 9 cents. I see by the map that there are some areas that have rates that go up to 14 cents. Certainly they need some help.
Page 56 PREV PAGE TOP OF DOC Would it not make more sense for us to try to formulate some plan that would help them without hurting the other two categories that are on this map?
Mr. ENGLISH. I think that is what gets into the date certain issue. It is you allow States to determine for themselves as to when they should act, how they should act, what they should come up with.
Those States that may not find it in their best interest to act, you know, I do not know that you really want to shove them into that.
Mr. JENKINS. Right. You and Mr. Chambliss started the discussion about the supply of electrical energy. Let me ask you this. It is my impression that there are no nuclear plants under construction in the United States. Is that true?
Mr. ENGLISH. That is right.
Mr. JENKINS. It is also my impression that there are no coal plants under construction in the United States.
Mr. ENGLISH. That is correct.
Mr. JENKINS. It is also my impression that there are no hydro stations of any magnitude under construction. So, my conclusion is that a problem that is going to face the entire electrical industry one day is the supply problem.
Mr. ENGLISH. That is what I was referring to when I said that competition works both ways. It has been without question a buyer's market because there has been a surplus of electric power recently.
We have seen the been of that of course have been direct. But there are those who are beginning to say that is tightening up now and we are likely to see is that surplus eliminated and then of course then it works the other way.
Mr. JENKINS. And deregulation is going to complicate that entire picture.
Page 57 PREV PAGE TOP OF DOC Mr. ENGLISH. Well, I do not know whether it is going to complicate it or simplify it. It is certainly going to make it, probablyfor the purchaser, it is going to be a disadvantage where up until this point, with a surplus, obviously it works to their advantage.
Mr. JENKINS. If deregulation blooms fully what do you see on the horizon in the way of mergers, both ways, in the electric utility industry?
Mr. ENGLISH. Well, we are already seeing a lot of anticipation with regard to the changes that are taking place in the States and around the country. You see power companies merging at a very unusual rate becoming bigger.
With the elimination as most of the legislation has been proposed has the elimination of the Public Utility Holding Company Act. If you will strike that out, you are going to have a lot of big holding companies that will get in the act as well.
You already have some huge entities that are now reaching beyond our shores and are looking to become international units. You see them advertised. One of the big power companies I know had on their cover of one of their annual reports that said, where does a 900-pound gorilla sit? Anywhere they want to.
What does a 900-pound gorilla want to become. It is an 1,800-pound guerrilla. I think that is the general trend that you are seeing with a lot of big power companies. Certainly with the repeal of PUCA, you are going to see even larger entities that come into play. Obviously, there is a domination. That is going to be a problem.
Mr. JENKINS. Thank you, sir.
Thank you, Mr. Chairman.
Mr. COMBEST. Thank you, Mr. Jenkins.
Mr. SMITH. Mr. Chairman, I would hope that any imposition or any challenge of this restructuring bill that impacts on our Rural Electrification Act of 1936, that we would request jurisdiction to review those provisions.
Page 58 PREV PAGE TOP OF DOC You said, Mr. English, that you thought it was reasonable to request jurisdiction anyway. Maybe it is. No. 1, I prefer the words restructuring to deregulation because I think we have got to end up with much more over sight and regulations than we did in the Telecommunications Act.
If there are two situations that exist that either utility companies are over charging now, then we can reduce the cost through competition. It will allow a reduction in costs to consumers.
If there is not a substantial over charge now, an area that I think concerns you and certainly that concerns me is the fact that large concentrations of utility use are going to have an upper hand in the bidding war that takes place.
So, if you have these huge industries of Ford, General Motors, Chrysler, or other huge corporate utility users that are saying look either give us your rate that might even be lower than you would normally charge, or we are going to go someplace else to give you this most efficient large scale business.
If that is the case and there is not currently an over charge, then that means other utility users are going to have to pay a higher rate. So, my fear is whether it is residential customers that are served by other utility companies now or whether it is customers that are now served by REA by our rural electric cooperatives, that they are going to end up footing the bill for the extra leverage that these big utility users have now in their position at the negotiating table to get lower rate bids. Is that a fair concern?
Mr. ENGLISH. I think that is a very legitimate concern, as I mentioned, if you are talking about a total deregulation, and I do not think that anyone is. So, it is a question then of how much restructuring.
I think you are absolutely right to refer to it as restructuring. That is the correct definition and how is that restructuring carried out?
Page 59 PREV PAGE TOP OF DOC Mr. SMITH. My other concern is that of all of these per kilowatt use in relation to the miles of electric transmission lines, that with the transmission lines that we have been able to build now with lower interest loans or whatever, I am concerned about the maintenance of those lines in a more open competitive market.
We had enough trouble building them in the first place. It seems to me that as you try to pass on the cost of maintaining these lines in relation to the amount of electricity that is used, how are we going to deal with that challenge, either Mr. Beyer or Mr. English, in terms of making sure that we end up being able to maintain these lines, even though the cost of that maintenance in relation to the electricity sold is going to be low compared to other users?
Mr. BEYER. Well, Mr. Chairman and Congressman Smith, you have got your finger on what I think and I believe is going to be a long term problem in maintaining quality, reliable, reasonably priced service in high cost to serve areas in rural America.
In a competitive market, in a profit market, the capital is going to flow to where the profit centers are. Where there are no profit centers, it is going to be much more difficult to maintain access to capital; access at affordable interest cost to capital.
It is going to be an increasing challenge for these systems that are serving in high cost to serve areas to access capital. Today, there is $3 billion of capital investment on an annual basis in the rural electric systems.
The Federal Government is providing only one-third of that capital. We are leveraging with credit support and that type of thing an additional two-thirds. As this thing moves to just a plain wire system, if that is where it is going, there is not going to be any profit there.
The capital is going to start drying up unless there is some Federal policy to make sure that it is maintained.
Page 60 PREV PAGE TOP OF DOC Mr. SMITH. Let me shift questions. Have you seen the administration's detailed proposal and when will that be coming forward? Is it going to be in the form of suggested legislation or just concepts to make it good for everybody?
Mr. BEYER. Well, Congressman, it is out today. In fact, I think there is a press release at the Department of Energy right now, if I remember the timing. It is out today. It is basically a conceptual principle thing. It is not detailed legislation.
Mr. SMITH. That sounds like Social Security.
Thank you, Mr. Chairman.
Mr. COMBEST. Mrs. Emerson.
Mrs. EMERSON. Thank you, Mr. Chairman. Thanks very much for devoting the time today to address this important issue.
I have a 26-county very rural district that depends and enjoys the low cost of energy in our district.
I certainly would not want to do anything to jeopardize the cost to consumers, too. I have a very elderly population, too. Consequently, I am very concerned about any restructuring, or deregulation, or whatever you all want to call it.
My first question, though, I want to address to you, Mr. English, and that is what lessons have we learned from the telecommunications' deregulation that we can use in the whole discussion here today?
Mr. ENGLISH. I think that it is not just telecommunications. I think it goes back 20 years. One of the first votes that I made in Congress was the so-called airline deregulation.
I voted for it. It seemed like a good idea at the time. We had a fellow named Kahn who is an economist with the Carter administration who was telling us how wonderful this thing was going to be and how great it was going to be.
Page 61 PREV PAGE TOP OF DOC Whenever I voted for that change, we had a non-stop flight on Braniff Airlines from Dulles Airport to Tulsa, OK, to Oklahoma City. I used to ride that every weekend as I would go back to my district.
One of the first things that I saw was gone after I cast that vote is I no longer had a non-stop flight to Oklahoma. I had to go through Dallas, or I had to go through Chicago, or I had to go through St. Louis, or I had to go through Atlanta, but nothing went straight to Oklahoma.
Now, ordinarily you would think well, you got less service; right? So, you would expect that the rate would go down since you got less service, but that is not the way it worked.
Instead of the rate going down, I found out the rate went up. I am aware of all of the claims the proponents say, well, gosh it is a lot cheaper to fly today than it was back in 1978. Well, what they did not do is to compare tickets.
That ticket you bought in 1978 was a ticket you could buy at the same rate whether you showed up today or whether you showed up last year. You probably could not buy it a year ago; last week or last month.
The other thing is that if you did not get on that airplane today, that ticket was still good next week, or next month, or whenever you wanted to use it, or you could cash it back in.
Well, you could still buy that ticket today. If you adjust that ticket for inflation, what you find is if you are flying to Oklahoma City, that it cost you a lot more today to fly than it did back in 1978.
I do not know why they did not offer the kind of tickets today under the CAB that they could. They could have. I would still probably be able to fly directly to Oklahoma. Well, the point is that it seemed like a good idea at the time.
Page 62 PREV PAGE TOP OF DOC We probably did not talk about it enough. We probably did not understand the implications there enough. We probably did not get a lot of air line officials in and say, now, what is it that you all are going to do with this thing, if we make these kinds of changes?
It seemed to me looking at 1996, outside of the Congress as well as within the Congress, that we were making some of the same mistakes. I am not sure that the Congress fully understood exactly what was going to happen with regard to the changes they were making.
It seemed like a good idea at the time. Philosophically, we all supported it. Competition was good and that is about all we needed to know about it. But it is not quite that simple. The Universal Service Fund that the Administrator was talking about, Congress turned that responsibility over to the FCC.
It is up to the FCC to figure out what universal service means and how it is going to be dispersed, and how it is going to be collected, and all of this stuff; all of these little detail things.
So, we have we got? We have got a Universal Service Fund that does not work. The FCC does not know what to do with it. They are thrashing this thing around. It is probably going to go on for months, if not years before we ever get anything out of it.
The lesson that I would say is that Congress needs to do their homework. Congress needs to understand what industry intends to do if the adjustments are made in the law. Congress needs to understand what the States are likely to do.
Congress needs to understand that if you are going to develop something like the Universal Service Fund, if you are going to deal with the infrastructure that exist out there now, if you are going to deal with all of those people that are likely to be disadvantaged and left out of the system, you had better dot the I's and cross the T's and write it they way that you want it to be written. Make sure that it works the way you want it to work.
Mrs. EMERSON. Thank you. Besides which, my two teenage daughters, my long distance phone bills have increased dramatically. So, what can I say? I learned my lesson.
Page 63 PREV PAGE TOP OF DOC Mr. Beyer, this is on a totally different subject, but I just want your thoughts about this. The administration has talked a great deal about the issue of global warming and the impact of cut backs in greenhouse gas emissions.
There are lots of studies that say energy costs are going to rise by 50 to 70 percent in some cases in rural America, in my district, which is a very high energy user for lots of reasons, agriculture, mining, aluminum production, forest products. This is a very big concern for us.
Have you all done any kind of an economic analysis of what would happen, particularly to the energy industry, electric utility industry, as far as cutting back greenhouse gas emissions and how much it is going to end up costing us, the consumers, tax payers, rural America?
Mr. BEYER. Mrs. Emerson, we have not, from an agency standpoint. There is a lot of that activity going on within the REC network, for example. There is a lot of it going on at EPA and Energy and that type of thing.
Let me digress here if you will permit me. You are in a State that has a very strong rural electric infrastructure and very well managed, very reasonably priced. They are working hard to prepare themselves for the future of a deregulated environment.
They are just a good system. I just wanted you to know that. That is a real issue for particularly the coal burners, the coal burning power plants obviously. We have not quantified any of that.
We are looking at it. As I understand, the administration's announcement at DOE today, the emissions part of it has been set aside and is not going to be a part of their recommendation in any event.
Mrs. EMERSON. Well, I hope that is true. Although I suspect that the EPA, through the back door, is going to try doing it nonetheless.
Page 64 PREV PAGE TOP OF DOC Mr. ENGLISH. You said it. I did not.
Mrs. EMERSON. I would ask you all to just sort of watch for that because it could in fact have a real significant impact on the whole issue of restructuring and the cost of doing business, not only for the rates for consumers, but also the cost of doing business for our rural electric cooperatives and any other energy producers that we have throughout the United States.
Mr. ENGLISH. Exactly. In this new environment that we are entering into, any cost increase is going to have some adverse affects on the systems, on their loan security, and on their prices to their consumers. There is no question about that. We will monitor that.
Mrs. EMERSON. Well, I appreciate it. Any kind of analysis that you all do in the near future, if you all could get that information to us, I would be grateful.
Mr. ENGLISH. We certainly will.
Mrs. EMERSON. Mr. Chairman, thank you very much.
Mr. COMBEST. Thank you, Mrs. Emerson.
Mr. Beyer, let me ask you this question and get you to comment on it. Recently cooperatives received $1.5 billion in write downs of loans by threatening bankruptcy.
It appears that the cooperatives demanded these write downs, not because they could not repay their debt, but in order to improve their competitive posture. Is that a true statement?
Mr. BEYER. No, Mr. Chairman, it is not a true statement.
It is a true statement that they come in and threatened bankruptcy. But that does not have a big influence on how we treat and work with the situation. Let me say that 3 years ago we had about 15 financially stressed, is a kind word. They were troubled borrowers really.
Page 65 PREV PAGE TOP OF DOC The majority of them had minority interests with investor-owned utilities in nuclear power plants. One of them ended up being a hole in the ground. There was no power plant. It was canceled. The cost just went bananas on the thing.
The investments that we are dealing with, with these financially stressed borrowers date back 15, 20 years. It is not something that just happened. It is something that was laying there for about 10 or 12 years without any attention.
As an example, some of those systems had 14 percent interest rates with the FFB Loan Guaranty Program that we work with, with Treasury. There is just a great amount of that debt that is interest accumulations. They were not allowed to restructure. They were not allowed to reprice their high cost debt, when the interest started to go down in the 1980's.
So, a lot of that is interest accumulation. I am very pleased to tell you today that we are making some progress. We are working actively now with six financially stressed borrowers.
We have four of them that were in bankruptcy; three of them which have a court approved plan at this time. We only have one of them at this time in active bankruptcy. So, we are making some progress.
Our goal is maximum recovery of the taxpayer dollars. That is a principle for us. You may not be surprised or you may be surprised. They come in and talk all kinds of good talk. But we are going to do this as fair and as consistent as we know how to do.
Mr. ENGLISH. Mr. Chairman, could I respond on that as well?
Mr. COMBEST. Sure.
Mr. ENGLISH. This goes back to that issue of these nuclear investments that we were talking about. Nearly every one of these cases, nearly every one is tied to the nuclear power plant.
Nearly every one, the cooperative is a minority owner in that plant in partnership with a big power company investor-owned utility. The investor-owned utilities have in fact been taking care of their losses through the tax code.
Page 66 PREV PAGE TOP OF DOC Since electric cooperatives are not-for-profit, obviously they are in a very, very difficult position with regard to how do they eat those costs. In effect, that is what has happened. If you want to trace all of this back, I suppose you could go back to the 1970's when I first came to Congress.
There was a strong incentive from the U.S. Government to get involved in nuclear power plants. We had, I know and I have seen this in which electric cooperatives who needed additional power generation and went to the Rural Utilities Service back during those days, and were told, well, it does not make any sense to do anything other than go nuclear.
If you remember back, those were the days when we were not even going to need a meter any longer because power was going to be so cheap. I know that our members were told during those days up before Three Mile Island, if you want any additional assistance from the Rural Utilities Service and the Federal Government, then you have got to buy into a nuclear plant and they did.
We all know what happened at Three Mile Island. You and I are very familiar with what happened with the Fuel Use Act and some of the changes made during that time. We were told in those days that you could not use natural gas because they were running out of natural gas. There was not enough natural gas.
Now, we are turning around going completely in a 180 the other direction. What we are seeing her, quite frankly, and the chickens are kind of coming home to roost. I, as a former Member, I was here. I did not vote for a bunch of that stuff. Let me say that.
Mr. COMBEST. We have your record here.
Mr. ENGLISH. Pull that record out.
But the fact of the matter is that the Federal Government made some bad decisions and required a lot of people to make some bad decisions and we are paying the cost.
Mr. COMBEST. Let me take this on to another issue here.
Page 67 PREV PAGE TOP OF DOC Both of you may be able to respond to this or you may need to. Are there areas in the country in which a rural electric cooperative and an investor-owned or a municipal power company provide electric to the same customer and there is an option there for that customer to choose?
Mr. ENGLISH. Mr. Chairman, I am aware, as I said, of a situation. I believe you have that situation in Lubbock in some cases in Texas. That is a very rare thing. Very few State laws would even allow such.
Mr. COMBEST. All right. Let me ask you that in the case where that occurs, are the rates competitive?
Mr. ENGLISH. I would assume, not knowing rates. Keep in mind that as far as electric cooperatives are concerned, the rates for electric cooperatives will be higher in 70 percent of the cases as far as the neighboring investor-owned utility is concerned. It goes back to the same numbers I am talking about. You have 6 consumers versus 35.
Mr. COMBEST. Right. That is where I was going with this. If you had a company that said in a given geographic area, X company provides power for 6 cents, the X rural electric company charges 12 cents. What would your comment be on that?
Mr. ENGLISH. Knowing nothing else about it, my assumption would be that, again, we are talking about an electric cooperative with very little density and an investor-owned with very high density.
You were talking about that 6 versus 35 consumers. That makes all of the difference in the world. The cost of keeping up the infrastructure is much higher obviously.
Most likely, you are going to have two-thirds of all the electric cooperatives's load, more than two-thirds, is residential, small business. On the industrial side it is the flip. Two-thirds are industrial, heavy commercial.
Page 68 PREV PAGE TOP OF DOC Mr. COMBEST. Let me take care of just a slight housekeeping matter here before I pass the time to Mr. Farr.
I believe Mr. Chambliss mentioned that the Commerce Committee had held 30 hearings. So, after today we only 29 more to go.
As was indicated, we do not have jurisdiction over this bill. There were a number of public and private power companies who wished to testify here today. At some point, we may go to another variety of rounds of this.
Our interest initially, and the reason for the witnesses today is because as a part of USDA and the Agriculture Committee, this agency does fall under our jurisdiction. Obviously, it would appear to me to be quite appropriate that the association which falls under that jurisdiction also is here.
The intent of our concern on this committee is not just limited to USDA and to NRECA. It is rural power and the implications that rural power and the delivery of that have on our constituents in rural America as a part of the cost of the infrastructure of living in Rural America.
So, anyone who had any impressions or ideas that there was a slight in this, that is not the case at all. It is the fact that these are our first witnesses. This is the only area we have jurisdiction over.
I agree, Mr. English, there may be some need at some point as this moves forward for this committee. Obviously that is a pay grade above mine for the full committee to exercise some jurisdictional concerns as the implications arise and as the Department of Agriculture is brought into this in terms of the overall.
So, I think that would be very appropriate. So, I would, again, just say to those people who are concerned and who have expressed their concern to their Representatives that they are not here.
Page 69 PREV PAGE TOP OF DOC There are a whole lot of people not here today. That does not take away our interest. We are interested in providing power to rural America.
The first hearing that this committee has had on this subject was going to be with the companies that were established cooperatives to provide that power and the agency of USDA which regulates them. That is as simple as that and as innocent as that.
Mr. ENGLISH. Mr. Chairman, if I might?
Mr. COMBEST. Yes.
Mr. ENGLISH. I think you are absolutely right.
I think the committee may have a far greater interest than even the rural aspect of it which is true and certainly as far RUS is concerned, there is an awful lot of Federal money that is at stake here that the committee has a responsibility for.
I think you are absolutely right in what you are saying. I think that this is going to reach beyond just rural America. It impacts urban America. It is going to have a big impact on another major jurisdiction for this committee. That is namely the food stamp recipients.
Maybe I am partial because of my loyalties to this committee. I have spent enough years here. I really feel that a lot of these folks cry out for hearings that address their particular issue and only this committee, I think, is set up to do that.
I would strongly encourage you to bring in others of public power, investor-owned. I think many of the issues we have laid out here, I do not think there is that much of a difference about that.
Mr. BEYER. Yes. I would agree with that too.
Mr. COMBEST. That is our purpose for the first hearing is to begin to explore where we might, legitimately, without having to go through some procedural fight in the House to determine jurisdiction.
Page 70 PREV PAGE TOP OF DOC Mr. BEYER. Mr. Chairman, if I might add, USDA, we have a $31 billion loan portfolio at risk in this whole process. It is going to depend upon how this thing unfolds as to what the risk is.
We do have a $31 billion loan portfolio. We certainly are paying attention to that. It seems like the Agriculture Committee would be very interested in that.
Mr. COMBEST. It is something that comes of interest to us. Again, under our jurisdiction, we had a number of contacts of people indicating they wanted to come up and argue the fact there should no longer be a program and it should be ended.
That is not the subject of this hearing. That, at any point, is not something we are going to delve into under the question of deregulation. I did want to ensure those that do have a concern from other power providers to rural America that we are very interested in that aspect as well.
Mr. Farr, I think had additional questions.
Mr. FARR. Thank you, Mr. Chairman.
I have a question of Mr. Beyer. I just want to reflect on your comment. I think there is a bigger picture here. Mr. English pointed out in his testimony essentially about the affordability of cost competitiveness of agriculture in America.
I think there is a bigger issue not just to energy costs, but as to transportation costs, as to labor security, and it is also to land preservation. I think that we have never focused on the ability to sustain farms in the future.
From a tax policy, Mr. English pointed out some of that and we have done that with the inheritance taxes last year in giving farms essentially accelerated rates.
I think Congress seriously needs to look at the ability to sustain agriculture in a global competitive environment; not necessarily all with subsidies, but with essentially recognition that you should not have unnecessary burdens that are not in the best interest of the land of the crops that are growing on it.
Page 71 PREV PAGE TOP OF DOC We need to develop in the new era essentially a new ethic about how we are going to approach this from our regulatory standpoint. I appreciate you having this hearing because this is certainly one of those elements.
Mr. Beyer, this committee went through the Freedom to Farm bill. I think what we realized as we went through it and now that we are in it is that we had no safety net.
You indicated that there was a safety net. How strong is this safety going to be? What happens so often in politics and Mr. English pointed it out in the deregulation of the airlines, we did not really think about it and there was no safety net.
There was no way to preserve those rural areas. There are many areas of the United States who relied on a good airline service lost them. All of these little commuter puddle jumpers have sprouted up. It took many years and some of these communities were really at risk during that period. What are we going to do in this area for the administration to guarantee or assure us that there will be that safety net so when the crisis comes, we will know how to manage it rather than just panic?
Mr. BEYER. Well, Congressmen and Mr. Chairman, the reason that we are talking about a safety net in the universal service mechanism is because of the history of some of this deregulation.
It seems to me to be much better to talk about it when you are forming it than after the fact. I did not know that Glenn English voted for airline regulation. I do not know if I like him so well now.
Mr. COMBEST. He who is without sin.
Mr. BEYER. If I have to fly to the Great Plains to North Dakota or South Dakota, really anywhere in the Great Plains, it is a $1,300 or $1,400 tomorrow. My wife and I buy always 14 days in advance, stay of over Saturday night and all of that type thing.
Page 72 PREV PAGE TOP OF DOC That is what deregulation of the airline business does for the industry. There are no profit centers there. So, you end up with one airline. That is just the way it is. I do not think Congress can let this thing lay, frankly.
I think Congress is going to, for 60 years, the Congress has supported infrastructure in rural America. I cannot see that going away frankly. You are exactly right. Quality infrastructure, electric infrastructure, the energy is basic to development.
If you allow energy prices in one State to be twice as much as energy prices in another State, I can tell you having spent half of my life in trying to develop rural America, it is going to have an impact on where the development goes.
The growth and development depends on quality infrastructure, whether it be the electric energy, whether it be the high tech digital telecommunication explosion. That stuff just needs to be there for development purposes.
Mr. FARR. But Government has to play a role in making sure that the path that we go down leads us in the right direction. I mean I have seen where in health issues of cleaning up rural septic systems that we sewer them, and then it becomes too costly for the families that have lived on the land to do it.
So, we urban sprawl. We develop it for real estate purposes and we lose the best agriculture lands. I mean, unintentional consequences where what we thought were in the best interest of society.
It seems to me that we have not focused on whether the road we are going down is going to lead us to the ability to sustain rural America. Rural America is much more than just farming.
It is what attracts people to see this country. It is something that we have that no other country has. It is a part of tourism. It is a part of our history. It is a part of our culture. It is a part of us.
Page 73 PREV PAGE TOP OF DOC We need to make sure that Government policy is going to allow us to preserve rural America. I hope that the administration will come in very strong with those safety nets to allow that to happen.
Mr. BEYER. Let me tell you, Congressman, that we are doing our best as a little old agency. We do not get much attention in Federal Government. I am glad to be here today. This is a wonderful opportunity to talk with the Congress on our views and where this goes, for whatever that means.
This thing is not going to happen very fast. In my judgment, it is a macro issue. We are just pleased to be here. We will do the best we can and provide you with whatever you need to make your judgments.
Mr. COMBEST. Mr. Beyer, I assure you not everybody who has been up here before has been glad to be here. So, we are glad to know you are.
I only have about 14 more pages single spaced of questions that I want to ask. I think we may bring this to a halt here. Let me suggest this. I do not know if we are quite to the point yet, but at some time we may, in the relatively near future, need to begin to look at some specific actions as the deregulation, if a deregulation bill moves forward.
At that point, we are going to have to, I think, try to have some influence over its outcome over the areas that we have concerns. We may need something very specific at that point.
I would encourage both of you, with the areas that you represent, and as well we will be requesting others to help us to feel free to make suggestions or call for comments as you see the movement of the potential impact of it as we actually get down to some final bill at some point, if we do. I think this dialogue needs to be open and it needs to continue.
It certainly needs to involve a variety of different interests. It is critical. It is important. It is not one of those things that we want to wake up and try to fly to Oklahoma City, Mr. English, after we voted for airline deregulation and realize that not only does it no longer go there, it costs more not to get there.
Page 74 PREV PAGE TOP OF DOC What we do not want to do is to wake up into an area that truly does need probably some reform and then all of a sudden, to all of our constituents out there that we are here trying to take care of, recognize the fact that they have no better or less service for more money.
That is not what we want. Balancing that is not always an easy job. We do appreciate the time that you have provided to us this morning.
Mr. ENGLISH. Mr. Chairman, if I might?
Mr. COMBEST. Mr. English.
Mr. ENGLISH. Real quickly, you know, I have paid for my sins over the past 20 years.
Mr. COMBEST. Well, not completely, but you have made a few good installments.
Mr. ENGLISH. I have been on and off a lot of bad flights and eaten a lot of bad food as a result of that.
Mr. COMBEST. Did the food get worse under deregulation?
Mr. ENGLISH. It got worse too, Mr. Chairman. It used to be pretty nice. The food was not bad at all.
Let me, before we shut down, if the chairman would allow me. I do have some very influential people with the rural electric cooperatives here with us and certainly people who guide me and who are in the forefront in their States involved in the whole discussion of restructuring, and my bosses.
I might also say, Mr. Chairman, and that is the statewide managers. They were having a meeting in town this week. They were kind enough to come up and join with me. If we could, I would like to recognize them as well.
Mr. COMBEST. Everyone of whom Mr. English just spoke, please stand up and let us see who you are. We welcome you. Who is keeping the lights on at home with you all up here?
Page 75 PREV PAGE TOP OF DOC We appreciate very much your being here. When Mr. English was chairman of this subcommittee and I was ranking member, Mr. English always got to have the last word, but not anymore. So, thank you all very much for coming. We appreciate your input.
The hearing is adjourned.
[Whereupon, at 11:50 a.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, it is a pleasure to appear before you today to discuss the effects of electric restructuring on rural areas.
Through the Rural Utilities Service and its predecessor, the Rural Electrification Administration, the Department of Agriculture has been directly involved in bringing safe, affordable and reliable electric power to rural areas for more than sixty years. Since the inception of the rural electrification program in 1936, the USDA has made more than $56 billion in loans and loan guarantees. Few actions by the Federal Government have improved the quality of life, created more opportunities for economic development or more fully integrated rural areas into the national economy than the act of helping communities bring power to all corners of this great nation. The Rural Electrification Act literally empowered America.
The success of that 60-year effort is revealed by the fact that nearly all Americans have power and by the fact that so many of us take for granted the availability of power at the flip of a switch. That success, however, does not mean that our job is done. Today, our mission is as important as ever. The fundamental challenges of distance, geography and population density remain. Rural electric infrastructure is simply more expensive to maintain, operate and replace than comparable urban infrastructure and with each passing day rural electric plant and equipment continues to age and becomes obsolete. In this era of change the capital provided by USDA, through RUS, is more needed than ever to upgrade, replace and improve rural electric infrastructure.
Page 76 PREV PAGE TOP OF DOC Demand for our rural electric lending programs remain strong. Over 830 rural electric borrowers, serving 25 million rural Americans, are currently participating in RUS lending programs. The outstanding principle of the RUS electric loan portfolio exceeds $30 billion.
Without the RUS lending programs, rural America would be a very different place. It would be a place of diminished quality of life, expensive electric power and lost economic opportunity.
The Rural Electrification Act, the cooperative movement and bipartisan support for RUS loans have helped conquer the challenges of the past. Most of rural America continues to be sparsely populated and does not attract competition.
The Energy Policy Act of 1992 opened the wholesale power market to competition. At least ten states have passed legislation permitting retail electric competition and at least seven electric restructuring bills are pending before the Congress.
USDA continues to bring the rural perspective to the development of the President's energy agenda. We have worked closely with the Department of Energy and have brought the wisdom, experience and advice of our rural electric borrowers to the table. Our central focus has been maintaining affordable rates for those living in the 80 percent of America's land mass that is rural.
The administration is confident that a properly restructured retail market will benefit consumers in all parts of the nation. Nevertheless, the Administration is mindful that the benefits of competition may not occur in all rural areas of the country. Accordingly, a rural safety net should be established, if necessary, to address any unintended consequences arising from the transition to retail competition. DOE and USDA staff are currently working together on analysis to determine what the likely impact will be of competition on rural areas.
We can achieve balance between competition and affordable service to all Americans. Congress struck that balance when it deregulated the telecommunications industry by including strong provisions to protect and advance universal service in a competitive market place.
Page 77 PREV PAGE TOP OF DOC There are three issues that important to rural areas in moving to competitive, retail market:
(1) Reliability. The reliability and integrity of the electric infrastructure must be ensured. Competition can not be allowed to lower safety or reliability standards. All providers of service must meet high standards of safety and reliability.
(2) Stranded Investment. USDA-RUS borrowers have invested billions in electric generation, transmission, and distribution facilities for over the last sixty years in a regulated, monopolistic industry. Deregulation changes the rules. If provisions are not made to protect existing investments in the deregulated market, there will be both generation facilities and lenders, including USDA, that will have no way to get that stranded investment returned. Failure to provide for the recovery of stranded investment will increase costs to rural consumers because those costs will have to be repaid by someone. Without providing for these existing investments, other lenders, including the Federal Government will be hesitant to make additional investments.
(3) Access to Capital. As the electric utility industry continues to move through this period of change, availability of capital for infrastructure financing will be more important than ever, particularly in high cost to service rural areas.
Just as the electric industry and rural America are changing it is important for government agencies to change with the times. RUS is doing its part to prepare for the new environment. RUS is reforming itself. Last year mortgage and loan security documents were updated for the first time in twenty-five years. Loans are now automated and processing time for loans and security documents have been slashed thanks to computerization. Regulations have been streamlined and are undergoing a new round of review. Mergers are being accommodated to improve economies of scale and opportunities for additional flexibility and leveraging of private capital have been increased. We are also paying very close attention to ways that State and Federal regulatory changes affect loan security. RUS policies and procedures must benefit rather than hinder cooperatives trying to meet changing times.
Page 78 PREV PAGE TOP OF DOC The RUS is also working aggressively to find solutions for the remaining handful of financially troubled generation and transmission borrowers. Policies of the 1970's and 1980's which encouraged investment in expensive nuclear facilities and other large generating investments combined with high interest rates brought financial difficulty to a number of RUS generation and transmission borrowers. While investor-owned utilities were allowed to write-off failed investments in nuclear facilities, RUS borrowers have been required to service this large debt for ten to fifteen years.
I am pleased to report that we have made dramatic, meaningful progress in developing responsible solutions for these financially stressed borrowers and new rules and policies are now in place to minimize future financial difficulties for all borrowers. Today, the RUS is actively working with six troubled borrowers, compared to fifteen three years ago. With the authority granted by Congress, RUS has new tools to facilitate refinancing and will continue to work together to develop long term solutions to enhance loan security and better position rural infrastructure for a new competitive environment.
In conclusion, Mr. Chairman, energy restructuring will create new challenges and opportunities for rural America. I am confident that by paying careful attention to the unique needs of rural markets, the Congress and the Administration can work together to pursue an energy policy which is good for all Americans.
Testimony of Glenn English
Mr. Chairman and members of the committee. I am Glenn English, chief executive officer of the National Rural Electric Cooperative Association, which represents the Nation's network of 1,000 not-for-profit, consumer-owned rural electric systems. These systems provide electric service to more than 30 million Americans in 46 States.
I appreciate the opportunity to appear before the Agriculture Committee to discuss the impacts of electric industry restructuring on residential and small business consumers in rural America. We, all of us, know that the House Commerce Committee has been very active on the issue of electric industry restructuring. To date, more than 20 hearings have been held, including field hearings in big city venues such as Dallas, Atlanta, Richmond and Chicago. During the course of these hearings, the Commerce Committee has examined several aspects of the restructuring issue in urban areas system reliability, technology innovation, environmental concerns, and the potential benefits of retail competition for the large industrial and commercial enterprises.
Page 79 PREV PAGE TOP OF DOC However, the potential impacts of electric industry restructuring on residential consumers, particularly in small communities, has not been the subject of Congressional inquiry. NRECA and the rural electric co-op systems applaud the House Agriculture Committee for making this the first forum to consider such an important subject. Large industrial users of electricitythe ''big dogs''have already been heard from in this debate, and they have made their views known. The ''big dogs'' know that they have the clout to demandand receivelower electric bills in the competitive marketplace. But, electric cooperatives own 47 percent of all the electric lines in America. System reliability for all consumers is important to us. In fact, NRECA operates a voluntary research program that is responsible for several advances in technologies benefiting residential and small users of electricity. Technology innovation benefiting all consumers is important to us. Seeing that the benefits of competition flows to all consumers is important to us.
Residential and small business consumers are skepticaland rightly sothat change from restructuring of the industry will result in any real benefits. A national poll conducted February 17 by Moore Information confirmed, among other things, that a majority of voters believe electric restructuring will only mean higher rates for the ordinary consumer and bigger profits for utilities.
These concerns are well founded. For example, California State Senator Steven Peace, one of the principal authors of the California restructuring legislation admitted that competition is intended to benefit industrial customers, not residential customers. He is quoted in the San Francisco Bay Guardian as saying, ''the idea was not to have a bunch of competitors suddenly flooding the market. We knew there wasn't enough potential savings for the little guyswe just tried to keep them from being harmed.''
As sweeping changes are made to the electric utility industry, electric cooperatives find the simple goal of keeping ''the little guy from harm,'' to be wholly inadequate and unacceptable because it won't work.
Page 80 PREV PAGE TOP OF DOC Electric cooperatives are committed to ensuring that any changes made to the industry brings true benefits to all consumersincluding the residential customers, small businesses, farmers and ranchersthe consumers who constitute our customer/owners.
And just who are the electric cooperatives?
Electric cooperatives are private, independent utility businesses owned by the consumers they serve. As not-for-profit entities, our goal is not to maximize dividends to shareholders in varied and distant locales, but rather to maximize the quality and value of service at the lowest cost to the co-op community of consumer/owners. Let me put this in some perspective. Nationwide, about two-thirds of electric co-op consumers are residential; the reverse is true for the IOUstwo-thirds of their electric loads are commercial and industrial. Second, electric cooperatives serve predominantly rural areasthe most isolated, rugged, difficult to serve areas in the country. Co-ops serve around 40 percent of the rural meters in Texas. Co-ops serve close to 80 percent of the rural meters in Georgia, and in Oklahoma, it is around 75 percent.
That we serve predominately residential consumers in rural areas defines the priorities of electric cooperatives in this debate about restructuring of the electric utility industry. Changes as to how the electric utility industry is regulatedeither at the State or Federal levelmust yield real benefits to residential and small business customers. Americans in small towns and on the farm deserve proof positive that any changes made to the most affordable and dependable electric utility system in the world will benefit them as much as they would benefit Alcoa, U.S. Steel or the Ford Motor Company.
Rural America is at risk as the electric utility industry is fundamentally changed.
More than 60 years ago, this committee held hearings and found that 85 percent of American farms were without electricity or running water. This committee discovered that only 2.3 percent of rural Texas was electrified. It discussed the immense challenges of building an infrastructure that would bring rural America into the twentieth century. The product of this committee's labors was the creation of the Rural Electrification Administration, and the undertaking of perhaps the most successful government program of our time. Sixty years later, rural America is electrified, plugged in to the information age, and ready to compete in the global marketplace.
Page 81 PREV PAGE TOP OF DOC But the job is not done. As America's electric industry teeters on the brink of radical transformation, the gains rural America has achieved in the past 60 years are placed at risk. The House Agriculture Committee must again exercise its jurisdiction by identifying where rural America is most at jeopardy now, and by identifying what needs most to be done, not merely to avert harm's way, but to bring the alleged benefits of competition to all Americans.
The first concern centers on the cost of providing reliable electric service to rural America. The simple fact is that it costs more to serve the farm or rural resident at the end of the line. That is why investor owned utilities were initially unwilling to serve Americans in isolated rural areas. While investor owned utilities have an average of 35 customers per mile, electric cooperatives have an average density of fewer than six consumers per mile. To maintain quality service, cooperatives must invest an average of $1,975 per consumer, compared with an average investor owned utility investment of $1,549 per customer. Finally, electric cooperatives receive far less revenue per mile of line$7,038, than the nearly $60,000 in revenue per mile of line that investor owned utilities receive.
If unfettered retail competition were to be implemented, a very real risk exists that the benefits of competition would simply bypass the high cost, difficult to serve areas. Furthermore, large industrial consumers located in rural areas are likely to be cherry-picked by competitors, increasing the electric rates of families, farmers and small businesses. A study examining the potential impacts of electric industry restructuring in Kentucky, conducted recently by David Freshwater, Ph.D. in agricultural economics at the University of Kentucky and Program Manager for TVA's Rural Studies program, concluded that ''rural areas are more costly to serve, and higher distribution costs may overwhelm any competitive benefits in the form of lower costs for electricity.'' NRECA urges the committee to explore how restructuring may impact residential consumers in rural America, and develop appropriate safeguards to ensure that this class of consumers actually sees benefits from changes to the electric utility industry.
Page 82 PREV PAGE TOP OF DOC Rural America is at risk also because it tends to be more economically disadvantaged than other areas of the country. Nationally, 26 percent of all households earn less than $20,000 per year. Furthermore, families living at or near the poverty line are more likely to live in rural America35 percent of households served by cooperatives have an income of less than $20,000 annually. Families living at the lower end of the wage scale spend a greater percentage of their income on necessities like electricity, and therefore are more likely to feel the hit of even modest increases in electric bills.
This committee has tremendous experience in dealing with the tragedy of poverty in America, and in grappling with the difficulties of administering the food stamp program. And as food is a necessity, so surely is electricity. As this committee knows better than anyone, the food stamp program is not the result of an inadequate supply of food. It is derived from the inability of some Americans to afford food. The affordability of electricity is a question that should be asked before restructuring of the industry, so Congress does not find itself with the problem that electricity supplies are adequate, but some Americans are not courted in the marketplace by electricity suppliers because those Americans are unable to afford the service.
We must take the steps necessary to ensure that changes to the marketplace do not force families to go without heat in the winter, or the elderly without air-conditioning during summer heat waves. Given this committee's expertise in dealing with low income issues on many other fronts, NRECA and the electric cooperatives urge the committee to investigate the effects that changes to the electric industry will have on low income Americans.
Rural Electric Cooperatives are moving forward to meet the challenges of the future.
For more than 60 years, electric cooperatives have stood as the entities through which Congress ''under the leadership and guidance of the House Agriculture Committeehave worked to electrify rural America. Electric cooperatives stand ready now to help deliver the benefits of competition to families and small businesses all across America. Even now, as states move to implement retail competition, many individuals and businesses are discovering that cooperatives effectively and efficiently bring customers together, increase their bargaining power, and deliver real benefits.
Page 83 PREV PAGE TOP OF DOC This past month in California, 11 agricultural cooperatives representing growers and producers, came together and created the California Electric Users Cooperative (CEUC), a federated purchasing cooperative that provides electricity services to 10,000 member cooperatives, who in turn may offer electricity and related services to their membership. Potentially, 40,000 growers in California can be served by and benefit from electric service through cooperatives. In forming an electric cooperative, California farmers are hoping to increase their buying power and lower their electric rates. In New York City, more than 500,000 people in housing cooperatives will begin purchasing electricity from a cooperative formed for that purpose. Neither of these electric cooperatives have the traditional utility structure, with ownership of electric power and distribution facilities. But, both cooperatives are the result of consumers' preference for having control over this important part of their lives. As more states move toward competition at a retail level, electric cooperatives can provide the model by which residential customers, small businesses, farmers and ranchers are able to join together and obtain a better deal for the power that they purchase.
Just as this committee provided the roadmap to electrify America in the 1930's, we are assured this committee possesses the tools to ensure that rural America benefits from the fundamental changes that are taking place in the electric utility industry. These tools include mechanisms to ensure that customers have the right to maintain local control over their utility provider, safeguards to ensure system reliability for rural or urban consumers, and provisions that will work to keep electric rates in America from dramatically increasing. NRECA looks forward to working with the committee on these provisions as Congressional debate on the restructuring issue proceeds.
States should have the freedom to decide at their own pace what changes to the electric industry are in the public interest.
While there is much that Congress should do to ensure that changes to the electric utility industry are in the best interests of the nation, Congress should recognize that one size does not fit all. Allowing states to act first and at their own pace on the issue of retail competition properly recognizes the unique challenges that exist from region to region. What is appropriate restructuring for New Hampshirea high-cost Statewill assuredly not work for Texas or Alabama. What is appropriate for the Pacific Northwest certainly will not fit in the Northeast Corridor. In other words, each state, each region of the country differs in its electric infrastructure and the practices, policies and politics that have caused that infrastructure to evolve.
Page 84 PREV PAGE TOP OF DOC States have a tremendous amount at stake in this debate. Just as retail competition may lower rates for families in the Northeastern United States, it has the potential to raise rates for families in other areas of the United States. For example, an August 1997 study by the Department of Energy's Energy Information Administration identified the Pacific Northwest and the Midwest as two regions of the country in which competitive prices may be higher than regulated prices. Another study by Legg Mason, Inc.a financial services institution based in Baltimore, MDconcluded that Idaho has nothing to gain, and will likely see rates increase if retail competition is in place.
The fact that retail competition has dramatically different consequences in each State should stand as a clear signal that a Federal, date-certain mandate is unwarranted. Congress should not force State legislatures to enact electric utility restructuring by a specific date. Just as California has had the freedom and flexibility to act as it sees fit and set its own timetables for retail competition, Texas and Oregon deserve the right to self-determination on the matter. Electric cooperatives are eager to work at a State level on measures that will promote true competition and benefit all classes of customers. Cooperatives participated in and supported legislation to move toward retail competition in Pennsylvania, Oklahoma, and Montana, and we will be constructively engaged as other states debate and act on restructuring measures. We are also eager to work with the Congress on those issues that are appropriately dealt with at a Federal level.
Proponents of retail choice in the electric industry maintain that it will mean lower rates for all consumers. Before Congress acts, let us be certain that is a promise that can be delivered. Similar promises in the cable television and telecommunications industries have failed to materialize for many residential customers. If Congress acts, it should ensure that the promise of lower prices and reliable service is a universal promise to all Americans, no matter where they live.
Page 85 PREV PAGE TOP OF DOC At this time, while electric cooperatives support particular elements of many legislative proposals being debated by Congress, we have yet to see any one piece of legislation that strikes the appropriate balance between what must be left to the discretion of the states, and what must be addressed in Congress.
We are encouraged by the prospect of this committee becoming actively involved in the debate. Americans need a strong advocate willing to insist that the benefits of change be spread equitably among all classes of customers.
I want to thank you, Mr. Chairman, and members of the committee, for beginning this dialogue on a very important subject. On behalf of electric consumers throughout the nation, let me thank the committee for its willingness to deal with this topic so thoughtfully.
"The Official Committee record contains additional material here."