SPEAKERS CONTENTS INSERTS Tables
Page 1 TOP OF DOCTHE APPLICATION OF THE ANTITRUST LAWS TO THE TENNESSEE VALLEY AUTHORITY AND THE FEDERAL POWER MARKETING ADMINISTRATIONS
WEDNESDAY, OCTOBER 22, 1997
House of Representatives,
Committee on the Judiciary,
The committee met, pursuant to notice, at 10:00 a.m., in room 2141, Rayburn House Office Building, Hon. Henry J. Hyde (chairman of the committee) presiding.
Present: Representatives Henry J. Hyde, F. James Sensenbrenner, Bill McCollum, George Gekas, Charles Canady, Bob Inglis, Bob Goodlatte, Ed Bryant, Steve Chabot, Bill Jenkins, Asa Hutchinson, Ed Pease, Christopher Cannon, John Conyers, Barney Frank, Rick Boucher, Martin Meehan, and William Delahunt.
Also present: Tom Mooney, general counsel and chief of staff; Joseph Gibson, chief antitrust counsel; Julian Epstein, minority staff director; Perry Apelbaum, minority chief counsel; Annelie Weber, office manager; and Shawn Friesen, staff assistant.
OPENING STATEMENT OF CHAIRMAN HYDE
Mr. HYDE [presiding]. The committee will come to order.
Page 2 PREV PAGE TOP OF DOC Today the committee holds an oversight hearing on the application of the antitrust laws to the Tennessee Valley Authority and the federal power marketing administrations. On June 4, we held an oversight hearing on the broader topic of antitrust aspects of electricity deregulation.
Through both of these hearings the committee continues to contribute to the overall debate on electricity deregulation in those areas over which we have jurisdiction. As the debate goes forward we will continue to work closely with the Commerce Committee and other committees of jurisdiction to produce an electricity deregulation bill that benefits all concerned. Although today's topic is somewhat academic, these federal entities supply much of the electricity in the areas in which they operate, and for that reason the issue is an important one within the overall debate about electricity deregulation.
Our hearing today will look primarily to the future. The question that we want to examine is whether, in the coming deregulated world, those entities should keep the antitrust immunity that they currently enjoy. I do not have any particular position on this question, but it is one that must be debated and resolved as deregulation efforts move forward. The answer depends at least in part on how these agencies are restructured in any deregulation legislation.
Having said that we look to the future today, let me also say several of our witnesses have been involved in various disputes with the federal entities that we will be considering. Although we will not re-litigate those disputes today, I do want to hear what these witnesses have to say about the past disputes, because that testimony can inform our policy judgments about the future.
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I do appreciate all of the witnesses who have come today. You've come literally from the four corners of the Nation, and we look forward to your testimony. Mr. Boucher has a statement.
[The prepared statement of Chairman Hyde follows:]
PREPARED STATEMENT OF HENRY J. HYDE, A MEMBER OF CONGRESS FOR THE STATE OF ILLINOIS, AND CHAIRMAN OF THE COMMITTEE ON THE JUDICIARY
Today the Committee holds an oversight hearing on ''The Application of the Antitrust Laws to the Tennessee Valley Authority and the Federal Power Marketing Administrations.'' On June 4, we held an oversight hearing on the broader topic of ''Antitrust Aspects of Electricity Deregulation.'' Through both of these hearings, the Committee continues to contribute to the overall debate on electricity in those areas over which we have jurisdiction. As the debate goes forward, we will continue to work closely with the Commerce Committee and other committees of jurisdiction to produce an electricity deregulation bill that benefits all concerned.
Although today's topic is somewhat academic, these federal entities supply much of the electricity in the areas where they operate. For that reason, this issue is an important one within the overall debate about electricity deregulation.
Our hearing today will look primarily to the future. The question that we want to examine is whether, in the coming deregulated world, these entities should keep the antitrust immunity that they currently enjoy. I do not have any particular position on this question, but it is one that must be debated and resolved as deregulation efforts move forward. The answer depends at least in part on how these agencies are restructured in any deregulation legislation.
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Having said that we look to the future today, let me also say that several of our witnesses have been involved in various disputes with the federal entities that we will be considering. Although we will not relitigate those disputes today, I do want to hear what these witnesses have to say about the past disputes because that testimony can inform our policy judgments about the future.
I appreciate all of the witnesses who have come today. You have come literally from the four corners of the nation, and we look forward to your testimony.
Mr. BOUCHER. Thank you very much, Mr. Chairman. I want to commend you for convening today's hearing, and I suppose I should ask if my friend and colleague, the gentleman from Massachusetts, would care to make a statement, since he outranks me in seniority, and according to proper procedure he should go first.
Mr. FRANK. Well, the chairmanI should have told youhad checked with me. I have an interest here because the gentleman of Virginia called it to my attention. He's the one who described to me a situation that requires us, I think, to do some oversight. So I'm here really at his initiative, and I would be ready to defer to him because he's taking a lead for us on this.
Mr. BOUCHER. Thank you very much, Mr. Frank. And thank you, Mr. Chairman, for convening the hearing today on what I think is a very timely subject, as this committee begins its consideration of the extent to which the federal antitrust laws ought to apply to the Tennessee Valley Authority, and to the public power marketing agencies.
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Mr. Chairman, I would suggest a very simple proposition; and that is, that if a publicly-owned utility is in any manner in competition with private sector power suppliers, the public entity should be required to live by the same antitrust requirements that apply to the private entity with which it competes. And I would encourage this committee to begin the process of enacting that very simple and straightforward assurance of fair and equal treatment for all participants in the power market.
My interest in the subject, as Mr. Frank suggested, was stimulated by the treatment that one of my constituent communities the City of Bristol, Virginia received from the Tennessee Valley Authority. At the time that the City of Bristol sought to use the new privileges that we conferred 1992 in the Energy Policy Act, in order to seek competitive bids for the wholesale purchase of electricity, and eventually to leave the Tennessee Valley Authority system. The City of Bristol did in fact negotiate a contract with another power supplier, as a result of which the city will save approximately $70 million over a 7-year period.
Instead of gracefully acknowledging the determination of its customer relationship with the City of Bristol, the Tennessee Valley Authority then engaged in a pattern of conduct, which the antitrust laws are designed to prohibit on the part of utilities to which they are subject. And I'll cite just a few examples.
The Tennessee Valley Authority first disparaged its competition by sending correspondence to the mayor of the City of Bristol and to selected industrial customers of the city, predicting that there would be blackouts if the city entered into a contract with a power supplier other than the TVA. These were scare tactics with absolutely no basis and fact, and arguably would violate the provisions of the Federal Trade Commission Act, which prohibits unfair competition, including false and misleading statements which disparage competitors. But of course, the TVA is not subject to the Federal Trade Commission Act.
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TVA then engaged in conduct which would probably be found to be predatory pricing, as defined and prohibited by the Sherman Act, by offering to sell TVA power to Bristol's largest customers for 2 percent less than whatever the price the City of Bristol could offer, based upon the cheaper power that it would soon be obtaining from the Cinergy Corporation, the new supplier of power to the City of Bristol.
It would seem that since TVA set no floor on the price that was contained within that offer, and was prepared to go as low as necessary in order to offer a price 2 percent less than whatever the City of Bristol could provide, that at some point if that offer was accepted, TVA would be losing money on the transaction. And since the transaction was clearly for the purpose of driving a competitor from the market, that in my humble opinion would be predatory pricing. And if TVA were subject to the Sherman Act, that kind of conduct would have been prohibited.
Next, the Tennessee Valley Authority pursued the City of Bristol for alleged stranded investments, totalling $54.1 million, even though the TVA had admitted that it has no facilities dedicated just to providing electricity service to the City of Bristol; and even though the TVA had more than a decade of notice that the City of Bristol would be searching for power from other suppliers. Surely within the course of that decade could have found some investment within its system that it could have avoided making if it were truly concerned about stranded costs.
Viewed in that light, I think it's very clear, Mr. Chairman, that the stranded investment claim is without merit, and has been made only for its intimidation value with respect to other TVA power distributors.
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Bristol was the first distributor to leave the system, and the message that TVA through this claim is sending is very simple; that if any other suppliers ofdistributors of TVA powershould exercise their rights and buy cheaper power from a TVA competitor, then the same kind of claim would be made against them, and their favorite customers would be cherry-picked by TVA, the same as the City of Bristol's customers were. And I would think that this kind of intimidation would constitute a restraint of trade, and clearly be prohibited by the antitrust laws if only TVA were subject to them.
So, Mr. Chairman, I would suggest that the proper congressional response is to say that the conduct exhibited by TVA, which would not be tolerated by private sector companies, will not be tolerated by a public sector entity either. The congressional remedy is to make TVA and the other pubic power entities subject to the antitrust laws.
Mr. Chairman, I thank you for convening this hearing and for receiving these comments.
Mr. HYDE. Thank you very much.
Are there any other opening statements? Mr. Meehan?
Mr. MEEHAN. Thank you, Mr. Chairman. And I too would like to congratulate you, and thank you for having this oversight hearing.
Mr. Chairman, electric utilities are this country's largest industry. They have assets in excess of $600 billion and annual revenues of about $200 billion. There are thousands of power plants and hundreds of thousands of miles of transition lines. For almost three generations utilities have had guaranteed universal access to power, in exchange for reasonable, government sanctioned returns on their investment.
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Now most utilities have developed into integrated monopolies, generating, transmitting, as well as distributing electricity to customers in their exclusive service areas. In the past 10 years however, technological change and cheaper fuel prices have created substantial pressure to open power markets to competition.
State and federal regulators, following the example of telecommunication deregulation, are now breaking up electric monopolies, allowing consumers to purchase power from an array of competitors. Proponents of competition speak of the numerous benefits; lower prices, improved innovations and inefficiencies, and better service.
When New Hampshire, for example, began its pilot program in the spring of 1996, competing power companies lowered retail rates by up to 20 percent to consumers. In the absence of federal legislation, Mr. Chairman, state legislators and regulators have moved forward on energy deregulation. Competition is now a fact of life in this industry. Utilities now aggressively market their power. Advertisements on television, for electricity, are now a matter of course. Under competition, many utilities that previously enjoy a virtual monopoly status must now, for the first time, worry about federal antitrust laws, and how these laws restraint anti-competitive behavior.
Federal utilities, such as the Tennessee Valley Authority and the Power Marketing Administrations, Mr. Chairman, need not worry about violating these federal antitrust laws, because they are federal instruments. But, as I believe that the testimony today will make clear, TVA and the PMAs are clearly engaged in competition with their private counterparts in the electricity market.
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As the General Accounting Office has recently concluded, TVA and PMAs enjoy a host of competitive advantages in the electricity market. They generally do not pay taxes. PMAs are exempt from many of the environmental laws. And PMAs enjoy access to below-market rate financing from the Federal Government.
Today's hearing, I believe, will cover perhaps the greatest competitive advantage enjoyed by federal utilities, an exemption from federal antitrust laws. By engaging in predatory pricing and tying schemes, TVA and the PMAs have undoubtedly distorted a free and open electricity marketplace. These are some of our nation's, Mr. Chairman, largest utilities, supplying some 25 percent of consumers with power.
Mr. Chairman, I look forward to today's testimony and to working with you to address the application of federal antitrust laws to TVA and the PMAs. If consumers are to realize the benefits of a competitive electricity market place, particularly at lower costs, I don't believe that we can have significant players, like TVA and the PMAs, engaging in clearly anti-competitive behavior.
With that, Mr. Chairman, I look forward to the testimony. Again, thank you for this oversight hearing.
Mr. HYDE. I thank the gentleman.
Mr. McCollum, do you have a statement?
Page 10 PREV PAGE TOP OF DOC Mr. MCCOLLUM. No.
Mr. HYDE. Mr. Gekas.
Mr. GEKAS. No, I do not.
Mr. HYDE. Mr. Bryant of Tennessee.
Mr. BRYANT. Thank you, Mr. Chairman. I want to join in and express my appreciation to the chairman for holding these very important hearings, as we begin to move down that road toward possible, and I assume fairly probable, deregulation of this particular industry.
I respect my colleagues on the other side. Mr. Boucher and I go back since I've been here in Congress, and I follow his lead in many cases. Telecommunications is an area that certainly he is an expert on, and I understand his situation with a constituency community.
However, there are two sides, at least, to this issue involving TVA. Obviously, I'm from the State of Tennessee, and have been a beneficiary, as well as the folks who came before me in Tennessee, of this situation that came about during the New Deal. TVA has been responsible in large part for the development of not only Tennessee, but the entire Tennessee Valley region.
And again, I would emphasize that there are definitely two sides to this issue. When TVA was created, it was created for a purpose. It's a governmental entity, and as such has been held in the courts not to be subject to the antitrust laws. And there's a reason for that.
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Along with its creation there were limitations placed on TVA, among which are the ability to go out and have a customer base beyond the TVA region. There is a fence built around TVA where they cannot go out and compete outside of that area.
Also TVA has been burdened with additional responsibilities over what private power companies do, such as the area of flood control. They manage recreational areas. One in particular that's not just one for Tennessee, but it serves the entire United States for recreation purposes, is Land Between the Lakes. They're also into economic development. Again, things that Congress has assigned to them as responsibilities, which are typically given to the private sector to do. It's a not-for-profit corporation. It does not pay taxes like other not-for-profit entities do.
But I simply say this in defense of the TVA. I certainly look forward again to this. As we begin to look at issues like antitrust, I hope we begin to look at other issues, such as removing the fences and boundaries, and perhaps some of the other responsibilities that Congress has placed on TVA. If we are going to have competition, as the saying goes up here in Washington so frequently, I think we all want a level playing field. And today's hearing is perhaps a good first step toward that direction, and I thank the Chair.
Mr. HYDE. Thank you, Mr. Bryant. We're so fond of members from Tennessee, that we have another one: Mr. Bill Jenkins of Tennessee.
Do you have an opening statement?
Page 12 PREV PAGE TOP OF DOC Mr. JENKINS. Thank you, Mr. Chairman. I did not intend to make an opening statement, but in other opening statements there have been statements made that I hope these witnesses will clarify here today. I spentI've lived my entire life in the State of Tennessee.
I spent some time on the TVA Board of Directors, and when I hear statements made; that TVA does not pay taxes; that TVA is exempt from environmental laws; that TVA enjoys below-market borrowing from federal agencies, I feel that those are statements that need to be clarified, because those statements are not true. And I hope that these witnesses will today clarify those statements. We have come here to hear the witnesses. I'm not sure exactly where those statements fit into the antitrust picture that we are here really to consider. But I do appreciate your having this hearing. I look forward to hearing all the witnesses, and I've looked at the witness list. You have some fine witnesses here, and that's all I have to say, Mr. Chairman. Thank you.
Mr. HYDE. And thank you, Mr. Jenkins.
Mr. Hutchinson of Arkansas.
Mr. HUTCHINSON. In order to save time, I will refrain from any opening statement, and I thank the chair for holding this hearing.
Mr. HYDE. I thank the gentleman for his refraining.
Mr. Pease, the gentleman from Indiana.
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Mr. PEASE. I thank you, Mr. Chairman. I have no opening statement. I do look forward to the testimony.
Mr. HYDE. Thank you, sir.
Mr. CANNON. Like my colleagues, I also wish to save time, and get on with the hearing. Thank you, Mr. Chairman.
Mr. HYDE. Thank you one and all.
Our first panel consists of witnesses who represent the government entities that we're examining today. On behalf of the Tennessee Valley Authority we have its general counsel, Mr. Ed Christenbury.
Mr. Christenbury is a graduate of the University of Tennessee and its law school. Before coming to the TVA, he spent 11 years with the Department of Justice. He was an assistant general counsel at the Nuclear Regulatory Commission for 7 years after that. He became general counsel of the TVA in 1987 and has served in that position since then.
Representing the federal power marketing administrations, we have Mr. Douglas Smith. The power marketing administrations are under the supervision of the Department of Energy, and Mr. Smith is the Department's deputy general counsel for energy policy. Mr. Smith is a graduate of the Massachusetts Institute of Technology and the Yale Law School. Before coming to the Department, he clerked for Judge Walter Stapleton of the United States Court of Appeals for the Third Circuit. He spent 7 years with the Washington office of the law firm of Powell, Goldstein, Frazer & Murphy, working on energy and environmental issues. He joined the Department in 1994, where he has worked on a variety of energy issues in the Office of General Counsel.
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We welcome both of you, and look forward to your testimony. And I would request, if possible, that you hold your general statement to about 5 minutes. Your full statement will be incorporated into the record, and questions will be asked of you, and you can have an opportunity to amplify. But, I don't want to hold you to that. If you have something that needs to be said, I'll leave it to your good judgment.
STATEMENT OF EDWARD S. CHRISTENBURY, GENERAL COUNSEL, TENNESSEE VALLEY AUTHORITY
Mr. CHRISTENBURY. Thank you, Mr. Chairman.
Members of the Committee, I appreciate the opportunity to be here today to address the antitrust implications as they relate to TVA. Just by way of background, as the committee is aware, TVA is a wholly-owned government corporation; has responsibilities for navigation and flood control on the 1,000 mile Tennessee Valley river system.
Mr. DELAHUNT. Mr. Chairman, could you ask the witness to move the microphone closer to him.
Thank you, sir.
Mr. CHRISTENBURY. Is this better?
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Mr. Chairman, in addition to our navigation and flood control responsibilities, TVA is of course one of the largest electric power producers in the country. We serve some 8 million customers in parts of 7 states in the southeast. We have 17,000 miles of transmission line, and we serve our power through 160 municipal and cooperative distributors.
As to the antitrust issue which the committee is considering today, there is not expressed antitrust exemption for TVA, either in the TVA Act or in any other statute. TVA rather is treated as any other government agency, in that the courts have said that when TVA is performing the statutory mandate which Congress has told it to do and is complying with the limitations and the restraints that Congress has placed on it, then it is exempt from the antitrust laws. This is the standard which the courts have generally applied to other government agencies as well.
As to what TVA's antitrust role should be in a restructured or a deregulated environment, in my own view, I think it is probably premature for the committee to seek to resolve that issue at this time. What I would suggest though is possibly not different from what some members of the committee have suggested today; that if at the end of the day, if when the deregulation of the electric utility industry is complete, if the changes in TVA, that some have predicted have occurredif at the end of that process TVA looks just like every other electric utility out there, whether in Birmingham or Boston, then in our view, it should be subject to the same antitrust laws as other utilities.
On the other hand, if during the restructuring process Congress gives to TVA a special role, a unique role, or a limited role, then I think that in performing that role Congress should consider whetherfollowing the same logic the courts have provided in the past, whether TVA should be exempt from the antitrust laws.
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What I would suggest to the committee today is that the definitive answer to your question will really turn on how the restructuring process proceeds, and what TVA's role is that the Congress crafts for it at the end of the process.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Christenbury follows:]
PREPARED STATEMENT OF EDWARD S. CHRISTENBURY, GENERAL COUNSEL, TENNESSEE VALLEY AUTHORITY
I am Edward S. Christenbury, General Counsel of the Tennessee Valley Authority. TVA is pleased to participate in these hearings to examine antitrust aspects of deregulating the electric power industry. This is an important issue, and I wish you well in this effort.
The antitrust laws are designed to promote competition in the private sector. TVA and other Federal agencies were exempted by Congress from the antitrust laws because they are not private businesses, but were created by statutes to fulfill important public functions.
TVA is a governmental agency charged by Congress to carry out specific responsibilities which include providing an ample supply of electric power at the lowest feasible rates to its customers. Congress included clear directives to TVA as to its operations to ensure that the public interest was served. Congress also imposed significant restrictions on TVA, including placing a geographic ''fence'' around TVA which prevented TVA from competing with other utility systems for customers outside that designated area.
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In recent years, strict regulatory oversight of the electric industry has been replaced with more market based rules, and the electric power industry is undergoing significant restructuring and deregulation.
It would be counterproductive to determine now whether the antitrust laws should be made applicable to TVA. Congress may change the TVA Act in light of the restructuring of the private electric sector. If, when these legislative restructuring activities are complete, TVA resembles the rest of the electric industry and is able to compete freely without its present statutory restrictions, then Congress might well decide that TVA should be subject to the same antitrust restrictions as the rest of the industry. However, to the extent TVA retains a unique governmental role and the restrictions that come with that status, making it distinct from others in the industry, Congress might choose to leave TVA's exemption intact. Thus, TVA's antitrust status after deregulation should, we believe, depend on what the future holds for the electric industry and for TVA after deregulationand that, of course, is an open question.
Good morning, Mr. Chairman and members of the Committee.
I am Edward S. Christenbury, General Counsel of the Tennessee Valley Authority.
TVA is pleased to participate in these hearings to examine antitrust aspects of deregulating the electric power industry. This is an important issue, and I wish you well in this effort. I have a brief prepared statement which I would like to present to the Committee.
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I will not attempt to address all of the specific provisions and requirements of the various antitrust laws, as that was ably presented in testimony before this Committee this past June by Robert Pitofsky, Chairman of the Federal Trade Commission (FTC), and Douglas Melamed, a Deputy Assistant Attorney General with the Department of Justice. I will discuss briefly, however, the primary antitrustlaw the Sherman Actwhich I believe is particularly pertinent to the matters being considered here by the Committee.
The Sherman Act, which predates TVA, was designed ''to be a comprehensive charter of economic liberty aimed at preserving free and unfettered competition,'' as the Supreme Court explained in the often-cited case of Northern Pac. Ry. v. United States (356 U.S. 1, 4 (1958)). The antitrust laws prohibit collusive conduct that restrains trade, such as price-fixing and bid-rigging, as well as monopolization and attempted monopolization. They rest on the premise that ''unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress'' (Northern Pac. Ry., 356 U.S. at 4). If you were to summarize these purposes, you could say that the main evil at which the antitrust laws are directed is the concentration of economic power in the hands of those who serve only their own profit-making interests.
The Federal Government and its agencies and instrumentalities were exempted from these laws by Congress because they are not private businesses, but were created by law to perform important public functions. Congress and the courts have decided that valid Government action is not the type of conduct at which the antitrust laws are directed. Indeed, it would be inconsistent for Congress to direct Federal agencies to undertake various activities in the public interest and at the same time to prohibit those activities under the Sherman Act. Hence, Federal instrumentalities, including TVA, are immune from the antitrust laws when they are performing their statutory purpose.
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Although electric utilities generally are not exempt from these laws, the antitrust laws have had little actual impact in the electric industry as it has developed through the years. Indeed, historically, the principle that competition is best has had a minimal place among electric utilities. Electric power companies were considered to be natural monopolies. By the 1930s, almost half of the country's electric energy was generated by only three holding company systems. Electric rates were high for those who could purchase power in cities and towns, and electricity was simply unavailable in many rural areas. To improve these conditions, the Federal and State governments chose to impose extensive regulation of electric power. The States took control of prices and services. They defined geographical boundaries of utilities' retail service areas, so that utilities not only had to supply all customers within their particular service areas, but also were insulated from competition from others for those customers. States then regulated the prices at which power was sold.
The Federal Government, through the Federal Energy Regulatory Commission (FERC), monitored wholesale power sales and prices under Title II of the Federal Power Act. Congress also passed the Public Utility Holding Company Act, which dismantled most of the large holding companies. Regulation was an effective way to protect the public interest in paying prices reasonably linked to the cost of service and having universal reliable service.
Congress also sought to promote alternatives to private power. The Rural Electrification Act helped finance new entrants to the utility marketthe rural electric cooperatives. In 1933, Congress created TVA after much debate about the proper role of the Government as a power producer. TVA's activities as a power producer, as well as its responsibilities for managing the resources of the Tennessee Valley region, were very clearly defined by Congress in the TVA Act. It was not given unbridled authority. To the contrary, Congress included specific directives to TVA as to its operations to ensure that the public interest was served. Congress directed TVA to sell electric power at rates as low as feasible, with the intention that TVA's rates would be a ''yardstick'' against which the rates of other utilities would be measured. Congress instructed TVA to give preference in electricity sales to municipalities and cooperatives, and authorized TVA to regulate the resale rates of those who distributed TVA power to consumers. It further permitted TVA to serve industrial customers directly in order to generate revenues to help reduce electric rates for all of TVA's customers. TVA was not organized to make a profit for shareholders, but rather to carry out a different kind of public purposeto provide an ample supply of electric power, even to those remote areas which others would not serve, and to do so at the lowest feasible rates.
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Over the years, TVA has carried out the responsibilities entrusted to it by Congressbringing electricity where none had been before, serving all homes and businesses within reach of its transmission lines, and doing so while complying fully with the restrictions placed upon it by the Congress.
Competition by TVA helped to lower the price of electric power substantially. Through the years TVA power customers have enjoyed some of the lowest-priced power in the Nation. This is due not only to the geographic advantages it enjoys, such as the availability of hydroelectric power, but also to effective and efficient management and operation of its power system. Efficient management by TVA's municipal and cooperative distributors has also contributed significantly to these low prices. But the benefits of TVA competition flowed not only to those persons and businesses that became customers of TVA or its distributors. The customers of the private power companies also benefited through lower prices brought about by the effect of TVA's competitive yardstick on the neighboring utilities.
After World War II, the demand for electric power throughout the country grew dramatically, and TVA's own need for power increased substantially. To meet this emerging demand in the Tennessee Valley, Congress decidedat TVA's requestto place TVA's power system on a self-financing basis. In 1959 Congress enacted the SelfFinancing Amendment to the TVA Act, which authorized TVA to finance its power system by issuing revenue bonds. At the same time, Congress placed a figurative ''fence'' around TVA. The fence prevents TVA from competing with other utility systems for wholesale customers outside the area in which TVA was the primary source of power supply in 1957. TVA was also prohibited from entering into exchange power arrangements with any company it was not exchanging power with in 1957. Thus, unlike private power companies, TVA operates under significant competitive restraints imposed by its organizing statute, and it is against this background that TVA's antitrust exemption must be viewed.
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The antitrust status which TVA enjoys is grounded in its responsibilities under the TVA Act, including these statutory limitations, and is not the result of any special treatment TVA has received by the courts. Similar exemptions also apply to all Federal agencies and instrumentalities when they are performing the task given to them by the Congress. Even those Federal entities engaged in commercial activities, such as the Federal Reserve System banks, the Federal Alaska Railroad, and military post exchanges, are exempt from the antitrust laws. In each instance, the courts have concluded that the fact that the federally created enterprise is engaged in commerce, and may even compete with private companies, is not a justification for subjecting the agency to the antitrust laws. It has been sufficient, in the courts' view, that each of these entities, like TVA, is carrying out a public duty or function entrusted to it by Congress.
In addition, because TVA has, since its inception, complied with the mandate and will of Congress, the antitrust laws have had little practical effect on TVA. In all the years of its existence, although TVA has been sued many times, our records show that only three antitrust cases have been filed against TVA, and one of those was dismissed voluntarily. In the two other cases, the courts upheld the exemption of TVA from the antitrust laws, recognizing that the actions of TVA that were challenged were valid Government activities which were in conformity with the TVA Act.
In recent years, due to advances in technology, among other reasons, legislators and regulators have been replacing strict oversight of electric utilities with more market-based rules, at least in some areas. Congress authorized FERC to order open access to wholesale distribution systems, which FERC did with Order 888. A number of States are experimenting with or considering varying levels of retail competition. Power marketers and independent power producers have entered into competition in wholesale markets. Mergers among private companies are proceeding, albeit subject to FERC's antitrust review. It seems almost universally agreed that the electric power industry is undergoing significant restructuring and deregulation. We anticipate that FERC will continue to oversee the use of interstate transmission services and, through its supervision, prevent the undue use of vertical market power. But more changes in previously regulated areas are obviously on the horizon. We do not know what is in store for the industry generally, or TVA in particular, in the coming years. As the Chairman of the FTC, Robert Pitofsky, pointed out in his testimony before this Committee last June, ''[t]he difficulty of predicting how the industry will look in the future suggests that fixing government [antitrust] policy in concrete at this stage could be counterproductive.''
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For the same reasons, we suggest that it would also be counterproductive to determine now whether the antitrust laws should be made applicable to TVA. Congress may change the TVA Act in light of the restructuring of the private electric sector. Indeed, TVA is about to begin a regional consensus-building process among TVA customers and Valley and regional stake-holders to consider questions about TVA's future in an open-market environment. This process will provide TVA, as well as the Congress, with important input as the Federal legislative effort on restructuring goes forward. If, when these legislative activities are complete, TVA resembles the rest of the electric industry and is able to compete freely without its present statutory restrictions, then Congress might well decide that TVA should be subject to the same antitrust restrictions as the rest of the industry. However, to the extent TVA retains a unique governmental role and the restrictions that come with that status, making it distinct from others in the industry, Congress might choose to leave TVA's exemption intact. Thus, TVA's antitrust status after deregulation should, we believe, depend on what the future holds for the electric industry and for TVA after deregulationand that, of course, is an open question.(see footnote 1)
I appreciate the opportunity to appear before the Committee today. I will be glad to answer any questions at this time.
Mr. HYDE. Thank you, Mr. Christenbury.
STATEMENT OF DOUGLAS W. SMITH, DEPUTY GENERAL COUNSEL FOR ENERGY POLICY, U.S. DEPARTMENT OF ENERGY
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Mr. SMITH. Mr. Chairman, Members of the Committee, good morning. My name is Doug Smith, and as you have said, I serve as Deputy General Counsel for Energy Policy at the U.S. Department of Energy. It's my pleasure to be here today to discuss the application of the federal antitrust laws to the Federal Power Marketing Administrations, which often go by their acronym, the PMAs.
There are five PMAs; the Alaska Power Administration, which I would note is in the process of being sold; and then the Bonneville Power Administration; the Southeastern Power Administration; the Southwestern Power Administration; and the Western Area Power Administration. All five of these are organizations within the U.S. Department of Energy.
The primary mission of the PMAs is to market electric power that's produced at federal water projects that are owned and operated by the Bureau of Reclamation and the U.S. Army Corps of Engineers. The PMAs generally do not own or operate generation facilities, with one minor exception, but BPA, WAPA and the Southwestern Power Administration do own extensive electricity transmission facilities.
As you've mentioned, the antitrust laws have been found by courts generally not to apply to federal entities, and there have been at least a couple of cases reaching that conclusion specifically with regard to the Power Marketing Administrations.
I would note that the Bonneville Power Administration is required to consider competitive impacts in making certain of its discretionary decisions concerning allocation of transmission capacity on its facilities.
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Under the current statutory framework governing the PMAs, and recognizing that there's oversight of the PMAs by both Congress and the Executive Branch, I don't believe that there's any significant benefit to simply superimposing potential liability under the antitrust laws on top of the statutes currently governing the activities of the PMAs. Let me explain how I've reached that conclusion.
The PMAs, in essence do two things. First, they provide transmission services on their transmission facilities. Transmission access is now provided on an open-access basis by the PMAs. There have been significant developments in terms of open access over the last few years. In the Energy Policy Act of 1992, the Federal Energy Regulatory Commission was given authority to order transmission-owning utilities to provide transmission access, and the PMAs are subject to those orders just as any other transmission-owning utility would be.
Moreover, it has been the Department of Energy's policy since the Federal Energy Regulatory Commission issued its open access policy in draft form in 1995, that the PMAs should follow the principles of open access as enunciated in FERC's Order 888. And the PMAs have taken steps to make it clear that they will be following the policy guidance in Order 888. BPA has filed and FERC has conditionally approved its compliance filing, and the Southwestern and Western Area Power Administrations expect to file similar tariffs by the end of this year.
With regard to the second major activity of the PMAs, which is marketing power from the federal hydroelectrical facilities, the PMAs are governed by a complex network of federal statutes which establish the basic ground rules for allocating power. They include the so-called Preference Policy, and they establish both substantive and procedural requirements for ratemaking activities.
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Simply applying the antitrust laws to the PMAs, and requiring the PMAs to try to straighten out potential conflicts between these other specific statutory directions and the general principles of the antitrust laws, would essentially leave the PMAs themselves, and then the courts, in the position of resolving some important public policy issues. I believe that the Congress, and not the courts, are in the best position to resolve any policy conflicts that may be perceived to exist between the general antitrust laws and the statutes currently governing the PMAs.
As Congress proceeds with its consideration of federal legislation on electricity restructuring, it's going to be essential to consider competition policy for the electricity industry in general, and in particular, the applicability of the antitrust laws to that sector.
Appropriate policies with respect to the application of the antitrust laws to the PMAs will depend on what other changes, if any, are contemplated for the role of the PMAs. The resolution of this issue is just one facet of a broader examination of the appropriate role of the PMAs in the evolving competitive electricity market.
I'd be glad to answer any questions.
[The prepared statement of Mr. Smith follows:]
PREPARED STATEMENT OF DOUGLAS W. SMITH, DEPUTY GENERAL COUNSEL FOR ENERGY POLICY, U.S. DEPARTMENT OF ENERGY
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It is my pleasure to appear before you today on behalf of the Department of Energy to discuss the application of the Federal antitrust laws to the Federal Power Marketing Administrations (PMAs).
The five PMAsthe Alaska Power Administration, the Bonneville Power Administration, the Southeastern Power Administration, the Southwestern Power Administration, and the Western Area Power Administrationare organizations within the United States Department of Energy. The primary mission of the PMAs is to market the electrical power produced at Federal water projects owned and operated by the Interior Department's Bureau of Reclamation and the U.S. Army Corps of Engineers.
The antitrust laws do not presently apply to the PMAs. Under the current statutory framework governing the PMAs and with continuing oversight from the Department of Energy and the Congress, there would be no significant benefit to subjecting the PMAs to claims under the antitrust statutes:
The PMA-owned transmission networks are being operated on an open access basis, thereby supporting competitive wholesale power markets.
The PMAs' allocation and sale of electricity are governed by statutory preference and ratemaking requirements. Application of the antitrust laws to the PMAs could leave to the courts the resolution of any perceived conflicts between the policies underlying the PMA's allocation and ratemaking requirements on the one hand and the antitrust laws on the other. Congress, not the courts, should address any such perceived conflicts between policies.
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It is essential for Congress to consider competition policy generally, and the applicability of the antitrust laws within the electricity sector in particular, in the context of Federal legislation on electricity restructuring. The appropriate policies with respect to the applicability of the antitrust laws to the PMAs will, of course, depend on what other changes, if any, are contemplated for the role and statutory framework of the PMAs. The resolution of this particular issue is just one facet of the broader examination of the appropriate role of the Federal Power Marketing Administrations in the evolving competitive electricity market.
Mr. Chairman and Members of the Committee: Good morning. My name is Douglas Smith, and I serve as Deputy General Counsel for Energy Policy at the U.S. Department of Energy. It is my pleasure to appear before you today on behalf of the Department of Energy to discuss the application of the Federal antitrust laws to the Federal Power Marketing Administrations (PMAs).
Two key points should be considered in examining these issues:
(1) The PMAs have a history of providing open access to their transmission facilities. By the end of this year, all three of the transmission-owning PMAs will have submitted proposed tariffs to FERC that are consistent with the open access policy of the Federal Energy Regulatory Commission's Order No. 888 as applicable to the PMAs. These open access practices support the development of competitive wholesale power markets.
(2) The PMAs are creatures of Federal statute, with policy goals, authorities, procedures and limitations established in authorizing statutes. To the extent that policies on allocation of power or ratemaking are thought to raise competitive concerns in light of changing market circumstances, it is appropriate for Congress to reconcile such potentially competing policy interests.
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THE FEDERAL POWER MARKETING ADMINISTRATIONS
Let me begin by providing a brief overview of the PMAs, their activities, and the statutory framework governing their activities.
There are five PMAsthe Alaska Power Administration (APA),(see footnote 2) the Bonneville Power Administration (BPA), the Southeastern Power Administration (SEPA), the Southwestern Power Administration (SWPA), and the Western Area Power Administration (WAPA)each operating in a different geographical region of the United States. (See Attachment 1.) All five PMAs are organizations within the United States Department of Energy (DOE). Each is headed by an Administrator who reports to the Deputy Secretary of Energy. A brief statistical comparison of the PMAs is appended as Attachment 2.
Mission. The primary mission of the PMAs is to market the electrical power produced at Federal water projects. The PMAs sell hydroelectric power generated at multipurpose water projects owned and operated primarily by the Interior Department's Bureau of Reclamation and the U.S. Army Corps of Engineers.
Transmission Facilities. The PMAs, other than SEPA, own, operate, and maintain a total of 33,125 circuit-miles of transmission line, 686 substations, and other related communication and control facilities in order to deliver power to customers. BPA's and WAPA's lines constitute a large percentage of the high-voltage (230 kV and above) transmission lines in the north-central and western United States. SEPA has no transmission facilities; it negotiates transmission arrangements with other utilities to use their transmission facilities to deliver power from the Federal dams to customers.
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Generation Facilities. With the exception of the APA, which now owns and operates one hydroelectric project in Alaska, the PMAs do not own or operate hydroelectric projects or other generation facilities.
Customers. The five PMAs have long-term contracts for the sale and transmission of Federal power to 1,245 customers. By law, preference in the sale of power is given to municipalities, rural electric cooperatives, irrigation districts, and other publicly-owned entities. 16 U.S.C. 832c(d); 16 U.S.C. 825s; 43 U.S.C. 485h(c); 16 U.S.C. 839g(c). The preference requirement provides for a ''right of first refusal'' by eligible preference entities. If they decline the power, it is sold to others. Most of the PMAs' preference customers are wholesale purchasers which, in turn, serve tens of millions of retail power users. In addition, BPA provides direct electrical service to 16 large industrial customers, primarily aluminum smelters. BPA is also required to extend the benefits of its low cost power to small farm and residential customers of investor-owned utilities within BPA's service area.
Rates. The PMAs are directed to market electricity ''at the lowest possible rates to consumers consistent with sound business principles.'' 16 U.S.C. §825s. Thus, each PMA develops cost-based rates for the power it sells. Rates are set to collect enough revenue to pay for annual operation and maintenance of the power features of the project, including the power O&M expenses of the generating agency, and repay with interest the capital investment in power generation and transmission facilities. In addition, some non-power costs such as irrigation investment are assigned by law to WAPA and BPA for repayment.
Ratemaking Procedures. The PMAs use open public processes in setting rates and allocating power. Proposed rates for APA, SEPA, SWPA and WAPA are submitted to the Deputy Secretary for approval on an interim basis and then forwarded to the Federal Energy Regulatory Commission (FERC) for final approval. By law, BPA's rate proposals go directly to FERC.
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Open Access Transmission. The transmission-owning PMAsBPA, WAPA and SWPAhave a history of voluntarily providing access to their transmission facilities, and each has either taken action to comply, or is in the process of establishing compliance, with FERC Order Nos. 888 and 889. BPA published comparable service tariffs in 1996, which have been conditionally approved by FERC. WAPA and SWPA will have filed such tariffs with FERC by the end of 1997.
APPLICATION OF ANTITRUST LAWS TO THE PMAS TO DATE
Claims against the PMAs under the antitrust laws have been rare. In at least one case, however, the decision of a PMA regarding allocation of power was challenged as violating the Sherman Act. The court concluded that ''SEPA and its agents who made the decision are, of course, not subject to the antitrust laws.'' Greenwood Utilities v. Mississippi Power Co., 751 F.2d 1484, 1504 (5th Cir. 1985). The court relied on Sea-Land Service Inc. v. Alaska Railroad, 659 F.2d 243 (D.C.Cir. 1981), cert. denied, 455 U.S. 919, which held that ''the Sherman Act . . . does not expose United States instrumentalities to liability, whether legal or equitable in character, for conduct alleged to violate antitrust constraints.'' Id. at 245.
BPA is required to consider impacts on competition in some circumstances. The Ninth Circuit has held that BPA must consider the impacts on competition when allocating transmission capacity, although the interests of preserving competition do not override BPA's statutory obligation to be fiscally self-supporting. California Energy Resources Conservation and Development Commission v. BPA, 831 F.2d 1467, 1475 (9th Cir. 1987); see California Energy Commission v. BPA, 909 F.2d 1298, 1309 (9th Cir. 1990), cert. denied, 500 U.S. 904 (1991). On the other hand, a court has held that SWPA is not similarly required to consider impacts on competition as part of its power allocation proceedings. Brazos Elec. Power Coop v. Southwestern Power Administration, 627 F.Supp. 350, 354 (W.D. Tex. 1985), aff'd, 819 F.2d 537 (5th Cir. 1987).
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1. Transmission Access
Many of the competition-related issues raised over time with regard to the PMAs have concerned transmission access. However, access to PMA transmission facilities is now available as a matter of both law and policy. BPA's organic statutes require that any transmission capacity on the Federal system in excess of that needed to carry out the Federal power marketing program and to meet existing contractual obligations must be made available to transmit nonfederal power. 16 U.S.C. §837e, 838d, and 839f(d). In the Energy Policy Act of 1992, Congress granted FERC the authority to order transmission over the nation's transmission systems, including those of the PMAs, to provide wholesale transmission services to others. 16 U.S.C. §824j(a); see 16 U.S.C. §824k(i)(1) (with respect to BPA, FERC's wheeling orders must be consistent with BPA's organic statutes). This authority provided a legal remedy for any claims of unfair denial of transmission access by the PMAs.
Since 1995, it has been the Department of Energy's policy that the PMAs implement the open access policies embodied in FERC Order Nos. 888 and 889 to the extent allowed by law. BPA has filed pro forma access tariffs with FERC for review and approval as acceptable non-jurisdictional reciprocity tariffs, and FERC recently granted approval conditioned upon BPA making specified changes. FERC has also concluded that BPA's transmission rates met the Federal Power Act requirements for FERC-ordered transmission. BPA has functionally separated its power marketing function from its transmission marketing and reliability function. Finally, BPA filed with FERC for review of its standards of conduct to guide the interactions between its power business line and its transmission business line. SWPA and WAPA are separating their power marketing function from their transmission marketing and reliability functions. WAPA and SWPA have recently published for public comment proposed open access tariffs, and will submit these tariffs to FERC for approval by the end of this year.
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BPA is required to market its power under a complex statutory scheme based fundamentally on allocating the benefits of the Federal Columbia River Power System preferentially to certain specified entities (e.g., publicly-owned utilities, direct service industrial customers, and residential consumers of regional investor-owned utilities). See Bonneville Project Act, 16 U.S.C. §832, 832c(a); Pacific Northwest Consumer Power Preference Act, 16 U.S.C. §837 et seq.; Pacific Northwest Power Planning and Conservation Act, 16 U.S.C. §839, 839c(b)(1). The other PMAs also market power according to statutory preference policies. WAPA's marketing of power is primarily guided by the Reclamation Project Act of 1939, 43 U.S.C. §485h(c), and the Flood Control Act of 1944, 16 U.S.C. §825s. In addition, each of WAPA's eleven ratesetting systems have individual project-specific statutes which must be followed when marketing power. SEPA and SWPA market power based on the Flood Control Act of 1944. 16 U.S.C. §825s.
Entities that do not receive an allocation of preference power, or those that seek to sell power to PMA customers, might perceive the statutory preferences as having anticompetitive effects, and might seek to use the antitrust laws, if they applied, as a means of challenging preference policy. The Greenwood Utilities case, referenced above, involved an antitrust challenge to a PMA decision to allocate its preference power in a particular way. In that case, SEPA had designated a geographic area in which it would market to preference customers, and, pursuant to that power marketing policy, had entered into a wheeling contract with Mississippi Power for transmission of power to SEPA's preference customers. Greenwood was a publicly- owned utility qualified to receive preference power, but was located outside of the designated marketing area in SEPA's marketing policy. Greenwood alleged that SEPA and Mississippi Power had conspired to impose unreasonable restraints of trade. With respect to SEPA, the court concluded that the antitrust laws did not apply.
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If the PMAs were subject to the antitrust laws, those who have advocated modification or elimination of existing preference policies could be expected to ask the courts to reconcile any perceived conflicts between the antitrust laws and statutory preference policy. Any reconsideration of such policies in light of competition goals is best left to Congress and the Executive, not the courts through application of the antitrust laws.
If the antitrust laws are applied to the PMAs, parties might claim that PMA rate practices constituted antitrust violations. Policies designed to mitigate the impact of hydroelectric facility operations on fish, for example, sometimes require BPA to operate the system in a way that produces large amounts of surplus power, which BPA attempts to sell at market prices, which are often very low and below its average costs. Although pricing below average costs rarely raises antitrust concerns, it is possible that a competitor of BPA could argue that such activity constitutes predatory pricing in violation of section 2 of the Sherman Act. The policy goal, of course, is to generate any revenue possible from the water that must be released for environmental purposes.
Some parties have suggested that certain mechanisms for the recovery of stranded costs might constitute a tying arrangement in violation of section 1 of the Sherman Act or section 3 of the Clayton Act. If the antitrust laws were applied to PMAs, parties might seek to challenge any PMA stranded cost policy under the antitrust laws. Resolution of policy conflicts with respect to recovery of any PMA stranded costs should be done by Congress, and not by the courts in the context of applying the general antitrust laws, given the Federal Treasury's outstanding capital investment in the PMAs.
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It will be essential for Congress to consider competition policy generally, and the applicability of the antitrust laws to the electricity industry in particular, in the context of Federal legislation on electric industry restructuring.
The appropriate policies with respect to the applicability of the antitrust laws to the PMAs will, of course, depend on what other changes, if any, are contemplated for the role and statutory framework of the PMAs. The resolution of this particular issue is just one facet of the broader examination of the appropriate role of the Federal Power Marketing Administrations in the evolving competitive electricity market.
This concludes my prepared statement. I will be pleased to respond to any questions that the Committee may have.
INSERT OFFSET RING FOLIOS 1 HERE
Mr. HYDE. Thank you, Mr. Smith.
Mr. Conyers, the gentleman from Michigan.
Mr. CONYERS. Good morning, Chairman Hyde, and Members.
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Mr. HYDE. Good morning.
Mr. CONYERS. Franklin Roosevelt, looking down on us, is turning in his grave of course, because he's saying, what have we wrought. I mean, this was one of the great New Deal ideas that came out of the Depression. But now the government corporation has become a market competitor, and Panel 2, which I hope you will stay to hear, will spell that out in detail.
In Rick Boucher's neck of the woods, as Kovel would say, they had to go elsewhere. They're doing better in the private market than in the public market. In Mississippi the electric power cooperative is being wiped out, and there are a lot of other activities like this going on that this committee is just beginning to track.
So I guess this happens in the course of governing. I mean, a great ideathe public entity that was brought in to save us from being devoured by the private utilities and powers now end up being the biggest, baddest guy on the block, himself. And pretty soon they're using the wonderfully vaunted free enterprise tactics, and guess what? They've become the biggest competitors.
So, while I do not want to apply antitrust legislation to the government, to government created entities, I am sure not going to sit by and watch all of these price discriminations, Sherman Act violations, refusals to wheel and deal, horizontal anti-competitive agreements, and just say, well, that's tough; they're immunized because they came out of the federal sector. No way.
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So we've got some deep digging to do, and I just hope that you'll realize, that once you are not lowering the consumer's utility costs, you're bad people from this one member's eyesight. That's what you were put there for, and once you can't justify that mission, then you need to go on Wall Street and float stock like everybody else.
Would you care to respond?
Mr. CHRISTENBURY. Thank you, Congressman.
One, I would certainly hope that President Roosevelt would not be disappointed for these reasons.
Our sole purpose today, as it was in 1933, is simply to keep rates as low as feasible. We have 8 million customers. One of the issues that you referred to is in Bristol, Virginia, where we are seeking to recovered stranded investment from Bristol, Virginia. That is money for general facilities which we have built to serve Bristol over the years.
We're not recovering that money for TVATVA is just a passthroughit is for Congressman Bryant's constituents and Congressman Jenkins' constituents. It's for the other 8 million people in the Tennessee Valley, that if Bristol does not pay that money then they will have to pay.
We have a statutory mandate to keep rates as low as feasible, and indeed that is our purpose. And the actions we have taken are only with regard to the other 8 million residents that we serve in the valley to keep their rates as low as feasible, as is our statutory mandate.
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Mr. CONYERS. When Bristol, Virginia tried to save $70 billion by purchasing power from an investor-owned utility, TVA promised the residents it would undercut prices by 2 percent, in an attempt to keep market share.
You know what that's called? Predatory pricing.
Mr. CHRISTENBURY. Congressman, if I could differ with you ever so slightly. As you know, predatory pricing by definition is when you sell below your cost. That is not below our cost. The price at 2 percent below what Bristol would have offered them, would still permit TVA to recover its cost and make a contribution to its fixed cost. It wouldn't be predatory.
Mr. CONYERS. Well, then okay. You're right. You're angels, and the poor blokes in Bristol, they just didn't understand what a good offer you had. I mean, it was a misunderstanding.
Mr. CHRISTENBURY. Congressman, ifand I don't want to tell you more than you want to know, but without belaboring the point, the rate that we provided to some of the industries up therea competitive index ratewas the same rate that we developed with Bristol, Virginia back in 1994. Now then, the 2 percent that we were benchmarking against was Appalachian Power, and Bristol was the recipient of that low rate. Today, it is the same rate at 2 percent below what the competition isthe competition has just changed, but the rate was proper then and is proper now.
Page 38 PREV PAGE TOP OF DOC Mr. CONYERS. Thanks. The people in Bristol, they just didn't get it, that's all. It isn't your fault.
Mr. CHRISTENBURY. Congressman, I would only say that the actions that we were taking are for the other residents and other constituents of the valley, in which we do have a duty to keep their rates as low as feasible.
Mr. HYDE. The gentleman's time has expired. The gentleman from Florida, Mr. McCollum.
Mr. MCCOLLUM. Thank you very much, Mr. Chairman.
Mr. Christenbury, if done properly to take into account stranded costs, do you favor the general proposition of deregulating the utility industry in this nation, and do you favor privatizing TVA?
Mr. CHRISTENBURY. Congressman, if I could possibly be a little less responsive than I would otherwise. Generally, we are supportive of the restructuring of the electric utility industry. I think that is an issue thats time has arrived.
The reason I would be a little hesitant in articulating a role for TVA in that restructure process is, TVA is now going through a regional consensus building process, where we are meeting with our competitors, the utilities that surround us; we're meeting with our customers; we're meeting with state governors; we're meeting with environmental groups, seeking their judgments and their counsel on what should be TVA's role in a restructured electric environment.
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Mr. MCCOLLUM. So, in short, you haven't finished your assessment yet.
Mr. CHRISTENBURY. Exactly, thank you.
Mr. MCCOLLUM. Let me ask this question. Would you be able toin your opinionmeet the competitive world out there, and cover your debt and so forth, if you were allowed to sell nationwide, in open competition no longer restricted to your region? Do you know?
Mr. CHRISTENBURY. Congressman, let me tell you what we are doing which ICurrently, we sell our power at 4 cent per kilowatt hour, which is a market base. We have begun a 10-year program that will reduce both our debt by some $14 billion, and bring us out at the end of 10 years at a cost of 3.5 cents a kilowatt hour. We believe that is going to be a market rate a decade from now.
So to answer your question, we think that the 10-year program that we have implemented and are moving into, will make TVA competitive with the market out there at the price that power will be sold for in the future.
Mr. MCCOLLUM. Does the full faith and credit of the Federal Government stand behind the debt you have, the $28 billion or whatever it is?
Mr. CHRISTENBURY. No, sir, it does not. We plainly print on all of our offering circulars that these bonds are not the responsibility of the Federal Government.
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Mr. MCCOLLUM. So, your opinion is, that over a 10-year period, in a plan that you're working on now, you can become competitive and you'd be open to the idea, at least, of being able to market your electricity fully and competitively within the nation, if you could wheel it, as they say.
Mr. CHRISTENBURY. We believe that we are competitive today, and will be competitive in 10 years. And we think that whatever role is carved out for TVA by the Congress, should be one that is fair. That is, if people can come into the TVA area, then
Mr. MCCOLLUM. You should be able to go out.
Mr. CHRISTENBURY. There should be some fairness in how that is dealt with.
Mr. MCCOLLUM. I certainly believe if we go the privatization, deregulation route, TVA should be a marketplace area, where everybody can come in and bid, and be competitive, and you should be able to go out and market all over the country. That would be my view. Now that's easier said than done. I realize that.
Mr. Smith, with all these other entities that you've described that we have a federal role in, what problems do you see in the privatization area, in terms of where we go? Can they be privatized, as we're discussing with TVA? Will costs or prices rise? Assuming of course we'd take care of the stranded costs issues.
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Mr. SMITH. First, let me note that stranded cost issues are potentially important issues that need to be confronted. One of the current statutory directives that the PMAs operate under is a responsibility to recover all their costs, and to make the payments required to the Treasury in order to repay their debt.
As you may know, the Administration made a proposalnow 3 years ago, I believeto privatize the western area, Southwestern and Southeastern Power Administrations. That proposal, frankly didn't get very far in the Congress, and we haven't since then re-proposed such a privatization. Issues about what to do with power marketing agencies in a more competitive market are among the issues that are being discussed within the Administration, in the larger context of developing an Administration Position on comprehensive electricity restructuring legislation. But as Deputy Secretary Moler testified yesterday, we haven't finished the process of developing that position yet.
Mr. MCCOLLUM. Thank you, Mr. Chairman.
Mr. HYDE. The gentleman's time has expired. The Chair will interrupt. The gentleman from Massachusetts, Mr. Frank, who is aspiring to become committee grammarian, has caught the Ranking Member, Mr. Conyers, in a flagrantly mixed metaphorhaving President Roosevelt looking down at us, and turning over in his grave, which is a geometric impossibility.
Mr. CONYERS. I ask for unanimous consent to correct the flagrant violation of English grammar in the Judiciary Committee.
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Mr. HYDE. Well, without objection, so ordered. I would suggest that FDR has a certain mobility, and can do both, but not simultaneously.
The gentleman from Massachusetts.
Mr. FRANK. Well, Mr. Chairman, now that you have poisoned my relations with one of my colleagues, I will try to repair that by deferring to anotherand I'll switch positions with the gentleman of Virginia, whose initiative is really responsible for us, to a great extent, in focusing on this. So I'll defer to the gentleman of Virginia.
Mr. BOUCHER. Thank you, very much, Mr. Frank, and thank you, Mr. Chairman.
Mr. Christenbury, let me return with you, if I may, to the subject that was opened by Mr. Conyers, with respect to whether or not your offer to some of the industrial customers of the City of Bristol is predatory pricing.
What you have offered is a rate that is 2 percent less than whatever the City of Bristol, with the cheaper power it's going to be getting from your competitor will offer to those customers. There's no floor in that offer at all. So as the City of Bristol offers less and less, you in theory would offer 2 percent less than whatever their most recent offer was. And without a floor in the offer, how can you confidently say to this committee, that whatever that price winds up being, you can recover your costs; you're still making money?
Page 43 PREV PAGE TOP OF DOC I think that's arithmetically impossible. And so why is it not predatory pricing for you to make that kind of offer?
Mr. CHRISTENBURY. Congressman, I think that's a fair question. The rates that were proposed that our people calculated were based on certain assumptions as to the rate that Bristol, Virginia would be offering, even with their new power from Cinergy. Our people then took that estimatewhich indeed it wasand then computed a rate 2 percent below that, and concluded that in that range that they were estimating, that not only would we recover our costs, but that we would make a contribution to our fixed costs.
So I appreciate the question, but that was the assumptions that went into it, and that was the basis upon which we concluded, that indeed was not predatory, but would cover our costs, and make a contribution to our fixed costs.
Mr. BOUCHER. Well, I hear a restatement now of the offer that I know that you made to these industrial customers. The terms on which you made it to them was 2 percent less than whatever the city offers. What you're saying today is 2 percent less than what the city in fact offered, and that's a very different equation. But even accepting your answer for the sake of asking this next question, let me just challenge perhaps the credibility of what you're saying.
The City of Bristol receivedand I can't recall the exact number. It was either 13 or 14 responses to its solicitation for power bids. The Tennessee Valley Authority was one of those power marketers responding. And of the bids received, yours was dead last. You had the worse bid of anybody. You proposed the highest sales price of any of the 13 or 14 bidding.
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Now, if you have all that cheap power, and if you could afford in fact to undersell the best competitor out of that 14 by 2 percent, if you can afford to do that and still make money, then why didn't you offer the City of Bristol a better bid to begin with? If you had, you probably would still have that business today.
Mr. CHRISTENBURY. Congressman, there are two aspects of the proposal. One of course, as you know, the offer to Bristol, Virginia is a firm rate power. That's yourBristol has some 15,000 customers; 13,000 of those are residential customers. They use a firm power, and we sell our firm power for a little over 4 cent a kilowatt hour.
Industries on the other hand frequently use a blended power rate, whether it's interruptable or firm. But in any event, for the purposes of our discussion today, I would certainly say that theseparate and apart from the firm power rate that we offered
Mr. BOUCHER. Mr. Christenbury, I don't want to be rude and interrupt you, but I'm limited on time. Let me just say that, Cinergy, which won this bid, is offering firm power also, so the basis on which you're seeking to draw a distinction here, really, I think is somewhat inaccurate.
But let me just say to you, I find it a little hard to believe that you could really make money at 2 percent less than the Cinergy rate, if you in fact were a full 13 bidders above that rate, at the time that you were seekingand I know how much you wanted to do it, to retain that customer.
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Let me move on to one other important subject. And that is the question of this claim you're making now for stranded costs recovery, in the amount of $54.1 million.
Isn't it true that you don't have any facilities that are captured within that $54 million figure, that are devoted just to supplying power to the City of Bristol, Virginia?
Mr. CHRISTENBURY. Congressman, the $54 million figure that we are now articulating to FERC, is based on a formula that FERC has adopted for recovering stranded investment
Mr. BOUCHER. Mr. Christenbury, could I just please get an answer to that first question. Isn't it true that none of the facilities contemplated within that $54 million figure, are devoted just to providing power to the City of Bristol, Virginia?
Mr. CHRISTENBURY. We do not build dedicated facilities, so we have no facilities that are dedicated and have been dedicated to Bristol, Virginia.
Mr. BOUCHER. So your claim for stranded cost recovery is with respect to general system investments that you have made over time, to serve your general coverage area, is that correct?
Mr. CHRISTENBURY. That is correct.
Page 46 PREV PAGE TOP OF DOC Mr. BOUCHER. Now you've had a very long notice from the City of Bristol that it was planning to leave your system. Dr. Fletcher, when he testifies will say that that notice was more than 10 years in length. Now surely during the course of that 10-year period, when you knew that Bristol was going to be leaving, there are some investments that you've made in your system that you could have avoided, if you were really concerned about stranded costs. So if you were, why didn't you avoid making those investments, instead of making those, knowing that Bristol was going to be leaving?
Mr. CHRISTENBURY. Congressman, I think our primary concern always of course is reliability and serving the customers that we have.
If you recall the history as I do, the issue of leaving the TVA system first arose in 1985, when Bristol had some thoughts about leaving the TVA system, and then changed their mind. The issue arose again in 1990, when in fact they did give us notice. In 1993 they again, in agreement with us, moved out the notice period for another 30 months, and during that period I think we worked out many of the issues that were separating us during that time.
But I think it's instructive to note that the contract that Bristol has with Cinergy today has a provision in it; that if they have to pay TVA $10 million or more in stranded investment, they can get out of that contract with Cinergy. Now, I'm presuming they would still expect us to serve them then if they got out of that contract.
So, I guess what I'm suggesting is, that indeed in our mind's eye it has not been clear that they were going to leave the system, and we with their knowledge continued to
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Mr. BOUCHER. Mr. Christenbury, let me just say to you. I thank you for your answer, and a couple of points by way of response.
First of all, the City of Bristol has made it clear to the TVA for a very long time, that unless rates were offered to the city that were far more reasonable, the city was leaving. While you might quarrel about when you actually got the official notice, but even by your own statement you knew as early as I think you said1990that the City of Bristol was planning to leave. And I'm sure that within the time between then and now, you have made investments in your system that would equal at least the $54 million you're now claiming to be stranded costs as a consequence of their leaving. And it seems to me that that's something that you could have avoided making if you were truly concerned about the stranded costs upon Bristol's departure.
I would suggest to you, Mr. Christenbury, that you are making this claim for stranded cost recovery, not because you are genuinely concerned about recovering those costs for the balance of the customers you served, but because you're trying to intimidate the other power distributors within your system. And to say to them that, if they follow the example of the first distributor who leaves, the City of Bristol, that they're going to have these gigantic claims levied against them as well. And that even if they eventually win on the merits, at the FERC or in court, they're going to spend millions of dollars defending themselves, and as a very small system that's going to be a lot of money that they could ill afford. And I would suggest to you that's the real reason that you've made that claim.
Mr. CHRISTENBURY. Congressman, I'm well aware of your views on this, and I am sensitive to thoseand I certainly don't want to quarrel with you. But I would point out though that that is not the reason. We are following a procedure that FERC has outlined. At least in our judgment, we would be remiss on behalf of our other 8 million customers that we have, if we did not seek to recover this money. Someone will have to pay this, either the other 8 million customers, or the residents of Bristol, Virginia.
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But I say that onlythat is our good faith effort in approaching this, and certainly not to quarrel with you on the point.
Mr. HYDE. The gentleman's time has expired.
The gentleman from Pennsylvania, Mr. Gekas.
Mr. GEKAS. I thank the Chair.
Mr. Christenbury, are the rates chargeable to the people living in Knoxville the same as those being charged to the people in Nashville?
Mr. CHRISTENBURY. The wholesale rate that TVA charges is the same throughout the valley. We have 160 distributors, and distributors's costs vary. So there may be a variance between Knoxville and Nashville, but it would not be TVA's wholesale costs; that would be the same.
Mr. GEKAS. But their wholesale costs for Chattanooga and Knoxville, and Nashville are the same.
Mr. CHRISTENBURY. Yes, sir, they are.
Mr. GEKAS. So that they would be also then the same for Bristol, Tennessee
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Mr. CHRISTENBURY. That is correct.
Mr. GEKAS [continuing]. And in historical times for Bristol, Virginia as well.
Mr. CHRISTENBURY. That is correct, sir.
Mr. GEKAS. Yet you offered Bristol, Virginia 2 percentI assume 2 percent on the wholesale cost, is that correct, less than whatever they could bargain with other providers?
Mr. CHRISTENBURY. It's a little bit different than that, sir. The wholesale rate is the firm power rate that wethat basically covers the bulk of your residential customers.
An offer that we were making to three industries in the Bristol, Virginia area, was with regard to their industrial rate, and it was for those three industries, and it was indeed a discount rate, with the logic being that if you can recover some of your fixed costscovering all of your costs and making a contribution to your fixed costs, it is better to keep those industries than to lose them entirely.
Mr. GEKAS. Why couldn't that same offer at 2 percent less than a current system be applied to the residents of Knoxville? In other words, it seems to me that you are able to come to a reduced rate, and still show a profit, still apply to fixed costs, even though it's 2 percent less than in a bargainable feature in Bristol, Virginia, why can't you do that for the people in Chattanooga, and give them lower rates now?
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Mr. CHRISTENBURY. The 2 percent under the competition for industrial rates, is something that appliesit's what we call our competitive index rate. Right now it applies only to areas in Bristol, Virginia; in North Georgia; in New Albany, Mississippi; and in Jackson, Tennessee. Those are the only areas that have qualified for that competitive rate. But our industrial rates, we frequently have; residential rates and wholesale rates are all the same, whether in Knoxville, Bristol, or Chattanooga.
Industrial rates, because of the difference in the load factor, and their needs, and the time of day, those historically vary markedly.
So, the point is fair that you're making, but it's an industrial rate that we were offering Bristol versus the firm residential rate that we offer in Knoxville, Chattanooga
Mr. GEKAS. Well, just take the industrial rate. How about the industrial rate in Knoxville? Can't you today knock that down to 2 percent less than what they might be offered by some independent group?
Mr. CHRISTENBURY. The competitive index rate, which the Board approvedwhich is what we were talking about for Bristol, was only in certain qualified areas where there was in fact immediate competition, and Bristol, Virginia was one of those areas.
Mr. GEKAS. So you responded to competitive factors in offering that 2 percent less. Then Knoxville, where there are no competitive features, you don't have any reason to offer a 2 percent or any kind of reduction?
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Mr. CHRISTENBURY. We have different rates that Knoxville industries do utilize. But to answer your question, the competitive index rate was geared to areas such as Bristol, Virginia and North Georgia, which are right on the border, and have a strong competitive market right there.
Mr. GEKAS. I think I do not understand. But one other question.
The other question is, do I have any more time? And the answer is
Mr. HYDE. The answer to that is an unequivocal no.
Mr. GEKAS. Can I appeal? I reserve the balance of my non-time.
Mr. HYDE. You're naturally very appealing.
The gentleman from Massachusetts.
Mr. FRANK. Thank you, Mr. Chairman. I thought Mr. Gekas asked a very good question, and I wouldbecause I don't, to be honest with you, think he answered it. And I'd take the two together.
Page 52 PREV PAGE TOP OF DOC Mr. Boucher asked you whether the rate you were offering, the 2 percent below industrial rate was predatory. You said no, you could make a profit at it. Well, you're the government agency that's supposed to offer the lowest, possible rate; you're not in this to make a profit.
If in fact 2 percent below what Bristol got allowed you to make a profit, why don't you offer that to people even where there isn't competition? Why should it take the presence of competition to get you to the lowest tractable rate. So it seems to me, either you're getting more than you need as a government agency everywhere else, or you're engaging in predatory pricing of Bristol. And if there's a third option, I'd like you to explain it to me.
Mr. CHRISTENBURY. Congressman, the theory of the
Mr. FRANK. Mr. Christenbury, I want you to be very specific. In fact, I think you've been dancing around Mr. Gekas' questions.
How is it that it's not predatoryif it's not predatoryif it's covering your costs and giving you some return, why don't you offer it elsewhere even though there's no competition? Isn't that what you're supposed to do, provide the lowest possible price?
Mr. CHRISTENBURY. The concept of the competitive index rate is that you are better served to keep an industry and to keep a contribution to your fixed costs, and that's the basis for it.
Mr. FRANK. Even though it's less than, you make money at it, so then why isn't it predatory.
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So what you're saying is, to meet competition you're prepared to go below what you need to stay alive, and what would be sustainable elsewhere. And then the question is, why isn't it predatory?
Mr. CHRISTENBURY. As most of the courts that have looked at the question have said, if what you are recovering are your costs, plus a contribution to your fixed assets, then that is by definition not predatory, and that is what we're doing here
Mr. FRANK. Then the other question. What are you afraid of the antitrust tax for? If you think you'd meet it, why shouldn't we subject you to it? I mean, would you object toNow, anti-trust may not make sense entirely, but for instance to prevent predatory pricing, what possible objection could you then have to having the law regarding predatory pricing as a prohibited practice upon you?
Mr. CHRISTENBURY. Congressman, the antitrust laws have been of small consequence to TVA. We have been in our
Mr. FRANK. No, Mr. Christenbury, this is the question. Would you object to our covering you under that part of the antitrust law, the part that prevents predatory pricing, and if so, why?
Mr. CHRISTENBURY. I would say that if TVA is in fact doing what the Congress has told it to doand I think both in our pricing and our offer we arethen, at least the courts have said, that we should not be subject to antitrust laws.
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Mr. FRANK. No, Mr. Christenbury, that's true. What the courts have said is, that the law now doesn't cover you. But the question is whether Congress should change the law, so the courts are irrelevant, you know.
We're not now talking about statutory interpretation; we're talking about writing a statute. And the question is, should we amend the statute. You say that you don't engage in predatory pricing. Why then would you be objecting to our covering you under that part of the antitrust laws which prohibit predatory pricing?
Mr. CHRISTENBURY. As I indicated in my statement, if at the end of the day we are just like any other utility, then I think for antitrust purposes we should indeed be treated just like
Mr. FRANK. So you would not object to our covering you under theI'm trying to understand whether that's a yes or a no.
Would you objectI know it's not the end of the day, but I'll call you at 5:00 if that will make you feel better. But now at the middle of the day when I'm asking you the question, would you object to TVA being covered by the anti-predatory pricing part of the antitrust?
Mr. CHRISTENBURY. It would not interfere with anything that we are doing at this time, no, sir.
Page 55 PREV PAGE TOP OF DOC Mr. FRANK. Mr. Christenbury, are you under the impression that's an answer to my question?
Mr. CONYERS. That's a yes.
Mr. FRANK. I mean, you really now are undermining your credibility. Why can't you just answer the question? Would you object?
Mr. CHRISTENBURY. Congressman I have no objection
Mr. FRANK. To covering you under the predatory pricing part? I appreciate that.
The last point I would just like to make is thisquestion. When is the last time you added, if you did, to the power generating capacity of the system?
Mr. CHRISTENBURY. Last year we brought on a 1,000 megawatt nuclear unit, watts bar Unit No. 1.
Mr. FRANK. How much power does Bristol use?
Mr. CHRISTENBURY. 125 megawatts.
Mr. FRANK. So you have added, as recently as last year, much more than Bristol uses, correct?
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Mr. CHRISTENBURY. Yes, we have.
Mr. FRANK. Well that seems to me to undercut the argument that you've got a stranded cost, since they've been trying to get out. When you say, well, they were sort of unclear about whether they wanted to get out. As it has revealed itself, they wanted to go out; you threatened them with adverse consequences, so they were a little bit hesitant. And then you said, see, they weren't really serious.
The fact that you have added substantially more generating capacity recently than they use, undercuts to me the argument that you would have a right to get stranded costs from them, since you were on notice for many years before that.
Thank you, Mr. Chairman.
Mr. HYDE. If you want to comment on that, Mr. Christenbury, you're free to.
Mr. CHRISTENBURY. I would just make the point that we have built for Bristol and their load for some 20 years. The fact that we brought on a 1,000 megawatts nuclear plant, that had been planned for many years. So Bristol adding to that doesn't in any way
Mr. FRANK. They first told you in 1985 that they wanted to pull out.
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Mr. CHRISTENBURY. They did, and they changed their mind at that point in time, sir.
Mr. HYDE. The gentleman from Tennessee, Mr. Bryant.
Mr. BRYANT. Thank you, Mr. Chairman. Maybe I am a little bit more familiar with this situation. But I'm not having quite the difficulty understanding some of the answers here that some of my colleagues are having.
But it seems to me, Mr. Christenbury, as I understand what you're saying is that TVA was created. It's an entity that Congress created, and we really tell you what you're going to do. We set the parameters on what TVA can and cannot do. And one of the things we've done over the years is limit you to a finite area, in which you can serve so many customers.
And what we're seeing now in the case of Bristol, Virginia, is a company from Cincinnati that's coming in to take away one of your customers inside this fence. But you're not allowed to go over that fence and go to Cincinnati to compete with that company, but they can come and cross over the fence and compete with you, because of the way Congress has set this thing up. Is that correct?
Mr. CHRISTENBURY. That is correct, Congressman. As you may knowFor example, Cinergy sells their wholesale power in Cincinnati for 4.3 cents a kilowatt hour, and they have come down to Bristol and sold power for 2.6 cents a kilowatt hour, and indeed have taken Bristol, Virginia away. We cannot on the other hand go outside the fence to seek to recover a comparable load.
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Mr. BRYANT. We're going to set the rules ultimately in Congress. What you think and the chairman thinks is important, but it's not going to ultimately dictate at the end of the day. The idea that if we're going to change the law, and let people come into your territory to compete with you, and sell power down here cheaper than they sell back in their areaand I don't know if that's predatory or not, I guess we can talk about that laterbut then we ought to let you do the same thing. In fact, lift the fence and let you compete on a level playing field with everyone else, if we're going to apply antitrust law to you, TVA, is that right?
Mr. CHRISTENBURY. For a variety of reasons I think that level of fairness would have to prevail, yes.
Mr. BRYANT. And regarding the stranded cost issue, I understand that if I go into McDonald's and I'm passing through a town, when I buy that hamburger I'm paying for that hamburger, and certain costs of maintenance of that building and so forth. And the fact that I'm not there everyday, and that they don't serve me everyday, I'm not a resident of that town, doesn't mean I get a cheaper hamburger.
Ultimately, we all pay in the valley, all 8 million customers, for these stranded costs; these $28 billion with a B now. And if you let somebody leave without bearing their responsibility, then obviously that burden shifts to the remaining customers in the form of higher rates, which obviously concerns me a great deal
But in assessing this amount of money to Bristol, or telling, this is what you owe, you mentioned a moment ago a formula. Is this just some idea that you thought of one day, that we're going to charge you this and punish you, or is this a standardized piece of law that you use to assess this formula?
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Mr. CHRISTENBURY. It certainly is not something that was done in a punitive manner at all. The Federal Energy Commission has set up a procedure for the recovery of stranded investment, and it's called a lost revenue procedure. And it's very simple. You don't look at structures, facilities; what you look at is the revenue that you would have received from the entity that is leaving. You look at what you can sell that same power that will be freed up for. In this case, Bristol, we would expect a revenue of some $20 million a year.
We could take the power that will be freed-up when Bristol leaves the system, and because we cannot go outside the fence, we have to sell it as simply surplus power for about half the price. So we would sell it for roughly $10 million. So you take the difference between that and multiply it by whatever your expectations, how long a period of time you expected to continue to serve that distributor. And that's the formula that FERCthere are many variables on that, and people could differ on each aspect of the formula, but that is the formula that FERC has outlined and which, we must comply with. That's where the matter rests at this time.
Mr. HYDE. The gentleman from Massachusetts, Mr. Delahunt.
Mr. DELAHUNT. Yes, thank you, Mr. Chairman. Just to pick up on the point that my friend from Tennessee was makingand I guess I need a little bit of a history lesson here.
As I interpret what you're saying, you're not concerned aboutor you would have no objection or response to Mr. Frank, about the application of the antitrust laws to the TVA. And I presume, in your case, Mr. Smith, you would have a similar response. Although I think the PMAs are dissimilar.
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But getting back to TVA, you wouldn't have difficulty with the application of the antitrust laws, as long as you were freed by congressional action to expand your service area. Is that correct?
Mr. CHRISTENBURY. Well, I would prefer not to get into an argument on what that structureor discussion of what that structure should look likebut to answer your question. If the restrictions and limitations that are currently
Mr. DELAHUNT. Imposed by Congress.
Mr. CHRISTENBURY. That are imposed by Congressif those restrictions are removed entirely, and our operation looks just like anyone else's, I think fairness would suggest that we should be subject to the same antitrust laws. But conversely, I also believe that if in fact Congress, for reasons it knows best, places restrictions, limitations, or crafts a unique role for TVA in the future, then I think you would want to consider whether under the previous logic, whether we at that point in time should continue to be exempt from the antitrust laws.
Mr. DELAHUNT. Well, I guess that goes to my allusion to a history lesson here.
Presumably in the mid-1930s the rationale for the creation of the TVAand I don't know the factual situation, I'm asking to be informedwas that the area to be serviced by the TVA was not sufficiently attractive to private capital, and that the government felt that for economic development and other reasons, TVA was necessary to provide low cost power to the geographical region presently served by the TVA. Is that correct?
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Mr. CHRISTENBURY. That was certainly a part, and indeed a large part, of the origin of TVA. I think there was also a desire, then as now, to have rates as low as feasible for the customers, and the thought was that TVA would be a benchmark by which both IOUs as well as other public power entities could be measured to determine whether indeed they were providing the customerthe residential customer with the lowest rates available.
Mr. DELAHUNT. But in the intervening 50 or 60 years much has changed.
Mr. CHRISTENBURY. Pardon?
Mr. DELAHUNT. A lot has changed in the last 5 or 6 decades.
Mr. CHRISTENBURY. Absolutely.
Mr. DELAHUNT. So now what we're really faced with, I guess, is whether the rationale for TVA and PMAs still exists, and your response isand I guess Mr. Smith would say the same thinglet's see what happens in terms of deregulation and restructuring as you refer to it.
Mr. CHRISTENBURY. I would certainly say that is a piece of it. I would also hope that if in fact through this whole process the goal continues to be
Mr. DELAHUNT. Let me just sayI'd be interested in both of your responses.
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Do you have a timeline for the process of restructuring and deregulation? When do you see it, from your perspectives, sorting out? When can we anticipate that the market will more or lessgive us a target datemore or less will have sorted out in terms of restruction and deregulation?
Mr. CHRISTENBURY. Mr. Smith can certainly respond. From my own viewswe are obviously following the legislation of Congressman Schaffer as well as others, and the timelines they are talking about is 2000, 2003, and others. My perception is that it may well prove to be a more daunting task, and indeed a more protracted task then many of us have thought in the past.
Mr. DELAHUNT. Ten years?
Mr. HYDE. The gentleman's time has expired. Thank you.
The gentleman from Ohio, Mr. Chabot.
Mr. CHABOT. I think the chairman, and I will yield my time to the distinguish gentleman from Tennessee, Mr. Jenkins.
Mr. HYDE. They are both distinguished, so I'm glad you said Mr. Jenkins.
Mr. CHABOT. I will differentiate between the two, Mr. Chairman.
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Mr. JENKINS. Thank you, Mr. Chairman. Let me follow up on a line of questioning Mr. Bryant started.
Mr. Christenbury, I'm glad that you had some informationI was hoping that you didabout the price of electricity at the utility that we've talked about here today, called Cinergy. Is that the proper name of it?
Mr. CHRISTENBURY. Yes, sir.
Mr. JENKINS. Would you tell us again, because I think it's significant. What is that utility wholesaling electricity for per kilowatt hour back in their own territory?
Mr. CHRISTENBURY. Cinergy sellsand there are variables to be sure. But Cinergy sells their wholesale power to their native load customers for 4.3 cents a kilowatt hour.
Mr. JENKINS. And what are they selling the electricity in Bristol, Virginia for?
Mr. CHRISTENBURY. 2.6 cents a kilowatt hour.
Mr. JENKINS. So if any charges could be made, or allegations made against TVA, that there were any antitrust violations with regard to any of this, certainly those allegations could be made against Cinergy?
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Mr. CHRISTENBURY. Well, sir, the point I was making earlier, to have a predatory rate, you have to know what their costs are, and I don't know that. But those figures
Mr. JENKINS. But if any allegations could be made one way, they could certainly be made another.
Now, with respect to discriminatory practicing, is there any question in your mind whatsoever that those people back in the Cinergy area, who are paying 4.3 cents per kilowatt hour, are discriminated against when their utility becomes a long hunter, and an overnight salesman, and goes far from home, and sells electricity for 2.7 cents. Is there absolutely any question in your mind, as the general counsel of TVA, that that is not discriminatory?
Mr. CHRISTENBURY. Congressman, I would be hesitant to get into characterizing acts. I thinkAs I say, I believethe figures certainly speak volumes, but I would feel uncomfortable in characterizing specific acts.
Mr. JENKINS. Well, you've been called upon to answer a lot of questions that probably somebody else should answer. But I find in the questioning a lot of misunderstanding.
I wish you'd take just a minute to point out to the members of this committee what the self-financing amendments to the TVA Act in 1959 did. In essence, and in a nutshell, did they not make TVA a private utility, and require TVA to go out into the open market and borrow money like any other utility in this country?
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Mr. CHRISTENBURY. That is correct, Congressman. Certainly as you know well, up until 1959 TVA was funded through appropriations. In 1959 TVA was placed on a self-financing basis, that is, it's power system was placed on a self-financing basis. From 1959, forward, the power system had to pay for itself, to finance itself, and it has done that through it's power revenues and through the selling of bonds in the open market.
Mr. JENKINS. And it's been said that you today get very favorable interest rates from federal agencies. You have an indebtedness of about $26 billion. What portion of that is from any federal financing agency whatsoever?
Mr. CHRISTENBURY. The great bulk of all of our borrowing today is in the public market. We at one time borrowed from the Federal Financing Bank, and are paying them an interest rate of 11 percent.
Mr. JENKINS. And that's more than you're paying in the open market, isn't it?
Mr. CHRISTENBURY. Oh, absolutely. We're paying now in open market about three or four basis points above what treasuries are selling.
Mr. JENKINS. I wanted you to make that point, and the charge has also been made that TVA does not pay taxes. Now, tell us how much tax. I just saw recently when I was in Tennessee this last week, the amount of money that TVA has paid to the states and to the counties, and to the cities for taxes.
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Now, what was that figure? These are ad valorem taxes.
Mr. CHRISTENBURY. That is correct. We make what we refer to as an in lieu of tax payments, which is equivalent to your ad valorem tax, your franchise tax. This year we will pay $271 million in lieu of tax payments to Tennessee and to the six other states where we sell power.
Mr. JENKINS. You did not pay income tax because you had no income; you're a non-profit corporation.
Mr. CHRISTENBURY. TVA is not-for-profit. We had a net income of $7.5 million this year on a $6 billion operation.
Mr. JENKINS. Well, now, there's been a statement made that TVA is exempt for environmental laws. If that's true, I want to know what's changed since I served as a member of the TVA Board, because it appeared that we were an example across this nation, and we were called upon to meet a higher standard than any other utility in this country. But is it true or is it not that TVA is exempt from environmental laws?
Mr. CHRISTENBURY. That statement was incorrect. We are covered under NEPA, the Clean Air Act, Clean Water Act. We are covered in all respects, and indeed as a federal agency, our environmental responsibilities are in most cases greater than IOUs.
Page 67 PREV PAGE TOP OF DOC Mr. JENKINS. Let me ask you one more question now. Cinergy complains when you come back to the area that you once served, and havehowever you want to describe itsolicited or courted customers there.
Now is that nowthey came in, got your customer. You went back, saw the customer. Is this not the very essence of deregulation that this Congress is now studying, and is this not what's going to happen across this land, everyday, tens and hundreds of thousands of times a day, in the event that this Congress passes some deregulation scheme for the electric utility industry?
Mr. CHRISTENBURY. Congressman, I believe in fact the complaints have come mostly from Bristol, but the point you make is exactly right. This is competition in its truest sense. I think that's where the whole restructuring, deregulation of the electric utility industry is going in many respects.
Mr. JENKINS. I see a red light on. That's all. Thank you very much, Mr. Christenbury, thank you, Mr. Chairman.
Mr. HYDE. Thank you, Mr. Jenkins. That completes the questioning by the committee for this panel. I want to thank both of you for your time and for your responses. Mr. Smith you escaped without a shot being fired. I don't know how you did that. But thank you both very much, and we'll be back to you.
Our second panel consists of four witnesses who have various perspectives on TVA and the PMAs.
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Our first witness is Dr. David Fletcher. Dr. Fletcher is a graduate of Virginia Tech, the University of Florida, and the University of Georgia Veterinary School. In addition to his veterinary practice he has served as president of the Virginia Board of Veterinary Medicine, and is president of the Chamber of Commerce in Bristol, Virginia. More pertinent to today's hearings, Dr. Fletcher is currently the chairman of the Bristol Utilities Board, and has been a member of that body for 15 years.
Our second witness is Mr. David Sanders. Mr. Sanders is a graduate of the University of the South, and the University of Mississippi Law School. He's an attorney with the law firm Mitchell, McNutt, Threadgill, Smith & Simms in Columbus, Mississippi, where he represents a number of electrical cooperatives. He's active in a wide variety of civic and professional endeavors, and he appears here today on behalf of 4-County Electric Power Association.
Our next witness is Mr. Brad Van Cleve. Mr. Van Cleve is a graduate of Indiana University in the Northwestern School of Law. He's an attorney with the law firm of Duncan, Weinberg, Miller & Pembroke in Portland, Oregon, where he works on a number of matters related to electricity. Before joining Duncan Weinberg, Mr. Van Cleve worked with the Portland General Electric Company for 10 years. He appears here today on behalf of the Industrial Customers of Northwest Utilities.
Our final witness is Ms. Katherine Sasseville. Ms. Sasseville is a graduate of the University of Minnesota and its law school. After a tour with the United States Navy, Ms. Sasseville became a commissioner on the Minnesota Public Utilities Commission. She then went into private practice before joining the Otter Tail Power Company in 1982. Since 1987, she's served as general counsel to the company. She appears here today on behalf of the Alliance for Power Privatization.
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So if you folks will confine your remarks in chief, as best as you canno sanction if you don'tto five minutes, by unanimous consent, your full statement will be made a part of the record. And so, our first witness is Dr. Fletcher.
STATEMENT OF DAVID W. FLETCHER, CHAIRMAN, BRISTOL VIRGINIA UTILITY BOARD
Dr. FLETCHER. I am Chairman of the Bristol Virginia Utilities Board, which operates a municipally-owned, electric power distribution system serving 15,000 customers. Bristol, Virginia presently purchases wholesale power from the Tennessee Valley Authority, but has entered into a 7-year fixed rate contract for firm power with Cinergy Services, Inc., beginning January 1, 1998.
In preparing to make that change, Bristol went to the marketplace. Bids were received from 19 prospective suppliers, with TVA's proposal being the very least favorable. Compared to TVA's rates, Bristol will save one-third of its wholesale power cost in excess of $70 million during the next 7 years.
TVA, a non-profit federal agency, has done everything it could to impede Bristol's efforts to take advantage of free competition in the marketplace. It is my understanding that TVA is not subject to federal or state antitrust laws because it is an instrumentality of the United States, in addition to being a public utility.
I believe that TVA's proprietary functionsand I emphasize proprietaryshould be made subject to federal antitrust laws, or at least TVA should be required to observe the same standards by which private industry is judged on issues pertaining to (1) practices which restrain trade by unfairly restricting competition; and (2) injuring competitors by publishing disparaging statements which are false or misleading.
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Now, I am not an attorney. I'm not trying to speak with authority about antitrust laws, and I certainly am not trying to make legal arguments. However, I would like to relate some events and circumstances which have occurred to demonstrate why I believe TVA has at least violated the principles of antitrust laws.
One, TVA has engaged in predatory pricing by soliciting business from Bristol's industrial customers, sending them letters containing the following language, and I quote, ''TVA would propose to serve your plant firm power, indexed to be 2 percent less than Bristol, Virginia's legitimate published firm rates.''
Now without even knowing or caring what retail rates Bristol would charge, TVA offers to build duplicate facilities and to sell retail power directly to Bristol's industrial customers for 2 percent less than any rate Bristol might offer. This cascading 2 percent less proposal places Bristol in a very non-competitive position. This proposal plus the millions of dollars that would be necessary for duplicate facilities places TVA in a position that they would necessarily have to sell product for less than their average production cost. If TVA were subject to the Sherman Act, we believe the price cutting just described would be in violation of that Act.
Two, Tennessee Valley Authority's dictatorial powers would surely violate at least the spirit of the Clayton Act. TVA answers to no one; it is like a ball player who referees a game in which he is playing. TVA requires all its distributors to enter into contracts which require total purchase of wholesale power. No agency regulates TVA or its rates. On the other hand, TVA itself regulates its distributors, including the rates they can charge. TVA is not subject to the Clayton Act, but if it were we suggest that it would clearly be in violation of that Act.
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TVA is the largest electric power producer in the United States. It behaves as though it has endless resources, and perhaps it has since it has easily borrowed its way into a $28 billion debt. TVA has a large legal staff, and does not hesitate to use its size and resources to intimidate a small town distributor.
In addition to attempting to cherrypick Bristol's industrial customers, perhaps the most sinister, the most revengeful action has only surfaced in recent days. TVA is now threatening to withhold access, to interchange facilities which have enabled Bristol, Virginia to exchange emergency power with its sister city of Bristol, Tennessee, benefitting both cities for over a half century. These interchange facilities are vital for the exchange of emergency power during storm episodes and for routine maintenance.
TVA has also demanded the huge sum of $54 million be paid as stranded costs although TVA has known for over 10 years they had no reasonable expectation to continue supplying us. When it appeared that Bristol intended to enter into contract with a new power supplier, TVA's chairman, Craven Crowell, wrote a letter, dated January 10, 1997, addressed to the mayor of Bristol, Virginia, in which he stated, the Bristol community was likely to suffer from blackouts and poor reliability if Bristol should be so foolish as to purchase its power from some other supplier.
That letter, which was publicized in the local news media, was obviously intended as a scare tactic, although the TVA chairman should have known that his statement was false and misleading.
Page 72 PREV PAGE TOP OF DOC TVA's reaction to Bristol's effort to take advantage of competition in the marketplace is more than just a frustration of the Federal Energy Policy Act. It is outrageous; it's a disgrace to the United States Government of which it is a part. We urge Congress to restrain TVA's arrogant abuses, which defy efforts to open the electric power industry to free competition. Thank you, Mr. Chairman.
[The prepared statement of Dr. Fletcher follows:]
PREPARED STATEMENT OF W. DAVID FLETCHER, CHAIRMAN, BRISTOL VIRGINIA UTILITY BOARD
The Tennessee Valley Authority's reaction to Bristol, Virginia Utilities Board's changing from TVA to an investor-owned wholesale power supply is considered to violate principles by which anti-trust laws govern conduct in the private sector, in the following ways:
1. TVA has tried to lure away Bristol's industrial customers by offering predatory prices which would be 2% below any rates which Bristol might charge;
2. While TVA is not regulated by any agency other than itself, TVA closely controls and regulates its distributors who are held captive by contracts which prohibit their purchasing power form any other source;
3. TVA has used its giant size to intimidate a small-town distributor to discourage Bristol from purchasing power elsewhere, and to deter other distributors from following suit; and
Page 73 PREV PAGE TOP OF DOC 4. TVA has published false and misleading statements which are disparaging of its competition, as a scare tactic to prevent competition.
TVA's conduct would have violated anti-trust laws, if TVA were subject to them. It is the belief of Bristol Virginia Utilities Board that TVA's proprietary functions should be made subject to federal anti-trust laws, or at least TVA should be required to observe the same standards by which private industry is judged on restraint of trade and unfair trade practices.
Mr. Chairman, Congressmen, Staff Members, my name is David Fletcher. I am Chairman of Bristol Virginia Utilities Board, which operates a municipally-owned electric power distribution system, serving about 600 million kilowatt hours of wholesale power per year to 15,000 customers.
Bristol, Virginia presently purchases wholesale power only from Tennessee Valley Authority (TVA), but has entered into a seven-year fixed rate contract to purchase power from an investor-owned utility, Cinergy Services, Inc., starting January 1, 1998. In preparing to make that change, Bristol went to the marketplace to seek the lowest rates available for its customers. In a highly-competitive situation, bids were received from 19 prospective suppliers. TVA's proposal was the least favorable bid.
Compared to TVA's rates in effect when the request for proposals was issued, Bristol will save 1/3 of its wholesale power costs, in excess of $70 million during the next seven years. Additional savings will be realized by avoiding TVA's rate increases. TVA has already imposed one rate increase since the Cinergy contract was signed.
Page 74 PREV PAGE TOP OF DOC TVA, a non-profit federal agency, has done everything it could to impede Bristol's efforts to take advantage of free competition in the marketplace.
I understand that TVA is not subject to federal or state anti-trust laws because it is an instrumentality of the United States, in addition to being a public utility. I believe that TVA's proprietary functions should be made subject to federal anti-trust laws, or at least TVA should be required to observe the same standards by which private industry is judged on issues pertaining to (1) practices which restrain trade by unfairly restricting competition, and (2) injuring competitors by publishing disparaging statements about competitors which are false or misleading.
I am not a lawyer. I am not trying to speak with authority about the anti-trust laws, and I certainly am not trying to make legal arguments. However, I would like to relate some events and circumstances which have occurred to demonstrate why I believe TVA has at least violated the principles by which anti-trust laws govern conduct in the private sector.
It is my understanding that the purpose of The Sherman Anti-Trust Act was to prevent practices which would restrain trade by restricting competition and The Act is directed against conduct which unfairly tends to destroy competition. I am told that price cutting is not unlawful, but price cutting will violate The Sherman Act where a rival is engaged in predatory pricing, and predatory pricing is prohibited because of fear that a dominant firm will deliberately sacrifice present revenues for the purpose of driving rivals from the market, and then recoup its losses through higher profits to be earned in the absence of competition.
Page 75 PREV PAGE TOP OF DOC TVA has engaged in predatory pricing by soliciting business from Bristol's industrial customers, sending them letters containing the following language: ''. . . TVA would propose to serve your plant . . . firm power indexed to be 2% less than BVUB's legitimate published firm rates.'' Without even knowing or caring what retail rates Bristol will charge its industrial customers, TVA offers to sell electricity directly to Bristol's industrial customers for 2% less. Obviously, Bristol could not compete. If Bristol cuts its price to meet the competition, TVA's price will automatically fall 2% below Bristol's reduced price, ad infinition. We believe that TVA's offer to our industrial customers was an offer to sell power below TVA's total average costs. Certainly, TVA's offer to sell power to our industrial customers implies a rate that is at least 30% below the lowest rate TVA proposed to Bristol for an all-requirements contract.
If TVA were subject to The Sherman Act, we believe the price cutting just described would be in violation of that Act.
We further understand that The Clayton Act was adopted by Congress in 1914 to address certain practices which had been held to be outside the ambit of The Sherman Act, but which Congress considered dangerous to free competition in trade and commerce. The Clayton Act was a prophylactic measure, intended to deter consequences of intercorporate relationship before they could work their evil on competition. Under certain circumstances, The Clayton Act attacked interlocking directors, tying arrangements, mergers, horizontal amalgamations, vertical amalgamations, etc. Tennessee Valley Authority's dictatorial powers would surely violate at least the spirit of The Clayton Act. TVA answers to no one. It is like a ball player who referees a game in which he is playing. TVA requires all of its distributors to enter into contracts which require the distributors to purchase all wholesale power from TVA, and no amount of power from any other source. No agency regulates TVA or the rates it can charge its distributors. On the other hand, TVA, itself, regulates its distributors, including the rates they can charge their retail customers. TVA is not subject to The Clayton Act, but if it were, we suggest that it would clearly be in violation of that Act.
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The Robinson-Patman Act, which Congress adopted in 1936, was intended to strengthen The Clayton Act provisions regarding price discrimination by eliminating inequities related to size and preferences. I understand that size, alone, does not violate the federal anti-trust laws, however, size carries an opportunity for abuse and size is therefore an earmark of monopoly. I further understand that a lawful monopoly may become unlawful under Section 2 of The Sherman Act, if it is used to foreclose competition or to destroy a competitor. TVA is the largest electric power producer in the United States. It behaves as though it has endless resources, and perhaps it has, since it has easily borrowed its way into a $28 billion debt. TVA has a large legal staff and does not hesitate to use its size and resources to intimidate a small-town distributor which had the audacity to leave TVA to find a more favorable wholesale supplier. In addition to attempting to pirate Bristol's industrial customers, TVA is now threatening to withhold access to interchange facilities which have enabled Bristol, Virginia to exchange emergency power with its sister City, Bristol, Tennessee, benefitting both Cities for over half a century. TVA has demanded a huge sum of $54.1 million to be paid by Bristol as stranded investment, although TVA had no reasonable expectation to continue supplying us, because TVA has known for 13 years that Bristol was seriously considering a change of wholesale suppliers.
The Federal Trade Commission Act supplements The Sherman and Clayton Acts by stopping practices which, if unchecked, would violate those Acts. We understand that the purpose of the Federal Trade Commission Act was to protect society against oppressive anti-competitive conduct. This Act's prohibition against unfair competition is violated by publishing false or misleading statements which would disparage a competitor's standing. When it appeared that Bristol intended to enter into a contract with a new wholesale power supplier, TVA's Chairman, Craven Crowell, wrote a letter dated January 10, 1997, addressed to the Mayor of Bristol, Virginia, in which he stated that the Bristol community was likely to suffer from blackouts similar to those experienced by consumers in the western United States if Bristol should be so foolish as to purchase its power from some other supplier. That letter, which was publicized in the local news media, was obviously intended as a scare tactic, although the TVA Chairman knew that his statement disparaging the competitor's reliability was false and misleading.
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TVA's reaction to Bristol's efforts to take advantage of competition in the marketplace is more than just a frustration of the Federal Energy Policy Act of 1992. It is outrageous and a disgrace to the United States government, of which it is a part. We urge Congress to restrain TVA's arrogant abuses which defy efforts to open the electric power industry to free competition in the marketplace.
Mr. HYDE. Thank you, Dr. Fletcher.
STATEMENT OF DAVID L. SANDERS, ATTORNEY, MITCHEL, MCNUTT, THREADGILL, SMITH AND SIMMS AND GENERAL COUNSEL, 4COUNTY ELECTRIC POWER ASSOCIATION
Mr. SANDERS. Mr. Chairman, I'm David Sanders, general counsel to 4-County Electric Power Association, a Mississippi-owned rural electrical co-op. The purpose of my testimony today is to provide this committee with information, describing 4-County's experience with TVA, and what we believe to be anti-competitive behavior on its part. Further, and perhaps more importantly, my purpose is to share with the committee the lack of any judicial or regulatory redress 4-County had against TVA for its anti-competitive behavior.
I'm not an antitrust lawyer. However, it appears TVA, as an agent of the Federal Government, is exempt from the antitrust laws. 4-County is a captive customer of TVA. The sole source power contract with TVA provides for a rolling 10-year cancellation notice, a perpetual contract, if you will.
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In December of 1993, 4-County in an effort to access the open competitive market, submitted to TVA our notice of cancellation. Little did we know what was in store for us. In 1994 4-County tested the market by seeking requests for proposals to provide power to 4-County. The proposals indicated that 4-County could save from $60 to $90 million in low electric rates for its customers over a 7-year period.
In an effort to force 4-County to withdraw it's contract cancellation, TVA told 4-County that if it was not a committed customer TVA would not guarantee it would build additional transmission facilities in our area, and that service might be impaired. TVA told us it may not make funds available for economic development in our area. TVA actively worked to turn our customers against us. When these tactics failed, TVA notified 4-County that it would not make the TVA enhance growth credit program, a program designed to encourage industrial development available to 4-County; a clear abuse in our opinion of market power.
In response, 4-County filed a suit in federal court, seeking to require TVA to make the program available; or an alternative, void the unconscionable contract. TVA countered, claiming $65 million in stranded investments.
The court, citing TVA's extensive statutory powers, to set the terms and conditions of its power supply, ruled by summary judgment in TVA's favor. The court's hands were tied of course, since TVA is empowered by the TVA Act with broad authority.
Next, Phillips Coal Company proposed to build a $470 million power plant in our service territory that would provide hundreds of high paying jobs, and sell power to TVA. TVA announced the project would either be relocated or canceled, since 4-County had given notice of contract cancellation. TVA told community leaders that 4-County stood in the way of this vital project. We even offered the seed a portion of our territory to the adjoining co-op, so that the facility would not be located in our area. TVA increased the pressure however.
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4-County customers, encouraged by TVA, berated us for killing the project. Threats of physical damage to 4-County's facilities were made. The motives of our Board, our general manager, and our staff were challenged, and there were threats of repercussions. It was a very nasty affair to say the least. In the end 4-County succumbed to this economic blackmail, and withdrew its contract cancellation. The project moved forward.
TVA should be subject to the same laws, including the antitrust laws, governing investor-owned utilities, and should be regulated by the Federal Energy Regulatory Commission. Currently, TVA is by and large exempt from the Energy Policy Act. The TVA Act and the Energy Policy Act create a wall inside which only TVA can supply power. FERC has no jurisdiction over TVA's wholesale rates. TVA is not subject to the regulation of any public service commission of any state. The courts have little or no jurisdiction over TVA's broad statutory powers. TVA customers have no grievance procedure. TVA regulates itself.
Quite frankly, TVA has for a long time used fear, political inputs, innuendos, harassment, market power, and misrepresentations to hold distributors in line. Such conduct cannot and should not be tolerated by Congress.
Mr. Chairman, I applaud you and this committee for providing oversight to the TVA. I ask you to remember the customers of TVA's distributors. 4-County and its customers who are also taxpayers, are represented by no one before TVA. As a result, TVA has grown into a huge unbridled bully. Unless disciplined, the bully will continue to bully. The focus of this oversight hearing assumes that there will be retain restructuring. We suggest Congress complete the job of opening up wholesale restructuring now.
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The Energy Policy Act should be amended by removing the TVA exemption. At the same time, FERC should have jurisdiction over TVA. These two actions alone will complete the work of the Energy Policy Act, will provide proper oversight for TVA, and will allow all TVA distributors, including 4-County, to participate in the competitive wholesale market, just like Bristol, Virginia.
I thank you for the opportunity to appear here today on behalf of 4-County, Mr. Chairman, and I appreciate the opportunity. Thank you very much.
[The prepared statement of Mr. Sanders follows:]
PREPARED STATEMENT OF DAVID L. SANDERS, ATTORNEY, MITCHEL, MCNUTTY, THREADGILL, SMITH AND SIMMS AND GENERAL COUNSEL, 4-COUNTY ELECTRIC POWER ASSOCIATION
Mr. Chairman, Members of the Committee, and Staff Members, I am pleased to appear before you today to discuss the Tennessee Valley Authority. I am David Sanders, general counsel to 4-County Electric Power Association, a consumer owned rural electrical cooperative, with a peak load of 185 megawatts and serving approximately 38,000 customers in rural Mississippi.
The purpose of my testimony today is to provide this Committee with information describing 4-County's experience with TVA and what may appear to be anticompetitive behavior on its part. Further, and perhaps more importantly, my purpose is to share with the Committee the lack of any judicial and regulatory agency redress 4-County's had against TVA for its anticompetitive behavior.
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4-County is a captive customer of TVA. The sole source Power Contract with TVA provides for a rolling 10-year cancellation notice. In other words, the power contract does not expire on a day certain, but 10 years after notice of cancellation. A moving target. A perpetual contract, if you will.
I am not an anti-trust lawyer. However, when looking into the legal rights of 4-County, I found under Lafayette v. Louisiana Power & Light Company,(see footnote 3) that a municipal utility could be liable under the anti-trust statutes, but such doctrine does not apply to TVA. This is because TVA is an agent and instrumentality of the federal government. This was the ruling in the Webster County Coal v. TVA and The City of Loudon v. TVA(see footnote 4) cases. TVA enjoys other exemptions and prerogatives. For example:
TVA is by and large exempt from the Energy Policy Act;
The TVA Act and the Energy Policy Act create a wall inside which only TVA can supply power;
FERC has no jurisdiction over TVA's wholesale rates;
TVA is not subject to regulation by any state Public Service Commission;
The Courts have little or no jurisdiction over TVA's broad statutory powers to set rates and the terms and conditions of power supply;
Page 82 PREV PAGE TOP OF DOCTVA customers have no grievance procedure;
TVA regulates itself.
On December 6, 1993, in an effort to access the competitive wholesale electric market, 4-County submitted to TVA its 10 year notice of cancellation. This notice, according to the TVA/4-County Contract, gave 4-County 10 years to make a power supply decision. Little did we know what was in store for us.
At first, matters were cordial between 4-County and TVA. TVA tried to convince us to withdraw our cancellation notice telling us the TVA contract was ''under review,'' and we should ''trust them'' because the contract issues would be addressed. However, 4-County was not wooed into withdrawing its notice of contract cancellation.
Let me talk just a minute about the Power Contract issues. In addition to the 10 year rolling cancellation provision, the Power Contract provides the following:
4-County can only buy power from TVA;
TVA can use 4-County's lines to transmit power to other TVA customers, but 4-County cannot use TVA lines.
TVA has control over the use of 4-County's revenue.
4-County is required to relinquish certain large customers to be served directly by TVA;
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TVA has control over 4-County's rates;
TVA exercises control over 4-County's system of accounts.
4-County learned more about TVA's financial condition. Presently, TVA has accumulated more than $27 billion in debt, $6.3 billion of which stands in non-performing nuclear assets. TVA is required to pay 33 of every revenue dollar in interest expense. TVA has successfully sold bonds to the public boasting of its AAA rating. To me, this rating is misleading since the financial rating of the TVA bonds comes solely from the ''implicit backing'' of the U.S. Government. Without this implicit backing of the Government, I believe, based on TVA's past and current financial performance, a TVA bond is no better than a ''junk bond.'' As you know, TVA bonds do not have the explicit guarantee of the U.S. Government.
In 1994, 4-County tested the market by seeking Requests For Proposals to provide power to 4-County. 4-County received 22 proposals from 16 competing electric power suppliers. These proposals indicated that 4-County could save between $60 and $90 million in lower electric rates over a 7 year period beginning in 1996.
TVA told 4-County that if it was not a ''committed customer,'' TVA would not guarantee it would invest additional capital in transmission facilities in our service territory, and that service might be impaired. TVA told us it may not make funds available for economic development in our area. TVA attempted to turn our customers against us. When these tactics failed, TVA notified 4-County that it would not make TVA's Enhanced Growth Credit Program, a program designed to encourage industrial development, available to 4-County. TVA told 4-County the program would only be made available ''if 4-County's notice of termination was withdrawn.'' TVA officials also said 4-County's participation in the program would be ''harmful to other TVA customers.'' This is not the case. The Enhanced Growth Credit Program is based on marginal cost power and any revenue from 4-County's participation would exceed the cost of generating and delivering the power, thus creating a profit for TVA. TVA's discrimination amounted to economic blackmail and an abuse of its market power.
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In response, 4-County filed suit in Federal Court seeking to require TVA to make the Enhanced Growth Credit Program available or, in the alternative, void the unconscionable Power Contract. TVA countered claiming $65 million in stranded investment. The Court, citing TVA's extensive statutory powers to set the terms and conditions of its power supply, ruled, by Summary Judgment, in TVA's favor. The Court's hands were tied, since the TVA Act empowers TVA with broad authority.
What happened next? Phillips Coal Company, a wholly-owned subsidiary of Phillips Petroleum, along with other joint venture partners, proposed to build a $470 million coal fired power plant in Choctaw County, Mississippi, and sell the power generated to TVA. The plant was attractive to TVA because Phillips Coal could build the facility, enter into a long-term power supply contract with TVA, and the ratepayers would pay the bill with no direct impact on TVA's debt. TVA had $27 billion in debt, and was pushing the $30 billion debt ceiling. The proposed plant site was in 4-County's service territory. The project drew a great deal of political attention. The State of Mississippi, as well as 4-County, wanted the coal facility for Mississippi.
Then, TVA announced the project would either be cancelled or not built in the 4-County service area, since 4-County had given notice of contract cancellation. TVA told the community leaders in Choctaw County that 4-County stood in the way of this vital project. In response to community unrest, 4-County met with the local citizens in an effort to explain its reasoning for attempting to access the competitive wholesale electric market and the sound business principles giving rise to the TVA contract cancellation. 4-County even offered to cede a portion of its territory to the adjoining co-op so the power plant would not be located in 4-County's territory. TVA increased the pressure by meeting with groups of local citizens in the Choctaw County area. 4-County customers in the area, encouraged by TVA, berated 4-County for ''killing the project.'' People made threats of physical damage to 4-County's facilities. The motives of our Board of Directors, General Manager, and staff, were challenged and there were threats of repercussions. It was a nasty affair. In the end, 4-County succumbed to TVA's economic blackmail, and withdrew its notice of cancellation. The project moved forward.
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The TVA Power Supply Contract is a one-sided, unilateral, unconscionable, burdensome, punitive, anti-competitive agreement. Without the peculiar prerogatives enjoyed by TVA, such a contract would not withstand FERC scrutiny. The conduct of TVA, after 4-County gave notice of termination, was threatening, harassing, and anti-competitive. TVA punished 4-County for exercising its legal right to terminate its perpetual power supply contract, ultimately forcing 4-County to back down and to remain a customer. TVA did this without any risk of suit for an antitrust violation. This outcome is hard to take because other government corporations that compete against private enterprise are not insulated from antitrust liability like TVA. Indeed, even the Supreme Court of the United States has found that governmental entities that compete in a proprietary business against private enterprise should be subject to antitrust laws.
Mr. Chairman, I applaud you and this Committee, for providing oversight by Congress of the TVA. I ask that you remember the customers of the TVA distributors. 4-County and its customers, who are also taxpayers, are represented by no one before TVA. They have no grievance process. They have nowhere to go. The Courts and FERC can give them no relief. As a result, TVA has grown into a huge unbridled bully. Unless disciplined, the bully will continue to bully.
TVA should be subject to the same laws governing investor-owned utilities, including the antitrust laws, and should be regulated by the Federal Energy Regulatory Commission. TVA has for a long time used fear, political influence, innuendos, harassment, market power, and misrepresentations to hold distributors in line. Such conduct cannot, and should not, be tolerated.
Page 86 PREV PAGE TOP OF DOC The focus of this oversight hearing assumes that there will be retail deregulation. We suggest Congress complete the job of opening up wholesale competition. The Energy Policy Act should be amended by removing the TVA exemption. At the same time, FERC should have jurisdiction over TVA. Those two simple actions will complete the work of the Energy Policy Act, provide the proper oversight of TVA, and allow all TVA distributors to participate in the competitive wholesale market. Just like Bristol, Virginia.
Again, I thank you for the opportunity to appear and present testimony on behalf of 4-County Electric Power Association. Mr. Chairman, I applaud you and the Committee for your efforts. Thank you.
Mr. HYDE. Thank you, Mr. Sanders.
Mr. Van Cleve.
STATEMENT OF S. BRADLEY VAN CLEVE, ATTORNEY, DUNCAN, WEINBERG, MILLER AND PEMBROKE, ON BEHALF OF INDUSTRIAL CUSTOMERS OF NORTHWEST UTILITIES
Mr. VAN CLEVE. Mr. Chairman and Members of the Committee, my name is Brad Van Cleve, and I'm appearing today on behalf of the Industrial Customers of Northwest Utilities, which is a non-profit association of over 40 industrial power users in the Pacific Northwest, whose members include Boeing, Intel, Atlantic Richfield, and Georgia Pacific, to name a few.
Page 87 PREV PAGE TOP OF DOC My comments today reflect ICNU's views and not necessarily the view of my law firm. The issue presented by these hearings is whether the antitrust laws should apply to the Federal Power Marketing Administrations, including BPA. I believe the answer is yes, unless some other mechanism can be implemented to ensure that the Power Marketing Administrations do not unreasonably interfere with the development and operation of competitive power markets.
BPA's role in northwest power markets has changed dramatically in recent years due to the advent of competition. BPA has adopted a market-driven business plan, which according to the agency in its own words means that it will, ''participate fully as a competitor in the market for power, transmission, and energy services.'' In other words, BPA has elected to operate like a business rather than a governmental agency.
This raises competitive concerns for two reasons. First, BPA controls 80 percent of the transmission assets and 40 percent of the generation assets in the Pacific Northwest; and BPA can act as a competitor, and exercise its market power without the restrictions imposed on private business by the antitrust laws. Unlike TVA, BPA does not have a fence around it as was discussed earlier today. In 1995 Congress removed many of the restrictions on BPA's ability to sell power outside the northwest, including to the California market.
In 1995 BPA decided to selectively grant transmission access and stranded cost recovery to certain customers in order to retain its market share for power sales. A subset of ICNU's members challenged BPA's actions in a case known as APAC v. BPA. In September of this year the Ninth Circuit Court of Appeals denied that challenge, stating that unlike most government agencies, BPA has extraordinary discretion to operate like a business.
Page 88 PREV PAGE TOP OF DOC The court found that BPA's actions will be upheld unless the explicitly conflict with a statutory directive. The case also rejected an argument that BPA must consider anti-competitive impacts of its actions, which was pointed out earlier by Mr. Smith. And particularly, we argued that BPA had to consider the impacts on downstream consumers, and the Ninth Circuit rejected that argument.
These three factors combine to create a serious risk that BPA will adversely impact power markets. BPA has market power in both transmission and generation. It has adopted a market-driven, competitive business plan, and it has been given wide judicial deference to act in its own business interest.
In the past, BPA has also engaged in conduct that would raise antitrust concerns if it were a private industry. These include refusing to provide transmission access to preserve power sales, and although BPA has filed an open access tariff with FERC, there's currently a dispute pending at FERC over access between BPA and an Idaho electric cooperative. BPA has also conditioned power sales on exclusive dealing provisions, and it has entered into agreements to limit generation output in exchange for lower prices.
Policymakers at both the state and federal level are increasingly relying on competition rather than regulation to determine the price of electricity. Therefore it is imperative that power marketing administrations do not adversely affect the operation of competitive power markets.
To preserve a competitive power market in the Pacific Northwest Congress should consider the legal separation of BPA's transmission and power marketing businesses, and application of the antitrust laws to BPA. Thank you for the opportunity to address the committee today.
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[The prepared statement of Mr. Van Cleve follows:]
PREPARED STATEMENT OF S. BRADLEY VAN CLEVE, ATTORNEY, DUNCAN, WEINBERG, MILLER & PEMBROKE, ON BEHALF OF THE INDUSTRIAL CUSTOMERS OF NORTHWEST UTILITIES
The electric industry is rapidly moving toward a competitive market. In the Northwest, the Bonneville Power Administration (''BPA'') controls 80% of the electric transmission market and 40% of the electric generation market. BPA has adopted a business strategy of participating ''fully as a competitor in the market for power, transmission and energy services. . . .'' The combination of BPA's market power with its business strategy creates a serious risk that BPA will engage in anti-competitive conduct to the detriment of emerging competitive power markets.
To ensure that Northwest electric consumers receive the benefits of competition, Congress should change the laws governing BPA, apply the antitrust laws to BPA, and require the separation of BPA's power and transmission businesses.
Mr. Chairman and Members of the Committee, my name is S. Bradley Van Cleve, and I am appearing today on behalf of the Industrial Customers of Northwest Utilities (''ICNU''), a non-profit trade association composed of large industrial power users located in the Pacific Northwest. A list of ICNU's members is attached to this testimony as Exhibit A.
Page 90 PREV PAGE TOP OF DOCI. Introduction
The electric power industry in the United States is rapidly moving toward a competitive market. I would like to address the role of the Bonneville Power Administration (''BPA'') in the electric marketplace in the Northwest. BPA is a federal power marketing administration that has long been a dominant force in both the electric power and electric transmission markets in the Northwest and throughout the Western United States. As power markets both at the wholesale and retail levels are being opened to competition, it is time to examine whether the laws governing BPA should be modified. BPA acts as, and should be treated as, a competitor when it participates in deregulated power markets. An efficient competitive market will ensure that electric consumers like the members of ICNU will pay the lowest prices possible, which will benefit the U.S. economy in general.
Congress could take several steps to ensure that BPA does not adversely affect operation of a competitive market. First, BPA's transmission business could be legally separated from its power marketing business to prevent abuse of its control of essential transmission assets. Second, BPA could be subject to existing rules governing competition, such as the federal antitrust laws. Third, the complex web of statutes governing BPA's operation could be revised to reflect changes in the market and the agency's mission.
BPA is a federal power marketing agency which is part of the United States Department of Energy. BPA was created in 1937 to market the electric power produced by federal dams along the Columbia River. BPA now markets 8600 average megawatts of electrical output from both federal and non-federal generating facilities in the Northwest, and it operates one of the largest high-voltage electric transmission networks in the world. BPA controls approximately 80 percent of the bulk electric transmission capacity and 40 percent of the installed electric generating capacity in the Northwest.
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BPA's role in developing power markets has evolved dramatically due to changes in the electric industry and evolution of the agency's mission. Although BPA was once merely a distributor of the electrical output of federal hydroelectric power, BPA has become a dominant player in the market for wholesale electricity purchases and sales. In this respect, BPA operates more like a business than like an arm of the federal government.
The reach of BPA's market influence extends far beyond the Northwest. Over the last several years, BPA has been the largest purchaser and seller of wholesale power in the Western Systems Coordinating Council, which is the regional electric reliability council covering most of the Western United States. In 1995, Congress enacted Section 508 of Public Law 10446, which increased BPA's ability to market firm power outside the Northwest by removing many existing statutory restrictions on BPA's marketing abilities.
III. Ninth Circuit APAC Decision
The character of BPA's participation in the market is well illustrated by the recent decision of the United Stated Circuit Court of Appeals for the Ninth Circuit in Association of Public Agency Customers v. Bonneville Power Administration, XXX F.3d XXX, 1997 WL 586809 (September 24, 1997) (''APAC v. BPA''). In that case, which was brought by a subset of ICNU's members, the court upheld BPA's decision to offer long-term transmission access and stranded-cost protection to certain end-use customers, called the Direct Service Industries (''DSIs''), in order to obtain their commitment to continue purchasing power from BPA. BPA denied similar access and stranded cost protection to APAC members, even though they also are large industrial users located in the Northwest, some of whom compete with the DSIs.
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The BPA actions challenged in APAC v. BPA were undertaken pursuant to its decision in its 1995 Business Plan to pursue a ''Market-Driven'' business strategy. Under this approach, ''BPA would participate fully as a competitor in the market for power, transmission, and energy services, using success in the market to ensure the financial strength necessary to fulfill its mandates. . . .'' Slip Opinion at 12535. Therefore, BPA has adopted a strategy to operate like a business and maximize its revenues.
The Ninth Circuit noted that BPA's business strategy allowed the agency to compete in competitive markets with extraordinary discretion to behave like a competitive business:
. . . Congress endowed the [BPA] Administrator with broad-based powers to act in accordance with BPA's best business interestspowers not normally afforded government agencies.
Id. at 12540. The court also found that the legislative history of BPA's organic statutes demonstrates an intent ''to enable [BPA] to operate in a businesslike fashion and to free it from the requirements and restrictions ordinarily applicable to the conduct of government business.'' Id. at 12541 (citing S. Rep. No. 164, 95th Cong., 1st Sess. 30 (1977), reprinted in 1977 U.S.C.C.A.N. 854, 883).
The court further found that BPA has broad discretion to implement its business mandate. According to the court:
Page 93 PREV PAGE TOP OF DOC[Congress] granted BPA an unusually expansive mandate to operate with a business oriented philosophy. Accordingly, it seems particularly wise to defer to the agency's actions in furthering its business interest, especially when the agency is responding to unprecedented changes in the market resulting from deregulation.
Id. at 12543.
Essentially, BPA's organic statutes have been construed to allow BPA to operate like a private competitive business, but under the legal exemption from the antitrust laws afforded to government agencies.
Absent a change in law, it is unlikely that a court will overturn BPA's anti-competitive actions, such as selectively offering transmission access and stranded cost protection to maintain its market share. Most cases challenging BPA's actions must be brought to the Ninth Circuit Court of Appeals, where the agency has a long history of liberal judicial deference. In APAC v. BPA, the court continued its policy of deference to BPA. The court stated: ''We are not to debate the wisdom of any BPA business decision unless that decision is so manifestly unreasonable as to rise to the level of being arbitrary and capricious.'' Id. at 12551.
In order to create a level playing field in the Northwest, BPA should have at least a minimum level of accountability when participating in the competitive market. Under current law, that accountability does not exist.
IV. Congress Should Consider Applying the Antitrust Laws to BPA
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As indicated earlier, there are many unresolved issues related to the future of BPA. Today, we are focused on one of those issuesthe impact of BPA on the competitive market. It is questionable whether BPA should be permitted to act as a competitor in developing power markets. To ensure the integrity of the market for electric energy in the Northwest and throughout the Western United States, if BPA does act as a competitor, it should be required to follow the same rules governing competition that apply to other market participants. Even if Congress ultimately decides to recreate BPA in another form, application of the antitrust laws to BPA will preserve competition in the interim.
BPA has chosen as its goal to participate fully as a competitor in the market for power, transmission and energy services. ICNU strongly believes that electric utility restructuring and the resulting increase in competition in electric energy markets should continue. ICNU believes that the market forces of competition serve to strengthen the electric industry, to the ultimate benefit of both suppliers and customers. We stress, however, that as competition in the industry evolves, the competitors must either abide by the laws that govern competitionnamely the antitrust lawsor be subject to other statutory safeguards that protect competition.
Congress elected in the Energy Policy Act of 1992 to allow FERC to open wholesale power markets to competition. Since then, FERC has issued Orders No. 888 and 888a, which require nondiscriminatory open access transmission and provide for market-based pricing at the wholesale level. In giving FERC the ability to require transmission access, Congress stated that the Energy policy Act of 1992, ''shall not be construed to modify, impair, or supersede the antitrust laws.'' 16 U.S.C. §824k(e)(2). In effect, the federal government has elected to replace a regulated monopoly regime with a competitive market. Given this policy choice, it is critical that those markets be structured to allow effective competition.
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The antitrust laws are designed to preserve competition and to ensure that consumers receive the best price and best service attainable through the operation of a competitive market. Given its size in the market and market driven strategy, BPA should not necessarily be exempt from the antitrust laws merely because it is an agency of the federal government. BPA is undoubtedly the competitor in the Northwest with the greatest ability to control both transmission and generation markets.
As the electric industry moves toward competition, private utilities and other market participants are increasingly subject to antitrust scrutiny. Pending antitrust cases involving utilities in the Northwest include: Cost Management Services, Inc. v. Washington Natural Gas Co., supra; California CNG v. Southern California Gas Co., F.3d XXX, WL 339956 (9th Cir. 1997); Columbia Steel Casting Co. v., Inc. v. Portland General Electric Co., 103 F.3d 1446 (9th Cir. 1996), reh'g en banc denied and decision amended, XXX F.3d XXX, 1996 WL 875737 (9th Cir. 1997), petition for cert. filed; Snake River Valley Electric Ass'n v. PacifiCorp, XXX F. Supp XXX 1997 WL 241086 (D. Id. 1997).
Potential BPA anti-competitive conduct falls into three broad categories: attempts to monopolize the market, agreements in restraint of trade, and price discrimination. The potential violations in the context of the electric industry are summarized below.
A. Refusals to Wheel. ''Wheeling'' is a procedure by which the owner of transmission facilities transmits electricity produced by another party. Almost 25 years ago, in the case of Otter Tail Power Company v. United States, 14 U.S. 366 (1973), the Supreme Court decided that a federal District Court had authority under the antitrust laws to enjoin an electric utility from refusing to transmit, or ''wheel,'' power to municipal distribution systems for the purpose of precluding those systems from competing with the utility. Use of market power in transmission to gain an advantage in power markets is, in effect, an attempt to monopolize.
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Recently, as a result of deregulation, there are increasing incidents when utilities that control transmission facilities refuse to provide retail wheeling across their lines. When a party refusing to wheel is a private utility, the antitrust laws, and in particular Section 2 of the Sherman Act, 15 U.S.C. §2, provide a remedy. The courts, relying on language from the Supreme Court in Otter Tail, have held that the Sherman Act is violated when an electrical utility uses its ''strategic dominance in the transmission of power . . . to foreclose potential entrance in the retail area from obtaining electric power from outside sources of supply.'' Snake River Elec. Ass'n, Slip Opinion at 6.
BPA has the authority and may have the business motivation to engage in conduct that would, if engaged in by any other supplier, constitute a violation of Section 2 of the Sherman Act. Because BPA controls 80% of the transmission facilities in the Northwest and 40% of the generation market, it can readily maintain and increase its share of power sales by refusing to wheel electricity purchased from other competitors. This is precisely the situation presented in a case pending at the Federal Energy Regulatory Commission (''FERC'') involving BPA. See Idaho Power Company's Application for Transmission Services Under Section 211 of the Federal Power Act at 14, Docket No. TX 976 (April 15, 1997).
B. Agreements in Restraint of Trade. Section 1 of the Sherman Act, 15 U.S.C. §1, prohibits agreements in restraint of trade. BPA sells a large portion of its power to public and private utilities, who in turn resell the power to ultimate consumers, including members of ICNU. BPA has an incentive to seek conditions which restrain competition because it is not subject to the antitrust laws. For example, BPA has sought agreement from its wholesale customers that they will not engage in retail wheeling as a condition of doing business with BPA. This conduct, if engaged in by any other market participant, would be a refusal to deal under Section 1 of the Sherman Act.
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BPA is also in a position to supply power to a utility at low prices if the utility agrees to restrict its own sale of generation into wholesale power markets. This practice was documented in a case from the mid-1980s, California Energy Resources Conservation and Development Commission v. BPA, 754 F.2d 1470, 1472 (9th Cir. 1985). Agreements to restrict output are a per se violation of the antitrust laws.
If the conduct described above, as well as other conduct violative of Section 1 of the Sherman Act, were undertaken by entities other than BPA, the entities would be subject to remedies provided by the antitrust laws. BPA should not be treated differently.
C. Price Discrimination Under Section 2(a) of the Clayton Act, as amended by the Robinson-Patman Act, it is unlawful for a seller to discriminate in price between different purchasers of a commodity of like grade and quality, subject to further statutory qualifications. The courts have held that electricity is a commodity subject to the Clayton Act, and that price discrimination by electric utilities may violate the Act.
If the past actions of BPA are any indication, BPA markets its electricity without regard to the price discrimination statute. BPA's conduct, which would be illegal absent its governmental exemption, causes competitive injury to those consumers who receive the unfavorable pricing.
V. Issues Related to Application of Antitrust Laws
A. Policy Issues
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Application of the antitrust laws to BPA raises a number of policy questions. These include: (1) whether it is feasible to apply the antitrust laws to an agency of the federal government; (2) how to insure that changes in antitrust law do not adversely affect the rights of BPA's preference customers; and (3) whether BPA should continue to set prices based on its costs of operation. If Congress pursues application of the antitrust laws to BPA, these issues should be further examined.
Regulation of BPA's conduct in the market could take a number of forms, and a range of remedies could apply to BPA. BPA could be subject to the antitrust law just like a private business. This would create the potential for treble damages, attorneys' fees, criminal liability, and injunctive relief. On the other hand, BPA might be treated like a local government, which may be subject to injunctive relief, but not to damages. In addition, BPA could be made subject to enforcement actions by the Department of Justice or the Federal Trade Commission.
C. Appropriate Forum
Application of the antitrust laws to BPA would create an issue of which court should have jurisdiction of these claims. Currently, most cases regarding BPA's actions must be brought at the Ninth Circuit Court of Appeals, which, as a federal appellate court, is not well-equipped to resolve the factual issues involved in an antitrust claim. Therefore, it may be appropriate to create jurisdiction with federal district courts. ICNU would be pleased to address these jurisdictional and technical issues in more detail at a later date if the Committee decides to pursue application of the antitrust laws to BPA.
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BPA has formidable market power in Northwest power markets, which creates a serious potential for anticompetitive conduct. BPA's ''market driven'' business strategy, combined with the liberal interpretation of its statutory limitations makes it more likely that its actions will adversely impact the market. Establishing an efficient market is essential to ensuring that electric consumers receive the benefit of electric industry restructuring.
In order to level the playing field in the Northwest, the rules governing BPA should be reexamined and changed. One solution would be to subject BPA to the same laws governing competition that apply to other players in the marketnamely the antitrust laws. Conversely, Congress might choose to separate BPA's transmission business from its power business, a proposal which ICNU members support, which would remedy part of the potential anti-competitive abuses. Separation alone will not completely resolve the problem, since BPA would still have monopoly power in power markets. Separation, however, will minimize the problem by eliminating the potential to use its transmission monopoly to enhance its power business. Thus, a combination of restructuring BPA and applying the antitrust laws may be necessary to ensure a competitive market.
Thank you for the opportunity to appear before the Committee and discuss these issues of great importance to the Pacific Northwest.
INDUSTRIAL CUSTOMERS OF NORTHWEST UTILITIES
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Bellingham Cold Storage;
Coastal St. Helens Chemical;
Davidson Industries, Inc.;
Eagle-Picher Minerals, Inc.;
Inland Empire Paper Co.;
James Hardie Gypsum, Inc.;
James River Corp.;
Lone Star Northwest;
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Pioneer Chlore Alkali Co.;
Ponderay Newsprint Co.;
Pope and Talbot, Inc.;
PCC Structurals, Inc.;
Shell Oil Refinery;
Sonoco Products Company;
Texaco Oil Refining;
Mr. HYDE. Thank you, Mr. Van Cleve. And as at the wedding feast at Cana, we saved the best wine for last. We have saved our best witness for last. Ms. Sasseville.
STATEMENT OF KATHERINE E. SASSEVILLE, GENERAL COUNSEL, OTTER TAIL POWER COMPANY
Ms. SASSEVILLE. Why, thank you very much, Mr. Chairman, and Members of the Committee. I am delighted to testify today on behalf of Otter Tail Power Company and the Alliance for Power Privatization.
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The question posed by today's hearing, is whether the PMAs should be subject to antitrust laws. The Alliance believes the answer is yes, and the sooner, the better. And we are not premature; the violations you're hearing about are happening today. This is the real world today. But application of the antitrust laws to the PMAs should be viewed as a transitional step to what Congress really needs to do, which is to get the Federal Government out of the electricity business.
Quite simply, Mr. Chairman, the PMAs are monopolists who are unregulated. The Alliance prefers that they be privatized, however, short of privatization Congress should do two things. Number one, regulate the PMAs. This will ensure that the PMAs are subject to the same rules that their competitors are subject to. Specifically make them subject to the FERC transmission and rate-setting authority and rules. And secondly, subject the PMAs to the antitrust laws, a step which this committee can and should take.
And here are some more examples of why you should make the PMAs subject to the antitrust laws. First they erroneously preclude competitive access to PMA power. Such an arrangement in any other context could be considered a refusal to deal, and in some cases this activity could be a per se violation of the Sherman Act.
Second, the PMAs essentially are unregulated monopolies, and the lack of regulation, coupled with antitrust immunity, allows the PMAs to engage in unduly discriminatory and anti-competitive business practices, and you've heard about some of these. And they're not subject to recourse in any forum. Third, the PMAs regularly meet with their preference customers to discuss wholesale price setting, and coupled with refusals to deal, that would be evidence of price fixing. Fourth, the GAO has found that the PMAs sell power below cost, and this activity could be considered predatory pricing.
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Now let me give you a couple of specific manifestations of the problems I've outlined. One of the PMAs, Bonnevillewith approximately 40 to 50 percent of the power consumed in the region, and having 80 percent of the control over transmissionhas a monopoly position in the transmission market, and then it also has market power in at least some of the generation markets. Unfortunately, neither Bonneville nor the other PMAs are subject to effective regulation or antitrust laws, with the result that the lower prices and the efficiencies that competition could create are lost to us. And this is particularly true in markets where the PMAs have monopoly power over transmission or generation, or both. And that includes WAPA too, with not quite as extensive power as BPA, but broadly extensive.
Without the discipline of either a regulator, or with the fear of a prosecutor, it's not surprising that PMAs feel free to use their unregulated monopoly position in anti-competitive ways.
For example, Bonneville says that it has a legal right to include the cost of power in the transmission rates, which all transmission users pay. That is, they assert that they can require their competitors to pay their power costs as a condition of using Bonneville's monopoly transmission facilities. This is totally contrary to existing federal regulations, and could constitute an anti-competitive tying arrangement. The PMAs have also attempted to exercise market power in another way which could be an illegal tying arrangement.
This year WAPA essentially refused to allow a utility to build a needed interconnection with a WAPA transmission line. WAPA refused to do this, even though it jeopardized reliability in the regionI'm talking North Dakota where the whole state is unstableunless the utility agreed to renegotiate an existing but unrelated transmission contract with WAPA. The interconnection would have been paid for entirely by the utility, and the utility rightly claimed that that tying is anti-competitive. They filed a complaint with the FERC; which has eventually settled. But this points out how far the PMAs are willing to go to assert their monopoly power.
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Mr. Chairman, we have a long history in this country of dealing with monopolists, and your committee is the committee that understands the legal and ethical essence of this problem. Either we regulate monopolists, or we limit their activities by the antitrust laws, or both. But with the PMA monopolists we essentially do neither. This committee should begin the process of reigning in the PMAs by reporting out legislation, subjecting them to the antitrust laws.
And one last thing if I may. It's truly an honor for me to testify before the House Judiciary Committee. I'm just a simple country lawyer, and I respect your understanding of this issue, which is so arcane when I try to talk to my family or anyone else. But I want to say why we're hearing about these problems. We're not just talking about agencies, we're talking about human beings, and the laws of human behavior apply. Unfettered monopoly power is absolute power; and absolute power corrupts, absolutely. Thank you.
[The prepared statement of Ms. Sasseville follows:]
PREPARED STATEMENT OF KATHERINE E. SASSEVILLE, GENERAL COUNSEL, OTTER TAIL POWER COMPANY
The Alliance for Power Privatization believes that the Federal Power Marketing Administrations (''PMAs'') should, as an interim step on the way to privatization, be made subject to the same antitrust laws as private entities competing in the electric power industry.
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The PMAs are engaged today in a variety of anti-competitive behaviors that could be actionable under current antitrust laws if the PMAs were subject to them. These behaviors are distorting the wholesale power market. There are no public policy justifications for allowing the PMAs to continue to be shielded from the antitrust laws.
The PMAs should be subject to antitrust laws for the following reasons:
The PMAs have interpreted their governing statutes to preclude competitive access to PMA power by shareholder-owned utilities. Such an arrangement in any other context, could be considered a refusal to deal. In some cases, refusals to deal are considered per se violations of the Sherman Act.
Because the PMAs are substantially unregulated, there is a considerable question as to whether they could claim the standard antitrust law defense of the state action doctrine (which is available to regulated firms in certain circumstances). Lack of regulation and antitrust immunity allows the PMAs to engage in unduly discriminatory and anti-competitive business practices that are not subject to recourse in any forum.
It is understood that the PMAs regularly meet with preference customers to discuss wholesale price-setting. Coupled with the possible refusal to deal mentioned above, in any other context this behavior could be evidence of price fixing, and could be actionable under antitrust laws.
The General Accounting Office has found that PMAs sell power below cost. This activity could be considered an actionable predatory pricing offense.
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Thank you, Chairman Hyde, for inviting me to testify today. I am Kati Sasseville, General Counsel for Otter Tail Power Company (''Otter Tail''). Otter Tail is a small, shareholder-owned utility that serves approximately 95,000 customers in the three-state region of Minnesota, North Dakota and South Dakota.
My testimony today is on behalf of the Alliance for Power Privatization (''Alliance''). The Alliance is an organization comprised of independent power producers, shareholder-owned utilities, an investment bank and power marketers. The Alliance seeks privatization of U.S. government-owned electricity supplies and government-owned transmission facilities. The power from government-owned facilities is marketed by the Federal Power Marketing Administrations (''PMAs''). The Alliance believes that reform of the PMAs is a necessary first step toward getting the Federal government out of the electricity business. Privatization and PMA reform should occur in conjunction with the restructuring of the electric power industry. Otherwise, the Federal government will remain as the last monopoly provider in the electric marketplace.
The specific question posed by today's hearing is whether the PMAs should be subject to antitrust laws. The Committee has chosen an excellent time to focus on this question, because the electric power markets are in a state of rapid transition from monopoly to competition. Given this backdrop, the answer to whether the PMAs should be subject to the antitrust laws is most certainly: ''Yesand the sooner, the better.'' In fact, the PMAs are already engaged in a variety of anti-competitive behaviors that could be actionable under current antitrust laws if the PMAs were subject to them. The Alliance believes that these behaviors are distorting the electric power markets. The PMAs operate as self-regulated entities that are immune from antitrust review. As we see it, there are no public policy justifications for this in today's marketplace.
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Overview of the PMAs
Before going into the details of the anti-competitive practices the PMAs are already engaged in, I will give you a little background on the PMAs. The PMAs are part of the Department of Energy and market power generated by the Federal government at hydroelectric facilities across the county. The projects themselves are operated and maintained by the Army Corps of Engineers, the Bureau of Reclamation and the International Boundary and Water Commission. With the exception of the Bonneville Power Administration, the PMAs sell only wholesale powerthey do not distribute or sell power at retail to end users. There are approximately 130 federally-owned facilities from which the PMAs market power in 34 states.
The PMAs are divided into four regions: the Bonneville Power Administration (''BPA''), the Western Area Power Administration (''WAPA''), the Southwestern Power Administration (''SWPA'') and the Southeastern Power Administration (''SEPA''). BPA operates in the states of Washington, Oregon, Idaho and Montana, while the other three PMAs operate in the geographical areas described by their names. A fifth PMA, the Alaska Power Administration, is currently in the process of being sold.
Significant changes in the status of the PMAs are under consideration. Legislation to privatize the PMAs has been introduced in both the 104th and 105th Congresses, and there have been several hearings on Capitol Hill and General Accounting Office (''GAO'') reports on the more questionable business practices of the PMAs. Undoubtedly, pressure to privatize the PMAs will mount as more evidence is uncovered that calls into question their viability in the deregulated and restructured electricity market.
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Operating Practices of the PMAs
The PMAs were established by the Congress between 1937 and 1977. The PMAs have interpreted their organic statutes as requiring that they market federally-generated power to so-called ''preference customers'' (mainly municipal utilities and cooperative utilities).(see footnote 5) The statutes also require that the PMAs sell federal electricity at the ''lowest possible cost consistent with sound business principles.'' Currently, however, the PMAs operate at a loss, and do not fully repay capital costs plus interest to the U.S. Treasury. Factors that contribute to the resulting subsidy of power to areas serviced by the PMAs include the following:
PMAs are not required to amortize their federal loans on a fixed schedule. The PMAs are essentially allowed to decide which debt to pay off first. Naturally, low-interest debt is carried while higher interest loans are paid off. The result is that the PMAs have not even begun to pay off certain low-interest loans (subsidized by the taxpayers) made over 40 years ago.
PMAs can extend the term of repayment for years until all units are complete at a project. This results in PMAs amortizing their debt over absurd amounts of time. Some projects have the equivalent of 100 year repayment schedules.
Historically, PMAs received funds from the Federal government at rates less than the Treasury borrowed at in the bond market. The difference between these two rates amounts to a subsidy for the 6 percent of the American people who receive PMA power, financed by the tax dollars of the vast majority of the American people who do not.
Page 109 PREV PAGE TOP OF DOCPMAs sell power at rates significantly below their costs and far below the power's market value. This makes wholesale competition with the PMAs in certain markets virtually impossible. No matter how efficient or cost sensitive a competitor may be, nothing can make up for the subsidies the PMAs receive from the American taxpayer.
The Reasons Why the PMAs Should Be Subject to Antitrust Laws
As I stated at the beginning of my testimony, the American people deserve protection from the anti-competitive practices of the PMAs today. The problems will only grow worse as we move to retail competition in the electric supply market.
The following is an outline of the reasons why the PMAs should be subject to antitrust laws:
1. The Preference Clause
The PMAs are engaging in anti-competitive and unduly discriminatory behavior as a result of their interpretation of the various ''preference clauses'' contained in their authorizing statutes. A ''preference clause,'' as the name suggests, requires that the PMAs accord a preference to certain entities in the marketing of Federal power.
For example, the Flood Control Act of 1944, which governs the marketing of power produced at Army Corps of Engineers facilities, requires the PMAs to:
Encourage the most widespread use of power at the lowest possible rates to consumers consistent with sound business principles;
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Establish rates which recover the cost of producing and transmitting power, including the amortization of the capital investment allocated to power over a reasonable period of years; and
Give preference in the sale of power to public bodies and cooperatives.
The PMAs have interpreted this preference clause to mean that all power generated at Army Corps of Engineers and Bureau of Reclamation facilities must be sold to public bodies and cooperatives on a non-competitive basis. Under the plain meaning of the statute, the PMAs could remain faithful to Congress' intent in enacting the preference clause by: (1) putting the power up for competitive bid; and (2) giving public bodies and cooperatives a first right of refusal to purchase the power at the market price. Unfortunately, court challenges to the PMAs' interpretation of the statute have failed because of the broad discretion afforded to the Secretary of Energy by Congress.(see footnote 6)
In any other context, this behavior might very well be subject to an action alleging violations of antitrust laws. Agreements regarding refusals to deal are in some cases considered to be per se violations of the Sherman Act. Here, the PMAs have taken an overly restrictive reading of the preference clause and have systematically excluded certain private entities from access to Federal power. Preference is one thing; exclusionary and anti-competitive behavior is another.
2. Exemptions From Regulation
Page 111 PREV PAGE TOP OF DOC Generally, firms in regulated industries may use the state action doctrine as a defense to a law suit under the antitrust laws. The theory is that pervasive regulatory oversight is an adequate substitute for antitrust scrutiny. The regulator is imbued with the authority to protect markets and consumers from anti-competitive practices, and the firm is generally relieved of antitrust liability.
Not so with the PMAs. On the one hand, there is a virtual lack of ongoing and effective regulatory review of PMA activities. On the other hand, the PMAs are immune from the antitrust laws. It is indeed quite ironic that the PMAs get the best of both worlds at the expense of competitive power markets, consumer welfare, and ultimately the taxpayer.
Unlike shareholder-owned utilities, who are regulated by public utility commissions at the state level and the Federal Energy Regulatory Commission (''FERC'') on the federal level, the PMAs are, for all practical purposes, self-regulated. Further, the courts have found that the PMAs have virtually unfettered discretion to operate as they see fit. The PMAs decide what they will charge and to whom they will sell without the discipline of a regulator or the fear of a prosecutor. The effect is that the PMAs distort competitive markets today and will continue to do so in markets opened up by the restructuring of the electric power industry. There is no justification for exempting the PMAs from antitrust laws under these facts.
An example of the problem is the transmission of electricity. FERC is responsible for regulating transmission. As a result of FERC Orders 888 and 889, all shareholder-owned utilities that own transmission facilities must file open-access tariffs with FERC. The tariffs, which FERC must approve, describe the rates, terms and conditions under which buyers and sellers may access a utility's transmission system.
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Transmission facilities owned by the PMAs are not subject to meaningful FERC jurisdiction. This is because the PMAs are not subject to Sections 205 and 206 of the Federal Power Act, which are the legal authorities for FERC Orders 888 and 889. FERC does not have the authority to compel or enforce PMA compliance with those orders. Accordingly, the PMAs may deny access to their transmission facilities by wholesale competitors at any time for any reason. The result is that lower-prices and efficiencies that result from competitive markets are lost in areas of the country where the PMAs own substantial transmission. Market participants who want to transmit power between points are often forced to use an uneconomic route because access to PMA transmission facilities is closed.
This problem is particularly acute in the Pacific Northwest, where BPA owns approximately 80 percent of the high-voltage transmission and sells at wholesale approximately 40 to 50 percent of the power consumed in that region. Clearly, BPA has a monopoly position on transmission in the region. It no doubt also has market power in at least some power markets or power products.
Consider this exchange that occurred on March 16, 1995, between Rep. Joseph Knollenberg and then-Department of Energy General Counsel Robert Nordhaus during a House Appropriations Subcommittee hearing on BPA's fiscal year 1996 budget. Rep. Knollenberg asked why BPA wasn't a candidate for privatization (p. 892 of hearings transcript):
NORDHAUS: . . . we are not sure anybody would want to buy it but if they did, they would have such a strong market position that it would probably not be in the public interest.
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KNOLLENBERG: It would be a monopoly of a kind?
NORDHAUS: A big one. Not your ordinary garden variety monopoly but one which would completely dominate power production and transmission in the Pacific Northwest.
This exchange demonstrates that the PMAs are monopolists. Unfortunately, they are monopolists who are neither subject to effective regulation, nor to antitrust laws.
It is bad enough that FERC has no meaningful authority over BPA. Compounding the problem, the 9th Circuit Court of Appeals repeatedly has held that it must give broad deference to the BPA Administrator's decisions because ''. . . Congress endowed the Administrator with broad-based powers to act in accordance with BPA's best business interestspowers not normally afforded government agencies.'' (Emphasis added.) Association of Public Agency Customers v. Bonneville Power Administration, Slip. Op. No. 9570862, Sept. 24, 1997, at 12450. Not even the Secretary of Energy controls BPA, even though BPA is within the Department of Energy. Speaking of BPA's lack of accountability, former Energy Secretary Hazel O'Leary commented sarcastically in a September 14, 1997, article in the Portland Oregonian: ''The wonderful thing about being at Bonneville is that you don't work for anybody.''
Lack of FERC regulation and antitrust immunity allows the PMAs to engage in unduly discriminatory transmission access practices. Anti-competitive transmission access practices by the PMAs must be subject to recourse in some forum. Either making the PMAs subject to FERC transmission jurisdiction or applying the antitrust laws to the PMAs would go a long way to fixing this problem.
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3. Price Fixing
Price fixing, with certain limited exceptions, is a violation of the Section 2 of the Clayton Act. The price a regulated utility may charge for electricity is set by state public utility commissions and FERC, often after a long and contentious regulatory process. In contrast, the unregulated PMAs regularly fix prices in the wholesale market in conjunction with their preference customer purchasers.
This fact came out in startling clarity in an oversight hearing before the House Subcommittee on Water and Power Resources on September 19, 1996, concerning the accounting practices of the PMAs. Subcommittee Chairman John Doolittle was questioning WAPA Administrator J.M. Shafer when the following exchange took place (pgs. 3536 of the hearing transcript):
DOOLITTLE: Well, let me ask you another question. Do you meet with your customers on a regular basis?
DOOLITTLE: And do you discuss rates with them?
SHAFER: Each year we make a studywe make them aware of what is being considered and what the indications are.
DOOLITTLE: So then rates would be a topic of discussion?
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SHAFER: Yes. Our rate process is a very open process. We use a public process so that all of our customers are aware. It is really open to the public.
DOOLITTLE: Could a private utility have rate discussions with their customers?
SHAFER: They can certainly sit in on the public meetings.
DOOLITTLE: Is there any difference in the way that private utilities would have to interact with their customers vis-a-vis rate discussions?
SHAFER: I am not aware of the private utilities having public hearings in the rate process. They, of course, go through State Public Utility Commissions for approval.
DOOLITTLE: They come up with what they want and go to the Public Utility Commission, and that commission holds the hearings. Isn't that the way it works?
SHAFER: As I understand it, that is correct.
Later, Doolittle continued questioning Shafer:
DOOLITTLE: I mean, for the customers, it is a real advantage, isn't it? The ability to have a kind of give and take with the utilities?
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SHAFER: Well, I think it is similar to the process that the customers have with the opportunities for hearings held by the commissions; the opportunity when rates are finally referred to
DOOLITTLE: Yes, but the one big difference is that you can have private conversations with these people versus
SHAFER: They are open. They are very open.
DOOLITTLE: Well, I mean, do you have the press there before you at proceedings?
SHAFER: If they want to be.
DOOLITTLE: So the press is invited?
SHAFER: No, they are not specifically invited, it is an open public meeting.
DOOLITTLE: If they are not invited and the meetings are not advised, it is kind of hard to be there, isn't it? I mean, the Public Utility Commission is one of the most bureaucratic, cumbersome structures I have ever heard of.
SHAFER: Yes. While they are not personally notified, they are notified through the announcement of the public process.
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The exchange makes it clear that PMAs regularly meet with their customers to discuss the prices they plan to charge for power. The crucial differences between the PMAs and shareholder-owned utilities (which the WAPA administrator failed to recognize at the hearing) is that: (1) there is no regulator between the PMAs and the preference customers; and (2) the PMAs intentionally exclude a critical market segment from purchasing PMA power (shareholder-owned utilities) and set prices well below market rates. In any other context, such meetings could be used as evidence in an antitrust action alleging price fixing.
4. Predatory Pricing
According to the GAO, the PMAs sell power below the cost of production. In a report released in September of 1996, entitled Power Marketing Administrations: Cost Recovery, Financing and Comparison to Nonfederal Utilties (GAO/AIMD96145), the GAO found that three of the PMAs (WAPA, SWPA and SEPA) are subsidized by U.S. taxpayers at an annual rate of over $300 million per year and billions of dollars over the last 30 years.
The subsidies come in two forms. First, the PMAs do not recover all of the costs associated with their power-related operations in the rates they charge their customers. In some instances, the PMAs have received appropriated funds that they are supposed to repay to the Treasury but either cannot or will not pay back. Second, power-related capital projects which produce PMA power are financed at interest rates below the Treasury's cost of funds. In other words, the Treasury has loaned money to the PMAs at rates lower than it pays to its borrowers. This gap has persisted since the 1960's and will continue for many years to come.
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Left unchecked by a regulator or the antitrust laws, the PMAs exploit their ability to sell power at below the cost of production. The PMAs effectively block competitors for the preference customers from competing because they are able to sell power at a loss. This is the kind of predatory pricing specifically prohibited by antitrust law.
What Congress Can Do
Congress can put an end to the anti-competitive practices of the PMAs in three ways.
Option 1: Congress can privatize the PMAs by selling the underlying electricity producing assets owned by the U.S. government. Private entities who would operate assets would then be subject to the full range of antitrust law, just like all other private firms.
Option 2: Congress can substantially amend the federal statutes that currently govern the way the PMAs operate to ensure that the PMAs operate like shareholder-owned utilities. Included in this option is making the PMAs subject to FERC transmission and rate setting authority and other appropriate regulatory oversight.
Option 3: Make the PMAs subject to antitrust laws.
The Alliance believes Option 1 is the cleanest and most competitively sound option. It is appalling as a matter of economics and policy that the U.S. government continues to compete with private entities in a fully competitive market like the wholesale bulk power market. The economic conditions that led to the formation of the PMAs (i.e., the Great Depression) have long since past. Congress can privatize the federal government's electricity producing assets while maintaining past commitments made to water users and environmental protection.
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Option 2 would go a long way to ending the competitive advantages enjoyed by the PMAs. Forcing the PMAs to set rates at market levels and making them subject to the same regulatory scheme as investor-owned utilities would at least make for a reasonable argument that the PMAs should be exempt from antitrust laws on the basis that they are a regulated entity.
Option 3, the only alternative over which this committee has jurisdiction, should be pursued immediately. Applying the antitrust laws to the PMAs will provide a direct avenue to the courts for purposes of getting the PMAs to cease and desist their anti-competitive behavior. My testimony has pointed to certain anti-competitive practices of the PMAs that could be subject to an antitrust action today. Because the PMAs are currently competing in a substantially open market (the wholesale bulk power market) without effective regulatory oversight, there is no policy justification for delaying the application of antitrust laws to them.
Chairman Hyde, thank you once again for the opportunity to testify. Otter Tail and the Alliance would welcome the opportunity to work with you and your staff on legislation to bring the PMAs into compliance with antitrust laws. I would be happy to answer any questions.
DISCLOSURE STATEMENT OF OTTER TAIL POWER COMPANY AND THE ALLIANCE FOR POWER PRIVATIZATION IN ACCORDANCE WITH HOUSE RULE XI, CLAUSE 2(G)(4)
Neither Otter Tail Power Company or the Alliance for Power Privatization has received a federal grant, contract or subcontract in the current or preceding two fiscal years.
Page 120 PREV PAGE TOP OF DOCKATHERINE ERIKSSON SASSEVILLE (KATI)
Position: General Counsel and Federal Liaison, Otter Tail Power Company, 215 S. Cascade, Fergus Falls, Minnesota 565380496, (218) 7398200.
Residence: Jewett Lake, Fergus Falls, Minnesota 56537, (218) 7394091.
Education: B.A. summa cum laude, American Studies, University of Minnesota, 1970, J.D. cum laude, University of Minnesota, 1973.
Former Positions: General Counsel, Otter Tail Power, 19871997, Senior Attorney, Otter Tail Power, 19821987, Partner, Peterson & Sasseville, 19811982, Commissioner, Minnesota Public Utilities Commission 19751981, Trial Attorney, Office of General Counsel, U.S. Navy, 19731975.
Current Boards and Offices: University of Minnesota Alumnae Association, National Board, State of Minnesota Commission on Reform and Efficiency, University of Minnesota Law School Alumnae Association Board, Board of Directors, Iowa State Regulatory Conference.
Current and Former Professional and Civic Memberships: Board of Advisors, West Central Area Business Innovation Center, University of Minnesota Regents Candidates Advisory Council, Administrative Conference of the United States, 197682, Fergus Falls Rotary Club, American and Minnesota Bar Associations, Minnesota Law PAC, President, 198687, Minnesota Women Lawyers, Otter Tail County Bar Association, President, 198687, Fergus Falls Business and Professional Women, Minnesota Women's Network, Founding Member, National Women's Political Caucus, Founding Member West Central Women's Political Caucus, Fergus Falls Chamber of Commerce, Board of Directors 198688, CoChair Fergus Falls Women's History Project, 1986, American Association of University Women.
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Awards: Fergus Falls AAUW: Women of the Year 1992, Minnesota NOW ''Charlotte Streibel Award,'' 1988, Distinguished Alumnae, Rockford College, 1987, One of ''Eight Most Influential'' Fergus Falls Daily Journal, 1987, ''Women of Achievement'' Fergus Falls BPW, 1986, ''Appreciation Award'' The Rail Action Corporation, 1985, Distinguished Achievement, Minnesota Women's Network, 1982, Harper's Bazaar Diamond Superwoman Award, 1980.
Personal: Six children, six grandchildren. Native of Fergus Falls. Interests: gardening, photography, travel and civic activities. Associate Chair, State Senate Dist. 10, DFL.
Mr. HYDE. Thank you, Ms. Sasseville.
We will now entertain questions, and Mr. Boucher will be first.
Mr. BOUCHER. Thank you very much, Mr. Chairman.
I basically see my mission here today as helping to underscore some of the conduct that has taken place, which would not be permitted if it were perpetrated by a private sector entity, but in this case has been perpetrated by the TVA, and in the further effort to underscore some of that conduct, and point out that these problems really are occurring.
Mr. Sanders, let me begin my questioning with you. I am told that the U.S. Department of Justice just recently has filed an antitrust complaint against the Rochester Gas & Electric Company. You may be aware of this, but let me briefly state the facts upon which this complaint was filed.
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Apparently, Rochester Gas & Electric had threatened the University of Rochester, and had said that if the University of Rochester did not continue to purchase electricity from Rochester Gas & Electric, that Rochester Gas & Electric would withhold an R&D grant that it was planning to make to the University of Rochester. And based upon that, the Department of Justice said that this was a tying arrangement; that the utility was in violation of the antitrust laws because it was requiring that in order to get the R&D grant, the University of Rochester continue to purchase power from the utility.
Now, I would like to analogize that situation, where the Department of Justice did in fact proceed under the antitrust laws against the private utility, to what the Tennessee Valley Authority has done in the case of the 4-County Electric Power Association; where I'm told that TVA threatened to withhold a coal-fired power plant from you, and from that region, and in fact, threatened to withhold economic development rates for some of the customers within the area, unless your power association continued to purchase power from the TVA.
And I would first ask you if that correctly states the facts. And then I would ask if that statement does state the facts correctly, if you see an analogy between that kind of conduct, and the conduct that DOJ has proceeded under the antitrust laws against the Rochester Gas & Electric Company, with regard to.
Mr. SANDERS. Yes, Congressman Boucher, I appreciate your bringing that to the committee's attention. I believe that the Department of Justice filed suit in June of this year, in upstate New York, against the Rochester Gas & Electric. The basis of that claim asserted by the Department of Justice, as I understand it, is that the Rochester Gas & Electricthat the Rochester Medical Center was in the process of building a co-generation unit, and taking some load away from Rochester Gas & Electric. Rochester threatened them, as I understand it, with taking away some research grants, and taking away some of the rate incentives.
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That is completely, exactly, on all four squares what happened to us down in Mississippi. The coal-fired plant was to be located right in the backyard of our service territory; a very rural area of Mississippi, a $470 million investment. It was dependent on the contract with TVA. TVA said, we're not going to do that. We're not going to locate it in your service territory; we'll move it somewhere else.
In fact, Chairman, Crowell came, and had a press release, and called all the community leaders in, and he said, it's very doubtful that we can locate this is an area where we don't have a committed customer. And then he got in a helicopter and flew off to another site, in another area he was looking at. The message was very clear.
Mr. BOUCHER. So you would have expected, if TVA had been subject to the antitrust laws, that in total consistency, the Department of Justice having proceeded against Rochester Gas & Electric, that DOJ probably would have proceeded against TVA, based upon what TVA did to you?
Mr. SANDERS. That would be my expectation, Mr. Boucher.
Mr. BOUCHER. Mr. Chairman, I'd like to ask unanimous consent that I have three additional minutes. I'll try to be brief with this.
Mr. HYDE. Without objection, so ordered.
Mr. BOUCHER. Thank you, Mr. Chairman.
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Mr. Fletcher, let me turn my questioning to you, if I may, and get your responses to some of the comments that our friend from the Tennessee Valley Authority made with regard to both the predatory pricing questions, and also questions related to the stranded cost recovery claim. And let's begin with the predatory pricing questions.
TVA basically offered to the customers of your utilities board, TVA power for 2 percent less, than whatever you could offer, even after you were acquiring cheaper power from the Cinergy Corporation. And I'd like to just ask a couple of questions, concerning TVA's efforts to remain your customer, because I think it bears on whether or not its conduct is predatory pricing.
How many bids did you receive, Dr. Fletcher, from parties that were interested in supplying power to you?
Dr. FLETCHER. Nineteen.
Mr. BOUCHER. And where did TVA rank in terms of its bid among the 19 that submitted bids to you?
Dr. FLETCHER. The very last.
Mr. BOUCHER. They were the very last.
Dr. FLETCHER. Very highest.
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Mr. BOUCHER. So they were the most expensive bidder among all the ones that submitted bids.
Dr. FLETCHER. That's correct.
Mr. BOUCHER. Now isn't it true, as Mr. Frank was suggesting, that the TVA is obligated to offer its lowest rate, the rate at which it covers its costs, and makes some commitment to its assets, as the TVA witness indicated? Isn't that what they're required to do?
Dr. FLETCHER. I believe that to be the case, Congressman.
Mr. BOUCHER. So in theory they would have been bidding to you the lowest possible rate at which they could have made money. And yet, after having lost that bid, and there being 18 bidders who offered a better rate, they still were saying that they could make money by going to your customers and offering 2 percent less than whatever the best bidder offered, and that turned out to be Cinergy.
And doesn't it seem a little unusual that they could sit here and say that they could make money, offering 2 percent less than the best bidder, when that was fully 18 bids worse than their own bid, when their own bid in theory was the lowest bid they could have offered and still made money? Doesn't that seem a little inconsistent to you?
Dr. FLETCHER. It seems quite inconsistent, Congressman.
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TVA could have competed, I think, legally so to speak, if they were subject to antitrust laws, if they were competing wholesale with Cinergy. But in this case, TVA's index rate was competing retail with Bristol, Virginia. And with that cascading index there was no way that Bristol, Virginia could compete in that matter. And the fact that they had no ideathey did not know what Bristol, Virginia's rate was going to be. And the fact that it would be necessary to spend X number of millions of dollars to build duplicate facilities to our industriesthat plus 2 percent less than whatever, it would seem to me that it's very obvious that they would most likely be selling their product for less than their production costs.
Mr. BOUCHER. I'm going to ask an additional question, Dr. Fletcher, and that relates to TVA's statement, when we were having the dialogue of the general counsel of TVA, concerning the stranded cost question.
When he said that, your contract with Cinergy provides for termination, I think, upon a certain amount of notice, and that in the event that you ever terminated your contract with Cinergy, the TVA authority might be looked to by the City of Bristol to be the provider of electricity once again. Given the fact that there were 18 companies that offered a better rate to you than the Tennessee Valley Authority, how likely do you think it would be that you would ever go back to TVA as the supplier of power to the Bristol, Virginia Utilities Board?
Dr. FLETCHER. I think it would be very unlikely, sir.
Mr. HYDE. The gentleman's time has again expired.
Page 127 PREV PAGE TOP OF DOC Mr. BOUCHER. Thank you, Mr. Chairman.
Mr. HYDE. The gentleman from Virginia, Mr. Goodlatte.
Mr. GOODLATTE. Mr. Chairman, I don't have any questions. Does the gentleman wish me to yield him time to ask another question?
Mr. BOUCHER. Well, thank you very much, Mr. Goodlatte, I'll take that opportunity.
And let me just pursue that again with you, Dr. Fletcher, if I may. What TVA is essentially saying is that part of their stranded cost recovery claim is based on the necessity perhaps to come back to the City of Bristol at some future time and be the power supplier once again. It would seem to me to be very unlikely, given the fact they were such an unsuccessful bidder when they were seeking to retain you as their customer, that you would ever turn to them again.
I guess you would say that the likelihood of that would be extreme at best, is that correct?
Dr. FLETCHER. Yes. I would say that as far as my understanding is, that TVA would have had to had reasonable expectation that Bristol, Virginia would continue to be their customer.
This is difficult for me to see how they could expect that, particularly when we in 1987better than 10 years ago, their then chairman, Chili Dean, sat in your office, Congressman, in your presence, and told Bristol, Virginia they would have to leave. Then in 1990 we gave them a formal notice that we would not renew our contract. That wasAt the time we were under a contract with TVA that required only a 4-year notification to leave. Then in 1993, with their contract due to expire in '95, TVA came to us and paid Bristol, Virginia $7 million; that is $5 million in cash, and $2 million and a little bit more in land and facilities; $7 million to extend our contract for 30 months.
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Now if they had any real expectations of us staying anyway, why would they pay us for a 30-month extension? And written into that extension, literally, was the statement, that at the end of this contract neither party will have any obligations, period.
Mr. BOUCHER. And notwithstanding their statement that at the end of the contract there would be no obligations, today they are pursuing the city for $54 million, is that correct?
Dr. FLETCHER. That is correct.
Mr. BOUCHER. I guess there are various statements from you and from TVA about when the notice that you were leaving actually took place; they have one interpretation, you have another. But it looks like everyone would agreeeven TVAsince 1993 it's been very clear that you were leaving, and
Dr. FLETCHER. Well, our formal notice was givenwritten formal notice in 1990.
Mr. BOUCHER. In 1990.
Dr. FLETCHER. Yes.
Mr. BOUCHER. So for 7 years it's been very clear that you were leaving. And Mr. Frank elicited from the Tennessee Valley Authority in his questioning, they have just added a 1,000 megawatt generating facility, which came on lineI think he said this past year. They've made other system investments; the sum total of which would have been much greater than the stranded costs they're seeking to recover from you. And the 1,000 megawatt generating facility is vastly greater than what would be required to supply your 100 megawatts of demand.
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And so I guess the logical question isand I admit it's somewhat rhetorical. But the logical question is, why did they not avoid making some of those investments, given the fact that they had notice that you were leaving, if in fact they were really worried about recovering their stranded costs? And doesn't it lead to the conclusion that what they're really seeking to do, is simply send a message to their other power distributors; that if those other distributors also think about leaving TVA for one of its competitors, the same kind of thing is going to happen to them.
Dr. FLETCHER. I think that is true, Congressman. Also, I would like toTVA's general counsel testified that the reason they were going after stranded costs for Bristol, Virginia, so that if they did not receive them it would be spread over the accounts of the other distributors, and they would have to pay it. That's not really true, because our situation is entirely single. The other 159 distributors of TVA have already settled so to speak. They've already, so to speak, admitted they will pay some stranded costs, and have entered into a contract with TVA, that they will pay this additional 5.5 or 6 percent increase for a matter of 10 years, and at the end of that 10 years there will be no more stranded costs.
Mr. HYDE. The gentleman's time has again expired.
Mr. Bryant from Tennessee.
Mr. BRYANT. Thank you, Mr. Chairman.
I want to just thank the panel for being here today, and sitting through this. Mr. Sanders, a special welcome to you. You're with a very distinguished law firm in Mississippi that I'm very familiar with, with its home base in Tupelo, and I've married the second most famous product out of Tupelo.
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Mr. SANDERS. Congratulations.
Mr. BRYANT. Thank you. And I have to say that about Tupelo. And I believe the first most famous product is out of Tupelo, but his name is Elvis Presley.
But you're in Columbus in that office, and certainly I'm sympathetic to your trials and tribulations as an attorney, representing the 4-County area. Dr. Fletcher, a very distinguished man, who has taken on a battle there on behalf of the City of Bristol; and the other two fine panelists who are here on the PMA issue.
I am not the absolute defender of the TVA. I am very supportive of the TVA, in the regards to keeping the rates for my constituents as well as other Tennesseans, and even others of the Tennessee Valley Authority, as low as possible. So when people start talking about things that could result in higher rates of power for my constituents, then I do get concerned, and certainly the effect of Bristol, Virginia on this situation is out there, and can be very positive or very negative, depending on how you look at it.
But I think for the most part we're on the same sheet of music; we all want low electric rates. And I think it's just a matter now for Congress, who is the boss; who does in factand is supposed to operate in oversight of these PMAs and of the TVA. So these folks do have us to be accountable to, and perhaps over the last years we haven't done as good a job as we should have in some areas; I don't know.
But we do want those low rates, and I think if we start talking about issues like stranded costs, and things I think could be passed on to my constituents, then yes, I do become concerned on this.
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Just a couple of other comments and questions, I guess, without getting into too much of the specifics. But Mr. Sanders, could you quickly tell usAs I understand, the Rochester case iswhat type of grantwas that a federal grant, or was that a grant available from the power company? Do you recall that fact?
Mr. SANDERS. Congressman Bryant, in all fairness and candor to the committee, I'm not sure of all of the exact specific facts in the Rochester case. My assumption is that there were economic incentives provided by Rochester Gas & Electric; that they were not federal grants, that they were actually economic incentives that were provided by the utility. I'm pretty certain that's correct, but I'll stand corrected as to how the exact Department of Justice complaint is framed.
I will just point out one thing though, that when the Department of Justice filed the lawsuit it had a public statement, and in that statement it said, we file this lawsuit as a quote, ''wakeup call to the utility industry.'' I would assume that what they were trying to do is to let the utility industry know that you can't use threats of loss of economic incentives and other type threats, which would be anti-competitive to keep a customer in the fold.
Mr. BRYANT. And certainly I think that's the direction this Congress has taken in looking at deregulation, not only in this industry but other industries to bring about that competition.
Again, just to the two members on the end on TVA. Ms. Sasseville, you mentioned what you'd like to see happen with the PMA. What would the two of you like to see happen to TVA as we move toward deregulation? Would you like to see complete privatization, or some type of hybrid situation? And my time is about to expire. But if you had your druthers, what would you like to see happen in regard to TVA in the future in this Congress as we set the policy and make a law in regard to that entity?
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Dr. FLETCHER. I'd like to see an independent commission make a study of TVA within the Tennessee Valley watershed, over a period of 10, maybe 15 years time, 20 years time. If TVA, being the power supplier, what the rates would be. Model that and compare it with another model of the Tennessee Valley area with alternative power suppliers.
Why shouldn't the Tennessee Valleyhave some reasonable idea of where they are, where they should go; whether TVA should survive as it is, or whether it should be privatized or broken up. I don't think anyone knows right now, and I certainly do not have a yes or no answer to that question.
But if I were a member of TVA, I would want to get all the best tools, the best minds together, and produce a model that would compare those two, and let's see where it should go, and what TVA should do.
Mr. HYDE. The gentleman's time has expired.
Mr. BRYANT. Mr. Chairman, I was just going to ask for one more minute. If Mr. Sanders could briefly answer.
Mr. HYDE. By unanimous consentyou're certainly entitled to one more minute.
Mr. SANDERS. I'll give a real brief response to that inquiry, Congressman. I think in all practicality that this Congress should take one step at a time. When the Energy Policy Act of 1992 was passed they just left one thing open, and that was TVA and some of the other PMAs.
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Wholesale wheeling is not open in this country yet. TVA has 8 million customers and 80,000 square miles, and it is not subject to competition. First step, put TVA under wholesale open accesswholesaleand put them under FERC. FERC will determine the fairness and the justice of the relationship for the customers. That is the first step, and see how TVA evolves. That would be my recommendation.
I would think that you and your constituents of Tennessee would be serious about looking into TVA, and how competitive it's going to be in the future for drawing economic development to your state, as well as where your relatives are in Mississippi. That's what our concern is.
Mr. HYDE. I thank the gentleman.
Mr. JENKINS. Thank you, Mr. Chairman. Well, Dr. Fletcher, I think Mr. Boucher and I could agree on one thing; that the people in Bristol, Tennessee, and the people in Bristol, Virginia, and the people in the outlying areas of both Virginia and Tennessee have a lot in common. We have grown together. We have the same momentum. And I certainly don't want to say anything here that in any way is going to impede that momentum. We socially, economically and even politically are very much alike, if you just pulled an invisible linethe state line out, we would be the same people.
There's a little part of all of who live in the Tennessee Valley, who have always admired somebody who would step up and put on the gloves with TVA, and we're especially admiring if you prevail while those gloves are on. And I think perhaps the City of Bristol, Virginia has, and I admire you for that, and I applaud you for that.
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But I also have to be concerned with the ratepayers who have remained in the TVA area, and deregulationas I see it, this is perhaps one of the first skirmishes in deregulation.
I had a friend in high school who used to say that, this thing is bigger than a high school romance; it's bigger than both of us. And I think maybe that may be what deregulation is. And we've got a lot of bridgesa lot of rivers to cross as we go into this deregulation scheme.
But I want you to tell me now, I seewhat I've heard here this morning, that Cinergy came down. They were selling their customers electricity at 4.2 cents per kilowatt hour. They came down to Bristol, Virginia. They sell you electricity at 2.7 cents per kilowatt hour. TVA was there, had to leave, but came back, and sought to solicit some customers at a rateand I don't remember the specifics of that, but at a rate less than Cinergy was willing to serve those customers for.
Now to me, this is the essence of deregulation. And my question to youbut my question is, in country terms that we certainly understand on the Tennessee side, and I think you understand on the Virginia side, what's the difference between what TVA did and what Cinergy did? Explain to me how the conduct should become illegal or inappropriate, or improper, when one utility does exactly the same thing that another does?
Dr. FLETCHER. Uh, Congressman, TVA was not competing with Cinergy; TVA was competing with Bristol, Virginia, and that's the difference. Cinergy had set their ratethat they would sell wholesale power to Bristol, Virginia. And TVA was indexingthey were offeringmaking their 2 percent index rate, was competing with Bristol, Virginia.
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Mr. JENKINS. Once the rate was set by Cinergy.
Dr. FLETCHER. Sir?
Mr. JENKINS. Once the rate was set by Cinergy, then who were they competing against?
Dr. FLETCHER. Cinergy was not setting the rate. Cinergy had nothing to do with setting Bristol, Virginia's rate. Bristol, Virginia has total responsibility to set the rate that they desire for their
Mr. JENKINS. But it was based upon the wholesale rate that you were quoting.
Dr. FLETCHER. And it hasn't been set; it was never set. TVA had no idea what Bristol, Virginia's rate might be; yet they said that they wouldthey would produce firm power for 2 percent less than whatever Bristol, Virginia's rate study might say.
Mr. JENKINS. Well, your answer is then, that you can distinguish that conduct?
Dr. FLETCHER. Yes, sir. It'sthe answerI mean, they were not competing with Cinergy for wholesale power; their proposal was competing with Bristol, Virginia for retail power.
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Mr. JENKINS. All right, sir.
Dr. FLETCHER. Maybe you did not realize that Bristol, Virginia did not sign that 10-year rolling contract that TVA was ableI mean they did a great selling job to the other 159 distributors, and I'd have to congratulate them on that. How they did it, I don't know. I can't believe how so many people could be so naive.
But Bristol, Virginia is not a party of that 10-year contract. And our contract simply required a 4-year notification; contract written by TVA.
Dr. FLETCHER. Yes, sir. I would say, Congressman, you talked about growing up in Tennessee all your life. I grew up in Virginia, but I've been with TVA all my life. I grew up on a TVA demonstration farm. My father was one of the original committees that created an REA co-op, which I believe served your home town; Powell Valley Electric Co-op, and my father was general manager of that co-op.
Mr. HYDE. The chair hates to intervene. This is fascinating. I would suggest, just from an outsider's point of view, from listening to Mr. Jenkins and you, Dr. Fletcher, you both sound like you're from Boston.
But it's now Mr. Pease's turn, the gentleman from Indiana.
Mr. PEASE. Thank you, Mr. Chairman. I intend shortly to yield the balance of my time to my colorful country colleague from Tennessee. But let me just say that I regret that I was unable to be present for your testimony because of another engagement. I am grateful for the time that you took to be with us, and for the written materials, which you presented and which I will study. I know it may be at times frustrating to see so few of us here, but this material is appreciated, it will be utilized, and I'm grateful for your time. And with that I yield to Mr. Jenkins.
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Mr. JENKINS. Well, thank you very much, Mr. Pease, and thank you, Mr. Chairman.
Mr. Sanders, we may add some more color to this hearing for the benefit of the chairman, I understand you attended the University of the South at Sawanee.
Mr. SANDERS. Yes, sir, I did, and we were still running the single wing when I was up there.
Mr. JENKINS. And the Majors are still there.
Mr. SANDERS. Yes, sir, Shirley Majors.
Mr. JENKINS. When I was at Tennessee Tech, not far away, your school had the reputation of being the best party school in the United States of America. Does it still hold that designation?
Mr. SANDERS. My son, who is a sophomore there, swears that's not the case.
Mr. JENKINS. Says it's not. I don't think the chairman was even listening.
Mr. Sanders, let me in response to something Dr. FletcherI certainly have been a person who has criticized TVA sometimes. I even criticize TVA as a TVA board member. But maybe if you go back as far as he goes back, we may even have been on different sides, because my family was fighting to keep their river bottom farms, when TVA was coming in and taking them. And I had two unclesI had an uncle, my wife had an unclewho said, don't come back to our house anymore for Sunday lunch after you're sworn in to the TVA Board of Directors.
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But as I understood it, your complaint was two or three-fold, and you said that TVA threatened to withhold some economic development funds
Mr. SANDERS. Yes, sir.
Mr. JENKINS [continuing]. If you got out of the contractual relationship with them, is that correct?
Mr. SANDERS. Yes, sir.
Mr. JENKINS. Well, now, it wouldn't be fair for those of us who pay a light bill to have our money diverted to an area to promote economic development. That is not within the TVA area, would it?
Mr. SANDERS. Let me see if I can shed a little light on that, Congressman.
Mr. JENKINS. All right, sir.
Mr. SANDERS. And let me say one thing in respect for Franklin Roosevelt. TVA served a good purpose. In 1933 TVA was needed; in 1935 the REA Act was needed. But the times have changed.
Mr. JENKINS. Those sponsored by Senator Norris
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Mr. SANDERS. Norris
Mr. JENKINS. The Republican from the State of Nebraska.
Mr. SANDERS. From the State of Nebraska.
Mr. JENKINS. A forgotten fact.
Mr. SANDERS. Yes. And much at the behest of FDR. But the times have changed. I mean you've just got to realize that the times have changed. You've got to also realize that 4-County was under a 10-year rolling perpetual contract. It didn't mean we could cancel it. Everyday we waited to take advantage of an open competitive market which we were facing, we had to wait 10 more years.
All we did at 4-County was to go to TVA and say, we believe that this market is opening up, it's becoming competitive, and 10 years from now we want a choice. When we first started out that's all we wanted to do; that was our sole mission. Little did we know what was going to happen to us, that I've tried to explain.
When they take away economic development incentives from us, you've got to realize on the Enhance Growth Credit program that they denied usthey were providing power for the Enhance Growth Credit program which was marginal power. If this glass is half full, that's baseload power. When a generator's not running that other half is just sitting there. When you run it up full, that's marginal costs. That's incremental costs; cheap, cheap, cheap. They made money on this economic growth program.
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Mr. JENKINS. Let's forget that TVA was involved. Let's assume for a minutewe've bantered poor Cinergy around here this morning.
Let's assume that Cinergy had been your utility, and Cinergy had been the utility for the whole of the State of Tennessee, and the same circumstances had arisen. Then would it be fair for Cinergy to take the money that is paid by the ratepayers, and to promote economic activity and development in your 4-County area, if you had gotten out.
Mr. SANDERS. I'm sorry.
Mr. JENKINS. Forget about TVA. Let's put Cinergy in there. Then would it have been fair to those of us who live in the State of Tennessee for Cinergy to take our money and to promote economic development and growth in the 4-County area, even though 4-County was not in the Cinergy area?
Mr. SANDERS. I'm not sure I understand. We were committed for 10 years, Congressman. When we gave notice we were still committed for 10 years. We had every legal right to say 10 years later we'll have other options.
Mr. JENKINS. Let's take the plant. Now, this was a private plant that you spoke of.
Mr. SANDERS. It was a plant
Page 141 PREV PAGE TOP OF DOC Mr. JENKINS. Was it Lignite?
Mr. SANDERS. It was a Lignite coal, clean burning plant, which was under development by Phillips Coal, a wholly-owned subsidiary of Phillips Petroleum, in joint venture with some other joint venture investors. And the only way that project would make any economic sense, was to have a long-term take or pay contract from a governmental entity like TVA.
And when TVA saidTVA drove the project, there was no question about that. If you want my personal opinion, I don't think TVA would have moved the project, but they certainly laid a very, very distinct and strong impression among all of the community leaders.
Mr. JENKINS. Is Dr. Fletcher just braver than you then? He was willing to get up there in the ring with the gloves on, and prevailed?
Mr. SANDERS. No. Dr. Fletcher had a 4-year contract, which ended on a day certain, and gave notice. And then had it extended only for 30 months. We had a 10-year rolling contract. Dr. Fletcher also had a provision in the Energy Policy Act, which exempted them from the TVA exemptionthe only one of 160 distributors.
Mr. JENKINS. Mr. Sanders, the chairman is glaring at me, and I'm a poor freshman in this institution, and I don't want to upset the chairman. But thank you very much, sir.
Mr. SANDERS. Yes, sir.
Page 142 PREV PAGE TOP OF DOC Mr. HYDE. I want to thank the gentleman for not saying he was a country lawyer. I appreciate that. But I am. I always count the spoons when somebody says that.
The last word will be Ms. Sasseville's.
Ms. SASSEVILLE. Thank you very much, Mr. Chairman. I was eager to interject a comment in answer to Mr. Jenkins, who has asked really a very crucial question. The difference between the conduct of Cinergy and the conduct of TVA, is that Cinergy's conduct was in accord with a tariff rate, that it had to submit to an independent regulatory body, which reviewed it, found that it did recover its costs; that it was not anti-competitive, and authorized Cinergy to offer that rate to all customers in a similar situation.
No one examined TVA's costs. No one analyzed them to see if they were recovering all their costs or if they were discriminating against their customers. It is that essential difference that investor-owned utilities are responsible to an independent public regulatory agency to ensure that we're not violating antitrust laws. That's the essence of the difference here.
Mr. JENKINS. Mr. Chairman, may I ask the lady one additional question.
Mr. HYDE. You surely may.
Mr. JENKINS. Will that answer suffice for those people back in the Cinergy area, who are still paying 4.2 cents per kilowatt hour for their electricity, when they have taken their product in a suitcase out, and sold it for 2.7 cents?
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Ms. SASSEVILLE. Mr. Chairman, Mr. Jenkins, I believe it will because I believe the 4.2 cents rate is also a tariff rate applicable to a different type of customer, which has certain cost characteristics. And that Cinergy can offer this rate that it offered to the City of Bristol, and as well as to other customers in that class.
Mr. JENKINS. But you come from Minnesota, I come from Tennessee, and ultimately only the people who are ratepayers in the Cinergy area will be able to make a determination as to whether they want to go to court against their utility for discriminatory practices or not. You're not going to make that for them, are you, ma'am?
Ms. SASSEVILLE. Mr. Chairman, Mr. Jenkins, no I'm not going to make them. As a matter of fact, I don't know if you recognize it, but Otter Tail Power Company is the only investor-owned utility in the United States, which has already been through an antitrust case over refusing to wheel power for public entities, and we don't want to get involved in any such further
Mr. JENKINS. Did you see a recent editorial? It may have been a couple of months ago, in ''The Los Angeles Times'', where the State of California has a state deregulation scheme going, and it's been going on for about 2 years I understand. And ''The Los Angeles Times'' editorialized against that practice; said it was creating more problems than it was solving. And they put in a note of caution to the Congress of the United States, that we should beware of the deregulation scheme that we're about to go into, for the same reasons that they found out there.
Page 144 PREV PAGE TOP OF DOC These were all investor-owned utilities I believe there were six or seven utilities involved. Did you see that, ma'am?
Ms. SASSEVILLE. Mr. Chairman and Mr. Jenkins, I didn't see that particular editorial, but I'm very familiar with the California situation, and the arguments. And I do tend to agree that California rushed a little too fast. I think they're going in the right direction, but I think they step too fast without considering all the technological problems, and it is those technology problems that are causing the difficulties being questioned today.
Mr. JENKINS. Well, in view of that, would you please, while you're here today in this capitol city, would you please admonish usthose of us who are in the Congressthat we should go slowly.
Ms. SASSEVILLE. Well, Mr. Chairman and Mr. Jenkins, I'm in no position to admonish Congress to do anything, but I would be happy to give my unsolicited advice that this is a highly complex industry. It's necessary to move cautiously, but with all deliberate speed, I believe.
Mr. HYDE. And on that high note, the Chair thanks this panel and the previous panel for a very illuminating morning. Thank you very much. The committee stands adjourned.
[Whereupon, at 12:40 p.m., the committee adjourned.]
Page 145 PREV PAGE TOP OF DOC48565 CC
THE APPLICATION OF THE ANTITRUST LAWS TO THE TENNESSEE VALLEY AUTHORITY AND THE FEDERAL POWER MARKETING ADMINISTRATIONS
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
THE APPLICATION OF THE ANTITRUST LAWS TO THE TENNESSEE VALLEY AUTHORITY AND THE FEDERAL POWER MARKETING ADMINISTRATIONS
OCTOBER 22, 1997
Serial No. 51
Page 146 PREV PAGE TOP OF DOC
Printed for the use of the Committee on the Judiciary
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
STEVEN SCHIFF, New Mexico
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB INGLIS, South Carolina
BOB GOODLATTE, Virginia
STEPHEN E. BUYER, Indiana
SONNY BONO, California
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
Page 147 PREV PAGE TOP OF DOCEDWARD A. PEASE, Indiana
CHRISTOPHER B. CANNON, Utah
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
CHARLES E. SCHUMER, New York
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
THOMAS E. MOONEY, Chief of Staff-General Counsel
JULIAN EPSTEIN, Minority Staff Director
C O N T E N T S
Page 148 PREV PAGE TOP OF DOC October 22, 1997
Hyde, Hon. Henry J., a Representative in Congress from the State of Illinois, and Chairman, Committee on the Judiciary
Christenbury, Edward S., general counsel, Tennessee Valley Authority
Fletcher, David W., chairman, Bristol Virginia Utility Board
Sanders, David L., attorney, Mitchell, McNutt, Threadgill, Smith and Simms and general counsel, 4-County Electric Power Association
Sasseville, Katherine E., general counsel, Otter Tail Power Company
Smith, Douglas W., deputy general counsel for energy policy, U.S. Department of Energy
Van Cleve, S. Bradley, attorney, Duncan, Weinberg, Miller and Pembroke, on behalf of Industrial Customers of Northwest Utilities
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Page 149 PREV PAGE TOP OF DOC Christenbury, Edward S., general counsel, Tennessee Valley Authority: Prepared statement
Hyde, Hon. Henry J., a Representative in Congress from the State of Illinois, and Chairman, Committee on the Judiciary: Prepared statement
Fletcher, David W., chairman, Bristol Virginia Utility Board: Prepared statement
Sanders, David L., attorney, Mitchell, McNutt, Threadgill, Smith and Simms and general counsel, 4-County Electric Power Association: Prepared statement
Sasseville, Katherine E., general counsel, Otter Tail Power Company: Prepared statement
Smith, Douglas W., deputy general counsel for energy policy, U.S. Department of Energy: Prepared statement
Van Cleve, S. Bradley, attorney, Duncan, Weinberg, Miller and Pembroke, on behalf of Industrial Customers of Northwest Utilities: Prepared statement
(Footnote 1 return)
This testimony represents the views of TVA and not necessarily those of the Administration.
(Footnote 2 return)
As authorized by the Alaska Power Administration Asset Sale and Termination Act, Public Law 10458, the assets of the APA are being sold to customer groups. APA assets consist of two power projects. The Eklutna project was sold to three customer groups on October 2, 1997. The Snettisham project will be sold to the Alaska Industrial Development and Export Authority no later than August 20, 1998.
(Footnote 3 return)
City of Lafayette, Louisiana, and City of Plaquemine, Louisiana, v. Louisiana Power & Light Company, 435 U.S. 399, 55 L.Ed. 2d 364, 98 S.Ct. 1123 (1978).
(Footnote 4 return)
City of Loudon, Tennessee v. Tennessee Valley Authority, 585 F.Supp. 83 (E.D. Tenn. 1984), and Webster County Coal Corporation v. Tennessee Valley Authority, 476 F.Supp. 529 (W.D. Ky. 1979).
(Footnote 5 return)
See, e.g., Flood Control Act of 1994, 16 U.S.C. §825s.
(Footnote 6 return)
See, e.g., Salt Lake City v. Western Area Power Administration, 926 F.2d 974 (10th Cir. 1991); Brazos Elec. Power Co-op, Inc. v. Southwest Power Administration, 819 F.2d 537 (5th Cir. 1987).