SPEAKERS CONTENTS INSERTS
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59–318 l
1999
HEARING ON THE ROLE OF THE POWER MARKETING ADMINISTRATIONS IN A RESTRUCTURED ELECTRIC INDUSTRY
HEARING
before the
SUBCOMMITTEE ON WATER AND POWER
of the
COMMITTEE ON RESOURCES
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
JUNE 24, 1999, WASHINGTON, DC
Serial No. 106–57
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Printed for the use of the Committee on Resources
Available via the World Wide Web: http://www.access.gpo.gov/congress/house
or
Committee address: http://www.house.gov/resources
COMMITTEE ON RESOURCES
DON YOUNG, Alaska, Chairman
W.J. (BILLY) TAUZIN, Louisiana
JAMES V. HANSEN, Utah
JIM SAXTON, New Jersey
ELTON GALLEGLY, California
JOHN J. DUNCAN, Jr., Tennessee
JOEL HEFLEY, Colorado
JOHN T. DOOLITTLE, California
WAYNE T. GILCHREST, Maryland
KEN CALVERT, California
RICHARD W. POMBO, California
BARBARA CUBIN, Wyoming
HELEN CHENOWETH, Idaho
GEORGE P. RADANOVICH, California
WALTER B. JONES, Jr., North Carolina
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WILLIAM M. (MAC) THORNBERRY, Texas
CHRIS CANNON, Utah
KEVIN BRADY, Texas
JOHN PETERSON, Pennsylvania
RICK HILL, Montana
BOB SCHAFFER, Colorado
JIM GIBBONS, Nevada
MARK E. SOUDER, Indiana
GREG WALDEN, Oregon
DON SHERWOOD, Pennsylvania
ROBIN HAYES, North Carolina
MIKE SIMPSON, Idaho
THOMAS G. TANCREDO, Colorado
GEORGE MILLER, California
NICK J. RAHALL II, West Virginia
BRUCE F. VENTO, Minnesota
DALE E. KILDEE, Michigan
PETER A. DeFAZIO, Oregon
ENI F.H. FALEOMAVAEGA, American Samoa
NEIL ABERCROMBIE, Hawaii
SOLOMON P. ORTIZ, Texas
OWEN B. PICKETT, Virginia
FRANK PALLONE, Jr., New Jersey
CALVIN M. DOOLEY, California
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CARLOS A. ROMERO-BARCELÓ, Puerto Rico
ROBERT A. UNDERWOOD, Guam
PATRICK J. KENNEDY, Rhode Island
ADAM SMITH, Washington
WILLIAM D. DELAHUNT, Massachusetts
CHRIS JOHN, Louisiana
DONNA CHRISTIAN-CHRISTENSEN, Virgin Islands
RON KIND, Wisconsin
JAY INSLEE, Washington
GRACE F. NAPOLITANO, California
TOM UDALL, New Mexico
MARK UDALL, Colorado
JOSEPH CROWLEY, New York
RUSH D. HUNT, New Jersey
LLOYD A. JONES, Chief of Staff
ELIZABETH MEGGINSON, Chief Counsel
CHRISTINE KENNEDY, Chief Clerk/Administrator
JOHN LAWRENCE, Democratic Staff Director
Subcommittee on Water and Power Resources
JOHN T. DOOLITTLE, California, Chairman
KEN CALVERT, California
RICHARD W. POMBO, California
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HELEN CHENOWETH, Idaho
GEORGE P. RADANOVICH, California
WILLIAM M. (MAC) THORNBERRY, Texas
GREG WALDEN, Oregon
MIKE SIMPSOM, Idaho
CALVIN M. DOOLEY, California
GEORGE MILLER, California
PETER A. DeFAZIO, Oregon
OWEN B. PICKETT, Virginia
ADAM SMITH, Washington
DONNA CHRISTIAN-CHRISTENSEN, Virgin Islands
GRACE F. NAPOLITANO, California
ROBERT FABER, Staff Director/Counsel
JOSHUA JOHNSON, Professional Staff
STEVE LANICH, Minority Staff
C O N T E N T S
Hearing held June 24, 1999
Statement of Members:
Doolittle, Hon. John, a Representative in Congress from the State of California
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Statement of Witnesses:
Casten, Thomas R., President and CEO, Trigen Energy Corporation
Prepared statement of
Crews, Wayne, Director of Competition and Regulation Policy, Competitive Enterprise Institute
Prepared statement of
English, Glenn, Chief Executive Officer, National Rural Electric Cooperative Association
Prepared statement of
Hauter, Wenonah, Director, Public Citizen's Critical Mass Energy Project
Prepared statement of
Hoecker, James J., Chairman, Federal Energy Regulatory Commission
Prepared statement of
Mele, Chris, Legislative Director for Energy, National Association of Regulatory Utility Commissioners
Prepared statement of
Rezendes, Victor S., Director, Energy, Resources, and Science Issues; Resources, Community and Development Division, U.S. General Accounting Office
Prepared statement of
Richardson, Alan H., Executive Director, American Public Power Association
Prepared statement of
Santa, Don, Vice President, LG&E Energy Corporation
Prepared statement of
THE ROLE OF THE POWER MARKETING ADMINISTRATIONS IN A RESTRUCTURED ELECTRIC INDUSTRY
THURSDAY, JUNE 24, 1999
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House of Representatives,
Subcommittee on Water and Power,
Committee on Resources,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:04 p.m., in Room 1334, Longworth House Office Building, Hon. John Doolittle [chairman of the Subcommittee] presiding.
STATEMENT OF HON. JOHN DOOLITTLE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
Mr. DOOLITTLE. The Subcommittee on Water and Power will come to order.
We are meeting today to hear testimony on the role of the Federal Power Marketing Administrations in a restructured electric industry. The first section of the hearing is devoted to issues regarding the overall restructuring, while the second half of the hearing discusses the overall restructuring as it relates to the Power Marketing Administrations.
I also want to call everyone's attention—and I'll say this again when we get more members here—but for the witnesses, through the miracle of technology, everything you say over these microphones will be broadcast on the Internet around the world. So keep that in mind during the recesses.
Although the Commerce Committee has the lead on the electric industry restructuring initiative, the House Resources Committee has legislative responsibility for the generation and marketing of electric power from Federal Regional Power Marketing Agencies. The Subcommittee on Water and Power oversees the Power Marketing Administrations within the Department of Energy, which market the electrical power produced at Federal water projects. Since the PMA's market more than 6 percent of all electric power generated in the United States, they play a significant role in any legislation before Congress that seeks to restructure the $200 billion-per-year electric power industry.
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Over the last four years, this Subcommittee has held several hearings to address the efficiency of the PMA's and the underlying generation and transmission assets. We have also remained deeply involved in the general debate concerning restructuring of the electric power industry as well as PMA's specific initiatives.
This hearing is the first hearing in a series that will examine the role of the PMA's in restructuring. It will focus on the parameters of the broader restructuring debate itself rather than the specific issues that arise in the individual PMA service areas. It will discuss the Federal legislative and regulatory steps that are driving the restructuring. It will also look at the responses of the States and the dramatic changes in the technology that will affect both restructuring generally and management of PMA assets in particular. A number of affected groups will testify on the impact and issues involved in restructuring and how PMA management and mission affect those issues. Finally, there will be consideration of how the PMA's in a restructured environment will be able to repay the Federal investment in PMA and generating agency assets.
Future hearings will be directed to the issues that are unique in each of the PMA service areas. Thereafter, we will take up the various legislative options that are under consideration. At that time, I know, there are several members of the Subcommittee who may have specific provisions that they will want to have considered. And I urge members to reserve their debate on those issues for those later hearings.
The overall argument over whether or not the electric industry should be restructured has largely been decided. While States and the Federal Government are moving at different speeds toward restructuring and sometimes in different directions, the advantages to consumers resulting from competitive markets for electricity services are real and warrant fundamental changes in the laws and regulations governing the industry.
Indeed, many of the States, the industry as a whole, and the technology itself have moved us rapidly in that direction over the last few years. While the need for restructuring is easily answered, the challenge remains how we restructure.
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As one of our witnesses will remind us, it is also the question of whether we should be restructuring or deregulating the marketplace. One of the tough problems facing policy-makers at the Federal level is the overlapping jurisdiction with the States, respect for the principle of Federalism and States rights have led to the establishment of a dual system of regulation between the Federal Government and the States.
We are far from the end of this debate. This set of hearings should be very interesting, particularly since the assets this Subcommittee must deal with are Federal rather than local.
During the course of this hearing, I am especially interested in getting answers to three questions. One, what will competitive electricity markets of the future look like? Two, how will the management of the PMA's affect electricity competition? And three, how do we ensure local benefits and open the marketplace and fair competition?
I look forward to hearing the testimony of today's witnesses.
I don't see that I have a Ranking Member with us at this time, and should he wish to offer his opening statement, I will yield to him.
In the meantime, I would like to invite our first panel of witnesses to come forward. And if you would, remain standing, please, so that I can administer the oath.
Okay. Would you please raise your right hand?
[Witnesses sworn.]
Let the record reflect that each of our witnesses answered in the affirmative.
And, gentlemen, please be seated. We are very pleased to have you here.
The custom of the Committee is to turn on the yellow light at the beginning of your fifth minute. Please don't cut off your testimony when the red light goes on, but it is an indicator that is a guide. Take it for that.
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We are very appreciative of having the expertise available to us today, and we would like to begin by introducing the Chairman of the Federal Energy Regulatory Commission, Chairman Hoecker, James Hoecker.
STATEMENT OF JAMES J. HOECKER, CHAIRMAN, FEDERAL ENERGY REGULATORY COMMISSION
Mr. HOECKER. Thank you, Mr. Chairman. I appreciate very much your invitation to appear today. I am here to outline what is being accomplished at the FERC in wholesale power markets, which is the focus of its jurisdiction under the Federal Power Act.
In the broadest sense, competition is growing in wholesale power markets in response to various factors: the Energy Policy Act of 1992 and technological and business developments and the Commission's efforts to remove barriers to competition and to let markets, not regulators, determine the price of wholesale power.
Wholesale competition will provide substantial benefits to industry and to consumers, including innovative services, supply options, and the prospect of reduced prices for energy end-users. Even where retail choice is unavailable, wholesale competition will lower the cost of power purchased by utility suppliers for resale in that retail market.
The Commission is promoting competition in wholesale power markets primarily through two key initiatives. The first initiative is Order No. 888, which we adopted in 1996. It sought to promote competition by increasing the availability of transmission services that sellers and buyers depend on in order to trade power.
Order No. 888 required each public utility that owns, controls, or operates transmission facilities to file an open-access, non-discriminatory transmission tariff with us. Order No. 888 also allowed a utility to seek recovery of its so-called stranded costs. These are costs of utility generation plants incurred to serve a customer that, in an open-access environment, uses the utility's transmission to buy power from someone else, even though that utility may have had the reasonable expectation of serving that customer indefinitely.
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In the three years since the issuance of Order No. 888, the power industry has undergone extensive change. Many electric utilities have merged with other electric utilities and even gas utilities.
A large number of new sellers have entered the wholesale power market. Traditional utilities have sold 10 percent of the Nation's generating capacity to new operators. About two dozen States have started or set a date for retail competition.
And in response to growing wholesale competition, transmission access, and State policy decisions, it is more important than ever to manage transmission operations regionally.
Because of continuing engineering and economic inefficiencies as well as the continuing ability of transmission owners to discriminate against others who want to use their wires to gain access to markets, the Commission recently proposed a second initiative. It strongly encourages the voluntary formation of regional transmission organizations or RTOs.
If RTOs meet certain minimum requirements under our proposal, such as a sufficient geographic scope and independence from any power seller or buyer, they will be able to lead us toward a fairer, more efficient, and more reliable system for trading bulk power.
The Commission's proposed rules seek to encourage not only public utilities, but also non-public utilities such as Power Marketing Administrations to join RTOs. However, the Commission can order transmission over PMA facilities in only limited circumstances. And the PMAs are not subject to the same Order 888 open access rules applicable to public utilities.
Although I am pleased to say that three PMAs voluntarily offer transmission service under open access tariffs that are on file with us, the differences and applicability of competitive open access among owners of transmission should, nevertheless, be eliminated. To ensure that transmission service is available from the PMAs and other non-public utilities, and as readily as it is from public utilities, the Congress will have to act.
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Competitive power markets will depend on a transmission network that is as open and as accessible as possible. Transmission policy in the areas of open access, regional operations, and reliability should be crafted to recognize that transmission facilities owned by PMAs are integral parts of the power grid.
Mr. Chairman, members of the Committee, I want to thank you for the opportunity to share with the Subcommittee the Commission's perspective on electric restructuring. And I will be pleased to answer your questions.
[The prepared statement of Mr. Hoecker follows:]
Mr. DOOLITTLE. Thank you.
Our next witness will be Mr. Thomas R. Casten, president and CEO of Trigen Energy Corporation. Mr. Casten.
STATEMENT OF THOMAS R. CASTEN, PRESIDENT AND CEO, TRIGEN ENERGY CORPORATION
Mr. CASTEN. Thank you, Mr. Chairman, and members of the Subcommittee, for inviting me. I want to compliment you for considering the issue of electric deregulation. I believe that there is no issue before this Congress of greater importance to America's economic strength and the quality of the U.S. in the global environment.
I think that modernizing electric regulation is an issue around which the diverse perspectives represented by the Resources Committee can come together. This is so because electric restructuring, if done right, will create jobs, lower energy costs, improve services, and significantly reduce air pollution. These public goods will accrue to all Americans.
I discuss the economic and environmental benefits of unleashing electric competition in a book that I authored last year called ''Turning Off the Heat,'' copies of which have been distributed to all Committee members and your staffs.
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I believe it is possible to discern the future and the positive direction of a competition-driven energy industry by observing other recently deregulated network industries. America's electric industry is woefully inefficient in the way it uses raw materials, precisely because of monopoly protection and outmoded regulations.
The U.S. industry wastes two-thirds of all the fuel that it burns, and it has shown zero improvement in that efficiency in 40 years. For the past four decades, the U.S. has been stuck at 33 percent efficiency. As a result, energy costs all Americans too much and there is far too much pollution. My company, by contrast, operates 45 power plants in 17 States that capture between 65 and 90 percent of the energy in the fuel that we burn and that emit half the pollution.
Competition will force all energy companies to extract more value from the fuel that they burn. This will lower the prices that consumers pay, and it will cut pollution. Competitive energy producers will offer better value, just as the deregulated telecommunications has offered cellular phones, Internet access, and now global satellite services.
For example, dispersed generation units are available and proven today that do not require more transmission lines and are 20 times cleaner than today's aged electric generating plants. Competition will cause the U.S. to drop its carbon dioxide emissions to well below the targets that were set in the Kyoto Protocol while reducing the cost of energy to all citizens. It's a win/win.
Electric restructuring is moving forward, but with different parochial rules in each State. Half the States represented by members of this Subcommittee and more than a third of the States represented by members of the full Committee have already chosen to restructure their electricity markets. Others will follow quickly.
Congress now has before it restructuring bills that appear to have many of the elements of successful national compromise, particularly the version offered by Representatives Largent and Markey. I believe it is in the national interest for Congress to move quickly to pass legislation that removes Federal barriers to open competition in energy markets.
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The Subcommittee's jurisdiction over Federal power programs offers its members a particularly complex challenge. You are tasked with determining how to integrate capitalist market forces into the practices and customer bases of government-owned or government-affiliated enterprises, including PMA's and their customers.
I know how contentious these matters are. I have no interest in wading into the middle of the battles between public and private power. Where I pick sides is in the fight between government regulation and open markets. I think this Subcommittee should focus its inquiry not on the traditional positions of the contending electricity camps, but on the interest of individual energy consumers and on the broad national interest in a strong economy and a clean environment.
The Subcommittee should concentrate on delivering economic and societal benefits of modern energy technology to all consumers, including those traditionally served by Federal power programs. Whether considering a rural water district, Federal military installation, Indian reservation, or municipal power authority, the most important question to me is, how can that energy customer enjoy the best possible value and cause the least damage to the environment today and in the future?
Federal power programs were instituted earlier in this century largely to promote economic development in those parts of the country or among those sectors of society not well-served by private electricity business. At a minimum, it should be Federal policy to help those same regions or sectors of society obtain still more favorable energy services from the private sector, if the private sector makes them available. And I assure you, it will.
This will mean, among other things, assuring that Federal transmission policies encourage interconnection of distributed generation. If grants and subsidies are to remain part of the Federal power program, it would be appropriate to focus those grants where the market has failed to provide high-value energy services to customers.
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Mr. Chairman, Congress has deregulated five network industries since 1970: rail freight, interstate trucking, interstate gas, long-distance telephones, and airlines. A 1997 study found that, 10 years after the regulations were eased in each of those industries, real prices dropped between 27 and 58 percent, service improved, and all classes of customers in each of those industries shared the benefit.
I am convinced that opening competition in the energy markets will benefit all energy consumers and all the communities in which they live. I am also convinced that the power of the market will inevitably reduce energy-related air pollution, including CO2, while saving money.
I urge this Subcommittee to lend its weight to the drive toward competition in electric markets.
Thank you for this opportunity to testify, and I will be happy to take your questions.
[The prepared statement of Mr. Casten follows:]
Mr. DOOLITTLE. Thank you.
Our next witness will be Christopher Mele, legislative director for energy with the National Association of Regulatory Utility Commissioners.
Mr. Mele.
STATEMENT OF CHRIS MELE, LEGISLATIVE DIRECTOR FOR ENERGY, NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS
Mr. MELE. Good afternoon, Mr. Chairman, and members of the Committee. As you said, my name is Chris Mele, and I am with NARUC. NARUC is an organization comprised of State officials charged with the duty of regulating the retail rates and services of electric, gas, water, and telephone utilities operating within their respective jurisdictions.
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Before I go forward, I would like to just point out that my background in this issue goes back quite a few years. I was up to my eyeballs in it in the State of Pennsylvania when we re-regulated or de-regulated or restructured our electric industry in that State. And that time I was representing the rural electric cooperative and the municipals. So for the last four or five years of my career have been wading through this hip-deep most times. In fact, my wife would tell you that I probably know this issue better than her in the last five years.
I greatly appreciate the opportunity to appear before your Subcommittee on behalf of NARUC. States are, in fact, leading the charge to restructure electric markets. And each case, the States are putting in place elements that are essential to ensure vibrant, safe, and sustainable markets.
Twenty-two States so far—and the number keeps growing rather rapidly—have adopted retail electric restructuring programs to enable customers to choose among energy suppliers while ensuring the safety, reliability, and quality of electric services.
I guess the key here is do no harm, and I think that is the way the States are operating. And I think that when the Federal Government is ready to go, that is the way they should operate.
Some will argue that the level of activity is insufficient, that the States should have adopted retail. Yet the States that have adopted retail open access electricity programs are home to more than 50 percent of the Nation's population. All this activity has taken place within the last four years alone. And I believe the States will continue to pursue restructuring programs that are in the public interest and in the States' interest.
State restructuring initiatives contain many common elements, customer choice, functional unbundling, pricing reform, stranded cost recovery, protection of public benefits, sensitivity to the exercise of market power, and mechanisms to support emerging regional markets.
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It should come as no surprise that the timing and implementation of such initiatives differ from State to State in ways that reflect local customer needs and other market realities, including such factors as climate, demographics, indigenous resources, environment impacts, past choices of technology, current resource preferences, system capacity, geography, and form of utility ownership—just to name a few.
The State's intention, and NARUC's hope, is that we can learn from the unfolding State initiatives about what does and doesn't work before risking harm to the broader consuming public by requiring States to restructure local markets by a date certain or a uniform set of Federal standards to take into account the unique local circumstances of each State.
We believe it prudent for Congress not to risk disrupting these policies through prescriptive national models, but rather consider legislation that facilitates State restructuring efforts. There are things Congress can do to help the States by removing uncertainty and reducing the prospect of torturous litigation.
NARUC established a broad set of principles that I am going to summarize here on how to move forward both from the State level and from the Federal level.
One is enabling customers to choose among electricity suppliers through State determinations of appropriate restructuring policies.
Two, maintaining or improving the reliability of the electric system.
Three, ensuring customer access to reasonably priced services, including adequate protections for low-income customers.
Four, protecting consumers from anti-competitive behavior, undue discrimination, poor service, and unfair billing and disconnection policies.
Five, ensuring the maintenance or improvement of public benefits in environmental programs through existing or new mechanisms.
Six, State determinations concerning retail stranded cost recovery.
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And, lastly, enhanced State authorities necessary to create regional mechanisms to address transmission reliability, market power, and other regional concerns.
As I said, there are areas that the Federal Government ought to be involved in, affirming States' authority to order and implement retail access or customer-choice programs free from the threat of pre-emption under the Commerce Clause or the Federal Power Act, affirming States' authority to impose wires charges to support the recovery of stranded costs and other State-sponsored programs.
Let me jump to my conclusions and just say a few things we think that the Federal Government should leave to the States, and I mentioned them briefly before. But one is grandfathering. Currently, none of the proposals out there have an in-depth grandfathering provision. If you don't grandfather carefully and fully, you are going to disrupt what 22 other States have already done. And in the best case, you will create confusion; in the worst case, you may destroy the markets that are forming.
With that, I would like to end my comments and ask that my written testimony be put into the record. And I thank you for you attention.
[The prepared statement of Mr. Mele follows:]
SUMMARY OF REMARKS BY CHRISTOPHER MELE, NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS
• States should be left to decide whether, when and how local markets should be opened to greater competition that enables customers to choose among electricity suppliers, while maintaining system reliability, protecting consumers from anti-competitive behavior or poor service, and ensuring the continuation of important public benefit programs.
• Federal legislation could greatly enhance restructuring initiatives by:
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—Affirming State authority to order and implement retail access/customer choice programs;
—Affirming State authority to impose charges to support stranded costs and benefits policies;
—Affirming State authority to regulate customer bypass of local distribution networks;
—Reaffirming State jurisdiction over the rates, terms and conditions of retail electric services; and
—Authorizing voluntary formation of regional regulatory bodies to enable States to address regional transmission and system operation concerns.
—Providing for ''grandfather'' of existing State restructuring proposals.
• In conjunction with focused legislation, NARUC would also favor reforming PUHCA and repealing prospectively the mandatory purchase requirements contained in PURPA conditioned upon the development of competitive retail electric markets.
• Unlike any of the other regulated industries, conditions in the electric industry vary widely across the country. While the development of retail customer choice is critical, preferably it should be implemented in a manner that respects these differences. In our view, that can only happen if decision-makers closest to these conditions—State commissions and legislatures—enjoy the flexibility to adapt pro-competitive policies to the needs of local retail consumers.
• If Congress reaches a consensus that it needs to accelerate and broaden the transition to greater retail competition, it should do so through legislation that preserves broad State authority to implement policies flexibly in response to the conditions in local retail markets.
STATEMENT OF CHRISTOPHER MELE, LEGISLATIVE DIRECTOR FOR ENERGY, NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS
Mr. Chairman and Members of the Subcommittee:
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Good morning. My name is Christopher Mele. I am the Legislative Director for Energy for the National Association of Regulatory Utility Commissioners, commonly known as NARUC. I respectfully request that NARUC's written statement be included in today's hearing record.
NARUC is a quasi-governmental nonprofit organization founded in 1889. Within its membership are the governmental bodies of the fifty States engaged in the economic and safety regulation of carriers and utilities. The mission of the NARUC is to serve the public interest by seeking to improve the quality and effectiveness of public regulation in America. More specifically, NARUC is comprised of those State officials charged with the duty of regulating the retail rates and services of electric, gas, water and telephone utilities operating within their respective jurisdictions. We have the obligation under State law to assure the establishment and maintenance of such energy utility services as may be required by the public convenience and necessity, and to ensure that such services are provided at rates and conditions which are just, reasonable and nondiscriminatory for all consumers.
I greatly appreciate the opportunity to appear on behalf of NARUC before the Subcommittee on Water and Power of the U.S. House of Representatives Committee on Resources. I would also like to commend the Chairman for exploring State perspectives on the complex issues involved in fostering greater competition in the electric industry.
Before passage of the Energy Policy Act of 1992 (EPAct), our system of regulated electric monopoly service providers was a model of stability as regulators worked to ensure that utilities provided essential services to retail consumers at reasonable rate levels. Before and since EPAct, the U.S. has enjoyed the most economical electricity rates among those Western industrialized nations not heavily dependent on hydropower sources of energy. Times and fashions change, of course, and now the electric utility industry is one of the last of the utility sectors to undergo a transformation from monopoly franchise to market participant. States are leading the charge to restructure retail electric markets. In each case, the States are putting in place elements that are essential to ensure vibrant, safe and sustainable markets.
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Twenty-two States have adopted retail electric restructuring programs to enable customers to choose among energy suppliers while ensuring the safety, reliability and quality of electric services. Still others are working through their State commissions and/or legislatures to open access to retail electricity markets.
While some argue that this level of activity is insufficient, the States that have adopted retail open-access electricity programs are home to more than one-half of the nation's population. All this activity has taken place within the last four years alone, and I believe States will continue to pursue restructuring programs that are in the public interest and the States' interest.
The States pursuing retail open-access are acting with great care and precision to ensure the continued reliability of electric services and universal access to retail services and public benefits previously provided by a vertically integrated industry. Careful review of these activities discloses that State restructuring initiatives contain many common elements: customer choice, functional unbundling, pricing reform, stranded cost recovery, protection of public benefits, sensitivity to the exercise of market power, and mechanisms to support emerging regional markets. It should also come as no surprise that the timing and implementation of such initiatives differ from State to State in ways that reflect local customer needs and other market realities including such factors as climate, demographics, indigenous resources, environmental impacts, past choices of technology, current resource preferences, system capacity, geography, and form of utility ownership—to name a few.
The States' intentions, and NARUC's hope, is that we all can learn from the unfolding State initiatives about what does and doesn't work before risking harm to the broader consuming public by requiring States to restructure local markets by a date certain through a uniform set of Federal standards that fail to take unique local circumstances into account. We believe it prudent for Congress to not risk disrupting these policies through prescriptive national models, but rather consider legislation that facilitates State restructuring efforts. There are things Congress can do to help the States by removing uncertainty and reducing the prospect of tortuous litigation.
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In July 1996, NARUC adopted ''Principles to Guide the Restructuring of the Electric Industry.'' The Principles are intended to support States' restructuring initiatives to provide customer choice while ensuring the continued provision of adequate, safe, reliable and efficient energy services at fair and reasonable prices at the lowest long-term cost to society. In light of the local impact that restructured markets will have, our Principles reiterate our view that State commissions and legislatures should decide whether, when and how local markets should be opened to greater competition.
In brief, the NARUC Principles support:
• Enabling customers to choose among electricity suppliers through State determinations of appropriate restructuring policies;
• Maintaining or improving the reliability of the electricity system;
• Ensuring customer access to reasonably priced services, including adequate protections for low-income customers;
• Protecting consumers from anti-competitive behavior, undue discrimination, poor service and unfair billing and disconnection policies;
• Ensuring the maintenance or improvement of public benefit and environmental programs through existing or new mechanisms;
• State determinations concerning retail stranded cost recovery; and
• Enhanced State authorities necessary to create regional mechanisms to address transmission, reliability, market power and other regional concerns.
Based on these basic goals, NARUC believes that in tile following areas, Federal legislation could enhance restructuring initiatives by:
• Affirming State authority to order and implement retail access/customer choice programs free from the threat of preemption under the Commerce Clause or the Federal Power Act;
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• Affirming States authority to impose wires charges to support the recovery of stranded costs, State-sponsored energy efficiency and/or environmental programs, and universal service programs;
• Affirming States' authority to regulate retail power delivery services regardless of the facilities used, thereby eliminating the threat of customers bypassing the local distribution network;
• Reaffirming States' exclusive jurisdiction over the rates, terms and conditions of retail electric services, including retail transmission services;
• Authorizing the voluntary formation by States of regional regulatory bodies to enable States to address regional transmission and system operation concerns.
With these issues resolved legislatively, while continuing to accord States the discretion to determine whether, when and how to open retail electricity markets to competition, States would be confident of their legal authority to move forward on restructuring efforts as local conditions dictate.
In conjunction with this type of focused legislation, NARUC would also favor reforming the Public Utility Holding Company Act of 1935 (PUHCA), while continuing to ensure consumer protections against abusive multistate utility holding company practices, and repealing prospectively the mandatory purchase requirements contained in the Public Utility Regulatory Policies Act of 1978 (PURPA). NARUC conditions its support for PUHCA reform and PURPA repeal upon the development of competitive retail electric markets and as part of broader restructuring legislation, not as stand alone initiatives.
Another issue in this debate, where Federal legislation is necessary, is reliability. Any legislation should explicitly confirm the public interest in transmission grid reliability, the need for mandatory compliance with reliability standards, and a provision of explicit authority for the FERC and the states in cooperation to enforce the necessary standards. I emphasize the cooperative nature of this task. Congress could accomplish this by authorizing voluntary formation by States of regional bodies to oversee transmission issues, Independent System Operators, system planning issues and reliability.
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One last component that would need to be addressed in Federal legislation is the inclusion of language to ''grandfather'' State restructuring plans that were in place prior to enactment of any Federal legislation. In the States that have moved to provide retail open access, there have been delicate compromises reached to produce consensus. States have crafted these proposals and plans to meet their unique circumstances. In addition, Federal preemption could have disastrous effects on those States which already have retail consumers participating in burgeoning open access markets. In essence, without a grandfather provision Congress would be changing the rules for an immature market, causing confusion at best and the collapse of an undeveloped market at worse.
While I have just discussed issues which NARUC believes the Federal Government ought to include in legislation should Congress proceed with electric restructuring, there are areas where NARUC believes Congress ought not take action. NARUC does not support proposals which require States to implement customer choice by a date certain. For the reasons previously stated, a Federal mandate is unnecessary (given the pace at which
State commissions and legislatures are now moving) and unwise (given the need for each State to address restructuring issues at a pace that makes sense in light of its individual economic, demographic, climatic and yes, political circumstances). We appreciate the desire of some to get on with the transition as quickly as possible, but if implementation of the pioneering State programs proves that the benefits of customer choice are as compelling as the proponents of a Federal mandate believe, States will embrace pro-competitive policies, as many currently are, at a pace that makes sense for their individual needs.
States should also retain jurisdiction to address the recovery of costs for power sales and delivery service provided retail customers regardless of the facilities used. This means that technical definitions as to the character of facilities as transmission or distribution investments should not impinge upon the ability of State commissions to exercise authority over every retail transaction. This issue is of critical importance to ensure that States have the option of imposing non-bypassable charges to fund stranded cost and benefit programs.
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Conclusion
The States are now performing their historic role as laboratories to test how the words ''greater competition for retail consumers'' can be turned into real-world services that customers will buy. The State commissions and legislatures must be allowed to continue to experiment with retail access, including customer choice initiatives. As the consequences of competitively-based wholesale markets become clearer, States are putting in place complementary retail policies which are adapted to regional market conditions. State commissions are developing and implementing compatible retail policies which preserve reliability, prevent the stranding of ''public goods,'' ensure consistency with environmental values, minimize cost shifting, provide for stranded cost recovery, and most importantly, improve economic efficiency. Over time, States will work together, as some are now doing, to devise and implement regional institutions to adapt their regulatory responsibilities to the reality of regional power markets.
If Congress chooses to act in this area, any Federal legislation should preserve broad State authority to implement these policies flexibly in response to the conditions in local retail markets. The development of retail customer choice should be implemented in a manner that respects these differences. In our view, that can only happen if decisionmakers closest to these conditions—State commissions and legislatures—enjoy the flexibility to adapt pro-competitive policies to the needs of local retail consumers. In the weeks and months ahead, my colleagues and I look forward to continue working with Congress and all interested parties to develop workable policies that support an efficient and environmentally sound electric services industry that meets the needs of all retail consumers.
Mr. DOOLITTLE. Thank you. And let me assure you that all the full set of testimony will be included in the record along with your oral statements here.
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Our next witness will be Mr. Wayne Crews, director of competition and regulation policy with the Competitive Enterprise Institute.
Mr. Crews.
STATEMENT OF WAYNE CREWS, DIRECTOR OF COMPETITION AND REGULATION POLICY, COMPETITIVE ENTERPRISE INSTITUTE
Mr. CREWS. Good afternoon, Mr. Chairman, and members of the Subcommittee. My name is Wayne Crews. I direct competition and regulation policy at the Competitive Enterprise Institute. I appreciate the opportunity to appear today. CEI is non-partisan, non-profit organization that works to educate opinion leaders on market-based alternatives to political programs and regulations.
I am here today to provide an alternative—a little bit of an alternative model of achieving the free market, free electricity markets, asking the question, does the pursuit of Federal retain open access have it wired or tangled? When policymakers embark upon restructuring, as opposed to deregulating a heavily regulated industry, they risk creating more regulation than existed before. This is the dilemma raised by today's calls for mandatory retail open access in electricity, which is intended to ensure that every commercial, residential, and industrial customer shall have the choice of any electricity provider while the local utility will be required to distribute the new provider's electricity.
Nearly every network industry now, from electricity and telecommunications to railroads and cable TV—and even, potentially, the computer operating systems—suffers from the threat of open access disease, a regulatory infection caused by dual exposure to regulators who assume themselves indispensable to competitive markets and economists who cling to the notion that capitalism generates natural monopolies apart from a government-granted franchise.
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The irredeemable problem with open access and achieving at the retail level is its coercive character. The desire of a transmission or distribution owner to control its wire isn't compatible with the desire of others to hitch an uninvited ride, a problem for which there is no stable regulatory solution.
Thus, despite years of effort, electricity reform at the Federal level stands a good chance of dying again in Congress this year. Every fundamental question—State versus Federal jurisdiction, the role of independent system operators, reciprocity, the role of rural power, stranded costs—all remain hotly debated.
More substantial and robust electricity competition could emerge if more precious years weren't wasted trying to mandate it. Competition doesn't require granting everybody with a kite and a key the right to dump their electricity into the grid for somebody else to manage.
Instead, the artificial barriers that prohibit voluntary competition are the State-granted exclusive local delivery franchises that protect incumbent utilities. These should be removed. Open access leaves those delivery franchises intact, and as the market grows and the deregulated generation aspect of the industry moves forward, it is going to contort around this still-regulated transmission structure while other network industries in the country are moving ahead, even in some cases creating redundancy in certain areas.
If those franchises were ended as opposed to pursuing mandatory access, that would grant to entrepreneurs and adventurous electric utilities the clout voluntary access deals and develop infrastructure by forming consortia, sharing rights of way with network industry cousins, like telecommunications, Internet, and railroad firms.
For instance, an independent power producer could team up with a baby Bell and real estate developers on the fringes of the grid to share costs of providing electricity and communications services to residential and business customers. That is one type of example.
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Some entrepreneurs could emulate companies like Qwest and Level 3; each is financing fiber networks thousands of miles long that feature buried redundant empty plastic conduits for rapid installation of next-generation fiber. And, on top of this, at this point in history, barring a breakthrough in wireless data transmission, given the Internet revolution, a multibillion-dollar effort to rewire the last mile to household consumers may emerge. So sharing costs with power entrepreneurs could prove essential, but right now they are prohibited from attempting that, given the exclusive franchise.
Under genuine competition, incumbent utilities threatened with such constant entry would be likely to offer open access voluntarily. Thus, the aims of the forced open access advocates would emerge, but in a market-driven manner. Other competitive pressures include lightweight micro-turbines capable of serving a 7-Eleven or large homes, which some researchers believe could rival the change in computing from mainframe to the desktop in significance.
Other potential avenues for competition include relatively new computer-controlled sideways drilling technology that allows oil and gas companies to flexibly snake under streets without disturbing the above ground. There are new technological controls over power flows that make it not quite so true anymore that we can't control where the electrons go. Other examples are in the handouts.
But ending exclusive franchise is necessary to ensure that firms other than existing utility monopolies can exploit all these options. Otherwise, a homeowners' association or a business park employing micro-turbines could find itself in violation of the local franchise.
Of course, if we removed the franchises and competition doesn't start to emerge in some places, then the States may properly consider forced access on a rifle-shot basis. That is the way it should be done.
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Forced-access advocates forget that innovation in transmission and distribution is as important as any other kind of innovation. Forced access could compromise entrepreneurial incentives to embrace innovation and enhance reliability because their advance remains too dependent on what regulators do.
Consultant Martin Mills points out that today's noisy and dirty grid is leading developers to design buildings with separate power systems, that second wires are inevitable in a lot of cases, and that the grid ultimately will need to emulate the architecture of the Internet to obtain the necessary liability levels.
The ability to make and execute such market strategies depends crucially on owners and operators who directly profit or lose from their decisions. Altering our deregulatory approach in the 106th Congress would set in motion a restructuring that is as fully efficient and entrepreneurial as possible. Years would possibly be saved on the need to revisit the industry to have its distortions legislatively ironed out, as may occur in telecommunications.
There is too often a tendency among policymakers to embrace technocratic solutions. Under genuine competition, regulators disappear. In contrast, mandatory access risks armor-plating regulators at a crucial moment in business history. Inefficiencies created by actual government monopolization of the grid will outweigh any potential, but unlikely, monopolistic abuses by the private owners of transmission and distribution, if they are subject to threats.
The answers to questions regarding the shape of tomorrow's power markets are not all locked into today's initial conditions. Information will be created by entrepreneurs as we go along, and we should give them a chance.
I thank the Subcommittee for its attention.
[The prepared statement of Mr. Crews follows:]
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Mr. DOOLITTLE. Thank you.
I announced this this at the beginning, but now that some of our additional members have shown up, all of the proceedings are being broadcast live over the Internet. I wanted to make you all aware of that.
Well, I appreciate the testimony that all of you have offered, and, Mr. Crews, let me just begin with you. Is there one jurisdiction some place that comes closest to implementing what you have advocated here?
Mr. CREWS. I think even at the level of the States, even at the State level, distribution franchises are staying intact. I think, ultimately, what might make sense is something like was done with the intrastate trucking deregulation that Congress did a few years ago as part of the FAA reauthorization. Congress removed the right or the ability of States to limit access of trucking companies and to limit their prices. That is the kind of thing that should be investigated. I think even if we have full mandatory access put in place at the State level and at the Federal level, we are still left with local delivery franchises for the next 10 years of so, and we would have to revisit that question.
And I think a lot of potential pain could be avoided by addressing those kinds of concerns now. The Supreme Court has addressed them recently in the Bell case in terms of—the case involved not every service has to be offered to competitors on an open-access basis. It was bogging some of those services down. So you can run into problems there with innovation.
I am given to understand that in Colorado there is an example where—I don't know the details of it, but it is something I could certainly look up and supply to the Committee—where a gas company was offering services to customers, but was not offering itself as a public utility. And therefore, it wasn't subject to the mandatory access requirements and things of that sort. So there are things that can be picked up.
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Mr. DOOLITTLE. Well, if you could find out something more about that and send it along I would appreciate it.
I saw you nodding your head, Mr. Casten. Did you want to comment on that subject?
Mr. CASTEN. To your direct question, sir. In 49 States, if a private power entrepreneur runs a wire across the road, they receive a go-to-jail card.
In Colorado, there is a law that has been tested for the gas companies that allows you to serve a group of private people. It hasn't been tested electricity-wise.
I think the example you are looking for is the United Kingdom. In 1989, when the U.K. deregulated, they allowed anybody that wanted to to run a wire. There haven't been very many wires run, but the cost of distribution and transmission has fallen to everybody because the monopoly protection was removed.
Mr. DOOLITTLE. Mr. Hoecker, would you want to comment on this subject?
Mr. HOECKER. Well, I am not familiar with the Colorado law that has been mentioned. It sounds to me as if there is some form of distributed generation off the grid.
If we are talking about the transmission system or interstate pipeline transportation, we are talking about industries that do have characteristics of natural monopoly. They are becoming open access. I happen to think open access is a very positive development, not simply a job-insurance program for regulators.
We have seen, as Mr. Casten has mentioned, natural gas prices drop since well-head prices were deregulated. And we have done our part at the FERC to promote access and free markets in the interstate pipeline industry. We expect to do the same thing for electric transmission as well.
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And it is clear that the Congress, through the Federal Power Act, has concluded that these kinds of facilities are affected with a public interest, that they have monopoly characteristics, and as the DC Circuit has said in another context, the Federal Power Act and the Natural Gas Act fairly bristle with concern about undue discrimination.
So as we move toward a free market and entrepreneurship and begin to bring the forces of markets to bear on industries that have formerly been monopolies, we have to structure a reasonable transition and not simply walk away from our public interest responsibilities.
Mr. DOOLITTLE. Mr. Crews believes that this isn't as great a problem as some seems. So somebody else runs a separate distribution facility, what's the problem with that?
Mr. HOECKER. I think separate distribution facilities or non-utility transmission services, while we haven't seen them, are entirely possible, but I also think that investors are going to think twice before building essential facilities in competition with the local utility franchise, who has had those facilities paid for by ratepayers over several generations. That is to go in the face of good financial planning in my estimation.
Mr. DOOLITTLE. Do you have an answer to that, Mr. Crews?
Mr. CREWS. Well, I would say, we don't have to argue about it. We can do away with the franchises and see what occurs. It may be that nothing does happen, prices remain high, and open access should be instituted on some kind of an ad hoc basis because of that residual monopoly power. But someone may move in, and if someone does attempt to move in, and we are seeing duplication and redundancy in other network industries, if someone does move in, that local utility has a serious problem on its hands. Because if someone does take the step of putting in new wire and all they have to do is call Pirelli Cable to do it, if they make the deals and lay that wire, then that utility really has a stranded cost on its hands.
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Mr. DOOLITTLE. Well, my time is up. The Chair recognizes Mr. Smith for his questions.
Mr. ADAM SMITH. No questions.
Mr. DOOLITTLE. Mr. Walden is recognized.
Mr. WALDEN. Thank you, Mr. Chairman.
A question for Mr. Hoecker: The Northwest delegation is working to develop a regional approach to balancing the role of the Bonneville Administration in a competitive environment. Similar efforts, I understand, are underway at the TVA. Do you support these sort of regional approaches on this issue?
Mr. HOECKER. Absolutely. I think looking at the electricity market on a regional basis is essential as bulk power markets and the number of wholesale transactions become more important and become more numerous. It is important that we look at reliability, transmission planning and expansion, and transmission pricing policies on a regional basis so that we can have real market forces at work at the generation level.
Mr. WALDEN. Given the discussion you and Mr. Crews had a moment ago about deregulating the transmission side, do you see that there would be a problem in a district like mine that is 72,000 square miles where we have got one person for every nine miles of line, in some cases? Do you think we would see some cherry-picking go on in the urban areas and leave the rural areas under-served if it is not under monopoly control?
Mr. HOECKER. I think that is always a concern. I think it ought to be the policy of regulators, and of the government generally, to ensure that all Americans have fair access to electric power. And, clearly, some remote rural customers are very expensive to serve. So, you are right, it is not an easy answer when it comes to those people.
Mr. WALDEN. Mr. Crews, I would entertain a response from you on that question.
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Mr. CREWS. It is always a concern. You want to be sure that rural customers are served. But rural customers don't need just electricity. They need cable TV and Internet access, and all those kinds of things. And I would think that the best way to at least help assure that is to make sure that there is not a local monopoly that can't be competed against, to at least have the potential for others to figure out a way if they can to come in with a wire.
And if they team up with—for instance, railroads now are selling off something called their short-liners. They are selling off their short spurs that serve rural areas. It is a perfect opportunity for them to sell those to, say, Level 3 and Enron, and then those two go in and try to put some infrastructure in place.
So we need lots of things occurring. And plus, if it a rural area, it is easier to get the rights to lay wire rather than——
Mr. WALDEN. Yes, I would suggest that at some point I invite you to come to my district. Towns like Fossil and Condon, they don't have cable TV, either, or very good access. So competition is really not the issue. It is just trying to get service at all.
Mr. Hoecker, I want to go back to you in the limited time I have. You have testified in favor of gaining jurisdiction over more than 400 transmission-owning electric co-ops. I assume this is, presumably, in response to existing problems or lack of jurisdiction. In the last years, have you run into those kinds of problems? Co-ops? Complaints?
Mr. HOECKER. I think—let me hearken back to your first question, which is the importance of regionalism. In using all the high-voltage transmission, which is generally highly integrated with the investor-owned transmission, electric co-ops, transmission-owning municipal utilities, and Power Marketing Administrations have important facilities that are integral to the operation of the grid. And if we are going to have a more efficient, more competitive bulk power market, the entire network, it seems to me, needs to be subject to the same kinds of open access requirements.
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And that isn't the case now. And whether we like it as a regulatory matter or not, transmission that is owned by one set of utilities, be they FERC jurisdictional or not, the operation of those facilities affects everybody's service.
Mr. WALDEN. Okay. Under the administration's bill, FERC would gain jurisdiction over more than 400 co-ops, a thousand muni's, PMA's, TVA, BPA. How do you plan to handle that somewhat increased workload you may find yourself with?
Mr. HOECKER. Well, I should be clear that what we are seeking jurisdiction over is the rates, terms, and conditions of high-voltage transmission service. BPA, TVA, those co-ops all provide a diverse menu of services to their customers, including retail service.
The Commission has no interest in that. We are not a retail regulator. That is the bigger part of the market. And we are simply trying to ensure that the bulk power market is inclusive and as transparent as possible.
Mr. WALDEN. Thank you, Mr. Chairman. I yield back my time.
Mr. DOOLITTLE. Mrs. Napolitano is recognized.
Mrs. NAPOLITANO. Thank you, Mr. Chair.
Mr. Hoecker, there is a specific question I have based on California experience. One of the things that was brought to my attention is that NEV, the New Energy Ventures, this week purchased the AES. One of the news accounts, they have a long-term contract to buy power from Bonneville, the Federal Power Agency's largest single customer outside the Pacific Northwest. The contract arrangement shields NEV from Bonneville's decision earlier this year to sell its excess capacity at prices set by the California Power Exchange.
As a result, NEV remains able to buy power at below-market rates for resale in the California market, which is going to undercut, you know, some of my smaller providers. In effect, they are going to be pocketing the difference between the secret contract price for taxpayer-generated power and the higher market price.
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What sort of Federal or the FERC controls would have to be in place to address this kind of situation?
Mr. DOOLITTLE. I would be happy to provide you with a fuller answer with that question. I think I would have to take a look at the contract arrangements. When Bonneville sells into southern California, or into California, into the independent system operator of the power exchange, it is subject to the same rules as any other seller of electric power.
I am not sure to what extent the New Energy Ventures contract with them would undercut, or the merger that you mentioned, would undercut the other providers in terms of price, but I would be happy to provide you with a fuller answer to that.
Mrs. NAPOLITANO. I would very much appreciate it.
Mrs. NAPOLITANO. Second question would be that I am wondering what your position would be on H.R. 1486, the bill to provide for a transition to market-based rates for the PMA's?
Mr. HOECKER. Well, the FERC, of course, has provided market-based rates for hundreds of energy providers over the last decade. And we have for new generation essentially allowed wholesale energy suppliers to sell at what the market will bear.
The concern I would have for market sales by a Power Marketing Administration is the concern under the statutes that they be able to recover their costs and repay their Federal obligations. But I haven't looked at this from a competitive perspective.
Certainly, we would like to see generation move to market. And I think that that is important for all sources of generation.
Mrs. NAPOLITANO. The other question I think I would have for Mr. Casten a—where are you? There you are. One of the questions is, what are the assumptions you are making when you assert that competition will cause the U.S. to drop its carbon-dioxide emissions to well below the targets of the Kyoto Protocol?
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Mr. CASTEN. Carbon dioxide is unlike any other pollutant. The only way you get rid of it is to burn less fuel. The electric industry is horribly inefficient. It burns three units of fuel to produce one unit of power. We have demonstrated in all of our plants that we can burn one-and-a-quarter units of fuel to make a unit of power.
Mrs. NAPOLITANO. How do you accomplish that?
Mr. CASTEN. We localize the generation to where there is a requirement for heat, such as the Coors brewery or an agricultural processing factory, or chemical plant, hospital——
Mrs. NAPOLITANO. You have recovery?
Mr. CASTEN. We then recover the heat that would have normally been thrown away and use that to offset other fossil energy. We also avoid the losses that are involved in the transmission system because the electricity is generated right at the user at their local voltage. It doesn't go up through the wires.
And so the overall efficiency of delivery goes up by two-and-half times. The savings that we create totally come out of not burning fuel. So our company as a whole produced 54 percent of the CO2 last year that would have been produced had the same power been generated conventionally.
Mrs. NAPOLITANO. Very interesting, and I think it is very admirable.
Thank you, Mr. Chair.
Mr. DOOLITTLE. Thank you.
Let me ask and I invite you gentlemen to comment. I have read that within 10, or perhaps as long as 20 years, although the article seemed to imply it was more likely to be 10 years, many, if not most, homes would be generating their own power through fuel cells. Would you care to comment on that?
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Yes, Mr. Casten?
Mr. CASTEN. The consensus of almost everybody that understands the technology is that we have learned that we can make power efficiently in smaller units and that the optimal power unit, which was moving up year after year, has moved down to very small.
Fuel cells are a wonderful technology because they are clean and they don't take any maintenance. And they would be in every home today, but they cost too much.
The argument that I believe I would subscribe to is that the automotive industry is probably going to drive the cost of fuel cells down via mass production, and that we will get to a point where we make most of the electric power locally. Most of the transmission system will prove to have been overbuilt, and we will greatly improve the competitiveness of the whole society by that kind of a move.
Along the way, though, we are already able to generate power on-site in all of our industry, hospitals, high schools, medical centers, with technology that exists, is proven and is cost-effective. But we are prevented from doing that by all of these barriers to efficiency.
In this rural territory that the Congressman referred to, I could put in a plant in a high school and it is maybe not quite efficient economically. If I could run some of the power down to the local hospital, I might have an economic plant. But in 49 States, if I run that wire, I go to jail.
So if Congress removes some of the barriers and lets the technology that is already available compete, your constituents are going to see lower-priced power and more services. We are ready with the technology.
Mr. DOOLITTLE. So even in the rural areas, in that example, it would clearly be a benefit toward doing some of those things?
Mr. CASTEN. Absolutely.
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Mr. DOOLITTLE. Mr. Hoecker, is it my understanding then that you are in support of this idea of asserting your jurisdiction over the PMA's?
Mr. HOECKER. Well, we would have to be given that jurisdiction by the Congress.
Mr. DOOLITTLE. Right, but——
Mr. HOECKER. Yes. I support that.
Mr. DOOLITTLE. You do support that. That would then mean that the PMA transmission facilities would be subject to the same open access requirements as the public utilities?
Mr. HOECKER. That is our purpose, sole purpose.
Mr. DOOLITTLE. Do you believe that electric energy produced at hydroelectric facilities should be considered renewable for the purpose of meeting a renewable generation requirement and should the Federal Government seek to impose that?
Mr. HOECKER. I know what a controversial question that is. And I view renewable energy, non-fossil energy, as very important. And hydroelectric is absolutely essential to the stability of the grid, particularly in the West. And I am happy to call it renewable. I am not sure what my opinion means as far as legislation is concerned.
Mr. DOOLITTLE. Well, I, for one, would be grateful, at least if you would express the opinion vigorously that it should be deemed renewable.
Mr. Casten, tell me your views about this issue of a Federal renewability standard. Do you think there ought to be such a thing? And if so, do you think hydropower should be counted as renewable?
Mr. CASTEN. Mr. Chairman, I think it is incumbent that we have leadership to move to a sustainable world. We are going to run out of fossil fuel, and before we run out of it, we are going to run out of places in the air to park all the carbon. Our grandchildren will still find water raining in the mountains and able to come down and make electricity. They are going to find a lot less fossil fuel than we found.
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So, I think that everything that doesn't burn fossil fuel ought to be encouraged. As to the specifics of the renewable standard, I think it is an awkward way to achieve the result, and that a better way to achieve the result would be for Congress to say to anybody that wants to make heat or power, go ahead, make heat and power, but here is the amount of fossil fuel that you are allowed to burn per megawatt hour you produce, and if you use more than that, buy some credits from somebody else. If you use less fossil fuel, sell your credits.
Oh, and another thing, next year, the amount allowed will go down. And then, periodically, Congress could set how fast that curve goes down, but let the market decide what is the best way to get to sustainability. You give us the leadership; certainly let hydro play a role in it.
Mr. DOOLITTLE. Thank you. Mr. Walden.
Mr. WALDEN. Thank you, Mr. Chairman.
I just want to follow up on your comment, Mr. Casten, because the example you used sort of strikes at the point I was trying to make. You could put in your power-generation facility for the high school, but you should know in this county of 1,700 people there is no hospital.
And so you might serve something in downtown, but it is the rural nature of this very county that I am struggling with on how all this works, because if you take the high school and you take the mill, and they are no longer on the grid there that the co-op is providing for, who is going to reach out? Is your company willing, then, to go out and go past the hospital and go out a hundred miles in this county and drop line every 9 miles to a ranch?
See? That is what I am trying to deal with in my district. I know it is unique from some, because it is so large and rural and expansive. But this is what the folks there are saying. People who have strung that line, maintained that line are saying, you take the big users off our system, who is going to step up to the plate to provide power to the ranch that is 30 miles out of town? Are you going to do that?
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Mr. CASTEN. We originally granted monopolies in order to encourage people to invest that money, and that worked. We got everything electrified.
Mr. WALDEN. It did.
Mr. CASTEN. But Congress had to fill in the holes with the rural utility systems. The country is now pretty well electrified, and the wires are there. And my question is, why would the people with the wires there stop providing service if they no longer had a monopoly?
Mr. WALDEN. Well, what is their cost going to be though to do that if you take their big users off. Isn't their cost per going to go up to maintain the service?
Mr. CASTEN. I am not at all sure.
I grew up in Windsor, Colorado, which is a pretty rural little town served by an RUS. And Kodak moved in there. There is an opportunity for Kodak to make 20 megawatts of power about one-third cheaper than it comes from Tri-State, the RUS. If that power was made at Kodak, you avoid the transmission cost of bringing that power over the mountain. And it is not clear at all to me that two businesses wouldn't work together. We are now starting with the power locally and much cheaper. And it can still get out to my father-in-law's farm.
But I think that the larger issue is to——
Mr. WALDEN. Well, we do have Cogen facilities throughout this district as well, and the power is purchased and is distributed.
Mr. CASTEN. Right. But the power can only be sold by the Cogen facility to its competitor. He can't run a wire across the street. And this tends to distort what is the best economic way to get it done.
I am arguing to take those barriers out of the way and trust, by and large, that markets fill every niche in trying to provide the service. Then come back if there are problems and make the adjustments.
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Mr. WALDEN. Yes, but I guess I am not willing—I am concerned about just saying come back and fix the problem, because rural communities in districts like mine get left out on every highway that is created. And that's what I struggle with as I try and represent this area.
I mean, I have been in small business for 13 years. I know where the profit is in my business, and I know where the loss is. I don't go seek the loss. I go seek what is profitable.
And that is my concern for districts like mine that get left off the Internet, that wouldn't have power if it weren't for the government stepping in. I mean, I generally approach this from a very free-enterprise status, but, on the other hand, there is some basic service I am concerned will be lost if we are not very careful about how we go down this road. Can you help me with that? Because Kodak is not going to locate in Fossil or John Day or——
Mr. CASTEN. I share the concern with Fossil, but I raise another concern. The kinds of technologies that I referred to in my answer to the chairman are being held back because you can't put them in any place. And those are precisely the kind of technologies that would work pretty well on my father-in-law's farm, which is in Hill Rose, Colorado, which about as remote as you get. Those technologies will be developed and brought forward and made more cost-effective.
So I think that the challenge that you have—and I appreciate that it is a challenge—is to try to get the barriers out of the way, so that these technologies can develop and still take care of these remote parts of the market.
Mr. WALDEN. And I understand what you are saying. There is a company in Bend that has developed a power unit. I am going to go visit in the next couple of weeks. That, you know, they are trying to get down to microwave-sized thing that will produce enough power for a house. We have had generators before.
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I literally have places in my district that just this year may get the first access to telephone service because they are so remote. And so, I mean, I realize I face a little different problem, but this is the problem I face, and to the extent we can get more power out there, great. I just don't want to leave those people off the line.
Mr. CASTEN. Just my final comment.
Mr. WALDEN. Yes.
Mr. CASTEN. I spend some of my time as the president of a Boy Scout Council, and we are building cabins in an extremely remote area. And the technology has now improved so that it is cheaper for us to put in photo-voltaic power than to run the transmission line. So the technology is coming.
Mr. WALDEN. Well, as a fellow Eagle Scout—and I serve on a council, too—I am glad to see you are doing that. Good work.
Thank you.
Mr. DOOLITTLE. Mrs. Napolitano.
Mrs. NAPOLITANO. Thank you.
Mr. Casten, I asked you the question in regard to the assumptions issue. One of the questions that I didn't quite get to, and didn't ask really for the answer was, does your industry need to take over what percentage, 10, 20, 50, of the market to accomplish the emissions reductions to meet the Kyoto Protocol?
Mr. CASTEN. In the United States, the average power plant was built in 1964 using 1959 technology. And I am thankful that the Internet and my personal computer came a little bit later or we would have a hard time being here today.
The people worry that, if Congress steps in, there will be the premature retirement of some of these assets. I would suggest that what we are facing is the post-mature retirement of most of the fossil power plants in the United States. It is not a matter of taking over the markets, but of generating that part of the power that is possible in connection with heat loads.
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And I can tell you what that statistic is. We had a peak of 550,000 megawatts of electricity generated on the peak hours of the year last year in the United States. That is our peak.
The DOE has found that we could put in about 120,000 megawatts of new combined heat and power serving existing thermal loads, breweries, hospitals, universities, packing plants, chemical factories, and so forth. That would get us to a national average efficiency of 55 to 60 percent. And that level, we would be below the Kyoto carbon emissions, and we would be saving money.
Britain deregulated electricity in 1989 and is now 7 percent below the carbon output that they were at in 1990. All of the drop has come from generating efficiency in the electric industry. Carbon emissions from industry have gone up slightly. Emissions from transportation have gone up a lot. And yet, Britain's total CO2 emissions are 7 percent below where they were, and their economy is very healthy.
So what needs to happen is for Congress to change the rules so that this kind of efficient power will get built. Am I answering your question, ma'am?
Mrs. NAPOLITANO. You have gone around the way, but you got there.
Mr. CASTEN. Thank you.
Mrs. NAPOLITANO. Thank you, Mr. Chair.
Mr. DOOLITTLE. I am interested in unleashing these exciting developments. Sounds like it is your belief, Mr. Casten, that the existing regulatory scheme is what is hindering this and maintaining these inefficient plants in existence to this day. Is that correct?
Mr. CASTEN. Yes, it is.
Mr. DOOLITTLE. If we go to this deregulation, what happens to reliability in the system, which has been quite high, I believe, heretofore?
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Mr. CASTEN. I know of no commodity in my lifetime that has been in short supply except those that had price regulation by the government someplace. Somehow there is bread on the shelf every day even though there is not a Federal bread regulatory agency.
[Laughter.]
I think that when you are in business, if you don't provide the reliability that the customer wants, you don't stay in the business very long. And I think we will as an industry provide reliability, but I make another point. Not every customer wants as much reliability as they are presently receiving. Some of that reliability costs an awful lot of money. Many of the big industries would find it cheaper to shut down a couple of megawatts rather than to pay for 20-percent extra power generation standing in place. Deregulation will give people those choices of how much reliability they buy. The market will supply it.
Mr. DOOLITTLE. Well, what is your reaction to that, Mr. Hoecker?
Mr. HOECKER. Well, I agree with an awful lot of what Mr. Casten says. I think these technologies are wonderful, and the market needs to test them. And they need to be promoted in an environment where these new sources of generation and some of the old ones, like hydro, have access to markets. And we want them to have access to the wires on a non-discriminatory basis. We think that will encourage their development. In those cases where they are distributed generation off the grid, I think the reliability question is a very poignant one because I think many Americans and American businesses would like to have the backup that connection to the utility, to the power grid, provides even if they self-generate.
I think that, frankly, reliability is—will be seen increasingly, perhaps—as a commodity just like power itself, and that a business decision to cycle one's plant offline for several hours to save power costs will be an important decision to make, and it is being done even today. But it is the universal access to power; it is the power at reasonable prices that I think Americans regard as almost a right. And I think that we tinker with that at our peril. So I am just advocating a bit of carefulness in this transition.
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Mr. DOOLITTLE. Although the proponents of deregulation would argue that, with some evidence from industries that have been deregulated, that the prices would drop, not go up. And with respect to that, let me just ask you, talking about running the wire across the street and it being a felony or a crime in 49 of the 50 States, what do you think of the idea of relaxing that so that they could run the wire across the street?
Mr. HOECKER. Well, I am not an expert on retail access laws per se, but I think the competition needs to come to the retail environment just as we are trying to promote it at the wholesale level. I don't think that we ought to criminalize that sort of behavior, if in fact that is what is happening.
There are reliability concerns, safety concerns, pricing concerns associated with the kind of situation that has been described, but I personally think the government should not burden those kinds of transactions unnecessarily if there is no public interest involved.
Mr. DOOLITTLE. I don't know how we got you as Chairman of FERC, but I am glad we did. I appreciate your candid response.
Are there further questions? Oh, yes.
Mr. MELE. Mr. Chairman, if I could respond? I have heard a number of discussions dealing with the wires across the street, which is the jurisdiction so far of my members. And one of the things that concerns me, and it was brought up in the discussion with rural areas—and let me give you a little story.
In Pennsylvania, the co-ops also had to open up their systems, just as the investor-owneds did. Nobody wants to sell power in the co-op areas.
These two gentlemen are talking about running wire; they are talking about industrial customers. My members care about the residential ratepayer. The residential ratepayer isn't going to see new wire coming to their houses—maybe 20 years from now after the companies have made all of their money on the industrial side, and then the residential folks have to pick up that cost.
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The other thing I would say, if you are going to allow residential distribution open access, if you will, you had better change the tort laws and the product-liability laws in this country. I would use that as a caution.
Mr. DOOLITTLE. Well, what is your reaction to the notion, if we change those laws that prohibit other people from building distribution systems, would that unleash the technology that would lead to many of the homes being able to generate their own power?
Mr. MELE. I think the technology is going to happen regardless of whether you open the distribution system up or not. As was stated before, there is money—if there is money to be made there, they will do it. If there is not enough money to made there, they won't do it. What they are going to advocate is, open up the distribution system—which is, I think everyone would agree, a State jurisdictional issue—open up the distribution to provide three or four different wires coming into a house.
And it is not going to come into a house. It is going to go into industry; it is going to go into large commercial, may even go to some small commercial. Residential ratepayers aren't going to see it for quite awhile.
Mr. DOOLITTLE. Well, suppose that were the case, and it went mainly to, which I presume probably would be the case initially, that it would go to the bigger users, but that is not necessarily a problem anyway, is it?
Mr. MELE. Not necessarily, I wouldn't think. However, the distribution system at that—when you are getting down to the level of the wires to the meter, the wires that are running down streets, I can see many reliability problems, perhaps. I can see, in certain instances, residential ratepayers' rates going up for their distribution component. I could see—foresee, rather—when there is a reliability problem, a residential ratepayer would pick up the phone and call his State legislator or his commissioner, his public utility commissioner, they are not going to pick up the phone and call the chairman and the clerk. They don't even know they exist.
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I am talking about a residential ratepayer. You are right about the industrial and large commercial. That is 100 percent correct.
Mr. DOOLITTLE. I realize my time is up. Let me just ask this follow-up question. I think I have read that some power companies are now technically able to do other things with those wires than just put power through them, like maybe a phone service or a cable TV service or something like that. So doesn't this all kind of get rearranged, our whole model of thinking about this, now that those are sort or interchangeable? Any reaction? Mr. Hoecker.
Mr. HOECKER. We are seeing an incredible trend toward diversification in the utility business. There has been a lot of consolidation among electric utilities, but also between electric utilities and gas companies because they both have access to the customer base. There are alliances between electric utilities and telephone operations or data—I should be more sophisticated and say, data and Internet providers. I think that we will see an emergence of energy and data and other kinds of services to the home by the same and competing providers using the same wires.
But the essential point I would make is that they are using the same wires. They are using an essential facility that allows all providers access to customers. And when you have essential facilities like that, you have to ensure that access is fair and non-discriminatory, whether it is into somebody's house or whether it is between two utilities across the State line.
Mr. DOOLITTLE. Are there further questions from our members?
Mr. Walden.
Mr. WALDEN. I might just follow up with one statement, Mr. Chairman, just to help, not ride this thing into the ground, but to give you an example in my district, Harney Electric Co-op has 348 miles of transmission line that services 1,887 customers. Now, again, I am concerned you could potentially go in and take whatever industrial customers are there, and there are a couple off the system, and, you know, the economics change dramatically for a small provider like that, just the economies of scale could be lost.
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So, as we work through this, I think we have to take these situations into account, is what I am saying. Because I don't want to leave those people out there paying an enormous rate for the power they used to get all in the name of deregulation, because I think industrial customers are going to be the first ones served and benefited by whatever deregulation comes.
I also harken back to my days in the legislature in support of let the States make these decisions—and Oregon is working on a deregulation bill right now—as opposed to us always jumping in to decide these things for them.
So, thank you, Mr. Chairman.
Mr. DOOLITTLE. Let me just—did you want to respond? Go ahead, Mrs. Napolitano.
Mrs. NAPOLITANO. Thank you, Mr. Chair.
Just one more statement, and I have had discussions in California over this particular issue, and that is that utilities have become very cognizant of making money for their investors, at least in my area they do. And I was told at one point that they had to make a certain amount of earning for their ratepayer—for their investors, and I thought, I thought you were public utilities. And we got into a little argument over that.
Do you have any comments over that because that bothers me? Public utilities were meant to be serving the public, not necessarily to make money for their investors.
Naturally, that is an investment. I am an investor. I may lose money on my investment, but I am not guaranteed a good return on my investment—and if I put into stock or bonds, or whatever. And that bothers me because that changes the flavor, if you will, of what utilities were meant to be. Would you address that?
Mr. HOECKER. Well, there is a long history of utilities that are affected with a public interest, being regulated by agencies like mine and those that Mr. Mele represents. I think that it is very important that we protect those public interests in reliability and safety and reasonable prices.
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On the other hand, it is important that investor-owned companies be able to earn a fair return and attract capital, so that they can continue to provide good services. Public utilities—electric utilities, in particular—kind of like the old Ma Bell, have been staples of the blue chip investment portfolio for a long time, and that is because they tend to provide a very nice dividend to their investors and are not necessarily always plowing their earnings back into the business because it hasn't been a competitive environment.
That may change as they are under pressures to compete. That may change their risk profile; that may change the way investors look at utilities. But I think it is important for us to make sure that they have a fair opportunity to earn their costs and a fair return. That's been a staple of the regulatory principles for the better part of this century, and I think that should continue to be the case.
But, clearly, when we move beyond cost-of-service regulation and into competition, they are at risk. And many of them are asking to be placed at risk, so they can provide new and innovative services. And we have to weigh those competing desires and motivations to make sure that we all have electricity service.
Mr. CASTEN. Could I comment on that quickly?
Mrs. NAPOLITANO. Certainly.
Mr. CASTEN. Just to put it in perspective, if you look at all the investor-owned utilities, they earn between 3 and 5 percent of their revenue as profits. The kind of changes I am talking about will drop costs by 30 to 50 percent. The profit portion of it, whether it is there with an IOU or not there with a PMA, is rather tiny. It is the 45 to 50 percent of the consumer dollar that is buying fuel or that is paying for transmission that goes away.
So profit is a small part of costs. It is about unleashing the competition to drive the other costs out of the equation. We energy entrepreneurs will all dream about making big profits when we do it, and then some guy will come in and offer a lower price, and the consumer wins just standing there watching.
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Mrs. NAPOLITANO. I wish there were more of that.
The other question I have has to do with the fuel cells. What is the life of a fuel cell?
Mr. CASTEN. The only fuel cells that have been in commercial operation have now got over 40,000 hours on the stacks and they haven't been replaced. The cost of maintenance on a fuel cell is almost completely the replacement of the stack part of it. And everybody has sort of had to forecast what that is going to be.
It has surprised everyone in running as long as it has. It appears that the technology is going to be able to give us four or five years between major overhauls.
Mrs. NAPOLITANO. And the disposal of such fuel cells?
Mr. CASTEN. There is a platinum on the element, and they would be almost certainly taken back and recycled.
Mrs. NAPOLITANO. Recycled?
Mr. CASTEN. Yes.
Mrs. NAPOLITANO. Thank you.
Mr. DOOLITTLE. Thank you. Would you just care to take a minute, maybe, and briefly describe the fuel cell and how it might work in the home environment? Yes, if you would, too, Mr. Casten?
Mr. CASTEN. All of our existing generation with fuel is a combustion process that some way or other drives a piston or a turbine or whatever else. The fuel cell releases electricity in a different fashion. It uses a chemical process.
The fuel first has to be reformulated to be only hydrogen, and then as it moves across the cell, helped by a catalytic process, the electricity flows, very tiny electricity, seven-tenths of a watt. They stack these things up together to give you enough electricity.
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The only emissions from the fuel cell are CO2, water and some heat. And you can use the heat to make hot water or whatever. The technology is marvelous. That's the good news.
The bad news is that the fuel cells today cost about $3,000 per kilowatt versus maybe $450 per kilowatt to put in a new combined-cycle gas turbine plant. So for fuel cell technology to gain acceptance, it is going to have to come down in cost with mass production.
Mr. DOOLITTLE. And that was your point about taking a page out of the automaker's book?
Mr. CASTEN. General Motors has recently tied up with a company, I think, called Plug Power. And there is a lot of money going to be invested to bring fuel cell costs down because that is about the only way we can think of to make a non-polluting car. And if fuel cell technology gets driven by the automotive industry, it will end up out in the ranch houses as well.
Mr. DOOLITTLE. Oh, so this would be used in automobiles as well, you mean?
Mr. CASTEN. Absolutely.
Mr. DOOLITTLE. Mr. Walden's concern about the rural areas—I mean, your testimony seems to acknowledge perhaps an exception for those areas or a way that even the improving technology could benefit those areas in the way of energy production, so they would free up dollars for other assistance. Is that a correct reflection of what you were saying in your testimony?
Mr. CASTEN. Yes, sir. I think there is some of the problem he alluded to. But I think we do need to separate distribution and generation. If there is cheaper power available, the companies with the distribution wires should be able to buy it and pass it on. But I will acknowledge completely that they get a lot of money from the one Kodak, and if Kodak is no longer there, there is some adjustment that would have to be taken care of.
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Mr. DOOLITTLE. Okay. Further questions?
[No response.]
Well, let me just ask this—this raises one issue. I think you are describing a high-temperature fuel cell. But there are low-temperature fuel cells, too, aren't there?
Mr. CASTEN. The fuel cells that I am familiar with have heat left over from 500 degrees Fahrenheit up to about 1,000 degrees Fahrenheit, and all of it is capable of being recaptured to make some useful heat, if we put them in the right places. They all reject heat.
Mr. DOOLITTLE. What do you think? What is the timeframe that we will actually see these available for homes? What would be your best guess?
Mr. CASTEN. I think that if we don't deregulate federally, we are probably looking in the 2010, 2015 area. If we deregulate federally, we are probably looking at 2005.
The comment that Chris Mele made, I do disagree with. There are 15 of these States that make it illegal for you to generate power on the site of the customer if you are not the local utility. There are so many other barriers. Yes, we would love to go deploy these things, and hopefully, make a profit, but the barriers that I cited in chapter 8 of my book are so stacked up that it is almost a miracle when you are finally able to get a power plant in that is not part of the protected monopoly.
And I think Congress does need to say to the States, electricity is interstate commerce; you cannot restrict people from generating and selling electricity.
Mr. DOOLITTLE. Well, I would certainly like to thank all of you for the testimony you have given us. This has been a very interesting discussion. And I think it is indicative of the exciting times that we face, and some real opportunities and perhaps challenges that will confront us as we move toward it.
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We no doubt will have a few extra questions that we would like to pose in writing, and we will hold the record open for your response, which we would hope would be as expeditious as possible.
Mr. DOOLITTLE. And with that, we will excuse the members of this panel.
Mr. HOECKER. Thank you, Mr. Chairman.
Mr. CASTEN. Thank you.
Mr. MELE. Thank you.
Mr. CREWS. Thank you, Mr. Chairman.
Mr. DOOLITTLE. We will invite the members of our second panel to come forward and ask you to assemble yourselves and remain standing, so we can administer the oath.
Would you please raise your right hand?
[Witnesses sworn.]
Let the record reflect that each answered in the affirmative.
We are very pleased to have you join us and welcome you to the hearing.
Our first witness is Mr. Alan H. Richardson, executive director of the American Public Power Association.
STATEMENT OF ALAN H. RICHARDSON, EXECUTIVE DIRECTOR, AMERICAN PUBLIC POWER ASSOCIATION
Mr. RICHARDSON. Good afternoon. I am Alan H. Richardson, executive director of APPA. I am just returning from seven days in Salt Lake City at APPA's annual conference. So while I would otherwise say that I am very happy to be here, and in view of the fact that I have just taken an oath, I will simply say, thank you for the opportunity to testify.
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Public power systems consist of about 2,000 municipally owned, State-owned utilities located throughout the country. Public power systems truly are public utilities. They are owned by units of State and local government. They are directly or indirectly governed by elected officials. They are managed by public servants. They focus on protecting and promoting the needs of the communities they serve.
As I have listened to what the previous panel has been saying, it seems to me that it is more appropriate to talk about the role of the power marketing program in the context of industry restructuring. We are not really restructured yet. And it seems to me that a lot of the comments that you have received in the discussion that has occurred really looks at timing issues in the implementation of change, not whether or not change is going to occur in the industry, because clearly it is.
APPA does support comprehensive Federal legislation relating to industry restructuring, but, as always, the devil is in the details. The most important detail is that legislation advance the interest of all consumers. And I think that to me means that it has to address a number of issues and it has to be looked at in a longer term perspective than immediate and rapid change.
We are all trying to promote competition in the industry, but I think it is also important to bear in mind that competition is a means to an end, and that end is benefits for consumers. I think it is also important to recognize that in every environment, whether it is a natural environment or an economic environment, competitors try to monopolize the situation that they enjoy. And to me, that means that we need to make sure that we have a market structure in place that controls the natural tendency of these competitors to engage in monopoly practices.
To paraphrase a comment that was made, and has been several times, by FERC Chairman Jim Hoecker, he says that you cannot believe in competition and yet be an agnostic in terms of market structure. And I think that is absolutely true.
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Now there are a number of issues that are a concern to APPA. I have identified them in my statement that I have submitted for the record.
To summarize briefly, we are concerned about Federal tax code provisions that deal with the way that we can use facilities financed with tax-exempt bonds in a new restructured environment. That is a critical issue for us as we move into a restructured environment and one that the House Ways and Means and Senate Finance committees need to address as quickly as possible to remove these impediments for publicly owned utilities who legitimately use the instrument of tax exempt financing for their own infrastructure facilities in order to operate, not simply compete but to operate in a restructured environment that is a now a reality in 22 States, and soon to be a reality in many more.
Congress needs to clarify State and Federal jurisdiction to make sure that the States can move forward. State and local decisionmaking should be preserved. We do oppose a Federal date-certain mandate from this Congress for industry restructuring.
Most important, Congress needs to address market power issues because, as I said, market structure, we believe, is critically important to the realization of the goals of competition as the means to the ends of benefiting electric consumers. And that, of course, has to be the overarching goal for any restructuring activities benefiting all consumers.
Now we believe that the Federal power marketing programs that currently exist do contribute to these goals of promoting competition, protecting against market power, and benefiting all consumers. We think the allocation of Federal power to 1,180 publicly-owned and cooperatively-owned utilities keeps these institutions in the marketplace as competitors.
A viable market needs a multitude of buyers and sellers. And the preservation of those entities, certainly through this transition period in the marketplace, we believe is very important for the benefits it provides to enhance competition in the market.
Another function of these utilities is to provide yardstick competition at the distribution level, and we think that that is also very important. Yardstick competition does work. It is important for regulators to be able to compare the activities of various competitors in a marketplace, and these publicly owned and cooperative systems that operate today do serve that function.
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By the same token, yardstick competition in generation, we believe, is served by the sale of Federal power at market-based rates into the market. Now I think we have seen this in the Pacific Northwest, for example, where the price of Bonneville power really has set the mark for the price of other power, including the price of power that comes out of the Washington Public Power Supply System. And I can tell you there is significant pressure on that institution to meet the price that is set by the Bonneville system.
So I believe the yardstick function continues to work and work to the benefit of consumers, certainly again through the transition period. The goal of electric restructuring is lower rates for all consumers. The proponents of market-based rates, however they might be defined, and I don't think we have come up with an adequate definition in the rhetoric, in the debate over PMA power, that adequately describes what market rates are, or would be higher than today's current rates.
And it seems rather inconsistent to me to advocate policies that increase rates for millions of consumers under the guise of industry restructuring intended to benefit consumers through lower rates when the exact opposite will occur.
Mr. Chairman, I thank you for the opportunity to be here this afternoon and look forward to questions you might have.
[The prepared statement of Mr. Richardson follows:]
Mr. DOOLITTLE. Thank you.
will be Glenn English, chief executive officer of the National Rural Electric Cooperative Association and a former distinguished member of the House of Representatives.
Mr. English.
STATEMENT OF GLENN ENGLISH, CHIEF EXECUTIVE OFFICER, NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION
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Mr. ENGLISH. Thank you very much, Mr. Chairman. I appreciate that. I am Glenn English, the chief executive officer of the National Rural Electric Cooperative Association. I represent some 1,000 electric cooperatives across the country. I might point, Mr. Chairman, these are privately-owned, not-for-profit, consumer-owned organizations.
And, Mr. Chairman, what I would like to do today is to request that my entire written testimony be made a part of the record and to speak not from the testimony but respond to the questions that you asked at the beginning of the hearing and also address some of the testimony that we heard earlier.
We have a rather unique perspective being electric cooperatives because in many States—in fact, most States—the 46 States that electric cooperative exist, we have some 83 percent of all the counties across the country in which we have electric cooperatives exist. They are not regulated. So that wire that you are talking about, those consumers who are part of those cooperatives do indeed have the ability to do exactly what Mr. Casten was saying that couldn't be done in so many areas and I think gives us a rather unique perspective with regard to much of what is happening in restructuring.
The reason that I say that is because I think, from one point of view, electric cooperatives are the only people who have truly had choice over the past 60 years that they have existed. And the reason that I say that is because, at any given time that those consumers wished, they could come together and vote to sell their electric cooperative, and sell it to anyone that they wished to sell it to. So it is a little bit different.
As you all know, certainly the reason our electric cooperatives got started in the first place is because of the fact that big power companies wouldn't provide electric power in many of those rural areas. And also, I think, it should be understood that not only would they not provide that power, but the only way that these people could get power is to do it themselves.
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And what they found was that this mechanism, this form of private business, the cooperative mechanism, built on the seven cooperative principles, that allowed them to do it themselves. And they came together, with a little assistance from the Federal Government; through government loans, they were able to, in fact, build their own electric utility.
Now that electric utility has gone to the point now that it represents nearly half of all the electric utility infrastructure in the entire Nation. So it is a huge infrastructure that really only serves about 10 percent of all the consumers in the Nation, some 30 million consumers spread across those 46 States.
What we are finding today, though, as we are seeing restructuring take place in the States, is that people are deciding that they would rather do it themselves. And they are once again reaching for that self-reliance, private-business approach known as the cooperative.
And this has recently happened in your home State of California, Mr. Chairman, in which we have the California Electric Users Cooperative, some 18 agricultural businesses, spreading all the way from San Diego to the Oregon border, who have decided to do it themselves. And they have formed an electric cooperative and are now providing power to those businesses.
And New York City, we have a group of residential consumers decided to do it for themselves. And we had the first Rochdale Electric Cooperative that was established there.
And what we are also finding is that, under a restructured environment, this gives an awful lot of people the opportunity to do it for themselves under this form of business.
We are developing new technology. You had the previous discussion with regard to fuel cells. And certainly the electric cooperatives have been very active as far as the research and development of fuel cells. We have, we think, a great opportunity to provide that for some of the most remote regions that are served by electric cooperatives.
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For instance, one now that has been developed and is being tried is in the State of Alaska, in some small villages up there. And they are using that fuel cell. They have just about completed those tests, and they intend to install it permanently on an island off the coast of Alaska.
And, indeed, new technology is coming onboard. I have no idea, Mr. Chairman, nor can anyone else tell you from the standpoint of what technology will come, be developed in the next few years. I know it isn't going to be 10 or 15 years before you see fuel cells. As I mention, you already got it within probably the next two years that it is being operational in Alaska.
But what I do know is that we have a cost that is involved in providing electric power in this country. It is ultimately that cost that will decide what form of fuel will be used to deliver those electrons to businesses. And we have a huge investment in the infrastructure that exists today.
I suspect that what we will see is new technology coming online as it is affordable and as it makes sense to the American people. And as this new technology comes online, no question, it is going to replace much of the existing technology. There is no question; environmentally it is going to be more sound. There is no question that it will carry a lower price for the American consumer.
But the bottom line is, it is the economics, the sound economic principles that have always guided American business, that will determine when it comes online and how it comes online. And certainly, as far as the form of business that it will be used, I would suggest to you that the cooperative mechanism under a restructured environment will have the probably the greatest opportunity to lead the way because it is the consumers themselves that make the decision in that form of business.
Thank you very much, Mr. Chairman.
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[The prepared statement of Mr. English follows:]
Mr. DOOLITTLE. Thank you.
Our next witness is Mr. Donald Santa, vice president of LG&E Energy Corporation.
Mr. Santa.
STATEMENT OF DON SANTA, VICE PRESIDENT, LG&E ENERGY CORPORATION
Mr. SANT