SPEAKERS CONTENTS INSERTS
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HEARING ON THE ROLE OF THE POWER MARKETING ADMINISTRATIONS IN A RESTRUCTURED ELECTRIC INDUSTRY
SUBCOMMITTEE ON WATER AND POWER
COMMITTEE ON RESOURCES
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
JUNE 24, 1999, WASHINGTON, DC
Serial No. 10657
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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
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
Page 3 PREV PAGE TOP OF DOCWILLIAM 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
Page 4 PREV PAGE TOP OF DOCCARLOS 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
Page 5 PREV PAGE TOP OF DOCHELEN 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
Page 6 PREV PAGE TOP OF DOCStatement 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
Page 7 PREV PAGE TOP OF DOCHouse of Representatives,
Subcommittee on Water and Power,
Committee on Resources,
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 attentionand I'll say this again when we get more members herebut 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.
Page 8 PREV PAGE TOP OF DOC 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.
Page 9 PREV PAGE TOP OF DOC 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?
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.
Page 10 PREV PAGE TOP OF DOC 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.
Page 11 PREV PAGE TOP OF DOC 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.
Page 12 PREV PAGE TOP OF DOC 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.
Page 13 PREV PAGE TOP OF DOC 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.
Page 14 PREV PAGE TOP OF DOC 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.
Page 15 PREV PAGE TOP OF DOC 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.
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.
Page 16 PREV PAGE TOP OF DOC 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 farand the number keeps growing rather rapidlyhave 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.
Page 17 PREV PAGE TOP OF DOC 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 ownershipjust 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.
Page 18 PREV PAGE TOP OF DOC 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:
Page 19 PREV PAGE TOP OF DOCAffirming 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 conditionsState commissions and legislaturesenjoy 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:
Page 20 PREV PAGE TOP OF DOC 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.
Page 21 PREV PAGE TOP OF DOC 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 ownershipto 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.
Page 22 PREV PAGE TOP OF DOC 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;
Page 23 PREV PAGE TOP OF DOC 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.
Page 24 PREV PAGE TOP OF DOC 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.
Page 25 PREV PAGE TOP OF DOC
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 conditionsState commissions and legislaturesenjoy 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.
Page 26 PREV PAGE TOP OF DOC Our next witness will be Mr. Wayne Crews, director of competition and regulation policy with the Competitive Enterprise Institute.
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 alternativea 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 TVand even, potentially, the computer operating systemssuffers 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.
Page 27 PREV PAGE TOP OF DOC 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 questionState versus Federal jurisdiction, the role of independent system operators, reciprocity, the role of rural power, stranded costsall 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.
Page 28 PREV PAGE TOP OF DOC 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.
Page 29 PREV PAGE TOP OF DOC 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:]
Page 30 PREV PAGE TOP OF DOC 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 ofthe 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 whereI don't know the details of it, but it is something I could certainly look up and supply to the Committeewhere 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.
Page 31 PREV PAGE TOP OF DOC 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.
Page 32 PREV PAGE TOP OF DOC 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.
Page 33 PREV PAGE TOP OF DOC 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.
Page 34 PREV PAGE TOP OF DOC 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 withfor 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 thinklet 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.
Page 35 PREV PAGE TOP OF DOC 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.
Page 36 PREV PAGE TOP OF DOC 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 awhere 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?
Page 37 PREV PAGE TOP OF DOC 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?
Page 38 PREV PAGE TOP OF DOC 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.
Page 39 PREV PAGE TOP OF DOC 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.
Page 40 PREV PAGE TOP OF DOC 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?
Page 41 PREV PAGE TOP OF DOC 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.
Page 42 PREV PAGE TOP OF DOC Mr. WALDEN. Yes, but I guess I am not willingI 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 haveand I appreciate that it is a challengeis 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.
Page 43 PREV PAGE TOP OF DOC 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 Scoutand I serve on a council, tooI am glad to see you are doing that. Good work.
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.
Page 44 PREV PAGE TOP OF DOC 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?
Page 45 PREV PAGE TOP OF DOC 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.
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 iswill be seen increasingly, perhapsas 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.
Page 46 PREV PAGE TOP OF DOC 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 areasand 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 housesmaybe 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.
Page 47 PREV PAGE TOP OF DOC 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 moneyif 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 systemwhich is, I think everyone would agree, a State jurisdictional issueopen 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 thatwhen 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 seeforesee, ratherwhen 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.
Page 48 PREV PAGE TOP OF DOC 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 dataI 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. 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.
Page 49 PREV PAGE TOP OF DOC 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 decisionsand Oregon is working on a deregulation bill right nowas opposed to us always jumping in to decide these things for them.
So, thank you, Mr. Chairman.
Mr. DOOLITTLE. Let me justdid 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 ratepayerfor 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 investmentand 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.
Page 50 PREV PAGE TOP OF DOC 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 utilitieselectric utilities, in particularkind 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.
Page 51 PREV PAGE TOP OF DOC 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.
Page 52 PREV PAGE TOP OF DOC 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 areasI 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.
Page 53 PREV PAGE TOP OF DOC Mr. DOOLITTLE. Okay. Further questions?
Well, let me just ask thisthis 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.
Page 54 PREV PAGE TOP OF DOC 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?
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.
Page 55 PREV PAGE TOP OF DOC 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.
Page 56 PREV PAGE TOP OF DOC 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.
Page 57 PREV PAGE TOP OF DOC 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.
STATEMENT OF GLENN ENGLISH, CHIEF EXECUTIVE OFFICER, NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION
Page 58 PREV PAGE TOP OF DOC 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 Statesin fact, most Statesthe 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.
Page 59 PREV PAGE TOP OF DOC 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.
Page 60 PREV PAGE TOP OF DOC 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.
Page 61 PREV PAGE TOP OF DOC [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.
STATEMENT OF DON SANTA, VICE PRESIDENT, LG&E ENERGY CORPORATION
Mr. SANTA. Good afternoon, Mr. Chairman, and Mr. Walden. On behalf of LG&E Energy Corp., thank you for the opportunity to testify today regarding the role of Federal Power Marketing Administrations in a restructured electric industry.
LG&E Energy is a diversified energy services holding company headquartered in Louisville, Kentucky. LG&E has been a leader in the competitive transformation on the electric industry and was among the earliest investor-owned utilities to support comprehensive Federal restructuring legislation.
LG&E's two regulated subsidiaries, Louisville Gas and Electric Company and Kentucky Utilities Company are within the Southeastern Power Administration's service territory. And the company has experience dealing with public power and Federal utilities in a variety of contexts.
In some cases, the LG&E companies supply public power with both generation and transmission services, and in other cases, the roles are reversed. In some cases, LG&E is a partner with public power, and in other cases, we are competitors. This is quite typical of how IOU's interact with public power. In my comments today, I will offer certain comments addressing both public power and the PMA's and then focus on PMA-specific issues.
Page 62 PREV PAGE TOP OF DOC The legal framework governing IOU's and public power affects each of these relationships I just referenced. Electric restructuring and the public policy promoting competition in the electric industry necessitate re-examining this legal framework. In particular, does this legal framework distort the market and frustrate the goal of competitive industry restructuring?
I will discuss this issue in three contexts. First, the rules governing access to transmission facilities owned and operated by public power and Federal utilities. Second, the rules governing public power and Federal utilities when they participate in competitive segments of the electric industry. And third, the fundamental question of the role of the Federal Government as a generator and marketer of electricity.
With respect to the first issue, public power and Federal utilities should be required to provide access to their transmission facilities under the same terms and conditions of service as investor-owned utilities. Transmission is the interstate highway system for commerce in electricity. Regardless of whether the transmission is owned by an IOU, public power, or a Federal utility, it is a monopoly function. And the detriments to competition from the exercise of market power in transmission are the same regardless of the ownership.
As Chairman Hoecker noted, the Energy Policy Act authorized the Commission to order non-jurisdictional utilities to provide transmission access on a case-specific basis. And in response to Order 888 reciprocity conditions, a number of publicly-owned utilities have voluntarily filed open-access tariffs.
Still there is no effective substitute for the full scope of the Commission's Federal Power Act authority to regulate the rates and terms and conditions of transmission service under a common set of standards. To paraphrase Betsy Moler, the former chair of the FERC, open access does not work well on Swiss-cheese basis.
Admittedly, it is not as simple as just amending the Federal Power Act. In fairness to public power, the Internal Revenue Code must be amended to address the tax consequences of providing private parties with access to transmission facilities constructed using tax-exempt financing. There is no dispute regarding this basic point. The devil is in the details, however, and, as always, the level playing field is in the eye of the beholder.
Page 63 PREV PAGE TOP OF DOC Next, to the extent that public power and Federal utilities choose to compete in competitive segments of the electric market, they also should be subject to the same legal requirements as investor-owned utilities competing in the same markets. With regard to such activities, they should be subject to the same regulatory obligations, the antitrust laws should apply with equal force, and the tax-exempt status should not be permitted to distort the outcomes in competitive markets.
With respect to the Power Marketing Administrations, the fundamental question of the role of the Federal Government as a generator and marketer of electricity must be revisited. This necessarily raises the issue of whether the PMA's and Federal Power projects should either be privatized or fundamentally restructured.
Admittedly, this is a complicated and divisive issue fraught with political peril. Still, at a time when the electric power industry is undergoing a fundamental restructuring, and the New Deal era statutes that served as the basis for Federal regulation of that industry are being re-examined, the role of the Federal Government as a generator and marketer of electricity should be re-examined as well.
While I am not an expert in the laws governing the PMA's and the particulars of the public policy issues affecting the PMA's constituencies, I offer the following observations based on my experience with analogous issues in other contexts:
First, the facts about Federal power must be separated from the myths about Federal power. For example, Federal power's proponents frequently cite its role as a competitive benchmark or yardstick for investor-owned utilities. What are the facts?
GAO points out that the PMA's historic position as a low-cost power provider stems from a number of factors. These include the inherent low-cost of hydro-power relative to other generating resources, Federal financing at low interest rates, flexibility in the repayment of principal on the treasury portion of PMA's debt, the PMA's tax-exempt status, and operating budgets that seek to break even rather than earn a profit or return on investment. Few, if any, of these factors are grounded in sound management and efficient operation.
Page 64 PREV PAGE TOP OF DOC The validity of any benchmark comparison is further undermined by the fact that the PMA's rates do not cover all costs associated with the production, transmission, and sale of power. For example, GAO has reported that SEPA's, SWAPA's, and WAPA's net cost to the treasury for the years 1992 through 1996 totaled about $1.5 billion because these PMA's rates did not recover all power-related costs.
Finally, even if one concedes that the benchmark concept for IOU's may have served some purpose in the past, one must question whether this concept has become an anachronism in an increasingly competitive market for the generation and sale of power.
My second observation is that the role of the Federal Government should be no greater than is needed to address legitimate needs that cannot be met adequately by the marketplace. To the extent there is a legitimate Federal interest to be served by intervening in the market, that intervention should be no greater than is necessary to address the problem. The fact that an extensive Federal intervention in the market for electricity may have been justified a half-century ago does not necessarily justify that same level of intervention today.
The goal of rural electrification has already been accomplished. And to the extent there remains a need to protect the rates of rural electric customers, it is hardly clear that the current program is very effective at achieving that goal.
For example, many of the current end-user recipients of PMA power are not rural customers. In fact, most rural customers are served by IOUs, and not by the PMAs and other preference customers. Therefore, I think as a threshold matter, the Committee should ask, is there still a legitimate Federal interest in protecting rural electric customers?
And even if the answer is yes, the Subcommittee should ask, is there a better way to target the Federal response to those who truly are in need and not just those who by the accident of history are within a preference customer-service territory?
Admittedly, because of the non-power uses of Federal water power projects and the legal obligations that attach to those uses, resolving the transition issues associated with Federal power will be daunting. This should not, however, deter the Subcommittee from asking and answering the threshold question of whether the Federal Government's historic role as a generator and marketer of electricity can be justified going forward.
Page 65 PREV PAGE TOP OF DOC In conclusion, let me commend the chairman and the Subcommittee for their interest in the role of PMA's in a restructured electric industry. As you no doubt appreciate, these are not easy issues. Still, they are important and timely questions in connection with providing a legal framework that encourages competitive electric markets.
Thank you for the opportunity to testify, and I am happy to respond to any questions the Subcommittee may have.
[The prepared statement of Mr. Santa follows:]
STATEMENT OF DONALD F. SANTA, JR., SENIOR VICE PRESIDENT, DEPUTY GENERAL COUNSEL, LG&E ENERGY CORP.
Good afternoon, Mr. Chainnan and Members of the Subcommittee. My name is Donald Santa, and I am the Senior Vice President, Deputy General Counsel of LG&E Energy Corp. Thank you for providing LG&E Energy Corp. with the opportunity to testify today regarding the role of Federal power marketing administrations (''PMAs'') in a restructured electric industry.
I have been asked to address today, from the perspective of an investor-owned utility, the issues that restructuring creates for the electric power industry. More particularly, I have been asked to address the role of public power, and especially the PMAs, in a restructured industry and the public policy issues related to this segment of the industry.
LG&E Energy Corp.'s Perspective.
Let me begin by telling the Subcommittee about LG&E Energy Corp. and its perspective on electric restructuring. LG&E Energy is a diversified energy services holding company headquartered in Louisville, Kentucky. The company has businesses in power generation and project development, retail gas and electric utility services, and asset-based energy marketing. The company owns and operates two regulated utility companies, Louisville Gas and Electric Company and Kentucky Utilities Company. Together, these companies serve retail customers in the Commonwealth of Kentucky and in a five-county portion of the Commonwealth of Virginia. LG&E Energy owns equity in and operates non-utility powerplants in six states as well as Spain and owns interests in natural gas distribution companies in Argentina.
Page 66 PREV PAGE TOP OF DOC Over the past decade, LG&E Energy has transformed itself from a small, locally focused regulated utility company into a diversified energy services company. This transformation mirrors the changes that have occurred in the electric power industry over that same period.
LG&E Energy Corp. has been a leader in the competitive transformation of the electric power industry. LG&E was among the first companies to form an unregulated energy marketing affiliate and to open its transmission system to non-discriminatory third-party access. LG&E also was among the first investor-owned utilities to support comprehensive Federal restructuring legislation.
LG&E's two regulated utility subsidiaries are within the Southeastern Power Administration's service area, and the company has experience dealing with public power entities in a variety of contexts. For example, Kentucky Utilities Company is a wholesale requirements supplier to 11 municipal systems and one college in Kentucky. (As part of doing business with these customers, KU has dealt with issues concerning their entitlements to SEPA power.) Louisville Gas and Electric Company is a partner with the Indiana Municipal Energy Agency and the Illinois Municipal Power Agency in its Trimble County generating station. LG&E's Western Kentucky Energy Corp. subsidiary is leasing and operating the generating assets of Big Rivers Electric Corporation, a generation and transmission cooperative, and is selling power under contract to Big Rivers' four member distribution cooperatives. And, given the proximity of the Tennessee Valley Authority, the LG&E companies have experience in dealing with TVA as a power supplier and as a competitor in off-system sales markets, as a transmission provider, and in the context of territorial disputes with TVA and its member cooperatives.
Finally, let me add a note about my personal perspective. Prior to joining LG&E in 1997, I served for four years as a member of the Federal Energy Regulatory Commission. During that period, the Commission implemented Title VII (the electricity Title) of the Energy Policy Act of 1992, issued its landmark Order No. 888 open access rule and dealt with many issues of first impression in connection with electric restructuring.
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A Sea Change in Industry Structure.
The domestic electric power industry has undergone a sea change in less than a decade. The combination of the market, technological innovation and the catalyst provided by Title VII of the Energy Policy Act have compelled an irreversible restructuring of the Nation's electric power industry. This restructuring currently is incomplete and has not occurred at a uniform pace across all regions and all segments of the industry. Still, there is no denying that the competition genie is out of the bottle.
While Title VII of the Energy Policy Act addressed only the wholesale power market, the message that Federal energy policy endorsed competition in the generation and sale of electricityand non-discriminatory transmission access as a means to promote that competitionprofoundly affected the mindset of the electric power industry. Once unleashed, market forces do not respect the line between Federal and state jurisdiction and the distinction between wholesale and retail customers. Beginning first in California and New Englandand now spreading to other regionsindividual states have begun opening their retail electricity markets to competition. At last count, a total of 21 states have authorized consumer choice for electricity. Not surprisingly, retail restructuring generally has occurred fastest in the states with high electricity rates and slowest in the states with low rates. Still, it is not a stretch to predict that within the foreseeable future most, if not all, states will have made the transition to retail electric competition.
While many refer to the ''deregulation'' of the electric industry, in fact only some segments of the industry are being ''deregulated'' while other segments are being ''reregulated.'' What is being ''deregulated'' are the segments and functions of the industry that are competitive. In particular, the generation and sale of electricity are being freed from traditional monopoly regulation. Also, functions such as metering and billing are being considered for deregulation. Meanwhile, the transmission and distribution segments of the industrythat is, the wires used to deliver electricity from the generator to the consumerstill exhibit the attributes of natural monopolies and are being ''reregulated'' on a stand-alone basis.
Page 68 PREV PAGE TOP OF DOC Retail restructuring is breaking down the longstanding vertically integrated, monopoly structure for electric utilities. As a result, there is no longer such a thing as a typical electric utility or even a typical model for an energy services company. Some companies, especially those in states that have not yet restructured their retail power markets, remain vertically integratedthat is, a single corporate entity provides generation, transmission and distribution services within a monopoly franchise service territory. Still, vertical integration is no longer the predominant model.
Increasingly, energy services companies are making strategic decisions regarding which segmentor segmentsof the energy business they wish to focus their resources. Some companies, in many cases with the incentive to recover stranded costs, have sold their electric generating assets. The Edison Electric Institute estimates that by next year, approximately 25 percent of all fossil fuel and hydroelectric generation owned by investor-owned utilities will have been offered for sale.
These divesting companies are focusing their resources on other aspects of the business. Some will be pure ''wires'' companies operating the transmission and distribution networks within their service territories and perhaps consolidating with other such companies to realize efficiencies of scope and scale. Others will focus on marketing products directly to consumers. This can range from marketing the energy commodity, to providing energy services, to marketing non-energy network services such as telecommunications, Internet and home security.
For every seller of generating plants, there is, of course, a buyer. Some companies are acquiring the divested generating plants as part of a strategy to become regional, and in some cases national, generating companies. In addition, open access and competition have created tremendous interest in the construction of new, merchant generating plants. Merchant plants are powerplants constructed (or acquired) solely for the purpose of selling power into the competitive market. The companies acquiring divested generation and constructing merchant plants are putting shareholder dollars at risk. There is no guarantee that the cost of owning and operating such powerplants will be recovered in the competitive market. This is in stark contrast to the traditional regulated, cost-of-service model for the recovery of utility powerplant investment.
Page 69 PREV PAGE TOP OF DOC Furthermore, a whole new segment of the electric industry has emerged as part of restructuring. This is the energy marketer segment. The growth of this segment has been astounding. For example, in 1998 energy marketers sold 2.3 billion megawatt hours of electricity, compared to only 7.1 million megawatt hours in 1994. This explosion in power marketer volumes is solid evidence of the liquidity that is developing in electric power markets.
As has been widely reported, restructuring has resulted in a wave of consolidation within the energy industry. This consolidation began with a series of mergers between neighboring, vertically integrated utilities. It now, however, has spread to combinations that cut across industry segments and that have brought a series of new players to the industry. In two cases now pending before the regulators, utilities from the United Kingdom have applied for authorization to acquire domestic utilities. There also has been a whole series of ''convergence'' mergers where electric companies have acquired natural gas pipelines and local distribution companies. There also are several instances where energy marketing companies have begun to acquire established utility companies. In other words, the new entrants have begun acquiring some of the industry's traditional players. To use an analogy to some of the toys we used as children, it is as if the ''tinker toys'' or the ''erector set'' that comprised the traditional industry structure is being taken apart and re-assembled into a variety of interesting new strategic structures.
We also are seeing the beginnings of regional structures for the operation and management of the transmission grid. Given the physics of electric transmission, the regional scope of wholesale power markets, and the advantages in terms of efficiency and reliability, a compelling case can be made for regional operation and management of the grid. Beginning first with its Regional Transmission Group policy statement and continuing with the Independent System Operator (or ''ISO'') principles adopted as part of the Order No. 888 open access rule, the FERC has encouraged voluntary efforts to establish regional structures for transmission. Most recently, the Commission issued a notice of proposed rulemaking providing even stronger impetus for regional transmission organizations (or ''RTOs''). In the three years since Order No. 888, the Commission has authorized five ISOs. A competing regional structure, the independent transmission company (or ''transco'') has gained favor in some quarters, and the Commission currently has pending before it applications to authorize two transcos.
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Completing the Legal Framework for Restructuring.
While the Energy Policy Act and subsequent actions by the FERC and the states have spurred electric restructuring, there remains a need for follow-up action by the Congress to remove impediments to a complete restructuring of the electric power industry. As noted earlier, LG&E Energy was an early proponent for comprehensive Federal restructuring legislation. Our preference would be a nationwide date certain for retail competition as the centerpiece of a Federal restructuring bill.
Still, should this not be possible, LG&E believes that there are a number of other positive steps that the Congress could take to promote an efficient restructuring of the electric power industry. Importantly, these steps address areas of Federal law that are beyond the authority of the states. Only action by the Congress can remove these impediments. In particular, Federal legislation should be enacted to enhance the competitiveness and efficiency of wholesale power markets and to ensure the reliability of the transmission grid.
First, the transition to competitive electric markets is being impeded by Federal laws that burden the industry with outdated legal obligations. The Public Utility Holding Company Act of 1935 should be repealed. The Congress also should repeal prospectively the mandatory purchase obligations under the Public Utility Regulatory Policies Act.
Second, FERC's authority to regulate interstate transmission should be enhanced. The Commission should be authorized to regulate all owners of interstate transmission facilities (i.e., municipals, cooperatives and Federal utilities, in addition to the investor-owned utilities currently regulated). It also should be authorized to order the owners of interstate transmission facilities to participate in RTOs and to establish mechanisms for enforcing national reliability standards.
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The Role of Public Power and the Power Marketing Administrations.
As exemplified by my earlier comments about LG&E's experience with public power, investor-owned utilities interact with public power in a variety of contexts. In some cases, IOUs supply public power with both generation and transmission services and, in other cases, the roles are reversed. In some cases, IOUs are partners with public power and, in other cases, the two are competitors. The legal framework governing IOUs and public power affects each of these relationships.
Electric restructuring and the public policy promoting competition in the electric industry necessitate a re-examination of this legal framework. In particular, it must be asked whether this legal framework distorts the market and frustrates the goal of competitive industry restructuring. For purposes of discussion, this examination of the legal framework can be subdivided as follows:
First, the rules governing access to transmission facilities owned and operated by public power and the Federal utilities;
Second, the rules governing public power and Federal utilities when they participate in the competitive segments of the electric industry; and,
Third, the fundamental question of the role of the Federal Government as a generator and marketer of electricity.
With respect to the first issue, public power should be required to provide access to its transmission facilities under that same terms and conditions of service as investor-owned utilities. Transmission is the interstate highway system for commerce in electricity. Regardless of whether transmission is owned by an IOU, public power or a Federal utility, it is a monopoly function. And the detriments to competition from the exercise of market power in transmission are the same regardless of ownership.
Page 72 PREV PAGE TOP OF DOC If the goal of Federal energy policy is greater competition in the generation and sale of electricity, open access to all parts of the highway system should be provided under the same terms and conditions. This becomes even more important as policy begins to focus on regional markets and the advantages of regional management and operation of the transmission grid. To paraphrase Betsy Moler, the former chair of the FERC, open access does not work well on a ''swiss cheese'' basis.
The Energy Policy Act authorized the Commission to order non-jurisdictional utilities to provide transmission access on a case-specific basis. And, in response to the Order No. 888 reciprocity conditions, a number of publicly-owned utilities have voluntarily filed open access tariffs with the FERC. Still, there is no effective substitute for the full scope of the Commission's Federal Power Act authority to regulate the rates, and terms and conditions of transmission service under a common set of standards.
Admittedly, it is not as simple as just amending the Federal Power Act. In fairness to public power, the Internal Revenue Code must be amended to address the tax consequences of providing private parties with access to transmission facilities constructed using tax exempt financing. There is no dispute regarding this basic point. The devil is in the details, however. And, as always, the ''level playing field'' is in the eye of the beholder.
Next, to the extent that public power chooses to compete in competitive segments of the electric power market, it also should be subject to the same legal requirements as investor-owned utilities competing in the same markets. With regard to such activities, public power should be subject to the same set of regulatory obligations; the antitrust laws should apply with equal force; and public power's tax-exempt status should not be permitted to distort the outcomes in competitive markets.
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The Federal Government as a Generator and Marketer of Electricity.
With respect to the Power Marketing Administrations, the fundamental question of the role of the Federal Government as a generator and marketer of electricity must be re-examined. This necessarily raises the issue of whether the PMAs and Federal power projects either should be privatized or be fundamentally restructured.
Admittedly, this is a divisive issue fraught with political peril. I readily acknowledge the complications arising from the multiple purposes served by Federal water power projects, the potential rate implications for preference power customers and the concerns of the various constituencies with a stake in the PMAs as part of their regional economies. Still, at a time when the electric power industry is undergoing a fundamental restructuring and the New Deal era statutes that have served as the basis for Federal regulation of the industry are being re-examined, the role of the Federal Government as a generator and marketer of electricity should be re-examined as well.
While I am not an expert in the laws governing the PMAs and the particulars of the public policy issues affecting the PMAs' constituencies, I offer the following observations based on my experience in dealing with analogous issues in other contexts:
First, the facts about Federal power must be separated from the myths about Federal power. Already, the Subcommittee's record of hearings on this issue and the work done by the General Accounting Office at the Chairman's request have done much in this regard.
For example, Federal power's proponents frequently cite its role as a competitive ''benchmark'' or ''yardstick'' for investor-owned utilities. What are the facts?
GAO points out that the PMAs' historic position as low-cost power providers stems from a number of factors, few of which are grounded in sound management and efficient operation. These factors include ''the inherent low cost of hydropower relative to other generating sources, Federal financing at relatively low interest rates, flexibility in repayment of principal on the Treasury portion of the PMAs' debt, the PMAs' tax exempt status, and operating budgets that seek to break even rather than earn a profit or return on investment.'' (see footnote 1)
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Even the PMAs question the validity of any comparison. In a prepared statement submitted to this Subcommittee in connection with its September 19, 1996, oversight hearing, J.M. Shafer, the Administrator of the Western Area Power Administration, stated: ''I question the usefulness of comparing the PMAs against other, nonfederal utilities for the purposes of determining why PMA power costs are lower.'' (see footnote 2)
The validity of any ''benchmark'' comparison is further undermined by the fact that the PMAs' power rates do not recover all of the costs associated with the production, transmission and sale of power. GAO has reported that SEPA's, SWAPA's and WAPA's net cost to the Treasury for the years 1992 through 1996 totaled about $1.5 billion, because the PMAs' rates did not recover all power-related costs. While the PMAs generally were following applicable laws and regulations for the recovery of their costs, the fact that such costs were not recovered in their rates calls into question the worth of any comparison to the rates charged by investor-owned utilities.
Finally, even if one concedes that the concept of the PMAs as a ''benchmark'' or ''yardstick'' for IOUs may have served some purpose in the past, one must question whether this concept has become an anachronism in an increasingly competitive market for the generation and sale of power.
Another example of separating the facts from the myths about Federal power is the role of the PMAs in serving rural customers. The laudable goal of a Federal program to ensure that rural and small-town America received electric service has been accomplished. Furthermore, in many cases, the demographics and the economies of the areas served by the PMAs have changed dramatically over the intervening years. For example, GAO reports that over one half of the towns that preference customers reported serving are urban. Furthermore, PMA power is used to serve very affluent areas, including Aspen, Colorado and parts of Orange County, California.(see footnote 3)
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Yes, PMA power is used to serve many rural customers. PMA power is not used, however, to serve the majority of rural customers. The majority of rural customers are served by investor-owned utilities. According to data compiled by the Edison Electric Institute, almost 60 percent of Americans living in rural areas with fewer than 1,500 people are served by IOUs. Furthermore, IOUs serve almost 80 percent of Americans living in areas with populations between 1,500 and 2,500 people (i.e., small-town America).
My second observation is that the role of the Federal Government should be no greater than is needed to address legitimate needs that cannot be met adequately by the marketplace. To the extent there is a legitimate Federal interest to be served by intervening in the market, the intervention should be no greater than is necessary to address the problem. The fact that an extensive Federal intervention in the market for electricity may have been justified a half century ago does not necessarily justify that same level of intervention today. And, if it is decided that such an intervention cannot be justified going forward, the needs of stakeholders that have relied on the historic policy should be dealt with as a transition issue rather than as a basis for preserving the status quo.
As already noted, the goal of rural electrification has been accomplished. And, to the extent there remains a need to protect the rates of rural electric customers, it is hardly clear that the current program is very effective at achieving that goal. As mentioned earlier, many of the current end-user recipients of PMA power are not rural customers. In fact, most rural customers are served by IOUs. Therefore, as a threshold matter, the Subcommittee should ask: Is there still a legitimate Federal interest in protecting rural electric customers? And, even if this question can be answered affirmatively, the Subcommittee should ask: Is there a better way to target the Federal response to those who truly are in need and not just those who by the accident of history are within a preference customer's service territory?
Page 76 PREV PAGE TOP OF DOC Clearly, if the Federal Government chooses to privatize or otherwise fundamentally restructure the PMAs, there will be legitimate stakeholder interests and transition issues that must be addressed. In this regard, the experience of the states in dealing with retail electric power restructuring is instructive. In each and every state that has chosen to restructure its retail power markets, there have been important transition issues. And, as part of the consensus building process that was necessary to forge broad support for restructuring, solutions were found for each of these issues.
For example, preference customers express concern that eliminating the PMAs will subject them to dramatically higher market rates for purchased power. While in some cases that might be true, it is not necessarily true across the board. In looking at this issue, GAO concluded that the results vary widely depending on the particular PMA and customer in question.(see footnote 4) For the customers with a legitimate need, this can be addressed as a transition issue.
Admittedly, because of the non-power uses of Federal water power projects and the legal obligations that attach to such uses, resolving the transition issues associated with Federal power will be daunting. Still, the mere presence of such issues should not deter the Subcommittee from asking and answering the threshold question of whether the Federal Government's historic role as a generator and marketer can be justified going forward.
In conclusion, let me commend the Chairman and the Subcommittee for their interest in the role of the PMAs in a restructured electric industry. As you no doubt appreciate, these are not easy issues. Still, these are important and timely questions in connection with providing a legal framework that encourages competitive electricity markets.
Thank you for the opportunity to testify today on behalf of LG&E Energy Corp. I am happy to respond to any questions from the Subcommittee.
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Donald F. Santa, Jr.
Senior Vice President,
Deputy General Counsel
LG&E Energy Corp.
Louisville, KY 40202
Mr. Santa's statement addresses the issue of the role of public power, and especially the Power Marketing Administrations, in a restructured electric industry from the perspective of an investor-owned utility. The statement first describes electric industry restructuring in general and the steps needed to complete the legal framework for restructuring. The statement then focuses on how electric restructuring and the public policy goal of promoting competition in the electric industry necessitate re-examining the legal framework governing public power and the PMAs. The statement identifies three areas for re-examination: (1) the rules governing access to transmission facilities owned and operated by public power and Federal utilities; (2) the rules governing public power and Federal utilities when they participate in the competitive segments of the electric industry; and (3) the fundamental question of the role of the Federal Government as a generator and marketer of electricity.
Mr. DOOLITTLE. Thank you.
Our next witness is Wenona Hauter, director of Public Citizen's Critical Mass Energy Project.
Page 78 PREV PAGE TOP OF DOCSTATEMENT OF WENONAH HAUTER, DIRECTOR, PUBLIC CITIZEN'S CRITICAL MASS ENERGY PROJECT
Ms. HAUTER. Mr. Chairman and members of the Subcommittee, I am Wenona Hauter, director of Public Citizen's Critical Mass Energy Project. And thank you for the opportunity to testify on behalf of Public Citizen.
Public Citizen was founded by Ralph Nader in 1971. It is a non-profit research, lobbying, and litigation organization located in Washington, DC. We advocate for consumer protection and for government and for corporate accountability.
As the rules governing the electric industry are rewritten State by State, the debate over the role of the PMA's dramatizes the larger debate over deregulation. Who should really benefit? Is it residential consumers and rural consumers? Or should all the benefits flow to large industrial customers, investor-owned utilities, and Wall Street financial firms. Should the air and water that is so important for our families' health and well-being be an important consideration? To answer questions in relation to the PMA's, it is important to understand how utility regulation is unfolding across the Nation.
Ohio became the 23rd State to send a bill to the Governor yesterday. But only a handful of bills are actually being implemented. Unfortunately, while the stated goal of the changes to the electric industry is to break up the monopolies an create competition, that is something we all support, the outcome of rewriting the laws governing the electric industry is turning out to be something quite different.
The process has been gamed at the State level as the incumbent utilities use their enormous power at State legislatures to rewrite the rules for their benefit. In many cases, the result will be in the long term the creation of unregulated monopolies.
These monopolies have even been granted billions of dollars in a bailout to pay them back for their uneconomic investments, leaving them in the enviable position of having free capital that is fueling the consolidation in the industry.
Page 79 PREV PAGE TOP OF DOC At the same time, the large industrial customers are getting their special deals, and the power marketers are winning the right to sell to them. Meanwhile, the residential and small-business consumers have been left unprotected from large price increases in the future after the legislated rate reductions have been sunset. With 60 percent of American families having an income of below $30,000, the price of fuel cells is going to have to come way down before everyone has a fuel cell in their basement.
There is no competition for residential customers in States that have begun implementing their bills, California, Massachusetts, and Rhode Island. At the same time, we see unprecedented consolidation in the industry and we see air emissions already beginning to rise because coal-power is becoming the cheapest option.
Utilities are purchasing coal plants at above book value. While no supports fuel cells more than we do at Public Citizen, we think it is going to be a long time before these utilities close down these coal plants that they are purchasing today.
The PMA's have the opportunity to play a unique role in protecting consumers in a deregulated marketplace. Because the deregulated electricity market is likely to have insufficient competition, the PMA's and the consumer-owned utilities, both the municipals and rural electric cooperatives, will provide yardstick for the fair price of electricity.
Restraining the sale of PMA electricity would remove this benchmark function of the PMA's and their preferred customers. This would be especially damaging to consumers at a time when their strong influence is needed to prevent cartel-like behavior and other forms of market domination and abuse within regional power pools.
The PMA's and consumer-owned utilities provide for corporate diversity among the many players who sell and buy electricity. They emphasize customer service rather than corporate profit.
Transmission is another area where the PMA's can play a valuable role in the future. Three of the four PMA's own a significant amount of transmission lines and facilities. These Federal PMA's could serve as the backbone for three non-profit, publicly-owned transmission companies. This would ensure fair electricity markets, increase reliability, increase transmission access, reduce regulation, reduce bureaucracy, eliminate cross subsidies, and eliminate affiliate abuses at the hands of the investor-owned utility companies. At the very least, the PMA's, with their large network of transmission lines and substations provide stabilization to the volatility that we already see in some markets where auctions of wholesale electricity are taking place.
Page 80 PREV PAGE TOP OF DOC Now, because we believe that the PMA's do serve an important function, especially for the future, we are pleased to see that the attempts to privatize them or to sell federally-owned dams have subsided, but we also oppose backdoor privatization efforts. We view the provisions in the Franks-Meehan legislation, which forced the PMA's to sell electricity at so-called market-based prices, as being unfair to millions of consumers living in the 33 States that the PMA's serve. It is also a sly way of forcing the PMA's to charge a higher price for electricity in an attempt to bring on their demise.
The term ''market-based'' is not defined in the legislation, and in this case, it is being used pejoratively to imply that some undefined subsidy exists. Now there are some utility plants that generate power below current market rates, including FERC-licensed hydro-power projects owned by private utilities in the Northeast and elsewhere.
Forcing any power plant to sell at some undefined rates could needlessly raise costs for consumers. The PMA's should continue providing cost-based power. This will be especially important in the deregulated environment where we can already see the vast advantages large consumers are having over residential and small-business consumers. It is going to be especially true of rural and inner-city consumers, who there will be little competition to serve.
We do not believe that the provision in H.R. 1486 mandating that revenues from electricity sales be diverted to the treasury for deficit reduction is reasonable, either. It is inappropriate to tax power users to reduce our Federal deficit, when far more money could be saved by closing loopholes and giveaways and other forms of corporate welfare.
However, we do believe that it is appropriate for PMA's to include in the cost of power mitigation strategies that deal with damage to fish, wildlife, and rivers. The PMA'sand, for that matter, the investor-owned utilitiesmust become responsible stewards of our natural environment. Dams are a major culprit of the degradation of our Nation's fresh-water resources. Their effects are far-reaching and ecologically complex.
Page 81 PREV PAGE TOP OF DOC Dams are concrete and impenetrable, the antithesis of a river's dynamic and fluid nature. Dams turn rivers into quiet stagnant reservoirs. They reduce or regulate water flows, while changing temperature levels that wildlife have evolved to depend on. Through diversion for power production, dams block water needed for healthy river systems and wreak havoc on the river's biological life. The most widely-recognized environmental effect of dams is their effect on fish; for instance, bringing those Northwest salmon runs to the brink of extinction.
Deregulation is putting added stress on rivers that have hydro facilities because the demand for low-priced power places a higher value on peak-hour electricity. And hydro facilities can stop or start generation in a matter of minutes to respond to demand. This is one of the reasons for the pressures from IOU's to privatize dams and the PMA's: Access to cheap, peak power means large profit.
Obviously, this is one of the reasons we oppose privatizing dams or PMA's. Rivers are owned by no one, nor should they be. They are a public resource. Private companies are driven by growth needs, and they are not economically rewarded for being good environmental stewards.
On the other hand, the PMA's should be responsive to the residents of their region and be good stewards. There are practical, affordable measures based on sound science that can bring back fish and restore the health of rivers. The costs of these measures should be included in the cost-based services provided to the residents of the regions.
In conclusion, the PMA's should play an important role in the future as the electric industry continues to go through changes, from providing a yardstick on how consumers are doing in the deregulated market and contributing to the diversity of utility ownership through creating an example for environmental stewardship.
Thank you very much.
[The prepared statement of Ms. Hauter follows:]
Page 82 PREV PAGE TOP OF DOCSTATEMENT OF WENONAH HAUTER, DIRECTOR, PUBLIC CITIZEN'S CRITICAL MASS ENERGY PROJECT
Public Citizen, founded by Ralph Nader in 1971, is a non-profit research, lobbying, and litigation organization based in Washington, DC. Public Citizen advocates for consumer protection and for government and corporate accountability, and is supported by over 150,000 members throughout the United States. The Critical Mass Energy Project, of which I am director, is Public Citizen's energy policy arm, working to decrease reliance on nuclear and fossil fuels and to promote safe, affordable and environmentally-sound energy alternatives.
As the rules governing the electric industry are rewritten, the debate over the role of the Federal power marketing administrations (PMAs) dramatizes the larger debate over deregulation of the industry. Who should really benefit? Should it be residential consumers? What about rural consumers? What about the environment? Or, will all the benefits flow to investor-owned utilities (IOUs), Wall Street firms, and large industrial customers?
To answer these questions in relation to the PMAs, it is necessary to understand: (1) how electric utility deregulation is unfolding across the nation; (2) the unique role PMAs play in providing a yardstick for the cost of electricity for consumers in the changing electricity market; (3) the benefits and costs to consumers in the regions served by the PMAs; (4) the appropriate role for transmission systems owned by the PMAs; (5) and the serious threat to the environment of privatizing or changing the role of the PMAs.
Public Citizen is pleased that attempts to privatize the PMAs or to sell federally-owned dams have subsided. For the record, we do not favor the privatization of the PMAs, the attempts to force PMAs to sell electricity at so-called market-based prices, or the related attempt to sell federally-owned dams. The Federal hydro plants and the PMAs that sell their power are part of projects that serve many other purposes, including irrigation, flood control, navigation, municipal water supply, recreation, and fish recovery and protection. Turning over dams or PMAs to utilities and others whose sole interest is to maximize power revenues threatens these other purposes.
Page 83 PREV PAGE TOP OF DOC The dramatic changes in the electric industry provide an opportunity for the PMAs to continue serving their historic roles of providing low-cost power to rural areas of the United States as well as serving as a yardstick for measuring how and if consumers are benefiting from deregulation.
Mr. DOOLITTLE. Thank you.
Our final witness is Victor S. Rezendes, director of energy and resources and science issues with the U.S. General Accounting Office.
Mr. Rezendes, welcome again.
STATEMENT OF VICTOR S. REZENDES, DIRECTOR, ENERGY, RESOURCES, AND SCIENCE ISSUES; RESOURCES, COMMUNITY AND DEVELOPMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE
Mr. REZENDES. Thank you, Mr. Chairman. It is a pleasure to be here today to discuss the PMAs' role in the restructured electricity industry.
I have identified five broad goals of the electricity restructuring that we think have impact on the PMAs. The first major goal of deregulation is encouraging price competition, including removing practices that treat potential competitors inconsistently and providing customers with lower electricity prices. As the market moves from a regulated to a more deregulated retail environment, it may be necessary to determine whether more consistent treatment of power providers is warranted.
For example, we have reported that, although PMAs are generally required to recover all costs, favorable financing terms, the lack of specific requirements to recover certain costs, have resulted in the net cost to the Federal Government of over a half a billion dollars each year. In part, because the PMAs sell power generated almost exclusively from hydropower, are not required to earn a profit and do not fully recover the government's costs in their rates, they are generally able to sell power more cheaply than other providers. Also, some electricity suppliers, such as investor-owned utilities, are required to pay Federal, State, and local taxes, but PMAs do not.
Page 84 PREV PAGE TOP OF DOC The second broad goal relates to protecting the environment. Because the electric industry is a major source of air pollution, a relevant question is whether the existing body of environmental law can accommodate change or whether restructuring legislation should have an environmental component to ensure compatibility with environmental values.
Some are concerned that competitive markets may result in increased emissions of pollutants because lower prices resultant from restructuring would increase electricity purchases and, therefore, increase generation an emissions. And, as a result, older polluting coal-fired generating facilities, which are generally exempt from the Clean Air's Act New Source Emission Standards, would be used more extensively. While the generation mix is likely to change, currently less than 2 percent of the PMAs' power comes from coal-fired plants. However, over 50 percent of TVA's power comes from these plants.
PMA hydropower is a clean, domestic, renewable source of electricity. However, hydropower facilities have significant impacts on surrounding areas, especially fish and wildlife.
The third goal relates to balancing the equity among stakeholders. As the industry moves to restructured environment, some costs that were included in the traditional regulated structure may not be recoverable in competitive rates.
Similarly, in terms of equity, concerns the issue whether PMA rates should be at market rates. If PMAs were authorized to charge market rates for power, slightly more than two-thirds of the present customers would experience a relatively small or no rate increase, increases of less than one-half of 1 percent per kilowatt.
Another issue affecting future price of PMA power is the reliability of Federal generating assets. In March, we reported that the Bureau's and the Corps' hydro-power plants are generally less reliable in generating electricity than non-Federal hydro-plants. We concluded that these agencies were unable to obtain funding for maintenance and repairs as needed, and, therefore, delayed repairs. These delays caused frequent extended outages and inconsistent plant performances.
Page 85 PREV PAGE TOP OF DOC The fourth broad goal of restructuring is maintaining the reliability of the interstate transmission grid. An issue that directly relates to the PMAs is the maintenance of reserves that may be called upon to meet planned or unforeseen outages by power providers. As we recently reported, hydro-power's inherent flexibility in meeting different levels of demand creates an opportunity for hydro-power to play a significant role in meeting demand during peak periods.
Finally, the last broad goal is promoting deregulation by redefined Federal roles, such as the Federal regulatory agencies. While restructuring has focused largely on deregulating the retained markets, some segments of the electric industry may face new or increased regulation.
Recent transmission policies have dealt with the concerns of market power and ownership and control of transmission facilities. For example, the PMAs transmission rates and facilities may have to come under new Federal regulation.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Rezendes follows:]
Mr. DOOLITTLE. Thank you.
Mr. Richardson, there seems to be some dispute as to what the effect of competition in the electric sector will have on reliability. In other words, some have formed a conclusion that competition will enhance reliability, and other maintain that it will harm reliability.
I am unclear, I guess, where APPA is because I think they have supported an ad which indicates it will harm reliability. And that is contrast to the NERC and the Department of Energy, which have come to the opposite conclusion. Could you tell us what you think about that and what the basis for you belief it?
Page 86 PREV PAGE TOP OF DOC Mr. RICHARDSON. Well, yes, I would be happy to do that, Mr. Chairman. The ad and our concern relates to advertisements of others urging the very rapid deregulation of the industry on the assumption that such action will encourage or promote greater reliability. In fact, we think that is not the case, that rapid action today will simply enhance the power of those who are able to manipulate the marketplace to their own advantage and to the detriment of reliability.
There was a report that was released within the last couple of days by the Consumer Federation of America and Consumers Union regarding the price spikes of last summer that came to a number of conclusions, including the fact that in the opinion of those two organizations what had occurred in the price spikes in the Midwest was more a question of market manipulation than it was the natural occurrences of outages and other problems that we are experiencing with the system.
Now to the broader point, will restructuring promote reliability or will it disadvantage or place reliability at issue, I think there are a couple of responses to that, and they have to do again with the timing that I referred to. It seems to me that the very rapid restructuring that is being proposed by some of a very quick date-certain Federal mandate could well place reliability in jeopardy; particularly at this point, since we do not have mandatory reliability standards.
The American Public Power Association, along with my colleague's association, National Rural Electric Cooperative Association, the Edison Electric Institute, and others have developed consensus legislation, which, for the most part, is included in the administration's proposal on restructuring, and we strongly support that. We think that is appropriate because reliability is a very serious issue.
In the longer term, I think a very good case can be made that as we bring in new technologies, we have distributed generation, which is something the APPA has long supported, and we begin to move away from the large, central-station power plants, there are some reliability, some positive reliability consequences that can occur.
Page 87 PREV PAGE TOP OF DOC So I say, I think we are back to the point that I made at the very outset that in terms of timing and how soon this transition to these new technologies will occur and the benefits that they might hold over the longer term for a more reliable electric system.
Mr. DOOLITTLE. I am not clear in my own mind as to what their timeframe is, those who are promoting a very rapid change in this area. But, I mean, what timeframe do you think would be reasonable?
Mr. RICHARDSON. Well, we are on a pretty fast track right now in terms of State legislation. Twenty-two is, I believe Wenona Hauter said, 23 States now, with Ohio having sent legislation to the governor, it seems to me highly likely that within the next four to five years most other States will have tackled this issue and come to some conclusions.
What has been of concern to us is Federal mandates requiring the complete customer access byfor all States, for all customersby the end of 1999 or the beginning of the year 2000. Each State needs to move at its own pace, and the utilities within those States, particularly the self-regulated utilities such as the public power systems that I represent, need to be able to govern their own affairs and structure their activities to move into a more competitive environment.
Mr. DOOLITTLE. But let me ask you and Mr. English bothif your reaction to the GAO's findings about the lower reliability of the PMA's, the lack of money for the proper maintenance of the generation equipment, and so forth, is that a concern to your organizations?
Mr. RICHARDSON. I think we are concerned that the money that is going into the Federal Government, paid by the rates of the customers of those systems, is not getting back out and being used for the purposes intended. Funds are included in the rates that are being paid by the customers of the Power Marketing Administrations, and yet, through the appropriations process, problems with budget and accounting matters, it is not getting back to the intended, beneficiary, which is those facilities that do need to be repaired.
Page 88 PREV PAGE TOP OF DOC Mr. DOOLITTLE. Mr. English.
Mr. ENGLISH. Mr. Chairman, if I could just pick up on that? I wholeheartedly agree. Let me also say, though, that I think there are a number of issues that we would have with what the GAO has reported with regard to the PMA's. I think, again, putting this into government terms versus real-world termsand I think most citizens of this country would have a very difficult time in understanding the calibrations of the GAO and how they came to the conclusions that they did with regard to this issue of cost to the governmentit is my understanding, in the calibrations that they have used, for instance, that most of what they are talking about has to do with interest.
Now, when most people borrow money, they go down and borrow the money, and on the day that they receive the money, it is what the interest rate is that day, and that is what they normally pay. It is my understanding, as far as what the GAO does, they ignore that reality, and then, in fact, what they have done is taken a period of time when the interest rates were at the highest, and saying, even though the money was borrowed at that time from the government when the rates were that low, that doesn't matter; we need to take an average rate, which I believe is 8 percent. That is the number they used, even though the money may cost the government much, much less at the time that it was actually borrowed.
I think there is a second issue that comes into play here, and that is the reality of what has taken place through the developments of the PMA's through the years. The reality is that many of the dams were constructed and agreements were signed with regard to preference of power at a particular time, when power may even have been cheaper from other sources. But, again, you found people in the area, and we are talking about many times small towns, electric cooperatives have, in fact, reached an agreement with the government at that time to make a commitment that they would, in fact, buy power and that they would in fact pay forlet's make sure we understand thatpay for the construction of the dams.
Page 89 PREV PAGE TOP OF DOC Now what we have also seen happen, Mr. Chairman, through the years is that it isn't just good enough to pay for the dam; it isn't good enough just to pay for the cost of producing the power. But, instead, these PMA's have become something of a cash cow for various causes that may exist in the local area, and I wholeheartedly agree that many of them are very worthwhile.
Recreation, for instance, for people in the local area, that is certainly beneficial. Irrigation for many farmers in the local area, that is certainly beneficialand certainly in assisting in the environmental causes in these areas, and that is certainly beneficial.
And we have talked about the question of fish, and certainly, particularly in the Bonneville area, we have seen enormous sums of money that are being spent by the ratepayers and those who buy power from Bonneville for dealing with the issue of salmon.
Now those are issues far beyond what we talk about simple costs and the payment of the construction of the facilities and the payment for the generation of power.
So I take great issue with that. And I think that it is something that we have really got to put in real-world terms in order for us to make certain we understand exactly what is being calculated in the way of the cost and what those costs were. Are they truly the cost to the Federal Government or are they just come calculation as to what the government should have received in the way of interest rates over some long-term average?
So the issue now of the question of whether the PMA's are operating as efficiently as they should, my colleague is absolutely right; there is no question about it that money that has been paid by the ratepayers many times is not being used for the purpose of continuing to make sure that those operation are at the peak efficiency, but are for other purposes. And I think that is wrong, Mr. Chairman.
Mr. DOOLITTLE. Would you and Mr. Richardson and your organizations support efforts to make sure that the money that is collected for those purposes is spent for those purposes?
Page 90 PREV PAGE TOP OF DOC Mr. ENGLISH. I can't speak for my colleague here, Mr. Chairman, but I would say the NRECA has long supported the fact that we will do just about anything to make sure that the money that is collected from the ratepayers for the purpose of maintaining those generating facilities is used for that purpose. We have even volunteered to collect money from the people in the local area to maintain that over and above what the rates are. But, you know, it is extremely important and extremely frustrating, Mr. Chairman.
Mr. RICHARDSON. We agree with that, Mr. Chairman.
Mr. DOOLITTLE. Thank you.
Mr. Rezendes, did you wish to comment on, or to respond to, Mr. English's observations on the GAO findings?
Mr. REZENDES. Yes. First, I would like to mention on the deferred maintenance fees, that it is the difficulty of the appropriation process, with the long lead time and competing priorities within an appropriation account that makes doing the maintenance and the kinds of business kinds of things that a private sector would do very difficult for the Federal Government to do, because whether you do maintenance on a generator or whether you are going to provide relief for hurricane victims is not a difficult choice for the Federal Government to make, one that, obviously, the private sector is not confronted with.
Getting back to the financing issue, that is only one of numerous things that the PMAs aren't recovering costs from. We also mention some retirement benefits, post-retirement health insurance issues. There's some construction cost.
But the big issue, I think, Mr. English is exactly correct, is the financing. We used a methodand I don't want to get too heavy into this in terms of what the average government portfolio is versus what the portfolio is of the various PMAsthat is a half a billion dollars a year. However, no matter what methodology you useI don't care if you go loan by loan, which we did, and that came out even higherno matter which methodology, no matter how you look at it, the Federal Government is not recovering the interest cost that it is incurring that the PMAs have the benefit of the money from.
Page 91 PREV PAGE TOP OF DOC In addition, PMAs, as you know, borrow money routinely over the years at various interest rates based on what they are at the time. However, they do have the option of paying back the high, and do pay back the high interest rates first and leave the low interest rates on the books, which means that only increases the amount of subsidy the Federal Government has to sustain to maintain that.
Mr. ENGLISH. Mr. Chairman, could I respond to that?
Mr. DOOLITTLE. Well, I want to follow up with another question because we are going to have a vote here in a minute.
You mentioned, Mr. Rezendes, the dams and hydroelectric power has an impact on rivers and fish, which it obviously does. Did your statement contemplate positive impacts as well as negative, or was it just negative?
Mr. REZENDES. No, it was a negative impact. And the fish mitigation costs, as you know, for just Bonneville is really a big number. I think Bonneville expects in the not-too-distant future they could be spending a billion dollars on this.
Mr. DOOLITTLE. Well, with nothing to show for all of that money, I might point out. Well, that perhaps could the subject of another GAO study.
Well, I am aware of situationsand I will direct this to Ms. Hauter, who expressed her negative view of damsmany occasions I am aware of, those dams are what create the adequate supplies of cold water to make sure there is water downstream for the fisheries. Is that not the case?
Ms. HAUTER. Overall, the effect on our waterways of dams is negative. Many problems. Dams restrict the flow of water downstream. The stagnant water that sits has effects on both fish and wildlife in the area.
And, generally, we think that damsthere needs to be mitigation. Many of the programs have failed. For instance, in the Pacific Northwest, where we would want to see the phasing-out of barging and trucking of fish and the use of spill as the primary means for juvenile fish passage, things need to be done in a better way. And there is a whole set of scientific evaluations in this area, and it can be done, and it can be done cost-effectively.
Page 92 PREV PAGE TOP OF DOC Mr. DOOLITTLE. Well, I would just observe that to only comment upon the negative aspects of dams is to ignore clear facts that they have positive, many positive benefits, not to mention the adequate water supply and the flood control, but just even looking at the environment, and of course the recreation that they provide. But I know, at least in our California situation, it is the presence of the dams that ensures the water available for the endangered fish. Now, yes, I am not saying there aren't negative consequences, too, but I think there are pluses and minuses, and I just want to get that plug in.
And with that, I am afraid, since I am the only one here, I am going to have to bring this hearing to a close.
I really appreciate the testimony that we have heard today from you, and I hope that you will answer further questions that we may have, which we will submit in writing and ask you to respond. We will hold the record open for that purpose.
[The information follows:]
Mr. DOOLITTLE. We thank you for coming.
And with that, the hearing is adjourned.
[Whereupon, at 4:25 p.m., the Subcommittee was adjourned.]
(Footnote 1 return)
Federal Electric Power: Operating and Financial Status of DOE's Power Marketing Administrations (GAO/RCED/AIMD-96-9FS, October 13, 1995).
(Footnote 2 return)
Oversight Hearing on Accounting Practices for Federal Power Marketing Administrations Before the Subcomm. on Water and Power Resources of the House Committee on Resources, 104th Cong. 104-101 (1996) (statement of J.M. Schaefer, Administrator, Western Area Power Administration).
(Footnote 3 return)
3\ Federal Power: Regional Effects of Changes in PMAs' Rates (GAO/RCED-99-15, November 16, 1998).
(Footnote 4 return)
Federal Power: PMA Rate Impacts, by Service Area (GAO/RCED-99-55, January 28, 1999).