Text of
Printed Hearing
The Committee on Energy and Commerce
W.J. "Billy" Tauzin, Chairman
H.R. 3406, The Electric Supply and Transmission Act of 2001
Subcommittee on Energy and Air Quality
December 12, 2001
1:00 PM
2123 Rayburn House Office Building
<DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:77118.wais]
THE ELECTRIC SUPPLY AND TRANSMISSION ACT OF 2001
=======================================================================
HEARINGS
before the
SUBCOMMITTEE ON ENERGY AND AIR QUALITY
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
on
H.R. 3406
__________
DECEMBER 12 and 13, 2001
__________
Serial No. 107-81
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
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COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma BART GORDON, Tennessee
RICHARD BURR, North Carolina PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia BART STUPAK, Michigan
BARBARA CUBIN, Wyoming ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois TOM SAWYER, Ohio
HEATHER WILSON, New Mexico ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING, Mississippi KAREN McCARTHY, Missouri
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
TOM DAVIS, Virginia THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee BILL LUTHER, Minnesota
ROBERT L. EHRLICH, Jr., Maryland LOIS CAPPS, California
STEVE BUYER, Indiana MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Energy and Air Quality
JOE BARTON, Texas, Chairman
CHRISTOPHER COX, California RICK BOUCHER, Virginia
STEVE LARGENT, Oklahoma RALPH M. HALL, Texas
Vice Chairman TOM SAWYER, Ohio
RICHARD BURR, North Carolina ALBERT R. WYNN, Maryland
ED WHITFIELD, Kentucky MICHAEL F. DOYLE, Pennsylvania
GREG GANSKE, Iowa CHRISTOPHER JOHN, Louisiana
CHARLIE NORWOOD, Georgia HENRY A. WAXMAN, California
JOHN SHIMKUS, Illinois EDWARD J. MARKEY, Massachusetts
HEATHER WILSON, New Mexico BART GORDON, Tennessee
JOHN SHADEGG, Arizona BOBBY L. RUSH, Illinois
CHARLES ``CHIP'' PICKERING, Mississippi KAREN McCARTHY, Missouri
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee BILL LUTHER, Minnesota
GEORGE RADANOVICH, California JOHN D. DINGELL, Michigan
MARY BONO, California (Ex Officio)
GREG WALDEN, Oregon
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Hearings held in Washington, DC:
December 12, 2001............................................ 1
December 13, 2001............................................ 99
Testimony of:
Acquard, Charles, Executive Director, National Association of
State Utility Consumer Advocates........................... 164
Blake, Hon. Francis, Deputy Secretary, U.S. Department of
Energy..................................................... 21
Breathitt, Hon. Linda K., Commissioner, Federal Energy
Regulatory Commission...................................... 31
Brownell, Hon. Nora Mead, Commissioner, Federal Energy
Regulatory Commission...................................... 35
Church, Lynne H., President, Electric Power Supply
Association................................................ 156
English, Glenn, CEO, National Rural Electric Cooperative..... 144
Gent, Michehl R., President and CEO, North American Electric
Reliability Council........................................ 152
Hochstetter, Hon. Sandra L., Chairman, Arkansas Public
Service Commission, on behalf of National Association of
Regulatory Utility Commissioners........................... 105
Hunt, Hon. Isaac C., Jr., Commissioner, Securities and
Exchange Commission........................................ 99
Hyman, Leonard S., Senior Industry Advisor to Salomon Smith
Barney..................................................... 177
Johnston, Robert, President and CEO, Municipal Electric
Authority of Georgia, on behalf of the Large Public Power
Council.................................................... 179
Massey, Hon. William L., Commissioner, Federal Energy
Regulatory Commission...................................... 39
McCullough, Glenn L., Jr., Chairman, Tennessee Valley
Authority.................................................. 44
Prindle, William R., Director of Building and Utilities
Programs, the Alliance To Save Energy...................... 169
Richardson, Alan H., President and CEO, American Public Power
Association................................................ 134
Rouse, James B., Director, Energy Policy, Praxair, Inc., on
behalf of the Electricity Consumers Resource Council....... 160
Sokol, David L., Chairman and CEO, Mid-American Energy
Holdings Company........................................... 128
Wood, Hon. Pat, III, Chairman, Federal Energy Regulatory
Commission................................................. 23
Additional material submitted for the record:
Blake, Hon. Francis, Deputy Secretary, U.S. Department of
Energy, letter dated January 31, 2002, enclosing response
for the record............................................. 94
Wood, Hon. Pat, III, Chairman, Federal Energy Regulatory
Commission:
Letter dated February 13, 2002, enclosing response for
the record............................................. 88
Letter dated February 25, 2002, enclosing response for
the record............................................. 92
Letter dated February 28, 2002, enclosing response for
the record............................................. 96
(iii)
THE ELECTRIC SUPPLY AND TRANSMISSION ACT OF 2001
----------
WEDNESDAY, DECEMBER 12, 2001
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Energy and Air Quality,
Washington, DC.
The subcommittee met, pursuant to notice, at 1 p.m., in
room 2123, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Largent, Burr,
Whitfield, Ganske, Norwood, Shimkus, Pickering, Bryant, Walden,
Tauzin (ex officio), Boucher, Hall, Sawyer, Wynn, Waxman,
Markey, Gordon, McCarthy, Strickland, Barrett, and Dingell (ex
officio).
Staff present: Jason Bentley, majority counsel; Sean
Cunningham, majority counsel; Andy Black, policy coordinator;
Sue Sheridan, minority counsel; and Rick Kessler, minority
professional staff.
Mr. Barton. The subcommittee will come to order. If
everybody will find your seat.
I want to welcome the four FERC commissioners that are
confirmed and our Deputy Secretary, Mr. Blake, from the
Department of Energy and our Commissioner of the TVA, Mr.
McCullough. We are glad to have you folks.
Today, we start 2 days of legislative hearings on a
comprehensive electricity bill, H.R. 3406. This bill is
intended to be the subject of a subcommittee markup next week,
assuming that Congress is going to still be in session next
week, which more and more is beginning to look like a good
assumption.
I want to ask our witnesses today and tomorrow to be
forthright, to be specific when talking about the bill. This is
a legislative attempt to balance all the various stakeholder
interests that have been expressed in numerous hearings over,
in the case of my subcommittee chairmanship, a 3-year period,
and if you want to go back further than that, you could go back
7 years when Congressman Schaeffer was subcommittee chairman
and did a number of hearings on this very same issue.
We have spent a great amount of time on both sides of he
aisle in this subcommittee reviewing electricity markets this
year and in years previous to this year. Major lessons that we
learn again and again are part of the bill before us today. No.
1, we must increase, or at least put incentives to increase,
the supply of electricity available to consumers. No. 2, we
must improve the effective operation of our transmission grid,
and more and more that's on an interstate basis, not just on an
intrastate basis. And No. 3, we've got to improve the capacity
of our transmission grid.
Today, our witnesses are various Federal officials. We have
the Deputy Secretary of Energy Frank Blake before us again, and
we want to welcome you. We also have, as I said earlier, the
four confirmed FERC commissioners before us, and we look
forward to the day when the fifth one, Joe Kelliher, who used
to be committee staff counsel, is also on your distinguished
panel.
I want to also say that it's good to see Chairman Wood here
as chairman. There are those today who are probably going to
make it appear that Mr. Wood and I have some differences, and
we may have some policy differences, but we have no personal
differences. If I can be personal for a minute, I have known
Pat Wood for a long, long time, and I remember three or 4 years
ago he and I plotting to get tickets to the Sugar Bowl when A&M
was playing Ohio State. So we go back a ways, and the best part
of our relationship, Chairman Wood, is that the best days are
ahead of us--you, as chairman of your Commission, and hopefully
me, as chairman of this distinguished subcommittee.
Mr. Wood. And we hope A&M will actually win the Sugar Bowl
next time.
Mr. Barton. It would be nice if the Aggies would win a bowl
game in our lifetime. I would admit to that.
I expect that we are going to get many questions today
about recent actions of the FERC, questions about Regional
Transmission Organizations, market-based rates in connection
with RTOs, the market power screen test, the suitability of
transcos in an RTO future, things like that.
We also want to welcome our chairman of the Tennessee
Valley Authority. We want to thank you for coming. There is a
title in our bill that has been worked out with Congressman
Bryant on the Republican side and Whitfield on the Republican
side and Congressman Gordon on the Democratic side. I think it
is a good title, and I look forward to what your concerns and
comments are on that particular title of the bill.
Tomorrow, we are going to hear from the SEC. We are also
going to have our usual number of stakeholder participants. And
the problem we have is that we have got lots of stakeholders,
and the table will only hold so many people.
I want to thank Chairman Tauzin of the full committee,
Ranking Member Rick Boucher, my good friend, of the
subcommittee, and also the full committee Ranking Member John
Dingell for their help in scheduling these hearings and their
cooperation in helping us to get witnesses.
After these hearings of today and tomorrow, it is my intent
to sit down and try to sift through all the testimony and see
what needs to be changed so that we can go to markup next week.
I would ask members to prepare suggestions in legislative form
for discussion and be prepared to offer them either to myself,
to Mr. Boucher or have them drafted and ready to go to markup
next week. I will be preparing a manager's amendment to
incorporate whatever changes I think improve the bill.
I see lots of people here in the audience who we have
worked with for the last few years. It is Christmastime, and so
I am kind of in the spirit of which of you have been naughty
and which of you have been nice. I don't think anybody has been
really naughty; I can almost say I don't think anybody has
really been nice either.
So I would say to you that normally Christmastime is--some
celebrate Christmas Christmas Eve, some celebrate Christmas
morning, some who are not of the Christian faith celebrate
Hanukkah, but whenever and however you celebrate, I think it
would be very nice for this subcommittee to give a Christmas
present early to the country, to the full committee, if we
could work together and pass a good electricity bill sometime
next week.
So with that, I would yield the balance of my time and
recognize my good friend, the distinguished ranking member, Mr.
Boucher, for an opening statement.
[The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Subcommittee on Energy
and Air Quality
Today, the Subcommittee starts two days of legislative hearings on
comprehensive electricity legislation, H.R.3406. This bill will most
likely be the subject of a subcommittee markup next week, if the
Congress is still in.
Today and tomorrow, I ask witnesses to be forthright and specific
when talking about the bill. Keep in mind that this legislation is an
attempt at a balance between stakeholders and Members, and few
compromise bills are universally loved.
The Members of this Subcommittee, on both sides of the aisle, have
spent a great deal of time reviewing electricity markets this year and
in years previous. Major lessons we learn again and again are part of
the bill before us today:
1. We must increasing the supply of electricity available to consumers;
2. We must improve the effective operation of our transmission grid;
and
3. We must increase the capacity of our transmission grid.
First, we welcome a very distinguished panel of Federal witnesses.
Deputy Secretary Frank Blake is back before us today, and I welcome
you. Thank you for your past work with this Subcommittee on Price-
Anderson and your previous testimony about electricity restructuring.
Next, we welcome back the four confirmed commissioners of the
Federal Energy Regulatory Commission (FERC). I look forward to when you
come back with a full slate of Commissioners. I commend the President's
great decision when he announced the intent to nominate Joe Kelliher to
FERC.
But back to the four of you. Led by my good friend, Chairman Wood,
it appears you four have been quite busy lately. I expect you will be
receiving many questions from Members today. I, for one, ask you to
address recent actions and statements on Regional Transmission
Organizations (RTOs), market-based rates in connection with RTOs, the
market power screen test , the suitability of transcos in an RTO
future, and whatever else we might be hearing about soon.
Chairman McCullough of the Tennessee Valley Authority (TVA) is also
here today. Welcome, and thanks for your help in forging agreement,
within the valley, among TVA, its distributors, as well as large and
small customers.
Tomorrow, we will welcome the Securities and Exchange Commission on
PUHCA and a regulator from the State of Arkansas. Following that, we
will have our usual wide table of industry participants and observers.
I want to thank Chairman Tauzin of the full committee, Ranking
Member Boucher of the subcommittee, and Ranking Member Dingell of the
full committee for their help in scheduling these hearings and
implementing a fair and open process. I thank all Subcommittee Members
for the attention they have given to these issues.
After this hearing, it will be time to work on changes to the bill.
I ask Members to prepare suggestions in legislative form for discussion
and, if not accepted, for offering as an amendment during markup. I
will be preparing a manager's substitute amendment incorporating some
of the changes discussed today.
As I look out to the audience and to both sides up here, I see lots
of people who have been nice. Not too many have been naughty, at least
not all of the time. While I have no songs for you, I do hear from
Santa that one of the packages under the tree is a model kit for a
pretty little electricity bill. My parents wouldn't let me open my
presents early, but if we do our homework we just may get to open it
next week. I can't imagine a more legislatively-satisfying holiday
season.
Mr. Boucher. Well, thank you very much, Mr. Chairman. I
appreciate the scheduling of 2 days of legislative hearings by
the subcommittee prior to our taking further action on the
chairman's electricity industry restructuring legislation.
Given the very significant changes that have recently
occurred, both in the market for wholesale electricity and in
the regulation of that market by the FERC, it is appropriate
that we take stock of current circumstances before we take
further legislative action. These hearings provide that
opportunity, and I thank Chairman Barton for honoring the
request that we made that these hearings take place.
I very much applaud the steps designed to strengthen the
wholesale electricity market, which have recently been
undertaken by the FERC. The Commission has issued notice of a
proposed rulemaking to develop a uniform standard for
interconnection. It has acted to ensure membership in broad
Regional Transmission Organizations by companies that own the
transmission lines. It has demonstrated, I think, a commendable
determination to make the wholesale market more functional and
more predictable.
To the extent that legislation is needed to reinforce
FERC's authority in these areas, we should act. In my view, we
should not take any steps which would impede the progress that
FERC is seeking to achieve in perfecting the market for
wholesale electricity transactions. And I am frankly concerned
that some of the provisions in the measure now before us might
have that effect, particularly the provisions in the bill that
relate to Regional Transmission Organization membership.
I also question the appropriateness of repealing the FERC's
merger review authority through which the Commission acts to
promote competition and address market power concerns. The
removal of merger review authority is all the more troubling
when it is teamed with repeal of the Public Utility Holding
Company Act, an event which inevitably will lead to greater
industry consolidation and heighten concerns about the
potential to misuse market power. Under these circumstances,
the FERC's merger review authority may be more needed in the
future than it is even at the present.
There is a clear need to encourage the construction of new
transmission lines in many places around the Nation. The bill
seeks to address this need through the creation of incentive
pricing for new transmission lines and by conferring Federal
authority to site new lines in instances in which the States
deny approval for that construction. Both of these provisions
are highly controversial. I will welcome the views of our
witnesses, both today and tomorrow, on whether other approaches
can achieve the goal of new transmission line construction.
In particular, I am interested in knowing whether Regional
Transmission Organizations can encourage the needed investment
under regular pricing without the use of incentive pricing. I
am also interested in learning about instances in which those
supporting Federal siting authority believe that States have
acted arbitrarily in balancing the need for new transmission
against the other values that States have an obligation to
consider. I am personally unaware of any such instances, and we
did in fact inquire about such instances in previous hearings.
The chairman's measure focuses on a range of other complex
matters, including the balance between State and Federal
jurisdiction over transmission, transmission reliability,
Federal authority over public power entities in certain
circumstances and the repeal of PURPA. While I have
reservations about many of the bill's provisions, I want to
commend Chairman Barton for his single-minded persistence in
working to achieve a landmark reform in our Nation's
electricity laws and for placing before this subcommittee a
comprehensive measure that addresses the most relevant topics.
I look forward to continued conversations with the chairman
and with other members of the subcommittee as we continue to
consider the best means of addressing the wholesale electricity
market and its related concerns. Thank you, Mr. Chairman, and I
want to welcome our witnesses, and I very much look forward to
their testimony.
Mr. Barton. The Chair would thank the gentleman from
Virginia for that statement. It is the Chair's intention to
continue opening statement. Mr. Shimkus has gone to vote and
hopefully will be back so that we can continue without having
any interruption. The Chair would ask if Mr. Bryant wishes an
opening statement.
Mr. Bryant. Yes. Thank you, Mr. Chairman; I have one. I
would also like to thank you for holding today's hearing on
H.R. 3406 and commend you for inviting such a distinguished
panel of witnesses representing the Federal perspective on the
electricity restructuring legislation. I especially look
forward to my friend, Glenn McCullough, testifying, who is the
chairman of the Tennessee Valley Authority, and I am sure
Chairman McCullough would agree that among the residents living
in the Valley there is an ``if it ain't broke, don't fix it''
mentality toward such legislation as restructuring our Nation's
electricity market.
However, as America's largest public power company, TVA
has--I should say America's largest public power company, TVA,
has provided reliable, low-cost power to all of us in the
Valley for nearly 70 years, and we are happy with the services
TVA provides. However, there is a nationwide movement toward a
more competitive electricity market. Several States have
already deregulated their wholesale electricity markets, and
times are changing. TVA must be prepared to change with them.
To prepare for life in a more competitive market, TVA, the
region's 158-power distributor to its customers, and industrial
users, after much negotiation, have reached a consensus on a
TVA title. The title, this consensus title, would allow the
distributors to renegotiate the contracts with TVA and to buy
some power outside of the seven-state region or the so-called
fence of TVA, which will help meet the growing demand from
Valley consumers.
In addition, the title would permit TVA to sell excess
power at a wholesale level outside the fence, which they cannot
currently do. Additionally, TVA's 17,000 miles of transmission
would come under the regulation of FERC for the first time.
This would help FERC in their effort to form Regional
Transmission Organizations to facilitate the reliable flow of
power.
I feel that H.R. 3406, the Electric Supply and Transmission
Act, is the most appropriate vehicle for the TVA title, and I
commend Chairman Barton for recognizing what is in the best
interest of the Tennessee Valley and including the consensus
agreement as the TVA title in H.R. 3406. I know there are some
in the power industry who want to compete with the Valley on a
one-way basis. These interests seek to create a market that
favors their utilities and that will put TVA at a competitive
disadvantage. I ask my colleagues on the subcommittee to
recognize the efforts of the stakeholders throughout the
Tennessee Valley and oppose them when the time comes up for
this vote. It is very important to my constituents that the
Valley's stakeholders be allowed to control the region's
destiny in a restructured market.
Again, I thank the chairman for his work on the electricity
restructuring issue, which I know is so important to him. And,
furthermore, I want to thank him for his work on behalf of the
residents and the numerous States involved in the Tennessee
Valley. Thank you.
Mr. Barton. Thank the gentleman from Tennessee and
recognize the distinguished gentleman from California for an
opening statement.
Mr. Waxman. Thank you, Mr. Chairman. The bill we are
considering today is called Electric Supply and Transmission
Act. I think a better name might be the One Last Gift for Enron
Act. This follows the $254 million gift to Enron in the
Republican stimulus bill and the long wish list of subsidies,
tax breaks and deregulation provisions Enron received in the
House energy bill. Enron's fingerprints are all over the
legislation we are examining today. This bill essentially
Federalizes the Nation's electricity transmission grid just as
Enron had advocated for years.
Five and a half years ago, Enron CEO Ken Lay testified
before this subcommittee and derided those who argued against
Enron's vision of the future. He testified that we did not need
to listen to those who argued that Enron's plan was untried and
too risky or that we needed to go slow. He ridiculed the
arguments that service will deteriorate or reliability will be
put at risk. Mr. Lay testified that competition in the
electricity markets would cause great things to happen.
Consumers would benefit handsomely, the environment would be
protected, and of course Enron would make a lot of money.
Mr. Lay's vision turned out to be dramatically wrong.
California and the West have suffered from skyrocketing energy
prices. A new report from the Consumer Federation of America,
which I ask unanimous consent to introduce into the record,
documents double-digit rate increases in Massachusetts, a 40
percent increase in New York and a 50 percent rate increase in
Montana over the last year.
There has even been evidence of market abuses in
Pennsylvania. And, of course, Enron itself is now in
bankruptcy. Mr. Lay and other Enron executives essentially
looted the company, while leaving employees and shareholders
with nothing. Even the environment seems to be suffering. As a
result of restructuring, emissions of nitrogen oxides and
carbon dioxide were significantly higher last year than FERC
had projected just a few years ago.
The legislation we are considering should be put on display
in a museum. It is an artifact of the era when corporate
America swooned at the mention of Enron's name. I think we need
to go back to the drawing board. The last thing we ought to do
now is pass another law that makes it easier for top executives
to steal and swindle millions of dollars from their workers and
shareholders. First and foremost, we need to figure out how to
prevent future energy collapses like Enron. The answer will
require more regulation and oversight of energy marketers, not
more deregulation like this legislation proposes.
We also need to be focused on how we ensure that
electricity is reliable, clean and affordable. This will
require doing more to promote conservation and renewable
sources of energy. Even before the collapse of Enron many
States were reconsidering restructuring. Of the 25 States that
have decided to restructure, three electric utilities, nine are
now reconsidering their decisions. Nevada even repealed its
deregulation law of April 2001.
I am glad we are holding today's hearing, but clearly we
need to hold many more before we consider moving legislation.
As many people have remarked, September 11 changed our world.
In its own way, December 2, the date Enron filed for
bankruptcy, fundamentally changed how we need to think about
energy policy. This should be a time for deep rest,
deliberative reevaluations, not a headlong rush to legislation
to preconceived ideological theories that fly in the face of
the disastrous reality Enron-style deregulation is inflicting
on millions of Americans. Thank you very much, Mr. Chairman.
Mr. Shimkus [presiding]. Thank you, Mr. Waxman. Just to
inform the panelists, what I plan to do is conduct my opening
statement, see if other members filter back from the votes. If
no one gets here in time, then we will kind of recess in place
until every member gets an opportunity, and then we will go to
the opening statements. That is per direction of the chairman.
So I, too, want to thank the panelists here today, although
I don't totally agree with my colleague from California. I have
sat through more energy hearings than the years that I have
been alive, seems like. And I have only been a member 5 years,
so we have really--those of us who have been on this
subcommittee for the past five or 6 years, I think we have got
a pretty good handle on energy.
But be that as it may, I will start with a prepared
statement and just say the Federal role in our Nation's
electricity system is an important one. For years, it has
worked to ensure that our Nation has reliable and affordable
power, but the system that generated and delivered that power
has changed dramatically, and the Federal Government's role has
to change to meet the challenges of this new system.
Illinois is a very unique State. We have a deregulated
market that will allow consumers to choose their energy
supplier in the coming year. We lead the Nation in electricity
produced by nuclear power. We are among the leaders in the
amount of electricity generated from coal. Greenpeace released
a study last month saying that Illinois is the fourth in the
Nation in the amount of planned power from solar electric
systems, and Illinois will soon become a major player in
electricity generated from wind power. On top of all that,
there is a project in my district to create a hydroelectric
dam.
Illinois has a truly diversified energy portfolio. The
problem is how do we get all this low-cost power to consumers?
And that is what I think we are here for to discuss. The answer
is transmission. This legislation provides incentives and an
environment to expand and update our Nation's transmission
grid. It provides for a process for transmission siting that
won't create a bottleneck at the States' borders, similar to
what we saw with natural gas pipelines at the California
border. We have utilities in Illinois that are begging to new
transmission but are being forced to stop these lines once they
hit the State borders. This bill will remedy that. And I say,
constitutionally, in the interstate commerce clause, this is
interstate commerce.
The bill also allows for open access to transmission for
all transmitting utilities. If we are to have a truly national
grid that is reliable and offers a seamless way to move power
from one part of the country to another part, then it is
important to have equal and open access to all transmission.
The RTO provisions in this legislation mandate participation in
an RTO but doesn't set a specific number of RTOs. I believe
this is the correct approach. RTOs are needed to facilitate an
open transmission system to move power easily from one place to
another.
This legislation has a number of other provisions aside
from what I have mentioned, but I wanted to focus on
transmission, because it is most important to me. I look
forward to addressing these and other issues in these hearings,
and when we mark up this legislation hopefully before we leave
before the Christmas break.
And with that, I will yield back my time, and I will now
recognize the gentleman from Iowa, Dr. Ganske, for 5 minutes--
for 3 minutes.
Mr. Ganske. Thank you, Mr. New Chairman. I want to thank
the Deputy Secretary, the FERC commissioners, the chairman of
the Tennessee Valley Authority for joining us today, as well as
the witnesses who will join us tomorrow, in particular, Mr.
David Sokol of Mid-American Energy Company, which helps to
supply energy in my Iowa district. I appreciate all of you for
taking time to address the committee.
We have an obligation to help assure that our power
generation system is ready to supply a reliable source of
electricity, both for our own safety and for the productivity
of our economy. The transmission system in our country is
crucial in guaranteeing a consistent and uninterrupted flow of
power to our cities, towns and rural communities. Recent events
have magnified the concerns that we have about our power
supply, but even before those events there were many steps
which needed to be taken to improve our power grid and our
transmission capabilities. Our electricity power grid is an
essential part of the American economy and of our basic
infrastructure.
I strongly believe we need to promote the use of renewable
resources. My State of Iowa has been a leader in the
development of wind energy power. I believe it is a clean,
practical source of energy which can be utilized to a much
greater extent than it currently is. Iowa is tenth in the
country in the potential for utilization of wind resources, but
we are currently third in the amount of wind energy produced.
Wind turbines in Iowa already produce enough energy to power
more than 60,000 residential homes. I know that in more
temperate areas of the country solar power holds more
potential.
The provisions of this legislation which would encourage
the use of net metering systems around the country are a
positive step toward making the use of solar and wind generated
power a more practical alternative to the small producer. Net
metering can play an important role in facilitating the
development of wind and solar power by small producers. I
commend the chairman for his leadership in including this
section in the legislation, and I plan to work with him in
offering an amendment during the markup, which I hope will
serve to clarify a couple of the provisions.
I thank the chairman, and I yield back my time.
Mr. Shimkus. The gentleman yields back his time. Chair
recognizes the other doctor, from the great State of Georgia,
Dr. Norwood.
Mr. Norwood. Thank you very much, Mr. Chairman. I would
like to simply place my opening statement in the record, and
perhaps you would reserve the amount of time I would have used
for an opening statement and extend the amount of time I will
have for questions.
So if you will do that, I will yield back to you.
Mr. Shimkus. I would say that is above my pay grade, so you
will have to negotiate.
With that, seeing no other members present, we are going to
ask the panelists and our guests to recess in place until we
come back.
[Brief recess.]
Mr. Barton. The subcommittee will come to order.
Congressman Hall will stop meeting and greeting. Was
Congressman Shimkus the last one to give an opening statement,
do we know? Ganske? So the last one was a Republican? Okay. The
Chair would recognize Mr. Sawyer for an opening statement.
Mr. Sawyer. Thank you very much----
Mr. Barton. The Chair is in error, and Mr. Markey was in
attendance before Mr. Sawyer. The Chair would recognize Mr.
Markey for a non-musical opening statement.
Mr. Markey. The theme is movies today, okay? You know, at
the very end, Mr. Chairman, of the 1942 Hollywood classic,
Casablanca, Captain Renault, the French police inspector,
played by Claude Raines, has just pulled up to the crumpled
body of the Nazi officer that Humphrey Bogart's character just
killed. He jumps out of his car and says, ``Major Strasser has
been shot.'' Bogart looks at him with expressionless eyes, and
Renault turns to his gendarmes and says, ``Round up the usual
suspects.'' That is kind of what we are doing here today, Mr.
Chairman.
In May, the majority pulled the plug on its markup of
California's emergency electricity legislation. In July and
August, the majority short-circuited efforts in the committee
and on the floor to address the electricity problems taking
place in the West as part of the comprehensive energy package.
And so today we are rounding up the usual suspects to
interrogate them yet again in a process which at this point
appears increasingly unlikely to result in enactment of any
public law.
Meanwhile, in a hearing room right across the hall from
here, in the Banking Committee, another feature is headlining.
It involves the dramatic implosion of a company called Enron.
Last year, the company was No. 7 on the Fortune 500; today,
Enron is essentially a penny stock company reduced to
bankruptcy. What happened? Where did all the money go? This
little drama is a tale of greed and ambition with multiple plot
twists, elaborate deceptions, villains and victims. It includes
complex deals with mysterious insider partnerships dubbed JEDI,
Chewbacca and Raptor. What a hearing, huh?
These are accounting--there are accounting firms with
apparent amnesia about their public responsibilities and scores
of Enron employees who have just seen their retirement savings
evaporate as they stood helplessly by unable to shift funds
into other investments.
So I would ask, is this subcommittee going to hold any
hearings on the Enron debacle before it proceeds to mark up an
electricity bill? It seems to me there are many lessons that
this subcommittee could learn from what went wrong with Enron.
Are we going to thoroughly investigate what happened to Enron
and what it means to emerging electricity markets? Or are we
going to engage in the absurd pretense that the collapse of
what was once the Nation's largest electricity and natural gas
marketing company has nothing to do with our electricity
markets? Does anybody think that if Enron had been the subject
of greater regulatory oversight, such as the types of rules
that we require for traders in securities, traders in futures
or other financial intermediaries, that the types of financial
shenanigans that occurred and took place would have been
allowed to occur? I think not.
In the aftermath of the Enron collapse, I think that we
need to look very seriously at extending some greater oversight
over the trading of electricity. Right now the bill we have
before us does not address this issue. Mr. Chairman, I ask
unanimous consent to address the committee for 1 additional
minute?
Mr. Norwood [presiding]. Any objection? Mr. Markey, the
chairman objects. We need to get through this so everybody will
have a turn. We have a lot of witnesses we want to hear from.
Mr. Markey. I know, I know, a lot of witnesses. I
appreciate it, I appreciate it.
Mr. Norwood. Mr. Sawyer, you are recognized for 3 minutes.
Mr. Markey. Excuse me. Oh, did anyone object?
Mr. Norwood. I did.
Mr. Markey. You objected, Mr. Chairman.
Mr. Norwood. Yes.
Mr. Markey. Why is that?
Mr. Norwood. Because we have a lot of witnesses we need to
hear from, and all of us are going to read the record to finish
listening to your statement.
Mr. Markey. No, but Mr. Chairman, let me ask--point of
personal privilege, Mr. Chairman. I did not schedule this
hearing for 1 in the afternoon. You can't persecute the
persecuted, okay? You are basically now holding the minority
accountable for the scheduling tactics of the majority. Now
that is not fair to us to wait for weeks to have a hearing like
this and then to tell us that we can't be extended 1 additional
minute. That doesn't show any good grace or courtesy on your
part.
Mr. Norwood. It doesn't show any good grace to extend over
the time that we have all agreed to either. Mr. Sawyer, you are
recognized for 5 minutes.
Mr. Markey. You are noted for your good grace, Mr.
Chairman. I mean it is a personal trait that you hold dear, I
thought, and here it is that you are making an exception only
because, I would hate to say it, but it seems to be personal,
and the subjects which I am raising seem to bring personal pain
to you. And it is not that I mean to have you pointed out as
the person not having the hearing on Enron, it is only that I
just wanted to finish what I thought was a relatively humorous
and----
Mr. Norwood. Mr. Markey, you now have your other 1 minute.
Mr. Walden, you are now recognized for 3 minutes.
Mr. Markey. Mr. Chairman, you have moved from the jocular
to the jugular here, unnecessarily, okay? I was keeping it in a
relatively light vain rather than----
Mr. Norwood. Mr. Walden, you are recognized for 3 minutes.
Mr. Walden. Thank you, Mr. Chairman. I would like to hear
from the witnesses, so in essence of time, so we can get on to
the subject at hand, I will waive the opportunity for an
opening statement and would appreciate time during questioning.
Thank you, Mr. Chairman.
Mr. Norwood. Mr. Sawyer, you are now recognized for 3
minutes.
Mr. Sawyer. Thank you, Mr. Chairman. The struggle that we
are all going through in trying to establish functional, stable
electricity markets is an important one. We can't just sit back
and hope that markets will emerge of their own accord. They
simply won't function without an appropriate regulatory
framework to support them, and these hearings are an important
step toward establishing them.
We are in the middle of an historic transformation of
vertically integrated utilities to a system of nationwide
wholesale competition and retail competition in about half the
States, merchant generators and soon RTOs. This is based on the
straightforward idea that modernizing regulation to move power
from low-cost producers to end consumers in a competitive
market can result in cheaper and more reliable electricity. But
if we are going to fulfill that promise, it seems to me we need
to take steps now to update a transmission system that has not
kept pace with the changes in the way electricity is generated
and regulated.
Wholesale competition has dramatically increased the number
of transactions and the amount of electricity being sent along
a makeshift grid that was designed decades ago to handle a
smaller number of point-to-point transactions. At the same
time, investment in new transmission has declined by an average
of about $117 million a year, each and every year since 1980,
and the decline is actually longer than that. It is, in short,
a system in long, slow atrophy. The result has been
predictable. Congestion, rising electricity prices, the lurking
risk of blackouts as transmission gets caught in bottlenecks.
This is a recognition that in order to create functioning,
competitive markets, we need to address several issues. First,
we need to redress the decline in investment in transmission.
Transmission is no longer the low-cost, country cousin
enterprise that it used to be. We need to bring rates of return
in line with higher risk involved in providing transmission--
provided that transmission assets are controlled independently
to assure open access to generators.
Incentive and performance-based rates, a concern to some,
do not have to be a giveaway to the electric industry; rather
they are a smart investment, properly managed, to create
viable, independent transmission business and to make up for
the shortage in capacity in this country. Innovative rates have
the potential to end up lowering electricity costs by getting
rid of the price distortions caused by transmission
bottlenecks. That is not simply theory; we have experience of
that in the not too distant past.
Second, we have got to encourage demand management programs
through the use of new technologies to expand the capacity of
existing rights-of-way. I also believe there needs to be some
form of backstop Federal authority in siting. Providing for new
lines is an important part of relieving identifiable
bottlenecks, and giving the States time to do that, after which
the FERC would have the authority to approve projects if the
States have not been able to do so, I think is an important
component.
Fourth, and finally, I believe we need to establish a
single mandatory national reliability organization to create
and enforce technical reliability standards that do not
endanger the stability of the grid. Moreover, I would hope that
they would be empowered to create procedures to safeguard the
grid itself against terrorist attacks.
I look forward to hearing from our witnesses. Thank you for
your flexibility in time and yield back whatever may remain.
Mr. Norwood. Thank you very much. And now I would like to
recognize our distinguished chairman of the full Commerce
Committee, Mr. Tauzin.
Chairman Tauzin. Thank you, Mr. Chairman. I want to thank
Chairman Barton for calling this hearing and for moving on this
process. This has been a labor of love for the chairman of this
subcommittee, and I want to encourage you all in this endeavor.
Mr. Barton has worked for a long and hard time crafting an
Electric Supply and Transmission Act, which we are going to
hear comments and suggestions and analysis on today. And I want
to thank him for that effort.
This is an attempt, literally, to comprehensively deal with
the questions of supply and transmission. Regardless of how you
feel about energy markets and whether they work or don't work
or whether deregulation crafted properly can work well and
crafted improperly, as we saw in California, can be an absolute
failure, we know two things: That if there isn't an adequate
supply and if that supply cannot be moved properly, that not
only will the markets fail but any attempts to properly
deregulate are not going to succeed. And so Mr. Barton has set
upon a course that hopefully will take this subcommittee
forward in producing for our committee and for the Congress a
piece of legislation designed to ensure those two elements are
as abundantly available to Americans as possible.
You know, until recently, electricity was sort of taken for
granted. I saw a poll in California where people were asked
where electricity came from, and awfully high percentage said,
``From the wall.'' I also saw a poll that said when people were
asked about the gasoline spikes in this country, they said,
``Isn't it remarkable that the gas companies knew just where to
put those stations right on top of the gas supplies?''
There is a lot of misunderstanding about electric markets
and energy markets in this country, and we all assumed that
when you turned the switch on electricity was going to be
there. We never had to worry about it. Absolutely reliable. And
then we saw the shortages in California and the West, and we
saw what tremendous economic havoc it can cause to a region of
the country that is so important to our Nation. We just can't
have that happen again, and we can't have it happen in other
parts of the country.
In a few weeks, we begin the year 2002. It will have been
10 years, a whole decade, since Congress enacted major energy
legislation, which was the Energy Policy Act of 1992. In that
time we have seen competitive electric markets struggle to take
hold. We have also seen more clearly the vital connection
between our Nation's economy and a clean, affordable, reliable
electric supply. And we have come to recognize what is
necessary to update the electric system for future economic
growth.
We learned, for example, that the four main structures of
the Internet system in this country, when looked at in toto,
consume as much energy as the entire country of Italy
consumes--about 8 percent of our national total. For that
economy to grow, we had better have reliable sources of
electricity and reliable means to deliver them to the parts of
the country that require them.
So it is time for Congress to address the issue again. It
is just that simple. And when we passed comprehensive national
energy policy legislation earlier this year, we made it very
clear we would be moving electricity at a later date. The later
date is here.
As a Nation, we can't rely upon the FERC alone to do this
for us. Well, the simple truth is that on occasion FERC may
think they can solve all these problems, but there is only so
much they can do. We in Congress must give them guidance, and
we must give them the tools that they need to make sure that
American ratepayers are protected and assured of affordable
electric supplies for the next 10-year period and beyond.
FERC can help us determine what to do, and that is why I am
very interested in what our FERC commissioners will say about
this bill today and why I am very pleased that you are here and
ready to help us think through the policy that will help you
and us work through the right answers.
I want to welcome Chairman Wood, and we have had a private
meeting before, and I want to thank you for agreeing to serve
the country in a hot spot. This is a tough one. And for all of
you on the Commission. We all know these are going to be tough
decisions as we move from regulated markets and shortage
markets to more abundant and flexible markets in the
electricity marketplace of America.
I want to also welcome Deputy Energy Secretary Frank Blake
again before our committee. We always appreciate your work with
us, Frank, and----
Mr. Markey. Mr. Chairman? Mr. Chairman? I would like to
make a unanimous consent request, Mr. Chairman, that the
gentleman from Louisiana be allowed to consume as much time as
he desires in his opening statement.
Chairman Tauzin. Actually, if my time is up, I am going to
wrap in one word, and that is I also want to welcome the TVA
chairman Mr. McCullough, to the subcommittee and look forward
to hearing all your testimony. I yield back any time that I may
have improperly consumed.
Mr. Norwood. It has been an observation, generally, that
the chairman of the full committee does get about whatever time
they wish to consumer. Mr. Gordon, you are recognized for 3
minutes.
Mr. Gordon. Thank you, Mr. Chairman. I think we have
already had one interruption today with a vote. I am going to
put my comments in the record so that we can move forward with
these witnesses. I don't want them to caught again.
Mr. Norwood. Thank you, Mr. Gordon. Mr. Whitfield, you are
recognized for 3 minutes.
Mr. Whitfield. Mr. Chairman, I know you will be
disappointed, but I am going to waive my opening statement.
Mr. Norwood. Actually, I am disappointed, Ed, but I accept
that. Mr. Hall, you are recognized for 3 minutes.
Mr. Hall. Mr. Chairman, I guess I am pleased that we are
conducting these hearings. I have mixed emotions about it. I
think the one good thing that can come out of it is to get some
detailed comments on the language of this legislation from the
folks that are in front of us here. All of us know a lot has
happened in the 2 years or so since we marked up 2944 in this
subcommittee. For some, like California, it has been agonizing.
I remember earlier in the year how we dreaded to see August
hit. August was lurking out there, and luckily we had a fairly
mild August. We are learning in Texas, and it is not easy. And
at the Federal level, we have begun to zero in on dealing with
the essential Federal issues.
For the most part, I think they are reflected in this
legislation, and while I don't think for a minute this is a
perfect bill, I think it is a good enough bill to move to the
full committee. I know the concerns of the coops, of public
power folks, of State commissions and a lot of others, and
hopefully we can work out ways to find ways to deal with their
concerns in this legislation.
One, I hope that we can get some stability and certainty to
the electric power industry and customers. I think I have used
about a minute and a half. Would I get in trouble with the
chairman if I wanted to offer to my friend from Boston my last
minute and a half?
Mr. Norwood. Well, after what you said about him in the
last hearing on nuclear energy, I think you ought to, and it is
certainly agreeable with----
Mr. Hall. Well, all right. I really want to do that.
Mr. Norwood. Go ahead.
Mr. Markey. You know, I just want to--I would like to say
that if you looked up the word ``graciousness'' in the
dictionary, Ralph Hall's picture would be next to it. You know
what I mean? This man is just the embodiment of the wonderful
spirit of collegiality that has always characterized this
committee. And I just want to say how honored I am to serve
with you and despite the fact that you come from Texas, there
is a great deal of admiration. If we don't produce anything up
in Massachusetts, we produce a lot of admiration for the
gentleman from Texas, and I----
Mr. Hall. Can I ask you something?
Mr. Markey. I will be glad to yield to the gentleman.
Mr. Hall. Are you about to do me like those two boys did
the Sierra Club? They had their meeting, and they had Santa
Clause there and a little boy on each knee, and one of them
said, told Santa, he said he wanted for Christmas a bird
feeder, and all those Sierra Club people clapped. They love
people that love little birds. And the other one said, ``And a
couple of BB guns.''
You are not going to do me like that, are you?
Mr. Markey. Where am I going now? You know, somebody has to
be Ed McMahon. Anyway, it is just great to have you all here
today.
I see vast amounts of billable hours out here, and we can't
believe what they are saying. They are really talking about
marking up right before we break for Christmas. And it is like
a Godsend, there is like hundreds of memos being faxed to
energy companies all over America putting them on alert that
this committee may be thinking about marking up----
Mr. Norwood. Mr. Hall, do you wish to reclaim your time now
that the time is up?
Mr. Markey. I think we should have the SEC investigate all
these people sitting out here collecting for what they are
doing today. Anyway, thank you, Mr. Chairman.
Mr. Norwood. The Chair would like to now recognize Mr.
Largent for 3 minutes.
Mr. Largent. Thirty minutes?
Mr. Norwood. Three.
Mr. Largent. Oh, 3 minutes. Thank you, Mr. Chairman. I do
want to commend Mr. Barton for holding the hearing today on
tomorrow's--and tomorrow's legislative hearings on the recently
introduced bill, H.R. 3406, the Electric Supply and
Transmission Act of 2001.
As many in this room know, one of my greatest concerns when
it comes to restructuring is how do we ensure an open and
transparent wholesale transmission market? There are
transmission constraints throughout the system. Probably one of
the most notable is the Path 15 that runs the length of
California. The constraints are only magnified by the various
forms of regulation of the grid. I think the word picture that
comes to mind when thinking about the grid's current regulatory
structure is swiss cheese.
I know that FERC commissioners here before us today share
similar concerns, as evidenced by their recent rulemakings and
orders. And with that, Mr. Chairman, I want to yield back my
time and insert my entire statement for the record; look
forward to this hearing.
Mr. Norwood. So ordered. Thank you, sir.
Mr. Norwood. Ms. McCarthy, you are recognized for 3
minutes.
Ms. McCarthy. Mr. Chairman, I am going to put the bulk of
my remarks in the record, if you wouldn't mind, and I thank you
and Ranking Member Boucher for holding this hearing. And I am
very much appreciative of the panel's efforts to educate us on
the need to protect our national security and take a look at
diversity and conservation and reliability and certainty in our
electric energy delivery system. I hope this committee will
take a look at distributed generation of renewable energy
sources that can also be a viable way to supplement our grid
and diversify the Nation's energy supply, because I do think
diversity is the key to the future as we address electric
energy needs and also global climate change.
I would like to yield back the balance of my time, Mr.
Chairman, and just put the extent of my remarks into the
record.
Mr. Norwood. So ordered. Thank you, Ms. McCarthy.
We will postpone just for a second till the chairman gets
here. He wants to do the introductions of the panel. I expect
him here any second.
Mr. Markey. Mr. Chairman, could I be recognized while we
are waiting? I have like 1 more minute to go.
Mr. Barton. Has Mr. Dingell been given an opportunity to
have an opening statement?
Mr. Dingell. Mr. Chairman, I thank you. Mr. Chairman, I
understand that, first of all, my own concerns about the Enron
situation and the wisdom of proceeding with the markup before
we've thoroughly examined the debacle that occurred in that
matter have already been raised by Mr. Markey and Mr. Waxman. I
think it is regrettable that Mr. Markey was not given an
additional minute to conclude his opening statement, because I
think it would have been of value to us in our consideration of
this matter.
I would be happy to yield Mr. Markey a minute of my time,
because I share his concerns about Enron and the future of the
electricity markets. I have a fine statement that I will be
happy to submit for the record in order to enable the committee
to accommodate Mr. Markey and to perhaps get into the question
of some of the rascality and misfortunes that have been
inflicted on so many people by the Enron debacle. While we are
talking about whether or not PUHCA and other Federal regulatory
statutes should be repealed, modified and so forth, given the
misfortunes and failures and, quite frankly, the obvious abuses
and perhaps even criminal misbehavior of the Enron matter.
So I ask unanimous consent for two things, Mr. Chairman:
One, that I be permitted to revise and extend my statement and
include it in the record, and, two, that the balance of my time
be yielded to Mr. Markey.
Mr. Barton. Will the gentleman yield?
Mr. Dingell. I am happy to yield.
Mr. Barton. We have the tradition on this subcommittee of
letting the ranking member of the subcommittee and the full
committee speak, I won't say forever, but I try not to cut our
senior membership off. So the gentleman from Michigan, as the
ranking member of the full committee, really has such time as
he may consume. And if he wishes to yield that to the
distinguished member from Massachusetts, that is fine with me.
I don't want us to get into a tizzy here before we even hear
from our distinguished panel. So I am open.
Mr. Dingell. Mr. Chairman? Mr. Chairman, I knew that your
natural grace and dignity and charm and ability and the very
fine conciliatory character that you have always displayed in
your capacity would encourage you in that direction, and I want
to express to you my thanks.
Mr. Barton. So do you wish to yield to the gentleman from
Massachusetts?
Mr. Dingell. At this time, I would ask unanimous consent I
be permitted----
Mr. Barton. You don't even have to ask unanimous consent;
you just yield to him, and we will put him on his good graces
to be his naturally charming self in an expeditious fashion.
Mr. Markey. Thank you, Mr. Chairman.
Mr. Dingell. As always, Mr. Chairman, you are gracious,
thank you.
Mr. Markey. You are gracious, Mr. Chairman. I thank you.
And I think Mr. Hall is kind of the master of the metaphor of
the parable within which the truth emerges, and I think his
story about the rabbits and the BB gun kind of have a certain
truth.
And I was thinking what would be the analogous metaphor
which I would use, and it came to me, and it's this: It's the
story of the mother with her two children, and they were at the
zoo, and the children went into one of the cages and they saw a
lion laying with a lamb, and they were remarking on how
beautiful it was. And the mother was exclaiming that it was the
biblical fulfillment of the prophecy of the lion and the lamb
laying together peacefully. And along came the zookeeper, and
the mother was just saying how beautiful it was to see the lion
and the lamb lying together. And the zookeeper said, ``Hey,
lady, don't get excited. We've got to put a new lamb in every
day.''
And so this legislation that we debate--and Mr. Dingell and
I and I think most on our side share this view--in my opinion
is heading toward the point where we will just be feeding more
lambs into a system which, unfortunately, is broke and that we
are not going to be providing the powers to the FERC which they
are going to need in order to protect the lambs, the upstarts,
the consumer, the competitors, those that want to have a full
place within this energy electricity structure, and we hope
that this hearing will help to illuminate those deficiencies. I
yield back the balance of my time.
Mr. Barton. Does Mr. Dingell wish to continue his opening
statement?
Mr. Dingell. You're so gracious that I will simply rely on
my authority to insert this in the record.
Mr. Barton. Without objection.
Are there any other members who have not yet had an
opportunity to present an opening statement? Hearing none, the
Chair would ask unanimous consent that all members not present
have the requisite number of days to put their opening
statement in the record.
[Additional statements submitted for the record follows:]
Prepared Statement of Hon. Heather Wilson, a Representative in Congress
from the State of New Mexico
Mr. Chairman, thank you for holding these final hearings on
electricity and the electric power industry and for bringing together
these excellent witnesses on electricity issues.
The issue of electric transmission policy is very important and it
is an integral part of our energy policy. The transmission grid is an
integral part of our energy infrastructure and we need a strong,
reliable, flexible energy grid to move our electricity. The events in
California this past year are evidence that we need to make positive
changes to ensure that there is an adequate supply, sufficient
transmission, improved reliability, reasonable cost of our nations
electricity.
I applaud the Chairman of this Committee for setting out the draft
of this bill months ago and asking for input. There are provisions in
this bill that I like and some that I have some concerns about,
particularly issues impacting states rights and the rural electric
cooperatives. It appears to me that there are a number of provisions in
this bill that FERC has authority to act on--they do not need
additional authority. (Examples. RTO's and incentive rates.)
Electricity markets are regional in character. They are defined by
the three electrically-separate interconnections. The Western
Interconnection includes all or parts of 14 western states and western
Canada and northwest Mexico. Regional markets require regional
solutions.
States have and will continue to be major players in this nation's
electricity policy. I seek cooperative approaches that will encourage
coordinated state and federal action, not federal preemption of states.
One of our challenges is to enable states and FERC to collaborate
on regional electricity issues. FERC has recognized this need in their
November 9 order. We need to amend HR 3406 to build on FERC's
initiative.
The some of the issues that need to be addressed are:
<bullet> We need to amend the reliability provisions to provide states,
when acting on a regional basis, significant say in the design
and enforcement of reliability standards.
<bullet> We need to delete Section 402 that gives FERC the power to
preempt states on the siting and permitting of transmission
facilities. FERC does not have the expertise, resources or
local knowledge to make transmission siting and eminent domain
decisions. This provision is not needed in the West. No western
state has ever denied a permit for an interstate transmission
line. The major challenge to permitting new transmission in the
West is getting rights-of-way across federal lands.
<bullet> We need to rethink the preemptive powers HR 3406 would grant
FERC and the Federal Trade Commission in the areas of
interconnection standards, net metering, demand response and
consumer protection.
<bullet> In the case of interconnection standards, FERC may already
have sufficient authority.
<bullet> In the case of demand response, many programs were put in
place during the Western electricity crisis. We are now getting
valuable information from those measures and states will be
able to incorporate such information into their own measures.
Even within the West, there are important differences among the
states that need to be recognized. In the Northwest, which is
reliant on hydroelectric generation, reducing total energy use
is typically more important that cutting peak load. Uniform
FERC standards would not recognize such differences.
<bullet> In the case of consumer protection, states, particularly those
that have moved to retail competition, largely have in place
consumer protection provisions.
<bullet> We need to ensure that FERC oversight over the rural electric
co-operatives and public power is reasonable. Except for a few
isolated examples, locally owned utilities typically do not
have surplus electricity to sell. These systems do not
represent a significant presence in wholesale markets, and they
have been and will continue to be net purchasers of generation.
<bullet> Section 201 creates FERC-lite for co-op that transmit
electricity. The co-op would set the transmission rate and the
FERC would review it to ensure it satisfies the
``comparability'' standard. The co-op retain control of rate
setting and FERC expands it jurisdiction over co-op
transmission rates.
<bullet> However, Section 702 would negate any notion of FERC-lite
authority and should be removed. It transfers the rate setting
function from the co-op to FERC which destroy Section 201.
I realize that HR 3406 includes provisions for retaining some
state-specific requirements in these areas. However, I am concerned
whenever we empower a federal agency to make determinations of whether
a state program is ``equivalent to'' or ``not inconsistent with'' we
are opening the door to new intrusions by the federal government into
state authorities. While the current members of the FERC or FTC may not
exercise such authorities to second-guess states, there is no assurance
that future members of those bodies.
I am looking forward to hearing from the witnesses as we continue
to work on the state and co-op issues.
Thanks
______
Prepared Statement of Hon. George Radanovich, a Representative in
Congress from the State of California
Mr. Chairman, today's hearing is a very important step towards
securing America's energy future. As this year comes to a close, we are
now well into the Twenty-First century. It is time for us to discard
entrenched views and work to secure ample, reliable and affordable
energy for our future.
We are now decades from the 1930's and the 1970's. It is time for a
change from the paradigms of industry currying favors from political
regulators, or of a cottage industry of subsistence energy. Fair
markets, consumer choice, and responsible entrepreneurship are the path
to a vibrant future.
The California Electricity Crisis of the past year is only
temporarily dormant. The underlying problems remain unresolved. Already
we see signs of a return to power plant construction delays, regulatory
manipulation, and consumer disregard. We are kidding ourselves if we
believe that a return to monopolies, or to the utopian proposals of the
1970's and 80's will provide reliable and affordable power for an
industrious state of 54 million citizens.
There are many positive steps in H.R. 3406 I would like to endorse.
First, electricity markets must be designed to work both in times of
overabundance and of undersupply. Consumers in California have shown
their unwillingness to pay any price for electricity as demonstrated by
their conservation efforts. Title I, Section 103 is a necessary action
to let the demand side, and consumers, be an active part of the market.
Second, we learned in California, that PURPA has unintended and
disastrous consequences on the prices consumers pay for electricity now
and for years to come. PURPA QF contracts represent approximately one-
third of California's outstanding electricity debt. PURPA was written
for a structure of monopoly electricity providers and in its present
form is no longer workable.
Third, PUHCA did nothing to help consumers in California's
Electricity Crisis. Any benefits of this arcane law are not evident to
consumers, although compliance with the law does impose additional
consumer costs. Since any benefits to consumers from this law no longer
exist, let us repeal this law and thus its costs.
There are some aspects of this law, which I would like to see
strengthened. I am concerned that Title I, Section 102 does not mention
hydroelectricity and geothermal sources along with solar, wind and
biomass. Small hydroelectric and geothermal sources are important
renewables that are available in the Sierra Nevada Mountains. The
Department of Energy has estimated that there are 3,000 MW of
incremental hydroelectricity, that can be responsibly developed in
California alone. We must do everything we can to secure the future of
this vital resource for our nation.
I am also concerned that the net-metering section carries risks
similar to those we are trying to correct through the repeal of PURPA
in that it shifts the costs of ``storing'' energy to the load serving
entities. These types of transactions should be limited to the capacity
of a utility to store energy, such as by a pumped hydro project. No
benefit is gained by requiring utilities to build power plants to sit
idle waiting for cloudy or windless days.
Lastly, I believe that the comparison of our transmission system to
our national road system prior to the development of the Interstate
Highway System is an appropriate one. The Federal Energy Regulatory
Commission is clearly struggling with how to put these various local
systems into a unified national framework. This legislation attempts to
be of help to that process by addressing issues such as RTOs, incentive
rates, and eminent domain, but it fails to provide a context for those
measures.
It is time to take a chalk to a clean slate. We can be of
tremendous help to this process by providing a ``bright line'' criteria
to focus the FERC on interstate transmission, and the States on
intrastate distribution. A separation criteria of 100 KV is reasonable
and appropriate. We should also require that the Department of Energy
provide a layout, by a date certain and with state input, for a 21st
Century National Interstate Transmission Highway of 100 KV lines and
above which incorporates all existing transmission lines in this size
range. Only transmission constructed in accordance with such a national
plan should be the beneficiary of incentive rates and eminent domain.
I encourage all of the parties with interests in this legislation
to abandon entrenched positions and to consider this legislation in the
light of the national interest and to best help consumers have secure
and affordable energy for their futures.
______
Prepared Statement of Hon. Chip Pickering, a Representative in Congress
from the State of Mississippi
Mr. Chairman, I would like to take this opportunity to bring to
your attention as well as that of the Commissioners concerns I have
regarding the new interim, generation market power test the Commission
adopted late last month. As I understand it, the Commission abandoned
the so-called ``Hub-and-Spoke'' generation market power screen, which
had been in place for many years and relied upon by market
participants, and adopted a new, definitive generation market power
standard called the ``Supply Margin Assessment'' test.
I have some real concerns about FERC's action. First, I find it
deeply troubling that such an important change in policy would be
ordered by FERC without any process for public comment.
Second, the substance of the policy change itself seems ill-advised
and wrong. I don't pretend to understand all the details or the
differences between the ``Hub-and-Spoke'' and ``Supply Margin
Assessment'' methods. And as you know, this Subcommittee has spent a
lot of time the past few years trying to understand, address, and
respond to legitimate market power concerns. We all want to avoid
another California-style mess. We all share the goal of having
competitive wholesale power markets. Addressing legitimate market power
concerns is an important part of this process. But I must tell you all
that there appear to be very serious problems with the new interim,
generation market power test you have adopted.
For example, we have heard that the new test will discourage new
generation investment and potentially expose other regions of the
country to ``California-like'' dependence on short-term markets and
power purchases. Additionally, we have heard that the new, interim test
may effectively deny most, if not all, of the nation's investor-owned
utilities that still own generation plants market-based rates in their
home states. This not only appears unfair, but also may create a
perverse incentive against longer term investments as utilities and
major merchant plant developers try to avoid being or becoming a
pivotal supplier and flunking the new test in certain areas. This,
combined with the blanket refund obligations you all have proposed, may
actually end up increasing consumer rates, create tremendous regulatory
and financial uncertainty, and lead to an unhealthy reliance on shorter
term and riskier transactions. I thought we had been down this road
before and were hoping to take a better-planned route to competitive
wholesale markets.
We all want to avoid another California debacle. But in view of all
the legitimate problems that have been raised about this interim,
market power test, and since you have already announced that you will
be starting a notice and comment rulemaking proceeding to address and
adopt a longer-term generation market power method--which I encourage--
I would ask that the Commission not implement or enforce in any way
this new interim method until all of its potential effects are better
understood. This can only be done after the Commission receives more
input from all interested parties--including state Commissioners--in a
notice and comment rulemaking proceeding. In my view, reviewing the
rehearing petitions, while important, does not substitute for a full-
blown rulemaking proceeding.
While I understand the Commission delayed full implementation of
the new test on December 20, 2001, I am still concerned about the
thought process leading up to the original order. Why did the
Commission risk disrupting what appear to be efficiently operating
wholesale electricity markets in most parts of the country to implement
a potentially costly and problematic interim test--especially as we
head into the winter heating season? It doesn't appear that the
Commission even considered that in many parts of the country,
electricity prices have been decreasing--in some areas significantly--
as new merchant plants come on line. Simply put, I don't see a crisis
warranting such a dramatic intervention in the market that would
justify such a major departure from long-standing FERC policy.
We all share Chairman Wood's and Commissioner Brownell's view that
the ``long-term success of the market model to address customers' needs
depends upon sufficient infrastructure and balanced market rules.''
However, the new, interim generation market power test appears to be
inconsistent with these important goals. If you all want utilities to
join Regional Transmission Organizations--a goal I share--this approach
seems like an awfully indirect, punitive, and potentially dangerous way
to get there. I would ask you all to take a step back and fully
consider the impact of the new test and hear from all concerned before
it has unintended and bad consequences for consumers and our nation's
electricity markets. I would hope you would consider these concerns in
a notice and comment rulemaking proceeding and not just review the
pending rehearing requests.
Mr. Barton. The Chair now wishes to welcome its
distinguished first panel. We have the distinguished Deputy
Secretary of Energy, Mr. Blake, from the Department of Energy;
we have the four FERC commissioners, including their
distinguished Chairman, Mr. Wood, and we have the chairman of
the Tennessee Valley Authority, Mr. McCullough.
Ladies and gentlemen, your statements are in the record in
their entirety. We are going to start with Deputy Secretary
Blake. Then we will go to Chairman Wood, and I would assume
each of the other commissioners have a statement you wish to
make; is that correct? Okay. And then we will go to Mr.
McCullough.
Welcome, Mr. Blake.
STATEMENTS OF HON. FRANCIS BLAKE, DEPUTY SECRETARY, U.S.
DEPARTMENT OF ENERGY; HON. PAT WOOD III, CHAIRMAN, FEDERAL
ENERGY REGULATORY COMMISSION; HON. LINDA K. BREATHITT,
COMMISSIONER, FEDERAL ENERGY REGULATORY COMMISSION; HON. NORA
MEAD BROWNELL, COMMISSIONER, FEDERAL ENERGY REGULATORY
COMMISSION; HON. WILLIAM L. MASSEY, COMMISSIONER, FEDERAL
ENERGY REGULATORY COMMISSION; AND GLENN L. MCCULLOUGH, JR.,
CHAIRMAN, TENNESSEE VALLEY AUTHORITY
Mr. Blake. Thank you, Mr. Chairman and members of the
committee, and thank you for the opportunity to come before you
today. I will just briefly summarize my testimony.
The administration strongly believes that we need to
continue the work of establishing open, transparent and
competitive electricity wholesale markets. This will benefit
consumers, through increased supply and lower prices, and it
will benefit the reliability and security of our transmission
infrastructure, an infrastructure that is essential to our
economy.
The President's national energy policy calls for
comprehensive electricity legislation. It respects the role of
the States and focuses on the regulation of wholesale power
markets and transmission in interstation commerce. We welcome
this committee's attention to the issues and applaud the
chairman's leadership on this matter.
As outlined in my testimony, we agree with most of the
goals of the proposed legislation, and we look forward to
working with the committee on those areas in the specifics
where we might have some disagreement.
let me close by emphasizing what we view as the importance
of following through on our nation commitment to open and
transparent markets. We need to continue on a clear path
forward to assure that affordable capital is available for the
infrastructure needs of our country. Thank you very much.
[The prepared statement of Hon. Francis Blake follows:]
Prepared Statement of Hon. Francis Blake, Deputy Secretary, United
States Department of Energy
Mr. Chairman and Members of the Subcommittee, I welcome the
opportunity to testify before you today on Chairman Barton's bill, HR
3406, the Electric Supply and Transmission Act.
The Administration believes that electricity legislation--done
right--will make wholesale power markets more competitive, strengthen
the transmission grid, increase electricity supply, lower prices,
protect consumers, and improve reliability. The President's National
Energy Policy calls for comprehensive electricity legislation that
respects the role of the States and focuses on the regulation of
wholesale power markets and transmission in interstate commerce.
When the Federal Power Act was written in 1935 there was virtually
no interstate commerce in electricity, there was no interstate
transmission grid, electricity markets were local, power plants were
built near consumers, and electricity generation was perceived to be a
natural monopoly.
The evolution of the electricity industry today presents a
different picture. The transmission grid is both interstate and
international, electricity markets encompass entire regions, almost all
wholesale electricity sales are in interstate commerce, and the natural
monopoly in generation has long since been disproved. The electricity
industry has been swept by dramatic changes for years, investment in
new transmission and generation has lagged as a result, and legislation
can significantly reduce this uncertainty and strengthen the U.S.
electricity industry. The time has come to modernize federal
electricity laws to recognize these changes.
In order to address these changes in the electricity market, the
President's National Energy Policy recommends several proposals to
encourage modernization of electricity law and foster investment in
both generation and transmission. First, the Department of Energy has
been tasked with conducting an analysis of the nation's transmission
grids in order to determine where we need more transmission and better
interconnectivity and instructs DOE to consider the benefits of a
national grid. A Department of Energy report on these issues is shortly
forthcoming. Second, the Policy encourages FERC to develop a rate
structure that would encourage the construction of additional
transmission. Finally, the Policy instructs DOE to develop legislation
that would provide the federal government with transmission siting
authority to address situations that might arise where failure to act
by a state or local government causes major constraint in an area's
transmission needs. The Department of Energy has been working with both
Congress and States to develop siting authority language that respects
the role of the States as well as regional needs.
The recent electricity crisis in California and the West was a
dramatic demonstration of the problems that exist under the status
quo--problems that Congress can and should address. The time has come
for Congress to reduce the tremendous regulatory uncertainty facing the
electricity industry, and modernize federal electricity laws in order
to make wholesale power markets more competitive, strengthen the
transmission grid, increase electricity supply, lower prices, protect
consumers, and improve reliability. We believe that Chairman Barton's
proposed legislation goes a long way toward accomplishing these goals,
and look forward to working with the Committee on this important bill.
As to the specifics of H.R. 3406:
Title I
<bullet> The Administration agrees with the policy goals of sections
101, 102 and 103.
<bullet> The Administration supports the repeal of PUHCA, as has every
Administration since 1984.
<bullet> The Administration supports prospective repeal of the
mandatory purchase obligation under PURPA and believes the
legislative language should be amended to eliminate the
ownership limits on PURPA qualifying facilities.
<bullet> The Administration supports section 142 because the
Administration believes that NRC antitrust review is redundant
and unnecessary and should be prospectively repealed.
Title II
<bullet> The Administration supports the policy goal of section 201 and
looks forward to working with the Committee to agree on final
specific language.
<bullet> With regard to section 202, the Administration believes RTOs
have great potential to improve competition, secure reliability
and ensure sensible regional coordination. To the degree RTOs
serve those purposes, we support them.
Title III
<bullet> With regard to section 301, the Administration believes this
section is an improvement over the reliability provisions of
legislation approved by the Subcommittee two years ago and
approved by the Senate last year.
Title IV
<bullet> The Administration agrees that FERC transmission-pricing
policies should encourage increased investment in new
transmission. The Administration therefore supports the
legislative proposal in section 401 to direct FERC to develop a
performance-based regulatory framework for transmission
pricing.
<bullet> Section 402 grants FERC limited authority to issue permits to
construct or modify transmission facilities under certain
circumstances. The Administration supports this proposal.
Title V
<bullet> The Administration generally supports the language in Title V
and looks forward to working with the Committee to agree on
final specific language.
Title VI
<bullet> The Administration generally agrees with the consumer
protection provisions in Title VI and looks forward to working
with the Committee to agree on final specific language.
Title VII
<bullet> The Administration opposes section 702, which expands FERC's
refund authority.
The President has asked for comprehensive electricity legislation
which will reduce regulatory uncertainty, make wholesale power markets
more competitive, strengthen America's transmission grid, increase
electricity supply, lower prices, and improve reliability. We believe
that this legislation is a good start on these principles and look
forward to working with Congress to enact them.
At this time I would be happy to answer any questions that the
Committee may have for me.
Mr. Barton. I think that's the shortest administration
statement before my subcommittee in the 3 years I have chaired
it. So I appreciate the support.
We will now go to the Chairman of the FERC, Mr. Pat Wood of
Texas.
STATEMENT OF HON. PAT WOOD III
Mr. Wood. Thank you, Chairman Barton and members. When I
joined the Federal Energy Regulatory Commission earlier this
summer, I did so with a sense of urgency. In the aftermath of
the tortuous experience in the western markets and the impacts
that it had on customer faith in the concept of competition
serving customers well, followed shortly after my ascension to
the chairmanship with the bombing of the World Trade Center and
the Pentagon and the implications upon what we redefined energy
security to mean and now in the aftermath of Enron and the, I
think, unfair association of its unique issues with other
players in the energy market, it is very clear to me from
talking to investors, from talking to customers and everybody
in between that we need to get this industry clarified, and we
need to make sure that the ground rules for investment and for
customers and for new participants are nailed down. So I think
the sense of urgency that I certainly heard from a number of
the committee members this morning is one that I personally
share at the Commission.
It is not a theory that we are talking about; it is real
dollars. With Congress and FERC, back in the mid-1980's, the
deregulation of the other great network energy industry,
natural gas, began. It took about 7 years compared to the 9
years which we are in now, in electricity. But since that
effort was largely wrapped-up in 1992, tens of billions, with a
``b,'' of dollars have stayed in customer pockets because of
the successful one-two punch of introducing competition and
then deregulating, getting government out of the way, a
significant sector of the natural gas industry. I think that is
not theory; that is a very real model that has got a lot of
application to what the committee has before it in the
chairman's package today.
I think that package does a lot of things. While FERC has
moved forward in the areas where we do have authority today, we
certainly think there are a number of areas where our authority
is either not clear or is nonexistent that are very important
to completing the energy infrastructure and competition-
certainty picture that investors and customers need to have
faith that their energy markets are working well on their
behalf.
I think I will list just a few of those. Certainly, the
steps that we are taking, I will be glad to discuss them along
the lines that I believe Chairman Barton laid out in his
statement. But the issues where we have no ability, such as on
the issues of PUHCA, PURPA, demand-side management--the
clarification about the issues there--and the great future of
the electric industry for small-scale distributed generation.
There is a provision there that I think is very important for
setting some clear investment and cost recovery standards for
DG. The importance of open access is not just a voluntary
thing. As the court affirmed yesterday, we have the right to
``lay out'' on a voluntary basis. With that, Chairman Barton's
bill actually says it is something that everybody should do;
that also includes Federal power agencies, which up to now have
not been as directly involved in the efforts to create a
seamless national power grid from coast to coast.
Enforcement of liability standards is important. This bill
addresses that as well, which we cannot do through the current
statute. The backstop of transmission expansions, while I share
the opinions of many that this may be a solution looking for a
problem, it would be nice if this happens in 10-year cycles to
ensure that good transmission concepts do not get forgotten or
overlooked or nixed by a State that may not want to have the
region improved.
And, finally, certainly, the customer protections, which do
not involve my agency, but the market oversight tools that are
strengthened and expanded at the end of the chairman's mark are
very important provisions that I think will enhance the
Commission's ability to oversee these markets. I think we are
doing quite a bit on that effort. I would like to report on
that later, but I think the sense of urgency also applies to
today's schedule, so I will conclude now, Mr. Chairman, and
look forward to any questions from the members.
[The prepared statement of Hon. Pat Wood III follows:]
Prepared Statement of Hon. Pat Wood, III, Chairman, Federal Energy
Regulatory Commission
i. introduction
Mr. Chairman and Members of the Subcommittee: Good afternoon. Thank
you for the opportunity to speak today on the Chairman's proposed
legislation, H.R. 3406, to restructure the electric utility industry to
full, effective wholesale competition. This industry has changed
substantially in the years since Congress enacted the Energy Policy Act
of 1992, moving closer to the Congressional goal of a competitive
wholesale electricity market. However, the transition is not complete.
Infrastructure investment suffers from the uncertainty of this long
transition. Reliability is being tested and customers are being
deprived of the financial savings and other benefits of a competitive
marketplace. It is time to finish the job.
Today, I will describe briefly the significant actions taken by the
Commission in recent months to do just that, and the efforts planned by
the Commission in the future. I will identify those areas in which
legislation could facilitate the Commission's efforts. Finally, I will
discuss other significant aspects of the Chairman's proposed
legislation and suggest certain modifications to the legislation.
My key point today is that successful completion of the industry's
transition requires a balancing of short-term and long-term
considerations. In the short term, we must take steps to ensure that
the transmission grid is operated more efficiently and fairly, and is
expanded when appropriate. We must eliminate unnecessary barriers to
entry of new generation, big or small. We must facilitate the
development of more market-based demand reduction programs. And we must
take steps to ensure that the type of market problems experienced in
California do not recur there or elsewhere by establishing clear, fair,
balanced market rules. Taking these steps in the short term will give
investors the certainty they need to make long-term commitments to new
electrical infrastructure. Over the long term, this commitment to sound
infrastructure and sound market rules ultimately will allow us to
achieve the kind of competitive wholesale markets envisioned by the
Energy Policy Act--with choices dictated by the market, not by
government.
Some argue that the short-term steps envisioned by the Commission
will chill infrastructure investments, not encourage them. I disagree.
People will not invest in generation where they believe transmission
owners will operate the grid unfairly, delay interconnections of new
generation or fail to expand the grid as needed. Similarly, markets
characterized by a pattern of extreme price turmoil and the risk of
further governmental restrictions will not provide the certainty needed
by investors. The short-term steps described below will encourage the
future stability of the markets, reduce or eliminate the risk of
crisis-driven governmental interventions and, thus, give investors the
confidence to commit billions of dollars to building the infrastructure
our nation needs.
ii. regional transmission organizations (rtos)
Electric power markets are regional in nature. For that reason, the
Commission has been promoting the formation and development of a small
number of RTOs. These institutions, once formed, will assure reliable
minute-by-minute grid operations, optimize fair use of the ``electric
highway'' by all users, plan for the future transmission needs of the
region and help long-term supply stay ahead of long-term demand.
Two years ago, the Commission decided to move forward with RTO
formation on a voluntary basis. Although that has been a more tortuous
path than originally intended, it is drawing to a close with utilities
in all regions of the country coalescing around organizations of
appropriate scope, governance and configuration. But if any party
challenges this progress in courts, then Congress should make clear its
intent that these organizations are its preference. This will save the
industry years in the courts, ensure customers get the billions of
dollars of savings that a competitive power market can deliver during
that time, and most importantly, rebuild to secure and reliable levels
a bedrock industry that has suffered inadequate investment in the past
decade.
Recently, the Commission clarified its policies and plans on RTOs.
In an order issued last month, the Commission indicated that it intends
to complete the RTO effort on two parallel tracks. The first track will
be to resolve issues on scope and governance in pending cases; the
second track will be a rulemaking to standardize the market design for
public utilities, to be implemented by RTOs. The Commission has also
begun forming state-federal regional panels as a structured forum for
constructive dialogue with state commissions on RTO development. We
hope to expand these panels in the future to discuss other joint
concerns. The Commission is updating cost-benefit studies on RTOs (with
input on the analysis from a diverse panel of state commissioners) and
will establish in future orders the timelines for continuing RTO
progress in each region. We expect to address the RTO structure in the
large Midwestern region of the country at our December meeting.
In establishing the characteristics and functions of RTOs and the
procedures for obtaining Commission approval of an RTO, the Commission
relies on sections 205 and 206 of the Federal Power Act. These sections
are the Commission's fundamental authority for ensuring that the rates,
terms and conditions of transmission in interstate commerce by public
utilities are just, reasonable and not unduly discriminatory or
preferential. In addition, the Commission has relied on its authority
under section 203 of the Federal Power Act to review proposed transfers
of operational control over jurisdictional transmission facilities.
While some may question the Commission's as-yet-unexercised authority
to require the formation of RTOs, there is no legitimate debate about
the Commission's authority to oversee voluntarily-formed RTOs.
I strongly support the formation of RTOs. RTOs will provide
significant benefits to electric utility customers across our Nation. I
believe the best legislative approach at this time would be for
Congress to adopt a provision permitting the Commission to require RTOs
where it finds such RTOs to be in the public interest. This simple step
would avoid problems that could arise if Congress codifies extensive
and cumbersome procedures for formation of RTOs and detailed standards
for those RTOs; it also would allow the Commission to adapt the RTO
procedures and standards appropriately over time, as circumstances
change.
Section 202 of the Chairman's proposed legislation would codify
more prescriptive procedures. Section 202 would require all
``transmitting utilities'' (a term that includes both investor-owned
utilities and public power/electric power cooperative utilities) to
participate in an RTO. A utility not in a Commission-approved RTO upon
enactment of the bill must submit an application to form or join an
RTO. If the Commission finds the application does not meet the
standards specified in the bill, the Commission, in consultation with
affected State authorities, must propose modifications. The Commission
cannot mandate formation of, or participation in, an RTO except under
these provisions. If an applicant asks, the Commission must hold an
evidentiary hearing on the proposed modifications. Subsequently, the
utility has a right to seek appellate review, during which time the
Commission's order is stayed. If the court finds the Commission's
decision is supported by a preponderance of the evidence, the court
must uphold the Commission's decision. Otherwise, the Commission must
order the utility to participate in its proposed RTO without
modification.
If Congress decides to proceed with the more elaborate process laid
out in Section 202, I have specific concerns about aspects of the
provision. First, I do not support giving a single RTO applicant the
unilateral right to require an ``evidentiary'' (trial-type) hearing
instead of ``paper'' hearings. While evidentiary hearings may be
appropriate in certain cases, most cases can be fairly resolved much
more quickly based on paper submissions and non-trial type procedures.
Further, because the provision requires a ``stay'' of a Commission RTO
order pending court review, and a Commission order likely would address
one application filed on behalf of all the participants in the region,
this provision could allow a single applicant to stall the creation of
an RTO and an effective wholesale market for many years, raising costs
for other applicants and all regional electricity consumers. Formation
of workable wholesale markets will be more likely and swift without
these provisions.
Second, I do not support the requirement for a ``preponderance'' of
the evidence instead of ``substantial'' evidence supporting the
Commission's decisions. The ``substantial evidence'' test has been the
basis for court review under the Federal Power Act since 1935, and I
see no reason why a different standard is now needed for this one
category of cases.
Third, I see no reason for the provision resembling ``baseball-
type'' arbitration, under which the Commission either must prevail in
court or accept without modification the utility's proposal. Judicial
review of Commission decisions sometimes yields a remand to the
Commission for a fuller explanation or more fact-finding, and I see no
reason to preclude that option here. In general, having RTO formation
dependent upon only transmission-owning applicants, rather than all
wholesale market players, leads to a less balanced and robust
marketplace. A successful wholesale market model must have strong
stakeholder participation and oversight at its core.
Section 202 also specifies the standards for RTOs. These standards
are drawn partly from the Commission's Order No. 2000. While it might
be appropriate to codify some general standards (such as the basic
independence requirement), other standards and the details of
implemention are not appropriate to legislate. As market circumstances
and structures change, and as the Commission gains experience with
market behavior, the Commission needs the flexibility to adapt its
rules over time to ensure that markets remain robust and customers'
interests are safeguarded; a rigid, legislative codification of
standards could preclude this flexibility.
If Congress does codify such standards, certain elements of section
202's standards raise other concerns. For example, the bill requires a
proposed RTO to have ``sufficient generation within the RTO's
boundaries to serve the load within such boundaries.'' While I agree
that this is desirable, exceptions may be appropriate in certain
circumstances, and section 202 should allow exceptions deemed
appropriate by the Commission.
The bill allows each public utility in an RTO to file ``original or
amended rates concerning transmission service on such utility's
facilities.'' This is contrary to the Commission's requirement in Order
No. 2000 that the RTO have the exclusive right to make rate filings
related to the rates, terms and conditions of transmission services it
provides to transmission customers in the region. While the Commission
found that transmission owners have the right to file to recover from
the RTO their own revenue requirements, it also found that it would be
contrary to the basic RTO independence requirement if transmission
owners could control the RTO's rate filings.
I note that section 3 of the bill would define a ``market
participant'' as ``any entity that generates, sells, or aggregates
electric power (other than State-ordered transition or default service)
that is transmitted on the transmission system operated by a regional
transmission organization.'' As above, I do not believe Congress should
legislate a definition of ``market participant,'' since such a
definition may need to be changed over time as we gain experience with
market behavior and new types of market institutions and activities
(for instance, it excludes energy service companies that could
aggregate demand and ``negawatts'' and offer price-responsive demand
opportunities in wholesale and retail electric markets). Further, with
respect to the specific definition in section 3, I disagree with the
provision on State-ordered transition or default service. This
provision appears to assume that, unlike other market participants,
utilities providing such services are economically indifferent to the
grid's operation because their profits or growth potential will not
depend on the cost of their power supplies. Depending on the terms
under which they provide this service, however, utilities may have the
same economic incentive as other market participants to benefit from
grid operations that provide them preferential access to low cost
supplies.
If Congress does legislate a definition, a better approach to
defining ``market participant'' is the definition adopted by the
Commission in Order No. 2000, which includes:
(i) Any entity that, either directly or through an affiliate,
sells or brokers electric energy, or provides ancillary
services to the Regional Transmission Organization, unless the
Commission finds that the entity does not have economic or
commercial interests that would be significantly affected by
the Regional Transmission Organization's actions or decisions;
and
(ii) Any other entity that the Commission finds has economic
or commercial interests that would be significantly affected by
the Regional Transmission Organization's actions or decisions.
18 CFR 35.34 (b)(2) (2001). This approach is more flexible than the
bill's assumption that providers of State-ordered transition or default
service always lack economic or commercial interests that would be
significantly affected by the RTO's actions or decisions.
Finally, three other provisions raise concerns. First, the
legislation would require the Commission to accept a cost/benefit
analysis submitted by an applicant to support its proposed scope and
configuration, unless the Commission finds the scope and configuration
does not meet the statutory requirements by a preponderance of the
evidence. Cost-benefit analyses are easily susceptible to manipulation
of assumptions and data to achieve a desired result, so any analysis
should be tested and verified rather than automatically accepted.
Second, the standard for the Commission's findings should be
``substantial evidence,'' not a preponderance. Third, the legislation
would preclude the Commission from requiring any change to the
governance or scope of an RTO finally approved without condition before
the law's enactment. This provision would prevent the Commission from
responding to changed circumstances warranting modifications in the
RTO's governance or scope.
iii. interconnections
The current lack of standardized interconnection agreements and
procedures means that every new generator can be forced to expend time
and money negotiating the terms and conditions of an interconnection
arrangement, before it can have any certainty about its ability to
deliver power to the grid. This uncertainty is a significant barrier to
entry for new generation.
To remedy this problem, on October 25, 2001, the Commission issued
an Advance Notice of Proposed Rulemaking (ANOPR) requesting comments on
a standardized generator interconnection agreement and procedures. The
ANOPR strongly encouraged interested parties to pursue consensus on the
issues and presented a model that was used successfully in Texas as a
strawman to facilitate the process. Parties must file this Friday a
document describing the consensus views and any remaining
disagreements; any additional comments are due by December 21, 2001. I
understand that industry is reaching consensus on many issues in the
ANOPR process but that they may request a brief extension of time to
complete their negotiations. I assure you that I will be receptive to a
brief extension if it is evident that progress is being acheived toward
a consensual resolution of these issues.
The Commission expects to use the outcome of the ANOPR as the
starting point for a rulemaking to standardize interconnection
protocols. This rulemaking will clarify and simplify the procedures for
interconnecting new generation, thus promoting competition and
benefitting customers.
The Commission has held that interconnection is a component of
transmission service. Thus, the Commission's authority to standardize
interconnection protocols derives from sections 205 and 206 of the
Federal Power Act, under which the Commission oversees the rates, terms
and conditions of jurisdictional transmission service.
Section 101 of the Chairman's proposed legislation establishes
requirements for interconnections with distribution or transmission
facilities. Section 101 addresses the generator's right to interconnect
and its duty to pay interconnection costs, the availability of backup
power and the rates, terms and conditions for such power. The
Commission is required to promulgate the technical standards for
interconnections. The Commission is also required to establish the
process and procedures for interconnection with transmission
facilities. A transmitting utility or regional transmission
organization is exempted from the Commission-established process and
procedures upon showing that ``substantially comparable interconnection
procedures and agreements have previously been filed with and approved
by the Commission for interconnection with that entity.'' But this
exemption provision would nullify the benefits of standardization by
forcing the Commission and utilities to litigate over which
``substantially comparable'' non-standard provisions are acceptable and
exempt from the standard, and keep non-standard agreements in place for
years.
As stated above, standardization of rules and procedures for
interconnecting all new generation and expansions of existing
generation is a good policy, both for traditional power plants and for
small-scale distributed generation. This is a high priority goal for
the Commission. Standardization will help minimize the costs and
barriers to entry for new and expanded generation, which is critical to
a robust competitive marketplace and the realization of lower
electricity costs for end users.
As written, Section 101 may be overly prescriptive and impede the
Commission's ability to adapt its approach as the industry changes over
time. A more general approach may be preferable. If the current
approach is retained, I suggest another change in Section 101,
pertaining to the right to backup power for generators interconnecting
with distribution facilities unless the local distribution utility
allows open access to its facilities. In this context, open access is
defined as access ``that is not unduly discriminatory or
preferential.'' However, the Commission found in establishing wholesale
open access to public utilities' transmission facilities that the lack
of a published tariff of rates, terms and conditions was a significant
obstacle to service. The Commission required public utilities to
provide open access transmission service by tariff. Accordingly, I
believe a local distribution utility must offer open access service by
tariff before it can be relieved of its duty to provide backup power.
iv. test for generation market power
Since beginning to grant market-based rates (rate deregulation) to
public utilities in the 1980s, the Commission primarily focused on the
applicant and employed a ``hub-and-spoke'' analysis to determine
whether an individual entity and its affiliates have generation market
power. In a hub-and-spoke analysis the applicant computes its market
share of generation in a particular market. While the Commission did
not use a ``bright line'' test, it looked to a benchmark for generation
market power of whether a seller had a market share of 20 percent or
less in each market.
In public deliberations shortly after I joined the Commission this
summer, which were informed in part by our experiences in California,
my colleagues and I questioned the usefulness of the hub-and-spoke test
as a tool to identify the potential for the exercise of harmful market
power. After reviewing the issue over the summer, the Commission
instructed our staff at an Open Meeting on September 26th to refine the
hub-and-spoke test on an interim basis for future applications and for
current certificate holders' three-year updates, while contemplating a
rulemaking to address the issue on a more permanent basis.
The revised test, the Supply Margin Assessment (SMA), improves upon
the hub-and-spoke in two critical ways. First, unlike the hub-and-
spoke, the SMA excludes from the analysis of the relevant market those
sellers who are physically precluded from participating in that market
by transmission constraints. Second, instead of deriving an overall
market share, the SMA determines whether any part of a seller's
capacity is ``pivotal,'' i.e., must be used to meet the market's peak
demand. For example, if peak demand in a market is 100 megawatts, total
capacity in the market (including the applicant's) is 120 megawatts and
the applicant owns 60 of the 120 megawatts, the seller's capacity is
pivotal because at least 40 megawatts of the seller's capacity is
needed to meet peak demand. By contrast, a seller with only 15
megawatts would not be pivotal because peak demand in the market could
be met fully by other suppliers.
A company that fails the SMA screen is subject to mitigation to
ensure that the company does not exercise market power by withholding
its capacity from the market. Under this mitigation, the company must
offer for sale, a day in advance, any short-term capacity which is not
already committed for sale or use by the company. The price for any
such sales is based on a ``split-the-savings'' approach which divides
the economic benefits of the transaction equally between the seller and
buyer. This test is administratively preferable to the more intensive
cost-of-service based calculation traditionally used, for example, to
set retail rates in regulated states. The company must also post offers
to sell long-term energy products (in addition to the daily products
noted above).
This mitigation is carefully tailored to apply only to the extent
necessary. For example, mitigation applies only in the specific market
where the utility has market power, and the utility (and its
affiliates) are still allowed to sell at market-based rates in any
areas where they do not possess market power. The mitigation applies
only to capacity that is not committed a day in advance (``spot''
sales), and does not affect a utility's authorization to sell its
capacity under long-term contracts. Finally, the SMA does not apply to
sales in an RTO or an Independent System Operator (ISO) with
Commission-approved market monitoring and mitigation.
The Commission soon will initiate a generic proceeding to consider
long-term changes to its analysis for generation market power. In the
meantime, the SMA and its carefully-crafted mitigation are a
substantial improvement on the prior approach, while continuing to
allow sellers to compete freely in markets where they lack generation
market power. I would note that the interim SMA market power screen is
subject to rehearing, and the Commission will consider carefully any
requests for rehearing.
Apart from these efforts, the Commission recently proposed a new
condition on its authorization of market-based rates for electricity
producers. Under this proposal, a seller would be subject to refunds or
other appropriate remedies if it engages in anti-competitive behavior
or exercises market power. This condition would be triggered only when
the seller engages in inappropriate conduct, not when market problems
are caused by poor market rules or other generic dysfunctions. The
Commission adopted a similar condition to help address the market
problems in California and the Western United States, and is now
proposing to extend the condition to public utilities elsewhere. The
Commission is receiving public comments on this proposal and will fully
consider the comments before making a final decision.
v. reliability
Section 301 of the Chairman's proposed legislation provides for
Commission certification of an electric reliability organization (ERO)
to develop and enforce reliability standards applicable to all users,
owners and operators of the bulk power system. The bill specifies the
criteria for the ERO. The ERO would be required to file its proposed
reliability standards with the Commission, and the Commission would
need to act on those proposals within specified time periods. The ERO
and the Commission would have to rebuttably presume that a proposal
from a regional entity for a reliability standard applicable on an
interconnection-wide basis is just, reasonable, not unduly
discriminatory or preferential and in the public interest. The ERO
would have authority to enforce its standards, subject to Commission
review.
Section 301's approach to reliability is a step in the right
direction. Although I have not seen problems with the current voluntary
process, parties inform me that federal legislation is needed to ensure
the enforceability of the reliability standards. While some technical
clarifications or modifications to the proposed language might be
useful, as a general matter section 301 takes a reasonable and
efficient approach to this problem.
vi. transmission jurisdiction
A. Open Access
``Separate but equal'' transmission is inherently unequal.
Transmission of electric power is interstate commerce and should be
fairly recognized as such. And all users of transmission service should
be treated equally, provided they pay for it. One need look no further
than Chairman Barton's home state to observe the positive impact that
having clear rules from a single regulator has had on needed investment
and expansion of the grid.
Section 201 of the Chairman's proposed legislation would allow the
Commission to require all public utilities and transmitting utilities
to offer open access transmission services. In recent years, open
access transmission services by public utilities have increased
competition in wholesale power markets significantly. Extending this
requirement to the large portion of the grid owned or operated by
transmitting utilities that are not public utilities will further
increase competition. I believe this can be done in a manner that
respects the historic independence of certain public power utilities
while ensuring that a consistent approach is applied to all users of
the interstate grid, to further wholesale electric competition and
benefit all electricity customers.
I support Section 201 but suggest minor changes. First, for reasons
explained above, section 201 should be clarified to provide that the
Commission can require open access transmission services by tariff, and
can require such tariffs to be on file with the Commission so that
potential transmission customers have available for public inspection,
in a centralized place (the Commission), all open access services being
offered and the rates, terms and conditions of such services.
Second, section 201 would require the Commission to ensure that the
rates charged for open access services by a transmitting utility other
than a public utility are comparable to the rates the utility charges
itself. The Commission would be given authority to review and remand
the rates for revision where necessary, but would not have the
authority to modify the rates directly. The Commission could be given
the authority to modify the rates where necessary, to prevent any delay
in the establishment of rates in compliance with section 201.
B. Stranded Costs
Section 201 also would require the Commission to authorize recovery
of wholesale stranded costs caused by a ``municipalization,'' and
specifies precisely how the Commission should determine the
``reasonable expectation period'' for purposes of calculating the
stranded costs. I am concerned about the latter provision, and believe
that the calculation of stranded costs should be left to the
Commission's discretion based on all relevant circumstances in a
particular case. The Federal Power Act does not prescribe how to
calculate stranded costs except in requiring that rates must be just,
reasonable and not unduly discriminatory or preferential. This
statutory approach should not be changed.
C. Transmission Siting
Section 402 would allow the Commission to authorize construction or
modification of transmission facilities if it makes each of three
findings: (1) the relevant State lacks authority to approve the action,
has withheld or delayed approval for more than a year or has
conditioned its approval such that the action is economically
infeasible; (2) the facilities being authorized will be used for
transmission of electric energy in interstate commerce; and (3) the
action is consistent with the public interest, as proposed or
conditioned.
A FERC backstop such as this may well be the best decision, but
there are others that could work. Since these siting issues are largely
regional, the RTO could be the backstop instead of FERC. This keeps the
relevant determinations of need, environmental issues and landowner
concerns closer to the affected citizens. Or, it may be enough to
simply require states to make final decisions (pro or con) within a
fixed time-frame. Some states specifically require that a transmission
line approval by that state be shown to provide direct benefits to the
citizens of that state. This sort of provision may make it difficult
for a state to approve routing of a line that has significant regional
benefits but not specific local benefits.
vii. other issues
A. Investigations, Refunds and Penalties
Section 702 of the proposed bill expands section 206 of the Federal
Power Act to allow the Commission to order refunds not only by public
utilities but also by other entities that provide transmission service
or power to a public utility. Section 703 expands the criminal
penalties authorized under section 316 of the Federal Power Act.
Section 703 also broadens section 316A of the Federal Power Act so that
civil penalties are authorized for violations of any provision under
Part II of the Federal Power Act, instead of only sections 211, 212,
213 or 214.
These provisions are helpful changes to the Federal Power Act. The
recent problems in wholesale markets in California and the Western
United States demonstrated the need for such changes.
B. PUHCA
Sections 111-125 of the Chairman's proposed legislation repeal the
Public Utility Holding Company Act of 1935 (PUHCA) and replace it with
increased access by the Commission and state regulators to certain
books and records. This is appropriate. PUHCA was enacted primarily to
undo harms caused by certain holding company structures that no longer
exist. In the 65 years since PUHCA was enacted, utility regulation has
increased substantially under the Federal Power Act (including
oversight of corporate restructurings such as electric utility mergers,
discussed below), federal securities laws and state laws, all of which
ensure that customers are fully protected.
C. PURPA
Sections 131-134 of the Chairman's proposed legislation repeal
prospectively the mandatory purchase obligation in the Public Utility
Regulatory Policies Act of 1978 (PURPA). As indicated in the bill's
proposed findings, PURPA's ``forced sale'' requirement is no longer
necessary to promote competition, in light of the availability of open
access transmission, and more often serves to distort competitive
outcomes. Thus, I agree that Congress should repeal PURPA but
``grandfather'' existing PURPA contracts. To provide a smoother
transition for parties which made investments under the expectations
created by PURPA, it may be appropriate to limit its repeal to those
states where all generation entities have the ability to sell their
output to the widest possible range of customers.
D. Mergers
Section 141 would repeal section 203 of the Federal Power Act, the
authority under which the Commission reviews proposed mergers and other
dispositions of public utility facilities. This provision may not be in
the public interest. The Commission deals with the electric utility
industry on a daily basis and much more closely than the federal
antitrust agencies. Thus, the Commission is better able to identify and
remedy any harmful effects of mergers and other dispositions. Our
efforts do not duplicate those actually being performed today by other
merger reviewing agencies. The Commission has used its section 203
authority as intended by Congress to ensure that mergers and other
dispositions are consistent with the public interest. Also, in recent
years, the Commission has acted quickly on merger applications, almost
always within 90 days after receiving public comments on a proposed
merger.
In addition, it may be a good idea to clarify the Commission's
authority to review mergers involving only generation facilities and
mergers of holding companies with electric utility subsidiaries. The
increasing amount of competition in power generation markets makes this
more than an academic question. But, to be fair, there are other, less
blunt tools that the Commission has to address generation market power.
viii. conclusion
The electric utility industry has come far since the enactment of
the 1992 Energy Policy Act. The Commission is moving ahead aggressively
to achieve that legislation's vision of fully competitive wholesale
markets. Additional legislation will help us get there faster. I
support the Commission-related provisions of Chairman Barton's proposed
legislation, with the modifications described above. This legislation
will help all electric customers realize greater benefits from
wholesale competition.
Mr. Barton. Thank you, Chairman.
We now go to Commissioner Breathitt from the great State of
Kentucky.
STATEMENT OF HON. LINDA K. BREATHITT
Ms. Breathitt. Thank you, Mr. Chairman and members of the
subcommittee. I appreciate the opportunity to appear before you
today to discuss your energy restructuring legislation. I
believe it is important for Congress and FERC to work in tandem
to accomplish the critical goal of ensuring the development of
a competitive wholesale electric power market that is fair and
efficient and that benefits consumers.
While I believe FERC has made great strides in the effort
to increase wholesale competition over the past several years,
I welcome congressional guidance through legislation that
assists in articulating and clarifying the steps that must be
taken toward this end.
I am supportive of the policies underlying H.R. 3406, and I
am pleased to see that it is consistent with many of the
comments I have made in past hearings before this subcommittee.
As I set forth in more detail in my written testimony, I
welcome congressional clarification of FERC's authority with
respect to RTOs and expansion of our authority in the areas of
civil and criminal penalties for violations of the Federal
Power Act. I support the repeal of PURPA and PUHCA, and I agree
that interconnection rules should be standardized. I also
believe the bill's approach to transmission siting represents a
great improvement over the current jurisdictional scheme.
I would like to take this opportunity to highlight an
aspect of H.R. 3406 that I cannot support, and that is repeal
of Section 203 of the Federal Power Act, which embodies the
Commission's merger review authority. I don't agree with the
basic underlying premise that FERC's merger review is
redundant. All merger reviews are not created equal. Unlike any
other agency with jurisdiction over mergers, our agency uses a
different test, and that is the public interest standard. This
is significantly different and distinct from the ``no harm to
competition'' review employed by other agencies, and I urge
this subcommittee to continue allowing FERC to protect the
public in this regard.
With this exception, while my testimony highlights various
details on which I suggest minor changes, I believe that your
work on this document ultimately will serve to aid the
Commission and the public as we move ahead with our agenda. I
didn't address the other topics that you said may likely come
up today. I stuck to your legislation, and I will happy to get
to those others if the time comes.
[The prepared statement of Hon. Linda K. Breathitt
follows:]
Prepared Statement of Hon. Linda K. Breathitt, Commissioner, Federal
Energy Regulatory Commission
Mr. Chairman and Members of the Subcommittee: I appreciate the
opportunity to appear before you today to discuss the Subcommittee's
proposed energy restructuring legislation. I believe it is important
for Congress and the Federal Energy Regulatory Commission (FERC) to
work in tandem to accomplish the critical goal of ensuring the
development of a competitive wholesale electric power market that is
fair and efficient and benefits consumers. While I believe FERC has
made great strides in the effort to increase wholesale competition over
the past several years, I welcome Congressional guidance through
legislation that assists in articulating and clarifying the steps that
must be taken toward this end.
My testimony today will comment on H.R. 3406 and highlight specific
aspects of the proposed legislation that I consider to be especially
important from the perspective of a federal energy regulator. As a
general matter, I am very supportive of H.R. 3406. I have testified
before this Subcommittee many times on restructuring issues, and I am
pleased that this proposed legislation is largely consistent with many
of the views I have expressed. I am also pleased that the bill would
have the effect of promoting small-scale renewable generation. As I
will discuss in greater detail below, however, there is one important
exception: I do not support the proposed repeal of section 203 of the
Federal Power Act (FPA).
Title I of the proposed legislation deals with electric supply.
Among the provisions of Title I, I would like to address my comments to
interconnection, the Public Utility Holding Act of 1935 (PUHCA), the
Public Utility Regulatory Policies Act of 1978 (PURPA), and merger
review. I have previously testified before this subcommittee that
interconnection rules should be clarified and standardized in order to
ensure that new sources of generation are able to interconnect to the
transmission system. The Commission accelerated this process of
standardization in October with the issuance of an Advanced Notice of
Proposed Rulemaking (ANOPR) addressing procedures and protocols for
interconnection. The ANOPR encourages parties to reach consensus on non
cost-related issues of transmission interconnection and uses as a
``strawman'' the ERCOT model as supplemented by current Commission
interconnection policy. Reports of the progress being made are
positive, and I support issuance of a NOPR as soon as possible. The
Commission's intention is to instruct parties to take up the issues of
cost responsibility for transmission interconnections in the second
phase of the transmission interconnection rulemaking.
Section 101 of the proposed legislation would decide the major
issue of cost responsibility by assigning system upgrade costs to the
generator. I believe these pricing decisions need to be made carefully
and with consideration of the multiple factors at issue. Although this
legislative process certainly is one forum for deciding this important
issue, the cost responsibility aspect might also benefit from comments
and a consensus process such as the Commission plans for the second
phase of our rulemaking. I expect the second phase, dealing with cost
issues, will be more difficult and contentious; many states already are
expressing their views.
Section 101 of the proposed legislation also requires the
Commission to promulgate the technical standards for generators
interconnecting with distribution facilities. Although it is no modest
undertaking to establish national standards for distribution
interconnections, I do believe reducing obstacles for small-scale
distributed generation can produce good results. Distributed generation
can increase options for consumers and would provide added reliability
to the grid. Standards for all players, as well as the net metering
provisions included in this legislation, may encourage the growth of
this fledgling movement toward decentralization of the electric grid.
Of course, we should expect the states to insist on a process that
allows their opinions and concerns to be heard since this section
shifts jurisdiction to the federal level.
The proposed legislation repeals PUHCA and replaces it with
increased access by the Commission and state regulators to certain
books and records. I support this legislation. The proposed legislation
also repeals prospectively the PURPA mandatory purchase obligation. I
support the repeal of the mandatory purchase requirement in Section 210
of PURPA. I also support proposed section 133 of the bill, which would
``grandfather'' existing PURPA contracts.
I would like to highlight Subtitle D of Title I, which would
eliminate FERC's merger review authority now embodied in section 203 of
the FPA. This is the single aspect of this proposed legislation that I
cannot support. The title itself of Subtitle D, ``Redundant Review of
Certain Matters,'' reveals my basic concern in this regard: I do not
agree that FERC merger review is redundant. All merger reviews are not
created equal. FERC's FPA ``public interest'' standard is different
from the ``no harm to competition'' antitrust standard of the Sherman
Act and the Clayton Act. The relevant information required for the type
of review conducted by FERC is not the same information required by
another agency conducting antitrust review of the same merger. While
the same merger may be reviewed by various agencies, the analyses are
not parallel; standards and requirements vary from agency to agency.
I believe it is important for FERC to continue its public interest-
focused merger analysis, which looks at a merger's effects on rates,
regulation, and competition. FERC, in its regulatory role, is
particularly attuned to the issues that may arise as a result of
competition and industry consolidation, including technical issues and
new kinds of mergers that may lead to the blurring of traditional
utility services with other business lines. By acknowledging these
issues, I believe that FERC has developed a dynamic and flexible
process--one that is required in today's market. I urge the
Subcommittee to continue to allow FERC to retain the authority to
protect the public in this respect.
Title II of the proposed legislation deals with transmission
operation. Section 201 of the proposed legislation would allow the
Commission to require all public utilities and transmitting utilities
to offer open access transmission services, extending the requirement
for open access to transmitting utilities that are not public
utilities. As I have testified on other occasions, I believe it is
important to have equal and open access to all transmission at
nondiscriminatory rates and comparable terms and conditions. At the
same time, the public power sector has expressed concerns unique to its
status, and these concerns should be addressed with respect to sections
201 and 202. Chairman Wood's testimony requests a change to the
legislation to allow all tariffs for open access transmission service
be on file with the Commission. I share the Chairman's concerns on
these issues and support his testimony in this regard.
Section 202 addresses Regional Transmission Organizations (RTOs).
There is no more important effort underway at FERC today than the
formation of RTOs. Since the Commission began promoting RTOs as a means
to remove barriers and impediments present in wholesale electricity
markets, I have been fully committed to the goal of RTO formation.
While there is room for disagreement on the best path to attain the
goal of fully functioning RTOs, FERC is very actively pursuing the
completion of the development of RTOs with clear responsibilities,
independence, and sufficient scope.
When the Commission issued Order No. 2000 in December 1999, we
decided to adopt an open and collaborative process that relied on
voluntary regional participation. Since that time, I have strongly
urged that FERC not depart from the basic philosophies embodied in
Order No. 2000, particularly in the absence of a formal decision to do
so, informed by the views of interested parties and state commissions.
In my view, sufficient question remains over FERC's authority to
mandate the formation of, or participation in, RTOs, such that any
moves on our part toward a mandate will be counterproductive to FERC's
ultimate goals. My concern is that this lack of clarity could lead the
industry and the Commission to divert resources away from the important
task of RTO implementation, and instead toward expensive and time-
consuming litigation over FERC's authority. I therefore support
Congressional clarification of FERC's authority with respect to RTOs.
Proposed section 202 mandates that all transmission utilities--both
investor-owned utilities and public power/electric power cooperative
utilities--participate in an RTO. To the extent this direction will
eliminate any existing uncertainty regarding FERC's authority and
permit RTO formation to proceed expeditiously, I support it. Proposed
section 202 also requires FERC to establish uniform market rules,
including the establishment and enforcement of ``seams'' agreements.
This direction is consistent with a generic rulemaking proceeding that
FERC already has announced.
While the RTO standards embodied in the proposed legislation are,
for the most part, consistent with those established in Order No. 2000,
I believe it is possible that RTO procedures and standards may need to
be adapted over time. In his testimony, Chairman Wood suggests that
instead of codifying detailed standards and procedures for
implementation of RTOs, additional flexibility for FERC to oversee an
adaptive process might be warranted. Chairman Wood advocates a
legislative approach that would have Congress adopt a simple provision
permitting the Commission to require RTOs where it finds such RTOs to
be in the public interest. I believe this approach would serve to
remove existing uncertainties, while preserving FERC's ability to
tailor its RTO program to an increasingly dynamic marketplace.
If Congress decides to take the approach of codifying RTO standards
and procedures, Chairman Wood's testimony outlines several concerns
regarding (1) the right of a single RTO applicant for an evidentiary
hearing; (2) the requirement for ``preponderance'' of the evidence
supporting FERC decisions; (3) the judicial review provision; (4) the
requirement for a proposed RTO to have ``sufficient generation within
the RTO's boundaries to serve the load within such boundaries;'' (5)
the right of each pubic utility in an RTO to make rate filings; (6) the
definition of ``market participant;'' and (7) the preclusion of FERC
modification to the governance and scope of an RTO approved before the
law's enactment. I share the Chairman's concerns on these issues and
support his testimony in this regard.
Title III of the proposed legislation provides for Commission
certification of one electric reliability organization to develop and
enforce reliability standards for the bulk-power system. I agree that
the voluntary reliability system, which has been in place for over
three decades, should be replaced with one in which a self-regulated
independent reliability organization, with oversight by the Commission,
establishes and enforces mandatory reliability standards. I especially
support the provisions of section 216(e), which provides for sanctions
and penalties for failure to comply with reliability rules. In my view,
such a change in the manner in which the reliability of the
interconnected grid is overseen and managed is required in order to
ensure a competitive bulk power market.
The provisions of Title IV direct the Commission to conduct a
rulemaking to establish incentive and performance-based rate policies
for expansion of transmission networks to promote expansion of the
transmission grid to support the growth of competitive markets. Section
401 states that such policies should encourage the deployment of new
transmission technologies to increase capacity of existing networks and
to reduce line losses; promote environmentally sound transmission
design techniques; and promote the efficient use of transmission
systems on a real-time basis. I believe that the Commission's
transmission rate policies should encourage and promote such policy
objectives. I would point out that I believe these goals may be
achieved through rate policies other than incentive or performance-
based rates. In my view, policies such as allowing a reasonable return
on equity or accelerated depreciation for new technologies would act to
encourage such investment.
Section 402 would give the Commission a ``backstop'' role in
transmission siting. I believe that this is certainly an improvement
over the present jurisdictional scheme, in which the Commission has no
role in the permitting and siting of new transmission facilities.
However, as I have testified previously, my primary concern with a
backstop role for the Commission is that such an approach could result
in costly and inefficient duplication of processes, records, and
efforts by the various decisional authorities involved in transmission
siting.
My preference would be for FERC to be granted federal eminent
domain authority similar to the authority the Commission exercises with
respect to the siting of interstate natural gas pipelines under the
Natural Gas Act. The Commission could develop procedures to ensure
cooperation with the states and provide for regional participation. I
believe that this more centralized approach is preferable from an
efficiency standpoint, and will result in less bureaucracy and more
timely decisions for transmission providers and consumers. I am not
advocating that the Commission should have siting authority for
electric distribution lines or power plants. I believe that state
governments are best positioned to make those determinations.
Finally, I would like to acknowledge the provisions of Title VII of
the proposed legislation. These provisions strengthen the Commission's
authority to assess civil and criminal penalties for violations of the
FPA and increase the level of such penalties. I have advocated such
changes and believe they will greatly aid the Commission in fulfilling
its regulatory responsibilities.
In conclusion, I again thank the Subcommittee for this opportunity
to comment upon the Subcommittee's proposed legislation. As I have
testified in previous hearings before this Subcommittee, the Commission
must have sufficient authority to advance its goals of achieving fair,
open and competitive bulk power markets. I believe that this
legislation, with the modifications I have suggested, would clarify our
authority and greatly assist the Commission in realizing the benefits
of wholesale competition.
Mr. Barton. Thank you.
We now welcome our new Commissioner, Commissioner Nora
Brownell from the great State of Pennsylvania, from Harrisburg
to Washington. I think this is your first time to testify
before this subcommittee. Is that correct?
STATEMENT OF HON. NORA MEAD BROWNELL
Ms. Brownell. Actually, it is my second as a Commissioner
and then a few times as a State commissioner, but I am glad to
be back.
Mr. Barton. We are glad to have you. Your statement is in
the record, and we will ask you to elaborate on it for 6
minutes.
Ms. Brownell. And perhaps the next time we come back it
will be to celebrate the passage of a comprehensive energy
bill.
I am going to be quick, because I know that the committee
has a lot of questions, and there are a lot of complex issues
to discuss. But I would note that events of the past few
months--September 11, the meltdown of Enron, the confusion of
the consumer market--have caused us all to evaluate what we do
and how we do it. But I believe we are at a critical juncture
in the development of energy markets that are needed to support
the continued growth of a digital economy. The issues are
complex, the answers are not easy, but they are issues that
have a long-term impact on our country.
We can succumb to inertia and the fear of change, and we
can leave the American public saddled with an inadequate,
inefficient electric system or we can complete the
transformation of that industry into the economically
competitive, reliable, technologically vibrant marketplace that
this Nation's consumers deserve. I believe that comprehensive
energy legislation and the work that we are doing at FERC can
provide the certainty and reliability that all stakeholders
need, that consumers need to have confidence in the system,
that investors need to invest in the system and that new
technology providers need to introduce what I think is a
vibrant new future that we have not even seen yet.
To accomplish this, I think we need large Regional
Transmission Organizations. I think we need to ensure there is
sufficient infrastructure, and we need to guarantee there are
equitable, well-understood business rules that reflect the
realities of a restructured market. There is much in this bill
that I support and have articulated that in my statement, and I
really applaud you for your vision and the comprehensive nature
of this bill. I do have concerns over some of the limitations
that this might put on FERC in establishing RTOs and the rules
under which they function, and I do have some concerns about
our merger authority. But I do believe that we can work
together with this agency and the other agencies represented
here to get the answers that we need and to have this train
finally arrive at the station since it left so long ago.
[The prepared statement of Hon. Nora Mead Brownell
follows:]
Prepared Statement of Nora Mead Brownell, Commissioner, Federal Energy
Regulatory Commission
i. introduction
Mr. Chairman and Members of the Subcommittee: Thank you for the
opportunity to share my thoughts on H.R. 3406 as well as the
Commission's recent actions concerning wholesale electricity markets.
We are at a critical juncture in the development of energy markets to
support the growth of a digital economy. We can succumb to inertia and
fear of change, and leave the American public saddled with an
inadequate, inefficient electric system. Or, we can complete the
transformation of that industry into the economically competitive,
technologically vibrant marketplace that this nation's consumers
deserve. I, for one, am committed to the latter course of action.
Passage of a comprehensive energy bill will certainly settle the
many concerns created by the lack of a long-term energy policy for our
country. I also believe the resolution of the issues related to the
restructuring of the electricity markets will, in fact, act as an
economic stimulus and unleash capital for the development of
infrastructure and new technologies. I also believe that we at FERC
must lay out a clear strategy for completing the transformation of
electricity markets. Not only is investment constrained, but business
plans are hampered by uncertainty. I am convinced that the prerequisite
to success is creation of a clear and cogent course of action that will
bring certainty and stability for all of the stakeholders by: (1)
establishing large Regional Transmission Organizations (RTOs); (2)
ensuring there is sufficient infrastructure; and (3) ensuring there are
equitable, well understood business rules that reflect the realities of
a restructured marketplace.
There are many provisions in H.R. 3406 that I support as consistent
with this course of action, including the call for standardization of
interconnection procedures, the establishment of minimum federal net
metering standards, the repeal of the Public Utility Holding Company
Act (PUHCA) and the Public Utility Regulatory Policies Act (PURPA), the
increase in enforcement tools, and the grant of backstop transmission
siting authority to the Commission as well as the authority to require
all transmitting utilities to offer open access transmission service. I
commend the continued leadership and hard work of the members of the
Subcommittee. I would, however, suggest that Section 202, concerning
the formation of RTOs, and Section 141, repealing Commission review of
mergers, be amended.
ii. section 202--rto formation
A. RTO formation has been delayed at the expense of electricity
customers
Large, independent RTOs can improve grid reliability by
facilitating transmission planning across a multi-state region, create
better pricing mechanisms such as eliminating ``pancaking'', improve
efficiency through better congestion management, and attract investment
in infrastructure by facilitating regional consensus on the need for
construction. Consistent with the Energy Policy Act of 1992, the
Commission has been working to foster RTOs for a number of years. So
far, the Commission has relied on the voluntary efforts of utilities to
form RTOs, and has held mediation and outreach to assist market
participants in reaching consensus on RTO governance, scope, and
configuration. Nevertheless, to date not a single RTO is up and
running.
I believe the price of doing nothing on RTO formation grows daily
and that we must move forward. The Commission has recently initiated a
number of processes to help ensure that any actions we take concerning
the development of RTOs be ones that will produce the most benefits for
customers and that adequately accommodate states' interests. First, the
Commission recently hired an outside consultant to perform an updated
study of the costs and benefits of RTO formation. Second, we have begun
to consider the standard RTO design features that will best ensure a
seamless national wholesale electricity market. During the week of
October 15, 2001, we held a conference to discuss the issue of standard
RTO design features with a wide range of market participants and state
commissions, and we will be doing more outreach and issuing a proposed
rule on the subject. Our RTO conference demonstrated considerable
consensus on a number of issues, such as congestion management, energy
markets, and market monitoring. Third, we have set up a new program
within FERC under which a number of regional panels consisting of
Commission staff and state commission staff will be established to
ensure better coordination with our state regulatory counterparts on
RTO development issues.
It may soon become necessary for the Commission to take more direct
action to establish mandatory RTOs. I believe the current language of
the Federal Power Act already gives us the authority to take such
action, and I will encourage my colleagues to join me in exercising
that authority in a prudent manner. Nevertheless, the few who oppose
RTOs would likely file judicial challenges to the exercise of that
authority, thus legislative clarification would save us all the time
and expense of litigation.
B. Section 202 would not speed development of competitive markets
Section 202 of H.R. 3406 does clarify that the Commission has the
authority to require transmitting utilities, whether investor- or
publicly-owned, to join an RTO. However, the following provisions of
Section 202 would leave the Commission so hamstrung in its exercise of
this authority, that I fear we would make no greater progress toward
the development of truly competitive wholesale electricity markets than
we have under the current statute:
Narrowly prescribing Commission review of an RTO application--Section
202 limits the Commission's authority over the development of
specific RTOs to proposing modifications to a utility's
application to form or join an RTO. Further, the Commission can
only propose such modifications when the application fails to
satisfy a rigid and limited set of standards specified in the
bill.
Allowing applicants to unnecessarily delay process--The provisions of
Section 202 requiring the Commission to hold an ``evidentiary''
trial-type hearing on the proposed modifications whenever an
applicant so requests and imposing a stay of the Commission's
order whenever an applicant seeks judicial review could enable
one RTO applicant to significantly delay and increase the cost
of RTO formation.
Making it easier for applicants to overturn Commission orders--Section
202's replacement of the existing ``substantial-evidence''
standard for judicial review under the Federal Power Act with a
``preponderance-of-the-evidence'' standard for review of
Commission modifications to RTO applications would make it
easier for applicants to overturn such modifications.
C. Section 202 should be replaced with a simple affirmation of
Commission authority to issue such RTO orders as are in the
public interest
I believe that Section 202 may not achieve the goals that the
Subcommittee has identified, i.e., the creation of competitive markets.
Therefore, I urge this Subcommittee either to replace it with a
provision simply affirming the Commission's authority to issue such
orders concerning the establishment, design, and operation of RTOs, and
the participation of transmitting utilities therein, as are in the
public interest. I would also urge the Subcommittee to consider tax
code amendments to ensure that electric cooperatives and public power
entities do not lose their tax-exempt status by transferring
transmission assets over to a for-profit RTO.
iii. section 141-merger review
Section 141 would repeal Section 203 of the Federal Power Act and,
thus, leave review of mergers and other dispositions of public utility
facilities to the Department of Justice and the Federal Trade
Commission. While I support coordination of federal agency review of
proposed utility mergers to ensure that such reviews are not
duplicative or overly time-consuming, I do not believe it is
appropriate to eliminate FERC review. The Commission has knowledge of
the electric utility industry that the federal antitrust agencies do
not, and Commission review is necessary to ensure that mergers and
other dispositions are consistent with the public interest.
iv. other provisions of h.r. 3046
Although I would suggest changes to Sections 202 and 141, there are
other provisions of H.R. 3046 that I heartily endorse.
A. Section 101 would ensure standardization of interconnection
procedures and allow consideration of an application's effect
on competition
Section 101 calls for standardization of interconnection
procedures. I strongly support the development of standardized
interconnection procedures, and I am happy to report that the
Commission is conducting a rulemaking to address this issue.
I further support the proposed amendment of the criteria for
evaluating an interconnection application. Under the existing language
of section 210 of the Federal Power Act, the Commission may grant an
application if it is in the public interest and it would either
encourage overall conservation, optimize efficiency, or improve
reliability. This bill would allow the Commission to grant an
application if it were in the public interest and promoted competition.
This language allows the Commission to continue to consider
conservation, efficiency and reliability, while also permitting the
Commission to consider competitive goals that will truly benefit
consumers.
B. Section 102's net metering standards would remove a barrier to entry
of new technology
I support the bill's call for minimum federal net metering
standards. Most utilities have been slow to provide for net metering,
and net metering is an essential step in the development of viable
markets for new technologies, such as distributed generation. The
establishment of national minimum standards on which states will build
net metering programs would enable this important new technology a
chance to compete. Net metering is also a valuable tool for consumers
who want to be actively involved in their purchasing decisions.
C. Sections 111-125 would appropriately repeal PUHCA
I support the bill's repeal of PUHCA. PUHCA was necessary to
address abuses that existed a half-century ago. However, that statute
has not only outlived its usefulness, it is actually thwarting needed
development of our electricity resources by subjecting registered
utility holding companies to heavy-handed regulation of ordinary
business activities and to outdated requirements that they operate
``integrated'' and contiguous systems. One of PUHCA's perverse effects
is that it causes foreign companies to buy here and U.S. companies to
invest overseas. Nevertheless, I appreciate the concerns of those, like
the rural electric cooperatives, who have opposed elimination of
certain safeguards that PUHCA provides against market power. The
Commission is aware of the concerns of the cooperatives and of the
problems with market power in general, and we are engaged in an
overhaul of our efforts at market monitoring and market power
protection. I believe that Section 111-125 strikes an appropriate
balance by replacing PUHCA with increased access by the Commission and
state regulators to certain books and records.
D. Sections 131-134 would appropriately eliminate prospective PURPA
forced sales
I support the bill's prospective elimination of the forced sale
provision of PURPA. PURPA was enacted out of concern over dependence on
oil for electric generation. Now, 22 years later, when a gas-fired
generator can be on-line in less than two years, and many advances are
being made in distributed generation, PURPA's subsidies for certain
types of generation are no longer appropriate.
E. Section 201 would ensure non-discriminatory access to the entire
transmission grid
Section 201 would grant the Commission the authority to require all
transmitting utilities (not just those that constitute ``public
utilities'' under the Federal Power Act) to offer open access
transmission service. I believe that all interstate transmission
facilities should be under one set of open access rules, including the
facilities owned and/or operated by municipals, cooperatives, the
Tennessee Valley Authority, and the federal power market
administrations and regardless of whether they are used for unbundled
wholesale, unbundled retail, or bundled retail transactions. Having all
transmission under one set of rules will ensure a properly functioning
and transparent transmission grid.
F. Section 301 will promote transmission reliability
I support Section 301, which grants the Commission jurisdiction
over electric reliability organizations. The reliability of the
electrical grid is critical to this nation's safety and economy, and it
is appropriate to have a greater governmental role in reviewing
reliability standards.
G. Section 402 will remove logjams to siting needed transmission
As I stated in my September 21, 2001 testimony before this
Subcommittee, I believe the Commission should have backstop authority
to site transmission facilities. State-by-state siting of such
transmission superhighways is an anachronism that impedes transmission
investment and slows transmission construction. There are many models
for regional planning that might be considered. For example, the
Western Governors Association has been working hard to address regional
issues in the West. Therefore, I support section 402, which allows the
Commission to authorize construction of transmission facilities that
are consistent with the public interest when the state has withheld or
delayed approval. But I also believe new models may respond to siting
issues in a way that recognizes state concerns while accepting the
reality that electricity planning and operations are regional, if not
national, in nature.
H. Sections 701-703 would provide needed expansion of enforcement
authority
The Commission must have an expanded role in monitoring for, and
mitigating, market power abuse. The enabling statutes of the Securities
and Exchange Commission and the Federal Communications Commission
provide for a range of enforcement measures, such as civil penalties. I
believe that providing FERC with similar authority would send a
powerful message to electricity market participants that we take
violations of the Federal Power Act just as seriously. Therefore, I
support H.R. 3406's recognition of the Commission's refund authority
over non-public utilities that provide transmission service or power to
a public utility. I also support the bill's increase in the level of
criminal penalties allowed under Section 316 of the Federal Power Act,
as well as the bill's authorization of civil penalties for violation of
any provision of Part II of the Federal Power Act.
v. conclusion
I appreciate the enormous commitment of time and energy that the
Chairman and the other members of this Subcommittee have put into
developing legislation to help transform the electricity industry into
the thriving force it should be. There are many competing interests to
be satisfied against a larger goal: the creation of a robust, viable,
liquid energy market supported by an enhanced infrastructure. Our
country is well served by change leaders such as yourself. I thank you
for the opportunity to share my thoughts with you.
Mr. Barton. We now welcome Commissioner Massey from the
great State of Louisiana. He has obviously been here a few
times. Your statement is in the record in its entirety. We
would ask you to elaborate for 6 minutes. Arkansas, I am sorry,
I said Louisiana--Arkansas.
STATEMENT OF HON. WILLIAM L. MASSEY
Mr. Massey. Thank you, Mr. Chairman. I respect and applaud
your efforts to enact electricity restructuring legislation. My
view is that without your help with changes in the law, the
restructuring of the electric industry will continue to be a
patchwork. Necessary transmission investments may not keep pace
with the needs of competitive markets, and this is a very
serious problem. And it will be much more difficult to maintain
reliability long term.
Thus, a number of provisions of this legislation are
excellent and have my support, and I have concerns about
others. In particular, I support the provisions related to
standardized generation interconnection, to ensure demand
responsiveness, and those related to mandatory reliability
rules, civil penalties and transmission infrastructure and
siting. I particularly appreciate your interest, Chairman
Barton, in solving this knotty problem related to transmission
siting, and it seems to me that you have proposed a manner of
proceeding that balances competing concerns and is reasonable.
I applaud it, and I think it will help get necessary
transmission built.
These are all excellent provisions. I support placing all
transmission under one set of Federal rules. I think we have to
do this. The bill sends a strong signal that RTOs are in the
public interest and that FERC may require their formation, and
I applaud this.
The legislation also includes provisions that I cannot
support, however. The Commission's merger review authority
should not be repealed. Indeed, this authority should be
strengthened to ensure that consumers are protected from
consolidations that may choke off the very competition that we
are striving to facilitate. And I would like to associate
myself with the remarks of Commissioner Breathitt on this very
point. In addition, I do not support legislatively tying FERC's
hands with respect to RTO approval standards and hearing
procedures. These should remain a matter of Commission policy
that may evolve over time with the changing needs of
competitive markets.
Let me close by saying, since members of the subcommittee
have raised the Enron collapse, I am deeply concerned about the
Enron collapse. I am concerned about the 21,000 employees who
are losing their jobs, I am concerned about investors and
retirees who lost their shirts, I am concerned because Enron
was the most visible corporate symbol of energy deregulation in
the world. We should be looking at whether there are lessons
here for our evolving energy policy.
Based upon what I have seen thus far, however, the collapse
was not related to a failure in energy markets. In fact, a
strong argument can be made that if Enron had focused on energy
assets and energy trading in the United States and had it
accurately disclosed profits and losses, it would probably
still be humming right along. And the energy market appeared to
recover rather quickly from the Enron collapse. We don't know
the whole story yet, but what we know thus far indicates that
the market has adjusted reasonably. Other market participants
moved into the breach. The energy market itself did not
collapse.
Nevertheless, whatever lessons there are here for energy
policy and energy markets, we should heed those lessons.
Perhaps the accounting standards and disclosure requirements
for a public utility should be a strengthened--perhaps we
should take a look at disclosure requirements for all public
utilities. I have an open mind. But the good news here is that
the short-term energy markets appeared to adjust rather quickly
to the collapse of the largest energy trading company in the
world. Thank you, Mr. Chairman.
[The prepared statement of Hon. William L. Massey follows:]
Prepared Statement of Hon. William L. Massey, Commissioner, Federal
Energy Regulatory Commission
Mr. Chairman and Members of the Subcommittee on Energy and Air
Quality: Thank you for the opportunity to testify on the important
electricity legislation now pending before the House and recent
Commission activity promoting efficient and reliable electricity
markets.
i. h.r. 3406--the electric supply and transmission act
A. Interconnection
I am generally supportive of the provisions of Title I. Section 101
addresses interconnection standards. The Commission has made a firm
decision to move forward on developing standard procedures and
agreements regarding interconnection and will likely do so in a way
that is consistent with section 101.
B. Demand response
Section 103 provides for implementation of price responsive demand
programs. As I have testified previously, markets need demand
responsiveness to price. This is a standard means of moderating prices
in well-functioning markets, but it is generally absent from
electricity markets. When prices for other commodities get high,
consumers can usually respond by buying less, thereby acting as a brake
on price run-ups. If the price, say, for a head of cabbage spikes to
$50, consumers simply do not purchase it. Without the ability of end
use consumers to respond to price, there is virtually no limit on the
price suppliers can fetch in shortage conditions. Consumers see the
exorbitant bill only after the fact. This does not make for a well
functioning market.
Instilling demand responsiveness into electricity markets requires
two conditions: first, significant numbers of customers must be able to
see prices before they consume, and second, they must have reasonable
means to adjust consumption in response to those prices. Accomplishing
both of these on a widespread scale will require technical innovation.
A modest demand response, however, can make a significant difference in
moderating price where the supply curve is steep.
Once there is a significant degree of demand responsiveness in a
market, demand should be allowed to bid demand reductions, or so called
``negawatts,'' into organized markets along with the megawatts of the
traditional suppliers. This direct bidding would be the most efficient
way to include the demand side in the market. But however it is
accomplished, the important point is that market design simply cannot
ignore the demand half of the market without suffering painful
consequences, especially during shortage periods. There was virtually
no demand responsiveness in the California market. Customers had no
effective means to reduce demand when prices soared.
It is important for Congress to send a message that instilling a
significant measure of demand responsiveness into electricity markets
is in the public interest. This legislation does just that, and I
endorse it.
C. PUHCA and PURPA
Subtitle B of Title I repeals PUHCA. I am pleased that the bill
appears to include important provisions regarding state and federal
access to the books and records of holding companies and their
subsidiaries.
Subtitle C of Title I repeals PURPA on a going forward basis. I
would support such repeal of PURPA if there were a mechanism to promote
the development of renewable resources, such as a reasonable portfolio
standard.
D. Review of Mergers
Section 141 repeals the Commission's authority to review mergers. I
do not support this provision. As we strive to move toward competitive
markets and light-handed regulation, the Commission's ability to remedy
market power is increasingly important. Market power is likely to exist
in the electric industry for a while. It is unreasonable to expect an
industry that has operated under a heavily regulated monopoly structure
for 100 years suddenly to shed all pockets of market power. An agency
such as FERC with a broad interstate view must have adequate authority
to ensure that market power does not squelch the very competition we
are attempting to facilitate.
The Commission's authority over mergers is important. We are seeing
unprecedented industry consolidation now. While mergers can produce
efficiencies, they can also increase both horizontal and vertical
market power. The Commission is particularly well suited to evaluate
proposed mergers involving electric utilities. The Commission's
detailed experience with electricity markets and its unique technical
expertise can provide critical insights into a merger's competitive
effects. In addition, the Commission's duty to protect the public
interest is broader than the focus of the antitrust agencies and thus
allows us to better protect consumers from other possible effects of a
merger, such as unreasonable costs. As the architect of Order No. 888
and the RTO Rule, Order No. 2000, the Commission must retain the
authority to condition a merger to ensure consistency with broader
policy goals. And unlike the antitrust agencies, the Commission's
merger procedures allow public intervention and participation in
proceedings critical to the restructuring of this vital national
industry.
For these reasons, I would not support any weakening of the
Commission's merger authority. Indeed, to ensure that mergers do not
undercut our competitive goals, the Commission's authority over
electricity mergers must be strengthened in a number of ways. The
Commission should be given direct authority to review mergers that
involve generation facilities. The Commission has interpreted the
Federal Power Act as excluding generation facilities per se from our
direct authority, although that interpretation is currently before the
courts. It is important that all significant consolidations in
electricity markets be subject to Commission review. For the same
reason, the Commission should be given direct authority to review
consolidations involving holding companies.
I am also concerned that significant vertical mergers can be
outside of our merger review authority. Under section 203 of the FPA,
our merger jurisdiction is triggered if there is a change in control of
jurisdictional assets, such as transmission facilities. Consequently,
consolidations can lie outside of the Commission's jurisdiction
depending on the way they are structured. For example, a merger of a
large fuel supplier and a public utility would not be subject to
Commission review if the utility acquires the fuel supplier because
there would be no change in control of the jurisdictional assets of the
utility. If the merger transaction were structured the other way, i.e.,
the fuel supplier acquiring the utility, it would be subject to
Commission review. Such vertical consolidations can have significant
anticompetitive effects on electricity markets. Those potential adverse
effects do not depend on how merger transactions are structured, and
thus our jurisdiction should not depend on how transactions are
structured. Therefore, I recommend that the Commission be given
authority to review all consolidations involving electricity market
participants, however structured.
E. Open Transmission Access
Section 201 allows the Commission to require all transmitting
utilities as well as public utilities to offer open access transmission
service. I am generally supportive of placing all transmission owners
under the same set of rules. I have concerns, however, with codifying
the manner in which the Commission should calculate stranded costs.
Such calculation should be left to the Commission's discretion and
judgment.
F. Regional Transmission Organizations
Section 202 sets out a number of provisions regarding RTOs and RTO
formation. I am particularly pleased that this legislation sends a
clear message that RTOs are in the public interest. Nevertheless, I am
concerned with the proposals to codify matters such as RTO standards,
hearing requirements, and when the Commission may or may not make
modifications to existing RTOs. It would be far more useful to give the
Commission express authority to require RTO formation under standards
determined to be appropriate by the Commission. This would allow
standards to evolve along with the requirements of competitive markets.
G. Reliability
Section 301 provides for Commission certification of an
organization to develop and enforce reliability standards. The industry
needs mandatory reliability standards. Vibrant markets must be based
upon a reliable trading platform. Yet, under existing law there are no
legally enforceable reliability standards. Compliance with the
reliability rules of the North American Electric Reliability Council
(NERC) is voluntary. A voluntary system is likely to break down in a
competitive electricity industry.
I support legislation that would lead to the promulgation of
mandatory reliability standards. A private standards organization with
an independent board of directors could promulgate mandatory
reliability standards applicable to all market participants. These
rules would be reviewed by the Commission to ensure that they are fair
and not unduly discriminatory. The mandatory rules would then be
applied by RTOs, the entities that will be responsible for maintaining
short-term reliability in the marketplace. Mandatory reliability rules
are critical to evolving competitive markets, and I urge Congress to
enact legislation to accomplish this objective.
Section 301 seems reasonable and I support its adoption.
H. Transmission Infrastructure
Section 401 directs the Commission to adopt policies that
facilitate construction of transmission facilities needed for
competitive electricity markets, and to report to the Congress on
transmission adequacy. I support these goals. I am particularly
supportive of the legislation's specific goals such as promoting
economically efficient enlargement of transmission networks, including
the provision of proper price signals so that new generation and
transmission is built where it provides the lowest overall cost to
consumers.
I. Transmission Siting
Section 402 enacts backstop transmission siting authority for the
Commission. In previous testimony, I have recommended that Congress
transfer to the Commission the authority to site new interstate
electric transmission facilities. The transmission grid is the critical
superhighway for electricity commerce, but it is becoming congested
because of the new uses for which it was not designed. Transmission
expansion has not kept pace with changes in the interstate electricity
marketplace.
Although the Commission is responsible for well functioning
electricity markets, it has no authority to site the electric
transmission facilities that are necessary for such markets to thrive
and produce consumer benefits. Existing law leaves siting to state
authorities. This contrasts sharply with section 7 of the Natural Gas
Act, which authorizes the Commission to site and grant eminent domain
for the construction of interstate gas pipeline facilities. Exercising
that authority, the Commission balances local concerns with the need
for new pipeline capacity to support evolving markets. We have
certificated well over 15,000 miles of new pipeline capacity during the
last six years. No comparable expansion of the electric grid has
occurred.
I continue to recommend legislation that would transfer siting
authority to the Commission. Such authority would make it more likely
that transmission facilities necessary to reliably support emerging
regional interstate markets would be sited and constructed. A strong
argument can be made that the certification of facilities necessary for
interstate commerce to thrive should be carried out by a federal
agency.
Adequate grid facilities are essential to robust wholesale power
markets. I am confident that transmission will be built in sufficient
quantities if siting authority is rationalized, rate jurisdiction is
clarified, and adequate cost recovery mechanisms and risk-based rates
of return are allowed.
Proposed section 402 provides the Commission with backstop siting
authority to ensure that the necessary transmission facilities are
built. This provision appears to provide appropriate respect for the
siting prerogatives of the states and has my support.
J. Federal Utilities
I have long advocated placing all transmission providers under the
same set of rules. Placing TVA, BPA and the Federal Power Marketing
Administration under Commission authority has my full support.
Section 523 permits BPA to transfer operational control of its
transmission facilities to an RTO. Although I strongly support allowing
BPA to participate in an RTO, I would not limit its participation in an
RTO of a specific scope as this section does. In addition, I would
recommend that Congress specifically authorize TVA and the PMAs to
participate in RTOs determined to be appropriate by the Commission.
K. Penalties
Section 703 expands the scope of civil penalties to include all of
Part II of the Federal Power Act. This provision moves toward giving
the Commission much needed tools to police the markets and I support
it.
ii. recent ferc action on rto formation and markets
A. RTO Formation
The Commission has received a number of proposals to form RTOs, and
has acted on most such proposals. In general, the Commission has
strongly encouraged RTOs to grow larger and has provided guidance on
independence and RTO governance. In July, the Commission issued an
order expressing its preference for no more than four large RTOs in the
nation, but has recently indicated that greater flexibility will be
allowed in RTO formation.
During October 15-19, 2001 the Commission held five days of public
hearings on a wide range of issues related to RTO formation and market
design. In an order issued November 7, the Commission indicated a
desire to receive additional comment from state commissions with regard
to RTO formation, and indicated that additional cost benefit analyses
on RTOs would be conducted. Also, the Commission stated its intention
to standardize market design rules as appropriate. The November 7 order
stated that since it is not possible for all RTOs to be in operation by
our December 15, 2001 deadline, the Commission will set out in future
orders a time line for continuing RTO progress in each region. I expect
the Commission to act on such orders in the near future.
B. Market-based Rates
In two orders the Commission issued November 7, 2001, we began to
correct severe weaknesses in our market based pricing policy. My
longstanding concerns had been sharpened by the failure of the
California market and the economic consequences that spun from it.
We've learned that we must accurately assess market conditions when
depending on markets to discipline prices. And we must provide adequate
refund protection to customers when poorly functioning markets do not
protect them from unreasonable prices.
In AEP Power Marketing, et al., the Commission took three important
steps in our market based pricing policy. First, we concluded that our
traditional market power analysis no longer adequately protects
customers against generation market power.
Second, we announced a new interim analytic screen to protect
customers until we develop the tools we need for the longer term. That
interim tool is the Supply Margin Assessment, or SMA, and will be
applied to all sales except those into an ISO or RTO with approved
monitoring and mitigation. This is a major step in the right direction.
The SMA improves on the old analysis by taking into account
transmission capability and by looking to the critical notion of a
``pivotal supplier'' in a market. When supplies are tight, prices in
electricity markets can run up quickly, especially when there is a
pivotal supplier whose capacity is needed to satisfy demand. The SMA
addresses that problem and does not allow pivotal suppliers to charge
market based prices. The SMA is a major improvement. Like most new
policy tools, it is not perfect, but we are moving in the right
direction. As with any analytic method, it is only a snapshot of
current market conditions. But if market conditions change, parties are
free to file a complaint showing that the new conditions result in a
seller failing the SMA screen.
Third, the Commission applied the SMA to three sellers in the
context of their triennial updated analysis, found that they fail, and
put in place innovative mitigation measures requiring the applicants to
offer all uncommitted generation capacity into the spot market. Sales
will be priced at the traditional split savings adder. As the order
points out, maintaining an accurately priced spot market is the single
most important element for disciplining longer term transactions. Thus,
with the spot market mitigation in place, an applicant may freely
negotiate longer term transactions but must post on its web site a
portfolio of long term products and prices that are available.
In another order issued November 20 in EL01-118, the Commission
took two additional important steps. First, we announced the start of a
generic proceeding to develop new analytic methods for evaluating
markets and market power on a long term basis. I fully support
launching this important initiative. Second, the order initiated a
section 206 proceeding to place a refund condition in the tariffs of
sellers with market based pricing. That condition would prohibit
anticompetitive behavior and the exercise of market power. This is an
improvement providing customers with some added protection, and to that
extent I support the order.
But we should do more for customers. The order fails to provide any
refund protection to customers when market structure and market rules
are flawed and unjust and unreasonable rates result. The Federal Power
Act states that such rates are unlawful. This is precisely the
situation in which the Commission found itself in the California
proceeding. We did not make any findings of bad behavior on the part of
any sellers. We found only a market that was badly broken. The risk of
a broken market should not be placed solely on customers. Our tariff
condition should provide for refunds whenever the Commission finds that
unjust and unreasonable rates are charged.
iii. conclusion
I stand ready to answer questions and to assist the Subcommittee in
any way. Thank you for this opportunity to testify.
Mr. Barton. Thank you, Commissioner.
We would now like to hear from the chairman of the
Tennessee Valley Authority. I believe this is your first time
to testify.
STATEMENT OF GLENN L. MCCULLOUGH, JR.
Mr. McCullough. Before your subcommittee, it is, sir.
Mr. Barton. Yes, sir.
Mr. McCullough. Thank you, Mr. Chairman.
Mr. Barton. Your statement is in the record, and you are
recognized for 6 minutes.
Mr. McCullough. Thank you very much, Mr. Chairman and
distinguished members of the subcommittee. I would like to
thank you, Chairman Barton, as well as Ranking Member Boucher,
for your leadership on issues relating to the supply of
reliable and affordable electricity throughout the Nation. I
would also like to express my gratitude and appreciation to
Congressman Ed Bryant, Congressman Chip Pickering, Congressman
Bart Gordon and Congressman Ed Whitfield, all of whom sit on
this subcommittee as they have been amongst the strongest
advocates for the people of the Tennessee Valley and TVA.
We are very grateful to them for their collective support
of the TVA title. The title represents their consensus, and
ours, on the best way to comprehensively address TVA's place in
a more competitive market. I would also like to thank the
Tennessee Valley Public Power Association, the Tennessee Valley
Industrial Committee for their help in drafting this important
legislative proposal. The title, which is now part of H.R.
3406, affirms TVA's role as a steward within the Valley region,
and it maintains the integrity of TVA's mission. It ensures the
availability of affordable electricity for rural and fixed-
income consumers in the Tennessee Valley, and it ensures the
reliability of TVA's power supply and transmission system.
The specific provisions of the title are discussed in my
written testimony, and TVA and its customers believe that these
provisions are in the best interest of the people and the
businesses of our region. We are grateful to everyone who had a
role in developing the TVA title, and we appreciate the support
it has received from members of the subcommittee.
It has been more than 2 years since a representative from
TVA appeared before this subcommittee, Mr. Chairman. In that
time there have been many changes, and truly it is a new day at
TVA. Director Skila Harris and I began serving the Valley in
November 1999. Director Bill Baxter was sworn in less than 2
weeks ago. We are committed to making TVA a more responsible
and business-like agency as we work to deliver affordable,
reliable power, a cleaner environment and a vibrant economy for
the good of the people.
I would like to report to the subcommittee that TVA is
stronger operationally and financially as our entire
organization prepares for the future of competition. And I am
proud to say that through our diverse power supply, reliable
transmission system, operational and financial performance and
leadership in renewable energy and new technologies, TVA is
addressing some of the key concerns in our Nation's energy
future. While there is still much work to be done, I am
confident that TVA will add value in the competitive
marketplace as a result of our excellent business performance.
Now let me take just a couple of moments to share some of
the recent examples of the value we provide to the people in
the Tennessee Valley. Through distributors of TVA power, we
provide affordable, reliable electricity to 8.3 million
residential consumers. And in recent years, we have pushed
TVA's performance to new levels of excellence. TVA won the 2001
Quality Cup awarded by the Rochester Institute of Technology in
USA Today for comprehensive business improvement initiatives.
During fiscal year 2001, our customer outage duration was three
times better than the average of other U.S. companies we
benchmark. In 2000, TVA's Sequoyah and Browns Ferry Nuclear
Plants were ranked as the second and third most efficient
nuclear power generators in the Nation.
TVA is providing financial value to our customers, having
had only one rate increase in 14 years. We reduced TVA's debt
by $610 million in fiscal year 2001, which is $160 million more
than was projected. We reduced TVA's overall interest expense
as a percentage of revenue to its lowest level in more than 15
years. We are repaying the U.S. Treasury for its original
investment in the TVA power system. For fiscal year 2001, our
payment to the Treasury, including principal and interest, was
$55 million. TVA does not receive any Federal appropriations.
TVA's commitment to excellence also provides value for the
environment. TVA has conducted a multibillion dollar program to
further reduce nitrogen oxide and sulfur dioxide emissions from
our generating plants. By 2005, we will have reduced sulfur
dioxide emissions 75 to 80 percent since 1977. Nitrogen oxide
emissions during the ozone season will be down by 70 to 75
percent. In addition, TVA is one of the first three utilities
in the Nation to offer an accredited green power option for our
customers.
In these and many other ways, TVA provides value to our
customers and value to the Nation. Our priorities are closely
aligned with the issues identified in the national energy
policy. By providing reliable, affordable, environmentally
sound energy, TVA is demonstrating many of the objectives
outlined in this policy. I will work very closely with you,
with every member of this subcommittee as we continue to work
on ways to improve affordable, reliable energy for the Nation.
Thank you for this opportunity to appear before you today,
and I look forward to answering any questions.
[The prepared statement of Glenn L. McCullough follows:]
Prepared Statement of Glenn L. McCullough, Jr., Chairman, Tennessee
Valley Authority
Good afternoon, Mr. Chairman and distinguished members of the
Subcommittee. I would like to thank you, Chairman Barton, as well as
Ranking Member Boucher, for your interest and leadership on issues
relating to the continuous supply of reliable and affordable
electricity throughout the Nation. I assure you that it is an issue we
take very seriously at the Tennessee Valley Authority.
I am pleased to be here today to discuss with the subcommittee how
H.R. 3406, the Electric Supply and Transmission Act, addresses the way
in which TVA might look in the more competitive and restructured
electricity marketplace of the future. Together with the Tennessee
Valley Public Power Association (TVPPA), the trade association
representing the distributors of TVA power, and the Tennessee Valley
Industrial Committee (TVIC), which represents TVA's large industrial
customers, I am very pleased that the Valley's consensus language was
accepted as the TVA title in H.R. 3406. Additionally, this language is
generally acceptable to the administration. The regional consensus
approach, included in this title, reflects a great deal of hard work
and compromise from stakeholders throughout the Valley, and represents
a common-sense approach to addressing, in a comprehensive manner, the
unique setting of TVA in the electricity marketplace. It is for this
reason that I would like to express a great deal of gratitude and
appreciation to Congressman Ed Bryant, Congressman Chip Pickering,
Congressman Bart Gordon, Congressman Rick Boucher, and Congressman Ed
Whitfield, all of whom sit on this subcommittee, as they have all been
among the strongest advocates for TVA, TVPPA, TVIC, and most
importantly the Valley's ratepayers, throughout this process.
a new day at tva
It has been more than two years since a representative from TVA
last appeared before this subcommittee. In that time, there have been
many changes, and it is a new day at TVA. We have a completely new
Board. Director Skila Harris and I began serving the Valley in November
of 1999 and Director Bill Baxter was sworn in less than two weeks ago.
We are committed to making TVA a more responsible and business-like
agency as we work to deliver affordable, reliable power, a cleaner
environment and a vibrant economy for the good of the people.
I would like to report to the subcommittee that TVA is stronger
operationally and fiscally as the entire organization prepares for the
future of competition. While there is still much work to be done, I am
confident that a very bright future lies ahead for the people we are
charged to serve. As a result of our hard work, I am certain that we
will succeed in the competitive marketplace as people continue to
recognize the value TVA delivers through excellent business
performance.
tva background
TVA, which is the Nation's largest provider of public power, was
created by Congress in 1933 to provide for flood control, navigation,
and the generation of electric power in the seven-state region of the
Tennessee Valley, which includes Alabama, Georgia, Kentucky,
Mississippi, North Carolina, Tennessee, and Virginia. This mission is
the cornerstone of our service across the Valley today. Together with
158 municipally and cooperatively owned distributor customers, TVA
provides electricity ultimately to 8.3 million residential consumers
throughout the Tennessee Valley, while managing and developing the
Tennessee River watershed and providing leadership for sustainable
economic development for the people we serve.
The Tennessee River system is the fifth-largest river basin in the
United States. It stretches 652 miles from Knoxville, Tennessee, to
Paducah, Kentucky, where it flows into the Ohio River and ultimately
the Mississippi. It encompasses over 11,000 miles of shoreline, 54 dams
and 14 locks. About 34,000 loaded barges travel the Tennessee River
each year--the equivalent of two million trucks traveling the roads.
TVA, incidentally, no longer receives any federally appropriated funds
for the management and stewardship of the Tennessee River. TVA has used
power revenues for these functions since October 1999.
TVA's power system has a generating capacity of 30,365 MW. TVA
operates 59 coal fired units at 11 plants, five nuclear reactors at
three plant sites, 29 hydro-power plants, and five combustion turbine
plants. The Bush Administration's National Energy Policy released
earlier this year recognizes the importance of diversity in energy
supply--including new attention to promoting nuclear energy, clean coal
technologies, and renewable energy sources. TVA's mix of coal, nuclear,
hydroelectric, and natural gas-fired generation resources illustrates
the value and benefits of such diversity. In FY2001 TVA's generation
sources were approximately 65 percent fossil and combustion turbine, 29
percent nuclear, and 6 percent hydropower.
TVA provides wholesale power to 158 local power distributors and 62
directly served customers through a network of 17,000 miles of
transmission lines in the seven state region. The TVA Act directs the
three members of the Board of Directors, all of whom are appointed by
the President and confirmed in the Senate, to set TVA's electric rates
as low as feasible, while recovering the full costs of providing
electricity for the Valley.
tva's business performance
I am very proud of the way employees from throughout TVA have
responded to the call of service in the public interest throughout the
Tennessee Valley. Here are just a few examples of our most recent
accomplishments:
POWER SYSTEM
<bullet> In Fiscal Year 2001, TVA transmission reliability to customers
was 99.999 percent. To put that In perspective, we are three
times better in terms of customer outage duration than the
average of the U.S. companies we benchmark.
<bullet> TVA won the 2001 Quality Cup awarded by the Rochester
Institute of Technology and USA Today for a comprehensive
improvement initiative. The improvements helped TVA set a best-
in-industry record for transmission system operating
efficiency.
<bullet> The July 2001 issue of Nucleonics Week ranked TVA's Sequoyah
and Browns Ferry nuclear plants as the second and third most
efficient nuclear power generators in the Nation in 2000.
<bullet> On October 15, 2001, TVA broke ground on the nation's first
large-scale flow-battery energy-storage plant. The Regenesys
plant, located in Mississippi, will store electricity during
off-peak periods and release it for use when the need for
electricity increases, using a chemical process to store
energy.
FINANCIAL
<bullet> Fiscal Year 2001 power sales increased by 1.2 percent over
sales the previous year and interest expense was down $103
million from the 2000 fiscal year.
<bullet> TVA reduced debt by $610 million in 2001, $160 million more
than projected, for a total reduction of almost $2.4 billion
since 1997. Interest expense in 2001 accounted for 23 percent
of TVA revenue, down from a high of 34 percent in 1997, for the
lowest percentage in more than 15 years. TVA continues to be
interested in further cost cutting and debt reduction where
warranted.
<bullet> Fiscal year 2002 budget projections estimate revenues
exceeding $7--billion for the first time in TVA's history.
<bullet> In the fiscal year 2001, TVA sent $55 million to the United
States Treasury, $20 million in principle and $35 million in
interest, on the original appropriated investment in TVA. To
date, TVA has returned to the Treasury $3.4 billion, including
interest, on the original investment of $1.419 billion.
ENVIRONMENTAL STEWARDSHIP
<bullet> On October 4, 2001, TVA announced plans to construct five
scrubbers, one each at fossil plants in Kentucky and Alabama,
and three at two plants in Tennessee. They will cost about $1.5
billion altogether and when completed will collectively reduce
emissions of sulfur dioxide by more than 200,000 tons per year.
At that point TVA will have reduced total SO2 emissions by 85
percent since 1977.
<bullet> TVA is also in the midst of a $1 billion program to reduce
nitrogen-oxide emissions at its plants by constructing 18
selective-catalytic-reduction systems--or SCRs--on 25 coal-
fired generating units. It is one of the most massive
pollution-control programs in the nation. This will reduce
TVA's NO<INF>X</INF> emissions by 70 to 75 percent during the
ozone season by 2005.
<bullet> TVA is one of only three utilities in the nation to offer a
fully accredited Green Power option to its customers. Along
with participating distributors, TVA offers residential
consumers 150 kilowatt-hour blocks of electricity that include
a portfolio of wind, solar, and land-fill gas generation.
<bullet> TVA's power system is setting production records, operating
more efficiently and more cost-effectively than at any time in
the past three decades, and TVA has had only one rate increase
in 14 years. Affordable, reliable electric power is the fuel of
our region's economy, and TVA is performing as a business as it
delivers power production, economic growth and environmental
stewardship for the region.
the tva title
Once again, I would like to express my appreciation for the
subcommittee's leadership on electricity issues and to you
specifically, Chairman Barton, for working closely with members from
the Tennessee Valley delegation on issues relating to TVA. As a Federal
corporation, TVA plays a unique role in meeting the power supply needs
of the seven-state Tennessee Valley region, and there are statutory and
regulatory issues that affect our region that are not experienced by
investor-owned utilities. As a result, TVA has been involved in
extensive discussions with distributors of TVA power and industries
directly served by TVA in an effort to reach consensus on the
appropriate role for TVA to play in a future restructured competitive
environment. The TVA provisions that are part of H.R. 3406 reflect that
consensus, although they are still under review within the
Administration. Some of the key provisions within the TVA title in H.R.
3406 include:
Equitable Competition
<bullet> Restrictions to fair competition, such as the TVA ``Fence''
and ``Anti-Cherry Picking'' amendment will be removed
simultaneously on the effective date of federal legislation.
TVA Power Sales
<bullet> TVA will only sell electricity outside of the existing service
area at the wholesale level. These sales will be limited to
electricity that is excess to the demand of its customers in
the TVA service area.
<bullet> TVA will be permitted to sell to its existing retail customers
inside the TVA service area. Only if retail open access is
implemented in a distributor's service area will TVA be allowed
to sell to new retail customers in that distributor's service
area.
Regulation of TVA Transmission System
<bullet> TVA transmission service rates, terms and conditions will be
subject to regulation by the Federal Energy Regulatory
Commission.
It would come as no surprise to any of you that TVA is a large and
complex organization and quite different from any other utility in the
Nation. The area in which TVA can serve electricity is limited by law.
The boundary that was established by the 1959 amendments to the TVA Act
is known as the ``fence.'' While TVA is limited outside the fence,
other utilities are limited in their ability to serve loads within the
fence. Many of these unique and complex issues may require
Congressional action.
TVA's mission, as codified by the TVA Act, is to serve the people
of the Valley. There is a key theme throughout the TVA title contained
in H.R. 3406 that I would like to emphasize--the title continually
reaffirms TVA's role as a steward within the Valley region. The
original mission is left unchanged by the title I have come here to
discuss today.
In the effort to maintain the integrity of our original mission,
TVA has agreed to several restrictions that I am certain no other
utility in the country would be willing to subject themselves to. The
TVA Title in H.R. 3406, creates a model where TVA would be required to
renegotiate its current contracts with all of its customers inside the
Valley in order to bring about wholesale competition. Furthermore, with
respect to sales outside the Valley, this title prohibits TVA from
selling to any retail customers outside the Valley, and allows only the
sale of excess power to wholesale customers outside the Valley.
TVA has been in the process of preparing for competition for
several years. As I mentioned earlier, we have reduced debt by $2.4
billion over the past four years, while reducing the interest burden of
our debt from a high of 34 percent of our costs in 1997 to the current
rate of 23 percent. Additionally, we have been paying debt down while
making significant upgrades to our transmission system to ensure
reliability, adding peaking generation to our system, and installing
significant emissions control equipment at our fossil plants across the
Valley. All of these things add up to better service to our customers.
We continue to believe that when competition arrives in the Valley, we
will be the low-cost choice for our customers.
Customer service has been a core component of the process of
developing the consensus title. To this end, in addition to internal
preparation for competition, we are also in the midst of discussions
with our customers about the future. We have offered distributors of
TVA power a 10-percent partial-requirements contract and a shorter-term
contract. In doing so, we hope to promote a new relationship with our
customers through innovation and flexibility. Moreover, while some
distributors are seeking shorter-term contracts, others would like
long-term contracts with more price stability and rate security. The
needs of our customers are diverse. By working closely with
distributors and knowing what each distributor plans for its future,
TVA can best serve the Valley in the competitive future.
I would like to share several basic principles that we believe are
necessary, with respect to the TVA Title, as this subcommittee moves
forward: (1) that TVA legislation affirms TVA's responsibility for the
integrated resource management of the Tennessee River and economic
development; (2) ensures the availability of affordable electricity for
rural and fixed-income consumers in the Tennessee Valley; and (3)
ensures the continued reliability of the power supply and the
transmission system.
conclusion
TVA is working hard to prepare for competition by reducing our
debt, keeping our electric rates low, and efficiently managing the
Tennessee Valley's integrated resource system. I want to assure all of
you that TVA will continue to work cooperatively with Congress and the
people of the Valley to ensure that restructuring is done in a way
that's fair to TVA, to the ratepayers, to our distributors, to
taxpayers, and that it enables us to set the standard for public power
in the future.
We have worked with many stakeholders, especially TVPPA and TVIC,
to develop a regional, common sense approach to restructuring. I am
very proud of the progress we have made at TVA, and I have never been
more confident that the Valley's future is bright. I hope to continue
working very closely with this Subcommittee, and I applaud you all for
your insight and leadership. Furthermore, TVA and the Administration
look forward to working with Congress on the legislative provisions in
Title V dealing with TVA. Thank you again for the opportunity to appear
here today, and I look forward to answering your questions.
Mr. Barton. Thank you, Mr. Chairman. The Chair recognizes
himself for 5 minutes for questions.
There is never going to be a good time to comprehensively
try to change an industry that is as integral to our Nation's
economy as the electricity generation, transmission and
distribution industry, because there are always going to be
vested players with status quo special interests that they wish
to protect. So there comes a time you have to hold a number of
hearings, and then you have to look at all the record and put
your best team on the field, so to speak. And that is what the
latest bill is, H.R. 3406.
Let me say with regard to Enron in that the bill that the
subcommittee passed last year Enron opposed. The only CEO I
have ever thrown out of my office was the CEO of Enron, Mr.
Jeff Skilling, because he came into my office last year and
basically told me what was going to be in the bill or else, and
I said, ``or else,'' and he was asked to leave. Now, we later
had some substantive discussions, but if anybody thinks that
Enron can dictate what this subcommittee does or what this
subcommittee chairman does, I have got a bridge in Brooklyn
that I want to try to sell you, because that just does not
happen.
And I can also say with regards to what happened at Enron
that it is amazing to me that the largest player in making the
market, Enron Online was the largest market maker for wholesale
electricity, and I think I am correct in saying for natural gas
too, although I may be incorrect in that, that it was larger by
orders of multiples. The day after Enron Online went blank
there was no energy price spike, there were no shortages of
electricity or natural gas anywhere in this country.
And if you think about that, if you were in a town that had
two grocery stores, or maybe three grocery stores, and one was
a little Mom and Pop on the corner, and the other one was one
that had just come into town, and the other one was one that
dominated the market and had 70 percent of the market, and that
grocery store shut down. People would probably not have food
the next day in certain parts of that community. That did not
happen when Enron went belly up. The market worked. Power was
presented and the prices didn't spike and life went on.
So I don't think that this is a hearing necessarily going
to be dominated by what happened at Enron. Enron leveraged
itself to the hilt and engaged in some accounting practices
that were very questionable, to say the least. And we have
investigators looking at those, as does the Financial Services
Committee. So if there are corrections to be made because of
what happened at Enron, so be it, but that does not take away
the need to create a national electricity system that is based
on open markets that are accessible to all.
Now let me ask a few questions to our distinguished panel.
Does everybody on the panel support the position in the bill
that everybody, whether they are an IOU, a muni or a co-op, if
they are engaged in the interstate transmission, has to be a
part of an RTO? Is there anybody that opposes that? Okay.
Nobody is saying anything, so the Chair is going to say they
are all looking at me like they at least accept it if not
support it.
Mr. McCullough. Mr. Chairman, TVA believes that the concept
of a Regional Transmission Organization in the Southeast is
desirable, and we pledge to work cooperatively with this
subcommittee toward that concept in a way that is fair to our
ratepayers, our distributors and our bond holders.
Mr. Barton. Well, the bill does make all Federal power
administrations, including Bonneville and TVA, FERC
jurisdictional for interstate transmission rates.
To my four commissioners, the pending bill requires that
RTOs be up and functional 1 year after date of enactment. I am
told that the pending proposals--and I don't want you to
comment necessarily on any specific proposal--but that the
proposals on RTOs that are currently before the FERC those are
in sufficient shape that within a year after passage of this
bill, if we maintain the current language, we could have RTOs
up and functioning. Do you all agree or disagree with that?
Mr. Wood. Chairman Barton, I would agree with that.
Mr. Barton. You would agree. And the other FERC
commissioners all agree with that.
We have a title in this on reliability, which several of
the commissioners, I believe, in your written--and I know the
Deputy Secretary of Energy, in his statement, said is an
improvement over the past bill. Would the FERC commissioners
wish to comment on the reliability title of the bill?
Mr. Massey. I think it is a good title, Mr. Chairman. I
think you ought to enact it.
Mr. Barton. Oh, well, I appreciate that.
Ms. Breathitt. I support it and said so in my testimony and
didn't have any recommended tweaks or changes.
Mr. Barton. Okay. I have got 12 seconds left; I want to ask
some questions later in the hearing, if we have time, about the
FERC order on market power and the ability to set market
prices. I have had a phone conversation with Chairman Wood
about this. I read, I believe, the dissenting opinion that
Commissioner Breathitt had when that order came out. I share
some of Commissioner Breathitt's concerns about it. It would
seem to me that we would not want to penalize a market maker or
a market provider before there has even been a complaint of
market power.
And as I understand the order, just the fact that you have
enough reserve capacity so that if your reserve capacity is
larger than the peak power demand, you are deemed automatically
to have market power and to have used that market power. And to
me that is a little bit like being convicted before there has
even been a crime committed. So I have got some concerns about
that. I would let Chairman Wood comment briefly, and then I am
going to have to go to Mr. Boucher, because my time has
expired.
Mr. Wood. Thank you, Chairman Barton. The supply margin
assessment test that we adopted following discussions we had
since the first day I was on the Commission, I think all four
of us and our prior colleague, Curt Hebert, recognize that the
tests that we were applying to market-based rate authority,
which is in effect a deregulation certificate, in light of the
California history and the need for the Commission to do what I
would characterize as a pretty dramatic response to that, is to
make sure that this never happens again.
There is a balance between having a totally deregulated
market, which is what we had in the West, and the need to do
what we had to do on June the 19th, which was put a mitigation
plan over the top of every single player in the entire western
half of the country. We were looking for something, or I was,
certainly, looking for something much more surgical than that,
that would not be an after-the-fact response but would in
effect look at who has the ability to exercise market power,
allow them to make the money and to make, in the formula that
we adopted, sufficient money, but not allow them to go above a
cloud of reasonable rates, which we are required under the
Federal Power Act to maintain a zone of reasonableness for
rates in advance.
It is not a conviction of something, they are not being
punished for something, but we identify people who because of
their size in a relevant market have the ability to actually
control the price of that market and say you can do so much but
not more than that. It is to me an example of what I would hope
any Federal agency would do: get through the crisis and then
look at what could in fact be a more focused and surgical
solution toward making sure that crisis never happens in any
other part of the country again.
So with the 1,200 people who have deregulation
certificates, there may be a few, as they come back through the
Commission, that because of their size are going to be subject
to the supply margin assessment test. But I think that is a
pragmatic response to a situation that we want to ensure never
happens again, because customers do not need to go through what
they went through in the West again.
Mr. Barton. Well, put me down as undecided.
Mr. Wood. Okay.
Mr. Barton. And we will continue to dialog on this. But the
chairman would recognize the distinguished ranking member, Mr.
Boucher, for 5 minutes of questions.
Mr. Boucher. Well, thank you very much, Mr. Chairman. I
welcome this opportunity to have a conversation with the
distinguished members of the Federal Energy Regulatory
Commission about a number of the provisions that are contained
in the legislation now before us. I apologize for being absent
while you made your statements. You may have actually answered
some of the questions I will propound. I had to attend briefly
a hearing in another committee, the name of which is rarely
ever mentioned in this committee, but I do apologize. It shall
not be mentioned here. I apologize for being absent.
I am interested in your views on these matters, so let me
just ask all of these questions at one time, and you can
respond to those questions that you choose to respond to as a
group. First of all, I am interested in your view with regard
to a continuation of the FERC's merger authority. I suspect you
have definite views on this, and I would welcome those views. I
happen to think that if we repeal your authority simultaneously
with repealing the Holding Company Act, all of the inevitable
consolidation in the industry that will occur in the wake of
that will produce enormous market power concerns, and you would
then be perhaps powerless to address those if you didn't have
merger review authority. So your response to that would be
welcome.
As a second matter, I am interested in your response to the
provisions in the bill that would prescribe the way in which
investor-owned utilities and others who own transmission become
members of Regional Transmission Organizations. It strikes me
as a rather detailed prescription, and your response to those
particulars would be welcome. It may be that you would prefer a
simple statement in the legislation clearly confirming your
authority to regulate RTO membership, and if that is the case,
I hope you will tell us.
As a third matter, the bill contains provisions on
incentive pricing for the construction of new transmission, and
my question to you is whether that is appropriate, in your
opinion, or as a possible alternative should we specifically
empower, or can you empower, Regional Transmission
Organizations to bid out that construction, to manage the
construction and in some way through its own mechanism to
achieve the goal of having new construction built in those
parts of the country where new construction is required. And so
your view with regard to incentive pricing and the alternative
of simply having the RTOs undertake the job of bidding out the
new construction would be welcome.
And, then finally, I would like to have your view with
regard to the language in the proposed statute that relates to
uniform interconnection standards. I know that you have a
notice of proposed rulemaking out on that subject. Do you
believe that you have sufficient statutory authority to adopt a
standard? Do you need additional authority? And what is your
reaction to the provision in the bill that addresses uniform
interconnection standards? Mr. Wood, would you like to begin?
Mr. Wood. Yes, sir, Mr. Boucher. In brief, the merger
authority issue, I probably don't have as strong a feeling on
that as my colleagues do. I think I share their general
direction, but I also recognize that we are the only agency in
the government that does that. If you want that issue to
continue, then it probably should be stuck in someone else's
statute that they should have the duties that we have, if there
is a concern about inefficiency in government there.
I do think in just the brief time I have been on the
Commission, we deal with mergers rather routinely in 90 days.
There are a few examples of those that are very slow but
certainly nothing like the FCC that I know the committee has
been concerned with in the past.
The consolidation that will happen in the industry as a
result of mergers, combined with the RTO provision, and
consolidation of companies that transmit and stay regulated are
probably not a big concern; in fact, it probably will happen to
recognize the economies of scale. Consolidation of generation
owners within a given market, yes, that would be a market power
concern. Quite frankly, our tests that I just discussed briefly
with Mr. Barton would, in effect, limit those companies'
ability to exercise that market power as it works today. But
there are two things going on there.
RTOs, I think that looking through those provisions, and
there was some language there, but the main thing that when you
look at successful models in the country that have set up
wholesale markets that work is it is not just a transmission-
owning company game. They have the assets, but there are a lot
of people that play in that market, and the most successful
models, the ones here on the East Coast, the one in Chairman
Barton's and my home State, and others around the world, did
start very broadly from a broad stakeholder participatory
effort. And I think that the way some of the language goes, and
I mention this in my testimony on RTOs, is a bit more focused
on the right of the transmission owner to stop something, to
slow it down in court, et cetera, recognizing that there are a
lot more people here than just the transmission owners; it is a
wholesale market we are talking about.
Mr. Boucher. So you would prefer not to have that language
in that statute.
Mr. Wood. Again, I think the confirming of the Commission's
authority, as Chairman Barton outlined, is helpful. It was just
reaffirmed yesterday that order 2000, which made it a voluntary
effort, was just reaffirmed by the local court here in the D.C.
Court of Appeals.
Mr. Boucher. Well, let me ask you the other side of the
equation, though. Do you see anything in the statutory
provisions, the proposed provisions in this bill, that might
restrict your authority to take the kinds of steps that you are
currently taking with regard to RTO membership?
Mr. Wood. Yes, and those are what I specifically mentioned
in my written testimony. So I could go through those, but, by
and large, certainly the haste to get into an RTO is a
positive. I think we are getting there, but, certainly, you
never know until you actually get it stuck in the sand that you
are there. And the nailing-down of some contours in what ought
to work is positive but in some cases could be a little more
detailed than we may need 5 years from now, because these will
morph over time into institutions that address the needs of
their customers and of their owners. And so my only concern is
just a general statutory legislative type concern that very
specific language, while it may work today may 5 years from now
be difficult. But that is not a critical ``at-the-heart''
concern.
Incentive pricing, requiring bidding out, we haven't
discussed this as a body, but I certainly would intend that it
be an option out there that should be employed anyway to ensure
that the best product for the least cost is what we get in
these systems.
Mr. Boucher. On that note, do we need to do something
statutorily to authorize the RTOs to undertake bidding out, or
is this something that their basic charters could empower them
to do?
Mr. Wood. Well, I think the basic charter of the RTO could.
If, however, you are in conflict with a State statute that says
only a regulated utility can build a power line, as opposed to
a merchant that may want to come in and invest in a power line
to fix a constraint----
Mr. Boucher. So some provision that affirmatively empowers
RTOs to bid out would be a helpful measure.
Mr. Wood. And also follows through and says if you are in
fact the winning bidder, that you have a right to move forward
under perhaps some Federal authority to build that line. Then
that, of course, ties back into the siting issue, which I know
is quite delicate and I think was addressed pretty delicately
by the bill.
And your final provision was uniform interconnection
standards. Yes, we are moving forward on uniform
interconnection standards with regard to the larger power
plants. But as I mentioned in my opening statement, what the
Barton bill does that we cannot do is really allow a broad
national template to be laid for the small distributed
generation that I really think is a big part of our Nation's
energy future.
Mr. Boucher. And you would like to be able to do that.
Mr. Wood. Well, I think we or the Department or somebody
that--when I was at Texas, the Department gave the State a
pretty nice grant of R&D money to actually get consultants to
draft those standards. So the State of Texas has them. I
understand that California and New York have similar although
not exactly the same standards. And we could do a 50-state kind
of approach to this here or you could have a very investor-
friendly, kind of here's how it works in America approach on
distributed generation, which this bill would do. It would have
the standards set nationally and implemented by the States.
Mr. Barton. We can possibly do a second round if members
wish.
Mr. Boucher. Well, thank you, Mr. Chairman. I realize this
has taken a great deal of time. This is a helpful conversation,
Mr. Wood. I thank you for those answers. And in a second round,
I would like to get the response of the other panel members to
that same set of inquiries. Thank you, Mr. Chairman.
Mr. Barton. Gentleman from Tennessee, Mr. Bryant's
recognized for 5 minutes.
Mr. Bryant. I thank the chairman. I would like to direct
two of my first questions to the director of the TVA Board,
Glenn McCullough. The first one, and I will give you the
question and ask you to answer it, and then I will ask you
another question after that. Keep that in mind as you answer
from a timing standpoint. One of my biggest concerns is the
continuation of reliable and affordable electricity to my
constituents and to the people of Tennessee. Would this
language in this bill do anything to jeopardize those issues of
reliability and affordability?
Mr. McCullough. No, Mr. Bryant; in fact, the consensus
title language that is in tact in H.R. 3406 we believe is the
best language to ensure affordable, reliable power for the
people of Tennessee Valley and also to have a competitive,
transparent marketplace.
Mr. Bryant. Okay. My second question would be could you
explain in some detail, if you would like, to this subcommittee
some of the ways in which TVA and the distributors, the 158
customers plus, I guess, the direct-buy customers for that
matter, how TVA has been preparing for the eventuality of a
restructured electricity marketplace?
Mr. McCullough. Yes. Mr. Bryant, TVA is offering partial
requirements contracts to our 158 power distributors. In other
words, we are saying to the power distributor, ``You can look
into the market, you can self-generate, you can go with an
independent power producer.'' We recognize that an open
marketplace offering competition and choice is desirable, and
TVA wants to embrace that sort of marketplace. So the consensus
title language enables distributors to buy power from another
supplier. With 2 years notice, they can buy 10 percent of their
requirements, and now they are under full requirements
contract. With 3 years length of notice, they could buy all
their power from another provider.
Second, the language in the consensus title, which is
contained in this bill, yields to FERC on oversight of
transmission. That is a compromise, but we trust the judgment
of FERC on oversight of transmission tariffs. And we feel like
that that again demonstrates TVA's willingness to embrace a
competitive and open marketplace.
Third, the merchant plan activity in the Tennessee Valley
is vibrant and brisk. Many independent power producers are
interested in locating in the Valley. There is an abundance of
natural gas pipelines. We go through the FERC-ordained
procedure to enable them to access our transmission grid to
deliver power to a place where it is needed. So TVA is working
cooperatively in compliance with FERC, with the ordained
procedure for independent power producers to access our system,
and, again, we think that that is in line with the energy
security needs of the country.
Those are three ways that we are embracing competition and
choice, and that language is contained in this bill.
Mr. Bryant. Thank you. Let me ask one question to Mr. Wood,
if I could, regarding transmission siting, which is an always
an issue to me in terms of a State's and individual rights
versus efforts by government, whether it be, again, a State
government or Federal Government to site over somebody's
private property. And there is a balance there. I would ask you
to describe FERC's authority to site, in this case, natural gas
pipelines. Is it the same broad authority necessary to
effectively site interstate transmission lines? And what do you
see on behalf of--or at least chairman of FERC, the right
balance between State and regional concerns as well as
individual concerns?
Mr. Wood. Thank you, Mr. Bryant. I am probably not the
strongest advocate for Federalizing this particular issue, as
you might find either at the table or in the administration,
but I think, having been a State commissioner, in fact, I am
just filing an affidavit today in a lawsuit that I am still
being sued for for putting a transmission line in South Texas,
so I remember these responsibilities well and have to say from
a personal level I would rather they not follow us up here to
DC. But in the purpose of balancing what is in the best
interest of the public, I would say largely, in my experience,
the States have been able to address these issues.
The one instance I mention in my testimony where there
might be a concern is if a State statute, which is not the same
one I had to deal with but I understand is true in about 10 or
so States, says that you have to show there is a local benefit
for the placement of a transmission line. If that transmission
line is meant to bring up the voltage of the entire grid but
you may be at the corner of a State, it may be difficult to say
that the residents of that corner of Tennessee, in fact, are
benefiting from the placement of this line. That may be more
for the benefit of Kentucky. But yet that is an approval that
is required by the State of Tennessee. So the regional aspects
on the regional lines really would probably be the area where
there is a problem.
On the addressing lines that rest largely within a single
State, I can't say I have heard of any problem with that. It is
when you have got regional lines. And I would suggest, as I
mentioned in my testimony, that these Regional Transmission
Organizations, which are made up of multiple States, their
commissions, some oversight by FERC, by all the participants in
those regional markets, that a proper procedure may be to put
it not at the Federal level, but at the regional level to look
at what the best siting is. The Western Governors have set a
good template in fact for how that ought to work and that I
have kind of been on record of being a pretty good fan of.
Mr. Bryant. Mr. Chairman, I think my time has expired.
Mr. Largent [presiding]. Yes, sir; your time is expired. I
recognize the gentleman from Tennessee, Mr. Gordon.
Mr. Gordon. Thank you. Chairman McCullough, since you
seemed to be up to bat a little earlier, I will return to you.
As you know, the Tennessee Valley Authority was created to help
control the flooding that was devastating to a large region of
the country, as well as to help with economic development to
one of the poorest regions of our Nation. And with that, there
was a Federal investment. Three years ago, Congress has
mandated there will be no more Federal dollars appropriated for
the Tennessee Valley Authority. Not only that, but the TVA's
continuing to pay back that original investment, millions of
dollars to the Treasury every year, which is appropriate, an
agreement that was made.
I guess one thing that concerns me is that every river in
the Nation the management is paid for by the Corps of Engineers
except for the Tennessee River, which is underwritten by the
ratepayers in that area. So it appears that not only is this a
misconception that somehow there is a Federal appropriated
subsidy to TVA not accurate, but TVA really is having to take
up additional responsibilities that taxpayers take care of
elsewhere. Would you want to comment on that if I am correct or
not?
Mr. McCullough. Well, Mr. Gordon, you are correct in every
point you make. I would emphasize that while TVA does not
receive any Federal appropriations, we have not in any way
neglected our responsibility to manage and develop the
Tennessee River and its tributaries. Appropriations, I believe,
is your prerogative and the leadership of Congress, as far as
TVA is concerned. We are committed to running TVA like the big
business that is it, being held accountable to you and your
colleagues here on the Hill. In fact, we benchmarked our
performance in terms of water quality, in terms of navigation,
flood control.
And you are exactly correct, in 1933, the Tennessee River
was out of control, and the Tennessee Valley was flooded almost
every year. That has not been the case since the dams and the
reservoirs have been constructed. Not only that, we have
affordable, reliable power in the Tennessee Valley. And the
Tennessee Valley's economy has grown significantly, providing
better jobs for the people of the Tennessee Valley.
Mr. Gordon. You had mentioned earlier in your testimony
about some of the model environmental programs you were doing.
Once again, these are programs that are underwritten by
ratepayers, yet they are modeled for the entire Nation. Can you
talk some more about those environmental initiatives?
Mr. McCullough. Yes. We have significant water quality
initiatives and amebas hydro and oxygenization program in our
hydroelectric facilities to ensure that the water quality in
the Tennessee Valley is among the best in the country. We are
working very closely with State and Federal oversight
authorities to ensure that the water--as a matter of fact, over
4 million people get their drinking water each day from the
Tennessee River. TVA has a mandate to ensure that it is of the
highest quality. We are working on other initiatives to
modernize and in fact to generate more hydroelectricity and at
the same time have a higher quality of water. And we are doing
it all without a penny of federally appropriated dollars. We
think it is our reason for being, it is our mission, and we
think it is a responsible way to run the business. But you are
correct in the points you make.
Mr. Bryant. Thank you.
Mr. McCullough. Yes, sir.
Mr. Largent. Does the gentleman yield back?
Mr. Gordon. Yes. I yield back the balance of my time.
Mr. Largent. Mr. Shimkus from Illinois is recognized for
questions.
Mr. Shimkus. Thank you, Mr. Chairman. Mr. Blake, two quick
questions, then I have a question for the commissioners. Does
the administration support the inclusion of currently non-FERC
jurisdiction transmission owners into RTOs?
Mr. Blake. Yes.
Mr. Shimkus. And based upon the President's national energy
policy, do you think that the Barton energy draft meets the
intent of the administration when they presented their national
energy policy?
Mr. Blake. I think it is definitely in line with the
administration's desire for comprehensive electricity
legislation.
Mr. Shimkus. Thank you. For the FERC commissioners, I am
interested in this seams agreement issue, and especially for
the State of Illinois in which we currently have three RTOs or
we may have three RTOs. We understand that the cost of getting
electricity into one's home may be 5 to 10 percent of the cost
per kilowatt hour. As someone who is concerned about the
competitive benefits to the individuals in my State, can you
talk me through the seams agreement, and are there things that
we need to do to address this? To tell you the truth, I am kind
of confused by the whole issue. And why I don't just go with
the chairman and then go from my left to my right? Thank you.
Mr. Wood. Yes, sir; let me jump in first. These are all
pending, actually, I just posted the agenda for next Wednesday
for our Commission, in which we will take up the seams
agreement, among really a litany of issues relating to the
structure of the wholesale market in the Midwestern United
States. So I think I might defer to Linda and Bill, who were
there actually when the seams agreements were first voted on,
for giving you some specific answers.
Mr. Shimkus. That is great. Commissioner Breathitt?
Ms. Breathitt. I need to speak generically about this,
because there is a particular seams agreement that was worked
out between two parts of the Midwestern area of the U.S. But
seams are going to occur between RTOs. And the purpose of
working out seams agreements between RTOs is to minimize the
flow of electricity between the seams. So the protocols don't
impede--the protocols that one RTO has don't impede the flow of
electricity from one region to the other, from two different
RTOs.
So that is one way to address the ability for power to flow
from one to the other is through a seams agreement that might
address procedures and protocols or rates even, or congestion
bottlenecks. So they can address those very important aspects,
and that is what I think will be important for us to make sure
our agency encourages, because you are going to have a number
of RTOs within the United States.
Mr. Shimkus. If I could follow up. A good seams agreement,
could that help forestall some market power abuses? Could there
be market power abuses because of poor seams agreements and the
like?
Ms. Breathitt. Market power abuses can occur whether you
have a seams agreement or not, and those need to be dealt with
through a number of ways. But a seams agreement, per se, may
not directly address market power. But what a seams agreement
can help minimize is the inability for power to flow easily
between regions and markets.
Mr. Shimkus. Commissioner Massey?
Mr. Massey. Mr. Shimkus, a couple of years ago, when this
issue came before the Commission, the question was whether we
should encourage a seams agreement in the Midwest or encourage
the formation of a single RTO. And my vote----
Mr. Shimkus. And we are still debating that.
Mr. Massey. Yes. Well, my vote at that time was in favor of
a single RTO for the Midwest. However, a seams agreement can be
a good thing. It depends on how well it is enforced and how
well it is complied with. I think it can help to mitigate
market power. I think it can ensure that power flows freely
across the seam without trading difficulties. In particular, it
can help deal with the critical issue of how to manage
congestion on the grid. But I think a better solution in many
parts of the country is simply to ensure that the RTOs are
appropriately sized to start with.
Mr. Shimkus. Mr. Chairman, my time is expired, and I will
quit my questions.
Mr. Largent. Yes. Mr. Sawyer from Ohio is recognized.
Mr. Sawyer. Thank you, Mr. Chairman. I just want to observe
that these exchanges I think have been extraordinarily helpful,
and I am particularly grateful that we took the time to have
these hearings this week.
Let me touch on a couple of observations that you made,
Chairman Wood, and one that I made. The first is that even at a
time when transactions and generating capacity has been--or
investment has been growing, the transmission really has been
in a very long, slow decline. It seems to me that that is the
single most debilitating impediment to achieving the goal that
we are all talking about here.
At the same time, in your testimony, you suggested that
infrastructure investment suffers from the uncertainty of the
long transition to competitive wholesale electricity markets. I
am inclined to agree with that. Can you talk to me briefly, or
other commissioners, about the steps that have been taken to
increase the certainty and what steps you need from us to help
you achieve it? I would be happy to hear from other
commissioners as well.
Mr. Wood. A great question. In 1996, the Commission in what
was called Order 888, put down the first--I guess the first
book of the trilogies and said, ``We are going to open these
wholesale markets.'' That now was argued before the Supreme
Court shortly after the attacks, and we expect a decision on
that in the spring. Order 2000, which was the step that was
taken in late 1999 says, ``Not only are we going to fix this on
a utility-by-utility specific basis, but we want to encourage
the development of regional groups that look at electricity on
a regional basis, which most people acknowledge makes a lot of
sense.'' So that was actually affirmed--that order was affirmed
yesterday by the D.C. Court of Appeals.
So now we are implementing those two orders of the
Commission on a utility basis and on a regional basis, and so
those steps are going forward. They are tediously slow, from my
perspective. Investors, I know would look for somewhere else
until these rules got clarified. That is why we have now
announced that we are going to finish the trilogy with the
``third book,'' which will be saying not only do we want these
things and we think they are a good idea, but here is what we
specifically want them to do, so that investors know these are
the rules of the road for investing in a transmission business
from now for 10 years.
We were at Wall Street last week. I heard that message in
spades, even in the post-Enron----
Mr. Sawyer. We have as well.
Mr. Wood. Yes.
Mr. Sawyer. What do you need from us to help you facilitate
this and move----
Mr. Wood. Yes. And I am sorry I didn't put this in my
testimony, because it is an idea that I actually heard in
discussions from an exasperated participant in these markets,
that no matter what the committee does by adding incentive
rates to the legislation or the Commission does to pull it all
together, at the end of the day, the bulk, say 90, 80 percent
of the revenues that a transmission company would spend would
be ultimately paid by--or would be paid by a ratepayer that is
retail-regulated by our colleagues at the States. The split
jurisdiction between--we have jurisdiction over some of the
transmission--over all the transmission access, some of the
transmission rates--encouraging transmission to be built, with
the States collecting 80 percent of the dollars, they may not
agree that it gets built.
Mr. Sawyer. Could we just have a quick commentary from
other commissioners?
Ms. Breathitt. I think this is something that our agency
can do and you asked for something that Congress could do, but
may I spend 30 seconds on that?
Mr. Sawyer. Sure.
Ms. Breathitt. State returns are often a couple or several
hundred basis points over Federal returns on transmission. One
thing that the FERC can do is make those more comparable so it
incents transmission owners or transmission companies to build.
Mr. Sawyer. Others?
Ms. Breathitt. We have heard that.
Mr. Sawyer. Other comments?
Ms. Brownell. I would simply add that I think we could
clarify with one simple statement or authority to establish
RTOs. I agree with my colleague on incentive rates, but you
need to give incentive rates to innovators, not for people to
continue their jobs the way they have always done them. Because
that will bring the changes that you talked about.
Mr. Sawyer. Commissioner Massey?
Mr. Massey. I believe that you are moving in the right
direction in placing transmission under one set of rules. I
think that is critically important. Right now about 30 percent
of the grid is exempt from the open access requirements
directly. No. 2, I do think it is important for Congress to
make a statement about RTOs and their importance to evolving
regional markets. It would be helpful to have a clear statement
from Congress that we can insist that these institutions be
formed. Otherwise we may continue to have a patchwork because a
particular State may, for example, have its own statute that
says you can't transfer control of any transmission assets in
this State or any assets at all without the approval of the
State Commission. And if they withhold that approval, we may
still have a patchwork in some parts of the country. So I think
it needs to be clear that the Federal entity that is
responsible for regional markets can get this done. And, No. 3,
I think we do need mandatory reliability rules.
Mr. Sawyer. Thank you for your flexibility, Mr. Chairman.
Mr. Largent. I recognize the gentleman from Oregon, Mr.
Walden.
Mr. Walden. Thank you very much, Mr. Chairman. I want to
thank the chairman of the subcommittee specifically for working
with us for the inclusion of a Northwest title, because similar
to my colleagues from Tennessee and who are representing the
Tennessee Valley Authority, the Northwest is indeed unique in
its power system and the way it operates and how we are working
together to form regional RTO out there. So I appreciate the
subcommittee chairman's work with us on inclusion of that
title.
There was a little present associated with that section of
the bill, however, that I hope to work with the full committee
chairman on, and that is the section 525 language that deals
with continuation of preference power for the DSIs in the
Northwest. They have been under enormous pressure of late
because of power costs and yet represent 40 percent of the
Nation's supply of aluminum and are important employers in the
region. My concern is that this inclusion may indeed blow up
talks that are ongoing right now in the region, and so I draw
the committee's attention to that.
I wanted to follow-up a little bit on FERC's--the language
in Section 401 that would expand oversight over transmission
networks on reliability and support. And I wonder, some of the
comments I have received indicate that FERC already has that
authority to approve incentive transmission rates that are just
and reasonable. Do you feel you need this additional authority?
Mr. Wood. Sir, it wouldn't hurt. I think a lot of things
that were not written in the 1992 law or in the 1935 law are
subject to being challenged by court, and my experience
certainly at the State level if issues related to ratemaking
are not clear enough from the statute, they certainly become
litigation targets. And if Congress deemed that this is a good
goal, and I would agree that it is a good goal, then it would
be helpful to put that in the statute, clearly that authority
is here.
Mr. Walden. Do you feel that it will result in construction
of additional transmission facilities? I mean is there a
guarantee that comes with this for consumers?
Mr. Wood. No, no, no. I think as with ratemaking in
general, you give somebody sufficient revenue, sufficient
return, you have a high expectation that they will deliver on
that but no guarantee.
Mr. Walden. One of the other concerns would come out of
Section 101 of the bill, the interconnection standards--and
this may have been addressed in some earlier discussions I
think my colleague from Virginia raised--about whether FERC has
the technical expertise to set some of these very technical
standards. How would you go about that? Are you going to rely
on the IEEE standards?
Mr. Wood. The current process that we have going on now is
very much a collaborative effort with the industry, with, quite
frankly, the Commission staff playing a catalyst and
shepherding role, getting the experts together on talking about
issues of this nature. It is clearly the right way to go
forward. IEEE standards--I know from having done this back in
my home State, IEEE standards fill a lot of that effort, a lot
of the contract revised back on the industry standard setting
bodies to that, which is referenced in the statute.
Mr. Walden. I think that is all the questions I have at
this time, Mr. Chairman.
Mr. Largent. Okay. The Chair recognizes Mr. Markey for his
questions.
Mr. Markey. Thank you, Mr. Chairman, very much.
Mr. Barton. Would the Chair suspend just a second? This
will be our last questioner before we go, because we have six
votes. So we will do Mr. Markey, and then we will recess, and
then we will come back at approximately four o'clock. I don't
see how we can do six votes in less than that time.
Mr. Largent. Mr. Markey is recognized.
Mr. Markey. Thank you, Mr. Chairman. It seems to me that
the Enron collapse raises some fundamental questions about the
nature and the adequacy of oversight over the traders who are
marketing electricity. If in fact the transactions that are now
raising eyebrows wee intended to conceal trading, our
investment losses, what does that say about whether we can
continue to allow these energy trading firms to be completely
unregulated? When it comes to banks, security firms and
commodities markets, we have Federal regulators in place that
have holding company, risk assessment authorities, authorities
to set capital standards and margin rules, audit trail and
recordkeeping authorities, large trading or large position
reporting requirements, and anti-fraud and anti-manipulation
authorities, backed up with market surveillance systems and
enforcement powers.
But when it comes to electricity trading, we really don't
seem to have that type of regulatory infrastructure. Don't you
think, Mr. Chairman, that we should put such a regulatory
structure in place so that we can make sure that any future
potential Enron collapse is much less likely to ever occur.
Mr. Wood. Thank you, Mr. Markey. One of the major features
of the RTO rule that was just affirmed yesterday by the D.C.
Court of Appeals is that we have a market monitoring section
that looks at the regional transactions on a hour-by-hour,
minute-by-minute basis. We have the ability now certain in the
Northeast and your area, as well as on down through here, with
our oversight of the markets that have already been organized
up here. So you monitor transactions on a--transaction-by-
transaction basis and we do. That information is valuable, it
is very helpful. The fact that the local monitors and at the
Commission are looking at that, and on occasion acting on that
information is very helpful. We do not have the capability
across the entire country, because quite frankly the markets
across the country are not that organized. It is difficult
without an organized market to have much oversight of a lot of
disparate activity.
Mr. Markey. What is your authority to regulate a non-
utility electricity trader like Enron?
Mr. Wood. Well, they, actually, under the act, would be
considered a public utility. The way that the utilities--they
don't own the wires in this, but they have a marketing
certificate just as I have discussed with some other questions
earlier. There are 1,200 people that have market certificates--
--
Mr. Markey. So you believe you have existing authority.
Mr. Wood. We do, and in the past we have waived our
accounting requirements for the last 10 years of these
unregulated parties, because we don't set their rates. The main
reason we have accounting requirements is not to protect
sophisticated players in the market, but to protect the
customers.
Mr. Markey. So what are you going to put in place post-
Enron?
Mr. Wood. We just posted this afternoon--this morning--our
agenda for next week, and we were taking up an item which
interestingly was work already going on to reflect the changes
in accounting for derivatives and for hedging instruments that
we were looking from a ratemaking point of view but we are
considering looking at that for more of a disclosure point of
view.
Mr. Markey. Would that allow you to look at the capital
structure of Enron?
Mr. Wood. That is an open question. That would be certainly
something we would ask the--it would be a notice of proposed
rulemaking. So at the phase of asking in public----
Mr. Markey. Do you have the capacity and do you believe you
have the inherent authority to look at the capital structure of
these companies, if you put such a rulemaking in place?
Mr. Wood. The statutory authority, yes. The technical
expertise on our staff at present to discern that, I would have
to get back to you on that, sir.
Mr. Markey. Mr. Massey?
Mr. Massey. Well, I think we have the authority to look the
capital structure. Whether we should is a matter that I am open
to argument about. We certainly have the authority to take a
look at the current exemption that we had in place, as Pat
says, for about 10 years, an exemption from our uniform system
of account filings for about 1,200 power marketers and sellers,
because we don't generally regulate their rates. However, we
have conditioning authority that we can use in reasonable ways.
Mr. Markey. When you say you are open, who else would do it
but you? Who would have responsibility but you? You are the
expert agency in the field of energy trading.
Mr. Massey. Well, we definitely ought to consider what the
lessons from this are for energy trading, and I think we will.
Mr. Markey. Let me just--I know my time is going to run
out--l just want to run down yes or no, and I would like you
and the chairman to each answer. In your opinion, do you have
the power and intent to establish, one, capital requirements?
Chairman Wood?
Mr. Wood. I am not given enough of a question to give you a
thoughtful answer. I will be glad to do so.
Mr. Markey. Mr. Wood--I mean Mr. Massey?
Mr. Massey. I think we have the power----
Mr. Markey. Yes or no. I mean I am going to run out of
time.
Mr. Massey. Yes, we have the power. I don't know whether we
ought to establish those standards.
Mr. Markey. Okay. Ms. Breathitt?
Ms. Breathitt. Mr. Markey, we have also included in a
recent rulemaking electronic trading platforms to come in under
our standards of conduct.
Mr. Markey. Capital requirements, yes or no?
Ms. Breathitt. I haven't studied that, but I----
Mr. Markey. Okay. That is fine. I think you should study
it. Next----
Ms. Breathitt. I have the intent.
Mr. Markey. The intent, that is good. I just need you--
margin requirements, yes or no?
Mr. Wood. Same answer.
Mr. Markey. Answer is?
Mr. Wood. I will get back to you.
Mr. Markey. Okay. Ms. Breathitt?
Ms. Breathitt. I haven't looked at it, but I would have the
intent to do it if we can.
Mr. Wood. If we have the authority, I am willing to look at
it.
Mr. Markey. Ms. Brownell?
Ms. Brownell. I think it is important we work with other
financial oversight agencies to make sure that we having a
coordinated appropriate response, which would include,
Congressman Markey asking these questions. But in many cases,
from what we have seen, these are financial issues, so I just
want to make sure that the right agency is looking at the right
thing.
Mr. Markey. They are exempted from many of those other
agencies' regulations. I mean you won't be responsible.
Auditing and bookkeeping requirements?
Mr. Wood. The answer to that is that we do have the
authority certainly on the physical delivery of the power, and
that is what I mentioned to you a moment ago that would be
subject to our discussions next week in our open meeting.
Mr. Markey. Ms. Breathitt, very quickly, and then I am
going to----
Ms. Breathitt. Yes.
Mr. Markey. Yes.
Ms. Brownell. Yes.
Mr. Markey. Yes.
Mr. Massey. I answer the same as Chairman Wood.
Mr. Markey. Okay. And the large trader or large position
reporting, so you know what is going on in the market.
Mr. Wood. Same answer on the accounting side. Yes, sir. I
think that is certainly something that would come up next week
in our discussions.
Ms. Breathitt. I agree with the chairman's response.
Ms. Brownell. As do I.
Mr. Massey. I agree, and I think we ought to take a close
look at that.
Mr. Markey. And, finally, anti-fraud and anti-manipulation
rules applicable to trading activities.
Mr. Largent. This will be the last question.
Mr. Markey. Okay. Thank you.
Mr. Wood. I do understand that the other two agencies do
have authority over fraud issues, and I would certainly defer
to their expertise on that. But if they don't I am not aware
that we do have that authority. But we will certainly look for
it and I will get back to you on that.
Mr. Markey. Would you want that authority?
Mr. Wood. I think anything that diminishes customers' faith
in the efficacy of markets ought to be vested in us or
somebody.
Mr. Largent. Gentleman's time has expired. I yield to the
chairman of the subcommittee for a brief statement.
Mr. Barton. Before we break for the recess, I want to
follow-up on some of Congressman Markey's questions just
briefly. There is absolutely no question that the collapse of
Enron's stock price has wiped out many of their pensioners,
many retirees around the country. I mean it is a major, major
calamity, and nobody is taken away from that. Until this year,
until this Congress, this committee had jurisdiction over the
financial industry also. So you had one committee that had
energy jurisdiction and also security jurisdiction. And both
Mr. Markey and I are very unhappy that we lost the security
jurisdiction to the new Financial Services Committee.
I am not taking away from the collapse of Enron, but in
terms of the energy markets, is there any evidence that because
of the collapse of Enron and the disappearance of Enron Online,
that power was not sent where it was supposed to have been
sent? Did the market fail in the sense of energy getting to
where it was contracted to go?
Mr. Wood. In fact, no. No, sir. The physical deliveries of
gas have continued, and in fact I think the big story here is
that the markets really didn't hardly hiccup at all.
Mr. Barton. So we have got an accounting disaster with
Enron and a financial reporting disaster and probably a
partnership creation problem, but we don't have an energy
market problem.
Mr. Wood. No, I think energy markets performed admirably
well in the past couple of months on this issue.
Mr. Barton. Thank you, Mr. Chairman.
Mr. Largent. Well, we will recess this hearing until four
o'clock, and I know that the chairman of the subcommittee feels
Enron's pain.
[Brief recess.]
Mr. Barton. If our panelists are still in the room, they
could resume their seats. And if we have--do we have a member
back there, anybody? It is Mr. Norwood's turn.
The subcommittee will come to order. When we recessed, Mr.
Markey had asked his 5 minutes of questions. We now go to the
majority,and Mr. Norwood of Georgia is recognized for 5 minutes
for questions.
Mr. Norwood. Thank you very much, Mr. Chairman. I am
delighted about this hearing and, as others on the committee, I
am very concerned about Federal deregulation of electricity, I
am concerned about its unintended consequences, and I want to
take this opportunity to see if we can't clear up some things.
It seems to me that we all ought to be a little concerned
about deregulation of electricity. We have noted the
deregulation in California, and the consequences of that was
generally the cost to the ratepayer. Enron, the poster boy for
deregulation, right or wrong, has ended up hurting people. And
in my own State of Georgia, we were one of the first States to
deregulate gas. And though it looked right, it appeared right,
everything should have been right, but in the end it turned out
to be a very costly mistake to the ratepayers in Georgia. So it
is right and correct that we have great concerns about this.
Now, just so you know where I am coming from, I come from
the State of Georgia. We are very happy with our utilities
there. That includes the coops, that includes the munis, that
includes Souther Company, that includes Georgia Power. And,
frankly, the reason we are very happy with them is that the
give us very good service at very good rates, and we want to be
sure that the FERC doesn't do anything that it might help
somebody else but at a great cost to us locally.
I want to thank all of the Commission members for being
here, and I am going to direct my questions to the chairman in
hopes that because of time limitations the rest of you would be
kind enough to at some point in time be willing to respond too.
Mr. Wood, it has been a while since I have had as many
people as upset coming through my office here and in Augusta
with you. It has been a long time since a Federal agency has
generated quite so much concern. I have been, frankly, amazed.
And in view of our good relations with our utilities and our
good relations with the consumers, many of whom I know well as
voting citizens and friends, it is just rather been amazing.
Of course, I tried to defend you and tell them you were
from Texas, couldn't be all bad. But I----
Mr. Barton. All bad?
Mr. Norwood. All bad.
Mr. Barton. All good.
Mr. Norwood. I sort of have stopped defending you. I read
the other day in Energy Daily, I think it was September the
26th, of an interview, a remarkable interview that you had, and
in that interview there is a quote of yours reported in that
article from the Senate hearing that you were talking about
punishing regulated entities, regulated utilities. Now, the
quote says, ``A few heads on the stakes around the campfire may
make all the animals behave a lot better in the forest.'' Is
that accurate?
Mr. Wood. I recall saying that; yes, sir. Not in that
context, I would like to explain, but----
Mr. Norwood. Well, that is accurate. That is the first
thing, so I don't have to go check the Senate record. I guess
probably where I am coming from a little bit here is I have got
a great curiosity about whose head you want to put on a stake,
and I have even got more interest in that if any of those
people are friends of mine. And I am beginning to think maybe
that might be the case. In Georgia, when we start talking about
animals and campfires and forests, we are usually talking about
deer hunting. Are you a deer hunter?
Mr. Wood. No, sir.
Mr. Norwood. I don't know why I sort of suspected that. But
that is a quite a metaphor. And I want to--I am going to get
back to that in a little while, but I want to just get right at
the bottom line in here, and it is going to take a while, Mr.
Chairman, so I hope you will have a few rounds.
I am curios to know about this order from November the 20th
revoking market-based rates of two or three companies that were
singled out, one of which was Southern Company, which
apparently shifts the cost of doing business from wholesale to
retail and how this is going to affect the retail customer in
Georgia. Now, I suspect that it is going to affect the retail
customer in Georgia and probably not in a good way. I would
just like to make sure that when FERC goes utility hunting they
don't end up shooting the customer. And that is really the
bottom line. I really think we all sort of agree with that.
That is really what this is about, isn't it, the ratepayer and
trying to give them the least costly electricity with the best
service.
When you decided that you wanted to force these companies
into not being able to use market-based rates, were you aware
at the time that in Southern Company at least the profits they
make by selling power at market-based rates goes back to our
retail customers to reduce their rates. At least 90 percent of
the profits do. So in the end, those profits are used by our
utilities to reduce what a member of the household might pay. I
heard you talking about customers earlier, and I am not talking
here about industrial customers; I am talking about folks at
home. We you aware of that fact when you decided that market-
based rates wouldn't be good enough for these companies, guilty
or not?
Mr. Barton. This will have to be your last question in this
round.
Mr. Norwood. I am just warming up, boss.
Mr. Barton. I know you are just warming up, but you are 2
minutes over in this warmup period.
Mr. Norwood. All right. Well, could the----
Mr. Barton. He can answer.
Mr. Norwood. [continuing] Chairman answer? Thank you.
Mr. Barton. If he has a good answer. We won't accept bad
answers.
Mr. Wood. I have several. Could I respond to the full list,
sir? Is that appropriate?
Mr. Barton. You have got the right.
Mr. Wood. My comment on the animals in the forest, sir,
related to people who are violating the Natural Gas Act or
violating the Federal Power Act. And if they are in the context
of all the California issues, we were looking at market power
and anti-competitive conduct, at physical and economic
withholding of power from the market, those type of things.
Those are people who are violating the law, and those are the
people whose heads should be on the stake.
Mr. Norwood. And you should do that, but don't put innocent
people's head on the stake in the process of one-size-fits-all.
Mr. Wood. I agree with that. We will not do that, sir. Our
job is to go through due process. In fact, we have got a number
of enforcement actions at the Commission today. Some may result
in the finding of guilt, some may result in the finding of
innocence, but we go through that process first.
As to the order on November 20, we took the oldest three
people in line that we told 3 years ago we are going to look at
this every 3 years and see if it still matches what is going on
in the marketplace. We learned from California--as an answer to
Mr. Barton's question a moment ago, we learned from California
that you could have a deregulated marketplace or you could have
one that gets out of control as that one did, that necessitated
the Commission to come in and put what I think, as a market-
oriented person, was a very prescriptive and I think a
difficult non-market-based solution on top of that market.
What we sought to do with our new policy, which we
discussed through the summer and voted on, on September 26, at
that same meeting, and implemented on November 20 with these
first three applicants--there will be others that either pass
it or don't pass the test, coming up at this next meeting next
week--is updating a policy that we have all acknowledged is
broken and does not appropriately address market power. And if
the profits from the market were being used to refund the
California retail customers, our job is to look after the
wholesale market as well. Those profits are coming from a
market that may have resulted in some of the wholesale
customers paying too much.
So what we are looking at here is a balance of all the
customers. I think my colleagues on the Georgia Commission are
totally capable of making sure that the retail customer stays
protected in that State, but our job is to make sure that the
wholesale----
Mr. Norwood. Not if you force the wholesale basic utility
company to raise rates that they can't help raise them because
you are forcing them to sell their generated power at a
different rate; in other words, at a cost rate rather than a
market rate. They lose money.
And my question was do you understand that 90 percent of
that money goes for the retail payer and helps then reduce the
retail rate?
Mr. Wood. Yes.
Mr. Norwood. You understood that.
Mr. Wood. Yes, sir, and we had that same policy in Texas
when I was a regulator, as do most States.
Mr. Barton. We are going to have to suspend this question
for this period. So we are going to go to Mr. Waxman now for 5
minutes.
Mr. Waxman. Thank you very much, Mr. Chairman. Before I ask
some questions about this legislation before us, Mr. Blake, I
wanted to ask you, I understand you have been deeply involved
in ongoing discussions within the administration about changing
the new source review air pollution requirements under the
Clean Air Act; is that correct?
Mr. Blake. Yes, sir; I have been involved.
Mr. Waxman. The utility industry has been the strongest
proponent of rolling back these important air pollution
protections. Have you met with or otherwise received the views
of the electric utilities or other industry sectors on this
topic?
Mr. Blake. Yes, sir.
Mr. Waxman. And have you met with the environmental groups
on this topic?
Mr. Blake. Yes, sir.
Mr. Waxman. Will you provide to the members of this
subcommittee with a list of the names and dates for all these
contacts?
Mr. Blake. Yes, sir.
Mr. Waxman. I thank you for your cooperation.
In your testimony, Mr. Blake, you repeat seven goals for
electricity legislation: Reducing uncertainty, increasing
wholesale competition, strengthening transmission, increasing
supply, lowering prices, protecting consumers and improving
reliability. I am disappointed that promoting cost effective
energy conservation doesn't even make your list. We all know
that you can't improve reliability by addressing supply and not
demand for electricity. That is like trying to balance the
budget only by raising taxes and never controlling spending.
Your testimony also calls for modernizing electricity law but
not our power sources. In fact, you urge repeal of the PURPA
provision supporting renewable energy sources. Electricity
legislation should promote not disadvantage clean, renewable
energy sources.
And, finally, you make no mention of environmental
protection. We now have evidence that our air pollution has
increased under restructuring to date. It appears that you have
fundamentally changed our electricity system without protecting
air quality from the effects of restructuring. Does the
administration believe that energy conservation, promotion of
renewable energy and environmental protection must be goals of
any electricity restructuring legislation?
Mr. Blake. Yes, sir. And I would just comment that there
are provisions in the legislation that we noted the
administration supports, such as advocating net metering as
well as distributed generation. In terms of emissions increase,
I am not quite sure what the baseline comparisons are pre- and
post-deregulation that would suggest that opening up markets
has resulted in greater pollution. In fact, most of the
experience over the last several years has been the addition of
new cleaner natural gas-fired turbines around the country, and
I would suspect that if you looked at a per GDP basis that you
would actually see a substantial reduction in emissions that we
gained through opening up the markets, rather than an increase.
Mr. Waxman. Thank you. Mr. Chairman, I have a report from
Synaps Energy Economics, Inc., a retrospective review of FERC's
environmental statement on open transmission access, and the
summary--both the summary and the report I would like to have
the committee receive for the record.
Mr. Barton. Could we have an opportunity to have the
committee staff look at it?
Mr. Waxman. Certainly.
Mr. Barton. I am sure we will put some version if not the
whole thing in, but we would like to at least review before we
agree to put it in the record.
Mr. Waxman. And since I have a second more, Mr. Blake,
would you agree that using energy more efficiently can boost
our economy, enhance our energy security and help the
environment?
Mr. Blake. Yes, sir.
Mr. Waxman. Thank you very much, Mr. Chairman.
Mr. Barton. You still have a minute and 20 if you actually
have more--we have got the clock set at 2 minutes. It goes
yellow, so you have got a minute and a half if you still want
to use it.
Mr. Waxman. Thank you. You are very kind, Mr. Chairman, but
I am going to yield it back for one of the other members to
take advantage of that opportunity.
Mr. Barton. Okay. We thank the gentleman from California.
Gentleman from North Carolina, the very patient Mr. Burr, is
recognized for 5 minutes.
Mr. Burr. Thank you, Mr. Chairman. Chairman Wood, what is
your definition of market power?
Mr. Wood. The ability in a real-time market to affect price
by withholding supply.
Mr. Burr. Can that be also achieved because an entity has
limited competition?
Mr. Wood. Yes. He can withhold a certain amount of
supplies, whatever the market is. He has the ability and no
competitive check.
Mr. Burr. Could it be affected because the general capacity
was not adequate to meet the need?
Mr. Wood. Yes.
Mr. Burr. So there are multiple reasons that there could be
a spike in price other than a company that just wanted to gouge
consumers; am I correct?
Mr. Wood. Yes, absolutely.
Mr. Burr. And the end result of that would resemble market
power abuse in every case. Price would go up because something
had happened to supply; is that correct?
Mr. Wood. Correct.
Mr. Burr. And how would FERC determine on the spot--I take
for granted that there is a process that you go through. How
long would that be to determine whether there was a market
power finding?
Mr. Wood. Well, quite frankly, it could take a year. I mean
we have been looking at the California market for quite some
time. There have been----
Mr. Burr. And what effect would that have on Wall Street's
view of the electric industry, the companies that make it up?
What effect might that have on the availability of capital for
new generation, given that every potential charge, every
potential bill that goes out is susceptible to a refund
determined by FERC over some period of time yet to be defined?
Mr. Wood. I think it could be a problem, and we have got--
as you may know, there is a pending item that we have out for
comment from the parties on just that issue.
Mr. Burr. Has the Commission ever had a finding of market
power?
Mr. Wood. Well, we have a pending case regarding natural
gas on that issue, but I have not----
Mr. Burr. Did we find a market power abuse in California?
Is there a finding of market power in California?
Mr. Wood. Not from a specific player; no, sir.
Mr. Burr. Let me read Mr. Massey's comments. I think these
were from the debate over E47. And I quote, ``has concerns
about the tariff conditions, because it requires a showing of
bad behavior for FERC to order refunds.'' He argued that ``FERC
has never been able to show bad behavior, even in California.''
Unfortunately, he would add another test, a bad market test.
But, clearly, through the information I found, there has never
been a determination of finding of market power in California.
Mr. Wood. That is correct.
Mr. Burr. Biggest spike in electricity pricing.
Mr. Wood. In the electric markets; yes, sir.
Mr. Burr. Now, given that there is a mechanism that you
have proposed, FERC's proposed, that would force the automatic
refund, would Wall Street respond differently if California
were to happen a second time with still no finding of market
power?
Mr. Wood. I was asked this question last week. Commissioner
Brownell had the opportunity to meet over 2 days with a number
of Wall Street analysts and investors. And quite frankly, the
issue of the refund authority for anti-competitive behavior I
think was viewed in its proper context, which is a customer
protection issue that, like a nuclear bomb, would never be
invoked. I don't perceive that that is----
Mr. Burr. Well, a customer protection could also be
extended to our inability to allow people to compete to supply
power within a given power, because that created the same price
spike as somebody that withholds power, right?
Mr. Wood. I am sorry, can you repeat that, Mr. Burr?
Mr. Burr. You said earlier that you get the same result
when you limit competition in a given market. So if potentially
you are holding people liable, shouldn't we hold those liable
that limit competition in a marketplace, because they
artificially affect the price?
Mr. Wood. If I missed something----
Mr. Burr. I am trying to decide the scope of what FERC
would like, as a Commission, to be involved in.
Mr. Wood. Well, I think, certainly, we would like the
market to be open and transparent and full of diverse number of
players whose----
Mr. Burr. And is it transparent when every potential sale
of electricity is susceptible to a refund under a determination
that FERC will make on an undetermined amount of time?
Mr. Wood. I have to admit I don't believe that this is
actually a cloud at all. I don't think----
Mr. Burr. Well, given that there has been no finding of
market powers, why are we so insistent on this new rule that
deals with market power?
Mr. Wood. Again, you are talking about the refund authority
on the anti-competitive?
Mr. Burr. Yes.
Mr. Wood. The anti-competitive behavior, quite frankly, if
somebody were making a business plan of making money off of
anti-competitive behavior, I would expect that we would not
allow them to be in this market. And so I think those are the
only people who are going to be negatively affected by the
condition that we placed in all the power marketer
certificates.
Mr. Burr. Because I am out of time, let me just turn to
RTO's for just a second and follow Mr. Norwood with something
dear to me, and that is the GridSouth. GridSouth was approved--
--
Mr. Wood. Initially; yes, sir.
Mr. Burr. Yet it is not operational. What is the problem
that FERC has with GridSouth?
Mr. Wood. The GridSouth, again, was approved before I
joined the Commission. GridSouth was given conditional approval
with the urging that they approach their neighboring RTO
proponents in Florida and Georgia and other States to increase
the scope, the size of the relevant area over which the RTO
would have control. And so the condition for the approval was
that there be sufficient scope and----
Mr. Burr. My interpretation of Order 2000 left a tremendous
amount of flexibility on governance and market rules. But now
it seems like what we are calling for is a standard market
rule. We have approved you to do an RTO, but now we want to set
some new conditions in there so we don't this to be
operational. You have been approved, but you have not met rules
that we have yet as a Commission to decide what they are going
to be. Is that an accurate statement?
Mr. Wood. We are engaging in a rulemaking for standardized
market designs so that we don't have the seams issues that
Commissioner Breathitt pointed out.
Mr. Burr. How long have we been in that now?
Mr. Wood. I am sorry?
Mr. Burr. How long have we been in that process?
Mr. Wood. We announced that we were doing the rulemaking on
September 26, and we intend to be complete on that by this
summer.
Mr. Burr. If I heard you earlier, you, in an answer to a
question--and I know my time is up, Mr. Chairman--basically
said, as it related to merger authority at FERC, that you
didn't have heartburn if that was taken away. Did I understand
you accurately or is that something you are passionate about
maintaining with the jurisdiction of.
Mr. Wood. I think you could characterize me as thinking it
is appropriate to have it at FERC, but I think Congress has a
right to put these issues where they want to put them, and I
don't have as strong an opinion about that as Commissioner
Breathitt may. So I mean to be fair as to who might be the best
one to discuss that, I probably wouldn't.
Mr. Burr. That is why I chose you. I thank the chairman.
Mr. Barton. Thank Congressman Waxman. He yielded his time
to me to use at my discretion, and then recommended that you be
given his 2 minutes. So you owe----
Mr. Burr. I thank the gentleman from California.
Mr. Barton. [continuing] you owe Mr. Waxman for that extra
2 minutes. The Chair recognizes himself for the second round of
questions for 5 minutes, and we hope that the second round we
can get all members' questions on the record.
I want to go to Mr. McCullough, because I haven't asked you
a question yet. I understand that the TVA is considering
leasing one or more of its unfinished nuclear power plants to a
private entity, and then the private entity would put up the
operating--put up the capital necessary to finish the plant and
then lease it back to the TVA. I am extremely, and I want to
triple extremely skeptical of such a plan. So would you like to
elaborate on whether this just some private developer's wish
list or is something you are seriously considering ?
Mr. McCullough. To my knowledge, we don't have any specific
proposal that would be specific in terms of some sort of lease
proposal regarding Bellafonte. I assume it would be the
Bellafonte site or perhaps Browns Ferry Unit 1 or Watts Barr
Unit 2. There are all sorts of concepts, and people who are
interested in submitted proposals to TVA we accept those and we
evaluate them in a business-like manner, and we respond.
Mr. Barton. Well, I think I would have to look at the TVA
stats written. I don't claim to be an expert, but certainly if
TVA wishes to finish those plans and operate themselves, you
have got that opportunity and that right. I would support
legislation if it would require legislation. If you want to
dispose of them and basically privatize them, let those plants
be put up on the market for private utilities to come in and
bid and finish out. I would go that way, but I am extremely
leery to kind of have something that is half fish and half
fowl, that you have a government entity that still owns it, it
is financed by private capital, and then it is leased back to
the government entity. That does not sit well with me.
Mr. McCullough. I recognize and I don't disagree with the
points you make, Mr. Chairman.
Mr. Barton. Okay. I want to give Commissioner Breathitt an
opportunity to comment on the market-based rate authority that
came out, because it is my understanding that you had a
dissenting opinion. So I want to give you a chance to dissent,
because from what I know I share most of what you dissented
about. If I can't be more leading than that, let me know and I
will try again.
Ms. Breathitt. Well, you have just given me an opportunity
to restate my views, and I would like to start by saying that I
agree with my colleagues wholeheartedly that the Commission
does need to come up with an improved way to determine
applications for market-based rates, that we may be in, or we
are in, an era in the evolution of electricity markets that the
hub-and-spoke analysis is probably not serving the public as it
used to. So we all agreed that we needed to come up with a new
permanent way to assess applications for market-based rates.
That given, what I disagreed with, Mr. Chairman, is the
interim measure that the Commission decided upon for
determining market-based rates for those companies coming up
for their 3-year review and those entities asking for market-
based rates for the first time. I disagreed with the interim
method. Would you like to know why?
Mr. Barton. Yes.
Ms. Breathitt. I disagreed with the interim method because
I felt that it made the finding already that entities were
engaging in anti-competitive behavior without giving the
entities a chance to say that they weren't and our Commission
saying, ``Yes, you were, and here's the cure.'' I think back to
when we approved the AEPCSW merger, and we found, using the
hub-and-spoke, that there was a potential for market power, and
the cure was that they had to sell one power plant and that
that would eliminate their ability to exercise it. In this
instance, we said that every power plant had to go back to
cost-based rates, and I felt that this interim test was too
blunt, that it didn't make a more finely tuned assessment; that
was one part. The other was that it didn't give the parties an
opportunity to say whether they thought that was the best way
we could come up with an interim approach.
And the final point that I disagreed with was that it could
have unintended consequences, which we have already seen in a
new application. In another area of the country, an entity has
declined to sell power into an area where they failed the test.
So the power from that new plant will never be sold into an
area in Virginia because--I don't think that is what we
intended, but----
Mr. Barton. Well, my problem is that we are trying to
create a real national market while protecting the rights of
specific States. If they don't want to open their markets, they
don't have to. We are not trying to preempt that. But if you
are concerned about market power, the way to prevent it, in my
opinion, is to create a real market so there are a lot of
potential suppliers going into the market. You have adequate
transmission capacity to get the power to the market. You do
that and no one player that is supplying power can dominate the
market. So I would rather address market from a market
initiative than from a regulatory initiative.
And any time even the best--we have got four very bright
people here. And to some extent, I know all four of you
personally, and I have the highest opinion of your intellect
and your willingness to do good public service. But when four
or five people try to develop a market test for a nation as
diverse as the United State of America, you are almost, be
definition, bound to fail. And so I would err on the side of
trying to create the market, create the transmission grid, give
the States the right to oversee at the local level, and do it
that way, instead of even with the best of intentions coming up
with something almost out of the blue. I mean Mr. Wood
disagrees with that. He is frowning. I should say out of the
maroon, but then you wouldn't like it if I said that.
So in any event, before I turn it over to Mr. Boucher, I
want to make--I asked I think in the first round of questions
if everybody supported the concept of net metering, but I want
to make sure that you all--you may not agree exactly how we are
doing that metering in the bill, but the concept of net
metering you support. Does the administration support that, Mr.
Blake? Okay. Does the Commission support it?
Ms. Breathitt. Yes.
Mr. Barton. Okay. I don't know that TVA would have to have
a position on net metering, but it would be nice to know if you
do support it.
Mr. McCullough. Yes, we do, Mr. Chairman.
Mr. Barton. I thank you. The chairman recognizes Mr.
Boucher for 5 minutes.
Mr. Boucher. Well, Mr. Chairman, at a minimum, I think we
could do a net metering bill.
Mr. Barton. That is a start, that is a start.
Mr. Boucher. Let me give the other members of the FERC,
apart from the chairman, the opportunity to respond to the set
of questions that I had propounded to the chairman earlier. And
let me just briefly mention what these are. First of all, do
you support a continuation of your merger review authority, and
if so, why? Do you support the provisions in the legislation
relating to incentive pricing as a way to encourage new
transmission construction, or do you believe that there are
other ways to accomplish the task of getting new transmission
lines built?
With regard to Regional Transmission Organization
membership, do you support any of the provisions in the
legislation that relate to ways that membership will be
required or do you believe in the alternative that your present
processes and your present authorities are adequate to
accomplish that task? And do you have any comments with regard
to the uniform interconnection standards that are contained in
the legislation? Or, in the alternative, do you think that you
can go forward with current authority in order to promote a
uniform interconnection standard? Ms. Breathitt, would you like
to begin?
Ms. Breathitt. Yes. I would like to address your question,
No. 1, with respect to mergers. If I am not already on strong
record, I would like to be placed on strong record now for
asking the committee to please reconsider the language in the
bill that would take away our merger authority. As I had
mentioned earlier, we use a public interest standard. We are
the only agency in merger review that uses that standard. Other
agencies use a different standard, which is ``no harm to
competition,'' and I think it is real important for one agency
to have that standard for merger review. All mergers aren't
created equal, and we look at the effect on rates, competition
and the effect on regulation. I think that is very important
for the public to have our agency as a place for that.
Mr. Boucher. While we are on the subject of merger review,
let me ask Mr. Massey and Ms. Brownell if they have comments
concerning that. Ms. Brownell?
Ms. Brownell. I never thought I would say this, having been
on the other side of a merger when I worked in banking for a
regulator, but I think we do need that authority. I think we
look at it through a different screen, but I think it is
important that we maintain discipline and focus and not use it
as an opportunity for people to have a shopping spree to extort
commitments that do not advantage either the merger, the
shareholders or the consumers.
Mr. Boucher. Mr. Massey?
Mr. Massey. I agree with Commissioner Breathitt and
Commissioner Brownell's comments. I think an important point is
we have a very public and open process for determining mergers
and all stakeholders get to come in and tell us what they
think. That is important. It is not a closed process, and
keeping it open is absolutely critical. And I agree that we
have a broader standard than the anti-trust agencies use, and
at this particularly critical time I would not recommend
repealing our authority when we are promoting competitive
markets. It could be that a merger would undercut the very
competition that we are trying to facilitate.
Mr. Boucher. Thank you very much. Ms. Breathitt, would you
like to talk to the RTO issue?
Ms. Breathitt. Yes. Because of our open architecture
language in Order 2000, we do have the ability to allow RTOs to
change over time, and I would hate to see the committee
limiting our flexibility to do that by having a very strict
title. I liked your idea of addressing it and perhaps even
mandating it, but keep the title simple to allow the
flexibility that is going to happen over time.
Mr. Boucher. Okay. Ms. Brownell?
Ms. Brownell. I would agree with Commissioner Breathitt. I
think it is very important that we encourage, mandate if you
wish to do that, people to join RTOs, but because of the
evolutionary nature and because we do have a different
evaluation, companies should not control the process. They act
in their own self-interest, as they should, and I applaud that.
We have that larger self-interest to protect the consumers and
the other stakeholders, and I think the provisions of this bill
would limit that.
Mr. Boucher. Thank you. Mr. Massey?
Mr. Massey. I agree with my colleagues.
Mr. Boucher. Thank you, Mr. Massey. Thank you for that
answer; that was terrific. You are an excellent witness. That
is very much to the point.
Ms. Breathitt, Ms. Brownell and Mr. Massey, the question of
incentive pricing.
Ms. Breathitt. That one is tougher for me, because actually
it was a controversial part of Order 2000, and we put that in
there because it was a voluntary rule, and we wanted to have
some carrots. It is in the reg text. Yes, it was controversial.
But I do think that the Commission can use incentive pricing,
but we need to do it carefully, and, as Commissioner Brownell
stated earlier, we shouldn't just be willy nilly using
incentive pricing without a good public policy goal.
Mr. Boucher. Do you need any additional authority to do
that?
Ms. Breathitt. It is already in our reg text. We have made
it part of the Federal regulations.
Mr. Boucher. So whatever is in the bill is really
superfluous in that regard?
Ms. Breathitt. I think so.
Mr. Boucher. Okay. Ms. Brownell, Mr. Massey, quickly, do
you have a response?
Ms. Brownell. I don't think we need additional authority. I
would reemphasize let us use this to incent innovation, incent
efficiency, incent companies who are committed to opening
markets. We have seen some interesting models in the UK where
they have used performance-based and incentive-based ratemaking
to reduce congestion through not only building new transmission
but in fact adding innovative solutions to existing
transmission. So I think we need to just not buy into the
concept without addressing those very specific policy goals.
Mr. Boucher. Mr. Massey?
Mr. Massey. I don't think we should just throw money at
transmission just for the sake of it. We ought to get some bang
for our buck. If we are going to increase the incentives for
transmission, we need more transmission to actually get built,
and we need good performance in managing those transmission
assets, and we ought to insist on it.
Mr. Boucher. Okay. Thank you all very much. Thank you, Mr.
Chairman.
Mr. Norwood [presiding]. You are welcome. The Chair now
recognizes Mr. Bryant, the gentleman from Tennessee, for 5
minutes for questions.
Mr. Bryant. Thank you. Mr. McCullough, let me ask you a few
more questions. The changes in TVA in this bill would result in
the enactment of changes that are I think very dramatic to TVA.
How do you think that TVA and TVA distributors would fare in a
competitive wholesale market?
Mr. McCullough. Well, Mr. Bryant, I believe that, first of
all, has been taking steps, in terms of focusing on our
business performance to ensure that we had a delivered price of
power that was competitive, competitive with any region in the
country, to ensure that our reliability when benchmarked
against other utilities, the best in America, compares
favorably. We have worked with our distributors to provide them
with some flexibility in the requirements of their contracts.
What does that--I had dinner last night with Herman Morris, the
CEO at Memphis Light, Gas and Water. We have a proposal on the
table that would enable any one of 158 power distributors to go
to the market for 10 percent of their requirements with 24
months notice. They give us 24 months notice, they can buy 10
percent of what is now total requirements contract. With 36
months notice, they can buy all of their power in the open
market from another supplier.
The way we are best preparing for competitive and open
marketplace that TVA desires is by having the best practices in
place in the way we run our business. We believe without any
doubt that TVA is competitive today and will be even more
competitive in the future. We welcome competition and choice.
It needs to be done in a manner that is consistent with the
language that you and others have made sure is in tact in this
3406. The consensus title language welcomes competition and
choice, enables TVA to compete with investor-owned utilities
and other entities. Our distributors and the consumer can
choose. We welcome that, and that is why we are very pleased
that that language is in tact in H.R. 3406.
Mr. Bryant. Now, you have testified that there will be
language in the bill that would allow these 158 distributors to
purchase their power elsewhere. Were a distributor to do this,
how would their stranded cost be determined?
Mr. McCullough. First of all, the language says that after
2000--after September 30 of 2007, there would be no potential
stranded cost recovery for TVA. In the event that there are
stranded costs--and we believe that we can wholesale. The fence
should fall in both directions. In other words, once this
language is enacted into law, the distributors can choose where
to buy their power. TVA would be given the opportunity to
wholesale, and I underline that word ``wholesale'' outside what
is now the fenced-in area. If stranded costs become an issue,
we would yield to FERC, and we have confidence in the wisdom of
FERC to determine an equitable stranded cost recovery
mechanism.
Mr. Bryant. As I understand this new title, new generation
to serve the Tennessee Valley load could be built by TVA but
also by the distributors, by independent power producers and by
other utilities. Is this correct, and why is it important that
TVA be among those that would be allowed to build to meet its
load?
Mr. McCullough. You are correct. That language is in tact
in H.R. 3406. TVA only asks the opportunity to compete on a
level playing field with other investor-owned utilities,
independent power producers, power marketers, as the Valley's
economy continues to grow, and we hope it paces the rest of the
Nation. We are in business to serve the Valley. We feel that we
ought to have the right with the input from our power
distributors. So TVA, unilaterally, would not make a decision
on the need for new generation, but as the Valley's economy
continues to grow, we feel it is only fair that TVA would have
the right to choose, if necessary, to add new generation
capacity to meet the growing demands of our Valley's economy.
Mr. Bryant. Mr. Chairman, my voice is about to go, and I
would yield back my time. Thank you.
Mr. Norwood. I thank the gentleman. Mr. Sawyer, you are
recognized now for 5 minutes.
Mr. Sawyer. Thank you, Mr. Chairman. Let me return to a
topic that we have touched on in the course of these
discussions in a more specific way, and that is the need, as
Commissioner Massey put it, to make decisions and get on with
the business of building transmission capacity. The chairman
has an approach in his bill that has a three-pronged test
whether or not new transmission capacity is needed. First, if
the States have not acted within 12 months, the FERC determines
that the project will be used for interstate commerce, and,
third, the project is in the public interest.
Mine would trigger itself in a different way, but
essentially come down to similar kinds of decisions. It would
make a determination up front that there are transmission
constraints and therefore a need and create an annual list of
such locations and then proceed to permit that same, I suppose,
arbitrary 12-month timeframe within which the States might act,
after which the FERC would undertake this cut that the chairman
would--I understandably prefer not to have to bring to his
lips.
He suggested something the Department of Energy has talked
about in terms of regional siting boards. I suppose that is a
nice way around the whole States' rights question, but how they
would work and how we would structure them it seems to me
remains very much open. Could you, each of you, comment on the
specifics of the siting procedures that are not only before us
in the course of this week and suggest directions that we might
go to reach a structure and a procedure that in the end would
let us do what Commissioner Massey wanted to do--get on with
it.
Mr. Blake. To start from the administration's perspective,
I think, as you have articulated, is, first, circumscribing the
authority very narrowly, using it only in the context where
there is an identified national interest. And our view is that
that would be something that we would identify in a larger
national transmission study. Second, that you try to make this
a regional decision, using presumably something like the RTO
process, and that you would only be addressing those instances
where, for a variety of reasons, the region can't act. I mean
it would be a last step backstop.
Mr. Sawyer. Would the regions have a specific set of
standards that we would determine nationally that each region
would make separately or would they set separate standards? How
do you----
Mr. Blake. Well, I think the national interest would be
identified outside of the individual regions, and then the
region, presumably, would have a number of different methods
for addressing that national interest.
Mr. Sawyer. Chairman?
Mr. Wood. There are really two things that happen in a
transmission line. The first is the need. That is largely my
experience has been, although not exclusively, been kind of not
a big issue. The RTO engineers get an objective enough group of
people that everybody acknowledges they are expert.
Mr. Sawyer. Well, if we look at Southern California----
Mr. Wood. Well, you have got the need there. The issues
then become----
Mr. Sawyer. But it was so difficult they couldn't get to
it.
Mr. Wood. And this is exactly why the RTO function is
great. You had it on a boundary between PG&E and SoCal Edison.
Well, SoCal Edison wanted to take care of the area within SoCal
Edison. PG&E wanted to take care of the people within PG&E, but
nobody really wants to build a bridge to the other one, because
there is not a lot of money in it, there is not an incentive in
it, your customers aren't perceived to get a real benefit from
it. Too bad, actually they would have gotten a great benefit
from it had it been worked out. But the same thing applies that
even when you regionalize something to an RTO, you do get
around the very parochial nature of each utility and each
transmission company taking care of itself.
Mr. Sawyer. Commissioner?
Ms. Breathitt. I think the provisions in the bill, as I
have testified, take us in a very positive step forward. Now, I
had advocated, though, for outright transmission siting
authority for interstate, because one State could act within
the 12 months, and another State may not. So then you have
added a year to the process.
But the other point I would like to make is that the
solution isn't always a transmission solution. It might be more
inexpensive to build a power plant to solve congestion or it
may be less expensive to build a gas pipeline to serve a
constraint. So as Mr. Blake stated, there are several ways to
cure a congestion problem besides just a new transmission.
Mr. Wood. We would agree on that.
Ms. Brownell. Which I think speaks to the importance that
an impartial analysis done by an RTO would speak to, because
they would have no vested interest in either a transmission or
a generation solution. Further, your suggestion, which I think
DOE has already taken, to do an annual evaluation of
transmission constraints and what they are costing us, because
that is the point that we haven't really looked at, and is the
invisible cost of, frankly, doing nothing with these markets.
Mr. Massey. And the third possible solution, in addition to
a transmission solution or a generation solution, is a demand-
side solution that lightens the load. And I think the RTO
planning process can look at all three options, and on a
regional basis, not just on a State-by-State basis, but on a
regional basis. What is the best regional solution? It is not
always transmission.
But when transmission is the best solution, we have got to
get it sited, and I think the bill is a reasonable compromise
respecting States' rights and the Federal responsibility to
ensure that interstate markets work well. We have crossed the
divide. We did that 6 years ago, and we said we wanted a
market-based approach at the wholesale level. It seems to me it
is now our responsibility to make sure those markets work well,
and we can't do that without the necessary investment in
transmission.
Mr. Sawyer. Thank you. Thank you, Mr. Chairman.
Mr. Norwood. I recognize myself now for 5 minutes, and
Chairman Wood, if we could try to go back to where we left off.
Mr. Wood. Yes, sir.
Mr. Norwood. The new FERC order that really singled out
three companies changed the formula FERC used to calculate
market power, not to mention that these companies don't have to
commit an abuse, which drives me a little crazy. Your order
includes generating capacity that is used to serve its retail
customers and contracted commitments as far as generation and
capacity. In short, if the order is intended for the wholesale
market, retail customers shouldn't be affected by principle.
The biggest problem with this test that you have set up is that
it assumes that all the generation that a utility owns is
available for sale in a whole sale market and thus included in
the market power analysis.
Now, we talked about the fact that these companies could
very easily be changed to cost-based rates for market-based
rates and that that would cost, for example, our major utility
a lot of money for which much of that money is used to keep the
retail rates down. Now, when you came to this decision, when
you determined that we were going to do this, did FERC take
time to have a study or look at how this would affect the rates
of my constituents and Georgia Power customers? Did you do any
work in that area?
Mr. Wood. We did not do a cost/benefit study; no, sir.
Mr. Norwood. Did FERC then go ahead and analyze whether
requiring Souther Company to post its cost for the world to see
would reduce price competition and raise the prices at which
Southern Company would have to buy power; again, another cost
for my constituents? Did you do a study on that?
Mr. Wood. We didn't do a study, but we actually are pretty
familiar with the split savings approach. It has been one that
the Commission has used for a while, which is how they put the
cost of them producing the next increment, and then we split
the difference between them and the customers' cost of buying
the next increment, which is usually a number in between
those----
Mr. Norwood. So you have a written detailed analysis of how
you determined this wouldn't affect the ratepayer?
Mr. Wood. No, but we have a written policy of how this
process is done and was done for 80 years before the move to
market-based rates----
Mr. Norwood. But you have made it so easy, you see, to take
people out of market-based to cost-based now that it is a
greater concern now. So we would like--you know, I would like
to know how you are going to help me keep from raising the
rates on consumers in Georgia?
Mr. Wood. Well, I think the most helpful thing that can
happen is--which we left specifically open, is that outside the
area where they have a dominant market share, the utilities and
their affiliates can sell into those markets in the neighboring
States, the neighboring areas, and make sales into those
markets in a competitive market that they don't have a dominant
control, which is I think the goal that certainly this bill
seems to be pointing toward.
Mr. Norwood. Well, do you--just tell me this: Do you agree
forcing a company to post its cost of doing business for the
world to see will end up then for that company causing them to
pay more or less for power?
Mr. Wood. I think their posting the costs for what it costs
them to generate is what regulated companies do every time they
go to retail rate cases. I think that data is certainly there
for the Georgia regulators and the Alabama regulators to look
at when they set the rates for the regulated retail side, and
we are asking them to look at the same data.
Mr. Norwood. Well, I don't know that the Georgia regulators
post it for the world to see. We have handled it pretty well.
But you are talking about posting it for the whole damn world
to see.
Mr. Wood. Again, I think those are----
Mr. Norwood. And in a competitive market which you believe
in that interferes with your ability to be competitive. Let us
move to the next one because time is limited.
Mr. Wood. Yes, sir.
Mr. Norwood. Tell me this: How many hundreds of millions of
dollars might it cost Georgia Power's retail customer when
large corporations want to interconnect to its transmission
system and must, at least according to your November 20 order,
be considered a network resource? Example: A cost that must be
borne by retail customers again rather than the interconnecting
company. How high do our rates got to go because of that
November 20 order?
Mr. Wood. Sir, I think in fact the interconnecting of more
power plants in Georgia and in every other State will put
downward pressure on the cost of power. The cost of power is
probably 70 percent of a Georgia customers retail bill and to
have that be derived not just from one company but from several
companies competing against each other in Georgia and in the
neighboring States will put downward pressure on the bills.
That is the point of the whole initiative: to open up the grid
so that competitive power plants compete against each other and
drive those costs down. And there may be some costs to upgrade
the transmission grid.
Mr. Norwood. What do you mean maybe?
Mr. Wood. Well, there may be. If the transmission grid has
to be added onto faster than other costs than the utilities
rates are coming down, which they do, they depreciate over
usually a 15-, 20-year life. If the cost of adding new plants
is more than the cost of the old plant, depreciating down, and
there is no growth of load, which is not true in that part of
the country, there are a lot of things that have to be true
before rates go up.
Mr. Norwood. Well, that is similar to the story we heard in
Georgia about gas deregulation. It all makes sense when you sit
there behind a desk and work it out, but in the end, many of
these things you presume might happen, you think might happen
in a free market, actually don't, and the problem here is when
you are dealing with electricity in this country, energy in
this country, we better be right. And you are sitting here
telling me that you have put out a marketing order November 20
and nobody had time to do any studies, because we don't have to
worry about Georgia because we are here in Washington worrying
about the country.
Somebody has to worry about what the ratepayers have to pay
at home, and I am being told by a lot of people, and it is
amazing how many people who come from different walks of life
in the utility market, that many of these things that you are
doing are not going to work the way you hope and I hope they do
too. They are going to increase the cost for our ratepayers. So
did you do any studies? You said no already a couple of times.
Mr. Wood. I have answered your question, but I think it is
important to realize that monopolies generally do not favor
competition, despite the very strong evidence in the wholesale
gas industry that competition has resulted in tens of billions
of dollars going back to customers. Your State has chosen to go
to a retail gas experiment. That is a political decision. But
the choice to open up wholesale markets is an economic
decision, and I think the evidence is uniform.
Mr. Norwood. Well, it wasn't intended to be a political
decision, and my time is up. It was intended to be an economic
decision, the same as your decisions are intended to be
economic decisions, and all I am saying is when you make those
decisions and you affect thousands and thousands of people,
then we are concerned when you don't have a study to back--I
need more information, because other smart people are saying
you are not right. My time is up, don't forget where we were, I
will be right back after this vote.
Mr. Chairman, Mr. Waxman would like to have the next 5
minutes.
Chairman Tauzin. He is entitled to it, I believe.
Mr. Norwood. Mr. Waxman, you are recognized.
Mr. Waxman. Thank you very much, Mr. Chairman, both Mr.
Chairmans. Mr. Wood, the policy you advocate regarding Regional
Transmission Organizations is a bit different from the policy
contained in H.R. 3406. You recommend that Congress authorize
FERC to require RTOs where it would be in the public interest.
H.R. 3406 mandates RTOs whether or not they are in the public
interest. Is that an accurate distinction between your position
and H.R. 3406?
Mr. Wood. It is accurate, but it is not the source of my
recommendations for amendment.
Mr. Waxman. Okay. I can see why you don't think there ought
to be--I can see why you think there ought to be a public
interest test. If Congress or FERC chose to force States into
RTOs, that would be a pretty dramatic step. We don't yet know
how much it would cost to establish RTOs, but it could cost
tens or hundreds of millions of dollars. These costs could be
borne by States and the private sector. Is that accurate?
Mr. Wood. Yes, sir. All costs are borne by the customer,
ultimately.
Mr. Waxman. Before mandating participation in RTOs, don't
we have an obligation to ensure that RTOs make sense
economically and from a policy perspective?
Mr. Wood. Yes, sir. And for that reason we have agreed to
do a region-by-region cost/benefit analysis for RTOs prior to
implementing them.
Mr. Waxman. Establishing RTOs is a major Federal action,
isn't it?
Mr. Wood. I am not sure what those words mean, but I mean
it certainly is an important thing that we would be doing.
Mr. Waxman. Okay. Whenever the Federal Government
undertakes something important, like a major Federal action, it
is required by law to examine the potential impacts on the
environment. FERC should understand this, because when it
issued Order 888, FERC analyzed the expected environmental
impacts of increased competition. Unfortunately, we now know
that FERC's analysis got it wrong.
A new study by the North American Commission on
Environmental Cooperation demonstrated the links between
electricity restructuring, increased demand for electricity and
increased air pollution. In 1996, FERC projected that emissions
from power generation were most likely to fall under
competition. Instead air emissions increased and by more than
FERC projected in its worse case scenario. The CEC study shows
that FERC's worse case scenario underestimated the growth and
demand from 1995 to 2000 by 4.6 percent. As a consequence, FERC
underestimated emissions of nitrogen oxides by 4 percent and
carbon dioxide by 8 percent.
Mr. Wood, since we agree there should be a sound policy
basis for RTOs prior to their establishment, I have the
following question for you: Would you commit today to updating
FERC's projection of the environmental impact of increased
competition prior to FERC's approval of any RTOs?
Mr. Wood. I would not be able to agree to do that today.
Mr. Waxman. And why not?
Mr. Wood. I have to look into whether actually NEPA would
apply to what is an economic regulatory action. I read the
report from the CEC that you have discussed, and I know these
issues were reviewed on the court's original review of Order
888 and Order 2000, and I think the Commission was found to be
within what it did appropriately the first time.
Mr. Waxman. Well, I am going to leave it to you to review
and see whether it is required or not, along with your
colleagues. But let me ask this of the members of the
Commission. Chairman Barton in text in proposed H.R. 3406 to
restructure the electric utility industry. Enron, a Texas-based
energy company, has been lobbying for the policies in this bill
for years. President Bush has endorsed Enron's model for
electricity competition and his Department of Energy has
testified they are generally in favor of this legislation.
Reliant, another Texas-based energy company, has lobbied for
the demand reduction program under Section 103 of this bill.
And, Mr. Wood, you are a former Texas regulator, and you are
working toward the goals of this bill through administrative
action.
There is a lot of support for the policies we are
considering today from companies and officials from Texas.
However, the bulk of the bill before us does not appear to
apply to Texas. Texas, one State in the continental U.S. that
is not affected by the transmission provisions in this
legislation. Historically, Texas has been treated separately
from the rest of the U.S. under the logic that electricity does
not flow across its borders. This logic is no longer true.
Texas is now connected to other States. I would like to from
the members of the Commission wouldn't it make sense to put
Texas under the same rules that apply to Wisconsin, Georgia,
California, Michigan and every other State in the continental
U.S.? And wouldn't the rest of us in the U.S. feel more
comfortable if they were also in there? Mr. Massey, do you want
to comment on that?
Mr. Massey. Oh, I think it would probably make sense to do
that, yes.
Mr. Barton. Would the gentleman yield?
Mr. Waxman. Let us get the commissioners, and then I will
be able to yield if I have any time.
Ms. Brownell. I think it would probably make sense. I would
also add that there have been a number of advocates for
competitive markets who come from other States. Certainly,
Pennsylvania has a number of those advocates, and I am one of
them.
Ms. Breathitt. I think it would make sense for all
interstate transmission to be part of the new grid that this
bill is trying to create. I don't know what it would take to do
that with respect to Texas, but I think that it should become
part of the grid, just as this bill is asking public power to
become.
Mr. Waxman. Mr. Wood?
Mr. Wood. If I didn't think it would slow down the progress
that was made in Texas for 5 years to have FERC catch up to
where Texas is, I would probably not have a problem with it.
But as one who committed the last 6 years of my professional
career to advance the ideas that I am advancing here on the
Federal level, I think putting Texas under Federal jurisdiction
now would dramatically slow down the positive growth that has
happened in my home State and would not support it.
Mr. Norwood. Thank you, Mr. Waxman. Mr. Chairman, you are
recognized for 5 minutes.
Mr. Barton. Well, I asked to be--I guess unanimous consent
to be briefly----
Chairman Tauzin. I do ask to be recognized. I yield quickly
to my friend from Texas.
Mr. Barton. I would just point out, in response to my good
friend from California's question, you can make the argument
that it would make a lot more sense to put the same State
situation in the great State of California that we have in
Texas where you have an intrastate system with more than ample
supply and an interconnection network intrastate, through
ERCOT, that disseminates power around the State in a very
efficient and cost-effective fashion.
My good friend from California knows that California has an
intrastate pipeline system for natural gas that is not subject
to FERC jurisdiction----
Chairman Tauzin. Maybe that ought to be.
Mr. Barton. [continuing] and my recollection is that when
Mr. Green of Texas offered an amendment to make it FERC
jurisdictional, my good friend from California vehemently
opposed that. So let us talk apples and apples and oranges and
oranges, not apples and oranges. And with that, I would yield
back.
Chairman Tauzin. I thank my friend. I don't have a lot of
time, Mr. Chairman, because I have not had a chance on the
first round to ask a few questions. I am going to be very
brief, but I am going to submit some questions to you and the
other commissioners in writing.
I am deeply concerned, as a number of my colleagues on this
panel are concerned, about the order issued on November 20. I
am deeply concerned that it was issued without a process of
public comment and that we are hearing an awful lot of about
some very deleterious effects that it might have upon companies
in our region and more importantly upon consumer rates and
decisions those companies may make.
We are hearing, for example, that this new interim
generation market power test you have adopted may well
discourage new generation investment. It may expose our regions
of the country to the same kind of problems California had,
that it may indeed have the perverse incentive against longer-
term investments and thus put us into a position where
companies are making shorter-term and riskier transactions in
order to avoid flunking your test. Some have said you put
forward a test nobody can pass, and therefore it is met and
designed simply to punish or force some companies into an RTO.
Now, I want those companies in an RTO; I think we all agree
with that. I think getting the companies to join RTOs is a
worthwhile goal. I share that with you and Commissioner
Brownell, but I want to suggest to you that without having
public comment, with all of these incredible assertions we are
hearing about the effects of this order, that perhaps you might
want to consider delaying the effectiveness of this order until
you have had a chance to go on notice and accept public
comments and examine some of these consequences.
I join the gentleman in the chair in being very concerned
about the impact it may have on consumer rates in my part of
the country. Rates are going down right now. There is no big
crisis. And I question the wisdom of putting a big change like
this into effect just perhaps to punish a few companies into
joining RTOs when it may have some pretty serious effects. Now,
I will let you respond, but I am going to ask some very
specific questions on the record in writing since I am just
about out of time, I think. Chairman Wood?
Mr. Wood. Thank you, Chairman Tauzin. These orders, as the
others, are subject to rehearing. Rehearing is the appropriate
place for those companies and others to make comments to the
Commission about these effects. The hub-and-spoke methodology,
as well as this methodology, and really all the market-based
rate issues, have always been dealt with on case-by-case
adjudication and not by rulemaking. So it is not a departure
from our process to do that, and we do have a process by which
people can provide input on a rehearing, and I think those are
actually due in the next couple of weeks for people to do so.
I have to say, as a practical matter, certainly in the
South and in other parts of the country, there is a lot of
progress toward RTO development or even independent system
operators, which was the kind of precursor to RTOs. And our
order specifically said if you are in an ISO or an RTO, that
has a market monitoring, a market mitigation function that can
identify on a surgical basis anti-market, anti-competitive
behavior: that is the end goal we want. We don't want to have
to live through California again, Mr. Chairman. We don't want
the Congress to have to be put through that test, we don't want
the consumers or the State, to be put through that test, and,
actually, it is in a time when prices are low, when things are
more calm and peaceful that we should be putting the trip wires
that keep market power from hopping up and----
Chairman Tauzin. I don't deny that. I don't deny that we
ought to be encouraging the RTO transactions. I think we ought
to encourage them, and I want to help you, but I am deeply
concerned that the interim order you have put in place may have
some very damaging effects on the market in the meantime. And
you ought to hear some public comments. Whether you hear it in
rehearing or whether you delay the implementation until you
have had a chance to ferret all these questions out, we ought
to have some confidence in that. None of us want to go home and
say that on our watch our Federal authority made a significant
change without a lot of public comment, that caused a
dislocation of rates and generation investment in our
communities when in fact we are very deeply concerned about
what we saw in California and it repeating itself in other
parts of the country.
I had a blackout in Louisiana, believe it or not. Energy-
rich State like Louisiana, we had one a few years ago. I can't
afford the risk of having that happen in my State, on my watch,
and I would urge you to be extraordinarily careful about
receiving the public comment and input you need before you move
forward.
Mr. Wood. We will, Mr. Chairman, and the comments on that
were extended at parties' request until early January. So
people do have time to get that in.
Mr. Norwood. I thank the Chairman. I would like to close
our hearing by announcing that there will be a notice published
that will go to markup next Wednesday when we are back in town.
And I would like to close, Chairman Wood, by just telling you
that I have a lot of other questions that I am deeply sorry
that we couldn't air them here, that I would like to get very
specific answers to, and for you to note that we have noted
that by joining an RTO, a utility can make all these bad things
go away with the market order. And that suggests, perhaps, just
suggests to an untrained eye that FERC's November 20 order
might have been punitive like heads on stakes and stuff like
that.
Punishing companies who have not yet complied with Order
2000, an order that I know you know was voluntary, but it is
really, in our view, the customers of Georgia Power who will be
harmed of public power in Georgia, a State that is very proud
of what and how we have been doing things. And I hope that
hasn't escaped the Commission.
There is a lot I would like to tell you about deer hunting.
You know, this thing being in the woods and campfires and all
that kind of stuff, heads on stakes, it is dealing with deer
hunting but unexperienced deer hunters can run into a lot of
problems in the woods. Sometimes you are real anxious,
sometimes you have got a itchy finger, sometimes you are
staring out there real, real hard looking for that buck-only
day and everything looks like it has antlers on it. And
sometimes you shoot the wrong deer and you kill that doe and
you are not supposed to, and they will come along and take your
license and sometimes you are so anxious as an experienced
hunter that you actually wound a buck, and they are real
dangerous when they get wounded. Those antlers and hooves will
chew you up.
So we are glad you are here, and we hope we are going to be
able to work this out, but you better pick on a lot more
companies than three if you want to do any picking,
particularly when one of them is out of the Southeast. So with
that, I will adjourn this hearing until tomorrow where we will
resume the hearing tomorrow. Meeting adjourned.
[Whereupon, at 5:29 p.m., the hearing was recessed until
Thursday, December 13, 2001.]
[Additional material submitted for the record follows:]
Federal Energy Regulatory Commission
Office of the Chairman
February 13, 2002
The Honorable W.J. ``Billy'' Tauzin
Chairman
Committee on Energy and Commerce
U.S. House of Representatives
Washington, D.C. 20515-6115
Dear Mr. Chairman: I am pleased to reply to the questions in your
letter of January 14, 2002 on recent Commission actions regarding
regional transmission organizations (RTOs) and market based rate
authorizations. For your convenience, I've repeated your question
before providing an answer.
Question (1) Please describe any analyses the Commission has
undertaken of the proper scope, configuration and market rules for RTOs
and of the costs and benefits to consumers in each State of proposed
RTOs and alternatives.
Following our week-long public hearings on RTO issues in October,
2001, the Commission committed to our state commissioner colleagues and
others that we would update and disaggregate the cost-benefit studies
that were done in 1999 for Order No. 2000. On November 1, 2001, the
Commission contracted with ICF to perform the analyses. The base case
the contractor uses in these analyses characterizes current utility
dispatch, planning, and other industry conditions important for
analyzing the economic impacts of an RTO proposal. The base case also
reflects the ``no action'' alternative, i.e., status quo implementation
of Order No. 888 by the Commission. The analyses include use of a
modeling framework that builds scenarios needed to characterize and
study the proposed RTO initiatives and produce economic impacts for use
in economic cost and benefit analysis. We are consulting with a
regionally diverse, interested and knowledgeable group of state
Commissioners on the details of the models to make the results as
accurate and meaningful as possible. Our contractor expects to deliver
the study later this month.
Question (2) As you know the Louisiana Public Service Commission
issued a show cause order to Entergy and others about why they should
be allowed to join an RTO. What have you done to resolve the concerns
of state regulators in Louisiana and other states about impacts on
retail customers from utility participation in RTOs?
The Commission has worked extensively to identify and begin to
solve the concerns of state regulators about impacts on retail
customers from utility participation in RTOs in all the states.
Specifically, in brief, we have:
<bullet> Held five RTO national outreach workshops in March and April
2000;
<bullet> Held state-specific sessions during the Commission's October
2001 RTO Week;
<bullet> Undertaken a cost-benefit analysis of RTOs in response to
state requests;
<bullet> Begun using state-FERC panel discussions to identify and
address RTO issues of mutual concern;
<bullet> Expanded collaboration through the National Association of
Regulatory Utility Commissioners (NARUC);
<bullet> Invited and received extensive state commissioners' on-the-
record comments on a number of regional RTO concerns.
The details on each of these below, though somewhat lengthy, show
we continue to work with state regulators to resolve state concerns
about RTO impacts on retail customers.
RTO National Outreach. In Order No. 2000, the Commission said that
it would undertake a collaborative process, one in which Commission
staff would be fully engaged with transmission owners, public and non-
public utilities, as well as state officials and affected interest
groups, to actively work toward the voluntary development of RTOs. That
process began in March and April 2000 with five national workshops,
including one in Kansas City, Missouri and another in College Park,
Georgia.
State Sessions During RTO Week. To continue our dialogue, we held
workshops on RTOs in October 2001 and devoted various sessions to state
issues. We learned about the retail-customer concerns states have
related to cost-shifting, RTO startup costs, and independence.
Cost-Benefit Analysis. As discussed in response to question No. 1,
during those October meetings, the states asked the Commission to do a
cost-benefit analysis for each RTO region (and perhaps for each state)
to determine the effect on retail customers. We began that work right
away and expect to have some results by late February 2002.
State-FERC Panel Discussions. Based on the discussion at the
October 2001 workshops, the Commission decided to move on two parallel
tracks to finalize RTO issues. The first track is addressing geographic
scope and governance aspects of RTO proposals after we have consulted
with state commissions. The second track for resolving RTO issues is a
proceeding addressing transmission tariff and market design rules for
public utilities, including RTOs. This will address the issues needed
for organizations to accomplish the characteristics and functions in
Order No. 2000.
The Commission has begun regional state-FERC panel discussions on
RTO and market design issues to provide a more systematic foundation
for obtaining state input. The Commission has already had state-FERC
panel discussions with state commissioners from the Midwest and
Northeast and plans discussion with Southeast Commissioners on February
15. Transcripts of these discussions are placed in the appropriate
dockets. The Commission also has created a new Division of State
Relations within the Office of External Affairs.
Expanded Collaboration Through NARUC. The Commission also has
reached out to the states through the National Association of
Regulatory Utility Commissioners. The Commission held two of three
sessions on issues of mutual concern during NARUC's upcoming winter
meetings in Washington, D.C. On February 10, we discussed whether
wholesale and retail transmission service should be under the same
rates, terms and conditions. On February 11, we discussed how
regulators can assure an adequate capacity reserve for regional energy
markets. On February 14, we will be cosponsoring with the Department of
Energy a demand response conference.
Finally, with respect to the specific concerns of the Louisiana
Public Service Commission and other Southeast state commissions, I want
to assure you of my commitment to carefully consider their views on
these important matters.
Question (3) How does the new ``supply margin'' market power test
in the Commission's order of November 20 differ from the established
``hub-and-spoke'' test for market power? Did the Commission conduct any
study or analysis before issuing the new market power test to determine
what percentage of vertically-integrated public utilities, if any,
would be able to pass the test? Would any such utility be able to pass
the new test?
The ``hub-and-spoke'' test for generation market power computes an
applicant's market share of installed capacity and uncommitted capacity
in a particular market. A separate analysis is required for each
utility that is directly interconnected with the applicant (relevant
market). The analysis compares the installed capacity of the applicant
to the sum of the installed capacity of the applicant, all utilities
directly interconnected with the applicant, and all utilities directly
interconnected with the relevant market. A similar analysis is
performed for uncommitted capacity. While the Commission did not employ
a bright line test, it used a benchmark that a seller did not have
generation market power if, on balance, a seller has a market share of
20 percent or less in each relevant market.
The ``supply margin assessment'' (SMA) builds on and improves the
established hub-and-spoke analysis in two ways. First, in determining
the geographic market, the SMA considers transmission constraints that
may prevent a seller from delivering its power to a particular buyer.
Thus, the SMA can more accurately determine what supply can reach
buyers to compete with the applicant. Second, in determining the size
that triggers generation market power concerns, the SMA establishes a
threshold based on whether an applicant is pivotal in the market, i.e.,
whether at least some of the applicant's capacity must be used to meet
the market's peak demand. An applicant will be pivotal if its capacity
exceeds the market's surplus of capacity above peak demand--that is,
the market's supply margin. Thus, an applicant will fail the SMA screen
if the amount of its capacity exceeds the market's supply margin. By
contrast, under the hub-and-spoke method, an applicant would pass the
screen if its market share were less than 20 percent, even if its
capacity were pivotal. Effectively, the supply margin threshold
identifies whether the applicant is a must-run supplier needed to meet
peak load in a market. Thus, the supply margin is sensitive to the
potential for the applicant to successfully withhold supplies in the
market in order to raise prices.
The Commission's staff examined numerous options for addressing
generation market power, and a copy of a staff paper on the topic was
made available to the public on the Commission's website following the
September 26, 2001 Commission meeting. Because the test is an objective
one, intended to apply on a nondiscriminatory basis to all applicants,
the Commission did not conduct a study or analysis to determine which
of the current 1200 power market certificate holders would be able to
pass the test. Whether a particular vertically-integrated public
utility would be able to pass the SMA screen will depend on the facts
of a particular case. A vertically-integrated public utility will pass
the test if its capacity is not pivotal in relevant markets; i.e., the
control area that it operates or adjacent control areas.
Question (4) What findings, circumstances, or emergency conditions
warranted the Commission's apparently sudden change of policy in the
November 20 order? What specific findings of abuse of market power did
the Commission make prior to issuing the order?
The November 20 order was issued in response to continuing concerns
raised by intervenors in market-based rate cases (including the dockets
involving AEP, Entergy and Southern) that the hub-and-spoke analysis
does not adequately assess generation market power and, in particular,
that it does not consider transmission constraints. The issue was
identified and discussed in dissenting and concurring opinions by three
of the four current FERC Commissioners in a number of orders issued
last summer. See, e.g., Sierra Pacific Power Company and Nevada Power
Company, 96 FERC para. 61,050 (2001); Huntington Beach Development,
L.L.C., 96 FERC para. 61,212 (2001). In addition, the issue was
discussed by the Commission at its September 26, 2001 public meeting.
As noted in response to question (3), a staff paper discussing options
for addressing market power was made available to the public following
the September 26, 2001 public meeting.
In the November 20 order, the Commission stated that it ``has
concluded that, because of significant structural changes and corporate
realignments that have occurred and continue to occur in the electric
industry, our hub-and-spoke analysis no longer adequately protects
customers against generation market power in all circumstances. The
hub-and-spoke analysis worked reasonably well for almost a decade when
the markets were essentially vertical monopolies trading on the margin
and retail loads were only partially exposed to the market. Since that
time markets have changed and expanded. While we intend to undertake a
generic review of markets and market power in general, we conclude that
in the interim a more appropriate test should be applied to ensure that
customers are protected against market power in generation.
Accordingly, we have developed a Supply Margin Assessment (SMA) screen
to be used pending completion of a generic rulemaking proceeding.'' 97
FERC para. 61,219 at 61,969.
Question (5) What analysis did the Commission conduct to determine
whether revocation of market based rate authority could result in
increased retail rates for consumers in states served by the affected
utilities?
In its November 20 order, the Commission did not revoke the market-
based rate authority of the affected utilities. The Commission
established cost-based mitigation only for prospective spot market
sales (i.e., less than 24 hours) within the affected utilities' control
areas. The Commission subsequently deferred implementing price
mitigation measures pending further proceedings.
The Commission did not conduct an analysis to determine whether
revocation of market-based rate authority could result in increased
retail rates. The Commission stated in the November 20 order that the
hub-and-spoke analysis no longer adequately protects customers against
generation market power In all circumstances. Therefore, it concluded
that the interim SMA screen ``should be applied to ensure that
customers are protected against market power in generation.'' 97 FERC
para. 61,219 at 61,969. Preventing the exercise of such market power
benefits the retail customers of utilities that would otherwise have to
pay excessive prices for purchases from sellers with market power.
Question (6) Would a public utility that is a member of a
Commission-approved RTO be exempt from the November 20 order? If so,
given that no public utility is now a member of a Commission-approved
RTO, was the order intended to penalize RTO applicants who disagree
with the Commission regarding the appropriate scope or configuration of
an RTO?
The November 20 order explains that all sales, including bilateral
sales, into an ISO or RTO with Commission-approved market monitoring
and mitigation will be exempt from the SMA and, instead, will be
governed by the specific thresholds and mitigation provisions approved
for the particular markets. 97 FERC para. 61,219 at 61,970. As a
result, a public utility that is a member of a Commission-approved RTO
would be exempt from the November 20 order to the extent that the RTO
has Commission-approved market monitoring and mitigation. The
Commission-approved market monitoring and mitigation should prevent the
exercise of generation market power in the relevant markets, thus
justifying the exemption from the SMA. The order was not intended to
penalize RTO applicants who disagree with the Commission regarding the
appropriate scope or configuration of an RTO. Since the November 20 SMA
order, FERC has approved the MISO RTO, which currently supports
electric service to more than 8 million customers in 15 states across
the Midwest and Canada.
Question (7) The District of Columbia Circuit Court of Appeals
recently held that RTO participation under the Commission's Order No.
2000 is voluntary. Do you believe that indirect means of
``encouraging'' RTO participation, such as revocation of market based
rate authority, are consistent with the voluntary and flexible approach
of Order No. 2000?
The Commission's actions are not inconsistent with Order No. 2000
and, indeed, were taken to fulfill our responsibilities under the FPA
to ensure just and reasonable rates. Because an RTO with approved
market monitoring and market power mitigation reduces sellers' ability
to exercise market power within the RTO region, and because an RTO
ensures nondiscriminatory transmission access and increases market
efficiency, it is appropriate to encourage all utilities to join an RTO
and is not necessary to require those utilities in an RTO to comply
with an additional market power test such as the SMA. For utilities
that do not sell in areas that have market power mitigation in place,
however, the Commission has the responsibility under the FPA to ensure
that market power cannot be exercised before it authorizes market-based
rates. Because the hub-and-spoke test no longer assures lack of market
power in generation, the Commission replaced it.
Question (8) Is it appropriate for the Commission to adopt an
entirely new market power test without first holding a rulemaking
proceeding with opportunity for comment? In the absence of a new rule
developed out of an open process, is it appropriate for the Commission
to revoke a utility's market-based rate authority without a hearing for
that utility?
This question concerns legal issues that have been raised by a
number of entities in requests for rehearing of the November 20 order.
Since these are pending before the Commission now, under the
Administrative Procedure Act and the Commission's ex parte rule, it is
inappropriate for me to respond to these questions at this time.
Question (9) We understand that the Commission has issued a stay
with respect to portions of the November 20 order, and we are pleased
that the Commission will convene a technical conference where affected
parties will have the opportunity to address the consequences of the
order. Does the Commission also plan to engage in an open notice-and-
comment rulemaking process before adopting a new market power test? If
not, will each affected company be afforded an opportunity for a
hearing before its market-based rate authority is revoked under a new
policy?
This question also concerns issues that have been raised by a
number of entities in requests for rehearing of the November 20 order.
Thus, I cannot comment on the merits at this time.
Question (10) Our understanding is that the Commission has not
delayed the implementation of that portion of the November 20 order
that requires all three companies to treat unaffiliated entities
seeking to interconnect as competing network resources and to post
optimum areas for the location of prospective generating facilities on
their websites. Does the Commission intend to provide the affected
parties an opportunity for a hearing or comment before this requirement
takes effect?
It is correct that the Commission has not delayed the
implementation of that portion of the November 20 order that requires
all three companies to treat unaffiliated entities seeking to
interconnect as competing network resources and to post optimum areas
for the location of prospective generating facilities on their web
sites. A number of entities have raised issues regarding this aspect of
the November 20 order in their requests for rehearing. The full
Commission will decide at some future time how to address these
questions.
Question (11) Numerous utilities have expended a great deal of
time, money and effort to develop RTO applications that meet the RTO
standards under Order No. 2000. Our understanding is that Order No.
2000 established a voluntary and flexible approach to RTO formation and
specifically contemplated a variety of corporate structures for RTOs,
including independent transmission companies and independent system
operators. Despite this, the Commission has not approved a single RTO,
including RTOs that were previously conditionally approved by the
Commission. Does this mean tile Commission has taken a narrower or
different course on RTO policy in departure from the voluntary and
flexible approach of Order No. 2000?
No, the Commission had not changed course on RTO policy.
On December 19, 2001 the Commission granted RTO status to the
Midwest ISO (97 FERC para. 61,326). Although the Commission directed
the Midwest ISO to make certain additional filings, the new RTO
received the authority it needed to begin to operate immediately. The
Midwest RTO began commercial operations and security coordination in
December 2001 and began providing service under a single tariff in
February 2002.
Question (12) Our understanding is that the Alliance RTO was
conditionally approved several times prior to the order of December 19,
in which the Alliance must now consider merging with the Mid-West ISO
(MISO). Please explain why the Commission has apparently changed course
with respect to the Alliance and how (if at all) this change is
consistent with the voluntary and flexible approach of Order No. 2000.
As stated in the Commission's December 19 order:
Our earlier finding regarding the adequacy of the scope of the
Alliance RTO relied, in part, on implementation of the [Inter-RTO
Coordination Agreement (IRCA)] . . . which was intended to provide the
basis for a seamless market in the territories served by the Midwest
ISO and the Alliance RTO. However, since the Commission issued its
order approving the Settlement and its July 12 Order approving Alliance
RTO's scope, the confidence of the Commission and participating state
commissions in the IRCA's ability to resolve seams issues has eroded.
Specifically . . . the Midwest ISO and Alliance Companies filed status
reports which indicate that the IRCA implementation has not progressed
as expected . . . We have also taken additional continents from the
various state commissions in the Midwest, and they overwhelmingly
prefer a single Midwest RTO and Midwest ISO as the surviving RTO.
Another change affecting our ruling is International Transmission's
election to withdraw from the Alliance RTO, thereby shrinking the
Alliance RTO and concomitantly diminishing its scope. As a result, we
can no longer conclude that the proposed Alliance RTO has sufficient
scope consistent with the factors identified in Order No. 2000 . . . In
sum, the Alliance RTO has not achieved the necessary close coordination
that was called for to achieve Order No. 2000's characteristics, and in
particular, scope, that it could not achieve on its own. 97 FERC para.
61,327 at 62,529-530
The December 19 order is pending rehearing, so I cannot comment
further.
Question (13) The Commission states in its December 19 Alliance
order that ``our action should not be construed to prejudge other types
of RTOs in other parts of the country, including a structure in which a
for-profit transmission company could be an umbrella RTO.'' If the
Commission is able to conditionally approve, and then later reject, an
RTO proposal developed at great expense on the requirements of Order
No. 2000, what assurances do RTO applicants in other regions have that
``rules of the road'' will not change and prevent them from forming
RTOs that satisfy the requirements of Order No. 2000?
The rules of the road have not changed. The Commission is committed
to choosing regulatory approaches that foster competitive markets
whenever possible and assure reliable service at a reasonable price.
This question also raises issues that are the subject of rehearing and
I cannot discuss it further.
I hope this information is helpful. If I can be of further
assistance in this or any other Commission matter, please let me know.
Best regards,
Pat Wood, III
Chairman
______
Federal Energy Regulatory Commmission
Office of the Chairman
February 25, 2002
The Honorable Joe Barton
Chairman, Subcommittee on Energy and Air Quality
Committee on Energy and Commerce
U.S. House of Representatives
Washington, D.C. 20515-6115
Dear Mr. Chairman: Thank you for your letter of February 15, 2002.
Your letter cites a study issued by the Commission's staff in December
2001 on electric transmission constraints. The study identified
numerous transmission constraints across the United States and stated
that increases in transmission infrastructure investment would benefit
customers by decreasing costs caused by congestion on existing lines.
You ask several questions about this study and the provisions in
section 401 of H.R. 3406 on transmission pricing methods that could
encourage expansion of the transmission grid. Below are my answers to
your questions.
Question 1: The Study states that Commission staff have
``identified a number of significant transmission constraints that
increase costs to customers.'' It identifies 16 specific constraints
across the Northeast, the Eastern Interconnection, and the West. It
estimates that these constraints cost consumers more than $1 billion
total the summers of 2000 and 2001 combined. Please explain further why
these constraints have resulted in higher electricity costs for
consumers.
Answer: Transmission constraints hamper the efficient operation of
markets and increase customer costs by restricting the ability of
suppliers to deliver less expensive energy into constrained ``load
pockets''. This means that when customer demand inside the ``load
pocket'' exceeds the capability of the transmission lines to deliver
power into the area, the transmission limit may, depending on the
availability of cheaper generation outside the load pocket, shut out
additional cheaper generation and force local demand to be met by more
expensive generation inside the constraint area. Thus, transmission
constraints force customers to buy more expensive energy because they
cannot get cheaper energy over the transmission grid.
Question 2: The Study also set forth an objective to ``[r]ecognize
that even with the high estimated cost of transmission investment . . .
the overall savings in energy could significantly benefit customers.''
The Study apparently achieved this objective, finding that the benefits
to consumers from increased transmission investment (in terms of the
delivered price for electricity) are ``potentially quite large.'' Is
substantial new investment in transmission capacity necessary to
eliminate or reduce the costly constraints identified in the Study?
Answer: In many cases, yes. The transmission constraints that were
studied limit significant amounts of low-cost power imports for many
hours in each year. In most of those cases, area reliability and total
power costs would be significantly improved by construction of
additional bulk transmission lines.
For other constraints, however, transmission expansion is one
option to eliminate transmission constraints, but not necessarily the
only one. Other options include building new generation, including
distributed generation, and energy conservation within the constrained
area. The Study noted that substantial additional investment in new
transmission capacity could be made with only a small impact on
customer bills, and can produce significant cost savings in the
delivered price of energy into the load pocket. Moreover, all
alternatives are problematic. For example, constructing new generation
necessitates finding an acceptable location for the plant, air
pollution offsets, and additional fuel supplies. A regional planning
process, such as the one contemplated in the Commission's Order No.
2000 on regional transmission organizations, is needed to determine
which alternatives are both feasible and cost effective.
Question 3: How will the Commission's transmission rate policies,
including incentive and performance-based rate treatments, help ensure
that the transmission industry attracts sufficient investment to
alleviate transmission constraints on a priority basis?
Answer: A longstanding principle of the Commission's ratemaking is
that rates must allow an opportunity for the utility to earn a return
on invested capital commensurate with the returns earned by other
companies facing similar risks. This principle is intended to ensure
that utilities can attract the capital they need to build
infrastructure. The Commission has authorized additional incentives for
transmission investments in certain circumstances. Last year, for
example, the Commission authorized a range of premiums on equity
returns and accelerated depreciation for transmission expansions
completed by certain deadlines in the Western United States. The goal
of these rate incentives was to encourage urgently-needed
infrastructure expansions in response to the severe electric energy
shortages then facing California and other areas in the West. As
another example, the Commission has authorized a range of rate
incentives for regional transmission organizations, since these
organizations can bring greater efficiencies to power markets and
benefits to customers. I am willing to consider similar incentives or
other ratemaking methods whenever necessary to ensure that utilities
and independent merchant transmission builders can obtain the capital
they need to support timely and adequate expansion of our Nation's
infrastructure.
Question 4: Particularly given the Study's findings regarding the
benefits of increased transmission investment, section 401's provisions
for incentive and performance-based transmission rates seem to be
reasonable and in the public interest. Surprisingly, opponents of
transmission rate reform have claimed that section 401 would require
the Commission to set transmission rates at ``unjust and unreasonable''
levels. In your opinion, would section 401 repeal, undermine, or
otherwise be inconsistent with the just and reasonable standard of the
Federal Power Act (``FPA'')? In other words, would section 401 permit
or require the Commission to charge rates that are unjust or
unreasonable under sections 205 or 206 of the FPA (either the plain
text of those sections or as they have been historically construed by
the courts)?
Answer: No. Section 401 of H.R. 3406 would require the Commission
to adopt by rule:
. . . transmission pricing policies and standards for promoting
the expansion and improvement of interstate transmission
networks through incentive-based and performance-based rate
treatments and other means the Commission deems necessary or
appropriate to ensure reliability of the electric system, to
support interstate wholesale markets for electric power, and
expand transmission capacity needed to sustain the growth of
wholesale competition.
The policies and standards established under section 401 would be
required to accomplish certain goals, such as ``promot[ing]
economically efficient enlargement of transmission networks,''
``provid[ing] a return on equity that causes needed investment in
transmission facilities to be made,'' ``promot[ing] the voluntary
participation in and formation of regional transmission
organizations,'' ``reduc[ing] congestion on transmission networks,''
and ``allow[ing] for accelerated depreciation for transmission
equipment and facilities.'' Section 401 requires that all transmission
rates approved after the effective date of the new rules must comply
with, among other things, ``the requirement of sections 205 and 206,
that all rates, charges, terms and conditions be just and reasonable
and not unduly discriminatory.''
These provisions are consistent with the existing provisions of the
FPA as applied by the Commission and interpreted by the courts. We
interpret the provisions of section 401 as clarifying authority that
the Commission already has under the FPA, in its discretion, to allow
different types of non-traditional rate treatments to meet our
regulatory goals, so long as those rate treatments meet the statutory
requirement that rates be just and reasonable and not unduly
discriminatory or preferential. As noted above in response to Question
3, the Commission already has taken certain actions similar to those
specified in section 401. In addition, the Supreme Court has held that
``rate-making agencies are not bound to the service of any single
regulatory formula; they are permitted, unless their statutory
authority otherwise plainly indicates, `to make the pragmatic
adjustments which may be called for by particular circumstances.' ''
Permian Basin Area Rate Cases, 390 U.S. 747, 776 (1968) (citing FPC v.
Natural Gas Pipeline Co., 315 U.S. 575, 586 (1942)). The Commission may
set rates to achieve relevant regulatory purposes, and may do so by
including non-cost incentives to encourage behavior in the public
interest. Mobil Oil Corp. v. FPC, 417 U.S. 283, 316-17. Encouraging
future supply is an appropriate factor in determining a just and
reasonable rate and adequate protection of customers. Permian Basin,
390 U.S. at 796, 815. Accordingly, section 401 of H.R. 3406 would not
permit or require the Commission to allow utilities to charge unjust or
unreasonable rates under sections 205 or 206, and would provide us
continued discretion to allow non-traditional rate treatments as
appropriate.
Question 5: While the Commission already has broad authority to set
the boundaries of the ``zone of reasonableness'' under the just and
reasonable standard, do you agree that section 401 would provide useful
clarification and direction to the Commission to tailor transmission
rates to the policy goals of eliminating transmission constraints,
increasing efficiency of wholesale power markets, and reducing the
overall cost of delivered power for consumers? Would section 401 help
prevent non-productive challenges to the Commission's legal authority
to design rate treatments appropriate to meet these policy goals?
Answer: Ensuring development of adequate energy infrastructure is
vitally important to all energy customers. One of my goals as Chairman
of the Commission is to encourage the full exercise of our statutory
authority to promote such development. While I believe the FPA's
existing provisions allow the Commission to take the types of actions
addressed in section 401, some participants in the industry may
disagree. Section 401 could help reduce or forestall legal challenges
on these issues. Thus, I support the provisions of section 401.
If I can be of further assistance in this or anything else, please
call me.
Best regards,
Pat Wood, III
Chairman
______
The Deputy Secretary of Energy
Washington, DC 20585
January 31, 2002
The Honorable Henry A. Waxman
U.S. House of Representatives
2204 Rayburn House Office Building
Washington, DC 20515
Dear Representative Waxman: I am writing in response to your
questions during my testimony before the House Energy and Air Quality
Subcommittee on December 12, 2001, as well as your letter dated January
25, 2002, regarding discussions with electric utilities, other industry
sectors, and environmental groups about the new source review (NSR)
program.
I have held the following meetings regarding the NSR program. A
list of the meeting attendees is enclosed.
<bullet> July 10, 2001: Natural Resources Defense Council
<bullet> July 18, 2001: Sinclair Oil Company
<bullet> July 23, 2001: Electric Reliability Coordinating Council
<bullet> July 25, 2001: The Coal-Based Generation Stakeholder's Group
<bullet> August 28, 2001: WEST Associates
<bullet> August 29, 2001: Wisconsin Energy Corporation
<bullet> September 10, 2001: Edison Electric Institute
<bullet> November 28, 2001: Air Quality Coalition
Please let me know if I can be of any further assistance on this,
or any other, matter.
Sincerely,
Francis S. Blake
Enclosure
Attendees at Meetings/Discussions Between Deputy Secretary of Energy
Francis S. Blake and Representatives from Electric Utilities, Other
Industry Sectors, and Environmental Groups Regarding: The New Source
Review Program
July 10, 2001, Natural Resources Defense Council
David Hawkins, Natural Resources Defense Council.
July 18, 2001, Sinclair Oil Company
Clint Ensign, Klane Forsgren, Albert Knoll, Dick Wilson, Lee Lampton,
Richard Meeks, and Jim McCarthy.
July 23, 2001, Electric Reliability Coordinating Council
Glenn McCullough, TVA, Anthony J. ``Tony'' Alexander, FirstEnergy,
Dwight Evans, Southern Company, Bill Coley, Duke Power, Richard M.
``Dick'' Hayslip, Haley Reeves Barbour, ERCC, Boyden Gray, ERCC, Marc
Racicot, ERCC, Jeanette Pablo, TVA, Michael Dowling, FirstEnergy, Karl
Moor, Southern Company, David Mitchell, Duke Energy, Henry Nickel,
Hunton & Williams, Terry Grauman, Hunton & Williams, and Rene Eastman,
Salt River Project.
July 25, 2001, The Coal-Based Generaton Stakeholder's Group
Irl Englehardt, Peabody Energy, Tom Kuhn, Edison Electric Institute,
Fred Palmer, Peabody Energy, James Roberts, RAG American Coal, Tom
Altmeyer, National Mining Association, Tony Kavanaugh, American
Electric Power, and Quin Shea, Edison Electric Institute.
August 28, 2001, West Associates
Robbie Aiken, Pinnacle West Capital Corporation, Renee Eastman, The
Salt River Project, Don Elliott, Paul, Hastings, Janofsky & Walker,
Dave Lock, Platte River Power Authority, C.V. Mathai, Pinnacle West
Capital Corporation, Gloria Quinn, Southern California Edison, David
Steele, Strategic Issue Management Group, and Linda Stuntz,
representing PacifiCorp.
August 29, 2001, Wisconsin Energy Corporation
Richard Abdoo, Darnell Demasters, Larry Bruniel, and Pat Quinn.
September 10, 2001, Edison Electric Institute
Gerard M. Andreson, DTE Energy, William A. Coley, Duke Energy, E. Linn
Draper, American Electric Power, Dwight H. Evans, Southern Company,
Robert A. Fenech, Nuclear, Consumers Energy, Thomas R. Kuhn, Edison
Electric Institute, Gary L. Rainwater, AmerenCIPS, James E. Rogers,
Jr., Cinergy Corporation, Skiles W. Boyd, Detroit Edison, Ray Harry,
Southern Company, Mary D. Kenkel, Cinergy Corporation, John D. Kinsman,
Edison Electric Institute, Susan LaBombard, Ameren Services, Alfonse S.
Mannato, Jr., Edison Electric Institute, Quinlan J. Shea, III, Edison
Electric Institute, Daniel V. Steen, FirstEnergy Corporation, William
F. Tyndall, Cinergy, and Steven Colovas, American Continental Group.
November 28, 2001, Air Quality Coalition
Kevin O'Donovan, Larisa Dobriansky, Red Cavaney, API, Tom Kuhn, Edison
Electric Institute, Tom Altmeyer, National Mining Association, Henson
Moore, American Forest Paper Association, Rose Sanders, American
Chemistry Council, Mark Whittendon, National Association of
Manufacturers, and James Schultz, American Iron/Steel Institute.
______
Federal Energy Regulatory Commission
Office of the Chairman
February 28, 2002
The Honorable Joe Barton, Chairman
Subcommittee on Energy and Air Quality
Committee on Energy and Commerce
U.S. House of Representatives
Washington, D.C. 20515-6115
Dear Chairman Barton: This is in response to Congressman Waxman's
request for information asked at your subcommittee hearing on February
13, 2002. He asked me to provide a list of my contacts with Enron
officials during my terms as a commissioner at the Federal Energy
Regulatory Commission (FERC) and at the Public Utility Commission of
Texas (PUCT).
As the enclosed chronology details, I first met Ken Lay on May 29,
1996, when I was invited to present an update on Texas
telecommunications and electric utility regulation to the members of
the Governor's Business Council, an advisory group of Texas business
executives that Mr. Lay had chaired since then-Governor Ann Richards
formed the council in the early 1990's.
The enclosed chronology reflects my best recollection of all
contacts I had with Enron officials based in part on calendars I have
maintained since January 1996. 1 do not have any records prior to
January 1996. 1 have not maintained phone logs during this period.
Despite this, I believe that the contacts in the enclosed chronology
represent all contacts with Mr. Lay and other officials, with the
exception of Steve Kean, with whom I may have talked by phone two or
three times over the seven-year period. From my records, the first
occurrence of a meeting with Steve Kean is in 1998, but I feel certain
we had been introduced sometime prior to that date.
In addition, the enclosed chronology does not list any meetings
with non-executive Enron staff or outside attorneys, nor does it
reflect contacts I may have had at legislative hearings, PUC Open
Meetings, public conferences or public speeches. The enclosed
chronology does not reflect several meetings I had with former Enron de
Mexico President Max Yzaguirre in Texas during May, 2001 to discuss the
duties of a PUCT Commissioner.
Finally, as you prefaced your oral request with a reference to
letters Mr. Lay was reported to have written endorsing my nomination to
both my current and prior positions, the letter that actually played a
role in getting me an interview with then Governor Bush in early 1995
has not been in the public record. In 1991-1993 I worked as a legal
counsel to FERC Commissioner Jerry J. Langdon, a Democrat from Midland,
Texas who had known Governor Bush for many years. Martin L. Allday,
also from Midland, was Chairman of FERC under President George H.W.
Bush, including during the time I worked for Commissioner Langdon.
Shortly after the 1994 Texas gubernatorial election, these two men
wrote a letter recommending me to Governor-elect Bush for the open PUCT
position. After his inauguration, Governor Bush called me in for an
interview for the position on January 27, 1995. During my interview, I
observed the enclosed letter from Chairman Allday and Commissioner
Langdon on his desk. He offered me the position after our interview. I
accepted it, and following my confirmation by the Texas Senate on
February 22, 1995, was sworn in by Governor Bush and joined the PUCT
the following day.
I trust this information satisfies the request. Please contact me
if I can provide any further information.
Best regards,
Pat Wood, III
Chairman
Enclosures
Cc: The Honorable Rick Boucher
[GRAPHIC] [TIFF OMITTED] T7118.001
[GRAPHIC] [TIFF OMITTED] T7118.002
THE ELECTRIC SUPPLY AND TRANSMISSION ACT OF 2001
----------
THURSDAY, DECEMBER 13, 2001
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Energy and Air Quality,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:30 a.m., in
room 2123, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Largent,
Whitfield, Ganske, Norwood, Shimkus, Fossella, Bryant, Walden,
Tauzin (ex officio), Boucher, Sawyer, Wynn, John, Waxman,
Markey, Gordon, McCarthy, and Dingell (ex officio).
Staff present: Jason Bentley, majority counsel; Sean
Cunningham, majority counsel; Andy Black, policy coordinator;
Sue Sheridan, minority counsel; and Eric Kessler, minority
professional staff.
Mr. Barton. The subcommittee will come to order. Today is a
continuation of 2 days of hearings on the Electric Supply and
Transmission Act of 2001. These are legislative hearings on a
pending bill, H.R. 3406, preparing to go to markup next week.
Today we have two panels. Our first panel is our executive
branch witnesses. We have the Honorable Isaac Hunt, who is the
Commissioner of the Securities and Exchange Commission; and we
have the Honorable Sandra Hochstetter, who is Chairman of the
Arkansas Public Service Commission. She is appearing on behalf
of the National Association of Regulatory Utility
Commissioners, better known as NARUC.
Lady and gentleman, welcome. Your statement is in the
record in its entirety. We are going to recognize you,
Commissioner Hunt, to elaborate on your statement for 6
minutes; and then we will recognize the Chairwoman Hochstetter
to elaborate on her statement. Welcome to the subcommittee.
STATEMENTS OF HON. ISAAC C. HUNT, JR., COMMISSIONER, SECURITIES
AND EXCHANGE COMMISSION; AND HON. SANDRA L. HOCHSTETTER,
CHAIRMAN, ARKANSAS PUBLIC SERVICE COMMISSION, ON BEHALF OF
NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS
Mr. Hunt. Thank you, Mr. Chairman, Ranking Member Boucher,
and members of the subcommittee. I am Commissioner Isaac C.
Hunt, Jr., of the U.S. Securities and Exchange Commission. I am
pleased to have this opportunity to testify before you on
behalf of the Commission about H.R. 3406 and the SEC's
continuing support for repeal of the Public Utility Holding
Company Act of 1935.
The SEC continues to support efforts to appeal the 1935 Act
and replace it with legislation that preserves certain
important consumer protections. In considering repeal, it is
useful to review both the history that led Congress to enact
the Act in 1935 and the changes that have occurred in the
electric industry since then.
During the first quarter of the last century misuse of the
holding company structure led to serious problems in the
electric and gas industry. Abuses arose, including inadequate
disclosure of the financial position, and earning power of
holding companies, unsound accounting practices, excessive debt
issuances, and abusive affiliate transactions.
The 1935 Act was enacted to address these problems. In the
years following the passage of the Act the SEC worked to
reorganize and simplify existing public utility companies in
order to eliminate the problems that Congress identified.
By the early 1980's the SEC concluded that the 1935 Act had
accomplished its basic purpose and that many aspects of it had
become redundant with other Federal and State regulation.
In addition, changes in the accounting profession and in
the investment banking industry had provided investors and
consumers with a range of protections unforeseen in 1935.
Because of these changes the SEC unanimously recommended that
Congress repeal the 1935 Act based on its conclusion that it
was no longer necessary to prevent the recurrence of the abuses
that led to the Act's enactment.
For a number of reasons, including the potential for abuse
through the use of a multi-State holding company structure,
related concerns about consumer protection, and the lack of a
consensus for change, repeal legislation was not enacted during
the early 1980's.
Because of continuing changes in the industry, however, the
SEC continued to look at ways to administer the statute more
flexibly. In response to continuing changes in the utility
industry during the early 1990's, then Chairman Arthur Levitt
directed the SEC staff in 1994 to undertake a study of the 1935
Act that culminated in a June 1995 report.
That report again recommended repeal of the 1935 Act, or
amendment of the Act to give the SEC broad exemptive authority
to administer the Act.
The June 1995 report also outlined and recommended that the
Commission adopt a number of administrative initiatives to
streamline regulation under the Act. The SEC has implemented
many of these initiatives.
The utility industry has continued to undergo rapid change
since publication of the report. Congress facilitated some of
these changes. Specifically the Energy Policy Act of 1992 added
statutory exemptions to the 1935 Act, which allow holding
companies to own exempt wholesale generators and foreign
utility companies and allow registered holding companies to
engage in a wide range of telecommunication activities.
Based on the findings in 1995, as well as the continuing
pace of change in the industry, the SEC continues to recommend
that Congress appeal the 1935 Act, subject to appropriate
safeguards.
Repeal of the Act is not, however, a magical solution to
the current energy problems in the United States. While it can
be viewed as a part of a needed response, repeal will not
directly affect the supply of electricity due to the fact that
the Energy Policy Act, as I just mentioned, removed
restrictions under the Act for investment and generation
facilities.
Repeal of the Act would, however, remove provisions that
prohibit utility companies from owning utilities in different
parts of the country, and generally prevent non-utility
businesses from acquiring utilities in more than one State.
If the 1935 Act were repealed, the greatest impacts would
probably be the continuing consolidation of the utility
industry, as well as the entry of new companies into the
utility business.
Repeal of the Act would also eliminate any impediments that
exist to other regulators' attempts to modernize regulation of
the utility industry. For example, the FERC recently
implemented new regulations designed to create independent
regionally operated transmission grids.
As a result of FERC's new regulations, many utilities will
cede operating control, and in some cases actual ownership, of
their transmission facilities, to newly created entities.
The status of both the new entities that will control these
systems, and the status of the utility companies that will own
stakes in the new entities, raise a number of issues under the
1935 Act.
Most notably, it has been asserted that the limits the Act
places on the other business activities of a utility holding
company will create obstacles for non-utility companies to
invest in or operate these new transmission entities.
The SEC believes that it has the necessary authority under
the Act to deal with the issues created by FERC's restructuring
without impeding that restructuring. Nevertheless, repeal of
the Act would effectively resolve these issues.
In conclusion, let me emphasize that the SEC takes
seriously its duties to administer faithfully the letter and
spirit of the 1935 Act and is committed to promoting the
fairness, liquidity, and efficiency of the United States
securities markets.
By supporting conditional repeal of the 1935 Act, the SEC
hopes to reduce unnecessary regulatory burdens on America's
energy industry while providing adequate protections for energy
consumers. Mr. Chairman and Members, I would be pleased to
answer your questions.
[The prepared statement of Hon. Isaac C. Hunt, Jr.
follows:]
Prepared Statement of Hon. Isaac C. Hunt, Jr., Commissioner, U.S.
Securities and Exchange Commission
Chairman Barton, Ranking Member Boucher, and Members of the
Subcommittee: I am pleased to have this opportunity to testify before
you on behalf of the Securities and Exchange Commission (``SEC'')
regarding H.R. 3406 and the SEC's continuing support for repeal of the
Public Utility Holding Company Act of 1935 (``PUHCA'' or ``1935 Act'').
In particular, because much of the regulation required by PUHCA is
either duplicative of that done by other regulators or unnecessary in
the current environment, the SEC continues to support repeal of PUHCA.
H.R. 3406 would accomplish the goal of eliminating duplicative and
unnecessary regulation. As the SEC has testified in the past, however,
we continue to believe that repeal should be accomplished in a manner
that also preserves important protections for consumers of utility
companies in multistate holding company systems.
i. introduction
To understand the SEC's position on repeal of PUHCA, it is useful
to review both the history that led Congress to enact PUHCA in 1935 and
the changes that have occurred in the electric industry since then.
During the first quarter of the last century, misuse of the holding
company structure led to serious problems in the electric and gas
industry. These abuses included inadequate disclosure of the financial
position and earning power of holding companies, unsound accounting
practices, excessive debt issuances and abusive affiliate transactions.
The 1935 Act was enacted to address these problems.<SUP>1</SUP> The Act
also placed restrictions on the geographic scope of holding company
systems and limited holding companies to activities related to their
gas or electric businesses. Because of its role in addressing issues
involving securities and financings, the SEC was charged with
administering the Act. In the years following the passage of the 1935
Act, the SEC worked to reorganize and simplify existing public utility
holding companies in order to eliminate abuses.
---------------------------------------------------------------------------
\1\ See 1935 Act section 1(b), 15 U.S.C. Sec. 79a(b).
---------------------------------------------------------------------------
By the early 1980s, however, many aspects of the 1935 Act
regulation had become redundant: state regulation had expanded and
strengthened since 1935, and the SEC had enhanced its regulation of all
issuers of securities, including public utility holding companies.
Changes in the accounting profession and the investment banking
industry also had provided investors and consumers with a range of
protections unforeseen in 1935. The SEC therefore concluded that the
1935 Act had accomplished its basic purpose and that many of its
remaining provisions were either duplicative or were no longer
necessary to prevent the recurrence of the abuses that had led to the
Act's enactment. The SEC thus unanimously recommended that Congress
repeal the Act.<SUP>2</SUP>
---------------------------------------------------------------------------
\2\ See Public Utility Holding Company Act Amendments: Hearings on
S. 1869, S. 1870 and S. 1871 Before the Subcomm. On Securities of the
Senate Comm. On Banking, Housing, and Urban Affairs, 97th Cong., 2d
Sess. 359-421 (statement of SEC).
---------------------------------------------------------------------------
For a number of reasons--including the potential for abuse through
the use of a multistate holding company structure, related concerns
about consumer protection, and the lack of a consensus for change--
repeal legislation was not enacted during the early 1980s. Because of
continuing change in the industry, however, the SEC continued to look
at ways to administer the statute more flexibly.
In response to continuing changes in the utility industry during
the early 1990s, and the accelerated pace of those changes, in 1994,
then-Chairman Arthur Levitt directed the SEC's Division of Investment
Management to undertake a study, under the guidance of then-
Commissioner Richard Y. Roberts, to examine the continued vitality of
the 1935 Act. The study was undertaken as a result of the developments
noted above and the SEC's continuing need to respond flexibly in the
administration of the 1935 Act. The purpose of the study was to
identify unnecessary and duplicative regulation, and at the same time
to identify those features of the statute that remain appropriate in
the regulation of the contemporary electric and gas
industries.<SUP>3</SUP>
---------------------------------------------------------------------------
\3\ The study focused primarily on registered holding company
systems. There were, at the time of the study, 19 such systems. The
1935 Act was enacted to address problems arising from multistate
operations, and reflects a general presumption that intrastate holding
companies and certain other types of holding companies, which the 1935
Act exempts and which now number 119, are adequately regulated by local
authorities. Despite their small number, registered holding companies
account for a significant portion of the energy utility resources in
this country. As of September 30, 2001, the 27 registered holding
systems (which included 35 registered holding companies) owned 133
electric and gas utility subsidiaries, with operations in 44 states,
and in excess of 2500 nonutility subsidiaries. In financial terms, as
of September 31, 2001, the 27 registered holding company systems owned
more than $417 billion of investor-owned electric and gas utility
assets and received in excess of $173 billion in operating revenues.
The 27 registered systems represent over 40% of the assets and revenues
of the U.S. investor-owned electric utility industry and almost 50% of
all electric utility customers in the United States.
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The SEC staff worked with representatives of the utility industry,
consumer groups, trade associations, investment banks, rating agencies,
economists, state, local and federal regulators, and other interested
parties during the course of the study. In June 1995, a report of the
findings made during the study (``Report'') was issued. The staff's
Report outlined the history of the 1935 Act, described the then-current
state of the utility industry as well as the changes that were taking
place in the industry, and again recommended repeal of the 1935 Act.
The Report also outlined and recommended that the Commission adopt a
number of administrative initiatives to streamline regulation under the
Act.
Since the report was published, the utility industry in the United
States has continued to undergo rapid change. Some of these changes
have been facilitated by Congress. Specifically, as a result of
recently-created statutory exemptions, anyone, including registered and
exempt holding companies, is now free to own exempt wholesale
generators and foreign utilities and to engage in a wide range of
telecommunication activities.<SUP>4</SUP> In addition, the SEC has
implemented many of the administrative initiatives that were
recommended in the Report.<SUP>5</SUP>
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\4\ Sections 32 and 33 of the Act, which were added to it by the
Energy Policy Act of 1992, permit, subject to certain conditions, the
ownership of exempt wholesale generators and foreign utility companies.
The impact of section 32 on the electricity industry is discussed in
more detail below. Section 34, which was added by the
Telecommunications Act of 1996, permits holding companies to acquire
and retain interests in companies engaged in a broad range of
telecommunications activities.
\5\ The Report recommended rule amendments to broaden exemptions
for routine financings by subsidiaries of registered holding companies
(see Holding Co. Act Release No. 26312 (June 20, 1995), 60 FR 33640
(June 28, 1995)) and to provide a new exemption for the acquisition of
interests in companies that engage in energy-related and gas-related
activities (see Holding Co. Act Release No. 26667 (Feb. 14, 1997), 62
FR 7900 (Feb. 20, 1997) (adopting Rule 58)). In addition, the Report
recommended and the SEC has implemented changes in the administration
of the Act that would permit a ``shelf'' approach for approval of
financing transactions. For example, during calendar year 2000, all
eleven of the new registered holding companies received multi-year
financing authorizations that included a wide range of debt and equity
securities. The Report further recommended a more liberal
interpretation of the Act's integration requirements which has been
carried out in our merger orders. The Report also recommended an
increased focus upon auditing regulated companies and assisting state
and local regulators in obtaining access to books, records and
accounts. Six state public utility commissions participated in the last
three audits of the books and records of registered holding companies.
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iii. repeal of puhca
Based on the findings in the Report as well as the continuing pace
of change in the utility industry, the SEC continues to recommend that
Congress repeal the 1935 Act subject to appropriate
safeguards.<SUP>6</SUP> As the Report stated, regulation under the 1935
Act that affects the ability of holding company systems to issue
securities, acquire other utilities, and acquire nonutility businesses
is largely redundant in view of other existing regulation and controls
imposed by the market.<SUP>7</SUP> Repealing the Act is not, however, a
magic solution to the current problems facing the U.S. utility
industry. PUHCA repeal can be viewed as part of the needed response to
the current energy problems facing the country--notably, the
Administration's recent report on energy policy includes a
recommendation that PUHCA be repealed.<SUP>8</SUP> But repeal of the
Act will not, for example, have any direct effect on the supply of
electricity in the United States. The Act does not, for example,
currently place significant restrictions on the construction of new
generation facilities. As part of the Energy Policy Act, Congress
amended the Act in 1992 to remove most restrictions on the ability of
registered and exempt holding companies (as well as nonutility
companies) to build, acquire and own generating facilities anywhere in
the United States. These types of facilities--exempt wholesale
generators or ``EWGs''--are not considered to be electric utility
companies under PUHCA, and, in fact, are exempt from all provisions of
PUHCA. The only limitation that remains under PUHCA is one imposed by
Congress on registered holding companies--namely, that a registered
company may not finance its EWG investments in a way that may ``have a
substantial adverse impact on the financial integrity of the registered
holding company system.'' <SUP>9</SUP> In short, the Energy Policy Act
removed restrictions on the ability of registered and exempt holding
companies to build, acquire and own generating facilities anywhere in
the United States. As a result, a number of registered holding
companies now have large subsidiaries that own generating facilities
nationwide. Numerous other companies not subject to the Act have also
entered the generation business.<SUP>10</SUP>
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\6\ We do, however, have a concern about coupling PUHCA repeal with
provisions that would provide unique regulatory benefits to small
groups of companies under other statutes that the Commission
administers. Section 125 of H.R. 3406 raises this concern. Section 125
appears to address a unique set of circumstances that give rise to
questions about the status of an issuer as an ``investment company''
under the Investment Company Act of 1940. The Investment Company Act
already provides the Commission with significant flexibility to deal
with status issues. We therefore see no reason for legislation to deal
with such issues. More broadly, we are prepared to work with any
utility holding companies currently relying on the exemption from the
definition of ``investment company'' provided by section 3(c)(8) of the
Investment Company Act if repeal of PUHCA leads to questions about
their status under the Investment Company Act.
\7\ As we have testified previously, however, there is a continuing
need to protect consumers. Although deregulation is changing the way
utilities operate in some states, electric and gas utilities have
historically functioned as monopolies whose rates are regulated by
state authorities. Some regulators subject these rates to greater
scrutiny than others. There is a continuing risk that a monopoly, if
left unguarded, could charge higher rates and use the additional funds
to subsidize affiliated businesses in order to boost its competitive
position in other markets. Thus, so long as electric and gas utilities
continue to function as monopolies, the need to protect against this
type of cross-subsidization will remain. In view of the sophistication
of contemporary securities regulation, and analysis by the public and
private sectors, the best means of guarding against cross-subsidization
is likely to be audits of books and records and federal oversight of
affiliate transactions. The SEC therefore continues to recommend the
enactment of legislation to provide necessary authority to the FERC and
the state public utility commissions relating to affiliate
transactions, audits and access to books and records, for the continued
protection of utility consumers. More broadly, repeal of the 1935 Act
may be accomplished either separately or as part of a more
comprehensive package of energy reform legislation. The SEC does not
have a preference as to whether the Act is repealed on a stand-alone
basis or as part of broader, energy-related legislation.
\8\ See National Energy Policy: Report of the National Energy
Policy Development Group at 5-12 (May 2001) (recommending the reform of
``outdated federal electricity laws, such as the Public Utility Holding
Company Act'').
\9\ While no Commission approval is required for the acquisition of
an EWG as a result of the Energy Policy Act, Commission approval is
required, for example, before a registered holding company can issue
securities to finance the acquisition of, or guarantee securities
issued by, an EWG. Under the Energy Policy Act, Congress directed the
SEC to adopt rules with respect to registered holding companies' EWG
investments. Pursuant to these requirements, in 1993 the SEC adopted
rules 53 and 54 to protect consumers and investors from any substantial
adverse effect associated with investments in EWGs. Rule 53 created a
partial safe harbor for EWG financings. Rule 53 describes circumstances
in which the issue or sale of a security for purposes of financing the
acquisition of an EWG, or the guarantee of a security of an EWG, will
be deemed not to have a substantial adverse impact on the financial
integrity of the system. For transactions outside the Rule 53 safe
harbor, a registered holding company must obtain SEC approval of the
amount it wishes to invest in EWGs. The standards that the SEC uses in
assessing applications of this type are laid out in Rule 53(c).
\10\ See, e.g., National Energy Policy: Report of the National
Energy Policy Development Group at 5-11 (May 2001) (noting that
``[m]ost new electricity generation is being built not by regulated
utilities, but by independent power producers'').
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Instead, repeal of the Act would eliminate regulatory restrictions
that prohibit utility holding companies from owning utilities in
different parts of the country and that prevent nonutility businesses
from acquiring regulated utilities. In particular, repeal of the
restrictions on geographic scope and other businesses would remove the
impediments created by the Act to capital flowing into the industry
from sources outside the existing utility industry. Repeal would thus
likely have the greatest impact on both the continuing consolidation of
the utility business as well as the entry of new companies into the
utility business.
Repeal of the Act would also eliminate any impediments that exist
to other regulators' attempts to modernize regulation of the utility
industry. For example, during the past year, questions have arisen
about how the Act will impact the ability of the Federal Energy
Regulatory Commission (``FERC'') to implement its plans to restructure
the control of transmission facilities in the United
States.<SUP>11</SUP> Specifically, in order to ``ensure that
electricity consumers pay the lowest price possible for reliable
service,'' the FERC recently implemented new regulations designed to
create ``independent regionally operated transmission grids'' that are
meant to ``enhance the benefits of competitive electricity markets.''
<SUP>12</SUP> As a result of FERC's new regulations, many utilities
will cede operating control--and in some cases, actual ownership--of
their transmission facilities to newly-created entities. The status of
these entities, as well as the status of utility systems or other
companies that invest in them, raise a number of issues under the Act.
Most prominently, it has been asserted that the limits the Act places
on the other businesses in which a utility holding company can engage
will create obstacles for nonutility companies that may wish to invest
in or operate these new transmission entities.
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\11\ See FERC Order 2000, ``Regional Transmission Organizations,'
65 FR 810 (Jan. 6, 2000) (codified at 18 C.F.R. Sec. 35.34).
\12\ Order 2000, 65 FR at 811.
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The SEC believes it has the necessary authority under the Act to
deal with the issues created by the FERC's restructuring without
impeding that restructuring. Nonetheless, repeal of the Act would
effectively resolve these issues.
The SEC takes seriously its duties to administer faithfully the
letter and spirit of the 1935 Act and is committed to promoting the
fairness, liquidity, and efficiency of the United States securities
markets. By supporting conditional repeal of the 1935 Act, the SEC
hopes to reduce unnecessary regulatory burdens on America's energy
industry while providing adequate protections for energy consumers.
Mr. Barton. Thank you, Commissioner.
We would now like to hear from the Chairwoman of the
Arkansas Public Services Commission, the Honorable Sandra
Hochstetter. Your statement is in the record, and we would ask
that you elaborate for 6 minutes.
STATEMENT OF HON. SANDRA L. HOCHSTETTER
Ms. Hochstetter. That you, Mr. Chairman, and members of the
subcommittee. I am here today on behalf of NARUC, and we would
like to commend you for your tireless work on the issue of
electric restructuring.
We would also like to thank you for including NARUC in the
discussions and process since you have been chairman of this
subcommittee. Our testimony here today is a mixture of
concerns, as well as compliments.
To begin with, NARUC would like to say that we are pleased
that you did not include a section that would expand FERC
jurisdiction to include unbundled retail transmission service
in H.R. 3406.
We do believe that the issue of transmission jurisdiction
is now properly before the Supreme Court. Accordingly, we
recommend that Congress allow the Court to continue to rule on
transmission jurisdiction issues prior to taking any
legislative action.
Second, we would like to thank you for Section 605 with
respect to retail competition. However, we do feel that you
could go a bit further to clarify that a State can determine
not to implement retail competition.
The issue of whether or not that it makes economic sense
for any particular State to adopt retail competition is clearly
a unique State-specific factual inquiry that should depend upon
a quantitative analysis of cost versus benefit.
We appreciate the difficulties with divergent points of
view that you have confronted to get the legislation to this
point. However, we feel like we must express significant
concern with H.R. 3406 as it is currently drafted.
First, as to interconnection standards. While NARUC
supports national technical power quality standards adopted by
an appropriate technical standards organization, we must oppose
the provisions found in Section 101 which provides for Federal
preemption of distribution of interconnection terms,
conditions, costs, and rates.
FERC should properly focus on transmission interconnection
standards, and not distribution. We consider this to be a
safety and reliability issue, as well as a generation supply
and potential cost shifting issue, and therefore State and
local officials, and retail customers, should be responsible
for working out those details.
As to net metering, while NARUC appreciates the efforts of
this committee to permit States to establish additional
requirements to those net metering standards promulgated by
FERC, we must express concern and oppose the federally
preemptive provisions found in Section 102.
Once again that metering is a retail jurisdiction issue,
subject to State jurisdiction. With respect to Section 103, we
support demand management programs, but believe that retail
demand reduction programs should be developed by the States
under traditional State jurisdiction over retail services.
Once again, these are retail consumer programs. We do feel,
however, that Congress could be helpful in the demand reduction
area by doing things in the following areas. Congress can
promote energy efficiency programs through the use of increased
funding, tax credits, in the setting of increasingly more
efficient national building codes and standards for motors,
lighting, and appliances.
And additionally Congress should continue to provide
funding for energy efficiency and conservation for low and
moderate income consumers, as these are appropriate Federal
programs.
On the issue of a regional transmission organization, NARUC
believes that an RTO formation can provide benefits to the
market and to all consumers provided that the policies that
establish RTOs will enhance the Federal-State partnership, and
provide for truly independent RTO governance and operation with
appropriate Federal and State oversight.
The Arkansas Commission, as a matter of fact, has been one
of the strongest State Commission supporters of FERC's efforts
to facilitate the formation of RTOs. However, we remain
concerned that an appropriate role for State Regulators in both
RTO creation and operation has not been formalized.
In addition, there are certain important transmission
pricing issues that need to be resolved. H.R. 3406 does not
advance State participation in any aspect of RTO governance or
decisionmaking.
The mandatory participation provisions of H.R. 3406 also
fail to recognize and take into consideration that currently
under State laws utilities are generally required to obtain
State Commission approval to participate in RTOs if the
membership would require transfer of assets into the RTO.
In addition, we believe that Congress should require FERC
to recognize States' interests in actively reviewing questions
of RTO governance. These areas would include the development
and revision of market rules, reliability in planning, access
to RTO market monitoring information, and development with
Federal authorities of market power mitigation programs.
With respect to transmission reliability, NARUC has
consistently agreed that reliability should be addressed in any
Federal electricity legislation. However, we believe that while
this needs to take place on a Federal level, the law should
also preserve the authority of the States to set more rigorous
standards when deemed to be in the public interest.
Congress should expressly include in the legislation a
savings clause that would protect existing State authority to
ensure reliable transition service, as well as a regional
advisory role for the State.
State officials ultimately will be held accountable by the
public when the lights fail to stay on. So, because of this
responsibility, we believe that we need to act effectively to
ensure uninterrupted electricity service.
With respect to siting authority, we would strongly oppose
any legislative provisions that contemplate Federal siting
authority. While the Arkansas Commission certainly understands
the basis for the recommendation by some parties that
transmission siting authority should be vested in FERC, we
would recommend that the States, utilizing where appropriate
regional mechanisms, continue to have primary siting authority.
And then if such regional approaches once employed prove
inadequate or fail, then the question of FERC's role can
certainly be revisited at that time. In conclusion, we would
like to thank you again for our ability to participate in this
process.
Unfortunately, we can't support the bill as it is currently
drafted. We don't believe that a compelling case has been made
for Federal preemption of State retail authority. Congress can
and should do much to help the wholesale market and focus on
those issues.
But it should stop short of usurping State regulatory
jurisdiction over retail matters. Thank you again, and I would
be happy to answer any questions that you may have.
[The statement of Hon. Sandra L. Hochstetter follows:]
Prepared Statement of Hon. Sandra L. Hochstetter, Chairman, Arkansas
Public Service Commission on behalf of the National Association of
Regulatory Utility Commissioners
Mr. Chairman and Members of the Subcommittee: My name is Sandra L.
Hochstetter. I am the Chairman of the Arkansas Public Service
Commission. I am here today on behalf of the National Association of
Regulatory Utility Commissioners, commonly known as NARUC. I greatly
appreciate the opportunity to appear before the House Energy and
Commerce Subcommittee on Energy and Air Quality and I respectfully
request that NARUC's written statement be included in today's hearing
record as if fully read.
NARUC is a quasi-governmental, nonprofit organization founded in
1889. Its membership includes the State public utility commissions for
all States and territories. NARUC's mission is to serve the public
interest by improving the quality and effectiveness of public utility
regulation. NARUC's members regulate the retail rates and services of
electric, gas, water and telephone utilities. We have the obligation
under State law to ensure 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 that are just, reasonable and nondiscriminatory for all
consumers.
Mr. Chairman, NARUC commends you for your tireless work on the
issue of electric restructuring. We would also like to thank you and
your staff for including NARUC in the discussions and process since you
have been Chairman of this Subcommittee. You have been willing to speak
to our members on numerous occasions and have been consistently willing
to listen to our concerns.
NARUC is pleased that you did not include a section that would
expand FERC jurisdiction to include unbundled retail transmission
service in H.R. 3406. We believe that the issue of transmission
jurisdiction is now properly before the Supreme Court. Accordingly,
NARUC continues to recommend that Congress allow the Court to rule on
transmission jurisdiction issues prior to taking any legislative
action. We would also like to take this opportunity to thank you for
section 605, which clarifies that this legislation will not require a
State to implement retail competition or require the unbundling of
retail transmission.
Mr. Chairman, while we do appreciate the difficulties with
divergent points of view you have confronted to get this legislation to
this point, NARUC must express our significant concerns with H.R. 3406
as it is currently drafted. NARUC is troubled by the great extent to
which the bill intrudes into areas now regulated by the States.
I would now like to share NARUC's views on specific provisions
found in H.R. 3406. In some instances the NARUC positions may be at
variance with the view of the Arkansas Commission and I will note these
distinctions.
interconnection; net metering; demand management
While NARUC supports national technical power quality standards
adopted by appropriate technical standards organizations, we must
oppose the provisions found in section 101 which provide for the
Federal pre-emption of distribution interconnection terms, conditions,
costs and rates. NARUC believes that Congress should support the
States' authority to work with local distribution utilities and other
stakeholders, including the renewable and small generating community,
to provide interconnection arrangements for self-generation units that
utilize the local distribution network. NARUC considers this a safety
and reliability issue, as well as a generation supply and potential
cost shifting issue, and therefore State and local officials and retail
customers should be responsible for working out cooperative solutions
that best fit the specific circumstances of connection to a
distribution system. This way the safety, reliability, and economic
impact concerns of a particular project and system are not jeopardized
by a generic rule promulgated without the benefit of the project and
systems unique specifications.
While NARUC appreciates the efforts to permit States to establish
additional requirements to those net metering standards promulgated by
FERC, NARUC must also oppose the Federally pre-emptive provisions found
in section 102. Once again we must stress that net metering is a retail
issue subject to State jurisdiction. NARUC supports legislation
removing federal barriers to State implementation of net metering. The
most critical barrier involves the current lack of jurisdictional
clarity over net metering. The Federal Power Act has been alleged to
preempt State net metering programs, slowing development of this
promising new approach to promoting competition and resource diversity.
Therefore, the bill should be amended to promote State implementation
of net metering programs of the States' own choosing, in the States'
own time, rather than being forced to implement minimum standards of
FERC's choosing.
With regard to section 103, NARUC supports demand management
programs, but believes that retail demand reduction programs should be
developed by the States under traditional State jurisdiction over
retail services. Congressional action to provide for more robust and
effective demand-side options, without FERC pre-emption of the States,
can be accomplished.
For example, Congress could promote energy efficiency programs
through increased funding, tax credits, and the setting of increasingly
more efficient national building codes and standards for motors,
lighting and appliances.
Congress could also promote planning strategies for maintaining a
proper balance between supply and load, which includes demand-side
management techniques (including price-responsive demand mechanisms),
intermittent and renewable resources, conservation/energy efficiency
programs, as well as traditional supply and transmission options. One
good way for Congress to act in this area would be to authorize willing
States to address these issues on a regional basis. I would note that
regulators in Arkansas, Louisiana, and Mississippi and the Entergy
Corporation supported legislation introduced by Senator Dale Bumpers in
the early 1990's, which would have authorized States that regulated
electric utilities operating under PUHCA to conduct integrated resource
planning on a regional basis. I believe such approaches are even more
appropriate now than ten years ago.
Finally, Congress should continue to provide funding for energy
efficiency and conservation for low and moderate income consumers
through programs that provide education, weatherization, housing
improvements, installation of higher efficiency appliances, and similar
usage reduction measures.
Taken together, these options could help lower costs to consumers,
reduce load, conserve valuable resources, and lower costs to utilities,
while spreading the costs and benefits to all retail ratepayers, rather
than providing benefits to just large industrial customers.
puhca
Congress should reform the Public Utility Holding Company Act
(PUHCA), but in doing so, should allow the States to protect the public
through maintaining effective oversight of holding company practices
and expanding State access to holding company books and records,
independent of any similar authorities granted to the federal
regulatory bodies. NARUC believes that Subtitle B of H.R. 3406 fits
within our criteria for support.
purpa
NARUC supports legislation to lift PURPA's purchase requirement
where a State determines that generating markets are competitive or
that the public interest in resource acquisition is protected. However,
NARUC opposes pre-empting State jurisdiction by granting FERC authority
to order the recovery of costs in retail rates or to otherwise limit
State authority to require mitigation of PURPA contract costs. It is
NARUC's position that the States that have already approved these
contracts are in a better position to address this issue than FERC.
In section 133, FERC is directed to promulgate and enforce
regulations to provide for recovery of PURPA costs. Therefore, NARUC
cannot support the PURPA provisions found in H.R. 3406.
regional transmission organizations (rto)
On the important issue of RTOs, NARUC believes that RTO formation
can provide benefits to the market and all customers, provided the
policies that establish RTOs enhance the Federal-State partnership and
provide for truly independent RTO governance and operation with
appropriate Federal and State oversight. The Arkansas Commission has
been one of the strongest State commission supporters of FERC's efforts
to facilitate the formation of RTOs. However, we remain concerned that
an appropriate role for State regulators in both RTO creation and
operation has not been formalized.
Unfortunately, H.R. 3406 does not advance State participation in
any aspect of RTO governance or decision making. The mandatory
participation provisions of H.R. 3406 fail to recognize that currently,
under State laws, utilities are generally required to obtain State
commission approval to participate in RTOs, if RTO membership requires
the utility to relinquish control or divest the transmission facilities
held in the retail rate base. For instance, the utilities whose
facilities comprise existing RTOs, which are ``grandfathered'' in
section 202 (h) (6) on page 64, received State commission approval to
participate in those RTOs.
Congress should require FERC, in cooperation with the States, to
determine boundaries, structure, and functions for regional
transmission organizations (RTO). The RTOs should be given sufficient
authority to perform regional grid management and expansion, while
providing for efficient system operations that are built and operated
in the most economical, reliable and environmentally acceptable way in
order to realize shortterm and longterm reliability as well as
facilitate efficient wholesale market transactions.
Congress should require FERC to recognize the States' interest in
actively reviewing questions of RTO governance. This would include:
development (and revision) of market rules; reliability and planning;
access to RTO market monitoring information; and development, with
federal authorities, of market power mitigation programs.
In addition, Congress should require that RTOs or other regional
bodies have sufficient authority to conduct long term planning for
their regions and, working with the States and transmission owners,
implement long-term planning that should:
1. Recognize the need for new investment in transmission facilities;
2. Assures that reliability is not compromised;
3. Reduces any decisional role for entities with unreasonable market
power; and
4. Provides a cost allocation method that is objective, non-
discriminatory, weighs environmental and societal risk, and
ensures that costs are allocated in a proportionate manner to
those that receive the benefits.
transmission reliability
In numerous communications with this Subcommittee, both in letters
and in testimony, NARUC has consistently and repeatedly expressed the
belief that reliability should be addressed in any Federal electricity
legislation. Our position as to what policies must be included in any
reliability legislation have been equally consistent.
NARUC believes that Congress should mandate compliance with
industry-developed reliability standards for the bulk power system,
while preserving the authority of the States to set more rigorous
standards when deemed to be in the public interest. Congress should
also ensure that States continue to have the authority to establish
effective price signals that allow consumers to choose alternative
levels of reliability and power quality. To that end, Congress should
expressly include in legislation: (1) a savings clause to protect
existing State authority to ensure reliable transmission service, and
(2) a regional advisory role for the States.
We would like to thank you Mr. Chairman for including in Title III
of H.R. 3406 the savings provisions that were substantially the similar
to those savings provision included in S.2071 which was passed by the
Senate during the 106th Congress. However, I would also like to bring
to your attention that H.R. 3406 does not address a regional advisory
role for the States, which is especially critical to western States.
Reliability language should not fail to provide a continuing role
for States in ensuring reliability of all aspects of electrical
service, including generation, transmission, and power delivery
services or results in FERC's preemption of State authority to ensure
safe and reliable service to retail consumers. State officials will be
held accountable by the public when the lights fail to stay on. Because
of this responsibility, State officials and regulators are particularly
concerned that they be able to act effectively to ensure uninterrupted
electricity service.
transmission siting authority
NARUC strongly opposes any legislative provisions that contemplate
Federal siting authority. States should retain authority to site
electric facilities, while Congress should support the States'
authority to negotiate and enter into cooperative agreements or
compacts with federal agencies and other States to facilitate the
siting and construction of electric transmission facilities as well as
to consider alternative solutions to such facilities, such as
distributed generation and energy efficiency. Here again Congress
should authorize the development of regional approaches in this area.
Giving FERC eminent domain and siting authority is not a panacea.
Beyond the practical matter of the time FERC would need to be prepared
to assume this new role and the additional funds that Congress would
need to appropriate to accomplish this, NARUC does not believe that
many examples actually exist, beyond anecdotal evidence, where a State
action (or inaction) is solely responsible for unreasonably preventing
a needed transmission project. Further, the numbers of examples that
may exist do not warrant Federal pre-emption in this area.
In addition, there may be alternatives to a specific transmission
project. A State may determine that a transmission line is not
necessary if, for example, distributed generation is used instead,
thereby saving valuable resources and protecting citizens from the
unnecessary effects of the transmission project.
While the Arkansas Commission does understand the basis for the
recommendation by some parties that transmission siting authority
should be vested in the FERC, we would recommend that the States,
utilizing where appropriate regional mechanisms, continue to have
primary siting authority. If such regional approaches once employed
prove inadequate, the question of FERC's role can certainly be
revisited.
consumer protection
NARUC's members have a long standing commitment to consumer
protection. Indeed, State utility commissions were established to
ensure that consumers received essential services without fear of
predatory practices and pricing. Therefore, we compliment you for your
attention, Mr. Chairman, to the consumer issues that are found in H.R.
3406. However, while we favor strong consumer protection measures,
NARUC does not believe that pre-empting the States by Federally
legislating retail consumer protections is the way to go. The States
are more capable in dealing with abuses that occur at the retail level,
and in fact many, if not most, of the States that have moved to
restructure and unbundled their retail electric markets have in place
regulations or laws that address the consumer issues found in H.R.
3406. In short, Congress should not limit State authority to prescribe
and enforce laws, regulations or procedures regarding consumer
protection.
NARUC believes that it would be helpful if Congress would reinforce
the States' authority to require all load serving entities to disclose
generation sources and accompanying environmental impacts.
Additionally, Congress should require regional transmission
organizations, system operators, reliability counsels and other
regional agencies to adopt policies that allow public access to
information necessary to enable adequate monitoring of energy markets,
while also providing protection for information demonstrated to be
commercially sensitive.
Mr. Chairman, in conclusion, NARUC would again like to thank you
for your efforts on this legislation and for offering us an opportunity
to express our views. For your review and information I have included,
as part of this testimony (Attachment1), a copy of the NARUC National
Electricity Policy that was adopted by the NARUC membership at our
Annual Convention in November.
Unfortunately, NARUC cannot support H.R. 3406 as drafted. We do not
believe that a compelling case has been made for Federal pre-emption of
State retail authority. It is the position of NARUC that Congress can
do a great deal to advance and enhance the wholesale market without
risking possible harm to those retail institutions that have heretofore
not experienced the major dislocations that have occurred in wholesale
markets.
NARUC would welcome the opportunity to work with you and your
office prior to the Subcommittee markup to address the concerns raised
here today. I would be happy to answer any questions you may have.
Attachment 1
naruc's national electricity policy
I. GENERAL PRINCIPLES
The nation's energy policy should assure adequate, reasonably
priced, reliable, safe, and environmentally sound electricity. To
achieve this goal, Federal legislation should:
1. Encourage additional fuel- and technology-diverse supply resources
to meet the nation's growing energy demands;
2. Promote demand-side management to achieve the most efficient use of
electricity;
3. Provide for reliability standards and their enforcement;
4. Assure open and effective regional wholesale markets;
5. Minimize the environmental impacts of energy generation, delivery
and use; and
6. Respect, preserve and strengthen the States' traditional roles in
regulating distribution systems, planning, siting approval,
reliability assurance, and consumer protection.
II. DIVERSE, PLENTIFUL AND ENVIRONMENTALLY RESPONSIBLE ENERGY SUPPLIES
A. Congress should encourage environmentally responsible electricity
generation and the increased use of renewable energy
technologies as a tool to achieve fuel diversity and greater
energy security.
B. Congress should encourage domestic exploration and production of new
natural gas supplies and expansion of natural gas transmission
and delivery infrastructure in an environmentally sound manner
at reasonable costs, but should avoid an overreliance on
natural gas for new electric generation.
C. Coal fuels a significant portion of the nation's electric power and
is expected to do so for the foreseeable future. However,
because of coal's air emissions, it is important that Congress
and States work together to reduce such air emissions and
encourage development of lowpolluting central station
generation, including clean-coal technology.
D. Congress or the Administration should increase the efficiency for
licensing and relicensing processes of hydroelectric and
nuclear facilities, without compromising substantive
environmental and safety standards.
E. Although nuclear facilities create long-term radioactive waste
problems, they should continue to play an important part of our
national electric supply portfolio because they provide a
significant portion of the nation's electricity supply and do
not produce air emissions.
F. Congress needs to fulfill its commitment to provide the long-term
storage of spent nuclear fuel very quickly. To accomplish this,
Congress should ensure that the Nuclear Waste Fund revenue and
appropriations are managed responsibly and used only for the
establishment of a permanent repository. Pending development of
a permanent repository, it is better to store spent fuel at one
(or more) central location(s) on an interim basis than to leave
it at reactor sites.
G. The States support ongoing and renewed efforts to maintain the
security of nuclear power plants and prevent the proliferation
of weapons-grade byproducts.
H. Congress should enact legislation to lift the Public Utility
Regulatory Policies Act's mandatory purchase requirement, but
should allow the States to determine appropriate measures to
protect the public interest in resource acquisition and to
address mitigation and cost recovery issues associated with
these contracts.
III. DEMAND MANAGEMENT
A. Congress should promote energy efficiency programs through increased
funding, tax credits, and the setting of increasingly more
efficient national building codes and standards for motors,
lighting and appliances.
B. Congress should promote planning strategies for maintaining a proper
balance between supply and load that includes demand-side
management techniques (including price-responsive demand
mechanisms), intermittent and renewable resources,
conservation/energy efficiency programs, as well as traditional
supply and transmission options.
C. Congress should continue to provide funding for energy efficiency
and conservation for low and moderate income consumers through
programs that provide education, weatherization, housing
improvements, installation of higher efficiency appliances, and
similar usage reduction measures.
IV. RTOS, RELIABILITY, PLANNING & DELIVERY INFRASTRUCTURE
A. Regional Transmissions Organizations
1. Congress should require the FERC, in cooperation with the States, to
determine boundaries, structure, and functions for regional
transmission organizations (RTO).
2. Congress should require the FERC to give RTOs sufficient authority
to perform regional grid management, expansion, and efficient
system operations that are built and operated in the most
economical, reliable and environmentally acceptable way to
realize shortterm as well as longterm reliability and
facilitate efficient wholesale market transactions.
3. Congress should require the FERC to recognize States' rights to
active participation in RTO governance. This would include
development (and revision) of market rules, reliability and
planning, access to RTO market monitoring information,
development, with federal authorities, of market power
mitigation programs.
B. Long-term planning
1. Congress should require that RTOs or other regional bodies have
sufficient authority to conduct long term planning for their
regions and, working with the States and transmission owners,
implement long-term planning that should:
(a) Take into account fuel diversity including renewables
resources;
(b) Recognize the need for new investment in generation and
transmission facilities that provides adequate reserve
margins;
(c) Assure that reliability is not compromised by resource
imbalances;
(d) Reduce any decisional role for entities with unreasonable
generation or transmission market power;
(e) Include broad public participation and collaboration among
market participants and third party participation in
offering competitive alternatives such as demand-side and
distributed generation options;
(f) Develop a cost allocation method that is objective, non-
discriminatory, weighs environmental and societal risk, and
associates costs with benefits;
(g) Allow the use of competition, subject to appropriate regulatory
oversight, to encourage robust wholesale markets; and
(h) Assure adequate resources in all regions of the nation.
2. Congress should support the States' authority over local
distribution utilities to provide interconnection arrangements
for selfgeneration and generation units that utilize the local
distribution network.
C. Reliability
1. Congress should mandate compliance with industry-developed
reliability standards on the bulk power system that include
adequate reserve margins and preserve the authority of the
States to set more rigorous standards when deemed to be in the
public interest.
2. Congress should ensure that States continue to have the authority to
establish effective price signals that allow consumers to
choose alternative levels of reliability and power quality.
D. Delivery Infrastructure
1. States should retain authority to site electric facilities, while
Congress should support the States' authority to negotiate and
enter into cooperative agreements or compacts with federal
agencies and other States to facilitate the siting and
construction of electric transmission facilities as well as to
consider alternative solutions to such facilities, such as
distributed generation and energy efficiency.
2. Congress should pursue policies that promote and ensure pipeline
safety, and streamline existing siting processes to increase
administrative efficiency, including the coordination of all
federal, State and local participation in these processes,
without compromising substantive environmental and safety
standards.
V. ENERGY MARKETS
A. Access to Information
1. Congress should recognize that States implementing competitive
retail markets and those with traditional regulatory
structures, and Federal, State and regional agencies and
organizations overseeing the development of wholesale energy
markets require comprehensive and timely market information.
Congress should adopt policies that safeguard public access to
information necessary to enable the monitoring of these
markets, while also providing protection for information
demonstrated to be commercially, or otherwise, sensitive.
B. Retail Markets
1. Congress should not interfere with the States' authority over all
aspects of retail service including the authority to determine
just and reasonable retail rates, and those retail rates
designed to encourage reductions in peak demand and to
encourage demand-side management options.
2. Congress should not mandate retail electricity competition.
C. Wholesale markets
1. Congress should require the FERC to promulgate clear and
consistently applied market rules that foster investment in
generation, transmission and demand-side management resources.
2. Congress should mandate effective and independent monitoring of the
wholesale electricity markets and empower the relevant States
and federal agencies with authority to investigate, enforce,
and remedy problems resulting from the exercise of market power
or other abusive behavior that distorts market operations. Such
remedies should include the use of structural remedies, codes
of conduct, or affiliate rules.
3. Congress should preserve a State's ability to require that a
utility's retained generation be used to serve native load.
VI. ENVIRONMENTAL PROTECTION
A. Congress should assure that State and federal energy and
environmental policies be coordinated and complementary.
B. Congress should address all air emissions from all electric power
generation in ways that: 1) minimize adverse environmental
impacts; 2) are comprehensive and synchronized to reduce
regulatory costs; 3) rely, to the extent possible, on market-
based trading mechanisms, and 4) identify, to the extent
possible, the net impact of resource decisions, including
external factors, on public health, the environment and the
economy.
C. Congress should assist States and utilities to establish programs to
phase out power plants grandfathered under the Clean Air Act
with facilities that utilize clean coal technology or by other
means, in a way that preserves the integrity of the bulk power
system and minimizes the economic impact on local areas.
VII. CONSUMER PROTECTION
A. Congress should not limit State authority to prescribe and enforce
laws, regulations or procedures regarding consumer protection.
B. Congress should reinforce the States' authority to require all load
serving entities to disclose generation sources and
accompanying environmental impacts.
C. Congress should address the preservation of public benefits in any
electric industry restructuring legislation. Societal costs and
benefits should be studied prior to the adoption of any
particular implementation or funding mechanism.
D. Congress should require regional transmission organizations, system
operators, reliability counsels and other regional agencies to
adopt policies that allow public access to information
necessary to enable adequate monitoring of energy markets,
while also providing protection for information demonstrated to
be commercially sensitive.
E. Congress should reform the Public Utility Holding Company Act
(PUHCA), but, in doing so, should allow the States to protect
the public through maintaining effective oversight of holding
company practices and expanding State access to holding company
books and records, independent of any similar authorities
granted to the federal regulatory bodies.
Mr. Barton. Thank you.
The Chair would recognize himself for the first 5 minutes
of questions. Commissioner Hunt, you stated that your agency
supports repeal of PUHCA you said with proper safeguards. Could
you elaborate on the proper safeguards, please?
Mr. Hunt. Yes, sir. The proper safeguards in our view would
be giving access to books and records both to State regulatory
authorities and auditing powers, and access to, books and
records of utilities to the FERC.
We think that is necessary for FERC to look at affiliate
transactions, cross-subsidization, and for the States to have
enough power to audit the utilities in their particular States.
Mr. Barton. And do you consider the provisions on H.R. 3406
with regards to the safeguards to be acceptable or appropriate,
or do you think we need to enhance them in some way?
Mr. Hunt. I think they are adequate, sir, but I would
accede to FERC on that issue, because they will be the ones at
the Federal level who would really have the power under the
bill to audit the books and records of the utilities.
Mr. Barton. Okay. Chairwoman Hochstetter, do you think that
NARUC would ever support a Federal bill?
Ms. Hochstetter. Well, certainly. It would just depend on
the language within the Federal bill.
Mr. Barton. But we have to have a Federal system, and you
are looking at the most States' rights chairman you are going
to have on this subcommittee, and I have bent over backwards to
prevent preemption of the States' rights in almost every title
of the bill.
And you are a very eloquent spokeswoman, but basically
everything in the bill to protect the States doesn't go quite
far enough to protect the States in your written testimony,
which means that if we go far enough, we don't have a Federal
bill.
So if you were me, what would you do? Would you just throw
up your hands and say the heck with it, and let these great
States that have been out there for all these years squabbling
among themselves continue to squabble?
Or would you just pass a bill that says let FERC do it,
instead of letting the Congress do it, where you have a little
input?
Ms. Hochstetter. Mr. Chairman, honestly, there is much
about this bill that we can support, and I think if I were in
your shoes, I would ask NARUC for specific wording provisions,
some specific amendatory language that might be acceptable to
the organization and to individual States to address these
particular preemption concerns that I have identified.
Mr. Barton. Well, we have been doing that for 3 years.
Ms. Hochstetter. Well, we would certainly be happy to give
another go at it.
Mr. Barton. And we will be happy to give you another go at
it, but we have got about a week to let you have a go at it. I
did listen with detail to what you said, and when you talked
about a savings clause, I think we can work on that.
I don't see a way around the RTO issue, and I just think it
is going to be real tough to create a national system if we
don't change to some extent the status quo at the State level
on a fallback position on transmission siting.
And if I heard you correctly, you said that NARUC, that if
the States can't agree, instead of letting the FERC come in at
the end like we do, and let the FERC make the decision, your
group apparently wants to create some sort of a regional
arbitration panel; is that correct?
Ms. Hochstetter. Mr. Chairman, the States have been engaged
in recent discussions with FERC on creating regional advisory
panels, or regional advisory boards, to work with FERC on RTO
issues.
And I think that that mechanism with respect to RTO issues
could also work for transmission siting. And I also think that
there have been some approaches, particularly in the Western
part of the United States, where groups of States have worked
together to work through transmission citing issues.
In my part of the country, which is your part of the
country as well, I am not aware of any transmission projects
that have not been able to go forward. I think that these cases
may be isolated where there have been problems.
I think it may be a spotty thing, as opposed to a universal
problem that needs a universal fix. So that's why I had
respectfully suggested that we may want to approach it in a
more moderate basis.
Mr. Barton. Do you think that NARUC is willing to allow the
RTO body, once it is in power, to make the final siting
decisions?
Ms. Hochstetter. I think it is entirely possible, Mr.
Chairman, that if the States had a strong real formalized role
in RTO governance decisions, then siting could become part of
that process, yes, sir. But it would depend upon the structure
of our role, our ongoing role with respect to RTO governance
and operation.
Mr. Barton. And, of course, our RTO proposal that is in the
bill gives the States that real authority in the RTO creation.
You are aware of that?
Ms. Hochstetter. That's correct.
Mr. Barton. And you like that part of the bill?
Ms. Hochstetter. Yes, sir. I think it is the ongoing
involvement on a day-to-day operational basis that we would
like to see strengthened in the bill.
Mr. Barton. Thank you. My time has expired. The gentleman
from Virginia, Mr. Boucher.
Mr. Boucher. Thank you, Mr. Chairman. Ms. Hochstetter, I
share your view with respect to the need to retain State
authority over the siting of transmission lines, and frankly I
don't think the case has been made that States have abused
their discretion to site these lines in a way that would
warrant this grant of Federal siting authority.
So we are in agreement on that. Tell me if you would what
some of the concerns that States have to consider are when the
decision is made whether or not transmission lines should be
approved?
Ms. Hochstetter. Yes, sir. I am glad that you asked that
question. There are a number of things set out in our statute
that we must consider, in addition to getting the input of a
number of other State agencies.
There are citing issues involving historic property,
landowners rights, environmental quality, endangered species,
and then on an economic basis, there are cost benefit
ramifications, in terms of making sure that the infrastructure
and its costs are in fact allocated in a manner that provides
benefits to those that pay the costs.
Mr. Boucher. Are you aware of any instances cited by the
proponents of this grant of Federal authority to site
transmission lines, where the claim has been made that the
State has acted arbitrarily in balancing these competing
interests of new transmission lines on the one hand, versus the
other values that you have mentioned on the other, that the
State has not engaged in a reasonable balancing process?
And that it has in some way its discretion to weigh these
various values and come to a decision? Are you aware of
instances where the allegation has been made of some abuse of
discretion in that regard?
Ms. Hochstetter. I have honestly only heard of one
antidotal story, and I don't have much information or knowledge
on it. And so I did find it somewhat interesting that that was
a proposal in the legislation, because from my knowledge and
experience--and I have been in this industry for 17 years--I am
not aware of any line that was necessary that has failed to be
sited.
I am sure that there may be one or two examples, but I am
not aware of any.
Mr. Boucher. Okay. Well, I have been asking that question
to a number of witnesses who have been testifying before this
subcommittee this year, and we have yet to hear examples from
anyone that would suggest that States have acted
inappropriately, and would lend credence to the claim that
there needs to be Federal authority in this area.
And let me just ask one additional question, and that
relates to a way in which we might encourage the investments to
be made in new transmission lines where they in fact have to be
built.
A number of proposals have been put forward to address that
concern. The bill contains a new system of incentive pricing
authorities for the FERC. I would welcome your view with regard
to the appropriateness of incentive pricing as a way to
encourage and incent new power line construction.
And I would also welcome your view with regard to whether
or not there might be another alternative. And that is
sufficiently to empower regional transmission organizations to
bid out the construction of these lines themselves.
And perhaps ultimately to be the owner of the newly
constructed lines. Your thoughts on that alternative and
whether or not that might work?
Ms. Hochstetter. Yes, sir. Thank you. I am honestly not
aware of any examples, at least in my State and in my regional
of the country, where traditional cost of service based rate
making has not be sufficient to incent transmission owners to
build new transmission.
Certainly incentive rates might provide more encouragement
and inducements, but I am not aware of the fact that we are at
that point where that is absolutely necessary. I think it is
something that could be considered at some point.
But we do have to keep in mind that when you use a rate
design that it generally increases retail rates to consumers.
So there is a balancing act that has to go into the process,
and I would think that from a logical standpoint that you would
start with the cost of service basis for incremental
transmission construction.
And if that didn't work, then move to something else, but I
don't think you have to jump over that first phase necessarily
to get new transmission constructed.
Mr. Boucher. Okay. Mr. Chairman, those are my questions.
Thank you very much.
Mr. Largent [presiding]. I thank the gentleman. The
gentleman from Illinois, Mr. Shimkus, is recognized.
Mr. Shimkus. Thank you, Mr. Chairman. I will have just a
brief question for Chairman Hochstetter. Define retail. In your
statement, you talked about retail issues. Define retail for
me.
Ms. Hochstetter. There are a couple of different
definitions that I might proffer. One is those program that
have to do with services provided off of the distribution
facilities, which is what State regulators regulate everything
that is of a distribution nature.
Another definition of retail might be those rates,
programs, and services offered to residential, commercial, and
industrial customers.
Mr. Shimkus. Is there not another definition of retail?
Could there not be retail over the transmission lines?
Ms. Hochstetter. A portion of the transmission lines
certainly are involved in retail service, and of course from
the standpoint of the bundled service that we still have, a
majority of the transmission service is in fact retail.
Mr. Shimkus. Now, if we have a generating facility in
Arkansas, and a manufacturing plant in Missouri, by the
Constitutional definition that would be interstate commerce
would it not?
Ms. Hochstetter. That's correct, and based on my
understanding, Missouri would have to have retail open access
to allow that manufacturing plant in Missouri to buy from the
merchant plant in Arkansas.
Mr. Shimkus. Okay. What about Illinois?
Ms. Hochstetter. Then in that scenario, that plant or the
manufacturing plant in Illinois would certainly be free to
purchase from the merchant plant in Arkansas.
Mr. Shimkus. Would it not make an argument for our role in
the debate referencing interstate commerce to try to create
that national grid as the chairman has so aptly attempting to
do?
Ms. Hochstetter. I agree that the division lines are
somewhat gray at times, because certainly the transmission
commerce is a mixture of retail and wholesale.
Mr. Shimkus. And I think that is probably the fundamental
principle of what we try to address here on this committee, and
as the committee Members have stated, this is the only
committee really defined by the Constitution that deals with
interstate commerce.
It is really a tough argument to make these days that
wholesale, i.e., and some retail, are not interstate commerce
and should be kept solely for the jurisdiction of the control
of the State, and that's why we probably are going to move in
some direction.
And we would rather that you be helpful than adversary, and
with that, Mr. Chairman, I yield back the balance of my time.
Mr. Largent [presiding]. I thank the gentleman. The
gentleman from Michigan, Mr. Dingell, is recognized.
Mr. Dingell. Mr. Chairman, I thank you for your courtesy,
and I commend the chairman for this hearing. To the witnesses,
I am going to give you questions which I hope can be answered
yes or no.
Your testimony states this morning that repeal of the Act
would eliminate regulatory restrictions that prevent utility
holding companies from owning utilities at different parts of
the country, and to prevent non-utility businesses from
acquiring regulated utility.
I interpret this as meaning that but for PUHCA, Enron could
have acquired regulated utilities. Is that correct?
Mr. Hunt. Mr. Congressman, I don't think--that may be
correct. Enron is exempt from PUHCA now because it does not
operate a utility outside of Oregon, where it is incorporated.
Mr. Dingell. So they could then have bought it either way?
Mr. Hunt. They could have bought another utility outside of
Oregon, and they would have probably become an interstate
company obviously, and been subject to the Act.
Mr. Dingell. So if they bought one outside?
Mr. Hunt. Yes, sir.
Mr. Dingell. So the answer to the question then is yes.
Now, let's look at the accounting in the Enron matter. It was
celebrated perhaps by meeting one of two tests. It was either
incompetent or it was criminal, or perhaps both.
Having said that, in that case, wouldn't you and I now be
sitting here discussing how State regulators would be faced
with the massive job of shifting through Enron's
extraordinarily complex corporate structures where evidence of
cross-subsidization of non-energy investments financed by
captive utility consumers?
Mr. Hunt. Mr. Congressman, as you know, my agency has just
begun a serious investigation of the Enron matter, and it would
be difficult for me to speak either about the accounting issues
or anything specific about Enron until we have all the facts
with respect to our investigation.
Mr. Dingell. Well, would you not now then be in a situation
of rubbing around through Enron's accounting to find whether or
not there was evidence of cross-subsidization of non-energy
investments being made by charging captive utility consumers
for the costs of that?
Mr. Barton. After he answers the question would the
gentleman yield?
Mr. Dingell. I would be happy to yield for the Chair. But
isn't that a real possibility, and you would be here discussing
that with me this morning?
Mr. Hunt. Sir, the SEC's Office of Chief Accountant is
going to look very seriously at, and our other accountants are
going to look very seriously and note, all the ramifications of
the accounting problems as they relate to Enron.
And I am not going to guess as to what they are going to
find, but they will be looking at the whole accounting issue
with respect to Enron.
Mr. Dingell. I am not asking for that answer. All I am
doing is saying we would have been in the awkward position then
of probably having to be looking to see if Enron was using
captive utility consumers' payments to subsidize cross-
fertilization of investments; isn't that right?
Mr. Hunt. That is a possibility, as I said, Mr.
Congressman. They only own one utility.
Mr. Dingell. And as you have already told me, but for
PUHCA, they could have bought more?
Mr. Hunt. Yes.
Mr. Dingell. Now, in the light of what we are now learning,
is the SEC confident in its earlier contention that the books
and records protection is an adequate legislative offset for
repealing PUHCA?
Mr. Hunt. I think that FERC would be better able to handle
that. They are the ones that we would suggest should have the
books and records authority at the Federal level.
Mr. Dingell. Isn't it fair to observe that on securities
matters that the SEC is the premier and the major, and the
principal Federal Agency dealing with securities matters?
Mr. Hunt. Yes, sir.
Mr. Dingell. And PUHCA is, of course, a twofold
responsibility of the Federal Government; a part deals with
energy, but more importantly, a part, or the principal part,
deals with securities because it was directed at dealing with
the outrages committed by Mr. Ensel in the 1920's; isn't that
right?
Mr. Hunt. Yes, sir.
Mr. Dingell. Very good. I thank you. Mr. Chairman, I am
happy to yield to you.
Mr. Barton. I thank you, Congressman. You know, I was
talking to the staff when you started your question, and so I
may have missed the premise. But my understanding is that Enron
is not a public utility holding company under the PUHCA.
So that what Mr. Dingell was asking you was really more of
a hypothetical question than a real time question, because they
are not subject to PUHCA.
Mr. Hunt. They are not subject to PUHCA, because they only
operate utilities in one State, the State in which they are
incorporated.
Mr. Barton. And if they had been a PUHCA regulated company
would their books have been looked at in any more detail than
they should have been looked at under the reality of how they
have been regulated or been reviewed by the SEC?
Mr. Hunt. Well, the----
Mr. Barton. The gentleman has yielded to me to let you have
a pop at answering my question.
Mr. Hunt. I think that certainly I can't see anything
different, Mr. Chairman, with respect to the relationship
between the outside auditors and the company itself.
Mr. Barton. I would ask for unanimous consent that the
gentleman from Michigan be given an additional 2 minutes since
he yielded to me on his last 15 seconds, and obviously I have
peaked his interest by my question.
Mr. Dingell. Mr. Chairman, I thank you, and you have helped
with the point. But the point that we come down to is under
PUHCA the Enron folks had one utility, and the Enron folks
could not under PUHCA have owned, or bought, or acquired a
second utility in another State.
And in that PUHCA precluded certain fine possibilities of
serious misbehavior by the Enron folks then; isn't that true?
Mr. Hunt. Sir, they could not have acquired a utility in
another State without coming under the SEC's jurisdiction under
PUHCA.
Mr. Dingell. Right. So that would have had the practical
effect then of preventing them from diversifying, right?
Mr. Hunt. They may not have minded being under PUHCA, sir.
Mr. Dingell. And adding a splendid new level of complexity
to some of the most obscure, murky, perhaps incompetent, or
more perhaps a plainly dishonest aggregation of corrupt
bookkeeping; isn't that right?
Mr. Hunt. I can't say whether it was corrupt or not, Mr.
Congressman, because we have not completed our investigation.
Mr. Dingell. Well, if it looks like a duck, and quacks like
a duck, and flies a duck, let it be said that it is a duck. And
I think here, dear friends, that we have before us a duck, or
more correctly, an incorrect, incompetent, dishonest, and
embarrassing bookkeeping.
Mr. Sawyer. Will the gentleman yield?
Mr. Dingell. I am happy to yield to the gentleman if he
wants to talk about this correct, incompetent, bookkeeping.
Mr. Sawyer. I just wondered. You do have some experience in
duck hunting don't you?
Mr. Dingell. I do. I also have some experience in correct
and dishonest bookkeeping.
Mr. Sawyer. Truly as an observer, I'm sure.
Mr. Dingell. It is from observation and not from engaging
in the practice. Mr. Chairman, as always, you are courteous and
kind, and I thank you for your graciousness.
Mr. Largent [presiding]. The gentleman's time has expired.
I recognize the gentleman from Kentucky, Mr. Whitfield, for
questions.
Mr. Whitfield. Mr. Chairman, actually, I am not going to
ask any questions today.
Mr. Largent. Okay. All right. Then the Chair will yield to
himself, as I am next in line here, and I have just one
question. Actually, one comment and a question.
Mr. Hunt, I wanted to ask you, is it possible--and kind of
following up on Mr. Dingell's line of questioning, if PUHCA had
been repealed and Enron had gotten into more diverse utility
company holdings, is it not possible that it would have raised
Enron to another level of scrutiny by the SEC or by FERC that
perhaps would have kept Enron out of trouble?
And I know that we are projecting into the future here, and
thinking about possibilities, but it is my belief that perhaps
if PUHCA had been repealed and Enron had gotten into where they
held more than one utility company, that possibly they could
have been scrutinized to a greater degree, and thereby avoiding
some of the problems that they now find themselves in?
Mr. Hunt. Well, we would certainly hope that if PUHCA had
been repealed FERC would have been given more power to examine
the books and records of a company in the situation of Enron,
particularly if they bought utilities outside of Oregon where
they now own a utility.
So we would hope that FERC would expand its authorities and
would have given close scrutiny to a company like that with its
new powers.
Mr. Largent. Thank you, Mr. Chairman. Ms. Hochstetter, I
would like to ask you a question. I was surprised a little bit
by your response about cost of service rates, and that those
are good enough to construct transmission.
Is it your belief that we have a shortage of transmission
in this country today?
Ms. Hochstetter. I believe it depends upon what type of
transmission service you are talking about.
Mr. Largent. I am talking about interstate transmission.
Ms. Hochstetter. To serve the bulk wholesale power market,
it is my understanding that that is correct. I don't know that
there is a constraint, at least in my part of the country, with
respect to serving native load customers. But certainly the
system is not configured in such a manner to serve the bulk
wholesale power market.
Mr. Largent. So we are talking about interstate
transmission, which is what we are talking about here in
Washington, that you believe that there is a shortage in
transmission to serve the bulk power grid?
Ms. Hochstetter. Capacity. Maybe not necessarily a
situation where you automatically have to go toward
constructing new lines. But there are obviously as you know
ways to enhance capacity without building new lines, and siting
new transmission lines.
But I am certainly aware of and would acknowledge the fact
that we will need incremental transition capacity, and probably
lines in this country. But I am not necessarily convinced that
incentive rate making is the first necessary step.
Mr. Largent. Well, we have heard stories and perhaps you
haven't, of constraints--you know, Path-15 is one that we have
heard a lot about in California, where there is a significant
transmission constraint, intrastate constraint in California.
We have heard of constraints in Wisconsin and Illinois,
between Chicago and Milwaukee, that there is serious
constraints of transmission there. And I am just wondering if
you feel like that the--I mean, your opinion is that cost to
service rates are good enough for transmission construction
today, then why aren't those transmission lines where there are
constraints being constructed?
Ms. Hochstetter. I think honestly, sir, one of the reasons
is that because everyone is waiting to make investments until
the RTO structure is a known quantity, and RTOs are actually
implemented, and up and running.
I think people are delaying making investments until they
know what that type of organization is going to look like. And
what also the transmission pricing policies will be coming out
of FERC.
You know, they have an interconnection note going on right
now, the second phase of which will deal with incremental
transition pricing policies. So I think that once we have the
RTO system configured, and these new transition pricing
policies, I think you will see folks stepping up to the bar and
making transmission infrastructure investments.
Mr. Largent. Let me ask you a question about RTOs. I sat
here when you were talking about that, and I had actually
wanted to ask some of the panelists that we had yesterday this
question.
How involved should FERC be in determining the size or
number of RTOs in this country?
Ms. Hochstetter. I think they should be very involved, and
I think they should be involved in a partnership format with
the States, which is a step that they had taken, and we commend
them greatly for doing that.
We have over the last few months begun to forge that type
of partnership in an ongoing dialog with them on RTO issues.
Mr. Largent. Is less better in terms of the number of RTOs?
Ms. Hochstetter. I honestly think it is a region specific
question, and I think that Chairman Wood has recognized that,
and I think that they have recently changed their position on
four being the perfect number. So I think it is one of those
things that has to be looked at on a region by region basis.
Mr. Largent. Okay. I see that my time has expired. Let's
see. The Chair recognizes the gentleman from Ohio, Mr. Sawyer,
for questions.
Mr. Sawyer. Thank you very much, Mr. Chairman. In light of
the exchanges, Commissioner Hunt, let me just return to what I
think Congressman Barton asked earlier. You make a very
specific recommendation with regard to what you believe the
role between the SEC and FERC ought to be with regard to
affiliate transactions, audits, access to books, records, and
continued protection of utility companies.
Do the provisions of the bill before us, 3406, satisfy your
recommendations?
Mr. Hunt. I think so, Mr. Congressman. Obviously, you
should also get the views of FERC, and whether they think that
this power is adequately amplified in this bill for them to do
the job, because we would be--if we had our way, we would be
out of this business, and this business would belong to FERC.
Mr. Sawyer. Let me just make an observation before I move
on. It strikes me that looking to the kinds of traditional
solutions provided either by the SEC or FERC with regard to
Enron may not be where we need to look.
It strikes me that Enron structured its business to operate
in the seams between the controls put in place 65 years ago,
and that those controls may not have been adequate even in the
best of circumstances, but that is just an observation.
Mr. Hunt. I think part of that business was unregulated by
us and by FERC, the trading part of the business. We regulate
another part and FERC regulates another part, but as to the
trading part, I think you are right. Neither of us regulates it
under existing law.
Mr. Sawyer. It is good to see you here today.
Mr. Hunt. It's good to see you, too, sir.
Mr. Sawyer. Ms. Hochstetter, I guess I would agree with Mr.
Boucher and with you with regard to the way in which the States
have functioned, and I think to suggest that they acted
arbitrarily or inappropriately, or abused discretion with
regard to siting responsibilities that they have, it is an
accurate observation to say that those kinds of things have
simply not occurred.
And I think it is probably also true that any transmission
that has been needed--I can't think of a circumstance anywhere
in the country where it has been ultimately denied as a product
of siting difficulties.
Our problem it seems to me, however, is that not just
recently, and not just waiting for RTOs to come into place, but
over the last quarter of a century, we have seen a decline in
investment, in overall transmission.
And that a transmission system designed to serve a cost of
service environment, and with an obligation to serve a service
territory, has worked.
But it has not created the broader grid of the kind that
the Sitting Chair was suggesting, and that the decline year in
and year out of over $100 million in investment in transmission
has led to a system that over the long term has begun to
atrophy in terms of the uses to which it has attempted to be
put today.
That is to say, that for the bulk transmission and the
functioning of a real grid in regional markets instead of a
series of transmission lines cobbled together to meet the needs
of a grid.
Having said that, could you describe for me the kind of RTO
or kind of regional siting authority that you are talking
about? Would it function within an RTO?
Would it have the authority to bring eminent domain to
difficult siting decisions in the same way that the States can
today? And when there is disagreement between existing siting
authorities among States, who resolves it?
Ms. Hochstetter. I think, sir, the vision that I had
mentioned earlier on a regional basis would probably have to by
law involve voluntary cooperation and coordination as the first
step.
I am not certain that regional eminent domain authority is
something that is appropriate. But I certainly think that a
regional association of some sort, hand-worked through a
majority, if not all of the difficulties, and should at least
be a first step, a first effort that is made.
And to the extent that either an RTO isn't the one siting
the authority or to the extent that the States can't achieve
that.
Mr. Sawyer. When Arkansas confronted a difficult siting
decision, you mentioned that you had an obligation to look at a
number of questions, and included among those was whether or
not it provides service to the people affected by the siting
decision.
If in fact this is an interstate transmission line, and
Arkansas disagrees with Texas and Louisiana, for example, how
does that get resolved under the structure that you envision?
Ms. Hochstetter. Well, I certainly recognize that you are
not going to have a perfect scenario and that there could be
problems. I think what I am just suggesting is that let's not
jump over the first couple of alternative methods in getting to
the ultimate objective.
I certainly acknowledge, and I am just speaking on behalf
of the Arkansas Commission at this point, I will certainly
acknowledge that at some point FERC's siting authority, or some
kind of FERC backstop, might be appropriate and might be
necessary.
But I don't think that you have to automatically go to that
as your first approach, the first step if you will, in doing
that if you like.
Mr. Sawyer. I would just submit that I believe that at
least both the bill that the chairman has worked on, and the
one that I have does give primary initial siting authority and
sufficient time for the States to act directly.
But that that backup authority is put in place not as a
first use, but in anticipation of potential problems.
Mr. Barton. Would the gentleman yield?
Mr. Sawyer. With whatever I have left, I would be happy to.
Mr. Barton. I would ask for unanimous consent that Mr.
Sawyer have 2 minutes, and if you would yield 1 minute to me.
Mr. Sawyer. I would be pleased to do so.
Mr. Barton. Let's use that hypothetical. Let's say you have
a three State COMPAC, and Arkansas is right in the middle, and
so we have Oklahoma and Tennessee, and we have this regional
citing authority that you talked about.
And the regional citing authority has got one
representative from the State of Arkansas, and one
representative from the State of Oklahoma, and one
representative from the State of Tennessee.
And the pending transmission line is an interstate line
that goes from Oklahoma to Tennessee across the great State of
Arkansas. The regional siting authority meets and it votes 2 to
1 to build it, the one vote being the State of Arkansas, and it
says that we don't need it, and we don't get anything out of
it, and we vote no.
If we went to that regional siting authority could we put
language in the regional siting authority that would bind the
losing State, the losing State, to exercise their State eminent
authority, right of eminent domain, even if they lose? Would
NARUC accept that?
Ms. Hochstetter. Well, without checking with the NARUC
officers and the NARUC board, I would have to say that I
honestly don't know. It is an interesting hypothetical, and----
Mr. Barton. Well, would you accept that? If you were the
Commissioner representing the State of Arkansas in this three
State COMPAC, and you voted no, but the other two States voted
yes, and we were giving that State COMPAC the right to make the
decision and not the FERC, would you accept that kind of a
provision acting on behalf of the State of Arkansas?
Ms. Hochstetter. I honestly don't know. I think I would
have to look at to what extent, if any, there was an impact on
retail rates.
Mr. Barton. No, I am not talking about that. We are going
to do something.
Ms. Hochstetter. I understand, sir.
Mr. Barton. We are going to get a national grid built, one
way or the other. I want the States to have every bit of access
and authority, and input possible, but at some point in time
somebody has got to pull the trigger so to speak and say we are
going to build it if it is in the regional interest.
Now, you put on the table this regional authority and that
is not a unique brand new idea.
Ms. Hochstetter. Right.
Mr. Barton. I am willing to go down that road if I can get
your group and your utility commissioners to accept that at
some point in time, even acting on behalf of your State, that
you vote no, and you still accept the overall product for the
greater good.
But if you won't accept that, if NARUC won't accept that,
then we will keep our backup authority at the FERC level.
Ms. Hochstetter. Well, let me answer you on behalf of the
Arkansas commission, because I honestly cannot speak based on
your hypothetical on behalf of NARUC. Our Commission does not
want to be parochial, and that is one of the reasons that we
have been a strong advocate of RTOs at FERC.
And I think that we are somewhat unique, at least in our
part of the country, in our support of the RTO concept. Along
these lines----
Mr. Barton. You have got some of the biggest merchant
plants in the country being built in your State.
Ms. Hochstetter. Yes, sir.
Mr. Barton. And you want to get that power out there.
Ms. Hochstetter. Provided that we get some benefit out of
that, that's correct. But the concept of net public interest is
near and dear to my heart and to our Commission's heart.
And if you are looking at something on a regional basis and
the net public interest shows that the majority of the folks
will benefit from the project, I personally do not have a
problem with that, and I don't think our Commission would.
Mr. Barton. I will take that.
Mr. Largent [presiding]. The gentleman's time has expired.
I recognize the gentleman from Tennessee, Mr. Bryant.
Mr. Sawyer. Mr. Chairman, I yielded 1 minute of my 2. Can I
have 1 minute as long as his?
Mr. Largent. Sure.
Mr. Sawyer. Well, probably not. Okay. Forget I asked.
Mr. Barton. I am reinforcing your point, Mr. Sawyer.
Mr. Bryant. Thank you. Madam Chairman, let me follow up on
that, and not to beat a dead horse here, but this is a very
important issue. Coming from the State of Tennessee, let me
assure you that we probably would not vote against Arkansas in
that scenario.
Ms. Hochstetter. I appreciate that.
Mr. Bryant. But we could always run it through Texas, or
perhaps Missouri. This question though is that there is no
question that the President and his energy policy, and the
report indicated that we needed more infrastructure, and I
don't think that is the issue here.
It is how we go about it, and by protecting State's rights,
and regional rights, and even individual property owner's
rights as we talk about this process. And I am interested in
your testimony as it relates to the incentive pricing.
And a couple of times you have referred to in your
statement or in your testimony today about not leaping over the
cost of service and going right to the incentive pricing
because ultimately we all know the rate payer is going to be
charged with this.
And not necessarily seeing a direct visible benefit out of
that, it is going to be difficult to accept. It is going to be
very difficult in the Tennessee Valley, where we have become
accustomed over the years to very reliable and inexpensive
power, particularly to our residential customers and our
constituents.
As we move toward this restructuring my constituents are
very concerned about prices going up. So every point that is
out there where this court occur, I know that the blame for
that is going to come back to restructuring in general, and
those in Congress responsible for it.
And I am a rate payer also, and so I don't want to see that
either. So I am intrigued that if there is truly a middle
ground so that we don't leap over and go right to the incentive
pricing.
But my question to you though is realistically--and I have
always heard that that is--that people are waiting for Congress
to act to provide some ``stability'' before they start building
and putting money, and investing money in infrastructure.
Can we say how we would get there without incentive
pricing? I mean, how do you say that we are not going to start
out with this, but if it doesn't work, we will get to that,
because everybody is going to hold out until it gets to that
point?
I mean, how do you reasonably get some interim steps in
there that would actually work, rather than people continuing
to hold out on building until they get the money that they want
to build?
Ms. Hochstetter. Yes, sir. I think that FERC is ultimately
going to need to take a lead in that, and so I think in terms
of waiting for Congressional action, it is probably waiting for
Congressional action to ask FERC to move forward in
coordination and in consultation with the States to address
some of these issues.
But I think that is something that could be done in a
proceeding at FERC to discuss that type of cost of service,
versus incentive rate design, and work through those issues in
this consultative process that we have begun to form with the
FERC.
So I think that is something that could be handled on an
administrative basis, as opposed to in Congressional
legislation, just to direct us to move forward in partnership,
the States, in conjunction with FERC on these issues.
Mr. Bryant. I have additional time, but I know there is a
very qualified and competent second panel ready to testify, and
I would waive the balance of my time so we can move on toward
our second panel.
Mr. Largent. All right. The gentleman yields back his time,
and I will recognize the gentleman from Louisiana, Mr. John.
[No response.]
Mr. Largent. Mr. Wynn, from Maryland.
[No response.]
Mr. Shimkus. Mr. Chairman, I have one additional question,
but I am not up yet.
Mr. Largent. Well, maybe Mr. Walden would yield you time.
Mr. Walden. Mr. Chairman, I would be happy to yield to my
colleague.
Mr. Shimkus. And I thank my colleague. For Mr. Hunt. I have
been told from some Illinois utilities PUHCA has prevented them
from refinancing bonds. Could this be true?
Mr. Hunt. Without knowing the facts of that case, Mr.
Congressman, I couldn't answer, but I would be glad to get back
to you with an answer.
Mr. Shimkus. Well, I don't question them, but the final
question is if they do have an inability to refinance bonds
under PUHCA at this time, understanding how rates have gone, we
could then make a correlation that individual rate payers are
not getting the advantage of the ability to refinance, and in
essence are incurring higher rates than they probably are,
unless they were able to refinance. Is that a fairly good
analysis?
Mr. Hunt. Well, I just don't know what PUHCA's involvement
in that problem is, Mr. Congressman. Certainly if a utility
can't refinance, the rate payers may suffer some harm. But to
the extent that PUHCA and we had anything to do with the non-
refinancing in this instance, I can't speak to that because I
don't know the facts.
Mr. Shimkus. And if you would check to get that, I would
appreciate that.
Mr. Hunt. I will try.
Mr. Shimkus. That is the only question I have, Mr.
Chairman. Thank you.
Mr. Largent. The gentleman from Oregon, does he yield back
his time? Do you have any questions?
Mr. Walden. I will save mine for the next panel, Mr.
Chairman.
Mr. Largent. Okay. The gentleman from Georgia, Mr. Norwood.
Do you have any questions for this panel?
Mr. Norwood. No questions.
Mr. Largent. Seeing no other requests for questions, I will
excuse this panel. Thank you, Mr. Hunt, and Ms. Hochstetter, I
appreciate your testimony, and we will ask the next panel to
come in.
Ladies and gentlemen, we thank all of you for your
willingness to testimony before this committee. I would ask you
to summarize your remarks in 5 minutes, and I will begin by
introducing Panel Two.
They are David Sokol, representing Mid-American Energy
Holdings Company; Mr. Robert Johnston, representing the
Municipal Electric Authority of Georgia; Mr. Alan Richardson,
representing the American Public Power Association; Mr. Glenn
English, an Oklahoman, also representing the National Rural
Electric Cooperative.
And Mr. Michehl Gent, representing the North American
Electric Reliability Council; Ms. Lynne Church, representing
the Electric Power Supply Association; Mr. James B. Rouse,
representing the Electric Consumers Research Council; Charles
Acquard, representing the Consumers for Fair Competition; Mr.
William Prindle, representing The Alliance to Save Energy; and
finally Mr. Leonard Hyman, representing or with Salomom Smith
Barney.
As I said, we welcome you and we will begin with Mr. Sokol
to present your testimony in 5 minutes, and then we will move
through the panel.
Thank you, Mr. Sokol.
STATEMENTS OF DAVID L. SOKOL, CHAIRMAN AND CEO, MID-AMERICAN
ENERGY HOLDINGS COMPANY; ALAN H. RICHARDSON, PRESIDENT AND CEO,
AMERICAN PUBLIC POWER ASSOCIATION; GLENN ENGLISH, CEO, NATIONAL
RURAL ELECTRIC COOPERATIVE; MICHEHL R. GENT, PRESIDENT AND CEO,
NORTH AMERICAN ELECTRIC RELIABILITY COUNCIL; LYNNE H. CHURCH,
PRESIDENT, ELECTRIC POWER SUPPLY ASSOCIATION; JAMES B. ROUSE,
DIRECTOR, ENERGY POLICY, PRAXAIR, INC., ON BEHALF OF THE
ELECTRICITY CONSUMERS RESOURCE COUNCIL; CHARLES ACQUARD,
EXECUTIVE DIRECTOR, NATIONAL ASSOCIATION OF STATE UTILITY
CONSUMER ADVOCATES; WILLIAM R. PRINDLE, DIRECTOR OF BUILDING
AND UTILITIES PROGRAMS, THE ALLIANCE TO SAVE ENERGY; LEONARD S.
HYMAN, SENIOR INDUSTRY ADVISOR TO SALOMON SMITH BARNEY; AND
ROBERT JOHNSTON, PRESIDENT AND CEO, MUNICIPAL ELECTRIC
AUTHORITY OF GEORGIA, ON BEHALF OF THE LARGE PUBLIC POWER
COUNCIL
Mr. Sokol. Thank you, Mr. Chairman, for the opportunity to
be here today. I am David Sokol, Chairman and CEO of Mid-
American Energy Holdings Company, and my comments are fully
endorsed today by our largest shareholder, Warren Buffett, and
his Berkshire Hathaway Company.
Before providing comments on H.R. 3406, I would like to
explain why we believe that moving forward with this
legislation is so crucial. As the head of a company that
provides the electrical load that feeds industry jobs and
production, we have seen a very steady downward trend for much
of this year that has accelerated in recent months.
We do not share the view of some who believe that this
recession is destined to be either relatively brief or
comparatively painless. Congress does, however, have in its
power to take the steps that will spur the economy and reassure
investors and consumers in this sector.
Passing real comprehensive energy legislation, a bill that
contains electricity modernization as a fundamental component
is vital to that effort.
This perhaps could be one of the most important stimulus
measures this committee can pass for the American economic
recovery. With regard to the bill, I would like to offer my
comments section by section, and under Title One of Electricity
Supply, Subtitle A, Mid-American fully supports this section.
Tough Mid-American does not have a financial stake in this
area, we believe that distributed generation should be an
integral part of the energy future of this country, and will
deliver significant benefits to consumers and the environment.
We have some minor technical concerns on the net metering
language, but establishing minimum standards to encourage
States to adopt policies to promote generalization and with
renewables is clearly appropriate.
Under Subtitle B regarding the Public Utility Holding
Company Act, Mid-American strongly supports repealing PUHCA and
replacing it with comprehensive provisions to enhance
regulatory access to the books and records of all utility
holding companies.
PUHCA is the most substantial impediment to new investments
and energy infrastructure, keeping billions of dollars of new
capital out of this industry. The SEC, FERC, State Regulators,
the administration, and the Democratic leadership of the
Senate, have all endorsed PUHCA repeal as necessary pieces of a
national energy strategy.
It is in the words of your former colleague, Senator Tom
Carper of Delaware, ``a no-brainer.'' Subtitle C provisions
regarding the Public Utility Regulatory Act, we strongly
support these provisions as well, and we note that respective
PURPA repeal is long enjoyed by partisan support.
Under Subtitle D, the redundant review of certain matters.
Section 142 eliminates the redundant review of multiple
agencies over utility mergers. This is a desirable provision,
but I understand that there is significant opposition to
certain parts of the section.
At a minimum, we would recommend establishing reasonable
time limits on the FERC merger review period. Under Title II,
Transmission Operations, Section 201 embodies the FERC like
compromise, bringing non-jurisdictional utilities under limited
FERC oversight.
Mid-American was one of the first investor-owned utilities
to endorse this compromise and we support this section
strongly. Section 202 on regional transmission organizations,
or RTOs, includes many items that have been sought for years by
advocates of a more transparent transmission system.
First, a date certain for RTO participation; and second,
placing all uses of the system under the same tariff; and,
third, independence requirements and minimum standards for
RTOs.
The principles underlying this language is very sound;
mandatory participation with flexible implementation. At the
same time we understand that this section has received some
criticism that it is too cumbersome, and perhaps too
prescriptive.
We would suggest the work continue on the section as the
bill moves forward through the process in order to refine these
very sound concepts. Under Title III of transmission
reliability, Section 301 is a streamline version of the
reliability language that has been included in earlier bills.
This language has broad stakeholder support, and Mid-
American supports and prefers this approach, and we could also
accept the section on reliability in the Daschle and Bingaman
bill.
The most important thing is that we must have a mandatory,
enforceable, reliability system in place. Under transmission
infrastructure, Section 401 addresses two priority issues for
improving the transmission infrastructure.
Encouraging FERC to develop incentive rates for investments
and new infrastructure, and requiring FERC to conduct a
rulemaking on pricing to ensure adequate capitalization of
stand-alone transmission entities.
These provisions are sound policy, and frankly shouldn't be
controversial. Some of the other policy directives toward FERC
we would characterize as clearly desirable, but not absolutely
essential, and non-binding language could be appropriate.
Under Section 402, this is a very important section.
Performing siting of interstate transmission lines is an issue
that only Congress can address. Every electricity consumer has
a stake in fixing transmission bottlenecks, and making for a
more wholesome transmission system.
While my first instincts would usually be unfettered
protection of property rights, there must be some way to ensure
that vital transmission infrastructure gets built for this
country.
The formula that you have outlined will do the job, and we
would encourage the committee to continue exploring options
with the various stated entities involved.
Under Federal Utilities, we understand that these three
sections represent consensus approaches by the stakeholders in
the affected regions, and while we are not an expert on these
issues, we commend that consensus approach.
And Mid-American strongly supports Title VI and VII of the
Consumer Protection and related matters. Mr. Chairman, there is
one other topic that I would like to address before I conclude,
and that is the problems at Enron.
No one should make Enron or the Enron situation an energy
issue. It is an issue of bad investments and the clear misuse
of accounting. Energy markets are functioning fine without
Enron.
This committee has a great history on matters of oversight
investigations, and we applaud Chairman Tauzin on announcing
his intentions to hold hearings on this matter. I also believe
that Representative Markey has raised valid questions about the
oversight of electricity trading markets that deserve the
committee's attention.
But the subcommittee should not turn away from the task of
doing its part to aid the economic recovery modernizing the
vastly needed electricity laws and infrastructure because of
the problems at one company, no matter how high profile that
company is.
The changes that you are proposing under 3406 are very long
overdue, and I would be happy to answer any questions that you
might have.
[The prepared statement of David L. Sokol follows:]
Prepared Statement of David L. Sokol, Chairman and CEO, MidAmerican
Energy Holdings Co.
Thank you, Mr. Chairman, for the opportunity to testify today. I am
David L. Sokol, Chairman and CEO of MidAmerican Energy Holdings
Company, a global energy company based in Des Moines, Iowa. I was
pleased to testify before the Subcommittee earlier this year on the
topic of barriers to competitive generation, and am appreciative that
the subcommittee has allowed me to come back.
MidAmerican is a diversified, international energy company
headquartered in Des Moines, Iowa with approximately $11 billion in
assets. The company consists of four major subsidiaries: CE Generation
(CalEnergy) a global energy company that specializes in renewable
energy development in California, New York, Texas and the West, as well
as the Philippines; MidAmerican Energy Company, an electric and gas
utility serving the states of Iowa, South Dakota, Illinois and a small
part of Nebraska; Northern Electric, an electric and gas utility in the
United Kingdom, and Home Services.com, a residential real estate
company operating throughout the country.
As head of a company that includes both regulated utility assets
and independent, competitive generation assets, in addition to
experience participating in the already-deregulated energy markets in
the U.K., I hope I bring a balanced perspective to the consideration of
these issues.
For the last three years, MidAmerican has taken a leadership role
in attempting to build support for reasonable, middle ground solutions
to modernizing the electricity industry.
In that spirit, I will attempt in my testimony to point out some
areas of potential compromise that could resolve outstanding
disagreements over the few remaining areas of dispute in this
legislation. It is time for all stakeholders to engage to help resolve
these issues. To do otherwise only serves the interest of those who
seek to gain advantage from the existing inefficiencies in the system
at the expense of energy consumers.
Mr. Chairman, in addition to your leadership in this area, I have
been impressed by the commitment of both Secretary Abraham and the
Democratic leadership of the Senate to ensuring that electricity
modernization is a core component of our national energy strategy. They
recognize that attempting to create a twenty-first century energy
policy without modernizing electricity laws is akin to trying to
install a high-speed rail system on seventy year-old tracks.
Before providing comments on H.R. 3406, I would like to explain why
I believe moving forward with this legislation is so critical.
As the head of a company that provides the electric load that feeds
industry, jobs and production, I have seen a steady downward trend for
much of the year that has accelerated in recent months. I do not share
the view of some who believe that this recession is destined to be
relatively brief and comparatively painless.
Congress does, however, have it in its power to take steps that
will spur the economy and reassure investors and consumers. Passing
real comprehensive energy legislation--a bill that contains electricity
modernization as a fundamental component--is vital to that effort. This
perhaps could be one of the most important stimulus measures this
committee can pass for American economic recovery.
With regard to the bill, I'd like to comment section-by-section:
Title I: Electric Supply
Subtitle A--Interconnection, Net Metering and Demand Management
MidAmerican supports this section.
I believe distributed generation should be an integral part of our
energy future and will deliver significant benefits to consumers and
the environment. The provisions in H.R. 3406 refine the principles of a
stakeholder compromise between transmission and distribution owners and
independent generators that will bring greater clarity and certainty to
the interconnection process.
I know that there is some concern about addressing distribution
interconnection in this section, but members should be aware that this
section only mandates that a national technical standard be established
where feasible and that generators pay the reasonable costs of
interconnection. I would recommend a technical change to the bill to
clarify the section on back-up power that we will provide to the
committee staff.
The language on net metering should not overturn existing state net
metering policies, but should establish minimum standards to encourage
states to adopt policies to promote remote generation with renewables.
Net metering will create some cost shifting to customers who are not
net metered under the rate design used by most utilities today. These
costs are for services that would otherwise be billed based upon the
net metered customer's meter registration, but net metering eliminates
that registration. Such costs include transmission and distribution
service, billing and other customer services, taxes and system benefits
charges. Determining the means for recovering these shifted costs is
best left to the states.
Subtitle B--Provisions Regarding the Public Utility Holding Company Act
of 1935
MidAmerican strongly supports repealing PUHCA and replacing it with
comprehensive provisions to enhance regulatory access to the books and
records of all utility holding companies.
PUHCA is the most substantial impediment to new investment in
energy infrastructure, keeping billions of dollars of new capital out
of this industry. The SEC, FERC, state regulators, the Administration
and the Democratic leadership of the Senate have all endorsed PUHCA
repeal as a necessary piece of the national energy strategy.
PUHCA places a set of arbitrary and often counter-productive
limitations on investments in the regulated energy industry. It keeps
new capital and new ideas out of the industry at a time when
transmission infrastructure alone requires tens of billions of dollars
in new investment. PUHCA requires the concentration of utility assets
because of its physical integration standard, increasing concerns about
market power.
PUHCA is an impediment to bringing new capital and new
infrastructure into California's market because no entity that owns
more than ten percent of any utility in the eastern two-thirds of the
country could make a significant capital investment in those companies
or in regulated assets such as new transmission without running afoul
of PUHCA. And, finally, PUHCA provides a ``first bite'' advantage to
foreign-owned corporations seeking to acquire American utility assets.
Replacing PUHCA with up-to-date provisions that provide state and
federal regulators with enhanced access to the books and records of all
utility holding companies is, in the words of your former colleague,
Sen. Tom Carper of Delaware, ``a no brainer.''
Subtitle C--Provisions Regarding the Public Utility Regulatory Policy
Act of 1978
MidAmerican strongly supports these provisions and notes that
prospective repeal of PURPA's Sec. 210 mandatory purchase requirement
with full guarantee of cost recovery has long enjoyed bipartisan
support.
Through our CalEnergy subsidiary, MidAmerican owns geothermal
energy facilities that are QF producers. While PURPA has played an
important role in opening up wholesale electricity markets, there have
been cases where QF contracts anticipated higher levels of ``avoided
costs'' than market conditions actually produced. At the same time, I'm
pleased to note that the recent settlement in California between QF
producers and one of the state's largest utilities will provide
consumers clean, renewable electricity at a fraction of the cost of
many of the long-term contracts for conventional generation signed by
the state.
Virtually every state in the country is looking at more market-
based methods of promoting renewable energy, and the PURPA Sec. 210
mandatory purchase requirement has become outdated.
Subtitle D--Redundant Review of Certain Matters
Section 141 of the bill eliminates the redundant review of multiple
agencies over utility mergers. While I understand that there is
significant opposition to this section, I would recommend at a minimum
establishing some reasonable time limit on FERC merger review.
Placing a time limit on merger consideration would not in any way
prejudice the outcome of FERC's proceedings, but it would provide the
markets with greater certainty in making judgments on transactions.
Title II: Transmission Operations
Section 201 embodies the ``FERC lite'' compromise bringing non-
jurisdictional utilities under limited FERC oversight. MidAmerican was
one of the first investor-owned utilities to endorse the compromise and
supports this section.
``FERC lite'' brings all owners of transmission facilities that are
used in interstate commerce under FERC jurisdiction for the purposes of
establishing terms and conditions of service. FERC would also be given
the authority to ensure that rates charged by currently non-
jurisdictional utilities to users of their transmission systems are
comparable to the rates those utilities charge themselves.
This is a major step forward in the creation of a seamless
transmission grid while recognizing the different financial structures
of different transmission owners.
Many non-jurisdictional transmission owners have already moved to
place their assets in regional transmission organizations to ensure
that their customers are not isolated from regional electricity
markets. TRANSLink, the independent transmission company that
MidAmerican has joined in the Upper Midwest, includes both public power
entities and a large regional rural cooperative.
Section 202 on regional transmission organizations, or RTOs,
includes many items that have been sought for years by advocates of a
more transparent transmission system: 1) a date certain for RTO
participation 2) placing all uses of the system under the same tariff
and 3) independence requirements and minimum standards for RTOs. The
principle underlying the language is sound--mandatory |
